-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T8EWdq5SegKKVeCm4UNpvZqfYslWZy3aU6C2b5GP8YMCYRMtn7F2Zgb0vpj31o6F WIF5JcoMkePomXGNp+i6Cg== 0000926372-96-000045.txt : 19960930 0000926372-96-000045.hdr.sgml : 19960930 ACCESSION NUMBER: 0000926372-96-000045 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUREPAC INC/ CENTRAL INDEX KEY: 0000729069 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 042769995 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13588 FILM NUMBER: 96635761 BUSINESS ADDRESS: STREET 1: 200 ELMORA AVE CITY: ELIZABETH STATE: NJ ZIP: 07207 BUSINESS PHONE: 9085279100 MAIL ADDRESS: STREET 1: 200 ELMORA AVENUE STREET 2: 200 ELMORA AVENUE CITY: ELIZABETH STATE: NJ ZIP: 07207 FORMER COMPANY: FORMER CONFORMED NAME: MOLECULON INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MOLECULON BIOTECH INC DATE OF NAME CHANGE: 19860417 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------- FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Fiscal Year Ended June 30, 1996 Commission File Number: 0-13588 FAULDING INC. (FORMERLY, PUREPAC, INC.) (Exact name of registrant as specified in its charter) DELAWARE 04-2769995 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 200 Elmora Avenue, Elizabeth, New Jersey 07207 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908) 527-9100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None - ------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of class) 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 twelve 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 (Section 229.405 of this chapter) is not contained herein, and will 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. / / 15,064,560 Number of shares outstanding of the Registrant's Common Stock as of September 16, 1996 $ 36,161,675 Aggregate market value of the voting stock held by nonaffiliates of the Registrant as of September 16, 1996 PART I (All dollar references are in thousands, unless otherwise indicated.) ITEM 1. BUSINESS (a) & (b) General Development of Business and Financial Information About Industry Segments Faulding Inc. (the "Company"), through Purepac Pharmaceutical Co. ("Purepac"), a wholly-owned subsidiary, is primarily engaged in the development, manufacture and sale of generic oral drug products. Through acquisitions, as noted below, the Company recently has expanded its operations into the generic injectable and medical device businesses. The Company was incorporated in Delaware on September 2, 1982. On February 29, 1996, the Company's name was changed to Faulding Inc in conjunction with the acquisition transaction discussed herein (see "Acquisitions"). The Company's executive offices and principal research, manufacturing and distribution facilities are located at 200 Elmora Avenue, Elizabeth, New Jersey 07207; its telephone number is (908) 527-9100. A majority of the outstanding common stock of the Company is owned by Faulding Holdings Inc. ( Holdings ), a wholly-owned subsidiary of F.H. Faulding & Co. Limited ( Faulding ), a major Australian pharmaceutical company. Acquisitions On February 29, 1996 the Company acquired all of the outstanding capital stock of each of Faulding Medical Device Co. ("FMD"), Faulding Puerto Rico, Inc. ("FPR"), and Faulding Pharmaceutical Co. ("FPC"), collectively the "Acquired Companies," from Holdings in exchange for 2,438,712 shares of its common stock. As part of the acquisition, the Company created a Class B Preferred Stock with 150,000 authorized shares, par value at $.01, all of which were issued to Holdings for a cash purchase price of $100 per share, resulting in net proceeds to the Company. All subsequent references herein to the Company shall be deemed to include the Acquired Companies unless otherwise stated. Acquired Companies FMD is engaged in the design, development and commercialization of disposable medical devices and injectable drug delivery system devices. FPR operates a parenteral product pharmaceutical manufacturing facility producing a variety of generic injectable pharmaceuticals in Aguadilla, Puerto Rico. 2 FPC was established to market the products manufactured by FPR and certain injectable generic drug products manufactured by Faulding and licensed to FPC. (c) Description of Business Introduction A generic drug contains the same active drug substances as and is the therapeutic equivalent of a brand name drug for which patent protection, granted by the United States Patent Office and/or exclusivity granted by the United States Food and Drug Administration (the "FDA"), has expired. Accordingly, a generic drug is marketed under its chemical name or under a brand name promoted by its generic manufacturer. While subject to the same government standards as its brand name equivalent, a generic drug is usually marketed at a substantially lower price. Sales of generic drugs have increased significantly in recent years, due in substantial part to greater awareness and acceptance of generic drugs by physicians, pharmacists and the general public. Among the factors contributing to such increased awareness and acceptance have been the enactment and modification of laws in most states permitting (or in some instances requiring) physicians or pharmacists to substitute generic drugs for brand name drugs, and the publication by the FDA of a list of therapeutically equivalent drugs which provides physicians and pharmacists with the approved sources of generic drug alternatives for each drug product. In addition, since generic drugs are typically sold at prices substantially below those of brand name drugs, the prescribing of generic drugs has been encouraged and, in some instances, required by various government agencies and private health insurers as a cost-saving measure in the purchase of, or reimbursement for, drug products. Products The Company markets generic prescription drugs in oral solid (tablet and capsule), and injectable forms. In accordance with FDA requirements, each dosage strength and form of a generic drug is considered a separate drug product. Classification of the Company's drug products and their number can be generally summarized as follows: antibiotic and anti-infective drugs (6); anti-cancer drugs (6); cardiovascular drugs (37); anti-inflammatories (14); analgesics (10); anti-depressants and tranquilizers (33); and all others (24). Sales of prescription oral drug products and injectable forms represented 84% and 16%, respectively, of the Company's revenue for the year ended June 30, 1996. For the year ended June 30, 1995, prescription oral drugs, injectables, and over-the-counter non-prescription drugs ("OTC") represented 93%, 6% and 1%, respectively. For the year ended June 30, 1994, prescription oral drugs, injectables 3 and OTC represented 96%, 3% and 1%, respectively. A majority of the Company's oral products is sold under its Purepac(R) label and the balance is sold under private label agreements with certain pharmaceutical distributors. The majority of the Company's injectable products is sold under the Faulding(R) label. Nifedipine, the generic version of Pfizer's PROCARDIA (R) cardiovascular product, accounted for 4%, 11% and 13% of the Company's revenue for its years ended June 30, 1996, 1995 and 1994, respectively. In 1992 and subsequent years, additional companies received approval from the FDA to sell nifedipine and entered the market. It is typical in the generic drug industry for the first companies selling a new generic product to initially have a relatively high profit margin, which then decreases as selling prices decline when more companies enter the market. Nifedipine has also received adverse publicity which has reduced overall demand for the immediate release form sold by Purepac. New Product Development Research and development expenditures for the years ended June 30, 1996, 1995 and 1994 amounted to $10,361, $7,729 and $7,562, respectively. During the year ended June 30, 1996, the Company's new product development program remained focused on AB-rated (substitutable) generic equivalents to a number of immediate-release and modified-release oral prescription products, injectable products and drug delivery devices. Purepac: During the year ended June 30, 1996, Purepac received FDA approval for three new generic drug products: diclofenac sodium delayed-release tablets and two immediate release products, indapamide tablets and diflunisal tablets. Diclofenac, a non-steroidal anti-inflammatory product, accounted for 9% of the Company's revenue during the year ended June 30, 1996. During the year ended June 30, 1995, Purepac received FDA approval for one new generic drug product. During the years ended June 30, 1996 and 1995, Purepac filed, respectively, six and two Abbreviated New Drug Applications ("ANDAs") for solid oral dose products. At each of June 30, 1996 and 1995, Purepac, respectively, had seven ANDAs pending approval. No assurance can be given as to the receipt or timing of ANDA approvals and the commercial significance of any products so approved. See "Government Regulation." Acquired Companies: During the year ended June 30, 1996, the Company, through FPC and FMD, filed four ANDAs for the approval of new injectable products and two 4 510K submissions for the approval of new medical devices, and received FDA approval for one anti-cancer drug product, mitomycin, for injection. At June 30, 1996, the Acquired Companies had four ANDAs and two 510K submissions pending approvals. Marketing and Customers The Company markets its products primarily through a sales force of 15 people. The Company's customers include drug wholesalers, national and regional retail drugstore chains, drug distributors and hospitals. At June 30, 1996, the Company had approximately 241 customers. For the year ended June 30, 1996, three customers each accounted for approximately 11%, 10% and 10% of sales. The Company believes that the loss of any two or more of these customers could have a material impact on the Company's financial position, results of operations and cash flow. For the year ended June 30, 1995, three customers each accounted for approximately 12%, 11% and 10% of sales. For the year ended June 30, 1994, two customers each accounted for approximately 12% and 11% of sales. The backlog of firm orders at June 30, 1996 was $1,862, compared with $1,050 at June 30, 1995 and $3,904 at June 30, 1994. The Company does not believe that its backlog is material in the understanding of its historical and prospective operations as annual fluctuations are primarily attributable to unpredictable timing differences in receipt of product orders. The Company anticipates that it will fill all of its June 30, 1996 backlog during its year ending June 30, 1997. Seasonality is not a factor in the Company's business. Manufacturing and Sources of Supply The Company manufactures and packages more than 90% of its products (measured as a percentage of revenue) in its own manufacturing facilities (Refer to Item 2 hereof, Properties). Approximately 5% is sourced under a licensing agreement with and manufactured by Faulding for certain generic injectable products, including anti-cancer products. The balance of the Company's products are manufactured to its specifications by a number of outside contractors. Alternative contract manufacturing sources are available. Raw materials essential to the conduct of the Company's business are pharmaceutical chemicals and packaging components which it purchases in bulk from a variety of sources. Historically, the Company has not experienced any significant difficulty in obtaining the raw materials it requires. If raw materials from a current supplier were to become unavailable, approval for a replacement supplier must be sought from the FDA. The FDA approval process could cause a delay of several months or longer in the manufacture of the product so impacted. 5 Environmental Matters (Dollars in thousands) The Company's operations require it to comply with a broad variety of laws, statutes and regulations which are intended to protect both the environment and the industrial workplace including, among others, the Federal Clean Water Act, Clean Air Act, Resources Conservation and Recovery Act, Emergency Planning and Community Right-to-Know Act, Comprehensive Environmental Response, Compensation and Liability Act and the Occupational and Safety Health Act, as well as their state and local equivalents, if any. The Company believes that it is currently in substantial compliance with all federal, state and local environmental laws and regulations applicable to its business as now conducted. During the years ended June 30, 1996, 1995 and 1994, the Company expended $106, $55 and $24, respectively, for environmental control equipment in connection with the expansion of its manufacturing facilities. Capital expenditures for environmental control equipment for the year ending June 30, 1997 are estimated to be $170. Competition The Company competes with a number of other generic pharmaceutical companies in a highly competitive and fragmented segment of the health-care industry. In addition, many brand name companies with substantially greater financial resources for research, development and marketing are entering the generic market. Principal competitive factors in the generic drug market include regulatory compliance, price, customer service (including prompt fulfillment of orders) and the ability to introduce generic versions of brand name drugs promptly after the date of patent expiration granted by the United States Patent Office and/or exclusivity granted by the FDA. Government Regulation Pharmaceutical manufacturers are subject to extensive regulation by the FDA and other government agencies and authorities. Various federal laws and regulations govern the testing, manufacturing, safety, labeling, packaging, storage, pricing, advertising and promotion of the Company's generic drug products. Failure to comply with such laws and regulations may result in the imposition of fines, recall and/or seizure of products, suspension of manufacturing and FDA refusal to approve new drug applications. 6 Regulatory Approval Process The Company's product line primarily consists of generic drug products which contain the same active ingredient as the innovator (brand name) product. The dosage form, route of administration and strength must be the same as the innovator's product that was previously approved by the FDA under a full New Drug Application (NDA). The NDA includes the results of clinical trials that demonstrate safety and efficacy. Each generic drug product is subject to prior FDA approval through the submission of an ANDA or Abbreviated Antibiotic Drug Application ("AADA"). An ANDA must contain essentially the same information as a full NDA, with the exception of safety and efficacy data. Since a generic drug product contains the same active ingredient in the same amount as the innovator product, it is assumed to have the same safety and efficacy profile. A generic product must be bioequivalent to the innovator product referenced in the application. Applications for most solid oral dosage forms must, therefore, contain data which demonstrate that the proposed generic drug product has the same rate and extent of systemic absorption as the innovator product. An in-vivo bioavailability study is typically conducted in healthy human subjects to meet this requirement. In addition, the generic product must meet appropriate in-vitro (dissolution) criteria. For most injectable drug products, an in-vivo bioequivalence study is not normally required. Quality Control testing of all drug products is conducted to ensure that the product meets compendial (United States Pharmacopeia) standards and in-house specifications, as applicable. Recent Trends in FDA Procedures The FDA has placed greater emphasis on the filing of complete ANDAs by all generic drug product manufacturers, including the Company, and has enunciated its position that it will not accept any application that does not contain all necessary information as specified in the FDA's current guidelines. In addition, the FDA has imposed more stringent requirements on various aspects of the product development process, the need for development of new procedures and increased documentation, all of which extend the time required for manufacturers, including the Company, to prepare and file ANDAs. Further, review times are also being affected by a reduction in staff levels at the FDA. Another major component of the FDA's review process, applicable to all generic drug manufacturers, is the product specific pre-approval inspection in which the FDA focuses on the development of the drug product, the manufacture of exhibit batches and the applicant's capability to manufacture that product in accordance 7 with the methods and specifications defined in the ANDA. This manner of inspection may also potentially lengthen the approval time for ANDAs. A significant new guideline was issued by the FDA in November 1995. This guidance relaxed the regulatory requirements for the implementation of scale-up and post approval changes ("SUPAC"). This guideline is intended to save the industry considerable time and money in manufacturing efficiencies. Good Manufacturing Practices As a manufacturer of pharmaceutical products, the Company is also subject to current Good Manufacturing Practices ("cGMP") standards promulgated by the FDA. Failure to comply with such standards may result in, among other actions, the suspension of production and possibly the seizure of non- complying products. Medicaid Prudent Pharmaceutical Purchasing Act of 1991 Effective January 1, 1991, all generic pharmaceutical manufacturers were required to pay a rebate, equal to 10% of the manufacturer's average net selling price, for each prescription of its products reimbursed by the states under Medicaid. As of January 1, 1994, the rebate percent increased to 11%. Proposed Health Care Regulation Numerous proposals for health care regulation and reform have recently been proposed at both the federal and state levels. These proposals, generally, seek to reduce the cost of health care and increase its availability and efficiency. It cannot be determined at this time which, if any, of such proposals will be enacted and, to the extent enacted, what effect such proposals will have on the price, distribution and marketing of pharmaceutical products, including those of the Company. Employees At June 30, 1996, the Company employed 465 full-time employees. Of these, 58 were executive and administrative personnel. Personnel primarily engaged in research, product development and regulatory activities totaled 77. Marketing and sales personnel totaled 29. Production and distribution personnel totaled 215, while quality assurance and quality control totaled 86. Collective bargaining agreements between the Company and Locals 575 and 815 of the International Brotherhood of Teamsters expiring in January 1997 and January 1999, respectively, covered 119 employees as of June 30, 1996. The Company has not experienced a material work stoppage in the past five years and believes that its current labor relations are satisfactory. 8 ITEM 2. PROPERTIES The Company's executive offices, as well as research, production, principal warehouse and distribution facilities, are housed in a 245,000 square foot facility with two adjoining acres of parking space in Elizabeth, New Jersey. In addition, the Company leases a 13,000 square foot distribution center in Sparks, Nevada and a 38,000 square foot warehouse and office building in Linden, New Jersey, a 3,000 square foot office and development laboratory in Scottsdale, Arizona and a 68,000 square foot facility, comprised of seven buildings in Aguadilla, Puerto Rico. The Company believes that its facilities will be sufficient to satisfy its anticipated needs for the proximate future. ITEM 3. LEGAL PROCEEDINGS On September 11, 1995, the United States District Court for the District of New Jersey granted the Company's motion to dismiss a complaint filed against the Company and certain of its former senior executives in a lawsuit entitled Dechter vs. Purepac, Inc., Robert H. Bur and Russell J. Reardon, 94 Civ. 6195. Pursuant to the court's decision, the plaintiffs had the opportunity to file a motion with the court to submit a proposed amended complaint. The plaintiffs elected not to file such a motion, thereby terminating such litigation. Pursuant to an agreement dated as of December 31, 1995, the Company has settled certain litigation entitled Merck & Co., Inc. v. Purepac Pharmaceutical Co. Case No. 95-495 in the United States District Court for the District of Delaware. In accordance with such agreement, the Company is to receive a cash settlement. The proceeds will be payable in three equal annual installments. In addition the Company has agreed not to pursue the marketing or sale of the pharmaceutical product which was the subject of the litigation in the United States until the patent expiration, currently expected in the year 2006. On August 21, 1996, an action was commenced against the Company, Purepac, Faulding and Zeneca, Inc. in the United States District Court for the District of Delaware entitled Purdue Pharma L.P. and the Purdue Frederick Company vs. F.H. Faulding & Co. Limited, Faulding Inc., Purepac Pharmaceutical Co. and Zeneca Inc., 96 Civ.427. The complaint alleges that the manufacture and marketing in the United States of KADIAN (TM) infringes a patent assigned to one of the plaintiffs and constitutes unfair competitive practices under Federal and State law. The Company, through Purepac, manufactures KADIAN (TM) pursuant to a contract manufacturing agreement with Faulding. Zeneca Inc. is the U.S. distributor of KADIAN (TM). The complaint seeks, among other things, an order enjoining the Company and Purepac from the commercial manufacture of KADIAN (TM) and treble and punitive damages in the event that the defendants have violated Federal or State unfair competitive and deceptive trade practices law. 9 While the Company has not yet been served in the action , the Company believes the allegations in the complaint to be entirely without merit and intends, in cooperation with its co-defendants, to vigorously defend this action. The commencement of the action did not impact the launch of KADIAN (TM) . The Company is involved in litigation incidental to the conduct of its business, in addition to the above matters, and does not believe that the ultimate adverse resolutions of any, or all, thereof would have a material adverse effect on its financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the last quarter of the fiscal year ended June 30, 1996. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The Company's Common Stock was traded on the Nasdaq National Market System ("Nasdaq/NMS") under the symbol PURE through February 29, 1996. Effective February 29, 1996, the Company's name was changed from Purepac, Inc. to Faulding Inc., and the Nasdaq/NMS trading symbol, as of March 1, 1996, was changed from PURE to FAUL. The following table sets forth the range of high and low closing sales prices of the Company's common stock on the Nasdaq/NMS. FOR THE QUARTER ENDED: HIGH LOW - ---------------------------------------------------------------- Fiscal 1995 September 30, 1994 $ 14.250 $ 8.000 December 31, 1994 16.250 10.125 March 31, 1995 11.625 8.750 June 30, 1995 11.375 8.375 Fiscal 1996 September 30, 1995 10.875 7.750 December 31, 1995 8.750 4.625 March 31, 1996 7.750 5.000 June 30, 1996 7.125 4.125 - ---------------------------------------------------------------- 10 (b) Holders of Common Stock The number of holders of record of the Company's common stock at September 16, 1996 was 455. (c) Dividends The Company has neither declared nor paid any dividends on its shares of common stock since its inception. Any decision as to the future payment of common stock dividends will depend on the earnings and financial position of the Company and such other factors as the Board of Directors deems relevant. No dividends are payable on the common stock until all declared and accrued dividends have been paid in full on the Company's issued and outstanding shares of preferred stock, all of which are owned by Holdings. (Refer to Note 11 of the Notes to Consolidated Financial Statements.) ITEM 6. SELECTED FINANCIAL DATA (Dollars in Thousands Except Per Share Amounts)
Year Ended June 30, --------------------------------------------------------- 1996 1995 1994 1993 1992 --------------------------------------------------------- OPERATING DATA: restated restated Net sales $ 75,784 $ 64,905 $ 71,952 $ 70,508 $ 64,531 Income (loss) before preferred stock dividends (5,001) (1,618) 3,992 9,160 14,979 Preferred stock dividends 2,307 2,080 2,080 2,080 2,081 Net income (loss), available for common stock $ (7,308) $(3,698) $ 6,061(a) $ 7,080 $ 12,776(b) Net income (loss) per common share, primary (.49) $ (.25) $ .41 $ .57 $ 1.05 BALANCE SHEET DATA: restated --- --- --- Working capital $ 36,296 $ 27,005 $ 24,221 $ 23,150 $ 20,460 Total assets 98,678 85,863 67,267 63,017 52,269 Long-term debt --- --- --- --- --- Stockholders' equity $ 82,923 $ 72,079 $ 54,860 $ 48,060 $ 39,699
11 The February 29, 1996 acquisitions of the Acquired Companies (see "Item 1) was accounted for as similar to a pooling of interests. Therefore, financial operating data presented for the years ended June 30, 1995 and 1994 and balance sheet data as of June 30, 1995 have been restated as if the acquisitions took place as of July 1, 1993. The data reflects the accounts of Faulding Inc. and the Acquired Companies. Financial operating data presented for the years ended June 30, 1993 and 1992 and balance sheet data as of June 30, 1994, 1993 and 1992 has not neen restated as the restated amounts would not significantly differ the amounts presented. As FPR and FPC did not commence operations until April 7, 1995, the Acquired Companies' operations reflect only the results of FMD for the year ended June 30, 1994. The year ended June 30, 1995 reflects the year's results of FMD and less than three months' results of FPR and FPC. (a) Net income available for common stock for the year ended June 30, 1994 included the favorable cumulative effect of a change in accounting for income taxes of $4,149. (b) Net income available for common stock for the year ended June 30, 1992 included the unfavorable cumulative effect on prior years of a change in the method of accounting for income taxes of $122. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in thousands) Overview: Acquisitions On February 29, 1996 the Company acquired all of the outstanding capital stock of each of Faulding Medical Device Co. ("FMD"), Faulding Puerto Rico, Inc. ("FPR"), and Faulding Pharmaceutical Co. ("FPC"), collectively the "Acquired Companies," from Faulding Holdings Inc. (the Company's majority stockholder) in exchange for 2,438,712 shares of its common stock. This acquisition transaction was accounted for as similar to a pooling of interests and, therefore, commencing July 1, 1993 financial statements for the periods presented have been restated as if the acquisition took place at the beginning of the earliest period presented. The financial statements reflect the accounts of the Company (including Purepac) and the Acquired Companies. Since the acquisitions were accounted for as similar to a pooling of interests, acquisition expenses of $1,043 were charged against the results of operations during the year ended June 30, 1996. 12 Results of Operations Year Ended June 30, 1996 Compared with the Year Ended June 30, 1995 The following sets forth the pre-tax operating results of , respectively, the Company prior to its acquisition of the Acquired Companies. STATEMENTS OF OPERATIONS - Purepac
Three Months Ended Year Ended June 30, June 30, ---------------------- --------------------- 1996 1995 1996 1995 - ----------------------------------------------------------------------------- Net Sales $ 19,667 $ 14,319 $ 63,822 $ 61,146 Cost of sales 12,676 11,391 47,112 46,476 - ----------------------------------------------------------------------------- Gross profit 6,991 2,928 16,710 14,670 - ----------------------------------------------------------------------------- Expenses: Selling, general and administrative 2,746 2,504 8,997 9,817 Research and development 2,331 1,632 9,054 6,741 Acquisition Expenses 25 --- 1,043 --- Restructuring Costs 184 --- 842 --- - ----------------------------------------------------------------------------- Total expenses 5,286 4,136 19,936 16,558 - ----------------------------------------------------------------------------- Income (loss) from operation 1,705 (1,208) (3,226) (1,888) Other income (expense), net 24 (39) 1,625 (63) - ----------------------------------------------------------------------------- Income (loss) before income taxes 1,729 (1,247) (1,601) (1,951) - -----------------------------------------------------------------------------
12 STATEMENTS OF OPERATIONS - Acquired Companies
Three Months Ended Year Ended June 30, June 30, ---------------------- --------------------- 1996 1995 1996 1995 - ----------------------------------------------------------------------------- Net Sales $ 3,905 $ 2,066 $ 11,962 $ 3,759 Cost of sales 3,420 1,137 11,285 2,812 - ----------------------------------------------------------------------------- Gross profit 485 929 677 947 - ----------------------------------------------------------------------------- Expenses: Selling, general and administrative 880 374 2,867 374 Research and development 289 503 1,307 988 - ----------------------------------------------------------------------------- Total expenses 1,169 877 4,174 1,362 - ----------------------------------------------------------------------------- Income (loss) from operation (684) 52 (3,497) (415) Other income (expense), net --- (221) (603) (326) - ----------------------------------------------------------------------------- Income (loss) before income taxes (684) (169) (4,100) (741) - -----------------------------------------------------------------------------
The discussion below relates to the segregated results presented above. Purepac Results of Operations Net sales for the three and twelve month periods ended June 30, 1996 were $19,667 and $63,822, respectively, compared with $14,319 and $61,146 for the 13 corresponding 1995 periods. The increase in the fourth quarter's result of 37% over the prior year's period is primarily due to initial net sales of diclofenac, which was approved in March 1996. Diclofenac sales in the fourth quarter represented 23% of the quarter's sales. For the twelve months ended June 30, 1996, net sales increased by 4%, due principally to the diclofenac sales offset by competition impacting on Purepac's mature product line, which includes the product nifedipine. In addition to diclofenac, FDA approvals of diflunisal and indapamide were received by Purepac, respectively, in May and June 1996. In addition, initial sales from the contract manufacturing of KADIAN (TM) for Faulding Services Inc. were recorded in the quarter ended June 1996. Faulding Services Inc. is a 100% owned subsidiary of Holdings. Gross profit for the three and twelve month periods ended June 30, 1996 were $6,991 and $16,710, respectively, compared with $2,928 and $14,670 for the corresponding 1995 periods. Gross profit as a percentage of net sales for the three and twelve month periods ended June 30, 1996 were 36% and 26%, compared with 20% and 24% for the corresponding periods in the prior year. For the three and twelve month periods respectively, the increase in gross profit was due to the sales of diclofenac late in the third fiscal quarter 1996, partially offset by price erosion due to competition impacting on Purepac's mature product line. Selling, general and administrative expenses for the current three and twelve month periods were $2,746 and $8,997, respectively, compared to the corresponding prior year's respective amounts of $2,504 and $9,817. Current period expenses as a percentage of net sales were 14% and 14%, respectively, compared with 18% and 16% for the corresponding prior year's periods. In addition, Purepac incurred $1,043 in acquisition expenses in the twelve months to June 30, 1996 related to the purchase of the Acquired Companies, and an additional $842 in costs related to the restructuring of the Purepac business, primarily organizational and personnel changes. No such acquisition or restructuring costs were incurred in the prior financial year. Research and development expenses for the current three and twelve month periods were $2,331 and $9,054, respectively. This equates to 12% and 14% of net sales. Expenses for the prior year's corresponding periods were $1,632 (11%) and $6,741 (11%). The increase in research and development expenses was mainly due to an increase in biostudies costs required as part of the ANDA submission process to the FDA, in addition to the recruitment of key new scientific personnel. Other income/(expense) for the current three and twelve month periods were $24 and $1,625, respectively, compared with ($39) and ($63), respectively, in the prior year's corresponding periods. The $1,625 for the current twelve month period is mainly attributable to the settlement of a patent litigation by Purepac which was recorded in the quarter ended December 31, 1995 and is non-recurrent. 14 Net income/(loss) before income tax for the current three and twelve month periods were $1,729 and $(1,601), respectively. If the acquisition and restructuring costs were excluded for the current year's reported periods, the net income would be $1,938 and $284. These results compare to net losses before income tax for the prior year's corresponding periods of $1,247 and $1,951. The results for the three and twelve month periods ended June 30, 1996 were affected by negative pricing pressures within the oral generic pharmaceutical industry, partly counterbalanced by new product approvals for diclofenac, diflunisal, indapamide and contract manufacturing income for KADIAN (TM). The future financial results will continue to be dependent on the ability of income from sales of new products to counter ongoing price erosion within the industry. Acquired Companies The Acquired Companies became wholly owned subsidiaries of Faulding Inc. effective March 1, 1996. FPC and FPR did not commence operations until April 7, 1995; hence the prior year represents the full-year operating results of FMD and less than three months operating results for FPC and FPR. Current and prior year net sales for FMD relate to a distribution agreement with a third party -- which was terminated as of December 31, 1995 -- for products sourced from F.H. Faulding & Co. Limited ("Faulding"), the beneficial majority stockholder of Faulding Inc. The products previously sold under that agreement, together with additional products sourced from Faulding, are now being sold by FPC. Consequently, comparison with the prior year is not representative and hence the following analysis principally relates to current year operating results. Net sales for the three and twelve month periods ended June 30, 1996 were $3,905 and $11,962, respectively. Of these net sales, 51% and 70%, respectively, were related to products manufactured at the FPR production facility in Aguadilla, Puerto Rico. These products were sold either under contract manufacturing agreements or by FPC to its customers in the USA. The majority of the remainder of the net sales comprises products manufactured by and licensed from Faulding. Net sales in the current three month period included mitomycin, which sales commenced in the third quarter, licensed from Faulding, and approved by the FDA for marketing in November 1995. Gross profits for the three and twelve month periods ended June 30, 1996 were $485 and $677, respectively. Gross profits were unfavorably impacted by both under utilization of the production facility in Puerto Rico and production related expenses incurred by FMD, which did not record any related net sales during the periods. Gross profit in the current three month period included earnings from the sales of mitomycin. 15 Selling, general and administrative expenses for the current three and twelve month periods were $880 and $2,867, respectively, representing principally selling expenses associated with FPC. Research and development expenses include the development costs associated with FMD. Expenses for the current three and twelve months were $289 and $1,307, respectively. Net loss before income tax for the three and twelve month periods to June 30, 1996 were $684 and $4,100, respectively. Of the current twelve month loss before income tax, $3,005 was incurred prior to the Acquired Companies becoming wholly owned subsidiaries of the Company. Consolidated Income Tax Benefit The calculation of the provision (benefit) for income taxes of the Company, which includes Purepac and the Acquired Companies, has been prepared in accordance with accounting for the acquisitions as similar to a pooling of interests consistently applying Statement of Financial Accounting Standard No. 109 ("SFAS109"). For the three month period ended June 30, 1996, Purepac's net income before income taxes resulted in the recording of an income tax provision of $671. Purepac's net loss before income tax for the twelve month current period resulted in the recording of an income tax benefit of $252. For the Acquired Companies, only the net loss before income tax since acquisition can be consolidated into the Company's income tax returns. As a result, an income tax benefit of $291 and $449 has been included in the three and twelve month current periods, respectively. The income tax benefit of the net losses prior to acquisition have been fully reserved against as the recovery of these losses is dependent on future taxable income of each of the respective companies, which at present cannot be assured. Year Ended June 30, 1995 Compared With the Year Ended June 30, 1994 (As restated) Net sales for the year ended June 30, 1995 was $64,905 compared with $71,952 for the prior year ended June 30, 1994. The decrease reflects lower sales of certain mature products including nifedipine, primarily due to declines in selling prices and to a lesser degree volume reductions of some products as a result of competitive pressures, partially offset by increased sales of several new products. The nifedipine products accounted for 11% of net sales for the year compared with 13% for the prior year. 16 Gross profit for the year was $15,618 compared with $23,417 for the prior year, a decline of $7,799 (33%). The gross profit as a percent of net sales for the year ended June 30, 1995 was 24% compared with 33% for the prior year ended June 30, 1994. The decline was attributable primarily to lower sales due to increased competition and to a lesser extent to higher raw material costs. The selling, general and administrative expenses for the year ended June 30, 1995 were $10,191 compared with $9,410 for the prior year ended June 30, 1994, an increase of $782 (8%). The expense as a percent of net sales was 16% compared with 13% for the prior year. The increase was primarily due to higher personnel expenses. The research and development expenses for the year remained relatively constant at $7,729 compared with the prior year expense of $7,562. The expense as a percent of net sales for the year ended June 30, 1995 was 12% compared with 11% for the prior year ended June 30, 1994. The steady level of expense reflects the continuing commitment to new product development. Other income/(expense) of ($390) for the year ended June 30, 1995 included interest expense of $432 partially offset by interest income of $42. The corresponding prior year other income of $149 included interest income of $102 and income of $200 from the sale of the Company's Poroplastic technology to Faulding, partially offset by interest expense of $153. The interest income decline was primarily due to the reduction of cash available for investment. The interest expense for both years primarily includes the interest expense of the Acquired Companies as well as the revolving credit agreement fees of the Company. The effective income tax (benefit) rate for the year ended June 30, 1995 was (40%) compared with 39% for the year ended June 30, 1994 before the cumulative effect of a change in accounting for income taxes. Net loss for the year ended June 30, 1995 before preferred stock dividends was $1,618 compared with net income for the prior year before preferred stock dividends of $3,992. Financial Condition, Liquidity and Capital Resources The Company had $1,897 in cash and cash equivalents at June 30, 1996, compared with $1,225 at June 30, 1995. The current year's increase of $672 resulted primarily from $15,000 in cash provided by the issuance of the Class B preferred stock associated with the February 29, 1996 acquisitions and $4,769 provided by additions to paid-in capital. This was offset by $13,302 used for operating activities, $3,795 for investments in property, plant and equipment and $2,000 to repay bank loans. 