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<SEC-DOCUMENT>0001017062-01-000663.txt : 20010402
<SEC-HEADER>0001017062-01-000663.hdr.sgml : 20010402
ACCESSION NUMBER: 0001017062-01-000663
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 11
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010330
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: WATSON PHARMACEUTICALS INC
CENTRAL INDEX KEY: 0000884629
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 953872914
STATE OF INCORPORATION: NV
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-13305
FILM NUMBER: 1585246
BUSINESS ADDRESS:
STREET 1: 311 BONNIE CIRCLE
CITY: CORONA
STATE: CA
ZIP: 92880
BUSINESS PHONE: 9092701400
MAIL ADDRESS:
STREET 1: 311 BONNIE CIRCLE
CITY: CORONA
STATE: CA
ZIP: 92880
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
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<FILENAME>0001.txt
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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)
----------------
<TABLE>
<S> <C>
Nevada 95-3872914
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
311 Bonnie Circle, Corona, CA 92880-2882
(Address of principal executive offices, including 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, $0.0033 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 [_]
Indicate 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. [X]
Aggregate market value, as of March 16, 2001, of Common Stock held by non-
affiliates of the registrant: $5,468,020,000 based on the last reported sale
price on the New York Stock Exchange.
Number of shares of Common Stock outstanding on March 16, 2001: 105,821,868.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of
Stockholders, to be held on May 7, 2001, are incorporated by reference in Part
III of this report.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
WATSON PHARMACEUTICALS, INC
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
ITEM 1. Business............................................................................... 3
ITEM 2. Properties............................................................................. 27
ITEM 3. Legal Proceedings...................................................................... 27
ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 29
ITEM 4a. Executive Officers of the Registrant................................................... 29
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 31
ITEM 6. Selected Financial Data................................................................ 32
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 34
ITEM 7a. Quantitative And Qualitative Disclosures About Market Risk............................. 41
ITEM 8. Financial Statements and Supplementary Data............................................ 41
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................................... 42
ITEM 11. Executive Compensation................................................................. 42
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................... 42
ITEM 13. Certain Relationships and Related Transactions......................................... 42
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 43
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
Watson Pharmaceuticals, Inc. is primarily engaged in the development,
manufacture, marketing and distribution of branded and off-patent (generic)
pharmaceutical products. We were incorporated in 1985 and began operations as
a manufacturer and marketer of off-patent pharmaceuticals. Through internal
product development and synergistic acquisitions of products and businesses,
we have grown into a diversified specialty pharmaceutical company. Currently,
we market more than 28 branded pharmaceutical product-lines and approximately
140 off-patent pharmaceutical products. We also develop advanced drug delivery
systems designed to enhance the therapeutic benefits of existing drug forms.
Our principal executive offices are located at 311 Bonnie Circle, Corona,
California 92880.
Recent Developments
Schein Pharmaceutical, Inc. In August 2000, we completed our acquisition of
Schein Pharmaceutical, Inc. The Schein acquisition marked our entrance into
the nephrology market, through Schein's branded iron replacement products,
INFeD(R) (iron dextran injection) and Ferrlecit(R) (sodium ferric gluconate
complex in sucrose injection). At the time of acquisition, Schein was the
seventh-largest generic pharmaceutical company in the United States based on
number of units sold. Schein's generic product line complemented and expanded
our existing product offerings by adding a significant number of marketed
products to our then existing product portfolio.
Makoff R&D Laboratories, Inc. In November 2000, we acquired Makoff R&D
Laboratories, Inc. and its rights to Ferrlecit(R). Ferrlecit(R) is an
injectable iron therapy used to treat iron deficiency anemia in hemodialysis
patients. The Makoff acquisition gave us ownership of the approved New Drug
Application (NDA), or United States market approval, for Ferrlecit(R), greater
control over the supply process for Ferrlecit(R), and enhanced our marketing
capabilities with Makoff's dedicated nephrology telemarketing sales
organization. It also has created a direct relationship between us and
Aventis, the manufacturer of Ferrlecit(R).
Jerome Stevens Pharmaceuticals, Inc. In October 2000, we entered into an
exclusive worldwide marketing and distribution agreement with Jerome Stevens
Pharmaceuticals, Inc. for Unithroid(TM), the first and currently only United
States Food and Drug Administration (FDA) approved form of levothyroxine
sodium, USP tablets. Levothyroxine sodium is a synthetic hormone used to treat
hypothyroidism or underactive thyroid glands. A majority of patients treated
for hypothyroidism are women. In 1997, the FDA adopted regulations that now
require all oral forms of levothyroxine sold in the United States to be
approved by the FDA. Unithroid(TM) is the first and currently only
levothyroxine product with an FDA approved NDA (received in August 2000). We
launched Unithroid(TM) in the United States in December 2000.
Genelabs Technologies, Inc. In November 2000, we obtained an exclusive
license to market and sell Aslera(TM) in the United States and throughout
North America from Genelabs Technologies, Inc. Aslera(TM) is an
investigational drug developed by Genelabs for the treatment of chronic
autoimmune disease systemic lupus erythematosus, or Lupus. Lupus is a life
threatening condition that causes the body's immune system to attack its own
tissues, which can lead to inflammation, arthritis pain, tissue injury and
major organ damage. Aslera(TM) was granted priority review designation by the
FDA in October 2000, following Genelabs submission of an NDA in September
2000. The FDA grants priority review to those drugs that are designed to treat
a serious condition for which there is not an adequate remedy at hand. In
addition, in 1994, the FDA granted Aslera(TM) Orphan Drug designation, which
provides for up to seven years of marketing exclusivity in the United States
from the date of the drug's approval. Aslera(TM) has the potential to be the
first new treatment of Lupus in 40 years. We expect to launch Aslera(TM) in
the U.S. in 2001, assuming timely FDA approval. We are also joining forces
with Genelabs to pursue other commercial applications beyond the initial
indication for Aslera(TM), as well as for other products based on the active
ingredient of Aslera(TM), prasterone.
3
<PAGE>
Branded Pharmaceutical Products
Newly developed pharmaceutical products are normally patented and, as a
result, generally are offered by a single provider when first introduced to
the market. We currently market a number of patented products. We also market
certain trademarked off-patent products directly to healthcare professionals.
We classify these patented and off-patent trademarked products as our branded
pharmaceutical products.
Our branded pharmaceutical business develops, manufactures and markets
products primarily in three therapeutic areas: Women's Health, General
Products, and Nephrology. We have targeted these therapeutic areas based
predominately on their potential growth opportunities. We believe that the
nature of these markets and the identifiable base of physician prescribers
provide us with the opportunity to achieve significant market penetration
through our specialized sales forces. Since many of our branded products are
proprietary and generally realize higher profit margins, we believe that our
branded products will generate more consistent earnings over a longer period,
when compared to our generic products. We intend to continue to expand our
branded product portfolio through internal product development, strategic
alliances and strategic acquisitions. See "Growth Strategy." Sales of branded
products accounted for approximately 53% of our total revenues in 2000, and
are expected to account for approximately 50% of our net product sales in
2001.
Women's Health
We currently market a total of 10 oral contraceptives and one female
hormone replacement product, primarily to obstetricians and gynecologists
through our specialized sales force of approximately 167 representatives.
Unithroid(TM) is also marketed by our Women's Health sales force jointly with
our General Products sales force. Our Women's Health product offering is the
largest, in terms of sales, within our branded pharmaceutical business and
remains a key area of focus and growth potential for us. Our Women's Health
branded products lines currently consist of the following:
<TABLE>
<CAPTION>
Watson Branded Product Active Ingredient Therapeutic Classification
---------------------- ------------------------------------------ ---------------------------
<S> <C> <C>
Alora(R) Estradiol (transdermal patch) Female hormone replacement
Brevacon(R) Norethindrone and ethinyl estradiol Oral contraceptive
Levora(R) Levonorgestrel and ethinyl estradiol Oral contraceptive
Low-Ogestrel(R) Norgestrel and ethinyl estradiol Oral contraceptive
Necon(R) Norethindrone and ethinyl estradiol Oral contraceptive
Norinyl(R) Norethindrone and ethinyl estradiol Oral contraceptive
Nor-QD(R) Norethindrone Oral contraceptive
Ogestrel(R) Norgestrel and ethinyl estradiol Oral contraceptive
Tri-Norinyl(R) Norethindrone and ethinyl estradiol Oral contraceptive
Trivora(R) Levonorgestrel and ethinyl estradiol Oral contraceptive
Unithroid(TM) Levothyroxine sodium Thyroid hormone replacement
Zovia(R) Ethynodiol diacetate and ethinyl estradiol Oral contraceptive
</TABLE>
We significantly expanded our presence in the branded oral contraceptive
market in 1997 with our acquisition of several off-patent oral contraceptive
brands from G.D. Searle & Company, Inc., including Trivora(R), Levora(R) and
Nor-QD(R). Since 1997, we have acquired additional products to expand the
portfolio of our marketed branded oral contraceptive products. We believe that
our product line is well-positioned to further penetrate this market.
In 1999, we entered the hormone replacement therapy (HRT) market by
reacquiring marketing and distribution rights to Alora(R), an estradiol
transdermal patch for hormone replacement. We also acquired rights to an
estradiol and progestin combination hormone replacement patch product which we
developed with Procter & Gamble under a prior collaborative agreement. The NDA
for this product was submitted in December 1999. In October 2000, we received
a Non-Approvable Letter from the FDA. The NDA was subsequently amended with
additional clinical testing results and that amendment is currently under
review by the FDA.
4
<PAGE>
General Products
Our General Products offering currently consists of anti-hypertensive,
neurology and psychiatry, pain management and dermatology products. The sales
of our General Products are supported by a sales force of approximately 201
representatives. We currently market a total of 14 branded product-lines that
we classify as General Products, including the following:
<TABLE>
<CAPTION>
Watson
Branded
Product Active Ingredient Therapeutic Classification
------------- -------------------------------------- -------------------------------------
<S> <C> <C>
Androderm(R) Testosterone (transdermal patch) Male hormone replacement
Cinobac(R) Cinoxacin Antibiotic
Condylox(R) Podofilox Topical antimitotic for genital warts
Cordran(R) Flurandrenolide Topical corticosteroid
Cormax(R) Clobetasol propionate Topical corticosteroid
Dilacor XR(R) Diltiazem Anti-hypertensive
Loxitane(R) Loxapine succinate Anti-psychotic
Maxidone(TM) Hydrocodone bitartrate & acetaminophen Analgesic
Microzide(R) Hydrochlorothiazide Anti-hypertensive
Monodox(R) Doxycycline monohydrate Antibiotic
Norco(R) Hydrocodone bitartrate & acetaminophen Analgesic
Unithroid(TM) Levothyroxine sodium Thyroid hormone replacement
</TABLE>
The Androderm(R) testosterone patch is our male HRT product. We acquired
the United States and Canadian rights to Androderm(R) from Glaxo SmithKline
PLC (formerly SmithKline Beecham PLC) in May 1999.
In June 2000, we entered into a co-marketing agreement with Pharmacia
Corporation for its Cleocin-T(R) line of acne products. We believe the
Cleocin-T(R) line of products compliments our existing oral antibiotic product
for acne, Monodox(R).
In fourth quarter 2000, we launched three new pain management products,
Maxidone(TM), Norco(R) 5/325 and Norco(R) 7.5/325. The additional dosage forms
of Norco(R) are product extensions of our existing Norco(R) 10/325 product. We
believe that pain management therapies will be a key growth area as physicians
increasingly focus on the treatment of pain. We market our pain management
products primarily to general and internal medicine practitioners and
surgeons.
In December 2000, we entered the thyroid replacement market with the
introduction of Unithroid(TM), a synthetic hormone for hypothyroidism. We
acquired marketing and distribution rights to Unithroid(TM) in October 2000
through an exclusive agreement with Jerome Stevens. Unithroid(TM) is marketed
through our General Products and Women's Health sales forces.
In late 2000, we redeployed members of our Oclassen(R) Dermatologics sales
and marketing personnel to our Women's Health, General Products and Nephrology
areas. Our branded dermatology product offerings are now promoted by our
General Products sales and marketing force under the Oclassen(R) Dermatologics
label.
Nephrology
In August 2000, we entered the nephrology market through our acquisition of
Schein and its iron replacement products, INFeD(R), and Ferrlecit(R). INFeD(R)
and Ferrlecit(R) are injectable products that treat iron deficiency anemia in
patients with end-stage renal disease who are receiving supplemental
erythropoietin therapy. INFeD(R), which was introduced in 1992, is not under
patent protection and does not have marketing exclusivity. Ferrlecit(R), which
was introduced in 1999, was granted a five-year exclusivity period by the FDA
as a new chemical entity, which runs through June 2004. In addition, effective
January 1, 2001, we received a "J-code" for Ferrlecit(R) which should allow
for more uniform coverage and quicker billing procedures under Medicare
5
<PAGE>
throughout the United States. While INFeD(R) has been a market leader since
its introduction in 1992, we are concentrating our marketing efforts on the
next generation product, Ferrlecit(R). We hope to broaden the potential
application of these products through expanded use in dialysis and by seeking
additional indications for use in other non-dialysis iron deficiency anemia
(such as, anemia associated with certain cancers and chemotherapeutic
treatments and gastrointestinal disorders associated with chronic blood loss).
We currently have a team of approximately 54 sales and marketing professionals
promoting INFeD(R) and Ferrlecit(R) primarily to nephrologists, dialysis
centers and pharmaceutical chains.
Off-Patent (Generic) Pharmaceutical Products
When patents no longer protect a branded product, opportunities exist for
third parties to introduce off-patent or generic counterparts to the branded
product. These generic products are the therapeutic equivalent to their brand-
name counterparts and are generally sold at prices significantly less than the
branded product. As such, off-patent pharmaceuticals provide a safe, effective
and cost-efficient alternative to branded products.
We are a recognized leader in the development, manufacture and sale of off-
patent pharmaceutical products. We currently market over 140 off-patent
pharmaceutical products in more than 900 packaging sizes and/or dosage
strengths. We target generic drugs that are difficult to formulate or
manufacture or that will complement or broaden our existing product lines.
Since the prices and unit volumes of our branded products will likely decrease
upon the introduction of generic alternatives, we also intend to develop
generic alternatives to our branded products. Sales of our generic products
accounted for approximately 47% of our total revenues in 2000 and are expected
to account for approximately 50% of our net product sales in 2001.
Current examples of our portfolio of off-patent pharmaceutical products
include the following:
<TABLE>
<CAPTION>
Watson Off-patent Comparable
Product Brand Name Brand Holder Therapeutic Classification
----------------- ------------- ------------------------- --------------------------
<S> <C> <C> <C>
Butalbital, aspirin,
caffeine and codeine Fiorinal(R)
(BACC) w/codeine Novartis Analgesic
Bisoprolol fumarate/
hydrochlorothiazide Ziac(R) Lederle Laboratories Anti-hypertensive
Carisoprodol Soma(R) Wallace Laboratories Muscle relaxant
Clorazepate Tranxene(R) Abbott Laboratories Tranquilizer
Dicyclomine Bentyl(R) Aventis Pharmaceuticals Antispasmodic
Doxazosin mesylate Cardura(R) Pfizer Laboratories Anti-hypertensive
Estradiol Estrace(R) Bristol-Myers Squibb Female hormone replacement
Estropipate Ogen(R) Pharmacia/Upjohn Female hormone replacement
Guanfacine Tenex(R) A.H. Robins Anti-hypertensive
Hydrocodone bitartrate/
acetaminophen Lorcet(R) Forest Pharmaceuticals Analgesic
Hydrocodone bitartrate/
acetaminophen Vicodin(R) Knoll Pharmaceuticals Analgesic
Lorazepam Ativan(R) Wyeth-Ayerst Laboratories Tranquilizer
Loxapine succinate Loxitane(R) Watson Anti-psychotic
Nicotine polacrilex gum Nicorette(R) SmithKline Beecham Aid to smoking cessation
Nicotine transdermal
system Habitrol(R) Ciba-Geneva Aid to smoking cessation
Oxycodone/acetaminophen Percocet(R) Endo Pharmaceuticals Analgesic
Pemoline Cylert(R) Abbott Laboratories Attention-deficit disorder
Pentazocine/naloxone Talwin Nx(R) Sanofi-Synthelabo Analgesic
Propafenone
hydrochloride Rythmol(R) Knoll Pharmaceuticals Anti-arrhythmic
Ranitidine Zantac(R) Glaxo Wellcome Anti-ulcer
Sucralfate Carafate(R) Aventis Pharmaceuticals Anti-ulcer
Sulfasalazine Azulfidine(R) Pharmacia/Upjohn Bowel anti-inflammatory
</TABLE>
The competitive nature of the generic drug industry generally requires the
regular introduction of new products into our product line in order to
maintain historic sales and gross margin levels. Accordingly, we have
maintained a product development program designed to introduce new off-patent
products on a sustained basis.
6
<PAGE>
We cannot, however, guarantee that our development program will be successful
in introducing products on a timely basis to maintain historic sales levels.
In fact, increases in our generic sales in recent years have been largely
attributable to acquisitions rather than internal product development. In
addition, we have, in recent years, reduced spending on generic development
activities in favor of increased spending on branded product development. We
believe this trend will continue in 2001.
Revenues
We have two reportable segments: branded and generic pharmaceutical
products. We evaluate these segments based primarily on net revenues and gross
profit. Summarized net revenues and gross profit information is presented in
Note 9 to our consolidated financial statements as of December 31, 2000 and
the three years ended December 31, 2000. Our revenues for the three years
ended December 31, 2000 were derived as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
$ % $ % $ %
-------- --- -------- --- -------- ---
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Branded product sales............ $422,983 52% 357,427 51% 253,984 42%
Off-patent product sales......... 370,809 46% 306,979 44% 329,805 54%
Research, development and
licensing fees.................. 17,732 2% 40,484 5% 23,396 4%
-------- --- -------- --- -------- ---
Total revenues................. $811,524 100% $704,890 100% $607,185 100%
======== === ======== === ======== ===
</TABLE>
Our recent revenue growth is principally a result of our plan, begun in
1995, to diversify our business from solely a manufacturer and marketer of
general pharmaceuticals and develop and expand our branded business into
selected therapeutic areas.
Research and Development
We devote significant resources to the research and development of branded
and generic products and proprietary drug delivery technologies. In that
regard, we incurred research and development expenditures of $67.3 million in
2000, $51.2 million in 1999 and $53.1 million in 1998. Our research and
development strategy focuses primarily on the following product development
areas:
. the development of sustained-release technologies and the application of
these technologies to existing drug forms;
. the application of proprietary drug-delivery technology for new product
development in specialty areas;
. the expansion of existing oral immediate-release products with respect
to additional dosage strengths;
. medium-to-late stage drug opportunities;
. off-patent drugs particularly difficult to develop or manufacture, or
that complement or broaden our existing product lines; and
. off-patent drugs that target smaller specialized or under-served
markets.
Our acquisitions of Schein, Royce Laboratories Inc. and The Rugby Group,
Inc. expanded our off-patent research and development resources and
capabilities. Our acquisitions of Schein, Makoff and TheraTech increased our
branded product development resources. As of December 31, 2000, we maintained
research and development facilities in Corona, California; Danbury,
Connecticut; Cincinnati, Ohio; Copiague, New York; and Salt Lake City, Utah.
We are presently developing a number of branded products, some of which
utilize novel drug-delivery systems, through a combination of internal and
collaborative programs, including joint ventures. Generally, our proprietary
product development emphasizes mid-to-late-stage drug opportunities in the
three
7
<PAGE>
specialty areas where we have an existing sales and marketing presence, namely
Women's Health, General Products, and Nephrology. Our off-patent product
development focuses on generic drugs that are difficult to formulate or
manufacture or that will complement or broaden our existing product line.
Our current branded product development efforts include:
. Oxytrol(TM) (Oxybutynin Patch). We are developing a proprietary
oxybutynin patch for the treatment of urinary incontinence. An estimated
5% to 10% of the United States population suffers from an overactive
bladder, which affects primarily post-menopausal women. Our proprietary
oxybutynin patch is currently in Phase III clinical trials in the United
States. Subject to the timely and successful completion of Phase III
clinical trials, we intend to file an NDA in 2001. Phase II clinical
trials data demonstrated that our transdermal oxybutynin patch had
comparable efficacy to an immediate-release oral formulation, but had
significantly lowered the incidence of dry mouth to roughly 38% of the
patients treated compared with roughly 94% of recipients of the oral
drug. We believe this will help differentiate our product in the
marketplace should the patch receive FDA approval. This product was
developed internally using the proprietary technologies we acquired
through our acquisition of TheraTech.
. Aslera(TM). In November 2000, we obtained an exclusive license to
market and sell Aslera(TM) in the United States and throughout North
America from Genelabs. Aslera(TM) is an investigational drug developed
by Genelabs for the treatment of chronic autoimmune disease systemic
lupus erythematosus, or Lupus. Aslera(TM) was granted priority review
designation by the FDA in October 2000, following Genelab's submission
of an NDA in September 2000. The FDA grants priority review to those
drugs that are designed to treat a serious condition for which there is
not an adequate remedy at hand. In addition, in 1994, the FDA granted
Aslera(TM) Orphan Drug designation, which provides for up to seven years
of marketing exclusivity in the United States from the date of the
drug's approval. Aslera(TM) has the potential to be the first new
treatment for Lupus in 40 years. We expect to launch Aslera(TM) in the
United States in 2001, assuming timely FDA approval. We are also joining
forces with Genelabs to pursue other commercial applications beyond the
initial indication for Aslera(TM), as well as for other products based
on the active ingredient of Aslera(TM), prasterone.
. Onychomycosis Patch. We are developing a proprietary transdermal patch
for the treatment of onychomycosis (fungal infection of the toe and
fingernails). An estimated 15% to 20% of adults in the United States
between the ages of 40 to 60 suffer from this affliction. Placebo
controlled, phase II clinical trials have been conducted in 44 patients
with onychomycosis. Over a 3 month dosing period in which our patches
were applied daily, almost 80% of the active treated patients
demonstrated global improvement as assessed by the physicians
participating in the study. None of the patients on active treatment
experienced a worsening of their nail infections. We intend to initiate
phase III clinical trials in the United States during the second half of
2001, pending a successful end of phase II meetings with the FDA.
. Oral Estradiol/Progesterone Product. We are developing a combination
estradiol plus progesterone oral product for HRT in postmenopausal women
with an intact uterus. Our product will co-administer both hormones in a
patient friendly, once a day dosage form. Our product also utilizes a
proprietary technology that allows for the administration of
progesterone with increased bioavailability using lower doses. We intend
to complete pivotal pharmacokinetic trials in the first half of 2001 and
initiate phase III trials in the United States by the end of 2001,
pending a successful pre-phase III meeting with the FDA.
. Other Products in Development. Other new branded product initiatives
currently under development include: expanding the Alora(R) label to
include use in the treatment of oesteoporosis; a transdermal selegiline
patch (which is under development by Somerset Pharmaceuticals, Inc., a
joint venture between Watson and Mylan Laboratories, Inc.) for
Parkinson's disease and depression; and other novel drug delivery
technology initiatives.
8
<PAGE>
Our goal is to increase the number of NDAs we submit to the FDA in the
future. However, product development is inherently risky and uncertain,
especially when the development concerns new products for which safety and
efficacy have not been established and the market for which is unproven. The
development process also requires substantial time, effort and financial
resources and any commercialization of a product will require prior government
approval, which may not be forthcoming. We cannot be certain that we will be
successful in commercializing any of the products in development on a timely
basis, if at all. We also cannot guarantee that any investment we make in
developing products will be recouped, even if we are successful in
commercializing those products.
Growth Strategy
We intend to grow our business through a combination of internal research
and development, strategic alliances and strategic acquisitions. We believe
that our three-pronged growth strategy will allow us to expand both our
branded and off-patent product offerings, with the long-term goal of a mix
favoring branded products. Based upon business conditions, our financial
strength and other factors, we regularly reexamine our growth strategies.
Research and development. Our internal research and development efforts are
focused on developing branded and off-patent products, often times using
proprietary drug delivery technologies that enhance the therapeutic benefits
of existing drug forms. In the short term, we are working to, among other
things, (a) develop sustained-release technologies and apply these
technologies to existing drug forms, (b) develop products using our
proprietary transdermal patch technologies and (c) expand our existing oral
immediate-release products by introducing additional dosing strengths. See
"Research and Development."
Strategic Alliances. We intend to consider and, as appropriate, enter into
strategic commercial alliances with other companies that, among other things,
(a) can provide proprietary and synergistic technologies to enhance our
product offerings or provide us with marketed or late stage development
products or (b) could assist us in accelerating the development of our
proprietary drug delivery technologies. Our recent alliance activities include
a worldwide agreement with Jerome Stevens to market and distribute
Unithroid(TM) for hypothyroidism and a collaboration and license agreement
with Genelabs to develop Aslera(TM), an investigational drug designed to treat
Lupus.
Strategic Acquisitions. Business and product acquisitions have accounted
for a substantial portion of our growth in the last five years. Our
acquisitions in 2000 of Schein and Makoff strengthened our branded and generic
product portfolios. We intend to consider and, as appropriate, acquire
additional businesses and products in the future, with a focus on branded or
proprietary products in late-stage development.
Sales and Marketing
We market our branded products through our specialty sales groups, which we
maintain for each of our three therapeutic product areas, Women's Health,
General Products and Nephrology. During late 2000, we redeployed members of
our Oclassen(R) Dermatologics sales and marketing team into our General
Products, Women's Health and Nephrology therapeutic areas. Our dermatology
line is now promoted by our General Products sales force. 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 physicians. We believe this focused marketing approach enables us to
develop highly knowledgeable and dedicated sales representatives and to foster
close professional relationships with physicians. We have approximately 422
sales representatives that comprise our Women's Health, General Products and
Nephrology specialty sales groups. We sell our branded products primarily
under the "Watson Pharma" label, except for our dermatological products that
we sell under the "Oclassen(R) Dermatologics" label.
We market our off-patent products through a team of approximately 50 people
involved in sales, marketing, telemarketing and administrative functions. We
also market certain of our off-patent products through our
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Women's Health, General Products and Nephrology specialty sales groups. We
sell our off-patent products primarily under the "Watson Laboratories" label,
except for our over-the-counter products that we sell under our "Rugby" label
or under private label, as with our generic nicotine polacrilex gum smoking
cessation product.
Customers
We sell our pharmaceutical products primarily to drug wholesalers,
retailers and distributors, including large chain drug stores, hospitals,
clinics, government agencies and managed healthcare providers such as health
maintenance organizations and other institutions. These customers comprise a
significant part of the distribution network for pharmaceutical products in
the United States. This distribution network is continuing to undergo
significant consolidation marked by mergers and acquisitions among wholesale
distributors and the growth of large retail drug store chains. As a result, a
small number of large wholesale distributors control a significant share of
the market, and the number of independent drug stores and small drug store
chains has decreased. We expect that consolidation of drug wholesalers and
retailers will increase pricing and other competitive pressures on drug
manufacturers.
Sales to certain of our customers accounted for 10% or more of our annual
net revenues during the past three years. McKesson HBOC, Inc. accounted for
18%, 20% and 16% of our net revenues in 2000, 1999 and 1998, respectively.
Bergen Brunswig Corporation accounted for 18%, 12% and 11% of our net revenues
in 2000, 1999 and 1998, respectively. Cardinal Health, Inc. accounted for 14%
and 12% of our net revenues in 1999 and 2000, respectively. The loss of any of
these customers could materially and adversely affect our business, results of
operations or financial condition.
Competition
The pharmaceutical industry is highly competitive. We compete with
different companies depending upon product categories, and within each product
category, upon dosage strengths and drug-delivery systems. Such competitors
include the major brand name and off-patent manufacturers of pharmaceuticals,
especially those doing business in the United States. In addition to product
development, other competitive factors in the pharmaceutical industry include
product quality and price, reputation and service and access to proprietary
and technical information. It is possible that developments by others will
make our products or technologies noncompetitive or obsolete.
We compete in the branded product business to identify and quickly bring to
market new products embodying technological innovations. Successful marketing
of branded products depends primarily on the ability to communicate the
effectiveness, safety and value of branded products to healthcare
professionals in private practice, group practices and managed care
organizations. We anticipate that our branded product offerings will support
our three areas of therapeutic focus: Women's Health, General Products and
Nephrology. Based upon business conditions and other factors, we regularly
reexamine our business strategies and may from time to time reallocate our
resources from one therapeutic area to another, withdraw from a therapeutic
area or add an additional therapeutic area in order to maximize our overall
growth opportunities.
Our competitors in branded products include the major brand name
manufacturers of pharmaceuticals such as Johnson & Johnson and American Home
Products. Based on total assets, annual revenues and market capitalization, we
are considerably smaller than these and other national competitors in the
branded product area. These competitors, as well as others, have been in
business for a longer period of time, have a greater number of products on the
market and have greater financial and other resources than we do. If we
directly compete with them for the same markets and/or products, their
financial strength could prevent us from capturing a profitable share of those
markets.
Revenues and gross profit derived from the sales of off-patent
pharmaceutical products tend to follow a pattern based on certain regulatory
and competitive factors. As patents for brand name products and related
exclusivity periods expire, the first off-patent manufacturer to receive
regulatory approval for off-patent
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equivalents of such products is generally able to achieve significant market
penetration. 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
(a) the number of competitors in that product's market and (b) the timing of
that product's regulatory approval and launch, in relation to competing
approvals and launches. Consequently, we must continue to develop and
introduce new products in a timely and cost-effective manner to maintain our
revenues and gross margins. In addition to off-patent competition from other
off-patent drug manufacturers, we face competition from brand name companies.
Many of these companies seek to participate in sales of generic products by,
among other things, collaborating with other off-patent pharmaceutical
companies or by marketing their own generic equivalent to their branded
products.
Manufacturing, Suppliers and Materials
The principal components used in our products are active and inactive
pharmaceutical ingredients and packaging materials. We manufacture many of our
own finished products at our plants in Corona, California; Danbury,
Connecticut; Miami, Florida; Carmel, New York; Copiague, New York; Salt Lake
City, Utah and Humacao, Puerto Rico. However, we purchase active
pharmaceutical ingredients from both domestic and international sources and
thus are dependent on third parties for the active ingredients used in our
products. The FDA requires pharmaceutical manufacturers to identify in their
drug applications the supplier(s) of all the raw materials for its products.
If raw materials for a particular product become unavailable from an approved
supplier specified in a drug application, any delay in the required FDA
approval of a substitute supplier could interrupt manufacture of the product.
To the extent practicable, we attempt to identify more than one supplier in
each drug application. However, many raw materials are available only from a
single source and, in many of our drug applications, only one supplier of raw
materials has been identified, even in instances where multiple sources exist.
In addition, we obtain a significant portion of our raw materials from
foreign suppliers. Arrangements with international raw material suppliers are
subject to, among other things, FDA regulation, various import duties and
other government clearances. Acts of governments outside the United States may
affect the price or availability of raw materials needed for the development
or manufacture of our products. In addition, recent changes in patent laws in
jurisdictions outside the United States may make it increasingly difficult to
obtain raw materials for research and development prior to the expiration of
the applicable United States or foreign patents.
We also contract with third parties for the manufacture of a number of our
finished products, a significant portion of which are currently available only
from sole or limited suppliers. This includes products that have historically
accounted for a significant portion of our revenues and also includes a
significant number of our oral contraceptive products, Ferrlecit(R),
Unithroid(TM) and, if approved by the FDA, Aslera(TM). See "Risk Factors--If
we are unable to obtain sufficient supplies from key suppliers that in some
cases may be the only source of finished products or raw materials, then our
ability to deliver our products to the market may be impeded."
Patents and Proprietary Rights
We believe patent protection of our proprietary products is important to
our business. Our success with our branded products will depend, in part, on
our ability to obtain, and successfully defend if challenged, patent or other
proprietary protection for such products. We currently have a number of U.S.
and foreign patents issued and pending. However, the issuance of a patent is
not conclusive as to its validity or as to the enforceable scope of the claims
of the patent. Accordingly, our patents may not prevent other companies from
developing similar or functionally equivalent products or from successfully
challenging the validity of our patents. Hence, if our patent applications are
not approved or, even if approved, if such patents are circumvented or not
upheld in a court of law, our ability to competitively exploit our patented
products and technologies may be significantly reduced. Also, such patents may
or may not provide competitive advantages for their respective products or
they may be challenged or circumvented by competitors, in which case our
ability to commercially exploit these products may be diminished. From time to
time, we may need to obtain licenses to patents and other proprietary
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rights held by third parties to develop, manufacture and market our products.
If we are unable to timely obtain these licenses on commercially reasonable
terms, our ability to commercially exploit such products may be inhibited or
prevented.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, through confidentiality agreements with our partners,
customers, employees and consultants. It is possible that these agreements
will be breached or will not be enforceable in every instance, and that we
will not have adequate remedies for any such breach. It is also possible that
our trade secrets will otherwise become known or independently developed by
competitors.
We may find it necessary to initiate litigation to enforce our patent
rights, to protect our trade secrets or know-how or to determine the scope and
validity of the proprietary rights of others. Litigation concerning patents,
trademarks, copyrights and proprietary technologies can often be protracted
and expensive and, as with litigation generally, the outcome is inherently
uncertain.
Pharmaceutical companies with brand products are increasingly suing
companies that produce off-patent forms of their brand name products for
alleged patent and/or copyright infringement or other violations of
intellectual property rights which may delay or prevent the entry of such a
generic product into the market. For instance, when we file an Abbreviated New
Drug Application (ANDA) seeking approval of a generic equivalent to a branded
drug, we may certify to the FDA that we do not intend to market our generic
drug until any patent listed by the FDA as covering the branded drug has
expired, in which case, the ANDA will not be approved by the FDA until no
earlier than the expiration of such patent(s). On the other hand, we could
certify that any patent listed as covering the branded drug is invalid and/or
will not be infringed by the manufacture, sale or use of our generic
equivalent. In that case, we are required to notify the branded product holder
or the patent holder that such patent is invalid or is not infringed. The
patent holder has 45 days from receipt of the notice in which to sue for
patent infringement. The FDA is then prevented from approving our ANDA for 30
months after receipt of the notice unless a shorter period is deemed
appropriate by a court.
Litigation alleging infringement of patents, copyrights or other
intellectual property rights may be costly and time consuming, and could
result in a substantial delay or prevention of the introduction of our
products, any of which could have a material adverse effect on our business,
financial condition or results of operations. For further information
concerning litigation risks and uncertainties, see "Risk Factors--Patent,
trademark and copyright litigation is becoming more widespread and can be
expensive and may delay or prevent entry of our products, especially generics,
into the market" and "Item 3. Legal Proceedings."
Government Regulation and Regulatory Matters
All pharmaceutical manufacturers, including Watson, are subject to
extensive, complex and evolving regulation by the federal government,
principally the FDA, and to a lesser extent, by the U.S. Drug Enforcement
Agency and state government agencies. The Federal Food, Drug and Cosmetic Act,
the Controlled Substances Act and other federal statutes and regulations
govern or influence the testing, manufacturing, packing, labeling, storing,
record keeping, safety, approval, advertising, promotion, sale and
distribution of our products.
FDA approval is required before any dosage form of any new drug, including
an off-patent equivalent of a previously approved drug, can be marketed. The
process for obtaining governmental approval to manufacture and market
pharmaceutical products is rigorous, time-consuming and costly, and the extent
to which it may be affected by legislative and regulatory developments cannot
be predicted. We are dependent on receiving FDA and other governmental
approvals prior to manufacturing, marketing and shipping new products.
Consequently, there is always the chance the FDA or other applicable agency
will not approve our new products, or the rate, timing and cost of such
approvals will adversely affect our product introduction plans or results of
operations. See "Risk Factors Extensive industry regulation has had, and will
continue to have, a significant impact on our business, especially our product
development and manufacturing capabilities."
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All applications for FDA approval must contain information relating to
product formulation, raw material suppliers, stability, manufacturing
processes, packaging, labeling and quality control. There are generally two
types of applications for FDA approval that would be applicable to our new
products:
. New Drug Application or NDA. We file an NDA when we seek approval for
drugs with active ingredients and/or with dosage strengths, dosage
forms, delivery systems or pharmacokinetic profiles that have not been
previously approved by the FDA. Generally, NDAs are filed for newly
developed branded products or for a new dosage form of previously
approved drugs.
. Abbreviated New Drug Application or ANDA. We file an ANDA when we seek
approval for off-patent, or generic, equivalents of a previously
approved drug.
The process required by the FDA before a previously unapproved
pharmaceutical product may be marketed in the U.S. generally involves the
following:
. preclinical laboratory and animal tests;
. submission of an investigational new drug application, or IND, which
must become effective before clinical trials may begin;
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed product for its intended use;
. submission of an NDA containing the results of the preclinical and
clinical trials establishing the safety and efficacy of the proposed
product for its intended use; and
. FDA approval of an NDA.
Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. We then submit the results of
these studies, which must demonstrate that the product delivers sufficient
quantities of the drug to the bloodstream to produce the desired therapeutic
results, to the FDA as part of an IND, which must become effective before we
may begin human clinical trials. The IND automatically becomes effective 30
days after receipt by the FDA unless the FDA, during that 30-day period,
raises concerns or questions about the conduct of the trials as outlined in
the IND. In such cases, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can begin. In addition, an
independent Institutional Review Board at the medical center proposing to
conduct the clinical trials must review and approve any clinical study.
Human clinical trials are typically conducted in three sequential phases:
. Phase I. During this phase, the drug is initially introduced into a
relatively small number of healthy human subjects or patients and is
tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion.
. Phase II. This phase involves studies in a limited patient population to
identify possible adverse effects and safety risks, to determine the
efficacy of the product for specific targeted diseases or conditions,
and to determine dosage tolerance and optimal dosage.
. Phase III. When Phase II evaluations demonstrate that a dosage range of
the product is effective and has an acceptable safety profile, Phase III
trials are undertaken to further evaluate dosage, clinical efficacy and
to further test for safety in an expanded patient population at
geographically dispersed clinical study sites.
The results of product development, preclinical studies and clinical
studies are then submitted to the FDA as part of an NDA, for approval of the
marketing and commercial shipment of the new product. The NDA drug development
and approval process now averages approximately five to ten years.
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FDA approval of an ANDA is required before we may begin marketing an off-
patent or generic equivalent of a drug that has been approved under an NDA, or
a previously unapproved dosage form of a drug that has been approved under an
NDA. The ANDA approval process generally differs from the NDA approval process
in that it does not require new preclinical and clinical studies; instead, it
relies on the clinical studies establishing safety and efficacy conducted for
the previously approved drug. The ANDA process, however, requires data to show
that the ANDA drug is bioequivalent (i.e., therapeutically equivalent) to the
previously approved drug. "Bioequivalence" compares the bioavailability of one
drug product with another and, when established, indicates whether the rate
and extent of absorption of an off-patent drug in the body are substantially
equivalent to the previously approved drug. "Bioavailability" establishes the
rate and extent of absorption, as determined by the time dependent
concentrations of a drug product in the bloodstream needed to produce a
therapeutic effect. The ANDA drug development and approval process generally
takes less time than the NDA drug development and approval process since the
ANDA process does not require new clinical trials establishing the safety and
efficacy of the drug product.
Among other things, supplemental NDAs or ANDAs 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 or other
requirements are satisfied.
To obtain FDA approval of both NDAs and ANDAs, our manufacturing procedures
and operations must conform to FDA quality system and control requirements
generally referred to as current Good Manufacturing Practices, or cGMP, as
defined in Title 21 of the U.S. Code of Federal Regulations. These regulations
encompass all aspects of the production process from receipt and qualification
of components to distribution procedures for finished products. They are
evolving standards; thus, we must continue to expend time, money and effort in
all production and quality control areas to maintain compliance. 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 the continuing possibility that we may be adversely affected by
regulatory actions despite our efforts to maintain compliance with regulatory
requirements. See "Risk Factors--Extensive industry regulation has had, and
will continue to have, a significant impact on our business, especially our
product development and manufacturing capabilities."
We are subject to the periodic inspection of our facilities, procedures and
operations and/or the testing of our products by the FDA, the Drug Enforcement
Administration and other authorities, which conduct periodic inspections to
assess compliance with applicable regulations. In addition, in connection with
its review of our applications for new products, the FDA conducts pre-approval
and post-approval reviews and plant inspections to determine whether our
systems and processes comply with cGMP and other FDA regulations. Among other
things, the FDA may withhold approval of NDAs, ANDAs or other product
applications of a facility if deficiencies are found at that facility. Our
vendors that supply us finished products or components used to manufacture,
package and label products are subject to similar regulation and periodic
inspections.
Following such inspections, the FDA may issue notices on Form 483 and
Warning Letters that could cause us to modify certain activities identified
during the inspection. A Form 483 notice is generally issued at the conclusion
of an FDA inspection and lists conditions the FDA investigators believe may
violate cGMP or other FDA regulations. FDA guidelines specify that a Warning
Letter be issued only for violations of "regulatory significance" for which
the failure to adequately and promptly achieve correction may be expected to
result in an enforcement action.
Failure to comply with FDA and other governmental regulations can result in
fines, unanticipated compliance expenditures, recall or seizure of products,
total or partial suspension of production and/or distribution, suspension of
the FDA's review of NDAs, ANDAs or other product applications enforcement
actions, injunctions and criminal prosecution. Under certain circumstances,
the FDA also has the authority to revoke previously granted drug approvals.
Although we have internal compliance programs, if these programs do not meet
regulatory agency standards or if our compliance is deemed deficient in any
significant way, it could have a material adverse effect on us. For further
information regarding our regulatory compliance and other risks
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associated with government regulation, see "Risk Factors--Extensive industry
regulation has had, and will continue to have, a significant impact on our
business, especially our product development and manufacturing capabilities."
The Generic Drug Enforcement Act of 1992 established penalties for
wrongdoing in connection with the development or submission of an ANDA. Under
this Act, the FDA has the authority to permanently or temporarily bar
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 NDA, ANDA or other regulatory submissions
under the Fraud, Untrue Statements of Material Facts, Bribery and Illegal
Gratuities Policy Act.
Reimbursement levels include Medicare, Medicaid and other federal and state
medical assistance programs established according to statute and government
regulations and policy. Federal law requires that all pharmaceutical
manufacturers rebate a percentage of their revenues arising from Medicaid-
reimbursed prescription drug sales to individual states. The required rebate
is currently 11% of the average manufacturer price for sales of Medicaid-
reimbursed products marketed under ANDAs. For sales of Medicaid-reimbursed
products marketed under NDAs, manufacturers are required to rebate the greater
of approximately 15% of the average manufacturer price or, the difference
between the average manufacturer price and the lowest net sales price to a
non-government customer during a specified period.
Recently, there has been enhanced political attention and governmental
scrutiny at the federal and state levels of the prices paid or reimbursed for
pharmaceutical products under Medicaid, Medicare and other government
programs. See "Risk Factors--Government actions in connection with third-party
reimbursement programs may adversely affect our business." See also "Item 3.
Legal Proceedings."
In order to assist us in commercializing products, we have obtained from
government authorities and private health insurers and other organizations,
such as Health Maintenance Organizations (HMOs) and Managed Care Organizations
(MCOs), authorization to receive reimbursement at varying levels for the cost
of certain products and related treatments. Third party payors increasingly
challenge pricing of pharmaceutical products. The trend toward managed
healthcare in the United States, the growth of organizations such as HMOs and
MCOs and legislative proposals to reform healthcare and government insurance
programs could significantly influence the purchase of pharmaceutical
products, resulting in lower prices and a reduction in product demand. Such
cost containment measures and healthcare reform could affect our ability to
sell our products and may have a material adverse effect on our business,
results of operations and financial condition. Due to the uncertainty
surrounding reimbursement of newly approved pharmaceutical products,
reimbursement may not be available for some of our products. Additionally, any
reimbursement granted may not be maintained or limits on reimbursement
available from third-party payors may reduce the demand for, or negatively
effect the price of, those products.
