SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20045
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WATSON PHARMACEUTICALS, INC.
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(Exact name of Registrant as specified in its charter)
NEVADA 95-3872914
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
311 BONNIE CIRCLE
CORONA, CA 91720
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(909) 270-1400
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.0033 PAR VALUE
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 [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
AGGREGATE MARKET VALUE, AS OF MARCH 2, 1998, OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT: $2,975,020,943 BASED ON THE LAST REPORTED SALE
PRICE ON THE NEW YORK STOCK EXCHANGE.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON MARCH 2, 1998: 88,273,160
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days after the end of the fiscal year ended December
31, 1997. Portions of such Proxy Statement are incorporated by reference in Part
III of this report.
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
Watson Pharmaceuticals, Inc., incorporated in 1985, is engaged in the
development, production, marketing and distribution of off-patent and branded
pharmaceutical products. Unless otherwise specified, reference to "Watson" or
the "Company" shall refer to Watson Pharmaceuticals, Inc. and its subsidiaries
and excludes The Rugby Group, Inc. (as discussed below).
OFF-PATENT PHARMACEUTICALS
The Company is recognized as one of the leaders in the off-patent
pharmaceutical industry. Pharmaceutical products initially sold on an exclusive
basis are known in the industry as branded (or proprietary) products. Off-patent
drugs are therapeutically equivalent to their brand name counterparts and are
generally sold at prices significantly less than branded products. Accordingly,
off-patent pharmaceuticals provide a safe, effective and cost efficient
alternative to users of these products.
BRANDED PHARMACEUTICALS
The Company's branded pharmaceutical business is focused primarily on
three therapeutic areas: Dermatology, Women's Health and NeuroPsychiatry. Watson
has strategically focused on these markets due to their perceived growth
opportunities. The nature of these markets and the identifiable base of
physician prescribers allow the Company to achieve significant market
penetration through its specialized sales forces.
The Company also markets several products that are promoted to primary
care physicians around the country. These products include two hypertension
products and a pain management drug. Watson promotes these three products
through its Primary Care sales group.
As a result of recent acquisitions, the proportionate revenues derived
from Watson's branded business have increased significantly. The following
information has been restated to reflect mergers accounted for under the pooling
of interests accounting method as discussed in "Summary of Recent Transactions,"
below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(in thousands) $ % $ % $ %
- -------------- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Off-patent product sales $200,890 59% $189,275 75% $141,191 73%
Branded product sales 123,125 37% 34,364 14% 29,036 15%
Royalty income from branded sales 14,249 4% 27,162 11% 22,247 12%
-------- --- -------- --- -------- ---
Total revenues $338,264 100% $250,801 100% $192,474 100%
======== === ======== === ======== ===
</TABLE>
The Company may choose to acquire additional branded products for
marketing and distribution purposes. Watson may also choose to enter into
collaborative or licensing agreements with various parties at various stages of
product development.
SUMMARY OF RECENT TRANSACTIONS
Several strategic acquisitions have supported the Company's growth over
the past year. The Company acquired Royce Laboratories, Inc. ("Royce"), a
developer and manufacturer of off-patent pharmaceutical products; and Oclassen
Pharmaceuticals, Inc. ("Oclassen"), a developer and marketer of Dermatology
products. During 1997, Watson also entered into an agreement to acquire The
Rugby Group, Inc. ("Rugby"), a developer and marketer of
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off-patent pharmaceutical products. The Rugby acquisition was completed on
February 27, 1998. A summary of these transactions is set forth below:
<TABLE>
<CAPTION>
CONSIDERATION IN MILLIONS
-------------------------
ACQUIRED COMPANY MARKET DATE SHARES CASH TRANSACTION TYPE
- ---------------- ------------ ------- --------- -------- --------------------
<S> <C> <C> <C> <C> <C>
Oclassen Pharmaceuticals Dermatology 2-27-97 6.6 Pooling of interests
Royce Laboratories Off-patent 4-16-97 5.2 Pooling of interests
The Rugby Group Off-patent 2-27-98 $67.5* Cash purchase
<FN>
* - Excludes certain contingent payments
</FN>
</TABLE>
The Company also made several product acquisitions during the year.
These included the acquisition of certain oral contraceptive products from G.D.
Searle & Co. ("Searle") and the acquisition of a significant hypertension
product from Rhone-Poulenc Rorer ("RPR"). A summary of these product
acquisitions is set forth below:
<TABLE>
<CAPTION>
CASH CONSIDERATION IN
PRODUCT THERAPEUTIC AREA DATE MILLIONS
- ------- ------------------- -------- ---------------------
<S> <C> <C> <C>
Dilacor XR(R) Hypertension/Angina 6-30-97 $190.0 *
Genora(R), Levora(R), Nor QD(R) Oral contraceptives 10-15-97 $75.0 *
Trivora(R) Oral contraceptives 10-15-97 $45.0 *
<FN>
* - Excludes certain contingent payments
</FN>
</TABLE>
The recent transactions above are more fully described in Note 2 of Notes to
Consolidated Financial Statements.
PRODUCTS
OFF-PATENT PHARMACEUTICALS
Watson manufactures and markets approximately 52 off-patent
prescription products in capsule or tablet forms in approximately 126 dosage
strengths. The Company markets its products to drug distributors, pharmaceutical
wholesalers, chain drug stores, hospitals, health maintenance organizations and
other drug companies. Some of the Company's more significant off-patent products
are:
<TABLE>
<CAPTION>
PRODUCT THERAPEUTIC AREA DOSAGES BRANDED PRODUCT
- ------- ------------------- ------- ---------------
<S> <C> <C> <C>
Diltiazem HCl extended release
capsules Hypertension/Angina 3 Dilacor XR(R)
Hydrocodone 7.5/500 Analgesic 1 Lortab(R)
Hydrocodone 7.5/750 Analgesic 1 Vicodin ES(R)
Estradiol tablets Hormonal Regulator 3 Estrace(R)
Butalbital, Aspirin, Caffeine, and
Codeine Phosphate Capsules Analgesic 1 Fiorinal(R)
Guanfacine Hypertension 2 Tenex(R)
Hydrocodone 10/500 Analgesic 1 Lortab(R)
Hydrocodone 10/650 Analgesic 1 Lorcet(R)10/650
Loxapine Central Nervous System 4 Loxitane(R)
Estropipate Hormonal Regulator 4 Ogen(R)
</TABLE>
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Watson's sales of off-patent drugs have increased significantly in
recent years. The Company believes that this growth is attributable to a number
of factors, including (i) modification of certain federal and state laws to
permit or mandate substitution of off-patent drugs by pharmacists, (ii) the
enactment of abbreviated procedures for obtaining Food and Drug Administration
("FDA") approval to manufacture off-patent prescription drugs, (iii) changes in
government and third-party payor reimbursement policies to encourage cost
containment by health care providers and consumers, (iv) increased acceptance of
off-patent drugs by physicians, pharmacists and consumers, and (v) an increasing
number of products which have lost patent protection.
During 1997, seven dosages in the hydrocodone bitartrate/acetaminophen
product group accounted for approximately 21% of total revenues. In 1996 and
1995, six dosages in the hydrocodone bitartrate/acetaminophen product group
accounted for approximately 29% and 35%, respectively, of total revenues.
BRANDED PHARMACEUTICAL PRODUCTS
The Company markets its branded products to physicians through its four
principal sales groups: Dermatology, Women's Health, NeuroPsychiatric and
Primary Care.
DERMATOLOGY
Watson markets several products for the prevention and treatment of
skin diseases. These products are Monodox(R) (doxycycline monohydrate), for the
treatment of severe acne; Cordran(R) (flurandrenolide) and Cormax(TM)
(clobetasol propionate), for the treatment of dermatoses; Condylox(R) (podofilox
0.5%), for the treatment of genital warts; and Cinobac(R) (cinoxacin), for the
treatment of urinary tract infections. The Company acquired these products in
connection with its acquisition of Oclassen.
WOMEN'S HEALTH
The Company markets a variety of oral contraceptive products. These
products include Zovia(TM) (ethynodiol diacetate & ethinyl estradiol), Genora(R)
(norethindrone and ethinyl estradiol), Levora(R) (levonorgestrel), Nor QD(R)
(norethindrone) and Trivora(R) (levonorgestrel and ethinyl estradiol tablets,
USP - Triphasic Regimen).
NEUROPSYCHIATRIC
Watson markets three central nervous system products: Loxitane(R)
(loxapine succinate), for the treatment of psychotic disorders, Zarontin(R)
(ethosuximide) for the treatment of pediatric epilepsy, and Eldepryl(R)
(selegiline), a product of Somerset Pharmaceuticals, Inc. ("Somerset"). Watson
owns 50% of Somerset through a joint venture with another pharmaceutical
company. These products are sold into this growing specialty market, exclusively
to psychiatrists and neurologists.
PRIMARY CARE
The Company markets three products directly to primary care physicians.
These products are Norco(TM) (hydrocodone bitartrate & acetaminophen), a branded
off-patent analgesic; and Microzide(R) (hydrochlorothiazide) and Dilacor XR(R),
which are both used in the treatment of hypertension and angina. Norco(TM) and
Microzide(R) are internally developed products. Dilacor XR(R) was acquired from
RPR in 1997. The Company's Primary Care sales group was significantly expanded
in 1997 to support the promotion of this product. In 1997, sales of Dilacor
XR(R) accounted for approximately 19% of total revenues.
JOINT VENTURES
Watson has made substantial investments in pharmaceutical joint
ventures and expects to utilize this method of investment in the future. The
Company does not control these joint ventures or the commercial exploitation of
the branded and off-patent products they develop, manufacture and/or market.
Further, there is no assurance that such joint ventures will be profitable.
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The Company owns a 50% interest in Somerset, which manufactures and
markets the product Eldepryl(R), used in the treatment of Parkinson's disease.
Somerset is actively involved in research projects regarding additional
indications of Eldepryl(R) and other chemical compounds.
The Company owns a 50% interest in ANCIRC, a joint venture with Andrx
Corporation ("Andrx"), that is developing off-patent pharmaceutical products
utilizing the Andrx's controlled-release technology. As of March 2, 1998, ANCIRC
has two products under review with the FDA. Watson currently owns 18.5% of
Andrx, a publicly traded company that utilizes controlled-release technologies
to develop oral pharmaceutical products.
PRODUCT DEVELOPMENT
The Company devotes significant resources to the research and
development of off-patent and proprietary products. During the three years ended
December 31, 1997, the Company incurred research and development expenditures of
$18.1 million, $22.9 million and $24.6 million, respectively. There can be no
assurance that any of the products currently in development will receive the
required regulatory approvals from the FDA.
Watson's research and development strategy focuses on the following
product development areas: (i) the continuation of its existing oral immediate-
release products, (ii) the development of niche, difficult-to-produce off-patent
drugs, (iii) the development of sustained-release technologies and the
application of these technologies to existing products (iv) the application of
proprietary drug delivery technology for new product development in specialty
areas, and (v) medium-to-late stage new drug opportunities.
OFF-PATENT PRODUCT DEVELOPMENT
The Company's core development efforts will remain in the area of
off-patent prescription drugs. Watson will continue to focus on niche products
that offer significant opportunity, but which may not necessarily attract
numerous competitors. The Company will also focus on technically
difficult-to-formulate products, or products that require advanced manufacturing
technology. By emphasizing the development of difficult-to-formulate products,
the Company seeks markets with limited competition, thereby creating higher
margin sales from its off-patent products. In addition, when evaluating which
drug development projects to undertake, Watson considers whether the product,
once developed, will complement other products in its portfolio, or will
otherwise assist in making the Company's product line more complete.
The Company's acquisitions of Royce and Rugby have increased its
resources in the area of off-patent product development. The Company presently
has submissions for approval pending before the FDA representing 19 separate
products of varying dosage strengths. In addition, approximately 20 projects are
currently under development. During 1997 and through March 2, 1998, Watson
received 10 off-patent product approvals from the FDA.
Of the 52 off-patent products currently marketed by the Company, it
received the first abbreviated new drug application ("ANDA") approval for 38
products. As of March 2, 1998, the Company believed it held the only ANDA
approval for 15 of these products.
Over the next few years, patent protection on a relatively large number
of branded drugs will expire, thereby providing additional off-patent product
opportunities. The branded products targeted for off-patent development include
those with specialized or growing markets as well as those products with U.S.
sales of over $100 million.
ANCIRC was formed in 1994 to conduct research and development
activities in the area of controlled-release technologies. Since its founding,
ANCIRC has conducted development on a variety of projects and has filed two
submissions with the FDA. A total of 8 products are currently under development
at ANCIRC.
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<PAGE>
PROPRIETARY PRODUCT DEVELOPMENT
Watson is developing certain proprietary products, some of which
utilize novel drug delivery systems, that if and when developed, will require
FDA approval of a New Drug Application ("NDA") prior to marketing. The Company
is also developing proprietary products through a combination of internal and
collaborative programs, including joint ventures.
Based on data gathered during clinical studies, the Company has
focused its efforts on two products that utilize its proprietary injection
molding drug delivery technology. The Progesterone/Vaginal Insert and
Estradiol/Vaginal Insert, which will be used for hormone replacement therapy,
are currently in Phase II/III clinical studies. There can be no assurance that
any of these proprietary products, if and when fully developed, will contribute
materially to Watson's revenues in the future.
The Company is also involved in the development of a gum-delivery
technology and is developing two prescription pharmaceutical products in this
area. In 1994, an application was filed with the FDA for an off-patent version
of Nicorette(R), a nicotine gum product developed and marketed by Smith Kline
Beecham ("SKB"). In February 1996, SKB's Nicorette(R) was approved by the FDA as
an over-the-counter product and its exclusivity was extended to 1999.
The Company is also developing a psoralen-based phototherapeutic
product for use in PUVA therapy for indications in psoriasis and vitiligo.
Watson believes that this product will reduce the side effects characteristic of
current psoralen therapy.
In recent years, Somerset has increased its research and development
spending in order to 1) develop additional indications for selegiline (the
parent compound of Eldepryl(R)), using a transdermal delivery system and 2)
develop and evaluate different therapeutic areas using selegiline and other
compounds. In November 1997, Somerset announced completion of the Phase III
clinical trials of its selegiline transdermal system for the treatment of
Alzheimer's disease. Somerset reported that the preliminary analyses of the
efficacy data did not yield statistically significant differences between the
placebo and the selegiline treatment group. A Phase III clinical study using the
selegiline transdermal system in Major Depression was recently completed and is
currently undergoing evaluation. In addition, a Phase III clinical trial is
being conducted in Parkinson's disease.
SALES AND MARKETING
BRANDED PRODUCTS
The Company markets its branded products through its four sales groups:
Dermatology, Women's Health, NeuroPsychiatric and Primary Care. Each of these
sales groups focuses on physicians who specialize in the diagnosis and treatment
of different medical conditions and each offers products to satisfy the needs of
these specialty physicians. The Company believes that this focused marketing
approach enables it to develop highly knowledgeable and dedicated sales
representatives and to foster close professional relationships with physicians.
During 1997, the Company created or acquired the sales forces for each
therapeutic area as well as the marketing infrastructure to support sales
efforts in these specialty areas. The Company's branded products sales force has
grown to more than 300 representatives at the end of 1997. Approximately 140
sales representatives are in Primary Care, 60 are in Dermatology, 60 are in
NeuroPsychiatric, and 40 are in Women's Health. The Company's Dermatology sales
force, acquired in its merger with Oclassen, is one of the largest and best
trained in the country.
OFF-PATENT PRODUCTS
Customer service activities are an integral part of the Company's sales
and marketing operations. The Company uses its best efforts to maintain adequate
inventories, make timely delivery of its products and provide technical and
other service support to its customers. Rugby's strong telemarketing
organization and field force are expected to enhance the Company's sales and
marketing efforts in the off-patent product area.
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CUSTOMERS
The Company markets its products primarily to pharmaceutical
wholesalers, drug distributors, and chain drug stores that in turn market to
retailers, managed care entities, hospitals and government agencies. Watson
sells its dermatology products under the "Oclassen Pharmaceuticals" label. All
of the Company's other products are marketed as products of "Watson
Laboratories". Watson has witnessed a consolidation of its customers, as chain
drug stores and wholesalers merge or consolidate. In addition, a number of the
Company's customers have instituted source programs that limit the number of
suppliers of generic pharmaceutical products carried by that customer. As a
result of these developments, there is heightened competition among off-patent
drug producers for the business of this smaller and more selective customer
base.
The Company ships products pursuant to purchase orders. In 1997, two
customers in the aggregate accounted for 23% of the Company's product sales, 12%
and 11%, individually. In 1996, sales to one customer accounted for 10% of
product sales. In 1995, no individual customer accounted for more than 10% of
product sales.
COMPETITION
The off-patent pharmaceutical industry is highly competitive, with
offerings from numerous off-patent manufacturers, as well as products from
off-patent divisions of major international innovator companies. Watson competes
in the marketplace by developing, acquiring or licensing pharmaceutical products
for indications that generally have relatively large patient populations or for
which limited or inadequate treatments are available. With respect to off-patent
pharmaceuticals, Watson's philosophy is to develop, acquire or license
therapeutic equivalents to previously patented products that are difficult-to-
formulate. There can be no assurance, however, that developments by others will
not render the Company's pharmaceutical products or technologies obsolete or
uncompetitive. In addition to product development, other competitive factors in
the pharmaceutical industry include product quality and price, reputation and
dissemination of technical information.
Revenues and gross profit derived from the sales of off-patent
pharmaceutical products tend to follow a pattern based on regulatory and
competitive factors unique to the off-patent pharmaceutical industry. As patents
for brand name products and related exclusivity periods mandated by regulatory
authorities expire, the first
off-patent manufacturer to receive regulatory approval for off-patent
equivalents of such products is generally able to achieve a relatively high
market share. As competing off-patent manufacturers receive regulatory approvals
on similar products, market share, revenues and gross profit typically decline.
Accordingly, the level of market share, revenues and gross profit attributable
to a particular off-patent product is normally related to the number of
competitors in that product's market and the timing of that product's regulatory
approval, in relation to competing approvals.
Watson therefore is dependent, in part, on its ability to develop and
rapidly introduce new products, the timing of regulatory approval of such
products and the number and timing of regulatory approvals of competing
products. In addition to competition from other off-patent drug manufacturers,
the Company faces competition from brand name companies as they increasingly
sell their products into the off-patent market directly by establishing,
acquiring or forming licensing or business arrangements with off-patent
pharmaceutical companies. No regulatory approvals are required for a brand name
manufacturer to market their products into the off-patent market. In addition,
brand name companies are increasingly pursuing strategies to prevent or delay
the introduction of off-patent competition. These strategies include, among
other things, seeking to establish regulatory obstacles to the bioequivalence of
off-patent drugs to the brand name products and instituting legal actions based
on a host of alleged infringements.
During 1996 and 1997, certain national drug wholesalers instituted
programs designed to provide cost savings to independent retail pharmacies on
their purchases of certain off-patent pharmaceutical products. Pursuant to the
programs, independent retail pharmacies generally agreed to purchase their
requirements of off-patent pharmaceutical products from one wholesaler and
permitted the wholesaler to select the product suppliers. Each wholesaler
encouraged off-patent drug suppliers to participate in its program by offering
to purchase the
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wholesaler's requirements of particular products from a single supplier. Such
programs encouraged off-patent drug suppliers to aggressively bid to be the
exclusive supplier of products under the programs. These programs resulted in
reduced prices to non-wholesaler customers. As a result of the institution of
the programs, the off-patent drug industry experienced a significant reduction
in the prices charged by suppliers for many off-patent pharmaceutical products.
SUPPLIERS AND MATERIALS
The principal components used in the Company's business are active and
inactive pharmaceutical ingredients and certain packaging materials. Certain
components are available only from sole-source suppliers. In addition, the FDA
must approve suppliers of certain ingredients for the Company's products. The
development and regulatory approval of Watson's products are dependent upon its
ability to procure active ingredients and packaging materials from FDA-approved
sources. FDA approval of a new supplier would be required if, for example,
active ingredients or such packaging materials were no longer available from the
initially approved source. The qualification of a new supplier could potentially
delay the manufacture of the drug involved. Arrangements with foreign suppliers
are subject to certain additional risks, including the availability of
governmental clearances, export duties, political instability, currency
fluctuations and restrictions on the transfer of funds.
Although Watson considers its sources of supply to be adequate and, to
date, no significant difficulty has been encountered in obtaining materials
required for products, there can be no assurance that the Company will continue
to be able to obtain materials as required or at reasonable prices. An extended
inability to obtain material or significant price increases that cannot be
passed on to customers could have a material adverse effect on the Company.
Watson contracts for the manufacture of certain products and intends to
evaluate this strategy for certain future products. Outside contract
manufacturing enables the Company to direct its financial resources to product
in-licensing and acquisition, product development and sales and marketing
efforts. The selected outside manufacturers are required by the Federal Food,
Drug and Cosmetic Act and by FDA regulations to follow current Good
Manufacturing Practices ("cGMP"). Accordingly, the Company is dependent upon its
contract manufacturers to comply with such requirements or similar standards
imposed by foreign regulators. To ensure such compliance, quality assurance
audits of the contract manufacturers sites and batch records are performed to
determine compliance with cGMP requirements and to the Company's specifications.
In addition, the FDA conducts regular inspections and audits of firms subject to
cGMP requirements. Watson believes it has good relationships with its outside
contract manufacturers.
From time to time, certain outside suppliers have experienced
regulatory difficulties that have inhibited their ability to deliver products to
the Company. In the event a supplier has such a difficulty which cannot be
resolved within a reasonable time, the resulting delay could have a material
adverse effect on the Company.
PRODUCT LIABILITY
Product liability suits by consumers represent a continuing risk to
firms in the pharmaceutical industry. One method Watson employs to minimize such
risks is to enforce stringent quality control procedures. Although the Company
carries product liability insurance, it believes that no reasonable amount of
insurance can fully protect against all such risks due to the inherent risks
associated with the production of pharmaceuticals for human consumption.
PATENTS AND PROPRIETARY RIGHTS
Watson believes that protection of its patents, proprietary products,
technologies, processes and know-how is important to its business. The Company
maintains an active patent program to protect its technologies. To date, 15 U.S.
patents have been issued to the Company: five covering compositions of matter
for its oral delivery systems (which patents expire in 2003), five covering
aspects of its buccal systems (which expire between 2005 and 2010), two covering
aspects of its mucosal tissue drug delivery (which expire in 2007 and 2008), one
covering its microencapsulation composition used in its sustained release oral
potassium chloride product (expiring in 2006), one covering its chlorhexidine
compound (expiring in 2007) and one covering its cutaneous therapeutic devices
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(expiring in 2009). The Company maintains an aggressive patent program, has
three additional United States patents pending and has several patent
applications at different stages of development. Recent changes to the patent
law resulting from passage of the Uruguay Round Agreements Act ("URAA") will
lengthen the term of some granted patents. Generally, patents have terms that
are the longer of 17 years from patent grant or 20 years from patent
application. The Company also seeks patent protection in major foreign
pharmaceutical markets, and has numerous foreign patents and patents pending.
There can be no assurance that Watson's patents or those of its
competitors would be held valid by a court of competent jurisdiction. There can
be no assurance that pending patents will result in issued patents, that patents
issued to or licensed by the Company will not be challenged or circumvented by
competitors, or that such patents will be found to be valid or sufficiently
broad to protect the Company's technology or to provide the Company with a
competitive advantage. Watson relies on non-disclosure agreements with certain
employees, consultants and other parties to protect, in part, trade secrets and
other proprietary technology. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that others will not independently develop equivalent proprietary
information or that third-parties will not otherwise gain access to the
Company's trade secrets and proprietary knowledge.
Watson may find it necessary to initiate litigation to enforce its
patent rights, to protect its trade secrets or know-how and to determine the
scope and validity of the proprietary rights of others. Patent litigation can be
costly and time-consuming, and there can be no assurance that the Company's
litigation expenses will not be significant in the future or that the outcome of
such litigation will be favorable to the Company.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by
the federal government, principally the FDA and, to a lesser extent, by state
and local governments. The Federal Food, Drug and Cosmetic Act and other federal
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, recordkeeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production and/or distribution, refusal of the government
to enter into supply contracts or to approve NDAs or ANDAs, and criminal
prosecution. The FDA also has the authority to revoke previously granted drug
approvals.
Changes in FDA procedures have increased the time and expense involved
in obtaining NDA and ANDA approvals and in complying with the FDA's cGMP
standards. The ANDA drug development and approval process now averages
approximately two to five years. FDA approval is required before each dosage
form of any new drug can be marketed. Applications for FDA approval must contain
information relating to bioequivalency, product formulation, raw material
suppliers, stability, manufacturing processes, packaging, labeling and quality
control. FDA procedures require full-scale manufacturing equipment to be used to
produce test batches for FDA approval. Validation of manufacturing processes by
the FDA also is required before a Company can market new products. The FDA
conducts pre-approval and post-approval reviews and plant inspections to enforce
these rules. Supplemental filings are required for approval to transfer products
from one manufacturing site to another and may be under review for a year or
more. In addition, certain products may only be approved for transfer once new
bioequivalency studies are conducted.
The Company's manufacturing operations are required to comply with cGMP
standards as interpreted by the FDA. This concept encompasses all aspects of the
production process, including validation and record keeping, and involves
changing and evolving standards. In recent years, the FDA has increased the
number of regular inspections to determine compliance with its cGMP standards.
The evolving and complex nature of regulatory requirements, the broad authority
and discretion of the FDA and the generally high level of regulatory oversight
results in a continuing possibility that from time to time the Company will be
adversely affected by regulatory actions despite its ongoing efforts and
commitment to achieve and maintain full compliance with all regulatory
requirements.
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The Hatch-Waxman Act of 1984 extended the established abbreviated
application procedure for obtaining FDA approval for off-patent forms of
brand-name drugs originally marketed before 1962 which are off-patent or whose
market exclusivity has expired. This act also provides market exclusivity
provisions that could preclude the submission or delay the approval of a
competing ANDA. One such provision allows a five-year market exclusivity period
for NDAs involving new chemical compounds and a three-year market exclusivity
period for NDAs (including different dosage forms) containing new clinical
investigations essential to the approval of the application. The market
exclusivity provisions apply equally to patented and non-patented products.
Another provision may extend patents for up to five years as compensation for
reduction of the effective life of the patent as a result of time spent by the
FDA reviewing a drug application. Patents may also be extended pursuant to the
terms of the URAA.
The Generic Drug Enforcement Act of 1992 establishes penalties for
wrongdoing in connection with the development or submission of an ANDA by
authorizing the FDA to permanently or temporarily debar companies or individuals
from submitting or assisting in the submission of an ANDA, and to temporarily
deny approval and suspend applications to market off-patent drugs. The FDA may
also suspend the distribution of all drugs approved or developed in connection
with certain wrongful conduct and/or withdraw approval of an ANDA and seek civil
penalties. The FDA can also significantly delay the approval of any pending ANDA
under the Fraud, Untrue Statements of Material Facts, Bribery and Illegal
Gratuities Policy Act.
Medicaid, Medicare and other reimbursement legislation or programs
govern reimbursement levels, including requiring that all pharmaceutical
manufacturers rebate to individual states a percentage of their revenues arising
from Medicaid-reimbursed drug sales. The required rebate for off-patent drug
manufacturers is currently 11% of average net sales price for products marketed
under ANDAs. For products marketed under NDAs, manufacturers are required to
rebate the greater of 15.1% of average net sales price or, the difference
between average net sales price and the lowest net sales price during a
specified period. The Company believes that the federal and/or state governments
may continue to enact measures in the future aimed at reducing the cost of drugs
to the public. The Company cannot predict the nature of such measures or their
impact on the Company's profitability.
Federal, state and local laws of general applicability, such as laws
regulating working conditions also govern Watson. In addition, the Company is
subject, as are all manufacturers generally, to various federal, state and local
environmental protection laws and regulations, including those governing the
discharge of material into the environment. Compliance with such environmental
provisions is not expected to have a material effect on the earnings, cash
requirements or competitive position of the Company in the foreseeable future.
However, no assurance can be given that changes to, or compliance with, such
environmental provisions will not have a material effect on the Company's
earnings, cash requirements or competitive position.
Continuing studies of the proper utilization, safety, and efficacy of
pharmaceuticals and other health care products are being conducted by industry,
government agencies and others. Such studies, which increasingly employ
sophisticated methods and techniques, can call into question the utilization,
safety and efficacy of previously marketed products and in some cases have
resulted, and may in the future result, in the discontinuance of their
marketing. In certain countries, these studies gave rise to claims for damages
from persons who believe they have been injured through the use of particular
pharmaceutical products.
SEASONALITY
The Company's business, taken as a whole, is not materially affected by
seasonal factors.
PERSONNEL
As of December 31, 1997, the Company had 1,020 full-time employees,
including 15 employees who hold Ph.D.'s. Of the Company's employees, 96 are
engaged in research and development, 358 in manufacturing, 165 in quality
assurance and quality control, 323 in sales and marketing, and 78 in
administration. Employees are not represented by unions and the Company has
never experienced a work stoppage.
10
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. The Company desires to
take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the express
purpose of availing itself of the protections of the safe harbor with respect to
all forward-looking statements. Several important factors, in addition to the
specific factors discussed in connection with such forward-looking statements
individually, could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein.
Such additional factors include, among other things, future economic,
competitive and regulatory conditions, demographic trends, financial market
conditions, the management of acquisitions and future business decisions of the
Company and its competitors, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Therefore,
the Company wishes to caution each reader of this report to consider carefully
these factors as well as the specific factors discussed with each
forward-looking statement in this report and as disclosed in the Company's
filings with the Securities and Exchange Commission as such factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the ability of the Company to implement its business strategy and may
cause actual results to differ materially from those contemplated by the
statements expressed herein.
ITEM 2. PROPERTIES
The Company's headquarters are located in Corona, California and Watson
owns the related land and buildings. The Company maintains manufacturing
facilities in Corona, California, Miami, Florida, Copiague, New York and Dayton,
Ohio. The principal manufacturing site in Corona, California as well as the
facilities in Copiague, New York and Dayton, Ohio are owned. The Company leases
another manufacturing facility in Corona, California, as well as research and
development and manufacturing facilities in Miami, Florida. Watson's principal
research facilities are located in Corona, California and are owned by the
Company.
The facilities leased from third parties are subject to leases with
terms expiring, subject to renewal options, between 1998 and 2002 and with
current monthly base rental payments ranging from approximately $2,000 to
approximately $25,000. One property in Corona, California is leased from a trust
that includes the Company's Chairman and its Executive Vice President - Research
and Development. This lease expires, subject to renewal options, in 2000 and
provides for monthly base rental payments of $25,000. Some of the Company's
leases contain escalation provisions and require the Company to pay for
utilities, taxes, insurance and maintenance expenses.
Although the Company's facilities are adequate to meet its current
needs, Watson has plans to construct and acquire additional space to accommodate
its growth. In keeping with this strategy, the Company completed in 1996
construction of 100,000 square feet of additional manufacturing workspace in its
Corona, California location. During 1997, the Company continued construction of
a 90,000-square-foot manufacturing plant in Changzhou City, People's Republic of
China. This facility is expected to become operational in 1998. Recently,
construction began on 40,000 square feet of additional space for administrative
and research-related activities at Watson's headquarters location.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In October 1995, a class action complaint captioned JIMMY JACKSON V.
CIRCA PHARMACEUTICALS, INC., ET al., was filed against Circa, Lawrence Raisfeld
and Robert Shulman, former presidents of Circa, and Roger Jordan, president of
Vitarine Pharmaceuticals ("Vitarine") in the Circuit Court of Tallapoosa County,
Alabama. This suit is expected to settle for $225,000.
In November 1997, a suit was filed against Royce and Watson naming them
as defendants, along with five other corporations, in an action captioned
MICHAEL D. HARDY, INDIVIDUALLY AND MICHAEL D. HARDY AS EXECUTOR OF THE ESTATE OF
JUDITH MARIE HARDY V. ROYCE LABORATORIES, INC., ET AL. in the Western District
of Kentucky at Louisville. Plaintiff alleges that his wife suffered personal
injuries due to her ingestion of the drug quinine for leg cramps in June 1995,
and personal injuries leading to death due to its ingestion in April 1997. The
plaintiff seeks actual damages in the amount of six million dollars for personal
injuries suffered by his wife, actual damages in the amount of ten million
dollars for wrongful death and additional punitive damages. The parties to this
action are presently conducting discovery. It is contemplated that any liability
and defense costs will be covered by the Company's product liability insurance.
Watson and Royce intend to vigorously defend this action.
The Company is involved in various other disputes and litigation
matters that arise in the ordinary course of business. The litigation process is
inherently uncertain and it is possible that the resolution of these disputes
and lawsuits may adversely affect the Company. In management's opinion, Watson
is not currently involved in any legal proceedings which, individually or in the
aggregate, could have a material effect on its consolidated financial condition,
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended December 31, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
PRINCIPAL OCCUPATION AND POSITION
NAME AGE AND OFFICE WITH REGISTRANT
- ---- --- ---------------------------------
Allen Chao, Ph.D. 52 Chairman of the Company since May 1996, Chief
Executive Officer and Director since 1983 and a
co-founder of the Company.
David C. Hsia, Ph.D. 53 Executive Vice President - Scientific Affairs
since July 1997, and a co-founder of the Company.
Chato Abad 44 Vice President - Finance and Principal Financial
and Accounting Officer since June 1997 and
Corporate Controller since joining the Company in
1987.
Fred Wilkinson 41 Executive Vice President - Sales and Marketing
since July 1997 and Vice President - Sales and
Marketing since joining the Company in June 1996.
The executive officers of the Company are appointed annually by the
Board of Directors, hold office until their successors are chosen and qualify,
and may be removed at any time by the affirmative vote of a majority of the
Board. The Company has employment agreements with each of the executive
officers. David C. Hsia is the brother-in-law of Allen Chao. There are no other
family relationships between any director and executive officer of the Company.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the New York Stock Exchange
on September 17, 1997 under the symbol "WPI." Previously, the Company's common
stock traded on the Nasdaq National Market Tier of The Nasdaq Stock Market under
the symbol "WATS". The following table sets forth the quarterly high and low
share price information for the years ended December 31, 1997 and 1996, as
adjusted to retroactively reflect the October 1997 two-for-one stock split in
the form of a 100% stock dividend:
1996, BY QUARTER HIGH LOW
---------------- --------- -----------
First $ 24.750 $ 18.500
Second $ 24.250 $ 18.250
Third $ 20.000 $ 13.000
Fourth $ 23.000 $ 15.875
1997, BY QUARTER
----------------
First $ 23.063 $ 17.688
Second $ 22.250 $ 16.000
Third $ 30.375 $ 21.625
Fourth $ 34.125 $ 27.000
As of March 2, 1998, there were approximately 9,000 holders of record
of the Company's common stock, which does not include those who held in street
or nominee name.
Since its initial public offering in February 1993, the Company has not
paid a cash dividend on its common stock and does not anticipate paying
dividends in the foreseeable future.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
FOR THE YEARS ENDED DECEMBER 31, (1)
--------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Product sales $ 324,015 $ 223,639 $170,227 $127,894 $ 99,022
Royalty income 14,249 27,162 22,247 1,209
--------- --------- -------- -------- --------
Total revenues 338,264 250,801 192,474 129,103 99,022
--------- --------- -------- -------- --------
Cost of revenues 125,057 101,921 81,417 62,495 51,185
Research and development 18,055 22,895 24,562 23,525 18,621
Selling, general and administrative 50,937 38,891 34,873 30,368 30,836
Amortization of product rights 7,213 386 306
Merger expenses (1) 14,718 13,939
--------- --------- -------- -------- --------
Total operating expenses 215,980 164,093 155,097 116,388 100,642
--------- --------- -------- -------- --------
Operating income (loss) 122,284 86,708 37,377 12,715 (1,620)
Equity in earnings of joint ventures 10,694 17,909 22,766 24,968 24,688
Investment and other income (2) 11,620 9,861 12,905 7,896 17,962
Gain from (provision for) legal settlement (3) 2,299 (7,633)
Partnership loss (7,644)
--------- --------- -------- -------- --------
22,314 27,770 35,671 35,163 27,373
--------- --------- -------- -------- --------
Income before provision (benefit)
for income taxes 144,598 114,478 73,048 47,878 25,753
Provision (benefit) for income taxes (4) 54,414 35,916 24,867 10,853 (21,917)
--------- --------- -------- -------- --------
Net income $ 90,184 $ 78,562 $ 48,181 $ 37,025 $ 47,670
========= ========= ======== ======== ========
Basic earnings per share (1) $ 1.04 $ 0.92 $ 0.58 $ 0.45 $ 0.60
========= ========= ======== ======== ========
Diluted earnings per share (1) $ 1.01 $ 0.89 $ 0.56 $ 0.44 $ 0.59
========= ========= ======== ======== ========
Weighted average shares
outstanding, no dilution (1) 86,991 85,028 83,317 81,849 78,982
========= ========= ======== ======== ========
Weighted average shares
outstanding, diluted basis (1) 89,325 88,081 85,515 83,563 81,128
========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, (1)
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Current assets $ 246,765 $ 326,203 $ 234,754 $ 206,814 $ 183,115
Working capital 146,925 292,948 195,091 178,479 151,002
Total assets 754,981 472,854 364,235 298,468 265,825
Long-term debt 2,385 3,864 3,758 5,091 2,143
Liability from acquisition of product rights 95,000
Deferred tax liabilities 36,887 12,226
Deferred partnership liability 14,033 15,242
Total stockholders' equity 565,010 423,108 320,088 249,330 206,092
</TABLE>
14
<PAGE>
(1) The Company merged with Circa Pharmaceuticals, Inc. ("Circa"), in July
1995, with Oclassen Pharmaceuticals, Inc. ("Oclassen"), in February
1997, and with Royce Laboratories, Inc. ("Royce"), in April 1997. These
transactions were accounted for as pooling of interests, and
consequently, the consolidated financial data presented include those
of Circa, Oclassen, and Royce for all periods presented. The costs
associated with these mergers were $13.9 million in 1995 and $14.7
million in 1997.
In October 1997, the Company effected a two-for-one stock split in the
form of a 100% stock dividend. Share and per share amounts for all
reported periods have been restated to reflect the stock split.
(2) Included in investment and other income for the years ended December
31, 1995, 1994, and 1993 were gains from the sale of common stock of
Marsam Pharmaceuticals, Inc. ("Marsam") of $6.2 million, $3.2 million,
and $14.5 million, respectively. The Company has no remaining
investment in Marsam.
(3) The gain from (provision for) legal settlement was the result of
lawsuits in which Circa was a defendant. All of these lawsuits were
settled by the first quarter of 1996.
(4) As a result of the pooling of interest accounting for the Company's
1995 merger with Circa, an income tax benefit of $29.8 million was
recorded for the year 1993. This tax benefit resulted from a reduction
in the valuation allowance for Circa's net deferred tax assets. These
net deferred tax assets represented net operating loss and tax credit
carryforwards generated by Circa prior to its merger with the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such risks and uncertainties are discussed below in "Factors That
May Affect Future Results."
GENERAL
The Company derives its revenues from the development, manufacture and
sale of pharmaceutical products. From the Company's founding in 1983 until
mid-1995, revenues were generated primarily from sales of off-patent versions of
branded pharmaceutical products. In order to create a more predictable and
diverse revenue stream, Watson has recently made significant investments in
branded pharmaceutical businesses and products. As compared with off-patent
products, branded products offer stronger competitive protection and typically
sell at higher and more stable margins.
As the Company diversifies its product portfolio, off-patent products
remain an integral component of the Company's current and future revenues. In
recent years, the Company has expanded its product offering through internal
development and acquisitions. Watson will continue to invest significant
resources in the development of difficult-to-produce, niche products for its
off-patent business.
BRANDED PHARMACEUTICALS
In 1997, a strategy was developed to target three specialty therapeutic
areas: Women's Health, Dermatology and NeuroPsychiatric. The Company invested
significant resources in the acquisition and development of products and
personnel for these focus areas. Specialty sales groups were either created or
acquired to successfully promote newly purchased products. Watson's total sales
force grew from approximately 20 representatives in late 1996 to more than 300
by the end of 1997. Acting as the cornerstone in the sales infrastructure is the
Primary Care sales division. This group provides key support for Watson's pain
and hypertension products and also provides a direct link to the Primary Care
physician for products promoted by the specialty sales groups.
15
<PAGE>
Also in 1997, Watson secured its revenue stream from Dilacor XR(R)
(diltiazem hydrochloride) by purchasing the rights to this branded product. This
transaction provided Watson full control over the marketing and distribution of
Dilacor XR(R) and any off-patent versions to be offered by the Company. Prior to
this acquisition, the Company owned a royalty interest in the product.
ACQUISITION OF PRODUCT RIGHTS TO DILACOR XR(R) - On June 30, 1997, the
Company obtained the exclusive U.S. and certain worldwide marketing, sales, and
distribution rights to Dilacor XR(R) for $190.0 million in cash, future
royalties, and an inventory supply agreement. The Company's Primary Care sales
group promotes Dilacor XR(R).
This product has been available in the U.S. for the treatment of
hypertension since June 1992 and was approved for the treatment of chronic
stable angina in March 1995. In October 1997, Andrx Corporation received
regulatory approval and began to market an off-patent form of Dilacor XR(R). In
response, the Company has introduced its own off-patent alternative, which was
well received in the market. Due to this recent off-patent competition, the
Company's product sales and gross profits from Dilacor XR(R) are likely to
decline in future periods.
ACQUISITION OF PRODUCTS FROM G. D. SEARLE & CO. ("SEARLE") - In the
fourth quarter of 1997, the Company acquired the U.S. rights to certain Searle
branded off-patent oral contraceptive products. The Food and Drug Administration
("FDA") approved one of these products, Trivora(R) (levonorgestrel and ethinyl
estradiol), in February 1998. Under the terms of this agreement, cash of $85.0
million was paid through December 31, 1997, which included $5.0 million for
Trivora(R). The Company will pay a total of $45.0 million for Trivora(R), with
the remaining $40.0 million to be paid in 1998. The Company also acquired the
U.S. rights to additional oral contraceptive products from Searle (the "Future
Products"). Payment for these products is due upon achievement of certain
events, which include in certain instances, approvals by the FDA. If all
contingent events occur before July 1, 1999, the aggregate acquisition cost for
the Future Products will be $48.5 million plus certain contingent payments. The
Searle products complement Watson's existing oral contraceptive line and are
sold through the Company's Women's Health division.
ACQUISITION OF OCLASSEN PHARMACEUTICALS, INC. ("OCLASSEN") - In
February 1997, the Company acquired Oclassen. Watson issued approximately 6.6
million shares of its common stock for all of the outstanding common shares of
Oclassen. At the acquisition date, the value of the Watson shares issued was
$135.0 million. Oclassen markets specialty pharmaceutical products to prevent
and treat skin diseases. Currently, the following five products are marketed:
Monodox(R) (doxycycline monohydrate), Condylox(R) (podofilox 0.5%), Cordran(R)
(flurandrenolide), Cinobac(R) (cinoxacin) and Cormax(TM) (clobetasol
propionate). The Company's Dermatology sales group promotes the Oclassen
products.
ACQUISITION OF PRODUCTS FROM COCENSYS, INC. ("COCENSYS") - In October
1997, the Company acquired two products and two co-promotion agreements from
CoCensys. In addition, Watson hired certain sales and marketing personnel from
CoCensys. A total of $9.0 million was paid. The products purchased from CoCensys
are sold through the NeuroPsychiatric sales group and are expected to serve the
needs of a growing specialty market for the treatment of psychiatric disorders,
epilepsy, schizophrenia and pain.
OFF-PATENT PHARMACEUTICALS
During 1997 and through early 1998, Watson increased its off-patent
product offerings through acquisitions and internal development.
ACQUISITION OF ROYCE LABORATORIES, INC. ("ROYCE") - In April 1997, the
Company acquired Royce. Royce develops and manufactures off-patent prescription
drugs in solid dosage forms (tablets and capsules). The Royce product portfolio
and development pipeline complemented the Company's business, with little
overlap. The Company issued approximately 5.2 million shares of its common stock
(valued at $98 million on the merger date) for all of the outstanding common
shares of Royce. All Royce products are now marketed directly by the Company
under the "Watson Laboratories" label.
16
<PAGE>
1998 PURCHASE OF THE RUGBY GROUP, INC. ("RUGBY") - On February 27,
1998, Watson completed its acquisition of Rugby from Hoechst Marion Roussel,
Inc. Rugby develops, manufactures, and markets a wide array of off-patent
pharmaceutical products. The agreement provided for an initial payment of
approximately $67.5 million in cash and contingent payments based on certain
future sales and operating results.
INTERNAL PRODUCT DEVELOPMENT - In 1997, Watson received Food and Drug
Administration ("FDA") approval for 10 off-patent products in 23 separate dosage
strengths.
OTHER SIGNIFICANT INVESTMENTS AND JOINT VENTURES
1995 ACQUISITION OF CIRCA - In July 1995, the Company merged with Circa
in a pooling of interests transaction. Circa manufactured off-patent
pharmaceuticals and held investments in Somerset Pharmaceuticals, Inc.
("Somerset"), Andrx Corporation ("Andrx"), and the ANCIRC joint venture with
Andrx. The Company issued approximately 37.4 million shares of its common stock
for all of the outstanding common shares of Circa. On the merger date, the value
of this acquisition was approximately $680 million.
PREVIOUS ROYALTY AGREEMENT - Prior to the Company's June 1997 purchase
of the rights to Dilacor XR(R) from Rhone-Poulenc Rorer, Inc. ("RPR"), Circa and
RPR were partners in the development of this product. Since 1993, the Company
has earned royalties from RPR's sales of Dilacor XR(R). Revenues earned under
this royalty arrangement were $14.2 million in 1997 (earned through the
termination date of June 30, 1997), $27.2 million in 1996 and $22.2 million in
1995.
SOMERSET JOINT VENTURE - The Company owns 50% of the outstanding shares
of Somerset, which markets the product Eldepryl(R) for the treatment of
Parkinson's disease. Somerset is also developing additional indications for
selegiline (the parent compound of Eldepryl(R)), using a transdermal delivery
system. The Company recorded equity in earnings from this joint venture of $12.7
million in 1997, $20.1 million in 1996, and $24.8 million in 1995. Orphan drug
exclusivity expired for Eldepryl(R) in June 1996. During 1997 and 1996, a number
of competitors introduced off-patent tablets to compete with Eldepryl(R)
capsules. The introduction of off-patent competition and increased research and
development spending in support of various clinical trials has significantly
reduced Somerset's contribution to the Company's operating results. Management
expects the Company's earnings from Somerset to continue to decline from current
levels.
INVESTMENT IN ANDRX - In 1994, the Company acquired a 7.5% interest in
Andrx, a drug delivery company utilizing controlled-released technologies to
develop oral pharmaceutical products. Watson increased its ownership interest in
Andrx in October 1995 and again in June 1997. At December 31, 1997, the Company
owned approximately 18.5% of the outstanding shares of Andrx. Following Andrx'
initial public offering in June 1996 (Nasdaq: ADRX), the fair value of this
investment has increased by $55.2 million to $92.2 million at December 31, 1997.
ANCIRC JOINT VENTURE - In 1994, the Company and Andrx formed a joint
venture, ANCIRC, to develop off-patent pharmaceutical products utilizing Andrx'
controlled-release technology. During 1995, Watson increased its ownership
interest in this joint venture from 40% to 50%. The Company utilizes the equity
method to account for this joint venture and recognized losses from ANCIRC of
approximately $2.0 million, $2.0 million and $1.7 million in 1997, 1996 and
1995, respectively. To date, ANCIRC has filed two abbreviated new drug
applications ("ANDA") with the FDA.
QUARTERLY FLUCTUATIONS
The Company's results of operations on a quarterly basis have
fluctuated in the past, and may continue to fluctuate. The Company believes such
fluctuations are primarily due to new product introductions and to a variety of
additional factors including, but not limited to, purchasing practices of the
Company's customers and changes in the degree of competition regarding the
Company's products.
17
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes selected components of the Company's
results of operations, in thousands of dollars and as percentages of revenues.
The table reflects the Company's mergers with Circa, Oclassen, and Royce for all
periods presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- ---------------------
$ % $ % $ %
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Product sales $ 324,015 95.8% $ 223,639 89.2% $ 170,227 88.4%
Royalty income 14,249 4.2% 27,162 10.8% 22,247 11.6%
--------- ------ --------- ------ --------- ------
Total revenues 338,264 100.0% 250,801 100.0% 192,474 100.0%
--------- ------ --------- ------ --------- ------
OPERATING EXPENSES:
Cost of revenues 125,057 37.0% 101,921 40.6% 81,417 42.3%
Research and development 18,055 5.3% 22,895 9.1% 24,562 12.8%
Selling, general and administrative 50,937 15.1% 38,891 15.5% 34,873 18.1%
Amortization of product rights 7,213 2.1% 386 0.2% 306 0.2%
Merger expenses 14,718 4.4% 13,939 7.2%
--------- ------ --------- ------ --------- ------
Total operating expenses 215,980 63.9% 164,093 65.4% 155,097 80.6%
--------- ------ --------- ------ --------- ------
Operating income 122,284 36.2% 86,708 34.7% 37,377 19.4%
OTHER INCOME:
Equity in earnings of joint ventures 10,694 3.2% 17,909 7.1% 22,766 11.8%
Investment and other income (net) 11,620 3.4% 9,861 3.9% 12,905 6.7%
--------- ------ --------- ------ --------- ------
Total other income 22,314 6.6% 27,770 11.1% 35,671 18.5%
--------- ------ --------- ------ --------- ------
Income before provision for income taxes 144,598 42.7% 114,478 45.7% 73,048 38.0%
Provision for income taxes 54,414 16.1% 35,916 14.3% 24,867 12.9%
--------- ------ --------- ------ --------- ------
NET INCOME $ 90,184 26.6% $ 78,562 31.4% $ 48,181 25.1%
========= ====== ========= ====== ========= ======
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues for the year ended December 31, 1997 were $338.3 million
compared to $250.8 million for the year ended December 31, 1996, an increase of
$87.5 million or 34.9%. The increase in revenues was composed of a $100.4
million increase in product sales, partially offset by a $12.9 million decrease
in royalty income. The increase in product sales was largely due to sales of
Dilacor XR(R), which was purchased from RPR in June 1997. The Company also
experienced 1997 sales increases in Dermatological products, Women's Health
products, core off-patent products and new products approved or acquired during
the year. These sales increases were partially offset by decreased sales of
certain strengths in the Company's hydrocodone product line.
18
<PAGE>
Royalty income decreased $12.9 million or 47.5% in 1997 as compared
with 1996 due to the Company's purchase of the Dilacor XR(R)product line from
RPR in June 1997.
Gross profit margins increased to 61.4% in 1997 from 54.4% in 1996. The
increase in the gross profit margin was due largely to sales of Dilacor XR(R),
higher sales of Dermatological branded products and sales of new products
introduced in 1997. The increased gross profit margin from these products was
partially offset by a decline in gross profit margins of certain core off-patent
products.
Research and development expenses decreased from $22.9 million in 1996
to $18.1 million in 1997. Following the mergers with Royce and Oclassen, the
Company consolidated certain research and development functions and eliminated
duplicate programs.
Selling, general and administrative expenses increased from $38.9
million in 1996 to $50.9 million in 1997. The increase consists of a $16.8
million increase in sales and marketing expenses and a $4.8 million decrease in
general and administrative costs. The Company incurred increased sales and
marketing costs as it expanded its branded products sales and marketing efforts.
The Company increased its sales force from approximately 20 representatives in
late 1996 to more than 300 at December 31, 1997.
As a result of the mergers of Royce and Oclassen with Watson, and the
subsequent consolidation of many of the administrative functions, the Company
has experienced a decrease in its general and administrative expenses. As a
percentage of revenues, general and administrative costs decreased from 7.4% to
4.0% from 1996 to 1997, respectively. This decrease reflects efficiencies
achieved following the mergers and the fact that the Company's revenue growth
outpaced the growth in administrative costs.
Amortization expense in 1997 increased from $386,000 to $7.2 million
due to the amortization associated with product rights acquired during the year.
Amortization expense in 1997 was primarily due to the purchase of Dilacor XR(R).
The Company has capitalized these product rights and is amortizing them over the
estimated 17-year life of the product.
In 1997, the Company recorded one-time charges of $14.7 million for
costs incurred in connection with the mergers of Royce and Oclassen. These costs
included investment banking fees and other merger-related expenses. No such
expenses were incurred in 1996.
Equity in earnings from joint ventures decreased $7.2 million or 40.2%
to $10.7 million in 1997 compared to $17.9 million in 1996, due primarily to
lower earnings from Somerset. The decrease in Somerset earnings is due in part
to the loss of exclusivity for Eldepryl(R) in June 1996. During 1997 and 1996, a
number of competitors introduced off-patent tablets to compete with Eldepryl(R)
capsules. Increased competition and research and development spending in support
of various clinical trials have significantly reduced Somerset's contribution to
the Company's operating results. Management expects the Company's earnings from
Somerset to continue to decline.
Investment and other income increased 17.2% to $11.6 million in 1997
from $9.9 million in 1996 due to higher average cash and marketable securities
balances in 1997.
The provision for income taxes increased to $54.4 million in 1997,
compared to $35.9 million in 1996. The effective income tax rate was 38.0% and
31.0% for the years ended December 31, 1997 and 1996, respectively. The increase
in the Company's effective income tax rate was due primarily to the
non-deductibility of a significant portion of merger expenses incurred in 1997
and lower earnings from Somerset which are partially exempt from tax.
Net income increased to $90.2 million in 1997 from $78.6 million in
1996. As a percentage of revenues, net income decreased to 26.7% in 1997 from
31.3% in 1996 principally due to certain non-recurring merger expenses related
to the mergers with Royce and Oclassen and the higher effective tax rate in
1997. Exclusive of merger expenses of $14.7 million and related income taxes,
net income for 1997 would have been $103.1 million (or $1.15) per share, an
increase of 31.3% over 1996.
19
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues for the year ended December 31, 1996 were $250.8 million
compared to $192.5 million for the year ended December 31, 1995, an increase of
$58.3 million or 30.3%. The increase in revenues was composed of a $53.4 million
increase in product sales and a $4.9 million increase in royalty income. The
increase in product sales was due to: (i) sales of products introduced in 1996
which totaled $26.1 million; (ii) a $24.9 million increase in sales relating to
products introduced during the fourth quarter of fiscal 1995 and; (iii) a net
increase in sales of the Company's other core products, defined generally as
products available in the market place for at least twelve months. These
increases were partially offset by decreased sales of certain strengths of
hydrocodone products.
Royalty income increased 22.1% in 1996 as compared with 1995 due to
increased demand for Dilacor XR(R). In June 1997, Watson purchased the product
rights to Dilacor XR(R).
Gross profit margins increased to 54.4% in 1996 from 52.2% in 1995.
This favorable increase was due to higher than average gross margins earned on
the sales of certain core products and new products introduced during 1996.
Research and development expenses decreased slightly from $24.6 million
in 1995 to $22.9 million in 1996. Following the merger with Circa, the Company
integrated the two research and development departments of Watson and Circa into
one, eliminating duplicate programs.
Selling, general and administrative expenses increased from $35.2
million in 1995 to $39.3 million in 1996. As a percentage of revenues, these
costs decreased from 18.3% to 15.7% from 1995 to 1996, respectively, which
reflects management's cost control efforts and the fact that the Company's
revenue growth outpaced the growth in selling, general and administrative
expenses.
In connection with the merger with Circa, the Company recorded a
one-time $13.9 million merger-related charge. This charge included investment
banking fees and other costs related to the consolidation of operations of the
two companies. No such expenses were incurred in 1996.
Equity in earnings from joint ventures decreased $4.9 million or 21.3%
to $17.9 million in 1996 compared to $22.8 million in 1995. These earnings
primarily represent earnings from Somerset and ANCIRC. Equity in earnings from
Somerset decreased from $24.8 million in 1995 to $20.1 million in 1996 in part
due to: (i) the loss of exclusivity for Eldepryl(R) in June 1996 and, (ii)
increased research and development expenditures in support of the Phase III
clinical trials. During 1996, three competitors introduced off-patent tablets to
compete with Eldepryl(R) capsules. The Company's portion of ANCIRC's losses
increased slightly from $1.7 million in 1995 to $2.0 million in 1996.
Investment and other income decreased $3.0 million or 23.6% to $9.9
million in 1996 from $12.9 million in 1995. This decrease was due to the 1995
recognition of a $6.2 million gain from the sale of Marsam Pharmaceuticals, Inc.
common stock, a stock held for investment purposes. This was partially offset by
an increase in interest income in 1996 which resulted from higher short-term
interest rates on a larger base of invested cash.
The provision for income taxes increased to $35.9 million in 1996,
compared to $24.9 million in 1995. The effective income tax rates were 31.0% and
34.0% for the years ended December 31, 1996 and 1995, respectively. The higher
effective income tax rate in 1995 resulted primarily from the non-deductibility
of a significant portion of merger expenses incurred in that year.
Net income increased to $78.6 million in 1996 from $48.2 million in
1995. As a percentage of revenues, net income increased to 31.3% in 1996 from
25.0% in 1995 principally due to: (i) revenue growth and continued cost control
efforts during 1996 and, (ii) the one-time merger expenses related to the merger
with Circa in 1995.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased from $292.9 million at December
31, 1996 to $146.9 million at December 31, 1997. This $146.0 million decrease
was primarily due to the product right acquisitions of Dilacor XR(R) ($140.0
million), and Women's Health products from Searle ($85.0 million), and the
increased investment in Andrx ($15.3 million). The overall decrease was
partially offset by 1997 cash flow from operations ($97.0 million).
The Company invested $14.6 million in capital expenditures during 1997.
This investment consisted of land, leasehold and building improvement additions
of $7.2 million and machinery, research and lab equipment additions of $7.4
million. Watson expects to invest approximately $25.0 million in capital
improvements in 1998.
At December 31, 1997, the Company had notes payable outstanding of
approximately $3.2 million. These notes are unsecured, include interest at fixed
rates ranging from 8.1% to 13.5% per annum and require monthly payments ranging
from $94,000 in 1998 to $78,000 through August 2001. In addition, two credit
facilities are available to the Company with unsecured borrowing commitments
totaling $95.0 million. Watson has made no borrowings against these credit
facilities as of December 31, 1997.
The Company's purchase of the rights to Dilacor XR(R) was structured
with a $40.0 million cash payment in June 1997 and a $55.0 million payment in
July 1997. At December 31, 1997, the remaining scheduled payments are due as
follows:
DUE DATE AMOUNT
-------- -------------
January 1, 1998 $45.0 million
January 1, 1999 30.0 million
January 1, 2000 15.0 million
January 1, 2001 5.0 million
-------------
Total $95.0 million
=============
The Company's cash and marketable securities totaled $114.9 million at
December 31, 1997. Management believes that the Company's cash and marketable
securities, plus cash provided from operations will be sufficient to meet its
normal operating requirements during the coming year. However, the Company has
entered into certain acquisitions that are expected to require significant
future cash payments. To date, the Company has used existing cash to fund its
acquisitions, including approximately $67.5 million paid in February 1998
pursuant to the Rugby acquisition. However, Watson may require the use of its
existing credit facilities or additional funding in order to meet its remaining
acquisition commitments. At the present time, the Company is pursuing financing
alternatives, which include modifications of its current credit facilities, a
public or private debt offering or some combination of these alternatives.
Management expects to complete acceptable financing arrangements in the near
future.
The Company continues to review additional opportunities to acquire or
invest in companies, technologies, product rights and other investments that are
compatible with its existing business. Watson could use sources other than cash,
such as financing alternatives discussed herein, to fund additional acquisitions
or investments. If such acquisition or investment is completed, the Company's
operating results and financial condition could change materially in future
periods.
Management believes inflation does not have, and has not had, a
significant impact on the Company's revenues or operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's liquid investments are at fixed
interest rates and therefore the fair value of these instruments is affected by
changes in market interest rates. However, all of the Company's liquid
investments mature within one year. As a result, the Company believes that the
market risk arising from its holding of these financial instruments is minimal.
21
<PAGE>
The Company's investment in Andrx, which was stated at a fair value of
$92.2 million at December 31, 1997, is composed of 2.7 million shares of Andrx
common stock. Andrx common stock has traded on The Nasdaq Stock Market, under
the symbol "ADRX", since its initial public offering in June 1996. As a publicly
traded equity security, this investment has exposure to price risk. The
following table sets forth the Andrx quarterly high and low share price
information from its initial public offering through December 31, 1997:
HIGH LOW
------ ------
1996, BY QUARTER
Second $17.50 $12.00
Third $15.50 $11.00
Fourth $17.63 $12.75
1997, BY QUARTER
First $26.75 $15.25
Second $38.75 $20.50
Third $45.63 $31.75
Fourth $47.00 $28.75
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Securities and Exchange Commission ("SEC") encourages companies to
disclose forward-looking information so investors may better understand a
company's future prospects and make informed investment decisions. This report
contains such forward-looking statements made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. The reader must
carefully consider all such statements as they inherently involve certain risks
and uncertainties that could cause actual results to differ materially from the
Company's forward-looking statements. The reader should carefully evaluate such
statements in light of risk factors described herein or in the Company's other
SEC filings.
The Company's future results of operations will depend, to a
significant extent, upon its ability to introduce new off-patent and branded
pharmaceutical products. Future operating results may vary significantly on an
annual or quarterly basis depending on the timing of, and the Company's ability
to obtain, FDA approvals for such products and FDA approvals for shipment of
such products. Newly introduced off-patent products with limited or no
off-patent competition are typically sold at higher prices, often resulting in
increased gross profit margins. As competition from other manufacturers
intensifies, selling prices typically decline. The Company's future operating
results may also be affected by a variety of additional factors, including
customer purchasing practices and changes in the degree of competition affecting
the Company's products. Introduction by other companies of competitive products
could have a material adverse effect on the operating results and financial
condition of the Company.
The Company has been involved in a number of significant merger and
acquisition transactions. These transactions have been motivated by many
factors, including the desire to expand and diversify the Company's product
portfolio, the desire to obtain new technologies and the desire to attract key
personnel. Growth through acquisition presents significant risks, including
those associated with the ability to integrate and successfully operate acquired
businesses, the ability to develop and implement operational and financial
systems to manage rapidly growing operations, the substantial management time
devoted to such activities, the possibility of undisclosed liabilities, risks
related to product transition and the ability to realize anticipated benefits of
the combined entity.
The Company has instituted a program in order to become year 2000
compliant. The ultimate cost of this program has not been and is not expected to
be material to the Company's consolidated financial position or results of
operations. Although management believes the Company has an adequate program in
place in order to become year 2000 compliant, there can be no assurance that the
program ultimately will be successful.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the financial
statements set forth in Item 14(a) under the caption "Consolidated Financial
Statements" as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's fiscal years
ended December 31, 1997, 1996 and 1995.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information concerning directors of the Company required under this
Item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's fiscal year ended December 31,
1997.
EXECUTIVE OFFICERS
The information concerning executive officers of the Company required
under this Item is provided under Item 4 A.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's fiscal year ended December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's fiscal year ended December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's fiscal year ended December 31, 1997.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following are included herein under Item 8:
Reports of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1997.
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997.
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31,
1997.
Notes to Consolidated Financial Statements.
(A) 2. FINANCIAL STATEMENT SCHEDULES:
II. Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is included in the Consolidated Financial Statements or
notes thereto.
(A) 3. EXHIBITS
25
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger among the Company, Gum
Acquisition Corp. and Circa Pharmaceuticals, Inc., filed as
Exhibit 2.1 to the Company's Registration Statement on Form
S-4, Reg. No. 33-60211 ("33-60211") and hereby incorporated
by reference.
2.2 Agreement and Plan of Merger among the Company, Opalacq Co.
and Oclassen Pharmaceuticals, Inc. dated as of September 25,
1996, as amended effective November 14, 1996, and as amended
effective December 31, 1996, filed as Exhibit 2.1 to the
Company's Registration Statement on Form S-4, Reg. No.
333-16275 ("333-16275") and hereby incorporated by reference.
2.3 Agreement and Plan of Merger among the Company, Dolphins
Acquisition Corp. and Royce Laboratories, Inc. dated as of
December 24, 1996, filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-4, Reg. No. 333-20029
("333-20029") and hereby incorporated by reference.
3.1 Articles of Incorporation of the Company and all amendments
thereto, filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 and
Exhibit 3.1(A) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996 and hereby incorporated
by reference.
3.2 Bylaws of the Company, as amended as of July 18, 1995, filed
as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 and hereby incorporated
by reference.
4.1 Loan Agreement between the Company, its subsidiaries and Bank
of America NT & SA dated August 19, 1994, filed as Exhibit
4.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994 and hereby incorporated by
reference.
4.1(a) Amendment to loan agreement between the Company, its
subsidiaries and Bank of America NT & SA dated as of February
26, 1996, filed as Exhibit 4.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995 and
hereby incorporated by reference.
4.1(b) Amendment to loan agreement between the Company, its
subsidiaries and Bank of America NT & SA dated as of December
31, 1996, filed as Exhibit 4.1(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996 and hereby incorporated by reference.
4.2 Credit Agreement between the Company, its subsidiaries and
Mellon Bank, N.A. dated December 19, 1997.
4.2(a) Amendment Number One to Credit Agreement between the Company,
its subsidiaries and Mellon Bank, N.A. dated January 23,
1998.
10.1 Lease between Westgate Associates and the Company dated
October 1991 and addendums thereto, filed as Exhibit 10.5 to
the Company's Registration Statement on Form S-1, Reg. No.
33-46229 ("33-46229") and hereby incorporated by reference.
10.2 Industrial Real Estate Lease, as amended, dated August 8,
1995, between Hsi-Hsiung Hsu Hwa Chao (Chao Family) Trust I
and the Company, filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995 and hereby incorporated by reference.
10.3 Lease and Option Termination Agreement between Watson
Laboratories, Inc. and Research Property Associates dated
January 31, 1997, filed as Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996 and hereby incorporated by reference.
26
<PAGE>
10.4 Lease between Bayview Associates and Oclassen
Pharmaceuticals, Inc. dated November 15, 1988, filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and hereby
incorporated by reference.
10.4(a) Amendment to lease between Limar Realty Corporation #11
(successor in interest to Bayview Associates) and Oclassen
Pharmaceuticals, Inc., dated October 10, 1995, filed as
Exhibit 10.4(a) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 and hereby
incorporated by reference.
10.5 Grant of Option to Purchase Real Estate by and between Dr.
Alec Keith, Mr. Wallace C. Snipes and Zetachron, Incorporated
dated July 1, 1987, filed as Exhibit 10.8 to 33-46229 and
hereby incorporated by reference.
*10.6 The Company's 1985 Stock Incentive Plan, filed as Exhibit
10.11 to 33-46229 and hereby incorporated by reference.
*10.7 1991 Stock Option Plan of the Company as revised, filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 and hereby incorporated
by reference.
*10.7(a) Amendment to the 1991 Stock Option Plan of the Company, filed
as Exhibit 10.6(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and hereby
incorporated by reference.
*10.7(b) Amendment to the 1991 Stock Option Plan of the Company, filed
as Exhibit 10.6(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and hereby
incorporated by reference.
*10.8 1995 Non-Employee Directors' Stock Option Plan, as amended,
filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995 and hereby
incorporated by reference.
10.9 Form of the Company's Employee Invention, Confidential
Information Agreement, filed as Exhibit 10.22 to 33-46229 and
hereby incorporated by reference.
10.10 Purchase Agreement relating to the Company's purchase of 132
Business Center Drive property, filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 and hereby incorporated by reference.
10.11 Purchase and Sale Agreement between the Company, its
subsidiaries and AETNA Real Estate Associates dated October
18, 1994 regarding the acquisition of 311 Bonnie Circle,
Corona, California, filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1994 and hereby incorporated by reference.
