<PAGE> 1
[Image]
Form 10-K/A for WATSON PHARMACEUTICALS INC filed on May 5, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K/A
AMENDMENT NO. 1
(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
---------------
WATSON PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 95-3872914
------------------------------- -------------------
(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
----------------------------------------------------
(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 filed 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> 2
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
2
<PAGE> 3
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
</TABLE>
- -----------------
* - Excludes certain contingent payments
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 *
</TABLE>
- -------------------
* - Excludes certain contingent payments
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>
3
<PAGE> 4
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.
4
<PAGE> 5
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.
5
<PAGE> 6
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.
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.
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.
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.
6
<PAGE> 7
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
7
<PAGE> 8
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
8
<PAGE> 9
(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.
At the conclusion of an inspection during November 1997, the Company
received a Form FD 483 ("FD483") from the FDA listing several perceived
deficiencies in specifications and control procedures for the oldest of the
Company's approved products. The Company's response to the FD 483 demonstrated
that additional specifications and procedures had been or were being developed.
On January 28, 1998, before the Company's response was evaluated, the FDA issued
a Warning Letter that cited the need to take corrective actions. Thereafter,
the Company provided a written response to the Warning Letter and met with the
FDA to discuss the FD 483 observations and the Warning Letter. Based upon
discussions with the FDA, the Company believes that all issues raised by the
FDA have been resolved or will be resolved satisfactorily within a time period
agreed to with the FDA.
9
<PAGE> 10
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> 11
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 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.
Beginning in late 1997, a number of product liability suits were filed
against Rugby and numerous manufacturing defendants for personal injuries
arising out of the use of phentermine hydrochloride. The Plaintiffs allege
various injuries, ranging from memory loss and anxiety to heart damage and
death. To date, twenty-six cases have been filed in state and federal courts in
eleven different states. Most of the cases involve multiple plaintiffs, and six
of the complaints were filed as class actions. The Company believes that it will
be fully indemnified by Hoechst Marion Roussel, Inc. ("HMRI") for the defense
and liability of these cases, and HMRI is currently controlling the defense of
all these matters. Additionally, it is Rugby's position that it has recourse for
liability from the manufacturing defendants in these cases.
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.
11
<PAGE> 12
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
<PAGE> 13
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/ CHATO ABAD
-----------------------------------------
Chato Abad
Vice President-Finance
(Principal Financial and Accounting
Officer)
Date: May 4, 1998
13
<PAGE> 14
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.
F-1
<PAGE> 15
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> 16
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> 17
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> 18
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
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> 19
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, Except Earnings per Share)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 20
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
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> 21
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
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> 22
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
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>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
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
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 23
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:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>
F-10
<PAGE> 24
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> 25
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> <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> 26
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> 27
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> 28
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:
<TABLE>
<CAPTION>
DUE DATE AMOUNT
--------------- -------------
<S> <C>
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
==============
</TABLE>
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> 29
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
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
========= =========
</TABLE>
F-16
<PAGE> 30
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM INVESTMENTS
Investments and other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>
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> 31
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues $ 73,489 $101,512 $107,365
======== ======== ========
Gross profit $ 39,640 $ 88,840 $ 93,748
======== ======== ========
Net income $ 12,924 $ 31,564 $ 41,099
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
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> 32
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
At December 31, 1997, annual maturities of long-term debt consisted of the
following:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
-----------------------------------------
<S> <C>
1998 $ 864
1999 1,002
2000 858
2001 525
2002 -
-------
$ 3,249
=======
</TABLE>
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> 33
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Current provision:
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
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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%
=== === ===
</TABLE>
F-20
<PAGE> 34
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(in thousands)
<S> <C> <C>
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)
======= =======
</TABLE>
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> 35
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> <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> 36
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:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
<S> <C>
1998 $ 2,779
1999 2,594
2000 654
2001 251
2002 and after 99
-------
$ 6,377
=======
</TABLE>
F-23
<PAGE> 37
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> 38
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> 39
WATSON PHARMACEUTICALS, INC.
