-----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, HE52ZsRnlRRGC1/Flz3dVUKfRrMJFV5xHaBfZ2JuhWnMjY2/uu0U7XkyIh29Gypr M7BE7dyCIQhBhGkNdW84mg== 0000950144-01-004036.txt : 20010328 0000950144-01-004036.hdr.sgml : 20010328 ACCESSION NUMBER: 0000950144-01-004036 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVEN PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000815838 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 592767632 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-17254 FILM NUMBER: 1580711 BUSINESS ADDRESS: STREET 1: 11960 SW 144TH ST CITY: MIAMI STATE: FL ZIP: 33186 BUSINESS PHONE: 3052535099 MAIL ADDRESS: STREET 1: 11960 SW 144TH STREET CITY: MIAMI STATE: FL ZIP: 33185 10-K405 1 g66397e10-k405.txt NOVEN PHARMACEUTICALS 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER 1-09623 NOVEN PHARMACEUTICALS, INC. INCORPORATED UNDER THE LAWS OF THE I.R.S. EMPLOYER IDENTIFICATION NUMBER STATE OF DELAWARE 59-2767632 11960 S.W. 144TH STREET, MIAMI, FLORIDA 33186 305-253-5099 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.0001 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 1, 2001, there were 22,232,176 shares of Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant on March 1, 2001, was approximately $611 million. DOCUMENTS INCORPORATED BY REFERENCE: Part III: Portions of registrant's Proxy Statement for its 2001 Annual Meeting of Shareholders. 2 NOVEN PHARMACEUTICALS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business................................................................................ 3 Item 2. Properties.............................................................................. 19 Item 3. Legal Proceedings....................................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders..................................... 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 21 Item 6. Selected Financial Data................................................................. 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 32 Item 8. Financial Statements and Supplementary Data............................................. 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. 32 PART III Item 10. Directors and Executive Officers of the Registrant...................................... 33 Item 11. Executive Compensation.................................................................. 33 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 33 Item 13. Certain Relationships and Related Transactions.......................................... 33 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 33
2 3 PART I ITEM 1. BUSINESS. GENERAL Noven Pharmaceuticals, Inc. ("Noven") is a leader in the development and manufacture of advanced transdermal and transmucosal drug delivery products and technologies. Noven was incorporated in Delaware in 1987, and its principal executive offices are located at 11960 S.W. 144th Street, Miami, Florida 33186; its telephone number is (305) 253-5099. Noven's principal commercialized products are transdermal drug delivery systems for use in hormone replacement therapy. Noven's first product was an estrogen patch for the treatment of menopausal symptoms marketed under the brand name Vivelle(R) in the United States and Canada and under the brand name Menorest(R) in Europe and certain other markets. In May 1999, Noven's second generation estrogen patch, the smallest transdermal estrogen patch ever approved by the United States Food and Drug Administration ("FDA"), was launched in the United States under the brand name Vivelle-Dot(TM). Noven also developed a combination estrogen/progestin transdermal patch for the treatment of menopausal symptoms, which is marketed under the brand name CombiPatch(TM) in the United States and under the brand name Estalis(R) in Europe and certain other markets. See "Transdermal Drug Delivery - Products" below for a more complete description of Noven's transdermal products and their marketing status. Noven has an active research and development program featuring a broad range of products and therapeutic categories. Three of its development projects are currently in the clinical trial stage. Noven has completed Phase III clinical trials for MethyPatch(R), its once-daily transdermal methylphenidate delivery system for the treatment of Attention Deficit Hyperactivity Disorder ("ADHD"), and expects to file a New Drug Application with the FDA in mid-2001. Noven believes that this product will address several serious issues associated with existing therapies and, if approved, will compete in the almost $1 billion market for drugs that treat ADHD. No assurance can be given that this product will be approved by the FDA or that, if approved, it will be successfully marketed. See "Research and Development" below for a more complete description of Noven's product development program, and see "Transdermal Drug Delivery - Products" below for a more complete description of Noven's methylphenidate product. NOVOGYNE PHARMACEUTICALS In May 1998, Noven and Novartis Pharmaceuticals Corporation ("Novartis") formed a joint venture limited liability company called Vivelle Ventures LLC to market and sell women's prescription healthcare products, with the initial focus on marketing Vivelle(R) in the United States and Canada. The joint venture does business under the name Novogyne Pharmaceuticals ("Novogyne"). Novogyne also markets Vivelle-Dot(TM) and co-promotes Novartis' Miacalcin(R) Nasal Spray, a product used to treat osteoporosis. Noven expects that Novogyne's product line will be expanded in the future, although no assurance can be given that Novogyne will add additional products or that such products will be successfully marketed. Novogyne is managed by a committee of five members, three of which are appointed by Novartis and two of which are appointed by Noven. Pursuant to the 3 4 joint venture operating agreement, certain significant actions require a supermajority vote of the committee members. The President of Novogyne is Robert C. Strauss, who also serves as President, Chief Executive Officer and Co-Chairman of Noven. The establishment of Novogyne modified a prior relationship in which Noven had licensed to Novartis the exclusive right to market Vivelle(R) in the United States and Canada and had received royalties from Novartis based upon Novartis' sales. Noven initially invested $7.5 million in return for a 49% equity interest in Novogyne. Novartis contributed its rights to Vivelle(R) to Novogyne and also licensed to Novogyne the right to use the Vivelle(R) trademark in return for a 51% equity interest in Novogyne. Under the terms of the joint venture agreements, Noven manufactures Vivelle(R) and Vivelle-Dot(TM), performs marketing, sales and promotional activities, and receives royalties from Novogyne based on Novogyne's sales of the products. Novartis distributes Vivelle(R) and Vivelle-Dot(TM) and provides certain other services to Novogyne, including marketing to the managed care sector. Novogyne's management committee has the authority to distribute cash to Novartis and Noven based upon a contractual formula. The joint venture agreements provide for an annual preferred return of $6.1 million to Novartis and then an allocation of income between Novartis and Noven depending upon sales levels attained. Noven's share of income increases as product sales increase, subject to a maximum of 49%. Either party may dissolve the joint venture following the third anniversary of the formation of the joint venture (May 2001) in the event that Novogyne does not achieve certain financial results. Noven expects that the applicable financial targets will be achieved, although no assurance can be given that unexpected events will not affect Novogyne's financial performance. Dissolution may also result from a change in control of Noven if the acquirer is a top ten pharmaceutical company (as measured by annual dollar sales). Upon dissolution, Novartis would reacquire the rights to market Vivelle(R) and Vivelle-Dot(TM), subject to the terms of Novartis' prior arrangement with Noven, and Novogyne's other assets would be liquidated and distributed to the parties in accordance with their capital account balances as determined pursuant to the operating agreement. The joint venture operating agreement also has a buy/sell provision which allows either party to compel either the purchase of the other party's interest in Novogyne or the sale of its own interest at a price set by the party triggering the buy/sell provision. Novartis is a larger company with greater financial resources than Noven, and therefore may be in a better position to be the purchaser if the provision is triggered. 4 5 STRATEGY Noven's strategy for continued growth and profitability is to utilize its proprietary transdermal drug delivery technology to establish a leadership position in this field, and to develop and market products utilizing its proprietary transmucosal drug delivery technology. In pursuing this strategy, Noven intends to focus on developing products for the following therapeutic areas: hormone replacement therapy, central nervous system conditions, cardiovascular disease and pain management. On a long-term basis, Noven will seek to (i) expand its technology base and develop other drug delivery technologies, (ii) capitalize on the opportunity presented by its collaboration with Novartis through Novogyne by licensing certain of Noven's women's health products to Novogyne and by expanding Novogyne's product range beyond transdermal products, (iii) form new strategic alliances with other pharmaceutical companies and (iv) establish its own sales force to market certain of its independently developed products, including MethyPatch(R). No assurance can be given that Noven will successfully implement all or part of its long-term strategy. HRT MARKET OVERVIEW There are more than 40 million post-menopausal women in the United States, and this group is expected to grow by 50% by 2020. Noven estimates that worldwide sales of all hormone replacement products, including those delivered transdermally, are over $3.0 billion annually and that worldwide transdermal hormone replacement product sales are over $500 million annually. With the aging of the population worldwide, conditions and diseases such as menopause, osteoporosis and heart disease, which may benefit from hormone replacement therapy, are expected to become significantly more prevalent. Menopause begins when the ovaries cease to produce estrogen, or when both ovaries are removed surgically prior to natural menopause. The most common acute physical symptoms of natural or surgical menopause are hot flashes and night sweats, which can occur in up to 85% of menopausal women. Another common problem is vaginal dryness. This condition, which affects an estimated 25% of women, usually begins within five years after menopause. Moderate-to-severe menopausal symptoms can be treated by replacing the estrogen that the body can no longer produce. Estrogen replacement therapy relieves hot flashes and night sweats effectively, and prevents drying and shrinking of the reproductive system. Another condition related to the inability to produce estrogen is osteoporosis, a progressive deterioration of the skeletal system through the loss of bone mass. The loss of estrogen in menopause causes increased skeletal resorption and decreased bone formation. Osteoporosis currently affects over 20 million women and contributes to approximately 1.5 million fractures annually in 5 6 the United States. Morbidity and suffering associated with these fractures are substantial. Estrogen replacement prevents the loss of bone mass and reduces the incidence of vertebral and hip fractures in older women. Numerous medical studies and the National Institutes of Health recommend a combination of estrogen replacement therapy, exercise and Vitamin D as the most effective method of preventing osteoporosis in post-menopausal women. Various reported studies have suggested that estrogen replacement therapy may reduce the risk of colon cancer and cardiovascular disease, and may prevent or treat osteoarthritis, Alzheimer's disease, strokes, and tooth loss in menopausal women, but the efficacy of estrogen replacement therapy for the prevention or treatment of these conditions has not been conclusively demonstrated. Other reported studies suggest that prolonged use of estrogen or combination estrogen/progestin hormone replacement therapy may increase the risk of endometrial or breast cancer and/or may present other health risks. TRANSDERMAL DRUG DELIVERY DESCRIPTION Transdermal drug delivery systems utilize an adhesive patch containing medication which is administered through the skin and into the bloodstream over an extended period of time. Transdermal drug delivery systems may offer significant advantages over conventional oral and parenteral dosage forms, including non-invasive administration, controlled delivery, improved patient compliance, reduced abuse potential, and avoidance of certain problems and adverse side-effects. Noven believes that its technology enables it to develop patient-friendly transdermal systems that improve a patient's quality of life by reducing skin irritation sometimes associated with transdermal drug delivery systems, improving adhesion and minimizing patch size. Noven's patented, proprietary transdermal drug delivery systems incorporate a thin, solid state, multi-laminate construction with a drug-bearing interpolymeric adhesive. Noven's transdermal drug delivery systems are capable of being modified to deliver a wide variety of chemical entities. By utilizing a unique, patented blend of polymeric components which effectively modulate the solubility of the drug compound in the adhesive, Noven has achieved the delivery of lipophilic and hydrophilic drugs while minimizing the amount of drug needed in the adhesive. By reducing the dependence of these transdermal systems on chemical means of enhancement, skin irritation is significantly reduced. As a result of these developments, larger molecules, previously believed to be unsuitable for transdermal delivery, can be administered at efficacious doses with minimal irritation. In addition, patches incorporating Noven's technology generally have a greater drug depletion rate than competitive patches. As a result, Noven's products can often deliver more drug through a smaller patch area than its competitors' products. This permits Noven to reduce patch size, which can have a beneficial effect on patient preference and provide an advantage over competitive patches that deliver similar compounds through a larger patch. This may also permit Noven to develop patient-friendly patches in cases where, due to the nature of the compound, competitors' products could not deliver a proper dose without making the patch objectionably large. 6 7 PRODUCTS FIRST GENERATION TRANSDERMAL ESTROGEN DELIVERY SYSTEM Noven's first generation transdermal estrogen delivery system (marketed as Vivelle(R), Menorest(R), and Femiest(R)) is available by prescription and utilizes Noven's advanced transdermal matrix technology. This product delivers 17-beta estradiol, the primary estrogen produced by the ovaries, through a patch that is applied twice weekly. This product offers five dosage strengths, thereby allowing physicians to maintain patients on the appropriate dose of estrogen. This product has been approved for marketing by the FDA, as well as by regulatory authorities in 46 foreign countries, for the treatment of menopausal symptoms. This product has also been approved for marketing in the United States and 40 foreign countries for the prevention of osteoporosis. Marketing rights to this product are held by Novogyne in the United States, Aventis in Japan and by Novartis AG in all other territories. Marketing rights outside of the United States and Canada were held exclusively by Aventis until October 1999, when Novartis AG sublicensed Aventis' rights to market the product in all of Aventis' exclusive markets other than Japan. Novartis AG is selling this product under the brand name Menorest(R) in over 20 foreign countries, including France, Germany and the United Kingdom. Novogyne markets this product in the United States under the brand name Vivelle(R), Novartis AG's Canadian affiliate markets this product under the brand name Vivelle(R) in Canada, and Aventis markets this product under the brand name Femiest(R) in Japan. Pursuant to license and supply agreements with Aventis, Novartis AG and Novogyne, Noven manufactures Vivelle(R), Menorest(R) and Femiest(R) for these parties and receives fees based on their sales of the products. The supply agreements for Menorest(R) and Femiest(R) are long-term agreements and the supply agreement for Vivelle(R) expires in January 2003. SECOND GENERATION TRANSDERMAL ESTROGEN DELIVERY SYSTEM Noven's continued efforts to improve its matrix patch technology have resulted in the successful development of a second generation transdermal estrogen replacement system called Vivelle-Dot(TM). This second generation system, utilizing Noven's proprietary Dot Matrix(TM) technology, is only one-third the area of a Vivelle(R) or Menorest(R) system at any given dosage level, yet provides the same delivery of drug over the same period. This system is even more flexible and comfortable to wear than the first generation product, with a lower potential for skin irritation. This product is bioequivalent to Noven's first generation product and is available in four dosage strengths. Applications are pending with FDA to add a fifth dosage strength and to add a claim for the treatment of osteoporosis. In January 1999, Noven received FDA approval to market Vivelle-Dot(TM) for the treatment of the symptoms of menopause, and, in May 1999, Novogyne launched Vivelle-Dot(TM) in the United States. Aventis has marketing rights for Vivelle-Dot(TM) in Japan. In November 2000, Noven entered into an exclusive license agreement with Novartis AG pursuant to which Noven granted Novartis AG the right to market Vivelle-Dot(TM) under the name Estradot(TM) in all countries other than the United States, Canada and Japan. The agreement also grants Novartis AG marketing rights in the same territories to any product improvements and future generations of estrogen patches developed by Noven. Noven received an 7 8 up-front license payment of $20 million upon execution of the agreement and will receive an additional milestone payment upon registration of Estradot(TM) in certain European countries. For accounting purposes, the up-front payment has been deferred and is being recognized as license revenue over 10 years beginning in the fourth quarter of 2000, and the milestone payment will be similarly treated if and when it is received. In March 2001, Estradot(TM) was approved for marketing in the Netherlands. There can be no assurance that Novartis AG will be successful in effecting the additional registrations of Estradot(TM) or that Noven will receive the milestone payment. Pursuant to license and supply agreements with Novartis AG and Novogyne, Noven manufactures the product for these parties and receives fees based on their sales of the product. The supply agreement for Estradot(TM) is a long-term agreement and the supply agreement for Vivelle-Dot(TM) expires in January 2003. TRANSDERMAL COMBINATION ESTROGEN/PROGESTIN DELIVERY SYSTEM Another of Noven's major developments in HRT was the first combination transdermal therapy system approved for marketing by the FDA, a combination patch containing 17-beta estradiol and a progestin, norethindrone acetate. Benefits of estrogen replacement therapy include menopausal symptom control, osteoporosis prevention and cardiovascular protection. For women who have an intact uterus (non-hysterectomized), estrogen replacement therapy has been associated with an increased risk of endometrial cancer. To address this situation, a combination therapy of estrogen and progestin is prescribed. Using both products together has been shown to reduce the risk of endometrial cancer while continuing to produce the benefits of estrogen replacement therapy. Further, studies have shown that continuous use of both estrogen and low dose progestin may be effective for many women in eliminating the monthly menstrual cycle or irregular bleeding. In 1998, Aventis, Noven's then exclusive worldwide licensee for this product, received approval from the FDA, as well as regulatory authorities in 13 foreign countries, for the treatment of menopausal symptoms. Aventis markets the product under the brand name CombiPatch(TM) in the United States, where it is the only available combination HRT patch. Pursuant to the October 1999 sublicense by Aventis to Novartis AG described above, Novartis AG also acquired the right to market this product outside of the United States and Japan and is marketing this product under the brand name Estalis(R) in a number of foreign countries. Noven expects that Novartis AG will launch Estalis(R) in additional countries over the next several years, although no assurance can be given that Novartis AG will launch and successfully market Estalis(R) in any given country. Pursuant to license and long-term supply agreements with Aventis and Novartis AG, Noven manufactures the combination product for these parties and receives fees based on their sales of the product. TRANSDERMAL METHYLPHENIDATE DELIVERY SYSTEM Noven has developed a once-daily transdermal methylphenidate patch for the treatment of ADHD. ADHD is the most commonly diagnosed and the most widely studied behavioral disorder in children in the United States. ADHD is characterized by developmentally inappropriate levels of attention, concentration, activity, distractibility and impulsivity symptoms. The disorder 8 9 typically causes functional impairment that can limit success and create hardship in school, at work, and in social and familial relationships. As children age, the symptoms can lead to serious conduct disorders, criminal behavior, substance abuse and accidental injuries. While prevalence rates can vary dramatically from study to study, it is widely reported that ADHD affects about 3 to 5 percent of school-aged children in the United States, or about 2 million children nationwide. Prevalence rates vary among studies because of differences in diagnostic criteria. Stimulant therapies, including methylphenidate, are the most prescribed drug type for the treatment of ADHD. ADHD symptoms often persist into adolescence and adulthood. Some studies have reported that ADHD will persist into adulthood in up to 60 percent of individuals. Industry analysts have valued the ADHD market at almost $1 billion, with as many as 1.5 million children receiving pharmacological treatment for ADHD. Presently, all ADHD medications approved in the United States are delivered orally, and the majority of patients require more than one dose per day. Noven expects that its small patch, worn under clothing, would eliminate the stigma that many children suffer when receiving oral methylphenidate during the school day, and would substantially reduce the drug diversion and abuse issues that affect most pill formulations. Noven also believes that its product will provide physicians with broad dosing flexibility, because dosing can be discontinued by simply removing the patch. Noven completed Phase III clinical studies for this product in the first quarter of 2001 and expects to file a New Drug Application with the FDA in mid-2001. The market for ADHD drugs is highly competitive, with a product mix that includes generic methylphenidate, other stimulant medications and a variety of other drug types. There is at least one other once-daily ADHD medication on the market, and other products which may have improved safety and efficacy profiles are also in development. There can be no assurance that Noven's product will receive FDA approval, that the product will be successfully commercialized or that it will compete effectively against extended release oral formulations of methylphenidate and/or other ADHD medications. Some of the companies marketing competitive products are substantially larger and have greater financial resources than Noven, as well as greater experience commercializing pharmaceutical products. DEPENDENCE ON LICENSEES AND JOINT VENTURE During 2000, 36%, 44% and 18% of Noven's revenues were generated from sales to, and fees and royalties received from, Novartis AG, Novogyne and Aventis, respectively. Noven expects to be dependent on sales to Novartis AG, Novogyne and Aventis, as well as fees and royalties generated from such parties' sales of its transdermal delivery systems, for a significant portion of its expected revenues for the next several years, and no assurance can be given regarding the amount and timing of such revenues. Failure of any of these parties to successfully market Noven's products would cause the quantity of products purchased from Noven and the amount of fees and royalties ultimately paid to Noven to be reduced and would therefore have a material adverse effect on Noven's business and results of operations. Noven expects to be able to exert influence on the marketing of Vivelle(R) and Vivelle-Dot(TM) in the United States through its participation in the management of Novogyne, but the management committee of 9 10 Novogyne is comprised of a majority of Novartis representatives. With respect to Aventis' and Novartis AG's marketing efforts, Noven's agreements with these parties impose certain obligations on them, but there can be no assurance that such agreements will provide Noven with any meaningful level of protection or cause these parties to perform at a level that Noven deems satisfactory. In addition to Noven's dependence on sales by licensees, Noven expects that a significant amount of its earnings for at least the next several years will be generated through its interest in Novogyne, and no assurance can be given regarding Novogyne's future profitability. Novogyne's sales force is significantly smaller than the sales forces promoting several competitive products, including the market leading product, and there can be no assurance that Novogyne's sales force will be successful. Failure of Novogyne to successfully market Vivelle(R) and Vivelle-Dot(TM) would have a material adverse effect on Noven's business and results of operations. See "Competition" below for a more complete description of the competitive factors affecting Noven and its business. TRANSMUCOSAL DRUG DELIVERY DESCRIPTION Large, complex, bioengineered molecules such as peptides, proteins and carbohydrates typically require an injectable route of delivery. When taken orally (as capsules or tablets) they are broken down and largely inactivated in the stomach and intestines. The transdermal route is also unsuitable for these molecules because they are often too large to pass through the skin intact. Transmucosal drug delivery utilizing Noven's transmucosal patch technology may offer a viable alternative. The lining of the mouth is thin and highly vascular, and drugs can pass rapidly across the mucosa and into the bloodstream without being subjected to breakdown in the gastrointestinal tract. Noven's oral patch technology provides the opportunity to focus and maintain a high concentration of drug against the mucosa to maximize absorption. Noven's transmucosal drug delivery system utilizes a bio-adhesive patch containing medication which adheres to the buccal mucosa. The system then administers the drug across the mucosa and into the bloodstream. Transmucosal drug delivery also has many of the advantages associated with transdermal drug delivery, including non-invasive administration and controlled delivery. There are many other companies active in the development of transmucosal delivery systems. Challenges faced by Noven and these companies in developing marketable transmucosal systems include designing a stable transmucosal platform that will deliver drug at a predictable rate, creating an adhesive system that will adhere in a wet environment, designing a product that a patient will find comfortable to wear, and identifying suitable compounds for incorporation into the system. PRODUCTS DENTIPATCH(R) - TRANSMUCOSAL LIDOCAINE DELIVERY SYSTEM Noven's first transmucosal delivery system, the DentiPatch(R) system, is a patented, proprietary technology consisting of a thin, solid state multi-laminate construction with a drug-bearing bio-adhesive that delivers lidocaine through the buccal mucosa over time. DentiPatch(R) was approved for marketing by the FDA in May 1996 and by the United Kingdom Medicines Control Agency in December 1998 and is the first FDA-approved, and still the only commercially available, oral transmucosal patch. Noven launched the product nationwide in April 1997. The product is indicated for the prevention of pain from oral injections and soft tissue dental procedures. It is the first topical 10 11 anesthetic clinically proven to prevent pain when large needles are inserted to the bone. Noven is currently marketing the DentiPatch(R) system in the United States through its own marketing and sales department. RESEARCH AND DEVELOPMENT For the years ended December 31, 2000, 1999 and 1998, Noven spent $13.6 million, $7.2 million and $6.8 million, respectively, for company-sponsored research and development activities. From time to time, Noven may supplement its research and development efforts by entering into research and development agreements, joint ventures and other collaborative arrangements with other companies to defray the cost of product development. In allocating research and development dollars and resources, Noven may devote greater resources to the development of products that Noven believes it can market and sell without a business partner. Noven's research and development philosophy is to identify drugs that can be delivered either transdermally or transmucosally, which can be developed rapidly and which have substantial market potential. Noven also seeks therapies that can be improved by using Noven's innovative technologies. The majority of drugs that Noven will focus on are established agents currently being delivered to patients other than transdermally or transmucosally. Noven's research and development expense may vary significantly from quarter to quarter depending on product development cycles and the timing of clinical studies. Noven intends to focus on long-term growth prospects, and therefore may incur higher than expected research and development expenses in a given period rather than delay clinical activities. These variations in research and development spending may not be accurately anticipated and may have a material effect on Noven's results of operations. Statements in this Form 10-K concerning the timing of regulatory filings and approvals are forward looking statements which are subject to risks and uncertainties. The length of time necessary to complete clinical trials, and from submission of an application for market approval to a final decision by a regulatory authority, varies significantly. No assurance can be given that Noven will have the financial resources necessary to complete products under development, that those projects to which Noven dedicates sufficient resources will be successfully completed, that Noven will be able to obtain regulatory approval for any such product, or that any approved product may be produced in commercial quantities, at reasonable costs, and be successfully marketed, either by Noven or by a licensing partner. Similarly, there can be no assurance that Noven's competitors, many of whom have greater resources than Noven, will not develop and introduce products that will adversely affect Noven's business and results of operations. The following table summarizes the status of products marketed, approved and/or under development by Noven and is qualified by reference to the more detailed descriptions elsewhere in this Form 10-K. Noven has additional products in early development and continuously evaluates drugs that may be suitable for transdermal or transmucosal delivery. 11 12
PRODUCT INDICATION REGULATORY STATUS MARKETING RIGHTS - ------- ---------- ----------------- ---------------- TRANSDERMAL HRT Estrogen Menopausal Symptoms FDA-approved; Novogyne--U.S. Vivelle(R)/Menorest(R)/ Approved in 46 foreign Aventis--Japan Femiest(R) countries Novartis AG--all other territories Osteoporosis FDA-approved; Approved in 40 foreign countries Second Generation Estrogen Menopausal Symptoms FDA-approved; Novogyne--U.S. Vivelle-Dot(TM)/ Approved in Netherlands; Aventis--Japan Estradot(TM) Applications pending in Novartis AG--all other other countries territories Osteoporosis Application filed and pending in the U.S.; Approved in Netherlands; Applications pending in other countries Third Generation Estrogen Menopausal Symptoms/ Pre-clinical development Novogyne--U.S. and Canada Osteoporosis Aventis--Japan Novartis AG--all other territories Combination Estrogen/Progestin Menopausal Symptoms FDA-approved; Aventis--U.S. and Japan CombiPatch(TM)/Estalis(R) Approved in 26 foreign Novartis AG--all other countries territories Second Generation Combination Menopausal Symptoms/ Pre-clinical development Aventis--Worldwide Estrogen/Progestin Osteoporosis Methyltestosterone Female Libido Phase II Noven TRANSMUCOSAL Lidocaine/DentiPatch(R) Dental Pain Control FDA-approved; Noven Approved in U.K.
