-----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, Fymd5eVKk29STrOGikiEBGRJT8rnG5ZcgIn0eDbuwUgLUSkgKHABy+jaG3DcMPln phn3ymaBydHUv+yWmqm8Ng== 0000898432-02-000559.txt : 20020814 0000898432-02-000559.hdr.sgml : 20020814 20020814161456 ACCESSION NUMBER: 0000898432-02-000559 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02736763 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 p10q-2ndqtr_2002.txt JUNE 30, 2002 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 June 30, 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 X No ___ 32,492,490 Number of shares of Common Stock outstanding as of August 9, 2002. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data) JUNE 30, DECEMBER 31, Assets 2002 2001 ------ (UNAUDITED) (AUDITED) ----------- --------- Current assets: Cash and cash equivalents $ 24,447 $ 67,742 Accounts receivable, net of allowances of $29,787 and $47,168 56,980 38,009 Inventories 46,017 31,458 Prepaid expenses and other current assets 4,886 4,156 Deferred income tax assets 43,222 34,485 -------- -------- Total current assets 175,552 175,850 Property, plant and equipment, at cost less accumulated depreciation and amortization 27,608 24,345 Deferred charges and other assets 12,971 8,426 Intangible assets 25,554 8,305 Goodwill 24,626 -- -------- -------- Total assets $266,311 $216,926 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 212 $ 239 Accounts payable 24,211 18,007 Payables due to distribution agreement partners 15,644 32,295 Accrued salaries and employee benefits 3,996 2,859 Accrued expenses and other current liabilities 4,853 4,817 Income taxes payable 34,094 14,766 -------- -------- Total current liabilities 83,010 72,983 Long-term debt, less current portion 964 1,060 Accrued pension liability 331 331 Deferred income tax liabilities, net 3,999 4,129 Commitments and contingencies Shareholders' equity: Common Stock, par value $.01 per share; authorized 90,000,000 shares; issued and outstanding 32,161,303 and 32,035,189 shares 322 320 Additional paid-in capital 114,052 115,610 Retained earnings 63,633 22,493 -------- -------- Total shareholders' equity 178,007 138,423 -------- -------- Total liabilities and shareholders' equity $266,311 $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) SIX MONTHS ENDED THREE MONTHS ENDED ---------------- --------------------- (*RESTATED) (*RESTATED) JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ---- ---- ---- --------- Net sales $ 182,263 $ 55,001 $ 101,755 $ 29,297 Cost of goods sold 96,573 35,452 55,340 18,176 --------- -------- --------- -------- Gross margin 85,690 19,549 46,415 11,121 Operating expenses: Research and development 6,937 3,657 4,063 2,119 Selling, general and administrative 16,363 8,954 8,847 4,759 --------- -------- --------- -------- Total operating expenses 23,300 12,611 12,910 6,878 --------- -------- --------- -------- Operating income 62,390 6,938 33,505 4,243 Settlements 9,051 -- -- -- Other (expense) income (4,380) 364 (223) 45 Interest income (expense) 381 (442) 127 (222) --------- -------- --------- -------- Income before provision for income taxes 67,442 6,860 33,409 4,066 Provision for income taxes 26,302 3,160 13,029 1,862 --------- -------- --------- -------- NET INCOME 41,140 3,700 20,380 2,204 Retained earnings (accumulated deficit): Beginning of period 22,493 (31,429) 43,253 (29,933) --------- -------- --------- -------- End of period $ 63,633 $(27,729) $ 63,633 $(27,729) ========= ======== ========= ======== NET INCOME PER SHARE OF COMMON STOCK: BASIC $ 1.28 $ .12 $ .64 $ .07 ========= ======== ========= ======== DILUTED $ 1.25 $ .12 $ .62 $ .07 ========= ======== ========= ======== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: BASIC 32,069 29,725 32,089 29,790 ========= ======== ========= ======== DILUTED 32,869 31,442 32,898 31,637 ========= ======== ========= ======== * Restated as described in Notes to Consolidated Financial Statements. The accompanying notes are an integral part of these consolidated financial statements.
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PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) SIX MONTHS ENDED (*RESTATED) JUNE 30, JUNE 30, 2002 2001 ---- ------ Cash flows from operating activities: Net income $ 41,140 $ 3,700 Adjustments to reconcile net income to net cash used in operating activities: Deferred income taxes (8,867) 1,444 Depreciation and amortization 2,358 1,625 Write-off of inventories 2,742 466 Allowances against accounts receivable (17,381) 1,819 Settlements (9,651) -- Tax effect from exercise of stock options (2,254) 1,716 Other (23) 149 Changes in assets and liabilities: Increase in accounts receivable (1,331) (9,166) Increase in inventories (17,233) (3,101) Increase in prepaid expenses and other assets (7,298) (1,439) Increase (decrease) in accounts payable 6,105 (2,027) Decrease in payables due to distribution agreement partners (16,651) (78) Increase (decrease) in accrued expenses and other liabilities 1,250 (151) Increase in income taxes payable 19,328 101 -------- ------- Net cash used in operating activities (7,766) (4,942) Cash flows from investing activities: Capital expenditures (3,551) (1,569) Acquisition of FineTech (32,581) -- Proceeds from sale of fixed assets 28 17 -------- ------- Net cash used in investing activities (36,104) (1,552) Cash flows from financing activities: Proceeds from issuances of Common Stock 698 929 Net proceeds from revolving credit line -- 5,712 Principal payments under long-term debt and other borrowings (123) (134) -------- ------- Net cash provided by financing activities 575 6,507 Net (decrease) increase in cash and cash equivalents (43,295) 13 Cash and cash equivalents at beginning of period 67,742 222 -------- ------- Cash and cash equivalents at end of period $ 24,447 $ 235 ======== ======= Supplemental disclosure of cash flow information Cash paid during the year for: Taxes $ 18,095 $ 182 ======== ======= Interest $ 76 $ 447 ======== ======= * Restated as described in 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 JUNE 30, 2002 (UNAUDITED) Pharmaceutical Resources, Inc. (the "Company" or "PRX") 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. BASIS OF PREPARATION: The accompanying consolidated financial statements at June 30, 2002 and for the six-month and three-month periods ended June 30, 2002 and 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. On April 17, 2002, the Company purchased a portion of International Specialty Products' ("ISP's") fine chemical business, FineTech Ltd. ("FineTech") based in Haifa, Israel. The acquisition was accounted for as a purchase under Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and the consolidated financial statements include the operating results from the date of acquisition. Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying consolidated 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. Results of operations for interim periods are not necessarily indicative of those to be achieved for a full fiscal year. RESTATEMENT OF PRIOR YEAR RESULTS Certain items in the consolidated financial statements for the six and three-month periods ended June 30, 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 (the "Genpharm 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 ("EITF") Issue 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 Issue 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 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 No. 109, "Accounting for Income Taxes" ("SFAS 109"). The aggregate of $10,833,000 assigned to the Genpharm Distribution Agreement is included in intangible assets net of amortization that began in the third calendar quarter of 1998. The total value is being amortized on a straight-line basis over fifteen years and included as a non-cash charge in selling, general and administrative expenses. The impact of the restatement for the six and three-month periods ended June 30, 2001 is as follows: --5-- PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) Six Months Ended Three Months Ended CONSOLIDATED STATEMENTS OF June 30, 2001 June 30, 2001 ---------------------------------- ---------------------------------- OPERATIONS AND ACCUMULATED DEFICIT As Reported Restated As Reported Restated ---------------- ---------------- ---------------- --------------- (In Thousands) Selling, general and administrative $8,592 $8,954 $4,578 $4,759 Net income $4,062 $3,700 $2,385 $2,204 Accumulated deficit ($25,561) ($27,729) ($25,561) ($27,729) Net income per share of common stock: Basic $0.14 $0.12 $0.08 $0.07 Diluted $0.13 $0.12 $0.08 $0.07
ACCOUNTS RECEIVABLE: JUNE 30, DECEMBER 31, 2002 2001 ---- ---- (IN THOUSANDS) Accounts receivable $86,767 $85,177 ------ ------ Allowances: Doubtful accounts 856 998 Returns and allowances 11,726 4,847 Price adjustments 17,205 41,323 ------ ------ 29,787 47,168 ------ ------ Accounts receivable, net of allowances $56,980 $38,009 ====== ====== The accounts receivable amounts at June 30, 2002 and December 31, 2001 are net of provisions for customer rebates of $13,259,000 and $14,081,000, and chargebacks of $104,218,000 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. The increase in chargebacks is due to lower contract pricing on fluoxetine and a larger volume of sales through the Company's wholesale customers, primarily due to new product awards and trade show promotions. 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 customer's inventory 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. The Company's exclusivity period for fluoxetine, the generic version of Eli Lilly and Company's Prozac(R), 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 an 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 sales price the Company charged --6-- PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) during the exclusivity period. Through June 30, 2002, the Company issued price protection credits of approximately $26,200,000 and adjusted the reserve by approximately $5,800,000, which due to a profit split with a strategic partner had a favorable affect of approximately $1,160,000 on the Company's gross margins in the quarter, for price protection on the 40 mg it believes is no longer necessary. The Company expects that the remaining price protection reserve at June 30, 2002 of approximately $2,400,000 will be sufficient and fully utilized. Accordingly, sales and gross margin generated by fluoxetine in fiscal year 2002 have been and will continue to be adversely affected in future periods. The affect of gross margin declines from lower pricing on the 40 mg capsule have been offset, however, by an increase in the Company's profit sharing percentage. Although there can be no assurance, the Company expects to continue to introduce new products throughout fiscal year 2002 and to increase sales of certain existing products to offset any loss of sales and gross margin on its fluoxetine products. The Company's exclusivity period for megestrol acetate oral suspension, the generic version of Bristol Myers Squibb's ("BMS") Megace(R) Oral Suspension, ended in mid-January 2002. One generic competitor was granted U.S. Food and Drug Administration ("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 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 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 for the remainder of fiscal year 2002, despite potential competition. Based on these factors and the Company not experiencing any significant price competition to date on megestrol acetate oral suspension, the Company did not record a price protection reserve for such product as of June 30, 2002, but will continue to evaluate the effect of potential competition and will record a price protection reserve when it deems necessary. INVENTORIES: JUNE 30, DECEMBER 31, 2002 2002 ---- ---- (IN THOUSANDS) Raw materials and supplies $17,256 $11,574 Work in process and finished goods 28,761 19,884 ------ ------ $46,017 $31,458 ====== ====== DEFERRED CHARGES AND OTHER ASSETS: 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 deferred charges and other assets on the consolidated balance sheets (see "-Legal Proceedings"). In April 2002, the Company entered into an agreement (the "Genpharm 11 Product Agreement") to expand its strategic product partnership with Merck KGaA. Under the terms of the Genpharm 11 Product 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 --7-- PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) Company and Genpharm (see "-Distribution Agreements-Genpharm, Inc."). Pursuant to the Genpharm 11 Product Agreement, Genpharm has agreed to develop the products, submit all corresponding ANDAs to the FDA and subsequently manufacture the products. Par has agreed to 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 Genpharm 11 Product Agreement, the Company paid Genpharm a non-refundable fee of $2,000,000 in the second quarter of 2002, which is included in deferred charges and other assets on the consolidated balance sheets, for two of the products, loratadine 10 mg tablets and mirtazapine tablets, which are tentatively approved and expected to be marketed in fiscal years 2003 to 2004. In addition, the Company will be required to pay an additional non-refundable fee of up to $414,000 based upon FDA acceptance of filings for six of the nine remaining products. INTANGIBLE ASSETS: On March 5, 2002 the Company acquired the United States rights to five products from BMS. Based on the Company's market research, these products, which include the antihypertensives Capoten(R) and Capozide(R), the cholesterol-lowering medications Questran(R) and Questran Light(R), and Sumycin(R), an antibiotic, are expected to generate annual net sales of approximately $10,000,000. 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 settlements and included in settlement income in the first quarter of 2002. The value assigned to the agreement is included in intangible assets and is being amortized on a straight-line basis over seven years as a non-cash charge included in cost of goods sold. ACQUISITION OF FINETECH: On March 15, 2002, the Company announced the termination of negotiations with ISP related to its purchase of the entire 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 after 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 $1,278,000 in related acquisition costs, both of which were included in other expense in the first quarter of 2002. The Company subsequently purchased a portion of ISP's fine chemical business, FineTech, based in Haifa, Israel, from ISP in April 2002 for approximately $32,000,000 and $1,200,000 in related acquisition costs financed by its cash-on-hand. The Company has acquired the physical facilities, the intellectual property and patents of FineTech and has retained all FineTech employees. FineTech specializes in the design and manufacture of proprietary synthetic chemical processes used in the production of complex organic compounds for the pharmaceutical industry. 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 had revenues of approximately $6,000,000 in 2001; however, the purchase is not expected to have a material effect on the Company's earnings in fiscal year 2002. The Company expects to transfer a portion of FineTech's personnel and technological resources to a laboratory facility in the northeastern United States. 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 purchase price for FineTech has been allocated to assets and liabilities based on management's estimates of fair value through a third party valuation firm. The following table sets forth the allocation of the purchase price (in thousands): --8-- PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) Current assets $971 Property, plant and equipment 1,045 Intellectual property 6,580 Goodwill 24,626 ------ Total assets acquired 33,222 Current liabilities 22 -- Total liabilities assumed 22 -- Net assets acquired $33,200 ====== In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill will not be amortized, however will be tested for impairment using a fair value approach at least annually. The intellectual property, included in intangible assets on the consolidated balance sheets, consists of trademarks, patents, product and core technology, and research contracts. The values of these intangible assets are being amortized on a straight-line basis over estimated useful lives of 6 to 10 years. CHANGES IN SHAREHOLDERS' EQUITY: Changes in the Company's Common Stock and Additional Paid-in Capital accounts during the six months ended June 30, 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 122,689 2,000 594,000 Compensatory arrangements 3,425 -- (2,152,000) ---------- -------- ------------- Balance, June 30, 2002 32,161,303 $322,000 $ 114,052,000 ========== ======== ============= RESEARCH AND DEVELOPMENT AGREEMENTS: GENERICS (UK) LTD.: 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 approximately $340,000 for the first six months of fiscal year 2002, fulfilling their funding requirements through June 30, 2002. Under the Development Agreement, Generics is not required to fund more than $1,000,000 in any one calendar year. RHODES TECHNOLOGIES, INC.: 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 --9-- PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) responsible for marketing, sales and distribution. The companies will share equally in expenses and profits. SVC Pharma has identified several candidates for drug development, the first of which has the potential to be marketed by the Company in either fiscal year 2003 or 2004. The Company expects to begin funding the first project pursuant to the agreement in the latter part of this year. PRODUCT DEVELOPMENT AGREEMENTS: NORTEC DEVELOPMENT ASSOCIATES, INC.: In May 2002, the Company entered into an agreement with Nortec Development Associates, Inc. (a Glatt company) ("Nortec") to develop an extended release generic version of a currently marketed branded extended release pharmaceutical product, which according to the Company's market research, had sales of approximately $300 million during the last twelve months. Under the terms of the agreement, the Company obtained an exclusive license to utilize Glatt's CPS(TM) Technology in its ANDA submission for the potential product covered in the agreement. If formulation and development are successful, the ANDA for the drug will be submitted to the FDA in 2003 and will include a Paragraph IV certification. CPS(TM) Technology is Glatt's new proprietary drug delivery system for the development and production of drug pellets with controlled release properties. The Company and Nortec have agreed to collaborate on the formulation, while Par will serve as the exclusive marketer and distributor of the product. As part of the agreement, the product selection criteria took into consideration Nortec's ability to develop difficult extended release formulations and Par's experience in patent challenge opportunities. Glatt is considered by many in the pharmaceutical industry to be a leader in fluid bed technology for the pharmaceutical and related industries. A significant percentage of currently marketed generic and branded controlled release products utilize Glatt's technology. In June 2002, the Company expanded its collaboration with Nortec to develop an extended release generic version of another currently marketed, branded extended release pharmaceutical product, which according to the Company's market research, had sales of approximately $150 million during the last twelve months. Under the terms of the new agreement, Par has also obtained an exclusive license to utilize Nortec/Glatt's CPS(TM) Technology in its ANDA submission for the potential product covered in the agreement. If successful in development, the Company expects to submit an ANDA to the FDA for the product in 2003. The Company and Nortec have agreed to collaborate on the formulation, while Par will serve as the exclusive marketer and distributor of the product. Pursuant to these agreements with Nortec, the Company made non-refundable payments totaling $625,000, which were charged to research and development expenses in the second quarter of 2002. In addition, the Company agreed to pay a total of $1,175,000 in various installments related to the achievement of certain milestones in the development of the two potential products and $600,000 for each product on the day of the first commercial sale. DISTRIBUTION AND SUPPLY AGREEMENTS: GENPHARM, INC. Pursuant to the Genpharm Distribution Agreement, the Company has the exclusive distribution rights within the United States and certain other United States territories to approximately 40 generic pharmaceutical products. To date, 18 of such products have obtained FDA approval and 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. Currently, there are seven 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 according to the Company's market research, had sales of approximately $110 million in 2001. In June 2002 the Company began shipping flecainide acetate, which is indicated for the prevention of paroxysmal supraventricular tochycardias (PSUT) and documented ventricular arrhythmia. Flecainide acetate is covered under the Genpharm Distribution --10-- PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) Agreement. The FDA awarded generic marketing exclusivity for flecainide acetate to Par through October 2002. Par's launch of flecainide acetate is under license from 3M. Under terms of the agreement, Par will pay 3M a licensing fee based on a percentage of Par's flecainide sales. The parties have also agreed to dismiss all outstanding claims in settling patent litigation between them and counter claims between the parties, thereby allowing Par to ship flecainide without risk of any future litigation from 3M. 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. To date, two of such products have obtained FDA approval and are currently being marketed by Par. The remaining products are either being developed or have been identified for development. 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 made by the Company of products included in the Genpharm Additional Product Agreement. 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, three 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. To date, three of such products have obtained FDA approval, two of which are currently being marketed by Par. The products covered by the Reddy Development and Supply Agreement are in addition to four 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. 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 June 30, 2002 and December 31, 2001, the Company had payables due to all distribution agreement partners of approximately $15,644,000 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 --11-- PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) 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, PRX and certain subsidiaries, other than real property, and is guaranteed by PRX and certain of its subsidiaries. In connection with such facility, Par, PRX 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 June 30, 2002, the borrowing base was approximately $27,000,000. 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 June 30, 2002 and December 31, 2001, the Company had deferred income tax assets of $43,222,000 and $34,485,000, respectively, consisting of temporary differences, primarily related to accounts receivable reserves, and net deferred income tax liabilities of $3,999,000 and $4,129,000, respectively, primarily related to the Genpharm Distribution Agreement. 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: SIX MONTHS ENDED THREE MONTHS ENDED ---------------- ------------------ (*RESTATED) (*RESTATED) JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ---- ---- ---- ---- (In Thousands, Except Per Share Amounts) NET INCOME $41,140 $ 3,700 $20,380 $ 2,204 BASIC: Weighted average number of common shares outstanding 32,069 29,725 32,089 29,790 NET INCOME PER SHARE OF COMMON STOCK $ 1.28 $ .12 $ .64 $ .07 ======= ======= ======= ======= ASSUMING DILUTION: Weighted average number of common shares outstanding 32,069 29,725 32,089 29,790 Effect of dilutive options 800 1,717 809 1,847 ------- ------- ------- ------- Weighted average number of common and common equivalent shares outstanding 32,869 31,442 32,898 31,637 NET INCOME PER SHARE OF COMMON STOCK $ 1.25 $ .12 $ .62 $ .07 ======= ======= ======= =======
* Restated as described in Notes to Consolidated Financial Statements. --12-- PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) The Company had outstanding options of 2,361,890 and 2,163,539 at the end of the six-month and three-month periods ended June 30, 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 June 30, 2002 and 2001, all incremental shares from assumed conversions of the Company's outstanding options and warrants were included in the computation of diluted earnings per share in both periods. NEW ACCOUNTING STANDARDS: In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which is effective for the Company as of January 1, 2003. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Company is evaluating the impact of the adoption of SFAS 146, but does not believe it will have a material impact on the Company's financial position, result of operations and cash flows. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: 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 to prevent the Company from marketing its generic product prior to the expiration of their patents. 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/or not infringed by Par's products. Par also seeks a declaratory judgment that the extension of the term of one of the patents is invalid. All parties are seeking to recover their respective attorneys' fees. On February 25, 2002, the lawsuit brought in the District of Delaware was dismissed pursuant to a stipulation of the parties. The case in the District of New Jersey is currently in fact discovery. Par intends to vigorously defend the lawsuit. At this time, it is not possible for the Company to predict the outcome of the plaintiffs' prayer for injunctive relief or their claim for attorneys' fees. 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 --13-- PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) intends to vigorously litigate these cases. While the outcome of litigation is never certain, Par believes that it will prevail in these litigations. 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 $2,437,000 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 June 30, 2002 the Company had invested approximately $438,000 of its planned investment. The Company has the exclusive right to market to the pharmaceutical industry certain laboratory software currently in development by HighRapids. PRX'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 its interest in HighRapids. SUBSEQUENT EVENTS: In July 2002, the Company entered into an agreement with Three Rivers Pharmaceuticals ("Three Rivers") to market and distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's Rebetol(R), which according to the Company's market research had U.S. sales of approximately $250 million for the first six months of 2002. Ribavirin, a synthetic nucleoside analogue with antiviral activity, is indicated for the treatment of hepatitis C, a chronic condition suffered by approximately 4 million Americans. Three Rivers filed an ANDA with a Paragraph IV certification with the FDA in August 2001 and is currently in litigation with the patent holders. Under the terms of the agreement, Three Rivers will supply the product to Par and will be responsible for managing the regulatory process and ongoing patent litigation. Par will have the exclusive right to sell the product in non-hospital markets upon FDA approval and final marketing clearance. According to current FDA practice, Par believes it may be entitled to co-exclusively market the generic product ribavirin for up to 180 days, during which time only one other company could be approved to market another generic version of the drug. If successful, Par could introduce ribavirin in the 2003 to 2004 timeframe. --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 experienced significant sales, gross margin and net income growth in both the six and three-month periods ended June 30, 2002 when compared to the corresponding periods of the prior year. Net income of $41,140,000 for the six-month period of 2002 increased $37,440,000 from $3,700,000 for the same period of 2001. Revenue increases of $127,262,000, or 231%, from fiscal year 2001 led to the significant improvement, reflecting the continuing success of new products, particularly megestrol acetate oral suspension (Megace(R) Oral Suspension) and fluoxetine (Prozac(R)) 40 mg capsules, introduced since July 2001. Net sales were $182,263,000 in the most recent six-month period compared to net sales of $55,001,000 for the same period of last year. Improved gross margins followed the sales growth, increasing to $85,690,000, or 47% of net sales, in fiscal year 2002, from $19,549,000, or 36% of net sales, in the same period of the prior year. Results for the six months ended June 30, 2002 included increased spending of $3,280,000 on research and development and $7,409,000 on selling, general and administrative costs, 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 $4,278,000 in connection with its termination of the acquisition of the entire ISP FineTech fine chemical business. The Company subsequently purchased a portion of ISP's fine chemical business, FineTech based in Haifa, Israel, from ISP in April 2002. FineTech had revenues of approximately $6,000,000 in 2001 however; this purchase is not expected to have a material effect on the Company's earnings in fiscal year 2002. The Company's net income for the second quarter 2002 increased $18,176,000 to $20,380,000 compared to $2,204,000 in the second quarter of the prior year, reflecting the increased sales and gross margin growth described above. Second quarter 2002 sales and gross margins of $101,755,000 and $46,415,000 (46% of net sales), respectively, improved significantly over prior year second quarter sales and gross margins of $29,297,000 and 11,121,000 (38% of net sales). Research and development expenses of $4,063,000 for the most recent three-month period were 92% higher than $2,119,000 incurred in the same quarter of 2001. Selling, general and administrative costs of $8,847,000 in the second quarter 2002 increased $4,088,000 from the same quarter of the prior year, primarily due to increased legal, shipping, marketing and personnel costs. 