SCHEDULE II - VALUATION & QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
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> 40
WATSON PHARMACEUTICALS, INC.
EXHIBIT INDEX
1997 FORM 10-K/A
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.27 Stock Purchase Agreement among the Company, Hoechst Marion
Roussel, Inc. and Marisub, Inc. dated August 25, 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. *
</TABLE>
- ------------------
(*) The Company has submitted a confidential treatment request relating to
certain provisions of these agreements with the Securities and Exchange
Commission.
<PAGE> 1
EXHIBIT 10.27
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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").
R E C I T A L S
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.
A G R E E M E N T S
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 Seventy
Million Dollars ($70,000,000) (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 $39,000,000; or (b) reduced by the amount by which $38,000,000 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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
<PAGE> 2
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 $39,000,000, 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 $39,000,000 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 Medicaid
rebates included as an accrued liability in the Interim Financial Statements and
the reserve relating to the claim by the Department of Defense (the "Dapa
Reserve") included in the Interim Financial Statements shall not have been
reversed from July 31, 1997 through the Closing Date if the effect of such
reversal would be to increase the consolidated net income of the Company and its
Subsidiaries; and (e) the assets and liabilities reflected on the Closing
Balance Sheet shall exclude (i) all intangible assets of the Company or any of
its Subsidiaries; (ii) any asset or liability relating to Chelsea Laboratories
Caribe, Inc. ("Caribe"); (iii) any asset or liability relating to the Monroe,
North Carolina manufacturing facility owned by Chelsea Laboratories, Inc.; and
(iv) the amounts referenced in Sections 6 and 9(a) of the Novopharm Agreement
(as defined herein) and any
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
2
<PAGE> 3
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
amounts relating to purchase credits or similar adjustments due or claimed to be
due to the Company or its Subsidiaries from Novopharm pursuant to the terms of
the Novopharm Agreement, and any amounts relating to damages owed or claimed to
be owed by Novopharm to the Company or its Subsidiaries due to Novopharm's
breach of such agreement, other than claims relating to shortages of product or
defective goods. 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 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
3
<PAGE> 4
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
4
<PAGE> 5
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
5
<PAGE> 6
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
6
<PAGE> 7
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
7
<PAGE> 8
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
8
<PAGE> 9
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
9
<PAGE> 10
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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. Sections 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. Section
262, 21 C.F.R. Part 601 et. seq., and all terms and conditions of the ELA and/or
PLA.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
10
<PAGE> 11
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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. Section 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.
Sections 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. Section 335a(k)(l) and the list described
in 21 U.S.C. Section 335a(k)(2), and such certification and such list was in
each case true and
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
11
<PAGE> 12
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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. Section 335a(a) or authorized by 21 U.S.C. Section 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. Sections 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 reduced the amount of the Medicaid
rebates reflected as an accrued liability in its books and records or its
consolidated financial statements or the Dapa Reserve reflected as an accrued
liability in its books and records or its consolidated financial statements if
the effect of such reduction would be to increase the consolidated net income of
the Company and its Subsidiaries.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
12
<PAGE> 13
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
13
<PAGE> 14
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
14
<PAGE> 15
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
15
<PAGE> 16
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
16
<PAGE> 17
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
17
<PAGE> 18
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
18
<PAGE> 19
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
19
<PAGE> 20
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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:
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
20
<PAGE> 21
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
21
<PAGE> 22
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
22
<PAGE> 23
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
23
<PAGE> 24
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
24
<PAGE> 25
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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;
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
25
<PAGE> 26
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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:
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
26
<PAGE> 27
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
27
<PAGE> 28
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 Ciprofloxacin 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 January 8, 1997 by and among Bayer AG, Bayer
Corporation, Barr Laboratories, Inc. ("Barr") and Parent (the "Cipro Supply
Agreement") or the Agreement dated as of March 29, 1996, as amended, between
Parent and Barr (the "Barr 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 January 8, 1997 by
and among Parent, the Company, Bayer AG, Bayer Corporation and Barr. 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 Cipro Supply Agreement or the Barr Supply Agreement upon
Watson's or one of its Subsidiaries' appointment
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
28
<PAGE> 29
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
as Parent's exclusive distributor of Ciprofloxacin 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
Ciprofloxacin in the United States other than the Cipro Supply Agreement, the
Barr 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 Ciprofloxacin 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
29
<PAGE> 30
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 Distributed Ranitidine), 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;
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
30
<PAGE> 31
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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 Option
Agreements between the Company and Pharma Pass, LLC; or
(xvii) not reduce the amount of the Medicaid rebates included
as an accrued liability in the books and records or the consolidated financial
statements of the Company and its Subsidiaries or the Dapa Reserve reflected in
the books and records or the consolidated financial statements of the Company
and its Subsidiaries if the effect of such reduction would be to increase the
net income of the Company or its Subsidiaries.