Federal, state and local laws of general applicability, such as laws
regulating working conditions, also govern our company. In addition, we are
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. We do not expect the costs of
complying with such environmental provisions to have a material effect on our
earnings, cash requirements or competitive position in the foreseeable future.
Recently, the U.S. Federal Trade Commission (FTC) announced its intention
to conduct a study of whether brand-name and generic drug manufacturers have
entered into agreements, or have used other strategies, to delay competition
from generic versions of patent-protected drugs. The FTC's announcement, and
subsequent study, could affect the manner in which generic drug manufacturers
resolve intellectual property litigation with branded pharmaceutical
companies, and could result generally in an increase in private-party
litigation against pharmaceutical companies. For example, Watson and its
subsidiary, The Rugby Group, have been named in a number of lawsuits seeking
to recover on behalf of various classes of plaintiffs in connection with an
allegedly
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anticompetitive arrangement between Bayer AG and its affiliates, Barr
Laboratories, Inc., Hoechst Marrion Roussel (HMR) and The Rugby Group
concerning Bayer's Cipro(R) product and its generic equivalent. The
arrangement in question was entered into prior to our acquisition of The Rugby
Group from HMR, and we believe that to the extent liability exists, if at all,
we are entitled to indemnification from HMR for the defense of such cases and
for any liability that may arise out of such cases. See "Item 3. Legal
Proceedings." However, the impact of the FTC's study, and the potential
private-party lawsuits associated with arrangements between brand-name and
generic drug manufacturers is uncertain, and could have an adverse effect on
us. See "Risk Factors--Federal regulation of arrangements between
manufacturers of brand-name and generic drugs could affect Watson."
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.
Seasonality
Our business, taken as a whole, is not materially affected by seasonal
factors.
Employees
As of December 31, 2000, we had approximately 3,000 full-time employees,
none of whom are represented by labor unions. Of our employees, approximately
350 are engaged in research and development, 1,260 in manufacturing, 320 in
quality assurance and quality control, 615 in sales and marketing, and 455 in
administration. We believe our relations with our employees are good.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We caution the reader that certain important factors may affect our actual
results and could cause such results to differ materially from any forward-
looking statement which may have been deemed to have been made in this report
or which are otherwise made by us or on our behalf. For this purpose any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "would", "estimate", "continue" or "pursue",
or the negative other variations thereof or comparable terminology are
intended to identify forward-looking statements.
Forward-looking statements involve risks and uncertainties that cannot be
predicted or quantified and, consequently, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Such risks and uncertainties include, among other things:
. the success of our product development activities and uncertainties
related to the timing or outcome of such activities;
. the timing with which regulatory authorizations and product roll-out may
be achieved, if at all;
. our ability to retain key personnel;
. our ability to adequately protect our technology and enforce our
intellectual property rights;
. our success in acquiring or licensing proprietary technologies that are
necessary for our product development activities;
. the outcome of litigation involving Watson (including patent, trademark
and copyright litigation), and the costs, expenses and possible
diversion of management's time and attention arising from such
litigation;
. our ability to obtain and maintain a sufficient supply of products to
meet market demand in a timely manner;
. our ability to timely and cost effectively integrate into our operations
the companies that we acquire, including Makoff and Schein;
. our dependence on sole source suppliers and the risks associated with a
production interruption or shipment delays at such suppliers;
. the scope, outcome and timeliness of any governmental, court or other
regulatory action (including, without limitation, the scope, outcome or
timeliness of any inspection or other action of the FDA);
. the availability on commercially reasonable terms of raw materials and
other third party sourced products;
. our exposure to product liability and other lawsuits and contingencies;
. our successful compliance with extensive, costly, complex and evolving
governmental regulations and restrictions;
. the market acceptance of our products and the impact of competitive
products and pricing;
. our ability to successfully compete in both the branded and generic
pharmaceutical product sectors;
. our quarterly results, which have fluctuated in the past, may continue
to fluctuate; and
. other risks and uncertainties detailed herein and from time to time in
our Securities and Exchange Commission filings.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or
otherwise. We also may make additional disclosures in our Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K that we may file from time to time
with the Securities and Exchange Commission. Please also note that we provide
a cautionary discussion of risks and uncertainties under the Section entitled
"Risk Factors". These are factors that we think could cause our actual results
to differ materially from expected results. Other factors besides those listed
here could also adversely affect us. This discussion is provided as permitted
by the Private Securities Litigation Reform Act of 1995.
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RISK FACTORS
We operate in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. The following discussion
highlights some of these risks and others are discussed elsewhere in this
report.
Risks Associated With Investing In The Business Of Watson
In order to remain profitable and continue to grow and develop our business,
we are dependent on successful product development and commercialization of
newly developed products. If we are unable to successfully develop or
commercialize new products, our operating results will suffer.
Our future results of operations will depend to a significant extent upon
our ability to successfully commercialize new branded and off-patent
pharmaceutical products in a timely manner. These new products must be
continually developed, tested and manufactured and, in addition, must meet
regulatory standards and receive requisite regulatory approvals in a timely
manner. Products currently in development by Watson may or may not receive the
regulatory approvals necessary for marketing by Watson or other third-party
partners. Furthermore, the development and commercialization process is time-
consuming, costly and subject to numerous factors that may delay or prevent
the development and commercialization of new products, including legal actions
brought by our competitors. In addition, the commercialization of off-patent
products may be substantially delayed by the listing with the FDA of patents
that have the effect of potentially delaying approval of the off-patent
product by up to 30 months. In some cases, such patents have issued and been
listed with FDA after the key chemical patent on the branded drug product has
expired or been litigated. See "Item 3. Legal Proceedings." If any of our
products, if and when acquired or developed and approved, cannot be
successfully or timely commercialized, our operating results could be
adversely affected. This risk particularly exists with respect to the
development of proprietary products because of the uncertainties, higher costs
and lengthy time frames associated with research and development of such
products and the inherent unproven market acceptance of such products. Delays
or unanticipated costs in any part of the process or our inability to obtain
regulatory approval for our products, including failing to maintain our
manufacturing facilities in compliance with all applicable regulatory
requirements, could cause our operating results to suffer. We cannot guarantee
that any investment we make in developing products will be recouped, even if
we are successful in commercializing those products.
In addition, we have made substantial investments in collaborative and
joint venture programs and may use collaborations and joint ventures to
develop or commercialize products in the future. These arrangements typically
involve other pharmaceutical companies as partners which may be competitors of
ours in certain markets. In many instances we will not control these
collaborations and joint ventures or the commercial exploitation of the
licensed products, and can not assure you that these ventures will be
profitable. Although restrictions contained in certain of these programs have
not had a material adverse impact on the marketing of our own products to
date, any such marketing restriction could affect future revenues and have a
material adverse effect on our operations. Our results of operations may
suffer if existing collaborative or joint venture partners withdraw, or if
these products are not timely developed, approved or successfully
commercialized.
We are dependent on key personnel for our continued growth and development.
Loss of such key personnel could cause our business to suffer.
The success of our present and future operations will depend, to a
significant extent, upon the experience, abilities and continued services of
certain of our executive officers. In this regard, Allen Chao, Ph.D.,
Chairman, Chief Executive Officer and President of Watson, was diagnosed with
very early stage stomach cancer in 1999. Subsequently, he underwent successful
surgery and voluntarily completed a course of chemotherapy which he elected to
undertake to better ensure a complete and thorough recovery. Dr. Chao has
since reported that his recovery is complete and his physicians have declared
him cancer-free. Although we have other senior management personnel, a
significant loss of the services of Dr. Chao or other key personnel could
cause our
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business to suffer. We have entered into employment agreements with all of our
senior executive officers, including Dr. Chao. We do not carry key-man life
insurance on any of our officers. In March 2001, Fred Wilkinson resigned as
our Chief Operating Officer and Senior Vice President of Sales and Marketing
to become Chief Executive Officer and President of Columbia Laboratories, Inc.
If we are unable to adequately protect our technology or enforce our patents,
we may be less able to successfully exploit such technology or use such
patents to secure an advantage over our competitors.
Although we have not experienced significant problems to date, our success
with the patented brand name products that we have developed may depend in
part on our ability to obtain patent protection for such products. We
currently have a number of United States and foreign patents issued and
pending. However, if our patent applications are not approved, or, if
approved, if such patents are not upheld in a court of law, it may reduce our
ability to competitively exploit our patented products. Also, such patents may
or may not provide competitive advantages for their respective products or
they may be challenged or circumvented by competitors, in which case our
ability to commercially exploit these products may be diminished.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, through confidentiality agreements with our partners,
customers, employees and consultants. It is possible that these agreements
will be breached or that they will not be enforceable in every instance, and
that we will not have adequate remedies for any such breach. It is also
possible that our trade secrets will become known or independently developed
by our competitors.
From time to time we may need to rely on licenses to proprietary technologies,
which may be difficult or expensive to obtain.
We may need to obtain licenses to patents and other proprietary rights held
by third parties to develop, manufacture and market products. If we are unable
to timely obtain these licenses on commercially reasonable terms, our ability
to commercially exploit our products may be inhibited or prevented.
Patent, trademark and copyright litigation is becoming more widespread and can
be expensive and may delay or prevent entry of our products, especially
generics, into the market.
Litigation concerning patents, trademarks, copyrights and proprietary
technologies can be protracted and expensive. Additionally, pharmaceutical
companies with patented brand products are increasingly suing companies that
produce off-patent generic forms of their patented brand name products for
alleged patent and/or copyright infringement or other violations of
intellectual property rights which may delay or prevent the entry of such a
generic product into the market. For instance, when we file an ANDA seeking
approval of a generic equivalent to a branded drug, we may certify to the FDA
that we do not intend to market our generic drug until any patent listed by
the FDA as covering the branded drug has expired, in which case, the ANDA will
not be approved by FDA until no earlier than the expiration of such listed
patent(s). On the other hand, we could certify that any patent listed as
covering the branded drug is invalid or will not be infringed by the
manufacture, sale or use of our generic equivalent. In that case, we are
required to notify the branded product holder or the patent holder that such
patent is not infringed or is invalid. The patent holder has 45 days from
receipt of the notice in which to sue for patent infringement. The FDA is then
prevented from approving our ANDA for 30 months after receipt of the notice
unless a shorter period is deemed appropriate by a court. Since a large part
of our business involves the development, manufacture and marketing of off-
patent products, there is a risk that such a brand company may sue us for
alleged patent, trademark and/or copyright infringement or other violations of
intellectual property rights. There is also a risk that a third party could
sue us for alleged patent, trademark and/or copyright infringement or other
violation of intellectual property rights in connection with our development
or commercialization of a branded product. The outcome of litigation is
inherently uncertain. Litigation may be costly and time consuming, and could
result in a substantial delay or prevention of the introduction of our
products, any of which could harm our business, financial condition, cash
flows, or results of operations.
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As a part of our business strategy, we plan to consider, an as appropriate,
make acquisitions of businesses. Inherent in this practice is a risk that we
may experience difficulty integrating the businesses of companies that we
acquire, which would be disruptive to our management and operations.
The merger of two companies involves the integration of two businesses that
have previously operated independently. Difficulties encountered in
integrating two businesses could harm the operating results or financial
condition of the combined company's business. As a result of uncertainty
following a merger and during the integration process, we could experience
disruption in our business or employee base. There is also a risk that key
employees of a merged company may seek employment elsewhere, including with
competitors. If we and a merger partner are not able to successfully blend our
respective products and technologies to create the advantages that the merger
is intended to create, it may adversely affect our results of operations, our
ability to develop and introduce new products and the market price of our
shares. Furthermore, there may be overlap between the products or customers of
Watson and the merged company that may create conflicts in relationships or
other commitments detrimental to the integrated businesses.
In addition, as a result of acquiring businesses or entering into other
significant transactions, we have experienced, and will likely continue to
experience, significant charges to earnings for merger and related expenses
that may include transaction costs, closure costs or acquired in-process
research and development charges. These costs may include substantial fees for
investment bankers, attorneys, accountants and financial printing costs and
severance and other closure costs associated with the elimination of duplicate
or discontinued products, operations and facilities. These charges could
adversely affect our results of operations for particular quarterly or annual
periods; however, we would not expect such charges to have a material adverse
effect upon our financial condition.
As part of our business strategy, we intend to pursue transactions that may
cause us to experience significant charges to earnings that may adversely
affect our stock price and financial condition.
We regularly review potential transactions related to technologies,
products and product rights and businesses complementary to our business. Such
transactions could include, but are not limited to, mergers, acquisitions,
strategic alliances, licensing agreements or co-promotion agreements. In the
future, we may choose to enter into such transactions at any time. During the
fourth quarter of 2000, we recorded a special, one-time charge in the amount
of $22.4 million for certain Makoff merger and related expenses, including
transaction costs for professional fees and severance, contract termination
and asset impairment costs. Depending upon the nature of any transaction, we
may experience significant charges to earnings, which could be material, and
could possibly have an adverse impact upon the market price of our stock. For
example, in connection with the TheraTech, Inc. merger in January 1999, we
recorded merger-related expenses of $20.5 million in the first quarter of
1999. In addition, in connection with the Schein acquisition in August 2000,
we announced on September 12, 2000, that our earnings per share would be
adversely affected for the third and fourth quarters of 2000 and the first
quarter of 2001 due to lower than anticipated product sales of Schein,
aggressive generic pricing competition in our branded dermatology line and
higher than anticipated goodwill and operating expenses associated with the
Schein acquisition. Total product rights, other identifiable intangible assets
and goodwill from the Schein acquisition aggregated approximately $900 million
(generally amortized over a 20-25 year period). In the third quarter of 2000,
we recorded a charge of $125 million related to the Schein merger for
purchased, in-process research and development expenses. If we were to enter
into similar transactions in the future, our stock price and financial
condition could be adversely affected.
As a result of potential new accounting guidelines regarding goodwill, we
may be required in the future to incur charges to earnings relating to the
goodwill resulting from our acquisitions. At its December 20, 2000 board
meeting, the Financial Accounting Standards Board, or FASB, reached a
tentative decision that purchased goodwill should not be amortized; rather it
should be reviewed and accounted for using an impairment approach. Under this
approach, goodwill would be reviewed for impairment, that is, written down and
expensed against earnings, only in the periods in which the recorded value of
goodwill is more than its fair value. Separately recognized, non-goodwill
intangible assets with a definite life would continue to be accounted for
under an
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amortization approach. The FASB published a revised Exposure Draft in the
first quarter of 2001 for a 30-day comment period. A new statement is expected
to be issued in the second quarter of 2001. Under the FASB's tentative new
statement, goodwill amortization expense would be eliminated in future
periods, however, if the fair value of our goodwill is determined at some
future date to be less than its recorded value, a charge to earnings may be
required. Such a charge may be in an amount that is material to our results of
operations and net worth.
If we are unable to obtain sufficient supplies from key suppliers that in some
cases may be the only source of finished products or raw materials, then our
ability to deliver our products to the market may be impeded.
Some materials used in our manufactured products, and some products sold by
us, are currently available only from sole or limited suppliers. Among others,
this includes products that have historically accounted for a significant
portion of our revenues and also includes a significant number of our oral
contraceptive products, Ferrlecit(R), Unithroid(TM) and, if approved by the
FDA, Aslera(TM). In the event an existing supplier should lose its regulatory
status as an approved source, we would attempt to locate a qualified
alternative; however, we may be unable to obtain the required components or
products on a timely basis or at commercially reasonable prices. In addition,
from time to time, certain of our outside suppliers have experienced
regulatory or supply-related difficulties that have inhibited their ability to
deliver products to us, causing supply delays or interruptions. To the extent
such difficulties cannot be resolved within a reasonable time, and at
reasonable cost, or we are required to qualify a new supplier, our profit
margins and market share for the affected product could decrease, as well as
delay our development and sales and marketing efforts.
Our arrangements with foreign suppliers are subject to certain additional
risks, including the availability of government clearances, export duties,
political instability, currency fluctuations and restrictions on the transfer
of funds. For example, we obtain a significant portion of our raw materials
from foreign suppliers. Arrangements with international raw material suppliers
are subject to, among other things, FDA regulation, various import duties and
other government clearances. Acts of governments outside the United States may
affect the price or availability of raw materials needed for the development
or manufacture of our products. In addition, recent changes in patent laws in
jurisdictions outside the United States may make it increasingly difficult to
obtain raw materials for research and development prior to the expiration of
the applicable United States or foreign patents.
Government actions in connection with third-party reimbursement programs may
adversely affect our business.
Recently, there has been enhanced political attention and governmental
scrutiny at the federal and state levels of the prices paid or reimbursed for
pharmaceutical products under Medicaid, Medicare and other government
programs. In November 1999, Schein was informed by the U.S. Department of
Justice that it, along with several other pharmaceutical companies, is a
defendant in a qui tam action brought in 1995 under the Federal False Claims
Act currently pending in the Federal District Court for the Southern District
of Florida. As of the date hereof, Schein has not been served in this action.
A qui tam action is a civil lawsuit brought by an individual for an alleged
violation of a federal statute, in which the Department of Justice has the
right to intervene and take over the prosecution of the lawsuit at its option.
Pursuant to applicable federal law, the qui tam action is under seal and no
details are available concerning, among other things, the various theories of
liability against Schein or the amount of damages sought from Schein. We
believe that the action may relate to whether allegedly improper price
reporting by pharmaceutical manufacturers led to excessive payments by
Medicare and/or Medicaid. The qui tam action may seek to recover damages from
Schein based on its price reporting practices. Schein has also received
notices or subpoenas from the attorneys general of various states, including
Florida, Nevada, New York and Texas, indicating investigations, claims and/or
possible lawsuits relating to pharmaceutical pricing issues and whether
allegedly improper efforts by pharmaceutical manufactures led to increased
payments by Medicare and/or Medicaid. Other state and federal inquiries
regarding pricing and reimbursement issues are anticipated. Any actions which
may be instituted to recover damages from Schein or other affiliates based on
price reporting practices, if successful, could adversely affect Watson and
may have a material adverse effect on our business results of operations and
financial condition.
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In order to assist us in commercializing products, we have obtained from
government authorities and private health insurers and other organizations,
such as HMOs and MCOs, authorization to receive reimbursement at varying
levels for the cost of certain products and related treatments. Third party
payors increasingly challenge pricing of pharmaceutical products. The trend
toward managed healthcare in the United States, the growth of organizations
such as HMOs and MCOs and legislative proposals to reform healthcare and
government insurance programs could significantly influence the purchase of
pharmaceutical products, resulting in lower prices and a reduction in product
demand. Such cost containment measures and healthcare reform could affect our
ability to sell our products and may have a material adverse effect on our
business, results of operations and financial condition. Due to the
uncertainty surrounding reimbursement of newly approved pharmaceutical
products, reimbursement may not be available for some of Watson's products.
Additionally, any reimbursement granted may not be maintained or limits on
reimbursement available from third-party payors may reduce the demand for, or
negatively affect the price of, those products and could harm significantly
our business, results of operations and financial condition.
Federal regulation of arrangements between manufacturers of brand-name and
generic drugs could affect Watson.
Recently, the U.S. Federal Trade Commission (FTC) announced its intention
to conduct a study of whether brand-name and generic drug manufacturers have
entered into agreements, or have used other strategies, to delay competition
from generic versions of patent-protected drugs. The FTC's announcement, and
subsequent study, could affect the manner in which generic drug manufacturers
resolve intellectual property litigation with branded pharmaceutical
companies, and could result generally in an increase in private-party
litigation against pharmaceutical companies. For example, we and our
subsidiary, The Rugby Group, have been named in a number of lawsuits seeking
to recover on behalf of various classes of plaintiffs in connection with an
allegedly anticompetitive arrangement between Bayer AG and its affiliates,
Barr Laboratories, Inc., Hoechst Marrion Roussel, or HMR, and The Rugby Group
concerning Bayer's Cipro(R) product and its generic equivalent. The
arrangement in question was entered into prior to our acquisition of The Rugby
Group from HMR, and we believe that to the extent liability exists, if at all,
we are entitled to indemnification from HMR for the defense of such cases and
for any liability that may arise out of such cases. In addition, we understand
that various state and federal agencies are investigating the allegations made
in these actions. The impact of the FTC's study, and the potential private-
party lawsuits associated with arrangements between brand-name and generic
drug manufacturers is uncertain, and could adversely affect our business
(regardless of any indemnification rights we may have against third parties).
See also "Item 3. Legal Proceedings."
We do not manufacture the active pharmaceutical ingredients used in the
preparation of our products and are dependent on third parties for the active
ingredients used in our products.
The principal components of our products are active and inactive
pharmaceutical ingredients. Generally, we do not manufacture the active
pharmaceutical ingredients used in the preparation of our products. Instead,
we purchase these active pharmaceutical ingredients from both domestic and
international sources. The FDA requires pharmaceutical manufacturers to
identify in their drug applications the supplier(s) of all the raw materials
for its products. If raw materials for a particular product become unavailable
from an approved supplier specified in a drug application, any delay in the
required FDA approval of a substitute supplier could interrupt manufacture of
the product. The qualification of a new supplier could materially and
adversely affect our profit margins and market share for the product, as well
as delay our development and sales and marketing efforts. To the extent
practicable, we attempt to identify more than one supplier in each drug
application. However, many raw materials are available only from a single
source and, in many of our drug applications, only one supplier of raw
materials has been identified, even in instances where multiple sources exist.
Any interruption of supply could negatively impact our ability to manufacture
our products. In addition, we obtain a significant portion of our raw
materials from foreign suppliers. Arrangements with international raw material
suppliers are subject to, among other things, FDA regulation, various import
duties and other government clearances. Acts of governments outside the United
States may affect the price or availability of raw materials needed for the
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development or manufacture of drugs. In addition, recent changes in patent
laws in jurisdictions outside the United States may make it increasingly
difficult to obtain raw materials for research and development prior to the
expiration of the applicable United States or foreign patents.
The testing, marketing and sale of our products involves the risk of product
liability claims by consumers and other third parties, and insurance against
such potential claims is expensive.
The design, development and manufacture of our products involve an inherent
risk of product liability claims and associated adverse publicity. Insurance
coverage is expensive and may be difficult to obtain, and may not be available
in the future on acceptable terms, or at all. Although we currently maintain
product liability insurance for our products in amounts we believe to be
commercially reasonable, if the coverage limits of these insurance policies
are not adequate, a claim brought against Watson, whether covered by insurance
or not, could adversely affect our financial condition and/or results of
operations and cash flows.
Risks Relating To Investing In The Pharmaceutical Industry
Extensive industry regulation has had, and will continue to have, a
significant impact on our business, especially our product development and
manufacturing capabilities.
All pharmaceutical companies, including Watson, are subject to extensive,
complex, costly and evolving regulation by the federal government, principally
the FDA and to a lesser extent by the U.S. Drug Enforcement Agency (DEA) and
state government agencies. The Federal Food, Drug and Cosmetic Act, the
Controlled Substances Act and other federal statutes and regulations govern or
influence the testing, manufacturing, packing, labeling, storing, record
keeping, safety, approval, advertising, promotion, sale and distribution of
our products.
We are subject to periodic inspection of our facilities, procedures and
operations and/or the testing of its products by the FDA, the DEA and other
authorities, which conduct periodic inspections to confirm that we are in
compliance with all applicable regulations. In addition, the FDA conducts pre-
approval and post-approval reviews and plant inspections to determine whether
our systems and processes are in compliance with current good manufacturing
practices, or cGMP, and other FDA regulations.
Following such inspections, the FDA may issue notices on Form 483 and
warning letters that could cause us to modify certain activities identified
during the inspection. A Form 483 notice is generally issued at the conclusion
of an FDA inspection and lists conditions the FDA inspectors believe may
violate cGMP or other FDA regulations. FDA guidelines specify that a warning
letter is issued only for violations of "regulatory significance" for which
the failure to adequately and promptly achieve correction may be expected to
result in an enforcement action.
Failure to comply with FDA and other governmental regulations can result in
fines, unanticipated compliance expenditures, recall or seizure of products,
total or partial suspension of production and/or distribution, suspension of
the FDA's review of new drug applications, or NDAs, or ANDAs, or other product
applications, enforcement actions, injunctions and criminal prosecution. Under
certain circumstances, the FDA also has the authority to revoke previously
granted drug approvals. Although we have instituted internal compliance
programs, if these programs do not meet regulatory agency standards or if
compliance is deemed deficient in any significant way, it could materially
harm our business. Certain of our vendors are subject to similar regulation
and periodic inspections.
In connection with an FDA inspection of our Corona, California facility in
December 1998, the FDA issued a warning letter in January 1999. The warning
letter related to our quality systems and cGMP compliance, including areas
such as documentation, training and laboratory controls. The FDA conducted
additional inspections of our Corona facility in the first and fourth quarters
of 1999. At the close of each of these inspections, the FDA issued to Watson a
Form 483 notice listing observations made during those inspections. The
observations from the first quarter inspection generally related to our
quality systems and cGMP compliance
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including areas such as laboratory controls, documentation, investigations,
training, data review and validation. The observations from the fourth quarter
inspection generally related to our quality systems and cGMP compliance
including areas such as training and documentation.
We have initiated and continue to implement quality improvements at our
Corona facility. Among other things, these quality improvements seek to
address deficiencies noted by the FDA in the warning letter and the Form 483
notices. However, to date, the FDA has not performed a comprehensive cGMP
inspection of the Corona facility to determine the sufficiency and adequacy of
these quality improvements. We cannot predict the timing of any subsequent FDA
inspections or what the outcome of such inspections will be. In 2000, we
received three ANDA approvals from our Corona facility, one in each month of
July, September and October of 2000, and received approval of an ANDA
supplement from our Corona facility in August 2000. In February 2001, we
received three ANDA approvals from our Corona facility.
In connection with a January 1999 inspection of our Miami, Florida
facility, the FDA issued a warning letter in April 1999. In that warning
letter, the agency commented that observations about inadequate
investigations, documentation and training had appeared in past inspection
reports (although the FDA acknowledged that a number of these had occurred
prior to our purchase of the Miami facility in 1997). The FDA conducted a
follow-up inspection of our Miami facility in the first quarter of 2000. At
the close of this inspection, the FDA issued a Form 483 notice listing
observations that related to our quality systems and cGMP compliance,
including areas such as validation and investigations. We have initiated and
continue to implement quality improvements at our Miami facility.
Based on a follow-up inspection conducted in the first quarter of 2000, the
Florida District Office of the FDA recommended to the FDA's Center for Drug
Evaluation and Research, or CDER, approval of pending ANDAs from the Miami
facility. The Florida District Office found that sufficient corrections have
been made to now recommend approval of our ANDAs. The recommendation of the
Florida district office is not binding on CDER since final action on product
applications is the responsibility of CDER. We cannot predict whether or when
CDER will approve the pending applications from our Miami facility. However,
CDER has approved three ANDAs from our Miami facility since the time the
Florida District Office made its approval recommendation, one in each month of
March, September, and December of 2000. In January 2001, we received one ANDA
approval from our Miami facility.
On July 29, 1999, the FDA concluded an inspection of Schein's Marsam
Pharmaceuticals, Inc. sterile manufacturing facility, located in Cherry Hill,
New Jersey. Schein is a wholly owned subsidiary of Watson and Marsam is a
wholly owned subsidiary of Schein. At the close of the inspection, Marsam
received a Form 483 detailing the FDA's inspectional observations and noting a
number of significant deficiencies in current good manufacturing practices.
During the inspection, Marsam initiated actions to address a number of the
FDA's inspectional observations by voluntarily recalling all Marsam products
within expiry and suspending manufacturing and testing activities. In
September 1999, Marsam submitted its response to the FDA's inspectional
observations, together with its proposed corrective action plan (Marsam
corrective action plan). A corrective action plan is a systematic approach to
assure that processes, quality assurance and quality control programs,
validation programs, employee training, and management controls comply with
cGMP regulations. On March 3, 2000, Marsam received a warning letter from the
FDA relating to the observations made during the inspection. This FDA warning
letter also acknowledged the commitments Schein made under the Marsam
corrective plan. Schein has confirmed in meetings with FDA representatives its
approach to addressing current cGMP deficiencies at Marsam on a voluntary
basis. Marsam is currently ineligible to receive new product approvals. After
reviewing strategic alternatives, including divestiture, for the Marsam
facility, we are currently in the process of closing down Marsam's operations
and liquidating its assets.
On September 10, 1998, the United States, on behalf of the FDA, based on
actions it filed in Federal Court in the Southern District of New York on
September 9, 1998 and the District of Arizona on September 10, 1998,
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initiated seizures of drugs and drug related products manufactured by Schein's
Steris Laboratories, Inc. facility located in Phoenix, Arizona. Steris is a
wholly owned subsidiary of Schein. The action alleged certain instances in
which the Steris facility, located in Phoenix, Arizona, was not operating in
conformity with cGMP regulations. The actions resulted in the seizure of all
drugs and drug related products in Schein's possession manufactured at the
Steris facility and halted the manufacture and distribution of Schein's Steris
Laboratories, Inc. manufactured products.
On October 16, 1998, Steris and certain of its officers, without admitting
any allegations of the complaints and disclaiming any liability in connection
therewith, entered into a consent agreement with the FDA. Under the terms of
the consent agreement, Steris is required, among other things, to demonstrate
through independent certification that Steris' processes, quality assurance
and quality control programs, and management controls comply with cGMP
regulations. The consent agreement also provides for independent certification
of Steris' management controls, quality assurance and quality control
programs, and employee cGMP training. It further requires that Steris develop
a timeline and corrective action plan for implementing these actions and for
expert certification with respect to matters covered in previous FDA
inspections of the facility. Steris has submitted to the FDA the corrective
action plan provided for under the consent agreement (Steris corrective action
plan) and is implementing the Steris corrective action plan.
As a result of the consent agreement, Steris has divided its product line
into three categories: products that it will seek to manufacture under
expedited certification procedures under the consent agreement, products that
it will seek to manufacture once it satisfies all conditions under the consent
agreement and products it has decided not to manufacture in the near term.
Expedited certification procedures apply for certain products that are
particularly important to the medical community because they are primarily or
exclusively available from Schein or that are particularly significant to
Schein.
In October 1998, Schein resumed commercial distribution of INFeD(R), its
branded injectable iron product, from existing inventory. In the second
quarter of 1999, Schein began distribution of newly manufactured lots of
INFeD(R) under the consent agreement and, in the fourth quarter of 1999,
Schein resumed the manufacture of one other product deemed medically necessary
under the expedited certification procedures in the consent agreement. On
February 11, 2000, the FDA concluded an inspection at Steris.
Steris is currently ineligible to receive new product approvals, and we
cannot predict when Steris will resume manufacturing additional products. In
March 2000, Schein resumed certain manufacturing and distribution under the
expedited certification procedures provided in the consent agreement. Newly
manufactured products must undergo certification by independent experts and
review by the FDA prior to commercial distribution. On August 25, 2000, Schein
announced that the FDA had authorized it to monitor its commercial
distribution of INFeD(R) without certification by independent third-party
consultants. We are currently reviewing strategic alternatives, including
divestiture, for the Steris facility.
There can be no assurance that the FDA will determine that we have
adequately corrected the deficiencies at our operating sites, that subsequent
inspectional observations will not result in additional deficiencies at the
sites discussed above or at our other operating sites, that approval of any of
the pending or subsequently submitted NDAs, ANDAs or Supplements to such
applications by Watson or its subsidiaries will be granted or that the FDA
will not seek to impose additional sanctions against Watson or any of its
subsidiaries. The range of possible sanctions includes, among others, FDA
issuance of adverse publicity, product recalls or seizures, fines, total or
partial suspension of production and/or distribution, suspension of the FDA's
review of product applications, injunctions, and civil or criminal
prosecution. Any such sanctions, if imposed, could have a material adverse
effect on our business. Additionally, significant delays in the review or
approval of applications for new products or in complying with the
requirements of the Marsam corrective action plan, the Steris corrective
action plan or the consent agreement or any additional requirement resulting
from any subsequent FDA inspectional observations at our facilities could
materially harm our business, results of operation and financial condition.
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The process for obtaining governmental approval to manufacture and market
pharmaceutical products is rigorous, time-consuming and costly, and we cannot
predict the extent to which we may be affected by legislative and regulatory
developments. We are dependent on receiving FDA and other governmental
approvals prior to manufacturing, marketing and shipping our products.
Consequently, there is always the chance that the FDA or other applicable
agency will not approve products, or that the rate, timing and cost of such
approvals, will adversely affect our product introduction plans or results of
operations.
The pharmaceutical industry is highly competitive.
Our competitors vary depending upon categories, and within each product
category, upon dosage strengths and drug-delivery systems. These competitors
include the major brand name and off-patent manufacturers of pharmaceuticals,
especially those doing business in the United States. In addition to product
development, other competitive factors in the pharmaceutical industry include
product quality and price, reputation, service, and access to technical
information. It is possible that developments by our competitors will make our
products or technologies noncompetitive or obsolete.
Because we are smaller than many of our national competitors in the branded
pharmaceutical products sector, we may lack the financial and other resources
needed to maintain our profit margins and to capture increased market share in
this sector.
The intensely competitive environment of the branded product business
requires an ongoing, extensive search for technological innovations and the
ability to market products effectively, including the ability to communicate
the effectiveness, safety and value of branded products to healthcare
professionals in private practice, group practices and managed care
organizations. Our branded pharmaceutical business operates primarily in the
following therapeutic areas: Women's Health, General Products and Nephrology.
In this regard, we announced on January 12, 2001 that we had redeployed
members of our Oclassen(R) Dermatologics brand sales force to the Women's
Health, General Products and Nephrology therapeutic areas in order to
strategically support and leverage the expanding brand franchise. The General
Products sales force will continue to promote our dermatology product line in
addition to its current product offerings. Our competitors vary depending upon
product categories, and within each product category, upon dosage strengths
and drug-delivery systems. These competitors include the major brand name
manufacturers of pharmaceuticals, such as Johnson & Johnson and American Home
Products. Based on total assets, annual revenues, and market capitalization,
we are smaller than these and other national competitors in the branded
product arena. These competitors, as well as others, have been in business for
a longer period of time than Watson, have a greater number of products on the
market and have greater financial and other resources than we do. If we
directly compete with them for the same markets and/or products, their
financial strength could prevent us from capturing a profitable share of those
markets.
Sales of our products may continue to be adversely affected by the continuing
consolidation of our distribution network and the concentration of our
customer base.
Our principal customers are wholesale drug distributors and major retail
drug store chains. These customers comprise a significant part of the
distribution network for pharmaceutical products in the United States. This
distribution network is continuing to undergo significant consolidation marked
by mergers and acquisitions among wholesale distributors and the growth of
large retail drug store chains. As a result, a small number of large wholesale
distributors control a significant share of the market, and the number of
independent drug stores and small drug store chains has decreased. We expect
that consolidation of drug wholesalers and retailers will increase pricing and
other competitive pressures on drug manufacturers, including Watson. For the
year ended December 2000, our three largest customers accounted for 18%, 18%
and 14%, individually, of our net revenues. The loss of any of these customers
could materially and adversely affect our business, results of operations and
financial condition.
26
<PAGE>
ITEM 2. PROPERTIES
We conduct our operations using a combination of owned and leased
properties. We believe that these facilities are suitable for the purpose for
which we use them.
Our owned properties consist of facilities used for research and
development, manufacturing, warehouse, storage, distribution and
administrative functions. These properties are located in Corona, California;
Miami, Florida; Carmel, New York; Copiague, New York; and Humacao, Puerto
Rico;, and total approximately 928,000 square feet. Outside of the United
States, we own a 10,000 square foot raw material processing facility in
Coleraine, Northern Ireland and a majority interest in a 90,000 square foot
pharmaceutical facility located in Changzhou City, People's Republic of China.
Properties that we lease in the United States are located throughout the
country and include a distribution center, research and development,
manufacturing, warehouse, sales and marketing, and administrative facilities.
These leased properties total approximately 572,000 square feet and are
subject to lease terms that expire between 2001 and 2005. In addition, a 39-
year lease on approximately seven acres of land will expire in 2033. Many of
these leases have renewal options available to us. We have also leased a
32,000 square foot manufacturing facility in Corona through 2004 from a
related party trust.
We acquired two injectable pharmaceutical manufacturing facilities as part
of our acquisition of Schein, Steris Laboratories, Inc. and Marsam
Pharmaceuticals, Inc. We are in the process of seeking strategic alternatives
for Steris, including its divestiture. We are also in the process of closing
down Marsam's operations and liquidating its assets.
We believe that we have sufficient facilities to conduct our operations
during 2001. However, we continue to evaluate the purchase or lease of
additional properties, as our business requires.
ITEM 3. LEGAL PROCEEDINGS
Beginning in late 1997, a number of product liability suits were filed
against Watson, The Rugby Group and certain other company affiliates, as well
as numerous other manufacturing defendants, for personal injuries allegedly
arising out of the use of phentermine hydrochloride. The plaintiffs allege
various injuries, ranging from minor injuries and anxiety to heart damage and
death. As of March 15, 2001, approximately 1,700 cases have been filed against
Watson and its affiliates in numerous state and federal courts. Most of the
cases involve multiple plaintiffs, and several were filed or certified as
class actions. We believe that we will be fully indemnified by Hoechst Marion
Roussel, Inc. (HMR) for the defense of all such cases and for any liability
that may arise out of these cases. HMR is currently controlling the defense of
all these matters as the indemnifying party under its agreements with the
Company. Additionally, we may have recourse against the manufacturing
defendants in these cases.
In August 1999, Watson Laboratories, Inc. filed suit in the United States
District Court for the Central District of California against Rhone-Poulenc
Rorer, Inc. and certain of its affiliates (collectively, RPR)
(Watson Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., et. al.). The suit
seeks unspecified damages, restitution and injunctive relief from RPR for
unfair competition and breach of contract arising under certain agreements
related to our June 1997 acquisition of certain worldwide rights to the
Dilacor(R) XR product and its generic equivalent from RPR, including RPR's
failure to fulfill its supply obligations to the company for the Dilacor XR(R)
product and its generic equivalent. In November 1999, RPR answered the
Company's first amended complaint, denying its material allegations, and filed
a counterclaim for declaratory relief. In January 2000, the company responded
to the counterclaim, denying its material allegations. The trial is scheduled
for June 2001.
In June 1999, a suit was filed against Watson (William Higuchi and Setsuko
Higuchi v. Watson Pharmaceuticals, Inc.) in the United States District Court
for the District of Utah. The plaintiffs allege that they were holders of
TheraTech, Inc. stock certificates and were entitled to receive Watson stock
certificates free of
27
<PAGE>
any restrictive legends in connection with our acquisition of TheraTech. The
complaint contends, among other things, that we breached our obligation to the
plaintiffs by initially issuing Watson stock certificates that contained
restrictive legends and by unreasonably delaying issuance of certificates
without restrictive legends, during which time the trading prices of our stock
declined. The complaint includes various tort and contract claims, and seeks
consequential damages of approximately $11,500,000 and punitive damages. In
January 2000, the Company responded to the complaint, denying its material
allegations. We believe that we have substantial meritorious defenses to the
plaintiffs' claims and intend to vigorously defend the action. We also believe
that, to the extent liability exists, if at all, we may be entitled to
indemnification and/or contribution from third parties. The trial is scheduled
for April 2001.
Beginning in July 2000, a number of suits have been filed against Watson, a
Watson subsidiary, The Rugby Group and other Watson entities in various state
and federal courts alleging claims under various federal and state competition
and consumer protection laws. As of March 15, 2001, a total of approximately 34
cases have been filed against Watson, The Rugby Group and other Watson
entities. The actions generally allege that the defendants engaged in unlawful,
anticompetitive conduct in connection with alleged agreements, entered into
prior to Watson's acquisition of The Rugby Group from HMR, related to the
development, manufacture and sale of the drug substance ciprofloxacin
hydrochloride, the generic version of Bayer's brand drug, Cipro(R). The actions
generally seek declaratory judgment, damages, injunctive relief, restitution
and other relief on behalf of certain purported classes of individuals and
other entities. In addition, we understand that various state and federal
agencies are investigating the allegations made in these actions. We intend to
vigorously defend the Company in these actions. We also believe that to the
extent liability exists, if at all, we are entitled to indemnification from HMR
for the defense of such cases and for any liability that may arise out of such
cases.
Recently, there has been enhanced political attention and governmental
scrutiny at the federal and state levels of the prices paid or reimbursed for
pharmaceutical products under Medicaid, Medicare and other government programs.
In November 1999, Schein was informed by the U.S. Department of Justice that
it, along with several other pharmaceutical companies, is a defendant in a qui
tam action brought in 1995 under the U.S. False Claims Act currently pending in
the Federal District Court for the Southern District of Florida. Schein has not
been served in this action. A qui tam action is a civil lawsuit brought by an
individual for an alleged violation of a federal statute, in which the
Department of Justice has the right to intervene and take over the prosecution
of the lawsuit at its option. Pursuant to applicable federal law, the qui tam
action is under seal and no details are available concerning, among other
things, the various theories of liability against Schein or the amount of
damages sought from Schein. We believe that the qui tam action relates to
whether allegedly improper price reporting by pharmaceutical manufacturers led
to increased payments by Medicare and/or Medicaid. The qui tam action may seek
to recover damages from Schein based on its price reporting practices. Schein
has also received notices or subpoenas from the attorneys general of various
states, including Florida, Nevada, New York and Texas, indicating
investigations, claims and/or possible lawsuits relating to pharmaceutical
pricing issues and whether allegedly improper efforts by pharmaceutical
manufactures led to excessive payments by Medicare and/or Medicaid. Other state
and federal inquiries regarding pricing and reimbursements issues are
anticipated. Any actions which may be instituted to recover damages from Schein
or its affiliates based on price reporting practices, if successful, could
adversely affect the Company and may have a material adverse effect on our
business, results of operations and financial condition.
On March 14, 2001, Watson Pharma, Inc., Watson Laboratories, Inc. and
Danbury Pharmacal, Inc., (the Watson parties) filed a lawsuit in the United
States District Court for the District of Columbia against Bristol-Myers Squibb
Company (BMS) (Watson Pharma, Inc., et. al. v. Bristol-Myers Squibb Company).
The suit seeks unspecified treble damages and injunctive relief for violations
of the Sherman Act and violations of the District of Columbia monopolization
statute in connection with a series of acts allegedly undertaken by BMS to
unlawfully block competition in the buspirone market. Among other things, the
suit alleges that on February 26, 2001, BMS filed a patent infringement action
against the Company and Danbury Pharmacal, Inc. in the United States District
Court for the District of Connecticut, and on February 27, 2001, filed another
lawsuit against the Company in the United States District Court for the Central
District of California alleging the same
28
<PAGE>
infringement claims, in an attempt to illegally forestall generic competition
for buspirone. The Company has not yet responded to the lawsuits filed by BMS,
but believes it has substantial meritorious defenses.
Watson and its affiliates are involved in various other disputes,
governmental and/or regulatory inspections, inquires, investigations and
proceedings, and litigation matters that arise from time to time in the
ordinary course of business. The process of resolving matters through
litigation or other means is inherently uncertain and it is possible that the
resolution of these matters will adversely affect the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Below are our executive officers as of March 29, 2001.
<TABLE>
<CAPTION>
Name Age Principal Position with Registrant
---- --- ----------------------------------
<S> <C> <C>
Allen Chao, Ph.D. ........ 55 Chairman, Chief Executive Officer and President
Michael E. Boxer.......... 39 Senior Vice President and Chief Financial Officer
Donald A. Britt, Sr. ..... 52 Senior Vice President, Quality Assurance
Maria Chow................ 46 Senior Vice President, Manufacturing Operations
Charles D. Ebert, Ph.D. .. 47 Senior Vice President, Research and Development
Robert C. Funsten......... 41 Senior Vice President, General Counsel and Secretary
David C. Hsia, Ph.D. ..... 56 Senior Vice President, Scientific Affairs
</TABLE>
Allen Chao, Ph.D.