17 A comparison of the balance sheet accounts at June 30, 1996 to the June 30, 1995 balances shows the following to be noteworthy: Accounts receivable increased by $6,019 due to the higher sales level, primarily in the last quarter. Included in the reserves for doubtful accounts and sales allowances is the allowance for sales returns, allowances and discounts of $3,135 at June 30, 1996 compared with $2,497 at June 30, 1995, an increase of $638. This increase is primarily due to increases of $427 in the provision for floor stock price adjustments and $195 in the provision for credits owed to direct source buying groups. The increase in the provision for such allowances had an adverse effect on net sales and operations with no effect on cash flows. Inventory increased by $5,658 primarily in raw materials due to higher sales volumes and in anticipation of increased production. In addition, inventory levels within FPC increased to meet anticipated sales of the products licensed from Faulding. Due to affiliated companies increased by $2,663 primarily due to the additional products licensed by and purchased from Faulding by FPC, primarily during the prior six month period. The accrued preferred dividends payable to Holdings, of $689 for the three month period ended June 30, 1996 was subsequently paid on July 1, 1996. In October 1995, the Company made the decision to restructure certain aspects of its business. This restructuring was considered necessary to prepare the Company to be more competitive in the oral generic pharmaceutical industry. Also, this restructuring is expected to better position the Company to integrate the Acquired Companies. Costs associated with this restructuring, including severance payments, totaled $842. The Company believes that its current cash resources, anticipated operating cash flows and funds available under a revolving credit and loan arrangement with a bank will be sufficient to fund its working capital needs for the next 24 months. In addition, it is not anticipated that the Acquired Companies will generate adequate revenues to finance their combined operating expenses until at least 1998. Depending upon the timing of the Company's cash flow requirements, which is highly dependent upon the unpredictable timing of the receipt of FDA product approvals, the future cash flow needs of the Company could exceed the Company's current cash resources and its available credit under its existing credit facilities. As of June 30, 1996, the Company had $1,897 in cash, plus approximately $15,000 of available borrowings under its existing credit facilities. 18 Accordingly, the Company may need to seek additional credit facilities or to seek additional funding from sales of its securities or from other sources. The Company anticipates that it would be able to increase its credit facilities or obtain financing from other sources, should it require additional cash flow to support the commercialization of new products following receipt of FDA approval therefor. However, there can be no assurance that such financing will be available when required, if at all, or will be available upon terms the Company may deem commercially reasonable. New Accounting Pronouncements In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 "Accounting For Stock Based Compensation" ("SFAS 123") which requires that an employer's financial statements include expanded disclosure regarding stock-based employee compensation arrangements. The Company is evaluating the requirements of SFAS 123, which must be adopted during the Company's fiscal year ended June 30, 1997. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 121 Accounting For The Impairment Of Long-Lived Assets ( SFAS 121 ), which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. To determine a loss, if any, to be recognized, the book value of the asset would be compared to the market value or expected future cash flow value. The Company is required to adopt SFAS 121 for the fiscal years beginning after December 15, 1995. During fiscal year ended June 30, 1997, the Company will adopt SFAS 121 and anticipates, based upon information currently available, that it will not have a material impact on its results of operations and financial position. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," was issued by the Financial Accounting Standards Board in February 1992. SFAS 109 is effective for years beginning after December 15, 1992. The Company adopted SFAS 109, effective July 1, 1993. This statement superseded SFAS 96, "Accounting for Income Taxes." The cumulative effect of adopting SFAS 109 on the Company's financial statements, for the year ended June 30, 1994 increased income by $4,149 with a corresponding increase in the deferred tax asset. (Refer to Note 14 of the Notes to Consolidated Financial Statements.) 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS Page Report of Independent Public Accountants Deloitte & Touche LLP........................................21 Consolidated Balance Sheets June 30, 1996 and 1995.......................................22 Consolidated Statements of Operations Year ended June 30, 1996, 1995 and 1994......................23 Consolidated Statements of Stockholders' Equity Year ended June 30, 1996, 1995 and 1994......................24 Consolidated Statements of Cash Flows Year ended June 30, 1996, 1995 and 1994..................... 25 Notes to Consolidated Financial Statements...........................26 FINANCIAL STATEMENT SCHEDULE Schedule II: Valuation and Qualifying Accounts Year ended June 30, 1996, 1995 and 1994......................47 20 [ LETTERHEAD OF DELOITTE & TOUCHE ] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Faulding Inc.: We have audited the accompanying consolidated balance sheets of Faulding Inc. and subsidiaries as of June 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Faulding Inc. and its subsidiaries at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such a financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 14 to the financial statements, the Company changed its method of accounting for income taxes effective July 1, 1993, to conform with the Statement of Financial Accounting Standards No. 109. Deloitte & Touche LLP August 16, 1996(August 27, 1996 as to Note 16) Parsippany, New Jersey 21 CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, -------------------------------------- 1996 1995 - --------------------------------------------------------------------------- ASSETS - --------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 1,897 $ 1,225 Accounts receivable, trade (less reserves for doubtful accounts and sales allowances of $3,355 and $2,616 at June 30, 1996 and 1995, respectively) 17,118 11,099 Inventory (Note 3) 26,496 20,838 Due from affiliated companies (Note 5) --- 1,816 Other current assets 3,315 2,298 Deferred income taxes (Note 14) 3,225 3,513 - --------------------------------------------------------------------------- TOTAL CURRENT ASSETS 52,051 40,789 - --------------------------------------------------------------------------- Property, plant and equipment, net (Note 4) 41,510 40,565 Other assets (Note 5) 4,279 3,595 Deferred income taxes (Note 14) 838 914 - --------------------------------------------------------------------------- TOTAL ASSETS $ 98,678 $ 85,863 =========================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------- Current liabilities: Accounts payable $ 7,553 $ 5,684 Due to affiliated companies (Note 5) 847 --- Loan payable to bank (Note 7) --- 2,000 Accrued expenses (Note 6) 6,666 5,580 Accrued preferred dividends (Note 11) 689 520 - --------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 15,755 13,784 - --------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 12) --- --- - --------------------------------------------------------------------------- "Stockholders' equity (Notes 8, 9, 10 and 11): Class A convertible preferred stock; par value $.01, authorized 1,834,188 shares; issued and outstanding 834,188 (liquidation value $24,475) 8 8 Class B convertible preferred stock; par value $.01, authorized 150,000 shares; issued and outstanding 150,000 (liquidation value $15,000) 2 --- Common stock; par value $.01, authorized 35,000,000 shares; issued and outstanding 15,064,560 and 15,019,935 at June 30, 1996 and 1995, respectively 151 150 Capital in excess of par value 57,139 44,302 Retained earnings 25,623 27,619 - --------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 82,923 72,079 - --------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 98,678 $ 85,863 ===========================================================================
The accompanying notes are an integral part of these consolidated financial statements. 22 CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share amounts)
Year Ended June 30, ------------------------------------------------ 1996 1995 1994 ------------------------------------------------ NET SALES $ 75,784 $ 64,905 $ 71,952 Cost of sales 58,397 49,287 48,535 - ----------------------------------------------------------------------------------------------- Gross profit 17,387 15,618 23,417 - ----------------------------------------------------------------------------------------------- Expenses: Selling, general and administrative 11,864 10,191 9,410 Research and development 10,361 7,729 7,562 Acquisition expenses 1,043 --- --- Restructuring costs 842 --- --- - ----------------------------------------------------------------------------------------------- Total expenses 24,110 17,920 16,972 - ----------------------------------------------------------------------------------------------- Income (loss) from operations (6,723) (2,302) 6,445 Other income (expense), net 1,021 (390) 149 - ----------------------------------------------------------------------------------------------- Income (loss) before income taxes (5,702) (2,692) 6,594 Provision (benefit) for income taxes (Note 14) (701) (1,074) 2,602 - ----------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE PREFERRED STOCK DIVIDENDS (5,001) (1,618) (3,992) Preferred stock dividends 2,307 2,080 2,080 - ----------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR INCOME TAXES (7,308) (3,698) 1,912 Cumulative effect of a change in accounting for income taxes (Note 14) --- --- 4,149 - ----------------------------------------------------------------------------------------------- NET INCOME (LOSS), AVAILABLE FOR COMMON STOCK $ (7,308) $ (3,698) $ 6,061 =============================================================================================== PRIMARY EARNINGS PER COMMON SHARE (NOTE 2) Income (loss) before cumulative effect of a change in accounting for income taxes $ (.49) $ (.25) $ .13 Cumulative effect of a change in accounting for income taxes (Note 14) --- --- .28 - ----------------------------------------------------------------------------------------------- Net income (loss) $ (.49) $ .25 $ .41 =============================================================================================== Weighted average number of common shares outstanding 15,039,391 14,977,248 14,906,896 - ----------------------------------------------------------------------------------------------- EARNINGS PER SHARE ASSUMING FULL DILUTION (NOTE 2): Income before cumulative effect of a change in accounting for income taxes $ .20 Cumulative effect of a change in accounting for income taxes (Note 14) .21 - ----------------------------------------------------------------------------------------------- Net income $ .41 =============================================================================================== Weighted average number of fully diluted shares 19,997,322 - -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 23 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands except share data)
Common Stock Preferred Stock (Note 10) (Note 11) Capital in ------------------------------------------- Excess of Retained Shares Amount Shares Amount Par Value Earnings Total - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1993 as previously reported 12,427,848 $ 124 834,188 $ 8 $ 27,909 $ 20,019 $ 48,060 Common stock issued pursuant to acquisitions (Note 2) 2,438,712 24 --- --- 19,497 --- 19,521 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1993 as restated 14,856,560 $ 148 834,188 $ 8 $ 47,406 $ 20,019 $ 67,581 - ------------------------------------------------------------------------------------------------------------------------------ Common stock issued pursuant to stock grant plan (Note 9) 82,250 1 --- --- (1) --- --- Class A preferred stock dividend (Note 11) --- --- --- --- (2,080) --- (2,080) Stock grant amortization --- --- --- --- 371 --- 371 Reduction of income tax liability from exercise of stock options (Note 8) --- --- --- --- 62 --- 62 Pooling of interest adjustement (Note 2) --- --- --- --- --- 306 306 Net income --- --- --- --- --- 8,141 8,141 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1994 14,948,810 $ 149 834,188 $ 8 $ 45,758 $ 28,466 $ 74,381 - ------------------------------------------------------------------------------------------------------------------------------ Common stock issued pursuant to stock grant plan (Note 9) 71,125 1 --- --- (1) --- --- Class A preferred stock dividend (Note 11) --- --- --- --- (2,080) --- (2,080) Stock grant amortization --- --- --- --- 367 --- 367 Reduction of income tax liability from issuance of stock pursuant to stock grant plan (Note 9) --- --- --- --- 258 --- 258 Pooling of interest adjustment (Note 2) --- --- --- --- --- 771 771 Net income --- --- --- --- --- (1,618) (1,618) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1995 15,019,935 $ 150 834,188 $ 8 $ 44,302 $ 27,619 $ 72,079 - ------------------------------------------------------------------------------------------------------------------------------ Preferred stock Class B issued --- --- 150,000 2 14,998 --- 15,000 Common stock issued pursuant to stock grant plan 44,625 1 --- --- (1) --- --- Class A preferred stock dividend (Note 11) --- --- --- --- (2,080) --- (2,080) Class B preferred stock dividend --- --- --- --- (227) --- (227) (Note 11) Stock grant amortization --- --- --- --- 110 --- 110 Reduction of income tax liability from issuance of stock pursuant to stock grant plan (Note 9) --- --- --- --- 37 --- 37 Pooling of interest adjustment (Note 2) --- --- --- --- --- 3,005 3,005 Net income (loss) --- --- --- --- --- (5,001) (5,001) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1996 15,064,560 $ 151 984,188 $ 10 $ 57,139 $ 25,623 $ 82,923 ==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended June 30, ------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (loss), Available for Common Stock $ (7,308) $ (3,698) $ 6,061 Adjustments To Reconcile Net Income (loss) To Net Cash Provided By (Used For) OPERATING ACTIVITIES: Depreciation and amortization 2,862 2,494 2,126 Compensation expense - stock grants 110 366 371 Provision for deferred taxes (including cumulative effect of accounting change) --- --- (2,834) Deferred income tax, asset 364 72 --- INCREASE (DECREASE) IN CASH FROM: Accounts receivable, trade (6,020) 481 (1,020) Inventory (5,658) (1,649) (4,272) Other current assets (928) (661) (188) Other assets (696) (174) --- Accounts payable 1,869 (1,383) 99 Accrued expenses 1,086 1,168 (1,063) Accrued income taxes (51) (1,175) (1,066) Accrrued dividends 169 --- --- Due to/from affiliates 899 (4,907) 183 - ------------------------------------------------------------------------------------------------ TOTAL ADJUSTMENTS (5,994) (5,368) (7,664) - ------------------------------------------------------------------------------------------------ Net Cash Provided By (Used For) Operating Activities (13,302) (9,066) (1,603) - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (3,795) (15,241) (5,880) - ------------------------------------------------------------------------------------------------- Net Cash Provided By (Used For) Investing Activities (3,795) (15,241) (5,880) - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from bank --- 2,000 --- Repayments to bank (2,000) --- --- Proceeds from issuance of preferred stock 15,000 --- --- Proceeds from additions to paid in capital 4,769 20,344 --- - ------------------------------------------------------------------------------------------------- Net Cash Provided By (Used For) Financing Activities 17,769 22,344 --- - ------------------------------------------------------------------------------------------------- Increase (Decrease) In Cash and Cash Equivalents $ 672 $ (1,963) $ (7,483) ================================================================================================= Cash and cash equivalents, beginning of year 1,225 3,188 10,671 - ------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 1,897 $ 1,225 $ 3,188 ================================================================================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid (received) during the year for: Interest $ 214 $ 77 $ 29 Income taxes $ (857) $ 89 $ 2,355 - -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) 1. Organization and Business The Company is a manufacturer of oral generic drugs for sale primarily to drug wholesalers, drugstore chains, and distributors in the United States. After the February 29, 1996 acquisitions (as discussed herein), the Company has expanded its operations into the manufacturing and distribution of generic injectable drugs and medical devices, which products are targeted to be marketed to hospitals and drug wholesalers. At June 30, 1996, 1995, and 1994, 61%, 54% and 55%, respectively, of the outstanding common stock of Faulding Inc. (the "Company") was owned by Faulding Holdings Inc. ("Holdings"), a wholly-owned subsidiary of F. H. Faulding & Co. Limited ("Faulding"), a major Australian pharmaceutical company. On February 29, 1996, the Company changed its name from Purepac, Inc. to Faulding Inc. 2. Basis of Presentation and Significant Accounting Policies Acquisitions On February 29, 1996 the Company acquired all of the outstanding capital stock of each of Faulding Medical Device Co. ("FMD"), Faulding Puerto Rico, Inc. ("FPR"), and Faulding Pharmaceutical Co. ("FPC"), collectively the "Acquired Companies," from Holdings (the Company's principal stockholder) in exchange for 2,438,712 shares of its common stock. As part of the acquisition, the Company created a Class B Preferred Stock with 150,000 authorized shares, par value at $.01, all of which were issued to Holdings for a cash purchase price of $100 per share, for a total value of $15 million. At the effective date of acquisition the authorized number of shares of common stock was increased from 25 million shares to 35 million shares. Principles of Consolidation The acquisition transaction was accounted for as similar to a pooling of interests and, therefore, financial statements for all periods presented have been restated as if the acquisition took place at the beginning of the earliest period presented. The financial statements reflect the accounts of Faulding Inc. (including its wholly owned subsidiary, Purepac Pharmaceutical Co.) and the Acquired Companies. All intercompany transactions and balances have been eliminated. 26 The combined operations reported in the Company's consolidated financial statements are comprised as follows: Year Ended June 30, Year Ended June 30, 1996 1995 ------------------- ------------------- Faulding Inc. (formerly Purepac, Inc.) - ------------------------ Net sales $ 63,822 $ 61,146 Cost of sales 47,112 46,476 Operating expenses 19,936 16,558 Net income (loss) before preferred stock dividends (1,349) (847) Combined Operations of Acquired Companies - ------------------------- Net sales $ 11,962 3,759 Cost of sales 11,285 2,811 Operating expenses 4,174 1,362 Net income (loss) before preferred stock dividends (3,651) (771) Consolidated Operations - -------------------------- Net sales $ 75,784 64,905 Cost of sales 58,397 49,287 Operating expenses 24,110 17,920 Net income (loss) before preferred stock dividends (5,001) (1,618) Note: The Acquired Companies' operations for the year ended June 30, 1995 reflect the year's results of FMD and three month's results of FPR and FPC, as they did not commence operations until April 7, 1995. Since the acquisition transaction was accounted for as similar to a pooling of interests, the acquisition expenses of $1,043 were charged to results of operations in the year ended June 30, 1996. The expenses include $576 for financial advisory services and $467 for professional fees. Summary of Significant Accounting Policies The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 27 Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments for which it is practicable to estimate value. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, trade receivables and payables approximate their respective fair values due to the short-term nature of the instruments. Revenue Recognition Sales revenue is recognized upon shipment of the Company's products. Cash and Cash Equivalents Cash and cash equivalents consist of cash, certificates of deposit and commercial paper having original maturities of three months or less. Inventory Inventory is stated at the lower of cost (first-in, first-out) or market. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation and amortization is computed using the straight-line method over the following estimated useful lives: Building and improvements 30 years Machinery and equipment 4-10 years Furniture and fixtures 5-10 years Leasehold improvements remaining term of lease 28 Trademarks and Patents Trademarks acquired by Purepac, included in other assets, are amortized over 40 years using the straight-line method, consist of the following: June 30, 1996 June 30, 1995 ------------- ------------- Cost $ 500 $ 500 Accumulated amortization (208) (195) ------------- ------------- Net book value $ 292 $ 305 ============= ============= Patents acquired by FMD, included in other assets, are amortized over 10 years using the straight-line method, consist of the following: June 30, 1996 June 30, 1995 ------------- ------------- Cost $ 381 $ 381 Accumulated amortization (57) (19) ------------- ------------- Net book value $ 324 $ 362 ============= ============= Research and Development Costs Research and development costs, including charges for such services provided by Faulding, are charged to operations as incurred and represent the Company's independent research and development efforts. Earnings Per Common Share Primary earnings per common share is calculated by (i) dividing income before cumulative effect of a change in accounting for income taxes less preferred dividends by the weighted average number of common shares outstanding during the year and (ii) by dividing the cumulative effect of a change in accounting for income taxes, if any, by such average number of common shares. Common stock equivalents are excluded as the effect is either not material or anti-dilutive. Earnings per share, assuming full dilution (principally from convertible preferred shares), is also presented for the year ended June 30, 1994 and is based on the assumption that all contingently issuable shares were outstanding from the beginning of the year to the extent dilution results. For the years ended June 30, 1996 and 1995, fully diluted earnings per share is not presented as the effect would be anti-dilutive. 29 Supplemental Cash Flow Information During the years ended June 30, 1996 and 1995, the Company recognized a tax benefit when the Company issued 71,125 and 82,250 shares, respectively, of common stock to employees pursuant to the Company s 1991 Restricted Stock Incentive Plan. The transactions provided the Company with tax benefits equal to the fair market value of the stock on the date of issuance. For financial reporting purposes, the tax benefits were recorded as a reduction of the deferred tax asset to the extent previously provided and the remainder of the benefit was recorded as additional capital in excess of par value. During the year ended June 30, 1994, the Company recognized a tax benefit when a holder of nonstatutory stock options purchased 14,000 shares of common stock at $1.81 per share. This transaction provided the Company a tax benefit to the extent that the fair market value of the stock issued on the exercise date exceeded the option price. For financial reporting purposes, this benefit was recorded as additional capital in excess of par value. 3. Inventory June 30, 1996 June 30, 1995 ------------- ------------- Raw materials $ 11,160 $ 6,078 Work-in-process 4,509 6,114 Finished goods 10,827 8,646 ------------- ------------- Total $ 26,496 $ 20,838 ============= ============= 4. Property, Plant and Equipment June 30, 1996 June 30, 1995 ------------- ------------- Land $ 2,199 $ 2,199 Buildings and improvements 16,311 13,021 Machinery and equipment 29,612 23,037 Leasehold improvements 5,100 4,790 Construction in progress 825 7,308 ------------- ------------- Total cost $ 54,047 $ 50,355 Less accumulated depreciation and amortization (12,537) (9,790) ------------- ------------- Net book value $ 41,510 $ 40,565 ============= ============= 30 5. Related-Party Transactions During the years ended June 30, 1996, 1995 and 1994, the Company paid Faulding $4,057, $2,289 and $3,789, respectively, for merchandise purchases (pursuant to agreements to market injectable and oral products, both described herein), $287, $918 and $1,007, respectively, for research and development services and $603, $326 and $123, respectively, for interest expense on loan advances associated with the Acquired Companies prior to the acquisition by the Company. In addition, the Company paid Faulding Services Inc., $296, $266, and $186, respectively, for business development services (pursuant to an agreement with Faulding Services Inc. which terminated on December 31, 1995 and described herein). Faulding Services Inc. is a 100% owned subsidiary of Holdings. During the years ended June 30, 1996, 1995, and 1994, the Company was reimbursed $466, $1,919 and $486, respectively, by Faulding for materials and services related to research and development projects and $200 during the year ended June 30, 1994 for the sale to Faulding of the Company s Poroplastic(R) technology. 30 Additionally, during the year ended June 30, 1996, the Company invoiced $1,018 to Faulding Services Inc. for contract manufacturing of KADIAN (TM) (pursuant to an agreement with Faulding Services Inc., described herein). During the year ended June 30, 1994, the Company paid Faulding Services Inc. $623 for engineering and consulting services related to the construction of a manufacturing suite to accommodate the modified-release technology. Included in other assets at June 30, 1996 and 1995 is $2,903 paid by the Company to Faulding in June 1992 to acquire the proprietary technology, including the scientific information and expertise, processes and procedures, for the manufacture and sale of the generic version of certain modified- release pharmaceutical products. The acquired technology is restricted to use, on an exclusive basis, in the United States of America and its territories. Amortization of this technology will commence in fiscal 1997. Amounts due from (due to) affiliated companies are payable on demand and were as follows as of: June 30, 1996 June 30, 1995 ------------- ------------- Faulding $ (1,881) $ 1,843 Holdings --- 10 Faulding Services Inc. 1,034 (37) ------------- ------------- $ (847) $ 1,816 ============= ============= 31 Purepac entered into an agreement with Faulding as of December 5, 1992, pursuant to which Purepac agreed to provide services to Faulding for the tableting of pellets and micropellets on a time and materials basis. During the year ended June 30, 1996, no related services were provided by Purepac to Faulding. In addition, Purepac and Faulding entered into a three-year agreement, also dated as of December 5, 1992, which is automatically renewable for successive two-year periods, pursuant to which Faulding granted Purepac a non-exclusive license to import, distribute and market an erythromycin oral product in the United States. On January 1, 1993, Purepac and Faulding Services Inc. entered into a consulting agreement, which terminated on December 31, 1995, pursuant to which Purepac retained Faulding Services Inc. to serve as a business development consultant and advisor on a non-exclusive basis. On August 1, 1993, Purepac entered into a ten-year agreement with Faulding Services Inc. to manufacture KADIAN (TM) utilizing Faulding technology, processes and manufacturing methods licensed to Faulding Services Inc. Faulding Services Inc., at its sole cost, has sought all necessary approvals and/or registrations from the appropriate regulatory authority to enable the sale of the product, which was approved by the FDA on July 3, 1996. Under that agreement, Purepac had commenced the manufacturing of KADIAN (TM) based on orders received from Faulding Services Inc. and the initial income from this contract was recorded in the quarter ending June 30, 1996. The parties amended this agreement in December 1994 to resolve certain inconsistencies between this agreement and an agreement with an unrelated third party, to distribute the product manufactured by Purepac. On June 27, 1995 the Company and Faulding Services Inc. entered into a Services Agreement pursuant to which Purepac agreed to provide certain services on Faulding Services Inc. s behalf that Faulding Services Inc. had agreed to provide under the agreement with the third party. On March 15, 1995, Purepac and Faulding entered into a three-year non-exclusive license agreement for Purepac to import and distribute doxycycline, a delayed-release product, in the United States in exchange for certain payments to Faulding for its supply of the product to Purepac. 32 Purepac and Faulding entered into two agreements as of June 26, 1995 for two products that had been under ongoing development review for several years. One is a licensing agreement pursuant to which Faulding granted to Purepac an exclusive ten-year license to utilize certain technology to complete the development of a modified-release product and manufacture and sell the product in the United States. Relating to the product development, Purepac paid to Faulding most of the technology licensing fees prior to June 30, 1994 with the balance paid during the year ended June 30, 1996, all expensed as research and development costs. In addition, Purepac will be obligated to pay royalties related to net sales of the product. As of June 30, 1996, development activity regarding this agreement has not continued. The second agreement is a ten-year Co-development, Supply and Licensing Agreement whereby Faulding will develop and deliver a certain component pellet of a modified-release product for Purepac's use in developing, manufacturing and distributing such product in the United States. Faulding will supply Purepac with pellets at a price set forth in the agreement. If the parties later concur that Purepac will manufacture the pellets, Faulding will grant Purepac an exclusive license to the pellet technology for the remainder of the term of the agreement in consideration of a technology transfer fee of $250 and ongoing royalty payments. As of June 30, 1996, development activity regarding this agreement has not continued. On January 23, 1996, FPC and Faulding entered into a Supply Agreement for injectable products developed and manufactured by Faulding for sale in the United States. Supply of six anti-cancer products, under this agreement, commenced in fiscal 1996. ANDA submissions for additional products covered by this agreement have been filed with the FDA. Additional products are under development by Faulding. On January 23, 1996, a Licensing and Supply Agreement was signed between FMD and Faulding for the medical device products developed by FMD. Though such products have not yet been launched in the United States, products utilizing these technologies have received regulatory approval in some other markets. 6. Accrued Expenses June 30, 1996 June 30, 1995 ------------- ------------- Advertising and promotion programs $ 1,408 $ 1,320 Compensation and payroll taxes 2,446 1,677 Medicaid rebate 668 520 Professional fees 402 848 All other 1,742 1,215 ------------- ------------- TOTAL $ 6,666 $ 5,580 ============= ============= 33 7. Long-Term Debt On May 24, 1990, the Company entered into an uncollateralized financing agreement with a commercial bank, which agreement was amended on May 24, 1992 and again amended in August 1994. The agreement permits the Company to borrow up to $15,000, of which a maximum of $5,000 may be borrowed under a term loan facility. Borrowings under the term loan facility mature five years from the date of the borrowing. The difference between the total financing agreement of $15,000 and any borrowings under the term loan facility may be utilized as revolving debt. The Company is required to meet certain financial covenants, including a minimum debt-to-equity ratio and a minimum aggregate net asset amount. At June 30, 1996, the Company had no outstanding borrowings from the bank and no outstanding letters of credit. At June 30, 1995, the Company had an outstanding loan from the bank of $2,000 at an interest rate of 6.64% per annum. At June 30, 1995, there were no outstanding letters of credit. 8. Stock Options 1994 Stock Option Plan On October 18, 1994, the shareholders approved the 1994 Stock Option Plan (the 1994 Plan ) which provides for issuance of up to 1,000,000 options to acquire shares of the Company s authorized common stock. The options are intended to qualify as Incentive Stock Options (statutory options) as defined by the Internal Revenue Code or as Nonstatutory Stock Options. Under the 1994 Plan, the Incentive Stock Options may be granted to key employees of the Company or a subsidiary of the Company and the Nonstatutory Stock Options may be granted to any key employee, officer, non-employee director or consultant to the Company or a subsidiary of the Company, with the exception that Nonstatutory Stock Options may not be granted to a holder of more than 10% of the total voting power of the Company. The exercise price of all Incentive Stock Options must be at least equal to the fair market value of such shares on the date of grant. The exercise price of all Nonstatutory Stock Options granted under the 1994 Plan shall be determined by the Board of Directors of the Company at the time of grant. No option granted shall be exercisable after the expiration of ten (10) years from the date of grant. 34 During the year ended June 30, 1995, the Company awarded two employees 33,000 Incentive Stock Options exercisable at $9.25 per share. During the year ended June 30, 1996, the Company awarded nine employees options to purchase 507,500 shares, of which 343,323 were Incentive Stock Options and 164,177 were Nonstatutory Stock Options. During the year ended June 30, 1996, due to two resignations and one cancelation, awards totaling 108,000 shares were terminated. Information on the 1994 stock option plan activity is as follows: Number of Options Awarded ---------------------------------- Incentive Number of Exercisable Stock Nonstatutory Employees Price Range Total Options Stock Options --------- ----------- ------ --------- ------------- Outstanding at June 30, 1995 2 $ 9.25 33,000 33,000 - ------------------------------------------------------------------------------ Options Awarded 27 $ 4.625- 675,000 510,823 164,177 $ 10.125 Terminated/ Canceled (3) $ 6.125- (108,000) (98,304) (9,696) $ 9.25 - ------------------------------------------------------------------------------ Outstanding at June 30, 1996 26 $ 4.625- 600,000 445,519 154,481 $ 10.125 - ------------------------------------------------------------------------------ 9. Restricted Stock Incentive Plan The shareholders approved the Company's 1991 Restricted Stock Incentive Plan (the "Plan") for key employees of the Company. The Board of Directors have allotted 465,000 shares for the plan. On November 25, 1991, the Company awarded grants aggregating 275,000 shares of the Company's common stock to 15 employees. Such grants were valued at $8.125 per share, being the market value thereof on the date of grant. During the year ended June 30, 1993, due to two resignations, grants totaling 20,000 shares were terminated. During the year ended June 30, 1994, due to one resignation, grants totaling 20,000 shares were terminated. During the year ended June 30, 1995, due to two resignations, grants totaling 10,500 shares were terminated. During the year ended June 30, 1996, due to seven resignations, grants totaling 43,000 shares were terminated. 35 On March 5, 1993, the Company awarded grants aggregating 50,000 shares of the Company's common stock to six employees. Such grants were valued at $13.8125 per share, being the market value thereof on the date of grant. During the year ended June 30, 1994, due to one resignation, grants totaling 7,500 shares were terminated. During the year ended June 30, 1996, due to one resignation, grants totaling 4,000 shares were terminated. During the year ended June 30, 1996, the Company issued 44,625 shares of common stock to employees pursuant to the Plan. As a result of the issuance of these shares, the Company will have an income tax deduction of $272 in the year ending June 30, 1997. The deduction will result in a reduction in taxes payable of approximately $103. In the same year, for financial reporting purposes, the tax benefit will be recorded as a reduction of the deferred tax asset to the extent previously provided and the remainder of the benefit will be recorded as additional capital in excess of par value. It will not be reflected in the reported earnings or the earnings per share calculations. During the year ended June 30, 1995, the Company issued 71,125 shares of common stock to employees pursuant to the Plan. As a result of the issuance of these shares, the Company had an income tax deduction of $759 in the year ending June 30, 1996. The deduction resulted in a reduction in taxes payable of approximately $288. In the same year, for financial reporting purposes, the tax benefit was recorded as a reduction of the deferred tax asset to the extent previously provided and the remainder of the benefit was recorded as additional capital in excess of par value. It was not reflected in the reported earnings or the earnings per share calculations. During the year ended June 30, 1994, the Company issued 82,250 shares of common stock to employees pursuant to the Plan. As a result of the issuance of these shares, the Company had an income tax deduction of $1,347 in the year ended June 30, 1995. The deduction resulted in a reduction in taxes payable of approximately $512. In that year, for financial reporting purposes, the tax benefit was recorded as a reduction of the deferred tax asset to the extent previously provided and the remainder of the benefit was recorded as additional capital in excess of par value. It was not reflected in the reported earnings or the earnings per share calculations. 36 Information on the Restricted Stock Incentive Plan activity is as follows: Number of Grants Awarded, by Date ---------------------------------- November 25, 1991 March 5, 1993 ----------------- ------------- Outstanding at June 30, 1992 275,000 - -------------------------------------------------------------------------- Terminated (20,000) Grants awarded --- 50,000 - -------------------------------------------------------------------------- Outstanding at June 30, 1993 255,000 50,000 - -------------------------------------------------------------------------- Terminated (20,000) (7,500) Shares Issued (82,250) --- - -------------------------------------------------------------------------- Outstanding at June 30, 1994 152,750 42,500 - -------------------------------------------------------------------------- Terminated (10,500) --- Shares Issued (56,250) (14,875) - -------------------------------------------------------------------------- Outstanding at June 30, 1995 86,000 27,625 - -------------------------------------------------------------------------- Terminated (43,000) (4,000) Shares Issued (34,000) (10,625) - -------------------------------------------------------------------------- Outstanding at June 30, 1996 9,000 13,000 ========================================================================== 10. Common Stock During the years ended June 30, 1996, 1995 and 1994, the Company issued in aggregate 44,625, 71,125, and 82,250 shares of common stock to employees, pursuant to the Company's 1991 Restricted Stock Incentive Plan discussed in Note 9. The Company received no proceeds from these transactions. During the years ended June 30, 1996, 1995 and 1994, the Company recognized $110, $366 and $385, respectively as compensation expense for the 1991 Restricted Stock Incentive Plan. During the year ended June 30, 1996, the Company issued 2,438,712 shares of common stock to Holdings (the Company's principal stockholder) pursuant to acquisitions of companies discussed in Note 2. The company received no proceeds from the exchange of shares for the acquisition of the Acquired Companies. 