4.3 Filings; Other Action. Subject to the terms and conditions herein
provided, the
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
31
<PAGE> 32
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
32
<PAGE> 33
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 Barr shall have amended (the "Barr Amendment") the
Preferred Supplier Agreement (the "Barr Agreement") dated as of March 29, 1996
between the Company and Barr to delete Section 15.6 of the Barr Agreement or
shall terminate the Barr Agreement. If amended, no provision of the Barr
Agreement other than Section 15.6, shall be amended
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
33
<PAGE> 34
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 Barr as consideration for entering
into the Barr Amendment or terminating the Barr 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
34
<PAGE> 35
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
35
<PAGE> 36
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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 Novopharm for the
change of control to the Preferred Distributor Agreement (the "Novopharm
Agreement") dated August 29, 1994 between the Company and Novopharm Limited
("Novopharm"), which consent shall not alter any of the provisions of the
Novopharm 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 a liability to a contribution of
capital 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 the
purchase of Distributed Ranitidine (which amount shall not exceed $30,000,000 in
the aggregate) (i) shall remain outstanding as of the Closing Date; (ii) shall
not be converted into a contribution to capital; 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 Searle & Co.
("Searle") relating to the non-competition provisions of the Distribution
Agreement dated July 1, 1994 between the Company and Hamilton Pharma Inc.;
provided, that this condition shall terminate as of October 31, 1997.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
36
<PAGE> 37
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(m) Watson shall have received sufficient evidence that each of the
agreements between the Company and Pharma Pass, LLC 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 Distributed
Ranitidine (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 Distributed Ranitidine, as the case may be; plus (ii) all
royalties paid by Watson or any of its Subsidiaries with respect to such Product
or Distributed Ranitidine, as the case may be, except for the royalty to be paid
pursuant to Section 6.4. 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,
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
37
<PAGE> 38
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 ranitidine (Rx or OTC) or Ciprofloxacin 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
38
<PAGE> 39
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
customary practices. In the case of Products or Distributed Ranitidine
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 Distributed Ranitidine, 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 Distributed
Ranitidine, the amount by which Net Sales with respect to each Product or
Distributed Ranitidine, as the case may be, exceeds Cost of Sales with respect
to each Product or Distributed Ranitidine, 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 Distributed Ranitidine, 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 1998, 1999 and 2000, Watson and its
Subsidiaries shall record sales of Products or products included in the
Distribution Business according to their usual,
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
39
<PAGE> 40
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 to book sales in the
year 1998 or defer the recognition of sales to the year 2000 that would, in each
case, otherwise be booked in 1999; or (ii) conduct promotional sales programs
during the last quarter of 1998 or 1999 or during the first quarter of 2000, in
each case, outside the ordinary course of business that would have the effect of
increasing sales in 1998 or 2000 and decreasing sales in 1999.
(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 ranitidine (Rx or OTC) as a distributed
(rather than a manufactured) product through goods purchased from Novopharm or
any other third party ("Distributed Ranitidine"), 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 Distributed Ranitidine 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
Distributed Ranitidine sold by Watson and its Subsidiaries for the period
covered by such Quarterly Report.