12 13
PRODUCT INDICATION REGULATORY STATUS MARKETING RIGHTS - ------- ---------- ----------------- ---------------- OTHER TRANSDERMALS Methylphenidate/ Attention Deficit Phase III clinical trials Noven MethyPatch(R) Hyperactivity Disorder completed; NDA preparation in process Ketoprofen Pain Relief Phase II Noven
MANUFACTURING Noven conducts its manufacturing operations in a facility comprised of two approximately 40,000 square foot buildings located on approximately 10 acres in Miami-Dade County, Florida. This facility has been inspected by the FDA and by the Medicines Control Agency of the United Kingdom and found to be in compliance with applicable regulatory requirements. This facility has been certified by the Drug Enforcement Administration to manufacture products containing controlled substances in anticipation of the launch of MethyPatch(R). This facility is currently producing Menorest(R), Vivelle(R), Femiest(R), Vivelle-Dot(TM), CombiPatch(TM), Estalis(R) and DentiPatch(R) for commercial sale. With this facility, Noven's manufacturing capability is approximately 400 million patches per year. There is sufficient room for further development of facilities at this site that would significantly increase Noven's manufacturing capacity to accommodate additional products under development. Noven anticipates that full development of this site, including possible new construction on the property, can accommodate Noven's space requirements for the foreseeable future. No assurance can be given that Noven will have the financial resources necessary to adequately expand its manufacturing capacity if and when the need arises. Noven has the capacity to design, develop, build and maintain its production equipment, including fabrication of replacement parts where appropriate. Additionally, Noven's engineering expertise provides valuable support to its research and development groups by rapidly fabricating or modifying equipment essential in the product development program. Raw materials essential to Noven's business are generally readily available from multiple sources. Certain raw materials and components used in the manufacture of Noven's products are, however, available from limited sources, and in some cases, a single source. Any curtailment in the availability of such raw materials could be accompanied by production or other delays, and, in the case of products for which only one raw material supplier exists, could result in a material loss of sales, with consequent adverse effects on Noven's business and results of operations. In addition, because raw material sources for pharmaceutical products must generally be approved by regulatory authorities, changes in raw material suppliers may result in production delays, higher raw material costs and loss of sales, customers and market share. 13 14 MARKETING Except for the DentiPatch(R) product, Noven has historically granted marketing rights to its products to its joint venture company, Novogyne, or to larger pharmaceutical companies. As Noven develops new products, it will evaluate whether to license such products to a larger company or to Novogyne or to utilize its own clinical, marketing and sales capabilities. Noven's evaluation will be conducted on a product-by-product basis and will include consideration of the characteristics of the particular market and the estimated costs associated with clinical studies, sales, marketing and distribution. These combined costs and Noven's financial position will be factored into the decision of whether to license or directly conduct clinical trials and market the product. Noven expects that it will seek to retain manufacturing rights in any future licensing transactions, partly in an effort to safeguard its proprietary technology. There can be no assurance that Noven will be able to reach a favorable agreement in any particular transaction or collaborative arrangement. The establishment of Novogyne provided Noven with a sales force over which it has substantial day-to-day management control. If Noven develops any products in the future for the women's healthcare market, it may seek to license the marketing rights for such products to Novogyne. If Noven is able to complete and file an NDA for its MethyPatch(R) product, Noven expects to hire a sales force to sell MethyPatch(R) in the United States rather than granting marketing rights to a third party. Hiring a sales force, and expanding Noven's sales and marketing infrastructure to support the sales force, would require the expenditure of substantial funds. There can be no assurance that, if MethyPatch(R) is approved for marketing by the FDA, Noven will generate sufficient sales of the product to cover the expense of Noven's sales and marketing organization and/or to realize adequate profits. In addition, some of these expenses may be incurred prior to receipt of marketing approval. In the event that MethyPatch(R) is not approved for marketing, these expenses will not be recovered. Additionally, any delays in organizing a sales force for Noven's MethyPatch(R) product could have an adverse impact on Noven's ability to market the product and to realize profits from sales of the product. COMPETITION The markets for Noven's products are highly competitive. All drug delivery products being developed by Noven will face competition from both conventional forms of drug delivery (i.e., oral and parenteral), and possibly alternate forms of drug delivery, such as controlled release oral delivery, liposomes, implants, gels and creams. In addition, some or all of the products being marketed or developed by Noven face, or will face, competition from other transdermal or transmucosal products that deliver the same drugs to treat the same indications. Competition in drug delivery systems is generally based on a company's marketing strength, product performance characteristics (i.e., reliability, safety, patient convenience) and product price. Acceptance by physicians and other health care providers, including managed care groups, is also critical to the success of a product. The first product on the market in a particular therapeutic area typically is able to obtain and maintain a significant market share. In a highly competitive marketplace and with evolving technology, there can be no assurance that additional product introductions or developments by others will not render Noven's products or technologies noncompetitive or obsolete. 14 15 Noven faces competition from a number of companies in the development of transdermal and transmucosal drug delivery products, and competition is expected to intensify as more companies enter the field. Competitors include Alza Corporation, Elan Corporation, plc, Watson Pharmaceuticals, Inc., Mylan Pharmaceuticals, Inc., LTS Lohmann Therapie-Systeme AG, Ethical Holdings, plc, Johnson & Johnson, Schering-Plough Corporation, 3M Corporation, Groupe Fournier and others. Some of these companies are substantially larger than Noven and have greater financial and research and development resources than Noven, as well as greater experience in developing and commercializing pharmaceutical products. Noven also competes with other drug delivery companies in the establishment of business arrangements with large pharmaceutical companies to assist in the development or marketing of products. Noven has attempted to minimize certain competitive risks by its technological innovation and by developing strategic alliances with Novartis and Aventis. Noven also believes that its hormone replacement systems have certain competitive advantages, such as their small size, excellent adhesion, reduced skin irritation and broad dosing ranges. Other competitive factors affecting Noven's business include the prevalence and influence of managed care organizations, government organizations, buying groups and similar institutions that are able to seek price discounts and rebates on pharmaceutical products. As the influence of these entities continues to grow, Noven and its marketing partners may face increased pricing pressure. Outside of the United States, Noven's products may be affected by government price controls and reimbursement policies. PATENTS AND PROPRIETARY RIGHTS Noven seeks to obtain patent protection on its delivery systems and manufacturing processes where possible. Noven has obtained over 20 United States patents and over 130 foreign patents relating to its transdermal and transmucosal delivery systems and manufacturing processes, and has over 100 pending patent applications worldwide. As a result of the changes in United States patent law under the General Agreement on Tariffs and Trade and the accompanying Agreement on Trade-Related Aspects of Intellectual Property Law, which took effect in their entirety on January 1, 1996, the terms of some existing Noven patents have been extended beyond the term of seventeen years from the date of grant. Noven patents filed after June 7, 1995 will have a term of twenty years computed from the effective filing date. Noven is unaware of the existence of any challenge to the validity of its patents or of any third party claim of patent infringement with respect to any of its products that could have a material adverse effect on Noven's business or prospects. Although there is a statutory presumption as to a patent's validity, the issuance of a patent is not conclusive as to such validity, or as to the enforceable scope of the claims of the patent. There is no assurance that Noven's patents or any future patents will prevent other companies from developing similar or functionally equivalent products. Furthermore, there is no 15 16 assurance that any of Noven's future processes or products will be patentable, that any pending or additional patents will be issued in any or all appropriate jurisdictions or that Noven's processes or products will not infringe upon the patents of third parties. Noven also attempts to protect its proprietary information under trade secret laws. Generally, Noven's agreements with each employee, licensing partner, consultant, university, pharmaceutical company and agent contain provisions designed to protect the confidentiality of its proprietary information. There can be no assurance that these agreements will not be breached, that Noven will have adequate legal remedies as a result thereof, or that Noven's trade secrets will not otherwise become known or be independently developed by others. GOVERNMENT REGULATION Noven's operations are subject to extensive regulation by governmental authorities in the United States and other countries with respect to the testing, approval, manufacture, labeling, marketing and sale of pharmaceutical products. Noven devotes significant time, effort and expense to address the extensive government regulations applicable to its business. The marketing of pharmaceutical products requires the approval of the FDA in the United States. The FDA has established regulations, guidelines and safety standards which apply to the pre-clinical evaluation, clinical testing, manufacturing and marketing of pharmaceutical products. The process of obtaining FDA approval for a new product may take several years and is likely to involve the expenditure of substantial resources. The steps required before a product can be produced and marketed for human use include: (i) pre-clinical studies; (ii) submission to the FDA of an Investigational New Drug Exemption ("IND"), which must become effective before human clinical trials may commence in the United States; (iii) adequate and well controlled human clinical trials; (iv) submission to the FDA of a New Drug Application ("NDA") or, in some cases, an Abbreviated New Drug Application ("ANDA"); and (v) review and approval of the NDA or ANDA by the FDA. An NDA generally is required for products with new active ingredients, new indications, new routes of administration, new dosage forms or new strengths. An NDA requires that complete clinical studies of a product's safety and efficacy be submitted to the FDA, the cost of which is substantial. These costs can be reduced, however, for delivery systems which utilize approved drugs. An ANDA involves an abbreviated approval process that may be available for products that have the same active ingredient(s), indication, route of administration, dosage form and dosage strength as an existing FDA-approved product, if clinical studies have demonstrated bio-equivalence of the new product to the FDA-approved product. Under FDA ANDA regulations, companies that seek to introduce an ANDA product must also certify that the product does not infringe on the approved product's patent or that such patent has expired. If the applicant certifies that its product does not infringe on the approved product's patent, the patent holder may institute legal action to determine the relative rights of the parties and the application of the patent, and the FDA may not finally approve the ANDA until a court finally determines that the applicable patent is invalid or would not be infringed by the applicant's product. Pre-clinical studies are conducted to obtain preliminary information on a product's efficacy and safety. The results of these studies are submitted to the FDA as part of the IND and are reviewed by the FDA before human clinical 16 17 trials begin. Human clinical trials may commence 30 days after receipt of the IND by the FDA, unless the FDA objects to the commencement of clinical trials. Human clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase I trials consist of testing the product primarily for safety in a small number of patients at one or more doses. In Phase II trials, the safety and efficacy of the product are evaluated in a patient population somewhat larger than the Phase I trials. Phase III trials typically involve additional testing for safety and clinical efficacy in an expanded population at different test sites. A clinical plan, or protocol, accompanied by the approval of the institution participating in the trials, must be reviewed by the FDA prior to commencement of each phase of the clinical trials. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time. The results of product development and pre-clinical and clinical studies are submitted to the FDA as an NDA or an ANDA for approval. If an application is submitted, there can be no assurance that the FDA will review and approve the NDA or an ANDA in a timely manner. The FDA may deny an NDA or an ANDA if applicable regulatory criteria are not satisfied or it may require additional clinical testing. Even if such data is submitted, the FDA may ultimately deny approval of the product. Further, if there are any modifications to the drug, including changes in indication, manufacturing process, labeling, or a change in a manufacturing facility, an NDA or an ANDA supplement may be required to be submitted to the FDA. Product approvals may be withdrawn after the product reaches the market if compliance with regulatory standards is not maintained or if problems occur regarding the safety or efficacy of the product. The FDA may require testing and surveillance programs to monitor the effect of products which have been commercialized, and has the power to prevent or limit further marketing of these products based on the results of these post-marketing programs. The approval procedures for the marketing of Noven's products in foreign countries vary from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Even after foreign approvals are obtained, further delays may be encountered before products may be marketed. For example, many countries require additional governmental approval for price reimbursement under national health insurance systems. If practical and acceptable to the FDA, Noven intends to design its FDA protocols for the clinical studies of its products to permit acceptance of the data by foreign regulatory authorities and to thereby reduce the risk of duplication of clinical studies. However, additional studies may be required to obtain foreign regulatory approval. Further, some foreign regulatory agencies may require additional studies involving patients located in their countries. Manufacturing facilities are subject to periodic inspections for compliance with the FDA's good manufacturing practices ("GMP") regulations and each domestic drug manufacturing facility must be registered with the FDA. Foreign regulatory authorities may also have similar regulations. In complying with standards set forth in these regulations, Noven must expend significant time, money and effort in the area of quality assurance to insure full technical compliance. Facilities handling controlled substances, such as Noven's, also must be licensed by the United States Drug Enforcement Administration, and are subject to more extensive regulatory requirements than those facilities not licensed to handle controlled substances. Noven has produced transdermal drug 17 18 delivery products in accordance with the FDA's GMP regulations for clinical trials, manufacturing process validation studies and commercial sale. FDA approval to manufacture a drug is site specific. In the event an approved manufacturing facility for a particular drug becomes inoperable, obtaining the required FDA approval to manufacture such drug at a different manufacturing site could result in production delays, which could adversely affect Noven's business and results of operations. The federal and state governments in the United States, as well as many foreign governments, from time to time explore ways to reduce medical care costs through health care reform. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, Noven cannot predict what impact any reform proposal ultimately adopted may have on the pharmaceutical industry or on the business or operating results of Noven. Noven's activities are subject to various federal, state and local laws and regulations regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and possible future local, state, federal and foreign regulations. Under certain of these laws, Noven could be liable for substantial costs and penalties in the event that waste is disposed of improperly. While it is impossible to accurately predict the future costs associated with environmental compliance and potential remediation activities, compliance with environmental laws is not expected to require significant capital expenditures and has not had, and is not presently expected to have, a material adverse effect on Noven's earnings or competitive position. EMPLOYMENT Noven employs approximately 232 people; approximately 93 are engaged in manufacturing and process development, 18 in research and development, 58 in medical affairs, regulatory affairs, quality assurance and quality control and 63 in marketing and administration. No employee is represented by a union and Noven has never experienced a work stoppage. Noven believes its employee relations are good. In addition to the employees employed directly by Noven, Novogyne has a contract sales force of approximately 110 individuals that are managed by Noven under the terms of the Novogyne joint venture agreements. RISK OF PRODUCT LIABILITY CLAIMS Testing, manufacturing and marketing pharmaceutical products subject Noven to the risk of product liability claims. Noven believes that it maintains an adequate amount of product liability insurance, but there can be no assurance that its insurance will cover all future claims or that Noven will be able to maintain existing coverage or obtain additional coverage at reasonable rates. There can be no assurance that claims arising under any product liability cases, whether or not covered by insurance, will not have a material adverse effect on Noven's business, financial condition or results of operations. SEASONALITY There are no significant seasonal aspects to Noven's business. 18 19 ITEM 2. PROPERTIES. Noven's headquarters and manufacturing facilities are located on a 10 acre site in Miami, Florida. On this site, Noven owns an approximately 28,000 square foot building which is used for laboratory, office and administrative purposes. Noven also leases from Aventis, for nominal rent, two approximately 40,000 square foot buildings on this site, which are being used by Noven for manufacturing, engineering, administrative and warehousing purposes. One of these facilities has been certified by the Drug Enforcement Administration to manufacture products containing controlled substances in anticipation of the launch of MethyPatch(R). The lease expires in 2024 and Noven has an option to purchase the leased facilities at any time during the term. Aventis may terminate the lease prior to the expiration of its term upon termination or expiration of the 1992 license agreement between Noven and Aventis. Noven expects that it will have sufficient cash to purchase the facility in this event. Nonetheless, if Noven were unable to purchase the facility, termination of the lease by Aventis could have a material adverse effect on the business and results of operations of Noven. Noven also owns 5 acres of vacant land on a contiguous site that could accommodate new buildings for a variety of manufacturing, warehousing and developmental purposes. Noven believes that its facilities are in satisfactory condition, are suitable for their intended use and, in the aggregate, have capacities in excess of those necessary to meet Noven's present needs. Noven's sole manufacturing facility and its research and development activities, as well as its corporate headquarters and other critical business functions, are located in an area subject to hurricane casualty risk. Although Noven has certain limited protection afforded by insurance, Noven's business, earnings and competitive position could be materially adversely affected in the event of a major windstorm or other casualty. ITEM 3. LEGAL PROCEEDINGS. Noven is a party to pending legal proceedings arising in the normal course of business, none of which Noven believes is material to its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Noven did not submit any matters to a vote of stockholders during the fourth quarter of the fiscal year ended December 31, 2000. 19 20 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is a list of the names, ages, positions held and business experience of the persons serving as executive officers of Noven as of March 1, 2001. Officers serve at the discretion of the Board of Directors. There is no family relationship between any of the executive officers or between any of the executive officers and any of Noven's directors, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. ANTHONY S. DE PADOVA, M.D. Dr. de Padova, age 57, has been with Noven since September 2000 and, since November 2000, has served as Vice President, Clinical Research and Regulatory Affairs. From March 2000 to September 2000, he served as Director of Clinical Trials for the School of Medicine, State University of New York. From 1993 to 2000, he served with Knoll Pharmaceutical Company as Vice President - Medical Affairs/Clinical Research. JEFFREY F. EISENBERG. Mr. Eisenberg, age 35, has been with Noven since November 1998 and, since November 2000, has served as Vice President, General Counsel and Corporate Secretary. From 1995 through 1998, Mr. Eisenberg served as Associate General Counsel and then as Acting General Counsel of IVAX Corporation. W. NEIL JONES. Mr. Jones, age 48, has been with Noven since February 1997 and, since November 2000, has served as Vice President, Marketing and Sales. From 1981 through 1997, he served Ciba-Geigy Corporation in a variety of sales and marketing positions, most recently as Executive Director of Marketing. JUAN A. MANTELLE. Mr. Mantelle, age 42, has been with Noven since March 1990 and, since June 2000, has served as Vice President and Chief Technical Officer. From December 1986 to March 1990, he served Paco Research Corp. as Manager - Product Development. From April 1983 to December 1986, he served Key Pharmaceuticals, Inc. as Senior Research Engineer. JAMES B. MESSIRY. Mr. Messiry, age 58, has been Vice President and Chief Financial Officer of Noven since January 1999. From 1979 through 1984, and subsequently from 1991 until 1998, he served the Bacardi group of companies in a variety of senior executive positions in Europe and North America, most recently as Vice President of Bacardi-Martini, Inc. Between 1985 and 1991, Mr. Messiry held senior finance positions at Beatrice Latin America and Dole Fresh Fruit. From 1973 to 1979, Mr. Messiry served Pfizer, Inc. in various financial and strategic planning roles. STEVEN SABLOTSKY. Mr. Sablotsky, age 46, is a founder of Noven. He currently serves as Co-Chairman of the Board of Directors. He served as Chairman of the Board of Directors from Noven's organization in 1987 through September 2000, and served as President and Chief Executive Officer from January 1987 until December 1997. He is a member of the American Institute of Chemical Engineers. ROBERT C. STRAUSS. Mr. Strauss, age 59, has been President, Chief Executive Officer and Co-Chairman of Noven since September 2000. From December 1997 through September 2000, he served as President and Chief Executive Officer and as a Director of Noven. From March 1997 to July 1997, he served as President and Chief Operating Officer and a Director of IVAX Corporation. From 1983 to 1997, he served in various executive positions with Cordis Corporation, most recently as its Chairman of the Board, President and Chief Executive Officer. Mr. Strauss serves on the Board of Directors of Eclipse Surgical Technologies, Inc. (medical devices), Columbia Laboratories, Inc. (pharmaceuticals) and Percardia Inc. (medical devices). 20 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) Market Information Noven's Common Stock is listed on the Nasdaq Stock Market and is traded under the symbol NOVN. The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported on the Nasdaq Stock Market. HIGH PRICE LOW PRICE ---------- --------- First Quarter, 1999 6 7/8 4 1/4 Second Quarter, 1999 7 1/8 4 1/4 Third Quarter, 1999 9 3/8 5 7/8 Fourth Quarter, 1999 18 3/8 8 1/4 First Quarter, 2000 27 1/4 10 3/8 Second Quarter, 2000 30 1/2 6 17/32 Third Quarter, 2000 48 7/8 23 3/4 Fourth Quarter, 2000 64 1/4 22 1/2 (b) Holders. As of March 1, 2001 the number of stockholders of record was 350. (c) Dividends. Noven has never paid a cash dividend on its Common Stock and intends to retain all earnings for the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future. 21 22 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data presented below is derived from the audited financial statements of Noven. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes appearing elsewhere in this Form 10-K.
Years Ended December 31, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (in thousands, except per share amounts) Statement of Operations Data: Revenues $ 42,924 $ 31,650 $ 21,842 $ 14,267 $ 20,467 Expenses: Cost of products sold 19,219 12,721 9,447 5,180 10,021 Research and development 13,621 7,171 6,808 9,723 8,730 Marketing, general and administrative 8,737 7,860 10,105 9,845 4,878 -------- -------- -------- -------- -------- Total expenses 41,577 27,752 26,360 24,748 23,629 Income (loss) from operations 1,347 3,898 (4,518) (10,481) (3,162) Equity in earnings of Novogyne 9,294 1,487 -- -- -- Interest income, net 1,385 343 439 924 1,178 -------- -------- -------- -------- -------- Income (loss) before income taxes 12,026 5,728 (4,079) (9,557) (1,984) Income tax benefit 7,608 4,732 -- -- -- -------- -------- -------- -------- -------- Net income (loss) $ 19,634 $ 10,460 $ (4,079) $ (9,557) $ (1,984) ======== ======== ======== ======== ======== Basic earnings (loss) per share $ 0.90 $ 0.49 $ (.19) $ (.47) $ (.10) ======== ======== ======== ======== ======== Diluted earnings (loss) per share $ 0.84 $ 0.48 $ (.19) $ (.47) $ (.10) ======== ======== ======== ======== ======== Balance Sheet Data: Cash, cash equivalents and short-term investments $ 40,976 $ 15,338 $ 5,573 $ 17,148 $ 19,149 Working capital 46,734 16,581 8,847 18,683 24,859 Investment in Novogyne 15,431 8,365 7,500 -- -- Total assets 104,031 56,888 40,156 38,224 44,229 Long-term notes payable 265 604 -- -- -- Deferred license revenue 27,220 8,028 5,644 5,870 6,096 Stockholders' equity 65,277 39,393 28,325 29,881 36,077
22 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the 2000 financial statements and the related notes included in this Form 10-K. GENERAL From its inception in 1987 through 1994, Noven engaged primarily in the development of advanced transdermal and transmucosal drug delivery systems. During this period, Noven's revenues consisted primarily of amounts paid to Noven under license agreements with Novartis and Aventis. In 1995, after receipt of regulatory approvals for its first generation transdermal estrogen delivery system, a significant portion of Noven's revenues was derived from the sale of this product to Novartis and Aventis. In 1996, revenues from the sale of this product increased substantially as Novartis and Aventis purchased product to supply their distribution channels and build their own inventory positions. In 1997, although retail sales of the products increased over 1996, Noven experienced lower sales as Novartis, Aventis and their distributors reduced inventories. In May 1998, Noven and Novartis formed Novogyne to market and sell women's healthcare products in the United States and Canada, with the initial focus on marketing Noven's first generation estrogen delivery system, Vivelle(R). The establishment of Novogyne modified a prior relationship in which Noven granted Novartis an exclusive license to market Vivelle(R) in the United States and Canada and Noven received royalties from Novartis based upon Novartis' sales. Novogyne is managed by a committee consisting of five members, three of which are appointed by Novartis and two of which are appointed by Noven. Novartis contributed its rights to Vivelle(R) to Novogyne and also licensed the right to use the Vivelle(R) trademark in return for a 51% equity interest in Novogyne. Noven invested $7.5 million in return for a 49% equity interest in Novogyne. In January 1999, Noven received FDA approval for its second generation estrogen delivery system, Vivelle-Dot(TM), which was launched by Novogyne in May 1999. Under the terms of the joint venture agreements, Noven manufactures Vivelle(R) and Vivelle-Dot(TM), performs marketing, sales and promotional activities, and receives royalties from Novogyne based on Novogyne's sales of the products. Novartis distributes Vivelle(R) and Vivelle-Dot(TM) and provides certain other services to Novogyne, including marketing to the managed care sector. The joint venture agreements provide for an annual preferred return of $6.1 million to Novartis and then an allocation of income between Novartis and Noven according to a contractual formula depending upon sales levels attained. Novogyne's management committee has the authority to distribute cash to Novartis and Noven based upon a contractual formula. Noven's share of income increases as product sales increase, subject to a maximum of 49%. Novogyne's income resulted in the recognition by Noven of $9.3 million and $1.5 million in income in 2000 and 1999, respectively. In 2000 and 1999, Noven received $2.2 million and $0.6 million in distributions from Novogyne based upon Novogyne's results of operations for the years ended December 31, 1999 and 1998, respectively. Noven expects that a significant portion of its earnings for the next several years will be generated through its interest in Novogyne, but no assurance can be given regarding Novogyne's future profitability. 23 24 In 1998, Aventis received regulatory approval from the FDA and from certain European regulatory authorities to market Noven's transdermal combination estrogen/progestin delivery system. Aventis markets the product in the United States under the name CombiPatch(TM). In October 1999, Novartis AG sublicensed Aventis' rights to market (1) Noven's combination estrogen/progestin transdermal system under the name Estalis(R) in all countries other than the United States and Japan, and (2) Noven's first generation estrogen transdermal system under the name Menorest(R) in all countries other than the United States, Canada and Japan. In connection with the sublicense transaction, and pursuant to Noven's license agreement with Aventis, Noven received $2.7 million in cash from Aventis as Noven's share of the sublicense fees paid to Aventis. This amount was recorded as deferred license revenue and is being recognized as license revenue over seven and one half years beginning in the fourth quarter of 1999. As of March 1, 2001, Estalis(R) was being marketed by Novartis AG in a number of countries, and Noven expects that Novartis AG will launch Estalis(R) in more countries over the next several years, although no assurance can be given that Novartis AG will launch or successfully market Estalis(R) in any given country. In November 2000, Noven entered into an exclusive license agreement with Novartis AG pursuant to which Noven granted Novartis AG the right to market Noven's second generation transdermal estrogen delivery system under the name Estradot(TM) in all countries other than the United States, Canada and Japan. The agreement also grants Novartis AG marketing rights in the territory to any product improvements and future generations of estrogen patches developed by Noven. Noven received an up-front license payment of $20 million upon execution of the agreement and will receive an additional milestone payment upon Novartis AG's receipt of regulatory approval for Estradot(TM) in certain European countries. The up-front payment was deferred and is being recognized as license revenue over ten years beginning in the fourth quarter of 2000, and the milestone payment will be similarly treated if and when it is received. Noven will manufacture Estradot(TM) for Novartis AG. In March 2001 Estradot(TM) was approved for marketing in the Netherlands. There can be no assurance that Novartis AG will be successful in effecting the additional registrations of Estradot(TM) or that Noven will receive the milestone payment. Noven expects that revenues from product sales to its licensees will fluctuate from quarter to quarter and year to year depending upon various factors not in Noven's control, including, but not limited to, the marketing efforts of each licensee, the inventory requirements of each licensee, the 24 25 impact of competitive products, and the timing and scope of Estalis(R) and Estradot(TM) launches by Novartis AG. Noven's earnings may fluctuate because of, among other things, fluctuations in research and development spending resulting from the timing of clinical trials involving products in development. In addition, in 2000, Noven recorded an income tax benefit in an amount equal to 63% of income before income taxes. In 2001, Noven expects to record an income tax expense in an amount equal to approximately 34% to 38% of income before income taxes. This expected increase in Noven's tax expense for 2001 will adversely affect Noven's earnings in 2001 compared to 2000. Noven's level of research and development expenditures and its accrued state income taxes, among other factors, could impact Noven's effective income tax rate. RESULTS OF OPERATIONS 2000 COMPARED TO 1999 Total revenues for the year ended December 31, 2000 were $42.9 million, an increase of $11.3 million, or 36%, over the prior year. The increase in revenues was attributable to greater product sales, which increased $10.7 million, or 34%, for the year ended December 31, 2000, compared to 1999. The increase in product sales was attributable to sales of Estalis(R), which Noven shipped to Novartis AG in 15 countries beginning in the fourth quarter of 1999, and to a lesser extent, sales of Vivelle(R) and Vivelle-Dot(TM). Vivelle-Dot(TM) was launched by Novogyne in May 1999. A decline in sales of CombiPatch(TM) in the United States from 1999 to 2000 partially offset the increased sales of Noven's other products. Gross profit (product sales less cost of products sold) for the year ended December 31, 2000 was $22.8 million (54% of product sales), compared to $18.6 million (59% of product sales) for the prior year. Novogyne increased its inventory during 2000 in anticipation of an increase in product demand. This caused an increase in the profit that Noven was required to defer with respect to product sold to Novogyne that remained in Novogyne's inventory at December 31, 2000. This profit will be recognized by Noven at the time such inventory is sold by Novogyne. See Note 1, Summary of Significant Accounting Policies - Vivelle Ventures LLC in the Notes to Financial Statements for more information. In addition, product mix contributed to the decline in gross margins as Noven sold more product outside of the United States while United States sales remained generally flat. Noven's foreign sales have a lower gross profit. Noven expects its gross profit percentage to remain in the mid-50 percent range in 2001. Research and development expenses increased approximately $6.5 million, or 90%, for the year ended December 31, 2000, compared to the prior year. The increase in research and development expenses was primarily attributable to clinical studies and related expenses for Noven's methylphenidate transdermal delivery system. The future level of research and development expenditures will depend on, among other things, the status of products under development and the outcome of clinical trials, strategic decisions by management, the consummation of new collaborative arrangements and Noven's liquidity. Noven's research and development expenses may vary significantly from quarter to quarter depending on product development cycles and the timing of clinical studies. Marketing, general and administrative expenses increased approximately $0.9 million, or 11%, for the year ended December 31, 2000, compared to the prior year. The increase was primarily due to higher personnel, recruitment costs and outside consulting services. 25 26 For the years ended December 31, 2000 and 1999, Noven reported equity in earnings of Novogyne of $9.3 million and $1.5 million, respectively. Novogyne's revenue increased from $34.3 million to $58.5 million, an increase of 71%. All of this increase was associated with increased sales of Vivelle-Dot(TM), which was launched in the second quarter of 1999. Novogyne had net income of $29.1 million for the year ended December 31, 2000 versus $10.7 million for the prior year. Interest income, net increased approximately $1.0 million, or 304%, for the year ended December 31, 2000 compared to 1999, primarily due to higher average balances in cash and cash equivalents and the receipt of $20 million related to the license of Estradot(TM). See Note 3, License Agreements, in the Notes to Financial Statements for more information. Income tax benefit for the year ended December 31, 2000 resulted from the recognition of a deferred income tax benefit of $9.4 million. Realization of the deferred income tax asset of $15.2 million at December 31, 2000 depends upon generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that the deferred income tax asset will be realized based upon estimated future taxable income. See Note 7, Income Taxes, in the Notes to Financial Statements for further information. Noven expects its effective tax rate to be between 34% and 38% in 2001. 1999 COMPARED TO 1998 Total revenues for the year ended December 31, 1999 were $31.6 million, an increase of $9.8 million, or 45%, over the prior year. The increase in revenues was attributable to product sales, which increased $11.2 million, or 56%, for the year ended December 31, 1999, compared to 1998. Product sales in 1999 included $1.2 million in minimum fee payments related to sales of Menorest(R) in certain European countries through 1998. The remaining $10.0 million of the increase in product sales was primarily attributable to sales of CombiPatch(TM), which was launched in the United States by Aventis in September 1998, and to a lesser extent, sales of Vivelle-Dot(TM), which was launched in the United States by Novogyne in May 1999. License revenue declined by $1.4 million, or 82%, for the year ended December 31, 1999 compared to the prior year, due to $1.5 million in milestone payments received in 1998. Gross profit (product sales less cost of products sold) for the year ended December 31, 1999 was $18.6 million (59% of product sales), compared to $10.7 million (53% of product sales) for the prior year. The increase in gross margin resulted primarily from a 20% increase in production volume, manufacturing efficiencies and the recognition of higher royalty and minimum fee payments. Research and development expenses increased approximately $0.4 million, or 5%, for the year ended December 31, 1999, compared to the prior year. Marketing, general and administrative expenses decreased approximately $2.2 million, or 22%, for the year ended December 31, 1999, compared to the prior year. This decrease was primarily due to lower sales and marketing expenses associated with DentiPatch(R) as a result of Noven's decision to reduce promotion of that product and, to a lesser extent, a redeployment of most of Noven's marketing personnel to Novogyne, which reimburses Noven for its marketing expenses incurred on behalf of Novogyne. 