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 --15-- 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 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 its internal 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 Net sales of $182,263,000 for the six months ended June 30, 2002 increased $127,262,000, or 231%, from net sales of $55,001,000 for the six months ended June 30, 2001. The sales increase was primarily due to new products introduced since July of 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 six months of 2002 were approximately $57,052,000 and $43,715,000, respectively. Net sales of distributed products, which consist of products manufactured under contract and licensed products, were approximately 58% and 56%, respectively, of the Company's net sales in the six-month periods ended June 30, 2002 and 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. Net sales in the second quarter of 2002 increased $72,458,000, or 247%, from net sales of $29,297,000 for the corresponding quarter of 2001, primarily due to sales of new products. The sales increase included net sales of fluoxetine and megestrol acetate oral suspension of approximately $31,182,000 and $24,314,000, respectively. Net sales of distributed products were approximately 58% of the Company's total net sales in the most recent quarter compared to approximately 54% of the total for the same quarter of last year. 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 charged during the exclusivity period. Accordingly, the Company's sales and --16-- gross margins generated by fluoxetine in fiscal year 2002 have been and will continue to be adversely affected in future periods. The Company's exclusivity period for megestrol acetate oral suspension ended in mid-January 2002. One 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 for the remainder of 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 June 30, 2002, but will continue to evaluate the effect of potential competition and will record a price protection reserve when it deems necessary. 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 gross margin for the six-month period ended June 30, 2002 of $85,690,000 (47% of net sales) increased $66,141,000 from $19,549,000 (36% 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 six-month period ended June 30, 2002, megestrol acetate oral suspension contributed approximately $35,860,000 to the margin improvement while fluoxetine, particularly the 40 mg strength, which is subject to profit sharing agreements with Reddy and Genpharm, contributed approximately $22,247,000 to the margin improvement. As discussed above, additional manufacturers of generic drugs 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 10 mg and 20 mg strengths. As a result, the Company's gross margin from fluoxetine is expected to decline in future periods. The affects of gross margin declines from lower pricing on the 40 mg capsule have been offset, however, by an increase in the Company's profit sharing percentage under an agreement with Reddy. The Company's gross margin for megestrol acetate oral suspension could also decline if additional manufacturers introduce and market comparable generic products. The gross margin for the second quarter of 2002 was $46,415,000 (46% of net sales) compared to $11,121,000 (38% of net sales) in the corresponding quarter of the prior year. Additional gross margin contributions from higher margin new products, particularly megestrol acetate oral suspension and fluoxetine which contributed approximately $19,772,000 and $12,049,000, respectively, generated the higher margins in the second quarter of 2002. Inventory write-offs amounted to $2,742,000 and $977,000 for the six-month and three-month periods ended June 30, 2002, respectively, compared to $466,000 and $181,000 in the corresponding periods of the prior year. The increases in both periods were primarily attributable to increased production to meet higher sales and inventory levels. Part of the increase in the six-month period was also due to both 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 --17-- 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 Research and development expenses of $6,937,000 for the six months ended June 30, 2002 increased $3,280,000, or 90%, from $3,657,000 for the corresponding period of the prior year. The increased costs were primarily attributable to additional payments of $2,631,000 for development work performed for the Company by unaffiliated companies, particularly Elan Transdermal Technologies, Inc. ("Elan"), related to the development of a clonidine transdermal patch and other products and, to a lesser extent, higher costs for personnel and the acquisition of FineTech. 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 six-month period were $610,000, net of Generics funding, compared to expenses of $576,000 for the comparable period of last year. Annual research and development costs in fiscal year 2002 are expected to exceed the total for fiscal year 2001 by approximately 44%. The Company purchased FineTech, based in Haifa, Israel, from ISP in April 2002. FineTech specializes in the design and manufacture of proprietary synthetic chemical processes used in the production of complex organic compounds for the pharmaceutical industry. FineTech also manufactures complex synthetic active pharmaceutical ingredients for companies in the branded and generic pharmaceutical industries at its manufacturing facility in Haifa, Israel. The Company expects to transfer a portion of FineTech's personnel and technological resources to a laboratory facility in the northeastern United States. FineTech will be operated as an independent, wholly owned subsidiary of PRX and will provide immediate chemical synthesis capabilities and strategic opportunities to the Company and other customers (see "Notes to Consolidated Financial Statements-Acquisition of FineTech"). 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 acetate and latanoprost, resulted from the Company's relationship with FineTech. In addition, the Company and FineTech are currently collaborating on two additional products of which ANDAs have already been filed with the FDA . For the three-month period ended June 30, 2002, research and development expenses of $4,063,000 increased $1,944,000 from $2,119,000 for same three-month period of the prior year primarily due to increased outside development costs for Elan and Nortec. Research and development expenses at IPR for the most recent three months were $287,000, net of Generics funding, compared to expenses of $291,000 in the same period of the prior year. The Company currently has seven 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 three additional products during the remainder of fiscal year 2002. None of the potential products described above are subject to any profit sharing arrangements. Under the Genpharm 11 Product Agreement, Genpharm will 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. Currently there are two ANDA's for potential products covered under the Genpharm 11 Product Agreement, both of which have been tentatively approved, pending with, and awaiting approval from, the FDA (see "Notes to Consolidated Financial Statements-Deferred Charges and Other Assets"). 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 seven ANDAs for potential products (two tentatively approved) that are covered by the Genpharm Distribution Agreement pending with, and awaiting approval from, the FDA. To date, the Company is marketing 18 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 and the Company began marketing the product in June 2002 (see "Notes to Consolidated Financial Statements-Distribution and Supply Agreements-Genpharm, Inc."). --18-- Genpharm and the Company share the costs of developing the products covered under the Genpharm Additional Product Agreement. To date, the Company is marketing two products under the Genpharm Additional Product Agreement (see "Notes to Consolidated Financial Statements-Distribution and Supply Agreements-Genpharm, Inc."). SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative costs of $16,363,000 for the six months ended June 30, 2002 increased $7,409,000 from $8,954,000 in the corresponding period ended June 30, 2001, 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 six-month period was primarily attributable to additional legal fees, marketing programs and shipping costs associated with new product introductions and higher sales volumes, 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"). For the second quarter of 2002, selling, general and administrative costs of $8,847,000 (9% of net sales) increased $4,088,000 from $4,759,000 (16% of net sales) for the corresponding quarter of the prior year primarily due to higher legal, shipping, marketing and personnel expenses. 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. 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 settlements and included in settlement income in the first quarter of 2002. OTHER EXPENSE/INCOME Other expenses were $4,380,000 and $223,000 for the six-month and three-month periods ended June 30, 2002, respectively, compared to other income of $364,000 and $45,000 in the corresponding periods of 2001. Other expenses in the current six-month period included approximately $4,278,000 incurred in connection with the acquisition of the entire ISP FineTech fine chemical business in March 2002. Other expenses recorded in the second quarter of 2002 are related to the withdrawal of the Company's universal shelf registration statement during the quarter. Included in other income in fiscal year 2001 was a payment from 3M to the Company releasing the parties from a prior product agreement recorded in the first quarter of 2001. INCOME TAXES The Company recorded provisions for income taxes of $26,302,000 and $3,160,000, respectively, and $13,029,000 and $1,862,000, respectively, for the six-month and three-month periods ended June 30, 2002 and 2001 based on applicable federal and state tax rates (see "Notes to Consolidated Financial Statements-Income Taxes"). CRITICAL ACCOUNTING POLICIES ESTIMATES AND RISKS The Company's critical accounting policies are set forth in it's Annual Report on Form 10-K for the year ended December 31, 2001. There has been no change, update or revision to the Company's critical accounting policies subsequent to the filing of the Company's Form 10-K for the year ended December 31, 2001. --19-- FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents of $24,447,000 at June 30, 2002 decreased $43,295,000 from $67,742,000 at December 31, 2001 due primarily to the Company's use of funds to finance the acquisition of FineTech and, to a lesser extent, to fund operations and capital projects. Working capital, which includes cash and cash equivalents decreased to $92,542,000 at June 30, 2002 from $102,867,000 at December 31, 2001. The working capital ratio was 2.11x at June 30, 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 $16,000,000 for fiscal year 2002. The Company made non-refundable payments totaling $625,000 pursuant to its agreements with Nortec entered into in the second quarter of 2002, which were charged to research and development expenses during the period. In addition, the Company agreed to pay a total of $1,175,000 in various installments related to the achievement of certain milestones in the development of the two potential products and $600,000 for each product on the day of the first commercial sale (see-"Notes to Consolidated Financial Statements-Product Development Agreements-Nortec Development Associates, Inc."). On March 15, 2002, the Company announced the termination of negotiations with ISP related to the purchase of the entire 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 $1,278,000 in related acquisition costs, both of which were included in other expense in the first quarter of 2002. The Company subsequently purchased FineTech, a portion of ISP's fine chemical business based in Haifa, Israel, from ISP in April 2002 for approximately $32,000,000 and $1,200,000 in related acquisition costs financed by its cash-on-hand (see-"Notes to Consolidated Financial Statements-Acquisition of FineTech"). As of June 30, 2002 the Company had payables due to distribution agreement partners of $15,644,000, 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 third 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 on the date of the commencement of the development program for each product. The Company paid Elan $750,000 for products covered under this agreement in the first six months of 2002. In December 2001, the Company committed to making an equity investment of up to $2,437,000 over a period of time in HighRapids. HighRapids will utilize the Company's cash infusion for working capital and operating expenses. Through June 30, 2002, the Company had invested approximately $438,000 of its planned investment (see-"Notes to Consolidated Financial Statements-Commitments, Contingencies and Other Matters-Other Matters"). 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. --20-- 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 $833,000 in fiscal year 2002. In addition, Par will pay Elan $1,000,000 upon FDA approval of the product and a royalty on all sales of the product. 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 $340,000 for the first six months of fiscal year 2002, fulfilling their funding requirements through June 30, 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 it will continue to introduce new products during fiscal year 2002 and increase 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 June 30, 2002, the Company's total outstanding long-term debt, including the current portion, amounted to $1,176,000. 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, PRX and certain subsidiaries, other than real property, and is guaranteed by PRX and certain of its subsidiaries. In connection with such facility, Par, PRX 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 June 30, 2002, the borrowing base was approximately $27,000,000. To date, no debt is outstanding under the Loan Agreement. SUBSEQUENT EVENTS: In July 2002, the Company entered into an agreement with Three Rivers Pharmaceuticals ("Three Rivers") to market and distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's Rebetol(R), which according to the Company's market research had U.S. sales of approximately $250 million for the first six months of 2002. Ribavirin, a synthetic nucleoside analogue with antiviral activity, is indicated for the treatment of hepatitis C, a chronic condition suffered by approximately 4 million Americans. Three Rivers filed an ANDA with a Paragraph IV certification with the FDA in August 2001 and --21-- is currently in litigation with the patent holders. Under the terms of the agreement, Three Rivers will supply the product to Par and will be responsible for managing the regulatory process and ongoing patent litigation. Par will have the exclusive right to sell the product in non-hospital markets upon FDA approval and final marketing clearance. According to current FDA practice, Par believes it may be entitled to co-exclusively market the generic product ribavirin for up to 180 days, during which time only one other company could be approved to market another generic version of the drug. If successful, Par could introduce ribavirin in the 2003 to 2004 timeframe. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. --22-- 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 to prevent the Company from marketing its generic product prior to the expiration of their patents. 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/or not infringed by Par's products. Par also seeks a declaratory judgment that the extension of the term of one of the patents is invalid. All parties are seeking to recover their respective attorneys' fees. On February 25, 2002, the lawsuit brought in the District of Delaware was dismissed pursuant to a stipulation of the parties. The case in the District of New Jersey is currently in fact discovery. Par intends to vigorously defend the lawsuit. At this time, it is not possible for the Company to predict the outcome of the plaintiffs' prayer for injunctive relief or their claim for attorneys' fees. 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 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. ITEM 5. OTHER INFORMATION. In June 2002 the Company's Board of Directors ("Board") determined it was in the best interests of the Company and its shareholders to request the withdrawal of PRX universal shelf registration statement. Since utilization of the shelf registration had become unlikely, the Board decided to recommend its withdrawal. Furthermore, PRX believes it now has adequate cash resources available for general corporate and other purposes. The $110 million registration statement on Form S-3 was originally filed with the Securities and Exchange Commission ("SEC") in December 2002. The Company filed its request for withdrawal on Form RW with the SEC on June 20, 2002. --23-- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 11 Product Development Agreement, effective April 2002, between the Company and Genpharm, Inc. * SVC Pharma LP Limited Partnership Agreement dated April 2002, among the Company, UDF LP, a Delaware limited partnership, and the other parties named therein. Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Certain portions of this exhibit have been omitted and have been filed with the SEC pursuant to a request for confidential treatment thereof. (b) Reports on Form 8-K: On May 2, 2002, May 7, 2002 and May 9, 2002 the Company filed a Current Report on Form 8-K. --24-- 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) August 14, 2002 /s/ Kenneth I. Sawyer ------------------------------------------ Kenneth I. Sawyer CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS (Principal Executive Officer) August 14, 2002 /s/ Dennis J. O'Connor ------------------------------------------ Dennis J. O'Connor VICE PRESIDENT - CHIEF FINANCIAL OFFICER AND SECRETARY (Principal Accounting and Financial Officer) --25-- EXHIBIT INDEX Exhibit Number Description Page Number - ------- ----------- ----------- 10.36 11 Product Development Agreement, effective April 2002, between the Company and Genpharm, Inc. * 10.37 SVC Pharma LP Limited Partnership Agreement, dated April 2002, among the Company, UDF LP., a Delaware limited partnership, and the other parties named therein. 99.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Certain portions of this exhibit have been omitted and have been filed with the SEC pursuant to a request for confidential treatment thereof. --26-- EX-10 3 pr_prodevel-agrmt.txt EXHIBIT 10.36 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION March 25, 2002 Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, NY 10977 USA 11 PRODUCT DEVELOPMENT AGREEMENT -------------------------------- Genpharm Inc. ("GENPHARM") wishes to expand its business relationship with Pharmaceutical Resources, Inc. ("PRI") to include the development, supply and distribution in the Territory (as defined below) of generic pharmaceutical products (identified below) not currently covered by existing business relationships between us, upon the basic business terms of this letter agreement (the "LETTER AGREEMENT"), as follows: 1. The molecules which are to be the subject matter of this expanded relationship are as follows (each, a "PRODUCT" and collectively, the "PRODUCTS"): *** tablets 10 mg *** tabs 5, 10, 20, 40 mg *** tabs, 5 mg/6.25 mg, 10 mg/12.5 mg, 20 mg/12.5 mg and 20 mg/25 mg *** XR 500 mg *** tabs 15, 30, 45 mg *** tabs .25, .50, 1, 2, 3, 4 mg *** tabs 25, 50 mg *** chewable tabs 5, 25 mg *** tabs 125, 250, 500 mg *** tabs 250 mg *** capsules 20, 40 mg 2. Genpharm (directly, through its Affiliates or third parties) will be responsible for the development of the Products, for applying for an FDA Product approval to market the Products in the Territory (the ANDA for such Products to be registered in Genpharm's name or in the name of one of its Affiliates) and to supply the Products to PRI or its affiliates for commercialization in the Territory. 3 Genpharm reserves the right to manufacture the Products, but PRI and Genpharm will discuss, in good faith, opportunities to maximize Gross Profit through the technical transferring of manufacturing and/or packaging to PRI and/or by allowing PRI to suggest alternative raw material sources. Both parties must agree with any shifting of manufacturing and/or packaging to PRI as well as with any raw material suppliers suggested by PRI. The costs of conversion will be funded *** % by PRI and *** % by Genpharm. 4. The obligations of Genpharm to develop, manufacture and supply the Products to PRI and the obligations of PRI to commercialize the Products in the Territory will be upon the terms set forth in Schedules "A" to "L" annexed hereto. Terms and phrases used in this Letter Agreement or the Schedules hereto and not otherwise defined shall have their respective meanings set forth in Schedule "M" hereto. 5. Subject to adjustment pursuant to Paragraph 8 and 10 below, Gross Profits will be shared *** % to PRI and *** % to Genpharm. 6. PRI shall pay to Genpharm a non-refundable fee of $*** U.S. in respect of *** Tablets 10 mg and *** Tablets 15, 30 and 45 mg (collectively the "APPROVED PRODUCTS" and individually an "APPROVED PRODUCT"). PRI shall pay to Genpharm an additional non-refundable fee of $*** U.S. upon the FDA accepting for filing Genpharm's (and/or its Affiliates') ANDA's submissions in respect of 6 of the 9 remaining Products contemplated by this Agreement; provided, however, that if Genpharm (and/or its Affiliates) have not had its (their) ANDA submissions accepted for filing by the FDA in respect of 6 Products (other than Approved Products) prior to April 1, 2004 then the additional non-refundable fee of $*** U.S. herein contemplated shall be paid to Genpharm at the rate of $*** U.S. upon acceptance for filing by the FDA of an ANDA submission made by Genpharm (or its Affiliates) in respect of a Product (other than an Approved Product), the portions of the additional non-refundable fee accruing in respect of Products whose ANDA submissions have been accepted for filing by the FDA prior to April 1, 2004 to be paid on April 1, 2004 and the remaining instalments of the additional non-refundable fee to be paid as an ANDA submission for a Product is accepted for filing by the FDA (provided that the aggregate instalments of the additional non-refundable fee paid to Genpharm shall not exceed $*** U.S.). In the event that third party agents are used to develop a Product, PRI will also pay to Genpharm *** % of the associated research and development costs incurred to such third party in accordance with the relevant development agreement. 7. Subject to the final sentence of this Paragraph 7, PRI will be responsible for *** % of the costs of development raw material, as well as *** % of the costs of producing the bio-batches and conducting the applicable bio-studies and *** % of the costs of producing the necessary validation, confirmation and exhibition batches of each Product (irrespective of whether any of such costs were incurred prior to or subsequent to the date hereof). PRI will pay its share of such costs to Genpharm within thirty CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (30) days after its receipt of an invoice therefor from Genpharm. Genpharm will not forward an invoice to PRI for PRI's share of the costs of producing the bio-batches and conducting the applicable biostudy in respect of any Product until the earlier of (i) the acceptance for filing of Genpharm's (or its Affiliate's) submission of an ANDA for such Product and (ii) the expiry of 6 months from the date upon which the biostudy is completed or abandoned. PRI shall be only responsible for its share of the cost of the development raw materials, producing the bio batches and conducting the applicable biostudies and the cost of producing the necessary validation, confirmation and exhibition batches in respect of the Approved Products to the extent that PRI's *** % share thereof exceeds $*** U.S. 8. PRI shall pay to Genpharm, within 30 days of the receipt of an invoice therefor (which invoice shall be accompanied with a copy of the third party invoice evidencing the expense in question), *** % of the legal fees and disbursements and other reasonable expenses actually incurred by Genpharm and its Affiliates (irrespective of whether such legal fees, disbursements or other expenses were incurred prior to or subsequent to the date hereof) in connection with legal matters relating to patent issues and/or the development and registration of each Product including, without limiting the generality of the foregoing, legal fees, disbursements and other reasonably expenses incurred in connection with patent certification ( hereinafter referred to as "PATENT OPINIONS") to be made by Genpharm or its Affiliate in the ANDA to be submitted for such Product (including, without limitation, reasonable costs of obtaining initial patent opinions regarding the validity and enforceability of patents in the Territory and non-infringement thereof by such Product), to investigate and defend the claim of any Person (hereafter referred to as a "CLAIM") that the Product as developed by Genpharm (and/or its Affiliates) infringes any patent or other proprietary right of such Person enforceable in the Territory and to seek, defend, intervene in or appeal a decision of the FDA or of any court of competent jurisdiction in the Territory (hereinafter referred to as a "CITIZEN'S PETITION") relating to market exclusivity claimed by Genpharm or by any other Person in relation to a Product (such legal fees, disbursements and other expenses incurred by Genpharm and its Affiliates in relation to a Product being herein referred to collectively as the "LEGAL EXPENSES"). Genpharm shall control the defense of any such Claim and the prosecution and/or defense of any Citizen's Petition and PRI shall have the right to participate in the defense or prosecution of same. Genpharm will provide PRI with access to counsel of Genpharm or its applicable Affiliate engaged in the prosecution, defense or investigation of such Claim, Citizen's Petition or Patent Opinion to discuss with and disclose to PRI possible future Legal Expenses to be incurred in the investigation, defense or prosecution of the Claim, Citizen's Petition or Patent Opinion and to provide access to all relevant documentation with regard to the same. Genpharm and PRI shall cooperate in good faith to develop a strategy acceptable to both Genpharm and PRI for the defense or prosecution of any such Claim or Citizen's Peitition and in the strategy for patent certification under ANDA. Genpharm shall not admit or assume liability for (on behalf of itself or PRI) or settle or compromise any Claim or Citizen's Petition without the prior written consent of PRI, such consent not to be unreasonably withheld or unduly delayed. If the Legal Expenses incurred by Genpharm and its Affiliates in respect of a Product exceeds $*** US then, at any time CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION thereafter and prior to receipt by Genpharm or its Affiliate of a final ANDA approval from the FDA for such Product, PRI shall have the right defer its obligation to fund *** % of any future Legal Expenses incurred by Genpharm and its Affiliates with respect to such Product by notice in writing to Genpharm (a "NOTICE"), which Notice shall be effective upon its receipt by Genpharm and shall defer the obligation of PRI to fund any Legal Expenses incurred by Genpharm and its Affiliates with respect to such Product after the date upon which such Notice is received by Genpharm (the Legal Expenses incurred after receipt of such Notice being hereinafter referred to as the "FUTURE LEGAL EXPENSES" and PRI's *** % share thereof being hereinafter referred to as the "Deferred Legal Expenses") but, for greater certainty, PRI shall pay to Genpharm, within 30 days of the receipt of an invoice therefor, *** % of the Legal Expenses incurred by Genpharm and its Affiliates to and including the date upon which such Notice is so received by Genpharm. Deferral by PRI hereunder of its obligation to fund Future Legal Expenses incurred by Genpharm and its Affiliates in respect of one or more Products shall not affect the obligation of PRI to fund, on a current basis, Legal Expenses incurred by Genpharm and its Affiliates with respect to other Products (subject to PRI's rights to defer its obligations to fund such expenses with respect to any other Product or Products in accordance with the provisions hereof) or reduce or eliminate PRI's obligations to pay the Deferred Legal Expenses to Genpharm. The obligation of PRI to fund Legal Expenses (including Future Legal Expenses) incurred in respect of a Product shall terminate upon termination of this Letter Agreement in respect of such Product provided that PRI shall remain liable to Genpharm for the Legal Expenses (including Future Legal Expenses) relating to such Product incurred prior to such date of termination, which liability shall survive the termination of this agreement. In the event that PRI exercises its right pursuant to this paragraph to defer its obligation to fund any Future Legal Expenses in respect of a Product (hereinafter in this Section referred to as the "SPECIFIC PRODUCT") then the Deferred Legal Expenses owing to Genpharm for PRI in respect of such Specific Product shall be paid to Genpharm as a first charge against PRI's share of Gross Profit earned by PRI from commercialization of such Specific Product in the Territory provided that: (i) if the full amount of Deferred Legal Expenses owing the Genpharm are not paid to Genpharm within 6 months of the first commercialization of such Specific Product in the Territory by PRI (the date upon which such 6 month period expires being hereinafter referred to as the "EXPIRY DATE"); (ii) if the parties mutually determine not to launch such Specific Product or determine not to continue the development or to seek an ANDA approval in respect of such Specific Product (the date upon which such determination is made being hereinafter referred to as the "DETERMINATION DATE"); (iii) this Agreement is terminated in respect of such Specific Product prior to payment in full by PRI of the Deferred Legal Expenses relating thereto (the effective date of termination being hereinafter referred to as the "TERMINATION DATE"); or CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (iv) one (1) year has elapsed since Genpharm or its Affiliate incurred such Deferred Legal Expense (the date upon which one (1) year period expires being hereinafter referred to as the "Maturity Date") then such Deferred Legal Expense(s) (or the balance thereof) owing to Genpharm shall fall due and be paid by PRI to Genpharm within 30 days of the Determination Date, the Termination Date, the Expiry Date or the Maturity Date, whichever first occurs. Where the settlement or judgment of any Claim results in the award or payment of funds to Genpharm, Genpharm shall pay *** % thereof to PRI within 30 days of receipt of the award or payment of funds from the third party. Where the settlement or judgment of a Claim in relation to such Product results in an award against Genpharm requiring Genpharm to pay funds to any Person, PRI shall pay to Genpharm *** % of such liability upon receipt of a copy of the settlement or judgment and at or prior to the time that Genpharm is required to make such payment to the third party. 