-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EYOWYkq7mflSfHhhTnHmm4p2BKebGuAx2wsBFxiziVOgS+kaKjZdrhqc0iQCkJeR oeNQ1qX0cBMBzgY1pOk2Bg== 0000898432-02-000350.txt : 20020515 0000898432-02-000350.hdr.sgml : 20020515 20020515165447 ACCESSION NUMBER: 0000898432-02-000350 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACEUTICAL RESOURCES INC CENTRAL INDEX KEY: 0000878088 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 223122182 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10827 FILM NUMBER: 02653369 BUSINESS ADDRESS: STREET 1: ONE RAM RIDGE RD CITY: SPRING VALLEY STATE: NY ZIP: 10977 BUSINESS PHONE: 9144257100 MAIL ADDRESS: STREET 1: ONE RAM RIDGE RD CITY: SPRING VALLEY STATE: NY ZIP: 10977 10-Q 1 pr10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 COMMISSION FILE NUMBER 1-10827 PHARMACEUTICAL RESOURCES, INC. (Exact name of registrant as specified in its charter) NEW JERSEY 22-3122182 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (845) 425-7100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No___ 32,077,163 Number of shares of Common Stock outstanding as of May 8, 2002. This is page 1 of 87 pages. The exhibit index is on page 24. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data) MARCH 31, DECEMBER 31, ASSETS 2002 2001 ------ ---- ---- (Unaudited) (Audited) Current assets: Cash and cash equivalents $77,546 $67,742 Accounts receivable, net of allowances of $30,607 and $47,168 17,834 38,009 Inventories 44,304 31,458 Prepaid expenses and other current assets 5,555 4,156 Deferred income tax assets 34,578 34,485 ------ ------ Total current assets 179,817 175,850 Property, plant and equipment, at cost less accumulated depreciation and amortization 25,785 24,345 Deferred charges and other assets 1,375 1,427 Intangible assets 29,184 15,304 ------ ------ Total assets $236,161 $216,926 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $224 $239 Accounts payable 22,860 18,007 Payables due to distribution agreement partners 21,932 32,295 Accrued salaries and employee benefits 3,717 2,859 Accrued expenses and other current liabilities 5,700 4,817 Income taxes payable 16,776 14,766 ------ ------ Total current liabilities 71,209 72,983 Long-term debt, less current portion 1,016 1,060 Accrued pension liability 331 331 Deferred income tax liabilities, net 4,077 4,129 Commitments and contingencies Shareholders' equity: Common Stock, par value $.01 per share; authorized 90,000,000 shares; issued and outstanding 32,058,332 and 32,035,189 shares 321 320 Additional paid-in capital 115,954 115,610 Retained earnings 43,253 22,493 ------ ------ Total shareholders' equity 159,528 138,423 ------- ------- Total liabilities and shareholders' equity $236,161 $216,926 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 2 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT) (In Thousands, Except Per Share Amounts) (Unaudited) THREE MONTHS ENDED ------------------ (*AS RESTATED) MARCH 31, MARCH 31, 2002 2001 ---- ---- Net sales $80,508 $25,704 Cost of goods sold 41,233 17,276 ------ ------ Gross margin 39,275 8,428 Operating expenses: Research and development 2,874 1,538 Selling, general and administrative 7,516 4,195 ----- ----- Total operating expenses 10,390 5,733 ------ ----- Operating income 28,885 2,695 Settlements 9,051 - Other (expense) income (4,157) 319 Interest income (expense) 254 (220) --- ---- Income before provision for income taxes 34,033 2,794 Provision for income taxes 13,273 1,298 ------ ----- NET INCOME 20,760 1,496 Retained earnings (accumulated deficit), beginning of period 22,493 (31,429) ------ ------ Retained earnings (accumulated deficit), end of period $43,253 $(29,933) ====== ======= NET INCOME PER SHARE OF COMMON STOCK: BASIC $.65 $.05 === === DILUTED $.63 $.05 === === WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: BASIC 32,048 29,661 ====== ====== DILUTED 32,868 31,235 ====== ====== *Restated as described in the Notes to Consolidated Financial Statements. The accompanying notes are an integral part of these consolidated financial statements. 3 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) THREE MONTHS ENDED ------------------ (*AS RESTATED) MARCH 31, MARCH 31, 2002 2001 ---- ---- Cash flows from operating activities: Net income $20,760 $1,496 Adjustments to reconcile net income to net cash provided by (used) in operating activities: Deferred income taxes (145) 1,024 Depreciation and amortization 930 831 Write-off of inventories 1,765 285 Allowances against accounts receivable (16,561) 566 Settlements (9,651) - Tax benefit from exercise of stock options 170 188 Other 5 64 Changes in assets and liabilities: Decrease (increase) in accounts receivable 36,736 (2,558) (Increase) decrease in inventories (14,611) 41 Increase in prepaid expenses and other assets (5,896) (946) Increase (decrease) in accounts payable 4,853 (2,164) Decrease in payables due to distribution agreement partners (10,363) (303) Increase (decrease) in accrued expenses and other liabilities 1,741 (189) Increase in income taxes payable 2,010 86 ----- -- Net cash provided by (used in) operating activities 11,743 (1,579) Cash flows from investing activities: Capital expenditures (2,055) (456) Proceeds from sale of fixed assets - 17 ----- -- Net cash used in investing activities (2,055) (439) Cash flows from financing activities: Proceeds from issuances of Common Stock 175 5 Net proceeds from revolving credit line - 2,128 Principal payments under long-term debt and other borrowings (59) (85) --- --- Net cash provided by financing activities 116 2,048 Net increase in cash and cash equivalents 9,804 30 Cash and cash equivalents at beginning of period 67,742 222 ------ --- Cash and cash equivalents at end of period $77,546 $252 ====== === * RESTATED AS DESCRIBED IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The accompanying notes are an integral part of these consolidated financial statements. 4 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) Pharmaceutical Resources, Inc. (the "Company" or "PRI") operates, primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"), in one business segment, the manufacture and distribution of generic pharmaceuticals in the United States. Marketed products are principally in solid oral dosage form (tablet, caplet and two-piece hard-shell capsule). The Company also distributes one product in the semi-solid form of a cream and one oral suspension. *restatement of results Certain items in the consolidated financial statements for the three-month period ended March 31, 2001 have been restated to change the manner in which the Company accounted for its transactions with Merck KGaA in fiscal year 1998. In June 1998, the Company sold to Merck KGaA 10,400,000 shares of its Common Stock, and entered into a distribution agreement, dated March 1998, with Genpharm, Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA. Previously, the Company accounted for the sale of the Common Stock and the distribution agreement as separate transactions. In restating its consolidated financial statements, the Company has accounted for the two agreements as a single transaction under Emerging Issues Task Force Issue ("EITF") No. 96-18 "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services". Under EITF 96-18, the fair value of the Common Stock sold, to the extent it exceeded the cash consideration received for such Common Stock, must be attributed to the distribution agreement. The Company determined the fair value of the Common Stock sold to Merck KGaA to be $27,300,000, which exceeded the cash consideration of $20,800,000 by $6,500,000. That $6,500,000 has therefore been assigned to the distribution agreement, with a corresponding increase in shareholders' equity. Additionally, the Company recorded a deferred tax liability, and a corresponding increase in the financial reporting basis of the distribution agreement, of $4,333,000 to account for the difference between the basis in the distribution agreement for financial reporting and income tax purposes as required by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS 109"). The aggregate of $10,833,000 assigned to the distribution agreement is included in intangible assets, and beginning in the third calendar quarter of 1998 is being amortized on a straight-line basis over fifteen years as a non-cash charge included in selling, general and administrative expenses. The impact of the restatement for the three months ended March 31, 2001 is as follows: Three Months Ended CONSOLIDATED STATEMENTS OF March 31, 2001 - -------------------------- ---------------------------- OPERATIONS AND ACCUMULATED DEFICIT As Reported Restated - ---------------------------------- ----------- ------------ Selling, general and administrative $4,014 $4,195 Net income $1,677 $1,496 Accumulated deficit ($27,946) ($29,933) Net income per share of common stock: Basic $0.06 $0.05 Diluted $0.05 $0.05 BASIS OF PREPARATION: The accompanying consolidated financial statements at March 31, 2002 and for the three-month periods ended March 31, 2002 and March 31, 2001 are unaudited; however, in the opinion of the Company's management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present a fair statement of the information presented therein. The consolidated balance sheet at December 31, 2001 was derived from the Company's audited consolidated financial statements at such date. Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying financial statements and these notes do not include all disclosures required by accounting principles generally accepted in the United States for audited financial statements. Accordingly, these statements should be read in conjunction with the Company's most recent annual financial statements. 5 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. Certain items on the consolidated financial statements for the prior year have been reclassified to conform to the current year financial statement presentation. ACCOUNTS RECEIVABLE: MARCH 31, DECEMBER 31, 2002 2001 ---- ---- (IN THOUSANDS) Accounts receivable $48,441 $85,177 ------- ------- Allowances: Doubtful accounts 689 998 Returns and allowances 8,409 4,847 Price adjustments 21,509 41,323 ------ ------ 30,607 47,168 ====== ====== Accounts receivable, net of allowances $17,834 $38,009 The accounts receivable amounts at March 31, 2002 and December 31, 2001 are net of provisions for customer rebates of $8,121,000 and $14,081,000, and chargebacks of $54,786,000 and $41,830,000, respectively. Customer rebates are price reductions generally given to customers as an incentive to increase sales volume. This incentive is based on a customer's volume of purchases during an applicable monthly, quarterly or annual period. Chargebacks are price adjustments given to the wholesale customer for product it resells to specific healthcare providers on the basis of prices negotiated between the Company and the provider. Where the provider has negotiated with the Company for a price below the normal resale price, the Company adjusts its price to the wholesaler supplying that provider accordingly. The adjustment is based on the wholesaler's actual resales to that provider. The accounts receivable allowances include price adjustments that consist of cash discounts, sales promotions and price protection or shelf-stock adjustments. The Company may offer price protection, or shelf-stock adjustments, with respect to sales of new generic drugs for which it has a market exclusivity period. To account for the fact that the price of such drugs typically will decline when additional generic manufacturers introduce and market a comparable generic product at the end of the exclusivity period, such plans, which are common in the industry, generally provide that the Company credit its customers with respect to the quantity remaining on the customer's shelf at the end of the exclusivity period for the difference between the Company's new price at the end of the exclusivity period and the price at which the Company sold the customers the product. In the Company's experience, the amount by which the price of a drug may decline at the end of an exclusivity period will depend in part on the number of additional generic manufacturers that introduce and market a comparable product. The Company estimates the amount by which prices will decline by monitoring the number and status of U.S. Food and Drug Administration ("FDA") applications and tentative approvals and its historical experience with other drugs for which the Company had market exclusivity. The Company estimates the amount of shelf stock that will remain at the end of an exclusivity period based on both its knowledge of the inventory practices for wholesalers and retail distributors and conversations it has with its major customers. Using these factors, the Company estimates the total price protection credit it will have to issue at the end of an exclusivity period. The Company records charges (reductions of sales) to accrue this amount for specific product sales that will be subject to price protection based on the Company's estimate of customer inventory levels and market prices at the end of the exclusivity period. The Company's exclusivity period for megestrol acetate oral suspension ended in mid-January 2002. The Company has recently learned that a generic competitor was granted FDA approval to market another generic version of megestrol acetate oral suspension and began shipping the product to a limited number of customers in the second quarter of 2002. In addition, a second potential generic competitor entered into a settlement agreement with Bristol Myers Squibb ("BMS") pursuant to which the public record states that the present formulation of the generic company's product infringes a BMS patent related to megestrol acetate. However, at this time the Company has no information as to whether the settlement agreement provides for the generic competitor to enter the market at some point in the future. The Company has patents that cover its unique formulation for megestrol acetate oral suspension and will avail itself of all legal remedies and will take all of the necessary steps to protect its intellectual property rights. Although competitors may be taking the necessary 6 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) steps to enter the market, the Company believes they are less likely to successfully enter this market because of patents owned by BMS or the Company. Megestrol acetate oral suspension is still anticipated to be a significant profit contributor during fiscal year 2002, despite the potential of competition. Based on these factors and the Company not experiencing any significant competition to date, the Company did not record a price protection reserve for megestrol acetate oral suspension as of March 31, 2002, but will continue evaluating the effect of potential competition and will record a price protection reserve when it deems necessary. The Company's exclusivity period for fluoxetine ended in late-January 2002. With respect to fluoxetine, the Company established a price protection reserve during the exclusivity period of approximately $34,400,000, based on its estimate that between eight and ten additional generic manufacturers would introduce and market comparable products for the 10 mg and 20 mg tablets and between one and three additional manufacturers would introduce and market a comparable product for the 40 mg capsules. As a result of the introduction of these competing generic products during the first quarter of 2002, the sales price for fluoxetine has substantially declined from the price the Company received during the exclusivity period and the Company issued price protection credits of approximately $23,500,000 through March 31, 2002. The Company expects that the remaining price protection reserve at March 31, 2002 of approximately $10,900,000 will be sufficient and fully utilized. Accordingly, the Company's sales and gross margins generated by fluoxetine in fiscal year 2002 have been and will continue to be adversely affected in future periods. Although there can be no assurance, the Company expects to continue to introduce new products throughout fiscal year 2002 and increase sales of certain existing products to offset the loss of sales and gross margin on its fluoxetine products. CHANGES IN SHAREHOLDERS' EQUITY: Changes in the Company's Common Stock and Additional Paid-in Capital accounts during the three months ended March 31, 2002 were as follows: ADDITIONAL COMMON STOCK PAID-IN SHARES AMOUNT CAPITAL ------ ------ ------- Balance, December 31, 2001 32,035,189 $320,000 $115,610,000 Exercise of stock options 22,008 1,000 117,000 Compensatory arrangements 1,135 - 227,000 ----- ----- ------- Balance, March 31, 2002 32,058,332 $321,000 $115,954,000 ========== ======== ============ RESEARCH AND DEVELOPMENT AGREEMENT: The Company, Israel Pharmaceutical Resources L.P. ("IPR"), and Generics (UK) Ltd. ("Generics"), a subsidiary of Merck KGaA, entered into an agreement (the "Development Agreement"), dated as of August 11, 1998, pursuant to which Generics agreed to fund one-half the costs of the operating budget of IPR, the Company's research and development operation in Israel, in exchange for the exclusive distribution rights outside of the United States to products developed by IPR after the date of the Development Agreement. In addition, Generics agreed to pay IPR a perpetual royalty for all sales of the products by Generics or its affiliates outside the United States. To date, no such products have been brought to market by Generics and no royalty has been paid. The Development Agreement has an initial term of five years and automatically renews for additional periods of one year subject to earlier termination upon six months' notice in certain circumstances. Pursuant to the Development Agreement, Generics funded approximately $788,000 for fiscal year 2001 and $170,000 for the first three months of fiscal year 2002, fulfilling their funding requirements through March 31, 2002. Under the Development Agreement, Generics is not required to fund more than $1,000,000 in any one calendar year. INTANGIBLE ASSETS: On March 5, 2002 the Company acquired the United States rights to five products from BMS. The products include the antihypertensives Capoten(R) and Capozide(R), the cholesterol-lowering medications Questran(R) and Questran Light(R), and Sumycin(R), an antibiotic. Based on the Company's market research, these products are expected to generate annual net sales of approximately $10,000,000. The product acquisition agreement is retroactive to January 1, 2002. To obtain the rights to the five products, the Company paid approximately $1,024,000 in March 2002 and agreed to make an additional payment of 7 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) approximately $1,025,000 in the first quarter of 2003. The Company also agreed to terminate its outstanding litigation against BMS involving megestrol acetate oral suspension and buspirone. The Company determined, through a third party appraisal, the fair value of the agreement to be $11,700,000, which exceeded the cash consideration of $2,049,000 and associated costs of $600,000 by $9,051,000. The $9,051,000 value was assigned to the litigation settlement and included in the settlement income in the first quarter of 2002. The value assigned to the agreement was included in intangible assets and will be amortized on a straight-line basis over seven years as a non-cash charge that will be included in cost of goods sold. In November 2001, the Company entered into a joint development and marketing agreement with Breath Ltd. of the Arrow Group to pursue the worldwide distribution of latanoprost ophthalmic solution 0.005%, the generic equivalent of Pharmacia Corporation's ("Pharmacia") Xalatan(R), a glaucoma medication. As a result of this agreement, Par filed an Abbreviated New Drug Application ("ANDA") for latanoprost, including a Paragraph IV certification that the existing patents for the product will not be infringed by Par's generic product. Par has reason to believe that its ANDA is the first to be filed for this drug with a Paragraph IV certification. In December 2001, Pharmacia, among others, initiated a patent infringement action against Par and Par intends to vigorously defend its position in its pending litigation with Pharmacia. Pursuant to this agreement Par made payments to Breath Ltd. of $2,500,000 in fiscal year 2001 and $2,500,000 in the first quarter of fiscal year 2002, which are included in intangible assets on the consolidated balance sheets (see "-Legal Proceedings"). In April 1999, the Company entered into an agreement with FineTech Ltd. ("FineTech") for the right to use a process for a pharmaceutical bulk active. Pursuant to this agreement, the Company paid FineTech approximately $2,000,000, included in intangible assets on the consolidated balance sheets, in fiscal years 2000 and 2001 for a completed process together with its technology transfer package and patent. The Company will pay royalties to FineTech on gross margins from sales of all products developed pursuant to this agreement. In January 1999, the Company entered into a profit sharing agreement (the "Genpharm Profit Sharing Agreement") with Genpharm pursuant to which the Company will receive a portion of the profits generated from the sale of products sold under a separate agreement between Genpharm and an unaffiliated United States based pharmaceutical company in exchange for a non-refundable fee of $2,500,000 paid by the Company. The fee, included in intangible assets on the consolidated balance sheets, will be amortized over a projected revenue stream from the products when launched by the third party. To date there are two ANDAs for potential products covered under the Genpharm Profit Sharing Agreement awaiting FDA approval. The agreement between Genpharm and the unaffiliated third party covers 15 products that are not included in the Company's other distribution agreements with Genpharm as described below. On June 30, 1998, the Company completed a strategic alliance with Merck KGaA, a pharmaceutical and chemical company located in Darmstadt, Germany. Pursuant to a Stock Purchase Agreement, dated March 25, 1998, the Company issued 10,400,000 shares of the Company's Common Stock to Merck KGaA, through its subsidiary EMD, Inc. ("EMD" formerly known as Lipha Americas, Inc.) in exchange for cash of $20,800,000 and the exclusive United States distribution rights to a portfolio of products covered by a distribution agreement, dated March 25, 1998, with Genpharm (the "Genpharm Distribution Agreement"). The Company determined the fair value of the Common Stock sold to Merck KGaA was $27,300,000, which exceeded the cash consideration of $20,800,000 by $6,500,000. The $6,500,000 value was assigned to the Genpharm Distribution Agreement, with a corresponding increase in shareholders' equity. Additionally, the Company recorded a deferred tax liability, and a corresponding increase in the financial reporting basis of the distribution agreement, of $4,333,000 to account for the difference between the basis in the distribution agreement for financial reporting and income tax purposes as required by SFAS 109. The aggregate of $10,833,000 assigned to the distribution agreement is included in intangible assets, and beginning in the third calendar quarter of 1998, is being amortized on a straight-line basis over fifteen years as a non-cash charge included in selling, general and administrative expenses. Under the Genpharm Distribution Agreement, the Company obtained the exclusive distribution rights within the United States and certain other United States territories to approximately 40 generic pharmaceutical products. To date, 16 of such products have obtained FDA approval and 15 are currently being marketed by Par. The remaining products are either being developed, have been identified for development, or have been submitted to the FDA for approval. 