Document:

exv10w3

 

Exhibit 10.3

FACILITY BUILD-OUT AGREEMENT

This Facility Build-Out Agreement (this “Agreement”) is made as of April ___, 2005, between
Advancis Pharmaceutical Corporation, a Delaware corporation (“Advancis”), and Clonmel Healthcare
Limited, whose registered office is situated at Waterford Road, Clonmel, Co. Tipperary (“Clonmel”).

RECITALS

	A.	 	On or about October 18, 2004, Advancis and Clonmel entered into that certain Letter of Intent
and Authorization to Begin Purchasing (the “LOI”) in respect of a proposed collaboration
between the parties to facilitate the manufacture and supply by Clonmel of Advancis’
amoxicillin PULSYS product (the “Product”), and on or about December 3, 2004, Advancis and
Clonmel entered into that certain Heads of Agreement (the “HOA”), pursuant to which, among
other things, it was anticipated that:

	 	(i)	 	Clonmel will perform development, scale-up and validation services with respect
to the Product;
	 
	 	(ii)	 	Clonmel will design, construct and make available to Advancis certain
production and office facilities at Waterford Road, Clonmel, Co. Tipperary, Clonmel,
Ireland, as more specifically described in Exhibit A hereto (the “Build-Out
Facilities”) and shall procure the installation of the equipment (the “Build-Out
Equipment”) currently identified and to be identified at Exhibit B in the
Build-Out Facilities for the purpose of being able to develop and manufacture the
Product; and
	 
	 	(iii)	 	Clonmel will manufacture at the Build-Out Facilities and supply commercial
quantities of the Product for sale and distribution by Advancis.

	B.	 	Advancis and Clonmel are in the process of entering into a Development and Clinical
Manufacturing Agreement (the “Development Agreement”) and a Manufacturing and Supply Agreement
(the “Supply Agreement” and collectively with the Development Agreement, the “Product
Agreements”).
	 
	C.	 	Further to the Product Agreements:

	 	(i)	 	Clonmel has received from DPS Engineering & Construction Ltd (“DPS”), a
proposal setting out details relating to the design and construction of the Build-Out
Facilities and the installation of the Build-Out Equipment, more specifically
identified on Exhibit C, and the form of which shall be in accordance with the
form previously reviewed by the parties (the “DPS Proposal”);
	 
	 	(ii)	 	Advancis and Clonmel have already purchased and will purchase and install or
cause to be installed at the Build-Out Facilities the Build-Out Equipment; and
	 
	 	(iii)	 	Clonmel has purchased certain Materials (defined below) to be used in the
manufacture of Products.

 

 

	D.	 	In addition, Clonmel and DPS are, substantially simultaneously
herewith, entering into certain Articles of Agreement with the
Schedule and the six attachments thereto, and including both the 10%
+/- Cost Estimate approved by the parties and the standard form of
performance bond (the “DPS Agreement”). The DPS Agreement is a
project management agreement with respect to the design and
construction of the Build-Out Facilities, which incorporates the terms
of the DPS Proposal, and the form of which shall be in accordance with
the form previously reviewed by the parties. DPS is currently
performing work in respect of the Build-Out Facilities pursuant to the
purchase order entered into with Clonmel that is more specifically
identified on Exhibit D.
	 
	E.	 	As an inducement for Advancis to enter into the Supply Agreement,
Advancis has agreed to reimburse Clonmel for certain payments made by
Clonmel under this Agreement in respect of the Build-Out Facilities
and Build-Out Equipment. Advancis and Clonmel desire to set forth the
terms and conditions on which Advancis will reimburse Clonmel for
payments made to DPS for design and construction of the Build-Out
Facilities and to third party suppliers of the Equipment and
Materials.

TERMS OF AGREEMENT

Accordingly, the parties hereby agree as follows:

	1.	 	Construction.

	1.1.	 	Clonmel shall procure the design and construction of the Build-Out Facilities. Advancis
acknowledges that this obligation may be sub-contracted to DPS by Clonmel or to such others as
may be agreed in writing by the parties (provided that nothing in this clause shall relieve
Clonmel of any of its obligations pursuant to this Agreement).

	 	(a)	 	Clonmel shall use with any contractors, and to the extent DPS is entering
into agreements with subcontractors, shall require DPS to use forms substantially
similar to the Articles of Agreement RIAI form as modified by the Clonmel Healthcare
Limited Main Contractor Building Agreement in accordance with the forms previously
reviewed by the parties. In addition, subject to approval of costs by Advancis,
Clonmel shall require each contractor and shall procure that, where appropriate, DPS
or any other Exhibit D Third Party (as defined in clause 1.2(a) below), shall require
any contractors which they engage in connection with the design or construction of
the Build-Out Facilities, to enter into a performance bond for [***] percent ([***]%)
of the relevant contract price and on substantially similar terms to the performance
bond referenced in the DPS Agreement. Clonmel acknowledges and shall ensure that
Advancis shall be the ultimate beneficiary of any such performance bond.
	 
	 	(b)	 	Clonmel represents and warrants to Advancis that the Build-Out Facilities,
as currently described in the Approved Build-Out Documents (as defined in clause

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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1.2(a) below), and as may be further described and developed in amendments to
Exhibit D, will be sufficient and appropriate for Clonmel to meet all of
its obligations under the Product Agreements (referred to herein as “Fitness for
Purpose”). Clonmel will use its best efforts at each stage of the construction of
the Build-Out Facility to provide plans and specifications that if executed, will
provide a Build-Out Facility that complies with Clonmel’s Fitness for Purpose
representation and warranty. If Clonmel determines that a change to the plans and
specifications is necessary, Clonmel must obtain Advancis’ prior approval pursuant
to clause 2.6(a) of this Agreement. Upon the completion of the construction of the
Build-Out Facility, if the Build-Out Facility fails to meet the Fitness for Purpose
standard, Clonmel shall be solely responsible for correcting any flaws and providing
a Build-Out Facility that complies with the Fitness for Purpose standard.