26 27 For the year ended December 31, 1999, Noven reported equity in earnings of Novogyne of $1.5 million; Noven reported no equity in earnings of Novogyne for the year ended December 31, 1998. Novogyne was formed in May 1998. Novogyne's revenue for the year ended December 31, 1999 was $34.3 million versus $16.7 million for the period from May 1, 1998 (Date of Inception) through December 31, 1998, an increase of 105%. The increase was associated with increased sales of Vivelle(R) and Vivelle-Dot(TM). Vivelle-Dot(TM) was launched in the second quarter of 1999. Novogyne had net income of $10.7 million for the year ended December 31, 1999 versus $3.4 million for the period from May 1, 1998 (Date of Inception) through December 31, 1998. Interest income, net decreased approximately $0.1 million, or 22%, for the year ended December 31, 1999 compared to 1998, primarily due to lower average balances in cash and cash equivalents and an increase in debt mainly associated with a Master Lease facility entered into in May 1999. Income tax benefit for the year ended December 31, 1999 resulted from the recognition of a deferred income tax benefit of $5.0 million. See Note 7, Income Taxes, in the Notes to Financial Statements for further information. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000 and December 31, 1999, Noven had $41.0 million and $15.3 million, respectively, in cash and cash equivalents. Working capital increased by $30.1 million from $16.6 million at December 31, 1999 to $46.7 million at December 31, 2000. Net cash of approximately $21.6 million was provided by operating activities during 2000, compared to approximately $9.5 million provided during the prior year. Net cash generated by operating activities primarily resulted from the receipt of an up-front license fee of $20 million in November 2000 from Novartis AG in connection with the Estradot(TM) license agreement. See Note 3, License Agreements, in the Notes to Financial Statements for more information. Non-cash items (equity in earnings of Novogyne of $9.3 million and deferred income tax benefit of $9.4 million) constituted 95% of Noven's net income of $19.6 million. Changes in working capital accounted for most of the remaining increase. Net cash of approximately $0.7 million was provided by investing activities during 2000, compared to approximately $0.8 million used in investing activities during the prior year, an increase of approximately $1.5 million. Net cash provided by investing activities during 2000 was attributable to cash distributions from Novogyne, partially offset by the purchase of fixed assets and payment of patent development costs. Net cash of approximately $3.4 million was provided by financing activities during 2000, compared to approximately $1.0 million provided by financing activities during 1999, an increase of approximately $2.4 million. Net cash provided by financing activities during 2000 was attributable to cash received in connection with the issuance of common stock from the exercise of stock options, partially offset by payments made on notes payable. In December 2000, Noven entered into a secured revolving credit facility (the "Credit Facility") providing for borrowings of up to the lesser of 27 28 $10 million or eligible accounts receivable. The Credit Facility will terminate in April 2002 and bears interest at LIBOR plus 1.50% (8.07% at December 31, 2000). At December 31, 2000, there were no amounts outstanding under the Credit Facility. Terms of the Credit Facility include, among other things, minimum net worth, revenue and operating results requirements, as well as certain financial ratios, measured on a quarterly basis. See Note 5, Credit Facility, in the Notes to Financial Statements for further information. Noven's principal sources of short-term liquidity are existing cash, cash generated from product sales, fees and royalties under license agreements and borrowings under its Credit Facility. In April 2000, Noven received a cash distribution of $2.2 million from Novogyne based upon Novogyne's results of operations for the year ended December 31, 1999. In November 2000, Noven entered into an exclusive license agreement with Novartis AG pursuant to which Noven received an up-front license payment of $20 million and will receive an additional milestone payment upon registration of the licensed product in certain European countries. In 2001, Noven expects to invest up to $5 million in plant and equipment and software to increase production capacity and to implement an enterprise resource planning system. Pursuant to a Severance and Non-Competition Agreement entered into with Steven Sablotsky, Noven's Co-Chairman of the Board of Directors, Noven is required to pay Mr. Sablotsky $1.2 million in June 2001 in consideration for, among other things, a three year non-competition agreement. Cash requirements for federal and state income taxes are also expected to increase. Noven believes that it will have sufficient cash available to meet its operating needs and anticipated capital requirements over the short term. For the long term, Noven intends to utilize funds derived from the above sources, as well as funds generated through sales of products under development. Noven expects that such funds will be comprised of payments received pursuant to licensing arrangements, as well as Noven's direct sales of its own products. Noven expects that its cash requirements will continue to increase, primarily to fund clinical studies for products under development and for plant and equipment to expand production capacity. There can be no assurance that Noven will successfully complete the development of such products, that Noven will obtain regulatory approval for any such products, that any approved product may be produced in commercial quantities, at reasonable costs, and be successfully marketed, or that Noven will successfully negotiate future licensing arrangements. To the extent that capital requirements exceed available capital, Noven will seek alternative sources of financing to fund its operations. In addition to the Credit Facility, alternative financing may be needed to fund further activities. No assurance can be given that alternative financing will be available, if at all, in a timely manner, on favorable terms. If Noven is unable to obtain satisfactory alternative financing, Noven may be required to delay or reduce its proposed expenditures, including expenditures for research and development and plant and equipment, in order to meet its future cash requirements. 28 29 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for historical information contained herein, the matters discussed herein are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting Noven's operations, results of operations, markets, products, prices and prospects, and other factors discussed elsewhere in this report and the other documents filed by Noven with the Securities and Exchange Commission ("SEC"). These factors may cause Noven's results to differ materially from the statements made in this report or otherwise made by or on behalf of Noven. The following is a brief summary of some of the risk factors, which are not listed in order of priority, that could adversely affect Noven's results. Most of these factors are described elsewhere in this report, but the risks described below are not the only risks Noven faces. o Noven faces competition from a number of companies in the development of transdermal and transmucosal drug delivery products, and competition is expected to intensify as more companies enter the field. Some of these companies are substantially larger than Noven and have greater financial and research and development resources than Noven, as well as greater experience in developing and commercializing pharmaceutical products. Noven's products compete with other transdermal products as well as alternative dosage forms of the same or comparable chemical entities. There can be no assurance that Noven's products will successfully compete against competitive products or that developments by others will not render Noven's products obsolete or uncompetitive. o Noven's equity in earnings of Novogyne contributed a significant portion of Noven's earnings in 2000, and Novogyne's results may continue to be material to Noven in the future. Because, among other things, Noven and Novartis are vastly different in size, the interests of Noven and Novartis may not always be aligned, which may result in potential conflicts between Noven and Novartis on matters relating to Novogyne. Novartis also has the right to dissolve Novogyne under certain circumstances. Novogyne's management committee is comprised of a majority of representatives from Novartis. In addition, the joint venture operating agreement has a buy/sell provision which allows either party to compel either the purchase of the other party's interest in Novogyne or the sale of its own interest at a price set by the party triggering the buy/sell provision. Novartis is a larger company with greater financial resources than Noven, and therefore may be in a better position to be the purchaser if the provision is triggered. o Noven expects to be dependent on sales to Novartis, Novogyne and Aventis, as well as fees and royalties generated from such parties' sales of its transdermal delivery systems, for a significant portion of its expected revenues for at least the next several years, and no assurance can be given regarding the amount and timing of such revenues. Failure of any of these parties to market Noven's products successfully would cause the quantity of products purchased from Noven and the amount of fees and royalties ultimately paid to Noven to be reduced and would therefore have a material adverse effect on Noven's business and operations. In the short term, Noven's growth depends in part on Novartis' launch plans and marketing efforts with respect to Estalis(R) and Estradot(TM), and the scope and success of those efforts are outside the control of Noven. 29 30 o Almost all of Noven's revenues are currently generated through sales of its hormone replacement therapy transdermal delivery systems. While these products have been found to be safe and effective by the FDA and the regulatory authorities of those countries where Noven's products are approved, published studies have concluded that there may be some health risks associated with hormone replacement therapy. o Noven's long-term strategy is dependent, in part, upon the successful development and commercialization of new products. The length of time necessary to complete clinical trials and obtain marketing approval from regulatory authorities may be considerable. No assurance can be given that Noven will have the financial resources necessary to complete products under development, that those projects to which Noven dedicates sufficient resources will be successfully completed, that Noven will be able to obtain regulatory approval for any such product, or that any approved product can be produced in commercial quantities, at reasonable costs, and be successfully marketed, either by Noven or by a licensing partner. A project can fail or be delayed at any stage of development, even if each prior stage was completed successfully. Some of Noven's development projects will not be completed successfully or on schedule. Many of the factors which may cause a product in development to fail or be delayed, such as difficulty in enrolling patients in clinical trials, lack of sufficient supplies or raw materials and changes in regulations, are beyond Noven's control. o Noven's operations are subject to extensive regulation by governmental authorities in the United States and other countries with respect to the testing, approval, manufacture, labeling, marketing and sale of pharmaceutical products. Noven devotes significant time, effort and expense addressing the extensive government regulations applicable to its business. Even if a product is approved by a regulatory authority, product approvals may be withdrawn after the product reaches the market if compliance with regulatory standards is not maintained or if problems occur regarding the safety or efficacy of the product. Failure to comply with governmental regulations may result in fines, unanticipated compliance expenditures, interruptions of production and resulting loss of sales and criminal prosecution. o The federal and state governments in the United States, as well as many foreign governments, including the United Kingdom, from time to time explore ways to reduce medical care costs through health care reform. In the United States, these proposals include government programs involving prescription drug reimbursement benefits for seniors. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, Noven cannot predict what impact any reform proposal ultimately adopted may have on the pharmaceutical industry or on the business or operating results of Noven. o Substantially all of Noven's revenues are generated through sales of transdermal delivery systems. Noven's products are marketed primarily to physicians, some of whom are reluctant to prescribe a transdermal delivery system when an alternative delivery system is available. Noven and its licensees must demonstrate to prescribing physicians the benefits of transdermal delivery, especially with respect to products such as MethyPatch(R) for which there is no transdermal system on the market. The commercial success of Noven's products is also based in part on patient preference, and difficulties in obtaining patient acceptance of Noven's transdermal or transmucosal delivery systems may similarly impact Noven's ability to market its products. 30 31 o Noven's success will depend, in part, on its ability to obtain or license patents and operate without infringing the proprietary rights of others. There is no assurance that Noven's patents or any future patents will prevent other companies from developing similar or functionally equivalent products. Furthermore, there is no assurance that any of Noven's future processes or products will be patentable, that any pending or additional patents will be issued in any or all appropriate jurisdictions or that Noven's processes or products will not infringe upon the patents of third parties. Noven also attempts to protect its proprietary information under trade secret laws. There can be no assurance that these means will be effective, that Noven will have adequate legal remedies as a result thereof, or that Noven's trade secrets will not otherwise become known or be independently developed by others. o Like all pharmaceutical companies, Noven faces a risk of loss and associated adverse publicity from product liability lawsuits. Noven believes that it maintains an adequate amount of product liability insurance, but there can be no assurance that its insurance will cover all future claims or that Noven will be able to maintain existing coverage or obtain additional coverage at reasonable rates. o Certain raw materials and components used in the manufacture of Noven's products are available from limited sources, and, in some cases, a single source. Any curtailment in the availability of such raw materials could be accompanied by production or other delays, and, in the case of products for which only one raw material supplier exists, could result in a material loss of sales, with consequent adverse effects on Noven's business and results of operations. Additionally, regulatory authorities must generally approve raw material sources for pharmaceutical products. If any of Noven's suppliers cease to be approved or if Noven must change suppliers for any reason, the change could result in increased costs, delays in production and loss of sales. o All of Noven's products are manufactured at a single facility located in Miami, Florida. An interruption of manufacturing operations resulting from regulatory issues, technical problems, casualty loss, including hurricane, or other factors could have a material adverse effect on Noven's business and financial results. o If Noven is able to complete and file an NDA for its MethyPatch(R)product, Noven expects to hire a sales force to sell MethyPatch(R)in the United States rather than granting marketing rights to a third party. Hiring a sales force, and expanding Noven's sales and marketing infrastructure to support the sales force, would require the expenditure of substantial funds. There can be no assurance that, if MethyPatch(R)is approved for marketing by the FDA, Noven will generate sufficient sales of the product to cover the expense of Noven's sales and marketing organization and/or to realize adequate profits. In addition, some of these expenses may be incurred prior to receipt of marketing approval. In the event that MethyPatch(R)is not approved for marketing, these expenses will not be recovered. Additionally, any delays in organizing a sales force for MethyPatch(R) could have an adverse impact on Noven's ability to market the product and realize profits from sales of the product. o There is an ongoing public debate in the United States regarding the appropriateness of using methylphenidate and other medications to treat children with ADHD. The outcome of this debate is uncertain, and Noven cannot predict what impact, if any, the increased public attention will have on the market for products indicated for ADHD generally, or on MethyPatch(R) specifically. 31 32 o From time to time Noven may need to acquire licenses to patents and other intellectual property of third parties to develop, manufacture and commercialize its products. There can be no assurance that Noven will be able to acquire such licenses on commercially reasonable terms. The failure to obtain such a license would negatively affect the ability of Noven to develop, manufacture and commercialize certain products, and could therefore have an adverse effect on Noven's business and financial results. o In 2000, Noven recorded an income tax benefit in an amount equal to 63% of income before income taxes. In 2001, Noven expects to record an income tax expense in an amount equal to approximately 34% to 38% of income before income taxes. This expected increase in Noven's effective tax rate for 2001 will adversely affect Noven's earnings in 2001 compared to 2000. Noven's level of research and development expenditures and its accrued state income taxes, among other factors, could impact Noven's effective income tax rate. o The market price of Noven's common stock was extremely volatile in the year 2000 and may continue to be volatile going forward. In the year 2000, Noven's common stock traded as low as $6.531 per share and as high as $64.25 per share before closing at $37.375 on December 29, 2000, the last trading day of the year. There could be any number of factors causing this volatility, some of which may be unrelated to Noven's business or financial results and many of which may be beyond Noven's control. Noven, like any other company with a volatile stock price, may be subject to securities litigation, which could have a material adverse effect on Noven's business and financial results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risks relating to Noven's operations may result from changes in LIBOR interest rates if Noven borrows under its Credit Facility. Noven had no variable rate debt outstanding during the year ended or at December 31, 2000. Therefore, changes in interest rates did not affect interest expense, earnings or cash flows in 2000. Noven cannot predict market fluctuations in interest rates and their impact on any variable rate debt that Noven may have outstanding, nor can there be any assurance that fixed rate long-term debt will be available at favorable rates, if at all. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Index to Financial Statements at page 39 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 32 33 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning directors required by item 10 is incorporated by reference to Noven's Proxy Statement for its 2001 Annual Meeting of Shareholders. The information concerning executive officers required by item 10 is contained in the discussion entitled "Executive Officers of the Registrant" in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION. The information required by item 11 is incorporated by reference to Noven's Proxy Statement for its 2001 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by item 12 is incorporated by reference to Noven's Proxy Statement for its 2001 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by item 13 is incorporated by reference to Noven's Proxy Statement for its 2001 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS See Index to Financial Statements at page 39 of this report. (a)(2) FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the required information is not applicable or the information is included in the consolidated financial statements or the notes thereto. 33 34 (a)(3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------ ----------- ---------------- 3.1 Noven's Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 of Noven's Form 10-K for the year ended December 31, 1998 (File No. 1-09623). 3.2 Noven's Bylaws, as amended and restated as of February 8, Filed herewith. 2001. 10.1 Noven Pharmaceuticals, Inc. Amended and Restated Stock Incorporated by reference to Noven's Option Plan.* Form 10-K for the year ended December 31, 1990 (File No. 1-09623), as further amended on June 23, 1992 and incorporated by reference to the definitive Proxy Statement dated May 11, 1992, for the Annual Meeting of Shareholders held on June 23, 1992. 10.2 Amendment to Noven Pharmaceuticals, Inc. Amended and Incorporated by reference to Noven's Restated Stock Option Plan.* Form 10-Q for the quarter ended June 30, 1999 (File No. 0-17254). 10.3 Noven Pharmaceuticals, Inc. 1997 Stock Option Plan.* Incorporated by reference to Noven's definitive Proxy Statement dated May 1, 1997, for the Annual Meeting of Shareholders held on June 3, 1997. 10.4 Amendment to Noven Pharmaceuticals, Inc. 1997 Stock Incorporated by reference to Noven's Option Plan.* Form 10-Q for the quarter ended June 30, 1999 (File No. 0-17254). 10.5 Noven Pharmaceuticals, Inc. 1999 Long-Term Incentive Incorporated by reference to Noven's Plan.* definitive Proxy Statement dated April 19, 1999, for the Annual Meeting of Shareholders held on June 8, 1999.
34 35
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------ ----------- ---------------- 10.6 Employment Agreement between Noven and Robert C. Strauss Incorporated by reference to Exhibit dated December 12, 1997.* 10.31 of Noven's Form 10-K for the year ended December 31, 1997 (File No. 1-09623). 10.7 Employment Agreement (Change in Control), dated as of Incorporated by reference to the December 1, 1999, between Noven and each of Jeffrey F. Form of Employment Agreement (Change Eisenberg, W. Neil Jones, Juan A. Mantelle, James B. in Control) filed as Exhibit 10.7 of Messiry and Steven Sablotsky, and dated as of December 1, Noven's Form 10-K for the year ended 2000 between Noven and Anthony M. de Padova, M.D.* December 31, 1999 (File No. 1-09623). 10.8 Severance and Noncompetition Agreement between Noven and Incorporated by reference to Exhibit Steven Sablotsky dated as of September 21, 2000.* 10.1 of Noven's Form 10-Q for the quarter ended September 30, 2000 (File No. 0-17254). 10.9 Form of Indemnification Agreement for Directors and Incorporated by reference to Exhibit Officers. 10.4 of Noven's Form 10-K for the year ended December 31, 1998 (File No. 1-09623). 10.10 License Agreement between Noven and Ciba-Geigy Incorporated by reference to Exhibit Corporation dated November 15, 1991 (with certain 10.9 of Amendment No. 1 to Noven's provisions omitted pursuant to Rule 406). Registration Statement on Form S-2 (File No. 33-45784). 10.11 Agreement between Noven and Turnpike-McNeil Development Incorporated by reference to Exhibit Limited dated January 29, 1993 (re: real property). 10.17 of Noven's Form 10-K for the year ended December 31, 1992 (File No. 1-09623). 10.12 Agreement between Noven and Turnpike-McNeil Development Incorporated by reference to Exhibit Limited dated January 29, 1993 (re: real property and 10.18 of Noven's Form 10-K for the building). year ended December 31, 1992 (File No. 1-09623).
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EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------ ----------- ---------------- 10.13 Industrial Lease between Rhone-Poulenc Rorer Incorporated by reference to Pharmaceuticals Inc. and Noven dated March 23, 1993 and Exhibit 10.20 of Noven's Form 10-K effective February 16, 1993 (with certain provisions for the year ended December 31, 1993 omitted pursuant to Rule 24b-2). (File No. 1-09623). 10.14 Formation Agreement by and between Novartis Incorporated by reference to Exhibit Pharmaceuticals Corporation and Noven dated as 10.32 to Noven's Form 10-Q for the of May 1, 1998. quarter ended March 31, 1998 (File No. 0-17254). 10.15 Operating Agreement of Vivelle Ventures LLC (a Incorporated by reference to Exhibit Delaware limited liability company) dated as of 10.33 to Noven's Form 10-Q for the May 1, 1998. quarter ended March 31, 1998 (File No. 0-17254). 10.16 Marketing and Promotional Agreement by and Incorporated by reference to Exhibit between Noven and Vivelle Ventures LLC 10.4 to Noven's Form 10-Q for the dated as of May 1, 1998. quarter ended March 31, 1998 (File No. 0-17254). 10.17 Sublicense Agreement by and among Novartis Incorporated by reference to Exhibit Pharmaceuticals Corporation, Noven and 10.35 to Noven's Form 10-Q for the Vivelle Ventures LLC dated as of May 1, 1998. quarter ended March 31, 1998 (File No. 0-17254). 10.18 Amended and Restated Limited Assignment Incorporated by reference to Agreement by and among Novartis Pharmaceuticals Exhibit 10.17 of Noven's Form 10-K Corporation, Noven and Vivelle Ventures LLC for the year ended December 31, dated as of April 1, 1999. 1999 (File No. 1-09623). 10.19 Amended and Restated License Agreement between Noven and Incorporated by reference to Exhibit Rhone-Poulenc Rorer, Inc. dated September 30, 1999 (with 10.1 of Noven's Form 10-Q for the certain provisions omitted pursuant to Rule 24b-2). quarter ended September 30, 1999 (File No. 0-17254). 10.20 Amended and Restated License Agreement between Noven and Incorporated by reference to Exhibit Rhone-Poulenc Rorer, Inc. dated September 30, 1999 (with 10.2 of Noven's Form 10-Q for the certain provisions omitted pursuant to Rule 24b-2). quarter ended September 30, 1999 (File No. 0-17254).
36 37
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------ ----------- ---------------- 10.21 Amended and Restated Supply Agreement between Noven and Incorporated by reference to Exhibit Novartis Pharmaceuticals Corporation dated as of April 1, 10.20 of Noven's Form 10-K for the 1999 (with certain provisions omitted pursuant to Rule year ended December 31, 1999 (File 24b-2). No. 1-09623). 10.22 License Agreement between Noven and Novartis Pharma AG Incorporated by reference to Exhibit dated as of November 3, 2000 (with certain provisions 10.2 of Noven's Form 10-Q for the omitted pursuant to Rule 24b-2). quarter ended September 30, 2000 (File No. 0-17254). 10.23 Credit Agreement between Noven and SunTrust Bank Miami, Filed herewith. N.A. dated as of December 5, 2000 (with certain provisions omitted pursuant to Rule 24b-2).** 11 Computation of Earnings per Share. Filed herewith. 21 Subsidiaries of the Registrant. Filed herewith. 23.1 Consent of Deloitte & Touche LLP. Filed herewith. 23.2 Consent of PricewaterhouseCoopers LLP. Filed herewith.
- --------------- * Compensation Plan or Agreement. ** Certain exhibits and schedules to this document have not been filed. The Registrant agrees to furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request. (b) REPORTS ON FORM 8-K. No Current Reports on Form 8-K were filed by Noven during the quarter ended December 31, 2000. 37 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 2001 NOVEN PHARMACEUTICALS, INC. By: /s/ ROBERT C. STRAUSS ---------------------------------- ROBERT C. STRAUSS President, Chief Executive Officer and Co-Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- By: /s/ ROBERT C. STRAUSS Principal Executive March 27, 2001 ---------------------------- Officer and Co-Chairman Robert C. Strauss of the Board (President and CEO) By: /s/ STEVEN SABLOTSKY Co-Chairman of the Board March 27, 2001 ---------------------------- Steven Sablotsky By: /s/ JAMES B. MESSIRY Principal Financial March 27, 2001 --------------------------- Officer James B. Messiry (Vice President and Chief Financial Officer) By: /s/ DIANE M. BARRETT Principal Accounting March 27, 2001 ---------------------------- Officer Diane M. Barrett (Vice President, Finance and Treasurer) By: /s/ SIDNEY BRAGINSKY Director March 27, 2001 --------------------------- Sidney Braginsky By: /s/ REGINA E. HERZLINGER Director March 27, 2001 ---------------------------- Regina E. Herzlinger By: /s/ JOHN G. CLARKSON, M.D. Director March 27, 2001 ----------------------------- John G. Clarkson, M.D. By: /s/ LAWRENCE J. DUBOW Director March 27, 2001 ------------------------------- Lawrence J. DuBow
38 39 INDEX TO FINANCIAL STATEMENTS
PAGE ---- NOVEN PHARMACEUTICALS, INC. INDEPENDENT AUDITORS' REPORT 40 FINANCIAL STATEMENTS Balance Sheets as of December 31, 2000 and 1999 41 Statements of Operations for the years ended December 31, 2000, 1999 and 1998 42 Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 43 Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 44 Notes to Financial Statements 45 VIVELLE VENTURES LLC (d/b/a NOVOGYNE PHARMACEUTICALS) (A SIGNIFICANT UNCONSOLIDATED SUBSIDIARY) REPORT OF INDEPENDENT ACCOUNTANTS 59 FINANCIAL STATEMENTS Balance Sheets as of December 31, 2000 and 1999 60 Statements of Operations for the years ended December 31, 2000 and 1999 and for the period May 1, 1998 (Date of Inception) through December 31, 1998 61 Statements of Members' Capital for the years ended December 31, 2000 and 1999 and for the period May 1, 1998 (Date of Inception) through December 31, 1998 62 Statements of Cash Flows for the years ended December 31, 2000 and 1999 and for the period May 1, 1998 (Date of Inception) through December 31, 1998 63 Notes to Financial Statements 64
39 40 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Noven Pharmaceuticals, Inc.: We have audited the accompanying balance sheets of Noven Pharmaceuticals, Inc. ("Noven") as of December 31, 2000 and 1999, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of Noven's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals), Noven's investment in which is accounted for by use of the equity method, for the years ended December 31, 2000 and 1999. Noven's equity in Vivelle Ventures LLC of $15,431,000 and $8,365,000 at December 31, 2000 and 1999, respectively, and Noven's share of that joint venture's income of $9,294,000 and $1,487,000 for the years then ended are included in the accompanying financial statements. Such 2000 and 1999 financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such joint venture for 2000 and 1999, is based solely on the report of such other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, and for 2000 and 1999 the reports of other auditors, provide a reasonable basis for our opinion. In our opinion, based on our audits, and for 2000 and 1999 the reports of other auditors, such financial statements present fairly, in all material respects, the financial position of Noven Pharmaceuticals, Inc. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Certified Public Accountants Miami, Florida February 16, 2001 40 41 NOVEN PHARMACEUTICALS, INC. Balance Sheets At December 31, 2000 and 1999 (in thousands except share amounts)
2000 1999 --------- --------- ASSETS Current Assets: Cash and cash equivalents $ 40,976 $ 15,338 Accounts receivable (less allowance for doubtful accounts of $121 in 2000 and $167 in 1999) 5,677 3,015 Due from Novogyne 2,917 3,684 Inventories 6,098 3,578 Net deferred income tax assets 4,500 -- Prepaid and other current assets 495 415 --------- --------- 60,663 26,030 Property, plant and equipment, net 15,154 15,329 Other Assets: Investment in Novogyne 15,431 8,365 Net deferred income tax asset 10,700 5,000 Patent development costs, net 1,972 1,805 Deposits and other assets 111 359 --------- --------- 28,214 15,529 --------- --------- $ 104,031 $ 56,888 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 6,522 $ 5,085 Notes payable, current portion 340 348 Accrued compensation and related liabilities 2,504 2,237 Other accrued liabilities 1,903 1,193 Deferred license revenue, current portion 2,660 586 --------- --------- 13,929 9,449 Long-Term Liabilities: Notes payable 265 604 Deferred license revenue 24,560 7,442 --------- --------- 38,754 17,495 Commitments and Contingencies (Note 8) Stockholders' Equity: Preferred stock - authorized 100,000 shares of $.01 par value; no shares issued or outstanding -- -- Common stock - authorized 40,000,000 shares, par value $.0001 per share; issued and outstanding 22,177,598 in 2000 and 21,546,271 in 1999 2 2 Additional paid-in capital 72,864 66,614 Accumulated deficit (7,589) (27,223) --------- --------- 65,277 39,393 --------- --------- $ 104,031 $ 56,888 ========= =========
See accompanying notes to financial statements. 41 42 NOVEN PHARMACEUTICALS, INC. Statements of Operations Years Ended December 31, 2000, 1999 and 1998 (in thousands except per share amounts)
2000 1999 1998 -------- -------- -------- Revenues: Product sales $ 41,998 $ 31,334 $ 20,114 License revenue 926 316 1,728 -------- -------- -------- Total revenues 42,924 31,650 21,842 Expenses: Cost of products sold 19,219 12,721 9,447 Research and development 13,621 7,171 6,808 Marketing, general and administrative 8,737 7,860 10,105 -------- -------- -------- Total expenses 41,577 27,752 26,360 -------- -------- -------- Income (loss) from operations 1,347 3,898 (4,518) Equity in earnings of Novogyne 9,294 1,487 -- Interest income, net 1,385 343 439 -------- -------- -------- Income (loss) before income taxes 12,026 5,728 (4,079) Income tax benefit 7,608 4,732 -- -------- -------- -------- Net income (loss) $ 19,634 $ 10,460 $ (4,079) ======== ======== ======== Basic earnings (loss) per share $ 0.90 $ 0.49 $ (0.19) ======== ======== ======== Diluted earnings (loss) per share $ 0.84 $ 0.48 $ (0.19) ======== ======== ======== Weighted average number of common shares outstanding: Basic 21,914 21,508 21,013 ======== ======== ======== Diluted 23,249 21,897 21,013 ======== ======== ========
See accompanying notes to financial statements. 42 43 NOVEN PHARMACEUTICALS, INC. Statements of Stockholders' Equity Years Ended December 31, 2000, 1999 and 1998 (in thousands)
COMMON STOCK ADDITIONAL -------------------- PAID-IN ACCUMULATED TREASURY SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL ------ ------ ------- ------------ --------- -------- Balance at December 31, 1997 20,475 $ 2 $ 64,146 $(33,604) $ (663) $ 29,881 Issuance of shares pursuant to stock option plan, net 41 -- 23 -- -- 23 Issuance of shares pursuant to exercise of warrants 966 -- 2,500 -- -- 2,500 Net loss -- -- -- (4,079) -- (4,079) -------- -------- -------- -------- -------- -------- Balance at December 31, 1998 21,482 2 66,669 (37,683) (663) 28,325 Issuance of shares pursuant to stock option plan, net 96 -- 247 -- -- 247 Retirement of shares of treasury stock, at cost (97) -- (663) -- 663 -- Issuance of shares for bonus compensation 65 -- 361 -- -- 361 Net income -- -- -- 10,460 -- 10,460 -------- -------- -------- -------- -------- -------- Balance at December 31, 1999 21,546 2 66,614 (27,223) -- 39,393 Issuance of shares pursuant to stock option plan, net 574 -- 3,707 -- -- 3,707 Issuance of shares for bonus compensation 55 -- 782 -- -- 782 Tax benefit from exercise of stock options -- -- 1,650 -- -- 1,650 Issuance of shares of stock and options to charitable organizations 3 -- 111 -- -- 111 Net income -- -- -- 19,634 -- 19,634 -------- -------- -------- -------- -------- -------- Balance at December 31, 2000 22,178 $ 2 $ 72,864 $ (7,589) $ -- $ 65,277 ======== ======== ======== ======== ======== ========
See accompanying notes to financial statements. 43 44 NOVEN PHARMACEUTICALS, INC. Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998 (in thousands except share amounts)
2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income (loss) $ 19,634 $ 10,460 $ (4,079) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,325 1,363 1,206 Amortization of patent costs 237 208 255 Deferred income tax benefit (9,401) (5,000) -- Recognition of deferred license revenue (926) (316) (226) Equity in earnings of Novogyne (9,294) (1,487) -- Expense related to issuance of shares of stock and options to charitable organizations 111 -- -- (Increase) decrease in accounts receivable (2,662) 29 (1,819) Decrease (increase) in due from Novogyne 767 (195) (3,489) Increase in inventories (2,520) (845) (232) (Increase) decrease in prepaid and other current assets (80) 6 (139) Decrease (increase) in deposits and other assets 248 (245) (50) Increase in accounts payable 1,437 131 2,791 Increase in accrued compensation and related liabilities 1,049 1,683 693 Increase in other accrued liabilities 1,561 1,052 51 Increase in deferred license revenue 20,118 2,700 -- -------- -------- -------- Cash flows provided by (used in) operating activities 21,604 9,544 (5,038) Cash flows from investing activities: Maturity of securities, net -- -- 5,880 Purchase of property, plant and equipment, net (1,150) (1,173) (1,480) Investment in Novogyne -- -- (7,500) Distribution from Novogyne 2,228 622 -- Payments for patent development costs (404) (248) (259) -------- -------- -------- Cash flows provided by (used in) investing activities 674 (799) (3,359) Cash flows from financing activities: Issuance of common stock 3,707 247 2,523 Notes payable (347) 773 179 -------- -------- -------- Cash flows provided by financing activities 3,360 1,020 2,702 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 25,638 9,765 (5,695) Cash and cash equivalents, beginning of year 15,338 5,573 11,268 -------- -------- -------- Cash and cash equivalents, end of year $ 40,976 $ 15,338 $ 5,573 ======== ======== ========
