SETTLEMENT AGREEMENT
This Settlement Agreement ("Agreement") is entered into as of January 14, 2005 by and between Adams Laboratories, Inc. ("Adams"), a Texas corporation having its principal place of business in Chester, New Jersey; and Carolina Pharmaceuticals, Inc. ("Carolina"), a Delaware corporation having its principal place of business in Cary, North Carolina; and Cornerstone Biopharma, Inc. ("Cornerstone"), a Nevada corporation having its principal place of business in Cary,
North Carolina (collectively the "Parties").
RECITALS
WHEREAS, Adams is the plaintiff in Civil Action No. 04-CV-3535 (SAS) in the United States District Court for the Southern District of New York (the "Litigation"), in which Adams asserts claims under Section 43(a) of the Lanham Act, under N.Y. Gen. Bus. Law Sections 349 & 350, and under common law against Carolina and Cornerstone; and
WHEREAS, Carolina and Cornerstone filed counterclaims in the Litigation, asserting claims under Section 2 of the Sherman Act, under Section 43(a) of the Lanham Act, under N.Y. Gen. Bus. Law Section 349, under N.C. Gen. Stat. Section 75.1.1, and under common law against Adams; and
WHEREAS, the Parties wish to settle all claims and counterclaims asserted in the Litigation and wish to resolve all disputes between or among them, without any admission of fault or liability by any of the Parties, on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the Parties agree as follows:
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TERMS AND CONDITIONS
1. ASSIGNMENT OF HUMIBID MARKS AND HUMIBID DM FORMULATION TO ADAMS. On or before February 15, 2005 (the "Effective Date"), Cornerstone will deliver to Adams an Assignment, duly executed by Cornerstone, in the form attached as Exhibit A hereto, assigning to Adams, as of the Effective Date, all of Cornerstone's rights, title and interest in, to and under all HUMIBID trademarks, including all registrations and applications for any HUMIBID marks, and including the goodwill of the business associated with and symbolized by the HUMIBID marks. Such assignment shall also include all of Cornerstone's right, title and interest in the new prescription formulation for Humibid DM capsules developed in conjunction with PharmaFab, Inc. (the "Humibid DM Rx Product"). Cornerstone and Carolina will not sell any products under any HUMIBID mark after the Effective Date.
2. ASSIGNMENT OF SUBLICENSE AGREEMENT AND ALLERX MARKS AND PATENTS TO CORNERSTONE. On or before the Effective Date, Adams will deliver to Cornerstone: (a) an Assignment, duly executed by Adams, in the form attached as Exhibit B hereto, assigning to Cornerstone, as of the Effective Date, all of Adams' rights and obligations, as amended by Adams and JMED, under that certain agreement dated April 25, 1999 between Adams and J-Med Pharmaceuticals, Inc. (the "J-Med Agreement"), which includes exclusive rights under U.S. Patent #'s 5,846,976 and 6,270,796, until April 28, 2009, a copy of which is attached to Exhibit B hereto; (b) a writing executed by J-Med Pharmaceuticals, Inc. in the form attached as Exhibit C hereto (the "J-Med Consent"), providing its consent to Adams' assignment to Cornerstone of Adams' rights and obligations under the J-Med Agreement; and (c) an Assignment, duly executed by Adams, in the form attached as Exhibit D hereto, assigning to Cornerstone, as of the Effective Date, all of Adams' rights, title and interest in, to and under all ALLERX trademarks,
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patents, including all registrations and applications for any ALLERX marks, and including the goodwill of the business associated with and symbolized by the ALLERX marks. Adams will not sell any products under any ALLERX mark after the Effective Date.
3. DISMISSAL OF ALL CLAIMS AND COUNTERCLAIMS. Within three (3) business days after the Parties have fulfilled their respective obligations under paragraphs 1 and 2 of this Agreement, the Parties will file a Stipulation in the Litigation in the form attached as Exhibit E hereto, dismissing all claims and counterclaims in the Litigation with prejudice, each party to bear its own costs.
4. ROYALTY PAYMENTS TO CORNERSTONE. If Adams sells any pharmaceutical products under any HUMIBID mark during the period beginning on the Effective Date and ending on the three (3) year anniversary of the Effective Date (the "Royalty Period"), then Adams shall pay an annual royalty on any sales made during the Royalty Period in accordance with the following terms and conditions:
(a) Adams shall pay to Cornerstone royalties during the Royalty Period equal to: (i) one percent (1%) of Adams' Net Sales of pharmaceutical products under any HUMIBID marks during any fiscal year in the Royalty Period on the first $10 million of Adams' Net Sales during said fiscal year, plus (ii) two percent (2%) of Adams' Net Sales of pharmaceutical products under any HUMIBID marks in excess of $10 million during said fiscal year year. For these purposes, a fiscal year shall be the annual anniversary of the Effective Date. For the three (3) fiscal years during the Royalty Period, Adams shall pay to Cornerstone a minimum royalty payment equal to $50,000 for each fiscal year during the Royalty Period. If for any fiscal year during the Royalty Period, the royalties payable to Cornerstone are less than $50,000, Adams
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shall, within 30 days after the end of such fiscal year, make-up the difference with a supplemental payment to Cornerstone.