	1.2.	 	Subject to clause 1.3, Advancis shall, within[***] days after receipt of Clonmel’s invoice
therefore, pay Clonmel for the actual amounts paid or to be paid by Clonmel for:

	 	(a)	 	all properly incurred and payable expenses arising out of any of the
agreements listed on Exhibit D to this Agreement (the “Approved Build-Out
Documents”), performed by any third party who is a party to the Approved Build Out
Documents (referred to herein as an “Exhibit D Third Party”) and supported by all
documentation and vouching which Advancis may require; and/or
	 
	 	(b)	 	expenditures by Clonmel in respect of the Build-Out Equipment (in
accordance with Section 2 below).

	1.3.	 	Notwithstanding anything to the contrary in clause 1.2:

	 	(a)	 	all sums payable by Advancis under this Agreement shall be exclusive of
VAT; Clonmel is solely responsible for all VAT, in respect of any of the transactions
or activities contemplated in this Agreement; and
	 
	 	(b)	 	All funds paid by Advancis to Clonmel that are for costs not yet incurred
shall promptly be paid by Clonmel, without deduction or set off, to any Exhibit D
Third Party in accordance with Clonmel’s obligations under the applicable Approved
Build-Out Document or for the applicable Build-Out Equipment, and Clonmel shall
promptly deliver to Advancis documentation confirming in reasonable detail such
payments to such parties.

	1.4.	 	Advancis shall have no obligation to pay or reimburse Clonmel for:

	 	(a)	 	any obligation incurred by Clonmel as a result of a modification to the
Approved Build-Out Documents made without the prior written consent of Advancis;

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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	 	(b)	 	any amount paid or agreed as due by Clonmel, including pursuant to the Approved
Build-Out Documents, in respect of penalties, interest, damages, indemnification or
other similar obligations of Clonmel that do not constitute fees for services
rendered by an Exhibit D Third Party (for the avoidance of doubt, this clause cannot
be used by Advancis to avoid any indemnification obligations under clause 10.2 of
this Agreement); or
	 
	 	(c)	 	any equipment appearing in the third category, as described below, of
Exhibit B.

	1.5.	 	The parties acknowledge and agree that Advancis has already provided Clonmel with payments in
the amount of $[***], and such funds have been and shall be applied to pay for all properly
incurred and payable expenses arising out of the Approved Build-Out Documents and performed by
any Exhibit D Third Party.
	 
	1.6.	 	Exhibit D may be varied at any time by agreement in writing between the parties (and,
without limitation, the signature of both parties on a revised and restated Exhibit D
shall be sufficient evidence of any such agreement). Advancis shall agree to any amendment to
Exhibit D and any modification to any Approved Build-Out Document in respect of work
reasonably required in order that the Build-Out Facilities achieve Fitness for Purpose. If
the parties cannot reasonably agree to a modification to Exhibit D, the dispute shall
be handled in accordance with the provisions of Section 14.
	 
	1.7.	 	Clonmel shall procure all works, and each Approved Build-Out Document shall provide that all
works shall be performed by each Exhibit D Third Party, on a transparent cost basis with
Advancis having a right to information on price build up and access to overhead and profit
figures for the purpose of approving bids.

	2.	 	Build-Out Equipment Purchase and Reimbursement.

	2.1.	 	In relation to the items of Build-Out Equipment identified in Exhibit B:

	 	(a)	 	Clonmel shall purchase in its own name the Build-Out Equipment identified
in Part 1 of Exhibit B. All such equipment shall be the sole property of
Clonmel but all purchases of such equipment must be pre-approved by Advancis.
	 
	 	(b)	 	Advancis shall:

	 	(i)	 	identify and engage a supplier for;
	 
	 	(ii)	 	order and purchase;
	 
	 	(iii)	 	carry out any necessary factory acceptance testing for;

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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	 	(iv)	 	cause to be delivered to the Build-Out Facilities;
	 
	 	(v)	 	carry out any necessary site acceptance testing for;
	 
	 	(vi)	 	make any payment due to the supplier in respect of;

the Build-Out Equipment identified at Part 2 of Exhibit B,
provided that Clonmel will provide all reasonable assistance to Advancis in
carrying out any factory acceptance testing and site acceptance testing. Where
in that exhibit the ownership of such equipment is specified to vest with
Advancis, such equipment shall remain the sole property of Advancis.
Where in Part 2 of Exhibit B the ownership of that equipment is
specified to vest with Clonmel, such equipment shall become the sole property
of Clonmel when incorporated into the Build-Out Facilities or when incorporated
with other pieces of Build-Out Equipment.

	 	(c)	 	Clonmel shall purchase in its own name the Build-Out Equipment identified
in Part 3 of Exhibit B. All such equipment shall be the sole property of
Clonmel.
	 
	 	(d)	 	Clonmel shall cause each item of Build-Out Equipment, including Build-Out
Equipment purchased directly by Advancis, to be installed at the Build-Out Facility
in accordance with the timetable set forth in Exhibit B (for the avoidance of doubt,
this clause cannot be used by Advancis to avoid any indemnification obligations under
clause 10.2 of this Agreement). Save as otherwise provided in this Agreement,
Clonmel shall be entitled to use such equipment solely to manufacture Products for
Advancis or otherwise to perform its obligations under the Product Agreements.
	 
	 	(e)	 	Advancis shall, within [***] days after receipt of Clonmel’s invoice
therefore, reimburse Clonmel for its actual out-of-pocket cost (including any
applicable taxes, transportation fees and installation charges invoiced to Clonmel by
the supplier of any Build-Out Equipment, other than, in all instances, VAT), for the
purchase and installation of the Build-Out Equipment, excluding all such equipment
listed in Part 3 of Exhibit B (and any costs incurred by Clonmel in respect
of the equipment listed in Part 3 of Exhibit B shall be to Clonmel’s account
and Clonmel shall be entitled to no reimbursement of those costs by Advancis pursuant
to this clause, Section 1 above or otherwise). Subject to clause 2.4, all costs
incurred by Clonmel for repairs to and maintenance of the Build-Out Equipment shall
be the responsibility of Clonmel. Clonmel shall keep and maintain the equipment in
good working order and shall provide adequate insurance for the equipment at
Clonmel’s expense.

