As filed with the Securities and Exchange Commission on
May 1, 2007
Registration
No.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Cumberland Pharmaceuticals
Inc.
(Exact name of registrant as
specified in its charter)
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Tennessee
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2834
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62-1765329
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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2525 West End Avenue,
Suite 950
Nashville, Tennessee
37203
(615) 255-0068
(Address, including zip code,
and telephone number, including
area code, of registrant’s
principal executive offices)
A.J. Kazimi
Chairman and CEO
2525 West End Avenue,
Suite 950
Nashville, Tennessee
37203
(615) 255-0068
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Martin S.
Brown, Esq.
Virginia Boulet, Esq.
Adams and Reese LLP
424 Church Street, Suite 2800
Nashville, Tennessee 37219
(615) 259-1450
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Donald J. Murray, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019-6092
(212) 259-8000
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Approximate date of commencement of proposed offering to the
public:
As soon as practicable after this
registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following box:
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Title of Each Class of
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Aggregate Offering
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Amount of
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Securities to be Registered
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Price(1)
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Registration Fee
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Common Stock, no par value per share
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$115,000,000
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$3,531
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(1)
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Estimated solely for purpose of
calculating the registration fee pursuant to Rule 457(o)
under the Securities Act.
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The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any state where the offer or sale is
not permitted.
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PRELIMINARY
PROSPECTUS
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SUBJECT
TO COMPLETION
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2007
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Shares
Common
Stock
This is the initial public offering of our common stock. No
public market currently exists for our common stock. We are
offering all of
the shares
of our common stock offered by this prospectus.
We have applied to have our common stock included for quotation
on The Nasdaq Global Market under the symbol “CPIX”.
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should carefully read the
discussion of material risks of investing in our common stock in
“Risk factors” beginning on page 6 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per
share
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Total
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Public offering price
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$
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$
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Underwriting discounts and
commissions
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$
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$
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Proceeds, before expenses, to us
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$
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$
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The underwriters may also purchase up to an
additional shares
of our common stock at the public offering price, less the
underwriting discounts and commissions payable by us, to cover
over-allotments, if any, within 30 days from the date of
this prospectus. If the underwriters exercise this option in
full, the total underwriting discounts and commissions will be
$ and our total proceeds, before
expenses, will be $ .
The underwriters are offering the common stock as set forth
under “Underwriting.” Delivery of the shares will be
made on or
about ,
2007.
UBS
Investment Bank
Inside front cover of prospectus to feature two product photos:
[Artwork to be submitted]
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with additional information or
information different from that contained in this prospectus. We
are offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of shares
of our common stock.
TABLE OF
CONTENTS
Through and
including ,
2007 (the 25th day after the date of this prospectus),
federal securities laws may require all dealers that effect
transactions in our common stock, whether or not participating
in this offering, to deliver a prospectus. This is in addition
to the dealers’ obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold
allotments or subscriptions.
Amelior
®
,
Acetadote
®
and the Cumberland Pharmaceuticals logo are trademarks or
service marks of Cumberland Pharmaceuticals Inc. All other
trademarks or service marks appearing in this prospectus are the
property of their respective holders.
.1
Prospectus summary
This summary highlights select contents of this prospectus,
and may not contain all of the information that you should
consider before investing in our common stock. This summary
should be read together with the more detailed information found
elsewhere in this prospectus, including “Risk factors”
and our consolidated financial statements and related notes
beginning on
page F-1.
References in this prospectus to “Cumberland,”
“we,” “us” and “our” refer to
Cumberland Pharmaceuticals Inc. and our consolidated
subsidiaries, unless the context indicates otherwise.
OUR
COMPANY
We are a profitable and growing specialty pharmaceutical company
focused on the acquisition, development and commercialization of
branded prescription products. Our primary target markets are
hospital acute care and gastroenterology, which are
characterized by relatively concentrated physician prescriber
bases. Unlike many emerging pharmaceutical and biotechnology
companies, we have established a product development and
commercial operating infrastructure that is scalable to
accommodate our expected growth. Our management team consists of
pharmaceutical industry veterans experienced in business
development, clinical and regulatory affairs, and sales and
marketing.
Since our inception in 1999, we have successfully funded the
acquisition and development of our product portfolio with
limited external investment, while maintaining profitable
operations over the past three years. Our portfolio consists of
two products approved by the U.S. Food and Drug Administration,
or FDA, one late-stage development product candidate nearing
completion of Phase III clinical trials and several
early-stage development projects. We were directly responsible
for the clinical development and regulatory approval of
Acetadote, one of our marketed products, and are currently
completing development of Amelior, our lead product candidate.
We promote Acetadote and our other FDA-approved product,
Kristalose, through dedicated hospital and gastroenterology
sales forces, which together are comprised of 42 sales
representatives and managers. We believe that our target markets
are highly concentrated, and consequently can be penetrated
effectively by small, dedicated sales forces without large-scale
promotional activity. For the years 2004, 2005 and 2006, our net
revenue was $12.0 million, $10.7 million and
$17.8 million, respectively, and our net income was
$558,000, $2.0 million and $4.4 million, respectively.
OUR
PRODUCTS
Our key products and product candidates include:
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Product
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Indication
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Delivery
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Status
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Amelior
®
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Pain and Fever
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Injectable
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Phase III
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Acetadote
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Acetaminophen Poisoning
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Injectable
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Marketed
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Kristalose
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Chronic and Acute Constipation
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Oral Solution
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Marketed
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Amelior,
our lead pipeline candidate, is an intravenous
formulation of ibuprofen that we expect will be the first
injectable product approved in the U.S. for the treatment
of both pain and fever. Amelior is currently in Phase III
clinical trials. We expect to complete clinical development by
early 2008 and are preparing to submit our new drug application,
or NDA, to the FDA for review. Amelior is designed to provide
physicians with a safe, effective treatment alternative for
patients who are unable to take oral medication for pain relief
and fever reduction. If approved, we plan to market Amelior in
the U.S. through our hospital sales force and in
international markets through alliances with marketing partners.
We believe Amelior currently represents our most significant
product opportunity.
According to IMS Health, the U.S. market for injectable
analgesics, or pain relievers, exceeded $302 million, or
491 million units, in 2006. This market consists primarily
of the non-steroidal anti-inflammatory drug ketorolac and
generic opioids. Despite having a poor safety profile, usage of
1
ketorolac has grown from approximately 38 million units in
2003, or 7% of the market, to approximately 43 million
units in 2006, or 9% of the market, according to IMS Health.
Injectable opioids such as morphine and meperidine accounted for
approximately 447 million units sold in 2006. While opioids
are widely used for acute pain management, they are associated
with a variety of side effects including sedation, nausea,
vomiting, headache, cognitive impairment and respiratory
depression. Based on the results of clinical studies to date, we
believe Amelior represents a potentially safer alternative to
ketorolac, the only non-opioid injectable pain relief drug
available in the U.S. Further, we believe Amelior is a safe and
effective treatment for hospitalized patients with fever who are
unable to take oral medication. There is currently no approved
injectable treatment for fever in the U.S.
Acetadote
is the only intravenous formulation of
N-acetylcysteine, or NAC, approved in the U.S. for the
treatment of acetaminophen poisoning. Though safe at recommended
doses, acetaminophen can cause liver damage with excessive use.
Acetaminophen overdose is the most common cause of acute liver
failure in adults in the U.S. According to the American
Association of Poison Control Centers’ Toxic Exposure
Surveillance System, acetaminophen was the leading cause of
poisonings presenting to emergency departments in the
U.S. in 2005, with approximately 77,000 cases treated.
NAC is accepted worldwide as the standard of care for treating
acetaminophen overdose. Until our 2004 launch of Acetadote, the
only FDA-approved form of NAC available in the U.S. was an
oral preparation. Medical literature suggests that, for a number
of patients, IV treatment is the only reasonable route of
administration due to nausea and vomiting associated with the
administration of oral NAC for acetaminophen overdose. Sales of
Acetadote have increased consistently since we launched the
product in June 2004, with wholesaler sales to hospitals growing
43% from $9 million in 2005 to $13 million in 2006. We
believe that we can continue to expand market share, and that
our Acetadote sales and marketing platform should help
facilitate the anticipated launch of Amelior.
Kristalose
, a prescription laxative product, is a
crystalline form of lactulose designed to enhance patient
acceptance and compliance. Based on data from IMS Health, the
U.S. prescription laxative market has grown rapidly over
the past few years, increasing from approximately
$206 million in 2003 to $389 million in 2006,
representing a compound annual growth rate of 24%. Wholesaler
sales of Kristalose to pharmacies were $10.5 million in
2006. During that year, we acquired exclusive
U.S. commercialization rights to Kristalose, subsequently
assembling a dedicated field sales force and re-launching the
product in October 2006 under the Cumberland brand. We believe
that we can increase market share for Kristalose given its many
positive, competitive attributes including better taste,
consistency, ease of use and cost relative to competing products.
Early-stage product candidates.
Our
early-stage product candidates are being developed by Cumberland
Emerging Technologies, Inc., or CET, our 86%-owned subsidiary.
CET collaborates with leading research institutions to identify
and advance the development of promising pre-clinical product
candidates within our target segments. Current CET projects
include an improved treatment for fluid buildup in the lungs of
cancer patients and an anti-infective for treating fungal
infections in immuno-compromised patients.
OUR COMPETITIVE
STRENGTHS
We believe our key competitive strengths include the following:
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A significant late-stage product opportunity in Amelior;
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Strong growth potential of our existing marketed products,
Acetadote and Kristalose;
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Our focus on underserved niche markets, including hospital acute
care and gastroenterology;
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A profitable business with a history of fiscal discipline; and
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Extensive management expertise in business development, clinical
and regulatory affairs, and sales and marketing.
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2
OUR
STRATEGY
Our objective is to develop, acquire and commercialize branded
pharmaceutical products for specialty physician market segments.
Our strategy to achieve this objective includes the following
key elements:
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Successfully develop and commercialize Amelior, our lead product
candidate in Phase III clinical trials;
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Maximize sales of our marketed products, Acetadote and
Kristalose;
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Expand our dedicated hospital and gastroenterology sales forces;
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Expand our product portfolio by acquiring rights to additional
marketed products and late-stage product candidates; and
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Develop a pipeline of early-stage products through CET, our
majority-owned subsidiary.
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RISKS AFFECTING
US
Our business is subject to numerous risks that could prevent us
from successfully implementing our business strategy. These and
other risks are discussed further in the section entitled
“Risk factors” immediately following this prospectus
summary, and include the following:
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Our Amelior product candidate has not been approved for sale and
may never be successfully commercialized;
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We currently market two products, Acetadote and Kristalose. An
adverse development regarding either of these products could
have a material and adverse impact on us;
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If any manufacturer we rely upon fails to produce our products
and product candidates in the amounts we require on a timely
basis, or fails to comply with stringent regulations applicable
to pharmaceutical drug manufacturers, we may face delays in the
commercialization of Amelior, or may be unable to meet demand
for the product supplied by the manufacturer and may lose
potential revenues;
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We are dependent on a variety of other third parties. If these
third parties fail to perform as we expect, our operations could
be disrupted and our financial results could suffer; and
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If we are unable to maintain and build an effective sales and
marketing infrastructure, we will not be able to successfully
commercialize and grow our products and product candidates.
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CORPORATE
INFORMATION
We were incorporated in Tennessee in 1999. Our principal
executive offices are located at 2525 West End Avenue,
Suite 950, Nashville, Tennessee 37203, and our telephone
number is
(615) 255-0068.
Our website address is www.cumberlandpharma.com. The information
on, or accessible through, our website is not part of this
prospectus.
3
The offering
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Common stock we are offering
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shares
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Common stock to be outstanding after this offering
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shares
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Use of proceeds
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We estimate that the net proceeds from this offering will be
approximately $ million, or
approximately $ million if
the underwriters exercise their over-allotment option in full,
assuming an initial public offering price of
$ per share. We expect to use
the net proceeds from this offering primarily for potential
acquisitions, product development and expansion, and general
corporate purposes. We may use a portion of the net proceeds to
acquire the rights to one or more marketed, FDA-approved
products or one or more product candidates in late-stage
development. We may use a portion of the net proceeds to expand
our operations in order to prepare for the launch of one or more
new products. We may also repay outstanding borrowings under our
credit facilities.
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Proposed Nasdaq Global Market Symbol
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CPIX
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The number of shares of common stock to be outstanding after
this offering is based
on shares
outstanding as
of
and excludes:
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shares
of common stock issuable upon exercise of options issued under
our 1999 Stock Option Plan and options issued in connection with
debt financings in 2001 and 2003, at a weighted average exercise
price of $ per share;
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shares
of common stock issuable upon exercise of outstanding warrants
at a weighted average exercise price of
$ and
$ per share;
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shares
of common stock issuable upon conversion of outstanding
preferred stock; and
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shares
of common stock reserved for future issuance under our current
stock option plans.
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Unless otherwise indicated, all information in this prospectus
assumes the underwriters do not exercise their option to
purchase up
to shares
of our common stock to cover over-allotments.
4
Summary consolidated
financial data
The tables below summarize our financial data as of the dates
and for the periods indicated. You should read the following
information together with the more detailed information
contained in “Selected consolidated financial data,”
“Management’s discussion and analysis of financial
condition and results of operations” and our consolidated
financial statements and the accompanying notes included
elsewhere in this prospectus.
Pro forma data below gives effect to the conversion
of
shares of our preferred stock
into
shares of common stock. Pro forma as adjusted data below gives
effect to the sale
of
shares of common stock that we are offering at an assumed
initial public offering price of $
per share, after deducting underwriting discounts and
commissions and estimated offering expenses to be paid by us.
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Years Ended
December 31,
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Statement of
operations data:
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2004
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2005
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2006
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(in thousands,
except per share data)
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Net revenues
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$
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12,032
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$
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10,690
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$
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17,815
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Operating income
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1,569
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750
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2,224
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Net income before income taxes
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558
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770
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1,708
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Net income
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558
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1,954
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4,404
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Net income per share—basic
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$
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0.12
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$
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0.41
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$
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0.90
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Net income per share—diluted
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$
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0.07
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$
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0.24
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$
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0.55
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Weighted average shares
outstanding—basic
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4,541
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4,748
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4,899
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Weighted average shares
outstanding—diluted
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7,741
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8,045
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8,016
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As of
December 31, 2006
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Pro Forma
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Balance sheet
data:
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Actual
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Pro
Forma
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as
Adjusted
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(in
thousands)
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Cash and cash equivalents
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$
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6,255
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$
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$
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Working capital
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3,945
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Total assets
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26,481
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Total long-term debt and other
long-term obligations
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10,543
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Preferred stock
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2,743
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Total shareholders’ equity
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11,126
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5
Risk factors
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risks, together with
all of the information included in this prospectus, before
investing in our common stock. In addition to the risks outlined
below, there may be other unforeseen risks which may not or
cannot be identified at this time. If any of these risks were to
occur, our business, financial condition and results of
operations could be materially and adversely affected. In that
case, the trading price of our common stock could decline, and
you might lose all or part of your investment.
RISKS RELATED TO
OUR BUSINESS
Our Amelior
product candidate has not been approved for sale and may never
be successfully commercialized.
We anticipate that a substantial portion of our future growth
will come from sales of our Amelior product candidate. However,
Amelior has neither been approved nor marketed by the U.S. Food
and Drug Administration, or FDA, and it is still subject to
risks associated with its clinical development.
Amelior is undergoing Phase III clinical trials to test its
efficacy and safety. Delays in the completion of these clinical
trials, which can result from unforeseen issues, FDA
interventions, problems with enrolling patients and other
reasons, could significantly delay commercial launch and affect
our product development costs. Moreover, results from these
clinical studies may not be as favorable as the results we
obtained in prior, completed studies.
If the results of our clinical trials are favorable, we intend
to submit to the FDA an application for marketing approval for
Amelior. The FDA may decline to accept our application. If the
FDA declines our application, it may require that we conduct
additional studies and submit additional data prior to
resubmitting the application. If the FDA accepts and reviews the
application, it may still require that we conduct additional
studies or submit other data. Conducting studies and collecting,
analyzing and submitting necessary data can be time-consuming
and expensive. The FDA may not act on our application during the
timeframe that we expect. Moreover, the FDA might not approve
our application, in which event we would not be able to sell
Amelior in the U.S., or it might approve Amelior for only
limited uses, in which event the market for this product could
be significantly reduced, adversely affecting our commercial
opportunity. In addition, new government regulations could
prevent or delay regulatory approval of Amelior.
Amelior, which is injectable ibuprofen, is a non-steroidal
anti-inflammatory drug, or NSAID. The widespread use of NSAIDs
has meant that the adverse effects of these relatively safe
drugs have become increasingly prevalent. The two main adverse
drug reactions associated with NSAIDs relate to the
gastrointestinal tract and the kidneys. Recent studies suggest
there may also be a risk of cardiovascular adverse effects
associated with NSAIDs. While we are currently studying the
safety of Amelior in our clinical trials, the FDA may require
additional safety data be collected prior to or after any
approval of the product.
Even if Amelior is successfully developed and approved by the
FDA, it may never gain significant acceptance in the marketplace
and therefore never generate substantial revenue or profits for
us. Physicians may determine that existing drugs are adequate to
address patients’ needs. For example, oral non-narcotic
pain and fever reducers, as well as narcotic IV pain
relievers, are widely available and commonly prescribed. If
physicians determine that Amelior is safe and effective, it will
still compete, on a
patient-by-patient
and
physician-by-physician
basis, with other therapeutic alternatives. Additionally, we are
aware of other companies developing products that would address
the same market that we are targeting for Amelior. The extent to
which Amelior will be reimbursed by the U.S. government or third-
6
Risk
factors
party payors is also currently unknown, and reimbursement levels
of Amelior compared to those of other competitive drugs will
also affect the level of market acceptance.
As a result of the foregoing and other factors, we do not know
the extent to which Amelior will contribute to our future growth.
We currently
market two products, Acetadote and Kristalose. An adverse
development regarding either of these products could have a
material and adverse impact on us.
We currently market and sell two products, Acetadote and
Kristalose. Changes impacting either product in areas such as
competition, government regulation, intellectual property,
reimbursement and manufacturing would profoundly affect us.
Similarly, a product contamination or other safety issue in
either of our product markets, whether or not directly involving
our products, could negatively impact us.
If any
manufacturer we rely upon fails to produce our products and
product candidates in the amounts we require on a timely basis,
or fails to comply with stringent regulations applicable to
pharmaceutical drug manufacturers, we may face delays in the
commercialization of Amelior, or may be unable to meet demand
for the product supplied by the manufacturer and may lose
potential revenues.
We do not manufacture any of our products or product candidates,
and we do not currently plan to develop any capacity to do so.
Our dependence upon third parties for the manufacture of
products could adversely affect our profit margins or our
ability to develop and deliver products on a timely and
competitive basis. If for any reason we are unable to obtain or
retain third-party manufacturers on commercially acceptable
terms, we may not be able to sell our products as planned.
Furthermore, if we encounter delays or difficulties with
contract manufacturers in producing our products, the
distribution, marketing and subsequent sales of these products
could be adversely affected. In either event, we may choose to
or need to seek an alternative source of supply for, or abandon,
a product line or sell a product line on unsatisfactory terms.
Our agreement with Bioniche Teoranta, or Bioniche, for the
exclusive manufacture and supply of Acetadote requires that we
obtain Acetadote only from Bioniche, even if we could obtain
Acetadote from another supplier on terms more favorable than the
terms of our agreement with Bioniche.
We have minimum purchase obligations under our Acetadote supply
agreement with Bioniche and our Kristalose supply agreement with
Inalco S.p.A. and Inalco Biochemicals, Inc., or collectively
Inalco. If our purchase obligations exceed demand for these
products, we may be forced to either breach our contract with
that manufacturer or purchase a supply of the product that we
may be unable to sell. Our contract with Bioniche extends until
2011, and our contract with Inalco extends until 2021.
On February 2, 2007, Mayne Pharma Pty. Ltd., our exclusive
manufacturer of Amelior, was acquired by Hospira, Inc. If
Hospira encounters integration problems or if we have
disagreements with Hospira, with whom we have not collaborated
in the past, our supply of Amelior could be interrupted.
Amelior is manufactured at a single facility in Australia.
Acetadote is manufactured at a single facility in Ireland and
the active pharmaceutical ingredient for Kristalose is
manufactured at a single facility in Italy. If any one of these
facilities is damaged or destroyed, or if local conditions
result in a work stoppage, we could suffer a delay or suspension
of clinical trials, in the case of Amelior, or an inability to
meet demand in the case of our marketed products. Kristalose is
manufactured through a complex process involving trade secrets
of the manufacturer. Accordingly, it would be particularly
difficult to find a new manufacturer of Kristalose on an
expedited basis.
7
Risk
factors
In addition, all manufacturers of our products and product
candidates must comply with current good manufacturing
practices, referred to as cGMP, enforced by the FDA through its
facilities inspection program. These requirements include
quality control, quality assurance and the maintenance of
records and documentation. Manufacturers of our product
candidates may be unable to comply with cGMP requirements and
with other FDA, state and foreign regulatory requirements. We
have no control over our manufacturers’ compliance with
these regulations and standards. If our third-party
manufacturers do not comply with these requirements, we could be
subject to:
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fines and civil penalties;
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suspension of production or distribution;
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suspension or delay in product approval;
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product seizure or recall; and
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withdrawal of product approval.
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We are dependent
on a variety of other third parties. If these third parties fail
to perform as we expect, our operations could be disrupted and
our financial results could suffer.
We have a relatively small internal infrastructure. We rely on a
variety of third parties, other than our third-party
manufacturers, to help us operate our business. Other third
parties on which we rely include:
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Cardinal Health Specialty Pharmaceutical Services, a logistics
and fulfillment company and business unit of Cardinal, which
warehouses and ships both Kristalose and Acetadote;
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Advogent Group, Inc., a spin-off of Cardinal, which provides a
field sales force that is the primary selling team for
Kristalose; and
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Vanderbilt University and the Tennessee Technology Development
Corporation, co-owners with us of Cumberland Emerging
Technologies, Inc., or CET, and the universities that
collaborate with us in connection with CET’s research and
development programs.
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If these third parties do not continue to provide services to
us, or collaborate with us, we might not be able to obtain
others who can serve these functions. This could disrupt our
business operations, delay completion of clinical trials,
regulatory approval and market launch of Amelior or any future
product candidate, increase our operating expenses and otherwise
adversely affect our operating results.
If we are unable
to maintain and build an effective sales and marketing
infrastructure, we will not be able to commercialize and grow
our products and product candidates successfully.
Historically, we have relied on Cardinal, to provide sales
representatives to promote our products. Recently, we exercised
an option under our agreement with Cardinal to convert the
hospital sales force for our products to Cumberland employees.
This conversion was completed in January 2007. Our ability to
maintain and increase our revenues and profitability,
particularly in the near term, will depend on our ability to
address any issues or inefficiencies that arise from
transitioning this sales force from Cardinal employees to our
employees.
As we grow, we may not be able to secure sales personnel or
organizations that are adequate in number or expertise to
successfully market and sell our products. This risk would be
accentuated if we acquire products in areas outside of acute
care/emergency medicine and gastroenterology, since our sales
forces specialize in these areas. If we are unable to expand our
sales and marketing capability or any other capabilities
necessary to commercialize our products and product candidates,
we will need to contract
8
Risk
factors
with third parties to market and sell our products. If we are
unable to establish and maintain adequate sales and marketing
capabilities:
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we may not be able to increase our product revenue;
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we may generate increased expenses; and
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we may not continue to be profitable.
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Competitive
pressures could reduce our revenues and profits.
The pharmaceutical industry is intensely competitive. Our
strategy is to target differentiated products in specialized
markets. However, this strategy does not relieve us from
competitive pressures, and can entail distinct competitive
risks. For example, a new entrant into a smaller market could
have a disproportionately large impact on others in the market.
In addition, certain of our competitors do not aggressively
promote their products in our markets. A relatively modest
increase in promotional activity in our markets could result in
large shifts in market share, adversely affecting us.
Kristalose competes in the U.S. with several other prescription
laxative products, two of which are marketed by large,
international pharmaceutical companies. Acetadote competes
domestically with several orally administered prescription
products for treating acetaminophen overdose. We are aware of
products under development, including an intravenous
acetaminophen product, which could compete with Amelior. We have
limited patent protection against direct competition.
We compete with numerous pharmaceutical, specialty
pharmaceutical and biotechnology companies. Our competitors may
sell or develop drugs that are more effective and useful and
less costly than ours, and they may be more successful in
manufacturing and marketing their products. Many of our
competitors have significantly greater financial and marketing
resources than we do. Additional competitors may enter our
markets.
The pharmaceutical industry is characterized by constant and
significant investment in new product development, which can
result in rapid technological change. The introduction of new
products could substantially reduce our market share or render
our products obsolete. The selling prices of pharmaceutical
products tend to decline as competition increases, through new
product introduction or otherwise, which could reduce our
revenues and profitability.
Governmental and private health care payors have recently
emphasized substitution of branded pharmaceuticals with less
expensive generic equivalents. An increase in the sales of
generic pharmaceutical products could result in a decrease in
our revenues. While there are no generic equivalents competing
with Amelior, Acetadote or Kristalose at this time, in the
future we could face generic competition.
Our future growth
depends on our ability to identify and acquire rights to
products. If we do not successfully identify and acquire rights
to products and successfully integrate them into our operations,
our growth opportunities would be limited.
We acquired rights to Amelior, Acetadote and Kristalose. Our
business strategy is to continue to acquire rights to
FDA-approved products as well as pharmaceutical product
candidates in the late stages of development. We do not plan to
conduct basic research or early-stage product development,
except to the extent of our investment in CET. We have limited
resources to acquire third-party products, businesses and
technologies and integrate them into our current infrastructure.
Many acquisition opportunities involve competition among several
potential purchasers including large multi-national
pharmaceutical companies and other competitors that have access
to greater financial resources than we do.
9
Risk
factors
With future acquisitions, we may face financial and operational
risks and uncertainties, including:
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not realizing the expected economic return or other benefits
from an acquisition;
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incurring higher than expected acquisition and integration costs;
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assuming or otherwise being exposed to unknown liabilities;
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developing or integrating new products that could disrupt our
business and divert our management’s time and attention;
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not being able to preserve key suppliers or distributors of any
acquired products;
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incurring substantial debt or issue dilutive securities to pay
for acquisitions; and
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acquiring products that could substantially increase our
amortization expenses.
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We are not precluded from engaging in a large acquisition in the
future, including an acquisition that entails the investment of
substantially all of the proceeds from this offering. While
large acquisitions potentially present large opportunities, they
also could magnify the risks identified above.
We may not be able to engage in future product acquisitions, and
those we do complete may not be beneficial to us in the long
term.
Continued
consolidation of distributor networks in the pharmaceutical
industry as well as increases in retailer concentration may
limit our ability to profitably sell our products.
We sell most of our products to large pharmaceutical
wholesalers, who in turn sell to, thereby supplying, hospitals
and retail pharmacies. The distribution network for
pharmaceutical products has become increasingly consolidated in
recent years. Today, three large wholesalers control most of the
market. Further consolidation among, or any financial
difficulties of, pharmaceutical wholesalers or retailers could
result in the combination or elimination of warehouses, which
could cause product returns to us. In addition, further
consolidation or financial difficulties could also cause our
customers to reduce the amounts of our products that they
purchase, which would materially and adversely affect our
business, financial condition and results of operations.
If governmental
or third-party payors do not provide adequate reimbursement for
our products, our revenue and prospects for continued
profitability will be limited.
Our financial success depends, in part, on the availability of
adequate reimbursement from third-party healthcare payors. Such
third-party payors include governmental health programs such as
Medicare and Medicaid, managed care providers and private health
insurers. Third-party payors are increasingly challenging the
pricing of medical products and services, while governments
continue to propose and pass legislation designed to reduce the
cost of healthcare. Adoption of such legislation could further
limit reimbursement for pharmaceuticals. For example, in
December 2003, Congress enacted a limited prescription drug
benefit for Medicare beneficiaries in the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003. Under this
program, drug prices for certain prescription drugs are
negotiated by drug plans, with the goal to lower costs for
Medicare beneficiaries. Future cost control initiatives could
decrease the price that we would receive for any products, which
would limit our revenue and profitability. In addition,
legislation and regulations affecting the pricing of
pharmaceuticals might change.
Reimbursement practices of third-party payors might preclude us
from achieving market acceptance for our products or maintaining
price levels sufficient to realize an appropriate return on our
investment in product acquisition and development. If we cannot
obtain adequate reimbursement levels, our business, financial
condition and results of operations would be materially and
adversely affected.
10
Risk
factors
“Formulary”
practices of third-party payors could adversely affect our
competitive position.
Many managed health care organizations are now controlling the
pharmaceutical products listed on their formulary lists. The
benefit of having products listed on these formulary lists
creates competition among pharmaceutical companies which, in
turn, has created a trend of downward pricing pressure in our
industry. In addition, many managed care organizations are
pursuing various ways to reduce pharmaceutical costs and are
considering formulary contracts primarily with those
pharmaceutical companies that can offer a full line of products
for a given therapy sector or disease state. Our products might
not be included on the formulary lists of managed care
organizations, and downward pricing pressure in our industry
generally could negatively impact our operations.
Our CET joint
initiative may not result in our gaining access to commercially
viable products.
Our CET joint initiative with Vanderbilt University and
Tennessee Technology Development Corporation is designed to help
us investigate, in a cost-effective manner, early-stage products
and technologies. However, we may never gain access to
commercially viable products from CET for a variety of reasons,
including:
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CET investigates early-stage products, which have the greatest
risk of failure prior to FDA approval and commercialization;
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In some programs, we do not have pre-set rights to product
candidates developed by CET. We would need to agree with CET and
its collaborators on the terms of any product license to, or
acquisition by, us;
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We rely principally on government grants to fund CET’s
research and development programs. If these grants were no
longer available, we or our co-owners might be unable or
unwilling to fund CET operations at current levels or at
all;
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We may become involved in disputes with our co-owners regarding
CET policy or operations, such as how best to deploy CET assets
or which product opportunities to pursue. Disagreement could
disrupt or halt product development; and
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CET may disagree with one of the various universities with which
CET is collaborating on research. A disagreement could disrupt
or halt product development.
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The size of our
organization and our activities are growing, and we may
experience difficulties in managing growth.
As of April 30, 2007, we had 33 full-time employees.
We may need to continue to expand our managerial, operational,
financial and other resources in order to increase our marketing
efforts with regard to our currently marketed products, continue
our business development and product development activities and
commercialize our product candidates. We have experienced, and
may continue to experience, rapid growth in the scope of our
operations in connection with the commercial launch of new
products. Our financial performance will depend, in part, on our
ability to manage any such growth effectively. Our management,
personnel, systems and facilities currently in place may not be
adequate to support this future growth.
We depend on our
key personnel, the loss of whom would adversely affect our
operations. If we fail to attract and retain the talent required
for our business, our business will be materially
harmed.
We are a relatively small company, and we depend to a great
extent on principal members of our management and scientific
staff. If we lose the services of any key personnel, in
particular, A.J. Kazimi,
11
Risk
factors
our Chief Executive Officer, it could have a material adverse
effect on our business prospects. We currently have a key man
life insurance policy covering the life of Mr. Kazimi. We
have entered into agreements with each of our employees that
contain restrictive covenants relating to non-competition and
non-solicitation of our customers and suppliers for one year
after termination of employment. Nevertheless, each of our
officers and key employees may terminate his or her employment
at any time without notice and without cause or good reason, and
so as a practical matter these agreements do not guarantee the
continued service of these employees. Our success depends on our
ability to attract and retain highly qualified scientific,
technical and managerial personnel and research partners.
Competition among pharmaceutical companies for qualified
employees is intense, and we may not be able to retain existing
personnel or attract and retain qualified staff in the future.
If we experience difficulties in hiring and retaining personnel
in key positions, we could suffer from delays in product
development, loss of customers and sales and diversion of
management resources, which could adversely affect operating
results.
We face potential
product liability exposure, and if successful claims are brought
against us, we may incur substantial liability for a product or
product candidate and may have to limit its
commercialization.
We face an inherent risk of product liability lawsuits related
to the testing of our product candidates and the commercial sale
of our products. An individual may bring a liability claim
against us if one of our product candidates or products causes,
or appears to have caused, an injury. If we cannot successfully
defend ourselves against the product liability claim, we may
incur substantial liabilities. Liability claims may result in:
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decreased demand for our products;
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injury to our reputation;
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withdrawal of clinical trial participants;
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significant litigation costs;
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substantial monetary awards to or costly settlement with
patients;
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product recalls;
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loss of revenue; and
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the inability to commercialize our product candidates.
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We are highly dependent upon medical and patient perceptions of
us and the safety and quality of our products. We could be
adversely affected if we or our products are subject to negative
publicity. We could also be adversely affected if any of our
products or any similar products sold by other companies prove
to be, or are asserted to be, harmful to patients. Also, because
of our dependence upon medical and patient perceptions, any
adverse publicity associated with illness or other adverse
effects resulting from the use or misuse of our products or any
similar products sold by other companies could have a material
adverse impact on our results of operations.
We have product liability insurance that covers our clinical
trials and the marketing and sale of our products up to a
$10 million annual aggregate limit, subject to specified
deductibles. Our current or future insurance coverage may prove
insufficient to cover any liability claims brought against us.
Because of the increasing costs of insurance coverage, we may
not be able to maintain insurance coverage at a reasonable cost
or obtain insurance coverage that will be adequate to satisfy
any liability that may arise.
12
Risk
factors
We have never
paid dividends on our capital stock, and we do not anticipate
paying any cash dividends in the foreseeable future.
We have never paid cash dividends on our capital stock. We do
not anticipate paying cash dividends to our shareholders in the
foreseeable future. The availability of funds for distributions
to shareholders will depend substantially on our earnings. Even
if we become able to pay dividends in the future, we expect that
we would retain such earnings to enhance capital
and/or
reduce long-term debt.
RISKS RELATING TO
GOVERNMENT REGULATION
We are subject to
stringent government regulation. All of our products face
regulatory challenges.
Virtually all aspects of our business activities are regulated
by government agencies. The manufacturing, processing,
formulation, packaging, labeling, distribution, promotion and
sampling, and advertising of our products, and disposal of waste
products arising from such activities, are subject to
governmental regulation. These activities are regulated by one
or more of the FDA, the Federal Trade Commission, or the FTC,
the Consumer Product Safety Commission, the U.S. Department
of Agriculture and the U.S. Environmental Protection
Agency, or the EPA, as well as by comparable agencies in foreign
countries. These activities are also regulated by various
agencies of the states and localities in which our products are
sold. For more information, see “Business—Government
Regulation.”
Like all pharmaceutical manufacturers, we are subject to
regulation by the FDA under the authority of the Federal Food,
Drug and Cosmetic Act, or the FDC Act. All “new drugs”
must be the subject of an FDA-approved new drug application, or
NDA, before they may be marketed in the U.S. The FDA has the
authority to withdraw existing NDA approvals and to review the
regulatory status of products marketed under the enforcement
policy. The FDA may require an approved NDA for any drug product
marketed under the enforcement policy if new information reveals
questions about the drug’s safety and effectiveness. All
drugs must be manufactured in conformity with cGMP, and drug
products subject to an approved NDA must be manufactured,
processed, packaged, held and labeled in accordance with
information contained in the NDA. Since we rely on third parties
to manufacture our products, cGMP requirements directly affect
our third party manufacturers and indirectly affect us. The
manufacturing facilities of our third-party manufacturers are
continually subject to inspection by such governmental agencies,
and manufacturing operations could be interrupted or halted in
any such facilities if such inspections prove unsatisfactory.
Our third-party manufacturers are subject to periodic inspection
by the FDA to assure such compliance.
Pharmaceutical products must be distributed, sampled and
promoted in accordance with FDA requirements. The FDA also
regulates the advertising of prescription drugs. The FDA has the
authority to request post-approval commitments that can be
time-consuming and expensive to comply with.
Under the FDC Act, the federal government has extensive
enforcement powers over the activities of pharmaceutical
manufacturers to ensure compliance with FDA regulations. Those
powers include, but are not limited to, the authority to
initiate court action to seize unapproved or non-complying
products, to enjoin non-complying activities, to halt
manufacturing operations that are not in compliance with cGMP,
and to seek civil monetary and criminal penalties. The
initiation of any of these enforcement activities, including the
restriction or prohibition on sales of our products, could
materially adversely affect our business, financial condition
and results of operations.
Any change in the FDA’s enforcement policy could have a
material adverse effect on our business, financial condition and
results of operations.
13
Risk
factors
We cannot determine what effect changes in regulations or
statutes or legal interpretation, when and if promulgated or
enacted, may have on our business in the future. Such changes
could, among other things, require:
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changes to manufacturing methods;
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expanded or different labeling;
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recall, replacement or discontinuance of certain products;
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additional record keeping; and
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expanded documentation of the properties of certain products and
scientific substantiation.
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Such changes, or new legislation, could have a material adverse
effect on our business, financial condition and results of
operations.
RISKS RELATING TO
INTELLECTUAL PROPERTY
Our strategy to
secure and extend marketing exclusivity or patent rights may
provide only limited protection from competition.
We seek to secure and extend marketing exclusivity for our
products through a variety of means, including FDA exclusivity
and patent rights. Acetadote has been designated as an
“orphan drug” and is indicated to prevent or lessen
hepatic (liver) injury when administered intravenously within
eight to ten hours after ingesting quantities of acetaminophen
that are potentially toxic to the liver. As such, Acetadote is
protected until 2011 against competition from another drug using
the same active ingredient to treat the same indication. Orphan
drug marketing exclusivity does not, however, protect a drug
from competition by a different drug marketed for the same
indications.
We do not have “composition of matter” or
“use” patents for our marketed products. We do have a
U.S. patent, No. 6,727,286, and some related
international patents, which are directed to ibuprofen solution
formulations, methods of making the same, and methods of using
the same, and which are related to our formulation and
manufacture of Amelior. We have applied for additional U.S. and
international patent protection for our invention related to
ibuprofen solution formulations, methods of making the same, and
methods of using the same, but those applications may not result
in issued patents. Additionally, the active ingredient in
Amelior—ibuprofen—is in the public domain, and if a
competitor were to develop a sufficiently distinct formulation,
it could develop and seek FDA approval for an ibuprofen product
that competes with Amelior. Following successful completion of
our clinical studies, we also plan to seek three-year marketing
exclusivity for Amelior.
Inalco manufactures Kristalose and owns two U.S. patents,
Nos. 5,003,061 and 5,480,491, related to the manufacture of
Kristalose. These patents are not directed to the composition or
use of Kristalose and do not prevent a competitor from
developing a formulation and developing and seeking FDA approval
for a product that competes with Kristalose.
While we consider patent protection when evaluating product
acquisition opportunities, any products we acquire in the future
may not have significant patent protection. Neither the
U.S. Patent and Trademark Office nor the courts have a
consistent policy regarding the breadth of claims allowed or the
degree of protection afforded under many pharmaceutical patents.
Patent applications in the U.S. and many foreign jurisdictions
are typically not published until 18 months following their
priority filing date, and in some cases not at all. In addition,
publication of discoveries in scientific literature often lags
significantly behind actual discoveries. Therefore, neither we
nor our licensors can be certain that we or they were the first
to make the inventions claimed in our issued patents or pending
patent applications, or that we or they were the first to file
for protection of the inventions set forth in these
14
Risk
factors
patent applications. In addition, changes in either patent laws
or in interpretations of patent laws in the U.S. and other
countries may diminish the value of our intellectual property or
narrow the scope of our patent protection. Furthermore, our
competitors may independently develop similar technologies or
duplicate technology developed by us in a manner that does not
infringe our patents or other intellectual property. As a result
of these factors, our patent rights may not provide any
commercially valuable protection from competing products.
If we are unable
to protect the confidentiality of our proprietary information
and know-how, the value of our technology and products could be
adversely affected.
In addition to patents, we rely upon trade secrets, unpatented
proprietary know-how and continuing technological innovation
where we do not believe patent protection is appropriate or
attainable. For example, the manufacturing process for
Kristalose involves substantial trade secrets and proprietary
know-how. We have entered into confidentiality agreements with
certain key employees and consultants pursuant to which such
employees and consultants must assign to us any inventions
relating to our business if made by them while they are our
employees, as well as certain confidentiality agreements
relating to the acquisition of rights to products.
Confidentiality agreements can be breached, though, and we might
not have adequate remedies for any breach. Also, others could
acquire or independently develop similar technology.
We depend on our
licensors for the maintenance and enforcement of our
intellectual property and have limited, if any, control over the
amount or timing of resources that our licensors devote on our
behalf.
When we license products, we often depend on our licensors to
protect the proprietary rights covering those products. We have
limited, if any, control over the amount or timing of resources
that our licensors devote on our behalf or the priority they
place on maintaining patent or other rights and prosecuting
patent applications to our advantage. While any such licensor is
expected to be under contractual obligations to us to diligently
prosecute its patent applications and allow us the opportunity
to consult, review and comment on patent office communications,
we cannot be sure that it will perform as required. If a
licensor does not perform and if we do not assume the
maintenance of the licensed patents in sufficient time to make
required payments or filings with the appropriate governmental
agencies, we risk losing the benefit of all or some of those
patent rights.
If the use of our
technology conflicts with the intellectual property rights of
third parties, we may incur substantial liabilities, and we may
be unable to commercialize products based on this technology in
a profitable manner or at all.
Third parties, including our competitors, could have or acquire
patent rights that they could enforce against us. In addition,
we may be subject to claims from others that we are
misappropriating their trade secrets or confidential proprietary
information. If our products conflict with the intellectual
property rights of others, they could bring legal action against
us or our licensors, licensees, manufacturers, customers or
collaborators. If we were found to be infringing a patent or
other intellectual property rights held by a third party, we
could be forced to seek a license to use the patented or
otherwise protected technology. We might not be able to obtain
such a license on terms acceptable to us or at all. If an
infringement or misappropriation legal action were to be brought
against us or our licensors, we would incur substantial costs in
defending the action. If such a dispute were to be resolved
against us, we could be subject to significant damages, and the
manufacturing or sale of one or more of our products could be
enjoined.
15
Risk
factors
We may be
involved in lawsuits to protect or enforce our patents or the
patents of our collaborators or licensors, which could be
expensive and time consuming.
Competitors may infringe our patents or the patents of our
collaborators or licensors. To counter infringement or
unauthorized use, we may be required to file infringement
claims, which can be expensive and time-consuming. In addition,
in an infringement proceeding, a court may decide that a patent
of ours is not valid or is unenforceable, or may refuse to stop
the other party from using the technology at issue on the
grounds that our patents do not cover the technology in
question. An adverse result in any litigation or defense
proceeding could put one or more of our patents at risk of being
invalidated or interpreted narrowly and could put our patent
applications at risk of not issuing.
Interference proceedings brought by the U.S. Patent and
Trademark Office may be necessary to determine the priority of
inventions with respect to our patent applications or those of
our collaborators or licensors. Litigation or interference
proceedings may fail and, even if successful, may result in
substantial costs and distract our management. We may not be
able, alone or with our collaborators and licensors, to prevent
misappropriation of our proprietary rights, particularly in
countries where the laws may not protect such rights as fully as
in the U.S.
Furthermore, because of the substantial amount of discovery
required in connection with intellectual property litigation,
some of our confidential information could be disclosed during
this type of litigation. In addition, there could be public
announcements of the results of hearings, motions or other
interim proceedings or developments. If securities analysts or
investors perceive these results to be negative, it could have a
substantial adverse effect on the price of our common stock.
If we breach any
of the agreements under which we license rights to our products
and product candidates from others, we could lose the ability to
continue commercialization of our products and development and
commercialization of our product candidates.
We have exclusive licenses for the marketing and sale of certain
products and may acquire additional licenses. Such licenses may
terminate prior to expiration if we breach our obligations under
the license agreement related to these pharmaceutical products.
For example, the licenses may terminate if we fail to meet
specified quality control standards, including cGMP with respect
to the products, or commit a material breach of other terms and
conditions of the licenses. Such early termination could have a
material adverse effect on our business, financial condition and
results of operations.
Our agreement with Inalco appoints us as the exclusive marketer,
seller and distributor of Kristalose in the U.S. Either we or
Inalco may terminate this agreement upon the breach of any
material provision of the agreement if the breach is not cured
within 45 days following written notice. If our agreement
with Inalco were terminated, we would lose our right to continue
commercialization of Kristalose in the U.S.
Under an agreement between us and Vanderbilt University, we have
received certain clinical data to support our planned NDA
submission for Amelior. Either we or Vanderbilt may terminate
this agreement upon the breach of any material provision of the
agreement if the breach is not cured within 45 days
following written notice. If our agreement with Vanderbilt were
terminated, we would lose our right to use the data to support
our planned NDA submission, and this loss may hinder our ability
to commercialize Amelior in accordance with our plans.
16
Risk
factors
RISKS RELATED TO
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We have
identified material weaknesses and a significant deficiency in
our internal controls that, if not properly corrected, could
result in material misstatements in our financial
statements.
In connection with our fiscal year 2006 financial statement
audit, we identified three material weaknesses, and an
additional significant deficiency (not rising to the level of a
material weakness), in our internal controls. A significant
deficiency is a control deficiency, or a combination of control
deficiencies, that adversely affects our ability to initiate,
authorize, record, process, or report external financial data
reliably in accordance with U.S. generally accepted accounting
principles such that there is more than a remote likelihood that
a misstatement of our annual or interim financial statements
that is more that inconsequential will not be prevented or
detected by our employees. A material weakness is a significant
deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material
misstatement of our annual or interim financial statement will
not be presented or detected by our employees. We have
undertaken a remediation plan designed to correct these issues.
We summarize below the nature of the material weaknesses
referenced above as well as the related remediation steps that
we are implementing or plan to implement:
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Non-Routine Transactions.
We did not maintain
adequate policies and procedures related to our financial
reporting in order to account for significant, non-routine
transactions in accordance with U.S. generally accepted
accounting principles. To remedy this material weakness, we are
implementing a new policy requiring management to review
quarterly the accounting treatment for all transactions and
contracts entered into.
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Financial Statement Review Process.
We lack
adequate personnel resources possessing sufficient expertise in
U.S. generally accepted accounting principles to effectively
perform a review of the annual financial statements. To remedy
this material weakness, we intend to establish a new internal
position that will be primarily responsible for SEC and other
external reporting requirements. This position will report to
the Vice President of Finance and Accounting.
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Taxes.
We do not have an adequate number of
personnel with appropriate qualifications and training in
accounting for income taxes to perform a sufficient review of
the income tax provision. To remedy this material weakness, we
are implementing new procedures that, among other things,
require us to further review the work of our external tax
provider and to increase communication and information-sharing
between our external tax provider and us.
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The significant deficiency relates to our policies and
procedures for the review of our master listing of stock options
granted. To remedy this significant deficiency, we are reviewing
each transaction on our master listing against the relevant
source documents and implementing new policies requiring
quarterly review of the master listing by departments including
our finance and accounting departments.
If we are not able to timely remedy the material weaknesses and
significant deficiency described above, we may be unable to
provide to our shareholders the required financial information
in a timely and reliable manner, and we may misreport financial
information, either of which could subject us to stockholder
litigation and regulatory enforcement actions. This could
materially and adversely impact our financial condition and the
market value of our securities.
17
Risk
factors
Our operating
results are likely to fluctuate from period to period.
We are a relatively new company seeking to capture significant
growth. While our revenues and operating income have increased
over time, we anticipate that there may be fluctuations in our
future operating results. Potential causes of future
fluctuations in our operating results may include:
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new product launches, which could increase revenues but also
increase sales and marketing expenses;
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acquisition activity and other one-time charges (such as for
inventory expiration);
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increases in research and development expenses resulting from
the acquisition of a product candidate that requires significant
additional development;
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changes in the competitive, regulatory or reimbursement
environment, which could drive down revenues or drive up sales
and marketing or compliance costs; and
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unexpected product liability or intellectual property claims and
lawsuits.
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See also “Management’s discussion and analysis of
financial condition and results of operations —
Liquidity and capital resources.” Fluctuation in operating
results, particularly if not anticipated by investors and other
members of the financial community, could add to volatility in
our stock price.
Our focus on
acquisitions as a growth strategy has created a large amount of
intangible assets whose amortization could negatively affect our
results of operations.
Our total assets include intangible assets related to our
acquisitions. The value of these intangible assets represents
the excess of the acquisition purchase price over the fair value
of the separate assets we acquired. As of December 31,
2006, intangible assets relating to product and data
acquisitions represented approximately 37.1% of our total
assets. We may never realize the value of these assets.
Generally accepted accounting principles require that we
evaluate on a regular basis whether events and circumstances
have occurred that indicate that all or a portion of the
carrying amount of the asset may no longer be recoverable, in
which case we would write down the value of the asset and take a
corresponding charge to earnings. Any determination requiring
the write-off of a significant portion of unamortized intangible
assets would adversely affect our results of operations.
We may need
additional funding and may be unable to raise capital when
needed, which could force us to delay, reduce or eliminate our
product development or commercialization and marketing
efforts.
We may need to raise additional funds in order to meet the
capital requirements of running our business and acquiring and
developing new pharmaceutical products. If we require additional
funding, we may seek to sell common stock or other equity or
equity-linked securities, which could result in dilution to
purchasers of common stock in this offering. We may also seek to
raise capital through a debt financing, which would result in
ongoing debt-service payments and increased interest expense.
Any financings would also likely involve operational and
financial restrictions being imposed on us. We might also seek
to sell assets or rights in one or more commercial products or
product development programs. Additional capital might not be
available to us when we need it on acceptable terms or at all.
If we are unable to raise additional capital when needed, we
could be forced to scale back our operations to conserve cash.
18
Risk
factors
We have a
relatively short history of profitability and may not be able to
sustain or increase our net income levels.
We were incorporated in 1999 and incurred operating losses until
2004. We recorded our first year of profitability in 2004 and
have increased profitability in each of 2005 and 2006. As of
December 31, 2006, however, we still had an accumulated
deficit of ($7.4) million, representing the amount by which
our historical losses have exceeded our historical profits. We
may not be able to maintain or improve our current levels of
revenue or net income. In such event, investors are likely to
lose confidence in our ability to grow, and our stock price
would suffer.
RISKS RELATED TO
THIS OFFERING AND AN INVESTMENT IN OUR STOCK
As a new
investor, you will experience immediate and substantial dilution
in the net tangible book value of your shares.
The initial public offering price of our common stock in this
offering is considerably more than the net tangible book value
per share of our outstanding common stock. Investors purchasing
shares of common stock in this offering will pay a price that
substantially exceeds the value of our tangible assets after
subtracting liabilities. As a result, investors in this offering
will:
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incur immediate dilution of
$ per share, based on an
assumed initial public offering price of
$ per share;
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contribute % of the total amount
invested to date to fund our company based on an assumed initial
offering price to the public of
$ per share;
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but will own only % of the shares
of common stock outstanding after the offering.
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We may conduct substantial additional equity offerings or issue
equity as consideration in an acquisition or otherwise. These
future equity issuances, together with the exercise of
outstanding options or warrants, could result in future dilution
to investors.
The market price
of our common stock may fluctuate substantially.
The initial public offering price for the shares of our common
stock sold in this offering has been determined by negotiation
between the representatives of the underwriters and us. This
price may not reflect the market price of our common stock
following this offering. The price of our common stock may
decline. In addition, the market price of our common stock is
likely to be highly volatile and may fluctuate substantially.
The realization of any of the risks described in these
“Risk factors” could have a dramatic and material
adverse impact on the market price of our common stock. In
addition, securities class action litigation has often been
instituted against companies whose securities have experienced
periods of volatility in market price. Any such securities
litigation brought against us could result in substantial costs
and a diversion of management’s attention and resources,
which could negatively impact our business, operating results
and financial condition.
We will incur
increased costs as a result of operating as a public company,
and our management will be required to devote additional time to
new compliance initiatives.
We will incur increased costs as a result of operating as a
public company, and our management will be required to devote
additional time to new compliance initiatives. As a public
company, we will incur legal, accounting and other expenses that
we did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well
as rules subsequently implemented by
19
Risk
factors
the SEC and Nasdaq, have imposed various new requirements on
public companies, including requiring establishment and
maintenance of effective disclosure and financial controls and
changes in corporate governance practices. These rules and
regulations will increase our legal and financial compliance
costs and will render some activities more time-consuming and
costly.
The Sarbanes-Oxley Act will require, among other things, that we
maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, we must
perform system and process evaluation and testing of our
internal controls over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal controls over financial
reporting, beginning with our Annual Report on Form 10-K
for the fiscal year ending December 31, 2008, as required
by Section 404 of the Sarbanes-Oxley Act. Our testing, or
the subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material
weaknesses. As described in a previous risk factor, we have
identified certain deficiencies in the past. Our compliance with
Section 404 will require that we incur substantial
accounting expense and expend significant management efforts.
Moreover, if we are not able to comply with the requirements of
Section 404 in a timely manner, or if we or our independent
registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be
material weaknesses, the market price of our stock could decline
and we could be subject to sanctions or investigations by
Nasdaq, the SEC or other regulatory authorities, which would
require additional financial and management resources.
There may not be
a viable public market for our common stock.
Prior to this offering, there has been no public market for our
common stock, and a regular trading market might not develop or
continue after this offering. Moreover, the market price of our
common stock might decline below the initial public offering
price.
We will have
broad discretion in how we use the proceeds of this offering,
and we may not use these proceeds effectively, which could
affect our results of operations and cause our stock price to
decline.
We will have broad discretion over the use of proceeds from this
offering. We expect that the net proceeds from this offering
will be used to fund clinical trials for Amelior and other
research, marketing and development activities, and to fund
working capital, capital expenditures and other general
corporate purposes. We may also use a portion of the net
proceeds to acquire products. We have no present agreements with
respect to any such product acquisitions. We will have
considerable discretion in the application of the net proceeds,
and you will not have the opportunity, as part of your
investment decision, to assess whether the proceeds are being
used appropriately. The net proceeds may be used for purposes
that do not increase our operating results or market value.
Until the net proceeds are used, they may be placed in
investments that do not produce significant income or that lose
value.
Future sales of
our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in
the public market after this offering or the perception that
these sales may occur could cause the market price of our common
stock to decline. In addition, the sale of these shares in the
public market could impair our ability to raise capital through
the sale of additional common or preferred stock. After this
offering, we will
have shares
of common stock outstanding. Of these shares, all shares sold in
the offering, other than shares, if any, purchased by our
affiliates, will be freely tradable.
20
Risk
factors
Some provisions
of our second amended and restated charter, bylaws and Tennessee
law may inhibit potential acquisition bids that you may consider
favorable.
Our corporate documents contain provisions that may enable our
board of directors to resist a change in control of our company
even if a change in control were to be considered favorable by
you and other shareholders. These provisions include:
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the authorization of undesignated preferred stock, the terms of
which may be established and shares of which may be issued
without shareholder approval;
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advance notice procedures required for shareholders to nominate
candidates for election as directors or to bring matters before
an annual meeting of shareholders;
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limitations on persons authorized to call a special meeting of
shareholders;
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a staggered board of directors;
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a requirement that vacancies in directorships are to be filled
by a majority of the directors then in office and the number of
directors is to be fixed by the board of directors; and
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no cumulative voting.
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These and other provisions contained in our second amended and
restated charter and bylaws could delay or discourage
transactions involving an actual or potential change in control
of us or our management, including transactions in which our
shareholders might otherwise receive a premium for their shares
over then current prices, and may limit the ability of
shareholders to remove our current management or approve
transactions that our shareholders may deem to be in their best
interests and, therefore, could adversely affect the price of
our common stock.
In addition, we are subject to control share acquisitions
provisions and affiliated transaction provision of the Tennessee
Business Corporation Act, the applications of which may have the
effect of delaying or preventing a merger, takeover or other
change of control of us and therefore could discourage attempts
to acquire our company. For more information, see
“Description of capital stock—Anti-takeover effects of
Tennessee law and provisions of our charter and bylaws.”
21
Special note
regarding forward-looking statements
Statements in this prospectus that are not historical factual
statements are “forward-looking statements.”
Forward-looking statements include, among other things,
statements regarding our intent, belief or expectations, and can
be identified by the use of terminology such as “may,”
“will,” “expect,” “believe,”
“intend,” “plan,” “estimate,”
“should,” “seek,” “anticipate” and
other comparable terms or the negative thereof. In addition, we,
through our senior management, from time to time make
forward-looking oral and written public statements concerning
our expected future operations and other developments. While
forward-looking statements reflect our good-faith beliefs and
best judgment based upon current information, they are not
guarantees of future performance and are subject to known and
unknown risks and uncertainties, including those mentioned in
“Risk factors,” “Management’s discussion and
analysis of financial condition and results of operations”
and elsewhere in this prospectus. Actual results may differ
materially from the expectations contained in the
forward-looking statements as a result of various factors. Such
factors include, without limitation:
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legislative, regulatory or other changes in the healthcare
industry at the local, state or federal level which increase the
costs of, or otherwise affect our operations;
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changes in reimbursement available to us by government or
private payers, including changes in Medicare and Medicaid
payment levels and availability of third-party insurance
coverage;
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competition; and
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changes in national or regional economic conditions, including
changes in interest rates and availability and cost of capital
to us.
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22
Use of proceeds
We estimate that the net proceeds to us from the sale of
the shares
of common stock offered hereby will be approximately
$ million, assuming an
initial public offering price of $
and after deducting underwriting discounts and commissions and
estimated offering expenses. If the underwriters exercise their
over-allotment option in full, we estimate that our net proceeds
will be approximately
$ million. Each $1.00
increase (decrease) in the assumed initial public offering price
of $ per share would increase
(decrease) the net proceeds to us from this offering by
approximately $ million,
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same.
Depending on market conditions at the time of pricing of this
offering and other considerations, we may sell fewer or more
shares than the number set forth on the cover page of this
prospectus.
The principal purposes of this offering are to obtain additional
capital and to create a public market for our common stock. We
expect to use the net proceeds from this offering primarily for
potential acquisitions, product development and expansion and
general corporate purposes. We may use a portion of the net
proceeds to acquire the rights to one or more marketed,
FDA-approved products or one or more product candidates. We may
also use a portion of the net proceeds to expand our operations
in order to prepare for the launch of one or more new products,
including expanding our sales forces. We may also use a portion
of the net proceeds of this offering to repay all or a portion
of our outstanding borrowings under our credit facility. Amounts
loaned under our credit facility bear interest at BBA LIBOR
Daily Floating Rate plus 2.50% per annum, and the facility
expires in April 2008 with respect to the revolving line of
credit and in April 2009 with respect to the term loan.
The amounts we actually expend for the above-specified purposes
may vary depending on a number of factors, including changes in
our business strategy, the amount of our future revenues and
expenses and our future cash flow. If our future revenues or
cash flow are less than we currently anticipate, we may need to
support our ongoing business operations with net proceeds from
this offering that we would otherwise use to support
acquisitions and other methods of growth.
Until we use the net proceeds from this offering for the above
purposes, we intend to invest the funds in short-term,
investment-grade, interest-bearing securities as directed by our
investment policy. Our goals with respect to the investment of
these net proceeds are capital preservation and liquidity so
that such funds are readily available.
