-----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, GV/0WS+kLFCzjeDyBcWMjw4yCiVoZ6WCzENymIP8zLyQ8+2IU/CRMSkGdCzfwvat LT5Xn+vADtW4LHFhNGTNmg== 0000898432-03-000324.txt : 20030328 0000898432-03-000324.hdr.sgml : 20030328 20030328170020 ACCESSION NUMBER: 0000898432-03-000324 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10827 FILM NUMBER: 03626026 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-K 1 pr_form10-k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Fiscal Year Ended December 31, 2002 Commission File Number: 1-10827 PHARMACEUTICAL RESOURCES, INC. (Exact name of Registrant as specified in its charter) NEW JERSEY 22-3122182 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (845) 425-7100 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $.01 par value The New York Stock Exchange, Inc. - ---------------------------- --------------------------------- 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes X No --- --- The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $1,371,238,982 as of March 21, 2003 (assuming, solely for purposes of this calculation, that all directors and executive officers of the Registrant are "affiliates"). Number of shares of the Registrant's common stock outstanding as of March 21, 2003: 32,936,414 DOCUMENTS INCORPORATED BY REFERENCE: None PART I ITEM 1. Business. - ------ -------- GENERAL Pharmaceutical Resources, Inc. (the "Company" or "PRX") is a holding company that, through its principal subsidiary, is in the business of developing, manufacturing and distributing a broad line of generic drugs in the United States. In addition, the Company develops and manufactures in small quantities complex synthetic active pharmaceutical ingredients through its subsidiary, FineTech Laboratories, Ltd. ("FineTech") based in Haifa, Israel and sells a limited number of mature brand name drugs through an agreement with Bristol Myers Squibb ("BMS"). PRX operates primarily through its wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par"), a manufacturer and distributor of generic drugs. The Company's executive offices are located at One Ram Ridge Road, Spring Valley, New York 10977, and its telephone number is (845) 425-7100. Generic drugs are the pharmaceutical and therapeutic equivalents of brand name drugs and are usually marketed under their generic (chemical) names rather than by a brand name. Generally, a generic drug cannot be marketed until the expiration of applicable patents on the brand name drug. Generic drugs must meet the same government standards as brand name drugs, but are typically sold at prices below those of brand name drugs. Generic drugs provide a cost-effective alternative for consumers while maintaining the safety and effectiveness of the brand name pharmaceutical product. The Company's product line consists primarily of prescription generic drugs consisting of 156 products representing various dosage strengths for 59 drugs. In addition to manufacturing its own products, the Company has strategic alliances with several pharmaceutical and chemical companies providing it with products for sale through distribution, development or licensing agreements (see "-Product Line Information"). The Company markets its products primarily to wholesalers, retail drug store chains, managed health care providers and drug distributors, principally through its own sales staff. The Company promotes the sales efforts of wholesalers and drug distributors that sell the Company's products to clinics, government agencies and other managed health care organizations (see "-Marketing and Customers"). As described in Management's Discussion and Analysis of Financial Condition and Results of Operations, certain statements in this document 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. Such statements involve known and unknown risks, uncertainties, trends 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. Any forward-looking statements included in this document 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. The financial data and share amounts, except per share, employee and shareholder numbers, contained in Parts I and II are in thousands. FISCAL YEAR 2002 HIGHLIGHTS: RESULTS OF OPERATIONS. Fiscal year 2002 marked the Company's second consecutive historical year in terms of revenues and earnings. The Company's net income in 2002 of $79,454 increased $25,532, or 47%, from $53,922 for fiscal year 2001. The significantly improved results reflected record net sales and gross margins for the Company of $381,603 and $183,290 (48% of net sales), respectively, primarily attributable to the continued success of megestrol acetate oral suspension, the generic version of BMS's Megace(R) Oral Suspension, and the introduction of new products throughout the year. Revenues and gross margins in fiscal year 2001 of $271,035 and $109,729 (40% of net sales), respectively, benefited from marketing exclusivity for fluoxetine 10 mg and 20 mg tablets and fluoxetine 40 mg capsules, the generic versions of Eli Lilly and Company's Prozac(R), which expired in January 2002. The growth was obtained despite the loss of exclusivity on these key products and a substantially increased investment in research and development. Research and development spending in fiscal year 2002 rose 61% to $17,910 from $11,113 for the prior year. POSITION FOR FUTURE GROWTH. The Company recognizes that the development of successful new products is critical to achieving its goal of sustainable growth over the long term. As such, the Company's investment in research and development in fiscal year 2002, which is expected to increase again in fiscal year 2003, reflects its commitment to develop new products or technologies 2 through its internal development programs in addition to projects with strategic partners. In fiscal year 2002, the Company expanded its capabilities in product development through its acquisition of FineTech, as well as, entering into new development agreements with Rhodes Technologies, Inc. ("RTI"), an affiliated company of Purdue Pharma L.P., Three Rivers Pharmaceuticals, LLC ("Three Rivers"), Nortec Development Associates, Inc. (a Glatt company) ("Nortec") and Genpharm Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA. Together with its strategic partners, PRX currently has over 40 drugs in development and 28 Abbreviated New Drug Applications ("ANDAs") filed with the United States Food and Drug Administration ("FDA") awaiting approval. Among the 28 ANDAs are several the Company believes may represent first-to-file opportunities that may entitle Par, or its strategic partner, up to 180 days of marketing exclusivity or co-exclusivity. However, it is difficult to know with certainty that an ANDA filing has exclusivity, or shared exclusivity, until final approval is received from the FDA. These products include: paroxetine capsules (Paxil(R)); olanzapine 20 mg (Zyprexa(R)); latanoprost (Xalatan(R)); ribavirin (Rebetol(R)); and tramadol with acetaminophen (Ultracet(R)). The Company expects to file as many as 18 to 20 more ANDAs in 2003. The process of bringing new products to market and the cost associated with research and development involves many uncertainties, including, among other things, unforeseen changes in market conditions, and regulatory or legal challenges. As such, no assurance can be given that the Company will file ANDAs with the FDA, obtain FDA approval or launch any of the products that are currently in development. PROFIT SHARING ON OMEPRAZOLE. In the fourth quarter of 2002, the Company began receiving royalty payments as a result of KUDCo's, a subsidiary of Schwarz Pharma AG of Germany, launch of omeprazole, the generic version of Astra Zeneca's ("Astra") Prilosec(R). Under terms of its agreement with KUDCo, Genpharm, PRX's strategic partner, is currently receiving a 15 percent share of the profits, as defined in their agreement, generated by KUDCo's sales of omeprazole. Through its partnership agreement with Genpharm, PRX is currently receiving 25 percent of Genpharm's profit. KUDCo's launch of omeprazole is "at risk" because Astra appealed the court's patent infringement decision. The full impact of KUDCo's omeprazole launch on the Company's revenues is unclear since, among other things, Astra has introduced a new drug, Nexium(R), in an apparent attempt to switch consumers using Prilosec(R) and Astra's decision to market a non-prescription form of Prilosec(R) along with Proctor & Gamble, all of which may reduce generic sales of omeprazole. In December 2002, the Company recognized $755 of revenues related to its share of Genpharm's profits. The December 2002 revenues were significantly reduced as Genpharm recovered out-of-pocket development and legal expenses incurred during the product development and litigation process. Unless there is a court ruling that is unfavorable to KUDCo in the pending appeal by Astra, in which case the Company could be obligated to return any payments received from Genpharm, the Company anticipates recording revenues of up to $20,000 in fiscal year 2003 from its share of the profits on omeprazole. LEGAL PROCEEDINGS. The Company prevailed against Alpharma USPD, Inc. ("Alpharma") in an interference proceeding before the U.S. Patent and Trademark Office regarding PRX's patents and applications relating to megestrol acetate oral suspension formulations. Additionally, PRX filed suit against Alpharma in the U.S. District Court, Southern District of New York in February 2002. Alpharma has now entered into a consent judgment and order of permanent injunction in this matter. Alpharma is now enjoined from making, using, selling or importing its megestrol oral suspension product. PRX believes these proceedings validate its strategy of developing products based on patented science and technology. The Company expects megestrol oral suspension to be a strong contributor to its earnings in 2003. In February 2003, Three Rivers reached a final settlement with Schering Corporation ("Schering") in the patent litigation case of Rebetol(R) brand ribavirin. Schering has provided a non-exclusive license to Three Rivers for all its U.S. patents relating to this product. In return, Three Rivers has agreed to pay Schering a reasonable royalty based upon net sales of Three Rivers' and Par's generic ribavirin product. Although the license does not remove all existing legal hurdles to distribute this product, the Company believes it significantly improves the likelihood of Par and Three Rivers eventually marketing ribavirin. ACQUISITION OF FINETECH. On March 15, 2002, the Company terminated its negotiations with International Specialty Products ("ISP") related to the Company's purchase of the combined 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 following the announcement of the proposed transaction. Pursuant to the termination of negotiations, the Company paid ISP a $3,000 break-up fee in March 2002, which was subject to certain credits and offsets, and incurred approximately $1,262 in related acquisition costs, both of which were included in acquisition termination charges on the consolidated statements of operations in fiscal year 2002. 3 The Company subsequently purchased FineTech, based in Haifa, Israel, from ISP in April 2002 for approximately $32,000 and incurred $1,237 in related acquisition costs, all of which were financed by its cash-on-hand. The Company acquired the physical facilities, intellectual property and patents of FineTech and 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 has the ability to manufacture in small quantities complex synthetic active pharmaceutical ingredients at its manufacturing facility in Haifa, Israel. This facility operates in compliance with FDA current Good Manufacturing Practices ("cGMP") standards. The Company is in the process of transferring a portion of FineTech's personnel and technological resources to a laboratory facility in Rhode Island. FineTech is operated as an independent, wholly-owned subsidiary of PRX and provides immediate chemical synthesis capabilities and strategic opportunities to the Company and other customers. REINCORPORATION. In fiscal year 2003, the Company intends to submit for shareholder approval a proposal to change its state of incorporation from New Jersey to Delaware (the "Reincorporation"). The Reincorporation will be effected by the merger of the Company with and into a wholly-owned Delaware subsidiary of the Company formed solely for the purpose of consummating the Reincorporation. The operations, business, assets and liabilities of the Company, as well as its directors and officers, will be unaffected by the Reincorporation. The surviving corporation of the Reincorporation shall retain the name "Pharmaceutical Resources, Inc." and the Company's common stock will continue to be listed and traded on the New York Stock Exchange ("NYSE") under the symbol "PRX". In addition to the Reincorporation, the Company expects to shortly change the state of incorporation of Par from New Jersey to Delaware. PRODUCT LINE INFORMATION The Company operates in one industry segment, namely the manufacture and distribution of generic pharmaceuticals. Products are marketed principally in solid oral dosage form consisting of tablets, caplets and two-piece hard-shell capsules. The Company also distributes one product in the semi-solid form of a cream and one oral suspension product. Par markets 69 products, representing various dosage strengths for 25 drugs that are manufactured by the Company and 87 additional products, representing various dosage strengths for 34 drugs that are manufactured for it by other companies. Par holds ANDAs for the drugs it manufactures. Below is a list of drugs manufactured and/or distributed by Par, including several brand-name products, Capoten(R), Capozide(R), Questran(R) and Questran Light(R), and Sumycin(R), the Company sells through an agreement with BMS. The names of all of the drugs under the caption "Competitive Brand-Name Drug" are trademarked. The holders of the trademarks are non-affiliated pharmaceutical manufacturers. NAME COMPETITIVE BRAND-NAME DRUG ---- --------------------------- CENTRAL NERVOUS SYSTEM: Biperiden Hydrochloride Akineton Benztropine Mesylate Cogentin Buspirone Hydrochloride BuSpar Doxepin Hydrochloride Sinequan, Adapin Fluoxetine Prozac Fluphenazine Hydrochloride Prolixin Imipramine Hydrochloride Tofranil Tizanidine Hydrochloride Zanaflex Triazolam Halcion CARDIOVASCULAR: Acebutolol Hydrochloride Sectral Amiodarone Hydrochloride Cordarone Captopril Capoten Captopril & HCTZ Capozide Doxazosin Mesylate Cardura Enalapril Maleate Vasotec Enalapril Maleate & HCTZ Vaseretic Flecainide Acetate Tambocor 4 Guanfacine Tenex Hydralazine Hydrochloride Apresoline Hydra-Zide Apresazide Indapamide Lozol Isosorbide Dinitrate Isordil Lisinopril Zestril Minoxidil Loniten Nicardipine Hydrochloride Cardene Sotalol Hydrochloride Betapace ANALGESIC/ANTI-INFLAMMATORY: Aspirin (zero order release) Zorprin Carisoprodol & Aspirin Soma Compound Dexamethasone Decadron Etodolac Lodine Ibuprofen Advil, Nuprin, Motrin Orphengesic/Orphengesic Forte Norgesic/Norgesic Forte Oxaprozin Daypro Tramadol Hydrochloride Ultram ANTI-BACTERIAL: Doxycycline Monohydrate Monodox Silver Sulfadiazine (SSD) Silvadene Tetracycline Sumycin ANTI-DIABETIC: Metformin Hydrochloride Glucophage ANTI-DIARRHEAL: Diphenoxylate Hydrochloride & Atropine Sulfate Lomotil ANTIEMETIC: Meclizine Hydrochloride Antivert Prochlorperazine Maleate Compazine ANTI-GOUT: Allopurinol Zyloprim ANTI-HISTAMINIC: Cyproheptadine Hydrochloride Periactin ANTI-NEOPLASTIC: Hydroxyurea Hydrea Megestrol Acetate Megace Megestrol Acetate Oral Suspension Megace Oral Suspension ANTI-PARKINSON: Selegiline Hydrochloride Eldepryl ANTI-THROMBOTIC: Ticlopidine Hydrochloride Ticlid ANTI-ULCERATIVE: Ranitidine Hydrochloride Zantac Famotidine Pepcid Nizatidine Axid 5 ANTI-VIRAL: Acyclovir Zovirax ANTI-HYPERTHYROID: Methimazole Tapazole BRONCODILATOR: Metaproterenol Sulfate Alupent CHOLESTEROL LOWERING: Lovastatin Mevacor Cholestyramine Questran GENTRO-URINARY (DIURETIC): Amiloride Hydrochloride Midamor GLUCORTICOID: Methylprednisolone Medrol OVULATION STIMULANT: Clomiphene Citrate Clomid From January 1, 2002 to March 1, 2003, the FDA approved ANDAs filed by either the Company or its strategic partners for the following drugs: buspirone 5 mg, 10 mg and 15 mg tablets; ciprofloxacin 100 mg, 250 mg, 500 mg and 750 mg; doxycycline 75 mg; fluoxetine 10 mg and 20 mg capsules; lisinopril 2.5 mg, 5 mg, 10 mg, 20 mg, 30 mg and 40 mg tablets; metformin hydrochloride 500 mg, 850 mg and 1,000 mg tablets; nizatidine 150 mg and 300 mg capsules; tizanidine 2 mg and 4 mg tablets; and tramadol 50 mg tablets. In addition, the Company or its strategic partners received tentative FDA approval in the same period for the following drugs: loratadine 10 mg tablets; mirtazapine 15 mg, 30 mg and 45 mg tablets; omeprazole delayed release 10 mg and 20 mg capsules; quinapril 5 mg, 10 mg, 20 mg and 40 mg tablets; torsemide 5 mg, 10 mg, 20 mg and 100 mg tablets; and zolpidem tartrate 5 mg and 10 mg tablets. The Company has two patents related to its unique formulation of megestrol acetate oral suspension. The U.S. Patent and Trademark Office granted the patents, United States Patent No. 6,028,065 and No. 6,268,356, on March 1, 2000 and July 31, 2001, respectively. The Company seeks to introduce new products not only through its internal research and development program, but also through joint venture, distribution and other agreements with pharmaceutical companies located throughout the world. As part of that strategy, the Company has pursued and continues to pursue arrangements and affiliations which it believes could provide access to raw materials at favorable prices, share development costs, generate profits from jointly-developed products and expand distribution channels for new and existing products. The Company's existing material distribution and supply agreements are described in Notes to Consolidated Financial Statements - Distribution and Supply Agreements. In fiscal year 2002, the Company entered into several new agreements, which are described below. The Company is selling five of BMS's brand products, the antihypertensives Capoten(R) and Capozide(R), the cholesterol-lowering medications Questran(R) and Questran Light(R), and Sumycin(R), an antibiotic, through the BMS Asset Purchase Agreement, dated March 5, 2002. The Company obtained the right to sell these products manufactured by BMS through a legal settlement and began selling the products in March 2002. In December 2002, the Company entered in a supply and distribution agreement with Genpharm and Leiner Health Products, LLC. ("Leiner") related to the recent switch of loratadine 10 mg tablets (Claritin(R)) from prescription to over-the counter. Pursuant to the agreement, Genpharm has agreed to manufacture the product and Leiner has agreed to market and engage in over-the-counter distribution of the product in the United States and its territories for Par. The Company is to receive a portion of installment payments made to Genpharm by Leiner in fiscal year 2003 totaling $594 in addition to a percentage of the net profit attributable to Leiner sales. 6 RESEARCH AND DEVELOPMENT The Company's research and development activities consist of (i) identifying and conducting patent and market research on brand name drugs for which patent protection has expired or is expected to expire in the near future, (ii) researching and developing new product formulations based upon such drugs, (iii) obtaining approval from the FDA for such new product formulations, and (iv) introducing technology to improve production efficiency and enhance product quality. The scientific process of developing new products and obtaining FDA approval is complex, costly and time consuming and there can be no assurance that any products will be developed despite the amount of time and money spent on research and development. The development of products may be curtailed in the early or later stages of development due to the introduction of competing generic products or for other strategic reasons. The research and development of oral solid and suspension products, including preformulation research, process and formulation development, required studies and FDA review and approval, has historically taken approximately two to three years. Accordingly, Par typically selects for development products that it intends to market several years in the future. However, the length of time necessary to bring a product to market can vary significantly and depends on, among other things, availability of funding, problems relating to formulation and safety or efficacy or patent issues associated with the product. The Company contracts with outside laboratories to conduct biostudies, which, in the case of oral solids, generally are required for FDA approval. Biostudies are used to demonstrate that the rate and extent of absorption of a generic drug are not significantly different from the corresponding brand name drug and currently cost between $100 to $500 for each biostudy. During fiscal year 2002, the Company contracted with outside laboratories, expending $1,502 to conduct biostudies for four potential new products, and will continue to do so in the future. In addition, the Company shared in certain costs for biostudies totaling $630 for products in development with its strategic partners. Biostudies must be conducted and documented in conformity with FDA standards (see "-Government Regulation"). As part of its internal research and development program, the Company has approximately 15 products in active development. The Company expects that approximately ten of these products will be the subject of biostudies in fiscal year 2003, but has not filed any ANDAs with respect to such potential products. In addition, 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. Although there can be no assurance, annual research and development expenses for fiscal year 2003, including certain payments to non-affiliated companies, are expected to increase by approximately 30% to 40% from fiscal year 2002. As a result of its internal product development program, the Company currently has nine ANDAs pending with the FDA, three of which have received tentative approval, for potential products that are not subject to any distribution or profit sharing agreements. In addition, there are 19 ANDAs pending with the FDA, four of which have received tentative approval, that have been filed by the Company or one of its strategic partners, for potential products covered under various distribution agreements. No assurance can be given that the Company or any of its strategic partners will successfully complete the development of products either under development or proposed for development, that they will obtain regulatory approval for any such product, that any approved product will be produced in commercial quantities or that any approved product can be sold at a profit. To supplement its own internal development program, the Company enters into development and license agreements with third parties with respect to the development and marketing of new products and technologies. The Company's existing material product development agreements are described in Notes to Consolidated Financial Statements - Research and Development Agreements and Research and Development Ventures. In fiscal year 2002, the Company entered into the following new agreements, which are described below. In November 2002, the Company amended its agreement (the "Supply and Marketing Agreement") with Pentech Pharmaceuticals, Inc. ("Pentech"), dated November 2001, to market paroxetine hydrochloride capsules. Pursuant to the Supply and Marketing Agreement, as amended, Par has the exclusive right to market, sell and distribute the product in the United States and its territories and will pay Pentech a percentage of the gross profit from sales on the product. Paroxetine hydrochloride is the generic version of GlaxoSmithKline's Paxil(R). Currently, GlaxoSmithKline markets Paxil(R) only in tablet form. Paxil(R), a selective serotonin reuptake inhibitor, is indicated for the treatment of 7 depression and other disorders. Par believes that its ANDA submission for paroxetine hydrochloride capsules is the first to be filed with a paragraph IV certification. The Company believes that another generic drug company has first-to-file status for the tablet form of this product. Par intends to market a capsule form of the product. Pursuant to the Supply and Marketing Agreement with Pentech, Par is responsible for payment of all legal expenses up to $2,000, which have been expensed as incurred, to obtain final regulatory approval. Legal expenses in excess of $2,000 are fully creditable against future profit payments. In fiscal year 2003, Par will be responsible for Pentech costs associated with the project up to $1,300, which will be charged to research and development expenses as incurred. The Company and Three Rivers entered into a license and distribution agreement in July 2002 (the "Three Rivers Distribution Agreement"), which was amended in October 2002, to market and distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's Rebetol(R). Ribavirin, a synthetic nucleoside analogue with antiviral activity, is indicated for the treatment of hepatitis C, a chronic condition, which according to the Company's market research, is suffered by approximately four million Americans. Under the terms of the Three Rivers Distribution Agreement, Three Rivers will supply the product and be responsible for managing the regulatory process and ongoing patent litigation. Upon FDA approval and final marketing clearance, Par will have the exclusive right to sell the product in non-hospital markets and will be required to pay Three Rivers a percentage of the gross profits, as defined in the agreement. In addition, the Company paid Three Rivers $1,000, which was charged to research and development expenses in fiscal year 2002, and agreed to pay Three Rivers $500 at such time Par commercially launches the product. 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. 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. In May 2002, the Company entered into an agreement with Nortec to develop an extended release generic version of a currently marketed branded extended release pharmaceutical product. Under the terms of the agreement, the Company obtained the right to utilize Nortec/Glatt's drug delivery system technology in its ANDA submission for the potential product covered in the agreement. If formulation and development are successful, the ANDA for the drug could be submitted to the FDA in 2004 and will include a Paragraph IV certification. The Company and Nortec have agreed to collaborate on the formulation, while Par has agreed to serve as the exclusive marketer and distributor of the product. 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. Under the terms of the new agreement, Par also obtained the right to utilize Nortec/Glatt's drug delivery system 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 has agreed to serve as the exclusive marketer and distributor of the product. Pursuant to these agreements with Nortec, the Company made non-refundable payments totaling $1,000, which were charged to research and development expenses in fiscal year 2002. The Company also agreed to pay a total of $800 in various installments related to the achievement of certain milestones in the development of the two potential products and $600 for each product on the day of its first commercial sale. In addition to these payments, the Company agreed to pay Nortec a royalty on net sales of the products, as defined in the agreements. In April 2002, the Company entered into an agreement (the "Genpharm 11 Product Agreement") with Genpharm, to expand its strategic product partnership. 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, as defined in the agreement, on all sales of products covered under this agreement. In the second quarter of 2002, the Company paid Genpharm a non-refundable fee of $2,000 for two products, loratadine 10 mg tablets and mirtazapine tablets, which have been tentatively approved by the FDA. Although there can be no assurance, the Company anticipates bringing the two products to market in fiscal year 2003. The Company will also be required to pay an additional non-refundable fee of up to $414 based upon FDA acceptance of filings for six of the nine remaining products. There are ANDA's for three of these potential products covered under the Genpharm 11 Product Agreement, pending with, and awaiting approval from, the FDA. 8 In April 2002, the Company entered into an agreement with RTI to establish a joint venture partnership in the United States. The new joint venture was named SVC Pharma and is 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 has agreed to provide scientific and technological expertise in the development of non-infringing, complex molecules. In addition to providing chemical synthesis capabilities, RTI has agreed to provide the manufacturing capacity for sophisticated intermediate and active pharmaceutical ingredients. Par has agreed to provide development expertise in dosage formulation and will be responsible for marketing, sales and distribution. The companies have agreed to 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 late in fiscal year 2004. The Company's funding of $952, related to the first project, began in the fourth quarter of fiscal year 2002. The Company accounts for its share of the expenses of SVC Pharma with a charge to research and development as incurred. For fiscal year 2002, the Company increased research and development spending to $17,910 from $11,113 and $7,634, respectively, in fiscal years 2001 and 2000. The increase in 2002 reflects payments to Elan related to the development of a clonidine transdermal patch and other products; external development costs as described above and, to a lesser extent, increased personnel costs and the acquisition of FineTech. MARKETING AND CUSTOMERS The Company primarily markets its products under the Par label to wholesalers, retail drug store chains, managed health care providers, distributors and, to a lesser extent, drug manufacturers and government agencies, primarily through its own sales staff. Some of the Company's wholesalers and distributors purchase products that are warehoused for certain drug chains, independent pharmacies and managed health care organizations. Customers in the managed health care market include health maintenance organizations, nursing homes, hospitals, clinics, pharmacy benefit management companies and mail order customers. The Company promotes its products primarily through incentive programs with its customers, at trade shows and through advertisements in trade journals. The Company has approximately 140 customers, some of which are part of larger buying groups. In fiscal year 2002, the Company's three largest customers in terms of net sales dollars, McKesson Drug Co., Cardinal Health, Inc., and Walgreen Co. accounted for approximately 17%, 16% and 10%, respectively, of its net sales. The loss of any one or more of these customers or the substantial reduction in orders from any of such customers could have a material adverse affect on the Company's operating results, prospects and financial condition (see "Notes to Consolidated Financial Statements-Accounts Receivable-Major Customers"). ORDER BACKLOG The approximate dollar amount of open orders, believed by management to be firm, as of December 31, 2002 was $18,185, as compared to $12,800 at December 31, 2001 and $4,400 at December 31, 2000. Although open orders are subject to cancellation without penalty, management expects to substantially fill all of such orders in the near future. COMPETITION The generic pharmaceutical industry is highly competitive due principally to the number of competitors in the market along with the consolidation of the Company's distribution outlets through mergers, acquisitions and the formation of buying groups. The Company has identified at least ten principal competitors, and experiences varying degrees of competition from numerous other companies in the health care industry. The Company also experiences competition from certain manufacturers of brand name drugs and/or their affiliates introducing generic pharmaceuticals comparable to certain of the Company's products. When other manufacturers introduce generic products in competition with the Company's existing products, its market share and prices with respect to such existing products typically decline, sometimes substantially, depending largely on, among other things, the number of competitors entering the market. Similarly, the Company's potential for profits is significantly reduced, if not eliminated, as competitors introduce products before the Company. In addition, the Company believes that the shrinking number of significant distribution channels over the past years through consolidation among wholesalers and retailers and the formation of large buying groups have resulted in further 9 pricing pressures. Accordingly, the level of revenues and gross profit generated by the Company's current and prospective products depend, in large part, on the number and timing of introductions of competing products and the Company's timely development and introduction of new products. In the generic drug industry, when a company first introduces a generic drug, it may, under certain circumstances, be granted exclusivity by the FDA to market a product for a period of time before any other generic manufacturers may enter the market. At the expiration of such exclusivity periods, other generic manufacturers may enter the market, and as a result the price of the drug may decline significantly (in some instances a price decline has exceeded 90%). As a result of the expected price decline upon the expiration of a marketing exclusivity period, it has become common in the industry for generic pharmaceutical manufacturers, like the Company, that have been granted such exclusivity periods to offer price protection to their customers. Under such price protection arrangements, the Company will generally provide a credit to its customers for the difference between the Company's new price at the expiration of the exclusivity period and the price at which the Company sold the customers the product with respect to the quantity remaining in the customer's inventory at the expiration of the exclusivity period. As a result, the total price protection the Company will credit customers at the expiration of an exclusivity period will depend on the amount by which the price declines as the result of the introduction of comparable generic products by additional manufacturers, and the inventory customers have at the expiration of the exclusivity period. In July 2001 and August 2001, the Company began marketing megestrol acetate oral suspension, and 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. Generic competitors of the Company received 180-days marketing exclusivity for the generic version of fluoxetine 10 mg and 20 mg capsules, which the Company began selling in the first quarter of 2002, following the expiration of such other party's exclusivity period. As expected, additional generic competitors, with products comparable to all three strengths of the Company's fluoxetine products, began entering the market in the first quarter of 2002, eroding the pricing the Company received during the exclusivity period, particularly on the 10 mg and 20 mg strengths. Despite another generic approval for megestrol acetate oral suspension in the first quarter of 2002, to date the Company still maintains a significant share of the market for this product. Although megestrol oral suspension and fluoxetine 40 mg capsules are expected to continue to contribute significantly to the Company's overall performance, the rapid growth of the Company's product line through new product introductions and, to a lesser extent, increased sales of certain existing products have somewhat reduced its reliance on each of these key products. The principal competitive factors in the generic pharmaceutical market, include, among other things: (i) introduction of other generic drug manufacturer's products in direct competition with the Company's 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, (v) pricing pressures and product deletions by competitors, (vi) reputation as a manufacturer of quality products, (vii) level of service (including maintaining sufficient inventory levels for timely deliveries), (viii) product appearance, and (ix) breadth of product line. RAW MATERIALS The raw materials essential to the Company's manufacturing business are purchased primarily from United States distributors of bulk pharmaceutical chemicals manufactured by foreign companies. To date, the Company has experienced no significant difficulty in obtaining raw materials and expects that raw materials will generally continue to be available in the future. However, since the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. A delay of six months or more in the manufacture and marketing of the drug involved could result, while a new supplier becomes qualified by the FDA and its manufacturing process is judged to meet FDA standards, which, depending on the particular product, could have a material adverse effect on the Company's results of operations and financial condition. Generally the Company attempts to minimize the effects of any such situation by specifying, where economically and otherwise feasible, two or more suppliers of raw materials for the drugs it manufactures. 10 EMPLOYEES As of December 31, 2002 the Company had approximately 456 employees compared to 393 and 297, respectively, at December 31, 2001 and 2000. The increased headcount levels in fiscal year 2002, primarily in research and development and administrative functions, reflect the continued growth of the Company from fiscal year 2001. GOVERNMENT REGULATION All pharmaceutical manufacturers are subject to extensive regulation by the Federal government, principally the FDA and, as appropriate, the Drug Enforcement Administration, Federal Trade Commission ("FTC"), and state and local governments. The Federal Food, Drug, and Cosmetic Act (the "Act"), the Controlled Substances Act, and other Federal statutes and regulations govern the development, testing, manufacture, safety/effectiveness, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Noncompliance with applicable regulations can result in judicially and/or administratively imposed sanctions, including the initiation of product seizures, injunction actions, fines and criminal prosecutions. Administrative enforcement measures may involve the recall of products, as well as the refusal of the government to enter into supply contracts or to approve new drug applications. The FDA also has the authority to withdraw approval of drugs in accordance with regulatory due process procedures. FDA approval is required before any new drug, including a generic equivalent of a previously approved proprietary drug, can be marketed. To obtain FDA approval for a new drug, a prospective manufacturer must, among other things as discussed below, demonstrate that its manufacturing facilities comply with the FDA's cGMP regulations. The FDA may inspect the manufacturer's facilities to assure such compliance prior to approval or at any other reasonable time. The manufacturer must follow cGMP regulations at all times during the manufacture and processing of drugs. To comply with the standards set forth in these regulations, the Company must continue to expend significant time, money and effort in the areas of production, quality control and quality assurance. To obtain FDA approval of a new drug, a manufacturer must demonstrate the safety and effectiveness of the proposed drug. There are currently two basic ways to satisfy the FDA's safety and effectiveness requirements: 1. NEW DRUG APPLICATIONS ("NDA"): Unless the procedure discussed in paragraph 2 below is permitted under the Act, a prospective manufacturer must submit to the FDA an NDA containing complete pre-clinical and clinical safety and efficacy data or a right of reference to such data. The pre-clinical data must provide an adequate basis for evaluating the safety and scientific rationale for the initiation of clinical trials. Clinical trials are conducted in three sequential phases and may take several years to complete. At times, the phases may overlap. Data from pre-clinical testing and clinical trials is submitted to the FDA as an NDA for marketing approval. 2. ABBREVIATED NEW DRUG APPLICATIONS: The Hatch-Waxman amendments established a statutory procedure for submission, FDA review and approval of ANDAs for generic versions of drugs previously approved by the FDA (such previously approved drugs are hereinafter referred to as "listed drugs"). As the safety and efficacy have already been established by the innovator company, the FDA waives the need for complete clinical trials. However, a generic manufacturer is typically required to conduct bioavailability/bioequivalence studies of its test product against the listed drug. The bioavailability/bioequivalence studies assess the rate and extent of absorption and concentration levels of a drug in the blood stream required to produce a therapeutic effect. Bioequivalence is established when the rate of absorption and concentration levels of a generic product are substantially equivalent to the listed drug. For some drugs (e.g., topical antifungals), other means of demonstrating bioequivalence may be required by the FDA, especially where rate and/or extent of absorption are difficult or impossible to measure. In addition to the bioequivalence data, an ANDA must contain patent certifications, chemistry, manufacturing, labeling and stability data. The Hatch-Waxman amendments also established certain statutory protections for listed drugs. Under the Hatch-Waxman amendments, approval of an ANDA for a generic drug may not be made effective for interstate marketing until all relevant patents for the listed drug have expired or been determined to be invalid or not infringed by the generic drug. Prior to enactment of the Hatch-Waxman amendments, the FDA did not consider the patent status of a previously approved drug. In addition, under the Hatch-Waxman amendments, statutory non-patent exclusivity periods are established following approval of 11 certain listed drugs, where specific criteria are met by the drug. If exclusivity is applicable to a particular listed drug, the effective date of approval of ANDAs (and, in at least one case, submission of an ANDA) for the generic version of the listed drug is usually delayed until the expiration of the exclusivity period, which, for newly approved drugs, can be either three or five years. The Hatch-Waxman amendments also provide for extensions of up to five years of certain patents covering drugs to compensate the patent holder for reduction of the effective market life of the patented drug resulting from the time involved in the Federal regulatory review process. During 1995, patent terms for a number of listed drugs were extended when the Uruguay Round Agreements Act (the "URAA") went into effect to implement the latest General Agreement on Tariffs and Trade (the "GATT") to which the United States became a treaty signatory in 1994. Under GATT, the term of patents was established as 20 years from the date of patent application. In the United States, the patent terms historically have been calculated at 17 years from the date of patent grant. The URAA provided that the term of issued patents be either the existing 17 years from the date of patent grant or 20 years from the date of application, whichever was longer. The effect generally was to add patent life to already issued patents, thus delaying FDA approvals of applications for generic products. In addition to the Federal government, states have laws regulating the manufacture and distribution of pharmaceuticals, as well as regulations dealing with the substitution of generic drugs for brand-name drugs. The Company's operations are also subject to regulation, licensing requirements and inspection by the states in which they are located and/or conduct business. Certain activities of the Company may also be subject to FTC enforcement. The FTC enforces a variety of antitrust and consumer protection laws to ensure that the nation's markets function competitively, are vigorous, efficient and free of undue restrictions. The Company also is governed by Federal and state laws of general applicability, including laws regulating matters of environmental quality, working conditions, and equal employment opportunity. The Company is also subject to the recently enacted Sarbanes-Oxley Act (the "SOX Act"), including regulations to be promulgated thereunder. The SOX Act contains a variety of provisions affecting public reporting companies, such as the Company, including its relationship with its auditors, prohibiting loans to executive officers and requiring the evaluations of a company's internal disclosure controls and procedures. The Federal government made significant changes to Medicaid drug reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA"). Generally, OBRA provides that a generic drug manufacturer must offer the states an 11% rebate on drugs dispensed under the Medicaid program and must enter into a formal drug rebate agreement, as the Company has, with the Federal Health Care Financing Administration. Although not required under OBRA, the Company has also entered into similar state agreements. ITEM 2. PROPERTIES. - ------ ---------- The Company owns an approximately 92,000 square foot facility built to Par's specifications which contain its executive offices, and manufacturing and domestic research and development operations. The building, occupied by Par since fiscal year 1986, also includes research and quality control laboratories, as well as packaging and warehouse facilities. The building is located in Spring Valley, New York, on a parcel of land of approximately 24 acres, of which approximately 15 acres are available for future expansion. The Company owns another building in Spring Valley, New York, across the street from its executive offices, occupying approximately 36,000 square feet on two acres. This property was acquired in fiscal year 1994 and is used for offices and warehousing. The Company is currently in the process of converting the warehouse and some of the office space into new research and quality control laboratories. The capital project is expected to be completed in fiscal year 2003. The purchase of the land and building was financed by a mortgage loan, which was paid in full in February 2003. Par owns a third facility (the "Congers Facility") of approximately 33,000 square feet located on six acres in Congers, New York. The Company has outsourced the operations previously performed at the Congers Facility to BASF and the Halsey Drug Co., Inc. ("Halsey"). In March 1999, Par entered into an agreement to lease the Congers Facility and related machinery and equipment to 12 Halsey. The lease agreement had an initial term of three years, with an additional two-year renewal period and contains purchase options permitting Halsey to purchase the Congers Facility and substantially all the equipment thereof at any time during the lease terms for a specified amount. Pursuant to the lease agreement, Halsey paid the purchase options of $150 and $100, respectively, in March of 2002 and 1999. The lease agreement provides for annual fixed rent of $600 per year during the two-year renewal period. In fiscal year 2002, the Company leased additional office space in Woodcliff Lake, New Jersey. The lease, as amended in December 2002, covers approximately 41,000 square feet and expires in January 2010. The Company moved certain of its administrative personnel to the facility in July 2002. In the first quarter of 2003, the Company moved additional administrative functions to this location. In fiscal year 2003, the Company is planning to move its primary warehousing operation to a facility in Montebello, New York. In August 2002, the Company entered into a ten-year lease expiring in September 2012 to occupy approximately 190,000 square feet of the facility. Par occupies approximately 47,000 square feet in a building located in Spring Valley, New York for warehouse space under a lease that expires December 2004. The Company has the option to extend the lease for two additional five-year periods. FineTech is currently leasing approximately 8,600 square feet at three locations in Nesher and Technion, Israel, which contain its laboratories and administrative offices. The terms of the lease are for ten years and 11 months, with an additional two-year and 11 month renewal period. In fiscal year 2003, FineTech is planning on moving its laboratories from Technion to Nesher, expanding its space under the current lease by approximately 8,600 additional square feet. FineTech also leases approximately 2,500 square feet of laboratory space in Coventry, Rhode Island. The lease expires in December 2007 and may be extended up to an additional five-year period. Israel Pharmaceutical Resources L.P. ("IPR"), a research and development operation owned by the Company, leased approximately 13,000 square feet at Yaacobi House in Even Yehuda, Israel. The term of the lease was to expire in April 2005, and the Company guaranteed IPR's obligations under the lease. In fiscal year 2002, the Company sold the assets of IPR and the lessor of the facility agreed to terminate the lease subject to the fulfillment of certain conditions, including the payment of a $75 fee. The Company believes that its owned and leased properties are sufficient in size, scope and nature to meet its anticipated needs for the reasonably foreseeable future (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition" and "Notes to Consolidated Financial Statements-Long-Term Debt" and "-Commitments, Contingencies and Other Matters-Leases"). ITEM 3. 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 believes 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 is also seeking 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' motion for injunctive relief or their claim for attorneys' fees. 13 Par, among others, is a defendant in three lawsuits filed in the 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 defend these lawsuits. While the outcome of litigation is never certain, Par believes that it will prevail in these lawsuits. The Company prevailed against Alpharma in an interference proceeding before the U.S. Patent and Trademark Office regarding PRX's patents and applications relating to megestrol acetate oral suspension formulations. Additionally, PRX filed suit against Alpharma in the U.S. District Court, Southern District of New York in February 2002. Alpharma has now entered into a consent judgment and order of permanent injunction in this matter. Alpharma is hereby enjoined from making, using, selling or importing its megestrol oral suspension product. The Company is involved in certain other litigation matters, including product liability and patent actions, as well as 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------ --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2002. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------ --------------------------------------------------------------------- (a) MARKET INFORMATION. The Company's Common Stock is traded on the NYSE. The following table shows the range of closing prices for the Common Stock as reported by the NYSE for each calendar quarter during the Company's two most recent fiscal years. YEAR ENDED IN 2002 2001 --------------- ---------------- QUARTER ENDED APPROXIMATELY HIGH LOW HIGH LOW --------------------------- ----- --- ---- --- - March 31 $33.20 $16.10 $13.41 $6.63 June 30 29.00 20.91 30.69 12.35 September 30 28.60 21.85 41.50 29.91 December 31 30.55 20.05 39.06 29.40 (b) HOLDERS. As of March 21, 2003, there were approximately 2,200 holders of record of the Common Stock. The Company believes that, in addition, there are a significant number of beneficial owners of its Common Stock whose shares are held in "street name". (c) DIVIDENDS. During fiscal years 2002, 2001 and 2000, the Company did not pay any cash dividends on its Common Stock. The payment of future dividends on its Common Stock is subject to the discretion of the Board of Directors and is dependent upon many factors, including the Company's earnings, its capital needs, the terms of its financing agreements and its general financial condition. The Company's current loan agreement with General Electric Capital Corporation ("GECC") prohibits the declaration or payment of any dividend, or the making of any distribution, to any of the Company's stockholders (see "Notes to Consolidated Financial Statements-Short-Term Debt"). (d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. NUMBER OF SECURITIES TO WEIGHTED TO BE ISSUED AVERAGE NUMBER OF UPON EXERCISE EXERCISE PRICE OF SECURITIES OF OUTSTANDING OF OUTSTANDING REMAINING OPTIONS, WARRANTS OPTIONS, WARRANTS AVAILABLE FOR PLAN CATEGORY AND RIGHTS AND RIGHTS FUTURE ISSUANCE ------------- ----------------- ----------------- --------------- EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS: 2001 Performance Equity Plan 2,751 $28.56 1,249 1997 Directors Stock Option Plan 138 $18.81 27 1990 Stock Incentive Plan 134 $3.54 - EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS: 2000 Performance Equity Plan 741 $6.87 54 ----- ----- Total 3,764 $23.04 1,330 In fiscal year 2000, the Company's Board of Directors adopted the 2000 Performance Equity Plan (the "2000 Plan") which plan was subsequently amended, making it a non-qualified, broad-based plan not subject to shareholder approval. The 2000 Plan provides for the granting of incentive and nonqualified stock options to employees of the Company and to others. The 2000 Plan became effective March 23, 2000 and will continue until March 22, 2010 unless terminated sooner. The Company reserved 1,025 shares of Common Stock for issuance under the 2000 Plan. The maximum term of an option under the 2000 Plan is ten years. Vesting and option terms are determined in each case by the Compensation and Stock Option Committee of the Board. The maximum term of the option is reduced to five years if an incentive stock option is granted to a holder of more than 10% in the Company (see "Notes to Consolidated Financial Statements-Short-Term Debt"). (e) RECENT STOCK PRICE. On March 21, 2003, the closing price of a share of the Common Stock on the NYSE was $41.71 per share. 15 ITEM 6. SELECTED FINANCIAL DATA. - ------ -----------------------
THREE TWELVE FOR THE YEARS ENDED MONTHS MONTHS ------------------------------------------ ENDED ENDED (*RESTATED)(*RESTATED)(*RESTATED)(*RESTATED) 12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 9/30/98 -------- -------- -------- -------- -------- ------- INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales $381,603 $271,035 $85,022 $80,315 $16,775 $59,705 Cost of goods sold 198,313 161,306 62,332 64,140 17,105 56,135 -------- -------- -------- ------- ------- ------- Gross margin 183,290 109,729 22,690 16,175 (330) 3,570 Operating expenses (income): Research and development 17,910 11,113 7,634 6,005 1,125 5,775 Selling, general and administrative 40,215 21,878 16,297 13,509 3,792 12,271 Settlements (9,051) - - - - - Acquisition termination charges 4,262 - - - - - Asset impairment/restructuring charge - - - - 1,906 1,212 -------- -------- -------- ------- ------- ------- Total operating expenses 53,336 32,991 23,931 19,514 6,823 19,258 -------- -------- -------- ------- ------- ------- Operating income (loss) 129,954 76,738 (1,241) (3,339) (7,153) (15,688) Other (expense) income (305) (364) 506 906 1 6,261 Interest income (expense) 604 (442) (916) (63) 89 (382) -------- -------- -------- ------- ------- ------- Income (loss) before provision for income taxes 130,253 75,932 (1,651) (2,496) (7,063) (9,809) Provision for income taxes 50,799 22,010 - - - - -------- -------- -------- ------- ------- ------- Net income (loss) $79,454 $53,922 $(1,651) $(2,496) $(7,063) $(9,809) ======== ======== ======== ======= ======= ======= Net income (loss) per share of common stock: Basic $2.46 $1.76 $(.06) $(.08) $(.24) $(.46) ======== ======== ======== ======= ======= ======= Diluted $2.40 $1.68 $(.06) $(.08) $(.24) $(.46) ======== ======== ======== ======= ======= ======= Weighted average number of common shares outstanding: Basic 32,337 30,595 29,604 29,461 29,320 21,521 ======== ======== ======== ======= ======= ======= Diluted 33,051 32,190 29,604 29,461 29,320 21,521 ======== ======== ======== ======= ======= ======= BALANCE SHEET DATA Working capital $136,305 $102,867 $18,512 $21,221 $24,208 $29,124 Property, plant and equipment (net) 27,055 24,345 23,560 22,681 22,789 24,283 Total assets 301,457 216,926 93,844 92,435 88,418 93,576 Long-term debt, less current portion 2,426 1,060 163 1,075 1,102 1,143 Shareholders' equity 220,790 138,423 64,779 65,755 67,329 74,328
* Restated as described in Notes to Consolidated Financial Statements. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------ ----------------------------------------------------------------------- OF OPERATIONS. ------------- CERTAIN STATEMENTS IN THIS DOCUMENT 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, TRENDS 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 DOCUMENT INCLUDE (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, (viii) UNANTICIPATED COSTS IN ABSORBING ACQUISITIONS (ix) OBTAINING OR LOSING 180-DAY EXCLUSIVITY ON PRODUCTS AND (x) GENERAL INDUSTRY AND ECONOMIC CONDITIONS. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT 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. FISCAL YEAR 2000 RESULTS GIVE EFFECT TO THE RESTATEMENT DESCRIBED IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS. RESULTS OF OPERATIONS GENERAL The Company experienced significant sales, gross margin and net income growth in fiscal year 2002 when compared to fiscal year 2001. Net income of $79,454 for the year ended December 31, 2002 increased $25,532 from $53,922 for the year ended December 31, 2001. Net income in 2001 included the favorable impact from the reversal of a previously established valuation allowance of $9,092 related to net operating loss ("NOL") carryforwards. Net sales reached a historical high of $381,603 in 2002, an increase of $110,568, or 41%, from 2001. The increased revenues were primarily the result of new product introductions in fiscal year 2002 and the continuing success of megestrol acetate oral suspension (Megace(R) Oral Suspension), introduced in the third quarter of 2001. The revenue increase was achieved despite lower sales of fluoxetine (Prozac(R)) 10 mg and 20 mg tablets, which were introduced with 180-day exclusivity in August 2001 and experienced severe price competition in fiscal year 2002. The sales growth generated increased gross margins of $183,290, or 48% of net sales, in fiscal year 2002, compared to $109,729, or 40% of net sales, in 2001. Results for fiscal year 2002 included increased spending on research and development and selling, general and administrative expenses of $6,797 and $18,337, respectively, primarily due to increased activity with outside development partners, and additional legal fees, personnel costs, product liability insurance and shipping costs associated with new product launches. Additionally, the Company recorded income from settlements of $9,051 in the first quarter of 2002 related to the termination of its litigation with BMS and acquisition termination charges of $4,262 in connection with its termination of the acquisition of the combined ISP FineTech fine chemical business based in Haifa, Israel and Columbus, Ohio. The Company subsequently purchased FineTech, based in Haifa, Israel, from ISP in April 2002. The purchase of FineTech did not have a material effect on the Company's earnings for fiscal year 2002. The Company's net income of $53,922 for fiscal year 2001, which included the reversal of a previously established valuation allowance related to NOL carryforwards, increased $55,573 from a net loss of $1,651 for fiscal year 2000. The Company did not recognize a tax benefit for its losses in fiscal year 2000. The revenue increase of $186,013, or 219%, in 2001 from revenues generated during 2000, reflected the successful launch of three products that benefited from marketing exclusivity in fiscal year 2001, fluoxetine 10 mg and 20 mg tablets, fluoxetine 40 mg capsules and megestrol acetate oral suspension. Net sales were $271,035 for fiscal year 2001 compared to net sales of $85,022 in fiscal year 2000. Accompanying the sales growth, the gross margins increased to $109,729, or 40% of net sales, in 2001, from $22,690, or 27% of net sales, in 2000. The improved results included an increased investment in research and 17 development, which totaled $11,113 for fiscal year 2001, an increase of $3,479 from fiscal year 2000. In fiscal year 2001, selling, general and administrative costs were $21,878, an increase of $5,581 from the previous year, primarily due to additional marketing programs, shipping costs and legal fees associated with new product launches. In addition to its own product development program, the Company has several strategic alliances through which it co-develops and distributes products. As a result of its internal program and these strategic alliances, the Company's pipeline of potential products includes 28 ANDAs (seven of which have been tentatively approved), pending with, and awaiting approval from, the FDA. The Company pays a percentage of the gross profits to its strategic partners on sales of products covered by its distribution agreements. Generally, products that the Company develops internally, without having to split gross profits with its strategic partners, would contribute higher gross margins than products covered under distribution agreements (see "Notes to Consolidated Financial Statements-Research and Development Agreements" and "-Distribution and Supply Agreements"). In July 2001 and August 2001, the FDA granted approvals for three ANDA submissions, one each by Par, Dr. Reddy's Laboratories Ltd. ("Reddy") and Alphapharm Pty Ltd., an Australian subsidiary of Merck KGaA, for megestrol acetate oral suspension, fluoxetine 40 mg capsules and fluoxetine 10 mg and 20 mg tablets, respectively, which as first-to-file opportunities entitled the Company to 180-days of marketing exclusivity for the products. The Company began marketing megestrol acetate oral suspension, which is not subject to any profit sharing agreements, in July 2001. In August 2001, the Company began marketing fluoxetine 40 mg capsules covered under a distribution agreement with Reddy and fluoxetine 10 mg and 20 mg tablets covered under a distribution agreement with Genpharm. Generic competitors of the Company received 180-days marketing exclusivity for the generic version of fluoxetine 10 mg and 20 mg capsules, which the Company began selling in the first quarter of 2002 following the expiration of such other party's exclusivity period. As expected, additional generic competitors, with products comparable to all three strengths of the Company's fluoxetine products, began entering the market in the first quarter of 2002, eroding the pricing the Company received during the exclusivity periods, particularly on the 10 mg and 20 mg strengths. Despite another generic approval for megestrol acetate oral suspension in the first quarter of 2002, to date the Company still maintains a significant share of the market for this product. Although megestrol oral suspension and fluoxetine 40 mg capsules are expected to continue to contribute significantly to the Company's overall performance, the rapid growth of the Company's product line through new product introductions and, to a lesser extent, increased sales of certain existing products have reduced its reliance on each of these key products. Critical to the continued growth of the Company is the introduction of new manufactured and distributed products at selling prices that generate significant gross margins. 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. Sales and gross margins of the Company's products are principally dependent upon (i) pricing and product deletions by competitors, (ii) the introduction of other generic drug manufacturers' products in direct competition with the Company's significant products, (iii) the ability of generic competitors to quickly enter the market after patent or exclusivity period expirations, diminishing the amount and duration of significant profits from any one product, (iv) the continuation of existing distribution agreements, (v) the introduction of new distributed products, (vi) the consolidation among distribution outlets through mergers, acquisitions and the formation of buying groups, (vii) the willingness of generic drug customers, including wholesale and retail customers, to switch among generic pharmaceutical manufacturers, (viii) approval of ANDAs and introduction of new manufactured products, (ix) granting of potential exclusivity periods, (x) market penetration for the existing product line and (xi) the level of customer service (see "Business-Competition"). NET SALES Net sales of $381,603 for fiscal year 2002 increased $110,568, or 41%, from net sales in fiscal year 2001. The sales increase was primarily due to higher sales of megestrol acetate oral suspension, introduced in late July 2001, new 18 products introduced in fiscal year 2002, particularly tizanidine (Zanaflex(R)), metformin (Glucophage(R)), flecainide (Tambocor(R)) and nizatidine (Axid(R)), sold under distribution agreements with Reddy or Genpharm, and the addition of five BMS brand products, sold pursuant to an agreement with BMS. Net sales of fluoxetine and megestrol acetate oral suspension in fiscal year 2002 were $89,952 and $83,022, respectively, compared to $122,270 and $43,869, respectively, in the prior year. Net sales of distributed products, which consist of products manufactured under contract and licensed products, were approximately 60% and 66%, respectively, of the Company's net sales in fiscal years 2002 and 2001. The Company is substantially dependent upon distributed products for its overall sales, and as the Company introduces new products under its distribution agreements, it is expected that this dependence will continue. Any inability by suppliers to meet expected demand could adversely affect future sales. The Company's exclusivity period for fluoxetine expired in late-January 2002. The Company established a price protection reserve with respect to fluoxetine during the exclusivity period of approximately $34,400, 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. In fiscal year 2002, the Company issued price protection credits totaling approximately $27,400 and eliminated the price protection reserve it believed was no longer necessary. Pursuant to distribution agreements with strategic partners, the elimination of the remaining reserve had a favorable impact on the Company's gross margin of approximately $1,800 in fiscal year 2002. 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 gross margins generated by fluoxetine in fiscal year 2002 were and will continue to be adversely affected (see "Notes to Consolidated Financial Statements-Accounts Receivable"). The Company's exclusivity period for megestrol acetate oral suspension expired 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 take steps necessary to protect its intellectual property rights. Although competitors may be taking the steps necessary to enter the market, the Company believes it will be difficult for them to successfully enter this market because of patents owned by BMS or the Company. Megestrol acetate oral suspension is still anticipated by the Company to be a significant profit contributor for fiscal year 2003, despite the potential of competition. In accordance with the Company's accounting policies, the Company did not record a price protection reserve for megestrol acetate oral suspension as of December 31, 2002. The Company will continue to evaluate the effect of potential competition and will record a price protection reserve when and as it deems necessary. Pursuant to a profit sharing agreement with Genpharm (the "Genpharm Profit Sharing Agreement"), the Company will receive a portion of the profits generated from the sale of omeprazole, the generic version of Astra Zeneca's ("Astra") Prilosec(R). In November 2001, the FDA granted Genpharm 180 days' marketing co-exclusivity for 10 mg and 20 mg doses of omeprazole. The exclusivity would have allowed only Genpharm and/or Andrx Corporation ("Andrx") "), a pharmaceutical company located in Fort Lauderdale, Florida, to enter the market during the exclusivity period. Under the Genpharm Profit Sharing Agreement, the Company was entitled to receive at least 30% of profits generated by Genpharm based on the sale of omeprazole. In November 2002, the Company announced that Genpharm and Andrx, in conjunction with KUDCo, a subsidiary of Schwarz Pharma AG of Germany, had relinquished exclusivity rights for 10 mg and 20 mg doses of omeprazole, thereby allowing KUDCo to enter the market with a generic version of Prilosec(R). As a result, KUDCo received final ANDA approval from the FDA for its generic version of Prilosec(R). The terms of the agreement provide Genpharm with an initial 15% share of KUDCo's profits, as defined in their agreement, with a subsequent reduction over time based on a number of factors. The Company reduced its share of Genpharm's profit derived from omeprazole pursuant to the Genpharm Profit Sharing Agreement from 30% to 25%. In December 2002, KUDCo launched omeprazole "at risk" because Astra appealed the court's patent infringement decision. The full impact of KUDCo's omeprazole launch on the Company's revenues is presently unclear since, among other things, Astra has introduced a new drug, Nexium(R), in an apparent attempt to switch consumers using Prilosec(R) and Astra's decision to market a non-prescription form of Prilosec(R) along with Proctor & Gamble, all of which may reduce generic sales of omeprazole. In December 2002, the Company recognized $755 of revenues related 19 to its share of Genpharm profits, which were significantly reduced as Genpharm recovered out-of-pocket development and legal expenses incurred during the product development and litigation process. These expenses were substantially recovered by Genpharm in 2002. Unless there is a court ruling that is unfavorable to KUDCo in the pending appeal by Astra, in which case the Company could be obligated to return any payments received from Genpharm, the Company anticipates recording revenues of up to $20,000 in fiscal year 2003 from its share of the profits on omeprazole. Net sales for fiscal year 2001 of $271,035 increased $186,013, or 219%, from net sales of $85,022 for fiscal year 2000. The sales increase was primarily due to the launch in the third quarter of 2001 of fluoxetine 10 mg and 20 mg tablets sold under a distribution agreement with Genpharm, fluoxetine 40 mg capsules sold under a distribution agreement with Reddy, and megestrol acetate oral suspension manufactured by the Company. Net sales of distributed products represented approximately 66% and 64%, respectively, of the Company's net sales in fiscal years 2001 and 2000. GROSS MARGINS The gross margin for fiscal year 2002 of $183,290 (48% of net sales) increased $73,561 from $109,729 (40% of net sales) in the prior year. The gross margin improvement was achieved primarily through the additional contributions from sales of higher margin new products, including megestrol acetate oral suspension and, to a lesser extent, increased sales of certain existing products. Megestrol acetate oral suspension contributed an additional $33,552 in fiscal year 2002 to the gross margin improvement when compared to fiscal year 2001. As previously discussed, additional generic drug manufacturers introduced comparable fluoxetine products at the expiration of the Company's exclusivity period that adversely affected the Company's sales volumes, selling prices and gross margins for such products, particularly the 10 mg and 20 mg strengths. The effects of gross margin declines from lower pricing on the fluoxetine 40 mg capsule have been partially offset, however, by an increase in the Company's profit sharing percentage under an agreement with Reddy. Although aggregate sales of the fluoxetine products declined in 2002, the increased profits on the 40 mg capsule lessened the impact of the lower margin contributions from the 10 mg and 20 mg strengths. The Company's gross margin for megestrol acetate oral suspension could also decline if additional manufacturers enter the market with comparable generic products. The gross margin of $109,729 (40% of net sales) for fiscal year 2001 increased $87,039 from $22,690 (27% of net sales) in fiscal year 2000. The gross margin improvement was achieved through additional contributions from sales of higher margin new products and, to a lesser extent, increased sales of certain existing products and more favorable manufacturing overhead variances. For fiscal year 2001, fluoxetine, which is subject to profit sharing agreements with Genpharm and Reddy, contributed approximately $38,736 to the gross margin improvement while megestrol acetate oral suspension contributed approximately $34,613. Inventory write-offs amounted to $3,096 for fiscal year 2002 compared to $1,790 in fiscal year 2001. The increase was primarily attributable to normally occurring write-offs resulting from increased production required to meet higher sales and inventory levels. The inventory write-offs, taken in the normal course of business, are related primarily to work in process inventory not meeting the Company's quality control standards and the disposal of finished products due to short shelf lives. In addition, the Company experienced 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 in fiscal year 2002. Inventory write-offs of $1,790 for fiscal year 2001 were comparable to $1,645 in fiscal year 2000. In addition to write-offs taken in the normal course of business, inventory write-offs in fiscal year 2001 included the disposal of validation batches related to manufacturing process improvements. In fiscal year 2002, the Company's top four selling products accounted for approximately 57% of net sales compared to 70% and 45%, respectively, of net sales in fiscal years 2001 and 2000. One of the products, tizanidine, was not one of the top four products in either of the preceding periods and accounted for approximately 6% of the Company's total 2002 net sales. The aggregate sales and gross margins generated by fluoxetine and megestrol acetate oral suspension continued to account for a significant portion of the Company's overall sales and gross margins in both fiscal years 2002 and 2001 and any further reductions in pricing for these products will continue to reduce future contributions of these products to the Company's overall financial performance. Although there can be no such assurance, the Company anticipates continuing to introduce new products in fiscal year 2003 and attempt to increase sales of certain existing products in an effort to offset the sales and gross margin declines resulting from competition on any of its significant products. The Company will also try 20 to reduce the overall impact of the top four products, by adding additional products through new and existing distribution agreements and seeking to gain efficiencies through manufacturing process improvements. OPERATING EXPENSES/INCOME RESEARCH AND DEVELOPMENT Research and development expenses of $17,910 for fiscal year 2002 increased $6,797, or 61%, from $11,113 for the prior year. The increased costs were primarily attributable to additional payments of approximately $7,100 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, the acquisition of FineTech and funding of SVC Pharma, the Company's joint venture partnership. These expenses were partially offset by lower biostudy costs, primarily related to products covered under distribution agreements with Genpharm, in fiscal year 2001. Total research and development costs for fiscal year 2003 are expected to exceed the total for fiscal year 2002 by approximately 30% to 40%. The increase is expected as a result of increased internal development activity and projects with third parties, increased research and development venture activity and the inclusion of FineTech activities for the full year. The Company purchased FineTech, based in Haifa, Israel, from ISP in April 2002. The Company has enjoyed a long-standing relationship with FineTech for more than seven years. One of the Company's potential first-to-file products, latanoprost, resulted from the Company's relationship with FineTech. In addition, the Company and FineTech are currently collaborating on two additional products for which ANDAs have already been filed with the FDA (see "Notes to Consolidated Financial Statements-Acquisition of FineTech"). In April 2002, the Company entered into an agreement with RTI to establish a joint venture partnership in the United States. The new joint venture was named SVC Pharma and is 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 has agreed to provide scientific and technological expertise in the development of non-infringing, complex molecules. In addition to providing chemical synthesis capabilities, RTI has agreed to provide the manufacturing capacity for sophisticated intermediate and active pharmaceutical ingredients. Par has agreed to provide development expertise in dosage formulation and will be responsible for marketing, sales and distribution. The companies have agreed to 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 late in fiscal year 2004. The Company's funding of $952 related to the first project began in the fourth quarter of fiscal year 2002 and was charged to research and development expenses. The Company accounts for its share of the expenses of SVC Pharma with a charge to research and development as incurred. The Company currently has nine ANDAs for potential products (three 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 ten additional products during fiscal year 2003. 