*10.12 Senior Executive Employment Agreement dated as of May 29,
1995 between the Company and Allen Chao, filed as Exhibit
10.1 to 33-60211 and hereby incorporated by reference.
*10.13 Form of Senior Executive Employment Agreement dated as of May
29, 1995 between the Company and David C. Hsia, filed as
Exhibit 10.2 to 33-60211 and hereby incorporated by
reference.
27
<PAGE>
10.14 Release, Exit and Consulting Agreement between Alec D. Keith
Ph.D. and the Company, dated July 18, 1996, filed as Exhibit
10.15 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and hereby incorporated by
reference.
10.15 Intellectual Property Agreement between Alec D. Keith, Ph.D.
and the Company dated as of July 18, 1996, filed as Exhibit
10.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 and hereby incorporated
by reference.
*10.16 Employment Agreement with Dr. Melvin Sharoky dated April 26,
1991 as amended January 19, 1993 and July 17, 1995, filed as
Exhibit 10.3 to the Company's Quarter Report on Form 10-Q for
the quarter ended June 30, 1995 and hereby incorporated by
reference.
*10.16(a) Amendment to the Employment Agreement with Dr. Melvin
Sharoky dated February 12, 1997, filed as Exhibit 10.16(a) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 and hereby incorporated by reference.
*10.17 Form of Employment Agreement between the Company, Oclassen
Pharmaceuticals, Inc., and Glenn A. Oclassen, filed as
Exhibit 10.1 to 333-16275 and hereby incorporated by
reference.
*10.20 Form of Employment Agreement between Royce Laboratories, Inc.
and Patrick J. McEnany, filed as Exhibit 10.1 to Royce
Laboratories, Inc.'s Current Report on Form 8-K dated January
8, 1997 and hereby incorporated by reference.
*10.20(a) Consulting Agreement between Patrick J. McEnany and the
Company dated January 31, 1998.
*10.20(b) Amendment to Stock Option Agreement between Patrick J.
McEnany and the Company dated January 29, 1998.
10.21 License Agreement between the Company and Rorer
Pharmaceutical Products, Inc., dated June 30, 1997, filed as
Exhibit 10.1 to the Company's Current Report 8-K dated June
30, 1997 and hereby incorporated by reference.
10.22 Inventory Purchase Agreement between the Company and
Rhone-Poulenc Rorer Pharmaceuticals, Inc., dated June 30,
1997, filed as Exhibit 10.2 to the Company's Current Report
8-K dated June 30, 1997 and hereby incorporated by reference.
10.23 Manufacturing and Supply Agreement between the Company and
Rhone-Poulenc Rorer Pharmaceuticals, Inc., dated June 30,
1997, filed as Exhibit 10.3 to the Company's Current Report
8-K dated June 30, 1997 and hereby incorporated by reference.
10.24 Agreement Regarding Partnership Termination by and among
Rhone-Poulenc Rorer Inc., Rhone-Poulenc Rorer
Pharmaceuticals, Inc., Watson Pharmaceuticals, Inc., Circa
Pharmaceuticals, Inc., and BOL, Inc., dated June 30, 1997,
filed as Exhibit 10.4 to the Company's Current Report 8-K
dated June 30, 1997 and hereby incorporated by reference.
10.25 Asset Purchase Agreement among the Company, G. D. Searle &
Co. and SCS Pharmaceuticals, dated September 30, 1997, filed
as Exhibit 10.1 to the Company's Current Report 8-K dated
October 16, 1997 and hereby incorporated by reference.
10.26 Supply Agreement between the Company and G. D. Searle & Co.,
dated October 16, 1997, filed as Exhibit 10.2 to the
Company's Current Report 8-K dated October 16, 1997 and
hereby incorporated by reference.
28
<PAGE>
10.27 Stock Purchase Agreement among the Company, Hoechst Marion
Roussel, Inc. and Marisub, Inc. dated August 25, 1997.
10.27(a) Amendment to Stock Purchase Agreement among the Company,
Hoechst Marion Roussel, Inc. and Marisub, Inc. dated
November 26, 1997.
10.27(b) Second Amendment to Stock Purchase Agreement by and among the
Company, Hoechst Marion Roussel, Inc. and Marisub, Inc.
dated February 27, 1998.
10.28 Supply and License Agreement by and between Hoechst Marion
Roussel, Inc. and The Rugby Group, Inc. dated February 27,
1998.
10.29 Contract Manufacturing Agreement by and between Hoechst
Marion Roussel, Inc. and The Rugby Group, Inc. dated February
27, 1998.
22.1 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule (EDGAR version only).
99.1 Consolidated Financial Statements of Somerset
Pharmaceuticals, Inc. and Subsidiaries for the years ended
December 31, 1997, 1996 and 1995.
- ------------------------------
*Compensation Plan or Agreement
(B) REPORTS ON FORM 8-K: None
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By: /s/ ALLEN CHAO
-------------------------
Allen Chao, Ph.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ CHATO ABAD
------------------------
Chato Abad
Vice President-Finance
(Principal Financial and Accounting Officer)
Date: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- --------------------------- -------------------
<S> <C> <C>
/s/ ALLEN CHAO Chairman and March 16, 1998
- ----------------------------- Chief Executive Officer
Allen Chao, Ph.D.
/s/ MICHEL J. FELDMAN Secretary and Director March 16, 1998
- -----------------------------
Michel J. Feldman
/s/ MICHAEL FEDIDA Director March 16, 1998
- -----------------------------
Michael Fedida
/s/ ALBERT F. HUMMEL Director March 16, 1998
- -----------------------------
Albert F. Hummel
/s/ ALEC D. KEITH Director March 16,1998
- -----------------------------
Alec D. Keith, Ph.D.
/s/ MELVIN SHAROKY Director March 16, 1998
- -----------------------------
Melvin Sharoky, M.D.
/s/ RONALD R. TAYLOR Director March 16, 1998
- -----------------------------
Ronald R. Taylor
/s/ ANDREW L. TURNER Director March 16,1998
- -----------------------------
Andrew L. Turner
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORTS OF INDEPENDENT ACCOUNTANTS ........................................ F-2
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996 ...................................... F-5
CONSOLIDATED STATEMENTS OF INCOME
for each of the three years in the period ended
December 31, 1997 ..................................................... F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
for each of the three years in the period ended December 31, 1997 ..... F-7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for each of the three years in the period ended December 31, 1997 ..... F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................ F-10
FINANCIAL STATEMENT SCHEDULE:
II. Valuation and Qualifying Accounts ................................. F-26
All other schedules are omitted because they are not applicable or the required
information is included in the Consolidated Financial Statements or notes
thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Watson Pharmaceuticals, Inc.
In our opinion, based upon our audits and the reports of other auditors, the
consolidated financial statements listed in the accompanying index on page F-1
present fairly, in all material respects, the financial position of Watson
Pharmaceuticals, Inc. and its subsidiaries at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Somerset Pharmaceuticals, Inc. (Somerset), an entity which is 50%
owned by the Company. The Company's investment in Somerset aggregated
$27,643,000 and $24,653,000 at December 31, 1997 and 1996, respectively, and its
equity in the earnings of Somerset totaled $12,672,000, $20,100,000 and
$24,800,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
In addition, we did not audit the financial statements of Oclassen
Pharmaceuticals, Inc. (Oclassen), a wholly owned subsidiary, which statements
reflect total assets of $35,900,000 at December 31, 1996, and total revenues of
$34,421,000 and $29,247,000 for the years ended December 31, 1996 and 1995,
respectively. Those financial statements were audited by other auditors whose
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Somerset and Oclassen, is
based solely on the reports of each of the respective other auditors. We
conducted our audits of the these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the respective reports of other auditors provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
February 2, 1998, except as to
Note 2, which is as of February 27, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Somerset Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Somerset
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1997 and 1996, and
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Somerset Pharmaceuticals, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
February 4, 1998
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oclassen Pharmaceuticals, Inc.;
We have audited the balance sheets of Oclassen Pharmaceuticals, Inc.
(a Delaware corporation) as of December 31, 1995 and 1996, and the related
statements of income, stockholders' equity (deficit) and cash flows for the
years then ended (not presented herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Oclassen
Pharmaceuticals, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oakland California
January 17, 1997
F-4
<PAGE>
<TABLE>
<CAPTION>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 82,837 $ 158,221
Marketable securities 32,102 80,966
Accounts receivable, net of allowances for
doubtful accounts of $2,140 and $2,206 65,044 32,845
Royalty receivable 5,554
Inventories 46,967 32,429
Prepaid expenses and other current assets 416 6,381
Deferred tax assets 19,399 9,807
--------- ---------
Total current assets 246,765 326,203
Property and equipment, net 88,004 78,429
Investments and other assets 131,083 66,051
Product rights, net 289,129 2,171
--------- ---------
$ 754,981 $ 472,854
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 44,423 $ 31,758
Income taxes payable 9,553 472
Current portion of long-term debt 864 1,025
Current liability from acquisition of product rights 45,000
--------- ---------
Total current liabilities 99,840 33,255
Long-term debt 2,385 3,864
Long-term liability from acquisition of product rights 50,000
Deferred tax liabilities 36,887 12,226
--------- ---------
Total liabilities 189,112 49,345
--------- ---------
Commitments and contingencies
Minority interest 859 401
--------- ---------
Stockholders' equity:
Preferred stock; no par; 2,500,000 shares authorized;
none outstanding
Common stock; par value of $.0033; 500,000,000 shares
authorized; 87,882,233 and 85,432,702 shares
issued and outstanding 290 282
Additional paid-in capital 256,682 231,511
Retained earnings 275,037 184,853
Unrealized gain, net of tax 33,025 7,189
Notes receivable from stockholders (24) (727)
--------- ---------
565,010 423,108
--------- ---------
$ 754,981 $ 472,854
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, Except Earnings per Share)
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
REVENUES:
Product sales $324,015 $223,639 $170,227
Royalty income 14,249 27,162 22,247
-------- -------- --------
Total revenues 338,264 250,801 192,474
-------- -------- --------
OPERATING EXPENSES:
Cost of revenues 125,057 101,921 81,417
Research and development 18,055 22,895 24,562
Selling, general and administrative 50,937 38,891 34,873
Amortization of product rights 7,213 386 306
Merger expenses 14,718 13,939
-------- -------- --------
Total operating expenses 215,980 164,093 155,097
-------- -------- --------
OPERATING INCOME 122,284 86,708 37,377
OTHER INCOME:
Equity in earnings of joint ventures 10,694 17,909 22,766
Investment and other income (net) 11,620 9,861 12,905
-------- -------- --------
Total other income 22,314 27,770 35,671
-------- -------- --------
Income before provision for income taxes 144,598 114,478 73,048
Provision for income taxes 54,414 35,916 24,867
-------- -------- --------
NET INCOME $ 90,184 $ 78,562 $ 48,181
======== ======== ========
Basic earnings per share $ 1.04 $ 0.92 $ 0.58
======== ======== ========
Diluted earnings per share $ 1.01 $ 0.89 $ 0.56
======== ======== ========
Weighted average shares
outstanding, no dilution 86,991 85,028 83,317
======== ======== ========
Weighted average shares
outstanding diluted basis 89,325 88,081 85,515
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 90,184 $ 78,562 $ 48,181
--------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,381 7,283 6,019
Amortization 7,213 1,342 1,347
Deferred income tax (benefit) provision (1,948) 20,399 8,215
Decrease in deferred partnership liability (14,033)
Dividends received from Somerset 8,000 18,000 18,000
Equity in earnings of joint ventures (9,012) (14,684) (19,067)
Gain on sale of marketable securities (6,243)
(Recovery of) provision for doubtful accounts (66) 604 467
Tax benefit related to stock option plan 10,882 7,752 6,808
Changes in assets and liabilities:
Accounts receivable (32,133) (1,857) (11,637)
Royalty receivable 5,554 2,651 (8,205)
Inventories (14,538) (2,332) (8,359)
Prepaid expenses and other current assets 5,965 (1,053) (18)
Other assets (2,155) (2,386) 91
Accounts payable and accrued expenses 12,665 (4,123) 8,561
Income taxes payable 9,081 (2,512) 3,263
Other liabilities (744) (211)
--------- --------- ---------
Total adjustments 6,889 28,340 (15,002)
--------- --------- ---------
Net cash provided by operating activities 97,073 106,902 33,179
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (14,605) (12,835) (23,877)
Disposals of property and equipment 965 460 1,463
Purchases of marketable securities (130,321) (840,969) (387,280)
Proceeds from maturities of marketable securities 179,118 801,179 396,725
Proceeds from sale of common stock 7,005
Acquisition of product rights (144,171) (2,000)
Investment in Andrx (15,307) (15,645)
Additions to investments and other assets (6,496) (3,090) (818)
--------- --------- ---------
Net cash used in investing activities $(130,817) $ (55,255) $ (24,427)
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $ $ 743 $ 171
Principal payments on long-term debt (1,640) (886) (1,561)
Principal payments on liability for acquisitition of product rights (55,000)
Proceeds from exercise of stock options 15,000 9,210 12,204
--------- --------- ---------
Net cash (used in) provided by financing activities (41,640) 9,067 10,814
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (75,384) 60,714 19,566
Cash and cash equivalents at beginning of year 158,221 97,507 77,941
--------- --------- ---------
Cash and cash equivalents at end of year $ 82,837 $ 158,221 $ 97,507
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 336 $ 422 $ 472
Income taxes $ 36,734 $ 10,376 $ 6,765
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of product rights:
Fair value of assets acquired $(294,171) $ (2,000)
Fair value of liabilities assumed 150,000
========= =========
$(144,171) $ (2,000)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
ADDITIONAL RECEIVABLE UNEARNED
COMMON STOCK PAID-IN RETAINED UNREALIZED FROM COMPENSATION-
SHARES AMOUNT CAPITAL EARNINGS GAIN (LOSS) STOCKHOLDERS STOCK AWARDS
------ ------ ---------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 82,638 $ 273 $ 195,305 $ 58,110 $ (870) $ (653) $ (2,814)
Exercise of options/warrants 1,214 4 7,867 9
Tax benefit related to exercise of options 6,808
Amortization of unearned compensation 1,958
Common stock issued in private placement 322 1 4,438
Adjustment for unrealized gain 1,491
Net income 48,181
------ ----- --------- --------- ------ ------ --------
BALANCE AT DECEMBER 31, 1995 84,174 278 214,418 106,291 621 (644) (856)
Exercise of options/warrants 1,259 4 9,331 (83)
Tax benefit related to exercise of options 7,762
Amortization of unearned compensation 856
Adjustment for unrealized gain 6,568
Net income 78,562
------ ----- --------- --------- ------ ------ --------
BALANCE AT DECEMBER 31, 1996 85,433 282 231,511 184,853 7,189 (727)
Exercise of options/warrants 2,449 8 14,289 703
Tax benefit related to exercise of options 10,882
Adjustment for unrealized gain 25,836
Net income 90,184
------ ----- --------- --------- -------- ------ --------
BALANCE AT DECEMBER 31, 1997 87,882 $ 290 $ 256,682 $ 275,037 $ 33,025 $ (24) $
====== ===== ========= ========= ======== ===== ========
</TABLE>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
BALANCE AT DECEMBER 31, 1994 $ 249,351
Exercise of options/warrants 7,880
Tax benefit related to exercise of options 6,808
Amortization of unearned compensation 1,958
Common stock issued in private placement 4,439
Adjustment for unrealized gain 1,491
Net income 48,181
---------
BALANCE AT DECEMBER 31, 1995 320,108
Exercise of options/warrants 9,252
Tax benefit related to exercise of options 7,762
Amortization of unearned compensation 856
Adjustment for unrealized gain 6,568
Net income 78,562
---------
BALANCE AT DECEMBER 31, 1996 423,108
Exercise of options/warrants 15,000
Tax benefit related to exercise of options 10,882
Adjustment for unrealized gain 25,836
Net income 90,184
---------
BALANCE AT DECEMBER 31, 1997 $ 565,010
=========
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
Watson Pharmaceuticals, Inc. ("Watson" or the "Company") is engaged in
the development, production, marketing and distribution of off-patent and
proprietary pharmaceutical products. The consolidated financial statements
include the accounts of wholly owned and majority owned subsidiaries after
elimination of intercompany accounts and transactions. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company's significant wholly owned subsidiaries include Watson
Laboratories, Inc. ("Watson Labs"), Circa Pharmaceuticals, Inc. ("Circa"),
Oclassen Pharmaceuticals, Inc. ("Oclassen"), and Royce Laboratories, Inc.
("Royce"). Circa, Oclassen and Royce were acquired by Watson in July 1995,
February 1997 and April 1997, respectively. All three acquisitions were
accounted for as poolings of interests, and accordingly, the Company's
consolidated financial statements have been restated to include the results of
operations, financial position and cash flows from all three entities (Note 2).
Investments are accounted for under the equity method of accounting
where the Company can exert significant influence and ownership does not exceed
50%. These investments include Somerset Pharmaceuticals, Inc. and ANCIRC.
Investments in which the Company holds less than a 20% interest and does not
exert significant influence are accounted for under the cost method of
accounting. The Company's investment in Andrx Corporation ("Andrx") is accounted
for under the cost method of accounting.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, cash equivalents, marketable securities,
accounts and other receivables, accounts payable, accrued expenses and debt
approximate fair value. The fair value of cash equivalents, marketable
securities and the Company's investment in Andrx is based on quoted market
prices at December 31, 1997 and 1996.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The fair market value of the Company's cash, cash equivalents and
marketable securities, all of which mature in 1998, consisted of the following:
DECEMBER 31
1997 1996
-------- --------
(IN THOUSANDS)
Fixed income securities:
U.S. government and
government agency securities $ 27,996 $ 69,121
State-issued securities 2,300 3,405
Corporate bonds 4,500 16,936
Commerical paper 41,472 107,276
Equity securities 3,006 17,547
Money market, time deposits and cash 35,665 24,902
-------- --------
$114,939 $239,187
======== ========
F-10
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash equivalents are highly liquid investments with original maturities
of three months or less. Investments with maturity dates between three and
twelve months are considered to be marketable securities. All of the Company's
debt and equity securities are classified as available-for-sale securities.
Unrealized gains or losses on these securities are excluded from earnings and
are reported as a separate component of stockholders' equity, net of applicable
income taxes, until realized. Realized gains and losses are determined on the
specific identification method and are reported in investment and other income.
Realized gains and losses were not material for the years ended December 31,
1997 and 1996. In 1995, the Company realized a gain of $6.2 million from the
sales of marketable securities.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Major renewals and improvements are capitalized, while routine
maintenance and repairs are expensed as incurred. At the time properties are
retired from service, the cost and accumulated depreciation are removed from the
respective accounts and the related gains or losses are reflected in income.
Depreciation expense is computed principally on the straight-line
basis, over estimated useful lives of two to ten years for furniture, fixtures
and equipment and thirty years for buildings and building improvements.
Leasehold improvements and assets recorded under capital leases are amortized on
the straight-line basis over the respective lease terms or the estimated useful
life of the assets, ranging from five to thirty years.
PRODUCT RIGHTS
Product rights are stated at cost, less accumulated amortization, and
are amortized ratably over estimated lives of 17 years or less. The accumulated
amortization related to product rights was $8.5 million and $1.3 million at
December 31, 1997 and 1996, respectively.
POTENTIAL IMPAIRMENT OF LONG-LIVED ASSETS
The Company annually evaluates its long-lived assets, including product
rights, for potential impairment. When circumstances indicate that the carrying
amount of the asset may not be recoverable, as demonstrated by estimated future
cash flows, an impairment loss would be recorded based on fair value.
REVENUE RECOGNITION
The Company recognizes revenue, net of sales discounts and allowances,
from the sale of its pharmaceutical products upon shipment.
PRODUCT SALES TO MAJOR CUSTOMERS
In 1997, two customers in the aggregate accounted for 23% of the
Company's product sales, 12% and 11%, individually. In 1996, one customer
accounted for 10% of product sales. In 1995, no individual customer accounted
for more than 10% of product sales.
RESEARCH AND DEVELOPMENT ACTIVITIES
The costs associated with the development, testing and approval of
pharmaceutical products are expensed as incurred.
F-11
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
Income taxes are accounted for using an asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities at the applicable tax rates. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
EARNINGS PER SHARE ("EPS")
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding in each year. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding plus any potential dilution that could occur
if options and warrants were converted into common stock in each year.
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share", ("SFAS 128"). In accordance with the
implementation provisions of SFAS 128, the Company has restated earnings per
share in the Consolidated Statements of Income for the years ended December 31,
1996 and 1995. The unaudited quarterly data for the first three quarters of 1997
and for 1996 presented in Note 10 have also been restated to comply with the
provisions of SFAS 128. A reconciliation of the numerators and the denominators
of basic and diluted earnings per share for the years ended December 31, 1997,
1996, and 1995 is as follows (in thousands, except for EPS):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Basic EPS computation
Net income (numerator) $90,184 $78,562 $48,181
Weighted average shares outstanding (denominator) 86,991 85,028 83,317
Basic EPS $ 1.04 $ 0.92 $ 0.58
======= ======= =======
Diluted EPS Computation
Net income (numerator) $90,184 $78,562 $48,181
Weighted average shares outstanding 86,991 85,028 83,317
Assumed exercise of all outstanding
stock options 2,334 3,053 2,198
------- ------- -------
Weighted average shares outstanding
diluted basis (denominator) $89,325 $88,081 $85,515
Diluted EPS $ 1.01 $ 0.89 $ 0.56
======= ======= =======
</TABLE>
In October 1997, the Company effected a two-for-one stock split in the
form of a 100% stock dividend. All share and per share amounts for the reported
periods have been restated to reflect the stock split.
CONCENTRATION OF CREDIT RISK
The Company is subject to a concentration of credit risk with respect
to its trade receivable balance, all of which are due from service providers,
distributors, wholesalers and chain drug stores in the health care and
pharmaceutical industries throughout the United States. The Company performs
ongoing credit evaluations of its customers and maintains reserves for potential
uncollectible accounts. Actual losses from uncollectible accounts have been
within management's expectations.
F-12
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and disclosure of
comprehensive income (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information," in June 1997. SFAS 131 establishes
standards for the reporting of information about operating segments of a
business. Generally, financial information is required to be reported on the
basis that it is used internally by management for evaluating segment
performance.
SFAS 130 and SFAS 131 address disclosure matters and will have no
effect on the Company's consolidated financial position, results of operations
or cash flows. The Company will adopt SFAS 130 and SFAS 131 in 1998.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform with the 1997 presentation. These reclassifications had
no effect on net income or retained earnings.
2. MERGERS AND ACQUISITIONS
ACQUISITION OF ROYCE
On April 16, 1997, the stockholders of Royce approved the merger with
Watson and Royce became a wholly owned subsidiary of the Company. Royce
develops, manufactures and markets off-patent prescription drugs in solid dosage
forms (tablets and capsules). Under the terms of the Royce merger agreement,
Royce stockholders received 0.19 share of the Company's common stock for each
Royce share. Accordingly, the Company issued approximately 5.2 million shares of
its common stock for all of the outstanding common shares of Royce. The merger
qualified as a tax-free reorganization for federal income tax purposes and was
accounted for as a pooling of interests. The Company's consolidated financial
statements have been retroactively restated to include the results of Royce for
all periods presented. A one-time charge of $5.8 million for merger-related
expenses was recorded in the quarter ended June 30, 1997. These expenses
included investment banking fees and other costs related to the consolidation of
operations between the two companies.
ACQUISITION OF OCLASSEN
On February 26, 1997, the stockholders of Oclassen approved the merger
with Watson and Oclassen became a wholly owned subsidiary of the Company.
Oclassen develops specialty prescription pharmaceuticals to prevent and treat
skin diseases, and markets these products to dermatologists. Under the terms of
the Oclassen merger agreement, Oclassen stockholders received 0.37 share of the
Company's common stock for each Oclassen share. Accordingly, the Company issued
approximately 6.6 million shares of its common stock for all of the outstanding
common shares of Oclassen. The merger qualified as a tax-free reorganization for
federal income tax purposes and was accounted for as a pooling of interests. The
Company's consolidated financial statements have been retroactively restated to
include the results of Oclassen for all periods presented. A one-time charge of
$8.9 million for merger-related expenses was recorded in the quarter ended March
31, 1997. These expenses included investment banking fees and other costs
related to the consolidation of operations between the two companies.
F-13
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Combined and separate results of Watson, Oclassen, and Royce during the
periods preceding the mergers are summarized as follows (in thousands):
<TABLE>
<CAPTION>
WATSON OCLASSEN ROYCE COMBINED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
TWO MONTHS ENDED FEBRUARY 28, 1997 (UNAUDITED)
Total revenues $ 30,845 $ 8,222 n/a $ 39,067
Total Costs $ 19,371 $ 7,468 n/a $ 26,839
-------- -------- -------- --------
Net income $ 11,474 $ 754 n/a $ 12,228
FOUR MONTHS ENDED APRIL 30, 1997 (UNAUDITED
Total revenues $ 62,708 $ 16,255 $ 6,138 $ 85,101
Total Costs $ 46,854 $ 13,285 $ 6,010 $ 66,149
-------- -------- -------- --------
Net income $ 15,854 $ 2,970 $ 128 $ 18,952
YEAR ENDED DECEMBER 31, 1996
Total revenues $194,120 $ 34,364 $ 22,317 $250,801
Total Costs $120,822 $ 29,906 $ 21,511 $172,239
-------- -------- -------- --------
Net income $ 73,298 $ 4,458 $ 806 $ 78,562
YEAR ENDED DECEMBER 31, 1995
Total revenues $152,935 $ 29,036 $ 10,503 $192,474
Total Costs $105,045 $ 26,409 $ 12,839 $144,293
-------- -------- -------- --------
Net income $ 47,890 $ 2,627 $ (2,336) $ 48,181
</TABLE>
The combined financial results of the Company, Oclassen, and Royce
include adjustments and reclassifications made to conform accounting policies
and financial statement presentations of the three companies. Intercompany
transactions between the three companies for the periods presented were not
material.
SUBSEQUENT EVENT-ACQUISITION OF THE RUGBY GROUP, INC. ("RUGBY")
On February 27, 1998, Watson completed its acquisition of Rugby from
Hoechst Marion Roussel, Inc. Rugby develops, manufactures, and markets a wide
array of off-patent pharmaceutical products. Under the terms of the agreement,
the Company acquired Rugby and its ANDAs, which include several licensed
products, plus Rugby's sales and marketing operations for U.S. off-patent
pharmaceuticals. The transaction also included Rugby's product development group
and product pipeline. The agreement provided for an initial payment of
approximately $67.5 million in cash and contingent payments based on certain
future sales and operating results.
ACQUISITION OF PRODUCTS FROM G. D. SEARLE & CO. ("SEARLE")
In the fourth quarter of 1997, the Company acquired the U.S. rights to
certain Searle branded off-patent oral contraceptive products. The FDA approved
one of these products, Trivora(R) (levonorgestrel and ethinyl estradiol), in
February 1998. Under the terms of this agreement, cash of $85.0 million was paid
through December 31, 1997, which included $5.0 million for Trivora(R). The
Company will pay a total of $45.0 million for Trivora(R), with the remaining
$40.0 million to be paid in 1998. The Company also acquired the U.S. rights to
additional oral contraceptive products from Searle (the "Future Products").
Payment for these products is due upon achievement of certain events, which
include in certain instances, approvals by the FDA.
F-14
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If all contingent events occur before July 1, 1999, the aggregate
acquisition cost for the Future Products will be $48.5 million plus certain
contingent payments.
ACQUISITION OF PRODUCTS FROM COCENSYS, INC. ("COCENSYS")
In October 1997, the Company acquired two products and two co-promotion
agreements from CoCensys. In addition, Watson also hired certain sales and
marketing personnel from CoCensys. A total of $9.0 million was paid from
available cash to fund this acquisition.
ACQUISITION OF PRODUCT RIGHTS TO DILACOR XR(R)
On June 30, 1997, the Company obtained the exclusive U. S. and certain
worldwide marketing, sales, and distribution rights to Dilacor XR(R) for $190.0
million in cash (payable as set forth below), future royalties, and an inventory
supply agreement. These product rights were capitalized and are amortized on the
straight-line basis over 17 years. The Company made scheduled payments to RPR of
$95.0 million through December 31, 1997, from its available cash. The remaining
scheduled payments are due as follows:
DUE DATE AMOUNT
--------------- -------------
January 1, 1998 $45.0 million
January 1, 1999 30.0 million
January 1, 2000 15.0 million
January 1, 2001 5.0 million
-------------
Total $95.0 million
==============
Prior to the Company's purchase of the rights to Dilacor XR(R), Circa
and RPR were partners in the development of this product. Since 1993, the
Company has earned royalties from RPR's sales of Dilacor XR(R). Revenues earned
under this royalty arrangement were $14.2 million in 1997 (earned through the
termination date of June 30, 1997), $27.2 million in 1996 and $22.2 million in
1995.
ACQUISITION OF CIRCA
On July 17, 1995, the stockholders of the Company and Circa approved
the merger with Watson and Circa became a wholly owned subsidiary of the
Company. Under the terms of the Circa merger agreement, Circa stockholders
received 0.86 share of the Company's common stock for each Circa share.
Accordingly, the Company issued approximately 37.4 million shares of its common
stock for all of the outstanding common shares of Circa. The merger qualified as
a tax-free reorganization and was accounted for as a pooling of interests. The
Company's consolidated financial statements have been retroactively restated to
include the results of Circa for all periods presented. A one-time charge of
$13.9 million for merger-related expenses was recorded in the quarter ended
September 30, 1995. These expenses included investment banking fees and other
costs related to the consolidation of operations between the two companies.
Prior to its merger with the Company, Circa maintained stock award
plans for key employees and officers. The stock granted under these plans
contained certain vesting provisions which required unearned compensation to be
recorded for the fair market value of the shares issued. The stock awards were
converted to equivalent common shares in the Company pursuant to the merger
exchange ratio. Compensation expense was charged on the straight-line basis to
selling, general and administrative expense over the related vesting periods and
was fully amortized during the year ended December 31, 1996.
F-15
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BALANCE SHEET COMPONENTS
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(IN THOUSANDS)
INVENTORIES:
Raw materials $ 16,905 $ 12,477
Work-in-process 9,303 7,150
Finished goods 20,759 12,802
--------- ---------
$ 46,967 $ 32,429
========= =========
PROPERTY AND EQUIPMENT:
Buildings and improvements $ 48,206 $ 37,859
Leaseholds improvements 8,722 9,499
Land and land improvements 5,261 4,937
Machinery and equipment 50,449 46,872
Research and laboratory equipment 9,707 9,969
Furniture and fixtures 3,183 4,156
--------- ---------
125,528 113,292
Less accumulated depreciation and amortization (47,681) (40,256)
--------- ---------
77,847 73,036
Construction in progress 10,157 5,393
--------- ---------
$ 88,004 $ 78,429
========= =========
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Trade accounts payable $ 24,824 $ 18,485
Accrued payroll and benefits 5,684 3,688
Contract obligations and reserves 2,449 2,651
Royalties and other accruals 11,466 6,934
--------- ---------
$ 44,423 $ 31,758
========= =========
F-16
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM INVESTMENTS
Investments and other assets consisted of the following:
DECEMBER 31,
1997 1996
-------- --------
(IN THOUSANDS)
Investments in joint ventures $ 31,626 $ 27,434
Other long-term investments 92,233 33,730
Other assets 7,224 4,887
-------- --------
$131,083 $ 66,051
======== ========
INVESTMENT IN SOMERSET PHARMACEUTICALS,INC.("SOMERSET") JOINT VENTURE
The Company owns 50% of the outstanding common stock of Somerset and
utilizes the equity method to account for this investment. Somerset manufactures
and markets the product Eldepryl(R), which is used in the treatment of
Parkinson's disease. Income recognized from Somerset was approximately $12.7
million, $20.1 million, and $24.8 million in 1997, 1996, and 1995, respectively.
Income is composed of the Company's 50% share of Somerset's earnings and
management fees, offset by amortization of goodwill. The net excess of the cost
of this investment over the fair value of net assets acquired was $6.4 million
and $7.4 million at December 31, 1997 and 1996, respectively. Such goodwill is
amortized on the straight-line basis over 15 years.
Somerset has been notified by the Internal Revenue Service ("IRS") that
it may be subject to additional income taxes and interest for its 1993, 1994,
and 1995 tax years. The IRS has proposed adjustments relating to credits claimed
under Internal Revenue Code Section 936. These proposed adjustments amount to
approximately $13.0 million of additional income tax and interest charges, 50%
of which would be Watson's share. Management of Somerset believes that it has
complied with all relevant tax laws and intends to vigorously defend its
position on this matter.
INVESTMENT IN OTHER JOINT VENTURES
The Company has entered into several other joint ventures, including
ANCIRC, the Company's collaboration with Andrx, and two agreements with
China-based Changzhou No. 4 Pharmaceuticals Factory. Watson recognized losses
from other joint ventures of approximately $2.0 million, $2.2 million, and $1.7
million in 1997, 1996, and 1995, respectively.
F-17
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMBINED RESULTS FOR UNCONSOLIDATED INVESTMENTS IN JOINT VENTURES
The following aggregate financial information is provided for
unconsolidated investments in joint ventures accounted for using the equity
method:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- ---------
(IN THOUSANDS)
Net revenues $ 73,489 $101,512 $107,365
======== ======== ========
Gross profit $ 39,640 $ 88,840 $ 93,748
======== ======== ========
Net income $ 12,924 $ 31,564 $ 41,099
======== ======== ========
DECEMBER 31,
-----------------
1997 1996
------- -------
(IN THOUSANDS)
Current assets $60,604 $46,572
Other assets 8,508 10,342
------- -------
Total assets $69,112 $56,914
======= =======
Current liabilities $18,300 $20,123
Other liabilities 1,309 --
Stockholders' equity 49,503 36,791
------- -------
Total liabilities and stockholders' equity $69,112 $56,914
======= =======
OTHER LONG-TERM INVESTMENTS
Other long-term investments are comprised primarily of the Company's
investment in Andrx. Andrx develops advanced controlled-release drug delivery
systems and distributes certain off-patent pharmaceutical products manufactured
by others. Andrx trades publicly on the Nasdaq Stock Market, under the symbol
ADRX. At December 31, 1997, the Company owned 2.7 million common shares of
Andrx, which represents approximately 18.5% of the total Andrx common shares
outstanding. This investment included 600,000 shares of Andrx purchased in June
1997 for $15.3 million in cash. Watson accounts for this investment using the
cost method, adjusted to fair value. At December 31, 1997, the Company recorded
an unrealized gain of $33.1 million (net of income taxes of $22.1 million) on
its investment in Andrx, which is included as a separate component of
stockholders' equity.
F-18
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEBT
Long-term debt consisted of the following:
DECEMBER 31,
----------------------
1997 1996
------- -------
(IN THOUSANDS)
Note payable to bank, unsecured,
at a fixed rate of 8.1% per annum,
payable in monthly installments of $78,
including interest, due August 2001 $ 2,904 $ 3,577
Other notes payable 345 1,312
------- -------
3,249 4,889
Less current portion (864) (1,025)
------- -------
$ 2,385 $ 3,864
======= =======
At December 31, 1997, annual maturities of long-term debt consisted of the
following:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
-----------------------------------------
1998 $ 864
1999 1,002
2000 858
2001 525
2002 -
-------
$ 3,249
=======
At December 31, 1997, the Company maintained two financing agreements,
which are summarized as follows.
In 1997, the Company entered into an agreement with a bank (the "1997
financing agreement") that provided for a $50.0 million revolving, unsecured
line of credit which expires on March 31, 1998. This commitment was subsequently
increased to $75.0 million in January 1998. The 1997 financing agreement
provides favorable interest rates equal to the bank's Base Rate (8.50% per annum
at December 31, 1997) or a LIBOR Rate (as defined in the 1997 financing
agreement) plus 0.75%. Under the 1997 financing agreement, the Company must
maintain specified financial ratios and comply with certain restrictive
covenants. No borrowings have been made under the 1997 financing agreement.
In 1994, the Company entered into an agreement with a bank (the "1994
financing agreement"), which has been amended and which provided for several
financing facilities. As of December 31, 1997, the facilities available under
the 1994 financing agreement were (i) a $20.0 million revolving, unsecured line
of credit which expires on August 31, 1998, and (ii) the balance of an original
$5.0 million term loan. The 1994 financing agreement provides for variable
interest rates for the $20.0 million revolving, unsecured line of credit equal
to the bank's Reference Rate (8.50% per annum at December 31, 1997) minus 0.25%
or other short-term rates based on various interest rate bases. Under the 1994
financing agreement, the Company must maintain specified financial ratios and
comply with certain restrictive covenants. With the exception of the original
$5.0 million term loan noted above, no borrowings have been made under the 1994
financing agreement.
F-19
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
The provision for income taxes is summarized as follows:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- --------
Current provision: (in thousands)
Federal $ 46,990 $ 11,059 $ 13,182
State 9,372 4,458 3,585
-------- -------- --------
56,362 15,517 16,767
-------- -------- --------
Deferred provision (benefit):
Federal (2,228) 17,364 7,622
State 280 3,035 478
-------- -------- --------
(1,948) 20,399 8,100
-------- -------- --------
Provision for income taxes $ 54,414 $ 35,916 $ 24,867
======== ======== ========
The exercise of stock options represents a tax benefit and has been
reflected as a reduction of income taxes payable and an increase to additional
paid-in capital. Such benefits recorded were $10.9 million, $7.8 million and
$6.8 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Income taxes of $1.6 million have been provided for the possible distribution of
approximately $21.0 million of undistributed earnings related to the Company's
investments in joint ventures.
Reconciliations between the statutory federal income tax rate and the
Company's effective income tax rate were as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
Expected tax at federal statutory rate 35% 35% 35%
State income tax, net of federal benefit 4 5 5
Research tax credits and other credits (1) (1)
Dividends received deduction (2) (4) (7)
Non-deductible merger expenses 2 3
Other (1) (4) (1)
--- --- ---
38% 31% 34%
=== === ===
F-20
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities are measured based on the
difference between the financial statement and tax bases of assets and
liabilities at the applicable tax rates. The significant components of the
Company's net deferred tax assets and liabilities were:
DECEMBER 31,
------------------
1997 1996
------- -------
(in thousands)
Benefits from NOL carryforwards 5,319 4,492
Difference in accounting for inventory and receivables 8,900 8,299
Difference in depreciation for book and tax purposes (7,351) (5,544)
Difference in investment basis for book and tax (1,590) (1,205)
Unrealized gains - SFAS 115 (22,093) (4,800)
Valuation allowance (5,529) (7,854)
Other 4,856 4,193
------- -------
(17,488) (2,419)
======= =======
The Company had net operating loss ("NOL") carryforwards at December
31, 1997 of approximately $15.0 million and $13.0 million for federal and
Florida state income tax purposes, respectively. During 1997, the Company
utilized NOL carryforwards of approximately $2.0 million to offset federal
income. Due to restrictions imposed as a result of ownership changes to acquired
subsidiaries, the amount of the NOL carryforward available to offset future
taxable income is subject to limitation. The annual NOL utilization may be
further limited if additional changes in ownership occur. The Company's NOL
carryforwards will begin to expire in 2003.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In 1992, the Company authorized 2.5 million shares of no par preferred
stock. The Board of Directors has the authority to fix the rights, preferences,
privileges and restrictions, including dividend rates, conversion and voting
rights, terms and prices of redemptions and liquidation preferences without vote
or action by the stockholders. At December 31, 1997, no preferred stock was
issued.
STOCK OPTION PLANS
The Company has adopted several stock option plans that authorize the
granting of options to purchase the Company's common stock subject to certain
conditions. Under these plans, the Company has reserved 5.0 million shares for
issuance at December 31, 1997. The options are granted at the fair market value
of the shares underlying the options at the date of the grant, generally become
exercisable over a five-year period and expire in ten years. In conjunction with
the mergers with Circa, Oclassen, and Royce, certain stock option and warrant
plans were assumed by the Company. The options and warrants in these plans were
adjusted by the individual exchange ratios specified in each merger agreement.
No additional options or warrants will be granted under any of the assumed
plans.
F-21
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), in 1996. As permitted by SFAS 123, the Company measures compensation cost
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations, but provides pro forma
disclosures of net income and earnings per share as if the fair value method (as
defined in SFAS 123) had been applied beginning in 1995. Had compensation cost
been determined using the fair value method prescribed by SFAS 123, the
Company's net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income As reported $ 90,184 $ 78,562 $ 48,181
======== ========== ==========
Pro forma $ 82,182 $ 72,472 $ 43,021
======== ========== ==========
Basic earnings per share As reported $ 1.04 $ 0.92 $ 0.58
======== ========== ==========
Pro forma $ 0.94 $ 0.85 $ 0.52
======== ========== ==========
Diluted earnings per share As reported $ 1.01 $ 0.89 $ 0.56
======== ========== ==========
Pro forma $ 0.92 $ 0.82 $ 0.50
======== ========== ==========
</TABLE>
The weighted average fair value of the options have been estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997, 1996 and 1995,
respectively: no dividend yield; expected volatility of 49%, 51% and 55%;
risk-free interest rate of 6.15%, 6.18% and 6.43% per annum; and expected terms
ranging from approximately three to eight years. Weighted averages are used
because of varying assumed exercise dates.
A summary of the status of the Company's stock option plans as of
December 31, 1997, 1996 and 1995, and for the years then ended is presented
below (shares in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 7,615 $ 12.39 8,295 $ 11.24 5,653 $ 7.26
Granted 2,388 $ 23.25 1,215 $ 17.88 3,923 $ 15.71
Exercised (2,399) $ 5.97 (1,150) $ 7.56 (1,111) $ 6.40
Canceled (564) $ 18.49 (745) $ 16.08 (170) $ 13.72
------ ------ ------
Outstanding at end of year 7,040 $ 17.77 7,615 $ 12.39 8,295 $ 11.24
====== ====== ======
Weighted average fair value of options
granted during the year $12.28 $ 8.42 $ 7.34
====== ====== ======
</TABLE>
F-22
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
WEIGHTED AVERAGE EXERCISE PRICE EXERCISE PRICE
RANGE OF SHARES REMAINING OF SHARES SHARES OF SHARES
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE OUTSTANDING EXERCISABLE EXERCISABLE
---------------- ----------- ----------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3 to $ 13 1,760 5.6 $ 7 1,408 $ 7
$ 13 to $ 19 3,051 7.8 $ 18 1,225 $ 18
$ 19 to $ 33 1,947 9.1 $ 25 122 $ 21
$ 33 to $ 51 282 2.9 $ 39 252 $ 39
----- ----
$ 3 to $ 51 7,040 7.4 $ 18 3,007 $ 15
===== ====
</TABLE>
8. RELATED PARTIES
The Company leases a portion of its facilities from related parties.
The related aggregate rent expense in 1997, 1996 and 1995 was $309,000, $432,000
and $432,000, respectively, and was allocated to cost of revenues, research and
development and selling, general and administrative expenses.
The Company had notes receivable due from related parties in the
amounts of $2.0 million and $2.4 million at December 31, 1997 and 1996,
respectively. The $2.0 million note will mature in April 1998; the $2.4 million
note was repaid during 1997.
9. COMMITMENTS AND CONTINGENCIES
FACILITY AND EQUIPMENT LEASES
The Company has entered into operating leases for certain facilities
and equipment. The terms of the operating leases for the Company's facilities
require the Company to pay property taxes, normal maintenance expenses and
maintain minimum insurance coverage. Total rental expense for operating leases
in 1997, 1996 and 1995, including rent paid to related parties, was $2.5
million, $2.1 million and $2.0 million, respectively.
At December 31, 1997, future minimum lease payments under all
noncancelable operating leases consisted of the following:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
1998 $ 2,779
1999 2,594
2000 654
2001 251
2002 and after 99
-------
$ 6,377
=======
F-23
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE RETIREMENT PLAN
The Company maintains a 401(k) retirement plan covering substantially
all employees. Monthly contributions are made by the Company based upon the
employee contributions to the plan. The Company contributed approximately
$398,000, $472,000 and $296,000 to the retirement plan for the years ended
December 31, 1997, 1996, and 1995, respectively.
LEGAL MATTERS
In March 1996, the Company paid $2.7 million in settlement of all
outstanding claims related to an inquiry by the United States Department of
Justice as to possible violations of the False Claims Act in respect of drugs
sold by Circa prior to cessation of these product sales in 1990. The Company had
established a reserve at December 31, 1995 for the full amount of the
settlement.
The Company is involved in various disputes and litigation matters
which arise in the ordinary course of business. The litigation process is
inherently uncertain and it is possible that the resolution of these disputes
and lawsuits may adversely affect the Company. Management believes, however,
that the ultimate resolution of such matters will not have a material adverse
impact on the Company's consolidated financial position or results of
operations.
F-24
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly financial and market price
information is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
1997 QUARTER QUARTER QUARTER QUARTER
- ---- --------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 109,764 $ 91,817 $ 70,943 $ 65,740
Costs and expenses 66,091 53,612 46,649 49,628
--------- -------- -------- --------
Operating income 43,673 38,205 24,294 16,112
Other income, net 3,058 4,230 7,376 7,650
Provision for income taxes 17,308 14,837 12,558 9,711
--------- -------- -------- --------
Net income $ 29,423 $ 27,598 $ 19,112 $ 14,051
========= ======== ======== ========
Basic earnings per share $ 0.33 $ 0.32 $ 0.22 $ 0.16
========= ======== ======== ========
Diluted earnings per share $ 0.33 $ 0.31 $ 0.22 $ 0.16
========= ======== ======== ========
Market price per share: High $ 34.13 $ 30.38 $ 22.25 $ 23.06
Low $ 27.00 $ 21.63 $ 16.00 $ 17.69
</TABLE>
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
1996 QUARTER QUARTER QUARTER QUARTER
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 67,292 $ 62,333 $ 61,619 $ 59,557
Costs and expenses 42,948 40,914 41,049 39,182
-------- -------- -------- --------
Operating income 24,344 21,419 20,570 20,375
Other income, net 6,792 7,385 6,762 6,831
Provision for income taxes 10,164 9,609 8,513 7,630
-------- -------- -------- --------
Net income $ 20,972 $ 19,195 $ 18,819 $ 19,576
======== ======== ======== ========
Basic earnings per share $ 0.25 $ 0.23 $ 0.22 $ 0.23
======== ======== ======== ========
Diluted earnings per share $ 0.24 $ 0.22 $ 0.21 $ 0.22
======== ======== ======== ========
Market price per share: High $ 23.00 $ 20.00 $ 24.25 $ 24.75
Low $ 15.88 $ 13.00 $ 18.25 $ 18.50
</TABLE>
The quarterly data above were restated, as applicable, to reflect the
adoption of SFAS 128 and for acquisitions in 1997 accounted for under the
pooling of interests method as further discussed in Note 1 and Note 2,
respectively. Accordingly, this information varies from historical Form 10-Q
filings with the Securities and Exchange Commission prior to the effective dates
of these transactions.
F-25
<PAGE>
<TABLE>
<CAPTION>
WATSON PHARMACEUTICALS, INC.
SCHEDULE II - VALUATION & QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGE TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS/ END OF
OF PERIOD EXPENSES OTHER PERIOD
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR END 1997:
Allowance for doubtful accounts $ 2,206 $ - $ (66) $ 2,140
YEAR END 1996:
Allowance for doubtful accounts $ 1,602 $ 1,749 $ (1,145) $ 2,206
YEAR END 1995:
Allowance for doubtful accounts $ 1,135 $ 600 $ (133) $ 1,602
</TABLE>
F-26
<PAGE>
WATSON PHARMACEUTICALS, INC.
EXHIBIT INDEX
1997 FORM 10-K
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.2 Credit Agreement between the Company, its subsidiaries and
Mellon Bank, N.A. dated December 19, 1997.
4.2(a) Amendment Number One to Credit Agreement between the Company,
its subsidiaries and Mellon Bank, N.A. dated as of January
23, 1998.
10.20(a) Consulting Agreement between Patrick J. McEnany and the
Company dated January 31, 1998.
10.20(b) Amendment to Stock Option Agreement between Patrick J.
McEnany and the Company dated January 29, 1998.
10.27 Stock Purchase Agreement among the Company, Hoechst Marion
Roussel, Inc. and Marisub, Inc. dated August 25, 1997. *
10.27(a) Amendment to Stock Purchase Agreement among the Company,
Hoechst Marion Roussel, Inc. and Marisub, Inc. dated
November 26, 1997.
10.27(b) Second Amendment to Stock Purchase Agreement by and among the
Company, Hoechst Marion Roussel, Inc. and Marisub, Inc.
dated February 27, 1998. *
10.28 Supply and License Agreement by and between Hoechst Marion
Roussel, Inc. and The Rugby Group, Inc. dated February 27,
1998. *
10.29 Contract Manufacturing Agreement by and between Hoechst
Marion Roussel, Inc. and The Rugby Group, Inc. dated February
27, 1998. *
22.1 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule (EDGAR version only).
99.1 Consolidated Financial Statements of Somerset
Pharmaceuticals, Inc. and Subsidiaries for the years ended
December 31, 1997, 1996 and 1995.
(*) The Company has submitted a confidential treatment request relating to
certain provisions of these agreements with the Securities and Exchange
Commission.
EXHIBIT 4.2
CREDIT AGREEMENT
WATSON PHARMACEUTICALS, INC.
AND
MELLON BANK, N.A.
DECEMBER __, 1997
<PAGE>
TABLE OF CONTENTS
PAGE(S)
ARTICLE I
DEFINITIONS................................ 1
SECTION 1.1 Defined Terms............................................. 1
SECTION 1.2 Other Definitional Provisions............................. 7
ARTICLE II
THE CREDIT................................ 7
SECTION 2.1 The Revolving Loans....................................... 7
(a) The Revolving Commitment.................................. 7
(b) Limitation on Revolving Loans............................. 8
(c) Making the Revolving Loans................................ 8
(d) Reduction of the Revolving Commitment..................... 8
(e) Revolving Note............................................ 8
SECTION 2.2 Repayment................................................. 9
(a) Mandatory Repayments...................................... 9
(b) Optional Payment.......................................... 9
SECTION 2.3 Interest Rate and Payment Dates........................... 9
(a) Payment................................................... 9
(b) Interest Rate............................................. 10
(c) Rate Periods.............................................. 10
(d) Interest After Maturity................................... 10
(e) Selection, Conversion or Renewal of Rate Options.......... 10
(f) Base Rate Fallback........................................ 11
SECTION 2.4 Closing Fees...............................................11
SECTION 2.5 Unused Commitment Fees.................................... 11
ARTICLE III
GENERAL PROVISIONS CONCERNING THE REVOLVING LOANS...................... 11
SECTION 3.1 Use of Proceeds........................................... 11
SECTION 3.2 Computation of Interest and Fees.......................... 12
(a) Calculations.............................................. 12
(b) Determination by Bank..................................... 12
-i-
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TABLE OF CONTENTS
(Continued)
PAGE(S)
SECTION 3.3 Payments.................................................. 12
SECTION 3.4 Payment on Non-Business Days.............................. 12
SECTION 3.5 Reduced Return............................................ 12
SECTION 3.6 Indemnities and Losses.................................... 13
(a) Indemnities............................................... 13
(b) Funding Losses............................................ 13
SECTION 3.7 Requirements of Law....................................... 14
ARTICLE IV
CONDITIONS OF LENDING.......................... 15
SECTION 4.1 Conditions Precedent to Initial Revolving Loans........... 15
SECTION 4.2 Conditions Precedent to Each Borrowing.................... 16
ARTICLE V
REPRESENTATIONS AND WARRANTIES..................... 17
SECTION 5.1 Representations and Warranties............................ 17
(a) Organization.............................................. 17
(b) Authorization............................................. 17
(c) Governmental Consents..................................... 17
(d) Validity.................................................. 17
(e) Financial Condition....................................... 17
(f) Litigation................................................ 18
(g) Employee Benefit Plans.................................... 18
(h) Disclosure................................................ 18
(i) Environmental Matters..................................... 18
(j) Employee Matters.......................................... 19
(k) Solvency.................................................. 19
(l) Title to Properties....................................... 19
(m) Tax Returns............................................... 19
(n) Compliance with Other Agreements and Applicable Laws...... 20
ARTICLE VI
COVENANTS................................. 20
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TABLE OF CONTENTS
(Continued)
PAGE(S)
SECTION 6.1 Affirmative Covenants..................................... 20
(a) Financial Information..................................... 20
(b) Notices and Information................................... 21
(c) Corporate Existence, Etc.................................. 22
(d) Payment of Taxes and Claims............................... 22
(e) Maintenance of Properties; Insurance...................... 23
(f) Inspection................................................ 23
(g) Compliance with Laws Etc.................................. 23
(h) Hazardous Waste Studies................................... 23
SECTION 6.2 Negative Covenants........................................ 23
(a) Leverage Ratio............................................ 23
(b) Minimum Net Worth......................................... 24
(c) Liens Etc................................................. 24
(d) Debt...................................................... 24
(e) Consolidation, Merger or Dissolution...................... 24
(f) Loans, Investments, Secondary Liabilities................. 24
(g) Asset Sales............................................... 25
(h) Dividends................................................. 25
(i) Transactions with Affiliates.............................. 25
(j) Books and Records......................................... 25
(k) Restructure............................................... 25
ARTICLE VII
EVENTS OF DEFAULT............................ 26
SECTION 7.1 Events of Default......................................... 26
ARTICLE VIII
MISCELLANEOUS............................... 28
SECTION 8.1 Amendments, Etc........................................... 28
SECTION 8.2 Notices, Etc.............................................. 28
SECTION 8.3 No Waiver; Remedies....................................... 29
SECTION 8.4 Costs and Expenses........................................ 29
SECTION 8.5 Participations............................................ 29
SECTION 8.6 Effectiveness: Binding Effect............................. 29
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TABLE OF CONTENTS
(Continued)
PAGE(S)
SECTION 8.7 Governing Law; Choice of Forum; Service of Process; Jury
Trial Waiver.............................................. 30
SECTION 8.8 Waiver of Notices......................................... 31
SECTION 8.9 Entire Agreement.......................................... 31
SECTION 8.10 Separability of Provisions................................ 31
SECTION 8.11 Execution in Counterparts................................. 31
SCHEDULE 5.1(f) Litigation
SCHEDULE 5.1(i) Environmental Matters
SCHEDULE 5.1(m) Tax Returns
SCHEDULE 6.2(c) Permitted Liens
SCHEDULE 6.2(d)(iv) Permitted Debt
SCHEDULE 6.2(f)(vi) Permitted Investments
EXHIBIT A Revolving Note
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CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of December __, 1997, is entered into
between WATSON PHARMACEUTICALS, INC., a Nevada corporation ("BORROWER") and
MELLON BANK, N.A. ("BANK"). Borrower and Bank agree as follows:
ARTICLE I
DEFINITIONS
SECTION I.1 DEFINED TERMS. As used in this Agreement, the following
terms have the following meanings:
"ACQUISITION": The acquisition of any purchase or other acquisition by
an Obligor (directly or indirectly) of assets or securities of any other Person,
other than the purchase of inventory, equipment, or other assets in the ordinary
course of business.
"AGREEMENT": This Credit Agreement, as amended, supplemented or
modified from time to time.
"AVERAGE UNUSED PORTION OF REVOLVING COMMITMENT": as of the end of any
month, the Revolving Commitment, LESS the average daily balance of Revolving
Loans that were outstanding during the month just ended.
"BANK": As set forth in the introductory paragraph of this Agreement.
"BASE RATE": The interest rate per annum announced from time to time by
Bank as its Base Rate. The Base Rate may be greater or less than other interest
rates charged by Bank to other borrowers and is not solely based or dependent
upon the interest rate which Bank may charge any particular borrower or class of
borrowers. Information concerning the Base Rate may be obtained from Bank.
"BASE RATE OPTION": Has the meaning set forth in Section 2.3(b).
"BOA": Bank of America NT & SA.
"BORROWER": As set forth in the introductory paragraph of this
Agreement.
"BORROWING": As defined in Section 2.1(a).
"BUSINESS DAY": Any day on which Bank is open for business at the
location where the Note is payable unless otherwise stated.
"CHANGE OF CONTROL": Shall be deemed to have occurred at such times as
a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Act of 1934), becomes the "beneficial owner" (as defined in Rule
13d-3 under the
<PAGE>
Securities Exchange Act of 1934), directly or indirectly, of more than fifty
percent (50%) of the total voting power of all classes of stock then outstanding
of Borrower normally entitled to vote in the election of directors.
"CLOSING FEE": Has the meaning set forth in Section 2.4.
"DEFAULT": A condition or event which, after notice or lapse of time or
both, would constitute an Event of Default if that condition or event were not
cured or removed within any applicable grace or cure period.
"DOLLARS AND $": Dollars in lawful currency of the United States of
America.
"EBITDA": as of the end of any fiscal quarter, the sum of Borrower's
consolidated net earnings (or loss), less the amount of any extraordinary gains,
and before interest expense, cash income taxes, depreciation, and amortization
for the four fiscal quarter period ended with such fiscal quarter, each as
determined in accordance with GAAP; it being understood that if Borrower
completes a Permitted Acquisition that involves the acquisition of a Person,
then (i) for the first fiscal quarter ended after the date of the consummation
of such Acquisition, EBITDA will be calculated by including the EBITDA of the
acquired Person for its prior four fiscal quarters, (ii) for the second fiscal
quarter ended after the date of the consummation of such Acquisition, EBITDA
will be calculated by including the EBITDA of the acquired Person for its prior
three fiscal quarters, (iii) for the third fiscal quarter ended after the date
of the consummation of such Acquisition, EBITDA will be calculated by including
the EBITDA of the acquired Person for its prior two fiscal quarters, (iv) for
the fourth fiscal quarter ended after the date of the consummation of such
Acquisition, EBITDA will be calculated by including the EBITDA of the acquired
Person for its immediately prior fiscal quarter, and (v) thereafter, EBITDA will
be calculated without adding any EBITDA of the acquired Person that predated the
Permitted Acquisition.
"ERISA": The Employee Retirement Income Security Act of 1974, as
amended to the date hereof and from time to time hereafter and any successor
statute.
"ERISA AFFILIATE": As applied to any Person, any trade or business
(whether or not incorporated) which is a member of a group of which that Person
is a member and which is under common control within the meaning of Section
414(b) and (c) of the Internal Revenue Code.
"GAAP": Generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession or any public commission having regulatory responsibility over
Borrower or any Subsidiary.
"GUARANTORS": Watson Laboratories, Inc., Circa Pharmaceuticals, Inc.,
Oclassen
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Pharmaceuticals, Inc., and Royce Laboratories, Inc.
"GUARANTY": A general continuing guaranty executed and delivered by the
Guarantors respecting the obligations of Borrower owing to Bank.
"HOECHST": Hoechst Marion Roussel, Inc., a Delaware corporation.
"INTEREST RATE OPTIONS": Has the meaning set forth in Section 2.3(b).
"INTERNAL REVENUE CODE": The Internal Revenue Code of 1986, as amended
to the date hereof and from time to time hereafter and any successor statute.
"LIEN": Any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"LIBOR RATE OPTION": Has the meaning set forth in Section 2.3(b).
"LIBOR RATE": For any day for any proposed or existing Rate Segment
corresponding to a Rate Period shall mean the rate per annum determined by Bank
to be the rate per annum obtained by dividing (the resulting quotient to be
rounded upward to the nearest 1/16 of 1%) (A) the rate of interest (which shall
be the same for each day in such Rate Period) estimated in good faith by Bank in
accordance with its usual procedures (which determination shall be conclusive)
to be the average of the rates per annum for deposits in United States dollars
offered to major money center banks in the London interbank market at
approximately 11:00 a.m., London time, two London Business Days prior to the
first day of such Rate Period for delivery on the first day of such Rate Period
in amounts comparable to such Rate Segment (or, if there are no such comparable
amounts actively traded, the smallest amounts actively traded) and have
maturities comparable to such Rate Period by (B) a number equal to 1.00 minus
the Libor Rate Reserve Percentage for such day.
The "LIBOR RATE" also may be expressed by the following formula:
(average of rates offered to major
money banks in the London inter-
Libor Rate = BANK MARKET ESTIMATED BY BANK)
(1.00 - Libor Rate Reserve Percentage)
"LIBOR RATE RESERVE PERCENTAGE": For any day shall mean the percentage
(rounded upward to the nearest 1/16 of 1%), as determined in good faith by Bank
(which determination shall be conclusive) as representing for such day the
maximum effective reserve requirement (including, without limitation,
supplemental, marginal and emergency requirements ) for member banks of the
Federal Reserve System with respect to eurocurrency funding (currently referred
to as "Eurocurrency Liabilities") of any maturity. Each Libor Rate shall be
adjusted automatically as of the effective date of any change in
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the Libor Rate Reserve Percentage.
"LOAN DOCUMENTS": This Agreement, the Note, the Guaranty, and each
other document required by Bank in connection with this Agreement and/or the
credit extended hereunder.
"LONDON BUSINESS DAY": A day for dealing in deposits in United States
dollars by and among banks in the London interbank market.
"MATERIAL ADVERSE CHANGE": A material adverse change in the business,
operations, results of operations, assets, liabilities, or condition (financial
or otherwise) of Borrower and the Guarantors, taken as a whole.
"MATURITY DATE": March 31, 1998.
"NET ISSUANCE PROCEEDS": cash proceeds received by Borrower or any of
its Subsidiaries in connection with their issuance (other than to Borrower) of
equity securities after the date of this Agreement, net of reasonable
out-of-pocket costs and expenses (including, underwriting discounts and
commissions) paid or incurred in connection therewith.
"NET WORTH": as of any date of determination, the result of (a)
Borrower's total consolidated stockholder's equity, MINUS (b) the amount of
minority interests held by Borrower or its Subsidiaries.
"NOTE": The Revolving Note.
"OBLIGOR": Borrower or any of the Guarantors.
"PBGC": The Pension Benefit Guaranty Corporation established pursuant
to Subtitle A of Title IV of ERISA.
"PERMITTED ACQUISITIONS": (a) the Permitted Hoechst Acquisition, (b)
the Permitted Other Acquisitions, (c) the Permitted Rugby Group Acquisition, and
(d) the Permitted Searle Acquisitions.
"PERMITTED ACQUISITION CONDITIONS": (a) no Default or Event of Default
shall have occurred and be continuing or would result from the consummation of
the proposed Acquisition, (b) the assets being acquired, or the Person whose
securities are being acquired, are useful in or engaged in, as applicable, the
development, manufacture, or distribution of pharmaceutical products, (c)
Borrower has provided Bank with confirmation, supported by reasonably detailed
calculations that on a PRO FORMA basis (adjusted to eliminate expense items that
would not have been incurred and include income items that would have been
recognized, in each case, if the combination had been accomplished at the
beginning of the period) created by adding the historical financial statements
of Borrower and its Subsidiaries to the historical financial statements of the
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Person to be acquired (or the historical financial statements related to the
assets to be acquired) pursuant to the proposed Acquisition, Borrower and its
Subsidiaries would have been in compliance with the financial covenants in
Sections 6.2(a) and 6.2(b) of this Agreement as of the fiscal period ended
immediately prior to the proposed date of consummation of such proposed
Acquisition, (d) Borrower has provided Bank with copies of the definitive
purchase and sale documentation, and (e) in the case of the acquisition of
securities of a Person, such Person either executes and delivers a joinder to
the Guaranty or is merged with and into the Obligor that is making such
Acquisition, with such Obligor as the survivor of such merger.
"PERMITTED HOECHST ACQUISITION": The consummation of product
Acquisitions by one or more of the Obligors from Hoechst, so long as (a) the
Permitted Acquisition Conditions are satisfied in connection with each such
Acquisition, and (b) the aggregate consideration paid in connection with all
such Acquisitions does not exceed $90,000,000.
"PERMITTED OTHER ACQUISITIONS": The consummation of Acquisitions by one
or more of the Obligors, so long as (a) the Permitted Acquisition Conditions are
satisfied in connection with each such Acquisition, and (b) the aggregate
consideration paid in connection with all such Acquisitions does not exceed
$15,000,000.
"PERMITTED RUGBY GROUP ACQUISITION": The consummation of the
transactions contemplated by that certain Stock Purchase Agreement, dated August
25, 1997, among Hoechst, Borrower, and Marisub, Inc., so long as (a) the
Permitted Acquisition Conditions are satisfied in connection with such
Acquisition, and (b) the aggregate cash consideration paid in connection with
such Acquisition does not exceed $75,000,000 plus an "earn out" and royalties.
"PERMITTED SEARLE ACQUISITIONS": The consummation of the transactions
contemplated by that certain Asset Purchase Agreement, dated September 30, 1997,
among Searle, Watson Laboratories, Inc., and SCS Pharmaceuticals, Inc.
"PERSON": An individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority or other entity of whatever nature.
"PLAN": Any employee pension benefit plan maintained or contributed to
by Borrower or any ERISA Affiliate of Borrower and insured by the Pension
Benefit Guaranty Corporation under Title IV of ERISA.
"PORTION": "BASE RATE PORTION" shall mean at any time the part,
including the whole, of the unpaid principal amount of the Note bearing interest
at such time under the Base Rate Option, in accordance with the first sentence
of Section 2.3(d), or in accordance with Section 2.3(f) as applicable. "LIBOR
RATE PORTION" shall mean at any time, the part, including the whole, of the
unpaid principal amount of the Note bearing interest at such time under the
Libor Rate Option or in accordance with the second sentence of Section 2.3(d) as
applicable.
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"RATE PERIOD": As defined in Section 2.3(c).
"RATE SEGMENT": Of the Libor Rate Portion at any time shall mean the
entire principal amount of such Portion to which at such time there is
applicable a particular Rate Period beginning on a particular day and ending on
another particular day. (By definition, each Portion is at all times composed of
an integral number of discrete Rate Segments, each corresponding to a particular
Rate Period, and the sum of the principal amounts of all Rate Segments of a
particular Portion at any time equals the principal amount of such Portion at
such time).
"REGULATION G, T, U AND X": Regulations G, T, U and X, respectively,
promulgated by the Board of Governors of the Federal Reserve System, as amended
from time to time, and any successors thereto.
"REVOLVING COMMITMENT": The amount of $50,000,000, as such amount may
be reduced pursuant to Section 2.1(d).
"REVOLVING LOANS": As defined in Section 2.1(a).
"REVOLVING NOTE": As defined in Section 2.1(e).
"SEARLE": G.D. Searle & Co., a Delaware corporation.
"SOLVENT": When used with respect to any Person, that as of the date as
to which the Person's solvency is to be measured:
(i) the fair saleable value of its assets is in excess of the
total amount of its liabilities (including contingent
liabilities) as they become absolute and matured;
(ii) it has sufficient capital to conduct its business; and
(iii) it is able to meet its debts as they mature (subject, in the
case of Obligors, to their ability to refinance their debt to
Bank and BOA at or before the time of the maturities thereof).
"STANDARD NOTICE": An irrevocable notice provided by Borrower to Bank
on a Business Day that is:
(i) received on or prior to the Business Day applicable to the
selection of, conversion to, or renewal of, the Base Rate
Option or prepayment of any Base Rate Portion; and
(ii) at least three London Business Days in advance in the case of
selection of, conversion to, or renewal of, the Libor Rate
Option or prepayment of any
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<PAGE>
Libor Rate Portion.
Standard Notice must be provided no later than 11:00 a.m., California time, on
the last day permitted for such notice.
"SUBSIDIARY": A corporation of which shares of stock having ordinary
voting power (other than stock having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such corporation are at the time owned, directly, or indirectly
through one or more intermediaries, or both, by Borrower.
"TOTAL SENIOR DEBT": (i) indebtedness arising from the lending of money
by any Person to Borrower or its Subsidiaries, (ii) indebtedness, whether or not
in any such case arising from the lending by any Person of money to Borrower or
its Subsidiaries, (A) which is represented by notes payable or drafts accepted
that evidence extensions of credit, (B) which constitutes obligations evidenced
by bonds, debentures, notes, licensing agreements, or similar instruments, or
(C) upon which interest charges are customarily paid (other than accounts
payable) or that was issued or assumed as full or partial payment for property
or assets, and (iii) indebtedness that constitutes an obligation with respect to
a capital lease.