Dividend policy
We have not declared or paid any dividends on our common stock
and do not anticipate paying cash dividends on our common stock
for the foreseeable future. We currently intend to retain any
future earnings for use in the operation of our business and to
fund future growth. The payment of any dividends by us on our
common or preferred stock is limited by our loan agreement with
Bank of America. Any future decision to declare and pay
dividends will be at the sole discretion of our board of
directors.
23
Capitalization
The following table sets forth our capitalization as of
December 31, 2006:
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on an actual basis;
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on a pro forma basis to give effect to the conversion of all of
our outstanding preferred stock
into shares of
common stock; and
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on a pro forma as adjusted basis to give further effect to the
sale
of shares
of common stock that we are offering at an assumed initial
public offering price of
$ per share, after deducting
underwriting discounts and commissions and estimated offering
expenses to be paid by us.
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You should read the following table in conjunction with our
consolidated financial statements and related notes and
“Management’s discussion and analysis of financial
condition and results of operations” appearing elsewhere in
this prospectus.
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As of
December 31, 2006
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Pro Forma
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Actual
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Pro
Forma
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as
Adjusted
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(in
thousands)
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Cash and cash
equivalents
(1)
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$
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6,255
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$
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$
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Long-term debt and long-term
obligations
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6,657
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Shareholders’ equity:
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Preferred stock, no par value;
3,000,000 shares authorized, 855,495 shares issued and
outstanding, actual;
and shares
authorized, no shares issued or outstanding, pro forma and pro
forma as
adjusted
(2)
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2,743
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—
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—
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Common Stock, no par value;
10,000,000 shares authorized; 4,922,075 shares issued
and outstanding,
actual; shares
authorized, shares
issued and outstanding, pro forma;
and shares
authorized, shares
issued and outstanding on a pro forma as adjusted
basis
(3)
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15,743
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Additional paid-in
capital
(1)
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Accumulated deficit
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(7,360
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Total shareholders’
equity
(1)
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11,126
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Total
capitalization
(1)
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$
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17,783
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$
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$
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(1)
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Each $1.00 increase or decrease in
the assumed initial public offering price of
$ per share would increase or
decrease, as applicable, the amount of cash and cash
equivalents, additional paid-in capital, total
shareholders’ equity and total capitalization by
approximately $ million,
assuming the number of shares offered by us, as set forth on the
cover of this prospectus, remains the same and after deducting
the estimated underwriting discounts and commissions payable by
us.
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(2)
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Upon the completion of this
offering, the outstanding shares of preferred stock will convert
into an aggregate
of shares
of common stock.
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(3)
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Excludes:
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shares
of common stock issuable upon exercise of outstanding options at
a weighted average exercise price of
$ per share;
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shares
of common stock reserved for future issuance under our 2007
Long-Term Incentive Compensation Plan and our 2007
Directors’ Plan; and
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shares
of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of
$ per share.
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24
Dilution
Our net tangible book as of December 31, 2006 was
$1.3 million, or $ per share.
Net tangible book value per share represents the amount of our
total tangible assets less total liabilities, divided by the
total number of shares of common stock outstanding. Our pro
forma net tangible book value as of December 31, 2006 was
$
million, or
$
per share of common stock. Pro forma net tangible book value per
share gives effect to the conversion of all of our preferred
stock
into shares
of our common stock, which will occur upon completion of this
offering.
After giving further effect to the sale by us
of shares
of common stock in this offering at an assumed initial public
offering price of
$ per
share, after taking into account the automatic conversion of our
preferred stock upon completion of this offering, and after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma as adjusted net
tangible book value as of December 31, 2006 would have been
approximately
$ million,
or approximately
$ per
share. This amount represents an immediate increase in pro forma
net tangible book value of
$ per
share to our existing shareholders and an immediate dilution in
pro forma net tangible book value of approximately
$ per
share to new investors purchasing shares of common stock in this
offering. We determine dilution by subtracting the pro forma as
adjusted net tangible book value per share after this offering
from the amount of cash that a new investor paid for a share of
common stock.
The following table illustrates this dilution on a per share
basis:
|
|
|
|
|
|
|
|
|
|
|
Assumed initial public offering
price per share
|
|
|
|
|
|
$
|
|
|
|
Net tangible book value per share
as of December 31, 2006
|
|
$
|
|
|
|
|
|
|
|
Effect on net tangible book value
per share on conversion of preferred stock into common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value
per share as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
Increase per share attributable to
this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible
book value per share after this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of
$ per
share would increase (decrease) our pro forma as adjusted net
tangible book value as of December 31, 2006 by
approximately
$ million,
the pro forma as adjusted net tangible book value per share
after this offering by
$
and the dilution in pro forma as adjusted net tangible book
value to new investors in this offering by
$ per
share, assuming the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same and after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
25
Dilution
The following table summarizes, as of December 31, 2006,
the differences between the number of shares purchased from us,
the total consideration paid to us and the average price per
share that existing shareholders and new investors paid. The
table gives effect to the conversion of all of our outstanding
preferred stock
into shares of
common stock, which will occur upon completion of this offering.
The calculation below is based on an assumed initial public
offering price of
$ per
share and before deducting underwriting discounts and
commissions and estimated offering expenses that we must pay.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Total
Shares
|
|
|
Total
Consideration
|
|
|
Price
|
|
|
|
Number
|
|
%
|
|
|
Number
|
|
%
|
|
|
per
Share
|
|
|
|
|
|
Existing shareholders
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of
$ per
share would increase (decrease) total consideration paid to us
by investors participating in this offering by approximately
$ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
The discussion and tables above assume no exercise of the
underwriters’ over-allotment option. If the
underwriters’ over-allotment option is exercised in full,
the number of shares of common stock held by existing
shareholders will be further reduced
to ,
or % of the total number of shares of common stock to
be outstanding after this offering, and the number of shares of
common stock held by investors participating in this offering
will be further increased
to ,
or % of the total number of shares of common stock to
be outstanding after this offering.
In addition, the above discussion and table assume no exercise
of stock options after December 31, 2006. As of
December 31, 2006, we had outstanding options to purchase a
total
of shares
of common stock at a weighted average exercise price of
$ per
share and we had
reserved shares
of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of
$ per share. If all such
options and warrants had been exercised as of December 31,
2006, pro forma as adjusted net tangible book value per share
would have been $ per share,
and dilution to new investors would have been
$ per
share.
26
Selected
consolidated financial data
The following consolidated statement of operations data for the
years ended December 31, 2004, 2005 and 2006 and
consolidated balance sheet data as of December 31, 2005 and
2006 have been derived from our audited consolidated financial
statements and related notes, which are included elsewhere in
this prospectus. The consolidated statements of operations data
for the years ended December 31, 2002 and 2003 and the
consolidated balance sheet data as of December 31, 2002,
2003 and 2004 have been derived from our audited consolidated
financial statements that do not appear in this prospectus. The
following selected consolidated financial data should be read in
conjunction with, and is qualified by reference to, our
consolidated financial statements and related notes, which were
examined and reported upon by KPMG LLP, and
“Management’s discussion and analysis of financial
condition and results of operations” appearing elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
Statement of
operations
data
(1)
:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
(in thousands,
except per share data)
|
|
|
|
|
Net revenues
|
|
$
|
2,086
|
|
|
$
|
2,943
|
|
|
$
|
12,032
|
|
|
$
|
10,690
|
|
|
$
|
17,815
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
—
|
|
|
|
—
|
|
|
|
816
|
|
|
|
533
|
|
|
|
2,399
|
|
|
Selling and marketing
|
|
|
2,100
|
|
|
|
2,726
|
|
|
|
6,802
|
|
|
|
5,647
|
|
|
|
7,349
|
|
|
Research and development
|
|
|
934
|
|
|
|
1,658
|
|
|
|
746
|
|
|
|
1,158
|
|
|
|
2,233
|
|
|
General and administrative
|
|
|
2,279
|
|
|
|
2,265
|
|
|
|
2,358
|
|
|
|
2,588
|
|
|
|
2,999
|
|
|
Amortization of product license
rights
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
515
|
|
|
Other
|
|
|
—
|
|
|
|
5
|
|
|
|
6
|
|
|
|
13
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
5,313
|
|
|
|
6,654
|
|
|
|
10,729
|
|
|
|
9,940
|
|
|
|
15,592
|
|
|
Gain on insurance recovery
|
|
|
—
|
|
|
|
—
|
|
|
|
266
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,227
|
)
|
|
|
(3,710
|
)
|
|
|
1,569
|
|
|
|
750
|
|
|
|
2,224
|
|
|
Interest income
|
|
|
3
|
|
|
|
8
|
|
|
|
1
|
|
|
|
89
|
|
|
|
209
|
|
|
Interest expense
|
|
|
73
|
|
|
|
765
|
|
|
|
1,012
|
|
|
|
63
|
|
|
|
722
|
|
|
Other expense (income)
|
|
|
(9
|
)
|
|
|
2
|
|
|
|
—
|
|
|
|
6
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before minority interest
and income taxes
|
|
|
(3,289
|
)
|
|
|
(4,469
|
)
|
|
|
558
|
|
|
|
770
|
|
|
|
1,708
|
|
|
Minority interest in net loss of
consolidated subsidiary
|
|
|
7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,184
|
|
|
|
2,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,282
|
)
|
|
$
|
(4,469
|
)
|
|
$
|
558
|
|
|
$
|
1,954
|
|
|
$
|
4,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share—basic
|
|
$
|
(0.80
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
0.12
|
|
|
$
|
0.41
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share—diluted
|
|
$
|
(0.80
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
0.07
|
|
|
$
|
0.24
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding—basic
|
|
|
4,116
|
|
|
|
4,261
|
|
|
|
4,541
|
|
|
|
4,748
|
|
|
|
4,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding—diluted
|
|
|
4,116
|
|
|
|
4,261
|
|
|
|
7,741
|
|
|
|
8,045
|
|
|
|
8,016
|
|
|
|
|
|
|
(1)
|
|
The sum of the individual amounts
may not agree due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
Balance sheet
data:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,790
|
|
|
$
|
771
|
|
|
$
|
516
|
|
|
$
|
5,536
|
|
|
$
|
6,255
|
|
|
Working capital
|
|
|
(485
|
)
|
|
|
(3,110
|
)
|
|
|
262
|
|
|
|
5,640
|
|
|
|
3,945
|
|
|
Total assets
|
|
|
1,946
|
|
|
|
2,083
|
|
|
|
4,507
|
|
|
|
10,173
|
|
|
|
26,481
|
|
|
Total long-term debt and other
long-term obligations
|
|
|
2,358
|
|
|
|
3,108
|
|
|
|
2,436
|
|
|
|
2,398
|
|
|
|
10,543
|
|
|
Preferred stock
|
|
|
2,743
|
|
|
|
2,743
|
|
|
|
2,743
|
|
|
|
2,743
|
|
|
|
2,743
|
|
|
Total shareholders’ equity
(deficit)
|
|
|
(1,762
|
)
|
|
|
(3,433
|
)
|
|
|
(22
|
)
|
|
|
6,234
|
|
|
|
11,126
|
|
27
Management’s
discussion and analysis of financial condition and results of
operations
The following discussion and analysis of our financial
position and results of operations should be read together with
our audited consolidated financial statements and related notes
appearing elsewhere in this prospectus. This discussion and
analysis may contain forward-looking statements that involve
risks and uncertainties. You should review the “Risk
factors” section of this prospectus for a discussion of
important factors that could cause actual results to differ
materially from the results described in or implied by the
forward-looking statements described in the following discussion
and analysis.
OVERVIEW
We are a specialty pharmaceutical company focused on the
acquisition, development and commercialization of branded,
prescription products. We are building our product portfolio
primarily by acquiring rights to FDA-approved and late-stage
development products and marketing them to specialty physician
segments. Our primary target markets are hospital acute care and
gastroenterology. Our current portfolio consists of two marketed
products and one late-stage development product nearing
completion of Phase III clinical trials.
We pursued the development of Acetadote for the treatment of
acetaminophen poisoning and acquired rights to clinical data to
support its approval. Approval of the product was obtained in
January 2004 and we began to market Acetadote in the second
quarter of 2004 and launched the product with a dedicated
hospital sales force. In March 2006, we received approval from
the FDA for the use of Acetadote in pediatric patients.
We gained access to marketed gastroenterology products by
negotiating co-promotion agreements with the original developers
of these products. These agreements allowed us to enter the
gastroenterology market with minimal up-front costs and limited
ongoing operating risk. In 2005, we made a strategic decision to
de-emphasize our reliance on co-promotion agreements as a
primary growth driver. In April 2006, we acquired exclusive
commercial rights in the U.S. to Kristalose, a
gastroenterology product we had previously co-promoted under an
arrangement with Bertek Pharmaceuticals Inc., a subsidiary of
Mylan Laboratories Inc. In October 2006, we re-launched
Kristalose under the Cumberland brand with a dedicated field
sales force targeting gastroenterologists and other high
prescribers of laxative products.
Our research and development expenses have grown consistently
because of our program to develop Amelior. We expect research
and development expenses to increase in 2007 as we continue our
clinical work related to Amelior. We plan to complete the
Amelior clinical work in early 2008.
We have funded our operations with private equity capital of
approximately $14 million during the past six years. We
have supplemented this equity funding by re-investing our
profits and utilizing our credit facilities in order to support
our operations.
Prior to 2007, our sales forces were contracted to us by a third
party. In January 2007, we brought the hospital sales force
in-house via our
newly-formed,
wholly-owned
subsidiary, Cumberland Pharma Sales Corp. We continue to
outsource the dedicated gastroenterology sales force. All
expenses associated with the sales forces are included in
selling and marketing expense.
In 2000, we formed CET with Vanderbilt University and Tennessee
Technology Development Corporation to identify early-stage drug
development activities. CET partners with universities and other
research organizations to advance promising, early-stage product
candidates through the development process and on to
commercialization.
28
Management’s
discussion and analysis of financial condition and results of
operations
Our operating results have fluctuated in the past and are likely
to fluctuate in the future. These fluctuations can result from
competitive factors, new product acquisitions or introduction,
the nature, scope and result of our research and development
programs, pursuit of our growth strategy and other factors. As a
result of these fluctuations, our historical financial results
are not necessarily indicative of future results.
We were incorporated in 1999 and have been headquartered in
Nashville, Tennessee since inception.
CRITICAL
ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND
ESTIMATES
Accounting
Estimates and Judgments
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates, judgments and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the period. We base our estimates on past
experience and on other factors we deem reasonable given the
circumstances. Past results help form the basis of our judgments
about the carrying value of assets and liabilities that are not
determined from other sources. Actual results could differ from
those estimates. These estimates, judgments and assumptions are
most critical with respect to our accounting for revenue
recognition, provision for income taxes, stock-based
compensation, research and development accounting, and
intangible assets.
Revenue
Recognition
Our revenue is derived primarily from the product sales of
Acetadote and Kristalose. Revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed and determinable and collectibility is probable.
Delivery is considered to have occurred upon either shipment or
arrival at destination on shipping terms. When these conditions
are satisfied, we recognize gross revenue, which is the price we
charge generally to our wholesalers for a particular product. We
record allowances for estimated chargebacks, discounts and
damaged goods, and accruals for rebates and fees for services.
Allowances and accruals are established by management as its
best estimate at the time of sale based on each product’s
historical experience adjusted to reflect known changes in the
factors that impact such reserves. Allowances for chargebacks
and discounts, and accruals for rebates and returns are
established based on the contractual terms with customers;
analysis of historical levels of discounts, returns, chargebacks
and rebates; communications with customers and purchased
information about the rate of prescriptions being written and
the levels of inventory remaining in the distribution channel,
if known, as well as expectations about the market for each
product and anticipated introduction of competitive products.
The allowances for chargebacks and accruals for rebates and
returns are established by product, and are the most significant
estimates used in the recognition of our revenue from product
sales. If the actual amount of cash discounts taken,
chargebacks, rebates and expired product returns differ from the
amounts estimated by management, material differences may result
from the amount of our revenue recognized from product sales.
From January 2006 through part of April 2006, we recorded
contract sales revenue which was based on co-promotion
agreements primarily with Bertek Pharmaceuticals Inc., for the
sales of Kristalose. Co-promotion fees were calculated based on
a percent of gross sales or similar calculation. Contract sales
revenue is included in net revenues.
29
Management’s
discussion and analysis of financial condition and results of
operations
Other income, which is included in net revenues, includes rental
and grant income. Rental income and grant income were three
percent of net revenues in 2006.
Income
Taxes
We provide for deferred taxes using the asset and liability
approach. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
operating loss and tax credit carry-forwards and differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Our
principal differences are related to the timing of deductibility
of certain items such as depreciation, amortization and expense
for options issued to non-employees. Deferred tax assets and
liabilities are measured using management’s estimate of tax
rates expected to apply to taxable income in the years in which
management believes those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. In order to
fully utilize the deferred tax asset of $4.0 million as of
December 31, 2006, we will need to generate future taxable
income of approximately $11.8 million prior to the
expiration of the net operating loss carry-forwards in 2025.
Stock-Based
Compensation
Prior to January 1, 2006 we applied the intrinsic-value-based
method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25,
Accounting for Stock issued to
Employees,
and related interpretations including
FIN No. 44,
Accounting for Certain Transactions
involving Stock Compensation an interpretation of APB Opinion
No. 25
, to account for our stock options issued under
the 1999 Stock Option Plan. Under this method, compensation
expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise
price. Statement of Financial Accounting Standards, or
SFAS, No. 123,
Accounting for Stock-Based
Compensation
and Financial Accounting Standards Boards, or
FASB No. 148,
Accounting for Stock-Based
Compensation—Transition and Disclosure, an amendment of
FASB Statement No. 123
, established accounting and
disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As
permitted by then-existing accounting standards, we elected to
continue to apply the intrinsic-value-based method of accounting
described above, and adopted only the disclosure requirements of
SFAS No. 123, as amended.
Effective January 1, 2006, we adopted SFAS,
No. 123(R), Share-Based Payment, which revises
SFAS No. 123,
Accounting for Stock-Based
Compensation
and supersedes Accounting Principles Board, or
APB, Opinion No. 25,
Accounting for Stock Issued to
Employees
. SFAS 123(R) requires that share-based
payment transactions with employees be recognized in the
financial statements based on their fair value and recognized as
compensation expense over the vesting period. We adopted
SFAS 123(R) effective January 1, 2006, prospectively
for new equity awards issued subsequent to December 31,
2005.
30
Management’s
discussion and analysis of financial condition and results of
operations
Information on employee and non-employee stock options granted
in 2006 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted
|
|
Average
|
|
Weighted
Average
|
|
|
|
Stock Options
|
|
Average
|
|
Intrinsic
Value
|
|
Fair Value of
|
|
Grants made
during quarter ended
|
|
Granted
|
|
Exercise
Price
|
|
per
Share
|
|
Option (per
Share)
|
|
|
|
|
|
March 31, 2006
|
|
|
12,000
|
|
|
$18.00
|
|
|
$4.00
|
|
|
$8.36
|
|
June 30, 2006
|
|
|
24,300
|
|
|
$18.74
|
|
|
$3.26
|
|
|
$9.90
|
|
September 30, 2006
|
|
|
9,075
|
|
|
$18.00
|
|
|
$4.00
|
|
|
$11.16
|
|
December 31, 2006
|
|
|
2,600
|
|
|
$18.00
|
|
|
$4.00
|
|
|
$11.01
|
Under SFAS No. 123(R), we calculate the fair value of
stock option grants using the Black-Scholes option-pricing
model. The assumptions used in the Black-Scholes model ranged
from two months to ten years for the expected term, 37%-63% for
the expected volatility, 4.34% to 5.08% for the risk free rate
and zero percent for dividend yield for the year ended
December 31, 2006. Future option expense could be impacted
by changes in our model assumptions.
For employee stock option grants, the weighted average expected
option terms for 2006 represent the application of the
simplified method as defined in SEC Staff Accounting Bulletin
(or SAB), No. 107 issued in March of 2005. The simplified
method defines the expected life as the average of the
contractual term of the options and the weighted average vesting
period for the option. For non-employee stock option grants, the
expected option terms for 2006 represent the contractual term.
Estimated volatility for 2006 was determined in accordance of
SAB No. 107 and was determined by reviewing historical
volatility of similar public companies.
As of December 31, 2006, we had approximately $322,000 of
unrecognized share-based compensation expense related to
unvested option awards. Additionally, as of December 31,
2006, we had outstanding vested options to purchase
3,899,088 shares of our common stock and unvested options
to purchase 105,890 shares of our common stock.
Furthermore, as of December 31, 2006, we had outstanding
34,479 warrants to purchase shares of our common stock.
Research and
Development
We account for research and development costs and accrue
expenses, based on estimates of work performed, patient
enrollment or fixed-fee-for-services. As work is performed
and/or
invoices are received, we adjust our estimates and accruals. To
date, our accruals have been within our estimates. Total
research and development costs are a function of studies being
conducted and will increase or decrease depending on the level
of activity in any particular year.
Intangible
Assets
Intangible assets include license agreements, product rights and
other identifiable intangible assets. We assess the impairment
of identifiable intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. In determining the recoverability of our intangible
assets, we must make assumptions regarding estimated future cash
flows and other factors. If the estimated undiscounted future
cash flows do not exceed the carrying value of the intangible
assets, we must determine the fair value of the intangible
assets. If the fair value of the intangible assets is less than
the carrying value, an impairment loss will be recognized in an
amount equal to the difference.
31
Management’s
discussion and analysis of financial condition and results of
operations
RESULTS OF
OPERATIONS
The following table sets forth, for the periods indicated,
certain items from our statement of operations expressed as a
percentage of net revenues, as well as the
period-to-period
change in these items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
%
Change
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2004-2005
|
|
|
2005-2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
(11.2
|
%)
|
|
|
66.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
6.8
|
|
|
|
5.0
|
|
|
|
13.5
|
|
|
|
(34.7
|
)
|
|
|
349.9
|
|
|
Selling and marketing
|
|
|
56.5
|
|
|
|
52.8
|
|
|
|
41.2
|
|
|
|
(17.0
|
)
|
|
|
30.1
|
|
|
Research and development
|
|
|
6.2
|
|
|
|
10.8
|
|
|
|
12.5
|
|
|
|
55.2
|
|
|
|
92.9
|
|
|
General and administrative
|
|
|
19.6
|
|
|
|
24.2
|
|
|
|
16.8
|
|
|
|
9.7
|
|
|
|
15.9
|
|
|
Amortization of product license
rights
|
|
|
—
|
|
|
|
—
|
|
|
|
2.9
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
117.4
|
|
|
|
614.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
89.2
|
|
|
|
93.0
|
|
|
|
87.5
|
|
|
|
(7.4
|
)
|
|
|
56.9
|
|
|
Gain on insurance recovery
|
|
|
2.2
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(100.0
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
13.0
|
|
|
|
7.0
|
|
|
|
12.5
|
|
|
|
(52.2
|
)
|
|
|
196.5
|
|
|
Interest income
|
|
|
0.0
|
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
—
|
(1)
|
|
|
133.8
|
|
|
Interest expense
|
|
|
8.4
|
|
|
|
0.6
|
|
|
|
4.1
|
|
|
|
(93.8
|
)
|
|
|
—
|
(1)
|
|
Other expense
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
—
|
|
|
|
(50.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
4.6
|
|
|
|
7.2
|
|
|
|
9.6
|
|
|
|
38.0
|
|
|
|
121.7
|
|
|
Income tax benefit
|
|
|
0.0
|
|
|
|
11.1
|
|
|
|
15.1
|
|
|
|
—
|
|
|
|
127.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
(2)
|
|
|
4.6
|
|
|
|
18.3
|
|
|
|
24.7
|
|
|
|
250.1
|
|
|
|
125.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Not meaningful.
|
|
|
|
(2)
|
|
The sum of the individual amounts
do not agree to the total due to rounding.
|
Description of
operating accounts
Net revenues
consist of net product revenue, revenue from
co-promotion agreements and other revenue. Net product revenue
consists primarily of gross revenue less discounts and
allowances, such as cash discounts, rebates, chargebacks and
returns. Revenue from co-promotion agreements includes product
promotion fees. Other income includes rental and grant income.
Cost of products sold
consists primarily of the cost of
each unit of product sold. Cost of products sold also includes
expense for slow moving or expired product.
Selling and marketing expense
consists primarily of
expense relating to the promotion, distribution and sale of
products, including salaries and related costs.
Research and development expense
consists primarily of
clinical trial expenses, salary and wages and related costs of
materials and supplies, and certain activities of third-party
providers participating in our clinical studies.
General and administrative expense
includes finance and
accounting expenses, executive expenses, office expenses and
business development expenses, including salaries and related
costs.
32
Management’s
discussion and analysis of financial condition and results of
operations
Amortization of product license rights
resulted from our
acquisition of the exclusive U.S. commercialization rights to
Kristalose.
Interest income
consists primarily of interest income
earned on cash deposits.
Interest expense
consists primarily of interest incurred
on debt and other long-term obligations.
Income tax benefit
consists primarily of the realization
of our deferred tax assets less taxes incurred on income.
Year ended
December 31, 2006 compared to year ended December 31,
2005
Net revenues.
Net revenues in 2006 totaled
$17.8 million, representing an increase of
$7.1 million, or 66.7%, over net revenues in 2005 of
$10.7 million. This increase was primarily due to
additional product revenue from sales of Kristalose, as well as
continued growth of Acetadote. In April 2006, we entered into an
agreement to acquire the exclusive U.S. commercial rights
to Kristalose and began recording revenue based on shipments of
the product. Prior to April 2006, we co-promoted Kristalose and
recorded a co-promotion fee based on a percentage of the
product’s sales. In 2005, revenue was reduced by
$2.0 million for promotional costs owed to a wholesaler.
Additionally, unlike prior years, in 2006, we did not offer any
special purchasing opportunities to our customers prior to
product price increases.
Cost of products sold.
Cost of products sold
in 2006 totaled $2.4 million, representing an increase of
$1.9 million, or 349.9%, over cost of products sold in 2005
of $533,000. Cost of products sold as a percentage of net
revenues was 13.5% and 5.0% in 2006 and 2005, respectively. The
majority of the increase was due to recording the cost of
products sold associated with Kristalose beginning in April
2006. Prior to that date, we recorded no Kristalose cost of
products sold because of the co-promotion arrangement referred
to above. Acetadote cost of products sold, as a percentage of
Acetadote net revenue, was not materially different between 2006
and 2005.
Selling and marketing.
Selling and marketing
expense in 2006 totaled $7.3 million, representing an
increase of $1.7 million, or 30.1%, over selling and marketing
expense in 2005 of $5.6 million. Selling and marketing
expense as a percentage of net revenues was 41.2% and 52.8% in
2006 and 2005, respectively. The increase was primarily due to
the launch of our new dedicated gastroenterology field sales
force as well as other sales and marketing costs associated with
the re-launch of Kristalose. We anticipate selling and marketing
expense will grow, as we expand both sales forces as well as our
product lines.
Research and development.
Research and
development expense in 2006 totaled $2.2 million,
representing an increase of $1.1 million, or 92.9%, over
research and development expense in 2005 of $1.2 million.
Research and development expense as a percentage of net revenues
was 12.5% and 10.8% in 2006 and 2005, respectively. This
increase was primarily due to increased clinical studies
activities associated with the development of Amelior. Research
and development expense is expected to continue to grow in 2007,
as we work to complete our final studies of Amelior prior to
submission for approval to the FDA.
General and administrative.
General and
administrative expense in 2006 totaled $3.0 million,
representing an increase of $412,000, or 15.9%, over general and
administrative expense in 2005 of $2.6 million. General and
administrative expense as a percentage of net revenues was 16.8%
and 24.2% in 2006 and 2005, respectively. The dollar increase in
general and administrative expense was primarily due to an
increase in salaries and related expenses from 2005, as a result
of the addition of personnel to support our growth. We expect
general and administrative expense to increase in future
33
Management’s
discussion and analysis of financial condition and results of
operations
periods as we continue to add staff, expand our infrastructure
and support the requirements of a public company.
Amortization of product license
rights.
Amortization of product license rights
totaled $515,000 in 2006. This expense is a result of
amortization associated with our acquisition of the exclusive
U.S. commercialization rights to Kristalose. We expect to incur
annual amortization expense relating to these product license
rights through March 2021.
Interest income.
Interest income in 2006
totaled $209,000 compared to interest income in 2005 of $89,000.
The majority of the increase in interest income was due to
larger cash balances in 2006.
Interest expense.
Interest expense in 2006
totaled $722,000 compared to interest expense in 2005 of
$63,000. The majority of the increase in interest expense was
due to interest expense associated with debt incurred to finance
the acquisition of Kristalose. In 2005, we had minimal debt and
thus, minimal interest expense.
Income tax benefit.
Net income tax benefit in
2006 totaled $2.7 million compared to net income tax
benefit in 2005 of $1.2 million. The increase was due to
full recording of our deferred tax asset after determining that
it was more likely than not that we would realize the benefits
of the deferred tax asset.
Year ended
December 31, 2005 compared to year ended December 31,
2004
Net revenues.
Net revenues in 2005 totaled
$10.7 million, representing a decrease of $1.3 million, or
11.2%, over net revenues in 2004 of $12.0 million. This
decrease was primarily due to promotional costs owed to a
wholesaler. This was partially off-set by a full year of sales
of Acetadote in 2005, versus nine months in 2004. In 2005, two
products accounted for all product sales, and there were two
additional products for which we received a portion of product
revenue based on promotion agreements. In 2004 and 2005, we
provided our key customers the opportunity to purchase
additional product prior to implementing a price increase.
Certain customers took advantage of this opportunity and
purchased additional product. The last year we offered such an
incentive to our customers was 2005.
Cost of products sold.
Cost of products sold
in 2005 totaled $533,000, representing a decrease of $283,000,
or 34.7%, over cost of products sold in 2004 of $816,000. Cost
of products sold as a percentage of net revenues was 5.0% and
6.8% in 2005 and 2004, respectively. The majority of the
decrease was due to a change in the product mix, which in 2004
included a higher ratio of gastroenterology products as compared
to 2005. Gastroenterology products tend to have a higher
manufacturing cost per unit than our other products.
Selling and marketing.
Selling and marketing
expense in 2005 totaled $5.6 million representing a
decrease of $1.2 million, or 17.0%, over selling and marketing
expense in 2004 of $6.8 million. Selling and marketing
expense as a percentage of net revenues was 52.8% and 56.5% in
2005 and 2004, respectively. The decrease was due to lower
royalty costs, a reduction in marketing costs relative to 2004
when we launched Acetadote, reduced distribution costs and
reduced sales force expenses.
Research and development.
Research and
development expense in 2005 totaled $1.2 million,
representing an increase of $412,000 or 55.2%, over research and
development expense in 2004 of $746,000. Research and
development expense as a percentage of net revenues was 10.8%
and 6.2% in 2005 and 2004, respectively. This increase was
primarily due to increased expenses relating to clinical studies
associated with the development of Amelior.
General and administrative.
General and
administrative expense in 2005 totaled $2.6 million,
representing an increase of $230,000, or 9.7%, over general and
administrative expense in 2004 of
34
Management’s
discussion and analysis of financial condition and results of
operations
$2.4 million. General and administrative expense as a
percentage of net revenues was 24.2% and 19.6% in 2005 and 2004,
respectively. This increase was primarily due to increased stock
option expense for consulting services as well as increased
salaries and related expenses.
Interest income.
Interest income in 2005
totaled $89,000 compared to interest income in 2004 of $1,000.
The majority of the increase in interest income in 2005 resulted
from higher levels of cash and cash equivalents.
Interest expense.
Interest expense in 2005
totaled $63,000 compared to interest expense in 2004 of
$1.0 million. The majority of the decrease in interest
expense in 2005 resulted from lower levels of outstanding debt
as 2004 had significant interest expense associated with
convertible debt which was converted to equity in 2004.
Income tax benefit.
Net income tax benefit in
2005 totaled $1.2 million. We had no income tax benefit in
2004. The existence of the income tax benefit was due to
initial, partial recording of our deferred tax asset after
determining that it was more likely than not that we would
realize at least a portion of benefits of the deferred tax asset.
LIQUIDITY AND
CAPITAL RESOURCES
As of December 31, 2006, cash and cash equivalents was
$6.3 million, working capital was $3.9 million and our
current ratio (current assets to current liabilities) was 1.5 to
1. Management expects funds for our operating and capital
requirements will be provided by continuing revenue and existing
cash balances, as well as from collaborative agreements and
other financing arrangements. As of December 31, 2006, we
also had the ability to make additional draws of up to
$3 million on our line of credit and will have substantial
proceeds from this offering.
The following table summarizes our net increase (decrease) in
cash and cash equivalents for the years ended December 31,
2004, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(1,439
|
)
|
|
$
|
2,416
|
|
|
$
|
2,163
|
|
|
Investing activities
|
|
|
(51
|
)
|
|
|
(318
|
)
|
|
|
(6,553
|
)
|
|
Financing activities
|
|
|
1,236
|
|
|
|
2,922
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
$
|
(255
|
)
(1)
|
|
$
|
5,020
|
|
|
$
|
719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The sum of the individual amounts
do not agree to the total due to rounding.
|
Net cash provided by operating activities was $2.2 million
for the year ended December 31, 2006. During this time, net
income of $4.4 million was partially offset by net changes
in assets and liabilities of $713,000 and adjustments to
reconcile net income to net cash for depreciation, amortization,
stock-based compensation, and deferred tax benefit.
Net cash used in investing activities was $6.6 million for
the year ended December 31, 2006. This use of cash was
primarily due to a payment of $6.5 million for the
acquisition of exclusive U.S. rights to Kristalose.
35
Management’s
discussion and analysis of financial condition and results of
operations
Net cash provided by financing activities was $5.1 million
for the year ended December 31, 2006, including
$5.5 million of proceeds from the issuance of long-term
debt to fund the acquisition of rights to Kristalose.
In April 2006, we entered into an agreement with Inalco to
acquire exclusive U.S. commercial rights for Kristalose. In
order to complete this transaction, we obtained funding from
Bank of America in the form of a three-year term loan for
$5.5 million and a new two-year revolving line of credit
agreement, both with an interest rate of LIBOR plus 2.5% (7.83%
as of December 31, 2006). The borrowings are collateralized
by a first lien against all of our assets. We are paying off the
term loan in quarterly installments, with the final payment due
in 2009. This agreement contains various covenants, all of which
we were in compliance with as of December 31, 2006. In
addition to the three-year term loan, we deferred
$4.5 million of the purchase price, with $1.5 million
due in 2007 and $3.0 million due in 2009.
In conjunction with this line of credit agreement and term loan
agreement, we issued to the lender warrants to purchase up to
1,979 shares of common stock at $18.00 per share. The
warrants expire in April 2016. The estimated fair value of such
warrants of $25,680, as determined using the Black-Scholes
model, has been recorded in the accompanying financial
statements as permanent equity in accordance with Emerging
Issues Task Force, or EITF,
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock.
In conjunction with the Kristalose agreement with Inalco, we are
obligated to purchase a minimum amount of Kristalose inventory
each year. We expect our normal inventory purchasing to be above
the required minimum amount.
As part of our agreement with Bioniche, our supplier of
Acetadote, we are obligated to purchase a minimum amount of
Acetadote inventory each year beginning in 2007, through 2011.
We expect that our normal inventory purchasing to be above the
required minimum amount.
In the second quarter of 2005, we received approximately
$2.0 million from various investors in exchange for
convertible promissory notes with a maturity date six months
from the date of issuance. The notes bore interest at a fixed
annual rate of 3.5%. In the fourth quarter of 2005, and pursuant
to the terms of the notes, the principal value plus all elected
accrued interest was converted into shares of our common stock.
In April 2005, we conducted a private placement of our common
stock in which we issued 100,000 shares of common stock for
total gross proceeds of $1.8 million, with net proceeds of
$1.7 million. The purpose of this offering was to provide
funding to advance product agreements, to complete product
development and for general corporate purposes.
In May 2004, we issued 43,000 shares of our common stock to
S.C.O.U.T. Healthcare Fund, L.P., or S.C.O.U.T., for cash
consideration of $516,000.
On October 21, 2003, we amended our $1.0 million,
one-year revolving line of credit. Under the terms of the
amended agreement, we had borrowing capacity up to the lesser of
$3.5 million or 80% of our eligible receivables, plus 50%
of our eligible inventory. The agreement was extended to March
2006. The agreement contained various provisions and covenants
with which we were in compliance at December 31, 2005.
On September 5, 2003, we received $1.0 million from
S.C.O.U.T. in the form of a convertible promissory note with a
maturity date of September 5, 2004. The note bore interest
at a fixed annual rate of 10%. Pursuant to the terms of the
note, on its maturity date the principal value of the note plus
all accrued interest automatically converted into
91,667 shares of our common stock.
36
Management’s
discussion and analysis of financial condition and results of
operations
During 2000, we signed an agreement with a third party to cover
a variety of development efforts related to a specific
pharmaceutical drug, including preparation of submissions to the
FDA. Under the terms of the agreement, we deferred a portion of
each bill from the third party. One-third of the deferred amount
accrued interest at an annual rate of 12.5% and was due after
eighteen months. The remaining two-thirds will be due upon
specific milestone events. Upon meeting the first milestone, an
amount equal to one-third of the original deferred amount, or
approximately $205,000, will become due and payable. Upon
completion of the final milestone event, an amount equal to five
times one-third of the original deferred amount, or
approximately $1 million, will become due and payable to
the third party. Since the application of these factors is
contingent upon specific events which may or may not occur in
the future and which have not occurred as of December 31,
2006, the expense for these factors has not been recorded.
The following table sets forth a summary of our contractual cash
obligations as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by
Year
|
|
|
Contractual
obligations
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011+
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Amounts reflected in the
balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
—
|
|
|
$
|
826
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Term loan
|
|
|
1,833
|
|
|
|
1,833
|
|
|
|
917
|
|
|
|
—
|
|
|
|
—
|
|
|
Other contractual obligations
|
|
|
2,078
|
|
|
|
411
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Other cash obligations not
reflected in the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
375
|
|
|
|
487
|
|
|
|
492
|
|
|
|
460
|
|
|
|
47
|
|
|
Purchase
obligations
(1)
|
|
|
2,084
|
|
|
|
2,384
|
|
|
|
2,684
|
|
|
|
2,984
|
|
|
|
809
|
|
|
|
|
|
|
(1)
|
|
Represents minimum purchase
obligations under Kristalose and Acetadote manufacturing
agreements.
|
OFF-BALANCE SHEET
ARRANGEMENTS
During 2004, 2005 and 2006, we did not engage in any off-balance
sheet arrangements.
RECENT ACCOUNTING
PRONOUNCEMENTS
In September 2005, the EITF issued EITF Issue
No. 04-13,
Accounting for Purchases and Sales of Inventory with the Same
Counterparty.
EITF
No. 04-13
provides guidance as to when purchases and sales of inventory
with the same counterparty should be accounted for as a single
exchange transaction. EITF
No. 04-13
also provides guidance as to when a non-monetary exchange of
inventory should be accounted for at fair value. EITF
No. 04-13
will be applied to new arrangements entered into, and
modifications or renewals to existing arrangements occurring
after January 1, 2007. The application of EITF
No. 04-13
is not expected to have a significant impact on our financial
statements.
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurement,
or Statement 157.
SFAS 157 defines fair value, establishes a framework for
the measurement of fair value, and enhances disclosures about
fair value measurements. The Statement does not require any new
fair value measures. The Statement is effective for fair value
measures already required or permitted by other standards for
fiscal years beginning after November 15, 2007. We are
required to adopt Statement 157 beginning on
January 1, 2008. Statement 157 is required to be
applied prospectively, except for certain financial instruments.
Any transition adjustment will be recognized as an adjustment to
opening retained earnings in the year of adoption. We are
currently evaluating the impact of adopting Statement 157
on our results of operations and financial position.
37
Management’s
discussion and analysis of financial condition and results of
operations
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
, an
interpretation of FASB Statement 109 (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements
and prescribes a threshold of more-likely-than-not for
recognition of tax benefits of uncertain tax positions taken or
expected to be taken in a tax return. FIN 48 also provides
related guidance on measurement, de-recognition, classification,
interest and penalties, and disclosure. The provisions of
FIN 48 are effective for us as of January 1, 2007,
with any cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We are
in the process of assessing the impact of adopting FIN 48
on our results of operations and financial position.
RECENTLY ADOPTED
ACCOUNTING STANDARDS
In March 2005, the FASB issued Statement No. 123R (which
replaces Statement No. 123 issued in 1995),
Share-Based
Payments
, which addresses accounting for transactions in
which an entity exchanges its equity instruments for goods or
services, with a primary focus on transactions in which an
entity obtains employee services in share-based payment
transactions. This Statement is a revision of Statement
No. 123 and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees,
and its related
implementation guidance. For nonpublic companies, this Statement
requires measurement of the cost of employee services received
in exchange for stock compensation based on the grant-date fair
value of the employee stock options. Incremental compensation
costs arising from subsequent modifications of awards after the
grant date must be recognized. This Statement was effective for
us as of January 1, 2006.
QUANTITATIVE AND
QUALITATIVE DISCLOSURE OF MARKET RISKS
Our exposure to market risk is related to interest rates on our
cash on deposit in highly liquid money market accounts. The main
objective of our cash investment activities is to preserve
principal while maximizing interest income through low risk
investments. Derivative instruments are not included in our
investment portfolio. Our investment policy focuses on principal
preservation and liquidity.
While we operate primarily in the U.S., we do have foreign
currency exposure considerations. Acetadote is manufactured by a
supplier that denominates supply prices in Canadian dollars.
Additionally, much of our research and development is performed
abroad. Foreign currency transactions in U.S. dollars totaled
approximately $1.4 million in 2006.
38
Business
OVERVIEW
We are a profitable and growing specialty pharmaceutical company
focused on the acquisition, development and commercialization of
branded prescription products. Our primary target markets are
hospital acute care and gastroenterology, which are
characterized by relatively concentrated physician prescriber
bases. Unlike many emerging pharmaceutical and biotechnology
companies, we have established a product development and
commercial operating infrastructure that is scalable to
accommodate our expected growth. Our management team consists of
pharmaceutical industry veterans with significant experience in
business development, clinical and regulatory affairs, and sales
and marketing.
Since our inception in 1999, we have successfully funded the
acquisition and development of our product portfolio with
limited external investment and maintained profitable operations
over the past three years. Our portfolio consists of two
products approved by the U.S. Food and Drug Administration, or
FDA, one late-stage development product candidate nearing
completion of Phase III clinical trials and several
early-stage development projects. We were directly responsible
for the clinical development and regulatory approval of
Acetadote, one of our marketed products, and are currently
completing development of Amelior, our lead product candidate.
We promote Acetadote and our other FDA-approved product,
Kristalose, through dedicated hospital and gastroenterology
sales forces, which are comprised of 42 sales representatives
and managers.
Our key products and product candidates include:
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Product
|
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Indication
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Delivery
|
|
Status
|
|
|
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Amelior
®
|
|
Pain and Fever
|
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Injectable
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Phase III
|
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Acetadote
®
|
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Acetaminophen Poisoning
|
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Injectable
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Marketed
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Kristalose
®
|
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Chronic and Acute Constipation
|
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Oral Solution
|
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Marketed
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|
Amelior
, our lead pipeline candidate, is an intravenous
formulation of ibuprofen that we expect will be the first
injectable product approved in the U.S. for the treatment
of both pain and fever. Amelior is currently in Phase III
clinical trials. We expect to complete clinical development by
early 2008 and are preparing to submit our new drug application,
or NDA, to the FDA for review. Amelior is designed to provide
physicians with a safe, effective treatment alternative for
patients who are unable to take oral medication for pain relief
or fever reduction. If approved, we plan to market Amelior in
the U.S. through our hospital sales force and in
international markets through alliances with marketing partners.
We believe Amelior currently represents our most significant
product opportunity.
Injectable analgesics, or pain relievers, currently available in
the U.S. include opioids, such as morphine and meperdine,
and ketorolac, a non-steroidal anti-inflammatory drug, or NSAID.
While opioids accounted for over 91% of market volume, with
approximately 447 million units sold in 2006, they are
known to cause undesirable side effects including nausea,
vomiting and cognitive impairment. Ketorolac is the only
non-opioid injectable analgesic approved for sale in the U.S.
and has also been known to cause unwanted side effects. Despite
strong safety warnings from the FDA, use of ketorolac in the
U.S. has grown from approximately 38 million units
sold in 2003 (7% of the market) to approximately 43 million
units sold in 2006 (9% of the market) according to IMS Health
Inc., or IMS Health. Based on the results of clinical studies to
date, we believe Amelior represents a potentially safer
alternative therapy to ketorolac. Further, we believe Amelior is
a safe and effective treatment for hospitalized patients with
fever who are unable to take oral medication. There is currently
no approved injectable treatment for fever in the U.S.
39
Business
Acetadote
is an intravenous formulation of
N-acetylcysteine, or NAC, indicated for the treatment of
acetaminophen poisoning. According to the American Association
of Poison Control Centers’ Toxic Exposure Surveillance
System, acetaminophen was the leading cause of poisonings
presenting to emergency departments in the U.S., with
approximately 77,000 cases treated in 2005. In January 2004,
Acetadote received FDA approval as an orphan drug, a designation
which provides for seven years of marketing exclusivity from
date of approval. Since its launch in June 2004, we have
consistently grown product sales for Acetadote, with wholesaler
sales to hospitals growing 43% to $13 million in 2006. We
believe that we can continue to expand market share, and that
our Acetadote sales and marketing platform should help
facilitate the commercial launch of Amelior.
Kristalose,
a prescription laxative product, is a
crystalline form of lactulose designed to enhance patient
acceptance and compliance. Based on data from IMS Health, the
market for prescription laxatives in the U.S. grew from
approximately $206 million in 2003 to $389 million in
2006, driven largely by new product introductions and increased
promotional activity by our competitors. Wholesaler sales of
Kristalose to pharmacies were $10.5 million in 2006. We
acquired exclusive U.S. commercialization rights to
Kristalose during that year, assembled a new dedicated field
sales force and re-launched the product in October 2006 under
the Cumberland brand. We believe that Kristalose has competitive
advantages over competing prescription laxatives, and that the
potential for growth of this product is significant.
Early-stage product candidates.
Our
early-stage product candidates are being developed through
Cumberland Emerging Technologies, Inc., or CET, our 86%-owned
subsidiary. CET collaborates with leading research institutions
to identify and pursue promising pre-clinical programs within
our target market segments. We have negotiated rights to develop
and commercialize these product candidates. Current CET projects
include an improved treatment for fluid buildup in the lungs of
cancer patients and an anti-infective for treating fungal
infections in immuno-compromised patients. In conjunction with
these research institutions, we have obtained grant funding to
support the development of these programs.
OUR COMPETITIVE
STRENGTHS
Significant
late-stage product opportunity in Amelior
We believe Amelior currently represents our most significant
product opportunity based on the large potential markets for
intravenous treatment of pain and fever, as well as clinical
results for the product to date. We have conducted several
clinical trials to support this product and expect to complete
Phase III clinical studies by early 2008. Based on our
clinical results to date, we believe Amelior represents a
potentially safer alternative to ketorolac, which is the only
injectable non-opioid analgesic currently on the
U.S. market, with approximately 43 million units sold
in 2006. We have retained exclusive commercialization rights for
Amelior in the U.S. and plan to market the product through our
existing hospital sales force.
Strong growth
potential of our existing marketed products, Acetadote and
Kristalose
We believe that there is significant opportunity to increase
sales of our two currently approved products, Acetadote and
Kristalose. Since its launch in June 2004, we have consistently
grown product sales for Acetadote. During 2006, hospital
purchases of Acetadote from wholesalers grew 43% to
$13 million. Kristalose competes in the high growth
U.S. prescription laxatives market which, based on data
from IMS Health, grew from approximately $206 million in
2003 to $389 million in 2006, or a compound annual growth
rate of approximately 24%. After acquiring exclusive U.S. rights
to Kristalose in April 2006, we assembled an experienced,
dedicated sales force and designed a new marketing
40
Business
program, re-launching the product in October 2006. We believe
both Kristalose and Acetadote have favorable competitive
profiles, and that we can increase market share for each.
Focus on
underserved niche markets
We focus our efforts on specialty physician segments where we
believe we can leverage our industry expertise and sales
capability to deliver products that address unmet medical needs.
Currently, our primary target markets are hospital acute care
and gastroenterology. We consider these markets attractive
because of their relatively concentrated prescriber bases, which
allow us to reach target prescribers with a small number of
sales representatives. Moreover, we believe these markets are
less prone to competition from larger pharmaceutical companies
than other pharmaceutical sectors.
Profitable
business with a history of fiscal discipline
We have been profitable since 2004, during which time we have
generated sufficient cash flows to fund our development and
marketing programs without the need for significant external
financing. As an emerging pharmaceutical company with limited
resources, we have historically focused on product opportunities
with relatively low acquisition, development, and
commercialization costs. Further, we believe that our
third-party manufacturing and distribution relationships allow
us to outsource these functions efficiently while directing most
of our resources to our core competencies of business
development, clinical and regulatory affairs, and sales and
marketing.
Integrated
specialty pharmaceutical company with extensive management
expertise
Our executives have significant pharmaceutical industry
experience in business development, clinical and regulatory
affairs, and sales and marketing. This team is augmented by our
Pharmaceutical and Medical Advisory Boards, which consist of
highly experienced healthcare professionals.
|
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|
Ø
|
Our business development team is led by our CEO and our Director
of Business Development and is comprised of a multi-disciplinary
group of executives. This team sources product opportunities
independently as well as through our international network of
pharmaceutical and medical industry insiders. Their efforts have
resulted in acquisition, license, co-promotion and strategic
alliance agreements, and have provided us with rights to our
current portfolio. This group is also responsible for acquiring
rights to early-stage product candidates through CET.
|
|
|
|
Ø
|
Our clinical, regulatory affairs and product development team is
led by three professionals with substantial experience advancing
late-stage clinical candidates successfully through the FDA
approval process. This team was directly responsible for
obtaining FDA approval for Acetadote and is responsible for our
development of Amelior. We have established internal
capabilities to develop proprietary product formulations, design
and manage our clinical trials, prepare all regulatory
submissions and manage our medical call center.
|
|
|
|
Ø
|
Our sales and marketing team is managed by five executives who
have broad experience marketing branded pharmaceuticals. They
manage the dedicated hospital and gastroenterology sales forces
that promote our products and that together are comprised of 42
sales representatives and managers. Our executives also direct
our national marketing campaigns and manage relationships with
key accounts.
|
41
Business
OUR
STRATEGY
Our objective is to develop, acquire and commercialize branded
pharmaceutical products for specialty physician market segments.
Specifically, we plan to:
Successfully
develop and commercialize Amelior, our Phase III product
candidate
Amelior is in late-stage Phase III clinical development for
the treatment of pain and fever. We have gathered positive data
regarding the safety and efficacy of this product, and we expect
to complete clinical trials in early 2008. We believe that there
is significant market potential for Amelior in both pain and
fever. We intend to penetrate the U.S. hospital market with
our existing hospital sales force and to commercialize the
product internationally through alliances with marketing
partners.
Maximize sales of
our marketed products
Over the past three years, we have employed an effective
marketing campaign resulting in consistent sales growth for our
product Acetadote. We intend to expand our hospital sales force
in anticipation of a potential launch of Amelior. We believe we
can leverage this expanded sales force to increase Acetadote
sales. We are also supporting several studies to explore other
potential indications for Acetadote. In October 2006, we
re-launched Kristalose under the Cumberland brand with a new
marketing program and dedicated sales force, which we expect to
expand significantly over time. This marketing program is
designed to enhance brand awareness through increased
promotional activity and highlights Kristalose’s many
positive, competitive attributes. In addition to our sales
efforts, we may also pursue co-promotion arrangements with third
parties to support growth of our products.
Expand sales
force operations
We intend to continue building our sales and marketing
infrastructure in order to drive prescription volume and product
sales. We currently utilize two distinct sales teams:
|
|
|
|
Ø
|
We promote Acetadote, and plan to promote Amelior,
through our dedicated hospital sales team consisting of 16
representatives and managers covering approximately 1,400 major
U.S. medical centers. We expect to significantly increase
this sales force in order to fully capitalize on the market
potential of Acetadote and Amelior.
|
|
|
|
Ø
|
We promote Kristalose through a dedicated field sales force
of 26 sales representatives and managers to approximately 6,400
gastroenterologists and other high prescribers of laxatives. We
believe that we can increase the market for Kristalose
significantly by investing in our marketing program and
significantly expanding this sales force.
|
Expand our
product portfolio by acquiring rights to additional products and
late-stage product candidates
We intend to build a portfolio of complementary, niche products
largely through product acquisitions. We focus on
under-promoted, FDA-approved drugs with existing brand
recognition as well as late-stage development products which
address unmet medical needs, a strategy which we believe helps
minimize our exposure to the significant risk, cost and time
associated with drug discovery and research. We plan to continue
to target products that are competitively differentiated, have
valuable trademarks or other intellectual property, and allow us
to leverage our existing infrastructure. We also plan to explore
opportunities to seek approval for new uses of existing
pharmaceutical products.
42
Business
Develop a
pipeline of early-stage products through CET
In order to build our product pipeline, we are supplementing our
acquisition and late-stage development activities with the
early-stage drug development activities of CET, our
majority-owned subsidiary. CET partners with universities and
other research organizations to cost-effectively develop
promising, early-stage product candidates. Current pre-clinical
projects nearing clinical-stage development include:
|
|
|
|
Ø
|
a treatment for fluid buildup in the lungs of cancer patients,
in collaboration with Vanderbilt University, and
|
|
|
|
Ø
|
a highly purified anti-infective for treating fungal infections
in immuno-compromised patients, in collaboration with the
University of Mississippi.
|
INDUSTRY
The hospital
market
According to IMS Health, U.S. hospitals accounted for
approximately $31 billion, or 11%, of
U.S. pharmaceutical sales in 2006. IMS Health also reports
that in 2006, marketing and promotional efforts focused on
hospital-use drugs represented only about $662 million, or
3%, of approximately $21 billion total pharmaceutical
industry spending on promotional activity. The majority of
promotional spending is directed towards large outpatient
markets promoting drugs intended for chronic use rather than
short-term use in the hospital setting. We believe the lack of
promotional emphasis on the hospital marketplace indicates that
the hospital market is underserved. We also believe that the
hospital market is highly concentrated, with a small number of
large institutions responsible for a majority of pharmaceutical
spending, and consequently that it can be penetrated effectively
without large-scale promotional activity by a small, dedicated
sales force.
Market for
injectable analgesics
Therapeutic agents used to treat pain are collectively known as
analgesics. Physicians prescribe injectable analgesics for
hospitalized patients who have high levels of acute pain,
require rapid pain relief or cannot take oral analgesics.
According to IMS Health, the U.S. market for injectable
analgesics exceeded $302 million, or 491 million
units, in 2006. This market is comprised principally of generic
opioids and the NSAID ketorolac. Injectable opioids such as
morphine, meperidine, hydromorphone and fentanyl accounted for
approximately 447 million units sold in 2006. While opioids
are widely used for acute pain management, they are associated
with a variety of unwanted side effects including sedation,
nausea, vomiting, constipation, headache, cognitive impairment
and respiratory depression. Respiratory depression, if not
monitored closely, can be deadly. Opioid-related side effects
can warrant dosing limitations, which may reduce overall
effectiveness of pain relief. Side effects from opioids can
cause a need for further medication or treatment, and can
increase lengths of stay in post-anesthesia care units as well
as overall hospital stay, which can lead to increased costs for
hospitals and patients.
Despite having a poor safety profile, usage of ketorolac, the
only non-opioid injectable analgesic available in the U.S., has
grown from approximately 38 million units in 2003, or 7% of
the market, to approximately 43 million units in 2006,
representing 9% of the market, according to IMS Health. The FDA
specifically warns that ketorolac should not be used in various
patient populations that are at-risk for bleeding, as a
prophylactic analgesic prior to major surgery or for
intraoperative administration when stoppage of bleeding is
critical.
43
Business
Fever
Significant fever is generally defined as a temperature of
greater than 102 degrees Fahrenheit. High fevers can cause
hallucinations, confusion, convulsions and death. Hospitalized
patients are subject to increased risk for developing fever,
especially from exposure to infectious agents. Patients with
endotracheal intubation, sedation, reduced gastric motility,
nausea or recent surgery are frequently unable to ingest,
digest, absorb, or tolerate oral products to reduce fever.
Treatment for these patients ranges from rectal delivery of
medication to physical cooling measures such as tepid baths, ice
packs and cooling blankets. In the U.S., there is currently no
FDA-approved intravenous medication for the treatment of fever.
Acetaminophen
poisoning
Acetaminophen is one of the most widely used drugs for oral
treatment of pain and fever in the U.S. and can be found in many
common
over-the-counter,
or OTC products and prescription narcotics. Though safe at
recommended doses, the drug can cause liver damage with
excessive use. According to the American Association of Poison
Control Centers’ Toxic Exposure Surveillance System,
acetaminophen poisoning is the leading cause of toxic drug
ingestions in the U.S. In 2005, approximately 77,000 people
were treated and 333 people died due to acetaminophen
poisoning in the U.S.
In a study published in 2005 that examined acute liver failure,
researchers concluded that acetaminophen poisoning was
responsible for acute liver failure in over half the patients
examined in 2003, up from 28% in 1998. While an estimated 48% of
cases were due to the accidental use of acetaminophen over
several days, causing chronic liver failure, an estimated 44% of
the cases were intentional overdoses, causing acute liver
failure.
According to the FDA, four grams of acetaminophen is the daily
maximum dosage recommended for adults. Ingesting eight grams of
acetaminophen in a single day causes a significant number of
people, whose livers have been previously stressed by a virus,
medication or alcohol, to experience more serious complications.
When used in conjunction with opiates, acetaminophen can be
effective in relieving pain after surgery or injury; however,
some patients who take acetaminophen/opiate combination drugs on
a chronic basis eventually require increasing amounts to achieve
the same level of pain relief, which can also lead to liver
failure.
Market for the
treatment of Acetaminophen overdose
NAC is widely accepted as the standard of care for acetaminophen
overdose. Throughout Europe and much of the rest of the world,
NAC has been available in an injectable formulation for over
25 years. Until the 2004 approval of Acetadote, however,
the only FDA-approved form of NAC available in the U.S. was
an oral preparation. Prior to the approval of Acetadote, many
U.S. hospitals prepared an off-label, IV form of NAC from
the oral solution to treat patients suffering from acetaminophen
poisoning. For a number of these patients, an IV product is
the only reasonable route of administration due to nausea and
vomiting associated with the administration of oral NAC for the
overdose. Moreover, IV treatment requires fewer doses and a
shorter treatment protocol, reducing treatment from three days
to one day.
Acetaminophen poisoning treatment is typically initiated in the
emergency department and continued in the intensive care unit.
NAC is marketed to emergency physicians and nurses, critical
care physicians, clinical and medical toxicologists and poison
control centers. According to
The Medical Letter on Drugs and
Therapeutics,
NAC is virtually 100% effective in preventing
severe liver damage, renal failure and death if administered
within eight to ten hours of the overdose.
44
Business
The
gastrointestinal market
According to the National Institute of Diabetes, Digestive and
Kidney Diseases, gastrointestinal diseases result in
approximately 50 million physician visits and
14 million hospitalizations annually. Many of these
physician visits are to one of the only 11,700
gastroenterologists in the U.S.