8 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) Currently, there are eight ANDAs for potential products (two of which have been tentatively approved) that are covered by the Genpharm Distribution Agreement pending with, and awaiting approval from, the FDA. Genpharm is required to use commercially reasonable efforts to develop the products and is responsible for the completion of product development and obtaining all applicable regulatory approvals. The Company pays Genpharm a percentage of the gross profits on all sales of products covered by the Genpharm Distribution Agreement. On July 31, 2001, Alphapharm Pty Ltd. ("Alphapharm"), an Australian subsidiary of Merck KGaA, was granted final approval by the FDA for flecainide acetate tablets, the generic version of Minnesota Mining and Manufacturing Companys' ("3Ms'") Tambocor(R), which will be distributed by the Company under the Genpharm Distribution Agreement. Since Alphapharm was the first-to-file an ANDA and obtained Paragraph IV certification, the Company anticipates receiving up to 180 days of marketing exclusivity for the product. The Company anticipates commencing the marketing of the product in the second quarter of fiscal year 2002. On September 5, 2001, Merck KGaA and certain of its affiliates sold their entire holdings of 13,634,012 shares of Common Stock, representing approximately 43% of the Company's total number of outstanding shares of Common Stock at the close of the transaction in September 2001, to unaffiliated institutional investors in a private placement. The selling of these shares did not change the terms of any existing distribution or development agreements between the Company and Merck KGaA or its affiliates. LEASE AGREEMENT: In March 1999, Par entered into an agreement to lease (the "Lease Agreement") its manufacturing facility and related machinery and equipment located in Congers, New York (the "Congers Facility") to Halsey Drug Co., Inc. ("Halsey"), a manufacturer of generic pharmaceutical products. The Lease Agreement has an initial term of three years, subject to an additional two-year renewal period and contains a purchase option permitting Halsey to purchase the Congers Facility and substantially all the equipment thereof at any time during the lease terms for a specified amount. The Lease Agreement provides for annual fixed rent during the initial term of $500,000 per year and $600,000 per year during the renewal period. DISTRIBUTION AND SUPPLY AGREEMENTS: DR. REDDY'S LABORATORIES LTD. In April 2001, the Company and Dr. Reddy's Laboratories Ltd. ("Reddy"), a producer of bulk active ingredients for the pharmaceutical industry and a developer and manufacturer of finished dosage forms located in India, entered into a broad-based co-marketing and development agreement (the "Reddy Development and Supply Agreement") covering up to 14 generic pharmaceutical products, five of which have been filed with, and awaiting approval from, the FDA, to be marketed exclusively by Par in the United States and certain other United States territories. Reddy is required to use commercially reasonable efforts to develop the products covered by the Reddy Development and Supply Agreement, and is responsible for the completion of product development and for obtaining all applicable regulatory approvals. The Company will pay Reddy a percentage of the gross profits on sales of the products sold by Par in accordance with the Reddy Development and Supply Agreement. On August 2, 2001, the Company received 180-day marketing exclusivity for fluoxetine 40 mg capsules, the generic version of Eli Lilly and Company's Prozac(R), pursuant to the Reddy Development and Supply Agreement and began immediately shipping the product. The products covered by the Reddy Development and Supply Agreement are in addition to five products currently being marketed by the Company under prior agreements with Reddy. Pursuant to these agreements, the Company pays Reddy a certain percentage of the gross profits on sales of any products covered under such agreements. GENPHARM, INC.: The Company and Genpharm entered into a distribution agreement (the "Genpharm Additional Product Agreement"), dated November 27, 2000, pursuant to which Genpharm granted the Company exclusive distribution rights within the United States and certain other United States territories with respect to five generic pharmaceutical products not included in the Company's other distribution agreements with Genpharm (see "-Intangible Assets" and "-Subsequent Events"). The products are either being developed, have been identified for development, 9 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) or have been submitted to the FDA for approval. Currently, there is one ANDA (tentatively approved) for a potential product covered by the Genpharm Additional Product Agreement pending with, and awaiting approval from, the FDA. Genpharm and the Company are sharing the costs of developing the products and for obtaining all applicable regulatory approvals. The Company will pay Genpharm a percentage of the gross profits on all sales of products included in the Genpharm Additional Product Agreement. On August 2, 2001, the Company received 180-day marketing exclusivity for fluoxetine (Prozac(R)) 10 mg and 20 mg tablets, covered under the Genpharm Additional Product Agreement and immediately began shipping the product. BASF CORPORATION: In April 1997, Par entered into a Manufacturing and Supply Agreement (the "BASF Supply Agreement") with BASF Corporation ("BASF"), a manufacturer of pharmaceutical products. Under the BASF Supply Agreement, Par agreed to purchase minimum quantities of certain products manufactured by BASF, and to phase out Par's manufacturing of those products. As part of the agreement, BASF discontinued its direct sale of those products. The agreement had an initial term of three years and would have renewed automatically for successive two-year periods until December 31, 2005, if Par had met certain purchase thresholds. Since Par did not meet the minimum purchase requirement of one product in the third and final year of the agreement, BASF had the right to terminate the agreement with a notice period of one year. BASF has not given Par such notice and to ensure continuance of product supply, BASF and the Company have agreed to continue to operate under terms similar to those of the BASF Supply Agreement. PAYABLES DUE TO DISTRIBUTION AGREEMENT PARTNERS: As of March 31, 2002 and December 31, 2001, the Company had payables due to distribution agreement partners of $21,932,000 and $32,295,000, respectively. SHORT-TERM DEBT: In December 1996, Par entered into a Loan and Security Agreement (the "Loan Agreement") with General Electric Capital Corporation ("GECC"). The Loan Agreement, as amended, provides Par with a revolving line of credit expiring March 2005. Pursuant to the Loan Agreement, Par is permitted to borrow up to the lesser of (i) the borrowing base established under the Loan Agreement or (ii) $30,000,000. The borrowing base is limited to 85% of eligible accounts receivable plus 50% of eligible inventory of Par, each as determined from time to time by GECC. The interest rate charged on the line of credit is based upon a per annum rate of 2.25% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par, PRI and certain subsidiaries, other than real property, and is guaranteed by PRI and certain of its subsidiaries. In connection with such facility, Par, PRI and their subsidiaries have established a cash management system pursuant to which all cash and cash equivalents received by any of such entities are deposited into a lockbox account over which GECC has sole operating control if there are amounts outstanding under the line of credit. The deposits would then be applied on a daily basis to reduce the amounts outstanding under the line of credit. The revolving credit facility is subject to covenants based on various financial benchmarks. As of March 31, 2002, the borrowing base was approximately $26,700,000. To date, no debt is outstanding under the Loan Agreement. INCOME TAXES: The Company accounts for income taxes in accordance with the provisions of SFAS 109, which requires the Company to recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. At March 31, 2002 and December 31, 2001, the Company had deferred income tax assets of $34,578,000 and $34,485,000, respectively, consisting of temporary differences, primarily related to accounts receivable reserves, and net deferred income tax liabilities of $4,077,000 and $4,129,000, respectively, primarily related to the Genpharm Distribution Agreement. 10 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) EARNINGS PER SHARE: The Company presents earnings per share data in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"), which establishes the standards for the computation and presentation of basic and diluted earnings per share data. Under SFAS 128, the dilutive effect of stock options is excluded from the calculation of basic earnings per share but included in diluted earnings per share except in periods of net loss where inclusion would be anti-dilutive. The following is a reconciliation of the amounts used to calculate basic and diluted earnings per share: THREE MONTHS ENDED ------------------ (*AS RESTATED) MARCH 31, MARCH 31, 2002 2001 ---- ---- (In Thousands, Except Per Share Amounts) NET INCOME $20,760 $1,496 BASIC: Weighted average number of common shares outstanding 32,048 29,661 NET INCOME PER SHARE OF COMMON STOCK $.65 $.05 === === ASSUMING DILUTION: Weighted average number of common shares outstanding 32,048 29,661 Effect of dilutive options 820 1,574 --- ----- Weighted average number of common and common equivalent shares outstanding 32,868 31,235 NET INCOME PER SHARE OF COMMON STOCK $.63 $.05 === === The Company had outstanding options of 2,034,125 as of March 31, 2002 that were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the Common Stock in the period. As of March 31, 2001, incremental shares from assumed conversions of all of the Company's outstanding options and warrants were included in the computation of diluted earnings per share. NEW ACCOUNTING STANDARDS: In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 changes the accounting for business combinations, requiring that all business combinations be accounted for using the purchase method and is effective for all business combinations initiated after June 30, 2001. SFAS 142 specifies the financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. SFAS 142 is effective for fiscal years beginning after December 15, 2001. SFAS 142 requires that the useful lives of intangible assets acquired on or before June 30, 2001 be reassessed and the remaining amortization periods adjusted accordingly. Previously recognized intangible assets deemed to have indefinite lives should be tested for impairment. Goodwill recognized on or before June 30, 2001 shall be tested for impairment as of the beginning of the fiscal year in which SFAS 142 is initially applied in its entirety. In August of 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets," ("SFAS 144") which is effective for fiscal years beginning after December 15, 2001. SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long lived assets and supersedes SFAS 121 and the accounting and reporting provisions of the APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual, 11 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The adoption of these new accounting standards did not have a material impact on the Company's consolidated financial position, results of operations and cash flows. COMMITMENTS, CONTINGENCIES AND: RETIREMENT PLANS: The Company has a defined contribution social security integrated retirement plan (the "Retirement Plan") which provides retirement benefits to eligible employees as defined in the Retirement Plan. The Company suspended employer contributions to the Retirement Plan effective December 30, 1996. Consequently, participants in the Retirement Plan will no longer be entitled to any employer contributions under such plan for 1996 or subsequent years. The Company also maintains a retirement savings plan (the "Retirement Savings Plan") whereby eligible employees are permitted to contribute from 1% to 25% of their compensation to the Retirement Savings Plan. The Company contributes an amount equal to 50% of the first 6% of compensation contributed by the employee. Participants of the Retirement Savings Plan become vested with respect to 20% of the Company's contributions for each full year of employment with the Company and thus become fully vested after five full years. In fiscal year 1998, the Company merged the Retirement Plan into the Retirement Savings Plan. LEGAL PROCEEDINGS: Par has filed an ANDA (currently pending with the FDA) for latanoprost (Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to a joint manufacturing and marketing agreement with the Company, seeking approval to engage in the commercial manufacture, sale and use of the latanoprost product in the United States. Par's ANDA includes a Paragraph IV certification that the existing patents in connection with Xalatan(R) are invalid, unenforceable or will not be infringed by Par's generic product. Par has reason to believe that its ANDA is the first to be filed for this drug with a Paragraph IV certification. As a result of the filing of the ANDA, Pharmacia Corporation, Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and Upjohn Company and the Trustees of Columbia University in the City of New York filed lawsuits against the Company on December 14, 2001 in the United States District Court for the District of Delaware and on December 21, 2001 in the United States District Court for the District of New Jersey alleging patent infringement. Pharmacia and Columbia are seeking an injunction. On February 8, 2002, Par answered the complaint brought in the District of New Jersey and filed a counterclaim, which seeks a declaration that the patents-in-suit are invalid, unenforceable and not infringed by Par's products. Par also seeks a declaratory judgment that the extension of judgment concerning the term of one of the patents is invalid, as well as reimbursement for attorneys' fees. In addition, on February 25, 2002 the lawsuit brought in the District of Delaware was dismissed pursuant to a stipulation of the parties. Par intends to vigorously defend the lawsuits. At this time, it is not possible for the Company to predict the outcome of this litigation and the impact, if any, that it might have on the Company. Par, among others, is a defendant in three lawsuits filed in United States District Court for the Eastern District of North Carolina (filed on August 1, 2001, October 30, 2001 and November 16, 2001, respectively) by aaiPharma Inc., involving patent infringement allegations connected to a total of three patents related to polymorphic forms of fluoxetine (Prozac(R)). Par intends to vigorously litigate these cases. While the outcome of litigation is never certain, Par believes that it will prevail in these litigations. On July 16, 2001, the Federal Circuit Court of Appeals in Washington D.C. affirmed the Company's summary judgment victory in its patent infringement case with BMS over megestrol acetate oral suspension, the generic version of BMS's Megace(R) Oral Suspension. On July 25, 2001, the FDA granted the Company final approval for megestrol acetate oral suspension with marketing exclusivity until mid-January 2002 and the Company immediately began shipping the product to its customers. Although the Court had disposed of all of BMS's infringement issues, Par's counterclaims for patent invalidity, unfair competition and tortuous interference seeking an injunction and an award of compensatory and punitive damages remained. In March 2002 BMS sold the rights to five products to Par in exchange for a payment of $2,049,000 and the termination of all the Company's outstanding litigation against BMS involving megestrol acetate oral suspension and buspirone. 12 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) On March 30, 2001, the Company reached an agreement with 3M with respect to a previous product agreement (the "Product Co-development, Supply and Distribution Agreement") entered into between the parties on January 6, 1994. Under the terms of the agreement, 3M agreed to pay the Company $750,000 in April 2001 in exchange for the mutual termination of the Product Co-development, Supply and Distribution Agreement. On August 1, 2001 Alpharma USPD, Inc. filed a lawsuit in the U.S. District Court for the District of Maryland seeking a declaratory judgment that Alpharma's megestrol acetate formulation does not infringe U.S. Patent No. 6,028,065 granted to the Company and/or that the Company's patent is invalid. The Company is involved in certain other litigation matters, including certain product liability and patent actions, and actions by former employees, and believes these actions are incidental to the conduct of its business and that the ultimate resolution thereof will not have a material adverse effect on its financial condition, results of operations or liquidity. The Company intends to vigorously defend these actions. OTHER MATTERS: In December 2001, the Company committed to making an equity investment of up to $2,400,000 over a period of time in HighRapids, Inc. ("HighRapids"), a Delaware corporation and software developer. HighRapids is the surviving corporation of a merger with Authorgenics, Inc., a Florida corporation. HighRapids will utilize the Company's cash infusion for working capital and operating expenses. Through March 31, 2002 the Company had invested $259,000 of its planned investment in HighRapids. The Company has the exclusive right to market to the pharmaceutical industry certain laboratory software currently in development. PRI's Chief Executive Officer and a director of the Company, each holds shares of HighRapids common stock (less than 1%), which were acquired prior to the Company acquiring a controlling interest in HighRapids. On March 15, 2002, the Company announced the termination of negotiations with International Specialty Products ("ISP") related to the purchase of the ISP FineTech fine chemical business, based in Haifa, Israel and Columbus, Ohio. At that time, the Company discontinued negotiations with ISP as a result of various events and circumstances that occurred since the announcement of the proposed transaction. Pursuant to the termination of the purchase, the Company paid ISP a $3,000,000 break-up fee in March 2002, which was subject to certain credits and offsets, and incurred approximately $1,268,000 in related acquisition costs, both of which were included in other expense in the first quarter of 2002. As part of the termination the Company received the rights to a raw material developed by ISP FineTech under a prior agreement. The Company subsequently purchased FineTech based in Haifa, Israel in a separate transaction in April 2002 (see "-Subsequent Events"). SUBSEQUENT EVENTS: In April 2002, the Company entered into an agreement with Rhodes Technologies, Inc. ("RTI"), an associated company of Purdue Pharma L.P., to establish a joint venture partnership in the United States. The new joint venture will be named SVC Pharma and will be owned equally by both parties. SVC Pharma will utilize, on a case-by-case basis, advanced technologies and patented processes to develop, manufacture, market and distribute certain unique, proprietary pharmaceutical products. Under the terms of the agreement, when both partners agree to pursue a specific project, each partner