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 five ANDAs for potential products (two tentatively approved) covered under the Genpharm 11 Product Agreement pending with, and awaiting approval from, the FDA (see "Notes to Consolidated Financial Statements-Research and Development Agreements"). The Company and Genpharm entered into a distribution agreement (the "Genpharm Distribution Agreement"), dated March 1998. 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. The Company is currently marketing 19 products under the Genpharm Distribution Agreement (see "Notes to Consolidated Financial Statements-Distribution and Supply Agreements-Genpharm, Inc."). 21 Genpharm and the Company share the costs of developing products covered under an agreement (the "Genpharm Additional Product Agreement"), dated November 27, 2000. The Company is currently marketing two products under the Genpharm Additional Product Agreement (see "Notes to Consolidated Financial Statements-Distribution and Supply Agreements-Genpharm, Inc."). In fiscal year 2001, the Company incurred research and development expenses of $11,113 compared to $7,634 for fiscal year 2000. The increased costs were primarily attributable to payments to Elan related to the development of a clonidine transdermal patch and higher costs for raw material, biostudies, including those related to products developed by Genpharm, personnel and additional payments for formulation development work performed for the Company by unaffiliated companies. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative costs of $40,215 (11% of net sales) for fiscal year 2002 increased $18,337 from $21,878 (8% of net sales) in fiscal year 2001. The increase in 2002 was primarily attributable to additional legal fees of $6,029, personnel costs of $4,247 and, to a lesser extent, product liability insurance and distribution costs associated with new product introductions and higher sales volumes. Distribution costs include those related to shipping product to the Company's customers, primarily through the use of a common carrier or an external distribution service. Shipping costs totaled $2,838 in fiscal year 2002, an increase of $1,489 from the prior year. The Company anticipates it will continue to incur a high level of legal expenses related to the costs of litigation connected with potential new product introductions (see "Notes to Consolidated Financial Statements-Commitments, Contingencies and Other Matters-Legal Proceedings"). Although there can be no such assurance, selling, general and administrative costs in fiscal year 2003 are expected to increase by approximately 10% from fiscal year 2002. Although selling, general and administrative costs of $21,878 for fiscal year 2001 increased $5,581, or 34%, over the preceding year, the cost as a percentage of net sales in the respective periods decreased to 8% in 2001 from 19% in 2000. The higher dollar amount in fiscal year 2001 was primarily attributable to additional marketing programs, distribution costs and legal fees associated with new product introductions and, to a lesser extent, increased personnel costs. In fiscal year 2001, shipping costs of $1,349 increased $575 from $774 in fiscal year 2000. SETTLEMENTS On March 5, 2002 the Company entered into the BMS Asset Purchase Agreement and 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. To obtain the rights to the five products, the Company agreed to terminate its outstanding litigation against BMS involving megestrol acetate oral suspension and buspirone, paid approximately $1,024 in March 2002 and agreed to make an additional payment of approximately $1,025 in the first quarter of 2003. The Company determined, through an independent third party appraisal, the fair value of the product rights received to be $11,700, which exceeded the cash consideration of $2,049 and associated costs of $600 by $9,051. The $9,051 value was assigned to the litigation settlements and included in settlement income in the first quarter of 2002. The fair value of the product rights received is being amortized on a straight-line basis over seven years beginning in March 2002, with the net amount included in intangible assets on the consolidated balance sheets. ACQUISITION TERMINATION CHARGES On March 15, 2002, the Company terminated its negotiations with ISP related to the Company's purchase of the combined 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 following the announcement of the proposed transaction. Pursuant to the termination of negotiations, the Company paid ISP a $3,000 break-up fee in March 2002, which was subject to certain credits and offsets, and incurred $1,262 in related acquisition costs, both of which were included in acquisition termination charges on the consolidated statements of operations in fiscal year 2002. 22 OTHER EXPENSE/INCOME Other expense of $305 for fiscal year 2002 was comparable to $364 in fiscal year 2001. Other income of $506 in fiscal year 2000 included payments from strategic partners to reimburse the Company for research costs incurred in prior periods. INTEREST INCOME/EXPENSE Net interest income of $604 in fiscal year 2002 was primarily derived from money market and other short-term investments. Net interest expense of $442 and $916 in fiscal years 2001 and 2000, respectively, was primarily due to outstanding balances on the Company's line of credit with GECC during the periods. INCOME TAXES The Company recorded provisions for income taxes of $50,799 and $22,010, respectively, for the years ended December 31, 2002 and 2001 based on the applicable federal and state tax rates for those periods. The provision in fiscal year 2001 was net of tax benefits of $9,092 related to previously unrecognized NOL carryforwards. The Company did not recognize a benefit for its operating losses for fiscal year 2000 (see "Notes to Consolidated Financial Statements-Income Taxes"). FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents of $65,121 at December 31, 2002 decreased $2,621 from $67,742 at December 31, 2001. In fiscal year 2002, the Company funded the acquisition of FineTech and capital projects primarily through its operating activities. Working capital, which includes cash and cash equivalents, increased to $136,305 at December 31, 2002 from $102,867 at December 31, 2001, primarily from increases in inventory and accounts receivable due to the Company's sales growth, as well as, maintaining customer service levels. The working capital ratio of 2.83x at December 31, 2002 improved from 2.41x at December 31, 2001. A summary of the Company's contractual obligations and commercial commitments as of December 31, 2002 were as follows: AMOUNTS DUE IN FISCAL YEARS --------------------------- TOTAL 2005 AND OBLIGATION OBLIGATION 2003 2004 THEREAFTER ---------- ---------- ---- ---- ---------- Operating leases $21,054 $2,812 $2,927 $15,315 Industrial revenue bond 2,000 397 384 1,219 Mortgage loan 809 39 39 731 Other 213 164 49 - ------- ------ ------ ------- Total obligations $24,076 $3,412 $3,399 $17,265 ======= ====== ====== ======= In addition to its internal research and development costs, 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, the most significant of which are described below, are either capitalized or expensed according to the Company's accounting policies. Pursuant to the Genpharm Profit Sharing Agreement, Genpharm will pay the Company its share of profits related to KUDCo's sale of omeprazole 60 days after the month in which the product was sold. The terms of the agreement provide Genpharm with an initial 15% share of KUDCo's profits, as defined in their agreement, with a subsequent reduction over time based on a number of factors. The Company reduced its share of Genpharm's profit derived from omeprazole pursuant to the Genpharm Profit Sharing Agreement from 30% to 25%. In December 2002, KUDCo launched omeprazole "at risk" because Astra appealed the court's patent infringement decision. In December 2002, the Company recognized $755 of revenues related to its share of Genpharm profits. Unless there is a court ruling that is unfavorable to KUDCo in the pending appeal by Astra, in which case the Company could be obligated to return any payments received from 23 Genpharm, the Company anticipates receiving up to $17,000 in cash in fiscal year 2003 from its share of the profits on omeprazole. In November 2002, the Company amended the Supply and Marketing Agreement with Pentech, dated November 2001, to market paroxetine hydrochloride capsules. Pursuant to the Supply and Marketing Agreement, Par is responsible for all legal expenses up to $2,000, which have been expensed as incurred, to obtain final regulatory approval. Legal expenses in excess of $2,000 are fully creditable against future profit payments. In fiscal year 2003, Par will also be responsible for Pentech costs associated with the project up to $1,300, which will be charged to research and development expenses as incurred. Pursuant to its joint venture partnership with RTI named SVC Pharma, the Company agreed to share equally in expenses and profits of the partnership. The Company's funding of $952 related to the first project began in the fourth quarter of fiscal year 2002. The Company accounts for its share of the expenses of SVC Pharma with a charge to research and development as incurred. In July 2002, the Company and Three Rivers entered into the Three Rivers Distribution Agreement, which was amended in October 2002, to market and distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's Rebetol(R). Under the terms of the Three Rivers Distribution Agreement, Three Rivers will supply the product and 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 and pay Three Rivers a percentage of the gross profits as defined in the agreement. The Company paid Three Rivers $1,000 in November 2002, which was charged to research and development during the period, and agreed to pay Three Rivers $500 at such time Par commercially launches the product. The Company made non-refundable payments totaling $1,000 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 $800 in various installments related to the achievement of certain milestones in the development of two potential products and $600 for each product on the day of the first commercial sale (see-"Notes to Consolidated Financial Statements-Research and Development Agreements"). In April 2002, the Company entered into the Genpharm 11 Product Agreement pursuant to which Genpharm agreed to develop the products, submit all corresponding ANDAs to the FDA and subsequently manufacture the products. Par 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, as defined in the agreement, on all sales of the products covered under this agreement. Pursuant to the Genpharm 11 Product Agreement, the Company paid Genpharm a non-refundable fee of $2,000, included in intangible assets on the consolidated balance sheets, in the second quarter of 2002 for two of the products. In addition, the Company will be required to pay an additional non-refundable fee of up to $414 based upon FDA acceptance of filings for six of the nine remaining products. In April 2002, the Company purchased FineTech, a portion of ISP's fine chemical business based in Haifa, Israel, from ISP for approximately $32,000 and $1,237 in related acquisition costs, all of which were financed by its cash-on-hand (see "Notes to Consolidated Financial Statements-Acquisition of FineTech"). As of December 31, 2002 the Company had payables due to distribution agreement partners of $18,163, related primarily to amounts due pursuant to profit sharing agreements with strategic partners. The Company expects to pay these amounts out of its working capital in the first quarter of 2003. In December 2002, the Company and Elan terminated an agreement (the "Development, License and Supply Agreement"), dated December 2001, to develop several modified release drugs over the next five years. The Company paid Elan $1,902 in fiscal years 2002 and 2003, which was charged to research and development expenses, for a product covered under the Development, License and Supply Agreement, thereby completing its obligations pursuant to the agreement. In December 2001, the Company made the first payment of a potential equity investment of up to $2,438 to be made over a period of time in HighRapids, Inc. ("HighRapids"), a Delaware Corporation and software developer and owner of patented rights to an artificial intelligence generator. Pursuant to an agreement between the Company and HighRapids, effective December 1, 2001, the Company, subject to its ongoing evaluation of HighRapids' operations, has agreed 24 to purchase units, consisting of secured debt, evidenced by 7% secured promissory notes, up to an aggregate principal amount of $2,425 and up to an aggregate 1,330 shares of the common stock of HighRapids. 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 December 31, 2002, the Company had invested $768 of its potential investment. Due to HighRapids current operating losses and the Company's evaluation of its short-term prospects for profitability, the investment was expensed as incurred in fiscal years 2002 and 2001 and included in other expense on the consolidated statements of operations (see-"Notes to Consolidated Financial Statements-Commitments, Contingencies and Other Matters-Other Matters"). 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% (Xalatan(R)). Pursuant to this agreement, Par paid Breath Ltd. $2,500 in fiscal year 2001 and an additional $2,500 in the first quarter of 2002, which are included in intangible assets on the consolidated balance sheets. The Company paid FineTech a total of $2,000 from September 2000 through September 2001, which is included in intangible assets on the consolidated balance sheets, pursuant to an agreement with FineTech in April 1999, which was later modified in August 2000, for the right to use a process for a pharmaceutical bulk active latanoprost together with its technology transfer package, DMF and patent filings. FineTech paid all costs and expenses associated with the development of the process, exclusive of patent prosecution and maintenance, which shall be at the Company's expense. 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 in fiscal year 2001 and $833 in 2002, which were charged to research and development expenses in the respective periods. In addition, Par will pay Elan $1,000 upon FDA approval of the product and a royalty on all sales of the product. The Company, 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 December 2002, the Company decided to terminate its IPR operations and sold the assets of IPR to a private company in Israel. The loss on the sale of IPR's assets was $920 and was included in selling, general and administrative expenses in December 2002. The expenses of IPR for fiscal year 2002 were $1,032 and are included in research and development expenses as incurred, net of the funding from Generics. The Company expects the remaining shutdown expenses at IPR to be nominal in fiscal year 2003 (see "Notes to Consolidated Financial Statements-Research and Development Ventures"). The Company expects to continue to fund its operations, including research and development activities, capital projects, 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. In addition, the Company expects to fund the purchase and installation of certain capital equipment for FineTech in Rhode Island from an industrial revenue bond issued for that purpose (see "-Financing"). In fiscal year 2003, the Company expects its capital spending to increase due to the planned expansion of its laboratories, office space and an initiative related to improvements of its information systems. Although there can be no assurance, the Company anticipates it will continue to introduce new products and attempt to increase sales of certain existing products, in an effort to offset the loss of sales and gross margins from competition on any of its significant products. The Company will also try to reduce the overall impact of its top products by adding additional products through new and existing distribution agreements. FINANCING At December 31, 2002, the Company's total outstanding long-term debt, including the current portion, amounted to $3,022. The amount consists primarily of an outstanding mortgage loan with a bank, an industrial revenue bond and capital leases for computer equipment. In June 2001, the Company and the bank entered into an agreement that extended the term of the mortgage loan of which the remaining balance was originally due in May 2001. The mortgage loan 25 extension, in the principal amount of $877, was to be paid in equal monthly installments over a term of 13 years maturing May 1, 2014. The mortgage loan, secured by certain real property of the Company, had a fixed interest rate of 8.5% per annum, with rate resets after the fifth and tenth years based upon a per annum rate of 3.25% over the five-year Federal Home Loan Bank of New York rate. The Company paid the remaining balance on the mortgage loan in February 2003. The industrial revenue bond, in the principal amount of $2,000, is to be paid in equal monthly installments over a term of five years maturing January 1, 2008. The bond will be secured by certain equipment of FineTech located in Rhode Island, bears interest at 4.27% per annum and is subject to covenants based on various financial benchmarks. At December 31, 2001, the Company's total outstanding long-term debt, including the current portion, amounted to $1,299 consisting primarily of an outstanding mortgage loan with a bank and capital leases for computer equipment. In December 1996, Par entered into a Loan and Security Agreement (the "Loan Agreement") with GECC. The Loan Agreement was amended in December 2002, to incorporate the addition of FineTech and remove IPR as a party to the agreement. 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. 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. As of December 31, 2002, the borrowing base was approximately $27,000. 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 collateralized by the assets of the Company, other than real property, and is guaranteed by the Company. In connection with such facility, the Company 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. In November 2002, GECC waived certain events of default related to financial covenants and amended the financial covenants in the Loan Agreement. To date, no debt is outstanding under the Loan Agreement. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Critical accounting policies are those most important to the portrayal of the Company's financial condition and results of operations, and require management's most difficult, subjective and complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The Company's most critical accounting policies, discussed below, pertain to revenue recognition including the determination of sales returns and allowances, the determination of whether certain costs pertaining to the Company's significant development and marketing agreements are capitalized or expensed as incurred, the valuation and assessment of impairment of intangible assets, the determination of depreciable and amortizable lives, the determination of pension benefits and issues related to legal proceedings. In applying such policies, management must use some amounts that are based on its informed judgments and estimates. Because of the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. The Company is not aware of any reasonably likely events or circumstances that would result in different amounts being reported that would materially affect its financial condition or results of operations. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE AND RESERVES: At the time product is shipped and title passes to its customers, the Company recognizes revenue and simultaneously records an estimate for sales returns, chargebacks, rebates, price protection adjustments or other sales allowances, as a reduction in revenue, with a corresponding adjustment to the accounts receivable reserves (see "Notes to Consolidated Financial Statements-Accounts Receivable"). The Company has the historical experience and access to other information, including the total demand for each drug the Company manufactures or distributes, the Company's market share, the recent or pending introduction of new drugs, the inventory practices of the Company's customers, the resales by its customers to end-users having contracts with the Company, and rebate agreements with each customer, necessary to reasonably estimate the amount of such sales returns and allowances. Some of the assumptions used for certain of the Company's estimates are based on information received from third parties, such as customer inventories at a particular point in time, or other market factors beyond the Company's control. The Company regularly reviews all information related to these estimates and adjusts the reserves accordingly if and when actual experience differs from previous estimates. The Company's reserves related to the items described above, at December 31, 2002 and 2001, totaled $113,008 and $103,079, respectively. 26 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 made 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 Company accepts returns of product according to the following: (i) the returns must be approved by authorized personnel in writing or by telephone with the lot number and expiration date accompanying any request, (ii) the Company generally will accept returns of products from any customer and will give such customer a credit for such return provided such product is returned within six months prior to, and until 12 months following, such product's expiration date, (iii) any product that has more than six months until its expiration date may be returned to the Company; however, no credit will be issued to the customer, (iv) the Company will not accept returns of products if such products cannot be resold, unless the reason that such products cannot be resold is that the expiration date has passed. In addition, private label stock is not returnable. The Company's provision for returns has increased in fiscal year 2002 primarily due to higher overall sales volumes and a higher rate of returns from several brand products the Company began selling in 2002 pursuant to an agreement with BMS. The accounts receivable reserves also include provisions for cash discounts, sales promotions and price protection. Cash or terms discounts are given to customers who pay within a specific period of time. Sales or trade show promotions may be run by the Company where additional discounts may be given on a new product or certain existing products as an added incentive for the customer to purchase the Company's products. The Company generally offers price protection, or shelf-stock adjustments, with respect to sales of new generic drugs for which it has a market exclusivity period. Price protection accounts for the fact that the price of such drugs typically will decline, sometimes substantially, 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 for a credit to customers with respect to the customer's remaining inventory at the end of the exclusivity period for the difference between the Company's new price and the price at which the Company originally sold the product. The Company estimates the amount by which prices will decline based on its monitoring of the number and status of FDA applications and tentative approvals and its historical experience with other drugs for which the Company had market exclusivity. The Company estimates the amount of shelf stock that will remain at the end of an exclusivity period based on both its knowledge of the inventory practices for wholesalers and retail distributors and conversations it has with its major customers. Using these factors, the Company estimates the total price protection credit it will have to issue at the end of an exclusivity period and records charges (reductions of sales) to accrue this amount for specific product sales that will be subject to price protection based on the Company's estimate of customer inventory levels and market prices at the end of the exclusivity period. As noted above, although the Company believes it has the information necessary to reasonably estimate the amount of such price protection at the time the product is sold, there are inherent risks associated with these estimates. The Company adjusts its price protection reserves accordingly if and when actual experience differs from those estimates. At December 31, 2002, the Company did not have any significant price protection reserves. At December 31, 2001, the Company's price protection reserve was $31,400. INVENTORY RESERVES: The Company examines inventory levels, including expiration dates by product, on a regular basis. The Company makes provisions for obsolete and slow moving inventories as necessary to properly reflect inventory value with changes in these provisions charged to cost of goods sold. Inventory reserves at December 31, 2002 and 2001, respectively, totaled $6,803 and $5,714. RESEARCH AND DEVELOPMENT AND MARKETING AGREEMENTS: The Company will either capitalize or expense amounts related to the development and marketing of new products and technologies through third parties based on the Company's determination of its ability to recover in a reasonable period of time the estimated future cash flows anticipated to be generated pursuant to each agreement. Under the Company's accounting policies, amounts related to the Company's funding of the research and development efforts of others or to the purchase of contractual rights to products that have not been approved by the FDA where the Company has no alternative future use for the product, are expensed and included in research and development costs. Amounts for contractual rights acquired by the Company to a process, product or other legal right having multiple or alternative future uses that support its realizabilty, as well as, an approved product, are capitalized and included in intangible assets on the consolidated balance sheets. The Company records the value of these agreements based on the purchase price and subsequent milestone 27 payments related to each agreement. Capitalized costs are amortized on an accelerated basis over the estimated useful life over which the related cash flows are expected to be generated and charged to cost of goods sold. Changing market, regulatory or legal factors, among other things, may affect the realizability of the projected cash flows an agreement was expected to generate. The Company regularly monitors these factors and subjects all capitalized costs to periodic impairment testing. GOODWILL AND INTANGIBLE ASSETS: The Company determines the estimated fair values of goodwill and certain intangible assets with definitive lives based on purchase price allocations performed by independent third party valuation firms at the time of acquisition. In addition, certain amounts paid to third parties related to the development and marketing of new products and technologies, as described above, are capitalized and included in intangible assets on the consolidated balance sheets. The goodwill is tested at least annually for impairment using a fair value approach. Intangible assets with definitive lives, also tested periodically for impairment, are capitalized and amortized over their estimated useful lives. As a result of the acquisition of FineTech in fiscal year 2002, the Company had recorded goodwill of $24,662 at December 31, 2002. In addition, intangible assets with definitive lives, net of accumulated amortization, totaled $35,692 and $15,822, respectively, at December 31, 2002 and 2001. PENSION BENEFITS: The determination of the Company's obligation and expense for pension benefits is dependent on its selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Notes to Consolidated Financial Statements - Commitments, Contingencies and Other Matters and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation. In accordance with accounting principles generally accepted in the United States, actual results that differ from the Company's assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in future periods. While the Company believes its assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect pension obligations and future expense. LEGAL PROCEEDINGS: The Company records its costs, including patent litigation expenses, related to legal proceedings as incurred in selling, general and administrative expenses. As discussed in Notes to Consolidated Financial Statements - Commitments, Contingencies and Other Matters, the Company is a party to several patent infringement matters whose outcome could have a material impact on its future profitability, cash flows and financial condition. The Company is also currently involved in other litigation matters, including certain patent actions, product liability and actions by former employees and believes these actions are incidental to the business and that the ultimate resolution thereof will not have a material adverse effect on its future profitability, cash flows or financial condition. The Company is defending or intends to defend all of these actions vigorously. NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other Intangible Assets" ("SFAS 142"). This statement requires that goodwill and intangible assets deemed to have an indefinite life are not be amortized. Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate an impairment might exist by applying a fair-value-based test. The adoption of this standard did not have a material impact on our financial position or results of operations. In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective January 1, 2003. It requires the recording of an asset and a liability equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists. The asset is required to be depreciated over the life of the related equipment or facility, and the liability accreted each year based on a present value interest rate. This standard, which the Company will adopt in 2003, will not have a material effect on the Company's consolidated financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). It establishes a single accounting model for the impairment of long-lived assets to be held and used or to be disposed of by sale or abandonment, and broadens the definition of discontinued operations. The Company adopted SFAS 144 in 2002, with no significant change in the accounting for the impairment and disposal of long-lived assets. 28 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123" ("SFAS 148") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this standard amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure requirements of SFAS 148 as of December 31, 2002. The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of SFAS 123, as amended. Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of our stock and the exercise price. SUBSEQUENT EVENTS In February 2003, Three Rivers Pharmaceuticals reached a settlement with Schering in the patent litigation case involving Rebetol(R) brand ribavirin which is indicated for the treatment of chronic hepatitis C. Under the terms of the settlement, Schering has provided a non-exclusive license to Three Rivers for all its U.S. patents relating to this product. In return for this license, Three Rivers has agreed to pay Schering a reasonable royalty based upon net sales of Three Rivers' and Par's generic ribavirin product. The parties were in litigation in the U.S. District Court for the Western District of Pennsylvania. The agreement is subject to the Court's dismissal of the relevant lawsuits. Three Rivers is also currently in litigation with Ribapharm, Inc. regarding certain patents that Ribapharm asserts relate to ribavirin. A trial date in that litigation is scheduled for May 2003. Three Rivers does not have tentative approval from the FDA at this time, although the Company anticipates an approval within a reasonable period of time. Three Rivers anticipates that the product will not be launched until the Ribapharm litigation is satisfactorily resolved and an approval is obtained from the FDA. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - ------- ---------------------------------------------------------- Not applicable. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------ -------------------------------------------------------- See Index to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------ --------------------------------------------------------------- DISCLOSURE. ---------- In May 2002, the Company engaged Deloitte & Touche LLP ("Deloitte & Touche") to serve as Pharmaceutical Resources, Inc.'s independent auditor for 2002. Prior to that date, Arthur Andersen LLP ("Andersen") had served as the Company's independent public accountants. The reports by Andersen on the Company's consolidated financial statements for the past two years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. Andersen's report on Pharmaceutical Resources, Inc. consolidated financial statements for 2001 was issued on an unqualified basis in conjunction with the filing of Pharmaceutical Resources, Inc.'s Annual Report on Form 10-K. During the Company's two most recent fiscal years, and through the date of the change, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to Andersen's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such years; and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K. The decision to change accountants was recommended by the Audit and Finance Committee and approved by the Audit Committee of the Board of Directors on May 1, 2002. During 2002, there were no disagreements with Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure, or 29 auditing scope or procedures which, if not resolved to Deloitte & Touche's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for 2002 and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K. 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------- -------------------------------------------------- DIRECTORS The Company's Certificate of Incorporation, as amended, provides that the Company's Board of Directors (the "Board") shall be divided into three classes, with the term of office of one class expiring each year. The Company's Bylaws provide that the number of directors constituting the Board shall not be less than three nor more than 15, with the actual number to be set from time to time by resolution of the Board. The Board has set such number at seven. Peter S. Knight and Scott L. Tarriff, the present Class I directors, have terms that expire in 2003, and have been selected as nominees for election as Class I directors at the Company's 2003 Annual Meeting of Shareholders (the "Meeting"). If Messrs. Knight and Tarriff are elected to the Board at the Meeting, their terms will expire in 2006. The three Class II directors have terms that expire in 2004 and the two Class III directors have terms that expire in 2005. The following table sets forth certain information regarding each nominee (provided by such nominee) for election as a Class I director of the Company and the year in which each was first elected as a director of the Company: CLASS I NAME AND AGE PRINCIPAL OCCUPATION(S) (AS OF 3/20/03) YEAR OF FIRST ELECTION - ----------------------- --------------- ---------------------- PETER S. KNIGHT (1)(2)(3) 52 2001* Since November 2001, a managing director of MetWest Financial, a Los Angeles-based asset management holding company. From January 2000 to October 2001, President of Sage Venture Partners, a telecommunications investment firm. From 1990 to 2000, a partner in Wunder, Knight, Forscey & DeVierno, a law firm. Also, Mr. Knight is a director of the Whitman Education Group, Medicis Pharmaceutical Corporation, EntreMed, Inc. and the Schroder Mutual Funds. SCOTT L. TARRIFF 43 2001* Since September 2001, President and Chief Executive Officer of Par Pharmaceutical, Inc., the Company's principal operating subsidiary, and from January 1998, Executive Vice President of the Company. From 1995 to 1997, Senior Director, Marketing, Business Development and Strategic Planning, of the Apothecon division of Bristol-Myers Squibb. 31 The following table sets forth certain information (provided by them) regarding the Class II directors (whose terms expire in 2004) and the Class III directors (whose terms expire in 2005) and the year in which each was first elected as a director of the Company: CLASS II NAME AND AGE PRINCIPAL OCCUPATION(S) (AS OF 3/20/03) YEAR OF FIRST ELECTION - ----------------------- --------------- ---------------------- KENNETH I. SAWYER 57 1989 Since October 1990, Chairman of the Board of the Company. Since October 1989, Chief Executive Officer and President of the Company. MARK AUERBACH (1)(2)(3) 64 1990 Since June 1993, Senior Vice President and Chief Financial Officer of Central Lewmar L.P., a distributor of fine papers. From December 1995 to January 1999, Chief Financial Officer of Oakhurst Company, Inc. and of Steel City Products, Inc., each a distributor of automotive products. Chief Executive Officer of Oakhurst Company, Inc. from December 1995 to May 1997. Also, Mr. Auerbach is a director of Acorn Holding Corp. JOHN D. ABERNATHY (1)(2)(3) 65 2001 Since January 1995, Chief Operating Officer of Patton Boggs LLP, a law firm. Also, Mr. Abernathy is a director of Sterling Construction Company, Inc., a heavy civil construction company, and Steel City Products, Inc., a distributor of automotive products. 32 Class III NAME AND AGE PRINCIPAL OCCUPATION(S) (AS OF 3/20/03) YEAR OF FIRST ELECTION - ----------------------- --------------- ---------------------- RONALD M. 61 2001* NORDMANN (1)(2)(3) Since October 2000, Co-President of Global Health Associates, LLC, a provider of consulting services to the pharmaceutical and financial services industries. From September 1994 to December 1999, a partner and portfolio manager at Deerfield Management, a health care hedge fund. From December 1999 to October 2000, Mr. Nordmann was a private investor. Also, Mr. Nordmann is a director of Neurochem, Inc., Guilford Pharmaceuticals Inc. and Shire Pharmaceuticals Group plc. and is a trustee of The Johns Hopkins University. ARIE GUTMAN 49 2002 Since June 1991, President and Chief Executive Officer of FineTech Laboratories, Ltd. (formerly known as ISP Finetech Ltd.), an Israeli company, which, as of April 19, 2002, became a wholly-owned subsidiary of the Company. FineTech Laboratories, Ltd. develops synthetic chemical processes utilized in the pharmaceutical industry. (1) A member of the Compensation and Stock Option Committee of the Board. (2) A member of the Audit Committee of the Board. (3) A member of the Nominating Committee of the Board. * On October 11, 2001, the Board filled a vacancy caused by a director resignation by selecting Peter S. Knight as a Class I director. On December 14, 2001, the Board filled two additional vacancies caused by director resignations by selecting Scott L. Tarriff as a Class I director and Ronald M. Nordmann as a Class III director. EXECUTIVE OFFICERS The executive officers of the Company consist of Mr. Sawyer as Chief Executive Officer, President and Chairman of the Board, Mr. Tarriff as Executive Vice President, and Dennis J. O'Connor as Vice President, Chief Financial Officer and Secretary. Mr. O'Connor, age 51, has served as Vice President, Chief Financial Officer and Secretary of the Company since October 1996. From June 1995 to October 1996, he served as Controller of Par. The executive officers of Par consist of Mr. Sawyer as Chairman, Mr. Tarriff as President and Chief Executive Officer, and Mr. O'Connor as Vice President, Chief Financial Officer and Secretary. The executive officers of FineTech Laboratories, Ltd. ("FineTech") consist of Dr. Gutman as President and Chief Executive Officer, Mr. Sawyer as Chairman, and Mr. O'Connor as Vice President, Chief Financial Officer and Secretary. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE As a public company, the Company's directors, executive officers and more than 10% beneficial owners of its Common Stock are subject to reporting requirements under Section 16(a) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and required to file certain reports with the Securities and Exchange Commission (the "Commission") in respect of their ownership of Company equity securities. The Company believes that during fiscal year 2002, other than with respect to one Form 4 report required to be filed by Mr. Auerbach, all such required reports were filed on a timely basis. 33 ITEM 11. EXECUTIVE COMPENSATION. - ------- ---------------------- The following table sets forth information for fiscal years 2002, 2001 and 2000 in respect of compensation earned by the Company's Chief Executive Officer and the only three other executive officers of the Company who earned over $100,000 in salary and bonus during fiscal year 2002 (the "Named Executives"). The Company awarded or paid such compensation to all such persons for services rendered in all capacities during the applicable fiscal years.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------- ---------------------- NAME AND RESTRICTED SECURITIES PRINCIPAL FISCAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER POSITION(S) YEAR SALARY($) BONUS($) COMPENSATION AWARDS($)(1) OPTIONS(#)(2) COMPENSATION($) - ----------- ------ ------- -------- ------------ ------------ ------------- --------------- Kenneth I. Sawyer 2002 $403,468 $220,000 $ 15,533(4) - - $28,501(3) CHIEF EXECUTIVE 2001 $397,088 $305,000 $173,046(4) - 325,000 $13,185(3) OFFICER, 2000 $355,175 - $169,477(4) - - $9,760(3) PRESIDENT AND CHAIRMAN Scott L. Tarriff 2002 $300,000 $200,000 $12,600 - 200,000 $60,191(5) EXECUTIVE VICE 2001 $220,510 $200,000 $12,288 - 295,000 $11,620(5) PRESIDENT; 2000 $185,000 $42,000 $3,692 - - $8,074(5) CHIEF EXECUTIVE OFFICER AND PRESIDENT OF PAR Dennis J. 2002 $186,197 $100,000 $12,600 - 25,000 $25,314(6) O'Connor VICE PRESIDENT, 2001 $158,077 $150,000 $12,288 - 165,000 $11,597(6) CHIEF FINANCIAL 2000 $150,700 $5,000 $12,000 - 30,000 $6,211(6) OFFICER AND SECRETARY Arie Gutman 2002 $167,308(7) $50,000 - - 300,000 $1,697(8) CHIEF EXECUTIVE 2001 - - - - - - OFFICER AND 2000 - - - - - - PRESIDENT OF FINETECH
(1) The Named Executives do not hold any shares of restricted stock. (2) Reflects options granted to Messrs. Sawyer, Tarriff and O'Connor and Dr. Gutman under the Company's various stock option plans. (3) Includes insurance premiums paid by the Company for term life and disability insurance for the benefit of Mr. Sawyer of $6,276, $93 and $74, respectively, for fiscal years 2002, 2001 and 2000, $5,500, $5,250 and $5,250, respectively, in contributions to the Company's 401(k) Plan for each of the fiscal years 2002, 2001 and 2000, and $14,949, $6,288 and $2,755, respectively, for fiscal years 2002, 2001 and 2000 in contributions made by the Company to the Retirement Savings Plan for the benefit of Mr. Sawyer. Also includes $1,776, $1,554 and $1,681 in fiscal years 2002, 2001 and 2000, respectively, for the maximum potential estimated dollar value of the Company's portion of insurance premium payments from a split-dollar life insurance policy as if the premiums were advanced to Mr. Sawyer, without interest, until the earliest time the premiums may be refunded by Mr. Sawyer to the Company. (4) Includes $129,477 for each of the fiscal years 2001 and 2000 for the forgiveness of a loan from the Company and $2,933, $43,569 and $40,000, respectively, earned by Mr. Sawyer in fiscal years 2002, 2001 and 2000 pursuant to his employment agreement for annual cost of living increases since 1996. (5) Includes $7,855, $82 and $68, respectively, of insurance premiums paid by the Company for term life and disability insurance for the benefit of Mr. Tarriff for fiscal years 2002, 2001 and 2000, $5,500, $5,250 and $5,250, respectively, in contributions to the Company's 401(k) Plan for fiscal years 2002, 2001 and 2000, and $14,949, $6,288 and $2,755, respectively, for fiscal years 2002, 2001 and 2000 in contributions made by the Company 34 to the Retirement Savings Plan for the benefit of Mr. Tarriff. Also includes $31,887 for the reimbursement of financial planning expenses for fiscal year 2002. (6) Represents $4,865, $58 and $56, respectively, of insurance premiums paid by the Company for term life and disability insurance for the benefit of Mr. O'Connor for fiscal years 2002, 2001 and 2000, $5,500, $5,250 and $3,450, respectively, in contributions to the Company's 401(k) Plan for fiscal years 2002, 2001 and 2000, and $14,949, $6,288 and $2,705, respectively, for fiscal years 2002, 2001 and 2000 in contributions made by the Company to the Retirement Savings Plan for the benefit of Mr. O'Connor. (7) Dr. Gutman's salary for fiscal year 2002 reflects the fact that he was employed by the Company for less than a full year. Pursuant to his employment agreement with the Company, Dr. Gutman is entitled to an annual base salary of $300,000, subject to certain increases set forth therein. Dr. Gutman was not employed by the Company in fiscal years 2001 and 2000. (8) Represents $1,697 of insurance premiums paid by the Company for term life and disability insurance for the benefit of Dr. Gutman for fiscal year 2002. The following table sets forth stock options granted to the Named Executives during fiscal year 2002. STOCK OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM ----------------- ------------------ % OF SHARES TOTAL OPTIONS UNDERLYING GRANTED TO OPTIONS EMPLOYEES IN EXERCISE EXPIRATION NAME GRANTED(#) FISCAL YEAR(1) PRICE($) DATE 5%($) 10%($) - ---- ---------- -------------- -------- ---------- ----- ------ Kenneth I. Sawyer - - - - - - Scott L. Tarriff(2) 200,000 23.58% $25.85 7/28/09 $2,104,709 $4,904,867 Dennis J. O'Connor(3) 25,000 2.95% $25.90 8/28/09 $263,598 $614,294 Arie Gutman(4) 300,000 35.37% $21.65 4/11/12 $4,084,671 $10,351,357
(1) Represents the percentage of total options granted to all employees of the Company during fiscal year 2002. (2) Represents options granted on July 29, 2002 pursuant to the 2001 Plan. One-quarter of such options become exercisable on each anniversary date of the grant over the next four years. (3) Represents options granted on August 29, 2002 pursuant to the 2001 Plan. One-quarter of such options become exercisable on each anniversary date of the grant over the next four years. (4) Represents options granted on April 12, 2002 pursuant to the 2001 Plan. One-quarter of such options become exercisable on each anniversary date of the grant over the next four years. The following table sets forth certain information with respect to the number of stock options exercised by the Named Executives during fiscal year 2002 and, as of December 31, 2002, the number of securities underlying unexercised stock options and the value of the in-the-money options held by the Named Executives. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FY-END(#) AT FY-END($)(1) ---------------------- -------------------- SHARES ACQUIRED ON VALUE NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ----------- ----------- ------------- ----------- ------------- Kenneth I. Sawyer 297,500 $7,432,990 101,667 223,333 $221,750 $887,000 Scott L. Tarriff 100,000 $2,537,168 122,750 422,250 $1,503,700 $1,144,800 Dennis J. O'Connor 30,000 $750,796 69,000 158,500 $791,325 $585,675 Arie Gutman - - - 300,000 - $2,445,000
(1) Based upon the NYSE closing price of the Common Stock on December 31, 2002 of $29.80. 35 COMPENSATION OF DIRECTORS Effective January 1, 2003, directors who are not employees of the Company (or any of its subsidiaries) and who are deemed to be independent under the audit committee rules of the NYSE are entitled to receive an annual retainer of $30,000 (which covers payments for attending up to six meetings of the Board) for service on the Board. Such directors received an annual retainer of $24,000 for serving on the Board in fiscal year 2002. Each member who serves as a chairman of a committee (other than the Audit Committee) is entitled to receive an additional annual retainer of $5,000 per chairmanship. Each member of a committee (other than the Audit Committee) is entitled to receive an additional annual retainer of $2,000 for each committee membership. Effective January 1, 2003, any member who serves as the Chairman of the Audit Committee is entitled to receive an additional annual retainer of $10,000 (compared to $5,000 in fiscal year 2002) and each other member of the Audit Committee is entitled to receive an additional annual retainer of $5,000 (compared to $2,000 in fiscal year 2002). In addition to receiving the annual retainers, under the Company's 1997 Directors' Stock Option Plan (the "Directors' Plan"), non-employee directors are granted options each year to purchase 10,000 shares of Common Stock on the earliest to occur of the following: (x) the date on which the Company's shareholders elect directors at an annual meeting of shareholders or any adjournment thereof, (y) the date in January of each year on which the first meeting of the Compensation Committee occurs or (z) the last business day of January of such fiscal year. Prior to an amendment to the Directors' Plan adopted by the Board in January 2003, which was not subject to the approval of shareholders, such directors were granted options to purchase 7,500 shares of Common Stock on the earlier to occur of the following: (x) the date on which shareholders of the Company elected directors at an annual meeting of shareholders or (y) December 31 of such fiscal year. Directors who are employees of the Company (or any of its subsidiaries) receive no additional remuneration for serving as directors or as members of committees of the Board. All directors are entitled to reimbursement for out-of-pocket expenses incurred by them in connection with their attendance at Board and committee meetings. In February 2003, the Board adopted, subject to shareholder approval at the Meeting, amendments to the Directors' Plan providing for an increase in the number of shares of Common Stock reserved for issuance under the Directors' Plan from 450,000 to 750,000 and an extension of the expiration date of the Plan from October 28, 2007 to October 28, 2013. EMPLOYMENT AGREEMENTS The Company and Mr. Sawyer entered into an amended and restated employment agreement, dated as of January 4, 2002 (the "Amended Agreement"), that provides for Mr. Sawyer to remain as the Company's Chief Executive Officer ("CEO") and Chairman of the Board ("Chairman") and Chairman of the board of directors of Par until: (i) the termination by Mr. Sawyer for any reason, including the Company's material breach of the Amended Agreement (as provided therein), or by the Company for Cause (as such term is defined in the Amended Agreement), without Cause or by reason of Disability (as such term is defined in the Amended Agreement), (ii) a Change of Control (as such term is defined in the Amended Agreement), (iii) the election by the Board of a new CEO or (iv) the death of Mr. Sawyer. So long as Mr. Sawyer remains employed under the Amended Agreement as CEO, he is to be paid a base annual salary in 2003 equal to $414,362, subject to any increases provided in the Board's discretion and annual adjustments to reflect increases in the Consumer Price Index (the "CPI"). In addition, Mr. Sawyer is eligible for annual bonuses based on performance criteria to be determined by the Board, including his performance and the performance and financial condition of the Company and/or Par. Pursuant to the Amended Agreement, Mr. Sawyer earned a base salary of $403,468 in fiscal year 2002 and received an increase to his base salary equal to $10,894 to reflect an increase in the CPI. The annual adjustment became effective as of October 2002, and resulted in an increase of $2,933 to Mr. Sawyer's compensation for fiscal year 2002. Mr. Sawyer earned a bonus equal to $220,000 for fiscal year 2002. The Amended Agreement provides for certain payments and benefits upon a Change of Control, the election of a new CEO and/or the termination of Mr. Sawyer's employment, and it permits him to remain as Chairman for successive one-year periods following the termination of his duties as CEO. Upon the earliest to occur of (i) the election of a new CEO, (ii) a Change of Control or (iii) the termination of Mr. Sawyer's employment with the Company for any reason, Mr. Sawyer is entitled to a one-time lump sum payment of $1,000,000. In the event that Mr. Sawyer remains as Chairman following the election of a new CEO, the Company will additionally pay Mr. Sawyer an annual base salary of $250,000 (subject to annual CPI increases) in return for a commitment from Mr. Sawyer that he will devote up to 50% of his business time to the Company as its Chairman. Mr. Sawyer will be permitted, in such event, to engage in other employment activities so long as such activities do not directly compete with 36 the Company's business or involve the disclosure of Confidential Information (as such term is defined in the Amended Agreement) or the hiring or solicitation of any employees, agents, customers or suppliers of the Company. The Amended Agreement provides also for (i) the transfer to Mr. Sawyer of ownership of a life insurance policy maintained by the Company on Mr. Sawyer and (ii) a lump sum payment to Mr. Sawyer (calculated based on his then current base salary), which was made on February 28, 2002, equal to 45 days of vacation time previously accrued but unused by Mr. Sawyer. Upon termination of Mr. Sawyer's employment by the Company for Cause or by reason of his Disability or termination by Mr. Sawyer for any reason (other than as a result of a material breach of the Amended Agreement by the Company) or termination by reason of his death, the Company will pay Mr. Sawyer, or his estate, as the case may be, his then current base salary through the termination date. Upon a termination of Mr. Sawyer's employment without Cause by the Company or by Mr. Sawyer following a material breach by the Company, Mr. Sawyer is to be paid an additional lump sum payment as follows (i) if during Mr. Sawyer's tenure as CEO, an amount equal to his unpaid and owed base salary through December 31 of the year of such termination or (ii) if Mr. Sawyer is employed solely as Chairman, an amount equal to his unpaid and owed base salary for the remaining period in which he was to serve as Chairman. In addition, for two years following the date of Mr. Sawyer's termination of employment for any reason, the Company will pay the costs associated with Mr. Sawyer's continued participation in all life insurance, medical, health and accident, and disability plans and programs in which he was entitled to participate immediately before his termination. In connection with his employment by the Company and Par, Mr. Sawyer was granted options, in January 2003, to purchase 50,000 shares of Common Stock at an exercise price of $31.70. The Company has entered into an employment agreement with Mr. Tarriff, dated as of February 6, 2003, to replace a prior employment agreement originally entered into on February 20, 1998. Pursuant to his employment agreement, Mr. Tarriff holds the positions of Executive Vice President of the Company and Chief Executive Officer of Par for an initial three-year term, with successive one-year terms thereafter, for which he is paid an initial annual base salary of $300,000, subject to review and increase by the Board and annual adjustments to reflect increases in the CPI. In addition, Mr. Tariff is eligible for annual bonuses based on performance criteria to be determined by the Board, including his performance and the performance and financial condition of the Company and/or Par. In the event that Mr. Tarriff's employment is terminated by the Company without Cause (as such term is defined in the agreement) or by Mr. Tarriff upon a material breach of his employment agreement by the Company, or if the Company elects not to renew his employment agreement, Mr. Tarriff is entitled to receive a severance payment equal to two times his base salary or a severance payment equal to $1,000,000, if such termination were to occur after July 15, 2003 or at any time after a Change of Control (as such term is defined in the agreement). In addition, while Mr. Tarriff is employed by the Company, the Company is obligated to pay the premiums on a $3,000,000 term life insurance policy for the benefit of Mr. Tarriff and his estate. If Mr. Tarriff's employment is terminated other than for Cause within 12 months following a Change of Control, then Mr. Tarriff (or his estate) will have 24 months from the date of such termination to exercise his stock options, so long as the stock option plan underlying such options is still in effect and such stock options have not expired at the time of the exercise. In connection with his employment by the Company and Par, Mr. Tarriff was granted, in July 2002, options to purchase 200,000 shares of Common Stock at an exercise price of $25.85 and, in January 2003, he was granted additional options to purchase 100,000 shares of Common Stock at an exercise price of $31.50. The Company has entered into an employment agreement with Mr. O'Connor, dated as of February 6, 2003, to replace a prior severance agreement originally entered into on October 23, 1996. Pursuant to his employment agreement, Mr. O'Connor holds the positions of Vice President, Chief Financial Officer and Secretary of each of the Company and Par for an initial three-year term, with successive one-year terms thereafter, for which he is paid an initial annual base salary of $210,000, subject to review and increase by the Board and annual adjustments to reflect increases in the CPI. In addition, Mr. O'Connor is eligible for annual bonuses based on performance criteria to be determined by the Board, including his performance and the performance and financial condition of the Company and/or Par. In the event that Mr. O'Connor's employment is terminated by the Company without Cause (as such term is defined in the agreement) or by Mr. O'Connor upon a material breach of his employment agreement by the Company, or if the Company elects not to renew his employment agreement, Mr. O'Connor is entitled to receive a severance payment equal to one-and-a-half times his base salary or a severance payment equal to two times his base salary, if such termination were to occur after July 15, 2003 or at any time after a Change of Control (as such term is defined in the agreement). In addition, while Mr. O'Connor is employed by the Company, the Company is obligated to pay the premiums on a $1,000,000 term life insurance policy for the benefit of Mr. O'Connor and his estate. If Mr. O'Connor's employment is terminated other than for Cause within 12 months following a Change of Control, then Mr. O'Connor (or 37 his estate) will have 24 months from the date of such termination to exercise his stock options, so long as the stock option plan underlying such options is still in effect and such stock options have not expired at the time of the exercise. In connection with his employment by the Company and Par, Mr. O'Connor was granted, in August 2002, options to purchase 25,000 shares of Common Stock at an exercise price of $25.90 and, in January 2003, he was granted additional options to purchase 25,000 shares of Common Stock at an exercise price of $31.50 and 25,000 shares at an exercise price of $31.70. In connection with its acquisition of FineTech, the Company entered into an employment agreement with Dr. Gutman, dated as of December 18, 2002. Pursuant to his employment agreement, Dr. Gutman holds the positions of Chief Executive Officer and President of FineTech for an initial five-year term, with successive one-year terms thereafter, for which he is paid an initial annual base salary of $300,000, subject to review and increase by the Board and annual adjustments to reflect increases in the CPI. In addition, Dr. Gutman is eligible for an annual bonus that is based on performance criteria to be determined by the Board, including his performance and the performance and financial condition of the Company and/or FineTech. Dr. Gutman is entitled to receive a severance payment equal to one-and-a-half times his base salary if his employment were terminated by the Company or FineTech without Cause (as such term is defined in the employment agreement) or by Dr. Gutman upon a material breach by the Company and/or FineTech, or if his employment agreement were not renewed by the Company after the five-year term or if he were to terminate his employment for any reason after the five-year term. In addition, while Dr. Gutman is employed by the Company, the Company is obligated to pay the premiums on a $1,000,000 term life insurance policy for the benefit of Dr. Gutman and his estate. If Dr. Gutman's employment is terminated other than for Cause within 12 months following a Change of Control, then Dr. Gutman (or his estate) will have 24 months from the date of such termination to exercise his stock options, so long as the stock option plan underlying such options is still in effect and such stock options have not expired at the time of the exercise. In connection with his employment by the Company and FineTech, Dr. Gutman was granted options, in April 2002, to purchase 300,000 shares of Common Stock at an exercise price of $21.65. Under the Company's stock option agreements with Messrs. Sawyer, Tarriff and O'Connor and Dr. Gutman, any unexercised portion of the options becomes immediately exercisable in the event of a Change of Control (as such term is defined in their respective employment agreements). PENSION PLAN The Company maintains a defined benefit plan (the "Pension Plan") intended to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Effective October 1, 1989, the Company ceased benefit accruals under the Pension Plan with respect to service after such date. The Company intends that distributions will be made, in accordance with the terms of the Pension Plan, to participants as of such date and/or their beneficiaries. The Company will continue to make contributions to the Pension Plan to fund its past service obligations. Generally, all employees of the Company (or a participating subsidiary) who had completed at least one year of continuous service and attained 21 years of age were eligible to participate in the Pension Plan. For benefit and vesting purposes, the Pension Plan's "Normal Retirement Date" is the date on which a participant attains age 65 or, if later, the date of his/her completion of ten years of service. Service is measured from the date of employment. The retirement income formula is 45% of the highest consecutive five-year average basic earnings during the last ten years of employment, less 83-1/3% of the participant's Social Security benefit, reduced proportionately for years of service less than ten at retirement. The normal form of benefit is a life annuity, or for married persons, a joint survivor annuity. None of the Named Executives has any years of credited service under the Pension Plan. The Company maintains a Retirement Savings Plan (the "Retirement Savings Plan") whereby eligible employees, including the Named Executives, 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 up to 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. The Company also may contribute additional funds each fiscal year to the Retirement Savings Plan, the amount of which, if any, is determined by the Board in its sole discretion. In June 2002, the Company made a discretionary contribution to the Retirement Savings Plan of approximately $600,000 for Plan year 2001. 38 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee currently consists of Messrs. Knight (Chairman), Abernathy, Auerbach and Nordmann. None of such committee members is, or was ever, an executive officer or employee of the Company. COMPENSATION AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee approves the policies and programs pursuant to which compensation is paid or awarded to the Company's executive officers and key employees. In reviewing overall compensation for fiscal year 2002, the Compensation Committee focused on the Company's objectives to attract executive officers of high caliber from larger, well-established pharmaceutical manufacturers, to retain the Company's executive officers, to encourage the highest level of performance from such executive officers and to align the financial interests of the Company's management with that of its shareholders by offering awards that can result in the ownership of Common Stock. The Company did not utilize any specific formulae or guidelines in reviewing and approving executive compensation. KEY ELEMENTS OF EXECUTIVE OFFICER COMPENSATION PROGRAM. The key elements of the Company's executive officer compensation program consist of base salary, annual bonus, stock options and other incentive awards through participation in the Company's various incentive plans. In awarding or approving compensation to executive officers in fiscal year 2002, the Compensation Committee considered the present and potential contributions of the executive officers to the Company, the ability of the Company to attract and retain qualified executive officers in light of the competitive environment of the Company's industry and the Company's financial condition. BASE SALARY AND ANNUAL BONUS. Base salary and annual bonus for executive officers are determined by reference to Company-wide and individual performances for the previous fiscal year. The factors considered by the Compensation Committee include both strategic and operational factors, such as efforts in responding to regulatory challenges, in exploring strategic alternatives for the Company, in research and development, in reviewing and implementing updated systems and operational procedures, as well as the Company's financial performance. In addition to Company-wide measures of performance, the Compensation Committee considered performance factors particular to each executive officer, including the performance of the area(s) for which such officer had management responsibility and individual accomplishments of such officer. Base salaries for executive officers of the Company were determined primarily by reference to industry norms, the principal job duties and responsibilities undertaken by such persons, individual performance and other relevant criteria. The Compensation Committee annually re-evaluates whether or not any adjustments are necessary to reflect compensation for executive officers of similar entities such as the Company. The Compensation Committee considered it appropriate and in the best interests of the Company and its shareholders to set the base salaries for the Company's executive officers at competitive levels in order to attract and retain high caliber managers for the Company so as to position the Company for future growth and improved performance. The Compensation Committee, in determining the annual bonuses to be paid to the Company's executive officers for fiscal year 2002, considered each individual's contribution to the Company's performance, as well as the Company's financial performance and assessments of each executive officer's participation and contribution as described above. The non-financial considerations applied varied among executive officers depending upon the operations under their management and direction. STOCK OPTIONS AND OTHER AWARDS. The Company's 2000 Plan, as amended by the Board to constitute a non-qualified, broad-based option plan not requiring shareholder approval under NYSE rules, provides for stock option and other equity-based awards. The Company's 2001 Plan, which was approved by the Company's shareholders initially at the Company's annual meeting held on July 12, 2001, provides for stock option and other equity-based awards. Under such Plans, the size of each award and the persons to whom such awards are granted is determined by the Compensation Committee based upon the nature of services rendered by the executive officer, the present and potential contribution of the grantee to the Company and the overall performance of the Company. The Compensation Committee believes that grants of stock options will help enable the Company to attract and retain the best available talent and to encourage the highest level of performance in order to continue to serve the best interests of the Company and its shareholders. Stock options and other equity-based awards provide executive officers with the opportunity to acquire equity interests in 39 the Company and to participate in the creation of shareholder value and benefit correspondingly with increases in the price of the Common Stock. In fiscal year 2003, the Company intends to submit for shareholder approval an increase in the number of shares issuable under the 2001 Plan. COMPENSATION COMMITTEE'S ACTIONS FOR FISCAL YEAR 2002. In determining the amount and form of executive officer compensation to be paid or awarded for fiscal year 2002, the Compensation Committee considered the criteria discussed above. Based upon the Compensation Committee's review of the Company's performance following the conclusion of fiscal year 2002, the Company granted cash bonuses to Messrs. Sawyer, Tarriff and O'Connor and Dr. Gutman, the Named Executives, in the amounts of $220,000, $200,000, $100,000 and $50,000, respectively. In addition, Messrs. Sawyer, Tarriff and O'Connor were granted, in January 2003, options to purchase shares of Common Stock in the amounts of 50,000, 100,000 and 50,000, respectively. CHIEF EXECUTIVE OFFICER COMPENSATION. The Compensation Committee approved an amended employment agreement for Mr. Sawyer on January 4, 2002. Under the employment agreement, Mr. Sawyer's base salary for fiscal year 2002 was $403,468. The employment agreement provides for annual increases based on changes in the CPI during Mr. Sawyer's term of employment. In fiscal year 2002, Mr. Sawyer earned a base salary of $403,468 and received an annual adjustment to his base salary equal to $10,894 to reflect an increase in the CPI. The annual adjustment became effective as of October 2002, and resulted in an increase of $2,933 in Mr. Sawyer's compensation for fiscal year 2002. Based upon the Compensation Committee's review of the Company's performance following the conclusion of fiscal year 2002, the Company granted to Mr. Sawyer a cash bonus in the amount of $220,000. Mr. Sawyer did not receive any options to purchase shares of Common Stock during fiscal year 2002. COMPENSATION AND STOCK OPTION COMMITTEE The Compensation Committee currently consists of Messrs. Knight (Chairman), Abernathy, Auerbach and Nordmann. 