37 11. Preferred Stock The authorized but unissued preferred stock may be issued from time to time, in one or more series, by the Board of Directors. Class A In 1987, the Company issued and sold to Holdings 834,188 shares of the Class A preferred stock at $29.34 per share, or $23,133, net of expenses of $1,342. These shares provide for a cumulative dividend of 8.5% per annum, which dividend accrues until such time as the Company shall have profits, surpluses or other funds legally available for payment of dividends. Dividends accrue on each share of Class A preferred stock on a daily basis at 8.5% per annum of liquidation value and are payable quarterly on the first days of January, April, July and October, beginning in January 1988. If any accrued dividends, for any reason, are not paid on these days, then such dividend shall be considered in arrears and, until paid, shall continue to be accrued on the liquidation value (purchase price less dividends paid) plus dividends in arrears. During the years ended June 30, 1996, 1995 and 1994, all current year preferred dividends totaling $2,080, each year were paid. The quarterly dividend of $520 was declared and accrued at June 30, 1996 and subsequently paid on July 1, 1996. Each share of Class A preferred stock may be converted, at the election of the holder, into six shares of common stock. At June 30, 1996, 5,005,128 shares of common stock were reserved for issuance under the terms of the Class A preferred stock. In the event of any liquidation, dissolution or winding up of the Company, the holders of Class A preferred stock shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus or earnings, amounts in cash equal to the sum of $29.34 per share plus all accrued and unpaid dividends. On or after December 1, 1997, the Company may, at its election, redeem any or all shares of Class A preferred stock. For each share of Class A preferred stock redeemed, the Company shall be obligated to pay a redemption price of $29.34 per share plus any accrued and unpaid dividends. 38 Class B On February 29, 1996, as part of the acquisition of the Acquired Companies, the Company created a Class B preferred stock with 150,000 authorized shares, par value at $.01, all of which were issued to Holdings for a cash price of $100 per share or an aggregate of $15 million. These shares pay an annual dividend of $4.50 per share or an aggregate of $675 per year, and are convertible into shares of the Company's common stock at a rate of 10.433 shares of common stock for each share of Class B preferred stock. Dividends accrue on each share of Class B preferred stock on a daily basis at 4.5% per annum of liquidation value and are payable quarterly on the first days of January, April, July and October, beginning April 1, 1996. If any accrued dividends, for any reason, are not paid on these days, then such dividend shall be considered in arrears and, until paid, shall continue to be accrued on the liquidation value (purchase price less dividends paid) plus dividends in arrears. The initial dividend for the period February 29, 1996 to March 31, 1996, of $58 was paid on April 1, 1996. The quarterly dividend of $169 was declared and accrued at June 30, 1996 and subsequently paid on July 1, 1996. On or after the first anniversary of the date of issuance, each share of Class B preferred stock may be converted, at the election of the holder, into 10.433 shares of common stock. At June 30, 1996, 1,564,950 shares of common stock were reserved for issuance under the terms of the Class B preferred stock. In the event of any liquidation, dissolution or winding up of the Company, the holders of Class B preferred stock shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus or earnings, amounts in cash equal to the sum of $100.00 per share plus all accrued and unpaid dividends. On or after February 29, 1999, the Company may, at its election, redeem any or all shares of Class B preferred stock. For each share of Class B preferred stock redeemed, the Company shall be obligated to pay a redemption price of $100.00 per share plus any accrued and unpaid dividends. 12. Commitments and Contingencies Leases The Company leases certain of its equipment and property under operating leases which provide for monthly lease payments and, in certain instances, provide options to purchase the property at fair market value. 39 The Company through FPR has a long-term lease for a seven building facility in Aguadilla, Puerto Rico from the Port Authority of the Commonwealth of Puerto Rico which expires in the year 2020. For the years ended June 30, 1996, 1995 and 1994, total rental expense for operating leases amounted to $867, $556 and $350, respectively. The following is a schedule of future minimum rental payments under such operating leases: Fiscal Year Ending June 30, ------------------------------------------ 1997 $ 704 1998 531 1999 252 2000 185 2001 178 Thereafter 3,386 Litigation On September 11, 1995, the United States District Court for the District of New Jersey granted the Company's motion to dismiss a complaint filed against the Company and certain of its former senior executives in a lawsuit entitled Dechter vs. Purepac, Inc., Robert H. Bur and Russell J. Reardon, 94 Civ. 6195. Pursuant to the court's decision, the plaintiffs had the opportunity to file a motion with the court to submit a proposed amended complaint. The plaintiffs elected not to file such a motion, thereby terminating such litigation. Pursuant to an agreement dated as of December 31, 1995, the Company has settled certain litigation entitled Merck & Co., Inc. v. Purepac Pharmaceutical Co. Case No. 95-495 in the United States District Court for the District of Delaware. In accordance with such agreement, the Company is to receive a cash settlement. The proceeds will be payable in three equal annual installments. In addition the Company has agreed not to pursue the marketing or sale of the pharmaceutical product which was the subject of the litigation in the United States until the patent expiration in the year 2006. 40 On August 21, 1996, an action was commenced against the Company, Purepac, Faulding and Zeneca, Inc. in the United States District Court for the District of Delaware entitled Purdue Pharma L.P. and the Purdue Frederick Company vs. F.H. Faulding & Co. Limited, Faulding Inc., Purepac Pharmaceutical Co. and Zeneca Inc. 96 Civ.427. The complaint alleges that the manufacture and marketing in the United States of KADIAN (TM) infringes a patent assigned to one of the plaintiffs and constitutes unfair competitive practices under Federal and State law. The Company, through Purepac, manufactures KADIAN (TM) pursuant to a contract manufacturing agreement with Faulding, and Zeneca Inc. is its U.S. distributor. While the Company has not yet been served in the action, the complaint seeks, among other things, an order enjoining the Company from the commercial manufacture of KADIAN (TM) and treble and punitive damages in the event that the defendants have violated Federal or State unfair competitive and deceptive trade practices law. The Company believes the allegations in the complaint to be entirely without merit and intends, in cooperation with its co-defendants, to vigorously defend this action. The commencement of the action did not impact the launch of KADIAN (TM) . The Company is involved in litigation incidental to the conduct of its business, in addition to the above matters, and does not believe that the ultimate adverse resolutions of any, or all, thereof would have a material adverse effect on its financial position, results of operations or cash flows. 13. Employee Benefit Plans In January 1990, the Company adopted a defined benefit pension plan (the "Plan"). The Plan covers employees who have one year or more of credited service and whose employment is not governed by a collective bargaining agreement. Net periodic pension cost is comprised of the components listed below, as determined using the projected unit credit actuarial cost method. The Company's funding policy is to make annual contributions to the Plan in such amounts necessary to fund benefits provided under the Plan on the basis of information furnished by the Company's actuary. 41 Year Ended June 30, -------------------------------- Net Periodic Pension Cost 1996 1995 1994 ------ ------ ------ Service cost for benefits earned during the period $ 506 $ 305 $ 338 Interest cost on projected benefit obligation 194 154 121 Return on plan assets (138) (88) (63) Amortization of prior service cost 19 19 29 Amortization of actuarial loss 34 1 33 ------ ------ ------ Total $ 615 $ 391 $ 458 ====== ====== ====== June 30, June 30, Funded Status and Obligation of the Plan 1996 1995 -------- -------- Actuarial present value of accumulated benefit obligations $ 1,703 $ 1,111 Vested benefits included in above 1,538 993 - ------------------------------------------------------------------------- Projected benefit obligation $ 3,373 $ 2,388 Plan assets at fair value (2,191) (1,462) Unrecognized prior service cost (155) (175) Unrecognized net gain (loss) (709) (201) Additional Liability 2 4 -------- -------- Accrued pension obligation $ 320 $ 554 ======== ======== The discount rate used in determining the projected benefit obligations was 7.25% at June 30, 1996, a decrease of .75% from June 30, 1995. The rate of increase in future compensation levels used in the determination was 5.5% for both June 30, 1996 and 1995. The expected long-term rate of return on the Plan's assets used in determining pension cost was 8% for both years. 42 The Company also has a 401(k) savings and investment plan established January 1, 1990, which allows employees to defer up to 15% of their salary, with the Company matching 25% of employees' contributions not exceeding 5% of their salary. The plan was amended, effective January 1, 1991, to increase the Company match from 25% to 50% of the first 5% of employees' contribution and, effective July 1, 1991, to increase the Company matching contribution to 50% of each employee's contribution not exceeding 6% of an employee's salary. The Company's contribution charged to operations for the years ended June 30, 1996, 1995, and 1994 was $230, $224 and $196, respectively. 14. Income Taxes The Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"), effective July 1, 1993. This statement superseded Statement of Financial Accounting Standard No. 96, "Accounting for Income Taxes". The cumulative effect of adopting SFAS 109 on the Company's financial statements for the year ended June 30, 1994, was to increase income by $4,149 ($.28 per primary common share and $.21 per share on a fully diluted basis) with a corresponding increase in the deferred tax asset. Beginning with the adoption of SFAS 109, the income tax expense provision does not include the benefit of recognizing available loss carryforwards to the extent they have already been recognized as a deferred tax asset. Instead, there will be a reduction in the deferred tax asset when such benefits are utilized to reduce taxes payable. Deferred income tax assets, both current and non-current, reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. The decrease in the current year s deferred tax assets resulted primarily from the recognition of tax deductible items in the current year. 43 Net deferred tax assets consisted of the following as of: June 30, June 30, 1996 1995 ------------ ------------ Current Deferred Tax Asset: Reserve for doubtful accounts $ 989 $ 779 Reserve for inventory obsolescence 298 509 Sundry accruals 542 557 Federal operating loss carryforwards 1,197 1,021 Federal tax credit carryforwards 707 707 State operating loss carryforwards 168 198 ------------ ------------ 3,901 3,771 ------------ ------------ Current Deferred Tax Liability: Stock grant amortization 336 158 Receivables 216 --- Prepaids 68 96 Property, plant and equipment 56 4 ------------ ------------ 676 258 ------------ ------------ NET CURRENT DEFERRED TAX ASSET $ 3,225 $ 3,513 ============ ============ Non-Current Deferred Tax Asset: Stock grant amortization $ 359 $ 392 Federal operating loss carryforwards 4,677 3,416 State operating loss carryforwards 63 --- ------------ ------------ 5,099 3,808 ------------ ------------ Non-Current Deferred Tax Liability: Receivables 217 --- Property, plant and equipment 2,919 2,609 License amortization 385 285 ------------ ------------ 3,521 2,894 ------------ ------------ Valuation Allowance (740) --- ------------ ------------ NET NON-CURRENT DEFERRED TAX ASSET $ 838 $ 914 ============ ============ 44 The provision for income taxes was comprised of the following: Year Ended June 30, -------------------------------- 1996 1995 1994 ------- -------- ------- Current Federal $ (624) $(1,026) $ 1,047 State (77) (120) 366 ------- -------- ------- (701) (1,146) 1,413 Deferred Federal 61 1,149 State 11 40 ------- -------- ------- Total provision (benefit) $ (701) $ 1,074 $ 2,602 ======= ======== ======= The Company has net operating losses and tax credits available as carryforwards to reduce future federal income taxes. State tax losses are also available as carryforwards. At June 30, 1996, for federal tax purposes, the net operating loss and tax credit carryforwards amounted to $14,870 and $707, respectively; they expire through year 2003. The future utilization of the net operating loss carryforwards by the Company is subject to limitation under provisions of the Internal Revenue Code. In addition, the Company will carryback its current year's federal net operating loss and recover approximately $1,340 of federal income tax. The benefit of net operating losses generated by the Acquired Companies prior to acquisition by the Company cannot be realized until the individual company generates taxable income to utilize such benefit. As of June 30, 1996 this had not occurred, a valuation allowance has been provided fully for these net operating losses. 45 A reconciliation of the statutory federal rate to the effective tax rate is as follows: Year Ended June 30, -------------------------- 1996 1995 1994 ----- ----- ---- Statutory federal rate (34%) (34%) 34% State taxes net of federal benefit (4) (4) 4 Loss of benefit of utilizing pre- acquisition net operating loss carryforwards 20 --- -- Non deductible acquisition expenses 6 --- -- Other (2) 1 --------------------------- Effective tax rate (12%) (40%) 39% ===== ===== ==== 15. Segment Information The Company operates in one business segment, the pharmaceutical industry. Primarily, the Company manufactures and sells oral generic pharmaceutical products and, since the February 29, 1996 acquisitions, the Company has expanded into the manufacturing, distribution and commercialization of generic injectable drugs and medical devices. For the year ended June 30, 1996, three customers each accounted for approximately 11%, 10%, and 10% of sales. Sales to the three customers were $8.7 million, $7.4 million and $7.4 million, respectively. For the year ended June 30, 1995, three customers each accounted for approximately 12%, 11% and 10% of sales. Sales to the three customers were $7.8 million, $6.9 million and $6.3 million, respectively. For the year ended June 30, 1994, two customers each accounted for approximately 12% and 11% of sales. Sales to the two customers were $8.3 million and $8.1 million, respectively. 16. Subsequent Events On August 27, 1996, a customer of the Company, FoxMeyer Drug Co., filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The accounts receivable balance owed by FoxMeyer to the Company was approximately $1.4 million and $1.5 million on June 30, 1996 and August 27, 1996, respectively. Due to the uncertainties surrounding the bankruptcy filing, the impact on future results of operations and financial position cannot be determined. 46 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
Balance at Charged to Balance For the Year Ended Beginning Costs and at End June 30, 1996: of Year Expenses Deductions of Year - ----------------------------------------------------------------------------------- Allowance for sales returns, allowances and discounts $ 2,497 $ 17,324 $ 16,686 $ 3,135 Allowance for doubtful accounts 119 101 --- 220 - ----------------------------------------------------------------------------------- TOTAL $ 2,616 $ 17,425 $ 16,686 $ 3,355 =================================================================================== Balance at Charged to Balance For the Year Ended Beginning Costs and at End June 30, 1995: of Year Expenses Deductions of Year - ----------------------------------------------------------------------------------- Allowance for sales returns, allowances and discounts $ 1,365 $ 12,874 $ 11,742 $ 2,497 Allowance for doubtful accounts 187 (68) --- 119 - ----------------------------------------------------------------------------------- TOTAL $ 1,552 $ 12,806 $ 11,742 $ 2,616 =================================================================================== Balance at Charged to Balance For the Year Ended Beginning Costs and at End June 30, 1994: of Year Expenses Deductions of Year - ----------------------------------------------------------------------------------- Allowance for sales returns, allowances and discounts $ 2,195 $ 9,016 $ 9,846 $ 1,365 Allowance for doubtful accounts 254 (67) --- 187 - ----------------------------------------------------------------------------------- TOTAL $ 2,449 $ 8,949 $ 9,846 $ 1,552 ===================================================================================
47 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III (All dollar references are in thousands, unless otherwise indicated.) ITEM 10. DIRECTORS, OFFICERS AND SIGNIFICANT EMPLOYEES DIRECTORS - --------- The directors of the Company are as follows: Common Stock Beneficially Company Owned as of Name Office(s) Since Age Sept. 20 1996 - ------------------ ----------------- ----- --- ------------- Edward D. Tweddell Director/Chairman 1990 55 -0-(2) Alan G. McGregor Director 1988 60 -0-(2) David Beretta (1) Director 1989 68 -0- Bruce C. Tully Director 1989 47 -0- Richard F. Moldin President, Chief 1995 48 10,000(3) Executive Officer, Chief Operating Officer (1) Mr. Beretta died on September 16, 1996. (2) Mr. McGregor and Dr. Tweddell are directors of Faulding, the parent of Holdings, the principal stockholder of the Company. See "Principal Stockholders" of the Company and "Compensation Committee Interlocks and Insider Participation." (3) Excludes 200,000 shares issuable upon the exercise of stock option awards, not presently exercisable, that have been made to Mr. Moldin under the Company's 1994 Stock Option Plan. See "Compensation of Executive Officers." Edward D. Tweddell, M.D., was elected a director in November 1990 and was subsequently elected Chairman of the Board. He joined Faulding as Managing Director of its Faulding Pharmaceuticals Division in September 1988. He was elected to the Board of Directors of Faulding in March 1989 and served as Executive Director of the Faulding Pharma Group from 1990 to November 1993 when he was appointed Group Managing Director and Chief Executive Officer of Faulding. From July 1987, until joining Faulding, he held the position of Chairman and Chief Executive Officer of Pharmol Pacific Ltd., an Australian biotechnology company. Prior thereto and from April 1986, he was President and Chief Executive 48 Officer of Homecare Japan, LTD. Dr. Tweddell, who holds a Bachelor of Science degree in addition to an honors degree in Medicine, spent his early career in medical practice and, in 1976, joined the multinational pharmaceutical company, Pfizer International Inc. ("Pfizer"), where he held a number of senior management positions. Alan G. McGregor, a director of the Company since June 1988, is Chairman of Faulding. Mr. McGregor is also a director of James Hardie Industries Ltd., Burns, Philp & Co. Ltd. and other companies. He has served as a partner in two major Adelaide, South Australia law firms and was a Crown Prosecutor with the South Australian Crown Solicitor's Office. David Beretta, a director of the Company since April 1989, was President of Executive Consulting Inc., a business consulting firm in Jamestown, Rhode Island until his death on September 16, 1996. From April 1991, Mr. Beretta was Vice Chairman and President of Amtrol Inc., a concern engaged in the manufacture of products used in flow control, storage, heating and other treatment of fluids in the water systems market and selected sectors of the heating, ventilating and air conditioning market in West Warwick, Rhode Island. Until 1982, he was Chairman of the Board of Uniroyal, Inc. and remained a director until 1987. He was also a director of Chartel Power Systems Inc. Bruce Tully, a director of the Company since April 1989, has been a Managing Director of BT Securities Corporation, a subsidiary of Bankers Trust New York Corporation in New York, New York, since September 1989. Prior thereto and from October 1986, he was Managing Director of Bankers Trust Company and for four years prior thereto, was a Vice President thereof. Richard F. Moldin, was appointed President and Chief Executive Officer of the Company and President of Purepac on July 17, 1995 and was appointed to serve as a director and Chief Operating Officer of the Company on July 24, 1995. Prior to joining the Company and from October 1994 he served as Managing Director, Australia & New Zealand for Wellcome Australia Limited. From May 1993 until his appointment as Managing Director, he was Divisional Manager, Primary Manufacturing, for Wellcome Foundation Limited, U.K. Prior thereto and from September 1979, he served in various executive positions at Burroughs Wellcome Co., U.S.A., including from October 1991 to February 1993 as Vice President, Logistics & Primary Manufacturing. 49 EXECUTIVE OFFICERS - ------------------ Set forth below is certain information with respect to the Company's executive officers who are not serving as a director. Lee Craker, age 41, was appointed Chief Financial Officer of the Company on May 26, 1995 and was appointed Treasurer on October 11, 1995. Mr. Craker has held various positions with Faulding, or certain of its affiliates, dating from his initial employment by Faulding in 1973. From May 1985 to May 1990 he served as Finance and Administration Manager of David Bull Laboratories Pty. Ltd., a wholly-owned subsidiary of Faulding. From May 1990 to June 1994, he was Finance and Administration Manager of the Faulding Pharma Group and from July 1994 until joining the Company in May 1995 he was Finance and Administration Manager of Faulding Services Inc. Garth Boehm, Ph.D., age 46, joined the Company as Vice President - Scientific Affairs in April 1990 and was elected Executive Vice President in October 1991. He was Deputy Research Director of Faulding Pharmaceuticals, a division of Faulding, from July 1989 to April 1990. From 1985 to June 1989, he held senior management positions at Enterovax Limited, a joint venture of Faulding, the University of Adelaide and the Australian Industry Development Corporation. Prior thereto and from 1981, he was Development Scientist of the R&D Division of Faulding. William R. Griffith, age 48, was elected Secretary of the Company in October 1993. Mr. Griffith is a member of Parker Duryee Rosoff & Haft, counsel to the Company. Mr. Griffith has been a practicing attorney for more than ten years. 50 ITEM 11. EXECUTIVE COMPENSATION (Dollars in thousands) Summary Compensation Set forth below is the aggregate compensation for services rendered in all capacities to the Company during its fiscal years ended June 30, 1996, 1995 and 1994 by each of its executive officers who served as an executive officer on June 30, 1996 and whose compensation exceeded $100 during its fiscal year ended June 30, 1996: Summary Compensation Table Annual Compensation Name and Fiscal Other Annual Principal Position Year Salary Bonus Compensation - ----------------- ------ ------ ----- ------------ Richard F. Moldin 1996 $ 285 $ 105 (1) Chief Executive Officer, 1995 --- --- --- President and Chief 1994 --- --- --- Operating Officer Lee Craker 1996 $ 158 $ 38 (1) Chief Financial Officer 1995 --- --- --- and Treasurer 1994 --- --- --- Garth Boehm 1996 $ 164 $ 31 (1) Executive Vice President 1995 $ 161 $ 7 (1) 1994 $ 156 $ 30 (1) - ------------------ (1) Such amounts for each of the named executive officers listed in the Summary Compensation Table are less than 10% of the total annual salary and bonus reported for each such executive officer. 51 Stock Options and Bonus Plans The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the Board of Directors on August 16, 1994 and by a majority in interest of the stockholders of the Company on October 18, 1994. The 1994 Plan provides for the granting of up to 1,000,000 options which are intended to qualify either as incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986 or as options which are not intended to meet the requirements of such section ("Nonstatutory Stock Options"). The total number of shares of Common Stock reserved for issuance under the 1994 Plan is 1,000,000. Options to purchase shares may be granted under the 1994 Plan to persons who, in the case of Incentive Stock Options, are employees (including officers) of the Company, or, in the case of Nonstatutory Stock Options, are employees (including officers) or non-employee directors of the Company. The 1994 Plan is administered by a committee appointed by the Board of Directors, which has discretionary authority, subject to certain restrictions, to determine the number of shares issued pursuant to Incentive Stock Options and Nonstatutory Stock Options and the individuals to whom, the time at which, and the exercise price for which options will be granted. The exercise price of all Incentive Stock Options granted under the 1994 Plan must be at least equal to the fair market value of such shares on the date of the grant or, in the case of Incentive Stock Options granted to the holder of more than ten percent of the Company's Common Stock, at least 110% of the fair market value of such shares on the date of the grant. The maximum exercise period for which Incentive Stock Options may be granted is ten years from the date of grant (five years in the case of an individual owning more than 10% of the Company's Common Stock). The aggregated fair market value (determined at the date of the option grant) of shares with respect to which Incentive Stock Options are exercisable for the first time by the holder of the options during any calendar year shall not exceed $100. 52 The following table sets forth certain information concerning grants of stock options to the executive officers of the Company under the 1994 Plan during the fiscal year ended June 30, 1996. Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed Annual Rates of Stock Price Individual Appreciation Grants for Option Term - ----------------------------------------------------------------------------------------------- % of Total Options Granted to Employees Number of in Fiscal Options Year Ended Exercise Expiration Name Granted June 30, 1996 Price Date 5%($) 10%($) - -------------------- --------- ------------- -------- --------- ----- ------ Richard F. Moldin Chief Executive 150,000 25% $ 10.125 7/16/2005 6.555 17.285 Officer, President and Chief Operating 50,000 8.3% $ 6.25 4/21/2006 4.04 10.67 Officer Garth Boehm Executive Vice 30,000 5% $ 6.125 2/28/2006 3.965 10.455 President
53 The following table sets forth certain information with respect to options granted to officers, directors and employees of the Company and its subsidiaries under the 1994 Plan during the fiscal year ended June 30, 1996. The dollar value set forth below reflects the difference between the aggregate exercise price of the options and the estimated value of the Company's Common Stock at June 30, 1996. Fiscal Year End Option Values Number of Unexercised Options at June 30, 1996 Value of ----------------------------- Unexercised Options Name Exercisable Unexercisable at June 30, 1996 - ------------------- ----------- ------------- ------------------- Richard F. Moldin -0- 200,000 $ -0- Chief Executive Officer, President and Chief Operating Officer Garth Boehm -0- 30,000 $ -0- Executive Vice President All Non-Executive Employees as a -0- 370,000 $ -0- Group 1991 Restricted Stock Incentive Plan The Company's 1991 Restricted Stock Incentive Plan (the "1991 Plan") was adopted by the Board of Directors on November 25, 1991 and ratified by a majority in interest of the stockholders of the Company on October 21, 1992. The stated intent of the 1991 Plan is to induce persons of outstanding ability and potential to join and remain with the Company and to enable key employees, who make substantial contribution to the Company, to acquire proprietary equity interests in the Company. The Board of Directors chooses the Committee, whose members are ineligible to receive stock awards under the 1991 Plan, to administer the Plan. The Committee determines the employees to whom awards of Common Stock will be granted and the amount, size and terms of each such award. 54 A total of 465,000 shares of Common Stock of the Company were reserved for issuance under the 1991 Plan, of which aggregate grants of 275,000 and 50,000 were awarded in November 1991 and March 1993, respectively, at the respective values of $8.125 and $13.8125, being the respective market value thereof on the date of the grant. During the year ended June 30, 1994, due to two resignations, grants totaling 27,500 shares were terminated and 82,250 shares were issued. During the year ended June 30, 1995, due to two resignations, 10,500 shares were terminated and 71,125 shares were issued. During the year ended June 30, 1996, due to eight terminations, grants totaling 47,000 shares were terminated and 44,625 shares were issued. Pension Plan The Company maintains a defined benefit pension plan, fully paid for by the Company, for the benefit of eligible employees. All non-union employees become eligible for participation in the pension plan on January 1 or July 1, as applicable, following completion of one year of service. 161 persons were participants in the pension plan as of June 30, 1996. A participant in the Company's pension plan will receive retirement income based on .91% of his final average annual compensation, defined in the pension plan as including salary, bonuses, overtime and commissions, plus .52% of his final average annual compensation in excess of Social Security covered compensation, multiplied by years of credited service up to 35 years. Years of service for benefit accrual purposes are only after January 1, 1976. Final average compensation is defined in the pension plan as the average of a participant's total compensation received during the highest paid five consecutive plan years during the last 10 consecutive plan years immediately prior to retirement. A participant is 100% vested in his accrued pension benefit after five years of service as defined in the plan. The vested benefit of many participants employed prior to October 31, 1989, are provided through both the Purepac pension plan and the Solvay Group Pension Plan, the predecessor Company's plan. 55 The following table indicates the estimated annual plan benefits payable upon retirement as of June 30, 1996 at age sixty-five after fifteen, twenty, twenty-five, thirty and thirty-five years of credited service to the Company: PENSION PLAN TABLE (Dollars in thousands) Average Compensation Annual Benefit Based on Years of Service - ------------------ ---------------------------------------- 15 20 25 30 35 -- -- -- -- -- $ 125,000 ........ $25 $33 $41 $50 $ 58 150,000 ........ 30 40 50 60 70 175,000 ........ 30 40 50 60 70 200,000 ........ 30 40 50 60 70 225,000 ........ 30 40 50 60 70 250,000 ........ 30 40 50 60 70 300,000 ........ 30 40 50 60 70 350,000 ........ 30 40 50 60 70 400,000 ........ 30 40 50 60 70 450,000 ........ 30 40 50 60 70 500,000 ........ 30 40 50 60 70 At June 30, 1996, the credited years of service under the pension plan for Mr. Moldin was one. Mr. Craker and Dr. Boehm are not participants in the pension plan. Savings Plan The Company has a savings plan, implemented as of January 1, 1990, covering all non-union employees of the Company and its subsidiaries. Under the savings plan, employees may defer up to 15% of their salary, to a maximum of $9 per annum. The Company makes an annual matching contribution equal to 50% of an employee's contribution, not exceeding 6% of the employee's salary. Matching contributions are vested at the rate of 20% per annum commencing upon one year's participation in the savings plan. All vested amounts in a participant's account, including earnings, may be distributed only following hardship, retirement, death, permanent or total disability or termination of employment. For the three year period ended June 30, 1996, the Company had contributed an aggregate of $650,000 to the savings plan (net of forfeitures of non-vested amounts), for the respective accounts of 193 participants. Of such $650,000, an aggregate of $11 has been credited to the accounts of all current executive officers as a group, being $ -0-, $11, and $ -0- for the respective accounts of Mr. Moldin, Dr. Boehm and Mr. Craker. 56 COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION General Compensation Policies The Company's Compensation Committee (the "Committee") is responsible for establishing, approving and administering the policies which govern annual executive salary levels, increases/adjustments, incentive payments, the award of stock grants under the Company's 1991 Restrictive Stock Incentive Plan and the award of stock options under the Company's 1994 Stock Option Plan. During the year ended June 30, 1996 and until the death of David Beretta on September 16, 1996, the Committee was composed of three members, all of whom were non-employee directors. See "Compensation Committee Interlocks and Insider Participation." It is anticipated that the Board of Directors will appoint a replacement member for Mr. Beretta in the near future. In setting salary levels, providing incentives and granting stock and option incentives, the objectives of the Committee are to encourage profitable growth of the Company in a mutuality of interest between the Company's executives and stockholders and to balance competitive pay with the Company's overall performance. Specifically, the Committee attempts to provide levels of compensation to the President/CEO and the Company's other executive officers which reflect the contribution of such executives to the Company's growth in sales, earnings and market share, the development of stockholder value as reflected in the increase in the Company's stock price and the implementation of corporate strategies consistent with the growth of the Company. Growth in earnings is a significant factor in determining compensation. In addition, contribution to the development of new product opportunities, the progress of bioavailability and other studies and of development activities required to bring products to market and the successful marketing of the Company's primary products are evaluated in setting compensation policy. As well, to assure the Company's ability to attract, motivate and retain talented executives, the Committee attempts to keep the Company's levels of executive compensation competitive with that of other health care companies of comparable size and performance. President/CEO and Executive Officers Compensation The Company's executive compensation program consists of three key components: base salary, a cash incentive scheme and long term incentives through the awards of restricted stock grants and stock options. 57 The incentive payments have two performance components, each with a 50% weighting: (a) a financial budget achievement target based on net profit before taxes and (b) achievement of specific job-related objectives. The underlying principle for the design and implementation of the Company's incentive scheme is based on the concept that the Company commit in advance to predetermined annual levels of performance. Actual results achieved are measured against that commitment. The Company's long term incentives to date have been in the form of restricted stock and stock option grants. The object of this program has been to advance the longer term interest of the Company and its stockholders. Equity compensation is an important element of the perfor- mance-based compensation of the executive officers and helps to ensure that management's interests remain closely aligned with those of the Company's stockholders. The Committee is of the view that Restricted stock awards and stock option grants provide the Company's key employees an opportunity for increased equity ownership and help to create an incentive to remain with the Company for the long term, since the grants vest over a four to six year period. During the approximate five month period from January to July 17, 1995 Michael R.D. Ashton held the position of President and Chief Executive Officer of the Company. His yearly salary as President of Faulding Services Inc. had already been established, was not altered upon his acceptance of additional responsibilities as President and CEO of the Company and was paid by Faulding Services Inc. On July 17, 1995, the Company appointed Richard F. Moldin as its President and Chief Executive Officer. Mr. Moldin's initial compensation package reflected the Company's determination to recruit experienced executive officers who had considerable experience in the pharmaceutical industry by offering them compensation cometitive with that of health care companies of comparable size and performance. He received an initial base salary of $285,000 and a grant of 150,000 stock options under the 1994 Stock Option Plan. Mr. Moldin received an additional grant of 50,000 stock options in April, 1996 and a cash incentive award of $105,000 in September, 1996. His additional compensation reflected the Committee's assessment of Mr. Moldin's leadership in strengthening the position of the Company, his efforts in broadening the Company's base of operations to include the generic injectable business and his leadership contribution in implementing the Company's programs during the fiscal year ended June 30, 1996. 58 $1,000,000 Limit On Tax Deductible Compensation As part of the Omnibus Budget Reconciliation Act passed by Congress in 1993, a new limit has been created for the deductibility of compensation paid to certain officers. These officers are the Chief Executive Officer and the next four most highly compensated officers in office at the end of the year. Compensation paid to these officers in excess of $1,000,000, that is not performance-based, cannot be claimed by the Company as a tax deduction. It is the Committee's intention to continue to utilize performance-based compensation. Accordingly, these regulations should not impact the compensation paid by the Company to its officers. Edward D. Tweddell ) Members of the Alan G. McGregor ) Compensation Committee September 23, 1996 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Dr. Tweddell is Group Managing Director and Chief Executive Officer and a Director of Faulding. He is also a Director of Holdings, which owns approximately 61.6% of the Company's Common Stock, plus preferred stock convertible into additional shares of the Company's Common Stock. Alan McGregor is Chairman of the Board and a Director of Faulding. See "Principal Stockholders" and "Certain Relationships and Related Transactions." 59 Set forth below is a line graph comparing the cumulative stockholder return on the Company's Common Stock against the cumulative total return of the NASDAQ United States Index and the NASDAQ Pharmaceutical Index for the Company's fiscal years ended June 30, 1996, June 30, 1995, June 30, 1994, June 30, 1993 and June 30, 1992, respectively. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG PUREPAC, INC., THE NASDAQ UNITED STATES INDEX AND THE NASDAQ PHARMACEUTICAL INDEX