SECTION I.2 OTHER DEFINITIONAL PROVISIONS.
(a) All terms defined in this Agreement shall have the defined
meanings when used in the Note or any certificate or other document made or
delivered pursuant hereto.
(b) As used herein and in the Note, and any certificate or
other document made or delivered pursuant hereto, accounting terms not defined
in Section 1.1, and accounting terms partly defined in Section 1.1 to the extent
not defined, shall have the respective meanings given to them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and section,
subsection, schedule and exhibit references are to this Agreement unless
otherwise specified.
ARTICLE II
THE CREDIT
SECTION II.1 THE REVOLVING LOANS.
(a) THE REVOLVING COMMITMENT. Bank agrees, on the terms and
conditions hereinafter set forth, to make loans ("REVOLVING LOANS") to
Borrower from time to time during the period from the date hereof to up
to, but not including, the Maturity Date in an aggregate amount not to
exceed, at any one time outstanding, the Revolving
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Commitment, as such amount may be reduced pursuant to Section 2.1(d).
Each borrowing (a "BORROWING") of a Revolving Loan shall be in
a minimum amount of $1,000,000; provided that every selection of, conversion to,
or renewal of, the Libor Rate Option shall be in a minimum principal amount of
$1,000,000 or an integral multiple of $1,000,000 above such amount. Within the
limits of the Revolving Commitment and prior to the Maturity Date, Borrower may
borrow, repay pursuant to Section 2.2(b), and reborrow under this Section
2.1(a).
(b) LIMITATION ON REVOLVING LOANS. Bank shall have no
obligation to make Revolving Loans hereunder to the extent they would cause the
outstanding amount of Revolving Loans to exceed the Revolving Commitment.
(c) MAKING THE REVOLVING LOANS. Borrower may borrow under the
Revolving Commitment on any Business Day, provided that Borrower shall give Bank
a Standard Notice specifying (i) the amount of the proposed Borrowing, and (ii)
the requested date of the Borrowing. Upon satisfaction of the applicable
conditions set forth in Article IV, the proceeds of all such Revolving Loans
will then be made available to Borrower by Bank by crediting the account of
Borrower on the books of Bank, or as otherwise directed by Borrower.
The Standard Notice may be given in writing (including
facsimile transmission) signed by an authorized officer of Borrower or orally,
but if the Standard Notice is provided orally, Borrower shall confirm the oral
Standard Notice on the same day in writing (including facsimile transmission) no
later than 1:00 p.m., California time, and any conflict regarding a written or
oral notice and Bank's books and records applicable to the same Borrowing shall
be conclusively determined by Bank's books and records absent manifest error.
Bank shall not incur any liability to Borrower in acting upon any oral or
written notice of Borrowing which Bank believes in good faith to have been given
by a Person duly authorized to borrow on behalf of Borrower.
(d) REDUCTION OF THE REVOLVING COMMITMENT. Borrower shall have
the right, upon at least 2 Business Days prior written notice to Bank, to
terminate in whole or reduce in part the unused portion of the Revolving
Commitment, without premium or penalty, provided that each partial reduction
shall be in the aggregate amount of $5,000,000 or an integral multiple thereof
and that such reduction shall not reduce the Revolving Commitment to an amount
less than the amount of the Revolving Loans outstanding hereunder on the
effective date of the reduction. Such notice shall be irrevocable and such
reduction shall not be reinstated.
(e) REVOLVING NOTE. The Revolving Loans made by Bank pursuant
hereto shall be evidenced by a promissory note of Borrower, substantially in the
form of EXHIBIT A, with any appropriate insertions (the "REVOLVING NOTE"),
payable to the order of Bank and representing the obligation of Borrower to pay
the aggregate unpaid principal amount of all Revolving Loans made by Bank, with
interest thereon as prescribed in Section 2.3. Bank hereby is authorized to
record in its books and records and on any schedule annexed
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to the Revolving Note, the date and amount of each Revolving Loan made by Bank,
and the date and amount of each payment of principal thereof, and in the case of
Libor Rate Option Revolving Loans, the Libor Rate, the Libor Rate Portion, and
the Rate Period with respect thereto, and any such recordation shall constitute
PRIMA FACIE evidence of the accuracy of the information so recorded; provided
that failure by Bank to effect such recordation shall not affect Borrower's
obligations hereunder. Prior to the transfer of a Revolving Note, Bank shall
record such information on any schedule annexed to and forming a part of such
Revolving Note.
SECTION II.2 REPAYMENT.
(a) MANDATORY REPAYMENTS. The aggregate principal amount of
the Revolving Loans outstanding on the Maturity Date, together with accrued
interest thereon, shall be due and payable in full on the Maturity Date. If at
any time the aggregate outstanding Borrowings exceed the Revolving Commitment
then in effect, Borrower immediately shall repay the excess to Bank.
(b) OPTIONAL PAYMENT. Borrower shall have the right at its
option from time to time to prepay the Base Rate Portion in whole or in part
without premium or penalty. Borrower shall have no right to prepay any part of
the Libor Rate Portion at any time without the prior written consent of Bank
except that (i) Borrower may prepay any part of any Rate Segment at the
expiration of the Rate Period corresponding to such Rate Segment, and (ii)
Borrower may prepay any part of any other Rate Segment so long as Borrower also
makes payment to Bank of any amounts payable under Section 3.6(b) in connection
therewith. Prepayments shall be made by giving Bank written notice thereof
(which shall be irrevocable) by no later than 11:00 a.m. (California time) on
the proposed date of prepayment, specifying the date, amount, and type of
prepayment, and upon such date the amount so specified, accrued interest
thereon, and any amounts payable under Section 3.6(b) shall be due and payable.
SECTION II.3 INTEREST RATE AND PAYMENT DATES.
(a) PAYMENT. The principal balance of the Note shall be paid
in accordance with the terms set forth in the Note. Accrued interest on the Base
Rate Portion shall be due and payable on the last Business Day of each month
commencing on December 31, 1997. Interest on each Rate Segment of the Libor Rate
Portion which has a Rate Period shall be due and payable on the last day of the
corresponding Rate Period. After maturity of any part of a Note (by acceleration
or otherwise), interest on such part of the Note shall be due and payable ON
DEMAND.
(b) INTEREST RATE. The unpaid principal amount of the Note
shall bear interest for each day until due on one or more bases selected by
Borrower from among the interest rate options (the "INTEREST RATE OPTIONS") set
forth below. Borrower understands and agrees: (i) that Bank may from time to
time determine that the right of Borrower to select, convert to, or renew the
Libor Rate Option is not available, which availability shall not be unreasonably
withheld, (ii) that Borrower shall not have the right to select, convert
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to, or renew the Libor Rate Option at any time that a Default or Event of
Default has occurred and is continuing, and (iii) that subject to the provisions
hereof, Borrower may select any number of options to apply simultaneously to
different parts of the unpaid principal amount of the Note and may select any
number of Rate Segments to apply simultaneously to different parts of the Libor
Rate Portion.
AVAILABLE INTEREST RATE OPTIONS
BASE RATE OPTION: A rate per annum for each day equal to the Base Rate.
LIBOR RATE OPTION: A rate per annum for each day equal to the Libor Rate for
such day plus three quarters (0.75) of a percentage point.
(c) RATE PERIODS. At any time when Borrower selects, converts
to, or renews the Libor Rate Option, Borrower shall fix a period (the "RATE
PERIOD") which shall be one, two, or three weeks or one, two, or three months,
during which the Libor Rate Option shall apply to the corresponding Rate
Segment; PROVIDED, that Borrower may not elect a Rate Period that will end after
the Maturity Date. Bank's right to payment of principal and interest under the
Note shall in no way be affected by the fact that one or more Rate Periods may
be in effect.
(d) INTEREST AFTER MATURITY. Upon the occurrence and during
the continuation of an Event of Default, the principal amount of any part of the
Base Rate Portion shall bear interest for each day until paid (before and after
judgment) at a rate per annum (based on a year of 365 days and actual days
elapsed) which for each day shall be the greater of (a) 2% above the Base Rate
Option on the day such amount became due, and (b) 2% above the Base Rate Option,
such interest rate to change automatically from time to time effective as of the
effective date of each change in the Base Rate. Upon the occurrence and during
the continuation of an Event of Default, the principal amount of any part of the
Libor Rate Portion shall bear interest for each day until paid (before and after
judgment) (a) until the end of the applicable then current Rate Period at a rate
per annum 2% above the Libor Rate Option otherwise applicable to such part, and
(b) thereafter in accordance with the previous sentence.
(e) SELECTION, CONVERSION OR RENEWAL OF RATE OPTIONS. Subject
to the other provisions hereof, Borrower may select any Interest Rate Option to
apply to the borrowings evidenced by the Note. Subject to the other provisions
hereof, Borrower may convert any part of the unpaid principal amount of the Note
from any Interest Rate Option to the other Interest Rate Option: (a) at any time
with respect to the conversion from the Base Rate Option to the Libor Rate
Option, and (b) at the expiration of any Rate Period with respect to conversion
from or renewals of the Libor Rate Option as to the Rate Segment corresponding
to such expiring Rate Period (or at any other time, subject to Section 3.6(b)).
Whenever Borrower desires to select, convert, or renew the Libor Rate Option,
Borrower shall give Bank a Standard Notice thereof (which shall be irrevocable),
specifying the date, amount, and type of the proposed new Rate Option. If such
notice has been duly given, and if Bank approves the proposed selection,
conversion, or renewal, on
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and after the date specified in such notice, interest shall be calculated upon
the unpaid principal amount of the Note taking into account such selection,
conversion or renewal.
(f) BASE RATE FALLBACK. If any Rate Period expires, any part
of the Rate Segment corresponding to such Rate Period which has not been
converted or renewed in accordance with Section 2.3(e) hereof automatically
shall be converted to the Base Rate Option. If Borrower fails to select, or if
Bank fails to approve an Interest Rate Option to apply to the borrowings
evidenced by the Note, such borrowings shall be deemed to be at the Base Rate
Option. If at any time Bank shall have determined in good faith (which
determination shall be conclusive) that the accrual of interest at the Libor
Rate Option has been made unascertainable, impractical, or unlawful by
compliance by Bank in good faith with any law (including common law),
constitution, statute, treaty, regulation, rule, ordinance, order, injunction,
writ, decree or award of any government or political subdivision or any agency,
authority, bureau, central bank, commission, department or instrumentality of
either, or any court, tribunal, grand jury or arbitrator, in each case whether
foreign or domestic, or administration thereof by any official body charged with
the interpretation or administration thereof or with any request or directive of
any such event, the outstanding principal amount of the Note subject to the
Libor Rate Option shall accrue interest at the Base Rate Option and Borrower
shall not have the right to select the Libor Rate Option.
SECTION II.4 CLOSING FEE. On the date of the execution and delivery of
this Agreement, Borrower shall pay to Bank a closing fee ("CLOSING FEE") in an
amount equal to .05% times the Revolving Commitment.
SECTION II.5 UNUSED COMMITMENT FEES. On the last Business Day of each
month during the term of this Agreement, Borrower shall pay to Bank an unused
commitment fee in an amount equal to .20% per annum times the Average Unused
Portion of the Revolving Commitment; PROVIDED, HOWEVER, that the unused
commitment fee shall not begin to accrue until the date on which Bank has sent a
written notice to Borrower that each of the conditions precedent set forth in
Section 4.1 have been satisfied or waived.
ARTICLE III
GENERAL PROVISIONS CONCERNING THE REVOLVING LOANS
SECTION III.1 USE OF PROCEEDS. The proceeds of the Revolving Loans
hereunder shall be used by Borrower for its general working capital and
corporate purposes (including, without limitation, the financing of Permitted
Acquisitions), consistent with the terms and conditions hereof.
SECTION III.2 COMPUTATION OF INTEREST AND FEES.
(a) CALCULATIONS. Interest in respect of the Base Rate Option
Revolving Loans shall be calculated on the basis of a 365 day year for the
actual days elapsed. Any change in the interest rate on a Base Rate Revolving
Loan resulting from a change in the Base Rate shall become effective as of the
opening of business on the day on which such
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change in the Base Rate shall become effective. Interest in respect of the Libor
Rate Option Revolving Loans, and any fees payable hereunder, shall be calculated
on the basis of a 365 day year for the actual days elapsed.
(b) DETERMINATION BY BANK. Each determination of an interest
rate or fee by Bank pursuant to any provision of this Agreement shall be
conclusive and binding on Borrower in the absence of manifest error.
SECTION III.3 PAYMENTS. Borrower shall make each payment of principal,
interest, and fees hereunder and under the Note, without setoff or counterclaim,
not later than 11:00 a.m. (California time) on the day when due in lawful money
of the United States of America to Bank at the office of Bank designated in
writing in immediately available funds. Any interest not paid when due shall be
compounded and shall thereafter accrue interest at the rate then applicable to
the Base Rate Portion of Borrowings hereunder (and if no Base Rate Portion of
Borrowings is outstanding, then at the rate applicable to such Borrowings as if
outstanding under the Base Rate Option).
SECTION III.4 PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be
made hereunder or under the Note shall be stated to be due on a day which is not
a Business Day, such payment may be made on the next succeeding Business Day,
and with respect to payments of principal, interest thereon shall be payable at
the then applicable rate during such extension.
SECTION III.5 REDUCED RETURN. If Bank shall have determined that any
applicable law, regulation, rule or regulatory requirement applicable to Bank
(collectively in this Section 3.5 "REQUIREMENT") regarding capital adequacy, or
any change therein, or any change in the interpretation or administration
thereof by any United States federal or state governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by Bank with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on Bank's capital as a consequence of its Revolving Commitment and
obligations hereunder to a level below that which would have been achieved but
for such Requirement, change or compliance (taking into consideration Bank's
policies with respect to capital adequacy) by an amount deemed by Bank to be
material (which amount shall be determined by Bank's reasonable allocation of
the aggregate of such reductions resulting from such events), then from time to
time, within five Business Days after demand by Bank (including a calculation in
reasonable detail of such amount), Borrower shall pay to Bank such additional
amount or amounts as will compensate Bank for such reduction. Bank does not
currently have knowledge of any new Requirement or any pending change in any
existing Requirement that would result in such additional amounts being owed.
SECTION III.6 INDEMNITIES AND LOSSES.
(a) INDEMNITIES. Whether or not the transactions contemplated
hereby shall be consummated, Borrower agrees to indemnify, defend, and hold
Bank, and the
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shareholders, officers, directors, employees and agents of Bank
(each, an "INDEMNIFIED PERSON"), harmless from and against any and all claims,
liabilities, losses, damages, costs and expenses (whether or not any of the
foregoing Indemnified Persons is a party to any litigation), including, without
limitation, reasonable attorneys fees and costs (including, without limitation,
the reasonable estimate of the allocated cost of in-house legal counsel and
staff) and costs of investigation, document production, attendance at a
deposition, or other discovery, prior to the assumption of defense by Borrower,
with respect to or arising out of any proposed acquisition by Borrower or any of
its Subsidiaries of any Person or any securities (including a self-tender), this
Agreement or any use of proceeds hereunder, or any claim, demand, action or
cause of action being asserted against Borrower or any of its Subsidiaries
(collectively, the "INDEMNIFIED LIABILITIES"), provided that Borrower shall have
no obligation hereunder with respect to Indemnified Liabilities arising from the
gross negligence or willful misconduct of, or violations of this Agreement by,
any such Indemnified Persons. If any claim is made, or any action, suit or
proceeding is brought, against any Indemnified Person of the type contemplated
by this Section, the Indemnified Person shall notify Borrower within thirty days
of Bank being notified in writing of the commencement of such action, suit or
proceeding, and Borrower will assume the defense of such action, suit or
proceeding, employing counsel selected by Borrower and reasonably satisfactory
to the Indemnified Person, and pay the fees and expenses of such counsel. This
covenant shall survive termination of this Agreement and payment of the
outstanding Note for a period of five years.
(b) FUNDING LOSSES. Borrower agrees to indemnify Bank and to
hold Bank harmless from any reasonable loss or expense including, but not
limited to, any such loss or expense arising from interest or fees payable by
Bank to lenders of funds obtained by it in order to maintain its Libor Rate
Option Revolving Loans hereunder, which Bank may sustain or incur as a
consequence of (i) payment, prepayment or conversion of any part of any Rate
Segment of the Libor Rate Portion on a day other than the last day of the
corresponding Rate Period (whether or not any such payment is pursuant to demand
by Bank under the Note and whether or not any such payment, prepayment or
conversion is consented to by Bank, unless Bank shall have expressly waived such
indemnity in writing); (ii) default by Borrower in making a conversion or
continuation after Borrower has given a notice thereof, (iii) default by
Borrower in making any payment after Borrower has given a notice of payment,
(iv) attempt by Borrower to revoke in whole or part any irrevocable notice given
pursuant to Section 2.3(e) hereof; or (v) breach of or default by any obligor in
the performance or observance of any covenant or condition in the Note, any
separate security, guarantee or suretyship agreement between Bank and any
obligor, or any other document executed and delivered to Bank by any Obligor in
connection with the indebtedness evidenced by the Note. If Bank sustains any
such loss or expense, it shall from time to time notify Borrower of the amount
reasonably determined in good faith by Bank (which determination shall be
conclusive) to be necessary to indemnify Bank for such loss or expense. Such
amount shall be due and payable by Borrower ON DEMAND (provided that Bank shall
give Borrower a written calculation of such amount in reasonable detail). This
covenant shall survive termination of this Agreement and payment of the
outstanding Note.
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SECTION III.7 REQUIREMENTS OF LAW. In the event that any law,
regulation, or directive applicable to Bank or any change therein or in the
interpretation or application thereof or compliance by Bank with any request or
directive (whether or not having the force of law) from any United States
federal or state central bank or other governmental authority, agency or
instrumentality:
(a) does or shall impose, modify or hold applicable any
reserve, assessment rate, special deposit, compulsory loan or other requirement
(collectively in this Section 3.7 "REQUIREMENTS") against assets held by, or
deposits or other liabilities in or for the account of, advances or loans by, or
other credit extended by, or any other acquisition of funds by, any office of
Bank which are not otherwise included in the determination of any Libor Rate at
the last Borrowing, conversion or continuation date of a Revolving Loan;
(b) does or shall impose, modify, or hold applicable any of
the Requirements against the Revolving Commitment to extend credit;
(c) does or shall impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing, or maintaining its Revolving Commitment, or the Libor Rate
Option Revolving Loans or to reduce any amount receivable thereunder (which
increase or reduction shall be determined by Bank's reasonable allocation of the
aggregate of such cost increases or reduced amounts receivable resulting from
such events), then, in any such case, Borrower shall pay to Bank, within five
Business Days of its demand, any additional amounts necessary to compensate Bank
for such additional cost or reduced amount receivable as determined by Bank with
respect to Sections 3.5 and 3.6 of this Agreement (provided that Bank shall give
Borrower a written calculation of reasonable detail of such amounts). If Bank
becomes entitled to claim any additional amounts pursuant to this subsection, it
shall notify Borrower of the event by reason of which it has become so entitled.
Such notice shall contain a statement incorporating the calculation as to any
additional amounts payable pursuant to the foregoing sentence, and such
statement submitted by Bank to Borrower shall be conclusive in the absence of
manifest error. Bank does not currently have knowledge of any new Requirement or
any pending change in any existing Requirement that would result in such
additional amounts being owed.
ARTICLE IV
CONDITIONS OF LENDING
SECTION IV.1 CONDITIONS PRECEDENT TO INITIAL REVOLVING LOANS. The
obligation of Bank to make its initial Revolving Loan is subject to the
conditions precedent that:
(a) Bank shall have received on or before the day of the
initial Borrowing the following, each dated prior to or as of such day, in form
and substance satisfactory to Bank:
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(i) The Note issued by Borrower to the order of Bank;
(ii) Copies of the Articles of Incorporation of
Borrower, certified as of a recent date by the Secretary of State of its state
of formation or incorporation;
(iii) Copies of the Bylaws of Borrower, certified by
the Secretary or an Assistant Secretary of Borrower;
(iv) Copies of resolutions of the Board of Directors
of Borrower, in form and substance satisfactory to Bank, approving the Loan
Documents and the Borrowings hereunder;
(v) An incumbency certificate executed by the
Secretary or an Assistant Secretary of Borrower or equivalent document,
certifying the names and signatures of the officers of Borrower or other Persons
authorized to sign the Loan Documents and the other documents to be delivered
hereunder;
(vi) Executed originals of all Loan Documents;
(vii) A certificate executed by the Secretary or an
Assistant Secretary of Borrower indicating those officers of Borrower who are
authorized to make requests for Revolving Loans hereunder;
(b) All fees required to be paid at closing, including, but
not limited to, the Closing Fee, shall have been paid by Borrower to Bank;
(c) All factual information previously furnished by Borrower
to Bank shall be true and correct in all material respects;
(d) No Material Adverse Change has occurred since September
30, 1997;
(e) Bank shall have received an opinion of Borrower's counsel
in form and substance reasonably satisfactory to Bank;
(f) No action, suit, investigation or proceeding shall have
been pending or threatened in any court or before any arbitration or
governmental authority against Borrower or any of its Subsidiaries and that
reasonably could be expected to result in a Material Adverse Change or that is
pending against Bank or Borrower or any of its Subsidiaries and relates to the
loans contemplated hereunder;
(g) Borrower and its Subsidiaries are in compliance, in all
material respects, with any existing material financial obligations; and
(h) All corporate and legal proceedings and all instruments
and documents in connection with the transactions contemplated by this Agreement
shall be
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reasonably satisfactory in content, form and substance to Bank and its counsel,
and Bank and such counsel shall have received any and all further information
and documents which Bank or such counsel may reasonably have requested in
connection therewith, such documents where appropriate to be certified by proper
corporate or governmental authorities.
SECTION IV.2 CONDITIONS PRECEDENT TO EACH BORROWING. The obligation of
Bank to make a Revolving Loan on the occasion of each Borrowing (including the
initial Borrowing) shall be subject to the further conditions precedent that on
the date of such Borrowing (a) the following statements shall be true and Bank
shall have received the notice required by Section 2.1(c), which notice shall be
deemed to be a certification by Borrower that:
(i) The representations and warranties contained in Section 5.1 are
correct in all material respects on and as of the date of such Borrowing as
though made on and as of such date,
(ii) No event has occurred and is continuing, or would result from such
Borrowing, which constitutes a Default or an Event of Default, and
(iii) Nothing shall have occurred and Bank shall not have become aware
of any fact or condition not previously known, which Bank shall determine has,
or could reasonably be expected to result in a Material Adverse Change, and
(iv) All Loan Documents are in full force and effect.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION V.1 REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants as follows:
(a) ORGANIZATION. Borrower and its Subsidiaries are duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Borrower and its Subsidiaries are (except, in
each case, where failure to comply with the foregoing would not result in a
Material Adverse Change) duly authorized, qualified and licensed in all
applicable jurisdictions, and under all applicable laws, regulations, ordinances
or orders of public authorities, to carry on its business in the locations and
in the manner presently conducted.
(b) AUTHORIZATION. The execution, delivery and performance by
Borrower of the Loan Documents, and the making of Borrowings hereunder, are
within Borrower's corporate powers, have been duly authorized by all necessary
corporate action, do not contravene (i) Borrower's charter, by-laws or other
organizational document or (ii) any material law or regulation (including
Regulations G, T, U and X) binding on or affecting
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Borrower or its properties, and will not constitute an event of default under
any material agreement to which Borrower is a party or by which its assets or
properties may be bound. The execution, delivery and performance by the
Guarantors of the Guaranty is within each of the Guarantor's corporate powers,
has been duly authorized by all necessary corporate action, does not contravene
(i) any Guarantor's charter, by-laws or other organizational document or (ii)
any material law or regulation (including Regulations G, T, U and X) binding on
or affecting any Guarantor or its properties, and will not constitute an event
of default under any material agreement to which any Guarantor is a party or by
which its assets or properties may be bound.
(c) GOVERNMENTAL CONSENTS. No authorization or approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body (except routine reports required pursuant to the Securities
Exchange Act of 1934, as amended (if such act is applicable to Borrower), which
reports will be made in the ordinary course of business) is required for the due
execution, delivery and performance by Borrower or the Guarantors of the Loan
Documents.
(d) VALIDITY. The Loan Documents to which they are parties are
the binding obligations of Borrower and the Guarantors, enforceable in
accordance with their respective terms; except in each case as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
liquidation, moratorium or other similar laws of general application and
equitable principles relating to or affecting creditors' rights.
(e) FINANCIAL CONDITION. The balance sheets of Borrower and
any of its consolidated Subsidiaries as at September 30, 1997 and the related
statements of income and retained earnings of Borrower and any of its
consolidated Subsidiaries, copies of which have been furnished to Bank, fairly
present the financial condition of Borrower and any of its consolidated
Subsidiaries as at such date and the results of the operations of Borrower and
any of its consolidated Subsidiaries for the period ended on such date, all
determined in accordance with GAAP (subject to the absence of footnotes and
normal year-end audit adjustments), consistently applied, and since September
30, 1997 there has not been a Material Adverse Change.
(f) LITIGATION. Except as set forth on SCHEDULE 5.1(F) hereto,
there is no known pending or threatened action or proceeding affecting Borrower
or any of its Subsidiaries before any court, governmental agency or arbitrator,
which may materially adversely affect the consolidated financial condition or
operations of Borrower and its Subsidiaries or which may result in a Material
Adverse Change.
(g) EMPLOYEE BENEFIT PLANS. Borrower and each of its ERISA
Affiliates has fulfilled its obligations, if any, under the minimum funding
standards of ERISA and the Internal Revenue Code with respect to each Plan and
is in compliance in all material respects with the applicable provisions of
ERISA and the Internal Revenue Code, and has not incurred any liability with
respect to any Plan under Title IV of ERISA. No reportable event has occurred
under Section 4043(b) of ERISA for which the PBGC requires 30 day notice. No
action by Borrower or of any ERISA Affiliate of Borrower to terminate or
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withdraw from any Plan has been taken and no notice of intent to terminate a
Plan has been filed under Section 4041 of ERISA. No proceeding has been
commenced with respect to a Plan under Section 4042 of ERISA, and no event has
occurred or condition exists which might constitute grounds for the commencement
of such a proceeding.
(h) DISCLOSURE. No representation or warranty of Borrower
contained in this Agreement or any other document, certificate or written
statement furnished to Bank by or on behalf of Borrower for use in connection
with the transactions contemplated by this Agreement contains any known untrue
statement of a material fact or omits to state a known material fact (known to
Borrower in the case of any document not furnished by it) necessary in order to
make the statements contained herein or therein not misleading. There is no fact
known to Borrower (other than matters of a general economic nature) which
materially adversely affects the business, operations, property, assets or
condition (financial or otherwise) of Borrower and any of its Subsidiaries,
taken as a whole, which has not been disclosed herein or in such other
documents, certificates and statements furnished to Bank for use in connection
with the transactions contemplated hereby.
(i) ENVIRIONMENTAL MATTERS. Except as set forth in SCHEDULE
5.1(I) hereto, neither Borrower nor any Subsidiary, nor any of their respective
officers, employees, representatives or agents, nor, to the best of their
knowledge, any other person, has treated, stored, processed, discharged,
spilled, or otherwise disposed of any substance defined as hazardous or toxic by
any applicable federal, state or local law, rule, regulation, order or
directive, or any waste or by-product thereof, at any real property or any other
facility owned, leased or used by Borrower or any Subsidiary, in violation of
any applicable statutes, regulations, ordinances or directives of any
governmental authority or court, which violations reasonably may result in
uninsured liability to Borrower or any Subsidiary or any of their respective
officers, employees, representatives, agents or shareholders in an uninsured
amount exceeding $5,000,000 for all such violations; and the unresolved
violations set forth in said Schedule 5.1(i) will not result in liability to
Borrower or any Subsidiary or any of their respective officers, employees,
representatives, agents or shareholders in an amount exceeding $5,000,000 for
all such unresolved violations. Except as set forth in said Schedule, no
employee or other person has made a claim or demand in writing against Borrower
or any Subsidiary based on alleged damage to health caused by any such hazardous
or toxic substance or by any waste or by-product thereof, other than claims,
demand or charges which have been settled or satisfied; and the unsatisfied
claims or demands against Borrower or any Subsidiary set forth in said Schedule
5.1(i) will not result in uninsured liability to Borrower or any Subsidiary or
any of their respective officers, employees, representatives, agents or
shareholders in an amount exceeding $5,000,000 in excess of reserves on the
books of Borrower for all such unsatisfied claims or demands. Except as set
forth in said Schedule 5.1(i), neither Borrower nor any Subsidiary has been
charged in writing by any governmental authority with improperly using,
handling, storing, discharging or disposing of any such hazardous or toxic
substance or waste or by-product thereof or with causing or permitting any
pollution of any body of water, other than claims, demand or charges which have
been settled or satisfied; and the outstanding related charges set forth in said
Schedule 5.1(i) will not result in uninsured liability to Borrower or any
Subsidiary or any of their respective
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officers, employees, representatives, agents or shareholders in an amount
exceeding $5,000,000 for all such outstanding charges.
(j) EMPLOYEE MATTERS. There is no known strike or work
stoppage in existence or threatened involving Borrower or any of its
Subsidiaries that may materially adversely affect the consolidated financial
condition or operations of Borrower and its Subsidiaries taken as a whole or
that reasonably could be expected to result in a Material Adverse Change.
(k) SOLVENCY. Borrower and the Guarantors, taken as a whole,
are Solvent.
(l) TITLE TO PROPERTIES. Borrower and each of its Subsidiaries
has good and marketable title to (or a valid leasehold or license in) all of its
material properties and assets subject to no liens, mortgages, pledges, security
interests, encumbrances or charges of any kind, except those as are permitted
under Section 6.2(c) hereof.
(m) TAX RETURNS. Except as set forth on SCHEDULE 5.1(M)
hereto, Borrower and its Subsidiaries has filed, or caused to be filed, in a
timely manner all tax returns, reports and declarations which are required to be
filed by it (including any automatic or granted extensions). All information in
such tax returns, reports and declarations is complete and accurate in all
material respects. Borrower and each of its Subsidiaries has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
received by it, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower or
its Subsidiaries and with respect to which adequate reserves have been set aside
on its books. Adequate provision has been made for the payment of all accrued
and unpaid Federal, State, county, local, foreign and other taxes whether or not
yet due and payable and whether or not disputed.
(n) COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS.
Neither Borrower nor any of its Subsidiaries is in default in any material
respect under, or in violation in any material respect of any of the terms of,
any agreement, contract, instrument, lease or other commitment to which it is a
party or by which it or any of its assets are bound, the loss of which
reasonably could be expected to result in a Material Adverse Change, and
Borrower and each of its Subsidiaries is in compliance in all material respects
with all applicable provisions of laws, rules, regulations, licenses, permits,
approvals and orders of any foreign, Federal, State or local governmental
authority, except for those the failure to comply with which reasonably could
not be expected to result in a Material Adverse Change.
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ARTICLE VI
COVENANTS
SECTION VI.1 AFFIRMATIVE COVENANTS. So long as any Note shall remain
unpaid or Bank shall have any Revolving Commitment hereunder, Borrower will,
unless Bank shall otherwise consent in writing:
(a) FINANCIAL INFORMATION. Furnish to Bank:
(i) as soon as available, but in any event within 90
days after the end of each fiscal year of Borrower, (1) a copy of
Borrower's consolidated balance sheet of itself and its consolidated
Subsidiaries as at the end of each fiscal year and the related
consolidated statements of income and retained earnings (or comparable
statement) employed in the business and changes in financial position
and cash flow for such year, setting forth in each case in comparative
form the figures for the previous year, accompanied by an unqualified
report and opinion thereon of independent certified public accountants
acceptable to Bank, and, if prepared, such accountants' letter to
management, and (2) a copy of Borrower prepared consolidating balance
sheet and income statements prepared in connection with the statement
provided in subpart (1) above;
(ii) as soon as available, but in any event within 45
days after the end of each fiscal quarter, Borrower's unaudited
consolidated (and consolidating balance sheets of itself and any
consolidated Subsidiaries) as at the end of such period and the related
unaudited consolidated and consolidating statements of income and
retained earnings, certified by a duly authorized officer of Borrower
as being fairly stated in all material respects subject to year end
adjustments; all such financial statements to be complete and correct
in all material respects and to be prepared in accordance with GAAP
applied consistently throughout the periods reflected therein (except
as disclosed therein);
(iii) (a) together with each delivery of financial
statements of Borrower and any of its Subsidiaries pursuant to
subdivision (i) above, a certificate, executed by Borrower's chairman
of the board (if an officer) or its president or one of its vice
presidents or by its chief financial officer stating that the signers
have reviewed the terms of this Agreement and have made, or caused to
be made under their supervision, a review in reasonable detail of the
transactions and condition of Borrower and any of its Subsidiaries
during the accounting period covered by such financial statements and
that such review has not disclosed the existence during or at the end
of such accounting period, and that the signers do not have knowledge
of the existence as at the date of such certificate, of any condition
or event that constitutes a Default or an Event of Default, or, if any
such condition or event existed or exists, specifying the nature and
period of existence thereof and what action Borrower has taken, is
taking and proposes to take with respect thereto; and (b) together with
each delivery of financial statements of Borrower and any of its
Subsidiaries pursuant to subdivision (i) and (ii) above, a certificate
demonstrating in
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reasonable detail compliance during and at the end of the applicable accounting
periods with the restrictions contained in Section 6.2 hereof; and
(iv) Any other report as Bank may reasonably request
from time to time.
(b) NOTICES AND INFORMATION. Deliver to Bank:
(i) promptly upon the Chief Executive Officer, the
Vice President-Finance, or the Director of Finance of Borrower
obtaining knowledge (a) of any condition or event which constitutes a
Default or an Event of Default, (b) that any Person has given any
notice to Borrower or any Subsidiary of Borrower or taken any other
action with respect to a claimed default or event or condition of the
type referred to in Section 7.1(e), (c) of the institution of any
litigation involving an alleged uninsured liability (including possible
forfeiture of property) of Borrower or any of its Subsidiaries equal to
or greater than $5,000,000 or any adverse determination in any
litigation involving a potential uninsured liability of Borrower or any
of its Subsidiaries equal to or greater than $5,000,000 or (d) of a
Material Adverse Change, an officers' certificate specifying the nature
and period of existence of any such condition or event, or specifying
the notice given or action taken by such holder or Person and the
nature of such claimed default, Event of Default, Default, event or
condition, and what action Borrower has taken, is taking and proposes
to take with respect thereto;
(ii) promptly upon becoming aware of the occurrence
of or forthcoming occurrence of (a) any reportable event under Section
4043(b) of ERISA for which the PBGC requires 30 day notice, (b) any
action by Borrower or any ERISA Affiliate of Borrower to terminate or
withdraw from a Plan or the filing of any notice of intent to terminate
under Section 4041 of ERISA, (c) any notice of noncompliance made with
respect to a Plan under Section 4041(b) of ERISA, and (d) the
commencement of any proceeding with respect to a Plan under Section
4042 of ERISA;
(iii) promptly, and in any event within 10 days after
receipt thereof, a copy of any material notice, summons, citation,
directive, letter or other form of communication from the FDA, the DEA,
or any other governmental authority or court in any way concerning any
allegedly unlawful action or omission on the part of Borrower or its
Subsidiaries in connection with the manufacture, storage, or sale of
products or the operation of Borrower's or its Subsidiaries'
businesses; and
(iv) promptly upon Bank's request, such other
statements, budgets, forecasts or reports as to Borrower and its
Subsidiaries as Bank reasonably may request.
(c) CORPORATE EXISTENCE, ETC. At all times preserve and keep
in full force and effect its and its Subsidiaries' corporate existence and
rights and franchises material to
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its business and those of each of its Subsidiaries; PROVIDED, HOWEVER, that the
corporate existence of any such Subsidiary that is not a Guarantor may be
terminated if such termination is in the best interest of Borrower and is not
materially disadvantageous to the holder of any Note.
(d) PAYMENT OF TAXES AND CLAIMS. Pay, and cause each of its
Subsidiaries to pay, all taxes, assessments and other governmental charges
imposed upon it or any of its properties or assets or in respect of any of its
franchises, business, income or property before any penalty or interest accrues
thereon, and all claims (including, without limitation, claims for labor,
services, materials and supplies) for sums which have become due and payable and
which by law have or may become a lien upon any of its properties or assets,
prior to the time when any penalty or fine shall be incurred with respect
thereto; provided that no such charge or claim need be paid if being contested
in good faith by appropriate proceedings promptly instituted and diligently
conducted and if such reserve or other appropriate provision, if any, as shall
be required in conformity with GAAP shall have been made therefor.
(e) MAINTENANCE OF PROPERTIES: INSURANCE. Maintain or cause to
be maintained in good repair, working order and condition all material
properties used or useful in the business of Borrower and its Subsidiaries and
from time to time will make or cause to be made all appropriate repairs,
renewals and replacements thereof. Borrower will maintain or cause to be
maintained, with financially sound and reputable insurers, insurance with
respect to its properties and business and the properties and business of its
Subsidiaries against loss or damage of the kinds customarily insured against by
corporations of established reputation engaged in the same or similar businesses
and similarly situated, of such types and in such amounts as are customarily
carried under similar circumstances by such other corporations. Borrower will
comply with any other insurance requirement set forth in any other Loan Document
and, upon the request of Bank, deliver to Bank a copy of each insurance policy,
or, if permitted by Bank, a certificate of insurance listing all insurance in
force.
(f) INSPECTION. Permit any authorized representatives
designated by Bank to visit and inspect any of the properties of Borrower or any
of its Subsidiaries, including its and their financial and accounting records,
and to make copies and take extracts therefrom, and to discuss its and their
affairs, finances and accounts with its and their officers, all upon prior
notice and at such reasonable times during normal business hours and as often as
reasonably may be requested.
(g) COMPLIANCE WITH LAWS ETC Exercise, and cause each of its
Subsidiaries to exercise, all due diligence in order to comply with the
requirements of all applicable laws, rules, regulations and orders of any
governmental authority, including, without limitation, all rules and regulations
of public utility commissions or similar regulatory authorities, and all
environmental laws, rules, regulations and orders, noncompliance with which
reasonably could be expected to result in a Material Adverse Change.
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(h) HAZARDOUS WASTE STUDIES. Promptly, and in any event within
thirty days after submission, provide Bank with copies of all such
investigations, studies, samplings and testings as may be requested by any
governmental or regulatory authority relative to any substance defined as
hazardous or toxic by any applicable federal, state or local law, rule,
regulation, order or directive, or any waste or by-product thereof, at or
affecting any real property or any facility owned, leased or used by Borrower or
any Subsidiary.
SECTION VI.2 NEGATIVE COVENANTS. So long as any Note shall remain
unpaid or Bank shall have any Revolving Commitment hereunder, Borrower will not,
without the written consent of Bank:
(a) LEVERAGE RATION. At the end of any fiscal quarter of
Borrower, permit the ratio of Total Senior Debt to EBITDA, to be greater than
3.00:1.00.
(b) MINIMUM NET WORTH. At the end of any fiscal quarter of
Borrower, permit Net Worth to be less than $468,000,000 plus (i) 100% of the
amount by which Borrower's Net Worth is increased by virtue of the consummation
of the Permitted Rugby Group Acquisition, plus (ii) 75% of Borrower's
consolidated net income (net loss to have no effect and shall not be a
deduction) for each fiscal quarter ended on or after December 31, 1997, plus
(iii) 100% of any Net Issuance Proceeds received by Borrower or its
Subsidiaries.
(c) LIENS ETC. Create or suffer to exist, or permit any of its
Subsidiaries to create or suffer to exist, any Lien upon or with respect to any
of its properties, whether now owned or hereafter acquired, or assign, or permit
any of its Subsidiaries to assign, any right to receive income, in each case to
secure any indebtedness of any Person other than (i) Liens in favor of Bank;
(ii) Liens reflected on SCHEDULE 6.2(C) hereto; (iii) purchase money Liens upon
or in any personal property acquired or held by Borrower or any Subsidiary in
the ordinary course of business to secure the purchase price of such property or
to secure purchase money financing incurred solely for the purpose of financing
the acquisition of rights in or use of such property; and (iv) Liens for taxes,
assessments or other governmental charges or levies not yet due or thereafter
payable without penalty, or Liens of carriers, warehousemen, mechanics,
materialmen and landlords incurred in the ordinary course of business for sums
not overdue, or any such Liens being diligently contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with GAAP
shall have been set aside on its books (but only if such Liens do not,
individually or in the aggregate, result in a Materially Adverse Change or
materially adversely affect the rights of Bank); (v) Liens incurred in the
ordinary course of business in connection with workmen's compensation,
unemployment insurance or other forms of governmental insurance or benefits, or
to secure performance of statutory obligations, leases and contracts (other than
for borrowed money) entered into in the ordinary course of business or to
secured obligations on surety or appeal bonds; and (vi) judgment Liens in
existence less than 30 days after the entry thereof or with respect to which
execution has been stayed or the payment of which is covered in full (subject to
a customary deductible) by insurance.
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<PAGE>
(d) DEBT. Create, incur, assume or permit to exist, or permit
any Subsidiary to create , incur, assume or permit to exist, any direct or
contingent indebtedness, liabilities or lease obligations (other than those to
Bank), or become liable for the debts of others without Bank's written consent,
except for (i) acquiring goods, supplies or merchandise on normal trade credit,
(ii) endorsing negotiable instruments received in the usual course of business,
(iii) obtaining surety bonds in the usual course of business, (iv) the
indebtedness of Borrower set forth on SCHEDULE 6.2(D)(IV) attached hereto, (v)
additional indebtedness in an aggregate amount not to exceed $10,000,000 at any
one time outstanding, (vi) unsecured indebtedness owing to BOA in an aggregate
amount not to exceed $110,000,000 at any one time outstanding, and (vii)
unsecured long term indebtedness in an aggregate amount not to exceed
$175,000,000, so long as the proceeds are used to repay the credit facilities
provided by Bank and BOA, and (viii) guarantees by Borrower of the obligations
of its Subsidiaries in a principal amount not in excess of $2,500,000.
(e) CONSOLIDATION, MERGER OR DISSOLUTION. Except for Permitted
Acquisitions, (i) consolidate with or merge into any other corporation or
entity, (ii) wind up, liquidate or dissolve, or (iii) agree to do any of the
foregoing.
(f) LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make or permit
to remain outstanding, or permit any Subsidiary to make or permit to remain
outstanding, any loan or advance to, or guarantee, induce or otherwise become
contingently liable, directly or indirectly (except as permitted by Section
6.2(d), in connection with the obligations, stock or dividends of, or own,
purchase or acquire any stock, obligations or securities of or any other
interest in, or make any capital contribution to, any other Person, except that
Borrower and its Subsidiaries may:
(i) own, purchase or acquire certificates of deposit
issued by Bank, BOA, or any other commercial bank having combined
assets in excess of $500,000,000 ("Qualified Banks"), repurchase
agreements entered into with Qualified Banks, commercial paper issued
by issuers rated Moody's P-1, corporate bonds issued by issuers rated
Moody's A or better, municipal bonds rated Moody's AA or better, direct
obligations of the United States of America or its agencies,
obligations guaranteed by the United States of America, or shares of
mutual funds or other investment funds that invest solely in one or
more of the foregoing;
(ii) continue to own the existing capital stock of
Borrower's Subsidiaries ;
(iii) endorse negotiable instruments for deposit or
collection or similar transactions in the ordinary course of
business;
(iv) allow Borrower's Subsidiaries to make or permit
to remain outstanding advances from Borrower's Subsidiaries to
Borrower;
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<PAGE>
(v) make or permit to remain outstanding loans and
advances to any of its officers, employees, directors and shareholders
or enter into or permit to remain outstanding guarantees in connection
with the obligations of any of its officers, directors and
shareholders, in an aggregate amount for all such loans, advances and
guarantees not exceeding $1,000,000 outstanding at any one time;
(vi) continue to own those investments existing on
the date of this Agreement that are described on SCHEDULE 6.2(F)(VI);
(vii) make the Permitted Acquisitions; and
(viii) make additional investments in an aggregate
amount not to exceed $5,000,000.
(g) ASSET SALES. Convey, sell, lease, transfer or otherwise
dispose of, or permit any Subsidiary to convey, sell, lease, transfer or
otherwise dispose of, in one transaction or a series of transactions, all or any
part of its or any of its Subsidiary's business, property or fixed assets
outside the ordinary course of business, whether now owned or hereafter
acquired.
(h) DIVIDENDS. Authorize, declare or pay any dividends.
(i) TRANSACTIONS WITH AFFILIATES. Neither Borrower nor any of
its Subsidiaries shall enter into any transaction for the purchase, sale or
exchange of property or the rendering of any service to or by any affiliate,
except in the ordinary course of and pursuant to the reasonable requirements of
Borrower's or its Subsidiary's business and upon fair and reasonable terms no
less favorable to Borrower or its Subsidiary than Borrower or its Subsidiary
would obtain in a comparable arm's length transaction with an unaffiliated
person.
(j) BOOKS AND RECORDS. Borrower will keep proper books of
record and account in which full, true and correct entries in conformity with
GAAP and all requirements of applicable law shall be made of all dealings and
transactions in relation to their businesses and activities.
(k) RESTRUCTURE. Make any change in the principal nature of
the Obligors' business operations (taken as a whole), or the date of Borrower's
fiscal year.
ARTICLE VII
EVENTS OF DEFAULT
SECTION VII.1 EVENTS OF DEFAULT. If any of the following events
("EVENTS OF DEFAULT") shall occur and be continuing:
(a) Borrower shall fail to pay (i) any installment of
principal hereunder when due or declared due, or (ii) any installment of
interest or any other amount payable
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<PAGE>
hereunder within five Business Days of the date when due or declared due; or
(b) Any representation or warranty made by Borrower herein or
by Borrower (or any of its officers) in connection with the Loan Documents shall
prove to have been incorrect in any material respect when made; or
(c)(i) Borrower shall fail or neglect to perform, keep, or
observe any covenant contained in Section 6.2 on the date that Borrower is
required to perform, keep, or observe such covenant; or (ii) Borrower shall fail
or neglect to perform, keep, or observe any covenant contained in this Agreement
(exclusive of a default covered by another subsection of this Section 7.1) on
the date that Borrower is required to perform, keep, or observe such covenant,
and the breach of such covenant is not cured to Lender's satisfaction within
thirty days of such breach; or
(d) Borrower or any of its Subsidiaries shall default in the
performance of or compliance with any term contained in any Loan Document other
than this Agreement and such default shall not have been remedied or waived
within any applicable grace period; or
(e) (i) Borrower or any Guarantor shall (A) fail to pay any
principal of, or premium or interest on, any indebtedness, the aggregate
outstanding principal amount of which is at least $5,000,000 (excluding
indebtedness evidenced by the Note), when due (whether by scheduled maturity,
required prepayment, acceleration, demand or otherwise) and such failure shall
continue after the applicable grace period, if any, specified in the agreement
or instrument relating to such indebtedness, or (B) fail to perform or observe
any term, covenant or condition on its part to be performed or observed under
any agreement or instrument relating to any such indebtedness or material to the
performance, business, property, assets, condition (financing or otherwise) or
prospects of Borrower and any Guarantor taken as a whole, when required to be
performed or observed, and such failure shall continue after the applicable
grace period, if any, specified in such agreement or instrument; or
(f) (i) Borrower or any Guarantor shall commence any case,
proceeding or other action (A) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or (B)
seeking appointment of a receiver, trustee, custodian or other similar official
for it or for all or any substantial part of its assets, or Borrower or any of
its Subsidiaries shall make a general assignment for the benefit of its
creditors; or (ii) there shall be commenced against Borrower or any Guarantor
any case, proceeding or other action of a nature referred to in clause (i) above
which (A) results in the entry of an order for relief or any such adjudication
or appointment or (B) remains undismissed, undischarged or unhanded for a period
of forty five days; or (iii) there shall be commenced against Borrower or any of
its Subsidiaries any case, proceeding or other action seeking issuance of a
warrant of
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<PAGE>
attachment, execution, distraint or similar process against all or any
substantial part of its assets which results in the entry of an order for any
such relief which shall not have been vacated, discharged, or stayed or bonded
pending appeal within sixty days from the entry thereof; or (iv) Borrower or any
Guarantor shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the acts set forth in clause (i), (ii)
and (iii) above; or (v) Borrower or any Guarantor shall generally not, or shall
be unable to, or shall admit in writing its inability to, pay its debts as they
become due; or
(g) One or more judgments or decrees shall be entered against
Borrower or any Guarantor involving in the aggregate a liability (not paid or
fully covered by insurance or reserves) equal to or greater than $5,000,000 and
all such judgments or decrees shall not have been vacated, discharged, or stayed
or bonded pending appeal within sixty days from the entry thereof; or
(h) Any guaranty, if any, for any reason other than
satisfaction in full of all obligations of Borrower under the Loan Documents,
ceases to be in full force and effect or is declared null and void, or any
guarantor denies that it has any further liability under such guaranty or gives
notice to such effect and any such cessation, declaration or denial shall not
have been rescinded, and such guarantee reaffirmed, to the satisfaction of Bank
within thirty days after Borrower knows of such development; or
(i) The occurrence of any one or more of the following events
with respect to Borrower or any ERISA Affiliate of Borrower provided such event
or events could reasonably be expected, in the judgment of Bank, to subject
Borrower or any ERISA Affiliate of Borrower to any tax, penalty or liability (or
any combination of the foregoing) which, in the aggregate, could have a material
adverse effect on the financial condition of Borrower or any Guarantor with
respect to a Plan: (A) a reportable event shall occur with respect to a Plan
which is, in the reasonable judgment of Bank, likely to result in the
termination of such Plan for purposes of Title IV of ERISA, or (B) any Plan
termination (or commencement of proceedings to terminate a Plan) or the full or
partial withdrawal from a Plan by Borrower or any ERISA Affiliate of Borrower;
or
(j) There shall be instituted against Borrower or any
Guarantor, any proceeding for which forfeiture of any property is a potential
penalty and such proceeding remains undismissed, undischarged or unbonded for a
period of thirty days from the date Borrower knows of such proceeding; or
(k) A Change of Control shall have occurred; or
(l) Any governmental authority takes action that Bank
reasonably believes materially adversely affects the Obligors' financial
condition taken as a whole or ability to perform obligations under the Loan
Documents.
Then, (i) upon the occurrence of any Event of Default
described in clause (f) above, the Revolving Commitment immediately shall
terminate and all Revolving Loans hereunder with accrued interest thereon, and
all other amounts owing under the
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<PAGE>
Loan Documents automatically shall become due and payable, and (ii) upon the
occurrence of any other Event of Default, Bank may, by notice to Borrower,
declare the Revolving Commitment to be terminated forthwith, whereupon the
Revolving Commitment shall immediately terminate; and, by notice to Borrower,
declare the Revolving Loans hereunder, with accrued interest thereon, and all
other amounts owing under the Loan Documents to be due and payable forthwith,
whereupon the same shall immediately become due and payable. Bank shall have all
rights, powers and remedies available under each of the Loan Documents, or
accorded by law. All rights, powers and remedies of Bank in connection with each
of the Loan Documents may be exercised at any time by Bank and from time to time
after the occurrence of an Event of Default, are cumulative and not exclusive,
and shall be in addition to any other rights, powers or remedies provided by law
or equity. Except as expressly provided above in this Section, presentment,
demand, protest and all other notices of any kind are hereby expressly waived.
Notwithstanding any other provision of this Agreement, including Section 8.2,
notices to Borrower under this Section shall be communicated in writing
(including facsimile transmissions).
ARTICLE VIII
MISCELLANEOUS
SECTION VIII.1 AMENDMENTS, ETC. No amendment or waiver of any provision
of the Loan Documents nor consent to any departure by Borrower therefrom, shall
in any event be effective unless the same shall be in writing and signed by Bank
and Borrower, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
SECTION VIII.2 NOTICES, ETC. Except as otherwise set forth in this
Agreement, all notices and other communications provided for hereunder shall be
in writing (including facsimile communication) and mailed or sent by facsimile
or delivered, if to Borrower, at its address set forth on the signature page
hereof; and if to Bank, at its address set forth on the signature page hereof;
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party. All such notices and communications
shall be effective when sent by facsimile, or three days after such notice or
communication is deposited in the mails, except that notices and communications
to Bank pursuant to Article II or VII shall not be effective until received by
Bank.
SECTION VIII.3 NO WAIVER: REMEDIES. No failure on the part of either
party hereto to exercise, and no delay in exercising, any right under any of the
Loan Documents shall operate as a waiver thereof; nor shall any single or
partial exercise of any right under any of the Loan Documents preclude any other
or further exercise thereof or the exercise of any other right. The remedies
herein provided are cumulative and not exclusive of any remedies provided by law
or in equity. Nothing contained in this Agreement is, or shall in the future be
deemed to constitute, a waiver of any right, remedy, power, or protection
available to Bank in any law (including without limitation the common law), or
in equity, now or in the future, whether or not such right, remedy, power, or
protection is express
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<PAGE>
herein.
SECTION VIII.4 COSTS AND EXPENSES. Borrower shall pay to Bank
immediately upon demand the full amount of all reasonable costs and expenses,
including reasonable attorneys fees (to include outside counsel fees and all
allocated costs of Bank's in-house counsel), incurred by Bank in connection with
(a) the negotiation and preparation of this Agreement and each other of the Loan
Documents, and the preparation of any amendments and waivers hereto and thereto,
(b) the enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents (including, without
limitation, in appellate, bankruptcy, insolvency, liquidation, reorganization,
moratorium or other similar proceedings) or the restructuring of the Loan
Documents, and (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including, without limitation, any action for
declaratory relief.
SECTION VIII.5 PARTICIPATIONS. Bank may sell, assign, transfer,
negotiate or grant participations to other financial institutions in all or part
of the obligations of Borrower outstanding under the Loan Documents, provided
that any such sale, assignment, transfer, negotiation or participation shall be
in compliance with the applicable federal and state securities laws and shall
not increase the liability of Borrower hereunder; and provided further that any
assignee or transferee agrees to be bound by the terms and conditions of this
Agreement. Bank may, in connection with any actual or proposed assignment or
participation, disclose to the actual or proposed assignee or participant, any
information relating to Borrower or any of its Subsidiaries.
SECTION VIII.6 EFFECTIVENESS; BINDING EFFECT. This Agreement shall
become effective when it shall have been executed and delivered by Borrower and
Bank and thereafter shall be binding upon and inure to the benefit of Borrower,
Bank and their respective successors and assigns, except that Borrower shall not
have the right to assign its rights hereunder or any interest herein without the
prior written consent of Bank.
SECTION VIII.7 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY
TRIAL WAIVER
(a) The validity, interpretation and enforcement of this
Agreement and the other Loan Documents and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the laws of the State of California.
(b) Borrower and Bank irrevocably consent and submit to the
non-exclusive jurisdiction of the state courts of the County of Los Angeles and
the United States District Court for the Central District of California and
waive any objection based on venue or FORUM NON CONVENIENS with respect to any
action instituted therein arising under this Agreement or any of the other Loan
Documents or in any way connected with or related or incidental to the dealings
of the parties hereto in respect of this Agreement or any of the other Loan
Documents or the transactions related hereto or thereto, in each case whether
now existing or hereafter arising, and whether in contract, tort, equity or
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<PAGE>
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above.
(c) Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth on
the signature pages hereof and service so made shall be deemed to be completed
five days after the same shall have been so deposited in the U.S. mails, or, at
Bank's option, by service upon Borrower in any other manner provided under the
rules of any such courts. Within thirty days after such service, Borrower shall
appear in answer to such process, failing which Borrower shall be deemed in
default and judgment may be entered by Bank against Borrower for the amount of
the claim and other relief requested.
(d) BORROWER AND BANK EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR (2) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO
OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND BANK EACH HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR BANK MAY FILE AN ORIGINAL
COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Bank shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Bank, that the losses were the
result of acts or omissions constituting gross negligence or willful misconduct.
In any such litigation, Bank shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary care
in the performance by it of the terms of this Agreement.
SECTION VIII.8 WAIVER OF NOTICES. Borrower hereby expressly waives
demand, presentment, protest and notice of protest and notice of dishonor with
respect to any and all instruments and commercial paper, included in or
evidencing any of the obligations, and any and all other demands and notices of
any kind or nature whatsoever with respect to the obligations and this
Agreement, except such as are expressly provided for herein. No notice to or
demand on Borrower which Bank may elect to give shall entitle Borrower to any
other or further notice or demand in the same, similar or other circumstances.
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<PAGE>
SECTION VIII.9 ENTIRE AGREEMENT. This Agreement with Exhibits and
Schedules and the other Loan Documents embody the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof.
SECTION VIII.10. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
SECTION VIII.11. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
MELLON BANK, N.A. WATSON PHARMACEUTICALS, INC.
By:__________________________ By:________________________________________
Name: Kevin D. Kelly Name: Allen Chao, Ph.D.
Title: Vice President Title: Chief Executive Officer and
Chairman
Address: Address:
Western Region 311 Bonnie Circle
Middle Market Banking Corona, California 91720
400 South Hope Street Attention: Allen Chao, Ph.D.
Los Angeles, California 90071 Chief Executive Officer and
Attention: Kevin D. Kelly Chairman
Vice President
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EXHIBIT 4.2(A)
AMENDMENT NUMBER ONE
TO CREDIT AGREEMENT
This AMENDMENT NUMBER ONE TO CREDIT AGREEMENT, dated as of
January 23, 1998 (this "Amendment"), is entered into between MELLON BANK, N.A.,
a national banking association ("Bank"), and WATSON PHARMACEUTICALS, INC., a
Nevada corporation ("Borrower").
WHEREAS, Bank and Borrower entered into that certain Credit
Agreement, dated as of December 19, 1997 (the "Loan Agreement");
WHEREAS, Borrower has requested that the Loan Agreement be
amended to modify the loan facilities set forth in the Loan Agreement; and
WHEREAS, subject to the terms and conditions contained herein,
Bank is willing to so amend the Loan Agreement.
NOW, THEREFORE, in consideration of the mutual covenants,
conditions, and provisions hereinafter set forth, the parties hereto agree as
follows:
ARTICLE 1
AMENDMENTS
1. The definition of Revolving Commitment contained in Section
1.1 of the Loan Agreement hereby is deleted in its entirety and the following
hereby is substituted in lieu thereof:
"REVOLVING COMMITMENT": The amount of $75,000,000, as such amount may
be reduced pursuant to Section 2.1(d).
2. AMENDMENT OF SECTION 6.2(D) OF THE LOAN AGREEMENT. Section
6.2(d) of the Loan Agreement hereby is deleted in its entirety and the following
is substituted in lieu thereof:
"(d) DEBT. Create, incur, assume or permit to exist, or permit
any Subsidiary to create , incur, assume or permit to exist, any direct or
contingent indebtedness (including undrawn committed lines of credit),
liabilities or lease obligations (other than those to Bank), or become liable
for the debts of others without Bank's written consent, except for (i) acquiring
goods, supplies or merchandise on normal trade credit, (ii) endorsing negotiable
instruments received in the usual course of business, (iii) obtaining surety
bonds in the usual course of business, (iv) the indebtedness of Borrower set
forth on SCHEDULE 6.2(D)(IV) attached hereto, (v) additional indebtedness in an
aggregate amount not to exceed $10,000,000 at any one time
<PAGE>
outstanding, (vi) unsecured indebtedness owing to BOA plus undrawn committed
lines of credit provided by BOA to Borrower in an aggregate amount not to exceed
$80,000,000 at any one time; PROVIDED, HOWEVER, that prior to increasing
Borrower's revolving credit facility with BOA, Borrower shall obtain the prior
written consent of Bank to any proposed amendment, such consent of Bank not to
be unreasonably withheld, delayed, or conditioned, (vii) unsecured long term
indebtedness in an aggregate amount not to exceed $175,000,000, so long as the
proceeds are used to repay the credit facilities provided by Bank and BOA, and
(viii) guarantees by Borrower of the obligations of its Subsidiaries in a
principal amount not in excess of $2,500,000."
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Bank that (a) the
execution, delivery, and performance of this Amendment are within its corporate
powers, have been duly authorized by all necessary corporate action, and (b)
this Amendment and the Loan Agreement, as amended by this Amendment, constitute
Borrower's legal, valid, and binding obligation, enforceable against Borrower in
accordance with its terms, except in each case as such enforceability may be
limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or
other similar laws of general application and equitable principles relating to
or affecting creditors' rights.
ARTICLE 3
CONDITIONS PRECEDENT
The effectiveness of this Amendment is subject to the
fulfillment, to the satisfaction of Bank and its counsel, of each of the
following conditions:
4.1 Bank shall have received a duly executed Guaranty
Reaffirmation Agreement from each of the Guarantors and such agreement shall be
in full force and effect;
4.2 Bank shall have received, in immediately available funds,
an amendment fee of $12,500 from Borrower;
4.3 Bank shall have received a new Revolving Note in the face
amount of $75,000,000, in replacement of the Revolving Note previously issued by
Borrower to Bank.
4.4 The representations and warranties set forth in this
Amendment, the Loan Agreement as amended by this Amendment, and the other Loan
Documents shall be true and correct in all material respects on and as of the
date hereof, as though made on such date (except to the extent that such
representations and warranties relate solely to an earlier date); and
-2-
<PAGE>
4.5 No Event of Default or event which with the giving of
notice or passage of time would constitute an Event of Default shall have
occurred and be continuing on the date hereof, nor shall result from the
consummation of the transactions contemplated herein.
ARTICLE 4
MISCELLANEOUS
6.1 EXECUTION IN COUNTERPARTS. This Amendment may be executed
in any number of counterparts, each of which when so executed and delivered
shall be deemed an original. All of such counterparts shall constitute but one
and the same instrument. Delivery of an executed counterpart of the signature
page of this Amendment by telecopier shall be equally effective as delivery of a
manually executed counterpart. Any party delivering an executed counterpart of
the signature page of this Amendment by telecopier thereafter also shall deliver
promptly a manually executed counterpart, but the failure to deliver such
manually executed counterpart shall not affect the validity, enforceability, or
binding effect of this Amendment.
6.2 NO OTHER AMENDMENT. The Loan Agreement, as amended hereby,
shall be and remain in full force and effect in accordance with its respective
terms and hereby is ratified and confirmed in all respects. The execution,
delivery, and performance of this Amendment shall not operate as a waiver of or,
except as expressly set forth herein, as an amendment, of any right, power, or
remedy of Bank under the Loan Agreement, as in effect prior to the date hereof.
This Amendment shall be deemed a part of and hereby is incorporated in the Loan
Agreement.
6.3 GOVERNING LAW. This Amendment shall be governed by, and
construed and enforced in accordance with, the laws of the State of California.
6.4 FURTHER ASSURANCES. Borrower shall execute and deliver all
agreements, documents, and instruments, in form and substance reasonably
satisfactory to Bank, and take all actions as Bank may reasonably request from
time to time, to fully consummate the transactions contemplated under this
Amendment and the Loan Agreement as amended by this Amendment.
6.5 REFERENCES.
(a) Upon the effectiveness of this Amendment, each
reference in the Loan Agreement to "this Agreement," "hereunder," "herein,"
"hereof," or words of like import referring to the Loan Agreement shall mean and
refer to the Loan Agreement as amended by this Amendment.
-3-
<PAGE>
(b) Upon the effectiveness of this Amendment, each
reference in the Loan Documents to the "Loan Agreement," "thereunder,"
"therein," "thereof," or words of like import referring to the Loan Agreement
shall mean and refer to the Loan Agreement as amended by this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered as of the date first set forth above.
WATSON PHARMACEUTICALS, INC.
a Nevada corporation
By:__________________________________
Allen Chao, Ph.D.
Chief Executive Officer and
Chairman
MELLON BANK, N.A.
a national banking association
By:__________________________________
Kevin D. Kelly
Vice President
-4-
<PAGE>
GUARANTY REAFFIRMATION AGREEMENT
Dated as of January 23, 1998
The undersigned, each as Guarantor under the Guaranty (as such terms
are defined in and under the Credit Agreement, dated December 19, 1997, as
amended by that certain Amendment Number One to Credit Agreement dated as of
even date herewith, between Watson Pharmaceuticals, Inc., a Nevada corporation,
and Mellon Bank, N.A., a national banking association (hereinafter "Amendment"),
hereby consents and agrees to said Amendment and hereby confirms and agrees that
the Guaranty is, and shall continue to be, in full force and effect and is
hereby ratified and confirmed in all respects.
WATSON LABORATORIES, INC.,
a Nevada corporation
By _____________________________
Allen Chao, Ph.D.
President
CIRCA PHARMACEUTICALS, INC.,
a New York corporation
By _____________________________
Allen Chao, Ph.D.
Chairman
Title: _________________________
OCLASSEN PHARMACEUTICALS, INC.,
a Delaware corporation
By _____________________________
Allen Chao, Ph.D.
Chairman
ROYCE LABORATORIES, INC.,
a Florida corporation
By _____________________________
Allen Chao, Ph.D.
Chairman
5
EXHIBIT 10.20(A)
CONSULTING AGREEMENT
This CONSULTING AGREEMENT ("Agreement") is entered into as of January 31,
1998 by and between Watson Pharmaceuticals, Inc. (the "Company"), Royce
Laboratories, Inc., a wholly-owned subsidiary of the Company ("Royce"), and
Patrick McEnany (the "Consultant").
RECITAL:
A. Consultant is employed by Royce and the Company pursuant to the terms
of that certain Employment Agreement (the "Employment Agreement") dated as of
April 16, 1997 among Consultant, the Company and Royce.
B. Consultant terminated his employment with the Company and Royce for
Good Reason (as such term is defined in the Employment Agreement) effective as
of January 31, 1998 ("Separation Date").
C. Pursuant to the terms of the Employment Agreement, upon termination by
Consultant of Consultant's employment with the Company for Good Reason, the
Company is required to enter into this Agreement with Consultant to set forth
the terms upon which Consultant shall provide certain consulting services to the
Company, all on the terms and subject to the conditions set forth herein.
AGREEMENTS:
NOW, THEREFORE, in consideration of the mutual promises herein contained
and agreements set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. ENGAGEMENT. Royce hereby engages Consultant as a consultant to the
Company and Royce, and Consultant hereby agrees to be so engaged, all on the
terms and subject to the conditions set forth in this Agreement. The parties
hereto agree that, upon the request of the Company or Royce from time to time
during the Term (as herein defined), at no additional charge, Consultant shall
perform up to ten (10) hours of consulting services per month for and on behalf
of the Company and/or Royce at such times to be mutually agreed upon by the
Company and Consultant; provided, however, that (i) such monthly services shall
not be cumulative and will be lost if not performed in any month; and (ii) if
such services are required to be performed in person, such services shall be
provided in increments of five consecutive hour periods. Consultant may provide
additional consulting services to the Company or Royce on terms (including
payment terms) and at times mutually agreed upon by Consultant, on the one hand,
and the Company or Royce, on the other hand.
<PAGE>
2. OPTIONS. The Company hereby acknowledges and agrees that, during the
Term, all options granted to Consultant pursuant to Section 4(f) of the
Employment Agreement shall continue to vest in accordance with the terms
thereof.
3. EXPENSES. The Company agrees to reimburse Consultant for all reasonable
expenses incurred by him in providing consulting services under this Agreement
in accordance with the Company's policies and practices regarding expense
reimbursement then in effect.
4. TERM. Subject to the terms and conditions set forth herein and unless
otherwise terminated earlier as provided herein, this Agreement shall commence
on and as of the Separation Date and shall terminate on April 16, 2002 (the
"Term").
5. OFFICER POSITIONS. Effective as of the Separation Date, Consultant
hereby resigns as an employee, officer and director of Royce and as an employee
and officer of the Company and such resignation is accepted by Royce and the
Company, as the case may be.