will contribute resources to the new enterprise. RTI will provide scientific and technological expertise in the development of non-infringing, complex molecules. In addition to providing chemical synthesis capabilities, RTI will provide the manufacturing capacity for sophisticated intermediate and active pharmaceutical ingredients. Par will provide development expertise in dosage formulation and will be responsible for marketing, sales and distribution. The companies will share equally in expenses and profits. SVC Pharma has already identified several candidates for drug development. The first of these has the potential to be marketed by the Company at the end of fiscal year 2003 or early in fiscal year 2004. In April 2002, the Company acquired FineTech from ISP for $32,000,000. The acquisition was financed by cash-on-hand and is not expected to have a material effect on earnings in fiscal year 2002. FineTech, based in Haifa, Israel, specializes in the design and manufacture of proprietary synthetic chemical processes used in the production of complex organic compounds for the pharmaceutical industry. The Company has acquired the physical facilities, the intellectual property and patents of FineTech and has retained all FineTech employees. FineTech also manufactures complex synthetic active pharmaceutical 13 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) ingredients for companies in the branded and generic pharmaceutical industries at its manufacturing facility in Haifa, Israel. This facility operates in compliance with FDA current good manufacturing practices (cGMP) standards. FineTech achieved revenues of approximately $6,000,000 in 2001. The Company expects to transfer a portion of FineTech's personnel and technological resources to a laboratory facility in the northeastern United States. The remaining physical assets in Haifa are valued at less than $2,000,000. FineTech will be operated as an independent, wholly owned subsidiary of PRI and will provide immediate chemical synthesis capabilities and strategic opportunities to the Company and other customers. The Company has enjoyed a long-standing relationship with FineTech for more than seven years. Two of the Company's six potential first-to-file products, flecainide and latanoprost, resulted from the Company's relationship with FineTech. In addition, the Company and FineTech are currently collaborating on three additional products. ANDAs have already been submitted for two of these products. In April 2002, the Company entered into an agreement to expand its strategic product partnership with Merck KGaA. Under the terms of the new agreement, Par has licensed the exclusive rights to 11 generic pharmaceutical products currently under development and not included in any other distribution agreements between the Company and Genpharm (see "-Intangible Assets" and "-Distribution and Supply Agreements-Genpharm, Inc."). Pursuant to the agreement, Genpharm is to develop the products, submit all corresponding ANDAs to the FDA and subsequently manufacture the products. Par will serve as exclusive U.S. marketer and distributor of the products, pay a share of the costs, including development and legal expenses incurred to obtain final regulatory approval, and pay Genpharm a percentage of the gross profits on all sales of products covered under this agreement. Pursuant to the agreement, the Company will pay Genpharm a non-refundable fee of $2,000,000 in the second quarter of 2002 for two of the products, loratadine 10 mg tablets and mirtazapine tablets, which are tentatively approved and expected to be launched in fiscal years 2003 to 2004. In addition, the Company will be required to pay a non-refundable fee of up to $414,000 based upon FDA acceptance of filings for six of the nine remaining products. According to the Company's market research loratadine 10 mg tablets, the generic version of Schering-Plough's non-sedating antihistamine Claritin(R), had U.S. sales of approximately $1.8 billion in fiscal year 2001 and mirtazapine, the generic equivalent of Organon's antidepressant Remeron(R), had U.S. sales of approximately $400 million in 2001. In fiscal year 2001, the cumulative sales of the 11 branded products totaled approximately $7.8 billion. The majority of these products are expected to enter the U.S. market between 2003 and 2006. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CERTAIN STATEMENTS IN THIS FORM 10-Q MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES OF CURRENT PRODUCTS AND THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE TYPICALLY BY USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS," "ANTICIPATES," "CONTINUING," "ONGOING," "EXPECTS," "BELIEVES," OR SIMILAR WORDS AND PHRASES. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN THIS FORM 10-Q INCLUDE, AMONG OTHERS, (I) INCREASED COMPETITION FROM NEW AND EXISTING COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS (ESPECIALLY UPON COMPLETION OF EXCLUSIVITY PERIODS), (II) PRICING PRESSURES RESULTING FROM THE CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (III) THE AMOUNT OF FUNDS AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND DEVELOPMENT JOINT VENTURES, (IV) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR DELAYS AND UNANTICIPATED COSTS IN OBTAINING REGULATORY APPROVALS, (V) CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT AGREEMENTS, (VI) THE CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET FUTURE DEMAND, (VII) THE COSTS AND OUTCOME OF ANY THREATENED OR PENDING LITIGATION, INCLUDING PATENT AND INFRINGEMENT CLAIMS AND (VIII) GENERAL INDUSTRY AND ECONOMIC CONDITIONS. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q ARE MADE ONLY AS OF THE DATE HEREOF, BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF, AND, SUBJECT TO APPLICABLE LAW TO THE CONTRARY, THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. RESULTS OF OPERATIONS GENERAL The Company's net income of $20,760,000 for the three-month period ended March 31, 2002 increased $19,264,000 from $1,496,000 for the three-month period ended March 31, 2001. An increase in revenues of $54,804,000, or 213%, from those realized in the first quarter of 2001 led to the significant improvement, reflecting the successful launch of new products, particularly megestrol acetate oral suspension (Megace(R) Oral Suspension) and fluoxetine (Prozac(R)) 40 mg capsules, over the prior nine months. Net sales were $80,508,000 in the first quarter of 2002 compared to net sales of $25,704,000 for the same period last year. Improved gross margins followed the sales growth, increasing to $39,275,000, or 49% of net sales, in the first quarter of fiscal year 2002, from $8,428,000, or 33% of net sales, in the same period of the prior year. The improved results included an 87% increase in research and development spending in the most recent three months to $2,874,000 from $1,538,000 for the comparable period of 2001. First quarter 2002 selling, general and administrative costs of $7,516,000 increased $3,321,000 from the corresponding period of the prior year, primarily due to additional personnel costs and marketing programs, shipping costs and legal fees associated with new product launches. Additionally, the Company recorded net settlement income of $9,051,000 in the first quarter of 2002 related to the termination of its litigation with BMS and other expense of $4,268,000 in connection with its termination of the acquisition of the ISP FineTech fine chemical business. In July 2001 and August 2001, the FDA granted approvals for three ANDA submissions, one each by Par, Reddy and Alphapharm, for megestrol acetate oral suspension, fluoxetine 40 mg capsules and fluoxetine 10 mg and 20 mg tablets, respectively, which as first-to-file opportunities entitled the Company to 180-days of marketing exclusivity for the products. The Company began marketing megestrol acetate oral suspension, which is not subject to any profit sharing agreements, in July 2001. In August 2001, the Company began marketing fluoxetine 40 mg capsules covered under the Reddy Development and Supply Agreement and fluoxetine 10 mg and 20 mg tablets covered under the Genpharm Additional Product Agreement. Generic competitors of the Company received 180-days marketing exclusivity for another generic version of fluoxetine 10 mg and 20 mg capsules, which the Company also began selling following the end of the exclusivity period in the first quarter of 2002. As expected, additional generic competitors, with comparable products to all three strengths of the Company's fluoxetine, began entering the market in the first quarter of 2002, severely eroding the pricing the Company received during the exclusivity periods, particularly on the 10 mg and 20 mg strengths. Although the Company has recently learned of another generic approval for megestrol acetate oral suspension in the first quarter of 2002, to date the Company had not experienced any significant generic competition on this product (see "Notes to Consolidated Financial Statements-Accounts Receivable" ). Critical to sustaining the improvement in the Company's financial condition is the introduction of new manufactured and distributed products at selling prices that generate significant gross margin. The Company, through its internal 15 development program and strategic alliances, is committed to developing new products that have limited competition and longer product life cycles. In addition to new product introductions expected as part of its various strategic alliances, the Company plans to continue to invest in research and development efforts while seeking additional products for sale through new and existing distribution agreements, additional first-to-file opportunities, vertical integration with raw material suppliers and unique dosage forms and strengths to differentiate its products in the marketplace. The Company is engaged in efforts, subject to FDA approval and other factors, to introduce new products as a result of its research and development efforts and distribution and development agreements with third parties. No assurance can be given that the Company will obtain or develop any additional products for sale (see "-Financial Condition-Liquidity and Capital Resources"). The generic drug industry in the United States continues to be highly competitive. The factors contributing to the intense competition and affecting both the introduction of new products and the pricing and profit margins of the Company, include, among other things: (i) introduction of other generic drug manufacturer's products in direct competition with the Company's significant products, (ii) consolidation among distribution outlets through mergers, acquisitions and the formation of buying groups, (iii) ability of generic competitors to quickly enter the market after patent expiration or exclusivity periods, diminishing the amount and duration of significant profits, (iv) willingness of generic drug customers, including wholesale and retail customers, to switch among pharmaceutical manufacturers and (v) pricing and product deletions by competitors NET SALES First quarter 2002 net sales of $80,508,000 increased $54,804,000, or 213%, from net sales of $25,704,000 for the corresponding period of fiscal year 2001. The sales increase was primarily due to new products introduced in the prior year, particularly fluoxetine, sold under distribution agreements with Reddy and Genpharm, and megestrol acetate oral suspension manufactured by the Company. Net sales of fluoxetine and megestrol acetate oral suspension for the first quarter of 2002 were approximately $25,870,000 and $19,401,000, respectively. Net sales of distributed products, which consist of products manufactured under contract and licensed products, were approximately 56% and 58%, respectively, of the Company's net sales in the three month periods ended March 31, 2002 and March 31, 2001. The Company is substantially dependent upon distributed products for its sales, and as the Company introduces new products under its distribution agreements, it is expected that this trend will continue. Any inability by suppliers to meet expected demand could adversely affect future sales. The Company's exclusivity period for megestrol acetate oral suspension ended in mid-January 2002. The Company has recently learned that a generic competitor was granted FDA approval to market another generic version of megestrol acetate oral suspension and began shipping the product to a limited number of customers in the second quarter of 2002. In addition, a second potential generic competitor entered into a settlement agreement with BMS pursuant to which the public record states that the present formulation of the generic company's product infringes a BMS patent. However, at this time the Company has no information as to whether the settlement agreement provides for the generic competitor to enter the market at some point in the future. The Company has patents that cover its unique formulation for megestrol acetate oral suspension and will avail itself of all legal remedies and will take all of the necessary steps to protect its intellectual property rights. Although competitors may be taking the necessary steps to enter the market, the Company believes they are less likely to successfully enter this market because of patents owned by BMS or the Company. Megestrol acetate oral suspension is still anticipated to be a significant profit contributor during fiscal year 2002, despite the potential of competition. Based on these factors and the Company not experiencing any significant competition to date, the Company did not record a price protection reserve for megestrol acetate oral suspension as of March 31, 2002, but will continue evaluating the effect of potential competition and will record a price protection reserve when it deems necessary. The Company's exclusivity period for fluoxetine ended in late-January 2002. With respect to fluoxetine, the Company established a price protection reserve during the exclusivity period of approximately $34,400,000, based on its estimate that between eight and ten additional generic manufacturers would introduce and market comparable products for the 10 mg and 20 mg tablets and between one and three additional manufacturers would introduce and market a comparable product for the 40 mg capsules. As a result of the introduction of these competing generic products during the first quarter of 2002, the sales price for fluoxetine has substantially declined from the price the Company received during the exclusivity period and the Company issued price protection credits of approximately $23,500,000 through March 31, 2002. The Company expects that the remaining price protection reserve at March 31, 2002 of approximately $10,900,000 will be sufficient and fully utilized. Accordingly, the Company's sales and gross margins generated by fluoxetine in fiscal year 2002 have been and will continue to be adversely affected in future periods. 16 Sales of the Company's products are principally dependent upon, among other things, (i) pricing levels and competition, (ii) market penetration for the existing product line, (iii) the continuation of existing distribution agreements, (iv) introduction of new distributed products, (v) approval of ANDAs and introduction of new manufactured products, including potential exclusivity periods, and (vi) the level of customer service. Although there can be no assurance, the Company anticipates introducing new products throughout fiscal year 2002 and increasing sales of certain existing products to offset the loss of sales and gross margins from competition on any of its significant products. The Company will continue to implement measures to reduce the overall impact of its top products, including adding additional products through new and existing distribution agreements, manufacturing process improvements and cost reductions. GROSS MARGIN The Company's gross margin of $39,275,000 (49% of net sales) for the first quarter of 2002 increased $30,847,000 from $8,428,000 (33% of net sales) in the corresponding period of the prior year. The gross margin improvement was achieved primarily as a result of additional contributions from sales of higher margin new products, particularly megestrol acetate oral suspension and fluoxetine, and to a lesser extent, increased sales of certain existing products. In the three-month period ended March 31, 2002, megestrol acetate oral suspension contributed approximately $16,088,000 to the margin improvement while fluoxetine, which is subject to profit sharing agreements with Genpharm and Reddy, contributed approximately $10,198,000 to the margin improvement. As discussed above, additional generic manufacturers have introduced and began marketing comparable fluoxetine products at the end of the Company's exclusivity period adversely affecting the Company's sales volumes, selling prices and gross margins for the products, particularly the 10mg and 20mg strengths. As a result, the Company's gross margin from fluoxetine is expected to substantially decline in future periods. The Company's gross margin for megestrol acetate oral suspension could also decline if additional manufacturers introduce and market comparable generic products. Inventory write-offs in the first quarter of 2002 increased to $1,765,000 from $285,000 in the first quarter of 2001. The increase was primarily attributable to the write-off of inventory for a product whose launch was delayed due to unexpected patent issues and certain raw material not meeting the Company's quality control standards. The inventory write-offs, taken in the normal course of business, are related primarily to work in process inventory not meeting the Company's quality control standards and the disposal of finished products due to short shelf lives. OPERATING EXPENSES RESEARCH AND DEVELOPMENT For the three-month period ended March 31, 2002, the Company incurred research and development expenses of $2,874,000 compared to $1,538,000 for the corresponding period of the prior year. The increased costs were primarily attributable to the following: (i) payments to Elan Transdermal Technologies, Inc. ("Elan") related to the development of a clonidine transdermal patch and other products, (ii) payments for formulation development work performed for PRI by unaffiliated companies and (iii) higher costs for raw material and personnel. The Company's domestic research and development program is integrated with IPR, its research operation in Israel. Research and development expenses at IPR for the most recent quarter were $323,000, net of Generics funding, compared to expenses of $285,000 for the comparable quarter of last year. The Company, IPR and Generics have an agreement pursuant to which Generics shares one-half of the costs of IPR's operating budget up to a maximum payment of $1,000,000 in any one calendar year in exchange for the exclusive distribution rights outside of the United States to the products developed by IPR after the date of the agreement (see "Notes to Consolidated Financial Statements-Research and Development Agreements"). Annual research and development costs in fiscal year 2002 are expected to exceed the total for fiscal year 2001 by approximately 35%. The Company currently has five ANDAs for potential products (two tentatively approved) pending with, and awaiting approval from, the FDA as a result of its own product development program. The Company has in process or expects to commence biostudies for at least four additional products during fiscal year 2002. None of the potential products described above are subject to any profit sharing arrangements. 