Measurement Period NASDAQ NASDAQ (Fiscal Year Covered) Faulding Inc. United States Pharmaceutical - --------------------- ------------- ------------- -------------- FYE 6/30/91 100 100 100 FYE 6/30/92 256 120 125 FYE 6/30/93 174 151 108 FYE 6/30/94 151 153 91 FYE 6/30/95 188 204 120 FYE 6/30/96 82 261 177
- -------------- * $100 Invested on 6/30/91 in Stock or Index. 60 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS OF PUREPAC The following table sets forth certain information regarding shares of the Company's outstanding Common Stock beneficially owned on September 19, 1995, (i) by each person who is known by the Company to beneficially own or exercise voting or dispositive control over more than 5% of the Company's Common Stock, (ii) by each of the Company's Directors, and (iii) by all executive officers and Directors of the Company as a group: Name of Number of Shares Percentage Beneficial Owner Beneficially Owned of Class - --------------------------------------------------------------------- Faulding Holdings Inc. 15,848,770(1) 73.3%(1) 529 Fifth Avenue 8th Floor New York, New York 10017 All executive officers 19,876(2) * and directors as a Group (9 persons) - -------------- (1) Includes 5,005,128 shares issuable upon conversion of 834,188 shares of the Company's Class A Preferred Stock and 1,564,950 shares issuable under conversion of 150,000 share of the Company's Class B Preferred Stock. 2) Mr. McGregor is Chairman and a director, and Dr. Tweddell is Group Managing Director, Chief Executive Officer and a director, respectively, of Faulding, the sole stockholder of Holdings. Dr. Tweddell is also a director of Holdings. Each of Dr. Tweddell and Mr. McGregor, however, disclaims any beneficial interest in or voting or dispositive control over the shares of the Company's Common Stock owned by Holdings. Excludes 190,124 shares issuable to, but not presently exercisable by, Mr. Moldin under the 1994 Plan. Includes 9,876 shares exercisable by Mr. Moldin as of July 17, 1996 under the 1994 Plan. * Equals a percentage less than 1% of the outstanding shares of the Company's stock. 61 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Related-Party Transactions See Item 1. "BUSINESS: Acquisitions" for information with respect to the Company's acquisition of all of the outstanding capital stock of each of FMD, FPR, and FPC, from Holdings in exchange for 2,438,712 shares of its common stock and the contemporaneous sale to Holdings of $15.0 million of Class B Preferred Stock. During the years ended June 30, 1996, 1995 and 1994, the Company paid Faulding $4,057, $2,289 and $3,789, respectively, for merchandise purchases (pursuant to agreements to market injectable and oral products, both described herein), $287, $918 and $1,007, respectively, for research and development services and $603, $326 and $123, respectively, for interest expense on loan advances associated with the Acquired Companies prior to the acquisition by the Company. In addition, the Company paid Faulding Services Inc., $296, $266, and $186, respectively, for business development services (pursuant to an agreement with Faulding Services Inc. which terminated on December 31, 1995 and described herein). Faulding Services Inc. is a 100% owned subsidiary of Holdings. During the years ended June 30, 1996, 1995, and 1994, the Company was reimbursed $466, $1,919 and $486, respectively, by Faulding for materials and services related to research and development projects and $200 during the year ended June 30, 1994 for the sale to Faulding of the Company s Poroplastic(R) technology. Additionally, during the year ended June 30, 1996, the Company invoiced $1,018 to Faulding Services Inc. for contract manufacturing of KADIAN (TM) (pursuant to an agreement with Faulding Services Inc., described herein). During the year ended June 30, 1994, the Company paid Faulding Services Inc. $623,000 for engineering and consulting services related to the construction of a manufacturing suite to accommodate the modified-release technology. Included in other assets at June 30, 1996 and 1995 is $2,903 paid by the Company to Faulding in June 1992 to acquire the proprietary technology, including the scientific information and expertise, processes and procedures, for the manufacture and sale of the generic version of certain modified- release pharmaceutical products. The acquired technology is restricted to use, on an exclusive basis, in the United States of America and its territories. Amortization of this technology will commence in fiscal 1997. 62 Amounts due from (due to) affiliated companies are payable on demand and were as follows as of: June 30, 1996 June 30, 1995 ------------- ------------- Faulding $ (1,881) $ 1,843 Holdings --- 10 Faulding Services Inc. 1,034 (37) ----------- ------------- $ (847) $ 1,816 =========== ============= Purepac entered into an agreement with Faulding as of December 5, 1992, pursuant to which Purepac agreed to provide services to Faulding for the tableting of pellets and micropellets on a time and materials basis. During the year ended June 30, 1996, no related services were provided by Purepac to Faulding. In addition, Purepac and Faulding entered into a three-year agreement, also dated as of December 5, 1992, which is automatically renewable for successive two-year periods, pursuant to which Faulding granted Purepac a non-exclusive license to import, distribute and market an erythromycin oral product in the United States. On January 1, 1993, Purepac and Faulding Services Inc. entered into a consulting agreement, which terminated on December 31, 1995, pursuant to which Purepac retained Faulding Services Inc. to serve as a business development consultant and advisor on a non-exclusive basis. On August 1, 1993, Purepac entered into a ten-year agreement with Faulding Services Inc. to manufacture KADIAN (TM) utilizing Faulding technology, processes and manufacturing methods licensed to Faulding Services Inc. Faulding Services Inc., at its sole cost, has sought all necessary approvals and/or registrations from the appropriate regulatory authority to enable the sale of the product, which was approved by the FDA on July 3, 1996. Under that agreement, Purepac had commenced the manufacturing of KADIAN (TM) based on orders received from Faulding Services Inc. and the initial income from this contract was recorded in the quarter ending June 30, 1996. The parties amended this agreement in December 1994 to resolve certain inconsistencies between this agreement and an agreement with an unrelated third party, to distribute the product manufactured by Purepac. On June 27, 1995 the Company and Faulding Services Inc. entered into a Services Agreement pursuant to which Purepac agreed to provide certain services on Faulding Services Inc.'s behalf that Faulding Services Inc. had agreed to provide under the agreement with the third party. 63 On March 15, 1995, Purepac and Faulding entered into a three-year non- exclusive license agreement for Purepac to import and distribute doxycycline, a delayed-release product, in the United States in exchange for certain payments to Faulding for its supply of the product to Purepac. Purepac and Faulding entered into two agreements as of June 26, 1995 for two products that had been under ongoing development review for several years. One is a licensing agreement pursuant to which Faulding granted to Purepac an exclusive ten-year license to utilize certain technology to complete the development of a modified-release product and manufacture and sell the product in the United States. Relating to the product development, Purepac paid to Faulding most of the technology licensing fees prior to June 30, 1994 with the balance paid during the year ended June 30, 1996, all expensed as research and development costs. In addition, Purepac will be obligated to pay royalties related to net sales of the product. As of June 30, 1996, development activity regarding this agreement has not continued. The second agreement is a ten-year Co-development, Supply and Licensing Agreement whereby Faulding will develop and deliver a certain component pellet of a modified-release product for Purepac s use in developing, manufacturing and distributing such product in the United States. Faulding will supply Purepac with pellets at a price set forth in the agreement. If the parties later concur that Purepac will manufacture the pellets, Faulding will grant Purepac an exclusive license to the pellet technology for the remainder of the term of the agreement in consideration of a technology transfer fee of $250 and ongoing royalty payments. As of June 30, 1996, development activity regarding this agreement has not continued. On January 23, 1996, FPC and Faulding entered into a Supply Agreement for injectable products developed and manufactured by Faulding for sale in the United States. Supply of six anti-cancer products, under this agreement, commenced in January 1996. ANDA submissions for additional products covered by this agreement have been filed with the FDA. Additional products are under development by Faulding. On January 23, 1996, a Licensing and Supply Agreement was signed between FMD and Faulding for the medical device products developed by FMD. Though such products have not yet been launched in the United States, products utilizing these technologies have received regulatory approval in some other markets. The Company believes that the terms of the foregoing agreements are at least as favorable as those it could have obtained in comparable nonaffiliated third party transactions. 64 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as a Part of This Report 1. FINANCIAL STATEMENTS Report of Independent Public Accountants - Deloitte & Touche LLP. Consolidated Balance Sheets - June 30, 1996 and 1995. Consolidated Statements of Operations - Year ended June 30, 1996, 1995, and 1994. Consolidated Statements of Stockholders' Equity - Year ended June 30, 1996, 1995, and 1994. Consolidated Statements of Cash Flows - Year ended June 30, 1996, 1995, and 1994. Notes to Consolidated Financial Statements. 2. FINANCIAL STATEMENT SCHEDULE Schedule II: Valuation and Qualifying Accounts - Year ended June 30, 1996, 1995, and 1994. All other schedules to the consolidated financial statements are omitted since the required information is either inapplicable or the information is presented in the financial statements or related notes. 65 3. EXHIBITS Exhibit Number Description of Document (3) (i) Certificate of Incorporation filed September 2, 1982 (1). (ii) Certificate of Amendment to Certificate of Incorporation filed June 30, 1983 (1). (iii) Certificate of Amendment to Certificate of Incorporation filed November 13, 1987 (3). (iv) Certificate of Amendment to Certificate of Incorporation filed February 29, 1996. (v) By-laws (1). (4) (i) Copy of Specimen Stock Certificate (1). (iv) Forms of Series A and Series B Warrants sold to Allen & Company Incorporated (5). (10) (i) Stock Purchase and Stockholders' Agreement dated September 2, 1987, among the Company, Moleculon Research Company, Arthur S. Obermayer and Faulding Holdings Inc., formerly Faulding U.S.A. Inc. (4). (vii) 1991 Restricted Stock Incentive Plan (7). (viii) Agreement dated as of December 5, 1992, between F. H. Faulding & Co. Limited and Purepac Pharmaceutical Co. (8). (ix) Agreement dated December 5, 1992, between F. H. Faulding & Co. Limited and Purepac Pharmaceutical Co. (8). (x) Agreement dated as of December 5, 1992, between F. H. Faulding & Co. Limited and Purepac Pharmaceutical Co. (8). (xi) Consulting Agreement dated January 1, 1993, between Purepac Pharmaceutical Co. and Faulding Services Inc., formerly Faulding Inc. (8). 66 (xii) Toll Manufacturing Agreement dated as of August 1, 1993 between Faulding Services Inc., formerly Faulding Inc. and Purepac Pharmaceutical Co., as amended as of December 22, 1994 (9). (xiii) Letter agreement dated as of June 29, 1994, between Faulding Inc., formerly Purepac, Inc. and F.H. Faulding & Co. Limited (10). (xiv) 1994 Stock Option Plan (11). (xv) Agreement dated as of March 15, 1995 between F.H. Faulding & Co. Limited and Purepac Pharmaceutical Co. (13) (xvi) License Agreement dated June 26, 1995 between F.H. Faulding & Co. Limited and Purepac Pharmaceutical Co. (13) (xvii) Services Agreement dated as of June 26, 1995 between Faulding Pharmaceutical Co., formerly Faulding Hospital Products, Inc. and Purepac Pharmaceutical Co. (13) (xviii) Services Agreement dated as of June 26, 1995 between Faulding Services Inc., formerly Faulding Inc. and Purepac Pharmaceutical Co. (13) (xix) Co-Development, Supply and Licensing Agreement dated as of June 26, 1995 between F.H. Faulding & Co. Limited and Purepac Pharmaceutical Co. (13) (xx) Letter of Intent between F.H. Faulding & Co. Limited and the Company dated August 9, 1995 (12). (xxi) Stock Purchase Agreement, dated as of January 23, 1996 between Faulding Holdings Inc. and Purepac, Inc. (14) (xxii) Preferred Stock Purchase Agreement, dated as of January 23, 1996 between Faulding Holdings Inc. and Purepac, Inc. (14) (xxiii) Development and Distribution Agreement, dated as of January 23, 1996 between F.H. Faulding & Co. Limited and Faulding Pharmaceutical Co. 67 (xxiv) Licensing and Supply Agreement, dated as of January 23, 1996 between F.H. Faulding & Co. Limited and Faulding Medical Device Co. (xxv) License Agreement, dated as of February 29, 1996 between F.H. Faulding & Co. Limited and Purepac, Inc. (11) Computation of Earnings Per Share. (11.1) Computation of Earnings Per Share Assuming Full Dilution. (21) Subsidiaries of Registrant. (27) Financial Sata Schedule __________________________________ (1) Previously filed as an Exhibit to Registration Statement 2-87116 on Form S-1, filed with the Securities and Exchange Commission (the "Commission") on October 12, 1983 and incorporated herein by reference. (2) Previously filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended November 30, 1984 and incorporated herein by reference. (3) Previously filed as an Exhibit to Current Report on Form 8-K filed with the Commission on November 25, 1987 and incorporated herein by reference. (4) Previously filed as Exhibit to Schedule 13D filed with the Commission by Faulding Holdings Inc. (formerly Faulding U.S.A. Inc.) on or about September 15, 1987 and incorporated herein by reference. (5) Previously filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended November 30, 1986 and incorporated herein by reference. (6) Previously filed as Exhibit to Annual Report on Form 10-K for the transition period ended June 30, 1990 and filed with the Commission on or about September 26, 1990 and incorporated herein by reference. 68 (7) Previously filed as Exhibit to Registration Statement on Form S-8 filed with the Commission on or about August 18, 1993 and incorporated herein by reference. (8) Previously filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended June 30, 1993 and incorporated herein by reference. (9) Previously filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended June 30, 1994 and incorporated herein by reference. Amendment dated as of December 22, 1994 filed herewith. (10) Previously filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended June 30, 1994 and incorporated herein by reference. (11) Previously filed as an Exhibit to the Proxy Statement filed with the Commission on September 17, 1994 and incorporated herein by reference. (12) Previously filed as an Exhibit to Current Report on Form 8-K filed with the Commission on August 17, 1995 and incorporated herein by reference. (13) Previously filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended June 30, 1995 and incorporated herein by reference. (14) Previously filed as an Exhibit to the Proxy Statement filed with the Commission on January 30, 1996 and incorporated herein by reference. (b) Reports on Form 8-K Current Reports on Form 8-K filed with the Commission during July 1, 1995 through June 30, 1996: Financial Report Items Reported Statements ------ -------------- ---------- 1. Filed August 17, 1995 Item 5 None 69 INDEX TO EXHIBITS (3) (iv) Certificate of Amendment of Certificate of Incorporation filed February 29, 1996. (10) (xxiii) Development and Distribution Agreement, dated as of January 23, 1996 between F.H. Faulding & Co. Limited and Faulding Pharmaceutical Co. (xxiv) Licensing and Supply Agreement, dated as of January 23, 1996 between F.H. Faulding & Co. Limited and Faulding Medical Device Co. (xxv) License Agreement, dated as of February 29, 1996 between F.H. Faulding & Co. Limited and Purepac, Inc. (11) Computation of Earnings Per Share. (11.1) Computation of Earnings Per Share Assuming Full Dilution. (21) Subsidiaries of Registrant. (27) Financial Sata Schedule 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PUREPAC, INC. Date: September 26, 1996 /s/ Edward D. Tweddell Edward D. Tweddell, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: September 26, 1996 /s/ Richard F. Moldin Richard F. Moldin, President and Chief Executive Officer (Principal Executive Officer) Date: September 26, 1996 /s/ Lee H. Craker Lee H. Craker, Chief Financial Officer (Principal Accounting Officer) Date: September 26, 1996 /s/ Alan G. McGregor Alan G. McGregor Director Date: September 26, 1996 /s/ Bruce C. Tully Bruce C. Tully, Director 68 EX-3 2 EXHIBIT 3(IV) EXHIBIT 3 (iv) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF PUREPAC, INC. The undersigned, being the President and Secretary of Purepac, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), pursuant to Section 242 of the General Corporation Law of the State of Delaware, do hereby certify: 1. The name of the Corporation is Purepac, Inc.. 2. This Certificate of Amendment and the amendments to the Certificate of Incorporation of the Corporation set forth herein have been duly approved, adopted, certified, executed and acknowledged in accordance with Section 242 of the General Corporation Law of the State of Delaware. 3. The Certificate of Incorporation of the Corporation is hereby amended so as to change the name of the Corporation to Faulding Inc. Accordingly, Article FIRST of the Certificate of Incorporation is hereby deleted in its entirety and the following is substituted therefor: FIRST: The name of the Corporation is Faulding Inc. 4. The Certificate of Incorporation of the Corporation is hereby amended so as to increase the number of authorized shares of common stock of the Corporation from 25,000,000 to 35,000,000. Accordingly, Article FOURTH of the Certificate of Incorporation is hereby deleted in its entirety and the following is substituted therefor: FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 36,834,188, which shall consist of 35,000,000 shares, $.01 par value, designated as Common Stock and 1,834,188 shares, $.01 par value, designated as Preferred Stock. All cross-references in each Part of this Article FOURTH refer to other Sections in such Article unless otherwise indicated. The following is a statement of the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of each class of stock of the Corporation. I. PREFERRED STOCK The Preferred Stock shall be comprised of (i) a Class A Preferred Stock which shall consist of 834,188 shares and (ii) additional Preferred Stock ("Additional Preferred Stock") which shall consist of 1,000,000 shares. Part 1: Dividends on Class A Preferred Stock. 1.1 General Dividend Obligation. The Corporation shall pay to the holders of the Class A Preferred Stock out of the assets of the Corporation at any time available for the payment of dividends under the provisions of the General Corporation Law of the State of Delaware; preferential dividends at the times and in the amounts provided for in this part. 1.2 Accrual of Dividends. Dividends on each share of Preferred Stock shall be cumulative from the date of issuance of such share of Class A Preferred Stock, whether or not at the time such dividend shall accrue or become due or at any other time there shall be profits, surplus or other funds of the Corporation legally available for the payment of dividends. Dividends shall accrue on each share of Class A Preferred Stock (at the rate and in the manner prescribed by Sections 1.2, 1.3 and 2.4) from and including the date of issuance of such share to and including the date on which either (a) payment equal to the Redemption Price of such share (as defined in Section 2.4) shall have been paid in the manner prescribed in Section 5.3 or (b) such share shall be converted into shares of Common Stock, as set forth in Part 3. For purposes of this Section, the date on which the Corporation shall initially issue any share of Class A Preferred Stock shall be deemed to be the "date of issuance" of such share regardless of how many times transfer of such share shall be made on stock records maintained by or for the Corporation and regardless of the number of certificates which may be issued to evidence such share (whether by reason of transfers of such share or for any other reason). 1.3 Payment of Dividends. Dividends shall accrue on each share of Class A Preferred Stock (computed on a daily basis on the basis of a 360 day year) at the rate of 8.5% per annum of the Liquidation Value (as defined in Section 4.1). Dividends shall be payable on Class A Preferred Stock quarterly on the first day of each January, April, July and October beginning January 1, 1988 and each such day is herein called a "Dividend Payment Date". On each Dividend Payment Date all dividends which shall have accrued on each share of Class A Preferred Stock then outstanding during the quarter year ending upon the day immediately preceding such Dividend Payment Date shall be deemed to become "due" for all purposes of this Section regardless of whether the Corporation shall be able or legally permitted to pay such dividend on such Dividend Payment Date. If any dividend on any share shall for any reason not be paid at the time such dividend shall become due, such dividend in arrears shall be paid as soon as payments of same shall be permissible under the provisions of the General Corporation Law of the State of Delaware. Until such dividend in arrears is paid, dividends shall continue to accrue on shares of Class A Preferred Stock but the percentage rate expressed herein shall be applied to the Liquidation Value thereof plus all dividends in arrears thereon (including dividends computed pursuant to this sentence). Notwithstanding anything to the contrary contained herein, if any dividend on any share shall not be paid at the time such dividend shall become due, at the option of the Company, such dividend may be paid at any time and from time to time, in whole or in part, in fully paid and nonassessable shares of Common Stock of the Corporation valued at the Fair Market Value thereof as determined in accordance with the provisions of Section 1.5. 1.4 Distribution of Partial Dividend Payments. If at any time the Corporation shall pay less than the total amount of dividends due on outstanding Class A Preferred Stock at the time of such payment, such payment shall be distributed among the holders of Class A Preferred Stock so that an equal amount shall be paid with respect to each outstanding share of Class A Preferred Stock. 1.5 Definition of Fair Market Value. (a) Fair Market Value ("FMV"), for the purposes of this Part 1, shall mean the market price of shares of Common Stock of the Corporation if a trading market exists for the Corporation's shares or the fair market value of the Common Stock, as ascertained in accordance with the procedure set forth in Section 1.5(b), if no trading market then exists; provided, however, that appropriate adjustment shall be made (to the nearest $.01 per share) to reflect mergers, recapitalizations, stock splits, combinations or other similar changes. (b) If at any time pursuant to the terms of this Section 1.5 it becomes necessary to determine the FMV as defined in Subsection 1.5(a) pursuant to this Subsection 1.5(b), then holder(s) of shares of Class A Preferred Stock who are entitled to receive such dividend payments in shares of Common Stock as set forth in Section 1.3 (the "Holder(s)") and the Corporation, within ten (10) business days of notice by the Corporation electing to pay such dividends in shares of Common Stock at the FMV, shall notify the other party of its selection of a nationally recognized investment banking firm as that term is understood in the investment banking industry (an "Investment Bank") to deliver an opinion as to the FMV of such securities. In the event that either party fails to notify the other party of its selection of an Investment Bank within such specified time period, the calculation of the FMV by the Investment Bank nominated by the other party shall be determinative and binding on both parties. The FMV shall be the fair market value of such securities in the aggregate which shall be determined by the Investment Banks taking into account all of the relevant factors and circumstances existing at the time of such determination. In the event that the two Investment Banks so selected are unable to agree upon the fair market value of the securities in question within thirty (30) days following their selection, then, unless the difference between the fair market value ascertained by both such Investment Banks is greater than 20% per share, the FMV shall be the arithmetic mean of the two fair market values so ascertained by the Investment Banks. In the event that the difference between the fair market values ascertained by such Investment Banks is greater than 20% per share, the two Investment Banks shall, within ten (10) days of its engagement, without consultation with the other two Investment Banks, deliver its opinion as to the FMV, and the FMV shall be conclusively calculated in accordance with the following formula: Market Price = 2A + B + C 4 where A is the FMV ascertained by the third Investment Bank and B and C are the FMVs ascertained by each of the two Investment Banks chosen earlier. Each of the three Investment Banks shall be engaged by the Holder(s) and the Corporation. The Corporation shall pay, in the aggregate, one-half of the fees and expenses of the Investment Banks, and the Holder(s) shall pay, in the aggregate, one-half of the fees and expenses of the Investment Banks, in proportion to the number of shares of Common Stock to be issued to each of them. 1.6 Definition of Market Price. Market Price shall mean, with respect to the Common Stock, the daily closing prices for the Common Stock of the Corporation (if a trading market shall exist) for the twenty (20) consecutive trading days commencing five (5) trading days preceding the day specified in the applicable section hereof with the closing price for each day being the closing price reported on the principal securities exchange upon which the Common Stock of the Corporation is traded or, if it is not so traded, then the average of the closing bid and asked prices as reported by the National Association of Securities Dealers Automated Quotation System or if not quoted thereon, in the interdealer market on the "Pink Sheets" of the National Quotation Bureau (excluding the highest and lowest bids on each day there are four or more market makers). Part 2: Optional Redemption 2.1 Time of Election. On or after the first day of the one hundred twenty first (121st) month following the date of issuance of the Class A Preferred Stock, the Corporation, at its election, may redeem all or any shares of Class A Preferred Stock (the "Scheduled Redemption Date"). 2.2 Redeemed Class A Preferred Stock to be Cancelled. The Corporation shall cancel each share of Class A Preferred Stock which it shall redeem or for any other reason acquire, and no shares of Class A Preferred Stock which shall be redeemed or otherwise acquired by the Corporation shall thereafter be reissued, sold or transferred by the Corporation to any person. The number of shares of Class A Preferred Stock which the Corporation shall be authorized to issue shall be deemed to be reduced by the number of shares of Class A Preferred Stock which the Corporation shall redeem or otherwise acquire. 2.3 Determination of Number of Each Holder's Shares to be Redeemed. If the Corporation does not redeem all of the outstanding shares of Class A Preferred Stock on the Scheduled Redemption Date, the number of shares of Calss A Preferred Stock to be redeemed from each holder thereof shall be determined by multiplying the total number of shares of Class A Preferred Stock to be redeemed by a fraction, the numerator of which shall be the total number of shares of Class A Preferred Stock held by such holder and the denominator of which shall be the total number of Shares of Class A Preferred Stock outstanding, except that in situations to which Section 2.4(b) hereof applies, the Corporation shall not repurchase the last share of Class A Preferred Stock held by any holder. 2.4 Redemption Price. (a) For each share of Class A Preferred Stock which shall be redeemed by the Corporation pursuant to this Part 2, the Corporation shall be obligated to pay to the holder of such share an amount (herein called the "Redemption Price") for such share equal to $29.34 per share. The Corporation shall be obligated to pay on any Redemption Date both the Redemption Price for each share and all dividends which shall have accrued (computed on a daily basis) on each share to and including the Redemption Date and which shall not previously have been paid. Such payments which the Corporation shall be obligated to make on any Redemption Date shall be deemed to become "due" for all purposes of this Part 2 regardless of whether paid on such Redemption Date. (b) If for any reason the Corporation is prohibited from paying accrued unpaid dividends on shares of Class A Preferred Stock being redeemed from any holder, then such accrued unpaid dividends shall be added in equal amounts per share to the Liquidation Value of the shares of Class A Preferred Stock remaining outstanding in the hands of such holder; provided, that in no event shall the Corporation redeem the last share of Class A Preferred Stock (the "Last Share") held by any holder until the Corporation shall have paid to such holder all accrued unpaid dividends on all Class A Preferred Stock held by such holder at any time. The shares of Class A Preferred Stock remaining outstanding after any redemption (including the Last Share), and including the accrued unpaid dividends thereon, shall continue to earn cumulative dividends at the rate and in the manner prescribed in Section 1.3. (c) Each holder of Class A Preferred Stock shall be entitled to receive on or at any time after any Redemption Date the full Redemption Price, plus accrued unpaid dividends, for each share of Class A Preferred Stock held by such holder which the Corporation shall be obligated to redeem on the Scheduled Redemption Date upon surrender by such holder to the Corporation at one of its share transfer agencies, or in the event that at that time there is no such agency, then at the Corporation's principal office, of the certificate representing such share of Class A Preferred Stock duly endorsed in blank or accompanied by an appropriate form of assignment duly endorsed in blank. After the payment by the Corporation in the manner required by Section 5.3 of the full Redemption Price for any Class A Preferred Stock, plus accrued unpaid dividends except as otherwise provided in Section 2.4(b), all rights of the holder of such Stock shall (whether or not the certificate representing such share of Class A Preferred Stock shall have been surrendered for cancellation) cease and terminate with respect to such share of Class A Preferred Stock. 2.5 Allocation of Partial Redemption Payments Among Holders of Class A Preferred Stock. If at any time the Corporation shall not be able to pay the full Redemption Price for all shares which the Corporation shall have become obligated to redeem at or prior to such time, each holder of shares of Class A Preferred Stock shall have the right to have redeemed by the Corporation a number of such holder's shares equal to the product derived by multiplying the total number of shares of Class A Preferred Stock which the Corporation shall be able to redeem at such time by a fraction, the numerator of which shall be the total number of shares of Class A Preferred Stock which the Corporation shall have become obligated to redeem from such holder at or prior to such time (but which the Corporation shall not have redeemed at or prior to such time) and the denominator of which shall be the total number of shares of Class A Prefcerred Stock which the Corporation shall have become obligated to redeem from all holders of Class A Preferred Stock at or prior to such time (but which the Corporation shall not have redceemed at or prior to such time). Part 3: Conversion 3.1 Right to Convert. (a) The shares of Class A Preferred Stock, at the option of the respective holders thereof, may at any time, and from time to time, be converted into fully paid and nonassessable shares of Common Stock of the Corporation at the "Conversion Rate" provided for in subsection 3.1(g) below. (b) So long as any shares of Class A Preferred Stock shall be outstanding, the Corporation will not make any share distribution on its shares of Common Stock unless the Corporation, by proper legal action, shall have authorized and reserved an amount of shares equal to the amount thereof which would have been declared upon the shares of Common Stock into which such shares of Class A Preferred Stock might have been converted, and the Corporation shall, out of such additional shares so authorized and reserved on account of such share distribution, upon the conversion of any shares of Class A Preferred Stock, deliver with any shares of Common Stock into which shares of Class A Preferred Stock are converted, but without additional consideration therefor, such number of shares of Common Stock as would have been deliverable to the holders of the Common Stock into which such shares of Class A Preferred Stock had been so converted had such shares of Common Stock been outstanding at the time of such share distribution. For the purpose of this Section 3.1, a share distribution shall be a dividend payable only in shares of Common Stock of the Corporation of the same class as the present authorized shares of Common Stock. This shall not limit the right of the Corporation, however, to declare and pay any dividends whether in cash, shares, or otherwise, except as specifically otherwise provided in this Article FOURTH. (c) In case of any combination or change of the shares of Class A Preferred Stock or of the shares of Common Stock into a different number of shares of the same or any other class or classes, or in case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Conversion Rate shall be appropriately adjusted so that the rights of the holders of shares of Class A Preferred Stock and of the shares of Common Stock will not be diluted as a result of such combination, change, consolidation, merger, sale or conveyance. Adjustments in the rate of conversion shall be calculated to the nearest one-tenth of a share. (d) So long as any shares of Class A Preferred Stock are outstanding, the Corporation shall reserve and keep available out of its duly authorized but unissued shares for the purpose of effecting the conversion of the shares of Class A Preferred Stock such number of its duly authorized shares of Common Stock and other securities as shall from time to time be sufficient to effect the conversion of all outstanding shares of Class A Preferred Stock. (e) Any dividends accrued on any shares of Class A Preferred Stock from the preceding Dividend Payment Date to the date of conversion shall be payable to the holder of record of such shares immediately prior to its conversion. In the event that any dividends on the outstanding shares of Common Stock shall have been declared prior to, and shall be payable subsequent to, the conversion of such shares of Class A Preferred Stock, such dividends shall not be payable on any shares of Common Stock into which such shares of Class A Preferred Stock shall have been converted. (f) In the event that the Corporation shall at any time or from time to time offer to the holders of the shares of Common Stock any rights to subscribe for shares or any other securities of the Corporation, each holder of record of the shares of Class A Preferred Stock at the time at which the record is taken of the holders of shares of Common Stock entitled to receive such rights shall be entitled to subscribe for and purchase, at the same price at which such shares or other securities are offered to the holders of the shares of Common Stock and on the same terms, the number of such shares or the amount of such other securities for which such holder would have been entitled to subscribe if he had been the holder of record at that time of the number of shares of Common Stock into which his shares of Class A Preferred Stock were convertible (pursuant to the provisions hereof) at such record time. (g) The initial "Conversion Rate", subject to adjustment as provided above, shall be six shares of Common Stock for each share of Class A Preferred Stock. 3.2 Surrender of Certificates. Any holder of shares of Class A Preferred Stock desiring to exercise the right of conversion herein provided shall surrender to the Corporation at one of its share transfer agencies, or in the event that at that time there is no such agency, then at the principal office of the Corporation, the certificate or certificates representing the shares of Class A Preferred Stock so to be converted, duly endorsed in blank for transfer or accompanied by properly executed instruments for the transfer thereof, together with a written request for the conversion thereof. The Corporation shall execute and deliver, at the Corporation's expense, a new certificate or certificates representing the shares of Common Stock into which the shares of Class A Preferred Stock have been converted and, if applicable, a new certificate or certificates representing the balance of the shares of Class A Preferred Stock formerly represented by the surrendered certificate or certificates which, at the holder's request, shall not have been converted into shares of Common Stock. The Corporation shall not be required to issue fractions of shares of Common Stock upon conversion of the shares of Class A Preferred Stock. In the event any fractional interest in a share of Common Stock shall be deliverable upon the conversion of any share of Class A Preferred Stock, the Corporation shall, if surplus is available, purchase such fractional interest for an amount in cash equal to the current FMV of such fractional interest. Part 4: Liquidation. 4.1 Rights of Holders of Class A Preferred Stock. In the event of any voluntary or involuntary liquidation (whether complete or partial), dissolution or winding up of the Corporation, the holders of Class A Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, an amount in cash equal to the sum of $29.34 per share plus any amounts payable pursuant to Section 2.4(b) (the "Liquidation Value"), plus all unpaid dividends accrued thereon to the date of final distribution. No distribution shall be made on any Junior Securities (as defined in Section 5.1) by reason of any voluntary or involuntary liquidation (whether complete or partial), dissolution or winding up of the Corporation unless each holder of any share of Class A Preferred Stock shall have received all amounts to which such holder shall be entitled under this Section 4.1. 4.2 Allocation of Liquidation Payments Among Holders of Class A Preferred Stock. If upon any dissolution, liquidation (whether complete or partial), or winding up of the Corporation, the assets of the Corporation available for distribution to holders of Class A Preferred Stock (hereinafter in this Section 4.2 called the "Total Amount Available") shall be insufficient to pay the holders of outstanding Class A Preferred Stock the full amounts to which they shall be entitled under Section 4.1, each holder of Class A Preferred Stock shall be entitled to receive an amount equal to the product derived by multiplying the Total Amount Available by a fraction, the numerator of which shall be the number of shares of Class A Preferred Stock held by such holder and the denominator of which shall be the total number of shares of Class A Preferred Stock then outstanding. Part 5: Additional Provisions Governing Class A Preferred Stock. 