9. Nothing in this Agreement constitutes a guarantee or warranty of Genpharm that a. development of a Product will be successful; or b. a Product Approval for any Product will be obtained. In the event that any of Products are not developed for technical or commercial reasons no replacement products are to be added to this Agreement in lieu thereof. 10. Gross Profits applicable to a Product earned by PRI in respect of any period during which PRI enjoys generic market exclusivity shall be shared *** % by Genpharm and *** % by PRI; provided, however, that the aggregate incremental additional Gross Profits payable to Genpharm in respect of such Product as a result of such exclusivity (being the Gross Profits payable to Genpharm in excess of the Gross Profits that would be payable to Genpharm but for this paragraph 10) shall not exceed $*** US and thereafter Gross Profits shall be shared by Genpharm and PRI in the proportions contemplated in Section 5 above. 11. (a) No later than thirty (30) days from the execution date of this Letter Agreement, the parties shall establish a Product Development Committee (the "PDC") consisting of at least one person from each of PRI and Genpharm which shall act as liaison between the parties to ensure that PRI is kept current of the development status of each Product. Unless otherwise agreed by the parties, the PDC shall meet at least once per quarter, such meetings to continue until one (1) year after commencement of commercialization of the last Product or such other time as may be agreed by the parties. The PDC will meet alternately at the offices of PRI and Genpharm or as otherwise agreed by the parties. Each party shall bear the cost of its own travel expenses relating to meetings of the PDC. (b) Genpharm hereby agrees to: (i) provide PRI at regularly scheduled meetings of the PDC access to and copies of all scientific information relevant to the development and registration of each Product; (ii) provide PRI with copies of all communications to or from the FDA in connection with the development and registration of each Product as soon as reasonably practicable, but in any event within three (3) business days of the receipt or transmittal by Genpharm of such communication; (iii) promptly advise PRI in writing of any unforeseen material problems or delay encountered or additional requirements imposed upon Genpharm or its Affiliates, as the case may be, since the date of its last report in connection with the development and registration of a Product (and of which PRI has not been otherwise advised pursuant hereto); (iv) provide PRI with such other information as PRI may reasonably request in writing from time to time with respect to the status of the development and/or registration of a particular Product, as soon as reasonably practicable but in any event within three (3) business days of receipt of such request; and (v) within two (2) business days of receipt by Genpharm of a request therefor, and subject to the availability of the parties, arrange a conference call among PRI, Genpharm and Genpharm's legal counsel to answer PRI's questions or provide PRI with information regarding legal matters surrounding the development and/or registration of each Product. 12. PRI represents and warrants to Genpharm that neither it nor any of its Affiliates is an Ineligible Person. Genpharm represents and warrants to PRI that neither it nor any of its Affiliates who have or will be developing a Product for the Territory or who is or will be a Manufacturer thereof is an Ineligible Person. 13. In the event that any provision of this Letter Agreement contradicts any provision contained in Schedules "A" through "M" attached hereto, the provisions of this Letter Agreement shall govern. 14. In the event that the innovator/ brand, or any competing generic product, applicable to a Product becomes an over-the-counter pharmaceutical then PRI shall use reasonable best commercial efforts to exploit the OTC market for such Product, failing which the rights to market the Product as a OTC pharmaceutical in the Territory shall revert exclusively to Genpharm without any obligation on Genpharm to share with PRI the Gross Profits or other revenue earned from the commercialization of such Product in the Territory and without any payment from Genpharm to PRI as a result thereof. [SIGNATURE PAGE FOLLOWS] CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION If the foregoing terms are acceptable to you, kindly sign and return the duplicate copy of this agreement enclosed herewith on or before the 25th day of March, 2002. Yours very truly, GENPHARM INC. Per: /S/ HANK KLAKURKA ----------------- Hank Klakurka The undersigned hereby acknowledges and agrees to the foregoing. DATED this 25th day of March, 2002. PHARMACEUTICAL RESOURCES, INC. Per: /S/ SCOTT TARRIFF ----------------- Scott Tarriff CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "A" EXCLUSIVE APPOINTMENT A.1 EXCLUSIVE DISTRIBUTOR: Subject to the provisions of this agreement and to the receipt by Genpharm or its Affiliate, as the case may be, of a Product Approval for such Product, Genpharm hereby appoints PRI as the sole and exclusive distributor of the Products for the Territory and PRI hereby accepts such appointment and agrees to act as such sole distributor upon such terms and conditions. Except for its right to delegate to an Affiliate of PRI any duty, obligation or right hereunder in relation to a Product in accordance with the provisions of Section L.8 of Schedule "L" hereto (but only for so long as such Person remains an Affiliate of PRI), PRI shall not delegate to any Person any duty or obligation of PRI hereunder in relation to a Product without the prior written consent of Genpharm (which consent may be withheld in the sole discretion of Genpharm). A.2 NATURE OF RELATIONSHIP: This agreement does not constitute or create (and the parties do not intend to create hereby) a joint venture, pooling arrangement, partnership, or formal business organization of any kind between and among any of the parties, and the rights and obligations of the parties shall be only those expressly set forth herein. The relationship established between PRI and Genpharm by this agreement is solely that of buyer and seller, each is an independent contractor engaged in the operation of its own respective business. Neither party shall be considered to be an agent of the other for any purpose whatsoever. Each party shall be responsible for providing its own personnel and workers' compensation, medical coverage or similar benefits, any life, disability or other insurance protection; and shall be solely responsible for the payment of social security benefits, unemployment insurance, pension benefits, withholding any required amounts for income and other employment-related taxes and benefits of its own employees, and shall make its own arrangements for injury, illness or other insurance coverage to protect itself; its Affiliates, its subcontractors and personnel from any damages, loss and/or liability arising out of the performance of this agreement. Neither party has the power or authority to act for, represent, or bind the other (or its Affiliates) in any manner. A.3 TERRITORIAL AND PRODUCT RESTRICTIONS APPLICABLE TO PRI: During the term of this agreement applicable to a Product, neither PRI nor any of its Affiliates will directly or indirectly sell such Product outside of the Territory or to any Person in the Territory where it knows or has reason to believe that such Product will be resold by such Person outside of the Territory. In the event the foregoing provision is or becomes unenforceable or is unlawful in the Territory, then it shall be deemed replaced by the most restrictive provision on marketing or sale of the Product outside of the Territory as shall be lawful and enforceable in the Territory. If Genpharm establishes that one of PRI's customers or a customer of any of its Affiliates is exporting such Product out of the Territory, PRI shall (and shall cause its Affiliates to) either cease to supply such customer or obtain (and enforce, if necessary) an undertaking from such customer not to sell the Product outside of the Territory (unless PRI [or its Affiliate, as the case may be] is precluded from taking such action under applicable law). In addition, PRI shall not (and it shall not authorize, permit or suffer any of its Affiliates to), directly or indirectly, manufacture, purchase, sell or distribute a Competing Product in the Territory at any time during the term of this agreement applicable to a Product (including, for CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION greater certainty, prior to receipt by Genpharm or any of its Affiliate of a Product Approval for such Product). CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "B" MANUFACTURE AND SUPPLY OF PRODUCT B.1 EXCLUSIVE SUPPLIER: Subject to receipt by Genpharm or its Affiliate of a Product Approval for a Product Genpharm shall use commercially reasonable efforts to manufacture (or cause to be manufactured) and supply to PRI, in accordance with the terms and conditions set forth herein and in a timely fashion, reasonable quantities of such Product. PRI shall order from Genpharm all of its and its Affiliate's requirements of the Product for the Territory in accordance with the terms and conditions set forth herein. B.2 MANUFACTURING RESPONSIBILITIES: Each Product supplied by Genpharm hereunder shall be manufactured (which shall include, without limitation, all testing, bulk packaging and labelling) in an FDA approved facility and in accordance with the following (collectively, the "Product Manufacturing Requirements"), (i) the Specifications for the Product, (ii) applicable cGMP and good laboratory practices and (iii) all other applicable rules, regulations and requirements of the FDA relative to the manufacture of such Product. B.3 STORAGE OF PRODUCTS PENDING SHIPMENT: The finished bulk Product to be made available to PRI hereunder shall be stored by Genpharm and/or the Manufacturer, pending shipment, in accordance with the Specifications for such Product and applicable cGMP. B.4 QUALITY CONTROL AND ASSURANCES AND RELEASE DOCUMENTATION: Genpharm shall, or shall cause the Manufacturer to, perform all in-process quality control tests and quality assurance reviews on the Product as required by the Product Manufacturing Requirements and shall, or shall cause the Manufacturer to, certify in writing that each batch of the Product delivered to PRI was manufactured in strict conformity with the Product Manufacturing Requirements and the other terms of this agreement. B.5 PRODUCT WARRANTY: Genpharm warrants that all Product supplied by it to PRI pursuant to this agreement shall be manufactured, packaged, tested, stored and handled in accordance with the Product Manufacturing Requirements and that at the time of the delivery of such Product to the carrier at Genpharm's or the Manufacturer's Plant, as the case may be, such Product: (i) will not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act ("Act"), as amended, or within the meaning of any applicable state or municipal law in which the definitions of adulteration and misbranding are substantially the same as those contained in the Act, as such Act and such laws are constituted and effective at the time of delivery and (ii) will not be an article which may not, under the provisions of Sections 404 and 505 of such Act, be introduced into interstate commerce. NEITHER GENPHARM NOR THE MANUFACTURER MAKES ANY REPRESENTATION THAT THE PRODUCT IS USEFUL FOR THE INTENDED PURPOSE OR THAT IT IS FREE FROM INHERENT SIDE EFFECTS EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "C" PRODUCTION FORECASTS, ORDERS AND DELIVERIES C.1 FORECASTS AND COMMITMENTS: To assist Genpharm to schedule production of the Products, PRI shall provide to Genpharm (or as it directs) for each Product to be manufactured and supplied to PRI hereunder, quarterly (at least 45 days in advance of the commencement of the first calendar month forecasted thereunder), a 12 month rolling forecast of PRI's estimated requirements of the Product, which forecast shall represent a commitment of PRI to purchase the quantity of Product projected for the first month thereunder and a commitment, subject to a 20% variance, to purchase the quantity of Product forecasted for the second and third months forecasted thereunder. Subject to the foregoing, all forecasts are estimates only and PRI shall only be bound to purchase the Product pursuant to purchase orders submitted, or deemed hereunder to be submitted, by it to Genpharm (or to such person as Genpharm may direct). All purchase orders for a Product shall specify the delivery date therefor, which delivery date shall be no sooner than 16 weeks following the receipt of such order by Genpharm or such other period of time as Genpharm shall specify in writing to PRI within a reasonable period of time following receipt by Genpharm or the Manufacturer of the Product Approval for such Product. PRI shall deliver the first such forecast within a reasonable period of time following receipt of such Product Approval by Genpharm or the Manufacturer and shall deliver the updated and extended forecasts every 3 months thereafter. C.2 PURCHASE ORDERS: All orders for Product shall be placed using PRI's standard form of purchase order and shall be invoiced using Genpharm's standard form of invoice. All purchase orders submitted by PRI shall contemplate the purchase of Product in minimum batch sizes as contemplated in the applicable Product Approval or multiples thereof (unless Genpharm agrees in writing to smaller quantities [either generally or in respect of any particular purchase order]) and shall specify, amongst other things, the required delivery date. In the event of any conflict between the terms of any purchase order and the terms of any invoice related thereto, the terms of the purchase order shall govern. In the event of any conflict between the terms of any purchase order and the terms of this agreement, the terms of this agreement shall govern (unless the parties shall have mutually agreed to the contrary in writing in respect of a particular instance). C.3 DELIVERY OF PRODUCT: (a) Products shall be made available to PRI for pickup in bulk containers (where applicable) at Genpharm's or the Manufacturer's Plant, as the case may be. PRI shall arrange for shipping and/or transportation of the Products from such Plant to PRI's Spring Valley, New York facility and pay all shipping and related costs, including insurance, and any customs duties and other taxes imposed on the importation of the Product into the Territory. Genpharm shall (or shall cause the Manufacturer to) promptly notify PRI by fax that any order (or part thereof) is available for pick-up at its or at such Manufacturer's Plant (this notice shall hereafter be referred to as the "AVAILABILITY NOTICE"). PRI shall use reasonable commercial efforts to pick up the Products that are the subject of an Availability Notice within 10 business days of receipt of the Availability Notice; provided that, if such pickup has not occurred on or CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION prior to the expiry of such 10 day period, PRI shall, for purposes of its payment obligations to Genpharm pursuant to Sections D.1 and D.2 of Schedule "D" hereto, be deemed to have picked up the Products which are the subject of the Availability Notice on the last business day of such 10 day period. If the Products in question have not been picked up by or on behalf of PRI within 20 business days of an Availability Notice, Genpharm may, but shall not be obligated to, cause the Products to be delivered to PRI's Spring Valley, New York, facility at PRI's sole cost and expense and risk of loss and title to the Products shall pass to PRI upon pickup of the Products at Genpharm's or such Manufacturer's Plant, as the case may be, in the same manner as if the pickup had been effected by PRI itself, provided that Genpharm shall provide for the Products to be insured during transit in a commercially reasonable manner at PRI's sole cost and expense. (b) Genpharm shall, or shall cause the Manufacturer to, supply to PRI all documentation necessary to export such Product from the jurisdiction where its Plant is located and all documentation required by PRI to import such Product into the Territory to the extent that same is available to Genpharm (or such Manufacturer) or is reasonably capable of being generated by it. (c) Risk of loss and title to the Products shall pass to PRI upon pickup of the Product by, on behalf of, or for the account of PRI at Genpharm's or such Manufacturer's Plant as aforesaid. (d) Products supplied by Genpharm hereunder shall have a minimum shelf life of 20 months which shall run from the date that the Availability Notice in respect of such Product is received by PRI. C.4 CANCELLATION OF ORDER: Notwithstanding anything herein contained, if an Availability Notice in respect of any Product subject to a purchase order has not been given within 60 days following the required delivery date hereunder PRI shall be entitled to cancel such order (or portion thereof in respect of which no Availability Notice has so been given) by notice in writing to Genpharm. C.5 Documentation to Accompany Deliveries: All deliveries of Product by or on behalf of Genpharm shall be accompanied by all documentation required under applicable law to import the Product into, and for PRI to offer the Product for sale in, the Territory including, without limitation, any quality assurance or quality control audit results and/or certifications that the Product Approval for the Product have been audited to ensure that any Product supplied hereunder has been manufactured in conformity with cGMP and applicable FDA regulations. C.6 Assistance With Export & Import Laws: PRI and Genpharm shall provide such commercially reasonable assistance as the other may request relative to the exportation or importation of Products not expressly provided in this agreement. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "D" PAYMENTS, REPORTS AND AUDIT D.1 PURCHASE PRICE: (a) The purchase price payable by PRI for Product supplied to it by or on behalf of Genpharm shall be the aggregate of (i) the Transfer Price of such Product and (ii) the additional consideration to be paid to Genpharm pursuant to Section D.3 below in respect of Net Sales of such Product. (b) In addition to such purchase price PRI shall pay all applicable sales tax, use tax, consumption tax, goods and services tax, value added tax or similar tax, imposts or duties levied upon the sale of the Product by Genpharm to PRI whether that tax, impost or duty is levied under the laws of the jurisdiction where the Manufacturer's Plant is located or the jurisdiction where PRI or Genpharm is located (or of any state, province, territory or other political subdivision thereof) and whether it is currently in force or comes into force after the Effective Date of this agreement. (c) The Transfer Price shall be invoiced and all payments hereunder shall be made in U.S. dollars. Any costs or expenses which are to be paid by PRI hereunder or which were incurred by Genpharm (or a Manufacturer, as the case may be) in a currency other than U.S. dollars shall be converted into its U.S. dollar equivalent in accordance with the usual procedures therefore used by Genpharm or the applicable Manufacturer in determining its Manufacturing Costs. D.2 INVOICING AND PAYMENT: Genpharm shall invoice PRI for the Transfer Price of the Product at the time such product is picked up or is deemed to be picked up by or on behalf of PRI as contemplated in Section C.3 of Schedule "C" hereto or within a reasonable period of time thereafter. The Transfer Price shall be due and payable within 45 days following the date of such invoice. Each shipment of Product to PRI shall constitute a separate sale, obligating PRI to pay the purchase price therefor, whether such shipment be in whole or only partial fulfilment of any order. D.3 ADDITIONAL CONSIDERATION: (a) As additional consideration for the Products PRI shall pay to Genpharm *** % of the Gross Profits arising out of Net Sales in the Territory by PRI or its Affiliates of Product supplied by or on behalf of Genpharm pursuant hereto, which additional consideration shall be paid to Genpharm as part of the purchase price for the Product sold and shall not be treated as a royalty or similar payment. (b) The payment to Genpharm of its share of Gross Profits shall be made in U.S dollars. For the purposes of determining Gross Profits, any delivery costs or other expenses incurred by PRI which are relevant to the calculation of Gross Profits and which are payable or were paid in a currency other than U.S. Dollars shall be converted into their U.S. dollar equivalent based upon the rate of exchange between the currency in question and U.S. dollars as reported in the Wall Street Journal on the 2nd business day preceding the day on which any such payment on account of Gross Profits is due. D.4 PAYMENT OF ADDITIONAL CONSIDERATION AND ACCOMPANYING DOCUMENTATION: Genpharm's share of Gross Profits shall be paid by PRI to Genpharm quarterly, within 30 days following the end of each calendar quarter (being the last day of March, June, August and December in each year) with respect to Net Sales made by PRI or its Affiliates of such Products during such calendar quarter. Each such payment shall be accompanied by the following in respect of each Product supplied by or on behalf of Genpharm: (a) a sales summary reasonably satisfactory to Genpharm showing all sales of such Product by Units (sku's) and dollars made by PRI and its Affiliates during the quarter in question; (b) a detailed statement showing all returns, adjustments, credits, rebates and other debits and credits relevant to the calculation of Net Sales of such Product for the quarter in question together with copies of all documentation to support allowable deductions used in computing Net Sales during such quarter; (c) a detailed statement showing Repackaging Expenses, Recall Expenses and Excess Reprocurement Costs incurred by PRI and its Affiliates and duties and taxes recovered by PRI and its Affiliates which are relevant to the calculation of Gross Profits for the quarter in question; (d) a certificate signed by the Chief Financial Officer of PRI certifying that, to the best of his knowledge, information and belief, after reasonable investigation, the foregoing statements contemplated in (a), (b) and (c) above are true and correct and do not omit any material information required to be provided pursuant to this Section; and (e) a summary of the calculation of the Gross Profits payable to Genpharm on such date. For purposes of this agreement a sale shall be considered to have been made at the time the Product is shipped by PRI's or its Affiliate's to its customer. For purposes of computing Net Sales, all sales and other transactions between PRI and its Affiliates shall be disregarded. D.5 ADDITIONAL INFORMATION: PRI shall provide to Genpharm and shall cause its Affiliates to provide to Genpharm, promptly following a request therefor, such additional information concerning any sales of a specific Product (including, without limitation, in respect of any sale, the date of the shipment, the name of the customer, the number of Units of the Product (by sku, if requested) sold to such customer and the invoice price charged by PRI or its Affiliates), chargebacks, credits, returns, adjustments and other credits and debits relevant to the calculation of Net Sales and Gross Profits in respect of a Product including information relating to Repackaging Expenses, Recall Expenses and Excess Reprocurement Costs incurred in or applicable to any period in respect of such Product, as Genpharm may reasonably request. Genpharm shall, or shall cause the applicable Manufacturer to, provide to PRI, promptly following a request CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION therefor, such additional information concerning the calculation of the Transfer Price of Products previously supplied to PRI hereunder as PRI may reasonably request. D.6 INTEREST: All payments to be made to Genpharm under this agreement shall bear interest from and after the Applicable Day (as that term is defined below) until paid at the annualized rate equal to the daily (as at the close of business on each such day) prime rate as quoted from time to time by Citibank N.A., New York, New York plus 5%, compounded daily. For purposes of this Section the term "APPLICABLE DAY" shall mean: (i) where the payment is on account of the Transfer Price of a Product which has not been made on its due date and PRI has not on 2 or more occasions during the same calendar year failed to pay a Transfer Price to Genpharm on its due date, 30 days after the due date therefore; (ii) in any other case, the due date therefore. D.7 MAINTENANCE OF RECORDS: Each of Genpharm and PRI agrees that it shall keep (and shall cause its Affiliates to keep) complete and accurate books and records of account containing all information required for the computation and verification of all amounts on which payments hereunder are based and shall, upon reasonable written notice from the other, make such records available for examination by such other party or, at the requesting party's expense, supply copies of such records to such other party. D.8 EXAMINATION OF RECORDS: Each of Genpharm and PRI shall have the right, upon reasonable written notice to the other, to designate an independent certified public or chartered accountant (except one to whom the other has a reasonable objection) to have access during ordinary working hours to such records as may be necessary to audit the correctness of any invoice, report or payment made under this agreement. Genpharm and PRI shall provide and shall cause its Affiliates to provide to the accountant engaged by the other full and complete access to their pertinent books and records. In the event that any accountant shall have questions which are not in his judgment answered by such books and records, the accountant shall have the right to confer with representatives of the Person whose books and records are under review including its Chief Financial Officer. If any audit under this Section D.8 shall reveal a discrepancy by more than 3% of any amount payable hereunder or $10,000.00 US, whichever is greater, the costs and expenses relating to such investigation/audit shall be borne by the party creating such discrepancy. Genpharm and PRI shall each have the right to audit such books and records of the other pursuant to this Section D.8 no more often than twice in any contract year (as hereinafter defined) unless in any of the prior 3 contract years such investigation revealed a discrepancy by more than 3% or $10,000.00 US, as aforesaid, in which case Genpharm or PRI shall have the right to audit such books and records of the other 3 times in such contract year. For the purposes hereof, a contract year shall be a period of 12 months commencing on the Effective Date of this agreement or on an anniversary thereof. Any Person whose books and records are to be audited in accordance with the foregoing may, as a condition to providing any accountant access to its books and records, require such accountant to execute a reasonable confidentiality agreement. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION D.9 SURVIVAL OF OBLIGATION: The obligation to make the payments and to provide the reports contemplated in this Schedule "D" and the rights of PRI and Genpharm to conduct audits or investigations pursuant to Section D.8 hereof shall survive the termination or expiration of this agreement and shall apply to all Products supplied to PRI by or on behalf of Genpharm pursuant hereto prior to the effective date of the termination or expiration of this agreement or thereafter notwithstanding that such Product may have been resold by PRI or its Affiliates to its customers after the termination or expiration of this agreement. For greater certainty, the parties acknowledge and agree that PRI shall pay to Genpharm *** % of the Gross Profit derived from Net Sale of all Products supplied by or on behalf of Genpharm to PRI pursuant to this agreement irrespective of whether such Product is resold by PRI or its Affiliate prior to or subsequent to the termination or expiration of this agreement. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "E" REPACKAGING AND DISTRIBUTION E.1 PRI'S REPACKAGING RESPONSIBILITIES: (a) PRI shall repackage and relabel the Product into finished labelled Units for sale in the Territory in an FDA approved facility and shall be solely responsible for the contents of the labels and artwork on all Units of finished labelled Product sold or otherwise released by PRI (except for information contained in such labels which are also contained on the labels of the bulk Product supplied by or on behalf of Genpharm to PRI pursuant hereto). In repackaging and relabelling the Product PRI shall comply with (i) the Specifications for such Product, (ii) applicable FDA cGMP and (iii) all other applicable rules, regulations and requirements of the FDA and any other applicable governmental or regulatory bodies, agencies and officials in the Territory relative to repackaging and labelling of the Product for sale in the Territory. All labels and all artwork concepts on all packaging material used by PRI in connection with relabelling and packaging of a Product shall be subject to the prior reasonable approval of Genpharm, provided that the approval by Genpharm of any label or artwork concept shall not relieve or otherwise affect PRI's obligations or responsibilities hereunder in relation to relabelling and packaging of the Product or arising out of the use of such labels or packaging material or the release of Product in the Territory so labelled and packaged (or impose any obligation or responsibility on Genpharm in connection with such labels or packaging material or their use or release, as aforesaid, except as expressly contemplated above with respect to the contents of information contained on the labels which was provided by or on behalf of Genpharm). (b) Genpharm shall, or shall cause the Manufacturer to, supply to PRI all information and data relating to a Product which it is obligated to provide to PRI and its Affiliates as a repackager and relabeller of such Product pursuant to applicable laws. Genpharm shall, or shall cause the Manufacturer to, deliver to PRI, upon reasonable request of PRI, a copy of all correspondence which it receives from or forwards to the FDA or other regulatory authority with respect to a Product following receipt of its Product Approval therefor provided that such correspondence does not contain Confidential Information of Genpharm or such Manufacturer which it desires to maintain confidential and which it is not obligated by law to disclose to PRI. E.2 PRI'S OBLIGATION RE MARKETING: PRI shall use reasonable best commercial efforts (utilizing its marketing, distribution and management systems and those of its Affiliate) to develop a market for the Products in the Territory and to actively and continuously promote the sale of the Products in the Territory, such efforts shall be not less than those used by PRI and its Affiliates to promote the sale of other products which they market. PRI shall be solely responsible for advertising and promotion of the Product and shall comply with all applicable laws, rules and regulations in that regard including, without limitation, applicable FDA regulations and guidelines. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION E.3 PRICING: PRI shall have sole discretion in setting the price for the sale of the Products in the Territory, provided that it shall not discount the price of any Product to enhance the sale of PRI's or any of its Affiliates' Other Products (as that term is defined below) or use any Product as a loss leader or incentive to procure the sale of PRI's or any of its Affiliates' Other Products (including, without limitation, through tied or bundled sales). Rebate and other discount programs (excluding any pricing programs where the price of the Product is discounted to enhance the sale of PRI's or any of its Affiliates' Other Products or where a Product is used as such loss leader or incentive or to procure the sale of PRI's or its Affiliates' Other Products) generally available to PRI's or its Affiliates' customers in connection with the purchase of pharmaceutical products shall not be prohibited by this Section. Any discounts to a price below what is reasonably necessary to secure sales of any Product or discounts that are used to secure sale of Other Products of PRI's or its Affiliate's (through bundled sales or otherwise) will be fully absorbed by PRI out of its share of Gross Profits in relation to the Product or will be charged to those Other Products of PRI or its Affiliates that are in the product bundles, as the case may be, and will not directly or indirectly reduce Genpharm's share of Gross Profits hereunder. For purposes of this Section E.3, the term "OTHER PRODUCTS" shall mean pharmaceutical products sold, marketed and distributed by PRI or its Affiliates other than the Products. E.4 STORAGE AND HANDLING BY PRI: PRI shall ensure that all Products made available to it by or on behalf of Genpharm pursuant to this agreement are transported, received, handled, stored and delivered in accordance with the Specifications for the Product applicable thereto and applicable cGMP and other FDA requirements (and the requirements of all other applicable governmental or regulatory bodies, agencies or affiliates in the Territory) so that such Products do not become adulterated or otherwise cease to meet their Specifications as a result of any acts or omissions of PRI, its Affiliates, and their respective agents, employees, transporters or those for whom PRI or its Affiliates are responsible. E.5 RELEASE OF PRODUCT BY PRI: PRI shall conduct or cause to be conducted such quality control tests as it deems necessary or as are required by law (including any rules, regulations and requirements of the FDA and the requirements of all other applicable governmental or regulatory body, agency or officials in the Territory) prior to sale or other release of a Product in the Territory. E.6 CREDIT RISKS: PRI shall assume sole responsibility for all credit risks and collections of receivables in respect of Products sold by it or its Affiliates in the Territory and in respect of all dealings between PRI or its Affiliates and its customers and any third parties from whom PRI and/or its Affiliates sources any goods and services required by it in connection with repackaging, labelling, transporting, storing, promoting, marketing, selling or delivering the Product. E.7 REPACKAGING AND MARKETING EXPENSES: For greater certainty, PRI acknowledges and agrees that it shall be solely responsible for all costs and expenses incurred by it or its Affiliates in connection with relabelling, packaging, promoting, marketing and selling the Products in the Territory (or otherwise performing its obligations hereunder) without any right to recover same directly or indirectly from Genpharm (save and except for partial recovery of permitted listing fees and other similar payments contemplated in Paragraph (iv) of the definition "Net Sales" and Repackaging Expenses through the calculation and sharing of Gross Profits hereunder). CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "F" PRODUCT REJECTIONS AND RETURNS F.1 PRODUCT REJECTION: (a) Within 35 days from the date of receipt of each delivery of Product PRI shall inspect the Product (PRI hereby acknowledging that its failure to inspect shall not release it from the obligations it would otherwise have had it conducted an inspection as herein contemplated, or provide it with additional rights). PRI shall advise Genpharm in writing (a "REJECTION NOTICE") if a shipment of Product is not in conformity with Genpharm's obligations hereunder or is otherwise defective, provided, however, that PRI's failure to advise Genpharm in a timely manner that a shipment of Product does not conform shall not prejudice PRI's right to reject or return the Product if the defect or other non-conforming condition which justifies rejection or return could not have been detected by PRI's inspection in accordance with cGMP standards. If PRI delivers a Rejection Notice in respect of all or any part of a shipment of Product, then Genpharm and PRI shall have 60 days from the date of Genpharm's receipt of such notice to resolve any dispute regarding whether all or any part of such shipment of Product fails to conform with the Product Specifications or is otherwise defective. Disputes between such parties as to whether all or any part of a shipment rejected by PRI conforms with Product Specifications not resolved in the 60 day period shall be resolved by an independent testing laboratory or a consultant (if not a laboratory analysis issue), the cost of which shall be paid by the party least successful in such dispute. (b) In the event any Product is appropriately rejected by PRI (being Product which does not satisfy the Product warranty contemplated in Section B.5 of Schedule "B" hereto as a result of any act by or omission of Genpharm or the Manufacturer), Genpharm shall replace such Product with conforming goods within 16 weeks or, if requested by PRI, provide a credit to PRI for the Transfer Price previously paid by PRI to Genpharm on account of the Product in question, and for all transportation and insurance costs, duties, taxes and fees paid or payable by PRI to import and deliver the Product in question from Genpharm's or the Manufacturer's Plant, as the case may be, to PRI's facility in Spring Valley, New York. The credit shall be provided immediately following the expiry of the period during which Genpharm may dispute a Rejection Notice as contemplated in Subsection (a) above (unless the Rejection Notice is disputed by Genpharm, in which event such credit shall only be given upon resolution of the dispute). Replacement Products shall be delivered to PRI at no cost to PRI if PRI has already paid for the rejected Products and not received a credit therefor, as aforesaid. (c) For purposes of Section H.2 of Schedule "H" hereto, once a Product is rejected by PRI, PRI's obligation to pay for such Product shall be suspended until such time as it is determined: (i) by the independent laboratory or consultant that the Product should not have been rejected by PRI; or CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (ii) by the parties or by any arbitration conducted pursuant hereto or by a final order of a court of competent jurisdiction (which is not subject to further appeal) that no act by or omission of Genpharm or the Manufacturer was the cause of the problem. F.2 PRODUCTS RETURNS: (a) Notwithstanding the provisions of Section F.1 above, Genpharm shall accept the return of any Product which is returned to PRI by its customers because of defects (including failure to meet the Product's Specifications) which are due to any act or omission of Genpharm. In the event of such an accepted return, Genpharm shall provide a credit to PRI for the Transfer Price paid by PRI to Genpharm for the returned Product and all transportation and insurance costs and custom duties, taxes and fees paid by PRI upon the importation and delivery of such Product from Genpharm's or the Manufacturer's Plant, as the case may be, to PRI's facility in Spring Valley, New York (or an allowance on account thereof) or, at PRI's request, shall make available to PRI, without charge, replacement Product within a period of 16 weeks. At PRI's option, and with the consent of Genpharm, which shall not be unreasonably withheld, PRI may destroy any Product returned to it. (b) Any return of Product accepted by PRI from its customers in the ordinary course of business, including without limitation, Product returned as defective due to acts or omissions attributable to PRI, its Affiliates or their respective agents or employees, shall be treated as returns for the purpose of calculating Net Sales so that when PRI next calculates the share of Gross Profits payable to Genpharm in respect of the Product in question, it shall not include (if the sale of the returned Product was not previously included in a prior reporting period) or it shall deduct from Net Sales (if previously included in respect of a prior reporting period), as the case may be, an amount equal to the Gross Profit attributable to returned Product, it being the intention of Genpharm and PRI that no share of Gross Profit shall be paid or payable to Genpharm in respect of the sale of a returned Product. (c) In the event any Product is returned to Genpharm by its customers because the Product is alleged to be defective and PRI believes that such defect is due to an act or omission of Genpharm or the Manufacturer, PRI shall notify Genpharm within a reasonable period of any such return and shall provide or make available to Genpharm (or, at Genpharm's direction, the Manufacturer) such samples (if available) and other information concerning the returned Product available to PRI or its Affiliate so as to allow Genpharm (or such Manufacturer) to test and evaluate the allegedly defective Product. PRI shall retain a sufficient number of samples of the allegedly defective Product so that additional samples are available at a later date should additional testing be required by an independent testing laboratory or consultant as contemplated in Subsection (d) below, or by PRI or by Genpharm (or such Manufacturer) for their own purposes. If not enough samples exist to be so divided, then PRI and Genpharm shall confer and reach agreement as to the handling of any available samples. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (d) Genpharm shall complete its review and evaluation of the returned Products (or cause the Manufacturer to complete such review and evaluation) within 20 business days of receiving the returned Products from PRI or such longer period of time as may be reasonable in the circumstances to enable Genpharm (or such Manufacturer) to conduct or cause to be conducted such tests, studies or investigations (and to receive the results therefrom) as may be required to confirm or dispute the existence of the problem or to identify the cause or source thereof. If Genpharm asserts that the returned Product satisfies the Product Manufacturing Requirements or that the defect is not due to any act or omission of Genpharm or the Manufacturer, representative samples of the Product shall be submitted to a mutually acceptable independent testing laboratory or consultant (if not a laboratory analysis issue) for analysis or review, the costs of which shall be paid by the party against whom the discrepancy is resolved. If it is determined by the independent laboratory or consultant that the returned Product does not satisfy the Product warranty contemplated in Section B.5 of Schedule "B" hereto and that such failure is due to any act by or omission of Genpharm or the Manufacturer, then the replacement Product in respect of the returned Product shall be delivered to PRI without charge or appropriate credit (or allowance) shall be given therefor as contemplated in Subsection F.2(a) above. F.3 EXCLUSIVE REMEDY: Subject to Section G.1 and G.2 of Schedule "G" hereto and to its rights, if any, to recover expenses associated with a Recall as herein contemplated, PRI hereby acknowledges and agrees (on its own behalf or on behalf of its Affiliates) that the sole remedy for Genpharm's failure to supply Product in accordance with the provisions of this agreement (unless such failure is wilful or due to gross negligence of Genpharm or the Manufacturer, if applicable) shall be to require Genpharm to replace the Product that does not meet such Product's warranty hereunder with conforming goods within the time periods hereinbefore contemplated or to provide PRI with a credit in the amount contemplated in this Schedule "F" and that Genpharm (and its Affiliates) shall not be liable to PRI for consequential or incidental damages including, without limitation, loss of profits or prospective profits of any kind (and that neither PRI nor any of its Affiliates shall have any rights or recourse whatsoever against the Manufacturer, all of which rights and recourses, if any, are herein waived and released); provided that in the event that Genpharm fails to supply Product (or replacement Product) to PRI in accordance with its obligations hereunder and, as a result of such failure, a customer of PRI or its Affiliate is entitled to cancel an order for such Product from PRI or its Affiliate and to source a Competing Product from an alternate source (being a Person other than PRI or any of its Affiliates) and to require PRI or its Affiliate to pay to such customer the reasonable excess reprocurement costs incurred by such customer, then Genpharm's responsibility shall be limited to reimbursing PRI for *** % of such excess reprocurement costs actually paid or credited by PRI or its Affiliate to its customer (such costs being the difference between the landed cost to such customer of such Competing Product over and above the sale price of the Product in question from PRI to such customer [the "EXCESS REPROCUREMENT COSTS"]). F.4 RETURN POLICY: Other than Product which have been appropriately rejected by PRI pursuant to Section F.1 above or returned Product as contemplated in CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION Subsection F.2(a) above, PRI shall not have the right to return to Genpharm any Product purchased by it without Genpharm's prior written consent. F.5 SURVIVAL OF PROVISIONS: The provisions of this Schedule "F" shall survive the termination or expiration of this agreement. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "G" DAMAGES, INDEMNIFICATION AND INSURANCE G.1 LIMITATION RE CLAIMS: Subject to the limitations set forth in this Section G.1, PRI and Genpharm covenant and agree to indemnify, save harmless and compensate the other (and its Affiliates, for whose benefit such other party shall hold the benefit of this provision in trust) from, against or for, as the case may be, any and all claims, demands, actions, causes of action, suits, proceedings, judgements, damages, expenses (including reasonable attorney's fees and expenses), losses, fines, penalties and other similar assessments, as the case may be, (the "DAMAGES") relating to or arising out of a breach by Genpharm or PRI, as the case may be, of any of the representations, warranties, covenants or agreements herein; provided that, except where the breach arises out of the representation or warranty being intentionally false or inaccurate or constitutes a wilful material breach by Genpharm or PRI of its duties or obligations hereunder or an act or omission constituting gross negligence, the claim of the aggrieved party for Damages arising out of the breach shall be limited to claiming the amounts owing or payable to it in accordance with the provisions of this agreement and any out of pocket costs and expenses (including amounts paid or payable by it to third parties, other than Excess Reprocurement Costs [except to the extent contemplated in Section F.3 of Schedule "F" hereto]) which it has incurred and the aggrieved party shall not be entitled to recover from the defaulting or breaching party any lost profits or consequential or punitive damages, including loss or damage to its goodwill or reputation. G.2 THIRD PARTY CLAIMS: In the event that the sale or other release in the Territory by PRI or its Affiliates of any Product supplied by or on behalf of Genpharm to PRI pursuant to this agreement results in a third party claim: (a) to the extent that the Damages awarded or incurred relate to or arise out of the manufacturing, testing, bulk packaging, labelling (if applicable), storage or handling of a Product by Genpharm or a Manufacturer or any other act by or omission of Genpharm, a Manufacturer or any other Persons for whose acts or omissions they are responsible at law Genpharm shall be responsible therefor and shall defend, indemnify and hold harmless PRI and its Affiliate from and against all such Damages; and (b) to the extent that the Damages awarded or incurred relate to or arise out of transporting, receiving, manufacturing (if applicable), repackaging, labelling (if applicable), testing, storage, handling, use, marketing, distribution, sale or delivery of a Product by PRI or its Affiliates or any other act by or omission of PRI, any of its Affiliate or any other Person for whose acts or omissions they or any one or more of them is responsible at law, PRI shall be responsible therefor and shall defend, indemnify and hold harmless Genpharm and its Affiliates from and against all such Damages; Upon the assertion of any third party claim against Genpharm or PRI (or their respective Affiliates) that may give rise to right of indemnification under this agreement, the Person claiming a right to indemnification (the "INDEMNIFIED PARTY") shall give prompt notice to the Person alleged to have the duty to indemnify (the "INDEMNIFYING PARTY") of the existence of such claim (provided CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION that the failure to give such notice in timely fashion shall not release the Indemnifying Party of its obligations of indemnification hereunder except to the extent that the Indemnifying Party has been prejudiced thereby) and shall give the Indemnifying Party reasonable opportunity to control, defend and/or settle such claim at its own expense and with counsel of its own selection; provided, however, that the Indemnified Party shall, at all times, have the right to fully participate in such defense at its own expense with separate counsel and, provided that both parties to the extent that they are not contractually or legally excluded therefrom, or otherwise prejudiced in a legal position by so doing, shall co-operate with each other and with their respective insurers in relation to the defense of such third party claim. The Indemnifying Party shall consult with the Indemnified Party with respect to settlement of any claim. The Indemnifying Party shall have the right to settle any claim without the consent of the Indemnified Party, provided that the Indemnified Party is unconditionally released from such claim and it is not otherwise prejudiced by the terms of settlement. In the event the Indemnifying Party elects to defend such claim, the Indemnified Party may not settle such claim without the prior written consent of the Indemnifying Party. If the Indemnifying Party shall, within a reasonable time after such notice has been given, fail to defend, compromise or settle such claim, (or thereafter fails to diligently defend such claim) then the Indemnified Party shall have the right to defend, compromise or settle such claim without prejudice to its rights of indemnification hereunder. Notwithstanding the foregoing, in the event of any dispute with respect to indemnity hereunder, each party shall be entitled to participate in the defence of such claim and to join and implead the other in any such action. G.3 INSURANCE: Each of PRI and Genpharm shall (and shall cause their respective Affiliates, as required, to) during the term of this agreement and for a period of not less than 36 months following the termination of this agreement, carry or be subject to coverage under (as a named insured) product liability insurance (including blanket contractual liability) in an amount of not less than $10 Million U.S. combined single limit, which insurance will be written on an occurrence policy form with an insurance carrier reasonably acceptable to the other party. Each of Genpharm and PRI shall, at the request of the other, provide evidence to such requesting party of compliance with its insurance obligations (and those of its Affiliate) under this Section and evidence of renewals of any such policy, from time to time. G.4 SURVIVAL: The provisions of this Schedule "G" shall survive termination or expiration of this agreement. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "H" TERM AND TERMINATION H.1 TERM: The initial term of this agreement shall commence on the Effective Date and, for each particular Product, shall terminate on the 10th anniversary of the date upon which Genpharm or its Affiliate receives the Product Approval for such Product, unless earlier terminated in accordance with the provisions of this agreement. Thereafter, this agreement shall, in respect of such Product, automatically renew from year to year unless PRI or Genpharm gives written notice of termination to the other at least 180 days prior to the expiration of the initial term or any renewal term, as the case may be, subject to earlier termination as provided in this agreement. H.2 PAYMENT AND REPORTING DEFAULTS: Genpharm may, by notice in writing to PRI, terminate this agreement or, at its option, terminate this agreement in respect of the particular Product or Products to which the default herein contemplated relates, if PRI fails to pay to Genpharm any amount payable by it to Genpharm hereunder as and when the same shall have become due and payable or shall have failed to deliver (or caused to be delivered, as the case may be), in timely fashion, the reports or information contemplated in Sections D.4 or D.5 of Schedule "D" hereto and in either case, such breach shall have continued unremedied for a period of 15 business days after written notice of such breach has been given by Genpharm to PRI; provided that PRI shall not have the right to such 15 business day grace period within which to cure such default and Genpharm shall have the immediate right to terminate the agreement for such breach if PRI shall have previously breached Section D.4 or D.5, or failed to remit any sums of at least $100,000.00 to Genpharm when due, in the aggregate, three times in the 12 month period immediately preceding the default in question. In the event that PRI has been given notice pursuant to this Section H.2 and it disputes the alleged breach, the dispute shall be submitted to arbitration pursuant to Schedule "K" hereto and this agreement shall continue in full force until such time as the arbitrator renders his decision. Termination of this agreement pursuant hereto shall be without prejudice to any other right or remedy which Genpharm may have against PRI arising out of the breach in question including the right to obtain compensation for its damages (provided that such right shall be subject to the limitations set forth in Schedule "G" hereto). H.3 MATERIAL BREACH: Subject to the provisions of Section H.2 above, Genpharm or PRI may, by notice in writing to the other, terminate this agreement or, at its option, terminate this agreement in respect only of those Products to which the default in question relates, if such other party shall have breached any of its material duties or obligations under this agreement and such default continues unremedied for a period of 60 days following receipt of notice of such default (or, if such default is capable of being remedied but is not reasonably capable of being remedied within such 60 day period, such longer period of time as is reasonable in the circumstances, not exceeding 90 days in the aggregate, provided that the defaulting party has, within such 60 day period, commenced and thereafter actively and diligently pursues the remedying of such default). In the event that a party has been given notice pursuant to this Section H.3 and such party disputes the alleged breach, the dispute shall be submitted to arbitration pursuant to Schedule "K" hereto and this agreement shall continue in full force until such time as the arbitrator renders his decision. The CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION arbitrator shall determine whether or not there has been a breach and/or whether or not the same has been remedied within the required cure period. Termination of this agreement pursuant hereto shall be without prejudice to any other right or remedy the party terminating this agreement may have against the defaulting party arising out of the breach in question including the right to obtain compensation for its damages (provided that such right shall be subject to the limitations set forth in Section G.1 of Schedule "G" hereto). H.4 EVENTS OF DEFAULT: Genpharm shall have the right to terminate this agreement upon written notice to PRI in the event that any one or more of the following events shall become applicable to PRI or any of its Affiliates to whom any material duty or obligations of PRI hereunder has been delegated or assigned and PRI may terminate this agreement in the event that any one or more of the following events shall become applicable to Genpharm or, at its option, may terminate this agreement in respect only to those Products which are being manufactured by a Manufacturer (other than Genpharm) if any of the following events shall become applicable to a Manufacturer (PRI, its Affiliate, Genpharm or the Manufacturer affected by such event being referred to as the "PARTY"): (i) an order is made or a resolution or other action of such Party is taken for the dissolution, liquidation, winding up or other termination of its corporate existence; (ii) the Party commits a voluntary act of bankruptcy, becomes insolvent, makes an assignment for the benefit of its creditors or proposes to its creditors a reorganization, arrangement, composition or readjustment of its debts or obligations or otherwise proposes to take advantage of or shelter under any statute in force in the United States or in the governing jurisdiction of such Party for the protection of debtors; (iii) if any proceeding is commenced with respect to a compromise or arrangement, or to have such Party declared bankrupt or to have a receiver appointed in respect of such Party or a substantial portion of its property and such proceeding is not fully stayed or dismissed within 30 days after such commencement; (iv) a receiver or a receiver and manager of any of the assets of such Party is appointed and such receiver or receiver and manager is not removed within 30 days of such appointment; or (v) such Party ceases or takes steps to cease to carry on its business. H.5 INELIGIBLE PERSON: Genpharm or PRI may terminate