	2.2.	 	Exhibit B may be varied at any time by agreement in writing between the parties
(and, without limitation, the signature of both parties on a revised and restated
Exhibit B shall be sufficient evidence of any such agreement).

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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	2.3.	 	At the request of Advancis, Clonmel shall execute and deliver such documents, make such
public filings and take such further actions as may be reasonably necessary or desirable to
protect the rights, title and interest of Advancis in the Build-Out Equipment where ownership
in such is specified to vest with Advancis, as indicated on Exhibit B, including
affixing labels or otherwise marking that Build-Out Equipment in a manner to indicate
Advancis’ ownership thereof.

	2.4.	(a)	 	Subject to sub-clause (b) and (c), Advancis may, at any time and from time to time on
reasonable notice to Clonmel, in its sole discretion and it its sole cost, remove any
Build-Out Equipment that is located at the Build-Out Facilities or otherwise at Clonmel’s
facilities where in Exhibit B the ownership in such is specified to vest with
Advancis.

	 	(b)	 	Advancis indemnifies Clonmel in respect of any costs, loss or damage
incurred by Clonmel (including, for the avoidance of doubt, loss or damage incurred
by Clonmel by reason of a breach of any agreement with Advancis for the supply and
manufacture of the Product) where Advancis exercises any rights pursuant to
sub-clause (a) above.
	 
	 	(c)	 	Advancis may not remove any item of Build-Out Equipment in Clonmel’s
possession from the Build-Out Facilities or elsewhere where any payment due to
Clonmel from Advancis in respect of such equipment (pursuant to clause 2.1 or
otherwise) is outstanding.
	 
	 	(d)	 	For avoidance of doubt, Advancis shall have no obligation to remove from
the Build-Out Facilities any Build-Out Equipment and shall not be liable for any
Build-Out Equipment that it elects to abandon. Where Advancis has failed to remove
any Build-Out Equipment within two (2) years of notice from Clonmel that Clonmel
intends to proclaim such equipment abandoned, then such equipment shall be deemed to
have been abandoned by Advancis and the property and ownership in same shall vest
with Clonmel. Clonmel shall have no liability or obligations whatsoever to Advancis
in respect of any Build-Out Equipment deemed to have been abandoned by Advancis
pursuant to this sub-clause.

	2.5.	 	The terms of the purchase agreements between Advancis and the suppliers for any items of
Build-Out Equipment supplied by Advancis pursuant to clause 2.1(b) shall be reasonably
acceptable to Clonmel. Clonmel hereby confirms that all such purchase agreements currently
reflected in Exhibit B are acceptable. In addition, Advancis shall take all reasonable
steps necessary to assign all supplier warranties to Clonmel relating to such Build-Out
Equipment, and in the event any warranty is unassignable, Advancis agrees to cooperate with
Clonmel to enable Clonmel to make warranty claims through Advancis.
	 
	2.6.	 	In order to proceed with the obligations set forth in this Agreement as efficiently as
possible, the parties agree as follows:

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	 	(a)	 	Clonmel acknowledges and agrees that in connection with the construction of
the Build-Out Facility, Advancis shall approve all invoices and bids and all
deviations from plans and specifications, [***], and Clonmel shall not proceed
without first obtaining such approval. Clonmel shall provide Advancis with cost
estimates for invoices and bids and all deviations from plans and specification for
Advancis’ [***] review and approval. In addition, Clonmel shall provide Advancis
with reasonable access to the Build-Out Facility.
	 
	 	(b)	 	Clonmel shall take all necessary steps to facilitate and assist the
construction process and in no way hinder any contractor either in performance of
work or in accessing the site.
	 
	 	(c)	 	Clonmel shall procure that the design and construction of the Build-Out
Facility and the installation of the Build-Out Equipment and all related work shall
be in accordance with good contracting practice, the Safety, Health and Welfare at
Work Act, 1989, the Safety, Health and Welfare at Work (Construction) Regulations
1995, S.I. No. 138 of 1995, the Safety, Health and Welfare at Work (Construction)
Regulations, 2001, as any of the foregoing may be amended from time to time and any
applicable health and safety legislation, directions, by-laws or codes of practice.
	 
	 	(d)	 	Notwithstanding 2.6(a) above, once Advancis has approved such invoices and
bids and such deviations from plans and specifications, Advancis shall not, without
the prior approval of Clonmel, issue any directions or instructions in respect of the
Build-Out Equipment or the Build-Out Facilities to DPS or any Exhibit D Third Party
or otherwise interfere with the carrying out of any works or services associated with
the Build-Out Equipment or the Build-Out Facilities. Advancis agrees that while on
Clonmel’s site, Advancis shall comply with all reasonable directions of Clonmel or
its agents and representatives.

	3.	 	Materials Purchase and Reimbursement.

	3.1.	 	Pursuant to the LOI, Clonmel was authorized to begin purchasing on behalf of Advancis certain
materials necessary to enable Clonmel to manufacture pivotal trial material with respect to
the manufacture and supply of the Products during the fourth quarter of 2004 (the
“Materials”). A list of the Materials is attached as Exhibit E. All such Materials
shall be the sole property of Advancis, and Clonmel shall be entitled to use such Materials
solely to manufacture Products for Advancis or otherwise to perform its obligations under the
Product Agreements. Advancis shall, within thirty (30) days after receipt of Clonmel’s
invoice therefore, reimburse Clonmel for the actual out-of-pocket cost of the Materials,
including any applicable taxes and transportation fees invoiced to Clonmel by the supplier of
any Materials.
	 
	3.2.	 	At the request of Advancis, Clonmel shall execute and deliver such documents, make such
public filings and take such further actions as may be reasonably necessary or desirable to

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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protect the rights, title and interest of Advancis in the Materials, including
affixing labels or otherwise marking the Materials in a manner to indicate Advancis’
ownership thereof.