40 PERFORMANCE GRAPH The graph below compares the cumulative total return of the Common Stock with the cumulative total returns of the NYSE Composite Index, the S&P(R) Health Care Index (Drugs - Major Pharmaceuticals) and the S&P(R) Health Care (Pharmaceuticals) Index for the period from September 30, 1997 to December 31, 2002, including the transition period reflecting the change of the Company's fiscal year from September 30 to December 31 in fiscal year 1998. The graph assumes $100 was invested on September 30, 1997 in the Common Stock and $100 was invested on such date in each of the Indexes. The comparison assumes that any dividends were reinvested. CUMULATIVE TOTAL RETURN (GRAPH OMITTED) 3Q97 3Q98 4Q98 4Q99 4Q00 4Q01 4Q02 - -------------------------------------------------------------------------------- Company / Index SEP-97 SEP-98 DEC-98 DEC-99 DEC-00 DEC-01 DEC-02 - -------------------------------------------------------------------------------- PHARMACEUTICAL RESOURCES, INC. $100 $200 $224 $232 $326 $1,591 $1,402 - -------------------------------------------------------------------------------- NYSE COMPOSITE INDEX $100 $101 $120 $131 $132 $119 $95 - -------------------------------------------------------------------------------- S&P(R)HEALTH CARE INDEX (DRUGS - MAJOR PHARMACEUTICALS) (COMPRISED OF SEVEN COMPANIES) $100 $152 $174 $143 $197 $152 N/A* - -------------------------------------------------------------------------------- S&P(R)HEALTH CARE (PHARMACEUTICALS) INDEX (COMPRISED OF 13 COMPANIES) $100 $146 $166 $146 $200 $170 $136 - -------------------------------------------------------------------------------- * On December 31, 2001, Standard & Poor's discontinued the S&P(R) Health Care Index (Drugs - Major Pharmaceuticals) and replaced it with the S&P(R) Health Care (Pharmaceuticals) Index. 41 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------- -------------------------------------------------------------- The following table sets forth, as of March 12, 2003, the beneficial ownership of shares of Common Stock by (i) each current director, including the two nominees, of the Company, (ii) the Named Executives, as defined in the "Executive Compensation" section of this report and (iii) all directors and current executive officers of the Company as a group (based solely in respect of clauses (i), (ii) and (iii) upon information furnished to the Company by such persons). Pursuant to rules promulgated under the Exchange Act, a person is deemed to be a beneficial owner of an equity security if such person has or shares the power to vote or to direct the voting of such security and/or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. In general, a person is also deemed to be a beneficial owner of any equity securities that the person has the right to acquire within 60 days. Based solely upon its review of filings made with the Commission on Schedule 13G and Form 13F pursuant to Section 13 of the Exchange Act, the Company believes that no person beneficially owned more than 5% of the Common Stock as of March 12, 2003. SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT SHARES OF % OF COMMON COMMON STOCK STOCK NAME OF BENEFICIAL OWNER --------- ------ ------------------------ Kenneth I. Sawyer(1)(2)........................ 139,167 * Scott L. Tarriff(1)(2)(3)...................... 93,250 * Dennis J. O'Connor(2).......................... 66,119 * John D. Abernathy(1)(2)........................ 13,500 * Mark Auerbach(1)(2)............................ 21,000 * Arie Gutman(1)(2).............................. 77,750 * Peter S. Knight(1)(2).......................... 7,500 * Ronald M. Nordmann(1)(2)....................... 7,500 * All directors and current executive officers as a group (eight persons)(2)(3)............... 425,786 1.3% - ------------------------ * Less than 1%. (1) A current director of the Company. (2) Includes the following shares of Common Stock that may be acquired upon the exercise of options that are or will be vested and exercisable on or before May 11, 2003 under the Company's stock option plans: Mr. Sawyer - 111,667; Mr. Tarriff - 76,750; Mr. O'Connor - 64,500; Mr. Abernathy - 11,000; Mr. Auerbach - 11,000; Dr. Gutman - 75,000; Mr. Knight - 7,500; Mr. Nordmann - 7,500; and all directors and current executive officers as a group - 364,917. (3) Includes 1,500 shares of Common Stock held by Mr. Tarriff's spouse. For the purposes of the foregoing table, the business address of each director and Named Executive of the Company is c/o Pharmaceutical Resources, Inc., One Ram Ridge Road, Spring Valley, NY 10977. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - ------- ---------------------------------------------- In December 2001, the Company made the first installment of an agreed-to investment of up to $2,438,297 to be made over a period of time in HighRapids, Inc. ("HighRapids"), a Delaware corporation and software developer. Pursuant to an agreement between the Company and HighRapids, effective December 1, 2001, the Company, subject to its ongoing evaluation of HighRapids' operations, has agreed to purchase units, consisting of secured debt, evidenced by 7% secured promissory notes, up to an aggregate principal amount of $2,425,000 and up to an aggregate 1,329,650 shares of the common stock of HighRapids. HighRapids is the surviving corporation of a merger with Authorgenics, Inc., a Florida 42 corporation. The Company's cash infusion will be utilized by HighRapids for working capital and operating expenses. As of December 31, 2002, the Company had invested approximately $768,000 in HighRapids. As of December 31, 2002, the Company held approximately 30% of the outstanding common stock of HighRapids and had the exclusive right to market to the pharmaceutical industry certain regulatory compliance and laboratory software currently in development. Mr. Sawyer is the President, Chief Executive Officer and a director of HighRapids. Mr. Auerbach, a director of the Company, owns shares of HighRapids' common stock (less than 1%) that were acquired prior to the commitment of the Company discussed above. In April 1999, the Company entered into an agreement with FineTech for the right to use a process for the pharmaceutical bulk active latanoprost. Pursuant to this agreement, the Company paid FineTech an aggregate of approximately $2,000,000 in fiscal years 2000 and 2001, which is included in intangible assets on the consolidated balance sheets, for a completed process together with its technology transfer package and patent. The Company has since purchased FineTech and pursuant to this agreement, the Company is obligated to pay royalties on gross profits from sales of all products developed under this agreement to the President of FineTech, Dr. Gutman, who is currently a director of the Company. In addition, Dr. Gutman is entitled to royalties on gross profits from potential sales of several other products pursuant to agreements made with FineTech prior to the Company's acquisition. ITEM 14. CONTROLS AND PROCEDURES. - ------- ----------------------- Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including our consolidated subsidiaries) required to be included in our periodic SEC filings. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above. 43 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - ------- ---------------------------------------------------------------- (a)(1)&(2) FINANCIAL STATEMENTS AND SCHEDULES. See Index to Consolidated Financial Statements and Schedules after Signature Page. (a)(3) EXHIBITS. 3.1.1 Certificate of Incorporation of the Registrant, dated July 29, 1991 - previously filed as an exhibit to the Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. 3.1.2 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 3, 1992 - previously filed as an exhibit to the Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. 3.1.3 Articles of Amendment to the Certificate of Incorporation of the Registrant, dated June 26, 1998 - previously filed as an exhibit to the Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. 3.2 By-Laws of the Registrant, as amended - previously filed as an exhibit to the Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. 10.1 1989 Employee Stock Purchase Program of the Registrant - previously filed as an exhibit to the Registrant's proxy statement dated August 16, 1990 and incorporated herein by reference. 10.2 1990 Stock Incentive Plan of the Registrant, as amended - previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the 1997 fiscal year and incorporated herein by reference. 10.3 1997 Directors' Stock Option Plan - previously filed as an exhibit to the Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. 10.3.1 1997 Directors' Stock Option Plan, as amended- previously filed as an exhibit to the Registrant's Quarterly Report for the quarter ended March 31, 2002 and incorporated herein by reference. 10.4 2000 Performance Equity Plan - previously filed as an exhibit to the Registrant's Annual Report for the 2000 fiscal year and incorporated herein by reference. 10.5 2001 Performance Equity Plan - previously filed as an exhibit to the Registrant's Quarterly Report for the quarter ended June 30, 2001 and incorporated herein by reference. 10.6 Form of Retirement Plan of Par - previously filed as an exhibit to the Registrant's Registration Statement on Form S-1 (File No. 2-86614) and incorporated herein by reference. 10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984 - previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the 1990 fiscal year and incorporated herein by reference. 10.7 Form of Retirement Savings Plan of Par - previously filed as an exhibit to the Registrant's Registration Statement on Form S-1 (File No. 2-86614) and incorporated herein by reference. 10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984 - previously filed as an exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-4533) and incorporated herein by reference. 10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984 - previously filed as an exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-4533) and incorporated herein by reference. 44 10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985 - previously filed as an exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-4533) and incorporated herein by reference. 10.8 Par Pension Plan, effective October 1, 1984 - previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the 1991 fiscal year and incorporated herein by reference. 10.9 Second Amended and Restated Employment Agreement, dated as of January 4, 2002, between the Company and Kenneth I. Sawyer - previously filed as an exhibit to Amendment No. 1 to the Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference. 10.9.1 Severance Agreement, dated as of October 23, 1996, between the Registrant and Dennis J. O'Connor - previously filed as an exhibit to the Registrant's Annual Report for the 1997 fiscal year and incorporated herein by reference. 10.9.2 Employment Agreement, dated as of February 6, 2003, by and between Pharmaceutical Resources, Inc., and Scott L. Tarriff. 10.9.3 Employment Agreement, dated as of February 6, 2003, by and between Pharmaceutical Resources, Inc., and Dennis O'Connor. 10.11 Lease Agreement, dated as of January 1, 1993, between Par and Ramapo Corporate Park Associates - previously filed as an exhibit to the Registrant's Annual Report for the 1996 fiscal year and incorporated herein by reference. 10.12 Lease Extension and Modification Agreement, dated as of August 30, 1997, between Par and Ramapo Corporate Park Associates - previously filed as an exhibit to the Registrant's Annual Report for the 1997 fiscal year and incorporated herein by reference. 10.13 Amended and Restated Distribution Agreement, dated as of May 1, 1998, among the Company, Par Pharmaceutical, Inc. and Sano Corporation - previously filed as an exhibit to the Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference.* 10.14 Release and Amendment Agreement, dated as of May 1, 1998, among the Company, Par Pharmaceutical, Inc., Sano Corporation, and Elan Corporation, plc - previously filed as an exhibit to the Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference.* 10.15 Mortgage and Security Agreement, dated May 4, 1994, between Urban National Bank and Par - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 1994 and incorporated herein by reference. 10.15.1 Mortgage Loan Note, dated May 4, 1994 - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 1994 and incorporated herein by reference. 10.15.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban National Bank - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 1994 and incorporated herein by reference. 10.15.3 Mortgage Modification Agreement and Restated Mortgage Loan Note, dated May 1, 2001, between Hudson United Bank and Par - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference. 10.16 Pledge Agreement, dated December 27, 1996, between Par and General Electric Capital Corporation - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 28, 1996 and incorporated herein by reference. 45 10.17 Pledge Agreement, dated December 27, 1996, between the Registrant and General Electric Capital Corporation - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 28, 1996 and incorporated herein by reference. 10.18 Loan and Security Agreement, dated December 27, 1996, between Par and General Electric Capital Corporation. - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 28, 1996 and incorporated herein by reference. 10.18.1 First Amendment and Waiver to Loan and Security Agreement, dated May 22, 1997, between Par and General Electric Capital Corporation - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997 and incorporated herein by reference. 10.18.2 Second Amendment and Waiver to Loan and Security Agreement, dated as of August 22, 1997, between Par and General Electric Capital Corporation - previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the 1997 fiscal year and incorporated herein by reference. 10.18.3 Third Amendment and Consent to Loan and Security Agreement, dated as of March 4, 1998, between Par and General Electric Capital Corporation - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 28, 1998 and incorporated herein by reference. 10.18.4 Fourth Amendment and Consent to Loan and Security Agreement, dated as of May 5, 1998, among the Company, General Electric Capital Corporation, and the other parties named therein - previously filed as an exhibit to Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. 10.18.5 Fifth Amendment to Loan and Security Agreement, dated as of October 30, 1998, among the Company, General Electric Capital Corporation, and the other parties named therein - previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the 1998 fiscal year and incorporated herein by reference. 10.18.6 Sixth Amendment to Loan and Security Agreement, dated as of February 2, 1999, among the Company, General Electric Capital Corporation, and the other parties named therein - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the transition period ended December 31, 1998 and incorporated herein by reference. 10.18.7 Seventh Amendment and Waiver to Loan and Security Agreement, dated as of August 13, 1999, among the Company, General Electric Capital Corporation, and the other parties named therein - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999 and incorporated herein by reference. 10.18.8 Eighth Amendment to Loan and Security Agreement, dated as of December 28, 1999, among the Company, General Electric Capital Corporation, and the other parties named therein - previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the 1999 fiscal year and incorporated herein by reference. 10.18.9 Ninth Amendment and Waiver to Loan and Security Agreement, dated as of March 27, 2001, among the Company, General Electric Capital Corporation, and the other parties named therein - previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the 2000 fiscal year and incorporated herein by reference. 10.18.10 Tenth Amendment and Consent to Loan and Security Agreement, dated as of August 20, 2001, among the Company, General Electric Capital Corporation, and the other parties named therein - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference. 10.18.11 Eleventh Amendment to Loan and Security Agreement, dated as of March 29, 2002, among the Company, General Electric Capital Corporation, and the other parties named therein- previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference. 46 10.18.12 Twelfth Amendment and Waiver to Loan and Security Agreement, dated as of November 13, 2002, among the Company, General Electric Capital Corporation, and the other parties named therein- previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference. 10.18.13 Thirteenth Amendment, Waiver and Consent to Loan and Security Agreement, dated as of December 2002, among the Company, General Electric Capital Corporation, and the other parties named therein. 10.18.14 Loan Agreement, dated as of December 1, 2002, among GE Capital Public Finance, Inc., as Lender and Rhode Island Industrial Facilities Corporation, as Issuer, and FineTech Laboratories, Ltd., as Borrower. 10.19 Distribution Agreement, dated March 25, 1998, between the Company and Genpharm, Inc. - previously filed as an exhibit to Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference.* 10.20 Services Agreement, dated June 26, 1998, between the Company and Merck KGaA - previously filed as an exhibit to Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. 10.21 Services Agreement, dated June 26, 1998, between the Company and Genpharm, Inc - previously filed as an exhibit to Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. 10.22 Manufacturing and Supply Agreement, dated April 30, 1997, between Par and BASF Corporation - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997 and incorporated herein by reference. 10.23 Development Agreement, dated as of August 11, 1998, among the Company, Generics (UK) Ltd., and Israel Pharmaceutical Resources L.P - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the transition period ended December 31, 1998 and incorporated herein by reference. 10.24 Agreement of Lease, dated as of March 17, 1999, between Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated herein by reference. 10.25 Manufacturing and Supply Agreement, dated as of March 17, 1999, between Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated herein by reference. 10.26 Letter Agreement, dated as of January 21, 1999, between the Registrant and Genpharm, Inc. - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated herein by reference.* 10.27 License Agreement, dated as of July 9, 2001, between Breath Easy Limited and Par Pharmaceutical, Inc. - previously filed as an exhibit to Amendment No. 1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference. 10.28 License and Supply Agreement, dated as of April 26, 2001, between Elan Transdermal Technologies, Inc. and Par Pharmaceutical, Inc. - previously filed as an exhibit to Amendment No. 1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference.* 10.29 Development and Supply Agreement, dated as of April 17, 2001, between Par Pharmaceutical, Inc., Dr. Reddy's Laboratories Limited, and Reddy-Cheminor, Inc. - previously filed as an exhibit to Amendment No. 1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference.* 47 10.30 Supply and Marketing Agreement, dated as of November 19, 2001, between Pentech Pharmaceuticals, Inc. and Par Pharmaceutical, Inc. - previously filed as an exhibit to Amendment No. 1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference. 10.31 Development, License and Supply Agreement, dated as of December 11, 2001, between Elan Corporation PLC. and Par Pharmaceutical, Inc. - previously filed as an exhibit to Amendment No. 1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference.* 10.32 Letter Agreement, dated as of December 28, 2001, among Pharmaceutical Resources, Inc., ISP Hungary Holdings Limited, ISP Investments, Inc., ISP Chemicals, Inc. and ISP Technologies Inc. (with the attached form of Purchase Agreement) - previously filed as an exhibit to Registrant's Report on Form 8-K dated January 11, 2002 and incorporated herein by reference. 10.33 Purchase Agreement among ISP Hungary Holdings Limited, ISP Investments Inc., ISP Chemco Inc. and Par Pharmaceutical, Inc. dated April 17, 2002 - previously filed as an exhibit to Registrant's Report on Form 8-K dated April 17, 2002 and incorporated herein by reference. 10.35 Asset Purchase Agreement between Bristol-Myers Squibb Company and Par Pharmaceutical, Inc. in respect of the sale of the Capoten(R), Capozide(R), Questran(R) and Questran Light(R) Brands - previously filed as an exhibit to Registrant's Report on Form 8-K dated March 7, 2002 and incorporated herein by reference. 10.36 Asset Purchase Agreement between Bristol-Myers Squibb Company and Par Pharmaceutical, Inc. in respect of the sale of the Sumycin(R) Brand - previously filed as an exhibit to Registrant's Report on Form 8-K dated March 7, 2002 and incorporated herein by reference. 10.37 11 Product Development Agreement, effective April 2002, between the Company and Genpharm, Inc. - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference.* 10.38 SVC Pharma LP Limited Partnership Agreement dated April 2002, among the Company, UDF LP, a Delaware limited partnership, and the other parties named therein - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference. 10.39 Patent and Know How License Agreement dated May 24, 2002 among Nortec Development Associates, Inc. and Par Pharmaceutical, Inc - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 2002 and incorporated herein by reference.* 10.40 Amendment No. 1 to the Patent and Know How License Agreement dated May 24, 2002 among Nortec Development Associates, Inc. and Par Pharmaceutical, Inc. - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 2002 and incorporated herein by reference.* 10.41 Patent and Know How License Agreement dated June 14, 2002 among Nortec Development Associates, Inc. and Par Pharmaceutical, Inc. - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 2002 and incorporated herein by reference.* 10.42 License and Distribution Agreement, dated July 3, 2002, between the Company and Three Rivers Pharmaceuticals, LLC. - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference. * 10.43 First Amendment to License and Distribution Agreement, dated October 18, 2002, between the Company and Three Rivers Pharmaceuticals, LLC. 48 - previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference. 10.44 First Amendment to the Supply and Marketing Agreement, dated as of November 12, 2002, between Pentech Pharmaceuticals, Inc. and Par Pharmaceutical, Inc.* 10.45 Termination Agreement, dated December 20, 2002, relating to Development, License and Supply Agreement, dated as of December 11, 2001, between Elan Corporation PLC. and Par Pharmaceutical, Inc.* 10.46 Asset Purchase Agreement, dated December 5, 2002, by and between Israel Pharmaceutical Resources L.P., and Trima, Israel Pharmaceutical Products, Maabarot LTD. 10.47 Supply and Distribution Agreement, dated as of December 20, 2002, between Genpharm Inc., Leiner Health Products, LLC, and Par Pharmaceutical, Inc.* 21 List of Subsidiaries. 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. (a)(4) REPORTS ON FORM 8-K. During the quarter ended December 31, 2002, the Company did not file any reports on Form 8-K. - ------------------------------------------ * Certain portions have been omitted and have been filed with the Commission pursuant to a request for confidential treatment thereof. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: March 28, 2003 PHARMACEUTICAL RESOURCES, INC. ------------------------------ (REGISTRANT) By: /s/ Kenneth I. Sawyer ------------------------------ Kenneth I. Sawyer Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Kenneth I. Sawyer Chief Executive Officer and March 28, 2003 - ------------------------ Chairman of the Board of Kenneth I. Sawyer Directors /s/ Scott L. Tarriff Executive Vice President and March 28, 2003 - ------------------------ Director Scott L. Tarriff /s/ Dennis J. O'Connor Vice President, Chief Financial March 28, 2003 Officer and Secretary (Principal - ------------------------ Accounting and Financial Officer) Dennis J. O'Connor /s/ John D. Abernathy Director March 28, 2003 - ------------------------ John D. Abernathy /s/ Mark Auerbach - ------------------------ Director March 28, 2003 Mark Auerbach /s/ Arie Gutman Director March 28, 2003 - ------------------------ Arie Gutman /s/ Peter S. Knight Director March 28, 2003 - ------------------------ Peter S. Knight /s/ Ronald M. Nordmann Director March 28, 2003 - ------------------------ Ronald M. Nordmann CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kenneth I. Sawyer, Chief Executive Officer of Pharmaceutical Resources, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Pharmaceutical Resources, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Kenneth I. Sawyer ------------------------------- Kenneth I. Sawyer Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Dennis J. O'Connor, Chief Financial Officer of Pharmaceutical Resources, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Pharmaceutical Resources, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Dennis J. O'Connor -------------------------------- Dennis J. O'Connor Chief Financial Officer PHARMACEUTICAL RESOURCES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 PAGE INCLUDED IN PART II: ---- - ------------------- Reports of Independent Public Accountants F-2 through F-3 Consolidated Balance Sheets at December 31, 2002 and 2001 F-4 Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit) for the years ended December 31, 2002, 2001 and 2000 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 F-6 Notes to Consolidated Financial Statements F-7 through F-28 INCLUDED IN PART IV: SCHEDULE: II Valuation and qualifying accounts F-29 ------------------------------------------------- Other financial statement schedules are omitted because the conditions requiring their filing do not exist or the information required thereby is included in the financial statements filed, including the notes thereto. F - 1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Pharmaceutical Resources, Inc.: We have audited the accompanying consolidated balance sheet of Pharmaceutical Resources, Inc. (a New Jersey corporation) and subsidiaries as of December 31, 2002, and the related consolidated statements of operations and retained earnings (accumulated deficit) and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended December 31, 2002, listed in the Index at Item 15a2. These consolidated financial statements and the financial statement schedule are the responsibility of Pharmaceutical Resources, Inc.'s management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audit. Pharmaceutical Resources, Inc.'s consolidated financial statements and financial statement schedules for each of the years in the two-year period ended December 31, 2001, were audited by other auditors who have ceased operations. Those auditors' report dated March 26, 2002 expressed an unqualified opinion on those consolidated financial statements, which included an explanatory paragraph that described the restatement discussion in Note 2 to the consolidated financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pharmaceutical Resources, Inc. and subsidiaries, as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Parsippany, New Jersey March 11, 2003 F - 2 THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED AUDIT REPORT BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Pharmaceutical Resources, Inc.: We have audited the accompanying consolidated balance sheets of Pharmaceutical Resources, Inc. (a New Jersey corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations and retained earnings (accumulated deficit) and cash flows for each of the three years in the period ended December 31, 2001. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in the Restatement of Results footnote, the 2000 and 1999 consolidated financial statements have been restated to reflect the value of exclusive U.S. distribution rights obtained by the Company through its strategic alliance with Merck KGaA. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pharmaceutical Resources, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Roseland, New Jersey March 26, 2002 F - 3 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (In Thousands, Except Share Data) ASSETS 2002 2001 ------ ---- ---- Current assets: Cash and cash equivalents $65,121 $67,742 Accounts receivable, net of allowances of $36,257 and $47,168 54,263 38,009 Inventories, net 51,591 31,458 Prepaid expenses and other current assets 7,136 4,156 Deferred income tax assets 32,873 34,485 ------- ------ Total current assets 210,984 175,850 Property, plant and equipment, at cost, less accumulated depreciation and amortization 27,055 24,345 Unexpended industrial revenue bond proceeds 2,000 - Intangible assets, net 35,692 15,822 Goodwill 24,662 - Other assets 1,064 909 ------- ------ Total assets $301,457 $216,926 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $596 $239 Accounts payable 14,637 18,007 Payables due to distribution agreement partners 18,163 32,295 Accrued salaries and employee benefits 5,175 2,859 Accrued expenses and other current liabilities 10,034 4,817 Income taxes payable 26,074 14,766 ------- ------ Total current liabilities 74,679 72,983 Long-term debt, less current portion 2,426 1,060 Accrued pension liability - 331 Deferred income tax liabilities, net 3,562 4,129 Commitments and contingencies Shareholders' equity: Common Stock, par value $.01 per share; authorized 90,000,000 shares; issued and outstanding 32,804,480 and 32,035,189 shares 328 320 Additional paid-in capital 118,515 115,610 Retained earnings 101,947 22,493 ------- ------ Total shareholders' equity 220,790 138,423 ------- ------- Total liabilities and shareholders' equity $301,457 $216,926 ======= ======= The accompanying notes are an integral part of these consolidated balance sheets. F-4 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (In Thousands, Except Per Share Amounts) (*Restated) 2002 2001 2000 ---- ---- ---- Net sales $381,603 $271,035 $85,022 Cost of goods sold 198,313 161,306 62,332 ------- ------- ------ Gross margin 183,290 109,729 22,690 Operating expenses (income): Research and development 17,910 11,113 7,634 Selling, general and administrative 40,215 21,878 16,297 Settlements (9,051) - - Acquisition termination charges 4,262 - - ------- ------- ------ Total operating expenses 53,336 32,991 23,931 ------- ------- ------ Operating income (loss) 129,954 76,738 (1,241) Other (expense) income (305 ) (364) 506 Interest income (expense) 604 (442) (916) ------- ------- ------ Income (loss) before provision for income taxes 130,253 75,932 (1,651) Provision for income taxes 50,799 22,010 - ------- ------- ------ Net income (loss) 79,454 53,922 (1,651) Retained earnings (accumulated deficit), beginning of year 22,493 (31,429) (29,778) ------- ------- ------ Retained earnings (accumulated deficit), end of year $101,947 $22,493 $(31,429) ------- ------- ------ Net income (loss) per share of common stock Basic $2.46 $1.76 $(.06) ==== ==== === Diluted $2.40 $1.68 $(.06) ==== ==== === Weighted average number of common shares outstanding Basic 32,337 30,595 29,604 ====== ====== ====== Diluted 33,051 32,190 29,604 ====== ====== ====== * Restated as described in the Notes to Consolidated Financial Statements. The accompanying notes are an integral part of these consolidated financial statements. F-5 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (In Thousands)
(*Restated) 2002 2001 2000 ---- ---- ---- Cash flows from operating activities: Net income (loss) $79,454 $53,922 $(1,651) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Deferred income taxes 1,045 (20,081) - Depreciation and amortization 5,775 3,349 3,030 Write-off of inventories 3,096 1,790 1,645 Allowances against accounts receivable (10,911) 43,214 1,395 Settlements (9,051) - - Tax benefit from exercise of stock options 220 11,765 - Other 991 181 234 Changes in assets and liabilities: Increase in accounts receivable (5,087) (58,917) (6,173) Increase in inventories (23,161) (12,999) (1,991) Increase in prepaid expenses and other assets (11,937) (4,377) (415) (Decrease) increase in accounts payable (3,469) 6,532 41 (Decrease) increase in payables due to distribution agreement partners (14,132) 30,607 404 Increase in accrued expenses and other liabilities 7,610 3,569 786 Increase in income taxes payable 11,308 14,766 - -------- ------- ------- Net cash provided by (used in) operating activities 31,751 73,321 (2,695) -------- ------- ------- Cash flows from investing activities: Capital expenditures (6,921) (4,622) (3,207) Acquisition of FineTech, net of cash acquired (32,618) - - Proceeds from sale of fixed assets 751 1,158 44 -------- ------- ------- Net cash used in investing activities (38,788) (3,464) (3,163) -------- ------- ------- Cash flows from financing activities: Proceeds from issuances of Common Stock 2,693 7,597 382 Net (payments) proceeds from revolving credit line and other short-term borrowings - (9,666) 5,775 Restricted proceeds from industrial revenue bond 2,000 - - Principal payments under long-term debt and other borrowings (277) (268) (253) -------- ------- ------- Net cash provided by (used in) financing activities 4,416 (2,337) 5,904 -------- ------- ------- Net (decrease) increase in cash and cash equivalents (2,621) 67,520 46 Cash and cash equivalents at beginning of year 67,742 222 176 -------- ------- ------- Cash and cash equivalents at end of year $65,121 $67,742 $222 -------- ------- ------- Supplemental disclosure of cash flow information Cash paid during the year for: Taxes $38,211 $15,620 - Interest $148 $626 $933 * Restated as described in the Notes to Consolidated Financial Statements. The accompanying notes are an integral part of these consolidated financial statements.
F-6 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002 (In Thousands, Except Per Share Amounts) 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. In addition, the Company develops and manufactures in small quantities complex synthetic active pharmaceutical ingredients through its subsidiary, FineTech Ltd. ("FineTech") based in Haifa, Israel and sells a limited number of mature brand name drugs through an agreement with Bristol Myers Squibb ("BMS"). 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. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of PRX and its wholly owned subsidiaries. All intercompany transactions are eliminated in consolidation. References herein to the "Company" refer to PRX and its subsidiaries. Certain items on the consolidated financial statements and in Notes to Consolidated Financial Statements for the prior years have been reclassified to conform to the current year financial statement presentation. On April 17, 2002, the Company purchased FineTech Ltd. ("FineTech"), which is based in Haifa, Israel, from International Specialty Products ("ISP"). The acquisition was accounted for as a purchase under Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and the accompanying consolidated financial statements include the operating results of FineTech from the date of acquisition. USE OF ESTIMATES: The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. The consolidated financial statements include certain amounts that are based on management's best estimates and judgments. Estimates are used in determining such items as provisions for rebates, returns, price adjustments, price protection and other sales allowances, depreciable/amortizable lives, pension benefits, and amounts recorded for contingencies and other reserves. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. The Company is not aware of reasonably likely events or circumstances that would result in different amounts being reported that would have a material impact on results of operations or financial condition. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out basis) or market value. The Company examines inventory levels, including expiration dates by product, on a regular basis. The Company makes provisions for obsolete and slow moving inventories as necessary to properly reflect inventory value. Changes in these provisions are charged to cost of goods sold. DEPRECIATION AND AMORTIZATION: Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives that range from three to 40 years. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease. IMPAIRMENT OF LONG-LIVED ASSETS: The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may no longer be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset were less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. F-7 RESEARCH AND DEVELOPMENT AND PATENT LITIGATION COSTS: Costs incurred by the Company's internal product development program to develop new products and obtain pre-marketing regulatory approval for such products are expensed as incurred and charged to research and development. The Company will either capitalize or expense amounts related to the development and marketing of new products and technologies through third parties based on the Company's determination of its ability to recover in a reasonable period of time the estimated future cash flows anticipated to be generated pursuant to each agreement. Accordingly, amounts related to the Company's funding of the research and development efforts of others or to the purchase of contractual rights to products that have not been approved by the United States Food and Drug Administration ("FDA") where the Company has no alternative future use for the product, are expensed and included in research and development costs. Amounts for contractual rights acquired by the Company to a process, product or other legal right having multiple or alternative future uses that support its realizabilty, as well as, an approved product, are capitalized and included in intangible assets on the consolidated balance sheets. The capitalized costs are amortized on an accelerated basis over the estimated useful life over which the related cash flows are expected to be generated and the amortization is charged to cost of goods sold. Patent litigation costs are expensed as incurred and included in selling, general and administrative expenses. GOODWILL AND INTANGIBLE ASSETS: The Company determines the estimated fair values of goodwill and certain intangible assets with definitive lives based on purchase price allocations performed by independent third party valuation firms at the time of acquisition. In addition, certain amounts paid to third parties related to the development and marketing of new products and technologies, as described above, are capitalized and included in intangible assets on the consolidated balance sheets. Goodwill is not amortized, but tested at least annually for impairment using a fair value approach. Intangible assets with definitive lives are capitalized and amortized over their estimated useful lives. INCOME TAXES: Deferred income tax assets and liabilities are computed annually based on enacted tax laws and rates for temporary differences between the financial accounting and income tax bases of assets and liabilities. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount that is more likely than not to be realized. PENSION BENEFITS: The determination of the Company's obligation and expense for pension benefits is dependent on its selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in the Commitments, Contingencies and Other Matters footnote to the consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation. In accordance with accounting principles generally accepted in the United States, actual results that differ from the Company's assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in future periods. While the Company believes its assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect pension obligations and future expense. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE AND RESERVES: At the time product is shipped and title passes to its customers, the Company recognizes revenue and simultaneously records an estimate for sales returns, chargebacks, rebates, price protection adjustments or other sales allowances, as a reduction in revenue, with a corresponding adjustment to the accounts receivable reserves. Customers are permitted to return unused product, after approval from the Company, up to 180 days before and one year after the expiration date for the product's lot. Additionally, certain customers are eligible for price rebates, offered as an incentive to increase sales volume, on the basis of the volume of purchases of a product over a specified period which generally ranges from one to three months, and certain customers are credited with chargebacks on the basis of their resales to end-use customers, such as HMO's, which have contracts with the Company. The Company also generally offers price protection, also known as shelf-stock adjustments, with respect to sales of new generic drugs for which it has a market exclusivity period. Price protection accounts for the fact that the price of such drugs typically will decline, sometimes substantially, 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 for a credit to customers with respect to the customer's remaining inventory at the expiration of the exclusivity period for the difference between the Company's new price and the price at which the Company originally sold the product. The Company records charges (reductions of revenue) to accrue this amount for F-8 specific product sales that will be subject to price protection based on the Company's estimate of customer inventory levels and market prices at the expiration of the exclusivity period. In each of these instances, the Company has the historical experience and access to other information, including the total demand for each drug the Company manufactures, the Company's market share, recent or pending introduction of new drugs, inventory practices of the Company's customers and the resales by its customers to end-users having contracts with the Company, necessary to reasonably estimate the amount of such returns or allowances, and records reserves for such returns or allowances at the time of sale. EARNINGS PER COMMON SHARE DATA: Earnings (loss) per common share is computed by dividing earnings (loss) by the weighted average number of common shares outstanding. Earnings (loss) per common share assuming dilution, were computed assuming that all potentially dilutive securities, including "in-the-money" stock options, were converted into common shares at the beginning of each year. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of the Company's accounts receivable, accounts payable and accrued liabilities approximate fair market value based upon the relatively short-term nature of these financial instruments. The carrying amount of the Company's long-term debt, including the current portion, approximate fair market value based upon current borrowing rates available to the Company. CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the Company to credit risk consist of trade receivables. The Company markets its products primarily to domestic wholesalers, retail drug store chains, managed health care providers and distributors. The Company believes the risk associated with this concentration is limited due to the number of wholesalers, drug store chains, managed health care providers and distributors, and their geographic dispersion and its performance of certain credit evaluation procedures (see "-Accounts Receivable-Major Customers"). CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, the Company considers all highly liquid money market instruments with an original maturity of three months or less when purchased to be cash equivalents. At December 31, 2002, cash equivalents were deposited in financial institutions and consisted of immediately available fund balances. STOCK-BASED COMPENSATION: The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion 25") and complies with the disclosure provisions SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under APB Opinion 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company's stock and the exercise price. In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123" ("SFAS 148") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this standard amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. F-9 The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:
For the Years Ended December 31, (*Restated) 2002 2001 2000 ---- ---- ---- Net income (loss) as reported $79,454 $53,922 $(1,651) Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (7,702) (5,137) (970) -------- ------- ------- Pro forma net income (loss) 71,752 $48,785 $(2,621) Net income (loss) per share of common stock: As reported - Basic $2.46 $1.76 $(.06) As reported - Diluted $2.40 $1.68 $(.06) Pro forma - Basic $2.22 $1.59 $(.09) Pro forma - Diluted $2.17 $1.52 $(.09)
SEGMENTS OF AN ENTERPRISE: SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting of financial information about operating segments in annual financial statements. The Company's management considers its business to be a single business entity. NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, FASB issued SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets" ("SFAS 142"). This statement requires that goodwill and intangible assets deemed to have an indefinite life are not be amortized. Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate an impairment might exist by applying a fair-value-based test. The adoption of this standard did not have a material impact on our financial position or results of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective January 1, 2003. It requires the recording of an asset and a liability equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists. The asset is required to be depreciated over the life of the related equipment or facility, and the liability accreted each year based on a present value interest rate. This standard, which the Company will adopt in 2003, will not have a material effect on the Company's consolidated financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). It establishes a single accounting model for the impairment of long-lived assets to be held and used or to be disposed of by sale or abandonment, and broadens the definition of discontinued operations. The Company adopted SFAS 144 in 2002, with no significant change in the accounting for the impairment and disposal of long-lived assets. NOTE 2 - RESTATEMENT OF RESULTS: Certain items in the consolidated financial statements for fiscal year 2000 were restated due to a change in the manner the Company accounted for its transactions with Merck KGaA in fiscal year 1998. In June 1998, the Company sold to Merck KGaA 10,400 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. The Company previously accounted for the sale of the Common Stock and the distribution agreement as separate transactions. In restating its consolidated financial statements, the Company accounted for the two transactions as a single transaction under Emerging Issues Task Force Issue ("EITF") No. 96-18 F-10 "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services". Under EITF 96-18, the fair value of the Common Stock sold, to the extent it exceeded the cash consideration received for such Common Stock, is attributed to the distribution agreement. Under the restatement, the Company determined the fair value of the Common Stock sold to Merck KGaA to be $27,300, which exceeded the cash consideration of $20,800 received by the Company by $6,500. That $6,500 was assigned to the Genpharm Distribution Agreement, with a corresponding increase in shareholders' equity. Additionally, the Company recorded a deferred tax liability of $4,333 and a corresponding increase in the financial reporting basis of the Genpharm Distribution Agreement to account for the difference between the basis in the Genpharm Distribution Agreement for financial reporting and income tax purposes as required by SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). The aggregate value assigned to the Genpharm Distribution Agreement of $10,833 is being amortized on a straight-line basis over 15 years beginning in the third quarter of fiscal 1998, and the net amount is included in intangible assets. The amortization is included as a non-cash charge in selling, general and administrative expenses. The impact of the restatements described above on the previously reported results for fiscal year 2000 were as follows: FOR THE YEAR ENDED CONSOLIDATED STATEMENT OF DECEMBER 31, 2000 OPERATIONS AND ACCUMULATED DEFICIT Reported Restated ------------------------------------ ---------------- ----------------- Selling, general and administrative $15,575 $16,297 Net loss ($929) ($1,651) Accumulated deficit ($29,623) ($31,429) Net loss per share of common stock: Basic and diluted ($0.03) ($0.06) NOTE 3 - ACQUISITION OF FINETECH: On March 15, 2002, the Company terminated its negotiations with ISP related to the Company's purchase of the combined 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, the Company paid ISP a $3,000 break-up fee in March 2002, which was subject to certain credits and offsets, and incurred approximately $1,262 in related acquisition costs, both of which were included in acquisition termination charges on the consolidated statement of operations in fiscal year 2002. The Company subsequently purchased FineTech, based in Haifa, Israel, from ISP in April 2002 for approximately $32,000 and incurred $1,237 in related acquisition costs, all of which were financed by its cash-on-hand. The Company acquired the physical facilities, intellectual property and patents of FineTech and 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 has the ability to manufacture in small quantities complex synthetic active pharmaceutical ingredients at its manufacturing facility in Haifa, Israel. This facility operates in compliance with FDA current Good Manufacturing Practices (cGMP) standards. The purchase did not have a material effect on the Company's earnings in fiscal year 2002. The Company is in the process of transferring a portion of FineTech's personnel and technological resources to a laboratory facility in Rhode Island. FineTech is operated as an independent, wholly-owned subsidiary of PRX and provides immediate chemical synthesis capabilities and strategic opportunities to the Company and other customers. F-11 The purchase price for FineTech was allocated to assets and liabilities based on management's estimates of fair value through an independent third party valuation firm. The following table sets forth the allocation of the purchase price: Current assets $971 Property, plant and equipment 1,046 Intellectual property 6,580 Goodwill 24,662 ------ Total assets acquired 33,259 Current liabilities 22 ------ Total liabilities assumed 22 ------ Net assets acquired $33,237 ====== In accordance with SFAS 142, the goodwill will not be amortized, but will be tested for impairment using a fair value approach at least annually. NOTE 4 - ACCOUNTS RECEIVABLE: DECEMBER 31, DECEMBER 31, 2002 2001 ---- ---- Accounts receivable $90,520 $85,177 ------ ------ Allowances: Doubtful accounts 1,156 998 Returns 18,868 4,847 Price adjustments and allowances 16,233 41,323 ------ ------ 36,257 47,168 Accounts receivable, net of allowances $54,263 $38,009 ====== ====== The gross accounts receivable amounts above at December 31, 2002 and December 31, 2001 are net of provisions for customer rebates of $13,610 and $14,081, and chargebacks of $63,141 and $41,830, 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 made 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 increased chargebacks are primarily 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 Company accepts returns of product according to the following: (i) the returns must be approved by authorized personnel in writing or by telephone with the lot number and expiration date accompanying any request, (ii) the Company generally will accept returns of products from any customer and will give such customer a credit for such return provided such product is returned within six months prior to, and until 12 months following, such product's expiration date, (iii) any product that has more than six months until its expiration date may be returned to the Company; however, no credit will be issued to the customer, (iv) the Company will not accept returns of products if such products cannot be resold, unless the reason that such products cannot be resold is that the expiration date has passed. In addition, private label stock is not returnable. The Company's provision for returns has increased in fiscal year 2002 primarily due to higher overall sales volumes and a higher rate of returns from the brand products the Company is currently selling. The accounts receivable reserve for price adjustments and allowances includes provisions for cash discounts, sales promotions and price protection. Cash or terms discounts are given to customers who pay within a specific period of time. Sales or trade show promotions may be run by the Company where additional discounts may be given on a new product or certain existing products as an added incentive for the customer to purchase the Company's products. The Company generally offers price protection, also known as shelf-stock adjustments, with respect to sales of new generic drugs for which it has a market exclusivity period. Price protection accounts for the fact that the price F-12 of such drugs typically will decline, sometimes substantially, 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 Company's industry, generally provide for a credit to customers with respect to the customer's remaining inventory at the end of the exclusivity period for the difference between the Company's new price and the price at which the Company originally sold the product. In the Company's experience, the amount by which the price of a drug may decline at the end of an exclusivity period will depend in part on the number of additional generic manufacturers that introduce and market a comparable product. The Company estimates the amount by which prices will decline based on its monitoring of the number and status of FDA applications and tentative approvals and its historical experience with other drugs for which the Company had market exclusivity. The Company estimates the amount of shelf stock that will remain at the end of an exclusivity period based on both its knowledge of the inventory practices for wholesalers and retail distributors and conversations it has with its major customers. Using these factors, the Company estimates the total price protection credit it will have to issue at the end of an exclusivity period. The Company records charges (reductions of sales) to accrue this amount for specific product sales that will be subject to price protection based on the Company's estimate of customer inventory levels and market prices at the end of the exclusivity period. As a result, the Company will be required to credit customers for price protection based on the quantity of that inventory and the decrease in a particular products market price at the end of the exclusivity period. The Company's exclusivity period for fluoxetine, the generic version of Eli Lilly and Company's Prozac(R), expired in late-January 2002. With respect to fluoxetine, the Company established a price protection reserve during the exclusivity period of approximately $34,400, based on its estimate that between eight and ten additional generic manufacturers would introduce and market products comparable to 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 substantially declined from the sales price the Company charged during the exclusivity period. In fiscal year 2002, the Company issued price protection credits totaling approximately $27,400 and eliminated the price protection reserve that it believes was no longer necessary. Pursuant to distribution agreements with strategic partners, the elimination of the reserve had a favorable impact on the Company's gross margin of approximately $1,800 in fiscal year 2002. The Company's exclusivity period for megestrol acetate oral suspension, the generic version of BMS's Megace(R) Oral Suspension, expired 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 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 intends to take the steps necessary to protect its intellectual property rights. According to the Company's accounting policies, the Company did not record a price protection reserve for such product as of December 31, 2002. The Company will continue to evaluate the effect of potential competition and will record a price protection reserve when and as it deems necessary. MAJOR CUSTOMERS: The Company's top three customers by sales volume accounted for approximately 17%, 16% and 10% of net sales in fiscal year 2002, 14%, 13% and 9% of net sales in fiscal year 2001 and 21%, 9% and 8% of net sales in fiscal year 2000. The amounts due from these same three customers accounted for approximately 8%, 11% and 2% of the accounts receivable balance at December 31, 2002 and 23%, 14% and 6% of the accounts receivable balance at December 31, 2001. NOTE 5 -INVENTORIES, NET: DECEMBER 31, DECEMBER 31, 2002 2001 ---- ---- Raw materials and supplies, net $17,400 $11,574 Work in process and finished goods, net 34,191 19,884 ------ ------ $51,591 $31,458 ======= ======= F-13 NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET: DECEMBER 31, DECEMBER 31, 2002 2001 ---- ---- Land $ 2,231 $ 2,231 Buildings 21,509 20,455 Machinery and equipment 21,858 21,794 Office equipment, furniture and fixtures 8,284 6,474 Leasehold improvements 928 2,170 ------ ------ 54,810 53,124 Less accumulated depreciation and amortization 27,755 28,779 ------ ------ $27,055 $24,345 ======= ======= Depreciation and amortization expense was $5,775, $3,349 and $3,030, respectively, for the years ended December 31, 2002, 2001 and 2000. NOTE 7 - UNEXPENDED INDUSTRIAL REVENUE BOND PROCEEDS: On December 1, 2002, FineTech entered into a loan agreement among GE Capital Public Finance, Inc., a Delaware corporation ("Lender"), and Rhode Island Industrial Facilities Corporation, a public corporation and governmental agency of the State of Rhode Island and Providence Plantations ("Issuer"), to finance the acquisition and installation of equipment in Rhode Island. Pursuant to the agreement, the Issuer will finance all or a portion of the acquisition and installation of equipment (as defined in the agreement) by FineTech by issuing a $2,000 revenue bond and obtaining a loan from the Lender. FineTech shall repay the loan directly to the Lender, as assignee of Issuer and holder of the bond (see "-Long-Term Debt). The Lender has deposited the $2,000 in an escrow fund to be held, invested and disbursed as provided in an escrow agreement. The $2,000 is restricted for purchase of the equipment, as defined in the agreement, and was recorded as a noncurrent asset on the consolidated balance sheet. NOTE 8 - INTANGIBLE ASSETS, NET: DECEMBER 31, DECEMBER 31, 2002 2001 ---- ---- BMS Asset Purchase Agreement, net of accumulated amortization of $1,393 $10,307 - Product License fees 9,199 $5,017 Genpharm Distribution Agreement, net of accumulated amortization of $3,250 and $2,528 7,583 8,305 Intellectual property, net of accumulated amortization of $451 6,129 - Genpharm Profit Sharing Agreement, net of accumulated amortization of $26 2,474 2,500 ------- ------- $35,692 $15,822 ======= ======= Intangible assets include estimated fair values of certain distribution rights acquired by the Company for equity instruments or in legal settlements, amounts paid for contractual rights acquired by the Company to a process, product or other legal right having multiple or alternative future uses that support its realizabilty and intellectual property. The values of the distribution rights, pursuant to agreements with BMS and Genpharm, are capitalized and amortized on a straight-line basis over the products' estimated useful lives of seven to 15 years. The values of the product license fees and the Genpharm Profit Sharing Agreement will be amortized, beginning in the period in which the product or products are brought to market, over the estimated useful life in which the related cash flows are generated. The values of the intellectual property, consisting of trademarks, patents, product and core technology, and research contracts, are amortized on a straight-line basis over their estimated useful lives of six to 10 years. All capitalized costs are subject to periodic impairment testing. In March 2002, the Company entered into an agreement with BMS (the "BMS Asset Purchase Agreement") and acquired the United States rights to five of BMS's brand products. Pursuant to the BMS Asset Purchase Agreement, the Company terminated its outstanding litigation against BMS involving megestrol acetate oral suspension and buspirone, paid approximately $1,024 in March 2002 and agreed to make an additional payment of approximately $1,025 in the first quarter of 2003. The Company determined, through an independent third party F-14 appraisal, the fair value of the product rights received to be $11,700, which exceeded the cash consideration of $2,049 and associated costs of $600 by $9,051. The $9,051 value was assigned to the litigation settlements and included in settlement income in the first quarter of 2002. The fair value of the product rights received is being amortized on a straight-line basis over seven years beginning in March 2002, with the net amount included in intangible assets on the consolidated balance sheets. The amortization is included as a non-cash charge in cost of goods sold. In April 2002, the Company entered into an agreement (the "Genpharm 11 Product Agreement") with Genpharm, to expand its strategic product partnership. Pursuant to the Genpharm 11 Product Agreement, the Company paid Genpharm a non-refundable fee of $2,000 in the second quarter of 2002, included in intangible assets on the consolidated balance sheets, for two products, loratadine 10 mg tablets and mirtazapine tablets, which have been tentatively approved by the FDA (see "-Research and Development Agreements-Genpharm, Inc."). In November 2001, the Company entered into a joint development and marketing agreement with Breath Ltd. of the Arrow Group ("Breath") to pursue the worldwide distribution of latanoprost ophthalmic solution 0.005%, the generic equivalent of Pharmacia Corporation's ("Pharmacia") Xalatan(R), a glaucoma medication. Pursuant to the agreement, the Company has the right to market the product upon FDA approval in the United States and certain United States territories while Breath has the rights to all worldwide markets outside of the United States and such territories. As a result of this agreement, Par filed an 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. Par intends to vigorously defend its position in the pending litigation with Pharmacia (see "-Legal Proceedings"). Pursuant to this agreement, Par made payments of $2,500 in fiscal year 2001 and $2,500 in the first quarter of fiscal year 2002 to Breath, which are included in intangible assets on the consolidated balance sheets. In April 1999, the Company entered into an agreement with FineTech for the right to use a process for the pharmaceutical bulk active latanoprost. Pursuant to this agreement, the Company paid FineTech approximately $2,000 in fiscal years 2000 and 2001, which is included in intangible assets on the consolidated balance sheets, for a completed process together with its technology transfer package and patent. The Company has since purchased FineTech and pursuant to this agreement, the Company is obligated to pay royalties on gross profits from sales of all products developed under this agreement to the President of FineTech, Dr. Gutman, who is currently a director of the Company. In addition, Dr. Gutman is entitled to royalties on gross profits from potential sales of several other products pursuant to agreements made with FineTech prior to the Company's acquisition. On June 30, 1998, the Company completed a strategic alliance with Merck KGaA, a pharmaceutical and chemical company located in Darmstadt, Germany. Pursuant to a Stock Purchase Agreement, dated March 25, 1998, the Company issued 10,400 shares of the Company's Common Stock to Merck KGaA, through its subsidiary EMD, Inc. ("EMD" formerly known as Lipha Americas, Inc.), in exchange for cash of $20,800 and the exclusive United States distribution rights to a portfolio of products covered by a distribution agreement with Genpharm (see "-Distribution and Supply Agreements-Genpharm, Inc."). The Company determined the fair value of the Common Stock sold to Merck KGaA to be $27,300, which exceeded the cash consideration of $20,800 received by the Company by $6,500. That $6,500 was assigned to the Genpharm Distribution Agreement, with a corresponding increase in shareholders' equity. Additionally, the Company recorded a deferred tax liability of $4,333 and a corresponding increase in the financial reporting basis of the Genpharm Distribution Agreement to account for the difference between the basis in the Genpharm Distribution Agreement for financial reporting and income tax purposes as required by SFAS 109. The aggregate value assigned to the Genpharm Distribution Agreement of $10,833 is being amortized on a straight-line basis over 15 years beginning in the third quarter of fiscal 1998, and the net amount is included in intangible assets. The amortization is included as a non-cash charge in selling, general and administrative expenses. In January 1999, the Company and Genpharm, entered into a profit sharing agreement (the "Genpharm Profit Sharing Agreement") pursuant to which the Company receives a portion of the profits generated from the sale of omeprazole, the generic version of Astra Zeneca's ("Astra") Prilosec(R), and 15 products sold under a separate agreement between Genpharm and an unaffiliated United States-based pharmaceutical company in exchange for a non-refundable fee of $2,500 paid by the Company and included in intangible assets on the consolidated balance sheets. In November 2001, the FDA granted Genpharm 180-days marketing co-exclusivity for 10 mg and 20 mg doses of omeprazole. The exclusivity would have allowed only Genpharm and/or Andrx Corporation ("Andrx") to enter the F-15 market during the exclusivity period. Under the Genpharm Profit Sharing Agreement, the Company was entitled to receive at least 30% of profits generated by Genpharm based on the sale of omeprazole. In November 2002, the Company announced that Genpharm and Andrx in conjunction with KUDCo, a subsidiary of Schwarz Pharma AG of Germany, had relinquished exclusivity rights for 10 mg and 20 mg doses of omeprazole, thereby allowing KUDCo to enter the market with a generic version of Prilosec(R). As a result, KUDCo received final ANDA approval from the FDA for its generic version of Prilosec(R). The terms of the agreement provide Genpharm with an initial 15% share of KUDCo's profits, as defined in the agreement, with a subsequent reduction over time based on a number of factors. The Company reduced its share of Genpharm's profit derived from omeprazole pursuant to the Genpharm Profit Sharing Agreement from 30% to 25%. In December 2002, KUDCo launched omeprazole "at risk" because Astra is appealing the court's patent infringement decision. The full impact of KUDCo's omeprazole launch on the Company's revenues is presently unclear since, among other things, Astra has introduced a new drug, Nexium(R), in an apparent attempt to switch consumers using Prilosec(R) and Astra's decision to market a non-prescription form of Prilosec(R) along with Proctor & Gamble, all of which may reduce generic sales of omeprazole. The Company recognized $755 in revenues in December 2002 related to its share of Genpharm profits and began amortizing the $2,500 fee paid pursuant to the Genpharm Profit Sharing Agreement over the product's cash flows over its estimated useful life. The amortization is charged to cost of goods sold. In the event there is a court ruling that is unfavorable to KUDCo in the pending appeal by Astra, the Company could be obligated to return any payments received from Genpharm pursuant to this agreement. The Company recorded amortization expense related to intangible assets of $2,592 and $722, respectively, for fiscal years 2002 and 2001. Annual amortization expense in each of the next five years, related to the intangible assets currently being amortized, is expected to be $3,070 per year. NOTE 9 - RESEARCH AND DEVELOPMENT AGREEMENTS: To supplement its own internal development program, the Company seeks to enter into development and license agreements with third parties with respect to the development and marketing of new products and technologies. To date, the Company has entered into several of these types of agreements and advanced funds to several non-affiliated companies for products in various stages of development. Payments related to these agreements are either expensed as incurred or capitalized according to the Company's Significant Accounting Policies. To date, the Company entered into the following product development agreements that it believes are significant to its business. THREE RIVERS PHARMACEUTICALS, LLC. In July 2002, the Company and Three Rivers Pharmaceuticals, LLC ("Three Rivers") entered into a license and distribution agreement (the "Three Rivers Distribution Agreement"), which was amended in October 2002, to market and distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's Rebetol(R). Under the terms of the Three Rivers Distribution Agreement, Three Rivers will supply the product and be responsible for managing the regulatory process and ongoing patent litigation. Upon FDA approval and final marketing clearance, Par will have the exclusive right to sell the product in non-hospital markets and will be required to pay Three Rivers a percentage of the gross profits, as defined in the agreement. In addition, the Company paid Three Rivers $1,000, which was charged to research and development expenses in fiscal year 2002, and agreed to pay Three Rivers $500 at such time as Par commercially launches the product. 