(b) For purposes of this paragraph 3, the term "net sales" is defined to mean net sales determined in accordance with generally accepted accounting principles, consistently applied.
(c) Adams shall submit to Cornerstone within forty-five (45) days after the end of each calendar quarter during the Royalty Period a statement setting forth (i) Adams' net sales of pharmaceutical products under any HUMIBID marks during that quarter, and (ii) the amount of the royalties payable to Cornerstone for that quarter pursuant to paragraph 4 of this Agreement. Within sixty (60) days after the end of each calendar quarter during the Royalty Period, Adams shall make payment to Cornerstone of the full amount of royalties payable for that quarter or portion thereof as appropriate. All such payments shall be made by Adams in U.S. dollars to the credit of a bank account designated in writing by Cornerstone.
(d) Any payments due to Cornerstone hereunder that are received after the due date shall bear interest at the rate of twelve percent (12%) per year from the due date.
(e) Adams shall have the right to offset royalties payable to Cornerstone and Carolina against amounts otherwise owed by Cornerstone or Carolina to Adams arising under this Agreement (i.e., inventory purchases or returns liability).
(f) Adams agrees to keep true and accurate records and books of account containing all data necessary for the determination of royalties payable under this Paragraph 4, which records and books of account shall be opened for review upon at least thirty (30) days written notice during reasonable business hours, but in no event more than twice in any twelve (12) month period, for inspection by an independent certified public accountant selected by
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Cornerstone and acceptable to Adams (which acceptance shall not be unreasonably withheld) for the sole purpose of verifying the accuracy of Adams' statements hereunder. Cornerstone shall be solely responsible for the costs of the independent accountant. If any such inspection indicates the royalty payments due to Cornerstone have been underpaid or overpaid for any period, the applicable Party shall promptly pay to the other the amount of such underpayment or overpayment. Before any independent accountant conducts any inspection of Adams' records and books of account, Adams may require the accountant to enter into a written agreement with Adams under which the accountant agrees not to disclose to any third party any information in Adams' records and books of account made available for the accountant's inspection and not to disclose to Cornerstone or Carolina the name, address, or sales volume of any customers of Adams.
(g) Notwithstanding the foregoing, no royalties shall be payable on any sales made by Adams of the Humibid DM Rx Product.
5. SALES PRIOR TO THE EFFECTIVE DATE. Cornerstone agrees not to sell or launch the Humibid DM Rx Product but shall cause Pharmafab, Inc. to manufacture sufficient launch quantities as Adams may require for the sale by Adams. From January 5, 2005 through the Effective Date, Cornerstone will make sales of its over-the-counter versions of Humibid (Humibid e and Humibid CS) only to existing customers and such sales shall be limited to re-orders not solicited by Cornerstone. The parties agree that Wal-Mart is not an existing customer of Cornerstone for this purpose. From January 5, 2005 through the Effective Date, Adams will make sales of its AlleRx product line only to existing customers and such sales shall be limited to re-orders not solicited by Adams.
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6. RETURNS OF PRODUCT SOLD PRIOR TO THE EFFECTIVE DATE. Cornerstone and Carolina shall be responsible for all returns of products sold by Adams under any AlleRx mark prior to the Effective Date, provided that Adams reimburses Cornerstone or Carolina for the first $1 million of documented AlleRx product returns that were sold by Adams prior to the Effective Date, to the extent such products are returned within 18 months of the Effective Date. Adams shall be responsible for all returns of products sold by Cornerstone and Carolina under any Humibid mark prior to the Effective Date, provided that Cornerstone or Carolina reimburses Adams for the first $1 million of documented Humibid product returns that were sold by Cornerstone or Carolina prior to the Effective Date, to the extent such products are returned within 18 months of the Effective Date. After the Effective Date, each party, on a monthly basis, will provide product return documentation in reasonable detail (lot number, quantity, and dollar credit amount) to the other party, until the $1 million return limit has been exceeded. Each party will have 30 days to inspect the documentation and make payment to the other party.
7. FINISHED GOODS INVENTORIES. Upon the Effective Date, Cornerstone shall transfer to Adams all its right, title and interest in any finished goods inventories of Humibid e, Humibid CS, Humibid LA, and Humibid DM, excepting the Humibid DM Rx Product, at no cost to Adams. Upon the Effective Date, Cornerstone shall transfer to Adams all its right, title and interest in any finished goods inventories of the Humibid DM Rx Product and Adams shall transfer to Cornerstone all its right, title and interest in any finished goods inventories of AlleRx Dose Pack, AlleRx D and AlleRx Suspension syrup. Such transfers will be made at actual cost basis in such inventory with the intent of having no cash exchange hands at the Effective Date. However, if one party's cost basis in transferred inventory exceeds the others, then the party transferring the lower cost value of inventory will pay such deficiency to the other by wire
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transfer on the Effective Date. By way of example, if Adams delivers to Cornerstone $250,000 of AlleRx inventory, at cost basis, and Cornerstone delivers to Adams $400,000 of the Humibid DM Rx Product inventory, at cost basis, then Adams will make wire transfer payment to Cornerstone in the amount of $150,000 on the Effective Date. The cost basis of each parties inventory will be subject to a maximum of $500,000. Five days prior to the Effective Date, the parties will provide each other with a detailed listing of the finished goods inventories referenced herein.