5.1 Seniority Over Junior Securities. No dividend shall be paid on any Junior Securities, no distribution of cash or property of any kind (other than Junior Securities) shall be made for any reason (including but not limited to any voluntary or involuntary dissolution, winding up, or complete or partial liquidation of the Corporation) by the Corporation or any subsidiary with respect to any Junior Securities, and no redemption or other acqujisition of any Junior Securities shall be made directly or indirectly by the Corporation if, when the payment of any such dividends, distribution, redemption or acquisition is to be made: (i) any dividend which shall have become due on any share of Class A Preferred Stock shall remain unpaid (except unpaid dividends added to the Liquidation Value of Class A Preferred Stock pursuant to Section 2.4), or (ii) any other payment or distribution on or with respect to any shares of Class A Preferred Stock under the terms hereof which shall have been due from the Corporation at such time shall not have been made in full. The term "Junior Securities" shall mean any equity security of any kind which the Corporation shall at any time issue or be authorized to issue other than Class A Preferred Stock. 5.2 Voting Rights. Class A Preferred Stock shall not have any voting rights or powers except as required by the General Corporation Law of Delaware. 5.3 Method of Payments. Any payment at any time due with respect to any share of Class A Preferred Stock (including but not limited to any payment of any dividend due on such share, the payment of the Redemption Price for such share, and any payment due on such share under Part 4) shall be made by means of a check to the order of the record holder shown on the Corporation's records, mailed by first class mail. 5.4 Amendment and Waiver. No change in the provisions of this Part 5 of this Article FOURTH of this Certificate of Incorporation affecting any interests of the holders of shares of Class A Preferred Stock shall be binding or effective unless such change shall have been approved in writing by the holders of at least 51% of the shares of Class A Preferred Stock outstanding at the time such change shall be made, provided that no such change shall, without the prior written consent of the holders of an aggregate of at least 80% of the shares of Class A Preferred Stock then outstanding, be made in the applicable dividend rate. 5.5 Registration of Transfer of Class A Preferred Stock. The Corporation will keep at one of its share transfer agencies, or in the event that at that time there is no such agency, then in its principal office, a register for the registration of the Class A Preferred Stock. Upon the surrender of any certificate representing shares of Class A Preferred stock at such agency or the Corporation's principal office, the Corporation will, at the request of the registered holder of such certificate, execute and deliver, at the Corporation's expense, a new certificate or certificates in exchange representing the number of shares of Class A Preferred Stock represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Class A Preferred Shares as shall be requested by the holder of the surrendered certificate, shall be substantially identical in form to the surrendered certificate, and the shares of Class A Preferred Stock represented by such new certificate shall earn cumulative dividends from the date to which dividends shall have been paid on the shares represented by the surrendered certificate or certificates. 5.6 Replacement. Upon receipt by the Corporation of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of Class A Preferred Stock (an affidavit of the registered holder without bond being satisfactory for this purpose) the Corporation, at its expense, will execute and deliver in lieu of such certificate, a new certificate of like kind, representing the number of shares of Class A Preferred Stock which shall have been represented by such lost, stolen destroyed or mutilated certificate, dated and earning cumulative dividends from the date to which dividends shall have been paid on such lost, stolen, destroyed or mutilated certificate. Part 6: Additional Preferred Stock. 6.1 Authority of Board of Directors. Shares of Additional Preferred Stock may be issued from time to time in series or otherwise and the Board of Directors of the Corporation is hereby authorized, subject to the limitations provided by law, to establish and designate the series, if any, of the Additional Preferred Stock, to fix the number of shares constituting any such series, and to fix the voting powers, designations, and relative, participating, optional, conversion, redemption and other rights of the shares of Additional Preferred Stock or series thereof, the qualifications, limitations and restrictions thereof, and to increase and to decrease the number of shares of Additional Preferred Stock or shares constituting any such series. The authority of the Board of Directors of the Corporation with respect to shares of Additional Preferred Stock or any series thereof shall included but shall not be limited to the authority to determine the following: (a) The designation of any series. (b) The number of shares initially constituting any such series. (c) The increase, and the decrease to a number not less than the number of the outstanding shares of any such series, of the number of shares constituting such series theretofore fixed. (d) The rate or rates and the times at which dividends on the shares of Additional Preferred Stock or any series thereof shall be paid, and whether or not such dividends shall be cumulative, and, if such dividends shall be cumulative, the date or dates from and after which they shall accumulate. (e) Whether or not the shares of Additional Preferred Stock or series thereof shall be redeemable, and, if such shares shall be redeemable, the terms and conditions of such redemption, including but not limited to the date or dates upon or after which such shares shall be redeemable and the amount per share which shall be payable upon such redemption, which amount may vary under different conditions and at different redemption dates. (f) The amount payable on the shares of Additional Preferred Stock or series thereof in the event of the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; provided, however, that the holders of shares ranking senior to other shares shall be entitled to be paid, or to have set apart for payment, not less than the liquidation value of such shares before the holders of shares of the Common Stock or the holders of any other series of preferred stock ranking junior to such shares. (g) Whether or not a sinking fund shall be provided for the redemption of the shares of Additional Preferred Stock or series thereof, and, if such a sinking fund shall be provided, the terms and conditions thereof. (h) Whether or not a purchase fund shall be provided for the shares of Additional Preferred Stock or series thereof, and, if such a purchase fund shall be provided, the terms and conditions thereof. (i) Whether or not the shares of Additional Preferred Stock or series thereof shall have conversion privileges, and, if such shares shall have conversion privileges, the terms and conditions of conversion, including but not limited to any provisions for the adjustment of the conversion rate or the conversion price. (j) Any other relative rights, preferences, qualifications, limitations and restrictions. II. COMMON STOCK All shares of Common Stock shall be identical and shall entitle the holders thereof to the same rights and privileges. Part 1: Dividends 1.1 Dividends. When and as dividends are declared upon the Common Stock, whether payable in cash, in property or in securities of the Corporation, the holders of Common Stock shall be entitled to share equally, share for share, in such dividends. 1.2 Dissolution. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, either voluntarily or involuntarily, the holders of shares of Common Stock shall be entitled, after payment or provision for payment of the debts and other liabilities of the Corporation and the amounts to which the holders of any outstanding preferred shares, including outstanding shares of Class A Preferred Stock, shall be entitled in accordance with I. PREFERRED STOCK, Part 1, Section 1.3 of this Article FOURTH as respects the Class A Preferred Stock or the provisions of a certificate of designation with respect to any class or series of Additional Preferred Stock which may then be outstanding, to share ratably in the remaining assets of the Corporation. 1.3 Voting Rights. Except as otherwise provided herein or by law, the holders of the Common Stock shall be entitled to one vote per share on all matters upon which Stockholders are entitled to vote. IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment of Certificate of Incorporation on the 29th day of February, 1996, and affirm that the statements contained herein are true under the penalty of perjury. /s/ Richard F. Moldin Richard F. Moldin,President /s/ William R. Griffith William R. Griffith, Secretary EX-10 3 EXHIBIT 10(XXIII) EXHIBIT 10 (xxiii) DEVELOPMENT AND DISTRIBUTION AGREEMENT BETWEEN F.H. FAULDING & CO. LIMITED AND FAULDING PHARMACEUTICAL CO. TABLE OF CONTENTS 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . 2 2. APPOINTMENT. . . . . . . . . . . . . . . . . . . 6 3. THE PRODUCTS.. . . . . . . . . . . . . . . . . . 7 4. THE PRODUCT SUMMARY SHEETS.. . . . . . . . . . . 9 5. PRODUCT DEVELOPMENT REVIEW PROCESS.. . . . . . .10 6. PRODUCT REGISTRATION.. . . . . . . . . . . . . .12 7. FORECASTS AND ORDERS. . . . . . . . . . . . . . .13 8. INVOICED PURCHASE PRICE;PURCHASE PRICE ADJUSTMENT.14 9. SHIPMENT OF PRODUCTS. . . . . . . . . . . . . . .17 10. AUDITS.. . . . . . . . . . . . . . . . . . . . .19 11. SUB-LICENSEES. . . . . . . . . . . . . . . . . .20 12. QUALITY CONTROL. . . . . . . . . . . . . . . . .21 13. PRODUCT ACCEPTANCE.. . . . . . . . . . . . . . .22 14. NOTIFICATION OF ADVERSE DRUG EXPERIENCES.. . . .24 15. RECALLS. . . . . . . . . . . . . . . . . . . . .25 16. RELATIONSHIP OF FAULDING AND FPC.. . . . . . . .26 17. TRADEMARKS AND LABELING. . . . . . . . . . . . .26 18. ADVERTISING. . . . . . . . . . . . . . . . . . .27 19. NOTICES. . . . . . . . . . . . . . . . . . . . .28 20. WARRANTIES AND INDEMNIFICATIONS. . . . . . . . .28 21. CONFIDENTIALITY. . . . . . . . . . . . . . . . .30 22. TAXATION ISSUES. . . . . . . . . . . . . . . . .31 23. TERM AND TERMINATION.. . . . . . . . . . . . . .32 24. FORCE MAJEURE. . . . . . . . . . . . . . . . . .33 25. COMPLIANCE WITH LAW. . . . . . . . . . . . . . .33 26. EXECUTION OF ALL NECESSARY ADDITIONAL DOCUMENTS.34 27. WAIVER.. . . . . . . . . . . . . . . . . . . . .34 28. ASSIGNMENT AND AMENDMENT.. . . . . . . . . . . .34 29. ENTIRE AGREEMENT.. . . . . . . . . . . . . . . .34 30. GOVERNING LAW. . . . . . . . . . . . . . . . . .34 31. SEVERABILITY.. . . . . . . . . . . . . . . . . .34 32. HEADINGS.. . . . . . . . . . . . . . . . . . . .35 Schedule A Initial Products DEVELOPMENT AND DISTRIBUTION AGREEMENT dated January , 1996 (the "Agreement") by and between F.H. FAULDING & CO. LIMITED, a corporation organized under the laws of the State of South Australia with offices at 160 Greenhill Road, Parkside 5063, South Australia ("FAULDING") and FAULDING PHARMACEUTICAL CO. a corporation organized under the laws of the State of Delaware with its principal place of business at 200 Elmora Avenue, Elizabeth, New Jersey ("FPC"). WHEREAS, FAULDING is engaged in the development and manufacture of certain injectable pharmaceutical and medical products and FPC is a distributor and seller of injectable pharmaceutical and medical products; WHEREAS, FAULDING has negotiated the termination of certain agreements pursuant to which FAULDING, or one of its Affiliates, had granted to certain third parties the exclusive right to distribute the Initial Products (as hereinafter defined) in the United States; WHEREAS, the parties wish to formalize their business arrangement pursuant to which FAULDING has permitted FPC, since September 1995, to distribute one of the Initial Products, which is identified on Schedule A hereto, on an exclusive basis in the Territory; WHEREAS, FPC wishes to be appointed, and FAULDING has agreed to appoint FPC, as FAULDING's exclusive distributor in the Territory of each of the Initial Products under the terms and provisions of this Agreement; WHEREAS, the parties intend, on an ongoing basis, to review FAULDING's development program for the Territory with the expectation that new injectable products may be added as Products under the provisions of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants contained herein, FAULDING and FPC agree to the following: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (a) "ADE" shall mean adverse drug experience as defined under the laws or regulations of the Regulatory Authority. (b) "Affiliates" shall mean (i) an entity controlled by a common parent that owns more than fifty percent of the voting stock of both such entity and one of the parties to this Agreement and (ii) such parent company. (c) "Antecedent Supply Agreements" shall mean (i) the Marketing and Supply Agreement dated February 2, 1990 between FAULDING Medical Device Co. (formerly, David Bull Laboratories U.S.A. Inc.) and Schein Pharmaceutical Inc. and (ii) the Manufacturing and/or Supply Agreement, dated August 23, 1993, between FAULDING (formerly, David Bull Laboratories Pty Ltd.) and Fujisawa USA, Inc. (d) "Average Selling Price" shall mean, with respect to each Product in any Calendar Quarter, the Net Sales Value of the Net Units Sold during such Quarter divided by the number of Net Units Sold during such Quarter. (e) "Batch" with respect to any of the Products shall refer to a separate and distinct quantity of such Product, which is (i) processed under continuous and identical conditions and designated by a distinctive batch number and an expiration date and (ii) approved by the Regulatory Authority. (f) "Calendar Quarter" shall mean those three month periods commencing, respectively, on January 1, April 1, July 1 and October 1, except that the initial Calendar Quarter shall mean the period commencing on the FPC Licensing Date and ending on the last day of the Calendar Quarter in which the FPC Licensing Date occurs. (g) "Certificate of Analysis" shall mean a document certifying that a Batch of a Product meets all Specifications, which is dated and signed by a duly authorized representative of the Quality Control or Quality Assurance department of FAULDING. (h) "DEA" shall mean the United States Drug Enforcement Agency. (i) "FDA" shall mean the United States Food and Drug Administration. (j) "Firm Order" shall have the meaning set forth in Section 7(a) of this Agreement. (k) "FPC Licensing Date" shall mean the later of the Inclusion Date and the date upon which the parties obtain all necessary approvals and/or registrations from the Regulatory Authority to enable Marketing by FPC of such Product in the Territory. (l) "GMP" shall mean good manufacturing practice as required by the regulations of the FDA and/or required by any other like authority, whether federal or state, regulating the development and manufacturing and Marketing of therapeutic substances in any part of the Territory and Australia and the import and Marketing of therapeutic substances in any part of the Territory. (m) "Inclusion Date" shall mean with respect to any product the date upon which the parties hereto have executed a Product Summary Sheet for such product and have thereby incorporated such product as a Product under the terms and conditions of this Agreement as of such date. (n) "Initial Products" shall mean the Products set forth on Schedule A of this Agreement, which the parties intend to incorporate as Products, as set forth in Section 3(a) of this Agreement. (o) "Invoiced Purchase Price" shall have the meaning set forth in Section 8(b)(iii) of this Agreement. (p) "Issue of Concern" shall have the meaning set forth in Section 4 of this Agreement. (q) "Marketing" in respect of any of the Products means the promotion, advertising, distribution and sale of such Product and includes a product launch campaign. (r) "Marketing Year" shall mean with respect to each Product the period from July 1 to June 30 of each calendar year, except that the initial Marketing Year shall mean the period commencing on the FPC Licensing Date and ending on the last day of the month of June immediately following the FPC Licensing Date. (s) "Net Sales Value" shall mean with respect to the Net Units Sold of any Product during any Calendar Quarter the gross sales of FPC from sales of such Product to independent third parties (not including amounts received as reimbursement of freight, insurance and other costs or taxes incurred as a result of the direct sale to an independent third party) invoiced by FPC during such Quarter, less price discounts, trade returns, trade allowances, chargebacks or rebates relating to such sales, as calculated using FPC's standard accounting procedures, in accordance with U.S. generally accepted accounting principles, consistently applied. (t) "Net Units Sold" shall mean, with respect to the sales of any Product during any Calendar Quarter during the term of this Agreement, the total number of units of such Product sold during such Quarter, less any returns. (u) "Product Review Liaison" shall mean the liaison appointed by each party to communicate with the other party with regard to the product development review process with respect to each Product, as set forth in Sections 4 and 5 of this Agreement. (v) "Product Summary Sheet" in respect of each Product shall have the meaning set forth in Section 4 of this Agreement. (w) "Products" shall mean those injectable products for which a Product Summary Sheet has been prepared and countersigned by both parties to this Agreement and such product has thereby been incorporated and made a part of this Agreement. (x) "Purchase Price" shall mean with respect to each of the Products sold to FPC hereunder the greater of (i) fifty (50%) percent of the Average Selling Price or (ii) 110% of the U.S. TMC of such Product. (y) "Purchase Price Adjustment" shall have the meaning set forth in Section 10(b) hereof. (z) "Registration" with respect to any Product shall mean the gaining of all permissions from all Regulatory Authorities, including, without limitation the DEA, necessary to permit the commencement of Marketing by FPC of such Product in the Territory. (aa) "Regulatory Application" shall mean, as the case may be, the New Drug Application, the Abbreviated New Drug Application or the Abbreviated Antibiotic Drug Application that is filed with the FDA in respect of a particular Product. (bb) "Regulatory Authority" shall mean the FDA, the DEA and/or any other like authority, whether federal or state, regulating the import, and Marketing of therapeutic substances in any part of the Territory and the Therapeutics Goods Administration and/or any other like authority in Australia. (cc) "Specifications" of a Product shall mean the specifications for the Product as stated in the Regulatory Application for such Product. (dd) "Territory" shall mean the U.S. and its territories and possessions. (ee) "U.S." shall mean the United States of America. (ff) "U.S. TMC" with respect to any Product shall mean the cost to FAULDING of manufacturing each unit of such Product during any Calendar Quarter on a fully absorbed basis, calculated according to FAULDING's standard costing system, subject to normal accounting procedures, consistent with generally accepted Australian accounting principles and , subject to the provisions of Section 8(c) hereof, as converted into U.S. dollars at FAULDING's budgeted exchange rate, which is ordinarily established in the Calendar Quarter commencing January 1 of each Year; provided, however, such exchange rate shall not be greater than 105% nor less than 95% of the T/T mid rate of the Australia and New Zealand Banking Group Limited in Adelaide, Australia on the date that the budgeted rate is established. 2. APPOINTMENT. (a) Subject to the provisions of Sections 3, 4 and 5 of this Agreement, FAULDING hereby grants to FPC beginning on the FPC Licensing Date for each Product and extending for the period of time that such Product is included as a Product under the terms of this Agreement, the exclusive right to Market such Product in the Territory, and FAULDING agrees to supply to FPC, subject to the provisions of Sections 5 and 7 of this Agreement, all of its requirements of such Product. (b) FPC agrees that it will neither Market nor attempt to Market any Product outside the Territory either on its own account or through any third party nor will it sell any Product to any person or corporation within the Territory where FPC has reasonable grounds to believe that such other person or corporation intends to sell such Product outside the Territory. (c) Subject to the provisions of Section 5(b)(vii), 5(c)(iv) and 5(d) of this Agreement, FPC agrees that during the term of this Agreement, it shall not source any of the Products from any third party without the prior written consent of FAULDING. (d) Subject to the provisions of Section 5 of this Agreement, FPC shall use reasonable efforts to Market the Products covered by this Agreement during the term hereof and as contemplated by Section 6 of this Agreement, to obtain and/or maintain the Registration of the Products in the Territory. (e) Subject to the time tables set forth in the Product Summary Sheets and/or established or modified during the product development review process contemplated by Section 5 of this Agreement, FAULDING shall use reasonable efforts, as may be applicable, to develop the Products for Registration and Marketing in the Territory and, subject to the provisions of Sections 7, 9 and 10(c) of this Agreement, to supply FPC with Products. (f) FAULDING hereby grants FPC a right of first refusal to Market within the Territory as a Product hereunder any generic injectable product developed or manufactured by FAULDING, and acceptable for U.S. registration, during the term of this Agreement, unless otherwise agreed to by the parties. 3. THE PRODUCTS. (a) The parties agree that it is their mutual intention that each of the Initial Products shall be incorporated into this Agreement as a Product on a date subsequent to the date on which exclusive marketing rights under the Antecedent Supply Agreements terminate, as set forth on Schedule A hereto. The parties further acknowledge that FPC has been marketing one of the Initial Products, which is identified on Schedule A hereto, since September 1995 and that all pertinent terms of this Agreement, including without limitation, the payment terms set forth in Sections 8 and 9 hereto, shall apply to sales of such Initial Product that have occurred from September 1995 up to the date hereof as if such sales had occurred during the term hereof. As soon as reasonably practicable after the date hereof, the parties shall commence negotiations of the terms of a Product Summary Sheet to include each Initial Product as a Product under the terms of this Agreement. (b) As provided, and subject to the conditions set forth, in Section 2(f) hereof, at any time during the term of this Agreement, FAULDING may notify FPC in writing, by means of FAULDING's "Monthly International Business & Product Development Minutes", or by any other written communication delivered to FPC, of its intent to make a pharmaceutical product not covered by this Agreement available to FPC (the "FAULDING Notice of Intent"). FPC shall have sixty days from its receipt of the FAULDING Notice of Intent to inform FAULDING in writing whether or not it wishes to negotiate the terms of a Summary Product Sheet to include such product as an additional Product under the terms of this Agreement (the "Section 3(b) Notice"). If (i) FPC informs FAULDING that it does not have an interest in negotiating with FAULDING, (ii) FPC fails to deliver to FAULDING a Section 3(b) Notice, within sixty (60) days of its receipt of the FAULDING Notice of Intent, of its interest in negotiating with FAULDING, or (iii) the parties, after negotiating in good faith for a period of an additional sixty (60) days from the date of receipt by FPC of the Section 3(b) Notice, are unable to come to an agreement on the terms that would make such new product a Product hereunder, FAULDING shall have the right to register and Market such product in the Territory and/or enter into an agreement with any third party for the registration and Marketing of such product in the Territory; provided, however, that the terms offered to any such third party shall not be more favorable than those that had been offered to FPC in the negotiations described in this Section 3(b). (c) At any time during the term of this Agreement, FPC may notify FAULDING in writing of its desire to Market a pharmaceutical product in the Territory (the "FPC Product Proposal"). Such Proposal will contain as full a description of the product as reasonably possible, including, without limitation, detailed unit forecasts for the first five-year Marketing period, the estimated selling prices for all presentations requested of FAULDING and, as applicable, the requested timetable for development and delivery of registration materials for submission of a Regulatory Application. (d) The parties acknowledge and agree that it is their mutual intent under Section 3(c) for FPC to, and FPC hereby does, grant FAULDING a right of first refusal to supply injectable anti-cancer products on FPC's behalf but that, subject to the limitation set forth in the last sentence of Section 3(e) hereof, FPC shall be in no way restricted from sourcing any other products from any other third party. (e) FAULDING shall have sixty (60) days from its receipt of the FPC Product Proposal to inform FPC in writing whether or not it wishes to negotiate the terms of a Product Summary Sheet to include such product as an additional Product under the terms of this Agreement (the "Section 3(e) Notice"). If (i) FAULDING informs FPC through such Notice, that it does not have an interest in negotiating with FPC, (ii) FAULDING fails to deliver a Section 3(e) Notice to FPC, within sixty (60) days of its receipt of the FPC Product Proposal or (iii) the parties, after negotiating in good faith for a period of an additional sixty (60) days from the date of receipt by FPC of the Section 3(e) Notice, are unable to come to an agreement on the terms that would make such new product a Product hereunder, FPC shall have the right to Market such product independently of this Agreement and to enter into an agreement with a third party for the purchase, and(as may be applicable) the development, of such product from such third party; provided, however, that the material terms offered to such third party must be essentially the same as, and, in any event no more favorable than, the material terms of the FPC Product Proposal delivered to FAULDING. Notwithstanding the provisions of Section 3(d) hereof to the contrary, once FPC has delivered an FPC Product Proposal to FAULDING hereunder, it may not Market, nor negotiate with any third party to develop, manufacture or Market the product which is the subject of the FPC Product Proposal until one of the conditions set forth in Subsection (i), (ii) or (iii) of this Section 3(e) has been satisfied. 4. THE PRODUCT SUMMARY SHEETS. (a) The parties, upon reaching an agreement between them to incorporate any product as a Product, as described in Section 3 of this Agreement, shall prepare and countersign a Product Summary Sheet in respect of such Product. (b) Each Product Summary Sheet shall describe the Product and shall set forth the material terms with respect to the development, manufacturing and Marketing of the Product that have been agreed to by the parties as of the execution date thereof, including, without limitation, the targeted submission date to the FDA, and as set forth in Section 8 of this Agreement, the estimated U.S. TMC per unit, the estimated Net Selling Price per unit and the Invoiced Purchase Price per unit for the first Marketing Year. The detailed content and requirements of the Product Summary Sheet will be agreed upon between the parties from time to time. 5. PRODUCT DEVELOPMENT REVIEW PROCESS. (a) The parties shall each appoint a liaison (the "Product Review Liaison") to communicate with each other with regard to information required in Section 4 and this Section 5 hereof. Either party may change its Product Review Liaison by written notice to the other party. (b) During the term of this Agreement, the parties, through their Product Review Liaisons (i) shall amend the Product Summary Sheets, through a written document countersigned by both such Liaisons, to reflect any material changes in the terms between them with respect to each Product and (ii) shall promptly give each other written notice, by facsimile, of any "Issue of Concern" associated with any of the Products (as defined hereafter in Section 5(c)hereof) as to which FAULDING or FPC obtains information. (c) For purposes of this Agreement, an "Issue of Concern" will mean any circumstance that, in the reasonable opinion of either party, may materially affect the timing and continued economic viability of the development, manufacture or Marketing of any Product, including, without limitation, the following: (i) the manufacture, use or sale of any of the Products has resulted in, or may result in, the infringement of a third party's patent or other intellectual property rights or the occurrence of any other intellectual property issue associated with any of the Products that has, or may have, a material effect on either party's business; (ii) the development of any Product or submissions of a Regulatory Application to the Regulatory Authority is not going to be achieved, or is not likely to be achieved, within six (6) months after the relevant due dates as agreed to by the parties and set forth in the most current Product Summary Sheet; (iii) during any Marketing Year, the forecasted sales of such Product are less than 75% of the forecasted sales listed in the most current Product Summary Sheet for such Product; (iv) during any Marketing Year, the forecasted net profit before taxes is less than 75% of the forecasted net profit before taxes from sales of such Product that is listed in the most current Product Summary Sheet for such Product; (v) projected development, manufacturing, Marketing or Registration costs of either party are currently expected to be greater than 130% of such costs previously forecasted by such party; (vi) the estimated Net Selling Price, the estimated U.S. TMC or the Invoiced Purchase Price, in the reasonable opinion of either party, does not reflect prevailing market conditions of such Product; (vii) FAULDING is unable to supply a Product ordered by FPC for a period of time exceeding ninety (90) days after the requested delivery date; or (viii) either party has become aware of a serious safety concern with respect to such Product. (d) The recipient of any notice with respect to an Issue of Concern will promptly acknowledge receipt of such information, and, thereafter, the parties will negotiate in good faith to resolve any such Issue of Concern to their mutual satisfaction. FAULDING shall not be required to deliver any Product pursuant to which it has delivered or received, as the case may be, an Issue of Concern Notice under Section 5(c)(i) or 5(c)(viii)hereof until such time, if ever, that the parties agree that such Issue of Concern is no longer applicable to such Product. (e) After due deliberation and good faith negotiations between them, if either party determines that it is not in its best interest to continue to develop, manufacture or sell, as the case may be, a Product or Products pursuant to the terms of this Agreement, such party may, by written notice to the other party, delete such product as a Product hereunder. In addition to its right to suspend delivery of Products set forth in Section 5(d) hereof, FAULDING may only be obligated to deliver Products, which have been deleted pursuant to this Section 5(e),that are ordered prior to the date of deletion and the provisions of Section 23(c) shall apply with respect to the deleted Products insofar as such provisions are consistent with such deletion. 6. PRODUCT REGISTRATION. (a) FPC shall apply for registration, or for amendments to existing registrations, of the Products as required by applicable laws and regulations and obtain and maintain such registrations in its own name and at its own expense; provided, however, that prior to expending any such registration costs, FPC shall submit a written estimate of such costs to FAULDING for FAULDING's prior written approval. and provided, further, however, that upon expiration or the termination of the Agreement for any reason, whatsoever, or upon the deletion of any Product hereunder, FPC, at the request of FAULDING, shall promptly transfer the registration to FAULDING, or its designee, of all of the Products affected, as the case may be, by such expiration, termination or deletion. After the transfer of the registration of such Products to FAULDING or its designee, FAULDING shall promptly reimburse FPC for (i) all of FPC's reasonable expenses(A) that relate directly to such registration or transfer (other than the expenses set forth in Section 6(b) hereto for which FPC is solely responsible) and (B) for which FAULDING has given its prior written approval, as set forth in this Section 6(a), or (ii) for such other amount as may be negotiated by the parties prior to the transfer. (b) FPC shall bear the responsibility and expense for any applicable filings and approvals made in connection with advertising and promotional materials and shall, at its sole expense, comply with requirements imposed by the Regulatory Authority relating to the marketing and distribution of each of the Products in the Territory. (c) FAULDING shall provide reasonable assistance to FPC in the fulfillment of its obligations pursuant to Sections 6(a) and 6(b) hereof. 7. FORECASTS AND ORDERS (a) At least ninety (90) days prior to the commencement of the Marketing of any Product, and, thereafter, by the fifteenth (15th) day of each subsequent month during the term of this Agreement, FPC shall provide FAULDING with a forecast of the number of Batches of each Product to be ordered for delivery during each month for the succeeding twenty-four (24) month period. Such forecast shall not be a binding obligation on either party with the exceptions that (i) the forecast for the most current four month period shall constitute a firm order(the "Firm Order"); and (ii) FAULDING shall not be required to supply during any such four month period more than one hundred and twenty per cent (120%) of the amount forecasted in the Firm Order for such four month period but will use all reasonable efforts to supply the full amount ordered. (b) The Firm Orders and acknowledgments thereof may be issued or given on FPC's or FAULDING's standard purchase order forms, as the case may be, containing standard terms and conditions, but the terms and conditions of this Agreement, and not such standard terms and conditions, shall govern the purchase and sale of Products under this Agreement. (c) The Firm Order shall state in reasonable detail the quantities of each Product to be delivered to FPC and the requested dates for delivery of each such Product. Except with the written consent of FAULDING, no Firm Order of any Product will require FAULDING to make a shipment of such Product (i) on a date less than ninety (90) days after the date of the order or (ii) containing less than the Batch size of such Product. (d) FPC shall pay in full in U.S. dollars against FAULDING's invoices for any Product shipped to it pursuant to this Agreement within sixty (60) days from the date of delivery of such Products to the destination in the Territory designated by FPC. FPC shall wire transfer all payments hereunder to a bank or banks designated in writing by FAULDING unless instructed otherwise by FAULDING. As set forth in Section 8 hereof, FPC shall pay the aggregate Invoiced Purchase Price for each of the Products, subject to the Purchase Price Adjustment mechanism described in such Section. 8. INVOICED PURCHASE PRICE; PURCHASE PRICE ADJUSTMENT. (a) FPC shall sell each of the Products to third parties in arms' length transactions at prices to be set by FPC in its sole discretion. (b) Ninety (90) days prior to the commencement of each Marketing Year, the parties will amend each Product Summary Sheet to reflect the following information agreed upon by the parties for such Marketing Year with respect to each unit of such Product: (i) FAULDING's good faith estimate of the U.S. TMC; (ii) FPC's good faith estimate of the Net Selling Price; and (iii) the "Invoiced Purchase Price", which for purposes of this Agreement shall be the parties' good faith estimate of the Purchase Price, as calculated in Section 1(x) hereof. (c) All orders of each Product delivered to FPC by FAULDING hereunder during each Marketing Year will be invoiced at the Invoiced Purchase Price for such Product set forth in such Product Summary Sheet, unless the parties agree in writing to an amended Invoiced Purchase Price and provided, further, that if the aggregated Purchase Price of any Product at the end of the first, second or third Calendar Quarter of any Marketing Year is greater than 110% or less than 90% of the aggregated Invoiced Purchase Price paid for such Product during such Quarter, the Invoiced Purchase Price per unit for the following Calendar Quarter shall equal the Purchase Price per unit of such Product during the immediately preceding Quarter. It is further agreed that during any Marketing Year if: (i) the applicable currency exchange rate either increases or decreases by greater than five (5%) percent; or (ii) the amount equal to 110% of the U.S. TMC of any Product either increases or decreases by greater than ten (10%) due to (i) a change in the cost of the active drug substance such that the cost of the affected Product changes by greater than plus or minus ten (10%) percent and/or (ii) a change in the applicable currency exchange rate, then FAULDING, in a fully documented written proposal, may request FPC's approval of a TMC change with respect to any such affected Product. FPC shall respond in writing to FAULDING's request within thirty (30) days of FPC's receipt of such request and will not unreasonably withhold approval of such request. (d) Within thirty (30) days after the end of each Calendar Quarter, FPC shall calculate and send to FAULDING a statement reflecting the following financial data with respect to the purchase of each of the Products from FAULDING and the sale of each the Products to its customers during such Quarter (FPC's "Quarterly Statement"): (i) the number of Net Units Sold, the Net Sales Value of the Net Units Sold and the Average Selling Price per unit; (ii) the Purchase Price per unit and Purchase Price payable for Net Units Sold, as calculated in Section 1(w) hereof, including the calculation of (i) fifty (50%) percent of the Average Selling Price and (ii) 110% of the U.S. TMC of such Product, as set forth in Section 1(w) hereof; (iii) the Invoiced Purchase Price per unit and the Invoiced Purchase Price for Net Units Sold for purchases during such Period; (iv) if (a) the Purchase Price for Net Units Sold is greater than the Invoiced Purchase Price for Net Units Sold, the Purchase Price Adjustment due FAULDING or (b) the Invoiced Purchase Price for Net Units Sold is greater than the Purchase Price for Net Units Sold, the Purchase Price Adjustment due FPC; and (v) the sum of the Purchase Price Adjustments for each of the Products sold during such Period and the amount payable to FAULDING or FPC, as the case may be. (e) The parties acknowledge and agree that (i) it is necessary for the calculations set forth in this Section 8 for FPC to, and FPC shall, account for all sales of each of the Products hereunder on a strict first-in-first-out basis and (ii) notwithstanding the provisions of Section 8(c) to the contrary, at no time during the term hereof will FAULDING be paid by FPC for any Product hereunder in an amount less than 110% of the U.S. TMC as agreed in the Product Summary Sheet on the date of supply of such Product. FPC will compute the calculations set forth under Section 8(d) hereof using the U.S. TMC indicated in the most current Product Summary Sheet at the beginning of the Period unless informed otherwise by FAULDING in writing under the procedure outlined in Section 8(c). In the event that FAULDING notifies FPC of the revision of the U.S. TMC, such revised U.S. TMC will apply for all subsequent shipments of such Product unless otherwise agreed to by the parties. (f) The calculations of FPC set forth in its Quarterly Statement shall be final, unless within twenty (20) days after receipt of such Statement, FAULDING notifies FPC in writing of any objection to such calculations, specifying such objections in reasonable detail. Upon receipt of any such objection, the matter shall be resolved as set forth in Section 8(g) of this Agreement. (g) If FAULDING objects to any calculations in FPC's Quarterly Statement (the "Disputed Amount"), then each of the parties shall endeavor to agree promptly upon such Disputed Amount. In the event that a Disputed Amount has not been resolved in writing within thirty (30) days after the date of receipt by FPC of FAULDING's written objection, then the Disputed Amount shall be submitted to an internationally recognized accounting firm mutually acceptable to the parties (the "Arbitrator"). Nothing herein shall be construed to authorize or permit the Arbitrator to determine any question or matter whatever under or in connection with this Agreement, except the determination of what adjustments, if any, must be made in FPC's calculations set forth in its Quarterly Statement. Within thirty (30) days of the submission of any dispute to the Arbitrator pursuant to this Section 8(g), the Arbitrator shall render a decision along with a statement of reasons therefor. The decision of the Arbitrator shall be final and binding upon each party hereto. The fees and expenses of the Arbitrator for any determination under this Section 8(g) shall be paid by the party against whom the discrepancy is resolved. (h) FPC's payment to FAULDING or any amount due FPC, as the case may be and as calculated in FPC's Quarterly Statement, shall be delivered to the other party in U.S. dollars via wire transfer to the bank or banks designated by such other party shall be paid by FPC or FAULDING, as the case may be, within sixty (60) days after the end of the Calendar Quarter to which the changes pertain. With respect to any Disputed Amount in FPC's Quarterly Statement, the party responsible shall pay or repay the other party, or make any other adjustment required, within twenty (20) days after the resolution of the dispute by the parties or the decision of the Arbitrator, as the case may be. (i) Each of the parties shall keep proper books of account on all records with respect to any of the Products, clearly recording all matters and transactions relating to any of the Products. Each of the parties will permit authorized representatives of the other party, upon reasonable prior written notice to inspect such books and records, as set forth in Section 10 of this Agreement. 