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. 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. 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. Under the terms of the agreement, the Company obtained the right to utilize Nortec/Glatt's drug delivery system technology in its ANDA submission for the potential product covered in the agreement. If formulation and development are successful, the ANDA for the drug could be submitted to the FDA in 2004 and will include a Paragraph IV certification. The Company and Nortec have agreed to collaborate on the formulation, and Par has agreed to serve as the exclusive marketer and distributor of the product. F-16 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. Under the terms of the new agreement, Par also obtained the right to utilize Nortec/Glatt's drug delivery system 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 $1,000, which were charged to research and development expenses in fiscal year 2002. The Company also agreed to pay a total of $800 in various installments related to the achievement of certain milestones in the development of the two potential products and $600 for each product on the day of the first commercial sale. In addition to these payments, the Company agreed to pay Nortec a royalty on net sales of the products, as defined in the agreements. GENPHARM, INC.: Under the terms of the Genpharm 11 Product Agreement, Par licensed the exclusive rights to 11 generic pharmaceutical products currently under development. 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, as defined in the agreement, on all sales of products covered under this agreement. In the second quarter of 2002, the Company paid Genpharm a non-refundable fee of $2,000, included in intangible assets on the consolidated balance sheets, for two of the products. Pursuant to the Genpharm 11 Product Agreement, the Company's share of development and legal costs related to the other products has been expensed as incurred. In addition to the two products noted above, there are three other ANDAs for potential products covered under the Genpharm 11 Product Agreement, pending with, and awaiting approval from, the FDA. The Company will also be required to pay an additional non-refundable fee of up to $414 based upon FDA acceptance of filings for six of the nine remaining products. ELAN TRANSDERMAL TECHNOLOGIES, INC.: In December 2002, the Company and Elan Transdermal Technologies, Inc. ("Elan") terminated an agreement (the "Development, License and Supply Agreement"), dated December 2001, to develop several modified release drugs over the next five years. The Company paid Elan $1,902 in fiscal years 2002 and 2003, which was charged to research and development expenses, for a product covered under the Development, License and Supply Agreement, thereby completing its obligations pursuant to the agreement. In April 2001, Par entered into a licensing agreement with Elan to market a clonidine transdermal patch, a generic version of Boehringer Ingelheim's Catapres TTS(R). Elan filed an ANDA for the product with the FDA earlier in fiscal year 2001, including a Paragraph IV certification, certifying that the product did not infringe the branded product's formulation patent, which expires in May 2003. Elan will be responsible for the development and manufacture of the 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 product. Pursuant to the agreement, the Company paid Elan approximately $1,167 and $833, respectively, in fiscal years 2001 and 2002, which was charged to research and development expenses. In addition, Par will pay to Elan $1,000 upon FDA approval of the product, and a royalty on all future sales of the product. PENTECH PHARMACEUTICALS, INC.: In November 2002, the Company amended its agreement (the "Supply and Marketing Agreement") with Pentech Pharmaceuticals, Inc. ("Pentech"), dated November 2001, to market paroxetine hydrochloride capsules. Pursuant to the Supply and Marketing Agreement, as amended, Par has the exclusive right to market, sell and distribute the product in the United States and its territories and has agreed to pay Pentech a percentage of the gross profit from sales on the product. Paroxetine hydrochloride is the generic version of GlaxoSmithKline's Paxil(R). Currently, GlaxoSmithKline markets Paxil(R) only in tablet form. Paxil(R), a selective serotonin reuptake inhibitor, is indicated for the treatment of depression and other disorders. The Company believes that its ANDA submission for paroxetine hydrochloride capsules is the first to be filed with a paragraph IV certification. The Company has reason to believe that another generic drug company has first-to-file status for the tablet form of this product. Par intends to market a capsule form of the product. Pursuant to the Supply and Marketing Agreement with Pentech, Par is responsible for all legal expenses up to $2,000, which have been expensed as incurred, to obtain final regulatory approval. Legal expenses in excess of $2,000 are fully creditable against future profit payments. In fiscal year 2003, Par will be responsible for F-17 Pentech costs associated with the project up to $1,300, which will be charged to research and development expenses as incurred. NOTE 10 - RESEARCH AND DEVELOPMENT VENTURES: The Company is committed to developing new products that have limited competition and longer product life cycles. To augment its internal development program, the Company seeks to enter into research and development ventures where it can share development costs while using the expertise of its partners. To date, the Company has entered into the following research and development ventures. RHODES TECHNOLOGIES, INC.: In April 2002, the Company entered into an agreement with Rhodes Technologies, Inc. ("RTI"), an affiliated company of Purdue Pharma L.P., to establish a joint venture partnership in the United States. The new joint venture was named SVC Pharma and is 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 has agreed to provide scientific and technological expertise in the development of non-infringing, complex molecules. In addition to providing chemical synthesis capabilities, RTI has agreed to provide the manufacturing capacity for sophisticated intermediate and active pharmaceutical ingredients. Par has agreed to provide development expertise in dosage formulation and will be responsible for marketing, sales and distribution. The companies will share equally in expenses and profits. SVC Pharma has identified several candidates for drug development. The Company's funding of $952, related to the first project, began in the fourth quarter of fiscal year 2002. The Company accounts for its share of the expenses of SVC Pharma with a charge to research and development as incurred. 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 December 2002, the Company decided to terminate its IPR operation and sold the assets of IPR to a private company in Israel. The loss on the sale of IPR's assets was $920 and is included in selling, general and administrative expenses in December 2002. The expenses of IPR for fiscal year 2002 were $1,032 and are included in research and development as incurred, net of the funding from Generics. The Company expects the remaining shutdown expenses at IPR to be nominal in fiscal year 2003. NOTE 11 - DISTRIBUTION AND SUPPLY AGREEMENTS: BRISTOL MYERS SQUIBB: The Company is selling five of BMS's brand products including the antihypertensives Capoten(R) and Capozide(R), the cholesterol-lowering medications Questran(R) and Questran Light(R), and Sumycin(R), an antibiotic through the BMS Asset Purchase Agreement, dated March 5, 2002. The Company obtained the right to sell these products manufactured by BMS through a legal settlement and began selling the products in March 2002. 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 to be marketed exclusively by Par in the United States and certain other United States territories. To date, three of such products have obtained FDA approval, two of which are currently being marketed by Par. In addition, three of the products have been filed with, and are awaiting approval from, the FDA. 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 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 with Reddy, the Company pays Reddy a certain percentage of the gross profits, as F-18 defined in each agreement, on sales of all products covered under such 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, 19 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, as defined in the agreement, on all sales of products covered by the Genpharm Distribution Agreement. 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 has agreed to pay Genpharm a percentage of the gross profits, as defined in the agreement, on all sales made by the Company of products included in the Genpharm Additional Product Agreement. In December 2002, the Company entered into a supply and distribution agreement with Genpharm and Leiner Health Products, LLC. ("Leiner") related to the recent switch of loratadine 10 mg tablets (Claritin(R)) from prescription to over-the counter. Pursuant to the agreement, Genpharm has agreed to manufacture the product and Leiner has agreed to market and engage in over-the-counter distribution of the product in the United States and its territories for Par. The Company will receive a portion of installment payments made to Genpharm by Leiner in fiscal 2003 totaling $594 in addition to a percentage of the net profit attributable to Leiner sales. 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: Pursuant to these distribution agreements, the Company pays its partners a percentage of gross profits as defined in each agreement. As of December 31, 2002 and 2001, the Company had payables due to distribution agreement partners of $18,163 and $32,295, respectively. The decrease is primarily due to lower pricing on fluoxetine following the expiration of the Company's exclusivity period in January 2002. NOTE 12 - 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 was amended in December 2002, to incorporate the addition of FineTech and remove IPR as a party to the agreement. 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 F-19 borrowing base established under the Loan Agreement or (ii) $30,000. 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. As of December 31, 2002, the borrowing base was approximately $27,000. 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 collateralized by the assets of the Company, other than real property, and is guaranteed by the Company. In connection with such facility, the Company 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. In November 2002, GECC waived certain events of default related to financial covenants and amended the financial covenants in the Loan Agreement. To date, no debt is outstanding under the Loan Agreement. NOTE 13 - LONG-TERM DEBT: DECEMBER 31, DECEMBER 31, 2002 2001 Industrial revenue bond (a) $2,000 - Mortgage loan (b) 809 $851 Other (c) 213 448 ------- ------ 3,022 1,299 Less current portion (596) (239) ------- ------ $2,426 $1,060 ======= ====== (a) The industrial revenue bond in the principal amount of $2,000 is to be paid in equal monthly installments over a term of five years maturing January 1, 2008. The bond is secured by certain equipment of FineTech in Rhode Island, bears interest at 4.27% per annum and is subject to covenants based on various financial benchmarks. (b) In June 2001, the Company and Hudson United Bank entered into an agreement that extended the terms of the mortgage loan. The mortgage loan extension, in the principal amount of $877, is to be paid in equal monthly installments over a term of 13 years maturing May 1, 2014. The mortgage loan, secured by certain real property of the Company, has a fixed interest rate of 8.5% per annum, with rate resets after the fifth and tenth years based upon a per annum rate of 3.25% over the five-year Federal Home Loan Bank of New York rate. The Company paid the remaining balance on the mortgage loan in February 2003. (c) Includes primarily amounts due under capital leases for computer equipment. Long-term debt maturities during the next five years, including the portion classified as current, are as follows: $596 in 2003, $472 in 2004, $441 in 2005, $459 in 2006, $442 in 2007, and $612 thereafter. During fiscal years 2002, 2001 and 2000, the Company incurred interest expense of $148, $626 and $933, respectively. Interest paid approximated interest expense in each of these fiscal years. NOTE 14 - EARNINGS PER SHARE: Outstanding options and warrants of 1,793 and 3,175 as of December 31, 2002 and 2001, respectively, were included in the computation of diluted earnings per share because the exercise prices were lower than the average market price of the Common Stock in the respective periods. Outstanding options and warrants of 3,354 as of December 31, 2000, where the exercise prices were lower than the average market price of the Common Stock in the respective period, were excluded from diluted earnings per share because they would have been anti-dilutive. Outstanding options and warrants of 1,971, 579 and 263 as of December 31, 2002, 2001 and 2000, respectively, 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 respective periods. The following is a reconciliation of the amounts used to calculate basic and diluted earnings per share: F-20 FOR THE YEARS ENDED DECEMBER 31, (*RESTATED) 2002 2001 2000 ---- ---- ---- NET INCOME (LOSS) $79,454 $53,922 $(1,651) BASIC: Weighted average number of common shares outstanding 32,337 30,595 29,604 NET INCOME (LOSS) PER SHARE OF COMMON STOCK $2.46 $1.76 $(.06) ==== ==== === ASSUMING DILUTION: Weighted average number of common shares outstanding 32,337 30,595 29,604 Effect of dilutive options 714 1,595 - ------- ------- ------- Weighted average number of common and common equivalent shares outstanding 33,051 32,190 29,604 NET INCOME (LOSS) PER SHARE OF COMMON STOCK $2.40 $1.68 $(.06) ==== ==== === NOTE 15 - SHAREHOLDERS' EQUITY: PREFERRED STOCK: In 1990, the Company's shareholders authorized 6,000 shares of a newly created class of preferred stock with a par value of $.0001 per share. The preferred stock is issuable in such series and with such dividend rates, redemption prices, preferences and conversion, and other rights as the Board may determine at the time of issuance. At December 31, 2002 and 2001, the Company did not have preferred stock issued and outstanding. COMMON STOCK: In August 2001, Merck KGaA and Genpharm exercised options and warrants covering 1,421 shares of Common Stock. EMD, Merck KGaA and Genpharm subsequently sold their entire holdings of 13,634 shares of Common Stock, representing approximately 43% of the Company's total outstanding shares of Common Stock at the close of the transaction in September 2001, to unaffiliated institutional investors in a private placement. DIVIDEND: The Company did not pay any dividends on its Common Stock in fiscal years 2002, 2001 and 2000. CHANGES IN SHAREHOLDERS' EQUITY: Changes in the Company's Common Stock and Additional Paid-in Capital accounts during fiscal years 2002 and 2001 were as follows: (*RESTATED) ADDITIONAL COMMON STOCK PAID-IN SHARES AMOUNT CAPITAL ------- ------ ------- Balance, December 31, 1999 29,562 $296 $95,503 Issuance of stock options - - 258 Exercise of stock options 66 1 176 Compensatory arrangements 19 - 205 ------- ------ ------- Balance, December 31, 2000 29,647 297 96,142 Exercise of Genpharm warrants 250 2 2,095 Exercise of Genpharm stock options 351 4 699 Exercise of Merck KGaA stock options 820 8 1,632 Exercise of stock options 961 9 3,092 Issuance of stock options - - 129 Compensatory arrangements 6 - 11,821 ------- ------ ------- Balance, December 31, 2001 32,035 320 115,610 Exercise of stock options 761 8 2,471 Compensatory arrangements 8 - 434 ------- ------ ------- Balance, December 31, 2002 32,804 $328 $118,515 ======= ====== ======= F-21 Compensatory arrangements include the tax treatment related to the exercise of stock options. EMPLOYEE STOCK PURCHASE PROGRAM: The Company maintains an Employee Stock Purchase Program ("Program"). The Program is designed to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. It enables eligible employees to purchase shares of Common Stock at a discount of up to 15% of the fair market value. An aggregate of 1,000 shares of Common Stock have been reserved for sale to employees under the Program. Employees purchased 8 and 7 shares during fiscal years 2002 and 2001, respectively. At December 31, 2002, 813 shares remain available for issuance and sale under the Program. STOCK OPTIONS: The following is a summary of stock option activity in each of the periods as follows: FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ -------- ------ --------- Outstanding at beginning of year 3,754 $18.88 2,197 $3.40 1,766 $2.90 Granted 891 $23.99 2,576 $25.95 550 $5.19 Exercised (761) $3.26 (961) $3.23 (66) $2.64 Canceled/Surrendered (120) $25.38 (58) $5.73 (53) $6.11 --- -- -- Outstanding at end of year 3,764 $23.04 3,754 $18.88 2,197 $3.40 ===== ===== ===== At December 31, 2002, 2001 and 2000 exercisable options amounted to 931, 834 and 571, respectively. The weighted average exercise prices of the options for these respective periods were $20.23, $2.76 and $3.82. Exercise price ranges and additional information regarding the 3,764 options outstanding at December 31, 2002 were as follows:
Outstanding Options Exercisable Options ------------------- ------------------ Exercise Number Weighted Average Weighted Average Number Weighted Average Price Range of Options Exercise Price Remaining Life of Options Exercise Price ----------- ---------- -------------- --------------- ---------- ---------------- $1.50 to $4.13 154 $2.16 2.4 years 154 $2.16 $5.13 to $7.63 771 $6.65 6.9 years 224 $6.23 $21.65 to $24.33 542 $22.18 9.2 years 3 $24.05 $25.85 to $29.90 354 $26.77 6.9 years - - $30.55 to $36.25 1,943 $30.76 8.5 years 550 $30.98
In fiscal year 2001, the Company's shareholders approved the 2001 Performance Equity Plan (the "2001 Plan"). The 2001 Plan provides for the granting of incentive and nonqualified stock options to employees of the Company or to others. The 2001 Plan became effective July 12, 2001 and will continue until July 11, 2011 unless terminated sooner. The Company initially reserved 4,000 shares of Common Stock for issuance under the 2001 Plan. The maximum term of an option under the 2001 Plan is ten years. Vesting and option terms are determined in each case by the Compensation and Stock Option Committee of the Board. In fiscal year 2000, the Company's Board adopted the 2000 Performance Equity Plan (the "2000 Plan") which plan was subsequently amended, making it a non-qualified, broad-based plan not subject to shareholder approval. The 2000 Plan provides for the granting of incentive and nonqualified stock options to employees of the Company and to others. The 2000 Plan became effective March 23, 2000 and will continue until March 22, 2010 unless terminated sooner. The Company has reserved 1,025 shares of Common Stock for issuance under the 2000 Plan. The maximum term of an option under the 2000 Plan is ten years. Vesting and option terms are determined in each case by the Compensation and Stock Option Committee of the Board. The maximum term of the option is reduced to five years if an incentive stock option is granted to a holder of more than 10% in the Company. In fiscal year 1998, the Company's shareholders approved the 1997 Directors' Stock Option Plan (the "1997 Directors' Plan") pursuant to which options are granted to non-employee directors of the Company. The 1997 Directors' Plan became effective October 28, 1997 and will continue until F-22 October 28, 2007, unless terminated sooner. Options granted under the 1997 Directors' Plan will become exercisable in full on the first anniversary of the date of grant, provided that the eligible director has not been removed "for cause" as a member of the Board on or prior to the first anniversary of the date of grant. The maximum term of an option under the 1997 Directors' Plan is ten years. The Company reduced the number of shares of Common Stock for issuance under the 1997 Directors' Plan to 450 shares. In connection with the adoption of the 1997 Directors' Plan, the 1995 Directors' Stock Option Plan was terminated. Under all the stock option plans, the stock option exercise price of all the option grants equaled the market price on the date of grant. At December 31, 2002 and 2001, options for 1,330 and 607 shares, respectively, were available for future grant under the Company's various stock option plans. As permitted under SFAS 123, the Company elected to follow APB Opinion 25 and related interpretations in accounting for stock-based awards to employees. Pro-forma information regarding net income is required by SFAS 123. This required information is to be determined as if the Company had accounted for its stock-based awards to employees under the fair value method of that standard. The fair value of options granted during the years ended December 31, 2002, 2001, and 2000, has been estimated at the date of grant using the Black-Scholes stock option pricing model, based on the following weighted average assumptions: FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 ---- ---- ---- Risk free interest rate 4.3% 4.5% 4.8% Expected term 5.5 years 5.2 years 5.7 years Expected volatility 68.6% 69.4% 68.4% It is assumed that no dividend will be paid for the entire term of the option. The weighted-average fair value of options granted in fiscal years 2002, 2001 and 2000 were $14.89, $15.74 and $3.29, respectively. NOTE 16 - INCOME TAXES: The components of the Company's provision for income taxes for the years ended December 31, 2002, 2001 and 2000 are as follows: For the Years Ended December 31, 2002 2001 2000 ---- ---- ---- Current income tax provision: Federal $43,682 $34,807 - State 6,072 5,723 - ------ ------ - 49,754 40,530 - ------ ------ - Deferred income tax benefit: Federal 938 (16,075) - State 107 (2,445) - ------ ------ - $50,799 $22,010 - ====== ====== = F-23 Deferred tax assets and (liabilities) as of December 31, 2002 and 2001 are as follows: Deferred tax asset, net: December 31, December 31, 2002 2001 Current deferred assets: Accounts receivable $29,608 $32,781 Inventories 2,076 1,442 Accrued expenses 913 71 Other 276 191 ------ ------ 32,873 34,485 ------ ------ Non-Current deferred assets: Asset impairment reserve 431 467 Research and development expenses 377 367 Other 487 280 ------ ------ 1,295 1,114 ------ ------ Deferred tax assets 34,168 35,599 ------ ------ Deferred liabilities: Fixed assets (1,900) (1,921) Genpharm distribution agreement (2,957) (3,322) ------ ------ (4,857) (5,243) ------ ------ Net deferred tax asset $29,311 $30,356 ====== ====== The exercise of stock options in fiscal years 2002 and 2001, respectively, resulted in credits to additional paid-in capital of $9,984 and $220. In addition, due to the recognition of the benefit associated with net operating losses prior to fiscal year 2001 relating to employee stock options, $1,561 was credited to additional paid-in capital in fiscal year 2001. The table below provides a reconciliation between the statutory federal income tax rate and the effective rate of income tax expense for each of the periods as follows: For the Years Ended December 31, 2002 2001 2000 ---- ---- ---- Federal statutory tax rate 35% 35% (34%) State tax - net of Federal benefit 4% 3% 2% Other - 3% - (Decrease) increase in valuation reserve for deferred tax assets - (12%) 32% ---- ---- ---- Effective tax rate 39% 29% - ==== ==== ==== NOTE 17 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: LEASES: At December 31, 2002, the Company had minimum rental commitments aggregating $21,054 under non- cancelable operating leases expiring through fiscal year 2012. Amounts payable there under are $2,812 in 2003, $2,927 in 2004, $2,535 in 2005, $2,436 in 2006, $2,140 in 2007 and $8,204 thereafter. Rent expense charged to operations in fiscal years 2002, 2001 and 2000 was $1,513, $611 and $622, respectively. RETIREMENT PLANS: The Company has 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 up to 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. The Company also may contribute additional funds each fiscal year to the Retirement Savings Plan, the amount of which, if any, is determined by the Company's Board of Directors in F-24 its sole discretion. The Company's provisions for these plans and the defined benefit plan discussed below were $1,895 in fiscal year 2002, $559 in fiscal year 2001 and $317 in fiscal year 2000. In fiscal year 1998, the Company merged a defined contribution social security integrated Retirement Plan into the Retirement Savings Plan. In June 2002, the Company made a discretionary contribution to the Retirement Savings Plan of approximately $600 for Plan year 2001. The Company maintains a defined benefit plan (the "Pension Plan") that covers eligible employees, as defined in the Pension Plan. The Pension Plan has been frozen since October 1, 1989. Since the benefits under the Pension Plan are based on the participants' length of service and compensation (subject to Employee Retirement Income Security Act of 1974 and Internal Revenue Service limitations), service costs subsequent to October 1, 1989 are excluded from benefit accruals under the Pension Plan. The funding policy for the Pension Plan is to contribute amounts actuarially determined as necessary to provide sufficient assets to meet the benefit requirements of the Pension Plan retirees. The assets of the Pension Plan are invested in mortgages and bonds. Net pension expense for fiscal years 2002, 2001 and 2000 included the components set forth in the table below. FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 ---- ---- ---- Interest cost $125 $132 $131 Actual return on Pension Plan assets (216) (405) (132) Recognized actuarial loss - 2 3 Net amortization and deferral asset gain 78 290 23 Amortization of initial unrecognized transition obligation 51 51 51 ---- ---- ---- Net pension expense $38 $70 $76 ==== ==== ==== For fiscal years 2002 and 2001, the discount rate used to measure the projected benefit obligation for the Pension Plan was 6.5% and 6.25%, respectively, and the assumed long-term rate of return on plan assets was 6.5% and 7.00% for the same periods. The following provides a reconciliation of the Pension Plan's benefit obligation, assets and funded status. DECEMBER 31, DECEMBER 31, 2002 2001 ---- ---- CHANGE IN BENEFIT OBLIGATION Benefit obligation at the beginning of the year $2,070 $2,020 Interest cost 125 131 Actuarial loss 4 59 Benefits paid (136) (140) ----- ----- Benefit obligation at the end of the year $2,063 $2,070 ===== ===== CHANGE IN PLAN ASSETS Fair value of Pension Plan assets at the beginning of the year $2,051 $1,661 Actual return on assets 216 404 Employer contributions 17 126 Benefits paid (136) (140) ----- ----- Fair value of Pension Plan assets at the end of the year $2,148 $2,051 ===== ===== FUNDED STATUS OF PLAN Over/(under) funded status $85 $(19) Unrecognized net actuarial gain (75) (1) Unrecognized transition obligation 280 332 Adjustment for minimum liability (290) (331) ----- ----- Net recorded pension liability $- $(19) ===== ===== F-25 The Company has no additional minimum pension liability because the Pension Plan Assets exceed the benefit obligation at the end of the year. In accordance with SFAS No. 87, "Employer's Accounting for Pensions", the Company recorded an additional minimum pension liability for under funded plans of $331 for fiscal year 2001 representing the excess of under funded accumulated benefit obligations over previously recorded pension cost liabilities. A corresponding amount is recognized as an intangible asset except to the extent that these additional liabilities exceed related unrecognized prior service cost and net transition obligation, in which case the increase in liabilities would be charged directly to shareholders' equity. 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 believes 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 is also seeking 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' motion for injunctive relief or their claim for attorneys' fees. Par, among others, is a defendant in three lawsuits filed in the 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 defend these lawsuits. While the outcome of litigation is never certain, Par believes that it will prevail in these lawsuits. The Company prevailed against Alpharma USPD, Inc. ("Alpharma") in an interference proceeding before the U.S. Patent and Trademark Office regarding PRX's patents and applications relating to megestrol acetate oral suspension formulations. Additionally, PRX filed suit against Alpharma in the U.S. District Court, Southern District of New York in February 2002. Alpharma has now entered into a consent judgment and order of permanent injunction in this matter. Alpharma is hereby enjoined from making, using, selling or importing its megestrol oral suspension product. The Company is involved in certain other litigation matters, including product liability and patent actions, as well as 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 all of these actions. OTHER MATTERS: In December 2001, the Company made the first payment of a potential equity investment of up to $2,438 to be made over a period of time in HighRapids, Inc. ("HighRapids"), a Delaware corporation and software developer and owner of patented rights to an artificial intelligence generator. Pursuant to an agreement between the Company and HighRapids, effective December 1, 2001, the Company, subject to its ongoing evaluation of HighRapids' operations, has agreed to purchase units, consisting of secured debt, evidenced by 7% secured promissory notes, up to an aggregate principal amount of $2,425 and up to an aggregate 1,330 shares of the common stock of HighRapids. 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 December 31, 2002, the Company had invested $768 of its potential investment. Due to HighRapids current operating losses and the Company's evaluation of its short-term prospects for F-26 profitability, the investment was expensed as incurred in fiscal years 2002 and 2001 and included in other expense on the consolidated statements of operations. As of December 31, 2002, the Company held approximately 30% of the outstanding common stock of HighRapids and had the exclusive right to market to the pharmaceutical industry certain regulatory compliance and laboratory software currently in development. PRX's Chief Executive Officer is the President, Chief Executive Officer and a director of HighRapids. A director of the Company owns shares of HighRapids' common stock (less than 1%) that were acquired prior to the commitment of the Company discussed above. NOTE 18 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA: Selected quarterly financial data for fiscal years 2002 and 2001 is unaudited and included in the table below.
FISCAL QUARTERS ENDED --------------------------------------------------------- MARCH 31, 2002 JUNE 30, 2002 SEPT. 30, 2002 DEC. 31, 2002 -------------- ------------- -------------- ------------- Net sales $80,508 $101,755 $100,237 $99,103 Gross margin 39,275 46,415 46,952 50,648 Net income 20,760 20,380 19,643 18,671 Net income per common share Basic $.65 $.64 $.60 $.57 Diluted $.63 $.62 $.59 $.56
FISCAL QUARTERS ENDED --------------------------------------------------------- (*RESTATED) (*RESTATED) (*RESTATED) MARCH 31, 2001 JUNE 30, 2001 SEPT. 29, 2001 DEC. 31, 2001 -------------- ------------- -------------- ------------- Net sales $25,704 $29,297 $127,924 $88,110 Gross margin 8,428 11,121 51,928 38,252 Net income 1,496 2,204 33,732 16,490 Net income per common share Basic $.05 $.07 $1.09 $.52 Diluted $.05 $.07 $1.04 $.50 (REPORTED) (REPORTED) (REPORTED) Net sales $25,704 $29,297 $99,724 Gross margin 8,428 11,121 41.563 Net income 1,677 2,385 26,850 Net income per common share Basic $.06 $.08 $.87 Diluted $.05 $.08 $.83
Certain items in the selected quarterly financial data for fiscal year 2001 were restated to reflect the quarterly amortization and corresponding tax effect of the value of the exclusive United States distribution rights obtained by the Company through a strategic alliance with Merck KGaA as described in the "Restatement of Results" footnote. In addition, certain items were restated to reflect the reversal of a price protection reserve originally recorded in the third quarter of 2001 related to the Company's fluoxetine (Prozac(R)) product launch in August 2001. The Company had intended to record the effect of the total projected price protection reserve anticipated upon competition entering the market at the end of the Company's exclusivity period in late-January 2002 over the entire exclusivity period based on its net sales in each period. However, because the total projected price protection reserve was based on customer inventories at the end of the exclusivity period, the accounting treatment requires that the reserve be recorded only in the periods in which the remaining inventory would have been sold (see "-Accounts Receivable"). As a result, the Company restated its numbers for the third quarter 2001 (reversing the reserve in such quarter) and recorded the entire price protection reserve in the fourth quarter of 2001 and January 2002. The restatement related to price protection resulted in increases in net sales of $28,200, gross margin of $10,365 and net income of $6,882 in the third quarter of 2001. F-27 NOTE 19 - SUBSEQUENT EVENTS In February 2003, Three Rivers Pharmaceuticals reached a settlement with Schering Corporation ("Schering") in the patent litigation case involving Rebetol(R) brand ribavirin, which is indicated for the treatment of chronic hepatitis. Under the terms of the settlement, Schering has provided a non-exclusive license to Three Rivers for all its U.S. patents relating to this product. In return for this license, Three Rivers has agreed to pay Schering a reasonable royalty based upon net sales of Three Rivers' and Par's generic ribavirin product. The parties were in litigation in the U.S. District Court for the Western District of Pennsylvania. The agreement is subject to the Court's dismissal of the relevant lawsuits. Three Rivers is also currently in litigation with Ribapharm, Inc. regarding certain patents that Ribapharm asserts relate to ribavirin. A trial date in that litigation is scheduled for May 2003. Three Rivers does not have tentative approval from the FDA at this time. F-28
SCHEDULE II PHARMACEUTICAL RESOURCES, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (In Thousands) Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions Balance at charged to Balance at beginning costs and end of Description of period expenses Deductions period ----------- ----------- ---------- ---------- ---------- Allowance for doubtful accounts: Year ended December 31, 2002 $998 $547 $389(a) $1,156 Year ended December 31, 2001 $914 $84 - $998 Year ended December 31, 2000 $773 $141 - $914 Allowance for returns and price adjustments: Year ended December 31, 2002 $46,170 $113,281 $124,350(b) $35,101 Year ended December 31, 2001 $3,040 $79,239 $36,109(b) $46,170 Year ended December 31, 2000 $1,786 $9,801 $8,547(b) $3,040
(a) Write-off of uncollectible accounts. (b) Returns and allowances charged against allowance provided thereof. F-29 EXHIBIT 21 Pharmaceutical Resources, Inc. ------------------------------ List of Subsidiaries -------------------- Percentage of Voting Securities Owned Jurisdiction of by Its Entity Organization Immediate Parent ------ ------------ ------------------- Par Pharmaceutical, Inc. New Jersey 100% PRX Pharmaceuticals, Inc. Delaware 100% PRI-Research, Inc. Delaware 100% Par Pharma Group, Ltd. Delaware 100% Nutriceutical Resources, Inc. New York 100% ParCare Ltd. New York 100% Quad Pharmaceuticals Inc. Indiana 100% Israel Pharmaceutical Resources LP Israel 99% FineTech Ltd. Israel 100% 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 Annual Report of Pharmaceutical Resources, Inc. (the "Company") on Form 10-K for the period ended December 31, 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 March 28, 2003 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 Annual Report of Pharmaceutical Resources, Inc. (the "Company") on Form 10-K for the period ended December 31, 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 March 28, 2003 EX-10 3 pharma_exh10-92.txt EXHIBIT 10.9.2 EXHIBIT 10.9.2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of February 6, 2003, by and between Pharmaceutical Resources, Inc., a New Jersey corporation ("Resources"), and Scott L. Tarriff ("Executive"). R E C I T A L S : A. WHEREAS, Executive is presently employed by Resources in the capacities of Executive Vice President of Resources and President and Chief Executive Officer of Resources's wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par" and, together with Resources, "Employer"), and currently serves as a member of the Board of Directors of Resources (the "Board"); and B. WHEREAS, Employer and Executive desire to cancel and replace Executive's existing employment agreement, dated February 20, 1998, as modified from time to time (the "Existing Employment Agreement"), and enter into this Agreement in order for Executive to continue to perform the duties associated with his positions with Employer on the terms and conditions set forth herein. In consideration of the mutual promises herein contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT. 1.1. GENERAL. Resources hereby employs Executive in the capacities of Executive Vice President of Resources and President and Chief Executive Officer of Par at the compensation rate and benefits set forth in Section 2 hereof for the Employment Term (as defined in Section 3.1 hereof). Executive hereby accepts such employment, subject to the terms and conditions herein contained. In all such capacities, Executive shall perform and carry out such duties and responsibilities as may be assigned to him from time to time by the Board and by the Chief Executive Officer of Resources reasonably consistent with Executive's positions and this Agreement, and shall report to the Board and the Chief Executive Officer of Resources. 1.2. TIME DEVOTED TO POSITION. Executive, during the Employment Term, shall devote substantially all of his business time, attention and skills to the business and affairs of Employer. 1.3. CERTIFICATIONS. Whenever the Chief Executive Officer and/or Chief Financial Officer of Resources are required by law, rule or regulation or requested by any governmental authority or by Resources's or Par's auditors to provide certifications with respect to Resources's or Par's financial statements or filings with the Securities and Exchange Commission or any other governmental authority, Executive shall sign such certifications as may be reasonably requested by such officers, Resources and/or Par, with such exceptions as Executive deems necessary to make such certifications accurate and not misleading. 2. COMPENSATION AND BENEFITS. 2.1. SALARY. At all times Executive is employed hereunder, Employer shall pay to Executive, and Executive shall accept, as full compensation for any and all services rendered and to be rendered by him during such period to Employer in all capacities, including, but not limited to, all services that may be rendered by him to any of Employer's existing subsidiaries, entities and organizations hereafter formed, organized or acquired by Employer, directly or indirectly (each, a "Subsidiary" and collectively, the "Subsidiaries"), the following: (i) a base salary at the annual rate of $300,000, or at such increased rate as the Board (through its Compensation and Exhibit 10.9.2 - Page 1 Stock Option Committee), in its sole discretion, may hereafter from time to time grant to Executive, subject to adjustment in accordance with Section 2.2 hereof (as so adjusted, the "Base Salary"); and (ii) any additional bonus and the benefits set forth in Sections 2.3, 2.4 and 2.5 hereof. The Base Salary shall be payable in accordance with the regular payroll practices of Employer applicable to senior executives, less such deductions as shall be required to be withheld by applicable law and regulations or otherwise. 2.2. ADJUSTMENTS IN BASE SALARY. On each October 1 during the Employment Term, the Base Salary shall be increased by that percentage, if any, by which the Consumer Price Index, Urban Wage Earners and Clerical Workers, for the New York City metropolitan area, published by the United States Government as of the month of September of such year exceeds such Index for the immediately preceding September. 2.3. BONUS. Subject to Section 3.3 hereof, Executive shall be entitled to an annual bonus during the Employment Term in such amount (if any) as determined by the Board based on such performance criteria as it deems appropriate, including, without limitation, Executive's performance and Employer's earnings, financial condition, rate of return on equity and compliance with regulatory requirements. The target amount of Executive's annual bonus shall be fifty (50%) percent of the Base Salary. 2.4. STOCK OPTIONS. Executive shall be entitled to participate in stock option and similar equity plans of Employer. In connection herewith, Executive has been granted options to purchase 200,000 shares of common stock of Resources on terms and conditions set forth in the 2001 Performance Equity Plan and Executive's Stock Option Agreement with Resources. Executive shall be entitled to any additional annual stock option grants provided at the discretion of the Board commencing in January 2004. 2.5. EXECUTIVE BENEFITS. 2.5.1. EXPENSES. Employer shall promptly reimburse Executive for expenses he reasonably incurs in connection with the performance of his duties (including business travel and entertainment expenses) hereunder, all in accordance with Employer's policies with respect thereto as in effect from time to time. 2.5.2. EMPLOYER PLANS. Executive shall be entitled to participate in such employee benefit and welfare plans and programs as Employer may from time to time generally offer or provide to executive officers of Employer or its Subsidiaries, including, but not limited to, participation in life insurance, health and accident, medical plans and programs and profit sharing and retirement plans. 2.5.3. VACATION. Executive shall be entitled to four (4) weeks of paid vacation per calendar year, prorated for any partial year. 2.5.4. AUTOMOBILE. Employer shall provide Executive with an automobile cash allowance commensurate with his titles and positions. 2.5.5. LIFE INSURANCE. Employer shall obtain (PROVIDED, that Executive qualifies on a non-rated basis) a term life insurance policy, the premiums of which shall be borne by Employer and the death benefits of which shall be payable to Executive's estate, or as otherwise directed by Executive, in the amount of $3 million throughout the Employment Term. 3. EMPLOYMENT TERM; TERMINATION. 3.1. EMPLOYMENT TERM. Executive's employment hereunder shall commence on the date hereof and, except as otherwise provided in Section 3.2 hereof, shall continue until the third (3rd) anniversary of the date of this Agreement (the "Initial Term"). Thereafter, this Agreement shall automatically be renewed for successive one-year periods commencing on the third (3rd) anniversary of the date of this Agreement in each subsequent year (the Initial Term, together with any such subsequent employment period(s), being referred to herein as the "Employment Term"), unless Executive or Employer shall have provided a Notice of Termination (as defined in Section 3.4.2 hereof) in respect of its or his election not to renew the Employment Term to the other party at least 180 days prior to such termination. Upon non-renewal of the Employment Term pursuant to this Section 3.1 or termination pursuant to Sections Exhibit 10.9.2 - Page 2 3.2.1 through 3.2.6 hereof, inclusive, Executive shall be released from any duties hereunder (except as set forth in Section 4 hereof) and the obligations of Employer to Executive shall be as set forth in Section 3.3 hereof only. 3.2. EVENTS OF TERMINATION. The Employment Term shall terminate upon the occurrence of any one or more of the following events: 3.2.1. DEATH. In the event of Executive's death, the Employment Term shall terminate on the date of his death. 3.2.2. WITHOUT CAUSE BY EXECUTIVE. Executive may terminate the Employment Term at any time during such Term for any reason whatsoever by giving a Notice of Termination to Employer. The Date of Termination pursuant to this Section 3.2.2 shall be thirty (30) days after the Notice of Termination is given. 3.2.3. DISABILITY. In the event of Executive's Disability (as hereinafter defined), Employer may, at its option, terminate the Employment Term by giving a Notice of Termination to Executive. The Notice of Termination shall specify the Date of Termination, which date shall not be earlier than thirty (30) days after the Notice of Termination is given. For purposes of this Agreement, "Disability" means disability as defined in any long-term disability insurance policy provided by Employer and insuring Executive, or, in the absence of any such policy, the inability of Executive for 180 days in any twelve (12) month period to substantially perform his duties hereunder as a result of a physical or mental illness, all as determined in good faith by the Board. 3.2.4. CAUSE. Employer may, at its option, terminate the Employment Term for "Cause" based on objective factors determined in good faith by a majority of the Board as set forth in a Notice of Termination to Executive specifying the reasons for termination and the failure of the Executive to cure the same within ten (10) days after Employer shall have given the Notice of Termination; PROVIDED, HOWEVER, that in the event the Board in good faith determines that the underlying reasons giving rise to such determination cannot be cured, then the ten- (10) day period shall not apply and the Employment Term shall terminate on the date the Notice of Termination is given. For purposes of this Agreement, "Cause" shall mean (i) Executive's conviction of, guilty or no contest plea to, or confession of guilt of, a felony or other crime involving moral turpitude; (ii) an act or omission by Executive in connection with his employment that constitutes fraud, criminal misconduct, breach of fiduciary duty, dishonesty, gross negligence, malfeasance, willful misconduct or other conduct that is materially harmful or detrimental to Employer; (iii) a material breach by Executive of this Agreement; (iv) continuing failure to perform such duties as are assigned to Executive by Employer in accordance with this Agreement, other than a failure resulting from a Disability; (v) Executive's knowingly taking any action on behalf of Employer or any of its affiliates without appropriate authority to take such action; (vi) Executive's knowingly taking any action in conflict of interest with Employer or any of its affiliates given Executive's position with Employer; and/or (vii) the commission of an act of personal dishonesty by Executive that involves personal profit in connection with Employer. 3.2.5. WITHOUT CAUSE BY EMPLOYER. Employer may, at its option, terminate the Employment Term for any reason or no reason whatsoever (other than for the reasons set forth elsewhere in this Section 3.2) by giving a Notice of Termination to Executive. The Notice of Termination shall specify the Date of Termination, which date shall not be earlier than thirty (30) days after the Notice of Termination is given. 3.2.6. EMPLOYER'S MATERIAL BREACH. Executive may, at his option, terminate the Employment Term upon Employer's material breach of this Agreement and the continuation of such breach for more than ten (10) days after written demand for cure of such breach is given to Employer by Executive (which demand shall identify the manner in which Employer has materially breached this Agreement). Employer's material breach of this Agreement shall mean (i) the failure of Employer to make any payment that it is required to make hereunder to Executive when such payment is due or within two (2) business days thereafter; (ii) the assignment to Executive, without Executive's express written consent, of duties inconsistent with his positions, responsibilities and status with Employer, or a change in Executive's reporting responsibilities, titles or offices or any plan, act, scheme or design to constructively terminate the Executive, or any removal of Executive from his positions with Employer, except in connection with the termination of the Exhibit 10.9.2 - Page 3 Employment Term by Employer for Cause, without Cause or Disability or as a result of Executive's death or voluntary resignation or by Executive other than pursuant to this Section 3.2.6; (iii) a reduction by Employer in Executive's Base Salary; or (iv) a permanent reassignment of Executive's primary work location, without the consent of Executive, to a location more than 35 miles from Employer's executive offices in Woodcliff Lake, New Jersey. 3.3. CERTAIN OBLIGATIONS OF EMPLOYER FOLLOWING TERMINATION OF THE EMPLOYMENT TERM. Following termination of the Employment Term under the circumstances described below, Employer shall pay to Executive or his estate, as the case may be, the following compensation and provide the following benefits in full satisfaction and final settlement of any and all claims and demands that Executive now has or hereafter may have hereunder against Employer. In connection with Executive's receipt of any or all monies and benefits to be received pursuant to this Section 3.3, Executive shall not have a duty to seek subsequent employment during the period in which he is receiving severance payments and the Severance Amount (as defined in Section 3.3.2 hereof) shall not be reduced solely as a result of Executive's subsequent employment by an entity other than Employer. 3.3.1. FOR CAUSE. In the event that the Employment Term is terminated by Employer for Cause, Employer shall pay to Executive, in a single lump-sum, an amount equal to any unpaid but earned Base Salary through the Date of Termination. 3.3.2. WITHOUT CAUSE BY EMPLOYER; MATERIAL BREACH BY EMPLOYER; ELECTION NOT TO RENEW BY EMPLOYER. In the event that the Employment Term is terminated by Employer pursuant to Section 3.2.5 hereof or by Executive pursuant to Section 3.2.6 hereof or Employer elects not to renew this Agreement at any time pursuant to Section 3.1 hereof, Employer shall pay to Executive, subject to Executive's continued compliance with the terms of Section 4 hereof, an amount equal to (i) if such termination is effective (subject to clause (ii) of this Section 3.3.2) before July 15, 2003, two times the Base Salary in effect at such applicable time, or (ii) if such termination is effective after July 15, 2003 or at any time after a Change of Control (as defined in Section 3.4.1 hereof) of Employer, $1 million ((i) or (ii), as applicable, the "Severance Amount"). Any payments made in accordance with this Section 3.3.2 shall be made in twelve (12) equal installments over the course of one (1) year from the Date of Termination in accordance with Employer's regular payroll practices. 3.3.3 WITHOUT CAUSE BY EXECUTIVE; ELECTION NOT TO RENEW BY EXECUTIVE. In the event that the Employment Term is terminated by Executive pursuant to Section 3.2.2 hereof or Executive elects not to renew this Agreement at any time pursuant to Section 3.1 hereof, Employer shall pay to Executive, in a single lump-sum, an amount equal to any unpaid but earned Base Salary through the Date of Termination. 3.3.4. DEATH, DISABILITY. In the event that the Employment Term is terminated by reason of Executive's death pursuant to Section 3.2.1 hereof or by Employer by reason of Executive's Disability pursuant to Section 3.2.3 hereof, Employer shall pay to Executive, subject to, in the case of Disability, Executive's continued compliance with the terms of Section 4 hereof, the Severance Amount, less any life insurance and/or disability insurance benefits received by Executive or his estate pursuant to insurance policies provided by Employer (including pursuant to Section 2.5.5 hereof), payable in accordance with Section 3.3.2 hereof. 3.3.5. POST-EMPLOYMENT TERM BENEFITS. In the event Executive is terminated pursuant to Sections 3.2.1 through 3.2.6 hereof, inclusive, or either Employer or Executive elects not to renew this Agreement pursuant to Section 3.1 hereof, Employer shall reimburse Executive for any unpaid expenses pursuant to Section 2.5.1 hereof and if Executive is terminated pursuant to Sections 3.2.3, 3.2.5 or 3.2.6 hereof or Employer elects not to renew this Agreement pursuant to Section 3.1 hereof, Employer shall pay, on behalf of Executive, for a period equal to twenty-four (24) months from the Date of Termination (the "Benefits Period"), subject to Executive's continued compliance with the terms of Section 4 hereof, all life insurance, medical, health and accident, and disability plans and programs in which Executive was entitled to participate immediately prior to the Date of Termination; PROVIDED, that Executive's continued participation is legally possible under the general terms and provisions of such plans and programs; and PROVIDED, FURTHER, that in the event Executive is entitled to equal or comparable benefits from a subsequent employer during the Benefits Period, Employer's obligation with respect thereto pursuant to this Section 3.3.5 shall end as of such date. In the event that Executive's participation in any such plan or program is barred, Employer, at its sole cost and expense, shall use its commercially reasonable efforts to provide Executive with benefits substantially similar to those that Exhibit 10.9.2 - Page 4 Executive was entitled to receive under such plans and programs for the remainder of the Benefits Period. 3.3.6. STOCK OPTIONS. (a) If, within twelve (12) months following a Change of Control (as defined in Section 3.4.1 hereof) of Employer, the Employment Term is terminated other than for Cause, then Executive (or his estate) shall have twenty-four (24) months from the date of such event to exercise such stock options; PROVIDED, that the relevant stock option plan remains in effect and such stock options shall not have otherwise expired in accordance with the terms thereof. In connection therewith, Employer agrees to use commercially reasonable efforts to amend Executive's Stock Option Agreements if necessary to effectuate the provisions of this Section 3.3.6(a). (b) In the event the Employment Term is terminated (i) by Employer pursuant to Section 3.2.5 hereof and the reason for such termination is not related to the performance of Executive in his duties with respect to Employer, or (ii) by Executive pursuant to Section 3.2.6 hereof, then all stock options theretofore granted to Executive shall thereupon vest and Executive shall have twenty-four (24) months from such date to exercise such options; PROVIDED, that the relevant stock option plan remains in effect and such stock options shall not have otherwise expired in accordance with the terms thereof. In connection therewith, Employer agrees to use commercially reasonable efforts to amend Executive's Stock Option Agreements if necessary to effectuate the provisions of this Section 3.3.6(b). 3.4. DEFINITIONS. 3.4.1. "CHANGE OF CONTROL" DEFINED. A "Change of Control" of Employer means (i) the approval by the stockholders of Resources of the sale, lease, exchange or other transfer (other than pursuant to internal reorganization) by Resources or Par of all or substantially all of its respective assets to a single purchaser or to a group of associated purchasers; (ii) the first purchase of shares of equity securities of Par or Resources pursuant to a tender offer or exchange offer (other than an offer by Par or Resources) for at least fifteen (15%) percent of the equity securities of Par or Resources; (iii) the approval by the stockholders of Resources of an agreement for a merger or consolidation in which neither Par nor Resources shall survive as an independent, publicly-owned corporation; (iv) the acquisition (including by means of a merger) by a single purchaser or a group of associated purchasers of securities of Par or Resources from either Par or Resources or any third party representing thirty-five (35%) percent or more of the combined voting power of Par's or Resources's then outstanding equity securities in one or a related series of transactions (other than pursuant to an internal reorganization) or (v) the change of the membership of a majority of the Board during any period of two (2) consecutive years, unless the election, or the nomination for election by Resources's stockholders, of each new director was approved by a vote of at least two-thirds of the directors of the Board still in office who were directors of Resources at the beginning of the period. 3.4.2. "NOTICE OF TERMINATION" DEFINED. "Notice of Termination" means a written notice that indicates the specific termination provision relied upon by Employer or Executive and, except in the case of termination pursuant to Sections 3.2.1, 3.2.2 or 3.2.5 hereof, that sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employment Term under the termination provision so indicated. 3.4.3. "DATE OF TERMINATION" DEFINED. "Date of Termination" means such date as the Employment Term is expired if not renewed or terminated in accordance with Sections 3.1 or 3.2 hereof. 4. CONFIDENTIALITY AND NONSOLICITATION; PROPERTY RIGHTS. 4.1. "CONFIDENTIAL INFORMATION" DEFINED. "Confidential Information" means any and all information (oral or written) relating to Employer or any Subsidiary or any entity controlling, controlled by, or under common control with Employer or any Subsidiary or any of their respective activities, including, but not limited to, information relating to: technology, research, test procedures and results, machinery and equipment; Exhibit 10.9.2 - Page 5 manufacturing processes; financial information; products; identity and description of materials and services used; purchasing; costs; pricing; customers and prospects; advertising, promotion and marketing; and selling, servicing and information pertaining to any governmental investigation, except such information which becomes public, other than as a result of a breach of the provisions of Section 4.2 hereof. 4.2. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Executive shall not at any time (other than as may be required or appropriate in connection with the performance by him of his duties hereunder), directly or indirectly, use, communicate, disclose or disseminate any Confidential Information in any manner whatsoever (except as may be required under legal process by subpoena or other court order). 4.3. CERTAIN ACTIVITIES. Executive shall not, while employed by Resources and for a period of two (2) years following the Date of Termination, directly or indirectly, hire, offer to hire, entice away or in any other manner persuade or attempt to persuade any officer, employee, agent, lessor, lessee, licensor, licensee or supplier of Employer or any of its Subsidiaries to discontinue or alter his or its relationship with Employer or any of its Subsidiaries. 4.4. NON-COMPETITION. Executive shall not, while employed by Resources and for a period of one (1) year following the Date of Termination, engage or participate in, directly or indirectly (whether as an officer, director, employee, partner, consultant, equityholder, lender or otherwise), any business that manufactures, markets or sells products that compete with any product of Employer that is significant to Employer's business based on sales and/or profitability of any such product as of the Date of Termination, unless the Employment Term is terminated by Employer pursuant to Section 3.2.5 hereof or by Executive properly pursuant to Section 3.2.6 hereof. Nothing herein shall prohibit Executive from being a passive owner of not more than one (1%) percent of any publicly-traded class of capital stock of any entity engaged in a competing business. 4.5. PROPERTY RIGHTS; ASSIGNMENT OF INVENTIONS. With respect to information, inventions and discoveries or any interest in any copyright and/or other property right developed, made or conceived of by Executive, either alone or with others, at any time during his employment by Employer and whether or not within working hours, arising out of such employment or pertinent to any field of business or research in which, during such employment, Employer is engaged or (if such is known to or ascertainable by Executive) is considering engaging, Executive hereby agrees: (a) that all such information, inventions and discoveries or any interest in any copyright and/or other property right, whether or not patented or patentable, shall be and remain the exclusive property of Employer; (b) to disclose promptly to an authorized representative of Employer all such information, inventions and discoveries or any copyright and/or other property right and all information in Executive's possession as to possible applications and uses thereof; (c) not to file any patent application relating to any such invention or discovery except with the prior written consent of an authorized officer of Employer (other than Executive); (d) that Executive hereby waives and releases any and all rights Executive may have in and to such information, inventions and discoveries, and hereby assigns to Executive and/or its nominees all of Executive's right, title and interest in them, and all Executive's right, title and interest in any patent, patent application, copyright or other property right based thereon. Executive hereby irrevocably designates and appoints Employer and each of its duly authorized officers and agents as his agent and attorney-in-fact to act for him and on his behalf and in his stead to execute and file any document and to do all other lawfully permitted acts to further the prosecution, issuance and enforcement of any such patent, patent application, copyright or other property right with the same force and effect as if executed and delivered by Executive; and (e) at the request of Employer, and without expense to Executive, to execute such documents and perform such other acts as Employer deems necessary or appropriate, for Employer to obtain patents on such Exhibit 10.9.2 - Page 6 inventions in a jurisdiction or jurisdictions designated by Employer, and to assign to Employer or its designee such inventions and any and all patent applications and patents relating thereto. 4.6. INJUNCTIVE RELIEF. The parties hereby acknowledge and agree that (a) Employer will be irreparably injured in the event of a breach by Executive of any of his obligations under this Section 4; (b) monetary damages will not be an adequate remedy for any such breach; (c) Employer will be entitled to injunctive relief, in addition to any other remedy which it may have, in the event of any such breach; and (d) the existence of any claims that Executive may have against Employer, whether under this Agreement or otherwise, will not be a defense to the enforcement by Employer of any of its rights under this Section 4. 4.7. NON-EXCLUSIVITY AND SURVIVAL. The covenants of Executive contained in this Section 4 are in addition to, and not in lieu of, any obligations that Executive may have with respect to the subject matter hereof, whether by contract, as a matter of law or otherwise, and such covenants and their enforceability shall survive any termination of the Employment Term by either party and any investigation made with respect to the breach thereof by Employer at any time. 5. MISCELLANEOUS PROVISIONS. 5.1. SEVERABILITY. If, in any jurisdiction, any term or provision hereof is determined to be invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired; (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction; and (c) the invalid or unenforceable term or provision shall, for purposes of such jurisdiction, be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. 5.2. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement (and all signatures need not appear on any one counterpart), and this Agreement shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. 5.3. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed duly given upon receipt when delivered by hand, overnight delivery or telecopy (with confirmed delivery), or three (3) business days after posting, when delivered by registered or certified mail or private courier service, postage prepaid, return receipt requested, as follows: If to Employer, to: Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, New York 10977 Attention: Vice President - Finance and Administration Telecopy No.: (845) 425-7922 Copy to: Stephen A. Ollendorff, Esq. Whitney John Smith, Esq. Kirkpatrick & Lockhart LLP 599 Lexington Avenue New York, New York 10022 Telecopy No.: (212) 536-3901 Exhibit 10.9.2 - Page 7 If to Executive, to: Scott L. Tarriff c/o Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, New York 10977 or to such other address(es) as a party hereto shall have designated by like notice to the other parties hereto. 5.4. AMENDMENT. No provision of this Agreement may be modified, amended, waived or discharged in any manner except by a written instrument executed by both Resources and Executive. 5.5. ENTIRE AGREEMENT. This Agreement and, with respect to Section 3.3.6 hereof, Executive's Stock Option Agreements and the governing stock option plans constitute the entire agreement of the parties hereto with respect to the subject matter hereof, and supersede all prior agreements and understandings of the parties hereto, oral or written, including, but not limited to, the Existing Employment Agreement and that certain Trade Secret, Non-Disclosure and Restrictive Covenant Agreement, dated as of October 19, 1999 (the "Restrictive Covenant Agreement"), with respect to the subject matter hereof. Executive and Employer hereby agree that each of the Existing Employment Agreement and the Restrictive Covenant Agreement is hereby superseded and of no further force and effect, and that this Agreement shall be effective as of the date hereof. In the event of any conflict between Section 3.3.6 hereof and Executive's Stock Option Agreements and the governing stock option plans, Section 3.3.6 shall govern. 5.6. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be wholly performed therein. 5.7. HEADINGS. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 5.8. BINDING EFFECT; SUCCESSORS AND ASSIGNS. Executive may not delegate any of his duties or assign his rights hereunder. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. Employer shall require any successor (whether direct or indirect and whether by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer, by an agreement in form and substance reasonably satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform if no such succession had taken place. 5.9. WAIVER, ETC. The failure of either of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Agreement or any provision hereof or the right of either of the parties hereto thereafter to enforce each and every provision of this Agreement. No waiver of any breach of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party against whom or which enforcement of such waiver is sought, and no waiver of any such breach shall be construed or deemed to be a waiver of any other or subsequent breach. 5.10. CAPACITY, ETC. Executive and Employer hereby represent and warrant to the other that, as the case may be: (a) he or it has full power, authority and capacity to execute and deliver this Agreement, and to perform his or its obligations hereunder; (b) such execution, delivery and performance shall not (and with the giving of notice or lapse of time or both would not) result in the breach of any agreements or other obligations to which he or it is a party or he or it is otherwise bound; and (c) this Agreement is his or its valid and binding obligation in accordance with its terms. 5.11. ENFORCEMENT; JURISDICTION. If any party institutes legal action to enforce or interpret the terms and conditions of this Agreement, the prevailing party shall be awarded reasonable attorneys' fees at all trial and appellate levels, and the expenses and costs incurred by such prevailing party in connection therewith. Any legal action, suit or proceeding, in equity or at law, arising out of or relating to this Agreement shall be instituted exclusively in the State or Federal courts located in the State and County of New York and each party agrees not to assert, by way of motion, as a Exhibit 10.9.2 - Page 8 defense or otherwise, in any such action, suit or proceeding, any claim that such party is not subject personally to the jurisdiction of any such court, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or should be transferred, or that this Agreement or the subject matter hereof may not be enforced in or by any such court. Each party further irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against any party if given personally or by registered or certified mail, return receipt requested or by any other means of mail that requires a signed receipt, postage prepaid, mailed to such party as herein provided. Nothing herein contained shall be deemed to affect or limit the right of any party to serve process in any other manner permitted by applicable law. 5.12. ARBITRATION. (a) Any dispute under Section 3 hereof, including, but not limited to, the determination by the Board of a termination for Cause pursuant to Section 3.2.4 hereof, or in respect of the breach thereof shall be settled by arbitration in the Borough of Manhattan, City of New York. The arbitration shall be accomplished in the following manner. Either party may serve upon the other party written demand that the dispute, specifying the nature thereof, shall be submitted to arbitration. Within ten (10) days after such demand is given in accordance with Section 5.3 hereof, each of the parties shall designate an arbitrator and provide written notice of such appointment upon the other party. If either party fails within the specified time to appoint such arbitrator, the other party shall be entitled to appoint both arbitrators. The two (2) arbitrators so appointed shall appoint a third arbitrator. If the two arbitrators appointed fail to agree upon a third arbitrator within ten (10) days after their appointment, then an application may be made by either party hereto, upon written notice to the other party, to the American Arbitration Association (the "AAA"), or any successor thereto, or if the AAA or its successor fails to appoint a third arbitrator within ten (10) days after such request, then either party may apply, with written notice to the other, to the Supreme Court of the State of New York, New York County, for the appointment of a third arbitrator, and any such appointment so made shall be binding upon both parties hereto. (b) The decision of the arbitrators shall be final and binding upon the parties. The party against whom the award is rendered (the "non-prevailing party") shall pay all fees and expenses incurred by the prevailing party in connection with the arbitration (including fees and disbursements of the prevailing party's counsel), as well as the expenses of the arbitration proceeding. The arbitrators shall determine in their decision and award which of the parties is the prevailing party, which is the non-prevailing party, the amount of the fees and expenses of the prevailing party and the amount of the arbitration expenses. The arbitration shall be conducted, to the extent consistent with this Section 5.12, in accordance with the then prevailing rules of commercial arbitration of the AAA or its successor. The arbitrators shall have the right to retain and consult experts and competent authorities skilled in the matters under arbitration, but all consultations shall be made in the presence of both parties, who shall have the full right to cross-examine the experts and authorities. The arbitrators shall render their award, upon the concurrence of at least two of their number, not later than thirty (30) days after the appointment of the third arbitrator. The decision and award shall be in writing, and counterpart copies shall be delivered to each of the parties. In rendering an award, the arbitrators shall have no power to modify any of the provisions of this Agreement, and the jurisdiction of the arbitrators is expressly limited accordingly. Judgment may be entered on the award of the arbitrators and may be enforced in any court having jurisdiction. [SIGNATURE PAGE FOLLOWS] Exhibit 10.9.2 - Page 9 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. PHARMACEUTICAL RESOURCES, INC. By: /s/ Kenneth I. Sawyer ----------------------------- Name: Kenneth I. Sawyer Title: Chief Executive Officer /s/ Scott L. Tarriff -------------------- Scott L. Tarriff Exhibit 10.9.2 - Page 10 EX-10 4 pharma_exh10-93.txt EXHIBIT 10.9.3 EXHIBIT 10.9.3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of February 6, 2003, by and between Pharmaceutical Resources, Inc., a New Jersey corporation ("Resources"), and Dennis O'Connor ("Executive"). R E C I T A L S : A. WHEREAS, Executive is presently employed by Resources in the capacities of Vice President, Chief Financial Officer and Secretary of Resources and Vice President, Chief Financial Officer and Secretary of Resources's wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par" and, together with Resources, "Employer"); and B. WHEREAS, Resources and Executive desire to cancel and replace Executive's existing severance agreement, dated October 23, 1996, as modified from time to time (the "Severance Agreement"), and enter into this Agreement in order for Executive to continue to perform the duties associated with his positions with Employer on the terms and conditions set forth herein. In consideration of the mutual promises herein contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT. 1.1. GENERAL. Resources hereby employs Executive in the capacities of Vice President, Chief Financial Officer and Secretary of Resources and Vice President, Chief Financial Officer and Secretary of Par at the compensation rate and benefits set forth in Section 2 hereof for the Employment Term (as defined in Section 3.1 hereof). Executive hereby accepts such employment, subject to the terms and conditions herein contained. In all such capacities, Executive shall perform and carry out such duties and responsibilities as may be assigned to him from time to time by the Board, by the Chief Executive Officer of Resources and by the Chief Executive Officer of Par reasonably consistent with Executive's positions and this Agreement, and shall report to the Board, the Chief Executive Officer of Resources and the Chief Executive Officer of Par. 1.2. TIME DEVOTED TO POSITION. Executive, during the Employment Term, shall devote substantially all of his business time, attention and skills to the business and affairs of Employer. 