Allen Chao, Ph.D., 55, a co-founder of the Company, has been our Chief
Executive Officer of the Company since 1985, Chairman since May 1996 and
President since February 1998. Dr. Chao serves on the Board of Directors of
Somerset Pharmaceuticals, Inc., a research and development pharmaceutical
company, which is fifty percent (50%) owned by the company. Dr. Chao also
serves on the Board of Directors of Accuray, Inc., a developer of medical
devices for the treatment of cancers. Dr. Chao served as Director of
Pharmaceutical Technology and Packaging Development at Searle Laboratories,
Inc. from September 1979 to August 1983, where he had overall responsibility
for new product implementation and new pharmaceutical technology development.
He received a Ph.D. in industrial and physical pharmacy from Purdue University
in 1973.
Michael E. Boxer
Michael E. Boxer, age 39, has served as our Senior Vice President and Chief
Financial Officer since June 1999. Previously he served as our Chief Financial
Officer since July 1998. Before joining Watson, Mr. Boxer was President of The
Enterprise Group, a financial advisory firm, which provided consulting services
to Watson. From 1991 to 1997, he was Vice President of the Health Care Group at
Furman Selz, LLC, a New-York-based investment bank. While at Furman Selz, Mr.
Boxer participated in our public financings and our acquisition of Oclassen
Pharmaceuticals, Inc. Mr. Boxer received an M.B.A. from the University of
Chicago in 1991.
Donald A. Britt, Sr.
Donald A. Britt, Sr., age 52, has served as Senior Vice President, Quality
Assurance of the company since August 2000. Previously he served Schein
Pharmaceutical, Inc. as its Senior Vice President, Quality since
29
<PAGE>
January 2000. From May 1999 through January 2000, Mr. Britt was Senior Vice
President QA/QC and Compliance for Centocor, Inc. From February 1996 through
May 1999 he was initially Vice President of World Wide Quality for Rhone-
Poulenc Rorer, Inc. and subsequently named Senior Vice President for
World Wide and Health, Safety and Environment for Aventis S.A. Mr. Britt began
his career with assignments in production and quality prior to joining Glaxo
where he spent 11 years in positions of increasing responsibility, culminating
with his assignment as Corporate Director of Quality Assurance. In 1994, he
joined Fisons as Vice President of Quality. Mr. Britt has a B.S. in Chemistry
from the University of South Carolina.
Maria Chow
Maria Chow, age 46, has served as Senior Vice President, Manufacturing
Operations since March 2001 and has been a Vice President of Watson
Laboratories, Inc., a subsidiary of the Company, since 1992. Ms. Chow received
her B.S. in Business Administration from California State University, Long
Beach in 1979.
Charles D. Ebert, Ph.D.
Charles D. Ebert, Ph.D., age 47, has served as Senior Vice President,
Research and Development since May 2000; previously he served as Senior Vice
President, Proprietary Research and Development of the company since June
1999. Before, Dr. Ebert served TheraTech as its Senior Vice President,
Research and Development since 1992, and as its Vice President, Research and
Development from 1987 to 1992. Prior to joining TheraTech, he was Director of
Research and Development at Cygnus Therapeutic Systems from 1986 to 1987 where
he directed the development of transdermal products. From 1984 to 1986, he was
Senior Research Scientist and Manager in the Systems Development Group of
Ciba-Geigy Corporation, responsible for the development of new transdermal,
gastrointestinal and mucosal drug delivery systems. Dr. Ebert received his
B.S. in Biology from the University of Utah in 1977 and his Ph.D. in
Pharmaceutics from the University of Utah in 1981.
Robert C. Funsten
Robert C. Funsten, age 41, has served as Senior Vice President, General
Counsel and Secretary of the company since June 1999. Previously, Mr. Funsten
was the Vice President, General Counsel and Secretary of the company from
December 1998 to June 1999, and was Vice President, Legal Affairs of the
company from July 1998 to December 1998. Before joining the company, Mr.
Funsten was the Vice President and General Counsel of Chiron Vision
Corporation, an ophthalmic surgical device company, from August 1995 to June
1998 and previously served as its Vice President and Corporate Counsel from
November 1993 to August 1995. Prior to joining Chiron Vision Corporation, Mr.
Funsten was in private practice at Stradling, Yocca, Carlson & Rauth. Mr.
Funsten received a J.D. from Stanford School of Law in 1986.
David C. Hsia, Ph.D.
David C. Hsia, Ph.D., age 56, has served as our Senior Vice President,
Scientific Affairs since May 1995 and has been a Vice President of Watson
since 1985. Dr. Hsia is also co-founder of the company. He has been involved
in the development of pharmaceutical formulations for oral contraceptives,
sustained-release products and novel dosage forms. Dr. Hsia received a Ph.D.
in industrial and physical pharmacy from Purdue University in 1975.
Our executive officers are typically appointed annually by the Board of
Directors, hold office until their successors are chosen and qualified, and
may be removed at any time by the affirmative vote of a majority of the Board.
We have employment agreements with each of our executive officers. David Hsia
is the brother-in-law of Allen Chao. There are no other family relationships
between any director and executive officer of the Company.
30
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the symbol
"WPI." The following table sets forth the quarterly high and low share price
information for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31, 2000: High Low
----------------------------- ------ ------
<S> <C> <C>
First quarter............................................. $45.75 $33.69
Second quarter............................................ 54.69 37.50
Third quarter............................................. 71.50 48.13
Fourth quarter............................................ 67.88 42.25
<CAPTION>
Year ended December 31, 1999:
-----------------------------
<S> <C> <C>
First quarter............................................. $62.94 $37.06
Second quarter............................................ 47.50 30.50
Third quarter............................................. 40.31 28.00
Fourth quarter............................................ 43.31 26.50
</TABLE>
As of March 16, 2001, we estimate that there were approximately 80,000
holders of our common stock, including those who held in street or nominee
name.
We have not paid any cash dividends since our initial public offering in
February 1993, and do not anticipate paying any cash dividends in the
foreseeable future.
31
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except earnings per share)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENTS:
Net revenues................. $811,524 $704,890 $607,185 $369,260 $265,461
Cost of sales(2)............. 371,781 234,340 212,041 132,531 108,816
-------- -------- -------- -------- --------
Gross profit............. 439,743 470,550 395,144 236,729 156,645
-------- -------- -------- -------- --------
Royalty income............... -- -- -- 14,249 27,162
-------- -------- -------- -------- --------
Operating expenses:
Research and development... 67,294 51,158 53,077 38,033 42,112
Selling, general and
administrative............ 161,652 127,864 113,344 64,372 50,727
Amortization............... 55,215 29,986 22,469 7,213 386
Merger and related
expenses(3)............... 22,350 20,467 -- 14,718 --
Charge for acquired in-
process research and
development(4)............ 125,000 -- 13,000 -- --
-------- -------- -------- -------- --------
Total operating
expenses................ 431,511 229,475 201,890 124,336 93,225
-------- -------- -------- -------- --------
Operating income......... 8,232 241,075 193,254 126,642 90,582
-------- -------- -------- -------- --------
Other income (expense):
Equity in (loss) earnings
of joint ventures......... (2,461) (2,591) 6,788 10,694 17,909
Gain on sales of
securities(5)............. 358,561 44,275 -- -- --
Interest and other income.. 15,354 4,845 8,235 13,536 11,937
Interest expense........... (24,284) (11,192) (8,255) (1,417) (1,620)
-------- -------- -------- -------- --------
Total other income, net.. 347,170 35,337 6,768 22,813 28,226
-------- -------- -------- -------- --------
Income before income tax
provision, extraordinary
item and cumulative
effect of change in
accounting principle.... 355,402 276,412 200,022 149,455 118,808
Provision for income taxes... 184,678 93,751 78,248 54,800 35,522
-------- -------- -------- -------- --------
Income before extraordinary
item and cumulative effect
of change in accounting
principle................... 170,724 182,661 121,774 94,655 83,286
Extraordinary loss on early
retirement of debt, net of
taxes of $730(6)............ (1,216) -- -- -- --
Cumulative effect of change
in accounting principle, net
of taxes of $7,208(7)....... (12,013) -- -- -- --
-------- -------- -------- -------- --------
Net income............... $157,495 $182,661 $121,774 $ 94,655 $ 83,286
======== ======== ======== ======== ========
Basic earnings per share..... $ 1.55 $ 1.85 $ 1.25 $ 0.99 $ 0.90
======== ======== ======== ======== ========
Diluted earnings per share... $ 1.52 $ 1.82 $ 1.22 $ 0.97 $ 0.86
======== ======== ======== ======== ========
Weighted average shares
outstanding, basic.......... 101,430 98,500 97,460 95,240 92,900
======== ======== ======== ======== ========
Weighted average shares
outstanding, diluted........ 103,575 100,520 100,140 97,830 96,300
======== ======== ======== ======== ========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets............. $ 831,345 $ 459,918 $ 328,305 $281,157 $359,778
Working capital............ 550,905 309,137 222,335 171,706 316,639
Total assets............... 2,579,898 1,465,581 1,138,231 824,011 535,198
Long-term debt............. 483,272 150,365 151,381 10,270 12,873
Liabilities-acquired rights
and businesses............ 19,907 55,925 53,851 99,659 --
Deferred tax liabilities... 255,968 87,060 54,512 36,887 12,226
Total stockholders'
equity.................... 1,547,969 1,058,908 802,897 612,535 464,668
</TABLE>
- --------
(1) The company merged with Makoff R&D Laboratories, Inc. in 2000, with
TheraTech, Inc. in 1999 and with Oclassen Pharmaceuticals, Inc. and Royce
Laboratories, Inc. in 1997. These transactions were all accounted for
under the pooling of interests accounting method, and accordingly, the
selected consolidated financial data in Item 6 includes the results of
operations of these businesses for all periods presented.
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 reflect the
stock split.
(2) In the fourth quarter of 2000, Watson recorded an integration related
charge of $22.2 million to rationalize its product lines and evaluate
certain production and administrative facilities. This charge, which was
primarily recorded to cost of sales, is discussed further in Note 2 to the
consolidated financial statements.
(3) Merger expenses of $22.4 million in 2000, $20.5 million in 1999 and $14.7
million in 1997 relate to the company's acquisitions of Makoff, TheraTech,
Oclassen and Royce, as discussed in (1) above.
(4) Charges for acquired in-process research and development of $125 million
in 2000 and $13 million in 1998 relate to the company's acquisitions of
Schein Pharmaceutical, Inc. and The Rugby Group, Inc., respectively. These
charges are discussed further in Note 2 to the consolidated financial
statements.
(5) Watson sold 7.3 million common shares and 1.1 million common shares of
Andrx Corporation in 2000 and 1999, respectively. Gross realized gains of
$358.6 million and $44.3 million were recorded from these sales in each
respective year. At December 31, 2000, the company owned approximately 2.7
million common shares of Andrx.
(6) Reflects the write-off of a portion of deferred financing costs associated
with a $100 million prepayment of debt in September 2000.
(7) Reflects the impact of the adoption of Staff Accounting Bulletin 101 (SAB
101) on revenue recognition effective January 1, 2000. Pro forma amounts
of income before extraordinary item, net income and related diluted
earnings per share, assuming the retroactive application of SAB 101 for
the years ended December 31, 1998 through 2000 (previous amounts were not
material) are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Income before extraordinary item............... $170,724 $177,296 $112,308
Net income..................................... $169,508 $177,296 $112,308
Diluted earnings per share..................... $ 1.64 $ 1.76 $ 1.12
</TABLE>
33
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. We discuss such risks and uncertainties under the caption
"Forward-Looking Statements" in Item 1 of this Form 10-K.
GENERAL
Watson is a pharmaceutical company primarily engaged in the development,
production, marketing and distribution of both branded and generic (off-
patent) pharmaceutical products. The company was incorporated in 1985 and
began operations as a manufacturer and marketer of generic pharmaceuticals.
Through internal product development and synergistic acquisitions of products
and businesses, we have grown into a diversified specialty pharmaceutical
company. Currently, Watson markets 28 branded pharmaceutical product lines and
approximately 140 generic pharmaceutical products. Watson also develops
advanced drug delivery systems designed to enhance the therapeutic benefits of
existing drugs.
The following discussion of the company's financial condition and results
of operations should be read in conjunction with the company's consolidated
financial statements and notes thereto included elsewhere in this report. As
more fully described in Note 2 of the company's consolidated financial
statements, we acquired Makoff R&D Laboratories, Inc. (Makoff) on November 15,
2000. Makoff is a developer, licensor and marketer of pharmaceutical products
and medical foods relating to the management of kidney disease. We accounted
for this acquisition under the pooling-of-interests method, and accordingly,
this discussion and the consolidated financial statements for all periods
presented include the results of operations of Makoff.
We completed our acquisition of Schein Pharmaceutical, Inc. (Schein),
during the third quarter of 2000. Schein has a branded business focused in the
area of nephrology for the management of iron deficiency and anemia and
develops, manufactures and markets a broad line of generic products. The
aggregate purchase price of $825 million to acquire all the outstanding Schein
shares consisted of (a) approximately $510 million in cash, (b) the issuance
of approximately 5.4 million Watson common shares with a market value of
approximately $300 million, and (c) direct transaction costs of approximately
$15 million. In addition, we assumed short-term liabilities with a fair value
of approximately $375 million (principally debt that was subsequently retired)
and long-term liabilities with a fair value of approximately $5 million. We
accounted for this acquisition under the purchase method of accounting, and
accordingly, Schein's results of operations are included in our consolidated
financial statements from the date of acquisition.
Our principal executive offices are located at 311 Bonnie Circle, Corona,
California 92880.
FINANCIAL HIGHLIGHTS
For the year ended December 31, 2000, Watson reported net income of $157.5
million, or $1.52 per diluted share, compared with 1999 net income of $182.7
million, or $1.82 per diluted share. In 1998, we reported net income of $121.8
million, or $1.22 per diluted share.
Net income for 2000 included the following non-recurring items: (a) a
charge of $125 million for purchased in-process research and development, or
IPR&D, (b) integration-related costs of $22.2 million associated with our
acquisitions of Makoff and Schein in 2000, (c) a $22.4 million charge for
merger and related expenses associated with our acquisition of Makoff, (d) a
charge of $13 million related to a collaboration and licensing agreement with
Genelabs Technologies, Inc. (Genelabs), (e) an extraordinary loss on early
retirement of debt of $1.2 million (net of taxes of $0.7 million), (f) a
charge of $12 million (net of taxes of $7.2 million) for the cumulative effect
of a change in the accounting method for revenue recognition and (g) a gain of
$358.6 million from the sale in 2000 of shares of Andrx common stock.
Net income for 1999 included the following non-recurring items: (a) a
charge of $20.5 million for merger and related expenses related to our 1999
acquisition of TheraTech, Inc. (TheraTech), (b) an income tax benefit of
34
<PAGE>
$9.8 million related to changes in income tax regulations associated with the
utilization of net operating loss carryforwards, and (c) a gain of $44.3
million from the 1999 sale of Andrx common shares.
Net income for 1998 included a non-recurring charge of $13 million for
IPR&D associated with our acquisition of The Rugby Group, Inc. (Rugby).
ACQUISITIONS
In addition to our acquisitions of Makoff and Schein, we completed a number
of other acquisitions of businesses and products during the three years ended
December 31, 2000. For more information, see Note 2 to the accompanying
consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
The following table presents Watson's consolidated statements of income in
thousands of dollars and as percentages of net revenues. We have restated the
data for 1999 and 1998 to include the results of operations of Makoff (in
thousands of dollars and as percentages of net revenues):
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
$ % $ % $ %
-------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................... $811,524 100% $704,890 100% $607,185 100%
Cost of sales.................... 371,781 46 234,340 33 212,041 35
-------- --- -------- --- -------- ---
Gross profit................... 439,743 54 470,550 67 395,144 65
-------- --- -------- --- -------- ---
Operating expenses:
Research and development........ 67,294 8 51,158 7 53,077 9
Selling, general and
administrative................. 161,652 20 127,864 19 113,344 19
Amortization.................... 55,215 7 29,986 4 22,469 4
Merger and related expenses..... 22,350 3 20,467 3 -- --
Charge for acquired in-process
research and development....... 125,000 15 -- -- 13,000 2
-------- --- -------- --- -------- ---
Total operating expenses....... 431,511 53 229,475 33 201,890 34
-------- --- -------- --- -------- ---
Operating income............... 8,232 1 241,075 34 193,254 31
-------- --- -------- --- -------- ---
Other income (expense):
Equity in (loss) earnings of
joint ventures................. (2,461) -- (2,591) -- 6,788 1
Gain on sales of securities..... 358,561 44 44,275 6 -- --
Interest and other income....... 15,354 2 4,845 1 8,235 1
Interest expense................ (24,284) (3) (11,192) (2) (8,255) (1)
-------- --- -------- --- -------- ---
Total other income, net........ 347,170 43 35,337 5 6,768 1
-------- --- -------- --- -------- ---
Income before income tax
provision, extraordinary item
and cumulative effect of change
in accounting principle......... 355,402 44 276,412 39 200,022 32
Provision for income taxes....... 184,678 23 93,751 13 78,248 12
-------- --- -------- --- -------- ---
Income before extraordinary item
and cumulative effect of change
in accounting principle......... 170,724 21 182,661 26 121,774 20
Extraordinary loss on early
retirement of debt, net of taxes
of $730......................... (1,216) -- -- -- -- --
Cumulative effect of change in
accounting principle, net of
taxes of $7,208................. (12,013) (2) -- -- -- --
-------- --- -------- --- -------- ---
Net income..................... $157,495 19% $182,661 26% $121,774 20%
======== === ======== === ======== ===
</TABLE>
35
<PAGE>
YEAR ENDED DECEMBER 31, 2000 COMPARED TO 1999
Net revenues for the year ended December 31, 2000 were $811.5 million,
compared to $704.9 million in 1999, an increase of $106.6 million or 15%. This
revenue growth was attributable to our increased sales of both branded and
generic products. Watson's branded product growth was attributable largely to
sales of our nephrology products (acquired in the Schein acquisition),
increased sales of our women's health products and sales of branded products
launched during the fourth quarter of 2000. We recorded lower sales of our
branded products Monodox(R) and Dilacor XR(R) in 2000, due primarily to
increased generic competition. Our growth in generic product sales was
attributable primarily to sales of our nicotine polacrilex gum, sales of the
generic products we acquired in the Schein acquisition and certain products
launched in 2000.
Increased generic sales were partially offset by our phase-out of certain
products acquired in the Rugby acquisition and lower sales of estradiol and
certain strengths of our hydrocodone products. These generic products
experienced significant competition in 2000, which we anticipate will continue
in 2001. During 2000, branded products accounted for approximately 53% of our
net product sales and generic products accounted for approximately 47% of our
net product sales. In 2001, we expect branded products will comprise one-half
of our total product sales, with the balance provided by sales of our generic
products.
Our overall gross profit margin on product sales decreased to 53% in 2000
from 65% in 1999. This decline was primarily due to price competition in the
generic market and limited new generic product introductions. In the third and
fourth quarters of 2000, we implemented certain cost reduction strategies at
our manufacturing facilities. We expect our overall gross margin will improve
in 2001 due to these cost reduction strategies, the integration initiatives
discussed below, and new product introductions anticipated in 2001. We believe
our 2001 overall gross margin percentage will be in the range of the mid- to
upper-fifties. Our achievement of this projected overall gross margin is
dependent on our successful implementation of the cost reduction strategies,
our successful integration of the companies we have acquired and the launches
in 2001 of certain anticipated new products.
We recorded an integration charge in the fourth quarter of 2000 that also
reduced our gross profit margin in 2000. This charge was associated with the
integration of acquired businesses as we implemented several initiatives to
rationalize our product lines and production and administrative facilities.
The total integration charge was $22.2 million, $19.9 million of which was due
to the write-down of certain inventories and was charged to cost of sales. The
balance of the charge was related to discontinued research and development
commitments ($1.4 million), severance costs associated with the termination of
approximately 20 employees ($0.6 million) and lease termination costs ($0.3
million).
Research and development expenses increased to $67.3 million in 2000,
compared to $51.2 million in 1999. This increase was largely attributable to
costs associated with our collaboration and license agreement with Genelabs.
In this arrangement, during the fourth quarter of 2000 we expensed $13 million
that was primarily related to a non-refundable license fee we paid for the
exclusive North American rights to Aslera(TM), a development stage proprietary
product. In 2000, we continued to focus on our branded product development and
decreased spending on certain generic product development projects. In this
regard, spending on clinical studies for branded products increased in 2000,
while administrative costs were lower due to efficiencies realized from the
1999 consolidation of our proprietary development program. In 2001, we expect
our research and development spending to increase, with a continued emphasis
on the development of branded products.
Selling, general and administrative expenses increased to $161.7 million in
2000, compared to $127.9 million in 1999. The largest contributor to this
increase was the additional selling, general and administrative costs that
resulted from the combination of our operations with those of Schein. The
addition of Schein's nephrology division, in particular, caused our operating
costs to increase in the last six months of 2000. Also during 2000, we
expanded our sales force in the women's health area and, overall, incurred
higher advertising and promotional expenses. In addition, we incurred higher
professional fees in 2000, primarily due to increased legal costs associated
with certain patent-related and litigation matters. In 2001, we anticipate
that selling, general and administrative expenses will increase from 2000
levels as we continue to expand the branded component of our business.
36
<PAGE>
Amortization expense in 2000 increased to $55.2 million, compared to $30
million in 1999. We recorded additional amortization in 2000 related to the
intangible assets recorded in the Schein acquisition. In addition, we recorded
a full year of amortization expense on our 1999 product acquisitions. We
expect amortization expense to increase in 2001 as we record a full year of
amortization on the intangible assets related to the Schein acquisition.
In the fourth quarter of 2000, we acquired Makoff and recorded a charge of
$22.4 million for merger and related expenses. This charge consisted of
transaction costs for investment banking fees, professional fees and other
costs of $13.6 million and closing costs of $8.8 million. The $8.8 million
closing costs consisted of employee termination costs for approximately 50
employees ($4.7 million), asset impairment costs ($2.5 million) and lease and
contract termination costs ($1.6 million). As of December 31, 2000, we had
paid $12.9 million of transaction and closure costs and had charged-off the
impaired assets of $2.5 million. In 1999, we recorded a nonrecurring $20.5
million charge related to our acquisition of TheraTech. The 1999 charge
consisted of transaction fees for investment bankers, attorneys, accountants
and financial printing costs ($11.1 million) and closure costs associated with
the elimination of duplicate or discontinued products, operations and
facilities ($9.4 million).
In the third quarter of 2000, we recorded a charge of $125 million for the
write-off of in-process research and development related to our acquisition of
Schein. Watson, in conjunction with an independent valuation firm, based this
charge on an assessment of the value of purchased research and development at
Schein. This charge is discussed further in Note 2 to the consolidated
financial statements. We incurred no such charge in 1999.
In 2000, we sold approximately 7.3 million shares of common stock of Andrx
Corporation. The net proceeds from these sales totaled $381.5 million. We
recorded a pre-tax gain on these sales of $358.6 million. In 1999, we sold 1.1
million shares of Andrx common stock, received net proceeds of $54.6 million
and recorded a pre-tax gain of $44.3 million from these sales.
We recorded a loss of $2.5 million from our investment in joint ventures in
2000, primarily due to our share of Somerset Pharmaceuticals, Inc.'s 2000
loss. Somerset is a joint venture in which we and Mylan Laboratories, Inc.
each hold a fifty percent interest. Somerset manufactures and markets a single
product, Eldepryl(R), for the treatment of Parkinson's disease. In 1999, we
incurred a loss of $2.6 million from Somerset. The 2000 loss resulted from
research and development spending by Somerset to develop alternative
indications for selegiline (the active compound of Eldepryl(R)). We believe
that Somerset will continue to experience losses in near-term future periods
and expect that our share of such losses will approximate the loss we recorded
in 2000.
Interest and other income in 2000 increased to $15.4 million from $4.8
million in 1999, due primarily to higher 2000 cash balances as a result of the
proceeds received from the Andrx sales discussed above. We anticipate our
average cash balances to be lower in 2001, and accordingly, expect interest
income earned in 2001 to be lower than interest income in 2000.
Interest expense in 2000 increased to $24.3 million from $11.2 million in
1999, due primarily to interest expense on debt incurred in July 2000 in
connection with the Schein acquisition. Interest expense was offset by
approximately $7.1 million of interest capitalized during the year ended
December 31, 2000. In 2001, we anticipate that interest expense will increase,
as the borrowings related to the Schein acquisition are expected to be
outstanding for the full year.
Our income tax provision for 2000 reflected a 52% effective tax rate on
pre-tax income, compared to 34% for 1999. The difference in the effective tax
rate from 1999 to 2000 was primarily the result of non-deductible IPR&D
charges and amortization expense related to goodwill recorded in 2000, both of
which were from the Schein acquisition. We also incurred certain non-
deductible merger costs in 2000 related to our acquisition of Makoff. In
addition, our 1999 effective tax rate was reduced by changes in income tax
regulations related to limitations on the use of acquired net operating loss
carryforwards. As a result of these tax law changes, we recorded a one-time
$4.1 million reduction in income tax expense in third quarter 1999 and also
recognized a reduction in our overall effective tax rate during the last three
quarters of 1999.
37
<PAGE>
Effective January 1, 2000, we adopted Staff Accounting Bulletin 101 (SAB
101) issued by the Securities and Exchange Commission in December 1999. SAB
101 requires sales to be recognized, among other things, when the risk of
ownership transfers to the customer. Watson now records revenues and the
related cost of revenues from product sales in accordance with SAB 101. Our
revenues from milestone payments, research, development and licensing
agreements are now recognized based on the "contingency-adjusted performance
model." Under this method, Watson recognizes such revenues over the contract
performance period, subject to the elimination of contingencies for individual
milestones. As a result of adopting SAB 101, we recorded a cumulative
adjustment in the first quarter of 2000 of $12 million (net of income taxes of
$7.2 million).
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
Net revenues for the year ended December 31, 1999 were $704.9 million,
compared to $607.2 million for the year ended December 31, 1998, an increase
of $97.7 million or 16%. This revenue growth was attributable to increased
sales of branded products, primarily our core branded products and women's
health products acquired in the fourth quarter of 1998. These sales increases
were partially offset by lower sales of Dilacor XR(R) and its generic
equivalent, diltiazem, due to supply interruptions at Watson's former third
party supplier.
Our overall sales of generic products were lower in 1999 compared to 1998.
This was primarily the result of our phasing-out a number of products,
beginning in mid-1998, that were obtained in our acquisition of Rugby, reduced
sales of diltiazem as discussed previously, and increased price competition in
1999. In 1999, branded products accounted for approximately 54% of net product
sales, compared to approximately 43% in 1998. Our gross profit margin on
product sales increased to 65% in 1999 from 63% in 1998, largely due to the
higher margins typically generated by branded products.
Research and development expenses decreased to $51.2 million in 1999 from
$53.1 million in 1998. This decrease was due to a combination of efficiencies
realized upon consolidation of TheraTech's proprietary drug development
program into the company-wide program during 1999, as well as timing
differences among the various development projects between the two years.
Selling, general and administrative expenses increased to $127.9 million in
1999 from $113.3 million in 1998. Selling and marketing expenses accounted for
most of the increase, while general and administrative costs were essentially
flat year over year. Watson incurred higher personnel-related expenses in 1999
due to the expansion of its branded products sales force. During 1999, we
added new sales force personnel in the women's health and general products
sales groups. In addition, we increased promotional spending in support of the
women's health products acquired in the fourth quarter of 1998.
Amortization expense increased to $30 million in 1999 from $22.5 million in
1998 due primarily to our acquisition of certain women's health products in
the fourth quarter of 1998 and the 1999 purchases of Androderm(R) and Alora(R)
transdermal products.
During the first quarters of 1999 and 1998, Watson recorded non-recurring
charges related to its acquisitions of TheraTech and Rugby, respectively. In
the TheraTech acquisition, we recorded a special charge of $20.5 million for
merger and related expenses. This charge consisted of transaction fees for
investment bankers, attorneys, accountants and financial printing costs ($11.1
million) and closure costs associated with the elimination of duplicate or
discontinued products, operations and facilities ($9.4 million). The
eliminated operations were not significant to Watson. The $9.4 million of
closure costs consisted of employee termination costs ($3.9 million), non-cash
facility shutdown and asset impairment costs ($4.2 million) and lease and
contract termination costs ($1.3 million). As of December 31, 1999, we had
paid all material merger-related costs and charged off all applicable assets.
In the first quarter of 1998, we recorded a non-recurring charge of $13
million for in-process research and development costs associated with our
acquisition of Rugby.
In 1999, we incurred a net loss of $2.6 million from our joint ventures,
primarily due to the pass-through of Somerset's 1999 loss. The equity in
earnings from these joint ventures was $6.8 million in 1998. Somerset's
38
<PAGE>
1999 loss resulted from increased competition in the market for Eldepryl(R)
(Somerset's sole product) and increased research and development spending by
Somerset to develop alternative indications for selegiline (the active
compound of Eldepryl(R)).
In November 1999, we sold approximately 1.1 million common shares of our
investment in Andrx. Watson recognized a gain of $44.3 million from these
sales. At December 31, 1999, we owned 5 million Andrx shares, which was
approximately 15.8% of the total Andrx common shares outstanding at that date.
Interest and other income decreased to $4.8 million in 1999 from $8.2
million in 1998 because cash, cash equivalents and marketable securities were
higher in 1998 following our issuance of $150 million of senior unsecured
notes in May 1998. Interest expense increased in 1999 as these senior notes
were outstanding for the full year.
The provision for income taxes of $93.8 million for 1999 reflects an
overall tax rate of 34%, while the $78.2 million provision for 1998 reflects
an overall rate of 40%. The lower effective tax rate in 1999 is primarily
attributable to June 1999 changes in income tax regulations relating to the
"separate return limitation year" (SRLY) limitations on the use of acquired
net operating loss carryforwards. Previously, we had maintained a valuation
allowance against certain deferred tax assets related to acquired net
operating loss carryforwards because of uncertainty as to their future
realization under the SRLY limitations. With the June 1999 change in the SRLY
rules, management determined that those carryforwards would be realized.
Therefore, we have reversed the related valuation allowance and reduced our
1999 income tax provision by $9.8 million. Based on the tax year in which
these carryforwards will be deductible, $4.1 million of that total was
recorded as a one-time reduction in income tax expense during second quarter
1999, and the remaining $5.7 million was recognized through a reduction in
Watson's effective tax rate during the final three quarters of 1999. In
addition, approximately $2.8 million of valuation allowance was released
during 1999, when Watson determined that the deferred tax assets to which it
had related would be realized.
LIQUIDITY AND CAPITAL RESOURCES
Watson's working capital increased to $550.9 million at December 31, 2000
from $309.1 million at December 31, 1999, due primarily to 2000 net income of
approximately $157.5 million and the December 31, 2000 classification of our
investment in Andrx common stock as marketable securities. Our most
significant sources of cash during 2000 were the proceeds from borrowings
($501 million), proceeds from sales of securities ($383 million) and cash
received from exercises of stock options and warrants ($110 million).
Significant uses of cash in 2000 were the purchase of Schein common shares and
other Schein related acquisition expenses ($519 million), cash used to retire
Schein indebtedness and payments made on other long-term debt ($366 million),
payments of federal and state income taxes ($163 million), which were
considerably higher in 2000 due to the gains on sales of Andrx common stock,
and an increased investment in inventories to help reduce the risk of
potential intermittent future supply interruptions. Our 2000 investment in
property and equipment amounted to $34.3 million and consisted primarily of
additions to machinery and equipment. We expect to spend approximately $50
million in property and equipment additions during 2001.
In July 2000, we entered into a credit agreement with a bank and a
consortium of lenders that included a $500 million term loan facility and a
$200 million revolving credit facility that is available for working capital
and other needs. The $500 million term loan was drawn upon in its entirety,
which we used, along with approximately $250 million in cash on hand, to pay
off certain existing Schein indebtedness and to purchase approximately 26
million shares of Schein common stock through a cash tender offer. Quarterly
principal payments on the term loan borrowings begin at $15 million per
quarter in the first year and increase thereafter. Any outstanding borrowings
under the credit agreement mature in July 2005. In September 2000, we paid
$100 million of principal on the term loan facility, plus the required $15
million payment.
The interest rate under this credit agreement was fixed at the London
Interbank Offered Rate (LIBOR) plus 1.375% through December 31, 2000
(approximately 8.2% at December 31, 2000). Beginning January 2001, the margin
over LIBOR is determined based on a leverage test, with the margin increasing
and decreasing in 1/8%
39
<PAGE>
increments based on an interest rate grid. The interest rate is subject to
adjustment each quarter, based on a leverage ratio, and the LIBOR rate is also
subject to market fluctuations. The variable interest rate feature of this
credit agreement has increased our exposure to interest rate risk. The annual
impact on our results of operations of a 100 basis point interest rate change
on this credit agreement (based on the December 31, 2000 outstanding balance)
would be approximately $2.5 million after tax.
Under the credit agreement, we are subject to customary financial and other
operational covenants. As of February 28, 2001, we had not drawn any funds
from the $200 million revolving facility.
In April 1998, we filed a shelf registration statement with the Securities
and Exchange Commission that would allow us, from time to time, to raise up to
$300 million from offerings of senior or subordinated debt securities, common
stock, preferred stock or a combination thereof. In May 1998, pursuant to this
registration statement, we issued $150 million of 7 1/8% senior unsecured
notes due May 2008, with interest payable semi-annually in May and November.
Subject to preparation of a supplement to the existing prospectus and certain
other matters, the balance of this registration statement remains available
for issuance at Watson's discretion.
Watson's investment in Andrx consisted of 2.7 million Andrx common shares
with a fair market value of approximately $155 million at December 31, 2000.
As previously discussed, in 2000 we sold 7.3 million shares of Andrx and
recorded a pre-tax gain of $358.6 million. In 2001, through February 28, 2001,
we sold approximately 200,000 additional Andrx shares and received proceeds of
approximately $13 million from these sales. We may sell additional Andrx
common stock during 2001 and beyond.
We do not believe that inflation has had a significant impact on the
company's revenues or operations.
Our cash and marketable securities totaled approximately $238 million at
December 31, 2000. We believe that our cash and marketable securities balance,
our cash flow from operations and the financing sources discussed herein, will
be sufficient to meet our normal operating requirements during the next twelve
months. We continue to review additional opportunities to acquire or invest in
companies, technologies, product rights and other investments that are
compatible with our existing business. We could use cash, the financing
sources discussed herein and financing sources that subsequently become
available, to fund additional acquisitions or investments. In addition, we may
consider issuing additional debt or equity securities in the future to fund
potential acquisition or growth or to refinance existing debt. If a material
acquisition or investment is completed, our operating results and financial
condition could change materially in future periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS), No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended. SFAS
133 requires the recognition of the fair value of all derivative instruments
on the balance sheet as assets or liabilities, measured at fair value. Gains
and losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether or not it
qualifies for hedge accounting. If the derivative qualifies as a hedge, the
change in its fair value will be recognized in other comprehensive income
until the hedged item is recognized in earnings. Watson will adopt SFAS 133
effective January 1, 2001. Based on our current operations, the adoption of
SFAS 133 is not expected to have a material impact on our results of
operations or financial position.
40
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a publicly traded equity security, our investment in Andrx has exposure
to price risk. The market price of Andrx common shares has been, and may
continue to be, volatile. The following table sets forth the Andrx high and
low market price per share information, based on published financial sources,
for 1999 and 2000:
<TABLE>
<CAPTION>
Year Ended December 31, 2000: High Low
----------------------------- ------ ------
<S> <C> <C>
First quarter............................................. $65.50 $20.13
Second quarter............................................ 68.31 43.63
Third quarter............................................. 93.50 63.94
Fourth quarter............................................ 94.88 50.82
<CAPTION>
Year Ended December 31, 1999:
-----------------------------
<S> <C> <C>
First quarter............................................. $23.13 $11.13
Second quarter............................................ 39.00 15.41
Third quarter............................................. 39.00 28.57
Fourth quarter............................................ 29.00 19.25
</TABLE>
Other than our investment in Andrx, substantially all of our cash
equivalents and marketable securities are at fixed interest rates and, as
such, changes in market interest rates will affect the fair value of these
instruments. However, all of these investments mature within one year and we
believe that the market risk arising from our holding of these investments is
not material. We believe that the fair value of our fixed-rate long-term debt
approximates its carrying value of approximately $150 million at December 31,
2000. While changes in market interest rates may affect the fair value of our
fixed-rate long-term debt, we believe the effect, if any, of reasonably
possible near-term changes in the fair value of such debt on our financial
condition, results of operations or cash flows will not be material.
At this time, we are not party to any interest rate or derivative hedging
contracts and have no material foreign exchange or commodity price risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the financial
statements set forth in Item 14(a) under the caption "Consolidated Financial
Statements" as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
41
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information concerning directors of Watson required under this Item is
incorporated herein by reference from our definitive proxy statement, to be
filed pursuant to Regulation 14A, related to the Registrant's 2001 Annual
Meeting of Stockholders to be held on May 7, 2001 (the "2001 Proxy
Statement").
Executive Officers
The information concerning executive officers of Watson required under this
Item is provided under Item 4a of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated herein by
reference from our 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is incorporated herein by
reference from our 2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated herein by
reference from our 2001 Proxy Statement.
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
The following are included herein under Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants....................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-5
Consolidated Statements of Income for each of the three years in the
period ended December 31, 2000.......................................... F-6
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2000.......................................... F-8
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 2000............................. F-10
Notes to Consolidated Financial Statements............................... F-11
</TABLE>
(a) 2. Financial Statement Schedules
None. All financial statement 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
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Articles of Incorporation of the Company, and all amendments thereto, are
incorporated by reference to Exhibit 3.1 to the Company's June 30, 1995 Form 10-
Q and to Exhibit 3.1(A)
to the Company's June 30, 1996 Form 10-Q.
3.2 The Company's By-laws, as amended as of December 11, 1998, are incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form S-8
(Reg. No. 333-70933), filed on January 19, 1999.
4.1 Trust Indenture dated May 18, 1998 between the Company and First Union National
Bank, as Trustee for the issuance of the Company's Senior Unsecured Notes, is
incorporated by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-3/A (Reg. No. 333-49079), filed on April 30, 1999.
10.1 Industrial Real Estate Lease, with addendum, dated December 23, 1985, between
Hsi-Hsiung Hsu Hwa Chao (Chao Family) Trust I and the Company, is incorporated
by reference to Exhibit 10.6 to 33-46229.
Second Amendment thereto dated August 8, 1995 is incorporated by reference to
Exhibit 10.1 to the Company's September 30, 1995 Form 10-Q.
Third Amendment thereto dated August 31, 1998 is incorporated by reference to
Exhibit 10.3 to the Company's 1998 Form 10-K.
Fourth Amendment thereto dated March 19, 2001.
*10.2 1991 Stock Option Plan of the Company, as revised, is incorporated by reference
to Exhibit 10.1 to the Company's June 30, 1995 Form 10-Q.
Plan amendments are incorporated by reference to Exhibit 10.6(a) to the Company's
June 30, 1996 Form 10-Q and by reference to Exhibit 10.6(a) to the Company's
March 31, 1997 Form 10-Q.
*10.3 1995 Non-Employee Directors' Stock Option Plan, as amended, is incorporated by
reference to Exhibit 10.2 to the Company's June 30, 1995 Form 10-Q.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
*10.4 Form of Key Employee Agreement. The Company has entered into a Key
Employee Agreement in substantially the form filed herewith with
each of its executive officers, who include Michael E. Boxer,
Donald A. Britt, Sr., Allen Chao, Ph.D., Maria Chow, Charles
Ebert, Robert C. Funsten, and David C. Hsia, Ph.D. A copy of each
of these individual's Key Employee Agreements will be provided to
the Staff upon request.
10.5 Asset Purchase Agreement among the Company, G. D. Searle & Co. and
SCS Pharmaceuticals, dated September 30, 1997, is incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K dated October 16, 1997.
10.6 Supply Agreement between the Company and G. D. Searle & Co., dated
October 16, 1997, is incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K dated October 16, 1997.
10.7 Stock Purchase Agreement among the Company, Hoechst Marion
Roussel, Inc. and Marisub, Inc. dated August 25, 1997 is
incorporated by reference to Exhibit 10.27 to the Company's 1997
Form 10-K.
Amendment dated November 26, 1997 is incorporated by reference to
Exhibit 10.27(a) to the Company's 1997 Form 10-K.
Second Amendment dated February 27, 1998, is incorporated by
reference to Exhibit 10.27(b) to the Company's 1997 Form 10-K.
10.8 Supply and License Agreement by and between Hoechst Marion
Roussel, Inc. and The Rugby Group, Inc. dated February 27, 1998,
is incorporated by reference to Exhibit 10.28 to the Company's
1997 Form 10-K.
10.9 Contract Manufacturing Agreement by and between Hoechst Marion
Roussel, Inc. and The Rugby Group, Inc., dated February 27, 1998,
is incorporated by reference to Exhibit 10.29 to the Company's
1997 Form 10-K.
10.10 Supply Agreement by and between the Company and G. D. Searle & Co.
dated November 18, 1998 is incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K dated November
18, 1998.
10.11 License Agreement between the Company and Rorer Pharmaceutical
Products, Inc., dated June 30, 1997, is incorporated by reference
to Exhibit 10.1 to the Company's Current Report 8-K dated June
30, 1997.
+10.12 Distribution Agreement between R&D Laboratories, Inc. and Rhone-
Poulenc Rorer GmbH dated June 24, 1993, as amended June 28, 1994.
+10.13 Manufacturing & Supply Agreement between R&D Laboratories, Inc.
and Rhone-Poulenc Rorer GmbH dated December 1, 1998, as amended
by that Amendment No. 1 dated in 2000.
+10.14 Trademark Agreement between R&D Laboratories, Inc. and Rhone-
Poulenc Rorer GmbH dated August 26, 1993, as amended by that
Amendment No. 1 dated in 2000.
10.15 Amended and Restated Credit Agreement dated as of August 28, 2000
among the Company, SG Cowen Securities and Societe Generale.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Singer Lewak Greenbaum & Goldstein LLP.
</TABLE>
- --------
* Compensation Plan or Agreement
+ Confidential treatment will be requested with respect to certain portions
of this exhibit. Omitted portions will be filed separately with the SEC.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended December 31,
2000.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WATSON PHARMACEUTICALS, INC.
(Registrant)
/s/ Allen Chao
By: _________________________________
Allen Chao, Ph.D.
Chairman, Chief Executive Officer
and President (Principal
Executive Officer)
/s/ Michael E. Boxer
By: _________________________________
Michael E. Boxer
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
/s/ R. Chato Abad
By: _________________________________
R. Chato Abad
Vice President-Finance
(Principal Accounting Officer)
Date: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Allen Chao Chairman, Chief Executive March 29, 2001
____________________________________ Officer and President
Allen Chao, Ph.D.