8. MANUFACTURING AND PRODUCT SUPPLY. Prior to the Effective Date, Adams and Cardinal Health PTS, LLC ("Cardinal Health") shall have entered into an agreement whereby Cardinal Health will continue to manufacture the current formulations of AlleRx Dose pack and AlleRx D for Cornerstone for a period of 12 months after the Effective Date. Cardinal Health or Adams will bill and Cornerstone shall pay $2.70 and $6.10 for each container, dose pack or bottle, of the current formulations of AlleRx Dose pack and AlleRx D, respectively and $0.25 for AlleRx samples, plus the cost of shipping. Cornerstone will be required to make purchase orders of such product at the current production lot sizes in place at the Effective Date. Cornerstone will provide Cardinal and Adams with a four (4) month committed purchase forecast. With respect to the ALLERx Suspension product currently manufactured by Hitech, Adams will use commercially reasonable efforts to transfer any open purchase orders or supply agreement to Cornerstone.
Prior to the Effective Date, Adams, Cornerstone and Pharmafab will meet and Pharmafab and Adams will agree that PharmaFab will manufacture and package, under Adams labeling and tooling, the Humibid DM Rx Product for Adams. Cornerstone will be responsible for the purchase of the initial launch quantities subject to the maximum dollar cost basis of $500,000 set
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forth in paragraph 7 above. It is understood that no inventory currently exists for the Humibid DM Rx Product.
As soon as commercially reasonable after the Effective Date, (a) Cornerstone will, at its cost, provide tooling and labeling to Cardinal Health in order to identify Cornerstone as the distributor of the AlleRx products and (b) Adams will, at its cost, provide tooling and labeling to PharmaFab, Inc. in order to identify Adams as the distributor of the Humibid products.
9. REPRESENTATIONS AND WARRANTIES OF ADAMS. Adams hereby represents and warrants to Cornerstone and Carolina as follows:
(a) Adams and the person executing this Agreement on its behalf are legally authorized to execute this Agreement, and the terms of this Agreement are binding upon, and, enforceable against, Adams.
(b) The J-Med Agreement is in full force and effect, and the executed Assignment in the form attached as Exhibit B hereto, together with the executed J-Med Consent in the form attached as Exhibit C hereto, will convey to Cornerstone all rights and obligations of Adams under the J-Med Agreement, as amended, in accordance with its terms.
(c) Adams is the lawful sole owner of all rights, title and interest in the ALLERX marks identified in the Assignment attached as Exhibit D hereto and is unaware of any other person or entity who is currently claiming ownership of any ALLERX mark for any product or service. The executed Assignment in the form attached as Exhibit D hereto will convey to Cornerstone all rights, title and interest in all ALLERX marks identified in said Assignment.
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(d) As of the Effective Date there is no action pending or threatened against Adams, other than the Litigation, relating to Adams' rights or obligations under the J-Med Agreement, or to any ALLERX products, or to any ALLERX marks identified in the Assignment attached as Exhibit D hereto.
(e) During the period between December 1, 2004 and the Effective Date, Adams' promotional and sales activities with respect to products sold under any ALLERX marks were consistent with and at the same level as such activities during October-November 2004.
(f) During the two year period ending December 31, 2004: (i) Adams has sold less than 650,000 units of AlleRx Dose Pack; (ii) less than 40,000 units of AlleRx D; and (iii) less than 20,000 units of AlleRx Suspension.
(g) Adams shall submit to Cornerstone any orders it receives for AlleRx Dose Pack, AlleRx D and AlleRx Suspension on or after the Effective Date.
10. REPRESENTATIVES AND WARRANTIES OF CORNERSTONE AND CAROLINA. Cornerstone and Carolina hereby represent and warrant to Adams as follows:
(a) Cornerstone and Carolina and the persons executing this Agreement on their behalf are legally authorized to execute this Agreement, and the terms of this Agreement are binding upon, and enforceable against, Cornerstone and Carolina.
(b) Cornerstone is the lawful sole owner of all rights, title and interest in the HUMIBID marks identified in the Assignment attached as Exhibit A hereto and the formulation for the Humid DM Rx Product and is unaware of any other person or entity who is currently claiming ownership of any HUMIBID mark or such formulation for any product or service. The executed Assignment in the form attached as Exhibit A hereto will convey to Adams all rights, title and interest in all HUMIBID marks identified in said Assignment.
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(c) As of the Effective Date there is no action pending or threatened against Cornerstone or Carolina, other than the Litigation, relating to any HUMIBID products or to any HUMIBID marks identified in the Assignment attached as Exhibit A hereto.
(d) During the period between December 1, 2004 and the Effective Date, Cornerstone's and Carolina's promotional and sales activities with respect to products sold under any HUMIBID marks were consistent with and at the same level as such activities during ...