17 Under the Genpharm Distribution Agreement, Genpharm pays the research and development costs associated with the products covered by the Genpharm Distribution Agreement. Currently, there are eight ANDAs for potential products (two of which have been tentatively approved) that are covered by the Genpharm Distribution Agreement pending with, and awaiting approval from, the FDA. To date, the Company is marketing 15 products under the Genpharm Distribution Agreement. Flecainide acetate tablets (Tambocor(R)), covered under the Genpharm Distribution Agreement, received final approval from the FDA in July 2001. The Company anticipates commencing the marketing of the product in the second quarter of 2002 (see "Notes to Consolidated Financial Statements-Intangible Assets"). Genpharm and the Company share the costs of developing the products covered under the Genpharm Additional Product Agreement. Currently, there is one ANDA for a potential product (tentatively approved) covered by the Genpharm Additional Product Agreement pending with, and awaiting approval from, the FDA. The Company began marketing fluoxetine 10 mg and 20 mg tablets, covered under the Genpharm Additional Product Agreement, in August 2001 (see "Notes to Consolidated Financial Statements-Distribution and Supply Agreements-Genpharm, Inc."). SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative costs of $7,516,000 for the first quarter of 2002 increased $3,321,000, or 79%, from $4,195,000 in the same period of last year, however, the costs as a percentage of net sales in the respective periods decreased to 9% in 2002 from 16% in 2001. The higher dollar amount in the current quarter was primarily attributable to additional marketing programs, shipping costs and legal fees associated with new product introductions, and to a lesser extent, increased personnel costs. The Company anticipates it will continue to incur a high level of legal expenses related to the costs of litigation connected with certain potential new product introductions (see "Notes to Consolidated Financial Statements-Commitments, Contingencies and Other Matters-Legal Proceedings"). SETTLEMENTS On March 5, 2002 the Company acquired the United States rights to five products from BMS. The products include the antihypertensives Capoten(R) and Capozide(R), the cholesterol-lowering medications Questran(R) and Questran Light(R), and Sumycin(R), an antibiotic. Based on the Company's market research, these products are expected to generate annual net sales of approximately $10,000,000. The product acquisition agreement is retroactive to January 1, 2002. To obtain the rights to the five products, the Company paid approximately $1,024,000 in March 2002 and agreed to make an additional payment of approximately $1,025,000 in the first quarter of 2003. The Company also agreed to terminate its outstanding litigation against BMS involving megestrol acetate oral suspension and buspirone. The Company determined, through a third party appraisal, the fair value of the agreement to be $11,700,000, which exceeded the cash consideration of $2,049,000 and associated costs of $600,000 by $9,051,000. The $9,051,000 value was assigned to the litigation settlement and included in the settlement income in the first quarter of 2002 OTHER (EXPENSE) INCOME Other expense of $4,157,000 in the three-month period ended March 31, 2002 includes approximately $4,268,000 incurred in connection with the termination of the acquisition of the ISP FineTech fine chemical business in March 2002. Other income of $319,000 in the three-month period ended March 31, 2001 included a payment from 3M to the Company releasing the parties from a prior product agreement (see "Notes to Financial Statements-Commitments, Contingencies and Other Matters-Legal Proceedings"). INCOME TAXES The Company recorded provisions for income taxes of $13,273,000 and $1,298,000, respectively, for the three-month period ended March 31, 2002 and March 31, 2001 (see "Notes to Consolidated Financial Statements-Income Taxes"). FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents of $77,546,000 at March 31, 2002 increased $9,804,000 from $67,742,000 at December 31, 2001. A portion of the net cash generated by operations was used to fund capital projects. Working capital, which includes cash and cash equivalents increased to $108,608,000 at March 31, 2002 from $102,867,000 at December 31, 2001, primarily due to the increased net 18 cash position and higher inventories partially offset by lower accounts receivable. The working capital ratio was 2.53x at March 31, 2002 compared to 2.41x at December 31, 2001. The Company, from time to time, enters into agreements with third parties with respect to the development of new products and technologies. To date, the Company has entered into agreements and advanced funds to several non-affiliated companies for products in various stages of development. These types of payments are expensed as incurred and included in research and development costs. Annual research and development expenses, including payments to non-affiliated companies, are expected to total approximately $15,000,000 for fiscal year 2002. On March 15, 2002, the Company announced the termination of negotiations with ISP related to the purchase of the ISP FineTech fine chemical business, based in Haifa, Israel and Columbus, Ohio. At that time, the Company discontinued negotiations with ISP as a result of various events and circumstances that occurred since the announcement of the proposed transaction. Pursuant to the termination of the purchase, the Company paid ISP a $3,000,000 break-up fee in March 2002, which was subject to certain credits and offsets, and incurred approximately $1,268,000 in related acquisition costs, both of which were included in other expense in the first quarter of 2002. The Company subsequently acquired FineTech based in Haifa, Israel in a separate transaction with ISP in April 2002 for $32,000,000, financed by the Company's cash-on-hand (see-"Subsequent Events"). As of March 31, 2002 the Company had payables due to distribution agreement partners of $21,932,000, related primarily to amounts due on fluoxetine pursuant to profit sharing agreements with strategic partners. The Company expects to pay these amounts out of its working capital in the second quarter of 2002. In December 2001, Par entered into an agreement with Elan to develop a range of modified release drugs over the next five years. Under the terms of the agreement, the companies will identify two drug candidates for development at the beginning of each year, commencing in the first quarter of 2002. Elan will be responsible for the development and manufacture of all products, while Par will be responsible for marketing, sales and distribution. Par will reimburse Elan for research and development costs and Elan will receive a royalty from the sale of the products. Pursuant to the agreement, Par will pay Elan up to $1,500,000 per calendar year in monthly installments beginning the date of the commencement of the development program for each product. The Company paid Elan $250,000 for products covered under this agreement in the first quarter of 2002. In December 2001, the Company committed to making an equity investment of up to $2,400,000 over a period of time in HighRapids. HighRapids will utilize the Company's cash infusion for working capital and operating expenses. Through March 31, 2002, the Company had invested $259,000 of its $2,400,000 planned investment. In November 2001, the Company entered into joint development and marketing agreement with Breath Ltd. of the Arrow Group to pursue the worldwide distribution of latanoprost ophthalmic solution 0.005% (Xalatan(R)). Pursuant to this agreement, Par paid Breath Ltd. $2,500,000 in fiscal year 2001 and an additional $2,500,000 in the first quarter of 2002. In November 2001, the Company entered into a license agreement with Pentech Pharmaceuticals, Inc. ("Pentech") to market paroxetine hydrochloride capsules. Pursuant to this agreement, Par paid Pentech $200,000 in fiscal year 2001 and will pay an additional $400,000 based on the achievement of certain milestones. In April 2001, Par entered into a licensing agreement with Elan to market a generic clonidine transdermal patch (Catapres TTS(R)). Elan will be responsible for the development and manufacture of all products, while Par will be responsible for marketing, sales and distribution. Pursuant to the agreement, the Company paid Elan $1,167,000 in fiscal year 2001 and $500,000 in the first quarter of 2002 of a total of $2,000,000 due in monthly installments. In addition, Par will pay Elan $1,000,000 upon FDA approval of the product and a royalty on all sales of the product. In March 1999, the Company entered into an agreement to lease, with an option to purchase, its Congers Facility to Halsey. Halsey paid the Company a purchase option of $100,000 in March 1999 and is obligated to pay rent of $500,000 annually during the initial three-year term of the lease. The rent is expected to continue to cover the Company's fixed costs of the facility in subsequent periods. Under the purchase option, Halsey may purchase the facility and substantially all the machinery and equipment at any time during the lease for a specified amount (see "Notes to Consolidated Financial Statements-Leasing Agreement"). 19 The Company, IPR and Generics entered into the Development Agreement, dated August 11, 1998, pursuant to which Generics agreed to fund one-half of the costs of IPR's operating budget in exchange for the exclusive distribution rights outside of the United States to the products developed by IPR after the date of the agreement. In addition, Generics agreed to pay IPR a perpetual royalty for all sales of the products by Generics or its affiliates outside the United States. To date, no such products have been brought to market by Generics and no royalty has been paid to IPR. Pursuant to the Development Agreement, Generics funded approximately $788,000 for fiscal year 2001 and $170,000 for the first three months of fiscal year 2002, fulfilling their funding requirements through March 31, 2002. Under the Development Agreement, Generics is not required to fund more than $1,000,000 in any one calendar year (see "Notes to Consolidated Financial Statements-Research and Development Agreements"). The Company expects to fund its operations, including research and development activities and its obligations under the existing distribution and development arrangements discussed herein, out of its working capital and, if necessary, with available borrowings against its line of credit with GECC, if and to the extent available (see "-Financing"). Although there can be no assurance, the Company anticipates introducing new products during fiscal year 2002 and increasing sales of certain existing products to offset the loss of sales and gross margins from competition on any of its significant products. The Company will continue to implement measures to reduce the overall impact of its top products, including adding additional products through new and existing distribution agreements, manufacturing process improvements and cost reductions. FINANCING At March 31, 2002, the Company's total outstanding long-term debt, including the current portion, amounted to $1,240,000. The amount consists primarily of an outstanding mortgage loan with a bank and capital leases for computer equipment. In December 1996, Par entered into the Loan Agreement with GECC. The Loan Agreement, as amended, provides Par with a revolving line of credit expiring March 2005. Pursuant to the Loan Agreement, Par is permitted to borrow up to the lesser of (i) the borrowing base established under the Loan Agreement or (ii) $30,000,000. The borrowing base is limited to 85% of eligible accounts receivable plus 50% of eligible inventory of Par, each as determined from time to time by GECC. The interest rate charged on the line of credit is based upon a per annum rate of 2.25% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par, PRI and certain subsidiaries, other than real property, and is guaranteed by PRI and certain of its subsidiaries. In connection with such facility, Par, PRI and their subsidiaries have established a cash management system pursuant to which all cash and cash equivalents received by any of such entities are deposited into a lockbox account over which GECC has sole operating control if there are amounts outstanding under the line of credit. The deposits would then be applied on a daily basis to reduce the amounts outstanding under the line of credit. The revolving credit facility is subject to covenants based on various financial benchmarks. As of March 31, 2002, the borrowing base was approximately $26,700,000. To date, no debt is outstanding under the Loan Agreement. SUBSEQUENT EVENTS In April 2002, the Company entered into an agreement with RTI, an associated company of Purdue Pharma L.P., to establish a joint venture partnership in the United States. The new joint venture will be named SVC Pharma and will be owned equally by both parties. SVC Pharma will utilize, on a case-by-case basis, advanced technologies and patented processes to develop, manufacture, market and distribute certain unique, proprietary pharmaceutical products. Under the terms of the agreement, when both partners agree to pursue a specific project, each partner will contribute resources to the new enterprise. RTI will provide scientific and technological expertise in the development of non-infringing, complex molecules. In addition to providing chemical synthesis capabilities, RTI will provide the manufacturing capacity for sophisticated intermediate and active pharmaceutical ingredients. Par will provide development expertise in dosage formulation and will be responsible for marketing, sales and distribution. The companies will share equally in expenses and profits. SVC Pharma has already identified several candidates for drug development. The first of these has the potential to be marketed by the Company at the end of fiscal year 2003 or early in fiscal year 2004. In April 2002, the Company acquired FineTech from ISP for $32,000,000. The acquisition was financed by cash-on-hand and is not expected to have a material effect on earnings in fiscal year 2002. FineTech, based in Haifa, Israel, specializes in the design and manufacture of proprietary synthetic chemical processes used in the production of complex organic compounds for the pharmaceutical industry. The Company has acquired the physical facilities, the 20 intellectual property and patents of FineTech and has retained all FineTech employees. FineTech also manufactures complex synthetic active pharmaceutical ingredients for companies in the branded and generic pharmaceutical industries at its manufacturing facility in Haifa, Israel. This facility operates in compliance with FDA current good manufacturing practices (cGMP) standards. FineTech achieved revenues of approximately $6,000,000 in 2001. The Company expects to transfer a portion of FineTech's personnel and technological resources to a laboratory facility in the northeastern United States. The remaining physical assets in Haifa are valued at less than $2,000,000. FineTech will be operated as an independent, wholly owned subsidiary of PRI and will provide immediate chemical synthesis capabilities and strategic opportunities to the Company and other customers. The Company has enjoyed a long-standing relationship with FineTech for more than seven years. Two of the Company's six potential first-to-file products, flecainide and latanoprost, resulted from the Company's relationship with FineTech. In addition, the Company and FineTech are currently collaborating on three additional products. ANDAs have already been submitted for two of these products. In April 2002, the Company entered into an agreement to expand its strategic product partnership with Merck KGaA. Under the terms of the new agreement, Par has licensed the exclusive rights to 11 generic pharmaceutical products currently under development and not included in any other distribution agreements between the Company and Genpharm (see "-Intangible Assets" and "-Distribution and Supply Agreements-Genpharm, Inc."). Pursuant to the agreement, Genpharm is to develop the products, submit all corresponding ANDAs to the FDA and subsequently manufacture the products. Par will serve as exclusive U.S. marketer and distributor of the products, pay a share of the costs, including development and legal expenses incurred to obtain final regulatory approval, and pay Genpharm a percentage of the gross profits on all sales of products covered under this agreement. Pursuant to the agreement, the Company will pay Genpharm a non-refundable fee of $2,000,000 in the second quarter of 2002 for two of the products, loratadine 10 mg tablets and mirtazapine tablets, which are tentatively approved and expected to be launched in fiscal years 2003 to 2004. In addition, the Company will be required to pay a non-refundable fee of up to $414,000 based upon FDA acceptance of filings for six of the nine remaining products. According to the Company's market research loratadine 10 mg tablets, the generic version of Schering-Plough's non-sedating antihistamine Claritin(R), had U.S. sales of approximately $1.8 billion in fiscal year 2001 and mirtazapine, the generic equivalent of Organon's antidepressant Remeron(R), had U.S. sales of approximately $400 million in 2001. In fiscal year 2001, the cumulative sales of the 11 branded products totaled approximately $7.8 billion. The majority of these products are expected to enter the U.S. market between 2003 and 2006. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. - ------ ----------------- Par has filed an ANDA (currently pending with the FDA) for latanoprost (Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to a joint manufacturing and marketing agreement with the Company, seeking approval to engage in the commercial manufacture, sale and use of the latanoprost product in the United States. Par's ANDA includes a Paragraph IV certification that the existing patents in connection with Xalatan(R) are invalid, unenforceable or will not be infringed by Par's generic product. Par has reason to believe that its ANDA is the first to be filed for this drug with a Paragraph IV certification. As a result of the filing of the ANDA, Pharmacia Corporation, Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and Upjohn Company and the Trustees of Columbia University in the City of New York filed lawsuits against the Company on December 14, 2001 in the United States District Court for the District of Delaware and on December 21, 2001 in the United States District Court for the District of New Jersey alleging patent infringement. Pharmacia and Columbia are seeking an injunction. On February 8, 2002, Par answered the complaint brought in the District of New Jersey and filed a counterclaim, which seeks a declaration that the patents-in-suit are invalid, unenforceable and not infringed by Par's products. Par also seeks a declaratory judgment that the extension of judgment concerning the term of one of the patents is invalid, as well as reimbursement for attorneys' fees. In addition, on February 25, 2002 the lawsuit brought in the District of Delaware was dismissed pursuant to a stipulation of the parties. Par intends to vigorously defend the lawsuits. At this time, it is not possible for the Company to predict the outcome of this litigation and the impact, if any, that it might have on the Company. Par, among others, is a defendant in three lawsuits filed in United States District Court for the Eastern District of North Carolina (filed on August 1, 2001, October 30, 2001 and November 16, 2001, respectively) by aaiPharma Inc., involving patent infringement allegations connected to a total of three patents related to polymorphic forms of fluoxetine (Prozac(R)). Par intends to vigorously litigate these cases. While the outcome of litigation is never certain, Par believes that it will prevail in these litigations. On July 16, 2001, the Federal Circuit Court of Appeals in Washington D.C. affirmed the Company's summary judgment victory in its patent infringement case with BMS over megestrol acetate oral suspension, the generic version of BMS's Megace(R) Oral Suspension. On July 25, 2001, the FDA granted the Company final approval for megestrol acetate oral suspension with marketing exclusivity until mid-January 2002 and the Company immediately began shipping the product to its customers. Although the Court had disposed of all of BMS's infringement issues, Par's counterclaims for patent invalidity, unfair competition and tortuous interference seeking an injunction and an award of compensatory and punitive damages remained. In March 2002 BMS sold the rights to five products to Par in exchange for a payment of $2,049,000 and the termination of all the Company's outstanding litigation against BMS involving megestrol acetate oral suspension and buspirone. On August 1, 2001 Alpharma USPD, Inc. filed a lawsuit in the U.S. District Court for the District of Maryland seeking a declaratory judgment that Alpharma's megestrol acetate formulation does not infringe U.S. Patent No. 6,028,065 granted to the Company and/or that the Company's patent is invalid. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. - ------- --------------------------------- (a) Exhibits: 10.1.1 1997 Directors' Stock Option Plan, as amended. 10.18.11 Eleventh Amendment to Loan and Security Agreement, dated as of March 29, 2002, among the Company, General Electric Capital Corporation, and the other parties named therein. (b) Reports on Form 8-K: On January 14, 2002, March 1, 2002 and March 22, 2002 the Company filed a Current Report on Form 8-K. 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHARMACEUTICAL RESOURCES, INC. ------------------------------ (Registrant) May 15, 2002 /s/ KENNETH I. SAWYER --------------------- Kenneth I. Sawyer CHIEF EXECUTIVE OFFICE AND CHAIRMAN OF THE BOARD OF DIRECTORS (Principal Executive Officer) May 15, 2002 /s/ DENNIS J. O'CONNOR ---------------------- Dennis J. O'Connor VICE PRESIDENT - CHIEF FINANCIAL OFFICER AND SECRETARY (Principal Accounting and Financial Officer) 23 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 10.2.1 1997 Directors' Stock Option Plan, as amended. 10.18.11 Eleventh Amendment to Loan and Security Agreement, dated as of March 29, 2002, among the Company, General Electric Capital Corporation, and the other parties named therein. 