	3.3.	 	Advancis may, at any time and from time to time, in its sole discretion and at its sole cost,
remove any or all of the Materials located at the Build-Out Facilities or otherwise at
Clonmel’s facilities. For avoidance of doubt, Advancis shall have no obligation to remove any
such Materials and shall not be liable for any Materials that it elects to abandon. Where
Advancis has failed to remove any Materials within one (1) year of the termination of the
Product Agreements, such Materials shall be deemed to have been abandoned by
Advancis and the property and ownership in same shall vest with Clonmel. Clonmel shall have
no liability or obligations whatsoever to Advancis in respect of any Materials deemed to have
been abandoned by Advancis pursuant to this clause.

	4.	 	Currency. All invoices issued by Clonmel and all payments made by Advancis hereunder
shall be denominated in U.S. Dollars, regardless of the currency in which Clonmel’s third
party obligations are denominated. Advancis shall not be required to compensate Clonmel for
any currency fluctuations, including any occurring between the date of Clonmel’s invoice and
the date of Advancis’ payment.
	 
	5.	 	Audit Rights. Advancis shall have the right upon reasonable advance notice, during
normal working hours, either itself or by its agent to examine the books and records of
Clonmel insofar as they relate to the amounts to be paid by Advancis under this Agreement.
	 
	6.	 	Confidentiality. The terms and conditions of that certain Non Disclosure Agreement
by and between Advancis and Clonmel dated as of June 12, 2000 (the “Non Disclosure
Agreement”), are hereby incorporated herein and the Non Disclosure Agreement is hereby amended
such that the permissible uses of the Information (as defined in the Non Disclosure Agreement)
include the activities contemplated hereunder.
	 
	7.	 	Intellectual Property Ownership.

	7.1.	 	Clonmel acknowledges and agrees that any and all patents, trade secrets, technical know-how,
trademarks and all other intellectual property rights of any kind related to the Products are
and will remain the sole property of Advancis and shall constitute Information of Advancis for
purposes of the Non Disclosure Agreement. Any and all ideas, discoveries, inventions, works
of authorship, know-how, processes, formulas, improvements and revisions (collectively,
“Inventions”) made, conceived, reduced to practice or developed by Clonmel, either solely or
jointly with Advancis or any other party, in connection with or arising from or relating to
confidential information of Advancis or the activities undertaken by Clonmel under this
Agreement or that relate to or are capable of use in connection with any business of Advancis
or products offered, used, sold or developed by Advancis of which Clonmel became aware
pursuant to its activities hereunder, shall belong exclusively to Advancis. Clonmel shall
assign to Advancis, and hereby does so assign, all such Inventions and the right to obtain
patents or copyright registrations on any and all such Inventions in any or all countries.
Upon request by Advancis, Clonmel shall assist Advancis in any way necessary, including

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	 	 	executing documents to perfect in Advancis all right, title and interest in and to such
Inventions.

	 	7.2.	 	Clonmel warrants that the performance of Clonmel’s obligations under this Agreement and
DPS’s obligations under the DPS Agreement with respect to the Build-Out Facility and the
construction of same, but not the Build-Out Equipment, do not and will not infringe any
third party intellectual property rights and Clonmel hereby indemnifies Advancis in respect
of any third party intellectual property infringement.
	 
	 	7.3.	 	Clonmel shall procure for the benefit of each of Clonmel and Advancis a perpetual,
royalty-free license to use the copyright and all other rights relating to the design of
the Build-Out Facility and all drawings, designs, reports and other documents for any
purpose related to the design and construction of the Build-Out Facility and the
installation of the Build-Out Equipment.

	8.	 	Term; Termination.

	8.1.	 	This Agreement may be terminated by either party in the event the other party materially
defaults on any of its obligations under this Agreement and fails to cure such default within
[***] calendar days after receipt of written notice of such default from the non-defaulting
party. Any termination pursuant to this clause shall be without prejudice to any rights the
terminating party may have in respect of the breach the subject of the notice to be issued
under this clause.

	 	8.2.	 	(a)  Advancis may terminate this Agreement on not less than [***] calendar days’ prior
written notice to Clonmel.

	 	(b)	 	Where Advancis exercises any rights pursuant to this clause 8.2:

	 	(i)	 	Clonmel may procure the completion of such of the Build-Out
Facilities as is reasonably required to ensure that the Clonmel premises at
Waterford Road are watertight and otherwise compliant with any legislative
requirements (including without limitation the Safety, Health and Welfare at
Work Act 1989 and any regulations made thereunder) and Advancis shall be liable
for any expenses or out-of-pocket costs reasonably incurred by Clonmel pursuant
to this sub-clause.
	 
	 	(ii)	 	within [***] days of the issue of an appropriate invoice by
Clonmel, Advancis shall pay to Clonmel:

	 	(A)	 	any amounts which, but for the termination of the
Agreement, would otherwise have been payable to Clonmel pursuant to the
Agreement up to the date of its termination; and

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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	 	(B)	 	an amount equal to the value of any unavoidable commitment or
obligation undertaken by Clonmel in accordance with this Agreement prior
to the date of termination;

	 	(c)	 	Advancis acknowledges that although it has the right to terminate this
Agreement at will, Advancis will not terminate this Agreement and then seek damages
from Clonmel for breach of the Product Agreements when Clonmel’s breach was caused by
Advancis’ at will termination of this Agreement. Accordingly, Advancis hereby agrees
not to pursue any actions against Clonmel for breach of the Product Agreements when
Clonmel’s breach of the Product Agreements arises solely as a result of Advancis’
exercise of its rights under this clause 8.2. In addition, Advancis hereby consents
to Clonmel’s use and admission into evidence of this clause in any applicable
arbitribal, judicial or other proceeding.
	 
	 	(d)	 	In the event of a notification of a termination pursuant to this clause
8.2, both parties shall take commercially reasonable efforts to minimise any capital
or other costs being incurred in respect of the Build-Out Facilities, the Build-Out
Equipment or the Product or generally in respect of any obligation under the
Agreement.