/s/ Michael J. Fedida Director March 29, 2001
____________________________________
Michael J. Fedida
/s/ Michel J. Feldman Director March 29, 2001
____________________________________
Michel J. Feldman
/s/ Albert F. Hummel Director March 29, 2001
____________________________________
Albert F. Hummel
/s/ Ronald R. Taylor Director March 29, 2001
____________________________________
Ronald R. Taylor
/s/ Andrew L. Turner Director March 29, 2001
____________________________________
Andrew L. Turner
/s/ Fred G. Weiss Director March 29, 2001
____________________________________
Fred G. Weiss
</TABLE>
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants....................................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999............................. F-5
Consolidated Statements of Income for each of the three years in the period ended
December 31, 2000....................................................................... F-6
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2000....................................................................... F-8
Consolidated Statements of Stockholders' Equity for each of the three years in the period
ended December 31, 2000................................................................. F-10
Notes to Consolidated Financial Statements............................................... F-11
</TABLE>
All financial statement 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>
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 accompanying 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,
2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
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 Makoff R&D
Laboratories, Inc. (Makoff), a wholly owned subsidiary, which statements
reflect total assets of $10,036,000 at December 31, 1999 and total net
revenues of $10,658,000 and $5,992,000 for the years ended December 31, 1999
and 1998, respectively. In addition, we did not audit the financial statements
TheraTech, Inc. (TheraTech), a wholly owned subsidiary, which statements
reflect total net revenues of $40,045,000 for the year ended December 31,
1998. Those 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 Makoff and TheraTech, is based solely on
the reports of each of the respective other auditors. We conducted our audits
of these statements in accordance with auditing standards generally accepted
in the United States of America, 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 our opinion.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of recognizing revenue during the year ended
December 31, 2000.
PricewaterhouseCoopers LLP
Los Angeles, California
February 12, 2001
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Directors and Stockholders
Makoff R&D Laboratories, Inc.
We have audited the consolidated balance sheets of Makoff R&D Laboratories,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the two years in the period ended December 31, 1999 (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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Makoff R&D
Laboratories, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the two
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 25, 2000, except
for the second paragraph
of Note 19, as to which
the date is March 15, 2000
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
TheraTech, Inc.
We have audited the consolidated balance sheet of TheraTech, Inc. and
subsidiaries as of December 31, 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended
(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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TheraTech,
Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
February 5, 1999
F-4
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 66,194 $ 108,172
Marketable securities............................... 171,452 13,865
Accounts receivable, net of allowances for doubtful
accounts of $4,170 and $3,385...................... 85,703 198,963
Assets held for disposition......................... 142,067 --
Inventories......................................... 248,945 109,077
Prepaid expenses and other current assets........... 30,084 10,026
Deferred tax assets................................. 86,900 19,815
---------- ----------
Total current assets............................... 831,345 459,918
Property and equipment, net.......................... 194,487 139,603
Investments and other assets......................... 109,521 291,642
Product rights and other intangibles, net............ 1,444,545 574,418
---------- ----------
$2,579,898 $1,465,581
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses............... $ 200,965 $ 77,659
Income taxes payable................................ 18,935 33,550
Current portion of long-term debt................... 52,882 2,114
Current liability from acquisitions of products and
businesses......................................... 7,658 37,458
---------- ----------
Total current liabilities.......................... 280,440 150,781
Long-term debt....................................... 483,272 150,365
Long-term liability from acquisitions of products and
businesses.......................................... 12,249 18,467
Deferred tax liabilities............................. 255,968 87,060
---------- ----------
Total liabilities.................................. 1,031,929 406,673
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock; no par value per share; 2,500,000
shares
authorized; none outstanding....................... -- --
Common stock; $0.0033 per share par value;
500,000,000 shares authorized; 105,600,200 and
98,853,000 shares issued............................ 348 326
Additional paid-in capital........................... 758,760 399,424
Retained earnings.................................... 706,693 551,628
Accumulated other comprehensive income............... 82,168 107,530
---------- ----------
Total stockholders' equity......................... 1,547,969 1,058,908
---------- ----------
$2,579,898 $1,465,581
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net revenues..................................... $811,524 $704,890 $607,185
Cost of sales.................................... 371,781 234,340 212,041
-------- -------- --------
Gross profit................................. 439,743 470,550 395,144
-------- -------- --------
Operating expenses:
Research and development....................... 67,294 51,158 53,077
Selling, general and administrative............ 161,652 127,864 113,344
Amortization................................... 55,215 29,986 22,469
Merger and related expenses.................... 22,350 20,467 --
Charge for acquired in-process research and
development................................... 125,000 -- 13,000
-------- -------- --------
Total operating expenses..................... 431,511 229,475 201,890
-------- -------- --------
Operating income............................. 8,232 241,075 193,254
-------- -------- --------
Other income (expense):
Equity in (loss) earnings of joint ventures.... (2,461) (2,591) 6,788
Gain on sales of securities.................... 358,561 44,275 --
Interest and other income...................... 15,354 4,845 8,235
Interest expense............................... (24,284) (11,192) (8,255)
-------- -------- --------
Total other income, net...................... 347,170 35,337 6,768
-------- -------- --------
Income before income tax provision,
extraordinary item and cumulative effect of
change in accounting principle.............. 355,402 276,412 200,022
Provision for income taxes....................... 184,678 93,751 78,248
-------- -------- --------
Income before extraordinary item and cumulative
effect of change in accounting principle........ 170,724 182,661 121,774
Extraordinary loss on early retirement of debt,
net of taxes of $730............................ (1,216) -- --
Cumulative effect of change in accounting
principle, net of taxes of $7,208............... (12,013) -- --
-------- -------- --------
Net income....................................... $157,495 $182,661 $121,774
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Basic earnings per share:
Income before extraordinary item and cumulative
effect of change in accounting principle........ $ 1.68 $ 1.85 $ 1.25
Extraordinary loss on early retirement of debt... (0.01) -- --
Cumulative effect of change in accounting
principle, net of taxes......................... (0.12) -- --
-------- -------- --------
Net income..................................... $ 1.55 $ 1.85 $ 1.25
======== ======== ========
Diluted earnings per share:
Income before extraordinary item and cumulative
effect of change in accounting principle........ $ 1.65 $ 1.82 $ 1.22
Extraordinary loss on early retirement of debt... (0.01) -- --
Cumulative effect of change in accounting
principle, net of taxes......................... (0.12) -- --
-------- -------- --------
Net income..................................... $ 1.52 $ 1.82 $ 1.22
======== ======== ========
Pro forma amounts assuming the accounting change is
applied retroactively (See Note 1):
Income before extraordinary item................. $170,724 $177,296 $112,308
======== ======== ========
Net income....................................... $157,495 $177,296 $112,308
======== ======== ========
Net income per share, basic...................... $ 1.55 $ 1.80 $ 1.15
======== ======== ========
Net income per share, diluted.................... $ 1.52 $ 1.76 $ 1.12
======== ======== ========
Weighted average shares outstanding:
Basic............................................ 101,430 98,500 97,460
======== ======== ========
Diluted.......................................... 103,575 100,520 100,140
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 157,495 $ 182,661 $ 121,774
--------- --------- ---------
Reconciliation to net cash (used in)
provided by operating activities:
Depreciation.............................. 16,194 14,192 12,797
Amortization.............................. 55,215 30,086 22,569
Charge for acquired in-process research
and development.......................... 125,000 -- 13,000
Extraordinary loss on early retirement of
debt..................................... 1,216 -- --
Cumulative effect of change in accounting
principle................................ 12,013 -- --
Deferred income tax (benefit) provision... (8,659) (3,026) 1,593
Equity in loss (earnings) of joint
ventures................................. 2,829 3,051 (5,706)
Tax benefits related to exercise of
options.................................. 28,556 12,125 13,593
Gain on sales of securities............... (358,561) (44,275) --
Other..................................... (10,379) 3,088 (525)
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable...................... 80,225 (107,524) (16,980)
Inventories.............................. (82,276) (26,770) (18,824)
Prepaid expenses and other current
assets.................................. (10,956) 27,334 (12,375)
Assets held for disposition.............. (19,921) -- --
Accounts payable and accrued expenses.... (15,817) 3,863 654
Income taxes payable..................... (12,745) 33,550 (9,553)
--------- --------- ---------
Total adjustments...................... (198,066) (54,306) 243
--------- --------- ---------
Net cash (used in) provided by
operating activities................ (40,571) 128,355 122,017
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......... (34,340) (27,320) (27,424)
Purchases of marketable securities.......... (44,170) (55,061) (77,880)
Proceeds from maturities of marketable
securities................................. 57,274 74,711 84,262
Acquisitions of product rights.............. (18,645) (105,865) (177,357)
Acquisitions of businesses, net of cash
acquired................................... (518,699) -- (71,559)
Proceeds from sales of securities........... 383,439 54,580 --
Contingent payment related to acquisition of
The Rugby Group............................ (23,407) -- --
Issuance of notes receivable................ (12,400) -- --
Additions to investments and other assets... (17,807) (7,173) (10,207)
--------- --------- ---------
Net cash used in investing
activities.......................... $(228,755) $ (66,128) $(280,165)
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-8
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
2000 1999 1998
---------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt..... $ 501,000 $ 1,000 $148,418
Principal payments on long-term debt......... (365,949) (1,882) (7,294)
Payments on liability for acquisition of
product rights.............................. (15,000) (30,380) (45,000)
Distributions to stockholders and other...... (2,430) (3,177) --
Proceeds from exercises of stock options and
warrants.................................... 109,727 16,808 26,933
---------- -------- --------
Net cash provided by (used in) financing
activities................................ 227,348 (17,631) 123,057
---------- -------- --------
Net (decrease) increase in cash and cash
equivalents................................... (41,978) 44,596 (35,091)
Cash and cash equivalents at beginning of
year.......................................... 108,172 63,576 98,667
---------- -------- --------
Cash and cash equivalents at end of year....... $ 66,194 $108,172 $ 63,576
========== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the years for:
Interest (including capitalized interest of
$7,084)................................... $ 26,530 $ 11,080 $ 5,965
Income taxes............................... $ 162,690 $ 42,920 $ 82,960
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES:
Acquisitions of businesses:
Fair value of assets acquired................ $1,127,094 $ 31,465 $ 97,323
Less liabilities assumed..................... (384,875) (31,465) (25,764)
Less common stock issued..................... (217,057) -- --
Less cash acquired........................... (6,463) -- --
---------- -------- --------
Net cash paid for acquisitions............. $ 518,699 $ -- $ 71,559
========== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-9
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
2000 1999 1998
---------- ---------- --------
<S> <C> <C> <C>
Common stock--shares outstanding:
Beginning balance........................... 98,853 98,057 96,158
Exercise of stock options and warrants...... 1,330 796 1,899
Acquisitions and other...................... 5,417 -- --
---------- ---------- --------
Ending balance.............................. 105,600 98,853 98,057
---------- ---------- --------
Common stock--amount:
Beginning balance........................... $ 326 $ 324 $ 317
Exercise of stock options and warrants...... 4 2 7
Acquisitions and other...................... 18 -- --
---------- ---------- --------
Ending balance.............................. 348 326 324
---------- ---------- --------
Additional paid-in capital:
Beginning balance........................... 399,424 370,641 329,179
Exercise of stock options and warrants...... 109,723 16,933 27,593
Tax benefits related to exercise of stock
options.................................... 28,556 12,125 13,593
Acquisitions and other...................... 221,057 (275) 276
---------- ---------- --------
Ending balance.............................. 758,760 399,424 370,641
---------- ---------- --------
Retained earnings:
Beginning balance........................... 551,628 371,788 250,014
Net income.................................. 157,495 182,661 121,774
Distribution to stockholders................ (2,430) (2,821) --
---------- ---------- --------
Ending balance.............................. 706,693 551,628 371,788
---------- ---------- --------
Accumulated other comprehensive income:
Beginning balance........................... 107,530 60,144 33,025
Other comprehensive (loss) income........... (25,362) 47,386 27,119
---------- ---------- --------
Ending balance.............................. 82,168 107,530 60,144
---------- ---------- --------
Total stockholders' equity.................... $1,547,969 $1,058,908 $802,897
========== ========== ========
Comprehensive income:
Net income.................................. $ 157,495 $ 182,661 $121,774
Other comprehensive (loss) income, net of
tax:
Unrealized holding gains on securities.... 199,240 75,412 27,119
Reclassification for gains included in net
income................................... (224,602) (28,026) --
---------- ---------- --------
Other comprehensive (loss) income........... (25,362) 47,386 27,119
---------- ---------- --------
Comprehensive income........................ $ 132,133 $ 230,047 $148,893
========== ========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-10
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--Description of Business and Significant Accounting Policies
Description of business and basis of presentation
Watson Pharmaceuticals, Inc. (Watson or the company) is primarily engaged
in the development, production, marketing and distribution of both branded and
generic (off-patent) pharmaceutical products. The company was incorporated in
1985 and began operations as a manufacturer and marketer of generic
pharmaceuticals. Through internal product development and synergistic
acquisitions of products and businesses, the company has grown into a
diversified specialty pharmaceutical company. Watson also develops advanced
drug delivery systems designed to enhance the therapeutic benefits of existing
drugs.
The consolidated financial statements include the accounts of wholly owned
and majority-owned subsidiaries after elimination of intercompany accounts and
transactions. Investments are accounted for under the equity method when the
company can exert significant influence and ownership does not exceed 50%.
Investments in which the company owns less than a 20% interest and does not
exert significant influence are generally accounted for at fair value as
available-for-sale securities.
The company completed its acquisition of Makoff R&D Laboratories, Inc.
(Makoff) in November 2000, as further discussed in Note 2. This acquisition
was accounted for as a pooling of interests and, accordingly, the accompanying
consolidated financial statements have been restated to reflect the results of
operations of Makoff for all periods presented.
Use of estimates
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.
Cash equivalents and marketable securities
Cash equivalents are highly liquid investments with original maturities of
three months or less at the date of purchase. Marketable securities consist of
debt and equity investments and include common stock, time deposits,
commercial paper, U.S. and state and local government obligations.
At the time of purchase, the company classifies marketable securities as
available-for-sale or held-to-maturity. Available-for-sale securities are
recorded at fair value based on quoted market prices at each balance sheet
date. Unrealized holding gains and losses are excluded from earnings and are
reported as a separate component of accumulated other comprehensive income,
net of applicable income taxes, until realized. Realized gains and losses on
cash equivalents and marketable securities are determined on a specific
identification basis. The gross realized gains for the years ended December
31, 2000 and 1999 were $358.6 million and $44.3 million, respectively, and
resulted from sales of shares of the company's investment in Andrx Corporation
(Andrx) common stock. Realized gains and losses were not material for the year
ended December 31, 1998. At December 31, 2000 and 1999, the company did not
classify any marketable securities as held-to-maturity securities.
F-11
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The fair value of cash, cash equivalents and marketable securities is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Cash and cash equivalents:
Money market funds and cash............................ $ 66,194 $ 99,696
Corporate and non-government obligations............... -- 8,476
-------- --------
$ 66,194 $108,172
======== ========
Marketable securities:
Equity securities:
Cost................................................... $ 13,055 $ --
Gross unrealized gain.................................. 157,637 --
-------- --------
Fair value............................................. 170,692 --
U.S. government obligations............................. 760 13,865
-------- --------
$171,452 $ 13,865
======== ========
</TABLE>
The gross unrealized gain is primarily related to the company's investment
in Andrx. At December 31, 2000, the company included its investment in Andrx
in marketable securities, as further discussed in Note 4.
Fair value of other financial instruments
The fair values of the company's accounts receivable, accounts payable,
accrued expenses and long-term debt approximate their carrying values at
December 31, 2000. The fair values of the company's long-term investments were
based on quoted market prices at December 31, 2000.
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 method,
over estimated useful lives of two to ten years for furniture, fixtures and
equipment and twenty to forty years for buildings and building improvements.
Leasehold improvements are amortized on the straight-line method over the
shorter of the respective lease terms or the estimated useful life of the
assets, and generally range from five to thirty years.
Product rights and other intangible assets
Product rights are stated at cost, less accumulated amortization, and are
amortized on the straight-line method over their estimated useful lives
ranging from two to twenty years. Goodwill is amortized on the straight-line
method over fifteen to twenty-five years and is primarily related to the
company's acquisitions of Schein Pharmaceutical, Inc. (Schein) in 2000 and The
Rugby Group, Inc. (Rugby) in 1998. Other intangible assets are recorded at
cost and are amortized on the straight-line method over their estimated useful
lives ranging from two to seventeen years.
F-12
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Potential impairment of long-lived assets
The company periodically evaluates its long-lived assets for potential
impairment by evaluating the operating performance and future undiscounted
cash flows of the underlying assets.
Revenue recognition and change in accounting principle
Effective January 1, 2000, the company adopted Staff Accounting Bulletin
101 (SAB 101) issued by the Securities and Exchange Commission in December
1999. SAB 101 requires sales to be recognized, among other things, when the
risk of ownership transfers to the customer. Watson now records revenues from
product sales, net of sales discounts and allowances, in accordance with SAB
101. The company's revenues from milestone payments, research, development and
licensing agreements are now recognized based on the "contingency-adjusted
performance model." Under this method, Watson recognizes such revenue over the
contract performance period, subject to the elimination of contingencies for
individual milestones. In connection with this change in accounting principle,
Watson recorded a cumulative effect charge of $12 million (net of income taxes
of $7.2 million) effective January 1, 2000. The pro forma amounts presented in
the consolidated statements of income were calculated assuming the accounting
change was made retroactively to all periods presented.
Shipping and handling costs
The company classifies shipping and handling costs as part of selling,
general and administrative expenses. Shipping and handling costs were $12
million $11 million, and $11.6 million in 2000, 1999 and 1998, respectively.
Sales to major customers
For the year ended December 31, 2000, the company's three largest customers
accounted for 18%, 18% and 14%, individually, of the company's net revenues.
In 1999, the three largest customers comprised 20%, 12% and 12%, individually,
of Watson's net revenues. In 1998, the two largest customers accounted for 16%
and 11%, individually, of the company's net revenues.
Research and development activities
Research and development activities are expensed as incurred and consist of
self-funded research and development costs and the costs associated with work
performed under collaborative research and development agreements. Research
and development expenses include direct and allocated expenses and exclude
reimbursable general and administrative costs. Research and development
expenses incurred under collaborative agreements were approximately $2.2
million, $6.8 million and $11.9 million for the years ended December 31, 2000,
1999 and 1998, respectively.
Income taxes
Income taxes are accounted for using an asset and liability approach that
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.
F-13
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Earnings per share (EPS)
Basic earnings per share is computed by dividing net income by the weighted
average common shares actually outstanding during a period. Diluted earnings
per share is computed by dividing net income by the weighted average common
shares that would have been outstanding during the period, assuming, among
other things, that all vested in-the-money stock options had been exercised at
the beginning of the period. A reconciliation of the numerators and the
denominators of basic and diluted earnings per share for the years ended
December 31, 2000, 1999, and 1998 is as follows (in thousands, except for
EPS):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income.................................... $157,495 $182,661 $121,774
======== ======== ========
Denominators:
Denominator for basic EPS, weighted average
shares outstanding........................... 101,430 98,500 97,460
Assumed exercise of dilutive stock options and
warrants..................................... 2,145 2,020 2,680
-------- -------- --------
Denominator for diluted EPS................... 103,575 100,520 100,140
======== ======== ========
Basic EPS....................................... $ 1.55 $ 1.85 $ 1.25
======== ======== ========
Diluted EPS..................................... $ 1.52 $ 1.82 $ 1.22
======== ======== ========
</TABLE>
Concentration of credit risk
The company is subject to a concentration of credit risk with respect to
its accounts receivable balance, all of which is due from wholesalers,
distributors, chain drug stores and service providers in the health care and
pharmaceutical industries throughout the United States. Approximately 54% of
the trade receivable balance represented amounts due from four customers at
December 31, 2000 and three customers at December 31, 1999. The company
performs ongoing credit evaluations of its customers and maintains reserves
for potential uncollectible accounts. Actual losses from uncollectible
accounts have been minimal.
Reclassifications
Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform with the 2000 presentation. These reclassifications
had no effect on net income or retained earnings.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS), No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended. SFAS
133 requires the recognition of the fair value of all derivative instruments
on the balance sheet as assets or liabilities, measured at fair value. Gains
and losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. If the derivative qualifies as a hedge, the change in
its fair value will be recognized in other comprehensive income until the
hedged item is recognized in earnings. The company will adopt SFAS 133
effective January 1, 2001. Based on the company's current operations, the
adoption of SFAS 133 is not expected to have a material impact on the
company's results of operations or financial position.
F-14
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 2--Acquisitions of Businesses and Products
Acquisition of Schein Pharmaceuticals, Inc.
During the third quarter of 2000, Watson completed its acquisition of
Schein Pharmaceutical, Inc. (Schein). Schein has a branded business focused in
the area of nephrology for the management of iron deficiency and anemia and
develops, manufactures and markets a broad line of generic products.
The aggregate purchase price of $825 million to acquire all the outstanding
Schein shares consisted of (a) approximately $510 million in cash, (b) the
issuance of approximately 5.4 million Watson common shares with a market value
of approximately $300 million, and (c) direct transaction costs of $15
million. In addition, short-term liabilities with a fair value of
approximately $375 million (principally long-term debt that was subsequently
retired) and long-term liabilities with a fair value of approximately $5
million were assumed by the company. Watson accounted for this acquisition
under the purchase method of accounting. Accordingly, Schein's results of
operations are included in the consolidated financial statements from the date
of acquisition.
Watson completed the acquisition in two steps. In the first step, on July
6, 2000, following a cash tender offer, a Watson subsidiary purchased
approximately 26,068,500 shares of Schein common stock, constituting 77.8% of
Schein's outstanding shares as of that date. Following the purchase of these
shares, Watson repaid approximately $190 million of Schein's existing
indebtedness. The share purchase and debt retirement were financed utilizing
$500 million borrowed under a new term loan facility and cash on hand. During
August 2000, Watson retired the remaining $50 million of previous Schein
indebtedness, utilizing cash on hand.
In the second step of the acquisition, on August 28, 2000, following
Schein's stockholders' approval and adoption of the merger agreement, Watson
converted each remaining outstanding share of Schein not purchased by the
company in the cash tender, into the right to receive 0.42187 of a share of
Watson common stock. Watson subsequently issued approximately 5.4 million of
its common shares in exchange for all of the remaining outstanding common
shares of Schein.
Approximately $500 million of the purchase price was allocated to Schein's
existing product rights. These product rights are amortized on the straight-
line method over periods of two to 20 years, with the weighted average life
approximating 19.5 years. The remaining excess of the purchase consideration
over the fair value of the tangible net assets acquired of approximately $400
million was recorded as goodwill, which is amortized on the straight-line
method over 25 years.
The company allocated a portion of the purchase price to in-process
research and development (IPR&D). IPR&D represents ongoing research and
development projects acquired by the company for products that have not been
approved for commercial sale by the Food and Drug Administration and would
have no alternative future use. Under the purchase method of accounting, IPR&D
is not an asset and, accordingly, the $125 million of the total purchase price
of Schein that was determined to be IPR&D was charged to expense at the date
of acquisition. The company used independent professional valuation
consultants to assess and allocate values to IPR&D. The IPR&D charge relates
to approximately 30 generic product development projects, the three most
significant of which were valued at $28.5 million, $16.8 million and $11.6
million. These projects relate primarily to the development of antiulcer,
antidepressant, and anticonvulsant products, respectively.
The value of each project was determined using discounted cash flow models,
with the forecasted net cash flows for each product discounted back to its
present value using discount factors (ranging from 30% to 65%) that take into
account the stage of completion and the risks surrounding the successful
commercial development of each purchased in-process development project.
Material net cash inflows for significant projects were forecasted to commence
between 2001 and 2003. The percentage of completion rate for significant
projects
F-15
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
ranged from approximately 40% to over 75%. Substantial further research and
development, pre-clinical testing and clinical trials will be required to
determine the technical feasibility and commercial viability of the products
under development. At the date of acquisition, the company believes that the
assumptions used in the valuation process were reasonable. There can be no
assurance that such efforts will be successful. Delays in the development or
in the introduction of marketing of the products under development could
result in such products being marketed at a time when their cost and
performance characteristics would not be competitive in the marketplace or
could result in a shortening of their commercial lives.
The following summarized, unaudited pro forma results of operations for the
years ended December 31, 2000 and 1999 assumes the acquisition had been
effective as of the beginning of each period presented (in thousands, except
diluted earnings per share):
<TABLE>
<CAPTION>
Years Ended December
31,
---------------------
2000 1999
---------- ----------
<S> <C> <C>
Net revenues......................................... $1,004,600 $1,182,051
Income before extraordinary item and accounting
change.............................................. $ 112,442 $ 91,500
Net income........................................... $ 99,215 $ 91,500
Diluted earnings per share........................... $ 0.96 $ 0.86
</TABLE>
In connection with the company's acquisition of Schein, the company
acquired two injectable pharmaceutical manufacturing facilities, Steris
Laboratories, Inc., located in Phoenix, Arizona, and Marsam Pharmaceuticals,
Inc., located in Cherry Hill, New Jersey. At the time of the Schein
acquisition, the company decided to dispose of these facilities. Accordingly,
these facilities were recorded at their estimated fair market values at the
time of the Schein acquisition, based on the reports of an independent
appraiser, and the net assets of the two facilities have been classified as a
current asset on the company's consolidated balance sheet. An accrual for
estimated future losses at these facilities through their expected disposition
date of June 2001 is included in this balance. From the acquisition date
through December 31, 2000, these facilities operated at losses totaling $16.6
million, net of tax, that were applied against the accrual for estimated
future losses. In addition, interest capitalized on these two facilities
aggregated $3.3 million, net of tax, and was added to the carrying amount of
these facilities.
A severance accrual of $33.6 million was established for termination costs
associated with approximately 80 duplicative Schein employees. As of December
31, 2000, the accrual has a remaining balance of $13.7 million.
Acquisition of Makoff R&D Laboratories, Inc.
On November 15, 2000 Watson completed its acquisition of Makoff, a
developer, licensor and marketer of pharmaceutical products and medical foods
related to the management of kidney disease. Under the terms of the merger
agreement, each share of Makoff common stock was converted into the right to
receive 1.9555 of a share of Watson's common stock. Accordingly, Watson issued
approximately 2.8 million common shares, having a market value of
approximately $155 million on the date of acquisition, in exchange for all the
outstanding shares of Makoff. The acquisition was accounted for as a pooling
of interests for accounting purposes and qualified as a tax-free merger for
federal income tax purposes. During the fourth quarter of 2000, the company
recorded a special charge of $22.4 million for certain merger and related
expenses associated with the Makoff acquisition. This charge consisted of
transaction costs for investment banking fees, professional fees, printing and
other costs of $13.6 million and closure costs of $8.8 million. The $8.8
million consisted of employee termination costs for approximately 50 employees
($4.7 million) which were paid pursuant to existing employment agreements,
asset impairment costs ($2.5 million) and lease and contract termination costs
($1.6 million). As of December 31, 2000, the company had paid $12.9 million of
the total transaction and closure costs and had charged-off the impaired
assets of $2.5 million. Accrued merger expenses as of December 31, 2000
totaled approximately $7 million.
F-16
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Integration charge
In connection with the company's integration of acquired businesses, in the
fourth quarter of 2000 Watson commenced several initiatives to rationalize its
product lines and evaluate certain production and administrative facilities.
As a result of these actions, the company recorded a pretax charge of $22.2
million in the fourth quarter of 2000. These charges included inventory write-
downs of $19.9 million charged to cost of sales, $1.4 million related to
discontinued research and development commitments, $0.6 million of severance
costs related to the termination of approximately 20 employees and $0.3
million of lease termination costs. The company expects to complete these
initiatives during 2001. Watson may incur additional charges as it continues
to integrate recently acquired companies and products. The nature and amount
of these charges are expected to be finalized in the first half of 2001.
Transaction with Genelabs Technologies, Inc.
In November 2000, Watson entered into a collaboration and license agreement
with Genelabs Technologies, Inc (Genelabs). Genelabs granted the company an
exclusive license for North American rights to the proprietary product,
Aslera(TM), an investigational drug for the treatment of lupus erythematosus
(commonly known as "lupus").
In exchange for the rights to Aslera(TM), Watson paid a non-refundable
license fee of $10 million and also acquired three million shares of Genelabs'
common stock (which represented approximately 6% of the outstanding shares of
Genelabs at December 31, 2000) at a price of $6.85 per share and a warrant to
purchase 500,000 shares of common stock at $6.85 per share. The license fee
and the difference between the price Watson paid to acquire the Genelabs'
common stock and warrant and the fair value of the securities on the purchase
date, which approximated $3.4 million, were charged to research and
development expense in the fourth quarter of 2000. In connection with this
agreement, Watson also agreed to certain contingent payments aggregating
$45 million upon FDA approval of Aslera(TM). In addition, Watson will pay to
Genelabs royalties on net sales of Aslera(TM) and will share future co-
marketing rights with Genelabs.
Acquisition of TheraTech
In January 1999, Watson's acquisition of TheraTech was completed. TheraTech
is a drug-delivery company that develops, manufactures and markets innovative
products based on its patented and proprietary technologies and systems. Under
the terms of the merger agreement, each share of TheraTech common stock was
converted into the right to receive 0.2663 of a share of the company's common
stock. Accordingly, the company issued approximately 5.8 million common shares
having a market value of approximately $330 million on the date of acquisition
in exchange for all the outstanding common shares of TheraTech. The
acquisition was accounted for as a pooling of interests and qualified as a
tax-free merger for federal income tax purposes.
During the first quarter of 1999, the company recorded a special charge of
$20.5 million for certain merger and related expenses of the TheraTech
acquisition. The charge consisted of transaction fees for investment bankers,
attorneys, accountants and financial printing costs ($11.1 million) and
closure costs associated with the elimination of duplicate or discontinued
products, operations and facilities ($9.4 million). The eliminated operations
were not significant to the company. The $9.4 million of closure costs
consisted of employee termination costs ($3.9 million), non-cash facility
shutdown and asset impairment costs ($4.2 million) and lease and contract
termination costs ($1.3 million). As of December 31, 2000, the company had
paid all material merger-related costs and charged-off the impaired assets and
shutdown facilities.
F-17
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Combined and separate selected financial data of Watson, TheraTech and
Makoff for the years ended December 31, 2000, 1999 and 1998 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Watson Makoff TheraTech Adjustments Combined
-------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
2000
----
Net revenues............... $796,504 $20,774 $ -- $(5,754) $811,524
======== ======= ======= ======= ========
Net income................. $159,450 $ 2,130 $ -- $(4,085) $157,495
======== ======= ======= ======= ========
1999
----
Net revenues............... $689,232 $15,658 $ -- $ -- $704,890
======== ======= ======= ======= ========
Net income................. $178,881 $ 3,780 $ -- $ -- $182,661
======== ======= ======= ======= ========
1998
----
Net revenues............... $556,148 $10,992 $40,045 $ -- $607,185
======== ======= ======= ======= ========
Net income (loss).......... $120,829 $ 3,092 $(2,147) $ -- $121,774
======== ======= ======= ======= ========
</TABLE>
Prior to its merger with Watson, Makoff was taxed as an "S" Corporation.
All Makoff income, losses, gains and credits were passed through to the Makoff
stockholders. Accordingly, no income tax provision is included in the
consolidated financial statements related to Makoff's income prior to its
merger with Watson. If Makoff's pretax earnings for the year ended December
31, 2000 had been taxed at Watson's historic effective tax rate, the company's
diluted earnings per share, on a pro forma basis, would have been $1.51.
Makoff made distributions to its stockholders, before its merger with Watson,
totaling $2.4 million in 2000 and $2.8 million in 1999. Watson has not made
distributions to its stockholders since its initial public offering in 1993
and does not anticipate doing so in the foreseeable future.
The separate 1999 operating results of TheraTech, for the period prior to
its acquisition in January 1999, were not material. The combined financial
results of the company and TheraTech include certain reclassifications to
conform the financial statement presentations of the companies.
Acquisitions of transdermal systems product rights
In May 1999, Watson reacquired the U.S. and Canadian rights to the
Androderm testosterone transdermal system from SmithKline Beecham for $24.5
million in cash and, in October 1999, reacquired the marketing and
distribution rights for the Alora(R) estradiol transdermal system from Procter
& Gamble for approximately $37.5 million in cash. In connection with the
Alora(R) acquisition, Watson also reacquired rights to an estradiol and
progestin combination patch product for certain contingent payments
aggregating $37.5 million payable upon FDA approval.
Acquisitions of oral contraceptive products from G. D. Searle & Co.
Under the terms of the October 1997 agreement, in 1999, Watson exercised
its right to acquire two additional oral contraceptives, Ogestrel(R) and Low-
Ogestrel(R) from Searle. During 1999, the company made cash payments
aggregating $33.8 million to Searle and agreed to certain contingent payments
based on the technology transfer and net aggregate annual sales of certain of
the acquired products. Watson entered into supply agreements with Searle
whereby the company has the right to purchase these products from Searle
through October 2001 and, for some products, beyond.
Under a separate agreement with Searle, in November 1998, Watson acquired
the U.S. rights to three other oral contraceptive products for $120 million in
cash. The company entered into a supply agreement allowing it to purchase
these products in finished form from Searle for two years and in bulk form for
an additional one-year period.
F-18
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Acquisition of The Rugby Group, Inc.
In February 1998, Watson completed its acquisition of Rugby from Hoechst
Marion Roussel, Inc. Rugby developed, manufactured and marketed a wide array
of off-patent pharmaceutical products. Under the terms of the agreement, the
company acquired Rugby and its abbreviated new drug applications, which
included several licensed products, plus Rugby's sales and marketing
operations for U.S. off-patent and over-the-counter pharmaceutical products.
The transaction also included Rugby's product development group and product
development pipeline. Under the terms of the acquisition agreement, the
company paid approximately $67.5 million in cash at closing with a contingent
payment to be based on future sales and operating results. This contingent
payment of $23.4 million was paid in March 2000 and was recorded as an
addition to the Rugby acquisition cost. The unamortized cost of the purchase
price over the fair value of the assets acquired was $43.6 million at December
31, 2000, and is being amortized over 20 years.
The acquisition was accounted for as a purchase and Rugby's results of
operations have been recorded in the company's consolidated financial
statements since the date of acquisition. The company charged $13 million of
the Rugby purchase price to IPR&D expense in the first quarter of 1998.
NOTE 3--Balance Sheet Components
Selected balance sheet components consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Inventories:
Raw materials.......................................... $100,859 $ 48,952
Work-in-process........................................ 52,529 13,897
Finished goods......................................... 95,557 46,228
-------- --------
$248,945 $109,077
======== ========
Property and equipment:
Buildings and improvements............................. $ 75,416 $ 64,114
Leasehold improvements................................. 20,323 14,773
Land and land improvements............................. 12,046 10,633
Machinery and equipment................................ 108,165 90,670
Research and laboratory equipment...................... 29,235 24,571
Furniture and fixtures................................. 7,969 6,895
-------- --------
253,154 211,656
Less accumulated depreciation and amortization......... (95,358) (83,624)
-------- --------
157,796 128,032
Construction in progress............................... 36,691 11,571
-------- --------
$194,487 $139,603
======== ========
Accounts payable and accrued expenses:
Trade accounts payable................................. $ 72,502 $ 37,321
Accrued payroll, severance and related benefits........ 39,616 6,827
Accrued third-party rebates............................ 34,464 16,347
Royalties payable...................................... 18,021 8,061
Deferred income........................................ 9,631 --
Merger costs........................................... 6,989 --
Other accrued liabilities.............................. 19,742 9,103
-------- --------
$200,965 $ 77,659
======== ========
</TABLE>
F-19
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 4--Investments and Other Assets
Investments and other assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Investments in joint ventures............................ $ 38,139 $ 40,639
Other long-term investments.............................. 14,988 211,895
Long-term deferred tax assets............................ 33,387 25,838
Other assets............................................. 23,007 13,270
-------- --------
$109,521 $291,642
======== ========
</TABLE>
Investment in Somerset joint venture
The company's investments in joint ventures consisted primarily of its
investment in Somerset Pharmaceuticals, Inc (Somerset). Watson 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. The
company recorded a loss from Somerset's operations of $2.4 million and $2.9
million in 2000 and 1999, respectively and recorded earnings from Somerset of
$7.4 million in 1998. The Somerset joint venture results reported by Watson
consist of 50% of Somerset's earnings and management fees, offset by the
amortization of goodwill. The net excess of the cost of this investment over
the fair value of net assets acquired was $3.5 million and $4.5 million at
December 31, 2000 and 1999, respectively. Such goodwill is amortized on the
straight-line basis over 15 years.
In connection with an examination of Somerset's federal income tax returns
for the three years ended December 31, 1995, the Internal Revenue Service
(IRS), in June 1997, issued to Somerset a report that contained proposed
adjustments to Somerset's use of tax credits claimed under Internal Revenue
Code Section 936. In September 1999, Somerset's case was transferred from the
appellate level back to the agent level for further development of the facts.
In October 2000, Somerset received a no change letter from the IRS for the
three years ended December 31, 1995. As a result, the IRS has withdrawn its
proposed adjustments from Somerset's federal income tax returns.
Other long-term investments
Other long-term investments at December 31, 2000 consisted primarily of the
company's investment in Genelabs. As discussed in Note 2, the company acquired
this investment in November 2000. Genelabs (Nasdaq:GNLB) is engaged in the
discovery and development of a new class of pharmaceutical products that
selectively regulate the activation or deactivation of genes, or gene
expression. Genelabs also developed the proprietary hormone product
Aslera(TM), for the treatment of lupus.
At December 31, 1999, the company's other long-term investments was
primarily comprised of its investment in Andrx Corporation. Andrx
(Nasdaq:ADRX) is a drug-delivery company utilizing controlled-release
technologies to develop oral pharmaceutical products. During 2000 and 1999,
Watson sold 7.3 million shares and 1.1 million shares, respectively, of Andrx.
The gross realized gains from these sales were $358.6 million and $44.3
million, respectively, in 2000 and 1999. At December 31, 2000, the company
owned approximately 2.7 million Andrx common shares, or 3.9% of the total
Andrx shares outstanding. At December 31, 2000, the company included its
investment in Andrx in marketable securities in its consolidated balance
sheet.
F-20
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 5--Product Rights and Other Intangibles
Watson has made significant acquisitions of pharmaceutical product rights.
Generally, the acquisition of a product right will allow the company to
control certain aspects of the manufacturing, marketing, sales and
distribution of the underlying product(s). The breadth of such control may
vary and is normally determined by the specific terms of the relevant
agreement.
Goodwill is the excess of the purchase price paid over the fair value of
identifiable net assets acquired in business combinations accounted for as
purchases. The goodwill recorded by Watson is primarily related to its
acquisitions of Schein in 2000 and Rugby in 1998.
Product rights and other intangibles consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
2000 1999
---------- --------
(in thousands)
<S> <C> <C>
Product rights....................................... $1,085,191 $579,633
Goodwill............................................. 456,976 50,069
Other intangibles.................................... 18,794 5,917
---------- --------
1,560,961 635,619
Less accumulated amortization........................ (116,416) (61,201)
========== ========
$1,444,545 $574,418
========== ========
</TABLE>
NOTE 6--Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
2000 1999
---------- --------
(in thousands)
<S> <C> <C>
Term loan facility, due 2005........................ $ 385,000 $ --
Senior unsecured notes, 7.125%, face amount of $150
million,
due 2008 (effective rate of 7.25%)................. 148,737 148,608
Other notes payable................................. 2,417 3,871
---------- --------
536,154 152,479
Less current portion................................ (52,882) (2,114)
---------- --------
$ 483,272 $150,365
========== ========
</TABLE>
On July 5, 2000, the company entered into a credit agreement with a bank
that includes a $500 million term loan facility and a $200 million revolving
credit facility that is available for working capital and other needs. The
$500 million term loan was drawn upon in its entirety and, along with
approximately $250 million in cash on hand, used to pay off certain existing
Schein indebtedness and to purchase approximately 26 million shares of Schein
common stock through the tender offer, as further discussed in Note 2. In
September 2000, the company prepaid $100 million of borrowings under the
facility in addition to a required payment of $15 million that was due October
1, 2000. In connection with the $100 million prepayment, the company incurred
an extraordinary loss of $1.2 million, net of taxes of $0.7 million,
representing the write-off of deferred financing costs.
The interest rate under this credit agreement was fixed at the London
Interbank Offered Rate (LIBOR) plus 1.375% through December 31, 2000
(approximately 8.2% at December 31, 2000). Beginning January 2001, the margin
over LIBOR is determined based on a leverage test, with the margin increasing
and decreasing in 1/8%
F-21
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
increments based on an interest rate grid. The interest rate is subject to
adjustment each quarter, based on a leverage ratio. The LIBOR rate, subject to
market fluctuations, may also change. Watson is subject to customary financial
and other operational covenants. As of December 31, 2000, the company had not
drawn any funds from the $200 million revolving credit facility.
In May 1998, the company issued $150 million of 7.125% senior unsecured
notes. These notes are due in May 2008, with interest-only payments due semi-
annually in November and May. The company is subject to financial and other
operational covenants.
Annual maturities of notes payable are as follows: $52.9 million in 2001
$69.6 million in 2002, $84 million in 2003, $100 million in 2004, $81 million
in 2005 and $148.7 million thereafter.
NOTE 7--Income Taxes
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
2000 1999 1998
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current provision:
Federal...................................... $138,129 $86,992 $67,352
State........................................ 15,178 9,785 9,341
-------- ------- -------
153,307 96,777 76,693
-------- ------- -------
Deferred provision (benefit):
Federal...................................... 33,014 (2,869) 920
State........................................ (1,643) (157) 635
-------- ------- -------
31,371 (3,026) 1,555
-------- ------- -------
$184,678 $93,751 $78,248
======== ======= =======
</TABLE>
The exercise of certain stock options results in 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 $11.9 million, $12.1 million and
$13.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively. In addition, $16.6 million of these benefits resulted in
increased net operating loss (NOL) carryforwards in 2000. Income taxes of $1.8
million have been provided for the possible distribution of approximately
$24.3 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>
Years Ended
December 31,
----------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rates.................... 35% 35% 35%
State income taxes, net of federal benefit............... 2 2 3
Merger costs capitalized for tax purposes................ 2 1 --
Valuation allowance reduction for tax law change......... -- (4) --
IPR&D costs capitalized for tax purposes................. 12 -- 2
Other.................................................... 1 -- --
--- --- ---
52% 34% 40%
=== === ===
</TABLE>
F-22
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
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) are presented below:
<TABLE>
<CAPTION>
December 31,
-------------------
2000 1999
--------- --------
(in thousands)
<S> <C> <C>
Benefits from NOL carryforwards....................... $ 36,066 $ 11,650
Benefits from tax credit carryforwards................ 2,849 3,043
Differences in financial statement and tax accounting
for:
Inventory, receivables and accruals................. 82,333 15,827
Research and development............................ 361 805
Property, equipment and intangible assets........... (195,820) (11,973)
Investments in joint ventures....................... (1,827) (1,948)
Non-compete agreement............................... 8,834 10,209
Unrealized holding gains on securities................ (57,433) (72,515)
Other................................................. (4,217) 3,495
--------- --------
(128,854) (41,407)
Less valuation allowance.............................. (6,828) --
--------- --------
$(135,682) $(41,407)
========= ========
</TABLE>
A valuation allowance has been established due to the uncertainty of
realizing certain NOL carryforwards and a portion of the other deferred tax
assets. The company had NOL carryforwards at December 31, 2000 of
approximately $71 million for federal income tax purposes and an aggregate of
$265 million for state income tax purposes. During 2000, the company utilized
NOL carryforwards of approximately $40 million to offset federal taxable
income. Due to restrictions imposed as a result of ownership changes to
acquired subsidiaries, the amount of NOL carryforwards 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 2001, if not utilized.
NOTE 8--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 but not limited to,
dividend rates, conversion and voting rights, terms and prices of redemptions
and liquidation preferences without vote or action by the stockholders. At
December 31, 2000, no preferred stock had been 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. At December 31, 2000, the company had reserved 9.2 million shares
of its common stock for issuance upon exercise of options granted or to be
granted under these plans. 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 certain of the company's acquisitions, Watson assumed stock option and
warrant plans from the acquired companies. The options and warrants in these
plans were adjusted by the individual exchange ratios specified in each
transaction. No additional options or warrants will be granted under any of
the assumed plans.