6.4 Royalty Payment on Distributed Ranitidine.
(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 Distributed Ranitidine (Rx) and
Distributed Ranitidine (OTC), respectively, during the calendar quarter covered
by the Quarterly Report; provided, however, that, in lieu of the foregoing
royalty, until the earlier of the date upon which the Ranitidine 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 Distributed Ranitidine during the period beginning
on the Closing Date and ending on December 31, 1998. For purposes of this
Agreement, the "Ranitidine Payment" shall mean an amount equal to $15,000,000,
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 Distributed Ranitidine
during the period from the opening of business
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
40
<PAGE> 41
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 Novopharm Agreement, or any other amounts from Novopharm due to
the breach of such agreement by Novopharm 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 Ranitidine 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 ranitidine
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 Novopharm pursuant to Section 4 of the Novopharm Agreement.
(d) Watson and its Subsidiaries shall sell Distributed Ranitidine 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 ranitidine as a
manufactured product, Watson and its Subsidiaries agree to use commercially
reasonable good faith efforts to market and sell Distributed Ranitidine, unless
it becomes commercially unfeasible for Watson or its Subsidiaries to continue to
market and sell Distributed Ranitidine. 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 Distributed Ranitidine
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 Distributed Ranitidine multiplied by the following
fraction, the numerator of which is equal to the number of units of Distributed
Ranitidine 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 Distributed Ranitidine) or service included in such bundled sale
multiplied by the respective standard invoice unit price thereof.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
41
<PAGE> 42
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(e) To the extent that Watson or one of its Subsidiaries actually
receives any amounts from Novopharm relating to purchase credits on any units of
Distributed Ranitidine sold by the Company or its Subsidiaries and such purchase
credits relate in whole or in part to the period of time prior to August 11,
1997, Watson or one of its Subsidiaries shall pay such amount of the credits
which relate to the sale of Distributed Ranitidine made by the Company or its
Subsidiaries prior to August 11, 1997 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
March 31, 2000, 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 1999; and (ii) the Distribution Net Profit during calendar year
1999 (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 $150,000,000:
(i) if the Upside Net Profits are less than or equal to $*,
zero dollars ($0.00);
(ii) if the Upside Net Profits are less than or equal to $*
but greater than $*, (A) four (4); multiplied by (B) the Upside Net Profits less
$*;
(iii) if the Upside Net Profits are less than or equal to $*
but greater than $*, $20,000,000 plus the following: (A) three (3); multiplied
by (B) the Upside Net Profits less $*;
(iv) if the Upside Net Profits are less than or equal to $*
but greater than $*, $35,000,000 plus the following: (A) two and one-half (2.5);
multiplied by (B) the Upside Net Profits less $*; and
(v) if the Upside Net Profits are greater than $*, $47,500,000
plus the following: (A) two (2); multiplied by (B) the Upside Net Profits less
$*.
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
42
<PAGE> 43
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 (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 1999 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 1999 shall be deemed to be equal to the sum of (x)
the Distribution Net Profits derived by
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
43
<PAGE> 44
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 1999; 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, 1999, (i) all Net Profits received from the
commercial sale of such Product during calendar year 1999 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,
1999, 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
1999 shall be equal to the Net Profit derived by Watson and its Subsidiaries
from the sale of such Product during calendar year 1999 multiplied by the
following fraction: the numerator of which is equal to the Net Profit derived by
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
44
<PAGE> 45
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 1999 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 1999 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, 1999, 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, 2000 (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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
45
<PAGE> 46
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 Distributed Ranitidine 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
46
<PAGE> 47
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
47
<PAGE> 48
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
48
<PAGE> 49
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
49
<PAGE> 50
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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,
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
50
<PAGE> 51
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 $1,250,000, 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 $22,500,000 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 $1,250,000, 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 $22,500,000 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
51
<PAGE> 52
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
52
<PAGE> 53
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
53
<PAGE> 54
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
54
<PAGE> 55
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
55
<PAGE> 56
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
56
<PAGE> 57
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
57
<PAGE> 58
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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:___________________________
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
58
<PAGE> 1
EXHIBIT 10.27(b)
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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:
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
<PAGE> 2
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
"(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:
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
2
<PAGE> 3
"(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 "Novopharm" and replacing such
word with the phrase "Novopharm Limited ("Novopharm")".