	8.3.	(a)	 	Either party can terminate this Agreement upon a termination of the Supply
Agreement that occurs prior to the stated expiration of the Supply Agreement. Termination
of this Agreement pursuant to this subclause shall be effective immediately upon the giving
of notice to the other party that the terminating party has decided to terminate this
Agreement.

	 	(b)	 	When a termination occurs pursuant to clause 8.3(a):

	 	(i)	 	Clonmel may procure the completion of such of the Build-Out
Facilities as is reasonably required to ensure that the Clonmel premises at
Waterford Road are watertight and otherwise compliant with any legislative
requirements (including without limitation the Safety, Health and Welfare at
Work Act 1989 and any regulations made thereunder) and Advancis shall be liable
for any expenses or out-of-pocket costs reasonably incurred by Clonmel pursuant
to this sub-clause.
	 
	 	(ii)	 	within [***] of the issue of an appropriate invoice by Clonmel,
Advancis shall pay to Clonmel:

	 	(A)	 	any amounts which, but for the termination of the
Agreement, would otherwise have been payable to Clonmel pursuant to the
Agreement up to the date of its termination; and
	 
	 	(B)	 	an amount equal to the value of any unavoidable
commitment or

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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obligation undertaken by Clonmel in accordance with this
Agreement prior to the date of termination.

	 	8.4. (a)	 	Clonmel and Advancis represent and warrant to each other that:

	 	(i)	 	their entry into this Agreement was duly authorized;
	 
	 	(ii)	 	they each properly signed and delivered the Agreement to the
other, and
	 
	 	(iii)	 	this Agreement has been executed by duly authorized
representatives from the respective parties.

	 	(b)	 	In addition, Clonmel represents and warrants that it is a wholly owned
subsidiary of Stada Arzneimittel AG (“Stada”), and that Stada has authorized and
approved Clonmel’s entry into this Agreement and the performance of the terms of the
Agreement. Upon request from Advancis, Clonmel will obtain from Stada a certificate
confirming such facts. Upon execution of this Agreement by Clonmel, Clonmel shall
deliver a document in substantially the same form as attached hereto as Exhibit F,
executed by Stada, unconditionally guaranteeing Clonmel’s performance under this
Agreement.

	9.	 	Independent Contractor. The relationship between the parties shall be that of
independent contractors, and nothing in this Agreement shall render either party or any person
employed by either party an agent, employee, joint venturer or partner of the other party.
	 
	10.	 	Limitation; Indemnification.

	 	10.1. (a)	 	Subject to 10.1(b), Clonmel shall indemnify, hold harmless and defend Advancis and
its employees, officers, directors, stockholders and agents from and against any claims,
demands, suits, proceedings, liabilities, judgments, awards, losses, damages, costs and
expenses (including reasonable attorney fees) (“Claims”) by any third party in connection
with this Agreement, including without limitation Claims made by DPS, Claims made by any
Exhibit D Third Party, the suppliers of Equipment and Materials and the employees of
Clonmel provided always that Clonmel shall not be liable to Advancis in respect of any such
Claim to the extent that it has arisen by reason of the negligence of Advancis or by reason
of a breach by it of this Agreement.

	 	(b)	 	For the avoidance of doubt, Clonmel shall have no liability to Advancis
pursuant to this clause 10.1 in respect of:

	 	(i)	 	payments due to any supplier of the Build-Out Equipment
identified in Part 2 of Exhibit B or in respect of any tax, duty, royalty, fee
or other Claim in relation to such equipment; and
	 
	 	(ii)	 	any cost loss or damage indemnified by Advancis under clause
10.2.

- 11 -

 

	 	10.2. (a)	 	Advancis shall indemnify, hold harmless and defend Clonmel and its employees,
officers, directors, stockholders and agents from and against any Claims by any third party
in connection with:

	 	(i)	 	any penalties, interest, damages, indemnity or similar
obligation of Clonmel which are a result of Advancis’ failure to timely pay
Clonmel pursuant to the terms of this Agreement;
	 
	 	(ii)	 	any loss arising by reason of a delay by Advancis in the supply
of the Build-Out Equipment; and
	 
	 	(iii)	 	any breach by Advancis of clause 2.6(d).

provided always that Advancis shall not be liable to Clonmel in respect of any such
Claim to the extent that it has arisen by reason of an act or the negligence of
Clonmel or by reason of a breach by it of this Agreement.

	 	(b)	 	Advancis agrees to take all necessary precautions to prevent injury to any
persons or damage to property and shall defend, indemnify and hold harmless Clonmel
and its directors and employees (the “Indemnitees”) from and against all claims,
damages, liabilities, judgments, losses, expenses (including reasonable attorneys’
fees), fines and penalties sustained or incurred by or asserted against any
Indemnitee which are based on, related to or arising out of any act or omission of
Advancis or its employees, agents or subcontractors in the course of conducting its
business activities or engaging in activities on the premises of Clonmel.
	 
	 	(c)	 	Advancis shall defend, indemnify and hold harmless the Indemnitees from and
against all claims, damages, liabilities, judgments, losses, expenses (including
reasonable attorneys’ fees), fines and penalties sustained or incurred by or asserted
against any Indemnitee for injury to any person (including death) or damage to
property arising out of the use of the Build-Out Equipment and the Clonmel facilities
by Advancis or any of its employees, agents or subcontractors, whether or not such
claim is based upon its condition or on the alleged negligence of Clonmel in
permitting its use; provided that Advancis shall have no obligations hereunder in the
event of, and to the extent of, Clonmel’s wilful misconduct.
	 
	 	(d)	 	[***].
	 
	 	10.3.	 	In no event will either party be liable for lost profits or loss of data or any
special, indirect, incidental, or consequential damages, however caused, on any theory
of liability and whether or not such party has been advised of the possibility of such
damages, arising under any cause of action and arising in any way out of this agreement,
except to the extent of third party indemnity claims arising under clauses 10.1 and 10.2
of this Agreement.