F-23
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations, which require compensation expense for options to be
recognized when the market price of the underlying stock exceeds the exercise
price on the date of the grant. Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), permits companies to
apply existing accounting rules under APB 25 and provide pro forma disclosures
of net income and earnings per share as if the fair value method (as defined
in FAS 123) had been applied. Had compensation cost been determined using the
fair value method prescribed by FAS 123, the company's net income and earnings
per share would have been as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income.............................. $145,335 $165,250 $108,525
======== ======== ========
Pro forma basic EPS............................... $ 1.43 $ 1.68 $ 1.11
======== ======== ========
Pro forma diluted EPS............................. $ 1.40 $ 1.64 $ 1.08
======== ======== ========
</TABLE>
The weighted average fair value of the options has been estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 2000, 1999 and 1998,
respectively: no dividend yield; expected volatility of 58%, 49% and 41%;
risk-free interest rate of 6.09%, 5.59% and 5.14% per annum; and expected
terms of approximately six years. Weighted averages are used because of
varying assumed exercise dates.
A summary of the company's stock option plans as of December 31, 2000, 1999
and 1998, and for the years then ended is presented below (shares in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of year................ 7,194 $27.11 6,784 $24.26 7,580 $19.09
Granted................. 2,711 46.47 1,720 38.30 1,272 42.26
Exercised............... (1,262) 23.33 (642) 15.99 (1,643) 14.49
Cancelled............... (671) 36.92 (668) 31.58 (425) 20.63
------ ------ ------
Outstanding--end of
year................... 7,972 $32.28 7,194 $27.11 6,784 $24.26
====== ====== ======
Weighted average fair
value of options
granted................ $21.38 $23.46 $20.42
====== ====== ======
</TABLE>
F-24
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The following table summarizes information about stock options outstanding
at December 31, 2000 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Weighted Average
Remaining Weighted Average Weighted Average
Range of Exercise Prices Shares Life in Years Exercise Price Shares Exercise Price
- ------------------------ ------ ---------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$ 4.06 to $15.00........ 860 3.4 $ 9.05 807 $ 9.23
$15.01 to $20.00........ 1,428 4.9 17.87 1,150 18.02
$20.01 to $30.00........ 1,256 5.2 26.31 908 26.41
$30.01 to $40.00........ 1,640 7.9 35.01 468 34.71
$40.01 to $50.00........ 1,845 8.5 44.62 340 43.41
$50.01 to $69.33........ 943 9.2 54.34 54 53.96
----- -----
7,972 6.7 $32.28 3,727 $23.09
===== =====
</TABLE>
NOTE 9--Operating Segments
Watson is a manufacturer and marketer of pharmaceutical products with two
reportable operating segments: branded and generic pharmaceutical products.
The branded products segment includes the company's lines of women's health,
general products and nephrology products. Watson has aggregated its branded
product lines because of similarities in regulatory environment, manufacturing
processes, methods of distribution and types of customer. This segment
includes patent-protected products and trademarked generic products that
Watson promotes directly to healthcare professionals as branded pharmaceutical
products. The generic products segment includes off-patent pharmaceutical
products that are therapeutically equivalent to proprietary products. The
company sells its generic products primarily to pharmaceutical wholesalers,
drug distributors and chain drug stores.
The accounting policies of the operating segments are the same as those
described in Note 1. Watson primarily evaluates its operating segments based
on net revenues and gross profit. The "other" classification includes revenues
from research, development and licensing fees. Net revenues and gross profit
information for the company's operating segments for the three years ended
December 31, 2000 are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net revenues:
Branded pharmaceutical products................ $422,983 $357,427 $253,984
Generic pharmaceutical products................ 370,809 306,979 329,805
Other.......................................... 17,732 40,484 23,396
-------- -------- --------
Total net revenues........................... $811,524 $704,890 $607,185
======== ======== ========
Gross profit:
Branded pharmaceutical products................ $338,056 $292,764 $198,560
Generic pharmaceutical products................ 83,955 137,302 173,188
Other.......................................... 17,732 40,484 23,396
-------- -------- --------
Total gross profit........................... $439,743 $470,550 $395,144
======== ======== ========
</TABLE>
F-25
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 10--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 2000, 1999 and 1998 was $8.5 million, $7.2 million and $6.8 million,
respectively.
At December 31, 2000, future minimum lease payments under all non-
cancelable operating leases consisted of $9.6 million in 2001, $8.9 million in
2002, $8.7 million in 2003, $4.2 million in 2004, $3.3 million in 2005 and
$5.2 million thereafter.
Employee retirement plans
The company certain retirement plans covering substantially all employees.
The company contributes to the plans based upon the employee contributions.
Watson contributed $2.7 million, $1.8 million and $1.4 million to these
retirement plans for the years ended December 31, 2000, 1999, and 1998,
respectively.
Legal matters
The company is involved in various claims, disputes, investigations,
inquiries and legal proceedings that arise from time to time in the ordinary
course of its business. While there can be no assurance that an adverse
determination of any such matters could not have a material adverse impact on
the company in any future period, management does not believe, based on
information known to it, that the ultimate resolution of such matters will
have a material adverse impact on the company's consolidated financial
position or results of operations.
F-26
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 11--Quarterly Financial Data (Unaudited)
The company changed its accounting method for revenue recognition for the
adoption of SAB 101, effective January 1, 2000, as further discussed in Note
1. The unaudited quarterly consolidated financial data are shown below as
reported before the adoption of SAB 101 and as adjusted to reflect the
adoption of SAB 101 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fourth Third Second First
2000 Quarter Quarter Quarter Quarter
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
As reported before SAB 101:
Net revenues.......................... $254,755 $187,854 $195,251 $182,645
Gross profit........................ 113,957 88,224 126,374 118,629
Income (loss) before extraordinary
item................................. (1,911) (62,691) 95,724 144,252
Net income (loss)................... $ (1,911) $(63,907) $ 95,724 $144,252
======== ======== ======== ========
Basic earnings (loss) per share..... $ (0.02) $ (0.63) $ 0.96 $ 1.46
======== ======== ======== ========
Diluted earnings (loss) per share... $ (0.02) $ (0.63) $ 0.94 $ 1.43
======== ======== ======== ========
Adjusted for SAB 101:
Net revenues.......................... $254,755 $179,331 $200,204 $177,234
Gross profit........................ 113,957 82,414 128,103 115,269
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle.............. (1,911) (66,322) 96,805 142,152
Net income (loss)................... $ (1,911) $(67,538) $ 96,805 $130,139
======== ======== ======== ========
Basic earnings (loss) per share..... $ (0.02) $ (0.66) $ 0.97 $ 1.31
======== ======== ======== ========
Diluted earnings (loss) per share... $ (0.02) $ (0.66) $ 0.96 $ 1.29
======== ======== ======== ========
Market price per share: High......... $ 67.88 $ 71.50 $ 54.69 $ 45.75
Low.......... $ 42.25 $ 48.13 $ 37.50 $ 33.69
<CAPTION>
Fourth Third Second First
1999 Quarter Quarter Quarter Quarter
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues.......................... $193,161 $173,025 $172,819 $165,885
Gross profit........................ 127,306 111,188 116,600 115,456
Net income.......................... $ 73,509 $ 35,615 $ 46,267 $ 27,270
======== ======== ======== ========
Basic earnings per share............ $ 0.75 $ 0.36 $ 0.47 $ 0.28
======== ======== ======== ========
Diluted earnings per share.......... $ 0.73 $ 0.35 $ 0.46 $ 0.27
======== ======== ======== ========
Market price per share: High......... $ 43.31 $ 40.31 $ 47.50 $ 62.94
Low.......... $ 26.50 $ 28.00 $ 30.50 $ 37.06
</TABLE>
The company's pro forma net income and diluted earnings per share for the
fourth quarter of 1999, assuming retroactive application of SAB 101, is $74.7
million and $0.75, respectively.
The quarterly data above were restated, as applicable, for the acquisition
of Makoff in November 2000 and TheraTech in January 1999, accounted for under
the pooling of interests method as further discussed in Note 2.
F-27
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Articles of Incorporation of the Company, and all amendments thereto,
are incorporated by reference to Exhibit 3.1 to the Company's June
30, 1995 Form 10-Q and to Exhibit 3.1(A) to the Company's June 30,
1996 Form 10-Q.
3.2 The Company's By-laws, as amended as of December 11, 1998, are
incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-8 (Reg. No. 333-70933), filed on
January 19, 1999.
4.1 Trust Indenture dated May 18, 1998 between the Company and First Union
National Bank, as Trustee for the issuance of the Company's Senior
Unsecured Notes, is incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3/A (Reg. No. 333-49079),
filed on April 30, 1999.
10.1 Industrial Real Estate Lease, with addendum, dated December 23, 1985,
between Hsi-Hsiung Hsu Hwa Chao (Chao Family) Trust I and the
Company, is incorporated by reference to Exhibit 10.6 to 33-46229.
Second Amendment thereto dated August 8, 1995 is incorporated by
reference to Exhibit 10.1 to the Company's September 30, 1995 Form
10-Q.
Third Amendment thereto dated August 31, 1998 is incorporated by
reference to Exhibit 10.3 to the Company's 1998 Form 10-K.
Fourth Amendment thereto dated March 19, 2001.
*10.2 1991 Stock Option Plan of the Company, as revised, is incorporated by
reference to Exhibit 10.1 to the Company's June 30, 1995 Form 10-Q.
Plan amendments are incorporated by reference to Exhibit 10.6(a) to
the Company's June 30, 1996 Form 10-Q and by reference to Exhibit
10.6(a) to the Company's March 31, 1997 Form 10-Q.
*10.3 1995 Non-Employee Directors' Stock Option Plan, as amended, is
incorporated by reference to Exhibit 10.2 to the Company's June 30,
1995 Form 10-Q.
*10.4 Form of Key Employee Agreement. The Company has entered into a Key
Employee Agreement in substantially the form filed herewith with each
of its executive officers, who include Michael E. Boxer, Donald A.
Britt, Sr., Allen Chao, Ph.D., Maria Chow, Charles Ebert, Robert C.
Funsten, and David C. Hsia, Ph.D. A copy of each of these
individual's Key Employee Agreements will be provided to the Staff
upon request.
10.5 Asset Purchase Agreement among the Company, G. D. Searle & Co. and SCS
Pharmaceuticals, dated September 30, 1997, is incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
dated October 16, 1997.
10.6 Supply Agreement between the Company and G. D. Searle & Co., dated
October 16, 1997, is incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated October 16, 1997.
10.7 Stock Purchase Agreement among the Company, Hoechst Marion Roussel,
Inc. and Marisub, Inc. dated August 25, 1997 is incorporated by
reference to Exhibit 10.27 to the Company's 1997 Form 10-K.
Amendment dated November 26, 1997 is incorporated by reference to
Exhibit 10.27(a) to the Company's 1997 Form 10-K.
Second Amendment dated February 27, 1998, is incorporated by reference
to Exhibit 10.27(b) to the Company's 1997 Form 10-K.
10.8 Supply and License Agreement by and between Hoechst Marion Roussel,
Inc. and The Rugby Group, Inc. dated February 27, 1998, is
incorporated by reference to Exhibit 10.28 to the Company's 1997 Form
10-K.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.9 Contract Manufacturing Agreement by and between Hoechst Marion
Roussel, Inc. and The Rugby Group, Inc., dated February 27, 1998, is
incorporated by reference to Exhibit 10.29 to the Company's 1997
Form 10-K.
10.10 Supply Agreement by and between the Company and G. D. Searle & Co.
dated November 18, 1998 is incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K dated November 18, 1998.
10.11 License Agreement between the Company and Rorer Pharmaceutical
Products, Inc., dated June 30, 1997, is incorporated by reference to
Exhibit 10.1 to the Company's Current Report 8-K dated June 30,
1997.
+10.12 Distribution Agreement between R&D Laboratories, Inc. and Rhone-
Poulenc Rorer GmbH dated June 24, 1993, as amended June 28, 1994.
+10.13 Manufacturing & Supply Agreement between R&D Laboratories, Inc. and
Rhone-Poulenc Rorer GmbH dated December 1, 1998, as amended by that
Amendment No. 1 dated in 2000.
+10.14 Trademark Agreement between R&D Laboratories, Inc. and Rhone-Poulenc
Rorer GmbH dated August 26, 1993, as amended by that Amendment No. 1
dated in 2000.
10.15 Amended and Restated Credit Agreement dated as of August 28, 2000
among the Company, SG Cowen Securities and Societe Generale.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Singer Lewak Greenbaum & Goldstein LLP.
</TABLE>
- --------
* Compensation Plan or Agreement
+ Confidential treatment will be requested with respect to certain portions
of this exhibit. Omitted portions will be filed separately with the SEC.
2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>FOURTH AMENDMENT TO LEASE
<TEXT>
<PAGE>
Exhibit 10.1
FOURTH AMENDMENT TO LEASE
-------------------------
This Fourth Amendment to Lease ("Amendment") is made as of March 19, 2001,
by and between RICHARD Y. CHAO, as Trustee of HSI-HSIUNG AND HSU HWA CHAO TRUST
I, hereinafter referred to as "Lessor," and WATSON PHARMACEUTICALS, INC., a
Nevada corporation, successor in interest to Watson Laboratories, Inc.,
hereinafter referred to as "Lessee."
Recitals:
--------
A. Lessor and Lessee have previously entered into a certain Lease dated
December 23, 1985, as amended by an Addendum, and Addendum #2 dated
August 11, 1992, a Second Amendment to Lease dated August 8, 1995, and
a Third Amendment to Lease dated August 31, 1998 (collectively, the
"Lease"), providing for the lease of that certain improved real
property, hereinafter referred to as the "Premises," in the City of
Corona, County of Riverside, State of California, commonly known as 100
Business Center Drive, Corona, California, consisting of a building
containing approximately 30,108 gross square feet.
B. Lessor and Lessee wish to extend the term of the Lease for an
additional three-year period, upon the terms and conditions set forth
hereinafter.
Agreement:
---------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Lessor and Lessee agree as
follows:
1. Paragraph 3.1 of the Lease is hereby replaced with the following: "The
term of this Lease shall be for nineteen (19) years commencing on
January 1, 1986 and ending on December 31, 2004, unless sooner
terminated pursuant to any provision hereof."
2. Except as modified hereby, the Lease remains in full force and effect.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Amendment as of
the date first above written.
LESSOR: LESSEE:
RICHARD Y. CHAO, AS TRUSTEE OF WATSON PHARMACEUTICALS, INC.,
HSI-HSIUNG AND HSU-HWA CHAO a Nevada corporation
TRUST I successor in interest to
Watson Laboratories, Inc.
By:______________________________ By:______________________________
Richard Y. Chao, Trustee Robert C. Funsten
Senior Vice President,
General Counsel and Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>FORM OF KEY EMPLOYEE AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.4
WATSON PHARMACEUTICALS, INC.
KEY EMPLOYEE AGREEMENT
This Key Employee Agreement ("Agreement") is entered into as of __________,
2000 (the "Effective Date"), by and between ________________________
("Executive") and Watson Pharmaceuticals, Inc. (the "Company"), a Nevada
corporation.
Whereas, the Company desires to employ Executive to provide personal
services to the Company, and wishes to provide Executive with certain
compensation and benefits in return for his services; and
Whereas, Executive wishes to be employed by the Company and provide
personal services to the Company in return for certain compensation and
benefits, including the benefits provided under the Agreement;
Now, Therefore, in consideration of the mutual promises and covenants
contained herein, it is hereby agreed by and between the parties hereto as
follows:
1. Employment by the Company. Subject to terms set forth herein, the
Company agrees to employ Executive in the position of _______________ and
Executive hereby accepts employment effective as of the Effective Date. In this
position, Executive shall perform such duties as are assigned from time to time
by the Chief Executive Officer ("CEO") of the Company, consistent with the
Bylaws of the Company and as may be required by the Company's Board of Directors
(the "Board"). During his employment with the Company, Executive will devote his
best efforts and substantially all of his business time and attention (except
for vacation periods as set forth herein and reasonable periods of illness or
other incapacity permitted by the Company's general employment policies) to the
business of the Company. Executive shall abide by the general employment
policies and procedures of the Company, except that wherever the terms of this
Agreement may differ from or are in conflict with the Company's general
employment policies or procedures, this Agreement shall control.
2. Compensation.
2.1 Salary. For services to be rendered hereunder, Executive shall
receive a base salary as set forth in Section 1 of the Compensation and
Severance Terms Schedule, attached hereto as Exhibit A. Executive will be
considered annually for increases in base salary in accordance with Company
policy and subject to review and approval by the CEO or the Compensation
Committee of the Board, as appropriate.
2.2 Bonus. Executive shall be eligible to participate in the
Company's bonus plan at the executive level throughout the duration of
Executive's employment with the Company. The Company shall have the sole
discretion to determine whether Executive is entitled to any such bonus and to
determine the amount of the bonus. The amount of Executive's bonus may be
determined in part based on Executive's performance with respect to certain
goals
1.
<PAGE>
established by the Company and attainment by the Company of its planned
financial objectives for the bonus period. Notwithstanding the foregoing, no
bonus is guaranteed to Executive. Any bonus is subject to the approval of the
CEO or the Compensation Committee of the Board, as appropriate. The Company
retains the authority to review, grant, deny or revise any bonus in its sole
discretion. To be eligible to receive a bonus, Executive must remain in
employment with the Company throughout the entire fiscal year. The target level
of such bonus is set forth in Section 2 of Exhibit A attached hereto.
2.3 Stock Options. In addition to any stock options which the
Company may have already granted to Executive prior to the Effective Date,
subject to approval of the Board or the Compensation Committee of the Board, as
appropriate, Executive will receive the stock option grants (if any) set forth
in Section 3 of Exhibit A, and such additional grants of stock options as may
from time to time be granted, pursuant to the terms and conditions set forth in
the applicable stock option agreement and plan documents, copies of which will
be made available upon Executive's request. For the purposes of this Agreement,
all stock options granted to Executive by the Company prior to the Effective
Date, granted hereunder, or granted in the future shall be referred to
hereinafter as the "Options."
2.4 Paid Time Off. Executive shall be eligible to accrue paid time
off ("PTO") during the term of this Agreement, in accordance with the Company's
standard policy regarding PTO and in an amount commensurate with other employees
at a level similar to that of the Executive.
2.5 Standard Company Benefits. Executive shall be entitled to all
rights and benefits for which he is eligible under the terms and conditions of
the standard Company benefits plans (e.g., health and disability insurance,
401(k) retirement plan, etc.) and other benefits and incentives which may be in
effect from time to time and provided by the Company to employees at levels
similar to the Executive.
3. Proprietary Information and Inventions.
Executive agrees to execute and abide by the Employee Proprietary
Information and Inventions Agreement attached hereto as Exhibit C and made a
part hereof by this reference.
4. Outside Activities.
4.1 Activities. Except with the prior written consent of the CEO or
the Board, as appropriate, Executive will not during his employment with the
Company undertake or engage in any other employment, occupation or business
enterprise, other than ones in which Executive is a passive investor. Executive
may engage in civic and not-for-profit activities so long as such activities do
not materially interfere with the performance of his duties hereunder.
4.2 Investments and Interests. During his employment by the Company,
Executive agrees not to acquire, assume or participate in, directly or
indirectly, any position, investment or interest known by him to be adverse to
or in conflict with the interest of the Company, its business or prospects,
financial or otherwise. By way of clarification, nothing contained in this
Agreement shall prevent Executive from holding, for investment purposes only, no
more than one percent (1%) of the capital stock of any publicly traded company.
2.
<PAGE>
4.3 Non-Competition. During his employment by the Company, except on
behalf of the Company, Executive will not directly or indirectly, whether as an
officer, director, stockholder, partner, proprietor, associate, representative,
consultant, or in any capacity whatsoever engage in, become financially
interested in, be employed by or have any business connection with any other
person, corporation, firm, partnership or other entity whatsoever known by him
to compete directly with the Company, anywhere in the world, in any line of
business engaged in (or planned to be engaged in) by the Company.
5. Other Agreements.
Executive represents and warrants that his employment by the Company
will not conflict with and will not be constrained by any prior agreement or
relationship with any third party. Executive represents and warrants that he
will not disclose to the Company or use on behalf of the Company any
confidential information governed by any agreement with any third party except
in accordance with an agreement between the Company and any such third party.
During Executive's employment by the Company, Executive may use, in the
performance of his duties, all information generally known and used by persons
with training and experience comparable to his own and all information which is
common knowledge in the industry or otherwise legally in the public domain.
6. Termination Of Employment.
6.1 At-Will Employment. Executive's relationship with the Company is
at-will. The Company shall have the right to terminate Executive's employment
with the Company at any time with or without Cause and with or without notice.
6.2 Termination by Company for Cause. If the Company terminates
Executive's employment at any time for Cause, Executive's salary shall cease on
the date of termination; and Executive will not be entitled to severance pay,
pay in lieu of notice or any other such compensation.
(a) Definition of "Cause." For purposes of this Agreement,
"Cause" shall mean (i) Executive's conviction of any felony; or, (ii)
Executive's gross misconduct, material violation of Company policy, or material
breach of Executive's duties to the Company, which Executive fails to correct
within thirty (30) days after Executive is given written notice by the CEO or
the Board, as appropriate.
6.3 Termination by Company Without Cause. If the Company terminates
Executive's employment at any time without Cause, Executive shall be entitled to
severance benefits as set forth in Section 4.1 of the Compensation and Severance
Terms Schedule, attached hereto as Exhibit A.
6.4 Executive's Voluntary Resignation. Executive may terminate his
employment with the Company at any time, with or without Good Reason, and with
or without notice. In the event Executive voluntarily terminates his employment
other than for Good Reason, he will not be entitled to severance pay, pay in
lieu of notice or any other such compensation.
3.
<PAGE>
6.5 Executive's Resignation for Good Reason. Executive may resign
his employment for Good Reason so long as Executive tenders his resignation to
the Company within sixty (60) days after the occurrence of the event which forms
the basis for his termination for Good Reason. If Executive terminates his
employment for Good Reason, Executive shall be eligible for severance benefits
as set forth in Section 4.2 of Exhibit A, attached hereto.
(a) Definition of "Good Reason." For purposes of this
Agreement, "Good Reason" shall mean any one of the following events which occurs
on or after the Effective Date: (i) any reduction of the Executive's then
existing annual base salary, except to the extent the annual base salary of all
other executive officers of the Company is similarly reduced (provided such
reduction does not exceed fifteen percent (15%) of Executive's then existing
annual base salary); (ii) any material reduction in the package of benefits and
incentives, taken as a whole, provided to the Executive (except that employee
contributions may be raised to the extent of any cost increases imposed by third
parties) or any action by the Company which would materially and adversely
affect the Executive's participation or reduce the Executive's benefits under
any such plans, except to the extent that such benefits and incentives of all
other executive officers of the Company are similarly reduced; (iii) any
diminution of the Executive's duties, responsibilities, authority, reporting
structure, titles or offices, excluding for this purpose an isolated,
insubstantial or inadvertent action not taken in bad faith which is remedied by
the Company immediately after notice thereof is given by the Executive; (iv)
request that the Executive relocate to a work site that would increase the
Executive's one-way commute distance by more than thirty-five (35) miles from
his then principal residence, unless the Executive accepts such relocation
opportunity; (v) any material breach by the Company of its obligations under
this Agreement; or (vi) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company.
6.6 Termination for Death or Disability. Executive's employment with
the Company will be terminated in the event of Executive's death, or any
illness, disability or other incapacity in such a manner that Executive is
physically rendered unable regularly to perform his duties hereunder for a
period in excess of one hundred eighty (180) consecutive days or more than one
hundred eighty (180) days in any consecutive twelve (12) month period. The
determination regarding whether Executive is physically unable regularly to
perform his duties shall be made by the Board. Executive's inability to be
physically present on the Company's premises shall not constitute a presumption
that Executive is unable to perform such duties. In the event that Executive's
employment with the Company is terminated for death or disability as described
in this Section 6.6, Executive or Executive's heirs, successors, and assigns
shall not receive any compensation or benefits other than payment of accrued
salary and PTO and such other benefits as expressly required in such event by
applicable law or the terms of applicable benefit plans.
6.7 Cessation. If Executive violates any provision of Section 8 of
this Agreement or the Employee Proprietary Information and Inventions Agreement
and Executive fails to correct such violation within ten (10) days after
Executive is given written notice by the CEO or the Board, as appropriate, then
any severance payments or other benefits being provided to Executive will cease
immediately, and Executive will not be entitled to any further compensation from
the Company.
4.
<PAGE>
7. Change of Control.
7.1 Definition. For purposes of this Agreement, Change of Control
means the occurrence of any of the following:
(a) a sale of assets representing fifty percent (50%) or more
of the net book value and of the fair market value of the Company's consolidated
assets (in a single transaction or in a series of related transactions);
(b) a liquidation or dissolution of the Company;
(c) a merger or consolidation involving the Company or any
subsidiary of the Company after the completion of which: (i) in the case of a
merger (other than a triangular merger) or a consolidation involving the
Company, the shareholders of the Company immediately prior to the completion of
such merger or consolidation beneficially own (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or comparable successor rules), directly or indirectly, outstanding
voting securities representing less than sixty percent (60%) of the combined
voting power of the surviving entity in such merger or consolidation, and (ii)
in the case of a triangular merger involving the Company or a subsidiary of the
Company, the shareholders of the Company immediately prior to the completion of
such merger beneficially own (within the meaning of Rule 13d-3 promulgated under
the Exchange Act, or comparable successor rules), directly or indirectly,
outstanding voting securities representing less than sixty percent (60%) of the
combined voting power of the surviving entity in such merger and less than sixty
percent (60%) of the combined voting power of the parent of the surviving entity
in such merger;
(d) an acquisition by any person, entity or "group" (within
the meaning of Section 13(d) or 14(d) of the Exchange Act or any comparable
successor provisions), other than any employee benefit plan, or related trust,
sponsored or maintained by the Company or an affiliate of the Company and other
than in a merger or consolidation of the type referred to in clause "(c)" of
this sentence, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rules) of
outstanding voting securities of the Company representing more than thirty
percent (30%) of the combined voting power of the Company (in a single
transaction or series of related transactions); or
(e) in the event that the individuals who, as of the Effective
Date, are members of the Board (the "Incumbent Board"), cease for any reason to
constitute at least fifty percent (50%) of the Board. (If the election, or
nomination for election by the Company's shareholders, of any new member of the
Board is approved by a vote of at least fifty percent (50%) of the Incumbent
Board, such new member of the Board shall be considered as a member of the
Incumbent Board.)
7.2 Termination After a Change of Control. In the event Executive's
employment with the Company is terminated without Cause, or Executive resigns
for Good Reason, within ninety (90) days prior to or twenty-four (24) months
following a Change of Control (a "Change of Control Termination"), then
Executive shall be eligible for severance benefits as set forth in Section 4.3
of Exhibit A, attached hereto.
5.
<PAGE>
7.3 Parachute Payments. In the event that it shall be determined
under this Section 7.3 that any payment or benefit to Executive or for the
benefit of Executive or on Executive's behalf (whether paid or payable or
distributed or distributable) pursuant to the terms of this Agreement or any
other agreement, arrangement or plan with the Company or any Affiliate (as
defined below) (including, without limitation, the severance benefits as set
forth in Section 4.3 of Exhibit A, attached hereto) (individually, a "Payment"
and collectively, the "Payments") would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or
any successor provision thereto (the "Excise Tax"), then Executive shall be
entitled to receive from the Company one or more additional payments
(individually, a "Gross-Up Payment" and collectively, the "Gross-Up Payments")
in an aggregate amount such that the net amount of the Payments and the Gross-Up
Payments retained by Executive after the payment of all Excise Taxes (and any
interest and penalties imposed with respect to such Excise Taxes) on the
Payments and all federal, state and local income tax, employment taxes and
Excise Taxes (including any interest and penalties imposed with respect to such
taxes and Excise Taxes) on the Gross-Up Payments provided for in this Section
7.3, and taking into account any lost or reduced tax deductions on account of
the Gross-Up Payments, shall be equal to the Payments. For purposes of this
Section 7.3, an "Affiliate" shall mean any successor to all or substantially all
of the business and/or assets of the Company, any person acquiring ownership or
effective control of the Company or ownership of a substantial portion of the
assets of the Company's assets, or any other person whose relationship to the
Company, such successor or such person acquiring ownership or control is such as
to require attribution between the parties under Section 318(a) of the Code.
(a) All determinations required to be made under this Section
7.3, including whether and when any Gross-Up Payment is required and the amount
of such Gross-Up Payment, and the assumptions to be utilized in arriving at such
determinations, shall be made by the Accountants (as defined below), which shall
provide Executive and the Company with detailed supporting calculations with
respect to such Gross-Up Payment within thirty (30) days of the receipt of
notice from Executive or the Company that Executive has received or will receive
a Payment. For the purposes of this Section 7.3, the "Accountants" shall mean
the Company's independent certified public accounting firm serving immediately
prior to the Change of Control (or other change in ownership or effective
control, or change in ownership of a substantial portion of the assets, of a
corporation, as defined in Section 280G of the Code) with respect to which such
determination is being made. In the event that the Accountants are also serving
as the accountants, auditors or consultants for the individual, entity or group
effecting the Change of Control (or other change in ownership or effective
control, or change in ownership of a substantial portion of the assets, of a
corporation, as defined in Section 280G of the Code), the Company shall appoint
another nationally recognized independent certified public accounting firm,
reasonably acceptable to Executive, to make the determinations required
hereunder (which accounting firm shall then be referred to as the "Accountants"
hereunder). All fees and expenses of the Accountants shall be borne solely by
the Company.
(b) For the purposes of determining whether any of the
Payments will be subject to the Excise Tax and the amount of such Excise Tax,
such Payments will be treated as "parachute payments" within the meaning of
section 280G of the Code, and all "parachute payments" in excess of the "base
amount" (as defined under Section 280G(b)(3) of the Code) of Executive shall be
treated as subject to the Excise Tax, unless and except to the extent that, in
the opinion of the Accountants, such Payments (in whole or in part) either do
not constitute "parachute payments" or represent reasonable compensation for
services actually rendered
6.
<PAGE>
(within the meaning of section 280G(b)(4) of the Code) in excess of the "base
amount," or such "parachute payments" are otherwise not subject to such Excise
Tax.
(c) For purposes of determining the amount of the Gross-Up
Payment, Executive shall be deemed to pay federal income taxes at the highest
applicable marginal rate of federal income taxation for the calendar year in
which the Gross-Up Payment is to be made and to pay any applicable state and
local income taxes at the highest applicable marginal rate of taxation for the
calendar year in which the Gross-Up Payment is to be made, net of the maximum
reduction in federal income taxes which could be obtained from the deduction of
such state or local taxes if paid in such year (determined without regard to
limitations on deductions based upon the amount of Executive's adjusted gross
income); and to have otherwise allowable deductions for federal, state and local
income tax purposes at least equal to those disallowed because of the inclusion
of the Gross-Up Payment in Executive's adjusted gross income.
(d) Any determination by the Accountants shall be binding upon
the Company and Executive. As a result of uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accountants hereunder, it is possible that the Gross-Up Payment made will have
been an amount less than the Company should have paid pursuant to this Section
7.3 (the "Underpayment"). In the event that the Company exhausts its remedies
pursuant to Section 7.3(f) and Executive is required to make a payment of any
Excise Tax, the Underpayment shall be promptly paid by the Company to or for
Executive's benefit.
(e) Executive shall notify the Company in writing of any claim
by the Internal Revenue Service or other taxing authority that, if successful,
would require the payment by the Company of a Gross-Up Payment. Such
notification shall be given as soon as practicable after Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. Executive shall
not pay such claim prior to the expiration of the 30-day period following the
date on which Executive gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes, interest and/or penalties with
respect to such claim is due). If the Company notifies Executive in writing
prior to the expiration of such period that the Company desires to contest such
claim, Executive shall: (i) give the Company any information reasonably
requested by the Company relating to such claim; (ii) take such action in
connection with contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation, engaging legal
representation with respect to such claim by an attorney selected by the Company
and reasonably acceptable to Executive; (iii) cooperate with the Company in good
faith in order to effectively contest such claim; and (iv) permit the Company to
participate in any proceedings relating to such claims; provided, however, that
the Company shall bear and pay directly all costs and expenses, including
attorneys' fees (including additional interest and penalties) incurred in
connection with such contest and shall indemnify Executive for and hold
Executive harmless from, on an after-tax basis, any Excise Tax or income,
employment or other taxes (including interest and penalties with respect
thereto) imposed as a result of such representation and payment of all related
costs and expenses.
(f) Without limiting the foregoing provisions of this Section
7.3, the Company shall control all proceedings taken in connection with such
contest and, at the
7.
<PAGE>
Company's sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the Internal Revenue Service or other
taxing authority in respect of such claim and may, at the Company's sole option,
either direct Executive to pay the amount claimed and sue for a refund or
contest the claim in any permissible manner, and Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to Executive, on an interest-free basis, and shall indemnify Executive
for and hold Executive harmless from, on an after-tax basis, any Excise Tax or
income, employment or other taxes (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance (including as a result of any forgiveness by
the Company of such advance); provided, further, that any extension of the
statute of limitations relating to the payment of taxes, interest and penalties
for the taxable year of Executive with respect to which such contested amount is
claimed to be due shall be limited solely to such contested amount. Furthermore,
the Company's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(g) The Gross-Up Payments provided for in this Section 7.3
shall be paid to Executive not later than the date upon which the severance
benefits payable to Executive under Section 4.3 of Exhibit A, attached hereto,
are due; provided, however, that if the amounts of such Gross-Up Payments cannot
be finally determined by the Accountants on or before such day, the Company
shall pay to Executive on such day an estimate, as determined in good faith by
the Company, of the minimum amount of such Gross-Up Payments and shall pay the
remainder of such Gross-Up Payments (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code) not later than 30 days after the amount
thereof can be determined by the Accountants. In the event that the amount of
the estimated payments exceeds the amount subsequently determined by the
Accountants to have been due to the Executive, such excess shall constitute a
loan by the Company to Executive, payable not later than 30 days after such
determination and demand by the Company (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code).
8. Nonsolicitation. While employed by the Company, and for one (1) year
following the termination of Executive's employment with the Company, Executive
agrees not to solicit, attempt to solicit, induce, or otherwise cause any
employee or independent contractor of the Company to terminate his or her
employment or contractual relationship in order to become an employee or
independent contractor to or for Executive or any other person or entity.
9. Release. In exchange for the severance compensation and benefits
provided under this Agreement to which Executive would not otherwise be
entitled, Executive shall enter into and execute a release substantially in the
form attached hereto as Exhibit B (the "Release") upon Executive's termination
of employment. Unless the Release is executed by Executive and delivered to the
Company within twenty-one (21) days (forty-five (45) days in the event of a
group termination) after the termination of Executive's employment with the
Company, Executive shall not receive any severance benefits provided under this
Agreement, acceleration,
8.
<PAGE>
if any, of Executive's Options as provided in this Agreement shall not apply and
Executive's Options in such event may be exercised following the date of
Executive's termination only to the extent provided under their original terms
in accordance with the applicable stock option plan and option agreements.
10. General Provisions.
10.1 Notices. Any notices provided hereunder must be in writing and
shall be deemed effective upon personal delivery (including, personal delivery
by facsimile transmission) or the third day after mailing by first class mail,
to the Company at its primary office location and to Executive at his address as
listed on the Company payroll (which address may be changed by written notice).
10.2 Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity or unenforceability will not affect any other
provision or any other jurisdiction, and such invalid or unenforceable provision
shall be reformed, construed and enforced in such jurisdiction so as to render
it valid and enforceable consistent with the intent of the parties insofar as
possible.
10.3 Waiver. If either party should waive any breach of any
provisions of this Agreement, he or it shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.
10.4 Entire Agreement. This Agreement, together with the Employee
Proprietary Information and Inventions Agreement, constitute the final,
complete, and exclusive embodiment of the entire agreement between Executive and
the Company regarding the subject matter hereof and supersede any prior
agreement, promise, representation, or statement, written or otherwise, between
Executive and the Company with regard to this subject matter. This Agreement is
entered into without reliance on any promise, representation, statement or
agreement other than those expressly contained or incorporated herein, and it
cannot be modified or amended except in a writing signed by Executive and a duly
authorized officer of the Company.
10.5 Counterparts. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
10.6 Headings. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
10.7 Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective successors, assigns, heirs, executors and administrators, except that
Executive may not assign any of his duties hereunder and he may not assign any
of his rights hereunder without the written consent of the Company, which shall
not be withheld unreasonably.
9.
<PAGE>
10.8 Attorneys' Fees. If either party hereto brings any action to
enforce his or its rights hereunder, the prevailing party in any such action
shall be entitled to recover his or its reasonable attorneys' fees and costs
incurred in connection with such action.
10.9 Arbitration. To provide a mechanism for rapid and economical
dispute resolution, Executive and the Company agree that any and all disputes,
claims, or causes of action, in law or equity, arising from or relating to this
Agreement (including the Release) or its enforcement, performance, breach, or
interpretation, will be resolved, to the fullest extent permitted by law, by
final, binding, and confidential arbitration held in Orange County, California
and conducted by Judicial Arbitration & Mediation Services/Endispute ("JAMS"),
under its then-existing Rules and Procedures. Nothing in this Section 10.9 or in
this Agreement is intended to prevent either Executive or the Company from
obtaining injunctive relief in court to prevent irreparable harm pending the
conclusion of any such arbitration.
10.10 Remedies. Executive's duties under Section 8 and the Employee
Proprietary Information and Inventions Agreement shall survive termination of
Executive's employment with the Company. Executive acknowledges that a remedy
at law for any breach or threatened breach by Executive of the provisions of
these sections and the Employee Proprietary Information and Inventions Agreement
would be inadequate, and that such a breach would cause irreparable harm to the
Company; and Executive therefore agrees that the Company shall be entitled to
injunctive relief in case of any such breach or threatened breach.
10.11 Governing Law. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the law of the
State of California as applied to contracts made and to be performed entirely
within California.
In Witness Whereof, the parties have executed this Agreement effective as
of the Effective Date above written.
WATSON PHARMACEUTICALS, INC.
By:___________________________
Name:
Title:
EXECUTIVE:
______________________________
Name:
10.
<PAGE>
Exhibit A
COMPENSATION AND SEVERANCE TERMS SCHEDULE
1. BASE SALARY
For services to be rendered under this Agreement, Executive shall receive
an initial base salary at an annualized rate of $___________, payable in
accordance with the Company's standard payroll practices, and subject to
increases as set forth in the Agreement.
2. BONUS
Executive's annual bonus, if granted, shall be at a target level of ____%
of the Executive's then current base salary.
3. STOCK OPTIONS
As of the Effective Date, Executive has outstanding option(s) to purchase
the number of shares of Company common stock as indicated on Attachment A to
this Exhibit A.
4. SEVERANCE BENEFITS
4.1 Termination By Company without Cause. If the Company terminates
Executive's employment at any time without Cause, the Company shall provide to
Executive, within thirty (30) days after the Effective Date of the Release
attached hereto as Exhibit B (as "Effective Date" is defined in the Release), as
the only severance compensation and benefits all of the following:
(a) A lump sum severance payment, subject to standard withholdings
or deductions, in an amount equal to the sum of: (i) twenty-four (24) months of
Executive's then base salary; (ii) two times Executive's target bonus to be
earned for the year in which termination occurs or two times the bonus amount
paid to the Executive in the prior year, whichever is greater; and (iii)
Executive's prorated bonus (based on Executive's target bonus amount) for the
year in which the termination occurs.
(b) Continued group health insurance benefits (e.g., medical,
dental, vision, etc.) for Executive and Executive's eligible dependents for a
period of up to eighteen (18) months under COBRA, and if Executive is not
covered under the Company's group health insurance plan at the end of eighteen
(18) months, the Company shall use its best efforts to provide Executive and
Executive's eligible dependents with comparable health insurance coverage for an
additional period of up six (6) months, but the Company shall not be obligated
to pay more than one hundred fifty percent (150%) of the cost of COBRA coverage
for such comparable coverage; provided, however, that in any event the Company's
obligation to provide any health benefits pursuant to this sentence ends when
Executive becomes eligible for health insurance with a new
1.
<PAGE>
employer (and Executive agrees to promptly notify the Company in writing of any
such event of eligibility).
(c) Outplacement services for one year with a nationally recognized
service selected by the Company.
4.2 Executive's Resignation for Good Reason. If Executive terminates his
employment with the Company for Good Reason, the Company shall provide to
Executive, within thirty (30) days after the Effective Date of the Release
attached hereto as Exhibit B (as "Effective Date" is defined in the Release), as
the only severance compensation and benefits, the same severance compensation
and benefits provided in Section 4.1 hereof.
4.3 Change of Control Termination. In the event of a Change of Control
Termination, the Company shall provide to Executive, within thirty (30) days
after the Effective Date of the Release attached hereto as Exhibit B (as
"Effective Date" is defined in the Release), as the only severance compensation
and benefits, (a) the same severance compensation and benefits provided in
Section 4.1 hereof and, (b) any unvested Options held by Executive shall have
their vesting accelerated in full so as to become one hundred percent (100%)
vested and immediately exercisable in full as of the date of such termination.
2.
<PAGE>
Exhibit B
RELEASE AGREEMENT
I understand that my position with Watson Pharmaceuticals, Inc. (the "Company")
terminated effective _______________ (the "Separation Date"). The Company has
agreed that if I choose to sign this Release, the Company will, within thirty
(30) days after the Effective Date of this Release, pay me certain severance
benefits (minus the standard withholdings and deductions) pursuant to the terms
of the Key Employee Agreement (the "Agreement") entered into as of
______________, 1999, between myself and the Company, and any agreements
incorporated therein by reference. I understand that I am not entitled to such
severance benefits unless I sign this Release. I further understand that,
regardless of whether I sign this Release, the Company will pay me all of my
accrued salary and paid time off through the Separation Date, to which I am
entitled by law.
In consideration for the severance benefits I am receiving under the Agreement,
I hereby release the Company and its officers, directors, agents, attorneys,
employees, shareholders, parents, subsidiaries, and affiliates from any and all
claims, liabilities, demands, causes of action, attorneys' fees, damages, or
obligations of every kind and nature, whether they are now known or unknown,
arising at any time prior to the date I sign this Release. This general release
includes, but is not limited to: all federal and state statutory and common law
claims, claims related to my employment or the termination of my employment or
related to breach of contract, tort, wrongful termination, discrimination,
harassment, defamation, fraud, wages or benefits, or claims for any form of
equity or compensation. Notwithstanding the release in the preceding sentence,
I am not releasing any right of indemnification I may have for any liabilities
and costs of defense (including without limitation reasonable attorneys' fees)
arising from my actions within the course and scope of my employment with the
Company.
In releasing claims unknown to me at present, I am waiving all rights and
benefits under Section 1542 of the California Civil Code, and any law or legal
principle of similar effect in any jurisdiction: "A general release does not
extend to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must have
materially affected his settlement with the debtor."
If I am forty (40) years of age or older as of the Separation Date, I
acknowledge that I am knowingly and voluntarily waiving and releasing any rights
I may have under the federal Age Discrimination in Employment Act of 1967, as
amended ("ADEA"). I also acknowledge that the consideration given for the
waiver in the above paragraph is in addition to anything of value to which I was
already entitled. I have been advised by this writing, as required by the ADEA
that: (a) my waiver and release do not apply to any claims that may arise after
my signing of this Release; (b) I should consult with an attorney prior to
executing this Release; (c) I have twenty-one (21) days (forty-five (45) days in
the event of a group termination) within which to consider this Release
(although I may choose to voluntarily execute this Release earlier); (d) I have
seven (7) days following the execution of this release to revoke the Release;
and (e) this Release will not be effective until the eighth day after this
Release has been signed both by me and by the Company ("Effective Date").