Cash payments for income taxes were $647 in 2000 and $123 in 1999. No income tax payments were made in 1998. Cash payments for interest were $64.3 in 2000, $49.3 in 1999 and $1.0 in 1998. Accrued compensation for the years ended 2000, 1999 and 1998 includes bonuses for certain employees and officers. Bonuses for 1999 and 1998 were partially settled by issuance of 55,125 and 65,000 shares of common stock with a value of $782 and $361, respectively. During 1999, Noven retired 97,100 shares of treasury stock valued at $663. See accompanying notes to financial statements. 44 45 NOVEN PHARMACEUTICALS, INC. Notes to Financial Statements Years Ended December 31, 2000, 1999 and 1998 1. Summary of significant accounting policies: Noven Pharmaceuticals, Inc. ("Noven") was incorporated in Delaware in 1987 and is engaged principally in one line of business, the manufacture and development of advanced transdermal and transmucosal drug delivery technologies and products. Vivelle Ventures LLC: Noven and Novartis Pharmaceuticals Corporation ("Novartis") entered into a joint venture by forming a limited liability company, Vivelle Ventures LLC (d/b/a Novogyne Pharmaceuticals) ("Novogyne"), effective May 1, 1998, to market and sell women's healthcare products in the United States and Canada, including Noven's transdermal estrogen delivery systems marketed under the brand names Vivelle(R) and Vivelle-Dot(TM). Noven accounts for its 49% investment in Novogyne under the equity method. Noven defers the recognition of 49% of its profit on products sold to Novogyne that remain in Novogyne's inventory until the products are sold. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. Cash and Cash Equivalents: Cash and cash equivalents includes cash and securities with an original maturity of three months or less. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventory costs include material, labor and manufacturing overhead. The following are the major classes of inventories as of December 31 (in thousands): 2000 1999 ------ ------ Finished goods $ 319 $ 125 Work in process 1,567 973 Raw materials 4,212 2,480 ------ ------ Total $6,098 $3,578 ====== ====== 45 46 Inventories at December 31, 2000 and 1999 relate to Noven's transdermal and transmucosal delivery systems. To date, Noven has not experienced and does not anticipate any difficulty acquiring materials necessary to manufacture its transdermal and transmucosal delivery systems. No assurance can be given that Noven will not experience difficulty in the future. Property, Plant and Equipment: Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging up to 31 years. Leasehold improvements are amortized over the life of the lease or the service life of the improvements, whichever is shorter. Retired assets are removed from the cost and accumulated depreciation accounts. Using its best estimates, Noven reviews for impairment long-lived assets and certain identifiable intangibles to be held and used whenever events or changes in circumstances indicate that the carrying amount of its assets might not be recoverable. Patent Development Costs: Costs related to the development of patents, principally legal fees, are capitalized and amortized over the lesser of their estimated economic useful lives or their remaining legal lives. Income Taxes: Noven's share of Novogyne's earnings is included in income before taxes. Noven accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS 109 provides that income taxes are accounted for using an asset and liability method which requires the recognition of deferred income tax assets and liabilities for expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities (see Note 7). Revenue Recognition: Substantially all of Noven's product sales were to its licensees, including Novogyne (see Notes 3 and 4). Revenues from product sales are recognized at the time of shipment. Certain license agreements provide for an adjustment to the price of the product based upon the licensee's actual sales price. Noven records such adjustments to revenues at the time that the information necessary to make the determination is received from the licensees. Royalty revenue consists of royalties payable by Novogyne and Novartis from sales of Vivelle(R) and Vivelle-Dot(TM) in the United States and Canada. Royalty revenue is recognized when earned and determinable and is included in product sales. Royalty revenue, in the amount of $3.7 million, $2.9 million and $2.6 million, was included in product sales for 2000, 1999 and 1998, respectively. License revenue consists of up-front, milestone and similar payments under license agreements and is recognized when earned under the terms of the applicable agreements. In some cases, license revenue will be deferred and recognized as license revenue over time. 46 47 Certain license agreements entitle Noven to minimum fees. Noven records revenue related to minimum fees as soon as supporting data is provided by the licensee. If the minimum fees are not determinable, Noven records these fees on a cash basis. These fees are included in product revenue. Noven has conformed its revenue recognition policy to the requirements of Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements", the effects of which are immaterial for all periods presented. Cost of Products Sold: Direct and indirect costs of manufacturing are included in cost of products sold. Research and Development Costs: Research and development costs include costs of internally generated research and development activities and costs associated with work performed under agreements with third parties. Research and development costs include direct and allocated expenses and are expensed as incurred. Fair Value of Financial Instruments: The carrying amounts of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable and accrued expenses reasonably approximate fair value because of the short maturity of these items. The Company believes the carrying amounts of the Company's notes payable and obligations under capital leases approximate fair value because the interest rates on these instruments change with, or approximate, market interest rates. Earnings (Loss) Per Share: Basic earnings (loss) per share is computed based on the average number of common shares outstanding. Diluted earnings (loss) per share is computed under the treasury stock method, whereby dilutive stock options are assumed to be exercised. Common equivalent shares are not included in the per share calculations when the effect of their inclusion would be antidilutive. Employee Stock Plans: In accordance with the provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", Noven may elect to continue to apply the provisions of the Accounting Principles Board's Opinion No. 25 (APB 25, "Accounting for Stock Issued to Employees") and related interpretations in accounting for its employee stock option plans, or adopt the fair value method of accounting prescribed by SFAS 123. Noven has elected to continue to account for its stock plans using APB 25, and therefore generally is not required to recognize compensation expense in connection with these plans. Companies that continue to use APB 25 are required to present, in the notes to the financial statements, the pro forma effects on reported net income and earnings per share as if compensation expense had been recognized based on the fair value of options granted (see Note 9). 47 48 Concentrations of Credit Risk: Noven's customers consist of Novogyne and a limited number of pharmaceutical companies with worldwide operations. Noven performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral to secure accounts receivable. Noven maintains an allowance for doubtful accounts based on an assessment of the collectibility of such accounts. Reclassification: Certain amounts presented in the accompanying financial statements for prior years have been reclassified to conform to the current year's presentation. Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes standards for the accounting and reporting of derivative instruments embedded in other contracts (collectively referred to as derivatives) and of hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure these instruments at fair value. In July 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133", which changes the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Noven does not expect the adoption of SFAS No. 133 to have any effect on its financial statements or disclosures. 2. Property, Plant and Equipment, net: Property, plant and equipment consists of the following at December 31, 2000 and 1999 (in thousands): 2000 1999 ------- ------- Land $ 2,540 $ 2,540 Building and improvements 2,393 2,393 Leased property and leasehold improvements 8,826 8,646 Manufacturing and testing equipment 7,710 6,908 Furniture 998 830 ------- ------- 22,467 21,317 Less accumulated depreciation and amortization 7,313 5,988 ------- ------- $15,154 $15,329 ======= ======= 3. License Agreements: Noven has license agreements with Aventis S.A. (f/k/a Rhone-Poulenc Rorer Inc.) ("Aventis") and Novartis. At the time of the formation of Novogyne, Novartis sublicensed its rights under its license agreement to Novogyne. Noven's agreement with Novogyne grants Novogyne the right to market Noven's transdermal estrogen delivery systems in the United States and Canada. Novartis' Canadian affiliate continues to market Noven's first generation transdermal estrogen delivery system in Canada and has been granted the right to market Noven's second generation transdermal estrogen 48 49 delivery system in Canada. The agreement provides for royalty payments based on sales by Novogyne and Novartis' Canadian affiliate. Warrants to purchase a total of 1,091,151 shares of Noven common stock were granted during the period 1991 through 1994 to Novartis under this agreement. Novartis exercised a warrant for 966,184 shares in the second quarter of 1998. The remaining warrants have expired. Noven has two license agreements with Aventis. These agreements grant Aventis the right to market Noven's first generation transdermal estrogen delivery system worldwide except for the United States and Canada and to market Noven's transdermal combination estrogen/progestin delivery system worldwide. The agreements also grant Aventis the right to market Noven's second generation transdermal estrogen delivery system in Japan. The agreements provide Noven certain milestone payments and fees based on Aventis' sales. Noven received milestone payments totaling $1.5 million in 1998, resulting from Aventis' receipt of regulatory approval for the combination product in the United States and certain European countries. Noven does not expect to receive any milestone payments under the existing agreements in 2001. Aventis funded the construction of a manufacturing facility for the production by Noven of transdermal drug delivery systems. Noven leases the facility at a nominal rate for a term of 31.5 years expiring in 2024 and has the right to purchase the facility at any time during the term of the lease at Aventis' book value. Noven has recorded both the facility and deferred revenue at amounts equal to the funds advanced by Aventis which are deferred and recognized as depreciation expense and license revenue over the life of the underlying lease. In October 1999, Novartis Pharma AG ("Novartis AG") sublicensed Aventis' rights to market (1) Noven's combination estrogen/progestin transdermal delivery system in all countries other than the United States and Japan, and (2) Noven's first generation estrogen transdermal delivery system in all countries other than the United States, Canada and Japan. In connection with the sublicense transaction, and pursuant to Noven's license agreement with Aventis, Noven received $2.7 million in cash from Aventis as Noven's share of the sublicense fees paid by Novartis to Aventis. This amount was recorded as deferred license revenue and is being recognized as license revenue over seven and one half years beginning in the fourth quarter of 1999. In November 2000, Noven entered into an exclusive license agreement with Novartis AG pursuant to which Noven granted Novartis AG the right to market Noven's second generation transdermal estrogen delivery system under the name Estradot(TM) in all countries other than the United States, Canada and Japan. The agreement also grants Novartis AG marketing rights, in its territory, to any product improvements and future generations of estrogen patches developed by Noven. Noven received an up-front license payment of $20 million upon execution of the agreement and will receive an additional milestone payment upon Novartis AG's receipt of regulatory approval for Estradot(TM) in certain European countries. The up-front payment was deferred and is being recognized as license revenue over 10 years beginning in the fourth quarter of 2000, and the milestone payment will be similarly treated if and when it is received. Noven will manufacture Estradot(TM) for Novartis AG. 4. Investment in Vivelle Ventures LLC: In 1998, Noven invested $7.5 million in return for a 49% equity interest in Novogyne. In return for a 51% equity interest, Novartis granted an exclusive sublicense to Novogyne of a license agreement with Noven (see Note 3). This sublicense assigned certain of Novartis' rights and obligations under license and supply agreements with Noven, and granted an exclusive license to Novogyne of the Vivelle(R) trademark. Noven shares in the income of Novogyne according to an established formula after an annual 49 50 preferred return of $6.1 million to Novartis. During 2000 and 1999, Novogyne produced $29.1 million and $10.7 million, respectively, of net income, and Noven recorded $9.3 million and $1.5 million, respectively, as equity in earnings of Novogyne. In 2000 and 1999, Noven received cash distributions of $2.2 million and $0.6 million, respectively, from Novogyne based on Novogyne's results of operations for the years ended December 31, 1999 and 1998, respectively. For the fiscal year ended December 31, 1998, Novogyne did not produce sufficient income under the established formula for Noven to recognize income from the operations of Novogyne. Under the terms of the agreement, however, Novogyne did generate sufficient income in 1998 to meet Novartis' preferred return. During the years ended December 31, 2000 and 1999 and the period from May 1, 1998 (Date of Inception) through December 31, 1998, Noven had the following transactions with Novogyne (in thousands): 2000 1999 1998 ------- ------- ------- Revenue: Trade product $13,220 $ 5,661 $ 4,289 Sample product and other 2,269 2,805 1,276 Royalty 3,429 2,555 1,607 ------- ------- ------- $18,918 $11,021 $ 7,172 ======= ======= ======= Expenses: Services $10,180 $ 8,367 $ 3,947 Product specific marketing expenses 4,133 2,695 1,672 ------- ------- ------- $14,313 $11,062 $ 5,619 ======= ======= ======= As of December 31, 2000 and 1999, the due from Novogyne is as follows (in thousands): 2000 1999 ------- ------- Sales of product $ 1,266 $ 1,103 Services provided by Noven 2,272 1,889 Royalty 935 1,053 Deferred profit on Novogyne inventory (1,556) (361) ------- ------- $ 2,917 $ 3,684 ======= ======= Under the terms of the joint venture agreements, Noven is responsible for the manufacture of the products, retention of samples and regulatory documentation, design and implementation of an overall marketing and sales program in the hospital and retail sales sectors of the market, including the preparation of marketing plans and sales force staffing and management, and the procurement of advertising services in connection with the marketing and promotion of the products. All other matters, including inventory control and distribution, management of marketing and sales programs for the managed care sector of the market, customer service support, regulatory affairs support and other administrative services are provided by Novartis. 50 51 The condensed Statements of Operations of Novogyne for the years ended December 31, 2000 and 1999 and for the period from May 1, 1998 (Date of Inception) through December 31, 1998 are as follows (in thousands): 2000 1999 1998 ------- ------- ------- Revenues $58,544 $34,274 $16,739 Cost of sales 9,698 6,530 3,793 Selling, general and administrative expenses 21,315 17,720 9,900 Income from operations 27,531 10,024 3,046 Interest income 1,562 661 333 ------- ------- ------- Net income $29,093 $10,685 $ 3,379 ======= ======= ======= The condensed Balance Sheets of Novogyne at December 31, 2000 and 1999 are as follows (in thousands): 2000 1999 ------- ------- Total assets (all of which are current) $41,382 $24,433 Total liabilities (all of which are current) $ 9,956 $ 9,036 Members' capital $31,426 $15,397 The joint venture operating agreement also has a buy/sell provision which allows each party to compel either the purchase of the other party's interest in Novogyne or the sale of its own interest in Novogyne at a price set by the party triggering the buy/sell provision. Either party may dissolve Novogyne following the third anniversary of the formation of Novogyne (May 2001) in the event that Novogyne does not achieve certain financial results. Noven expects that the applicable financial targets will be achieved, although no assurance can be given that unexpected events will not affect Novogyne's financial performance. Dissolution can also result from a change in control of Noven if the acquirer is a top ten pharmaceutical company (as measured by annual dollar sales). Upon dissolution, Novartis would reacquire the rights to market Vivelle(R) and Vivelle-Dot(TM) and Novogyne's other assets would be liquidated and distributed to the parties in accordance with their capital account balances as determined pursuant to the operating agreement. 5. Credit Facility: In December 2000, Noven entered into a credit agreement with a bank for a secured revolving credit facility (the "Credit Facility") providing up to the lesser of (a) $10 million or (b) the then eligible accounts receivable. The Credit Facility will terminate in April 2002. Amounts outstanding under the credit facility bear interest at LIBOR plus 1.50% (8.07% at December 31, 2000). Amounts outstanding under the Credit Facility are secured by accounts receivable and inventory. Noven pays certain fees in connection with the Credit Facility, including a quarterly commitment fee of 0.0625% of the aggregate unused portion of the Credit Facility. At December 31, 2000, there were no amounts outstanding under the Credit Facility. The terms of the Credit Facility include, among other provisions, minimum net worth, revenue and operating results requirements, as well as certain financial ratios, measured on a quarterly basis. 51 52 6. Notes Payable: In May 1999, Noven entered into a Master Finance Lease Agreement (the "Master Lease") for $1 million with a base lease term of three or four years depending upon the equipment type. The terms of the Master Lease include, among other provisions, minimum net worth, revenue and operating results requirements, as well as certain financial ratios, measured on a quarterly basis. Transactions under the Master Lease have been accounted for as financing arrangements. Long-term obligations, less installments due within one year, are summarized below (in thousands): 2000 1999 ---- ---- Borrowings under Master Lease, 8%, maturing in 2003 $402 $545 Capitalized equipment lease, 11%, maturing in 2004 26 31 Insurance installment note, 6%, maturing in 2001 177 376 ---- ---- 605 952 Less: installments due within one year 340 348 ---- ---- $265 $604 ==== ==== Principal payments on existing long-term debt for the years succeeding December 31, 2000 are $340 in 2001, $177 in 2002, $83 in 2003 and $5 in 2004. 7. Income Taxes: The components of the benefit from income taxes in 2000 and 1999 are as follows (in thousands): 2000 1999 ------- ------- Current Income Taxes Federal $ 1,251 $ 193 State 542 75 ------- ------- 1,793 268 Deferred Income Tax Benefit Federal (8,789) (4,655) State (612) (345) ------- ------- (9,401) (5,000) ------- ------- Income Tax Benefit $(7,608) $(4,732) ======= ======= 52 53 Deferred income taxes arise due to timing differences in reporting of certain income and expense items for book purposes and income tax purposes. The following table summarizes the tax effects comprising Noven's net deferred income tax asset as of December 31, 2000 and 1999 (in thousands): 2000 1999 -------- -------- Deferred Income Tax Assets: Deferred license revenue $ 8,062 $ 957 General business credit 6,052 4,922 Joint venture interest 575 501 Alternative minimum tax credit 586 185 Net operating losses -- 9,999 Other 417 389 -------- -------- Total deferred income tax assets 15,692 16,953 Deferred Income Tax Liabilities: Basis difference in fixed assets 492 423 -------- -------- Net deferred income tax asset 15,200 16,530 Valuation allowance -- (11,530) -------- -------- Net Deferred Income Tax Asset $ 15,200 $ 5,000 ======== ======== At December 31, 1999, Noven established $11.5 million in valuation allowances against its deferred income tax assets, which consisted primarily of net operating loss and research and development credit carryforwards. A portion of the carryforwards was utilized against 2000 income, and Noven recognized a deferred income tax asset of $15.2 million. Realization of the net deferred income tax asset of $15.2 million is dependent upon generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that the net deferred income tax asset will be realized based upon estimated future taxable income of Noven and, accordingly, no valuation allowance for the net deferred income tax asset was deemed necessary at December 31, 2000. At December 31, 2000, Noven had research and development credit carryforwards of $6.1 million, which will expire in 2002 through 2020. The income tax benefits derived from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options, when realized, are credited to additional paid-in capital. For the year ended December 31, 2000, Noven credited $1.7 million to additional paid-in capital related to the tax benefits from the exercise of stock options. 53 54 The difference between the statutory federal income tax rate applied to pretax income and the total income tax benefit is reconciled as follows (dollars in thousands):
2000 1999 1998 ------------------ -------------------- ------------------ AMOUNT % AMOUNT % AMOUNT % -------- ----- -------- ----- -------- ----- Income taxes at statutory rate $ 4,089 34.0 $ 1,947 34.0 $ (1,387) (34.0) Increase (decrease) in taxes: State income tax, net of federal benefits 470 3.9 (178) (3.1) -- -- Research and development expenditures (700) (5.8) 225 3.9 211 5.2 Other 63 .5 19 0.3 -- -- Establishment (reduction) of valuation allowance on deferred income tax assets (11,530) (95.9) (6,745) (117.7) 1,176 28.8 -------- ----- -------- ------- -------- ---- Income tax benefit $ (7,608) (63.3) $ (4,732) (82.6) $ -- -- ======== ====== ======== ======= ======== ====
8. Commitments and Contingencies: Noven has an employment agreement with Robert C. Strauss, its President, Chief Executive Officer and Co-Chairman, that provides for a base salary subject to cost of living increases each year and other increases and bonuses. This agreement provides for annual commitments of approximately $0.5 million and has a term extending through 2002. Noven has a formula bonus plan that includes company and individual performance goals, and Noven incurred $2.2 million, $2.1 million and $0.9 million of bonus expenses in 2000, 1999 and 1998, respectively. Under the plan, a fixed percentage of each employee's base salary is set as a target incentive bonus award for such employee. To the extent that actual company performance is equal to, exceeds or is less than the company performance targets, an employee's bonus award may be equal to, greater than or less than his target award. An employee's non-financial goals are then considered in determining his final bonus award. In 2000 and 1999, Noven met or exceeded each of the company performance goals, and in accordance with the plan formula the bonus awards to most employees were greater than their initial target awards. In September 2000, Noven entered into a Severance and Non-Competition Agreement with Steven Sablotsky, its Co-Chairman of the Board of Directors. Pursuant to the agreement, Mr. Sablotsky's employment as an officer of Noven will terminate on June 1, 2001. Noven will pay Mr. Sablotsky $1.2 million on that date, which will be amortized over the period of his three year non-competition agreement. 9. Stock Option Plans: Noven established its 1999 Long-Term Incentive Plan (the "1999 Plan") on June 8, 1999. The 1999 Plan replaced Noven's 1997 Stock Option Plan (the "1997 Plan") and no future stock option awards may be granted under the 1997 Plan. The 1999 Plan provides for the granting of up to 3,768,848 incentive and non-qualified stock options to selected individuals, including 2,768,848 shares that remained available under the 1997 Plan at the time of its termination. The terms and conditions of these options (including price, vesting schedule, term and number of shares) are determined by the Compensation and Stock Option Committee, which administers the 1999 Plan. The per share exercise price of (i) non-qualified stock options granted to directors and all other persons can not be less than the fair market value of the common stock on the date of 54 55 grant, (ii) incentive stock options granted to employees can not be less than the fair market value of the common stock on the date of grant and (iii) incentive stock options granted to employees owning in excess of 10% of Noven's issued and outstanding common stock can not be less than 110% of the fair market value of the common stock on the date of grant. Each option granted under the 1999 Plan is exercisable after the period(s) specified in the relevant option agreement, and no option can be exercised after ten years from the date of grant (or five years from the date of grant in the case of a grantee of an incentive stock option holding more than 10% of the issued and outstanding Noven common stock). At December 31, 2000, there were approximately 1,142,000 stock options outstanding under the 1999 Plan. Generally, the options vest over a period of five years, beginning one year after date of grant. The 1997 Plan, originally effective January 1, 1997, provided for the granting of up to 4,000,000 incentive and non-qualified stock options. At December 31, 2000, there were approximately 1,134,000 stock options outstanding under the 1997 Plan. The 1997 Plan is also administered by the Compensation and Stock Option Committee, and the terms and conditions of the 1997 Plan are similar to those of the 1999 Plan. Noven also has an earlier stock option plan, which had provisions similar to those of the 1997 and 1999 Plans. This plan terminated on December 31, 1996, and no additional options may be granted under this plan. At December 31, 2000, there were approximately 225,000 stock options outstanding under this plan. Noven applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its option plans. Accordingly, no compensation expense has been recognized. Had compensation cost for Noven's plan been determined based upon the fair value at the grant date consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", Noven's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts):
2000 1999 1998 ---------- ---------- ---------- Net income (loss): As reported $ 19,634 $ 10,460 $ (4,079) Pro forma $ 16,527 $ 8,412 $ (6,160) Basic earnings (loss) per share: As reported $ 0.90 $ 0.49 $ (0.19) Pro forma $ 0.75 $ 0.39 $ (0.29) Diluted earnings (loss) per share: As reported $ 0.84 $ 0.48 $ (0.19) Pro forma $ 0.71 $ 0.38 $ (0.29)
55 56 The fair value of each option granted during 2000, 1999 and 1998, is estimated as $23.44, $5.40 and $2.57, respectively, on the date of the grant using the Black Scholes option-pricing model with the assumptions listed below. 2000 1999 1998 ------- ------- ------- Volatility 84.6% 61.3% 64.5% Risk free interest rate 5.75% 5.72% 5.16% Expected life (years) 6 7 7 Stock option transactions related to the plans are summarized as follows (options and shares in thousands):
2000 1999 1998 ----------------------- --------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- ----- ------- ----- ------- ----- Outstanding at beginning of year 2,554 $ 8.32 2,026 $ 7.61 1,594 $ 8.27 Granted 626 $ 33.37 755 $ 9.54 675 $ 6.84 Exercised (634) $ 8.41 (105) $ 2.91 (56) $ 2.31 Canceled and expired (45) $ 8.06 (122) $ 8.63 (187) $ 11.89 ----- ----- ----- Outstanding at end of year 2,501 $ 14.57 2,554 $ 8.32 2,026 $ 7.57 ===== ===== ===== Options exercisable at end of year 745 $ 8.87 851 $ 8.28 656 $ 8.21 ===== ===== ===== Shares of common stock reserved 4,909 5,834 4,928 ===== ===== =====
The following table summarizes information concerning outstanding and exercisable options at December 31, 2000 (options in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ------------------------------------- RANGE OF NUMBER WEIGHTED AVERAGE NUMBER EXERCISE OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE PRICES AT YEAR END CONTRACTUAL LIFE EXERCISE PRICE AT YEAR END EXERCISE PRICE ----------- -------------- --------------------- -------------------- ----------- --------------------- $ 2.31 - 2.31 5 0.3 $ 2.31 5 $ 2.31 $ 4.19 - 6.25 969 4.3 $ 5.66 403 $ 5.85 $ 6.31 - 9.13 232 3.8 $ 8.34 79 $ 8.31 $ 10.00 - 14.38 608 4.8 $ 11.73 172 $ 12.30 $ 15.75 - 20.56 90 2.1 $ 17.08 86 $ 17.03 $ 32.06 - 41.81 597 6.9 $ 34.03 -- -- -------- ------- 2,501 4.9 $ 14.57 745 $ 8.87 ======== =======
56 57 10. 401(k) Savings Plan: On January 1, 1997, Noven established a savings plan under section 401(k) of the Internal Revenue Code (the "401(k) Plan") covering substantially all employees who have completed three months of service and have reached the age of twenty-one. This plan allows eligible participants to contribute from one to fifteen percent of their current compensation to the 401(k) Plan. Noven determines, on a year-to-year basis, the amount, if any, that it will provide as a matching contribution. For the years ended December 31, 2000, 1999 and 1998, Noven made no matching contributions. 11. Segment, Geographic and Customer Data: Noven is engaged principally in one line of business, the development and commercialization of advanced transdermal drug delivery systems, which represents more than 90% of total revenue. There were no sales or transactions between geographic areas. The following table presents information about Noven's revenues by geographic area (in thousands): 2000 1999 1998 ------- ------- ------- United States $25,386 $22,623 $15,490 Other countries 17,538 9,027 6,352 ------- ------- ------- Total Revenue $42,924 $31,650 $21,842 ======= ======= ======= Total revenue by customer of Noven, including royalty payments and license revenue (in thousands): 2000 1999 1998 ------- ------- ------- Novogyne $18,918 $11,021 $ 7,172 Novartis AG/Novartis 15,614 1,749 1,607 Aventis 7,620 18,059 11,677 Other 772 821 1,386 ------- ------- ------- Total Revenue $42,924 $31,650 $21,842 ======= ======= ======= 57 58 12. Unaudited Quarterly Condensed Financial Data (in thousands, except per share amounts):
2000 FIRST SECOND THIRD FOURTH FULL YEAR ---- -------- -------- -------- -------- --------- Revenue $ 9,603 $ 10,481 $ 11,163 $ 11,677 $ 42,924 Total operating expenses 8,418 10,374 10,215 12,570 41,577 -------- -------- -------- -------- -------- Income (loss) from operations 1,185 107 948 (893) 1,347 Equity in earnings of Novogyne 477 3,253 2,653 2,911 9,294 Interest income, net 200 267 306 612 1,385 Income tax (provision) benefit (35) (153) (282) 8,078 7,608 -------- -------- -------- -------- -------- Net income $ 1,827 $ 3,474 $ 3,625 $ 10,708 $ 19,634 ======== ======== ======== ======== ======== Basic earnings per share $ 0.08 $ 0.16 $ 0.16 $ 0.48 $ 0.90 ======== ======== ======== ======== ======== Diluted earnings per share $ 0.08 $ 0.15 $ 0.15 $ 0.45 $ 0.84 ======== ======== ======== ======== ========
1999 FIRST SECOND THIRD FOURTH FULL YEAR ---- -------- -------- -------- -------- --------- Revenue $ 7,477 $ 7,493 $ 8,060 $ 8,620 $ 31,650 Total operating expenses 6,804 6,589 6,849 7,510 27,752 -------- -------- -------- -------- -------- Income from operations 673 904 1,211 1,110 3,898 Equity in earnings of Novogyne -- -- -- 1,487 1,487 Interest income, net 52 64 77 150 343 Income tax (provision) benefit (9) (9) (50) 4,800 4,732 -------- -------- -------- -------- -------- Net income $ 716 $ 959 $ 1,238 $ 7,547 $ 10,460 ======== ======== ======== ======== ======== Basic earnings per share $ 0.03 $ 0.05 $ 0.06 $ 0.35 $ 0.49 ======== ======== ======== ======== ======== Diluted earnings per share $ 0.03 $ 0.05 $ 0.06 $ 0.34 $ 0.48 ======== ======== ======== ======== ========
58 59 REPORT OF INDEPENDENT ACCOUNTANTS To the Management Committee of Vivelle Ventures LLC d/b/a Novogyne Pharmaceuticals In our opinion, the accompanying balance sheets and the related statement of operations', members' capital and cash flows present fairly, in all material respects, the financial position of Vivelle Ventures LLC at December 31, 2000 and December 31, 1999, and the results of their operations and their cash flows for the years ended December 31, 2000 and December 31, 1999 and for the period May 1, 1998 (date of inception) through December 31, 1998 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Florham Park, New Jersey January 26, 2001 59 60 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS BALANCE SHEET AS OF DECEMBER 31, 2000 AND 1999
2000 1999 ----------- ----------- ASSETS Current assets Due from affiliate - Novartis Pharmaceuticals Corporation $35,476,621 $22,125,751 Due from Novartis Pharmaceuticals Canada, Inc. 244,688 140,396 Finished goods inventory (net of reserves of $200,000 as of December 31, 2000 and 1999) 5,660,562 2,063,121 Prepaid expenses -- 104,040 ----------- ----------- Total current assets $41,381,871 $24,433,308 =========== =========== LIABILITIES AND MEMBERS' CAPITAL Current liabilities Due to affiliate - Noven Pharmaceuticals, Inc. $ 4,472,350 $ 4,045,767 Accrued liabilities 113,120 87,492 Allowance for returns 5,370,495 4,902,438 ----------- ----------- Total current liabilities 9,955,965 9,035,697 ----------- ----------- Commitments and contingencies (see Note 5) Members' capital Capital contributions 2,332,707 4,712,352 Accumulated earnings 29,093,199 10,685,259 ----------- ----------- Total members' capital 31,425,906 15,397,611 ----------- ----------- Total liabilities and members' capital $41,381,871 $24,433,308 =========== ===========
The accompanying notes are an integral part of these financial statements. 60 61 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
2000 1999 1998 ----------- ----------- ----------- NET SALES Third parties $57,221,383 $33,285,381 $16,739,156 Novartis Pharmaceuticals Canada, Inc. 1,322,772 988,962 -- ----------- ----------- ----------- 58,544,155 34,274,343 16,739,156 COST OF SALES Third parties 9,165,457 6,060,087 3,793,410 Novartis Pharmaceuticals Canada, Inc. 532,187 470,004 -- ----------- ----------- ----------- 9,697,644 6,530,091 3,793,410 ----------- ----------- ----------- Gross profit 48,846,511 27,744,252 12,945,746 ----------- ----------- ----------- OPERATING EXPENSES Administrative expenses 1,391,446 1,387,405 552,735 Sales and marketing expenses 19,923,978 16,332,452 9,347,194 ----------- ----------- ----------- Income from operations 27,531,087 10,024,395 3,045,817 ----------- ----------- ----------- OTHER INCOME Interest income 1,562,112 660,864 333,054 ----------- ----------- ----------- Net income $29,093,199 $10,685,259 $ 3,378,871 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 61 62 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS STATEMENT OF MEMBERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 TOTAL ------------ Members' capital at May 1, 1998 -- Capital contribution by members $ 7,500,000 Net income 3,378,871 ------------ Members' capital at December 31, 1998 10,878,871 Net income 10,685,259 Distributions to members (6,166,519) ------------ Members' capital at December 31, 1999 15,397,611 Net income 29,093,199 Distributions to members (13,064,904) ------------ Members' capital at December 31, 2000 $ 31,425,906 ============ The accompanying notes are an integral part of these financial statements. 62 63 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
2000 1999 1998 ------------ ------------ ------------ OPERATING ACTIVITIES Net income $ 29,093,199 $ 10,685,259 $ 3,378,871 Changes in assets and liabilities Due from affiliate - Novartis Pharmaceuticals Corporation (13,350,870) (8,412,876) (13,712,875) Due from Novartis Pharmaceuticals Canada, Inc. (104,292) (140,396) -- Inventories (3,597,441) 1,264,424 (3,327,545) Prepaid expenses 104,040 (19,065) (84,975) Due to affiliate - Noven Pharmaceuticals, Inc. 426,583 557,041 3,488,726 Other liabilities 493,685 2,232,132 2,757,798 ------------ ------------ ------------ Net cash provided by/used in operating activities 13,064,904 6,166,519 (7,500,000) ------------ ------------ ------------ FINANCING ACTIVITIES Contribution by members -- -- 7,500,000 Distributions to members (13,064,904) (6,166,519) -- ------------ ------------ ------------ Net cash provided by/used in financing activities (13,064,904) (6,166,519) 7,500,000 ------------ ------------ ------------ Net increase in cash from above activities -- -- -- Cash and cash equivalents at beginning of year -- -- -- ------------ ------------ ------------ Cash and cash equivalents at end of year $ -- $ -- $ -- ============ ============ ============