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

- 12 -

 

	11.	 	Notices. Any notice, demand or request required by or made in connection with
this Agreement shall be deemed properly made if personally delivered in writing, including by
nationally-recognized air courier, or if deposited in the United States mail, postage prepaid,
to the address specified below or such other address as either party may specify to the other
by written notice:

	 
	To Advancis:

	 

	Advancis Pharmaceutical Corporation

	20425 Seneca Meadows Parkway

	Germantown, Maryland 20876

	USA

	Attention: Steven A. Shallcross, Senior Vice President and Chief Financial
Officer

	 
	With a copy to:

	 

	Advancis Pharmaceutical Corporation

	20425 Seneca Meadows Parkway

	Germantown, Maryland 20876

	USA

	Attention: Joseph J. Rogus, P.E., Senior Vice President, Technical
Operations

	 
	With an additional copy to:

	Howard S. Schwartz, Esquire

	DLA Piper Rudnick Gray Cary US LLP

	6225 Smith Avenue

	Baltimore, MD 21209-3600

	USA

	 
	To Clonmel:

	 

	Clonmel Healthcare Limited

	Waterford Road

	Clonmel, Co. Tipperary

	Ireland

	Attention: Senior Vice President

	 
	With a copy to:

	Clonmel Healthcare Limited

	Waterford Road

	Clonmel, Co. Tipperary

	Ireland

	Attention: Brendan Fitzpatrick, Operations Director

- 13 -

 

	 
	With an additional copy to:

	Richard Stowe

	Matheson Ormsby Prentice

	30 Herbert Street

	Dublin 2

	Ireland

	12.	 	Assignment. Neither party may assign its rights or obligations under this Agreement
without the prior written consent of the other party, which consent shall not be unreasonably
withheld.
	 
	13.	 	Governing Law. This Agreement shall be governed by and construed in accordance with
[***] without regard to its principles of conflicts of laws.
	 
	14.	 	Mandatory Arbitration. In the event of any dispute arising under this Agreement,
each party will escalate the dispute to its senior management and if a resolution cannot be
reached within a period of twenty (20) days, the parties will submit such dispute to
arbitration. Any such arbitration shall be governed by [***]. The person to be appointed as
arbitrator shall be agreed between the parties, or failing such agreement within ten (10)
days, to be nominated by [***].
	 
	15.	 	Third Party Beneficiaries. Except as otherwise expressly provided in this Agreement,
the provisions of this Agreement are for the benefit of the parties hereto and not for any
other person. This Agreement shall not provide any third person with any remedy, claim,
reimbursement, claim of action or other right in excess of those existing without reference to
this Agreement. Without limiting the generality of the foregoing, Clonmel acknowledges,
represents and warrants to Advancis that it has not made and will not make any representation
or any provision in the Approved Build-Out Documents that Advancis will have any liability or
exposure to those parties.
	 
	16.	 	Survival. The respective obligations of the Parties under Section 6, Section 7,
clause 8.2(c), Section 10 and Section 14 shall survive the termination of this Agreement until
all applicable statutes of limitations have run.
	 
	15.	 	Entire Agreement; Amendment. This Agreement, including its recitals, exhibits and
schedules, contains the entire agreement of the parties as to the construction of the
Build-Out Facilities and the installation of the Build-Out Equipment, and supersedes any and
all prior negotiations, correspondence, understandings and agreements between the parties with
respect to the subject matter hereof. This Agreement may only be amended or modified by a
written instrument signed by both parties.

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

- 14 -

 

	16.	 	Waivers. The terms hereof may be waived only by a written instrument signed by
the party waiving compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the
part of any party of any such right, power or privilege, nor any single or partial exercise of
any such right, power or privilege, preclude any further exercise thereof or the exercise of
any other such right, power or privilege.
	 
	17.	 	Rules of Construction. The definitions used in this Agreement shall apply equally to
both the singular and plural forms of the terms defined. Whenever the context may require,
any pronoun shall include the corresponding masculine, feminine and neuter forms. The words
“include,” “includes” and “including” shall be deemed to be followed by the phrase “but not
limited to.” All references herein to Sections or clauses shall be deemed references to
Sections or clauses of this Agreement unless the context shall otherwise require. Words such
as “herein,” “hereof,” “hereto,” “hereby” and “hereunder” refer to this Agreement taken as a
whole. Neither the captions to Sections or clauses or subdivisions thereof shall be deemed to
be a part of this Agreement. Except as otherwise expressly agreed to by both parties in
writing, if any term of any request, proposal, purchase order, invoice, acknowledgment or
other document issued by either party in connection herewith conflicts with the terms of this
Agreement, the terms of this Agreement shall control.

- 15 -

 

Execution

     IN WITNESS WHEREOF, the parties have executed this Facility Build-Out Agreement as of the date
first above written.

	 	 	 	 	 
	 	ADVANCIS PHARMACEUTICAL CORPORATION

 	 
	 	By:  	/s/ Edward M. Rudnic
 	 
	 	 	Name:  	Edward M. Rudnic, Ph.D 	 
	 	 	Title:  	Chairman and CEO 	 
	 
	 	CLONMEL HEALTHCARE LIMITED

 	 
	 	By:  	/s/ James Hanson
 	 
	 	 	Name:  	James Hanson 	 
	 	 	Title:  	Finance Director/CFO 	 

- 16 -

 

	 	 	 	 	 

EXHIBIT A

BUILD-OUT FACILITIES

Refer to following attachments:

1. The build-out drawing

2. Summary of scope

3. [***]

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

- 17 -

 

EXHIBIT B

BUILD OUT EQUIPMENT

[TO BE REVIEWED BY ALL PARTIES]

Part One — Build-Out Equipment to be purchased by Clonmel (to be reimbursed by Advancis)

	 	 	 	 	 
	 	 	Ownership	 	Scheduled
	Item	 	(Clonmel/Advancis)	 	Delivery Time
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

- 18 -

 

Part Two — Build-Out Equipment to be purchased by Advancis

	 	 	 	 	 
	 	 	 	 	Scheduled
	Item	 	Ownership (Clonmel/Advancis)	 	Delivery Time
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]
	 
	 	 	 	 
	[***]

	 	Advancis
	 	[***]

The parties acknowledge that the [***] to be used in the manufacturing of pivotal trial
material for the Products, was purchased and installed at the Build-Out Facility pursuant
to the parties’ LOI. The parties agree that such equipment shall be deemed to have been
purchased and installed pursuant to this Agreement.