Agreed:
___________________________ ________________________________________
Date [Employee]
___________________________ ________________________________________
Date WATSON PHARMACEUTICALS, INC.
<PAGE>
Exhibit C
EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>DISTRIBUTION AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.12
[*] Confidential treatment requested
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT dated this 24th day of June, 1993, by and between
R&D Laboratories, Inc. with offices at 4204 Glencoe Ave., Marina del Rey, CA
90292, United States of America
- hereinafter referred to as "R&D" -
and
Rhone-Poulenc Rorer GmbH, a German company with offices at Nattermannallee 1, D-
5000 Koln 30, Germany
- hereinafter referred to as "RPR" -
WITNESSETH
----------
WHEREAS, R&D and RPR have entered into discussions about the distribution of a
pharmaceutical product containing iron gluconate whereby RPR is willing to grant
to R&D a distribution right; and
WHEREAS, R&D wishes to obtain such distribution right on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
obligations set forth herein, the parties hereto agree as follows:
ARTICLE 1 - Definitions
- -----------------------
The following terms, as used in this Agreement, shall have the meanings set
forth in this Article:
1.1 "Affiliate" shall mean all corporations or business entities which,
directly or indirectly, are controlled by, do control, or are under common
control with R&D or RPR. For this purpose the meaning of the word
"control" shall mean the ownership of fifty percent (50%) or more of the
shares or voting rights of interest of such corporation or business
entity.
1.2 "NDA" shall mean a New Drug Application, as defined in the Drug Laws of
the States of the Territory and applicable regulations promulgated
thereunder.
<PAGE>
1.3 "Agreement Period" shall mean the period commencing upon the date set
forth above and extending until twelve (12) full calendar years from such
date, with such Period being automatically renewable for successive two
(2) year periods, unless either party shall notify the other of its desire
to terminate this Agreement not less than one hundred and eighty (180)
days before expiration of the Initial Period of this Agreement or the
subsequent Period then in effect, as the case may be.
1.4 "Compounds" shall mean the iron gluconate product, its analogs,
modifications and improvements, as well as any other related compounds
which are owned or otherwise lawfully entitled to be used by RPR.
1.5 "Product" shall mean any speciality in every pharmaceutical form
containing a Compound ready for application either alone or in combination
with other active ingredients.
1.6 "RPR know-how" shall mean all technology, formulae, trade secrets,
technical data, preclinical and clinical data, toxicological and
pharmacological data and any other information or experience owned,
controlled or possessed by RPR relating to or useful in connection with
the Compounds and/or Product as well as any improvements or modifications
to the Know-how developed by RPR, including, but not limited to, such data
or information as will enable R&D to use efficiently the Compounds.
1.7 "R&D know-how" shall mean all technology, formulae, trade secrets,
technical data, preclinical and clinical data, toxicological and
pharmacological data and any other information or experience owned,
controlled or possessed by R&D relating to or useful in connection with
the Compounds and/or Product, as well as any improvements or modifications
to the Know-how developed by R&D, including but not limited to, such data
or information as will enable R&D to manufacture efficiently the Products.
1.8 "R&D Territory" shall mean the countries listed in Exhibit A.
1.9 "RPR Territory" shall mean the rest of the world excluding R&D territory.
1.10 "Joint Know-how" shall mean all Know-how which the parties to the
Agreement have obtained together or in the costs of which they have
participated.
ARTICLE 2 - Grant; Trademark
- ----------------------------
2.1 RPR hereby grants to R&D during the Agreement Period an exclusive license
to import the Products from RPR and use and sell Products in the R&D
Territory under the RPR know-how, with the right to subdistribute in whole
or in part, to its affiliates or third parties. Any subdistributor will
bear the same obligations as R&D insofar as possible in this Agreement.
2.2 RPR warrants with R&D that it is the sole and exclusive owner of the
Compounds and has the sole and exclusive right, without any restrictions,
to disclose information on the Compounds and to grant the distribution
rights as set out herein and has not granted any other rights with respect
to the Compounds in the Territory; that it knows of no other
2
<PAGE>
person or enterprise which is working with the Compounds within the
Territory; that there is no action threatened or pending against any of
the Compounds in the Territory; that it does not know of any problems
concerning the safety or efficacy of the Compounds or of any questions
raised by any regulatory body in any country in the Territory and that it
has informed R&D of all adverse drug reactions known to it; that it does
not need the consent or approval of any third party, court or governmental
agency to enter into this Agreement; that it does not know of any patents
or patent applications which upon issuing as patents would be infringed by
the sale or supply of the Compounds within the Territory; that it does not
know of any circumstances and has not done any acts which are inconsistent
with the terms and purposes of this Agreement.
2.3 In the event R&D decides not to submit an NDA for any Product, this
Agreement shall be terminated upon thirty (30) days' written notice by R&D
to RPR, and R&D, upon request of RPR, shall furnish all R&D know-how
regarding all Compounds/ Products to RPR.
RPR, its affiliates and/or its licensees and distributors have the right
to use such R&D know-how without limitation and costs.
2.4 If, during the Agreement Period, R&D shall make an improvement concerning
Compound/Product (such as for example an improved process for the
manufacture of Product) for which patent applications can be filed by R&D,
R&D shall have the right to file such applications in R&D's name in the
R&D Territory with the exclusive right thereto; joint applications in the
name of R&D and of RPR shall be filed in countries outside the R&D
Territory agreed upon.
2.5 RPR or one of its affiliates shall grant R&D a registered Trademark of
RPR, and R&D shall use said Trademark for the Product under the Trademark
Agreement to be negotiated separately. In the event there is no Trademark,
RPR will file a new Trademark in the respective country after consulting
R&D.
ARTICLE 3 - Evaluation
- ----------------------
R&D shall, at its own expense, perform all clinical trials required in
connection with a New Drug Approval, filing an IND accordingly. If requested by
the Health Authorities, R&D shall carry out as well any preclinical work in
addition to the data submitted by RPR.
RPR shall provide R&D free of charge with all clinical samples required for the
clinical trials.
ARTICLE 4 - Diligence
- ---------------------
R&D agrees that it shall use its best efforts, itself or through its
subdistributors, to obtain Board of Health registrations and other necessary
authorizations to market the Product in each country of the original Territory
as soon as possible after obtaining such authorizations. If, in any country,
R&D shall fail to have introduced the Product within one year after obtaining
the last necessary governmental authorization, RPR shall have the right to
terminate this Agreement as to the country concerned upon six months written
notice to R&D of RPR's intent to do so, provided, however, that such termination
shall not take effect if R&D shall introduce the Product in that country before
the expiration of the six month's notice period. This provision shall not
3
<PAGE>
apply to any country in which R&D's failure to market the Product within the
time provided shall be for reasons beyond the control of R&D.
ARTICLE 5 - Delivery
- ---------------------
During the Agreement Period RPR shall supply R&D with, and R&D shall purchase
from, RPR or from sources indicated by RPR, all requirements of the Product at
the conditions established in Exhibit B.
ARTICLE 6 - Infringement and Indemnification
- --------------------------------------------
6.1 If R&D is required by a final determination of a court of competent
jurisdiction to obtain a license from any third party (other than RPR)
under any patent not licensed hereunder in order to manufacture, use or
sell the Product, and to pay a royalty under such license, and the
infringement of such patent cannot reasonably be avoided by R&D, then R&D
and RPR shall negotiate in good faith a solution for this situation.
6.2 If a third party obtains, by order, decree or grant from a competent
governmental authority, a compulsory license authorizing such third party
to manufacture, use or sell any Product sold by R&D, RPR shall give prompt
notice to R&D. For the effective period of such compulsory license, R&D
and RPR shall negotiate a solution for this situation.
6.3 In the event that the claims covering the Product contained in the Patent
Rights are declared invalid or unenforceable by a judgement, decree or
decision of a court, tribunal or other authority of competent
jurisdiction, then R&D and RPR shall renegotiate the terms and conditions
of this Agreement in good faith.
ARTICLE 7 - Responsibilities / Product liability
- ------------------------------------------------
7.1 R&D shall hold RPR harmless from any product liability claims or from any
product liability damages arising from the R&D Territory in relation to
R&D's or its Distributing Partners, mishandling of the Compound and to the
use of the Product. It is agreed that R&D promptly notifies RPR of any
such claims and that R&D cooperates with RPR in defending against such
claims, and provided that also such claims or damages do not result in
whole or in part from any negligence or defects attributable to RPR (as to
which RPR indemnities R&D), and provided that RPR promptly notifies R&D of
preclinical and clinical data relating to any serious or previously
unknown side effects of or adverse reaction to this Product. RPR will not
(except as provided in the parenthetical above) have to bear any damages
or financial indemnity for R&D, its distributors or a third party.
7.2 RPR is not responsible in case the production site is not approved by the
FDA.
ARTICLE 8 - Breach; Termination
- -------------------------------
8.1 In the event of a breach or default of this Agreement by either party
which is not remedied within ninety (90) days after the receipt of notice
thereof from the other party,
4
<PAGE>
the party not in breach or default shall be entitled (without prejudice to
any of its other rights) to terminate this Agreement by giving notice to
take effect immediately. The right to terminate this Agreement, as
hereinafter provided, shall not be affected in any way by a waiver of, or
failure to, take action with respect to any previous default.
8.2 At R&D's sole option, this Agreement shall be deemed terminated
immediately in the event that the Product is withdrawn from the market as
a result of actual or threatened regulatory action by the U.S. Ministry of
Health and Welfare or other governmental entity. R&D shall provide RPR
with a written notice of such termination.
ARTICLE 9 - Exchange of Information; Confidentiality
- ----------------------------------------------------
9.1 RPR has provided R&D with all RPR know-how available. RPR shall also be
under a continuing obligation to provide R&D promptly with all RPR know-
how during the Agreement Period.
R&D also shall be under a continuing obligation to provide RPR promptly
with all R&D Know-how during the Agreement Period.
9.2 R&D and/or its subdistributors shall be allowed to use free of charge the
RPR know-how in the R&D-Territory for their development and marketing
efforts. RPR shall be allowed to use free of charge the R&D know-how and
to have the R&D know-how used free of charge in its own territory for its
development and marketing efforts.
9.3 R&D agrees that during the validity of this Agreement and for a period of
five (5) years from the date of termination of this Agreement it shall:
a) not disclose RPR know-how provided pursuant to Article 9.1. and R&D
know-how to third parties except to the U.S. Ministry of Health and
Welfare and other governmental authorities, or Affiliates,
subdistributors and consultants of R&D pursuant to a non-disclosure
commitment; and
b) take such precautions with RPR know-how as it normally takes with its
own confidential and proprietary information to prevent disclosure to
third parties (except Affiliates and consultants as above).
9.4 RPR agrees that during the validity of the Agreement Period and for the
period of five (5) years from the date of termination of this Agreement it
shall:
a) not disclose R&D know-how pursuant to Article 9.1. to third parties
except to any governmental authorities or licensees its territory.
Affiliates and consultants of RPR, pursuant to a non-disclosure
commitment; and
b) take such precautions with R&D know-how as it normally takes with its
own confidential and proprietary information to prevent disclosure to
third parties (except Affiliates and consultants as above).
5
<PAGE>
9.5 The obligations of RPR and R&D under Articles 9.3. and 9.4. shall not, in
any event, apply to any information which:
a) at the time of disclosure is or thereafter becomes available to the
public in published literature or otherwise through no fault of either
party; or
b) was known to, or otherwise in the possession of, either party or an
Affiliate prior to the receipt of such information from the other
party; or
c) is obtained by either party from a source other than one of the
parties and other than one who would be breaching a commitment of
confidentiality to one party by disclosing such information to the
other party.
d) derive from clinical trials and are necessary and useful to fullfill
marketing purposes provided the disclosure is not damaging the
Product.
ARTICLE 10 - Meetings / Cooperation
- -----------------------------------
R&D and RPR agree to meet during the Agreement Period at a mutually agreeable
time and place for the purpose of exchanging information regarding the Compound
and Product.
The joint Know-how can be used free of charge by either party in its territory.
ARTICLE 11 - Licence Reference
- ------------------------------
All packages distributed by R&D will bear the licence reference "Distributed in
... by R&D Laboratories, Inc., 4204 Glencoe Ave., Marina del Rey, CA 90292, USA
(800) 338-9066 in licence of Rhone-Poulenc Rorer."
Any notice or communication required or permitted to be given or made under this
Agreement by one of the parties hereto to the other shall be in writing and
shall be deemed to have been sufficiently given or made for all purposes if
mailed by registered mail, postage prepaid, addressed to such other party at its
respective address as follows:
R&D LABORATORIES, INC.
4204 Glencoe Ave.
Marina del Rey, CA 90292
U.S.A.
Attention: Executive Vice President
RHONE-POULENC RORER GMBH
Nattermannallee 1
D - 5000 Cologne 30
Germany
Attention: Geschaftsleitung
6
<PAGE>
Service of any notice or communication shall be deemed to be complete three (3)
business days after mailing.
ARTICLE 12 - Force Majeure
- --------------------------
Neither party shall be responsible or liable to the other hereunder for failure
or delay in performance of this Agreement due to any war, fire, accident or
other casualty, or any labor disturbance or Act of God or the public enemy, or
any other contingency beyond such party's reasonable control. In addition, in
the event of the applicability of this Article, the party affected by such Force
Majeure shall use its best efforts to eliminate, cure and overcome any of such
causes and resume performance of its obligations.
ARTICLE 13 - Transfer of Health/Trademark Registration
- ------------------------------------------------------
After expiration of the Agreement R&D and/or its subdistributors will transfer
to RPR without any costs for RPR the health registration(s) and, in case a
Trademark owned by R&D and/or its subdistributors is used, the Trademark
registration to RPR or a company named by RPR.
ARTICLE 14 - Assignment
- -----------------------
This Agreement and all rights and obligations hereunder are personal to the
parties hereto and may not be assigned, other than to Affiliates as defined
herein, without the express prior written consent of the other. Any assignment
or attempt at same in the absence of such prior written consent shall be void
and without effect.
ARTICLE 15 - Governing Law
- --------------------------
This Agreement shall be construed, and the rights of the parties determined, in
accordance with the Swiss law.
ARTICLE 16 - Severability
- -------------------------
If any one or more of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remaining provisions hereof shall not in any way be affected or impaired
thereby. In the event any provisions shall be held invalid, illegal or
unenforceable, the parties shall use best efforts to substitute a valid, legal
and enforceable provision, which insofar as practical, implements the purposes
hereof.
ARTICLE 17 - Entire Agreement
- -----------------------------
This Agreement constitutes the entire understanding between the parties relating
to the subject matter hereof, and no amendment or modification to this Agreement
shall be valid or binding upon the parties unless made in writing and signed by
the representatives of such parties.
ARTICLE 18 - Arbitration
- ------------------------
All disputes, controversies, or differences which may arise between the parties
out of, or in relation to, or in connection with, this Agreement or for the
breach thereof, shall be finally
7
<PAGE>
settled by arbitration underlying Swiss law by which either party hereto is
bound. The arbitration proceedings with the application of Swiss law shall take
place in Zurich, Switzerland.
ARTICLE 19 - Miscellaneous
- --------------------------
In case any question arises between the parties hereto in connection with the
matter not provided for in this Agreement, the parties hereto shall confer
friendly with each other to reach a decision.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the day and year first written
above.
Cologne, June 24, 1993 Marina del Rey
RHONE-POULENC RORER GMBH R&D LABORATORIES, INC.
8
<PAGE>
EXHIBIT A
FOR THE DISTRIBUTION AGREEMENT
between
R&D Laboratories, Inc., 4204 Glencoe Ave., Marina del Rey, 90292 CA,
United States of America
and
Rhone-Poulenc Rorer GmbH, Nattermannallee 1, D-5000 Koln 30,
Germany
COUNTRY LIST
------------
United States of America and its possessions
[*]
Cologne, July 6, 1993 Marina del Rey, July 20, 1993
RHONE-POULENC RORER GMBH R&D LABORATORIES, INC.
<PAGE>
EXHIBIT B
FOR THE DISTRIBUTION AGREEMENT
between
R&D Laboratories, Inc., 4204 Glencoe Ave., Marina del Rey, 90292 CA,
United States of America
and
Rhone-Poulenc Rorer GmbH, Nattermannallee 1, D-5000 Koln 30,
Germany
Delivery Conditions
-------------------
- ex factory
- minimum annual quantity
[*] of each [*]
It is understood and agreed that R & D Laboratories, Inc. shall not be
required to purchase any quantity of any product in any country of the
territory until receipt of Board of Health registrations and/or
authorizations necessary to market the Product in the respective country.
- minimum quantity per purchase order
[*] of each [*]
Pricing
-------
Ferrlecit ampoules [*] x [*] ml [*]
ex factory
Payment
-------
Delivery against irrevocable and confirmed Letter of Credit at sight.
Cologne, July 6, 1993 Marina del Rey, Aug. 2, 1993
RHONE-POULENC RORER GMBH R&D LABORATORIES, INC.
<PAGE>
AMENDMENT 1
FOR THE DISTRIBUTION AGREEMENT
between
R&D Laboratories, Inc., 4204 Glencoe Ave., Marina del Rey, 90292 CA,
United States of America
and
Rhone-Poulenc Rorer GmbH, Nattermannallee 1, D-5000 Koln 30, Germany
DURATION PERIOD
---------------
Modification of Article 1.3 - Agreement Period
- ----------------------------------------------
The Agreement Period is defined as duration of ten (10) full calendar years
after FDA market approval of the first product in the US-market.
All other stipulation of the Agreement of June 24, 1993 remain unchanged.
Cologne Marina del Rey
Rhone-Poulenc Rorer GmbH R&D LABORATORIES, INC.
<PAGE>
EXHIBIT A/1
between
R&D Laboratories, Inc., 4640 Admiralty Way, Ste. 710, Marina del Rey,
90292 CA, United States of America
and
Rhone-Poulenc Rorer GmbH, Nattermannallee 1, D-5000 Koln 30, Germany
COUNTRY LIST
------------
Additional countries:
[*]
Cologne Marina del Rey,
RHONE-POULENC RORER GMBH R&D LABORATORIES, INC.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.13
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>MANUFACTURING & SUPPLY AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.13
[*] Confidential treatment requested
MANUFACTURING AND SUPPLY AGREEMENT
MANUFACTURING AND SUPPLY AGREEMENT ("Agreement") dated as of December 1, 1998
("Effective Date"), between Makoff R&D Laboratories, Inc. with offices at 4640
Admiralty Way, Suite 71 0, Marina del Rey, CA 90292, United States of America
("R&D"), on the one hand, and Rhone-Poulenc Rorer Ltd, an English company with a
manufacturing facility at Rainham Road South, Dagenham, Essex ("RPR") and Rhone-
Poulenc Rorer GmbH, a German company with offices at Nattermannallee 1, D 5000
Koln 30, Germany ("RPR GmbH"), on the other hand.
Whereas, R&D and RPR GmbH have entered into a Distribution Agreement dated June
24, 1993, as amended to date (the "Distribution Agreement") and a Trademark
Agreement dated August 26, 1993, as amended to date, (the "Trademark Agreement")
(collectively the "Prior Agreements"), which grant R&D the exclusive right to
import the Product (as defined below) into, and to use and sell the Product in,
the Territory (as each term is defined below); and
Whereas, RPR GmbH and RPR (an affiliate of RPR GmbH), on the one hand, and R&D,
on the other hand, desire to enter into this Agreement under which RPR will
supply to R&D all of R&D's requirements of the Product, and R&D will purchase
all of its requirements of the Product from RPR.
Therefore, in consideration of the mutual covenants and consideration set forth
herein, the parties hereto, intending to be legally bound, agree as follows:
ARTICLE I. -- DEFINITIONS
-------------------------
1.1 "Product" shall mean Ferrlecit(R) Injection, a sodium ferric gluconate
complex in sucrose manufactured by RPR in accordance with the Specifications (as
defined below).
1.2 "Specifications" shall mean all conditions, processes, methods and
parameters as contained and approved in the NDA (as defined below), including
those release specifications set forth in Exhibit A, as may be amended by
written agreement of the parties.
1.3 "Labeling/Packaging Specifications" shall mean those specifications
provided pursuant to the provisions of Article II-C, but shall exclude those
labeling and/or packaging specifications required under the NDA.
1.4 "Regulatory Approval" shall mean, with respect to any country in the
Territory, all governmental and regulatory registrations and approvals
(including, but not limited to, approvals of all final Product labeling)
required for the marketing, distribution and sale of the Product in such
country.
<PAGE>
1.5 "Territory" shall mean the United States of America and its possessions,
Canada, Greece, Argentina, Chile, Mexico, United Kingdom, Ireland, Japan, and
Singapore.
1.6 "NDA" shall mean the New Drug Application, as defined in the U.S. Federal
Food, Drug and Cosmetics Act (the "Act"), with respect to the Product, filed on
December 30, 1997 with the United States Food and Drug Administration ("FDA"),
as amended or supplemented from time to time.
1.7 "Date of Manufacture" shall mean the date on which the constituent
materials were first mixed.
1.8 Capitalized terms used but not defined in this Agreement shall have the
meaning attributed to them in the Distribution Agreement.
ARTICLE II. -- SUPPLY OF THE PRODUCT
------------------------------------
A. EXCLUSIVE SUPPLY OF THE PRODUCT. During the term of this Agreement, RPR
-------------------------------
shall supply R&D on an exclusive basis with all of its requirements of the
Product for the Territory, and R&D shall purchase all of its requirements of the
Product for the Territory from RPR, according to the terms of this Agreement,
including Exhibit B. RPR GmbH shall be jointly and severally liable with RPR for
the performance of all of RPR obligations under this Agreement.
B. FORECASTS, ORDERS, PRICES-AND TERMS
-----------------------------------
1. On or before execution of this Agreement and on the first day of each
calendar quarter thereafter, R&D shall provide RPR with a written [*] rolling
forecast, by calendar month, of R&D's requirements of Product. All forecasts
shall be prepared in good faith in order to facilitate RPR's manufacture and
shipment of the Product in compliance with this Agreement. The initial rolling
[*] forecast will cover the period from [*]. RPR hereby confirms that R&D has
provided RPR with this initial [*] forecast. Each month of each successive [*]
rolling forecast provided to RPR shall be firm and unchanged from the same month
in the previous [*] rolling forecast, except that:
a) R&D shall add an additional calendar quarter forecast by month to the
end of the quantities projected in the previous [*] rolling forecast; and
b) R&D may change the quantities that had been forecasted in months [*]
in the previous [*] rolling forecast, which months will now become months [*] in
the current [*] rolling forecast; provided, however, that the change in
previously projected quantities for months [*], as they become months [*], may
be no more than plus or minus [*] of the amounts that were previously projected
(when they were months [*] in the previous [*] rolling forecast).
2. The parties acknowledge that R&D has provided RPR with R&D's firm, binding
purchase orders for Product to be delivered by RPR during the initial [*] period
(the calendar year 1999). For all periods during the term of this Agreement
following such initial [*] period, firm purchase orders for Product shall be
placed by R&D with not less than [*] lead time prior to
2
<PAGE>
the shipment or other release date(s) requested by R&D, unless RPR agrees to and
accepts an order for shipment in less than [*].
During the term of this Agreement, R&D shall ensure that all of its orders for
shipment in any calendar month are, with respect to each of the first [*]
covered by each [*] rolling forecast, in a range of not less than [*]% and not
more than [*]% of the quantities forecast for such month, as set forth in such
rolling forecast. However, notwithstanding the foregoing, the parties have
agreed to a range of no less than [*]% and no more than [*]% of R&D's projected
orders for the initial [*] of production. The applicable acceptable range set
forth above will be referred to hereinafter as the "Relevant Band." RPR shall
not be obligated to accept orders outside the Relevant Band for any period.
Although RPR and R&D have agreed to discuss orders that fall outside the
Relevant Band, RPR shall be entitled to accept, or decline to accept, any
increase or decrease in such orders, in RPR's sole discretion.
R&D has an obligation to order a minimum annual quantity of [*] ampoules of
Product. Each purchase order shall include (a) the quantity of Product to be
purchased, (b) the requested shipping date(s) therefor; (c) any relevant
shipping instructions; and (d) any other information dictated by the
circumstances of the order. RPR may require R&D to place orders in full batch
size, e.g., approximately [*] ampoules, or multiples thereof. (The parties
acknowledge that although the normal batch size for the Product is [*] ampoules,
the demonstrated average yield per batch is approximately [*] ampoules. R&D
will only be responsible for paying RPR for the number of ampoules actually
shipped). To the extent of any conflict or inconsistency between the Agreement
and any purchase order, purchase order release, confirmation, acceptance or any
similar document, the provisions of this Agreement shall govern.
Notwithstanding any contrary provision herein, in the event a purchase order
submitted by R&D hereunder falls within the Relevant Band but does not meet the
requirement that it equals a full batch size or a multiple thereof, the quantity
of Product reflected on such purchase order shall be rounded down to the nearest
multiple of the full batch size, even if such nearest multiple does not fall
within the Relevant Band; provided, however, that R&D's orders for Product
reflected in such purchase order plus R&D's orders for Product either (i) to be
delivered during the [*] following the delivery date for such purchase order, or
(ii) reflected in the next [*] purchase orders submitted by R&D, if the latest
delivery dates for all such [*] purchase orders is earlier than such [*] shall
on an aggregate basis fall within the Relevant Band.
3. RPR shall accept purchase orders issued to it by R&D that are within the
Relevant Bands and other terms specified above by written notification to R&D
within [*] after receipt of such purchase order. If RPR cannot satisfy a
purchase order in full, either as to delivery schedule or as to quantities
ordered, it shall so inform R&D within such [*] period, detailing in writing the
extent to which that purchase order cannot be satisfied. If RPR is unable to
satisfy a purchase order in full it shall endeavor to make up the difference in
the next calendar quarter or allow R&D to add the difference to a future order
even though it would violate the Relevant Band. This make up window would be
suspended during periods when the RPR facility is not in operation.
4. RPR shall manufacture and ship Product pursuant to R&D's purchase orders
accepted by RPR. Delivery by RPR of quantities that are at least [*]% and no
more than [*]% of the
3
<PAGE>
quantities ordered shall be accepted by R&D as satisfactory performance under
this Agreement. However, in making a determination as to whether RPR has
satisfied these percentages, only the actual ampoules yielded from each batch
and shipped to R&D will be taken into account. For the purposes of this
Agreement, a timely shipment shall be a shipment made by RPR, through R&D's
carrier, a common carrier, or other method designated by and for the accounts
and at the expense of R&D no later than [*] from the shipment date set forth in
the applicable purchase order.
However, notwithstanding the foregoing, if RPR has provided R&D with between
[*]% and [*]% of the quantities ordered, R&D would have the option to reduce its
future orders by the amount of such excess. R&D would have to notify RPR of
R&D's intention in this regard within [*] of its receipt of such
excess Product.
5. The purchase price for each pack of [*] ampoules shall be [*] ex works RPR
(Incoterms 1990). R&D shall pay such purchase price to RPR GmbH as follows: R&D
shall arrange for an irrevocable and confirmed Letter of Credit at sight payable
to RPR GmbH and RPR shall make available Product as provided for in this
Agreement upon RPR GmbH's draw down under such Letter of Credit. These
shipments will be made available for R&D's carrier to pickup at RPR's factory
and, if the carrier selected by R&D is located on site at RPR, then RPR will
arrange the logistics of such shipment with R&D's carrier.
6. All shipments of the Product shall be shipped to a single R&D designated
site in the U.S., or in the case of orders for non-U.S. portions of North
America, South America, Europe or Asia, respectively, a single site within each
such geographic region. The parties will work together to develop mutually
acceptable procedures for packaging and other logistical issues relating to the
Product for marketing. All shipments shall be ex works RPR's manufacturing
facility (Incoterms 1990), and shall be accompanied by a certificate of
analysis, a statement of conformance with deviation reports, if applicable, and
a packing slip that describes the Product, the NDC number, date of manufacture,
the batch number(s), expiry date(s), batch quantities, the number of pallets per
batch, storage conditions the purchase order number and shows the shipment's
destination (as specified above). Title and risk of loss or damage to any
Product sold by RPR to R&D hereunder shall pass to R&D upon delivery by RPR to
the carrier at RPR's facility. R&D shall use its best efforts to designate a
carrier at the time of issuance of each purchase order to RPR, provided,
however, that if R&D fails to designate a carrier on its purchase order, RPR may
select a carrier for the account and risk of R&D.
C. LABELING AND PACKAGING
----------------------
1. The Product will be suitably packed for transit, each pallet or outer
package being labeled with:
a) the Product's approved name
b) RPR batch number(s)
c) RPR total batch number quantity (if it has been specified) and
individual pallet quantities
d) RPR name and address
e) NDC number and bar code on shipper
4
<PAGE>
f) Destination address(ees)
g) Product tariff code as provided to RPR by R&D
h) Partial pallet recognition (where applicable)
i) Storage conditions
Any change in packaging for transportation from those used on the ship test
performed in August, 1998, must first be approved in writing by R&D. Damage
caused to the Product, that is a direct result of RPR's negligence in packaging
the Product, shall be RPR's responsibility and RPR shall reimburse R&D for such
damage promptly.
2. R&D shall supply to RPR all labeling for the Product, including label
design and artwork (the "Labeling/Packaging Specifications"). Label design shall
include, but not be limited to, labeling for the ampoule, carton, foil and
package insert. When provided, the Labeling/Packaging Specifications shall
become part of the Specifications for the Product. R&D represents and warrants
that the Labeling/Packaging Specifications provided to RPR shall be in full
conformity with Regulatory Approvals and all applicable laws and regulations,
and RPR represents and warrants that it shall package and label the Product in
accordance with such Labeling/Packaging Specifications provided by R&D. RPR will
purchase ampoule labels as specified by R&D and overprint the applicable batch
numbers and expiration date. RPR will also print in-house all labels for the
corrugated cases (shippers) used to ship the Product. RPR will arrange to have
the foil (if printing is required) and the package insert printed by third
parties.
3. The accurate reproduction of the labeling in accordance with the
Packaging/Labeling Specifications provided by R&D is the responsibility of RPR.
On the packaging for the Product, R&D shall identify RPR as the manufacturer of
the Product as and to the extent permitted by applicable laws and regulations.
No changes shall be made to the artwork provided by R&D, or the label produced
therefrom, without R&D's written approval. R&D shall supply to RPR a printed
and/or electronic copy of the approved copy for all labels and labeling. R&D
will be provided with, and will promptly sign-off on, proofs for each label.
RPR shall maintain at all times sufficient inventories of labels and packaging
material to produce the Product, in accordance with the terms of the forecast
submitted by R&D. R&D shall reimburse RPR for RPR's costs of printing all
package inserts for the Product. RPR will separately invoice R&D for these
costs which are estimated at [*] per 1000 two-sided package inserts. To the
extent that RPR agrees to assist R&D in the logistics of the preparation of any
of the artwork necessary for labeling and packaging, R&D agrees to promptly
either directly pay for, or reimburse RPR for, any expenditure that RPR incurs
in connection with such work. R&D is responsible for all costs associated with
all changes to any labeling for the Product, including the costs of any obsolete
stock of any labeling or packaging. If R&D so requests, RPR will cooperate with
R&D in arranging for R&D to audit the printer(s) used by RPR to print R&D's
labels. All costs of such audit shall be borne exclusively by R&D.
4. The Product shall be packaged as follows.
a) Individual ampoules will be labeled and packed into a plastic tray,
which will hold [*] ampoules. The tray will be sealed with foil
lidstock.
5
<PAGE>
b) Two trays ([*] ampoules) will be packaged in a carton with one package
insert.
c) [*] cartons will be packed into a corrugated case (the shipper) that
will have a mutually agreed upon label.
d) [*] shippers will be stacked and cling film wrapped to each pallet,
except in the case where partial palletization is necessary.
e) The dimension of the pallet will be [*] mm x [*] mm, with nominal
thickness of [*] mm.
f) There will be approximately [*] pallets for each batch. Partial
pallets are acceptable, however, there shall be no mixing of batches
on a pallet.
D. INSPECTION OF SHIPMENTS
-----------------------
1. RPR will be responsible for quality control testing (except for the
molecular weight and sucrose testing that will be initially performed by R&D)
and release of the Product. RPR will provide R&D with a Certificate of
Analysis, packing slip and Statement of Conformance with the manufacturing
process as defined in the NDA for all batches of Product shipped to R&D.
Delivery of any Product by RPR to R&D, or its carrier, shall constitute a
certification by RPR that the Product conforms at the time of such delivery to
the Specifications. R&D, or its agent, and RPR shall store all Product in
controlled conditions as specified in the Product Specifications and
Labeling/Packaging Specifications. RPR accepts responsibility for the
manufacture of Product to the Specifications.
2. Upon receipt of each shipment of Product by R&D at the destination
specified in the shipping instructions, R&D agrees to inspect promptly each
shipment to determine whether any portion of it failed to conform with the
applicable Purchase Order or the Specifications. R&D will positively identify
all batches of the Product received. In the event that any portion of any
shipment failed to conform to the applicable Purchase Order or Specifications at
the time of delivery to R&D's carrier in accordance with the terms of Article
II.B.6, R&D may reject the non-conforming portion of the Product by giving
written notice to RPR within [*] of R&D's receipt of such shipment. Such notice
shall specify the manner in which the Product fails to meet the applicable
purchase order or Specifications. Failing such notification, R&D shall be deemed
to have accepted the shipment of Product, unless there is a later discovery of
latent non-conformance not reasonably detectable by R&D's inspection, so long as
such non-conformance is, after appropriate investigation, shown to be
attributable to RPR, as opposed to a subsequent act or omission by R&D, or its
agents.
3. The following release procedures shall be followed:
After all quality control testing (including molecular weight and sucrose
initially performed by [*]) has been satisfactorily performed, RPR will prepare
a Certificate of Analysis and a document package for each batch of Product and
release such batch for shipment. RPR will forward 10 ampoules of each batch
together with the corresponding paperwork to R&D and simultaneously arrange for
dispatch of the Product to R&D's carrier at the Dagenham facility. After the
Product has been physically received at the designated address in the United
States (or
6
<PAGE>
at the address designated for non-US shipments) R&D, or its agents, would have
[*] to perform a visual inspection and a product identification test and to
reject any allegedly non-conforming product in accordance with the terms of
Article II.D.2. above.
4. In the event of rejection for non-conformance in accordance with the terms
of Article II.D.2, upon giving RPR such notification of non-conformance, R&D
shall provide RPR with a reasonable opportunity, within [*] of such
notification, to inspect the Product and make any appropriate adjustment or
replacement. In all cases in which the parties agree that there is a shortage
or non-conformance, RPR shall, at its own cost, endeavor to replace any shortage
or non-conforming Product in the next quarter or allow R&D to add such shortage
to a future order even though it would violate the Relevant Band; provided,
however, that in the event any such nonconformance that triggers a rejection is
attributable to a matter reflected in the Certificate of Analysis, packing slip
or Statement of Conformance for the applicable shipment such that had R&D had a
copy of such documents prior to shipment it would have caused the shipment to be
aborted, RPR will refund to R&D the purchase price for such rejected Product
pending replacement of the non-conforming Product.
Any such non-conforming Product shall, at RPR's direction, be destroyed by R&D
at RPR's expense (and certified as so destroyed by R&D). Any dispute regarding
the proper rejection of a shipment shall be submitted for testing to an
independent laboratory to be mutually agreed upon. If the independent
laboratory finds that the shipment in question or any part of it did not comply
in all material respects with the Specifications at the time of delivery to
R&D's carrier in accordance with the terms of Article II.B.6, RPR shall replace
such supply of non-conforming Product in accordance with the terms hereof.
RPR's supply of substitute Product which conforms to the Specifications shall
satisfy and discharge any claims or potential claims of R&D against RPR with
respect to such nonconforming Product.
5. During the pendency of a dispute that requires settlement by an independent
laboratory, pending the resolution of such dispute RPR shall endeavor to replace
the portion of the shipment under dispute and if it is not able to do so will
allow R&D to add such amount to future relevant manufacture.
6. The parties agree to be bound by the determination of an independent
laboratory as to whether the Product conformed to Specifications at the time of
delivery to R&D's carrier in accordance with the terms of Article II.b.6. Costs
of the independent laboratory's activities shall be borne by R&D if the Product
in question is found to have conformed with the Specifications, and by RPR, if
such Product is found not to have conformed with the Specifications.
E. RECALLS
-------
In the event any governmental agency having applicable jurisdiction shall order,
or it shall otherwise become necessary to perform, any corrective action or
market action with respect to the Product supplied hereunder, including any
recall, field correction, market withdrawal, stock recovery, customer notice or
restriction, if the cause of such corrective action or market action is due
solely to RPR's failure to manufacture Product that conforms to the
Specifications, then RPR shall reimburse R&D for the reasonable out-of-pocket
costs incurred by R&D or its sub-distributor in notifying its customers of such
action, conducting any required retrieval of Product
7
<PAGE>
and replacing any retrieved Product. If the cause of such corrective action is
due to any other reason, then R&D will be fully liable for the costs of such
action. R&D, or its agents, will be exclusively responsible for handling all
customer complaints, inquiries, and the like in the Territory, and RPR will
appropriately cooperate with R&D concerning the same.
Upon being notified of the necessity for any corrective or market action with
respect to the Product, including any recall, field correction, market
withdrawal, stock recovery, customer notice or restriction, R&D shall promptly
notify RPR in writing and provide RPR with any material details of which R&D is
aware at the time of such notification.
F. RPR MANUFACTURING CAPABILITIES
------------------------------
Within ninety (90) days of the date of the Agreement, RPR will submit to R&D its
one and two year manufacturing capability plan for producing the Product in
conformity with the terms and conditions of this Agreement. R&D shall promptly
review the capability plan and confer with RPR respecting any mutually agreeable
revisions to the plan. Notwithstanding R&D's review of such procedures, it is
expressly acknowledged that RPR shall be responsible for complying with its
obligations under this Agreement.
ARTICLE III. -- GENERAL TERMS AND CONDITIONS
--------------------------------------------
A. CONFIDENTIALITY. All confidential and proprietary information of either RPR
---------------
and/or RPR GmbH, on the one hand, or R&D, on the other hand, disclosed to the
other party hereunder or in connection herewith shall be governed by the
confidentiality provisions of Article 9 of the Distribution Agreement.
B. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
1. Each of RPR GmbH and RPR, on the one hand, and R&D, on the other hand,
represents and warrants to the other as follows:
a) It has full corporate power and authority to enter into this Agreement
and consummate the transactions contemplated hereby.
b) It has obtained or applied for such permits, licenses and
authorizations of governmental or regulatory authorities as are
necessary to own its respective properties, conduct its business and
consummate the transactions contemplated hereby.
2. RPR represents and warrants to R&D that:
a) All Product supplied by RPR to R&D under this Agreement shall be
manufactured, tested and stored in accordance with the Specifications
and the Technical Agreement attached hereto as Exhibit B and shall at
the time of delivery to R&D's carrier in accordance with the terms of
Article II.B.6 conform to the Specifications and the Technical
Agreement attached hereto as Exhibit B;
8
<PAGE>
b) All Product supplied by RPR to R&D under this Agreement shall be
manufactured in accordance with all current Good Manufacturing
Practices as defined under the Act;
c) No Product supplied by RPR to R&D under this Agreement shall at the
time of delivery to R&D's carrier in accordance with the terms of
Article II.B.6 be adulterated or misbranded within the meaning of
Sections 303/304 of the Act; and
d) All Product supplied by RPR to R&D's carrier in accordance with the
terms of Article II.B.6, will be so supplied no more than four months
after the applicable Date of Manufacture (as defined in Article 1.7)
of such Product.
3. EXCEPT FOR THE EXPRESS WARRANTIES AND REPRESENTATIONS CONTAINED IN THIS
AGREEMENT, THE DISTRIBUTION AGREEMENT OR TRADEMARK AGREEMENT, NONE OF RPR, RPR
GmbH OR R&D MAKES ANY WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, IN FACT
OR IN LAW, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, OR NON INFRINGEMENT.
4. CERTAIN COVENANTS
-----------------
a) During the Term, RPR shall provide to R&D as they become available
copies of all Product-related correspondence from the FDA or any other
applicable regulatory authority, and all inspection reports with respect to the
Product issued by the FDA or any such other regulatory authority and related
correspondence to the extent it concerns the Product.
b) During the Term, R&D shall provide to RPR as they become available
copies of all Product-related correspondence from the FDA or any other
applicable regulatory authority in the Territory, and all inspection reports
with respect to the Product issued by the FDA or any such other regulatory
authority and related correspondence to the extent it concerns the Product.
c) RPR shall inform R&D in writing, at least six (6) months in advance of
any proposed change to the Specifications set forth herein, or the manufacturing
process with respect to the Product, that may affect any Regulatory Approval for
the Product. No such changes shall be made without the advance written approval
of R&D, such approval not to be unreasonably withheld or delayed, and without
all necessary regulatory submissions and approvals having been made and/or
obtained.
d) R&D shall receive, store and distribute the Product in accordance with
all applicable regulatory requirements, will engage in no conduct that renders
the Product adulterated or misbranded within the meaning of Sections 303/304 of
the Act, shall promote and distribute Product only in full compliance with
applicable laws and regulations, and shall be solely responsible for the failure
of itself, its Affiliates, agents and/or distributors, to comply with said laws
and regulations.
9
<PAGE>
C. STANDARD COMPLAINT HANDLING PROCEDURES
--------------------------------------
1. R&D and/or its relevant subdistributors shall be responsible in the
Territory for receiving, recording and responding to all customer inquiries
and/or complaints and all reports of alleged adverse drug experiences relating
to Product. In this regard, R&D and/or its relevant subdistributors shall be
responsible in the Territory for providing all medical information and for
responding to all inquiries and complaints relating to medical information
regarding the Product. R&D shall provide notice to RPR's Director of Quality
Assurance at the Dagenham facility of all Products complaints received. RPR
will investigate all complaints associated with the manufacturing and packaging
of the Product, including any inactive ingredients or the container/closure
system and all other packaging components for the Product. Upon completion of
the necessary investigation, RPR will provide a written summary to R&D. R&D
and/or its relevant subdistributors will be responsible for review of the
complaint investigation information and preparation of a written response to the
complainant. R&D will provide RPR with a copy of this written response.
Furthermore, RPR shall be responsible for performing all necessary testing which
should be performed under applicable current Good Manufacturing Practice
regulations in the U.S. as a result of any customer complaint relating to the
manufacturing of the Product. RPR shall, upon request, provide to R&D (subject
to Article III.A hereof) such technical information related to formulation,
manufacture, or stability of Product as is available to RPR to the extent
necessary to assist R&D with its obligations hereunder. R&D shall be solely
responsible for reporting to the FDA and all other government agencies in the
Territory all post-marketing adverse drug experience reports with respect to the
Product.
2. Each of RPR GmbH and R&D shall report to the other potentially serious
alleged adverse drug experiences (whether labeled or unlabelled) with respect to
the Product of which it becomes aware promptly and in no event later than five
(5) working days after initial receipt of the information by such party. Each
such report shall identify lot numbers and customers affected, if known. Each
of RPR GmbH and R&D will provide to the other party at the end of each calendar
half-year a summary of all other adverse drug experiences with respect to the
Product of which it is aware.
D. TERM
----
1. The term of this Agreement shall commence on the Effective Date and shall
continue until the expiration or termination of the Distribution Agreement.
E. FORCE MAJEURE
-------------
No party shall be responsible or liable to the other hereunder for any failure
or delay in its performance under this Agreement caused by war, fire, accident
or other casualty, labor disturbance, Act of God or the public enemy, or any
other contingency beyond such party's reasonable control. In the event of the
applicability of this Article, the party affected by such Force Majeure event
shall use commercially reasonable efforts to eliminate, cure and overcome such
event and resume performance of its obligations hereunder.