The accompanying notes are an integral part of these financial statements. 63 64 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 1. ORGANIZATION, BUSINESS AND BASIS OF ACCOUNTING Vivelle Ventures LLC (the "Company") was organized to maintain and grow a franchise in women's health in the United States of America focusing initially on the manufacturing, marketing and sale of a 17B-estradiol transdermal patch product under the trademark "Vivelle(R)" ("Vivelle(R)"). During 1999, the Company began doing business under the name "Novogyne Pharmaceuticals". The Company is a limited liability company between Novartis Pharmaceuticals Corporation ("Novartis") and Noven Pharmaceuticals, Inc. ("Noven") (collectively referred to as the "Members"), pursuant to a Formation Agreement dated as of May 1, 1998 (date of inception). Prior to the formation of the Company, Vivelle(R) was marketed by Novartis pursuant to a license ("License Agreement") granted by Noven which owns the patent rights and know-how for Vivelle(R) and Noven had previously supplied Vivelle(R) to Novartis under a supply agreement (the "Supply Agreement"). On May 1, 1998, Novartis granted an exclusive sublicense to the Company of the License Agreement, assigned the Company certain of its rights and obligations under the Supply Agreement, and granted an exclusive license to the Company of the Vivelle(R) trademark as its contribution of capital to the Company. These assets, with a value of $7.8 million as agreed to by the Members, have been recorded by the Company at Novartis' carryover basis of zero. Noven contributed $7.5 million in cash to the Company. Pursuant to the Formation Agreement, the initial capital interests of the Company were owned 51% by Novartis and 49% by Noven. Novartis is responsible for providing distribution, administrative and marketing services to the Company, pursuant to certain other agreements. Noven is responsible for supplying Vivelle(R) and other products to the Company and for providing marketing and promotional services pursuant to certain other agreements. The Company has no discrete employees. (See Note 4.) The Company commenced selling its second generation transdermal estrogen delivery system "Vivelle-Dot(TM)" ("Vivelle-Dot(TM)") in 1999. The patent rights and know-how for Vivelle-Dot(TM) have been transferred to the Company by means of the original sublicense granted by Novartis for Vivelle(R) as discussed above. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the deductions from gross sales for allowances, returns and discounts and provisions for inventory obsolescence. CASH AND CASH EQUIVALENTS For the purposes of the Statement of Cash Flows, cash is defined as unrestricted cash balances and investment securities with original maturities of three months or less. 64 65 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 INVENTORY Inventory is stated at the lower of cost or market value utilizing the first-in, first-out method. REVENUE RECOGNITION Revenues are recognized when the products are shipped and title passes to the customer. The Company has adopted Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, the effects which are immaterial for all periods presented. Provision is made at the time of sale for discounts and estimated sales allowances. SALES ALLOWANCES Novartis records the Company's sales net of sales allowances for chargebacks, Medicaid rebates, managed healthcare rebates, cash discounts and other allowances. Novartis maintains the reserves associated with such sales allowances on behalf of the Company and pays all moneys owed and issues credits to individual customers as deemed necessary. Revenues for the years ended December 31, 2000, December 31, 1999 and for the period May 1, 1998 through December 31, 1998, are net of $6,490,180, $5,345,003 and $4,577,436, respectively, for such sales allowances. The contracts that underlie these transactions are maintained by Novartis for its business as a whole and those transactions relating to the Company are estimated. Based on an analysis of the underlying activity, the amounts recorded by the Company represents management's best estimate of these charges that apply to sales of the Company. Revenues for the years ended December 31, 2000, December 31, 1999 and the period May 1, 1998 through December 31, 1998 are net of sales returns of $3,718,688, $4,545,525 and $2,489,221, respectively. All returns relating to sales of Vivelle(R) prior to May 1, 1998 are the responsibility of Novartis. All subsequent returns are the responsibility of the Company. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising costs incurred during the years ended December 31, 2000 and 1999, and the period May 1, 1998 through December 31, 1998 were $6,255,770, $4,947,824 and $2,874,635, respectively. INCOME TAXES The Company's income, gains, losses and tax credits are passed to its Members who report their share of such items on their respective income tax returns. Accordingly, income taxes have not been provided. 65 66 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 3. OPERATING AGREEMENT The Company's Operating Agreement provides, among other things, for the following: ALLOCATION OF NET INCOME AND LOSS Net income is allocated at the end of each fiscal year in accordance with the accounting method followed by the Company for federal income tax purposes in the following order of priority: o First, to Novartis until the cumulative amount of net income allocated under the relevant provisions of the Operating Agreement equals $6.1 million annually for the current and all prior fiscal years. o Second, any remaining net income attributable to sales of Vivelle(R) for each fiscal year is to be allocated 70% to Novartis and 30% to Noven until the cumulative amount of such net income equals the product of $30 million multiplied by a fraction, the numerator of which is the aggregate net income from sales of Vivelle(R) and the denominator of which is the aggregate net sales of Vivelle(R) in that period. o Third, any remaining net income attributable to sales of Vivelle(R) for each fiscal year is to be allocated 60% to Novartis and 40% to Noven until the cumulative amount of such net income equals the product of $10 million multiplied by a fraction, the numerator of which is the aggregate net income from sales of Vivelle(R) and the denominator of which is the aggregate net sales of Vivelle(R) in that period. o Lastly, all remaining net income attributable to Vivelle(R) and all other net income, including Vivelle-Dot(TM), are to be allocated to the members in proportion to their respective percentage interests. Net loss for any fiscal year is to be allocated between the Members in proportion to their respective percentage interests, with the exception of any net loss resulting from the termination of any license or know-how which would be allocated to the Member to whom such license or know-how reverts upon termination. DISTRIBUTIONS Distributable funds are equal to the Company's Net Cash Flow during the period, as defined in the Operating Agreement, less reserves for working capital and other purposes of $3 million or as determined by the Management Committee. Distributable funds are payable to the Members quarterly or as determined by the Management Committee. Distributions are made to the Members on the same basis as the allocation of net income. During 2000, distributions of $10,836,915 were made to Novartis and $2,227,989 to Noven related to the period January 1, 1999 to December 31, 1999. In 1999, distributions of $5,544,920 were made to Novartis and $621,599 to Noven related to the period of May 1, 1998 through December 31, 1998. Distributions during the years ended December 31, 2000 and 1999 were based on taxable income and subject to approval by the Management Committee prior to payment. 66 67 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 MANAGEMENT COMMITTEE The Operating Agreement provides for the formation of a Management Committee where the Members act on any matters to be determined by them through their representatives on the Management Committee. The Management Committee has general management powers with respect to the management and operation of the business and affairs of the Company and is responsible for policy setting and approval of the overall direction of the Company. The Management Committee consists of five individuals of whom three are designated by Novartis and two by Noven. Noven is entitled to appoint a member of the Committee to act as President of the Company. A decision by the Management Committee is made by the affirmative vote of a majority of the Committee members. The Operating Agreement also provides for certain actions or decisions to require the vote of at least four of the five members of the Management Committee. Those actions or decisions include but are not limited to approval of the annual operating and capital budget, approval of the annual sales and marketing plan, amendments to the documents concerning the formation of the Company, entering into any contract for a third party sales force, incurrence of indebtedness in excess of $1 million, admitting a new member, acquiring or disposing of assets with a value in excess of $500,000 or settlement of litigation in excess of $1 million. 4. TRANSACTIONS WITH AFFILIATES SERVICES The Company relies on Novartis and Noven for providing certain services. These are detailed below. Novartis is responsible for providing the following services: o Shipment of the products, fulfillment of product orders, inventory control and distribution, processing of invoices and cash management. o Management of the overall marketing and sales program for the products in the managed care sector of the market, including but not limited to all corporate, institutional and government accounts. o Customer service support and assistance for the products. o Regulatory affairs support and assistance for the products. o Bookkeeping and accounting, administrative functions relating to the distribution and sale of the products, and assistance with tax matters, insurance coverage and treasury services. o Legal services. Charges for these services are based upon predetermined budgeted amounts that were ratified by the Management Committee of the Company. Management believes this method is a reasonable basis for determining those charges. During the year ended December 31, 2000, December 31, 1999 and the period May 1, 1998 through December 31, 1998, Novartis charged the Company $1,148,953, $905,920 and $558,824, respectively, for these services. 67 68 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 The following summarizes the transactions processed through the due from Novartis account:
FOR THE PERIOD FOR THE YEARS ENDED MAY 1, 1998 DECEMBER 31, THROUGH ------------------------------------- DECEMBER 31, 2000 1999 1998 ----------------- ------------------ ----------------- Balance at the beginning of the period $22,125,751 $13,712,875 $ -- Capital contributions by members -- -- 7,500,000 Net sales (excluding returns) 62,262,835 38,819,868 19,228,377 Sales returns processed (3,250,631) (2,132,308) -- Interest income on cash balances 1,562,112 660,864 333,054 Distributions to members (13,064,905) (6,166,519) -- Payment to Noven for inventory purchases royalties and other items (33,363,053) (21,421,674) (9,578,807) Disbursements made on behalf of the Company (280,459) (1,347,731) (4,099,849) Novartis administrative charges (1,148,953) (905,920) (558,824) Receivable from Novartis Canada transferred to the Company (244,687) (140,396) -- Other 878,611 1,046,692 888,924 ----------------- ------------------ ----------------- Total $35,476,621 $22,125,751 $13,712,875 ================= ================== =================
Noven is responsible for providing the following services: o Manufacture and packaging of the products for distribution by Novartis. o Retention of samples and regulatory documentation of the products. o Design and implementation of an overall marketing and sales program for the products in the hospital and retail sales sectors of the market, including the preparation of annual and quarterly marketing plans and sales field force staffing. o Quality control and quality assurance testing of finished goods prior to shipment to Novartis. o Procurement of advertising services in connection with the marketing and promotion of the products. During the years ended December 31, 2000, December 31, 1999 and the period May 1, 1998 through December 31, 1998, Noven charged the Company $10,179,559, $8,367,130 and $3,946,958, respectively, for these services. 68 69 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 The following represents the amounts payable to Noven related to: AS OF DECEMBER 31, ----------------------------- 2000 1999 ---------- ---------- Purchases of inventory $1,265,547 $1,103,114 Services provided by Noven 2,271,693 1,889,171 Royalties 935,110 1,053,482 ---------- ---------- Total $4,472,350 $4,045,767 ========== ========== BOOKKEEPING, ACCOUNTING AND TREASURY The books and records of the Company are maintained by Novartis. The Company's transactions are initially recorded in Novartis' general ledger and are transferred to the Company's ledger on a monthly basis with the corresponding entry being recorded as an amount due to or from Novartis. The balances of this account of $35,476,621 as of December 31, 2000, $22,125,751 as of December 31, 1999 and $13,712,875 as of December 31, 1998 represent the net balance of these transactions for the period from commencement of the Company to those dates. The Company maintains a bank account. Transactions which are processed through this account are subsequently transferred to or from Novartis' bank accounts under a cash pooling mechanism whereby the Company's bank balance is maintained at zero. Transactions with Novartis on this basis are recorded in the general ledger account referred to above. The Company received interest on amounts due from Novartis during the year ended December 31, 2000, December 31, 1999 and the period May 1, 1998 through December 31, 1998 at an average annual rate of 7%, 5% and 6%, respectively. During these periods interest of $1,562,112, $660,864 and $333,054, respectively, was earned and is reflected in the amount due from Novartis. Novartis records the accounts receivable balances due from the Company's sales in its general ledger and records these in the Company's general ledger as amounts due from Novartis. The members have agreed that Novartis is responsible for managing the receivables balances and Novartis bears the risk of the balances not being recovered in full. However, the Company records receivables for sales to Novartis Pharmaceuticals Canada, Inc. and retains the risk related to these balances. These receivables are reflected in the amount due from Novartis Pharmaceuticals Canada, Inc. on the financial statements. ROYALTIES Royalties, which are included in sales and marketing expense, are payable to Noven by the Company on the sale of Vivelle(R) and Vivelle-Dot(TM) in the United States of America. The royalty formula is based upon a percentage of the products net sales. In addition, a minimum annual royalty formula is specified. During the years ended December 31, 2000, December 31, 1999 and the period May 1, 1998 through December 31, 1998, total royalties of $3,429,288, $2,554,544 and $1,606,908, respectively, were incurred, of which $935,110, $1,053,482 and $899,235 remained payable to Noven as of December 31, 2000, December 31, 1999 and 1998, respectively. 69 70 VIVELLE VENTURES LLC d/b/a NOVOGYNE PHARMACEUTICALS NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND FOR THE PERIOD MAY 1, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 PRODUCT TRANSACTIONS Vivelle(R) and Vivelle-Dot(TM) are manufactured by Noven and sold to the Company at an agreed upon price. During the years ended December 31, 2000, December 31, 1999 and the period May 1, 1998 through December 31, 1998 the Company purchased products from Noven in the amounts of $13,220,064, $5,661,182 and $5,149,587, respectively. During the period May 1, 1998 through December 31, 1998 the Company paid Novartis $1,682,363 for inventory that had previously been supplied to Novartis by Noven under the Supply Agreement. RESEARCH AND DEVELOPMENT Noven assumes responsibility for research and development costs associated with the development of Vivelle(R), Vivelle-Dot(TM) and all future generation products. 5. COMMITMENTS AND CONTINGENCIES The Company is subject to legal proceedings, including product liability claims, related to its normal course of business. As a result of an amended and restated Supply Agreement between Novartis and Noven, Noven will supply to the Company finished goods only. The Company is obligated to purchase a nominal amount of inventory in the subsequent fiscal year. 70 EX-3.2 2 g66397ex3-2.txt BYLAWS AS AMENDED AND RESTATED AS OF 02/08/2001 1 Exhibit 3.2 BY-LAWS OF NOVEN PHARMACEUTICALS, INC. ARTICLE I - OFFICES SECTION 1. REGISTERED OFFICE -- The registered office of the Corporation shall be established and maintained at 1 American Avenue, City of Dover, in the County of Kent in the State of Delaware. SECTION 2. OTHER OFFICES -- The Corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. ARTICLE II - MEETING OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS -- Annual meetings of stockholders for the election of directors and for such other business as may properly come before the meeting, shall be held at such place, either within or without the State of Delaware and at such time and date as the Board of Directors shall determine by resolution and as shall be set forth in the notice of the annual meeting. SECTION 2. SPECIAL MEETINGS -- Special meetings of the stockholders, for any purpose, unless otherwise proscribed by statute or by the Certificate of Incorporation, may be called by the Chief Executive Office or Chairman of the Board of Directors and shall be called by the Chief Executive Officer or Secretary at the request in writing of a majority of the directors and shall be held at such place, either within or without the State of Delaware, and at such time and date as the person or persons calling the same may specify in their request. Such request shall state the purpose of the proposed meeting. No business other than that stated in the notice shall be transacted at any special meeting. SECTION 3. REMOTE MEETINGS AND REMOTE COMMUNICATIONS -- The Board of Directors may, in its sole discretion, determine that any annual or special meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication. If authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may adopt, stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication: (A) participate in any annual or special meeting of stockholders; and (B) be deemed present in person and vote at any annual or special meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that: (i) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting 2 by means of remote communication is a stockholder or proxyholder, (ii) the Corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation. SECTION 4. VOTING -- Each stockholder entitled to vote in accordance with the terms and provisions of the Certificate of Incorporation and these By-Laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. The vote for directors and, upon the demand of any stockholder, the vote upon any question before the meeting shall be by ballot. All elections for directors shall be decided by plurality vote; all other questions shall be decided by majority vote of all holders of shares of stock entitled to vote thereon which are present in person or represented by proxy at the meeting, except as otherwise provided by the Certificate of Incorporation or the laws of the State of Delaware. SECTION 5. STOCKHOLDER LIST -- The officer who has charge of the stock ledger of the Corporation shall at least 10 days before each meeting of stockholders prepare a complete alphabetical addressed list of the stockholders entitled to vote at the ensuing election, with the number of shares held by each. Said list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, at the principal place of business of the Corporation. The list shall be available for inspection at the meeting. SECTION 6. QUORUM -- Except as otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding a majority of the stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. Shares of its own stock belonging to the Corporation or to another Corporation, if a majority of shares entitled to vote in the election of directors of such other corporation is held directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, as provided in Article I, Section 9, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed. When any meeting is convened, the presiding officer, if directed by the Board 2 3 of Directors, may adjourn the meeting if (A) no quorum is present for the transaction of business, or (B) the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders (i) to consider fully information which the Board determines has not been made sufficiently or timely available to stockholders or (ii) otherwise to exercise effectively their voting rights. SECTION 7. NOTICE OF MEETINGS -- Written notice, stating the place, if any, date and time of the meeting, the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation, not less than ten nor more than sixty days before the date of the meeting. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. SECTION 8. ACTION BY CONSENT OF STOCKHOLDERS -- Any action required to be taken at any annual or special meeting of the stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its principal place of business. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required hereby to the Corporation, written consents signed by a sufficient number of holders or members to take action are delivered to the Corporation by delivery to its principal place of business A telegram, cablegram or other electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxyholder, or by a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written, signed and dated for the purposes hereof; provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the Corporation can determine: (A) that the telegram, cablegram or other electronic transmission was transmitted by the stockholder or proxyholder or by a person or persons authorized to act for the stockholder or proxyholder and (B) the date on which such stockholder or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. The date on which such telegram, cablegram or electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. No consent given by telegram, cablegram or other electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper form shall be delivered to the Corporation by delivery to its principal place of business. Notwithstanding the foregoing limitations on delivery, consents given by telegram, cablegram or other electronic transmission may be 3 4 otherwise delivered to the principal place of business of the Corporation if, to the extent and in the manner provided by resolution of the Board of Directors. Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders or members who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders or members to take the action were delivered to the Corporation as provided herein. SECTION 9. ADJOURNMENTS -- Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and, except as set forth below, notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 10. ORGANIZATION -- Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in his absence by the Chief Executive Officer, or in his absence by a Vice-President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. SECTION 11. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD -- In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which record date: (A) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty nor less than ten days before the date of such meeting; (B) in the case of determination of stockholders entitled to consent to corporate action, shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (C) in the case of a dividend or other distribution or other action, shall not be more than sixty days prior to such action. If no record date is fixed: (1) the 4 5 record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (2) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Except as provided in Article I, Section 9, a determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 12. ADVANCE NOTICE OF BUSINESS TO BE TRANSACTED AT ANNUAL MEETINGS -- (a) To be properly brought before the annual meeting of stockholders, business must be either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board (or any duly authorized committee thereof), (ii) otherwise properly brought before the meeting by or at the direction of the Board (or any duly authorized committee thereof) or (iii) otherwise properly brought before the meeting by any stockholder of the Corporation (A) who is a stockholder of record on the date of the giving of the notice provided for in this Section 11 and on the record date for the determination of stockholders entitled to vote at such meeting and (B) who complies with the notice procedures set forth in this Section 11. In addition to any other applicable requirements, including but not limited to the requirements of Rule 14a-8 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), for business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of this Section 11(a), such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. (b) To be timely, a stockholder's notice to the Secretary pursuant to clause (iii) of Section 11(a) must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days nor more than 120 days prior to the anniversary date of the date on which the Company first mailed or caused to be mailed its proxy statement for its immediately preceding annual meeting of stockholders; PROVIDED, HOWEVER, that in the event that the annual meeting is called for a date that is not within 30 days before or after the anniversary date of the immediately preceding annual meeting, notice by the stockholder in order to be timely must be so received no later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting is mailed or such public disclosure of the date of the annual meeting is made, whichever first occurs. (c) To be in proper written form, a stockholder's notice to the Secretary pursuant to clause (iii) of Section 11(a) must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, together with evidence reasonably satisfactory to the Secretary of such beneficial ownership, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and 5 6 any material interest of such stockholder in such business, (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting and (vi) any material interest of the stockholder proposing to bring such business before such meeting (or any other stockholders known to be supporting such proposal) in such proposal. (d) Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at the annual meeting of stockholders except business brought before such meeting in accordance with the procedures set forth in this Article I Section 12; PROVIDED, HOWEVER, that, once business has been properly brought before such meeting in accordance with such procedures, nothing in this Article I Section 12 shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of such meeting determines that business was not properly brought before the meeting in accordance with the foregoing procedures, the chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. ARTICLE III - DIRECTORS SECTION 1. NUMBER AND TERM -- The number of directors shall be not less than three nor more than ten as determined from time to time by the Board of Directors. The directors shall be elected at the annual meeting of the stockholders and each director shall be elected and shall qualify. Directors need not be stockholders. SECTION 2. NOMINATIONS FOR DIRECTORS -- Only persons who are nominated in accordance with the procedures set forth in this Article III Section 2 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Article III Section 2. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation (i) in the case of an annual meeting, not less than 60 days nor more than 120 days prior to the anniversary date of the date on which the Corporation first mailed or caused to be mailed its proxy statement for its immediately preceding annual meeting of stockholders; PROVIDED, HOWEVER, that in the event that the annual meeting is called for a date that is not within 30 days before or after the anniversary date of the immediately preceding annual meeting notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting is mailed or such public disclosure of the date of the annual meeting is made, whichever first occurs, or (ii) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth day following the day on which notice of the date of the special meeting is mailed or public disclosure of the date of the special meeting is made, whichever first occurs. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal 6 7 occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act, as amended (including without limitation such persons' written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder, (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder together with evidence reasonably satisfactory to the Secretary of such beneficial ownership, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Article III Section 2. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 3. RESIGNATIONS -- Any director or member of a committee may resign at any time. Such resignation shall be made in writing or by electronic transmission, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the Chief Executive Officer or Secretary. Except as aforesaid, the acceptance of a resignation shall not be necessary to make it effective. SECTION 4. VACANCIES -- If the office of any director or member of a committee becomes vacant, or a new directorship or committee membership is created, the remaining directors in office, even if less than a quorum, by a majority vote may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen. SECTION 5. REMOVAL -- Any director or directors may be removed either for or without cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote, at a special meeting of the stockholders called for the purpose and the vacancies thus created may be filled at the meeting held for the purpose of removal, by the affirmative vote of a majority in interest of the stockholders entitled to vote. SECTION 6. INCREASE OF NUMBER -- The number of directors may be increased by amendment of these By-Laws by the affirmative vote of a majority of the directors then holding office or by the affirmative vote of a majority in interest of the stockholders, at the annual meeting 7 8 or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting to hold office until the next annual election and until their successors are elected and qualify. SECTION 7. REGULAR MEETINGS -- Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times fixed by resolution of the Board of Directors, and if so fixed by resolution, notices thereof need not be given. SECTION 8. SPECIAL MEETINGS -- Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board, the Chief Executive Officer, the Secretary, or by any two members of the Board of Directors. Notice of a special meeting of the Board of Directors shall be given by the person or persons calling the meeting at least twenty-four hours before the special meeting. SECTION 9. TELEPHONIC AND ELECTRONIC MEETINGS PERMITTED -- Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting thereof by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this By-Laws shall constitute presence in person at such meeting. SECTION 10. QUORUM; VOTE REQUIRED BY ACTION -- At all meetings of the Board of Directors, a majority of the whole Board of Directors shall constitute a quorum for the transaction of business. Except in cases in which the Certificate of Incorporation or these By-Laws otherwise provide, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 11. ORGANIZATION -- Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in his absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. SECTION 12. COMPENSATION -- Directors shall not receive any stated salary for their services as directors or as members of committees, but by resolution of the board a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. SECTION 13. ACTION WITHOUT MEETING -- Any action required or permitted to be taken at any meeting of the Board of Directors or of any Committee thereof may be taken without a meeting if all members of the Board of Directors or Committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors, or Committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. 8 9 ARTICLE IV - COMMITTEES SECTION 1. COMMITTEES -- The Board of Directors may designate one or more Committees, each Committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the Committee. In the absence or disqualification of a member of a Committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee shall, to the extent provided by the Board of Directors, have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such Committee shall have the power or authority in reference to the following matter: (A) approving or adopting, or recommending to the stockholders, any action or matter expressly required by applicable law to be submitted to stockholders for approval or (B) adopting, amending or repealing any bylaw of the Corporation. SECTION 2. COMMITTEE RULES -- Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules, each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article III of the By-Laws. ARTICLE V - OFFICERS SECTION 1. OFFICERS -- The officers of the Corporation shall consist of a Chief Executive Officer and a Secretary, and shall be elected by the Board of Directors and shall hold office until their successors are elected and qualified. In addition, the Board of Directors may elect a Chairman, a Chief Financial Officer, a Treasurer, one or more Vice-Presidents and such Assistant Treasurers and Assistant Secretaries, as it may deem proper. None of the officers of the Corporation need be directors. The officers shall be elected at the first meeting of the Board of Directors after each annual meeting. More than two offices may be held by the same person. Any officer may resign at any time upon written notice or electronic transmission to the Corporation. The Board of Directors may remove any officer with or without cause at any time, but such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. SECTION 2. OTHER OFFICERS AND AGENTS -- The Board of Directors may appoint such officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such power and perform such duties as shall be determined from time to time by the Board of Directors. 9 10 SECTION 3. CHAIRMAN -- The Chairman of the Board of Directors, if one be elected, shall preside at all meetings of the stockholders and of the Board of Directors and he shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 4. CHIEF EXECUTIVE OFFICER -- The Chief Executive Officer shall be the senior officer of the Corporation and, subject to the control of the Board of Directors, shall have general and active management and control of the business and affairs of the Corporation and over its several officers, and shall see that all orders and resolutions of the Board are carried into effect. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside over meetings of the stockholders of the Corporation. SECTION 5. CHIEF FINANCIAL OFFICER -- The Chief Financial Officer shall exercise supervision over all of the financial affairs of the Corporation, and shall perform such other duties as from time to time may be assigned by the Chief Executive Officer. SECTION 6. TREASURER -- The Treasurer shall have the care and custody of all the funds of the Corporation and shall deposit such funds in such banks or other depositories as the Board, or any officer or officers, or any officer and agent jointly, duly authorized by the Board, shall, from time to time, direct or approve. He or she shall disburse the funds of the Corporation under the direction of the Board of Directors, the Chief Executive Officer and the Chief Financial Officer. He or she shall keep a full and accurate account of all moneys received and paid on account of the Corporation and shall render a statement of his or her accounts whenever the Board of Directors, the Chief Executive Officer or the Chief Financial Officer shall so request. When required by the Board of Directors, he or she shall give bonds for the faithful discharge of his or her duties in such sums and with such sureties as the Board of Directors shall approve. SECTION 7. ASSISTANT TREASURERS -- Assistant Treasurers of the Corporation, if any, in order of their seniority or in any other order determined by the Board of Directors, shall generally assist the Treasurer and perform such other duties as the Board of Directors or the Treasurer shall prescribe, and, in the absence or disability of the Treasurer, shall perform the duties and exercise the powers of the Treasurer. SECTION 8. VICE-PRESIDENT -- Each Vice-President shall have such powers and shall perform such duties as shall be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 9. SECRETARY -- The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these By-Laws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the Chief Executive Officer, or by the directors, or stockholders, upon whose requisition the meeting is called as provided in these By-Laws. He shall record all the proceedings of the meetings of the Corporation and of directors in a book to be kept for that purpose. He shall keep in safe custody the seal of the Corporation, and when authorized by the Board of Directors, affix the same to any instrument requiring it, and when so affixed, it shall be attested by his signature or by the signature of any assistant secretary. 10 11 SECTION 10. ASSISTANT SECRETARIES -- Assistant Secretaries, if any, shall be elected and shall have such powers and shall perform such duties as shall be assigned to them by the directors or the Chief Executive Officer. SECTION 11. OTHER OFFICERS -- The Board or the Chief Executive Officer may appoint such other officers and assistant officers and agents as it or he or she shall deem necessary, who shall hold their offices for such terms and shall have authority and exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors, by resolution not inconsistent with these By-Laws. ARTICLE VI - INDEMNIFICATION SECTION 1. INDEMNIFICATION -- (a) GENERAL. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, to the full extent authorized or permitted by law, as now or hereafter in effect, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person seeking indemnification did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) DERIVATIVE ACTIONS. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, to the full extent authorized or permitted by law, as now or hereafter in effect, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; PROVIDED, HOWEVER, that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability 11 12 but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) SUCCESSFUL DEFENSE. To the extent that a present or former director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) PROCEEDINGS INITIATED BY ANY PERSON. Notwithstanding anything to the contrary contained in subsections (a) or (b) above, except for proceedings to enforce rights to indemnification, the Corporation shall not be obligated to indemnify any person in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized in advance, or unanimously consented to, by the Board. (e) PROCEDURE. Any indemnification under subsections (a) and (b) above (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) above. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination (i) by a majority vote of a quorum of the directors who are not parties to such action, suit or proceeding, (ii) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, (iii) if there are no such directors, or if such directors so direct by independent legal counsel in a written opinion, or (iv) by the stockholders of the Corporation. (f) ADVANCEMENT OF EXPENSES. Expenses (including attorneys' fees) incurred by a director or an officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking in form and substance satisfactory to the Corporation by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation pursuant to this Article VI. Such expenses (including attorneys' fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Board deems appropriate. (g) RIGHTS NOT EXCLUSIVE. The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (h) INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another 12 13 corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of the General Corporation Law of the State of Delaware. (i) DEFINITION OF "CORPORATION". For purposes of this Article VI, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article VI with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (j) CERTAIN OTHER DEFINITIONS. For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves service by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation," as referred to in this Article VI. (k) CONTINUATION OF RIGHTS. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (l) REPEAL OR MODIFICATION. Any repeal or modification of this Article VI by the stockholders of the Corporation shall not adversely affect any rights to indemnification and to advancement of expenses that any person may have at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification. (m) ACTION AGAINST CORPORATION. Notwithstanding any provisions of this Article VI to the contrary, no person shall be entitled to indemnification or advancement of expenses under this Article VI with respect to any action, suit or proceeding, or any claim therein, brought or made by him against the Corporation. 13 14 ARTICLE VII SECTION 1. CERTIFICATES OF STOCK -- Every holder of stock in the Corporation shall be entitled to have a certificate in the name of the Corporation signed by the Chairman of the Board, the Chief Executive Officer or a Vice-President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation and designating the class of stock to which such shares belong. Where a certificate is countersigned (A) by a transfer agent other than the Corporation or its employee, or (B) by a registrar other than the Corporation or its employee, the signatures of such officers may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. SECTION 2. LOST CERTIFICATES -- New certificates of stock may be issued in the place of any certificate therefore issued by the Corporation, alleged to have been lost, stolen or destroyed, and the directors may, in their discretion, require the owner of the lost or destroyed certificate or his legal representatives, to give the Corporation a bond, in such sum as they may direct, to indemnify the Corporation against it on account of the alleged loss, theft or destruction of any such new certificate. SECTION 3. TRANSFER OF SHARES -- The shares of stock of the Corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other persons as the directors may designate, by who they shall be cancelled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 4. REGULATIONS -- The Board may make such rules and regulations as it may deem expedient, not inconsistent with the Certificate of Incorporation or these By-Laws, concerning the issue, transfer and registration of certificates evidencing stock of the Corporation. It may appoint, or authorize any principal officer or officers to appoint, one or more transfer agents and one or more registrars, and may require all certificates of stock to bear the signature or signatures (or a facsimile or facsimiles thereof) of any of them. The Board may at any time terminate the employment of any transfer agent or any registrar of transfers. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall cease to be such officer, transfer agent or registrar, whether because of death, resignation, removal or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed or whose facsimile signature has been placed upon such certificate or certificates had not ceased to be such officer, transfer agent or registrar. 14 15 SECTION 5. DIVIDENDS -- Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any dividends, there may be set aside any funds of the Corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper, for working capital or a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interest of the Corporation. SECTION 6. SEAL -- The corporate seal shall be circular in form and shall contain the name of the Corporation, the year of its creation and the words "CORPORATE SEAL DELAWARE." Said seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced. SECTION 7. FISCAL YEAR -- The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. SECTION 8. CHECKS -- All checks, drafts, or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by an officer or agent of the Corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 9. NOTICE AND WAIVER OF NOTICE -- Whenever any notice is required by these By-Laws to be given, personal notice is not meant unless expressly stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at his address as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such mailing. Without limiting the manner by which notice otherwise may be given effectively to stockholders, whenever any notice is required by these By-Laws to be given any notice so required shall also be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and such inability becomes known to the secretary or an assistant secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given pursuant to electronic transmission shall be deemed given: (A) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (B) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (C) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (1) such posting and (2) the giving of such separate notice; and (D) if by any other form of electronic transmission, when directed to the stockholder. 