6. RESTRICTIVE COVENANTS AND CONFIDENTIALITY. Consultant hereby
acknowledges and agrees that Sections 9, 10, 11, 12 and 13 of the Employment
Agreement shall remain in full force and effect in accordance with their
respective terms for the time periods set forth therein regardless of the
termination of Consultant's employment and/or consulting relationship with the
Company and Royce. Subject to the terms and conditions of the Employment
Agreement, Company and Royce acknowledge Royce's obligations to make the
payments to Consultant required by Section 7(c) of the Employment Agreement.
7. RELEASE BY CONSULTANT. Consultant, for himself and for his
predecessors, successors, personal representatives, heirs, agents and assigns
(collectively, the "Releasing Parties"), hereby releases and discharges each of
the Company, Royce and their respective stockholders, directors, officers,
employees, affiliates, attorneys, agents and representatives and their
predecessors, successors, personal representatives, heirs, agents and assigns,
(collectively, the "Consultant's Released Parties"), from any and all actions,
causes of action, suits, charges, complaints, claims, liabilities, obligations,
controversies, assessments, judgments, proceedings, deficiencies, losses, fines,
penalties, costs, damages and expenses (including, without limitation, expenses
of investigation and attorney's and expert witnesses' fees and disbursements),
of any nature whatsoever, at law or in equity, including without limitation any
claims arising under the Age Discrimination in Employment Act (collectively, the
"Released Claims"), which the Releasing Parties had, now have, or hereafter may
have against any of Consultant's Released Parties, relating to Consultant's
employment with the Company and Royce or the termination of Consultant's
employment with the Company and Royce. Notwithstanding the provisions of this
Section 8, the Consultant's Released Parties shall not be released from their
respective obligations contained in (a) this Agreement; (b) Section 7(c) of the
Employment Agreement; and (c) the Company's option grants to Consultant.
8. RELEASE BY COMPANIES. The Company and Royce hereby release and
discharge Consultant, his predecessors, successors, personal representatives,
heirs, agents and assigns (the
2
<PAGE>
"Companies' Released Parties"), from any and all Released Claims which the
Company or Royce had, now have, or hereafter may have against any of the
Companies' Released Parties, relating to Consultant's employment with the
Company and Royce or the termination of Consultant's employment with Company and
Royce. Notwithstanding the provisions of this Section 9, the Companies' Released
Parties shall not be released from their respective obligations contained in (a)
this Agreement; (b) Sections 7(c), 9, 10, 11, 12 and 13 of the Employment
Agreement; and (c) the Company's options grants to Consultant.
9. WAIVER. The Company, Royce and Consultant acknowledge that they are
aware that statutes exist which render null and void releases and discharges of
any claims, rights, demands, liabilities, actions and causes of action which are
unknown to the releasing or discharging party at the time of execution of said
release and discharge. All parties hereby expressly waive, surrender and agree
to forego any protection to which they would otherwise be entitled against one
another by virtue of the existence of any statute in any jurisdiction,
including, but not limited to, California. IT IS EXPRESSLY UNDERSTOOD AND AGREED
THAT ALL RIGHTS UNDER SECTION 1542 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA
ARE EXPRESSLY WAIVED BY EACH PARTY. SECTION 1542 READS AS FOLLOWS:
SECTION 1542. A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH A DEBTOR.
10. TERMINATION FOR DEATH, DISABILITY OR CAUSE. The Company may terminate
this Agreement and Consultant's consulting arrangement with the Company and
Royce as follows:
(a) DEATH. In the event of the death of Consultant, this Agreement
shall terminate as of the date of death.
(b) DISABILITY. This Agreement shall terminate in the event that
Consultant shall, because of physical or mental illness or incapacity, be unable
to perform the duties and services to be performed by him under this Agreement
for a consecutive period of three months or such shorter periods aggregating
three months in any 12-month period.
(c) TERMINATION FOR CAUSE. Company may terminate Consultant's
consulting arrangement with Company and this Agreement at any time for Cause.
"Cause" shall mean: (i) a material breach or violation by Consultant of his
obligations under Sections 9, 10, 11, 12 or 13 of the Employment Agreement; (ii)
a material breach or violation by Consultant of his obligations under any
provision of this Agreement (other than Sections 9, 10, 11, 12 or 13 of the
Employment Agreement) or the failure of Consultant to materially perform his
duties or responsibilities hereunder (unless said material default is caused by
a Disability) after Consultant has been given
3
<PAGE>
at least thirty (30) days prior written notice together with an opportunity to
cure said breach, violation or failure during such thirty (30) day period;
provided, however, that Consultant shall only have the right to cure one breach
in any twelve consecutive month period during the Term; or (iii) actions by
Consultant constituting fraud and/or embezzlement.
11. NO PARTNERSHIP NOR JOINT VENTURE; INDEPENDENT CONTRACTOR.
(a) The parties hereto intend by this Agreement solely to effect the
appointment of Consultant as an independent contractor. No other relationship is
intended to be created between the parties hereto. Subject to Consultant's
rights and interests as a security holder of the Company, nothing in this
Agreement shall be construed as (i) giving Consultant any rights as an owner of
the business of the Company or Royce, (ii) giving the Company or Royce any
rights as a partner in or owner of any business of Consultant, (iii) entitling
Consultant to control in any manner the conduct of the Company's or Royce's
business or (iv) entitling the Company or Royce to control in any manner the
conduct of Consultant's business.
(b) In performing the services described in this Agreement,
Consultant shall at all times operate as an independent contractor, maintaining
his own organization as distinct and separate from that of the Company and
Royce. Nothing in this Agreement shall be deemed to create or constitute the
relation of employer and employee between the Company and/or Royce, on the one
hand, and Consultant, on the other hand. Consultant, Royce and the Company
hereby acknowledge (i) that Consultant shall be solely responsible for and shall
pay all taxes in respect of Consultant's income and engagement hereunder, (ii)
Consultant has requested that the Company not withhold taxes and other amounts
from any payments of compensation to Consultant hereunder, and (iii) Consultant
shall be solely responsible for his health insurance, retirement and disability
protection and all other so-called "fringe benefits" and the Company or Royce
shall not in any way be responsible therefor, except as otherwise required by
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA").
12. CONSULTANT'S OTHER ACTIVITIES. Consultant has advised Company that he
intends to become the President and Chief Executive Officer of AMDG, Inc.
("AMDG") after his resignation from Company and Royce. Consultant has advised
Company and Royce regarding the business of AMDG and Company and Royce hereby
acknowledge that, as long as AMDG does not engage in the development,
manufacture, sale or marketing of generic pharmaceutical products, (i) such
activity shall not be grounds for termination of this Agreement; (ii) such
future employment shall not reduce the Company's and Royce's obligations to make
the payments required by Section 7(c) of the Employment Agreement; and (iii)
such activity shall not be deemed to violate the provisions of Section 11 of the
Employment Agreement.
13. COMPANY GUARANTY. Company hereby guarantees to Consultant the due and
punctual payment and performance in full of all of the obligations of Royce
contained in this Agreement.
4
<PAGE>
13. MISCELLANEOUS.
(a) All notices required or permitted to be given hereunder shall be
in writing and shall be deemed given (i) when delivered in person at the time of
such delivery or by telecopy with receipt of transmission indicating the date
and time (provided, however, that notice delivered by telecopy shall only be
effective if such notice is also delivered by hand or deposited in the United
States mail, postage prepaid, registered or certified mail, on or before two (2)
business days after its delivery by telecopy), (ii) when received if given by a
nationally recognized overnight courier service or (iii) two (2) business days
after being deposited in the United States mail, postage prepaid, registered or
certified mail, addressed as follows:
If to Consultant:
Patrick McEnany
2000 South Bayshore Drive
Villa 16
Coconut Grove, Florid 33133
If to the Company or Royce:
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, CA 91720
Attn: Dr. Allen Chao
and/or at such other addresses and/or to such other addressees as may be
designated by notice given in accordance with the provisions hereof.
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, successors and permitted assigns.
As to Consultant, this Agreement is a personal service contract and shall not be
assignable by Consultant, but all obligations and agreements of Consultant
hereunder shall be binding upon and enforceable against Consultant and
Consultant's personal representatives, heirs, legatees and devices.
(c) The parties adopt the Recitals to this Agreement and agree and
affirm that construction of this Agreement shall be guided thereby; this
Agreement contains all of the agreements between the parties with respect to the
subject matter hereof; and this Agreement supersedes all other agreements, oral
or written, between the parties hereto with respect to the subject matter
hereof.
(d) No change or modification of this Agreement shall be valid unless
the same shall be in writing and signed by all of the parties hereto. No waiver
of any provisions of this Agreement shall be valid unless in writing and signed
by the waiving party. No waiver of any of
5
<PAGE>
the provisions of this Agreement shall be deemed, or shall constitute, a waiver
of any other provision, whether or not similar, nor shall any waiver constitute
a continuing waiver, unless so provided in the waiver.
(e) If any provisions of this Agreement (or portions thereof) shall,
for any reason, be invalid or unenforceable, such provisions (or portions
thereof) shall be ineffective only to the extent of such invalidity or
unenforceability, and the remaining provisions of this Agreement (or portions
thereof) shall nevertheless be valid, enforceable and of full force and effect.
(f) The section or paragraph headings or titles herein are for
convenience of reference only and shall not be deemed a part of this Agreement.
(g) This Agreement may be executed in multiple counterparts, each of
which shall be deemed to be an original and all of which when taken together
shall constitute a single instrument.
(h) This Agreement shall be governed and controlled as to validity,
enforcement, interpretation, construction, effect and in all other respects by
the laws of the State of Florida applicable to contracts made in that State
(other than any conflict of laws rule which might result in the application of
the laws of any other jurisdiction).
14. CONTRACTUAL CAPACITY. The parties agree that each has entered into
this Agreement knowingly and voluntarily with an understanding of its
ramifications. Consultant represents and agrees that he has read this Agreement
and understands it and that, except as stated herein, no promise or inducement
has been offered for this Agreement. Consultant further represents and
acknowledges that he has been advised in writing by the Company through this
Agreement that he should consult with an attorney prior to signing this
Agreement, that he has had a period of 21 days to consider this Agreement prior
to executing it, and that he has in fact consulted with his own attorney who has
negotiated this Agreement on his behalf.
15. EFFECTIVE DATE. It is agreed that Consultant has a period of seven (7)
days commencing on the first day after he has executed this Agreement during
which he may revoke this Agreement. Notice of such revocation must be personally
delivered or sent next day overnight delivery by reputable carrier to Watson
Pharmaceuticals, Inc., 311 Bonnie Circle, Corona, CA 91720, Attn: Dr. Allen
Chao. This Agreement shall become effective on the first day following
expiration of this seven-day period ("Effective Date"); provided however, that
if this Agreement is not revoked prior to the Effective Date or otherwise deemed
unenforceable, the consulting relationship shall begin on and as of the
Separation Date.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
----------------------------
Patrick McEnany
WATSON PHARMACEUTICALS, INC.
By:
----------------------------
Title:
-------------------------
ROYCE LABORATORIES, INC.
By:
----------------------------
Title:
-------------------------
7
EXHIBIT 10.20(B)
AMENDMENT
TO
STOCK OPTION AGREEMENT
AMENDMENT made this 29th day of January to the Stock Option Agreement
between Watson Pharmaceuticals, Inc. (the "Company") (as successor to the Royce
Laboratories, Inc. ("Royce") options) and Patrick J. McEnany ("McEnany") dated
July 8, 1991(the "Option").
WITNESSETH:
WHEREAS, the Option is a nonstatutory option and the Option expires and
becomes non-exercisable on the date that McEnany resigns from the employ of
Royce ;
WHEREAS, McEnany will be resigning from Royce effective January 30, 1998
(the "Termination Date"); and
WHEREAS, McEnany desires and the Company is willing to extend the period
during which the Option may be exercised for a period ending on April 30, 1998,
which is 90 days following the Termination Date.
NOW, THEREFORE, for good and valuable consideration, Section 2.2 of the
Option is hereby amended to read as follows:
2.2 DISCHARGE OR RESIGNATION.
(a) If an Optionee ceases to be an employee of the Company, by reason of
the fact that he is discharged for cause, as determined solely and
exclusively by the committee appointed by the Board to administer
this Option (the "Committee"), all rights of the Optionee to exercise
the Options granted hereunder shall terminate, lapse and be forfeited
at the time of Optionee's termination of employment.
(b) If an Optionee ceases to an employee of the Company by reason of his
resignation or voluntary action, all rights of Optionee to exercise
the Options granted hereunder shall terminate, lapse and be forfeited
on the date which is 90 days following such resignation or voluntary
action.
The Option shall remain in full force and effect in all other respects.
This Amendment shall be effective immediately.
IN WITNESS WHEREOF, the parties have executed this Amendment in multiple
counterparts, each of which shall be treated as an original, as of the day and
year first written above.
ATTEST: WATSON PHARMACEUTICALS, INC.
____________________________ By _____________________________
Its________________________
OPTIONEE:
_________________________________
Patrick J. McEnany
"CONFIDENTIAL MATERIAL FILED SEPARATELY WITH THE COMMISSION"
EXHIBIT 10.27
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of August 25, 1997, among Hoechst Marion
Roussel, Inc., a Delaware corporation ("PARENT"), Marisub, Inc., a Delaware
corporation and the wholly-owned subsidiary of Parent ("SELLER"), and Watson
Pharmaceuticals, Inc., a Nevada corporation ("WATSON").
RECITALS
A. Seller owns all of the outstanding shares of capital stock ("Shares")
of The Rugby Group, Inc., a New York corporation (the "COMPANY"), which Shares
consist of 220 shares of common stock, 3,980 shares of first preferred stock and
2,400 shares of second preferred stock.
B. Watson desires to purchase all the outstanding Shares from Seller and
Seller desires to sell such Shares to Watson, on the terms and subject to the
conditions herein contained.
AGREEMENTS
Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES; CLOSING AND MANNER OF PAYMENT
1.1 AGREEMENT TO PURCHASE AND SELL SHARES. On the terms and subject to the
conditions contained in this Agreement, Watson shall purchase from Seller, and
Seller shall sell to Watson, all of the outstanding Shares. At the Closing (as
defined herein), Seller shall deliver to Watson certificates evidencing the
Shares duly endorsed in blank, or accompanied by valid stock powers duly
executed in blank, in proper form for transfer.
1.2 PURCHASE PRICE. Subject to the adjustments set forth in this Article
I, the aggregate purchase price of the Shares shall be equal to * (the "CLOSING
PURCHASE PRICE"), plus the amount of the Upside Sharing Payment (as defined
herein), if any (collectively, the "PURCHASE PRICE").
1.3 ADJUSTMENT TO THE PURCHASE PRICE. The Closing Purchase Price shall be:
(a) increased by the amount by which the Net Book Value (as defined herein)
exceeds *; or (b) reduced by the amount by which exceeds the Net Book Value. The
Net Book Value shall be the amount by which the aggregate consolidated assets of
the Company and its Subsidiaries exceeds the aggregate consolidated liabilities
of the Company and its Subsidiaries, all as determined and adjusted in
accordance with Section 1.5 below and as shown on the Closing Balance Sheet.
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
1.4 MANNER OF PAYMENT OF THE PURCHASE PRICE. For purposes of the Closing,
the parties shall make a good-faith estimate of the Closing Purchase Price (the
"ESTIMATED CASH PAYMENT"), based upon the most recent ascertainable financial
information. At the Closing, Watson shall pay the Estimated Cash Payment to
Seller, by wire transfer to such account as Seller shall designate by written
notice delivered to Purchaser not later than two (2) business days prior to the
Closing. Following the Closing, the parties shall determine the final Closing
Purchase Price, taking into account the adjustments required pursuant to Section
1.3 and employing the procedures and criteria set forth in Sections 1.5 and 1.6.
If, based on the Closing Purchase Price as finally determined: (a) the Closing
Purchase Price exceeds the Estimated Cash Payment, Watson shall forthwith pay
the excess to Seller; or (b) the Estimated Cash Payment exceeds the Closing
Purchase Price, Seller shall forthwith pay the excess to Watson. Notwithstanding
anything to the contrary contained herein, if (x) the Company or any of its
Subsidiaries reverses any of the reserves set forth on the Interim Financial
Statements at any time from July 31, 1997 through the Closing Date where the
effect of such reversal would be to increase the Company's and its Subsidiaries'
consolidated net income; and (y) the Net Book Value, as calculated on the
Closing Balance Sheet, exceeds *, then the Net Book Value, as calculated on the
Closing Balance Sheet, shall be reduced by the amount of the increase in Net
Book Value resulting from such reversal and resultant increase in consolidated
net income; provided, however, that the Net Book Value shall not be reduced to
less than * based upon such reserve reversal.
1.5 DETERMINATION OF NET BOOK VALUE. The Net Book Value shall be
determined from a statement of the consolidated assets and liabilities of the
Company and its Subsidiaries as of the close of business on the day next
preceding the Closing (the "CLOSING BALANCE SHEET"). The Closing Balance Sheet
shall be prepared by Seller, at Seller's expense. Except as otherwise provided
in this Section 1.5, the Closing Balance Sheet shall be prepared in accordance
with generally accepted accounting principles ("GAAP") applied in a manner
consistent with the accounting principles applied in the preparation of the
Financial Statements (as defined herein) and the Interim Financial Statements
(as defined herein) based upon the Company's historical accounting practices.
Notwithstanding anything to the contrary contained in this Article I, (a) the
Closing Balance Sheet shall contain pro rata accruals for accrued salaries,
wages and vacation pay with respect to all of the employees of the Company and
its Subsidiaries, utilities and like items; (b) assets and liabilities shall be
reflected without regard to materiality; (c) the Closing Balance Sheet shall be
prepared on the basis that the intercompany payable from the Company to Parent
has been converted to equity in accordance with Section 5.3(j) of this
Agreement; (d) for purposes of preparing the Closing Balance Sheet, the *.
Seller shall cause the Closing Balance Sheet to be delivered to Watson not later
than sixty (60) days after the Closing Date. Seller shall make available to
Watson and Watson's accountants its work papers used in connection with the
preparation of the Closing Balance Sheet.
1.6 DISPUTES REGARDING CLOSING BALANCE SHEET. Disputes with respect to the
Closing Balance Sheet shall be dealt with as follows:
(a) Watson shall have sixty (60) days after receipt of the Closing Balance
Sheet from Seller (the "DISPUTE PERIOD") to dispute any of the elements of the
Closing Balance Sheet (a "DISPUTE"). If Watson does not give written notice of a
Dispute within the Dispute Period to Seller (a "DISPUTE NOTICE"), the Closing
Balance Sheet shall be deemed to have been accepted and agreed to by Watson in
the form in which it was delivered by Seller, and shall be final and binding
upon the parties hereto. If Watson has a Dispute, Watson shall give Seller a
Dispute
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<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
Notice within the Dispute Period, setting forth in reasonable detail the
elements and amounts with which it disagrees. Within thirty (30) days after
delivery of such Dispute Notice, the parties hereto shall attempt to resolve
such Dispute and agree in writing upon the final content of the disputed Closing
Balance Sheet.
(b) If Watson and Seller are unable to resolve any Dispute within the
thirty (30) day period after Seller's receipt of a Dispute Notice, the New York
office of the certified public accounting firm of Arthur Andersen LLP (the
"ARBITRATING ACCOUNTANT") shall be engaged as arbitrator hereunder to settle
such Dispute as soon as practicable. In the event Arthur Andersen LLP is
unwilling or unable to serve as the Arbitrating Accountant, the parties hereto
shall select by mutual agreement another nationally recognized certified public
accounting firm, who is not rendering (and during the preceding two-year period
has not rendered) services to either Parent, Watson or any of their respective
affiliates, to serve as the Arbitrating Accountant. In connection with the
resolution of any Dispute, the Arbitrating Accountant shall have access to all
documents, records, work papers, facilities and personnel necessary to perform
its function as arbitrator. The arbitration before the Arbitrating Accountant
shall be conducted in accordance with the commercial arbitration rules of the
American Arbitration Association. The Arbitrating Accountant's award with
respect to any Dispute shall be final and binding upon the parties hereto, and
judgment may be entered on the award. Parent and Watson shall each pay one-half
of the fees and expenses of the Arbitrating Accountant with respect to any
Dispute.
1.7 TIME AND PLACE OF CLOSING. Unless terminated earlier as provided in
Article VIII hereof, the transactions contemplated by this Agreement shall be
consummated (the "CLOSING") at 10:00 a.m., prevailing business time, at the
offices of D'Ancona & Pflaum, 30 North LaSalle, Suite 2900, Chicago, Illinois
60602 two (2) business days after all the conditions of Closing set forth in
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Article V hereof are satisfied or waived, or on such other date, or at such
other place, as shall be agreed upon by Seller and Watson. The date on which the
Closing shall occur in accordance with the preceding sentence is referred to in
this Agreement as the "CLOSING DATE". If the Closing shall occur, it shall be
deemed to be effective as of 12:01 a.m., prevailing time at the place of Closing
on the Closing Date.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF WATSON
Watson represents and warrants to Seller that the statements contained in
this Article II are true and correct as of the date hereof (except as otherwise
noted), except as set forth in the disclosure statement delivered by Watson to
Seller concurrently herewith and identified as the "WATSON DISCLOSURE
STATEMENT." All exceptions noted in the Watson Disclosure Statement shall be
numbered to correspond to the applicable sections to which such exception
refers; provided, however, that any disclosure set forth on any particular
schedule shall be deemed disclosed in reference to all applicable schedules.
2.1 EXISTENCE, GOOD STANDING, CORPORATE AUTHORITY. Watson is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Nevada and has all requisite power and authority to (i) own or lease,
and operate its properties and assets and to carry on its business as now
conducted, except where the failure to have such power and authority would not
have a Watson Material Adverse Effect (as defined herein); (ii) enter into and
perform this Agreement and the other agreements executed in connection herewith
to which Watson is a party (collectively, the "WATSON ANCILLARY DOCUMENTS"); and
(iii) consummate the transactions contemplated hereby and thereby. For purposes
of this Agreement, (a) the term "MATERIAL ADVERSE EFFECT" when used with respect
to any Person (as defined herein) means (i) a material adverse effect on the
business, results of operations, assets, product pipeline or financial condition
of such Person and its Subsidiaries (as defined herein), if any, taken as a
whole, or (ii) a material impairment in the ability of such Person or its
Subsidiaries to perform any of their obligations under this Agreement or to
consummate the transactions contemplated hereby or under the Watson Ancillary
Documents or the Ancillary Documents (as defined herein), as the case may be,
(b) the term "SUBSIDIARY" when used with respect to any Person means any
corporation or other organization, whether incorporated or unincorporated, of
which (i) at least fifty percent (50%) of the securities or other interests
having by their terms ordinary voting power to elect a majority of the board of
directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such Person or by any one or more of its Subsidiaries; or (ii) such Person or
any other Subsidiary of such Person is a general partner, it being understood
that representations and warranties of a Person concerning any former Subsidiary
of such Person shall be deemed to relate only to the periods during which such
former Subsidiary was a Subsidiary of such Person; and (c) the word "PERSON"
means an individual, a corporation, a partnership, a limited liability company,
an association, a trust or any other entity or organization, including a
government or political subdivision or any agency or instrumentality thereof, or
any affiliate (as that term is
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defined in the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "EXCHANGE ACT")) of any of the
foregoing.
2.2 AUTHORIZATION OF AGREEMENT AND OTHER DOCUMENTS. The execution and
delivery of this Agreement and the Watson Ancillary Documents and the
consummation by Watson of the transactions contemplated hereby and thereby have
been duly authorized by the Board of Directors of Watson and no other
proceedings on the part of Watson or its stockholders are necessary to authorize
the execution, delivery or performance of this Agreement or any Watson Ancillary
Document. This Agreement has been duly and validly executed and delivered and
is, and, as of the Closing Date, each of the Watson Ancillary Documents will be
duly and validly executed and delivered and will constitute, a valid and binding
obligation of Watson enforceable against Watson in accordance with its terms,
except to the extent that enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws affecting enforcement of creditors' rights generally, and by general
principles of equity (regardless of whether enforcement is considered in a
proceeding at law or in equity).
2.3 NO VIOLATION. Neither the execution and delivery by Watson of this
Agreement or the Watson Ancillary Agreements, nor the consummation by Watson of
the transactions contemplated hereby and thereby in accordance with their
respective terms, will (a) violate or conflict with or result in a breach of any
provisions of the Articles of Incorporation or By-Laws of Watson; (b) contravene
or conflict with or constitute a violation of any provision of any law,
regulation, judgment, injunction, order or decree binding upon or applicable to
Watson, except for any of the foregoing matters which would not have a Watson
Material Adverse Effect; (c) violate, conflict with, result in a breach of any
provision of, constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under, result in the termination, or
in a right of termination or cancellation of, accelerate the performance
required by, result in the triggering of any payment or other obligations
pursuant to, result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of Watson or any of its Subsidiaries
under, or result in being declared void, voidable, or without further binding
effect, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which Watson or any
of its Subsidiaries is a party, or by which Watson or any of its Subsidiaries or
any of their respective properties is bound or affected, in each case, where
such violation, conflict, lien or breach would have a Watson Material Adverse
Effect; or (d) other than the filings under applicable federal, state and local
laws and regulations, or filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and the expiration or early termination of all waiting
periods thereunder (the "HSR ACT") (collectively, the "REGULATORY FILINGS"),
require any consent, approval or authorization of, or declaration of, or
registration or filing with, any domestic governmental or regulatory authority,
the failure to obtain or make which would have a Watson Material Adverse Effect.
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2.4 NO BROKERS. Watson has not entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of
Parent, Seller, Watson or their respective Subsidiaries to pay any finder's fee,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby, except that Watson has retained Bear, Stearns & Co. Inc. as
its financial advisor.
2.5 ACCREDITED INVESTOR. Watson is an "accredited investor" within the
meaning of Rule 501(a) of Regulation D under the Securities Act of 1933, as
amended (the "SECURITIES ACT") and is acquiring the Shares for its own account
for investment and not with a view to, or for resale in connection with, any
"distribution" within the meaning of the Securities Act. Watson understands that
the Shares have not been registered under the Securities Act or any state
securities laws and are being transferred to Watson, in part, in reliance on the
foregoing representation.
2.6 LITIGATION. There is no litigation or proceeding, in law or in equity,
and there are no proceedings or governmental investigations before any
commission or other administrative authority, pending or, to Watson's knowledge,
threatened against Watson or any of its Subsidiaries, which, if determined
adversely to Watson or its Subsidiaries, would reasonably be likely to have a
Watson Material Adverse Effect.
2.7 FINANCING. Upon the terms and subject to the conditions of this
Agreement, Watson will have all funds necessary for the payment of the Closing
Purchase Price and anticipates having sufficient funds to pay the Upside Sharing
Payment.
2.8 EFFECT ON AGREEMENT. There is no agreement or arrangement binding on
Watson or any of its Subsidiaries that would materially limit its ability to
develop, sell or distribute any of the Products (as defined herein) or run the
Distribution Business (as defined herein) as such Distribution Business existed
on July 31, 1997, assuming the Closing had occurred as of such date, other than,
in each case, limitations which affect the pharmaceutical industry generally or
limitations which arise due to Watson's allocation of its limited resources.
Watson believes that it currently has adequate resources to run the Distribution
Business and develop, sell and/or distribute the Products in a commercially
reasonable good faith manner.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND PARENT
Seller and Parent, jointly and severally, represent and warrant to Watson
that the statements contained in this Article III are true and correct as of the
date hereof (except as otherwise noted), except as set forth in the disclosure
statement delivered by Parent and Seller to Watson concurrently herewith and
identified as the "DISCLOSURE STATEMENT." All exceptions noted in the Disclosure
Statement shall be numbered to correspond to the applicable sections to which
such exception refers; provided, however, that any disclosure set forth on any
particular schedule shall be deemed disclosed in reference to all applicable
schedules.
3.1 ORGANIZATION, STANDING AND QUALIFICATION. Seller and Parent are each
corporations duly organized, validly existing and in good standing under the
laws of their respective states of incorporation and has all power and authority
to (i) enter into and perform this Agreement and the other agreements executed
in connection herewith to which Parent or Seller is a party (collectively, the
"ANCILLARY DOCUMENTS"); and (ii) consummate the transactions contemplated hereby
and thereby. The Company and each of its Subsidiaries (i) is a corporation duly
organized, validly existing and in good standing under the laws of their
respective jurisdiction of incorporation; (ii) has all requisite power and
authority to own or lease, and operate their respective properties and assets,
and to carry on their respective businesses as now conducted, except where the
failure to have such power and authority would not have a Company Material
Adverse Effect; (iii) is duly qualified or licensed to do business and is in
good standing in all jurisdictions in which they own or lease property or in
which the conduct of their respective businesses requires them to so qualify or
be licensed except where the failure to so qualify would not have a Company
Material Adverse Effect; and (iv) has obtained all licenses, permits, franchises
and other governmental authorizations necessary to the ownership or operation of
their respective properties or the conduct of their respective businesses except
where the failure to have obtained such licenses, permits, franchises or
authorizations would not have a Company Material Adverse Effect.
3.2 CAPITALIZATION.
(a) The total authorized capital stock of the Company consists of (i) 400
shares of common stock, par value $50 per share, 220 shares of which are issued
and outstanding as of the date of this Agreement; (ii) 20,000 shares of first
preferred stock, par value $1 per share, 3,980 shares of which are issued and
outstanding as of the date of this Agreement; and (iii) 2,400 shares of second
preferred stock, par value $1,000 per share, 2,400 shares of which are issued
and outstanding as of the date of this Agreement. There are no shares of capital
stock of the Company of any other class authorized, issued or outstanding.
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(b) Each of the Shares is (i) duly authorized and validly issued; (ii)
fully paid and nonassessable and free of preemptive and similar rights; and
(iii) owned by Seller free and clear of all options, proxies, voting trusts,
voting agreements, judgments, pledges, charges, escrows, rights of first refusal
or first offer, mortgages, indentures, claims, transfer restrictions, liens,
equities, encumbrances, security interests and other encumbrances of every kind
and nature whatsoever, whether arising by agreement, operation of law or
otherwise (collectively, "CLAIMS").
(c) There are currently no outstanding, and, as of the Closing, there will
be no outstanding (i) securities convertible into or exchangeable for any
capital stock of the Company or any of its Subsidiaries, (ii) options, warrants
or other rights to purchase or subscribe to capital stock of the Company or any
of its Subsidiaries or securities convertible into or exchangeable for capital
stock of the Company or any of its Subsidiaries, or (iii) contracts,
commitments, agreements, understandings, arrangements, calls or claims of any
kind to which the Company or any of its Subsidiaries is a party or is bound
relating to the issuance of any capital stock of the Company or any of its
Subsidiaries.
3.3 SUBSIDIARIES. The Company owns directly or indirectly each of the
outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power to elect a majority of directors or others
performing similar functions with respect to such Subsidiary) of each of the
Company's Subsidiaries indicated in the Disclosure Statement as being owned by
the Company. Each of the outstanding shares of capital stock owned by the
Company of each of the Company's Subsidiaries is duly authorized, validly
issued, fully paid and nonassessable, and is owned, directly or indirectly, by
the Company free and clear of all Claims. The following information for each
Subsidiary of the Company is listed in the Disclosure Statement, if applicable:
(a) its name and jurisdiction of incorporation or organization; (b) the location
of its principal office; (c) a summary of its lines of business; (d) its
authorized capital stock or share capital; (e) the number of issued and
outstanding shares of capital stock or share capital and the owners thereof; and
(f) a list of its officers and directors. The only material asset owned by
Caribe is a manufacturing facility located in Puerto Rico.
3.4 OWNERSHIP INTERESTS. Neither the Company nor any of its Subsidiaries
owns any direct or indirect equity interest in, or is a party to any agreement
or arrangement relating to the ownership or control of a direct or indirect
equity interest in, any corporation, joint venture, limited liability company,
partnership, association or other entity. Since January 1, 1994, the Company has
not (i) disposed of the capital stock or all or substantially all of the assets
of any ongoing business, or (ii) purchased the business and/or all or
substantially all of the assets of another person, firm or corporation (whether
by purchase of stock, assets, merger or otherwise).
3.5 CONSTITUENT DOCUMENTS. True and complete copies of the Certificate of
Incorporation and all amendments thereto and the By-Laws as amended or restated,
as the case may be, and currently in force, of the Company and each of the
Company's Subsidiaries, and all stock records and all corporate minute books and
records of the Company and each of the Company's Subsidiaries have been
furnished or made available by Parent and Seller to Watson for inspection. Said
stock
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records accurately reflect all stock transactions and the current stock
ownership of the Company and its Subsidiaries. The corporate minute books and
records of the Company and its Subsidiaries contain true and complete copies of
all resolutions adopted by the stockholders or the board of directors of the
Company and its Subsidiaries and any other action formally taken by them
respectively as such.
3.6 AUTHORIZATION OF AGREEMENT AND OTHER DOCUMENTS. The execution and
delivery of this Agreement and the Ancillary Documents, and the consummation by
Seller and Parent of the transactions contemplated hereby and thereby, have been
duly authorized by the Board of Directors and sole shareholder of Seller and by
the Board of Directors of Parent and no other proceedings on the part of Seller
or Parent are necessary to authorize the execution, delivery or performance of
this Agreement or any Ancillary Document. This Agreement has been duly and
validly executed and delivered and is, and, as of the Closing Date, each of the
Ancillary Documents will be duly and validly executed and delivered and will
constitute, a valid and binding obligation of Seller and Parent, to the extent
each is a party thereto, enforceable against Seller and Parent, to the extent
each is a party thereto, in accordance with their respective terms, except to
the extent that enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
affecting enforcement of creditors' rights generally, and by general principles
of equity (regardless of whether enforcement is considered in a proceeding at
law or in equity).
3.7 NO VIOLATION. Neither the execution and delivery of this Agreement nor
the Ancillary Documents by Seller or Parent nor the consummation by Seller or
Parent of the transactions contemplated hereby and thereby in accordance with
their respective terms, will (a) violate or conflict with or result in a breach
of any provisions of the Certificate of Incorporation or By-Laws of Seller,
Parent, the Company or any of the Company's Subsidiaries; (b) violate, conflict
with, result in a breach of any provision of, constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
result in the termination, or in a right of termination or cancellation of,
accelerate the performance required by, result in the triggering of any payment
or other material obligations pursuant to, result in the creation of any lien,
security interest, charge or encumbrance upon any of the material properties of
the Company or any of its Subsidiaries under, or result in being declared void,
voidable, or without further binding effect, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust or any material
license, franchise, permit, lease, contract, agreement or other instrument,
commitment or obligation to which the Company or any of its Subsidiaries is a
party, or by which the Company or any of its Subsidiaries or any of their
respective properties is bound or affected; (c) contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to Parent, Seller, the
Company or any of the Company's Subsidiaries, except for any of the foregoing
matters which would not have a Company Material Adverse Effect; or (d) other
than the Regulatory Filings, require any consent, approval or authorization of,
or declaration of, or filing or registration with, any domestic governmental or
regulatory authority, the failure to obtain or make which would have a Company
Material Adverse Effect.
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3.8 COMPLIANCE WITH LAWS--GENERAL.
(a) The Company and each of its Subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals of any court, arbitral, tribunal,
administrative agency or commission or other governmental or other regulatory
authority or agency ("GOVERNMENTAL ENTITIES") necessary for the lawful conduct
of their respective businesses as they are currently conducted (the "PERMITS"),
except where the failure to hold such Permits would not have a Company Material
Adverse Effect.
(b) The Company and its Subsidiaries are in substantial compliance with
the terms of their respective Permits, except for any noncompliance that would
not have a Company Material Adverse Effect.
(c) The Company and its Subsidiaries are in substantial compliance with
all laws, ordinances or regulations of all Governmental Entities (including, but
not limited to, those related to occupational health and safety, controlled
substances or employment and employment practices) that are applicable to the
Company or any of its Subsidiaries, except for any noncompliance that would not
have a Company Material Adverse Effect.
(d) No investigation, review, inquiry or proceeding by any Governmental
Entity with respect to the Company or any of its Subsidiaries is, to the
knowledge of the Company, pending or threatened.
(e) Neither the Company nor any of its Subsidiaries are subject to any
agreement, contract or decree with any Governmental Entities arising out of any
current or previously existing violations of any laws, ordinances or regulations
applicable to the Company or any of its Subsidiaries.
3.9 COMPLIANCE WITH LAWS--FDA.
(a) As to each drug of the Company or its Subsidiaries for which a new
drug application or abbreviated new drug application has been approved by the
Food and Drug Administration ("FDA"), which drug is described in the Disclosure
Statement, the applicant and all persons performing operations covered by the
application are in substantial compliance with 21 U.S.C. ss.ss. 355 or 357, 21
C.F.R. Parts 314 or 430 et. seq., respectively, and all terms and conditions of
the application.
(b) As to each biologic product of the Company or its Subsidiaries for
which an established license application ("ELA") and/or product license
application ("PLA") has been filed, which products are described in the
Disclosure Statement, the applicant and all persons performing operations
covered by the application are in substantial compliance with 42 U.S.C. ss. 262,
21 C.F.R. Part 601 et. seq., and all terms and conditions of the ELA and/or PLA.
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(c) The Company and each of its Subsidiaries are in substantial compliance
with all applicable registration and listing requirements set forth in 21 U.S.C.
ss. 360 and 21 C.F.R. Part 207. To the extent required, the Company and each of
its Subsidiaries have obtained licenses from the Drug Enforcement Agency ("DEA")
and are in substantial compliance with all such licenses and all applicable
regulations promulgated by the DEA.
(d) Since January 1, 1994, all manufacturing operations conducted by or,
to the knowledge of the Company, for the benefit of the Company and its
Subsidiaries have been and are being conducted in substantial compliance with
the good manufacturing practice regulations set forth in 21 C.F.R. Parts 210 and
211.
(e) Neither the Company, its Subsidiaries nor, to the knowledge of the
Company, their respective officers, employees, or agents have made an untrue
statement of material fact or fraudulent statement to the FDA or the DEA, failed
to disclose a material fact required to be disclosed to the FDA or the DEA, or
committed an act, made a statement, or failed to make a statement that could
reasonably be expected to provide a basis for the FDA to invoke its policy
respecting "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal
Gratuities," set forth in 56 Fed. Reg 46191 (September 10, 1991).
(f) Parent and Seller have made available to Watson copies of any and all
reports of inspection observations, establishment inspection reports, warning
letters and any other documents received from or issued by the FDA or the DEA
within the last three years that indicate or suggest lack of compliance with the
FDA or the DEA regulatory requirements by the Company, its Subsidiaries or
persons covered by product applications or otherwise performing services for the
benefit of the Company or its Subsidiaries.
(g) Neither the Company nor its Subsidiaries have received any written
notice that the FDA or the DEA has commenced, or threatened to initiate, any
action to withdraw its approval or request the recall of any product of the
Company or its Subsidiaries or commenced or threatened to initiate, any action
to enjoin production at any facility owned or used by the Company or its
Subsidiaries or any other facility at which any of the Company's or its
Subsidiaries' products are manufactured, processed, packaged, labeled, stored,
distributed, tested or otherwise handled (the "MANUFACTURING Locations").
(h) As to each article of drug or consumer product currently manufactured
and/or distributed by the Company or its Subsidiaries, which products are
described in the Disclosure Statement, such article is not adulterated or
misbranded within the meaning of the FDCA, 21 U.S.C. ss.ss. 301c et. seq.
(i) As to each drug referred to in (a), the Company, its Subsidiaries and
their respective officers, employees, agents and affiliates have included or
caused to be included in the application for such drug, where required, the
certification described in 21 U.S.C. ss. 335a(k)(l) and the list described in 21
U.S.C. ss. 335a(k)(2), and such certification and such list was in each case
true and
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accurate when made and remained true and accurate thereafter.
(j) Neither the Company, its Subsidiaries, nor, to the knowledge of the
Company, their respective officers, employees, agents or affiliates, has been
convicted of any crime or engaged in any conduct for which debarment is mandated
by 21 U.S.C. ss. 335a(a) or authorized by 21 U.S.C. ss. 335a(b).
(k) As to each application or abbreviated application submitted to, but
not approved by, the FDA, and not withdrawn by the Company or its Subsidiaries,
or applicants acting on its behalf as of the date of this Agreement, the Company
and its Subsidiaries have complied in all material respects with the
requirements of 21 U.S.C. ss.ss. 355 and 357 and 21 C.F.R. Parts 312, 314 and
430 et. seq. and has provided, or will provide, all additional information and
taken, or will take, all additional action requested by the FDA in connection
with the application.
3.10 BOOKS AND RECORDS. The Company's and its Subsidiaries' books,
accounts and records are, and have been, in all material respects, maintained in
the Company's and its Subsidiaries usual, regular and ordinary manner, in
accordance with GAAP, and all material transactions to which the Company or any
of its Subsidiaries is or has been a party are properly reflected therein.
3.11 FINANCIAL STATEMENTS. The Disclosure Statement contains complete and
accurate copies of the audited consolidated balance sheets, statements of income
and retained earnings, statements of cash flows and notes to financial
statements (together with any supplementary information thereto) of the Company
and its Subsidiaries as of and for the years ended December 31, 1995 and 1996.
The financial statements described in the preceding sentence are hereinafter
referred to as the "FINANCIAL STATEMENTS". The Disclosure Statement also
contains complete and accurate copies of the unaudited consolidated balance
sheet and statement of income and retained earnings and unaudited statement of
cash flows of the Company and its Subsidiaries as of and for the seven month
period ended July 31, 1997. The financial statements described in the preceding
sentence are referred to herein as the "INTERIM FINANCIAL STATEMENTS". The
Financial Statements and the Interim Financial Statements present fairly, in all
material respects, the consolidated financial position of the Company and its
Subsidiaries as of the dates thereof and the consolidated results of operations
and cash flows of the Company and its Subsidiaries for the periods covered by
said statements, subject, in the case of the Interim Financial Statements, to
normal year end adjustments, all in accordance with GAAP applied on a consistent
basis, except as set forth in the notes to such Financial Statements and Interim
Financial Statements. The Disclosure Statement contains complete and correct
copies of all attorneys' responses to audit inquiry letters and all management
letters from the Company's and its Subsidiaries' independent certified public
accountants for the last three (3) fiscal years of the Company. Since January 1,
1994, there has been no material change in the Company's or its Subsidiaries'
accounting methods or principles, except (i) as described in the notes to the
Financial Statements or the Interim Financial Statements; and (ii) as provided
in the following sentence. Since July 31, 1997 through the date hereof, neither
the Company nor any of its Subsidiaries has *.
3.12 ACCOUNTS RECEIVABLES. To the knowledge of the Company, none of the
trade receivables and notes receivable which are reflected in the Financial
Statements or the Interim Financial Statements or which arose subsequent to July
31, 1997, is or was subject to any material counterclaim or set off. All of such
trade receivables arose out of bona fide, arms-length transactions for the sale
of goods or performance of services, and to the Company's
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knowledge, all such trade receivables and notes receivable are good and
collectible (or have been collected) in the ordinary course of business using
normal collection practices at the aggregate recorded amounts thereof, less the
amount of applicable reserves (i.e. rebates, returns or price adjustments),
customary charge backs, allowances for doubtful accounts and discounts. All such
reserves, charge backs, allowances for doubtful accounts and discounts, were and
are materially consistent in extent with reserves, charge backs, allowances for
doubtful accounts and discounts previously maintained by the Company in the
ordinary course of its business, subject to industry changes due to shelf
restocking or customer rebates. The Company reasonably believes that all
reserves, charge backs, allowances for doubtful accounts and discounts set forth
on the Financial Statements and the Interim Financial Statements are sufficient.
Since July 31, 1997, there has not been a material write-down or write-off of
the Company's aggregate trade receivables or a material adverse change in the
aging thereof.
3.13 INVENTORY. All inventory of the Company or any of its Subsidiaries
which is held for sale or resale, including raw materials, work in process and
finished goods (collectively, "INVENTORY"), consists of items of a quantity and
quality historically useable and/or saleable in the normal course of business,
except for immaterial items of Inventory or items of obsolete and slow-moving
material, substantially all of which have been written down to estimated net
realizable value on an item by item basis. None of such write-downs have had a
Company Material Adverse Effect. With the exception of items of below standard
quality which have been written down to their estimated net realizable value, no
material portion of the materials and/or workmanship comprising the Inventory is
defective. All Inventory reflected in the Financial Statements and the Interim
Financial Statements is valued at the lower of cost or market with cost
determined by the trailing average accounting method. Since July 31, 1997, there
has not been a material change in the level of the Inventory. All Inventory is,
and, to the knowledge of the Company, all material tools, dies, jigs, patterns,
molds, equipment, supplies and other materials used in the production of
Inventory are, located at the Real Estate (as defined herein), the Leased
Premises (as defined herein) or the Company's or its Subsidiaries' manufacturing
locations.
3.14 BANK ACCOUNTS. The Disclosure Statement contains a list showing: (a)
the name of each bank, safe deposit company or other financial institution in
which the Company or any of its Subsidiaries has an account, lock box or safe
deposit box; (b) the names of all persons authorized to draw thereon or to have
access thereto and the names of all persons and entities, if any, holding powers
of attorney from the Company or any of its Subsidiaries; and (c) all instruments
or agreements to which the Company or any of its Subsidiaries is a party as an
endorser, surety or guarantor, other than checks or other instruments endorsed
for collection or deposit.
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3.15 INTELLECTUAL PROPERTY.
(a) The Disclosure Statement identifies all of the following which are
used in the Company's or any of its Subsidiaries' businesses and in which the
Company or any of its Subsidiaries claims any ownership rights: (i) all
registered trademarks, service marks, slogans, trade names, trade dress and the
like (collectively with the associated goodwill of each, "TRADEMARKS"); (ii) all
common law Trademarks; (iii) all patents on and pending applications to patent
any technology or design; (iv) all registrations of and applications to register
copyrights; and (v) all licenses or rights in computer software, Trademarks,
patents, copyrights, unpatented formulations, manufacturing methods and other
know-how, to which the Company or any of its Subsidiaries is a party, other than
licenses to commercially available computer software and other know-how acquired
or entered into by the Company or any of its Subsidiaries in the ordinary course
of business. The rights required to be so identified, together with all
proprietary formulation, manufacturing methods, know-how and trade secrets that
are material to the Company's or any of its Subsidiaries' businesses, are
referred to herein collectively as the "INTELLECTUAL PROPERTY".
(b)(i) The Company or one of its Subsidiaries is the owner of or duly
licensed to use each Trademark and its associated goodwill; (ii) each of the
Trademark registrations exists and, to the Company's knowledge, has been
maintained in good standing; (iii) each patent and application included in the
Intellectual Property exists, is owned by or licensed to the Company or one of
its Subsidiaries and, to the Company's knowledge, has been maintained in good
standing; (iv) each copyright registration included in the Intellectual Property
exists and is owned by the Company or one of its Subsidiaries; (v) to the
Company's knowledge, no other firm, corporation, association or person claims
the right to use in connection with similar or closely related goods and in the
same geographic area, any mark which is identical or confusingly similar to any
of the Trademarks; (vi) the Company has no knowledge of any claim that any third
party asserts ownership rights in any of the Intellectual Property; (vii) the
Company has no knowledge of any claim that the Company's or its Subsidiaries'
use of any Intellectual Property infringes any right of any third party; (viii)
the Company has no knowledge that any third party is infringing on any of the
Company's or one of its Subsidiaries' rights in any of the Intellectual
Property; (ix) the Company has no knowledge that any of its actions or the
actions of its Subsidiaries has infringed or is infringing on any third party's
Intellectual Property rights; (x) to the Company's knowledge, there are no
undisclosed government restrictions which specifically limit the manner in which
any of the Intellectual Property may be used or licensed; and (xi) to the
Company's knowledge, neither the Company, its Subsidiaries nor any of their
respective officers or directors has disclosed any confidential information of
the Company or any of its Subsidiaries which would constitute trade secrets
under applicable law, except in the ordinary course of business of the Company
and its Subsidiaries or with the authority of the Company or one of its
Subsidiaries.
3.16 TITLE TO PROPERTIES. Attached to the Disclosure Statement is a list
and description of each item of tangible personal property owned by the Company
or any of its Subsidiaries which has a net book value in excess of $50,000. The
Company or its Subsidiaries, as the case may be, (i) has good and merchantable
title to such property free and clear of all Claims, except for (A) Claims set
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forth on the Disclosure Statement and (B) (x) mechanic's, materialmen's, and
similar liens, (y) liens arising under worker's compensation, unemployment
insurance, social security, retirement, and similar legislation and (z) liens on
goods in transit incurred pursuant to documentary letters of credit; and (ii)
enjoys peaceful and undisturbed possession under all leases to which it is a
party as lessee. All of the leases to which the Company or any of its
Subsidiaries is a party (other than leases for Leased Premises) are legal, valid
and binding obligations of the Company or its Subsidiaries and in full force and
effect, and no default by the Company or its Subsidiaries, or, to the knowledge
of the Company, any other party thereto has occurred and is continuing
thereunder. The Disclosure Statement lists all properties and assets used by the
Company or any of its Subsidiaries in connection with the operation of their
respective businesses which are held under any lease or under any conditional
sale or other title retention agreement to the extent the Company or its
Subsidiaries remaining obligations under any such lease or agreement exceeds
$50,000. Except for such assets and facilities as are immaterial to the business
of the Company or its Subsidiaries, all tangible assets and facilities of the
Company and its Subsidiaries are in good operating condition and repair
(ordinary wear and tear excepted) and, in the aggregate with the intangible
assets of the Company, are sufficient to conduct the business of the Company and
its Subsidiaries as previously conducted prior to the date hereof.
3.17 REAL ESTATE; LEASED PREMISES.
(a) Neither the Company nor any of its Subsidiaries owns any real estate,
or has the option to acquire any real estate (the "REAL ESTATE"). The definition
of Real Estate shall not include the facility located in Monroe, North Carolina
owned by Chelsea Laboratories, Inc. or any real estate owned by Caribe. The
Disclosure Statement accurately sets forth the street addresses of the Real
Estate and the legal descriptions of the Real Estate. Either the Company or one
of its Subsidiaries holds fee simple title to the Real Estate, subject only to
real estate taxes not delinquent and to covenants, conditions, restrictions and
easements of record which are set forth in the Disclosure Statement, none of
which makes title to the Real Estate unmarketable and none of which are violated
by the Company or its Subsidiaries or interfere with the Company's or its
Subsidiaries use thereof. The Real Estate is not subject to any leases or
tenancies. None of the improvements comprising the Real Estate or the businesses
conducted or proposed to be conducted by the Company or its Subsidiaries
thereon, are, to the Company's knowledge, in violation of any material use or
occupancy restriction, limitation, condition or covenant of record or any zoning
or building law, code, ordinance or public utility easement or any other
applicable law. No material expenditures are required to be made for the repair
or maintenance of any improvements on the Real Estate or for the Real Estate to
be used for its intended purpose.
(b) Neither the Company nor any of its Subsidiaries leases any real estate
(the "LEASED PREMISES"). The Leased Premises are leased to the Company or one of
its Subsidiaries, pursuant to written leases, true, correct and complete copies
of which have been provided to Watson or its counsel. None of the improvements
comprising the Leased Premises, or the businesses conducted or proposed to be
conducted prior to the Closing by the Company or its Subsidiaries thereon are in
violation of any building line or use or occupancy restriction, limitation,
condition or covenant of
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record or any zoning or building law, code or ordinance, public utility or other
easements or other applicable law, except for violations which do not have a
Company Material Adverse Effect or materially interfere with the conduct of the
business of the Company or its Subsidiaries. No material expenditures are
required to be made for the repair or maintenance of any improvements on the
Leased Premises or for the Leased Premises to be used for its intended purpose.
All options in favor of the Company or its Subsidiaries to purchase any of the
Leased Premises, if any, are in full force and effect.
(c) To the Company's knowledge, the improvements on the Real Estate, the
Leased Premises and the Company's and its Subsidiaries Manufacturing Locations
are currently served by gas, electricity, water, sewage and waste disposal and
other utilities adequate to operate such improvements at their current rates of
production, and none of the utility companies serving any such improvements has
threatened any reduction in service.
(d) There are no condemnation proceedings pending against the Company or
its Subsidiaries or, to the Company's knowledge, threatened with respect to any
portion of the Real Estate or the Leased Premises.
(e) There is no tax assessment (in addition to the normal, annual general
real estate tax assessment) pending against the Company or its Subsidiaries or,
to the Company's knowledge, threatened with respect to any portion of the Real
Estate or, to the extent the Company or its Subsidiaries is liable for payment
therefor, the Leased Premises.
(f) The buildings and other facilities located on the Real Estate and the
Leased Premises are free of any material latent structural or engineering
defects known to the Company or any material patent structural or engineering
defects.
3.18 CONTRACTS
(a) Neither the Company nor any of its Subsidiaries is a party to, or
bound by, or the issuer or beneficiary of, any undischarged written or oral: (i)
agreement or arrangement obligating the Company or its Subsidiaries to pay or
receive, or pursuant to which the Company or its Subsidiaries has previously
paid or received, an amount in excess of $50,000 (excluding purchase and sale
contracts or orders entered into by the Company or its Subsidiaries in the
ordinary course of business consistent with past practices); (ii) employment
agreement or arrangement not terminable at will or with any liability for
additional payments or compensation; (iii) consulting agreement or arrangement
obligating the Company or its Subsidiaries to pay or receive, or pursuant to
which the Company or its Subsidiaries has previously paid or received, an amount
in excess of $50,000 and not terminable at will or with any liability for
additional payments or compensation; (iv) collective bargaining agreement; (v)
plan or contract or arrangement providing for bonuses, severance, options,
deferred compensation, retirement payments, profit sharing, medical and dental
benefits or the like covering employees of the Company, other than the Plans (as
defined herein) described in the Disclosure Statement; (vi) agreement
restricting in any manner the Company's or any of its
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Subsidiaries' right to compete with any other person or entity, the Company's or
any of its Subsidiaries' right to sell any product to, or purchase any product
from, any other person or entity, the right of any other party to compete with
the Company or any of its Subsidiaries or the ability of such person or entity
to employ any of the Company's or any of its Subsidiaries' employees; (vii)
secrecy or confidentiality agreements, except for secrecy or confidentiality
provisions contained in agreements relating primarily to the purchase or sale of
products; (viii) any distributorship (excluding purchase and sale contracts or
orders entered into by the Company or its Subsidiaries in the ordinary course of
business consistent with past practices), non-employee commission or marketing
agent, representative or franchise agreement providing for the marketing and/or
sale of the products or services of the Company or any of its Subsidiaries and
obligating the Company or its Subsidiaries to pay or receive, or pursuant to
which the Company or its Subsidiaries has previously paid or received, an amount
in excess of $50,000; (ix) guaranty, performance, bid or completion bond, or
surety or indemnification agreement obligating the Company or its Subsidiaries
to pay or receive, or pursuant to which the Company or its Subsidiaries has
previously paid or received, an amount in excess of $50,000, other than
provisions contained in such agreements relating primarily to the purchase or
sale of products; (x) requirements contract; (xi) loan or credit agreement,
pledge agreement, note, security agreement, mortgage, debenture, indenture,
factoring agreement or letter of credit; (xii) agreement for the treatment or
disposal of Materials of Environmental Concern (as defined herein); (xiii) power
of attorney; (xiv) any contract, agreement or arrangement containing change of
control provisions and obligating the Company or its Subsidiaries to pay or
receive, or pursuant to which the Company or its Subsidiaries has previously
paid or received, an amount in excess of $50,000; or (xv) any other agreement
not entered into in the ordinary course of business and obligating the Company
or its Subsidiaries to pay or receive, or pursuant to which the Company or its
Subsidiaries has previously paid or received, an amount in excess of $50,000.
Neither the Company nor any of its Subsidiaries are currently negotiating (and
have not entered into preliminary discussions with respect to) any transaction
involving an aggregate payment by the Company or its Subsidiaries and/or
receipts to the Company or its Subsidiaries in excess of $150,000 excluding
purchase and sale contracts or orders entered into by the Company or its
Subsidiaries in the ordinary course of business consistent with past practices.
(b) All agreements, leases, subleases and other instruments referred to in
this Section 3.18, are, pursuant to their terms, in full force and binding upon
the Company or its Subsidiaries, and, to the knowledge of the Company, the other
parties thereto. There are no events of default by the Company or its
Subsidiaries or, to the knowledge of the Company, any other party thereto, under
any such agreement, lease, sublease or other instrument. No event, occurrence or
condition exists which, with the lapse of time, the giving of notice, or both,
or the happening of any further event or condition, would become an event of
default under any such agreement, lease, sublease or other instrument by the
Company or its Subsidiaries, or, to the knowledge of the Company, the other
contracting party. Neither the Company nor any of its Subsidiaries has released
or waived any material right under any such agreement, lease, sublease or other
instrument other than in the ordinary course of business consistent with past
practices.
(c) Immediately after the Closing, except as contemplated by this
Agreement, neither the
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Company nor any of its Subsidiaries will be bound by the terms of any stock
option agreement, registration rights agreement, stockholders agreement,
management agreement, consulting agreement or any other agreement relating to
the equity or management of the Company or its Subsidiaries.
(d) Neither the Company nor any of its Subsidiaries is a party to, or
bound by, any unexpired, undischarged or unsatisfied written or oral contract,
agreement, indenture, mortgage, debenture, note or other instrument under the
terms of which performance by Parent and Seller according to the terms of this
Agreement will be an event of default under or an event of acceleration, or
grounds for termination, or whereby timely performance by Parent and Seller of
this Agreement may be prohibited, prevented or delayed.
3.19 INSURANCE. The Disclosure Statement contains a true and correct list
of all insurance policies which are owned by the Company or its Subsidiaries or
which name the Company or any of its Subsidiaries as an insured (or loss payee),
including without limitation those which pertain to the Company's or its
Subsidiaries' assets, employees or operations. All such insurance policies are
in full force and effect and neither the Company nor any of its Subsidiaries
have received notice of cancellation of any such insurance policies. In the two
(2) year period ending on the date hereof, neither the Company nor any of its
Subsidiaries have received any written notice from, or on behalf of, any
insurance carrier relating to or involving an annual increase by over 10% in
insurance rates (except to the extent that insurance risks may be increased for
all similarly situated risks) or non-renewal of a policy, or requiring material
alteration of any of the Company's or its Subsidiaries' assets, purchase of
additional equipment, or material modification of any of the Company's or its
Subsidiaries' methods of doing business. Neither the Company nor any of its
Subsidiaries made any claim for reimbursement from its insurance carriers since
June 30, 1993.
3.20 LITIGATION. Except for matters which are immaterial to the Company or
its Subsidiaries, there is no litigation or proceeding, in law or in equity, and
there are no proceedings or governmental investigations before any commission or
other administrative authority, pending or, to the Company's knowledge,
threatened against the Company or any of its Subsidiaries, or any of the
Company's or its Subsidiaries' respective officers, directors or affiliates,
with respect to or affecting the Company's or its Subsidiaries' respective
operations, businesses, products, sales practices or financial condition, or
related to the consummation of the transactions contemplated hereby or by the
Watson Ancillary Documents or the Ancillary Documents. There are no facts known
to the Company which, if known by a potential claimant or governmental
authority, would reasonably give rise to a claim or proceeding which, if
asserted or conducted with results unfavorable to the Company or its
Subsidiaries, would have a Company Material Adverse Effect.
3.21 WARRANTIES. To the Company's knowledge, neither the Company nor any
of its Subsidiaries has made any oral or written warranties with respect to the
quality or absence of defects of its products or services which they have sold
or performed which are in force as of the date hereof. There are no material
warranty claims pending or, to the knowledge of the Company, threatened against
the Company or any of its Subsidiaries with respect to the quality of or absence
of defects in such products. The Disclosure Statement sets forth a summary,
which is accurate in all material
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respects, of all returns of products (on a product by product basis) during the
period beginning on April 1, 1997 and ending on the date hereof. Since January
1, 1995, neither the Company nor any of its Subsidiaries has had any reoccurring
product defects (other than returns due to date expirations) or product returns
or warranty claims that exceed historical levels.
3.22 PRODUCTS LIABILITY. Neither the Company nor any of its Subsidiaries
have received any written notice relating to, any claim involving any product
manufactured, produced, distributed or sold by or on behalf of the Company or
its Subsidiaries resulting from an alleged defect in design, manufacture,
materials or workmanship, or any alleged failure to warn, or from any breach of
implied warranties or representations, other than notices or claims that have
been settled or resolved by the Company or its Subsidiaries prior to the date of
this Agreement.
3.23 ARBITRATION. Neither the Company nor any of its Subsidiaries is a
party to, or bound by, any decree, order or arbitration award (or agreement
entered into in any administrative, judicial or arbitration proceeding with any
governmental authority) with respect to or affecting in any material respect the
properties, assets, personnel or business activities of the Company or its
Subsidiaries.
3.24 ERISA
(a) DEFINITIONS. The following terms, when used in this Section 3.24 and
elsewhere throughout this Agreement, shall have the following meanings. Any of
these terms may, unless the context otherwise requires, be used in the singular
or the plural depending on the reference.
(i) "EMPLOYEE BENEFIT PLAN" shall mean any bonus, stock, stock
purchase, or stock option plan, severance plan, salary continuation, vacation,
sick leave, fringe benefit, incentive, insurance or similar plan or arrangement
which (A) the Company maintains, administers, contributes to or has any
liability under, or has maintained, administered, contributed to or had any
liability under, (B) covers any current or former employees of the Company and
(C) is not a Pension Plan, Multiemployer Plan or Welfare Plan.
(ii) "ERISA AFFILIATE" shall mean any corporation, business or other
venture or person, which is now or at any relevant time was an affiliate of the
Company as determined under Code Sections 414(b), (c) (m) or (o) or ERISA
Section 4001(b)(1).
(iii)"MULTIEMPLOYER PLAN" shall mean any "multiemployer plan" as
defined in Sections 3(37) or 4001(a)(3) of ERISA which (A) the Company or any
ERISA Affiliate contributes to or has any liability under, or has contributed to
or had any liability under and (B) covers any current or former employees of the
Company or an ERISA Affiliate.
(iv) "PENSION PLAN" shall mean any "employee pension benefit plan" as
defined in Section 3(2) of ERISA (other than a Multiemployer Plan), including,
without limitation any qualified or non-qualified deferred compensation or
retirement plan, which (A) the Company
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maintains, administers, contributes to or has any liability under, or has
maintained, administered, contributed to or had any liability under and (B)
covers any current or former employees of the Company.
(v) "PLANS" shall mean all Employee Benefit Plans, Multiemployer
Plans, Pension Plans and Welfare Plans.
(vi) "WELFARE PLAN" shall mean any "employee welfare benefit plan" as
defined in Section 3(1) of ERISA which (i) the Company maintains, administers,
contributes to or has any liability under, or has maintained, administered,
contributed to or had any liability under and (ii) covers any current or former
employees of the Company.
(b) DISCLOSURE; DELIVERY OF RELEVANT DOCUMENTS. The Disclosure Statement
sets forth a complete list of each Pension Plan, Multiemployer Plan, Welfare
Plan and Employee Benefit Plan which covers any employees or former employees of
the Company. With respect to each Pension Plan, Welfare Plan and Employee
Benefit Plan set forth on the Disclosure Statement, true and complete copies of
the following documents, where applicable, have been delivered or made available
by the Company to Watson: (i) each Pension Plan, Welfare Plan and Employee
Benefit Plan document, related trust agreements, insurance contracts, annuity
contracts or other funding vehicles; (ii) the IRS determination letters for each
Pension Plan which is intended to be qualified under Code Section 401(a) and
each Welfare Plan fund that is intended to be tax exempt under Code Section
501(c)(9); (iii) each summary plan description; (iv) copies of any pending
applications, filings or notices with respect to any of the Pension Plans,
Welfare Plans or Employee Benefit Plans with or from the IRS, the Pension
Benefit Guaranty Corporation ("PBGC"), the Department of Labor or any other
governmental agency; (v) copies of all corporate resolutions or other documents
pertaining to the adoption of the Pension Plans, Welfare Plans or Employee
Benefit Plans or any amendments thereto or to the appointment of any fiduciaries
thereunder; (vi) copies of any investment management agreements and of any
fiduciary insurance policies, surety bonds, rules, regulations or policies, of
the Plan trustee or of any committee or other fiduciary thereof; (vii) written
descriptions of each Plan that is not evidenced by a formal plan document and
all communications and notices to employees regarding any such Plan; (viii)
annual reports on Form 5500, Form 990 financial statements and actuarial reports
for the most recent four Plan years; and (ix) all vendor contracts for services
performed for or on the behalf of the Plans, including, but not limited to,
third party administrative services, accounting and audit services and brokerage
services.
(c) REPRESENTATIONS AND WARRANTIES. The Company represents and warrants as
follows:
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(i) To the knowledge of the Company, all Pension Plans, Welfare Plans
and Employee Benefit Plans and any related trust agreements, insurance contracts
or annuity contracts (or any related trust instruments) have been established
and operated in material compliance with the applicable provisions of ERISA, the
Code (including, without limitation, the requirements of Code section 401(a) to
the extent any Pension Plan is intended to conform to that section), other
Federal statutes, state law (including, without limitation, state insurance law)
and the regulations and rules promulgated thereunder. A favorable determination
as to the qualification under Section 401(a) of the Code (and the tax exempt
status of the related trust) of each Pension Plan which is intended to so
qualify and each material amendment thereto has been made by the Internal
Revenue Service ("IRS"). All required reports, notices and descriptions with
respect to the Pension Plans, Welfare Plans and Employee Benefit Plans have been
appropriately filed or distributed (including without limitation IRS Forms 5500
Annual Reports, summary plan descriptions, summary annual reports, notice to
interested parties and any notice of plan amendment which is required prior to
the effectiveness of such amendments) and all required surety bonds have been
properly and timely purchased and maintained. The charges for administering the
Plans, Welfare Plans and Employee Benefit Plans, including fees for the trustees
and other service providers, which are customarily paid by the Company and which
are due and payable on or before July 31, 1997, have been paid or will be paid
or accrued on the Company's Interim Financial Statements.
(ii) To the knowledge of the Company, neither any Pension Plan or
Welfare Plan fiduciary nor any Pension Plan or Welfare Plan has engaged in any
transaction in violation of Section 406 of ERISA or section 4975(c)(1) of the
Code for which an exemption has not been granted or is not available. The
Company has not failed to make any contributions or to pay any amounts due and
owing to any Plan, as required by the terms of any such Plan or ERISA or any
other applicable law. There has been no reduction or curtailment of accrued
benefits with respect to any of the Plans which did not comply with the terms of
the Plan, the Code or ERISA. Full payment has been made or such amount has been
accrued on the Company's financial statements of all amounts which the Company
is required or committed to pay to the Plans as of the date hereof.
(iii) Each Plan is legally valid, binding, in full force and effect,
and, to the knowledge of the Company, there are no defaults by the Company
thereunder; and none of the rights of the Company thereunder will be impaired by
this Agreement or the consummation of the transaction contemplated hereby. The
annual reports on Form 5500 furnished to Watson fully and accurately set forth
the financial condition of each Plan and each trust funding any Welfare Plan.
With respect to each Pension Plan, Welfare Plan and Employee Benefit Plan, the
Disclosure Statement sets forth the name and address of the administrator and
trustees and the policy number and insurer under all insurance policies.
(iv) Neither the Company nor any of its Subsidiaries maintain any
Pension Plans subject to Title IV of ERISA or Section 412 of the Code. None of
the Pension Plans, Welfare Plans or Employee Benefit Plans has any material
unfunded liabilities which are not reflected on the Financial Statements. None
of the Pension Plans which are intended to be qualified under Code Section
401(a) is a "top-heavy" plan, as defined in Section 416 of the Code. The Company
does not
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have plans, programs, arrangements and has not made any other commitments to its
employees, former employees or their beneficiaries under which it has any
obligation to provide any retiree or other employee benefit payments which are
not adequately funded through a trust, insurance or other funding arrangement.