1.3. CERTIFICATIONS. Whenever the Chief Executive Officer of Resources or the Chief Executive Officer of Par is required by law, rule or regulation or requested by any governmental authority or by Resources's or Par's auditors to provide certifications with respect to Resources or Par's financial statements or filings with the Securities and Exchange Commission or any other governmental authority, Executive shall sign such certifications as may be reasonably requested by the Chief Executive Officer of Resources, the Chief Executive Officer of Par and/or Employer, with such exceptions as Executive deems necessary to make such certifications accurate and not misleading. 2. COMPENSATION AND BENEFITS. 2.1. SALARY. At all times Executive is employed hereunder, Employer shall pay to Executive, and Executive shall accept, as full compensation for any and all services rendered and to be rendered by him during such period to Employer in all capacities, including, but not limited to, all services that may be rendered by him to any of Employer's existing subsidiaries, entities and organizations hereafter formed, organized or acquired by Employer, directly or indirectly (each, a "Subsidiary" and collectively, the "Subsidiaries"), the following: (i) a base salary at the annual rate of $210,000, or at such increased rate as the Board (through its Compensation and Exhibit 10.9.3 - Page 1 Stock Option Committee), in its sole discretion, may hereafter from time to time grant to Executive, subject to adjustment in accordance with Section 2.2 hereof (as so adjusted, the "Base Salary"); and (ii) any additional bonus and the benefits set forth in Sections 2.3, 2.4 and 2.5 hereof. The Base Salary shall be payable in accordance with the regular payroll practices of Employer applicable to senior executives, less such deductions as shall be required to be withheld by applicable law and regulations or otherwise. 2.2. ADJUSTMENTS IN BASE SALARY. On each October 1 during the Employment Term, the Base Salary shall be increased by that percentage, if any, by which the Consumer Price Index, Urban Wage Earners and Clerical Workers, for the New York City metropolitan area, published by the United States Government as of the month of September of such year exceeds such Index for the immediately preceding September. 2.3. BONUS. Subject to Section 3.3 hereof, Executive shall be entitled to an annual bonus during the Employment Term in such amount (if any) as determined by the Board based on such performance criteria as it deems appropriate, including, without limitation, Executive's performance and Employer's earnings, financial condition, rate of return on equity and compliance with regulatory requirements. 2.4. STOCK OPTIONS. Executive shall be entitled to participate in stock option and similar equity plans of Employer. In connection herewith, Executive has been granted options to purchase 25,000 shares of common stock of Resources on terms and conditions set forth in the 2001 Performance Equity Plan and Executive's Stock Option Agreement with Resources. 2.5. EXECUTIVE BENEFITS. 2.5.1. EXPENSES. Employer shall promptly reimburse Executive for expenses he reasonably incurs in connection with the performance of his duties (including business travel and entertainment expenses) hereunder, all in accordance with Employer's policies with respect thereto as in effect from time to time. 2.5.2. EMPLOYER PLANS. Executive shall be entitled to participate in such employee benefit and welfare plans and programs as Employer may from time to time generally offer or provide to executive officers of Employer or its Subsidiaries, including, but not limited to, participation in life insurance, health and accident, medical plans and programs and profit sharing and retirement plans. 2.5.3. VACATION. Executive shall be entitled to four (4) weeks of paid vacation per calendar year, prorated for any partial year. 2.5.4. AUTOMOBILE. Employer shall provide Executive with an automobile cash allowance commensurate with his titles and positions. 2.5.5. LIFE INSURANCE. Employer shall obtain (PROVIDED, that Executives qualifies on a non-rated basis) a term life insurance policy, the premiums of which shall be borne by Employer and the death benefits of which shall be payable to Executive's estate, or as otherwise directed by Executive, in the amount of $1 million throughout the Employment Term. 3. EMPLOYMENT TERM; TERMINATION. 3.1. EMPLOYMENT TERM. Executive's employment hereunder shall commence on the date hereof and, except as otherwise provided in Section 3.2 hereof, shall continue until the third (3rd) anniversary of the date of this Agreement (the "Initial Term"). Thereafter, this Agreement shall automatically be renewed for successive one-year periods commencing on the third (3rd) anniversary of the date of this Agreement (the Initial Term, together with any such subsequent employment period(s), being referred to herein as the "Employment Term"), unless Executive or Employer shall have provided a Notice of Termination (as defined in Section 3.4.2 hereof) in respect of its or his election not to renew the Employment Term to the other party at least 90 days prior to such termination. Upon non-renewal of the Employment Term pursuant to this Section 3.1 or termination pursuant to Sections 3.2.1 through 3.2.6 hereof, inclusive, Executive shall be released from any duties hereunder (except as set Exhibit 10.9.3 - Page 2 forth in Section 4 hereof) and the obligations of Employer to Executive shall be as set forth in Section 3.3 hereof only. 3.2. EVENTS OF TERMINATION. The Employment Term shall terminate upon the occurrence of any one or more of the following events: 3.2.1. DEATH. In the event of Executive's death, the Employment Term shall terminate on the date of his death. 3.2.2. WITHOUT CAUSE BY EXECUTIVE. Executive may terminate the Employment Term at any time during such Term for any reason whatsoever by giving a Notice of Termination to Employer. The Date of Termination pursuant to this Section 3.2.2 shall be thirty (30) days after the Notice of Termination is given. 3.2.3. DISABILITY. In the event of Executive's Disability (as hereinafter defined), Employer may, at its option, terminate the Employment Term by giving a Notice of Termination to Executive. The Notice of Termination shall specify the Date of Termination, which date shall not be earlier than thirty (30) days after the Notice of Termination is given. For purposes of this Agreement, "Disability" means disability as defined in any long-term disability insurance policy provided by Employer and insuring Executive, or, in the absence of any such policy, the inability of Executive for 180 days in any twelve (12) month period to substantially perform his duties hereunder as a result of a physical or mental illness, all as determined in good faith by the Board. 3.2.4. CAUSE. Employer may, at its option, terminate the Employment Term for "Cause" based on objective factors determined in good faith by a majority of the Board as set forth in a Notice of Termination to Executive specifying the reasons for termination and the failure of the Executive to cure the same within ten (10) days after Employer shall have given the Notice of Termination; PROVIDED, HOWEVER, that in the event the Board in good faith determines that the underlying reasons giving rise to such determination cannot be cured, then the ten- (10) day period shall not apply and the Employment Term shall terminate on the date the Notice of Termination is given. For purposes of this Agreement, "Cause" shall mean (i) Executive's conviction of, guilty or no contest plea to, or confession of guilt of, a felony or other crime involving moral turpitude; (ii) an act or omission by Executive in connection with his employment that constitutes fraud, criminal misconduct, breach of fiduciary duty, dishonesty, gross negligence, malfeasance, willful misconduct or other conduct that is materially harmful or detrimental to Employer; (iii) a material breach by Executive of this Agreement; (iv) continuing failure to perform such duties as are assigned to Executive by Employer in accordance with this Agreement, other than a failure resulting from a Disability; (v) Executive's knowingly taking any action on behalf of Employer or any of its affiliates without appropriate authority to take such action; (vi) Executive's knowingly taking any action in conflict of interest with Employer or any of its affiliates given Executive's position with Employer; and/or (vii) the commission of an act of personal dishonesty by Executive that involves personal profit in connection with Employer. 3.2.5. WITHOUT CAUSE BY EMPLOYER. Employer may, at its option, terminate the Employment Term for any reason or no reason whatsoever (other than for the reasons set forth elsewhere in this Section 3.2) by giving a Notice of Termination to Executive. The Notice of Termination shall specify the Date of Termination, which date shall not be earlier than thirty (30) days after the Notice of Termination is given. 3.2.6. EMPLOYER'S MATERIAL BREACH. Executive may, at his option, terminate the Employment Term upon Employer's material breach of this Agreement and the continuation of such breach for more than ten (10) days after written demand for cure of such breach is given to Employer by Executive (which demand shall identify the manner in which Employer has materially breached this Agreement). Employer's material breach of this Agreement shall mean (i) the failure of Employer to make any payment that it is required to make hereunder to Executive when such payment is due or within two (2) business days thereafter; (ii) the assignment to Executive, without Executive's express written consent, of duties inconsistent with his positions, responsibilities and status with Employer, or a change in Executive's reporting responsibilities, titles or offices or any plan, act, scheme or design to constructively terminate the Executive, or any removal of Executive from his positions with Employer, except in connection with the termination of the Employment Term by Employer for Cause, without Cause or Disability or as a Exhibit 10.9.3 - Page 3 result of Executive's death or voluntary resignation or by Executive other than pursuant to this Section 3.2.6; (iii) a reduction by Employer in Executive's Base Salary; or (iv) a permanent reassignment of Executive's primary work location, without the consent of Executive, to a location more than 35 miles from Employer's executive offices in Woodcliff Lake, New Jersey. 3.3. CERTAIN OBLIGATIONS OF EMPLOYER FOLLOWING TERMINATION OF THE EMPLOYMENT TERM. Following termination of the Employment Term under the circumstances described below, Employer shall pay to Executive or his estate, as the case may be, the following compensation and provide the following benefits in full satisfaction and final settlement of any and all claims and demands that Executive now has or hereafter may have hereunder against Employer. In connection with Executive's receipt of any or all monies and benefits to be received pursuant to this Section 3.3, Executive shall not have a duty to seek subsequent employment during the period in which he is receiving severance payments and the Severance Amount (as defined in Section 3.3.2 hereof) shall not be reduced solely as a result of Executive's subsequent employment by an entity other than Employer. 3.3.1. FOR CAUSE. In the event that the Employment Term is terminated by Employer for Cause, Employer shall pay to Executive, in a single lump-sum, an amount equal to any unpaid but earned Base Salary through the Date of Termination. 3.3.2. WITHOUT CAUSE BY EMPLOYER; MATERIAL BREACH BY EMPLOYER; ELECTION NOT TO RENEW BY Employer. In the event that the Employment Term is terminated by Employer pursuant to Section 3.2.5 hereof or by Executive pursuant to Section 3.2.6 hereof or Employer elects not to renew this Agreement pursuant to Section 3.1 hereof, Employer shall pay to Executive, subject to Executive's continued compliance with the terms of Section 4 hereof, an amount equal to (i) if such termination is effective (subject to clause (ii) of this Section 3.3.2) before July 15, 2003, one-and-a-half (1.5) times the Base Amount, or (ii) if such termination is effective after July 15, 2003 or at any time after a Change of Control (as defined in Section 3.4.1 hereof) of Employer, two (2) times the Base Amount ((i) or (ii), as applicable, the "Severance Amount"). For purposes hereof, "Base Amount" shall mean the Base Salary in effect at such applicable time plus, if Executive's termination is not a result of, in whole or in part, Executive's performance in respect of his duties hereunder, the amount of Executive's last annual cash bonus pursuant to Section 2.3 hereof. Any payments made in accordance with this Section 3.3.2 shall be made in twelve (12) equal installments over the course of one (1) year from the Date of Termination in accordance with Employer's regular payroll practices. 3.3.3 WITHOUT CAUSE BY EXECUTIVE; ELECTION NOT TO RENEW BY EXECUTIVE. In the event that the Employment Term is terminated by Executive pursuant to Section 3.2.2 hereof or Executive elects not to renew this Agreement pursuant to Section 3.1 hereof, Employer shall pay to Executive, in a single lump-sum, an amount equal to any unpaid but earned Base Salary through the Date of Termination. 3.3.4. DEATH, DISABILITY. In the event that the Employment Term is terminated by reason of Executive's death pursuant to Section 3.2.1 hereof or by Employer by reason of Executive's Disability pursuant to Section 3.2.3 hereof, Employer shall pay to Executive, subject to, in the case of Disability, Executive's continued compliance with Section 4 hereof, the Severance Amount, less any life insurance and/or disability insurance received by Executive or his estate pursuant to insurance policies provided by Employer (including pursuant to Section 2.5.5 hereof), payable in accordance with Section 3.3.2 hereof. 3.3.5. POST-EMPLOYMENT TERM BENEFITS. In the event Executive is terminated pursuant to Sections 3.2.1 through 3.2.6 hereof, inclusive, or either Employer or Executive elects not to renew this Agreement pursuant to Section 3.1 hereof Employer shall reimburse Executive for any unpaid expenses pursuant to Section 2.5.1 hereof and if Executive is terminated pursuant to Sections 3.2.3, 3.2.5 or 3.2.6 hereof or Employer elects not to renew this Agreement pursuant to Section 3.1 hereof, Employer shall pay, on behalf of Executive, for a period equal to twenty-four (24) months from the Date of Termination (the "Benefits Period"), subject to Executive's continued compliance with the terms of Section 4 hereof, all life insurance, medical, health and accident, and disability plans and programs in which Executive was entitled to participate immediately prior to the Date of Termination; PROVIDED, that Executive's continued participation is legally possible under the general terms and provisions of such plans and programs; and PROVIDED, FURTHER, that in the event Executive is entitled to equal or comparable benefits from a subsequent employer during the Benefits Period, Employer's obligation with respect thereto pursuant to this Section 3.3.5 shall end as of such date. In the event that Executive's participation in any such plan or program is barred, Exhibit 10.9.3 - Page 4 Employer, at its sole cost and expense, shall use its commercially reasonable efforts to provide Executive with benefits substantially similar to those that Executive was entitled to receive under such plans and programs for the remainder of the Benefits Period. 3.3.6. STOCK OPTIONS. (a) If, within twelve (12) months following a Change of Control (as defined in Section 3.4.1 hereof) of Employer, the Employment Term is terminated other than for Cause, then Executive (or his estate) shall have twenty-four (24) months from the date of such event to exercise such stock options; PROVIDED, that the relevant stock option plan remains in effect and such stock options shall not have otherwise expired in accordance with the terms thereof. In connection therewith, Employer agrees to use commercially reasonable efforts to amend Executive's Stock Option Agreements if necessary to effectuate the provisions of this Section 3.3.6(a). (b) In the event the Employment Term is terminated (i) by Employer pursuant to Section 3.2.5 hereof and the reason for such termination is not related to the performance of Executive in his duties with respect to Employer, or (ii) by Executive pursuant to Section 3.2.6 hereof, then all stock options theretofore granted to Executive shall thereupon vest and Executive shall have twenty-four (24) months from such date to exercise such options; PROVIDED, that the relevant stock option plan remains in effect and such stock options shall not have otherwise expired in accordance with the terms thereof. In connection therewith, Employer agrees to use commercially reasonable efforts to amend Executive's Stock Option Agreements if necessary to effectuate the provisions of this Section 3.3.6(b). 3.4. DEFINITIONS. 3.4.1. "CHANGE OF CONTROL" DEFINED. A "Change of Control" of Employer means (i) the approval by the stockholders of Resources of the sale, lease, exchange or other transfer (other than pursuant to internal reorganization) by Resources or Par of all or substantially all of its respective assets to a single purchaser or to a group of associated purchasers; (ii) the first purchase of shares of equity securities of Par or Resources pursuant to a tender offer or exchange offer (other than an offer by Par or Resources) for at least fifteen (15%) percent of the equity securities of Par or Resources; (iii) the approval by the stockholders of Resources of an agreement for a merger or consolidation in which neither Par nor Resources shall survive as an independent, publicly-owned corporation; (iv) the acquisition (including by means of a merger) by a single purchaser or a group of associated purchasers of securities of Par or Resources from either Par or Resources or any third party representing thirty-five (35%) percent or more of the combined voting power of Par's or Resources's then outstanding equity securities in one or a related series of transactions (other than pursuant to an internal reorganization) or (v) the change of the membership of a majority of the Board during any period of two (2) consecutive years, unless the election, or the nomination for election by Resources's stockholders, of each new director was approved by a vote of at least two-thirds of the directors of the Board still in office who were directors of Resources at the beginning of the period. 3.4.2. "NOTICE OF TERMINATION" DEFINED. "Notice of Termination" means a written notice that indicates the specific termination provision relied upon by Employer or Executive and, except in the case of termination pursuant to Sections 3.2.1, 3.2.2 or 3.2.5 hereof, that sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employment Term under the termination provision so indicated. 3.4.3. "DATE OF TERMINATION" DEFINED. "Date of Termination" means such date as the Employment Term is expired if not renewed or terminated in accordance with Sections 3.1 or 3.2 hereof. 4. CONFIDENTIALITY AND NONSOLICITATION. 4.1. "CONFIDENTIAL INFORMATION" DEFINED. "Confidential Information" means any and all information (oral or written) relating to Employer or any Subsidiary or any person controlling, controlled by, or under common control with Employer or any Subsidiary or any of their respective activities, including, but not limited to, information relating to: Exhibit 10.9.3 - Page 5 technology, research, test procedures and results, machinery and equipment; manufacturing processes; financial information; products; identity and description of materials and services used; purchasing; costs; pricing; customers and prospects; advertising, promotion and marketing; and selling, servicing and information pertaining to any governmental investigation, except such information which becomes public, other than as a result of a breach of the provisions of Section 4.2 hereof. 4.2. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Executive shall not at any time (other than as may be required or appropriate in connection with the performance by him of his duties hereunder), directly or indirectly, use, communicate, disclose or disseminate any Confidential Information in any manner whatsoever (except as may be required under legal process by subpoena or other court order). 4.3. CERTAIN ACTIVITIES. Executive shall not, while employed by Resources and for a period of two (2) years following the Date of Termination, directly or indirectly, hire, offer to hire, entice away or in any other manner persuade or attempt to persuade any officer, employee, agent, lessor, lessee, licensor, licensee, customer, prospective customer or supplier of Employer or any of its Subsidiaries to discontinue or alter his or its relationship with Employer or any of its Subsidiaries. 4.4. INJUNCTIVE RELIEF. The parties hereby acknowledge and agree that (a) Employer will be irreparably injured in the event of a breach by Executive of any of his obligations under this Section 4; (b) monetary damages will not be an adequate remedy for any such breach; (c) Employer will be entitled to injunctive relief, in addition to any other remedy which it may have, in the event of any such breach; and (d) the existence of any claims that Executive may have against Employer, whether under this Agreement or otherwise, will not be a defense to the enforcement by Employer of any of its rights under this Section 4. 4.5. NON-EXCLUSIVITY AND SURVIVAL. The covenants of Executive contained in this Section 4 are in addition to, and not in lieu of, any obligations that Executive may have with respect to the subject matter hereof, whether by contract, as a matter of law or otherwise, and such covenants and their enforceability shall survive any termination of the Employment Term by either party and any investigation made with respect to the breach thereof by Employer at any time. 5. MISCELLANEOUS PROVISIONS. 5.1. SEVERABILITY. If, in any jurisdiction, any term or provision hereof is determined to be invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired; (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction; and (c) the invalid or unenforceable term or provision shall, for purposes of such jurisdiction, be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. 5.2. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement (and all signatures need not appear on any one counterpart), and this Agreement shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. 5.3. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed duly given upon receipt when delivered by hand, overnight delivery or telecopy (with confirmed delivery), or three (3) business days after posting, when delivered by registered or certified mail or private courier service, postage prepaid, return receipt requested, as follows: If to Employer, to: Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, New York 10977 Attention: Chairman Telecopy No.: (845) 425-7922 Exhibit 10.9.3 - Page 6 Copy to: Stephen A. Ollendorff, Esq. Whitney John Smith, Esq. Kirkpatrick & Lockhart LLP 599 Lexington Avenue New York, New York 10022 Telecopy No.: (212) 536-3901 If to Executive, to: Dennis J. O'Connor c/o Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, New York 10977 or to such other address(es) as a party hereto shall have designated by like notice to the other parties hereto. 5.4. AMENDMENT. No provision of this Agreement may be modified, amended, waived or discharged in any manner except by a written instrument executed by both Resources and Executive. 5.5. ENTIRE AGREEMENT. This Agreement and, with respect to Section 3.3.6 hereof, Executive's Stock Option Agreements and governing stock option plans constitute the entire agreement of the parties hereto with respect to the subject matter hereof, and supersede all prior agreements and understandings of the parties hereto, oral or written, including, but not limited to, the Severance Agreement and that certain Trade Secret, Non-Disclosure and Restrictive Covenant Agreement, dated as of June 26, 1995 (the "Restrictive Covenant Agreement"), with respect to the subject matter hereof. Executive and Employer hereby agree that each of the Severance Agreement and the Restrictive Covenant Agreement is hereby superseded and of no further force and effect, and that this Agreement shall be effective as of the date hereof. In the event of any conflict between Section 3.3.6 hereof and Executive's Stock Option Agreements and the governing stock option plans, Section 3.3.6 shall govern. 5.6. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be wholly performed therein. 5.7. HEADINGS. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 5.8. BINDING EFFECT; SUCCESSORS AND ASSIGNS. Executive may not delegate any of his duties or assign his rights hereunder. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. Employer shall require any successor (whether direct or indirect and whether by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer, by an agreement in form and substance reasonably satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform if no such succession had taken place. 5.9. WAIVER, ETC. The failure of either of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Agreement or any provision hereof or the right of either of the parties hereto thereafter to enforce each and every provision of this Agreement. No waiver of any breach of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party against whom or which enforcement of such waiver is Exhibit 10.9.3 - Page 7 sought, and no waiver of any such breach shall be construed or deemed to be a waiver of any other or subsequent breach. 5.10. CAPACITY, ETC. Executive and Employer hereby represent and warrant to the other that, as the case may be: (a) he or it has full power, authority and capacity to execute and deliver this Agreement, and to perform his or its obligations hereunder; (b) such execution, delivery and performance shall not (and with the giving of notice or lapse of time or both would not) result in the breach of any agreements or other obligations to which he or it is a party or he or it is otherwise bound; and (c) this Agreement is his or its valid and binding obligation in accordance with its terms. 5.11. ENFORCEMENT; JURISDICTION. If any party institutes legal action to enforce or interpret the terms and conditions of this Agreement, the prevailing party shall be awarded reasonable attorneys' fees at all trial and appellate levels, and the expenses and costs incurred by such prevailing party in connection therewith. Any legal action, suit or proceeding, in equity or at law, arising out of or relating to this Agreement shall be instituted exclusively in the State or Federal courts located in the State and County of New York and each party agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that such party is not subject personally to the jurisdiction of any such court, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or should be transferred, or that this Agreement or the subject matter hereof may not be enforced in or by any such court. Each party further irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against any party if given personally or by registered or certified mail, return receipt requested or by any other means of mail that requires a signed receipt, postage prepaid, mailed to such party as herein provided. Nothing herein contained shall be deemed to affect or limit the right of any party to serve process in any other manner permitted by applicable law. 5.12. ARBITRATION. (a) Any dispute under Section 3 hereof, including, but not limited to, the determination by the Board of a termination for Cause pursuant to Section 3.2.4 hereof, or in respect of the breach thereof shall be settled by arbitration in the Borough of Manhattan, City of New York. The arbitration shall be accomplished in the following manner. Either party may serve upon the other party written demand that the dispute, specifying the nature thereof, shall be submitted to arbitration. Within ten (10) days after such demand is given in accordance with Section 5.3 hereof, each of the parties shall designate an arbitrator and provide written notice of such appointment upon the other party. If either party fails within the specified time to appoint such arbitrator, the other party shall be entitled to appoint both arbitrators. The two (2) arbitrators so appointed shall appoint a third arbitrator. If the two arbitrators appointed fail to agree upon a third arbitrator within ten (10) days after their appointment, then an application may be made by either party hereto, upon written notice to the other party, to the American Arbitration Association (the "AAA"), or any successor thereto, or if the AAA or its successor fails to appoint a third arbitrator within ten (10) days after such request, then either party may apply, with written notice to the other, to the Supreme Court of the State of New York, New York County, for the appointment of a third arbitrator, and any such appointment so made shall be binding upon both parties hereto. (b) The decision of the arbitrators shall be final and binding upon the parties. The party against whom the award is rendered (the "non-prevailing party") shall pay all fees and expenses incurred by the prevailing party in connection with the arbitration (including fees and disbursements of the prevailing party's counsel), as well as the expenses of the arbitration proceeding. The arbitrators shall determine in their decision and award which of the parties is the prevailing party, which is the non-prevailing party, the amount of the fees and expenses of the prevailing party and the amount of the arbitration expenses. The arbitration shall be conducted, to the extent consistent with this Section 5.12, in accordance with the then prevailing rules of commercial arbitration of the AAA or its successor. The arbitrators shall have the right to retain and consult experts and competent authorities skilled in the matters under arbitration, but all consultations shall be made in the presence of both parties, who shall have the full right to cross-examine the experts and authorities. The arbitrators shall render their award, upon the concurrence of at least two of their number, not later than thirty (30) days after the appointment of the third arbitrator. The decision and award shall be in writing, and counterpart copies shall be delivered to each of the parties. In rendering an award, the arbitrators shall have no power to modify any of the Exhibit 10.9.3 - Page 8 provisions of this Agreement, and the jurisdiction of the arbitrators is expressly limited accordingly. Judgment may be entered on the award of the arbitrators and may be enforced in any court having jurisdiction. [SIGNATURE PAGE FOLLOWS] Exhibit 10.9.3 - Page 9 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. PHARMACEUTICAL RESOURCES, INC. By: /s/ Kenneth I. Sawyer ------------------------- Name: Kenneth I. Sawyer Title: Chief Executive Officer /s/ Dennis J. O'Connor ------------------------ DENNIS J. O'CONNOR Exhibit 10.9.3 - Page 10 EX-10 5 pharma_exh10-1813.txt EXHIBIT 10.18.13 EXHIBIT 10.18.13 THIRTEENTH AMENDMENT, WAIVER AND CONSENT TO LOAN AND SECURITY AGREEMENT --------------------------- THIRTEENTH AMENDMENT, WAIVER AND CONSENT, dated as of December 2002 (this "AMENDMENT"), to the Loan and Security Agreement referred to below by and among GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation ("Lender"), PAR PHARMACEUTICAL, INC., a New Jersey corporation ("BORROWER"), PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation ("PARENT"), and the other Credit Parties signatory thereto. W I T N E S S E T H - - - - - - - - - - WHEREAS, Lender, Borrower and Credit Parties are parties to that certain Loan and Security Agreement, dated as of December 15, 1996 (as amended, supplemented or otherwise modified prior to the date hereof, the "LOAN AGREEMENT"); WHEREAS, Lender, Borrower and Credit Parties have agreed to amend the Loan Agreement in the manner, and on the terms and conditions, provided for herein; and WHEREAS, Credit Parties have requested that the Lender, and Lender has agreed to, consent to Parent and Borrower entering into a guaranty of certain Indebtedness of Finetech Laboratories, Ltd. and waive Section 5(g) of the Loan Agreement with respect to such guaranty, subject to the terms and conditions provided for herein NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties to this Amendment hereby agree as follows: 1. DEFINITIONS. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. 2. AMENDMENT TO SECTION 11 OF THE LOAN AGREEMENT. As of the Amendment Effective Date (as hereinafter defined), the definition of "Subsidiary Guarantor" is hereby amended by deleting the text "IPR" from such definition so that IPR shall not be deemed as such under the Loan Agreement. 3. AMENDMENT TO SECTION 5(F) OF THE LOAN AGREEMENT. As of the Amendment Effective Date, Section 5(f) shall be amended to include the following at the end of such Section: "and each Corporate Guaranty Agreement, dated as of December __, 2002, between Borrower and Parent, respectively, and GE Capital Public Finance, Inc.". 4. WAIVER; CONSENT. As of the Amendment Effective Date, Lender hereby waives Section 5(g) of the Loan Agreement solely with respect to the proposed Corporate Guaranty Agreements (the "Guaranty Agreements") to be entered into by Parent and Borrower in favor of GE Capital Public Finance, Inc. ("GECP") and consents to Parent and Borrower entering into the Guaranty Agreements; PROVIDED, that such Guaranty Agreements shall not be secured by a Lien on any Credit Parties assets and such Guaranteed Indebtedness shall not exceed a principal amount of $2,000,000 in the aggregate. 5. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into this Amendment, each Credit Party hereby represents and warrants that: A. The execution, delivery and performance of this Amendment by such Credit Party which is a party hereto: (i) are within its respective corporate powers; (ii) have been duly authorized by all necessary corporate and shareholder action; and (iii) are not in contravention of any provision of its respective certificate or articles of incorporation or by-laws or other organizational documents. Exhibit 10.18.13 - Page 1 B. This Amendment has been duly executed and delivered by Borrower, Parent and each other Credit Party. C. This Amendment constitutes a legal, valid and binding obligation of Borrower, Parent and each such Credit Party which is a party hereto enforceable against Borrower, Parent and each Credit Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). D. No Default has occurred and is continuing both before and after giving effect to this Amendment. E. No action, claim or proceeding is now pending or, to the knowledge of Borrower, Parent or any other Credit Party, threatened against Borrower, Parent or any other Credit Party, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any federal, state, or local government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, which challenges Borrower's, Parent's or any other Credit Party's right, power, or competence to enter into this Amendment or, to the extent applicable, perform any of its obligations under this Amendment, the Loan Agreement or any other Loan Document, or the validity or enforceability of this Amendment, the Loan Agreement or any other Loan Document or any action taken under this Amendment, the Loan Agreement or any other Loan Document. F. The representations and warranties of the Credit Parties contained in the Loan Agreement, and each other Loan Document shall be true and correct on and as of the date hereof with the same effect as if such representations and warranties had been made on and as of such date (except that any such representation or warranty which is expressly made only as of a specified date need only be true as of such date). 6. NO OTHER MODIFICATIONS. Except as expressly provided in Sections 2, 3 and 4 hereof, (i) the Loan Agreement and the other Loan Documents shall be unmodified and shall continue to be in full force and effect in accordance with their terms and (ii) this Amendment shall not be deemed a waiver of any term or condition of any Loan Document and shall not be deemed to prejudice any right or rights which Lender may now have or may have in the future under or in connection with any Loan Document or any of the instruments or agreements referred to therein, as the same may be amended from time to time. 7. OUTSTANDING INDEBTEDNESS; AMENDMENT OF CLAIMS. Each Credit Party hereby acknowledges and agrees that as of the date hereof the aggregate outstanding principal amount of the Revolving Credit Loan is $0.00. Each Credit Party hereby waives, releases, remises and forever discharges Lender and each other Indemnified Person from any and all Claims of any kind or character, known or unknown, which each Credit Party ever had, now has or might hereafter have against Lender which relates, directly or indirectly, to any acts or omissions of Lender or any other Indemnified Person on or prior to the date hereof. 8. EXPENSES. Borrower hereby reconfirms its obligations pursuant to Section 10.2 of the Loan Agreement to pay and reimburse Lender for all reasonable out-of-pocket expenses (including, without limitation, reasonable fees of counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment and all other documents and instruments delivered in connection herewith. 9. EFFECTIVENESS. This Amendment shall become effective as of the date hereof (the "AMENDMENT EFFECTIVE DATE") only upon satisfaction in full in the judgment of the Lender of each of the following conditions on or prior to December __, 2002: A. GUARANTY; DEBT DOCUMENTS. Lender shall have received an executed copy of the Guaranty Agreements and executed debt documents entered into by Parent's subsidiary Finetech Laboratories Ltd. with Rhode Island Industrial Facilities Corporation and GEPF. Exhibit 10.18.13 - Page 2 B. AMENDMENT. Lender shall have received four (4) original copies of this Amendment duly executed and delivered by Lender and each Credit Party. C. PAYMENT OF EXPENSES. Borrower shall have paid to Lender all costs, fees and expenses owing in connection with this Amendment and the other Loan Documents and due to Lender (including, without limitation, reasonable legal fees and expenses). D. REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Credit Party contained in this Amendment shall be true and correct on and as of the Amendment Effective Date. 10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 11. COUNTERPARTS. This Amendment may be executed by the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (SIGNATURE PAGE FOLLOWS) Exhibit 10.18.13 - Page 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. BORROWER: --------- PAR PHARMACEUTICAL, INC. By: DENNIS O'CONNOR --------------- Name: Dennis O'Connor Title: VP-CFO LENDER: ------- GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ MICHAEL LUSTBADER --------------------- Name:Michael Lustbader Its: Duly Authorized Signatory PARENT: ------- PHARMACEUTICAL RESOURCES, INC. By: DENNIS O'CONNOR --------------- Name: Dennis O'Connor Title: VP-CFO (SIGNATURES CONTINUED ON NEXT PAGE) Exhibit 10.18.13 - Page 4 SUBSIDIARY GUARANTORS: NUTRICEUTICAL RESOURCES, INC. By: DENNIS O'CONNOR --------------- Name: Dennis O'Connor Title: VP-CFO PARCARE, LTD. By: DENNIS O'CONNOR --------------- Name: Dennis O'Connor Title: VP-CFO QUAD PHARMACEUTICALS INC. By: DENNIS O'CONNOR --------------- Name: Dennis O'Connor Title: VP-CFO PRX PHARMACEUTICALS, INC. By: DENNIS O'CONNOR --------------- Name: Dennis O'Connor Title: VP-CFO PAR PHARMA GROUP, LTD. By: DENNIS O'CONNOR --------------- Name: Dennis O'Connor Title: VP-CFO (SIGNATURES CONTINUED ON NEXT PAGE) Exhibit 10.18.13 - Page 5 PRI-RESEARCH, INC. By: DENNIS O'CONNOR Name: Dennis O'Connor Title: VP-CFO Exhibit 10.18.13 - Page 6 EX-10 6 pharma_exh10-1814.txt EXHIBIT 10.18.14 EXHIBIT 10.18.14 LOAN AGREEMENT Among GE CAPITAL PUBLIC FINANCE, INC., as Lender, and RHODE ISLAND INDUSTRIAL FACILITIES CORPORATION, as Issuer, and FINETECH LABORATORIES, LTD., as Borrower Dated as of December 1, 2002 ------------------------------------------- THIS INSTRUMENT CONSTITUTES A SECURITY AGREEMENT UNDER THE RHODE ISLAND UNIFORM COMMERCIAL CODE. -------------------------------------------- Exhibit 10.18.14 - Page 1 TABLE OF CONTENTS ----------------- PAGE ---- ARTICLE I - DEFINITIONS AND EXHIBITS ................................... 2 Section 1.01. Definitions .................................... 2 Section 1.02. Exhibits .................................... 6 Section 1.03. Rules of Construction .......................... 6 ARTICLE II - FINANCING OF EQUIPMENT AND TERMS OF LOAN .................. 6 Section 2.01. Acquisition of Equipment ....................... 6 Section 2.02. Loan ........................................... 7 Section 2.03. Interest ....................................... 7 Section 2.04. Payments ....................................... 7 Section 2.05. Payment on Non-Business Days ................... 8 Section 2.06. Loan Payments To Be Unconditional .............. 8 Section 2.07. Prepayments .................................... 8 ARTICLE III - CONDITIONS PRECEDENT .................................... 9 ARTICLE IV - REPRESENTATIONS, WARRANTIES AND COVENANTS OF ISSUER ................................................... 11 ARTICLE V - REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER ................................................. 14 ARTICLE VI - TITLE TO EQUIPMENT; SECURITY INTEREST ..................... 17 Section 6.01. Title to Equipment 17 Section 6.02. Security Interest in Equipment ................. 17 Section 6.03. Change in Name or Corporate Structure of Borrower; Change in Location of Borrower's Principal Place of Business .................... 18 Section 6.04. Liens and Encumbrances to Title ................ 18 Section 6.05. Personal Property .............................. 19 Section 6.06. Assignment of Insurance ........................ 19 Section 6.08. Agreement as Financing Statement ............... 19 ARTICLE VII - AFFIRMATIVE COVENANTS OF BORROWER ........................ 20 Section 7.01. Reporting Requirements ........................ 20 Section 7.02. Books and Records; Inspection and Examination .. 21 Section 7.03. Compliance With Laws; Environmental Indemnity .. 21 Section 7.04. Payment of Taxes and Other Claims 22 Section 7.05. Maintenance of Equipment ....................... 22 Section 7.06. Insurance ...................................... 23 Section 7.07. Preservation of Existence ...................... 24 Section 7.08. Performance by Lender .......................... 24 Section 7.09. Financial Covenants ............................ 24 Section 7.10. Covenant Regarding Tax Regulatory Agreement .... 25 ARTICLE VIII - NEGATIVE COVENANTS OF BORROWER .......................... 26 Section 8.01. Lien ........................................... 26 Section 8.02. Sale of Assets ................................. 26 Section 8.03. Consolidation and Merger ....................... 26 Section 8.04. Accounting ..................................... 26 Exhibit 10.18.14 - Page 2 Section 8.05. Transfers ...................................... 26 Section 8.07. Place of Business .............................. 26 Section 8.08. Modifications and Substitutions ................ 26 Section 8.09. Use of the Equipment ........................... 27 ARTICLE IX - DAMAGE AND DESTRUCTION; USE OF NET PROCEEDS ............... 27 ARTICLE X - ASSIGNMENT, SUBLEASING AND SELLING ......................... 28 Section 10.01. Assignment by Lender ......................... 28 Section 10.02. No Sale or Assignment by Borrower ............. 28 ARTICLE XI - EVENTS OF DEFAULT AND REMEDIES ............................ 28 Section 11.01. Events of Default ............................ 28 Section 11.02. Remedies on Default ........................... 30 Section 11.03. Return of Equipment ........................... 31 Section 11.04. No Remedy Exclusive ........................... 31 Section 11.05. Late Charge ................................... 32 ARTICLE XII - MISCELLANEOUS ............................................ 32 Section 12.01. Costs and Expenses of Lender .................. 32 Section 12.01A. Costs and Administrative Expenses of Issuer ... 32 Section 12.02. Disclaimer of Warranties ..................... 32 Section 12.03. Notices ....................................... 33 Section 12.04. Further Assurance and Corrective Instruments .. 33 Section 12.05. Binding Effect; Time of the Essence ........... 33 Section 12.06. Severability .................................. 33 Section 12.07. Amendments .................................... 33 Section 12.08. Execution in Counterparts ..................... 34 Section 12.09. Applicable Law ................................ 34 Section 12.10. Captions ...................................... 34 Section 12.11. Entire Agreement .............................. 34 Section 12.12. Usury ......................................... 34 Section 12.13. Bound Transcripts ............................. 34 Section 12.14. Waiver of Jury Trial .......................... 34 Exhibit 10.18.14 - Page 3 Section 12.15. Survival of Obligations ....................... 35 Section 12.16. Limited Liability; Immunity of Directors of Issuer ................................................... 35 Exhibit A - Schedule of Equipment and Loan Payments Exhibit B - Form of Certificate of Acceptance Exhibit C - Form of Opinion of Counsel to Borrower Exhibit D - Form of Opinion of Bond Counsel Exhibit E - Form of Bond Exhibit F - Administrative Fee Schedule Exhibit G - Form of Opinion of Israeli Counsel Exhibit H - Form of Certificate of Chief Financial Officer Exhibit 10.18.14 - Page 4 LOAN AGREEMENT Lender: GE Capital Public Finance, Inc. Suite 470 8400 Normandale Lake Boulevard Minneapolis, MN 55437 Telephone: (800) 346-3164 Telecopier: (612) 897-5601 Issuer: Rhode Island Industrial Facilities Corporation One West Exchange Street Providence, RI 02903 Telephone: (401) 222-2601 Telecopier: (401) 222-2102 Borrower: FineTech Laboratories, Ltd. 500 Washington Street Coventry, RI 02816 Telephone: (401) [ ] Telecopier: (401) [ ] THIS LOAN AGREEMENT dated as of December 1, 2002 (this "Agreement") among GE Capital Public Finance, Inc., a Delaware corporation, as lender (with its successors and assigns, "Lender"), Rhode Island Industrial Facilities Corporation, a public corporation and governmental agency of the State of Rhode Island and Providence Plantations (the "State"), duly organized and validly existing under the laws of the State, as issuer ("Issuer"), and FINETECH LABORATORIES, LTD., an Israeli corporation authorized to do business in the State of Rhode Island, as borrower ("Borrower"). WHEREAS, Issuer is authorized and empowered under the laws of the State, including the Rhode Island Industrial Facilities Corporation Act, Title 45, Chapter 37.1 of the General Laws of Rhode Island (the "Act"), to issue revenue bonds and to enter into loan agreements, contracts and other instruments and documents necessary or convenient to obtain loans for the purpose of facilitating the financing of certain projects as described in the Act; and WHEREAS, in furtherance of the purposes of the Act, Issuer proposes to finance all or a portion of the acquisition and installation of the Equipment (as hereinafter defined) by Borrower pursuant to this Agreement by issuing a revenue bond and obtaining a loan from Lender and lending the proceeds thereof to Borrower; and WHEREAS, Borrower proposes to borrow the proceeds of the loan made by Lender to Issuer upon the terms and conditions set forth herein to finance the acquisition and installation of the Equipment; and WHEREAS, Borrower shall make Loan Payments (as hereinafter defined) directly to Lender as assignee of Issuer and holder of the Bond (as hereinafter defined); and WHEREAS, this Agreement and the Bond shall not be deemed to constitute a debt or liability or moral obligation of the State or any political subdivision thereof, or a pledge of the faith and credit or taxing power of the State or any political subdivision thereof, but shall be a special obligation payable solely from the Loan Payments payable hereunder by Borrower to Lender as assignee of Issuer; Exhibit 10.18.14 - 5 NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, and in consideration of the premises contained in this Agreement, Lender, Issuer and Borrower agree as follows: ARTICLE I DEFINITIONS AND EXHIBITS Section 1.01. DEFINITIONS . The following terms used herein will have the meanings indicated below unless the context clearly requires otherwise: "ACQUISITION COSTS" means the contract price paid or to be paid to the Vendors or reimbursed to Borrower for any portion of the Equipment upon Borrower's acceptance thereof, including administrative, engineering, legal, financial and other costs incurred by Lender, Issuer, Borrower, Escrow Agent and Vendors in connection with the acquisition, installation and financing by Lender of such Equipment, which Acquisition Costs are set forth in Exhibit A hereto. "ADMINISTRATIVE EXPENSES" means (i) a percentage administrative fee, if any, set by a vote of the Board of Directors of the Issuer, in no case to exceed one-eighth of one percent per year of the principal amount of the Bond outstanding as set forth in Exhibit F hereto and (ii) the reasonable and necessary expenses incurred by the Issuer in connection with the issuance of the Bond and the performance of the Issuer's obligations under this Agreement. "AGREEMENT" means this Agreement, including all exhibits hereto, as any of the same may be supplemented or amended from time to time in accordance with the terms hereof. "BOND" means Issuer's $2,000,000 Revenue Bond (FineTech Laboratories, Ltd. Project - 2002 Series), in the form attached hereto as Exhibit E. "BORROWER" means FineTech Laboratories, Ltd., a Delaware corporation. "BUSINESS DAY" means a day other than a Saturday or Sunday on which banks are generally open for business in the State or in New York, New York. "CERTIFICATE OF ACCEPTANCE" means a Certificate of Acceptance, in substantially the form set forth as Exhibit B hereto, whereby Borrower acknowledges receipt in good condition of particular items of Equipment identified therein and confirms the date of delivery thereof and certain other matters. "CLOSING DATE" means December 26, 2002. "CODE" means the Internal Revenue Code of 1986, as amended, and United States Treasury regulations promulgated thereunder. "DEBT" means all (i) items of indebtedness for borrowed money which in accordance with generally accepted accounting principles or federal tax law would be included in determining total liabilities as shown on the liabilities side of a balance sheet, (ii) indebtedness secured by any mortgage, pledge, lien or security interest existing on property owned by Borrower, whether or not the indebtedness secured thereby shall have been assumed, and (iii) guaranties and endorsements for borrowed money (other than for purposes of collection in the Exhibit 10.18.14 - 6 ordinary course of business) by Borrower and other contingent obligations of Borrower in respect of, or to purchase or otherwise acquire, indebtedness of others. "DEFAULT" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default as provided in Article XI hereof. "DETERMINATION OF TAXABILITY" means any determination, decision or decree by the Commissioner of Internal Revenue, or any District Director of Internal Revenue or any court of competent jurisdiction, or an opinion obtained by Lender of counsel qualified in such matters, that an Event of Taxability shall have occurred. A Determination of Taxability also shall be deemed to have occurred on the first to occur of the following: (a) the date when Borrower files any statement, supplemental statement, or other tax schedule, return or document, which discloses that an Event of Taxability shall have occurred; or (b) the effective date of any federal legislation enacted after the date of this Agreement or promulgation of any income tax regulation or ruling by the Internal Revenue Service that causes an Event of Taxability after the date of this Agreement; or (c) if upon sale, lease or other deliberate action taken with respect to the Equipment within the meaning of Treas. Reg. ss. 1.141-2(d), the failure to receive an unqualified opinion of bond counsel to the effect that such deliberate action will not cause interest payable by Borrower hereunder or under any Agreement to become includable in the gross income of the recipient. "ENVIRONMENTAL LAWS" has the meaning ascribed thereto in paragraph (h) of Article V hereof. "EQUIPMENT" means the property identified in Exhibit A hereto to be used in connection with Borrower's operations (including, to the extent permitted pursuant to the Code without jeopardizing the tax-exempt status of the Interest, certain items originally financed through internal advances of Borrower in anticipation of obtaining permanent financing through Issuer), together with all replacement parts, additions, repairs, accessions and accessories incorporated therein and/or affixed to such property. "ESCROW AGENT" means Marshall & Ilsley Trust Company, N.A., as escrow agent under the Escrow Agreement, and its successors and assigns permitted under the Escrow Agreement. "ESCROW AGREEMENT" means the Escrow Agreement dated as of December 1, 2002 among Lender, Issuer, Borrower and Escrow Agent. "ESCROW FUND" means the fund established and held by Escrow Agent pursuant to the Escrow Agreement. "EVENT OF TAXABILITY" means any act, failure to act or use of the proceeds of the Loan, change in use of the Equipment or any misrepresentation or inaccuracy in any of the representations, warranties or covenants contained in this Agreement or the Tax Regulatory Agreement by Issuer or Borrower, or the enactment of any federal legislation after the date of this Agreement, or promulgation of any income tax regulation or ruling by the Internal Revenue Exhibit 10.18.14 - 7 Service after the date of this Agreement that causes the Interest to be or to become includable in Lender's gross income (as defined in the Code). "GROSS-UP RATE" means, with respect to any Interest payment (including payments made prior to the Event of Taxability), the rate necessary to calculate an additional payment in an amount sufficient such that the sum of the Interest payment plus such additional payment would, after reduced by the federal tax (including interest and penalties) actually payable thereon, equal the amount of the Interest payment. "Guarantors" means Pharmaceutical Resources, Inc., a New Jersey corporation, and Par Pharmaceutical Inc., a New Jersey corporation. "Guaranty" means the Guaranty Agreement dated as of December 24, 2002 executed on behalf of Guarantors. "INTEREST" means the portion of any payment from Issuer to Lender designated as and comprising interest. "INTEREST RATE" means an annual interest rate equal to 4.27%. "ISSUER" means Rhode Island Industrial Facilities Corporation, its successors or assigns, acting as issuer under this Agreement. "LENDER" means (i) GE Capital Public Finance, Inc., acting as lender under this Agreement, (ii) any surviving, resulting or transferee corporation of GE Capital Public Finance, Inc. and (iii) except where the context requires otherwise, any assignee(s) of Lender. "LOAN" means the loan from Issuer to Borrower pursuant to this Agreement. "LOAN PAYMENTS" means the loan payments payable by Borrower pursuant to the provisions of this Agreement and the Bond as required by Article II hereof and with respect to principal as specifically set forth in Exhibit A hereto. As provided in Article II hereof, Loan Payments shall be payable by Borrower directly to Lender, as assignee of Issuer and holder of the Bond, in the amounts and at the times as set forth herein. "LOAN PROCEEDS" means the total amount of money to be paid pursuant to Section 2.02 hereof by Lender to Escrow Agent for deposit and application in accordance with the Escrow Agreement. "PAYMENT DATE" means the dates the Loan Payments are payable as specifically set forth in Exhibit A hereto. "PREPAYMENT AMOUNT" means the amount which Borrower may or must from time to time pay or cause to be paid to Lender as assignee of Issuer and holder of the Bond in order to prepay the Loan and the Bond, as provided in Section 2.07 hereof, such amounts being set forth in Exhibit A hereto, together with accrued interest and all other amounts due hereunder. "PRINCIPAL" means the portion of any Loan Payment designated as principal in Exhibit A hereto. "PURCHASE AGREEMENTS" means Borrower's purchase agreements with Vendors of the Equipment. Exhibit 10.18.14 - 8 "STATE" means the State of Rhode Island and Providence Plantations. "TAX REGULATORY AGREEMENT" means the Tax Regulatory Agreement of even date herewith among Borrower, Issuer and Lender, as such Tax Regulatory Agreement may be amended from time to time in accordance with its terms. "UCC" means the Uniform Commercial Code as adopted and in effect in the State. "VENDOR" means the manufacturer or vendor of an item of Equipment, as well as the agents or dealers of the manufacturer, from whom Borrower has purchased or is purchasing items of Equipment. Exhibit 10.18.14 - 9 Section 1.02. EXHIBITS . The following exhibits are attached hereto and made a part hereof: EXHIBIT A: Schedule of Equipment and Loan Payments describing the Equipment and setting forth the principal portion of the Loan Payments, the Payment Dates and Prepayment Amounts. Issuer hereby authorizes Lender to insert in Exhibit A the serial or other identifying numbers relating to the Equipment when available. EXHIBIT B: Form of Certificate of Acceptance. EXHIBIT C: Form of opinion of counsel to Borrower and Guarantor. EXHIBIT D: Form of opinion of bond counsel. EXHIBIT E: Form of Bond. EXHIBIT F: Schedule of Issuer Administrative Fees. EXHIBIT G: Form of Opinion of Israeli Counsel. EXHIBIT H: Form of Certificate of Chief Financial Officer. Section 1.03. RULES OF CONSTRUCTION . (a) The singular form of any word used herein, including the terms defined in Section 1.01 hereof, shall include the plural, and vice versa. The use herein of a word of any gender shall include correlative words of all genders. (b) Unless otherwise specified, references to Articles, Sections and other subdivisions of this Agreement are to the designated Articles, Sections and other subdivision of this Agreement as originally executed. The words "hereof," "herein," "hereunder" and words of similar import refer to this Agreement as a whole. (c) The headings or titles of the several articles and sections shall be solely for convenience of reference and shall not affect the meaning, construction or effect of the provisions hereof. ARTICLE II FINANCING OF EQUIPMENT AND TERMS OF LOAN Section 2.01. ACQUISITION OF EQUIPMENT . Borrower either has ordered or shall order the Equipment pursuant to one or more Purchase Agreements from one or more Vendors. Borrower shall remain liable to the Vendor or Vendors in respect of its duties and obligations in accordance with each Purchase Agreement and shall bear the risk of loss with respect to any loss or claim relating to any item of Equipment covered by any Purchase Agreement, and neither Lender nor Issuer shall assume any such liability or risk of loss. Section 2.02. LOAN . Lender hereby agrees, subject to the terms and conditions of this Agreement, to make a loan to Issuer in the amount of $2,000,000 (consisting of the proceeds of the Bond which Lender hereby agrees to purchase from Issuer); Issuer hereby agrees, subject to the terms and conditions of this Agreement, to borrow such amount from Lender and to lend such amount to Borrower; and Borrower hereby agrees to borrow such amount from Issuer. Upon Exhibit 10.18.14 - 10 fulfillment of the conditions set forth in Article III hereof, Lender shall deposit the Loan Proceeds in the Escrow Fund to be held, invested and disbursed as provided in the Escrow Agreement. Issuer's obligation to repay the loan from Lender and to make payments on the Bond, and Borrower's obligation to repay the Loan, shall commence, and interest shall begin to accrue, on the date that Loan Proceeds are deposited in the Escrow Fund. Section 2.03. INTEREST . The principal amount of the Bond and the Loan hereunder outstanding from time to time shall bear interest (computed on the basis of actual days elapsed in a 360-day year) at the Interest Rate. Interest accruing on the principal balance of such loans outstanding from time to time shall be payable on each Payment Date set forth in Exhibit A and in the Bond and upon earlier demand in accordance with the terms hereof or prepayment in accordance with the terms of the Bond and Section 2.07 hereof. Upon the occurrence of a Determination of Taxability, Borrower shall, with respect to future interest payments, begin making Loan Payments calculated at the Gross-Up Rate. In addition, after a Determination of Taxability, Borrower shall make immediately upon demand of Lender a payment to Lender sufficient to supplement prior Loan Payments to the Gross-Up Rate. Section 2.04. PAYMENTS . Issuer shall pay the principal of, premium, if any, in accordance with Section 2.07 hereof, and interest on the Bond, but only out of the amounts paid by Borrower pursuant to this Agreement. Borrower shall pay to Lender, as assignee of Issuer, Loan Payments consisting of Principal, in the amounts and on the dates set forth in Exhibit A hereto and Interest at the Interest Rate on the outstanding Principal from the immediately preceding Payment Date to the current Payment Date. As security for its obligation to pay the principal of, premium, if any, in accordance with Section 2.07 hereof, and interest on the loan from Lender, Issuer assigns to Lender all of Issuer's right to receive Loan Payments from Borrower hereunder, all of Issuer's rights hereunder and all of Issuer's right, title and interest in and to the Equipment, and Issuer irrevocably constitutes and appoints Lender and any present or future officer or agent of Lender as its lawful attorney, with full power of substitution and resubstitution, and in the name of Issuer or otherwise, to collect the Loan Payments and any other payments due hereunder and under the Bond and to sue in any court for such Loan Payments or other payments, to exercise all rights hereunder with respect to the Equipment, and to withdraw or settle any claims, suits or proceedings pertaining to or arising out of this Agreement upon any terms. Such Loan Payments and other payments shall be made by Borrower directly to Lender, as Issuer's assignee and holder of the Bond, and shall be credited against Issuer's payment obligations hereunder and under the Bond. No provision, covenant or agreement contained in this Agreement or any obligation imposed on Issuer herein or under the Bond, or the breach thereof, shall constitute or give rise to or impose upon Issuer, the State or any political subdivision thereof, a pecuniary liability, a charge upon its general credit or taxing powers of Issuer, the State or any political subdivision thereof, as applicable, or a pledge of their general revenues but shall be a special obligation of Issuer payable solely from Loan Payments of Borrower and the proceeds of the sale of Equipment. In making the agreements, provisions and covenants set forth in this Agreement, Issuer has not obligated itself except with respect to the Equipment and the application of the Loan Payments to be paid by Borrower hereunder. All amounts required to be paid by Borrower hereunder shall be paid in lawful money of the United States of America in immediately available funds. No recourse shall be had by Lender or Borrower for any claim based on this Agreement, the Bond or the Tax Regulatory Agreement against any director, officer or employee of Issuer alleging personal liability on the part of such person, unless such claim is based on the willful dishonesty of or intentional violation of law by such person. Section 2.05. PAYMENT ON NON-BUSINESS DAYS . Whenever any payment to be made hereunder or under the Bond shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of Exhibit 10.18.14 - Page 11 interest or the fees hereunder, as the case may be. Section 2.06. LOAN PAYMENTS TO BE UNCONDITIONAL . The obligations of Borrower to make the Loan Payments required under this Article II and to make other payments hereunder and to perform and observe the covenants and agreements contained herein shall be absolute and unconditional in all events, without abatement, diminution, deduction, setoff or defense for any reason, including (without limitation) any failure of the Equipment to be delivered or installed, any defects, malfunctions, breakdowns or infirmities in the Equipment or any accident, condemnation, destruction or unforeseen circumstances. Notwithstanding any dispute between Borrower and any of Issuer, Lender, any Vendor or any other person, Borrower shall make all Loan Payments when due and shall not withhold any Loan Payments pending final resolution of such dispute, nor shall Borrower assert any right of set-off or counterclaim against its obligation to make such payments required under this Agreement. Section 2.07. PREPAYMENTS . (a) Borrower may, in its discretion, prepay the Loan in whole at any time after the third anniversary of the date hereof by paying the applicable Prepayment Amount. (b) Borrower shall prepay the Loan and the Bond in whole or in part at any time pursuant to Article IX hereof by paying the applicable Prepayment Amount. (c) Borrower shall prepay the Loan and the Bond in full immediately upon demand of Lender after the occurrence of an Event of Default by paying the applicable Prepayment Amount. A portion of such prepayment may be made with funds remaining in the Escrow Fund pursuant to the Escrow Agreement. (d) Borrower shall prepay the Loan and the Bond in full immediately upon demand of Lender after the occurrence of a Determination of Taxability by paying the applicable Prepayment Amount plus an amount necessary to supplement the prior Loan Payments to the Gross-Up Rate. (e) The amounts due hereunder shall be repaid, and the amounts due under the Bond shall be paid, in part with funds remaining in the Escrow Fund upon termination of the Escrow Agreement as provided in Sections 2.03 of the Escrow Agreement, and, if less than 80% of the amount deposited in the Escrow Fund has been disbursed pursuant to the Escrow Agreement, together with a prepayment premium calculated at the percentage used to determine the Prepayment Amount at the date of such prepayments. Upon any prepayment in part of the Loan and the Bond, the prepayment shall be applied to the Loan Payments and any other amounts due hereunder as determined by Lender. ARTICLE III CONDITIONS PRECEDENT Lender's agreement to make the loan to Issuer hereunder and to disburse the Loan Proceeds shall be subject to the condition precedent that Lender shall have received all of the following, each in form and substance satisfactory to Lender: Exhibit 10.18.14 - 12 (a) This Agreement, properly executed on behalf of Issuer and Borrower, and each of the Exhibits hereto properly completed. (b) The Bond, properly executed on behalf of Issuer. (c) The Tax Regulatory Agreement, properly executed on behalf of Issuer and Borrower. (d) The Escrow Agreement, properly executed on behalf of Borrower, Issuer, Lender and Escrow Agent. (e) The Guaranty Agreement properly executed on behalf of the Guarantor. (f) A certificate of the Secretary or an Assistant Secretary of Borrower, certifying as to (i) the resolutions of the board of directors authorizing the execution, delivery and performance of this Agreement, the Escrow Agreement and the Tax Regulatory Agreement and any related documents, (ii) the by laws of Borrower, and (iii) the signatures of the officers or agents of Borrower authorized to execute and deliver this Agreement, the Escrow Agreement and the Tax Regulatory Agreement and other instruments, agreements and certificates on behalf of Borrower. (g) Currently certified copies of the Articles of Incorporation of Borrower. (h) A Certificate of Good Standing issued as to Borrower by the Secretary of State of the State of Borrower's incorporation not more than ten (10) days prior to the date hereof and Tax Good Standing Certificate issued by the Division of Taxation of the State of Rhode Island. (i) A certificate of the Secretary or an Assistant Secretary of Guarantor, certifying as to (i) the resolutions of the board of directors authorizing the execution, delivery and performance of the Guaranty and any related documents, (ii) the by laws of Guarantor, and (iii) the signatures of the officers or agents of Guarantor authorized to execute and deliver the Guaranty and other instruments, agreements and certificates on behalf of Guarantor. (j) Currently certified copies of the Articles of Incorporation of Guarantor. (k) A Certificate of Good Standing issued as to Guarantor by the Secretary of State of the state of Guarantor's organization not more than ten (10) days prior to the date hereof. (l) Certificates of the insurance required hereunder, containing a lender's loss payable clause or endorsement in favor of Lender. (m) A completed and executed Form 8038 or evidence of filing thereof with the Secretary of Treasury. (n) A resolution or evidence of other official action taken by or on behalf of Issuer to authorize the transactions contemplated hereby. (o) Evidence that the issuance of the Bond for the purpose of financing of the Equipment has been approved by the "applicable elected representative" of Issuer after a public hearing held upon reasonable notice. Exhibit 10.18.14 - 13 (p) As applicable, financing statements authorized by Borrower, as debtor, and naming Issuer, as secured party, and Lender, as assignee, and/or the original certificate of title or manufacturer's certificate of origin and title application if any of the Equipment is subject to certificate of title laws. (q) Financing statements authorized by Issuer, as debtor, and naming Lender, as secured party. (r) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against Borrower, (ii) no financing statements have been filed and