9. SHIPMENT OF PRODUCTS (a) Deliveries of the Products to the destination in the Territory designated by FPC shall be made by FAULDING, F.O.B. FAULDING's manufacturing plant in Australia, and as otherwise designated in the Firm Orders. FAULDING will ensure that deliveries of the Products are accompanied by quality control certificates of analysis and will send copies of such certificates of analysis and shipment details contemporaneously by telecopier (confirmed by hard copies mailed) to FPC. FAULDING shall also ensure that all Products shall be transferred under appropriate storage conditions and packaged for shipment according to all laws and regulations of the Territory and Australia, as applicable. (b) FPC may choose the means of shipment by notifying FAULDING of its choice on its Firm Order. FPC shall pay for all freight and insurance costs. Identification of the goods to the contract shall occur and risk of loss shall pass to FPC upon delivery of the Products to the carrier. In the event FPC has not furnished FAULDING with shipping and insurance instructions in its Order, FAULDING shall deliver the Products to FPC, F.O.B. FAULDING's manufacturing plant in Australia, within ninety (90) days of acceptance of the order by delivery to a carrier selected by FAULDING and FAULDING shall, in its sole discretion, obtain insurance coverage thereon, the cost of which shall be borne by FPC and added to the purchase price. (c) FPC (i) shall be responsible for the payment of any import, customs or similar duties imposed by governmental authorities and of any federal, state, county or municipal sales or use tax, excise or similar charge, or any other tax assessment (other than that assessed against income), license, fee or other charge lawfully assessed or charged on the use or transportation of the Products sold and delivered to FPC pursuant to this Agreement; and (ii) shall obtain any licenses, authorizations or other documents required by any governmental authorities in order to permit the importation of the Products sold and delivered to FPC pursuant to this Agreement. FAULDING shall be responsible, at FPC's cost, for obtaining necessary export clearances and any licenses, authorizations or other documents required by any governmental authorities in order to permit the exportation of the Products delivered and sold to FPC pursuant to this Agreement. (d) FAULDING shall include in its invoice to FPC, described in Section 7 of this Agreement, all expenses incurred by FAULDING in connection with shipping the Products and FPC shall pay all such amounts reflected on such invoice in accordance with the provisions of Section 7(d) hereof. 10. AUDITS. (a) FPC shall have the right, no more than twice annually, with a limit of two FPC representatives on each such occasion and at its own cost, to visit FAULDING's manufacturing plant(s) for the Products during regular business hours, upon giving reasonable prior written notice to FAULDING. During any such visit, FPC shall have the right (i) to inspect the manufacturing facilities, (ii) to inspect quality control procedures and (iii) to review any applicable records to ensure that FAULDING complies with current GMP regulations and other applicable regulations for the Products. (b) FPC shall also have the right, no more than twice annually and at its own cost, during regular business hours, upon giving reasonable prior written notice to FAULDING to have an independent professionally qualified auditor or other qualified representative of FPC, reasonably approved by FAULDING, audit FAULDING's records relative to the total manufacturing costs and the calculation of the U.S. TMC of any of the Products and of any other incidental costs chargeable to FPC hereunder. (c) FAULDING shall have the right, no more than twice annually and at its own cost, during regular business hours, upon giving reasonable prior written notice to FPC to have an independent professionally qualified auditor or other qualified representative of FAULDING, reasonably approved by FPC, audit FPC's records relative to FPC's books of account, as set forth in Section 8 hereof. (d) The party conducting the audit shall assume all risk of loss and indemnify and hold the other party harmless from and against any and all loss, liability, damage, claim and expense including, but not limited to, reasonable attorneys' fees arising out of or resulting from the auditing party's presence on the audited party's premises. (e) Each of the parties will permit any inspection by the Regulatory Authority, which is required for Registration and Marketing of any of the Products, of all records and reports pertinent to the development, manufacturing, transport and Marketing of each Product. (f) Each of the parties shall retain any records or data with respect to their obligations and services pursuant to this Agreement, and the costs thereof, for a period equal to the longer of the period of time in accordance with the pertinent regulations and requirements of Australian Tax Office and Australian Stock Exchange and the Regulatory Authorities in the Territory, including, without limitation, the regulations and requirements of the FDA, the U.S. Internal Revenue Service and the U.S. Securities and Exchange Commission and five (5) years after the date of the termination or expiration of the Agreement. 11. SUB-LICENSEES. (a) FPC is authorized to appoint its own agents or sub-licensees ("Sub-licensees) for the solicitation of orders for and sub-distribution of such Product in the Territory. The appointment of any Sub-licensee shall be on such terms and conditions as FPC may reasonably require in writing, provided such terms and conditions are not inconsistent with the terms and conditions of this Agreement. (b) Where a Sub-licensee has been appointed by FPC pursuant to this Section 11, FPC agrees that it shall at all times be solely responsible for the acts, or omissions of such Sub-licensee and hereby agrees to indemnify FAULDING against any and all loss, liability, damage, claims, cost and expense (inclusive of attorney's fees and disbursements) arising from or in connection with such Sub-licensee's acts, or omissions. 12. QUALITY CONTROL. (a) FAULDING shall perform the quality control tests on each of the Products necessary for conformity of the Products to the Specifications. (b) FAULDING shall provide FPC with reasonable advance written notice of any proposed changes to the method of manufacture, associated facilities or other validated processes associated with any of the Products. FAULDING shall not make any such change, which requires prior approval by the Regulatory Authority, before such approval has been obtained. (c) FAULDING shall label each of the Products and apply Batch numbers and expiration dates to each Batch of Products, as required for such Product by the Regulatory Authority. Upon the testing of each Batch of any Product, FAULDING will promptly deliver a copy of the Certificate of Analysis with respect to such Batch to FPC by facsimile. Deliveries of each Batch of Product will also be accompanied by a copy of the relevant Certificate of Analysis. (d) Each party will maintain complete and accurate records for the periods set forth in Section 10(f) hereof. Each of the parties will use commercially reasonable efforts to ascertain the retention requirements of the pertinent Regulatory Authorities and will keep the other party informed of any changes that it becomes aware of that may reasonably impinge upon a Product. (e) FAULDING agrees that it will cooperate with FPC in its efforts to maintain the commercial viability of each of the Products in the Territory, including, but not limited to, supplying the data necessary to obtain and maintain Registration approval, as provided for in Section 6(a) of this Agreement. (f) Each party shall immediately notify the other party of any inspections by any Regulatory Authority that are "for cause", a result of a Recall of any of the Products or that may, directly or indirectly, in the reasonable opinion of such party, impinge upon the ability of either party to supply or Market any of the Products, including, without limitation, inspections of suppliers requiring approval of the Regulatory Authority. 13. PRODUCT ACCEPTANCE. (a) If FPC claims that there is a shortage of any of the Products delivered by FAULDING pursuant to a Firm Order, it shall submit written notice to FAULDING within ten (10) days of the date of the delivery of such Order. In case of an alleged or actual non-delivery, a written claim must be submitted to FAULDING within thirty (30) days of FAULDING's delivery advice notice. In the absence of such a written claim, in the case of either alleged shortage or non-delivery, the Products shall be deemed to have been delivered in accordance with this Agreement. In any event, FPC shall not be entitled to refuse to accept delivery by reason only of an alleged or actual shortage. (b) All Products received by FPC shall be deemed accepted unless FPC gives FAULDING written notice (the "Objection Notice") within thirty (30) days of such receipt specifying the manner in which the Products do not conform to the Specifications. The Objection Notice shall be accompanied by written reports of any testing performed by or for FPC on the relevant Products. Upon receipt of the Objection Notice, FAULDING may request FPC to return the relevant Products or samples thereof for further testing. The test results, if any, submitted to FAULDING by FPC shall be deemed conclusive unless FAULDING notifies FPC within seven (7) days after the completion of tests reasonably required to support or refute FPC's Objection Notice that it disagrees with such test results. In the event of such notice by FAULDING, the relevant Products or samples thereof shall be submitted to a mutually acceptable independent laboratory (the "Independent Laboratory") for analysis and a written report (the "Report"), the costs of which shall be paid by the party against whom the discrepancy is resolved. In the event that the results of the Report determine that any of the Products objected to by FPC do not meet the Specifications for such Product, FAULDING will use commercially reasonable efforts to replace such rejected Products with conforming goods within ninety (90) days from the date of the Report, provided that the departure from Specifications is not due to the fault or act of FPC. All transportation, shipping and insurance costs and other fees incident to the shipping back to FAULDING of the Products determined by the Report to be defective and the shipping to FPC of the replacement Products will be paid for by FAULDING and all costs incident to the shipping back of conforming goods will be paid for by FPC. (c) In the event that any of the Products are returned to FPC by its customers for the reason that said Products are claimed to be defective, FPC, subject to the provisions of Section 14 hereof, shall notify FAULDING within thirty (30) days of such return by written notice (the "Return Notice") specifying the manner in which such Products are claimed to be defective. Upon receipt of the Return Notice, FAULDING may request FPC to return the Products which are the subject of the Return Notice or samples thereof for testing. If FAULDING concludes that such Products do not conform to the Specifications or are otherwise defective, FAULDING will replace such Products with conforming goods within sixty (60) days after the completion of such tests as are reasonably required to support or refute the Return Notice, provided that the departure from Specifications is not due to the fault or act of FPC or its customer. If FAULDING concludes that the Products conform to the Specifications and are not otherwise defective, it shall notify FPC of its objection to the Return Notice within thirty (30) days of its receipt of the Return Notice or its receipt of the samples, whichever is later. If FPC disagrees with FAULDING's conclusion, then the Products shall be submitted to the Independent Laboratory for a Report, the costs of which shall be paid by the party against whom the discrepancy is resolved. In the event that the results of the Report determine that any of the Products returned to FPC do not meet the Specifications or are otherwise defective, FAULDING will use commercially reasonable efforts to replace such Products with conforming goods within ninety (90) days from the date of the Report, provided that the departure from Specifications is not due to the fault or act of FPC or the customer. All transportation, shipping and insurance costs and other fees incident to the shipping back to FAULDING of the Products (i) determined by the Report to be defective and the shipping to FPC of the replacement Products will be paid for by FAULDING; and (ii) determined by the Report not to be defective and the return shipment thereof to FPC will be paid for by FPC. (d) Any other complaints received by FPC with respect to any of the Products, other than complaints regarding the handling, shipping, supply and labeling of the Products (collectively, the "Distribution Complaints"), shall be forwarded to FAULDING and all Distribution Complaints shall be handled by FPC. Each party shall promptly deliver to the other party a copy of all correspondence and reports arising from any such complaints. 14. NOTIFICATION OF ADVERSE DRUG EXPERIENCES. (a) The parties shall each appoint a liaison (a "Medical Liaison Officer") to communicate with each other with regard to information required in this Section 14 and Section 15 hereof. Either party may change its Medical Liaison Officer by written notice to the other party. (b) During the term of this Agreement, FAULDING and FPC shall give each other notice, as set forth in this Section 14, of any ADE associated with any of the Products as to which FAULDING or FPC obtains information in accordance with the following: (i) Any ADE information obtained by FPC and any ADE information obtained by FAULDING, which in FAULDING's reasonable opinion may impact upon FPC's Registration or Marketing of the Product in the Territory, shall be reported to the other's Medical Liaison Officer, by telephone and in writing (only by facsimile) within two (2) calendar days after initial receipt of the information. The recipient shall acknowledge receipt of such information within twenty four (24) hours of its receipt. (ii) The reports shall contain to the extent reasonably possible all information required by the Regulatory Authority. (iii) Each of the parties will maintain complete and accurate records of each ADE for such periods as may be required by applicable law, but not less than five (5) years. (c) FPC will file any ADE Report for any Product required under applicable laws or regulations of the Regulatory Authority. Each party shall provide the other party with copies of all correspondence between the Regulatory Authority and itself related to Product safety, and promotional material. Copies of all such correspondence with the Regulatory Authority covered by this subsection (c) shall be provided to the other party by the party involved within ten (10) days of its receipt or delivery, as the case may be, of such correspondence. In addition, each party shall keep the other party timely advised in advance of any meetings or discussions with any Regulatory Authority relevant to the safety and efficacy of any of the Products. (d) If FAULDING determines it is necessary to issue a report with respect to the medical efficacy or safety of any Product, FAULDING shall provide such report to FPC in sufficient time to allow for issuance to FPC customers. 15. RECALLS. (a) In the event that either party determines that a Product does not conform to the Specifications or that it should be recalled for any other reason, prior to taking any action, it shall give written notice to the other party's Quality Officer specifying its reasons for the necessity of a recall (the "Recall Notice"). If both parties agree that the Product should be recalled, FPC will handle the administration of the recall and FAULDING, if permitted to do so under the laws and regulations of the Regulatory Authority, will replace all Products recalled as soon as reasonably practicable. (b) If, within ten (10) days from the date of the Recall Notice, the parties have been unable to reach an agree- ment concerning the necessity of a recall, the parties agree to submit the Product to the Independent Laboratory for a Report, the cost of which shall be paid by the party against whom the discrepancy is resolved. In the event that the discrepancy is resolved in the Report against FAULDING, FAULDING shall reimburse FPC for all reasonable out-of-pocket expenses relating to such recall. In the event that the discrepancy is resolved in the Report in favor of FAULDING and FPC elects to recall the Product notwithstanding the Report, FAULDING shall have no obligation to FPC with respect to replacement of Products or reimbursement of expenses. 16. RELATIONSHIP OF FAULDING AND FPC. (a) The relationship between FAULDING and FPC that is created by this Agreement shall be that of vendor and purchaser, and not that of principal and agent. In the performance of this Agreement, neither party shall have the authority to assume or create any obligation or responsibility, either expressed or implied, on behalf of or in the name of the other party, or to bind the other party in any manner whatsoever. (b) FPC shall conduct its own business in its own name and in such a manner as it sees fit, and shall be solely responsible for determining the prices to be charged for the Products in the Territory. 17. TRADEMARKS AND LABELING. (a) Nothing contained herein shall be construed as conferring any license in favor of FPC to any trademarks owned or claimed to be owned by FAULDING. Unless it obtains the written permission of FAULDING, FPC shall not affix or apply to any of the Products any trademark or other name, logo or emblem nor shall it remove or tamper with any trademarks applied to the Products by FAULDING. Nothing contained herein shall impose any obligation upon FAULDING to register or otherwise maintain in force any trademark. (b) FAULDING shall appear on the label of the Products as the manufacturer thereof and FPC as distributor. (c) FPC shall at all times recognize the validity and FAULDING's ownership of any trademarks which FAULDING permits it to use or permits to be used on or in relation to the Products and shall at no time do, or allow to be done, anything by way of omission or commission, which would put in issue or adversely affect such validity or ownership, or which would damage or prejudice the reputation or goodwill of FAULDING as owner thereof. (d) FPC shall enter into such trademark, service mark or trade name user agreements or other instruments relative to the grants of any rights to use any such trademarks as may be required by FAULDING, such agreements or other instruments to be coterminous for each Product with the license granted with respect to such Product as set forth in the relevant Product Summary Sheet. Upon expiration or termination of this Agreement or deletion of any Product, FPC agrees to do and execute such acts, deeds and things that may be required by FAULDING for the purpose of cancellation of any such agreements or instruments or the registrations thereof. (e) Products will be labeled and packaged in accordance with instructions provided by FPC. FPC will supply masters for labels, package inserts and packaging. FAULDING will procure, test, inspect and approve all labels, package inserts and packaging used for the Products in accordance with the laws and regulations of the Regulatory Authority. FAULDING will submit all new labels, package inserts and packaging used for any Products to FPC for approval prior to use unless otherwise agreed in writing. In the event that FPC requests a labelling change, all costs reasonably associated with the implementation of such change will be borne by FPC. 18. ADVERTISING. If this Agreement is terminated for any reason, neither party shall package or label any goods in a manner that the other party hereto might reasonably consider to be imitative of any goods sold by such party. 19. NOTICES. Notices provided under this Agreement to be given or served by either party on the other shall be given in writing and served personally or by prepaid registered airmail post or by courier or by means of facsimile to the following respective addresses or to such other addresses as the parties may hereafter advise each other in writing. It is agreed and understood by the parties that any such notice shall be deemed given and served on the date transmitted by facsimile, or a date four (4) days after the date of dispatch by courier or a date ten (10) days after the date of posting by airmail. To: FAULDING F.H. FAULDING & CO. LIMITED 160 Greenhill Road Parkside 5063 South Australia Attention: Secretary Facsimile +61 8 373 3120 To: FPC FAULDING PHARMACEUTICAL CO. 200 Elmora Avenue Elizabeth, New Jersey 07207 Attention: Chief Financial Officer Facsimile +1 908 355 7048 20. WARRANTIES AND INDEMNIFICATIONS. (a) FPC hereby warrants that: (i) it will comply with any applicable regulatory requirements with respect to the advertising, promotion, storage, distribution and sales of the Products; and (ii) with respect to any Product for which FPC has furnished FAULDING with Specifications, provided that FAULDING follows FPC's instructions with respect to such Specifications and Product formulation, at the Inclusion Date of each Product, to the best of its knowledge, the Marketing of such Product pursuant to the terms of this Agreement will not infringe any patent, trademark or other intellectual property rights relevant to the Territory. Notwithstanding any other provision of any sales agreement, purchase order or other contract between FAULDING and a customer, FAULDING shall not be liable for, and FPC agrees to indemnify FAULDING against and hold FAULDING harmless from, any and all loss, liability, damage, claim, cost and expense (including without limitation, attorney's fees and disbursements) arising from or in connection with any (A) breach of the warranties by FPC hereunder, (B) other misrepresentation or breach of this Agreement by FPC and (C) claim, express, implied or statutory made by FPC as to the efficacy or safety of any of the Products or the use to be made by any purchaser of the Products or (D) other act or omission of FPC in connection with the marketing, distribution and sale of any of the Products. In addition, if FPC uses its own trademarks, or other name, logo or emblem, pursuant to Section 17(a), it agrees to indemnify and hold FAULDING harmless from and against any and all loss, liability, damage, claim and expense including, but not limited to, reasonable attorneys fees, arising out of or relating to the use of such trademark or other name, logo or emblem. (b) FAULDING hereby warrants that: (i) all Products shipped to FPC pursuant to this Agreement will meet the Specifications for such Product at the time of shipment and throughout the stated shelf-life of such Product, provided however, that such Product has been stored in accordance with FAULDING's instructions; (ii) all Products manufactured and shipped to FPC hereunder will be manufactured in a plant which meets GMP; (iii) it will not deliver to FPC pursuant to this Agreement adulterated or misbranded Product, as defined by the FDA; and (iv) at the Inclusion Date of each Product, to the best of FAULDING's knowledge, the manufacturing of such Product pursuant to the terms of this Agreement will not infringe any patent, trademark or other intellectual property rights relevant to Australia. FAULDING hereby agrees to indemnify and hold FPC harmless from any and all loss (except consequential loss, such as, for example, loss of business or of profits), liability, damage, claim, cost and expense (including, without limitation, reasonable attorney's fees) arising from or in connection with the breach of FAULDING's warranties hereunder. Other than as expressly stated above in this Section 20, FAULDING makes NO WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY. THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED. 21. CONFIDENTIALITY. (a) Each of the parties agrees that it will not disclose any confidential information of the other party that it may acquire at any time during the term of this Agreement, including, without limitation, any confidential information of the other party it may acquire during any Product Review, without the prior written consent of such party and that it shall use all reasonable efforts to prevent unauthorized publication or disclosure by any person of such confidential information including requiring its employees, consultants or agents to enter into similar confidentiality agreements in relation to such confidential information. (b) The obligations undertaken by each party under this Section shall continue in force for a period of five (5) years following the termination or expiration of this Agreement. (c) The obligations contained in this Section do not apply to any information: (i) which was at the time of receipt by a party in the public domain or generally known in the pharmaceutical manufacturing industry otherwise than by breach of a party's duty of confidentiality; (ii) which a party can establish to have been known to it at the time of receipt from the other party and not to have been acquired directly or indirectly from the other party; (iii) acquired by a party from a third party otherwise than in breach of an obligation of confidence to the other party; (iv) required by law to be provided to governmental agencies but only for the purpose of providing it to such governmental agencies; and (v) disclosed to an Affiliate of either party for purposes consistent with the terms, and to further the purposes of this Agreement. 22. TAXATION ISSUES. (a) Each of the parties is aware that the commercial arrangements of this Agreement may be subject to transfer pricing reviews by the relevant taxation authorities in the Territory and Australia. As a result, this Agreement may be subject to internal reviews by either or both parties and to audits by the relevant taxation authorities. If as a result of such reviews or audits, it becomes necessary or advisable for either party (the "Affected Party")to change any commercial arrangements of this Agreement, including, without limitation, making retroactive adjustments, the other party, within thirty (30) days after written notification by the Affected Party, which notification shall explain in reasonable detail the reason for the proposed change, shall meet with the Affected Party and each of the parties agrees to negotiate in good faith, and to use its best efforts to reach agreement with respect to, any modifications to the commercial terms of this Agreement. In the event that the parties, despite their best efforts, cannot reach agreement with respect to any material change, which in the opinion of either party is necessary or advisable for the reasons set forth in this Section 22(a), either party, upon written notice to the other party, may terminate this Agreement. The provisions of Sections 23(c) and 20(d) of this Agreement shall apply upon any termination of the Agreement pursuant to this Section 22(a). (b) Each of the parties agrees to provide reasonable assistance, at the other party's reasonable cost, if such other party is subject to a taxation audit that reviews any commercial arrangements of this Agreement. 23. TERM AND TERMINATION. (a) Subject to any other provision hereof, this Agreement shall remain in effect until June 30, 2005, and the term of this Agreement shall automatically be renewed thereafter for up to four successive five-year terms unless notice is given by either party at least six months prior to the date of any such renewal of such party's desire not to renew such term. (b) This Agreement may be terminated by notice in writing by either party if the other party shall default in the performance of any of its obligations under this Agreement and such default shall continue for a period of not less than thirty (30) days after written notice specifying such default shall have been given; by either party if the other party makes an arrangement with its creditors or goes into receivership or liquidation, or if a receiver or a receiver and manager is appointed in respect of the whole or part of the property or business of the party in default or by either party if a major part of the assets or all of the assets of the other party are disposed of or acquired by any other person. (c) Immediately upon termination or expiration of this Agreement, FPC shall (i) accept any and all Products manufactured or in transit at the time of giving of written notice of termination or of expiration; and (ii) at FAULDING's option and request, cancel without penalty all orders for the Products not in transit at the time of giving written notice of termination. For a period of six months after the date of expiration or termination, each of the parties shall continue to submit Quarterly Statements as set forth in Section 8 hereof and the parties shall as soon as conveniently possible reconcile all accounts. 24. FORCE MAJEURE. Neither party shall be liable or be in breach of any provision of this Agreement for any failure or delay on its part to perform any obligation where such failure or delay has been occasioned by any act of God, war, riot, fire, explosion, flood, sabotage, accident or breakdown of machinery, unavailability of fuel, labor, containers or transportation facilities, accidents of navigation or breakdown or damage of vessels or other conveyancers for air, land or sea, other impediments or hindrances to transportation, government intervention, strikes or other labor disturbances or any other cause beyond the control of the parties. 25. COMPLIANCE WITH LAW. It shall be the responsibility of FPC to follow all procedures and take all action which is necessary or required for agreements of this type by the laws, treaties or regulations applicable to Marketing the Products in the Territory. Further, it is agreed that neither party shall be obligated to carry out or perform any or all of the terms of this Agreement as shall constitute a violation of any treaty, law, code or regulation of any governmental authority whether local, national or international. In any event, the other terms of this Agreement shall nevertheless continue and the parties shall use all reasonable efforts to re-negotiate and amend this Agreement so that the performance of this Agreement as so amended will not involve any such violation. 26. EXECUTION OF ALL NECESSARY ADDITIONAL DOCUMENTS. Each party agrees that it will forthwith upon the request of the other party execute and deliver all such instruments and agreements and will take all such other actions as the other party may reasonably request from time to time in order to effectuate the provision and purposes of this Agreement. 27. WAIVER. The failure of either of the parties to insist upon a strict performance of any other terms and provisions therein shall not be deemed a waiver of any subsequent breach of default in the terms or provisions of this Agreement. 28. ASSIGNMENT AND AMENDMENT. Other than an assignment by FAULDING to any of its Affiliates, neither this Agreement nor any rights arising hereunder shall be assigned by one party without the prior written consent of the other and then only upon approval of the other party and acceptance of such assignment in written form approved by such party, which approval shall not be unreasonably withheld. No amendment hereof shall be binding unless made in writing and signed by the parties hereto. 29. ENTIRE AGREEMENT. This Agreement incorporates the entire understanding of the parties and revokes and supersedes any and all agreements, contracts, understandings or arrangements that might have existed heretofore between the parties regarding the subject matter hereof. 30. GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the internal laws of the State of New York, excluding such state's rules relating to conflicts of laws, and its form, execution, validity, construction and effect shall be determined in accordance with such internal laws. 31. SEVERABILITY. If any term or provision of this Agreement shall be held invalid or unenforceable, the remaining terms hereof shall not be affected, but shall be valid and enforced to the fullest extent permitted by law. 32. HEADINGS. The headings used in this Agreement are intended for guidance only and shall not be considered part of this written understanding between the parties hereto. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. F.H. FAULDING & CO. LIMITED By: FAULDING PHARMACEUTICAL CO. By: Schedule A Antecedent Supply Agreement Under Initial Products Termination Date Cytarabine Injection June 3, 1995 20 mg/ml, 5ml Vial Cytarabine Injection June 3, 1995 20 mg/ml, 25ml Vial Cytarabine Injection June 3, 1995 20 mg/ml, 50ml Vial Vincristine Sulfate Injection December 31, 1995 1 mg/ml, 1ml Vial Vincristime Sulfate Injection December 31, 1995 1 mg/ml, 2ml Vial Sterile Vinblastine Sulfate December 31, 1995 10 mg/vial FPC began marketing Cytarabine Injection in the U.S. in September 1995. EX-10 4 EXHIBIT 10(XXIV) EXHIBIT 10(xxiv) LICENSING AND SUPPLY AGREEMENT, entered into as of the 23rd day of January, 1996 by and between FAULDING MEDICAL DEVICE CO., a corporation organized under the laws of the State of Delaware with its principal place of business at 8777 East Via de Ventura, Suite 315, Scottsdale, Arizona 85258(hereinafter referred to as "FMDC") and F.H. FAULDING & CO. LIMITED, a corporation organized under the laws of South Australia, with its principal place of business at 160 Greenhill Road, Parkside, South Australia 5063 (hereinafter referred to as "FAULDING"). WHEREAS, FMDC, a wholly owned subsidiary of FAULDING, has designed and developed the Devices (as hereinafter defined)in conjunction with certain development efforts of FAULDING; WHEREAS, the parties have registered certain patents and trademarks associated with the Devices in various countries in the Territory in the names hereinafter set forth; WHEREAS, the parties intend hereby to clarify their respective ownership rights in and to the Devices, and the technology, patents and trademarks associated with the Devices, agreeing, among other things, that FMDC is the beneficial owner of the Devices Technology and the Patents and that FAULDING is the beneficial owner of the ONCO-TAIN Technology, the Operational Know-How and the Trademarks (as such terms are hereinafter defined); WHEREAS, the parties wish to formalize their business arrangement pursuant to which FAULDING has marketed certain Devices and FAULDING Manufactured Products in the Territory (as such terms are hereinafter defined); WHEREAS, FAULDING wishes to be granted, and FMDC is willing to grant FAULDING, the exclusive right for the term of this Agreement to market and distribute Devices in the Territory and to utilize the Devices Technology to manufacture, market and distribute FAULDING Manufactured Products in the Territory and FMDC wishes to be granted, and FAULDING is willing to grant FMDC, the nonexclusive right to use the Trademarks for the term of this Agreement in connection with the manufacture and marketing outside of the Territory of the Devices and products utilizing a Device, all subject to the terms and conditions of this Agreement; WHEREAS, FAULDING has requested FMDC, and FMDC, having the exclusive rights in relation to the manufacture of the Components, has agreed, subject to the terms and conditions of this Agreement, to supply FAULDING with the Components for FAULDING's use in manufacturing FAULDING Manufactured Products (as such terms are hereinafter defined); and WHEREAS, if FMDC, or an Affiliate of FMDC (other than FAULDING), during the term of this Agreement, shall decide to manufacture any products that utilize any of the Devices, FAULDING agrees to grant FMDC or such Affiliate of FMDC a nonexclusive license during the term of this Agreement to use the Operational Know-How for the sole purpose of replicating and scaling-up on the SGV Equipment the process for the manufacture of products utilizing the Devices. NOW THEREFORE, in consideration of the mutual covenants as hereinafter contained, the parties agree as follows: 1. DEFINITIONS For the purposes of this Agreement, the following terms shall have the following meanings: 1.1 "Affiliates" shall mean (a) an entity controlled by a common parent that owns more than fifty percent of the voting stock of both such entity and one of the parties to this Agreement and (b) such parent company. 1.2 "Components" shall mean any item listed on Schedule A hereto (as such Schedule may be amended from time to time by mutual agreement between the parties), which is manufactured by or on behalf of FMDC either as a completed Device or as a part of a Device and which will be supplied to FAULDING by FMDC as set forth in Section 9 hereof. 1.3 "Devices" shall mean any of the Devices set forth on Schedule A hereto (as that Schedule may be amended from time to time by mutual agreement between the parties), which may either be a stand-alone Device or may be incorporated into a FAULDING-Manufactured-Product. 1.4 "Devices Technology" shall mean that technology (including technical, scientific, industrial information or knowledge, confidential information and expertise) in relation to the formulation and composition of the Devices, other than the ONCO-TAIN Technology, and the processes and the means and procedures for the manufacture and production of the Devices and, with the exception of the Operational Know-How, for the manufacture and production of products utilizing any of the Devices. 1.5 "FAULDING Manufactured Product(s)" shall mean a product manufactured by FAULDING that incorporates a Device. 