There have been no changes in the operation or interpretation of any of the
Pension Plans, Welfare Plans or Employee Benefit Plans since the most recent
annual report which would have any material effect on the cost of operating or
maintaining such Pension Plans, Welfare Plans or Employee Benefit Plans.
(v) Except for routine claims for benefits, there are no pending or
threatened claims, lawsuits or arbitration asserted or instituted against any of
the Pension Plans, Welfare Plans, or Employee Benefit Plans or against any
fiduciaries thereof, with respect to their duties to the Pension Plan, Welfare
Plans or Employee Benefit Plan or the assets of any trusts thereunder, by any
co-fiduciary or employee or beneficiary covered under any Pension Plans, Welfare
Plans or Employee Benefit Plans, or otherwise involving any Pension Plan,
Welfare Plan or Employee Benefit Plan, and the Company has no knowledge of any
facts which would give rise to or could reasonably be expected to give rise to
any such claims, lawsuits or arbitrations. To the knowledge of the Company,
neither the Company, nor any of its directors, officers, employees or any other
"fiduciary," as such term in defined in Section 3(21) of ERISA of any Pension
Plan, Welfare Plan or Employee Benefit Plan, has any liability for failure to
comply with ERISA, the Code or the terms of any Pension Plan, Welfare Plan or
Employee Benefit Plan.
(vi) The Company has not incurred, nor does it reasonably expect to
incur, any of the following:
(A) with respect to each "employee pension benefit plan" (as defined
in Section 3(2) of ERISA) which is or was (I) maintained by an ERISA
Affiliate and (II) subject to the requirements of Title IV of ERISA, any
liabilities or penalties arising under Title IV of ERISA;
(B) with respect to each "employee pension benefit plan" (as defined
in Section 3(2) of ERISA) which is or was (I) maintained by an ERISA
Affiliate and (II) subject to the requirements of Section 412 of the Code,
any liabilities, penalties or liens arising from an "accumulated funding
deficiency" (as such term is used in Section 412 or 4971 of the Code or
Section 302 of ERISA) or from a failure to make required contributions as
set forth in Section 412(n) of the Code;
(C) with respect to any "group health plan" (as defined in Section
5000(b)(1) of the Code) which is or was maintained by an ERISA Affiliate,
any liability relating to such ERISA Affiliate's obligations under Section
4980B of the Code and Sections 601 through 609 of ERISA.
(vii) Neither the Company nor any of its Subsidiaries is currently
contributing to or required to contribute to any Multiemployer Plan and except
as set forth on the Disclosure
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Statement, neither the Company nor any of its Subsidiaries ever contributed to
or been required to contribute to any Multiemployer Plan. Neither the Company,
its Subsidiaries or any ERISA Affiliate have any liability, potential liability
or contingent liability (including without limitation liability for past due
contributions) with respect to any Multiemployer Plan on behalf of any current
or former employee. Neither the Company, its Subsidiaries or any ERISA Affiliate
has incurred any current or potential withdrawal liability under Section 4201 of
ERISA (without regard to subsequent reduction or waiver of such liability under
Sections 4207 or 4208 thereof), as a result of a complete or partial withdrawal
(or potential partial withdrawal) from any Multiemployer Plan.
3.25 LABOR MATTERS. Except for events that occur after the date hereof
which are disclosed in writing by the Company to Watson, (a) there is no labor
strike, dispute, slowdown, work stoppage or lockout pending or, to the knowledge
of the Company, threatened against or affecting the Company or any of its
Subsidiaries and during the past three years, there has not been any such
action; (b) there are no union claims to represent the employees of the Company
or any of its Subsidiaries; (c) neither the Company nor any of its Subsidiaries
is a party to or bound by any collective bargaining or similar agreement with
any labor organization, or work rules or practices agreed to with any labor
organization or employee association applicable to employees of the Company or
any of its Subsidiaries; (d) none of the employees of the Company or any of its
Subsidiaries are represented by any labor organization and the Company does not
have any knowledge of any current union organizing activities among the
employees of the Company or any of its Subsidiaries, nor to the knowledge of the
Company does any question concerning representation exist with respect to such
employees; (e) the Company and its Subsidiaries are, and has at all times been,
in material compliance with all applicable employment laws and practices,
including, without limitation, any such laws relating to employment
discrimination, occupational safety and health and unfair labor practices; (f)
there is no unfair labor practice charge or complaint against the Company or any
of its Subsidiaries pending or, to the knowledge of the Company, threatened
before the National Labor Relations Board or, to the knowledge of the Company,
any charges or complaints, pending or threatened with any Governmental Entity
who has jurisdiction over unlawful employment practices; (g) there is no
grievance or arbitration proceeding arising out of any collective bargaining
agreement or other grievance procedure pending relating to the Company or any of
its Subsidiaries; (h) neither the Company nor any of its Subsidiaries is
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed by
them to the date of this Agreement or amounts required to be reimbursed to such
employees; (i) upon termination of the employment of any of the employees of the
Company or any of its Subsidiaries after the Closing, neither the Company nor
any of its Subsidiaries will be liable to any of its employees for severance
pay, except as otherwise required by federal law; (j) the employment of each of
the Company's or its Subsidiaries' employees is terminable at will without cost
to the Company or any of its Subsidiaries except as required under the Plans and
payment of accrued salaries or wages and vacation pay; (k) no employee or former
employee of the Company or any of its Subsidiaries has any right to be rehired
by the Company or its Subsidiaries prior to the Company's or its Subsidiaries'
hiring a person not previously employed by the Company or its Subsidiaries; and
(l) the Disclosure Statement contains a true and complete list of all employees
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who are employed by the Company or any of its Subsidiaries as of July 31, 1997,
and said list correctly reflects their salaries, wages, other compensation
(other than benefits under the Plans), dates of employment and positions.
Neither the Company nor any of its Subsidiaries owes any past or present
employee any sum in excess of $25,000 individually or $50,000 in the aggregate
other than for accrued wages or salaries for the current payroll period, and
amounts payable under the Plans. No employee owes any sum to the Company or any
of its Subsidiaries in excess of $25,000, and all employees together do not owe
the Company or any of its Subsidiaries in excess of $50,000.
3.26 ENVIRONMENTAL MATTERS.
(a) The Company, its Subsidiaries and their respective assets and
businesses are in substantial compliance with all Environmental Laws and
Environmental Permits (as herein defined) applicable to them. A copy of any
notice, citation, inquiry or complaint which the Company or any of its
Subsidiaries has received in the past three years of any alleged material
violation of any Environmental Law or Environmental Permit is contained in the
Disclosure Statement, and all such violations alleged in said notices have been
or are being corrected. A description of all such violations currently being
corrected is contained in the Disclosure Statement. The Company and its
Subsidiaries possess all Environmental Permits which are required for the
operation of their respective businesses, and are in substantial compliance with
the provisions of all such Environmental Permits. Copies of all material
Environmental Permits issued to the Company or any of its Subsidiaries have been
provided or made available to Watson or its counsel. To the Company's knowledge,
the Company has delivered to Watson copies of all environmental reports with
respect to the Real Estate and the Leased Premises in its possession (other than
reports prepared by or on behalf of Watson) which were conducted during the last
five years.
(b) The Company has provided or made available to Watson the material
safety data sheets kept in its possession or a list thereof for the Real Estate
and the Leased Premises. There has been no storage, treatment, generation,
transportation or Release of any Materials of Environmental Concern by the
Company or any of its Subsidiaries, or, to the knowledge of the Company, by any
other person or entity for which the Company or any of its Subsidiaries is or
may be held responsible, at any Facility (as herein defined) or any Offsite
Facility (as herein defined) in material violation of, or which could give rise
to any material obligation under, Environmental Laws.
(c) To the Company's knowledge, the Disclosure Statement sets forth a
complete list of all Containers (as herein defined) that are now present at, or
have heretofore been removed during the last two years from, the Real Estate or
the Leased Premises. To the Company's knowledge, all Containers which have been
heretofore removed from the Real Estate or the Leased Premises have been removed
substantially in accordance with all applicable Environmental Laws.
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(d) For the purposes of this Agreement: (i) "ENVIRONMENTAL LAWS" means all
federal, state and local statutes, regulations, ordinances, rules, regulations
and policies, all court orders and decrees and arbitration awards, and the
common law, which pertain to environmental matters or contamination of any type
whatsoever. Environmental Laws include, without limitation, those relating to:
manufacture, processing, use, distribution, treatment, storage, disposal,
generation or transportation of Materials of Environmental Concern; air, surface
or ground water or noise pollution; Releases; protection of wildlife, endangered
species, wetlands or natural resources; Containers; health and safety of
employees and other persons; and notification requirements relating to the
foregoing; (ii) "ENVIRONMENTAL PERMITS" means licenses, permits, registrations,
governmental approvals, agreements and consents which are required under or are
issued pursuant to Environmental Laws; (iii) "MATERIALS OF ENVIRONMENTAL
CONCERN" means (A) pollutants, contaminants, pesticides, radioactive substances,
solid wastes or hazardous or extremely hazardous, special, dangerous or toxic
wastes, substances, chemicals or materials within the meaning of any
Environmental Law, including without limitation any (i) "hazardous substance" as
defined in CERCLA, and (ii) any "hazardous waste" as defined in the Resource
Conservation and Recovery Act ("RCRA"), 42 U.S.C., Sec. 6902 ET. SEQ., and all
amendments thereto and reauthorizations thereof; and (B) even if not prohibited,
limited or regulated by Environmental Laws, all pollutants, contaminants,
hazardous, dangerous or toxic chemical materials, wastes or any other
substances, including without limitation, any industrial process or pollution
control waste (whether or not hazardous within the meaning of RCRA) which could
pose a hazard to the environment or the health and safety of any person, or
impair the use or value of any portion of the Real Estate or the Leased
Premises; (iv) "RELEASE" means any spill, discharge, leak, emission, escape,
injection, dumping, or other release or threatened release of any Materials of
Environmental Concern into the environment, whether or not notification or
reporting to any governmental agency was or is, required, including without
limitation any Release which is subject to CERCLA; (v) "FACILITY" means any
facility as defined in the Comprehensive Environmental Response, Compensation
and Liability Act, 42 U.S.C. 9601, ET. SEQ., as amended and reauthorized
("CERCLA"); (vi) "OFFSITE FACILITY" means any Facility which is not presently,
and has not heretofore been, owned, leased or occupied by the Company; and (vii)
"CONTAINERS" means above-ground and under-ground storage tanks.
3.27 INTERIM CONDUCT OF BUSINESS. Except as otherwise contemplated by this
Agreement, since December 31, 1996, neither the Company nor any of its
Subsidiaries has:
(a) sold, assigned, leased, exchanged, transferred or otherwise disposed
of any material portion of its assets or property, except for sales of Inventory
and cash applied in the payment of the Company's or its Subsidiaries'
liabilities in the usual and ordinary course of business in accordance with the
Company's or its Subsidiaries' past practices;
(b) written off any asset which has a net book value which exceeds $25,000
individually or $50,000 in the aggregate in value, or suffered any casualty,
damage, destruction or loss, or interruption in use, of any material asset,
property or portion of Inventory (whether or not covered by insurance), on
account of fire, flood, riot, strike or other hazard or Act of God;
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(c) waived any material right arising out of the conduct of, or with
respect to, its business;
(d) made (or committed to make) capital expenditures, except for such
capital expenditures as are in the ordinary course of business, which
expenditures in the aggregate do not exceed $100,000;
(e) made any material change in accounting methods or principles;
(f) borrowed any money or issued any bonds, debentures, notes or other
corporate securities (other than equity securities) in excess of $25,000
individually or $50,000 in the aggregate, including without limitation, those
evidencing borrowed money;
(g) increased the compensation payable to any employee, except for normal
pay increases in the ordinary course of business consistent with past practices,
but in any event, not granted any increase to any employee in excess of five
percent (5%) per annum;
(h) made any payments or distributions to its employees, officers or
directors except such amounts as constitute currently effective compensation for
services rendered, amounts paid pursuant to the Plans or reimbursement for
reasonable ordinary and necessary out-of-pocket business expenses;
(i) paid or incurred any management or consulting fees, or engaged any
consultants, except in the ordinary course of business consistent with past
practices;
(j) hired any employee who has an annual salary in excess of $50,000;
(k) terminated any employee having an annual salary or wages in excess of
$50,000;
(l) adopted any new Plan;
(m) issued or sold any securities of any class; or
(n) paid, declared or set aside any dividend or other distribution on its
securities of any class, or purchased, exchanged or redeemed any of its
securities of any class.
Notwithstanding the foregoing, the Company shall not be deemed to have breached
the terms of this Section 3.27 by entering into this Agreement or by
consummating the transactions contemplated hereby.
3.28 AFFILIATED TRANSACTIONS. Since January 1, 1996, neither the Company
nor any of its Subsidiaries has been a party to any transactions (other than
employee compensation and other ordinary incidents of employment) in excess of
$15,000 individually or $50,000 in the aggregate with a "Related Party". For
purposes of this Agreement, the term "RELATED PARTY" shall mean:
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any present or former officer or director, direct or indirect 10% stockholder or
present affiliate of the Company or any of its Subsidiaries, any present or
former known spouse, ancestor or descendant of any of the aforementioned persons
or any trust or other similar entity for the benefit of any of the foregoing
persons. No property or interest in any property (including, without limitation,
designs and drawings concerning machinery) which relates to and is or will be
necessary or useful in the present or currently contemplated future operation of
the Company's or its Subsidiaries' respective businesses, is presently owned by
or leased or licensed by or to any Related Party. Prior to the Closing, all
amounts due and owing to or from the Company or its Subsidiaries by or to any of
the Related Parties (excluding the amounts contemplated in Section 5.3(j) and
employee compensation and other incidents of employment) shall be paid in full
and all amounts owed by the Company or its Subsidiaries to any Related Party
shall be canceled and of no further force and effect. Except for the ownership
of securities representing less than a 5% equity interest in various publicly
traded companies, neither the Company, its Subsidiaries, nor to the Company's
knowledge, any present or former officer or director of the Company or any
present or former known spouse, ancestor or descendant of any of the
aforementioned persons or any trust or other similar entity for the benefit of
any of the foregoing persons has an interest, directly or indirectly, in any
business, corporate or otherwise, which is in competition with the Company's or
its Subsidiaries' respective businesses.
3.29 SIGNIFICANT CUSTOMERS, SUPPLIERS AND EMPLOYEES. The Disclosure
Statement sets forth an accurate list of the Company's and its Subsidiaries'
Significant Customers (as defined herein), Significant Suppliers (as defined
herein) and Significant Employees (as defined herein). The Company has no
knowledge of any intention by a (a) Significant Customer to terminate its
business relationship with the Company or its Subsidiaries or to limit or alter
its business relationship with the Company or its Subsidiaries in any material
respect; (b) Significant Supplier to terminate its business relationship with
the Company or its Subsidiaries or to limit or alter its business relationship
with the Company or its Subsidiaries in any material respect; or (c) Significant
Employee intends to terminate his employment with the Company or its
Subsidiaries. As used herein, (w) "SIGNIFICANT CUSTOMER" means the 10 largest
customers of the Company and its Subsidiaries, taken as a whole, including
distributors of the Company's products, measured in terms of sales volume in
dollars for the year ended December 31, 1996 and the seven month period ended
July 31, 1997, (x) "SIGNIFICANT SUPPLIER" means any supplier of the Company and
its Subsidiaries from whom the Company or its Subsidiaries has purchased
$250,000 or more of goods during the year ended December 31, 1996 and the seven
month period ended July 31, 1997, for use in the Company's or its Subsidiaries'
respective businesses; and (y) "SIGNIFICANT EMPLOYEE" means any officer (other
than officers who are employees of Parent) or significant research and
development employees of the Company or any of its Subsidiaries.
3.30 MATERIAL ADVERSE CHANGE. Since December 31, 1996, neither the Company
nor its Subsidiaries has suffered any material adverse change in the business,
operations, assets, product pipeline, liabilities or financial condition of the
Company or its Subsidiaries, taken as a whole, except for changes that have
affected the generic pharmaceutical industry as a whole.
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3.31 BRIBES. Neither the Company, its Subsidiaries nor, to the Company's
knowledge, any of their respective officers, directors, employees, agents or
representatives has made, directly or indirectly, with respect to the Company,
its Subsidiaries or their respective business activities, any bribes or
kickbacks, illegal political contributions, payments from corporate funds not
recorded on the books and records of the Company or its Subsidiaries, payments
from corporate funds to governmental officials, in their individual capacities,
for the purpose of affecting their action or the action of the government they
represent, to obtain favorable treatment in securing business or licenses or to
obtain special concessions, or illegal payments from corporate funds to obtain
or retain business.
3.32 ABSENCE OF INDEMNIFIABLE CLAIMS, ETC. There are no pending claims nor
to the knowledge of the Company, any threatened claims by any director, officer
or employee of the Company or its Subsidiaries to indemnification by the Company
or its Subsidiaries under applicable law, the Certificate of Incorporation or
By-laws of the Company or its Subsidiaries or any insurance policy maintained by
the Company or its Subsidiaries.
3.33 NO UNDISCLOSED LIABILITIES. There are no liabilities or obligations
of any nature (whether accrued, absolute, contingent or otherwise) of the
Company or its Subsidiaries other than (i) liabilities disclosed or provided for
in the Financial Statements or the Interim Financial Statements; (ii)
liabilities under this Agreement (or contemplated hereby); (iii) liabilities
incurred since July 31, 1997 in the ordinary course of business and consistent
with past practices; or (iv) liabilities which, individually or in the
aggregate, are not material to the Company or its Subsidiaries.
3.34 NO BROKERS. Neither the Company nor any of its Subsidiaries has
entered into any contract, arrangement or understanding with any person or firm
which may result in the obligation of the Company, Watson or their respective
Subsidiaries to pay any finder's fee, brokerage or agent's commissions or other
like payments in connection with negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby, except that Parent has
retained Dillon, Read & Co. Inc. as its financial advisor.
3.35 * AGREEMENT. Neither the Company nor any of its Subsidiaries is, or
as a result of the consummation of the transactions contemplated hereby will be,
a party to, or bound by, nor are any of their respective assets or businesses
subject to or limited by, any of the provisions of the Supply Agreement dated as
of * by and among * and Parent (the "* SUPPLY AGREEMENT") or the Agreement dated
as of *, as amended, between Parent and (the " SUPPLY AGREEMENT") other than
limitations which affect the pharmaceutical industry generally. The Company is a
party to a Settlement Agreement (the "SETTLEMENT AGREEMENT") dated as of * by
and among Parent, the Company, *. Neither Watson nor any of its Subsidiaries
will be a party to, or bound by, nor will any of their respective assets or
businesses be subject to or limited by, any of the provisions of the * Supply
Agreement or the * Supply Agreement upon Watson's or one of its Subsidiaries'
appointment
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"*SEE PAGE ONE OF EXHIBIT"
as Parent's exclusive distributor of * under such agreements, other than
limitations which affect the pharmaceutical industry generally and the terms of
the Exclusive Distribution Agreement, the terms of which are attached hereto as
Exhibit A. Neither Parent nor any of its Subsidiaries are bound by or are a
party to any agreement relating to the distribution or sale of * in the United
States other than the * Supply Agreement, the * Supply Agreement or the
Settlement Agreement. Neither the Company nor any of its Subsidiaries are bound
by or are a party to any agreement relating to the distribution or sale of * in
the United States other than the Settlement Agreement.
ARTICLE IV
COVENANTS
4.1 ALTERNATIVE PROPOSALS. From and after the date hereof and continuing
thereafter until the earlier of the termination of this Agreement or the Closing
Date, Parent and Seller agree (a) that they shall not, and they shall direct and
cause the Company, the Company's Subsidiaries and Parent's, Seller's, the
Company's and the Company's Subsidiaries' respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by Parent, Seller, the
Company or any of the Company's Subsidiaries) not to, initiate or solicit,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer with respect to a merger, acquisition, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of the assets or any equity securities of, the Company or its Subsidiaries (any
such proposal or offer being hereinafter referred to as an "ALTERNATIVE
PROPOSAL") or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Alternative Proposal, or otherwise facilitate any effort or attempt to make or
implement an Alternative Proposal; (b) that it will immediately cease and cause
to be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing, and it will
take the necessary steps to inform the individuals or entities referred to above
of the obligations undertaken in this Section 4.1; and (c) that it will notify
Watson promptly if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it.
4.2 INTERIM OPERATIONS.
(a) During the period from the date of this Agreement and continuing until
the earlier of the termination of this Agreement or the Closing Date, except as
set forth in the Disclosure Statement or as contemplated by the terms of this
Agreement, unless Watson has consented in writing thereto (which consent shall
not be unreasonably withheld), Parent and Seller shall cause the Company and
each of the Company's Subsidiaries to:
(i) conduct their respective operations according to their usual,
regular and ordinary
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"*SEE PAGE ONE OF EXHIBIT"
course in substantially the same manner as heretofore conducted, including,
without limitation, continue to purchase inventory (subject to Section 5.3(j)
with respect to the purchase of *), sell products (i.e. no special sales
promotions or discount programs outside the ordinary course of business) and pay
outstanding obligations in the ordinary course of business consistent with past
practices;
(ii) to the extent consistent with their respective businesses, use
commercially reasonable good faith efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective Significant Employees and maintain satisfactory relationships with
those persons having business relationships with them;
(iii) not amend their respective Certificates of Incorporation or
By-Laws or comparable governing instruments;
(iv) promptly notify Watson of any Company Material Adverse Effect,
any material litigation or material governmental complaints, investigations or
hearings (or communications indicating that the same may be contemplated), or
the material breach of any representation or warranty contained herein;
(v) not (A) issue any shares of its capital stock, effect any stock
split or otherwise change its capitalization as it existed on the date hereof;
(B) grant, confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital stock; (C)
increase any compensation or enter into or amend any employment agreement with
any of its present or future officers, directors or employees, except for normal
increases consistent with past practice, but in any event, not grant any
increase in compensation to any officer, director or employee in excess of five
percent (5%) per annum; (D) grant any severance or termination package to any
employee or consultant, except to the extent consistent with past practices; (E)
hire any new employee who shall have, or terminate the employment of any
employee who has, an annual salary in excess of $50,000; or (F) adopt any new
Plan (including any stock option, stock benefit or stock purchase plan) or amend
any existing Plan in any material respect, except for changes which are less
favorable to participants in such Plans;
(vi) not (A) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital stock or
other ownership interests; or (B) directly or indirectly, redeem, purchase or
otherwise acquire any shares of its capital stock, or make any commitment for
any such action;
(vii) not enter into any agreement or transaction, or agree to enter
into any agreement or transaction, outside the ordinary course of business,
including, without limitation, any transaction involving a merger,
consolidation, material joint venture, material license agreement, partial or
complete liquidation or dissolution, reorganization, recapitalization,
restructuring or a purchase, sale, lease or other disposition of a material
portion of assets or capital stock;
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"*SEE PAGE ONE OF EXHIBIT"
(viii) not enter into any additional research and development
contracts which call for the payment or receipt of funds in excess of $10,000
individually or $50,000 in the aggregate;
(ix) not incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of others other than in the ordinary course of its
business consistent with past practices, but in no event in an amount exceeding
$100,000 in the aggregate (other than normal expenditures for the purchase of
raw materials or other supplies);
(x) not make any loans, advances or capital contributions to, or
investments in, any other Person;
(xi) not make or commit to made any capital expenditures in excess
of $25,000 individually or $50,000 in the aggregate;
(xii) not apply any of its assets to the direct or indirect
payment, discharge, satisfaction or reduction of any amount payable directly or
indirectly to or for the benefit of any affiliate or Related Party of the
Company or any of its Subsidiaries or enter into any transaction with any
affiliate or Related Party of the Company or its Subsidiaries (except for
payment of salary and other customary expense reimbursements made in the
ordinary course of business to Related Parties who are employees of the Company
or its Subsidiaries);
(xiii) not voluntarily elect to alter the manner of keeping its
books, accounts or records, or change in any manner the accounting practices
therein reflected, except for changes in accounting laws which effect all
pharmaceutical companies generally;
(xiv) not grant or make any mortgage or pledge or subject itself or
any of its material properties or assets to any lien, charge or encumbrance of
any kind, except liens for taxes not yet delinquent;
(xv) maintain insurance on its tangible assets and its businesses in
such amounts and against such risks and losses as are currently in effect;
(xvi) not exercise any of the options contained in the * Agreements
between the Company and *; or
(xvii) not *.
4.3 FILINGS; OTHER ACTION. Subject to the terms and conditions herein
provided, the
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Company and Watson shall: (a) promptly make their respective filings and
thereafter make any other required submissions under the HSR Act with respect to
the transactions contemplated herein; (b) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Closing Date with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Closing Date from,
governmental or regulatory authorities of the United States, the several states
and foreign jurisdictions in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby; and (ii)
timely making all such filings and timely seeking all such consents, approvals,
permits or authorizations; (c) use commercially reasonable good faith efforts to
obtain all consents under or with respect to, any contract, lease, agreement,
purchase order, sales order or other instrument, Permit or Environmental Permit,
where the consummation of the transactions contemplated hereby would be
prohibited or constitute an event of default, or grounds for acceleration or
termination, in the absence of such consent; and (d) take, or cause to be taken,
all other commercially reasonable actions as are reasonably necessary, proper or
appropriate to consummate and make effective the transactions contemplated by
this Agreement. If, at any time after the Closing Date, any further commercially
reasonable action is necessary or desirable to carry out the purpose of this
Agreement, the proper officers and directors of Watson, Parent and Seller shall
take all such necessary action.
4.4 INSPECTION OF RECORDS. From the date hereof to the earlier of the
Closing Date or the termination of this Agreement, Parent and Seller shall cause
the Company and each of the Company's Subsidiaries to (a) allow all designated
officers, attorneys, accountants and other representatives of Watson reasonable
access during normal business hours to the offices, records and files,
correspondence, audits and properties, as well as to all information relating to
commitments, contracts, titles and financial position, or otherwise pertaining
to the business and affairs of the Company and its Subsidiaries; (b) furnish to
Watson, its counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information as such
persons may reasonably request; and (c) instruct the employees, counsel and
financial advisors of the Company and its Subsidiaries to cooperate with Watson
and its investigation of the business of the Company and its Subsidiaries. All
information disclosed by the Company to Watson and its representatives shall be
subject to the terms of that certain Non-Disclosure Agreement (the
"CONFIDENTIALITY AGREEMENT") dated as of February 22, 1996 between Watson and
the Company, which agreement is hereby ratified and confirmed in its entirety.
4.5 PUBLICITY. Neither party hereto shall make any press release or public
announcement with respect to this Agreement or the transactions contemplated
hereby without the prior written consent of the other party hereto (which
consent shall not be unreasonably withheld); provided, however, that each party
hereto may make any disclosure or announcement which such party, in the opinion
of its legal counsel, is obligated to make pursuant to applicable law or
regulation of any national securities exchange, in which case, the party
desiring to make the disclosure shall consult with the other party hereto prior
to making such disclosure or announcement.
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4.6 FURTHER ACTION. Each party hereto shall, subject to the fulfillment at
or before the Closing Date of each of the conditions of performance set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the transactions contemplated
hereby, including, without limitation, the conditions to closing set forth in
Article V hereof.
4.7 EXPENSES. Whether or not the transactions contemplated hereby are
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such expenses except as expressly provided herein; provided, however, that
Parent shall pay all of the transaction costs and expenses incurred by the
Company or Seller in connection with the transactions contemplated by this
Agreement, including, without limitation, the fees and expenses of Dillon, Read
& Co. Inc., Shook, Hardy & Bacon L.L.P. and KPMG Peat Marwick LLP.
ARTICLE V
CONDITIONS
5.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE TRANSACTION. The
respective obligations of each party to effect the transactions contemplated
hereby shall be subject to the fulfillment at or prior to the Closing Date of
each of the following conditions (unless waived by each of the parties hereto in
accordance with the provisions of Section 8.7 hereof):
(a) The waiting period applicable to the consummation of the transactions
contemplated hereby under the HSR Act shall have expired or been terminated.
(b) No preliminary or permanent injunction or other order or decree by any
federal or state court which prevents the consummation of the transactions
contemplated hereby or materially changes the terms or conditions of this
Agreement shall have been issued and remain in effect. In the event any such
order or injunction shall have been issued, each party agrees to use its
reasonable efforts to have any such injunction lifted.
(c) All material consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings or registrations required to be filed or registered after the Closing
Date.
(d) The Company and shall have amended (the "AMENDMENT") the Preferred
Supplier Agreement (the "*AGREEMENT") dated as of * between the Company and * to
delete Section 15.6 of the * Agreement or shall terminate the * Agreement. If
amended, no provision of the * Agreement other than Section 15.6, shall be
amended
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without the prior written consent of Watson, which consent shall not be
unreasonably withheld. Watson shall also have received sufficient evidence that
any and all payments required to be made to * as consideration for entering into
the * Amendment or terminating the * Agreement have been paid by Seller or
Parent.
(e) The Company and Parent shall have entered into an Exclusive
Distribution Agreement, which shall incorporate the provisions set forth on
EXHIBIT A attached hereto.
(f) The Company and Parent shall have entered into a Contract
Manufacturing Agreement in the form attached hereto as EXHIBIT B.
(g) Watson and Parent shall have entered into an Agreement with Respect to
Tax Matters in the form attached hereto as EXHIBIT C.
(h) The Company and Parent shall have entered into the Supply and License
Agreement in the form attached hereto as EXHIBIT D.
(i) The Company and Merrell Pharmaceuticals, Inc. ("MERRELL") shall have
entered into the Lease in the form attached hereto as EXHIBIT E, relating to the
lease of a portion of Merrell's facility located in Cincinnati, Ohio.
(j) The Company and Parent shall have entered into the Information
Services Agreement in the form attached hereto as EXHIBIT F relating to the use
of Parent's computer system.
(k) The Company and Parent shall have entered into the Seconding Agreement
in the form attached hereto as EXHIBIT G.
5.2 CONDITIONS TO OBLIGATION OF SELLER TO EFFECT THE TRANSACTION. The
obligation of Parent and Seller to effect the transactions contemplated hereby
shall be subject to the fulfillment at or prior to the Closing Date of the
following conditions (unless waived by Parent in accordance with the provisions
of Section 8.7 hereof):
(a) Watson shall have paid the Estimated Cash Payment to Seller as
provided in Section 1.4 hereof.
(b) Watson shall have performed, in all material respects, all of its
agreements contained herein that are required to be performed by Watson on or
prior to the Closing Date, and Seller shall have received a certificate of a
duly authorized officer of Watson, dated the Closing Date, certifying to such
effect.
(c) The representations and warranties of Watson contained in this
Agreement and in any document delivered in connection herewith shall be true and
correct as of the Closing, except
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to the extent that a failure to be true and correct would not have a Watson
Material Adverse Effect, and Seller shall have received a certificate of a duly
authorized officer of Watson, dated the Closing Date, certifying to such effect.
(d) Seller shall have received from Watson certified copies of the
resolutions of Watson's Board of Directors approving and adopting this
Agreement, the Watson Ancillary Documents and the transactions contemplated
hereby and thereby.
(e) Seller shall have received the opinion of D'Ancona & Pflaum relating
to certain portions of Watson's representations and warranties contained in
Sections 2.1, 2.2, 2.3 and 2.6 of this Agreement, which opinion shall be
reasonably acceptable to Parent.
(f) Watson shall have executed and delivered such other documents and
taken such other actions as Seller shall reasonably request.
5.3 CONDITIONS TO OBLIGATION OF WATSON TO EFFECT THE TRANSACTION. The
obligations of Watson to effect the transactions contemplated hereby shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions (unless waived by Watson in accordance with the provisions of Section
8.7 hereof):
(a) Seller shall have delivered to Watson certificates representing all of
the outstanding Shares, duly endorsed in blank or with duly executed stock
powers attached.
(b) Parent and Seller shall have caused the Company and each of its
Subsidiaries to deliver to Watson written resignations effective as of the
Closing Date of all of the directors of the Company and its Subsidiaries.
(c) Parent and Seller shall have performed, in all material respects, all
of their respective agreements contained herein that are required to be
performed by Seller and/or Parent on or prior to the Closing Date, and Watson
shall have received a certificate of a duly authorized officer of each of Seller
and Parent, dated the Closing Date, certifying to such effect.
(d) The representations and warranties of Seller and Parent contained in
this Agreement and in any document delivered in connection herewith shall be
true and correct as of the Closing, except to the extent that a failure to be
true and correct would not have a Company Material Adverse Effect, and Watson
shall have received a certificate of a duly authorized officer of each of Seller
and Parent, dated the Closing Date, certifying to such effect.
(e) Watson shall have received from Seller certified copies of the
resolutions of Seller's Board of Directors and sole stockholder approving and
adopting this Agreement, the Ancillary Documents and the transactions
contemplated hereby and thereby.
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(f) Watson shall have received from Parent certified copies of the
resolutions of Parent's Board of Directors and stockholders, if necessary,
approving and adopting this Agreement, the Ancillary Documents and the
transactions contemplated hereby and thereby.
(g) Watson shall have received the opinion of Shook, Hardy & Bacon L.L.P.
relating to certain portions of Parent's and Seller's representations and
warranties contained in Sections 3.1, 3.2, 3.3, 3.6 and 3.7 of this Agreement,
which opinion shall be reasonably acceptable to Watson.
(h) From the date of this Agreement through the Closing Date, there shall
not have occurred any (i) material adverse change in the financial condition,
business, assets, product pipeline or operations of the Company and its
Subsidiaries, taken as a whole; or (ii) material damage to or material loss of
any of the assets of or premises occupied by the Company or any of its
Subsidiaries due to fire, flood, riot, theft, act of God or other casualty,
which is not adequately covered by insurance, including business interruption
insurance.
(i) The Company shall have received the consent of * for the change of
control to the Preferred Distributor Agreement (the "* AGREEMENT") dated August
29, 1994 between the Company and * ("*"), which consent shall not alter any of
the provisions of the * Agreement in any manner, without the prior written
consent of Watson, which consent shall not be unreasonably withheld.
(j) Watson shall have received a letter from Parent stating that the
intercompany payable owed by the Company and/or its Subsidiaries to Parent
and/or its affiliates has been converted from * by Parent to Seller and by
Seller to the Company as of the Closing Date; provided, however, that all
additional amounts loaned by Parent to the Company and its Subsidiaries after
the date hereof through the Closing relating to * (i) shall remain outstanding
as of the Closing Date; (ii) shall not be converted into a *; and (iii) shall be
due and payable on the later of the Closing Date or October 1, 1997, with
interest accruing at a rate equal to the thirty day London Interbank Offering
Rate ("LIBOR") plus 1 1/2% per annum.
(k) Watson shall have received sufficient evidence that the Company and/or
its Subsidiaries have properly disposed of, or transferred the ownership rights
to an entity other than the Company or one of its Subsidiaries with respect to,
(i) its Monroe, North Carolina facility owned by Chelsea Laboratories, Inc.; and
(ii) all of its ownership interests in Caribe.
(l) Watson can delay the Closing until October 31, 1997 due to Watson's
on-going attempt to enter into a satisfactory arrangement with * relating to the
non-competition provisions of the Distribution Agreement dated July 1, 1994
between the Company and *; provided, that this condition shall terminate as of
October 31, 1997.
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(m) Watson shall have received sufficient evidence that each of the
agreements between the Company and * and its affiliates relating to the products
* and * have been terminated on or prior to the Closing Date.
(n) Seller and Parent shall have executed and delivered such other
documents and taken such other actions as Watson shall reasonably request.
ARTICLE VI
POST-CLOSING AGREEMENTS
6.1 CERTAIN DEFINITIONS. For purposes of this Article VI, the following
terms shall have the following meanings:
(a) "COST OF SALES" shall be determined using the accrual basis of
accounting in accordance with GAAP applied in a manner consistent with Watson's
customary practices. Cost of Sales with respect to each Product and * (as
defined herein), as the case may be, means the sum of the following amounts: (i)
the Manufacturing Costs (as defined herein) relating to such Product or *, as
the case may be; plus (ii) all royalties paid by Watson or any of its
Subsidiaries with respect to such Product or *, as the case may be, except for
the *. For purposes of calculating Cost of Sales with respect to each unit of
Product purchased by Watson or any of its Subsidiaries from Parent pursuant to
the terms of the Contract Manufacturing Agreement attached hereto as EXHIBIT B
and the Supply and License Agreement attached hereto as EXHIBIT D, each such
unit of Product shall be deemed to be purchased for the price of such unit of
Product set forth in * the Supply and License Agreement and * the Contract
Manufacturing Agreement *.
(b) "DISTRIBUTION BUSINESS" means the business conducted by Watson or any
of its Subsidiaries (including the Company), involving both (x) the purchase of
finished pharmaceutical products by Watson or any of its Subsidiaries
manufactured by any Person (other than Watson or any of its Subsidiaries); and
(y) the sale of such products by Watson or any of its Subsidiaries to
pharmaceutical wholesalers, warehousing chains, non-warehousing chains, retail
buying groups, hospital buying groups, independent pharmacies and any other
purchaser; provided, however, that the definition of Distribution Business shall
specifically exclude, and the calculation of Distribution Net Profits (as
defined herein) shall specifically exclude Distribution Net Profits derived by
Watson or any of its Subsidiaries from, each of the foregoing: (i) the
distribution and/or sale of pharmaceutical products by Watson or any of its
Subsidiaries in which Watson or any of its Subsidiaries owns the ANDA or the
NDA; (ii) the distribution and/or sale of pharmaceutical products by Watson or
any of its Subsidiaries under a brand name and detailed to physicians; (iii) the
distribution and/or sale of the generic equivalent of a branded product (each,
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a "GENERICIZED PRODUCT") by Watson or any of its Subsidiaries if Watson or any
of its Subsidiaries has acquired such distribution rights from the holder or
licensor of the NDA relating to such branded product so long as the Genericized
Product does not replace an AB rated equivalent product or an AB rated
equivalent Product being distributed by Watson or any of its Subsidiaries at the
time of the acquisition of such Genericized Product by Watson or any of its
Subsidiaries; (iv) the distribution and/or sale of any of the Products by Watson
or any of its Subsidiaries; (v) the distribution and/or sale by Watson or any of
its Subsidiaries of products distributed in packaging that was not historically
available through the Company's or any of its Subsidiaries' distribution
channels, including, without limitation, specially packaged unit dose products;
(vi) the distribution and/or sale of * or * by Watson or any of its
Subsidiaries; and (vii) the distribution and/or sale of any pharmaceutical
products by Watson or its Subsidiaries in any country other than the United
States ((i) through (vii) above being collectively referred to herein as the
"WATSON PRODUCTS").
(c) "DISTRIBUTION NET PROFITS" means the actual gross invoice price of
each product sold through the Distribution Business as determined using the
accrual basis of accounting in accordance with GAAP applied in a manner
consistent with Watson's customary practices, less the sum of (i) any and all
promotional allowances, rebates, quantity and cash discounts, and other usual
and customary discounts to customers accrued in the ordinary course of business,
in accordance with historical practice and GAAP and current industry trends;
plus (ii) amounts repaid or credited by reason of rejections or returns of
goods; plus (iii) retroactive price reductions; plus (iv) 50% of the reasonable
allowance for doubtful accounts accrued in the ordinary course of business, in
accordance with historical practice and GAAP; plus (v) the aggregate amount paid
by Watson or any of its Subsidiaries to any third party to purchase products
sold through the Distribution Business; plus (v) all royalties paid by Watson or
any of its Subsidiaries with respect to the Distribution Business; provided,
however, that the calculation of Distribution Net Profits shall exclude the
impact of unusual and non-recurring items as determined in accordance with GAAP
applied in a manner consistent with Watson's customary practices.
(d) "MANUFACTURING COST" means, with respect to a Product, Watson's or any
of its Subsidiaries' Direct Material Costs, Direct Labor Costs and Overhead
attributable to such Product. "DIRECT MATERIAL COSTS" shall mean reasonable
costs incurred in purchasing raw materials (without deduction for waste),
including sales and excise taxes imposed thereon, and all costs of packaging
components. "DIRECT LABOR COSTS" shall mean the reasonable cost of temporary and
full-time employees engaged in manufacturing activities who are directly
involved in product manufacturing and packaging and in quality assurance/quality
control. "OVERHEAD" allocated to a Product means indirect costs associated with
the production, testing, packaging, storage and handling of product, including a
reasonable allocation of facilities' costs allocable to product manufacturing
and packaging, including electricity, water, sewer, waste disposal, property
taxes and depreciation of building and machinery. The allocation and calculation
of Watson's or its Subsidiaries' Manufacturing Costs shall be made in accordance
with standard cost and reasonable cost accounting methods in accordance with
GAAP, applied in a manner consistent with Watson's
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"*SEE PAGE ONE OF EXHIBIT"
customary practices. In the case of Products or * manufactured in whole or in
part by a third party or third parties on behalf of Watson or its Subsidiaries,
"Manufacturing Cost" shall include all costs paid to such third party or third
parties by Watson or its Subsidiaries in order to complete the Products or *, as
the case may be, including, without limitation, costs related to the purchase of
labels. With respect to products purchased by Watson or one of its Subsidiaries
in finished package form, only the costs paid by Watson or one of its
Subsidiaries to such third party to purchase such products shall be included in
the calculation of Manufacturing Costs with respect to such product.
Notwithstanding the foregoing, Manufacturing Costs shall not include costs
relating to distribution expenses.
(e) "NET PROFITS" means for each Product and for *, the amount by which
Net Sales with respect to each Product or *, as the case may be, exceeds Cost of
Sales with respect to each Product or *, as the case may be; provided, however,
that the calculation of Net Profits shall exclude the impact of unusual and
non-recurring items as determined in accordance with GAAP applied in a manner
consistent with Watson's customary practices.
(f) "NET SALES" shall be determined using the accrual basis of accounting
in accordance with GAAP applied in a manner consistent with Watson's customary
practices. Net Sales means the actual gross invoice price of each Product or *,
as the case may be, sold by Watson or any of its Subsidiaries, regardless of
whether such Product is distributed or manufactured, less (i) any and all
promotional allowances, rebates, quantity and cash discounts, and other usual
and customary discounts to customers accrued in the ordinary course of business,
in accordance with historical practice and GAAP and current industry trends,
(ii) amounts repaid or credited by reason of rejections or returns of goods,
(iii) retroactive price reductions, and (iv) 50% of the reasonable allowance for
doubtful accounts accrued in the ordinary course of business, in accordance with
historical practice and GAAP.
(g) "PRODUCT" or "PRODUCTS" means the products listed on EXHIBIT H
attached hereto.
6.2 SALE OF PRODUCT.
(a) Watson and its Subsidiaries shall sell each Product and each product
included in the Distribution Business at prices to be determined by Watson in
its sole and absolute discretion. Watson and its Subsidiaries agree to use
commercially reasonable good faith efforts to develop, market, manufacture or
have manufactured, as the case may be, and sell each Product or each product
included in the Distribution Business, unless it becomes commercially unfeasible
for Watson or its Subsidiaries to continue to develop, market, manufacture or
have manufactured such product. Notwithstanding the foregoing, such efforts
shall be used without regard to the payment to be made pursuant to Section 6.5
of this Agreement.
(b) During calendar years *, Watson and its Subsidiaries shall record
sales of Products or products included in the Distribution Business according to
their usual,
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"*SEE PAGE ONE OF EXHIBIT"
regular and ordinary course in substantially the same manner as recorded in the
past. Without limiting the foregoing, Watson and its Subsidiaries shall not (i)
take any actions outside the ordinary course of business *; or (ii) *.
(c) The Upside Sharing Payment (as defined herein) shall reflect the net
profit (as calculated in the same manner as the calculation of Net Profit)
received by Watson or its Subsidiaries on the bundled sale of Products or
products included in the Distribution Business multiplied by the following
fraction, the numerator of which is equal to the number of units of such Product
or Distribution Business product, as the case may be, included in such bundled
sale multiplied by the standard invoice unit price thereof, and the denominator
of which is equal to the sum of the number of units of each product (including
the Products or any product sold through the Distribution Business) or service
included in such bundled sale multiplied by the respective standard invoice unit
price thereof.
6.3 QUARTERLY REPORTING. From the Closing Date through the period that
Watson or any of its Subsidiaries sells * as a distributed (rather than a
manufactured) product through goods purchased from * or any other third party *,
within forty-five (45) days after the end of each calendar quarter, Watson shall
provide Seller with a statement of accounting (the "QUARTERLY REPORT") which
shall set forth in full detail Watson's and its Subsidiaries' computation of Net
Profits relating to Watson's or any of its Subsidiaries' sale of * during the
calendar quarter recently ended. The Quarterly Report shall be accompanied by a
certificate of an executive officer of Watson certifying the amount of * sold by
Watson and its Subsidiaries for the period covered by such Quarterly Report.
6.4 *PAYMENT ON*.
(a) Together with the delivery of the Quarterly Report by Watson to
Seller, Watson shall pay Seller an amount equal to * of the Net Profit relating
to Watson's or any of its Subsidiaries' sale of * during the calendar quarter
covered by the Quarterly Report; provided, however, that, in lieu of the
foregoing *, until the earlier of the date upon which the * Payment (as defined
herein) has been paid in full or December 31, 1998, Watson or one of its
Subsidiaries shall pay Seller * of the Net Profit earned by Watson and its
Subsidiaries on the sale of * during the period beginning on the Closing Date
and ending on December 31, 1998. For purposes of this Agreement, the "*PAYMENT"
shall mean an amount equal to $*, which amount is comprised of the sum of (i)
any amount of Net Profit earned by the Company or one of its Subsidiaries on the
sale of * during the period from the opening of business
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"*SEE PAGE ONE OF EXHIBIT"
on August 11, 1997 through the Closing Date; and (ii) any amounts paid by Watson
or one of its Subsidiaries to Seller pursuant to the proviso at the end of the
first sentence of this Section 6.4(a) or Section 6.4(b)(ii) herein; and (iii)
amounts paid to Seller or Parent pursuant to Section 2.13 of the Contract
Manufacturing Agreement attached hereto as EXHIBIT B, but shall exclude the
amounts paid by Watson to Seller pursuant to Section 6.4(e) herein.
(b) To the extent Watson, the Company or any of their respective
Subsidiaries actually receives any refund of the amounts described in Sections 6
and 9(a) of the * Agreement, or any other amounts from * due to the breach of
such agreement by * or due to purchase credits or similar adjustments (other
than credits for shortages of goods or damaged goods), whether such amounts are
received, or relate to events occurring, before or after the Closing, Watson
agrees that such refund or payment shall be distributed as follows: (i) first,
to pay any and all out-of-pocket costs and expenses incurred by Watson, the
Company or their respective Subsidiaries, or by Parent and its Subsidiaries, at
the request of Watson, to collect such refund or payment, including, without
limitation, all out-of-pocket legal expenses and court costs; (ii) second, if
the event that gave rise to such breach or credit occurred on or prior to
December 31, 1998, to Seller in an amount up to the unpaid portion of the *
Payment as of the date Watson or any of its Subsidiaries actually receives such
refund or payment; and (iii) finally, any remainder of such refund or payment
shall be shared by the Company and Seller as follows: *. Notwithstanding the
foregoing, the amounts described in Section 6.4(e) hereof shall be paid by
Watson or one of its Subsidiaries to Seller.
(c) Within a reasonable time after there are no limitations (legal or
otherwise) on the Company's or its Subsidiaries' ability to sell * under its own
ANDA, or such earlier date as Watson determines, in its sole and absolute
discretion, Watson shall cause the Company to deliver a termination notice to *
pursuant to Section 4 of the * Agreement.
(d) Watson and its Subsidiaries shall sell * at a price to be determined
by Watson in its sole and absolute discretion. Until such time as Watson or one
of its Subsidiaries begins to sell * as a manufactured product, Watson and its
Subsidiaries agree to use commercially reasonable good faith efforts to market
and sell *, unless it becomes commercially unfeasible for Watson or its
Subsidiaries to continue to market and sell *. Such efforts shall be used
without regard to the payments to be made pursuant to this Section 6.4. Payments
to Seller based upon the Net Profit earned on the sale of * shall reflect the
net profit (as calculated in the same manner as the calculation of Net Profit)
received by Watson or its Subsidiaries on the bundled sale of products including
* multiplied by the following fraction, the numerator of which is equal to the
number of units of * multiplied by the standard invoice unit price thereof, and
the denominator of which is equal to the sum of the number of units of each
product (including *) or service included in such bundled sale multiplied by the
respective standard invoice unit price thereof.
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(e) To the extent that Watson or one of its Subsidiaries actually receives
any amounts from * relating to purchase credits on any units of * sold by the
Company or its Subsidiaries and such purchase credits relate in whole or in part
to the period of time prior to *, Watson or one of its Subsidiaries shall pay
such amount of the credits which relate to the sale of * made by the Company or
its Subsidiaries prior to * to Seller within ten (10) days after its receipt of
such amount.
6.5 UPSIDE SHARING PAYMENT.
(a) Subject to the provisions of Section 6.6 herein, on or prior to *,
Watson shall provide Seller with a statement of accounting (the "UPSIDE SHARING
REPORT") which shall set forth in full detail the computation of (i) the Net
Profit on Watson's and its Subsidiaries' sale of the Products during calendar
year *; and (ii) the Distribution Net Profit during calendar year * (the sum of
(i) and (ii) being collectively referred to herein as the "UPSIDE NET PROFITS").
The Upside Sharing Report shall be accompanied by a certificate of an executive
officer of Watson certifying the amount of the Upside Net Profits.
(b) Subject to the provisions of Section 6.6 herein, together with the
delivery of the Upside Sharing Report by Watson to Seller, Watson shall pay to
Seller an amount equal to the following (the "UPSIDE SHARING PAYMENT") provided,
however, that the Upside Sharing Payment shall not exceed $*:
*
6.6 SALES AND ACQUISITIONS.
(a) Except for acquisitions which qualify for the treatment under Section
6.6(b) herein: if (i) Watson or any of its Subsidiaries (A)(I) acquires any
pharmaceutical distribution business or
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any portion thereof in one or a series of related transactions; or (II) acquires
any entity which is in the pharmaceutical distribution business in one or a
series of related transactions and such distribution business is acquired by
Watson or any of its Subsidiaries in connection with such acquisition, and, in
each of (I) or (II) above, the aggregate net sales of the distribution business
acquired exceeds $* during the twelve month period immediately prior to such
acquisition, excluding the net sales of any products acquired which are or will
be Watson Products; or (ii) Watson sells to an unaffiliated third party all or
substantially all of the Distribution Business in one or a series of related
transactions (each of (i) and (ii) being collectively referred to herein as a
"SALE EVENT"), then, except as provided below in this Section 6.6(a), for
purposes of calculating the Upside Net Profit, the Distribution Net Profits
derived by Watson and its Subsidiaries from the Distribution Business during
calendar year * shall be deemed to be equal to (x) if the Sale Event occurs on
or after January 1, 1998, the Distribution Net Profits derived by Watson and its
Subsidiaries from the Distribution Business during the twelve month period
ending on the last day of the calendar month immediately preceding such Sale
Event; or (y) if the Sale Event occurs prior to January 1, 1998, the
Distribution Net Profits derived by Watson and its Subsidiaries from the
Distribution Business during calendar year 1997 for the period beginning on
January 1, 1997 and ending on the day immediately preceding the closing date of
the Sale Event multiplied by the following fraction, the numerator of which is
equal to 365 and the denominator of which is equal to the number of days between
January 1, 1997 and the day immediately preceding the closing date of the Sale
Event. Notwithstanding the foregoing, if the net profits (calculated in the same
manner as the calculation of Distribution Net Profits) of any distribution
business acquired by Watson or any of its Subsidiaries pursuant to Section
6.6(a)(i) is not less than zero for the twelve month period ending on the date
of the most recent financial statements referenced in the principal acquisition
agreement relating to Watson's or any of its Subsidiaries' acquisition of such
distribution business, then, in lieu of the foregoing calculation of
Distribution Net Profits, Watson may, in its sole discretion, elect to calculate
Distribution Net Profits derived by Watson and its Subsidiaries from the
Distribution Business during calendar year 1999 in accordance with the
provisions of Section 6.5 hereof. Watson must exercise such election by
delivering written notice to Parent on or prior to the closing date of the
acquisition of such distribution business. If Watson or one of its Subsidiaries
acquires any entity described in Section 6.6(a)(i)(A) above, with net sales
(excluding sales attributable to Watson Products) equal to or less than $*
during the twelve month period immediately prior to such acquisition, the net
profits (calculated in the same manner as the calculation of Distribution Net
Profits) derived by Watson and its Subsidiaries from such acquired business
during calendar year * shall be included in the calculation of Distribution Net
Profits.
(b) If (i) Watson or any of its Subsidiaries acquires any pharmaceutical
company primarily engaged in the manufacture and sale of pharmaceutical products
(an "ACQUIRED COMPANY"); and (ii) the Acquired Company distributes (but not
manufactures) five or less pharmaceutical products at the time of such
acquisition (the "ACQUIRED DISTRIBUTED Products"), then, for purposes of
calculating Upside Net Profits, the Distribution Net Profits derived by Watson
and its Subsidiaries from the sale of the Acquired Distributed Products during
calendar year * shall be deemed to be equal to the sum of (x) the Distribution
Net Profits derived by
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Watson and its Subsidiaries from the sale of the Acquired Distributed Products
during the twelve month period ending on the last day of the calendar month
immediately preceding the closing date of the acquisition of the Acquired
Company by Watson or any of its Subsidiaries; plus (y) the difference between
(A) the Distribution Net Profits derived by Watson and its Subsidiaries from the
sale of the Acquired Distributed Products during calendar year *; and (B) the
sum of (I) the Distribution Net Profits derived by Watson and its Subsidiaries
from the sale of the Acquired Distributed Products during the twelve month
period ending on the last day of the calendar month immediately preceding the
closing date of the acquisition of the Acquired Company by Watson or any of its
Subsidiaries; plus (II) the Distribution Net Profits derived by the Acquired
Company from the sale of the Acquired Distributed Products during the twelve
month period ending on the last day of the calendar month immediately preceding
the closing date of the acquisition of the Acquired Company by Watson or any of
its Subsidiaries; provided, however, that the amount calculated pursuant to this
subparagraph (y) shall not be less than zero.
(c) If Watson or any of its Subsidiaries disposes of any Product at any
time on or prior to December 31, *, (i) all Net Profits received from the
commercial sale of such Product during calendar year * shall be excluded from
the calculation of Upside Net Profits; and (ii) as consideration for the
exclusion of the Net Profits derived from the commercial sale of such Product
from the calculation of Upside Net Profits, Watson or one of its Subsidiaries
shall pay Seller an amount in cash equal to one-half (1/2) of any and all
consideration received by Watson and its Subsidiaries in connection with such
sale, including, without limitation, one-half (1/2) of the reasonably estimated
present value (using an 8% discount factor) of any future payments (including
royalty payments) to be received by Watson or any of its Subsidiaries in
connection with the disposition of such Product and the fair market value of the
securities or other non-cash consideration received by Watson or its
Subsidiaries, but after payment of all reasonable out-of-pocket costs and
expenses related to such sale, including, without limitation, any legal,
accounting and investment banking fees; provided, however, that if the closing
of the disposition of such Product occurs at any time prior to December 31, *,
in lieu of receiving the amounts set forth in Section 6.6(c)(ii), Parent may
elect to include the Net Profits derived from the sale of such Product during
the twelve month period ending on the last day of the calendar month immediately
preceding the closing date of the disposition of such Product in the calculation
of the Upside Net Profits. Parent must exercise such election by delivering
written notice to Watson on or prior to thirty (30) days after its receipt of
the Transfer Notice (as defined herein) with respect to the transaction
consummated by Watson or any of its Subsidiaries pursuant to this Section
6.6(c).
(d) If Watson or any of its Subsidiaries acquires any company which is
selling one or more of the Products or if Watson or any of its Subsidiaries
acquires the right to sell one or more of the Products from an unaffiliated
third party (each, a "PRODUCT ACQUISITION") and Watson or one of its
Subsidiaries is selling such Product as of the date of the Product Acquisition,
for purposes of calculating the Upside Net Profits, the Net Profit derived from
the sale of such Product by Watson and its Subsidiaries during calendar year *
shall be equal to the Net Profit derived by Watson and its Subsidiaries from the
sale of such Product during calendar year * multiplied by the following
fraction: the numerator of which is equal to the Net Profit derived by
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Watson and its Subsidiaries from the sale of such Product for the twelve month
period ending on the day immediately preceding the closing of the Product
Acquisition, and the denominator of which is equal to the sum of (i) the Net
Profit derived by Watson and its Subsidiaries from the sale of such Product for
the twelve month period ending on the day immediately preceding the closing of
the Product Acquisition; plus (ii) the Net Profit derived by the Person selling
the Product to Watson or one of its Subsidiaries (the "PRODUCT SELLING ENTITY")
from the sale of such Product for the twelve month period ending on the day
immediately preceding the closing of the Product Acquisition. If either Watson
or any of its Subsidiaries, on the one hand, or the Product Selling Entity, on
the other hand, has not been selling such Product for the entire twelve month
period referenced above, then the twelve month period referenced above shall be
revised to only include the period of time that each of Watson or any of its
Subsidiaries, on the one hand, or the Product Selling Entity, on the other hand,
has been selling such Product. The Net Profit derived by each of Watson or any
of its Subsidiaries, on the one hand, or the Product Selling Entity, on the
other hand, from the sale of such Product shall be appropriately adjusted to
exclude the Net Profits earned by Watson or any of its Subsidiaries, on the one
hand, or the Product Selling Entity, on the other hand, on the sale of the
Product due to initial new product launch stocking orders.
(e) Except as otherwise specified in this Section 6.6, all Net Profit
earned by Watson or its Subsidiaries from the sale of the Products during
calendar year * and all Distribution Net Profit earned by Watson and its
Subsidiaries from the sale of products included in the definition of
Distribution Business during calendar year * shall be included in the
calculation of Upside Net Profits pursuant to Section 6.5.
(f) Watson agrees to provide Parent with written notice of the occurrence
of any of the events set forth in this Section 6.6 within fifteen (15) days
after the closing of such event (the "TRANSACTION NOTICE").
(g) At any time on or prior to December 31, *, Watson and its Subsidiaries
agree not to dispose of any Product at less than such Product's fair market
value or, in connection with the acquisition of any business or product, grant
any significant royalty on sales of any of the Products, if the effect of such
disposition or acquisition would cause (i) Watson or one of its Subsidiaries to
obtain an asset or right of material value; and (ii) a material decrease or a
potentially material decrease to the anticipated value of the Upside Sharing
Payment calculated as of the date of such disposition or acquisition, as the
case may be; provided, however, that Watson or its Subsidiaries may enter into
the transactions described in Section 6.6(c) without complying with the
provisions of this Section 6.6(g).
6.7 DISPUTES REGARDING ARTICLE VI PAYMENTS. Disputes with respect to
payments made pursuant to this Article VI shall be dealt with as follows:
(a) Seller shall have until December 31, * (the "UPSIDE DISPUTE Period")
to dispute the amount of the Upside Sharing Payment (an "UPSIDE DISPUTE"). If
Seller does not give written notice of an Upside Dispute within the Upside
Dispute Period to Watson (an "UPSIDE DISPUTE
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NOTICE"), the amount of such payment shall be deemed to have been accepted and
agreed to by Seller and Parent and shall be final and binding upon the parties
hereto. If Seller has an Upside Dispute, Seller shall give Watson an Upside
Dispute Notice within the Upside Dispute Period, setting forth in reasonable
detail the elements and amounts with which it disagrees. Within thirty (30) days
after delivery of such Upside Dispute Notice, the parties hereto shall attempt
to resolve such Upside Dispute and agree in writing upon the final amount of the
disputed payment.
(b) If Watson and Seller are unable to resolve any Dispute within the
thirty (30) day period after Watson's receipt of an Upside Dispute Notice, the
Arbitrating Accountant shall be engaged as arbitrator hereunder to settle such
Upside Dispute as soon as practicable. In the event Arthur Andersen LLP is
unwilling or unable to serve as the Arbitrating Accountant, the parties hereto
shall select by mutual agreement another nationally recognized certified public
accounting firm, who is not rendering (and during the preceding two-year period
has not rendered) services to either Parent, Watson or any of their respective
affiliates, to serve as the Arbitrating Accountant. In connection with the
resolution of any Upside Dispute, the Arbitrating Accountant shall have access
to all documents, records, work papers, facilities and personnel necessary to
perform its function as arbitrator. The arbitration before the Arbitrating
Accountant shall be conducted in accordance with the commercial arbitration
rules of the American Arbitration Association. The Arbitrating Accountant's
award with respect to any Upside Dispute shall be final and binding upon the
parties hereto, and judgment may be entered on the award. Parent and Watson
shall each pay one-half of the fees and expenses of the Arbitrating Accountant
with respect to any Upside Dispute.
(c) Any dispute with respect to a payment made pursuant to Section 6.4
shall be handled in the same manner as provided in subparagraphs (a) and (b)
above; provided, however, that Seller shall have a period of three years from
the receipt of such payment to dispute the amount of each such payment.
Notwithstanding the foregoing, once Parent has directly or indirectly reviewed
Watson's or any of its Subsidiaries' records relating to the calculation of Net
Profits on the sale of * for a specific time period, no dispute shall be made by
Parent or Seller relating to any payment made pursuant to Section 6.4 with
respect to any time period prior to such review, except for any disputes made in
connection with such review.
(d) Any payments due by a party hereto to any other party hereto pursuant
to this Section 6.7 shall be payable within five business days of the final
resolution of any dispute, with interest accruing (i) from the date such dispute
was made for disputes under Section 6.4 at a rate equal to LIBOR plus 1 1/2% per
annum; and (ii) from the date such payment is due for disputes under Section 6.5
at a rate equal to LIBOR plus 1 1/2% per annum.
6.8 RECORDS: INSPECTION OF RECORDS. Watson and its Subsidiaries shall each
maintain complete and accurate books and records of account relating to the sale
of products in sufficient detail to permit an accurate calculation of Watson's
and its Subsidiaries' Net Profit on the sale of Products and the calculation of
the Distribution Net Profits. Seller shall have the right at any time while
payments are being made by Watson to Seller pursuant to the terms of this
Article VI and
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for one year thereafter to examine the relevant books and records of Watson and
its Subsidiaries relating to the sale of their products during normal business
hours and upon reasonable advance written notice to verify that appropriate
accounting and payments have been made by Watson to Seller under this Agreement.
Watson shall cooperate with Seller and Parent with respect to all reasonable
requests made by Seller or Parent with respect to such inspection.
6.9 INTELLECTUAL PROPERTY RIGHTS. Seller and Parent recognize and agree
that, they shall not acquire any intellectual or other property rights in the
Products or in the ANDAs relative to the Products. Seller and Parent hereby
acknowledge that they do not have, and shall not acquire, any interest in any of
Watson's or any of its Subsidiaries' trademarks or trade names unless otherwise
expressly agreed. Additionally, Parent and Seller shall not use and shall not
license or permit any third party to use, any name, slogan, logo or trademark
which is similar or deceptively similar to any of the names or trademarks used
in connection with the business of the Company or any of its Subsidiaries.
6.10 CONFIDENTIAL INFORMATION. During the period in which Watson is
required to make payments to Seller pursuant to this Article VI and for one year
thereafter, each party shall keep confidential and not disclose to others or use
for any purpose, other than as authorized by this Agreement, all "Confidential
Information" of the other party. For purposes of this Agreement, the term
"CONFIDENTIAL INFORMATION" means all know-how, trade secrets, formulae, data,
inventions, technology and other information, including financial information,
related to the manufacture, sale or marketing of the Products. The restrictions
of this Section shall not apply to any Confidential Information which (a) is or
becomes public knowledge through no fault of the recipient; (b) is received from
a third party having the lawful right to disclose the information; (c) is
required by law to be disclosed; or (d) is required to be disclosed in
connection with any applications filed with the FDA for approval to market the
Products. Additionally, Parent and Seller agree not to communicate or divulge
to, or use for the benefit of, any person, firm or corporation other than
Watson, its agents and representatives, any of the Company's or its
Subsidiaries' confidential information relating to the business conducted by the
Company or any of its Subsidiaries.
6.11 INSPECTION OF RECORDS. Parent and Seller, on the one hand, and
Watson, on the other hand, and their respective affiliates, shall each retain
and make their respective books and records (including expired insurance
policies and work papers in the possession of their respective accountants) with
respect to the Company and its Subsidiaries available for inspection by the
other party, or by its duly accredited representatives, for reasonable business
purposes at all reasonable times during normal business hours, for a seven (7)
year period after the Closing Date, with respect to all transactions of the
Company and its Subsidiaries occurring prior to and relating to the Closing, and
the historical financial condition, assets, liabilities, operations and cash
flows of the Company and its Subsidiaries. As used in this Section 6.11, the
right of inspection includes the right to make extracts or copies. The
representatives of a party inspecting the records of the other party shall be
reasonably satisfactory to the other party.
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6.12 HIRING AWAY EMPLOYEES. For a period of two (2) years from the Closing
Date, Parent and Seller shall not, and shall cause its employees and agents to
not, solicit for hire any salaried, technical or professional employees,
representatives or agents of the Company or any of its Subsidiaries. .
6.13 THIRD PARTY CLAIMS. The parties shall cooperate with each other with
respect to the defense of any claims or litigation made or commenced by third
parties subsequent to the Closing Date which are not subject to the
indemnification provisions contained in Article VII, provided that the party
requesting cooperation shall reimburse the other party for the other party's
reasonable out-of-pocket costs and expenses of furnishing such cooperation.
6.14 FURTHER ASSURANCES. The parties shall execute such further documents,
and perform such further acts, as may be necessary to transfer and convey the
Shares to Watson on the terms herein contained and to otherwise comply with the
terms of this Agreement.
6.15 INJUNCTIVE RELIEF. Parent and Seller specifically recognize that any
breach of Sections 6.9, 6.10 or 6.12 will cause irreparable injury to Watson and
that actual damages may be difficult to ascertain, and in any event, may be
inadequate. Accordingly (and without limiting the availability of legal or
equitable, including injunctive, remedies under any other provisions of this
Agreement), Seller and Parent agree that in the event of any such breach, Watson
shall be entitled to injunctive relief in addition to such other legal and
equitable remedies that may be available.
6.16 EMPLOYEE BENEFIT PLANS. In the event that Watson terminates any Plan
in which any employees or former employees of the Company (and their spouses,
dependents and beneficiaries) participate, then such employees and former
employees (and their spouses, dependents and beneficiaries) shall immediately
become eligible to participate in any comparable employee benefit plan or
program available to Watson's similarly-situated employees (and their spouses,
dependents and beneficiaries) upon terms and conditions which are no less
favorable than those afforded Watson's similarly-situated employees (and their
spouses, dependents and beneficiaries). Such employees and former employees
shall receive credit for their service with the Company (including service with
any predecessor company to the extent credited under Company plans) for purposes
of determining their eligibility to participate, vesting and eligibility for
benefits under such employee benefit plans and programs of Watson. Further, with
respect to any of Watson's health and dental care plans in which the Company's
employees or former employees (and their spouses, dependents and beneficiaries)
become entitled to participate in pursuant to this Section 6.16, Watson agrees
that such individuals shall be entitled to so participate without regard to any
applicable waiting periods and any limitations on pre-existing conditions.
In addition to the foregoing, Watson agrees that, in accordance with the
terms of the Company's severance and retention plans, programs and policies (or
in accordance with the terms of any replacement severance and retention plans,
programs or policies provided by Watson), all of which are listed on the
Disclosure Statement, Watson shall provide all severance and retention
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benefits to all employees and former employees of the Company who are or who
become entitled to such benefits prior or subsequent to the Closing.