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

- 19 -

 

Part Three — Build-Out Equipment to be purchased by Clonmel (Not to be reimbursed by
Advancis)

	 	 	 	 	 
	 	 	 	 	Scheduled
	Item	 	Ownership (Clonmel/Advancis)	 	Delivery Time
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Clonmel
	 	[***]
	 
	 	 	 	 
	[***]

	 	Clonmel & Advancis
	 	[***]

Part Four — Programme of Works

Refer to attached MS Project Plan from DPS as of February, 2005.

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

- 20 -

 

EXHIBIT C

Preliminary design proposal received from DPS Engineering & Construction Ltd including the [***].

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

- 21 -

 

EXHIBIT D

LIST OF APPROVED BUILD-OUT DOCUMENTS

	1.	 	The Agreement proposed between Clonmel Healthcare Limited (“Clonmel”) and DPS in
respect of the Design and Project/Construction management of the Project;
	 
	2.	 	The Articles of Agreement RIAI form as modified by the Clonmel Healthcare Limited Main
Contractor Building Agreement to be entered into by the parties set out in and in
accordance with clause 1.1(a) of the Facility Build-Out Agreement.
	 
	3.	 	The Agreement(s) proposed between Clonmel and other subcontractor(s) in respect of the
following works/services in relation to the Build-Out Facilities and/or Equipment:

	 	(a)	 	Enabling Works, relocation of Glatt support equipment, relocation of existing
cable trays and piping
	 
	 	(b)	 	Site Clearance
	 
	 	(c)	 	Noise Survey

- 22 -

 

EXHIBIT E

MATERIALS

The following materials have been/are to be purchased by Clonmel and then re-charged to Advancis.

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Quantity (if	 	 
	Material	 	Date	 	Supplier (if known)	 	known)	 	Price
	[***]

	 	December 12, 2004
	 	[***]
	 	[***]
	 	[***]
	[***]

	 	December 22, 2004
	 	[***]
	 	[***]
	 	[***]
	[***]

	 	November 4, 2004
	 	[***]
	 	[***]
	 	[***]
	[***]

	 	December 13, 2004
	 	[***]
	 	[***]
	 	[***]

 

[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

- 23 -exv10w1

 

Exhibit
 10.1

May 12, 2005

John J. Marcello

Managing Director

MECAR, S.A.

Rue Grinfaux, 50

B-7181 Petit-Roeulx-lez-Nivelles

Belgium

Dear John:

     On behalf of the Board of Directors (the “Board”) of The Allied Defense Group, Inc. (the
“Company”), I am very pleased to offer you the position of President and Chief Executive Officer of
the Company. This letter agreement clarifies and confirms the terms of your employment with the
Company.

1. POSITIONS; START DATE

     As President and Chief Executive Officer of the Company, you shall have the duties and
responsibilities customarily associated with such position and such duties as may be assigned to
you by the Board. Your office will be at the Company’s headquarters, located at 8000 Towers
Crescent Drive, Suite 260, Vienna, Virginia 22182. You agree not to actively engage in any other
employment, occupation or consulting activity that conflicts with the interests of the Company.
Unless we mutually agree otherwise, you will assume the office of President and Chief Executive
Officer on June 17, 2005 immediately following the annual shareholders meeting (the “Start Date”).

2. SALARY

     Your salary will be $24,583.33 per month ($295,000 annualized), payable monthly in accordance
with the Company’s standard payroll practice and subject to applicable withholding taxes. Because
your position is exempt from overtime pay, your salary will compensate you for all hours worked.
Your salary will be reviewed and effective annually by the Compensation Committee and any
adjustments will be effective as of the date determined by the Compensation Committee.

3. STOCK AWARD

     As a one-time “signing bonus”, you will be granted a restricted stock award of 16,000 shares
of Company common stock as of the Start Date. As will be set forth in a separate stock award
agreement, the shares will vest ratably over a four (4) year period. In view of this restriction,
the certificate evidencing the shares of Allied stock will be held in escrow by the Company pending
release as the shares vest.

 

 

4. BONUS

     In addition to your salary, you will be eligible to earn an annual bonus of up to 50% of your
base salary if you meet or exceed certain performance standards which will be mutually determined
by you and the Chairman of the Board and approved by the Compensation Committee. The performance
standards for 2005 will be mutually determined and approved within thirty (30) days of commencement
of employment and prior to the beginning of each subsequent calendar year. You will be eligible for
an annual bonus for any calendar year only if you remain employed with the Company as of December
31 of such calendar year. The bonus will be payable within ten (10) days of the public release by
the Company of its financial results for the relevant calendar year.

5. BENEFITS

     You will also be entitled, during the term of your employment, to such employee benefits as
the Company may offer from time to time, subject to applicable eligibility requirements. In
addition, the Company shall pay or reimburse you up to $4,000 annually for premiums on additional
life insurance as long as you are employed by the Company. You shall be entitled to designate the
beneficiary of the policy.

6. TERMINATION OF EMPLOYMENT

     Your employment may be terminated at any time by you or by the Company with or without Cause
without prior written notice. This at-will employment relationship cannot be changed except in a
writing signed by the Chairman of the Compensation Committee. The following matters will provide
the Company with justification to terminate your employment with “Cause”:

     (a) your conviction of any act by you of fraud or embezzlement;

     (b) your conviction of any felony involving an act of dishonesty, moral turpitude, deceit or
fraud;

     (c) your conviction of any act of dishonesty or misconduct (whether in connection with your
responsibilities as an employee of the Company or otherwise) that either materially impairs the
Company’s business, goodwill or reputation or materially compromises your ability to represent the
Company with the public; or

     (d) your material failure to perform your lawful duties to the Company after receiving written
notice from the Board describing such failure in reasonable detail.