remain in effect against Borrower relating to the Equipment except those financing statements filed by Lender, (iii) Lender has duly filed all financing statements necessary to perfect the security interest created pursuant to this Agreement and (iv) Lender has duly filed all financing statements necessary to perfect the transfer of Issuer's interest in this Agreement and the Loan Payments. (s) An opinion of counsel to Borrower and Guarantor, addressed to Lender and Issuer, in the form attached hereto as Exhibit C. (t) An opinion of bond counsel, addressed to Lender, in form and substance acceptable to Lender. (u) An opinion of Israeli counsel, in the form attached hereto as Exhibit G. (v) A form of certificate of chief financial officer, in the form attached hereto as Exhibit H. (w) Payment of Lender's fees, commissions and expenses required by Section 12.01 hereof. (x) Payment of Issuer's fees, commissions and expenses incurred in connection with this Agreement and the transactions contemplated hereby. (y) Any other documents or items reasonably required by Lender in connection herewith. Lender's agreement to make the loan to Issuer hereunder, to disburse the Loan Proceeds and to consider approval of any disbursement from the Escrow Fund shall be subject to the further conditions precedent that on the date thereof: (aa) Lender shall have received each of the items required for a disbursement pursuant to the Escrow Agreement; (bb) Lender shall have received in form and substance satisfactory to Lender Vendor invoice(s) and/or bill(s) of sale relating to the Equipment and, if such invoices have been paid by Issuer or Borrower, evidence of payment thereof and, if applicable, evidence of official intent to reimburse such payment as required by the Code; (cc) the representations and warranties contained in Articles IV and V hereof are correct in all material respects on and as of the date of such disbursement as though made on and as of such date, except to the extent that Exhibit 10.18.14 - 14 such representations and warranties relate solely to an earlier date; and (dd) no event has occurred and is continuing, or would result from such loan to Issuer or the Loan which constitutes a Default, an Event of Default or a Determination of Taxability. ARTICLE IVREPRESENTATIONS, WARRANTIES AND COVENANTS OF ISSUER Issuer represents, warrants and covenants for the benefit of Lender and Borrower, as follows: (a) Issuer is a public corporation and governmental agency of the State duly created and validly existing under the Constitution and laws of the State. (b) Issuer will exercise its best efforts to preserve and keep in full force and effect its existence as a body corporate and agency of the State. (c) Issuer is authorized under the Constitution and laws of the State to issue the Bond and to enter into this Agreement, the Escrow Agreement, the Tax Regulatory Agreement and the transactions contemplated hereby and to perform all of its obligations hereunder. (d) Issuer has duly authorized the issuance of the Bond and the execution and delivery of this Agreement, the Escrow Agreement and the Tax Regulatory Agreement under the terms and provisions of the resolution of its governing body or by other appropriate official approval, and further represents, covenants and warrants that all requirements have been met and procedures have occurred in order to ensure the enforceability of the Bond, this Agreement, the Escrow Agreement and the Tax Regulatory Agreement against Issuer, and Issuer has complied with such public bidding requirements as may be applicable to the Bond, this Agreement, the Escrow Agreement and the Equipment. Issuer has taken all necessary action and has complied with all provisions of the Act, including but not limited to the making of the findings required by the Act, required to make the Bond, this Agreement, the Escrow Agreement and the Tax Regulatory Agreement the valid and binding obligation of Issuer. (e) The officer of Issuer executing the Bond, this Agreement and any related documents has been duly authorized to issue the Bond and to execute and deliver this Agreement, the Escrow Agreement and the Tax Regulatory Agreement and such related documents under the terms and provisions of a resolution of Issuer's governing body, or by other appropriate official action. (f) The Bond, this Agreement, the Escrow Agreement and the Tax Regulatory Agreement are legal, valid and binding obligations of Issuer, enforceable in accordance with their respective terms, except to the extent limited by bankruptcy, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights. (g) Issuer has assigned to Lender all of Issuer's rights in the Equipment and this Agreement (except any indemnification payable to Issuer pursuant to Section 7.06 hereof, notice to Issuer pursuant to Section 12.03 hereof and its right to receive reimbursement for costs and expenses pursuant to Section 12.01A hereof) including the assignment of all rights in the security interest in the Equipment granted to Issuer by Borrower. Exhibit 10.18.14 - 15 (h) Issuer will not pledge, mortgage or assign this Agreement or its duties and obligations hereunder to any person, firm or corporation, except as provided under the terms hereof. (i) None of the issuance of the Bond or the execution and delivery of this Agreement, the Escrow Agreement or the Tax Regulatory Agreement, the consummation of the transactions contemplated hereby or the fulfillment of or compliance with the terms and conditions of the Bond, this Agreement, the Escrow Agreement or the Tax Regulatory Agreement violates any law, rule, regulation or order, conflicts with or results in a breach of any of the terms, conditions or provisions of any restriction or any agreement or instrument to which Issuer is now a party or by which it is bound or constitutes a default under any of the foregoing or results in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Issuer under the terms of any instrument or agreement. (j) There is no action, suit, proceeding, claim, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body pending or, to the best of Issuer's knowledge, threatened against or affecting Issuer, challenging Issuer's authority to issue the Bond or to enter into this Agreement, the Escrow Agreement or the Tax Regulatory Agreement or any other action wherein an unfavorable ruling or finding would adversely affect the enforceability of the Bond, this Agreement, the Escrow Agreement or the Tax Regulatory Agreement or any other transaction of Issuer which is similar hereto, or the exclusion of the Interest from gross income for federal tax purposes under the Code, or would materially and adversely affect any of the transactions contemplated by this Agreement. (k) Issuer will submit or cause to be submitted to the Secretary of the Treasury a Form 8038 (or other information reporting statement) at the time and in the form required by the Code. (l) The issuance of the Bond for the purpose of financing the Equipment has been approved by the "applicable elected representative" (as defined in Section 147(f) of the Code) of Issuer after a public hearing held upon reasonable notice. (m) Issuer will comply fully at all times with the Tax Regulatory Agreement, and Issuer will not take any action, or omit to take any action, which, if taken or omitted, respectively, would violate the Tax Regulatory Agreement. (n) Issuer will take no action that would cause the Interest to become includable in gross income for federal income tax purposes under the Code (including, without limitation, intentional acts under Treas. Reg. ss. 1.148-2(c) or consenting to a deliberate action within the meaning of Treas. Reg. ss. 1.141-2(d)), and Issuer will take and will cause its officers, employees and agents to take all affirmative actions legally within its power necessary to ensure that the Interest does not become includable in gross income of the recipient for federal income tax purposes under the Code (including, without limitation, the calculation and payment of any rebate required to preserve such exclusion). Exhibit 10.18.14 - 16 ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER Borrower represents, warrants and covenants for the benefit of Lender and Issuer, as follows: (a) Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Israel, has power to enter into this Agreement and by proper action has duly authorized the execution and delivery of this Agreement, the Escrow Agreement and the Tax Regulatory Agreement. Borrower is in good standing and is duly licensed or qualified to transact business in the State and in all jurisdictions where the failure to be so licensed or qualified would have a material adverse effect on the Borrower's business or prospects. (b) Borrower has been fully authorized to execute and deliver this Agreement, the Escrow Agreement and the Tax Regulatory Agreement under the terms and provisions of the resolution of its board of directors, or by other appropriate official approval, and further represents, covenants and warrants that all requirements have been met, and procedures have occurred in order to ensure the enforceability of this Agreement, the Escrow Agreement and the Tax Regulatory Agreement and this Agreement, the Escrow Agreement and the Tax Regulatory Agreement have been duly authorized, executed and delivered. (c) The President of Borrower executing this Agreement, the Escrow Agreement and the Tax Regulatory Agreement and any related documents has been duly authorized to execute and deliver this Agreement, the Escrow Agreement and the Tax Regulatory Agreement and such related documents under the terms and provisions of a resolution of Borrower. (d) This Agreement, the Escrow Agreement and the Tax Regulatory Agreement constitute valid and legally binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except to the extent limited by bankruptcy, reorganization or other laws of general application relating to effecting the enforcement of creditors' rights. (e) The execution and delivery of this Agreement, the Escrow Agreement and the Tax Regulatory Agreement, the consummation of the transactions contemplated hereby and the fulfillment of the terms and conditions hereof do not and will not violate any law, rule, regulation or order, conflict with or result in a breach of any of the terms or conditions of the articles of incorporation or by laws of Borrower or of any restriction or of any agreement or instrument to which Borrower is now a party and do not and will not constitute a default under any of the foregoing or result in the creation or imposition of any liens, charges or encumbrances of any nature upon any of the property or assets of Borrower contrary to the terms of any instrument or agreement. (f) The authorization, execution, delivery and performance of this Agreement by Borrower do not require submission to, approval of, or other action by any governmental authority or agency, which action with respect to this Agreement has not been taken and which is final and nonappealable. (g) There is no action, suit, proceeding, claim, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body pending or, to the best of Borrower's knowledge, threatened against or affecting Borrower, challenging Borrower's authority to enter into Exhibit 10.18.14 - 17 this Agreement, the Escrow Agreement or the Tax Regulatory Agreement or any other action wherein an unfavorable ruling or finding would adversely affect the enforceability of this Agreement, the Escrow Agreement or the Tax Regulatory Agreement or any other transaction of Borrower which is similar hereto, or the exclusion of the Interest from gross income for federal tax purposes under the Code, or would materially and adversely affect the financial condition, business or properties of borrower or any of the transactions contemplated by this Agreement. (h) The property at which the Equipment is located is properly zoned for its current and anticipated use and the use of the Equipment will not violate any applicable zoning, land use, environmental or similar law or restriction. Borrower has all licenses and permits to use the Equipment. Borrower has obtained all permits, licenses and other authorizations which are required under federal, state and local laws relating to emissions, discharges, releases of pollutants, contaminants, hazardous or toxic materials, or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes ("Environmental Laws") at Borrower's facilities or in connection with the operation of its facilities. Borrower and all activities of Borrower at its facilities comply with all Environmental Laws and with all terms and conditions of any required permits, licenses and authorizations applicable to Borrower with respect thereto. Borrower is also in compliance with all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in Environmental Laws or contained in any plan, order, decree, judgment or notice of which Borrower is aware. Borrower is not aware of, nor has Borrower received notice of, any events, conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance with, or which may give rise to any liability under, any Environmental Laws. (i) The Equipment is of the type authorized and permitted to be financed with the proceeds of the Bond pursuant to the Act. (j) Borrower owns or will own the Equipment and intends to operate the Equipment, or cause the Equipment to be operated, as a "Project," within the meaning of the Act, until the date on which all of the Loan Payments have been fully paid or the applicable Prepayment Amount has been fully paid. (k) Borrower will not take any action that would cause the Interest to become includable in gross income of the recipient for federal income tax purposes under the Code (including, without limitation, intentional acts under Treas. Reg. ss. 1.148-2(c) or deliberate action within the meaning of Treas. Reg. ss. 1.141-2(d)), and Borrower will take and will cause its officers, employees and agents to take all affirmative actions legally within its power necessary to ensure that the Interest does not become includable in gross income of the recipient for federal income tax purposes under the Code (including, without limitation, the calculation and payment of any rebate required to preserve such exclusion). (l) Borrower has heretofore furnished to Lender the compiled financial statement of Borrower for its fiscal years ended December 31, 1999 through December 31, 2001, the management-prepared financial statement of Borrower for the six (6) months ended June 30, 2001 and June 30, 2002, and those statements fairly present the financial condition of Borrower and Guarantor on the dates thereof and the results of their operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the business, properties or condition Exhibit 10.18.14 - 18 (financial or otherwise) of Borrower or the Guarantor. (m) Borrower has paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by it. Borrower has filed all federal, state and local tax returns which are required to be filed, and Borrower has paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by it to the extent such taxes have become due. (n) Borrower has or will have good and absolute title to all Equipment and all proceeds thereof, free and clear of all mortgages, security interests, liens and encumbrances except for the security interest created pursuant to this Agreement. (o) All financial and other information provided to Lender by or on behalf of Borrower in connection with Borrower's request for the Loan contemplated hereby is true and correct in all material respects and, as to projections, valuations or pro forma financial statements, present a good faith opinion as to such projections, valuations and pro forma condition and results. (p) Borrower has authorized Lender to file financing statements sufficient when filed to perfect the security interest created pursuant to this Agreement. When such financing statements are filed in the offices noted therein, Lender, as assignee of Issuer and holder of the Bond, will have a valid and perfected security interest in the Equipment, subject to no other security interest, assignment, lien or encumbrance. None of the Equipment is or will become a fixture on real estate. None of the Equipment constitutes a replacement of, substitution for or accessory to any property of Borrower subject to a lien of any kind. Borrower leases the real property upon which the Equipment will be located subject to no liens or encumbrances of any kind. (q) Upon delivery and installation of the Equipment, Borrower will provide to Issuer and Lender a completed and executed copy of the Certificate of Acceptance attached hereto as Exhibit B. (r) Borrower will aid and assist Issuer in connection with preparing and submitting to the Secretary of the Treasury a Form 8038 (or other applicable information reporting statement) at the time and in the form required by the Code. (s) Borrower will comply fully at all times with the Tax Regulatory Agreement, and Borrower will not take any action, or omit to take any action, which, if taken or omitted, respectively, would violate the Tax Regulatory Agreement. (t) Expenses for work done by officers or employees of Borrower in connection with the Equipment will be included as an Acquisition Cost, if at all, only to the extent (i) such persons were specifically employed for such particular purpose, (ii) the expenses do not exceed the actual cost thereof and (iii) such expenses are treated or capable of being treated (whether or not so treated) on the books of Borrower as a capital expenditure in conformity with generally accepted accounting principles applied on a consistent basis. (u) Any costs incurred with respect to that part of the Equipment paid from the Loan Proceeds shall be treated or capable of being treated on the books of Borrower as capital expenditures in conformity with generally accepted accounting principles applied on a consistent basis. Exhibit 10.18.14 - 19 (v) No part of the Loan Proceeds will be used to finance inventory or rolling stock or will be used for working capital or to finance any other cost not constituting an Acquisition Cost. (w) No person other than Borrower is in occupancy or possession of any portion of the real property where the Equipment is located. (x) The Equipment is property of the character subject to the allowance for depreciation under Section 167 of the Code. (y) The Borrower has received proper State Wide Planning approval prior to the date of this Agreement. ARTICLE VI TITLE TO EQUIPMENT; SECURITY INTEREST Section 6.01. TITLE TO EQUIPMENT . Legal title to the Equipment and any and all repairs, replacements, substitutions and modifications to such Equipment shall be in Borrower. Borrower will at all times protect and defend, at its own cost and expense, its title from and against all claims, liens and legal processes of creditors of Borrower, and keep all Equipment free and clear of all such claims, liens and processes. Section 6.02. SECURITY INTEREST IN EQUIPMENT . This Agreement is intended to constitute a security agreement within the meaning of the UCC or other applicable law. As security for Borrower's payment to Lender, as assignee of Issuer, of Loan Payments and all other amounts payable to Lender hereunder. Borrower hereby grants to Issuer, and Issuer hereby assigns to Lender, a security interest constituting a first lien, security interest, pledge and senior first priority specific charge on: (A) the Equipment, (B) all general intangibles and other property relating thereto, (C) all warehouse receipts, bills of lading and other documents of title now or hereafter covering any of the foregoing property, (D) all securities, funds, moneys, deposits and other property at any time held in or subject to the Escrow Fund, (E) all accessions thereto, (F) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed or used in connection with any of the foregoing property, (G) all substitutions for any of the foregoing property and (H) products and proceeds of any of the foregoing property. Borrower authorizes Lender, and hereby grants Lender a power of attorney (which is coupled with an interest), to file financing statements and amendments thereto describing the Equipment and containing any other information required by the applicable UCC or other applicable law and all proper terminations of the filings of other secured parties with respect to the Equipment, in such form and substance as Lender, in its sole discretion, may determine. Issuer and Borrower agree to execute such additional documents, including financing statements, deeds of charge, assignments, affidavits, notices and similar instruments, in form satisfactory to Lender, and take such other actions that Lender reasonably deems necessary or appropriate to establish and maintain the security interest created by this Section, and Issuer and Borrower hereby designate and appoint Lender as their agent, and grant to Lender a power of attorney (which is coupled with an interest), to execute on behalf of Issuer and Borrower, as the case may be, such additional documents and to take such other actions. If requested by Lender, Borrower shall obtain a landlord and/or mortgagee's consent and waiver with respect to the property where the Equipment is located. Borrower hereby waives any right that Borrower may have to file with the applicable filing officer any financing statement, amendment, termination or other record pertaining to the Equipment and/or Lender's interest therein. If requested by Lender, Borrower shall conspicuously mark the Equipment with appropriate lettering, labels or tags, and maintain such markings, so as clearly to disclose Lender's security interest in the Equipment. Exhibit 10.18.14 - 20 Section 6.03. CHANGE IN NAME OR CORPORATE STRUCTURE OF BORROWER; CHANGE IN LOCATION OF BORROWER'S PRINCIPAL PLACE OF BUSINESS . Borrower's chief executive office is located at the address set forth above, and all of Borrower's records relating to its business and the Equipment are kept at such location. Borrower hereby agrees to provide written notice to Lender and Issuer of any change or proposed change in its name, corporate structure, place of business or chief executive office or change or proposed change in the location of the Equipment. Such notice shall be provided thirty (30) days in advance of the date that such change or proposed change is planned to take effect. Borrower does business, and has done business, only under its own name and the trade names, if any, set forth on the execution page hereof. Section 6.04. LIENS AND ENCUMBRANCES TO TITLE . Borrower shall not, directly or indirectly, create, incur, assume or suffer to exist any mortgage, deed of trust, pledge, lien, charge, encumbrance or claim (together, "Liens") on or with respect to the Equipment or on or with respect to the real property where the Equipment will be located other than the respective rights of Lender and Issuer as herein provided; PROVIDED, HOWEVER, Borrower may create, incur, assume or suffer to exist a mortgage, deed of trust or similar lien on the real property where the Equipment will be located if Borrower provides Lender with a mortgagee's waiver or similar waiver in form and substance acceptable to lender. Borrower shall promptly, at its own expense, take such action as may be necessary to discharge or remove any such Lien or to provide Lender with a mortgagee's waiver or similar waiver. Borrower shall reimburse Lender for any expenses incurred by Lender to discharge or remove any Lien or for obtaining such waiver. Exhibit 10.18.14 - 21 Section 6.05. PERSONAL PROPERTY . The parties hereby agree that the Equipment is, and during the period this Agreement is in force will remain, personal property and, when subjected to use by Borrower hereunder, will not be or become fixtures; PROVIDED, HOWEVER, that if contrary to the parties' intent the Equipment is or may be deemed to be a fixture, Borrower shall cause filings to be made with the applicable government officials or filing offices to create and preserve for Lender as assignee of Issuer a perfected first priority security interest in the Equipment. Section 6.06. ASSIGNMENT OF INSURANCE . As additional security (but not as an absolute transfer) for the payment and performance of Borrower's obligations hereunder, Borrower hereby assigns to Lender, as assignee of Issuer, any and all moneys (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Equipment or any evidence thereof or any business records or valuable papers pertaining thereto, and Borrower hereby directs the issuer of any such policy to pay all such moneys directly to Lender. Borrower hereby assigns to Lender, as assignee of Issuer, any and all moneys due or to become due with respect to any condemnation proceeding affecting the Equipment. At any time, whether before or after the occurrence of any Event of Default, Lender may (but need not), in Lender's name or in Borrower's name, execute and deliver proof of claim, receive all such moneys, endorse checks and other instruments representing payment of such moneys, and adjust, litigate, compromise or release any claim against the issuer of any such policy or party in any condemnation proceeding. Section 6.07. OCCUPANCY. (a) Borrower hereby irrevocably grants to Lender the right to occupy the property where the Equipment is located (the "Premises") at any time after the occurrence and during the continuance of an Event of Default. (b) Lender may occupy the Premises only to hold, sell, store, liquidate, realize upon or otherwise dispose of the Equipment and for other purposes that Lender may in good faith deem to be related or incidental purposes. (c) The right of Lender to occupy the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all obligations of Borrower and Issuer hereunder, and (ii) final sale or disposition of all of the Equipment and delivery of all such Equipment to purchasers. (d) Lender shall not be obligated to pay or account for any rent or other compensation for the occupancy of the Premises. Borrower will pay, or reimburse Lender for, all taxes, fees, duties, levies, charges and expenses at any time incurred by or imposed upon Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Section. Section 6.08. AGREEMENT AS FINANCING STATEMENT . To the extent permitted by applicable law, a carbon, photographic or other reproduction of this Agreement or of any financing statements signed by signed by Borrower is sufficient as a financing statement in any state to perfect the security interests granted in this Agreement. Exhibit 10.18.14 - 22 ARTICLE VII AFFIRMATIVE COVENANTS OF BORROWER So long as the Loan shall remain unpaid, Borrower will comply with the following requirements: Section 7.01. REPORTING REQUIREMENTS . Borrower will deliver, or cause to be delivered, to Lender each of the following, which shall be in form and detail acceptable to Lender: (a) as soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year of Borrower and the Guarantors, the compiled financial statements of the Borrower and the Guarantors with the compilation report of independent certified public accountants of national standing selected by Borrower stating that such compilation is limited to presenting in form of financial statements information that is the representation of management and that, during such compilation, the accountants did not become aware of a departure from generally accepted accounting principles, which annual financial statements shall include the balance sheet of the Borrower and the Guarantors as at the end of such fiscal year and the related statements of income, retained earnings and cash flows of the Borrower and the Guarantors for the fiscal year then ended, all in reasonable detail and prepared in accordance with generally accepted accounting principles, together with a certificate of the chief financial officer of Borrower and the Guarantors stating (x) that such financial statements have been prepared in accordance with generally accepted accounting principles; (y) whether such officer has knowledge of the occurrence of any Default or Event of Default hereunder or fact or facts which may result in such a Default or Event of Default during the succeeding one hundred twenty (120) days and, if so, stating in reasonable detail the facts with respect thereto, and (z) all relevant facts in reasonable detail to evidence, and the computations as to whether Borrower is in compliance with the requirements set forth in Sections 7.09 and 7.10 hereof; (b) as soon as available and in any event within ninety (90) days after the end of the first three fiscal quarters of Borrower and the Guarantors, an unaudited balance sheet and statement of income and retained earnings of the Borrower and the Guarantors as of the end of and for such fiscal quarter then ended, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with generally accepted accounting principles and certified by the chief financial officer of Borrower and the Guarantors, subject to year-end audit adjustments; and accompanied by a certificate of that officer stating (i) that such financial statements have been prepared in accordance with generally accepted accounting principles, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied or fact or facts which may result in such a Default or Event of Default during the succeeding one hundred twenty (120) days and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to whether Borrower is in compliance with the requirements set forth in Sections 7.09 and 7.10 hereof; (c) immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting Borrower of the type described in Article V hereof or which seek an uninsured monetary recovery against Borrower in excess of $100,000; (d) as promptly as practicable (but in any event not later than five (5) Business Days) after an officer of Borrower obtains knowledge of the occurrence of any event that constitutes a Default or an Event of Default Exhibit 10.18.14 - 23 hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of Borrower of the steps being taken by Borrower to cure the effect of such Default or Event of Default; (e) promptly upon obtaining actual knowledge thereof, notice of any loss or destruction of or damage to any Equipment or of any material adverse change in any Equipment; (f) promptly after the amending thereof, copies of any and all amendments to its articles of incorporation or by laws that changes the name of Borrower; (g) promptly upon knowledge thereof, notice of the violation by Borrower of any law, rule or regulation the violation of which would have a material adverse effect on Borrower's financial or operational condition; (h) within 30 days of request by Lender, evidence satisfactory to Lender that Borrower has complied with the capital expenditure limitations of Code Section 144(a)(4); and (i) promptly upon knowledge thereof, notice of any material adverse change in the financial or operating condition of Borrower. Section 7.02. BOOKS AND RECORDS; INSPECTION AND EXAMINATION . Borrower will keep accurate books of record and account for itself pertaining to the Equipment and pertaining to Borrower's business and financial condition and such other matters as Lender may from time to time request in which true and complete entries will be made in accordance with generally accepted accounting principles consistently applied and will permit any officer, employee, attorney or accountant for Lender to audit, review, make extracts from, or copy any and all company and financial books, records and properties of Borrower at all times during ordinary business hours, and to discuss the affairs of Borrower with any of its members, officers, employees or agents. Borrower will permit Lender, or its employees, accountants, attorneys or agents, to examine and copy any or all of its records and to examine and inspect the Equipment at any time during Borrower's business hours. Section 7.03. COMPLIANCE WITH LAWS; ENVIRONMENTAL INDEMNITY . Borrower will (a) comply with the requirements of applicable laws and regulations, the noncompliance with which would materially and adversely affect its business or its financial condition, (b) comply with all applicable Environmental Laws and regulations and obtain any permits, licenses or similar approvals required by any such laws or regulations and (c) use and keep the Equipment, and will require that others use and keep the Equipment, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. Borrower shall secure all permits and licenses, if any, necessary for the installation and operation of the Equipment. Borrower shall comply in all respects (including, without limitation, with respect to the use, maintenance and operation of each item of the Equipment) with all laws of the jurisdictions in which its operations involving any component of Equipment may extend and of any legislative, executive, administrative or judicial body exercising any power or jurisdiction over the items of the Equipment or its interest or rights under this Agreement. Borrower will indemnify, defend and hold Lender harmless from and against any claims, loss or damage to which Lender may be subjected as a result of any past, present or future existence, use, handling, storage, transportation or disposal of any hazardous waste or substance or toxic substance by Borrower or on property owned, leased or controlled by Borrower. This indemnification shall survive the termination of this Agreement and payment of the indebtedness hereunder and under the Bond. Exhibit 10.18.14 - 24 Section 7.04. PAYMENT OF TAXES AND OTHER CLAIMS . Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Equipment) or upon or against the creation, perfection or continuance of the security interest created pursuant to this Agreement, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of Borrower; provided, that Borrower shall not be required to pay any such tax, assessment, charge or claim (i) whose amount, applicability or validity is being contested in good faith by appropriate proceedings, (ii) that in the aggregate do not exceed $10,000, and (iii) which Borrower has posted a bond for. Borrower will pay, as the same respectively come due, all taxes and governmental charges of any kind whatsoever that may at any time be lawfully assessed or levied against or with respect to the Equipment, as well as all gas, water, steam, electricity, heat, power, telephone, utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Equipment. Section 7.05. MAINTENANCE OF EQUIPMENT . (a) Borrower shall, at its own expense, maintain, preserve and keep the Equipment in good repair, working order and condition, and shall from time to time make all repairs and replacements necessary to keep the Equipment in such condition, and in compliance with state and federal laws, ordinary wear and tear excepted. Borrower shall maintain the Equipment in a condition suitable for certification by the manufacturer thereof (if certification is available) and in conformance with all manufacturer's recommended maintenance requirements. In the event that any parts or accessories forming part of any item or items of Equipment become worn out, lost, destroyed, damaged beyond repair or otherwise rendered unfit for use, Borrower, at its own expense and expeditiously, will replace or cause the replacement of such parts or accessories by replacement parts or accessories free and clear of all liens and encumbrances and with a value and utility at least equal to that of the parts or accessories being replaced (assuming that such replaced parts and accessories were otherwise in good working order and repair). All such replacement parts and accessories shall be deemed to be incorporated immediately into and to constitute an integral portion of the Equipment and, as such, shall be subject to the terms of this Agreement. Neither Lender nor Issuer shall have any responsibility in any of these matters, or for the making of improvements or additions to the Equipment. (b) Borrower will defend the Equipment against all claims or demands of all persons (other than Lender) claiming the Equipment or any interest therein. (c) Borrower will keep the Equipment free and clear of all security interests, liens and encumbrances except the security interest created pursuant to this Agreement. Section 7.06. INSURANCE. (a) Borrower shall, at its own expense, procure and maintain continuously in effect: (i) public liability insurance for personal injuries, death or damage to or loss of property arising out of or in any way relating to the Equipment sufficient to protect Lender from liability in all events, with a coverage limit of not less than $1,000,000 per occurrence unless a different coverage minimum with respect to particular Equipment is required by Lender, and (ii) insurance against such hazards as Lender may require, including, but not limited to, all-risk casualty and property insurance, in an amount equal to the greater of the full replacement cost of the Exhibit 10.18.14 - 25 Equipment with new equipment having substantially similar specifications or the applicable Prepayment Amount. (b) In accordance with State law, Borrower shall carry workers' compensation insurance covering all employees on, in, near or about the Equipment, and upon request, shall furnish to Lender certificates evidencing such coverage. (c) All insurance policies required by this Article shall be taken out and maintained with insurance companies acceptable to Lender; and shall contain a provision that the insurer shall not cancel or revise coverage thereunder without giving written notice to the insured parties at least thirty (30) days before the cancellation or revision becomes effective. No insurance shall be subject to any co-insurance clause. Each insurance policy required by this Article shall name Lender as an additional insured party and loss payee without regard to any breach of warranty or other act or omission of Borrower and shall include a lender's loss payable endorsement for the benefit of Lender. Prior to the delivery of Equipment, Borrower shall deposit with Lender evidence satisfactory to Lender of such insurance and, prior to the expiration thereof, shall provide Lender evidence of all renewals or replacements thereof. (d) As among Lender, Borrower and Issuer, Borrower assumes all risks and liabilities from any cause whatsoever, whether or not covered by insurance, for loss or damage to any Equipment and for injury to or death of any person or damage to any property, whether such injury or death be with respect to agents or employees of Borrower or of third parties, and whether such property damage be to Borrower's property or the property of others. As among Lender, Borrower and Issuer, whether or not covered by insurance, Borrower hereby assumes responsibility for and agrees to reimburse Lender and Issuer for and will indemnify, defend and hold Lender and Issuer harmless from and against all liabilities, obligations, losses, damages, penalties, claims, actions, costs and expenses (including reasonable attorneys' fees) not solely and directly caused by Lender's or Issuer's gross negligence or willful misconduct of whatsoever kind and nature, imposed on, incurred by or asserted against Lender or Issuer that in any way relate to or arise out of this Agreement, the transactions contemplated hereby and the Equipment, including but not limited to, (i) the selection, manufacture, purchase, acceptance or rejection of Equipment or the ownership of the Equipment, (ii) the delivery, lease, possession, maintenance, use, condition, return or operation of the Equipment, (iii) the condition of the Equipment sold or otherwise disposed of after possession by Borrower, (iv) any patent or copyright infringement, (v) the conduct of Borrower, its officers, employees and agents, (vi) a breach of Borrower of any of its covenants or obligations hereunder and (vii) any claim, loss, cost or expense involving alleged damage to the environment relating to the Equipment, including, but not limited to investigation, removal, cleanup and remedial costs. All amounts payable by Borrower pursuant to the immediately preceding sentence shall be paid immediately upon demand of Issuer or Lender, as the case may be. This provision shall survive the termination of this Agreement. Section 7.07. PRESERVATION OF EXISTENCE . Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business; and shall conduct its business. Section 7.08. PERFORMANCE BY LENDER . If Borrower at any time fails to perform or observe any of the covenants or agreements contained in this Agreement, and if such failure shall continue for a period of ten calendar days after Lender gives Borrower written notice thereof (or in the case of the agreements contained in Sections 7.05 and 7.06 hereof, immediately upon the occurrence of such failure, without notice or lapse of time), Lender may, but need not, perform or observe such covenant on behalf and in the name, place and Exhibit 10.18.14 - 26 stead of Borrower (or, at Lender's option, in Lender's name) and may, but need not, take any and all other actions which Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and Borrower shall thereupon pay to Lender on demand the amount of all moneys expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by Lender, together with interest thereon from the date expended or incurred at the lesser of 18% per annum or the highest rate permitted by law. To facilitate the performance or observance by Lender of such covenants of Borrower, Borrower hereby irrevocably appoints Lender, or the delegate of Lender, acting alone, as the attorney-in-fact of Borrower with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by Borrower under this Agreement. Section 7.09. FINANCIAL COVENANTS . Borrower will cause Pharmaceutical Resources, Inc. to comply with the following: (a) WORKING CAPITAL REQUIREMENT. Pharmaceutical Resources, Inc. excess of current assets over current liabilities, both as determined in accordance with general accounting practices applied on a consistent basis, shall be no less than Fifty Million Dollars ($50,000,000). (b) RATIO OF DEBT TO TANGIBLE NET WORTH. Pharmaceutical Resources, Inc. will maintain at all times its ratio of Debt (as defined above) to Tangible Net Worth (as defined below) at not more than 3.00 to 1.00. "Tangible Net Worth" means the excess of: (a) the tangible assets of Pharmaceutical Resources, Inc., which, in accordance with generally accepted accounting principles, are tangible assets, after deducting adequate reserves in each case where, in accordance with generally accepted accounting principles, a reserve is proper over (b) all Debt of Pharmaceutical Resources, Inc.; PROVIDED, HOWEVER, that (i) inventory shall be taken into account on the basis of the cost (determined on a first-in, first-out basis) or current market value (if known or easily asertainable), whichever is lower, (ii) in no event shall there be included as such tangible assets patents, trademarks, trade names, copyrights, licenses, good will, advances or loans to, or receivables from, directors, officers, employees or affiliates, prepaid or intangible assets, amounts relating to covenants not to compete, pensions assets, deferred charges or treasury stock or any securities or Debt of Pharmaceutical Resources, Inc. or any other securities unless the same are readily marketable in the United States of America or entitled to be used as a credit against federal income tax liabilities, (iii) securities included as such tangible assets shall be taken into account at their current market price or cost, whichever is lower, and (iv) any write-up in the book value of any assets shall not be taken into account. Exhibit 10.18.14 - 27 (c) TANGIBLE NET WORTH. Pharmaceutical Resources, Inc. will maintain its Tangible Net Worth (as defined above) at not less than Fifty Million Dollars at all times during the lease term. Section 7.10. COVENANT REGARDING TAX REGULATORY AGREEMENT . The representations made by Borrower in the Tax Regulatory Agreement are true and correct in all material respects and do not omit any further statement, the absence of which might be misleading in light of the statements made. The Borrower shall observe, perform and comply with all covenants and warranties undertaken by it in the Tax Regulatory Agreement. Exhibit 10.18.14 - 28 ARTICLE VIII NEGATIVE COVENANTS OF BORROWER So long as the Loan and the Bond shall remain unpaid, Borrower agrees that: Section 8.01. LIEN . Borrower will not create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of the Equipment except for the security interest created pursuant to this Agreement. Section 8.02. SALE OF ASSETS . Borrower will not sell, lease, assign, transfer or otherwise dispose of all or a substantial part of its assets or of any of the Equipment or any interest therein (whether in one transaction or in a series of transactions). Section 8.03. CONSOLIDATION AND MERGER . Borrower will not consolidate with or merge into any person, or permit any other person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all of the assets of any other person. (There can be no change in ownership of borrower during the term of the lease). Section 8.04. ACCOUNTING . Borrower will not adopt, permit or consent to any material change in accounting principles other than as required by generally accepted accounting principles. Borrower will not adopt, permit or consent to any change in its fiscal year. Section 8.05. TRANSFERS . Borrower will not in any manner transfer any property without prior or present receipt of full and adequate consideration. Section 8.06. [RESERVED]. Section 8.07. PLACE OF BUSINESS . Borrower will not permit any of the Equipment or any records pertaining to the Equipment to be located in any state or area in which, in the event of such location, a financing statement covering such Equipment would be required to be, but has not in fact been, filed in order to perfect the security interest created pursuant to this Agreement. Section 8.08. MODIFICATIONS AND SUBSTITUTIONS . (a) Borrower will not make any material alterations, modifications or additions to the Equipment which cannot be removed without materially damaging the functional capabilities or economic value of the Equipment. Upon return of the Equipment to Lender and at the request of Lender, Borrower, at its sole cost and expense, will remove all alterations, modifications and additions and repair the Equipment as necessary to return the Equipment to the condition in which it was furnished, ordinary wear and tear and permitted modifications excepted. (b) Notwithstanding the provisions of subparagraph (a) of this section, Borrower may, with the prior written consent of Lender, substitute for parts, elements, portions or all of the Equipment, other parts, elements, portions, equipment or facilities; PROVIDED, HOWEVER, that any substitutions made pursuant to Borrower's obligations to make repairs referenced under any provision of this Agreement shall not require such prior written consent. Borrower shall provide Exhibit 10.18.14 - 29 such documents or assurances as Lender may reasonably request to maintain or confirm the security interest assigned to Lender in the Equipment as so modified or substituted. Section 8.09. USE OF THE EQUIPMENT . Borrower will not install, use, operate or maintain the Equipment improperly, carelessly, in violation of any applicable law or in a manner contrary to that contemplated by this Agreement. ARTICLE IX DAMAGE AND DESTRUCTION; USE OF NET PROCEEDS Borrower shall provide a complete written report to Lender immediately upon any loss, theft, damage or destruction of any Equipment and of any accident involving any Equipment. If all or any part of the Equipment is lost, stolen, destroyed or damaged beyond repair ("Damaged Equipment"), Borrower shall as soon as practicable after such event either: (a) replace the same at Borrower's sole cost and expense with equipment having substantially similar specifications and of equal or greater value to the Damaged Equipment immediately prior to the time of the loss occurrence, such replacement equipment to be subject to Lender's approval, whereupon such replacement equipment shall be substituted in this Agreement and the other related documents by appropriate endorsement or amendment; or (b) pay the applicable Prepayment Amount of the Damaged Equipment. Borrower shall notify Lender of which course of action it will take within fifteen (15) calendar days after the loss occurrence. If, within forty-five (45) calendar days of the loss occurrence, (a) Borrower fails to notify Lender; (b) Borrower and Lender fail to execute an amendment to this Agreement to delete the Damaged Equipment and add the replacement equipment or (c) Borrower fails to pay the applicable Prepayment Amount, then Lender may, at its sole discretion, declare the applicable Prepayment Amount to be immediately due and payable, and Borrower is required to pay the same. The Net Proceeds of insurance with respect to the Damaged Equipment that is not repaired or replaced shall be made available by Lender to be applied to discharge Borrower's obligation under this Article. The payment of the Prepayment Amount and the termination of Lender's interest in the Damaged Equipment is subject to the terms of Section 2.07 hereof. For purposes of this Article, the term "Net Proceeds" shall mean the amount remaining from the gross proceeds of any insurance claim or condemnation award after deducting all expenses (including reasonable attorneys' fees) incurred in the collection of such claim or award. Exhibit 10.18.14 - 30 ARTICLE X ASSIGNMENT, SUBLEASING AND SELLING Section 10.01. ASSIGNMENT BY LENDER . This Agreement, and the obligations of Borrower to make payments hereunder, may be assigned and reassigned in whole or in part to one or more assignees or subassignees (who shall be purchaser of the Bond or an interest therein) by Lender at any time subsequent to its execution, without the necessity of obtaining the consent of Issuer or Borrower; PROVIDED, HOWEVER, that no such assignment or reassignment shall be effective unless and until (a) Issuer and Borrower shall have received notice of the assignment or reassignment disclosing the name and address of the assignee or subassignee, which notice Issuer shall maintain as evidence of the ownership and registration of the Bond, and (b) in the event that such assignment or reassignment is made to a bank or trust company as trustee for holders of certificates representing interests in this Agreement and the Bond, such bank or trust company agrees to maintain, or cause to be maintained, a book-entry system by which a record of the names and addresses of such holders as of any particular time is kept and agrees, upon request of Issuer or Borrower, to furnish such information to Issuer or Borrower. Upon receipt of notice of assignment, Borrower will reflect in a book-entry the assignee designated in such notice of assignment, and shall agree to make all payments to the assignee designated in the notice of assignment, notwithstanding any claim, defense, setoff or counterclaim whatsoever (whether arising from a breach of this Agreement or otherwise) that Issuer and Borrower may from time to time have against Lender or the assignee. Issuer and Borrower agree to execute all documents, including notices of assignment and chattel mortgages or financing statements, which may be reasonably requested by Lender or its assignee to protect their interest in the Equipment and in this Agreement. Section 10.02. NO SALE OR ASSIGNMENT BY BORROWER . This Agreement and the interest of Borrower in the Equipment may not be sold, assumed, assigned or encumbered by Borrower. ARTICLE XI EVENTS OF DEFAULT AND REMEDIES Section 11.01. EVENTS OF DEFAULT . The following constitute "Events of Default" under this Agreement: (a) failure by Borrower to pay to Lender, as assignee of Issuer, when due any Loan Payment or to pay any other payment required to be paid hereunder and the continuation of such failure for a period of ten (10) days; (b) failure by Borrower to maintain insurance on the Equipment in accordance with Section 7.06 hereof; (c) failure by Borrower to comply with the provisions of Sections 7.06, 7.09, 7.10, 7.11, 8.01, 8.02 or 8.03 hereof; (d) failure by Borrower or Issuer to observe and perform any other covenant, condition or agreement contained herein, in the Escrow Agreement, in the Tax Regulatory Agreement or in any other document or agreement executed in connection herewith on its part to be observed or performed for a period of thirty (30) days after written notice is given to Borrower or Issuer, as the case may be, specifying such failure and requesting that it be remedied; Exhibit 10.18.14 - 31 PROVIDED, HOWEVER, that, if the failure stated in such notice cannot be corrected within such 30-day period, Lender will not unreasonably withhold its consent to an extension of such time if corrective action is instituted by Borrower or Issuer, as the case may be, within the applicable period and diligently pursued until the default is corrected; (e) initiation by Issuer of a proceeding under any federal or state bankruptcy or insolvency law seeking relief under such laws concerning the indebtedness of Issuer; (f) Borrower or either Guarantor, as the case may be, shall be or become insolvent, or admit in writing its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or Borrower or either Guarantor, as the case may be, shall apply for or consent to the appointment of any receiver, trustee or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of Borrower or either Guarantor, as the case may be; or Borrower or either Guarantor, as the case may be, shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against Borrower or either Guarantor, as the case may be; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of Borrower; (g) determination by Lender that any representation or warranty made by Borrower, Guarantor or Issuer herein, in the Tax Regulatory Agreement or in any other document executed in connection herewith was untrue in any material respect when made; (h) an Event of Taxability shall occur; (i) an amendment or termination related to a filed financing statement describing any of the Equipment is improperly filed; (j) the occurrence of a default or an event of default under any instrument, agreement or other document evidencing or relating to any indebtedness or other monetary obligation of Borrower; (k) the occurrence of a default or an event of default under any agreement between or among Lender, General Electric Capital Corporation or any of their affiliates and Borrower; (l) Either Guarantor shall repudiate, purport to revoke or fail to perform Guarantor's obligations or covenants under the Guaranty; or (m) ownership of the stock of Borrower or either Guarantor changes during the period that the loan is outstanding Borrower hereby acknowledges that Lender has made its decision to enter into the transaction contemplated hereby based upon the management expertise of the current stockholders and their ownership of the stock of Borrower. Section 11.02. REMEDIES ON DEFAULT . Whenever any Event of Default shall have occurred, Lender, as assignee of Issuer, shall have the right, at its sole option without any further demand or notice, to take any one or any combination of the following remedial steps insofar as the same are available to secured parties under Article 9 of the UCC in effect in the State from time to Exhibit 10.18.14 - 32 time and which are otherwise accorded to Lender, as assignee of Issuer, by applicable law: (a) by notice to Issuer and Borrower, declare the entire unpaid principal amount of the Loan and the Bond then outstanding, all interest accrued and unpaid thereon and all amounts payable under this Agreement to be forthwith due and payable, whereupon the Loan, all such accrued interest and all such amounts shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which are hereby expressly waived by Borrower; (b) take possession of the Equipment wherever situated, without any court order or other process of law and without liability for enter in the premises, and lease, sublease or make other disposition of the Equipment for use over a term in a commercially reasonable manner, all for the account of Lender, provided that Borrower shall remain directly liable for the deficiency, if any, between the rent or other amounts paid by a lessee or sublessee of the Equipment pursuant to such lease or sublease during the same period of time, after deducting all costs and expenses, including reasonable attorneys' fees and expenses, incurred with respect to the recovery, repair and storage of the Equipment during such period of time; (c) in accordance with the UCC, take possession of the Equipment wherever situated, without any court order or other process of law and without liability for entering the premises, and sell the Equipment in a commercially reasonable manner. All proceeds from such sale shall be applied in the following manner: FIRST, to pay all proper and reasonable costs and expenses associated with the recovery, repair, storage and sale of the Equipment, including reasonable attorneys' fees and expenses; SECOND, to pay (i) Lender the amount of all unpaid Loan Payments or other obligations (whether direct or indirect owed by Borrower to Lender), if any, which are then due and owing, together with interest and late charges thereon, (ii) Lender the then applicable Prepayment Amount (taking into account the payment of past-due Loan Payments as aforesaid), plus a pro rata allocation of interest, at the rate utilized to calculate the Loan Payments, from the next preceding due date of a Loan Payment until the date of payment by the buyer, and (iii) any other amounts due hereunder, including indemnity payments, taxes, charges, reimbursement of any advances and other amounts payable to Lender or Issuer hereunder; and THIRD, to pay the remainder of the sale proceeds, purchase moneys or other amounts paid by a buyer of the Equipment to Borrower; (d) proceed by appropriate court action to enforce specific performance by Issuer or Borrower of the applicable covenants of this Agreement or to recover for the breach thereof, including the payment of all amounts due from Borrower. Borrower shall pay or repay to Lender or Issuer all costs of such action or court action, including, without limitation, reasonable attorneys' fees; and (e) take whatever action at law or in equity may appear necessary or desirable to enforce its rights with respect to the Equipment. Borrower shall pay or repay to Lender or Issuer all costs of such action or court action, including, without limitation, reasonable attorneys' fees. Exhibit 10.18.14 - 33 Notwithstanding any other remedy exercised hereunder, Borrower shall remain obligated to pay to Lender any unpaid portion of the Prepayment Amount. Section 11.03. RETURN OF EQUIPMENT . Upon an Event of Default, Borrower shall within ten (10) calendar days after notice from Lender, at its own cost and expense: (a) perform any testing and repairs required to place the Equipment in the condition required by Article VII; (b) if deinstallation, disassembly or crating is required, cause the Equipment to be deinstalled, disassembled and crated by an authorized manufacturer's representative or such other service person as is satisfactory to Lender; and (c) deliver the Equipment to a location specified by Lender, freight and insurance prepaid by Borrower. If Borrower refuses to deliver the Equipment in the manner designated, Lender may enter upon Borrower's premises where the Equipment is kept and take possession of the Equipment and charge to Borrower the costs of such taking. Borrower hereby expressly waives any damages occasioned by such taking. Section 11.04. NO REMEDY EXCLUSIVE . No remedy herein conferred upon or reserved to Lender or Issuer is intended to be exclusive and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle Lender or Issuer to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice other than such notice as may be required by this Article. All remedies herein conferred upon or reserved to Lender or Issuer shall survive the termination of this Agreement. Section 11.05. LATE CHARGE . Any Loan Payment not paid by Borrower on the due date thereof shall, to the extent permissible by law, bear a late charge equal to the lesser of five cents ($.05) per dollar of the delinquent amount or the lawful maximum, and Borrower shall be obligated to pay the same immediately upon receipt of Lender's written invoice therefor. ARTICLE XII MISCELLANEOUS Section 12.01. COSTS AND EXPENSES OF LENDER . After an Event of Default in connection with enforcement of Lender's rights and remedies hereunder, Borrower shall pay to Lender, in addition to the Loan Payments payable by Borrower hereunder, such amounts in each year as shall be required by Lender in payment of any reasonable costs and expenses incurred by Lender in connection with the execution, performance or enforcement of this Agreement, including but not limited to payment of all reasonable fees, costs and expenses and all administrative costs of Lender in connection with the Equipment, expenses (including, without limitation, attorneys' fees and disbursements), fees of auditors or attorneys, insurance premiums not otherwise paid hereunder and all other direct and necessary administrative costs of Lender or charges required to be paid by it in order to comply with the terms of, or to enforce its rights under, this Agreement. Such costs and expenses shall be billed to Borrower by Lender from time to time, together with a statement certifying that the amount so billed has been paid by Lender for one or more of the items above described, or that such amount is then payable by Lender for such items. Amounts so billed shall be due and payable by Borrower within thirty (30) days after receipt of the bill by Borrower. Exhibit 10.18.14 - 34 Section 12.01A. COSTS AND ADMINISTRATIVE EXPENSES OF ISSUER . Borrower shall pay to Issuer monthly the Administrative Fees, and such amounts in each year as shall be required by Issuer in payment of any reasonable costs and expenses incurred by Issuer in connection with the execution, performance or enforcement of this Agreement, including but not limited to payment of all reasonable fees, costs and expenses and all administrative costs of Issuer in connection with the Equipment, expenses (including, without limitation, attorneys' fees and disbursements), fees of auditors or attorneys, insurance premiums not otherwise paid hereunder and all other direct and necessary administrative costs of Issuer or charges required to be paid by it in order to comply with the terms of, or to enforce its rights under, this Agreement. Such costs and expenses shall be billed to Borrower by Issuer from time to time, together with a statement certifying that the amount so billed has been paid by Issuer for one or more of the items above described, or that such amount is then payable by Issuer for such item. Amounts so billed shall be due and payable by Borrower within thirty (30) days after receipt of the bill by Borrower. Section 12.02. DISCLAIMER OF WARRANTIES . LENDER AND ISSUER MAKE NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE VALUE, DESIGN, CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR FITNESS FOR USE OF THE EQUIPMENT, OR ANY OTHER WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT THERETO. In no event shall Lender or Issuer be liable for any loss or damage in connection with or arising out of this Agreement, the Equipment or the existence, furnishing, functioning or Borrower's use of any item or products or services provided for in this Agreement. Section 12.03. NOTICES . All notices, certificates, requests, demands and other communications provided for hereunder or under the Escrow Agreement or the Tax Regulatory Agreement shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed to the party to whom notice is being given at its address as set forth above and, if telecopied, transmitted to that party at its telecopier number set forth above or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy. If notice to Borrower of any intended disposition of the Equipment or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in this Section) at least ten (10) calendar days prior to the date of intended disposition or other action. Section 12.04. FURTHER ASSURANCE AND CORRECTIVE INSTRUMENTS . Issuer and Borrower hereby agree that they will, from time to time, execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such further acts, instruments, conveyances, transfers and assurances, as Lender reasonably deems necessary or advisable for the implementation, correction, confirmation or perfection of this Agreement, the Escrow Agreement or the Tax Regulatory Agreement and any rights of Lender hereunder or thereunder. Section 12.05. BINDING EFFECT; TIME OF THE ESSENCE . This Agreement shall inure to the benefit of and shall be binding upon Lender, Issuer, Borrower and their respective successors and assigns. Time is of the essence. Exhibit 10.18.14 - 35 Section 12.06. SEVERABILITY . In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 12.07. AMENDMENTS . To the extent permitted by law, the terms of this Agreement shall not be waived, altered, modified, supplemented or amended in any manner whatsoever except by written instrument signed by the parties hereto, and then such waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. Borrower and Lender agree to amend Exhibit A to this Agreement to more specifically identify the Equipment being financed hereunder at such time as such identification is possible. Such amendment shall be effected by written instrument signed by Borrower and Lender. Issuer's consent to the amendment referred to in this paragraph shall not be required. Such amendment may take the form of a Payment Request Form in the form attached to the Escrow Agreement as Exhibit A executed by Borrower and Lender. Section 12.08. EXECUTION IN COUNTERPARTS . This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart, provided that only the original marked "Original: 1 of 6" on the execution page thereof shall constitute chattel paper under the UCC. A purchase of this chattel paper from Issuer would violate the rights of Lender. Section 12.09. APPLICABLE LAW . This Agreement shall be governed by and construed in accordance with the laws of the State. Section 12.10. CAPTIONS . The captions or headings in this Agreement are for convenience only and in no way define, limit or describe the scope or intent of any provisions or sections of this Agreement. Section 12.11. ENTIRE AGREEMENT . This Agreement, the Tax Regulatory Agreement, the Escrow Agreement and the exhibits hereto and thereto constitute the entire agreement among Lender, Issuer, Borrower and Escrow Agent. There are no understandings, agreements, representations or warranties, express or implied, not specified herein or in such documents regarding this Agreement or the Equipment financed hereby. Section 12.12. USURY . It is the intention of the parties hereto to comply with any applicable usury laws; accordingly, it is agreed that, notwithstanding any provisions to the contrary in this Agreement, in no event shall this Agreement require the payment or permit the collection of interest or any amount in the nature of interest or fees in excess of the maximum permitted by applicable law. Section 12.13. BOUND TRANSCRIPTS . Within 45 days of the day of closing, Borrower shall cause to be prepared and furnished, at Borrower's expense, to Lender and its counsel, bound transcripts containing this Agreement, the Escrow Agreement, the Tax Regulatory Agreement and all other documents related thereto. Section 12.14. WAIVER OF JURY TRIAL . LENDER, ISSUER AND BORROWER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS AGREEMENT, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS AMONG LENDER, ISSUER OR BORROWER RELATING Exhibit 10.18.14 - 36 TO THE SUBJECT MATTER OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED AMONG LENDER, ISSUER AND BORROWER. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY RELATED TRANSACTIONS. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. Section 12.15. SURVIVAL OF OBLIGATIONS . The obligations of the Borrower to make the payments required by Section 5.3(b) hereof and to provide the indemnity required by Section 8.1 and Section 8.11 hereof shall survive the termination of this Agreement and the full payment of the Bond. Section 12.16. LIMITED LIABILITY; IMMUNITY OF DIRECTORS OF ISSUER . This Agreement does not pledge the general credit or the taxing power of the State or any political subdivision thereof. The liability of Issuer shall be limited to the proceeds received from the repayment of the loan hereunder. It is understood and agreed that Issuer is not generally or personally liable for the debt or any portion of the debt evidenced by this Agreement or the interest thereon; neither is Issuer nor are the directors of Issuer, the agents, attorneys or employees of Issuer, or their respective heirs, personal representatives or successors personally or generally liable in connection with any matter, cause or thing pertaining to this Agreement, the Tax Regulatory Agreement, the Escrow Agreement, or any instruments and documents executed and delivered by the Issuer in connection with the Equipment or the Bond. No covenant or agreement contained in this Agreement shall be deemed to be the covenant or agreement of any director, officer, attorney, agent or employee of Issuer in an individual capacity. No recourse shall be had for the payment of the principal or the interest thereon, if any, payable upon the redemption of the Bonds or any claim based thereon against any officer, director, agent, attorney or employee of Issuer past, present or future, or its successors or assigns, as such, either directly or through Issuer, or any such successor corporation, whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all of such liability of such directors, officers, agents, attorneys or employees, being hereby released as a condition of, and as a consideration for, the execution and delivery of this Agreement. [REMAINDER OF PAGE INTENTIONALLY BLANK; EXECUTION PAGE FOLLOWS.] IN WITNESS WHEREOF, the parties hereto have executed this Agreement in their respective corporate names by their duly authorized officers, all as of the date first written above. Exhibit 10.18.14 - 37 Lender: GE CAPITAL PUBLIC FINANCE, INC. By:/s/ Phillip Long ------------------- Title: Vice President Issuer: RHODE ISLAND INDUSTRIAL FACILITIES CORPORATION By:/s/ Earl Queenan ------------------ Title: Treasurer Borrower: FINETECH LABORATORIES, LTD. By:/s/ Kenneth I. Sawyer ---------------------- Title: Chairman Trade Names of Borrower, if any: NONE ORIGINAL:____ OF 6 Exhibit 10.18.14 - 38 EXHIBIT A TO LOAN AGREEMENT SCHEDULE OF EQUIPMENT AND LOAN PAYMENTS Description of Equipment ------------------------ The following Equipment is the subject of the Loan Agreement dated as of December 1, 2002 among GE Capital Public Finance, Inc. ("Lender"), Rhode Island Industrial Facilities Corporation ("Issuer") and FineTech Laboratories, Ltd. ("Borrower"). ------------------------------------------------------------------------- EQUIPMENT PRICE ------------------------------------------------------------------------- Laboratory & Walk-in Chemical Hoods $300,000.00 ------------------------------------------------------------------------- Different Sizes Rotovapors 100,000.00 ------------------------------------------------------------------------- Bench-Top Glass Reactors 30,000.00 ------------------------------------------------------------------------- Mechanical Stirrers, Vacuum & Circulation Pumps 110,000.00 ------------------------------------------------------------------------- Glass Pharma Design 20-L Reactor Systems 100,000.00 ------------------------------------------------------------------------- Analytical & Preparative Chromatographic Systems 250,000.00 ------------------------------------------------------------------------- GC/GC-MS Systems 100,000.00 ------------------------------------------------------------------------- FT-IR 30,000.00 ------------------------------------------------------------------------- UV-Vis 15,000.00 ------------------------------------------------------------------------- DSC/TGA/Melting Range Instrumentation 40,000.00 ------------------------------------------------------------------------- Analytical & Laboratory Balances 40,000.00 ------------------------------------------------------------------------- Titration Equipment 40,000.00 ------------------------------------------------------------------------- Temperature, Pressure & pH Measuring Equipment 20,000.00 ------------------------------------------------------------------------- Laboratory Glassware & Auxiliary Equipment 200,000.00 ------------------------------------------------------------------------- Computers, Communications & Network Equipment 100,000.00 ------------------------------------------------------------------------- Laser Particle Size Analyzer 30,000.00 ------------------------------------------------------------------------- Pharma-design Mill 20,000.00 ------------------------------------------------------------------------- HVAC Equipment 200,000.00 ------------------------------------------------------------------------- X-Ray Instrumentation 200,000.00 ------------------------------------------------------------------------- The Equipment is located at the following address. Prior to the relocation of the Equipment or portion thereof, Borrower will provide 30 days' prior written notice to Lender: 500 Washington Street Coventry, RI 02816 Exhibit 10.18.14 - 39 SCHEDULE OF LOAN PAYMENTS ------------------------- GE Capital Public Finance, Inc. Payment Schedule FINETECH LABORATORIES, LTD. Closing Date: December 26, 2002 Coupon Rate: 4.27%