There are over 40 common, well-defined gastrointestinal
conditions recognized in the U.S., including constipation,
chronic liver disease and cirrhosis, gastroesophageal reflux
disease, infectious diarrhea, irritable bowel syndrome, lactose
intolerance, pancreatitis and peptic ulcers. Because the market
for gastrointestinal diseases is broad in patient scope, yet
relatively narrow in physician base, we believe that it is an
attractive specialty focus which can provide a wide variety of
product opportunities but can be penetrated with a modest sales
force.
Market for
treatment of constipation
Constipation is a common condition in the U.S., affecting
approximately 20% of the population each year. While many
occurrences are non-recurring, a significant number are chronic
in nature and require some treatment to control or resolve.
Constipation treatments are sold in both the OTC, and
prescription segments. We believe that the prescription laxative
market in which Kristalose competes has historically consisted
of a few highly promoted brands including
MiraLax
®
(polyethylene glycol 3350), which is now being sold as an OTC
product, Amitiza and
Zelnorm
®
,
which is used for multiple indications including constipation,
as well as several generic forms of liquid lactulose and
polyethylene glycol 3350. Zelnorm was removed from the market in
March 2007 due to adverse safety findings, and is pending
further FDA review. According to data from IMS Health, this
market grew from approximately $206 million in 2003 to
$389 million in 2006, a compound annual growth rate of
approximately 24%. This increase in sales resulted primarily
from new product introductions and increased promotion of
branded products.
PRODUCTS
Our key products and product candidates include:
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Product
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Indication
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Delivery
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Status
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Amelior
®
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Pain and Fever
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Injectable
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Phase III
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Acetadote
®
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Acetaminophen Poisoning
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Injectable
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Marketed
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Kristalose
®
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Chronic and Acute Constipation
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Oral Solution
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Marketed
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Amelior
Amelior is an intravenous formulation of ibuprofen. We expect
Amelior will be the first injectable non-opioid product
available in the U.S. for the treatment of pain and fever.
The product is currently in Phase III clinical trials, and
we are preparing for our NDA submission to the FDA for
regulatory approval. If approved, we believe Amelior will
provide physicians with a safe, effective treatment alternative
for acute care patients requiring an intravenous product for
pain relief or fever reduction. We have retained the
U.S. marketing rights for Amelior and, if approved, plan to
market it in the U.S. through our hospital sales force. We
plan to commercialize the product outside of the
U.S. through alliances with international marketing
partners.
Ibuprofen, an NSAID, is a widely-used product now taken orally
for pain relief and fever reduction, but is currently
unavailable in an injectable formulation for this use. In May
1999, we acquired from Vanderbilt University an exclusive,
worldwide license to data on the use of intravenous ibuprofen.
45
Business
Published in the
New England Journal of Medicine
in March
1997, this data indicated that intravenous ibuprofen was
effective in reducing high fever in critically ill patients who
were largely unable to receive oral medication. Following
discussion with and recommendation by the FDA, we implemented a
development program for Amelior designed to obtain approval for
a dual indication for the product—reduction of pain and
treatment of fever.
We expect Amelior will be administered primarily to hospitalized
patients who are unable to receive analgesics or antipyretics
orally. We believe Amelior represents our most significant
product opportunity to date.
Development
history
We have actively managed the development of Amelior by
implementing the following steps:
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We obtained exclusive rights to an investigator IND which
contains supportive safety and efficacy data in which
hospitalized adult patients with sepsis received intravenous
ibuprofen.
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We developed a patented formulation for Amelior as well as a
proprietary manufacturing process.
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We completed a clinical study to establish the pharmacokinetic
equivalence of oral and intravenous ibuprofen in February 2001,
a study to establish safe administration of the optimized
dilution of Amelior’s IV preparation in March 2002, and a
study to demonstrate that the product is effective in reducing
fever in hospitalized adult malaria patients in July 2002.
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We completed a dose-ranging study to determine the optimum dose
to treat fever in hospitalized adult patients in August 2005.
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We completed enrollment for a dose-ranging study to determine
the product’s effectiveness in controlling pain in
post-surgical adult patients in October 2006.
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In January 2007, we initiated a pivotal study to demonstrate the
product’s effectiveness in controlling pain in
post-surgical adult patients. In April 2007, a subsequent study
was initiated to support the product’s use in additional
surgical populations.
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Over four years of stability studies for Amelior have been
successfully completed.
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A study to obtain data to support pediatric use is ongoing.
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An integrated safety database is being built, combining both
published experience with data from these new studies.
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We intend to complete clinical development of Amelior by early
2008.
Commercialization
strategy
We intend to expand our existing U.S. hospital sales force
to promote Amelior to physicians, nurses and pharmacy
directors, principally in the hospital setting. We believe that
we can achieve our commercial goals by utilizing our experienced
sales organization, and supporting them with an internal
marketing infrastructure that targets high-use institutions. We
have an international strategic alliance with Mayne Pharma Pty.
Ltd., which will manufacture commercial supplies of Amelior. We
intend to partner with third-parties to reach markets outside
the U.S. or to expand our reach to physician groups outside
the hospital where applicable.
Acetadote
Acetadote is N-acetylcysteine, or NAC, for the intravenous
treatment of acetaminophen overdose. Until we obtained FDA
approval for Acetadote in 2004, the only FDA-approved form of
NAC available in
46
Business
the U.S. was an oral preparation. Medical literature
suggested that many hospitals prepared an off-label, IV form of
NAC from the oral solution for easier administration and
accuracy in dosing. Given this market dynamic, we concluded that
a medical need existed for an FDA-approved, injectable
formulation of NAC for the U.S. market.
We actively managed the development and regulatory approval of
Acetadote by implementing the following steps:
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We held initial discussions with the FDA to design a development
plan.
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Acetadote was granted orphan drug status in October 2001, which
provides for seven years of marketing exclusivity from date of
marketing approval.
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We submitted our NDA in July 2002.
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We submitted a complete response to FDA initial review questions
in July 2003.
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We received FDA marketing approval for Acetadote in January 2004
for the treatment of acetaminophen overdose.
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Acetadote was launched in June 2004.
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Early in 2006, the FDA-approved revised labeling for the
product, which included an expanded indication for dosing in
pediatric patients.
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In connection with the FDA’s approval of Acetadote, we
committed to certain post-marketing activities for the product.
Our first phase IV commitment (pediatric) was completed and
accepted by the FDA in December 2004. Our second phase IV
commitment (clinical) was completed and accepted by the FDA in
August 2006. We anticipate completing our third and final
phase IV commitment (manufacturing) for Acetadote in 2007.
We are also supporting a number of studies to explore other
potential indications for the product.
We believe Acetadote has clinical and financial benefits
relative to oral NAC, including ease of administration,
minimizing nausea and vomiting associated with oral NAC,
accurate dosage control, shorter treatment protocol and
reduction in overall cost of acetaminophen overdose management.
Acetadote makes NAC administration easier to tolerate for
patients and easier to administer for medical providers. We
believe Acetadote also offers a significant cost benefit to both
patient and hospital by reducing the treatment regimen, usually
from three days to one day.
Acetadote is manufactured for us by Bioniche Teoranta at its
FDA-approved manufacturing facility in Ireland.
Kristalose
Kristalose is a prescription laxative administered orally for
the treatment of constipation. In patients with a history of
chronic constipation, lactulose therapy increases the number of
bowel movements per day and the number of days on which they
occur. Lactulose is a product with a long history of use as a
laxative, and as a treatment for hepatic encephalopathy, which
is a deterioration of the liver resulting in a
build-up
of
ammonia. Kristalose is an innovative, dry powder crystalline
formulation of lactulose which is designed to enhance patient
compliance and acceptance.
We co-promoted Kristalose from 2002 until April 2006 under an
agreement with Bertek Pharmaceuticals, Inc., the branded
division of Mylan Laboratories, Inc. Following Mylan’s
discontinuance of Bertek operations in 2006, we acquired
exclusive U.S. commercialization rights to Kristalose. We
re-launched Kristalose under the Cumberland brand in October
2006 with a dedicated, contract sales force of 26 sales
representatives and managers. We direct our sales efforts to
physicians
47
Business
who are the most prolific writers of prescription laxatives.
These physicians include gastroenterologists, pediatricians,
internists and colon and rectal surgeons.
We believe Kristalose offers competitive advantages over other
laxative products. Packaged in single dose packets, Kristalose
is very portable, is reconstituted in as little as four ounces
of water, is clear, virtually tasteless, does not change the
viscosity of the water and contains almost no calories, all of
which we believe cause Kristalose to compare favorably to liquid
lactulose products. Compared to polyethylene glycol 3350
products, we believe Kristalose has a fast onset of action and a
better pregnancy category rating. Compared with
Zelnorm
®
and
Amitiza
®
,
Kristalose has fewer potential side effects or contraindications
and is less expensive.
Kristalose is manufactured for us by Inalco S.p.A. at an
FDA-approved facility in Italy.
Early-stage
product candidates
Our early-stage product candidates are being developed by CET,
which collaborates with leading research institutions to
identify and pursue promising pre-clinical programs. Two of the
more advanced CET development programs are:
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In collaboration with Vanderbilt University, we are currently
developing a new treatment for fluid buildup in the lungs of
cancer patients. The product candidate is a protein therapeutic
being designed to treat “pleural effusion,” a
condition which occurs when cancer spreads to the surface of the
lung and chest cavity, causing fluid to accumulate and patients
to suffer shortness of breath and chest pain. An estimated
100,000 patients are affected by this condition each year.
Currently, the substances used in treating this cause pain and
have only a
60-90%
success rate. Vanderbilt University researchers believe they
have found a method of treating this condition which may involve
less pain, a higher success rate and faster healing time,
resulting in significantly shorter hospital stays.
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In collaboration with the University of Mississippi, we are
developing a highly purified, injectable anti-infective used to
treat fungal infections in immuno-compromised patients. This
product candidate’s active ingredient is currently
FDA-approved in a different formulation, and while it is the
therapeutic of choice for infectious disease specialists in
treating such fungal infections, it can produce serious side
effects related to renal toxicity, often resulting in dosage
limitations or discontinued use. University of Mississippi
researchers have developed what they believe is a purer and
safer form of the anti-infective.
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BUSINESS
DEVELOPMENT
Since inception, we have had an active business development
program focused on acquiring rights to marketed products and
product candidates that fit our strategy and target markets. We
source our business development leads both through our senior
executives and our international network of pharmaceutical and
medical industry insiders. These opportunities are reviewed and
considered on a regular basis by a multi-disciplinary team of
our managers against a list of selection criteria. We have
historically focused on product opportunities with relatively
low acquisition, development and commercialization costs,
employing a variety of deal structures.
We intend to continue to build a portfolio of complementary,
niche products largely through product acquisitions. Our primary
targets are under-promoted, FDA-approved drugs with existing
brand recognition and late-stage development products that
address unmet medical needs in the hospital acute care and
gastroenterology markets. We also plan to explore opportunities
to acquire rights to and seek approval for new uses of
pharmaceutical products. We believe that by focusing mainly on
approved or
48
Business
late-stage products, we can minimize the significant risk, cost
and time associated with drug development. We have completed
three material acquisitions including:
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exclusive, worldwide rights from Vanderbilt University to data
for intravenous ibuprofen to support our FDA submission for
Amelior;
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exclusive, worldwide rights to clinical data supporting the
safety and efficacy of Acetadote, which served as a key
component of our FDA submission and approval; and
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exclusive U.S. commercial rights to Kristalose.
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Our business development team is also responsible for
identifying appropriate CET product candidates and negotiating
with our university partners to secure rights to these
candidates. Through CET, we are collaborating with a growing
list of research institutions including:
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Vanderbilt University;
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University of Mississippi, School of Pharmacy; and
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University of Tennessee Research Foundation.
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Since 2004, these collaborations secured nearly $1 million
in National Institutes of Health grant funding for the
development of promising new products and several additional
proposals have been submitted or are awaiting review.
CLINICAL AND
REGULATORY AFFAIRS
We have established in-house capabilities for the management of
our clinical, professional and regulatory affairs. Our team
develops and manages our clinical trials, prepares regulatory
submissions, manages ongoing product-related regulatory
responsibilities and manages our medical information call
center. They were responsible for devising the regulatory and
clinical strategy and obtaining FDA approval for Acetadote and
are responsible for ongoing development of Amelior.
Clinical
development
Our in-house clinical development personnel are responsible for:
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creating clinical development strategies;
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designing and monitoring our clinical trials;
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creating case report forms and other study-related documents;
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overseeing clinical work contracted to third parties; and
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overseeing CET grant funding proposals.
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Regulatory and
quality affairs
Our internal regulatory and quality affairs team is responsible
for:
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preparing and submitting NDAs and fulfilling post-approval
marketing commitments;
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maintaining investigational and marketing applications through
the submission of appropriate reports;
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submitting supplemental applications for additional label
indications, product line extensions and manufacturing
improvements;
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evaluating regulatory risk profiles for product acquisition
candidates, including compliance with manufacturing, labeling,
distribution and marketing regulations;
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49
Business
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monitoring applicable third-party service providers for quality
and compliance with current Good Manufacturing Practices, Good
Laboratory Practices, and Good Clinical Practices, and
performing periodic audits of such vendors; and
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maintaining systems for document control, product and process
change control, customer complaint handling, product stability
studies and annual drug product reviews.
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Professional and
medical affairs
Our clinical and regulatory team provides in-house, medical
information support for our marketed products. This includes
interacting directly with healthcare professionals to address
any product or medical inquiries through our medical information
call center. Our call center was previously operated by the
Rocky Mountain Poison and Drug Center, or RMPDC. In 2006, we
expanded our clinical and regulatory capabilities and brought
our call center in-house in an effort to ensure the highest
level of quality and service. The RMPDC continues to supplement
our efforts by providing
after-hours
support for our call center and assisting us with our adverse
event collection/reporting and global pharmacovigilance
activities. In addition to coordinating the call center, our
clinical/regulatory group generates medical information letters,
provides informational memos to our sales forces and assists
with ongoing training for the sales forces.
SALES AND
MARKETING
Our sales and marketing team has broad industry experience in
selling branded pharmaceuticals. They manage the dedicated
hospital and gastroenterology sales forces, which are comprised
of 42 sales representatives and managers, direct our national
marketing campaigns and maintain key national account
relationships. We promote our products to hospitals and
office-based physicians across the U.S. and plan to
commercialize our products internationally through marketing
alliances.
In January 2007, we converted our hospital sales force, which
had previously been contracted to us by Cardinal Health Inc., or
Cardinal, to Cumberland employees through our newly-formed,
wholly-owned subsidiary, Cumberland Pharma Sales Corp. The
hospital sales team is comprised of 16 sales representatives and
managers, covering approximately 1,400 major medical centers
across the U.S. The gastroenterology-focused team, formed
in September 2006 with our re-launch of Kristalose, is a field
sales force comprised of 26 representatives and managers and
covering approximately 6,400 high prescribers of laxatives. This
gastroenterology sales force is contracted to us by Advogent
Group, Inc., or Advogent. Under our agreement, we pay Advogent a
monthly fee, a portion of which is used to compensate the sales
force. We also reimburse Advogent for bonuses and expense
reimbursement paid to the sales force. This agreement terminates
in August 2008. We have the option, with Advogent’s
consent, to extend the contract for one additional year. We also
have the option to bring this sales force in-house. We expect to
expand both sales forces significantly over the next several
years.
Our sales and marketing executives conduct ongoing market
analyses to evaluate marketing campaigns and promotional
programs. The evaluations include development of product
profiles, testing of the profiles against the needs of the
market, determining what additional product information or
development work is needed to effectively market the products
and preparing financial forecasts. We utilize professional
branding and packaging as well as promotional items to support
our products, including direct mail, sales brochures, journal
advertising, educational and reminder leave-behinds, patient
educational pieces and product sampling. We also attend regular
trade shows to promote broad awareness of our products.
50
Business
Our National Accounts group is responsible for key large buyers
and related marketing programs. This group supports sales and
marketing efforts by maintaining relationships with our
wholesaler customers as well as with third-party payors such as
Group Purchasing Organizations, Pharmacy Benefit Managers,
Hospital Buying Groups, state and federal government purchasers
and influencers and health insurance companies.
International
Sales and Marketing
Consistent with our strategy to outsource non-core functions, we
have licensed to third parties the right to distribute Amelior
outside the U.S. We have granted Alveda Pharmaceuticals
Inc., or Alveda, an exclusive license to distribute Amelior in
Canada subject to receipt of regulatory approval. Alveda is
obligated to make payments to us upon Amelior’s achieving
specified regulatory milestones in Canada and to pay us a
royalty based on Canadian sales of Amelior. This license
terminates five years after regulatory approval is obtained in
Canada for the later of the fever or pain indications. We have
granted Mayne Pharma (SEA) Pte Limited an exclusive license to
market and distribute Amelior in Southeast Asia subject to the
receipt of regulatory approval. Mayne Pharma (SEA) Pte Limited
is obligated to make payments to us upon Amelior’s
achieving specified regulatory milestones in Southeast Asia as
well royalty payments. The initial term of the agreement expires
on the fifth anniversary of Amelior obtaining regulatory
approval in Southeast Asia.
MANUFACTURING AND
DISTRIBUTION
We outsource certain non-core, capital-intensive functions,
including manufacturing and distribution. Our executives have
years of experience in these areas and manage these third-party
relationships with a focus on quality assurance.
Manufacturing
Our key manufacturing relationships include:
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In July 2000, we established an international manufacturing
alliance with Australia-based Mayne Pharma Pty. Ltd., or Mayne.
Mayne sources active pharmaceutical ingredients, or APIs, and
manufactures Amelior exclusively for us under an agreement that
expires on the fifth anniversary of FDA approval of Amelior,
subject to early termination upon 45 days prior notice in
the event of uncured material breach by us or Mayne. The
agreement will automatically renew for successive three-year
terms unless Mayne or we provide at least 12 months prior
written notice of non-renewal. Under the agreement, we pay Mayne
a transfer price per unit of Amelior supplied. In addition, we
reimburse Mayne for
agreed-upon
development, regulatory and inspection and audit costs. We have
also granted Mayne a right of first negotiation with respect to
the manufacture of all future pharmaceutical products we intend
to sell and the distribution of these products in Australia, New
Zealand, Canada and mutually agreed Southeast Asian and Latin
American countries.
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Bioniche Teoranta, or Bioniche, sources APIs and manufactures
Acetadote exclusively for us for sale in the U.S. at its
FDA-approved manufacturing facility in Ireland. Our relationship
with Bioniche began in January 2002. Bioniche manufactures and
packages Acetadote for us, and we purchase Acetadote exclusively
from Bioniche, pursuant to an agreement expiring in January
2011. This agreement is subject to early termination upon prior
written notice in the event of an uncured material default by us
or Bioniche. We have an option to renew the agreement for a
five-year term upon expiration. Under the agreement, we pay
Bioniche a transfer price per unit of Acetadote supplied, which
transfer price is subject to annual adjustment, and a royalty
based on our net sales of the product. In addition, we are
required to purchase minimum quantities of Acetadote.
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51
Business
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Inalco S.p.A. and Inalco Biochemicals, Inc., or collectively
Inalco, from which we licensed exclusive
U.S. commercialization rights to Kristalose in April 2006,
source APIs and provide us with a manufacturing supply for the
product under an agreement that expires in 2021. The agreement
renews automatically for successive three-year terms unless we
or Inalco provide written notice of intent not to renew at least
12 months prior to expiration of a term. Either we or
Inalco may terminate this agreement upon at least 45 days
prior written notice in the event of uncured material breach.
Under the agreement, we are required to pay Inalco a transfer
price per unit of Kristalose supplied and a royalty based on our
net sales of Kristalose. In addition, we are required to
purchase minimum quantities of Kristalose.
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Distribution
Like many other pharmaceutical companies, we employ an outside
contractor to facilitate our distribution efforts. Since August
2002, Specialty Pharmaceutical Services, or SPS, (formerly CORD
Logistics, Inc.) has exclusively handled all aspects of our
product logistics efforts, including warehousing, shipping,
customer billing and collections. A division of Cardinal, SPS is
located just outside of Nashville, Tennessee, and has a
well-established infrastructure. We maintain ownership of
finished products until their sale to our customers.
INTELLECTUAL
PROPERTY
We seek to protect our products from competition through a
combination of patents, trademarks, trade secrets, FDA
exclusivity and contractual restrictions on disclosure.
Proprietary rights, including patents, are an important element
of our business. We seek to protect our proprietary information
by requiring our employees, consultants, contractors and other
advisors to execute agreements providing for protection of our
confidential information on commencement of their employment or
engagement, through which we seek to protect our intellectual
property. We also require confidentiality agreements from
entities that receive our confidential data or materials.
Amelior
We are the owner of U.S. Patent No. 6,727,286, which
is directed to ibuprofen solution formulations, methods of
making the same, and methods of using the same, and which
expires in 2021. This U.S. patent is associated with our
completed international application
No. PCT/US01/42894.
We have filed for international patent protection in association
with this PCT application in various countries, some of which
have been allowed and some of which remain pending.
We have applied for additional protection for our invention
related to ibuprofen solution formulations, methods of making
the same and methods of using the same through
U.S. application
No. 10/739,050
and international application
No. PCT/US04/39770,
both of which remain pending.
We have an exclusive, worldwide license to clinical data for
intravenous ibuprofen from Vanderbilt University, in
consideration for royalty and other payment obligations that are
conditioned upon approval by the FDA of Amelior.
If Amelior is approved by the FDA, we intend to seek three years
marketing exclusivity from the FDA based on the clinical studies
we have sponsored to pursue approval of the product.
Acetadote
Acetadote was approved by the FDA in January 2004 as an orphan
drug for the intravenous treatment of acetaminophen overdose. As
an orphan drug, Acetadote is entitled to seven years of
marketing
52
Business
exclusivity for the treatment of this approved indication. We
have applied for patent protection for a new formulation of
Acetadote through U.S. patent application
No. 11/209,804,
as well as through international application
No. PCT/US06/20691,
both of which are directed to acetylcysteine compositions,
methods of making the same and methods of using the same. In
addition, we have an exclusive, worldwide license to NAC
clinical data from Newcastle Master Misercordiae Hospital in
Australia. We have no expected outstanding payment obligations
pursuant to this contract.
Kristalose
We are the exclusive licensee of two U.S. patents owned by
Inalco relating to Kristalose. The first, U.S. Patent
No. 5,003,061, is directed to a method for preparing
high-purity crystalline lactulose. The second, U.S. Patent
No. 5,480,491, is directed to a process for preparation of
crystalline lactulose. Our license rights include an exclusive
license to use related Inalco know-how and the Kristalose
trademark to manufacture, market and distribute Kristalose in
the U.S. Under our agreement with Inalco, Inalco is solely
responsible for prosecuting and maintaining both the patents and
know-how that we license from them. Our license expires in 2021
and is subject to earlier termination for material breach. Our
payment obligations under this agreement are described under
“Manufacturing and Distribution —
Manufacturing.”
COMPETITION
The pharmaceutical industry is characterized by intense
competition and rapid innovation. Our continued success in
developing and commercializing pharmaceutical products will
depend, in part, upon our ability to compete against existing
and future products in our target markets. Competitive factors
directly affecting our markets include but are not limited to:
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product attributes such as efficacy, safety,
ease-of-use
and cost-effectiveness;
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brand awareness and recognition driven by sales and marketing
and distribution capabilities;
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intellectual property and other exclusivity rights;
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availability of resources to build and maintain developmental
and commercial capabilities;
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successful business development activities;
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extent of third-party reimbursements; and
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establishment of advantageous collaborations to conduct
development, manufacturing or commercialization efforts.
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A number of our competitors possess research and development and
sales and marketing capabilities as well as financial resources
greater than ours. These competitors, in addition to emerging
companies and academic research institutions, may be developing,
or in the future could develop, new technologies that could
compete with our current and future products or render our
products obsolete.
Amelior
We are developing Amelior for the treatment of pain and fever,
primarily in a hospital setting. A variety of products already
address the acute pain market.
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Morphine, the most commonly used product for the treatment of
acute, post-operative pain, is manufactured and distributed by
several generic pharmaceutical companies.
|
|
|
|
Ø
|
Depodur
®
is an extended release injectable formulation of morphine that
is marketed by SkyePharma PLC.
|
53
Business
|
|
|
|
Ø
|
Other generic injectable opioids, including fentanyl, meperidine
and hydromorphone.
|
|
|
|
Ø
|
Ketorolac (brand name
Toradol
®
),
an injectable NSAID, is also manufactured and distributed by
several generic pharmaceutical companies.
|
We are aware of other product candidates in development to treat
acute pain including injectable NSAIDs, novel opioids, new
formulations of existing therapies and extended release
anesthetics. We believe the companies developing injectable,
non-narcotic analgesics for the treatment of post-surgical pain
are the primary potential competitors to Amelior. Cadence
Pharmaceuticals Inc. is developing an injectable formulation of
acetaminophen for the treatment of pain and fever, and Javelin
Pharmaceuticals Inc. is developing an injectable form of an
NSAID, diclofenac.
In addition to the injectable analgesic products above, many
companies are developing analgesics for specific indications
such as migraine and neuropathic pain, oral extended-release
forms of existing narcotic and non-narcotic products, and
products with new methods of delivery such as transdermal.
We are not aware of any approved injectable products indicated
for the treatment of fever in the U.S. There are, however,
numerous drugs available to physicians to reduce fevers in
hospital settings via oral administration to the patient,
including acetaminophen, ibuprofen and aspirin. These drugs are
manufactured by numerous pharmaceutical companies.
Acetadote
Acetadote is our injectable formulation of NAC for the treatment
of acetaminophen overdose. NAC is accepted worldwide as the
standard of care for acetaminophen overdose. Despite the
availability of injectable NAC outside the United States,
Acetadote, to our knowledge, is the only injectable NAC product
approved in the U.S. to treat acetaminophen overdose. Our
competitors in the acetaminophen overdose market are those
companies selling orally administered NAC including, but not
limited to, Geneva Pharmaceuticals, Inc., Bedford Laboratories
division of Ben Venue Laboratories, Inc., Roxane Laboratories,
Inc. and Hospira Inc.
Kristalose
Kristalose is a dry powder crystalline prescription formulation
of lactulose indicated for the treatment of constipation. The
U.S. constipation therapy market includes various
prescription and OTC products. The prescription products which
we believe are our primary competitors are
Amitiza
®
and liquid lactuloses:
|
|
|
|
Ø
|
Amitiza is indicated for the treatment of chronic idiopathic
constipation in adults and is marketed by Sucampo
Pharmaceuticals Inc. and Takeda Pharmaceutical Company Limited;
and
|
|
|
|
Ø
|
Liquid lactulose products are marketed by a number of
pharmaceutical companies.
|
In addition, Kristalose competed with the prescription product
Zelnorm
®
until it was pulled from the market in March 2007 due to adverse
safety findings. Indicated for treatment of chronic idiopathic
constipation in persons under aged 65 and produced by Novartis
Pharma AG, Zelnorm is under further review by the FDA.
There are several hundred OTC products used to treat
constipation marketed by numerous pharmaceutical and consumer
health companies.
MiraLax
®
(polyethylene glycol 3350), previously a prescription product,
is indicated for the treatment of constipation and is
manufactured and marketed by Braintree Laboratories, Inc. and
other generic pharmaceutical firms. Under an agreement with
Braintree, Schering-Plough introduced MiraLax as an OTC product
in February 2007.
54
Business
EMPLOYEES
As of April 30, 2007, we had 33 full-time employees,
which included 16 hospital sales representatives and managers.
We also have a dedicated gastroenterology field sales force
under contract that is comprised of 26 dedicated sales
representatives and managers. We believe that employing
experienced, independent contractors and consultants is a
cost-efficient and effective way to accomplish our goals. A
number of additional individuals have provided or are currently
providing services to us pursuant to agreements between the
individuals or their employers and us. None of our employees are
represented by a collective bargaining unit. We believe that we
have positive relationships with our employees.
FACILITIES
We currently lease approximately 6,300 square feet of
office space in Nashville, Tennessee for our headquarters under
an agreement expiring in December 2010. We have an option to
renew this lease for a five-year term upon expiration. We also
have entered into an occupancy agreement for approximately
9,000 square feet of additional office space adjoining our
headquarters. This occupancy agreement will be replaced by a
sublease for the same space, effective June 1, 2007. The
sublease expires in October 2010. We believe that these
facilities are adequate to meet our current needs for office
space. We currently do not plan to purchase or lease facilities
for manufacturing, packaging or warehousing, as such services
are provided to us by third-party contract groups.
Under an agreement expiring in May 2011, CET leases
approximately 6,900 square feet of office and wet
laboratory space in Nashville, Tennessee. CET uses this space to
operate the CET Life Sciences Center for product development
work to be carried out in collaboration with universities,
research institutions and entrepreneurs. CET has an option to
lease up to 20,000 square feet at the Life Sciences Center
should it need additional space. The CET Life Sciences Center
provides laboratory and office space, equipment and
infrastructure to early-stage life sciences companies and
university spin-outs.
GOVERNMENT
REGULATION
Pharmaceutical companies are subject to extensive regulation by
national, state, and local agencies in countries in which they
do business. The manufacture, distribution, marketing and sale
of pharmaceutical products is subject to government regulation
in the U.S. and various foreign countries. Additionally, in the
U.S., we must follow rules and regulations established by the
FDA requiring the presentation of data indicating that our
products are safe and efficacious and are manufactured in
accordance with cGMP regulations. If we do not comply with
applicable requirements, we may be fined, the government may
refuse to approve our marketing applications or allow us to
manufacture or market our products and we may be criminally
prosecuted.
We and our manufacturers and clinical research organizations may
also be subject to regulations under other federal, state and
local laws, including the Occupational Safety and Health Act,
the Resource Conservation and Recovery Act, the Clean Air Act
and import, export and customs regulations as well as the laws
and regulations of other countries.
FDA Approval
Process
The steps required to be taken before a new prescription drug
may be marketed in the U.S. include:
|
|
|
|
Ø
|
completion of pre-clinical laboratory and animal testing;
|
|
|
|
Ø
|
the submission to the FDA of an investigational new drug
application, or IND, which must be evaluated and found
acceptable by the FDA before human clinical trials may commence;
|
55
Business
|
|
|
|
Ø
|
performance of adequate and well-controlled human clinical
trials to establish the safety and efficacy of the proposed drug
for its intended use; and
|
|
|
|
Ø
|
submission and approval of a NDA.
|
The sponsor of the drug typically conducts human clinical trials
in three sequential phases, but the phases may overlap. In
Phase I clinical trials, the product is tested in a small
number of patients or healthy volunteers, primarily for safety
at one or more dosages. In Phase II clinical trials, in
addition to safety, the sponsor evaluates the efficacy of the
product on targeted indications, and identifies possible adverse
effects and safety risks in a patient population. Phase III
clinical trials typically involve testing for safety and
clinical efficacy in an expanded population at
geographically-dispersed test sites.
The FDA requires that clinical trials be conducted in accordance
with the FDA’s good clinical practices (GCP) requirements.
The FDA may order the partial, temporary or permanent
discontinuation of a clinical trial at any time or impose other
sanctions if it believes that the clinical trial is not being
conducted in accordance with FDA requirements or presents an
unacceptable risk to the clinical trial patients. The
institutional review board (IRB), or ethics committee (outside
of the U.S.), of each clinical site generally must approve the
clinical trial design and patient informed consent and may also
require the clinical trial at that site to be halted, either
temporarily or permanently, for failure to comply with the
IRB’s requirements, or may impose other conditions.
The results of the pre-clinical and clinical trials, together
with, among other things, detailed information on the
manufacture and composition of the product and proposed
labeling, are submitted to the FDA in the form of an NDA for
marketing approval. The FDA reviews all NDAs submitted before it
accepts them for filing and may request additional information
rather than accepting an NDA for filing. Once the submission is
accepted for filing, the FDA begins an in-depth review of the
NDA. Under the policies agreed to by the FDA under the
Prescription Drug User Fee Act, or PDUFA, the FDA has ten months
in which to complete its initial review of a standard NDA and
respond to the applicant. The review process and the PDUFA goal
date may be extended by three months if the FDA requests or the
NDA sponsor otherwise provides additional information or
clarification regarding information already provided in the
submission within the last three months of the PDUFA goal date.
If the FDA’s evaluations of the NDA and the clinical and
manufacturing procedures and facilities are favorable, the FDA
may issue an approval letter. The FDA may also issue an
approvable letter setting forth further conditions that must be
met in order to secure final approval of the NDA. If and when
those conditions have been met to the FDA’s satisfaction,
the FDA will issue an approval letter. An approval letter
authorizes commercial marketing of the drug for certain
indications. According to the FDA, the median total approval
time for NDAs approved during calendar year 2004 was
approximately 13 months for standard applications. If the
FDA’s evaluations of the NDA submission and the clinical
and manufacturing procedures and facilities are not favorable,
it may refuse to approve the NDA and issue a not-approvable
letter.
The time and cost of completing these steps and obtaining FDA
approval can vary dramatically depending on the drug. However,
to complete these steps for a novel drug can take many years and
cost millions of dollars.
Section 505(b)(2)
New Drug Applications
As an alternate path for FDA approval of new indications or new
formulations of previously-approved products, a company may file
a Section 505(b)(2) NDA, instead of a
“stand-alone” or “full” NDA.
Section 505(b)(2) of the FDC Act was enacted as part of the
Drug Price Competition and Patent Term Restoration Act of 1984,
otherwise known as the Hatch-Waxman Amendments.
Section 505(b)(2) permits the submission of an NDA where at
least some of the information required for approval comes
56
Business
from studies not conducted by or for the applicant and for which
the applicant has not obtained a right of reference. Some
examples of products that may be allowed to follow a 505(b)(2)
path to approval are drugs which have a new dosage form,
strength, route of administration, formulation or indication.
We successfully secured FDA approval of a 505(b)(2) NDA for
Acetadote in January 2004. We also plan to pursue marketing
approval for Amelior pursuant to the 505(b)(2) pathway.
Upon approval of a “full” or 505(b)(2) NDA, a drug may
be marketed only for the FDA-approved indications in the
approved dosage forms. Further clinical trials are necessary to
gain approval for the use of the product for any additional
indications or dosage forms. The FDA may also require
post-market reporting and may require surveillance programs to
monitor the side effects of the drug, which may result in
withdrawal of approval after marketing begins.
Special Protocol
Assessment Process
The special protocol assessment, or SPA, process generally
involves FDA evaluation of a proposed Phase III clinical
trial protocol and a commitment from the FDA that the design and
analysis of the trial are adequate to support approval of an
NDA, if the trial is performed according to the SPA and meets
its endpoints. The FDA’s guidance on the SPA process
indicates that SPAs are designed to evaluate individual clinical
trial protocols primarily in response to specific questions
posed by the sponsors. In practice, the sponsor of a product
candidate may request an SPA for proposed Phase III trial
objectives, designs, clinical endpoints and analyses. A request
for an SPA is submitted in the form of a separate amendment to
an IND, and the FDA’s evaluation generally will be
completed within a
45-day
review period under applicable PDUFA goals, provided that the
trials have been the subject of discussion at an
end-of-Phase II
and pre-Phase III meeting with the FDA, or in other limited
cases.
On June 14, 2004, we submitted a request for SPA of our
Amelior Phase III clinical study. During a meeting with the
FDA on September 29, 2004, the FDA confirmed that the
efficacy data from our study of post-operative pain with a
positive outcome will be considered sufficient to support a
505(b)(2) application for the pain indication. Final
determinations by the FDA with respect to a product candidate,
including as to the scope of its “labeling”, are made
after a complete review of the applicable NDA and are based on
the entire data in the application. Moreover, notwithstanding
any SPA, FDA approval of an NDA is subject to future public
health concerns unrecognized at the time of protocol assessment.
Orphan Drug
Designation
The Orphan Drug Act of 1983, or Orphan Drug Act, encourages
manufacturers to seek approval of products intended to treat
“rare diseases and conditions” with a prevalence of
fewer than 200,000 patients in the U.S. or for which there
is no reasonable expectation of recovering the development costs
for the product. For products that receive orphan drug
designation by the FDA, the Orphan Drug Act provides tax credits
for clinical research, FDA assistance with protocol design,
eligibility for FDA grants to fund clinical studies, waiver of
the FDA application fee, and a period of seven years of
marketing exclusivity for the product following FDA marketing
approval. Acetadote received Orphan Drug designation in October
2001 and was approved by the FDA for the intravenous treatment
of moderate to severe acetaminophen overdose in January 2004. As
an orphan drug, Acetadote is entitled to marketing exclusivity
until January 2011 for the treatment of this approved
indication. This exclusivity would not prevent a product with a
different formulation from competing with Acetadote, however.
57
Business
The Hatch-Waxman
Act
The Hatch-Waxman Act provides three years of marketing
exclusivity for the approval of new and supplemental NDAs,
including Section 505(b)(2) NDAs, for, among other things,
new indications, dosages or strengths of an existing drug, if
new clinical investigations that were conducted or sponsored by
the applicant are essential to the approval of the application.
It is under this provision that we expect to receive three years
marketing exclusivity for Amelior.
Other regulatory
requirements
Regulations continue to apply to pharmaceutical products after
FDA approval occurs. Post-marketing safety surveillance is
required in order to continue to market an approved product. The
FDA also may, in its discretion, require post-marketing testing
and surveillance to monitor the effects of approved products or
place conditions on any approvals that could restrict the
commercial applications of these products.
If we seek to make certain changes to an FDA-approved product,
such as promoting or labeling a product for a new indication,
making certain manufacturing changes or product enhancements or
adding labeling claims, we will need FDA review and approval
before the change can be implemented. While physicians may use
products for indications that have not been approved by the FDA,
we may not label or promote the product for an indication that
has not been approved. Securing FDA approval for new indications
or product enhancements and, in some cases, for manufacturing
and labeling claims, is generally a time-consuming and expensive
process that may require us to conduct clinical trials under the
FDA’s IND regulations. Even if such studies are conducted,
the FDA may not approve any change in a timely fashion, or at
all. In addition, adverse experiences associated with use of the
products must be reported to the FDA, and FDA rules govern how
we can label, advertise or otherwise commercialize our products.
In addition to FDA restrictions on marketing of pharmaceutical
products, several other types of state and federal laws have
been applied to restrict certain marketing practices in the
pharmaceutical industry in recent years. These laws include
anti-kickback statutes and false claims statutes. The federal
health care program anti-kickback statute prohibits, among other
things, knowingly and willfully offering, paying, soliciting or
receiving remuneration to induce or in return for purchasing,
leasing, ordering or arranging for the purchase, lease or order
of any health care item or service reimbursable under Medicare,
Medicaid or other federally financed health care programs. This
statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers,
purchasers and formulary managers on the other. Violations of
the anti-kickback statute are punishable by imprisonment,
criminal fines, civil monetary penalties and exclusion from
participation in federal health care programs.
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or
causing to be made, a false statement to have a false claim
paid. Recently, several pharmaceutical and other health care
companies have been prosecuted under these laws for allegedly
inflating drug prices they report to pricing services, which in
turn were used by the government to set Medicare and Medicaid
reimbursement rates, and for allegedly providing free product to
customers with the expectation that the customers would bill
federal programs for the product.
Outside of the U.S., our ability to market our products will
also depend on receiving marketing authorizations from the
appropriate regulatory authorities. The foreign regulatory
approval process includes all of the risks associated with the
FDA approval process described above. The requirements
58
Business
governing the conduct of clinical trials and marketing
authorization vary widely from country to country.
LEGAL
PROCEEDINGS
Except as described below, we are not a party to litigation or
other legal proceedings.
During the second quarter of 2006, our Chief Executive, a Vice
President of ours, and we were named as co-defendants in
Parniani v. Cardinal Health, Inc. et al.
, Case
No. 0:06-cv-02514-PJS-JJG
in the U.S. District Court in the District of Minnesota for
unspecified damages based on workers’ compensation and
related claims. A former employee of a third-party service
provider to us filed the complaint. The service provider, which
is also named as a co-defendant, has agreed to assume control of
our defense at its cost pursuant to a contract between it and
us. The service provider is seeking dismissal of the lawsuit
against us, our Chief Executive, and our Vice President, among
other co-defendants. Based upon the information available to us
to date, we believe that all asserted claims against us and the
individual defendants are without merit. However, if any of the
claims are deemed meritorious by judicial determination, we
expect to be indemnified by the service provider so that
resolution of this matter is not expected to have a material
adverse effect on our future financial results or financial
condition.
59
Management
OFFICERS AND
DIRECTORS
The following table sets forth the names and ages of our
directors, executive officers and key managers as of
April 30, 2007:
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
|
|
|
|
A.J. Kazimi
|
|
|
49
|
|
|
Chairman and Chief Executive
Officer
|
|
Martin E.
Cearnal
(1),(2)
|
|
|
62
|
|
|
Director
|
|
Dr. Robert G. Edwards
|
|
|
79
|
|
|
Director
|
|
Dr. Lawrence W.
Greer
(1),(2)
|
|
|
62
|
|
|
Director
|
|
Thomas R.
Lawrence
(1),(2)
|
|
|
67
|
|
|
Director
|
|
Jean W. Marstiller
|
|
|
57
|
|
|
Senior Vice President and
Corporate Secretary
|
|
Dr. Gordon R. Bernard
|
|
|
55
|
|
|
Senior Vice President and Medical
Director
|
|
Leo Pavliv
|
|
|
46
|
|
|
Vice President, Operations
|
|
J. William Hix
|
|
|
59
|
|
|
Vice President, Sales &
Marketing
|
|
David L. Lowrance
|
|
|
39
|
|
|
Vice President and Chief Financial
Officer
|
|
James L. Herman
|
|
|
52
|
|
|
Senior Director, National Accounts
and Corporate Compliance Officer
|
|
Elizabeth C. Gerken
|
|
|
38
|
|
|
Director, Business Development
|
|
Bruce J. Kent
|
|
|
44
|
|
|
Senior Manager, District Sales
|
|
Amy D. Rock
|
|
|
36
|
|
|
Senior Manager, Regulatory Affairs
|
|
|
|
|
|
(1)
|
|
Member of Audit Committee
|
|
|
|
(2)
|
|
Member of Compensation Committee
|
A.J. Kazimi, Chairman and Chief Executive
Officer.
Mr. Kazimi founded our company in
1999 and has served as our Chief Executive Officer and Chairman
of our Board of Directors since inception. His career includes
20 years in the biopharmaceutical industry. Prior to
joining our company, he spent eleven years from 1987 to 1998
helping to build Therapeutic Antibodies Inc., a
biopharmaceutical company, where as President and Chief
Operating Officer he made key contributions to the
company’s growth from its
start-up
phase through its initial public offering and product launches.
Mr. Kazimi oversaw operations in three countries and was
personally involved with the company’s product development
strategies, licensing and distribution agreements, and the
raising of more than $100 million through equity and debt
financings. From
1984-1987,
Mr. Kazimi worked at Brown-Forman Corporation, rising
through a series of management positions and helping to launch
several new products. Mr. Kazimi currently serves on the
board of directors for Aegis Sciences Corporation, a federally
certified forensic toxicology laboratory; the Tennessee
Biotechnology Association; and Aetos Technologies Inc., a
technology development company associated with Auburn
University. He also serves as Chairman and Chief Executive
Officer of Cumberland Emerging Technologies, Inc., or CET. He
holds a B.S. from the University of Notre Dame and an M.B.A.
from the Vanderbilt Owen Graduate School of Management.
Martin E. Cearnal, Director.
Mr. Cearnal
has served as a member of our board of directors since 2004. He
is the former President and Chief Executive Officer of
Physicians World, which became the largest provider of
continuing medical education during his tenure from 1985 to
2000. Physicians World was acquired by Thomson Healthcare in
2000. Mr. Cearnal served as President of Thomson Physicians
World from 2000 to 2003, and Executive Vice President-Chief
Strategy Officer for Thomson Medical Education from 2003 through
2005. Since 2006, he has been Executive Vice President-Chief
Strategy Officer for Jobson Medical Information.
Mr. Cearnal has 40 years experience in the Healthcare
industry
60
Management
and has been involved with the launches of such noteworthy
pharmaceutical products as
Lipitor
®
,
Actos
®
,
Intron-A
®
,
Straterra
®
,
Botox
®
and
Humira
®
.
Mr. Cearnal spent 17 years at Revlon Healthcare in a
variety of domestic and international pharmaceutical marketing
roles culminating in his position as Vice President, Marketing
for the International Operations. He serves the industry through
leadership and participation in several organizations, including
the Healthcare Marketing & Communications Council and
the Alliance for Continuing Medical Education. Mr. Cearnal
also serves as a member of our Audit Committee and our
Compensation Committee. He has a BS degree from Southeast
Missouri State University.
Dr. Robert G. Edwards,
Director.
Dr. Edwards has served as a member
of our board of directors since 1999. From 1991 to 1999, he was
Chairman and Managing Director of the Australasian subsidiary of
Therapeutic Antibodies Inc., overseeing operations in Australia,
New Zealand and Southeast Asia. Dr. Edwards also served as
Deputy Director of the Institute for Medical &
Veterinary Science in South Australia, President of the Royal
College of Pathologists of Australasia, and member of the
Australian National Health & Medical Research Council.
He currently serves as a director for CET, and is chairman of
the CET Scientific Advisory Board. Dr. Edwards holds a
Primary Degree from London University, Master of Human
Physiology from London University and an M.D. from the
University of Adelaide.
Dr. Lawrence W. Greer,
Director.
Dr. Greer has served as a member
of our board of directors since 1999. Since 2002, he has been
Senior Managing Partner of Greer Capital Advisors of Birmingham,
Alabama. Dr. Greer serves as investment advisor to two
private equity funds and general partner for two additional
private equity funds, including the S.C.O.U.T. Healthcare Fund
from which we have received equity financing. Dr. Greer and
his firm are established leaders in private healthcare
investments in the mid-south. Previously, he served as Vice
President-Investments of Dunn Investment Company, where he was
responsible for management of a marketable securities portfolio
plus personal management of a portfolio of 15 private equity
investments. He is the former Chairman of Southern BioSystems
which was acquired by DURECT Corporation in 2001. Dr. Greer
has also worked as an independent consultant in healthcare
administration and finance. Dr. Greer serves as the
chairman of the Audit Committee of our board of directors, as a
member of our Compensation Committee, and is an Audit Committee
financial expert. He also served as the chairman of the Audit
Committee for the Southtrust (Bank) Funds Board of Trustees for
several years. Dr. Greer holds a B.S. from Tulane
University, D.D.S. from Emory University and an M.B.A. from
Emory University.
Thomas R. Lawrence,
Director.
Mr. Lawrence has served as a
member of our board of directors since 1999. Since 2003 he has
been Chairman and Chief Executive Officer of Aetos Technologies
Inc., a corporation formed in 2003 by Auburn University to
market technological breakthroughs by its faculty. From 1998 to
2003, Mr. Lawrence advised business clients on matters of
marketing and corporate governance through his firm Capital
Consultants. He previously served as Co-Founder and Managing
Partner of Delta Capital Partners in Memphis from 1989 to 1998.
The partnership made investments in ten early-stage companies
which, by 1998, were valued at more than $30 million. Prior
to the formation of Delta, Mr. Lawrence founded several
companies in the areas of commercial leasing and venture capital
financing. He also worked for most of the 1980s as an
Institutional Sales Representative and Commercial Leasing
Specialist with the Investment Banking Group of Union Planters
Bank in Memphis, where he was responsible for the structure and
sale of over $1 billion in securities. Mr. Lawrence
serves as the chairman of our Compensation Committee, as a
member of our Audit Committee and as a director for CET. He
holds a B.S. from Mississippi State University.
Jean W. Marstiller, Senior Vice President and Corporate
Secretary.
Ms. Marstiller joined our Company
in 1999. She oversees our administrative operations, human
resources, site services and information systems, and became our
Corporate Secretary in 2007. She has 17 years
biopharmaceutical industry
61
Management
experience and was formerly Director of Administrative
Operations at Therapeutic Antibodies Inc., where she worked from
1989 until 1998. In that capacity, she oversaw administrative
services, information systems, and human resources.
Ms. Marstiller was employed by Brown-Forman Corporation
from 1982 until 1987, where she held management level positions
in the areas of finance and operations. She holds a B.E. from
Vanderbilt University and attended the Vanderbilt Owen Graduate
School of Management.
Dr. Gordon R. Bernard, Senior Vice President and Medical
Director.
Dr. Bernard has served as our
medical director since 1999. Dr. Bernard is the Assistant
Vice-Chancellor for Research at Vanderbilt University, and also
the Melinda Owen Bass Professor of Medicine and former Chief of
the Division of Allergy, Pulmonary and Critical Care Medicine at
Vanderbilt. In addition, he is the Medical Director of the
Vanderbilt Institutional Review Board and Chairman of
Vanderbilt’s Pharmacy and Therapeutics Committee, which is
responsible for approving the Vanderbilt Medical Center
Formulary of approved drugs and therapeutics. Dr. Bernard
also chairs the National Institutes of Health, Acute Respiratory
Distress Syndrome Clinical Trials Network. He holds a B.S. from
the University of Southwestern Louisiana and an M.D. from
Louisiana State University.
Leo Pavliv, Vice President, Operations.
Mr.
Pavliv has served as our Vice President, Operations since 2003,
and is responsible for Cumberland’s overall drug
development, including manufacturing and quality operations. He
has 23 years of experience developing pharmaceutical and
biological products. From 1997 to 2003 he worked at Cato
Research, a contract research organization, most recently as
Vice President of Pharmaceutical Development where he oversaw
development of a wide variety of products throughout the
development cycle. Prior to 1997, he held various scientific and
management positions at both large pharmaceutical and smaller
biopharmaceutical firms including Parke-Davis from 1984 to 1986,
Agouron Pharmaceuticals from 1992 to 1997, ProCyte from 1989 to
1992, and Interferon Sciences from 1986 to 1989. He is a
registered pharmacist (R.Ph.) and is regulatory affairs
certified (RAC). Mr. Pavliv holds a B.S., Pharmacy, and an
M.B.A. from Rutgers University.
J. William Hix, Vice President, Sales and
Marketing.
Mr. Hix is responsible for all
our sales and marketing efforts. He joined us in 2004 to form
and manage our national sales force promoting our acute care
product line to hospitals, poison control centers and
physicians. He was also instrumental in the design and
implementation of our field sales force which is responsible for
promoting our products in the gastroenterology market.
Mr. Hix brings significant industry experience to our
company having spent 30 years at Novartis/CIBA-GEIGY
Pharmaceutical Corporation from 1974 to 2004. There, his
responsibilities ranged from field sales, sales management,
sales operations, planning and promotion to marketing support
and operations. He holds a B.S. from the University of Memphis
and an M.B.A. from Our Lady of the Lake University.
David L. Lowrance, Vice President and Chief Financial
Officer.
Mr. Lowrance is responsible for
overseeing all our accounting and financial activities,
including financial reporting and planning. He has been with us
since 2003 and has 17 years of accounting and financial
experience in both international business and manufacturing.
From 1994 to 2003, he spent eight years with two global
conglomerates, including four years as Senior Vice President for
Icore International, a division of Smiths Group, PLC. Prior to
that, Mr. Lowrance worked as a senior accountant for
Ernst & Young, LLP from 1990 to 1994. He is a Certified
Public Accountant, or CPA, and holds a B.B.A. from the
University of Georgia.
James L. Herman, Senior Director, National Accounts and
Corporate Compliance Officer.
Mr. Herman
handles all national accounts sales, including wholesalers and
retail chain buying offices, managed care home offices and
federal government accounts. He is also charged with overseeing
our corporate compliance efforts. He has been with us since 2003
and has 17 years pharmaceutical industry experience. From
1998 to 2003, he was with Solvay Pharmaceuticals and served as
Director of
62
Management
Managed Care as well as Director of Trade Affairs and Customer
Service. From 1990 to 1998, Mr. Herman was with Schwarz
Pharma, where he held national sales leadership positions in
National Accounts and Managed Care. He holds a B.S. from Indiana
University and an M.B.A. from Cardinal Stritch University.
Elizabeth C. Gerken, Director, Business
Development.
Ms. Gerken has served as our
head of business development since 2001. She coordinates all
business development activities and is actively engaged in the
identification of product opportunities, the process of due
diligence and the negotiation of deal terms for our agreements.
Ms. Gerken has 15 years pharmaceutical industry
experience. She worked at Eli Lilly and Company from 1992 to
2000 with management roles in strategic planning, brand
management, sales management, and business development. She
holds a B.E. from Vanderbilt University and an M.B.A. from the
Vanderbilt Owen Graduate School of Management.
Bruce J. Kent, Senior Manager, District
Sales.
Mr. Kent joined us in July 2006 to
form and launch our field sales force. He is responsible for
managing that group of sales representatives which promotes our
gastroenterology product line. Mr. Kent has 19 years
of pharmaceutical industry experience. Beginning his career with
CIBA Pharmaceuticals in 1988, he spent 15 years with the
company now known as Novartis Pharmaceuticals, where he held
positions of increasing responsibility in sales, sales
management, managed healthcare, business analysis, and
e
business. Prior to joining our company, Mr. Kent
was the Executive Director of Sales for Rx Sample Solutions and
the head of the Northeast Regional Office from 2004 to 2006. He
holds a B.S. from the Pennsylvania State University.
Amy Dix Rock, Ph.D., Senior Manager, Regulatory
Affairs.
Dr. Rock joined our company in 2001
and built our Regulatory Affairs Department and infrastructure.
In addition to managing all interactions between our company and
the FDA, Dr. Rock oversees the preparation of pre-approval
and post-approval regulatory submissions. Her additional
responsibilities include involvement in protocol development and
clinical trials management, overseeing our medical call center
and supporting our corporate compliance initiatives. She holds a
B.A. from Washington University, a PhD in Immunology from the
University of Kentucky, and an M.B.A. from the Vanderbilt Owen
Graduate School of Management.
ADVISORY
BOARDS
In order to augment the efforts of our management and directors,
we have established two key advisory boards to support our
management and directors.
Pharmaceutical
Advisory Board
Our Board of Pharmaceutical Advisors is comprised of eight
individuals who have spent their careers in the pharmaceutical
industry. This group includes former senior executives from a
number of the major pharmaceutical firms including
Warner-Lambert Co. and its Parke-Davis division, Pfizer, Inc.,
Bristol-Myers Squibb Company, and CIBA Geigy Corp. These
individuals each advise members of our company’s management
on a wide variety of issues based on their expertise. These
industry advisors are helping to build our company by actively
contributing to many areas of our business such as strategy,
business development, human resources, marketing, international
activities, accounting and logistics.
Medical Advisory
Board
We have also established a Board of Medical Advisors to support
our product development efforts. This board includes six
physicians with representatives from the U.S. and international
medical communities who are leaders in the fields of emergency,
critical care and infectious disease medicine as well as
toxicology and cardiology. These individuals meet as a group
with our management to help us identify
63
Management
unmet medical needs and underserved patient populations in our
target areas. They also help us identify and evaluate relevant
product opportunities.
BOARD
COMPOSITION
Our board of directors currently consists of five directors who
are divided into three classes serving staggered three-year
terms. Dr. Robert G. Edwards is a Class I
director who will serve until our 2008 annual meeting of
shareholders. Dr. Lawrence W. Greer and Thomas R.
Lawrence are Class II directors who will serve until our
2009 annual meeting. A.J. Kazimi and Martin E. Cearnal
are Class III directors who will serve until our 2010
annual meeting. Upon expiration of the term of a class of
directors, directors in that class will be eligible to be
elected for a new three-year term at the annual meeting of
shareholders in the year in which their term expires. Any
additional directorships resulting from an increase in the
number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of directors
could have the effect of increasing the length of time necessary
to change the composition of a majority of our board of
directors. In general, at least two annual meetings of
shareholders will be necessary for shareholders to effect a
change in a majority of the members of our board of directors.
DIRECTOR
INDEPENDENCE
In December 2006 and in February 2007, our board of directors
undertook reviews of the independence of the directors and
considered whether any director had a material relationship with
us that could compromise his ability to exercise independent
judgment in carrying out his responsibilities. As a result of
this review, our board of directors determined that
Dr. Lawrence W. Greer and Martin E. Cearnal are
“independent” as defined under applicable National
Association of Securities Dealers Automated Quotation System, or
NASDAQ, rules and SEC rules and regulations. We expect that a
majority of our board will be independent within a year
following this offering as required by the Sarbanes-Oxley Act of
2002, SEC rules and regulations and NASDAQ rules.
BOARD
COMMITTEES
The standing committees of our board consist of an audit
committee and a compensation committee. Both committees will
have three members following this offering, two of whom will be
independent. We expect that all directors on our audit and
compensation committees will be independent within a year
following this offering.
Audit
committee
The members of our audit committee are Dr. Lawrence W.
Greer, Martin E. Cearnal and Thomas R. Lawrence. The Chair of
the audit committee is Dr. Greer, who has been
affirmatively determined by our board of directors to be
independent in accordance with applicable rules. In addition,
the board of directors has determined that Dr. Greer is an
“audit committee financial expert,” as such term is
described in Item 407 of
Regulation S-K.
The primary function of the audit committee is to assist our
board of directors in fulfilling its oversight responsibilities
by reviewing the financial reports and certain financial
information provided by us to any governmental body or the
public, reviewing our systems of internal controls regarding
finance, accounting, legal compliance and ethics that we have
established and overseeing our auditing, accounting and
financial reporting processes generally. Consistent with this
function, we expect the audit committee to encourage continuous
improvement of, and to foster adherence to, our policies,
procedures and practices at all levels, to be responsible for
managing the relationship with our
64
Management
independent registered public accountants, and to provide a
forum for discussion with the independent registered public
accountants and our board.
Some of the audit committee’s responsibilities include:
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appointing, determining the compensation for and overseeing our
relationship with our independent registered public accountants;
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overseeing, reviewing and evaluating our financial statements,
the audits of our financial statements, our accounting and
financial reporting processes, the integrity of our financial
statements, our disclosure controls and procedures and our
internal audit functions;
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reviewing and approving the services provided by our independent
registered public accountants, including the scope and results
of their audits and pre-approving permissible non-audit services
to be performed by them;
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resolving disagreements between management and our independent
registered public accountants;
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overseeing our compliance with legal and regulatory requirements
and compliance with ethical standards adopted by us;
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establishing and maintaining whistleblower procedures; and
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evaluating periodically our Standards of Business Conduct and
Ethics, Code of Ethics for Senior Financial Officers and
Procedures for Complaints and Concerns Regarding Accounting,
Internal Accounting Controls and Auditing Matters.
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Compensation
committee
The members of our compensation committee are Dr. Lawrence
W. Greer, Martin E. Cearnal, and Thomas R. Lawrence. The Chair
of the compensation committee is Thomas R. Lawrence. The
responsibilities of the compensation committee include:
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reviewing and recommending to the board of directors the
compensation and benefits of all of our executive officers and
directors;
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evaluating the performance of the principal executive officer;
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administering our equity incentive plans;
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establishing and reviewing general policies relating to
compensation and benefits of our employees;
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reviewing and evaluating the compensation discussion and
analysis prepared by management; and
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preparing an executive compensation report for publication in
our annual proxy statement.