7. PAYMENTS UPON TERMINATION OF EMPLOYMENT

     The payments you will be entitled to receive from the Company upon termination of your
employment will be as follows:

2

 

     (a) If you terminate your employment, or if the Company terminates your employment with or
without Cause, the Company will pay you any accrued and unpaid compensation (subject to normal
withholding and other deductions) to the effective date of termination of your employment.

     (b) In addition, if your employment is terminated by the Company without Cause or if you
terminate your employment following (i) a material adverse alteration or diminution in the nature
or status of your authority, duties or responsibilities from those in effect immediately prior to
such change, (ii) a reduction in your title of President and Chief Executive Officer or (iii) a
reduction in your base salary:

     (A) you will be entitled to aggregate severance payments equal to the sum of (x) your
annual salary immediately prior to the termination and (y) the average annual bonus earned
by you for the two (2) most recent annual periods; and

     (B) you will be entitled to receive medical, dental, vision, long-term care, life and
long-term disability insurance coverage and your 401(k) entitlement for one (1) year
following the termination at levels comparable to that provided immediately prior to your
termination (all at the cost of the Company except for any contributions paid by you prior
to the termination).

     (c) The aggregate severance payments set forth in paragraph 7(b)(A) above shall be payable in
equal monthly installments over the one (1) year period; provided, however, that if such
termination occurs within twelve (12) months following a Change of Control (as herein defined), the
entire sum shall be payable, at your election, either in a lump sum within thirty (30) days of the
date of employment termination or in periodic payments over a period not to exceed three (3) years.

     (d) You shall not be obligated to seek other employment or take any other action by way of
mitigation of the amounts payable to you under any provisions of this paragraph 7.

     (e) For purposes hereof, the term “Change of Control” means

     (A) the acquisition (other than by the Company) by any person, entity or “group” within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the “Exchange
Act”) (excluding, for this purpose, the Company or its subsidiaries or any employee benefit
plan of the Company or its subsidiaries which acquires beneficial ownership of voting
securities of the Company) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act), of 50% or more of either the then outstanding shares of
common stock or the combined voting power of the Company’s then outstanding capital stock
entitled to vote generally in the election of directors; or

     (B) individuals who, as of the date hereof, constitute the Board (as of the date hereof
the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to the date hereof whose

3

 

election, or nomination for election by the Company’s shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board shall be
considered as though such person were a member of the Incumbent Board; or

     (C) approval by the shareholders of the Company of (x) a reorganization, merger,
consolidation or share exchange, in each case, with respect to which persons who were the
shareholders of the Company immediately prior to such reorganization, merger, consolidation
or share exchange do not, immediately thereafter, own more than 50% of the combined voting
power entitled to vote generally in the election of directors of the reorganized, merged,
consolidated or other surviving company’s then outstanding voting securities, (y) a
liquidation or dissolution of the Company or (iii) the sale of all or substantially all of
the assets of the Company.

     (f) If your employment with the Company is terminated by the Company without Cause or if you
terminate your employment with the Company following (i) a material adverse alteration or
diminution in the nature or status of your authority, duties or responsibilities from those in
effect immediately prior to such change, (ii) a reduction in your title of President and Chief
Executive Officer or (iii) a reduction in your base salary, any non-vested stock or stock option
which is scheduled to vest within the next twelve (12) months will vest as of the date of the
termination of your employment in an amount equal to the amount scheduled to vest as of said future
date multiplied by a fraction, the numerator of which shall be the number of days of the then
current period up to and including the date of termination and the denominator of which will be
365.

8. NON-COMPETITION

     For a one (1) year period from and after termination of your employment for any reason (except
if such termination occurs within twelve (12) months following a Change of Control), you shall not
engage, directly or indirectly, either on your own behalf or on behalf of any other person, firm,
corporation or other entity, in any business competitive with any business of the Company (or any
of its subsidiaries), in the geographic area or areas in which Company (or any of its subsidiaries)
is conducting business at the time of termination of your employment, or own more than 5% of any
such firm, corporation or other entity. Upon any violation of the foregoing sentence, you will
forfeit any remaining amounts payable to you hereunder in addition to any other remedies available
to the Company as a result of the violation.

9. CONFIDENTIALITY

     With your employment comes the responsibility that you will honor any confidentiality
agreements you have signed with other entities. If you have any confidential information or trade
secrets, written, or otherwise known by you, you agree not to bring them to the Company, and you
agree not to use them in any way. You attest that you have not signed a “non-competition”
agreement or any other agreement that would prohibit you from working here.

4

 

10. TRANSITION

     It is understood and agreed that you will need to spend substantial amounts of time during the
balance of 2005 at our Belgian defense subsidiary, MECAR S.A., pending engagement of a replacement
Managing Director. You will work cooperatively with the Company’s Chief Operating Officer during
this period to insure that all necessary Chief Executive Officer functions are appropriately
handled in your absence.

     The Company will honor and comply with its remaining tax gross-up and relocation obligations
to you arising from your current employment agreement dated November 8, 2002, as amended. Also,
the Company will work with you as you negotiate an early termination of the lease of your Belgian
residence. For all other purposes, said agreement is terminated and replaced by this letter
agreement.

11. ADDITIONAL PROVISIONS

     The terms described in this letter agreement will be the terms of your employment, and this
letter supersedes any previous discussions or offers. Any additions or modifications of these
terms would have to be in writing and signed by you and the Chairman of the Compensation
Commission.

     The validity, interpretation, construction and performance of this letter agreement shall be
governed by the laws of the State of Delaware (except their provisions governing the choice of
law).

     If you agree that this letter agreement evidences our agreement concerning your employment
with the Company, please indicate so by signing both copies of this letter retaining one for your
files.

     We are very excited about you joining us. I look forward to a productive and mutually
beneficial working relationship. Please let me know if I can answer any questions for you about
any of the matters outlined in this letter agreement.

Sincerely,

J.H. Binford Peay, III,

Chairman of the Board

ACCEPTANCE

I accept employment with The Allied Defense Group, Inc. under the terms set forth in this letter
agreement:

			
	 
	 	 	 
	John J. Marcello

	 	 
	 
	Allied/Peay ltr to Marcello 05-12-05
	 	 

5

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