- ----------------------------------------------------------------------------------------------------------------------- Payment Payment Loan Principal Interest Principal Prepayment - ----------------------------------------------------------------------------------------------------------------------- DATE NUMBER PAYMENT COMPONENT COMPONENT BALANCE* AMOUNT* ---- ------ ------- --------- --------- -------- ------- - ----------------------------------------------------------------------------------------------------------------------- 12/26/02 - - - $2,000,000.00 $2,100,000.00 - ----------------------------------------------------------------------------------------------------------------------- 2/1/03 1 $39,099.15 $28,796.37 $8,302.78 1,971,203.63 2,069,763.81 - ----------------------------------------------------------------------------------------------------------------------- 3/1/03 2 37,099.15 30,084.95 7,014.20 1,941,118.68 2,038,174.61 - ----------------------------------------------------------------------------------------------------------------------- 4/1/03 3 37,099.15 30,192.00 6,907.15 1,910,926.68 2,006,473.01 - ----------------------------------------------------------------------------------------------------------------------- 5/1/03 4 37,099.15 30,299.44 6,799.71 1,880,627.24 1,974,658.60 - ----------------------------------------------------------------------------------------------------------------------- 6/1/03 5 37,099.15 30,407.25 6,691.90 1,850,219.99 1,942,730.99 - ----------------------------------------------------------------------------------------------------------------------- 7/1/03 6 37,099.15 30,515.45 6,583.70 1,819,704.54 1,910,689.77 - ----------------------------------------------------------------------------------------------------------------------- 8/1/03 7 37,099.15 30,624.03 6,475.12 1,789,080.51 1,878,534.54 - ----------------------------------------------------------------------------------------------------------------------- 9/1/03 8 37,099.15 30,733.01 6,366.14 1,758,347.50 1,846,264.88 - ----------------------------------------------------------------------------------------------------------------------- 10/1/03 9 37,099.15 30,842.36 6,256.79 1,727,505.14 1,813,880.40 - ----------------------------------------------------------------------------------------------------------------------- 11/1/03 10 37,099.15 30,952.11 6,147.04 1,696,553.03 1,781,380.68 - ----------------------------------------------------------------------------------------------------------------------- 12/1/03 11 37,099.15 31,062.25 6,036.90 1,665,490.78 1,748,765.32 - ----------------------------------------------------------------------------------------------------------------------- 1/1/04 12 37,099.15 31,172.78 5,926.37 1,634,318.00 1,716,033.90 - ----------------------------------------------------------------------------------------------------------------------- 2/1/04 13 37,099.15 31,283.70 5,815.45 1,603,034.30 1,667,155.67 - ----------------------------------------------------------------------------------------------------------------------- 3/1/04 14 37,099.15 31,395.02 5,704.13 1,571,639.28 1,634,504.85 - ----------------------------------------------------------------------------------------------------------------------- 4/1/04 15 37,099.15 31,506.73 5,592.42 1,540,132.55 1,601,737.85 - ----------------------------------------------------------------------------------------------------------------------- 5/1/04 16 37,099.15 31,618.84 5,480.31 1,508,513.71 1,568,854.26 - ----------------------------------------------------------------------------------------------------------------------- 6/1/04 17 37,099.15 31,731.36 5,367.79 1,476,782.35 1,535,853.64 - ----------------------------------------------------------------------------------------------------------------------- 7/1/04 18 37,099.15 31,844.27 5,254.88 1,444,938.08 1,502,735.60 - ----------------------------------------------------------------------------------------------------------------------- 8/1/04 19 37,099.15 31,957.58 5,141.57 1,412,980.50 1,469,499.72 - ----------------------------------------------------------------------------------------------------------------------- 9/1/04 20 37,099.15 32,071.29 5,027.86 1,380,909.21 1,436,145.58 - ----------------------------------------------------------------------------------------------------------------------- 10/1/04 21 37,099.15 32,185.41 4,913.74 1,348,723.80 1,402,672.75 - ----------------------------------------------------------------------------------------------------------------------- 11/1/04 22 37,099.15 32,299.94 4,799.21 1,316,423.86 1,369,080.81 - ----------------------------------------------------------------------------------------------------------------------- 12/1/04 23 37,099.15 32,414.87 4,684.28 1,284,008.99 1,335,369.35 - ----------------------------------------------------------------------------------------------------------------------- 1/1/05 24 37,099.15 32,530.22 4,568.93 1,251,478.77 1,301,537.92 - ----------------------------------------------------------------------------------------------------------------------- 2/1/05 25 37,099.15 32,645.97 4,453.18 1,218,832.80 1,255,397.78 - ----------------------------------------------------------------------------------------------------------------------- 3/1/05 26 37,099.15 32,762.14 4,337.01 1,186,070.66 1,221,652.78 - ----------------------------------------------------------------------------------------------------------------------- 4/1/05 27 37,099.15 32,878.71 4,220.44 1,153,191.95 1,187,787.71 - ----------------------------------------------------------------------------------------------------------------------- 5/1/05 28 37,099.15 32,995.71 4,103.44 1,120,196.24 1,153,802.13 - ----------------------------------------------------------------------------------------------------------------------- 6/1/05 29 37,099.15 33,113.12 3,986.03 1,087,083.12 1,119,695.61 - ----------------------------------------------------------------------------------------------------------------------- 7/1/05 30 37,099.15 33,230.95 3,868.20 1,053,852.17 1,085,467.74 - ----------------------------------------------------------------------------------------------------------------------- 8/1/05 31 37,099.15 33,349.19 3,749.96 1,020,502.98 1,051,118.07 - ----------------------------------------------------------------------------------------------------------------------- 9/1/05 32 37,099.15 33,467.86 3,631.29 987,035.12 1,016,646.17 - ----------------------------------------------------------------------------------------------------------------------- 10/1/05 33 37,099.15 33,586.95 3,512.20 953,448.17 982,051.62 - ----------------------------------------------------------------------------------------------------------------------- 11/1/05 34 37,099.15 33,706.46 3,392.69 919,741.71 947,333.96 - ----------------------------------------------------------------------------------------------------------------------- 12/1/05 35 37,099.15 33,826.40 3,272.75 885,915.31 912,492.77 - ----------------------------------------------------------------------------------------------------------------------- 1/1/06 36 37,099.15 33,946.77 3,152.38 851,968.54 877,527.60 - ----------------------------------------------------------------------------------------------------------------------- 2/1/06 37 37,099.15 34,067.56 3,031.59 817,900.98 834,259.00 - ----------------------------------------------------------------------------------------------------------------------- 3/1/06 38 37,099.15 34,188.79 2,910.36 783,712.19 799,386.43 - ----------------------------------------------------------------------------------------------------------------------- 4/1/06 39 37,099.15 34,310.44 2,788.71 749,401.75 764,389.79 - -----------------------------------------------------------------------------------------------------------------------
Exhibit 10.18.14 - 40 - ----------------------------------------------------------------------------------------------------------------------- 5/1/06 40 37,099.15 34,432.53 2,666.62 714,969.22 729,268.60 - ----------------------------------------------------------------------------------------------------------------------- 6/1/06 41 37,099.15 34,555.05 2,544.10 680,414.17 694,022.45 - ----------------------------------------------------------------------------------------------------------------------- 7/1/06 42 37,099.15 34,678.01 2,421.14 645,736.16 658,650.88 - ----------------------------------------------------------------------------------------------------------------------- 8/1/06 43 37,099.15 34,801.40 2,297.75 610,934.76 623,153.46 - ----------------------------------------------------------------------------------------------------------------------- 9/1/06 44 37,099.15 34,925.24 2,173.91 576,009.52 587,529.71 - ----------------------------------------------------------------------------------------------------------------------- 10/1/06 45 37,099.15 35,049.52 2,049.63 540,960.00 551,779.20 - ----------------------------------------------------------------------------------------------------------------------- 11/1/06 46 37,099.15 35,174.23 1,924.92 505,785.77 515,901.49 - ----------------------------------------------------------------------------------------------------------------------- 12/1/06 47 37,099.15 35,299.39 1,799.76 470,486.38 479,896.11 - ----------------------------------------------------------------------------------------------------------------------- 1/1/07 48 37,099.15 35,425.00 1,674.15 435,061.38 443,762.61 - ----------------------------------------------------------------------------------------------------------------------- 2/1/07 49 37,099.15 35,551.06 1,548.09 399,510.32 407,500.53 - ----------------------------------------------------------------------------------------------------------------------- 3/1/07 50 37,099.15 35,677.56 1,421.59 363,832.76 371,109.42 - ----------------------------------------------------------------------------------------------------------------------- 4/1/07 51 37,099.15 35,804.51 1,294.64 328,028.25 334,588.82 - ----------------------------------------------------------------------------------------------------------------------- 5/1/07 52 37,099.15 35,931.92 1,167.23 292,096.33 297,938.26 - ----------------------------------------------------------------------------------------------------------------------- 6/1/07 53 37,099.15 36,059.77 1,039.38 256,036.56 261,157.29 - ----------------------------------------------------------------------------------------------------------------------- 7/1/07 54 37,099.15 36,188.09 911.06 219,848.47 224,245.44 - ----------------------------------------------------------------------------------------------------------------------- 8/1/07 55 37,099.15 36,316.85 782.30 183,531.62 187,202.25 - ----------------------------------------------------------------------------------------------------------------------- 9/1/07 56 37,099.15 36,446.08 653.07 147,085.54 150,027.25 - ----------------------------------------------------------------------------------------------------------------------- 10/1/07 57 37,099.15 36,575.77 523.38 110,509.77 112,719.97 - ----------------------------------------------------------------------------------------------------------------------- 11/1/07 58 37,099.15 36,705.92 393.23 73,803.85 75,279.932 - ----------------------------------------------------------------------------------------------------------------------- 12/1/07 59 37,099.15 36,836.53 262.62 36,967.32 37,706.67 - ----------------------------------------------------------------------------------------------------------------------- 1/1/08 60 37,099.15 36,967.32 131.83 (0.00) (0.00) ---------- ---------- ------- - ----------------------------------------------------------------------------------------------------------------------- $2,225,949.00 $2,000,000.00 $ 225,949.00 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- * After payment of loan payment due on such date - -----------------------------------------------------------------------------------------------------------------------
Exhibit 10.18.14 - Page 41 EXHIBIT B TO LOAN AGREEMENT FORM OF CERTIFICATE OF ACCEPTANCE I, the undersigned, hereby certify that I am the duly qualified and acting _____________ of FineTech Laboratories, Ltd. ("Borrower") and, with respect to the Loan Agreement dated as of December 1, 2002 (the "Agreement") by and among Borrower, GE Capital Public Finance, Inc. ("Lender") and Rhode Island Industrial Facilities Corporation ("Issuer"), that: 1. The equipment described in Exhibit A to the Agreement (the "Equipment") has been delivered and installed in accordance with Borrower's specifications and has been accepted by Borrower. 2. Borrower has obtained from a reputable insurance company qualified to do business in the State (as defined in the Agreement) insurance with respect to all risks required to be covered thereby pursuant to Section 7.06 of the Agreement. 3. Attached to this Certificate of Acceptance are Vendor invoice(s) and/or bill(s) of sale relating to the Equipment and, if such invoices have been paid by Issuer or Borrower, evidence of payment thereof and, if applicable, evidence of official intent to reimburse such payment as required by the Code (as defined in the Agreement). 4. All of the representations and warranties of Borrower contained in the Agreement are true and correct as of the date hereof and no Default or Event of Default has occurred thereunder. Dated: __________ __, 2002. Borrower: FINETECH LABORATORIES, LTD. By__________________________________ Title_______________________________ Date________________________________ Exhibit 10.18.14 - 42 EXHIBIT C TO LOAN AGREEMENT FORM OF OPINION OF COUNSEL TO BORROWER December ___, 2002 Rhode Island Industrial Facilities Corporation One West Exchange Street Providence, RI 02903 FineTech Laboratories, Ltd. 500 Washington Street Coventry, RI 02816 GE Capital Public Finance, Inc. Suite 470 8400 Normandale Lake Boulevard Minneapolis, MN 55437 Re: $2,000,000 Rhode Island Industrial Facilities Corporation Revenue Bond (Finetech Laboratories, Ltd. Project - 2002 Series) ---------------------------------------------------------------- Ladies and Gentlemen: We have acted as counsel to FineTech Laboratories, Ltd. (the "Borrower") with respect to the issuance and delivery of the bond described above (the "'Bond") and with respect to the Loan Agreement dated as of December 1, 2002 (the "Loan Agreement") among GE Capital Public Finance, Inc. ("Lender"), Rhode Island Industrial Facilities Corporation ("'Issuer") and the Borrower, the Escrow Agreement of even date therewith (the "Escrow Agreement") among Lender, Issuer, Borrower and Marshall & Ilsley Corporation, as escrow agent, the Tax Regulatory Agreement of even date therewith (the "Tax Regulatory Agreement") (the Loan Agreement, the Escrow Agreement and the Tax Regulatory Agreement may be referred to herein collectively as the "Agreements") and various related matters and, in this capacity, have reviewed a duplicate original or certified copy of the Agreements. The bonds are issued to finance the acquisition of certain machinery and equipment for facilities located at 500 Washington Street, Coventry, Rhode Island and to install such machinery and equipment thereon and therein (the "Equipment") for the use in the manufacturing of printed folding boxes, cards, tags and labels by the Borrower. 1. Borrower has been duly organized and is validly existing as a corporation in good standing under the laws of the State of ____________ with full power and authority to own its properties and conduct its business. 2. Borrower has full power and authority to execute and deliver the Agreements and to carry out the terms thereof. The Agreements have been duly and validly authorized, executed and delivered, are in full force and effect and are the legal, valid and binding contracts of Borrower enforceable in accordance with their respective terms (including against claims of usury), except to the extent limited by state and federal laws affecting remedies and by Exhibit 10.18.14 - 43 bankruptcy, reorganization, or other laws of general application relating to or affecting the enforcement of creditors' rights. 3. No consent, authorization, approval or other action by, and no notice to, or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Borrower of the Agreements, except for such action which has been duly obtained or taken and is in full force and effect. 4. The consummation of the transactions contemplated by the Agreements and the carrying out of the terms thereof will not result in violation of any provisions of the articles of incorporation or bylaws of Borrower or result in the violation of any provision of, or in a default under, any indenture, mortgage, deed of trust, indebtedness, agreement, judgment, decree, order, statute, rule or regulation to which Borrower is a party or by which it or its property is bound. 5. There are no legal or governmental actions, suits, proceedings, inquiries or investigations pending, threatened or contemplated, or any basis therefor, to which Borrower is or may become a party or of which any property of Borrower is or may become subject, other than ordinary routine litigation incident to the kind of business conducted by Borrower which, if determined adversely to Borrower, would not, individually or in the aggregate, have a material adverse effect on the financial position or results of operations of Borrower. 6. There are no legal or governmental proceedings pending, threatened or contemplated, or any basis therefor, wherein an unfavorable decision, ruling or finding would adversely affect the validity of or security for the Bond, the Agreements or the transactions contemplated thereby. Exhibit 10.18.14 - 44 7. Borrower has taken all steps legally required as a condition precedent to the execution and delivery of the Loan Agreement and to permit the commencement of the acquisition, installation and operation of the Equipment (defined in the Loan Agreement). Borrower has made all submissions to governmental authorities and has obtained, and there are currently in full force and effect, all consents, approvals, authorizations, accreditations, licenses, permits and orders of any governmental or regulatory authority that are required to be obtained by Borrower to enable the Equipment to be acquired and installed in accordance with the plans and specifications thereof. 8. The Equipment constitutes personal property and when used by Borrower will not become fixtures under applicable law. 9. The provisions of the Loan Agreement are effective to create a security interest in favor of Lender, as assignee of Issuer, in all of the Borrower's right, title and interest in and to the Equipment and all proceeds thereof. Such security interest has been properly perfected and is subject to no liens or encumbrances. This opinion may be relied upon by the addressees hereto and any of their successors and assigns. Very truly yours Exhibit 10.18.14 - 45 EXHIBIT D TO LOAN AGREEMENT FORM OF OPINION OF BOND COUNSEL ___________ __, 2002 Rhode Island Industrial Facilities Corporation One West Exchange Street Providence, RI 02903 FineTech Laboratories, Ltd. 500 Washington Street Coventry, RI 02816 GE Capital Public Finance, Inc. Suite 470 8400 Normandale Lake Boulevard Minneapolis, MN 55437 $2,000,000 Rhode Island Industrial Facilities Corporation Revenue Bond (FineTech Laboratories, Ltd. Project - 2002 Series ) Ladies and Gentlemen: We have acted as counsel to Rhode Island Industrial Facilities Corporation ("Issuer") in connection with the issuance and sale of the bond described above (the "Bond") and with respect to the Loan Agreement dated as of December 1, 2002 (the "Loan Agreement") among GE Capital Public Finance, Inc. ("Lender"), Issuer and FineTech Laboratories, Ltd. ("Borrower"), the Escrow Agreement of even date therewith (the "Escrow Agreement") among Lender, Issuer, Borrower and Marshall & Ilsley Corporation, as escrow agent, the Tax Regulatory Agreement of even date therewith (the "Tax Regulatory Agreement"; the Loan Agreement, the Escrow Agreement and the Tax Regulatory Agreement may be referred to herein collectively as the "Agreements") and various related matters and, in this capacity, have reviewed a duplicate original or certified copy of the Agreements. Based upon the examination of these and such other documents as we deem relevant, it is our opinion that: The Bonds are issued under and pursuant to the Rhode Island Industrial Facilities Corporation Act, being Chapter 37.1 of Title 45 of the Rhode Island General Laws (1956), as amended, for the purpose of loaning the proceeds thereof to FineTech Laboratories, Ltd. (the "Borrower") to finance the acquisition of certain machinery and equipment by the Borrower for facilities located at 500 Washington Street, Coventry, Rhode Island and to install such machinery and equipment thereon and therein (the "Equipment") for manufacturing purposes. The proceeds of the Bond will be loaned to the Borrower pursuant to a Loan Agreement dated as of December 1, 2002 (the "Loan Agreement") among GE Capital Public Finance, Inc. (the "Lender"), the Issuer and the Borrower and an Escrow Agreement dated as of December 1, 2002 among the Issuer, Lender, the Borrower Exhibit 10.18.14 - 46 and Marshall & Ilsley Corporation, as Escrow Agent (the "Escrow Agent"). Under the Loan Agreement, the Borrower has agreed to make Loan Payments to be used to pay when due the principal of, Prepayment Price (as defined in the Loan Agreement), premium (if any) and interest on the Bonds. We have examined executed counterparts of the following, each dated as of December 1, 2002: (i) the Loan Agreement, (ii) the Escrow Agreement, (iii) the Bond Purchase Agreement among the Lender, the Issuer and the Borrower, and (iv) executed Bond No. R-1 (the "Issuer Documents"). As to questions of fact material to our opinion, we have relied upon representations of the Issuer and the Borrower contained in the Issuer Documents, the certified proceedings and other certifications of public officials furnished to us, and certifications furnished to us by or on behalf of the Issuer and the Borrower without undertaking to verify the same by independent investigation. Based upon the foregoing, we are of opinion that, under existing law: 1. The Issuer is duly created and validly existing as a public body corporate and agency of the State of Rhode Island and Providence Plantations (the "State") with the corporate power to enter into and perform the Issuer Documents and to issue the Bond. 2. The Issuer Documents have been duly authorized, executed and delivered by the Issuer and are valid and binding obligations of the Issuer legally enforceable upon the Issuer in accordance with their terms. 3. The Bond has been duly authorized, executed and delivered by the Issuer, is a valid and binding special obligation of the Issuer legally enforceable upon the Issuer in accordance with its terms, and the principal of, Prepayment Price, premium, if any, and interest on, and any amounts payable pursuant to the terms of the Bond (collectively, the "Debt Service") are payable solely from Loan Payments and other monies and security under the Loan Agreement. 4. The interest on the Bond is excluded from gross income for federal income tax purposes, except for any period during which the Bond is held by a "substantial user" of the facilities financed by the Bond or a "related person" within the meaning of Section 147(a) of the Internal Revenue Code of 1986, as amended, (the "Code") and except that the Borrower or another person, by taking action within three years after the date hereof that causes the $10,000,000 limitation set forth in Section 144(a)(4) of the Code or the $40,000,000 limitation set forth in Section 144(a)(10) of the Code to be exceeded, may cause interest on the Bond to become included in the gross income (retroactive to the date hereof, in the case of the $40,000,000 limitation) for federal income tax purposes. It should be noted, however, that interest on the Bond is an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. In addition to the foregoing exceptions, the opinion set forth in the first sentence of this paragraph is subject to the condition that the Issuer and the Borrower comply with all requirements of the Code that must be satisfied subsequent to the issuance of the Bond in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The Issuer and Borrower have covenanted to comply with each such requirement. Failure to comply with certain requirements may cause the inclusion of interest on the Bond in gross income for federal income tax purposes to be retroactive to Exhibit 10.18.14 - 47 the date of issuance of the Bond. We express no opinion regarding other federal tax consequences arising with respect to the Bond. 5. The Bond and the interest thereon are free from taxation of every kind by the State and by the municipalities and all political subdivisions of the State, although the Bond and any income therefrom may be included in the measure of State estate taxes and of certain State corporate and business taxes. It is to be understood that the rights of the holders of the Bond and the enforceability of the Bond and the Issuer Documents may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted to the extent constitutionally applicable and that their enforcement may also be subject to the exercise of judicial discretion in appropriate cases. This opinion relates only to the laws of the State of Rhode Island and federal securities laws, and we express no opinion herein with respect to the laws of any other jurisdiction. This opinion speaks as of the date hereof, and we undertake no obligation and hereby disclaim any obligation to advise you of any change in any matter set forth herein. This opinion is solely for your benefit in connection with the issuance of the Bonds and may not be cited or relied upon by any other person or by you in connection with any other matter without our firm's express written consent. Very truly yours, Exhibit 10.18.14 - 48 EXHIBIT E TO LOAN AGREEMENT FORM OF BOND STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS THIS BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THEREFORE CANNOT BE RESOLD UNLESS IT IS REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS BOND AND THE INTEREST THEREON SHALL NOT CONSTITUTE A DEBT, LIABILITY OR OBLIGATION OF THE STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS OR ANY POLITICAL SUBDIVISION THEREOF AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, OR PREMIUM, IF ANY, OR THE INTEREST HEREON. THE RHODE ISLAND INDUSTRIAL FACILITIES CORPORATION IS NOT OBLIGATED TO PAY THE PRINCIPAL OF, OR PREMIUM, IF ANY, OR THE INTEREST HEREON, EXCEPT FROM OR IN CONNECTION WITH THE AGREEMENT DESCRIBED HEREIN. Rhode Island Industrial Facilities Corporation Revenue Bond (FineTech Laboratories, Ltd. Project- 2002 Series) No.: R-1 $2,000,000 Maturity Date Interest Rate: 4.27% January 1, 2008 RHODE ISLAND INDUSTRIAL FACILITIES CORPORATION, a public corporation and governmental agency of the State of Rhode Island and Providence Plantations (the "State") duly created and validly existing under the laws of the State (hereafter referred to as "Issuer"), for value received, hereby promises to pay GE Capital Public Finance, Inc., 8400 Normandale Lake Boulevard, Suite 470, Minneapolis, Minnesota 55437, or to registered assigns, but solely from the Loan Payments hereinafter described, the principal sum of TWO MILLION DOLLARS in any coin or currency of the United States of America which on the date of payment thereof is the legal tender for the payment of public and private debts, and to pay, solely from such Loan Payments, in like coin and currency, interest on the principal sum from the date hereof, such interest to be at the rates, and all such payments of interest, principal or interest and principal to be payable at the time and place, in the amounts and in accordance with the terms set forth in that certain Loan Agreement dated as of December 1, 2002 (the "Loan Agreement") among Issuer, GE Capital Public Finance, Inc. ("Lender") and FineTech Laboratories, Ltd. ("Borrower"). All terms used herein in capitalized form and not otherwise defined herein shall have the meanings ascribed thereto in the Loan Agreement. This Bond is payable as to principal and prepayment premium, if any, solely from Loan Payments to be made by Borrower and is secured by, among other things, a lien on the Equipment financed pursuant to the Loan Agreement. THIS BOND IS A SPECIAL OBLIGATION OF THE ISSUER AND IS SECURED SOLELY BY A PLEDGE OF THE REVENUES AND RECEIPTS DERIVED BY THE ISSUER FROM OR IN CONNECTION WITH THE LOAN AGREEMENT AND THIS BOND SHALL NOT CONSTITUTE NOR GIVE RISE TO ANY PECUNIARY LIABILITY OR A CHARGE AGAINST THE GENERAL CREDIT OF Exhibit 10.18.14 - 49 ISSUER. THIS BOND AND THE INTEREST HEREON SHALL NOT CONSTITUTE A DEBT, LIABILITY OR OBLIGATION OF THE STATE OR ANY POLITICAL SUBDIVISION THEREOF (OTHER THAN A SPECIAL OBLIGATION OF ISSUER) AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE NOR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, OR PREMIUM, IF ANY, OR THE INTEREST HEREON, NOR SHALL ISSUER BE OBLIGATED TO PAY THE PRINCIPAL OF, OR PREMIUM, IF ANY, OR THE INTEREST HEREON EXCEPT FROM THE REVENUES DERIVED FROM OR IN CONNECTION WITH THE AGREEMENT AS AFORESAID. No covenant or agreement contained in this Bond shall be deemed to be the covenant or agreement of any member, officer, attorney, agent or employee of the Issuer in an individual capacity. No recourse shall be had for the payment of the principal, or premium, if any, or the interest hereon, or any claim based thereon against any officer, member, agent, attorney or employee of Issuer, past, present or future, or any successors or assigns, as such, either directly or through Issuer, or any such successor corporation, whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all of such liability of such members, officers, agents, attorneys or employees being hereby released as a condition of, and as a consideration for, the execution and delivery of this Bond. The person in whose name this Bond is registered shall be deemed and regarded as the absolute owner hereof for all purposes, and payment of or on account of principal, premium or interest to such registered owner shall be valid and effectual to satisfy and discharge the liability upon this Bond to the extent of the sum or sums so paid. This Bond is transferable only in minimum denominations of $100,000 by Lender upon prior written notice to the Issuer and the Borrower by an assignment duly executed by Lender or its duly authorized attorney and upon the concurrent assignment of the rights and interests of Lender under the Loan Agreement and the Assignment to the transferee of this Bond; provided, however, that each Lender by its acceptance hereof agrees that it shall not transfer this Bond except in compliance with all applicable federal and state securities laws. This Bond is subject to prepayment upon the terms and conditions set forth in the Loan Agreement. It is hereby certified, recited and declared that all acts, conditions and things required to exist to happen and to be performed precedent to and in the issuance of this Bond exist, have happened and have been performed in regular and due form and time as required by the Constitution and laws of the State applicable thereto and that the issuance of this Bond is in fully compliance with all Constitutional and statutory limitations, provisions and restrictions. IN WITNESS WHEREOF, Rhode Island Industrial Facilities Corporation has issued this Bond and has caused the same to be signed by the signature of its authorized representative this ____ day of __________, 2002. RHODE ISLAND INDUSTRIAL FACILITIES CORPORATION By: Its: Treasurer ------------------------------------ Exhibit 10.18.14 - 50 ASSIGNMENT FOR VALUE RECEIVED, the undersigned ___________________ (the "Transferor") hereby sells, assigns and transfers unto ___________________ (the "Transferee") PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF TRANSFEREE -------------------- the within Bond and all rights thereunder, and hereby irrevocably constitutes and appoints ________________ as attorney to register the transfer of the within Bond on the books kept for registration of transfer thereof, with full power of substitution in the premises. Date: Signature Guaranteed: __________________________________ NOTICE: Signature(s) must be guaranteed by an eligible guarantor institution which is a member of a recognized signature guarantee program, i.e.. Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) or New York Stock Exchange Medallion Signature Program. NOTICE: No transfer will be registered and no new Bond will be issued in the name of the Transferee, unless the signature(s) to this assignment correspond(s) with the name as it appears on the face of the within Bond in every particular, without alteration or enlargement or any change whatever and the Social Security or Federal Employer Identification Number of the Transferee is supplied. Exhibit 10.18.14 - 51 EXHIBIT G TO LOAN AGREEMENT FORM OF OPINION OF ISRAELI COUNSEL December ___, 2002 Rhode Island Industrial Facilities Corporation One West Exchange Street Providence, RI 02903 FineTech Laboratories, Ltd. 500 Washington Street Coventry, RI 02816 GE Capital Public Finance, Inc. Suite 470 8400 Normandale Lake Boulevard Minneapolis, MN 55437 Re: $2,000,000 Rhode Island Industrial Facilities Corporation REVENUE BOND (FINETECH LABORATORIES, LTD. PROJECT - 2002 SERIES) Ladies and Gentlemen: We have acted as counsel to FineTech Laboratories, Ltd. (the "Borrower") with respect to the issuance and delivery of the bond described above (the "'Bond") and with respect to the Loan Agreement dated as of December 1, 2002 (the "Loan Agreement") among GE Capital Public Finance, Inc. ("Lender"), Rhode Island Industrial Facilities Corporation ("'Issuer") and the Borrower, the Escrow Agreement of even date therewith (the "Escrow Agreement") among Lender, Issuer, Borrower and Marshall & Ilsley Corporation, as escrow agent, the Tax Regulatory Agreement of even date therewith (the "Tax Regulatory Agreement") (the Loan Agreement, the Escrow Agreement and the Tax Regulatory Agreement may be referred to herein collectively as the "Agreements") and various related matters and, in this capacity, have reviewed a duplicate original or certified copy of the Agreements. The bonds are issued to finance the acquisition of certain machinery and equipment for facilities located at 500 Washington Street, Coventry, Rhode Island and to install such machinery and equipment thereon and therein (the "Equipment") for the use in the manufacturing of printed folding boxes, cards, tags and labels by the Borrower. 1. Borrower has been duly organized and is validly existing as a corporation in good standing under the laws of the State of ____________ with full power and authority to own its properties and conduct its business. 2. Borrower has full power and authority to execute and deliver the Agreements and to carry out the terms thereof. The Agreements have been duly and validly authorized, executed and delivered, are in full force and effect and are the legal, valid and binding contracts of Borrower enforceable in accordance with their respective terms (including against claims of usury), except to the extent limited by state and federal laws affecting remedies and by Exhibit 10.18.14 - 52 bankruptcy, reorganization, or other laws of general application relating to or affecting the enforcement of creditors' rights. 3. No consent, authorization, approval or other action by, and no notice to, or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Borrower of the Agreements, except for such action which has been duly obtained or taken and is in full force and effect. 4. The consummation of the transactions contemplated by the Agreements and the carrying out of the terms thereof will not result in violation of any provisions of the articles of incorporation or bylaws of Borrower or result in the violation of any provision of, or in a default under, any indenture, mortgage, deed of trust, indebtedness, agreement, judgment, decree, order, statute, rule or regulation to which Borrower is a party or by which it or its property is bound. 5. There are no legal or governmental actions, suits, proceedings, inquiries or investigations pending, threatened or contemplated, or any basis therefor, to which Borrower is or may become a party or of which any property of Borrower is or may become subject, other than ordinary routine litigation incident to the kind of business conducted by Borrower which, if determined adversely to Borrower, would not, individually or in the aggregate, have a material adverse effect on the financial position or results of operations of Borrower. 6. There are no legal or governmental proceedings pending, threatened or contemplated, or any basis therefor, wherein an unfavorable decision, ruling or finding would adversely affect the validity of or security for the Bond, the Agreements or the transactions contemplated thereby. Exhibit 10.18.14 - 53 7. Borrower has taken all steps legally required as a condition precedent to the execution and delivery of the Loan Agreement and to permit the commencement of the acquisition, installation and operation of the Equipment (defined in the Loan Agreement). Borrower has made all submissions to governmental authorities and has obtained, and there are currently in full force and effect, all consents, approvals, authorizations, accreditations, licenses, permits and orders of any governmental or regulatory authority that are required to be obtained by Borrower to enable the Equipment to be acquired and installed in accordance with the plans and specifications thereof. 8. The Equipment constitutes personal property and when used by Borrower will not become fixtures under applicable law. 9. The provisions of the Loan Agreement are effective to create a security interest in favor of Lender, as assignee of Issuer, in all of the Borrower's right, title and interest in and to the Equipment and all proceeds thereof. Such security interest has been properly perfected and is subject to no liens or encumbrances. This opinion may be relied upon by the addressees hereto and any of their successors and assigns. Very truly yours Exhibit 10.18.14 - 54 EXHIBIT H TO LOAN AGREEMENT FORM OF CERTIFICATE OF CHIEF FINANCIAL OFFICER I, the undersigned, hereby certify that I am the duly qualified and acting chief financial officer of _______________ ("Borrower") and, with respect to Section [7.01(a)/7.01(b)] of the Loan Agreement dated as of _________, ___ (the "Agreement") by and among Borrower, GE Capital Public Finance, Inc. ("Lender") and _______________ ("Issuer"), that: 1. The attached financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. 2. I have no knowledge of any Default or Event of Default under the Agreement. [3. Section ___ of the Agreement requires Borrower to maintain its ration of Debt o Tangible Net Worth at not more than ___ to 1.00. The calculation of such ration is set forth below: 4. Section ___ of the Agreement requires Borrower to maintain its Debt Service Coverage Ratio at not less than ___ to 1.00. The calculation of such ratio is set forth below: 5. Section ___ of the Agreement requires Borrower to maintain its Tangible Net Worth at not less than $_______. Borrower's Tangible Net Worth is $________.] Dated: __________, 20__. BORROWER: By:__________________________________ Title: Chief Financial Officer Date:________________________________ Exhibit 10.18.14 - 55 EX-10 7 ex10-44.txt EXHIBIT 10.44 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXHIBIT 10.44 FIRST AMENDMENT TO THE SUPPLY AND MARKETING AGREEMENT BETWEEN PENTECH PHARMACEUTICALS, INC. AND PAR PHARMACEUTICAL, INC. THIS FIRST AMENDMENT TO THE TO THE SUPPLY AND MARKETING AGREEMENT (THIS "AMENDMENT"), dated as of November 12, 2002, is hereby entered into by and between Pentech Pharmaceuticals, Inc. ("Pentech"), an Illinois corporation, having offices at 3315 Algonquin Road, Rolling Meadows, Illinois 60008 and Par Pharmaceutical, Inc. ("Par"), a New Jersey corporation, having offices at One Ram Ridge Road, Spring Valley, New York 10977. WHEREAS, Pentech and Par have previously entered into that certain Supply And Marketing Agreement dated as of November 19, 2001 (the "Supply and Marketing Agreement"); and, WHEREAS, Pentech and Par wish to amend the Supply and Marketing Agreement by entering into this Amendment on the terms and conditions and for the purposes set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and promises set forth herein, the receipt and sufficiency of which is hereby acknowledged, Pentech and Par agree as follows: DEFINITIONS. Any capitalized terms used herein which are not defined herein, shall have the meaning set forth in the Supply and Marketing Agreement. The definition of "Agreement" in the Supply and Marketing Agreement shall hereby be deleted in its entirety and replaced with the following new definition. "Agreement" shall mean this Supply and Marketing Agreement as amended from time to time. The definition of "Cost of Goods" in the Supply and Marketing Agreement shall hereby be amended by appending the following to the definition of "Cost of Goods". Cost of Goods shall also include any license, royalty, profit or similar payment required to be made by Par to a third party in connection with Par's sale of a paroxetine product. The following new definitions shall hereby be added to the Agreement. "Project" shall mean all activities in conjunction with developing and obtaining regulatory approval for a paroxetine product. AMENDMENTS. Section 2.2 of the Supply and Marketing Agreement shall be deleted in its entirety and replaced with the following new Section 2.2. 2.2 LEGAL COUNSEL AND EXPENSES. In connection with the Paragraph IV Litigation, and as additional consideration for the exclusive right to market, sell and distribute paroxetine products in the Territory on behalf of Pentech, Par and Pentech hereby agree that Par shall have the sole and exclusive control of the Paragraph IV Litigation and all regulatory activities related to the Project. Par shall assume full responsibility for meeting the regulatory requirements in connection with the Project, including but not limited to maintaining cGMP compliance; provided however, that (1) the Chicago facility shall be dedicated to the Project and Pentech shall produce no other products at this facility and (2) Pentech shall cooperate with Par in good faith to resolve any regulatory compliance issues which may arise in connection with the Project. Pentech and Par further agree that Par shall employ Edward Haug, Esq., and his associates, of Frommer Lawrence & Haug LLP, 745 Fifth Avenue, New York, New York 10151 ("FLH"), as its primary legal counsel in connection with the Paragraph IV Litigation and all regulatory activities related to the Project. The President (or similar officer if there is no President) of Pentech, acting in good faith and in furtherance of the Paragraph IV Exhibit 10.44 - Page 1 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION Litigation and in obtaining regulatory approval for a paroxetine product, shall be allowed unlimited access to an contact with FLH in connection with the Paragraph IV Litigation and regulatory activities related to the Project. In addition, Pentech and Par each agree that Par will be fully responsible for all reasonable legal fees and expenses incurred by Pentech after the date of this Agreement resulting directly from the Paragraph IV Litigation. Notwithstanding anything to the contrary contained herein, in no event shall Par reimburse Pentech or be responsible to pay for any litigation fees and/or expenses (legal or otherwise) incurred before the signing of the Agreement nor any other Development Costs associated with the Project (other than the Funding Payments). All fees to be paid by Par under this Section 2.2 shall be paid by Par within thirty (30) days of Par's receipt of an invoice for such fees and expenses. All payments under this Section 2.2 are nonrefundable but legal expenses in excess of two million dollars ($2,000,000) shall be fully creditable against Profit Payments which become due and payable to Pentech pursuant to this Agreement. Section 2.3 of the Supply and Marketing Agreement shall be amended by appending the following to the end of Section 2.3. Par and Pentech further agree that in the event of any settlement to which Pentech and a third party are parties, which relates to paroxetine, Par will first be reimbursed for all of its direct costs related to the development and marketing of paroxetine, including but not limited to manufacturing related costs (e.g. spray drying equipment, facility modifications and API start-up costs) and legal expenses, out of any amounts received in the settlement by Par and Pentech, any remaining amounts that are received by Par and Pentech out of such a settlement will be divided *% to Par and *% to Pentech. Article 2 of the Supply and Marketing Agreement shall be amended by adding the following new section, Section 2.4. 2.4 PROJECT MANAGEMENT. Par shall have sole decision making control over the Project. In connection therewith, Par shall determine who shall work on the Project, and shall have discretion to employ individuals of its choosing to work on the Project. During the term of the Project, Pentech will provide such space and administrative support at its Chicago facility as Par may require for those Par employees which Par chooses to have work on the Project in Chicago from time to time. All Pentech employees who Par may elect to work on the project, shall work on the Project under the direction of Par. However, all such Pentech employees shall remain employees of Pentech and shall remain the sole responsibility and risk of Pentech. During the period from January 1, 2003 through December 31, 2003, Par shall reimburse Pentech for its reasonable corporate costs associated with the Project, up to a maximum of One Million Three Hundred Thousand Dollars ($1,300,000), including Pentech's expenses in employing individuals to work on the Project. To the extent that Pentech has allocated certain employees to work on the Project, and Par elects to not have such individuals work on the Project, Par will not reimburse Pentech for any expenses associated with such employees following Par's removal of such employees from the Project. Pentech may continue to employ (for work on other matters) or terminate such employees at Pentech's sole risk and expense. In no event will Par be responsible for (1) any legal expenses of Pentech that do not arise out of the Paragraph IV Litigation or the process of obtaining regulatory approval for the Product, or (2) any Pentech expenses which are not directly related to the Project. Section 5.2 of the Supply and Marketing Agreement shall be deleted in its entirety, including all subsections, and replaced by the following new section 5.2. 5.2 PROFIT PAYMENT. In addition to the Transfer/Contract Price Payment and subject to Section 3.1 hereof, Par shall pay Pentech the following Profit Payments: (A) Subject to Section 3.1, during the Term and any Renewal Term, the Profit Payment to be paid by Par to Pentech shall equal *% of the Gross Profit generated by Par from sales of capsule paroxetine product. (B) To the extent that Par markets a generic tablet version of paroxetine, during the Term of this Agreement and any Renewal Term, Par shall pay to Pentech a Profit Payment in the amount of *% of Par's gross profit generated by sales of the tablet version of paroxetine. Par's gross profit generated by sales of the tablet version shall be calculated using the same methodology as Exhibit 10.44 - Page 2 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION set forth herein for calculating the Gross Profit for sales of the capsule and shall include as a "Cost of Goods" any license, royalty, profit or similar payment required to be made by Par to a third party in connection with Par's sale of the tablet version of the paroxetine as well as any payments similar to the Transfer/Contract Price Payment, which are made to a third Party in connection with the tablets.. MANUFACTURING AND SUPPLY. Pentech and Par each recognize that as development of the project has progressed there have been modifications to the allocation of responsibility between the parties in regards to the development of a commercial paroxetine product, including manufacturing and supply responsibilities. Therefore, Pentech and Par hereby agree to negotiate in good faith to amend those portions of the Supply and Marketing Agreement which pertain to manufacturing and supply, in order to accurately reflect the relationship contemplated by the parties. ENTIRE AGREEMENT; AMENDMENT. This Amendment together with the Supply and Marketing Agreement (as amended by this Amendment) constitute the complete and entire understanding between the Parties with respect to the activities anticipated hereunder and thereunder, superseding and replacing all prior oral or written agreements, communications, representations, proposals, or negotiations specifically relating to the activities hereunder and thereunder and the subject matter hereof and thereof. No change or addition to or variation nor amendment of this Amendment, nor any cancellation or waiver of any of the terms or provisions hereof, nor any alteration or modification of any of the terms and conditions hereof, shall be effective or valid and binding on either Party unless in writing and signed by a duly authorized representative of each Party. All terms of the Agreement not specifically addressed or set forth in this Amendment shall continue to apply in full force and effect, and shall apply equally to this Amendment itself (e.g. confidentiality, notice, etc.). To the extent that there is any inconsistency between the terms of the Supply and Marketing Agreement and this Amendment, the terms of this Amendment shall govern. COUNTERPARTS. This Amendment may be executed in counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Parties have executed this Amendment as of the date first set forth above. PENTECH PHARMACEUTICALS, INC. PAR PHARMACEUTICAL, INC. By:/S/ AL HUMMEL By:/S/ SCOTT TARRIFF ---------------------------------- --------------------------------- Name: AL HUMMEL Name: SCOTT TARRIFF ------------------------------- ------------------------------- Title: PRESIDENT AND CHIEF EXECUTIVE Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER OFFICER Exhibit 10.44 - Page 3 EX-10 8 ex10-45.txt EXHIBIT 10.45 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXHIBIT 10.45 DATE: DECEMBER 20, 2002 ELAN CORPORATION, PLC. AND PAR PHARMACEUTICAL, INC. TERMINATION AGREEMENT RELATING TO DEVELOPMENT, LICENCE AND SUPPLY AGREEMENT DATED 11 DECEMBER 2001 CONTROLLED RELEASE ET AL. / NOMINATED COMPOUNDS Exhibit 10.45 - Page 1 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION THIS TERMINATION AGREEMENT is made December 20, 2002 BETWEEN: (1) ELAN CORPORATION, PLC., a public limited company incorporated under the laws of Ireland and having its registered office at Lincoln House, Lincoln Place, Dublin 2, Ireland ("ELAN"); and (2) PAR PHARMACEUTICAL, INC., a company organized under the laws of New Jersey, with offices at One Ram Ridge Road, Spring Valley, New York 10977, United States of America ("PAR") RECITALS: (A) Elan and Par entered into a development, licence and supply agreement dated 11 December 2001 (the "ORIGINAL AGREEMENT"). (B) Pursuant to the Original Agreement, the parties selected for development the Compound ********** and Elan has subsequently conducted development work to apply the Elan Technology to such Compound. (C) Elan and Par now wish to terminate the Original Agreement, on the terms and conditions set out in this Termination Agreement. NOW IT IS HEREBY AGREED AS FOLLOWS in consideration of the premises and mutual covenants promises herein contained: 1. DEFINITIONS AND INTERPRETATION ------------------------------ Except where expressly provided to the contrary in this Termination Agreement: 1.1. all capitalised terms used in this Termination Agreement shall have the same meanings as are assigned thereto in the Original Agreement; and 1.2. "TERMINATION DATE" shall mean December 20, 2002. 2. TERMINATION ----------- 2.1. The Original Agreement is hereby terminated with effect from the Termination Date. 2.2. For the avoidance of doubt: 2.2.1 the license granted by Elan to Par to import, use, offer for sale and sell the Products in the Territory is hereby terminated with effect from the Termination Date; 2.2.2 development work in respect of the Compound ********** is hereby abandoned; 2.2.3 Elan shall remain the owner of the Elan Intellectual Property; 2.2.4 no further Compounds will be selected for development; and Exhibit 10.45 - Page 2 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 2.2.5 Par's obligation not to develop, market or sell a Competing Product is hereby terminated with effect from the Termination Date. 3. EXISTING RIGHTS --------------- Except as expressly provided to the contrary in this Termination Agreement, each of the parties hereby waives all and any claims it may have against any other party as at the date hereof in respect of any breach of the Original Agreement. 4. SURVIVAL -------- Termination of the Original Agreement shall be without prejudice to: 4.1. the provisions of the Original Agreement relating to confidentiality, which shall accordingly survive until the 7th (seventh) anniversary of the Termination Date, and provisions ancillary thereto; or 4.2. any other agreement between Elan and Par. 5. FINANCIAL PROVISIONS -------------------- Within five business days of the Termination Date, Par shall pay to Elan the non-refundable sum of US$ 651,797 (o United States dollars), being the total amount outstanding in respect of development work up to and including the Termination Date and being in complete satisfaction of all amounts payable to Elan in respect of development or otherwise pursuant to the terms of the Original Agreement. Such payment shall be made by bank transfer without any deduction, set off or withholding whatsoever. 6. PATENT OPINION. - ----------------- Elan shall have not right to, and shall not, rely on any opinion of Frommer Lawrence & Haug LLP in respect of any intellectual property matters related to **********. 6. FURTHER ASSURANCE ----------------- At the request of any of the parties, each other party shall (and shall use reasonable efforts to procure that any other necessary persons shall) execute and perform all such documents, acts and things as may reasonably be required subsequent to the execution of this Termination Agreement for assuring to or vesting in the requesting party the full benefit of the terms hereof. 7. COUNTERPARTS ------------ This Termination Agreement may be signed in any number of counterparts with the same effect as if the signatures to each counterpart were upon a single instrument, and all such counterparts together shall be deemed an original of this Termination Agreement. 8. GOVERNING LAW AND JURISDICTION ------------------------------ This Termination Agreement shall be governed by the laws of the State of New York, excluding its conflict of laws rules. Any dispute arising shall be disposed of in the same manner as a dispute under the Original Agreement. IN WITNESS WHEREOF the parties hereto have executed this Termination Agreement. Exhibit 10.45 - Page 3 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SIGNED SIGNED By: /s/ Alex Nesbitt By: /s/ Scott Tarriff -------------------------------------- ------------------------------- For and on behalf of for and on behalf of ELAN CORPORATION, PLC. PAR PHARMACEUTICAL, INC. Exhibit 10.45 - Page 4 EX-10 9 ex10-46.txt EXHIBIT 10.46 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXHIBIT 10.46 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "AGREEMENT") made this 5th day of December, 2002, by and between ISRAEL PHARMACEUTICAL RESOURCES L.P., an Israeli limited partnership with offices at Yacobi House, Even Yehuda, Israel ("SELLER"), and TRIMA, ISRAEL PHARMACEUTICAL PRODUCTS, MAABAROT LTD., an Israeli private company with its address at Post Maabarot, Israel 40230 ("BUYER") (Seller and Buyer shall jointly be termed the "PARTIES", and each a "PARTY"). WITNESSETH WHEREAS, Seller desires to sell and transfer to Buyer certain assets specified below, and Buyer desires to purchase such assets, under the terms and conditions set forth below. NOW, THEREFORE, in consideration of the terms and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Preamble and Annex ------------------ The preamble and annex to this Agreement shall be considered part of this Agreement. 2. Sale and Purchase of Assets --------------------------- 2.1 Subject to the terms and conditions set forth herein, in consideration of the Purchase Price stipulated in Section 5 hereof, Seller agrees to sell, assign and transfer to Buyer, and Buyer agrees to purchase and assume from Seller, the assets listed in ANNEX A attached hereto and all rights and liabilities associated with such assets (the "PURCHASED ASSETS"), including without limitation with regard to the use of the Purchased Assets such as software licenses, instructions to use and maintain the Purchased Assets, standard operation procedures and warranty certificates relating to the Purchased Assets, all to the extent held or in the possession of Seller, free and clear of all liens, charges, claims, security interests, encumbrances and other restrictions or third party rights of any kind. 2.2 The Purchased Assets shall be sold to Buyer "as-is" at the time of the Closing (as defined below) and Seller makes no representation as to their functionality, value, condition or fitness for use, and makes no other representation of any kind except as expressly set forth in Section 6 hereof. 2.3 Except for the sale of the Purchased Assets, no other assets or rights of any kind, tangible or intangible, including without limitation goodwill, names or intellectual property rights of any kind whatsoever, are being sold, conveyed or otherwise transferred to Buyer by Seller. 3. Closing of Sale and Purchase ---------------------------- 3.1 The sale, assignment and transfer of the Purchased Assets and the payment of the Purchase Price (as stipulated in Section 5 hereof) shall take place in Herzlia on December 5, 2002 or at such other place and time as shall be agreed by the Parties (the "CLOSING"). Exhibit 10.46 - Page 1 3.2 At the Closing, Buyer shall pay to Seller the Purchase Price. 3.3 Title to the Purchased Assets and risk of loss shall pass to Buyer with delivery of possession in the Purchased Assets to be carried out immediately upon the Closing, at the same location where they are at the time of this Agreement, I.E. at the Premises (as defined below). Buyer hereby acknowledges that the Purchased Assets do not have to be delivered to a different location by Seller. All other non-Purchased Assets shall be retained by Seller and shall be removed by Seller from their present location at or promptly after the Closing. 4. Conditions Precedent -------------------- 4.1 Anything to the contrary in this Agreement notwithstanding, the obligation of Seller to sell the Purchased Assets to Buyer, and the obligation of Buyer to purchase the Purchased Assets from Seller, shall be contingent on the execution of (i) a Lease Termination Agreement between Seller and the lessor (the "LESSOR") of the premises leased by Seller at Yacobi House in the Industrial Zone in Even Yehuda (the "PREMISES"), and (ii) a Lease Agreement between Buyer and the Lessor with respect to the Premises, commencing immediately after the termination of Seller's lease of the Premises. 4.2 If any of the conditions precedent have not been fulfilled, or waived prior to the Closing by both Parties, the Closing will not take place; in such an event, this Agreement and all of the Parties' rights and obligations hereunder shall be terminated, unless agreed otherwise in writing by the Parties, and no Party shall be liable to the other Party for any damage, cost or expense caused to that other Party from the termination of this Agreement. 5. Purchase Price; Payment Terms; Reimbursement -------------------------------------------- 5.1 In consideration for the sale of the Purchased Assets, Buyer shall pay to Seller at the Closing the sum of $700,000 (seven hundred thousand U.S. dollars) (the "PURCHASE PRICE"), plus Value Added Tax. The Parties agree that, subject to Sections 5.4 and 5.5 hereof, the Purchase Price shall be the full and final consideration payable to Seller hereunder. 5.2 The Purchase Price shall be paid to Seller in U.S. dollars or in Israeli Shekels according to the representative rate of exchange last published by the Bank of Israel before the date of payment, by cashier's check, bank transfer or as otherwise agreed by the parties. 5.3 The Purchase Price is exclusive of VAT which shall be paid by Buyer to Seller at the 14th of the month following the Closing at the then applicable rate, in addition to the Purchase Price. 5.4 Seller shall reimburse Buyer within 10 (ten) days of receipt of Buyer's written demand for any payment made by Buyer to any third party in connection with the Purchased Assets, that (i) before the date of the Closing was committed and agreed to be paid by Seller, and (ii) is directly related to a service or other benefit provided to Seller prior to the date of the Closing. Buyer shall notify Seller promptly of any such claim for payment received by it from a third party, and, at Seller's request, shall cooperate with Seller in negotiating or otherwise dealing with such claim. Exhibit 10.46 - Page 2 5.5 Buyer shall reimburse Seller within 10 (ten) days of receipt of Seller's written demand for any payment made by Seller to a third party in connection with the Purchased Assets, which arises or relates to a service or other benefit that will be provided to Buyer within a period of no more than 60 (sixty) days after the Closing. The foregoing shall also include, notwithstanding the time limitation stipulated above, the respective portion relating to any period after the Closing, of the advance lease payment made by Seller to Lessor. . Seller shall provide to Buyer appropriate documentation regarding such payments, if any. Buyer's obligation under this Section 5.5 (excluding the advance lease payments) shall be limited to the aggregate amount of NIS 50,000. 6. Representations and Warranties of Seller ---------------------------------------- Seller represents and warrants to Buyer as follows: 6.1 Seller has full partnership authority to execute this Agreement and perform in accordance herewith, and this Agreement constitutes a valid and binding obligation of Seller and is enforceable against it in accordance with its terms. Each document of transfer contemplated by this Agreement, when executed and delivered by Seller in accordance with the provisions hereof, shall be the valid and legally binding obligation of Seller and be enforceable against Seller in accordance with its terms. This Agreement and all transactions contemplated hereby have been duly authorized by all requisite partnership action by Seller. Neither the execution nor the delivery of this Agreement nor fulfillment or compliance with the terms and conditions hereof will constitute a breach by Seller of its organizational documents or result in a breach of the terms, conditions or provisions of, or constitute a default under or result in a violation of, any agreement, contract or instrument to which Seller is a party or by which it is otherwise bound, result in a violation by Seller of any existing law or statute or any material rule or regulation or of any order, decree, judgement or injunction of any court or governmental agency, or result in the creation or imposition of any lien, charge, restriction, security interest or encumbrance of any nature whatsoever on the Purchased Assets. 6.2 Seller has good and clear title and a valid owner's interest in and to all of the Purchased Assets, free and clear of all liens, charges, encumbrances or third party rights of any nature whatsoever. 6.3 At the Closing or as soon as practicable thereafter, Seller will (i) deliver to Buyer all relevant documentation in Seller's possession which relates to the Purchased Assets, such as manuals, equipment documentation, construction drawings and floor plans; and (ii) deliver to Buyer all warranty certificates relating to the Purchased Assets. 6.4 Nothing in this Agreement shall cause or be construed to cause the transfer to Buyer of any of Seller's employees. Seller is and shall continue to be solely liable for Seller's employees, as they are at the time of this Agreement and as they may be in the future, in respect of such status. Without derogating from the generality of the foregoing, Seller shall indemnify Buyer for any losses, damages, costs and expenses (including reasonable legal fees and expenses) arising out of or due to any claim or demand made by any of Seller's employees against Buyer, in connection with their employment by Seller or with the transactions contemplated in this Agreement; provided, however, that Buyer shall promptly notify Seller of any such claim or demand and permit Seller to assume the defense or negotiation thereof. Exhibit 10.46 - Page 3 6.5 Seller shall, at any time and from time to time after the Closing, upon the reasonable request of Buyer and at Buyer's expense, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, documents, assignments, transfers, conveyances and assurances as may be reasonably required for better assigning, transferring, granting, conveying, assuring and confirming to Buyer, or to its successors and permitted assigns, any or all of the Purchased Assets. 7. Representations and Warranties of Buyer --------------------------------------- Buyer represents and warrants to Seller as follows: 7.1 Buyer has full corporate authority to execute this Agreement and perform in accordance herewith, and this Agreement constitutes a valid and binding obligation of Buyer and is enforceable against it in accordance with its terms. This Agreement and all transactions contemplated hereby have been duly authorized by all requisite action by Buyer. 7.2 Neither the execution nor the delivery of this Agreement nor fulfillment of or compliance with the terms and conditions hereof will constitute a breach by Buyer of the terms, conditions or provisions of, or constitute a default under or result in a violation of its organizational documents or any material agreement, contract or instrument to which Buyer is a party or by which it is otherwise bound, or result in a violation by Buyer of any existing law or statute or any rule or regulation of any jurisdiction, or of any order, decree or injunction of any court or governmental agency. 7.3 Buyer acknowledges that except for the sale of the Purchased Assets, subject to the provisions set forth in Section 2.1 hereof, no other assets or rights of any kind, tangible or intangible, including without limitation goodwill, names or intellectual property rights of any kind whatsoever, are being sold, transferred, conveyed or otherwise transferred to Buyer by Seller. 7.4 Buyer acknowledges that the Purchased Assets will be sold and delivered to it in their condition "as-is" at the time of the Closing, and that it has inspected and is familiar with the Purchased Assets and their condition and has found them to be satisfactory for its needs. Buyer warrants that it does not have, nor will have or make in the future, any claim, demand, complaint, cause of action or action against Seller or any of Seller's partners, for any reason whatsoever, with respect to the Purchased Assets, except for claims, demands, complaints and causes of action expressly permitted under this Agreement. 7.5 Buyer acknowledges that it did not receive from Seller or from anyone in Seller's name or on Seller's behalf any implied or oral representations with respect to the Purchased Assets. Buyer acknowledges that Seller's sole representations with respect to the Purchased Assets are the representations expressly made in this Agreement. Exhibit 10.46 - Page 4 8. No Warranty; Liability ---------------------- 8.1 SUBJECT TO THE REPRESENTATIONS MADE BY SELLER IN SECTION 6.2 HEREOF, THE PURCHASED ASSETS ARE SOLD IN THEIR CONDITION "AS-IS" AT THE TIME OF THE CLOSING. SELLER MAKES NO REPRESENTATION AND EXTENDS NO WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE CONDITION, VALUE OR FUNCTIONALITY OF THE PURCHASED ASSETS, AND MAKES NO WARRANTIES AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SELLER SHALL HAVE NO OBLIGATION TO CAUSE ANY OF ITS EMPLOYEES TO BE TRANSFERRED TO, OR EMPLOYED BY, BUYER. 8.2 Without derogating from the other provisions of this Agreement, except for a breach of Section 2.1 hereof, in no event will either of the Parties be liable to the other Party for any incidental, special or consequential damages (including lost profits) suffered by the other Party or any third party, even if that Party has been advised of the possibility of such damages, which result from this Agreement or the performance thereof. 9. Miscellaneous ------------- 9.1 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the Parties and supersedes all prior discussions, agreements or correspondence with regard to the subject matter hereof. No representations or warranties have been made by either of the Parties, except as expressly contained herein. 9.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the Parties. Neither Party may assign any of its rights or delegate any of it obligations hereunder without the prior written consent of the other Party. 9.3 GOVERNING LAW; JURISDICTION; LANGUAGE. This Agreement shall be governed by and construed under the laws of the State of Israel. The competent courts in Tel Aviv shall have exclusive jurisdiction in any dispute arising out of or in connection with this Agreement. This Agreement has been drafted, negotiated and executed in the English language. 9.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.5 NOTICES. All notices and other communications required or permitted hereunder to be given to a Party to this Agreement shall be in writing and shall be faxed (with confirmation sent by registered mail) or mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed to such Party's address as set forth hereinabove or at such other address as the Party shall have furnished to the each other Party in writing in accordance with this provision. Any notice sent in accordance herewith shall be effective (i) if mailed, 5 (five) business days after mailing, (ii) if sent by messenger, upon delivery, (iii) if sent by an overnight courier that guarantees second day delivery, two business days after mailing through such service, and (iv) if sent via facsimile, upon transmission and electronic confirmation of receipt or (if transmitted and received on a Exhibit 10.46 - Page 5 non-business day) on the first business day following transmission and electronic confirmation of receipt. 9.6 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of all Parties hereto or, with respect to a waiver, by the Party for whose benefit the waived term was. 9.7 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its remaining terms. 9.8 NON-RECOURSE. No recourse or claim may be had against any of the limited partners of Seller. 