6.17 PARENT EMPLOYEE STORE. For a period of five years from the Closing
Date (the "INITIAL TERM"), the Company agrees to continue to supply Parent's
employee store with over-the-counter products for the Company's cost of such
products plus ten percent (10%). The Initial Term shall automatically renew for
successive one year periods unless either party notifies the other party of its
desire to terminate the obligations set forth in this Section 6.17 at least
ninety (90) days prior to the expiration of the Initial Term or any renewal term
thereof.
ARTICLE VII
INDEMNIFICATION
7.1 GENERAL. From and after the Closing, subject to the limitations set
forth in Section 7.5, the parties shall indemnify each other as provided in this
Article VII. For purposes of this Article VII, each party shall be deemed to
have remade all of its representations and warranties contained in this
Agreement at the Closing with the same effect as if originally made at the
Closing; provided, however, that the Watson Disclosure Statement and the
Disclosure Statement may be updated at the Closing by Watson and Seller, as the
case may be, and, except as otherwise provided in this Article VII, no indemnity
shall be provided hereunder with respect to the matters set forth therein. No
disclosure contained in the updated Watson Disclosure Statement or the
Disclosure Statement, as the case may be, shall be deemed a waiver of Watson's
or Seller's and Parent's representations and warranties made on the date hereof
with respect to the conditions to closing set forth in Sections 5.2(c) and
5.3(d) hereof.
7.2 CERTAIN DEFINITIONS. As used in this Article VII, the following terms
shall have the indicated meanings:
(a) "DAMAGES" shall mean all liabilities, assessments, levies,
losses, fines, penalties, damages, costs and expenses, including, without
limitation, reasonable fees and expenses of attorneys, accountants and other
professionals, actually sustained or incurred by an Indemnified Party in
connection with the defense or investigation of any claim (after giving effect
to any insurance proceeds actually received by an Indemnified Party).
(b) "INDEMNIFIED PARTY" shall mean a party hereto who is entitled to
indemnification from another party hereto pursuant to this Article VII.
(c) "INDEMNIFYING PARTY" shall mean a party hereto who is required to
provide indemnification under this Article VII to another party hereto.
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(d) "THIRD PARTY CLAIMS" shall mean any claims for Damages which are
asserted or threatened by a party other than the parties hereto, their
successors and permitted assigns, against any Indemnified Party or to which an
Indemnified Party is subject.
7.3 SELLER'S INDEMNIFICATION OBLIGATIONS. Subject to the terms of Section
7.5, Seller and Parent, jointly and severally, and their respective successors
and assigns, shall indemnify, save and keep Watson, the Company, each of their
respective Subsidiaries and their respective successors and permitted assigns
(each a "WATSON INDEMNITEE" and collectively the "WATSON INDEMNITEES") harmless
against and from all Damages sustained or incurred by any Watson Indemnitee, as
a result of or arising out of: (a) any inaccuracy in or breach of any
representation and warranty made by Seller or Parent to Watson herein or in any
Ancillary Document; (b) any breach by Seller or Parent of, or failure of Seller
or Parent to comply with, any of the covenants or obligations under this
Agreement or the Ancillary Documents to be performed by Seller or Parent
(including, without limitation, Seller's and Parent's obligations under this
Article VII); and (c) without being limited by the foregoing paragraphs (a) and
(b), and without regard to whether any one or more of the items listed in this
subparagraph (c) may be disclosed in the Disclosure Statement or otherwise known
to Watson or any of its Subsidiaries as of the date hereof or the Closing Date,
(i) the Company's or its Subsidiaries ownership of the capital stock of Caribe
and the property located at Monroe, North Carolina which was owned by Chelsea
Laboratories, Inc., including, without limitation, any Damages caused by the
violation of any Environmental Law at such facilities or the presence or release
of any Hazardous Materials upon, about or beneath such facilities; (ii) any item
which should have been disclosed on the Disclosure Statement as of the Closing
Date in response to the representations and warranties set forth in Section 3.20
herein; and (iii) without being limited by subparagraph (ii) above, each of the
items disclosed on Schedules 3.8(d) and 3.20 of the Disclosure Statement and
each of the items described in the audit response letters attached as exhibits
to Schedule 3.11 of the Disclosure Statement; provided, however, that after the
Closing Date, Watson and the Company shall bear all liability for the item
disclosed on Schedule 3.8(d) of the Disclosure Statement relating to a contract
entered into by the Company with the Department of Defense.
7.4 WATSON'S INDEMNIFICATION OBLIGATIONS. Subject to the terms of Section
7.5, Watson shall indemnify, save and keep Parent and Seller and their
respective successors and permitted assigns ("SELLER INDEMNITEES"), forever
harmless against and from all Damages sustained or incurred by any Seller
Indemnitee, as a result of or arising out of: (a) any inaccuracy in or breach of
any representation and warranty made by Watson to Seller and Parent herein or in
any Watson Ancillary Document; and (b) any breach by Watson of, or failure by
Watson to comply with, any of the covenants or obligations under this Agreement
or the Watson Ancillary Documents to be performed by Watson (including, without
limitation, its obligations under this Article VII).
7.5 LIMITATION ON INDEMNIFICATION OBLIGATIONS.
(a) All representations and warranties made by any party to this
Agreement shall survive the Closing for a period of twenty months from the
Closing Date; provided however,
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that the representations and warranties contained in Section 3.9 shall survive
the Closing until the expiration of the applicable statute of limitations (the
"SURVIVAL PERIOD"). A claim by a Watson Indemnitee or a Seller Indemnitee for
indemnification under this Article VII must be asserted within the applicable
Survival Period.
(b) (i) the Watson Indemnitees shall only be entitled to
indemnification pursuant to Section 7.3 hereof once the Watson Indemnitees'
aggregate claims for indemnification exceed $*, but after such claims exceed
such amount, the Watson Indemnitees shall be entitled to seek indemnification
for all indemnification claims from the first dollar of Damages; and (ii) the
indemnification obligations of Parent and Seller pursuant to Section 7.3 hereof
shall be limited to an amount equal to $* in the aggregate.
(c) (i) the Seller Indemnitees shall only be entitled to
indemnification pursuant to Section 7.4 hereof once the Seller Indemnitees'
aggregate claims for indemnification exceed $*, but after such claims exceed
such amount, the Seller Indemnitees shall be entitled to seek indemnification
for all indemnification claims from the first dollar of Damages; and (ii) the
indemnification obligations of Watson pursuant to Section 7.4 hereof shall be
limited to an amount equal to $* in the aggregate.
(d) Notwithstanding anything to the contrary contained herein, the
limitations on Seller's and Parent's indemnification obligations contained in
this Section 7.5, including the time limitations contained in Section 7.5(a)
hereof, shall not apply to a claim for indemnification by a Watson Indemnitee
pursuant to Section 7.3(c) hereof, which claims may be brought by a Watson
Indemnitee against Seller or Parent at any time after the date hereof.
7.6 COOPERATION. Subject to the provisions of Section 7.8, the
Indemnifying Party shall have the right, at its own expense, to participate in
the defense of any Third Party Claim, and if said right is exercised, the
parties shall cooperate in the investigation and defense of said Third Party
Claim. Watson and its Subsidiaries shall take all reasonable directions from
Parent relating to any claim made with respect to Caribe or the Monroe, North
Carolina facility previously owned by Chelsea Laboratories, Inc., at Parent's
sole cost and expense.
7.7 SUBROGATION. The Indemnifying Party shall not be entitled to require
that any action be brought against any other person before action is brought
against it hereunder by the Indemnified Party and shall not be subrogated to any
right of action until it has paid in full or successfully defended against the
Third Party Claim for which indemnification is sought.
7.8 INDEMNIFICATION CLAIMS PROCEDURES.
(a) Promptly following the receipt of notice by the Watson
Indemnitees of a Third Party Claim which the Watson Indemnitees believe may
result in a demand for indemnification pursuant to this Article VII, Watson
shall notify Seller and Parent of such claim. Promptly following the receipt by
a Seller Indemnitee of notice of a Third Party Claim which
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such Seller Indemnitee believes may result in a demand for indemnification
pursuant to this Article VII, such Seller Indemnitee shall notify Watson of such
claim. The failure to give such notice shall not relieve the Indemnifying Party
of its obligations under this Agreement except to the extent that the
Indemnifying Party is substantially prejudiced as a result of the failure to
give such notice. Within fifteen (15) business days after receipt of the notice
by the Indemnifying Party pursuant to the preceding sentence, the Indemnifying
Party shall notify the Indemnified Party whether it elects to control the
defense of the Third Party Claim. If the Indemnifying Party elects to undertake
the defense of such Third Party Claim, it shall do so at its own expense with
counsel of its own choosing and it shall acknowledge in writing without
qualification its indemnification obligations as provided in this Agreement to
the Indemnified Party as to such Third Party Claim. If the Indemnifying Party
elects not to defend the Third Party Claim or fails to pursue such Third Party
Claim diligently, the Indemnified Party shall have the right to undertake,
conduct and control the defense of such Third Party Claim through counsel of its
own choosing and the Indemnifying Party shall be entitled to participate in (but
not control) the defense of such Third Party Claim, with its counsel and at its
expense. The party that litigates or contests the Third Party Claim shall keep
the other party fully advised of the progress and disposition of such claim.
(b) In the event the Indemnifying Party elects not to undertake the
defense of the Third Party Claim or fails to pursue diligently the defense of
such a claim and the Indemnified Party litigates or otherwise contests or
settles the Third Party Claim, then, provided that a final determination has
been made that the Indemnified Party is entitled to indemnification hereunder,
the Indemnifying Party shall promptly reimburse the Indemnified Party for all
amounts paid to settle such claim or all amounts paid in satisfaction of a
judgment against the Indemnified Party in contesting such claim and in providing
its right to indemnification hereunder, all in accordance with the provisions of
this Article VII. Notwithstanding the foregoing, no settlement of any Third
Party Claim without the prior written consent of the Indemnifying Party shall be
determinative of the validity of any claim that the Indemnified Party is
entitled to indemnification hereunder.
(c) No Third Party Claim will be settled by the Indemnifying Party without
the prior written consent of the Indemnified Party, which consent will not be
unreasonably withheld; provided, however, that if such claim asserts that the
Indemnifying Party is jointly and severally liable and the Indemnified Party
shall be fully released from all liability relating to such Third Party Claim in
connection with such settlement, the Indemnifying Party shall not be required to
obtain the consent of the Indemnified Party. If, however, the Indemnified Party
refuses to consent to a bona fide offered settlement which the Indemnifying
Party wishes to accept, the Indemnified Party may continue to pursue such Third
Party Claim free of any participation by the Indemnifying Party, at the sole
expense of the Indemnified Party. In such event, the Indemnifying Party shall
pay to the Indemnified Party the amount of the offer of settlement which the
Indemnified Party refused to accept, plus the reasonable costs and expenses
incurred by the Indemnified Party prior to the date the Indemnifying Party
notifies the Indemnified Party of the offer of settlement, all in accordance
with the terms of this Article VII, and, upon the payment or receipt of such
amount, as the case may be, the Indemnifying Party shall have no further
liability with respect to such Third Party Claim. The Indemnifying Party shall
be entitled to
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recover from the Indemnified Party any additional expenses incurred by such
Indemnifying Party as a result of the decision of the Indemnified Party to
pursue the matter.
ARTICLE VIII
TERMINATION
8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the transactions contemplated hereby may be abandoned at any time prior to the
Closing Date by the mutual consent of Watson, on the one hand, and Seller and
Parent, on the other hand.
8.2 TERMINATION BY EITHER PARTY. This Agreement and the transaction
contemplated hereby may be terminated at any time prior to the Closing by either
party if (a) the Closing shall not have occurred at or before 11:59 p.m. on
November 30, 1997; provided, however, that the right to terminate this Agreement
under this Section 8.2(a) shall not be available to any party whose failure to
fulfill any material obligation under this Agreement has been the cause of or
resulted in the failure of the Closing to occur on or prior to the aforesaid
date; (b) a court of competent jurisdiction or a governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action either (i) permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement; or (ii)
compelling Watson, the Company or any of their respective Subsidiaries to
dispose of or hold separate all or a material portion of the respective
businesses or assets of Watson, the Company or their respective Subsidiaries or
sell or license any material product of Watson, the Company or their respective
Subsidiaries, and such order, decree, ruling or other action shall have become
final and non-appealable.
8.3 TERMINATION BY THE COMPANY. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing Date by Seller and Parent if (a) there has been a breach by Watson of
any representation or warranty contained in this Agreement which would have a
Watson Material Adverse Effect; or (b) there has been a breach of any of the
covenants or agreements set forth in this Agreement on the part of Watson which
would have a Watson Material Adverse Effect, and which breach is not curable or,
if curable, is not cured within 30 days after written notice of such breach is
given by Seller to Watson.
8.4 TERMINATION BY WATSON. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing Date by Watson if (a) there has been a breach by Seller or Parent of any
representation or warranty contained in this Agreement which would have a
Company Material Adverse Effect; or (b) there has been a material breach of any
of the covenants or agreements set forth in this Agreement on the part of Seller
or Parent which would have a Company Material Adverse Effect, and which breach
is not
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curable or, if curable, is not cured within 30 days after written notice of such
breach is given by Watson to Seller.
8.5 REMEDIES. No party shall be limited to the termination right granted
in Sections 8.3 and 8.4 by reason of the nonfulfillment of any condition to such
party's closing obligations but may, in the alternative, elect to do one of the
following: proceed to close despite the nonfulfillment of any closing condition,
it being understood that consummation of the transaction contemplated herein
shall not be deemed a waiver of a party's wilful breach of any representation,
warranty or covenant or of any party's rights and remedies with respect thereto;
decline to close, terminate this Agreement as provided in Sections 8.3 and 8.4,
and thereafter seek damages to the extent permitted in Section 8.6; or seek
specific performance of the obligations of the other party. Each party hereby
agrees that in the event of any breach by such party of this Agreement, the
remedies available to the other party at law would be inadequate and that such
party's obligations under this Agreement may be specifically enforced.
8.6 RIGHT TO DAMAGES. If this Agreement is terminated pursuant to Sections
8.3 or 8.4, neither party hereto shall have any claim against the other except
if the circumstances giving rise to such termination were caused by either (a)
the other party's material breach of Article IV; or (b) a party's
representations and warranties contained in Articles II or III are incorrect
when made such that the incorrect representation and warranty would have a
Material Adverse Effect with respect to such party, in which event termination
shall not be deemed or construed as limiting or denying any legal or equitable
right or remedy of said party, and said party shall be entitled to recover,
without limitation, its costs and expenses which are incurred in pursuing its
rights and remedies (including reasonable attorneys' fees).
8.7 EXTENSION; WAIVER. At any time prior to the Closing Date, any party
hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(b) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto; and (c)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
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ARTICLE IX
GENERAL PROVISIONS
9.1 NOTICES. All notices required or permitted to be given hereunder shall
be in writing and may be delivered by hand, by facsimile, by nationally
recognized private overnight courier, or by United States mail. Notices
delivered by mail shall be deemed given three (3) business days after being
deposited in the United States mail, postage prepaid, registered or certified
mail. Notices delivered by hand or by facsimile, or by nationally recognized
private overnight courier shall be deemed given on the day following receipt;
provided, however, that a notice delivered by facsimile shall only be effective
if such notice is also delivered by hand, or deposited in the United States
mail, postage prepaid, registered or certified mail, on or before two (2)
business days after its delivery by facsimile. All notices shall be addressed as
follows:
If to Watson: If to Parent or Seller:
Watson Pharmaceuticals, Inc. Hoechst Marion Roussel, Inc.
311 Bonnie Circle 10236 Marion Park Drive
Corona, California 91720 P.O. Box 9627
Fax: (909) 270-1429 Kansas City, MO 64134-0627
Attn: Dr. Allen Chao, Fax: (816) 966-3805
Chairman & CEO Attn: North American General Counsel
With copies to: With copies to:
D'Ancona & Pflaum Shook, Hardy & Bacon L.L.P.
30 North LaSalle, Suite 2900 1200 Main Street, Suite 3100
Chicago, Illinois 60602 One Kansas City Place
Fax: (312) 580-0923 Kansas City, MO 64105
Attn: Michel J. Feldman Fax: (816) 421-5547
Attn: Randall B. Sunberg
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
9.2 ASSIGNMENT, BINDING EFFECT. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, which consent shall not be unreasonably
withheld. Subject to the preceding sentence, this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
permitted successors and assigns. Notwithstanding anything contained in this
Agreement to the contrary, nothing in
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this Agreement, expressed or implied, is intended to confer on any person other
than the parties hereto or their respective heirs, successors, executors,
administrators and assigns any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
9.3 ENTIRE AGREEMENT. This Agreement, the Exhibits, the Disclosure
Statement, the Watson Disclosure Statement, the Confidentiality Agreement, the
Ancillary Documents, the Watson Ancillary Agreements and any other documents
delivered by the parties in connection herewith constitutes the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.4 AMENDMENT. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
9.5 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to its rules of
conflict of laws.
9.6 COUNTERPARTS. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
9.7 HEADINGS. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.8 INTERPRETATION. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.9 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.10 INCORPORATION OF EXHIBITS. The Disclosure Statement, the Watson
Disclosure Statement and all Exhibits attached hereto and referred to herein are
hereby incorporated herein and made a part hereof for all purposes as if fully
set forth herein.
9.11 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such
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invalidity or unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable in order to achieve the intent of the parties to the extent
possible.
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
WATSON PHARMACEUTICALS, INC.
By:____________________________
Title:_________________________
HOECHST MARION ROUSSEL, INC.
By:____________________________
Title:_________________________
MARISUB, INC.
By:____________________________
Title:_________________________
58
EXHIBIT 10.27(A)
AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS AMENDMENT (the "AMENDMENT") is made as of November 26, 1997,
among HOECHST MARION ROUSSEL, INC., a Delaware corporation ("PARENT"), MARISUB,
INC., a Delaware corporation and the wholly-owned subsidiary of Parent
("SELLER"), and WATSON PHARMACEUTICALS, INC., a Nevada corporation ("WATSON").
WHEREAS, Parent, Seller and Watson entered into a Stock Purchase
Agreement (the "AGREEMENT") dated as of August 25, 1997, and desire to amend the
Agreement as provided herein.
NOW, THEREFORE, in consideration of the mutual agreements and
covenants contained herein and other good, valuable and sufficient
consideration, the parties hereto agree as follows:
1. Section 8.2 of the Agreement is amended to delete the date
"November 30, 1997" and to replace such date with "December 15, 1997".
2. The parties ratify the Agreement, as amended hereby, and confirm
that the Agreement, as amended hereby, remains in full force and effect.
3. This Amendment may be executed in counterparts, each of which
shall be deemed an original, and all of which, when taken together, shall be
deemed to be one instrument.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Amendment as of the date first written above.
WATSON PHARMACEUTICALS, INC.
BY:_________________________
TITLE:______________________
HOECHST MARION ROUSSEL, INC.
BY:_________________________
TITLE:______________________
MARISUB, INC.
BY:_________________________
TITLE:______________________
"CONFIDENTIAL MATERIAL FILED SEPARATELY WITH THE COMMISSION"
EXHIBIT 10.27(B)
SECOND AMENDMENT
TO
STOCK PURCHASE AGREEMENT
This Second Amendment (the "AMENDMENT") dated as of February ___, 1998 to
the Stock Purchase Agreement (the "PURCHASE Agreement") dated as of August 25,
1997, as amended on November 26, 1997, by and among Hoechst Marion Roussel,
Inc., a Delaware corporation ("PARENT"), Marisub, Inc., a Delaware corporation
and the wholly-owned subsidiary of Parent ("SELLER"), and Watson
Pharmaceuticals, Inc., a Nevada corporation ("WATSON"), is entered into by and
among Watson, Parent and Seller.
RECITALS
A. Watson, Parent and Seller have heretofore entered into the Purchase
Agreement, which provides, among other things, for the acquisition by Watson of
all the outstanding capital stock of The Rugby Group, Inc. (the "COMPANY"). All
capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed to them in the Purchase Agreement.
B. Watson, Parent and Seller wish to enter into this Amendment to amend
certain provisions and exhibits of the Purchase Agreement.
AGREEMENTS
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. STATUS OF PURCHASE AGREEMENT. Except as specifically set forth herein,
the Purchase Agreement and each of the exhibits thereto shall remain in full
force and effect and shall not be waived, modified, superseded or otherwise
affected by this Amendment. This Amendment is not to be construed as a release,
waiver or modification of any of the terms, conditions, representations,
warranties, covenants, rights or remedies set forth in the Purchase Agreement,
except as specifically set forth herein.
2. AMENDMENTS TO THE PURCHASE AGREEMENT.
2.1 RECITAL A OF THE PURCHASE AGREEMENT. Recital A of the Purchase
Agreement is hereby deleted in its entirety and replaced with the following:
"A. Seller owns all of the outstanding shares of capital stock ("SHARES")
of The Rugby Group, Inc., a New York corporation (the "COMPANY"), which Shares
consist of 220 shares of common stock."
2.2 SECTION 3.2(A) OF THE PURCHASE AGREEMENT. Section 3.2(a) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
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"*SEE PAGE ONE OF EXHIBIT"
"(a) The total authorized capital stock of the Company consists of (i) 400
shares of common stock, par value $50 per share, 220 shares of which are issued
and outstanding as of the date of this Agreement; (ii) 20,000 shares of first
preferred stock, par value $1 per share, no shares of which are issued and
outstanding as of the date of this Agreement; and (iii) 2,400 shares of second
preferred stock, par value $1,000 per share, no shares of which are issued and
outstanding as of the date of this Agreement. There are no shares of capital
stock of the Company of any other class authorized, issued or outstanding."
2.3 SECTION 5.1(E) OF THE PURCHASE AGREEMENT. Section 5.1(e) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(e) The Company and Parent shall have entered into the side letter
relating to * in the form attached hereto as EXHIBIT A."
2.4 SECTION 5.1(F) OF THE PURCHASE AGREEMENT. Section 5.1(f) of the
Purchase Agreement is hereby amended such that the form of Contract
Manufacturing Agreement attached to the Agreement as EXHIBIT B shall be revised
as set forth in ANNEX A attached hereto.
2.5 SECTION 5.1(G) OF THE PURCHASE AGREEMENT. Section 5.1(g) of the
Purchase Agreement is hereby amended such that the form of Agreement with
Respect to Tax Matters attached to the Agreement as EXHIBIT C shall be revised
as set forth in ANNEX B attached hereto.
2.6 SECTION 5.1(H) OF THE PURCHASE AGREEMENT. Section 5.1(h) of the
Purchase Agreement is hereby amended such that the form of Supply and License
Agreement attached to the Agreement as EXHIBIT D shall be revised as set forth
in ANNEX C attached hereto.
2.7 SECTION 5.1(I) OF THE PURCHASE AGREEMENT. Section 5.1(i) of the
Purchase Agreement is hereby amended such that the form of Lease attached to the
Agreement as EXHIBIT E shall be revised as set forth in ANNEX D attached hereto.
2.8 SECTION 5.1(J) OF THE PURCHASE AGREEMENT. Section 5.1(j) of the
Purchase Agreement is hereby amended such that the form of Information Services
Agreement attached to the Agreement as EXHIBIT F shall be revised as set forth
in ANNEX E attached hereto.
2.9 SECTION 5.1(K) OF THE PURCHASE AGREEMENT. Section 5.1(k) of the
Purchase Agreement is hereby amended such that the form of Seconding Agreement
attached to the Agreement as EXHIBIT G shall be revised as set forth in ANNEX F
attached hereto.
2.10 SECTION 5.1(L) OF THE PURCHASE AGREEMENT. A new Section 5.1(l) is
hereby added to the Purchase Agreement to read as follows:
"(l) Watson and HMRI shall have entered into the letter agreement relating
to *, attached to this Amendment as ANNEX G."
2.11 SECTION 5.3(I) OF THE PURCHASE AGREEMENT. Section 5.3(i) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
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"*SEE PAGE ONE OF EXHIBIT"
"(i) Intentionally omitted."
2.12 SECTION 5.3(J) OF THE PURCHASE AGREEMENT. Section 5.3(j) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(j) Watson shall have received a letter from Parent stating that the
intercompany payable owed by the Company and/or its Subsidiaries to Parent
and/or its affiliates has been converted from a liability to a contribution of
capital by Parent to Seller and by Seller to the Company as of the Closing
Date;"
2.13 SECTION 5.3(L) OF THE PURCHASE AGREEMENT. Section 5.3(l) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(l) Intentionally omitted."
2.14 SECTION 6.2(B) OF THE PURCHASE AGREEMENT. Section 6.2 of the Purchase
Agreement is hereby amended by deleting the word "During" and replacing such
word with the phrase "From and after the Closing, during".
2.15 SECTION 6.3 OF THE PURCHASE AGREEMENT. Section 6.3 of the Purchase
Agreement is hereby amended by deleting the word "*" and replacing such word
with the phrase "*".
2.16 SECTION 6.6(A) OF THE PURCHASE AGREEMENT. Section 6.6(a) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(a) Except for acquisitions which qualify for the treatment under Section
6.6(b) herein: if, at any time prior to January 1, 2000, (i) Watson or any of
its Subsidiaries (A)(I) acquires any pharmaceutical distribution business or any
portion thereof in one or a series of related transactions; or (II) acquires any
entity which is in the pharmaceutical distribution business in one or a series
of related transactions and such distribution business is acquired by Watson or
any of its Subsidiaries in connection with such acquisition, and, in each of (I)
or (II) above, the aggregate net sales of the distribution business acquired
exceeds $* during the twelve month period immediately prior to such acquisition,
excluding the net sales of any products acquired which are or will be Watson
Products; or (ii) Watson sells to an unaffiliated third party all or
substantially all of the Distribution Business in one or a series of related
transactions (each of (i) and (ii) being collectively referred to herein as a
"SALE EVENT"), then, except as provided below in this Section 6.6(a), for
purposes of calculating the Upside Net Profit, the Distribution Net Profits
derived by Watson and its Subsidiaries from the Distribution Business during
calendar year 1999 shall be deemed to be equal to the Distribution Net Profits
derived by Watson and its Subsidiaries from the Distribution Business during the
twelve month period ending on the last day of the calendar month immediately
preceding such Sale Event. Notwithstanding the foregoing, if the net profits
(calculated in the same manner as the calculation of Distribution Net Profits)
of any distribution business acquired by Watson or any of its Subsidiaries
pursuant to Section 6.6(a)(i) is not less than zero for the twelve month period
ending on the date of the most recent financial statements referenced in the
principal acquisition agreement relating to Watson's or any of its Subsidiaries'
acquisition of such distribution business, then, in lieu of the foregoing
calculation of Distribution Net Profits, Watson may, in its sole discretion,
elect to calculate Distribution Net Profits derived by Watson and its
Subsidiaries from the Distribution Business during calendar year 1999 in
accordance with the provisions of Section 6.5 hereof. Watson must
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"*SEE PAGE ONE OF EXHIBIT"
exercise such election by delivering written notice to Parent on or prior to the
closing date of the acquisition of such distribution business. If Watson or one
of its Subsidiaries acquires any entity described in Section 6.6(a)(i)(A) above,
with net sales (excluding sales attributable to Watson Products) equal to or
less than $* during the twelve month period immediately prior to such
acquisition, the net profits (calculated in the same manner as the calculation
of Distribution Net Profits) derived by Watson and its Subsidiaries from such
acquired business during calendar year 1999 shall be included in the calculation
of Distribution Net Profits."
2.17 ARTICLE VI OF THE PURCHASE AGREEMENT. Article VI of the Purchase
Agreement is hereby amended by adding the following to the end of such article:
"6.18 SEVERANCE BENEFITS.
(a) To the extent that the Company or any of its Subsidiaries incur any
severance obligations or liabilities which exceed * in connection with the
Company's and its Subsidiaries' anticipated plant closings at their facilities
located in *, whether before or after Closing, Parent shall reimburse the
Company for any such excess as soon as practicable after the amount of such
excess is determined.
(b) To the extent the Company or any of its Subsidiaries pays any
severance obligations or liabilities prior to the Closing to any employee in
connection with the Company's and its Subsidiaries' anticipated plant closings
at their facilities located in *, Watson agrees to reimburse the Company for the
amount of any such payments made to any such employee up to the amount of * with
respect to each such employee. Such payments shall be made by Watson to the
Company as soon as practicable after the amount of such severance obligation or
liability has been paid by the Company and invoiced to Watson.
(c) After the Closing, to the extent that any employee of the Company or
any of its Subsidiaries claims to have a right to severance benefits in excess
of * due to actions taken by the Company or its Subsidiaries at any time prior
to the Closing Date with respect to the closings of its facilities located in *,
Parent agrees to indemnify and hold harmless Watson, the Company and each of its
Subsidiaries for (a) all costs and expenses, including, without limitation,
reasonable attorneys fees, incurred by Watson, the Company or any of its
Subsidiaries in connection with the defense or investigation of any such claim;
and (b) all severance benefits paid to any such employee in excess of *.
Notwithstanding the foregoing, Watson agrees that Parent shall not have any
indemnification obligations under this Section 6.18(c) unless such severance
payments were made by Watson or its Subsidiaries pursuant to either (i) Parent's
prior written consent, which consent shall not be unreasonably withheld, or (ii)
a direction to make any such payment by a competent authority."
2.18 SECTION 7.5(D) OF THE PURCHASE AGREEMENT. Section 7.5(d) of the
Purchase Agreement is hereby amended by deleting the phrase "Section 7.3(c)
hereof" and inserting in its place the following: "(a) Section 7.3(c); or (b) a
violation by Parent of its obligations contained in Section 6.18 of this
Agreement,"
2.19 SECTION 8.2 OF THE PURCHASE AGREEMENT. Section 8.2 of the Purchase
Agreement is hereby amended by deleting the date "December 15, 1997" contained
in such section and replacing such date with "February 27, 1998".
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3. DISCLOSURE STATEMENT. The Disclosure Statement is hereby amended to add
the matters set forth on ANNEX H attached hereto.
4. REPRESENTATIONS AND WARRANTIES OF ENTITIES. Each of Watson, Parent and
Seller represents and warrants that its execution, delivery and performance of
this Amendment has been duly authorized by all necessary corporate action and
this Amendment is a legal, valid and binding obligation of such entity in
accordance with its terms.
5. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
6. GOVERNING LAW. This Amendment shall be a contract made under and
governed by the laws of the State of New York, without regard to conflict of
laws principles.
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IN WITNESS WHEREOF, the parties have executed this Amendment and caused
the same to be duly delivered on their behalf on the day and year first written
above.
WATSON PHARMACEUTICALS, INC.
By:_________________________
TITLE:______________________
HOECHST MARION ROUSSEL, INC.
By:_________________________
TITLE:______________________
MARISUB, INC.
By:_________________________
TITLE:______________________
6
"CONFIDENTIAL MATERIAL FILED SEPARATELY WITH THE COMMISSION"
EXHIBIT 10.28
SUPPLY AND LICENSE AGREEMENT
BY AND BETWEEN
HOECHST MARION ROUSSEL, INC.
AND
THE RUGBY GROUP, INC.
FEBRUARY 27, 1998
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
SUPPLY AND LICENSE AGREEMENT
AGREEMENT (this "Agreement") dated as of February 27, 1998, by
and between HOECHST MARION ROUSSEL, INC., a Delaware corporation ("HMRI"), and
THE RUGBY GROUP, INC., a New York corporation ("Rugby").
WHEREAS, HMRI is engaged in the manufacture of certain
pharmaceutical products pursuant to certain new drug applications owned by HMRI;
and
WHEREAS, Rugby desires to purchase and market generic versions of
such products, under its own name, or the name of an affiliate, and under the
private label name of certain of its customers in accordance with this
Agreement; and
WHEREAS, HMRI desires to supply and license such products to
Rugby, upon the terms and subject to the conditions provided herein.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants contained herein and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
The following terms shall have the meanings set forth below.
Unless the context indicates otherwise, the singular shall include the plural
and the plural shall include the singular.
I.1 "ACT" means the Federal Food, Drug and Cosmetic Act, as
amended.
I.2 "AFFILIATE" means any company, partnership or other entity
which directly or indirectly controls, is controlled by or is under common
control with a party to this Agreement. For purposes of this Agreement,
"control" with respect to an entity shall mean the legal power to direct or
cause the direction of the general management and policies of such entity.
I.3 "AGREEMENT" means this Supply and License Agreement.
I.4 "ANDA PRODUCT" means the products to be supplied by HMRI to
Rugby pursuant to the Contract Manufacturing Agreement.
I.5 "CONTRACT MANUFACTURING AGREEMENT" means that certain
Contract Manufacturing Agreement by and between HMRI and Rugby of even date
herewith.
I.6 "COST OF SALES" shall be determined using the accrual basis
of accounting in accordance with GAAP applied in a manner consistent with
Rugby's customary practices and includes (i) the Manufacturing Costs relating to
sucralfate; plus (ii) all royalties paid to third parties with respect to
sucralfate (other than to HMRI or its Affiliates pursuant to this Agreement).
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"*SEE PAGE ONE OF EXHIBIT"
I.7 "FDA" means the United States Food and Drug Administration or
any successor entity thereto.
I.8 "FORCE MAJEURE" has the meaning set forth in Section 11.3
herein.
I.9 "GMP" means Good Manufacturing Practices as promulgated under
the Act at 21 CFR (chapters 210, 211, 600 and 610), as the same may be amended
or re-enacted from time to time.
I.10 "HMRI KNOW-HOW" means Know-How relating to the Process or
Product, known to HMRI.
I.11 "INITIAL TERM" means the period commencing on the date
hereof and ending on December 31, *, unless terminated earlier in accordance
with Section 4.2 herein.
I.12 "KNOW-HOW" means technical and other information including
without limitation ideas, concepts, inventions, discoveries, data, formulae,
specifications, procedures for experiments and tests and other protocols,
results of experimentation and testing, media formulations, fermentation,
recovery and purification techniques and assay protocols.
I.13 "MANUFACTURING COSTS" means with respect to sucralfate
manufactured in finished dosage form (SKU) pursuant to this Agreement or
manufactured in whole or part by a third party or third parties on behalf of
Rugby or its Affiliates, all documented costs paid to HMRI or its Affiliates or
to a third party or third parties, as the case may be, in order to complete
sucralfate in finished dosage form (SKU) for Rugby or its Affiliates, including,
costs related to the purchase of labels. With respect to sucralfate manufactured
in finished dosage form (SKU) by Rugby or its Affiliates, Rugby's or any of its
Affiliates Direct Material Costs, Direct Labor Costs and Overhead attributable
to sucralfate. "Direct Material Costs" shall mean reasonable costs incurred in
purchasing raw materials (without deduction for waste), including sales and
excise taxes imposed thereon, and all costs of packaging components. "Direct
Labor Costs" shall mean the reasonable cost of temporary and full-time employees
engaged in manufacturing activities who are directly involved in product
manufacturing and packaging and in quality assurance/quality control. "Overhead"
allocated to a Product means indirect costs associated with the production,
testing, packaging, storage and handling of product, including a reasonable
allocation of facilities' costs allocable to product manufacturing and
packaging, including electricity, water, sewer, waste disposal, property taxes
and depreciation of building and machinery. The allocation and calculation of
Rugby's or its Affiliates' Manufacturing Costs shall be made in accordance with
standard cost and reasonable cost accounting methods in accordance with GAAP,
applied in a manner consistent with Rugby's customary practices. Notwithstanding
the foregoing, Manufacturing Costs shall not include costs relating to
distribution expenses.
I.14 "NDA" means the new drug applications related to the
Products, submitted to the FDA under Sections 505, 507 or 512 of the Act and
applicable regulations related thereto.
I.15 "NET PROFIT" means with respect to sucralfate Net Sales less
Cost of Sales, determined using the accrual basis of accounting in accordance
with GAAP applied in a manner consistent with Rugby's customary practices,
excluding the impact of unusual and nonrecurring items.
I.16 "NET SALES" shall be determined using the accrual basis of
accounting in accordance with GAAP applied in a manner consistent with Rugby's
customary practices and means the actual gross invoice price for sales of * by
Rugby or its Affiliates, less: (i) any and all promotional
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"*SEE PAGE ONE OF EXHIBIT"
allowance, rebates, quantity and cash discounts, and other usual and customary
discounts to customers accrued in the ordinary course of business, in accordance
with historical practice and GAAP and current industry trends; (ii) amounts
repaid or credited by reason of rejections or returns of goods; (iii)
retroactive price reductions; and (iv) 50% of the reasonable allowance for
doubtful accounts accrued in the ordinary course of business, in accordance with
historical practice and GAAP.
I.17 "PROCESS" means the process or processes for the production
of Product.
I.18 "PRODUCTS" means generic versions of * in package sizes
(SKU) and finished dosage forms as set forth on Exhibit A attached hereto,
manufactured and distributed by HMRI on a brand name basis pursuant to its'
NDAs, and such other products as may be added pursuant to the terms of Section
3.3(a) herein.
I.19 "PROPRIETARY PRODUCTS" means the HMRI proprietary Know-How
relating to the Process or the Product with respect to the Products listed on
Exhibit B attached hereto (as the same may be amended from time to time by HMRI
with respect to new products added to the terms of this Agreement).
I.20 "SPECIFICATIONS" means the written specifications for
Product contained in the NDAs, as the same may be amended from time to time by
HMRI pursuant to the provisions of Section 7.2 herein.
I.21 "TAXES" has the meaning set forth in Section 3.16 herein.
I.22 "TERM" means the period including the Initial Term and
ending on the date of the termination of this Agreement in accordance with
Article IV herein.
I.23 "TERRITORY" means the United States and its possessions and
territories.
ARTICLE II
GRANT OF LICENSE
II.1 GRANT OF LICENSE. Except as provided in Section 3.3(a), HMRI
hereby grants to Rugby an exclusive royalty free right and license to promote,
distribute, market and sell the Products in the Territory in perpetuity;
PROVIDED, HOWEVER, notwithstanding the foregoing, Rugby acknowledges and agrees
the royalty free right and license to promote, distribute and sell generic
versions, in package sizes (SKU) and finished dosage forms, of * shall be
exclusive except as to one third party. Notwithstanding the foregoing, except as
otherwise specifically provided herein, HMRI has the exclusive right to
manufacture the Products. Except as provided in Section 3.3(a), during and after
the Term, HMRI and its Affiliates agree not to promote, distribute, market or
sell the Products in the Territory. Except upon abandonment of a Product by
Rugby in accordance with Section 3.3(a)(i), upon expiration of the Term or
removal of a Product from this Agreement, Rugby shall have the right to
manufacture the generic equivalent of a Product under its own abbreviated new
drug application or, in accordance with Section 3.3(c) hereof, under HMRI's NDA.
II.2 RIGHT TO SUBLICENSE. Rugby shall have the right to grant
sublicenses under the license granted by HMRI to Rugby pursuant to Section 2.1
to Affiliates of Rugby and, with the prior written consent of HMRI, to entities
which are not Affiliates of Rugby. Rugby will provide a copy of all such
sublicenses to HMRI.
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"*SEE PAGE ONE OF EXHIBIT"
II.3 RIGHT OF FIRST REFUSAL. In the event HMRI determines (in its
sole discretion) to launch * pursuant to HMRI's new drug application, HMRI will
provide Rugby the right of first refusal on terms proposed by HMRI in good faith
as terms which would be acceptable to an unaffiliated third party, upon which
HMRI would supply * (the "Terms"). Concurrently with the delivery of the Terms,
HMRI shall deliver to Rugby all reasonably sufficient information in its
possession relating to the sale of * reasonably requested by Rugby and required
for Rugby to determine whether to accept the Terms. Rugby shall keep the Terms
confidential and shall have ten (10) business days to accept such Terms, which
acceptance shall be in writing in accordance with the provisions of Section 11.1
herein. In the event Rugby does not accept the Terms within such time period,
HMRI may offer such Terms to any other party and may negotiate with another
party ready, willing and able to enter into an agreement; PROVIDED, HOWEVER,
HMRI may not enter into an agreement with any other party on terms and
conditions less favorable in the aggregate to HMRI than the Terms (such less
favorable in the aggregate terms and conditions being referred to as the "Other
Party Terms"), without first offering to enter into an agreement with Rugby on
the Other Party Terms. Upon receipt of such offer, Rugby shall keep the Other
Party Terms confidential and shall have five (5) business days to accept the
Other Party Terms, which acceptance shall be in writing in accordance with the
provisions of Section 11.1 herein. In the event Rugby does not accept such Other
Party Terms within such time period, HMRI may enter into an agreement with any
other party on terms and conditions at least as favorable in the aggregate to
HMRI as the Other Party Terms; PROVIDED, FURTHER, that in the event that HMRI
offers to enter into an agreement with any other party with respect to * on
terms and conditions less favorable in the aggregate to HMRI than the then
existing Other Party Terms, HMRI shall first offer such terms and conditions to
Rugby and Rugby shall keep such terms and conditions confidential and shall have
five (5) business days to accept such terms and conditions offered by HMRI,
which acceptance shall be in writing in accordance with the provisions of
Section 11.1 herein. The provisions of this Section 2.3 shall terminate upon
HMRI entering into an agreement with another party with respect to *, in
accordance with this Section 2.3. Notwithstanding the foregoing, if the other
party accepting the Terms or the Other Party Terms, as the case may be, is an
Affiliate of HMRI, which in lieu of launching *, transfers such distribution
rights to a third party and such transfer is on terms less favorable in the
aggregate to the Terms or the Other Party Terms, as the case may be, such new
terms shall be offered to Rugby. Upon receipt of such offer, Rugby shall keep
such terms confidential and shall have five (5) business days to accept such
terms, which acceptance shall be in writing in accordance with the provisions of
Section 11.1 herein.
II.4 ACTIVE INGREDIENT SUPPLY AGREEMENT. Upon the reasonable
written request of Rugby, HMRI agrees to enter into discussions with Rugby
regarding the terms and conditions upon which HMRI and Rugby could enter into an
active ingredient supply agreement; PROVIDED, HOWEVER, that Rugby acknowledges
and agrees that HMRI is under no obligation to enter into such active ingredient
supply agreement.
ARTICLE III
MANUFACTURE, PURCHASE AND
SALE OF PRODUCT
III.1 PURCHASE AND SALE. Pursuant to the terms and conditions of
this Agreement, HMRI agrees to manufacture for Rugby, during the Term, the
Products for sale by Rugby in the Territory. During the Term, Rugby agrees to
purchase all of its requirements for the Products for sale in the Territory from
HMRI. HMRI agrees to use commercially reasonable efforts to meet Rugby's demand
for the Products and if there is a shortage in capacity, production capacity
will be allocated proportionately among all parties
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(including HMRI and its Affiliates) based upon each party's required production
over the previous twelve months. HMRI may subcontract with third parties for the
manufacture or packaging of Products to fulfill its obligations hereunder.
III.2 SHELF LIFE. HMRI will ship Product to Rugby with a shelf
life at least equal to the requisite regulatory shelf life for such Product
minus * months; PROVIDED, HOWEVER, in the event * is added as a Product and
becomes subject to the terms of this Agreement, HMRI will ship * to Rugby with a
shelf life at least equal to the requisite regulatory shelf life for * minus *
months.
III.3 PRODUCT EXPANSION OR ABANDONMENT; SALE OF PRODUCT.
(a) PRODUCT EXPANSION OR ABANDONMENT. Exhibit A attached hereto
sets forth the initial list of Products subject to the terms of this Agreement,
and may only be amended from time to time as provided in this Section 3.3.
Additional generic versions of products in finished dosage forms and in package
sizes (SKU) pursuant to HMRI new drug applications may be added to the terms of
this Agreement only upon the written agreement of HMRI and Rugby; PROVIDED,
HOWEVER, that to the extent that HMRI does not currently have the FDA approvals
necessary to manufacture, market, distribute and sell any of the Products in
package sizes of 500s and 1,000s, upon the request of Rugby, HMRI agrees to
promptly take all actions reasonably necessary (provided that Rugby is
responsible for all costs and expenses related thereto) to obtain all required
consents and approvals from the FDA in order to manufacture, market and
distribute each of the Products in such package sizes as requested by Rugby and,
upon HMRI's receipt of the required FDA approvals necessary to manufacture,
market, distribute and sell such Products in such requested package sizes, such
Products in such package sizes shall be deemed to be a "Product" pursuant to the
terms of this Agreement. HMRI may abandon a Product at any time upon prior
written notification to Rugby due to statutory, regulatory or similar
legislative concerns. In the event the statutory, regulatory or similar
legislative concerns are alleviated with respect to a Product and HMRI chooses
to again manufacture such Product, such Product will be included again in this
Agreement and again become subject to this Agreement if Rugby consents in
writing to such inclusion; PROVIDED, HOWEVER, in the event HMRI chooses not to
manufacture such Product, HMRI agrees to transfer the manufacturing rights in
accordance with the provisions of Section 3.3(c) herein with respect to such
Product (except with respect to the Proprietary Products) to Rugby. In addition,
Product may be abandoned by either party hereto upon two (2) years written
notification by such party to the other, which written notification shall
specify the package size (SKU) and finished dosage form to be abandoned;
PROVIDED, HOWEVER, unless otherwise agreed to by the parties, Product may not be
abandoned until January 1, 2000; PROVIDED, FURTHER, that * in finished dosage
form may be abandoned only upon the written agreement of both parties. On or
after January 1, *, Product may be abandoned (i) by Rugby or HMRI upon two (2)
years prior written notice upon a determination of senior management of Rugby or
HMRI, as the case may be, to discontinue sales or the manufacturing of such
Product, as the case may be, or (ii) by Rugby upon one (1) year prior written
notice (which notice may be delivered at any time after January 1, *) upon
approval or acquisition of an abbreviated new drug application for such Product
by Rugby or its Affiliates. If a Product is subsequently abandoned pursuant to
the terms of this Agreement, it will no longer be considered a Product or be
subject to this Agreement; PROVIDED, HOWEVER, in the event that HMRI abandons a
Product pursuant to Section 3.3(a)(i) and determines to manufacture such Product
again, HMRI will provide Rugby the opportunity to distribute and sell such
Product, and if Rugby consents in writing to such inclusion, such Product will
be included again in this Agreement and again become subject to this Agreement.
Rugby acknowledges that the exclusive royalty right and license to promote,
distribute, market and sell a particular Product shall terminate upon an
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abandonment of such Product by Rugby. Rugby shall be deemed to have abandoned a
Product if its forecasted purchases of such Product is equal to zero for *.
Subject to the availability of active ingredients and
manufacturing capacity, in the event HMRI abandons a Product (except abandonment
due to statutory, regulatory or similar legislative concerns) or Rugby
terminates the Agreement pursuant to the provisions of Section 4.2(a)(i) or (ii)
herein, then (i) upon six (6) months' prior written notice in the case of
abandonment of a Product, or (ii) on or prior to the termination of this
Agreement by Rugby pursuant to the provisions of Section 4.2(a)(i) or (ii)
herein, Rugby may purchase up to * supply of such abandoned Product (or Products
in the case of termination of the Agreement), which supply is based upon the
amount of Product purchased by Rugby or its subsidiaries over the previous *
months. Any such purchase shall not increase the obligations of HMRI under
Sections 3.10(b) and (c) of this Agreement. The timing for delivery of such
Product shall be reasonably determined by HMRI and shall be based upon the
availability of active ingredient and available manufacturing capacity.
(b) SALE OF NDA. In the event HMRI determines to sell an NDA to a
third party, HMRI shall notify Rugby in writing of such sale (the "NDA Sale
Notification"), which notification shall specify the NDA to be sold and the
package sizes (SKU) and finished dosage forms of Product manufactured pursuant
to such NDA. As a condition to the sale of the NDA to such third party, HMRI
shall retain such rights sufficient to enable it to, or shall cause such third
party to, license such Product to Rugby on the terms and conditions set forth in
this Agreement. In addition, to the extent that HMRI transfers the manufacturing
responsibility of Product manufactured pursuant to such NDA, as a condition of
such sale, HMRI shall cause such third party to supply such Product, in package
size (SKU) and finished dosage form manufactured pursuant to such NDA, to Rugby
on the terms and conditions set forth in this Agreement; PROVIDED, HOWEVER,
prior to December 31, *, HMRI will guarantee the continued supply to Rugby of
Product(s) manufactured pursuant to such NDA through December 31, * in
accordance with the terms of this Agreement; PROVIDED, FURTHER, on or subsequent
to January 1, *, Rugby may in its discretion remove such Product(s) from this
Agreement by providing written notice to HMRI within thirty (30) days after the
receipt of an NDA Sale Notification, and thereafter such Product(s) shall no
longer be considered a Product or be subject to this Agreement. In any event,
upon the sale of an NDA by HMRI to a third party in which HMRI transfers the
manufacturing responsibility of Product manufactured pursuant to such NDA, the
package sizes (SKU) and finished dosage forms of Product manufactured pursuant
to such NDA shall no longer be considered a Product or be subject to this
Agreement.
(c) TRANSFER OF TECHNOLOGY. In the event (i) HMRI determines to
abandon a Product pursuant to Section 3.3(a) herein, (ii) HMRI chooses not to
manufacture a Product previously abandoned due to statutory, regulatory or
similar legislative concerns after the statutory, regulatory or similar
legislative concerns are alleviated pursuant to Section 3.3(a), (iii) HMRI
elects not to renew the Agreement in accordance with Section 4.1 herein, or (iv)
Rugby terminates this Agreement pursuant to the provisions of Section 4.2
herein, HMRI agrees to transfer the manufacturing rights (including the HMRI
Know-How relating thereto) to such Product(s) to Rugby as soon as reasonably
practicable after the date of such event; PROVIDED, HOWEVER, HMRI shall have no
obligation to transfer such manufacturing rights to the Proprietary Products. In
the event the manufacturing rights to a Product are transferred to Rugby, until
such time as a second manufacturing site is qualified in connection with such
Product, HMRI will provide assistance reasonably requested by Rugby for the
transition of such manufacturing rights and related HMRI Know-How, including
taking all reasonable steps to allow Rugby to qualify a second manufacturing
site for such Product at a site designated by Rugby pursuant to the NDA and
consent by HMRI to the manufacture by Rugby or its Affiliate of such Product at
such site, and Rugby will be responsible for all of HMRI's reasonable
out-of-pocket costs in connection with the transfer of such manufacturing rights
and related
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HMRI Know-How, which expenses will be reimbursed by Rugby within thirty (30)
days after the completion of such transfer.
III.4 LABELING AND PACKAGING. Rugby shall be responsible for all
costs of developing, packaging and labeling for the Product, and shall provide
HMRI all art work to be applied to each Product, which shall be consistent with
the FDA approved labeling for the Products. Rugby shall provide such information
pursuant to this Section 3.4 to HMRI a sufficient period of time in advance of
delivery requirements for the Products set forth in this Agreement.
III.5 FORECASTS.
(a) LONG-RANGE FORECASTS. Upon execution of this Agreement and by
* of each year thereafter, Rugby shall provide HMRI with a forecast of the
quantities of each Product, by package size (SKU) and finished dosage form, that
Rugby intends to order during the * year period commencing with the following
calendar year. The parties acknowledge that such forecasts shall represent
reasonable best faith estimates, not purchase commitments.
(b) SHORT-TERM FORECASTS. Upon execution of this Agreement, and
thereafter at least thirty (30) days prior to the first (1st) day of each
succeeding *, Rugby will furnish HMRI with a rolling forecast of the quantities
of each Product, by package size (SKU) and finished dosage form, that Rugby
intends to order during the * period commencing with that *, stipulating
periodic delivery requirements. The first * of such forecast shall constitute a
binding commitment of Rugby to purchase such quantities evidenced by purchase
orders to HMRI pursuant to Section 3.6 herein. In the event it is reasonably
necessary for HMRI to purchase active ingredient for Product beyond the binding
commitment of Rugby, HMRI may request written authorization from Rugby regarding
such purchase. In the event Rugby authorizes such purchase or authorizes a
portion of such purchase, Rugby will be responsible for the costs of the active
ingredient authorized to be purchased which is not used by HMRI in the
manufacture of Product or other products. In the event Rugby does not authorize
such purchase, HMRI shall not be required (but will use commercially reasonable
efforts) to meet Rugby's forecasts or orders with respect to the Products
manufactured with such active ingredient. Rugby will be required to purchase
that percentage of the quantity of each Product specified in the short-term
forecast for successive quarters as follows:
PERCENTAGE OF PRODUCT INDICATED
* PERIOD IN THE FORECAST THAT RUGBY IS
OF THE FORECAST IS REQUIRED TO PURCHASE
--------------- -------------------------------
First *%
Second *% over the next
three quarters
III.6 ORDERS. Rugby acknowledges that each Product is produced in
full lot quantities, as set forth on Exhibit A attached hereto. At least * days
prior to the delivery date specified in each respective order, Rugby shall place
its purchase order with HMRI for each Product in full lot quantities, by package
size (SKU) and finished dosage form. Unless otherwise specified in writing, all
orders placed by Rugby with HMRI hereunder shall be addressed as follows:
Hoechst Marion Roussel, Inc.
2110 East Galbraith Road
P.O. Box 156300
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Cincinnati, OH 45215-6800
Attn: Mr. Ron Schallick
Such orders shall specify in each three month period an aggregate
quantity of each Product, by package size (SKU) and finished dosage form, which
is at least as great as the amount of such Product required to be purchased by
Rugby pursuant to Section 3.5. HMRI may reject any portion of an order which
exceeds *% of the most current forecast underlying such order, or may reject any
order which (i) except as otherwise provided in Section 3.14 regarding a good
faith payment dispute by Rugby, is received at a time when Rugby is delinquent
in payment hereunder or (ii) cannot be filled due to circumstances arising under
Section 11.3. Rugby acknowledges it will make good faith forecasts of the
quantities of each Product, by package size and finished dosage form, that Rugby
intends to order and will only place orders for Product to the extent reasonably
sufficient to support its inventory safety stock. Subject to availability of
active ingredient, HMRI will use its reasonable commercial efforts to supply
orders which exceed *% of the most current forecast underlying such order. All
rejections by HMRI shall be in writing and delivered to Rugby within five (5)
business days of HMRI's receipt of the order. HMRI shall deliver against each
such order in accordance with Section 3.7 herein. Rugby shall be obligated to
purchase all such Product, by package size (SKU) and finished dosage form,
ordered and delivered by the delivery date specified in Rugby's purchase order,
provided that such Product meets the Specifications. In no event shall the use
of any form of order acknowledgment, purchase order, shipping document,
confirmation or waybill be deemed to modify or substitute for the terms and
conditions of this Agreement. All such documents shall be subject to, and shall
be deemed to incorporate, the terms and conditions of this Agreement. The
parties acknowledge that the binding commitments of Rugby to purchase Product in
accordance with the rolling forecast of Rugby in effect on the date hereof,
which forecast is attached hereto as Exhibit C, will be binding on the parties
after the execution of this Agreement and such Products shall be purchased
pursuant to the terms of this Agreement.
III.7 DELIVERY. Delivery terms shall be F.O.B. HMRI's
manufacturing facility. HMRI shall ship Product in accordance with Rugby's
purchase order form or as otherwise directed by Rugby in writing. Title to any
Product purchased by Rugby shall pass to Rugby upon the earlier of (i) a common
carrier accepting possession or control of such Product or (ii) the passage of
such Product from the loading dock of HMRI's facility to Rugby or its agent.
III.8 SHORTAGES/ REJECTED GOODS.
(a) SHORTAGES. Rugby shall notify HMRI in writing of any shortage
in quantity of any shipment of Product within the earlier of (i) ten (10)
business days after discovery of such shortage and (ii) the shelf life of such
Product, but only to the extent that such Product is in the possession of Rugby.
Such notification shall specify the package size (SKU) and finished dosage form
of such Product. Rugby shall notify HMRI in writing of any shortage in quantity
of any shipment of Product that is not within its possession within the earlier
of (i) ten (10) business days after discovery and (ii) the shelf life of such
Product, and shall provide documentation reasonably satisfactory to HMRI
demonstrating such shortage existed while such Product was in the possession of
Rugby. In the event of such shortage (and the reasonable satisfaction in HMRI's
determination of documentation if Product is not in the possession of Rugby),
HMRI shall make up the shortage within seven (7) business days if replacement
Product stock is available, or, if no such replacement stock is available, as
soon as reasonably practicable after receiving such notice, at no additional
cost to Rugby.
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<PAGE>
(b) REJECTED GOODS. Rugby shall notify HMRI in writing of any
claim relating to Product that fails to meet the Specifications (other than for
reasons of storage, handling, or shipping by Rugby, its Affiliates, customers
and carriers) within the earlier of (i) ten (10) business days after discovery
that such Product so fails to meet the Specifications and (ii) the shelf life of
such Product, which notification shall specify the package size (SKU) and
finished dosage form of such Product. Subject to the provisions of Section
3.8(c) herein, HMRI shall replace such Product that fails to meet the
Specifications within ten (10) business days at no additional cost to Rugby. The
provisions of this Section 3.8(b) shall not apply to Product damaged in transit.
(c) DISPUTES. In the event of a conflict regarding whether
Product fails to meet the Specifications which HMRI and Rugby are unable to
resolve, a sample of such Product shall be submitted by Rugby to an independent
laboratory reasonably acceptable to both parties for testing and the test
results obtained by such laboratory shall be final and controlling. The fees and
expenses of such laboratory testing shall be borne entirely by the party against
whom such laboratory's findings are made. In the event the test results indicate
that the Product in question fails to meet the Specifications, HMRI shall
replace such Product at no additional cost to Rugby within ten (10) business
days after receipt of such results. In the event the test results indicate that
the Product in question does meet the Specifications, Rugby shall pay all
additional shipping and transportation costs incurred as a result of the
conflict.
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(d) SOLE REMEDY. The provisions of Sections 3.8(a) in the case of
shortage in quantity of any shipment of Product, and except as otherwise
provided in Section 9.2(c) herein, Sections 3.8(b) and (c), in the case of
Product that fails to meet the Specifications, shall be the sole remedy
available to Rugby with respect to any Shortage in quantity of any shipment of
Product, or Product that fails to meet the Specifications, as the case may be.
III.9 CAPACITY ALLOCATION. In the event HMRI, upon receiving a
forecast pursuant to Section 3.5 or a firm order pursuant to Section 3.6, is or
anticipates that it will be unable to meet such forecast or firm order, either
in whole or in part, then HMRI shall give written notice of such inability to
Rugby within ten (10) days of receipt of such forecast or firm order. HMRI and
Rugby shall meet within ten (10) days of such written notice to consider
alternatives for meeting Rugby's requirements for Product, including but not
limited to the sharing of the cost to expand HMRI's manufacturing capacity.
III.10 FAILURE TO SUPPLY
(a) At any time prior to the second anniversary of this
Agreement, as liquidated damages for HMRI's inability to supply a Product under
this Agreement or an ANDA Product under the Contract Manufacturing Agreement, if
Rugby makes a firm order for Product in accordance with Section 3.6 of this
Agreement or an ANDA Product in accordance with Section 2.7 of the Contract
Manufacturing Agreement (for purposes of this Section 3.10(a), such firm order
may be made without regard to the *% forecast limitation or the limitation of
Rugby to place orders only to the extent reasonably sufficient to support its
inventory safety stock) and HMRI is unable to supply any Product or ANDA Product
to Rugby for any reason whatsoever (including a Force Majeure), or if a Product
is abandoned by HMRI due to statutory, regulatory or legislative concerns, HMRI
shall pay Rugby the following amount for each day of such failure: *. During any
period that HMRI is making the payments to Rugby pursuant to this Section 3.10,
Rugby shall pay HMRI the prices set forth in * to this Agreement for the
purchase of Product and the prices set forth in * of the Contract Manufacturing
Agreement for the purchase of ANDA Product. All amounts owed by HMRI pursuant to
this Section 3.10(a) will be paid forty-five (45) days after the date of
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the onset of such inability to supply and each forty-five (45) days thereafter
during the period of such inability to supply. Any rectification of the
inability to supply a Product or an ANDA Product shall be effective as of the
first day of the next calendar quarter; the parties shall jointly agree on the
amount of such credits remaining for the purchase of Product pursuant to Section
3.11 herein or ANDA Product pursuant to Section 2.12 of the Contract
Manufacturing Agreement after the effective date of the rectification of the
inability to supply.
(b) At any time prior to the * anniversary of this Agreement, if
Rugby makes a firm order for Product in accordance with Section 3.6 and HMRI is
unable to deliver such Product to Rugby due to a Force Majeure (as defined in
Section 11.3 herein), or if a Product is abandoned by HMRI due to statutory,
regulatory, or legislative concerns due to a Force Majeure, for a period of up
to * from the date of such failure to supply, HMRI will reimburse Rugby for an
amount equal to Rugby's *. If such inability to meet a firm order is partial,
HMRI shall deliver against firm orders such quantities of such Product as are
available. Rugby acknowledges that it shall use its commercially reasonable good
faith efforts to purchase replacement Product at the lowest prices available.
The provisions of Sections 3.10(a) and (b) shall be Rugby's sole remedy for
HMRI's inability to deliver a Product to Rugby due to a Force Majeure in
accordance with this Section 3.10(b).
(c) During the Initial Term, if Rugby makes a firm order for
Product in accordance with Section 3.6 and HMRI is unable to deliver such
Product to Rugby in accordance with the terms of this Agreement due to any
reason other than a Force Majeure, or if a Product is abandoned by HMRI due to
statutory, regulatory, or legislative concerns due to any reason other than a
Force Majeure, for a period of up to * from the date of such failure to supply,
HMRI will reimburse Rugby for an amount equal to Rugby's *. If such inability to
meet a firm order is partial, HMRI shall deliver against firm orders such
quantities of such Product as are available. Rugby acknowledges that it shall
use its commercially reasonable good faith efforts to purchase replacement
Product at the lowest prices available. The provisions of Sections 3.10(a) and
(c) shall be Rugby's sole remedy for HMRI's inability to deliver a Product to
Rugby in accordance with this Section 3.10(c), except with respect to a willful
breach by HMRI that results in a material adverse effect to Rugby of the value
of this Agreement taken as a whole.
(d) All amounts owed to Rugby by HMRI pursuant to this Section
3.10 shall bear interest in the same manner as amounts owed by Rugby to HMRI
pursuant to Section 3.14. Rugby shall be entitled to set-off amounts owed
pursuant to this Section 3.10 for which a credit acknowledgment has been issued
by HMRI against purchases of Product.
III.11 PRODUCT PRICE. The pricing for the Products is determined
in accordance with HMRI's costs practices (on a capacity basis), as set forth in
the HMRI Product Costing Manual, according to generally accepted accounting
principles. The initial manufacturing costs for the Products, by package size
(SKU) and finished dosage form FOB at HMRI's manufacturing site is set forth in
* and shall be adjusted January 1 of each year during the Term at the rate of
3.5% annually for inflation (except active ingredient, which at all times shall
be at *. In the event either party is able to procure active ingredient at a
lesser price, the parties shall work together (to the extent permitted pursuant
to contractual obligations of the parties) to procure such lower priced active
ingredient. Except as otherwise provided in Section 3.10, the manufacturing
costs for the Products from the date hereof through the * anniversary of this
Agreement shall be as follows: * . As of the * anniversary of this Agreement and
at all times thereafter, the pricing for the Products shall be as set forth in *
of Exhibit A to this Agreement and in addition shall include a manufacturing
profit to HMRI of *% (except for *, which after the * anniversary of this
Agreement will be supplied at cost and will
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have the * as set forth in Section 3.12). If there is any dispute regarding the
provisions of this Section 3.11, such dispute shall be resolved in accordance
with the provisions of Article 10 herein.
III.12 PROFIT SPLIT RELATED TO * . Beginning January 1, *and
continuing in perpetuity, Rugby shall make payments to HMRI equal to *% of the
Net Profit of *, based upon the quarterly periods ended March 31, June 30,
September 30 and December 31. After January 1, *through the * anniversary of
this Agreement, the profit split for * shall be calculated as if purchased at
the cost set forth in * Exhibit A to this Agreement. Rugby shall make such
quarterly payments to HMRI in accordance with the provisions of Section 3.14 on
or before forty-five (45) days after the end of each such calendar quarter.
Payment to HMRI shall be accompanied by reasonable detail and documentation
regarding the Net Profit of * for such quarter. Profit split payments made to
HMRI shall reflect the net profit (as calculated in the same manner as the
calculation of Net Profit) received on the bundled sale of *, multiplied by the
following fraction, the numerator of which is equal to the number of units of *
multiplied by the standard invoice unit price thereof, and the denominator of
which is equal to the sum of the number of units of each product (including *)
or service included in such bundled sale multiplied by the respective standard
invoice unit price thereof.
III.13 ACCESS TO RECORDS.
(a) Each party shall maintain complete and accurate books and
records of account relating to the manufacturing costs of Product, and sale of
*, as the case may be. Each party shall have the right during the term of this
Agreement and for one year thereafter (and, in the case of HMRI, at any time
while profit split payments with respect to * are being made, and for one year
after the termination of such profit split payments) to examine the relevant
books and records of the other party relating to the manufacturing costs of
Products, and sale of *, as the case may be, during normal business hours and
upon reasonable advance written notice to verify the correctness of the
calculations of the cost of goods of the Products, or the profit split of *, as
the case may be. Each party shall cooperate with the other with respect to all
reasonable requests made with respect to such inspection.
(b) Each party shall have three (3) years after receipt of
payments pursuant to this Agreement or receipt of information relating to the
manufacturing costs of Products, as the case may be (the "Dispute Period") to
dispute the amount of any such payment pursuant to this Agreement or the
manufacturing costs of Products, as the case may be (a "Dispute"). If a party
does not give written notice of a Dispute within the Dispute Period to the other
(a "Dispute Notice"), the amount of such payment or the manufacturing costs, as
the case may be, shall be deemed to have been accepted and agreed to by the
other and shall be final and binding upon the parties hereto. If a party has a
Dispute, it shall promptly send the other party a Dispute Notice within the
Dispute Period, setting forth in reasonable detail the elements and amounts with
which it disagrees. Within thirty (30) days after delivery of such Dispute
Notice, the parties hereto shall attempt to resolve such Dispute and agree in
writing upon the final amount of the disputed item. No dispute shall be made
with respect to any payments made pursuant to Section 3.12 or the manufacturing
costs of the Products, as the case may be, that have previously been disputed by
a party in a review of the records of a party relating the calculation of
payments pursuant to Section 3.12 or the manufacturing costs of the Products, as
the case may be.
(c) If the parties are unable to resolve any Dispute within the
thirty (30) day period after receipt of a Dispute Notice, the New York office of
the certified public accounting firm of Arthur Andersen LLP (the "Arbitrating
Accountant") shall be engaged as arbitrator hereunder to settle such Dispute as
soon as practicable. In the event Arthur Andersen LLP is unwilling or unable to
serve as the Arbitrating
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Accountant, the parties hereto shall select by mutual agreement another
nationally recognized certified public accounting firm, who is not rendering
(and during the preceding two-year period has not rendered) services to either
HMRI, Rugby, or any of their respective Affiliates, to serve as the Arbitrating
Accountant. In connection with the resolution of any Dispute, the Arbitrating
Accountant shall have access to all documents, records, work papers, facilities
and personnel necessary to perform its function as arbitrator. The arbitration
before the Arbitrating Accountant shall be conducted in accordance with the
commercial arbitration rules of the American Arbitration Association. The
Arbitrating Accountant's award with respect to any Dispute shall be final and
binding upon the parties hereto, and judgment may be entered on the award. Each
party shall pay one-half of the fees and expenses of the Arbitrating Accountant
with respect to any Dispute.