24 EX-10 3 pharma_exh10-21.txt EX-10-21 EXHIBIT 10.2.1 PHARMACEUTICAL RESOURCES, INC. 1997 DIRECTORS STOCK OPTION PLAN Effective October 28, 1997 ARTICLE I DEFINITIONS As used herein, the following terms have the meanings hereinafter set forth unless the context clearly indicates to the contrary: (a) "Board" shall mean the Board of Directors of the Company. (b) "Company" shall mean Pharmaceutical Resources, Inc. (c) "Date of Grant" shall mean, with respect to any Eligible Director: (a) the Effective Date with respect to those Options granted on the Effective Date, (b) the date such Eligible Director is initially elected to the Board of Directors if such Eligible Director was first elected after the Effective Date, and (c) for each respective fiscal year of the Company thereafter, the date on which the shareholders of the Company shall elect directors at an annual meeting of shareholders or any adjournment thereof. (d) "Effective Date" shall mean October 28, 1997, the date of adoption by the Board. (e) "Eligible Director" shall mean any Director of the Company who is not an employee of the Company or its subsidiaries. (f) "Fair Market Value" on any day shall mean (a) if the principal market for the Stock is The New York Stock Exchange, any other national securities exchange or The NASDAQ Stock Market, the closing sales price regular way of the Stock on such day as reported by such exchange or market, or on a consolidated tape reflecting transactions on such exchange or market, or (b) if the principal market for the Stock is not a national securities exchange and if there are no closing prices reported on The NASDAQ Stock Market, the mean between the closing bid and the closing asked prices for the Stock on such day as quoted on such market, or (c) if there are no such prices quoted on The NASDAQ Stock Market, the price furnished by any New York Stock Exchange member selected by the Company from time to time for such purpose; provided that if clauses (a), (b) and (c) of this paragraph are all inapplicable, or if no trades have been made or no quotes are available for such day, the Fair Market Value of the Stock shall be determined by the Board by any method which it deems, in good faith, to be appropriate. The determination of the Board shall be conclusive as to the Fair Market Value of the Stock. (g) "Option" shall mean an Eligible Director's stock option to purchase Stock granted pursuant to the provisions of Article V hereof. (h) "Optionee" shall mean an Eligible Director to whom an Option has been granted hereunder. (i) "Option Price" shall mean the price at which an Optionee may purchase a share of Stock under a Stock Option Agreement. (j) "Qualified Domestic Relations Order" shall have the meaning assigned to such term under the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. (k) "1997 Plan" shall mean the Pharmaceutical Resources, Inc. 1997 Directors Stock Option Plan, the terms of which are set forth herein, as amended from time to time. (l) "1989 Plan" shall mean the Pharmaceutical Resources, Inc. 1989 Directors Stock Option Plan. (m) Sale shall mean any single transaction or series of related transactions, upon the consummation of the following events: (i) a definitive agreement for the merger or other business combination of the Company with or into another corporation pursuant to which the shareholders of the Company do not own, immediately after the transaction, more than 50% of the voting power of the corporation that survives and is a publicly owned corporation and not a subsidiary of another corporation, or (b) a definitive agreement for the sale, exchange, or other disposition of all or substantially all of the assets of the Company (other than to any wholly-owned subsidiary of the Company); provided, that a Sale shall not be deemed to have occurred if there shall be an affirmative vote of a majority of the Board to suspend the provisions of Section 4.3 of the 1997 Plan with respect to any such event. (n) "Stock" shall mean the common stock, par value $.01 per share, of the Company or, in the event that the outstanding shares of Stock are hereafter changed into or exchanged for different stock or securities of the Company or some other corporation, such other stock or securities. (o) "Stock Option Agreement" shall mean an agreement between the Company and the Optionee under which the Optionee may purchase Stock in accordance with the 1997 Plan. ARTICLE II THE 1997 PLAN 2.1 NAME. This 1997 Plan shall be known as the Pharmaceutical Resources, Inc. 1997 Directors Stock Option Plan." 2 2.2 PURPOSE. The purpose of the 1997 Plan is to advance the interests of the Company and its shareholders by affording Eligible Directors of the Company an opportunity to acquire, maintain and increase their ownership interests in the Company, and thereby to encourage their continued service as directors and to provide them additional incentives to achieve the growth objectives of the Company. 2.3 EFFECTIVE DATE. The Effective Date of the 1997 Plan is October 28, 1997. Any Options granted under the 1997 Plan shall only become effective if the shareholders of the Company shall have, on or before October 27, 1998, approved and adopted the 1997 Plan. If the 1997 Plan shall not be so approved and adopted, all Options granted hereunder shall be of no effect. 2.4 TERMINATION DATE. The 1997 Plan shall terminate and no further Options shall be granted hereunder upon the tenth anniversary of the Effective Date. ARTICLE III PARTICIPANTS Each Eligible Director shall participate in the 1997 Plan, provided that he is or was elected as a member of the Board at an annual meeting of shareholders, or any adjournment thereof, or was elected by Eligible Directors who were elected as members of the Board at an annual meeting of shareholders to fill a vacancy on the Board. ARTICLE IV SHARES OF STOCK SUBJECT TO 1997 PLAN 4.1 LIMITATIONS. Subject to any antidilution adjustment pursuant to the provisions of Section 4.2 hereof, the maximum number of shares of Stock which may be issued and sold hereunder shall not exceed 500,000 shares of Stock. Shares of Stock subject to an Option may be either authorized and unissued shares or shares issued and later acquired by the Company; provided, however, that the shares of Stock with respect to which an Option has been exercised shall not again be available for the grant of an Option hereunder. If any outstanding Options granted hereunder shall terminate or expire for any reason without being wholly exercised prior to the end of the period during which Options may be granted hereunder, new Options may be granted hereunder covering such unexercised shares. 4.2 ANTI-DILUTION. In the event that the outstanding shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of merger, consolidation, reorganization, recapitalization, reclassification, combination of shares, stock split, reverse stock split or stock dividend: 3 (a) The rights under outstanding Options granted hereunder, both as to the number of subject shares and the Option Price, shall be adjusted appropriately; and (b) Where dissolution or liquidation of the Company or any merger or combination in which the Company is not a surviving corporation is involved, each outstanding Option granted hereunder shall terminate, but the Optionee shall have the right, immediately prior to such dissolution, liquidation, merger or combination, to exercise his Option, in whole or in part, to the extent that it shall not have been exercised, without regard to the date on which such Option would otherwise have become exercisable pursuant to Sections 5.4 hereof. The foregoing adjustments and the manner of application thereof shall be determined solely by the Board, and any such adjustment may provide for the elimination of fractional share interests. The adjustments required under this Article shall apply to any successor or successors of the Company and shall be made regardless of the number or type of successive events requiring adjustments hereunder. 4.3 SALE OF COMPANY. Each Stock Option Agreement shall provide that, upon a Sale, the Board may elect either (a) to continue the outstanding Options without any payment or (b) to cause to be paid to the Optionee upon consummation of the Sale, a payment equal to the excess, if any, of the sale consideration receivable by the holders of shares of Common Stock in such a Sale (the "Sale Consideration") over the purchase price for his Option for each share of Common Stock the Optionee shall then be entitled to acquire under the 1997 Plan. If the Board elects to continue the Option, then the Company shall cause effective provisions to be made so that the Optionee shall have the right, by exercising the Option prior to the respective Expiration Dates, to purchase the kind and amount of shares of stock and other securities and property receivable upon such a Sale by a holder of the number of shares of Common Stock which might have been purchased upon exercise of the Option immediately prior to the Sale. The value of the Sale Consideration receivable by the holder of a share of Common Stock, if it shall be other than cash, shall be determined, in good faith, by the Board. Upon payment to the Optionee of the Sale Consideration, the Optionee shall have no further rights in connection with the Option granted, the Option shall be terminated and surrendered for cancellation and the Option shall be null and void. ARTICLE V OPTIONS 5.1 OPTION GRANT, NUMBER OF SHARES AND AGREEMENT. (a) EXCHANGE OF EXISTING OPTIONS. Subject to the provisions hereof, each Eligible Director on the Effective Date shall be granted an Option to purchase Ten Thousand (10,000) shares of Stock for each year of such Eligible Director's tenure as a director of the Company. Notwithstanding the 4 preceding sentence, the grant of Options to an Eligible Director pursuant to this Section 5.1(a) shall be expressly conditioned upon such Eligible Director surrendering for cancellation all stock options held by such Director which were granted to him under the 1989 Plan, and the number of Options granted to an Eligible Director under this Section 5.1(a) shall in no event exceed the number of such stock options granted under the 1989 Plan surrendered by such Director. (b) ANNUAL GRANT OF OPTIONS. Subject to the provisions hereof, each Eligible Director shall be granted an Option to purchase Five Thousand (5,000) shares of Stock on (i) the Effective Date and (ii) each subsequent Date of Grant (the "Annual Grant"). Notwithstanding anything herein to the contrary, no Eligible Director shall be entitled to receive more than one Annual Grant in any calendar year. (c) ADDITIONAL GRANT. Subject to the provisions hereof, on (i) the Effective Date and (ii) each subsequent Date of Grant, each Eligible Director shall be granted an Option to purchase up to an additional Six Thousand (6,000) shares of Stock (the "Additional Grant") if such Eligible Director owns on the respective Effective Date or subsequent Date of Grant (as the case may be) an amount of issued shares of Common Stock of the Company not less than the product of 2,500 shares of Common Stock multiplied by the sum of one and the number of years in which he was granted previously an Additional Grant. Notwithstanding the foregoing, for purposes of determining each Eligible Director's entitlement to an Additional Grant on the Effective Date, the Eligible Director must own not less than 2,500 shares of Common Stock of the Company by April 1, 1998. An Eligible Director who shall not be entitled to receive an Additional Grant on any particular Date of Grant as a result of the failure to satisfy the conditions set forth in this Section 5.1(c) shall be eligible to receive an Additional Grant pursuant to this Section 5.1(c) on any subsequent Date of Grant. Notwithstanding anything herein to the contrary, no Eligible Director shall be entitled to receive more than one Additional Grant in any calendar year. (d) AGREEMENT. Each Option so granted shall be evidenced by a written Stock Option Agreement, dated as of the Date of Grant and executed by the Company and the Optionee, stating the Option's duration, time of exercise, and exercise price. The terms and conditions of the Option shall be consistent with the 1997 Plan. 5.2 OPTION PRICE. The Option Price of the Stock subject to each Option shall be the Fair Market Value of the Stock on its Date of Grant. 5.3 OPTION EXPIRATION. Each Option shall expire on the tenth anniversary of such Option's Date of Grant (the "Expiration Date"). 5.4 OPTION EXERCISE. (b) Any Option granted under the 1997 Plan may not be exercised, in whole or in part, until the first anniversary of the Date of Grant, subject to any additional conditions imposed by the Board and set forth in a Stock 5 Option Agreement. If an Eligible Director shall be removed "for cause" as a member of the Board of Directors on or prior to the first anniversary of the Date of Grant of any Option, such Option shall terminate and be forfeited. Subject to the provisions of this Section 5.4(a), an Option shall remain exercisable at all times until the Expiration Date, regardless of whether the Optionee thereafter continues to serve as a member of the Board. Notwithstanding the foregoing, an Additional Grant shall automatically terminate and be forfeited in the event that the Eligible Director holding such Additional Grant shall fail to continue to own the number of shares of Common Stock which were equal to the number of shares which were a condition of such Additional Grant. Any such termination and forfeiture shall be done on a pro rata basis to the number of shares sold or disposed of. (c) An Option may be exercised at any time or from time to time during the term of the Option as to any or all full shares which have become exercisable in accordance with this Section, but not as to less than one hundred shares of Stock unless the remaining shares of Stock that are so exercisable are less than one hundred shares of Stock. The Option Price is to be paid in full in cash upon the exercise of the Option. The holder of an Option shall not have any of the rights of a shareholder with respect to the shares of Stock subject to the Option until such shares of Stock have been issued or transferred to him upon the exercise of his Option. (d) An Option shall be exercised by written notice of exercise of the Option, with respect to a specified number of shares of Stock, delivered to the Company at its principal office, and by cash payment to the Company at said office of the full amount of the Option Price for such number of shares. In addition to, and prior to the issuance of a certificate for shares pursuant to any Option exercise, the Optionee shall pay to the Company in cash the full amount of any Federal, state or local income or employment taxes required to be withheld by the Company as a result of such exercise. (e) At the discretion of the Board, the Stock Option Agreement may provide that an Option granted under the 1997 Plan may be exercised with respect to a specified number of shares of Stock by written notice of exercise to the Company stating that (i) the option price for the shares and any withholding tax due thereon will be paid to the Company directly by a broker-dealer designated by the Eligible Director and irrevocable instructions to such effect have been furnished by the Eligible Director to such broker-dealer, and (ii) an advice from the broker-dealer confirming payment to the Company will be promptly delivered to the Company. The exercise of any such option shall be irrevocable at the time of notice to the Company; PROVIDED, HOWEVER, that the Company shall not be required to deliver certificates for shares of Stock with respect to the exercise of the option until the Company has confirmed the receipt of good and sufficient funds in payment of the purchase price thereof. 5.5 NONTRANSFERABILITY OF OPTION. Unless otherwise provided in the relevant Stock Option Agreement, options may not be transferred by an Optionee otherwise than by will or the laws of descent and distribution, or by a Qualified Domestic Relations Order. Unless otherwise provided in the relevant 6 Stock Option Agreement, during the lifetime of an Optionee, his Option may be exercised only by him (or by his guardian or legal representative, should one be appointed) or by his spouse to whom the Option has been transferred pursuant to a Qualified Domestic Relations Order. In the event of the death of an Optionee, any Option held by him may be exercised by his legatee(s) or other distributee(s) or by his personal representative(s). ARTICLE VI STOCK CERTIFICATES The Company shall not be required to issue or deliver any certificate for shares of Stock purchased upon the exercise of any Option granted hereunder or any portion thereof unless, in the opinion of counsel to the Company, there has been compliance with all applicable legal requirements. An Option granted under the 1997 Plan will provide that the Company's obligation to deliver shares of Stock upon the exercise thereof may be conditioned upon the receipt by the Company of a representation as to the investment intention of the holder thereof in such form as the Company shall determine to be necessary or advisable solely to comply with the provisions of the Securities Act of 1933, as amended, or any other Federal, state or local securities laws. All certificates for shares of Stock delivered under the 1997 Plan shall be subject to such stop transfer orders and other restrictions as the Company may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, any Federal, state or local securities laws and applicable corporate law, and the Company may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. ARTICLE VII TERMINATION, AMENDMENT AND MODIFICATION OF 1997 PLAN The Board may at any time terminate the 1997 Plan, and may at any time and from time to time and, in any respect amend or modify the 1997 Plan. The Board may amend the terms of any award theretofore granted under the 1997 Plan; provided, however, that subject to Section 4.1 hereof, no such amendment may be made by the Board which in any material respect impairs the rights of the participant without the participant's consent. ARTICLE VIII RELATIONSHIP TO OTHER COMPENSATION PLANS The adoption of the 1997 Plan shall neither affect any other stock option, incentive or other compensation plans in effect for the Company or any of its subsidiaries, nor shall the adoption of the 1997 Plan preclude the 7 Company from establishing any other forms of incentive or other compensation plan for directors of the Company. ARTICLE IX MISCELLANEOUS 9.1 1997 PLAN BINDING ON SUCCESSORS. The 1997 Plan shall be binding upon the successors and assigns of the Company. 9.2 SINGULAR, PLURAL; GENDER. Whenever used herein, nouns in the singular shall include the plural, and the masculine pronoun shall include the feminine gender. 9.3 HEADINGS, ETC., NOT PART OF 1997 PLAN. Headings of articles and Sections hereof are inserted for convenience and reference, and do not constitute a part of the 1997 Plan. As of May, 1998 8 FIRST AMENDMENT TO PHARMACEUTICAL RESOURCES, INC. 1997 DIRECTORS STOCK OPTION PLAN FIRST AMENDMENT dated January 12, 2001, to the 1997 Directors Stock Option Plan (the "Plan") of Pharmaceutical Resources, Inc. (the "Company"). WHEREAS, the Company maintains the Plan, effective as of October 28, 1997; and WHEREAS, the Board of Directors of the Company has determined that it is appropriate to amend the Plan in order to revise the definition of the "Date of Grant". NOW, THEREFORE, the Plan is hereby amended as follows: 1. The definition of "Date of Grant" as set forth in Article I of the Plan is hereby revised and amended to read as follows: "(c) `Date of Grant' shall mean, with respect to any Eligible Director: January 12, 2001; and for each year thereafter, the earlier to occur of the following: (i) the date on which shareholders of the Corporation shall elect directors at an annual meeting of shareholders or any adjournment thereof or (ii) December 31 of each fiscal year.' 2. This Amendment shall be effective as of the date hereof. 3. In all respects not amended, the Plan is hereby ratified and confirmed and remains in full force and effect. PHARMACEUTICAL RESOURCES, INC. By:/s/ DENNIS J. O'CONNOR -------------------------------- Dennis J. O' Connor, Vice President and Chief Financial Officer 9 SECOND AMENDMENT TO PHARMACEUTICAL RESOURCES, INC. 1997 DIRECTORS STOCK OPTION PLAN SECOND AMENDMENT, dated March 28, 2001, to the 1997 Directors Stock Option Plan, as amended (the "Plan") of Pharmaceutical Resources, Inc. (the "Company"). WHEREAS, the Company maintains the Plan, effective as of October 28, 1997; and WHEREAS, the Board of Directors of the Company has determined that it is appropriate to amend the Plan in order to reduce the maximum number of shares of common stock, par value $.01 per share, of the Company which may be issued and sold under the Plan from 500,000 shares to 450,000 shares; and WHEREAS, the Board of Directors wishes to clarify that the options granted to Eligible Directors on January 12, 2001 were intended to be Annual Grants for the Company's 2000 fiscal year, during which time the Company did not hold an annual meeting of stockholders and consequently Annual Grants were not granted. NOW, THEREFORE, the Plan is hereby amended as follows: 1. The first sentence of Section 4.1 of the Plan is hereby revised and amended to read as follows: "Subject to any antidilution adjustment pursuant to the provisions of Section 4.2 hereof, the maximum number of shares of Stock which may be issued and sold hereunder shall not exceed 450,000 shares of Stock." 2. The following phrase shall be added to the end of the last sentence of Section 5.1(b): "except that the Options granted to Eligible Directors on January 12, 2001 shall be deemed to be the Annual Grant for the Company's fiscal year ending December 31, 2000." 3. The following phrase shall be added to the end of the last sentence of Section 5.1(c): "except that the Options granted to Eligible Directors on January 12, 2001 shall be deemed to be the Additional Grant for the Company's fiscal year ending December 31, 2000." 4. This Amendment shall be effective as of the date hereof. 10 5. In all respects not amended, the Plan is hereby ratified and confirmed and remains in full force and effect. PHARMACEUTICAL RESOURCES, INC. By:/s/ DENNIS J. O'CONNOR ----------------------------------------- Dennis J. O' Connor, Vice President and Chief Financial Officer 11 THIRD AMENDMENT TO PHARMACEUTICAL RESOURCES, INC. 1997 DIRECTORS STOCK OPTION PLAN THIRD AMENDMENT, dated January 8, 2002, to the 1997 Directors Stock Option Plan, as amended (the "Plan") of Pharmaceutical Resources, Inc. (the "Company"). WHEREAS, the Company maintains the Plan, effective as of October 28, 1997; and WHEREAS, the Board of Directors of the Company has determined that it is appropriate to amend the Plan in order to (i) revise the definition of the Date of Grant, (ii) to increase the Annual Grant of an option to purchase 7,500 shares of Stock, and (iii) eliminate the Additional Grant to purchase up to an additional 6,000 shares of Stock; NOW, THEREFORE, the Plan is hereby amended as follows: 1. The definition of "Date of Grant" as set forth in Article I of the Plan is hereby revised and amended to read as follows: "'Date of Grant' shall mean, with respect to any Eligible Director, the date such Eligible Director is initially elected to the Board of Directors and for each year thereafter, the earlier to occur of the following: (i) the date on which the shareholders of the Company shall elect directors at an annual meeting of shareholders or any adjournment thereof or (ii) December 31 of each fiscal year". 