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
3
<PAGE> 4
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 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".
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
4
<PAGE> 5
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
5
<PAGE> 6
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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:
------------------------------
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
6
<PAGE> 1
Exhibit 10.28
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
*
SUPPLY AND LICENSE AGREEMENT
BY AND BETWEEN
HOECHST MARION ROUSSEL, INC.
AND
THE RUGBY GROUP, INC.
FEBRUARY 27, 1998
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
<PAGE> 2
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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).
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
<PAGE> 3
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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, 2001, 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-2-
<PAGE> 4
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
actual gross invoice price for sales of * by Rugby or its Affiliates, less: (i)
any and all promotional 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) *% 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.
- ----------------
* will be added to Exhibit A to this Agreement upon the effective date of
the launch of such product in generic form. Pricing for * will be provided
within fifteen (15) days after Rugby's provision of estimated volumes and
estimated pricing of such product.
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-3-
<PAGE> 5
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
consent of HMRI, to entities which are not Affiliates of Rugby. Rugby will
provide a copy of all such sublicenses to HMRI.
II.3 RIGHT OF FIRST REFUSAL. In the event HMRI determines (in
its sole discretion) to launch a generic version of *, 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 a generic version of * (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 a generic
version of * 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 a generic version of *, 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 a
generic version of *, 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-4-
<PAGE> 6
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 (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 a generic version of * is added
as a Product and becomes subject to the terms of this Agreement, HMRI will ship
a generic version of * 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-5-
<PAGE> 7
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
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 four
(4) consecutive short-term forecasts (under Section 3.5(b) hereof) with respect
to the first three (3) months of each such forecast.
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;
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-6-
<PAGE> 8
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 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 October 1 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 three (3) 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 calendar quarter, 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 twelve (12) month period commencing with
that calendar quarter, stipulating periodic delivery requirements. The first
three months 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:
<TABLE>
<CAPTION>
Percentage of Product indicated
Three Month Period in the forecast that Rugby is
of the forecast is required to purchase
--------------- -----------------------
<S> <C> <C>
First 100%
Second 50% over the next three quarters
</TABLE>
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-7-
<PAGE> 9
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
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)
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-8-
<PAGE> 10
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
(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.
(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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-9-
<PAGE> 11
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-10-
<PAGE> 12
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 sucralfate, which after
the * anniversary of this Agreement will be supplied at cost and will have the
profit split 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 SUCRALFATE. Beginning January
1, 1999 and continuing in perpetuity, Rugby shall make payments to HMRI equal to
*% of the Net Profit of sucralfate, based upon the quarterly periods ended March
31, June 30, September 30 and December 31. After January 1, 1999 through the
second anniversary of this Agreement, the profit split for sucralfate 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 sucralfate 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 sucralfate, multiplied by the following fraction, the
numerator of which is equal to the number of units of sucralfate 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 sucralfate) 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
sucralfate, 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 sucralfate 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 sucralfate, 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 sucralfate, 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-11-
<PAGE> 13
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
"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 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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-12-
<PAGE> 14
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 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, 2001,
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 two years' 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, 2001). 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-13-
<PAGE> 15
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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) 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 Sucralfate), 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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-14-
<PAGE> 16
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-15-
<PAGE> 17
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-16-
<PAGE> 18
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-17-
<PAGE> 19
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 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:
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-18-
<PAGE> 20
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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 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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-19-
<PAGE> 21
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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
(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;
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-20-
<PAGE> 22
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-21-
<PAGE> 23
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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").
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-22-
<PAGE> 24
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 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").
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-23-
<PAGE> 25
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-24-
<PAGE> 26
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
(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:
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-25-
<PAGE> 27
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-26-
<PAGE> 28
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-27-
<PAGE> 29
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-28-
<PAGE> 30
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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:
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-29-
<PAGE> 1
Exhibit 10.29
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
*
CONTRACT MANUFACTURING AGREEMENT
BY AND BETWEEN
HOECHST MARION ROUSSEL, INC.