III.14 PAYMENT. All payments required by this Agreement shall be
made in United States Dollars. All invoices are strictly net and payment must be
received within forty-five (45) days from the date of invoice. The date of each
invoice shall be the date of shipment of products. Payment shall be made without
deduction, deferment, set-off, lien or counterclaim of any nature, other than
for rejected or returned goods, or credits issued by HMRI pursuant to Section
3.10 herein, in each case for which a credit acknowledgment has been issued by
HMRI. Time for payment shall be of the essence. Unless Rugby notifies HMRI in
writing of a good faith dispute, with respect to payments not received within
such forty-five (45) days, or within forty-five (45) days after the end of each
calendar quarter with respect to payments pursuant to Section 3.12 herein,
interest shall accrue on any amount overdue, at the rate of prime plus 2%, such
interest to begin accruing on a daily basis from the date of invoice, and shall
accrue both before and after judgment; PROVIDED, HOWEVER, in the case of a good
faith dispute regarding payment resolved to be due and not paid within three (3)
business days after such resolution, interest shall accrue on any amount
overdue, at the rate of prime plus 2%, such interest to begin accruing on a
daily basis from the date such payment becomes overdue, and shall accrue both
before and after judgment; PROVIDED, FURTHER, in the case of a good faith
dispute regarding payment, Rugby may in its discretion determine to pay such
amounts disputed to be overdue and in the event amounts are finally determined
not to be due by Rugby, HMRI shall repay such excess amounts determined not be
due to Rugby, and interest shall accrue on any such amount, at the rate of prime
plus 2%, such interest to begin accruing on a daily basis from the date such
disputed payment was received by HMRI.
With respect to defaults of payment not cured within ten (10)
business days after receipt of written notice from HMRI to Rugby, HMRI shall, in
its sole discretion, and without prejudice to any other of its accrued rights,
be entitled to suspend the provision of the Products or to treat the Agreement
as repudiated by notice in writing to Rugby exercised at any time thereafter;
PROVIDED, HOWEVER, a good faith bona fide dispute by Rugby regarding a payment
pursuant to this Agreement shall not be considered a default of payment so long
as Rugby notifies HMRI in writing of such dispute within the later of five (5)
business days from the date of invoice or the date of payment. Rugby
acknowledges it will notify HMRI promptly upon a determination that a dispute
exists regarding a payment.
III.15 ADVERTISING/MARKETING/SALES COSTS AND PRODUCT PRICING.
Rugby shall be responsible for all advertising, marketing and sales costs
associated with Product distribution. Rugby will have complete authority for all
pricing decisions for the Product. Rugby shall not alter the Products and shall
not recommend or knowingly sell the Products for any uses except as described in
the FDA approved Product labeling.
III.16 TAXES. Rugby shall reimburse HMRI for all tariffs, duties
and excise, sales or use, value added or other taxes or levies (collectively,
"Taxes") that are paid by HMRI that are directly related
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to the manufacture and sale to Rugby of the Products and which are not otherwise
included in the product pricing set forth in Section 3.11 herein.
Notwithstanding the foregoing, Rugby shall have no reimbursement obligations
pursuant to this Section 3.16 to the extent that (i) such Taxes are based on
HMRI's net income or (ii) such Taxes are recoverable or offset by HMRI, in whole
or in part, as a credit, rebate, deduction or otherwise.
ARTICLE IV
TERM AND TERMINATION
IV.1 TERM. The Initial Term of this Agreement will commence upon
the execution of this Agreement and will continue until December 31, *, unless
terminated earlier in accordance with the provisions of Section 4.2 herein.
Thereafter, this Agreement will automatically continue until either party
provides not less than * prior written notification to the other that this
Agreement will terminate, which notification shall specify the date upon which
this Agreement shall terminate (which in any event shall not be prior to
December 31, *). If HMRI so notifies Rugby that this Agreement will terminate,
HMRI will, as soon as reasonably practicable during the two-year notice period,
take all reasonable actions to allow Rugby to manufacture the Products in
accordance with Section 3.3(c ) herein, except with respect to the Proprietary
Products.
IV.2 EARLY TERMINATION.
(a) Either Rugby or HMRI, as the case may be, may terminate this
Agreement forthwith by notice in writing to the other party upon the occurrence
of any of the following events:
(i) if the other party commits a material breach of this
Agreement, other than a payment default, which in the case of a
breach capable of remedy shall not have been remedied within
thirty (30) days of the receipt by the other party of a notice
identifying the breach and requiring its remedy or such longer
time as the party in breach may demonstrate to the other party is
necessary to remedy the breach using its reasonable efforts to do
so; or
(ii) if the other party ceases for any reason to carry on
business or convenes a meeting of its creditors or has a receiver
or manager appointed in respect of all or substantially all of
its assets or is the subject of an application for an
administration order or of any proposal for a voluntary
arrangement or enters into liquidation (whether compulsorily or
voluntarily) or undergoes any analogous act or proceedings under
foreign law; or
(iii) the enactment of any law, order or regulation by a
governmental unit that would render it impossible for the other
party to perform its obligations hereunder. In the event Rugby
terminates this Agreement pursuant to this Section 4.2, HMRI
will take all reasonable actions to allow Rugby to manufacture
the Products in accordance with Section 3.3(c ) herein, except
with respect to the Proprietary Products.
IV.3 CONSEQUENCES OF TERMINATION AND SURVIVAL. Termination of
this Agreement for whatever reason shall not affect the accrued rights of either
HMRI or Rugby arising under or out of this Agreement. The obligations under
Section 2.1 (Grant of License), Section 3.3(a) (second paragraph only), Section
3.3(c) (Technology Transfer), Section 2.3 (Right of First Refusal), Section
3.10(a), Section 3.10(b)
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or (c) (in the case of Section 3.10(b) or (c), termination of this Agreement by
Rugby pursuant to Section 4.2(a) herein), Section 3.12 (Profit Split Relating to
*), Section 3.13 (Access to Records), Article 6 (Product Recalls), Article 7
(Warranties), Article 8 (Nondisclosure and Confidentiality), Article 9
(Indemnification and Insurance), Article 10 (Dispute Resolution) or any other
provision which expressly or by implication is intended to survive expiration or
termination shall survive expiration or termination of this Agreement or of any
extensions thereof.
IV.4 ACCRUED OBLIGATIONS. In the event that this Agreement is
terminated by HMRI pursuant to the provisions of Section 4.2 herein, Rugby shall
pay to HMRI, (i) all amounts outstanding and remaining to be paid for Product
supplied prior to the termination, (ii) all binding amounts for Product
forecasted pursuant to Section 3.5 herein or ordered pursuant to Section 3.6
herein and (iii) an amount to compensate HMRI for active ingredient that HMRI is
contractually committed to purchase at the time of such termination pursuant to
authorization received from Rugby in accordance with Section 3.5(b) herein which
is not subsequently used by HMRI to manufacture any Product or any other
product.
ARTICLE V
CERTIFICATES AND ACCESS AND REGULATORY MATTERS
V.1 CERTIFICATES OF ANALYSIS. HMRI shall perform, or cause to be
performed, sample tests on each lot of Product manufactured pursuant to this
Agreement before delivery to Rugby. Each test report shall set forth the items
tested, Specifications and test results in a certificate of analysis, containing
the types of information which shall have been approved by mutual agreement of
the parties, for each lot delivered. HMRI shall send, or cause to be sent, such
certificates to Rugby prior to delivery of each lot unless otherwise agreed.
V.2 CERTIFICATES OF MANUFACTURING COMPLIANCE. HMRI shall provide,
or cause to be provided, for each lot of Product manufactured pursuant to this
Agreement, a certificate of manufacturing compliance, containing the types of
information which shall have been approved by mutual agreement of the parties,
which will certify that the Product was manufactured in accordance with the
Specifications and the GMP. HMRI shall advise Rugby promptly if an authorized
agent of the FDA or other governmental regulatory agency visits any of HMRI's
manufacturing facilities, or the facilities where the Products are being
manufactured, concerning the Products. HMRI shall furnish to Rugby all material
information supplied to, or supplied by, the FDA or other governmental
regulatory agency, including the Form 483 observations and responses, to the
extent such information relates to the Products (or the ability of HMRI to
supply such Product), within five (5) business days of HMRI's receipt of such
information or delivery of such information, as the case may be.
V.3 CHANGES. HMRI shall provide written notification to Rugby a
reasonable time in advance prior to changing the critical specified raw
materials, packaging materials, their source, analytical test procedures or
critical manufacturing conditions or manufacturing equipment used in the
manufacture of Product.
V.4 ACCESS TO FACILITIES.
(a) RUGBY ACCESS. Upon the reasonable prior written request of
Rugby, Rugby shall have the right to inspect those portions of the manufacturing
and testing facilities of HMRI where Products
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are being manufactured or tested, as the case may be, during regular business
hours, to ascertain compliance with GMPs. If the FDA or other applicable
governmental regulatory agency asserts any notice to the effect that HMRI has
failed to comply with any law or regulation in connection with the manufacture
of Products, or if HMRI delivers Product that does not meet the Specifications,
then Rugby shall have the right to inspect such portions of the manufacturing
facilities of HMRI that relate to the manufacture of Product upon reasonable
notice and during normal business hours. Notwithstanding the provisions of this
Section 5.4(a), Rugby shall have no obligation or be deemed to have an
obligation to inspect the manufacturing and testing facilities of HMRI.
(b) HMRI ACCESS. Upon the reasonable prior written request of
HMRI, HMRI shall have the right to inspect those portions of the warehouse and
distribution facilities of Rugby where Products are being stored and
distributed, during regular business hours, to observe Product storage and
distribution or other related activities. If the FDA or other applicable
governmental regulatory agency asserts any notice to the effect that Rugby has
failed to comply with any law or regulation in connection with the storage or
distribution of Products, then HMRI shall have the right to inspect such
portions of the warehouse and distribution facilities of Rugby that relate to
the storage or distribution of Product upon reasonable notice and during normal
business hours. Notwithstanding the provisions of this Section 5.4(b), HMRI
shall have no obligation or be deemed to have an obligation to inspect the
warehouse and distribution facilities of Rugby.
V.5 REGULATORY CORRESPONDENCE. Rugby and HMRI shall make
available (or cause to be made available) to each other within three (3) days of
receipt of regulatory correspondence regarding regulatory letters, withdrawal of
Product, and correspondence bearing on the safety and efficacy of the Product.
V.6 PRODUCT INQUIRIES AND COMPLAINTS. Rugby will promptly submit
to HMRI all Product safety and efficacy inquiries, Product quality complaints
and adverse drug event reports received by it, together with all available
evidence and other information relating thereto. Except as otherwise required by
law or governmental regulation, HMRI will be responsible for investigating and
responding to all such inquiries, complaints and adverse events regarding
Product. It shall be the responsibility of HMRI to comply with all federal,
state and local governmental reporting requirements regarding adverse drug
events and Product quality matters, except where such events or matters are
caused by acts or omissions of Rugby, in which case HMRI may, consistent with
applicable law and regulation, request Rugby's assistance in such compliance.
HMRI will forward a copy of all FDA submissions concerning Product adverse drug
events or any Product safety-related topic to Rugby within five (5) business
days of submission. In the event of a dispute in respect of the therapeutic
action or quality of a Product: (i) if the dispute involves only Rugby and a
subsequent purchaser then Rugby and HMRI shall consult prior to any compromise
or settlement of such dispute; and (ii) if the dispute involves Rugby, HMRI and
a subsequent purchaser then both parties must consent prior to any compromise or
settlement of such dispute.
V.7 RESPONSE TO COMPLAINTS AND/OR ADVERSE DRUG REACTIONS (OR
EVENTS). Pursuant to reported complaint and/or adverse drug reaction (or event),
if the nature of the reported complaint and/or adverse drug reaction (or event)
requires testing, HMRI will, at Rugby's reasonable request and expense, perform
analytical testing of corresponding retention samples and provide the results
thereto to Rugby as soon as reasonably practicable; PROVIDED, HOWEVER, that HMRI
shall be responsible for the reasonable costs of such testing and reporting to
the FDA or any other governmental regulatory agency if it is determined that
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HMRI is responsible for such reported complaint and/or adverse drug reaction (or
event). Such testing shall be performed using NDA approved testing procedures.
V.8 ADDITIONAL INFORMATION. Rugby shall provide to HMRI in a
timely manner, but in no event less than sixty (60) days prior to the due date
of HMRI's annual report to the FDA with respect to the Products, all information
(in written form) which HMRI requests regarding the Products in order to comply
with applicable federal and state drug laws. Such information shall include,
without limitation, quantities of each Product sold. Rugby shall be responsible
for assuring that all promotional material produced by it relating to Products
comply with federal, state and local law. Rugby shall provide to HMRI prior to
first use copies of all advertising, promotional material, labeling and other
literature used on, or in connection with, the Products. HMRI shall provide to
Rugby a copy of such FDA annual report.
ARTICLE VI
PRODUCT RECALLS
VI.1 PRODUCT RECALLS. In the event (i) any government authority
issues a request, directive or order that Product be recalled, (ii) a court of
competent jurisdiction orders such a recall, or (iii) HMRI shall reasonably
determine that Product should be recalled, the parties shall take all
appropriate corrective actions, and shall cooperate in the investigations
surrounding the recall. In the event that HMRI determines that Product should be
recalled, HMRI shall consult with Rugby prior to taking any corrective actions.
In the event that such recall results from any cause or event other than that
arising from the storage, distribution or handling of the recalled Product by
Rugby or its Affiliates or the negligence of Rugby or its Affiliates, HMRI shall
be responsible for all documented out-of-pocket expenses of such recall
consistent with directions received from the appropriate governmental authority.
In the event that such recall results from any cause or event arising from the
storage, distribution or handling of the recalled Product by Rugby or its
Affiliates or the negligence of Rugby or its Affiliates, Rugby shall be
responsible for all such documented out-of-pocket expenses. For purposes of this
Agreement, the expenses of recall shall include the expenses of notification and
destruction or return of the recalled product and all other costs incurred in
connection with such recall, but shall not include lost profits of either party.
VI.2 DISPUTES. If there is any dispute concerning which party's
acts or omissions gave rise to such recall of Product, such dispute shall be
referred for decision to an independent expert (acting as an expert and not as
an arbitrator) to be appointed by agreement between Rugby and HMRI or, in the
absence of agreement, by the President for the time being of the Pharmaceutical
Research and Manufacturers of America. The costs of such independent expert
shall be borne equally between Rugby and HMRI. The decision of such independent
expert shall be in writing and, except for manifest error on the face of the
decision, shall be binding on both Rugby and HMRI.
ARTICLE VII
WARRANTIES
VII.1 FDA APPROVAL. HMRI warrants that each Product is approved
by the FDA for the uses set forth in the Product labeling. All Products will
conform to, and the Products manufactured by HMRI will be manufactured in
conformity with the regulations of the FDA and any comparable state agency
applicable thereto.
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VII.2 CONFORMITY WITH SPECIFICATIONS. HMRI warrants that each
Product manufactured by HMRI and sold to Rugby pursuant to this Agreement will
meet the Specifications for such Product in effect at the time title to such
Product passes from HMRI to Rugby pursuant to Section 3.6 herein. HMRI reserves
the right to amend such Specifications from time to time at the sole discretion
of HMRI, provided that Rugby is provided with written notice within a
commercially reasonable period of time in advance in order to effect any
necessary marketing or other changes and, provided further that such changes do
not cause the product delivered to Rugby to cease to be the equivalent of the
applicable Product then sold by HMRI.
VII.3 COMPLIANCE WITH THE FEDERAL FOOD, DRUG AND COSMETIC ACT.
HMRI warrants that all Product delivered to Rugby pursuant to this Agreement
will, at the time of such delivery, not be adulterated within the meaning of the
Act and will not be an article which may not, under the provisions of such Act,
be introduced into interstate commerce.
VII.4 NO LIENS. HMRI warrants that all Product delivered to Rugby
pursuant to this Agreement will, at the time of such delivery, be free and clear
of all liens, encumbrances, security interests and other encumbrances.
VII.5 EXCLUSION OF OTHER WARRANTIES. EXCEPT WHERE OTHERWISE SET
FORTH IN THIS AGREEMENT, SECTIONS 7.1, 7.2, 7.3 AND 7.4 ARE IN LIEU OF ALL
CONDITIONS, WARRANTIES AND STATEMENTS IN RESPECT OF PRODUCT AND IN RESPECT OF
THE MANUFACTURING SERVICES PROVIDED HEREUNDER, WHETHER EXPRESSED OR IMPLIED BY
STATUTE, CUSTOM OF THE TRADE OR OTHERWISE (INCLUDING BUT WITHOUT LIMITATION ANY
SUCH CONDITION, WARRANTY OR STATEMENT RELATING TO THE DESCRIPTION OR QUALITY OF
PRODUCT, ITS MERCHANTABILITY OR ITS FITNESS FOR A PARTICULAR PURPOSE OR USE
UNDER ANY CONDITIONS) AND ANY SUCH CONDITION, WARRANTY OR STATEMENT IS HEREBY
EXCLUDED. EXCEPT AS PROVIDED IN ARTICLE 9 HEREIN, REPLACEMENT OF ANY
NONCONFORMING PRODUCT AND REASONABLE DOCUMENTED OUT OF POCKET EXPENSES SHALL BE
RUGBY'S SOLE REMEDY FOR BREACH OF ANY EXPRESS WARRANTY CONTAINED IN THIS ARTICLE
VII. In no event shall HMRI or Rugby be liable under or with respect to this
Agreement for any indirect, incidental, consequential, special or punitive
damages of any kind, including loss of profits, including but not limited to due
to breach of warranty, tort, breach or repudiation of any term or condition of
this Agreement.
ARTICLE VIII
NONDISCLOSURE, CONFIDENTIALITY AND TRADEMARKS
VIII.1 NONDISCLOSURE OBLIGATIONS.
(a) Except as otherwise specifically provided in this Agreement,
Rugby acknowledges that the HMRI Know-How with which it may be supplied pursuant
to this Agreement or otherwise is supplied in circumstances imparting an
obligation of confidence and agrees to keep such HMRI Know-How secret and
confidential and to respect HMRI's proprietary rights therein and to use the
same for the sole purpose of this Agreement and during the period of this
Agreement or at any time for any reason whatsoever not to disclose or cause or
permit to be disclosed such HMRI Know-How to any third party.
(b) Rugby shall procure that only its respective employees or
employees of its Affiliates or consultants and contractors shall have access to
HMRI Know-How on a need to know basis and shall be
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subject to the same obligations of confidence as the principals pursuant to
Section 8.1(a) above and shall enter into secrecy agreements in support of such
obligations. Insofar as this is not reasonably practicable, the principals shall
take all reasonable steps to ensure that any such employees, consultants and
contractors are made aware of such obligations.
(c) Both parties undertake and agree not to disclose or permit to
be disclosed at any time for any reason whatsoever to any third party or
otherwise make use of or permit to be made use of any trade secrets or
confidential information relating to the technology, business affairs or
finances of the other or of any Affiliates, suppliers, agents, distributors,
licensees, licensors or other customers of the other which comes into their
possession pursuant to this Agreement.
(d) The obligations of confidence referred to in this Section 8.1
shall not extend to any information which:
(i) is or becomes part of the public domain other than by
unauthorized acts of the party obligated not to disclose such
Information or its Affiliates or sublicensees, as applicable;
(ii) can be shown by written documents to have been
disclosed to the receiving party or its Affiliates or
sublicensees by a third party, provided such Information was not
obtained by such third party directly or indirectly from the
other party under this Agreement pursuant to a confidentiality
agreement;
(iii) prior to disclosure under this Agreement, was
already in the possession of the receiving party or its
Affiliates or sublicensees, provided such Information was not
obtained directly or indirectly from the other party under this
Agreement pursuant to a confidentiality agreement;
(iv) can be shown by written documents to have been
independently developed by the receiving party or its Affiliates
without breach of any of the provisions of this Agreement;
(v) is disclosed by the receiving party pursuant to oral
questions, interrogatories, requests for information or
documents, subpoena, or a civil investigative demand of a court
or governmental agency; provided that the receiving party
notifies the other party immediately upon receipt thereof (and
provided that the disclosing party furnishes only that portion of
the information which it is advised by counsel is legally
required and impose such obligations of secrecy as are possible
in that regard); or
(vi) is required to be disclosed by a party under any
statutory, regulatory or similar legislative requirement or any
rule of any stock exchange to which it or any Affiliate is
subject, subject to the obligation of secrecy as are possible in
that regard.
VIII.2 TERMS OF THIS AGREEMENT. Rugby and HMRI each agree not to
disclose any terms or conditions of this Agreement to any third party without
the prior consent of the other party, except as required by applicable law.
Notwithstanding the foregoing, prior to execution of this Agreement, Rugby and
HMRI shall agree upon the substance of information that can be used as a routine
reference in the usual
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course of business to describe the terms of this Agreement from time to time,
without the other party's consent; PROVIDED, HOWEVER, that if either party
determines that excessive use of such statement is made by the other party, then
the party determined to be using such statement excessively shall, upon notice
by the other party, cease making such statement.
VIII.3 INJUNCTIVE RELIEF. The parties hereto understand and agree
that remedies at law may be inadequate to protect against any breach of any of
the provisions of this Article 8 by either party or their employees, agents,
officers or directors or any other person acting in concert with it or on its
behalf. Accordingly, each party shall be entitled to the granting of injunctive
relief by a court of competent jurisdiction against any action that constitutes
any such breach of this Article 8.
VIII.4 TRADEMARKS.
(a) HMRI TRADEMARKS. Rugby acknowledges that HMRI and its
Affiliates are the exclusive owner of (i) the trademarks, service marks, slogan,
trade names, trade dress and the like (including the associated goodwill of
each) held by HMRI or its Affiliates and (ii) all copyrights held by HMRI or its
Affiliates (collectively, the "HMRI Intellectual Property Rights"). In addition,
Rugby acknowledges that HMRI is the exclusive owner of the NDAs and any
supplements thereto. Rugby acknowledges that it shall have no rights hereunder
to any such HMRI Intellectual Property Rights and agrees that it shall not
contest or dispute the validity of or title to any of such HMRI Intellectual
Property Rights. Rugby agrees it shall not take or cooperate in litigation or
threatened litigation which might or is intended to impair or attack the HMRI
Intellectual Property Rights. Rugby shall market the Products under its own
trade names and trademarks, which shall not be confusingly similar to the HMRI
Intellectual Property Rights.
(b) RUGBY TRADEMARKS. HMRI acknowledges that Rugby and its
Affiliates are the exclusive owner of (i) the trademarks, service marks, slogan,
trade names, trade dress and the like (including the associated goodwill of
each) held by Rugby or its Affiliates and (ii) all copyrights held by Rugby or
its Affiliates (collectively, the "Rugby Intellectual Property Rights"). HMRI
acknowledges that it shall have no rights hereunder to any such Rugby
Intellectual Property Rights and agrees that it shall not contest or dispute the
validity of or title to any of such Rugby Intellectual Property Rights. HMRI
agrees it shall not take or cooperate in litigation or threatened litigation
which might or is intended to impair or attack the Rugby Intellectual Property
Rights.
ARTICLE IX
LIMITATION OF LIABILITY, INDEMNIFICATION AND INSURANCE
IX.1 INDEMNIFICATION BY RUGBY. Except as otherwise specifically
provided herein, Rugby shall indemnify and maintain HMRI against all claims,
actions, costs, expenses (including court costs and legal fees on a full
indemnity basis) or other liabilities ("Liabilities") whatsoever in respect of:
(a) any negligence or willful misconduct of Rugby in relation to
the use, marketing, storage, distribution, handling or sale of Product;
(b) any labeling of any Product to the extent that such labeling
has been supplied by or at the direction of Rugby and applied in accordance with
instructions from Rugby; and
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(c) any representation or warranty made by Rugby to its customers
or users with respect to Product, other than representations or warranties
contained in Article VII herein.
IX.2 INDEMNIFICATION BY HMRI. Except as otherwise specifically
provided herein, HMRI shall indemnify and maintain Rugby against all Liabilities
whatsoever in respect of:
(a) any defective design product liability claim with respect to
a Product;
(b) any labeling of any Product to the extent such labeling is
supplied by or at the direction of HMRI;
(c) HMRI's failure to comply with the Specifications; and
(d) any negligence or willful misconduct by HMRI in the
manufacture, packaging, storage, handling or shipping of Product.
IX.3 INDEMNIFICATION PROCEDURES. A party (the "Indemnitee") that
intends to claim indemnification under this Article 9 shall:
(a) notify the other party (the "Indemnitor") of any Liability
with respect to which the Indemnitee intends to claim indemnification as soon as
practicable after the Indemnitee becomes aware of any such Liability;
(b) permit the Indemnitor to assume the defense thereof with
counsel mutually satisfactory to the parties; and
(c) cooperate with the Indemnitor, at the Indemnitor's expense,
in the defense thereof.
With respect to any matter for which the Indemnitor has an
obligation to indemnify the Indemnitee under this Agreement, the Indemnitee
shall have the right to participate and be represented (at the Indemnitor's
expense) by legal counsel of the Indemnitee's choice in all proceedings and
negotiations, if representation by counsel retained by Indemnitor would be
inappropriate due to actual or potential differing interests between the
Indemnitee and any other party represented by such counsel in such proceedings.
The indemnity agreement in this Article 9 shall not apply to amounts paid in
settlement of any Liability if such settlement is effected without the consent
of the Indemnitor, which consent shall not be unreasonably withheld. Failure of
the Indemnitee to deliver notice to the Indemnitor within a reasonable time
after becoming aware of a Liability shall relieve the Indemnitor of any
liability to the Indemnitee pursuant to this Article 9 in the event such delay
is prejudicial to the Indemnitor's ability to defend such action.
IX.4 DISTRIBUTION INSURANCE. Rugby shall obtain and maintain in
effect for the term of this Agreement, liability insurance or indemnity policies
with an insurer reasonably acceptable to HMRI, in an amount not less than *with
an indemnity to principals clause with respect to the distribution of each
Product, which policies shall name HMRI as an additional insured and shall be
blanket policies. Such policies shall insure against liability on the part of
Rugby and any of its Affiliates, as their interests may appear, due to injury,
disability or death of any person or persons, or injury to property, arising
from the
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distribution of Products. Upon the execution of this Agreement and thereafter on
January 1 each year during the Term, Rugby shall provide to HMRI a certificate
of insurance (i) summarizing the insurance coverage, (ii) identifying any
exclusions and (iii) indicating that the terms of Rugby's insurance policies are
in accordance with this Section 9.4. Rugby shall promptly notify HMRI of any
alterations to the terms of this policy or in the amounts for which insurance is
provided.
IX.5 MANUFACTURER'S INSURANCE. HMRI shall obtain and maintain in
effect for the term of this Agreement, liability insurance or indemnity policies
with an insurer reasonably satisfactory to Rugby, in an amount not being less
than *with an indemnity to principals clause with respect to the manufacture,
storage or handling of Product, which policies shall name Rugby as an additional
insured and shall be blanket policies. Such policies shall insure against
liability on the part of HMRI and any of its Affiliates, as their interests may
appear, due to injury, disability or death of any person or persons, or injury
to property arising from the negligence of HMRI in the manufacture of Product.
Upon the execution of this Agreement and thereafter on January 1 each year
during the Term, HMRI shall provide to Rugby a certificate of insurance (i)
summarizing the insurance coverage, (ii) identifying any exclusions and (iii)
indicating that the terms of HMRI's insurance policies are in accordance with
this Section 9.5. HMRI shall promptly notify Rugby of any alterations to the
terms of the policy or in the amounts for which insurance is provided.
IX.6 PRODUCT LIABILITY CLAIMS. As soon as it becomes aware, each
party will give the other prompt written notice of any defect or alleged defect
in a Product, any injury alleged to have occurred as a result of the use or
application of a Product, and any circumstances that may give rise to litigation
or recall of a Product or regulatory action that may affect the sale or
manufacture of a Product, specifying, to the extent the party has such
information, the time, place and circumstances thereof and the names and
addresses of the persons involved. Each party will also furnish promptly to the
other copies of all papers received in respect of any claim, action or suit
arising out of such alleged defect, injury or regulatory action.
ARTICLE X
DISPUTE RESOLUTION
X.1 MEDIATION COMMITTEE. The Chief Executive Officers or
Presidents of the parties shall constitute the mediation committee (the
"Mediation Committee"). In the event any dispute or controversy arises under,
out of, in connection with or in relation to this Agreement or any amendments or
proposed amendment thereto or any breach thereof the parties agree that, before
any party initiates arbitration proceedings pursuant to Section 10.6, it shall
give the other party notice and shall demand that the members of the Mediation
Committee attempt to resolve the matter amicably. If the Mediation Committee is
unable to resolve a matter within ten (10) days of submission of the matter to
it via telephone, telefax or other written or oral contact, the Mediation
Committee shall meet in person, not later than twenty (20) days following
submission of the matter to it, at a mutually convenient place to attempt in
good faith to resolve the dispute. If the Mediation Committee is unable to
resolve a dispute, unless a mutually acceptable extension is agreed upon by the
Mediation Committee, either side shall have the right, but not the obligation,
to initiate arbitration proceedings respecting the matter under review, in
accordance with Section 10.6 herein.
X.2 NON-ARBITRABLE ISSUES. The parties acknowledge that matters
relating to product recalls as set forth in Article 6 herein, Disputes as set
forth in Section 3.13, and the matters set forth in Section 8.3 shall not be
submitted to arbitration pursuant to Section 10.3 hereof but instead shall be
resolved in accordance with Section 6.2, 3.13 and 8.3 herein, respectively.
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X.3 SCOPE OF ARBITRATION. The parties agree that all disputes and
controversies except those set forth in Section 10.2 herein arising under this
Agreement shall be resolved by arbitration in accordance with the provisions of
this Article 10; PROVIDED, HOWEVER, that during the period of arbitration on any
dispute the parties shall continue to fulfill their obligations as set forth in
this Agreement.
X.4 ARBITRATION PANEL. The arbitration shall be held before a
panel of three (3) persons (the "Arbitration Panel").
X.4.1 SELECTION. Within fifteen (15) days of the appointment
of the two initial arbitrators, the two arbitrators so appointed shall appoint
the third arbitrator, who shall be an attorney and shall act as chair of the
Arbitration Panel.
X.4.2 QUALIFICATIONS. The two arbitrators selected by the
parties hereto shall have experience in the pharmaceutical and/or biotechnology
industry. None of the arbitrators shall have been employed or be retained by or
otherwise related to HMRI or Rugby.
X.4.3 FAILURE TO NAME. If a party fails to name its
arbitrator within thirty (30) days of the receipt of the Notice of Arbitration
(as defined herein), then the arbitrator already named shall immediately select
the second arbitrator. The two arbitrators so appointed shall appoint the third
arbitrator, who shall be an attorney and shall act as chair of the Arbitration
Panel.
X.4.4 RIGHT TO SELECT REPLACEMENT. In the event that an
arbitrator refuses or is otherwise unable to serve as such, the party or the
other arbitrator(s) as the case may be, who selected such arbitrator shall have
the right to select his/her replacement. Such replacement shall be selected
within fifteen (15) days of the refusal or inability by such arbitrator to
serve.
X.5 DESIGNATION OF RULES, SITUS, GOVERNING LAW.
X.5.1 DESIGNATION OF RULES. The parties agree that the
arbitrators shall apply the Federal Rules of Evidence as they are applied in
cases tried to a court sitting without a jury; unless the parties otherwise
agree in writing, the opinions of expert witnesses shall not be admissible. The
parties agree that discovery proceedings shall be limited to: (i) the dispute;
(ii) depositions of those persons having direct knowledge of the dispute; and
(iii) submission of all documents which relate to the dispute.
X.5.2 SITUS. The arbitration hearing shall be held in New
York, New York, unless otherwise mutually agreed to in writing.
X.6 PROCEDURE.
X.6.1 CONCILIATION PERIOD. No party shall send a Notice of
Arbitration in connection with a dispute under this Article 10 unless at least
thirty (30) days prior to the date of such Notice of Arbitration, such party
shall have furnished to the other parties written notice of its intent to send a
Notice of Arbitration in connection with a dispute. During such thirty (30) day
period the Mediation Committee shall attempt in good faith to settle the dispute
in accordance with the provisions of Section 10.1 herein.
X.6.2 NOTICE OF ARBITRATION. The party seeking to institute
arbitration (hereinafter, a "Claimant") shall do so by sending the other parties
(hereinafter, each a "Respondent") a written notice of
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arbitration (the "Notice of Arbitration"). The Notice of Arbitration shall set
forth in detail the nature of the dispute. The Notice of Arbitration shall also
designate the arbitrator appointed by the Claimant and set forth a full
Curriculum Vitae or resume showing that the arbitrator meets the qualifications
set forth in Section 10.4.2.
X.6.3 RESPONSE. Within thirty (30) days after receipt of the
Notice of Arbitration, the Respondent shall send the Claimant a written Response
including any counterclaims (the "Response"). The Response shall also designate
the arbitrator appointed by the Respondent and set forth a full Curriculum Vitae
or resume showing that the arbitrator meets the qualifications set forth in
Section 10.4.2. If the Response sets forth a counterclaim, the Claimant may,
within fifteen (15) days of the receipt of the Response, deliver to the
Respondent and the arbitrators a Rejoinder (the "Rejoinder") answering such
counterclaim.
X.6.4 DISCOVERY. Within sixty (60) days of the date of the
Response, each party shall submit to the other parties and to the arbitrators
one (1) copy of all documents in the possession, custody or control of the party
or its Affiliates, which are relevant to the dispute or controversy set forth in
the Notice of Arbitration, Response or Rejoinder. Within forty-five (45) days of
the date of the Response, each party shall submit to the other parties a list of
all witnesses intended to be called at the hearing. Each party shall use its
commercially reasonable good faith efforts to make available for deposition
within thirty (30) days after the delivery of the list of witnesses at each
party's respective location of its operations, all of its agents, employees, and
Affiliates who have direct knowledge of the dispute at such times and places
that shall not unreasonably disrupt the business of the other parties. The chair
of the Arbitration Panel shall determine all discovery disputes and may enforce
a decision by imposing appropriate sanctions on the non-complying party.
X.6.5 RECORD. A stenographic record of all proceedings shall
be made and oaths administered by a duly licensed and qualified court reporter.
The court reporter shall prepare five (5) copies of the stenographic record of
such proceeding and shall send one (1) copy to each of the arbitrators and to
each of the parties within seven (7) days of the relevant proceeding under this
Section.
X.6.6 ATTENDANCE AT HEARING. Each party may be represented by
an attorney at all hearings before the Arbitration Panel. The Arbitration Panel
shall have the power to require the exclusion of any witness, other than a party
or other essential person, during the testimony of any other witness. Unless the
law provides to the contrary, the arbitration may proceed in the absence of any
party or representative who, after due notice, fails to be present or fails to
obtain a postponement. An award shall not be made solely on the default of a
party; the Arbitration Panel shall require the party who is present to submit
such evidence as it may require for the making of an award.
X.6.7 POSTPONEMENT OF HEARING. The Arbitration Panel, for
good cause shown, may postpone any hearing under any of the following
conditions: (i) upon the request of a party, (ii) upon its own initiative, and
(iii) upon mutual agreement by the parties.
X.6.8 POST-HEARING FILINGS. Any post-hearing briefs shall be
made by the parties to the Arbitration Panel and the other party within fourteen
(14) business days following the hearing. Each party shall be afforded an
opportunity to examine any post-hearing filings and to provide a response to the
Arbitration Panel within seven (7) business days of the receipt of a
post-hearing filing.
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X.6.9 AWARD OPINION. The Arbitration Panel shall issue an
opinion with respect to any dispute. The arbitrators shall issue a final
decision within one (1) month from the final hearing on any dispute. The
concurrence of two (2) arbitrators shall be sufficient for the entry of a final
decision. Such opinion shall be written in the form of "Findings of Fact" and
"Conclusions of Law," and shall include the reasons for a decision. A final
decision shall be binding on both parties.
X.6.10 REHEARING. The parties agree that a rehearing shall
only be allowed in the event that the chair of the Arbitration Panel is unable
or unwilling to continue performance of the duties of an arbitrator.
X.6.11 CONFIDENTIALITY. All arbitration proceedings hereunder
shall be conducted on a confidential basis and shall be subject to the
provisions of Article 8 (Nondisclosure and Confidentiality) herein. The parties
and the arbitrators shall not disclose or otherwise make public any information
revealed during the proceedings or any final decision which may result from the
proceedings.
X.6.12 WAIVER. Any arbitration proceeding hereunder must be
instituted within two (2) years after the controversy or claim is discovered or
reasonably should have been discovered. Failure to send a Notice of Arbitration
within such two-year period shall constitute an absolute bar to the institution
of any proceedings respecting such controversy or claim, and a waiver thereof.
X.7 AUTHORITY OF ARBITRATORS.
X.7.1 AWARDS. Except as otherwise specifically provided
herein, the arbitrators shall have the power to award money damages and
equitable relief such as rescission, specific performance and injunctive relief.
X.7.2 MODIFICATION OF ARTICLE 10. The Arbitration Panel shall
not have the power to amend, change or alter any provision of this Article 10
without the express written consent of each party hereto.
X.8 AWARDS.
X.8.1 JUDGMENT. Judgment upon the award rendered by the
arbitrators shall be enforceable in any court of competent jurisdiction. Each
party agrees to submit to the personal jurisdiction of that court for purposes
of the enforcement of any such award.
X.8.2 FEES AND EXPENSES. All fees of the arbitrators and the
court stenographer shall be paid by the party who does not prevail in the
arbitration as determined by the arbitrators. In the event a settlement occurs
before the issuance of a final decision, the parties shall unless otherwise
agreed, each pay an equal portion of any fees of the arbitrators and the court
stenographer and the cost of any transcripts. All other arbitration-related
expenses shall be borne by the party incurring such expenses.
ARTICLE XI
GENERAL PROVISIONS
XI.1 NOTICES.
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(a) Except as otherwise specifically provided herein, any
notice or other documents to be given under this Agreement shall be in writing
and shall be deemed to have been duly given if sent by registered post,
nationally recognized overnight courier or facsimile transmission to a party or
delivered in person to a party at the address or facsimile number set out below
for such party or such other address as the party may from time to time
designate by written notice to the other:
If to Watson or Rugby: Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Attn:Dr. Allen Chao
Fax: 909/270-1429
Copy to: D'Ancona & Pflaum
30 North LaSalle, Suite 2900
Chicago, Illinois 60602
Attn:Michel J. Feldman, Esq.
Fax: 312/589-0923
If to HMRI: Hoechst Marion Roussel, Inc.
10236 Marion Park Drive
Kansas City, Missouri 64134-0627, USA
Attn:General Counsel
Fax: 816/966-3805
Copy to: Hoechst Marion Roussel, Inc.
2110 East Galbraith Road
P.O. Box 156300
Cincinnati, OH 45215-6800
Attn:Vice President of Site Operations - Cincinnati
Fax: 513/948-4547
Copy to: Shook, Hardy & Bacon L.L.P.
1200 Main Street, Suite 3100
Kansas City, Missouri 64105
Attn:Randall B. Sunberg, Esq.
Fax: 816/421-5547
(b) Any such notice or other document shall be deemed to have
been received by the addressee three business days following the date of
dispatch of the notice or other document by post or, where the notice or other
document is sent by overnight courier, by hand or is given by facsimile,
simultaneously with the transmission or delivery. To prove the giving of a
notice or other document it shall be sufficient to show that it was dispatched.
XI.2 ENTIRE AGREEMENT; AMENDMENT.
(a) This Agreement, together with the Exhibits attached
hereto, embodies and sets forth the entire agreement and understanding of the
parties with respect to the subject matter herein and there are no promises,
terms, conditions or obligations, oral or written, expressed or implied, other
than those
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contained in this Agreement. The terms of this Agreement shall supersede all
previous oral or written agreements which may exist or have existed between the
parties relating to the subject matter of this Agreement, including (i) that
certain Agreement dated as of March 11, 1991, by and between Rugby-Darby Group
Companies, Inc. and Blue Ridge Laboratories, Inc. relating to the manufacture of
sucralfate tablets and (ii) that certain Agreement dated as of November 21, 1991
by and between Rugby-Darby Group Companies, Inc. and Blue Ridge Laboratories,
Inc. relating to diltiazem tablets. Neither party shall be entitled to rely on
any agreement, understanding or arrangement which is not expressly set forth in
this Agreement. Any other terms and conditions (including without limitation any
terms and conditions contained in any purchase order or sales invoice issued
pursuant to this Agreement) are hereby expressly excluded.
(b) This Agreement shall not be amended, modified, varied or
supplemented except in writing signed by duly authorized representatives of the
parties.
XI.3 FORCE MAJEURE. If either party is prevented or delayed
in the performance of any of its obligations under this Agreement by Force
Majeure (as defined herein) and shall give written notice thereof to the other
party specifying the matters constituting Force Majeure together with such
evidence as such party reasonably can give and specifying the period for which
it is estimated that such prevention or delay will continue, the party shall be
excused from the performance or the punctual performance of such obligations as
the case may be from the date of such notice for so long as such cause of
prevention or delay shall continue. The expression "Force Majeure" shall be
deemed to include any cause substantially affecting the performance by either
party of this Agreement arising from or attributable to acts, events,
non-happenings, omissions or accidents beyond the reasonable control of the
party whose performance is so affected.
XI.4 ASSIGNMENT. Neither party shall be entitled to assign its
rights and obligations hereunder without the prior written consent of the other;
PROVIDED, HOWEVER, either party shall be entitled, without the prior written
consent of the other, to assign its rights and obligations hereunder to an
Affiliate, but such assignment to an Affiliate shall not relieve the assigning
party of its obligations under this Agreement. No permitted assignment hereunder
shall be deemed effective until the assignee shall have executed and delivered
an instrument in writing reasonably satisfactory in form and substance to the
other party pursuant to which the assignee assumes all of the obligations of the
assigning party hereunder. Any purported assignment of this Agreement in
violation of this Section 11.4 shall be void. This Agreement shall be binding
upon the successors and permitted assigns of the parties and the name of a party
appearing herein shall be deemed to include the names of its successors and
assigns.
XI.5 HEADINGS, INTERPRETATION. The headings used in this
Agreement are for convenience only and are not a part of this Agreement nor
affect the interpretation of any of its provisions.
XI.6 ATTACHMENTS. All Exhibits referenced herein are hereby made
a part of this Agreement.
XI.7 INDEPENDENT PARTIES. This Agreement shall not be deemed to
create any partnership, joint venture, or agency relationship between the
parties. Each party shall act hereunder as an independent contractor.
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XI.8 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of New York, excluding its conflict of
laws principles.
XI.9 NO WAIVER. Neither the failure nor delay on the part of
either party to require the strict performance of any term, covenant or
condition of this Agreement or to exercise any right or remedy available on a
breach thereof shall constitute a waiver of any such breach or of any such term
or condition. The consent to, or the waiver of, any breach, or the failure to
require on any single occasion the performance or timely performance of any
term, covenant, or condition of this Agreement shall not be construed as
authorizing any subsequent or additional breach and shall not prevent a
subsequent enforcement of such term, covenant, or condition.
XI.10 SEVERABILITY. In the event that any provision of this
Agreement or the application thereof to any party or circumstance shall be
finally determined by a court of proper jurisdiction to be invalid or
unenforceable to any extent, then (i) a suitable and equitable provision shall
be substituted therefore in order to carry out, so far as may be valid and
enforceable, the intent and purpose of such invalid and unenforceable provision
and (ii) the remainder of this Agreement and the application of such provision
to the parties or circumstances other than those to which it is held invalid or
unenforceable shall not be affected thereby.
XI.11 INTERPRETATION. The parties hereto acknowledge and agree
that (i) each party and its representatives has reviewed and negotiated the
terms and provisions of this Agreement and have contributed to its revision,
(ii) the rule of construction to the effect that any ambiguities are resolved
against the drafting party shall not be employed in the interpretation of this
Agreement and (iii) the terms and provisions of this Agreement shall be
construed fairly as to each party hereto and not in favor of or against either
party regardless of which party was generally responsible for the preparation of
this Agreement.
XI.12 COUNTERPARTS. This Agreement may be executed simultaneously
in two counterparts, each of which shall be deemed an original, but both of
which together shall constitute a single agreement.
XI.13 THIRD PARTY BENEFICIARIES. This Agreement is not intended
to confer upon any non-party rights or remedies hereunder.
XI.14 FURTHER ASSURANCES. Each party shall execute and deliver
such additional instruments and other documents and use all commercially
reasonable efforts to take or cause to be taken, all actions and to do, or cause
to be done, all things necessary under applicable law to consummate the
transactions contemplated hereby.
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IN WITNESS WHEREOF, the parties hereto have each caused this
Agreement to be duly executed as of the date first above written.
HOECHST MARION ROUSSEL, INC.
By:________________________
Name:
Title:
THE RUGBY GROUP, INC.
By:________________________
Name:
Title:
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"CONFIDENTIAL MATERIAL FILED SEPARATELY WITH THE COMMISSION"
EXHIBIT 10.29
CONTRACT MANUFACTURING AGREEMENT
BY AND BETWEEN
HOECHST MARION ROUSSEL, INC.
AND
THE RUGBY GROUP, INC.
February 27, 1998
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
CONTRACT MANUFACTURING AGREEMENT
AGREEMENT (this "Agreement") dated as of February 27, 1998, by and between
HOECHST MARION ROUSSEL, INC., a Delaware corporation ("HMRI"), and THE RUGBY
GROUP, INC., a New York corporation ("Rugby").
WHEREAS, HMRI is engaged in the manufacture of certain pharmaceutical
products at its manufacturing facilities; and
WHEREAS, Rugby owns certain abbreviated new drug applications for certain
generic pharmaceutical products and desires to have HMRI manufacture such
products in accordance with this Agreement; and
WHEREAS, HMRI desires to supply such products to Rugby, upon the terms and
subject to the conditions provided herein.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
The following terms shall have the meanings set forth below. Unless the
context indicates otherwise, the singular shall include the plural and the
plural shall include the singular.
I.1 "ANDA" means the abbreviated new drug applications related to the
Products, submitted to the FDA pursuant to provisions of the Act and applicable
regulations related thereto.
I.2 "Act" means the Federal Food, Drug and Cosmetic Act, as amended.
I.3 "Affiliate" means any company, partnership or other entity which
directly or indirectly controls, is controlled by or is under common control
with a party to this Agreement. For purposes of this Agreement, "control" with
respect to an entity shall mean the legal power to direct or cause the direction
of the general management and policies of such entity.
I.4 "Agreement" means this Contract Manufacturing Agreement.
I.5 "Cost of Sales" shall be determined using the accrual basis of
accounting in accordance with GAAP applied in a manner consistent with Rugby's
customary practices and includes: (i) the Manufacturing Costs relating to *;
plus (ii) all royalties paid to third parties with respect to * (other than to
HMRI or its Affiliates pursuant to this Agreement).
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
RUGBY CONTRACT MFG - REDACT.DOCRUGBY CONTRACT MFG - REDACT
I.6 "FDA" means the United States Food and Drug Administration or any
successor entity thereto.
I.7 "Force Majeure" has the meaning set forth in Section 10.3 herein.
I.8 "GMP" means Good Manufacturing Practices as promulgated under the
Act at 21 CFR (chapters 210, 211, 600 and 610), as the same may be amended or
re-enacted from time to time.
I.9 "HMRI Know-How" means Know-How relating to the Process or Product,
known to HMRI.
I.10 "Initial Term" means the period commencing on the date hereof and
ending on December 31, *, unless terminated earlier in accordance with Section
3.2 herein.
I.11 "Know-How" means technical and other information including
without limitation ideas, concepts, inventions, discoveries, data, formulae,
specifications, procedures for experiments and tests and other protocols,
results of experimentation and testing, media formulations, fermentation,
recovery and purification techniques and assay protocols.
I.12 "Manufacturing Costs" means with respect to * manufactured in
finished dosage form (SKU) pursuant to this Agreement or manufactured in whole
or part by a third party or third parties on behalf of Rugby or its Affiliates,
all documented costs paid to HMRI or its Affiliates or to a third party or third
parties in order to complete * in finished dosage form (SKU) for Rugby or its
Affiliates, including, costs related to the purchase of labels. With respect to
* manufactured in finished dosage form (SKU) by Rugby or its Affiliates,
Manufacturing Costs shall include Rugby's or any of its Affiliates Direct
Material Costs, Direct Labor Costs and Overhead attributable to *. "Direct
Material Costs" shall mean reasonable costs incurred in purchasing raw materials
(without deduction for waste), including sales and excise taxes imposed thereon,
and all costs of packaging components. "Direct Labor Costs" shall mean the
reasonable cost of temporary and full-time employees engaged in manufacturing
activities who are directly involved in product manufacturing and packaging and
in quality assurance/quality control. "Overhead" allocated to a Product means
indirect costs associated with the production, testing, packaging, storage and
handling of product, including a reasonable allocation of facilities' costs
allocable to product manufacturing and packaging, including electricity, water,
sewer, waste disposal, property taxes and depreciation of building and
machinery. The allocation and calculation of Rugby's or its Affiliates'
Manufacturing Costs shall be made in accordance with standard cost and
reasonable cost accounting methods in accordance with GAAP, applied in a manner
consistent with Rugby's customary practices. Notwithstanding the foregoing,
Manufacturing Costs shall not include costs relating to distribution expenses.
I.13 "NDA Product" means the products supplied by HMRI to Rugby
pursuant to the Supply and License Agreement.
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
I.14 "Net Profit" means with respect to * Net Sales less Cost of
Sales, determined using the accrual basis of accounting in accordance with GAAP
applied in a manner consistent with Rugby's customary practices, excluding the
impact of unusual and nonrecurring items.
I.15 "Net Sales" shall be determined using the accrual basis of
accounting in accordance with GAAP applied in a consistent manner with Rugby's
customary practices and means the actual gross invoice price for sales of * by
Rugby or its Affiliates, less: (i) any and all promotional allowances, rebates,
quantity and cash discounts, and other usual and customary discounts to
customers accrued in the ordinary course of business, in accordance with
historical practice and GAAP and current industry trends; (ii) amounts repaid or
credited by reason of rejections or returns of goods; (iii) retroactive price
reductions; and (iv) 50% of the reasonable allowance for doubtful accounts
accrued in the ordinary course of business, in accordance with historical
practice and GAAP.
I.16 "Process" means the process or processes for the production of
Product.
I.17 "Products" means generic versions, in package size (SKU) and the
finished dosage forms as set forth on Exhibit A attached hereto, and such other
products as may be added pursuant to the terms of Section 2.4(a) herein;
provided, however, that generic versions, in the finished dosage forms set forth
on Exhibit B will be added as Products upon written notification by Rugby to
HMRI that ANDA approval has been attained with respect to such Product;
provided, further, that Rugby may remove a Product listed on Exhibit B upon
written notification to HMRI prior to production of site qualification batches
if pilot or active biostudies with respect to such Product have not been
initiated prior to the date hereof or if an ANDA with respect to such Product
has not been submitted to the FDA prior to January 1, *.
I.18 "Rugby Know-How" means know-how relating to the Process or
Product, known to Rugby and supplied to HMRI pursuant to the provisions of
Section 2.2 herein.
I.19 "Specifications" means the written specifications for Product
contained in the ANDAs. Rugby may amend the Specifications only with the prior
written consent of HMRI, which consent shall not be unreasonably withheld.
I.20 "Supply and License Agreement" means that certain Supply and
License Agreement between HMRI and Rugby of even date herewith.
I.21 "Taxes" has the meaning set forth in Section 2.16 herein.
I.22 "Term" means the period including the Initial Term and ending on
the date of the termination of this Agreement in accordance with Article IV
herein.
I.23 "Territory" means the United States and its possessions and
territories.
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
ARTICLE II
MANUFACTURE, PURCHASE AND
SALE OF PRODUCT
II.1 Purchase and Sale. Pursuant to the terms and conditions of this
Agreement, HMRI agrees to manufacture for Rugby, during the Term, the Products
for sale by Rugby in the Territory. During the Term, Rugby agrees to purchase
all of its requirements for the Products for sale in the Territory from HMRI.
HMRI agrees to use commercially reasonable efforts to meet Rugby's demand for
the Products and if there is a shortage in manufacturing capacity, production
capacity will be allocated proportionately among all parties (including HMRI and
its Affiliates) based upon each party's required production over the previous
twelve months. HMRI may manufacture Products at approved locations pursuant to
the ANDAs and may subcontract with third parties for the manufacture or
packaging of Products to fulfill its obligations hereunder at such approved
locations.
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
On or subsequent to the date of this Agreement, if Rugby can produce the
required number of quotes, as specified below, to supply a generic equivalent of
any Product at a price that is * or less than the price paid by Rugby for such
Product pursuant to Section 2.12 (the "Reduced Price"), Rugby will promptly
notify HMRI in writing, which notification will contain such bona fide quote or
quotes, as the case may be, and will specify the package sizes (SKU) and
finished dosage forms of Product (the "Reduction Notice"); provided, however, if
Rugby or any of its Affiliates provides a quote, to be a bona fide quote, such
quote must set forth the Manufacturing Costs for the Product on a fully burdened
basis and must be in accordance with GAAP applied in a manner consistent with
Rugby's customary practices. Two Reduced Price quotes are required prior to
January 1, *, with the average of such two quotes to be referred to herein as
the "Reduced Price"; provided, however, if Rugby or any of its Affiliates has
obtained its own ANDA for a Product, only Rugby's or its Affiliate's own Reduced
Price quote for such Product, consistent with the proviso in the preceding
sentence, is required. On or after January 1, *, only one Reduced Price quote,
whether provided by Rugby or a third party, is required. Within ten (10)
business days of HMRI's receipt of the Reduction Notice, HMRI shall notify Rugby
in writing that either (i) the price charged by HMRI to Rugby shall be reduced
to the Reduced Price, or (ii) HMRI is not willing to reduce the price of such
Product. In the event HMRI notifies Rugby that HMRI will not reduce the price of
such Product to the Reduction Price, then Rugby may, in its sole discretion,
remove such Product from this Agreement by delivering a written notice to HMRI.
In the event that a Product is removed from this Agreement pursuant to the
provisions of this Section 2.1, then upon fulfillment of its binding obligation
to purchase such Product in accordance with Section 2.6(b) herein, such Product
shall be removed from this Agreement and shall no longer be considered a Product
or be subject to this Agreement; provided, however, that any Product removed
from this Agreement will remain on the List of Upside Products in Exhibit H to
the Stock Purchase Agreement, dated as of August 25, 1997, as amended, by and
among HMRI, Marisub, Inc. and Watson Pharmaceuticals, Inc. (the "Stock Purchase
Agreement"), for purposes of Article VI of the Stock Purchase Agreement. Rugby
acknowledges and agrees that in the event the annual aggregate volume of tablets
and capsules (which volume shall be based upon finished package size (SKU)) of
Product subject to this Agreement is reduced to a level which is equal to or
less than *% of the annual aggregate volume of tablets and capsules of Product
ordered by Rugby from HMRI during the twelve (12) month period prior to the date
hereof, HMRI may in its sole discretion terminate this Agreement by providing
written notification of such intent to Rugby.
II.2 Rugby Know-How. Rugby hereby grants HMRI the non-exclusive right
to use the Rugby Know-How for the purpose of this Agreement. HMRI agrees not to
use or exploit the Rugby Know-How for any other purpose other than as set forth
in this Agreement.
II.3 Shelf Life. HMRI will ship Product to Rugby with a shelf life at
least equal to the requisite regulatory shelf life for such Product minus *
months.
II.4 Product Expansion or Abandonment/ Site Qualification.
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
(a) Product Expansion or Abandonment. Exhibit A attached hereto
sets forth the initial list of Products subject to the terms of this Agreement,
and may only be amended from time to time as provided in this Section 2.4.
Except as provided herein, additional generic versions of Products in finished
dosage forms and in package sizes (SKU) pursuant to Rugby ANDAs may be added to
the terms of this Agreement only upon the written agreement of HMRI and Rugby;
provided, however, that subject to the provisions of Section 1.17, (i) the
generic versions of each Product in finished dosage forms listed on Exhibit B
attached hereto will be added to the terms of this Agreement upon written
notification by Rugby to HMRI that ANDA approval has been attained; and (ii) to
the extent that HMRI does not currently have the FDA approvals necessary to
manufacture, market, distribute and sell any of the Products in package sizes of
500s and 1,000s, upon the request of Rugby, HMRI agrees to promptly take all
actions reasonably necessary (provided that all costs and expenses related
thereto are divided * between HMRI and Rugby through December 31, *, and are at
Rugby's sole cost and expense thereafter) to obtain all required consents and
approvals from the FDA in order to manufacture, market and distribute each of
the Products in such package sizes as requested by Rugby and, upon HMRI's
receipt of the required FDA approvals necessary to manufacture, market,
distribute and sell such Products in such requested package sizes, such Products
in such package sizes shall be deemed to be a "Product" pursuant to the terms of
this Agreement. Rugby may abandon Product at any time upon prior written
notification to HMRI due to statutory, regulatory or similar legislative
concerns. In the event the statutory, regulatory or similar legislative concerns
are alleviated with respect to a Product and Rugby chooses to again sell such
Product, Rugby will provide HMRI the opportunity to manufacture such Product and
in the event HMRI consents in writing to manufacture such Product, such Product
will be included again in this Agreement and again become subject to this
Agreement. In addition, Product may be abandoned by Rugby upon * written
notification by Rugby to HMRI (upon a determination of senior management of
Rugby to discontinue sales of such Product), which written notification shall
specify the package size (SKU) and finished dosage form to be abandoned;
provided, however, unless otherwise agreed to by the parties, Product may not be
abandoned until January 1, *; provided, further, that *, in finished dosage form
may be abandoned only upon the written agreement of both parties. If a Product
is subsequently abandoned pursuant to the terms of this Agreement, it will no
longer be considered a Product or be subject to this Agreement; provided,
however, in the event that Rugby determines to sell such Product again, Rugby
will provide HMRI the opportunity to manufacture such Product and in the event
HMRI consents in writing to manufacture such Product, such Product will again be
included and become subject to the terms of this Agreement. Rugby shall be
deemed to have abandoned a Product if its forecasted purchases of such Product
is equal to zero for *.
Subject to the availability of active ingredients and manufacturing
capacity, in the event Rugby terminates the Agreement pursuant to the provisions
of Section 3.2(a)(i) and (ii) herein, then on or prior to the termination of
this Agreement, Rugby may purchase up to * supply of such Products, which supply
is based upon the amount of Product purchased by Rugby or its Subsidiaries over
the previous *. Any such purchase shall not increase the obligations of HMRI
pursuant to Sections 2.11(a) and (b) of this Agreement. The timing for delivery
of such Product shall be determined by HMRI and shall be based upon the
availability of active ingredient and available manufacturing capacity.
(b) Site Qualification. During the Term, HMRI agrees to provide
technical consultation reasonably requested by Rugby that HMRI is reasonably
able to provide for the qualification of a second manufacturing site for up to *
ANDAs during the time that such qualification is pending. Rugby will provide
HMRI reasonable notification of its intent to qualify a second manufacturing
site for a Product for which technical consultation is requested pursuant to
this Section 2.4(b). Rugby will be responsible for all of HMRI's reasonable
out-of-pocket costs in connection with such technical consultation, which
expenses will be reimbursed by Rugby within thirty (30) days after completion of
such qualification.
II.5 Labeling and Packaging. Rugby shall be responsible for all costs
of developing, packaging and labeling for the Product, and shall provide HMRI
all art work and pharmacological information, usage instructions and warnings to
be applied to each Product, which shall be consistent with the FDA approved
labeling for the Products. Rugby shall provide such information pursuant to this
Section 2.5 to HMRI a sufficient period of time in advance of delivery
requirements for the Products set forth in this Agreement.
II.6 Forecasts.
(a) Long-Range Forecasts. Upon execution of this Agreement and by
* of each year thereafter, Rugby shall provide HMRI with a forecast of the
quantities of each Product, by package size (SKU) and finished dosage form, that
Rugby intends to order during the * year period commencing with the following
calendar year. The parties acknowledge that such forecasts shall represent
reasonable best faith estimates, not purchase commitments.
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"*SEE PAGE ONE OF EXHIBIT"
(b) Short-Term Forecasts. Upon execution of this Agreement, and
thereafter at least thirty (30) days prior to the first (1st) day of each
succeeding *, Rugby will furnish HMRI with a rolling forecast of the quantities
of each Product, by package size (SKU) and finished dosage form, that Rugby
intends to order during the * period commencing with that *, stipulating
periodic delivery requirements. The first * of such forecast shall constitute a
binding commitment of Rugby to purchase such quantities evidenced by purchase
orders to HMRI pursuant to Section 2.6 herein. In the event it is reasonably
necessary for HMRI to purchase active ingredient for Product beyond the binding
commitment of Rugby, HMRI may request written authorization from Rugby regarding
such purchase. In the event Rugby authorizes such purchase, or authorizes a
portion of such purchase, Rugby will be responsible for the costs of the active
ingredient authorized to be purchased which is not used by HMRI in the
manufacture of Product or other products. In the event Rugby does not authorize
such purchase, HMRI shall not be required (but shall use commercially reasonable
efforts) to meet Rugby's forecasts or orders with respect to the Products
manufactured with such active ingredient. Rugby will be required to purchase
that percentage of the quantity of each Product specified in the short-term
forecast for successive * as follows:
PERCENTAGE OF PRODUCT INDICATED
* PERIOD IN THE FORECAST THAT RUGBY IS
OF THE FORECAST IS REQUIRED TO PURCHASE
First *%
Second *% over the next *
II.7 Orders. Rugby acknowledges that each Product is produced in full
lot quantities, as set forth on Exhibit A attached hereto. At least * days prior
to the delivery date specified in each respective order, Rugby shall place its
purchase order with HMRI for each Product in full lot quantities, by package
size (SKU) and finished dosage form. Unless otherwise specified in writing, all
orders placed by Rugby with HMRI hereunder shall be addressed as follows:
Hoechst Marion Roussel, Inc.
2110 East Galbraith Road
P.O. Box 156300
Cincinnati, OH 45215-6800
Attn: Mr. Ron Schallick
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"*SEE PAGE ONE OF EXHIBIT"
Such orders shall specify in each three month period an aggregate quantity
of each Product, by package size (SKU) and finished dosage form, which is at
least as great as the amount of such Product required to be purchased by Rugby
pursuant to Section 2.5. HMRI may reject any portion of an order which exceeds
*% of the most current forecast underlying such order, or may reject any order
which (i) except as otherwise provided in Section 2.15 regarding a good faith
payment dispute by Rugby, is received at a time when Rugby is delinquent in
payment hereunder or (ii) cannot be filled due to circumstances arising under
Section 10.3. Rugby acknowledges it will make good faith forecasts of the
quantities of each Product, by package size and finished dosage form, that Rugby
intends to order and will only place orders for Product to the extent reasonably
sufficient to support its inventory safety stock. Subject to availability of
active ingredient, HMRI will use its reasonable commercial efforts to supply
orders which exceed *% of the most current forecast underlying such order. All
rejections by HMRI shall be in writing and delivered to Rugby within five (5)
business days of HMRI's receipt of the order. HMRI shall deliver against each
such order in accordance with Section 2.7 herein. Rugby shall be obligated to
purchase all such Product, by package size (SKU) and finished dosage form,
ordered and delivered by the delivery date specified in Rugby's purchase order,
provided that such Product meets the Specifications. In no event shall the use
of any form of order acknowledgment, purchase order, shipping document,
confirmation or waybill be deemed to modify or substitute for the terms and
conditions of this Agreement. All such documents shall be subject to, and shall
be deemed to incorporate, the terms and conditions of this Agreement. The
parties acknowledge that the binding commitments of Rugby to purchase Product in
accordance with the rolling forecast of Rugby in effect on the date hereof,
which forecast is attached hereto as Exhibit C, will be binding on the parties
after the execution of this Agreement and such Product shall be purchased
pursuant to the terms of this Agreement.
II.8 Delivery. Delivery terms shall be F.O.B. HMRI's manufacturing
facility. HMRI shall ship Product in accordance with Rugby's purchase order form
or as otherwise directed by Rugby in writing. Title to any Product purchased by
Rugby shall pass to Rugby upon the earlier of (i) a common carrier accepting
possession or control of such Product or (ii) the passage of such Product from
the loading dock of HMRI's facility to Rugby or its agent.
II.9 Shortages/ Rejected Goods.
(a) Shortages. Rugby shall notify HMRI in writing of any shortage
in quantity of any shipment of Product within the earlier of (i) ten (10)
business days after discovery of such shortage and (ii) the shelf life of such
Product, but only to the extent that such Product is in the possession of Rugby.
Such notification shall specify the package size (SKU) and finished dosage form
of such Product. Rugby shall notify HMRI in writing of any shortage in quantity
of any shipment of Product that is not within its possession within the earlier
of (i) ten (10) business days after discovery and (ii) the shelf life of such
Product, and shall provide documentation reasonably satisfactory to HMRI
demonstrating such shortage existed while such Product was in the possession of
Rugby. In the event of such shortage (and the satisfaction in HMRI's reasonable
determination of documentation if Product is not in the possession of Rugby),
HMRI shall make up the shortage within seven (7) business days if replacement
Product stock is available, or, if no such replacement stock is available, as
soon as reasonably practicable after receiving such notice, at no additional
cost to Rugby.
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
(b) Rejected Goods. Rugby shall notify HMRI in writing of any
claim relating to Product that fails to meet the Specifications (other than for
reasons of storage, handling, or shipping by Rugby, its Affiliates, customers
and carriers) within the earlier of (i) ten (10) business days after discovery
that such Product so fails to meet the Specifications and (ii) the shelf life of
such Product, which notification shall specify the package size (SKU) and
finished dosage form of such Product. Subject to the provisions of Section
2.9(c) herein, HMRI shall replace such Product that fails to meet the
Specifications within ten (10) business days at no additional cost to Rugby. The
provisions of this Section 2.9(b) shall not apply to Product damaged in transit.
(c) Disputes. In the event of a conflict regarding whether
Product fails to meet the Specifications which HMRI and Rugby are unable to
resolve, a sample of such Product shall be submitted by Rugby to an independent
laboratory reasonably acceptable to both parties for testing and the test
results obtained by such laboratory shall be final and controlling. The fees and
expenses of such laboratory testing shall be borne entirely by the party against
whom such laboratory's findings are made. In the event the test results indicate
that the Product in question fails to meet the Specifications, HMRI shall
replace such Product at no additional cost to Rugby within ten (10) business
days after receipt of such results. In the event the test results indicate that
the Product in question does meet the Specifications, Rugby shall pay all
additional shipping and transportation costs incurred as a result of the
conflict.
(d) Sole Remedy. The provisions of Sections 2.9(a) in the case of
shortage in quantity of any shipment of Product, and except as otherwise
provided in Section 8.2(a) herein, Sections 2.9(b) and (c), in the case of
Product that fails to meet the Specifications, shall be the sole remedy
available to Rugby with respect to any Shortage in quantity of any shipment of
Product, or Product that fails to meet the Specifications, as the case may be.
II.10 Capacity Allocation. In the event HMRI, upon receiving a
forecast pursuant to Section 2.6 or a firm order pursuant to Section 2.7, is or
anticipates that it will be unable to meet such forecast or firm order, either
in whole or in part, then HMRI shall give written notice of such inability to
Rugby within ten (10) days of receipt of such forecast or firm order. HMRI and
Rugby shall meet within ten (10) days of such written notice to consider
alternatives for meeting Rugby's requirements for Product, including but not
limited to the sharing of the cost to expand HMRI's manufacturing capacity.
II.11 Failure to Supply
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"*SEE PAGE ONE OF EXHIBIT"
(a) At any time prior to the second anniversary of this
Agreement, if Rugby makes a firm order for Product in accordance with Section
2.7 and HMRI is unable to deliver such Product to Rugby due to a Force Majeure,
or if a Product is abandoned by HMRI due to statutory, regulatory, or
legislative concerns due to a Force Majeure, for a period of up to * from the
date of such failure to supply, HMRI will reimburse Rugby for an amount equal to
Rugby's *. If such inability to meet a firm order is partial, HMRI shall deliver
against firm orders such quantities of such Product as are available. Rugby
acknowledges that it shall use its commercially reasonable good faith efforts to
purchase replacement Product at the lowest prices available. The provisions of
this Section 2.11(a) shall be Rugby's sole remedy for HMRI's inability to
deliver a Product to Rugby due to a Force Majeure in accordance with this
Section 2.11(a).