10
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F. RESPONSIBILITIES/ PRODUCT LIABILITY
-----------------------------------
1. R&D shall hold each of RPR and RPR GmbH harmless from any product liability
claims or from any product liability damages arising from the Territory in
relation to R&D's or its Distributing Partners (as defined in the Distribution
Agreement) use of the Product. It is agreed that R&D promptly notifies RPR and
RPR GmbH of any such claims and that R&D cooperates with RPR and RPR GmbH in
defending against such claims, and provided also that such claims or damages do
not result in whole or in part from any negligence or defects attributable to
RPR and RPR GmbH (as to which RPR or RPR GmbH, jointly indemnities R&D), and
provided that RPR or RPR GmbH promptly notifies R&D of preclinical and clinical
data relating to any serious or previously unknown side effects of or adverse
reaction to the Product. RPR and RPR GmbH will not (except as provided in
parenthesis above) have to bear any damages or financial indemnity for R&D, its
distributors or a third party.
2. Neither RPR nor RPR GmbH is responsible in case the Dagenham production
site is not approved by the FDA.
3. This article and the obligations contained herein shall survive the
expiration of this Agreement, or the termination of this Agreement for any
reason whatsoever, until the applicable statutes of limitations have all
expired.
ARTICLE IV. -- MISCELLANEOUS
----------------------------
A. INDEPENDENT CONTRACTOR
----------------------
In making and performing this Agreement, the parties are acting and shall act as
independent contractors. Nothing in this Agreement shall be deemed to create an
agency, joint venture, or partnership relationship between the parties hereto.
No party shall have the authority to obligate any other party in any respect,
and no party shall hold itself out as having any such authority except RPR as to
RPR GmbH, and RPR GmbH as to RPR. All personnel of RPR and RPR GmbH shall be
solely employees of RPR and RPR GmbH, respectively, and shall not represent
themselves as employees of R&D. All personnel of R&D shall be solely employees
of R&D and shall not represent themselves as employees of RPR or RPR GmbH.
B. ASSIGNMENT
----------
1. This Agreement and all rights and obligations hereunder are personal to the
parties hereto and may not be assigned, other than to Affiliates as defined
herein, without the express prior written consent of the other parties. Any
assignment or attempt at same in the absence of such prior written consent shall
be void and without effect. However, no such assignment shall relieve the
assigning party of its obligations hereunder.
2. RPR GmbH hereby represents that RPR is an Affiliate of RPR GmbH as such
term is defined in the Distribution Agreement.
11
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C. AMENDMENTS
----------
This Agreement may only be modified, amended, or supplemented by an instrument
in writing executed by RPR, RPR GmbH & R&D.
D. WAIVERS
-------
No term or provision hereof will be considered waived by any party, and no
breach excused by any party, unless such waiver or consent is in writing signed
on behalf of the party against whom the waiver is asserted. No consent by any
party to, or waiver of a breach by any party, whether expressed or implied, will
constitute a consent to, waiver of, or excuse of any other, different, or
subsequent breach by any party.
E. NOTICES
-------
Any notice or communication required or permitted to be given or made under this
Agreement by one of the parties hereto to the other shall be in writing and
shall be deemed to have been sufficiently given or made for all purposes (1) on
the day of dispatch if sent on a business day (in the county of the recipient's
location) by telecopier to the indicated number (with confirmation of receipt);
(2) three days after dispatch if sent by express courier (such as DHL) to the
indicated address below; and (3) seven days after dispatch if sent by registered
mail, postage prepaid, to the indicated address below:
Makoff R&D Laboratories, Inc.
4640 Admiralty Way
Suite 710
Marina del Rey, CA 90292
U.S.A.
Attention: General Counsel
Telecopier No. (310) 577-0744
Rhone-Poulenc Rorer GmbH
Nattermannallee 1
D-5000 Cologne 30
Germany
Attention: Geschaftsleitung
Telecopier No. 011-49-221-509-2711
Rhone-Poulenc Rorer Ltd.
Rainham Road South
Dagenham, Essex, RM 10 7XS U.K.
Attention: Customer Service Manager for the Sterile Business Stream
Telecopier No.: 011-44-181-919-2006
F. COUNTERPARTS
------------
This Agreement shall become binding when any one or more counterparts hereof,
individually, or taken together, shall bear the signatures each of the parties
hereto. This Agreement may be
12
<PAGE>
executed in any number of counterparts each of which shall be deemed an
original, but all of which taken together shall constitute but one and the same
instrument.
G. HEADINGS
--------
The article and section headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
H. ARBITRATION AND GOVERNING LAW
-----------------------------
This Agreement shall be construed, and the rights of the parties determined, in
accordance with Swiss law. All disputes, controversies, or differences which
may arise between the parties out of, or in relation to, or in connection with,
this Agreement or for the breach thereof, shall be finally settled by
arbitration held under Swiss law and by which each party hereto is bound. The
arbitration proceedings with the application of Swiss law shall take place in
Zurich, Switzerland and will be conducted in the English language.
I. SEVERABILITY
------------
Any of the provisions of this Agreement which are determined to be invalid or
unenforceable in any jurisdiction shall be ineffective to the extent of such
invalidity or unenforceability in such jurisdiction, without rendering invalid
or unenforceable the remaining provisions hereof or affecting the validity or
enforceability of any of the provisions of this Agreement in any other
jurisdiction.
J. ENTIRE AGREEMENT
----------------
This Agreement, the Prior Agreements and the contents of the February 3, 1997
letter of RPR GmbH to R&D regarding Schein Pharmaceutical constitute the entire
understanding and agreement of the parties with respect to the subject matter
hereof and thereof and supersede all prior agreements, express or implied, oral
or written with respect thereto.
K. INTERPRETATION
--------------
To the extent of any conflict or inconsistency, of any nature, between the
Agreement and the Prior Agreements, the provisions of the Prior Agreements shall
exclusively govern. If and when any such conflicts or inconsistencies (between
this Agreement and the Prior Agreements) are identified by any party, the
parties hereto will work together to promptly resolve such conflicts or
inconsistencies and, if material, incorporate the resulting resolution into an
amendment to this Agreement.
In the event that any material provision of this Agreement needs to be changed
during the term hereof, all parties hereto agree to negotiate in good faith to
consider such a proposed change, irrespective of which party initiated the
change and, if adopted and material, the resulting change would be included in
an amendment to this Agreement.
13
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IN WITNESS WHEREOF, duly authorized representatives of the parties hereto have
duly executed this Agreement, including exhibits, as of the Effective Date.
Makoff R&D Laboratories, Inc.
By: ____________________________
Name: Robert G. Weitzman
Title: Chief Financial Officer
Rhone-Poulenc Rorer GmbH Rhone-Poulenc Rorer Ltd
By: ____________________________ By: __________________________
Name: ____________________________ Name: C.C.B. Waights
Title: ____________________________ Title: V.P. & General Mgr.-Deg.
14
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EXHIBIT A
FERRLECIT(R) INJECTION SPECIFICATIONS
<TABLE>
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Test Method Specification
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[*]
15
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EXHIBIT B
TECHNICAL AGREEMENT
This agreement defines the steps to be taken to ensure that European Community
Guidelines and U.S. Food and Drug Administration Guidelines concerning Good
Pharmaceutical Manufacturing Practices (GMP) are being followed when product is
made by RPR for sale by R&D.
1. Product
The Product (Ferrlecit(R) Injection) is as listed in Appendix I.
2. Materials
All Product supplied by RPR will meet the most recent version of the release
specifications listed in Appendix I, as such specifications may be amended from
time to time to comply with applicable regulatory standards.
3. Manufacture - General
3.1 The good manufacturing practices for drug product detailed in The Rules
Governing Medicinal Products in the European Community, volume IV, and in the
then-current U.S. Code of Federal Regulations, will govern the manufacture of
the Product.
3.2 RPR will manufacture, package and test (except for sucrose and molecular
weight) (subject to Section 3.4 below) the Product at its plant at Rainham Road
South, Dagenham, Essex, England.
3.3 RPR will not use any new manufacturing or testing operations for the
Product, or transfer any manufacturing or testing operations for the Product to
any third parties or other sites until after any required FDA approval has been
obtained. In any such case, RPR will provide written information to R&D with
respect to the proposed change, and R&D will seek expeditiously the required FDA
approval on RPR's behalf However, R&D makes no assurances that such approval
would be forthcoming from the FDA and, furthermore, R&D has no responsibility to
RPR or RPR GmbH if such approval was not granted by the FDA by a particular
time, or any time at all.
3.4 R&D through [ * ] will be responsible for testing of Molecular Weight and
Sucrose until such time as validated assay methodologies can be transferred to
and incorporated by RPR.
3.5 Any significant change in the process, test procedures, change in the
source of starting materials, equipment or facilities required by RPR must be
approved in writing by R&D before the change can be implemented. However, in
any event, no change may be made that is not in compliance with FDA regulations.
4. Rework
There shall be no reworking of the Product.
16
<PAGE>
5. Documents
5.1 The Product will be manufactured and packaged in accordance with the RPR
manufacturing and packaging procedures as included in the latest version of the
approved NDA for the Product.
5.2 Any deviation from the process during manufacture must be carefully
investigated, explained and documented in the batch records, justified and
approved by RPR Quality Assurance and Production Managers and included in the
document package.
5.3 A full document package will be provided by RPR to R&D for the first three
batches. Contents of the full document package is listed in Appendix II.
Thereafter, a reduced document package for each batch will be provided along
with each batch as it is made available to R&D with a full package available
yearly. R-PR will, however, supply a full package if needed for a particular
purpose (e.g., regulatory inspection, or potential regulatory exposure, such as
a recall or complaint) to be notified in writing by R&D to RPR. Contents of the
various document packages are listed in Appendix II.
5.4 RPR will promptly provide R&D all FDA and similar authorities outside of
the U.S. reports, notices, and the like issued to RPR in respect of the Product.
RPR will also provide R&D with any FDA reports on the Dagenham facility if they
could in any way affect the Product. RPR will also provide R&D with RPR's
responses to the foregoing.
5.5 R&D will provide RPR with copies of all FDA and similar authorities
outside of the U.S. correspondence as well as all reports, notices, and the
like, issued to R&D in respect of the Product.
6. Batch Number
The RPR batch number will be used for numbering each batch of Product. This
number will appear on all documents relating to the particular batch of the
Product.
7. Dates of Manufacture and Expiry
The shelf-life for the Product is given in Appendix II RPR will assign the Date
of Manufacture based on the day of first mixing of constituent materials. RPR
will calculate the expiration date for each batch of product based on the
(i) date of manufacture and (ii) shelf life..
8. Quality Assurance/Quality Control
8.1 Quality Control of materials and components supplied by RPR will be
undertaken by RPR in accordance with the suppliers' procedures, test methods,
Specifications and conditions contained in the approved NDA for the Product.
RPR will follow FDA rules/guidelines for any changes and will first notify R&D
of any changes in writing.
8.2 In process testing as defined in the approved RPR Manufacturing Procedure,
will be undertaken by RPR in accordance with the procedures, methods and
Specifications contained in
17
<PAGE>
the approved NDA for the Product. RPR will follow FDA rules/guidelines for any
changes and will first notify R&D of any changes in writing.
8.3 RPR and R&D will agree on the finished product specifications and methods
of analysis to be used in each laboratory, as provided in the NDA. RPR will
follow FDA rules/guidelines for any changes and will first notify R&D of any
changes in writing.
8.4 RPR will fully test the Product to the finished product Specifications as
agreed to by both par-ties. An exception to this is Molecular Weight and
Sucrose - see 3.4 above.
8.5 R&D, or its agent will positively identify all batches of the Product
received using a suitable physical test. Release of Product to the market is
the responsibility of R&D, or its agent based on R&D's, or its agent's physical
testing and the document package provided by RPR.
8.6 RPR will allow Quality Assurance representatives from R&D to have access
to its manufacturing, warehousing, and laboratory premises at reasonable times
for audit purposes, once per year or as is reasonably needed to adequately
assure compliance upon extenuating circumstances (e.g., a follow -up audit after
----
a negative FDA 483 inspection). Access for subdistributors' Quality Assurance
representatives and/or representatives from R&D is at the sole discretion of
RPR.
8.7 There will be no carry over with production of the Product and R&D will be
supplied with full batches, assuming that R&D orders in full batch quantity
multiples.
9. Rejection
9.1 Any patent problem likely to cause rejection of the Product by R&D will be
communicated to the RPR Head of Quality Control by fax as soon as possible, but
in any case, within 45 days of transfer of title to R&D.
9.2 Rejection caused by incorrect information or materials supplied by R&D
will be the responsibility of R&D.
9.3 Rejection, regardless of when discovered, caused by incorrect
manufacturing or by incorrect monitoring of processes, or by incorrect materials
supplied by RPR, will be the responsibility of RPR.
9.4 Any problems thought to be due to manufacture or stability, which are
found during the sale of the Product will be communicated by R&D to RPR. RPR
will investigate and report results to R&D which is responsible for conducting
any Product recalls. If, as the result of the investigation, it is determined
that the problems identified are the result of manufacturing, then RPR shall be
responsible to replace the Product in the next quarter or allow R&D to add the
amount to a future order even though it would violate the Relevant Band and pay
all related costs associated therewith (see Article IIE of the Agreement
entitled "Recalls").
9.5 Any problems thought to be due to manufacture or stability, which are
found by RPR during normal monitoring of retained batches, shall be communicated
by RPR to R&D's Head of Quality promptly after results have been confirmed by
laboratory testing conducted within a
18
<PAGE>
reasonable length of time. RPR and R&D will fully define the parameters of a
field alert requirement prior to the first commercial shipment.
10. Retained Samples
10.1 RPR will, where feasible, retain sufficient samples of the raw materials
used to carry out the full specification tests in duplicate for five (5) years
from date of receipt.
10.2 RPR will retain, at minimum, sufficient samples of the final stage Product
to carry out the full specification tests in duplicate for the expiry period of
the Product plus one (1) year.
11. Stability Testing
11.1 RPR Quality Assurance will be responsible for maintaining a stability
testing program for the Product, and will provide an annual stability report to
R&D or information to R&D earlier if results of stability testing indicate any
failure. Annual reports to the FDA or other regulatory authorities in the R&D
territories are the responsibility of R&D, although the information required
with respect to stability will be supplied promptly by RPR on request. All
efforts will be made by RPR to assure that any requested information is promptly
provided.
11.2 The details of the stability testing program to be maintained is that
required and approved under the most current version of the NDA in the
possession of R&D the parameters of which are defined in Appendix III. R&D will
ensure that RPR is provided promptly with any FDA mandated changes that will
affect the stability program parameters.
19
<PAGE>
Makoff R&D Laboratories, Inc.
By:_____________________________________
Name: Robert G. Weitzman
Title: Chief Financial Officer
Rhone-Poulenc Rorer GmbH Rhone-Poulenc Rorer Ltd
By:_____________________________________ By:___________________________________
Name:___________________________________ Name: C.C.B. Waights
Title:__________________________________ Title: V.P. & General Mgr.-Deg.
20
<PAGE>
APPENDIX I
<TABLE>
<CAPTION>
Product Name 869323 Specification Ref. Shelf Life Manufacturing
Nos. (Months) Document No.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ferrlecit(R) Injection [*] ml. x [*] RPR/R[*]
USA Ampoules
- ---------------------------------------------------------------------------------------------------------
</TABLE>
RPR will make any changes in the specification reference number, if
necessary, and will incorporate the shelf life and manufacturing document
number into this appendix, consistent with the latest version of the
Ferrlecit NDA once R&D has received final FDA approval.
21
<PAGE>
APPENDIX II
THE DOCUMENT PACKAGE
Each document will bear the Batch Number.
Full Document Package:
- ----------------------
Certificate of Analysis
Batch Manufacturing Record (BMR) including all dispensing details
Manufacturing Procedure
In-Process Results
Batch Yields
Finished Product Microbiological & Analytical Results
Deviation Reports
Date of Manufacture
Expiry Date
Packaging Record
Packing Slip (Product description, NDC number, date of manufacture, batch
number(s), expiry date(s), batch quantities, the number of pallets per batch,
storage conditions, purchase order number, and destination)
Reduced Document Package:
- ------------------------
Certificate of Analysis
Statement of Conformity with Agreed Procedures
Packing Slip
STATEMENT OF CONFORMANCE
------------------------
This confirms that Product ______________________________ Batch No._____________
has been manufactured to BNM No. _________________________ on (date)____________
in conformance with the agreed manufacturing and control procedures.
* There were no deviations from the agreed procedure, or
* Deviations from the agreed procedure are described in the attached reports.
The number of units which were passed as satisfactory were __________________.
_______________________________________
Quality Control Manager
Rhone-Poulenc Rorer
22
<PAGE>
APPENDIX III
The first three production batches of Ferrlecit(R) Injection released for U.S.
distribution upon approval of the NDA will be placed on stability in accordance
with the stability conditions, time points, and test requirements listed below.
Thereafter, one additional production batch each year will also be placed into
the room temperature stability program and tested annually until the expiration
date is reached.
Stability test conditions: [*](degrees)C and [*]% relative
humidity.
Stability time points: [*] months and annually thereafter until
the desired expiration date is reached.
Stability test requirements: At each test point, testing will be
conducted as per all regulatory
specifications and methods as provided
in the NDA section B.7.2 (volume test
and ID test for benzyl alcohol
excluded). Sterility, bacterial
endotoxin and particulate testing will
be performed initially and at expiration
date (end of shelf life).
23
<PAGE>
AMENDMENT NO. 1 TO
MANUFACTURING AND SUPPLY AGREEMENT
This Amendment to the Manufacturing and Supply Agreement dated as of
December 1, 1998, between Makoff R&D Laboratories, Inc., doing business as R&D
Laboratories, Inc. ("R&D"), on one hand and Rhone-Poulenc Rorer GmbH ("RPR
GmbH") and Rhone-Poulenc Rorer Ltd. ("RPR Ltd."), on the other hand is being
entered into as of.............. 2000.
WHEREAS, A. Nattermann & Cie. GmbH, an affiliate of RPR GmbH, owns the
rights, including the trademark, to Ferrlecit(R), an iron gluconate product (the
"Product");
WHEREAS, R&D and RPR GmbH entered into a Distribution Agreement dated June
24, 1993, as amended to date (the "Distribution Agreement") and a Trademark
Agreement dated August 26, 1993, as amended to date (the "Trademark Agreement"),
which grant R&D the right to distribute the Product in the R&D Territory (as
defined in the Distribution Agreement), on the terms and conditions that are set
forth in those Agreements;
WHEREAS, R&D on the one hand, and RPR GmbH and RPR Ltd. on the other hand,
entered into a Manufacturing and Supply Agreement dated as of December 1, 1998
(the "R&D/RPR" M&S Agreement"), which sets forth the terms and conditions
pursuant to which RPR Ltd. has agreed to supply all of R&D's requirements of the
Product for distribution in the R&D Territory;
WHEREAS, as of January 1, 1999, R&D transferred all of its right, title and
interest in the Distribution and Trademark Agreements and the R&D/RPR M&S
Agreement to its wholly owned subsidiary, R&D Ferrlecit Capital Resources, Inc.;
WHEREAS, RPR GmbH, A. Nattermann & Cie. GmbH and RPR Ltd. are affiliates of
Aventis S.A., France, a life science group of companies, with Aventis Pharma AG,
Germany, as holding company for the pharmaceutical division of Aventis S.A.,
France;
WHEREAS, R&D on one hand and RPR GmbH and RPR Ltd. on the other hand
(hereinafter referred to as "Aventis") are desirous of amending certain terms
and conditions of the R&D/RPR M&S Agreement; and
WHEREAS, R&D and Aventis shall be hereinafter referred to in this Amendment
individually as a Party, or collectively as the Parties.
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual promises and covenants contained herein, the Parties agree as follows:
Section A. Changes to the R&D/RPR M&S Agreement: Other than those provisions
- ---------- ------------------------------------
of the R&D/RPR M&S Agreement that are expressly and specifically amended herein,
the remaining terms and conditions of the R&D/RPR M&S Agreement shall not be
amended by this Amendment and will remain in full force and effect.
For the purpose of this Amendment the term "Purchase Order" shall mean a firm
and binding purchase order.
24
<PAGE>
Section B. Order Forecasting Method: The Parties agree to modify the method by
- ---------- ------------------------
which R&D provides Aventis with its order forecasts for the Product, as set
forth below in this Section B.
1. Effective January, 2001, R&D shall provide Aventis with a [*] rolling
order forecast (the "Rolling Forecast") by calendar months of the
Product that it requires, instead of the current [*] Rolling Forecast.
The [*] Rolling Forecast will be updated quarterly, with the update
due on, or before, the first day of each calendar quarter.
The first such R&D [*] Rolling Forecast will be due on, or before,
[*]. However, since Purchase Orders for the period from [*] will be
provided to Aventis by R&D prior to [*] (see Section B.4.d. below),
the first R&D [*] Rolling Forecast for [*] will include additional
Purchase Orders for the period from [*].
2. The Rolling Forecast shall be presented to Aventis with batches being
the unit of measure of the Product being ordered by R&D. The
demonstrated average yield for these batches of Product is [*]
ampoules.
3. Beginning with the first quarter of 2001, at the end of each calendar
quarter, R&D shall update the Rolling Forecast by providing Aventis
with an additional [*] of forecasted requirements of the Product.
These additional [*] shall become months [*] through [*] of the
updated version of the Rolling Forecast.
4. The Rolling Forecast shall contain four (4) bands:
a. The most current [*] of the Rolling Forecast shall be referred to
herein as Band 1. No change shall be made in the number or timing
of the forecasted batches, once the first day of a calendar
quarter becomes part of Band 1.
b. The next [*] of the Rolling Forecast shall be referred to herein
as Band 2. No change shall be made in the number or timing of
the forecasted batches, once a calendar quarter becomes part of
Band 2. However, a [*]-time increase or decrease of up to a
maximum of [*]% may be made when a calendar quarter moves from
Band 2 (as months [*] - [*]), to Band 1 (as months [*] - [*]).
Notwithstanding any contrary provision herein, in the event a
Purchase Order submitted by R&D hereunder does not meet the
requirement that it equals a full batch size or a multiple
thereof, the quantity of Product reflected on such Purchase Order
shall be rounded down to the nearest multiple of the full batch
size.
c. The next [*] of the Rolling Forecast shall be referred to herein
as Band 3. No change shall be made in the number or timing of
the forecasted batches, once a calendar quarter becomes part of
Band 3. However, a one-time increase or decrease of up to a
maximum of [*]% may be made when a calendar quarter moves from
Band 3 (as months [*] - [*]) to Band 2 (as months [*] - [*]).
Notwithstanding any contrary provision herein, in the
25
<PAGE>
event a Purchase Order submitted by R&D hereunder does not meet
the requirement that it equals a full batch size or a multiple
thereof, the quantity of Product reflected on such Purchase Order
shall be rounded down to the nearest multiple of the full batch
size.
d. The last [*] of the Rolling Forecast shall be referred to herein
as Band 4. No change shall be made in the number or timing of
the forecasted batches, once a calendar quarter Is added to Band
4. However, a one-time increase or decrease of up to a maximum
of [*]% may be made when a calendar quarter moves from Band 4 (as
months [*] - [*]), to Band 3 (as months [*] - [*]). No partial
batches shall be allowed when such increase or decrease occurs.
e. [*] Promptly after execution of this Amendment, R&D shall provide
Aventis with Purchase Orders for the Product that it is ordering
for the period from [*], as set forth below in Section C.
f. In the event that the Parties agree to a change in the delivery
system of the Product and such a change materially modifies the
Rolling Forecast mechanism described hereinabove, the Parties
agree to meet and confer in good faith to make the necessary
modifications in the process described herein.
g. Aventis shall not be obligated to accept Purchase Orders above
the number of the batches in Band 1; provided that Aventis shall
accept any Purchase Order required hereunder to be submitted by
R&D pursuant to Section C hereinbelow.
5. Before a calendar quarter has moved into Band 1 (and become part of
the first [*] of the most recent version of the Rolling Forecast), R&D
shall provide Aventis with a Purchase Order for the quantities of the
Product to be supplied, during that particular calendar quarter. Once
such a Purchase Order has been provided to Aventis, R&D may not change
the amounts set forth therein. On the other hand, once a Purchase
Order has been received by Aventis, Aventis is obligated to supply
such Product to R&D, in the quantities and on the timetable set forth
in the Purchase Order. This provision regarding Purchase Order
placement, supersedes any contrary provision in the R&D/RPR M&S
Agreement.
In the event that Aventis cannot satisfy a Purchase Order full, either
as to delivery schedule or as to quantities ordered, the procedure set
forth in Article IIB3 of the R&D/RPR M&S Agreement shall be applied to
the new band approach set forth herein. Therefore, in such event, R&D
shall be allowed to add the amount of the shortfall in supply from
Aventis to a future order, even though by doing so it would cause such
future order to exceed the band provisions set forth herein.
26
<PAGE>
6. For purposes of clarification, the provisions of the R&D/RPR M&S
Agreement, which allow for a Relevant Band (as defined therein) of [*]
at the time of the issuance of a Purchase Order, are hereby
specifically rescinded.
7. The provisions of the R&D/RPR M&S Agreement, that allowed for a [*]%
adjustment when forecasted batches became months [*] in the most
recent Rolling Forecast, are hereby specifically rescinded and
superseded.
8. The R&D/RPR M&S Agreement described "satisfactory performance" by RPR
Ltd. (now Aventis) as supplying R&D with batches that contained at
least [*]% and no more than [*]% of its projected batch size of [*]
ampoules (the "Demonstrated Yield"). The Parties agree to increase
this acceptable range to at least [*]% and no more than [*]% of the
Demonstrated Yield. The provisions of the R&D/RPR M&S Agreement are
hereby changed accordingly. Although Aventis will notify R&D of the
availability of batches that fall outside of this acceptable range,
R&D shall have no obligation to accept such batches.
Section C. Product Orders-for the Period Beginning August, 2000 through
- ---------- ------------------------------------------------------------
December 31,1002: The Parties hereto agree to the following orders:
- ----------------
1. For the balance of 2000:
a. At the present time, R&D has ordered a total of [*] batches from
Aventis for delivery in 2000 and has provided Aventis with
Purchase Orders for same. The Parties hereby agree to change
such order from a total of [*] batches to be delivered to R&D for
2000, to a target total of [*] batches to be delivered to R&D for
2000.
b. Aventis agrees to use its commercially reasonable efforts to
provide R&D with [*] batches for 2000.
c. Promptly after execution hereof, Aventis shall provide R&D with a
delivery schedule for the target total of [*] batches referenced
above for 2000.
d. Promptly after execution hereof, R&D shall Provide Aventis with a
Purchase Order requesting a minimum of [*] additional batches for
2000 (from [*] batches).
2. For 2001: R&D's current forecast for Product to be delivered by
Aventis to R&D in 2001, is hereby superseded with the following:
a. R&D shall order a total of [*] batches for 2001.
b. Aventis hereby agrees to supply R&D with a total of [*] batches
for 2001. It is Aventis' intention to provide such batches to R&D
ratably throughout 2001. By no later than the execution of this
Agreement, Aventis shall
27
<PAGE>
provide R&D with a delivery schedule which sets forth the
projected delivery dates for the [*] batches in 2001.
c. Promptly after execution hereof, R&D shall provide Aventis with a
Purchase Order for a total of [*] batches for 2001. The delivery
dates for such batches shall be left open, pending receipt by R&D
of the Aventis Pharma 2001 delivery schedule.
3. For 2002: R&D's partial year current forecast for Product to be
delivered by Aventis to R&D in 2002, is hereby superseded with the
following:
a. R&D shall order a total of [*] batches for 2002.
b. Aventis hereby agrees to supply R&D with a total of [*] batches
for 2002. It is Aventis' intention to provide such batches to
R&D ratably throughout 2002. By no later than September 30,
2001, Aventis shall provide R&D with a delivery schedule which
sets forth the projected delivery dates for the [*] batches in
2002.
c. Promptly after execution hereof, R&D shall provide Aventis with a
Purchase Order for a total of [*] batches for 2002. The delivery
dates for such batches shall be left open, pending receipt by R&D
of the Aventis Pharma 2002 delivery schedule, which is due
September 30, 2001, as set forth above.
Section D. Method of Payment: The Parties agree to change the method of payment
- ---------- -----------------
from R&D to Aventis for the batches of Product supplied by Aventis as follows:
1. From time to time, R&D will advance Aventis funds as a prepayment
against future deliveries of the Product to R&D. Such advances shall
be wired to Aventis in EURO by R&D. The amount of each of these
advances in the future, shall be between [*].
2. Aventis shall give R&D credit for the fends transferred in the
Deutsche Mark equivalent of the EUROs wired. R&D shall endeavor to
keep the outstanding pre-payment balance with Aventis to no greater
than [*] of future deliveries of the Product.
3. In the future, when the EURO replaces the Deutsche Mark, all amounts
in the R&-D/RPR M&S Agreement will be automatically restated from
Deutsche Marks to their EURO equivalents.
4. Aventis shall keep contemporaneous records of all cash advances, and
amounts charged against same for deliveries of Product to R&D.
5. At the end of each calendar quarter, Aventis shall accrue an "in lieu
of" amount of interest based on the net average prepayment balance
that was outstanding for such quarter.
28
<PAGE>
a) From January 1, 2000 through September 30, 2000 - This in lieu of
amount of interest shall be based on the average US weekly
treasury bill rate during the calendar quarter.
b) Beginning October 1, 2000 - This in lieu of amount of interest
shall be based on the one month Euribor rate.
c) At the end of each calendar quarter, R&D and Aventis shall
reconcile their respective balances, including the accrued
Interest
6. The Parties agree that the requirement for R&D to maintain a letter of
credit in favor of Aventis, is hereby eliminated.
In the event that any material provision of this Amendment needs to be changed
during the term of the Distribution and Trademark Agreements, and the R&D/RPR
M&S Agreement, the Parties hereto agree to negotiate in good faith to consider
such a proposed change, irrespective of which party initiated the change and, if
adopted and material, the resulting change will be included as an additional
amendment to the R&D/RPR M&S Agreement.
29
<PAGE>
IN WITNESS WHEREOF, duly authorized representatives of the Parties have
duly executed this Amendment, as of the date first set forth hereinabove.
AGREED AND ACCEPTED:
Makoff R&D Laboratories, Inc. and its wholly owned subsidiary
R&D Ferrlecit Capital Resources, Inc.
_______________________________________
By: Rhoda Makoff, Ph.D.
Its: President/CEO
RPR GmbH
_______________________________________
By: Lindemann
Its: Managing Director
RPR Ltd.
_______________________________________
By: Tony Whelan
Its: Site Director
30
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.14
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>TRADEMARK AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.14
[*] Confidential treatment requested
TRADEMARK AGREEMENT
TRADEMARK AGREEMENT dated this 26th day of August 1993,
by and between
RHONE-POULENC RORER GMBH, a German company with offices at Nattermannallee 3,
50829 Cologne, Germany,
A. NATTERMANN & CIE. GMBH, 50829 Cologne, Germany,
- hereinafter referred to as RPR -
and
R & D LABORATORIES, INC., a Corporation with offices at 4204 Glencoe Ave.,
Marina del Rey, 90292 CA, United States of America,
- hereinafter referred to R & D -
WITNESSETH
WHEREAS, RPR is a pharmaceutical company based in Germany; and
WHEREAS, NATTERMANN has developed a product known by the name Ferrlecit (the
"Product") and perfected legal rights hereto; and
WHEREAS, NATTERMANN has applied for the trademark registration rights in R & D
Territory the trademark to "Ferrlecit" (the "Trademark") for use in marketing
the Products and
WHEREAS, R & D is a pharmaceutical company based in the United States; and
WHEREAS, R & D intends to obtain from RPR in its function as parent company of
A. Nattermann & Cie. GmbH the right to use and sell the product pursuant to
that certain Product Distribution Agreement between RPR and R & D; and
WHEREAS, R & D desires to use the Trademark in connection with its use and sale
of Products in R & D Territory, as those terms are defined in the Distribution
Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and other undertaking
of RPR and R & D set forth below, RPR and R & D hereby agree as follows:
ARTICLE 1 - Grant
- -----------------
RPR hereby grants to R & D during the term of this Agreement and subject to the
terms and conditions hereof, the exclusive right to use the Trademark in the R &
D Territory, all in connection with the use and sale of the Product.
ARTICLE 2 - Warranty
- --------------------
RPR represents and warrants that it has applied for the registration of the
Trademark in the Territory.
RPR shall use its best efforts to obtain registrations for the Trademark and,
once obtained, shall maintain and renew, at its expense, said registrations
during the term of this Agreement and provide R & D with copies of its
registrations when obtained.
ARTICLE 3 - Use / Licence Fee
- -----------------------------
R & D to the extent legally permissible, agrees to use the Trademark in lieu of
the name of the Product and in lieu of all other names indicating the Product
when referring to the Product, including in all packaging, sales materials and
correspondence. If RPR and R & D can agree on a different designation for the
Product other than Ferrlecit, RPR shall obtain a trademark registration in the R
& D Territory for the designation in RPR's name. Upon receipt of said
registration, RPR shall thereupon license use of said trademark to R & D on
terms and conditions identical to those set forth in this Agreement. Should RPR
not obtain a trademark registration for R & D, then the parties shall select a
new trademark, which trademark shall be substituted for Ferrlecit under this
Agreement.
R & D will pay to RPR for use of the Trademark a licence fee of [*]% of the net
sales of the Product in the R & D Territory.
Net sales are the sales less a flat fee of [*]% for trade discounts, like
rebates, boni, sconti, and less VAT.
ARTICLE 4 - Infringement
- ------------------------
RPR and R & D shall do everyting in their power to protect the Trademark. R & D
shall give prompt notice in writing to NATTERMANN of any infringement or
possible infringement of the Trademark by unrelated persons in the Territory.
RPR or R & D may in their respective discretion, either in its own name or in
the name of the other party or in both, take such action (including the
initiation of oppositions or other proceedings) as it may deem necessary or
desirable, at law or in equity or otherwise, to stop any infringement or
possible infringement of
2
<PAGE>
the Trademark in the Territory, and the parties shall fully cooperate with each
other in any such actions. RPR and R & D shall each pay [*] of the reasonable
attorney's fees and other costs of protecting the Trademark from infringement by
others in the Territory.
R & D shall not at any time claim any right, title or interest in or to the
Trademark other than the right to use it under all the terms and conditions
hereof. In the event of a claim or suit that the use of Ferrlecit as herein
provided infringes the Trademark rights of any unrelated party, RPR shall
reimburse and hold harmless R & D for all costs in defending such claim or suit
for infringement, including reasonable attorney's fees. Neither party shall
settle any oppositions or litigation referred to in this paragraph without the
approval of the other party.
ARTICLE 5 - Suits
- -----------------
Except as otherwise herein provided R & D shall indemnify and hold RPR harmless
from any claims, suits, or proceedings, including but not limited to attorney's
fees and expenses incurred therein, arising out of R & D's improper use of the
Trademark in connection with packaging, advertising or sale of the Product,
provided that RPR promptly notifies R & D as to any such claims, suits, or
proceedings, and permits R & D to defend the same, or settle the same on a basis
reasonably acceptable to RPR.
ARTICLE 6 - Term
- ----------------
This Agreement shall continue in force and effect for the same period as stated
in the Distribution Agreement for the Product.
ARTICLE 7 - Termination
- -----------------------
Either party may terminate this Agreement immediately by notice to the other
party in the event that:
a) the party shall commit a material breach or default under this Agreement or
under the Distribution Agreement entered into between the parties hereto of
even date, which breach or default shall not be remedied within 90 days
after giving the written notice thereof to the party in breach or default,
specifying the breach or default; or
b) the party shall admit in writing its inability to meet its obligations when
due or commit any other act of bankruptcy, permit the appointment of a
trustee or receiver of all or a substantial part of its assets, or
institute voluntary proceedings in bankruptcy or insolvency, or permit
involuntary institution of such proceedings against it., not vacated within
60 days.
3
<PAGE>
ARTICLE 8 - Force Majeure
- -------------------------
Neither party shall be responsible or liable to the other hereunder for failure
or delay in performance of this Agreement due to any war, fire, accident or
other casualty, or any labor disturbance or act of God or the public enemy, or
any other contingency beyond such party's reasonable control. In addition, in
the event of the applicability of this Article, the party affected by such force
majeure shall use its best efforts to eliminate, cure and overcome any such
causes and resume performance of its obligation.
ARTICLE 9 - Arbitration
- -----------------------
All disputes, controversies, or differences which may arise between the parties
out of, or in relation to, or in connection with, this Agreement or for the
breach thereof, shall be finally settled by arbitration underlying Swiss law by
which either party hereto is bound. The arbitration proceedings with the
application of Swiss law shall take place in Zurich, Switzerland.
ARTICLE 10 - Governing law
- --------------------------
The rights and obligations of the parties under this Agreement shall be
goverened and construed in accordance with the laws of Germany.
ARTICLE 11 - Assignment
- -----------------------
This Agreement and all rights and obligations herunder are personal to the
parties hereto and may not be assigned, other than to Affiliates as defined
herein, without the express prior written consent of the other. Any assignment
or attempt at same in the absence of such prior written consent shall be void
and without effect.
"Affiliate" shall mean all corporations or business entities which, directly or
indirectly, are controlled by, do control, or are under common control with R &
D or RPR: For this purpose the meaning of the word "control" shall mean the
ownership of fifty percent (50%) or more of the shares or voting rights of
interest of such corporation or business entity.
ARTICLE 12 - Entire Agreement
- -----------------------------
This Agreement, together with that certain Distribution Agreement between RPR
and R & D shall constitute the entire Agreement between the parties, and no
amendment or modification to this Agreement shall be valid or binding upon the
parties unless made in writing and signed by the representatives of such
parties.
ARTICLE 13 - Notices
- --------------------
Any notice or communication required or permitted to be given or made under this
Agreement by one of the parties hereto to the other shall be in writing and
shall be deemed to have been
4
<PAGE>
sufficiently given or made for all purposes if mailed by registered mail,
postage prepaid, addressed to such other party at its respective address as
follows:
R & D Laboratories, Inc.
4204 Glencoe Ave.
Marina del Ray, 90292 CA
U S A
Attn.: Reuben Sandler, Ph.D
Executive Vice President
RHONE-POULENC RORER GMBH
Nattermannallee 1
50829 Cologne
Germany
Attn.: Geschaeftsleitung
ARTICLE 14 - Miscellaneous
- --------------------------
In case any question arises between the parties hereto in connection with a
matter not provided for in this Agreement, the parties hereto shall confer
friendly with each other for decision.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the day and year first written
above.
Marina del Rey, Sept. 2, 1993 Cologne, August 26, 1993
R & D LABORATORIES, INC. RHONE-POULENC RORER GMBH
A. NATTERMANN & CIE. GMBH
5
<PAGE>
EXECUTION COPY
--------------
AMENDMENT NO. 1 TO
TRADEMARK AGREEMENT
This Amendment to the Trademark Agreement dated as of August 26, 1993, as
amended to date (the "Trademark Agreement") between Makoff R & D Laboratories,
Inc., doing business as R & D Laboratories, Inc. ("R & D"), on one hand and
Rhone-Poulenc Rorer GmbH ("RPR GmbH") on the other hand is being entered into as
of ............., 2000.
WHEREAS, A. Nattermann & Cie. GmbH, an affiliate of RPR GmbH, owns the
rights, including the trademark, to Ferrlecit(R), an iron gluconate product (the
"Product");
WHEREAS, R & D and RPR GmbH entered into a Distribution Agreement dated
June 24, 1993, as amended to date (the "Distribution Agreement') regarding the
Product;
WHEREAS, R & D and RPR GmbH and A. Nattermann & Cie. GmbH entered into the
Trademark Agreement, which granted R & D the right to distribute the Product in
the R & D Territory (as defined in the Distribution Agreement), on the terms and
conditions that are set forth in those Agreements;
WHEREAS, as of January 1, 1999, R & D transferred all of its right, title
and interest in the Distribution and Trademark Agreements to its wholly owned
subsidiary, R & D Ferrlecit Capital Resources, Inc.;
WHEREAS, RPR GmbH and A. Nattermann & Cie. GmbH are affiliates of Aventis
S.A., France, a life science group of companies, with Aventis Pharma AG,
Germany, as holding company for the pharmaceutical division of Aventis S.A.,
France;
WHEREAS, R & D on one hand and RPR GmbH and A. Nattermann & Cie. GmbH on
the other hand (hereinafter referred to as "Aventis") are desirous of amending
certain terms and conditions of the Trademark Agreement; and
WHEREAS, R & D and Aventis shall be hereinafter referred to in this
Amendment individually as a Party, or collectively as the Parties.
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual promises and covenants contained herein, the Parties agree as follows:
Section A. Changes to the Trademark Agreement: Other than those provisions of
- -----------------------------------------------
the Trademark Agreement that are expressly and specifically amended herein, the
remaining terms and conditions of the Trademark Agreement shall not be amended
by this Amendment and will remain in full force and effect.
<PAGE>
Section B. License Fee:
- ------------------------
1. The Parties agree that the license fee (royalty) set forth in the Trademark
Agreement and reaffirmed herein shall be due and payable as follows:
a. For calendar year 2000 - the license fee shall be paid annually in
----------------------
arrears, with the payment due no later February 28, 2001. The parties
have also agreed that RPR GmbH shall be entitled to receive interest on
the license fee payment applicable to the calendar year 2000. The
interest shall be calculated as follows:
1) On the license fee payment that is applicable to the calendar
quarter ending March 31, 2000, interest shall be accrued from June
1, 2000 until paid, at a rate equal to the weekly auction of. 30 day
U.S. Treasury Bills that occurred during the quarter.
2) On the license fee payment that is applicable to the calendar
quarter ending June 30, 2000, interest shall be accrued from
September 1, 2000 until paid, at a rate equal to the weekly auction
of 30 day U.S. Treasury Bills that occurred during the quarter.
3) On the license fee payment that is applicable to the calendar
quarter ending September 30, 2000, interest shall be accrued from
December 1, 2000 until paid, at a rate equal to the weekly U.S. 30
day Treasury Bills that occurred during the quarter.
4) All interest accrued, as set forth above, shall be paid on, or
before, February 28, 2001, along with the license fee for the
calendar year 2000.
b. Thereafter - the license fee shall be paid quarterly in arrears, with
----------
the payments due no later than sixty days after the end of each calendar
quarter.
2. The Parties agree to modify and add to the definitions in Article 3 of the
Trademark Agreement, as follows:
a. Gross Sales - shall mean the gross sales invoiced to third parties, net
-----------
of Sales Returns (as defined below), by R & D, its Affiliates, its
sublicensees and their affiliates in the Territory;
b. Net Sales - shall mean Gross Sales, less the Allowable Flat Reduction
---------
Percentage (as defined below);
c. Allowable Flat Reduction Percentage - represents a percentage of Gross
-----------------------------------
Sales, that the parties have agreed to subtract from Gross Sales, in
lieu of subtracting the Deductions From Gross Sales (as defined below),
in order to calculate Net Sales. The amount of this Allowable Flat
Reduction
2
<PAGE>
Percentage is calculated by multiplying [*] times a fraction, the
numerator of which is the Deductions From Gross Sales and the
denominator of which is Gross Sales. Notwithstanding the foregoing, the
----------------------------------
maximum Allowable Flat Reduction Percentage is [*] of Gross Sales and,
----------------------------------------------------------------------
therefore, Net Sales cannot be less than [*] of Gross Sales;
------------------------------------------------------------
d. Deductions From Gross Sales - shall mean the sum of all of the following
---------------------------
deductions: trade, cash and quantity discounts; rebates; chargebacks;
retroactive price adjustments; and all, similar deductions from Gross
Sales allowed by R & D, its Affiliates, its sublicensees and their
affiliates to third parties in the Territory; and
e. Sales Returns - shall mean those Gross Sales that are subsequently
-------------
returned by customers because of short or expired dating, or credits
that are issued because of damaged goods, or short shipments.
f. Examples: (i) If Gross Sales are [*] and Deductions From Gross Sales are
[*] , the Allowable Flat Reduction Percentage would be calculated as
follows: [*] X [*] . (ii) If Gross Sales are [*] and Deductions From
Gross Sales are [*], the Allowable Flat Reduction Percentage would be
calculated as follows: [*] X [*] , which would be limited to [*].