AND
THE RUGBY GROUP, INC.
FEBRUARY 27, 1998
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
<PAGE> 2
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 ranitidine; plus (ii) all royalties paid to third parties with respect to
ranitidine (other than to HMRI or its Affiliates pursuant to this Agreement).
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
<PAGE> 3
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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, 2001, 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 ranitidine
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 ranitidine in finished
dosage form (SKU) for Rugby or its Affiliates, including, costs related to the
purchase of labels. With respect to ranitidine 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 ranitidine. "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.
I.14 "NET PROFIT" means with respect to ranitidine 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 ranitidine 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;
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-2-
<PAGE> 4
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
and (iv) *% of the reasonable allowance for doubtful accounts accrued in the
ordinary course of business, in accordance with historical practice and GAAP.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-3-
<PAGE> 5
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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.
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-4-
<PAGE> 6
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
(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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-5-
<PAGE> 7
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 two (2) years 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, 2000; provided,
further, that ranitidine, 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 four (4) consecutive short-term forecasts (under Section 3.5(b) hereof) with
respect to the first three (3) months of each such forecast.
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 one year's supply of
such Products, which supply is based upon the amount of Product purchased by
Rugby or its Subsidiaries over the previous twelve (12) months. 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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-6-
<PAGE> 8
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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 October 1 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 three (3) 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 calendar quarter, 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 twelve (12) month period commencing with
that calendar quarter, stipulating periodic delivery requirements. The first
three months 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 quarters as
follows:
<TABLE>
<CAPTION>
Percentage of Product indicated
Three Month Period in the forecast that Rugby is
of the forecast is required to purchase
--------------- -----------------------
<S> <C> <C>
First 100%
Second 50% over the next three quarters
</TABLE>
II.7 ORDERS. Rugby acknowledges that each Product is produced
in full lot quantities, as set forth on Exhibit A attached hereto. At least
ninety (90) 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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-7-
<PAGE> 9
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
2110 East Galbraith Road
P.O. Box 156300
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 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-8-
<PAGE> 10
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
(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
(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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-9-
<PAGE> 11
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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
*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
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 RANITIDINE. Rugby shall make
payments to HMRI equal to (a) with respect to sales of ranitidine from the
Closing Date through December 31, 1998, *% of the Net Profit of ranitidine
(whether Rx or OTC) (other than Distributed Ranitidine, as defined in the Stock
Purchase Agreement, for which the royalty 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 ranitidine (whether
Rx or OTC) (other than Distributed Ranitidine, for which the royalty payment is
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-10-
<PAGE> 12
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
ranitidine 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 ranitidine, multiplied by the following
fraction, the numerator of which is equal to the number of units of ranitidine
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
ranitidine) 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
ranitidine, 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 ranitidine 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 ranitidine,
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 ranitidine, 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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-11-
<PAGE> 13
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-12-
<PAGE> 14
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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, 2001,
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 two years' 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, 2001).
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 Ranitidine), 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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-13-
<PAGE> 15
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
(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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-14-
<PAGE> 16
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-15-
<PAGE> 17
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-16-
<PAGE> 18
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-17-
<PAGE> 19
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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;
(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;
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-18-
<PAGE> 20
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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.
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:
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-19-
<PAGE> 21
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(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;
(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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-20-
<PAGE> 22
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-21-
<PAGE> 23
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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").
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-22-
<PAGE> 24
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-23-
<PAGE> 25
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-24-
<PAGE> 26
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-25-
<PAGE> 27
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
(b) This Agreement shall not be amended, modified,
varied or supplemented except in writing signed by duly authorized
representatives of the parties.
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
-26-
<PAGE> 28
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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.
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-27-
<PAGE> 29
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
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.
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:
CONFIDENTIAL TREATMENT - NOTED BY * AND STRIKE-THROUGH
-28-