this agreement in respect of a Product upon 30 days prior written notice to the other party if such party (otherwise than by reason of a breach of its obligations hereunder in respect of such Product) is legally prohibited from performing its obligations hereunder or becomes (or, in case of PRI, its Affiliates become and in the case of Genpharm, a Manufacturer thereof becomes) an Ineligible Person in respect of such Product (and, where the party purporting to terminate this agreement is also the party prohibited from performing or it or its Affiliate as hereinbefore contemplated is the Ineligible Person, it [or such Affiliate, as the case may be], has made CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION diligent best efforts to remove the prohibition or its status as an Ineligible Person) and such prohibition or status as an Ineligible Person has continued uninterrupted for a period of 120 days. H.6 FORCE MAJEURE: Either party may terminate this agreement with respect to a particular Product materially affected by an event of Force Majeure in accordance with the provisions of Section L.2 of Schedule "L" hereto (but this agreement shall continue in respect of the other Products which remain subject to this agreement and which are not effected by such Force Majeure event). H.7 PRICE EROSION: Either Genpharm or PRI may terminate this agreement in respect of a particular Product (the "Specific Product") on 120 days prior written notice to the other party if, in any calendar year, the Gross Profits derived from Net Sale of such Specific Product is less than 20% of the Gross Sales of the Specific Product during such period. H.8 MINIMUM THRESHOLD SALES: If, with respect to a Product: (i) in the first 12 month period (such period being herein referred to as the "PERIOD") commencing on the date (the "COMMENCEMENT DATE") which is the 2nd business days immediately following the date upon which the first Availability Notice (as contemplated in Subsection C.3(a) of Schedule "C" hereto) is given to PRI hereunder in respect of such Product, the aggregate Net Sales of such Product for such Period is less than the Threshold Amount applicable thereto; or (ii) in any subsequent 12 month period (a "SUBSEQUENT PERIOD") commencing on the anniversary of the Commencement Date the aggregate number of Units of such Product sold (excluding, for greater certainty, free goods) by PRI and its Affiliates in such Subsequent Period (and included in the Net Sales of such Product for such Subsequent Period) is, without reasonable justification (having regard to such factors as, by way of illustration only but without limitation, the Market Factors [as defined below]) less than 70% of the Units of such Product sold (excluding, for greater certainty, free goods) by PRI and its Affiliates during the Period; and the shortfall in sales cannot be attributable primarily to the fault of Genpharm, then Genpharm shall have the right to terminate this agreement in respect of such Product upon 90 days prior written notice to PRI. For purposes of this Section, the term "MARKET FACTOR" means: (A) the introduction into the Territory of a Competing Product or additional Competing Products during that or a preceding Subsequent Period which had a material adverse effect on the market share of PRI and any other manufacturers and distributors who were at the time of such introduction marketing Competing Products in the Territory; (B) a significant price erosion relating to the Product and Competing Products as a result of market forces resulting in a decision by PRI, acting reasonably, not to seek additional and less profitable CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION sales of such Product merely to increase Unit sales of such Product at the expense of Gross Profit; (C) the introduction into the Territory of new branded products which materially adversely affected the market for such Product and Competing Products, if any, in the Territory during that or a preceding Subsequent Period; (D) the introduction into the Territory of a product which has the same active ingredient and is for the same indication as such Product but which is in a different dosage form and which materially adversely affected the market for such Product and Competing Products, if any, in the Territory in that or a preceding Subsequent Period; (E) Force Majeure (as defined in Section L.2 of Schedule "L" hereto). H.9 NON-COMPETE OBLIGATION OF PRI: If Genpharm terminates this agreement (or terminates this agreement in respect of a particular Product or Products only) pursuant to Section H.2, H.3 or H.8 hereof or if PRI terminates this agreement pursuant to Section H.7 hereof, PRI shall not (and shall not authorize, cause, permit or suffer any of its Affiliates to) directly or indirectly, manufacture, purchase, sell or distribute in the Territory any Competing Products to any Product(s) as to which this agreement has been so terminated for a period of 24 months following the effective date of such termination. H.10 NON-COMPETE OBLIGATION OF GENPHARM: If PRI terminates this agreement (or terminates this agreement in respect of a particular Product or Products only) pursuant to Section H.3 hereof or if Genpharm terminates this agreement pursuant to Section H.7 hereof, Genpharm shall not (and shall not authorize, cause, permit or suffer any of its Affiliates to) directly or indirectly, sell or distribute such Product(s) in the Territory for a period of 24 months following the effective date of such termination. H.11 PURCHASE OF MATERIALS AND STOCK: Upon termination of this agreement by PRI (or termination of this agreement by PRI in respect of certain Products only) pursuant to Sections H.3 or H.5 (as a result of Genpharm or a Manufacturer becoming an Ineligible Person or being legally prohibited from performing its obligations hereunder), Genpharm shall, at the request of PRI, repurchase all such Products in respect of which this agreement has so terminated which were supplied by it or on its behalf and which are then in the possession, custody or control of PRI and available for sale (and which have not been adulterated or damaged since they were picked up by the carrier at Genpharm's or a Manufacturer's Plant for delivery to PRI and which remain qualified for sale in the Territory) and all packaging material in the possession, custody or control of PRI which were specifically acquired by PRI for the Products in question and which cannot be used by PRI or its Affiliates for any other products sold by any of them, at the landed cost to PRI of such Products and materials (determined in accordance with generally accepted accounting principles), which purchase price shall be paid within 30 days following delivery of such products and materials by PRI to the carrier for delivery to Genpharm. Genpharm shall also pay all transportation costs associated with shipping or transporting the repurchased Product or materials to Genpharm or to such other place as Genpharm may require. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION H.12 SURVIVAL: Any cause of action for breach of contract shall survive the termination or expiration of this agreement. The termination or expiration of this agreement shall not affect any right or obligation of Genpharm or PRI existing prior to the effective date of termination or expiration and which is by expressed hereunder to survive termination. Termination or expiration of this agreement shall not affect any right, duty or obligation arising pursuant to Section I.3, I.4, I.5, I.6 or I.7 hereof or Schedules "D", "F", "G" or "J" hereto (which shall survive termination). CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "I" REGULATORY MATTERS AND ACCESS TO FACILITIES I.1 ACCESS TO GENPHARM'S AND MANUFACTURER'S FACILITIES: PRI shall have the right, upon reasonable advance written notice to Genpharm, to inspect each Plant where a Product is being manufactured or stored to monitor compliance by Genpharm and the Manufacturer with the Product Manufacturing Requirements and to otherwise confirm that the Product is being manufactured, and that Genpharm is operating in compliance with the provisions of this agreement in all material respects. Genpharm shall have the right to have its representatives and/or those of its Affiliate present throughout such inspections. PRI shall promptly notify Genpharm of any non-compliance at such Plant determined through an inspection herein contemplated and upon receipt of such notice, Genpharm shall, or shall cause the applicable Manufacturer to, promptly and diligently rectify any non-compliance and implement appropriate procedures with a view to avoiding repetition of such non-compliance prior to commencing or continuing to manufacture the Product(s) in question. Genpharm shall, or shall cause each Manufacturer to, promptly notify PRI, in writing, of any circumstances relating to its Plant that may affect the quality of the Product being manufactured thereat. I.2 ACCESS TO PRI'S STORAGE FACILITIES: Genpharm shall have the right (through its own representatives and/or by representatives of a Manufacturer), upon reasonable advance notice to PRI, to inspect PRI's and its Affiliate's manufacturing and warehouse facilities which are used to receive, repackage, label, store or handle any Product to ensure compliance with the provisions of this agreement including, without limitation, that the Products are being received, repackaged, labelled, stored and handled in accordance with the Specifications for the Product relating thereto and applicable laws and regulations (including FDA cGMP guidelines) and to otherwise ensure that the Products do not become adulterated or otherwise cease to meet their Specifications as a result of any acts by or omissions of PRI, its Affiliates and their respective agents and employees or those for whom they are at law responsible. PRI shall have the right to have its representatives or those of its Affiliate present throughout such inspection. Genpharm shall promptly notify PRI of any non-compliance determined through an inspection herein contemplated and, upon receipt of such notice, PRI shall promptly and diligently rectify or cause the rectification of any non-compliance and implement or cause the implementation of appropriate procedures with a view to avoiding repetition of such non-compliance. PRI shall promptly notify Genpharm, in writing, of any circumstances relating to its facilities or those of its Affiliates where any of the Products are received, repackaged, labelled, stored or handled that may affect the quality of any Product. I.3 DETENTION OF TECHNICAL RECORDS AND SAMPLES: Each of Genpharm and PRI shall keep, or cause its Affiliates to keep, as required, such samples and such records (or copies thereof) in respect of the Products being manufactured, supplied or distributed by it as are required by the applicable Product Manufacturing Requirements and/or applicable law for such period of time as may be required thereunder. PRI shall permit and shall cause its Affiliates to permit Genpharm and the Manufacturers to have access to such samples and original records as are required to be maintained by PRI at all reasonable times CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION upon prior reasonable notice and shall, upon written request, promptly provide Genpharm (or any Manufacturer, as directed by Genpharm) with a copy of all such records. I.4 CO-OPERATION RE PRODUCT SAFETY: Genpharm and PRI shall promptly advise the other of any safety or toxicity problem of which such party or its Affiliate becomes aware regarding a Product being manufactured, supplied or distributed by it, intermediates or other ingredients or processes used in the manufacture such Product. I.5 FDA Correspondence: Following receipt of a Product Approval for a Product Genpharm and PRI shall provide the other (and Genpharm shall cause each Manufacturer to provide PRI) with a copy of any correspondence or notices received by such party from the FDA relating to or referring to such Product within 10 days of receipt and a copy of any response to any such correspondence or notices with 10 days of making a response. I.6 Customer Complaints: (a) PRI shall notify Genpharm and each Manufacturer, as applicable: (i) of any customer complaints or alleged adverse drug experiences ("ADE") relating to a Product promptly following their receipt by PRI or any of its Affiliates (but in any event within 5 days of receipt thereof, except in the case of a Serious ADE [as defined below] in which event PRI shall notify Genpharm and the Manufacturer of same within 24 hours, which latter notification shall be by telephone with a facsimile confirmation immediately following); or (ii) of any FDA complaints or complaints of any other governmental or regulatory body, agency or official in the Territory within 48 hours, except on weekends and holidays. For purposes of this agreement "SERIOUS ADE" shall mean an adverse event which gives rise to one or more of the following: death, threat to life, new or prolonged in-patient hospitalization, permanent or significant disability or incapacitation, overdose, cancer or congenital abnormality or serious laboratory abnormality which is thought by the reporting physician to be serious or associated with relevant clinical signs or symptoms. Genpharm shall, or shall cause the applicable Manufacturer to, notify PRI in the manner and within the time periods hereinbefore contemplated of any ADE or FDA complaint (or of the complaint of any governmental body, agency or official in the Territory) relating to such Product in respect of the Territory following their receipt by Genpharm or such Manufacturer. (b) Genpharm shall be responsible for filing or causing the Manufacturer to file any necessary complaint report required by the FDA in accordance with applicable FDA regulations. (c) To enable Genpharm or the Manufacturer to respond to any requirements of the FDA in connection with a complaint or ADE, PRI agrees to investigate and respond in writing to any complaint or ADE forwarded to it by or a Manufacturer promptly and, in no event, later than 30 days after receipt of the ADE or complaint from Genpharm or a Manufacturer. In addition, PRI shall provide Genpharm and the applicable Manufacturer with a copy of any correspondence, reports, or other documents relating to a complaint or ADE received by PRI or its Affiliate relating to the Product promptly of the receipt thereof and shall also provide to Genpharm (and such Manufacturer) PRI's response thereto within a reasonable period following generation of such document by PRI. Upon the request of Genpharm, PRI shall use reasonable commercial efforts to retrieve and shall cause its Affiliates to use reasonable commercial efforts to retrieve such samples of the Product which are the object of a complaint or ADE to enable Genpharm and/or the applicable Manufacturer to conduct such tests, studies and investigations as it determines to be necessary to respond to such ADE or complaint or to take appropriate corrective action. I.7 RECALLS: (a) In the event that Genpharm or a Manufacturer shall be required (or shall voluntarily decide) to initiate a recall, product withdrawal or field correction of any Product (a "RECALL"), whether or not such Recall has been requested or ordered by the FDA (or any other governmental body, agency or official having jurisdiction in the Territory) or by a court, Genpharm shall, or shall cause the applicable Manufacturer to, notify PRI and PRI shall fully co-operate and shall cause its Affiliates to fully co-operate with Genpharm (and such Manufacturer) in notifying their customers to return all such Product and shall follow any other instructions provided by Genpharm (or such Manufacturer). (b) In the event that PRI believes that a Recall may be necessary and/or appropriate, prior to taking any action PRI shall immediately notify Genpharm and the applicable Manufacturer and Genpharm and PRI shall co-operate and cause their respective Affiliates to co-operate with each other (and the other's Affiliate) in determining the necessity and nature of the action to be taken. (c) With respect to any Recall, Genpharm or the Manufacturer shall make all contacts with the FDA and shall be responsible for co-ordinating all of the necessary activities in connection with such Recall and PRI (and its Affiliates) and Genpharm (and its Affiliate) shall each co-operate with the other (and with the other's Affiliate) in recalling the affected Product. (d) In the event that it is determined by agreement of the parties or by arbitration as herein contemplated that a Recall results solely from any cause or event arising from the manufacture, labelling, storage, handling, or packaging of the Product by Genpharm or a Manufacturer or other cause or event attributable to Genpharm or a Manufacturer, Genpharm shall be responsible for all expenses of such Recall. In the event that it is determined by agreement of the parties or by arbitration as herein contemplated that a Recall results solely from any cause or event arising from the transportation, manufacturing (if applicable), repackaging, labelling, storage, handling, marketing or distribution of the Product by PRI or any of its Affiliates or other cause or event attributable to PRI or any of its Affiliates, PRI shall be responsible for all expenses of such Recall. If: (i) within 60 days of the initiation of a Recall, the parties are unable to agree that the cause of such Recall was solely the responsibility of PRI or its Affiliates or Genpharm or a Manufacturer as hereinbefore contemplated; or (ii) an arbitrator pursuant to an arbitration initiated by one of the parties in respect of such Recall within the 60 day period contemplated in (i) above, determines that the cause of such Recall was not solely the responsibility of PRI or its Affiliates or of Genpharm or a Manufacturer as hereinbefore contemplated; then PRI shall initially pay or reimburse Genpharm and its Affiliates, as the case may be, for the expenses of the Recall but shall be entitled to recover from Genpharm *** % of the expenses so incurred through deductions to and sharing of Gross Profits. (e) For purposes of this agreement, Recall expenses shall include, but not be limited to, the expenses of notification and destruction or return of the recalled Product, as the case may be, and PRI's (and its Affiliates') and Genpharm's and its Affiliates' reasonable out-of-pocket costs in connection with such Recall including but not limited to reasonable attorney's fees and expenses and credits and recall expenses claimed and paid to customers (the "RECALL EXPENSES"). Each of the parties shall use, and shall cause its Affiliates to use, its reasonable best efforts to minimize the Recall Expenses which it incurs and shall provide to the other, upon request, reasonable evidence of the out-of-pocket expenses being claimed by it. The direct out-of-pocket costs and expenses of the Recall contemplated above shall not include the gross amount invoiced by PRI or its Affiliates to the customers on the sale of the Product recalled, which amount shall be dealt with in accordance with the provisions of Section F.2 of Schedule "F" hereto and shall also not include any Excess Reprocurement Costs (within the meaning of Section F.3 of Schedule "F" hereto), which costs shall be paid by PRI (subject to its right to partially recover same through deduction from Gross Profits). (f) All Product recalled pursuant to this Section I.7 shall be treated as Product returned to PRI by its customers and the provisions of Section F.2 of Schedule "F" hereto shall apply thereto. (g) All communications relating to a Recall shall be held in confidence and shall be subject to the terms of Schedule "J" hereof. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "J" CONFIDENTIALITY J.1 CONFIDENTIAL NATURE OF AGREEMENT: Each of the parties hereto agrees that, without the prior written consent of the other, or except as may be required by law or court order, the existence and terms of this agreement shall remain confidential and shall not be disclosed to any Person other than employees and professional advisers of such party or its Affiliate who reasonably require knowledge of the existence or terms of this agreement and who are bound to such party or its Affiliate by a like obligation of confidentiality. Such employees and advisors will be advised of the nature and existence of the confidentiality undertakings of this agreement and of the applicability of such undertakings to them and will agree to be bound hereby. J.2 DUTY OF CONFIDENTIALITY: Each of Genpharm and PRI agrees to hold in trust and confidence (and to cause its Affiliates to hold in trust and confidence) for the benefit of the other party (and its Affiliates) all Confidential Information of such other party and its Affiliates and each further agree to safeguard, and to cause its Affiliates to safeguard, the Confidential Information of the other (or its Affiliates) to the same extent that it does with its own confidential information and to limit and control copies, extracts and reproductions made of such Confidential Information. Neither party will, without the express written consent of the other, directly or indirectly, use (or authorize, permit or suffer any of its Affiliates to use) any Confidential Information of the other party or of its Affiliates for any purpose other than to implement the provisions of this agreement or in regulatory proceedings or in litigation. Neither party will disclose Confidential Information to any Person, other than its employees or other representatives or those of its Affiliates who have a need to know to fulfill the provisions and intent of this agreement (where such provisions and intent cannot properly be fulfilled without such disclosure) and who have been informed of the confidential nature of the information and have agreed to be bound by the terms hereof. Each of Genpharm and PRI shall use its best efforts to prevent unauthorized use or disclosure of the Confidential Information of the other or its Affiliates and shall use protective measures no less stringent than those used by it in its own business to protect its own confidential information, including segregating such information at all times from the confidential material of others so as to prevent any commingling. J.3 COMPULSORY DISCLOSURES: In the event that either Genpharm or PRI (or any of their respective Affiliates) shall be legally compelled or required by a court of competent jurisdiction to disclose all or any part of the Confidential Information of the other (or its Affiliates), it shall provide prompt notice to the other so that such other party (or its Affiliates) may determine whether or not to seek a protective order or any other appropriate remedy. If a protective order or other appropriate remedy is not obtained before such disclosure is required, the party required to make disclosure will disclose only those portions of the Confidential Information in question which it is advised by written opinion of counsel (which opinion shall be addressed to such party and to the other party), it is legally required to disclose and will exercise its best efforts to obtain reliable assurances that confidential treatment will be accorded such Confidential Information. J.4 RETURN OF CONFIDENTIAL INFORMATION: Upon termination of this agreement each of Genpharm and PRI shall immediately return to the other all material containing or reflecting or referring to any Confidential Information of the CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION other party or its Affiliates (including all notes, summaries, analysis or other documents prepared or derived therefrom) and all copies thereof in any form whatsoever under the power or control of such party or its Affiliates, except that one copy may be retained for legal archival purposes, and such party shall delete such Confidential Information from all retrieval systems and data bases or destroy same as directed by the other party and furnish to the other party, if requested, a certificate of a senior officer of such party certifying such return, deletion and/or destruction. Where this agreement is terminated in respect of a particular Product or Products only then the foregoing obligations shall thereupon apply to Confirmation Information relating to such Product or Products. J.5 SURVIVAL: The obligations of confidentiality contained herein shall survive the termination of this agreement. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "K" ARBITRATION K.1 ARBITRATION: Any controversy or claim arising out of, or relating to, this agreement or the breach thereof shall be referred for decision forthwith to a senior executive of each party not involved in the dispute. If no agreement is reached within 30 days of the request by one party to the other to refer the same to such senior executive, then such controversy or claim shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, such arbitration to be held in New York, New York on an expedited basis. Judgement upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "L" GENERAL CONTRACT TERMS AND CONDITIONS L.1 NOTICE: Subject to the express provisions of this agreement, any notice required or permitted to be given under this agreement shall be sufficiently given if in writing and delivered by facsimile (with confirmation of transmittal) or overnight courier (with confirmation of delivery), as well as by prepaid registered mail (with return receipt requested) or hand delivery to the appropriate party at the address set forth below, or at such other address or to the attention of such other individual as such party may from time to time specify for that purpose in a notice similarly given: To Genpharm at: 85 Advance Road, Etobicoke, Ontario, M8Z 2A6, Canada Attention: Chief Financial Officer Fax Number: (416) 236-9807 To PRI at: One Ram Ridge Road Spring Valley, NY 10977 U.S.A. Attention: Chief Financial Officer Fax Number: (914) 425-7922 Any such notice shall be effective (i) if sent by mail, as aforesaid, 5 business days after mailing, (ii) if sent by facsimile, as aforesaid, when sent (with confirmation of receipt), and (iii) if sent by courier or hand delivered, as aforesaid, when received, provided that if any such notice shall have been sent by mail and if on the date of mailing thereof or during the period prior to the expiry of the 5th business day following the date of mailing there shall be a general postal disruption (whether as a result of rotating strikes or otherwise) in the country or territory where the sender or the intended recipient is situated then such notice shall not become effective until the 5th business day following the date of resumption of normal mail service. Where PRI is authorized or required to notify or otherwise communicate with a Manufacturer other than Genpharm it shall notify or otherwise communicate with such Manufacturer in the foregoing manner (and the provisions hereof shall apply mutatis mutandis) at the address or facsimile number (and to the attention of such individual) as Genpharm shall notify PRI from time to time in accordance with the foregoing notice provisions or at such other address or facsimile number or the attention of such other individual as such Manufacturer may specify in a notice similarly given, provided that a copy of each such notice or CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION other communication shall be forwarded to Genpharm at its address for notice hereunder. L.2 FORCE MAJEURE: Neither party shall be considered to be in default in respect of any obligation hereunder if failure of performance shall be due to Force Majeure (as hereinafter defined). If either party is affected by a Force Majeure event such party shall, within 20 days of its occurrence, give notice to the other party stating the nature of the event, its anticipated duration and any action being taken to avoid or minimize its effect. The suspension of performance shall be of no greater scope and no longer duration than is required by such Force Majeure and the non-performing party shall use commercially reasonable efforts to remedy its inability to perform. The obligation to pay money in a timely manner is absolute and shall not be subject to the Force Majeure provisions, except to the extent payment is prohibited by governmental rule or regulations other than rules or regulations incident to bankruptcy or insolvency proceedings of a party. Force Majeure shall mean an unforeseeable or unavoidable cause beyond the control and without the fault or negligence of a party or its Affiliate including, but not limited to, explosion, flood, war (whether declared or otherwise), accident, labour strike or other labour disturbance, inability to obtain materials or services, sabotage, acts of God, newly enacted legislation, newly issued orders or decrees of any Court and any binding act or order of any governmental agency. Notwithstanding anything in this Section, the party to whom performance is owned but to whom it is not rendered because of an event of Force Majeure as contemplated in this Section shall, after the passage of 120 days, have the option to terminate this agreement in respect of the Product affected by such event on 30 days prior written notice to the other party hereto. For greater certainty, Force Majeure in relation to Genpharm's obligation to supply Product hereunder to PRI shall include the inability to obtain the required Product from the Manufacturer thereof as a result of events or circumstances relating to such Manufacturer which would otherwise be an Event of Force Majeure had it occurred in relation to Genpharm. L.3 GOVERNING LAW AND CONSENT TO JURISDICTION: This agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of New York without giving effect to New York's choice of law provisions. L.4 ENTIRE AGREEMENT: This agreement contains the entire agreement and understanding of the parties with respect to its subject matter and supersedes all negotiations, prior discussions and any agreements relating to the Products. This agreement may not be amended or modified except by a written instrument signed by the parties. L.5 WAIVER: Any waiver of, or consent to depart from, the requirements of any provision of this agreement shall be effective only if it is in writing and signed by the party giving it, and only in the specific instance and for the specific purpose for which it has been given. No failure on the part of any party to exercise, and no delay in exercising, any right under this agreement shall operate as a waiver of such right. No single or partial exercise of any such right shall preclude any other or further exercise of such right or the exercise of any other right. L.6 COUNTERPARTS: This agreement may be executed in identical duplicate copies exchanged by facsimile transmission. The parties agree to execute two identical original copies of the agreement after exchanging signed facsimile versions. Each identical counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. L.7 SEVERABILITY OF PROVISIONS: If, for any reason whatsoever, any term, covenant or provision of this agreement or the application thereof to any party or circumstance or in any jurisdiction is to any extent held or rendered invalid, unenforceable or illegal, then such term, covenant or condition (a) is deemed to be independent of the remainder of this agreement and to be severable and divisible therefrom and its validity, unenforceability or illegality shall not affect, impair or invalidate the remaining provisions hereof; and (b) continue to be applicable and enforceable to the fullest extent permitted by law in every other jurisdiction and against any party and circumstances other than those as to which or in respect of which it has been held or rendered unenforceable or illegal. To the extent permitted by applicable law, Genpharm and PRI hereby waive any provision of law which renders any provision of this agreement prohibited or unenforceable in any respect. Should any provision of this agreement be so held to be unenforceable, such provision, if permitted by law, shall be considered to have been superseded by a legally permissible and enforceable clause which corresponds most closely to the intent of the parties as evidenced by the provision held to be unenforceable. L.8 ASSIGNMENT: Neither this agreement nor rights of a party hereunder may be assigned nor may the performance of any duties hereunder be delegated by PRI or by Genpharm without the prior written consent of the other party. Notwithstanding the foregoing, Genpharm and PRI may delegate from time to time some of their respective duties hereunder to any of their respective Affiliates and, in addition, Genpharm and/or its Affiliate may subcontract the manufacturing of a Product, in whole or in part, to any other Person (whether or not an Affiliate), provided that (a) such subcontracting is done in compliance with all applicable requirements of the FDA; (b) prior to any such delegation, the delegating party gives written notice thereof to the other party hereto (indicating the duties being so delegated and the duration of such delegation) and (c) no such delegation or subcontracting shall relieve Genpharm or PRI, as the case may be, of any of its obligations hereunder. Subject to the foregoing this agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. L.9 NON CONTRAVENTION: Each party represents and warrants that the execution, delivery and performance of this agreement by it will not contravene any other contract or agreement to which it is a party or by which it is bound. L.10 COMPLIANCE: Where, in accordance with the provisions of this agreement, the Affiliate of a party is required to do or omit to do or use reasonable commercial (or other) efforts to do or refrain from doing any act or thing such party shall use reasonable best commercial efforts to cause its Affiliates to comply. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "M" DEFINITIONS "AFFILIATE" means, subject to the limitations set forth below, any Person which, directly or indirectly, controls, is controlled by or is under common control with such Person. For purposes of this definition, the term "control" (as used in the terms "CONTROLS", "CONTROLLED BY" and "UNDER COMMON CONTROL") means either (i) holding 50% or more of the voting securities of such Person or, (ii) in the case of a Person that has no outstanding voting securities, having the right to 50% or more of the profits of such Person or having the right in the event of dissolution to 50% or more of the net assets of such Person or, (iii) the power to direct or cause the direction of the management and policies of such Person, whether pursuant to the ownership of voting securities, by contract or otherwise; provided, however, that Merck KGaA and its Affiliates shall be deemed not to be Affiliates of Genpharm unless such Person is Merck Generics Group B.V. or a subsidiary of Merck Generics Group B.V. so that by way of illustration only and without limiting the generality of the foregoing, Dey Laboratories, Inc. will not be an Affiliate of Genpharm; "ANDA" means the abbreviated new drug application heretofore or hereafter filed by Genpharm or any of its Affiliates with the FDA for or in respect of a Product; "APPROVED LISTING FEE" means, in respect of a Product, listing fees and other similar up-front payments paid by PRI and its Affiliates to unrelated third party customers in consideration for such customers agreeing to buy the Product to the exclusion of other Competing Products for a specified period of time, where: (i) the agreement pursuant to which such payment is to be made has been entered into in compliance with the policy relating to listing fees and other similar up-front payments previously approved by Genpharm, or the proposed agreement has been approved in writing by Genpharm; (ii) the agreement pursuant to which such payment is to be made has been entered into exclusively to enhance the sale of such Product and is not entered into to directly or indirectly enhance the sale of PRI or any of its Affiliates Other Products (within the meaning of Section E.3 of Schedule "E" hereto) or as an incentive for such customer to purchase any Other Products of PRI or its Affiliates; (iii) the amount to be paid pursuant to such agreement to such customer plus the amount previously paid to such customer and/or Affiliates of such customer in respect of such Product pursuant to any other similar agreement is less than the sum of $*** , or such greater amount as Genpharm may approve in writing, which approval shall not be unreasonably withheld or unduly delayed (and Genpharm shall be deemed to have approved a request for an increased amount to be paid to a customer unless Genpharm notifies PRI within 12 business hours (being hours between 9:00 a.m. and 5:00 p.m., Toronto time, on a CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION business day) of the receipt by Genpharm of a written request for such increased fee or payment that it does not consent to such increased amount; and (iv) not more than 2 unrelated third party customers of PRI and its Affiliates have already been paid (or are entitled to receive from PRI or its Affiliates) a listing fee or other similar upfront payment from PRI or its Affiliates in respect of such Product, unless Genpharm consents to increase the number of customers to whom listing fees or similar upfront payments may be made in accordance with the foregoing, which consent shall not be unreasonably withheld or unduly delayed [and Genpharm shall be deemed to have approved a request to the payment of a listing fee or other similar upfront payment to a specified customer where such payment would otherwise be in breach of this paragraph (iv) unless Genpharm notifies PRI within 12 business hours (being hours between 9:00 a.m. and 5:00 p.m., Toronto time, on a business day) of the receipt by Genpharm of a written request for such a payment to such specified customer that it does not so consent]; "BUSINESS DAY" means a day other than a Saturday, a Sunday or a day which is a statutory holiday in the Province of Ontario, Canada or the State of New York, United States of America; "cGMP" means the current Good Manufacturing Practices of the FDA (as in effect from time to time); "COMPETING PRODUCT" means, with respect to a particular Product, a generic pharmaceutical product which is in the same dosage form, has the same active ingredient, the same strength and is for the same indication as such Product but which is manufactured and supplied by or purchased or acquired from any Person other than Genpharm or its Affiliates; "CONFIDENTIAL INFORMATION" shall mean information disclosed to or obtained by one party from another party (including information obtained by one party as a result of access to the facilities of the other party) either prior to or during the term of this agreement which is non-public, confidential or proprietary in nature (including, without limitation, trade secrets, financial data, product information, manufacturing methods, market research data, marketing plans, identity of customers, or product information [including the nature and source of raw materials, product formulation and methods of producing, testing and packaging]) and which relates to the disclosing party's past, present or future research, development or business activities Confidential Information shall not, however, include information that a party can demonstrate by written evidence: (i) is in the public domain (provided that information in the public domain has not and does not come into the public domain as a result of a breach by a party hereto (or any of its Affiliates) of its obligations of confidentiality contained herein; (ii) is known by the receiving party prior to disclosure by the other party; or (iii) which has been developed by the receiving party independent of any disclosure by the other party; CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (iv) is subsequently, lawfully and in good faith obtained by the receiving party on a non-confidential basis from a third party as shown by documentation sufficient to establish the third party as the source of the information, provided that such third party was not under an obligation to treat such information in a confidential manner and had a lawful right to make such disclosure; "DEDUCTIBLE LISTING FEE" means, in relation to a Product in respect of a period for which Net Sales is being calculated hereunder, the aggregate of those amounts, each of which is the portion of an Approved Listing Fee paid by PRI or its Affiliates in such period or in any prior period amortized, on a monthly basis, over the period of the agreement pursuant to which such Approved Listing Fee is paid, applicable to such period; "EFFECTIVE DATE" means the 25th day of March, 2002; "FDA" shall mean the United States Food and Drug Administration (or whatever such agency might be called from time to time), or any successor agency having regulatory jurisdiction over the manufacture, distribution and sale of drugs in the United States. "GROSS PROFITS" means, for a Product in respect of any period, PRI's Net Sales of such Product in such period less the aggregate of the following: (a) the landed cost to PRI of such Product sold in such period by PRI and/or its Affiliate to unrelated third party customers, determined in accordance with generally accepted accounting principles consistently applied, to include, without duplication, the Transfer Price of such Product to PRI, import duties and taxes paid or payable by PRI in respect of purchase or importation of such Product and delivery charges (including insurance) incurred by PRI for the delivery of the Product from the Plant to PRI's Spring Valley, New York, facility; (b) Recall Expenses incurred in such period in respect of such Product; (c) Excess Reprocurement Costs incurred in such period in respect of such Product; and (d) Repackaging Expenses incurred by PRI applicable to the quantity of Product sold in such period determined in accordance with generally accepted accounting principles, consistently applied; For greater certainty, where Product sold by PRI or its Affiliates in a period (the "RESALE") had previously been sold by PRI or its Affiliates to an unrelated third party customer in that period or any prior period and returned to PRI or its Affiliates by such customer in such period or a prior period and an amount on account of the landed cost of such Product as contemplated in (a) above has been deducted in calculating Gross Profits in respect of the prior sale for such period or a prior period then the amount to be deducted under Paragraph (a) above in respect of the Resale shall be deemed to be nil. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION It is understood and agreed that where Product purchased by PRI has been returned to Genpharm or otherwise disposed of (in a manner approved of by Genpharm) entitling PRI to claim a reduction, refund, remission or other recovery of the import duties or taxes paid or payable by PRI in respect of the purchase or importation of such Product then PRI shall promptly claim such reduction, refund, remission or other recovery of such duties and taxes (and shall promptly file and submit all required documentation to the applicable fiscal authority therefore) and the Gross Profit for the period in which the reduction, refund, remission or other recovery of such duties and taxes is recognized by PRI (or its Affiliates) in accordance with generally accepted accounting principles shall be increased by the amount of the recognized reduction, refund, remission or other recovery of such duties and taxes. The deduction under (b) and (c) are limited to Recall Expenses or Excess Reprocurement Costs actually incurred in such period and shall not include any amount accrued, provided or reserved for estimated or potential deductions. Excess Reprocurement Costs and Recall Expenses (to the extent they represent amounts payable to unrelated third party customers) shall be considered to be actually incurred only when the payment is made or credit is issued to such customer by PRI or its Affiliates. "GROSS SALES" means, in respect of sale of Units of the Product by PRI and its Affiliates in the Territory, the gross invoice price charged by PRI and its Affiliates to unrelated third party customers less freight, postage and insurance related to the delivery of the Product to such customer to the extent that such amount is charged to such customer and shown separately on such invoice and has been included in the gross invoice price and less sales taxes and other governmental charges imposed upon the sale of such Product by PRI or its Affiliates to such customer (to the extent that such amounts have been included in gross invoice price); "INELIGIBLE PERSON" means any Person who is prohibited by any law, rule or regulation or by any order, directive or policy from selling any of the Products (assuming that the Product Approvals have been obtained) or other pharmaceutical products within the Territory or who is listed by a United States federal agency as debarred, suspended, proposed for debarment or otherwise ineligible for federal programs in the United States or other jurisdictions within the Territory; "MANUFACTURER" means, in respect of a Product, the Affiliate of Genpharm in whose name the Product Approval for such Product is registered; "MANUFACTURING COST" shall mean the cost to Genpharm or the Manufacturer to manufacture (including quality control and testing) and package the Product including, without limitation, the landed cost of raw materials and packaging materials, component costs, energy, labor (salary and benefits) and reasonable overhead charges (not to exceed 20% of the Manufacturing Cost) relating to the manufacture of the Product, and other direct and allocable indirect costs to manufacture such Product, including but not limited to manufacturing charges for material adjustments, for off grade or defective material, handling losses, physical adjustments, salvage and depreciation but specifically excluding costs incurred in research, development, design, marketing, promotion, administration or obtaining the Product Approval, determined in accordance with methods currently employed by Genpharm or such Manufacturer in the manufacture of all CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION products produced in the facility or facilities in which Product is manufactured. If, in the sole discretion of Genpharm or the Manufacturer, all or any portion of the manufacturing or packaging of the Product is subcontracted by Genpharm or such Manufacturer to a third party (or to any Affiliate of PRI) the Manufacturing Costs shall include the amount paid to such third party (or PRI's Affiliate). The Manufacturing Cost of the Product shall be established on the date that the Product Approval for such Product is acquired by Genpharm or the Manufacturer and on the first day of each calendar quarter thereafter, which amount shall be used to determine the Transfer Price of Product manufactured by Genpharm or the Manufacturer for PRI during the period until the next Manufacturing Cost determination date. The parties further acknowledge and agree that where, during a period between Manufacturing Cost determination dates, the variable costs incurred by Genpharm or the Manufacturer to manufacture the Product (and which are included in the Manufacturing Cost) have, in the aggregate, increased or decreased by more than 5%, a pro rata adjustment will be made to the Manufacturing Cost of Products manufactured during such period as agreed upon by Genpharm and PRI or, failing agreement, as determined by arbitration pursuant to Schedule "K" of this agreement. In determining changes in Manufacturing Cost due to changes in the variable costs incurred by Genpharm or Manufacturer for raw materials and components including active ingredient, such materials shall be used and costed on a first in, first out basis in accordance with generally accepted accounting principles, consistently applied. Within 30 days of the receipt of a Product Approval for such Product, and within 30 days of each Manufacturing Cost determination date, Genpharm shall deliver or cause to be delivered to PRI a statement showing the calculation of the Manufacturing Cost applicable to such period, which statement shall be accompanied by a certificate signed by the Chief Financial Officer of Genpharm or, at Genpharm's option, the Manufacturer of such Product certifying that, to the best of his knowledge, information and belief, after reasonable investigation, such statement is true and correct in all material respects; "NET SALES" means, in respect of a Product for a period, the gross amount invoiced by PRI and its Affiliates in such period to unrelated third party customers on account of the sale of such Product (excluding amounts for freight, postage, insurance, sales tax and other governmental charges imposed upon such sale which are included in the gross amount invoiced and shown separately on such invoice) PLUS any other form of revenue (other than interest accruing from or paid by such customers on account of outstanding overdue invoices) or expense reimbursement or recovery recognized by PRI or its Affiliates in such period in accordance with generally accepted accounting principles as a result of commercial arrangements relating to such Product LESS, without duplication: (i) credits issued or payments made by PRI and its Affiliates to unrelated third party customers for or on account of, without duplication, bona fide rebates granted and customary trade discounts (other than prompt payment discounts) actually allowed by PRI or its Affiliates to such customers in the ordinary course of business (except rebates or discounts granted wholly or partially in consideration of such customer's agreement to purchase any service or any product other than the Product unless such rebates or discounts are across-the-board rebates or discounts applied uniformly to the Product and other products or services as part of an overall program of rebates or discounts established by PRI CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION covering substantially all of its products), shelf stock adjustments, chargebacks, returned Product, rejection of damaged Product and billing and shipping errors related to the Product; (ii) out-of-pocket costs for freight, postage and insurance incurred by PRI or its Affiliates in the period to deliver the Product to unrelated third party customers to the extent that such amount is not charged to such customer; (iii) payments made by PRI and its Affiliates for administrative fees, reimbursements or similar payments to or for Medicaid or any other government programs, hospitals, health maintenance organizations, insurance carriers, or other similar arm's length entity or entities in connection with the purchase or utilization of the Product; (iv) Deductible Listing Fees paid by PRI or its Affiliates which are applicable to the period. It is understood and agreed that: (a) deductions under (i), (ii), (iii) and (iv) above from the gross amount invoiced or other revenue recognized shall not include any amounts which would be categorized as packaging, relabelling, selling, promotion, marketing or general or administrative expenses in accordance with generally accepted accounting principles; (b) deductions under (i), (iii) and (iv) above from the gross amount invoiced or other revenue recognized are for actual credits issued or payments made by PRI and its Affiliates and do not include amounts accrued, provided or reserved for estimated or potential deductions; (c) the deduction under (i) above from the gross amount invoiced or other revenue recognized shall not include any Recall Expenses or Excess Reprocurement Costs credited or paid to such customer or any amount paid or credited to the customer on returned or rejected Product to the extent of the Transfer Price of the Product returned or rejected (which amounts shall be dealt with in accordance with the provisions of Sections F.2 or F.3 of Schedule "F" hereto or the definition of "GROSS PROFIT"); (d) no amount shall be deducted under (i), (ii), (iii), (iv) above or otherwise from the gross amount invoiced or other revenue recognized on account of or as an allowance for a bad debt or doubtful account in relation to Product sold by PRI or its Affiliates; (e) no amount shall be deducted under (i), (ii), (iii), (iv) or otherwise from the gross amount invoiced or other revenue recognized where PRI has the right to recover the amount paid or credited to a customer or other Person from Genpharm pursuant to this agreement and, if any amount previously claimed as such deduction in calculating Net Sales in one period is subsequently recovered or becomes recoverable from Genpharm in another CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION period the amount so recovered shall be added to the Net Sales in the period in which it is recovered or becomes recoverable from Genpharm, it being the intention of the parties hereto that PRI shall not have the right to recover the same expense directly from Genpharm and again through the calculation of Gross Profits hereunder; (f) no credit or payment to an unrelated third party customer shall be deducted under (i) from the gross amount invoiced or other revenue recognized where such credit or payment is an attempt to directly or indirectly circumvent the restrictions or limitations contained herein as to the nature or quantum of the items which may be deducted hereunder in calculating Net Sales nor shall PRI or its Affiliates reduce the selling price at which the Product is sold to an unrelated third party customer with a view to circumventing such restrictions or limitations; and (g) in respect of transfers of Product by PRI to its Affiliates (or between Affiliates) for resale, the price at which such products are resold by such Affiliate to third parties (other than other Affiliates) shall be included in Gross Profits and the transfer price between PRI and its Affiliates or between such Affiliates will be disregarded. "PERSON" shall be broadly interpreted and shall include an individual, partnership, joint venture, association, corporation, company and any other form of business organization, government, regulatory or governmental agency, commission, department and instrumentality; "PLANT" means the manufacturing facility and/or warehouse used by Genpharm or any other Manufacturer to manufacture or store a Product which is to be supplied to PRI pursuant hereto; "PRODUCT" means the generic pharmaceutical products identified in Section 1 of this agreement which are to be developed and manufactured by or on behalf of Genpharm or a Manufacturer and supplied by or on behalf of Genpharm to PRI pursuant hereto; "PRODUCT APPROVAL" means, with respect to a Product, the final and unconditional approval of an ANDA by the FDA enabling Genpharm or the Manufacturer to sell such Product in the Territory; "PRODUCT MANUFACTURING REQUIREMENTS" shall have the meaning attributed thereto in Section B.2 of Schedule "B" hereto; "RECALL" shall have the meaning attributable thereto in Section I.7 of Schedule "I" hereto; "RECALL EXPENSES" shall have the meaning attributable thereto in Section I.7 of Schedule I hereto; "REPACKAGING EXPENSES" means the cost to PRI or its Affiliates to package the Product including, without limitation, the landed cost of packaging materials and labour (salaries and benefits) and reasonable overhead charges (not to exceed 20% of the Repackaging Expenses) relating to repackaging and labelling of the Product into finished labelled Units, determined in accordance with generally accepted accounting principles, consistently applied. The Repackaging CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION Expenses of a Product shall be determined on the date that the Product Approval for such Product is acquired by Genpharm or the Manufacturer and on the first day of each calendar quarter thereafter, which amount shall be used to determine the Repackaging Expenses of Products packaged into final labelled Units by PRI or its Affiliates during the period until the next Repackaging Expense determination date. The parties further acknowledge and agree that where, during a period between Repackaging Expense determination dates, the variable costs incurred by PRI or an Affiliate to repackage and label a Product (and which are included in the Repackaging Expenses) have, in the aggregate, increased or decreased by more than 5%, a pro rata adjustment will be made to the Repackaging Expenses of Products packaged into final labelled Units during such period as agreed to by Genpharm and PRI or, failing agreement, as determined by arbitration pursuant to Schedule "K" of this agreement. In determining changes in Repackaging Expenses due to changes in the variable costs incurred by PRI or its Affiliates for packaging material or other supplies, such materials and supplies shall be used and costed on a first in, first out basis in accordance with generally accepted accounting principles, consistently applied; "SPECIFICATIONS" means the terms and conditions applicable to a Product as described in the Product Approval covering such Product, as the same may be supplemented from time to time; "TERRITORY" means the 50 states of the United States of America, plus the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, Samoa and any other territory which, on the Effective Date is a United States government protectorate wherein an ANDA approved by the FDA is required to sell the Product in such territory; "TRANSFER PRICE" means the Manufacturing Cost of the Product supplied by or on behalf of Genpharm to PRI pursuant hereto; "THRESHOLD AMOUNT" means in respect of the Period, the following percentage of the generic market for the Product (measured in dollars) based upon unit sales as determined through IMS reported sales for such Period: (i) if, on the date the Period (as that term is defined in Section H.8 of Schedule "H" hereto) commences, there are not more than 2 other Competing Products being distributed in the Territory, 15%; or (ii) if, on the date the Period commences, there are more than 2 but less than 6 Competing Products being distributed in the Territory, 7-1/2%; or (iii) on the date the Period commences, there are more than 5 Competing Products being distributed in the Territory, 5%; "UNIT" means an individual packaged finished Product. EX-10 4 pharma_limited-partagmt.txt EXHIBIT 10.37 LIMITED PARTNERSHIP AGREEMENT ("Agreement") dated the day of April, 2002, among PAR SVC, LLC, a New York limited liability company ("PAR"), SVC PHARMA INC., a Delaware corporation ("SVC"), and UDF LP, a Delaware limited partnership ("UDF"), W I T N E S S E T H : - - - - - - - - - - WHEREAS, SVC, PAR and UDF desire to form a limited partnership upon the terms and conditions set forth herein; NOW, THEREFORE, it is agreed as follows: Section 1. FORMATION. SVC, PAR and UDF hereby form a limited partnership (the "Partnership") pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act, as the same may be amended from time to time (the "Delaware Act"). Section 2. PARTNERS. (a) GENERAL PARTNER. SVC shall be the general partner of the Partnership. (b) LIMITED PARTNERS. PAR and UDF shall be the limited partners of the Partnership. (c) DEFINED TERMS. SVC, together with any person or entity that becomes a substituted or additional general partner as provided herein, shall sometimes be referred to herein as the "General Partner," PAR and UDF, together with any person or entity that becomes a substituted or additional limited partner as provided herein, shall sometimes be referred to herein individually, as a "Limited Partner," and collectively, as the "Limited Partners," and the General Partner and the Limited Partners shall sometimes be collectively referred to herein as the "Partners." Section 3. NAME. The business of the Partnership shall be conducted under the name SVC Pharma LP or such other name or names as the General Partner may determine. Section 4. PURPOSES. The purpose of the Partnership is to research, develop, commercialize and market pharmaceutical preparations for human therapy as from time to time determined by the General Partner through subcontracting arrangements or otherwise, and any business ancillary or incidental to or in furtherance of any of the foregoing purpose, and such other business or businesses as the General Partner may, from time to time, determine to be in the interests of the Partnership. Section 5. PLACE OF BUSINESS. The Partnership may carry on business at such locations as may be determined by the General Partner. The principal office of the Partnership shall be located in Spring Valley, New York or such other place within or outside the State of New York as the General Partner may determine. Section 6. TERM. The Partnership shall begin on the date a Certificate of Limited Partnership is filed in the office of the Secretary of State of the State of Delaware, and shall continue for a period of ten years from the date of initial commercialization of a product to be automatically extended each year unless the Partners otherwise agree or unless the Partnership is otherwise dissolved in accordance with the provisions hereof or as otherwise provided by law. 2 Section 7. CAPITAL CONTRIBUTIONS. (a) AMOUNTS TO BE CONTRIBUTED. (i) BY PAR. $9,900.00 (ii) BY UDF. $9,900.00 (iii) BY SVC. $200.00 (b) LIABILITY FOR CAPITAL CONTRIBUTIONS. Each Partner shall be liable only for the making of the capital contribution set forth opposite such Partner's name in Section 7(a) hereof, and only such additional capital contribution as may be required pursuant to Section 8(a) hereof. (c) WITHDRAWAL OF CAPITAL CONTRIBUTIONS. Except with the consent of all the Partners, no Partner shall have the right to withdraw its capital contribution prior to dissolution and winding up of the Partnership pursuant to the terms of this Agreement. (d) INTEREST ON CAPITAL CONTRIBUTIONS. No interest shall accrue on the initial or any subsequent contributions to the capital of the Partnership. (e) LOANS. Loans, if any, by any Partner to the Partnership shall not be considered capital contributions. Section 8. ADDITIONAL CAPITAL CONTRIBUTIONS; LIMITATION. (a) ADDITIONAL CAPITAL AMOUNTS. In the event that the General Partner determines that additional capital is required for the business of the Partnership, each Partner hereby agrees to make additional capital contributions from time to time, as presented in Section 11(i), in accordance with and as limited by Section 8(b) below, in the aggregate amount so determined ("Additional Capital Amount"). In the event that a Limited Partner fails to make 3 the additional capital contribution as provided in Section 11(i), the provisions of Section 18(d) or 17(c), as applicable, shall control. (b) PROPORTIONATE CAPITAL CONTRIBUTIONS. The Additional Capital Amount to be contributed by each Partner shall be proportionate to such Partner's Percentage Interest (as defined in Section 9(a) below) ("Proportionate Capital Contribution"). Section 9. ALLOCATION OF PROFITS AND LOSSES. (a) PERCENTAGE INTERESTS. All items of income, gain, loss, deduction and credit of the Partnership shall be allocated among the Limited Partners as set forth below: SVC 1.0% PAR 49.5% UDF 49.5% ----- 100.0% ===== The percentage set forth opposite a Partner's name above shall constitute such Partner's percentage interest in the Partnership and is referred to herein as a Partner's "Percentage Interest." (b) CAPITAL ACCOUNTS. Notwithstanding any other provision of this Agreement, any allocation of income, gain, loss, deduction and credit of the Partnership made hereunder shall be made in such manner as will, after giving effect to such allocation, cause the Capital Accounts (as defined in Section 10(a) below) of the Partners to be in the ratio of the Partners' percentage interests. 