1.6 "Gross Profit" shall mean with respect to any Device or FAULDING Manufactured Product the Net Sales less the Total Manufacturing Costs of such Device or FAULDING Manufactured Product. 1.7 "Net Sales" shall mean, with respect to any Device or FAULDING Manufactured Product, the gross sales of FAULDING and its Affiliates during any particular calendar quarter from sales in the Territory of such Device or FAULDING Manufactured Product, as the case may be, to unaffiliated third parties (not including amounts received as reimbursement of freight, insurance and other costs or taxes) invoiced by FAULDING or its Affiliates during such quarter, less price discounts, trade returns, trade allowances, chargebacks or rebates relating to such sales, as calculated using FAULDING's standard accounting procedures, in accordance with the applicable generally accepted accounting principles, consistently applied. It is understood and agreed that where the amount of any deduction can not be fairly determined during the quarter immediately following the quarter in question, such deduction may be claimed by FAULDING with respect to the Net Sales during a subsequent quarter. 1.8 "ONCO-TAIN Technology" shall mean the technology associated with the vial safety sheathing system known as ONCO-TAIN, including, without limitation, the ONCO-TAIN know-how. 1.9 "Operational Know-How" shall mean the processes, methods and procedures associated with the operation of the SGV Equipment. 1.10 "Patents" shall mean the patents and patent applications listed on Schedule A hereto as and to the extent that they relate to the Devices, as such Schedule may be amended from time to time by mutual agreement of the parties, together with, as applicable, all continuations, continuations-in-part, reissues and extensions thereof, including all patents issuing upon such applications, in each case as and to the extent that they relate to the making, use or sale of the Devices. 1.11 (a) "Pre-existing Negotiations of FAULDING" shall mean the negotiations that FAULDING commenced with the companies set forth on Schedule B hereto, with respect to the granting of certain rights to such third parties to distribute certain Devices and FAULDING Manufactured Products within the United States. (b) "Pre-existing Negotiations of FMDC" shall mean the negotiations that FMDC commenced with the companies set forth on Schedule C hereto, with respect to the granting of certain rights to such third parties to distribute certain Devices within the Territory. 1.12 "Pre-existing Obligation of FAULDING" shall mean the third-party agreement that Faulding previously entered into, which is identified on Schedule B hereof. 1.13 "Registration" means the gaining of all permissions from all Regulatory Authorities in a country in which the gaining of such permissions is necessary to permit the commencement of marketing of any of the Devices or FAULDING Manufactured Product in that country. 1.14 "Regulatory Authority" in respect of a country means any and all bodies and organizations regulating the importation, and/or marketing of any of the Devices and FAULDING Manufactured Products in any part of that country. 1.15 "SGV Equipment" shall mean the equipment used to manufacture products utilizing the Devices, including, without limitation, the FAULDING Manufactured Products. 1.16 "Territory" shall mean all the countries of the world with the exception of the United States of America and its territories and possessions. 1.17 "Total Cost to FMDC" shall have the meaning set forth in Section 7.2 of this Agreement. 1.18 "Total Manufacturing Costs" with respect to: (a) any Component or Device shall mean the total manufacturing costs of such Component or Device calculated according to FMDC's standard costing system, subject to normal accounting procedures, and consistent with generally accepted U.S. accounting practices; and (b) any stand-alone Device or a FAULDING Manufactured Product shall mean, respectively, FAULDING's purchase price from FMDC of such Device or the cost to FAULDING of manufacturing such FAULDING Manufactured Product on a fully absorbed basis, calculated according to FAULDING's standard costing system, subject to normal accounting procedures, and consistent with generally accepted Australian accounting principles. 1.19 "Trademarks" shall mean the trademarks set forth on Schedule D hereto, as such Schedule may be amended from time to time by the parties. 1.20 "U.S." shall mean the United States of America. 2. EXCLUSIVE LICENSE TO THE DEVICES TECHNOLOGY 2.1 In consideration of the payments set forth in Sections 7 and 8 of this Agreement and the license accorded FMDC pursuant to Section 16.2 of this Agreement, FMDC hereby grants a license to FAULDING to the Devices Technology for the sole purposes of manufacturing FAULDING Manufactured Products and, subject to the conditions set forth in Section 4 of this Agreement, of marketing such Devices and FAULDING Manufactured Products within the Territory. The parties agree that, subject to the provisions of Section 4 of this Agreement, the license granted hereunder to FAULDING is sole and exclusive for the term of this Agreement for the manufacture of the FAULDING Manufactured Products and the marketing of the Devices and FAULDING Manufactured Products within the Territory. The parties further acknowledge that FAULDING has been marketing certain of the Devices and FAULDING Manufactured Products in the Territory prior to July 1995 and that all pertinent terms of this Agreement, including without limitation, the payment terms set forth in Sections 7 and 8 hereof, shall only apply to the sales of such Devices and FAULDING Manufactured Products that have occurred from July 1995 up to the date hereof as if such sales had occurred during the term hereof. 2.2 FAULDING agrees that, subject to the provisions of Section 4 of this Agreement, it will not use or exploit the Devices Technology for any purpose other than the manufacture of the FAULDING Manufactured Products and the marketing of the Devices and the FAULDING Manufactured Products in the Territory and that, subject to the provisions of Section 4 hereof, it will not: (a) manufacture, nor permit an Affiliate, agent or sublicensee to manufacture, any FAULDING Manufactured Product; and (b) will not sell, attempt to sell or permit any Affiliate, agent or sublicensee to sell or attempt to sell any FAULDING Manufactured Product or Device, outside the Territory either on its own account or through any third party nor will it sell, nor permit any of its Affiliates, agents or sublicensees to sell, any Device or FAULDING Manufactured Product to any person or corporation within the Territory where FAULDING or its Affiliate, agent or sublicensee has reasonable grounds to believe that such other person or corporation intends to sell such Device or FAULDING Manufactured Product outside the Territory. 3. SUB-DISTRIBUTORS 3.1 Subject to the limitations set forth in Section 3.2 of this Agreement, FAULDING shall have the right to appoint any Affiliate, agent or sub-licensee to market, distribute, promote and/or sell any Devices or FAULDING Manufactured Products within the Territory. 3.2 The appointment of any such Affiliate, agent or sub-licensee under Section 3.1 shall be on such terms and conditions as FAULDING may reasonably require in writing, provided such terms and conditions are not inconsistent with the terms and conditions of this Agreement. FAULDING agrees that it shall, at all times, be solely responsible for the acts, deeds or omissions of any Affiliate, agent or sub-licensee appointed pursuant to Section 3.1 and hereby indemnifies FMDC against any and all loss, liability, damage, claims, cost and expense arising from or in connection with such Affiliate's, agent's or sub-licensee's acts, deeds or omissions. 4. COMPETING PRODUCTS; EXCEPTIONS TO EXCLUSIVITY 4.1 FAULDING shall neither directly nor indirectly market a drug delivery device either within or outside the Territory that is the same as, or substantially similar to, any of the Devices, without the prior written consent of FMDC. 4.2 FAULDING acknowledges and agrees that notwithstanding the exclusive license set forth in Section 2 hereof, FAULDING hereby consents to the continuation by FMDC of the Pre-existing Negotiations of FMDC and further agrees that notwithstanding any provisions of Section 2 to the contrary, FMDC is not restricted hereunder from investigating any opportunity to market any Device, or any product utilizing a Device (collectively, the "FMDC Generated Product") in any country in the Territory (a "Device Marketing Opportunity"), provided, however, that FMDC shall provide FAULDING with a right of first refusal to market, or manufacture and market such FMDC Generated Product in such country as follows: (a) At any time during the term of this Agreement, FMDC may notify FAULDING in writing of a Device Marketing Opportunity (the "Notice of Opportunity"). Such Notice of Opportunity will identify the targeted market, will contain as full a description of the FMDC Generated Product as reasonably possible, and will summarize the proposed material terms, including the estimated selling price and, as applicable, the estimated timetable for development and submission of registration materials with respect to such FMDC Generated Product to the relevant Regulatory Authorities. (b) FAULDING shall have twenty (20) days from its receipt of the FMDC Notice of Opportunity to inform FMDC in writing whether or not it wishes to negotiate the terms on which it would, as the case may be, market or manufacture and market such FMDC Generated Product under the terms of this Agreement (the "Response Notice"). If (i) FAULDING informs FMDC through such Response Notice, that it does not have an interest in negotiating with FMDC, (ii) FAULDING fails to deliver a Response Notice to FMDC, within twenty (20) days of its receipt of the FMDC Notice of Opportunity or (iii) the parties, after negotiating in good faith for a period of an additional thirty (30) days from the date of receipt by FMDC of the Response Notice, are unable to come to an agreement on the terms that would permit FAULDING, as the case may be, to market or manufacture and market such FMDC Generated Product hereunder, FMDC shall have the right to market such FMDC Generated Product in the country or countries identified in the Notice of Opportunity independent of this Agreement and to enter into an agreement with a third party for (as may be applicable) the development, manufacturing and/ or marketing by, or the purchase from such third party, of such FMDC Generated Product; provided, however, that the material terms offered to such third party must be essentially the same as, and, in any event no more favorable than, the material terms of the FMDC Notice of Opportunity delivered to FAULDING. Notwithstanding the provisions of Section 4.2(a) hereof to the contrary, once FMDC has delivered a Notice of Opportunity to FAULDING hereunder, it may not market, nor negotiate with any third party to develop, manufacture or market the FMDC Generated Product which is the subject of the Notice of Opportunity until one of the conditions set forth in Subsection (i), (ii) or (iii) of this Section 4.2(b) has been satisfied. 4.3 FMDC acknowledges and agrees that FAULDING is committed with respect to supplying certain Faulding Manufactured Products to a third party under the Pre-existing Obligation and hereby consents to FAULDING's commitment to such third party with respect to such Products under the terms of the Pre-existing Obligation. Moreover, FMDC hereby consents to the continuation by FAULDING of the Pre-existing Negotiations of FAULDING and, agrees, upon a successful culmination of any such Negotiations, to negotiate in good faith with FAULDING to determine on what terms, if any, that FMDC would consent to FAULDING's entering into a third party agreement arising from such Negotiations. For purposes of this Section 4.3, FMDC shall use the same standards of good faith negotiations as are set forth in Section 4.4 immediately hereafter. 4.4 The parties acknowledge and agree that opportunities may arise for (a) FAULDING to supply certain Devices and FAULDING Manufactured Products to FMDC or an Affiliate of FMDC for marketing outside of the Territory; (b) for FAULDING to supply Devices and\or FAULDING Manufactured Products to a third party distributor on a world-wide basis, including the United States of America as well as countries within the Territory; and (c) for FMDC, or an Affiliate of FMDC, to market a Device or a product utilizing a Device within, as well as outside of, the Territory. The parties agree that in each such instance, the party having such an opportunity (the "Marketing Party") may not, under the terms of this Agreement, be permitted to enter into any such arrangement without the prior consent of the other party (the "Consenting Party") to this Agreement. The parties further agree that it is in their mutual best interest to negotiate in good faith, on a country-by-country and product-by-product basis to determine whether the Consenting Party can reach an accommodation with the Marketing Party that would be commercially acceptable to both of them, basing its decision in each instance, on the competitive impact, which the Consenting Party reasonably believes, the implementation of the Marketing Party's opportunity may have on the Consenting Party's business or prospects. 5. INTELLECTUAL PROPERTY RIGHTS OF FMDC 5.1 FAULDING acknowledges and agrees that FMDC is the beneficial owner of the Devices Technology and, except as set forth in Section 14 of this Agreement, of all industrial and intellectual property rights in relation to the Devices Technology, including the right to the Patents, registered or other designs, copyright, and any other confidential information. Nothing contained in this Agreement shall be effective to give FAULDING any rights of ownership in and to the Devices Technology, including, without limitation, any improvements to such Technology, described in Section 6 hereof, and to the intellectual property owned by FMDC. The licensing of the Devices Technology hereunder is for the sole purposes of manufacturing FAULDING Manufacturing Products and marketing Devices and FAULDING Manufactured Products in the Territory. 5.2 FAULDING acknowledges and agrees that FMDC is the beneficial owner of each of the Patents. With respect to any Patents that have heretofore been issued in FAULDING's name, FMDC, at its sole discretion, may direct FAULDING in writing, at any time and from time to time, to assign any or all of such Patents, at FAULDING's cost, to FMDC or its designee. Upon receipt of FMDC's directive, FAULDING shall promptly deliver to FMDC, or to FMDC's nominee, any documents in its possession relating to such Patent(s) and shall execute all such documents as may be required, or as FMDC may deem appropriate, to ensure that any such assignment is effected. 6. IMPROVEMENTS TO THE DEVICES TECHNOLOGY 6.1 Any improvement to the Devices Technology as it applies to any Component or Device or FAULDING Manufactured Product made or discovered by FMDC during the term of this Agreement shall be made known to FAULDING and FAULDING shall be entitled to use and commercially exploit any such improvements without any additional payment hereunder. 6.2 FAULDING acknowledges and agrees that FMDC is the beneficial owner of any improvements to the Devices Technology as it applies to any Device or any Device utilized in a Product made or discovered by FAULDING during the term of this Agreement. FAULDING shall promptly make any such improvement known to FMDC and, each of FMDC and FAULDING shall be entitled, consistent with the terms of this Agreement, to use and commercially exploit any such improvement without payment to the other party of any fee or royalty. 7. PURCHASE PRICE OF THE COMPONENTS 7.1 FAULDING shall purchase all of its requirements of each of the Components from FMDC. It is FMDC's current intention to have the Components manufactured for FMDC by a third party contract manufacturer (the "Contract Manufacturer"), but it is understood and agreed by both of the parties that at any time during the term of this Agreement, by ninety (90) days' notice to FAULDING, FMDC has the option of manufacturing any or all of such Components in-house provided, however, that FMDC (a) shall supply such Components to FAULDING on comparable terms as the terms then in effect through the FMDC's Contract Manufacturer; (b) shall receive prior authorization from the applicable Regulatory Authorities for its new manufacturing site and (c) shall ensure that the Contract Manufacturer continues to manufacture and supply the Component to FAULDING until such time as the alternate site is approved. 7.2 Subject to the provisions of Section 8 hereof, the purchase price for the Components shall be an amount equal to one hundred seventeen and one half (117-1/2%) percent of the "Total Cost to FMDC" of such Components. For purposes of this Agreement, the "Total Cost to FMDC" of any Components: (i) manufactured by the Contract Manufacturer shall be the Contract Manufacturer's invoice price to FMDC for such Components; and (ii) manufactured in-house shall be FMDC's Total Manufacturing Costs with respect to such Components, as defined in Section 1.18 of this Agreement. The parties agree that the "Total Cost to FMDC" will include, without limitation, any costs for laboratory testing, sterilization and transportation between processing sites. 7.3 FMDC shall keep at its principal office true and particular accounts and records of all Costs to FMDC in relation to the manufacturing of such Components for a period of five years after the date of the shipment of such Component to FAULDING. FAULDING shall have the right to audit such records as set forth under Section 13 of this Agreement. 8. REDUCTION OF PURCHASE PRICE 8.1 If during any calendar quarter, FAULDING's Gross Profit with respect to the sales of any Device or FAULDING Manufactured Product, which are sold in any country within the Territory by or on behalf of FAULDING under the terms of this Agreement, is less than twenty five (25%) percent of the Total Net Sales of such Device or Product in such country, FAULDING shall be entitled, with respect to such sales in such country, to a rebate of its purchase price of the Component(s)comprising such Device or incorporated into the FAULDING Manufactured Product to the extent that the purchase price of such Component(s) for such calendar quarter shall reduced from one hundred seventeen and one half (117-1/2%) percent to one hundred ten (110%) of the Total Cost to FMDC of such Components (the "Rebate"). 8.2 If FAULDING determines that it is entitled, with respect to the sales in any country in the Territory, to a Rebate with respect to its purchase of any Components comprising a Device or incorporated into a FAULDING Manufactured Product in such country, as set forth in Section 8.1 hereof, it shall, within thirty (30) days of such calendar quarter, calculate and send to FMDC, a detailed statement (the "Rebate Statement") reflecting the information for each of the Devices or FAULDING Manufactured Products for such calendar quarter for which a Rebate is claimed, including: (a) the product description, (b) the list of markets in which such Device or Product was sold and a Rebate is being claimed (c) the aggregate number of such units sold;(d) Net Sales made by or on behalf of FAULDING with respect to such units; (d)the Total Manufacturing Costs for such FAULDING Manufactured Products;(e) the Gross Profit, stated as a dollar amount and a percentage of Net Sales of such units (f) the purchase price of each of the Components comprising the Device or incorporated into a FAULDING Manufactured Product for which a Rebate is being claimed and (g) the amount of the claimed adjustment in purchase price to be payable to FAULDING. FAULDING shall state the amounts due and payable in U.S. dollars. The exchange rate shall be the T/T mid rate of the Australia and New Zealand Banking Group Limited in Adelaide, Australia on the last business day of the calendar quarter in question. 8.3 The calculations of FAULDING set forth in the Rebate Statement shall be final, unless within twenty (20) days after receipt of such Statement, FMDC notifies FAULDING in writing of any objection to such calculations, specifying such objections in reasonable detail. Upon receipt of any such objection, the matter shall be resolved as set forth in Section 8.4 of this Agreement. 8.4 If FMDC objects to any calculations in the Rebate Statement (the "Disputed Amount"), then FAULDING and FMDC shall endeavor to agree promptly upon such Disputed Amount. In the event that a Disputed Amount has not been resolved in writing within twenty (20) business days after the date of receipt by FAULDING of FMDC's written objection, then the Disputed Amount shall be submitted to a nationally recognized accounting firm mutually acceptable to FAULDING and FMDC (the "Arbitrator"). Nothing herein shall be construed to authorize or permit the Arbitrator to determine any question or matter whatever under or in connection with this Agreement, except the determination of what adjustments, if any, must be made in FAULDING's calculations to comply with the provisions of Section 8.2 hereof. Within thirty (30) days after the submission of any dispute to the Arbitrator pursuant to this Section 8.4, the Arbitrator shall render a decision along with a statement of reasons therefor. The decision of the Arbitrator shall be final and binding upon each party hereto. The fees and expenses of the Arbitrator for any determination under this Section 8.4 shall be paid by FMDC, except if the Arbitrator determines that an adjustment in FAULDING's calculations, which is greater than fifteen (15%) percent of the total amount claimed, should be made in FMDC's favor, then such fees and expenses shall be paid by FAULDING. 8.5 FMDC shall pay FAULDING within thirty (30) days after the date of its receipt of the Rebate Statement, or with respect to any Disputed Amount, within twenty (20)days after the decision of the Arbitrator, as set forth in Section 8.4 hereof, any Rebate due to FAULDING. FMDC shall make all such payments in U.S. dollars via wire transfer to the bank or banks designated by FAULDING. 8.6 With respect to each Device or FAULDING Manufactured Product for which a Rebate is claimed by FAULDING under this Section 8, FAULDING shall keep at its offices true and particular accounts and records of all sales, the invoiced amount of such sales and the amount of any other payments received or paid in relation to sales of such Device or Product for a period of five years after the date of the Rebate Statement. FMDC shall have the right to audit such records as set forth under Section 13 of this Agreement. 9. COMPONENTS: FORECASTS, ORDERS AND PAYMENT 9.1 At least ninety (90) days prior to the start of each calendar quarter, FAULDING shall provide FMDC with a forecast of its requirements of Components as required for manufacturing FAULDING Manufactured Devices or for sale of Devices or FAULDING Manufactured Products in the Territory for the next four calendar quarters in batch sizes specified by FMDC. The forecast for the most current three-month period shall constitute a firm order ("Firm Order "). The Firm Order shall be in the form of purchase order reasonably agreed to by the parties and shall state in detail the quantities of all Components ordered and dates for delivery and shall be binding on both parties regarding the Components to be supplied and purchased. The forecast for the remaining nine-month period is for planning purposes only and does not constitute a commitment to purchase or supply. However, FAULDING shall use all reasonable efforts to make each forecast as accurate as possible. 9.2 FMDC shall not be required pursuant to any Firm Order to supply during any particular quarter an amount of any Component that is more than one hundred ten percent (110%) of the amount of such Component that was forecasted for such quarter in FAULDING's most recent non-binding forecast, but will use all reasonable efforts to supply the full amount ordered. 9.3 After receipt of a Firm Order, FMDC shall promptly ship, or shall cause its Contract Manufacturer to ship, any Components ordered by FAULDING to arrive at the port of entry designated by FAULDING, as set forth in Section 9.5 hereof, within 15 business days of the requested delivery date. 9.4 FMDC shall invoice FAULDING for the Components at the time of shipment of the Components as set forth in Section 9.3 of this Agreement. FMDC has provided FAULDING in writing with the current purchase price of each Component and, upon sixty (60) days prior written notice, will provide FAULDING with any change to the purchase price of any such Component. As set forth in Section 13 of this Agreement, FAULDING shall have the right, pursuant to the provisions of Section 13 of this Agreement, to audit all records with respect to the calculation of the purchase price of any Component, as determined according to the provisions of Sections 7.2 and 8.1 hereof. Payment shall be made by FAULDING within sixty (60) days of FAULDING's receipt of the invoice or of the Components, whichever is later. All payments for Components by FAULDING shall be paid in U.S. Dollars by wire transfer to the account specified by FMDC from time to time. 9.5 FMDC shall ship the Components to FAULDING to the port of entry in Australia, as designated by FAULDING. FAULDING may choose the means of shipment by notifying FMDC of its choice in its Firm Order. FAULDING shall pay for all freight and insurance costs. Risk of loss of the goods shall pass to FAULDING upon delivery of the Components to the carrier. In the event FAULDING has not furnished FMDC with shipping and insurance instructions in its Firm Order, FMDC shall deliver the Components to FAULDING F.O.B. the manufacturing plant of FMDC or its Contract Manufacturer by delivery to a carrier selected by FMDC and FMDC shall, in its sole discretion, obtain insurance coverage thereon, the cost of which shall be borne by FAULDING and added to the purchase price. 9.6 FAULDING shall be responsible for all procedures required to clear customs for the Components and for the payment of any import, customs or similar duties imposed by governmental authorities and of any federal, state, county or municipal sales or use tax, excise or similar charge, or any other tax assessment (other than that assessed against income), license, fee or other charge lawfully assessed or charged on the use or transportation of the Components and Devices sold and delivered to FAULDING pursuant to this Agreement and shall obtain any licenses, authoriza- tions or other documents required by any governmental authori- ties in order to permit the importation and exportation after manufacture of the Components sold and delivered to FAULDING pursuant to this Agreement. 9.7 If FAULDING claims that there is a shortage of any of the Components delivered by FMDC pursuant to a Firm Order, it shall submit written notice to FMDC within thirty (30) days of the date of the delivery of such order. In case of alleged non-delivery, a written claim must be submitted to FMDC within thirty (30) days of receipt of FMDC's Invoice or expected date of delivery, whichever is earlier. In the absence of such a written claim, in the case of either an alleged shortage or non-delivery, the Components shall be deemed to have been delivered in accordance with this Agreement. In any event, FAULDING shall not be entitled to refuse to accept delivery by reason only of an alleged or actual shortage. 10. REGISTRATION; REGULATORY APPROVALS 10.1 FAULDING shall seek, or cause an Affiliate or sub-licensee to seek, all necessary approvals and/or registrations from the appropriate Regulatory Authorities in each country in the Territory in which FAULDING chooses to market any Device or FAULDING Manufactured Product to enable the marketing of such Device or FAULDING Manufactured Product in such country. Nothing provided herein, however, shall require FAULDING to seek registration of any Device or FAULDING Manufactured Product in any country in the Territory. 10.2 FAULDING, or an Affiliate or sub-licensee of FAULDING, will carry out all activities required to maintain or obtain approval of the Devices and FAULDING Manufactured Products described in Section 10.1 of this Agreement. Upon written request of FAULDING and at the cost of FAULDING, FMDC shall provide FAULDING with reasonable assistance in obtaining and maintaining such approvals. 10.3 To the extent permissible under applicable laws or regulations, each application for Registration in relation to a (a)Device shall state that the Device is supplied by FMDC under license and (b) in relation to a FAULDING Manufactured Product shall name FAULDING as the manufacturer of the Product and shall state that the Device is supplied by FMDC under license . Upon termination of the License Agreement, the provisions of Section 25.3 of this Agreement shall apply. 10.4 FAULDING shall notify FMDC of any and all registrations of each Device and FAULDING Manufactured Product in the Territory, and upon such registration in any country in the Territory, FAULDING shall use reasonable efforts, at its expense, to market, or cause the marketing of, such Device or FAULDING Manufactured Product in and throughout such country in order to obtain the optimum market potential for such Device or FAULDING Manufactured Product within and throughout such country. 11. ADVERSE EVENTS; RECALLS 11.1 FAULDING agrees that it will, in accordance with all applicable laws and regulations of the Territory, as such laws and regulations, may from time to time be amended, notify FMDC promptly (a)of any adverse reactions reported to it or to any Affiliate or sub-licensee of FAULDING resulting from the use of the Devices Technology (and provide to FMDC copies of all such adverse action reports received by it or any Affiliate or sub-licensee of FAULDING), (b) of any complaints from third parties involving the Devices Technology and (c) of any recall, or proposed recall, of any Devices or FAULDING Manufactured Products resulting from the use of the Devices Technology. 11.2 In the event that FMDC uses the Devices Technology, either outside of the Territory or, subject to the provisions of Section 4 hereof, within the Territory, in the manufacture of any other product, FMDC agrees that it will, in accordance with all applicable laws and regulations, as such laws and regulations, may from time to time be amended, notify FAULDING promptly (a) of any serious and unexpected adverse reactions reported to it or to any of its Affiliates or sub- licensees resulting from such use of the Devices Technology (and provide to FAULDING copies of all other adverse action reports received by it or any sublicensee of FMDC), (b) of any complaints from third parties involving the Devices Technology and (c) of any recall of Device or any product utilizing Devices Technology. 12. QUALITY CONTROL 12.1 Whether FMDC supplies FAULDING with Components either through its Contract Manufacturer or in-house, FMDC will ensure that: (a) the Components are manufactured in conformance with all applicable regulations, including without limitation, Good Manufacturing Practices, and in accordance with the specifications for the Components agreed to by the parties and FAULDING's Firm Orders described in Section 9 hereof; (b) adequate quality control is maintained in respect of the manufacture, packaging, labeling and storage of the Components; that any quality control testing of the Components is conducted in accordance with all relevant scientific and legal standards and with all reasonable diligence and expedition and that all packaging and labeling used for the Components meets all the requirements under the applicable laws, rules and regulations of Australia and the United States of America; (c) complete and accurate records with respect to the manufacture, packaging, labeling and storage of the Components are maintained for such period of time as is required by applicable law; (d) all Components will be transferred under appropriate storage conditions and packaged for shipment according to all laws and regulations of the United States of America and Australia, as applicable, and with all necessary export clearances obtained; and (e) FAULDING shall have the right, at its own cost, (i) twice annually or (ii) upon a (A) report to FAULDING or any sub-licensee of FAULDING of any serious and unexpected adverse reactions resulting from the use of the Device of which the Component is a part (the "Component's Device"), (B) any complaints from third parties involving the Component's Device or the Device Technology, (C) any recall of the Component's Device or the FAULDING Manufactured Product of which the Component's Device is a part; to visit the manufacturing plant for the Components during regular business hours, provided reasonable prior written notice is provided to the Contract Manufacturer and/or FMDC. 12.2 All Components received by FAULDING from FMDC shall be deemed to comply with the provisions of Section 12.1 hereof unless FAULDING gives FMDC written notice (the "Objection Notice") within thirty (30) days of such receipt specifying the manner in which the Components do not conform to specifications. The Objection Notice shall be accompanied by written reports of any testing performed by or for FAULDING on the Components. Upon receipt of the Objection Notice, FMDC may request FAULDING to return the rejected Components or samples thereof for further testing. The test results, if any, submitted to FMDC by FAULDING shall be deemed conclusive unless FMDC notifies FAULDING within thirty (30) days of its receipt of the Objection Notice or the samples, whichever is later, that it disagrees with such test results. In the event of such notice by FMDC, the rejected Components or samples thereof shall be submitted to a mutually acceptable independent laboratory (the "Independent Laboratory") for analysis in the form of a written report (the "Report"), the costs of which shall be paid by the party against whom the discrepancy is resolved. In the event that the results of the Report determine that any of the Components rejected by FAULDING do not meet specifications, FMDC will ensure that such Components are replaced with conforming goods within ninety (90) days from the date of the Report, provided that the departure from specifications is not due to any fault or act of FAULDING. All transportation, shipping and insurance costs and other fees incident to the shipping back to FMDC of the Components determined by the Report to be defective and the shipping to FAULDING of the replacement Components will be paid for by FMDC if the Components have been determined by the Report to be defective. 13. AUDITS 13.1 During any visit contemplated by Section 12.1(e) of this Agreement, FAULDING shall have the right (a) to inspect the manufacturing facilities, (b) to inspect quality control procedures and (c) to review any records maintained pursuant to Section 12.1(c) to ensure that the manufacturer of the Components complies with all applicable regulations. 13.2 After giving reasonable written notice to FAULDING, FMDC shall have the right during ordinary business hours, twice annually, and at its own cost, to have independent auditors inspect and audit the accounts and records referred to in Section 8.6 of this Agreement. 13.3 After giving reasonable written notice to FMDC, FAULDING shall have the right during ordinary business hours, twice annually, and at its own cost, to have independent auditors inspect and audit the accounts and records referred to in Section 7.3 hereof. 13.4 The party conducting the audit shall assume all risk of loss and indemnify and hold the other party harmless from and against any and all loss, liability, damage, claim and expense including, but not limited to, reasonable attorneys' fees arising out of or resulting from the auditing party's presence on the audited party's premises. 14. ONCO-TAIN TECHNOLOGY 14.1 FMDC acknowledges and agrees that FAULDING is the owner of the ONCO-TAIN Technology and of all industrial and intellectual property rights in relation to the ONCO-TAIN Technology, including the right to patents, registered or other designs, copyright, and any other confidential information. Nothing contained in this Agreement shall be effective to give FMDC any rights of ownership in and to the ONCO-TAIN Technology including, without limitation, any improvements to such Technology, and to the intellectual property owned by FAULDING. 14.2 In the event that FMDC shall desire to manufacture or market any product which in any way utilizes the ONCO-TAIN Technology anywhere, within or outside the Territory, the parties agree to negotiate in good faith to determine whether they can reach an agreement that is commercially acceptable to both of them. 15. OPERATIONAL KNOW-HOW 15.1 FMDC acknowledges and agrees that FAULDING is the owner of the Operational Know-How and of all industrial and intellectual property rights in relation to the Operational Know-How, including the right to patents, registered or other designs, copyright, and any other confidential information. Nothing contained in this Agreement shall be effective to give FMDC any rights of ownership in and to such Operational Know-How including, without limitation, any improvements to such Know-How, and FMDC's right to use the Operational Know-How, as set forth in Section 15.2 of this Agreement, shall be for the sole purpose of replicating and scaling-up on the SGV Equipment the process for the manufacture of products utilizing the Devices Technology. 15.2 The parties understand and agree that FMDC, or an Affiliate of FMDC other than FAULDING(collectively or alternatively, "the "Manufacturer") may undertake to manufacture products utilizing the Devices Technology. In such event, FAULDING agrees to negotiate in good faith with the Manufacturer to reach mutually acceptable and commercially reasonable rates and terms on which to: (a) provide to the Manufacturer all Operational Know-How in its possession as may be necessary and helpful to replicate and scale-up the process for the manufacture of products utilizing the Devices; and (b) provide appropriate scientists and engineers to aid the Manufacturer in the commissioning of the SGV Equipment and the replicating and scaling-up of the process of manufacturing products utilizing the Devices, all at the reasonable cost of the Manufacturer. 15.3 For the purposes of Section 15.2: (a) "commercially reasonable rates and terms" shall mean rates and terms that are not less favorable to the Manufacturer than those rates and terms, which in the reasonable judgement of each of FAULDING and the Manufacturer, could be obtained by the Manufacturer from a non-affiliated third-party in an arms-length negotiation in the ordinary course of its business for similar work; and (b) "aid...in the commissioning of the SGV Equipment and the replicating and scaling-up of the process of manufacturing products utilizing the Devices" shall include, without limitation, providing to the Manufacturer on-site FAULDING engineers to assist in the scaling-up process, to the reasonable satisfaction of the Manufacturer, and permitting personnel of the Manufacturer, at the Manufacturer's reasonable expense, to visit FAULDING's premises in Australia for technical discussions relating to operations of the SGV Equipment. 16. OWNERSHIP AND LICENSING OF TRADEMARKS 16.1 FMDC acknowledges and agrees that FAULDING is the beneficial owner of each of the Trademarks. With respect to any Trademarks that have heretofore been registered by FMDC (under either its current name or its prior name, DBL, Inc., FAULDING, at its sole discretion, may direct FMDC in writing, at any time and from time to time, to assign any or all of such Trademarks, at FMDC's cost, to FAULDING or its designee. Upon receipt of FAULDING's directive, FMDC shall promptly deliver to FAULDING, or to FAULDING's nominee, any documents in its possession relating to such Trademark(s) and shall execute all such documents as may be required, or as FAULDING may deem appropriate, to ensure any such assignment is effected. 