-----------------
3. The Parties hereby reaffirm that the license fee (royalty) shall be
calculated at [*] of the Net Sales amount.
Section C. Reports, Payments and Audits:
- -----------------------------------------
1. Royalty reports and accounting:
a. Reports and exchange rates
1. During the term of the Agreement following the First Commercial Sale
of Licensed Product, R & D shall furnish to Aventis a quarterly
Written report showing in reasonably specific detail, on a country-
by-country basis, (a) the Gross Sales of all Licensed Products sold
by R & D, its Affiliates and its sublicensees in the Territory
during the reporting period and the calculation of Net Sales from
such gross sales; (b) the royalties payable in United States
dollars, if any, which shall have accrued hereunder based upon Net
Sales of Licensed Products; (c) the withholding taxes, if any,
required by law to be deducted in respect of such sales; (d) the
date of the First Commercial Sales of each Licensed Product in each
country in the Territory during the reporting period; and (e) the
exchange rates used in determining the amount of United States
dollars as specified in this Amendment. Reports shall be due on the
sixtieth (60th) day following the close of each quarter. R & D shall
keep complete and accurate records in sufficient detail and in
accordance with U.S. Generally Accepted Accounting Principles
3
<PAGE>
consistently applied to properly reflect all Gross Sales and Net
Sales, as reported to R & D by its sublicensees, and to enable the
royalties payable hereunder to be determined.
2. With respect to sales of Licensed Products invoiced in United States
dollars, the Net Sales amounts and the amounts due to Aventis
hereunder shall be expressed in United States dollars. With respect
to sales of Licensed Products invoiced in a currency other than
United States dollars, the Net Sales amounts and the amounts due to
Aventis hereunder shall be expressed in the domestic currency of the
party making the sale together with the United States dollar
equivalent of the amount payable to Aventis, calculated using the
arithmetic average of the spot rates on the last Business Day of
each month of the calendar quarter in which the Net Sales were made.
The "Closing mid-point rates" found in the "Dollar spot forward
against the Dollar" table published by the Financial Times or any
other publication as agreed by the parties shall be used as the
source of spot rates to calculate the average as defined in the
preceding sentence.
2. Payments
a. Payment Terms: Royalties shown to have accrued by each royalty report
provided for under Article I of Section C of this Amendment shall be due
on the date such royalty report is due. Payment of royalties in whole or
in part may be made in advance of such due date.
Any obligation that R & D may have under German law to pay royalties on
any basis other than that set forth herein is hereby superseded and
rescinded.
b. Payment method: All payments by R & D to Aventis, under the Agreement
shall be paid in United States dollars, and made by bank wire transfer
in immediately available funds to such account as Aventis has
designated.
c. Late Payments: R & D shall pay interest to Aventis on the aggregate
amount of any payments by R & D that are not paid on or before the date
such payments are due under this Amendment at a rate per annum equal to
the lesser of the prime rate of interest as reported by The Wall Street
Journal, Eastern U.S. Edition, from time to time, plus [*], or the
highest rate permitted by applicable law, calculated on the number of
days such payment is delinquent.
Any obligation that R & D may have under German Law to pay interest on
overdue royalties is hereby superseded and rescinded.
3. Aventis Audits
4
<PAGE>
a. Upon the written request of Aventis and not more than once in each
calendar year, R & D shall permit an independent certified public
accounting firm of nationally recognized standing, selected by Aventis
and reasonable acceptable to R & D at Aventis' expense, to have access
during normal business hours to such of the records of R & D as may be
reasonable necessary to verify the accuracy of the royalty reports
hereunder for any year ending not more than thirty-six (36) months prior
to the date of such request. The written request for audit must be
submitted to R & D no less than thirty (30) days in advance of the
contemplated audit date. R & D shall reasonably cooperate with the
accounting firm to schedule the audit at R & D. The accounting firm
shall enter into a confidentiality agreement with R & D and disclose to
Aventis only whether the records are correct or not and the specific
details concerning any discrepancy.
In the event of such an audit, R & D shall use its best efforts to
expeditiously arrange with R & D's sublicensees for the related audit of
the records of such sublicensees. In such best efforts, R & D shall use
any contractual remedies (provided for in R & D's agreements with its
sublicensees) or other legal means available to ensure the compliance of
R & D's sublicensees. The accounting firm would have to directly enter
into a separate confidentiality agreement with R & D's sublicensees.
Such accounting firm would disclose to Aventis, only whether the records
of such sublicensees are correct or not and the specific details
concerning any discrepancies. No other information shall be shared.
b. If such accounting firm concludes that additional royalties were owed
during such period, R & D shall pay the additional royalties within
thirty (30) days of the date Aventis delivers to R & D such accounting
firm's written report so concluding, If such accounting firm concludes
that royalties were overpaid during such period, Aventis shall pay the
amount of such overpayment to R & D within thirty (30) days after the
date Aventis receives the report of such accounting firm. All amounts
due under this Section shall be subject to interest payments in the same
manner as provided for in Section C 2c above.
c. If either party in good faith disputes the conclusion of the account
firm under Section 3b, or any specific aspect of the conclusion, then
such party shall inform the other party by written notice within thirty
(30) days after receiving a copy of the audit containing such
conclusion, specifying in detail the reasons for disputing such
conclusion. The parties shall promptly thereafter meet and negotiate in
good faith a resolution to such dispute. In the event that the parties
are unable to resolve such dispute within sixty (60) days after such
dispute notice is received, the matter shall be resolved in a manner
consistent with the procedures set forth in the Trademark Agreement as
amended hereby and interest shall be payable on
5
<PAGE>
any payment determined to be due in the same manner as provided for in
Section C 2c above.
d. The fees charged by such accounting firm shall be paid by Aventis;
provided, however, if the audit discloses that the royalties payable by
R & D for the audited period are more than one hundred ten percent
(110%) of the royalties actually paid for such period, then R & D shall
pay the reasonable fees and expenses charged by such accounting firm.
e. R & D entered into its sublicense agreement with Schein Pharmaceutical,
Inc. prior to this Amendment No. 1 to the Trademark Agreement. R & D
will use its best efforts to ensure that Schein makes all necessary
reports to R & D, keeps and maintains records of sales made pursuant to
its sublicense with R & D and grants access to such records to Aventis'
independent accountant, to the same extent required with respect to R &
D's records under this Agreement.
f. Upon the completion of any such review, or final resolution in the case
of a disputed amount, of any year under this Section 3, the calculation
of royalties payable with respect to such year shall be final, binding
and conclusive upon Aventis and R & D. Thereafter, R & D, its Affiliates
and sublicensees shall be released from any liability or accountability
with respect to royalties for such year and no further audit of such
year shall be permitted under Section.
6
<PAGE>
In the event that any material provision of this Amendment needs to be changed
during the term of the Distribution and Trademark Agreements, and the R&D/RPR
M&S Agreement, the Parties hereto agree to negotiate in good faith to consider
such a proposed change, irrespective of which party initiated the change and, if
adopted and material, the resulting change will be included as an additional
amendment to the R&D/RPR M&S Agreement.
IN WITNESS WHEREOF, duly authorized representatives of the Parties have
duly executed this Amendment, as of the date first set forth hereinabove.
AGREED AND ACCEPTED:
Makoff R & D Laboratories, Inc. and its wholly owned subsidiary
R & D Ferrlecit Capital Resources, Inc.
- -------------------------------
By: Rhoda Makoff, Ph.D.
Its: President/CEO
RPR GmbH
- -------------------------------
By: Lindemann
Its: Managing Director
A. Nattermann & Cie. GmbH
- -------------------------------
By: Lindemann
Its: Managing Director
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.15
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>AMENDED AND RESTATED CREDIT AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.15
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of August 28, 2000
among
WATSON PHARMACEUTICALS, INC.,
as Borrower,
THE FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTIES HERETO
as Lenders,
SG COWEN SECURITIES CORPORATION,
as Arranger and Book Runner,
and
SOCIETE GENERALE,
as Administrative Agent
FIRST UNION NATIONAL BANK,
as Syndication Agent,
and
SUMMIT BANK,
as Documentation Agent
<PAGE>
TABLE OF CONTENTS
Page
----
i
<PAGE>
EXHIBITS AND SCHEDULES
Exhibit A - Form of Assignment and Acceptance
Exhibit B-1 - Form of Revolving Loan Note
Exhibit B-2 - Form of Term Loan Note
Exhibit B-3 - Form of Swing Loan Note
Exhibit C - Form of Notice of Borrowing
Exhibit D - Form of Notice of Continuation/Conversion
Exhibit E - List of Closing Documents
Exhibit F - Form of Officer's Certificate
Exhibit G - Form of Compliance Certificate
ii
<PAGE>
EXECUTION COPY
AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 28, 2000
(as amended, supplemented or modified from time to time, this "Agreement") is
---------
entered into among WATSON PHARMACEUTICALS, INC., a Nevada Corporation (the
"Borrower"), the financial institutions from time to time party hereto, whether
--------
by execution of this Agreement or an Assignment and Acceptance (the "Lenders"),
-------
SG COWEN SECURITIES CORPORATION, in its capacity as arranger and book runner (in
such capacity, the "Arranger"), SOCIETE GENERALE ("SG"), in its capacity as
-------- --
administrative agent for the Lenders (in such capacity, the "Administrative
--------------
Agent"), FIRST UNION NATIONAL BANK, in its capacity as syndication agent for the
- -----
Lenders (in such capacity, the "Syndication Agent"), and SUMMIT BANK, in its
-----------------
capacity as documentation agent for the Lenders (in such capacity, the
"Documentation Agent"). This Agreement amends and restates the Credit Agreement
-------------------
dated as of July 5, 2000 among the Borrower, the Lenders, the Arranger, the
Administrative Agent and the Syndication Agent.
ARTICLE I
DEFINITIONS
1.01. Certain Defined Terms. The following terms used in this
---------------------
Agreement shall have the following meanings, applicable both to the singular and
the plural forms of the terms defined:
"Accommodation Obligation" means any Contractual Obligation,
------------------------
contingent or otherwise, of any Person with respect to any Indebtedness,
obligation or liability of another, if the primary purpose or intent thereof by
the Person incurring the Accommodation Obligation is to provide assurance to the
obligee of such Indebtedness, obligation or liability of another Person that
such Indebtedness, obligation or liability will be paid or discharged, or that
any agreements relating thereto will be complied with, or that the holders
thereof will be protected (in whole or in part) against loss in respect thereof
including, without limitation, direct and indirect guarantees, endorsements
(except for collection or deposit in the ordinary course of business), notes co-
made or discounted, recourse agreements, take-or-pay agreements, keep-well
agreements, agreements to purchase or repurchase such Indebtedness, obligation
or liability or to provide any security therefor or to provide funds for the
payment or discharge thereof, agreements to maintain solvency, assets, level of
income, or other financial condition, and agreements to make payment other than
for value received.
"Acquisition" means, collectively, the Tender Offer and, on and after
-----------
the Merger Effective Date, the Merger.
"Administrative Agent" has the meaning ascribed to such term in the
--------------------
preamble hereto.
<PAGE>
"Administrative Agent's Account" means the Administrative Agent's
------------------------------
account, account number 9044019 (re: Watson Pharmaceuticals), maintained at the
office of Societe Generale, 1221 Avenue of the Americas, New York, New York, ABA
#026004226, or such other account as the Administrative Agent may from time to
time specify in writing to the Borrower and the Lenders.
"Administrative Agent's Fee Letter" means the letter dated July 5,
---------------------------------
2000 between the Administrative Agent and the Borrower.
"ANCIRC" means ANCIRC, a New York partnership jointly owned by
------
Circasub Inc., an indirect Subsidiary of the Borrower, and SR Six, Inc., a
subsidiary of Andrx Corporation.
"Affiliate" means, as applied to any specified Person, any other
---------
Person that directly or indirectly controls, is controlled by, or is under
common control with, such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as applied to any specified
Person, means the possession, directly or indirectly, of the power to vote ten
percent (10%) or more of the Securities having voting power for the election of
directors of such specified Person or otherwise to direct or cause the direction
of the management and policies of such specified Person, whether through the
ownership of voting Securities or by contract or otherwise.
"Agents" means, collectively, the Administrative Agent, the
------
Syndication Agent, the Documentation Agent and the Arranger.
"Agreement" has the meaning ascribed to such term in the preamble
---------
hereto.
"Applicable Base Rate Margin" means initially a rate equal to 0.375%
---------------------------
per annum during the period from the Closing Date until the Six Month Date.
Thereafter, such rate will reset quarterly as set forth below on the first day
of the month following receipt by the Administrative Agent of the financial
statements delivered in accordance with Section 7.01(a), commencing with the Six
---------------
Month Date, based upon the Leverage Ratio for the applicable Financial Covenant
Period, calculated as of the last day of such period; provided, however, if the
-------- -------
calculation of the Leverage Ratio based upon the unaudited financial statements
of the Borrower and its Subsidiaries for the fourth fiscal quarter of any Fiscal
Year varies from the calculation of the Leverage Ratio based upon the audited
financial statements of the Borrower and its Subsidiaries for such Fiscal Year,
such rate will be reset (as set forth below) retroactively to the first day of
the month following receipt by the Administrative Agent of the unaudited
financial statements for such fourth fiscal quarter:
<TABLE>
<CAPTION>
If the Leverage Applicable Base
Ratio is: Rate Margin
--------- -----------
<S> <C>
Equal to or greater than 3.5 1.250%
Less than 3.5 but equal to or greater than 3.0 0.875%
Less than 3.0 but equal to or greater than 2.5 0.625%
Less than 2.5 but equal to or greater than 2.0 0.375%
Less than 2.0 but equal to or greater than 1.5 0.250%
Less than 1.5 0.125%
</TABLE>
2
<PAGE>
"Applicable Eurodollar Rate Margin" means initially a rate equal to
---------------------------------
1.375% per annum during the period from the Closing Date until the Six Month
Date. Thereafter, such rate will reset quarterly as set forth below on the
first day of the month following receipt by the Administrative Agent of the
financial statements delivered in accordance with Section 7.01(a), commencing
---------------
with the Six Month Date, based upon the Leverage Ratio for the applicable
Financial Covenant Period, calculated as of the last day of the period;
provided, however, if the calculation of the Leverage Ratio based upon the
- -------- -------
unaudited financial statements of the Borrower and its Subsidiaries for the
fourth fiscal quarter of any Fiscal Year varies from the calculation of the
Leverage Ratio based upon the audited financial statements of the Borrower and
its Subsidiaries for such Fiscal Year, such rate will be reset (as set forth
below) retroactively to the first day of the month following receipt by the
Administrative Agent of the unaudited financial statements for such fourth
fiscal quarter:
<TABLE>
<CAPTION>
If the Leverage Applicable Eurodollar
Ratio is: Rate Margin
--------- -----------
<S> <C>
Equal to or greater than 3.5 2.250%
Less than 3.5 but equal to or greater than 3.0 1.875%
Less than 3.0 but equal to or greater than 2.5 1.625%
Less than 2.5 but equal to or greater than 2.0 1.375%
Less than 2.0 but equal to or greater than 1.5 1.250%
Less than 1.5 1.125%
</TABLE>
"Applicable Lending Office" means, with respect to a particular
-------------------------
Lender, its Eurodollar Lending Office in respect of provisions relating to
Eurodollar Rate Loans and its Domestic Lending Office in respect of provisions
relating to Base Rate Loans.
"Approved Fund" means any fund that invests in bank loans.
-------------
"Arranger" has the meaning ascribed to such term in the preamble
--------
hereto.
"Asset Sale" means any sale, conveyance, transfer, lease or other
----------
disposition of property of any Loan Party to any Person other than another Loan
Party.
"Assignment and Acceptance" means an Assignment and Acceptance
-------------------------
substantially in the form of Exhibit A attached hereto and made a part hereof
(with blanks appropriately completed) delivered to the Administrative Agent in
connection with an assignment of a Lender's interest under this Agreement in
accordance with the provisions of Section 13.01.
-------------
"Attributable Debt" means with respect to a Sale and Leaseback
-----------------
Transaction, at the time of determination, the present value (discounted at the
rate of interest implicit in such transaction, determined in accordance with
GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such Sale and Leaseback
3
<PAGE>
Transaction (including any period for which such lease has been extended or may,
at the option of the lessor, be extended).
"Availability" means, at any particular time, the amount by which the
------------
Maximum Revolving Credit Amount at such time exceeds the Revolving Credit
Obligations at such time; provided, however, that during the period from the
Closing Date to the Business Day immediately preceding the Schein Redemption
Date, the Availability shall be reduced by $55,000,000.
"Aventis" means Aventis, S.A., a company formed under the laws of
-------
France, formerly known as Rhone-Poulenc Rorer, and its affiliates.
"Base Rate" means, on any date, a fluctuating interest rate per annum
---------
equal to the higher of:
(a) the rate of interest then most recently established by SG in
New York, New York as its base rate for Dollars loaned in the United States, in
effect on such date; and
(b) the Federal Funds Rate in effect on such date plus 1/2 of 1%.
The Base Rate is not necessarily intended to be the lowest rate of interest
determined by SG in connection with extensions of credit.
"Base Rate Loans" means all Loans which bear interest at a rate
---------------
determined by reference to the Base Rate as provided in Section 4.01(a).
---------------
"Bankruptcy Code" means Title 11 of the United States Code (11 U.S.C.
---------------
(S)(S) 101 et seq.), as amended from time to time, and any successor statute.
"Benefit Plan" means a defined benefit plan as defined in Section
------------
3(35) of ERISA (other than a Multiemployer Plan) which is subject to Title IV of
ERISA or Section 412 of the Code in respect of which any Loan Party or any ERISA
Affiliate is, or within the immediately preceding six (6) years was, an
"employer" as defined in Section 3(5) of ERISA.
"Board of Directors" means the board of directors or equivalent
------------------
governing body of a Person (or the general partner of such Person, as the case
may be,) or any committee thereof duly authorized to act on behalf of such board
of directors or equivalent governing body.
"Borrower" has the meaning ascribed to such term in the preamble
--------
hereto.
"Borrowing" means a borrowing consisting of Loans of the same Type
---------
made on the same day by the Lenders.
"Business" means the development, licensing, manufacturing ,
--------
marketing, distribution and sale of pharmaceutical products.
"Business Day" means a day, in the applicable local time, which is not
------------
a Saturday or Sunday or a legal holiday and on which banks are not required or
permitted by law or other
4
<PAGE>
governmental action to close (i) in New York, New York, (ii) in the case of
Eurodollar Rate Loans, in London, England and (iii) in the case of Letter of
Credit transactions for the Issuing Bank, in the place where its office for
issuance and administration of the pertinent Letter of Credit is located.
"Capital Expenditures" means, for any period being measured hereunder,
--------------------
the aggregate of all expenditures (whether paid in cash or other assets or
accrued as a liability (but without duplication)) during such period that, in
conformity with GAAP, are required to be included in or reflected by a Loan
Party's fixed asset account as reflected in its balance sheet; provided,
however, that Capital Expenditures shall include, whether or not such a
designation would be in conformity with GAAP, (A) that portion of Capital Leases
which is capitalized on the balance sheet of such Loan Party and (B)
expenditures for Equipment which is purchased simultaneously with the trade-in
of existing Equipment owned by such Loan Party to the extent that the gross
purchase price of the purchased Equipment exceeds the fair value of the
Equipment being traded in at such time.
"Capital Lease" means, as applied to any Person, any lease of any
-------------
property (whether real, personal or mixed) by that Person as lessee which, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that Person.
"Capital Stock" means, with respect to any Person, any capital stock
-------------
of such Person, regardless of class or designation, and all warrants, options,
purchase rights, conversion or exchange rights, voting rights, calls or claims
of any character with respect thereto.
"Cash Capital Expenditures" means, for any period, that portion of
-------------------------
Capital Expenditures which is paid in cash.
"Cash Equivalents" shall mean (i) marketable direct obligations issued
----------------
or unconditionally guaranteed by the United States Government or issued by an
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one (1) year after the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within ninety (90) days after the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation or Moody's
Investors Service, Inc. (or, if at any time neither Standard & Poor's
Corporation nor Moody's Investors Service, Inc. shall be rating such
obligations, then from other nationally recognized rating services) and not
listed in Credit Watch published by Standard & Poor's Corporation; (iii)
commercial paper, other than commercial paper issued by the Borrower or any of
its Affiliates, maturing no more than ninety (90) days after the date of
creation thereof and, at the time of acquisition, having a rating of at least
A-1 or P-1 from either Standard & Poor's Corporation or Moody's Investors
Service, Inc. (or, if at any time neither Standard & Poor's Corporation nor
Moody's Investors Service, Inc. shall be rating such obligations, then the
highest rating from other nationally recognized rating services) (iv) domestic
and Eurodollar certificates of deposit or time deposits or bankers' acceptances
maturing within ninety (90) days after the date of acquisition thereof issued by
any commercial bank organized under the laws of the United States of America or
any state thereof or the District of Columbia or European Economic Community or
Canada having combined capital and surplus of
5
<PAGE>
not less than $250,000,000; (v) bankers' acceptances maturing no more than
ninety (90) days after the date of creation thereof and, at the time of
acquisition, having a rating of at least A-1 or P-1 from either Standard &
Poor's Corporation or Moody's Investors Service, Inc. (or, if at any time
neither Standard & Poor's Corporation nor Moody's Investors Service, Inc. shall
be rating such obligation, then the highest rating from other nationally
recognized rating services); (vi) corporate securities maturing no more than one
(1) year after the date of acquisition thereof and, at the time of acquisition,
having one of the two highest ratings obtainable from either Standard & Poor's
Corporation of Moody's Investors Service, Inc. (or, if at any time neither
Standard & Poor's Corporation nor Moody's Investors Service, Inc. shall be
rating such obligations, then one of the two highest ratings from other
nationally recognized rating services); (vii) repurchase agreements with respect
to United States government securities, with contract periods not to exceed
thirty (30) days; and (viii) money market mutual funds that invest primarily in
the instruments set forth in the foregoing clauses of this definition.
"CERCLA" means the Comprehensive Environmental Response, Compensation
------
and Liability Act of 1980, 42 U.S.C. (S)(S) 9601 et seq., any amendments
thereto, any successor statutes, and any regulations promulgated thereunder.
"Change of Control" means the occurrence of one or more of the
-----------------
following events:
(a) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act) is or becomes the beneficial owner (as defined in Rules 13d-3 and
13d-5 under the Securities Exchange Act), directly or indirectly, of more than
40% of the total voting power of the Equity Interests of the Borrower;
(b) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, the assets of
the Borrower and its Subsidiaries taken as a whole to any "person" or group of
"persons" for purposes of Section 13(d) of the Securities Exchange Act (other
than to any Wholly Owned Subsidiary of the Borrower); or
(c) the adoption of a plan of liquidation of the Borrower.
"Chief Financial Officer" means the chief financial officer, chief
-----------------------
accounting officer or vice president of finance of the Borrower.
"Claim" means any claim or demand, by any Person, of whatsoever kind
-----
or nature for any alleged Liabilities and Costs, whether based in contract,
tort, implied or express warranty, strict liability, criminal or civil statute,
Permit, ordinance or regulation, common law or otherwise.
"Closing Date" means the date on which all of the conditions precedent
------------
in Sections 5.01 and 5.02 have been satisfied or waived pursuant to Section
---------------------- -------
13.09.
- -----
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and any successor statute and any regulations or guidelines promulgated
thereunder.
6
<PAGE>
"Commercial Letter of Credit" means any documentary letter of credit
---------------------------
issued by an Issuing Bank pursuant to Section 2.04 for the account of the
------------
Borrower, which is drawable upon presentation of documents evidencing the sale
or shipment of goods purchased by the Borrower or any of its Subsidiaries in the
ordinary course of their business.
"Commission" means the Securities and Exchange Commission and any
----------
Person succeeding to the functions thereof.
"Commitment" means, with respect to any Lender, such Lender's
----------
Revolving Loan Commitment and Term Loan Commitment, and as modified from time to
time pursuant to the terms of this Agreement or to give effect to any applicable
Assignment and Acceptance, and "Commitments" means the aggregate principal
-----------
amount of the Commitments of all the Lenders, the maximum amount of which shall
not exceed $700,000,000.
"Commitment Termination Date" means the day which is the earliest of
---------------------------
(A) July 6, 2005, (B) the termination of the Commitments pursuant to Section
-------
11.02(a) and (C) the date of termination in whole of the Revolving Credit
- --------
Commitments pursuant to Section 3.01(a)(ii).
-------------------
"Compliance Certificate" has the meaning ascribed to such term in
----------------------
Section 7.01(c).
- ---------------
"Contaminant" means any waste, pollutant (as that term is defined in
-----------
42 U.S.C. 9601(33) or in 33 U.S.C. 1362(13)), hazardous substance (as that term
is defined in 42 U.S.C. 9601(14)), hazardous chemical (as that term is defined
by 29 CFR Section 1910.1200(c)), toxic substance, hazardous waste (as that term
is defined in 42 U.S.C. 6901), radioactive material, special waste, petroleum,
including crude oil or any petroleum-derived substance, waste, or breakdown or
decomposition product thereof, or any constituent of any such substance or
waste, including, but not limited to polychlorinated biphenyls, and asbestos.
"Contractual Obligation" means, as applied to any Person, any
----------------------
provision of any Securities issued by that Person or any indenture, mortgage,
deed of trust, security agreement, pledge agreement, guaranty, contract,
undertaking, agreement or instrument to which that Person is a party or by which
it or any of its properties is bound, or to which it or any of its properties is
subject.
"Contribution Agreement" means the Contribution Agreement dated as of
----------------------
July 5, 2000 among the Borrower and the Guarantors, as such agreement may be
further amended, supplemented or otherwise modified from time to time.
"Current Assets" means, as at any date of determination, the total
--------------
assets of the Borrower and its Subsidiaries on a consolidated basis which may
properly be classified as current assets in conformity with GAAP.
"Current Liabilities" means, as at any date of determination, the
-------------------
current liabilities of the Borrower and its Subsidiaries on a consolidated basis
which may properly be classified as current liabilities in conformity with GAAP.
"Customary Permitted Liens" means
-------------------------
7
<PAGE>
(a) Liens (other than Environmental Liens and Liens in favor of the
PBGC) with respect to the payment of taxes, assessments or governmental charges
or claims, in all cases which are not yet due or are being contested in good
faith by appropriate proceedings and with respect to which adequate reserves or
other appropriate provisions are being maintained in accordance with GAAP;
(b) statutory Liens of landlords and Liens of suppliers, mechanics,
carriers, materialmen, warehousemen or workmen and other Liens imposed by law
created in the ordinary course of business in all cases for amounts not yet due
or which are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves or other appropriate provisions are being
maintained in accordance with GAAP;
(c) Liens (other than Environmental Liens and any Lien in favor of
the PBGC) incurred or deposits made in the ordinary course of business in
connection with worker's compensation, unemployment insurance or other types of
social security benefits or to secure the performance of bids, tenders, sales,
leases, contracts (other than for the repayment of borrowed money), surety,
appeal and performance bonds, in all cases for amounts not yet due or which are
being contested in good faith by appropriate proceedings and with respect to
which adequate reserves or other appropriate provisions are being maintained in
accordance with GAAP; and
(d) zoning restrictions, easements, licenses, reservations,
covenants, rights-of-way, utility easements, building restrictions and other
similar charges or encumbrances on the use of real property which do not
materially interfere with the ordinary conduct of the business of the Loan
Parties and which do not materially adversely affect the value of the real
property.
"Debt" means, as applied to any Person at any time, all indebtedness,
----
obligations or other liabilities of such Person (i) for borrowed money or
evidenced by debt securities, debentures, acceptances, notes or other similar
instruments, (ii) under profit payment agreements or in respect of obligations
to redeem, repurchase or exchange any Securities of such Person or to pay
dividends in respect of any stock, (iii) reimbursement obligations with respect
to letters of credit issued for such Person's account (to the extent not
accounted for in clause (i) above), (iv) to pay the deferred purchase price of
property or services, except accounts payable and accrued expenses arising in
the ordinary course of business, or (v) in respect of Capital Leases.
"Default" means an event which, with the giving of notice or the lapse
-------
of time, or both, would constitute an Event of Default.
"Default Rate" has the meaning ascribed to such term in Section
------------ -------
4.01(d).
- -------
"Disclosure Letter" means the Disclosure Letter dated as of July 5,
-----------------
2000 from the Borrower to the Administrative Agent and the Lenders.
"DOL" means the United States Department of Labor and any Person
---
succeeding to the functions thereof.
"Dollars" and "$" mean the lawful money of the United States.
------- -
8
<PAGE>
"Domestic Lending Office" means, with respect to any Lender, such
-----------------------
Lender's office, located in the United States, specified as the "Domestic
Lending Office" under its name on the signature pages hereof or on the
Assignment and Acceptance by which it became a Lender or such other United
States office of such Lender as it may from time to time specify by written
notice to the Borrower and the Administrative Agent.
"EBITDA" means, for any Financial Covenant Period, (i) the Net Income,
------
plus the following amounts (without duplication) to the extent deducted in
- ----
calculating such Net Income: (A) depreciation and amortization expense, (B)
interest expense, (C) the provision for income taxes (including federal, state,
local and foreign income taxes), (D) extraordinary or unusual losses, (E) non-
cash portion of nonrecurring losses and charges, (F) other non-operating, non-
cash losses and (G) cash expenditures arising in connection with the
transactions contemplated by the Transaction Documents in an aggregate amount
not to exceed $85,000,000; minus (ii) the following amounts (without
-----
duplication) for such Financial Covenant Period to the extent included in the
calculation of such Net Income: (A) the amount of extraordinary gains, (B)
interest income and (C) other non-operating, non-cash income; each item in
clauses (i) and (ii) calculated pursuant to GAAP for such period.
"Eligible Assignee" means (A) any of the following Persons approved by
-----------------
the Administrative Agent and, unless a Default has occurred and is continuing,
the Borrower, each such approval not to be unreasonably withheld or delayed: (i)
a commercial bank organized under the laws of the United States or any state
thereof; (ii) a savings and loan association or savings bank organized under the
laws of the United States or any state thereof; (iii) a commercial bank
organized under the laws of any other country or a political subdivision
thereof; provided that (x) such bank is acting through a branch or agency
located in the United States or (y) such bank is organized under the laws of a
country that is a member of the Organization for Economic Cooperation and
Development or a political subdivision of such a country; and (iv) any other
entity which is an "accredited investor" (as defined in Regulation D under the
Securities Act) which extends credit or buys loans as one of its businesses,
including, but not limited to, insurance companies, mutual funds and lease
financing companies; and (B) any Lender and any Affiliate or Approved Fund of
any Lender; provided that no Affiliate of the Borrower and no member of the
pharmaceutical industry or other competitor of the Borrower or any of its
Subsidiaries shall be an Eligible Assignee.
"Environmental, Health or Safety Requirement of Law" means
--------------------------------------------------
Requirements of Law derived from or relating to federal, state and local laws,
regulations, ordinances or orders relating to or addressing the environment,
health or safety, including but not limited to any law, regulation, ordinance or
order relating to the use, handling, or disposal of any Contaminant, any law,
regulation, ordinance or order relating to Remedial Action, and any law,
regulation, ordinance or order relating to workplace or worker safety and
health, as such Requirements of Law are promulgated by the specifically
authorized agency responsible for administering such Requirements of Law.
"Environmental Lien" means a Lien in favor of any Governmental
------------------
Authority for (i) any liability under any applicable Environmental, Health or
Safety Requirement of Law or (ii) damages arising from, or costs incurred by
such Governmental Authority in response to, a Release or threatened Release of a
Contaminant into the indoor or outdoor environment.
9
<PAGE>
"Environmental Property Transfer Act" means any applicable Requirement
-----------------------------------
of Law triggered by the transfer, sale, lease, mortgage or closure of any
Property, that conditions, restricts, prohibits or requires any notification or
disclosure for environmental reasons.
"Equipment" means a Person's present and future (i) equipment and
---------
fixtures, including, without limitation, machinery, manufacturing, distribution,
selling, computer system, data processing and office equipment, assembly
systems, tools, molds, dies, fixtures, appliances, furniture, furnishings,
vehicles, vessels, aircraft, aircraft engines, and trade fixtures, (ii) other
tangible personal property, and (iii) any and all accessions, parts and
appurtenances attached to any of the foregoing or used in connection therewith,
and any substitutions therefor and replacements, products and proceeds thereof.
"Equity Interests" means, with respect to any Person, any Capital
----------------
Stock issued by such Person, regardless of class or designation, any limited or
general partnership interest in such Person, or any limited liability membership
interest in such Person, regardless of designation.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and any successor statute.
"ERISA Affiliate" means any (i) corporation which is a member of the
---------------
same controlled group of corporations (within the meaning of Section 414(b) of
the Code) as any Loan Party, (ii) partnership, trade or business (whether or not
incorporated) which is under common control (within the meaning of Section
414(c) of the Code) with any Loan Party, and (iii) "affiliated service group"
(as defined in Section 414(m) of the Code).
"Eurodollar Affiliate" means, with respect to each Lender, the
--------------------
Affiliate of such Lender (if any) set forth below such Lender's name under the
heading "Eurodollar Affiliate" on the signature pages hereof or on the
Assignment and Acceptance by which it became a Lender or such Affiliate of a
Lender as it may from time to time specify by written notice to the Borrower and
the Administrative Agent.
"Eurodollar Interest Payment Date" means (i) with respect to any
--------------------------------
Eurodollar Rate Loan, the last day of each Eurodollar Interest Period applicable
to such Loan and (ii) with respect to any Eurodollar Rate Loan having a
Eurodollar Interest Period in excess of three (3) calendar months, the last day
of each calendar quarter during such Eurodollar Interest Period.
"Eurodollar Interest Period" has the meaning set forth in Section
-------------------------- -------
4.02(b).
- -------
"Eurodollar Lending Office" means, with respect to any Lender, the
-------------------------
office or offices of such Lender (if any) set forth below such Lender's name
under the heading "Eurodollar Lending Office" on the signature pages hereof or
on the Assignment and Acceptance by which it became a Lender or such office or
offices of such Lender as it may from time to time specify by written notice to
the Borrower and the Administrative Agent.
"Eurodollar Rate" means, with respect to any Eurodollar Interest
---------------
Period applicable to a Borrowing of Eurodollar Rate Loans, an interest rate per
annum obtained by dividing (i) the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any
successor page) as the London interbank offered rate
10
<PAGE>
for deposits in U.S. dollars at approximately 11:00 a.m. (London time) on the
Interest Rate Determination Date for such Eurodollar Interest Period for a
period equal to such Eurodollar Interest Period (provided that, if for any
reason such rate is not available, the term "Eurodollar Rate" shall mean, for
any Interest Period for all Eurodollar Rate Advances comprising part of the same
Borrowing, the rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank
offered rate for deposits in Dollars at approximately 11:00 A.M. (London time)
two Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period; provided, however, if more than one rate is
specified on Reuters Screen LIBO Page, the applicable rate shall be the
arithmetic mean of all such rates), by (ii) a percentage equal to 100% minus the
Eurodollar Reserve Percentage. The Eurodollar Rate shall be adjusted
automatically on and as of the effective date of any change in the Eurodollar
Reserve Percentage.
"Eurodollar Rate Loans" means those Loans outstanding which bear
---------------------
interest at a rate determined by reference to the Eurodollar Rate as provided in
Section 4.01(a).
- ---------------
"Eurodollar Reserve Percentage" means, for any day, that percentage
-----------------------------
which is in effect on such day, as prescribed by the Federal Reserve Board for
determining the maximum reserve requirement (including, without limitation, any
emergency, supplemental or other marginal reserve requirement) for a member bank
of the Federal Reserve System in New York, New York with deposits exceeding five
billion Dollars in respect of "Eurocurrency Liabilities" (or in respect of any
other category of liabilities which includes deposits by reference to which the
interest rate on Eurodollar Rate Loans is determined or any category of
extensions of credit or other assets which includes loans by a non-United States
office of any bank to United States residents).
"Event of Default" means any of the occurrences set forth in Section
---------------- -------
11.01 after the expiration of any applicable grace period and the giving of any
- -----
applicable notice, in each case as expressly provided in Section 11.01.
-------------
"Excess Cash Flow" means, for any Fiscal Year other than the Fiscal
----------------
Year ending December 31, 2000, EBITDA for such Fiscal Year, minus cash interest
-----
paid during such Fiscal Year, minus Cash Capital Expenditures made during such
-----
Fiscal Year, minus principal payments made on Funded Debt (excluding Revolving
-----
Loans) during such Fiscal Year, minus taxes paid in cash during such Fiscal
-----
Year, plus the decrease or minus the increase in Working Capital during such
---- -----
Fiscal Year.
"Excluded Sale Proceeds" means (i) proceeds from Asset Sales described
----------------------
in clauses (i), (ii), (iii), (vi) and (viii) of Section 9.02, , (ii) proceeds
------------
from a sale, transfer and other disposition described in clause (iv), (v) or
(vii) of Section 9.02 to the extent such proceeds are reinvested within 180 days
------------
following such sale, transfer or other disposition in Property used by a Loan
Party in the ordinary course of its business, and (iii) proceeds as described in
Section 1.01 of the Disclosure Letter.
"Excluded Securities Proceeds" means (i) proceeds from the issuance of
----------------------------
debt that are used to refinance outstanding indebtedness of the Borrower and
(ii) proceeds from
11
<PAGE>
Attributable Debt, purchase money Indebtedness, Capital Leases and trade
payables, in each case to the extent such Indebtedness is permitted under
Section 9.01.
- ------------
"FDA" shall mean the Food and Drug Administration.
---
"Federal Funds Rate" means, for any period, a fluctuating interest
------------------
rate per annum equal for each day during such period to the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day (or,
if such day is not a Business Day in New York, New York, for the next preceding
Business Day) in New York, New York by the Federal Reserve Bank of New York, or
if such rate is not so published for any day which is a Business Day in New
York, New York, the average of the quotations for such day on such transactions
received by the Administrative Agent from three federal funds brokers of
recognized standing selected by the Administrative Agent.
"Federal Reserve Board" means the Board of Governors of the Federal
---------------------
Reserve System or any Governmental Authority succeeding to its functions.
"Financial Covenant Period" means, in determining compliance with the
-------------------------
financial covenants hereunder, (i) with respect to the fiscal quarter ending
December 31, 2000, the financial information for such fiscal quarter multiplied
by four; (ii) with respect to the fiscal quarter ending March 31, 2001, the
financial information for the fiscal quarters ending December 31, 2000 and March
31, 2001 multiplied by two; (iii) with respect to the fiscal quarter ending June
30, 2001, the financial information for the fiscal quarters ending December 31,
2000, March 31, 2001 and June 30, 2001 multiplied by four-thirds; and (iv) with
respect to each fiscal quarter ending thereafter, the financial information for
the immediately preceding four fiscal quarters ending on the last day of such
fiscal quarter.
"Fiscal Year" means the fiscal year of the Borrower and its
-----------
Subsidiaries ending on December 31 of each calendar year.
"Fixed Charge Coverage Ratio" means, for any Financial Covenant
---------------------------
Period, the ratio of (i) EBITDA less Cash Capital Expenditures made during such
----
period to (ii) Interest Expense plus the regularly scheduled installments of
----
Funded Debt payable during such period.
"Floating Rate Note Indenture" means the Indenture dated December 24,
----------------------------
1997 between Schein and The Bank of New York, as trustee for the issuance of
Schein's Floating Rate Notes.
"Floating Rate Notes" means the Floating Rate Notes due 2004 issued by
-------------------
Schein pursuant to the Floating Rate Note Indenture.
"Forfeiture Proceeding" means any action, proceeding or investigation
---------------------
affecting any of the Loan Parties before any court, governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, or
the receipt of notice by any such party that any of them is a suspect in or a
target of any governmental inquiry or investigation, which may result in an
indictment of any of them or the seizure or forfeiture of any of their property.
12
<PAGE>
"Funded Debt" means Debt which matures more than one year from the
-----------
date of its creation or matures within one year from such date but is renewable
or extendible, at the option of the debtor, to a date more than one year from
such date or arises under a revolving credit or similar agreement which
obligates the lender or lenders to extend credit during a period of more than
one year from such date including, without limitation, all amounts of Funded
Debt required to be paid or prepaid within one year from the date of
determination.
"Funding Date" means the date of the funding of a Loan.
------------
"GAAP" means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the Financial Accounting Standards
Board or in such other statements by such other entity as may be in general use
by significant segments of the accounting profession as in effect from time to
time.
"Governing Documents" means, (a) with respect to any corporation, (i)
-------------------
the articles/certificate of incorporation (or the equivalent organizational
documents) of such corporation, (ii) the by-laws (or the equivalent governing
documents) of the corporation and (iii) any document setting forth the
designation, amount and/or relative rights, limitations and preferences of any
class or series of such corporation's Capital Stock; and (b) with respect to any
general partnership, (i) the partnership agreement (or the equivalent
organizational documents) of such partnership and (ii) any document setting
forth the designation, amount and/or relative rights, limitations and
preferences of any of the partnership interests; and (c) with respect to any
limited partnership, (i) the partnership agreement (or the equivalent
organizational documents) of such partnership, (ii) a certificate of limited
partnership (or the equivalent organizational documents) and (iii) any document
setting forth the designation, amount and/or relative rights, limitations and
preferences of any of the partnership interests; and (d) with respect to any
limited liability company, (i) the certificate of limited liability (or
equivalent filings) of such limited liability company, (ii) the operating
agreement (or the equivalent organizational documents) of such limited liability
company, and (iii) any document setting forth the designation, amount and/or
relative rights, limitations and preferences of any of such company's membership
interests.
"Governmental Authority" means any nation or government, any federal,
----------------------
state, local or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Guaranties" means, collectively, the Guaranties, substantially in the
----------
form of the Guaranties referred to in the List of Closing Documents, executed by
the Guarantors in favor of the Administrative Agent and the Lenders, as such
Guaranties may be amended, supplemented or otherwise modified from time to time.
"Guarantors" means, collectively, (i) from the Closing Date until the
----------
Merger Effective Date, the Initial Guarantors, (ii) on and after the Merger
Effective Date, the Initial Guarantors, Schein and the Specified Schein
Subsidiaries and (iii) Subsidiaries that execute a Guaranty and an
Acknowledgment of New Loan Party from time to time hereafter.
13
<PAGE>
"Holder" means any Person entitled to enforce any of the Obligations,
------
whether or not such Person holds any evidence of Indebtedness, including,
without limitation, the Administrative Agent and each Lender.
"Indebtedness" means, as applied to any Person at any time and without
------------
duplication, (a) all indebtedness, obligations or other liabilities of such
Person (i) for borrowed money or evidenced by debt securities, debentures,
acceptances, notes or other similar instruments, and any accrued interest, fees
and charges relating thereto, (ii) under profit payment agreements or in respect
of obligations to redeem, repurchase or exchange any Securities of such Person
or to pay dividends in respect of any stock, (iii) with respect to letters of
credit issued for such Person's account, (iv) to pay the deferred purchase price
of property or services, except accounts payable and accrued expenses arising in
the ordinary course of business, (v) in respect of Capital Leases or (vi) which
are Accommodation Obligations of the type referred to in clauses (i) through (v)
above; (b) all indebtedness, obligations or other liabilities of such Person or
others secured by a Lien (other than a Customary Permitted Lien) on any property
of such Person, whether or not such indebtedness, obligations or liabilities are
assumed by such Person (but on