4 Section 10. CAPITAL ACCOUNTS; ALLOCATIONS AND DISTRIBUTIONS. (a) DEFINED. As to any Partner, "Capital Account" shall mean an account maintained by the General Partner in accordance with Section 10(b) below. (b) ESTABLISHMENT AND MAINTENANCE. The General Partner shall establish and maintain a Capital Account for the Partners. Each such Capital Account shall be credited with (1) the amount of such Partner's Capital Contributions and (2) the amount of Net Income allocated to such Partner pursuant hereto. Each such Capital Account shall be debited with (i) any property distributed to such Partner, (ii) any cash distributions to such Partner, and (iii) the amount of Net Loss allocated to such Partner. In determining the balance of each Partner's Capital Account, and for all other purposes of this Agreement, the fair market value of any asset contributed to or distributed by the Partnership shall be determined in good faith by the General Partner, except as specifically provided herein. Any license granted pursuant to the Partnership by a Partner or an Affiliate of a Partner shall not be deemed an asset contributed to the Partnership. For purposes of this Agreement, "Affiliate" shall mean in the case of PAR, Par Pharmaceutical, Inc., a New Jersey corporation, and in the case of UDF, Rhodes Technologies, a Delaware General Partnership. (c) DISTRIBUTIONS. Subject to Section 10(e), the distributions shall be made to the Partners at times and in amounts determined by the General Partner; PROVIDED that all distributions are made PRO RATA in accordance with the Percentage Interests of the Partners. Distributions shall be made by the General Partner to the Partners as provided for herein of all amounts 5 contributed to the Partnership by the Partners which are no longer required to fund the Annual Budget. (d) TAX DISTRIBUTIONS. Subject to Section 10(e) hereof: (i) If the aggregate amounts distributed to a Partner pursuant to Section 10(c) hereof for any Fiscal Year of the Partnership is less than the Estimated Tax Amount (as hereinafter defined) of that Partner for such Fiscal Year, the General Partner, in its discretion may, and shall, upon receipt of a written request from any Partner, cause the Partnership to distribute additional amounts of cash to the Partners in proportion to their relative allocations of taxable income, until each Partner has received an amount of distributions for such Fiscal Year equal to its Estimated Tax Amount. For purposes hereof, Estimated Tax Amount shall mean, with respect to a Limited Partner, an amount of cash which in the good faith judgment of the General Partner (e) equals the amount of taxable income allocable to such Limited Partner in respect of such fiscal year multiplied by 40%; PROVIDED, HOWEVER, that, notwithstanding the foregoing calculation, distributions to each Limited Partner hereunder shall be in an equal amount. (ii) The General Partner shall cause the Partnership to make distributions in accordance with Section 10(d)(i) hereof to the Partners of their Estimated Tax Amounts for that period not later than the thirtieth (30th) day following the close of the fiscal quarter. The General Partner shall use its best efforts to ensure 6 that the Estimated Tax Amounts distributed by the Partnership in accordance with Section 10(d)(i) hereof shall be distributed to the Partners regardless of whether the Partnership otherwise has cash available for this purpose. At the close of the Fiscal Year, the General Partner shall make such proper adjustments as may be necessary to the character and amounts of such distributions to reconcile the final Estimated Tax Amounts of the Partners as of the close of the Fiscal Year with the projected Estimated Tax Amounts previously distributed to the Partners with respect to such Fiscal Year. (e) NO DEFICIT BALANCE. Notwithstanding the provisions of Section 10(c) and 10(d), the General Partner shall have the right to cause the Partnership to reduce or withhold distributions to any Partner to avoid a deficit balance in such Partner's Capital Account. (f) DISTRIBUTIONS UPON DISSOLUTION. Notwithstanding the provisions of Section 10(c), upon dissolution the General Partner shall make distributions to the Partners in the manner specified in Section 18. (g) TAX ELECTIONS. All matters concerning the allocation of tax items among the Partners, tax elections (except as otherwise required by income tax laws) and accounting procedures not expressly and specifically provided for by the terms of this Agreement or the Shareholder Agreement of even date herewith between PAR SVC, LLC and Rhodes Technologies shall be determined in good faith by the General Partner on a basis that is equitable among the Partners. 7 (h) TAX MATTERS PARTNER. The General Partner shall serve for each taxable year as the "Tax Matters Partner" of the Partnership under Internal Revenue Code ("Code") section 6231(a)(7) and section 301.6231(a)(7)-1 of the Treasury Regulations promulgated under the Code ("Regulations"). The General Partner shall have the power to manage and control, on behalf of the Partnership, any administrative proceeding at the Partnership level with the Internal Revenue Service relating to the determination of any item of Partnership income, gain, loss, deduction, or credit for federal income tax purposes. In furtherance of the foregoing, the General Partner shall have all the powers and responsibilities of such position provided in the Code and (a) shall promptly furnish the Internal Revenue Service with information sufficient to cause each Limited Partner to be treated as a "notice partner" as defined in Code section 6231(a)(8), (b) shall not file any action or suit or extend any statute of limitations relating to Partnership tax matters without first notifying each Limited Partner and obtaining the unanimous consent of all Limited Partners, and (c) shall not settle any action or suit relating to Partnership tax matters without first notifying all Limited Partners and obtaining the unanimous consent of all Limited Partners. Reasonable expenses incurred by the General Partner, in its capacity as such, will be treated as an operating expense of the Partnership and part of the Annual Budget hereunder. Any Limited Partner shall have the right to participate in any administrative proceedings relating to the determination of Partnership tax items at the Partnership level. (i) TAX ELECTIONS. The General Partner may, in its sole and absolute discretion, make or revoke, on behalf of the Partnership, such elections for federal income tax purposes as are permitted to be made under the Code, 8 including elections in accordance with Code section 754. (j) EFFECT OF CASH FLOW LOSSES. To the extent the Capital Account of any Partner is depleted by Cash Flow losses, such Capital Account shall be replenished from income of the Partnership before any net income distributions are made to the Partners. For the purposes of this Section 10(j), "Cash Flow" shall mean all net income of the Partnership as determined on the Partnership's books according to U.S. generally accepted accounting principles, plus (i) any amortization charge taken on the books for the amortization of intangible assets and (ii) depreciation, if any, taken on any assets including real property. Section 11. DUTIES AND OBLIGATIONS OF THE PARTNERS. (a) MANAGEMENT OF PARTNERSHIP BUSINESS. The General Partner shall have sole responsibility for managing and operating the business of the Partnership and shall exert its best efforts to promote the Partnership's success. In addition to any other rights and powers that the General Partner may possess under this Agreement and the Delaware Act, the General Partner, in the name and on behalf of the Partnership, shall, except to the extent otherwise provided herein, have all specific rights and powers required for or appropriate to the management of the Partnership's business. (b) FIDUCIARY DUTY OF GENERAL PARTNER. The General Partner shall be under a fiduciary duty to conduct the affairs of the Partnership in the best interests of the Partnership and of the Limited Partners, including the safekeeping of all Partnership funds and assets and the use thereof for the exclusive benefit of the Partnership. 9 (c) PROPOSALS AND PROJECTS. (i) The General Partner shall consider and review proposals submitted to the General Partner by a Limited Partner or an Affiliate (each, a "Proposal") to research, develop, commercialize and market pharmaceutical preparations for human therapy concentrating on pharmaceutical preparations having the potential for competitive advantage in the marketplace based upon unique formulations or dosage forms, new or expanded indications and/or patentability as to product, process or use (each, a "Product" and collectively the "Products"). Each Proposal shall be in such format as determined by the General Partner and shall include a proposed budget calculated to bring such Product successfully to market and a proposed timeline for so doing. No Limited Partner or its Affiliate has any obligation to present a Proposal to the General Partner on behalf of the Partnership with respect to any particular Product. (ii) The General Partner shall approve or reject each Proposal within a reasonable time period, based upon the specific characteristics and circumstances of each Proposal. Upon the approval of the General Partner, such Proposal (as may be modified by the General Partner) shall be designated a "Project" and such proposed budget (as may be modified by the General Partner) shall be designated the "Project Budget." The Project Budget shall be funded by the Partnership pursuant to a capital contributions schedule, 10 which generally shall require, unless the General Partner determines otherwise, that capital contributions in respect of the Annual Budget shall be made quarterly in advance and which shall generally consist of an initial portion, covering start-up and projected research and development costs through the end of the then current Fiscal Year, and subsequent annual portions pursuant to annual budgets (each, an "Annual Project Budget") developed each year by the General Partner, as may be amended from time to time by the General Partner in the event that it determines that such Annual Project Budget shall be insufficient to fund the Project for the then-current year. If the General Partner determines that a Project Budget shall not be sufficient to bring such Project to market successfully, whether due to cost overruns, adverse market conditions, unexpected developments or otherwise, the General Partner shall decide whether to increase the Project Budget or terminate the Project on behalf of the Partnership. Any Project Budget (including any modification by the General Partner) must be approved by the General Partner within 45 days of the General Partner's determination thereof failing which such Project Budget and the Project associated therewith shall be deemed rejected on behalf of the Partnership. Each Project Budget and each amendment or modification thereto shall be supported with detailed cost worksheets. (d) PROJECT DEVELOPMENT. The General Partner shall use commercially reasonable efforts to have a Project developed on behalf of the Partnership in accordance with the requirements of applicable law in such order of priority as 11 is determined by the General Partner. The Limited Partners acknowledge that there is no guaranty or warranty of the General Partner on behalf of the Partnership that development of any Product will be commenced or continued or successfully completed within any specific time period, if at all. (e) PROJECT SUBCONTRACTING. On a case-by-case basis, the General Partner shall decide where to subcontract the research, development, commercializing and/or marketing of a Project to an outside party, preferably a Limited Partner or an Affiliate; PROVIDED, HOWEVER, that (i) any subcontractor (including a Limited Partner or an Affiliate) that market, sells, distributes and collects receipts from sales of any Product shall be required to pay its gross profit (as determined in accordance with Exhibit A attached hereto) for such Product to the Partnership, except as otherwise determined by the General Partner, (ii) any Limited Partner or Affiliate that performs research on behalf of the Partnership shall be reimbursed for its research and development costs as determined in accordance with Exhibit B, (iii) any subcontractor shall be required to indemnify the Partnership in accordance with the terms prescribed by the General Partner, (iv) any subcontractor shall be required to purchase products liability insurance in such amount as the General Partner shall determine, (v) any subcontractor shall be required to comply with Current Good Manufacturing Practices (as hereinafter defined), and any material noncompliance with Current Good Manufacturing Practices by any subcontractor shall result in termination of such Person as a subcontractor, and (vi) any Person who is debarred, or whose affiliate is debarred, by the U.S. Food and Drug Administration or U.S. Defense Logistics Agency ("Debarment"), shall not be 12 engaged as a subcontractor hereunder, and any existing subcontracting arrangement with such Person shall automatically terminate upon such Debarment. "Current Good Manufacturing Practices" shall mean current good manufacturing practices for the methods used in, and the facilities and controls used for, the manufacture, processing, packaging and holding of the Product, all as set forth from time to time by the FDA pursuant to the Federal Food, Drug, and Cosmetic Act, as amended from time to time, and the rules and regulations promulgated thereunder (including specifically, Title 21, parts 210 and 211 of the Code of Federal Regulations of the United States). In the event a Limited Partner or an Affiliate is a subcontractor to the Partnership with respect to a Project, such Limited Partner's or Affiliate's compensation for its services to the Partnership on any Project shall be such amount approved by the General Partner. Where commercially reasonable, the General Partner will subcontract the Project, including primary Product development, research and development of active pharmaceutical ingredients, drug formulation and/or chemical composition, product approval and registration, bulk manufacturing, manufacturing of finished dosage form, marketing, distribution and sales, financial management, and legal compliance among the Limited Partners or their Affiliates. The General Partner shall have full and final authority over the distribution of responsibilities for each Project as it deems appropriate and desirable for the Partnership. Where any portion of a Project is subcontracted to a Limited Partner or an Affiliate, (x) the role played by such party shall be that of a subcontractor to the Partnership, and such party shall carry out its duties in accordance with the mandate of the General Partner; and (y) such party's compensation for its 13 services to the Partnership on such Project shall be the amount approved therefor by the General Partner. In the event that a Limited Partner or an Affiliate exceeds the amount approved by the General Partner with respect to such party's undertaking as a subcontractor, such excess amount shall not be reimbursed by the Partnership unless such reimbursement is approved by the General Partner. (f) PROGRESS REPORTS. The General Partner shall require each subcontractor under each Project to report on the progress of such Project on a periodic basis as determined by the General Partner. The General Partner shall monitor the progress of each Project and apprise the Partnership of such progress on a periodic basis as determined by the General Partner. The General Partner shall promptly report to the Partners any significant changes to the progress of a Project or its projected cost, schedule, or likelihood of success. (g) DUE ANALYSIS. In a Limited Partner's or an Affiliate's consideration of a Proposal intended to be submitted to the General Partner, the Limited Partner considering such submission agrees to undertake and agrees to cause its Affiliate to undertake such analyses with respect to the potential commercial viability of the Product or Products part thereof as such Limited Partner or Affiliate employs in determining whether or not to pursue the development of products within its own organization. (h) GROSS PROFIT PAYMENT. Payment to the Partnership of Gross Profit required under Section 11(c) hereof shall be made within forty-five (45) days following the conclusion of the calendar month in which the sale of the Product occurred. 14 (i) ANNUAL BUDGET. Each year during the term of this Agreement, the General Partner shall develop and approve an annual operating budget covering general operations for the upcoming year and incorporating, as separate line items, each Annual Project Budget (together, the "Annual Budget"). If the General Partner determines that an Annual Budget shall not be sufficient to fund the Partnership's obligations for the current year, whether due to cost overruns, adverse market conditions, unexpected developments or otherwise, the Annual Budget may be amended by the General Partner and upon such amendment the General Partner shall provide each Partner with written notice of any additional capital contribution due from such Partner pursuant to the amended Annual Budget, together with an explanation of such increase. Each Partner shall make an additional capital contribution to the Partnership in accordance with its Percentage interest to fund the Annual Budget. (j) DELIVERY OF FINANCIAL STATEMENTS. The General Partner shall deliver to the Partners financial statements of the Partnership as soon as practicable after the end of each fiscal year. (k) PARTNERSHIP TAX RETURNS. The General Partner shall cause the preparation and timely filing of all the Partnership's tax returns and shall promptly deliver copies thereof to the Partners. (l) LIMITATION ON ACTIONS OF LIMITED PARTNERS. The Limited Partners shall not participate in the control of the Partnership business or have the authority or right to act for or bind the Partnership. 15 (m) PERMITTED ACTIONS BY LIMITED PARTNERS. The Limited Partners are hereby entitled to possess or exercise one or more of the following powers or act in one or more of the following capacities and, in accordance with ss. 17-303 of the Delaware Act, any such possession, exercise or action shall not constitute participation in the control of the Partnership business within the meaning of the Delaware Act: (i) To be an independent contractor for or to transact business with, including being a contractor for, or to be an agent or employee of, the Partnership or a General Partner, or to be an officer, director or stockholder of a corporate General Partner, or to be a limited partner of a partnership that is a General Partner of the Partnership, or to be a trustee, administrator, executor, custodian or other fiduciary or beneficiary of an estate or trust which is a General Partner, or to be a trustee, officer, advisor, stockholder or beneficiary of a business trust which is a General Partner, or to be a member, manager, agent or employee of a limited liability company which is a general partner; (ii) To consult with or advise a General Partner or any other person with respect to any matter, including the business of the Partnership, or to act or cause a General Partner or any other person to take or refrain from taking any action, including by proposing, approving, consenting or disapproving, by voting or otherwise, with respect to any matter, including the business of the Partnership; 16 (iii) To act as surety, guarantor or endorser for the Partnership or a General Partner, to guaranty or assume one or more obligations of the Partnership or a General Partner, to borrow money from the Partnership or a General Partner, to lend money to the Partnership or a General Partner, or to provide collateral for the Partnership or a General Partner; (iv) To call, request, attend or participate at a meeting of the Partners or the Limited Partners; (v) To wind up the Partnership pursuant to ss. 17-803 of the Delaware Act; (vi) To take any action required or permitted by law to bring, pursue or settle or otherwise terminate a derivative action in the right of the Partnership; (vii) To serve on a committee of the Partnership or the Limited Partners or Partners or to appoint, elect or otherwise participate in the choice of a representative or another person to serve on any such committee, and to act as a member of any such committee directly or by or through any such representative or other person; (viii) To act or cause the taking or refraining from the taking of any action, including by proposing, approving, consenting or disapproving, by voting or otherwise, with respect to one or more of the following matters: 17 (A) The dissolution and winding up of the Partnership or an election to continue the Partnership or an election to continue the business of the Partnership; (B) The sale, exchange, lease, mortgage, assignment, pledge or other transfer of, or granting of a security interest in, any asset or assets of the Partnership; (C) The incurrence, renewal, refinancing or payment or other discharge of indebtedness by the Partnership; (D) A change in the nature of the business of the Partnership; (E) The admission, removal or retention of a General Partner; (F) The admission, removal or retention of a Limited Partner; (G) A transaction or other matter involving an actual or potential conflict of interest; (H) An amendment to this Agreement or the Partnership's Certificate of Limited Partnership; 18 (I) The merger or consolidation of the Partnership; (J) The indemnification of any Partner or other person; (K) The making of, or calling for, or the making of other determinations in connection with contributions; (L) The making of, or the making of other determinations in connection with or concerning, investments, including investments in property, whether real, personal or mixed, either directly or indirectly, by the Partnership; or (M) Such other matters as are stated in this Agreement or in any other agreement or in writing; (ix) To serve on the board of directors or a committee of, to consult with or advise, to be an officer, director, stockholder, partner (other than a general partner of a General Partner of the Partnership), member, manager, trustee, agent or employee of, or to be a fiduciary or contractor for, any person in which the Partnership has an interest or any person providing management, consulting, advisory, custody or other services or products for, to or on behalf of, or otherwise having a business or other relationship with, the Partnership or a General Partner of the Partnership; or 19 (x) Any right or power granted or permitted to the Limited Partners under the Delaware Act and not specifically enumerated in this Section 11(f). (n) OTHER ACTIONS BY LIMITED PARTNERS NOT CONSTITUTING CONTROL. The enumeration in Section 11(m) does not mean that the possession or exercise of any other powers or having or acting in other capacities by a Limited Partner constitutes participation by it in the control of the business of the Partnership. (o) CONSENT OF LIMITED PARTNERS. The Limited Partners hereby consent to the exercise by the General Partner of the powers conferred on the General Partner by this Agreement. Section 12. RESTRICTIONS ON THE AUTHORITY OF THE GENERAL PARTNER. (a) LIMITATIONS ON ACTIONS OF GENERAL PARTNER. The General Partner, in its conduct and management of the business and affairs of the Partnership, shall have all the powers conferred by the Delaware Act on general partners of a limited partnership; PROVIDED, HOWEVER, that the General Partner shall not take any of the following actions: (i) Do any act in contravention of this Agreement or which would make it impossible to carry on the ordinary business of the Partnership; or (ii) Admit any person or entity as an additional or substitute General Partner or as an additional or substitute Limited Partner, except as otherwise provided herein. 20 (b) ACTIONS REQUIRING CONSENT OF LIMITED PARTNERS. The General Partner shall not, without the consent of each of the Limited Partners, take any of the following actions: (i) Mortgage, assign or otherwise encumber its interest, if any, in the Partnership; or (ii) Extend the term of the Partnership. Section 13. LIMITED PARTNERS' LIABILITIES. (a) NO LIABILITY FOR LIABILITIES OF GENERAL PARTNER OR PARTNERSHIP. The Limited Partners shall not be liable for the debts or liabilities of the General Partner or the Partnership. (b) LIMITATION ON LIABILITY FOR DISTRIBUTIONS. A Limited Partner who receives a distribution from the Partnership shall have no liability under the Delaware Act or other applicable law for the amount of the distribution after the expiration of three years from the date of distribution. Section 14. DISABILITY OF THE LIMITED PARTNERS; ASSIGNMENT BY OR SUBSTITUTION OF LIMITED PARTNER. ( a) RIGHT TO CONTINUE BUSINESS. Upon the death, bankruptcy, dissolution or liquidation and termination of a Limited Partner (the "Affected Limited Partner"), the remaining Partners shall have the right to continue the business of the Partnership; PROVIDED, HOWEVER, that upon such event the administrator, committee, trustee or other legal representative or successor in interest of the Affected Limited Partner shall have all of the rights and 21 liabilities of the Affected Limited Partner as are necessary for the purpose of settling or managing the estate or the affairs of the Affected Limited Partner. (b) RIGHT TO ASSIGN PARTNERSHIP INTEREST. Subject to the restrictions on transferability contained in Section 20 below, the Affected Limited Partner (or its administrator, committee, trustee or other legal representative or successor in interest) shall have the right to assign its interest in the Partnership or to appoint such assignee as a substitute Limited Partner with respect to that interest. The General Partner shall make such amendments to this Agreement and the Partnership's Certificate of Limited Partnership, and file and record such amendments and other documents or instruments necessary to reflect such substitution. Section 15. REMOVAL OF THE GENERAL PARTNER. (a) RIGHT TO REMOVE GENERAL PARTNER. The Limited Partners, upon unanimous consent, shall have the right, exercisable by written notice to the General Partner, to remove the General Partner and appoint a substitute General Partner. (b) TERMINATION OF PARTNERSHIP INTEREST. The removed General Partner's Partnership Interest shall be terminated upon the date of such removal but it shall be entitled to receive the distributions, fees or other compensation then due to it pursuant to this Agreement or otherwise. (c) LIMITATION ON PERSONAL LIABILITY. The exercise of the right of removal granted in this Agreement or the removal of the General Partner shall not in any way impose any personal liability on the Limited Partners or render the Limited Partners general partners. If the General Partner is removed and a substitute General Partner is appointed, then, immediately upon the removal of 22 the General Partner, the Partners, including the substitute General Partner, shall amend the Partnership's Certificate of Limited Partnership and shall take or cause to be taken all filings and steps required in connection therewith, all in accordance with the Delaware Act or other applicable law. Section 16. ADMISSION OF AN ADDITIONAL GENERAL PARTNER. Any person or entity shall be admitted as an additional General Partner upon the unanimous written consent of the Partners. Upon any such event, there shall be promptly filed and caused to be recorded an appropriate amendment of the Partnership's Certificate of Limited Partnership. Section 17. EVENTS CAUSING DISSOLUTION. The happening of any one or more of the following events shall cause a dissolution of the Partnership: (a) WITHDRAWAL OF GENERAL PARTNER. The removal, death, bankruptcy, dissolution or liquidation and termination of the General Partner or other event of withdrawal of the General Partner which under the Delaware Act causes the dissolution of the Partnership, unless either (i) at the time of any such event there is at least one other General Partner, in which event the Partnership business may be carried on by the remaining General Partner or (ii) if there is no other General Partner, all the remaining Partners, within 90 days after any such event, (x) agree in writing to continue the business of the Partnership and (y) appoint effective as of the date of any such event a substituted General Partner; or (b) AGREEMENT TO DISSOLVE. An agreement to dissolve by the Limited Partners. 