16.2 FAULDING hereby licenses to FMDC the right to use the Trademarks in connection with the manufacture, distribution and sale, outside of the Territory, of the Devices and products utilizing such Devices, subject to the terms and conditions of this Agreement. FMDC shall use the Trademarks only upon, in connection with, and under the terms of this license. Each of the Trademarks shall at all times be used in accordance with acceptable trademark practices, including use of the appropriate notice of registration, legend or symbol wherever permitted or required by applicable law. All packaging and promotional material shall so indicate the licensing of the Trademarks and FMDC, upon FAULDING's request, will provide FAULDING with samples of all uses of the Trademarks. FMDC acknowledges and agrees that all goodwill in the Trademarks shall accrue to FAULDING. 17. WARRANTY 17.1 FMDC represents and warrants to FAULDING that: (a) it has the corporate authority to enter into this Agreement and to perform its obligations hereunder; (b) it is not aware of any legal, contractual or other restriction, limitation or condition which might affect adversely its ability to perform hereunder; (c) it is the owner of the Devices Technology free and clear of any liens or encumbrances of third parties and has sufficient right, title and interest in the Devices Technology to grant the license to FAULDING granted hereunder for the purpose of manufacturing and marketing FAULDING Manufactured Products within the Territory; and (d) the Components delivered to FAULDING by or on behalf of FMDC pursuant to this Agreement shall (i) meet the specifications for such Components, which have been agreed to by the parties, at the time of delivery by FMDC to FAULDING; (ii) be manufactured using materials mutually approved by the parties and (iii) be manufactured and stored in compliance with all applicable laws and regulations, including, without limitation, Good Manufacturing Practices; provided, however, that the warranty provided by FMDC to FAULDING in this Section 17.1(e)is specifically limited to the utilization of such Component as part of a Device and FMDC hereby makes no representation or warranty whatsoever with respect to the stability, safety or efficacy of the use of any Product in a FAULDING Manufactured Product format. 17.2 FAULDING represents and warrants to FMDC that: (a) it has the corporate authority to enter into this Agreement and to perform its obligations hereunder; (b) it is not aware of any legal contractual or other restriction, limitation or condition which might affect adversely its ability to perform hereunder. (c) it is the owner of the ONCO-TAIN Technology and the Operational Know-How clear of any liens or encumbrances of third parties and, upon the licensing of either the Operational Know-How, or the ONCO-TAIN Technology as contemplated, respectively, by Sections 14 and 15 hereof, it will be the owner of the ONCO-TAIN Technology or Operational Know-How, as the case may be, free and clear of any liens or encumbrances and to the best of its knowledge on the date hereof, will have sufficient right, title and interest in the ONCO-TAIN Technology or Operational Know-How, as the case may be, to grant a license to FMDC on the terms and conditions proposed, respectively, in Sections 14 and 15 hereof; and (d) to the best of its knowledge as of the date hereof, none of the Trademarks infringes the rights of any third parties in the United States of America. 18. INDEMNITY 18.1 FMDC agrees to indemnify, defend and hold harmless FAULDING, its Affiliates and subsidiaries and their respective employees against any and all claims, losses (except consequential losses, such as, for example, the loss of business or of profits), damages and liabilities, including reasonable attorney's fees, (a) relating to the Components supplied hereunder, including liability for death or personal injury, that results from the negligence or willful misconduct of FMDC, or (b) arising out of any breach of any obligation by FMDC hereunder or any representation or warranty by FMDC hereunder; provided, however, that the indemnity provided by FMDC pursuant to this Section 18.1 is limited strictly to the use of Components and Devices and FMDC shall under no circumstances be held liable, and FAULDING shall hold FMDC harmless, as set forth in Section 18.2, for any claims or losses arising from any Product's utilization in conjunction with a Device or the stability, safety or efficacy of the use of any Product in a FAULDING Manufactured Product. 18.2 FAULDING agrees to indemnify, defend and hold harmless FMDC, its Affiliates and subsidiaries and their employees against any and all claims, losses(except consequential losses, such as, for example, the loss of business or of profits), damages and liabilities, including reasonable attorney's fees, incurred by any of them (a) relating to any Product's utilization in conjunction with a Device or the stability, safety or efficacy of the use of any Product in a FAULDING Manufactured Product or to any other claim with respect to any FAULDING Manufactured Product distributed or sold hereunder, including liability for death or personal injury that results from the negligence or willful misconduct of FAULDING, or (b) arising out of any breach of any obligation by FAULDING hereunder, any representation or warranty by FAULDING hereunder, or any act or omission of FAULDING or any of its Affiliates or sub-licensees in connection with the marketing, distribution and sale of the FAULDING Manufactured Products hereunder. 18.3 (a) If FAULDING or any of its Affiliates or subsidiaries or FMDC or any of its Affiliates or subsidiaries (in each case an "Indemnified Party") receives any written claim which it believes is the subject of indemnity hereunder by FMDC or FAULDING, as the case may be, (in each case as "Indemnifying Party"), the Indemnified Party shall, as soon as reasonably practicable after forming such belief, give notice thereof to the Indemnifying Party, including full particulars of such claim to the extent known to the Indemnified Party; provided, that the failure to give timely notice to the Indemnifying Party as contemplated hereby shall not release the Indemnifying Party from any liability to the Indemnified party other than pursuant to this Section 18. The Indemnifying Party shall have the right, by prompt notice to the Indemnified Party, to assume the defense of such claim with counsel reasonably satisfactory to the Indemnified Party, and at the cost of the Indemnifying Party. If the Indemnifying Party does not so assume the defense of such claim or, having done so, does not diligently pursue such defense, the Indemnified Party may assume such defense, with counsel of its choice, but for the account of the Indemnifying Party. If the Indemnifying Party so assumes such defense, the Indemnified Party may participate therein through counsel of its choice, but the cost of such counsel shall be for the account of the Indemnified Party. (b) The party not assuming the defense of any such claim shall render all reasonable assistance to the party assuming such defense, and all out-of-pocket costs of such assistance shall be for the account of the Indemnifying Party. (c) No such claims shall be settled other than by the party defending the same, and then only with the consent of the other party, which shall not be unreasonably withheld; provided, that the Indemnified Party shall have no obligation to consent to any settlement of any such claim which imposes on the Indemnified Party any liability or obligation which cannot be assumed and performed in full by the Indemnifying party. 18.4 (a) FMDC shall have no liability hereunder for any claim (hereinafter a "Manufacture Infringement Claim") which, if true, would constitute a breach of the warranties contained in Section 17.1(c)hereof based on FAULDING's manufacture or distribution of any FAULDING Manufactured Product, as the case may be, after FAULDING receives a notice from FMDC that FAULDING should cease such manufacture or distribution due to a Manufacture Infringement Claim. (b) FAULDING shall have no liability hereunder for any claim (hereinafter a "Trademark Infringement Claim") which, if true, would constitute a breach of the warranties contained in Section 17.2(d)hereof based on FMDC's use of any of the Trademarks after FMDC receives a notice from FAULDING that FMDC should cease using any such Trademark due to a Trademark Infringement Claim. 19. PATENT PROSECUTION AND MAINTENANCE 19.1 FAULDING agrees, on FMDC's behalf and at FMDC's cost, to apply for, obtain and maintain the Patents. All expenses for the prosecution and maintenance of each of the Patents shall be paid by FMDC to FAULDING within sixty (60) days after FMDC's receipt of an invoice from FAULDING for such expenses; provided, however, that FAULDING shall seek instruction from FMDC before each significant action is taken during the prosecution and maintenance of the Patents and provided further, however, that FAULDING shall not incur any cost not usually incurred in the ordinary course of prosecuting or maintaining such Patents, and which is more than $1000, without receiving prior approval in writing from FMDC. FMDC agrees, at its own cost, to co-operate fully with FAULDING in the prosecution and maintenance of the patents as reasonably requested by FAULDING in writing. 19.2 FAULDING shall promptly furnish FMDC with true copies of the Patent(s) concerned. 20. PATENT AND TRADEMARK INFRINGEMENT 20.1 Each party will promptly notify the other party of any infringement or possible infringement by a third party of any of the Patents or Trademarks and any claim of litigation by a third party alleging invalidity of any of the Patents or Trademarks. Moreover, in the event of any claim or threat of litigation by a third party alleging infringement by any of the Patents or Trademarks or if either party discovers that any of the Patents or Trademarks infringe, or may possibly infringe, a third party's intellectual property rights, each Party shall promptly give notice of such claim or litigation to the other Party. 20.2 The "Litigating Party", which shall be: (a) FMDC with respect to any actions associated with alleged infringement of or by the Patents; and (b) FAULDING with respect to any actions associated with alleged infringement of or by the Trademarks, shall have the right but not the obligation to defend or prosecute any right with respect to such Patent or Trademark, as the case may be. In such event, the other party shall cooperate with the Litigating Party. 20.3 If the Litigating Party fails to prosecute or defend any such action (a) within ninety (90) days after its giving or receiving notice thereof or, (b) if applicable, within the earlier of (i) ninety (90) days after the Litigating Party receives notice of any such action or (ii) fifteen (15) days prior to the last day permitted by the court in which the action has been filed to file responsive pleadings, then the other party shall have the right, but not the obligation, to prosecute or defend any such action on its own behalf and, if necessary to sustain standing, the right to name the Litigating Party, or, if applicable, its successor or assignee, as a party plaintiff. In such event, the Litigating Party shall reasonably cooperate with the other party. 20.4 The party prosecuting or defending the action shall control all aspects of such action and bear all costs of such action and the proceeds of such action, of which there is no indemnification or for which indemnification is not sought, shall belong to the prosecuting or defending party. 21. CONFIDENTIALITY 21.1 FAULDING agrees with FMDC that it will not disclose to any person or corporation any confidential information of FMDC that it may acquire at any time during the term of this License Agreement, including, without limitation the Devices Technology and any improvements to the Devices Technology, without the prior written consent of FMDC and that FAULDING will use all reasonable efforts to prevent unauthorized publication or disclosure by any person of such Technology, including, without limitation, requiring its employees, consultants, Affiliates, sub-licensees and agents to enter into similar confidentiality agreements in relation to the Technology and such other confidential information. 21.2 FMDC agrees with FAULDING that it will not disclose to any person or corporation any confidential information of FAULDING that it may acquire at any time during the term of this License Agreement, including, without limitation, the Operational Know-How and the ONCO-TAIN Technology without the prior written consent of FAULDING and that FMDC will use all reasonable efforts to prevent unauthorized publication or disclosure by any person of such confidential information, including requiring its employees, consultants, Affiliates and agents to enter into similar confidentiality agreements in relation to such confidential information. 21.3 The obligations undertaken by each party under this Section 21 shall continue in force for a period of five (5) years following the termination or expiration of this Agreement. 21.4 The obligations contained in this Section 21 do not apply to any information: (a) which was at the time of receipt by a party in the public domain or generally known in the pharmaceutical manufacturing industry otherwise than by breach of a party's duty of confidentiality; (b) which a party can establish to have been known to it at the time of receipt from the other party and not to have been acquired directly or indirectly from the other party; (c) acquired by a party from a third party otherwise than in breach of an obligation of confidence to the other party; (d) required by law to be provided to governmental agencies but only for the purpose of providing it to such governmental agencies; (e) provided to any Regulatory Authority in the Territory in connection with the registration of a Device or FAULDING Manufactured Product; or (f) disclosed to an Affiliate of either party for purposes consistent with this Agreement. 22. TAXATION ISSUES 22.1 Each of the parties is aware that the commercial arrangements of this Agreement may be subject to transfer pricing reviews by the relevant taxation authorities in the Territory and the United States. As a result, this Agreement may be subject to internal reviews by either or both parties and to audits by the relevant taxation authorities. If as a result of such reviews or audits, it becomes necessary or advisable for either party (the "Affected Party")to change any commercial arrangements of this Agreement, including, without limitation, making retroactive adjustments, the other party, within thirty (30) days after written notification by the Affected Party, which notification shall explain in reasonable detail the reason for the proposed change, shall meet with the Affected Party and each of the parties agrees to negotiate in good faith, and to use its best efforts to reach agreement with respect to, any modifications to the commercial terms of this Agreement. In the event that the parties, despite their best efforts, cannot reach agreement with respect to any material change, which in the opinion of either party is necessary or advisable for the reasons set forth in this Section 22.1, either party, upon written notice to the other party, may terminate this Agreement. The provisions of Section 25.3 of this Agreement shall apply upon any termination of the Agreement pursuant to this Section 22.1. 22.2 Each of the parties agrees to provide reasonable assistance, at the Affected Party's reasonable cost, if the Affected Party is subject to a taxation audit that reviews any commercial arrangement of this Agreement. 23. NOTICES Notices provided under this Agreement to be given or served by either party on the other shall be given in writing and served personally or by prepaid registered airmail or by express mail or by means of facsimile to the following respective addresses or to such other addresses as the parties may hereafter advise each other in writing. It being agreed and understood by the parties that any such notice shall be deemed given and served on the dates transmitted by facsimile or a date ten (10) days after the date of airmail by post or express mail: To: FAULDING The Company Secretary F.H. FAULDING & CO. LIMITED 160 Greenhill Road PARKSIDE South Australia 5063 Facsimile +618 373 3120 To: FMDC President FAULDING MEDICAL DEVICE CO. 8777 East Via De Ventura Suite 315 Scottsdale, Arizona 85258 United States of America Facsimile +1 602 951 9540 with a copy to: Chief Financial Officer FAULDING MEDICAL DEVICE CO. 200 Elmora Avenue Elizabeth, New Jersey 07207 United States of America Facsimile +1 908 355 7048 24. ASSIGNMENT Neither party to this Agreement shall assign any rights hereunder to third parties other than the right of payment of monies accrued without the prior written consent of the other party; provided, however, that the restriction contained herein shall in no way limit the rights to sublicense granted to FAULDING under Section 3 of this Agreement or the rights of either party to make assignments to Affiliates. This Agreement shall be binding upon any permitted assignee or successor of either party. 25. TERM AND TERMINATION 25.1 This Agreement shall be for a term of twenty (20) years commencing as of the date of this Agreement and shall automatically be renewed thereafter for up to four successive five-year terms unless written notice is given by either party at least six months prior to the date of any such renewal of such party's desire not to renew such term. 25.2 This Agreement may be terminated by notice in writing by either party if the other party shall default in the performance of any of its obligations under this Agreement and such default shall continue for a period of not less than ninety (90) days after written notice specifying such default shall have been given; by either party if the other party makes an arrangement with its creditors or goes into receivership or liquidation (other than voluntary liquidation for the purpose of internal reorganization), or if a receiver or a receiver and manager is appointed in respect of the whole or part of the property or business of the party in default or by either party if a major part of the assets or all of the assets of the other party are disposed of to or compulsorily acquired by any other person. 25.3 Upon the expiration of, or the termination of this Agreement by either party, FAULDING shall have the right in each country in the Territory in which, prior to such termination, it has commenced marketing a Device or a FAULDING Manufactured Product, to Market such Device or FAULDING Manufactured Product under the terms of this Agreement until the earlier of: (a) three years after the date of expiration or date of termination; or (b) the date upon which the applicable Regulatory Authority has approved for marketing an alternative drug device for utilization with such Product (the "Extension Period"). 25.4 Upon the latter of: (a) the termination or expiration of this Agreement, (b) the termination or expiration of the Extension Period set forth in Section 25.3 hereof, or (c) with respect to any records or other data that must be retained for a period of time in accordance with, and as set forth in, the regulations of the Regulatory Authorities in the Territory (the "Retention Period"), the expiration of the Retention Period, FAULDING shall promptly deliver to FMDC all information with respect to the Devices Technology in FAULDING's possession and FMDC shall promptly deliver to FAULDING all information with respect to the ONCO-TAIN Technology and Operational Know-How, if any, in FMDC's possession and the parties shall as soon as conveniently possible reconcile all accounts. 26. NON WAIVER Any party's failure to exercise or enforce any right conferred upon it under this Agreement shall not be deemed to be a waiver of any such right or operate to bar the exercise or performance thereof at any time or times thereafter nor shall any party's waiver of any right under this Agreement at any given time including rights to any payment be deemed a waiver for any other time. 27. GOVERNING LAW This Agreement shall be deemed to be a contract made under and shall be governed by and construed in accordance with the laws of the State of New York. 28. ENTIRE AGREEMENT This Agreement incorporates the entire understanding of the parties and revokes and supersedes any and all agreements, contracts, understandings or arrangements that might have existed heretofore between the parties regarding the subject matter hereof. 29. HEADINGS The headings used in this Agreement are intended for guidance only and shall not be considered part of this written understanding between the parties hereto. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. FAULDING MEDICAL DEVICE CO. By: F.H. FAULDING & CO. LIMITED By: LICENSING AND SUPPLY AGREEMENT BETWEEN FAULDING MEDICAL DEVICE CO. AND F.H. FAULDING & CO. LIMITED TABLE OF CONTENTS 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . 2 2. EXCLUSIVE LICENSE TO THE DEVICES TECHNOLOGY. . . 5 3. SUB-DISTRIBUTORS . . . . . . . . . . . . . . . . 6 4. COMPETING PRODUCTS; EXCEPTIONS TO EXCLUSIVITY. . 7 5. INTELLECTUAL PROPERTY RIGHTS OF FMDC . . . . . . 8 6. IMPROVEMENTS TO THE DEVICES TECHNOLOGY . . . . .10 7. PURCHASE PRICE OF THE COMPONENTS . . . . . . . .11 8. REDUCTION OF PURCHASE PRICE. . . . . . . . . . .12 9. COMPONENTS: FORECASTS, ORDERS AND PAYMENT. . . .14 10. REGISTRATION; REGULATORY APPROVALS . . . . . . .16 11. ADVERSE EVENTS; RECALLS. . . . . . . . . . . . .17 12. QUALITY CONTROL . . . . . . . . . . . . . . . .18 13. AUDITS . . . . . . . . . . . . . . . . . . . . .19 14. ONCO-TAIN TECHNOLOGY . . . . . . . . . . . . . .20 15. OPERATIONAL KNOW-HOW . . . . . . . . . . . . . .21 16. OWNERSHIP AND LICENSING OF TRADEMARKS. . . . . .22 17. WARRANTY . . . . . . . . . . . . . . . . . . . .23 18. INDEMNITY. . . . . . . . . . . . . . . . . . . .24 19. PATENT PROSECUTION AND MAINTENANCE . . . . . . .27 20. PATENT AND TRADEMARK INFRINGEMENT. . . . . . . .27 21. CONFIDENTIALITY. . . . . . . . . . . . . . . . .28 22. TAXATION ISSUES. . . . . . . . . . . . . . . . .30 23. NOTICES. . . . . . . . . . . . . . . . . . . . .30 24. ASSIGNMENT . . . . . . . . . . . . . . . . . . .31 25. TERM AND TERMINATION . . . . . . . . . . . . . .32 26. NON WAIVER . . . . . . . . . . . . . . . . . . .33 27. GOVERNING LAW. . . . . . . . . . . . . . . . . .33 28. ENTIRE AGREEMENT . . . . . . . . . . . . . . . .33 29. HEADINGS . . . . . . . . . . . . . . . . . . . .34 Schedule A . . . . . . . Components, Devices & Patents Schedule B . . . . . . Pre-existing Negotiations and Obligation of FAULDING Schedule C . . . . . . . Pre-existing Negotiations of FMDC Schedule D . . . . . . . Trademarks EX-10 5 EXHIBIT 10(XXV) EXHIBIT 10 (xxv) LICENSE AGREEMENT This AGREEMENT, is made and entered into as of this 29th day of February, 1996 by and between F.H. FAULDING & CO. LIMITED, a corporation organized under the laws of South Australia ("Licensor") and PUREPAC, INC., a Delaware corporation ("Licensee"). W I T N E S S E T H: WHEREAS, Faulding Holdings Inc., a wholly owned subsidiary of Licensor ("Faulding"), and Licensee entered into a Stock Purchase Agreement dated as of January 23, 1996 (the "Stock Purchase Agreement") pursuant to which Licensee, as of the date hereof, purchased all of the outstanding common stock of each of Faulding Puerto Rico, Inc., Faulding Pharmaceutical Co. and Faulding Medical Device Co. (collectively, the "Subsidiaries"), formerly the wholly-owned subsidiaries of Faulding, in exchange for certain shares of Licensee's common stock; WHEREAS, Faulding and Licensee also entered into a Preferred Stock Purchase Agreement dated as of January 23, 1996 pursuant to which, as of the date hereof, Faulding purchased 150,000 shares of Licensee's Series B Preferred Stock for a purchase price of $15,000,000 (the "Preferred Stock Agreement") (the Stock Purchase Agreement and the Preferred Stock Agreement are collectively referred to as the "Faulding Transaction"); WHEREAS, as a result of the Faulding Transaction, Faulding is a majority owner of Licensee's common stock, giving effect to the conversion of all of the preferred stock of Licensee owned by Faulding; WHEREAS, as a result of the Faulding Transaction, the Licensee intends to change its name to "Faulding Inc." and to cause the Subsidiaries to continue to use the name "Faulding" in their corporate names; and WHEREAS, Licensor, as the sole owner of all the rights, title and interest in and to the duly registered tradename "Faulding", desires to grant, and Licensee desires to receive, a limited license to use the tradename "Faulding" according to the terms of this Agreement; NOW, THEREFORE, in consideration of these premises and the mutual covenants herein contained, and for other good, valuable and sufficient consideration given by each party to the other, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Grant of License. Licensor hereby grants to Licensee, and Licensee hereby accepts a non-exclusive, royalty-free license: (i) to use and display the tradename "Faulding" (the "Tradename") solely in connection with Licensee's business as it is currently configured including, but not limited to, the development, manufacture and sale of generic drug products ("Licensee's Business"); and (ii) for the use by each of the Subsidiaries solely in connection with their respective businesses as currently configured, in accordance with the terms and provisions of this Agreement. 2. Territory of License. Licensee may exercise the rights granted by this license throughout the world. 3. Term of License; Termination. a. At any time after Faulding no longer holds more than 50% of the outstanding common stock of Licensee on a fully diluted basis, Licensor may notify Licensee that it has three (3) years from the date of such notice in which to continue to use the Tradename as provided herein. Licensee's ability to continue to use the Tradename after such three year period will be subject to its reaching an agreement with Licensor governing such use. b. Licensor may terminate this Agreement, and the license hereby granted, on thirty (30) days' prior written notice to Licensee in the event that Licensee violates any of its obligations under this Agreement or in the event that Licensee breaches any covenant or warranty made in this Agreement. c. Licensor may terminate this license on thirty (30) days' prior written notice to Licensee in the event that, in the exercise of its sole and absolute discretion, it declines to continue using, maintaining, or defending the validity of the Tradename. In the event that the license terminates pursuant to this paragraph 3 c, and Licensor intends to cease use of the Tradename, Licensee shall be entitled to purchase an assignment of the Tradename from Licensor for one dollar ($1) by so notifying Licensor of such intent, after receipt of Licensor's notice and before the expiration of this License Agreement. 4. Protection of Trademark. a) Claims by Third Parties, Licensor's Indemnification. In the event that Licensee or the Subsidiaries, or any of them, is informed of any claim, suit or demand against Licensee on account of any alleged infringement, unfair competition, or similar matter relating to its use of the Tradename, Licensee shall promptly notify Licensor of any such claim, suit or demand. Thereupon Licensor shall promptly, take such action as may be necessary to protect and defend Licensee against any such claim by any third party and shall indemnify Licensee against any losses, costs or expenses incurred in connection therewith. Licensee shall have no independent power or authority to settle or compromise any such third party claim without prior written specific authorization from Licensor, who shall have the right to defend, compromise or settle any such claim, at its sole cost and expense using attorneys of its own choosing. Licensee agrees to cooperate fully with Licensor in connection with the defense or settlement of any such claim. b) Infringement by Third Parties. In the event that Licensee, the Subsidiaries, or any of them, believes that any third party is improperly using a trademark, tradename or logotype confusingly similar to the Tradename, Licensee shall promptly notify Licensor of all facts known to it relating to such use. Thereupon Licensor shall conduct its own investigation of such alleged infringing use and shall have the sole right to take any action it deems necessary to protect the Tradename. Licensee shall have no right to prosecute any claim against any alleged infringer of either the Tradename or Licensee's licensed use thereof and shall have no right to settle or compromise any claim against such alleged infringer, or to participate in any litigation against such alleged infringer. Licensee agrees to cooperate fully with Licensor in connection with the prosecution of any claim against such alleged infringer which may be brought by Licensor. c) No Contest. Licensee shall not, nor cause the Subsidiaries to, contest or deny the validity or enforceability of the Tradename or oppose or seek to cancel any registration thereof by Licensor, or aid or abet others in so doing either during the Term of this Agreement or at anytime thereafter. d) Maintenance of the Tradename. Licensor at all times during this Agreement shall maintain the viability of the Tradename and shall undertake to make all filings, and to take all other reasonable steps necessary to protect the Tradename. 5. Compliance with the Laws. Licensee shall use the Tradename, and conduct Licensee's Business thereunder, and insure that the Subsidiaries use the Tradename and conduct their respective businesses thereunder, in strict compliance with all applicable laws, rules and regulations of all applicable government authorities. Throughout the period hereof, including the wind-down period contemplated by paragraph 3 hereof, Licensee shall undertake no course of action, and will insure that the Subsidiaries undertake no course of action, which may lead to a loss of goodwill or other diminution in value of the Tradename, and shall use its reasonable commercial efforts and cause the Subsidiaries to use the same, to enhance the goodwill and value of the Tradename. 6. Indemnification by Licensee. Licensee hereby agrees to defend, indemnify and hold harmless Licensor from and against any and all suits, actions, claims, judgments, debts, obligations or rights of action of any nature or description, and all costs, including attorney's fees, incurred by Licensor in connection therewith, arising out of or relating to the rights granted to Licensee hereunder or any acts, omissions, statements, or representations of any employee, agent, subsidiary (including, but not limited to, the Subsidiaries) officer or director of Licensee relating thereto. Licensor shall notify Licensee of any such suit, action, claim, judgment, debt, obligation or right of action promptly upon receiving notice or being informed of the existence thereof. Upon such notice Licensee shall promptly take such action as may be necessary to protect and defend Tradename against such suit, action, claim, judgment, debt, obligation or right of action and shall indemnify Licensor against any loss, costs or expenses incurred in connection therewith. Licensor shall have no power or authority to settle or compromise any such suit, action, claim, judgment, debt, obligation or right of action and Licensor agrees to cooperate fully with Licensee with the defense thereof. 7. Assignment. Licensee's rights and interests hereunder may not be assigned, pledged, conveyed or otherwise transferred without the prior written consent of Licensor, which consent shall not be unreasonably withheld. Any such purported unauthorized pledge, assignment, conveyance or transfer shall be null and void. 8. Employment of Agents. Notwithstanding the terms of paragraph 7 hereof, Licensee may employ or cause any or all of the Subsidiaries to employ, the services of distributors, throughout the Territory for and on its behalf provided that such distributors shall not, directly or indirectly, be assignees or sublicensees of Licensee and provided that at all times Licensee shall be fully responsible for the actions of such distributors and performance which shall conform in all respects to the requirements of this Agreement. 9. Effect of Termination. In the event of expiration or termination of this Agreement pursuant to paragraph 3 hereof, Licensee shall, and shall likewise cause the Subsidiaries to, forthwith discontinue the use of the Tradename, and the Tradename, or any symbols deceptively similar thereto, shall thereafter not be used in any manner, or for any purpose, directly or indirectly, by Licensee and/or the Subsidiaries, and each of them. Upon the termination or expiration of this Agreement Licensee shall, and shall cause the Subsidiaries or any of them to, promptly take all necessary steps to sever all connection with the Tradename including, but not limited to, amending all of its corporate documents, stationery, brochures, advertising materials, charter and other filings. 10. Rights of Licensor. The expiration or termination of this Agreement shall be without prejudice to any other rights or claims of Licensor against Licensee or any or all of the Subsidiaries or any other remedy available to it. Such expiration or termination shall not relieve Licensee of any of its obligations to Licensor existing at the time of expiration or termination, or terminate those obligations of Licensee which, by their nature, survive the expiration or termination of this Agreement. 11. Miscellaneous. a) Survival of Representations, Warranties and Covenants. All statements contained in this Agreement shall be deemed representations, warranties and covenants by the Licensor or the Licensee, as the case may be, hereunder. All representations, warranties, covenants made by the Licensor and by the Licensee of this Agreement, or pursuant hereto, shall survive the termination of this Agreement. b) Notices. All notices, requests, demands, or other communications with respect to this Agreement shall be in writing and shall be (i) sent by facsimile transmission, (ii) sent by postal service, registered or certified mail, return receipt requested, or (iii) personally delivered by a nationally recognized express overnight courier service, charges prepaid, to the following addresses (or such other addresses as the parties may specify from time to time in accordance with this Section) To the Licensee: Faulding Inc. 200 Elmora Avenue Elizabeth, New Jersey 07207 Attention: President Fax No.: +1 908 355-7048 To the Licensor: F.H. Faulding & Co. Limited 160 Greenhill Road Parkside, So. Australia 5064 Attention: Secretary Fax No.: +618 373 3120 Any such notice shall, when sent in accordance with the preceding sentence, be deemed to have been given and received on the earliest of (i) the day delivered to such address or sent by facsimile transmission, (ii) the tenth business day following the date deposited with the postal service, or (iii) 5 days after shipment by such courier service. c) Construction. This Agreement shall be construed and enforced in accordance with the internal laws of the State of New York without giving effect to the principles of conflicts of law thereof. d) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same Agreement. e) No Implied Waiver; Remedies. No failure or delay on the part of the parties hereto to exercise any right, or privilege hereunder or under any instrument executed pursuant hereto shall operate as a waiver nor shall any single or partial exercise of any right, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. All rights, powers, and privileges granted herein shall be in addition to other rights and remedies to which the parties may be entitled at law or in equity. f) Entire Agreement. This Agreement sets forth the entire understandings of the parties with respect to the subject matter hereof, and it incorporates and merges any and all previous communications, understandings, oral or written, as to the subject matter hereof, and cannot be amended or changed except in writing, signed by the parties. g) Headings. The headings of the Sections of this Agreement, where employed, are for the convenience of reference only and do not form a part hereof and in no way modify, interpret or construe the meanings of the parties. h) Severability. To the extent that any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted hereof and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. F.H. FAULDING & CO. LIMITED By: Dr. Edward Tweddell Managing Director PUREPAC, INC. By: Richard Moldin Chief Executive Officer EX-11 6 EXHIBIT 11 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (Dollars in thousands except per share earnings) Year Ended June 30, ------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------------- DATA AS TO EARNINGS: Income (loss) before cumulative effect of a $ (5,001) $ (1,618) $ 3,992 change in accounting for income taxes Less: preferred stock dividends (2,307) (2,080) (2,080) - ---------------------------------------------------------------------------- Income (loss) before cumulative effect applicable to common and common equivalent shares $ (7,308) $ (3,698) $ 1,912 - ---------------------------------------------------------------------------- Cumulative effect of a change in accounting for income taxes $ --- $ --- $ 4,149 - ---------------------------------------------------------------------------- DATA AS TO NUMBER OF COMMON SHARES: Weighted average shares outstanding 15,039,391 14,977,248 14,906,896 Common equivalent shares relating to contingent issuance --- 35,877 85,298 - ---------------------------------------------------------------------------- Average number of common shares and common share equivalents 15,039,391 15,013,125 14,992,194 ============================================================================ PRIMARY EARNINGS PER COMMON SHARE: Income (loss) before cumulative effect of a change in accounting for income taxes $ (.49) $ (.25) $ .13 Cumulative effect of a change in accounting for income taxes --- --- .28 - ---------------------------------------------------------------------------- Net Income (Loss) $ (.49) $ (.25) $ .41 ============================================================================ EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT (Note 1, below): Income (loss) before cumulative effect of a change in accounting for income taxes $ (.49) $ (.25) $ .13 Cumulative effect of a change in accounting for income taxes --- --- .28 - ---------------------------------------------------------------------------- Net Income (Loss) $ (.49) $ (.25) $ .41 ============================================================================ Note 1: Common share equivalents in the aggregate dilute the primary earnings per common share by less than 3 percent. EX-11 7 EXHIBIT 11.1 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE ASSUMING FULL DILUTION (Dollars in thousands except per share earnings) Year Ended June 30, -------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------- DATA AS TO EARNINGS: Income (loss) before cumulative effect of a change in accounting for income taxes $ (5,001) $ (1,618) $ 3,992 - ---------------------------------------------------------------------------- Cumulative effect of a change in accounting for income taxes $ --- $ --- $ 4,149 - ---------------------------------------------------------------------------- DATA AS TO NUMBER OF COMMON SHARES: Average number of common shares and common share equivalents (Exhibit 11) 15,039,391 15,013,125 14,992,194 Additional shares assuming full dilution 6,570,078 5,005,490 5,005,128 - ---------------------------------------------------------------------------- Average number of common shares assuming full dilution 21,609,469 20,018,615 19,997,322 - ---------------------------------------------------------------------------- EARNINGS PER COMMON SHARE ASSUMING FULL DILUTION (1996 and 1995 - ANTIDILUTIVE): Income (loss) before cumulative effect of a change in accounting for income taxes $ (.23) $ .08 $ .20 Cumulative effect of a change in accounting for income taxes --- --- .21 - ---------------------------------------------------------------------------- Net Income (Loss) $ (.23) $ .08 $ .41 ============================================================================ EX-21 8 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES Name State of Incorporation - ------------------------------ ---------------------- Purepac Pharmaceutical Co. Delaware Faulding Medical Device Co. Delaware Faulding Puerto Rico, Inc. Delaware Faulding Pharmaceutical Co. Delaware EX-27 9 EXHIBIT 27
5 1,000 YEAR JUN-30-1996 JUN-30-1996 1,797 0 17,119 3,355 26,496 52,051 41,510 0 98,678 15,755 0 151 0 10 82,762 98,678 75,784 75,784 58,397 24,110 0 0 1,021 (5,702) (702) (5,000) 0 0 0 (5,000) (.49) 0
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