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COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas R. Lawrence, the Chair of our compensation committee, is
the Chairman of Aetos Technologies, Inc., a corporation formed
in 2003 by Auburn University to market technological
breakthroughs by its faculty. Mr. Kazimi, our Chairman and
Chief Executive Officer, serves on the board of directors of
Aetos Technologies. Other than this relationship, none of our
executive officers serves as a member of the board of directors
or compensation committee of any other entity that has one or
more executive officers who serve on our board of directors or
compensation committee.
CODES OF CONDUCT
AND CORPORATE GOVERNANCE
We are currently in the process of developing a Corporate
Compliance Program. Within this program, we plan to maintain
internal processes and review procedures that ensure our
business activities are
65
Management
conducted in compliance with applicable federal and state laws,
statutes, regulations or program requirements, including
guidance documents drafted specifically by governing entities
for the healthcare and pharmaceutical industries, consistent
with advancing, preserving and protecting public health.
To help ensure compliance, we plan to conduct regular, periodic
compliance audits by internal and external auditors and
compliance staff, who have expertise in federal and state
healthcare laws and regulations.
Our codes of conduct consist of a Standards of Business Conduct
and Ethics, a Code of Ethics for Senior Financial Officers, an
Insider Information, Trading or Dealing and Stock Tipping Policy
and Procedures for Complaints and Concerns Regarding Accounting,
Internal Accounting Controls, and Auditing Matters. As part of
our corporate compliance program, in 2006 we established a
compliance hotline to enable employees, directors and other
representatives to report compliance violations, including
violations of our codes of conduct.
Standards of
Business Conduct and Ethics
Our board of directors has adopted a Standards of Business
Conduct and Ethics which establish the standards of ethical
conduct applicable to all of our directors, officers, employees,
key advisors, consultants and contract organizations. The code
of ethics addresses, among other things, compliance with laws
and regulations, business practices, conflicts of interest,
employment policies and reporting procedures. Suspected
violations of this code may be reported on a confidential,
anonymous basis through the compliance hotline. The audit
committee oversees this process, tracks the complaints and
resolutions and reports the significant results to the full
board of directors. The code is distributed to all employees and
directors. All employees and directors must sign, date and
return a certification stating that they received, understand
and will comply with the code.
Code of Ethics
for Senior Financial Officers
In 2006, we adopted a Code of Ethics for Senior Financial
Officers. The code is designed to deter wrongdoing and to
promote honest and ethical conduct, full and accurate disclosure
in periodic reports, and compliance with laws and regulations by
our senior management who has financial responsibility. We
expect that any suspected violations of this code will be
reported to the audit committee. Any waiver of this code may
only be authorized by our audit committee and will be disclosed
as required by applicable law.
Insider
Information, Trading or Dealing and Stock Tipping
Policy
We are committed to fair trading for publicly traded securities
and have established standards of conduct for directors,
employees and others who obtain material or price-sensitive,
non-public information through their work with us. The policy is
distributed to all employees. Non-compliance with the policy may
be submitted on a confidential, anonymous basis through the
compliance hotline.
Procedures for
Complaints and Concerns Regarding Accounting, Internal
Accounting Controls, and Auditing Matters
In 2006, we established Procedures for Complaints and Concerns
Regarding Accounting, Internal Accounting Controls and Auditing
Matters to encourage any person who has a reasonable basis for a
complaint or concern regarding our financial statement
disclosures, accounting matters, internal accounting controls or
auditing matters to promptly submit a complaint or concern.
Complaints may be submitted on a confidential, anonymous basis
through the compliance hotline. The audit committee oversees
this process, immediately reviews the complaints and oversees
all necessary investigations. The audit committee tracks the
complaints and resolutions and reports the significant results
to the full board of directors.
66
Compensation
COMPENSATION
DISCUSSION AND ANALYSIS
We provide what we believe is a competitive total compensation
package to our executive management team through a combination
of base salary, long-term equity incentive compensation plan and
broad-based benefits programs.
We place significant emphasis on performance-based incentive
compensation programs. This Compensation Discussion and Analysis
explains our compensation philosophy, policies and practices
with respect to our chief executive officer, chief financial
officer, and the other three most highly-compensated executive
officers or the named executive officers.
The objectives of
our executive compensation program
Our compensation committee is responsible for establishing and
administering the policies governing the compensation for our
executive officers. Our executive officers are appointed by our
board of directors.
Our executive compensation programs are designed to achieve the
following objectives:
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attract and retain talented and experienced executives;
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motivate and reward executives whose knowledge, skills and
performance are critical to our success;
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align the interests of our executive officers and shareholders
by motivating executive officers to increase shareholder value
and rewarding executive officers when shareholder value
increases;
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provide a competitive compensation package in which total
compensation is primarily determined by company and individual
results and the creation of shareholder value;
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ensure fairness among the executive management team by
recognizing the contributions each executive makes to our
success; and
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compensate our executives to manage our business to meet our
long-range objectives.
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The compensation committee meets outside the presence of all of
our executive officers, including the named executive officers,
to consider appropriate compensation for our CEO. For all other
named executive officers, the committee meets outside the
presence of all executive officers except our CEO.
Mr. Kazimi annually reviews each other named executive
officer’s performance with the committee and makes
recommendations to the compensation committee with respect to
the appropriate base salary and the grants of long-term equity
incentive awards for all executive officers. Based in part on
these recommendations from our CEO, the compensation committee
approves the annual compensation package of our executive
officers other than our CEO. The compensation committee also
annually analyzes Mr. Kazimi’s performance and
determines his base salary and grants of long-term equity
incentive awards based on its assessment of his performance.
When making decisions on setting base salary and initial grants
of long-term equity incentive awards for new executive officers,
the compensation committee considers the importance of the
position to us, the past salary history of the executive officer
and the contributions to be made by the executive officer to us.
We use the following principles to guide our decisions regarding
executive compensation:
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provide compensation opportunities targeted at market median
levels;
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require performance goals to be achieved or common stock price
to increase in order for the majority of the target pay levels
to be earned;
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offer a comprehensive benefits package to all full-time
employees; and
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67
Compensation
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provide fair and equitable compensation.
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Our executive
compensation programs
Overall, our executive compensation programs are designed to be
consistent with the objectives and principles set forth above.
The basic elements of our executive compensation programs are
base salary, long-term equity incentive plan awards, retirement
savings opportunities and health and welfare benefits. Each of
these elements is summarized below.
Base
salary
Annually we review salary ranges and individual salaries for our
executive officers. We establish the base salary for each
executive officer based on consideration of median pay levels in
the market and internal factors, such as the individual’s
performance and experience, and the pay of others on the
executive team.
The base salaries paid to our named executive officers are set
forth below in the Summary Compensation Table. For the fiscal
year ended December 31, 2006, base cash compensation to our
named executive officers was approximately $1,079,090, with our
CEO receiving approximately $293,130 of that amount. We believe
that the base salary paid to our executive officers during 2006
achieves our executive compensation objectives, compares
favorably to market pay levels and is within our target of
providing a base salary at the market median.
In 2007, adjustments to our executive officers’ total
compensation were made based on an analysis of current market
pay levels of peer companies and in published surveys. In
addition to the market pay levels, factors taken into account in
making any changes for 2007 included the contributions made by
the executive officer, the performance of the executive officer,
the role and responsibilities of the executive officer and the
relationship of the executive officer’s base pay to the
base salary of our other executives.
Long-term equity
incentive compensation
We award long-term equity incentive grants to executive
officers, including the named executive officers, as part of our
total compensation package. These awards are consistent with our
pay for performance principles and align the interests of the
executive officers to the interests of our shareholders. The
compensation committee reviews and recommends to the board of
directors the amount of each award to be granted to each named
executive officer and the board of directors approves each
award. Long-term equity incentive awards to our executives were
made pursuant to our 1999 Stock Option Plan, or the 1999 Plan,
until April 2007, and thereafter, pursuant to our Long-Term
Incentive Compensation Plan.
1999
Stock Option Plan
Our 1999 Plan provides for the grant of incentive stock options
and nonqualified stock options. Grants can be made under the
1999 Plan to any of our employees, directors and consultants.
The 1999 Plan is administered by a committee designated by our
board of directors. The committee, in its sole discretion,
granted options under the 1999 Plan to certain persons rendering
services to us. Except as otherwise determined by the committee
and stated in the applicable option agreement, the exercise
price per share of each option granted under the 1999 Plan will
be the fair market value per share, as defined in the 1999 Plan.
In general, the fair market value per share is determined by our
board of directors.
68
Compensation
An option may generally be exercised until the tenth anniversary
of the date that we granted the option. Option holders who
exercise their options may pay for their shares in cash, check
or such other consideration as is deemed acceptable by us.
As
of ,
there were outstanding options to purchase a total
of shares
of common stock pursuant to the 1999 Plan. The exercise price
per share under such options ranges from $ to
$ .
Under the 1999 Plan, all executive officers were granted
incentive option agreements for common stock at exercise prices
equal to fair market value at time of issuance, except
Mr. Kazimi’s, whose exercise price is 110% of fair
market value at time of issuance. Each option agreement has a
term of ten years, except for Mr. Kazimi’s option
agreements, which have five-year terms. All agreements have
defined vesting schedules.
Long-Term
Incentive Compensation Plan
The purposes of the Long-Term Incentive Compensation Plan are:
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to encourage our employees and consultants to acquire stock and
other equity-based interests; and
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to replace the 1999 Plan without impairing the vesting or
exercise of any option granted thereunder.
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The Long-Term Incentive Compensation Plan authorizes the
issuance of each of the following incentives:
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incentive stock options (options that meet Internal Revenue
Service requirements for special tax treatment);
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non-statutory stock options (all stock options other than
Incentive Stock Options);
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stock appreciation rights (right to receive any excess in fair
market values of shares over a specified exercise price);
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restricted stock (shares subject to transfer and forfeiture
limitations); and
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performance shares (contingent awards comprised of stock
and/or
cash
and paid only if specified performance goals are met).
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The compensation committee administers the Long-Term Incentive
Compensation Plan. The compensation committee is authorized to
select participants, determine the type and number of awards to
be granted, determine and later amend, subject to certain
limitations, the terms of any award, interpret and specify the
rules and regulations relating to the Long-Term Incentive
Compensation Plan and make all other necessary determinations.
Employees and consultants other than non-employee directors are
eligible to participate. We may cancel unvested or unpaid
incentives for terminated employees and consultants to the
extent permitted by law.
Upon the occurrence of a change of control event, as defined in
the Long-Term Incentive Compensation Plan, all outstanding
options will automatically become exercisable in full, and
restrictions and conditions for other issued incentives will
generally be deemed terminated or satisfied. In addition, our
board of directors may amend or terminate the Long-Term
Incentive Compensation Plan, subject to shareholder approval, to
comply with tax or regulatory requirements.
Retirement
savings opportunity
Effective January 1, 2006, we established a 401(k) plan
covering all employees meeting certain minimum service and age
requirements. The plan allows all qualifying employees to
contribute the
69
Compensation
maximum tax-deferred contribution allowed by the Internal
Revenue Code. The non-Highly Compensated Employees, or non-HCEs,
do not have a minimum or maximum percentage limit that they can
defer. The HCEs, however, are limited to what they can defer
based on prior year’s testing. Hardship distributions are
permitted under well-defined circumstances. We do not currently
match employee contributions nor provide profit sharing at this
time; however, the plan is designed so that matching or profit
sharing can be arranged at any time.
Health and
welfare benefits
All full-time employees, including our named executive officers,
may participate in our health and welfare benefits programs,
including medical, dental and vision care coverage, disability
insurance and life insurance.
Employment
agreements, severance benefits and change in control
provisions
We have entered into employment agreements in 2007 with A.J.
Kazimi, our Chairman and CEO; Jean W. Marstiller, our Senior
Vice President, Administrative Services and Corporate Secretary;
Leo Pavliv, our Vice President, Operations; J. William Hix, our
Vice President, Sales and Marketing; and David L. Lowrance, our
Vice President and CFO. The following is a summary of the
material provisions of those employment agreements.
The employment agreements provide for an annual base salary of
$303,390 for Mr. Kazimi, $170,000 for Ms. Marstiller,
$211,000 for Mr. Pavliv, $180,000 for Mr. Hix, and
$158,400 for Mr. Lowrance. In addition, the employment
agreements provide that the individuals may be eligible for any
bonus program which has been approved by our board of directors.
Any such bonus is discretionary and will be subject to the terms
of the bonus program, the terms of which may be modified from
year-to-year
in the sole discretion of our board of directors. During the
period of employment under these agreements, each of our
executives will be entitled to additional benefits, including
eligibility to participate in any company-wide employee benefits
programs approved by our board of directors and reimbursement of
reasonable expenses.
Each executive’s employment is at-will and may be
terminated by us at any time, with or without notice and with or
without cause. Similarly, each executive may terminate his or
her employment with us at any time, with or without notice. The
employment agreements do not provide for any severance payments
in the event the employment is terminated for cause nor any
severance benefits in the event the employment is terminated as
a result of his or her death or permanent disability.
The employment agreements also include non-competition,
non-solicitation and nondisclosure covenants on the part of the
executives. During the term of each executive’s employment
with us and for one year after the executive ceases to be
employed by us, the employment agreements provide that he or she
may not compete with our business in any manner, unless the
executive discloses all facts to our board of directors and
receives a release allowing him or her to engage in a specific
activity. Pursuant to the employment agreements, the executives
also agree for a period of one year after the executive ceases
to be employed by us, he or she will not solicit business
related to the development or sales of pharmaceuticals products
from any entity, organization or person which is contracted with
us, which has been doing business with us, or a firm which the
executive knew we were going to solicit business from at the
time the executive ceased to be employed. Also, the executives
may not solicit our employees. The employment agreements also
impose obligations regarding confidential information and state
that any discoveries or improvements that are conceived,
developed or otherwise made by the executives, or with others,
are deemed our sole property. The employment agreements do not
contain any termination or change in control provisions.
70
Compensation
SUMMARY
COMPENSATION TABLE
The following table sets forth information, for the fiscal year
ended December 31, 2006, regarding the aggregate
compensation we paid to our named executive officers:
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Change in
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Pension
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Value and
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Nonqualified
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Deferred
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Stock
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Option
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Compensation
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All Other
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Name and
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Salary
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Bonus
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Awards
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Awards
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Earnings
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Compensation
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Total
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Principal
Position
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Year
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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A.J. Kazimi
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2006
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293,130
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96,255
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—
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20,825
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—
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—
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410,210
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Chairman and CEO
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James D. Aderhold
|
|
|
2006
|
|
|
194,000
|
|
|
40,000
|
|
|
—
|
|
|
17,940
|
|
|
—
|
|
|
—
|
|
|
251,940
|
|
former
V.P., Sales &
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo Pavliv
|
|
|
2006
|
|
|
192,500
|
|
|
42,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
234,500
|
|
V.P., Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. William Hix
|
|
|
2006
|
|
|
137,800
|
|
|
25,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
162,800
|
|
V.P., Sales & Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jean W. Marstiller
|
|
|
2006
|
|
|
135,160
|
|
|
40,000
|
|
|
—
|
|
|
15,180
|
|
|
—
|
|
|
—
|
|
|
190,340
|
|
Senior V.P. and Corporate Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David L. Lowrance
|
|
|
2006
|
|
|
126,500
|
|
|
28,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
155,000
|
|
V.P. and CFO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GRANTS OF
PLAN-BASED AWARDS TABLE
The following table sets forth information regarding grants of
compensatory awards we paid to our named executive officers
during the fiscal year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
Exercise or
|
|
Grant Date
|
|
|
|
|
|
Shares of
|
|
Securities
|
|
Base Price
|
|
Fair Value
|
|
|
|
|
|
Stock or
|
|
Underlying
|
|
of Option
|
|
of Stock
|
|
|
|
|
|
Units
|
|
Options
|
|
Awards
|
|
and Option
|
|
Name
|
|
Grant
Date
|
|
(#)
|
|
(#)
|
|
($/Sh)
|
|
Awards
|
|
|
|
|
|
A.J. Kazimi
|
|
|
6/30/06
|
|
|
—
|
|
|
10,000
|
|
|
19.80
|
|
|
8.33
|
|
James D. Aderhold
|
|
|
6/30/06
|
|
|
—
|
|
|
6,500
|
|
|
18.00
|
|
|
11.04
|
|
Leo Pavliv
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
J. William Hix
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Jean W. Marstiller
|
|
|
6/30/06
|
|
|
—
|
|
|
5,500
|
|
|
18.00
|
|
|
11.04
|
|
David L. Lowrance
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Our executive compensation policies and practices, pursuant to
which the compensation set forth in the Summary Compensation
Table and the Grants of Plan-Based Awards Table was paid or
awarded, are described above under, “Compensation
Discussion and Analysis.” A summary of certain material
terms of our compensation plans and arrangements is set forth
above under “Compensation Discussion and
Analysis—Employment Agreements, Severance Benefits and
Change in Control Provisions.”
71
Compensation
OUTSTANDING
EQUITY AWARDS TABLE
The following table sets forth information regarding unvested
stock and unexercised option awards held by our named executive
officers as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Market or
|
|
|
|
Option
Awards
|
|
|
|
|
|
Awards:
|
|
Payout
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Value of
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
Market
|
|
Unearned
|
|
Unearned
|
|
|
|
|
|
|
|
Plan
|
|
|
|
|
|
Number
|
|
Value of
|
|
Shares,
|
|
Shares,
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
of Shares
|
|
Shares or
|
|
Units or
|
|
Units or
|
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
|
or Units
|
|
Units of
|
|
Other
|
|
Other
|
|
|
|
Securities
|
|
Securities
|
|
Securities
|
|
|
|
|
|
of Stock
|
|
Stock
|
|
Rights
|
|
Rights
|
|
|
|
Underlying
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
That
|
|
That
|
|
That
|
|
That
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
Have
|
|
Have
|
|
Have
|
|
Have
|
|
|
|
Options(#)
|
|
Options(#)
|
|
Unearned
|
|
Exercise
|
|
Expiration
|
|
Not
|
|
Not
|
|
Not
|
|
Not
|
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Options(#)
|
|
Price($)
|
|
Date
|
|
Vested(#)
|
|
Vested($)
|
|
Vested(#)
|
|
Vested($)
|
|
|
|
A.J.
Kazimi
(1)
|
|
|
292,500
|
|
|
—
|
|
|
—
|
|
|
0.22
|
|
|
01/23/09
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
2,048,545
|
|
|
—
|
|
|
|
|
|
1.10
|
|
|
09/15/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,465
|
|
|
—
|
|
|
|
|
|
3.25
|
|
|
12/18/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,154
|
|
|
—
|
|
|
|
|
|
3.58
|
|
|
01/04/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
—
|
|
|
|
|
|
7.70
|
|
|
01/31/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,700
|
|
|
—
|
|
|
|
|
|
13.20
|
|
|
04/01/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,900
|
|
|
10,600
|
|
|
|
|
|
13.20
|
|
|
01/15/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
7,500
|
|
|
|
|
|
19.80
|
|
|
06/30/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James D.
Aderhold
(2)
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
|
1.00
|
|
|
12/27/09
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
186,300
|
|
|
—
|
|
|
|
|
|
3.25
|
|
|
01/08/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,505
|
|
|
—
|
|
|
|
|
|
3.25
|
|
|
12/18/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,650
|
|
|
—
|
|
|
|
|
|
3.25
|
|
|
01/04/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400
|
|
|
—
|
|
|
|
|
|
7.00
|
|
|
01/31/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
525
|
|
|
—
|
|
|
|
|
|
12.00
|
|
|
04/01/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
4,000
|
|
|
|
|
|
12.00
|
|
|
01/15/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625
|
|
|
4,875
|
|
|
|
|
|
18.00
|
|
|
06/30/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo
Pavliv
(3)
|
|
|
2,500
|
|
|
—
|
|
|
—
|
|
|
1.00
|
|
|
12/27/09
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
9,000
|
|
|
—
|
|
|
|
|
|
1.85
|
|
|
05/15/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
—
|
|
|
|
|
|
3.25
|
|
|
09/30/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
—
|
|
|
|
|
|
7.00
|
|
|
04/14/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
20,000
|
|
|
|
|
|
12.00
|
|
|
01/15/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. William
Hix
(4)
|
|
|
29,000
|
|
|
—
|
|
|
—
|
|
|
12.00
|
|
|
05/03/14
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Jean W.
Marstiller
(5)
|
|
|
72,840
|
|
|
—
|
|
|
—
|
|
|
0.20
|
|
|
01/23/09
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
140,000
|
|
|
—
|
|
|
|
|
|
1.00
|
|
|
09/15/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,615
|
|
|
—
|
|
|
|
|
|
3.25
|
|
|
01/04/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
—
|
|
|
|
|
|
7.00
|
|
|
01/31/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
—
|
|
|
|
|
|
12.00
|
|
|
04/01/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
|
3,000
|
|
|
|
|
|
12.00
|
|
|
01/15/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,375
|
|
|
4,125
|
|
|
|
|
|
18.00
|
|
|
06/30/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David L.
Lowrance
(6)
|
|
|
45,000
|
|
|
—
|
|
|
—
|
|
|
7.00
|
|
|
01/30/13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
2,000
|
|
|
—
|
|
|
|
|
|
12.00
|
|
|
04/01/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
12,500
|
|
|
|
|
|
12.00
|
|
|
01/15/15
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Compensation
|
|
|
|
|
(1)
|
|
A.J. Kazimi:
292,500 Options granted on January 23, 1999; vested
immediately.
2,048,545 Option granted on September 15, 1999; vested 20%
equally each December 31 over 5 year period
1999-2003.
3,465 Options granted on December 18, 2001; vested
immediately.
6,154 Options granted on January 4, 2002; vested
immediately.
3,000 Options granted on January 31, 2003; vested
December 31, 2003.
1,700 Options granted on April 1, 2004; vested
immediately.
26,500 Options granted on January 15, 2005; 5,300 options
or 20% vested immediately; 20% more vested each
December 31, 2005 and 2006; the remaining options will vest
equally each December 31, 2007 and 2008.
10,000 Options granted on June 30, 2006; 25% vested on
December 31, 2006; the remainder of options vest 25%
equally each December 31, 2007, 2008, 2009.
|
|
|
|
(2)
|
|
James D. Aderhold:
5,000 Options granted on December 27, 1999; vested on
December 31, 2000.
186,300 Options granted on January 8, 2001; 36,300 vested
immediately; 50,000 options vested each December 31, 2001,
2002, 2003.
4,505 Options granted on December 18, 2001; vested
immediately.
9,650 Options granted on January 4, 2002; vested
immediately.
1,400 Options granted on January 31, 2003; vested
immediately.
525 Options granted on April 1, 2004; vested
immediately.
10,000 Options granted on January 15, 2005; 2,000 options
vested immediately; 2,000 options vested each December 31,
2005 and 2006; 2,000 options will vest each December 31,
2007 and 2008.
6,500 Options granted on June 30, 2006; 25% or 1,625
options vested on December 31, 2006. The remaining options
vest 1,625 each December 31, 2007, 2008 and 2009.
|
|
|
|
(3)
|
|
Leo Pavliv:
2,500 Options granted on December 27, 1999; vested
immediately.
9,000 Options granted on May 15, 2000; vested
immediately.
1,500 Options granted on September 30, 2001; vested
immediately.
80,000 Options granted on April 14, 2003; 25% vested each
December 31 over the 4 year period
2003-2006.
20,000 Options granted on January 15, 2005; all options
will vest on December 31, 2009.
|
|
|
|
(4)
|
|
J. William Hix:
29,000 Options granted on May 3, 2004; 5,000 vested
immediately; 8,000 options vested each December 31 2004,
2005, 2006.
|
|
|
|
(5)
|
|
Jean W. Marstiller:
72,840 Options granted on January 23, 1999; vested
immediately.
140,000 Options granted on September 15, 1999; 25,000
vested immediately; 23,000 vested each December 31,
1999-2003.
4,615 Options granted on January 4, 2002; vested
immediately.
200 Options granted on January 31, 2003; vested
immediately.
5,000 Options granted on April 1, 2004; vested
immediately.
7,500 Options granted on January 15, 2005; 1,500 vested
immediately; 1,500 vested each December 31, 2005 and 2006;
1,500 will vest each December 31, 2007 and 2008.
5,500 Options granted on June 30, 2006; 1,375 vested
December 31, 2006; 1,375 will vest each December 31,
2007, 2008, 2009.
|
|
|
|
(6)
|
|
David L. Lowrance:
45,000 Options granted on January 30, 2003; 5,000 vested
immediately; 10,000 options vested each December 31,
2003-2006.
2,000 Options granted on April 1, 2004; vested
immediately.
12,500 Options granted on January 15, 2005; all options
will vest on December 31, 2009.
|
73
Compensation
OPTION EXERCISES
AND STOCK VESTED
The following table sets forth information regarding the
exercise and vesting of stock and option awards held by our
named executive officers during the fiscal year ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Awards
|
|
Stock
Awards
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
|
Shares
Acquired
|
|
Value Realized
|
|
Shares
Acquired
|
|
Value Realized
|
|
Name
|
|
on
Exercise(#)
|
|
on
Exercise($)
|
|
on
Vesting(#)
|
|
on
Vesting($)
|
|
|
|
|
|
A.J. Kazimi
|
|
|
6,154
|
|
|
113,357
|
|
|
—
|
|
|
—
|
|
James D. Aderhold
|
|
|
5,000
|
|
|
105,000
|
|
|
—
|
|
|
—
|
|
Leo Pavliv
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
J. William Hix
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Jean W. Marstiller
|
|
|
7,830
|
|
|
139,374
|
|
|
—
|
|
|
—
|
|
David L. Lowrance
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
PENSION BENEFITS
TABLE
We do not have any plan that provides for payments or other
benefits at, following, or in connection with retirement.
NONQUALIFIED
DEFERRED COMPENSATION TABLE
We do not have any plan that provides for the deferral of
compensation on a basis that is not tax qualified.
DIRECTOR
COMPENSATION TABLE
The following table sets forth information regarding the
aggregate compensation we paid to the members of our board of
directors during the fiscal year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
Earned
|
|
|
|
|
|
Non-Equity
|
|
Nonqualified
|
|
|
|
|
|
|
|
or Paid
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
Deferred
|
|
All Other
|
|
|
|
|
|
in Cash
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Compensation
|
|
Total
|
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Earnings
|
|
($)
|
|
($)
|
|
|
|
|
|
Martin E.
Cearnal
(1)
|
|
|
2,500
|
|
|
24,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,500
|
|
Dr. Robert G.
Edwards
(2)
|
|
|
26,500
|
|
|
24,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
128,420
|
|
|
178,920
|
|
Dr. Lawrence W.
Greer
(3)
|
|
|
26,500
|
|
|
69,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
95,500
|
|
Thomas R.
Lawrence
(4)
|
|
|
26,500
|
|
|
54,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,500
|
|
|
97,000
|
|
|
|
|
|
(1)
|
|
For service as a director in 2006,
Mr. Cearnal received fees equal to $26,500, paid as
follows: $2,500 cash, and shares of our common stock valued at
$24,000. These amounts exclude options to purchase
2,000 shares of our common stock that vested in 2006.
|
|
|
|
(2)
|
|
For service as a director in 2006,
Dr. Edwards received fees equal to $50,500, paid as
follows: $26,500 cash, and shares of our common stock valued at
$24,000. For consulting services provided in 2006 Dr. Edwards
received other compensation of $128,420, paid as follows:
$20,420 cash, and shares of our common stock valued at $108,000.
|
|
|
|
(3)
|
|
For service as a director in 2006,
Dr. Greer received fees equal to $50,500, paid as follows:
$26,500 cash, and shares of our common stock valued at $24,000.
In addition, for service as chairman of the Audit Committee of
the board of directors, Dr. Greer received a fee equal to
$45,000 paid in shares of our common stock valued at $45,000.
|
|
|
|
|
|
(4)
|
|
For service as a director in 2006,
Mr. Lawrence received fees equal to $50,500, paid as
follows: $26,500 cash, and shares of our common stock valued at
$24,000. In addition, for service as chairman of the
Compensation Committee of the board of directors,
Mr. Lawrence received a fee of $30,000 cash. For consulting
services provided in 2006, Mr. Lawrence received other
compensation of $16,500, paid entirely in cash.
|
74
Compensation
Director
compensation
Compensation to each outside director for service on the board
of directors including board committee responsibilities for 2007
will consist of a total fee in the amount of $75,500. All fees
will be paid in a combination of cash and equity, as we and each
director shall agree. Cash fees will include $2,500 paid in the
first quarter of 2007 and the remainder accrued and paid on
either a monthly or quarterly basis. Directors will not receive
separate compensation for attendance at board meetings, board
committee meetings or other company related activities. In
addition, outside directors will be reimbursed for all
reasonable and necessary business expenses incurred in the
performance of their service on the board of directors.
As part of their director compensation for 2007, Martin E.
Cearnal and Dr. Lawrence W. Greer have elected to take
equity. Martin E. Cearnal will be granted 3,318 shares of
common stock and Dr. Lawrence W. Greer will be granted
2,200 shares of common stock.
Long-term equity incentive awards to our directors were made
pursuant to the 1999 Plan until April 2007, and
thereafter, pursuant to the 2007 Directors’ Compensation
Plan, or the Directors’ Plan.
The purposes of the Directors’ Plan are:
|
|
|
|
Ø
|
to strengthen our ability to attract, motivate, and retain
qualified independent directors; and
|
|
|
|
Ø
|
to replace the 1999 Plan without impairing the vesting or
exercise of any option granted to any director thereunder.
|
The Directors’ Plan authorizes the issuance to non-employee
directors of each of the following types of awards:
|
|
|
|
Ø
|
options (all options to be issued under the Directors’ Plan
will not meet IRS requirements for special tax treatment and
therefore are non-qualified options);
|
|
|
|
Ø
|
restricted stock grants (shares subject to various restrictions
and conditions as determined by our compensation committee); and
|
|
|
|
Ø
|
stock grants (award of shares or our common stock with full and
unrestricted ownership rights).
|
The compensation committee of our board of directors will
administer the Directors’ Plan, if it is adopted. In the
event of a change of control of our company (as defined in the
Directors’ Plan), all outstanding options would
automatically become exercisable in full, and restrictions and
conditions for other issued awards shall generally be deemed
terminated or satisfied. Our board of directors may amend or
terminate the Directors’ Plan, subject to shareholder
approval if necessary, to comply with tax or regulatory
requirements.
INDEMNIFICATION
OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
Our charter and bylaws provide for indemnification of our
directors to the fullest extent permitted by the Tennessee
Business Corporation Act, as amended from time to time. Our
directors shall not be liable to us or our shareholders for
monetary damages for breach of their fiduciary duty of care. The
Tennessee Business Corporation Act provides that a Tennessee
corporation may indemnify its directors and officers against
expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by them in connection with any
proceeding, whether criminal or civil, administrative or
investigative if, in connection with the matter in issue, the
individual’s conduct was in good faith, and the individual
reasonably believed: in the case of conduct in the
individual’s official capacity with the corporation, that
the individual’s conduct was in its best interest; and in
all other cases, that the individual’s behavior was at
least not opposed to its best interest; and in the case of a
criminal
75
Compensation
proceeding, the individual had no reason to believe the
individual’s conduct was unlawful. In addition, we have
entered into indemnification agreements with our directors.
These provisions and agreements may have the practical effect in
certain cases of eliminating the ability of our shareholders to
collect monetary damages from directors. We believe that these
contractual agreements and the provisions in our charter and
bylaws are necessary to attract and retain qualified persons as
directors.
DIRECTORS AND
OFFICERS INSURANCE
We maintain a directors’ and officers’ insurance
policy that provides coverage to our directors and officers
relating to certain potential liabilities. The directors’
and officers’ insurance policy, provided by The Hartford
with a coverage amount of up to $3,000,000, covers
“wrongful act” or “securities” claims.
76
Certain
relationships and related party transactions
Other than compensation agreements and other arrangements which
are described in “Compensation” and the transactions
described below, since January 1, 2004, there has not been,
and there is not currently proposed, any transaction or series
of similar transactions to which we were or will be a party in
which the amount involved exceeded or will exceed $120,000 and
in which any related party, including any director, executive
officer, holder of five percent or more of any class of our
capital stock or any member of their immediate families had or
will have a direct or indirect material interest.
All of the transactions set forth below were approved by a
majority of the board of directors, including a majority of any
independent and disinterested members of the board of directors.
We believe that all of the transactions set forth below had
terms no less favorable to us than we could have obtained from
unaffiliated third parties. In connection with this offering, we
have adopted a written policy which requires all future
transactions between us and any related persons (as defined in
Item 404 of
Regulation S-K)
be approved in advance by our audit committee.
In September 2003, we borrowed $1,000,000 from S.C.O.U.T. in the
form of a convertible promissory note with a maturity date of
September 2004. The President and majority shareholder of the
general partner of S.C.O.U.T., Dr. Lawrence W. Greer,
serves on our board of directors. Pursuant to the terms of the
note, on its maturity date, S.C.O.U.T. converted the principal
value of the note plus all interest accrued at a fixed rate of
ten percent per annum into 91,667 shares of our common
stock at a price of $12.00 per share.
In April 2004, S.C.O.U.T. purchased 43,000 shares of our
common stock at a price of $12.00 per share and a five-year
warrant to purchase 20,000 of our common stock at an exercise
price of $12.00 per share.
Board members were granted a total of 12,409, 23,120 and
15,600 shares of common stock in 2006, 2005 and 2004,
respectively, for services rendered as directors and
consultants. The amounts recorded for such services were
$249,000, $277,000, and $187,000 in 2006, 2005 and 2004,
respectively. Additionally, two board members received a total
of 11,000 options with an exercise price of $18.00 per
share in 2005 and 16,780 options with an exercise price of
$12.00 per share in 2004. No options were issued to board
members in 2006.
In connection with this offering, we have adopted a written
policy, the Policy and Procedures with Respect to Related Person
Transactions. Our board of directors has determined that our
audit committee is best suited to review and approve all future
related person transactions. The Policy and Procedures with
Respect to Related Person Transactions covers a transaction,
arrangement, or relationship in which we or any of our
subsidiaries is or will be a participant and the amount involved
exceeds $120,000 per year, and in which any related person
has or will have a direct or indirect interest. The Policy and
Procedures with Respect to Related Person Transactions defines a
related person as:
|
|
|
|
Ø
|
any person who is, or at any time since the beginning of our
last fiscal year was, a director or executive officer of ours or
a nominee to become a director of ours;
|
|
|
|
Ø
|
any person who is known to be the beneficial owner of more than
5% of any class of our voting securities;
|
|
|
|
Ø
|
any immediate family member of any of the foregoing
persons; and
|
|
|
|
Ø
|
any firm, corporation or other entity in which any of the
foregoing persons is employed or is a partner or principal or in
a similar position or in which such person has a 5% or greater
beneficial ownership interest.
|
No member of our audit committee shall review or approve a
related person transaction in which he or an immediate family
member of his is the related person. The audit committee shall
approve only those related person transactions that are in, or
are not inconsistent with, the best interests of us and our
shareholders.
77
Principal
shareholders
The following table sets forth information known to us with
respect to beneficial ownership of shares of our common stock as
of February 28, 2007 by (i) each of our directors,
(ii) each of our named executive officers; (iii) all
of our directors and executive officers as a group; and
(iv) each person or group of affiliated persons known to us
to be the beneficial owner of 5% or more of our outstanding
common stock.
Beneficial ownership and percentage ownership are determined in
accordance with the rules of the SEC. This information does not
necessarily indicate beneficial ownership for any other purpose.
In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of common
stock underlying options or warrants held by that person that
are currently exercisable or will become exercisable within
60 days of February 28, 2007 are deemed outstanding
and are included in the number of shares beneficially owned,
while the shares are not deemed outstanding for purposes of
computing percentage ownership of any other person. To our
knowledge, except as indicated in the footnotes to this table
and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power
with respect to all shares of our common stock shown as
beneficially owned by them.
As of February 28, 2007, there were 228 holders of
record of our common stock and 42 holders of record of preferred
stock, which will automatically be converted into common stock
at the completion of this offering. For purposes of calculating
amounts beneficially owned by a shareholder before the offering,
the number of shares deemed issued and outstanding was
4,938,845 shares of common stock as of February 28,
2007. The percentage of beneficial ownership after this offering
is based
on shares
of common stock. For purposes of calculating the percentage
beneficially owned after the offering, the number of shares
deemed outstanding includes all shares deemed to be outstanding
before the offering, all shares into which our outstanding
shares of preferred stock will be converted as a result of the
offering and all shares being sold in the offering.
Unless otherwise indicated, the address for each person listed
is c/o Cumberland Pharmaceuticals Inc., 2525 West End
Ave., Suite 950, Nashville, Tennessee 37203.
78
Principal
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Percentage of
Shares
|
|
|
|
|
Shares
|
|
|
Beneficially
Owned
|
|
|
|
|
Beneficially
|
|
|
Before
|
|
|
After
|
|
|
Executive
officers and directors
|
|
Owned
|
|
|
Offering
|
|
|
Offering
|
|
|
|
|
|
|
|
A.J.
Kazimi
(1)
|
|
|
3,647,317
|
|
|
|
49.92
|
%
|
|
|
|
|
|
Thomas R.
Lawrence
(2)
|
|
|
122,288
|
|
|
|
2.47
|
%
|
|
|
|
|
|
Robert G.
Edwards
(3)
|
|
|
220,473
|
|
|
|
4.37
|
%
|
|
|
|
|
|
Lawrence W.
Greer
(4)
|
|
|
408,090
|
|
|
|
8.15
|
%
|
|
|
|
|
|
Martin E.
Cearnal
(5)
|
|
|
61,801
|
|
|
|
1.25
|
%
|
|
|
|
|
|
James D. Aderhold,
Jr.
(6)
|
|
|
223,809
|
|
|
|
4.34
|
%
|
|
|
|
|
|
Leo
Pavliv
(7)
|
|
|
93,000
|
|
|
|
1.85
|
%
|
|
|
|
|
|
Jean W.
Marstiller
(8)
|
|
|
317,273
|
|
|
|
6.14
|
%
|
|
|
|
|
|
Gordon R.
Bernard
(9)
|
|
|
56,592
|
|
|
|
1.15
|
%
|
|
|
|
|
|
David L.
Lowrance
(10)
|
|
|
47,000
|
|
|
|
*
|
|
|
|
|
|
|
J. William
Hix
(11)
|
|
|
29,000
|
|
|
|
*
|
|
|
|
|
|
|
Directors and executive officers
as a group (11 persons)
|
|
|
4,878,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas J.
Marchant
(12)
|
|
|
350,000
|
|
|
|
7.09
|
%
|
|
|
|
|
|
Mr. and Mrs. J. Kenneth
Hazen
(13)(14)
|
|
|
300,000
|
|
|
|
6.07
|
%
|
|
|
|
|
|
S.C.O.U.T. Healthcare Fund,
L.P.
(15)(16)
|
|
|
348,184
|
|
|
|
7.05
|
%
|
|
|
|
|
|
|
|
|
|
*
|
|
Less than 1.0% of the outstanding
common stock.
|
|
|
|
|
|
(1)
|
|
Includes 2,367,610 shares that
Mr. Kazimi has the right to acquire upon the exercise of
outstanding stock options.
|
|
|
|
(2)
|
|
Includes 19,233 shares
Mr. Lawrence has the right to acquire upon exercise of
outstanding stock options.
|
|
|
|
(3)
|
|
Includes 107,904 shares
Dr. Edwards has the right to acquire upon exercise of
outstanding stock options.
|
|
|
|
(4)
|
|
Includes
(i) 306,624 shares owned of record by S.C.O.U.T., a
limited partnership with respect to which Dr. Greer is the
President and majority Shareholder of the general partner,
(ii) 21,560 shares S.C.O.U.T. has the right to acquire
upon exercise of outstanding stock options,
(iii) 20,000 shares S.C.O.U.T. has the right to
acquire immediately from us pursuant to a warrant, and
(iv) 26,000 shares Dr. Greer has the right to
acquire immediately upon exercise of outstanding stock options.
|
|
|
|
(5)
|
|
Includes
(i) 11,700 shares Mr. Cearnal has the right to
acquire upon exercise of outstanding stock options and
(ii) 7,700 shares Mr. Cearnal will receive upon
conversion of his preferred stock.
|
|
|
|
(6)
|
|
Includes 215,005 shares
Mr. Aderhold has the right to acquire upon exercise of
outstanding stock options.
|
|
|
|
(7)
|
|
Includes 93,000 shares
Mr. Pavliv has the right to acquire upon exercise of
outstanding stock options.
|
|
|
|
(8)
|
|
Includes 228,530 shares
Ms. Marstiller has the right to acquire upon exercise of
outstanding stock options.
|
|
|
|
(9)
|
|
Includes 2,308 shares
Dr. Bernard has the right to acquire upon exercise of
outstanding stock options.
|
|
|
|
(10)
|
|
Includes 47,000 shares
Mr. Lowrance has the right to acquire upon exercise of
outstanding stock options.
|
|
|
|
(11)
|
|
Includes 29,000 shares
Mr. Hix has the right to acquire upon exercise of
outstanding stock options.
|
|
|
|
(12)
|
|
The address for Mr. Marchant
is 60 Germantown Court, Suite 220, Cordova, Tennessee,
38018.
|
|
|
|
(13)
|
|
The address for Mr. and
Mrs. J. Kenneth Hazen is 260 St. Andrews Fairway, Memphis,
Tennessee, 38111.
|
|
|
|
(14)
|
|
The number of shares reflected
above as beneficially held by Mr. and Mrs. J. Kenneth
Hazen are held jointly.
|
|
|
|
(15)
|
|
Includes
(i) 21,560 shares S.C.O.U.T. has the right to acquire
upon exercise of outstanding stock options, and
(ii) 20,000 shares S.C.O.U.T. has the right to acquire
immediately from us pursuant to a warrant.
|
|
|
|
(16)
|
|
The address for S.C.O.U.T. is 2200
Woodcrest Place, Suite 309, Birmingham, Alabama, 35209.
|
79
Description of
capital stock
GENERAL
Our authorized capital stock consists of one hundred million
shares of common stock, no par value, three million shares of
Series A preferred stock, no par value, and twenty million
shares of undesignated preferred stock, no par value.
COMMON
STOCK
As
of , shares
of common stock were issued and outstanding (which does not
include shares of
common stock issuable upon exercise of outstanding stock options
issued pursuant to our 1999 Plan or other options or warrants to
purchase common stock, and which does not
include shares of
common stock issuable upon conversion of all outstanding shares
of our preferred stock). We plan to issue additional stock
options to our directors, employees and consultants, and we may
issue shares of common stock to sellers of rights to certain
pharmaceutical products. Giving effect to the sale
of shares
offered hereby and the conversion of all outstanding shares of
our preferred stock, there would
be shares
of common stock outstanding following this offering.
The holders of shares of common stock are entitled to one vote
per share on any matter that comes before the shareholders.
Cumulative voting is not authorized. Holders of shares of common
stock do not have preemptive rights to purchase securities that
we may subsequently issue. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of
common stock are entitled to receive such dividends as may be
declared by our board of directors out of funds legally
available for payment as dividends. However, we do not
anticipate paying any dividends in the foreseeable future to
holders of our common stock. In the event of a liquidation,
dissolution, or winding up of our affairs, the holders of
outstanding shares will be entitled to share pro rata according
to their respective interests in our assets and funds remaining
after payment of all of our debts and other liabilities and the
liquidation preference of any outstanding preferred stock. All
of the shares of common stock currently outstanding are fully
paid and nonassessable.
PREFERRED
STOCK
Our board of directors is authorized, without approval of our
shareholders, to provide for the issuance of shares of preferred
stock in one or more series, to establish the number of shares
in each series, and to fix the designations, powers,
preferences, and rights of each such series and the
qualifications, limitations, or restrictions. Among the specific
matters that may be determined by our board are:
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the designation of each series;
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the number of shares of each series;
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the rights in respect of dividends, if any;
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whether dividends, if any, shall be cumulative or non-cumulative;
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the terms of redemption, repurchase obligation or sinking fund,
if any;
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the rights in the event of any voluntary or involuntary
liquidation, dissolution or winding up of our affairs;
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rights and terms of conversion, if any;
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restrictions on the creation of indebtedness, if any;
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restrictions on the issuance of additional preferred stock or
other capital stock, if any;
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80
Description of
capital stock
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restrictions on the payment of dividends on shares ranking
junior to the preferred stock; and
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voting rights, if any.
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Upon completion of this offering, no shares of preferred stock
will be outstanding and we have no current plans to issue
preferred stock. The issuance of shares of preferred stock, or
the issuance of rights to purchase preferred stock, could be
used to discourage an unsolicited acquisition proposal. For
example, a business combination could be impeded by the issuance
of a series of preferred stock containing class voting rights
that would enable the holder or holders of such series to block
any such transaction. Alternatively, a business combination
could be facilitated by the issuance of a series of preferred
stock having sufficient voting rights to provide a required
percentage vote of our shareholders. In addition, under some
circumstances, the issuance of preferred stock could adversely
affect the voting power and other rights of the holders of
common stock. Although prior to issuing any series of preferred
stock our board is required to make a determination as to
whether the issuance is in the best interests of our
shareholders, our board could act in a manner that would
discourage an acquisition attempt or other transaction that
some, or a majority, of our shareholders might believe to be in
their best interests or in which our shareholders might receive
a premium for their stock over prevailing market prices of such
stock. Our board of directors does not at present intend to seek
shareholder approval prior to any issuance of currently
authorized preferred stock, unless otherwise required by law or
applicable stock exchange requirements.
OUTSTANDING
OPTIONS AND WARRANTS
As
of ,
in addition to outstanding options to
acquire shares of
common stock issued pursuant to our 1999 Plan, we have issued
options to
purchase shares
of our common stock in connection with two debt financing rounds
in 2001 and 2003. These options have ten-year terms with
exercise prices of $ and
$ per share, respectively.
Total options outstanding as
of
have an average exercise price of
$ per share. We have also
issued warrants to purchase 32,500 shares of our common
stock at a price of $12.00 per share to Bank of America and
to S.C.O.U.T., a consulting and investment company in which
Dr. Lawrence W. Greer, one of our directors, is a
principal, and warrants to purchase 1,979 shares of our
common stock at a price of $18.00 per share to Bank of
America.
ANTI-TAKEOVER
EFFECTS OF TENNESSEE LAW AND PROVISIONS OF OUR CHARTER AND
BYLAWS
The Tennessee Business Combination Act, the Tennessee Investor
Protection Act, the Tennessee Greenmail Act and the Tennessee
Control Share Acquisition Act provide certain anti-takeover
protections for Tennessee corporations.
The Tennessee
Business Combination Act
The Tennessee Business Combination Act, or TBCA, governs all
Tennessee corporations. It imposes a five-year standstill on
transactions such as mergers, share exchanges, sales of assets,
liquidations and other interested party transactions between
Tennessee corporations and “interested shareholders”
and their associates or affiliates, unless the business
combination is approved by the board of directors before the
interested shareholder goes above the 10% ownership threshold.
Thereafter, the transaction either requires a two-thirds vote of
the shareholders other than the interested shareholder or
satisfaction of certain fair price standards.
The TBCA also provides for additional exculpatory protection for
the board of directors in resisting mergers, exchanges and
tender offers if a Tennessee corporation’s charter
specifically opts-in to such
81
Description of
capital stock
provisions. A Tennessee corporation’s charter may
specifically authorize the members of a board of directors, in
the exercise of their judgment, to give due consideration to
factors other than price and to consider whether a merger,
exchange, tender offer or significant disposition of assets
would adversely affect the corporation’s employees,
customers, suppliers, the communities in which the corporation
operates, or any other relevant factor in the exercise of their
fiduciary duty to the shareholders.
Our charter expressly opts-in and provides for exculpation of
the board of directors to the full extent permitted under the
TBCA. The opt-in will have the effect of protecting us from
unwanted takeover bids, because the board of directors is
permitted by the charter to take into account all relevant
factors in performing its duly authorized duties and acting in
good faith and in our best interests.
The Tennessee
Investor Protection Act
The Tennessee Investor Protection Act, or TIPA, generally
requires the registration, or an exemption from registration,
before a person can make a tender offer for shares of a
Tennessee corporation which, if successful, will result in the
offeror beneficially owning more than 10% of any class of
shares. Registration requires the filing with the Tennessee
Commissioner of Commerce and Insurance of a registration
statement, a copy of which must be sent to the target company,
and the public disclosure of the material terms of the proposed
offer. Additional requirements are imposed under that act if the
offeror beneficially owns 5% or more of any class of equity
securities of the target company, any of which was purchased
within one year prior to the proposed takeover offer. TIPA also
prohibits fraudulent and deceptive practices in connection with
takeover offers, and provides remedies for violations.
TIPA does not apply to an offer involving a vote by holders of
equity securities of the offeree company, pursuant to its
charter, on a share exchange, consolidation or sale of corporate
assets in consideration of the issuance of securities of another
corporation, or on a sale of its securities in exchange for cash
or securities of another corporation. Also exempt from TIPA are
tender offers which are open on substantially equal terms to all
shareholders, are recommended by the board of directors of the
target company, and include full disclosure of all terms.
The Tennessee
Greenmail Act
The Tennessee Greenmail act, or TGA, prohibits us from
purchasing or agreeing to purchase any of our securities, at a
price higher than fair market value, from a holder of 3% or more
of any class of its securities who has beneficially owned the
securities for less than two years. We can, however, make this
purchase if the majority of the outstanding shares of each class
of voting stock issued by us approves the purchase or if we make
an offer of at least equal value per share to all holders of
shares of the same class of securities as those held by the
prospective seller.
The Tennessee
Control Share Acquisition Act
Sections 48-103-301
through
48-103-312
of the Tennessee Control Share Acquisition Act, or TCSA, limit
the voting rights of shares owned by a person above certain
percentage thresholds, unless the non-interested shareholders of
the corporation approve the acquisition above the designated
threshold. However, the TCSA only applies to corporations whose
charter or bylaws contain an express declaration that control
share acquisitions are to be governed by the TCSA. In addition,
the charter or bylaws must specifically provide for the
redemption of control shares or appraisal rights for dissenting
shareholders in a control share transaction.
Our charter makes all of the express declarations necessary to
avail us of the full protection under the TCSA. The provisions
described above will have the general effect of discouraging, or
rendering more
82
Description of
capital stock
difficult, unfriendly takeover or acquisition attempts.
Consequently, such provisions would be beneficial to current
management in an unfriendly takeover attempt but could have an
adverse effect on shareholders who might wish to participate in
such a transaction. However, management believes that such
provisions are advantageous to shareholders in that they will
permit management and the shareholders to carefully consider and
understand a proposed acquisition and may require a higher level
of shareholder participation in the decision.
Pursuant to
Section 48-103-308
of the TCSA, we, at our option, may redeem from an acquiring
person all, but not less than all, control shares acquired in a
control share acquisition, at any time during the period ending
60 days after the last acquisition of control shares by
that person, for the fair value of those shares, if (1) no
control acquisition statement has been filed, or (2) a
control acquisition statement has been filed and the shares are
not accorded voting rights by the shareholders of this
corporation pursuant to
Section 48-103-307.
For these purposes, fair value shall be determined as of the
effective date of the vote of the shareholders denying voting
rights to the acquiring person, if a control acquisition
statement is filed, or if no control acquisition statement is
filed, as of the date of the last acquisition of control shares
by the acquiring person in a control share acquisition.
Pursuant to
Section 48-103-309
of the TCSA, if control shares acquired in a control share
acquisition are accorded voting rights and the acquiring person
has acquired control shares that confer upon that person a
majority or more of all voting power entitled to vote generally
with respect to the election of directors, all this
corporation’s shareholders of record, other than the
acquiring person, who have not voted in favor of granting those
voting rights to the acquiring person shall be entitled to an
appraisal of the fair market value of their shares in accordance
with Chapter 23 of the Tennessee Business Corporation Act.
Our corporate documents contain provisions that may enable our
board of directors to resist a change in control of our company
even if a change in control were to be considered favorable by
you and other shareholders. These provisions include:
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the authorization of undesignated preferred stock, the terms of
which may be established and shares of which may be issued
without shareholder approval;
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advance notice procedures required for shareholders to nominate
candidates for election as directors or to bring matters before
an annual meeting of shareholders;
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limitations on persons authorized to call a special meeting of
shareholders;
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a staggered board of directors;
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a requirement that vacancies in directorships are to be filled
by a majority of the directors then in office and the number of
directors is to be fixed by the board of directors; and
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no cumulative voting.
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These and other provisions contained in our second amended and
restated charter and bylaws could delay or discourage
transactions involving an actual or potential change in control
of us or our management, including transactions in which our
shareholders might otherwise receive a premium for their shares
over then current prices, and may limit the ability of
shareholders to remove our current management or approve
transactions that our shareholders may deem to be in their best
interests and, therefore, could adversely affect the price of
our common stock.
83
Description of
capital stock
TRANSFER AGENT
AND REGISTRAR
The transfer agent and registrar for our common stock is Mellon
Investor Services.
NASDAQ GLOBAL
MARKET LISTING
We have applied for our common stock to be quoted on The Nasdaq
Global Market under the trading symbol “CPIX”.
84
Shares eligible for
future sale
Immediately prior to this offering, there was no public market
for our common stock. Future sales of substantial amounts of
common stock in the public market, or the perception that such
sales may occur, could adversely affect the market price of our
common stock and could impair our ability to raise capital in
the future through the sale of our securities. Although we have
applied to have our common stock approved for quotation on The
Nasdaq Global Market, we cannot assure you that there will be an
active public market for our common stock.
Upon completion of this offering, we will have outstanding an
aggregate
of shares
of common stock, assuming the issuance
of shares
of common stock offered in our initial public offering,
conversion of our outstanding shares of preferred stock and no
exercise of options after December 31, 2006. Of these
shares, the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities
Act, except for any shares purchased by our
“affiliates,” as that term is defined in Rule 144
under the Securities Act, whose sales would be subject to
certain limitations and restrictions described below. See
“—Lock-Up
Agreements.” Persons who may be deemed affiliates generally
include individuals or entities that control, are controlled by
or are under common control with us and may include our
officers, directors and significant shareholders.
The remaining shares of
common stock held by existing shareholders were issued and sold
by us in reliance on exemptions from the registration
requirements of the Securities Act. Of these shares,
shares
will be subject to
“lock-up”
agreements described below on the effective date of this
offering. Upon expiration of the
lock-up
agreements 180 days after the effective date of this
offering, shares will become eligible for sale, subject in most
cases to the limitations of Rule 144. In addition, holders
of stock options could exercise such options and sell certain of
the shares issued upon exercise as described below. See
“—Lock-Up
Agreements.”
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Days after date
of
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Shares
eligible
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this
prospectus
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for
sale
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Comment
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Upon effectiveness
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Shares sold in the offering
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Upon effectiveness
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Freely tradable shares saleable
under Rule 144(k) that are not subject to the
lock-up
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90 Days
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Shares saleable under
Rules 144 and 701 that are not subject to a
lock-up
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180 Days
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Lock-up
released; shares saleable under Rules 144 and 701
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Thereafter
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Restricted securities held for one
year or less
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EMPLOYEE BENEFIT
PLANS
As of December 31, 2006, there were a total
of shares
of common stock subject to outstanding options under our 1999
Option Plan,
approximately of
which were vested and exercisable.
Immediately after the completion of this offering, we intend to
file registration statements on
Form S-8
under the Securities Act to register all of the shares of common
stock issued or reserved for future issuance under the 1999
Option Plan and the 2007 Long-Term Incentive Compensation Plan.
On the date which is 180 days after the effective date of
this offering, a total of
approximately shares of
common stock subject to outstanding options will be vested and
exercisable. After the effective dates of the registration
statements on
Form S-8,
shares purchased under the 1999 Option Plan and the 2007
Long-Term Incentive Compensation Plan generally would be
available for resale in the public market.
85
Shares eligible
for future sale
LOCK-UP
AGREEMENTS
We, all of our directors and executive officers and their
affiliates, and holders
of shares
of our outstanding stock have agreed that, without the prior
written consent of UBS Securities LLC, we and they will not
directly or indirectly, sell, offer, contract or grant any
option to sell (including without limitation any short sale),
pledge, transfer, establish an open “put equivalent
position” or liquidate or decrease a “call equivalent
position” or otherwise dispose of or transfer (or enter
into any transaction which is designed to, or might reasonably
be expected to, result in the disposition of), including the
filing (or participation in the filing) of a registration
statement with the SEC in respect of, any shares of common
stock, options or warrants to acquire shares of common stock, or
securities exchangeable or exercisable for or convertible into
shares of common stock currently or hereafter owned either of
record or beneficially by such persons (except for the
S-8
filings
referred to in the previous paragraph), or publicly announce an
intention to do any of the foregoing, for a period commencing on
the date hereof and continuing through the close of trading on
the date 180 days after the date of this prospectus, other
than permitted transfers described below. In addition, we and
they agree that, without the prior written consent of UBS
Securities LLC, we and they will not, during such period, make
any demand for or exercise any right with respect to, the
registration of any shares of common stock or any security
convertible into or exercisable or exchangeable for common stock.
The
180-day
restricted period described in the preceding two paragraphs will
be extended if:
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during the last 17 days of the
180-day
restricted period we issue an earnings release or announce
material news or a material event relating to us occurs; or
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prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period,
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in which case the restrictions described in the preceding two
paragraphs will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release, the
announcement of material news or the occurrence of a material
event.
UBS Securities LLC, in its sole discretion, may release the
common stock and other securities subject to the
lock-up
agreements described above in whole or in part at any time with
or without notice. When determining whether or not to release
common stock and other securities from
lock-up
agreements, UBS Securities LLC will consider, among other
factors, the holder’s reasons for requesting the release,
the number of shares of common stock and other securities for
which the release is being requested and market conditions at
the time.
RULE 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person who has beneficially owned shares of our common stock for
at least one year, including an affiliate, would be entitled to
sell in “broker’s transactions” or to market
makers, within any three-month period, a number of shares that
does not exceed the greater of:
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1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after this offering; or
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the average weekly trading volume in our common stock on The
Nasdaq Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such
sale.
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Sales under Rule 144 are generally subject to the
availability of current public information about us.
86
Shares eligible
for future sale
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been
an affiliate of ours at any time during the three months
preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell
such shares without having to comply with the manner of sale,
public information, volume limitation or notice filing
provisions of Rule 144. Therefore, unless otherwise
restricted, “144(k) shares” may be sold immediately
upon the completion of this offering.
RULE 701
In general, under Rule 701, any of our employees,
directors, officers, consultants or advisors who purchases
shares from us in connection with a compensatory stock or option
plan or other written agreement before the effective date of
this offering is entitled to sell such shares 90 days after
the effective date of this offering in reliance on
Rule 144, without having to comply with the holding period
and notice filing requirements of Rule 144 and, in the case
of non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of
Rule 144.
The SEC has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act of
1934, as amended, along with the shares acquired upon exercise
of such options, including exercises after the date of this
prospectus.
87
Material
U.S. federal income and estate tax consequences to
non-U.S. holders
GENERAL
The following is a general summary of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of our common stock that may be
relevant to a
non-U.S. holder
(as defined below). The summary is based on provisions of the
Internal Revenue Code of 1986, as amended, U.S. Treasury
regulations promulgated thereunder, rulings and pronouncements
of the Internal Revenue Service, or IRS, and judicial decisions,
all as in effect on the date of this prospectus and all of which
are subject to change (possibly on a retroactive basis) or to
differing interpretations. We have not sought, and will not
seek, any ruling from the IRS with respect to the tax
consequences discussed in this prospectus, and there can be no
assurance that the IRS will not take a position contrary to the
tax discussion below or that any such position would not be
sustained.