23 (c) Any failure by a Partner to make an Additional Capital Contribution as provided for in Section 8 hereof and (i) such failure continues for a period of 45 days of the written notice of such failure by another Partner and (ii) such failure is not subject to the provisions of Section 18(d) hereof. Section 18. CERTAIN CONTINGENCIES; LIQUIDATION. (a) LIQUIDATING AGENT. Upon the dissolution of the Partnership, the Partnership shall be liquidated in accordance with this Agreement and the Delaware Act. The liquidation shall be conducted and supervised by the General Partner or, if there is no General Partner, by a person who shall be designated for such purpose by the Limited Partners (the General Partner or such person so designated being herein referred to as the "Liquidating Agent"). The Liquidating Agent shall have all of the rights and powers with respect to the assets and liabilities of the Partnership in connection with the liquidation and termination of the Partnership that the General Partner has with respect to the assets and liabilities of the Partnership during the term of the Partnership, and the Liquidating Agent is hereby expressly authorized and empowered to execute any and all documents necessary or desirable to effectuate the liquidation and termination of the Partnership and the transfer of any asset or liability of the Partnership. The Liquidating Agent shall have the right from time to time, by revocable powers of attorney, to delegate to one or more persons or entities any or all such rights and powers and such authority and power to execute documents, and, in connection therewith, to fix the reasonable compensation of each such person or entity, which compensation shall be charged as an expense of liquidation. 24 (b) LIQUIDATION PROCEDURE. Upon dissolution of the Partnership, the Partnership shall be wound up and liquidated in accordance with the Delaware Act and the following provisions: (i) Any gain or loss realized on liquidating sales of the Partnership's assets, and all income, gain, deduction or loss for the taxable year (or fraction thereof) in which such liquidation occurs, shall be credited or charged to the Capital Accounts of the Partners in accordance with Section 9 hereof and the Capital Accounts of the Partners shall be further adjusted to reflect the manner in which any unrealized income, gain, loss or deduction inherent in any Partnership property to be distributed in kind (which has not previously been reflected in Capital Accounts) would be allocated among the Partners if there were a taxable disposition of such property for its fair market value on the date of such distribution. (ii) Each Partner shall pay to the Partnership all amounts owed by such Partner to the Partnership. (iii) The assets of the Partnership, including any monies received pursuant to Section 18(b)(ii) above, shall be applied in the following order: FIRST, to the payment of creditors of the Partnership, other than the Partners. 25 SECOND, to the establishment of any reserves that the Liquidating Agent, acting pursuant to this Agreement, in accordance with reasonable business judgment, deems reasonably necessary to provide for the payment when due of any contingent or unforeseen liabilities or obligations of the Partnership (which reserves may be paid over by the Liquidating Agent to a trustee or escrow agent for purposes of (A) distributing such reserves in payment of the aforementioned contingencies, and (B) distributing the balance of such reserves in the manner provided herein). THIRD, to the payment of liabilities of the Partnership to the Partners. FOURTH, to the Partners in proportion to their positive Capital Accounts, if any, in an amount as will bring each Limited Partner's Capital Account to zero and then to each Partner in accordance with its Percentage Interest. The choice of which, if any, Partnership assets are to be distributed among the Limited Partners shall be within the sole discretion of the Liquidating Agent and shall be binding upon all Partners. If assets are to be distributed in kind, the Liquidating Agent may, in its discretion, distribute such assets to the Limited Partners PRO RATA in accordance with each Partner's Percentage Interest, or cause, prior to distribution, the value of such assets to be determined by an independent appraiser chosen by the Liquidating Agent. Such value, as so determined, shall be binding upon all Limited Partners. (c) CONTINUATION OF PRODUCT SALES. In the event that on the date of dissolution a Product or Products is being commercialized by the Partnership, the General Partner or the Liquidating Agent, as applicable, shall notwithstanding any provision to the contrary herein take reasonable commercial efforts to the end that the Product or Products shall continue to be 26 commercialized for the ten (10) year period following dissolution on such basis that each Limited Partner shall receive on a quarterly basis fifty percent (50%) of the Gross Profit derived from the continued commercialization of same. The Partners may upon unanimous agreement elect to continue the marketing of such Products after the conclusion of the ten (10) year period provided for herein, failing which, the marketing of such Products shall cease. Any license granted by a Limited Partner or an Affiliate to the Partnership and required by the other Limited Partner or its Affiliate for the continued commercialization of any Products shall remain in effect for the ten (10) year period (or any extension thereof) provided for herein. (d) WITHDRAWAL FROM A PROJECT. In the event a Limited Partner does not contribute its entire share of an additional capital contribution as provided for in Section 11(i) hereof within the timeframe determined by the General Partner in accordance with the provisions hereof and such Limited Partner fails to remedy such failure within thirty (30) days of receipt of written notice thereof by the other Limited Partner, unless such failure is through no fault of such Limited Partner, then the non-contributing Limited Partner shall immediately provide notice to the other Partners identifying the specific Project and line item Annual Project Budget with respect to which such Limited Partner is withholding its additional capital contribution. In the event that PAR is the non-contributing Limited Partner, PAR agrees that (i) that the Project so identified shall cease to be a Project of the Partnership, (ii) UDF shall be free to pursue the Product underlying such Project, (iii) PAR shall license or cause to be licensed to UDF any intellectual property the subject matter of which was or was to be licensed by PAR or its Affiliate to the 27 Partnership in connection with the Project on the same terms and conditions as such intellectual property was licensed to or was to be licensed to the Partnership and (iv) PAR shall continue to perform, at UDF's expense, under any contract granted to PAR or its Affiliate by the Partnership with respect to the Project on terms and conditions substantially similar to those provided for in the contract with the Partnership. In the event that UDF is the non-contributing Limited Partner, UDF agrees that (i) the Project as identified shall cease to be a Project of the Partnership, (ii) PAR shall be free to pursue the Project underlying such Product, (iii) UDF shall license or cause to be licensed to PAR any intellectual property the subject matter of which was or was to be licensed by UDF or its Affiliate to the Partnership in connection with the Project on the same terms and conditions as such intellectual property was licensed to or was to be licensed to the Partnership and (iv) UDF shall continue to perform, at PAR's expense, under any contract granted to UDF or its Affiliate by the Partnership with respect to the Project on terms and conditions substantially similar to these provided for in the contract with the Partnership. Section 19. MEETINGS OF PARTNERS. (a) NOTICE OF MEETING; QUORUM. Any Partner may at any time call a meeting of Partners. Notice of any meeting of Partners shall be mailed to each Partner at least 15 and not more than 30 business days prior to the date of the meeting unless all of the Partners consent to a shorter notice period. Meetings will be held at such time and place as shall be agreed to by all the Partners. Partners constituting 100% in Percentage Interest present in person or by proxy throughout the meeting shall constitute a quorum for the transaction of business at any meeting. All Partners, officers and directors of Partners, the 28 Partnership's auditors and their respective counsel may attend and speak at any meeting of the Partners. (b) VOTING. A quorum being present, each question presented to any meeting of the Partners shall be decided by the unanimous vote of the Partners. Any question may be decided by the consent in writing by all of the Partners. Any question so decided shall be binding on all the Partners and their respective heirs, executors, administrators, successors and assigns. All proceedings and decisions at meetings of Partners and all written consents of Partners shall be recorded in a minute book which shall be available for inspection by the Partners at the principal place of business of the Partnership. Section 20. TRANSFERS OR DISPOSITIONS OF PARTNERSHIP INTERESTS; WITHDRAWAL OF A LIMITED PARTNER. (a) DEFINITION OF "SPECIFIED PERSON". "Specified Person" for purposes of this Agreement shall mean either: (i) with respect to PAR, its permitted successors and assigns shall mean any individual, corporation or partnership (whether limited or general), limited liability company, association, nominee or any other individual or entity in its own or any representative capacity which directly or indirectly controls, is controlled by or is under common control with PAR. For purposes of the foregoing sentence, "Control" shall mean an equity or income interest of 50% or more in, or the possession, directly or indirectly, of the power to cause the direction and management of any person or entity 29 described in the first sentence of this Section 20(i) whether through the ownership of voting securities by contract or declaration of trust, or otherwise. (ii) with respect to UDF, its permitted successors and assigns shall mean any person, individual, corporation or partnership (whether limited or general), limited liability company, association, nominee or any other individual or entity in its own or any representative capacity which directly or indirectly controls, is controlled by or is under common control with UDF. For purposes of the foregoing sentence, control shall mean an equity or income interest of 50% or more in, or the power, directly or indirectly to cause the direction and management of any person or entity described in the first sentence of this Section 20(ii). (b) LIMITATION ON DISPOSITION OF PERCENTAGE INTEREST. No Partner will directly or indirectly sell, offer for sale, or entertain an offer (whether solicited or unsolicited), transfer, pledge or otherwise dispose of any of its Percentage Interest in the Partnership, except to a Specified Person of such Partner, without the agreement of the other Partners. (c) RULES OF CONSTRUCTION. For purposes of the construction, interpretation and enforcement of this Section 20, it is agreed that the disposition by a Limited Partner of all or any portion of its Percentage Interest shall be deemed analogous to a disposition by a shareholder of the shares of common stock of a corporation organized under the laws of the State of New York ("New York Shares") and that this Section 20 shall be construed, 30 interpreted and enforced in accordance with the laws of the State of New York as such laws relate to a disposition of New York Shares without giving effect to any principles of conflict of laws which would otherwise render the laws of New York inapplicable to such disposition. (d) WITHDRAWAL OF LIMITED PARTNER. A Limited Partner may not withdraw from the Partnership prior to the dissolution and winding up of the Partnership, subject to the provisions contained in Section 20(a) and (b). Section 21. CONFIDENTIALITY. (a) CONFIDENTIAL NATURE OF AGREEMENT. Each Partner agrees that, without the prior written consent of the other Partners, or except as may be required by law or court order, the existence and terms of this Agreement shall remain confidential and shall not be disclosed to any Person other than (i) employees and professional advisers of such Partner or its Affiliate who reasonably require knowledge of the existence or terms of this Agreement and who are bound to such Partner or its Affiliate by a like obligation of confidentiality and (ii) governmental agencies where such disclosure is required by or advisable under applicable law. Each Partner shall advise its Affiliate, employees and advisors of the nature and existence of the confidentiality undertakings of this Agreement and of the applicability of such undertakings to them and shall have such Affiliate, employees and advisors agree to be bound hereby. (b) DUTY OF CONFIDENTIALITY. Each Partner agrees to hold in trust and confidence (and to cause its Affiliate to hold in trust and confidence) for the benefit of the other Partner (and its Affiliate) all Confidential Information (as hereinafter defined) of such other Partner and its Affiliate and 31 each further agrees to safeguard, and to cause its Affiliate to safeguard, the Confidential Information of the other Partner (or its Affiliate) to the same extent that it does with its own confidential information and to limit and control copies, extracts and reproductions made of such Confidential Information. No Partner will, without the express written consent of the other, directly or indirectly, use (or authorize, permit or suffer its Affiliate to use) any Confidential Information of the other Partner or of its Affiliate for any purpose other than to implement the provisions of this Agreement, in regulatory proceedings, in litigation, or where disclosure to a governmental agency is required by or advisable under applicable law. Except as set forth in the preceding sentence, no Partner will disclose Confidential Information to any Person, other than its employees or other representatives or those of its Affiliate who have a need to know to fulfill the provisions and intent of this Agreement (where such provisions and intent cannot property be fulfilled without such disclosure) and who have been informed of the confidential nature of the information and have agreed to be bound by the terms hereof. Each Partner shall use its best efforts to prevent unauthorized use or disclosure of the Confidential Information of the other Partner or its Affiliate and shall use protective measures no less stringent than those used by it in its own business to protect its own confidential information, including segregating such information at all times from the confidential material of others so as to prevent any commingling. (c) COMPULSORY DISCLOSURES. In the event that any Partner (or its Affiliate) shall be legally compelled or required by a court of competent jurisdiction to disclose all or any part of the Confidential Information of another Partner (or its Affiliate), it shall provide prompt notice to the other 32 so that such other Partner (or its Affiliate) may determine whether or not to seek a protective order or any other appropriate remedy. If a protective order or other appropriate remedy is not obtained before such disclosure is required, the Partner required to make disclosure will disclose only those portions of the Confidential Information in question which it is advised by written opinion of counsel (which opinion shall be addressed to such Partner and to the other Partner), it is legally required to disclose and will exercise its best efforts to obtain reliable assurances that confidential treatment will be accorded such Confidential Information. (d) RETURN OF CONFIDENTIAL INFORMATION. Upon dissolution of the Partnership pursuant hereto, each Partner shall, except as may be required for the continued commercialization of Product(s) pursuant to Section 18(c), immediately return to the other Partner all material containing or reflecting or referring to any Confidential Information of another Partner or its Affiliate (including all notes, summaries, analysis or other documents prepared or derived therefrom) and all copies thereof in any form whatsoever under the power or control of such Partner or its Affiliate, except that one copy may be retained for legal archival purposes, and such Partner shall delete such Confidential Information from all retrieval systems and data bases or destroy same as directed by the other Partner and furnish to the other Partner, if requested, a certificate of a senior officer of such Partner, certifying such return, deletion and/or destruction. Where only a particular Product/Products or Project/Projects is terminated by the General Partner on behalf of the Partnership in accordance with Section 18(d), then the foregoing obligations 33 shall thereupon apply to Confidential Information relating to such Product/Products or Project/Projects. (e) SURVIVAL. The obligations of each Partner under this Section 21 shall survive termination of this Agreement and shall continue in full force and effect for a period of three (3) years following any such termination. (f) DEFINITION OF CONFIDENTIAL INFORMATION. "Confidential Information" shall mean information of a Partner or its Affiliate disclosed to or obtained by another Partner or its Affiliate (including information obtained by one Partner or its Affiliate as a result of access to the facilities of another Partner or its Affiliate or as a result of its relationship with the other Partner or its Affiliate in connection with this Agreement) either prior to or during the term of this Agreement that is non-public, confidential or proprietary in nature (including, without limitation, trade secrets, financial data, product information, manufacturing methods, market research data, marketing plans, identity of customers, or product information (including the nature and source of raw materials, product formulation and methods of producing, testing and packaging)) and which relates to the disclosing party's past, present or future research, development or business activities. Confidential Information shall not, however, include information that a party can demonstrate by written evidence: (i) is in the public domain (provided that information in the public domain has not and does not come into the public domain as a result of a breach by a party hereto (or its Affiliate) of its obligations of confidentiality contained herein; 34 (ii) is known by the receiving party prior to disclosure by the other party as shown by documentation of the receiving party existing on the date of such disclosure sufficient to establish such knowledge; (iii) which has been developed by the receiving party independent of any disclosure by the other party; or (iv) is subsequently, lawfully and in good faith obtained by the receiving party on a non-confidential basis from a third party as shown by documentation sufficient to establish the third party as the source of the information, provided that such third party was not under an obligation to treat such information in a confidential manner and had a lawful right to make such disclosure. Section 22. NOTICES. Any notice, communication, payment or demand to be given to any party hereto pursuant to this Agreement shall be in writing and shall be sufficiently given or made for all purposes if delivered personally to such party, if sent to such party by receipt confirmed telecommunications, or if sent to such party by recognized courier, addressed as follows: SVC: SVC Pharma Inc. c/o Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, NY 10997 Attention: President PAR: PAR SVC, LLC c/o Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, NY 10977 Attention: Kenneth I. Sawyer 35 UDF: UDF LLC 3 Clearings Way Princeton, MA 01541 Attention: Chairman With copies in any event to: Stuart D. Baker Chadbourne & Parke LLP 30 Rockefeller Plaza New York, NY 10112 and Stephen A. Ollendorff, Esq. Kirkpatrick & Lockhart LLP 1251 Avenue of the Americas New York, NY 10020-1104 or to such other address as the addressee may have specified in a notice duly given to the sender as provided herein. Any such notice, communication, payment or demand shall be deemed to be received upon personal delivery, upon the day sent by telecommunications, or upon the first business day following deposit with a recognized courier for next day delivery. Section 23. FISCAL YEAR. The fiscal year of the Partnership shall end on the 31st day of December of each year. Section 24. BOOKS AND RECORDS. The books and records of the Partnership shall be maintained at its principal office. Each Partner shall have the right to inspect and audit said books and records upon reasonable notice and at reasonable times. Section 25. APPLICABLE LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, except for the provisions of Section 20 which shall be governed by, and 36 construed and enforced in accordance with the law of the State of New York as provided in Section 20(c). Section 26. SEVERABILITY. This Agreement is intended to be valid and effective under any applicable law and, to the extent permissible under applicable law shall be construed in a manner to avoid violation or invalidity under any applicable law. Should any terms or provisions of this Agreement be or become invalid, illegal or unenforceable under any applicable law, the other provisions of this Agreement shall not be affected and shall remain in full force and effect, and to the extent permissible under applicable law, any such invalid, illegal or unenforceable provision shall be deemed lawfully amended to conform with the intent of the parties. Section 27. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof. No amendment, modification, termination or waiver of any provision of this Agreement shall be effective unless the same shall be in writing and signed by all of the parties hereto. Section 28. HEADINGS. The headings in this Agreement are for reference purposes only and shall not in any manner affect the meaning, interpretation, enforceability or validity of this Agreement. Section 29. BINDING EFFECT. This Agreement shall be binding upon the parties hereto, their heirs, legatees, executors, legal representatives, successors in interest, assignees, transferees, creditors (including judgment creditors), trustees (including trustees in bankruptcy) and any person acting in a representative capacity for any of the foregoing. 37 Section 30. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective the date aforesaid. SVC PHARMA, INC. By /s/ EDWARD W. ALBRIGHT ---------------------- Title: President PAR SVC, LLC By: Pharmaceutical Resources, Inc. its Managing Member By /s/ KENNETH I. SAWYER --------------------- Kenneth I. Sawyer, President UDF LP By: Rhodes Technologies Inc. its General Partner By /s/ EDWARD W. ALBRIGHT ---------------------- Title: 38 EXHIBIT A --------- Gross Profit Determination Gross Sales: The invoiced amount billed to third parties for Products excluding any amount included in the invoiced amount in respect of sales taxes, tariffs, customs, duties, excise taxes, value added taxes, other taxes based upon the amount invoiced and other governmental charges incurred in connection with the sale, exportation or importation of Products. Sales Deductions: The cost of returns, cash, credit or such reasonable level of free goods allowances (to the extent associated directly with the sale of Products) retroactive price reductions and amounts refunded for spoiled, rejected, damaged, outdated Products, all as actually allowed, incurred or paid but not passed on to the purchaser and allowance for bad debts. Rebates: The cost of the sum of rebates to wholesalers and chain drug stores, health maintenance organizations, buying groups, closed provider pharmacies, vendor chargebacks, discount to wholesalers, stocking allowances, rebates to other health provision plans, hospices, in respect of Medicaid, Medicare or other government health schemes and all other government mandated rebates or allowances as actually allowed, incurred or paid. Where pricing or rebates are granted to customers by one of the parties acting as subcontractor for Sales and Marketing combining Company and non-Company Products as part of a package or bundle, the share of discounts from list or rebates, etc., attributable to the products will be the discounts or rebates agreed in a budget OR, if not specifically agreed in a budget, the lesser of (1) such discounts or rebates calculated on a pro rata basis, using list prices of relevant bundled products as a basis for apportionment or (2) such discounts or rebates calculated of relevant bundled products calculated at the highest discount or highest rebate offered as a basis for apportionment. COG: The amount equal to the sum of direct out-of-pocket costs for materials, supplies and direct labor for Products, shipping and insurance, to the extent applicable, as shipped calculated using US GAAP and including customary direct and indirect manufacturing overheads based on the greater of actual capacity utilization or a two (2) shift, five (5) day week utilization of the specific manufacturing facility in respect of the manufacture of Products, all other subcontractor's total direct out-of-pocket costs in respect of the manufacture of Products for materials, supplies and direct labor using GAAP and including customary direct and indirect manufacturing overheads in respect of the manufacture of Products. Where kits, other preparations or combination products are included in sales, the COG may include amounts relating to such sales, calculated on the same proportionate basis as used in recognizing the relevant Gross sales. Cost of Promotion: The out-of-pocket cost of marketing and promotion of the Product, including without limitation, the cost of telemarketing, promotions, promotional materials, market research and samples. Shipping and The amount equal to actual out-of-pocket Warehousing: costs incurred for shipping, transportation and warehousing of Products plus an allocation for personnel and warehouse overhead as approved by the Board of Directors. General and An amount equal to the actual costs of Administrative order taking, customer service, invoicing Expenses: and collections and administrative functions, not to exceed in the aggregate 2% of gross sales determined in accordance with this Exhibit A. 2 Gross Profit: The amount equal to Gross Sales minus the aggregate of COG, Sales Deductions, Rebates, Cost of Promotion, Shipping and Warehousing Expense and General and Administrative Expense. 3 EXHIBIT B --------- Research and Development Costs shall be calculated at $85.00 per hour (subject to an inflation adjustment to be agreed and approved by the Board of Directors) plus out-of-pocket costs of special equipment and materials consumed. If underlying costs increase, the Board of Directors may approve an upward adjustment to the hourly rate stated herein. EX-99 5 exhibit_99-1.txt EXHIBIT 99.1 EX-99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Pharmaceutical Resources, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kenneth I. Sawyer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Kenneth I. Sawyer - -------------------------------- Kenneth I. Sawyer Chief Executive Officer August 14, 2002 EX-99 6 exhibit_99-2.txt EXHIBIT 99.2 EX-99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Pharmaceutical Resources, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dennis J. O'Connor, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /S/ Dennis J. O'Connor - --------------------------------- Dennis J. O'Connor Chief Financial Officer August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----