15 16 Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by statute. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the Corporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to said notice or an electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed proper notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transactions of any business because the meeting is not lawfully called or convened. SECTION 10. INTERESTED DIRECTORS; QUORUM -- No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely of this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (A) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors constitute less than a quorum; or (B) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (C) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. SECTION 11. FORM OF RECORDS -- Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. SECTION 12. VOTING OF STOCK HELD -- Unless otherwise provided by resolution of the Board of Directors, the Chief Executive Officer may from time to time appoint an attorney or attorneys or agent or agents of the corporation, in the name and on behalf of the Corporation, to cast the vote that the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation, any of whose securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation, or to consent in writing to any action by any such other corporation; and the Chief Executive Officer shall instruct the person or persons so appointed as to the manner of casting such votes or giving such consent and may execute or cause to be executed on behalf of the Corporation, and under its corporate seal or otherwise, such 16 17 written proxies, consents, waivers or other instruments as may be necessary or proper in the premises. In lieu of such appointment, the Chief Executive Officer may himself or herself attend any meetings of the holders of shares or other securities of any such other corporation and there vote or exercise any or all power of the Corporation as the holder of such shares or other securities of such other corporation. ARTICLE VIII - AMENDMENTS These By-Laws may be altered and repealed and By-Laws may be made at any annual meeting of the stockholders or at any special meeting thereof, if notice thereof is contained in the notice of such special meeting, by the affirmative vote of a majority of the stock issued and outstanding or entitled to vote thereat, or by the Board of Directors at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice thereof is contained in the notice of such special meeting. As of February 8, 2001 /s/ Jeffrey F. Eisenberg ------------------------------------------ Jeffrey F. Eisenberg, Corporate Secretary 17 EX-10.23 3 g66397ex10-23.txt CREDIT AGREEMENT DATED 12/5/2000 1 Exhibit 10.23 CREDIT AGREEMENT BETWEEN SUNTRUST BANK AND NOVEN PHARMACEUTICALS, INC. DECEMBER 5, 2000 2 CREDIT AGREEMENT DATED AS OF DECEMBER 5, 2000 This CREDIT AGREEMENT is made and entered into as of the date set forth above by and between NOVEN PHARMACEUTICALS, INC., a Delaware corporation authorized to transact business in Florida ("Borrower"), and SUNTRUST BANK ("Bank"). For good and valuable consideration, the receipt of which is hereby acknowledged, Borrower and Bank hereby agree as follows: ss.1. TERMINOLOGY AND INTERPRETATION. ss.1.1 DEFINITIONS OF CAPITALIZED TERMS. When used herein, each capitalized term listed below shall have the meaning indicated below: "Account" shall mean any account (as that term is defined in the Uniform Commercial Code as in effect, from time to time, in the State of Florida) and any trade acceptance, note, letter of credit or other instrument customarily delivered in payment for a sale of goods or rendering of services by Borrower. "Acquisition" shall mean the acquisition of (i) a controlling equity interest in another Person (including the purchase of an option, warrant or convertible or similar type security to acquire such a controlling interest at the time it becomes exercisable by the holder thereof), whether by purchase of such equity interest or upon exercise of an option or warrant for, or conversion of securities into, such equity interest, or (ii) assets of another Person which constitute all or substantially all of the assets of such Person. "Advance" shall mean an advance made by Bank to Borrower pursuant to this Agreement. "Affiliate" shall mean any Person (i) which, directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, Borrower; or (ii) which beneficially owns or holds 10 percent or more of the aggregate voting rights for all classes of outstanding Voting Stock (or in the case of a Person which is not a corporation, 10 percent or more of the aggregate voting rights of such Person) of Borrower; or 10 percent or more of any class of the outstanding Voting Stock (or in the case of a Person which is not a corporation, 10 percent or more of the aggregate voting rights of such Person) of which is beneficially owned or held by Borrower (as used in the foregoing definition, the term "control" means, with respect to a Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of Voting Stock, by contract or otherwise). "Agreement" shall mean this Credit Agreement, as amended from time to time. 3 "Agreement Date" shall mean the date as of which this Agreement is dated. "Agreement Termination Date" shall mean the date on which the Commitment Termination Date shall have occurred and Borrower shall have fully, finally and irrevocably paid and satisfied all Obligations. "Applicable Law" shall mean (a) all applicable common law and principles of equity and (b) all applicable provisions of all (i) constitutions, statutes, rules, regulations and orders of Governmental Authorities, (ii) Governmental Approvals and (iii) orders, decisions, judgments and decrees of all courts and arbitrators. "Authorized Representative" shall mean any of the President, Chief Executive Officer, Chief Financial Officer or Executive Director - Finance of Borrower or, with respect to financial matters, the Chief Financial Officer or Executive Director - Finance of Borrower, or any other Person expressly designated by the Board of Directors of Borrower (or the appropriate committee thereof) as an Authorized Representative, as set forth from time to time in a certificate in a form prescribed by Bank. "Borrowing Account" shall mean a demand deposit account established by Borrower with Bank (or any substitute account established by Borrower with Bank). "Borrowing Base Certificate" shall mean a certificate of an Authorized Representative in a form prescribed by Bank. "Borrowing Notice" shall mean a notice delivered by an Authorized Representative in connection with an Advance in a form prescribed by Bank. "Business Day" shall mean a day (other than a Saturday) on which most banks are open for general commercial business in Miami, Florida ("day", as used herein, means a calendar day). "Capital Securities" shall mean, with respect to any Person, any shares of capital stock of such Person or any security convertible into, or any option, warrant or other right to acquire, any shares of capital stock of such Person. "Change of Control" shall mean any "person" or "group" (each as used in ss.ss.13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934) other than Steven Sablotsky (and/or any trusts or other entities owned or controlled by him or them) either (i) becomes the "beneficial owner" (as defined in Rule 13d-3 of the Securities Exchange Act of 1934), directly or indirectly, of Voting Stock of Borrower (or securities convertible into or exchangeable for such Voting Stock) representing more than 50 percent of the combined voting power of all Voting Stock of Borrower or (ii) otherwise attains the ability, through an express contractual arrangement, to elect a majority of the board of directors of Borrower. 2 4 "Change of Management" shall mean Robert Strauss' ceasing to be a senior, active manager of Borrower. "Code" shall mean the Internal Revenue Code of 1986, as amended and in effect from time to time. "Collateral" shall have the meaning given that term in the Security Agreement. "Commitment Termination Date" shall mean April 30, 2002. "Consequential Loss" shall mean, with respect to any prepayment of all or part of an Advance, any loss or expense actually incurred by Bank (by reason of liquidation or reemployment of deposits or other funds acquired by Bank to make, continue or maintain all or any part of the principal amount prepaid) as a result of such prepayment. "Consistent Basis" shall mean, in reference to GAAP, that the accounting principles observed in such period are comparable in all material respects to those applied in the preparation of the audited financial statements of Borrower referred to in ss.7.2(a). "Contract" shall mean an indenture, agreement (other than this Agreement and any other Credit Document), other contractual restriction, lease, instrument (other than the Note), certificate of incorporation or charter, or bylaw. "Copyright" shall mean any of the following: any copyright or general intangible of like nature (whether registered or unregistered), any registration or recording thereof, and any application in connection therewith, including any registration, recording and application in the United States Copyright Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof. "Copyright License" shall mean all rights under any written agreement granting any right to use any Copyright or Copyright registration. "Credit Documents" shall mean this Agreement, the Note, the Security Agreement, any other documents delivered by Borrower to Bank in connection with this Agreement, all as amended from time to time. "Debt" shall mean any of the following: (i) indebtedness or liability for borrowed money, (ii) obligations evidenced by bonds, notes, or other similar instruments, (iii) obligations for the deferred purchase price of property or services (excluding trade obligations incurred in the ordinary course of Borrower's business), (iv) obligations as lessee under capital leases, (v) current liabilities in respect of unfunded vested benefits 3 5 under plans covered by the Employee Retirement Income Security Act of 1974, as amended, (vi) obligations under letters of credit or acceptance facilities, (vii) all guarantees, endorsements (other than for collection or deposit in the ordinary course of business) and other contingent obligations to purchase, to provide funds for payment, or otherwise to assure creditors against loss, and (viii) obligations secured by any mortgage, lien, pledge or security interest or other charge or encumbrance on property, whether or not the obligations have been assumed. "Default" shall mean any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived (or, in the case of a judgment, action or proceeding, dismissed), become an Event of Default. "Default Rate" shall mean a floating per annum rate equal to 2.00 percent above the rate then applicable to Advances hereunder. "Deferred Revenue" shall mean, as of any date, the aggregate portions of lump sum payments which Borrower shall have theretofore received in connection with licensing transactions but which, pursuant to GAAP or requirements of the Securities and Exchange Commission, it shall not have theretofore recognized as current income. "Dollars" and "$" shall mean lawful money of the United States of America. "Eligible Account" shall mean, at any particular time, any Account which is then owed to Borrower based on Borrower's sale in the ordinary course of its business of goods that have theretofore been shipped or delivered by it to the applicable account debtor, which is evidenced by an invoice or other similar written billing, which is a valid, legally enforceable obligation of the account debtor thereunder, which represents an arms-length, bona fide transaction completed in accordance with the terms and provisions contained in any documents related thereto, and in which Bank has a valid, perfected, first-priority security interest securing the Obligations, excluding (a) any Account that is then outstanding 90 days or more from its invoice date or that is owed by an account debtor which has filed or had filed against it a bankruptcy petition, (b) any Account that is owed by an account debtor who is an employee or Affiliate (other than the Novogyne Joint Venture) of Borrower, (c) any Account that is subject to asserted setoff, credit (other than customary discount for prompt payment and other than amounts then owed by Borrower to the obligors of those Accounts) or dispute, (d) any Account that is owed by a governmental entity (unless Bank is reasonably satisfied that all steps have been taken under the Federal Assignment of Claims Act or other Applicable Law to ensure that, after an Event of Default and notification by Bank to such account debtor, such account debtor will be obligated to make payments on such Account directly to Bank) or by a Person residing or headquartered outside the United States (other than Novartis or Aventis, S.A. or any of their respective successors or Affiliates or such other Persons as Bank may approve in writing from time to time), (e) any Account that is evidenced by a trade 4 6 acceptance, note or other instrument unless such instrument is then in Bank's possession and endorsed in blank or to Bank, and (f) any Account that Bank determines in its reasonable discretion to be uncollectible, difficult to collect or otherwise unsatisfactory for any reason (which determination shall be conclusive and binding on Borrower). Bank may determine on a daily basis whether a particular Account is an Eligible Account based on the foregoing criteria, and if an Account ceases to meet any of such criteria, it shall immediately cease to be an Eligible Account for so long as such criteria are not met. "Eligible Accounts Amount" shall mean, at any particular time, (a) the total amount then owed to Borrower with respect to Eligible Accounts less (b) the total amount then owed by Borrower to the obligors of those Eligible Accounts. "Employee Benefit Plan" shall mean any employee benefit plan within the meaning of Section 3(3) of ERISA which (i) is maintained for employees of Borrower or any of its ERISA Affiliates or is assumed by Borrower or any of its ERISA Affiliates in connection with any Acquisition or (ii) has at any time been maintained for the employees of Borrower or any current or former ERISA Affiliate. "Environmental Law" shall mean any federal, state or local statute, law, ordinance, code, rule, regulation, order, decree, permit or license regulating, relating to, or imposing liability or standards of conduct concerning, any environmental matters, conditions, protection or conservation, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; the Superfund Amendments and Reauthorization Act of 1986, as amended; the Resource Conservation and Recovery Act, as amended; the Toxic Substances Control Act, as amended; the Clean Air Act, as amended; the Clean Water Act, as amended; together with all regulations promulgated thereunder, and any other "Superfund" or "Superlien" law. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as in effect from time to time. "ERISA Affiliate", shall mean, with respect to Borrower, any Person or trade or business which is a member of a group which is under common control with Borrower, and which, together with Borrower, is treated as a single employer within the meaning of Section 414(b) and (c) of the Code. "Event of Default" shall have the meaning given it in ss.8.1. "Facility Limit" shall mean, at any particular time, the lesser of (a) $10,000,000 and (b) the then Eligible Accounts Amount. "Fiscal Year" shall mean the twelve-month fiscal period of Borrower commencing on January 1 of each calendar year and ending on December 31 of such calendar year. 5 7 "GAAP" shall mean accounting principles that are consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, as in effect in the United States from time to time. "Governmental Approval" shall mean an authorization, consent, approval, license or exemption of, registration or filing with, or report or notice to, any Governmental Authority, including, without limitation, any such approval required under ERISA or by the PBGC. "Governmental Authority" shall mean any Federal, state, municipal, national or other governmental department, commission, board, bureau, court, agency or instrumentality or political subdivision thereof or any entity or officer exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any government or any court, in each case whether associated with the United States of America, a state thereof, or a foreign entity or government. "Hazardous Material" shall mean any pollutant, contaminant or hazardous, toxic or dangerous waste, substance or material (including without limitation petroleum products, asbestos-containing materials and lead) the generation, handling, storage, transportation, disposal, treatment, release, discharge or emission of which is subject to any Environmental Law. "Information" shall mean written data, services, reports, statements (including, but not limited to, financial statements delivered pursuant to or referred to in ss.ss.7.1(a) and 7.1(b)), opinions of counsel, documents and other written information, whether, in the case of any such in writing, it was prepared by Borrower or any other Person on behalf of Borrower and delivered by Borrower to Bank. "Intangible Assets" shall mean those assets of Borrower which are: (1) deferred assets, other than prepaid insurance, (2) Intellectual Property and other similar assets which would be classified as intangible assets on a balance sheet of Borrower prepared in accordance with GAAP (but excluding Borrower's investment in the Novogyne Joint Venture and assets of the type comprising the category "Deposits and Other Assets" on Borrower's Form 10-Q dated March 31, 2000), (3) unamortized debt, discount and expense, and (4) assets located outside of the United States. "Intellectual Property" shall mean all licenses, Patents, Copyrights, Trademarks, trade names and customer lists in which Borrower has any interest and all technology, know-how and processes relating to any inventory of Borrower. "Interest Period" shall mean successive one-month periods each beginning on the first Business Day of a month (or, in the case of the initial Interest Period, the day on which 6 8 the initial Advance is made) and each ending when the next one begins (or, in the case of the final Interest Period, on the Commitment Termination Date). "Leverage Ratio" shall mean, as of any date, the ratio of (i) Total Liabilities as of that date to (ii) Tangible Net Worth as of that date. "LIBOR Rate" shall mean, with respect to any Interest Period, the per annum London interbank offered rate (rounded upwards to the nearest 1/100 of 1.00 percent if not already a whole multiple of that fraction) for 30-day or one-month Dollar deposits on the first day of such Interest Period (or, if such first day is not a Business Day, the immediately preceding Business Day) as determined by Bank based on quotations appearing in or on Telerate Page 3750, the Reuters Screen LIBOR or LIBO Page, THE WALL STREET JOURNAL's "Money Rates" section or another recognized source. "Lien" shall mean any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any properties or assets (other than licenses granted by Borrower in the ordinary course of its business). "Material Adverse Effect" shall mean any material and adverse effect (whether occasioned by one or a number of concurrent events) upon (a) Borrower's assets, business operations, properties or condition, financial or otherwise, or (b) the ability of Borrower to make payment as and when due of all or any part of the Obligations. "Net Income" shall mean, with respect to any quarter of any Fiscal Year, the net income (loss) of Borrower for such quarter, reflected in the "Net Income" section of the consolidated statement of operations of Borrower determined in accordance with GAAP. "Net Revenue" shall mean, with respect to any quarter of any Fiscal Year, the amount that is reflected in the "Total Revenue" section of the consolidated statement of operations of Borrower and that is properly recognized as revenue in such quarter in accordance with GAAP. "Note" shall mean the Revolving Promissory Note, of even date herewith, made by Borrower to Bank's order in the principal amount of $10,000,000, and any modification, renewal or consolidation thereof or substitute therefor. "Novogyne Joint Venture" shall mean Vivelle Ventures, LLC, a Delaware limited liability company established pursuant to the Formation Agreement, dated as of May 1, 1998, by and between Borrower and Novartis Pharmaceuticals Corporation. "Novogyne Joint Venture Agreement" shall mean the Operating Agreement of Vivelle Ventures, LLC, dated as of May 1, 1998, between Borrower and Novartis Pharmaceuticals Corporation. 7 9 "Obligations" shall mean all indebtedness, liabilities, obligations and duties of Borrower to Bank arising under or in connection with this Agreement, the Note or any other Credit Documents, direct or indirect, absolute or contingent, due or not due, in contract or tort, liquidated or unliquidated, arising by operation of law or otherwise, now existing or hereafter arising, and whether or not for the payment of money or the performance or non-performance of any act, including, but not limited to, all actual damages which Borrower may owe to Bank by reason of any breach by Borrower of any Representation and Warranty, covenant, agreement or other provision of this Agreement or any of the other Credit Documents. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Patent" shall mean any of the following: (a) patents and letters patent of the United States or any other country, and all registrations and recordings thereof and applications therefor, including registrations, recordings and applications in the United States Patent and Trademark Office or an any similar office or agency of the United States, any state or territory thereof, or any other country, and (b) all reissues, continuations or extensions of any of the foregoing. "Patent License" shall mean all rights under any written agreement granting any right with respect to any invention on which a Patent is in existence. "Pension Plan" shall mean any employee pension benefit plan within the meaning of Section 3(2) of ERISA, other than a Multiemployer Plan, which is subject to the provisions of Title IV or ERISA or Section 412 of the Code and which (i) is maintained for employees of Borrower or any of its ERISA Affiliates or is assumed by Borrower or any of its ERISA Affiliates in connection with any Acquisition or (ii) has at any time been maintained for the employees of Borrower or any current or former ERISA Affiliate. "Permitted Liens" shall have the meaning given that term in ss.5.5. "Person" shall mean an individual, corporation, partnership, limited liability company, trust or unincorporated organization or a government or any agency or political subdivision thereof. "Prime Rate" shall mean Bank's Prime Rate as quoted or otherwise established by Bank from time to time (or, if Bank ceases to quote or otherwise establish a Prime Rate, a comparable index selected by Bank) (the Prime Rate is purely a discretionary benchmark and is not necessarily the lowest or most favorable rate at which Bank extends credit to its customers). "Prohibited Transaction" shall mean a transaction that is prohibited under Section 4975 of the Code or Section 406 of ERISA and not exempt under Section 4975 of the Code or Section 408 of ERISA. 8 10 "Rate Hedging Obligations" shall mean any and all obligations and liabilities of Borrower to Bank, whether absolute or contingent and however and whenever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including but not limited to Dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts, warrants and those commonly known as interest rate "swap" agreements; and (ii) any and all cancellations, buybacks, reversals, terminations or assignments of any of the foregoing. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time, and any regulation successor thereto. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time, and any regulation successor thereto. "Representation and Warranty" shall mean each representation and warranty made by Borrower pursuant to or under (a) ss.4 or any other provision of this Agreement or any other Credit Document, (b) any amendment of or waiver or consent under this Agreement, (c) any Schedule to this Agreement or any such amendment, waiver or consent, or (d) any statement contained in any certificate, financial statement, or other instrument or document delivered by or on behalf of Borrower pursuant to any Credit Document, whether or not (except as expressly provided to the contrary herein), in the case of any representation or warranty referred to in clause (a), (b), (c) or (d) of this definition, the information that is the subject matter thereof is within the knowledge of Borrower. "Security Agreement" shall mean the Security Agreement executed by Borrower in favor of Bank as of the date hereof, as amended or restated from time to time. "Security Interests" shall mean the security interests, liens, pledges and collateral assignments created by the Security Agreement. "Single Employer Plan" shall mean any employee pension benefit plan covered by Title IV of ERISA in respect of which Borrower or any Subsidiary is an "employer" as described in Section 4001(b) of ERISA and which is not a Multiemployer Plan. "Solvent" shall mean, when used with respect to any Person, that at the time of determination: (a) the fair value of its assets (both at fair valuation and at present fair saleable value on an orderly basis) is in excess of the total amount of its liabilities, 9 11 including contingent Obligations; (b) it is then able and expects to be able to pay its debts as they mature; and (c) it has capital sufficient to carry on its business as conducted and as proposed to be conducted. "Subsidiary" shall mean any corporation or other entity in which 50 percent or more of its outstanding Voting Stock or 50 percent or more of all equity interests is owned directly or indirectly by Borrower and/or by one or more of Borrower's Subsidiaries. "Tangible Net Worth" shall mean, as of any date, the total stockholder's equity of Borrower (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) as reflected in the "Stockholders' Equity" section of the balance sheet of Borrower prepared as of such date in accordance with GAAP, less the aggregate book value of Intangible Assets, less the amount of Accounts owed by officers or employees of Borrower. "Tax" shall mean any federal, state or foreign tax, assessment or other governmental charge or levy (including any withholding tax) upon a Person or upon its assets, revenues, income or profits other than income and franchise taxes imposed upon Bank by the federal government or the State of Florida (or any political subdivision thereof). "Termination Event" shall mean: (i) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder (unless the notice requirement has been waived by applicable regulation); or (ii) the withdrawal of Borrower or any ERISA Affiliate from a Pension Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA; or (iii) the termination of a Pension Plan, the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA; or (iv) the institution of proceedings to terminate a Pension Plan by the PBGC; or (v) any other event or condition which would constitute grounds under Section 4042(a) of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; or (vi) the partial or complete withdrawal of Borrower or any ERISA Affiliate from a Multiemployer Plan; or (vii) the imposition of a Lien pursuant to Section 412 of the Code or Section 302 of ERISA; or (viii) any event or condition which results in the reorganization or insolvency of a Multiemployer Plan under Section 4241 or Section 4245 of ERISA, respectively; or (ix) any event or condition which results in the termination of a Multiemployer Plan under Section 4041A of ERISA or the institution by the PBGC of proceedings to terminate a Multiemployer Plan under Section 4042 of ERISA. "Total Liabilities" shall mean, as of any date, the total liabilities which are reflected as "Current Liabilities" and "Long-Term Liabilities" on the balance sheet of Borrower prepared as of such date in accordance with GAAP. "Trademark" shall mean any of the following: (a) trademarks, trade names, 10 12 corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature (whether registered or unregistered), now owned or existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof; and (b) all reissues, extensions or renewals thereof. "Trademark License" shall mean all rights under any written agreement now owned or hereafter acquired by Borrower granting any right to use any Trademark. "Unfunded Benefit Liabilities" shall mean, with respect to any Plan at any time, the amount of unfunded benefit liabilities of such Plan at such time as determined under Section 4001(18) of ERISA. "Voting Stock" shall mean, with respect to any Person, Capital Securities of such Person entitling the holder thereof to vote in the election of directors of such Person. ss.1.2 OTHER DEFINITIONAL AND INTERPRETIVE PROVISIONS. (a) When used in this Agreement, "herein", "hereof" and "hereunder" and words of similar import shall refer to this Agreement as a whole and not to any particular section or subsection of this Agreement, and "Section" (and/or "ss.") or "subsection" and "Schedule" and "Exhibit" shall refer to sections and subsections of, and Schedules and Exhibits to, this Agreement unless otherwise specified. (b) Whenever the context so requires, when used in this Agreement the neuter gender shall include the masculine or feminine, and the singular number shall include the plural, and vice versa. (c) In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." (d) The words "includes" and "including" when used herein are not limiting. (e) When used herein, unless specifically provided herein otherwise, the phrase "acceptable to Bank" or "satisfactory to Bank" shall mean "acceptable and satisfactory to Bank in its sole and absolute discretion." (f) Each term defined in Article 1 or Article 9 of the Florida Uniform Commercial Code shall have the meaning given to it therein unless otherwise defined herein, except to the extent that the Uniform Commercial Code of another jurisdiction is 11 13 controlling, in which case such term shall have the meaning given to it in the Uniform Commercial Code of the applicable jurisdiction. ss.1.3 ACCOUNTING TERMS AND MATTERS. Unless the context otherwise requires, all accounting terms herein (including capitalized terms) that are not specifically defined herein shall be interpreted and determined under GAAP applied on a Consistent Basis. Unless otherwise specified herein, all accounting determinations hereunder and all computations utilized by Borrower in complying with the covenants contained herein shall be made, and all financial statements requested to be delivered hereunder shall be prepared, in accordance with GAAP applied on a Consistent Basis, except, in the case of such financial statements, for departures from GAAP that may from time to time be approved in writing by the independent certified public accountants who are at the time, in accordance with ss.7, reporting on the financial statements of Borrower. ss.1.4 REPRESENTATIONS AND WARRANTIES. All Representations and Warranties shall be made at and as of the Agreement Date, at and as of the time of each Advance, and, in addition, in the case of any particular Representation and Warranty, at such other time or times as such Representation and Warranty is made or deemed made in accordance with the provisions of this Agreement or the document pursuant to, under, or in connection with which such Representation and Warranty is made or deemed made, except to the extent that any such Representation or Warranty expressly states that it relates to a different specified date. ss.1.5 CAPTIONS. Section and subsection captions in this Agreement are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. ss.1.6 NEUTRAL INTERPRETATION. This Agreement and each other Credit Document has been thoroughly reviewed by counsel for Borrower and the Subsidiaries. No provision of this Agreement or other Credit Document shall be construed less favorably to Bank because it was drafted by Bank's counsel. ss.1.7 SEVERABILITY, CONFLICTS, ETC. Any provision of any Credit Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. It is the intention of the parties to this Agreement that if any provision of any Credit Document is capable of two constructions, one of which would render the provision void and the other of which would render the provision valid, the provision shall have the meaning which renders it valid. 12 14 ss.2. GENERAL TERMS. ss.2.1 COMMITMENT. Bank agrees, upon and subject to the terms and conditions hereinafter set forth, to make Advances to Borrower from time to time during the period from the Agreement Date to the Commitment Termination Date. ss.2.2 LIMITS. At no time shall the aggregate principal amount of Advances outstanding exceed the then Facility Limit. Moreover, during a period of 30 consecutive days between the Agreement Date and the Commitment Termination Date, Borrower shall, by repaying all Obligations prior to the beginning of that period and borrowing no additional Advances during that period, cause the amount of the Obligations outstanding to be zero at all times during that period. ss.2.3 USE OF ADVANCES. Each Advance shall be used for Borrower's general corporate purposes (including working capital and capital expenditures). ss.2.4 MAKING OF ADVANCES. Each Advance shall be made on the basis of written notice from Borrower to Bank specifying for such Advance the date thereof, the amount thereof, and any other information required under ss.2. Bank reserves the right to require any such notice to be made at least two Business Days before the date of the Advance requested by it. Each such notice shall be given by means of a writing reasonably satisfactory to Bank. Each notice requesting an Advance shall be irrevocable and binding on Borrower; and Borrower shall indemnify Bank against any loss or expense incurred by Bank as a result of any failure to fulfill on or before the date specified for such Advance the applicable conditions set forth in ss.3, including without limitation any loss or expense actually incurred by Bank by reason of the liquidation or reemployment of deposits or other funds acquired or held by Bank to fund the Advance when such Advance, as a result of such failure, is not made on such date. Bank shall make each Advance available to Borrower on the date specified by Borrower in accordance with this ss.2.4, upon fulfillment of the applicable conditions set forth in ss.3, by crediting the Borrowing Account, except that Bank may, in its discretion, apply all or any part of any Advance to repay any Obligations. ss.2.5 INTEREST RATES AND PAYMENT. (a) Interest shall accrue on the outstanding principal amount of Advances, during each Interest Period, at a per annum rate equal to 1.50 percent above the LIBOR Rate for that Interest Period. Borrower shall pay such accrued interest to Bank in arrears on the first Business Day of each calendar month and at maturity. Bank is hereby irrevocably authorized to debit any account of Borrower with Bank to make any interest payment on its due date. Nothing herein to the contrary withstanding, interest shall accrue on any overdue principal of Advances, fees or other Obligations at a floating per annum rate equal to the Default Rate and be payable on demand. (b) If Bank determines that for any period of time it is impossible or unfeasible for it to obtain funds in the London interbank market and so notifies Borrower, the outstanding principal amount of Advances shall, prior to their maturity, bear interest during 13 15 that period at a floating per annum rate equal to .50 percent below the Prime Rate. ss.2.6 MANDATORY REPAYMENT OF ADVANCES. (a) AT MATURITY. All Advances then outstanding shall mature and become immediately due and payable in full on the Commitment Termination Date. (b) PRIOR TO MATURITY. If at any time any of the limitations set forth in ss.2.2 are exceeded, Borrower shall, within two Business Days after Bank's demand, prepay the Advances in the amount of the excess. Nothing in this ss.2.6(b) shall be construed to restrict Bank's right to accelerate the Obligations or pursue its other remedies under ss.8 based on a limitation in ss.2.2 being exceeded. ss.2.7 OPTIONAL PREPAYMENTS OF ADVANCES. Borrower may, at any time and from time to time, upon one Business Day's advance notice, prepay the Advances in whole or in part without premium or penalty, except that any prepayment of an Advance shall be in a principal amount of a whole multiple of $100,000, and except that no prepayment shall be made on other than the last day of an Interest Period unless the payment is accompanied by the applicable Consequential Loss (as computed by Bank). Amounts to be prepaid shall irrevocably be due and payable on the date specified in the applicable notice of prepayment, together with interest thereon. Amounts prepaid in respect of Advances may be reborrowed, subject to the terms and conditions hereof. Borrower shall also have the right, upon one Business Day's advance notice, to prepay the Advances in full and terminate this Agreement, provided that (i) such prepayment shall be subject to the provisions hereinabove set forth with respect to prepayment, (ii) Borrower must fully prepay all Advances together with all other outstanding Obligations, and (iii) Borrower shall remit a pro rata payment of the commitment fee specified in ss.2.8, calculated to the date of receipt by Bank of the full payment of the Advances and other Obligations, and (iv) the written notice from Borrower must specify that Borrower desires to terminate this Agreement and prepay in full the Advances. ss.2.8 FACILITY AND COMMITMENT FEES. (a) Borrower shall pay to Bank a non-refundable facility fee in the amount of $10,000 on the Agreement Date. (b) Within 5 Business Days of being invoiced therefor, Borrower shall pay to Bank, with respect to each quarter of each Fiscal Year, a commitment fee equal to 0.0625 percent multiplied by the average daily amount by which the Facility Limit (based on the Eligible Accounts Amount on the first day of that quarter) exceeds the outstanding principal amount of Advances during that quarter. ss.2.9 PAYMENTS AND COMPUTATIONS. (a) Borrower shall make each payment hereunder by 11:00 a.m. (Miami, Florida time) on the day when due, in lawful money of the United States of America and immediately available funds without setoff or deduction of 14 16 any kind, to Bank at its address referred to in ss.9.9 (or another address of which Bank gives Borrower notice pursuant to ss.9.9). (b) All computations of interest, commissions and fees hereunder shall be made by Bank on the basis of a year of 360 days and the actual number of days (including the first day but excluding the last day) elapsed in the period for which such interest, commission or fee is payable. Payments received hereunder shall be applied first against interest and any lawful charges accrued but unpaid and the remainder, if any, against outstanding principal. If any interest payment required to be made hereunder is not made within 10 days after its due date, Borrower shall pay Bank on demand a late charge equal to 5.00 percent of the amount of the payment. Each late charge is intended to compensate Bank for administrative and other costs associated with not receiving a payment when due and is neither a penalty nor interest. (c) Whenever any payment to be made under this Agreement or any other Credit Document (as defined below) shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be reflected in the computation of interest, commissions or fees, as the case may be. (d) Borrower irrevocably authorizes Bank -- if and to the extent any payment is