2. The first sentence of Section 5.1(b) shall be revised and amended to read as follows: "Subject to the provisions hereof, each Eligible Director shall be granted an Option to purchase Seven Thousand Five Hundred (7,500) shares of Stock on the Date of Grant (the "Annual Grant"). 3. Section 5.1(c) shall be deleted in its entirety. 4. The last two sentences of Section 5.4(b) shall be deleted. 5. This Amendment shall be effective as of October 11, 2001. 12 6. In all respects not amended, the Plan is hereby ratified and confirmed and remains in full force and effect. PHARMACEUTICAL RESOURCES, INC. By:/s/ DENNIS J. O'CONNOR ----------------------------------------- Dennis J. O' Connor, Vice President and Chief Financial Officer 13 EX-10 4 p_eleventhamd.txt (10.18.11) EXHIBIT 10.18.11 ELEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT --------------------------- ELEVENTH AMENDMENT, dated as of March 29, 2002 (this "AMENDMENT"), to the Loan and Security Agreement referred to below by and among GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation ("LENDER"), PAR PHARMACEUTICAL, INC., a New Jersey corporation ("BORROWER"), PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation ("PARENT"), and the other Credit Parties signatory thereto. W I T N E S S E T H WHEREAS, Lender, Borrower and Credit Parties are parties to that certain Loan and Security Agreement, dated as of December 15, 1996 (as amended, supplemented or otherwise modified prior to the date hereof, the "LOAN AGREEMENT"); and WHEREAS, Lender, Borrower and Credit Parties have agreed to amend the Loan Agreement in the manner, and on the terms and conditions, provided for herein. NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties to this Amendment hereby agree as follows: 1. DEFINITIONS. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. 2. AMENDMENT TO RECITALS TO LOAN AGREEMENT. Recital A of the Loan Agreement is hereby deleted in its entirety as of the Amendment Effective Date (as hereinafter defined in Section 21 hereof). 3. AMENDMENT TO SECTION 1.2 OF THE LOAN AGREEMENT. As of the Amendment Effective Date, SECTION 1.2(c) of the Loan Agreement is hereby amended by deleting such Section in its entirety and inserting in lieu thereof the following new SECTION 1.2(c) to read as follows: "(c) Immediately upon receipt by Parent, Borrower or any other Credit Party of proceeds of any asset disposition (including insurance and condemnation proceeds, but excluding proceeds of the sale of Inventory in the ordinary course of business), Borrower shall prepay Revolving Credit Advances in an amount equal to all such proceeds, net of (A) commissions and other reasonable and customary transaction costs, fees and expenses properly attributable to such transaction and payable by the Credit Parties in connection therewith (in each case, paid to non-Affiliates), (B) transfer taxes, and (C) amounts payable to holders of senior Liens (to the extent such Liens constitute Permitted Encumbrances hereunder), if any. If Parent, Borrower or any other Credit Party issues Stock or any debt securities, no later than the Business Day following the date of receipt of the proceeds thereof, Borrower shall prepay Revolving Credit Advances in an amount equal to all such proceeds (other than any proceeds from the issuance of common stock of Parent used to finance the ISP Acquisition), net of underwriting discounts and commissions and other reasonable costs paid to non-Affiliates in connection therewith. Any Revolving Credit Advances prepaid under this Section 1.2(c) may, subject to the provisions hereof, be reborrowed." 4. AMENDMENT TO SECTION 1.3 OF THE LOAN AGREEMENT. As of the Amendment Effective Date, SECTION 1.3 of the Loan Agreement is hereby amended by deleting such Section in its entirety and inserting in lieu thereof the following new SECTION 1.3 to read as follows: "1.3 USE OF PROCEEDS. Borrower shall use the proceeds of the Revolving Credit Loan, as applicable, to (a) pay certain fees and expenses relating to the transactions under the Loan Documents and for Borrower's working capital purposes, capital expenditures and general corporate purposes and (b) fund a portion of the ISP Acquisition as provided in Section 5(a)." 5. AMENDMENT TO SECTION 3 OF THE LOAN AGREEMENT. As of the Amendment Effective Date, SECTION 3 of the Loan Agreement is hereby amended by (a) deleting the first sentence of SECTION 3.2 in its entirety and inserting in lieu thereof the following new sentence to read as follows: "(a) The names of Borrower and each Guarantor executing this Agreement as they appear in the official filings in the states of each such entity's state of incorporation or organization, (b) the type of entity of Borrower or such Guarantor, (c) the organizational identification number issued by each of Borrower's or such Guarantor's state of incorporation or organization or a statement that no such number has been issued, (d) each of Borrower's or such Guarantor's state of organization or incorporation, and (e) the location of each of Borrower's or such Guarantor 's chief executive office, corporate offices, warehouses, other locations of Collateral and locations where records with respect to Collateral are kept (including in each case the county of such locations) are as set forth in DISCLOSURE SCHEDULE (3.2) and, except as set forth in such Disclosure Schedule, such locations have not changed during the preceding twelve months." (b) amending and restating Section 3.8(b) in its entirety to read as follows: "(b) Borrower has no Subsidiaries other than Quad Pharmaceuticals, Ltd., an Indiana corporation, and Nutriceutical Resources, Inc., a New York corporation, and Borrower currently owns and shall at all times own 100% of the Stock of each of its Subsidiaries. Parent currently owns and shall at all times own 100% of the Stock of Borrower and each of its other Subsidiaries. Pharma and ParCare are inactive Subsidiaries of Parent, and NRI and Quad are inactive Subsidiaries of Borrower; and no such Subsidiary currently owns or, without giving thirty (30) days prior written notice to Lender, will 2 own any property or assets or engage in any business or activity, have any employees or any Indebtedness, liability or obligation and no such Subsidiary is or, without giving prior written notice to Lender, will become a party to any transaction or bound by any agreement, instrument or other document (other than the Loan Documents). Research owns 99% of the partnership interests in IPR. and (c) inserting the following new Sections at the end thereof to read as follows: "3.27 AUTHORIZATION FOR LENDER TO FILE FINANCING STATEMENTS. Each of Borrower and any Guarantor executing this Agreement hereby irrevocably authorizes the Lender at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of Borrower or such Guarantor or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Code or such jurisdiction, or (ii) as being of an equal or lesser scope or with greater detail, and (b) contain any other information required by part 5 of Article 9 of the Code for the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether Borrower or such Guarantor is an organization, the type of organization and any organization identification number issued to Borrower or such Guarantor, and (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. Borrower and each Guarantor agrees to furnish any such information to the Lender promptly upon request. Each of Borrower and any Guarantor executing this Agreement also ratifies its authorization for the Lender to have filed in any Uniform Commercial Code jurisdiction any initial financing statements or amendments thereto if filed prior to the date hereof. 3.28 GOOD STANDING CERTIFICATES. Not less frequently than once during each calendar quarter, each of Borrower and each other Credit Party shall, unless Lender shall otherwise consent, provide to Lender a certificate of good standing from its state of incorporation or organization, PROVIDED, that such certificates of good standing will not be required to be delivered regarding Pharma, NRI, Quad and ParCare (each, an "INACTIVE SUBSIDIARY") so long as such Inactive Subsidiary does not (i) own any property or assets, (ii) engage in any business or activity, (iii) have any employees or any Indebtedness, liability or obligation (other than under any Loan Document), or (iv) become party to any transaction or bound by any agreement, instrument or other documents (other than any Loan Documents)." 6. AMENDMENT TO SECTION 4.1 OF THE LOAN AGREEMENT. As of the Amendment Effective Date, SECTION 4.1(b) of the Loan Agreement is hereby amended by deleting such Section in its entirety and inserting in lieu thereof the 3 following new Section 4.1(b) to read as follows: "(b) as frequently as Lender may request and in any event no later than 15 days following the end of each Fiscal Month, a Borrowing Base Certificate in the form of EXHIBIT C as of the last day of the previous Fiscal Month detailing ineligible Accounts and Inventory for adjustment to the Borrowing Base, PROVIDED, that if the aggregate amount of outstanding Revolving Credit Advances equals or exceeds $20,000,000, Borrower shall also provide to Lender (based on Borrower's reasonable estimate and current estimates) no later than the last day of each month such a Borrowing Base Certificate as of the fifteenth day of such month;" 7. AMENDMENT TO SECTION 5 OF THE LOAN AGREEMENT. As of the Amendment Effective Date, SECTION 5 of the Loan Agreement is hereby amended by (a) deleting SECTION 5(a) in its entirety and inserting in lieu thereof the following new SECTION 5(a) to read as follows: "(a) merge with, consolidate with, acquire all or substantially all of the assets or capital stock of, or otherwise combine with, any Person or business or form any Subsidiary. Notwithstanding the foregoing, Parent may consummate the ISP Acquisition on or prior to September 30, 2002 subject to the satisfaction of each of the following conditions: (i) the aggregate purchase price for the ISP Acquisition shall not exceed $112.0 million (including any post-closing adjustment to the purchase price), and costs and expenses incurred by the Credit Parties in connection with the ISP Acquisition shall not exceed $4.0 million (excluding underwriting commissions incurred in connection with the issuance by the Parent of its common stock, which will not exceed 4.5% of the gross proceeds from any such common stock); (ii) the ISP Acquisition shall be financed with (a) no less than $90.0 million of a combination of internally generated cash and/or proceeds from the issuance of common stock of Parent, and (b) the balance from the proceeds of Revolving Credit Advances; (iii) at the time of the ISP Acquisition and after giving effect thereto, Borrower shall have Excess Borrowing Availability of not less than $2,000,000 (on a pro forma basis, with trade payables being paid in the ordinary course of business and without acceleration of sales); (iv) no additional Indebtedness, Guaranteed Indebtedness, contingent obligations or other liabilities shall be incurred, assumed or otherwise be reflected on a consolidated balance sheet of Parent immediately after 4 giving effect to the ISP Acquisition, except (A) Revolving Credit Advances made hereunder and (B) the "Assumed Liabilities" (as defined in the ISP Acquisition Agreement) and liabilities of ISP Israel permitted under Section 3.03(c) of the ISP Acquisition Agreement; (v) the business and assets acquired in the ISP Acquisition shall be free and clear of all Liens (other than Permitted Encumbrances), and Lender shall have received either (A) appropriate, duly executed UCC-3 termination statements and other lien release documentation in form and substance satisfactory to Lender or (B) evidence of the completion of all recordings and filings (including UCC-3 termination statements and other Lien release documentation) as may be necessary or, in the opinion of and at the request of Lender, reasonably desirable to perfect Lender's Lien on the Collateral; (vi) at or prior to the closing of the ISP Acquisition, Lender will be granted a first priority perfected Lien (subject to Permitted Encumbrances) in all assets (other than real property) acquired pursuant to the ISP Acquisition (provided that the pledge of the Stock of ISP Israel will be limited to 66 1/3 % of the capital stock of ISP Israel, and no pledge of any assets of ISP Israel will be required), and the Credit Parties shall have executed such documents and taken such actions as may be required by Lender in connection therewith including those specified in the last sentence of Section 3.6; (vii) on or prior to the date of the ISP Acquisition, Lender shall have received from the Credit Parties supplements to the Disclosure Schedules attached hereto, or such Disclosure Schedules updated, to reflect any change thereto as a result of the ISP Acquisition and, without limiting any other provision hereof, any change to any Disclosure Schedule hereof as a result of the ISP Acquisition shall be acceptable to the Lender in its sole discretion; (viii) on or prior to the date of the ISP Acquisition, Lender shall have received, in form and substance reasonably satisfactory to Lender, copies of the ISP Acquisition Documents, certified by the Parent as being true, correct and complete copies thereof, and Lender shall have completed all legal due diligence with respect to the ISP Acquisition with results satisfactory to Lender; (ix) at the time of the ISP Acquisition, Lender shall have received a legal opinion of counsel to the Credit Parties with respect to the ISP Acquisition and the documents 5 executed and delivered in connection therewith, in form and substance satisfactory to Lender; and (x) at the time of the ISP Acquisition and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing. Notwithstanding the foregoing, the Accounts and Inventory of the ISP Group purchased in the ISP Acquisition shall not be included in Eligible Accounts and Eligible Inventory without the prior written consent of Lender." (b) deleting SECTION 5(b) in its entirety and inserting in lieu thereof the following new SECTION 5(b) to read as follows: "(b) except as otherwise permitted in this Section 5 below, make any investment (including any investment in or advance to any other Person for research and development) in, or make or accrue loans or advances of money to, any Person, other than (i) investments for research and development in Persons which are not Credit Parties which, together with the aggregate amount of research and development expenses of the Credit Parties, do not in the aggregate exceed (A) $10,250,000 for the Fiscal Year ending December 31, 2001, (B) $22,500,000 for the Fiscal Year ending December 31, 2002, (C) $19,500,000 for the Fiscal Year ending December 31, 2003 and (D) $21,000,000 for the Fiscal Year ending December 31, 2004; (ii) investments for working capital and general corporate purposes in the form of intercompany loans or capital contributions from any Credit Party to any other Credit Party (except Parent), PROVIDED that (A) each Credit Party shall record all intercompany transactions on its books and records in a manner satisfactory to Lender, (B) no Default or Event of Default would occur and be continuing after giving effect to any such proposed intercompany loan or capital contribution, and (C) the aggregate amount outstanding at any time of all such intercompany loans and capital contributions made by any Credit Party to another Credit Party other than Parent shall not exceed $5,000,000 in any Fiscal Year (less any dividends under Section 5(l)(iv) below made in such Fiscal Year); and (iii) an investment in the form of an intercompany loan by Borrower to Parent for the purpose of funding a portion of the purchase price of the ISP Acquisition and related costs and expenses, PROVIDED that (A) each of Borrower and Parent shall record all intercompany transactions on its books and records in a manner satisfactory to Lender, (B) no Default or Event of Default would occur and be continuing after giving effect to any such proposed intercompany loan or capital contribution, and (C) the aggregate amount outstanding at any time of such intercompany loans shall not exceed $28,000,000;" (c) deleting SECTION 5(c) in its entirety and inserting in lieu thereof the following new SECTION 5(c) to read as follows: 6 "(c) create, incur, assume or permit to exist any Indebtedness, except: (i) the Obligations; (ii) Indebtedness other than the Obligations in an aggregate outstanding amount not exceeding $500,000; (iii) deferred taxes; (iv) other Indebtedness set forth in DISCLOSURE SCHEDULE (5(c)), (v) Indebtedness of Borrower secured by Borrower's real property (including any such Indebtedness secured by Borrower's real property set forth as DISCLOSURE SCHEDULE (5(c))), (vi) Indebtedness represented by Capital Lease Obligations; (vii) intercompany loans as permitted by Sections 5(b)(ii) and 5(b)(iii); and (viii) Indebtedness incurred by Parent in connection with funding a portion of the purchase price of the ISP Acquisition and related costs and expenses, in an amount not to exceed $28,000,000; PROVIDED, HOWEVER, that the aggregate amount of Indebtedness incurred by Borrower outstanding under clauses (v) and (vi) of this Section 5(c) shall not exceed $10,000,000;" (d) deleting SECTION 5(d) in its entirety and inserting in lieu thereof the following new SECTION 5(d) to read as follows: "(d) enter into any lending, borrowing or other commercial transaction with any of its employees, directors, Affiliates or any other Credit Party (including upstreaming and downstreaming of cash and intercompany advances, and payments by a Credit Party on behalf of another Credit Party which are not otherwise permitted hereunder) other than (i) loans to employees in the ordinary course of business in an aggregate outstanding amount not exceeding $50,000, (ii) those transactions contemplated under the Merck Equity Documents and (iii) indebtedness consisting of intercompany loans permitted under clause (ii) of Section 5(b);" (e) amending SECTION 5(i) by (i) deleting the word "and" where it appears immediately prior to clause (vi) and (ii) inserting the following new clauses (vii) and (viii) at the end of such Section 5(i) to read as follows: ", (vii) transfer by Parent of any assets acquired pursuant to the ISP Acquisition to any of its wholly owned, domestic Subsidiaries, PROVIDED, that (A) Parent provides Lender at least ten (10) Business Days' advance written notice of such asset transfer and (B) the Credit Parties have provided any such documents or taken any such actions as may be required by Lender to continue the perfection of Lender's Liens on such transferred assets, and (viii) the sale of other assets or properties having a book value not to exceed $250,000 in the aggregate." (f) deleting SECTION 5(l) in its entirety and inserting in lieu thereof the following new SECTION 5(l) to read as follows: 7 "(l) make or permit any Restricted Payment, except (i) intercompany loans from and capital contributions to the extent permitted by clause (ii) or (iii) of Section 5(b) above, (ii) employee loans permitted under Section 5(d) above, (iii) dividends by Subsidiaries of Parent (other than Borrower) paid to Parent, (iv) dividends by Borrower paid to Parent in an amount not to exceed $5,000,000 in any Fiscal Year, PROVIDED that no Default or Event of Default would occur and be continuing after giving effect to any such proposed dividend, and (v) prior to the earlier of March 1, 2003 and the consummation of the ISP Acquisition, repurchase by Parent of its common Stock in an amount not to exceed $30,000,000 in the aggregate, PROVIDED that (A) no Default or Event of Default shall have occurred or be continuing either before or after giving effect to any repurchase of common Stock, (B) no proceeds of the Revolving Credit Loan are used for such repurchase of common Stock, and (C) the Revolving Credit Loan balance is zero ($0);" and (g) inserting the following new subsections at the end thereof to read as follows: "(n) without limiting the prohibitions on mergers involving Borrower or any Guarantor contained in the Loan Agreement, neither Borrower nor any Guarantor shall reincorporate or reorganize itself under the laws of any jurisdiction other than the jurisdiction in which it is incorporated or organized as of the date hereof without the prior written consent of the Lender; or (o) each of Borrower and any Guarantor executing this Agreement acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement without the prior written consent of Lender and agrees that it will not do so without the prior written consent of Lender, subject to Borrower's or such Guarantor's rights under Section 9-509(d)(2) of the Code." 8. AMENDMENT TO SECTION 6 OF THE LOAN AGREEMENT. As of the Amendment Effective Date, SECTION 6 of the Loan Agreement is amended by: (a) amending and restating SECTION 6.1(a) in its entirety to read as follows: "(a) As collateral security for the prompt and complete payment and performance of the Obligations, Borrower and each Guarantor executing this Agreement hereby grants to the Lender a security interest