Case 00-09

Hi-Ho, Hi-Ho, It?s Off to Market We Go!

Sneezy, a strategic investor, is a well-known, publicly-traded company that develops, markets, and distributes pharmaceuticals for allergy sufferers. Sneezy?s current product for common allergy sufferers, NoSneeze, will soon lose its patent protection and Sneezy is looking to develop a new drug that will help them grow their market share.

On September 7, 19XX, Sneezy approached Dopey, a financial investor, with a proposal to form a NEWCO to support the development of a new drug. Sneezy would contribute cash in exchange for stated maturity debt with a market rate of return and shares of common stock of NEWCO. Dopey would contribute cash in exchange for shares of both common stock and preferred stock of NEWCO. Sneezy will not own a majority interest in NEWCO or control the Board of Directors.

Under the terms of the formation of NEWCO, Sneezy has the option to call the shares of common stock from Dopey after three years at fair market value and the option to call the shares of preferred stock after three years at a 35 percent premium over stated value. If Sneezy does not exercise its call option, Dopey has the option to put the shares of common stock to Sneezy at fair market value and the option to put the shares of preferred stock to Sneezy at a 25 percent premium over stated value.

NEWCO and Sneezy would enter into a development contract whereby Sneezy would provide a full range of services to NEWCO. The contract would be at arm?s length terms and NEWCO would have the ability to terminate the agreement for poor performance by Sneezy.

The development contract would have the following features:

? NEWCO will contract with Sneezy to develop specific drugs and to pursue FDA approval. The amount of the contract is limited to the funds received in the offering. Should all funds available to NEWCO be exhausted, Sneezy may, at its option, fund NEWCO?s development efforts. Otherwise, the contract terminates.

? Payments to Sneezy by NEWCO will be based on actual costs incurred by Sneezy plus additional costs for equipment usage.

? Sneezy will be required to make its best effort and will not be required to repay any amounts to NEWCO, nor will Sneezy be obligated to purchase the results of the R&D.

? NEWCO will retain the rights to developed technology; however, Sneezy will have the exclusive right for a specified period to manufacture and market any developed product at standard cost plus a 25 percent premium. Should Sneezy elect not to manufacture and market the product, NEWCO could engage another party.

Copyright 1998 Deloitte Development LLC

All rights reserved.

Case 00-09: Hi Ho, Hi Ho, It?s Off to Market We Go! Page 2

? All activities between Sneezy and NEWCO will be governed by the development contract and Sneezy will not be able to enter into contracts on behalf of NEWCO other than those specified.

Required:

A meeting with Sneezy?s Audit Committee is scheduled for tomorrow to address any issues related to the proposed development arrangement between Sneezy and Dopey and the proposed development contract between Sneezy and NEWCO. Prepare your thoughts on the above issues for discussion with the Audit Committee.

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Case 00-09 Hi-Ho, Hi-Ho, It's Off to Market We Go! Sneezy, a strategic investor, is a well-known, publicly-traded company that develops, markets, and distributes pharmaceuticals for allergy sufferers. Sneezy's current product for common allergy sufferers, NoSneeze, will soon lose its patent protection and Sneezy is looking to develop a new drug that will help them grow their market share. On September 7, 19XX, Sneezy approached Dopey, a financial investor, with a proposal to form a NEWCO to support the development of a new drug. Sneezy would contribute cash in exchange for stated maturity debt with a market rate of return and shares of common stock of NEWCO. Dopey would contribute cash in exchange for shares of both common stock and preferred stock of NEWCO. Sneezy will not own a majority interest in NEWCO or control the Board of Directors. Under the terms of the formation of NEWCO, Sneezy has the option to call the shares of common stock from Dopey after three years at fair market value and the option to call the shares of preferred stock after three years at a 35 percent premium over stated value. If Sneezy does not exercise its call option, Dopey has the option to put the shares of common stock to Sneezy at fair market value and the option to put the shares of preferred stock to Sneezy at a 25 percent premium over stated value. NEWCO and Sneezy would enter into a development contract whereby Sneezy would provide a full range of services to NEWCO. The contract would be at arm's length terms and NEWCO would have the ability to terminate the agreement for poor performance by Sneezy. The development contract would have the following features: NEWCO will contract with Sneezy to develop specific drugs and to pursue FDA approval. The amount of the contract is limited to the funds received in the offering. Should all funds available to NEWCO be exhausted, Sneezy may, at its option, fund NEWCO's development efforts. Otherwise, the contract terminates. Payments to Sneezy by NEWCO will be based on actual costs incurred by Sneezy plus additional costs for equipment usage. Sneezy will be required to make its best effort and will not be required to repay any amounts to NEWCO, nor will Sneezy be obligated to purchase the results of the R&D. NEWCO will retain the rights to developed technology; however, Sneezy will have the exclusive right for a specified period to manufacture and market any developed product at standard cost plus a 25 percent premium. Should Sneezy elect not to manufacture and market the product, NEWCO could engage another party. Copyright 1998 Deloitte Development LLC All rights reserved. Case 00-09: Hi Ho, Hi Ho, It's Off to Market We Go! Page 2 All activities between Sneezy and NEWCO will be governed by the development contract and Sneezy will not be able to enter into contracts on behalf of NEWCO other than those specified. Required: A meeting with Sneezy's Audit Committee is scheduled for tomorrow to address any issues related to the proposed development arrangement between Sneezy and Dopey and the proposed development contract between Sneezy and NEWCO. Prepare your thoughts on the above issues for discussion with the Audit Committee. Copyright 1998 Deloitte Development LLC All rights reserved