not made to Bank when due hereunder or under any other agreement relating to any Advance and any applicable grace period has expired -- to charge from time to time against a demand account in Borrower's name (which Borrower hereby agrees to maintain with Bank) any amount so due even if doing so creates an overdraft. Any overdraft so created shall (to the extent permitted by Applicable Law) bear interest until paid in full at the Default Rate and shall be due and payable, together with any accrued interest, immediately after being created. ss.2.10. CAPITAL ADEQUACY. If as a result of either (i) the introduction of or any change in, or in the interpretation of, any Applicable Law subsequent to the date of this Agreement, or (ii) the compliance by Bank with any request from any Governmental Authority made subsequent to the date of this Agreement, there is any increase in Bank's actual cost of making, funding or maintaining all or any part of an Advance or Advances, Borrower shall, from time to time, promptly upon Bank's request, pay to Bank such additional amounts as determined by Bank to be sufficient to indemnify Bank against such increased cost. Moreover, if either the introduction, effectiveness, interpretation, or phase-in of, or compliance by Bank with, any Applicable Law, directive, guideline, decision, or request (whether or not having the force of law) of any court, central bank, regulator, or other Governmental Authority arising subsequent to the date of this Agreement affects or would affect the amount of capital required or expected to be maintained by Bank, and Bank determines that the rate of return on its capital as a consequence of its making or maintaining any Advance or Advances is reduced to a level below that which Bank could 15 17 have achieved but for the occurrence of such circumstance, Borrower shall, from time to time, promptly upon Bank's request, pay to Bank such additional amounts as determined by Bank to be sufficient to compensate Bank for such reduction in its rate of return. A statement by Bank as to any such amount claimed by it in this ss.2.10 (including calculations thereof in reasonable detail and using reasonable attribution methods) shall, in the absence of manifest error, be conclusive and binding on Borrower. ss.2.11. EVIDENCE OF INDEBTEDNESS; IMPAIRED NOTE. The Advances and Borrower's obligations to repay them, with interest in accordance with the terms of this Agreement, shall be evidenced by this Agreement, the records of Bank, and the Note. The records of Bank shall be prima facie evidence of the Advances and the other indebtedness of Borrower under this Agreement, of accrued interest thereon, of accrued fees, and of all payments made in respect of any thereof. Upon Borrower's receipt from Bank of (a) reasonably satisfactory evidence of the loss, theft, destruction or mutilation of the Note (an "Impaired Note") and (b) (i) in the case of mutilation, such Impaired Note for cancellation or (ii) in all other cases, indemnity reasonably satisfactory to Borrower and reimbursement of Borrower's reasonable out-of-pocket expenses incidental thereto, Borrower shall make and deliver to Bank a new replacement Note of like tenor, date and principal amount in lieu of the Impaired Note. ss.3. CONDITIONS OF LENDING. ss.3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of Bank to make the initial Advance hereunder after the date hereof is subject to the condition precedent that Bank shall have received, on or before the day such Advance is made, the following, all in form and substance satisfactory to Bank: (a) The Note, duly executed by Borrower. (b) The Security Agreement, duly executed by Borrower and creating a perfected, first-priority security interest in all of Borrower's Accounts and inventory, and together with: (i) duly executed financing statements (Form UCC-1) (the "Financing Statements") to be duly filed under the Uniform Commercial Code of Florida and all other jurisdictions as may be necessary or, in the opinion of Bank, desirable to perfect the Security Interests; (ii) certified copies of Requests for Information or Copies (Form UCC-11), or equivalent reports acceptable to Bank, listing all effective financing statements which name Borrower (under its present name and any previous names) as debtor and which are filed in the jurisdictions referred to in paragraph (i) above, together with copies of such other financing statements (none of which may cover the Collateral); 16 18 (iii) judgment, tax lien and litigation searches in all relevant jurisdictions showing that there are no outstanding judgments or tax liens or pending lawsuits against Borrower or any property of Borrower except as disclosed herein; (iv) a landlord's lien waiver and agreement from the owner of each warehouse or other facility where inventory Borrower is being or may be stored with the exception of Borrower's headquarters building. (c) A report of Borrower's receivables agings and a Borrowing Base Certificate in a form provided by Bank. (d) A certified copy of the resolution of the board of directors of Borrower approving and authorizing each Credit Document to which it is a party and of all documents evidencing other necessary corporate action and Governmental Approvals, if any, with respect to each such Credit Document. (e) A certificate of the Secretary or an Assistant Secretary of Borrower certifying the name and true signatures of its officers authorized to sign each Credit Document to which it is a party and the other documents to be delivered by it hereunder. (f) A certificate of good standing certificate issued by the Florida Secretary of State with respect to Borrower; a copy of Borrower's articles of incorporation certified by such Secretary of State; and a copy of Borrower's bylaws certified as true and complete by an Authorized Representative. (g) A favorable opinion of Steel, Hector & Davis LLP, counsel for Borrower, covering such matters as Bank may request. (h) Whatever certificates and affidavits Bank requests to establish that no Florida documentary stamp tax is or will be owing in connection with the Credit Documents and a Tax Indemnity Agreement in favor of Bank, prepared by Bank, duly executed by Borrower and covering any liability for any such Tax. (i) Such other approvals, appraisals, opinions, consents and documents as Bank may reasonably request. ss.3.2 CONDITIONS TO EACH ADVANCE. The obligation of Bank to make each Advance to be made by it, including the initial Advance, is subject to the fulfillment of each of the following conditions to Bank's satisfaction: (a) As to each Advance made more than five Business Days after the date hereof, Bank shall have received evidence of the completion of all recordings and filings 17 19 as may be necessary, or, in the opinion of Bank, desirable, to perfect the Security Interests, including without limitation the filing of a UCC-1 form financing statement with the Florida Secretary of State; (b) each of the Representations and Warranties shall, in the determination of Bank in its reasonable discretion, be true and correct in all material respects at and as of the time of such Advance, with and without giving effect to such Advance and to the application of the proceeds thereof, except those expressly stated to be made as of a particular date which shall be true and correct in all material respects as of such date; (c) no Default or Event of Default shall have occurred and be continuing at the time of such Advance, with or without giving effect to such Advance and to the application of the proceeds thereof; (d) unless agreed to by Bank, no Account described in any of clauses (a) through (f) of the definition of Eligible Account herein was included in the computation of Eligible Accounts Amount for purposes of the Facility Limit on which such Advance is predicated; (e) receipt by Bank, within a reasonable time after Bank's request, of such materials as may have been requested pursuant to ss.7 as, when and to the extent required to be delivered thereunder; (f) such Advance will not contravene any Applicable Law; (g) all legal matters incident to such Advance and the other transactions contemplated by this Agreement shall be reasonably satisfactory to counsel for Bank; (h) no Federal tax liens or other Liens (besides the Security Interests and Permitted Liens) shall have been filed against any property of Borrower; (i) Borrower is Solvent and will be so after giving effect to such Advance; and (j) no limitation set forth in ss.2 will be exceeded after such Advance is made. Each Borrowing Notice shall constitute a Representation and Warranty by Borrower, made as of the time of the making of the Advance requested by it, that the conditions specified in clauses (b) through (d) have been fulfilled as of such time, unless a notice to the contrary specifically captioned "Disclosure Statement" is received by Bank from Borrower prior to 12:00 noon (Miami time), on the Business Day preceding the date of the requested Advance. To the extent that Bank agrees to make any Advance after receipt of a Disclosure Statement in accordance with the preceding sentence, the Representations and Warranties pursuant to the preceding sentence shall be deemed made as modified by the contents of such statement and repeated at the time of the making of such Advance as so modified. 18 20 ss.4. CERTAIN REPRESENTATIONS AND WARRANTIES OF BORROWER. In order to induce Bank to enter into this Agreement and to make Advances, Borrower represents and warrants to Bank as follows: ss.4.1 ORGANIZATION: POWER; QUALIFICATION; COMPLIANCE. Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has the corporate power and authority to own its properties and to carry on its businesses as now being and proposed to be hereafter conducted, and is duly qualified, in good standing, and authorized to do business, in all jurisdictions in which the character of its properties or the nature of its businesses requires such qualification, good standing or authorization except where failure to so qualify would not have a Material Adverse Effect. Borrower is conducting its business in material compliance with all Applicable Law. ss.4.2 SUBSIDIARIES. As of the Agreement Date, Borrower has no Subsidiaries which have assets or conduct business. ss.4.3 OWNERSHIP INTERESTS. As of the date of this Agreement, Borrower owns no equity investments in any Person other than the Novogyne Joint Venture. ss.4.4 NOVOGYNE JOINT VENTURE. The Novogyne Joint Venture was duly formed pursuant to the Novogyne Joint Venture Agreement and has not been dissolved. ss.4.5 SOLVENCY. Borrower is and will be Solvent after giving effect to the transactions contemplated by the Credit Documents. ss.4.6 AUTHORIZATION AND COMPLIANCE OF AGREEMENT AND NOTE. Borrower has the corporate power, and has taken all necessary corporate and other (including stockholder, if necessary) action to authorize it to execute, deliver and perform this Agreement and each of the other Credit Documents to which it is a party in accordance with their respective terms, to incur its other obligations under this Agreement and each of the other Credit Documents to which it is a party and to borrow hereunder. Each of this Agreement and the other Credit Documents delivered on the Agreement Date has been duly executed and delivered by Borrower and is a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms subject to the applicable bankruptcy and insolvency laws and other laws affecting the enforceability of creditors rights, generally. The execution, delivery and performance of this Agreement and the other Credit Documents by Borrower in accordance with their respective terms, and the incurring of obligations thereunder by Borrower, do not and will not (a) require (i) any Governmental Approval or (ii) any consent or approval of the stockholders of Borrower that has not been obtained, unless, in any such case, the failure to obtain any such Governmental Approval 19 21 or other consent or approval would not result in a Material Adverse Effect or adversely affect in any way the validity or enforceability of any Credit Document, (b) violate or conflict with, result in a breach of, or constitute a default under, (i) any Contract to which Borrower is a party or by which its or any of its properties may be bound, (ii) any Applicable Law, unless in any such case the violation would not have a Material Adverse Effect or adversely affect in any way the validity or enforceability of any Credit Document or (iii) Borrower's articles of incorporation or bylaws, or (c) result in or require the creation of any Lien upon any assets of Borrower (other than the Security Interests and Permitted Liens). ss.4.7 LITIGATION. Except as set forth on Schedule 4.7, as of the Agreement Date there are not, in any court or before any arbitrator of any kind or before or by any governmental or non-governmental body, any actions, suits or proceedings, pending (or to the knowledge of Borrower overtly threatened in writing), against or in any other way relating to or affecting (a) Borrower or the Novogyne Joint Venture or the business or any property of Borrower or the Novogyne Joint Venture, except actions, suits or proceedings that, if adversely determined, would not, (i) singly result in liability more than $1,000,000.00 above the amount of insurance coverage in effect with respect thereto or (ii) in the aggregate for Borrower and the Novogyne Joint Venture result in liability more than $3,000,000.00 above the amount of insurance coverage in effect with respect thereto or (iii) singly or in the aggregate otherwise have a Material Adverse Effect. ss.4.8 BURDENSOME PROVISIONS. Borrower is not a party to or bound by any Contract that is likely to have a Material Adverse Effect (it being understood, however, that Borrower is or may be a party to exclusive license agreements a breach of any of which might have a Material Adverse Effect). ss.4.9 NO MATERIAL ADVERSE CHANGE OR EVENT. Between December 31, 1999 and the Agreement Date, no change in the business, assets, liabilities, financial condition or results of operations of Borrower or the Novogyne Joint Venture has occurred, and no event has occurred or failed to occur, which has had or constituted or would reasonably be expected to have or constitute, either alone or in conjunction with all other such changes, events and failures, a Material Adverse Effect. (In determining whether an adverse change or effect has occurred, it is understood that such an adverse change or effect may have occurred, and such an event may have occurred or failed to occur, at any particular time notwithstanding the fact that at such time no Default shall have occurred and be continuing.) ss.4.10 NO ADVERSE FACT. No fact or circumstance is known to Borrower as of the date hereof which Bank could not reasonably be expected to be aware of and which, either alone or in conjunction with all other such facts and circumstances, has had a Material Adverse Effect that has not been set forth or referred to in the financial statements referred to in ss.7.2(a) or in a writing specifically captioned "Disclosure Statement" and delivered to Bank prior to the date hereof. If a fact or circumstance disclosed in such financial statements or Disclosure Statement, or if an action, suit or proceeding disclosed in 20 22 Schedule 4.7, should in the future have or constitute a Material Adverse Effect upon Borrower or any Subsidiary or upon this Agreement or any other Credit Document, such Material Adverse Effect shall be a change or event subject to ss.4.9 notwithstanding such disclosure. ss.4.11 TITLE TO PROPERTIES. Borrower has, as of the date of such financial statements or Forms 10-Q or 10-K, as the case may be, title to its properties reflected on the financial statements referred to in ss.7.2(a) or its most recent Form 10-Q or Form 10-K subject to no Liens or material adverse claims except Permitted Liens and the Security Interests. ss.4.12 PATENTS, TRADEMARKS, ETC. Borrower owns, or is licensed or otherwise has the lawful right to use, all Intellectual Property used in or necessary for the conduct of its business as currently in any material respect conducted. To Borrower's knowledge, the use of such Intellectual Property by Borrower does not infringe on the rights of any Person. ss.4.13 SECURITY INTERESTS. The Security Interests are all valid, perfected, first-priority (subject only to Permitted Liens) security interests securing all the Obligations. ss.4.14 MARGIN STOCK; ETC. The proceeds of the Advances will be used by Borrower only for the purposes expressly authorized herein. None of such proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin stock or for the purpose of reducing or retiring any Debt which was originally incurred to purchase or carry margin stock or for any other purpose which might constitute any of the Advances a "purpose credit" within the meaning of Regulation U. Neither Borrower nor any agent acting in its behalf has taken or will take any action which might cause this Agreement or any of the documents or instruments delivered pursuant hereto to violate any regulation of the Board of Governors of the Federal Reserve Board or to violate the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, or any state securities laws, in each case as in effect on the date hereof. ss.4.15 INVESTMENT COMPANY. Borrower is not an "investment company," or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (15 U.S.C. ss.80a-1, et seq.). The application of the proceeds of the Advances and repayment thereof by Borrower and the performance by Borrower of the transactions contemplated by the Credit Documents will not violate any provision of that statute, or any rule, regulation or order issued by the Securities and Exchange Commission thereunder, in each case as in effect on the date hereof. 21 23 ss.4.16 ERISA. (a) Borrower and each ERISA Affiliate is in material compliance with all applicable provisions of ERISA and the regulations and published interpretations thereunder and in material compliance with all Foreign Benefit Laws with respect to all Employee Benefit Plans except for any required amendments for which the remedial amendment period as defined in Section 401(b) of the Code has not yet expired and except for circumstances where the failure to comply could not reasonably be expected to have a Material Adverse Effect. Each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has been determined to be exempt under Section 501(a) of the Code. No material liability has been incurred by Borrower or any ERISA Affiliate which remains unsatisfied for any taxes or penalties with respect to any Employee Benefit Plan or any Multiemployer Plan; (b) Neither Borrower nor any ERISA Affiliate has (i) engaged in a nonexempt prohibited transaction described in Section 4975 of the Code or Section 406 of ERISA affecting any of the Employee Benefit Plans or the trusts created thereunder which could subject any such Employee Benefit Plan or trust to a material tax or penalty on prohibited transactions imposed under Internal Revenue Code Section 4975 or ERISA, (ii) incurred any material accumulated funding deficiency with respect to any Employee Benefit Plan, whether or not waived, or any other material liability to the PBGC which remains outstanding, other than the payment of premiums (and there are no premium payments which are due and unpaid which could reasonably be expected to have a Material Adverse Effect), (iii) failed to make a required material contribution or payment to a Multiemployer Plan, or (iv) failed to make a material required installment or other required payment under Section 412 of the Code, Section 302 of ERISA or the terms of such Employee Benefit Plan; (c) No Termination Event has occurred or is reasonably expected to occur with respect to any Pension Plan or Multiemployer Plan, and neither Borrower nor any ERISA Affiliate has incurred any unpaid withdrawal liability with respect to any Multiemployer Plan; (d) The present value of all vested accrued benefits under each Employee Benefit Plan which is subject to Title IV of ERISA, did not, as of the most recent valuation date for each such plan, exceed the then current value of the assets of such Employee Benefit Plan allocable to such benefits; (e) Each Employee Benefit Plan maintained by Borrower or any ERISA Affiliate, has been administered in accordance with its terms in all material respects and is in compliance in all material respects with all applicable requirements of ERISA and other Applicable Law, except for circumstances where the failure to comply or accord could not reasonably be expected to have a Material Adverse Effect; 22 24 (f) The making of the Advances will not involve any prohibited transaction under ERISA which is not subject to a statutory or administrative exemption; and (g) No material proceeding, claim, lawsuit and/or investigation exists or, to the best knowledge of Borrower after due inquiry, is threatened concerning or involving any Employee Benefit Plan. ss.4.17 NO DEFAULT. As of the date hereof, there exists no Default or Event of Default. ss.4.18 HAZARDOUS MATERIALS. To its knowledge, Borrower is in compliance with all applicable Environmental Laws in all material respects. Neither Borrower nor, to Borrower's knowledge, the Novogyne Joint Venture has been notified in writing of any action, suit, proceeding or investigation which, and Borrower is not aware of any facts which, (a) calls into question, or could reasonably be expected to call into question, compliance by Borrower or, to Borrower's knowledge, the Novogyne Joint Venture with any Environmental Laws, (b) seeks to suspend, revoke or terminate any license, permit or approval necessary for the generation, handling, storage, treatment or disposal of any Hazardous Material, or (c) seeks to cause any property of Borrower to be subject to any restrictions on ownership, use, occupancy or transferability under any Environmental Law to which Borrower is not currently subject, which in the case of any matter described in items (a), (b) or (c) above would result in a Material Adverse Effect. ss.4.19 EMPLOYMENT MATTERS. (a) Except as set forth in Schedule 4.19, none of the employees of Borrower is subject to any collective bargaining agreement and there are no strikes, work stoppages, election or decertification petitions or proceedings, unfair labor charges, equal opportunity proceedings, or other material labor/employee related controversies or proceedings pending or, to the best knowledge of Borrower, overtly threatened in writing against Borrower or between Borrower and any of its employees, other than those which would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; and (b) Except as set forth in Schedule 4.19 or to the extent a failure to maintain compliance would not have a Material Adverse Effect, Borrower is in compliance in all respects with all Applicable Law pertaining to labor or employment matters, including without limitation those pertaining to wages, hours, occupational safety and taxation and there is neither pending nor to Borrower's knowledge overtly threatened in writing any litigation, administrative proceeding nor, to the knowledge of Borrower, any investigation, in respect of such matters which, if decided adversely, would individually or in the aggregate have a Material Adverse Effect. 23 25 ss.4.20 RICO. To Borrower's knowledge, Borrower is not engaged in nor has engaged in any course of conduct that would subject any of its properties to any Lien, seizure or other forfeiture under any criminal law, racketeer influenced and corrupt organizations law (civil or criminal) or other similar laws. ss.4.21 ELIGIBLE ACCOUNTS. Each item included as an Eligible Account in the computations contained in each Borrowing Base Certificate fully qualifies as such. ss.5. CERTAIN GENERAL COVENANTS. Until the Agreement Termination Date, unless Bank shall otherwise consent in writing, Borrower shall: ss.5.1 PRESERVATION OF EXISTENCE AND PROPERTIES, SCOPE OF BUSINESS, COMPLIANCE WITH LAW, PAYMENT OF TAXES AND CLAIMS. (a) Preserve and maintain its corporate existence and all of its other franchises, licenses, rights and privileges, (b) preserve, protect and obtain all Intellectual Property, and preserve and maintain in good repair, working order and condition all other properties, required for the conduct of its business as presently conducted, all in accordance with customary and prudent business practices, (c) engage only in the business in which it is engaged as of the Agreement Date and related businesses that in Bank's reasonable judgment are closely related thereto, (d) comply with all Applicable Laws (including all Environmental Laws and all racketeer influenced and corrupt organizations law), (e) except to the extent permitted otherwise in ss.ss.5.5(b) and 5.5(d), pay or discharge when due (or as permitted by the Security Agreement) all Taxes owing by it or imposed upon its property (for the purposes of this clause, such Taxes shall be deemed to be due on the date after which they become delinquent), and all liabilities which might become a Lien on any of its properties, (f) take all action and obtain all Governmental Approvals required so that its obligations under the Credit Documents will at all times be valid and binding and enforceable in accordance with their respective terms, and (g) obtain and maintain all licenses, permits and approvals of Governmental Authorities and as are required for the conduct of its business as presently conducted, except where failure to do any of the foregoing would not have a Material Adverse Effect. ss.5.2 INSURANCE. Maintain insurance with responsible insurance companies against such risks and in such amounts as is customarily maintained by similar businesses, as may be required by the Security Agreement or by Applicable Law. ss.5.3 USE OF PROCEEDS. Use each Advance only for general corporate purposes (including working capital and capital expenditures) and refrain from using proceeds of any Advance to purchase or carry, or to reduce or retire or refinance any credit incurred to purchase or carry, any margin stock (within the meaning of Regulation U) or to extend credit to others for the purpose of purchasing or carrying any margin stock (if requested by Bank, Borrower shall furnish to Bank statements in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U). 24 26 ss.5.4 DEBT. Not incur, create, assume or permit to exist any Debt, however evidenced, except: (a) Debt existing as of the Agreement Date as set forth in Schedule 5.4; provided, none of the instruments and agreements evidencing or governing any such Debt (other than Debt permitted pursuant to ss.5.4(e)) shall be amended, modified or supplemented in any material respects after the Agreement Date to change any terms of subordination, repayment or rights of conversion, put, exchange or other rights from such terms and rights as in effect on the Agreement Date; (b) the Obligations and Rate Hedging Obligations; (c) the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (d) Debt incurred in connection with Acquisitions permitted under ss.5.8; (e) Debt based on or in connection with equipment leasing; (f) Debt incurred to purchase plant and equipment of Borrower in a cumulative amount not to exceed $7,000,000; and (g) other Debt which is subordinated in right of payment to the Obligations. ss.5.5 LIENS. Not incur, create or permit to exist any Lien with respect to any property or assets now owned or hereafter acquired by Borrower or any Subsidiary, other than the following ("Permitted Liens"): (a) Liens existing as of the date hereof as set forth in Schedule 5.5; (b) Liens imposed by law for taxes, assessments or charges of any Governmental Authority for claims which either are not yet due or which are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (c) statutory and contractual Liens of landlords, carriers, warehousemen, mechanics or materialmen on Borrower's equipment (but not its inventory (other than inventory which may be subject to a landlord's lien in favor of Aventis, S.A. on Borrower's inventory that is located at Borrower's headquarters)) and other Liens on such equipment (but not such inventory) imposed by law or created in the ordinary course of business for amounts either which are not yet due or which are being contested in good faith by 25 27 appropriate proceedings diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (d) Liens incurred or deposits made in the ordinary course of business (including without limitation surety bonds and appeal bonds) in connection with workers' compensation, Taxes, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, Contracts (other than for the repayment of Debt), statutory obligations and other similar obligations or arising as a result of progress payments under government Contracts; (e) easements (including reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded), which do not interfere materially with the ordinary conduct of the business of Borrower and its Subsidiaries taken as a whole and which do not materially detract from the value of the property to which they attach or materially impair the use thereof to Borrower; (f) Liens securing Debt permitted under ss.5.4(d), (e) and (f) provided that such Liens extend only to the property acquired with the proceeds of such Debt and Liens on other than Collateral securing Debt permitted under ss.5.4(a); and (g) Liens securing Debt permitted under ss.5.4(b). ss.5.6 TRANSFER OF ASSETS. Not sell, lease, transfer or otherwise dispose of any assets of Borrower or any Subsidiary other than (a) dispositions of inventory in the ordinary course of business, (b) dispositions of equipment or real property which, in the aggregate during any Fiscal Year, have a fair market value or book value, whichever is less, of $3,000,000 or less and is not replaced by equipment having at least equivalent value, (c) dispositions of property that is substantially worn, damaged, obsolete or, in the judgment of Borrower, no longer best used or useful in its business, (d) transfers of assets necessary to give effect to merger or consolidation transactions permitted by ss.5.7, (e) subleases of offices or other facilities of Borrower no longer used in itS business, and (f) dispositions of Intellectual Property permitted by ss.5.16. ss.5.7 MERGER AND CONSOLIDATION. (a) Not consolidate with or merge into any other Person, or (b) permit any other Person to merge into it, or (c) liquidate, wind-up or dissolve or sell, transfer or lease or otherwise dispose of all or a substantial part of its assets; provided, however, (i) any Subsidiary may merge, sell, transfer, lease or otherwise dispose of, all or substantially all of its assets into or consolidate with Borrower or any Subsidiary wholly owned by Borrower, (ii) any Subsidiary may liquidate, windup or dissolve so long as all of its assets (subject to its liabilities) are transferred to Borrower or to another Subsidiary, and (iii) any other Person may merge into or consolidate with Borrower or any Subsidiary wholly owned by Borrower and any Subsidiary may merge into or consolidate 26 28 with any other Person in order to consummate an Acquisition permitted by ss.5.8, provided further, that any resulting or surviving entity shall execute and deliver such agreements and other documents and take such other action as Bank may reasonably require to evidence or confirm its express assumption of the obligations and liabilities (if any) of its predecessor entities under the Credit Documents. ss.5.8 ACQUISITIONS. Not enter into any Contract, binding commitment or other binding arrangement providing for any Acquisition, or solicit the tender of securities or proxies in respect thereof in order to effect any Acquisition, unless (a) the Person to be (or whose assets are to be) acquired does not oppose such Acquisition and the line or lines of business of the Person to be acquired are substantially the same as Borrower or any of its Subsidiaries, (b) Borrower is the acquiring and surviving entity and either the cost of the Acquisition is paid entirely in stock or does not exceed $5,000,000, (c) an Authorized Representative shall have furnished Bank with a certificate to the effect that no Default or Event of Default shall have occurred and be continuing either immediately prior to or immediately after giving effect to such Acquisition and Borrower shall have furnished to Bank (i) pro forma historical financial statements as of the end of the most recently completed fiscal period of Borrower (whether quarterly or year end) giving effect to such Acquisition and assuming that any Debt incurred to effect such Acquisition shall be deemed to have been outstanding during the four-quarter period preceding such Acquisition and to have borne a rate of interest during such period equal to that rate in existence at the date of determination and (ii) a certificate in form and substance satisfactory to Bank prepared on a historical pro forma basis giving effect to such Acquisition as of the most recent fiscal quarter of Borrower then ended, which certificate shall demonstrate that no Default or Event of Default would exist immediately after giving effect thereof, and (d) the Person acquired shall be a Subsidiary, or be merged into or with Borrower or one of its Subsidiaries, immediately upon consummation of the Acquisition (or if assets are being acquired, the acquiror shall be Borrower or a Subsidiary). ss.5.9 TRANSACTIONS WITH AFFILIATES. After the date hereof, not enter into any transaction, including without limitation the purchase, sale, lease or exchange of property, real or personal, or the rendering of any service, with any Affiliate, except (a) that such Persons may render services to Borrower or its Subsidiaries for compensation at the same rates generally paid by Persons engaged in the same or similar businesses for the same or similar services or as may otherwise be approved by a majority vote of Borrower's Board of Directors, (b) that Borrower or any Subsidiary may render services to such Persons for compensation at the same rates generally charged by Borrower or such Subsidiary and (c) in either case in the ordinary course of business and pursuant to the reasonable requirements of Borrower's (or any Subsidiary's) business consistent with past practice of Borrower and its Subsidiaries and upon fair and reasonable terms no less favorable to Borrower (or any Subsidiary) than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. Notwithstanding anything to the contrary contained herein, any transaction or agreement with an Affiliate in connection with such 27 29 Affiliate's employment or compensation (including salary, bonus, stock options, severance arrangements, consulting arrangements and other benefits) payable or provided by Borrower which is approved by Borrower's Board of Directors comprised of at least a majority of independent Directors shall be deemed to have satisfied the requirements of items (a), (b) and (c), above. ss.5.10 COMPLIANCE WITH ERISA. With respect to any Pension Plan, Employee Benefit Plan or Multiemployer Plan, not: (a) permit the occurrence of any Termination Event which would result in a material liability on the part of Borrower or any ERISA Affiliate to the PBGC; or (b) permit the present value of all benefit liabilities under all Pension Plans to exceed the current value of the assets of such Pension Plans allocable to such benefit liabilities; or (c) permit any material accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code) with respect to any Pension Plan, whether or not waived; or (d) fail to make any contribution or payment to any Multiemployer Plan which Borrower or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto; or (e) engage, or permit Borrower or any ERISA Affiliate to engage, in any prohibited transaction under Section 406 or ERISA or Sections 4975 of the Code for which a civil penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section 4975 of the Code may be imposed and which would reasonably be expected to result in a Material Adverse Effect; or (f) permit the establishment of any Employee Benefit Plan providing post-retirement welfare benefits or establish or amend any Employee Benefit Plan which establishment or amendment could result in liability to Borrower or any ERISA Affiliate or increase the obligation of Borrower or any ERISA Affiliate to a Multiemployer Plan where such establishment or amendment would reasonably be expected to result in a Material Adverse Effect; or (g) fail, or permit any ERISA Affiliate to fail, to establish, maintain and operate each Employee Benefit Plan in compliance in all material respects with the provisions of ERISA, the Code and all other Applicable Law and interpretations thereof. ss.5.11 FISCAL YEAR. Not change its Fiscal Year. 28 30 ss.5.12 DISSOLUTION, ETC. Not wind up, liquidate or dissolve (voluntarily or involuntarily) or commence or suffer any proceedings seeking any such winding up, liquidation or dissolution. ss.5.13 LIMITATIONS OF SALES AND LEASEBACKS. Not enter into any arrangement with any Person providing for the leasing by Borrower or any Subsidiary of real or personal property, whether now owned or hereafter acquired in a related transaction or series of related transactions, which has been or is to be sold or transferred by Borrower or any Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of Borrower or any Subsidiary. ss.5.14 CHANGE IN CONTROL. Not cause or permit to exist or occur any Change of Control. ss.5.15 NEGATIVE PLEDGE CLAUSES. Not enter into or cause, suffer or permit to exist any agreement with any Person other than Bank pursuant to this Agreement or any other Credit Documents which prohibits or limits the ability of Borrower or any Subsidiary to create, incur, assume or suffer to exist any Lien upon any of its property, except in connection with Permitted Liens. ss.5.16 INTELLECTUAL PROPERTY. Not sell, assign, encumber or otherwise dispose of any of its Intellectual Property, except for the licensing of Intellectual Property in the ordinary course of business and sales, assignments or other dispositions of Intellectual Property no longer used or useful in Borrower's business. ss.5.17 AMENDMENT OF NOVOGYNE JOINT VENTURE. Not agree to terminate the Novogyne Joint Venture or materially amend the Novogyne Joint Venture Agreement. ss.5.18 COVENANTS EXTENDING TO THE NOVOGYNE JOINT VENTURE. Vote whenever possible to cause the Novogyne Joint Venture to do with respect to itself, its business and assets, each of the things required of Borrower in ss.ss.5.1 through 5.3 inclusive and not vote to permit it to do any of the things prohibited of Borrower in ss.ss.5.4 through 5.16 inclusive. ss.6. CERTAIN FINANCIAL COVENANTS. Until the Agreement Termination Date, unless Bank agrees otherwise in writing, Borrower shall: ss.6.1 TANGIBLE NET WORTH. Maintain at all times a Tangible Net Worth of not less than $35,000,000. ss.6.2 LEVERAGE RATIO. Maintain at all times a Leverage Ratio no greater than 1.00:1. 