in and Lien upon all of its property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title, or interest, including all of the following property in which it now has or at any time in the future may acquire any right, title or interest: all Accounts; all Deposit Accounts, other bank accounts and all funds on deposit therein; all money, cash and cash equivalents; all Investment Property; all Stock; all Goods (including 8 Inventory, Equipment and Fixtures); all Chattel Paper, Documents and Instruments; all Books and Records; all General Intangibles (including all Intellectual Property, contract rights, choses in action, Payment Intangibles and Software); all Letter-of-Credit Rights; all Supporting Obligations; and to the extent not otherwise included, all Proceeds, tort claims, insurance claims and other rights to payment not otherwise included in the foregoing and products of all and any of the foregoing and all accessions to, substitutions and replacements for, and rents and profits of, each of the foregoing, but excluding in all events Hazardous Waste (all of the foregoing, together with any other collateral pledged to the Lender pursuant to any other Loan Document, collectively, the "COLLATERAL")." (b) inserting the following sentence at the end of SECTION 6.1(b) to read as follows: "Borrower and each Guarantor executing this Agreement shall promptly, and in any event within two (2) Business Days after the same is acquired by it, notify Lender of any commercial tort claim (as defined in the Code) acquired by it and unless otherwise consented by Lender, Borrower or such Guarantor shall enter into a supplement to this Loan Agreement granting to Lender a Lien in such commercial tort claim." and (c) deleting the last sentence of Section 6.3 in its entirety and inserting the following new sentences in lieu thereof to read as follows: "Borrower and any Guarantor executing this Agreement also hereby (i) authorizes Lender to file any financing statements, continuation statements or amendments thereto that (x) indicate the Collateral (1) as all assets of Borrower or such Guarantor (or any portion of Borrower's or such Guarantor's assets) or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Code of such jurisdiction, or (2) as being of an equal or lesser scope or with greater detail, and (y) contain any other information required by Part 5 of Article 9 of the Code for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment and (ii) ratifies its authorization for Lender to have filed any initial financial statements, or amendments thereto if filed prior to the date hereof. Borrower and each Guarantor executing this Agreement acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement without the prior written consent of Lender and agrees that it will not do so without the prior written consent of Lender, subject to such Credit Party's rights under Section 9-509(d)(2) of the Code." 9 9. AMENDMENT TO SECTION 8 OF THE LOAN AGREEMENT. As of the Amendment Effective Date, SECTION 8 of the Loan Agreement is amended by: (a) amending and restating SECTIONS 8.1(e) to (g) in their entirety to read as follows: "(e) there shall be commenced against Borrower or any other Credit Party any Litigation seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which remains unstayed or undismissed for sixty (60) consecutive days; or Borrower or any other Credit Party shall have concealed, removed or permitted to be concealed or removed, any part of its property with intent to hinder, delay or defraud its creditors or any of them or made or suffered a transfer of any of its property or the incurring of an obligation which may be fraudulent under any applicable bankruptcy, fraudulent transfer or other similar law; or (f) a case or proceeding shall have been commenced involuntarily against Borrower or any other Credit Party in a court having competent jurisdiction seeking a decree or order: (i) under the United States Bankruptcy Code or any other applicable Federal, state or foreign bankruptcy or other similar law, and seeking either (x) the appointment of a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for such Person or of any substantial part of its properties, or (y) the reorganization or winding up or liquidation of the affairs of any such Person, and such case or proceeding shall remain undismissed or unstayed for sixty (60) consecutive days or such court shall enter a decree or order granting the relief sought in such case or proceeding; or (ii) invalidating or denying any Person's right, power, or competence to enter into or perform any of its obligations under any Loan Document or invalidating or denying the validity or enforceability of this Agreement or any other Loan Document or any action taken hereunder or thereunder; or (g) Borrower or any other Credit Party shall (i) commence any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it or seeking appointment of a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for it or any substantial part of its properties, (ii) make a general assignment for the benefit of creditors, (iii) consent to or take any action in furtherance of, or, indicating its consent to, approval of, or acquiescence in, any of the acts set forth in paragraphs (e) or (f) of this Section 8.1 or clauses (i) and (ii) of this paragraph (g), or (iv) shall admit in writing its inability to, or shall be generally unable to, pay its debts as such debts become due; or" and (b) inserting the following new subsection at the end thereof to read as follows: 10 "(k) an ERISA Event shall have occurred and be continuing that, in the opinion of the Lender, when taken together with all other ERISA Events that shall have occurred and are then continuing, would reasonably be expected to result in liability of any Credit Party in an aggregate amount exceeding the Minimum Actionable Amount." 10. AMENDMENT TO SECTION 10 OF THE LOAN AGREEMENT. As of the Amendment Effective Date, SECTION 10 of the Loan Agreement is amended by adding the following new subsections at the end thereof to read as follows: "10.14 PRESS RELEASES. Each Credit Party executing this Agreement agrees that neither it nor its Affiliates will in the future issue any press release or other public disclosure using the name of General Electric Capital Corporation or its affiliates or referring to this Agreement or the other Loan Documents without at least two (2) Business Days' prior notice to Lender and without the prior written consent of Lender unless (and only to the extent that) such Credit Party or Affiliate is required to do so under law or the rules of any securities exchange, and then, in any event, such Credit Party or Affiliate will consult with Lender before issuing such press release or other public disclosure. Each Credit Party consents to the publication by Lender of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement. 10.15 WAIVER OF RIGHTS. IF AND TO THE EXTENT THAT ANY OBLIGATION OF ANY CREDIT PARTY TO LENDER SHALL BE CONSIDERED AN OBLIGATION OF GUARANTY OR SURETYSHIP, THEN THE FOLLOWING PROVISIONS OF THIS SECTION 10.15 SHALL APPLY WITH RESPECT TO SUCH CREDIT PARTY SOLELY TO THE EXTENT THAT SUCH CREDIT PARTY IS DEEMED TO ACT IN THE CAPACITY OF A GUARANTOR AND SHALL NOT EFFECT A WAIVER OF RIGHTS IN SUCH PERSON'S CAPACITY AS BORROWER OR A CREDIT PARTY; (A) SUCH CREDIT PARTY EXPRESSLY WAIVES THE RIGHT TO REQUIRE LENDER FIRST TO PURSUE ANY OTHER PERSON, THE COLLATERAL, OR ANY OTHER SECURITY OR GUARANTY THAT MAY BE HELD FOR THE OBLIGATIONS, OR TO APPLY ANY SUCH SECURITY OR GUARANTY TO THE OBLIGATIONS BEFORE SEEKING FROM SUCH CREDIT PARTY PAYMENT IN FULL OF ITS LIABILITIES TO LENDER OR PROCEEDING AGAINST SUCH CREDIT PARTY FOR SAME. (B) SUCH CREDIT PARTY ACKNOWLEDGES THAT LENDER MAY, UNDER APPLICABLE LAW, PROCEED TO REALIZE ITS BENEFITS UNDER ANY OF THE LOAN DOCUMENTS GIVING LENDER A LIEN UPON ANY COLLATERAL, WHETHER OWNED BY BORROWER OR ANY CREDIT PARTY OR BY ANY OTHER PERSON, EITHER BY JUDICIAL FORECLOSURE OR BY NON-JUDICIAL SALE OR ENFORCEMENT. LENDER 11 MAY, AT ITS SOLE OPTION, DETERMINE WHICH OF ITS REMEDIES OR RIGHTS IT MAY PURSUE WITHOUT AFFECTING ANY OF ITS RIGHTS AND REMEDIES. IF, IN THE EXERCISE OF ANY OF ITS RIGHTS AND REMEDIES, LENDER SHALL FORFEIT ANY OF ITS RIGHTS OR REMEDIES, INCLUDING ITS RIGHT TO ENTER A DEFICIENCY JUDGMENT AGAINST BORROWER OR ANY CREDIT PARTY OR ANY OTHER PERSON, WHETHER BECAUSE OF ANY APPLICABLE LAWS PERTAINING TO "ELECTION OF REMEDIES" OR THE LIKE, SUCH CREDIT PARTY HEREBY CONSENTS TO SUCH ACTION BY LENDER AND WAIVES ANY CLAIM BASED UPON SUCH ACTION, EVEN IF SUCH ACTION BY LENDER SHALL RESULT IN A FULL OR PARTIAL LOSS OF ANY RIGHTS OF SUBROGATION WHICH SUCH CREDIT PARTY MIGHT OTHERWISE HAVE HAD BUT FOR SUCH ACTION BY LENDER. ANY ELECTION OF REMEDIES WHICH RESULTS IN THE DENIAL OR IMPAIRMENT OF THE RIGHT OF LENDER TO SEEK A DEFICIENCY JUDGMENT AGAINST ANY CREDIT PARTY SHALL NOT IMPAIR ANY OTHER CREDIT PARTY'S OBLIGATION TO PAY THE FULL AMOUNT OF THE OBLIGATIONS. IN THE EVENT LENDER SHALL BID AT ANY FORECLOSURE OR TRUSTEE'S SALE OR AT ANY PRIVATE SALE PERMITTED BY LAW OR THE LOAN DOCUMENTS AND CONDUCTED IN ACCORDANCE THEREWITH, LENDER MAY BID ALL OR LESS THAN THE AMOUNT OF THE OBLIGATIONS AND THE AMOUNT OF SUCH BID NEED NOT BE PAID BY LENDER BUT SHALL BE CREDITED AGAINST THE OBLIGATIONS. THE AMOUNT OF THE SUCCESSFUL BID AT ANY SUCH SALE, WHETHER LENDER OR ANY OTHER PARTY IS THE SUCCESSFUL BIDDER, SHALL BE CONCLUSIVELY DEEMED TO BE THE FAIR MARKET VALUE OF THE COLLATERAL AND THE DIFFERENCE BETWEEN SUCH BID AMOUNT AND THE REMAINING BALANCE OF THE OBLIGATIONS SHALL BE CONCLUSIVELY DEEMED TO BE THE AMOUNT OF THE OBLIGATIONS GUARANTEED BY SUCH CREDIT PARTY, NOTWITHSTANDING THAT ANY PRESENT OR FUTURE LAW OR COURT DECISION OR RULING MAY HAVE THE EFFECT OF REDUCING THE AMOUNT OF ANY DEFICIENCY CLAIM TO WHICH LENDER MIGHT OTHERWISE BE ENTITLED BUT FOR SUCH BIDDING AT ANY SUCH SALE. (C) SUCH CREDIT PARTY AGREES THAT LENDER SHALL BE UNDER NO OBLIGATION TO (I) MARSHAL ANY ASSETS IN FAVOR OF SUCH CREDIT PARTY, (II) PROCEED FIRST AGAINST ANY OTHER CREDIT PARTY OR PERSON OR ANY PROPERTY OF ANY OTHER CREDIT PARTY OR PERSON OR AGAINST ANY COLLATERAL, (III) ENFORCE FIRST ANY OTHER GUARANTY OBLIGATIONS WITH RESPECT TO, OR SECURITY FOR, THE OBLIGATIONS, OR (IV) PURSUE ANY OTHER REMEDY IN LENDER'S POWER THAT SUCH CREDIT PARTY MAY NOT BE ABLE 12 TO PURSUE ITSELF AND THAT MAY LIGHTEN SUCH CREDIT PARTY 'S BURDEN, ANY RIGHT TO WHICH SUCH CREDIT PARTY HEREBY EXPRESSLY WAIVES. (D) EACH CREDIT PARTY ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH THE CREDIT PARTIES. EACH CREDIT PARTY WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT." 11. AMENDMENT TO SCHEDULE A TO THE LOAN AGREEMENT. SCHEDULE A to the Loan Agreement is hereby amended as of the Amendment Effective Date by (a) inserting the following new definitions in the proper order thereof to read as follows: "`DEPOSIT ACCOUNTS" shall mean all "deposit accounts" as such term is defined in the Code, now or hereafter held in the name of any Person. "ELEVENTH AMENDMENT EFFECTIVE DATE" shall mean March __, 2002. "EXCESS BORROWING AVAILABILITY" shall mean Borrowing Availability less the amount of the outstanding Revolving Credit Loan. "FIXTURES" shall mean all "fixtures" as such term is defined in the Code, now owned or hereafter acquired by any Person. "INACTIVE SUBSIDIARY" shall have the meaning assigned to it in Section 3.28. "INTELLECTUAL PROPERTY SECURITY AGREEMENT" shall mean that certain Intellectual Property Security Agreement, dated as of March __, 2002 between Parent, Borrower, the other Grantors signatory thereto and Lender, together with all amendments, modifications and supplements thereto. "IPR" shall mean Israel Pharmaceutical Resources, L.P., an Israeli limited partnership. "ISP ACQUISITION" shall mean the acquisition pursuant to the ISP Acquisition Agreement by Parent from the ISP Group of its fine chemicals business, consisting of a manufacturing facility in Columbus, Ohio, certain inventory, intellectual property, and other assets related to the manufacture, sale, research and development of 13 advanced intermediates and active pharmaceutical ingredients for brand name and generic pharmaceutical companies and all of the issued and outstanding capital stock of ISP Israel. "ISP ACQUISITION AGREEMENT" shall mean the Purchase Agreement dated as of December 28, 2001 among the Parent and the ISP Group substantially in the form attached to the letter agreement dated December 28, 2001 among the Parent and the ISP Group, or such other agreement as Lender may deem approved in its discretion. "ISP GROUP" shall mean ISP Hungary Holdings Limited, ISP Investments Inc., ISP Chemicals Inc. and ISP Technologies Inc. "ISP ISRAEL" shall mean ISP FineTech Ltd., an Israeli corporation. "LITIGATION" shall mean any claim, lawsuit, litigation, investigation or proceeding of or before any arbitrator or Governmental Authority. "LETTER-OF-CREDIT RIGHTS" shall mean "letter-of-credit rights" as such term is defined in the Code, now owned or hereafter acquired by any Person, including rights to payment or performance under a letter of credit, whether or not such Person, as beneficiary, has demanded or is entitled to demand payment or performance. "PAYMENT INTANGIBLES" shall mean all "payment intangibles" as such term is defined in the Code, now owned or hereafter acquired by any Person. "PHARMA" shall mean Par Pharma Group, Ltd., a Delaware corporation. "PRX" shall mean PRX Pharmaceuticals, Ltd., a Delaware corporation. "RESEARCH" shall mean PRI-Research, Inc., a Delaware corporation. "QUAD" shall mean Quad Pharmaceuticals, Inc., an Indiana corporation. "SOFTWARE" shall mean all "software" as such term is defined in the Code, now owned or hereafter acquired by any Person, other than software embedded in any category of Goods, including all computer programs and all supporting information provided in connection with a transaction related to any program. "SUPPORTING OBLIGATIONS" shall mean all "supporting obligations" as such term is defined in the Code, including letters of credit and guaranties issued in support of Accounts, Chattel Paper, Documents, General Intangibles, Instruments, or Investment Property." and (b) amending and restating each of the following definitions in its entirety to read as follows: 14 "`ACCOUNT DEBTOR" shall mean any Person who is or may become obligated with respect to, or on account of, an Account, Chattel Paper or General Intangibles (including a Payment Intangible). "ACCOUNTS" shall mean all "accounts," as such term is defined in the Code, now owned or hereafter acquired by any Person, including: (i) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper or Instruments) (including any such obligations that may be characterized as an account or contract right under the Code); (ii) all of such Person's rights in, to and under all purchase orders or receipts for goods or services; (iii) all of such Person's rights to any goods represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods); (iv) all rights to payment due to such Person for Goods or other property sold, leased, licensed, assigned or otherwise disposed of, for a policy of insurance issued or to be issued, for a secondary obligation incurred or to be incurred, for energy provided or to be provided, for the use or hire of a vessel under a charter or other contract, arising out of the use of a credit card or charge card, or for services rendered or to be rendered by such Person or in connection with any other transaction (whether or not yet earned by performance on the part of such Person) ; (v) all health care insurance receivables; and (vi) all collateral security and guarantees of any kind given by any Account Debtor or any other Person with respect to any of the foregoing. "BORROWING BASE" shall mean at any time an amount equal to the sum at such time of: (a) Eighty-five percent (85%) (or such lesser percentage as may be specified by Lender in its reasonable credit judgment from time to time by written notice to Borrower) of the value (as determined by Lender) of Borrower's Eligible Accounts; PLUS (b) the lesser of (i) $12,000,000 or (ii) fifty percent (50%) (or such lesser percentage as may be specified by Lender in its reasonable credit judgment from time to time by written notice to Borrower) of the value of Borrower's Eligible Inventory, as determined by Lender, valued on a first-in, first-out basis (at the lower of cost or market). "CHATTEL PAPER" shall mean all "chattel paper," as such term is defined in the Code, including electronic chattel paper, now owned or hereafter acquired by any Person. "COLLATERAL" shall have the meaning assigned to it in Section 6.1(a). 15 "CODE" shall mean the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Lender's Lien on any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Agreement relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions; provided further, that to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern. "COMMITMENT MATURITY DATE" shall mean the earliest of (i) March [__], 2005, (ii) the date Lender's obligation to advance funds is terminated and the Obligations are declared to be due and payable pursuant to Section 7.2 and (iii) the date of prepayment in full by Borrower of the Obligations in accordance with the provisions of Section 1.2(b). "COMMITMENT TERMINATION DATE" shall mean the earliest of (i) March [__], 2005, (ii) the date of Termination of Lender's obligation to advance funds pursuant to Section 7.2 and (iii) the date of prepayment in full by Borrower of the Obligations in accordance with the provisions of Section 1.2(b). "ERISA EVENT" shall mean (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the IRC or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(b) of the IRC or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by any Credit Party or any ERISA Affiliate of any liability under Title IV of ERISA with respect to the termination of any Title IV Plan; (e) the receipt by any Credit Party or any ERISA Affiliate from the PBGC or a plan administrator of any notice expressing an intention to terminate any Title IV Plan or to appoint a trustee to administer any Title IV Plan; (f) the incurrence by any Credit Party or any ERISA Affiliate of any liability with respect to any withdrawal or partial withdrawal from any Title IV Plan or Multiemployer Plan; or (g) the receipt by any Credit Party or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from any Credit Party or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. 16 "GENERAL INTANGIBLES" shall mean all "general intangibles," as such term is defined in the Code, now owned or hereafter acquired by any Person, including all right, title and interest that such Person may now or hereafter have in or under any Contract, all Payment Intangibles, customer lists, Licenses, Intellectual Property, interests in partnerships, joint ventures and other business associations, permits, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials, Books and Records, Goodwill (including the Goodwill associated with any Intellectual Property), all rights and claims in or under insurance policies (including insurance for fire, damage, loss, and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life, key-person, and business interruption insurance, and all unearned premiums), uncertificated securities, choses in action, deposit accounts, rights to receive tax refunds and other payments, rights to received dividends, distributions, cash, Instruments and other property in respect of or in exchange for pledged Stock and Investment Property, and rights of indemnification. "GOODS" shall mean all "goods," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including embedded software to the extent included in "goods" as defined in the Code, manufactured homes, standing timber that is cut and removed for sale and unborn young of animals. "INVENTORY" shall mean all "inventory," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including all inventory, merchandise, goods and other personal property that are held by or on behalf of such Person for sale or lease or are furnished or are to be furnished under a contract of service or that constitute raw materials, work in process, finished goods, returned goods, or materials or supplies of any kind, nature or description used or consumed or to be used or consumed in such Person's business or in the processing, production, packaging, promotion, delivery or shipping of the same, including all supplies and embedded software. "LOAN DOCUMENTS" shall mean the Agreement, the Revolving Credit Note, each Pledge Agreement, the Financial Statements, each Guaranty, the Powers of Attorney, the patent and trademark assignment, the Intellectual Property Security Agreement, and the other documents and instruments listed in Schedule E, and all documents, instruments, certificates and notices at any time delivered by and between Lender and any Credit Party in connection with any of the foregoing. "MAXIMUM AMOUNT" shall mean the maximum amount of credit to be provided by Lender to or for the benefit of Borrower for aggregate Revolving Credit Advances and Letter of Credit Obligations outstanding at any time, without regard to the Borrowing Base or reserves, which amount, for purposes of the Agreement, is Thirty Million Dollars ($30,000,000). 