Fee shall be determined in two steps. First, on or before December 31 of each year, Alcon [P.R.] shall determine the Option C Processing Cost of the Option C Flour. The Option C Processing Cost shall be composed of the Option C Standard Cost less the cost of raw materials owned by MedChem [P.R.] and supplied to Alcon [P.R.] for processing and the depreciation on machinery and equipment owned by MedChem [P.R.] and used in the Conversion Process. Option C Standard Cost shall consist of direct labor, direct materials, variable overhead, fixed overhead and quality assurance cost, and is defined in * * * [a referenced schedule]. Option C Standard Cost shall not include costs associated with insurance provided by MedChem [P.R.], freight or other costs which shall be separately billed to MedChem [P.R.] by third parties. Option C Standard Cost also shall not include any direct labor costs incurred by MedChem [P.R.] in connection with the provision of services by MedChem [P.R.] employees at the Humacao Plant. The Option C Processing Cost plus 10% will then be used throughout the year for the purposes of billing MedChem [P.R.] for the quantity of Option C Flour produced each month. The second step in determining the Option C Processing Fee shall take place at the end of each year. At that time, Alcon [P.R.] shall determine any manufacturing and/or processing variances by comparing the Option C Processing Cost for such year with the actual cost and volumes of Option C Flour during such year. If the variances indicate that the cost to Alcon [P.R.] to process the Option C Flour was greater than the Option C Processing Cost, then MedChem [P.R.] shall pay to Alcon [P.R.] an amount of money equal to the total amount of such variance plus 10% within 30 days of MedChem [P.R.]'s receipt of written notice setting forth the amount of such variance. If the variance indicates that the cost to Alcon [P.R.] was less than the Option C Processing Cost, then MedChem [P.R.] shall receive from Alcon [P.R.] an amount of money equal to the total amount of such variance plus 10% within 30 days of the end of the year. MedChem [P.R.] shall have the right to engage an independent auditor, upon reasonable written notice, to examine the relevant books and records of Alcon [P.R.] in order to confirm the accurate calculation of the Option C Processing Cost. 10. Payment. MedChem [P.R.] shall pay Processing Fees pursuant to Alcon [P.R.]'s invoice for Avitene Delivered under any Order within 30 days following receipt by MedChem [P.R.] of such invoice. Payment by MedChem [P.R.] of any invoice submitted by Alcon [P.R.] to MedChem [P.R.] shall not be required with respect to any shipment or lot of Avitene which has been properly rejected and returned by MedChem [P.R.] in accordance with Section 8.5. Payment of any disputed amount (but only to the extent of the disputed amount) shall be deferred until resolution of such dispute. 11. Warranty. 11.1 General Warranty; Inspection. Alcon [P.R.] warrants that any Avitene Delivered under this Agreement shall meet the Product Specifications in every material respect, and that at the time of Delivery such Avitene shall be uncontaminated and free from defects in materials and workmanship. MedChem [P.R.] may make changes in the Product Specifications, but such changes must be made known to and agreed to by Alcon [P.R.], which agreement shall not be unreasonably withheld or delayed, and Alcon [P.R.] shall promptly incorporate said change(s) in such products, consistent with Good Manufacturing Practices and regulatory requirements. MedChem [P.R.] shall have the right to inspect the Humacao Plant during mutually agreed upon times when the processing of Avitene is in progress to insure that Alcon [P.R.]'s processing of Avitene is in compliance with the Product Specifications. This right of inspection granted to MedChem [P.R.] shall not be deemed as granting to MedChem [P.R.] access to any trade secrets retained by Alcon [P.R.] subsequent to the closing of the transactions contemplated by the Asset Purchase Agreements. 11.2 MedChem [P.R.] Indemnity. MedChem [P.R.] will indemnify and hold Alcon [P.R.] harmless from any and all claims, damages, costs and/ or expenses, including, but not limited to attorneys fees, arising directly from (i) any change required by MedChem [P.R.] in the Product Specifications or the Conversion Process from the manner in which such procedures were carried out by Alcon [P.R.] as of the date of this Agreement, if such change is the proximate cause of such claim, damages, costs or expenses, (ii) the promotion, distribution, sale and/or internal use by MedChem [P.R.] of Avitene processed by Alcon [P.R.] hereunder unless at the time of Delivery such Avitene did not meet the warranty set forth in Section 11.1 hereof and (iii) any breach by MedChem [P.R.] of its warranties and obligations under this Agreement. Upon the filing of any such claim or suit, Alcon [P.R.] shall immediately notify MedChem [P.R.] thereof and shall permit MedChem [P.R.], at its cost, to handle and control such claim or suit provided, however, that Alcon [P.R.] may, at its own expense, retain such additional attorneys as it may deem necessary, which attorneys will be permitted to reasonably observe and/or participate in all aspects of (but not control) the defense of such claims or suits. MedChem [P.R.] shall have the right, after consultation with Alcon [P.R.], to resolve and settle any such claims or suits. This Indemnity shall not abrogate or in any way modify the obligations of Alcon [P.R.] pursuant to the representations and warranties contained in the Asset Purchase Agreement. 11.3 Alcon [P.R.] Indemnity. Alcon [P.R.] will indemnify and hold MedChem [P.R.] harmless from and against any and all liability, damage, loss, cost, or expense resulting from any third party claims made or suits brought against MedChem [P.R.] which arise from Alcon [P.R.J's breach of any provision of this Agreement, including, but not limited to, claims of product defect relating to Avitene which is not in conformity with the warranty set forth in Section 11.1 hereof. Upon the filing of any such claim or suit, MedChem [P.R.] shall immediately notify Alcon [P.R.] thereof and shall permit Alcon [P.R.], at its cost, to handle and control such claim or suit; provided, however, that MedChem [P.R.] may, at its own expense, retain such additional attorneys as it may deem necessary, which attorneys will be permitted to reasonably observe and/or participate in all aspects of (but not control) the defense of such claims or suits. Alcon [P.R.] shall have the right, after consultation with MedChem [P.R.], to resolve and settle any such claims or suits. 