This summary is limited to
non-U.S. holders
that purchase our common stock issued pursuant to this offering
and that hold our common stock as a capital asset, which
generally is property held for investment. This summary also
does not address the tax considerations arising under the laws
of any foreign, state or local jurisdiction, or under
U.S. federal estate or gift tax laws except as specifically
described below. In addition, this summary does not address tax
considerations that may be applicable to a
non-U.S. holder
in light of its particular circumstances or to
non-U.S. holders
that may be subject to special tax rules, including, without
limitation:
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banks, insurance companies or other financial institutions;
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partnerships or other pass through entities;
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U.S. expatriates;
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tax-exempt organizations;
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tax-qualified retirement plans;
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dealers in securities or currencies;
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traders in securities that elect to use a
mark-to-market
method of accounting for their securities holdings; or
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persons that will hold common stock as a position in a hedging
transaction, “straddle” or “conversion
transaction” for tax purposes.
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For purposes of this summary, the term
“non-U.S. holder”
means a beneficial owner of our common stock that is not, for
U.S. federal income tax purposes:
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an individual citizen or resident of the U.S.;
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a corporation, or other entity treated as a corporation for
U.S. federal income tax purposes, that is created or
organized under the laws of the United States or any political
subdivision of the United States;
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an estate whose income, regardless of its source, is includible
in gross income for U.S. federal income tax purposes;
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a trust (1) if a U.S. court is able to exercise
primary supervision over the administration of the trust and one
or more U.S. persons have the authority to control all
substantial decisions regarding the trust, or (2) that has
in effect a valid election to be treated as a U.S. person;
or
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a partnership, or other entity treated as a partnership for
U.S. federal income tax purposes.
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88
Material
U.S. federal income and estate tax consequences to
non-U.S. holders
If a partnership or other entity classified as such for
U.S. federal income tax purposes holds shares of our common
stock, the tax treatment of a partner or owner will generally
depend on the status of the partner or owner and the activities
of the partnership or other entity. It is advised that
partnerships (and other entities classified as such for
U.S. federal income tax purposes) owning shares of our
common stock, and holders of interests in such entities, consult
their tax advisors.
Any
non-U.S. holder
of our common stock should consult their tax advisor regarding
the tax consequences of purchasing, holding, and disposing of
these shares of stock.
DIVIDENDS
As previously discussed, we do not anticipate paying dividends
on our common stock in the foreseeable future. If we pay
dividends on our common stock, however, those payments will
constitute dividends for U.S. federal income tax purposes
to the extent paid from our current or accumulated earnings and
profits, as determined under U.S. federal income tax
principles. To the extent those payments exceed our current and
accumulated earnings and profits, the payments will constitute a
return of capital and first reduce the
non-U.S. holder’s
adjusted tax basis, but not below zero, and then will be treated
as gain from the sale of stock, as described below under the
heading “Gain on Disposition of Common Stock.” Any
amount treated as a dividend paid to a
non-U.S. holder
will ordinarily be subject to a 30% U.S. federal
withholding tax, or a lower rate if an applicable income tax
treaty so provides. A
non-U.S. holder
will be required to satisfy certain certification and disclosure
requirements in order to claim a reduced rate of withholding
pursuant to an applicable income tax treaty.
Dividends that are effectively connected with a
non-U.S. holder’s
conduct of trade or business within the United States (and,
where an applicable tax treaty so requires, are attributable to
a permanent establishment or fixed base in the U.S.) will not be
subject to U.S. federal withholding tax, provided certain
certification and disclosure requirements are met, but instead
generally will be taxed in the same manner as if the
non-U.S. holder
were a U.S. person. Additionally,
non-U.S. holders
that are corporations receiving such dividends may be subject to
an additional branch profits tax at a rate of 30%, or at a lower
rate if provided by an applicable income tax treaty.
Non-U.S. holders
are encouraged to consult their tax advisors regarding any claim
to benefits under an applicable income tax treaty and the method
of claiming the benefits of the treaty. A refund or credit for
any
non-U.S. holder
that is subject to a reduced U.S. federal withholding
income tax rate may be obtained by timely filing a claim for a
refund with the IRS.
GAIN ON
DISPOSITION OF COMMON STOCK
A
non-U.S. holder
of our common stock generally will not be taxed on gain
recognized upon disposition unless:
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the
non-U.S. holder
is present in the U.S. for 183 days or more during the
taxable year of the disposition and has met certain other
requirements.
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the income or gain is effectively connected with the
non-U.S. holder’s
conduct of trade or business within the U.S. and, if an
applicable income tax treaty so requires, is attributable to a
permanent establishment or fixed base of the
non-U.S. holder
in the U.S.; or
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we are or have been a “United States real property holding
corporation” for U.S. federal income tax purposes at
any time within the shorter of the five-year period preceding
such disposition or your holding period for our common stock,
and certain other requirements are met. We believe that we are
not, and that we will not become, a United States real property
holding corporation.
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89
Material
U.S. federal income and estate tax consequences to
non-U.S. holders
If you are an individual described in the first bullet point
immediately above you will be subject to a flat 30% tax on the
amount by which gain resulting from the disposition of our
common stock and any other
U.S.-source
capital gains realized in the same taxable year exceed the
U.S.-source
capital losses recognized in that taxable year, unless an
applicable income tax treaty provides for an exemption or lower
rate. If you are an individual described in the second bullet
point immediately above you will be subject to tax on the net
gain derived from the sale under regular graduated
U.S. federal income tax rates. If you are a corporation
described in the second bullet point immediately above, you will
be subject to tax on the net gain generally in the same manner
as if you were a U.S. corporation for U.S. federal
income tax purposes, and may also be subject to the branch
profits tax equal to 30%, or such lower rate as may be specified
by an applicable income tax treaty, on your effectively
connected earnings and profits.
U.S. FEDERAL
ESTATE TAX
Common stock owned or treated as owned by a
non-U.S. holder
who is an individual will be included in that
non-U.S. holder’s
gross estate for U.S. federal estate tax purposes unless an
applicable estate tax or other treaty provides otherwise and
such
non-U.S. holder
therefore may be subject to U.S. federal estate tax.
U.S. INFORMATION
REPORTING AND BACKUP WITHHOLDING
We must report to you and to the Internal Revenue Service on an
annual basis the amount of dividends paid to you and any related
taxes withheld from those dividends. Copies of the information
returns reporting dividends and the related tax withheld may
also be made available to the tax authorities in the country in
which you reside under the provisions of an applicable income
tax treaty.
Backup withholding generally will not apply to payments of
dividends made by us or our paying agents, in their capacities
as such, to a
non-U.S. holder
of our common stock if the holder has provided the required
certification that it is not a U.S. person or certain other
requirements are met.
In general, backup withholding and information reporting will
not apply to proceeds from the disposition of our common stock
paid to a
non-U.S. holder
if the holder has provided the required certification that it is
a
non-U.S. holder.
Backup withholding is not an additional tax. Any amounts
withheld may be refunded or credited against the holder’s
U.S. federal income tax liability, if any, provided that
the required information is furnished to the IRS in a timely
manner.
Non-U.S. holders
should consult their tax advisors regarding the application of
the information reporting and backup withholding rules to them.
Prospective
non-U.S. holders
of our common stock should consult their tax advisors with
respect to the particular tax consequences to them of owning and
disposing of our common stock, including the consequences under
the laws of any state, local or foreign jurisdiction or under
any applicable tax treaty.
90
Underwriting
We are offering the shares of our common stock described in this
prospectus through the underwriters named below. UBS Securities
LLC, Jefferies & Company, Inc., Wachovia Capital
Markets, LLC and Morgan Joseph & Co. Inc. are the
representatives of the underwriters. UBS Securities LLC is the
sole book-running manager of this offering. We have entered into
an underwriting agreement with the representatives. Subject to
the terms and conditions of the underwriting agreement, each of
the underwriters has severally agreed to purchase the number of
shares of common stock listed next to its name in the following
table.
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Underwriters
|
|
Shares
|
|
|
|
|
|
|
|
UBS Securities LLC
|
|
|
|
|
|
Jefferies & Company,
Inc.
|
|
|
|
|
|
Wachovia Capital Markets,
LLC
|
|
|
|
|
|
Morgan Joseph & Co.
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters’ over-allotment option
described below.
Our common stock is offered subject to a number of conditions,
including:
|
|
|
|
Ø
|
receipt and acceptance of our common stock by the underwriters,
and
|
|
|
|
Ø
|
the underwriters’ right to reject orders in whole or in
part.
|
We have been advised by the representatives that the
underwriters intend to make a market in our common stock, but
that they are not obligated to do so and may discontinue making
a market at any time without notice.
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
OVER-ALLOTMENT
OPTION
We have granted the underwriters an option to buy up to an
aggregate of additional shares of our common stock. The
underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with this
offering. The underwriters have 30 days from the date of
this prospectus to exercise this option. If the underwriters
exercise this option, they will each purchase additional shares
approximately in proportion to the amounts specified in the
table above.
COMMISSIONS AND
DISCOUNTS
Shares sold by the underwriters to the public will initially be
offered at the initial offering price set forth on the cover of
this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. Any of these securities dealers may
resell any shares purchased from the underwriters to other
brokers or dealers at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms. Upon execution
of the underwriting agreement, the underwriters will be
obligated to purchase the shares at
91
Underwriting
the prices and upon the terms stated therein and, as a result,
will thereafter bear any risk associated with changing the
offering price to the public or other selling terms. The
representatives of the underwriters have informed us that they
do not expect to sell more than an aggregate
of shares
of common stock to accounts over which such representatives
exercise discretionary authority.
The following table shows the per share and total underwriting
discounts and commissions we will pay to the underwriters
assuming both no exercise and full exercise of the
underwriters’ option to purchase up to an additional shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
No
exercise
|
|
|
Full
exercise
|
|
|
|
|
|
|
|
Per share
|
|
$
|
|
|
|
$
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
We estimate that the total expenses of this offering payable by
us, not including the underwriting discounts and commissions,
will be approximately
$ million.
NO SALES OF
SIMILAR SECURITIES
We, our executive officers and directors and shareholders owning
substantially all of our stock have entered into
lock-up
agreements with the underwriters. Under these agreements,
subject to certain exceptions, we and each of these persons may
not, without the prior written approval of UBS Securities LLC,
offer, sell, contract to sell or otherwise dispose of, directly
or indirectly, or hedge our common stock or securities
convertible into or exchangeable or exercisable for our common
stock. These restrictions will be in effect for a period of
180 days after the date of this prospectus. At any time and
without public notice, UBS Securities LLC may, in its sole
discretion, release some or all of the securities from these
lock-up
agreements.
INDEMNIFICATION
We have agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities
Act. If we are unable to provide this indemnification, we have
agreed to contribute to payments the underwriters may be
required to make in respect of those liabilities.
NASDAQ GLOBAL
MARKET QUOTATION
We have applied to have our common stock approved for quotation
on The Nasdaq Global Market under the trading symbol
“CPIX”.
PRICE
STABILIZATION, SHORT POSITIONS
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including:
|
|
|
|
Ø
|
stabilizing transactions;
|
|
|
|
Ø
|
short sales;
|
|
|
|
Ø
|
purchases to cover positions created by short sales;
|
|
|
|
Ø
|
imposition of penalty bids; and
|
|
|
|
Ø
|
syndicate covering transactions.
|
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common stock while this offering is in progress.
These transactions
92
Underwriting
may also include making short sales of our common stock, which
involve the sale by the underwriters of a greater number of
shares of common stock than they are required to purchase in
this offering, and purchasing shares of common stock on the open
market to cover positions created by short sales. Short sales
may be “covered short sales,” which are short
positions in an amount not greater than the underwriters’
over-allotment option referred to above, or may be “naked
short sales,” which are short positions in excess of that
amount.
The underwriters may close out any covered short position by
either exercising their over-allotment option, in whole or in
part, or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase
shares through the over-allotment option.
Naked short sales are in excess of the over-allotment option.
The underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock
in the open market that could adversely affect investors who
purchased in this offering.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of that underwriter in stabilizing or short covering
transactions.
As a result of these activities, the price of our common stock
may be higher that the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on The Nasdaq Global Market, in
the
over-the-counter
market or otherwise.
DETERMINATION OF
OFFERING PRICE
Prior to this offering, there was no public market for our
common stock. The initial public offering price will be
determined by negotiation by us and the representatives of the
underwriters. The principal factors to be considered in
determining the initial public offering price include:
|
|
|
|
Ø
|
the information set forth in this prospectus and otherwise
available to representatives;
|
|
|
|
Ø
|
our history and prospects, and the history of and prospects for
the industry in which we compete;
|
|
|
|
Ø
|
our past and present financial performance and an assessment of
our management;
|
|
|
|
Ø
|
our prospects for future earnings and the present state of our
development;
|
|
|
|
Ø
|
the general condition of the securities markets at the time of
this offering;
|
|
|
|
Ø
|
the recent market prices of, and demand for, publicly traded
common stock of generally comparable companies; and
|
|
|
|
Ø
|
other factors deemed relevant by the underwriters and us.
|
AFFILIATIONS
Certain of the underwriters and their affiliates may from time
to time provide certain commercial banking, financial advisory,
investment banking and other services for us for which they were
and will be entitled to receive separate fees. The underwriters
and their affiliates may from time to time in the future engage
in transactions with us and perform services for us in the
ordinary course of their business.
93
Notice to investors
EUROPEAN ECONOMIC
AREA
In relation to each Member State of the European Economic Area,
or EEA, which has implemented the Prospectus Directive (each, a
Relevant Member State), with effect from and including the date
on which the Prospectus Directive is implemented in that
Relevant Member State, or the Relevant Implementation Date, our
common stock will not be offered to the public in that Relevant
Member State prior to the publication of a prospectus in
relation to our common stock that has been approved by the
competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and
notified to the competent authority in that Relevant Member
State, all in accordance with the Prospectus Directive, except
that, with effect from and including the Relevant Implementation
Date, our common stock may be offered to the public in that
Relevant Member State at any time:
|
|
|
|
Ø
|
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
|
|
|
|
Ø
|
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than €43,000,000 and
(3) an annual net turnover of more than €50,000,000,
as shown in its last annual or consolidated accounts; or
|
|
|
|
Ø
|
in any other circumstances which do not require the publication
by us of a prospectus pursuant to Article 3 of the
Prospectus Directive.
|
As used above, the expression “offered to the public”
in relation to any of our common stock in any Relevant Member
State means the communication in any form and by any means of
sufficient information on the terms of the offer and our common
stock to be offered so as to enable an investor to decide to
purchase or subscribe for our common stock, as the same may be
varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression
“Prospectus Directive” means Directive
2003/71/
EC
and includes any relevant implementing measure in each Relevant
Member State.
The EEA selling restriction is in addition to any other selling
restrictions set out below.
UNITED
KINGDOM
Our common stock may not be offered or sold and will not be
offered or sold to any persons in the United Kingdom other than
to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or
as agent) for the purposes of their businesses and in compliance
with all applicable provisions of the Financial Services and
Markets Act 2000, or the FSMA, with respect to anything done in
relation to our common stock in, from or otherwise involving the
United Kingdom. In addition, each underwriter has only
communicated or caused to be communicated and will only
communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the FSMA) received by it in connection
with the issue or sale of our common stock in circumstances in
which Section 21(1) of the FSMA does not apply to us.
Without limitation to the other restrictions referred to herein,
this prospectus is directed only at (1) persons outside the
United Kingdom, (2) persons having professional experience
in matters relating to investments who fall within the
definition of “investment professionals” in
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005; or (3) high net
worth bodies corporate, unincorporated associations and
partnerships and trustees of high value trusts as described in
Article 49(2) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005. Without limitation to the
other restrictions referred to herein, investment or investment
activity to which this prospectus relates is available only to,
and will be engaged in only with, such persons, and persons
within the United Kingdom who receive this
94
Notice to
investors
communication (other than persons who fall within (2) or
(3) above) should not rely or act upon this communication.
FRANCE
No prospectus (including any amendment, supplement or
replacement thereto) has been prepared in connection with the
offering of our common stock that has been approved by the
Autorité des marchés financiers or by the competent
authority of another State that is a contracting party to the
Agreement on the European Economic Area and notified to the
Autorité des marchés financiers; no common stock has
been offered or sold and will be offered or sold, directly or
indirectly, to the public in France except to permitted
investors, consisting of persons licensed to provide the
investment service of portfolio management for the account of
third parties, qualified investors (investisseurs
qualifiés) acting for their own account
and/or
corporate investors meeting one of the four criteria provided in
Article 1 of Decree N7
2004-1019
of
September 28, 2004 and belonging to a limited circle of
investors (cercle restreint d’investisseurs) acting for
their own account, with “qualified investors” and
“limited circle of investors” having the meaning
ascribed to them in Article L.
411-2
of the
French Code Monétaire et Financier and applicable
regulations thereunder; none of this prospectus or any other
materials related to the offer or information contained therein
relating to our common stock has been released, issued or
distributed to the public in France except to Permitted
Investors; and the direct or indirect resale to the public in
France of any common stock acquired by any Permitted Investors
may be made only as provided by articles L.
412-1
and L.
621-8
of the
French Code Monétaire et Financier and applicable
regulations thereunder.
ITALY
The offering of shares of our common stock has not been cleared
by the Italian Securities Exchange Commission (Commissione
Nazionale per le Società e la Borsa, or the CONSOB)
pursuant to Italian securities legislation and, accordingly,
shares of our common stock may not and will not be offered, sold
or delivered, nor may or will copies of this prospectus or any
other documents relating to shares of our common stock or the
offering be distributed in Italy other than to professional
investors (operatori qualificati), as defined in
Article 31, paragraph 2 of CONSOB
Regulation No. 11522 of July 1, 1998, as amended,
or Regulation No. 11522.
Any offer, sale or delivery of shares of our common stock or
distribution of copies of this prospectus or any other document
relating to shares of our common stock or the offering in Italy
may and will be effected in accordance with all Italian
securities, tax, exchange control and other applicable laws and
regulations, and, in particular, will be: (i) made by an
investment firm, bank or financial intermediary permitted to
conduct such activities in Italy in accordance with the
Legislative Decree No. 385 of September 1, 1993, as
amended, or the Italian Banking Law, Legislative Decree
No. 58 of February 24, 1998, as amended,
Regulation No. 11522, and any other applicable laws
and regulations; (ii) in compliance with Article 129
of the Italian Banking Law and the implementing guidelines of
the Bank of Italy; and (iii) in compliance with any other
applicable notification requirement or limitation which may be
imposed by CONSOB or the Bank of Italy.
Any investor purchasing shares of our common stock in the
offering is solely responsible for ensuring that any offer or
resale of shares of common stock it purchased in the offering
occurs in compliance with applicable laws and regulations.
This prospectus and the information contained herein are
intended only for the use of its recipient and are not to be
distributed to any third party resident or located in Italy for
any reason. No person
95
Notice to
investors
resident or located in Italy other than the original recipients
of this document may rely on it or its content.
In addition to the above (which shall continue to apply to the
extent not inconsistent with the implementing measures of the
Prospective Directive in Italy), after the implementation of the
Prospectus Directive in Italy, the restrictions, warranties and
representations set out under the heading “European
Economic Area” above shall apply to Italy.
GERMANY
Shares of our common stock may not be offered or sold or
publicly promoted or advertised by any underwriter in the
Federal Republic of Germany other than in compliance with the
provisions of the German Securities Prospectus Act
(Wertpapierprospektgestz—WpPG) of June 22, 2005, as
amended, or of any other laws applicable in the Federal Republic
of Germany governing the issue, offering and sale of securities.
SPAIN
Neither the common stock nor this prospectus have been approved
or registered in the administrative registries of the Spanish
National Securities Exchange Commission (Comisión Nacional
del Mercado de Valores). Accordingly, our common stock may not
be offered in Spain except in circumstances which do not
constitute a public offer of securities in Spain within the
meaning of articles 30bis of the Spanish Securities Markets
Law of 28 July 1988 (Ley
24/1988,
de
28 de Julio, del Mercado de Valores), as amended and
restated, and supplemental rules enacted thereunder.
SWEDEN
This is not a prospectus under, and has not been prepared in
accordance with the prospectus requirements provided for in, the
Swedish Financial Instruments Trading Act [lagen (1991:980) om
handel med finasiella instrument] nor any other Swedish
enactment. Neither the Swedish Financial Supervisory Authority
nor any other Swedish public body has examined, approved, or
registered this document.
SWITZERLAND
The common stock may not and will not be publicly offered,
distributed or re-distributed on a professional basis in or from
Switzerland and neither this prospectus nor any other
solicitation for investments in our common stock may be
communicated or distributed in Switzerland in any way that could
constitute a public offering within the meaning of
Articles 1156 or 652a of the Swiss Code of Obligations or
of Article 2 of the Federal Act on Investment Funds of
March 18, 1994. This prospectus may not be copied,
reproduced, distributed or passed on to others without the
underwriters’ prior written consent. This prospectus is not
a prospectus within the meaning of Articles 1156 and 652a
of the Swiss Code of Obligations or a listing prospectus
according to article 32 of the Listing Rules of the Swiss
Exchange and may not comply with the information standards
required thereunder. We will not apply for a listing of our
common stock on any Swiss stock exchange or other Swiss
regulated market and this prospectus may not comply with the
information required under the relevant listing rules. The
common stock offered hereby has not and will not be registered
with the Swiss Federal Banking Commission and has not and will
not be authorized under the Federal Act on Investment Funds of
March 18, 1994. The investor protection afforded to
acquirers of investment fund certificates by the Federal Act on
Investment Funds of March 18, 1994 does not extend to
acquirers of our common stock.
96
Notice to
investors
Legal matters
The validity of the shares of common stock issued in this
offering will be passed upon for us by the law firm of Adams and
Reese LLP, Nashville, Tennessee. Dewey Ballantine LLP, New York,
New York is counsel to the underwriters in connection with this
offering.
Experts
The consolidated financial statements and schedule of the
Company as of December 31, 2006 and 2005, and for each of
the years in the three-year period ended December 31, 2006,
have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent
registered public accounting firm, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and
auditing. The audit report covering the December 31, 2006
financial statements refer to a change in accounting for
stock-based compensation.
Where you can find
additional information
We filed a registration statement on
Form S-1
with the Commission with respect to the registration of the
common stock offered for sale with this prospectus. This
prospectus, which constitutes part of the registration
statement, does not contain all of the information set forth in
the registration statement and the exhibits to the registration
statement. For further information about us, the common stock we
are offering by this prospectus and related matters, you should
review the registration statement, including the exhibits filed
as a part of the registration statement. Statements contained in
this prospectus about the contents of any contract or any other
document that is filed as an exhibit to the registration
statement are not necessarily complete, and we refer you to the
full text of the contract or other document filed as an exhibit
to the registration statement. A copy of the registration
statement and the exhibits that were filed with the registration
statement may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange
Commission Headquarters Office, 100 F Street, N.E.,
Washington, D.C. 20549, and copies of all or any part of
the registration statement may be obtained from the SEC upon
payment of the prescribed fee. Information on the operation of
the public reference facilities may be obtained by calling the
SEC at
1-800-SEC-0330.
The SEC maintains a world wide web site that contains reports,
proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address
of the site is
http://www.sec.gov.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange
Act, and, in accordance with such requirements, will file
periodic reports, proxy statements and other information with
the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the
regional offices, public reference facilities and web site of
the SEC referred to above.
97
Report of
Independent Registered Public Accounting Firm
The Board of Directors
Cumberland Pharmaceuticals Inc.:
We have audited the accompanying consolidated balance sheets of
Cumberland Pharmaceuticals Inc. and subsidiaries (the Company)
as of December 31, 2005 and 2006, and the related
consolidated statements of income, shareholders’ equity
(deficit) and comprehensive income, and cash flows for each of
the years in the three-year period ended December 31, 2006.
In connection with our audits of the consolidated financial
statements, we have also audited the financial statement
Schedule II—Valuation and Qualifying Accounts for each
of the years in the three-year period ended December 31,
2006. These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Cumberland Pharmaceuticals Inc. and subsidiaries as
of December 31, 2005 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements
taken as a whole, present fairly, in all material respects, the
information set forth herein.
As discussed in notes 2 and 9 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
the fair value method of accounting for stock-based compensation
as required by Statement of Financial Accounting Standards
No. 123(R),
Share-Based Payments.
April 23, 2007
F-2
Cumberland
Pharmaceuticals Inc. and Subsidiaries
Consolidated balance
sheets
December 31,
2005 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,535,985
|
|
|
|
6,255,398
|
|
|
Accounts receivable, net of
allowances
|
|
|
2,414,813
|
|
|
|
5,120,462
|
|
|
Inventories
|
|
|
546,382
|
|
|
|
671,098
|
|
|
Prepaid assets
|
|
|
60,040
|
|
|
|
142,569
|
|
|
Deferred tax assets
|
|
|
12,492
|
|
|
|
405,443
|
|
|
Other current assets
|
|
|
21,185
|
|
|
|
48,352
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
8,590,897
|
|
|
|
12,643,322
|
|
|
Property and equipment, net
|
|
|
373,944
|
|
|
|
365,774
|
|
|
Intangible assets, net
|
|
|
36,975
|
|
|
|
9,834,270
|
|
|
Deferred tax assets
|
|
|
1,171,508
|
|
|
|
3,611,861
|
|
|
Other assets
|
|
|
—
|
|
|
|
25,897
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,173,324
|
|
|
|
26,481,124
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
281,209
|
|
|
|
1,833,332
|
|
|
Current portion of other long-term
obligations
|
|
|
1,127,455
|
|
|
|
2,052,501
|
|
|
Accounts payable
|
|
|
990,123
|
|
|
|
3,372,936
|
|
|
Accrued interest
|
|
|
2,205
|
|
|
|
101,913
|
|
|
Other accrued liabilities
|
|
|
549,723
|
|
|
|
1,337,472
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,950,715
|
|
|
|
8,698,154
|
|
|
Long-term debt, excluding current
portion
|
|
|
—
|
|
|
|
3,575,951
|
|
|
Other long-term obligations,
excluding current portion
|
|
|
988,961
|
|
|
|
3,081,359
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,939,676
|
|
|
|
15,355,464
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see
notes)
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock—no par value.
Authorized 3,000,000 shares; $2,780,359 or $3.25 per
share liquidation preference; issued and outstanding
855,495 shares at both December 31, 2005 and 2006
|
|
|
2,742,994
|
|
|
|
2,742,994
|
|
|
Common stock—no par value.
Authorized 10,000,000 shares; issued and outstanding
4,890,149 and 4,922,075 shares at December 31, 2005
and 2006, respectively
|
|
|
15,255,029
|
|
|
|
15,742,590
|
|
|
Accumulated deficit
|
|
|
(11,764,375
|
)
|
|
|
(7,359,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
6,233,648
|
|
|
|
11,125,660
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’ equity
|
|
$
|
10,173,324
|
|
|
|
26,481,124
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
CUMBERLAND
PHARMACEUTICALS INC. AND SUBSIDIARIES
Consolidated
Statements of Income
Years ended
December 31, 2004, 2005, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenue
|
|
$
|
8,869,358
|
|
|
|
8,224,670
|
|
|
|
16,980,898
|
|
|
Revenue from co-promotion
agreements
|
|
|
2,874,544
|
|
|
|
1,812,242
|
|
|
|
286,624
|
|
|
Other revenue
|
|
|
288,308
|
|
|
|
652,752
|
|
|
|
547,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
12,032,210
|
|
|
|
10,689,664
|
|
|
|
17,815,480
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
816,345
|
|
|
|
533,263
|
|
|
|
2,399,133
|
|
|
Selling and marketing
|
|
|
6,802,482
|
|
|
|
5,647,254
|
|
|
|
7,348,540
|
|
|
Research and development
|
|
|
745,932
|
|
|
|
1,157,881
|
|
|
|
2,232,984
|
|
|
General and administrative
|
|
|
2,357,968
|
|
|
|
2,587,861
|
|
|
|
2,999,347
|
|
|
Amortization of product license
rights
|
|
|
—
|
|
|
|
—
|
|
|
|
515,181
|
|
|
Other
|
|
|
6,205
|
|
|
|
13,489
|
|
|
|
96,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
10,728,932
|
|
|
|
9,939,748
|
|
|
|
15,591,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on insurance recovery
|
|
|
265,588
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,568,866
|
|
|
|
749,916
|
|
|
|
2,223,862
|
|
|
Interest income
|
|
|
969
|
|
|
|
89,239
|
|
|
|
208,677
|
|
|
Interest expense
|
|
|
1,011,631
|
|
|
|
63,204
|
|
|
|
721,804
|
|
|
Other expense
|
|
|
—
|
|
|
|
5,632
|
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
558,204
|
|
|
|
770,319
|
|
|
|
1,707,935
|
|
|
Income tax benefit
|
|
|
—
|
|
|
|
1,184,000
|
|
|
|
2,696,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
558,204
|
|
|
|
1,954,319
|
|
|
|
4,404,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share—basic
|
|
$
|
0.12
|
|
|
|
0.41
|
|
|
|
0.90
|
|
|
Net income per share—diluted
|
|
|
0.07
|
|
|
|
0.24
|
|
|
|
0.55
|
|
|
Weighted average shares
outstanding—basic
|
|
|
4,541,076
|
|
|
|
4,747,866
|
|
|
|
4,898,595
|
|
|
Weighted average shares
outstanding—diluted
|
|
|
7,741,140
|
|
|
|
8,045,045
|
|
|
|
8,016,426
|
|
See accompanying notes to consolidated financial statements.
F-4
Cumberland
Pharmaceuticals Inc. and Subsidiaries
Consolidated
statements of shareholders’ equity (deficit) and
comprehensive income
Years ended
December 31, 2004, 2005, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred
stock
|
|
|
Common
stock
|
|
|
Accumulated
|
|
|
shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
deficit
|
|
|
equity
(deficit)
|
|
|
|
|
|
|
|
Balance, December 31,
2003
|
|
|
855,495
|
|
|
$
|
2,742,994
|
|
|
|
4,444,852
|
|
|
$
|
8,101,251
|
|
|
$
|
(14,276,898
|
)
|
|
$
|
(3,432,653
|
)
|
|
Issuance of common stock, net of
proceeds allocated to common stock warrants issued with the
common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
43,000
|
|
|
|
373,850
|
|
|
|
—
|
|
|
|
373,850
|
|
|
Issuance of common stock warrants
in consideration with issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
142,150
|
|
|
|
—
|
|
|
|
142,150
|
|
|
Issuance of common stock upon
conversion of note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
111,489
|
|
|
|
1,337,868
|
|
|
|
—
|
|
|
|
1,337,868
|
|
|
Issuance of common stock for
services received
|
|
|
—
|
|
|
|
—
|
|
|
|
25,267
|
|
|
|
303,204
|
|
|
|
—
|
|
|
|
303,204
|
|
|
Stock options granted for services
received
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,928
|
|
|
|
—
|
|
|
|
43,928
|
|
|
Exercise of options and related tax
benefit, net of mature shares redeemed for the exercise price
|
|
|
—
|
|
|
|
—
|
|
|
|
18,799
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Options granted to note holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
454,453
|
|
|
|
—
|
|
|
|
454,453
|
|
|
Issuance of common stock options
upon extension of notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
151,074
|
|
|
|
—
|
|
|
|
151,074
|
|
|
Change in fair value of embedded
conversion feature
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,534
|
|
|
|
—
|
|
|
|
45,534
|
|
|
Net and comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
558,204
|
|
|
|
558,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
855,495
|
|
|
|
2,742,994
|
|
|
|
4,643,407
|
|
|
|
10,953,312
|
|
|
|
(13,718,694
|
)
|
|
|
(22,388
|
)
|
|
Issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
1,789,364
|
|
|
|
—
|
|
|
|
1,789,364
|
|
|
Offering costs settled with stock
options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(51,806
|
)
|
|
|
—
|
|
|
|
(51,806
|
)
|
|
Issuance of common stock upon
conversion of note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
112,916
|
|
|
|
2,032,488
|
|
|
|
—
|
|
|
|
2,032,488
|
|
|
Issuance of common stock for
services received
|
|
|
—
|
|
|
|
—
|
|
|
|
25,001
|
|
|
|
300,012
|
|
|
|
—
|
|
|
|
300,012
|
|
|
Stock options granted for services
received
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
226,709
|
|
|
|
—
|
|
|
|
226,709
|
|
|
Exercise of options and related tax
benefit, net of mature shares redeemed for the exercise price
|
|
|
—
|
|
|
|
—
|
|
|
|
8,825
|
|
|
|
4,950
|
|
|
|
—
|
|
|
|
4,950
|
|
|
Net and comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,954,319
|
|
|
|
1,954,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
855,495
|
|
|
|
2,742,994
|
|
|
|
4,890,149
|
|
|
|
15,255,029
|
|
|
|
(11,764,375
|
)
|
|
|
6,233,648
|
|
|
Issuance of common stock for
services received
|
|
|
—
|
|
|
|
—
|
|
|
|
13,759
|
|
|
|
273,298
|
|
|
|
—
|
|
|
|
273,298
|
|
|
Stock options granted for services
received
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,751
|
|
|
|
—
|
|
|
|
37,751
|
|
|
Exercise of options and related tax
benefit, net of mature shares redeemed for the exercise price
|
|
|
—
|
|
|
|
—
|
|
|
|
18,167
|
|
|
|
46,747
|
|
|
|
—
|
|
|
|
46,747
|
|
|
Stock-based
compensation—employee stock options grants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
104,085
|
|
|
|
—
|
|
|
|
104,085
|
|
|
Issuance of common stock warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,680
|
|
|
|
—
|
|
|
|
25,680
|
|
|
Net and comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,404,451
|
|
|
|
4,404,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2006
|
|
|
855,495
|
|
|
$
|
2,742,994
|
|
|
|
4,922,075
|
|
|
$
|
15,742,590
|
|
|
$
|
(7,359,924
|
)
|
|
$
|
11,125,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
Cumberland
Pharmaceuticals Inc. and Subsidiaries
Consolidated
statements of cash flows
Years ended
December 31, 2004, 2005, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
558,204
|
|
|
|
1,954,319
|
|
|
|
4,404,451
|
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
44,006
|
|
|
|
53,537
|
|
|
|
587,742
|
|
|
Deferred tax benefit
|
|
|
—
|
|
|
|
(1,184,000
|
)
|
|
|
(2,833,304
|
)
|
|
Non-employee stock grant expense
|
|
|
303,204
|
|
|
|
300,012
|
|
|
|
273,298
|
|
|
Non-employee stock option grant
expense
|
|
|
43,928
|
|
|
|
174,903
|
|
|
|
37,751
|
|
|
Stock-based
compensation — employee stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
104,085
|
|
|
Excess tax benefit derived from
exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
(37,747
|
)
|
|
Non-cash interest expense
|
|
|
785,433
|
|
|
|
—
|
|
|
|
339,593
|
|
|
Net changes in assets and
liabilities affecting operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,789,172
|
)
|
|
|
584,603
|
|
|
|
(2,705,649
|
)
|
|
Inventory
|
|
|
(6,905
|
)
|
|
|
254,492
|
|
|
|
(124,716
|
)
|
|
Prepaid and other current assets
|
|
|
(10,275
|
)
|
|
|
(36,743
|
)
|
|
|
(71,844
|
)
|
|
Accounts payable, accrued interest,
and other accrued liabilities
|
|
|
501,699
|
|
|
|
(518,922
|
)
|
|
|
3,308,017
|
|
|
Deferred revenue
|
|
|
(699,718
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Other long-term obligations
|
|
|
(169,784
|
)
|
|
|
833,806
|
|
|
|
(1,118,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
(1,439,380
|
)
|
|
|
2,416,007
|
|
|
|
2,163,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intangible
assets-license
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,479,658
|
)
|
|
Additions to property and equipment
|
|
|
(50,271
|
)
|
|
|
(301,908
|
)
|
|
|
(59,714
|
)
|
|
Additions to trademarks and patents
|
|
|
(839
|
)
|
|
|
(16,591
|
)
|
|
|
(13,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(51,110
|
)
|
|
|
(318,499
|
)
|
|
|
(6,552,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of note
payable
|
|
|
—
|
|
|
|
—
|
|
|
|
5,500,000
|
|
|
Costs of financing for long-term
debt and credit facility
|
|
|
—
|
|
|
|
—
|
|
|
|
(65,733
|
)
|
|
Principal payments on notes payable
|
|
|
(278,000
|
)
|
|
|
—
|
|
|
|
(916,668
|
)
|
|
Net borrowings (repayments) on line
of credit
|
|
|
997,577
|
|
|
|
(871,839
|
)
|
|
|
544,742
|
|
|
Proceeds from issuance of
convertible note
|
|
|
—
|
|
|
|
1,999,998
|
|
|
|
—
|
|
|
Proceeds from exercise of stock
options
|
|
|
—
|
|
|
|
4,950
|
|
|
|
9,000
|
|
|
Excess tax benefit from stock
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
37,747
|
|
|
Proceeds from issuance of stock and
warrants
|
|
|
516,000
|
|
|
|
1,789,364
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
1,235,577
|
|
|
|
2,922,473
|
|
|
|
5,109,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(254,913
|
)
|
|
|
5,019,981
|
|
|
|
719,413
|
|
|
Cash and cash equivalents,
beginning of year
|
|
|
770,917
|
|
|
|
516,004
|
|
|
|
5,535,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
516,004
|
|
|
|
5,535,985
|
|
|
|
6,255,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
123,482
|
|
|
|
63,809
|
|
|
|
377,202
|
|
|
Income taxes
|
|
|
—
|
|
|
|
18,000
|
|
|
|
55,659
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for license acquired
(note 6)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,500,000
|
|
|
Deferred financing costs
(note 5)
|
|
|
—
|
|
|
|
—
|
|
|
|
25,680
|
|
|
Settlement of notes payable
including accrued interest with issuance of common stock
(notes 5)
|
|
|
1,337,868
|
|
|
|
2,032,488
|
|
|
|
—
|
|
See accompanying notes to consolidated financial statements.
F-6
CUMBERLAND
PHARMACEUTICALS INC. AND SUBSIDIARIES
Notes to
consolidated financial statements
(1) ORGANIZATION
AND BASIS OF PRESENTATION
Cumberland Pharmaceuticals Inc. and its subsidiaries (the
Company or Cumberland) is a specialty pharmaceutical company,
which was incorporated in Tennessee on January 6, 1999. Its
mission is to provide high quality products to address
underserved medical needs. Cumberland is focused on acquiring
rights to, developing, and commercializing branded prescription
products for the acute care and gastroenterology markets.
The Company’s corporate operations and product acquisitions
have been funded by a combination of equity and debt financings.
The Company focuses its resources on maximizing the commercial
potential of its products, as well as developing new product
candidates, and has outsourced manufacturing and distribution to
carefully selected entities with the appropriate expertise and
infrastructure to support these activities.
In order to create access to a pipeline of early-stage product
candidates, the Company formed a subsidiary, Cumberland Emerging
Technologies (CET), which assists universities and other
research organizations to help bring biomedical projects from
the laboratory to the marketplace. The Company’s ownership
in CET is 86%. The remaining interest is owned by Vanderbilt
University and the Tennessee Technology Development Corporation.
During 2002, CET’s losses reduced its equity to a deficit
position. Accordingly, the Company reduced minority interest to
zero and has recorded 100% of the losses associated with the
joint venture since that time in accordance with Accounting
Research Bulletin No. 51,
Consolidated Financial
Statements.
These losses amounted to
approximately $92,000, $22,000, and $172,000 at
December 31, 2004, 2005, and 2006, respectively. The
Company will recover the cumulative loss of $445,000 before any
income is allocated to the minority interest holders.
In December 2006, the Company created a new, wholly-owned
subsidiary, Cumberland Pharma Sales Corp., that includes the
Company’s newly acquired hospital sales force who promote
the Company’s products,
Acetadote
®
and
Kristalose
®
.
These consolidated financial statements are stated in
U.S. dollars and are prepared under U.S. generally accepted
accounting principles. The accompanying consolidated financial
statements include the accounts of the Company and its majority
owned subsidiaries. All significant inter-company balances and
transfers have been eliminated.
(2) SIGNIFICANT
ACCOUNTING POLICIES
(a) Cash
and Cash Equivalents
For the purpose of the consolidated statements of cash flows,
cash and cash equivalents include highly liquid investments with
original maturities of three months or less when purchased.
(b) Accounts
Receivable
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The Company records allowances for
uncollectible amounts, cash discounts, chargebacks, and credits
to be taken by customers for product damaged in shipment based
on historical experience. The Company reviews its customer
balances on an individual account basis for collectibility. As
of December 31, 2005 and 2006, the allowance for
uncollectible amounts, cash discounts, chargebacks, and credits
for damaged product was $184,334 and $298,913, respectively.
Cash discounts are reductions to invoiced amounts offered to
customers for payment within a specified period of time from the
date of the invoice. The majority of the Company’s products
are distributed
F-7
Notes to
consolidated financial statements
through independent pharmaceutical wholesalers. In conjunction
with recognizing a sale to a wholesaler, “Net Product
revenue” and “Accounts Receivables” take into
account the sale of the product at the wholesale acquisition
cost and an accrual to reflect the difference between the
wholesale acquisition cost and the estimated average end-user
contract price. This accrual is calculated on a product specific
basis and is based on the estimated number of outstanding units
sold to wholesalers that will ultimately be sold under end-user
contracts. When the wholesaler sells the product to the end user
at the agreed upon end-user contract price, the wholesaler
charges the Company (“chargeback”) for the difference
between the wholesale acquisition price and the end-user
contract price and that chargeback is offset against the initial
accrual balance.
The Company’s estimate of the allowance for damaged product
is based upon historical experience of claims made for damaged
product. The Company recognizes revenue for its product when the
shipment is received by the customer. At this time, the Company
records a reduction in revenue for the estimate of product
damaged in shipment as the damaged product may not always be
discovered upon receipt of the product by the customer.
Accrued balances for discounts, chargebacks, and credits for
damaged product are recorded as a reduction to “Accounts
Receivable.” The majority of the 2006 allowance relates to
anticipated chargebacks.
(c) Inventories
The Company utilizes third parties to manufacturer and package
finished goods for sale, takes title to the finished goods at
the time of shipment from the manufacturer, and warehouses such
goods until distribution and sale. The Company’s inventory
was comprised completely of finished goods at December 31,
2005 and 2006. Inventories are stated at the lower of cost or
market. Cost is determined using the
first-in,
first-out method (FIFO).
In 2004, the Company recorded the net impact of an insurance
recovery of $265,588 related to the settlement of an insurance
claim for $73,815 of damaged inventory. The cost of the
inventory included in cost of products sold has been offset by a
portion of the insurance proceeds.
(d) Prepaid
Assets
Prepaid assets consist of the prepaid premium for
directors’ and officers’ insurance, product liability
insurance, prepaid consulting services, etc. The Company
expenses or amortizes all prepaid amounts as used or over the
period of benefit on a straight-line basis, as applicable.
(e) Property
and Equipment
Property and equipment, including leasehold improvements, are
stated at cost. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets, ranging
from three to 15 years. Leasehold improvements are
amortized over the shorter of the initial lease term plus its
renewal options, if renewal is reasonably assured, or the
remaining useful life of the related asset. Upon retirement or
disposal of assets, the asset and accumulated depreciation
accounts are adjusted accordingly and any gain or loss is
reflected in operations. Repairs and maintenance costs are
expensed as incurred. Improvements that extend an asset’s
useful life are capitalized.
The Company’s intangible assets consist of costs incurred
related to licenses, trademarks, and patents.
F-8
Notes to
consolidated financial statements
In 2006, the Company acquired the exclusive
U.S. commercialization rights (licenses) to
Kristalose
®
.
The cost of acquiring the licenses of products that are approved
for commercial use are capitalized and are amortized ratably
over the estimated life of the products. At the time of
acquisition, the product life is estimated based upon the term
of the license agreement, patent life or market exclusivity of
the products and our assessment of future sales and
profitability of the product. We assess this estimate regularly
during the amortization period and adjust the asset value or
useful life when appropriate. The total purchase price, which
includes the cost of the U.S. commercialization rights and
other related costs of obtaining these licenses, is being
amortized on a straight-line basis over 15 years, which is
management’s estimate of the asset’s useful life.
Trademarks are amortized on a straight-line basis over
10 years, which is management’s estimate of the
asset’s useful life.
Patents consist of outside legal costs associated with obtaining
patents for products that have already been approved for
marketing by the Food and Drug Administration (FDA). Upon
issuance of a patent, the finite useful economic life of the
patent (or family of patents) is determined, and the patent is
amortized over such useful life. If it becomes probable that a
patent will not be issued, related costs associated with the
patent application will be expensed at that time. All costs
associated with obtaining patents for products that have not
been approved for marketing by the FDA are expensed as incurred.
When the Company acquires license agreements, product rights,
and other identifiable intangible assets, it records the
aggregate purchase price as an intangible asset. The Company
allocates the purchase price to the fair value of the various
intangible assets in order to amortize their cost as an expense
in the consolidated statements of income, over the estimated
useful life of the related asset.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
, long-lived assets, such as
property, plant, and equipment, and purchased intangible assets
subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If circumstances
require a long-lived asset be tested for possible impairment,
the Company first compares undiscounted cash flows expected to
be generated by an asset to the carrying value of the asset. If
the carrying value of the long-lived asset is not recoverable on
an undiscounted cash flow basis, an impairment is recognized to
the extent that the carrying value exceeds its fair value. Fair
value is determined through various valuation techniques
including discounted cash flow models, quoted market values and
third-party independent appraisals, as considered necessary.
Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell, and no longer depreciated. The
assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset
and liability sections of the balance sheet. The Company
recorded no impairment charges during the three-year period
ended December 31, 2006.
The Company recognizes revenue in accordance with the Security
and Exchange Commission’s (SEC) Staff Accounting
Bulletin No. 101,
Revenue Recognition in Financial
Statements
as amended by Staff Accounting
Bulletin No. 104 (together, SAB 101), and
SFAS No. 48,
Revenue Recognition When Right of
Return Exists
(SFAS 48). Revenue is realized or
realizable and earned when all of the following criteria are
met: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the seller’s price to the buyer is fixed and
determinable; and (4) collectibility is
F-9
Notes to
consolidated financial statements
reasonably assured. SFAS 48 states that revenue from
sales transactions where the buyer has the right to return the
product shall be recognized at the time of sale only if
(1) the seller’s price to the buyer is substantially
fixed or determinable at the date of sale, (2) the buyer
has paid the seller, or the buyer is obligated to pay the seller
and the obligation is not contingent on resale of the product,
(3) the buyer’s obligation to the seller would not be
changed in the event of theft or physical destruction or damage
of the product, (4) the buyer acquiring the product for
resale has economic substance apart from that provided by the
seller, (5) the seller does not have significant
obligations for future performance to directly bring about
resale of the product by the buyer, and (6) the amount of
future returns can be reasonably estimated.
The Company’s net product revenue reflects reduction of
gross product revenue at the time of initial sales recognition
for estimated allowances for chargebacks, discounts, and damaged
goods and accruals of rebates, product returns, and
administrative fees for product promotion and fee for services.
Allowances of $184,334 and $298,913 as of December 31, 2005
and 2006, respectively, for chargebacks, discounts and
allowances for product damaged in shipment reduce accounts
receivable, and accrued balances of $83,056 and $742,678 as of
December 31, 2005 and 2006, respectively, for rebates,
product returns, and administrative fees increase other accrued
expenses.
As discussed in 2(b) above, the allowances for chargebacks,
discounts, and damaged goods are determined on a
product-by-product
basis, and are established by management as the Company’s
best estimate at the time of sale based on each product’s
historical experience adjusted to reflect known changes in the
factors that impact such allowances. These are established based
on the contractual terms with direct and indirect customers and
analysis of historical levels of chargebacks, discounts, and
credits claimed for damaged product.
Other organizations, such as managed care providers, pharmacy
benefit management companies, and government agencies, may
receive rebates from the Company based on negotiated contracts
to carry our product or reimbursements for filled prescriptions.
These entities represent indirect customers of the Company. In
addition, the Company may provide rebates to the end user. In
conjunction with recognizing a sale to a wholesaler, sales
revenues are reduced and accrued expenses are increased by our
estimates of the rebates that will be owed.
Consistent with industry practice, the Company maintains a
return policy that allows customers to return product within a
specified period prior to and subsequent to the expiration date.
The Company’s estimate of the provision for returns of
expired product is based upon historical experience with actual
returns.
The Company has also entered into agreements with key
wholesalers, resulting in product promotion and fee service
costs. In accordance with Emerging Issues Task Force (EITF)
No. 01-9,
Accounting for Consideration Given by a Vendor (Including a
Reseller of the Vendor’s Products)
(EITF
01-9),
these
administrative costs have been netted against product revenues.
For the first quarter of 2006 and the years ended
December 31, 2004 and 2005, the Company had two products
for which it received a co-promotion fee under the related
co-promotion agreements. The Company recognized the promotional
fees as revenue from co-promotion agreements during the period
in which the sales of the respective product occurred.
Other revenue is primarily comprised of revenue generated by CET
through consulting services, development funding, either from
private sector investment or through federal Small Business
(SBIR/STTR) grant programs, and lease income generated by
CET’s Life Sciences Center, a research center that provides
scientists with access to flexible lab space and other resources
to develop their products. The Company has received two grants
for medical research and a grant related to the product
Acetadote
®
.
F-10
Notes to
consolidated financial statements
Revenue related to grants is recognized when all conditions
related to such grants have been met. Grant revenue totaled
approximately $50,000, $253,000, and $375,000 for the years
ended December 31, 2004, 2005, and 2006, respectively.
The Company provides for deferred taxes using the asset and
liability approach. Under this method, deferred tax assets and
liabilities are recognized for future tax consequences
attributable to operating loss and tax credit carryforwards, as
well as differences between the carrying amounts of existing
assets and liabilities and their respective tax bases. The
Company’s principal differences are related to timing of
deductibility of certain items, such as depreciation,
amortization, and expense for options issued to nonemployees.
Deferred tax assets and liabilities are measured using enacted
tax rates, which are expected to apply to taxable income in the
years such temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period of
enactment.
Prior to January 1, 2006, the Company applied the
intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
, and related
interpretations and provided the required pro-forma disclosures
of SFAS No. 123,
Accounting for Stock-Based
Compensation
(SFAS 123) and
SFAS No. 148,
Accounting for Stock-Based
Compensation—Transition and Disclosure-an Amendment of FASB
Statement No. 123.
Under this method, compensation
expense is recorded only if the current market price of the
underlying stock exceeded the exercise price on the date of
grant. All options granted by the Company had an exercise price
equal to or greater than the market price of the underlying
stock on the date of grant.
Effective January 1, 2006, the Company adopted the
requirements of SFAS No. 123 (revised),
Share-Based
Payment
(SFAS 123R), utilizing the prospective method
of adoption. Under this approach, SFAS 123R applies to new
awards and the modification, repurchase, or cancellation of
outstanding awards beginning on January 1, 2006. Under the
prospective method of adoption, compensation cost recognized in
2006 includes only share-based compensation cost for all
share-based payments granted subsequent to January 1, 2006.
The cost is based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R and is
recognized as expense over the employee’s requisite service
period. The Company calculates the fair value of employee
options using the Black-Scholes option pricing model. No
compensation cost for share-based payments granted prior to, but
not yet vested as of January 1, 2006 has been recognized.
Because the Company used the minimum value method for purposes
of estimating fair value under SFAS No. 123 prior to
January 1, 2006, no pro forma disclosures (as required by
SFAS 123 related to 2004 and 2005) are permitted under
SFAS 123R.
|
|
|
|
(k)
|
Research and
Development
|
Research and development costs are expensed in the period
incurred. Research and development costs are comprised mainly of
clinical trial expenses, salary and wages, and other related
costs such as materials and supplies. Development expense
includes activities performed by third-party providers
participating in the Company’s clinical studies. The
Company accounts for these costs based on estimates of work
performed, patient enrollment, or fixed fee for services.
F-11
Notes to
consolidated financial statements
Advertising costs, including samples and print materials, are
expensed as incurred and amounted to $777,010, $479,361, and
$738,647 in 2004, 2005, and 2006, respectively.
The Company expenses distribution costs as incurred.
Distribution costs included in sales and marketing expenses
amounted to $610,424, $365,331, and $436,115 in 2004, 2005, and
2006, respectively.
The Company accounts for net income per share in accordance with
Statement of Financial Accounting Standards No. 128,
Earnings per Share.
Basic net income per share is
calculated by dividing net income by the weighted average number
of shares outstanding. Except where the result would be
antidilutive to income from continuing operations, diluted
earnings per share is calculated by assuming the conversion of
convertible instruments and the elimination of related interest
expense, and the exercise of stock options, as well as their
related income tax benefits.
The following table reconciles the numerator and the denominator
used to calculate diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
558,204
|
|
|
|
1,954,319
|
|
|
|
4,404,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding—basic
|
|
|
4,541,076
|
|
|
|
4,747,866
|
|
|
|
4,898,595
|
|
|
Preferred stock shares
|
|
|
855,495
|
|
|
|
855,495
|
|
|
|
855,495
|
|
|
Dilutive effect of stock options
and warrants
|
|
|
2,344,569
|
|
|
|
2,441,684
|
|
|
|
2,262,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding—diluted
|
|
|
7,741,140
|
|
|
|
8,045,045
|
|
|
|
8,016,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of outstanding stock options that are excluded from
the above calculation, as their impact would be anti-dilutive,
was 18,038 for the year ended December 31, 2006. There were
no anti-dilutive outstanding options as of December 31,
2004 and 2005. The convertible promissory notes were excluded
from the diluted computation in 2004, as they were anti-dilutive.
Total comprehensive income was comprised solely of net income
for all periods presented.
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management of the Company to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the period. Significant items subject to
estimates and assumptions include those related to chargebacks,
rebates, discounts, credits for damaged product, and returns,
the valuation and determination of useful lives of
F-12
Notes to
consolidated financial statements
intangible assets and the rate such assets are amortized, and
the realization of deferred tax assets. Actual results could
differ from those estimates.
|
|
|
|
(q)
|
Recently Issued
Accounting Standards
|
In September 2005, the Emerging Issues Task Force issued EITF
No.
04-13,
Accounting for Purchases and Sales of Inventory with the Same
Counterparty
(EITF
01-14).
EITF
04-13
provides guidance as to when purchases and sales of inventory
with the same counterparty should be accounted for as a single
exchange transaction. EITF
04-13
also
provides guidance as to when a nonmonetary exchange of inventory
should be accounted for at fair value. EITF
04-13
will
be applied to new arrangements entered into, and modifications
or renewals to existing arrangements occurring after
January 1, 2007. The application of EITF
04-13
is not
expected to have a material impact on the Company’s
consolidated financial statements.
In July 2006, the Financial Accounting Standards Board (FASB)
issued FIN No. 48,
Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement 109
(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s
financial statements and prescribes a threshold of
more-likely-than-not for recognition of tax benefits of
uncertain tax positions taken or expected to be taken in a tax
return. FIN 48 also provides related guidance on
measurement, derecognition, classification, interest and
penalties, and disclosure. The provisions of FIN 48 will be
effective for the Company on January 1, 2007, with any
cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The Company is in
the process of assessing the impact of adopting FIN 48 on
its results of operations and financial position.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement
(SFAS 157). SFAS 157
defines fair value, establishes a framework for the measurement
of fair value, and enhances disclosures about fair value
measurements. The Statement does not require any new fair value
measures. The Statement is effective for fair value measures
already required or permitted by other standards for fiscal
years beginning after November 15, 2007. The Company is
required to adopt SFAS 157 beginning on January 1,
2008. SFAS 157 is required to be applied prospectively,
except for certain financial instruments. Any transition
adjustment will be recognized as an adjustment to opening
retained earnings in the year of adoption. The Company is
currently evaluating the impact of adopting SFAS 157 on its
results of operations and financial position.
(3) PROPERTY
AND EQUIPMENT
Property and equipment consist of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
|
|
|
|
|
|
|
|
|
useful
lives
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Computer hardware and software
|
|
|
3-5 years
|
|
|
$
|
97,862
|
|
|
|
119,143
|
|
|
Office equipment
|
|
|
3-15 years
|
|
|
|
23,521
|
|
|
|
24,167
|
|
|
Furniture and fixtures
|
|
|
5-10 years
|
|
|
|
119,328
|
|
|
|
140,866
|
|
|
Leasehold improvements
|
|
|
15 years
|
|
|
|
273,016
|
|
|
|
289,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
513,727
|
|
|
|
573,441
|
|
|
Less accumulated depreciation and
amortization
|
|
|
|
|
|
|
(139,783
|
)
|
|
|
(207,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
373,944
|
|
|
|
365,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
Notes to
consolidated financial statements
Depreciation and amortization expense during 2004, 2005, and
2006 was $39,216, $48,862, and $67,884, respectively, and is
included in the consolidated statements of income in general and
administrative expense.
(4) INTANGIBLE
ASSETS
Intangible assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
46,986
|
|
|
|
46,986
|
|
|
Less accumulated amortization
|
|
|
(26,323
|
)
|
|
|
(31,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total trademarks
|
|
|
20,663
|
|
|
|
15,986
|
|
|
License
|
|
|
—
|
|
|
|
10,303,595
|
|
|
Less accumulated amortization
|
|
|
—
|
|
|
|
(515,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total license
|
|
|
—
|
|
|
|
9,788,414
|
|
|
Patents
|
|
|
16,312
|
|
|
|
29,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,975
|
|
|
|
9,834,270
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense, excluding amortization of product license
rights of $515,181 in 2006, for fiscal years 2004, 2005, and
2006 was $4,790, $4,675, and $4,677, respectively, and is
reflected in general and administrative expenses on the
accompanying consolidated statements of income. Amortization
expense, including the amortization of product licenses, is
expected to be approximately $690,000 in each of the years 2007
through 2011.
In April 2006, the Company completed a transaction to acquire
exclusive U.S. commercial rights (product licenses) for
Kristalose
®
for fair value of $10,303,595. This amount includes cash paid on
the effective date of the agreement of $6,500,000, installment
payments discounted using an interest rate of 7.33% of
$1,397,560 and $2,426,377 due April 7, 2007 and
April 7, 2009, respectively, and acquisition costs of
$13,775, and is net of the fair value of services received by
the Company in 2006 of $34,117 under a transition agreement. The
fair value of these services was included in selling and
marketing expenses.
(5) LONG-TERM
DEBT
A summary of long-term debt is as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
281,209
|
|
|
|
825,951
|
|
|
Term note payable
|
|
|
—
|
|
|
|
4,583,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281,209
|
|
|
|
5,409,283
|
|
|
Less current portion
|
|
|
281,209
|
|
|
|
1,833,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
3,575,951
|
|
|
|
|
|
|
|
|
|
|
|
In August and September 2003, the Company issued nine unsecured
promissory notes (the notes) with a combined face value of
$500,000 to several investors with original maturity dates of
130 days. One of the notes in the amount of $100,000 was
issued to a member of the Company’s Board of Directors, and
the transaction is considered to be a related party transaction.