17 "MINIMUM ACTIONABLE AMOUNT" shall mean $500,000. "PROCEEDS" shall mean "proceeds," as such term is defined in the Code and, in any event, shall include: (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Borrower or any other Credit Party from time to time with respect to any Collateral; (ii) any and all payments (in any form whatsoever) made or due and payable to Borrower or any other Credit Party from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any Collateral by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority); (iii) any claim of Borrower or any other Credit Party against third parties (a) for past, present or future infringement of any Intellectual Property or (b) for past, present or future infringement or dilution of any Trademark or Trademark License or for injury to the goodwill associated with any Trademark, Trademark registration or Trademark licensed under any Trademark License; (iv) any recoveries by Borrower or any other Credit Party against third parties with respect to any litigation or dispute concerning any Collateral, including claims arising out of the loss or nonconformity of, interference with the use of, defects in, or infringement of rights in, or damage to, Collateral; (v) all amounts collected on, or distributed on account of, other Collateral, including dividends, interest, distributions and Instruments with respect to Investment Property and pledged Stock; and (vi) any and all other amounts, rights to payment or other property acquired upon the sale, lease, license, exchange or other disposition of Collateral and all rights arising out of Collateral. "SUBSIDIARY GUARANTOR" shall mean NRI, ParCare, IPR, Research, PRX, Quad, and Pharma and each other Subsidiary of Parent, Borrower or other Credit Party which executes a guaranty or a support, put or other similar agreement in favor of Lender in connection with the transactions contemplated by the Agreement." 12. AMENDMENT TO SCHEDULE D TO THE LOAN AGREEMENT. SCHEDULE D to the Loan Agreement is hereby amended and restated in its entirety as of the Amendment Effective Date to read as set forth in SCHEDULE D attached hereto. 13. AMENDMENT TO SCHEDULE F TO THE LOAN AGREEMENT. SCHEDULE F to the Loan Agreement is hereby amended and restated in its entirety as of the Amendment Effective Date to read as set forth in SCHEDULE F attached hereto. 14. AMENDMENT TO DISCLOSURE SCHEDULES. The DISCLOSURE SCHEDULES to the Loan Agreement are hereby amended and restated in their entirety as of the Amendment Effective Date to read as set forth in EXHIBIT A attached hereto. 15. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into this Amendment, each Credit Party hereby represents and warrants that: 18 A. The execution, delivery and performance of this Amendment and the performance of the Loan Agreement, as amended hereby (the "AMENDED LOAN AGREEMENT"), the Intellectual Property Security Agreement and the Research Pledge Agreement (as defined below), by each Credit Party which is a party thereto: (i) are within their respective corporate powers; (ii) have been duly authorized by all necessary corporate and shareholder action; and (iii) are not in contravention of any provision of their respective certificates or articles of incorporation or by-laws or other organizational documents. B. The execution, delivery and performance of the Amended and Restated Revolving Credit Note, dated as of the date hereof, from Borrower in the principal amount of $30,000,000 (the "AMENDED REVOLVING CREDIT NOTE"): (i) are within Borrower's corporate powers; (ii) have been duly authorized by all necessary corporate and shareholder action; and (iii) are not in contravention of any provision of its certificate or article of incorporation or by-laws or other organizational documents. C. Each of this Amendment, the Intellectual Property Security Agreement and the Research Pledge Agreement has been duly executed and delivered by or on behalf of each Credit Party which is a party thereto and the Amended Revolving Credit Note has been duly executed and delivered by Borrower. D. Each of this Amendment, the Amended Loan Agreement, the Intellectual Property Security Agreement and the Research Pledge Agreement constitutes a legal, valid and binding obligation of each such Credit Party which is a party thereto enforceable against each Credit Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). E. The Amended Revolving Credit Note constitutes a legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). F. No Default (other than those waived pursuant hereto) has occurred and is continuing both before and after giving effect to this Amendment. G. No action, claim or proceeding is now pending or, to the knowledge of each Credit Party, threatened against any Credit Party, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any federal, state, or local government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, which challenges any Credit Party's right, power, or competence to enter into this Amendment or, to the extent applicable, perform any of its obligations under this Amendment, the 19 Amended Loan Agreement, the Amended Revolving Credit Note, the Intellectual Property Security Agreement, the Research Pledge Agreement or any other Loan Document, or the validity or enforceability of this Amendment, the Amended Loan Agreement, the Amended Revolving Credit Note or any other Loan Document or any action taken under this Amendment, the Amended Loan Agreement, the Amended Revolving Credit Note or any other Loan Document. H. The representations and warranties of the Credit Parties contained in the Loan Agreement, each Pledge Agreement, the Trademark Security Agreement and the Intellectual Property Security Agreement shall be true and correct on and as of the Amendment Effective Date (after giving effect to this Amendment) with the same effect as if such representations and warranties had been made on and as of such date (and any such representation or warranty which is expressly made only as of the Closing Date or another specified date shall be made as of the Amendment Effective Date). 16. NO OTHER AMENDMENT. Except as expressly provided in Sections 2 through 14 hereof, the Loan Agreement shall be unmodified and shall continue to be in full force and effect in accordance with its terms. Except as expressly provided herein, this Amendment shall not be deemed a waiver of any term or condition of any Loan Document and shall not be deemed to prejudice any right or rights which Lender may now have or may have in the future under or in connection with any Loan Document or any of the instruments or agreements referred to therein, as the same may be amended from time to time. 17. OUTSTANDING INDEBTEDNESS; AMENDMENT OF CLAIMS. Each Credit Party hereby acknowledges and agrees that as of March 15, 2002 the aggregate outstanding principal amount of the Revolving Credit Loan is $0.00. Each Credit Party hereby waives, releases, remises and forever discharges Lender and each other Indemnified Person from any and all Claims of any kind or character, known or unknown, which each Credit Party ever had, now has or might hereafter have against Lender which relates, directly or indirectly, to any acts or omissions of Lender or any other Indemnified Person on or prior to the date hereof. This Amendment shall constitute a Loan Document for all purposes of the Loan Agreement and each other Loan Document. 18. EXPENSES. Borrower hereby reconfirms its obligations pursuant to Section 10.2 of the Loan Agreement to pay and reimburse Lender for all reasonable out-of-pocket expenses (including, without limitation, reasonable fees of counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment and all other documents and instruments delivered in connection herewith. 19. PLEDGE BY RESEARCH. Borrower shall use its best efforts to deliver to Lender, no later than 30 days following the Amendment Effective Date, a fully executed Pledge Agreement duly executed by Research pledging 66 1/3 % of its partnership interest in IPR to Lender as collateral for the Obligations, and any documents related thereto (the "RESEARCH PLEDGE AGREEMENT"). Failure of Borrower to use its best efforts to deliver the Research Pledge Agreement on or 20 prior to 30 days from the Amendment Effective Date shall constitute an immediate Event of Default. 20. COLLATERAL APPRAISAL. No later than 120 days following the Amendment Effective Date, Lender shall have received an inventory appraisal of Borrower's Inventory, performed by appraisers retained by Borrower and acceptable to Lender, in form and substance satisfactory to Lender and reflecting asset values of Borrower at levels acceptable to Lender. No later than thirty days following the Amendment Effective Date Borrower shall have initiated such inventory appraisal and provided to Lender evidence thereof. 21. EFFECTIVENESS. This Amendment shall become effective as of the date hereof (the "AMENDMENT EFFECTIVE DATE") only upon satisfaction in full in the judgment of the Lender of each of the following conditions on or prior to March __, 2002: A. AMENDMENT. Lender shall have received four original copies of this Amendment duly executed and delivered by Lender and each Credit Party. B. PAYMENT OF AMENDMENT FEE AND EXPENSES. Borrower shall have paid to Lender a non-refundable amendment fee in the amount of $150,000 and all costs and expenses owing in connection with this Amendment and the other Loan Documents and due to Lender (including, without limitation, reasonable legal fees and expenses). C. NOTE. Lender shall have received a fully executed Amended Revolving Credit Note from Borrower in exchange for the Revolving Credit Note in effect prior to the Amendment Effective Date. D. OPINION. Lender shall have received a legal opinion of counsel to the Credit Parties with respect to this Amendment and the transactions contemplated hereby in form and substance satisfactory to Lender. E. COLLATERAL DOCUMENTS. Lender shall have received (i) certified copies of Requests for Information or other evidence satisfactory to Lender, listing all effective financing statements or chattel mortgages which name any Credit Party (under such Credit Party's current name, any previous name or any trade name or doing business name) as debtor, together with copies of such other financing statements; (ii) certificates or other evidences of ownership representing all instruments constituting part of the Collateral (including, without limitation, the stock certificates for the Subsidiaries of each Credit Party) and appropriate undated stock powers (or the equivalent thereof) executed in blank; and (iii) UCC-1 financing statements for each Credit Party, in form and substance satisfactory to Lender. F. INTELLECTUAL PROPERTY. Lender shall have received agreements relating to the granting to Lender of a security interest in Intellectual Property of Borrower and each other Credit Party to the extent applicable in a form suitable for filing with the appropriate Federal or State filing office. 21 G. LITIGATION DOCUMENTS. Lender shall have received, certified by Borrower as true correct and complete, copies of all complaints and pleadings relating to any patent infringement or related actions against any Credit Party filed relating to fluoxetine. H. POWERS OF ATTORNEY. Lender shall have received fully executed Powers of Attorney for Quad, Research, PRX, and Pharma, each in form and substance satisfactory to Lender. I. SECRETARIAL CERTIFICATES. A Secretarial Certificate substantially in the form of Exhibit D to the Loan Agreement duly completed and executed by the Secretary or Assistant Secretary of each Credit Party, together with all attachments thereto. J. DISCLOSURE SCHEDULES. Lender shall have received revised and updated Disclosure Schedules for all Credit Parties, certified by an officer of Borrower as true correct and complete as of the Amendment Effective Date. K. REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Credit Party contained in this Amendment shall be true and correct on and as of the Amendment Effective Date. 22. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 23. COUNTERPARTS. This Amendment may be executed by the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 24. JOINDER. By its signature below, each of Quad, Research, PRX and Pharma joins to the Loan Agreement as a Credit Party and a Guarantor, and assumes all of the rights, responsibilities of a Credit Party and a Guarantor as set forth therein, including but not limited to (i) the obligations of a Guarantor as set forth in SECTION 7 of the Loan Agreement and (ii) any representations and warranties, in each case as if such entity were an original signatory thereto. (SIGNATURE PAGE FOLLOWS) 22 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. BORROWER: PAR PHARMACEUTICAL, INC. By: /s/ DENNIS J. O'CONNOR ----------------------- Name: Dennis J. O'Connor Title: Vice President LENDER: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ MICHAEL LUSTBADER ---------------------- Name: Michael Lustbader Its: Duly Authorized Signatory PARENT: PHARMACEUTICAL RESOURCES, INC. By: /s/ DENNIS J. O'CONNOR ----------------------- Name: Dennis J. O'Connor Title: Vice President (SIGNATURES CONTINUED ON NEXT PAGE) 23 SUBSIDIARY GUARANTORS: NUTRICEUTICAL RESOURCES, INC. By: /s/ DENNIS J. O'CONNOR ----------------------- Name: Dennis J. O'Connor Title: Vice President PARCARE, LTD. By: /s/ DENNIS J. O'CONNOR ----------------------- Name: Dennis J. O'Connor Title: Vice President QUAD PHARMACEUTICALS INC. By: /s/ DENNIS J. O'CONNOR ----------------------- Name: Dennis J. O'Connor Title: Vice President PRX PHARMACEUTICALS, INC. By: /s/ DENNIS J. O'CONNOR ----------------------- Name: Dennis J. O'Connor Title: Vice President PAR PHARMA GROUP, LTD. By: /s/ DENNIS J. O'CONNOR ----------------------- Name: Dennis J. O'Connor Title: Vice President (SIGNATURES CONTINUED ON NEXT PAGE) 24 PRI-RESEARCH, INC. By: /s/ DENNIS J. O'CONNOR ----------------------- Name: Dennis J. O'Connor Title: Vice President 25 SCHEDULE D FEES 1. AMENDMENT FEE. A non-refundable amendment fee of $150,000 is payable by Borrower to Lender on the Eleventh Amendment Effective Date. 2. UNUSED LINE FEE: For each day after the Closing Date, and through but including the Termination Date, an amount equal to the Maximum Amount less the outstanding amount of the Revolving Credit Loan (exclusive of accrued, but unpaid, interest), for such day, multiplied by the Unused Line Fee Percentage for such period, the product of which is then divided by 360. The Unused Line Fee for each month (except for the month in which the Termination Date occurs) is payable on the first Business Day of the immediately following month, beginning on the first Business Day of the month following the month in which the Closing Date occurs; the final monthly installment of the Unused Line Fee is payable on the Termination Date. Notwithstanding the foregoing, any unpaid Unused Line Fee is immediately due and payable on the Commitment Maturity Date. The "Unused Line Fee Percentage" shall be, with respect to any period, 0.25%. 3. COLLATERAL MONITORING FEE: $30,000 for each per annum or part of a per annum, payable in advance on the Closing Date and on the first Business Day of each month following the Closing Date and prior to the Commitment Maturity Date. 4. AUDIT FEES: Borrower will reimburse Lender at the rate of $800 per person per day ("Audit Fees"), plus out of pocket expenses, for the audit reviews, field examinations and collateral examinations conducted by Lender's own personnel. Lender agrees that Borrower's obligation for Audit Fees shall not be payable with respect to more than three field examinations in any calendar year; PROVIDED, that no limit on Audit Fees will be imposed on Lender for those audits or examinations conducted at a time when a Default has occurred and is continuing. 5. EXPENSES: Borrower will pay to Lender on demand all costs incurred in connection with: (a) the preparation, negotiation, execution, delivery, performance and enforcement of the Loan Documents; (b) collection (including the fees and expenses of all advisors, consultants (including environmental and management consultants) and auditors and the reasonable fees of special legal counsel retained in connection therewith), including deficiency collections; (c) the forwarding to Borrower or any other Person on behalf of Borrower by Lender of the proceeds of any Loan (including by wire transfer); (d) any amendment, extension, modification or waiver of, or consent with respect to any Loan Document or advice in connection with the administration of the Revolving Credit Advances or the rights thereunder; (e) any litigation, contest, dispute, suit, proceeding or action (whether instituted by or between any combination of Lender, Borrower or any other Person or Persons), and an appeal or review thereof, in any way relating to the Collateral, any Loan Document, or any action taken or any other agreements to be executed or delivered in connection therewith, whether as a party, witness or otherwise; and (f) any effort (i) to 26 monitor the Revolving Credit Advances, (ii) to evaluate, observe or assess Borrower or any other Credit Party or the affairs of such Person, and (iii) to verify, protect, evaluate, assess, appraise, collect, sell, liquidate or otherwise dispose of the Collateral, including with respect to all of the foregoing: the reasonable fees of attorneys and the fees, costs and expenses of accountants, environmental advisors, appraisers, investment bankers, management and other consultants, and paralegals; court costs and expenses; photocopying and duplicating expenses; court reporter fees, costs and expenses; long distance telephone charges; air express charges; telegram charges; secretarial overtime charges; and expenses for travel, lodging and food paid or incurred in connection with the performance of such legal or other advisory services. 6. LETTER OF CREDIT FEE: For each day for which Lender maintains Letter of Credit Obligations outstanding, an amount equal to the amount of the Letter of Credit Obligations outstanding on such day, multiplied by 2%, the product of which is then divided by 360. The Letter of Credit Fee incurred for each month is payable at the same time each payment of the Unused Line Fee is due. Notwithstanding the foregoing, any unpaid Letter of Credit Fee is immediately due and payable on the Commitment Maturity Date. 7. FUNDING FEE. If Borrower uses any of the proceeds of a Revolving Credit Advance to fund any portion of the ISP Acquisition as permitted by Section 1.3 of the Agreement, Borrower shall pay Lender a non-refundable funding fee of $150,000 payable on the date of such Advance. 27 SCHEDULE F FINANCIAL COVENANTS 1. FIXED CHARGE COVERAGE RATIO. Parent and its Subsidiaries on a consolidated basis shall maintain for each Fiscal Quarter, commencing with the Fiscal Quarter ending on or about March 31, 2002, a Fixed Charge Coverage Ratio of not less than 2.00:1.00. 2. MINIMUM TANGIBLE NET WORTH. Parent and its Subsidiaries on a consolidated basis shall maintain, as at the end of each Fiscal Quarter, Tangible Net Worth of not less than the amount for such period set forth below: Fiscal Quarter Ending on or about: Minimum Tangible Net Worth ---------------------------------- -------------------------- December 31, 2001 45,600,000 March 31, 2002 105,000,000 June 30, 2002 115,000,000 September 30, 2002 125,000,000 December 31, 2002 135,000,000 March 31, 2003 145,000,000 June 30, 2003 155,000,000 September 30, 2003 165,000,000 December 31, 2003 175,000,000 March 31, 2004 190,000,000 June 30, 2004 205,000,000 September 30, 2004 220,000,000 December 31, 2004 235,000,000 3. CAPITAL EXPENDITURES. Parent and its Subsidiaries on a consolidated basis shall not make aggregate Capital Expenditures in excess of $7,500,000 for the Fiscal Year ending on or about December 31, 2001, $12,000,00 for the Fiscal Year ending on or about December 31, 2002 , $9,000,000 for the Fiscal Year ending on or about December 31, 2003, and $9,000,000 for the Fiscal Year ending on or about December 31, 2004 and each Fiscal Year thereafter. For purposes of this covenant in SCHEDULE F the following terms shall have the meanings set forth below: "EBITDA" shall mean, for any period, the Net Income (Loss) of Parent and its Subsidiaries on a consolidated basis for such period, PLUS interest expense, income tax expense, amortization expense, depreciation expense and extraordinary losses and MINUS extraordinary gains, in each case, of Parent and its Subsidiaries on a consolidated basis for such period determined in 28 accordance with GAAP to the extent included in the determination of such Net Income (Loss). "FIXED CHARGE COVERAGE RATIO" shall mean, for any period, the ratio of the following for Parent and its Subsidiaries on a consolidated basis determined in accordance with GAAP; (a) EBITDA for such period LESS (i) Capital Expenditures for such period which are not financed through the incurrence of any Indebtedness (excluding the Revolving Credit Loan) and (ii) taxes to the extent accrued or otherwise payable with respect to such period to (b) the sum of (i) interest expense paid or accrued in respect of any Indebtedness during such period, PLUS (ii) regularly scheduled payments of principal paid or that were required to be paid on Indebtedness (excluding the Revolving Credit Loan) during such period. "NET INCOME (LOSS)" shall mean with respect to any Person and for any period, the aggregate net income (or loss) after taxes of such Person for such period, determined in accordance with GAAP. "TANGIBLE NET WORTH" shall mean, with respect to any Person at any date, all amounts which, in accordance with GAAP, would be included under stockholders' equity on a consolidated balance sheet of such Person at such date LESS the aggregate of all intangibles in conformity with GAAP (including Intellectual Property, goodwill, organization expenses, treasury stock, all deferred financing and unamortized debt discount expenses, and all current and non-current deferred tax benefits). 29 EXHIBIT A TO ELEVENTH AMENDMENT Disclosure Schedules. -------------------- (See attached.) 30 -----END PRIVACY-ENHANCED MESSAGE-----