12. Term and Termination. 12.1 Term of Agreement. The term of this Agreement shall commence on the date hereof and shall end on December 31, 1990 (unless sooner terminated pursuant to this Section 12), and may be renewed on terms and conditions mutually satisfactory to the parties hereto. 12.2 Insolvency. * * 12.3 Default. (a) In General. Except as otherwise provided in this Section 12, either party, at its option, may terminate this Agreement upon the occurrence of any breach by the other party, provided however (i) that the nonbreaching party shall have delivered to the breaching party a written notice specifying such breach in reasonable detail, (ii) that the breaching party shall not have cured such breach within 60 days after receipt of the notice and (iii) that the nonbreaching party must exercise its option to terminate this Agreement within 60 days after the expiration of the cure period. (b) Failure to Deliver by Alcon [P.R.]. Subject to the provisions of Section 12.3(c) of this Agreement, MedChem [P.R.] may terminate this Agreement if Alcon [P.R.] fails to Deliver Avitene ordered by MedChem [P.R.] under this Agreement, provided, however, (i) that MedChem [P.R.] shall have delivered to Alcon [P.R.] a written notice of such failure to Deliver, (ii) that Alcon [P.R.] shall have failed to make Delivery within 60 days after receipt of such written notice and (iii) that MedChem [P.R.] must exercise its option to terminate this Agreement within 60 days after the expiration of the cure period. Alcon [P.R.] acknowledges and agrees that if Alcon [P.R.] fails to Deliver Avitene ordered by MedChem [P.R.] under this Agreement, MedChem [P.R.] may make alternative arrangements, at Alcon [P.R.]'s expense, for the processing of Avitene for the then remaining term of this Agreement. However, Alcon [P.R.] shall not be liable for any incidental or consequential damages sustained by MedChem [P.R.] due to such failure to deliver. 12.4 Establishment of MedChem [P.R.] Plant. MedChem [P.R.] may terminate this Agreement pursuant to the provisions of Section 13. 12.5 Remedies Not Exclusive. In the event of a breach of this Agreement, the rights of termination provided in this Section 12 shall not be exclusive of any remedies to which either party may be entitled at law or in equity (as limited by the express terms of this Agreement), provided, however, that such other remedies shall not be subject to the time limitations set forth in Sections 12.3(a) and (b). 13. MedChem [P.R.] Plant. The parties acknowledge and agree that, during the term of this Agreement, MedChem [P.R.] will take steps designed to establish alternative facilities (the "MedChem [P.R.] Plant") that will enable MedChem [P.R.] to undertake the Conversion Process. In connection with the establishment of the MedChem [P.R.] Plant, MedChem [P.R.] shall bear the costs of removing the Equipment from the Humacao Plant, including, but not limited to, the costs of repairing any damage to the Humacao Plant caused by such removal. Alcon [P.R.] covenants that it will provide reasonable assistance to MedChem [P.R.] in establishing the MedChem [P.R.] Plant, including training of the Humacao Plant Manager and other appropriate MedChem [P.R.] personnel in all aspects of the Conversion Process. In this regard, appropriate MedChem [P.R.] employees shall have the right, during the term of this Agreement, to observe with regard to the Conversion Process carried out by Alcon [P.R.] at the Humacao Plant. However, such MedChem [P.R.] employees will not participate in Alcon [P.R.]'s management process. In addition, upon the construction of the MedChem [P.R.] Plant, Alcon [P.R.] will assist with the validation of three initial Avitene production batches of each Avitene product produced at the MedChem [P.R.] Plant. When MedChem [P.R.] has successfully established the necessary machinery, equipment and quality control procedures, implemented the Conversion Process at the MedChem [P.R.] Plant and, in the sole opinion of MedChem [P.R.], conducted satisfactory validation tests and received all applicable governmental approvals relating to the operation of the MedChem [P.R.] Plant, MedChem [P.R.] shall have the right to terminate this Agreement prior to December 31, 1990 upon at least ninety (90) days prior written notice to Alcon [P.R.]. 17. Applicable Law. The validity, performance and construction of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. * 19. Notices. Notices and other communications by a party under this Agreement shall be in writing and hand-delivered, deposited with an overnight carrier for next day delivery, or deposited in the United States mail as certified mail, return receipt requested, postage prepaid, addressed to the parties as follows (or to such other addresses as either party may designate from time to time in writing): If to Alcon [P.R.]: Alcon Laboratories, Inc. 6201 South Freeway Forth Worth, TX 76134 Attention: Henry Meadows Vice President and Controller Surgical Specialty Division If to MedChem [P.R.]: MedChem Puerto Rico, Inc. 43 Nagog Park Acton, MA 01720 Attention: President and shall be deemed given when received. 20. No Agency Relationship. Neither party shall be deemed to be the agent of the other party for any purpose. Alcon [P.R.] shall be deemed an independent contractor for the purposes of its performance of services for MedChem [P.R.]. * ** The parties hereto have executed this Agreement as a sealed instrument and this Agreement becomes duly effective, as of the date first written above. JAMES A. ROCHELLE, PETITIONER v. COMMISSIONER OF Docket No. 18483-99. Filed May 24, 2001. R mailed to P a notice of deficiency which failed to provide Lawrence R. Jones, Jr., for petitioner. OPINION VASQUEZ, Judge: Respondent determined the following deficiencies in Federal income tax and section 6662(a) accuracy-related penalties: |