(b) During the Initial Term, if Rugby makes a firm order for
Product in accordance with Section 2.7 and HMRI is unable to deliver such
Product to Rugby in accordance with the terms of this Agreement due to any
reason other than a Force Majeure, or if a Product is abandoned by HMRI due to
statutory, regulatory, or legislative concerns due to any reason other than a
Force Majeure, for a period of up to * from the date of such failure to supply,
HMRI will reimburse Rugby for an amount equal to Rugby's *. If such inability to
meet a firm order is partial, HMRI shall deliver against firm orders such
quantities of such Product as are available. Rugby acknowledges that it shall
use its commercially reasonable good faith efforts to purchase replacement
Product at the lowest prices available. The provisions of this Section 2.11(b)
shall be Rugby's sole remedy for HMRI's inability to deliver a Product to Rugby
in accordance with this Section 2.11(b)The provisions of this Section 2.11(b)
shall be Rugby's sole remedy for HMRI's inability to deliver a Product to Rugby
in accordance with this Section 2.11(b), except with respect to a willful breach
by HMRI that results in a material adverse effect to Rugby of the value of this
Agreement taken as a whole.
(c) All amounts owed to Rugby by HMRI pursuant to this Section
2.11 shall bear interest in the same manner as amounts owed by Rugby to HMRI
pursuant to Section 2.15. Rugby shall be entitled to set-off amounts owed
pursuant to this Section 2.11 for which a credit acknowledgment has been issued
by HMRI against purchases of Product.
<PAGE>
II.12 Product Pricing. The manufacturing costs for the Products shall
be the lower of (i) HMRI's costs practices (on a capacity basis), as set forth
in the HMRI Product Costing Manual, according to generally accepted accounting
principles, adjusted at the rate of 3.5% annually for inflation or (ii) the 1997
Chelsea standard costs, adjusted at the rate of 3.5% annually for inflation, in
each of (i) or (ii) except with respect to active ingredient, which at all times
shall be at * . In the event either party is able to procure active ingredient
at a lesser price, the parties shall work together in good faith (to the extent
permitted pursuant to contractual obligations of the parties) to procure such
lower priced active ingredient. The initial manufacturing costs for the
Products, by package size (SKU) and finished dosage form FOB at HMRI's
manufacturing site is set forth in * on Exhibit A attached hereto and will be
adjusted January 1 of each year during the Term at the rate of 3.5% annually for
inflation (except with respect to active ingredient, which at all times shall be
at *. Except as otherwise provided in Section 2.10, the manufacturing costs for
the Products from the date hereof through the second anniversary of this
Agreement shall be as follows: * anniversary of this Agreement and at all times
thereafter, the pricing for the Products shall be as set forth in * of Exhibit A
to this Agreement and in addition shall include a manufacturing profit to HMRI
of *% (except for *, which after the second anniversary of this Agreement will
be supplied at cost and will have the * as set forth in Section 2.13). If there
is any dispute regarding the provisions of this Section 2.12, such dispute shall
be resolved in accordance with the provisions of Article 10 herein.
II.13 Profit Split Related to *. Rugby shall make payments to HMRI
equal to (a) with respect to sales of * from the Closing Date through December
31, *, *% of the Net Profit of * (other than Distributed *, as defined in the
Stock Purchase Agreement, for which the * payment is provided in Section 6.4
thereof), based upon the quarterly periods ended March 31, June 30, September 30
and December 31, and (b) thereafter, *% of the Net Profit of * (other than
Distributed *, for which the * payment is provided in Section 6.4 Stock Purchase
Agreement), based upon the quarterly periods ended March 31, June 30, September
30 and December 31, in perpetuity. Prior to the second year anniversary of this
Agreement, the profit split for * shall be calculated as if purchased at the
cost set forth in * Exhibit A to this Agreement. Profit split payments made to
HMRI shall reflect the net profit (as calculated in the same manner as the
calculation of Net Profit) received on the bundled sale of *, multiplied by the
following fraction, the numerator of which is equal to the number of units of *
multiplied by the standard invoice unit price thereof, and the denominator of
which is equal to the sum of the number of units of each product (including *)
or service included in such bundled sale multiplied by the respective standard
invoice unit price thereof.
II.14 Access to Records.
(a) Each party shall maintain complete and accurate books and
records of account relating to the manufacturing costs of Product, and sale of
*, as the case may be. Each party shall have the right during the term of this
Agreement and for one year thereafter (and, in the case
<PAGE>
"*SEE PAGE ONE OF EXHIBIT"
of HMRI, at any time while profit split payments with respect to * are being
made, and for one year thereafter) to examine the relevant books and records of
the other party relating to the manufacturing costs of Products, and sale of *,
as the case may be, during normal business hours and upon reasonable advance
written notice to verify the correctness of the calculations of the
manufacturing costs of the Products, or the profit split of *, as the case may
be. Each party shall cooperate with the other with respect to all reasonable
requests made with respect to such inspection.
(b) Each party shall have three (3) years after receipt of
payments pursuant to this Agreement or receipt of information relating to the
manufacturing costs of Products, as the case may be (the "Dispute Period"), to
dispute the amount of any such payment pursuant to this Agreement or the
manufacturing costs of Products, as the case may be (a "Dispute"). If a party
does not give written notice of a Dispute within the Dispute Period to the other
(a "Dispute Notice"), the amount of such payment or the manufacturing costs, as
the case may be, shall be deemed to have been accepted and agreed to by the
other and shall be final and binding upon the parties hereto. If a party has a
Dispute, it shall promptly send the other party a Dispute Notice within the
Dispute Period, setting forth in reasonable detail the elements and amounts with
which it disagrees. Within thirty (30) days after delivery of such Dispute
Notice, the parties hereto shall attempt to resolve such Dispute and agree in
writing upon the final amount of the disputed item. No dispute shall be made
with respect to any payments made pursuant to Section 2.13 or the manufacturing
costs of the Products, as the case may be, that have previously been disputed by
a party in a review of the records of a party relating the calculation of
payments pursuant to Section 2.13 or the manufacturing costs of the Products, as
the case may be.
(c) If the parties are unable to resolve any Dispute within the
thirty (30) day period after receipt of a Dispute Notice, the New York office of
the certified public accounting firm of Arthur Andersen LLP (the "Arbitrating
Accountant") shall be engaged as arbitrator hereunder to settle such Dispute as
soon as practicable. In the event Arthur Andersen LLP is unwilling or unable to
serve as the Arbitrating Accountant, the parties hereto shall select by mutual
agreement another nationally recognized certified public accounting firm, who is
not rendering (and during the preceding two-year period has not rendered)
services to either HMRI, Rugby, or any of their respective Affiliates, to serve
as the Arbitrating Accountant. In connection with the resolution of any Dispute,
the Arbitrating Accountant shall have access to all documents, records, work
papers, facilities and personnel necessary to perform its function as
arbitrator. The arbitration before the Arbitrating Accountant shall be conducted
in accordance with the commercial arbitration rules of the American Arbitration
Association. The Arbitrating Accountant's award with respect to any Dispute
shall be final and binding upon the parties hereto, and judgment may be entered
on the award. Each party shall pay one-half of the fees and expenses of the
Arbitrating Accountant with respect to any Dispute.
<PAGE>
II.15 Payment. All payments required by this Agreement shall be made
in United States Dollars. All invoices are strictly net and payment must be
received within forty-five (45) days from the date of invoice. The date of each
invoice shall be the date of shipment of Products. Payment shall be made without
deduction, deferment, set-off, lien or counterclaim of any nature, other than
for rejected or returned goods, or credits issued by HMRI pursuant to Section
2.11 herein, in each case for which a credit acknowledgment has been issued by
HMRI. Time for payment shall be of the essence. Unless Rugby notifies HMRI in
writing of a good faith dispute, with respect to payments not received within
such forty-five (45) days, or within forty-five (45) days after the end of each
calendar quarter with respect to payments pursuant to Section 2.12 herein,
interest shall accrue on any amount overdue, at the rate of prime plus 2%, such
interest to begin accruing on a daily basis from the date of invoice, and shall
accrue both before and after judgment; provided, however, in the case of a good
faith dispute regarding payment resolved to be due and not paid within three (3)
business days after such resolution, interest shall accrue on any amount
overdue, at the rate of prime plus 2%, such interest to begin accruing on a
daily basis from the date such payment becomes overdue, and shall accrue both
before and after judgment; provided, further, in the case of a good faith
dispute regarding payment, Rugby may in its discretion determine to pay such
amounts disputed to be overdue and in the event amounts are finally determined
not to be due by Rugby, HMRI shall repay such excess amounts to Rugby determined
not be due, and interest shall accrue on any such amount, at the rate of prime
plus 2%, such interest to begin accruing on a daily basis from the date such
disputed payment was received by HMRI.
With respect to defaults of payment not cured within ten (10) business days
after receipt of written notice from HMRI to Rugby, HMRI shall, in its sole
discretion, and without prejudice to any other of its accrued rights, be
entitled to suspend the provision of the Products or to treat the Agreement as
repudiated by notice in writing to Rugby exercised at any time thereafter;
provided, however, a good faith bona fide dispute by Rugby regarding a payment
pursuant to this Agreement shall not be considered a default of payment so long
as Rugby notifies HMRI in writing of such dispute within the later of five (5)
business days from the date of invoice or the date of payment. Rugby
acknowledges it will notify HMRI promptly upon a determination that a dispute
exists regarding a payment.
II.16 Advertising/Marketing/Sales Costs and Product Pricing. Rugby
shall be responsible for all advertising, marketing and sales costs associated
with Product distribution. Rugby will have complete authority for all sales
pricing decisions for the Product. Rugby shall not alter the Products and shall
not recommend or knowingly sell the Products for any uses except as described in
the FDA approved Product labeling.
II.17 Taxes. Rugby shall reimburse HMRI for all tariffs, duties and
excise, sales or use, value added or other taxes or levies (collectively,
"Taxes") that are paid by HMRI that are directly related to the manufacture and
sale to Rugby of the Products and which are not otherwise included in the
product pricing set forth in Section 2.12. Notwithstanding the foregoing, Rugby
shall have no reimbursement obligations pursuant to this Section 2.17 to the
extent that (i) such Taxes are based on HMRI's net income or (ii) such Taxes are
recoverable or offset by HMRI, in whole or in part, as a credit, rebate,
deduction or otherwise.
<PAGE>
ARTICLE III
TERM AND TERMINATION
III.1 Term. The Initial Term of this Agreement will commence upon
execution of this Agreement and will continue until December 31, *, unless
terminated earlier in accordance with the provisions of Section 3.2 herein.
Thereafter, this Agreement will automatically continue until either party
provides not less than * prior written notification to the other that this
Agreement shall terminate, which notification shall specify the date upon which
this Agreement shall terminate (which in any event shall not be prior to
December 31, *).
III.2 Early Termination.
(a) Either Rugby or HMRI, as the case may be, may terminate this
Agreement forthwith by notice in writing to the other party upon the occurrence
of any of the following events:
(i) if the other party commits a material breach of this
Agreement, other than a payment default, which in the case of a
breach capable of remedy shall not have been remedied within
thirty (30) days of the receipt by the other party of a notice
identifying the breach and requiring its remedy or such longer
time as the party in breach may demonstrate to the other party is
necessary to remedy the breach using its reasonable efforts to do
so; or
(ii) if the other party ceases for any reason to carry on
business or convenes a meeting of its creditors or has a receiver
or manager appointed in respect of all or substantially all of
its assets or is the subject of an application for an
administration order or of any proposal for a voluntary
arrangement or enters into liquidation (whether compulsorily or
voluntarily) or undergoes any analogous act or proceedings under
foreign law; or
(iii) the enactment of any law, order or regulation by a
governmental unit that would render it impossible for the other
party to perform its obligations hereunder.
III.3 Consequences of Termination and Survival. Termination of this
Agreement for whatever reason shall not affect the accrued rights of either HMRI
or Rugby arising under or out of this Agreement. The obligations under the
second paragraph only of Section 2.4(a), Section 2.11 (Failure to Supply) (in
the case of termination of this Agreement by Rugby pursuant to Section 3.2(a)
herein), Section 2.13 (Profit Split Relating to *), Section 2.14 (Access to
Records), Article 5 (Product Recalls), Article 6 (Warranties), Article 7
(Nondisclosure and Confidentiality), Article 8 (Indemnification and Insurance),
Article 9 (Dispute Resolution) or any other provision which expressly or by
implication is intended to survive expiration or termination shall survive
expiration or termination of this Agreement or of any extensions thereof.
<PAGE>
III.4 Accrued Obligations. In the event that this Agreement is
terminated by HMRI pursuant to the provisions of Section 3.2 herein, Rugby shall
pay to HMRI, (i) all amounts outstanding and remaining to be paid for Product
supplied prior to the termination, (ii) all binding amounts for Product
forecasted pursuant to Section 2.6 herein or ordered pursuant to Section 2.7
herein and (iii) an amount to compensate HMRI for active ingredient that HMRI is
contractually committed to purchase at the time of such termination pursuant to
authorization received from Rugby in accordance with Section 2.6(b) herein which
is not subsequently used by HMRI to manufacture any Product or any other
product.
ARTICLE IV
CERTIFICATES AND ACCESS AND REGULATORY MATTERS
IV.1 Certificates of Analysis. HMRI shall perform, or cause to be
performed, sample tests on each lot of Product manufactured pursuant to this
Agreement before delivery to Rugby. Each test report shall set forth the items
tested, Specifications and test results in a certificate of analysis, containing
the types of information which shall have been approved by mutual agreement of
the parties, for each lot delivered. HMRI shall send, or cause to be sent, such
certificates to Rugby prior to delivery of each lot unless otherwise agreed.
IV.2 Certificates of Manufacturing Compliance. HMRI shall provide, or
cause to be provided, for each lot of Product manufactured pursuant to this
Agreement, a certificate of manufacturing compliance, containing the types of
information which shall have been approved by mutual agreement of the parties,
which will certify that the Product was manufactured in accordance with the
Specifications and the GMP. HMRI shall advise Rugby promptly if an authorized
agent of the FDA or other governmental regulatory agency visits any of HMRI's
manufacturing facilities, or the facilities where the Products are being
manufactured, concerning the Products. HMRI shall furnish to Rugby all material
information supplied to, or supplied by, the FDA or other governmental
regulatory agency, including the Form 483 observations and responses, to the
extent that such report relates to Products (or the ability of HMRI to supply
such Product), within five (5) business days of HMRI's receipt of such
information or delivery of such information, as the case may be.
IV.3 Changes. HMRI shall not change the critical specified raw
materials, packaging materials, their source, analytical test procedures or
critical manufacturing conditions or manufacturing equipment used in the
manufacture of Product without the prior written consent of Rugby, which consent
shall not be unreasonably withheld.
IV.4 Access to Facilities.
<PAGE>
(a) Rugby Access. Upon the reasonable prior written request of
Rugby, Rugby shall have the right to inspect those portions of the manufacturing
and testing facilities of HMRI where Products are being manufactured or tested,
as the case may be, during regular business hours, to ascertain compliance with
GMPs. If the FDA or other applicable governmental regulatory agency asserts any
notice to the effect that HMRI has failed to comply with any law or regulation
in connection with the manufacture of Products, or if HMRI delivers Product that
does not meet the Specifications, then Rugby shall have the right to inspect
such portions of the manufacturing facilities of HMRI that relate to the
manufacture of Product upon reasonable notice and during normal business hours.
Notwithstanding the provisions of this Section 4.4(a), Rugby shall have no
obligation or be deemed to have an obligation to inspect the manufacturing and
testing facilities of HMRI.
(b) HMRI Access. Upon the reasonable prior written request of
HMRI, HMRI shall have the right to inspect those portions of the warehouse and
distribution facilities of Rugby where Products are being stored and
distributed, during regular business hours, to observe Product storage and
distribution or other related activities. If the FDA or other applicable
governmental regulatory agency asserts any notice to the effect that Rugby has
failed to comply with any law or regulation in connection with the storage or
distribution of Products, then HMRI shall have the right to inspect such
portions of the warehouse and distribution facilities of Rugby that relate to
the storage or distribution of Product upon reasonable notice and during normal
business hours. Notwithstanding the provisions of this Section 4.4(b), HMRI
shall have no obligation or be deemed to have an obligation to inspect the
warehouse and distribution facilities of Rugby.
IV.5 Regulatory Correspondence. Rugby and HMRI shall make available
(or cause to be made available) to each other within three (3) days of receipt
of regulatory correspondence regarding regulatory letters, withdrawal of
Product, and correspondence bearing on the safety and efficacy of the Product.
IV.6 Product Inquiries and Complaints. Rugby will promptly submit to
HMRI all Product safety and efficacy inquiries, Product quality complaints and
adverse drug event reports received by it, together with all available evidence
and other information relating thereto. Except as otherwise required by law or
governmental regulation, Rugby will be responsible for investigating and
responding to all such inquiries, complaints and adverse events regarding
Product. It shall be the responsibility of Rugby to comply with all federal,
state and local governmental reporting requirements regarding adverse drug
events and Product quality matters, except where such events or matters are
caused by acts or omissions of HMRI, in which case Rugby may, consistent with
applicable law and regulation, request HMRI's assistance in such compliance.
Rugby will forward a copy of all FDA submissions concerning Product adverse drug
events or any Product safety-related topic to HMRI within ten (10) business days
of submission.
<PAGE>
IV.7 Response to Complaints and/or Adverse Drug Reactions (or Events).
Pursuant to reported complaint and/or adverse drug reaction (or event), if the
nature of the reported complaint and/or adverse drug reaction (or event)
requires testing, HMRI will, at Rugby's reasonable request and expense, perform
analytical testing of corresponding retention samples and provide the results
thereto to Rugby as soon as reasonably practicable; provided, however, HMRI
shall be responsible for the reasonable costs of such testing and reporting to
the FDA or any other governmental regulatory agency if it is determined that
HMRI is responsible for such reported complaint and/or adverse drug reaction (or
event). Such testing shall be performed using ANDA approved testing procedures.
IV.8 Additional Information. HMRI shall provide to Rugby in a timely
manner, but in no event less than sixty (60) days prior to the due date of
Rugby's annual report to the FDA with respect to the Products, all information
(in written form) which Rugby requests regarding the Products in order to comply
with applicable federal and state drug laws. Such information shall include,
without limitation, quantities of each Product sold. Rugby shall be responsible
for assuring that all promotional material produced by it relating to Products
comply with federal, state and local law. [Rugby shall provide to HMRI prior to
first use copies of all advertising, promotional material, labeling and other
literature used on, or in connection with, the Products.] Rugby shall provide to
HMRI a copy of such FDA annual report.
ARTICLE V
PRODUCT RECALLS
V.1 Product Recalls. In the event (i) any government authority issues
a request, directive or order that Product be recalled, (ii) a court of
competent jurisdiction orders such a recall, or (iii) Rugby shall reasonably
determine that Product should be recalled, the parties shall take all
appropriate corrective actions, and shall cooperate in the investigations
surrounding the recall. In the event that Rugby determines that Product should
be recalled, Rugby shall consult with HMRI prior to taking any corrective
actions. In the event that such recall results from any cause or event other
than that arising from the defective manufacture, storage or handling (excluding
defects relating to packaging or labeling supplied by or prepared at the
direction of Rugby) of the recalled Product by HMRI, Rugby shall be responsible
for all documented out-of-pocket expenses of such recall consistent with
directions received from the appropriate governmental authority. In the event
that such recall results from any cause or event arising from the defective
manufacture, storage or handling (excluding defects relating to packaging or
labeling supplied by or prepared at the direction of Rugby), HMRI shall be
responsible for all such documented expenses. For purposes of this Agreement,
the expenses of recall shall include the expenses of notification and
destruction or return of the recalled product and all other documented
out-of-pocket costs incurred in connection with such recall, but shall not
include lost profits of either party.
V.2 Disputes. If there is any dispute concerning which party's acts or
omissions gave rise to such recall of Product, such dispute shall be referred
for decision to an independent expert (acting as an expert and not as an
arbitrator) to be appointed by agreement between Rugby and HMRI or, in the
absence of agreement, by the President for the time being of the Pharmaceutical
Research and Manufacturers of America. The costs of such independent expert
shall be borne equally between Rugby and HMRI. The decision of such independent
expert shall be in writing and, except for manifest error on the face of the
decision, shall be binding on both Rugby and HMRI.
<PAGE>
ARTICLE VI
WARRANTIES
VI.1 FDA Approval. Rugby warrants that each Product is approved by the
FDA for the uses set forth in the Product labeling.
VI.2 Compliance with GMP. HMRI warrants that all Products will be
manufactured in conformity with the regulations of the FDA and any comparable
state agency applicable thereto.
VI.3 Conformity with Specifications. HMRI warrants that each Product
manufactured by HMRI and sold to Rugby pursuant to this Agreement will meet the
Specifications for such Product in effect at the time title to such Product
passes from HMRI to Rugby pursuant to Section 2.8 herein. Rugby may amend such
Specifications from time to time only with the prior written consent of HMRI,
which consent shall not be unreasonably withheld.
VI.4 Compliance with the Federal Food, Drug and Cosmetic Act. HMRI
warrants that all Product delivered to Rugby pursuant to this Agreement will, at
the time of such delivery, not be adulterated within the meaning of the Act and
will not be an article which may not, under the provisions of such Act, be
introduced into interstate commerce.
VI.5 No Liens. HMRI warrants that all Product delivered to Rugby
pursuant to this Agreement will, at the time of such delivery, be free and clear
of all liens, encumbrances, security interests and other encumbrances.
VI.6 Exclusion of Other Warranties. EXCEPT WHERE OTHERWISE SET FORTH
IN THIS AGREEMENT, SECTIONS 6.1, 6.2, 6.3, 6.4 AND 6.5 ARE IN LIEU OF ALL
CONDITIONS, WARRANTIES AND STATEMENTS IN RESPECT OF PRODUCT AND IN RESPECT OF
THE MANUFACTURING SERVICES PROVIDED HEREUNDER, WHETHER EXPRESSED OR IMPLIED BY
STATUTE, CUSTOM OF THE TRADE OR OTHERWISE (INCLUDING BUT WITHOUT LIMITATION ANY
SUCH CONDITION, WARRANTY OR STATEMENT RELATING TO THE DESCRIPTION OR QUALITY OF
PRODUCT, ITS MERCHANTABILITY OR ITS FITNESS FOR A PARTICULAR PURPOSE OR USE
UNDER ANY CONDITIONS) AND ANY SUCH CONDITION, WARRANTY OR STATEMENT IS HEREBY
EXCLUDED. EXCEPT AS PROVIDED IN ARTICLE 8 HEREIN, REPLACEMENT OF ANY
NONCONFORMING PRODUCT AND REASONABLE DOCUMENTED OUT OF POCKET EXPENSES SHALL BE
RUGBY'S SOLE REMEDY FOR BREACH OF ANY EXPRESS WARRANTY CONTAINED IN THIS ARTICLE
VI. In no event shall HMRI or Rugby be liable under or with respect to this
Agreement for any indirect, incidental, consequential, special or punitive
damages of any kind, including loss of profits, including but not limited to due
to breach of warranty, tort, breach or repudiation of any term or condition of
this Agreement.
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"*SEE PAGE ONE OF EXHIBIT"
ARTICLE VII
NONDISCLOSURE, CONFIDENTIALITY AND TRADEMARKS
VII.1 Nondisclosure Obligations.
(a) Except as otherwise provided in this Agreement, Rugby
acknowledges that the HMRI Know-How with which it may be supplied pursuant to
this Agreement and HMRI acknowledges that the Rugby Know-How with which it may
be supplied pursuant to this Agreement or otherwise is supplied in circumstances
imparting an obligation of confidence and agrees to keep such HMRI Know-How or
Rugby Know-How, as the case may be, secret and confidential and to respect the
other's proprietary rights therein and to use the same for the sole purpose of
this Agreement and during the period of this Agreement or at any time for any
reason whatsoever not to disclose or cause or permit to be disclosed such HMRI
Know-How or Rugby Know-How, as the case may be, to any third party.
(b) Each party shall procure that only its respective employees
or employees of its Affiliates or consultants and contractors shall have access
to HMRI Know-How or Rugby Know-How, as the case may be, on a need to know basis
and shall be subject to the same obligations of confidence as the principals
pursuant to Section 7.1(a) above and shall enter into secrecy agreements in
support of such obligations. Insofar as this is not reasonably practicable, the
principals shall take all reasonable steps to ensure that any such employees,
consultants and contractors are made aware of such obligations.
(c) Both parties undertake and agree not to disclose or permit to
be disclosed at any time for any reason whatsoever to any third party or
otherwise make use of or permit to be made use of any trade secrets or
confidential information relating to the technology, business affairs or
finances of the other or of any Affiliates, suppliers, agents, distributors,
licensees, licensors or other customers of the other which comes into their
possession pursuant to this Agreement.
(d) The obligations of confidence referred to in this Section 7.1
shall not extend to any information which:
(i) is or becomes part of the public domain other than by
unauthorized acts of the party obligated not to disclose such
information or its Affiliates or sublicensees, as applicable;
(ii) can be shown by written documents to have been
disclosed to the receiving party or its Affiliates or
sublicensees by a third party, provided such information was not
obtained by such third party directly or indirectly from the
other party under this Agreement pursuant to a confidentiality
agreement;
<PAGE>
(iii) prior to disclosure under this Agreement, was
already in the possession of the receiving party or its
Affiliates or sublicensees, provided such information was not
obtained directly or indirectly from the other party under this
Agreement pursuant to a confidentiality agreement;
(iv) can be shown by written documents to have been
independently developed by the receiving party or its Affiliates
without breach of any of the provisions of this Agreement;
(v) is disclosed by the receiving party pursuant to oral
questions, interrogatories, requests for information or
documents, subpoena, or a civil investigative demand of a court
or governmental agency; provided that the receiving party
notifies the other party immediately upon receipt thereof (and
provided that the disclosing party furnishes only that portion of
the information which it is advised by counsel is legally
required and impose such obligations of secrecy as are possible
in that regard); or
(vi) is required to be disclosed by a party under any
statutory, regulatory or similar legislative requirement or any
rule of any stock exchange to which it or any Affiliate is
subject, subject to the obligation of secrecy as are possible in
that regard.
VII.2 Terms of this Agreement. Rugby and HMRI each agree not to
disclose any terms or conditions of this Agreement to any third party without
the prior consent of the other party, except as required by applicable law.
Notwithstanding the foregoing, prior to execution of this Agreement, Rugby and
HMRI shall agree upon the substance of information that can be used as a routine
reference in the usual course of business to describe the terms of this
Agreement from time to time, without the other party's consent; provided,
however, that if either party determines that excessive use of such statement is
made by the other party, then the party determined to be using such statement
excessively shall, upon notice by the other party, cease making such statement.
VII.3 Injunctive Relief. The parties hereto understand and agree that
remedies at law may be inadequate to protect against any breach of any of the
provisions of this Article 7 by either party or their employees, agents,
officers or directors or any other person acting in concert with it or on its
behalf. Accordingly, each party shall be entitled to the granting of injunctive
relief by a court of competent jurisdiction against any action that constitutes
any such breach of this Article 7.
<PAGE>
VII.4 Trademarks. HMRI acknowledges that Rugby and its Affiliates are
the exclusive owner of (i) the trademarks, service marks, slogan, trade names,
trade dress and the like (including the associated goodwill of each) held by
Rugby or its Affiliates and (ii) all copyrights held by Rugby or its Affiliates
(collectively, the "Rugby Intellectual Property Rights"). HMRI acknowledges that
it shall have no rights hereunder to any such Rugby Intellectual Property Rights
and agrees that it shall not contest or dispute the validity of or title to any
of such Rugby Intellectual Property Rights. HMRI agrees it shall not take or
cooperate in litigation or threatened litigation which might or is intended to
impair or attack the Rugby Intellectual Property Rights.
ARTICLE VIII
LIMITATION OF LIABILITY, INDEMNIFICATION AND INSURANCE
VIII.1 Indemnification by Rugby. Except as otherwise specifically
provided herein, Rugby shall indemnify and maintain HMRI against all claims,
actions, costs, expenses (including court costs and legal fees on a full
indemnity basis) or other liabilities ("Liabilities") whatsoever in respect of:
(a) any defective design product liability claim with respect to
a Product;
(b) any negligence or willful misconduct of Rugby in relation to
the use, marketing, storage, distribution, handling or sale of Product;
(c) any labeling of any Product to the extent that such labeling
has been supplied by or at the direction of Rugby and applied in accordance with
instructions from Rugby; and
(d) any representation or warranty made by Rugby to its customers
or users with respect to Product, other than representations or warranties
contained in Sections 6.2, 6.3, 6.4 or 6.5.
VIII.2 Indemnification by HMRI. Except as otherwise specifically
provided herein, HMRI shall indemnify and maintain Rugby against all Liabilities
whatsoever in respect of:
(a) HMRI's failure to comply with the Specifications; and
(b) any negligence or willful misconduct by HMRI in the
manufacture, storage, packaging, handling or shipping of Product.
VIII.3 Indemnification Procedures. A party (the "Indemnitee") that
intends to claim indemnification under this Article 8 shall:
(a) notify the other party (the "Indemnitor") of any Liability
with respect to which the Indemnitee intends to claim indemnification as soon as
practicable after the Indemnitee becomes aware of any such Liability;
<PAGE>
(b) permit the Indemnitor to assume the defense thereof with
counsel mutually satisfactory to the parties; and
(c) cooperate with the Indemnitor, at the Indemnitor's expense,
in the defense thereof.
With respect to any matter for which the Indemnitor has an obligation
to indemnify the Indemnitee under this Agreement, the Indemnitee shall have the
right to participate and be represented (at the Indemnitor's expense) by legal
counsel of the Indemnitee's choice in all proceedings and negotiations, if
representation by counsel retained by Indemnitor would be inappropriate due to
actual or potential differing interests between the Indemnitee and any other
party represented by such counsel in such proceedings. The indemnity agreement
in this Article 8 shall not apply to amounts paid in settlement of any Liability
if such settlement is effected without the consent of the Indemnitor, which
consent shall not be unreasonably withheld. Failure of the Indemnitee to deliver
notice to the Indemnitor within a reasonable time after becoming aware of a
Liability shall relieve the Indemnitor of any liability to the Indemnitee
pursuant to this Article 8 in the event such delay is prejudicial to the
Indemnitor's ability to defend such action.
VIII.4 Distribution/ Product Liability Insurance. Rugby shall obtain
and maintain in effect for the term of this Agreement, liability insurance or
indemnity policies with an insurer reasonably acceptable to HMRI, in an amount
not less than *with an indemnity to principals clause with respect to products
liability with respect to each Product and distribution of each Product, which
policies shall name HMRI as an additional insured and shall be blanket policies.
Such policies shall insure against liability on the part of Rugby and any of its
Affiliates, as their interests may appear, due to injury, disability or death of
any person or persons, or injury to property, arising from the distribution of
Products. Upon the execution of this Agreement and thereafter on January 1 each
year during the Term, Rugby shall provide to HMRI a certificate of insurance (i)
summarizing the insurance coverage, (ii) identifying any exclusions and (iii)
indicating that the terms of Rugby's insurance policies are in accordance with
this Section 9.4. Rugby shall promptly notify HMRI of any alterations to the
terms of this policy or in the amounts for which insurance is provided.
<PAGE>
VIII.5 Manufacturer's Insurance. HMRI shall obtain and maintain in
effect for the term of this Agreement, insurance or indemnity policies with an
insurer reasonably satisfactory to Rugby, in an amount not being less than *with
an indemnity to principals clause with respect to the manufacture, storage or
handling of Product, which policies shall name Rugby as an additional insured
and shall be blanket policies. Such policies shall insure against liability on
the part of HMRI and any of its Affiliates, as their interests may appear, due
to injury, disability or death of any person or persons, or injury to property
arising from the negligence of HMRI in the manufacture of Product. Upon the
execution of this Agreement and thereafter on January 1 each year during the
Term, HMRI shall provide to Rugby a certificate of insurance (i) summarizing the
insurance coverage, (ii) identifying any exclusions and (iii) indicating that
the terms of HMRI's insurance policies are in accordance with this Section 9.5.
HMRI shall promptly notify Rugby of any alterations to the terms of the policy
or in the amounts for which insurance is provided.
VIII.6 Product Liability Claims. As soon as it becomes aware, each
party will give the other prompt written notice of any defect or alleged defect
in a Product, any injury alleged to have occurred as a result of the use or
application of a Product, and any circumstances that may give rise to litigation
or recall of a Product or regulatory action that may affect the sale or
manufacture of a Product, specifying, to the extent the party has such
information, the time, place and circumstances thereof and the names and
addresses of the persons involved. Each party will also furnish promptly to the
other copies of all papers received in respect of any claim, action or suit
arising out of such alleged defect, injury or regulatory action.
ARTICLE IX
DISPUTE RESOLUTION
IX.1 Mediation Committee. The Chief Executive Officers or Presidents
of the parties shall constitute the mediation committee (the "Mediation
Committee"). In the event any dispute or controversy arises under, out of, in
connection with or in relation to this Agreement or any amendments or proposed
amendment thereto or any breach thereof the parties agree that, before any party
initiates arbitration proceedings pursuant to Section 9.6, it shall give the
other party notice and shall demand that the members of the Mediation Committee
attempt to resolve the matter amicably. If the Mediation Committee is unable to
resolve a matter within ten (10) days of submission of the matter to it via
telephone, telefax or other written or oral contact, the Mediation Committee
shall meet in person, not later than twenty (20) days following submission of
the matter to it, at a mutually convenient place to attempt in good faith to
resolve the dispute. If the Mediation Committee is unable to resolve a dispute,
unless a mutually acceptable extension is agreed upon by the Mediation
Committee, either side shall have the right, but not the obligation, to initiate
arbitration proceedings respecting the matter under review, in accordance with
Section 9.6 herein.
IX.2 Non-Arbitrable Issues. The parties acknowledge that matters
relating to product recalls as set forth in Article 5 herein, Disputes as set
forth in Section 2.14 and the matters set forth in Section 7.3 shall not be
submitted to arbitration pursuant to Section 9.3 hereof but instead shall be
resolved in accordance with Section 5.2, 2.14 and 7.3 herein respectively.
IX.3 Scope of Arbitration. The parties agree that all disputes and
controversies except those set forth in Section 9.2 herein arising under this
Agreement shall be resolved by arbitration in accordance with the provisions of
this Article 9; provided, however, that during the period of arbitration on any
dispute the parties shall continue to fulfill their obligations as set forth in
this Agreement.
IX.4 Arbitration Panel. The arbitration shall be held before a panel
of three (3) persons (the "Arbitration Panel").
<PAGE>
IX.4.1 Selection. Within fifteen (15) days of the appointment of the
two initial arbitrators, the two arbitrators so appointed shall appoint the
third arbitrator, who shall be an attorney and shall act as chair of the
Arbitration Panel.
IX.4.2 Qualifications. The two arbitrators selected by the parties
hereto shall have experience in the pharmaceutical and/or biotechnology
industry. None of the arbitrators shall have been employed or be retained by or
otherwise related to HMRI or Rugby.
IX.4.3 Failure to Name. If a party fails to name its arbitrator within
thirty (30) days of the receipt of the Notice of Arbitration (as defined
herein), then the arbitrator already named shall immediately select the second
arbitrator. The two arbitrators so appointed shall appoint the third arbitrator,
who shall be an attorney and shall act as chair of the Arbitration Panel.
IX.4.4 Right to Select Replacement. In the event that an arbitrator
refuses or is otherwise unable to serve as such, the party or the other
arbitrator(s) as the case may be, who selected such arbitrator shall have the
right to select his/her replacement. Such replacement shall be selected within
fifteen (15) days of the refusal or inability by such arbitrator to serve.
IX.5 Designation of Rules, Situs, Governing Law.
IX.5.1 Designation of Rules. The parties agree that the arbitrators
shall apply the Federal Rules of Evidence as they are applied in cases tried to
a court sitting without a jury; unless the parties otherwise agree in writing,
the opinions of expert witnesses shall not be admissible. The parties agree that
discovery proceedings shall be limited to: (i) the dispute; (ii) depositions of
those persons having direct knowledge of the dispute; and (iii) submission of
all documents which relate to the dispute.
IX.5.2 Situs. The arbitration hearing shall be held in New York, New
York unless otherwise mutually agreed to in writing.
IX.6 Procedure.
IX.6.1 Conciliation Period. No party shall send a Notice of
Arbitration in connection with a dispute under this Article 9 unless at least
thirty (30) days prior to the date of such Notice of Arbitration, such party
shall have furnished to the other parties written notice of its intent to send a
Notice of Arbitration in connection with a dispute. During such thirty (30) day
period the Mediation Committee shall attempt in good faith to settle the dispute
in accordance with the provisions of Section 9.1 herein.
<PAGE>
IX.6.2 Notice of Arbitration. The party seeking to institute
arbitration (hereinafter, a "Claimant") shall do so by sending the other parties
(hereinafter, each a "Respondent") a written notice of arbitration (the "Notice
of Arbitration"). The Notice of Arbitration shall set forth in detail the nature
of the dispute. The Notice of Arbitration shall also designate the arbitrator
appointed by the Claimant and set forth a full Curriculum Vitae or resume
showing that the arbitrator meets the qualifications set forth in Section 9.4.2.
IX.6.3 Response. Within thirty (30) days after receipt of the Notice
of Arbitration, the Respondent shall send the Claimant a written Response
including any counterclaims (the "Response"). The Response shall also designate
the arbitrator appointed by the Respondent and set forth a full Curriculum Vitae
or resume showing that the arbitrator meets the qualifications set forth in
Section 9.4.2. If the Response sets forth a counterclaim, the Claimant may,
within fifteen (15) days of the receipt of the Response, deliver to the
Respondent and the arbitrators a Rejoinder (the "Rejoinder") answering such
counterclaim.
IX.6.4 Discovery. Within sixty (60) days of the date of the Response,
each party shall submit to the other parties and to the arbitrators one (1) copy
of all documents in the possession, custody or control of the party or its
Affiliates, which are relevant to the dispute or controversy set forth in the
Notice of Arbitration, Response or Rejoinder. Within forty-five (45) days of the
date of the Response, each party shall submit to the other parties a list of all
witnesses intended to be called at the hearing. Each party shall use its
commercially reasonable good faith efforts to make available for deposition
within thirty (30) days after the delivery of the list of witnesses at each
party's respective location of its operations, all of its agents, employees, and
Affiliates who have direct knowledge of the dispute at such times and places
that shall not unreasonably disrupt the business of the other parties. The chair
of the Arbitration Panel shall determine all discovery disputes and may enforce
a decision by imposing appropriate sanctions on the non-complying party.
IX.6.5 Record. A stenographic record of all proceedings shall be made
and oaths administered by a duly licensed and qualified court reporter. The
court reporter shall prepare five (5) copies of the stenographic record of such
proceeding and shall send one (1) copy to each of the arbitrators and to each of
the parties within seven (7) days of the relevant proceeding under this Section.
IX.6.6 Attendance at Hearing. Each party may be represented by an
attorney at all hearings before the Arbitration Panel. The Arbitration Panel
shall have the power to require the exclusion of any witness, other than a party
or other essential person, during the testimony of any other witness. Unless the
law provides to the contrary, the arbitration may proceed in the absence of any
party or representative who, after due notice, fails to be present or fails to
obtain a postponement. An award shall not be made solely on the default of a
party; the Arbitration Panel shall require the party who is present to submit
such evidence as it may require for the making of an award.
IX.6.7 Postponement of Hearing. The Arbitration Panel, for good cause
shown, may postpone any hearing under any of the following conditions: (i) upon
the request of a party, (ii) upon its own initiative, and (iii) upon mutual
agreement by the parties.
<PAGE>
IX.6.8 Post-Hearing Filings. Any post-hearing briefs shall be made by
the parties to the Arbitration Panel and the other party within fourteen (14)
business days following the hearing. Each party shall be afforded an opportunity
to examine any post-hearing filings and to provide a response to the Arbitration
Panel within seven (7) business days of the receipt of a post-hearing filing.
IX.6.9 Award Opinion. The Arbitration Panel shall issue an opinion
with respect to any dispute. The arbitrators shall issue a final decision within
one (1) month from the final hearing on any dispute. The concurrence of two (2)
arbitrators shall be sufficient for the entry of a final decision. Such opinion
shall be written in the form of "Findings of Fact" and "Conclusions of Law," and
shall include the reasons for a decision. A final decision shall be binding on
both parties.
IX.6.10 Rehearing. The parties agree that a rehearing shall only be
allowed in the event that the chair of the Arbitration Panel is unable or
unwilling to continue performance of the duties of an arbitrator.
IX.6.11 Confidentiality. All arbitration proceedings hereunder shall
be conducted on a confidential basis and shall be subject to the provisions of
Article 7 (Nondisclosure and Confidentiality) herein. The parties and the
arbitrators shall not disclose or otherwise make public any information revealed
during the proceedings or any final decision which may result from the
proceedings.
IX.6.12 Waiver. Any arbitration proceeding hereunder must be
instituted within two (2) years after the controversy or claim is discovered or
reasonably should have been discovered. Failure to send a Notice of Arbitration
within such two-year period shall constitute an absolute bar to the institution
of any proceedings respecting such controversy or claim, and a waiver thereof.
IX.7 Authority of Arbitrators.
IX.7.1 Awards. Except as otherwise specifically provided herein, the
arbitrators shall have the power to award money damages and equitable relief
such as rescission, specific performance and injunctive relief.
IX.7.2 Modification of Article 10. The Arbitration Panel shall not
have the power to amend, change or alter any provision of this Article 9 without
the express written consent of each party hereto.
IX.8 Awards.
<PAGE>
IX.8.1 Judgment. Judgment upon the award rendered by the arbitrators
shall be enforceable in any court of competent jurisdiction. Each party agrees
to submit to the personal jurisdiction of that court for purposes of the
enforcement of any such award.
IX.8.2 Fees and Expenses. All fees of the arbitrators and the court
stenographer shall be paid by the party who does not prevail in the arbitration
as determined by the arbitrators. In the event a settlement occurs before the
issuance of a final decision, the parties shall unless otherwise agreed, each
pay an equal portion of any fees of the arbitrators and the court stenographer
and the cost of any transcripts. All other arbitration-related expenses shall be
borne by the party incurring such expenses.
ARTICLE X
GENERAL PROVISIONS
X.1 Notices.
(a) Except as otherwise specifically provided herein, any notice
or other documents to be given under this Agreement shall be in writing and
shall be deemed to have been duly given if sent by registered post, nationally
recognized overnight courier or facsimile transmission to a party or delivered
in person to a party at the address or facsimile number set out below for such
party or such other address as the party may from time to time designate by
written notice to the other:
If to Rugby or Watson: Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Attn: Dr. Allen Chao
Fax: 909/270-1429
Copy to: D'Ancona & Pflaum
30 North LaSalle, Suite 2900
Chicago, Illinois 60602
Attn: Michel J. Feldman, Esq.
Fax: 312/589-0923
<PAGE>
If to HMRI: Hoechst Marion Roussel, Inc.
10236 Marion Park Drive
Kansas City, Missouri 64134-0627, USA
Attn: General Counsel
Fax: 816/966-3805
Copy to: Hoechst Marion Roussel, Inc.
2110 East Galbraith Road
P.O. Box 156300
Cincinnati, OH 45215-6800
Attn: Vice President of Site Operations
- Cincinnati
Fax: 513/948-4547
Copy to: Shook, Hardy & Bacon L.L.P.
1200 Main Street, Suite 3100
Kansas City, Missouri 64105
Attn: Randall B. Sunberg, Esq.
Fax: 816/421-5547
(b) Any such notice or other document shall be deemed to have
been received by the addressee three business days following the date of
dispatch of the notice or other document by post or, where the notice or other
document is sent by overnight courier, by hand or is given by facsimile,
simultaneously with the transmission or delivery. To prove the giving of a
notice or other document it shall be sufficient to show that it was dispatched.
X.2 Entire Agreement; Amendment.
(a) This Agreement, together with the Exhibits attached hereto,
embodies and sets forth the entire agreement and understanding of the parties
with respect to the subject matter herein and there are no promises, terms,
conditions or obligations, oral or written, expressed or implied, other than
those contained in this Agreement. The terms of this Agreement shall supersede
all previous oral or written agreements which may exist or have existed between
the parties relating to the subject matter of this Agreement. Neither party
shall be entitled to rely on any agreement, understanding or arrangement which
is not expressly set forth in this Agreement. Any other terms and conditions
(including without limitation any terms and conditions contained in any purchase
order or sales invoice issued pursuant to this Agreement) are hereby expressly
excluded.
(b) This Agreement shall not be amended, modified, varied or
supplemented except in writing signed by duly authorized representatives of the
parties.
<PAGE>
X.3 Force Majeure. If either party is prevented or delayed in the
performance of any of its obligations under this Agreement by Force Majeure (as
defined herein) and shall give written notice thereof to the other party
specifying the matters constituting Force Majeure together with such evidence as
such party reasonably can give and specifying the period for which it is
estimated that such prevention or delay will continue, the party shall be
excused from the performance or the punctual performance of such obligations as
the case may be from the date of such notice for so long as such cause of
prevention or delay shall continue. The expression "Force Majeure" shall be
deemed to include any cause substantially affecting the performance by either
party of this Agreement arising from or attributable to acts, events,
non-happenings, omissions or accidents beyond the reasonable control of the
party whose performance is so affected.
X.4 Assignment. Neither party shall be entitled to assign its rights
and obligations hereunder without the prior written consent of the other;
provided, however, either party shall be entitled, without the prior written
consent of the other, to assign its rights and obligations hereunder to an
Affiliate, but such assignment to an Affiliate shall not relieve the assigning
party of its obligations hereunder. No permitted assignment hereunder shall be
deemed effective until the assignee shall have executed and delivered an
instrument in writing reasonably satisfactory in form and substance to the other
party pursuant to which the assignee assumes all of the obligations of the
assigning party hereunder. Any purported assignment of this Agreement in
violation of this Section 10.4 shall be void. This Agreement shall be binding
upon the successors and permitted assigns of the parties and the name of a party
appearing herein shall be deemed to include the names of its successors and
assigns.
X.5 Headings, Interpretation. The headings used in this Agreement are
for convenience only and are not a part of this Agreement nor affect the
interpretation of any of its provisions.
X.6 Attachments. All Exhibits referenced herein are hereby made a part
of this Agreement.
X.7 Independent Parties. This Agreement shall not be deemed to create
any partnership, joint venture, or agency relationship between the parties. Each
party shall act hereunder as an independent contractor.
X.8 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of New York, excluding its conflict of laws
principles.
X.9 No Waiver. Neither the failure nor delay on the part of either
party to require the strict performance of any term, covenant or condition of
this Agreement or to exercise any right or remedy available on a breach thereof
shall constitute a waiver of any such breach or of any such term or condition.
The consent to, or the waiver of, any breach, or the failure to require on any
single occasion the performance or timely performance of any term, covenant, or
condition of this Agreement shall not be construed as authorizing any subsequent
or additional breach and shall not prevent a subsequent enforcement of such
term, covenant, or condition.
<PAGE>
X.10 Severability. In the event that any provision of this Agreement
or the application thereof to any party or circumstance shall be finally
determined by a court of proper jurisdiction to be invalid or unenforceable to
any extent, then (i) a suitable and equitable provision shall be substituted
therefore in order to carry out, so far as may be valid and enforceable, the
intent and purpose of such invalid and unenforceable provision and (ii) the
remainder of this Agreement and the application of such provision to the parties
or circumstances other than those to which it is held invalid or unenforceable
shall not be affected thereby.
X.11 Interpretation. The parties hereto acknowledge and agree that (i)
each party and its representatives has reviewed and negotiated the terms and
provisions of this Agreement and have contributed to its revision, (ii) the rule
of construction to the effect that any ambiguities are resolved against the
drafting party shall not be employed in the interpretation of this Agreement and
(iii) the terms and provisions of this Agreement shall be construed fairly as to
each party hereto and not in favor of or against either party regardless of
which party was generally responsible for the preparation of this Agreement.
X.12 Counterparts. This Agreement may be executed simultaneously in
two counterparts, each of which shall be deemed an original, but both of which
together shall constitute a single agreement.
X.13 Third Party Beneficiaries. This Agreement is not intended to
confer upon any non-party rights or remedies hereunder.
X.14 Further Assurances. Each party shall execute and deliver such
additional instruments and other documents and use all commercially reasonable
efforts to take or cause to be taken, all actions and to do, or cause to be
done, all things necessary under applicable law to consummate the transactions
contemplated hereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to
be duly executed as of the date first above written.
HOECHST MARION ROUSSEL, INC.
By:_______________________________
Name:
Title:
THE RUGBY GROUP, INC.
By:________________________________
Name:
Title:
EXHIBIT 22.1
Watson Pharmaceuticals, Inc.
Subsidiaries of the Company
Name Country or State of Incorporation
Watson Laboratories, Inc. Nevada
Watson Pharmaceuticals (Asia), Ltd. British Virgin Islands
Corona Pharmaceuticals, Inc. Nevada
Circa Pharmaceuticals, Inc. New York
Oclassen Pharmaceuticals, Inc. Delaware
Royce Laboratories, Inc. Florida
B Q Pharmaceutical Realty, Inc. Delaware
The Rugby Group, Inc. New York
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-70878, No. 33-94350, No. 333-05737, No. 333-24577,
No. 333-37733 and No. 333-20029) of Watson Pharmaceuticals, Inc. of our report
dated February 2, 1998, except as to Note 2, which is as of February 27, 1998
appearing on page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Costa Mesa, California
March 12, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-70878, 33-94350, 333-05737, 333-24577 and 333-37733 on Form S-8 and 333-20029
on Form S-4 of Watson Pharmaceuticals, Inc. of our report dated February 4, 1998
(relating to the consolidated financial statements of Somerset Pharmaceuticals,
Inc. and subsidiaries) appearing in this Annual Report on Form 10-K of Watson
Pharmaceuticals, Inc. for the year ended December 31, 1997.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 16, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in the
Form 10-K of Watson Pharmaceuticals, Inc. for the year ended December 31, 1997
of our report dated January 17, 1997, relating to the financial statements of
Oclassen Pharmaceuticals, Inc. as of December 31, 1995 and 1996 and for the
years then ended, incorporated by reference. It should be noted that we have not
audited any financial statements of Oclassen Pharmaceuticals, Inc. subsequent to
December 31, 1996 or performed any audit procedures subsequent to the date of
our report.
Arthur Andersen LLP
March 13, 1998
EXHIBIT 99.1
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995, AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Somerset Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Somerset
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Somerset Pharmaceuticals, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
February 4, 1998
<PAGE>
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 32,141,000 $ 33,477,000
Investment securities 15,963,000 1,008,000
Accounts receivable (net of allowance for doubtful
accounts of $250,000 and $100,000, respectively) 3,526,000 6,172,000
Inventories 1,077,000 1,704,000
Prepaid expenses and other current assets 1,266,000 3,510,000
----------- ------------
Total current assets 53,973,000 45,871,000
PROPERTY AND EQUIPMENT - Net 752,000 4,891,000
INTANGIBLE ASSETS - Net 1,066,000 1,259,000
OTHER ASSETS 1,648,000 856,000
----------- ------------
$ 57,439,000 $ 52,877,000
=========== ============
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Accounts payable $ 516,000 $ 651,000
Royalty payable 1,172,000 1,626,000
Medicaid payable 687,000 1,039,000
Other accrued expenses 853,000 1,454,000
Accrued research and development 4,394,000 4,578,000
Income taxes payable 5,099,000 6,032,000
Accrued sales returns 906,000 580,000
Accrued compensation 600,000 1,494,000
Amounts due to related parties 1,433,000 1,621,000
Total current liabilities 15,660,000 19,075,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 13,719
shares authorized, 11,297 shares issued - -
Retained earnings 42,231,000 34,254,000
Less treasury stock, 644 shares at cost (452,000) (452,000)
----------- -----------
Total stockholders' equity 41,779,000 33,802,000
----------- -----------
$ 57,439,000 $ 52,877,000
============ ============
See notes to consolidated financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
NET SALES $ 66,956,000 $ 101,512,000 $ 107,365,000
------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales 6,622,000 12,672,000 13,617,000
Marketing 5,757,000 6,263,000 4,862,000
Research and development 13,073,000 20,118,000 17,904,000
Administrative 7,338,000 9,574,000 8,601,000
---------- ---------- ---------
32,790,000 48,627,000 44,984,000
----------- ----------- ----------
34,166,000 52,885,000 62,381,000
OTHER INCOME - Net 2,735,000 1,732,000 2,172,000
---------- ---------- ---------
INCOME BEFORE INCOME TAXES 36,901,000 54,617,000 64,553,000
PROVISION FOR INCOME TAXES 12,924,000 18,815,000 20,200,000
----------- ----------- ----------
NET INCOME $ 23,977,000 $ 35,802,000 $ 44,353,000
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
-3-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK TREASURY STOCK
----------------------- --------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 11,297 $ - 644 $(452,000) $ 26,099,000 $ 25,647,000
Net income - - - - 44,353,000 44,353,000
Dividends - - - - (36,000,000) (36,000,000)
--------- --------- --------- --------- ------------- ------------
BALANCE, DECEMBER 31, 1995 11,297 - 644 (452,000) 34,452,000 34,000,000
Net income - - - - 35,802,000 35,802,000
Dividends - - - - (36,000,000) (36,000,000)
--------- --------- --------- --------- ------------- ------------
BALANCE, DECEMBER 31, 1996 11,297 - 644 (452,000) 34,254,000 33,802,000
Net income - - - - 23,977,000 23,977,000
Dividends - - - - (16,000,000) (16,000,000)
--------- --------- --------- --------- ------------- ------------
BALANCE, DECEMBER 31, 1997 11,297 $ - 644 $(452,000) $ 42,231,000 $ 41,779,000
========= ========= ========= ======== ============= ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,977,000 $ 35,802,000 $ 44,353,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 952,000 1,048,000 847,000
Deferred tax expense (benefit) (8,000) (736,000) 283,000
Loss on sale of property and equipment 422,000 - -
Deferred revenue - (63,000) (229,000)
Changes in operating assets and liabilities:
Accounts receivable 2,646,000 7,703,000 6,778,000
Inventories 627,000 4,847,000 (1,258,000)
Prepaid expenses and other current assets 2,415,000 (1,438,000) (398,000)
Accounts payable (135,000) (861,000) 1,220,000
Royalty payable (454,000) (3,050,000) (1,174,000)
Accrued marketing costs - - (11,000,000)
Accrued research and development (184,000) 2,657,000 20,000
Other accrued expenses (1,521,000) 2,084,000 (350,000)
Income taxes payable (933,000) 1,642,000 (627,000)
Amounts due to related parties (188,000) (454,000) (243,000)
------------- ------------ ---------
Net cash provided by operating activities 27,616,000 49,181,000 38,222,000
------------- ------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in investment securities (14,955,000) (828,000) 3,158,000
Purchases of property and equipment (42,000) (251,000) (1,884,000)
Proceeds from sale of property and equipment 2,000,000 - -
Decrease in other assets 45,000 60,000 290,000
------------- ------------ ---------
Net cash (used in) provided by investing activities (12,952,000) (1,019,000) 1,564,000
</TABLE>
(Continued)
-5-
<PAGE>
<TABLE>
<CAPTION>
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES -
Dividends paid on common stock $ (16,000,000) $ (36,000,000) $ (36,000,000)
----------- ------------ ------------
Cash used in financing activities (16,000,000) (36,000,000) (36,000,000)
----------- ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,336,000) 12,162,000 3,786,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 33,477,000 21,315,000 17,529,000
----------- ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 32,141,000 $ 33,477,000 $ 21,315,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION -
Cash paid during the year for income taxes $ 12,092,000 $ 20,409,000 $ 22,074,000
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
1. PRINCIPLES OF CONSOLIDATION AND OPERATIONS
The consolidated financial statements include the accounts of Somerset
Pharmaceuticals, Inc. (the "Company") and its wholly owned
subsidiaries, Somerset Pharmaceuticals Holding Company and Somerset
Caribe, Inc. The Company is jointly owned by Mylan Laboratories, Inc.
and Watson Pharmaceuticals, Inc. ("Watson"), with each owning 50% of
the outstanding common stock of the Company. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The Company, incorporated in February 1986, is engaged
in the development, testing and marketing of drugs to be used in the
treatment of various human disorders. Currently, the Company
manufactures (at its facility in Puerto Rico), markets and sells
Eldepryl, which is used as a treatment for Parkinson's Disease. The
Company had exclusivity relating to the chemical compound Eldepryl for
use as a treatment for late stage Parkinson's Disease through June of
1996. In May 1996, the Company received approval from the Food and Drug
Administration for Eldepryl capsules and withdrew the tablet form from
the marketplace. Competitors entered the marketplace with a generic
version of the tablet in August 1996. The loss of exclusivity and the
introduction of competitive products could have a material impact on
the Company's future operating results.
The Company is party to an exclusive 14-year agreement (through
November 22, 2003) with Chinoin Pharmaceutical Company ("Chinoin") of
Budapest, Hungary under which Eldepryl and other new potential drugs
resulting from Chinoin research are made available for licensing by the
Company. The license agreement required the Company to pay royalties
equal to 7% of net sales of Eldepryl including sub-license revenues.
During 1996, the license agreement was amended to reduce the Eldepryl
royalties to 3.5% of net sales subsequent to May 31, 1996. The Company
incurred royalty expense of approximately $2,716,000, $5,917,000, and
$8,473,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The license agreement also requires the Company to
purchase the main raw material used in the manufacture of Eldepryl from
Chinoin through 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. CASH AND CASH EQUIVALENTS - The Company generally considers
debt instruments purchased with a maturity of three months or
less and investments in money market accounts to be cash
equivalents.
b. INVESTMENT SECURITIES - The Company accounts for investment
securities in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." At December 31,
1997 and 1996, the investment securities were
available-for-sale, and there were no material unrealized
gains or losses. Proceeds from sales and maturities of
investments were $44,973,000 and $4,968,000, respectively, in
1997 and 1995 and realized gains or losses were not material.
There were no sales or maturities of investments in 1996. The
gain or loss on sale is based on the specific identification
method.
c. INVENTORIES - Inventories are stated at the lower-of-cost or
market, with cost determined on a first-in, first-out basis.
-7-
<PAGE>
d. PROPERTY AND EQUIPMENT - Property and equipment are stated at
cost. Depreciation is provided over the estimated useful lives
of the assets by the straight-line method. Estimated useful
lives are five to seven years for machinery and equipment and
furniture and fixtures and was 35 years for the building.
e. INTANGIBLE ASSETS - Intangible assets are amortized on a
straight-line basis over 14 years.
f. RESEARCH AND DEVELOPMENT - Research and development costs are
expensed as incurred.
g. CONCENTRATION OF CREDIT RISK - The Company's product is sold
throughout the United States principally to distributors and
wholesalers in the pharmaceutical industry. The Company
performs ongoing credit evaluation of its customers' financial
condition and generally requires no collateral from its
customers.
h. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results could
differ from those estimates.
i. RECLASSIFICATIONS - Certain reclassifications have been made
to the 1996 financial statements to conform to the 1997
presentation.
3. INVENTORIES
Inventories consist of the following at December 31, 1997 and 1996:
1997 1996
Raw material $ 461,000 $ 1,083,000
Work in process 1,000 373,000
Finished goods 615,000 248,000
----------- -----------
Total $ 1,077,000 $ 1,704,000
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997
and 1996:
1997 1996
Land $ - $ 300,000
Building - 2,255,000
Machinery and equipment 1,263,000 4,281,000
Furniture and fixtures 97,000 153,000
---------- -----------
1,360,000 6,989,000
Less accumulated depreciation 608,000 2,098,000
---------- -----------
Property and equipment - net $ 752,000 $ 4,891,000
========== ===========
-8-
<PAGE>
5. SUB-LICENSE OF RIGHTS
On February 9, 1988, the Company granted a sub-license to its exclusive
right and license to use its technology to Draxis Health Inc. (formerly
Deprenyl Research Limited) to commercialize certain drugs in Canada for
15 years. The Company receives a royalty of 11% of Draxis Health Inc.'s
net sales over the license period.
Royalty income, net of related royalty expense payable to Chinoin,
included in other income for the years ended December 31, 1997, 1996
and 1995 was approximately $261,000, $175,000 and $197,000,
respectively.
6. INTANGIBLE ASSETS
Intangible assets primarily represent the cost of a modification to the
terms of the Chinoin Agreement, less accumulated amortization of
$1,639,000, and $1,446,000 at December 31, 1997 and 1996, respectively.
7. CO-PROMOTIONAL AGREEMENT
In 1990, the Company entered into an agreement with Sandoz
Pharmaceuticals Corporation ("Sandoz") to co-promote the product
Eldepryl. The agreement required Sandoz, among other things, to expend,
at a minimum, a predetermined amount for advertising during each year
of the agreement. In December 1994, the Company amended its
co-promotional agreement with Sandoz. The amended agreement eliminated
certain residual period payments to Sandoz, shortened the term to March
31, 1996, eliminated certain sales force detail requirements and
required certain payments to be made to the Company if a predetermined
level of sales was not achieved.
During 1995 the Company entered into an agreement with CoCensys, Inc.
("CoCensys") for the promotion of Elderpryl. The agreement was
effective January 1, 1996 and had an initial term of two years. Under
the terms of the original agreement, the Company would have compensated
CoCensys, based on a predetermined formula that considered both the
number of new prescriptions written and the net sales dollars achieved
in each quarter. During 1996 and 1997, the agreement was modified with
respect to term, new prescriptions and detail calls. During 1997,
CoCensys was acquired by Watson. In January 1998, the Company entered
into an agreement to pay Watson $4.8 million for the promotion and
marketing of Elderpryl during 1998.
During 1997, 1996 and 1995, the Company expensed (net of any payments
required to be made to the Company by Sandoz in 1995) $3,800,000,
$1,230,000 and $5,304,000, respectively, pursuant to these agreements.
Additionally, certain co-promotional fees paid by Sandoz at the
commencement of the 1990 agreement were recognized ratably by the
Company during the term of the agreement (six years, expiring on March
31, 1996), and certain costs associated with the procurement,
negotiating and execution of the agreement by the owners of the Company
were incurred by the Company in approximately the same amount.
8. OTHER INCOME
In November 1994, the Company prevailed in litigation it brought
against foreign defendants who were selling and marketing chemical
compounds similar to Eldepryl without FDA approval. In late 1997, a
final judgment was rendered by the United States Federal District
Court. In November 1997, the Company received and recorded as other
income approximately $1,225,000 for settlement of the litigation and
reimbursement of related costs.
-9-
<PAGE>
During November 1997, the Company sold its research and development
facility and related equipment with a net book value of approximately
$3,422,000 for $3,000,000. The resulting loss of $422,000 is recorded
as a reduction in other income. The Company financed in the form of a
note $1,000,000 of the sales price. The note receivable is
collateralized by the facility and will be collected in 60 monthly
installments bearing interest at 8%. Current and non-current portions
are included with prepaid expenses and other current assets and other
assets, respectively, in the consolidated balance sheet at December 31,
1997.
9. INCOME TAXES
The income tax provision consists of the following for the years ended
December 31, 1997, 1996 and 1995:
1997 1996 1995
Current tax expense:
Federal $ 10,283,000 $ 15,257,000 $ 15,625,000
State 2,549,000 4,194,000 4,177,000
Foreign 100,000 100,000 115,000
------------ ------------ ------------
12,932,000 19,551,000 19,917,000
------------ ------------ ------------
Deferred tax expense (benefit):
Federal (7,000) (669,000) 256,000
State (1,000) (67,000) 27,000
------------ ------------ ------------
(8,000) (736,000) 283,000
------------ ------------ ------------
Total provision
for income taxes $ 12,924,000 $ 18,815,000 $ 20,200,000
============ ============ ============
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant items comprising the Company's
deferred taxes (which are included in "Other Assets" in the balance
sheet) at December 31, 1997 and 1996 are as follows:
1997 1996
Deferred tax assets:
Deferred compensation $ 223,000 $ 557,000
Inventory valuation allowance 243,000 230,000
Chargeback and rebate allowances 593,000 216,000
Other 95,000 37,000
--------- ---------
1,154,000 1,040,000
Deferred tax liabilities -
different methods of accounting
between financial and income tax
reporting for amortization 326,000 220,000
--------- ---------
Net deferred tax assets $ 828,000 $ 820,000
========= =========
-10-
<PAGE>
The statutory federal income tax rate is reconciled to the effective tax rate as
follows for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
Tax at statutory rate 35.0 % 35.0 % 35.0 %
State income tax
(net of federal benefit) 3.8 3.6 2.8
Tax credits (7.9) (9.5) (9.4)
Tollgate tax 3.4 4.0 3.9
Other 0.7 1.3 (1.0)
----- ----- -----
Effective tax rate 35.0 % 34.4 % 31.3 %
===== ===== =====
Tax credits result principally from operations in Puerto Rico. See Note
13.
10. RELATED PARTY TRANSACTIONS
The Company incurs expenses for ongoing management services and over a
six-year period (which ended March 31, 1996) for specific services
related to the procurement, negotiation and execution of the original
co-promotion agreement by the owners of the Company. The Company also
has other transactions with one or both of its owners as detailed below
for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Management fees $ 3,348,000 $ 5,076,000 $ 5,370,000
Marketing and advertising 775,000 - -
Research and development 90,000 1,250,000 -
Inventory handling and distribution fees 465,000 519,000 415,000
Rent - equipment and facilities 640,000 1,217,000 1,416,000
</TABLE>
11. SIGNIFICANT CUSTOMERS
The Company had sales to certain customers which individually exceeded
10% of sales. In 1997 sales to five major customers were $15,878,000,
$13,498,000, $11,427,000, $8,658,000 and $7,746,000, respectively. In
1996 sales to three major customers were $23,200,000, $21,259,000 and
$18,692,000, respectively. In 1995 sales to four major customers were
of $23,986,000, $23,467,000, $15,733,000 and $13,111,000, respectively.
12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution profit sharing plan covering
substantially all employees. Contributions are made at the discretion
of the Board of Directors. Additionally, during 1994, the Company
initiated a deferred compensation plan for certain key employees.
During 1997, the Company terminated the deferred compensation plan.
During 1997, 1996 and 1995, the Company recorded expense of $-0-,
$954,000 and $83,000, respectively, under these plans. The Company
expects to terminate the defined contribution profit sharing plan
during 1998 without significant impact on 1998 operating results.
-11-
<PAGE>
13. CONTINGENCY
In connection with an examination of the Company's Federal tax returns
for the three years ended December 31, 1995, representatives of the
Internal Revenue Service (the "Service"), in June 1997, issued to the
Company a report that contains proposed adjustments to the Company's
use of tax credits under Internal Revenue Code section 936.
Under the proposed adjustments, the Company could be subject to
approximately $13 million of additional income tax and interest charges
that have not been accrued at December 31, 1997.
Management believes that the Company has met all of the requirements to
qualify for the tax credits available under Internal Revenue Code
section 936, and intends to vigorously defend its position on this
matter.
* * * * * *
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 82,837
<SECURITIES> 32,102
<RECEIVABLES> 67,184
<ALLOWANCES> 2,140
<INVENTORY> 46,967
<CURRENT-ASSETS> 246,765
<PP&E> 135,685
<DEPRECIATION> 47,681
<TOTAL-ASSETS> 754,981
<CURRENT-LIABILITIES> 99,840
<BONDS> 0
0
0
<COMMON> 290
<OTHER-SE> 564,720
<TOTAL-LIABILITY-AND-EQUITY> 754,981
<SALES> 324,015
<TOTAL-REVENUES> 338,264
<CGS> 125,057
<TOTAL-COSTS> 215,980
<OTHER-EXPENSES> (22,314)
<LOSS-PROVISION> (66)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 144,598
<INCOME-TAX> 54,414
<INCOME-CONTINUING> 90,184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,184
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.01
</TABLE>