These notes bore interest at the
F-14
Notes to
consolidated financial statements
contractual rate of 12% per annum for the first
30 days and 15% per annum thereafter. In addition to
the contractual interest rate, if the Company had not paid all
amounts due under the notes, the Company agreed to grant stock
options at the rate of 770 shares of common stock per
$50,000 face value of the notes on each of (i) the
30 day after the issuance of the notes and (ii) on a
continuing basis, each successive
30-day
period thereafter, or portion thereof, as the notes remained
outstanding. The holders of the notes had, at their option,
until the maturity date of the notes, the right to convert all
or a portion of unpaid principal and interest into shares of the
Company’s common stock at an exercise price of one share
per $12. In accordance with the terms of the note agreements,
the Company also agreed to issue stock options upon the issuance
of the notes to purchase shares of the Company’s common
stock at an exercise price of $12 per share and at the rate
of 1,540 shares of common stock per $50,000 face value of
the notes.
The aggregate fair value of the stock options granted upon the
issuance of the notes was $153,538. In accordance with
Accounting Principles Board Opinion No. 14,
Accounting
for Convertible Debt and Debt Issued with Stock Purchase
Warrants,
the portion of the proceeds of the notes which is
allocable to the options was recorded as paid-in capital. The
allocation of value between the notes and the options of
$346,462 and $153,538, respectively, was based on the fair value
of the stock options at time of issuance, since the instruments
qualified for equity classification under EITF
No. 00-19,
Accounting for Derivative Instruments Indexed to, and
Potentially Settled in, a Company’s Own
Stock.
The discount on the instruments created by
an allocation of value to the options resulted in an effective
conversion price less than the fair market value of the
Company’s common stock on the day the debt was issued
(commitment date). In accordance with EITF
No. 98-5,
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios
, and EITF
No. 00-27,
Application of Issue
No. 98-5
to Certain Convertible Instruments,
this difference was the
per share beneficial conversion feature and resulted in an
additional discount on the notes of $153,538. The total of the
discounts on the notes of $307,076 was accreted back to the
notes redemption value based on the effective-interest method
over the term of the notes. The Company amended the note
agreements in January 2004 to extend the maturity date an
additional 130 days. The modification was not considered to
be substantial under EITF
No. 96-19,
Debtors Accounting for a Modification or Exchange of Debt
Instruments
(EITF 96-19),
and was accounted for as a modification of the original debt. In
accordance with
EITF 96-19,
since the modification of the terms did not result in a debt
extinguishment, the change in the fair value of the embedded
conversion feature at the modification date (difference between
the fair value of the embedded conversion option immediately
before and after the modifications) of $45,534 should be
accounted for as an additional debt discount resulting in an
effect on the subsequent recognition of interest expense for the
associated debt. The amendments provided for an additional 1,540
stock options per $50,000 face value of the notes upon extension
of the notes. The fair value of the stock options, $151,074, was
recognized as additional interest expense over the extension
period. The modified notes had a 15% contractual interest rate
and contained similar provisions for granting 770 stock options
per $50,000 face value of the notes of each
30-day
anniversary of the notes being outstanding in the event of
nonpayment on the
agreed-upon
due dates. The following is a summary of the settlement of the
notes in May 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
Principal
|
|
|
interest
|
|
|
Total
|
|
|
|
|
|
|
|
Settled in 19,822 shares of
common stock
|
|
$
|
222,000
|
|
|
|
15,864
|
|
|
|
237,864
|
|
|
Settled in cash
|
|
|
278,000
|
|
|
|
37,053
|
|
|
|
315,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
500,000
|
|
|
|
52,917
|
|
|
|
552,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
Notes to
consolidated financial statements
During 2004, interest expense of $1,011,631 included $710,794
recorded by the Company as a result of the notes, which included
interest based on the contractual interest rate of the notes of
$29,167, the accretion of the discounts on the notes of $227,174
resulting from the fair value of the options granted when the
notes were issued and modified and the beneficial conversion
feature, and the fair value of the options issued at each thirty
day anniversary of $454,453.
At December 31, 2003, the Company’s revolving line of
credit provided that the Company could borrow the lesser of
$3.5 million or 80% of eligible accounts receivable, plus
50% of eligible inventory. The interest rate on the line was
LIBOR, plus 4% and 2.5% at December 31, 2003 and 2004,
respectively (5.13% and 4.92% as of December 31, 2003 and
2004, respectively). In 2004, the remaining unamortized discount
related to the value of stock warrants to purchase
12,500 shares of common stock at an exercise price of
$12 per share that were issued when the Company modified
this line of credit in 2003 was $103,806 and was included in
interest expense. The warrants, which were outstanding and
exercisable as of December 31, 2006 and expire October
2013, were valued utilizing the Black-Scholes model, with a
expected term of 10 years, 0% dividend yield, expected
volatility of 79%, and a risk-free interest rate of 4.26%.
In April 2006, the Company completed a transaction with Inalco
Biochemicals, Inc. and Inalco S.p.A. (collectively Inalco) to
acquire exclusive U.S. commercial rights for
Kristalose
®
.
In order to complete this transaction, funding was obtained from
Bank of America in the form of a three-year term loan for
$5,500,000 and a new two-year revolving line of credit
agreement, both with an interest rate of LIBOR plus 2.5% (7.83%
as of December 31, 2006). The term loan is being paid off
in quarterly installments of $458,334, with final payment due in
2009. The Company can borrow under the revolving line of credit
through April 2008 the lesser of $4.0 million or 80% of
eligible accounts receivable, plus 50% of eligible inventory.
The Company must pay an annual commitment fee of
1
/
2
of 1% on the unused portion of the commitment. The credit
agreement provides that borrowings are collateralized by a first
priority lien on all of the Company’s assets, except for
the Company’s equity interest in Cumberland Emerging
Technologies, Inc. The credit agreement contains an adverse
subjective acceleration clause and also requires that the
Company maintain a lockbox. However, cash received in the
lockbox is not required to be applied against amounts borrowed
under the line of credit. This credit agreement contains various
covenants and the Company was in compliance with all covenants
at December 31, 2006. As of December 31, 2005 and
2006, the Company has borrowed $281,209 and $825,951,
respectively, under its revolving line of credit and had
additional credit available under the revolving line of credit
of approximately $2,982,000 at December 31, 2006. In
conjunction with these agreements, the Company issued warrants
to purchase up to 1,979 share of common stock at an
exercise price of $18 per share, which expire in April 2016 and
are outstanding and exercisable as of December 31, 2006.
The estimated fair value of these warrants of $25,680, as
determined using the Black-Scholes model utilizing a expected
term of 10 years, risk-free interest rate of 4.89%,
volatility of 60%, and 0% dividend yield, has been recorded in
the accompanying consolidated financial statements as equity and
deferred financing costs.
On September 4, 2003, the Company borrowed $1,000,000 from
S.C.O.U.T. Healthcare Fund, L.P. (S.C.O.U.T.) in the form of an
uncollateralized convertible promissory note with a maturity
date of September 3, 2004. This transaction is a related
party transaction as the general partner of S.C.O.U.T. serves on
the Board of Directors of the Company. The note bore interest at
a fixed annual rate of 10%. Pursuant to the terms of the note,
on its maturity date, the principal value of the note plus any
accrued interest totaling $1,100,004 automatically converted
into 91,667 shares of common stock of the Company. Total
interest expense under this note in 2004 was $67,670.
In the second quarter of 2005, the Company received
approximately $2,000,000 from various individuals and companies
in exchange for uncollateralized convertible promissory notes
with maturity
F-16
Notes to
consolidated financial statements
dates six months from the date of issuance. The notes bore
interest at a fixed annual rate of 3.5%. In the fourth quarter
of 2005, and pursuant to the terms of the note, the principal
value of the note of $2,000,000, plus all accrued interest of
$32,488, converted into 112,916 shares of the
Company’s common stock. Accrued interest of $2,205 was paid
in cash at the request of the noteholder.
Future maturities of debt at December 31, 2006, by year and
in the aggregate, were as follow:
|
|
|
|
|
|
|
2007
|
|
$
|
1,833,332
|
|
|
2008
|
|
|
2,659,281
|
|
|
2009
|
|
|
916,670
|
|
|
|
|
|
|
|
|
Total debt payments
|
|
$
|
5,409,283
|
|
|
|
|
|
|
|
Interest expense associated with the Company’s long-term
debt and other long-term obligations consist of the following
components for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Noncash interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing
costs—revolving line of credit
|
|
$
|
—
|
|
|
|
—
|
|
|
|
14,433
|
|
|
Amortization of deferred financing
costs—term note payable
|
|
|
103,806
|
|
|
|
—
|
|
|
|
13,231
|
|
|
Options grant
expense—unsecured promissory notes
|
|
|
454,453
|
|
|
|
—
|
|
|
|
—
|
|
|
Accretion of
discount—unsecured promissory notes
|
|
|
227,174
|
|
|
|
—
|
|
|
|
—
|
|
|
Accretion of
discount—deferred purchase price
|
|
|
—
|
|
|
|
—
|
|
|
|
210,220
|
|
|
Accretion of discount—product
promotion costs
|
|
|
—
|
|
|
|
—
|
|
|
|
101,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
785,433
|
|
|
|
—
|
|
|
|
339,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit and term
note payable
|
|
|
75,841
|
|
|
|
57,967
|
|
|
|
351,875
|
|
|
Uncollateralized convertible
promissory notes
|
|
|
67,670
|
|
|
|
34,693
|
|
|
|
—
|
|
|
Unsecured promissory notes
|
|
|
29,167
|
|
|
|
—
|
|
|
|
—
|
|
|
Other long-term obligations
|
|
|
53,520
|
|
|
|
(29,456
|
)
|
|
|
30,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226,198
|
|
|
|
63,204
|
|
|
|
382,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
1,011,631
|
|
|
|
63,204
|
|
|
|
721,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) OTHER
LONG-TERM OBLIGATIONS
Other long-term obligations consist of the following components
at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Deferred purchase price, net of
discount of $465,843
|
|
$
|
—
|
|
|
|
4,034,157
|
|
|
Third-party development costs
|
|
|
410,846
|
|
|
|
410,846
|
|
|
Third-party sales force costs
|
|
|
329,169
|
|
|
|
—
|
|
|
Product promotional costs
|
|
|
1,376,401
|
|
|
|
578,111
|
|
|
Other
|
|
|
—
|
|
|
|
110,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,116,416
|
|
|
|
5,133,860
|
|
|
Less current portion
|
|
|
1,127,455
|
|
|
|
2,052,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
988,961
|
|
|
|
3,081,359
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Notes to
consolidated financial statements
In April 2006, the Company entered into an agreement with Inalco
Biochemicals, Inc. and Inalco S.p.A. (collectively Inalco) to
acquire exclusive U.S. commercialization rights (the
rights) for
Kristalose
®
.
In order to complete this transaction, funding was obtained from
Bank of America in the form of a term loan and a new revolving
line of credit. Additionally, in accordance with the terms of
the agreement, the Company has deferred a portion of this
purchase price. The following is a summary of amounts deferred
under the agreement as of December 31, 2006:
|
|
|
|
|
|
|
First installment paid upon the
effective date of the agreement
|
|
$
|
6,500,000
|
|
|
Second installment of $1,500,000
due on April 7, 2007, net of $25,610 discount using an
effective interest rate of 7.33%, as of December 31, 2006
|
|
|
1,474,390
|
|
|
Third installment of $3,000,000
due on April 7, 2009, net of $440,233 discount using an
effective interest rate of 7.33%, as of December 31, 2006
|
|
|
2,559,767
|
|
|
|
|
|
|
|
|
|
|
|
10,534,157
|
|
|
Less amounts previously paid
|
|
|
6,500,000
|
|
|
|
|
|
|
|
|
Deferred purchase price, net of
unaccreted discount
|
|
$
|
4,034,157
|
|
|
|
|
|
|
|
During 2000, the Company signed an agreement with a third party
to cover a variety of development efforts related to a specific
pharmaceutical drug, including preparation of submissions to the
FDA. In accordance with the agreement, the Company was billed,
and the Company expensed, approximately $1,010,000 during the
fiscal years 2001 through 2003. As of December 31, 2006,
the Company has paid approximately $600,000 of this balance and
has accrued approximately $410,000 as a long-term obligation.
The balance of approximately $410,000 is due in the following
timeframe (a) approximately $205,000 due no later than
submission of an application to the FDA, and
(b) approximately $205,000 due no later than FDA approval.
If neither the submission of the FDA application nor FDA
approval occurs due to the Company terminating the project, the
$410,000 will become due and payable and will accrue interest at
12.5% until paid.
The agreement also calls for contingent payments upon certain
milestones. Upon meeting the first milestone, New Drug
Application (NDA) submission for the pharmaceutical drug and FDA
acceptance of the submission for review, a contingent payment of
approximately $205,000 will become due and payable. Upon meeting
the second milestone, FDA approval, a contingent payment of
approximately $1,005,000 will become due and payable as follows:
approximately $800,000 immediately and approximately $205,000 in
twelve monthly installments starting on the date the milestone
is met. Since the payments are contingent on specific events
which may or may not occur in the future, and which have not
occurred or are deemed probable of occurring as of
December 31, 2006, the contingent liability for these
amounts of approximately $1,200,000 has not been recorded.
In connection with the aforementioned agreement, the Company
granted 50,000 stock options with contingent vesting clauses to
purchase the Company’s common stock at an exercise price of
$3.25. Vesting for 20,000 of these options was contingent upon
an NDA submission for the product candidate and FDA acceptance
of the submission for review on or before a target date of
July 30, 2003. If the NDA submission were to occur three
months after the target date, 12,000 options would vest. If the
submission for the product occurred between three and six months
after this target, 5,000 options would vest. None of the 20,000
options vested since the milestone was not met within six months
subsequent to the target date. The third party will have the
ability to vest in 30,000 options if FDA approval occurs within
13 months after the NDA is accepted for review. If approval
occurs within 14 and 15 months after acceptance for review,
the third party will vest in 15,000 options. If approval occurs
between 15 and 18 months after acceptance, the third party
will vest in 7,500 options. No options will vest after
18 months. As of December 31, 2006, the NDA submission
for the product candidate has not been submitted to the FDA for
review. Because vesting for these options is contingent
F-18
Notes to
consolidated financial statements
on events, which may or may not occur in the future, and which
have not occurred as of December 31, 2006, the expense for
these options has not been accounted for in the accompanying
consolidated financial statements.
The Company outsources certain sales force activities through an
agreement with a third party. Under the terms of the original
two-year agreement, the third party would bill the Company for
services performed regardless of whether or not the services led
to the generation and collection of co-promotion fees. However,
the agreement provided for deferral of payment for certain
amounts during the initial 12 months of the program, which
ended in November 2002. Beginning in the 13th month
(December 2002), the cumulative deferred amounts became due no
later than the 24th month of the program (November 2003),
payable in monthly installments of principal and interest.
However, the Company amended the agreement in April 2003 to
extend the due date of such deferred amounts to January 31,
2004. In February 2004, the Company amended the agreement to
extend the due date of such deferred amounts to June 30,
2004, at which time the full amount deferred was due. In 2005,
the Company agreed to make equal monthly payments to pay off the
balance owed. The amounts due under this agreement at
December 31, 2005 and 2006 were $329,169 and $0,
respectively. Total fees billed by the third party under this
and similar agreements, including various amendments, and
expensed by the Company totaled approximately $2,960,000,
$3,082,000, and $3,393,000 in 2004, 2005, and 2006, respectively.
In 2005, the Company entered into an agreement with a key
wholesaler for settlement of amounts owed under a contract in
the amount of $2,100,000 to be paid in installments over
28 months. The Company recorded this liability based on its
net present value of the payments of $1,976,000 using an
interest rate of 10%. At December 31, 2005 and 2006, the
Company had recorded liabilities of approximately $1,376,000 and
$578,000, respectively, related to this arrangement. In 2006,
interest expense includes accretion of the discount of $101,709
related to this liability.
As stated above in note 5, interest expense associated with
the Company’s other long-term obligations in 2004, 2005,
and 2006 was $53,520, $(29,456), and $30,336, respectively. In
2005, amounts owed to a vendor were forgiven and the accrued
interest balance was reduced by that amount.
(7) Income
Taxes
Income tax benefit includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
|
—
|
|
|
|
(121,359
|
)
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(136,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
1,146,580
|
|
|
|
2,861,859
|
|
|
State
|
|
|
—
|
|
|
|
37,420
|
|
|
|
(28,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
1,184,000
|
|
|
|
2,833,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
1,184,000
|
|
|
|
2,696,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Notes to
consolidated financial statements
The Company’s effective income tax rate for 2004, 2005, and
2006 reconciles with the federal statutory tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Federal tax expense at statutory
rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
State income tax expense (net of
federal income tax benefit)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
Permanent differences
|
|
|
(51
|
)
|
|
|
1
|
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
Change in deferred tax asset
valuation allowance
|
|
|
88
|
|
|
|
192
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax benefit
|
|
|
—
|
%
|
|
|
154
|
%
|
|
|
158
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of the net deferred tax assets are as follows at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Net operating loss and tax credits
|
|
$
|
4,096,939
|
|
|
|
3,520,054
|
|
|
|
2,834,870
|
|
|
Depreciation and amortization
|
|
|
(15,000
|
)
|
|
|
(9,914
|
)
|
|
|
71,412
|
|
|
Allowance for accounts receivable
|
|
|
76,000
|
|
|
|
97,032
|
|
|
|
30,841
|
|
|
Inventory write-off
|
|
|
—
|
|
|
|
73,271
|
|
|
|
175,961
|
|
|
Deferred charges
|
|
|
179,900
|
|
|
|
358,302
|
|
|
|
399,010
|
|
|
Investment income
|
|
|
—
|
|
|
|
(10,448
|
)
|
|
|
(10,448
|
)
|
|
Employee stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
37,747
|
|
|
Expense for options and stock
grants to nonemployees
|
|
|
488,126
|
|
|
|
505,489
|
|
|
|
517,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,825,965
|
|
|
|
4,533,786
|
|
|
|
4,056,916
|
|
|
Less deferred tax asset valuation
allowance
|
|
|
(4,825,965
|
)
|
|
|
(3,349,786
|
)
|
|
|
(39,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
|
1,184,000
|
|
|
|
4,017,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. In order to
fully realize the deferred tax asset, the Company will need to
generate future taxable income of approximately $11,816,000
prior to the expiration of the net operating loss carryforwards
in 2025. Taxable income for the years ended December 31,
2004, 2005, and 2006 was $1,616,571, $1,969,198, and $2,139,954,
respectively. In the fiscal years 2004, 2005, and 2006, the
valuation allowance was reduced by $490,198, $1,476,179, and
$3,310,174, respectively, resulting in corresponding credits to
deferred income tax expense. Based upon the level of taxable
income over the last three years and projections for future
taxable income over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not
that the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances, at
December 31, 2006. The valuation allowance at
December 31, 2006 represents the deferred tax assets
associated with CET that the Company believes are not more
likely than not will be utilized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the
carryforward period are reduced.
The Company has federal net operating loss carryforwards of
approximately $6,255,000 at December 31, 2006 that expire
between 2022 and 2025. The Company also has state net operating
losses of approximately $9,615,000 that expire between 2016 and
2025. The Company has federal credit carryforwards of
approximately $323,000 that expire starting in 2021.
F-20
Notes to
consolidated financial statements
(8) SHAREHOLDERS’
EQUITY
Preferred stock shareholders are entitled to vote with the
holders of common stock, as each preferred share is entitled to
the number of votes the holder would be entitled to if converted
to shares of common stock immediately prior to the vote. They
are also entitled to receive dividends on an equal basis with
holders of common stock on an if-converted equivalent.
Preferred stock shareholders are entitled to receive a
$3.25 per share liquidation preference in the event of the
dissolution, liquidation, or winding up of the Company. If
assets are insufficient to permit full payment, preferred
holders are entitled to ratable distribution of the available
assets. Preferred shares are convertible, at the option of the
holder, at any time after issuance, at the rate of one share of
common stock for each share of preferred stock. The preferred
stock will automatically be converted into common stock in the
event of an underwritten public offering of the Company’s
common stock or in the event of a consolidation, merger, or sale
of substantially all of the assets of the Company. In addition,
preferred shareholders are entitled to adjustment of the ratio
of conversion of Series A Preferred Stock into common stock
to reduce dilution in the event that the Company issued
additional equity securities at a purchase price of less than
$3.25 per share.
|
|
|
|
(b)
|
Common Stock and
Warrants
|
In April 2004, the Company issued 43,000 shares of common
stock to a related party at a purchase price of $12 per
share for total proceeds of $516,000. Simultaneously with the
issuance of the shares of stock, the Company issued a stock
purchase warrant with a fair value of $196,200 to purchase
20,000 shares of common stock at an exercise price of
$12 per share at any time within seven years of issuance.
The warrants, all of which are outstanding as of
December 31, 2006, were valued using the Black-Scholes
model using the following assumptions: 0% dividend yield, 77%
volatility, and 3.90% risk-free interest rate. The shares of
stock and the stock warrants were recorded at their relative
fair value of $142,150 and $373,850, respectively.
In March 2005, the Company initiated a private placement
offering of its common stock. The purpose of this offering was
for working capital and for other general corporate purposes,
including, but not limited to, the acquisition and development
of pharmaceutical products. The offering was a private, limited
offering by the Company in reliance upon exemptions from the
federal registration provisions of the Securities Act of 1933,
as amended, promulgated by the SEC under Regulation D. This
offering was completed in 2005, and the Company issued
100,000 shares of common stock at $18 per share, for
total net proceeds of $1,789,364 (gross proceeds of
$1,800,000 net of cash offering costs of $10,636). The
Company issued 3,500 stock options with a fair value of $51,806
to a non-employee as compensation for consulting services
associated with the private placement. The fair value of these
options has been recorded as additional offering costs and as
stock options granted for services received.
In 2004 and 2005, the Company issued 111,489 and
112,916 shares of common stock, respectively, upon
conversion of certain promissory notes into shares of the
Company’s common stock. See note 5 for a more in-depth
discussion of these transactions.
During 2004, 2005, and 2006, the Company issued 25,267, 25,001,
and 13,759 shares of common stock, respectively, valued at
$303,204, $300,012, and $273,298, respectively, to executives,
related parties, and advisors as compensation for services, and
is included in general and administrative expenses in the
consolidated statements of income. Included in these amounts are
shares of common stock granted to board members of 15,600,
23,120, and 12,409 in 2004, 2005, and 2006, respectively, for
consulting services rendered. The expense associated with these
grants to board members was
F-21
Notes to
consolidated financial statements
$187,200, $277,400, and $248,998 in 2004, 2005, and 2006,
respectively. In addition, the Company issued 18,799, 8,825, and
18,167 net shares of common stock to key executives and an
advisor, who exercised options in 2004, 2005, and 2006,
respectively.
As disclosed in notes 5 and 8(b), at December 31,
2006, the Company had outstanding warrants to acquire
34,479 shares of its common stock. See notes 5 and
8(b) for further information.
(9) STOCK
OPTIONS
The Company has adopted the Cumberland Pharmaceuticals Inc. 1999
Stock Option Plan (the Plan) that includes both incentive stock
options and nonqualified stock options to be granted to
employees, officers, consultants, directors, and affiliates of
the Company. The Company has reserved 4,050,000 shares of
no par value common stock for issuance under this Plan.
Incentive stock options must be granted with an exercise price
not less than the fair market value of the common stock on the
grant date. The options granted to shareholders owning more than
10% of the common stock on the grant date must be granted with
an exercise price not less than 110% of the fair market value of
the common stock on the grant date.
The options are exercisable on the date(s) established by each
grant; however, options granted to officers or directors are not
exercisable until at least six months after grant date. The
maximum exercise life of an option is ten years from grant date
and is five years for stock options issued to 10% shareholders.
Vesting is determined on a
grant-by-grant
basis, in accordance with the terms of the Plan and the related
grant agreements.
Options granted in connection with financing arrangements
discussed in note 5 were separately approved by the board of
directors and do not reduce the amount of options available for
issuance under the Plan.
Stock option activity for the three-year period ended
December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
|
|
Number of
|
|
|
exercise price
|
|
|
|
|
shares
|
|
|
per
share
|
|
|
|
|
|
|
|
Options outstanding,
December 31, 2003
|
|
|
3,901,133
|
|
|
$
|
1.89
|
|
|
Options granted
|
|
|
170,625
|
|
|
|
12.01
|
|
|
Options exercised
|
|
|
(19,150
|
)
|
|
|
0.22
|
|
|
Options expired
|
|
|
(20,000
|
)
|
|
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding,
December 31, 2004
|
|
|
4,032,608
|
|
|
|
2.34
|
|
|
Options granted
|
|
|
131,350
|
|
|
|
12.98
|
|
|
Options exercised
|
|
|
(9,555
|
)
|
|
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding,
December 31, 2005
|
|
|
4,154,403
|
|
|
|
2.68
|
|
|
Options granted
|
|
|
47,975
|
|
|
|
18.38
|
|
|
Options exercised
|
|
|
(19,484
|
)
|
|
|
1.93
|
|
|
Options expired
|
|
|
(4,500
|
)
|
|
|
18.00
|
|
|
Options forfeited
|
|
|
(173,416
|
)
|
|
|
5.26
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding,
December 31, 2006
|
|
|
4,004,978
|
|
|
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
F-22
Notes to
consolidated financial statements
Of the options outstanding in 2004, 2005, and 2006, 2,361,518,
2,388,018, and 2,391,864, respectively, were options issued to
one key executive.
The following table summarizes information concerning currently
outstanding and exercisable options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
Remaining
|
|
|
average
|
|
|
|
|
|
|
|
Range of
|
|
and expected
|
|
|
contractual
|
|
|
exercise
|
|
|
Options
|
|
|
Year
|
|
Exercise
Prices
|
|
to vest
|
|
|
life
|
|
|
price
|
|
|
exercisable
|
|
|
|
|
|
|
|
1999
|
|
$0.20-0.22
|
|
|
422,840
|
|
|
|
2.06 years
|
|
|
$
|
0.21
|
|
|
|
422,840
|
|
|
1999
|
|
1.00-1.10
|
|
|
2,355,379
|
|
|
|
2.70 years
|
|
|
|
1.09
|
|
|
|
2,355,379
|
|
|
2000
|
|
1.85
|
|
|
94,200
|
|
|
|
3.55 years
|
|
|
|
1.85
|
|
|
|
94,200
|
|
|
2001
|
|
3.25
|
|
|
401,078
|
|
|
|
4.22 years
|
|
|
|
3.25
|
|
|
|
401,078
|
|
|
2002
|
|
3.25-3.58
|
|
|
162,108
|
|
|
|
5.03 years
|
|
|
|
3.26
|
|
|
|
162,108
|
|
|
2002
|
|
6.25
|
|
|
6,775
|
|
|
|
5.48 years
|
|
|
|
6.25
|
|
|
|
6,775
|
|
|
2003
|
|
6.25-12.00
|
|
|
227,923
|
|
|
|
6.32 years
|
|
|
|
8.21
|
|
|
|
227,923
|
|
|
2004
|
|
12.00-13.20
|
|
|
160,625
|
|
|
|
7.36 years
|
|
|
|
12.01
|
|
|
|
160,625
|
|
|
2005
|
|
12.00-18.00
|
|
|
131,075
|
|
|
|
7.15 years
|
|
|
|
12.97
|
|
|
|
58,110
|
|
|
2006
|
|
18.00-19.80
|
|
|
42,975
|
|
|
|
7.48 years
|
|
|
|
18.42
|
|
|
|
10,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,004,978
|
|
|
|
|
|
|
|
|
|
|
|
3,899,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of employee options granted during 2006 were
estimated using the Black-Scholes option pricing model and the
following assumptions:
|
|
|
|
|
|
|
Dividend yield
|
|
|
0%
|
|
|
Expected term (years)
|
|
|
3-7
|
|
|
Expected volatility (range)
|
|
|
47%-54%
|
|
|
Risk-free interest rate (range)
|
|
|
4.68%-5.08%
|
|
The Company determined the expected life of share options based
on the simplified method allowed by
SEC Staff Accounting
Bulletin No. 107.
Under this approach,
the expected term is presumed to be the average between the
weighted average vesting period and the contractual term. The
expected volatility over the term of the respective option was
based on the volatility of similar entities. In evaluating
similarity, the Company considered factors such as industry,
stage of life cycle, size, and financial leverage. The risk-free
rate is based on a zero-coupon U.S. Treasury bond with a
term substantially equal to the corresponding option’s
expected term. The Company has never declared or paid any cash
dividends and does not presently plan to pay cash dividends in
the foreseeable future. The Company has reviewed historical
termination behavior and does not anticipate any further
forfeitures on options granted during 2006.
The fair value of non-employee options was estimated using the
Black-Scholes option pricing model and the following assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
Expected term (years)
|
|
|
10
|
|
|
|
10
|
|
|
|
.17-10
|
|
|
Expected volatility (range)
|
|
|
77%
|
|
|
|
77%
|
|
|
|
37%-63%
|
|
|
Risk-free interest rate (range)
|
|
|
3.90%
|
|
|
|
4.13%-4.39%
|
|
|
|
4.34%-4.42%
|
|
F-23
Notes to
consolidated financial statements
The Company determined the above assumptions utilizing the same
methodology as noted above for employees, except for the
expected term, which was calculated to be the contractual terms
of the options in accordance with SFAS 123R.
As previously discussed in item (j) of note 2, there
was no expense recorded in 2006 and there will be no expense in
future years associated with unvested employee stock option
awards outstanding as of January 1, 2006 due to the Company
utilizing the prospective method upon adoption of SFAS 123R.
The weighted average grant date fair value of share options
granted during the year ended December 31, 2004, 2005, and
2006 was approximately $12.00, $12.73, and $18.00, respectively.
The Company received cash from the exercise of stock options of
$4,950 and $9,000 during 2005 and 2006, respectively. Upon
exercise, the Company issues new shares of stock. During the
years ended December 31, 2004, 2005, and 2006, the
aggregate intrinsic value of options exercised under the Plan
was $225,587, $153,899, and $357,730, respectively, determined
as of the date of option exercise.
During the year ended December 31, 2006, the Company
recognized $141,836 of compensation expense related to stock
options and recognized a corresponding tax benefit of $37,747.
This amount consists of non-employee stock option expense of
$37,751 and employee stock option expense of $104,085. Such
expense is presented as a component of general and
administrative expenses. At December 31, 2006, there was
approximately $321,535 of unrecognized compensation cost related
to share-based payments granted in 2006, which is expected to be
recognized over a period of four years. This amount consists of
non-employee unrecognized compensation cost of $55,077 and
employee unrecognized compensation cost of $266,458.
The Company issued a total of 18,780, 23,800, and 12,000 stock
options to non-employees for services rendered by these
individuals in 2004, 2005, and 2006 as compensation for
assisting the Company’s management and supporting
operations. The amount of compensation expense recorded for such
services was $43,928, $226,709, and $37,751, in 2004, 2005, and
2006, respectively. Such expense is presented as a component of
general and administrative expenses. Included in these amounts
are options to purchase 16,780 shares of common stock at an
exercise price of $12.00 in 2004 and options to purchase
11,000 shares of common stock at an exercise price of
$18.00 in 2005 and that were granted to two board members.
(10) LEASES
The Company is obligated under long-term real estate leases for
office space expiring at various times through December 2011.
The Company also subleases a portion of the space under these
leases. Rent expense is recognized over the expected term of the
lease, including renewal option periods, on a straight-line
basis. Rent expense for 2004, 2005, and 2006 was $139,587,
$151,479, and $286,037, respectively, and sublease income was
$45,035, $49,131, and $71,173, respectively. Future minimum
lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) are:
|
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2007
|
|
$
|
375,461
|
|
|
2008
|
|
|
487,015
|
|
|
2009
|
|
|
492,278
|
|
|
2010
|
|
|
460,490
|
|
|
2011
|
|
|
46,711
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
1,861,955
|
|
|
|
|
|
|
|
F-24
Notes to
consolidated financial statements
Minimum lease payments have not been reduced by minimum sublease
rentals of $49,880 and $7,860 in 2007 and 2008, respectively,
under non-cancelable subleases.
During December of 2006, the Company signed a lease agreement
for additional office space at its West End location. The lease
agreement begins June 1, 2007 and ends on October 31,
2010. The additional cost of this agreement is approximately
$223,000 per year and has been included in the table above.
(11) MANUFACTURING
AND SUPPLY AGREEMENTS
The Company utilizes one supplier to manufacture each of its
products and product candidates. Although there are a limited
number of manufacturers of pharmaceutical products, management
believes that they could utilize other suppliers to manufacture
their prescription products on comparable terms. A change in
suppliers, any problems with such manufacturing operations or
capacity, or contract disputes with the suppliers, however,
could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.
The Company’s manufacturing and supply agreements with the
manufacturers of its products contain minimum purchase
obligations. For 2007, these obligations require the Company to
purchase approximately $2.1 million of product,
$2.4 million during 2008, $2.7 million during 2009,
$3.0 million during 2010, and $800,000 during 2011.
Beginning in April 2011 and continuing through the life of the
agreement, one of the manufacturing and supply agreements
requires minimum purchases of not less than 65% of the average
purchases in each of the three immediately preceding annual
periods.
The Company’s purchases under these agreements are
reflected in the cost of products sold in the accompanying
consolidated statements of income.
(12) CONTINGENCIES
The Company is currently party to one legal proceeding brought
about by an employee of a third-party contract sales
organization that does business with the Company. The lawsuit
asserts a multitude of claims arising out of the contract sales
organization’s decision to separate employment after the
employee claimed to have suffered a workers’ compensation
injury. The Company filed a Motion to Dismiss all of the claims
against the Company and its representatives. The oral arguments
were heard on the motion in November 2006. In December 2006, the
Magistrate Judge recommended the Company’s Motion to
Dismiss be granted on all claims.
(13) EMPLOYMENT
AGREEMENTS
Effective January 1, 2006, the Company entered into
employment agreements with its full-time and part-time
employees. Each employment agreement provides for a salary basis
for services performed, a potential annual bonus, and, if
applicable, a grant of incentive options to purchase the
Company’s common shares pursuant to an option agreement.
Two of the employment agreements address expense reimbursements
for relevant and applicable licenses and continuing education.
Employment agreements are amended each successive one-year
period, unless terminated.
(14) MARKET
CONCENTRATIONS
The Company currently focuses on acquiring, developing, and
commercializing branded prescription products for the acute care
and gastroenterology markets. The Company’s principal
financial instruments subject to potential concentration of
credit risk are accounts receivable, which are unsecured, and
cash equivalents. The Company’s cash equivalents consist
primarily of money market
F-25
Notes to
consolidated financial statements
funds. Certain bank deposits may at times be in excess of the
Federal Deposit Insurance Corporation (FDIC) insurance limits.
The Company’s primary customers are wholesale
pharmaceutical distributors in the U.S. Total revenues from
customers representing 10% or more of total revenues for the
respective years are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
Customer 1
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
22
|
%
|
|
Customer 2
|
|
|
13
|
|
|
|
33
|
|
|
|
20
|
|
|
Customer 3
|
|
|
27
|
|
|
|
13
|
|
|
|
25
|
|
Additionally, 92% and 67% of the Company’s accounts
receivable balances were due from these three customers at
December 31, 2005 and 2006, respectively.
(15) EMPLOYEE
BENEFIT PLAN
The Company sponsors an employee benefit plan that was
established January 1, 2006, the Cumberland Pharmaceuticals
401(k) Plan (the Plan) under section 401(k) of the Internal
Revenue Code of 1986, as amended, for the benefit of all
employees over the age of 21, having been employed by the
Company for at least six months. The Plan provides that
participants may contribute up to the maximum amount of their
compensation as set forth by the Internal Revenue Service each
year. Employee contributions are invested in various investment
funds based upon elections made by the employee. There were no
contributions made by the Company to the Plan in 2006.
(16) SUBSEQUENT
EVENTS
Beginning January 1, 2007, the Company’s newly formed
subsidiary, Cumberland Pharma Sales Corp., began full operations
for the purpose of employing the newly acquired hospital sales
force, which promotes the Company’s products,
Acetadote
®
and
Kristalose
®
in the acute care market. Previously, this sales force was
contracted through a third-party contract sales organization. In
October 2006, the Company notified the contract sales
organization that it was exercising its right to convert the
sales force to the Company’s employees and would,
therefore, not renew the contract sales agreement which expired
on December 31, 2006.
In January 2007, the Company’s board of directors approved
the Long-Term Incentive Compensation Plan, which was
subsequently approved by the shareholders in April 2007. The
purposes of the Long-Term Incentive Compensation Plan are to
encourage the Company’s employees and consultants to
acquire stock and other equity-based interests and is intended
to replace the Cumberland Pharmaceuticals Inc. 1999 Stock Option
Plan without impairing the vesting or exercise of any option
granted thereunder.
F-26
Cumberland
Pharmaceuticals Inc. and Subsidiaries
Schedule II—valuation
and qualifying accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column
B
|
|
|
Column
C
|
|
|
|
|
|
Column
E
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
Column
D
|
|
|
Balance
|
|
|
Column
A
|
|
beginning
|
|
|
costs and
|
|
|
other accounts
|
|
|
Deductions —
|
|
|
at end
|
|
|
Description
|
|
of
period
|
|
|
expenses
|
|
|
describe
|
|
|
describe(1)
|
|
|
of
period
|
|
|
|
|
|
|
|
Allowance for uncollectible
amounts, cash discounts, chargebacks, and credits issued for
damaged products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$
|
—
|
|
|
$
|
1,134,053
|
|
|
$
|
—
|
|
|
$
|
(944,094
|
)
|
|
$
|
189,959
|
|
|
December 31, 2005
|
|
|
189,959
|
|
|
|
616,908
|
|
|
|
—
|
|
|
|
(622,533
|
)
|
|
|
184,334
|
|
|
December 31, 2006
|
|
|
184,334
|
|
|
|
1,449,564
|
|
|
|
—
|
|
|
|
(1,334,985
|
)
|
|
|
298,913
|
|
|
Valuation allowance for deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$
|
5,316,163
|
|
|
$
|
(490,198
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,825,965
|
|
|
December 31, 2005
|
|
|
4,825,965
|
|
|
|
(1,476,179
|
)(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,349,786
|
|
|
December 31, 2006
|
|
|
3,349,786
|
|
|
|
(3,310,174
|
)(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
39,612
|
|
|
|
|
|
|
(1)
|
|
Write-off of uncollectible accounts, net of recoveries,
discounts, chargebacks, and credits taken by customers.
|
|
|
|
(2)
|
|
Includes a $1,184,000 reduction in the valuation allowance
reflecting the Company’s belief that the future recognition
of this amount of deferred tax assets is more likely than not.
Remaining decrease is due to the utilization of deferred tax
assets.
|
|
|
|
(3)
|
|
Includes a $2,833,303 reduction in the valuation allowance
reflecting the Company’s belief that the future recognition
of this amount of deferred tax assets is more likely than not.
Remaining decrease is due to the utilization of deferred tax
assets.
|
F-27
Part II
Information not
required in prospectus
|
|
|
|
ITEM 13.
|
OTHER EXPENSES OF
ISSUANCE AND DISTRIBUTION.
|
The expenses relating to the registration of the shares of
common stock being offered hereby, other than underwriting
discounts and commissions, will be borne by us. Such expenses
are estimated to be as follows:
|
|
|
|
|
|
|
Item
|
|
Amount
|
|
|
|
|
|
|
|
SEC registration fee
|
|
$
|
|
|
|
NASD filing fee
|
|
$
|
|
|
|
NASDAQ listing fee
|
|
$
|
|
|
|
Printing expenses
|
|
$
|
|
|
|
Legal fees and expenses
|
|
$
|
|
|
|
Accounting fees and expenses
|
|
$
|
|
|
|
Transfer agent and registrar
expenses
|
|
$
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
ITEM 14.
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
|
Our charter and bylaws provide for indemnification of our
directors to the fullest extent permitted by the Tennessee
Business Corporation Act, as amended from time to time. Our
directors shall not be liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty
as a director. The Tennessee Business Corporation Act provides
that a Tennessee corporation may indemnify its directors and
officers against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in
connection with any proceeding, whether criminal or civil,
administrative or investigative if, in connection with the
matter in issue, the individual’s conduct was in good
faith, and the individual reasonably believed: in the case of
conduct in the individual’s official capacity with the
corporation, that the individual’s conduct was in its best
interest; and in all other cases, that the individual’s
behavior was at least not opposed to its best interest; and in
the case of a criminal proceeding, the individual had no reason
to believe the individual’s conduct was unlawful. In
addition, we have entered into indemnification agreements with
our directors. These provisions and agreements may have the
practical effect in certain cases of eliminating the ability of
our shareholders to collect monetary damages from directors. We
believe that these contractual agreements and the provisions in
our charter and bylaws are necessary to attract and retain
qualified persons as directors.
|
|
|
|
ITEM 15.
|
RECENT SALES OF
UNREGISTERED SECURITIES.
|
In September 2003, we borrowed $500,000 from nine existing and
accredited shareholders pursuant to uncollateralized secured
notes payable with original maturity dates of 130 days.
These notes bore interest at 12% for the first 30 days and
15% thereafter. The holders of the notes had, at their option,
until the maturity date of the notes payable, the right to
convert all or a portion of the unpaid principal and interest
into shares of our common stock at a rate of $12.00 per share.
We also issued to these lenders options to purchase shares of
our common stock, at an exercise price of $12.00 per share,
and at the rate of 1,540 shares of common stock per $50,000
face value of the notes. If we had not prepaid all amounts due
and owing under the notes, we agreed to grant additional options
at the rate of 770 shares of common stock per $50,000 face
value on each of (i) the 30th day after the date of
the notes and (ii) on a continuing basis, each successive
30-day
period thereafter, or portion thereof, as the notes remained
outstanding. At December 31, 2003, the notes payable had
not been prepaid, so we granted options to acquire an additional
30,800 shares. We amended the notes agreements in
January 2004 to extend the maturity date 130 days. The
amendments granted an additional option to
II-1
Part II
purchase 1,540 shares per $50,000 face value upon extension
of the notes and contained similar provisions for granting
options in the event of nonpayment on the
agreed-upon
due dates. Based on the extension of the maturity date, to
purchase a total of 61,600 shares were earned by the
holders of the notes in 2004. We repaid these notes or settled
these notes in shares in May 2004. The issuance of these
securities was exempt from registration under the Securities Act
in reliance on Section 4(2) of the Securities Act.
In September 2003, we borrowed $1,000,000 from S.C.O.U.T.
Healthcare Fund, L.P., or S.C.O.U.T., in the form of a
convertible promissory note with a maturity date of September
2004. The President and majority shareholder of the general
partner of S.C.O.U.T., Dr. Lawrence W. Greer, serves on our
board of directors. Pursuant to the terms of the note, on its
maturity date, S.C.O.U.T. converted the principal value of the
note plus all interest accrued at a fixed rate of ten percent
per annum into 91,667 shares of our common stock at a price
of $12.00 per share.
On April 15, 2004, we issued 43,000 common shares at
$12.00 per share, for an aggregate consideration of
$516,000 and a five-year warrant to purchase 20,000 common
shares at $12.00 per share to S.C.O.U.T., which represented
to us that it was an accredited investor. This issuance was
exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act.
By an offering memorandum dated April 1, 2005, we offered
100,000 shares of our common stock at a purchase price of
$18.00 per share. Thirty investors subscribed for
100,000 shares in the aggregate, for an aggregate
consideration of $1,800,000. This issuance was exempt from
registration under the Securities Act in reliance on
Section 4(2) of the Securities Act.
By an offering memorandum dated May 5, 2005, we received
approximately $2,000,000 from approximately 41 investors in
exchange for uncollateralized convertible promissory notes with
a maturity date six months from the date of issuance. Upon
maturity, the principal and accrued interest payable on the
notes converted into 112,916 shares of common stock at a
rate of $18.00 per share. This issuance was exempt from
registration under the Securities Act in reliance on
Section 4(2) of the Securities Act.
Since January 1, 2004, we have granted options to purchase
287,610 shares of our common stock under the
1999 Option Plan to our employees, directors and
consultants at exercise prices ranging from $12.00 to
$22.00 per share. Of these, an aggregate of 775 shares
of our common stock were issued upon the exercise of stock
options.
Since January 1, 2004, we also issued an aggregate of
75,645 shares of common stock as compensation for services
pursuant to contracts. Restricted-stock legends were affixed to
the securities issued in these transactions. Our board of
directors determined that the fair value of the services
received equaled the value of the stock granted with values
ranging from $12.00 to $22.00 per share. The issuances of
common stock in connection with awards of restricted stock were
exempt either pursuant to Rule 701 or pursuant to
Section 4(2) of the Securities Act as transactions by an
issuer not involving a public offering.
|
|
|
|
ITEM 16.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
|
(a)
|
|
|
|
|
No.
|
|
Description
|
|
|
|
|
|
1.1*
|
|
Form of Underwriting Agreement.
|
|
3.1
|
|
Second Amended and Restated
Charter of Cumberland Pharmaceuticals Inc.
|
|
3.2
|
|
Amended and Restated Bylaws of
Cumberland Pharmaceuticals Inc.
|
II-2
Part II
|
|
|
|
|
No.
|
|
Description
|
|
|
|
|
|
4.1*
|
|
Specimen Common Stock Certificate
of Cumberland Pharmaceuticals Inc.
|
|
4.2
|
|
Warrant to Purchase Common Stock
of Cumberland Pharmaceuticals Inc., issued to Bank of America,
N.A. on October 21, 2003.
|
|
4.3*
|
|
Stock Purchase Warrant, issued to
S.C.O.U.T. Healthcare Fund L.P. on April 15, 2004.
|
|
4.4
|
|
Warrant to Purchase Common Stock
of Cumberland Pharmaceuticals Inc., issued to Bank of America,
N.A. on April 6, 2006.
|
|
4.5#
|
|
Form of Option Agreement under
1999 Stock Option Plan of Cumberland Pharmaceuticals Inc.
|
|
4.6*#
|
|
Form of Option Agreement under
2007 Long-Term Incentive Compensation Plan of Cumberland
Pharmaceuticals Inc.
|
|
4.7*#
|
|
Form of Agreement under
2007 Directors’ Compensation Plan of Cumberland
Pharmaceuticals Inc.
|
|
5.1*
|
|
Opinion of Adams and Reese LLP.
|
|
10.1†
|
|
Manufacturing and Supply Agreement
for N-Acetylcysteine, dated January 15, 2002, by and
between Bioniche Life Sciences, Inc. and Cumberland
Pharmaceuticals Inc.
|
|
10.2
|
|
Novation Agreement, dated
January 27, 2006, by and among Bioniche Life Sciences,
Inc., Bioniche Pharma Group Ltd., and Cumberland Pharmaceuticals
Inc.
|
|
10.3†
|
|
First Amendment to Manufacturing
and Supply Agreement for N-Acetylcysteine, dated
November 16, 2006, by and between Bioniche Teoranta and
Cumberland Pharmaceuticals Inc.
|
|
10.4†
|
|
Cardinal Health Contract Sales and
Services for Cumberland Pharmaceuticals Inc. Dedicated Sales
Force Agreement, dated May 16, 2006, by and between
Cardinal Health PTS, LLC and Cumberland Pharmaceuticals Inc.
|
|
10.5†
|
|
First Amendment to Contract Sales
and Service Agreement, dated July 19, 2006, by and between
Cardinal Health PTS, LLC and Cumberland Pharmaceuticals Inc.
|
|
10.6
|
|
Consent to Assignment by Cardinal
Health PTS, LLC to PG Holding Corporation of all of their
rights, title, interests and obligations under that certain
Cardinal Health Contract Sales and Services for Cumberland
Pharmaceuticals Inc. Dedicated Sales Force Agreement, dated
May 16, 2006, by and between Cardinal Health PTS, LLC and
Cumberland Pharmaceuticals Inc., as amended by that certain
First Amendment to Contract Sales and Service Agreement, dated
July 19, 2006, by and between Cardinal Health PTS, LLC and
Cumberland Pharmaceuticals Inc.
|
|
10.7†
|
|
Distribution Services Agreement,
dated August 3, 2000, by and between CORD Logistics, Inc.
and Cumberland Pharmaceuticals Inc.
|
|
10.8†
|
|
Strategic Alliance Agreement,
dated July 21, 2000, by and between F.H.
Faulding & Co. Limited and Cumberland Pharmaceuticals
Inc.
|
|
10.9†
|
|
Kristalose Agreement, dated
April 7, 2006, by and among Inalco Biochemicals, Inc.,
Inalco S.p.A., and Cumberland Pharmaceuticals Inc.
|
|
10.10†
|
|
License Agreement, dated
May 28, 1999, by and between Vanderbilt University and
Cumberland Pharmaceuticals Inc.
|
|
10.11#
|
|
Employment Agreement effective as
of January 1, 2007 by and between A.J. Kazimi and
Cumberland Pharmaceuticals Inc.
|
II-3
Part II
|
|
|
|
|
No.
|
|
Description
|
|
|
|
|
|
10.12#
|
|
Employment Agreement effective as
of January 1, 2007 by and between Jean W. Marstiller and
Cumberland Pharmaceuticals Inc.
|
|
10.13#
|
|
Employment Agreement effective as
of January 1, 2007 by and between Leo Pavliv and Cumberland
Pharmaceuticals Inc.
|
|
10.14#
|
|
Employment Agreement effective as
of January 1, 2007 by and between J. William Hix and
Cumberland Pharmaceuticals Inc.
|
|
10.15#
|
|
Employment Agreement effective as
of January 1, 2007 by and between David L. Lowrance and
Cumberland Pharmaceuticals Inc.
|
|
10.16*†
|
|
Second Amended and Restated Loan
Agreement by and between Cumberland Pharmaceuticals Inc. and
Bank of America, N.A., dated April 6, 2006.
|
|
10.17#
|
|
1999 Stock Option Plan of
Cumberland Pharmaceuticals Inc.
|
|
10.18*#
|
|
2007 Long-Term Incentive
Compensation Plan of Cumberland Pharmaceuticals Inc.
|
|
10.19*#
|
|
2007 Directors’
Compensation Plan of Cumberland Pharmaceuticals Inc.
|
|
10.20
|
|
Form of Indemnification Agreement
between Cumberland Pharmaceuticals Inc. and all members of its
Board of Directors.
|
|
10.21†
|
|
Lease Agreement, dated
September 10, 2005, by and between Nashville Hines
Development, LLC and Cumberland Pharmaceuticals Inc.
|
|
10.22*†
|
|
Sublease Agreement, dated
December 14, 2006, by and between Robert W.
Baird & Co. Incorporated and Cumberland Pharmaceuticals
Inc.
|
|
10.23†
|
|
Amended and Restated Lease
Agreement, dated November 11, 2004, by and between The
Gateway to Nashville LLC and Cumberland Emerging Technologies,
Inc.
|
|
10.24
|
|
First Amendment to Amended and
Restated Lease Agreement, dated August 23, 2005, by and
between The Gateway to Nashville LLC and Cumberland Emerging
Technologies, Inc.
|
|
21
|
|
Subsidiaries of Cumberland
Pharmaceuticals Inc.
|
|
23.1
|
|
Consent of KPMG LLP.
|
|
23.2*
|
|
Consent of Adams and Reese, LLP
(contained in Exhibit 5).
|
|
24
|
|
Powers of Attorney (contained on
the signature page hereto).
|
|
|
|
|
*
|
To be filed by amendment.
|
|
|
|
#
|
Indicates a management contract or compensatory plan.
|
|
|
|
†
|
Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from the Registration
Statement and submitted separately to the Securities and
Exchange Commission.
|
|
|
|
|
(b)
|
See Schedule II—Valuation and qualifying accounts
included in our audited financial statements included elsewhere
in this registration statement.
|
All other schedules have been omitted because they are not
applicable.
II-4
Part II
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers,
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful
defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
1) For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial
bona fide
offering thereof.
II-5
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized in the City of Nashville, State of Tennessee, on the
1st day of May, 2007.
CUMBERLAND PHARMACEUTICALS INC.
A.J. Kazimi
Chairman and CEO
(Principal Executive Officer)
Signatures and Power
of Attorney
Each person whose signature appears below constitutes and
appoints A. J. Kazimi and David L. Lowrance, and each of them
individually, his or her true and lawful
attorneys-in-fact
and agents, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including
post effective amendments) to this registration statement and
any additional registration statements to be filed pursuant to
Rule 462(b) under the Securities Act of 1933, and to file
the same, with all exhibits thereto and other documents in
connection therewith, with the SEC, granting unto said
attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby
ratifying and confirming all that said
attorneys-in-fact
and agents or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
a.j.
kazimi
A.J.
Kazimi
|
|
Chairman and CEO (Principal
Executive Officer)
|
|
May 1, 2007
|
|
/s/
david
l. lowrance
David
L. Lowrance
|
|
Vice President and CFO (Principal
Financial and Accounting Officer)
|
|
May 1, 2007
|
|
/s/
robert
g. edwards
Robert
G. Edwards
|
|
Director
|
|
May 1, 2007
|
|
/s/
thomas
r. lawrence
Thomas
R. Lawrence
|
|
Director
|
|
May 1, 2007
|
|
/s/
lawrence
w. greer
Lawrence
W. Greer
|
|
Director
|
|
May 1, 2007
|
|
/s/
martin
e. cearnal
Martin
E. Cearnal
|
|
Director
|
|
May 1, 2007
|
S-1
Exhibit Index
|
|
|
|
|
No.
|
|
Description
|
|
|
|
|
|
1.1*
|
|
Form of Underwriting Agreement.
|
|
3.1
|
|
Second Amended and Restated
Charter of Cumberland Pharmaceuticals Inc.
|
|
3.2
|
|
Amended and Restated Bylaws of
Cumberland Pharmaceuticals Inc.
|
|
4.1*
|
|
Specimen Common Stock Certificate
of Cumberland Pharmaceuticals Inc.
|
|
4.2
|
|
Warrant to Purchase Common Stock
of Cumberland Pharmaceuticals Inc., issued to Bank of America,
N.A. on October 21, 2003.
|
|
4.3*
|
|
Stock Purchase Warrant, issued to
S.C.O.U.T. Healthcare Fund L.P. on April 15, 2004.
|
|
4.4
|
|
Warrant to Purchase Common Stock
of Cumberland Pharmaceuticals Inc., issued to Bank of America,
N.A. on April 6, 2006.
|
|
4.5#
|
|
Form of Option Agreement under
1999 Stock Option Plan of Cumberland Pharmaceuticals Inc.
|
|
4.6*#
|
|
Form of Option Agreement under
2007 Long-Term Incentive Compensation Plan of Cumberland
Pharmaceuticals Inc.
|
|
4.7*#
|
|
Form of Agreement under
2007 Directors’ Compensation Plan of Cumberland
Pharmaceuticals Inc.
|
|
5.1*
|
|
Opinion of Adams and Reese LLP.
|
|
10.1†
|
|
Manufacturing and Supply Agreement
for N-Acetylcysteine, dated January 15, 2002, by and
between Bioniche Life Sciences, Inc. and Cumberland
Pharmaceuticals Inc.
|
|
10.2
|
|
Novation Agreement, dated
January 27, 2006, by and among Bioniche Life Sciences,
Inc., Bioniche Pharma Group Ltd., and Cumberland Pharmaceuticals
Inc.
|
|
10.3†
|
|
First Amendment to Manufacturing
and Supply Agreement for N-Acetylcysteine, dated
November 16, 2006, by and between Bioniche Teoranta and
Cumberland Pharmaceuticals Inc.
|
|
10.4†
|
|
Cardinal Health Contract Sales and
Services for Cumberland Pharmaceuticals Inc. Dedicated Sales
Force Agreement, dated May 16, 2006, by and between
Cardinal Health PTS, LLC and Cumberland Pharmaceuticals Inc.
|
|
10.5†
|
|
First Amendment to Contract Sales
and Service Agreement, dated July 19, 2006, by and between
Cardinal Health PTS, LLC and Cumberland Pharmaceuticals Inc.
|
|
10.6
|
|
Consent to Assignment by Cardinal
Health PTS, LLC to PG Holding Corporation of all of their
rights, title, interests and obligations under that certain
Cardinal Health Contract Sales and Services for Cumberland
Pharmaceuticals Inc. Dedicated Sales Force Agreement, dated
May 16, 2006, by and between Cardinal Health PTS, LLC and
Cumberland Pharmaceuticals Inc., as amended by that certain
First Amendment to Contract Sales and Service Agreement, dated
July 19, 2006, by and between Cardinal Health PTS, LLC and
Cumberland Pharmaceuticals Inc.
|
|
10.7†
|
|
Distribution Services Agreement,
dated August 3, 2000, by and between CORD Logistics, Inc.
and Cumberland Pharmaceuticals Inc.
|
|
10.8†
|
|
Strategic Alliance Agreement,
dated July 21, 2000, by and between F.H.
Faulding & Co. Limited and Cumberland Pharmaceuticals
Inc.
|
|
10.9†
|
|
Kristalose Agreement, dated
April 7, 2006, by and among Inalco Biochemicals, Inc.,
Inalco S.p.A., and Cumberland Pharmaceuticals Inc.
|
|
10.10†
|
|
License Agreement, dated
May 28, 1999, by and between Vanderbilt University and
Cumberland Pharmaceuticals Inc.
|
|
|
|
|
|
No.
|
|
Description
|
|
|
|
|
|
10.11#
|
|
Employment Agreement effective as
of January 1, 2007 by and between A.J. Kazimi and
Cumberland Pharmaceuticals Inc.
|
|
10.12#
|
|
Employment Agreement effective as
of January 1, 2007 by and between Jean W. Marstiller and
Cumberland Pharmaceuticals Inc.
|
|
10.13#
|
|
Employment Agreement effective as
of January 1, 2007 by and between Leo Pavliv and Cumberland
Pharmaceuticals Inc.
|
|
10.14#
|
|
Employment Agreement effective as
of January 1, 2007 by and between J. William Hix and
Cumberland Pharmaceuticals Inc.
|
|
10.15#
|
|
Employment Agreement effective as
of January 1, 2007 by and between David L. Lowrance and
Cumberland Pharmaceuticals Inc.
|
|
10.16*†
|
|
Second Amended and Restated Loan
Agreement by and between Cumberland Pharmaceuticals Inc. and
Bank of America, N.A., dated April 6, 2006.
|
|
10.17#
|
|
1999 Stock Option Plan of
Cumberland Pharmaceuticals Inc.
|
|
10.18*#
|
|
2007 Long-Term Incentive
Compensation Plan of Cumberland Pharmaceuticals Inc.
|
|
10.19*#
|
|
2007 Directors’
Compensation Plan of Cumberland Pharmaceuticals Inc.
|
|
10.20
|
|
Form of Indemnification Agreement
between Cumberland Pharmaceuticals Inc. and all members of its
Board of Directors.
|
|
10.21†
|
|
Lease Agreement, dated
September 10, 2005, by and between Nashville Hines
Development, LLC and Cumberland Pharmaceuticals Inc.
|
|
10.22*†
|
|
Sublease Agreement, dated
December 14, 2006, by and between Robert W.