29 31 ss.6.3 NET REVENUE. Earn Net Revenue for each quarter of each Fiscal Year of not less than $5,000,000. ss.6.4 LOSSES. Not permit its Net Income to be less than zero for any two consecutive quarters of any Fiscal Year. Borrower's compliance or non-compliance with the covenants in ss.6 shall be tested quarterly using the statements described in ss.7.1(a). ss.7. INFORMATION. ss.7.1 FINANCIAL STATEMENTS AND INFORMATION TO BE FURNISHED. Until the Agreement Termination Date, Borrower shall deliver to Bank: (a) QUARTERLY FINANCIAL STATEMENTS OF BORROWER; OFFICER'S CERTIFICATE. As soon as available and in any event within 50 days after the end of each of the first three quarters of each Fiscal Year, (i) a balance sheet of Borrower as at the end of such quarter, and the related statements of income and cash flows for such quarter and for the period from the beginning of the then current Fiscal Year through the end of such quarter, and accompanied by a certificate of an Authorized Representative to the effect that such financial statements present fairly the financial position of Borrower as of the end of such fiscal period and the results of its operations and the changes in financial position for such fiscal period, in conformity with the standards set forth in ss.7.2(b) with respect to interim financial statements, and (ii) a certificate of an Authorized Representative containing computations for such quarter comparable to that required pursuant to ss.7.1(b)(ii). (b) YEAR-END STATEMENT OF BORROWER; ACCOUNTANTS' AND OFFICER'S CERTIFICATES. As soon as available and in any event within 100 days after the end of each Fiscal Year, (i) balance sheet of Borrower as at the end of each Fiscal Year, and the notes thereto, and the related statement of income, shareholders' equity and cash flow, and the respective notes thereto, for such Fiscal Year, setting forth comparative financial statements for the preceding Fiscal Year, all prepared in accordance with GAAP applied on a Consistent Basis and containing, with respect to the financial statements, opinions of Deloitte & Touche LLP or other such independent certified public accountants of national standing selected by Borrower and reasonably acceptable to Bank, which are unqualified as to the scope of the audit performed and as to the "going concern" status of Borrower and without any exception not reasonably acceptable to Bank, and (ii) a certificate signed by an Authorized Representative and demonstrating compliance with ss.ss.6.1, 6.2, 6.3 and 6.4. (c) YEAR-END STATEMENT OF NOVOGYNE JOINT VENTURE; ACCOUNTANTS' AND OFFICER'S CERTIFICATES. As soon as available and in any event within 100 days after the end 30 32 of each fiscal year, a balance sheet of the Novogyne Joint Venture as at the end of each fiscal year, and the notes thereto, and the related statement of income, shareholders' equity and cash flow, and the respective notes thereto, for such fiscal year, setting forth comparative financial statements for the preceding fiscal year, all prepared in accordance with GAAP applied on a Consistent Basis and containing, with respect to the financial statements, opinions of PricewaterhouseCoopers LLP or other such independent certified public accountants of national standing selected by the Novogyne Joint Venture, which are unqualified as to the scope of the audit performed and as to the "going concern" status of the Novogyne Joint Venture and without any exception not acceptable to Bank in its reasonable discretion. (d) SEC MATERIALS; MANAGEMENT LETTERS. Promptly upon their becoming available to Borrower, a copy of (i) all Form 10-Qs, 10-Ks and other regular or special reports or effective registration statements which Borrower shall file with the Securities and Exchange Commission (or any successor thereto) or any securities exchange, (ii) any proxy statement distributed by Borrower or any Subsidiary to its shareholders, bondholders or the financial community in general, and (iii) any management letters submitted to Borrower by independent accountants in connection with the annual audit of Borrower. (e) ADDITIONAL MATERIALS. (i) Promptly upon the sending thereof, copies of all notices, reports and other communications from Borrower to any of its shareholders or securities holders generally; (ii) Promptly upon Borrower's becoming aware thereof, notice of each federal statutory Lien, tax or other state or local government Lien or other Lien (other than the Security Interests or Permitted Liens) filed against the property of Borrower or the Novogyne Joint Venture; (iii) Within 15 Business Days after the beginning of every quarter of each Fiscal Year, a report of Borrower's receivable agings certified by an Authorized Representative; (iv) Within 15 Business Days after the beginning of every quarter of each Fiscal Year, a schedule of Borrower's inventory certified by an authorized officer of Borrower and indicating, with respect to any such inventory, the location thereof; (v) Within 15 Business Days after the beginning of every quarter of each Fiscal Year (or, if Bank so requests, on a more frequent basis), a Borrowing Base Certificate reflecting Eligible Accounts Amount as of the beginning of such quarter; 31 33 (vi) From time to time and within a reasonable time after Bank's request, such data, certificates, reports, statements, documents or further information regarding this Agreement, any other Credit Document, any Advance, any Collateral or any other transaction contemplated hereby, or the business, assets, liabilities, financial condition, results of operations or business prospects of Borrower or, to the extent available to Borrower using its best efforts to obtain same in any case in which it is legally entitled to do so, the Novogyne Joint Venture, as Bank may reasonably request, in each case in form and substance, with a degree of detail, and certified in a manner, reasonably satisfactory to Bank. (f) NOTICE OF DEFAULTS, LITIGATION AND OTHER MATTERS. Promptly after any Authorized Representative of Borrower obtains knowledge thereof, notice of: (i) any Default; (ii) the commencement of any action, suit or proceeding or investigation in any court or before any arbitrator of any kind or by or before any Governmental Authority or non-governmental body against or in any other way relating adversely to or materially adversely affecting (A) Borrower, the Novogyne Joint Venture or any of their respective businesses or properties, that, if adversely determined, (1) singly would result in liability more than $500,000.00 (whether or not covered by insurance) or (2) in the aggregate for Borrower and the Novogyne Joint Venture would result in liability more than $1,000,000.00 (whether or not covered by insurance) or (3) otherwise would, singly or in the aggregate, have a Material Adverse Effect, or (B) in any material way this Agreement or the other Credit Documents or any transaction contemplated hereby or thereby; (iii) any amendment of the articles of incorporation or bylaws of Borrower or of the Novogyne Joint Venture Agreement; and (iv) any significant material adverse development in any lawsuits described in Schedule 4.7. ss.7.2 ACCURACY OF FINANCIAL STATEMENTS AND INFORMATION. (a) HISTORICAL FINANCIAL STATEMENTS. Borrower hereby represents and warrants to Bank: (i) that the financial statements heretofore furnished to Bank and listed in Schedule 7.2(a), are complete and correct and present fairly in all material respects, in accordance with GAAP applied on a Consistent Basis throughout the periods involved, the financial position of Borrower as at their respective dates and the results of operations, retained earnings and, as applicable, the changes in financial position or cash flows of Borrower for the respective periods to which such statements relate, and (ii) that, except as disclosed or reflected in such financial statements, Borrower has no liabilities, contingent or otherwise, nor any unrealized or anticipated losses as of the respective date(s) of such financial statements and required to be included in such financial statements, that, singly or in the aggregate, have had or are likely to have a Material Adverse Effect. (b) FUTURE FINANCIAL STATEMENTS. All financial statements delivered pursuant to ss.7.1, shall be complete and correct and present fairly in all material respects, in accordance with GAAP applied on a Consistent Basis, the financial position of Borrower 32 34 or the Novogyne Joint Venture (as the case may be), as at their respective dates and the results of operations, retained earnings, and cash flows of Borrower or the Novogyne Joint Venture (as the case may be) for the respective periods to which such statements relate, and their furnishing Bank shall constitute a Representation and Warranty by Borrower made on the date they are furnished to Bank to that effect and to the further effect that, except as disclosed or reflected in such financial statements, as at the respective dates thereof, Borrower, to Borrower's knowledge, had no liability, contingent or otherwise, nor any unrealized or anticipated loss as of the respective date(s) of such financial statements and required to be included in such financial statements, that, singly or in aggregate, has had or is likely to have a Material Adverse Effect. (c) HISTORICAL INFORMATION. Borrower hereby represents and warrants to Bank that all Information furnished to Bank in writing by or at the direction of Borrower or, to Borrower's knowledge, the Novogyne Joint Venture prior to the Agreement Date in connection with or pursuant to this Agreement and the relationship established hereunder, at the time it was so furnished, but in the case of Information dated as of a prior date, as of such date, (i) in the case of any such prepared in the ordinary course of business, was complete and correct in all material respects in the light of the purpose prepared, and, in the case of any such the preparation of which was requested by Bank, was complete and correct in all material respects to the extent necessary to give Bank true and accurate knowledge of the subject matter thereof, (ii) did not contain any untrue statement of a material fact, and (iii) did not omit to state a material fact necessary in order to make the statements contained therein not misleading in the light of the circumstances under which they were made; provided, however, Borrower represents and warrants that all plans, projections and forecasts of future events or future financial results were prepared to the best of Borrower's knowledge, but does not represent or warrant the achievement of the future results or the occurrence of the future events. (d) FUTURE INFORMATION. All Information furnished to Bank in writing by or at the direction of Borrower or, to Borrower's knowledge, the Novogyne Joint Venture, on and after the Agreement Date in connection with or pursuant to this Agreement or in connection with or pursuant to any amendment or modification of, or waiver under, this Agreement, shall, at the time it is so furnished, but in the case of Information dated as of a prior date, as of such date, (i) in the case of any such prepared in the ordinary course of business, be complete and correct in all material respects in the light of the purpose prepared, and, in the case of any such required by the terms of this Agreement or the preparation of which was requested by Bank, be complete and correct in all material respects to the extent necessary to give Bank true and accurate knowledge of the subject matter thereof, (ii) not contain any untrue statement of a material fact, and (iii) not omit to state a material fact necessary in order to make the statements contained therein not misleading, and the furnishing of them to Bank shall constitute a Representation and Warranty by Borrower made on the date they are furnished to Bank to the effect specified in clauses (a), (b) and (c); provided, however, Borrower represents and warrants that all plans, projections and 33 35 forecasts of future events or future financial results were prepared to the best of Borrower's knowledge, but does not represent or warrant the achievement of the future results or the occurrence of the future events. ss.7.3 ADDITIONAL AGREEMENTS RELATING TO DISCLOSURE. From the Agreement Date until the Agreement Termination Date, Borrower shall: (a) ACCOUNTING METHODS AND FINANCIAL RECORDS. Maintain a system of accounting, and keep such books, records and accounts (which shall be true and complete), as may be required or necessary to permit (i) the preparation of financial statements required to be delivered pursuant to ss.7.1 and (ii) the determination of Borrower's compliance with the terms of this Agreement and the other Credit Documents. (b) VISITS AND INSPECTIONS. Permit (and use its best efforts to cause the Novogyne Joint Venture to permit to the extent it is legally entitled to require the Novogyne Joint Venture to do so) representatives (whether or not officers or employees) of Bank, from time to time during normal business hours, and as often as may be reasonably requested, to (i) visit and, upon reasonable prior notice, inspect any properties of Borrower, (ii) inspect and make extracts from the books and records (including but not limited to management letters prepared by Borrower's independent accountants) and customer lists of Borrower, (iii) discuss with principal officers of Borrower and the independent accountants of each the businesses, assets, liabilities, financial conditions, results of operations and business prospects of Borrower and the Novogyne Joint Venture and (iv) inspect the Collateral and the premises upon which any of the Collateral is located, and verify the amount, quality, quantity, value and condition of, or any other matter relating to, the Collateral. If any of the Collateral is under the exclusive control of any third party, Borrower shall in good faith endeavor to cause such third parties to make the foregoing inspection rights available to Bank. ss. 8. DEFAULT. ss.8.1 EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it is voluntary or involuntary, or within or without the control of Borrower, or is effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any Governmental Authority or quasi-governmental body: (a) Borrower shall fail to pay (i) any amount required to reduce the total Advances to the Facility Limit within 5 days following written demand therefor from Bank to Borrower or (ii), except as provided in clause (i), any amount in respect of principal of or interest on an Advance when and as due (whether at maturity, by reason of notice of prepayment, acceleration or otherwise) in accordance with the terms of this Agreement and the Note; or Borrower shall fail to pay within 5 days following written demand therefor from 34 36 Bank to Borrower any amount owing under this Agreement or any other Credit Document in respect of fees, commissions or other charges (other than interest on Advances) when and as due (whether as stated, by reason of notice of prepayment or acceleration or otherwise) in accordance with the terms of this Agreement or such other Credit Document; or (b) Any Representation and Warranty shall at any time prove to have been incorrect or misleading in any material respect when made; or (c) Borrower shall default in the performance or observance of any term, covenant, condition or agreement contained in this Agreement (other than a default described in ss.8.1(a)) and, if the default is of a term, covenant, condition or agreement other than one contained in ss.5 or ss.ss.6.3 and 6.4, such default shall remain uncured for a period of 20 days after notice thereof to Borrower from Bank; or (d) Borrower shall fail to pay, in accordance with its terms and when due and payable, after giving effect to any notice, cure or grace periods, the principal of or interest on any Debt in an aggregate principal amount in excess of $500,000 (other than the Obligations), or the maturity of any such Debt, in whole or in part, shall have been accelerated, or any such Debt, in whole or in part, shall have been required to be prepaid prior to the stated maturity thereof, in accordance with the provisions of any Contract evidencing, providing for the creation of or concerning such Debt or, if any event shall have occurred and be continuing that would permit any holder or holders of such Debt, any trustee or agent acting on behalf of such holder or holders or any other Person so to accelerate such maturity or require any such prepayment and such holder or holders shall have accelerated such Debt or required such prepayment; or (e) (i) Borrower or the Novogyne Joint Venture shall (A) commence a voluntary case under the Federal bankruptcy laws (as now or hereafter in effect) or under any other bankruptcy or insolvency law of any jurisdiction, (B) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition or adjustment of debts, (C) consent to, or fail to contest in a timely and appropriate manner, any petition filed against it in an involuntary case under such bankruptcy laws or other laws, (D) apply for, or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of a substantial part of its assets, domestic or foreign, (E) admit in writing its inability to pay, or generally not be paying, its debts (other than those that are the subject of bona fide disputes) as they become due, (F) make a general assignment for the benefit of creditors, or (G) take any corporate action for the purpose of effecting any of the foregoing; or (ii) A case or other proceeding shall be commenced against Borrower or the Novogyne Joint Venture in any court of competent jurisdiction seeking (A) relief 35 37 under the Federal bankruptcy laws (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts, or (B) the appointment of a trustee, receiver, custodian, liquidator or the like of Borrower or the Novogyne Joint Venture of all or any substantial part of the assets, domestic or foreign, of Borrower or the Novogyne Joint Venture or, and, in each case, such case or proceeding shall continue undismissed or unstayed for a period of 60 days, or an order granting the relief requested in such case or proceeding against Borrower or the Novogyne Joint Venture (including, but not limited to, an order for relief under such Federal bankruptcy laws) shall be entered; or (f) (i) A judgment or order for the payment of money in an amount that (A) individually, exceeds by $500,000.00 or (B) when aggregated with all other unpaid judgments outstanding against Borrower, exceeds by $1,000,000.00, the amount of insurance coverage applicable thereto shall be entered against Borrower or the Novogyne Joint Venture by any court and (ii) either (A) such judgment or order shall continue undischarged and/or unbonded or unstayed for a period of 60 days or (B) enforcement proceedings shall have been commenced upon such judgment or order; or (g) Any Security Interest shall fail or cease to be fully perfected, enforceable in accordance with its terms, and prior to the rights of all third parties (except for the Permitted Liens) or any loss, theft, damage or destruction of any item or items of Collateral occurs which either (i) has or is reasonably likely to have a Material Adverse Effect or (ii) materially and adversely affects the operation of Borrower's business and is not covered by insurance as required therein; or (h) Any material provision of any Credit Document, or any portion of any obligation for the payment of money under any Credit Document, shall fail or cease to be in full force and effect, or Borrower shall make any written statement or bring any action challenging the enforceability or binding effect of any of the Credit Documents or any of the Security Interests; or (i) The dissolution of Borrower or the Novogyne Joint Venture shall occur; or (j) Any Change of Control or Change of Management shall occur; or (k) Borrower, any Subsidiary or the Novogyne Joint Venture shall engage in any significant conduct or activity that constitutes a felony (or the equivalent thereof under Applicable Law); or (l) All or a substantial part of the property of Borrower shall be nationalized, expropriated, seized or otherwise appropriated, or custody or control of such property or of Borrower shall be assumed by any Governmental Authority or any court of competent jurisdiction at the instance of any Governmental Authority and the same has or is 36 38 reasonably likely to have a Material Adverse Effect, unless the same is being contested in good faith by proper proceedings diligently pursued and a stay of enforcement is in effect; or (m) Borrower shall breach any of the material terms or conditions of any agreement under which any Rate Hedging Obligation is created and such breach continues beyond any applicable grace period, or any action is taken by Borrower to discontinue (except with the consent of Bank if it is a counterparty to such agreement) or assert the invalidity or unenforceability of any such agreement or Rate Hedging Obligation. ss.8.2 REMEDIES. (a) If and at any time after a Default occurs, Bank's obligation to make AdvanceS hereunder shall, at Bank's sole option, be suspended; provided, however, if Borrower cures such event or condition to Bank's satisfaction prior to its becoming an Event of Default, such obligation shall be reinstated. Upon the occurrence of an Event of Default, Bank's obligation to make Advances hereunder shall, at Bank's option, terminate. (b) If and at any time after an Event of Default occurs, Bank may, at its sole option, declare the principal of all outstanding Advances, all interest thereon and all other Obligations to be forthwith due and payable, whereupon all such principal, interest and other Obligations shall become and be forthwith due and payable, without presentment, demand, protest, notice of nonpayment or other notice of any kind, all of which are hereby expressly waived by Borrower; provided, however that upon the occurrence of an Event of Default described in ss.8.1(e), the principal of all outstanding Advances, all interest thereon and all other Obligations shall automatically become and be immediately due and payable in full. ss.8.3 NO WAIVER; REMEDIES CUMULATIVE. No failure on the part of Bank to exercise, and no delay iN exercising, any right under any Credit Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any Credit Document preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in the Credit Documents are cumulative and not exclusive of any remedies provided by Applicable Law or the other Credit Documents. ss.9. MISCELLANEOUS. ss.9.l AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement or other Credit Document, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the amendment or waiver is in writing and signed by Bank and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. ss.9.2 COSTS, EXPENSES AND CERTAIN TAXES. Borrower shall pay (or, if already paid by Bank, shall reimburse Bank for) on demand all reasonable costs and expenses in 37 39 connection with the negotiation, preparation, execution, delivery, filing, recording, administration and enforcement of the Credit Documents and any other documents to be delivered under the Credit Documents (including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for Bank) with respect thereto and with respect to advising Bank as to its rights and responsibilities under the Credit Documents after an Event of Default, and all costs and expenses (including reasonable counsel fees and expenses, including those incurred at the appellate level and in any bankruptcy proceedings) in connection with the enforcement of any of the Credit Documents and any other documents to be delivered thereunder or any restructuring or amendment thereof. Without limiting the generality of the foregoing, Borrower shall, upon demand, pay Bank a reasonable fee for the audit of its inventory, accounts or records performed by an employee of Bank and reimburse Bank for the cost of any such audit performed by a firm or person other than an employee of Bank; provided that, as long as no Event of Default has occurred within that period, Borrower shall not be required to pay the cost of any such audits conducted more than once in each consecutive twelve month period. In addition, Borrower shall pay on demand any and all documentary stamp, intangible and other taxes, fees, surcharges and other amounts payable or determined to be payable to any government or governmental subdivision, agency, agent, officer or instrumentality in connection with any of the Credit Documents, including the execution, delivery, filing or recording thereof, any other documents to be delivered thereunder or any Advances, and agrees to hold Bank harmless from and against any and all liabilities (including any interest and penalties) with respect to or resulting from any delay in paying or omission to pay such taxes, fees, surcharges and other amounts. Borrower shall pay Bank on the Agreement Date (in addition to the other items listed on any Closing Costs Statement or the like executed in conjunction herewith) any cost previously incurred by Bank (not to exceed $1,500) in auditing the Collateral. Borrower hereby authorizes Bank to deduct from the proceeds of any Advance disbursed the amount of any costs and expenses then owing pursuant to this ss.9.2 and to deduct any such amount from any account of Borrower with Bank. ss.9.3 CERTAIN COLLATERAL. As security for all Obligations, Borrower hereby grants Bank a continuing lien on and security interest in all deposit accounts (whether now existing or hereafter established) of Borrower with Bank or any affiliate thereof and all other property of Borrower that is now or hereafter owed by or in the possession or control of any branch or affiliate of Bank. At any time after an Event of Default, Bank may set off and apply any such deposit accounts against any and all obligations of Borrower under the Credit Documents, irrespective of whether or not Bank shall have made demand under any Credit Document and although such obligations may be unmatured. Bank shall endeavor to promptly notify Borrower after any such setoff has been made but shall not be liable to Borrower for failing to do so. ss.9.4 NO JOINT VENTURE. Nothing contained in any Credit Document shall be deemed or construed by the parties hereto or by any third person to create the relationship 38 40 of principal and agent or of partnership or joint venture or of any association between Bank and Borrower other than the relationship of creditor and debtor. ss.9.5 SURVIVAL. All covenants, agreements and Representations and Warranties made by Borrower in thiS Agreement shall, notwithstanding any investigation by Bank, be deemed material and have been relied upon by Bank and shall survive the execution and delivery to Bank of this Agreement. ss.9.6 FURTHER ASSURANCES; POWER OF ATTORNEY. Borrower shall, upon the request of Bank, execute and deliver such further documents and do such further acts as Bank may reasonably request in order to fully effectuate the purposes of any Credit Document. In addition, without limiting the generality of the foregoing, Borrower shall promptly do whatever Bank requests to cure any error (including any omission) in any of the Credit Documents. ss.9.7 SOVEREIGN IMMUNITY; GOVERNMENT INTERFERENCE. To the extent that Borrower has or hereafter maY acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment in aid of execution, attachment prior to judgment, execution or otherwise) with respect to itself or its property, Borrower hereby irrevocably waives such immunity in respect of its obligations hereunder or any other Credit Documents. In addition, Borrower hereby irrevocably waives, as a defense to any action arising out of or relating hereto, the interference of any administrative or governmental authority of the jurisdiction(s) in which Borrower is domiciled or the impossibility of performance resulting from any law or regulation, or from any change in the law or regulations, of such jurisdiction(s). ss.9.8 ASSIGNMENT. This Agreement may not be assigned by Borrower without Bank's prior written consent and any such assignment or attempted assignment without such prior written consent shall be null and void. Bank, with Borrower's consent (which shall not be unreasonably withheld or delayed and shall be deemed given if not denied within five Business Days after Bank's request therefor) if the assignee or participant is not affiliated with Bank (but otherwise with no need for such consent), may assign to any commercial financial institution in whole or in part, and may issue participating interests to any commercial financial institution in and to, this Agreement, any other Credit Document and any Advances and, in connection therewith, may make whatever disclosures regarding Borrower, any Subsidiary, the Novogyne Joint Venture or any Collateral it considers desirable, provided that any such proposed assignee shall agree to preserve the confidentiality of such information pursuant to a written agreement reasonably acceptable to Borrower or standard in the industry. This Agreement shall be binding upon Bank's and Borrower's respective successors and assigns and shall inure to the benefit of Bank's and Borrower's respective successors and assigns. With respect to Borrower's successors and assigns, such successors and assigns shall include any receiver, trustee or debtor-in-possession of or for Borrower. 39 41 ss.9.9 NOTICES. All notices, requests, approvals, consents and other communications provided for hereunder shall be in writing and mailed, telefaxed or hand-delivered, if to Borrower, at its address at 11960 S.W. 144th Street, Miami, Florida 33186, Attention: Chief Financial Officer, Telefax No. (305) 251-1887, with a copy to Borrower's in-house General Counsel, at the same address and with Telefax No. (305) 232-1836; and if, to Bank, at its address at 777 Brickell Avenue, 4th Floor, Miami, Florida 33131, Attention: Jonathan D. Fisher, Senior Vice President, Telefax No. (305) 579-7133; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. All such communications shall, when telefaxed or hand-delivered, be effective when received and, when mailed, be effective when deposited in the mails postage prepaid, addressed as aforesaid except that mailed notices to Bank shall not be effective unless and until received by Bank. ss.9.10 TAXES. All payments provided for herein or in any other Credit Documents shall be made free and clear of any deductions for any present or future Taxes. If any Taxes are imposed or required to be withheld from any payment, Borrower shall (a) increase the amount of such payment so that Bank will receive a net amount (after deduction of all Taxes) equal to the amount due hereunder and (b) promptly pay all Taxes to the appropriate taxing authority for the account of Bank and, as promptly as possible thereafter, send Bank an original receipt showing payment thereof, together with such additional documentary evidence as Bank may from time to time reasonably require. Borrower shall indemnify Bank from and against any and all Taxes (irrespective of when imposed) and any related interest and penalties that may become payable by Bank as a consequence of Borrower's failure to perform any of its obligations under the preceding sentence. ss.9.11 CURRENCY. Any obligation of Borrower under this Agreement or the Note to make payments in United States Dollars shall not be discharged or satisfied by any tender or recovery, whether pursuant to any judgment or otherwise, expressed in or converted into any other currency except to the extent that such tender or recovery results in the effective receipt by Bank of the full amount of United States Dollars payable to it, and Borrower shall indemnify Bank (and Bank shall have an additional legal claim against Borrower) for any difference between such full amount and the amount effectively received by Bank pursuant to any such tender or recovery. In the absence of manifest error, Bank's determination of amounts effectively received by it shall be conclusive. ss.9.12 USURY SAVINGS CLAUSE. Should any interest or other charges paid hereunder result in the computation or earning of interest in excess of the maximum rate or amount of interest permitted by Applicable Law, such excess interest and charges shall be (and the same hereby are) waived by Bank, and the amount of such excess shall be automatically credited against, and be deemed to have been payments in reduction of, the principal then due hereunder, and any portion of such excess which exceeds the principal then due hereunder shall be paid by Bank to Borrower. 40 42 ss.9.13 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida, U.S.A., without regard to any conflicts-of-law rule or principle that would give effect to the law of another jurisdiction. ss.9.14 JURISDICTION. Borrower hereby irrevocably agrees that any action or proceeding relating to any Credit Document that is brought by Borrower shall be tried by the courts of the State of Florida sitting in Miami-Dade County, Florida, U.S.A. or the United States district courts sitting there. Borrower hereby irrevocably submits, in any such action or proceeding that is brought by Bank, to the non-exclusive jurisdiction of each such court, irrevocably waives the defense of an inconvenient forum with respect to any such action or proceeding, and agrees that service of process in any such action or proceeding may be made upon Borrower by mailing a copy thereof by registered mail to Borrower at Borrower's address specified in ss.9.9 (as well as by any other lawful method). Borrower shall appoint and maintain at all times (in a manner satisfactory to Bank) an agent that is domiciled in Miami-Dade County, Florida and is acceptable to Bank to receive service of process in any such action or proceeding on Borrower's behalf. ss.9.15 ILLEGALITY. Bank shall have no obligation to make any Advance if its doing so would or might violate any Applicable Law. ss.9.16 APPROVALS AND CONSENTS. Bank may grant or deny any approval or consent contemplated hereby in its sole and absolute discretion, except as otherwise provided herein. ss.9.17 NO REPRESENTATIONS REGARDING RENEWAL, ETC. Borrower acknowledges that Bank has not agreed with or represented to Borrower that the facility created hereby will be renewed or extended past the Commitment Termination Date or that any Advances will be made after the Commitment Termination Date. ss.9.18 NO THIRD-PARTY RELIANCE. This Agreement is solely for the benefit of Bank and Borrower and may not be relied on by any third party. ss.9.19 INDEMNIFICATION; LIMITATION OF LIABILITY. Borrower shall indemnify and hold harmless Bank and each of its affiliates and their respective officers, directors, employees, agents and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities, costs and expenses (including without limitation reasonable attorneys' fees) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including without limitation in connection with any investigation, litigation, or proceeding or preparation of defense in connection therewith) the Credit Documents, any of the transactions contemplated herein or the actual or proposed use of the proceeds of any Advance or the 41 43 manufacture, storage, transportation, release or disposal of any Hazardous Material on, from, over or affecting any of the Collateral or any of the assets, properties or operations of Borrower, any Subsidiary or any predecessor in interest, directly or indirectly, except to the extent such claim, damage, loss, liability, cost or expense results from such Indemnified Party's gross negligence or willful misconduct or willful breach of this Agreement. In the case of an investigation, litigation or other proceeding to which the indemnity in this ss.9.19 applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by Borrower, its directors, shareholders or creditors or an Indemnified Party or any other Person or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. Borrower hereby waives and agrees not to assert any claim against Bank, any of its affiliates, or any of their respective directors, officers, employees, attorneys, agents and advisers, on any theory of liability, for special, indirect, consequential, or punitive damages arising out of or otherwise relating to the Credit Documents, any of the transactions contemplated herein or therein or the actual or proposed use of the proceeds of any Advance. To the extent that any of the indemnities required from Borrower under this ss.9.19 are unenforceable because they violate any Applicable Law or public policy, Borrower shall pay the maximum amount which it is permitted to pay under Applicable Law. ss.9.20 CONFIDENTIALITY. Borrower may have furnished and may in the future furnish to Bank certain information concerning Borrower and/or the Novogyne Joint Venture which Borrower has or will have advised Bank in writing is non-public, proprietary or confidential in nature ("Confidential Information"). Bank confirms to Borrower that it is Bank's policy and practice to maintain in confidence all Confidential Information which is provided to it under agreements providing for the extension of credit and which is identified to it as confidential, and that it will protect the confidentiality of Confidential Information submitted to it with respect to Borrower under this Agreement; provided, however, that (i) nothing contained herein shall prevent Bank or any assignee or participant from disclosing Confidential Information: A) to its Affiliates and their respective directors, officers and employees and to any legal counsel, auditors, appraisers, consultants or other persons retained by it or its Affiliates as professional advisors, on the condition that such information not be further disclosed except in compliance with this ss.9.20; B) under color of legal authority, including, without limitation, to any regulatory authority having jurisdiction over it or its operations or to or under the authority of any court deemed by it to be competent jurisdiction and C) to any actual or potential assignee of or participant in Bank's or such assignee's rights and obligations under this Agreement to the extent such actual or potential assignee or participant has agreed to maintain such information in confidence on the basis set forth in this ss.9.20 and ii) the terms of this ss.9.20 shall be inapplicable to any information furnished to it which is in its possession prior to the delivery to it of such information by Borrower, or otherwise has been obtained by it on a non-confidential basis, or which was or becomes available to the public or otherwise part of the public domain (other than as a result of Bank's failure or any prospective participant's or assignee's failure to abide hereby), or which was not non-public, proprietary or confidential when Borrower delivered it to Bank or any assignee. 42 44 ss.9.21 JURY TRIAL WAIVER. BORROWER AND BANK HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY AND ALL RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION (INCLUDING BUT NOT LIMITED TO ANY CLAIMS, CROSS CLAIMS OR THIRD PARTY CLAIMS) ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENTS TO WHICH EITHER IS A PARTY. BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF BANK NOR BANK'S COUNSEL HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT BANK WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. BORROWER ACKNOWLEDGES THAT THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN A MATERIAL INDUCEMENT TO BANK TO ENTER INTO THIS AGREEMENT AND TO MAKE ADVANCES HEREUNDER. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date hereof. Witnessed by: NOVEN PHARMACEUTICALS, INC. /s/ Tim O'Neil By: /s/ James B. Messiry - ----------------------------- ----------------------------- Captain Tim O'Neil Name: James B. Messiry - ----------------------------- ------------------------ Title: Vice President and Chief - ----------------------------- ------------------------ Financial Officer ------------------------ SUNTRUST BANK /s/ Diane O'Neil By: /s/ Jonathan D. Fisher - ----------------------------- ----------------------------- Diane O'Neil Name: Jonathan D. Fisher - ----------------------------- ------------------------ Title: Senior Vice President - ----------------------------- ------------------------ 43 EX-11 4 g66397ex11.txt COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 Noven Pharmaceuticals, Inc. Computation of Earnings per Share (in thousands except per share amounts)
2000 1999 1998 -------- -------- -------- BASIC EARNINGS (LOSS): Net income (loss) $ 19,634 $ 10,460 $ (4,079) Weighted average number of common shares outstanding 21,914 21,508 21,013 ======== ======== ======== Basic earnings (loss) per share $ 0.90 $ 0.49 $ (0.19) ======== ======== ======== DILUTED EARNINGS (LOSS): Net income (loss) $ 19,634 $ 10,460 $ (4,079) Weighted average number of common shares outstanding 21,914 21,508 21,013 Potential dilution on exercise of stock options 1,335 389 -- -------- -------- -------- Weighted average number of common shares outstanding, as adjusted 23,249 21,897 21,013 ======== ======== ======== Diluted earnings (loss) per share $ 0.84 $ 0.48 $ (0.19) ======== ======== ========
EX-21 5 g66397ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT NAME STATE OF ORGANIZATION - ------------------------------ -------------------------- Vivelle Ventures LLC Delaware EX-23.1 6 g66397ex23-1.txt CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in Registration Statement No. 333-64081 of Noven Pharmaceuticals, Inc. on Form S-8, in Registration Statement No. 333-56293 of Noven Pharmaceuticals, Inc. on Form S-3 and in Registration Statement No. 333-90835 of Noven Pharmaceuticals, Inc. on Form S-8 of our report dated February 16, 2001, appearing in this Annual Report on Form 10-K of Noven Pharmaceuticals, Inc. for the year ended December 31, 2000. Deloitte & Touche LLP Certified Public Accountants Miami, Florida March 23, 2001 EX-23.2 7 g66397ex23-2.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-64081) of Noven Pharmaceuticals, Inc., in the Registration Statement on Form S-8 (No. 333-90835) of Noven Pharmaceuticals, Inc. and in the Registration Statement on Form S-3 (No. 333-56293) of Noven Pharmaceuticals, Inc. our report dated January 26, 2001 relating to the financial statements Vivelle Ventures LLC which appears in this Form 10-K of Noven Pharmaceuticals, Inc. PricewaterhouseCoopers LLP Florham Park, New Jersey March 22, 2001 -----END PRIVACY-ENHANCED MESSAGE-----