Baird & Co. Incorporated and Cumberland Pharmaceuticals
Inc.
|
|
10.23†
|
|
Amended and Restated Lease
Agreement, dated November 11, 2004, by and between The
Gateway to Nashville LLC and Cumberland Emerging Technologies,
Inc.
|
|
10.24
|
|
First Amendment to Amended and
Restated Lease Agreement, dated August 23, 2005, by and
between The Gateway to Nashville LLC and Cumberland Emerging
Technologies, Inc.
|
|
21
|
|
Subsidiaries of Cumberland
Pharmaceuticals Inc.
|
|
23.1
|
|
Consent of KPMG LLP.
|
|
23.2*
|
|
Consent of Adams and Reese, LLP
(contained in Exhibit 5).
|
|
24
|
|
Powers of Attorney (contained on
the signature page hereto).
|
|
|
|
|
*
|
To be filed by amendment.
|
|
|
|
#
|
Indicates a management contract or compensatory plan.
|
|
|
|
†
|
Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from the Registration
Statement and submitted separately to the Securities and
Exchange Commission.
|
EXHIBIT 10.21
*Certain portions of this exhibit have been omitted pursuant to a request for confidential
treatment which has been filed separately with the SEC.
2525 WEST END
OFFICE LEASE AGREEMENT
BY AND BETWEEN
NASHVILLE HINES DEVELOPMENT, LLC
AS LANDLORD
AND
CUMBERLAND PHARMACEUTICALS INC.,
AS TENANT
BASIC LEASE INFORMATION
|
|
|
|
|
Lease Date:
|
|
Sept 10, 2005
|
|
|
|
|
|
Tenant:
|
|
Cumberland Pharmaceuticals Inc.
|
|
|
|
|
|
Address of Tenant:
|
|
2525 West End Avenue, Suite 950
|
|
|
|
Nashville, Tennessee 37203
|
|
|
|
|
|
Primary Contact:
|
|
Jean W. Marstiller
|
|
|
|
|
|
Landlord:
|
|
Nashville Hines Development, LLC
|
|
|
|
|
|
Address of Landlord:
|
|
Five Greenway Plaza
|
|
|
|
Houston, Texas 77046
|
|
|
|
Attention: F. Russ Nicholson
|
|
|
|
|
|
Leased Premises:
|
|
Approximately 6,341 square feet of RSF
|
|
|
|
Located on Floor 9
|
|
|
|
|
|
Commencement Date:
|
|
January 1, 2006
|
|
|
|
|
|
Lease Term:
|
|
Five (5) years
|
|
|
|
|
|
Base Rental:
|
|
Per
Exhibit G
. Initial monthly Base Rental is [***].
|
|
|
|
|
|
Initial Allowance:
|
|
[***] per square foot of RSF
|
The foregoing Basic Lease Information is hereby incorporated into and made a part of the Lease
identified above. In the event of any conflict between any Basic Lease Information and the Lease,
the Lease shall control.
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
|
PAGE
|
|
|
ARTICLE I
|
|
|
1
|
|
|
1.1. Leased Premises
|
|
|
1
|
|
|
1.2. Term
|
|
|
3
|
|
|
1.3. Use
|
|
|
3
|
|
|
1.4. Landlord’s Relocation Right
|
|
|
4
|
|
|
1.5. Surrender of Premises
|
|
|
5
|
|
|
1.6. Survival
|
|
|
5
|
|
|
|
|
|
|
|
|
ARTICLE II
|
|
|
6
|
|
|
2.1. Rental Payments
|
|
|
6
|
|
|
2.2. Base Rental
|
|
|
6
|
|
|
2.3. Additional Rental
|
|
|
7
|
|
|
2.4. Operating Expenses
|
|
|
8
|
|
|
2.5. Security Deposit
|
|
|
11
|
|
|
2.6. Landlord’s Lien
|
|
|
11
|
|
|
|
|
|
|
|
|
ARTICLE III
|
|
|
11
|
|
|
3.1. Services
|
|
|
11
|
|
|
3.2. Keys and Locks
|
|
|
13
|
|
|
3.3. Graphics, Building Directory and Name
|
|
|
13
|
|
|
3.4. Parking
|
|
|
14
|
|
|
|
|
|
|
|
|
ARTICLE IV
|
|
|
15
|
|
|
4.1. Care of Leased Premises
|
|
|
15
|
|
|
4.2. Entry for Repairs and Inspection
|
|
|
15
|
|
|
4.3. Nuisance
|
|
|
15
|
|
|
4.4. Laws and Regulations; Encumbrances; Rules of Building
|
|
|
15
|
|
|
4.5. Legal Use and Violations of Insurance Coverage
|
|
|
15
|
|
|
4.6. Hazardous Substances
|
|
|
16
|
|
|
4.7. Tenant Taxes
|
|
|
16
|
|
|
|
|
|
|
|
|
ARTICLE V
|
|
|
16
|
|
|
5.1. Initial Allowance; Leasehold Improvements
|
|
|
16
|
|
|
5.2. Repairs by Landlord
|
|
|
17
|
|
|
5.3. Repairs by Tenant
|
|
|
17
|
|
|
|
|
|
|
|
|
ARTICLE VI
|
|
|
18
|
|
|
6.1. Condemnation
|
|
|
18
|
|
|
6.2. Damages from Certain Causes
|
|
|
19
|
|
|
6.3. Casualty Clause
|
|
|
19
|
|
|
6.4. Casualty Insurance
|
|
|
20
|
|
|
6.5. Liability Insurance
|
|
|
21
|
|
|
6.6. Hold Harmless
|
|
|
21
|
|
|
6.7. Waiver of Subrogation Rights
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
PAGE
|
|
|
ARTICLE VII
|
|
|
22
|
|
|
7.1. Default and Remedies
|
|
|
22
|
|
|
7.2. Insolvency or Bankruptcy
|
|
|
26
|
|
|
7.3. Late Payments
|
|
|
26
|
|
|
7.4. Attorney’s Fees
|
|
|
26
|
|
|
7.5. Waiver of Homestead
|
|
|
26
|
|
|
7.6. No Waiver of Rights
|
|
|
27
|
|
|
7.7. Holding Over
|
|
|
27
|
|
|
7.8. Subordination
|
|
|
27
|
|
|
7.9. Estoppel Certificate
|
|
|
29
|
|
|
|
|
|
|
|
|
ARTICLE VIII
|
|
|
30
|
|
|
8.1. Sublease or Assignment by Tenant
|
|
|
30
|
|
|
8.2. Assignment by Landlord
|
|
|
32
|
|
|
8.3. Peaceful Enjoyment
|
|
|
32
|
|
|
8.4. Limitation of Landlord’s Personal Liability
|
|
|
32
|
|
|
8.5. Force Majeure
|
|
|
33
|
|
|
|
|
|
|
|
|
ARTICLE IX
|
|
|
33
|
|
|
9.1. Notices
|
|
|
33
|
|
|
9.2. Miscellaneous
|
|
|
34
|
|
|
9.3. Option to Renew
|
|
|
36
|
|
|
|
|
|
|
EXHIBIT A
|
|
SITE PLAN AND LOCATION OF THE BUILDING
|
|
|
|
|
|
EXHIBIT A-1
|
|
DESCRIPTION OF LAND
|
|
|
|
|
|
EXHIBIT B
|
|
FLOOR PLAN OF LEASED PREMISES
|
|
|
|
|
|
EXHIBIT C
|
|
AIR CONDITIONING AND HEATING SERVICES
|
|
|
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|
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EXHIBIT D
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BUILDING RULES AND REGULATIONS
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EXHIBIT F
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[INTENTIONALLY DELETED]
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EXHIBIT G
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BASE RENTAL
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EXHIBIT H
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JANITORIAL SPECIFICATIONS
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ii
2525 WEST END
OFFICE LEASE AGREEMENT
THIS LEASE AGREEMENT
(
“Lease”
) is
made and entered into on this
10
th
day
of
Sept
, 2005 (the
“Date of Lease”
),
by and between NASHVILLE HINES DEVELOPMENT, LLC, a
limited partnership organized under the laws of the State of Delaware, whose address for purposes
hereof is Five Greenway Plaza, Houston, Texas 77046 Attention: F. Russ Nicholson (hereinafter
called
“Landlord”
),
and CUMBERLAND PHARMACEUTICALS INC., a Tennessee corporation, whose address for
purposes hereof is 2525 West End Avenue, Suite 950, Nashville, TN 37203, Attention: Jean W.
Marstiller, (the address of the Leased Premises within the Building) (hereinafter called
“Tenant”
)
.
ARTICLE I.
1.1.
Leased Premises.
Landlord has constructed or intends to construct certain improvements on a certain tract or
parcel of land located on West End Avenue in Nashville, Davidson County, Tennessee, and more
particularly described in
Exhibit A-1,
attached hereto and incorporated herein by this
reference (the
“
Land
”).
The certain improvements including an office building with a retail area
included within it currently known as 2525 West End Avenue (the
“Building”
)
and the Parking
Facility (as defined herein). The Building, the Parking Facility, and the Land together with all
common areas not specifically made a part of the Building or the Parking Facility, and all other
improvements from time to time located thereon or related thereto are hereinafter collectively
referred to as the
“
Project
.”
Subject to and upon the terms hereinafter set forth, and in
consideration of the sum of Ten Dollars ($10.00), the premises, and the mutual covenants set
forth herein, the receipt and sufficiency of which are hereby acknowledged, Landlord does hereby
lease and demise to Tenant and Tenant does hereby lease and take from Landlord (subject to all
matters of record in Davidson County, Tennessee, that affect the Project) those certain premises
(hereinafter sometimes called the
“Leased Premises”
) located in the Building as shown on
Exhibit A,
attached hereto and incorporated herein, such Leased Premises being more
particularly described as follows:
Approximately 6,341 RSF on the ninth (9
th
) Floor of the Building and as
generally described or depicted on
Exhibit B,
attached hereto and
incorporated herein.
Tenant accepts the Leased Premises “AS-IS.” Landlord has not undertaken to perform any alteration
or improvement to the Lease Premises.
The terms
“Rentable Square Feet”
and
“RSF”,
as used herein, shall refer to (i) in the case
of a floor leased to a single tenant, the total square footage of all floor area measured from
the inside surface of the exterior glass line of the Building to the inside surface of the
opposite exterior glass line, excluding only Service Areas (defined below) and General Common
Areas (defined below), plus an allocation of the square footage of the General Common Areas, and
(ii) in the case of a floor leased to more than one tenant, the total square footage of all floor
areas within the inside surface of the exterior glass line of the Building enclosing the Leased
Premises and measured to the mid-point of demising walls (i.e., walls separating the Leased
Premises from areas leased to or held for lease to other tenants, from On-Floor Common Areas
(defined
1
below), and from General Common Areas), excluding only Service Areas, plus an allocation of
the square footage of the General Common Areas and an allocation of the square footage of the
On-Floor Common Areas. No deductions from Rentable Square Feet shall be made for columns or
projections.
“
Service Areas
”
shall mean the areas within (and measured from the exterior surface of the
interior walls enclosing, or from the inside surface of the exterior glass or wall enclosing, as
the case may be) Building stairs, elevator shafts, flues, vents, stacks, pipe shafts and vertical
ducts. Areas for the specific use of Tenant or other tenants of the Building or installed at the
request of Tenant such as special stairs or elevators are not included within the definition of
Service Areas.
“General Common Areas”
shall mean those areas within (and measured from the midpoint of the
walls or from the inside surface of the exterior glass enclosing) the Building’s elevator machine
rooms, main mechanical rooms, electrical rooms, and public lobbies, engineering and cleaning
staging areas, and other areas not leased or held for lease within the Building but which are
reasonably necessary for the proper utilization of the Building or to provide customary services
to the Building, plus an allocation of any On-Floor Common Areas to the General Common Areas on
the floor for floors that contain General Common Areas. The allocation of the square footage of
the General Common Areas shall be equal to the total square footage of the General Common Areas
multiplied by a fraction, the numerator of which is the Rentable Square Feet of the Leased
Premises (excluding the total square footage of the General Common Areas) and the denominator of
which is the total of all Rentable Square Feet contained in the Building (excluding the allocation
of the General Common Areas).
“On-Floor Common Areas”
shall mean the total square footage of all areas within (and measured
from the midpoint of the walls enclosing) public corridors, elevator foyers, rest rooms,
mechanical rooms, janitor closets, telephone and equipment rooms, and other similar facilities for
the use of all tenants on the floor on which the Leased Premises are located. The allocation of
the square footage of the On-Floor Common Areas shall be equal to the total On-Floor Common Areas
on said floor multiplied by a fraction, the numerator of which is the Rentable Square Feet of the
portion of the Leased Premises (excluding the allocations of General Common Areas and On-Floor
Common Areas) located on said floor and the denominator of which is the total of all Rentable
Square Feet on said floor (excluding the allocations of General Common Areas and On-Floor Common
Areas on the floor).
“
Parking Facility
”
shall mean the parking structure that is constructed or intended to be
constructed and located adjacent to the Building (the
“
Adjacent Parking Facility”),
the surface
parking area adjacent to the Building (the
“Surface Parking Area”),
and the existing garage
located across Kensington Place (the
“Kensington Parking Facility”)
as
shown and labeled on
Exhibit A
(which shall only be used by Tenant as parking for Tenant’s employees and the
employees of other office tenants, not customer parking), together with any connecting walkways,
covered walkways, or other means of access to said building or buildings, the grounds related
thereto and any additional improvements at any time related thereto. The Parking Facility may be
operated by a parking contractor designated from time to time by Landlord.
(a) This Lease does not grant Tenant any rights to light, air or view over or about the Land
or any other real property. Landlord specifically excepts and reserves to itself all
2
rights to and the use of any roofs, the exterior portions of the Leased Premises, the Land,
improvements and air and other rights below the improved floor level of the Leased Premises, the
improvements and air and other rights above the improved ceiling of Leased Premises, the
improvements and air and other rights located outside the demising walls of the Leased Premises and
such areas within the Leased Premises as are required for installation of utility lines and other
installations required to serve the Building or any occupants of the Building, and Landlord
specifically reserves to itself the right to use, maintain and repair same, and no rights with
respect thereto are conferred upon Tenant, unless otherwise specifically provided herein.
(b) Tenant has been in possession of the Leased Premises prior to the Commencement Date
pursuant to a sublease agreement, is aware of the condition of the Leased Premises and represents
and acknowledges that the Leased Premises is, as of the Commencement Date, in good order and
satisfactory condition. Tenant acknowledges that no promise by or on behalf of Landlord, any of
Landlord’s beneficiaries, the managing agent of the Building, the leasing agent of the Building or
any of their respective agents, partners or employees to alter, remodel, improve, repair, decorate
or clean the Leased Premises has been made to or relied upon by Tenant, and that no representation
respecting the condition of the Leased Premises or the Building by or on behalf of Landlord, any of
Landlord’s beneficiaries, the managing agent of the Building, the leasing agent of the Building or
any of their respective agents, partners or employees has been made to or relied upon by Tenant,
except to the extent expressly set forth in this Lease.
1.2.
Term.
(a) Subject to and upon the terms and conditions set forth herein, or in any exhibit hereto,
the term of this Lease shall commence on the Commencement Date (defined below) and shall expire at
6:00 P.M on December 31, 2010.
(b) As used herein,
“Commencement Date”
means January 1, 2006.
1.3.
Use
. The Leased Premises are to be used and occupied by Tenant (and its permitted
assignees and subtenants) solely for the purpose of office space and for no other purpose. The
Leased Premises shall not be used for any purpose which would create unreasonable elevator loads or
otherwise unreasonably interfere with Building operations, and Tenant shall not engage in any
activity which is not in keeping with the first class standards of the Building. In no event shall
the Leased Premises be used for the purpose of installing, marketing, operating, or providing
electronic telecommunications, information or data processing, storage or transmissions, or other
electronic office services or equipment for tenants or other occupants of the Building on a
shared-usage basis through a central switch or a local area network.
1.4.
Landlord’s Relocation Right.
Upon ninety (90) days’ written notice to Tenant
(“
Landlord’s Relocation Notice
”),
Landlord may substitute for the Leased Premises other premises
in the Building (the
“
New Premises
”),
in which event the New Premises shall be deemed to be the
Leased Premises for all purposes hereunder, provided:
(a) The New Premises shall be comparable to the Leased Premises in size, configuration and
market value;
3
(b) Landlord and Tenant shall cooperate in good faith in making any changes to the Tenant
Program, Space Plan, Preliminary Working Drawings, and/or Working Drawings (as defined herein and
as may be applicable depending upon which, if any, of the foregoing has then been prepared at the
time of Landlord’s election to relocate the Leased Premises) so as to conform the leasehold
improvements in the New Premises as closely as practicable to those planned for the Leased
Premises;
(c) To the extent Tenant shall have incurred any expense in the preparation of the Tenant
Program, Space Plan, Preliminary Working Drawings, Working Drawings and/or leasehold improvements
(as defined herein and as may be applicable depending upon which, if any, of the foregoing has
then been prepared, purchased or installed at the time of Landlord’s election to relocate the
Leased Premises), Landlord shall, at Landlord’s expense, cause each of such applicable items to be
reproduced for the New Premises so that Tenant shall not incur expenses in connection therewith by
reason of the exercise by Landlord of the relocation right contained herein. In addition, Landlord
shall reimburse Tenant within thirty (30) days after receipt of genuine, third-party invoices
marked “paid” for Tenant’s moving costs and all costs of reprinting stationery, cards and other
printed material bearing tenant’s address at the Lease Premises if such address changes due to the
relocation (but only the reasonable quantities existing immediately prior to the relocation); and
(d) Upon substitution of the New Premises for the Leased Premises, the Rentable Square Feet
of the New Premises shall control for purposes of this Lease, and Tenant Percentage Share
(hereinafter defined) and the Base Rental shall be recalculated and adjusted based on the Rentable
Square Feet of the New Premises.
Tenant shall not be entitled to any compensation for any inconvenience or interference with
Tenant’s business, nor to any abatement or reduction in rent or other sums payable by Tenant
hereunder, nor shall Tenant’s obligations under this Lease be otherwise affected, as a result of
the substitution of the New Premises, except as otherwise expressly provided in this Section.
Tenant agrees to cooperate with Landlord so as to facilitate the prompt completion by Landlord of
its obligations under this
Section.
Without limiting the generality of the preceding sentence,
Tenant agrees to promptly provide to Landlord such approvals, instructions, plans, specifications
and other information as may be reasonably requested by Landlord in connection with such
obligations. At Landlord’s request, Tenant shall execute a supplement to this Lease confirming the
substitution of the New Premises for the Leased Premises. Within twenty (20) days after receipt of
Landlord’s Relocation Notice, Tenant shall either accept such relocation or deliver written notice
to Landlord terminating this Lease effective no later than the ninetieth (90
th
) day
after Landlord’s relocation Notice. Tenant’s failure to deliver such termination notice within
such twenty (20) day period shall be deemed conclusively Tenant’s election to relocate to the New
Premises.
1.5.
Surrender of Premises.
(a) Upon the termination of this Lease by lapse of time or otherwise or upon the earlier
termination of Tenant’s right of possession, Tenant shall quit and surrender possession of the
Leased Premises to Landlord, broom clean, in the same condition as upon delivery of possession to
Tenant hereunder, normal wear and tear excepted. Before surrendering possession of the Leased
Premises, Tenant shall, without expense to Landlord, remove all signs, furnishings, equipment
(including all communication and other cables),
4
trade fixtures, merchandise and other personal property installed or placed in the Leased
Premises and all debris and rubbish, and Tenant shall repair all damage to the Leased Premises
resulting from such removal; provided if Tenant is then in default under this Lease, Tenant shall
not remove any such item unless Tenant receives written directions from Landlord authorizing or
directing the removal thereof. If Tenant fails to remove any of the signs, furnishings, equipment,
trade fixtures, merchandise and other personal property installed or placed in the Leased Premises
by the expiration or termination of this Lease, then Landlord may, at its sole option, (i) treat
Tenant as a holdover, in which event the provisions of this Lease regarding holding over shall
apply, (ii) deem any or all of such items abandoned and the sole property of Landlord, or (iii)
remove any and all such items and dispose of same in any manner. Tenant shall pay Landlord on
demand any and all expenses incurred by Landlord in the removal of such items, including, without
limitation, the cost of repairing any damage to the Leased Premises or the Building caused by such
removal and storage charges (if Landlord elects to store such property).
(b) All installations, additions, partitions, hardware, cables, wires, fixtures and
improvements, temporary or permanent (including, but not limited to, Tenant’s Extra Work), except
for Tenant’s signs, furnishings, equipment, communication cables, telephone switches, trade
fixtures, merchandise and other personal property, in or upon the Leased Premises, whether placed
there by Tenant or Landlord, shall, upon the termination of this lease by lapse of time or
otherwise or upon the earlier termination of Tenant’s right of possession, become Landlord’s
property and shall remain upon the Leased Premises, all without compensation, allowance or credit
to Tenant; provided, however, that if at the time Landlord consents to Tenant’s installation of
any installations, additions, partitions, hardware, cables, wires, fixtures and improvements or at
any time prior to termination of this Lease, Landlord requires removal of the same upon
termination, then Tenant, at Tenant’s sole cost and expense, upon termination of this Lease by
lapse of time or otherwise or upon the earlier termination of Tenant’s right of possession, shall
promptly remove such designated items placed in or upon the Leased Premises by or on behalf of
Tenant and, repair any damage to the Leased Premises or the Building caused by such removal,
failing which Landlord may remove the same and repair the Leased Premises or the Building, as the
case may be, and Tenant shall pay the cost thereof to Landlord on written demand.
1.6.
Survival.
Any claim, cause of action, liability or obligation arising under the
term of this Lease and under the provisions hereof in favor of a party hereto against or
obligating the other party hereto and all of Tenant’s indemnification obligations hereunder shall
survive the expiration or any earlier termination of this Lease.
ARTICLE II.
2.1.
Rental Payments.
(a) Commencing on the Commencement Date and continuing thereafter throughout the full term of
this Lease, Tenant hereby agrees to pay the Base Rental (defined below), and Tenant’s Forecast
Additional Rental (defined below) and Tenant’s Additional Rental Adjustment (defined below) in
accordance with this Article. The Base Rental and Tenant’s Forecast Additional Rental shall be due
and payable in equal monthly installments on the first
5
day of each calendar month during the initial term of this Lease and any extensions or
renewals hereof, and Tenant hereby agrees to so pay such rent to Landlord at Landlord’s address as
provided herein (or such other address as may be designated by Landlord from time to time) monthly
in advance.
(b) If the Commencement Date is other than the first day of a calendar month, then the
installments of Base Rental and Tenant’s Forecast Additional Rental for such month shall be
prorated and the installment or installments so prorated shall be paid in advance. Said
installments for such prorated month shall be calculated by multiplying the equal monthly
installment by a fraction, the numerator of which shall be the number of days of the Lease term
occurring during said commencement or expiration month, as the case may be, and the denominator of
which shall be thirty (30). If the term of this Lease commences or expires on other than the first
day of a calendar year, Tenant’s Forecast Additional Rental and Tenant’s Additional Rental shall be
prorated for such commencement or expiration year, as the case may be, by multiplying Tenant’s
Forecast Additional Rental and Tenant’s Additional Rental by a fraction, the numerator of which
shall be the number of whole and partial months of the Lease term during the commencement or
expiration year, as the case may be, and the denominator of which shall be twelve (12). In such
event the Tenant’s Additional Rental Adjustment shall be made as soon as reasonably possible after
the termination of this Lease.
(c) For purposes hereof, the term
“Rental”
shall mean and collectively refer to the Base
Rental, Tenant’s Forecast Additional Rental, Tenant’s Additional Rental Adjustment and other sums
payable by Tenant hereunder. Tenant agrees to pay all Rental at the times and in the manner
provided in this Lease, without abatement, demand, notice, set-off, deduction or counterclaim, and
all sums payable under this Lease by Tenant shall be deemed to be rent due and owing hereunder. All
Rental shall bear interest from the tenth (10
th
) day after the date due thereof until
paid at the lesser of (i) a per annum rate equal to the “prime rate” announced by Chase Manhattan
Bank, New York, New York, or its successor, (or if the “prime rate” is discontinued, the rate
announced as that being charged to the most credit-worthy commercial borrowers) plus two percent
(2%) or (ii) the maximum interest rate per annum allowed by law.
2.2.
Base Rental.
Throughout the full term of this Lease, Tenant hereby agrees to pay
a base annual rental (the
“Base Rental”)
in accordance with the schedule attached hereto as
Exhibit G,
as such dollar amount may be adjusted from lease year to lease year pursuant to
the terms of this Lease.
2.3.
Additional Rental.
(a) Commencing with the calendar year in which the Commencement Date occurs and continuing
thereafter for each calendar year during the full term of this Lease, Landlord shall present to
Tenant prior to the beginning of said calendar year (or for the calendar year in which the Lease
term commences, on the Commencement Date) a statement of Tenant’s Forecast Additional Rental.
Landlord’s failure to deliver such a statement of Tenant’s Forecast Additional Rental shall not
operate to excuse Tenant from the payment of the monthly installment of Tenant’s Forecast
Additional Rental due under
Section 2.
1(a)
.
Rather, Tenant shall continue to pay the monthly
installment of Tenant’s Forecast Additional Rental based on Landlord’s most recent calculation
thereof until such a statement is delivered to Tenant, with such statement being applied
retroactively to the beginning of the calendar year and Tenant
6
making up any under payments immediately upon its receipt of such statement. Landlord may,
from time to time, recalculate Tenant’s Forecast Additional Rental in order to more accurately
reflect Landlord’s good faith estimate of Tenant’s Additional Rental, and Tenant shall commence
paying the recalculated Tenant’s Forecast Additional Rental, in accordance with Section 2.1(a)
hereof, immediately after receiving notice thereof.
(b) As used herein,
“
Tenant’s Forecast Additional Rental”
shall mean Landlord’s reasonable
estimate of Tenant’s Additional Rental (defined below) for the coming calendar year (or, in the
calendar year in which the lease term commences, for such calendar year).
(c) Landlord shall absorb and be responsible for paying Operating Expenses (defined below)
during any calendar year to the extent such Operating Expenses are less than Nine and 17/100
Dollars ($9.17) per square foot of space in the Building leased to rent paying tenants (the
“Expense Stop”
).
As part of Tenant’s Additional Rental, Tenant shall be responsible for paying its
pro rata share of the Operating Expenses for any calendar year in excess of the Expense Stop. For
purposes hereof,
“Tenant’s Additional Rental”
for any calendar year shall mean Tenant’s Percentage
Share (defined below) of the Operating Expenses for such calendar year in excess of the Expense
Stop. As used herein,
“Tenant’s Percentage Share”
shall mean a fraction, the numerator of which is
the total number of square feet of Rentable Square Feet within the Leased Premises and the
denominator of which is the greater of (i) ninety-five percent (95%) of the total square footage of
all Rentable Square Feet in the Building (exclusive of any retail space) held for lease, or (ii)
the total square footage of all Rentable Square Feet in the Building (exclusive of any retail
space) actually leased to rent paying tenants.
(d) Landlord shall use reasonable efforts to provide Tenant, within one hundred twenty (120)
days after the end of the calendar year in which the Commencement Date occurs and of each calendar
year thereafter during the term of this Lease, with a statement detailing the Operating Expenses
for each such calendar year (the
“Annual Operating Expense Statement”
)
and a statement prepared by
Landlord comparing Tenant’s Forecast Additional Rental with Tenant’s Additional Rental. In the
event that Tenant’s Forecast Additional Rental exceeds Tenant’s Additional Rental for said calendar
year, Landlord shall pay Tenant (in the form of a credit against rentals next due or, upon
expiration of this Lease, in the form of Landlord’s check) an amount equal to such excess. In the
event that the Tenant’s Additional Rental exceeds Tenant’s Forecast Additional Rental for said
calendar year, Tenant hereby agrees to pay Landlord, within thirty (30) days of receipt of the
statement, an amount equal to such difference
(
“Tenant’s Additional Rental Adjustment”
).
(e) Tenant, at Tenant’s sole cost and expense, shall have the right, to be exercised by
written notice given to Landlord within sixty (60) days after receipt of the Annual Operating
Expense Statement for any calendar year, to audit Landlord’s books and records pertaining only to
the Operating Expenses for such calendar year, provided such audit must commence within thirty (30)
days after Tenant’s notice to Landlord and thereafter proceed regularly and continuously to
conclusion and, provided, further, that such audit must be conducted by a nationally recognized
independent public accounting firm in a manner that does not unreasonably interfere with the
conduct of Landlord’s business. Notwithstanding the foregoing, Tenant shall not have the right to
audit Landlord’s books
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and records regarding the Operating Expenses for any calendar year if (i) the Annual Operating
Expense Statement for such calendar year was prepared by a nationally recognized independent public
accounting firm, or (ii) Tenant is in default under the terms of this Lease or any circumstance
exists which with the giving of notice, the passage of time, or both, would constituted such a
default. Landlord agrees to cooperate in good faith with Tenant in the conduct of any such audit.
Tenant (and its agents, employees and accountants) shall hold the results of such audits in strict
confidence and not disclose the same to any third party, except as is necessary during any dispute
between Landlord and Tenant related thereto or as required by law. A copy of the results of any
such audit shall be promptly provided to Landlord, and Landlord may conduct an independent review
of the same. If there is any disagreement regarding the results of any such audit, the parties
shall select a third party auditor to resolve the dispute. Tenant shall not employ any person or
entity to audit Landlord’s books and records whose compensation is based, in whole or in part, on a
contingency fee or the results of the audit.
2.4.
Operating Expenses.
(a)
“Operating Expenses”,
for each calendar year, shall consist of (i) all Operating Costs
(defined below) for the Building, plus (ii) an amount equal to the sum of the total ownership,
management, maintenance, repair, replacement and operating costs accruing during each such calendar
year for portions of the Project not within the Building that are designated or maintained from
time to time as common areas, including, but not limited to, fifty (50%) percent of the cost of
maintaining the Kensington Place roadway adjoining the Project and those areas which are for the
benefit of the occupants of the Project whether or not so designated or maintained as common areas
(net of any contribution received from time to time from the owners of the other portions of the
Project for such expenses).
(b) For the purposes of this Lease,
“
Operating Costs
”
shall mean all expenses, costs and
accruals (excluding therefrom, however, specific costs billed to or otherwise incurred for the
particular benefit of specific tenants of the Building) of every kind and nature, computed on an
accrual basis, incurred or accrued in connection with, or relating to, the ownership, operation,
management, maintenance, repair and replacement of the Building during each calendar year,
including, but not limited to, the following:
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(i)
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wages and salaries, including taxes, insurance
and benefits, of all on and off-site employees engaged in operations,
management, maintenance, repair, replacement or access control, as
reasonably allocated by Landlord and rent for the Building’s management
office exclusive of that portion of such office used for leasing;
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(ii)
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cost of all supplies, tools, equipment and
materials to the extent used in operations, management, maintenance,
repairs or replacements, as reasonably allocated by Landlord;
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(iii)
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cost of all utilities, including, but not
limited to, the cost of electricity, the cost of water and the cost of
power for heating, lighting, air conditioning and ventilating;
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(iv)
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the cost of trash and garbage removal, cleaning,
vermin extermination, snow, ice and debris removal, and other services;
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(v)
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cost related to and fees payable under all
maintenance, management and service agreements, including, but not
limited to, a management fee contribution equal to three percent (3%)
of the gross revenues;
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(vi)
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costs related to those agreements related to
access control services, garage operations, window cleaning, elevator
maintenance, janitorial service, pest control and landscaping
maintenance;
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(vii)
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cost of inspections, repairs, maintenance and
replacements (except to the extent covered by proceeds of insurance);
provided the cost of capital repairs and replacements shall be
amortized over such reasonable period of time as Landlord shall
determine and only the portion of such costs allocable to any calendar
year (plus interest on the unpaid balance of such costs) may be
included in the Operating Costs for such calendar year;
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(viii)
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the cost of legal and accounting services incurred by Landlord
relating to management and maintenance of the Building but not
including any such expenses related to leasing of space in the
Building;
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(ix)
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amortization of the cost (plus interest on the
unpaid balance of such costs) of any system, apparatus, device, or
equipment which is installed for the principal purpose of (i) reducing
Operating Expenses, (ii) promoting safety or (iii) complying with
governmental requirements;
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(x)
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the cost of all insurance, including, but not
limited to, the cost of casualty, rental loss and liability insurance,
and insurance on Landlord’s personal property, plus the cost of all
deductible and co-insurance payments made by Landlord in connection
therewith;
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(xi)
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amounts due under easements, operating agreements,
parking operating agreements, declarations, covenants or instruments
encumbering the Land;
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(xii)
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reasonable replacement reserves;
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(xiii)
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cost of maintaining, striping, repairing, replacing, repaving and
lighting grounds, streets, parking areas, sidewalks, curbs, walkways,
landscaping, drainage and lighting facilities; and
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(xiv)
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all taxes, assessments and governmental charges,
whether or not directly paid by Landlord, whether federal, state, county
or municipal
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and whether they be by taxing districts or authorities presently
taxing the Building and said common areas or by others subsequently
created or otherwise, and any other taxes, assessments and
governmental charges attributable to the Building and that portion of
the common areas or their operation, excluding, however, taxes and
assessments attributable to the personal property of other tenants,
federal and state taxes on income, death taxes, franchise taxes, and
any taxes imposed or measured on or by the income of Landlord from the
operation of the Building or imposed in connection with any change of
ownership of the Building; provided, however, that if at any time
during the term of this Lease, the present method of taxation or
assessment shall be so changed that the whole or any part of the
taxes, assessments, levies, impositions or charges now levied,
assessed or imposed on real estate and the improvements thereon shall
be discontinued and as a substitute therefor, or in lieu of or in
addition thereto, taxes, assessments, levies, impositions or charges
shall be levied, assessed or imposed, wholly or partially, as a
capital levy or otherwise, on the rents received from the Building or
the rents reserved herein or any part thereof, then such substitute or
additional taxes, assessments, levies, impositions or charges, to the
extent so levied, assessed or imposed with respect to the Building,
shall be deemed to be included within the Operating Costs.
Consultation, legal fees and costs resulting from any challenge of tax
assessments as reasonably allocated by Landlord shall also be included
in Operating Costs. It is agreed that Tenant will be responsible for
ad valorem taxes on its personal property and on the value of the
leasehold improvements in the Leased Premises to the extent that the
same exceed the Tenant Improvement Allowance (and if the taxing
authorities do not separately assess Tenant’s leasehold improvements,
Landlord may make a reasonable allocation of the ad valorem taxes
allocated to the Building to give effect to this sentence). In the
case of special taxes and assessments which may be payable in
installments, only the amount of each installment accruing during a
calendar year shall be included in the Operating Costs for such year.
|
(c) Notwithstanding any language contained herein to the contrary, Tenant hereby agrees that,
during any calendar year in which the entire Building is not provided with Building Standard
Services or is not completely occupied, Landlord shall compute all Variable Operating Costs
(defined below) for such calendar year as though the entire Building were provided with Building
Standard Services and were completely occupied. For purposes of this Lease the term
“Variable
Operating Costs”
shall mean any operating cost that is variable with the level of occupancy of the
Building (e.g. utilities and cleaning services). In the event that Landlord excludes from
“Operating Costs”
any specific costs billed to or otherwise incurred for the particular benefit of
specific tenants of the Building or to other buildings or projects on the Land, Landlord shall have
the right to increase
“Operating Costs”
by an amount equal to the cost of providing standard
services similar to the services for which such excluded specific costs were billed or incurred. In
no event shall Landlord receive from all tenants of the Building more than one hundred percent
(100%) of any Operating Costs.
10
2.5.
Security Deposit.
[Intentionally deleted.]
2.6.
Landlord’s Lien.
[Intentionally
deleted.]
ARTICLE III.
3.1.
Services.
Landlord shall furnish the following services to Tenant during the term
of this Lease (
“Building Standard Services”
):
(a) Hot and cold domestic water to common use rest rooms and toilets, in such amounts as are
reasonably determined by Landlord
(b) Subject to curtailment as required by governmental laws, rules or mandatory regulations,
central heat and air conditioning in season, at such temperatures and in such amounts as are
reasonably determined by Landlord and on such dates and at such times as are more particularly
described on
Exhibit C
attached hereto and incorporated herein.
(c) Electric lighting service for all public areas and special service areas of the Building
in such amounts and locations as are reasonably determined by Landlord.
(d) Janitor service in accordance with the Janitorial Specifications attached hereto and
incorporated herein as
Exhibit H;
however, if Tenant’s floor coverings or other
improvements are other than building standard commercial grade, Tenant shall pay one hundred and
fifteen percent (115%) of the actual additional cleaning cost, if any, attributable thereto, and if
supplying such additional cleaning service requires active managerial oversight by Landlord,
Landlord shall be entitled to collect an administrative fee equal to fifteen percent (15%) of the
cost of such service.
(e) Access control for the Building shall be provided to the extent and in the manner
reasonably determined by Landlord; provided, however, Landlord shall have no responsibility to
prevent, and shall not be liable to Tenant for, any liability or loss to Tenant, its agents,
employees and visitors arising out of losses due to theft, burglary, or damage or injury to persons
or property caused by persons gaining access to the Leased Premises, and Tenant hereby releases
Landlord from all liability for such losses, damages or injury.
(f) Electrical service to floors with plug-in type bus risers sized to provide 8.0 watts per
useable square foot of electrical connected load capacity for tenant use above and beyond the base
building electrical requirements. Of that, 6.0 watts per useable square foot of electrical
connected load capacity will be available in 480/277V panels for tenant use leaving 2.0 watts per
useable square foot available in the bus riser for future tenant electrical loads. Of the 6.0 watts
per useable square foot, 3.0 watts per useable square foot of electrical connected load capacity
will be available in 208/120V panels for tenant use leaving 3.0 watts per useable square foot of
capacity in the 480/277V panels for future tenant electrical loads. This capacity is part of the
6.0 watts per useable square foot of power for tenant’s use noted above.
Should Tenant’s total rated electrical design load exceed the Building Standard rated
electrical design load for either low or high voltage electrical consumption, or if Tenant’s
electrical design requires low voltage or high voltage circuits in excess of Tenant’s share of the
Base Building Shell Condition circuits, Landlord will (at Tenant’s expense) install one (1)
11
additional high voltage panel and/or one (1) additional low voltage panel with associated
transformer, space for which has been provided in the base building electrical closets based on a
maximum of two (2) such additional panels per floor for all tenants on the floor (which additional
panels and transformers shall be hereinafter referred to as the
“additional electrical equipment”
).
If the additional electrical equipment is installed because Tenant’s low or high voltage rated
electrical design load exceeds the applicable Building Standard rated electrical design load, then
a meter shall also be added (at Tenant’s expense) to measure the electricity used through the
additional electrical equipment.
The design and installation of any additional electrical equipment (or any related meter)
required by Tenant shall be subject to the prior approval of Landlord (which approval shall not be
unreasonably withheld). All expenses incurred by Landlord in connection with the review and
approval of any additional electrical equipment shall also be reimbursed to Landlord by Tenant.
Tenant shall also pay on demand the actual metered cost of electricity consumed through the
additional electrical equipment (if applicable), plus any actual accounting expenses incurred by
Landlord in connection with the metering thereof.
If any of Tenant’s electrical equipment requires conditioned air in excess of Base Building
Shell Condition air conditioning, the same shall be installed by Landlord (on Tenant’s behalf), and
Tenant shall pay all design, installation, metering and operating costs relating thereto.
If Tenant requires that certain areas within Tenant’s demised premises must operate in excess
of the normal Building Operating Hours (as defined in
Exhibit C
attached hereto), the
electrical service to such areas shall be separately circuited and metered such that Tenant shall
be billed the costs associated with electricity consumed during hours other than Building Operating
Hours.
(g) All Building Standard fluorescent bulb replacement in all areas and all incandescent bulb
replacement in General Common Areas, Service Areas and On-Floor Common Areas.
(h) Non-exclusive multiple cab passenger service to the Leased Premises during Building
Operating Hours and at least one (1) cab passenger service to the Leased Premises twenty-four (24)
hours per day and non-exclusive freight elevator service during Building Operating Hours (all
subject to temporary cessation for ordinary repair and maintenance and during times when life
safety systems override normal building operating systems) with such freight elevator service
available at other times upon reasonable prior notice and the payment by Tenant to Landlord of any
additional expense actually incurred by Landlord in connection therewith.
To the extent the services described in subsection (a), (b), (c), (f) and (h) above require
electricity and water supplied by public utilities, Landlord’s covenants thereunder shall only
impose on Landlord the obligation to use its good faith, reasonable efforts to cause the applicable
public utilities to furnish the same. Failure by Landlord to furnish the services described in this
Section, or any cessation thereof, shall not render Landlord liable for damages to either person or
property, nor be construed as an eviction of Tenant, nor work an abatement of rent, nor relieve
Tenant from fulfillment of any covenant or agreement
12
hereof. In addition to the foregoing, should any of the equipment or machinery, for any cause,
fail to operate, or function properly, Tenant shall have no claim for rebate of rent or damages on
account of an interruption in service occasioned thereby or resulting therefrom; provided, however,
Landlord agrees to use reasonable efforts to repair said equipment or machinery promptly and to
restore said services.
3.2.
Keys and Locks.
Landlord shall install a card reader on the elevator servicing
the Leased Premises that restricts after hours access to the Leased Premises. Landlord shall also
supply Tenant with two (2) keys for each Building Standard lockset on code required doors entering
the Leased Premises from public areas. Additional keys will be furnished by Landlord upon an order
signed by Tenant and at Tenant’s expense. All such keys shall remain the property of Landlord. No
additional locks shall be allowed on any door of the Leased Premises without Landlord’s permission,
and Tenant shall not make or permit to be made any duplicate keys. Upon termination of this Lease,
Tenant shall surrender to Landlord all keys to any locks on doors entering or within the Leased
Premises, and give to Landlord the explanation of the combination of all locks for safes, safe
cabinets and vault doors, if any, in the Leased Premises.
3.3.
Graphics, Building Directory and Name.
Landlord shall provide and install all
graphics, letters, and numerals at the entrance to the Leased Premises on multi-tenant floors, if
any (it being understood that Tenant shall be responsible for all graphics on full floors occupied
by Tenant. Landlord shall maintain an electronic directory in such main lobby which shall include
such information relating to Tenant. All such letters and numerals shall be in the Building
standard graphics (font size to be approved by Landlord). Tenant agrees that Landlord shall not be
liable for any inconvenience or damage occurring as a result of any error or omission in any
directory or graphics. No signs, numerals, letters or other graphics shall be used or permitted on
the exterior of, or may be visible from outside, the Leased Premises, unless approved in writing by
Landlord. All on-floor graphics for full-floor tenants shall be removed by Tenant upon lease
expiration.
3.4.
Parking.
(a) Subject to the other provisions hereof, Landlord hereby agrees to make available, or to
cause the lessee or operator of the Parking Facility (the
“Garage Operator”
)
,
to make available to
Tenant (so long as Tenant shall continue to lease at least 6,341 RSF) up to twenty-five (25)
permits to park in the Kensington Parking Facility upon the terms and conditions set forth below
(the
“Parking Permits”
).
Landlord shall also provide (or cause the Garage Operator to provide)
visitor parking in a portion of the Parking Facility on a “first come-first served” pay basis at
such rates and upon such conditions as Landlord or the Garage Operator, as applicable, shall
establish from time to time.
(b) Tenant shall notify Landlord within thirty (30) days following the execution of this Lease
of the number of Parking Permits that it intends to utilize. Neither Landlord nor the Garage
Operator shall be obligated to hold any Parking Permits that Tenant does not elect to utilize.
(c) Tenant shall pay as rental for the Parking Permits at the rate charged from time to time
by Landlord (or the Garage Operator), in its sole and absolute discretion,
13
plus any applicable taxes thereon; provided the rate charged for the Parking Permits shall be
prorated for any partial months during the term of this Lease. The current charge to Tenant for
each Parking Permit is $40.00 per month, plus any applicable taxes thereon. In the event the rate
charged for the Parking Permits is increased, Tenant may elect to relinquish all or a portion of
the Parking Permits by giving written notice to Landlord (or its designee) within thirty (30) days
after receiving notice of such increase, in which event Tenant shall have no further right to or
interest in such Parking Permit and neither Landlord nor the Garage Operator shall have any
obligation to provide replacement parking for Tenant. If the rate charged for the Parking Permits
is increased and Tenant fails to notify Landlord, in writing, of its election to relinquish all or
a portion of the Parking Permits within thirty (30) days after receiving notice of such increase,
then Tenant shall be deemed to have agreed to such increase and shall have no further right to
relinquish its Parking Permits on account thereof. Unless Landlord directs otherwise, Tenant shall
pay the monthly charges established from time to time in accordance with this Lease by the Garage
Operator for parking in the Kensington Parking Facility to Landlord and Landlord shall collect such
payments, on behalf of the Garage Operator, monthly in advance, at the same time and place as
Tenant makes payments of Base Rent under the terms of this Lease.
(d) In the event the parking spaces covered by the Parking Permits are not available to Tenant
due to causes beyond the control of Landlord or the Garage Operator and Landlord is unable to
provide replacement parking to Tenant, neither Landlord nor Garage Operator shall be liable for any
damages that Tenant suffers on account thereof, nor shall such fact be construed as a constructive
eviction of Tenant, entitle Tenant to an abatement of any Rental or an abatement of the charges for
the Parking Permits, or relieve Tenant from fulfillment of any covenant or agreement hereof.
(e) Landlord or the Garage Operator may make, modify and enforce reasonable rules and
regulations relating to the parking of vehicles in the Parking Facility, and Tenant agrees to abide
by such rules and regulations. Except as expressly provided herein, this Lease does not grant
Tenant (or its agents, employees, contractors and visitors) the right to use the Parking Facilities
or any other parking areas located on the Land or serving the Building. So long as Landlord ensures
that there is sufficient parking available in the Parking Facilities to accommodate the holders of
the Parking Permits, Landlord or the Garage Operator may, from time to time, designate specific
portions of the Parking Facilities as reserved areas and Tenant shall have no right to park in such
reserved areas, except Tenant may park in reserved areas made available to tenants of the Building
to the extent Tenant has purchased Parking Permits specifically entitling Tenant to use the same.
Landlord agrees to make (or cause the Garage Operator to make) parking for Tenant’s guests and
visitors available on a non-exclusive basis in the Parking Facility. Landlord or the Garage
Operator may restrict Tenant’s right to utilize the Parking Permits on weekends and after 6:00 p.m.
in the evening when athletic events are scheduled in the nearby athletic facilities.
ARTICLE IV.
4.1.
Care of Leased Premises.
Tenant shall not commit or allow to be committed by
Tenant’s employees, agents or contractors, any waste or damage to any portion of the Leased
Premises or the Building. Upon the expiration or any earlier termination of this
14
Lease, Landlord shall have the right to re-enter and resume possession of the Leased Premises
immediately.
4.2.
Entry for Repairs and Inspection.
Tenant shall permit Landlord and its
contractors, agents or representatives to enter into and upon any part of the Leased Premises
during reasonable hours to inspect or clean the same, make repairs, alterations or additions
thereto, and, upon reasonable prior notice to Tenant, for the purpose of ‘showing the same to
prospective tenants or purchasers and Tenant shall not be entitled to any abatement or reduction of
rent by reason thereof. Landlord shall use its reasonable efforts not to interfere materially with
the operation of Tenant’s business during any such entry.
4.3.
Nuisance.
Tenant shall conduct its business and control its agents, employees,
invitees, contractors and visitors in such a manner as not to create any nuisance, or interfere
with, annoy or disturb any other tenant or Landlord in its operation of the Building.
4.4.
Laws and Regulations; Encumbrances; Rules of Building.
Tenant shall comply with,
and Tenant shall cause its employees, contractors and agents to comply with, and shall use its best
efforts to cause its visitors and invitees to comply with, (i) all laws, ordinances, orders, rules
and regulations of all state, federal, municipal and other governmental or judicial agencies or
bodies relating to the use, condition or occupancy of the Leased Premises, (ii) all recorded
easements, operating agreements, parking agreements, declarations, covenants and instruments
encumbering the Leased Premises, and (iii) the rules of the Building reasonably adopted and altered
by Landlord from time to time for the safety, care and cleanliness of the Leased Premises and
Building and for the preservation of good order therein. The initial rules of the Building are
attached hereto and incorporated herein as
Exhibit D.
4.5.
Legal Use and Violations of Insurance Coverage.
Tenant shall not occupy or use
the Leased Premises, or permit any portion of the Leased Premises to be occupied or used, for any
business or purpose which is unlawful, disreputable or deemed to be hazardous in any manner, or
permit anything to be done which would in any way increase the rate of fire, liability, or any
other insurance coverage on the Building or its contents.
4.6.
Hazardous Substances.
Tenant shall comply, at its sole expense, with all laws,
ordinances, orders, rules and regulations of all state, federal, municipal and other governmental
or judicial agencies or bodies relating to the protection of public health, safety, welfare or the
environment (collectively,
“Environmental Laws”)
in the use, occupancy and operation of the Leased
Premises. Tenant agrees that no Hazardous Substances (as hereinafter defined) shall be used,
located, stored or processed on the Leased Premises or be brought onto any other portion of the
Building by Tenant or any of its agents, employees, contractors, assigns, subtenants, guests or
invitees, and no Hazardous Substances will be released or discharged from the Leased Premises
(including, but not limited to, ground water contamination). The term
“Hazardous Substances”
shall
mean and include all hazardous and toxic substances, waste or materials, any pollutant or
contaminant, including, without limitation, PCB’s, asbestos and raw materials that include
hazardous constituents or any other similar substances or materials that are now or hereafter
included under or regulated by any Environmental Laws or that would pose a health, safety or
environmental hazard. Tenant hereby agrees to indemnify, defend and hold harmless Landlord from and
against any and all losses, liabilities (including, but not limited to, strict
15
liability), damages, injuries, expenses (including, but not limited to, court costs,
litigation expenses, reasonable attorneys’ fees and costs of settlement or judgment), suits and
claims of any and every kind whatsoever paid, incurred or suffered by, or asserted against,
Landlord by any person, entity or governmental agency for, with respect to, or as a direct or
indirect result of, the presence in or the escape, leakage, spillage, discharge, emission or
release from the Leased Premises of any Hazardous Substances or the presence of any Hazardous
Substances placed on or discharged from the Building by Tenant or any of its agents, employees,
contractors, assigns, subtenants, guests or invitees, including, without limitation, any losses,
liabilities (including, but not limited to, strict liability), damages, injuries, expenses
(including, but not limited to, court costs, litigation expenses, reasonable attorneys’ fees and
costs of settlement or judgment), suits and claims asserted or arising under the Comprehensive
Environmental Response, Compensation and Liability Act
(“
CERCLA
”),
any so-called federal, state or
local “Superfund” or “Superlien” laws or any other Environmental Law.
4.7.
Tenant Taxes.
Tenant shall pay promptly when due all taxes directly or indirectly
imposed or assessed upon Tenant’s gross sales, business operations, machinery, equipment, trade
fixtures and other personal property or assets, whether such taxes are assessed against Tenant,
Landlord or the Building. In the event that such taxes are imposed or assessed against Landlord or
the Building, Landlord shall furnish Tenant with all applicable tax bills, public charges and other
assessments or impositions and Tenant shall forthwith pay the same either directly to the taxing
authority or, at Landlord’s option, to Landlord.
ARTICLE V.
5.1.
Initial Allowance; Leasehold Improvements.
(a) Within ten (10) days of the Commencement Date, Landlord shall contribute [***] per RSF in
the Leased Premises (the
“
Initial Allowance
”)
for Tenant’s use during the initial Lease Term, all
or any portion of which Tenant may apply as a credit towards Base Rental next due and payable.
(b) Tenant shall not make or allow to be made any alterations or physical additions in or to
the Leased Premises, or place safes, vaults or other heavy furniture or equipment within the
Leased Premises, without first obtaining the written consent of Landlord which consent shall not
be unreasonably withheld so long as said alterations do not impact on Building systems or
structure and are not visible from outside the Leased Premises. Tenant shall deliver to Landlord a
copy of the “as-built” plans and specifications for all alterations or physical additions so made
in or to the Leased Premises. Tenant further specifically agrees that no food, soft drink or other
vending machine will be installed within the Leased Premises without the written consent of
Landlord. Any such machine(s) shall be for the use of Tenant and its employees and invitees only.
(c) Tenant shall indemnify and hold Landlord harmless from and against all costs (including
reasonable attorneys’ fees and costs of suit), losses, liabilities, or causes of action arising
out of or relating to any alterations, additions or improvements made by Tenant to the Leased
Premises, including, but not limited to, any mechanics’ or materialmen’s liens asserted in
connection therewith. No portion of Landlord’s interest in the Building shall be
16
subject to attachment on account of any work performed by or on account of Tenant, and Tenant
shall provide written notice of same to all of its contractors.
(d) Should any mechanic’s or other liens be filed against any portion of the Building by
reason of Tenant’s acts or omissions or because of a claim against Tenant, Tenant shall cause the
same to be canceled or discharged of record by bond or otherwise within thirty (30) days after
notice by Landlord. If Tenant shall fail to cancel or discharge said lien or liens, within said
thirty (30) day period, Landlord may, at its sole option, cancel or discharge the same and upon
Landlord’s demand, Tenant shall promptly reimburse Landlord for all reasonable costs incurred in
canceling or discharging such liens, and if canceling or discharging such liens requires active
managerial oversight by Landlord, Landlord shall be entitled to collect an administrative fee
equal to fifteen percent (15%) of the cost thereof.
5.2.
Repairs by Landlord.
All repairs, alterations or additions that affect the
Building’s structural components or the Building’s mechanical, electrical and plumbing systems
shall be made solely by Landlord or its contractor. In the event of any damage to such components
or systems or any other portion of the Building caused by Tenant or Tenant’s agents, contractors,
employees, visitors or invitees, the cost of repair or restoration of such damage shall be paid
for solely by Tenant in an amount equal to Landlord’s costs plus fifteen percent (15%) for
administrative cost recovery. Landlord shall make such repairs to Base Building Shell Condition
improvements as may be deemed necessary by Landlord for normal maintenance operations and Landlord
shall not otherwise be obligated to make improvements to, or repairs of, the Leased Premises.
5.3.
Repairs by Tenant.
Subject to Section 5.2, Tenant shall at its own cost and
expense, keep the Leased Premises and all leasehold improvements in a condition similar to the
condition as of the Commencement Date, normal wear and tear excepted, and Tenant shall perform all
maintenance, repairs and replacements necessary to accomplish the same. In addition, Tenant shall
perform all maintenance, repairs, replacements and improvements required by any governmental law,
ordination, rule or regulation. If Tenant fails to commence any maintenance, repairs, replacements
or improvements which it is required to perform hereunder within ten (10) days after written
notice from Landlord to Tenant and thereafter diligently proceed with such work until completion,
Landlord may, at its option, perform any such maintenance, repairs, replacements or improvements
deemed necessary by Landlord, and Tenant shall pay to Landlord on demand Landlord’s cost thereof
plus a charge of fifteen percent (15%) for administrative cost recovery.
ARTICLE VI.
6.1.
Condemnation.
If all or substantially all of the Leased Premises, or such
portion of the Leased Premises or the Building as would render, in Landlord’s reasonable judgment,
the continuance of Tenant’s business from the Leased Premises impracticable, shall be permanently
taken or condemned for any public purpose, then this Lease, at the option of Tenant or Landlord
upon the giving of written notice to the other party within ten (10) days from the date of such
condemnation or taking, shall forthwith cease and terminate. If less than all or substantially all
of the Leased Premises or any portion of the Building shall be permanently taken or condemned for
any public purpose, then Landlord shall have the option of terminating this Lease by written
notice to Tenant within ten (10) days from the date of such condemnation or taking. If this Lease
is terminated as provided above, this Lease shall cease and expire as if
17
the date of transfer of possession of the Leased Premises, the Building, or any portion
thereof, was the expiration date of this Lease. In the event that this Lease is not terminated by
either Landlord or Tenant as aforesaid, Tenant shall pay the Rental up to the date of transfer of
possession of such portion of the Leased Premises so taken or condemned and this Lease shall
thereupon cease and terminate with respect to such portion of the Leased Premises so taken or
condemned as if the date of transfer of possession of the Leased Premises was the expiration date
of the term of this Lease relating to such portion of the Leased Premises. Thereafter the Base
Rental, Tenant’s Forecast Additional Rental and Tenant’s Additional Rental shall be adjusted on a
pro rata, net rentable square foot basis. In the event of any such condemnation or taking and this
Lease is not so terminated, Landlord shall promptly repair the Leased Premises or the Building, as
the case may be, to Base Building Shell Condition so that the remaining portion of the Leased
Premises or Building, as the case may be, shall constitute an architectural unit, fit for Tenant’s
occupancy and business; provided, however, that Landlord’s obligation to repair hereunder shall be
limited to the extent of the net proceeds made available to Landlord for such repair from any such
condemnation or taking. In the event of any temporary taking or condemnation for any public
purpose of the Leased Premises or any portion thereof, then this Lease shall continue in full
force and effect except that Base Rental, Tenant’s Forecast Additional Rental, and Tenant’s
Additional Rental shall be adjusted on a pro rata net rentable square foot basis for the period of
time that the Leased Premises are so taken as of the date of transfer of possession of the Leased
Premises and Landlord shall be under no obligation to make any repairs or alterations. In the
event of any condemnation or taking of the Leased Premises, Tenant hereby assigns to Landlord the
value of all or any portion of the unexpired term of the Lease and all leasehold improvements and
Tenant may not assert a claim for a condemnation award therefor; provided, however, Tenant may
pursue a separate attempt to recover an award or compensation against or from the condemning
authority for (i) the value of any fixtures, furniture, furnishings, Tenant’s Extra Work and other
personal property which were condemned but which under the terms of this Lease, Tenant is
permitted to remove at the end of the term of this Lease, (ii) relocation and moving expenses, and
(iii) compensation for loss to Tenant’s business.
6.2.
Damages from Certain Causes.
Landlord shall not be liable or responsible to
Tenant for any loss or damage to any property or person occasioned by theft, fire, act of God,
public enemy, riot, strike, insurrection, war, act or omission of any tenant or occupant of the
Building, any nuisance or interference caused or created by any tenant or occupant of the Building,
requisition or order of governmental body or authority, court order or injunction, or any cause
beyond Landlord’s control or, except in the case of the gross negligence or intentional misconduct
of Landlord, for any damage or inconvenience which may arise through repair or alteration of any
part of the Building. Tenant shall notify Landlord of any damage to the Leased Premises, regardless
of the cause of such damage.
6.3.
Casualty Clause.
(a) In the event any portion of the Leased Premises or any portion of the General Common Areas
is damaged by fire or other casualty, earthquake or flood or by any other cause of any kind or
nature (hereinafter collectively referred to as the
“damaged property”
)
and the damaged property
can, in the opinion of the Landlord’s architect, be repaired within ninety (90) calendar days from
the date of notice of Landlord’s architect’s
18
opinion, then Landlord shall proceed to rebuild or restore the damaged property to Base
Building Shell Condition, subject to subsection (e) hereof.
(b) In the event the damaged property can not, in the opinion of Landlord’s architect, be
repaired within ninety (90) days from the date of notice of Landlord’s architect’s opinion, but can
be repaired within one hundred eighty (180) days from the date of notice of Landlord’s architect’s
opinion, Landlord, at Landlord’s sole option, shall have the right (i) to terminate this Lease by
notifying Tenant of such termination within twenty (20) days of receipt of Landlord’s architect’s
opinion, or (ii) to restore or rebuild the damaged property to Base Building Shell Condition,
subject to subsection (e) hereof.
(c) If, in the opinion of Landlord’s architect, damage to the damaged property cannot be
repaired within one hundred eighty (180) days from the date of notice of Landlord’s architect’s
opinion, then both Landlord and Tenant shall have the right to terminate this Lease by notifying
the other party in writing of such termination within twenty (20) days of receipt of Landlord’s
architect’s opinion.
(d) Notwithstanding any language herein to the contrary, if at the time of any such damage,
less than one (1) year remains in the term of this Lease, exclusive of any renewal options, then
Landlord, at Landlord’s sole option, shall have the right to terminate this Lease.
(e) If at anytime during the term of this Lease the Building is damaged and the cost of
repairing and restoring the same exceeds twenty-five percent (25%) of the replacement cost of the
improvements comprising the Building, then Landlord, at Landlord’s sole option, shall have the
right to terminate this Lease.
(f) Notwithstanding any language contained herein to the contrary, in the event this Lease is
not terminated as provided hereunder (i) Landlord shall be obligated to rebuild or restore the
damaged property only to the extent of the net insurance proceeds available to Landlord for the
purpose of rebuilding and restoration, (ii) if the damaged property is all or any portion of the
Leased Premises Landlord shall be obligated to rebuild or restore the damaged property only to Base
Building Shell Condition, except that Tenant shall have the right to require Landlord to rebuild or
restore the damaged property substantially to the condition which existed immediately prior to such
damage, provided that Tenant shall bear all costs and expenses, including without limitation,
rentals that are lost due to extended construction time, in excess of the lesser of (A) any net
insurance proceeds available to Landlord for the purpose of rebuilding or restoration, or (B) the
cost to Landlord of rebuilding and restoring the damaged property to Building Standard condition
(with Building Standard tenant allowances); and (iii) to the extent Landlord has rental loss
insurance proceeds available, Tenant shall be entitled to a pro rata abatement of Base Rental,
Tenant’s Forecast Additional Rental, and Tenant’s Additional Rental during the period of time the
Leased Premises, or any portion thereof, are untenantable due to such damage. Landlord’s
architect’s opinion shall be delivered to both Landlord and Tenant within thirty (30) days from the
date of any such damage. In the event of any termination of this Lease under this
Section,
this
Lease shall cease and terminate as if the date of such damage was the expiration date of the term
of this Lease. Notwithstanding any contrary language in this
Section,
if the Leased Premises, the
Building, or any portion thereof shall be damaged through the negligence or willful misconduct of
Tenant and the cost of repairing the same is not covered by Landlord’s insurance, such damage shall
be repaired by Landlord at the sole expense of Tenant and rent shall continue hereunder unabated.
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(g) If any portion of Tenant’s leasehold improvements (including, but not limited to, Tenant’s
Extra Work), alterations, additions, improvements, fixtures, furnishing, equipment or trade
fixtures are damaged by fire or other casualty, earthquake or flood or by any other cause of any
kind or nature, Tenant shall immediately restore the same to the condition existing immediately
prior to such damage, unless such damage is so extensive as to permit termination of this Lease as
provided herein and the Lease is terminated in accordance with such provisions.
6.4.
Casualty Insurance.
Landlord shall maintain all-risk property insurance on the
Building and on all Base Building Shell Condition improvements. Said insurance shall be maintained
with an insurance company authorized to do business in Tennessee, at full replacement cost and
payments for losses thereunder shall be made solely to Landlord. Tenant shall maintain at its
expense business interruption insurance and all-risk property insurance on the full replacement
cost of all its personal property, including removable trade fixtures, located in the Leased
Premises and on Tenant’s Extra Work and all other additions and improvements (including fixtures)
made by Tenant and not required to be insured by Landlord above, regardless of whether such
improvements were made at Landlord’s or Tenant’s expense. If the annual premiums to be paid by
Landlord shall exceed the standard rates because of Tenant’s operations within, or contents of, the
Leased Premises or because the improvements to the Leased Premises are in excess of improvements
contemplated by the Tenant Improvement Allowance, Tenant shall promptly pay the excess amount of
the premium upon request by Landlord (and if necessary, Landlord may allocate the insurance costs
of the Building to give effect to this sentence). Upon the request of Landlord, a duly executed
certificate of insurance, reflecting Tenant’s maintenance of the insurance required under this
Section 6.4
and
Section 6.5
, shall be delivered to Landlord.
6.5.
Liability Insurance.
Landlord and Tenant shall each maintain a policy or
policies of commercial general liability insurance with the premiums thereon fully paid on or
before the due dates, issued by and binding upon a solvent insurance company authorized to
transact business in Tennessee. Such insurance shall be written on an occurrence basis and shall
afford minimum protection (which may be affected by primary and/or excess coverage) of not less
than $1,000,000.00 per occurrence for bodily injury and property damage with umbrella liability in
excess of $1,000,000 of no less than $2,000,000 per occurrence and in the aggregate provided,
however, Tenant shall carry such greater limits of coverage as Landlord may reasonably request
from time to time so long as Landlord maintains similar limits of coverage.
6.6.
Hold Harmless.
Landlord shall not be liable to Tenant, its agents, servants,
employees, contractors, customers or invitees for any damage to person or property caused by any
act, omission or neglect of Tenant. Without limiting or being limited by any other indemnity in
this Lease, but rather in confirmation and furtherance thereof, Tenant agrees to indemnify, defend
by counsel reasonably acceptable to Landlord and hold Landlord, Landlord’s beneficiaries (if
Landlord is a land trust), the managing agent of the Building, the leasing agent of the Building
and their respective agents, partners, shareholders, officers, directors and employees of the
Building harmless of, from and against any and all losses, damages, liabilities, claims, liens,
costs and expenses (including, but not limited to, court costs, reasonable attorneys’ fees and
litigation expenses) in connection with injury to or death of any person or damage to or theft,
loss or loss of the use of any property occurring in or about the Leased Premises or the Building
arising from Tenant’s occupancy of the Leased Premises, or the
20
conduct of its business or from any activity, work, or thing done, permitted or suffered by
Tenant in or about the Leased Premises or the Building, or from any breach or default on the part
of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed
pursuant to the terms of this Lease, or due to any other act or omission or willful misconduct of
Tenant or any of its agents, employees, contractors, assigns, subtenants, guest or invitees.
6.7.
Waiver of Subrogation Rights.
Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant each hereby waives any and all rights of recovery, claim,
action or cause of action, against the other, its agents, servants, partners, shareholders,
officers or employees, for personal injury, loss or damage to business, and loss or damage that
may occur to the Leased Premises, the Building or any improvements thereto or thereon or any
personal property of such party therein or thereon by reason of fire, the elements, or any other
cause to the extent such loss or damage is covered by terms of the all-risk property insurance
policies referred to in
Section 6.4
hereof or any other insurance policy maintained by Landlord or
Tenant, as applicable, regardless of cause or origin, including negligence of the other party
hereto, its agents, officers, partners, shareholders, servants or employees, and covenants that no
insurer shall hold any right of subrogation against such other party. The foregoing waiver shall
apply regardless of the cause or origin of such claim, including but not limited to the negligence
of a party, or such party’s agents, officers, employees or contractors, but shall not apply if it
would have the effect, but only to the extent of such effect, of invalidating any insurance
coverage of Landlord or Tenant. Each party shall obtain any special endorsements, if any, required
by their respective insurers to evidence compliance with the aforementioned waiver.
ARTICLE VII.
7.1.
Default and Remedies.
(a) The occurrence of any of the following shall constitute a default under and breach of this
Lease by Tenant (an
“Event of Default”
):
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(i)
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Failure by Tenant to pay any Rental within ten
(10) days after the same becomes due hereunder;
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(ii)
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The Leased Premises are deserted, vacated, or not
used for a period exceeding thirty (30) consecutive days, even though
the Tenant continues to pay the stipulated monthly rent;
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(iii)
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Failure by Tenant to observe or perform any of
the covenants in respect of assignment and subletting set forth in
Article VIII;
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(iv)
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Failure by Tenant to cure forthwith, immediately
after receipt of notice from Landlord, any hazardous condition which
Tenant has created or permitted in violation of law or of this Lease;
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(v)
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Failure by Tenant to complete, execute and
deliver any instrument or document required to be completed, executed
and delivered by Tenant pursuant to
Section 7.8
or
Section 7.9
of
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this Lease, within ten (10) days after the initial written demand
therefor to Tenant;
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(vi)
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Failure by Tenant to observe or perform any other
covenant, agreement, condition or provision of this Lease, if such
failure shall continue for thirty (30) days after written notice thereof
from Landlord to Tenant; provided that such thirty (30) day period shall
be extended for the time reasonably required to complete such cure, if
such failure cannot reasonably be cured within said thirty (30) day
period and Tenant commences to cure such failure within said thirty (30)
day period and thereafter diligently and continuously proceeds to cure
such failure;
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(vii)
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The levy upon execution or the attachment by
legal process of the leasehold interest of Tenant, or the filing or
creation of a lien in respect of such leasehold interest, which lien
shall not be released or discharged within ten (10) days from the date
of such filing;
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(viii)
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Any default under or breach by any guarantor of Tenant’s obligations
under this Lease of such guarantor’s obligations under any agreements
with Landlord;
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(ix)
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Tenant or any guarantor of Tenant’s obligations
under this Lease becomes insolvent or bankrupt or admits in writing its
inability to pay its debts as they mature, or makes an assignment for
the benefit of creditors, or applies for or consents to the appointment
of a trustee or receiver for all or a major part of its property;
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(x)
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A trustee or receiver is appointed for Tenant,
any guarantor of Tenant’s obligations under this Lease or for a major
part of either party’s property and is not discharged within sixty (60)
days after such appointment;
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(xi)
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Any bankruptcy, reorganization, arrangement,
insolvency or liquidation proceeding, or other proceeding for relief
under any bankruptcy law or similar law for the relief of debtors, is
instituted (A) by Tenant or any guarantor of Tenant’s obligations under
this Lease, or (B) against Tenant or any guarantor of Tenant’s
obligations under this Lease and is allowed against it or is consented
to by it or is not dismissed within sixty (60) days after such
institution;
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(xii)
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Tenant’s repeated or continued failure to
timely pay any Rental due Landlord hereunder where such failure shall
continue or be repeated for two (2) consecutive months, or for a total
of four (4) months in any period of twelve (12) consecutive months; or
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(xiii)
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Tenant’s repeated failure to observe or perform any of the other
covenants, terms or conditions hereof more than six (6) times, in the
aggregate, in any period of twelve (12) consecutive months.
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(b) Upon the occurrence of an Event of Default, Landlord shall have the option to do and
perform any one or more of the following in addition to, and not in limitation of, any other
remedy or right permitted it by law or in equity or by this Lease:
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(i)
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Landlord, with or without terminating this
Lease, may immediately or at any time thereafter re-enter the Leased
Premises and correct or repair any condition which shall constitute a
failure on Tenant’s part to keep, observe, perform, satisfy, or abide
by any term, condition, covenant, agreement, or obligation of this
Lease or of the Rules and Regulations now in effect or hereafter
adopted or of any notice given Tenant by Landlord pursuant to the terms
of this Lease, and Tenant shall fully reimburse and compensate Landlord
on demand.
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(ii)
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Landlord, with or without terminating this
Lease, may immediately or at any time thereafter demand in writing that
Tenant vacate the Leased Premises and thereupon Tenant shall vacate the
Leased Premises and remove therefrom all property thereon belonging to
or placed on the Leased Premises by, at the direction of, or with
consent of Tenant within ten (10) days of receipt by Tenant of such
notice from Landlord, whereupon Landlord shall have the right to
re-enter and take possession of the Leased Premises. Any such demand,
re-entry and taking possession of the Leased Premises by Landlord shall
not of itself constitute an acceptance by Landlord of a surrender of
this Lease or of the Leased Premises by Tenant and shall not of itself
constitute a termination of this Lease by Landlord.
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(iii)
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Landlord, with or without terminating this Lease,
may immediately or at any time thereafter, re-enter the Leased Premises
and remove therefrom Tenant and all property belonging to or placed on
the Leased Premises by, at the direction of, or with consent of Tenant.
Any such re-entry and removal by Landlord shall not of itself constitute
an acceptance by Landlord of a surrender of this Lease or of the Leased
Premises by Tenant and shall not of itself constitute a termination of
this Lease by Landlord.
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(iv)
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Landlord, with or without terminating this Lease,
may immediately or at any time thereafter relet the Leased Premises or
any part thereof for such time or times, at such rental or rentals and
upon such other terms and conditions as Landlord in its sole discretion
may deem advisable, and Landlord may make any alterations or repairs to
the Leased Premises which it may deem necessary or
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proper to facilitate such reletting; and Tenant shall pay all costs
of such reletting including but not limited to the cost of any such
alterations and repairs to the Leased Premises, attorneys’ fees,
leasing inducements, and brokerage commissions; and if this Lease
shall not have been terminated, Tenant shall continue to pay all rent
and all other charges due under this lease up to and including the
date of beginning of payment of rent by any subsequent tenant of part
or all of the Leased Premises, and thereafter Tenant shall pay
monthly during the remainder of the term of this Lease the
difference, if any, between the rent and other charges collected from
any such subsequent tenant or tenants and the rent and other charges
reserved in this Lease, but Tenant shall not be entitled to receive
any excess of any such rents collected over the rents reserved
herein.
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(v)
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Landlord may immediately or at any time thereafter
terminate this Lease, and this Lease shall be deemed to have been
terminated upon receipt by Tenant of written notice of such termination;
upon such termination Landlord shall recover from Tenant all damages
Landlord may suffer by reason of such termination including, without
limitation, unamortized sums expended by Landlord for leasing commissions
and construction of tenant improvements, all arrearages in rentals,
costs, charges, additional rentals, and reimbursements, the cost
(including court costs and attorneys’ fees) of recovering possession of
the Leased Premises, the cost of any alteration of or repair to the
Leased Premises which is necessary or proper to prepare the same for
reletting and, in addition thereto, Landlord at its election shall have
and recover from Tenant either (A) an amount equal to the excess, if any,
of the total amount of all rents and other charges to be paid by Tenant
for the remainder of the term of this Lease over the then reasonable
rental value of the Leased Premises for the remainder of the term of this
Lease, or (B) the rents and other charges which Landlord would be
entitled to receive from Tenant pursuant to the provisions of
Section
7.
1(b)(iv)
if the Lease were not terminated. Such election shall be made
by Landlord by serving written notice upon Tenant of its choice of one of
the two said alternatives within thirty (30) days of the notice of
termination. All future amounts due in accordance with this
Section
7.
1(b)(v)
shall be discounted to present value at the per annum interest
rate publicly announced by a federally insured bank selected by Landlord
in the state in which the Building is located as such bank’s prime or
base rate.
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(c) If Landlord re-enters the Leased Premises or terminates this Lease pursuant to any of the
provisions of this Lease, Tenant hereby waives all claims for damages which may be caused by such
re-entry or termination by Landlord. Tenant shall and does hereby indemnify and hold Landlord
harmless from any loss, cost (including court costs and
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attorneys’ fees), or damages suffered by Landlord by reason of such re-entry or termination.
No such re-entry or termination shall be considered or construed to be a forcible entry.
(d) The exercise by Landlord of any one or more of the rights and remedies provided in this
Lease shall not prevent the subsequent exercise by Landlord of any one or more of the other rights
and remedies herein provided. All remedies provided for in this Lease are cumulative and may, at
the election of Landlord, be exercised alternatively, successively, or in any other manner and are
in addition to any other rights provided for or allowed by law or in equity.
(e) No act by Landlord with respect to the Leased Premises shall terminate this Lease,
including, but not limited to, acceptance of the keys, institution of an action for detainer or
other dispossessory proceedings, it being understood that this Lease may only be terminated by
express written notice from Landlord to Tenant, and any reletting of the Leased Premises shall be
presumed to be for and on behalf of Tenant, and not Landlord, unless Landlord expressly provides
otherwise in writing to Tenant.
(f) Upon termination of Tenant’s right to possess the Leased Premises, Landlord shall, only to
the extent required by applicable law, use objectively reasonable efforts to mitigate damages by
reletting the Leased Premises. Landlord shall not be deemed to have failed to do so if Landlord
refuses to lease the Leased Premises to a prospective tenant that Landlord deems, in the exercise
of Landlord’s business judgment, unacceptable for or incompatible with the other tenants of the
Building, or who (1) is an Affiliate (as defined below), parent or subsidiary of Tenant; (2) is not
acceptable to any Mortgagee of Landlord; (3) requires improvements to the Leased Premises to be
made at Landlord’s expense; or (4) is unwilling to accept lease terms then proposed by Landlord,
including: (a) leasing for a shorter or longer term than remains under this Lease; (b)
re-configuring or combining the Leased Premises with other space, (c) taking all or only a part of
the Leased Premises; and/or (d) changing the use of the Leased Premises. Notwithstanding Landlord’s
duty to mitigate its damages as provided herein, Landlord shall not be obligated (i) to give any
priority to reletting Tenant’s space in connection with its leasing of space in the Building or any
complex of which the Building is or becomes a part, or (ii) to accept below market rental rates for
the Leased Premises or any rate that would negatively impact the market rates for the Building. To
the extent that Landlord is required by applicable law to mitigate damages, Tenant must plead and
prove by clear and convincing evidence that Landlord failed to so mitigate in accordance with the
provisions of this Section 7.1(f), and that such failure resulted in an avoidable and quantifiable
detriment to Tenant.
7.2.
Insolvency or Bankruptcy.
The appointment of a receiver to take possession of all
or substantially all of the assets of Tenant or any guarantor of Tenant’s obligations under this
Lease, or any general assignment by Tenant or any guarantor of Tenant’s obligations under this
Lease for the benefit of creditors, or any action taken or suffered by Tenant or any guarantor of
Tenant’s obligations under this Lease under any insolvency, bankruptcy, or reorganization act,
shall, at Landlord’s option, constitute a breach of this Lease by Tenant. Upon the happening of any
such event or at any time thereafter, this Lease shall terminate five (5) days after written notice
of termination from Landlord to Tenant. In no event shall this Lease be assigned or assignable by
operation of law or by voluntary or involuntary bankruptcy proceedings or otherwise and in no event
shall this Lease or any
25
rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency, or
reorganization proceedings.
7.3.
Late Payments.
Tenant shall pay, as a one (1) time late charge on each
installment of any Rental owed by Tenant hereunder that is not paid when due, the greater of
$100.00 or an amount equal to five percent (5%) of the amount due for each and every thirty (30)
day period that said amount remains unpaid (but in no event shall the amount of such late charge
exceed an amount based upon the highest legally permissible rate chargeable at any time by Landlord
under the circumstances). Should Tenant make a partial payment of past due amounts, the amount of
such partial payment shall be applied first to reduce all accrued and unpaid late charges, in
inverse order of their maturity, and then to reduce all other past due amounts, in inverse order of
their maturity.
7.4.
Attorney’s Fees.
In any action to enforce a party’s rights under this Lease or
the terms hereof, the prevailing party shall be entitled to collect from the other party all court
costs, reasonable attorneys fees and litigation expenses, including, but not limited to, costs of
depositions and expert witnesses, actually incurred by the prevailing party in connection with such
action.
7.5.
Waiver of Homestead.
Tenant hereby waives and renounces all homestead or
exemption rights which Tenant may have under or by virtue of the Constitutions and Laws of the
United States, the State of Tennessee, and any other State as against any debt or sum Tenant may
owe Landlord under this Lease and hereby transfers, conveys, and assigns to Landlord all homestead
or exemption rights which may be allowed or set apart to Tenant, including such as may be set apart
in any bankruptcy proceeding, to pay any debt or sum owing by Tenant to Landlord hereunder.
7.6.
No Waiver of Rights.
No failure or delay of Landlord to exercise any right or
power given it herein or to insist upon strict compliance by Tenant of any obligation imposed on
it herein and no custom or practice of either party hereto at variance with any term hereof shall
constitute a waiver or a modification of the terms hereof by Landlord or any right it has herein
to demand strict compliance with the terms hereof by Tenant. No waiver of any right of Landlord or
any default by Tenant on one occasion shall operate as a waiver of any of Landlord’s other rights
or of any subsequent default by Tenant. No express waiver shall affect any condition, covenant,
rule, or regulation other than the one specified in such waiver and then only for the time and in
the manner specified in such waiver. No person has or shall have any authority to waive any
provision of this Lease unless such waiver is expressly made in writing and signed by an
authorized officer of Landlord.
7.7.
Holding Over.
In the event of holding over by Tenant after expiration or
termination of this Lease without the written consent of Landlord, Tenant shall pay as liquidated
damages, solely for such holding over, double the Rental that would have been payable if this
Lease had not so terminated or expired) for the entire holdover period. No holding over by Tenant
after the term of this Lease shall be construed to extend this Lease, and Tenant shall be deemed a
tenant at will, terminable on five (5) days notice from Landlord. In the event of any unauthorized
holding over, Tenant shall indemnify Landlord against all claims for damages by any other tenant
to whom Landlord shall have leased all or any part of the Leased Premises effective upon the
termination of this Lease. Any holding over with the
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express written consent of Landlord shall thereafter constitute this Lease to be a lease from
month to month (terminable by either party on thirty (30) days notice) at a Base Rental, Tenant’s
Forecast Additional Rental, and all other sums required to be paid by Tenant prior to the
expiration or termination of this Lease as may be determined by Landlord.
7.8.
Subordination.
(a) Landlord may have heretofore or may hereafter encumber with a mortgage, deed of trust,
deed to secure debt, financing statement or other security interests
(collectively, a
“Mortgage”)
the Land, the Project or any part thereof or any interest therein, may sell and lease back the
Land, the Project or any part thereof, and may encumber the leasehold estate under such a sale and
leaseback arrangement with a Mortgage. (The holder of any Mortgage is herein called a
“Mortgagee.”
A lease creating Landlord’s interest in the Land, the Project or part thereof is herein called a
“Ground Lease”
and the lessor under any such Ground Lease is herein called a
“Ground Lessor.”
)
This Lease and the rights of Tenant hereunder shall be and are hereby expressly made subject to
and subordinate at all times to any Mortgage and to any Ground Lease now or hereafter existing,
and to all amendments, modifications, renewals, extensions, consolidations and replacements
thereof, and to all advances made or hereafter to be made upon the security thereof; provided,
however, that the Mortgagee or Ground Lessor shall not, so long as Tenant shall not be in default
under this Lease, disturb Tenant in its possession of the Leased Premises or terminate Tenant’s
rights hereunder. Tenant agrees to execute and deliver to Landlord such further instruments
consenting to or confirming the subordination of this Lease to any Mortgage and to any Ground
Lease and containing such other provisions which may be requested in writing by Landlord within
ten (10) days after Tenant’s receipt of such written request.
(b) Tenant agrees that if Landlord defaults in the performance or observance of any covenant
or condition of this Lease required to be performed or observed by Landlord hereunder, Tenant will
give written notice specifying such default by certified or registered mail, postage prepaid, to
any Mortgagee or Ground Lessor of which Tenant has been notified in writing, and before Tenant
exercises any right or remedy which it may have on account of any such default of Landlord, such
Mortgagee or Ground Lessor shall have a reasonable amount of time to cure such default of Landlord,
if such default can be cured without such Mortgagee or Ground Lessor taking possession of the
mortgaged or leased estate, or to obtain possession of the mortgaged or leased estate and then to
cure such default of Landlord, if such default cannot be cured without such Mortgagee or Ground
Lessor taking possession of the mortgaged or leased estate.
(c) If any Mortgage is foreclosed, or Landlord’s interest under this Lease is conveyed or
transferred in lieu of foreclosure, or if any Ground Lease is terminated:
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(i)
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No person or entity which as the result of any
of the foregoing has succeeded to the interest of Landlord in this
Lease (any such person or entity being hereafter called a
“
Successor
”)
shall be liable for any default by Landlord or any other matter which
occurred prior to the date such Successor succeeded to Landlord’s
interest in this Lease, nor shall such Successor be bound by or
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subject to any offsets or defenses which Tenant may have against
Landlord or any other predecessor in interest to such Successor.
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(ii)
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Upon request of any Successor, Tenant will
attorn to such Successor, as Landlord under this Lease, subject to the
provisions of this
Section 7.
8(c)
and
Section 7.
8(e)
,
and will execute
and deliver such instruments as may be necessary or appropriate to
evidence such attornment within ten (10) days after receipt of a
written request to do so.
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(iii)
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No Successor shall be bound to recognize any
prepayment by more than thirty (30) days of any Rental payable by
Tenant hereunder.
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(d) Notwithstanding anything to the contrary contained herein, any Mortgagee may subordinate,
in whole or in part, its Mortgage to this Lease by sending Tenant notice in writing subordinating
all or any part of such Mortgage to this Lease, and Tenant agrees to execute and deliver to such
Mortgagee such further instruments consenting to or confirming the subordination of all or any
portion of its Mortgage to this Lease and containing such other provisions which may be requested
in writing by such Mortgagee within ten (10) days after Tenant’s receipt of such written request.
(e) Whether or not any Mortgage is foreclosed or any Ground Lease is terminated, or any
Mortgagee or Ground Lessor succeeds to any interest of Landlord under this Lease, no Mortgagee or
Ground Lessor shall have any liability to Tenant for any security deposit paid to Landlord by
Tenant hereunder, unless such security deposit has actually been received by such Mortgagee or
Ground Lessor.
(f) Should any prospective Mortgagee or Ground Lessor require a modification or modifications
of this Lease, which modification or modifications will not cause an increased cost or expense to
Tenant or in any other way materially and adversely change the rights and obligations of Tenant
hereunder, in the reasonable judgment of Tenant, then and in such event, Tenant agrees that this
Lease may be so modified and agrees to execute whatever documents are required therefor and deliver
the same to Landlord within ten (10) days following written request therefor. Should any
prospective Mortgagee or Ground Lessor require execution of a short form of this Lease for
recording (containing, among other customary provisions, the names of the parties, a description of
the Leased Premises and the term of this Lease), Tenant agrees to execute such short form of lease
and deliver the same to Landlord within ten (10) days following the request therefor.
(g) If Tenant fails within ten (10) days after initial written demand therefor to execute and
deliver any instruments as may be necessary or proper to effectuate any of the covenants of Tenant
set forth above in this
Section,
Tenant hereby makes, constitutes and irrevocably appoints any one
of Landlord or any of Landlord’s beneficiaries or partners in such beneficiaries as
attorney-in-fact for Tenant (such power of attorney being coupled with an interest) with full power
and authority to execute and deliver any such instruments for and in the name of Tenant.
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(h) No Mortgagee or Ground Lessor of which Tenant has been notified, in writing, shall be
bound any amendment or modification of this Lease made without the written consent of such
Mortgagee or Ground Lessor.
7.9.
Estoppel Certificate.
Tenant agrees that, from time to time upon not less than
ten (10) days’ prior request by Landlord, or any existing or prospective Mortgagee or Ground
Lessor, Tenant will, and Tenant will cause any subtenant, licensee, concessionaire or other
occupant of the Leased Premises claiming by, through or under Tenant, to complete, execute and
deliver to Landlord or Landlord’s designee or to any existing or prospective mortgagee or ground
lessor, a written estoppel certificate certifying (i) that this Lease is unmodified and is in full
force and effect (or if there have been modifications, that this Lease, as modified, is in full
force and effect and setting forth the modifications); (ii) the amounts of the monthly installments
of Base Rental, Tenant’s Forecast Additional Rental, Tenant’s Additional Rental Adjustment and
other sums then required to be paid under this Lease by Tenant; (iii) the date to which the Base
Rental, Tenant’s Forecast Additional Rental, Tenant’s Additional Rental Adjustment and other sums
required to be paid under this Lease by Tenant have been paid; (iv) that Landlord is not in default
under any of the provisions of this Lease, or if in default, the nature thereof in detail and what
is required to cure same; and (v) such other information concerning the status of this Lease or the
parties’ performance hereunder reasonably requested by Landlord or the party to whom such estoppel
certificate is to be addressed.
ARTICLE VIII.
8.1.
Sublease or Assignment by Tenant.
(a) The Tenant shall not, without the Landlord’s prior written consent, (i) assign, convey,
mortgage, pledge, encumber, or otherwise transfer (whether voluntarily, by operation of law, or
otherwise) this Lease or any interest hereunder; (ii) allow any lien to be placed upon Tenant’s
interest hereunder; (iii) sublet the Leased Premises or any part thereof; or (iv) permit the use or
occupancy of the Leased Premises or any part thereof by any one other than Tenant. Any attempt to
consummate any of the foregoing without Landlord’s consent shall be void and of no force or effect.
For purposes hereof, the transfer of the ownership or voting rights in a controlling interest of
the voting stock of Tenant (if Tenant is a corporation) or the transfer of a general partnership
interest or a majority of the limited partnership interest in Tenant (if Tenant is a partnership),
at any time throughout the term of this Lease, shall be deemed to be an assignment of this Lease.
(b) Notwithstanding anything herein to the contrary, if at any time or from time to time
during the term of this Lease, Tenant desires to sublet all or any portion of the Leased Premises
or assign all or any portion of Tenant’s interest in this Lease, Tenant shall notify Landlord in
writing (hereinafter referred to in this
Section
as the
“
Notice
”)
of the terms of the proposed
subletting or assignment, the identity of the proposed sublessee or assignee, the area proposed to
be sublet or covered by the assignment (hereinafter referred to as
“Sublet Space”),
and such other
information as Landlord may request to evaluate Tenant’s request to sublet or assign. Landlord
shall then have the option (i) to sublet the Sublet Space from Tenant as provided in subsection (c)
hereof at the same Base Rental and Tenant’s Additional Rental as Tenant is required to pay to
Landlord under this Lease for the Sublet Space, (ii) to terminate this Lease as to the Sublet Space
as provided in subsection (d)
29
hereof, or (iii) to allow the proposed sublease or assignment subject only to the final review
for approval as provided in subsection (e) hereof. Landlord s option to sublet, to terminate, or to
allow the proposed sublease or assignment subject to final review, as the case may be, shall be
exercisable by Landlord in writing within a period of thirty (30) calendar days after receipt of
the Notice and any failure by Landlord to exercise any of such options within said thirty (30) day
period shall be deemed to constitute the election of option (iii) above.
(c) In the event Landlord exercises the option to sublet the Sublet Space pursuant to
Landlord’s options set forth above, the term of the subletting from the Tenant to Landlord shall be
the term set forth in the Notice (which shall not be longer than the then current term of this
Lease unless Landlord expressly agrees in writing that any extension or renewal option contained in
this Lease will apply to such Sublet Space) and shall be on such terms and conditions as are
contained in this Lease to the extent applicable, except that the Landlord shall have the right to
further sublet the Sublet Space freely and without any consent or approval from Tenant and upon
such terms and for such rent as Landlord shall agree upon in its sole and absolute discretion.
(d) If Landlord elects to terminate this Lease pursuant to Landlord’s options set forth above,
then this Lease shall terminate as to the Sublet Space on the date set forth in Landlord’s notice
to Tenant, which date shall be no less than thirty (30) days and no more than ninety (90) days
after the date of such notice. If the Sublet Space does not constitute the entire Leased Premises
and Landlord exercises its option to terminate this Lease with respect to the Sublet Space, as to
that portion of the Leased Premises which is not part of the Sublet Space, this Lease shall remain
in full force and effect except that Base Rental, Tenant’s Forecast Additional Rental, and Tenant’s
Additional Rental shall be calculated on the difference between the Rentable Square Feet prior to
such termination and the Rentable Square Feet of the Sublet Space.
(e) If Landlord elects or is deemed to have elected to allow the proposed sublease or
assignment subject to final review, Tenant shall submit to Landlord, within twenty (20) calendar
days after receipt of Landlord’s notice of election (or the expiration of said thirty (30)-day
period if no such election is made), a copy of the proposed sublease or assignment, which sublease
or assignment must provide for the assumption of all of Tenant’s obligations under this Lease, and
such additional information concerning the business, reputation and credit-worthiness of the
proposed sublessee or assignee as shall be sufficient to allow Landlord to form a commercially
reasonable judgment with respect thereto. Landlord agrees not to unreasonably withhold its
approval of any proposed sublease or assignment and, in the event Landlord fails to approve or
disapprove any such sublease or assignment within thirty (30) days after Landlord’s receipt of
such submission from Tenant, such sublease or assignment shall be deemed to be approved; provided,
however, that if Landlord approves any proposed sublease or assignment, Landlord shall receive
from Tenant as additional rent hereunder seventy-five percent (75%) of any rents or other sums
received by Tenant pursuant to said sublease or assignment in excess of the rentals payable to
Landlord by Tenant under this Lease with respect to the Sublet Space (after deducting all of
Tenant’s reasonable costs associated therewith, including reasonable brokerage fees and the
reasonable cost of remodeling or otherwise improving the Leased Premises for said sublessee or
assignee), as such rents or other sums are received by Tenant from the approved sublessee or
assignee. Landlord may require that any rent or other sums paid by a sublessee or assignee be paid
directly to Landlord. If Landlord approves in writing the proposed sublessee or assignee and the
terms of the proposed sublease
30
or assignment, but a fully executed counterpart of such sublease or assignment is not
delivered to Landlord within sixty (60) calendar days after the date of Landlord’s written
approval, then Landlord’s approval of the proposed sublease or assignment shall be deemed null and
void and Tenant shall again comply with all the conditions of this
Section
as if the Notice and
options hereinabove referred to had not been given, received or exercised. If Landlord fails to
approve the form of sublease or assignment or the sublessee or assignee, Tenant shall have the
right to submit amended forms or other sublessees or assignees to Landlord to review for approval.
(f) Notwithstanding the giving by Landlord of its consent to any sublease or assignment with
respect to the Leased Premises, no sublessee or assignee may exercise any expansion option, right
of first refusal option, or renewal option under this Lease except in accordance with a separate
written agreement entered into directly between such sublessee or assignee and Landlord, and
Tenant may not exercise any such right with respect to any space that Tenant has sublet or
assigned.
(g) Notwithstanding the giving by Landlord of its consent to any subletting, assignment or
occupancy as provided hereunder or any language contained in such lease, sublease or assignment to
the contrary, unless this Lease is expressly terminated by Landlord, Tenant shall not be relieved
of any of Tenant’s obligations or covenants under this Lease and Tenant shall remain fully liable
hereunder.
(h) If, with the consent of the Landlord, the Leased Premises or any part thereof is sublet or
occupied by other than Tenant or this Lease is assigned, Landlord may, after default by Tenant,
collect rent from the subtenant, assignee or occupant, and apply the net amount collected to the
Rental herein reserved. No such subletting, assignment, occupancy, or collection shall be deemed
(i) a waiver of any of Tenant’s covenants contained in this Lease, (ii) a release of Tenant from
further performance by Tenant of its covenants under this Lease, or (iii) a waiver of any of
Landlord’s other rights hereunder.
(i) In no event shall Tenant assign this Lease or enter into any sublease, license, concession
or other agreement for use, occupancy or utilization of any part of the Leased Premises which
provides for a rental or other payment for such use, occupancy or utilization based in whole or in
part on the income or profits derived by any person from the Leased Premises leased, used, occupied
or utilized (other than an amount based on a fixed percentage or percentages of gross receipts of
sales), and Tenant agrees that all assignments, subleases, licenses, concessions or other
agreements for use, occupancy or utilization of any part of the Leased Premises shall provide that
the person having an interest in the possession, use, occupancy or utilization of the Leased
Premises shall not enter into any lease, sublease, license, concession or other agreement for use,
occupancy or utilization of space in the Leased Premises which provides for a rental or other
payment for such use, occupancy or utilization based in whole or in part on the income or profits
derived by any person from the Leased Premises leased, used, occupied or utilized (other than an
amount based on a fixed percentage or percentages of gross receipts of sales) and any such
purported assignment, sublease, license, concession or other agreement shall be absolutely void and
ineffective as a conveyance of any right or interest in the possession, use, occupancy or
utilization of any part of the Leased Premises.
31
8.2.
Assignment by Landlord.
Landlord shall have the right to transfer and assign, in
whole or in part, all its rights and obligations hereunder, in the Building, the Land and all other
property referred to herein, and in such event and upon such transfer (any such transferee to have
the benefit of, and be subject to, the provisions of Sections 8.03 and 8.04 hereof) no further
liability or obligation shall thereafter accrue against Landlord hereunder.
8.3.
Peaceful Enjoyment.
Landlord covenants that Tenant shall and may peacefully have,
hold and enjoy the Leased Premises free from hindrance by Landlord or any person claiming by,
through or under Landlord but subject to the other terms hereof, provided that Tenant pays the
rental and other sums herein recited to be paid by Tenant and performs all of Tenant’s covenants
and agreements herein contained. It is understood and agreed that this covenant and any and all
other covenants of Landlord contained in this Lease shall be binding upon Landlord and its
successors only with respect to breaches occurring during the ownership of the Landlord’s interest
hereunder.
8.4.
Limitation of Landlord’s Personal Liability.
Tenant specifically agrees to look
solely to Landlord’s equity interest in the Building for the recovery of any monetary judgment
against Landlord, it being agreed that Landlord (and its partners and shareholders) shall never be
personally liable for any such judgment. The provision contained in the foregoing sentence is not
intended to, and shall not, limit any right that Tenant might otherwise have to obtain injunctive
relief against Landlord or Landlord’s successors in interest or any suit or action in connection
with enforcement or collection of amounts which may become owing or payable under or on account of
insurance maintained by Landlord.
8.5.
Force Majeure.
Landlord and Tenant (except with respect to the payment of Rental
or any other monetary obligation under this Lease shall be excused for the period of any delay and
shall not be deemed in default with respect to the performance of any of the terms, covenants and
conditions of this Lease when prevented from so doing by a cause or causes beyond the Landlord’s or
Tenant’s (as the case may be) control (excluding financial inability to perform), which shall
include, without limitation, all labor disputes, governmental regulations or controls, fire or
other casualty, inability to obtain any material or services, acts of God, or any other cause not
within the reasonable control of Landlord or Tenant (as the case may be).
ARTICLE IX.
9.1.
Notices.
Any notice or other communications required or permitted to be given
under this Lease must be in writing and shall be effectively given or delivered if (i) hand
delivered to the addresses for Landlord and Tenant stated below, (ii) sent by certified or
registered United States Mail, return receipt requested, to said addresses, or (iii) sent by
nationally recognized overnight courier (such as Federal Express, UPS Next Day Air or Airborne
Express), with all delivery charges paid by the sender and signature required for delivery, to said
address. Any notice mailed shall be deemed to have been given upon receipt or refusal thereof.
Notice effected by hand delivery shall be deemed to have been given at the time of actual delivery.
Either party shall have the right to change its address to which notices shall thereafter be sent
and the party to whose attention such notice shall be directed by giving the other party notice
thereof in accordance with the provisions of this
Section 9.1.
The initial addresses of the parties
for purposes of this Lease are:
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To:
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Lionstone Cash Flow Office One, LP
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Five Greenway Plaza
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Houston, Texas 77046
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Attn: Daniel R. Dubrowski
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Telecopy: (713) 285-2911
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With copy to:
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Property Tennessee One Corporation
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c/o Lionstone Cash Flow Office One, LP
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Five Greenway Plaza
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Houston, Texas 77046
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Attn: F. Russ Nicholson
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Telecopy: (713) 285-2911
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With copy to:
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Nashville Hines Development, LLC
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Property Management Office
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2525 West End Avenue
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Nashville, TN 37203
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Attn: Project Manager
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Tenant:
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Cumberland Pharmaceuticals Inc.
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2525 West End Avenue, Suite 950
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Nashville, TN 37203
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Attn: Jean W. Marstiller
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Telecopy: (615) 255-0094
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With a copy to:
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Adams and Reese / Stokes Bartholomew LLP
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424 Church Street, Suite 2800
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Nashville, TN 37219-2386
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Attn: Martin S. Brown
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Telecopy: (615) 259-1470
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Tenant shall also send a copy of each such notice to each Mortgagee that notifies Tenant in writing
of its interest and the address to which notices are to be sent.
9.2.
Miscellaneous.
(a) This Lease shall be binding upon and inure to the benefit of the successors and assigns of
Landlord, and shall be binding upon and inure to the benefit of Tenant, its successors, and, to the
extent assignment may be approved by Landlord hereunder, Tenant’s assigns. Where appropriate the
pronouns of any gender shall include the other gender, and either the singular or the plural shall
include the other.
(b) All rights and remedies of Landlord and Tenant under this Lease shall be cumulative and
none shall exclude any other rights or remedies allowed by law. This Lease is declared to be a
Tennessee contract, and all of the terms hereof shall be construed according to the laws of the
State of Tennessee.
(c) This Lease may not be altered, changed or amended, except by an instrument in writing
executed by all parties hereto. Further, the terms and provisions of this
33
Lease shall not be construed against or in favor of a party hereto merely because such party
is the
“Landlord”
or the
“Tenant”
hereunder or such party or its counsel is the draftsman of this
Lease.
(d) If Tenant is a corporation, partnership or other entity, Tenant warrants that all consents
or approvals required of third parties (including but not limited to its Board of Directors or
partners) for the execution, delivery and performance of this Lease have been obtained and that
Tenant has the right and authority to enter into and perform its covenants contained in this Lease.
Likewise, if Landlord is a corporation, partnership or other entity, Landlord warrants that all
consent or approvals required of third parties (including but not limited to its Board of Directors
or partners) for the execution, delivery and performance of this Lease have been obtained and that
Landlord has the right and authority to enter into and perform its covenants contained in this
Lease.
(e) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HERETO SHALL AND THEY HEREBY DO
WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES
HERETO AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS
LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT’S USE OR OCCUPANCY OF THE DEMISED PREMISES
AND/OR ANY CLAIM OF INJURY OR DAMAGE. IN THE EVENT LANDLORD COMMENCES ANY PROCEEDINGS FOR
NONPAYMENT OF RENT OR ANY OTHER AMOUNTS PAYABLE HEREUNDER, TENANT SHALL NOT INTERPOSE ANY
COUNTERCLAIM OF WHATEVER NATURE OR DESCRIPTION IN ANY SUCH PROCEEDING, UNLESS THE FAILURE TO RAISE
THE SAME WOULD CONSTITUTE A WAIVER THEREOF. THIS SHALL NOT, HOWEVER, BE CONSTRUED AS A WAIVER OF
TENANT’S RIGHT TO ASSERT SUCH CLAIMS IN ANY SEPARATE ACTION BROUGHT BY TENANT.
(f) Wherever in this Lease there is imposed upon Landlord the obligation to use best or
reasonable efforts or due diligence, Landlord shall be required to do so only to the extent the
same is economically feasible and otherwise will not impose upon Landlord extreme financial or
other burdens.
(g) If any term or provision of this Lease, or the application thereof to any person or
circumstance, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the
application of such provision to persons or circumstances other than those as to which it is
invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be
valid and shall be enforceable to the extent permitted by law.
(h) Time is of the essence in this Lease.
(i) This Lease agreement shall not convey any leasehold estate from Landlord to Tenant.
Landlord and Tenant hereby agree that this Lease creates only the interest of a usufruct in Tenant
which may not be levied upon or assigned without Landlord’s permission.
34
(j) Tenant represents and warrants to Landlord that Tenant did not deal with any broker in
connection with this Lease. Tenant shall indemnify, defend and hold Landlord, Landlord’s
beneficiaries, the managing agent of the Building, the leasing agent of the Building and their
respective agents, partners and employees and the Building harmless of, from and against any and
all losses, damages, liabilities, claims, liens, costs and expenses (including, without
limitation, court costs, reasonable attorneys’ fees and litigation expenses) arising from any
claims or demands of any broker or brokers or finders for any commission alleged to be due such
other broker or brokers or finders claiming to have dealt with Tenant in connection with this
Lease or with whom Tenant hereafter deals or whom Tenant employs. The provisions of this
subsection shall survive the expiration or earlier termination of this Lease.
(k) If Tenant comprises more than one person, corporation, partnership, limited liability
company or other entity, the liability hereunder of all such persons, corporations, partnerships
or other entities shall be joint and several.
(1) Landlord’s receipt of any Rental payable by Tenant hereunder with knowledge of the breach
of a covenant or agreement contained in this Lease shall not be deemed a waiver of the breach. No
acceptance by Landlord of a lesser amount than the installment of Rental which is due shall be
considered, nor shall any endorsement or statement on any check or any letter accompanying any
check or payment be deemed, an accord and satisfaction. Landlord may accept a check or payment
without prejudice to Landlord’s right to recover the balance due or to pursue any other remedy
provided in this Lease.
(m) Wherever Landlord’s consent or approval is required pursuant to the terms of this Lease,
Landlord may grant or withhold the same in Landlord’s sole and absolute discretion, except as
otherwise expressly provided herein.
(n) Tenant covenants and agrees to keep strictly confidential all of the financial terms of
this Lease and not to disseminate any such information to any third parties without the prior
written consent of Landlord. Tenant further covenants and agrees that, at all times after the date
of this Lease and prior to the Commencement Date, unless consented to in writing by Landlord, no
press release or other public disclosure concerning this Lease shall be made by Tenant.
(o) Submission of this instrument for examination shall not constitute a reservation of or
option to lease the Leased Premises or in any manner bind Landlord, and no lease or obligation on
Landlord shall arise until this instrument is signed and delivered by Landlord and Tenant;
provided, however, the execution and delivery by Tenant of this Lease to Landlord, or the managing
agent of the Building or the leasing agent of the Building shall constitute an irrevocable offer by
Tenant to lease the Leased Premises on the terms and conditions herein contained, which offer may
not be revoked for thirty (30) days after such delivery.
(p)
Financial Statements.
Tenant shall deliver to Landlord, within fifteen (15) days
after Landlord’s request, Tenant’s annual financial statement for the immediately previous fiscal
year and Tenant’s quarterly financial statements, if any, prepared since such annual financial
statement, including balance sheets, income statements and cash flow statements,
35
prepared in accordance with generally accepted accounting principles consistently applied.
Such financial statements shall be certified by the chief financial officer of Tenant as being
true, accurate and complete in all material respects. If Tenant’s annual financial statement will
not be prepared or complete within such fifteen (15) day period, then Tenant’s time to deliver its
annual financial statement shall be extended to the day that such statement is completed in the
normal course of Tenant’s business and in keeping with reasonable business practices. However, if
Tenant’s time to respond would be extended by more than thirty (30) days, Tenant shall so notify
Landlord in writing upon Tenant’s receipt of Landlord’s request for Tenant’s financial statement,
and shall offer to Landlord (in the interim) a copy of Tenant’s prior year’s financial statement
with Tenant’s chief financial officer’s estimate of any material differences in Tenant’s financial
condition since that statement was prepared. Landlord shall only make request for such financial
statements when Landlord determines, in the exercise of Landlord’s reasonable judgment, that such
information is of immediate value.
9.3.
Option to Renew.
Subject to the provisions hereinafter set forth and the
expansion and renewal rights of other tenants on the floor containing the Leased Premises, Landlord
hereby grants to Tenant an option to extend the Lease Term for not less than the entire initial
Leased Premises (the
“Option to Renew”
)
on the same terms, conditions and provisions as contained
in this Lease, as modified in this
Section 9.3
, for one period of five (5) years (the
“Renewal
Period”
)
commencing on January 1, 2011 (the
“Renewal Period Commencement Date”
)
and ending at 6:00
p.m. on December 31, 2015.
(a) The Option to Renew shall be exercisable by written notice from Tenant to Landlord of
Tenant’s election to exercise said option
(“Tenant’s Renewal Notice”)
given not earlier than
twenty-four (24) months nor later than nine (9) months prior to the Renewal Period Commencement
Date, time being of the essence. If the Option to Renew is not so exercised, said option shall
thereupon expire.
(b) Tenant may only exercise the Option to Renew, and an exercise thereof shall only be
effective, if at the time of Tenant’s exercise of said option and on the Renewal Period
Commencement Date this Lease is in full force and effect and there is no Event of Default under
this Lease. No sublessee shall be entitled to exercise the renewal option under this
Section 9.3.
(c) Rent per Rentable Square Foot payable during the Renewal Period with respect to all space
included in the Leased Premises as of the Renewal Period Commencement Date shall be equal to
Landlord’s then-quoted Building rental rate for the Leased Premises, which may be a stepped rate,
taking into account other pecuniary concessions such as any rent abatement, tenant improvement
allowances, commissions, lese term, lease rate escalations, operating expenses, and taxes. Landlord
shall give Tenant written notice of the proposed Market Rental Rate within twenty (20) days
following written request by Tenant made not earlier than fourteen (14) months prior to the Renewal
Period Commencement Date; provided, however, Landlord shall not be required to provide its notice
of the proposed Market Rental Rate until Landlord has received Tenant’s Renewal Notice.
(d) If Tenant has validly exercised the Option to Renew, within thirty (30) days after request
by either party hereto, Landlord and Tenant shall enter into a written
36
amendment to this Lease confirming the terms, conditions and provisions applicable to the
Renewal Period as determined in accordance herewith, with such revisions to the rental provisions
of this Lease as may be necessary to conform such provisions to the Market Rental Rate.
[signatures appear on following page]
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IN WITNESS WHEREOF, the parties hereto have executed and sealed this Lease as of the date
aforesaid.
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LANDLORD:
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NASHVILLE HINES DEVELOPMENT, LLC,
a Delaware limited liability company
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By:
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Cash Flow Asset Management, L.P.,
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a Texas limited partnership, its sole manager
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By:
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CFAM GP, L.L.C.,
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a Texas limited liability company, its sole partner
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By:
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/s/ F. Russ Nicholson
F. Russ Nicholson
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Vice President
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TENANT:
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CUMBERLAND PHARMACEUTICALS INC.
,
a Tennessee corporation
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By:
Name:
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/s/ A.J. Kazimi
A. J. Kazimi
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Title:
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Chief Executive Officer
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38
EXHIBIT A
SITE PLAN AND LOCATION OF THE
BUILDING
Exhibit A — Page 1
EXHIBIT A-1
DESCRIPTION OF LAND
Tract 1 / 3.01 Acres
Being a parcel of land in Nashville, First Civil District, Eighteenth Councilmanic District,
Davidson County, Tennessee, generally located on the southerly side of West End Avenue between
Twenty-Fifth Avenue South and Natchez Trace, being part of Lot 1, Vanderbilt University
Consolidation Plat of record in Plat Book 9700, page 522, R.O.D.C. and being more particularly
described as follows:
Beginning at a mag nail (new) in the westerly right-of-way line of Twenty-Fifth Avenue South
(50-foot right-of-way) at the southerly terminus of a curve return to the southerly right-of-way
line of West End Avenue (right-of-way varies);
THENCE,
along said westerly right-of-way line of Twenty-Fifth Avenue South, S
36° 59' 53" E,
179.61 to an iron pipe (old) at the northeast corner of property conveyed to Vanderbilt University
by deed of record in Book 5157, page 991, R.O.D.C.;
THENCE,
along the northerly line of said property, S 53° 09' 57" W, 150.00 feet to an “x” in conc.
wall;
THENCE,
along the westerly line of said property, S 36° 59' 53" E, 179.81 feet to an iron pin
(set) in the northerly line of a fifty foot wide ingress and egress easement;
THENCE, along the northerly line of said ingress and egress easement the following
calls;
S 53°
08' 25" W, 90.85 feet to an iron pin (set) at the beginning of a curve to the
left;
Along said curve to the left, 136.18 feet to a railroad spike (new), said curve having a central
angle of
17° 56' 44", a radius of 434.80 feet, a tangent of
68.65 feet and a chord of S 44° 10' 03" W,
135.63 feet;
S 35°
11' 41" W, 8.07 feet to a mag nail (new);
THENCE, leaving the northerly line of said ingress and egress easement and along a severance line
the following calls:
N 36° 59' 13" W, 103.37 feet to a mag nail
(new);
S 53° 00' 47" W, 43.57 feet to a mag nail (new);
N 36° 59' 13" W, 3.57 feet to a mag nail (new);
S 53° 00' 47" W, 12.00 feet to a mag nail (new);
N 36° 59' 13" W, 285.90 feet to a mag nail (new) in the southerly right-of-way line of West End
Avenue;
THENCE, along said right-of-way the following calls;
N 54° 13' 39" E, 33.07 feet to a mag nail (new);
Exhibit A-1 — Page 1
N 53°
00' 47" E, 394.99 feet to an “x” in conc. (new) at the westerly terminus of a curve return to
the right to the westerly right-of-way line of Twenty-Fifth Avenue South; Along said curve to the
right 15.71 feet to the point of beginning, said curve having a
central angle of 89° 59' 19", a
radius of 10.00 feet, a tangent of 10.00 feet and a chord of S
81° 59' 33" E, 14.14 feet;
Containing 3.01 acres, more or less.
Exhibit A-1 — Page 2
EXHIBIT B
FLOOR PLAN OF LEASED PREMISES
[to be attached]
Exhibit B — Page 1
EXHIBIT
C
AIR CONDITIONING AND HEATING SERVICES
Subject to the provisions of
Section 3.1(b),
Landlord will furnish Building Standard air
conditioning and heating between 8 a.m. and 6 p.m. on weekdays (from Monday through Friday,
inclusive) and between 8 a.m. and 1:00 p.m. on Saturdays, all exclusive of Holidays as defined
below (the
“Building Operating Hours”
).
Upon request of Tenant made in accordance with the rules
and regulations for the Building, Landlord will furnish air conditioning and heating at other
times (that is, at times other than the times specified above), in which event Tenant shall
reimburse Landlord for Landlord’s actual cost of furnishing such services, plus an amount equal to
fifteen percent (15%) of such costs to cover Landlord’s administrative costs.
The Building Standard heating, ventilation and air conditioning system shall meet the
following design conditions, at the stated outside design conditions, based on one person per 100
square feet:
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1.
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Summer — Outdoor conditions 92 degrees Fahrenheit dry bulb, 75 degrees
Fahrenheit wet bulb; indoor conditions 75 degrees Fahrenheit dry bulb, 50% relative
humidity at design condition.
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2.
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Winter — Outdoor conditions minus 16 degrees Fahrenheit dry bulb; indoor
conditions 72 degrees Fahrenheit dry bulb.
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The following dates shall constitute
“Holidays”
as said term is used in this Lease:
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(a)
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New Year’s Day
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(b)
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Memorial Day
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(c)
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Independence Day
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(d)
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Labor Day
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(e)
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Thanksgiving Day
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(f)
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Friday following Thanksgiving Day
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(g)
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Christmas
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(h)
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Any other holiday generally recognized as such by landlords of
office space in the metropolitan Nashville, Tennessee office market, as
determined by Landlord in good faith.
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If in the case of any holiday described in (a) through (g) above, a different day shall be
observed than the respective day above-described, then that day which constitutes the day observed
by national banks in Nashville, Tennessee on account of such holiday shall constitute the holiday
under this Lease.
Exhibit C — Page 1
EXHIBIT D
BUILDING RULES AND REGULATIONS
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1.
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Sidewalks, doorways, vestibules, halls, stairways, and other similar areas shall not be used
for the disposal of trash, be obstructed by tenants, or be used by tenants for any purpose
other than entrance to and exit from the Leased Premises and for going from one part of the
Building to another part of the Building.
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2.
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Plumbing fixtures shall be used only for the purposes for which they are designed, and no
sweepings, rubbish, rags or other unsuitable materials shall be disposed into them. Damage
resulting to any such fixtures from misuse by a tenant shall be the liability of said tenant.
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3.
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Signs, advertisements, or notices visible in or from public corridors or from outside the
Building shall be subject to Landlord’s prior written approval.
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4.
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Movement in or out of the Building of furniture, office equipment, or any other bulky or
heavy materials shall be restricted to such hours as Landlord shall reasonably designate.
Landlord will determine the method and routing of said items so as to ensure the safety of all
persons and property concerned. Advance written notice of intent to move such items must be
made to the Building management office.
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5.
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All routine deliveries to a tenant’s Leased Premises during 8:00 a.m. to 5:00 p.m. weekdays
shall be made through the freight elevators. Passenger elevators are to be used only for the
movement of persons, unless an exception is approved by the Building management office.
Delivery vehicles shall be permitted only in such areas as are designated by Landlord, from
time to time, for deliveries to the Building.
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6.
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Building management shall have the authority to prescribe the manner that heavy furniture and
equipment are positioned.
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7.
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Corridor doors, when not in use, shall be kept closed.
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8.
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Tenant space that is visible from public areas must be kept neat and clean.
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9.
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All freight elevator lobbies are to be kept neat and clean. The disposal of trash or storage
of materials in these areas is prohibited.
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10.
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No animals shall be brought into or kept in, on or about the Building, except for seeing-eye
dogs.
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11.
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Tenant shall not tamper with or attempt to adjust temperature control thermostats in the
Leased Premises. Landlord shall adjust thermostats as required to maintain the Building
standard temperature. Landlord requests that all window blinds remain down and tilted at a 45
degree angle toward the street to help maintain comfortable room temperatures and conserve
energy.
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Exhibit D — Page 1
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12.
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Tenant will comply with all security procedures during business hours and after hours
and on weekends.
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13.
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Tenants are requested to lock all office doors leading to corridors and to turn out all
lights at the close of their working day.
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14.
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All requests for overtime air conditioning or heating must be submitted in writing to the
Building management office by 2:00 p.m. on the day desired for weekday requests, by 2:00 p.m.
Friday for weekend requests and by 2:00 p.m. on the preceding business day for holiday
requests.
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15.
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No flammable or explosive fluids or materials shall be kept or used within the Building
except in areas approved by Landlord, and Tenant shall comply with all applicable building
and fire codes relating thereto.
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16.
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Tenant may not place any items on the balconies of the Building that alter the exterior
appearance of the Building without obtaining Landlord’s prior written consent.
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17.
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Any motor vehicle exceeding the height restrictions of the Parking Facility shall not be
parked at any location on the Land or Parking Area.
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18.
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Tenant may not make any modifications, additions or repairs to the Leased Premises and may
not install any furniture, fixtures or equipment in the Leased Premises which is in violation
of any applicable building and/or fire code governing the Leased Premises or the Building.
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19.
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Except in those areas designated by Landlord. if any, smoking is prohibited in the Building
(including, but not limited to, the Leased Premises, the main building lobby, public
corridors, elevator lobbies, service elevator vestibules, stairwells, restrooms and other
common areas within the Building).
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20.
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All Tenant contractors shall abide by the contractor’s rules and regulations promulgated by
Landlord from time to time.
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Landlord reserves the right to rescind any of these rules and regulations and to make such other
and further rules and regulations as in its reasonable judgment shall, from time to time, be
required for the safety, protection, care and cleanliness of the Building, the operation thereof,
the preservation of good order therein and the protection and comfort of the tenants and their
agents, employees and invitees. Such rules and regulations, when made and written notice thereof
is given to a tenant, shall be binding upon it in like manner as if originally herein prescribed.
Exhibit D — Page 2
EXHIBIT F
[INTENTIONALLY DELETED]
Exhibit F — Page 1
EXHIBIT G
BASE RENTAL
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ANNUAL BASE
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RENTABLE SQUARE
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MONTHLY
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PERIOD
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RENTAL RATE
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FOOTAGE
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BASE RENTAL
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1/1/06-12/31/06
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[***]
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6,341
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[***]
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1/1/07-12/31/07
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[***]
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6,341
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[***]
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1/1/08-12/31/09
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[***]
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6,341
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[***]
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1/1/09-12/31/09
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[***]
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6,341
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[***]
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1/1/10-12/31/10
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[***]
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6,341
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[***]
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Exhibit G — Page 1