9.9 COSTS AND EXPENSES. Except as otherwise expressly provided herein, each of the Parties shall bear its own costs and expenses, including legal costs and expenses, in connection with this Agreement. IN WITNESS WHEREOF, the undersigned have set forth their signature as of the date first written above. /S/ ANDY KEIDAR /S/ ARIE L. GUTMAN - --------------- ------------------ BUYER SELLER By: ANDY KEIDAR By: ARIE L. GUTMAN -------------- -------------- Exhibit 10.46 - Page 6 EX-10 10 pharma_exh10-47.txt EXHIBIT 10.47 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXHIBIT 10.47 SUPPLY AND DISTRIBUTION AGREEMENT by and between GENPHARM INC., LEINER HEALTH PRODUCTS, LLC and PAR PHARMACEUTICAL, INC. LORATADINE DECEMBER 20, 2002 Exhibit 10.47 - Page 1 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION TABLE OF CONTENTS 1. DEFINITIONS..........................................................4 2. CERTAIN PAYMENTS.....................................................7 2.1 FIRST INSTALLMENT...........................................8 2.2 SECOND INSTALLMENT..........................................8 3. APPOINTMENT; PRODUCT SUPPLY AND DISTRIBUTION.........................8 3.1 APPOINTMENT AS EXCLUSIVE DISTRIBUTOR........................8 3.2 OBLIGATION TO REGISTER AND SUPPLY...........................8 3.3 OBLIGATION TO PURCHASE AND MARKET...........................8 3.4 FORECASTS AND FIRM ORDERS...................................9 3.5 INSUFFICIENCY OF SUPPLY.....................................9 4. PURCHASING; DELIVERY.................................................9 4.1 PURCHASE ORDERS.............................................9 4.2 DELIVERY...................................................10 4.3 ACCEPTANCE AND REJECTION...................................11 4.4 PACKAGING..................................................11 5. PRICE AND PAYMENT TERMS.............................................12 5.1 TRANSFER PRICE.............................................12 5.2 INVOICING AND PAYMENT......................................12 6. CERTAIN UNDERTAKINGS................................................12 6.1 PRODUCT COMPLAINTS AND ADVERSE DRUG EXPERIENCES............12 6.2 FACILITY MAINTENANCE; INSPECTION; REPORTS..................12 6.3 FILING REQUIREMENTS AND MAINTENANCE........................13 6.4 INSURANCE..................................................13 6.5 CERTAIN LITIGATION.........................................13 6.6 ALLOCATION OF NET PROFIT...................................13 6.7 PROVISION OF CERTAIN INFORMATION...........................14 7 WARRANTIES AND INDEMNIFICATION......................................14 7.1 CERTAIN REPRESENTATIONS AND WARRANTIES OF GENPHARM.........14 7.2 CERTAIN REPRESENTATIONS AND WARRANTIES OF LEINER...........14 7.3 CERTAIN REPRESENTATIONS AND WARRANTIES OF PAR..............15 7.4 PRODUCT RECALL.............................................15 7.5 OBLIGATIONS OF PAR.........................................16 Exhibit 10.47-Page 2 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 7.6 INDEMNIFICATION BY LEINER..................................16 7.7 INDEMNIFICATION BY GENPHARM................................16 7.8 INDEMNIFICATION PROCEDURES.................................17 8. AUDIT...............................................................17 8.1 AUDIT OF GENPHARM'S BOOKS..................................17 8.2 AUDIT OF LEINER'S BOOKS....................................18 8.3 AUDIT LIMITATIONS..........................................18 9. TERM AND TERMINATION................................................18 9.1 TERM.......................................................18 9.2 TERMINATION................................................19 9.3 POST-TERMINATION...........................................20 10. CONFIDENTIALITY.....................................................20 10.1 TREATMENT OF CONFIDENTIAL INFORMATION......................20 10.2 LIMITS ON DISCLOSURE.......................................20 11. FORCE MAJEURE.......................................................21 11.1 EFFECTS OF FORCE MAJEURE..................................21 11.2 NOTICE OF FORCE MAJEURE...................................21 11.3 ALLOCATION OF CAPACITY....................................21 12. MISCELLANEOUS......................................................22 12.1 DISPUTE RESOLUTION........................................22 12.2 INDEPENDENT CONTRACTORS...................................22 12.3 ASSIGNMENT................................................22 12.4 GOVERNING LAW.............................................22 12.5 CURRENCY UNITS............................................22 12.6 NO IMPLIED WAIVER.........................................23 12.7 NOTICE....................................................23 12.8 AMENDMENTS................................................24 12.9 COUNTERPARTS..............................................24 12.10 ENTIRE AGREEMENT..........................................24 12.11 BENEFIT; BINDING EFFECT...................................24 12.12 SURVIVAL..................................................24 12.13 FURTHER ASSURANCES........................................24 12.14 SEVERABILITY..............................................25 12.15 PAR AS THIRD-PARTY BENEFICIARY............................25 Exhibit 10.47 - Page 3 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SUPPLY AND DISTRIBUTION AGREEMENT THIS SUPPLY AND DISTRIBUTION AGREEMENT (this "Agreement"), dated as of December 20, 2002, is by and between Genpharm Inc., an Ontario, Canada corporation having offices at 85 Advance Road, Etobicoke, Ontario, M8Z 2S6 Canada ("Genpharm"), Leiner Health Products, LLC, a Delaware limited liability company having offices at 901 East 233rd Street, Carson, California 90705 ("Leiner"), and Par Pharmaceutical, Inc., a New Jersey corporation having offices at One Ram Ridge Road, Spring Valley, New York 10977 USA ("Par"). WHEREAS, Genpharm, among other things, manufactures certain generic pharmaceutical products, and Par and Leiner each, among other things, market and sell certain generic pharmaceutical products; WHEREAS, Genpharm has received tentative approval from the FDA (as defined herein) for the manufacture and by prescription sale of Loratadine (intended to be the bioequivalent to Claritin(R)) (the "Product") in 10 mg tablets and, by a prior written agreement, dated March 25, 2002 (the "Manufacturing Agreement"), Genpharm has appointed Par as the exclusive distributor in the Territory (as defined herein) of all Product manufactured by Genpharm; WHEREAS, based on the anticipated status of the Product as an over-the-counter product, Genpharm and Par desire that certain marketing and over-the-counter distribution rights in respect of the Product be sub-contracted to certain third-party distributors; and WHEREAS, Par and Genpharm desire to permit certain rights in respect of the marketing and over-the-counter distribution of the Product to be sub-contracted to Leiner, and Leiner wishes to market and engage in the over-the-counter distribution of the Product, in the Territory; all subject to the terms and conditions set forth herein. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. For purposes hereof, the following terms shall have the meanings set forth below: "Act" means the Federal Food, Drug, and Cosmetic Act, as amended from time to time, and the rules and regulations promulgated thereunder. "Affiliate" means, with respect to any Person, any other Person controlled by, controlling or under common control with such Person, where control means more than 50% ownership or voting rights of a Person or other power to direct the management or policy of a Person. "ANDA" means the abbreviated new drug application filed by the Manufacturer for the Product and approved by the FDA, as the same may be supplemented and/or amended from time to time. "API" means the active pharmaceutical ingredient, Loratadine HCl. Exhibit 10.47 - Page 4 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION "Arbitrator(s)" has the meaning set forth in Section 12.1 hereof. "cGMP" means the current Good Manufacturing Practices regulations of the FDA (as in effect from time to time) in 21 C.F.R. pts. 210 and 211. "Confidential Information" means any information that in any way shall relate to a party, including, without limitation, its products, business, know-how, patents, methods, trade secrets and technology, or to any Affiliate thereof, that shall be furnished to any other party(ies) in connection with this Agreement. Confidential Information shall include the existence and terms of this Agreement. Confidential Information shall not include any information: (i) that, at the time of disclosure, is generally available to the public; (ii) that, after the time of disclosure, becomes generally available to the public, except as a result of a breach of this Agreement by the recipient of such information; (iii) that, prior to the time of disclosure, becomes available to the recipient of such information from a third party which is not legally or contractually prohibited from disclosing such Confidential Information; PROVIDED, that such Confidential Information was not acquired, directly or indirectly, from the disclosing party or its Affiliates; (iv) the recipient of which can demonstrate was developed by or for such recipient independently of, and without the use of, the Confidential Information disclosed by the disclosing party or its Affiliates hereunder; or (v) that is required to be disclosed by legal or judicial process; PROVIDED, in each case, the party so disclosing information timely informs the other party, uses its commercially best efforts to limit the disclosure required by such legal or judicial process and maintains confidentiality, and permits the other party to attempt, by appropriate legal means, to limit such disclosure. "Effective Date" means the date of execution of this Agreement. "FDA" means the United States Food and Drug Administration or any successor governmental agency. "First Commercial Sale" means the first sale of the Product under this Agreement in an arms' length transaction to a third party. Par and Genpharm shall mutually determine whether and when to commence with the First Commercial Sale and shall notify Leiner in writing thereof. "Force Majeure Event" has the meaning set forth in Section 11.1 hereof. "Initial Term" has the meaning set forth in Section 9.1 hereof. "Ineligible Person" means any Person who is prohibited by any law, rule or regulation or by any order, directive or policy from selling the Product (assuming that the Product Approval has been obtained) or any other pharmaceutical product within the Territory or who is listed by any 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. Exhibit 10.47 - Page 5 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION "Leiner Facility" means the facility and warehouse used by Leiner to process, package, label and/or store the Product. "Losses" has the meaning set forth in Section 7.6 hereof. "Manufacturer" means Genpharm or its Affiliate in whose name the Product Approval is registered. "Manufacturing Agreement" has the meaning set forth in the second recital hereof. "Manufacturing Cost" means the actual, direct costs 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, labor (salary and allocable benefits), material adjustments for off-grade or defective material, handling losses, physical adjustments, salvage and reasonable overhead charges relating to the manufacture of the Product, calculated in accordance with U.S. generally accepted accounting principles, consistently applied. The Manufacturing Cost shall specifically exclude all costs incurred in research, development, design, marketing, promotion and administration and in obtaining the Product Approval. If, in the sole discretion of the Manufacturer, all or any portion of the manufacturing or packaging of the Product is subcontracted to a third party (or to any Affiliate), the Manufacturing Cost shall include the actual amount paid, without mark-up, to such third party (or Affiliate). Genpharm hereby preliminarily establishes the Manufacturing Cost at $**.** per 1,000 extended units in bulk. Within the first thirty (30) calendar days of manufacturing the Product, Genpharm may adjust such Manufacturing Cost upwards by up to *** (**%) percent and shall adjust such Manufacturing Cost downwards, as appropriate, to reflect its actual Manufacturing Cost, and shall deliver a Manufacturing Cost Statement to Leiner and Par promptly, and in any event within sixty (60) calendar days of commencing its manufacturing of the Product. Genpharm shall establish the Manufacturing Cost on the first day of each calendar year thereafter and shall deliver to Leiner and Par a Manufacturing Cost Statement within sixty (60) calendar days of such date. "Manufacturing Cost Statement" means a statement showing the calculation of the Manufacturing Cost applicable to the period for which it is delivered, which statement shall be accompanied by a certificate signed by the President or Chief Financial Officer of Genpharm certifying that, to the best of his or her knowledge, after reasonable investigation, such statement is true and correct in all material respects. "Net Profit" means Net Sales less (i) the actual, direct cost to Leiner to package and label such Product into appropriate configurations and SKUs, calculated in accordance with U.S. generally accepted accounting principles, consistently applied, (ii) *** (**%) percent of the amount calculated pursuant to clause (i) hereof, as a distribution fee, and (iii) the Transfer Price paid to Genpharm with respect to such Product. "Net Sales" means the gross invoiced sales price billed for the Product sold by Leiner and its Affiliates in the Territory less (i) returns, price protections, cash discounts and allowances offered to, and actually taken by, third parties in the ordinary course of business, (ii) applicable direct Exhibit 10.47 - Page 6 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION insurance costs and (iii) applicable non-income taxes incurred by Leiner, if any; all determined in accordance with U.S. generally accepted accounting principles, consistently applied. It is understood and agreed that (a) the Product shall not be bundled and sold with other products and (b) for purposes hereof, Product sold to affiliated parties shall be deemed to be sold at the gross invoiced sales price billed for Product sold to unaffiliated third parties in arms' length transactions. "Paragraph IV Litigation" means any litigation commenced in respect of the Product in accordance with and within the time specified by Section 505(j)(5)(B)(iii) of the Act following the Manufacturer's submission to the FDA of a certification in accordance with Section 505(j)(2)(A)(vii)(IV) of the Act solely with regard to claims of infringement, invalidity and unenforceability of any patent(s) in respect of the Product. "Person" means an individual, corporation, partnership or other entity. "Plant" means the facility and warehouse used by the Manufacturer to manufacture and/or store the Product. "Product" has the meaning set forth in the second recital hereof. "Product Approval" means the final and unconditional approval of an ANDA by the FDA enabling the Manufacturer to manufacture and sell the Product over-the-counter in the Territory. "Reasonable and Consistent Requirements" shall mean Leiner's reasonable and consistent requirements for the Product, based primarily upon the volume and timing of its prior orders. "Renewal Term" has the meaning set forth in Section 9.1 hereof. "SKUs" means stock keeping units. "Specifications" means the terms and conditions applicable to the Product and described in the ANDA for the Product, as the same may be supplemented or amended 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 sum of (a) the Manufacturing Cost of the Product supplied by the Manufacturer to Leiner pursuant hereto plus (b) applicable freight, taxes, duties, insurance and related charges incurred by the Manufacturer under Section 4.2(a) hereof to deliver the Product F.O.B. the Leiner Facility. Exhibit 10.47 - Page 7 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 2. CERTAIN PAYMENTS. 2.1 FIRST INSTALLMENT. On January 6, 2003, Leiner shall pay, by wire transfer of immediately available funds, the sum of $***,*** to a bank account of Genpharm previously designated to Leiner in writing by Genpharm. In the event that this Agreement is terminated pursuant to Section 9.2(a) hereof only, Genpharm shall promptly repay to Leiner all monies paid by Leiner to Genpharm under this Section 2.1, without interest. 2.2 SECOND INSTALLMENT. On July 1, 2003, Leiner shall pay, by wire transfer of immediately available funds, the sum of $***,*** to a bank account of Genpharm previously designated to Leiner in writing by Genpharm. In the event that this Agreement is terminated pursuant to Section 9.2(a) hereof only, Genpharm shall promptly repay to Leiner all monies paid by Leiner to Genpharm under this Section 2.2, without interest. 3. APPOINTMENT; PRODUCT SUPPLY AND DISTRIBUTION. 3.1 APPOINTMENT AS EXCLUSIVE DISTRIBUTOR. (a) Subject to receipt by the Manufacturer of the Product Approval and the written consent of Par and Genpharm to commence with the First Commercial Sale, which consent shall not be unreasonably withheld, Par hereby appoints Leiner as its exclusive sub-distributor of the Product solely for over-the-counter sales in the Territory, and Leiner hereby accepts such appointment and agrees to act as such exclusive sub-distributor, all upon the terms and conditions set forth herein. (b) To the extent required by the terms of the Manufacturing Agreement in order for the parties to fulfill their obligations hereunder, Genpharm hereby irrevocably and unconditionally consents to Par's appointment of Leiner as an exclusive sub-distributor of the Product in the Territory. The foregoing notwithstanding, nothing herein shall be construed to alter or diminish Genpharm's appointment of Par as the sole and exclusive distributor of the Product in the Territory pursuant to the Manufacturing Agreement. 3.2 OBLIGATION TO REGISTER AND SUPPLY. (a) Genpharm shall use its reasonable best efforts to cause the Manufacturer to obtain the Product Approval; PROVIDED, that nothing herein contained shall constitute a guarantee or representation by Genpharm or Par that the Product Approval will be obtained. (b) Subject to receipt by the Manufacturer of the Product Approval and the written consent of Par and Genpharm to commence with the First Commercial Sale, which consent shall not be unreasonably withheld, Genpharm shall use commercially reasonable efforts to cause the Manufacturer to manufacture and supply to Leiner reasonable quantities of the Product in bulk form and in a timely fashion, upon the terms and conditions set forth herein. 3.3 OBLIGATION TO PURCHASE AND MARKET. (a) Subject to receipt by the Manufacturer of the Product Approval and the written consent of Par and Genpharm to commence with the First Commercial Sale, which consent shall not be unreasonably withheld, Leiner, subject to Section 3.3(b) hereof, (i) shall use its commercially best efforts to market and sell the Product over-the-counter in the Territory and (ii) shall purchase all of its requirements for the Product in the Territory from Genpharm pursuant to this Agreement, all upon the terms and conditions set forth herein. Exhibit 10.47 - Page 8 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (b) Neither Leiner nor any of its Affiliates shall, directly or indirectly, market or sell the Product (i) to any of the Persons listed on SCHEDULE 3.3 hereto, (ii) bearing prescription labeling to any Person, (iii) outside of the Territory or (iv) to any Person in the Territory where it knows or has reason to believe that such Product will be resold by such Person (directly or indirectly) outside of the Territory. Genpharm and Leiner understand and agree that Par shall retain the exclusive right to market and sell the Product (A) to the customers listed on SCHEDULE 3.3 hereto and (B) bearing prescription labeling to any Person. 3.4 FORECASTS AND FIRM ORDERS. Leiner shall provide to Genpharm and Par, quarterly (at least sixty (60) calendar days in advance of the commencement of the first calendar month forecasted thereunder), a twelve (12)-month rolling forecast of Leiner's estimated requirements of the Product, which forecast shall represent a commitment of Leiner to purchase the quantity of Product projected for the first three months thereunder and a commitment to purchase from Genpharm (or Genpharm's designee) any raw materials not used or resold by the Manufacturer but ordered by the Manufacturer in reasonable reliance on the quantity of Product forecasted by Leiner for the fourth, fifth and sixth months forecasted thereunder. Such raw material purchased by Leiner shall be delivered to Leiner promptly after Leiner's payment therefor, and Leiner shall pay Genpharm promptly upon receipt of Genpharm's invoice for applicable freight, insurance and taxes, imposts or duties levied upon the sale of the raw materials by Genpharm to Leiner. Subject to the foregoing, all forecasts are estimates only, and Leiner shall be bound only to purchase the Product pursuant to purchase orders submitted, or deemed hereunder to be submitted, by it to Genpharm (and Par). Leiner shall deliver the first such forecast as soon as possible and in any event within thirty (30) calendar days after the Effective Date, and Leiner shall, subject to the first sentence hereof, deliver the updated and extended forecasts every three (3) months thereafter. 3.5 INSUFFICIENCY OF SUPPLY. In the event that Genpharm shall fail to supply Leiner's Reasonable and Consistent Requirements hereunder for a period exceeding one hundred twenty (120) consecutive days and Leiner is not in breach of this Agreement, Leiner may, in its discretion, elect to cause the Product to be manufactured for Leiner by a third party of Leiner's choosing (a "Third Party Source"). At the end of such 120-day period, Leiner shall give Genpharm not less than sixty (60) days notice of Leiner's intent to cause such Product to be manufactured by a Third Party Source for Leiner. If Genpharm is able to demonstrate to Leiner, in Leiner's reasonable good faith discretion, that it can meet Leiner's Reasonable and Consistent Requirements within such sixty (60) day period, then Leiner shall continue to procure all of its requirements of the Product from Genpharm. If Genpharm is unable to demonstrate to Leiner, in Leiner's reasonable good faith discretion, that it can meet Leiner's Reaonable and Consistent Requirements within such sixty (60) day period, and Leiner is not in breach of this Agreement, then Leiner shall have the right to secure additional supply of the Product from a Third Party Source to the extent that Genpharm is unable to meet Leiner's Reasonable and Consistent Requirements, only until such time as Genpharm is able to demonstrate to Leiner, in Leiner's reasonable good faith discretion, that it can meet Leiner's Reasonable and Consistent Requirements hereunder. 4. PURCHASING; DELIVERY. 4.1 PURCHASE ORDERS. (a) Leiner shall place orders for the Product with Genpharm using Leiner's standard form of purchase order, a copy of which is attached hereto as EXHIBIT A. Each purchase order submitted to Genpharm by Leiner shall contemplate the purchase of Product in minimum batch size as Exhibit 10.47 - Page 9 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION contemplated in the Product Approval or multiples thereof (unless Genpharm shall agree in writing to smaller quantities) and shall specify the requested delivery date therefor, which date shall not be less than one hundred twelve (112) calendar days from the date of Genpharm's receipt of such order. Each order placed pursuant to this Section 4.1 shall constitute a firm obligation to purchase the ordered quantities of the Product. The terms and conditions of this Agreement shall be controlling over any conflicting terms and conditions used by Leiner in ordering the Product or by Genpharm in accepting or confirming orders and any term or condition of such purchase order, acceptance or other document which shall conflict with or be in addition to the terms and conditions of this Agreement is hereby expressly rejected (unless all the parties shall have mutually agreed to the contrary in writing in respect of a particular instance). (b) Leiner acknowledges and agrees that the Manufacturer shall base its production planning for Product manufactured pursuant to this Agreement on the forecasts provided by Leiner pursuant to Section 3.4 hereof. Leiner hereby agrees that the Manufacturer shall have the right at any time, for purposes of Section 3.4 and otherwise, to order materials and supplies to manufacture one hundred twenty (120%) percent of those quantities of the Product forecasted to be ordered by Leiner under Section 3.4 for the then current and the next calendar quarter. In addition, to the extent any materials necessary for the manufacture of the Product require a longer lead time, the Manufacturer shall be entitled to order reasonable quantities of such materials for purposes of Section 3.4 and otherwise. 4.2 DELIVERY. (a) All Products shall be delivered in bulk containers, F.O.B. the Leiner Facility, and risk of loss and title to the Product shall pass to Leiner upon delivery of the Product to the Leiner Facility. Genpharm shall arrange for shipping and/or transportation of the Product from the Plant and pay all shipping and related costs, including insurance, and 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 Leiner, whether that tax, impost or duty is levied under the laws of the jurisdiction where the Plant is located and/or the jurisdiction where any of Genpharm, Leiner and/or Par 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. Each party shall supply to the other all documentation necessary to export such Product from the jurisdiction where the Plant is located and all documentation necessary to import such Product into the Territory, to the extent that same is available to such party or is reasonably capable of being generated by it. Genpharm shall ensure that the Product is transported and Leiner shall ensure that the Product is received, handled, stored and delivered, in accordance with the Specifications and applicable cGMP and other FDA requirements (and the requirements of all other applicable governmental or regulatory bodies, agencies or authorities in the Territory). (b) Genpharm shall use commercially reasonable efforts to ensure that the Product ordered by Leiner in accordance with this Agreement is shipped in accordance with the delivery dates specified in Leiner's purchase orders, as accepted by Genpharm, and Genpharm shall notify Leiner promptly of any significant anticipated delay. Neither Genpharm nor Par shall be liable for Leiner's loss of profits in the event of late or non-delivery. (c) Genpharm shall cause the Manufacturer to include in each shipment of the Product hereunder a certificate of analysis that shall certify that the Product contained in such shipment complies with the provisions of Section 7.1 of this Agreement. The Product supplied hereunder shall have a Exhibit 10.47 - Page 10 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION minimum shelf life of 20 months, which shall run from the date of shipment by the Manufacturer. 4.3 ACCEPTANCE AND REJECTION. Leiner shall give written notice to Genpharm of any claims that the Product purchased pursuant to this Agreement does not comply with the requirements of Section 7.1 of this Agreement promptly upon its becoming aware of such non-compliance. In the event that Leiner shall fail to notify Genpharm of any such claim within thirty (30) business days of Leiner's receipt or deemed receipt thereof at the Leiner Facility, such Product shall be deemed accepted by Leiner. Any notice by Leiner pursuant to this Section 4.3 that any Product does not comply with the terms and conditions hereof shall be accompanied by a true and correct copy of the results of any tests conducted by Leiner thereon. Leiner and Genpharm shall cooperate in good faith with the Manufacturer to resolve any disputes arising therefrom and in the event that the parties shall be unable to resolve such dispute within thirty (30) calendar days from the date of the Manufacturer's receipt of Leiner's notice pursuant to this Section 4.3, the parties shall submit such dispute to a mutually agreed-to independent laboratory. The determination by such laboratory shall be final and binding and the costs therefor shall be borne by the non-prevailing party. Leiner shall not dispose of any Product claimed by it not to comply with the terms and conditions hereof until final resolution of any dispute with respect thereto. Genpharm shall cause the Manufacturer to promptly replace any Product which does not comply with the terms and conditions hereof, at Genpharm's sole cost and expense, by delivery thereof to Leiner, but neither Par nor Genpharm shall be liable for Leiner's loss of profits in connection herewith. 4.4 PACKAGING. Leiner shall package the Product into appropriate configurations and SKUs. Leiner shall ensure that the Product is packaged with labels, product inserts and other labeling conforming with FDA requirements. Leiner shall be solely responsible, financially and legally, for the contents of the labels and artwork on all finished labeled Product sold or otherwise released by Leiner (except for information contained on such labels that is also contained on the labels of the bulk Product supplied by or on behalf of the Manufacturer to Leiner pursuant hereto). Leiner understands and agrees that all labels and artwork concepts on all packaging material used by Leiner in connection with labeling and packaging of the 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 Leiner's obligations or responsibilities hereunder (or impose any obligation or responsibility on Genpharm or Par 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 Genpharm or the Manufacturer). Genpharm understands and agrees that after initial approval of master labels and artwork concepts, Leiner shall not be obligated to provide revised individual customer labels or artwork to Manufacturer; PROVIDED, that such revision is confined to either trade dress or customer trademark issues. Leiner shall be responsible for the costs of printing plates and dies as may be applicable. Leiner shall comply with the Specifications and applicable cGMP and other FDA requirements (and the requirements of all other applicable governmental or regulatory bodies, agencies or authorities in the Territory) in all packaging and labeling of the Product. Exhibit 10.47 - Page 11 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 5. PRICE AND PAYMENT TERMS. 5.1 TRANSFER PRICE. Leiner shall pay Genpharm the Transfer Price of the Product. Genpharm shall provide Leiner with its best Transfer Price for the Product for over-the-counter distribution in the Territory, based upon comparable quantities, delivery dates and other terms and conditions, not giving effect to Section 2 hereof.. 5.2 INVOICING AND PAYMENT. Genpharm shall invoice Leiner for the Transfer Price of the Product within a reasonable period of time after the time such Product is delivered to Leiner as contemplated in Section 4.2 hereof. The Transfer Price shall be due and payable within forty-five (45) calendar days following the date of such invoice and thereafter shall bear interest 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. (or successor entity), New York, New York, plus five (5%) percent, compounded daily. Leiner shall pay the Transfer Price for each shipment of the Product, whether such shipment be in whole or in only partial fulfillment of any order. 6. CERTAIN UNDERTAKINGS. 6.1 PRODUCT COMPLAINTS AND ADVERSE DRUG EXPERIENCES. Leiner shall be responsible for handling all Product complaints promptly and for notifying Genpharm and Par of all such complaints promptly and in any event within thirty (30) calendar days of knowledge thereof. Leiner shall notify Genpharm and Par of any report of an adverse drug experience concerning the Product within three (3) calendar days of receipt of the report and provide Genpharm and Par with information as required by applicable law and regulations and/or as reasonably requested by Genpharm or Par. This Section 6.1 shall survive the termination or expiration of this Agreement with respect to Product distributed by Leiner. 6.2 FACILITY MAINTENANCE; INSPECTION; REPORTS. (a) Genpharm shall cause the Manufacturer to maintain and operate the Plant and implement such quality control procedures so as to be able to perform its obligations hereunder. Genpharm shall cause the Manufacturer to provide access to quality assurance representatives of Leiner and/or Par, at either party's request, to inspect the Plant at all times upon reasonable notice, during normal business hours and on a confidential basis. Genpharm shall also cause the Manufacturer to permit Leiner and/or Par, at either party's request, to conduct reasonable periodic visits to such Plant to discuss manufacturing and supply issues with management of Genpharm and the Manufacturer. (b) Leiner shall maintain and operate the Leiner Facility and implement such quality control procedures so as to be able to perform its obligations hereunder. Leiner shall provide access to quality assurance representatives of Genpharm (who may be accompanied by quality assurance representatives of the Manufacturer) and/or Par, at either party's request, to inspect the Leiner Facility at all times upon reasonable notice, during normal business hours and on a confidential basis. (c) Leiner shall promptly provide Genpharm and Par with a copy of any FDA Form 483 received at the conclusion of an inspection relating to the Product. Genpharm shall cause Leiner and Par to be promptly provided with a copy Exhibit 10.47 - Page 12 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION of any FDA Form 483 received by the Manufacturer following the conclusion of an inspection relating to the Product. 6.3 FILING REQUIREMENTS AND MAINTENANCE. (a) Genpharm shall cause the Manufacturer to promptly comply with all FDA filing and reporting requirements with respect to the Product, including, without limitation, all filing and reporting necessary to keep the ANDA current with the FDA. Genpharm shall cause the Manufacturer to be responsible for all stability studies as may be required for the Product in bulk containers. (b) Leiner shall be responsible for compliance with all FDA requirements concerning its repackaging, labeling, and marketing activities, including, but not limited to, stability of the Product in Leiner's container-closure system. 6.4 INSURANCE. Each of Leiner 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 or expiration 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 $15 million combined single limit, each of whose insurance shall name Par as an additional named insured and shall be written on an occurrence policy form with an insurance carrier reasonably acceptable to the other parties. Evidence of coverage, in the form of certificates of insurance, shall be provided to each party promptly upon execution of this Agreement and as reasonably requested thereafter. Such certificates shall be provided by written notice to the other party hereto fifteen (15) calendar days prior to any material change, cancellation or non-renewal of the policy. 6.5 CERTAIN LITIGATION. Genpharm and Par will (a) undertake the defense of legal matters relating to the Paragraph IV Litigation with regard to the Product and (b) be fully responsible for the legal fees and expenses resulting directly from the Paragraph IV Litigation and have ultimate decision making authority with regard to the Paragraph IV Litigation, subject to, and as provided in, the Manufacturing Agreement. 6.6 ALLOCATION OF NET PROFIT. (a)(i) With respect to Net Profit attributable to sales of the Product during the twelve (12)-month period commencing on the date of the First Commercial Sale, Leiner shall pay to Genpharm, as a royalty, within thirty (30) calendar days of the end of each calendar quarter thereof, an amount equal to *****-**** (**%) percent of the Net Profit attributable to sales of the Product during such calendar quarter. (ii) With respect to Net Profit attributable to sales of the Product following the first anniversary of the First Commercial Sale, Leiner shall pay to Genpharm, as a royalty, within thirty (30) calendar days of the end of each calendar quarter thereof, an amount equal to ***** (**%) percent of the Net Profit attributable to sales of the Product during such calendar quarter. (b) All payments made pursuant to this Section 6.6 shall be accompanied by a written statement setting forth in reasonable detail the basis for and calculation of such amount and signed by the Chief Financial Officer of Leiner certifying that, to the best of his or her knowledge, after reasonable investigation, such statement is true and correct. Exhibit 10.47 - Page 13 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 6.7 PROVISION OF CERTAIN INFORMATION. Genpharm and Leiner shall provide Par with such information as Par may reasonably request from time to time with respect to the subject matter of this Agreement, as soon as reasonably practicable after receipt of any such request. Such information may include, but is not limited to, the number of units of Product sold and related pricing information. 7 WARRANTIES AND INDEMNIFICATION. 7.1 CERTAIN REPRESENTATIONS AND WARRANTIES OF GENPHARM. (a) Genpharm represents, warrants and agrees to Leiner and Par that at the time of delivery to Leiner hereunder the Product: (i) will meet the Specifications, will not be adulterated or misbranded, within the meaning of the Act, will comply with any similar state and local laws and all regulations under those laws, and will not be an article which may not be introduced into interstate commerce under the provisions of Section 505 of the Act; and (ii) will have a minimum shelf life of at least twenty (20) months, which shall run from the date of shipment. (b) Genpharm represents and warrants to Leiner and Par that (i) the Manufacturer has characterized bulk containers as a "finished market package" in the ANDA and (ii) the ANDA and any other filings made with the FDA in connection with the Product prior to the date hereof were all accurate, complete, and truthful when filed and were made in good faith upon the best information available to Genpharm at such time. (c) Genpharm represents, warrants and agrees to Leiner and Par that the Product it has manufactured or will manufacture has been, and will be, manufactured, stored, transported and tested in accordance with the most current version of the ANDA, cGMP and all applicable laws in effect at the time of such manufacture and testing. (d) Genpharm represents and warrants to Leiner and Par that neither it nor any of its Affiliates is an Ineligible Person. THE FOREGOING WARRANTIES IN SECTION 7.1(a), (b), (c) AND (d) ARE MADE BY GENPHARM EXPRESSLY IN LIEU OF ANY OTHER EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT BY WAY OF LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 7.2 CERTAIN REPRESENTATIONS AND WARRANTIES OF LEINER. (a) Leiner represents, warrants and agrees to Genpharm and Par that (i) the repackaging, labeling, testing, storage, transportation and marketing activities that it will conduct with respect to the Product will comply with cGMP and all requirements of the Act, any similar state and local laws, and all regulations under those laws; and (ii) assuming the accuracy of the representation of Genpharm pursuant to Section 7.1(a)(i) hereof, the Product distributed by Leiner will not be adulterated or misbranded, within the meaning of the Act, and will not be an article which may not be introduced into interstate commerce under the provisions of Section 505 of the Act. (b) Leiner represents, warrants and agrees to Genpharm and Par that (i) any trademarks utilized in connection with the packaging and labeling of the Product are the property of Leiner and may be lawfully used by Leiner without breach of any contract or agreement to which Leiner is a party or by Exhibit 10.47 - Page 14 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION which Leiner is bound, and (ii) the Product label will comply in all material respects with all applicable laws and regulations. (c) Leiner represents and warrants to Genpharm and Par that neither it nor any of its Affiliates is an Ineligible Person. THE FOREGOING REPRESENTATIONS AND WARRANTIES IN SECTION 7.2(a), (b) AND (c) ARE MADE BY LEINER EXPRESSLY IN LIEU OF ANY OTHER EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT BY WAY OF LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 7.3 CERTAIN REPRESENTATIONS AND WARRANTIES OF PAR. Par hereby represents and warrants to Genpharm and Leiner that neither it nor any of its Affiliates is an Ineligible Person. THE FOREGOING REPRESENTATION AND WARRANTY IN SECTION 7.3 IS THE ONLY REPRESENTATION MADE BY PAR AND IS EXPRESSLY IN LIEU OF ANY EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT BY WAY OF LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 7.4 PRODUCT RECALL. (a) In the event that the 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 Manufacturer to, notify Leiner, and Leiner shall fully cooperate and shall cause its Affiliates to fully cooperate 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 Leiner believes that a Recall may be necessary and/or appropriate, prior to taking any action Leiner shall immediately notify Par and the Manufacturer and Genpharm and Leiner shall cooperate and cause their respective Affiliates to cooperate with each other (and the other's Affiliates) 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 coordinating all of the necessary activities in connection with such Recall and Leiner (and its Affiliates) and Genpharm (and its Affiliates) shall each cooperate with the other (and with the other's Affiliates) in recalling the affected Product. (d) (i) In the event that it is determined by agreement of the parties or by arbitration as herein contemplated that a Recall results from any cause or event arising from the manufacture, labeling, storage, transportation (prior to delivery to Leiner), handling or packaging of the Product by the Manufacturer or other cause or event attributable to the Manufacturer, Genpharm shall be responsible for all expenses of such Recall. (ii) In the event that it is determined by agreement of the parties or by arbitration as herein contemplated that a Recall results from any cause or event arising from the transportation(after delivery to Leiner), repackaging, labeling, storage, handling, Exhibit 10.47 - Page 15 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION marketing or distribution of the Product by Leiner or any of its Affiliates or other cause or event attributable to Leiner or any of its Affiliates, Leiner shall be responsible for all expenses of such Recall. (iii) In the event that it is determined by agreement of the parties or by arbitration as herein contemplated that a Recall results from a combination of (i) and (ii) above, then Genpharm and Leiner shall be responsible for all expenses of such Recall in proportions determined by such agreement of the parties or by such arbitration. (iv) Any costs incurred by the Manufacturer or Leiner in complying with their respective obligations pursuant to this Section 7.4 shall not be passed on to the other parties hereunder in the calculation of the Manufacturing Cost or otherwise. (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 Leiner'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 that it incurs and shall provide to the other, upon request, reasonable evidence of the Recall Expenses being claimed by it. (f) All communications relating to a Recall shall be held in confidence and shall be subject to the terms of Section 10 hereof. 7.5 OBLIGATIONS OF PAR. The parties hereby recognize and agree that Par shall have no obligations under this Agreement except as are expressly set forth herein. 7.6 INDEMNIFICATION BY LEINER. Leiner shall indemnify and hold Genpharm and Par and their respective Affiliates, officers, directors, employees and agents harmless from and against any claim, action, suit, proceeding, loss, liability, damage or expense (including, without limitation, reasonable attorneys' fees) ("Losses") arising directly or indirectly as a result of Leiner's and its Affiliates' negligent acts or omissions, willful wrongful acts or any breach of its representations, warranties, covenants or other obligations hereunder; PROVIDED, HOWEVER, that Leiner shall not be required to indemnify Par with respect to any Losses to the extent arising from or related to Par's or its Affiliates' negligent acts or omissions, willful wrongful acts or breach of its representation, warranty, covenants or other obligations hereunder, or from information supplied by Par or its Affiliates to Leiner or contained in regulatory filings or correspondence prepared or delivered by Par or its Affiliates in connection herewith; PROVIDED, FURTHER, that Leiner shall not be required to indemnify Genpharm with respect to any Losses to the extent arising from or related to Genpharm's or any of Genpharm's Affiliate's negligent acts or omissions, willful wrongful acts or breach of its representations, warranties, covenants or other obligations hereunder, or from information supplied by Genpharm or any of its Affiliates to Leiner or contained in regulatory filings or correspondence prepared or delivered by Genpharm or any of its Affiliates. 7.7 INDEMNIFICATION BY GENPHARM. Genpharm shall indemnify and hold Par and Leiner and their respective Affiliates, officers, directors, employees and agents harmless from and against any Losses arising directly or indirectly as a result of Genpharm's negligent acts or omissions, willful wrongful acts or any breach of its representations, warranties, covenants or other obligations hereunder; PROVIDED, HOWEVER, that Genpharm shall not be required to indemnify Par with respect to any Losses to the extent arising from Exhibit 10.47 - Page 16 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION or related to Par's or any of Par's Affiliate's negligent acts or omissions, willful wrongful acts or breach of its representation, warranty, covenants or other obligations hereunder, or from information supplied by Par or any of its Affiliates to Genpharm or contained in regulatory filings or correspondence prepared or delivered by Par or any of its Affiliates in connection herewith; PROVIDED, FURTHER, that Genpharm shall not be required to indemnify Leiner with respect to any Losses to the extent arising from or related to Leiner's or Leiner's Affiliates' negligent acts or omissions, willful wrongful acts or breach of its representations, warranties, covenants or other obligations hereunder, or from information supplied by Leiner or its Affiliates to Genpharm or contained in regulatory filings or correspondence prepared or delivered by Leiner or its Affiliates. 7.8 INDEMNIFICATION PROCEDURES. A party (the "Indemnitee") which intends to claim indemnification under this Article 7 shall promptly notify the party from whom it intends to claim indemnification (the "Indemnitor") in writing of any action, claim or liability in respect to which the Indemnitee or any of its offices, directors, employees or agents intends to claim such indemnification. The Indemnitee shall permit, and shall cause its employees and agents to permit, the Indemnitor, at its discretion, to settle any such action, claim or liability and agrees to the complete control of such defense or settlement by the Indemnitor; PROVIDED, HOWEVER, that such settlement does not adversely affect any other party's rights hereunder or impose any obligations on any other party in addition to those set forth herein in order for it to exercise such rights. No such action, claim or liability shall be settled by the Indemnitee without the prior written consent of the Indemnitor, and the Indemnitor shall not be responsible for any fees or other costs incurred other than as provided herein. The Indemnitee, its employees, agents and affiliates shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any action, claim or liability covered by this indemnification. The Indemnitee shall have the right, but not the obligation, to be represented by counsel of its own selection and at its own expense. 8. AUDIT. 8.1 AUDIT OF GENPHARM'S BOOKS. Genpharm shall, and shall cause the Manufacturer to, maintain true and complete books of account containing an accurate record of all data necessary for proper assessment of the Transfer Price for the Product provided in Section 5.1 hereof. Subject to Section 8.3 hereof, Genpharm shall, and shall cause the Manufacturer to, provide Par and Leiner with the right, through an independent certified public accountant (except any to whom Genpharm or the Manufacturer has a reasonable objection), to audit such books of account related to such cost at any time, on reasonable prior written notice, within two (2) years after the end of the calendar year in which the Products that are the subject of such payment were delivered for sale in the Territory for the purpose of verifying the accuracy of such cost. Genpharm or the Manufacturer may require such accountant to execute a reasonable confidentiality agreement as a condition to providing access to its books and records. Subject to the final sentence of this Section 8.1, the party or parties requesting the audit shall bear all costs of the audit. In the event that such certified public accountant shall have questions which are not in their judgment answered by such books and records, the auditor shall have the right to confer with representatives of Genpharm, including its Chief Financial Officer. The parties agree that information furnished to Par and Leiner as a result of any such audit shall be limited to a written statement by such certified public accountant to the effect that they have reviewed the books of account maintained by or on behalf of Genpharm or the Manufacturer and either (a) Genpharm's or the Manufacturer's calculations are correct or (b) setting forth any required Exhibit 10.47 - Page 17 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION adjustments thereto. The parties agree to be bound by the final result of such audit. If any such audit shows any overpayment by Leiner, Genpharm shall make a correcting refund or, at Leiner's option, credit, within thirty (30) calendar days after receipt of the written statement described above and, if such overpayment shall exceed three (3%) percent of any amount payable hereunder or $10,000, whichever is greater, Genpharm shall bear all costs of the audit. If any such audit shows any underpayment by Leiner, Leiner shall make a correcting payment within thirty (30) calendar days after receipt of the written statement described above. 8.2 AUDIT OF LEINER'S BOOKS. Leiner shall maintain true and complete books of account containing an accurate record of all data necessary for proper assessment of the Net Profit payments provided in Section 6.6 hereof. Subject to Section 8.3 hereof, Par and Genpharm shall have the right, through an independent certified public accountant (except any to whom Leiner has a reasonable objection), to audit Leiner's books of account related to such payment at any time, on reasonable prior written notice, within two (2) years after the end of the calendar year in which the Products that are the subject of such payment were delivered for sale in the Territory for the purpose of verifying the accuracy of such payment. Leiner may require such accountant to execute a reasonable confidentiality agreement as a condition to providing access to its books and records. Subject to the final sentence of this Section 8.2, the party or parties requesting the audit shall bear all costs of the audit. In the event that such certified public accountant shall have questions which are not in their judgment answered by such books and records, the auditor shall have the right to confer with representatives of Leiner, including its Chief Financial Officer. The parties agree that information furnished to Par and Genpharm as a result of any such audit shall be limited to a written statement by such certified public accountant to the effect that they have reviewed the books of account of Leiner and either (a) Leiner's calculations are correct or (b) setting forth any required adjustments thereto. The parties agree to be bound by the final result of such audit. If any such audit shows any underpayment by Leiner, Leiner shall make a correcting payment within thirty (30) calendar days after receipt of the written statement described above and, if such underpayment shall exceed three (3%) percent of any amount payable hereunder or $10,000, whichever is greater, Leiner shall bear all costs of the audit. If any such audit shows any overpayment by Leiner, Genpharm shall make a correcting payment or, at Leiner's option, credit, within thirty (30) calendar days after receipt of the written statement described above. 8.3 AUDIT LIMITATIONS. None of the parties shall have a right to (i) audit the books of account pursuant to this Section 8 on more than one occasion during any fiscal year and (ii) audit the books of account of any fiscal year pursuant to this Section 8 on more than one occasion; PROVIDED, HOWEVER, that the limitations provided in this Section 8.3 shall not apply to the Arbitrator(s) in respect of any resolution of any disputes pursuant to Section 12.1 hereof. 9. TERM AND TERMINATION. 9.1 TERM. This Agreement shall commence on the Effective Date and continue for a period of five (5) years from the date of the First Commercial Sale of the Product (the "Initial Term"); PROVIDED, HOWEVER, that this Agreement shall terminate if there shall be no First Commercial Sale by June 30, 2004. Thereafter, this Agreement shall be automatically renewed for successive twelve (12)-month periods (each, a "Renewal Term"), unless any party shall otherwise notify the other parties in writing at least six (6) months prior to the scheduled expiration date of the Initial Term or any Renewal Term. Exhibit 10.47 - Page 18 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 9.2 TERMINATION. This Agreement may be terminated during the Initial Term or any Renewal Term upon the occurrence of any of the following events: (a) FAILURE TO OBTAIN OVER-THE-COUNTER PRODUCT APPROVAL. If the Manufacturer shall fail to obtain Product Approval by the first anniversary of the first commercial sale of the Product in generic form by a third party pursuant to a valid abbreviated new drug application, any party may terminate this Agreement upon written notice thereof to the other parties. (b) CHANGE IN CIRCUMSTANCES. Notwithstanding any other provision of this Agreement, if during any rolling twelve (12)-month-period after the First Commercial Sale of the Product, the Net Profit for the Product shall be less than ****** (**%) percent of Net Sales, then any party may terminate this Agreement by notice in writing to the other parties, given no later than one hundred twenty (120) calendar days after the end of such rolling twelve (12) month period; PROVIDED, HOWEVER, a party may not terminate this Agreement under this Section 9.2(b) if its own breach of this Agreement or other actions has caused the Net Profit for such period to be less than ****** (**%) percent of Net Sales. (c) INFRINGEMENT. Any party may terminate this Agreement upon ninety (90) calendar days written notice to the other parties if, based upon the opinion of qualified counsel, such party believes that there is a substantial likelihood that the Product or API infringes the intellectual property rights of a third party. (d) BREACH. If any party commits a breach or default in the performance or observance of any of its material obligations under this Agreement and such breach or default is not cured within thirty (30) days after receipt by such party of the written notice from any non-breaching party specifying the breach or default, then the non-breaching or non-defaulting party may terminate this Agreement with immediate effect by giving written notice to the other parties. (e) BANKRUPTCY. This Agreement shall automatically terminate upon the initiation of any proceeding in bankruptcy, reorganization or arrangement for the appointment of a receiver or trustee to take possession of the assets of a party hereto or similar proceeding under the law for release of creditors by or against a party hereto, or if a party hereto shall make an assignment for the benefit of its creditors. (f) FORCE MAJEURE EVENT. If, as a result of a Force Majeure Event, a party does not perform its obligations hereunder for any consecutive period of 120 calendar days, any other party shall have the right to terminate this Agreement in its entirety upon providing written notice to the other parties, such termination to be effective within thirty (30) calendar days of such notice. (g) INELIGIBLE PERSON. (i) In the event that Genpharm or Leiner or any Affiliate of either of them shall become an Ineligible Person with respect to the Product, such party shall promptly notify the other parties in writing and shall keep the other parties apprised of its reasonable best efforts to have the status as an Ineligible Person removed, and any other party may terminate this Agreement upon thirty (30) calendar days prior written notice unless the status as an Ineligible Person is removed within such period. (ii) Leiner or Genpharm may terminate this Agreement upon thirty (30) calendar days prior written notice to the other parties if (otherwise than by reason of a breach of its obligations hereunder) it is legally prohibited from performing Exhibit 10.47 - Page 19 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION its obligations hereunder or it or one of its Affiliates shall become an Ineligible Person in respect of the Product (and it has made its reasonable best efforts to remove the prohibition or such status as an Ineligible Person) and such prohibition or status as an Ineligible Person has continued uninterrupted for a period of 120 calendar days. 9.3 POST-TERMINATION. (a) Upon the expiration or termination of this Agreement for any of the above reasons, the parties shall be permitted to continue in their respective businesses as if the Agreement has not been entered into in the first place. (b) Expiration or termination of this Agreement shall not relieve the parties of any obligations accruing prior to the effective date thereof or resulting therefrom. All payment obligations due pursuant to this Agreement shall survive termination or expiration of this Agreement, including, without limitation, (i) the payment by Leiner for the cost of all raw materials, production materials and inventories ordered on behalf of Leiner in accordance with Sections 3.4 and 4.1 hereof, but not used by the Manufacturer, and (ii) the payment by Leiner of all amounts pursuant to Sections 5 and 6.6 hereof. 10. CONFIDENTIALITY. 10.1 TREATMENT OF CONFIDENTIAL INFORMATION. Except as required by applicable laws and regulations or as otherwise provided in this Article 10, during the Term and any Renewal Term, and for a period of five (5) years after the later of the termination or expiration of this Agreement, each party shall hold in strict confidence, and may not use for purposes other than this Agreement, exploit or disclose to a third party (except as specifically set forth herein or with the express prior written consent of the other party) any and all Confidential Information. 10.2 LIMITS ON DISCLOSURE. (a) Without limiting the generality of the foregoing, each party may disclose Confidential Information, to those employees who need to receive the Confidential Information in order to further the activities contemplated in this Agreement. Each party shall take sufficient precautions to safeguard the Confidential Information, including obtaining appropriate commitments and enforceable confidentiality agreements. Each party understands and agrees that the disclosure of Confidential Information may result in serious and irreparable damage to the other party, that the remedy at law or any breach of this covenant may be inadequate, and that the party seeking redress hereunder shall be entitled to injunctive relief, without prejudice to any other rights and remedies to which such party may be entitled. (b) It is acknowledged that Confidential Information may be obtained by a party from the other party not only in writing or other tangible form (including electronic), but also through discussions between each party's respective representatives, demonstrations, observations and memorization and other intangible methods. (c) The above notwithstanding, each party shall have the right with the exercise of discretion, and insofar as practical under written confidentiality agreements having provisions no less stringent than those contained herein, to make disclosures of such portions of Confidential Information to third party consultants, attorneys, contractors, advisors, Affiliates and governmental agencies where, in the recipient's reasonable judgment, such disclosure is beneficial to development, approval or marketing of the Product pursuant to this Agreement. Exhibit 10.47 - Page 20 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (d) Any party shall consult with, and obtain prior written consent of, the other parties before issuing any press release or making any other public statement with respect to this Agreement, except as may be required by applicable law or any listing agreement with any national securities exchange; provided, that a party issuing such press release or making such public statement under requirement of applicable law or listing agreement shall nevertheless use its best efforts to consult with, and obtain prior written consent of, the other parties before issuing such press release or making such public statement. (e) Except as otherwise set forth in this Agreement, upon the expiration or termination of this Agreement and at the written request of the disclosing party, the receiving party shall return all Confidential Information of the disclosing party (including all copies, excerpts and summaries thereof contained on any media) or destroy such Confidential Information at the option of the disclosing party, in either case keeping no copies or extracts thereof. 11. FORCE MAJEURE. 11.1 EFFECTS OF FORCE MAJEURE. No party hereto shall be held liable or responsible for failure or delay in fulfilling or performing any of its obligations under this Agreement (other than the payment of money or indemnification) if such failure or delay is caused by, without limitation, acts of God, acts of the public enemy, fire, explosion, flood, drought, war, terrorists, riot, sabotage, embargo, strikes or other labor disputes, or by any other event or circumstance of like or different character to the foregoing beyond the reasonable control and without the fault or negligence of the affected party, or by intervention of governmental agency, regardless of fault (a "Force Majeure Event"). Such excuse shall continue as long as the Force Majeure Event continues. Subject to Section 9.2(f) hereof, upon cessation of such Force Majeure Event, such party shall promptly resume performance hereunder. 11.2 NOTICE OF FORCE MAJEURE. Each party agrees to give the other parties prompt written notice of the occurrence of any Force Majeure Event, the nature thereof and the extent to which the affected party will be unable to perform its obligations hereunder. Each party further agrees to use reasonable efforts to correct or address (if it is amenable thereto) the Force Majeure Event as quickly as possible and to give the other parties prompt written notice when it is again fully able to perform such obligations. 11.3 ALLOCATION OF CAPACITY. If the Manufacturer at any time is unable to fully supply the purchase orders of Leiner for the Product in accordance with this Agreement, Genpharm shall use reasonable efforts to cause the Manufacturer to equitably allocate its available resources and production capacity among Leiner and its other customers, taking into consideration the respective requirements of each during a reasonable period of time prior to the allocation, as well as such expected requirements during the allocation period. Leiner's recourse under Section 3.5 hereof shall be Leiner's sole and exclusive remedy (at law or equity) against Genpharm and Par with respect to any failure by Genpharm and Par to fully supply the purchase orders submitted by Leiner pursuant to this Agreement. Exhibit 10.47 - Page 21 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 12. MISCELLANEOUS. 12.1 DISPUTE RESOLUTION. The parties recognize that a BONA FIDE dispute as to matters may, from time to time, arise during the term of this Agreement which relates to a party's rights and/or obligations hereunder. In the event of the occurrence of such a dispute, any party may, by notice to the other parties, have such dispute referred to their respective officers, designated below, or their successors, for attempted resolution by good faith negotiation within thirty (30) calendar days after such notice is received. Such designated officers are as follows: For Genpharm : Hank Klakurka, Chief Executive Officer For Leiner: Robert M. Fisher, Senior Vice President For Par: Scott Tarriff, President and Chief Executive Officer If no agreement is reached within 30 calendar days of the referral to such officers, then such controversy or claim shall be settled by arbitration by arbitrator(s) (the "Arbitrator(s)") selected 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. Judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. The Arbitrator(s) shall have the discretion, to be exercised in accordance with applicable law, to allocate among the parties the arbitrators' fees and litigation costs, and the Arbitrator(s) shall also have authority to shift any prevailing party's attorney's fees to any non-prevailing party. 12.2 INDEPENDENT CONTRACTORS. The relationship between each of Genpharm, Par and Leiner is that of independent contractors and nothing herein shall be deemed to constitute the relationship of partners, joint venturers nor of principal and agent between any of Genpharm, Par and/or Leiner. No party shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of any other party or to bind any other party to any contract, agreement or undertaking with any third party. 12.3 ASSIGNMENT. This Agreement may be assigned by any party in connection with any sale, merger or other business combination involving all or substantially all of such parties' assets or capital stock. Except as set forth in the preceding sentence, neither this Agreement nor any other rights or obligations hereunder shall be assigned, delegated or subcontracted by any party by operation of law or otherwise without the prior written consent of the other parties. 12.4 GOVERNING LAW. This contract shall be governed by, and construed in accordance with, the laws of the State of New York. Subject to Section 12.1 hereof, in connection with any action commenced hereunder, each of the undersigned consents to the jurisdiction of the state and federal courts located in Manhattan, New York City and hereby waives any objection to venue or forum laid therein. The parties hereby agree that service of process by certified mail, return receipt requested, shall constitute personal service for all purposes hereof. 12.5 CURRENCY UNITS. All amounts invoiced and all payments made hereunder shall be in U.S. dollars. Any cost or expense that forms the basis of a payment hereunder which was incurred in a currency other than U.S. dollars shall be converted into its U.S. dollar equivalent in accordance with the usual procedures therefor used by the Person incurring such cost or expense. Exhibit 10.47 - Page 22 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 12.6 NO IMPLIED WAIVER. No failure or delay on the part of any party hereto to exercise any right, power or privilege hereunder or under any instrument executed pursuant hereto shall operate as a waiver; nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 12.7 NOTICE. All notices required to be given hereunder shall be in writing and shall be given by personal delivery, via facsimile transmission, by a nationally recognized overnight carrier or by registered or certified mail, postage prepaid with return receipt requested. Notices shall be addressed to the parties as follows: If to Genpharm: Genpharm Inc. 85 Advance Road, Etobicoke, Ontario, M8Z 2A6, Canada Attn: Chief Financial Officer Facsimile No.: (416) 236-9807 If to Leiner: Leiner Pharmaceuticals, Inc. 901 East 233rd Street, Carson, California 90705 USA Attn: Senior Vice President, Contract Manufacturing Facsimile No.: (310) 835-4436 with copy to: Leiner Health Products, LLC 901 East 233rd Street Carson, California 90745 Attn: Legal Department Facsimile No.: (310) 835-9458 If to Par: Par Pharmaceutical, Inc. One Ram Ridge Road Spring Valley, New York 10977 USA Attn: Scott Tarriff, President and Chief Executive Officer Michael Graves, Vice President of Marketing and Business Development Facsimile No.: (845)-573-5612 with a copy (which shall not constitute notice) to: Exhibit 10.47 - Page 23 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION Kirkpatrick & Lockhart LLP 599 Lexington Avenue New York, NY 10022 USA Attn: Stephen R. Connoni, Esq. Barry J. Gilman, Esq. Facsimile No.: (212) 536-3901 Notices delivered personally shall be deemed communicated as of actual receipt; notices sent via facsimile transmission shall be deemed communicated as of receipt by the sender of written confirmation of transmission thereof; notices sent via overnight courier shall be deemed communicated as of one business day following sending; and notices mailed shall be deemed communicated as of three business days after proper mailing. A party may change its address by written notice in accordance with this Section 12.7. 12.8 AMENDMENTS. Any amendment or modification of this Agreement shall be valid only if made in writing and signed by all parties hereto. 12.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which shall constitute a single document. 12.10 ENTIRE AGREEMENT. Except as set forth in the following sentence, this Agreement, including the Schedules hereto which are incorporated herein as if set forth in their entirety at the point of reference thereto, constitutes the entire understanding between the parties with respect to the subject matter hereof and supersedes all prior contracts, agreements and understandings related to the same subject matter between the parties. Excepted from the preceding sentence are (i) the Manufacturing Agreement, as may be deemed amended hereby, and (ii) that certain Side Agreement of even date herewith between Genpharm and Par, as such documents apply to Genpharm and Par, but which in no way affect Leiner's rights and obligations hereunder. The parties make no representations or warranties, except as expressly provided herein. The parties intend this Agreement to be a complete statement of the terms of their understanding. No change or modification of any of the provisions hereof shall be effective unless in writing and signed by an authorized officer of each of the parties. 12.11 BENEFIT; BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Subject to Section 12.15 hereof, there are no intended third-party beneficiaries of this Agreement. 12.12 SURVIVAL. Notwithstanding anything to the contrary contained in this Agreement, the provisions of Sections 1, 7, 8, 9.3, 10 and 12 shall survive any termination or expiration of this Agreement. 12.13 FURTHER ASSURANCES. The parties hereto agree that they shall take all appropriate actions, including, without limitation, the execution or filing of any documents or instruments, which may be reasonably necessary to carry out the intent and accomplish the purposes of any of the provisions hereof. Exhibit 10.47 - Page 24 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 12.14 SEVERABILITY. In the event that any provision of this Agreement shall be held invalid or unenforceable for any reason by a court of competent jurisdiction, such provision or part thereof shall be considered separate from the remaining provisions of this Agreement, which shall remain in full force and effect. Such invalid or unenforceable provision shall be deemed revised to effect, to the fullest extent permitted by law, the intent of the parties as set forth therein. 12.15 PAR AS THIRD-PARTY BENEFICIARY. Genpharm and Leiner recognize and agree that Par is an intended third-party beneficiary of Leiner's obligations to pay monies pursuant hereto. [SIGNATURE PAGE FOLLOWS] Exhibit 10.47 - Page 25 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written by their duly authorized representatives. GENPHARM INC. By: HANK KLAKURKA ------------- Name: Hank Klakurka Title: By: MARTIN MARINO ------------- Name: Martin Marino Title: Vice President, Legal Affairs LEINER HEALTH PRODUCTS, LLC By: /s/ GALE BENSUSSEN ------------------ Name: Gale Bensussen Title: President PAR PHARMACEUTICAL, INC. By: /s/ MICHAEL GRAVES ------------------ Name: Michael Graves Title: Vice President of Marketing and Business Development Exhibit 10.47 - Page 26 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE 3.3 CERTAIN CUSTOMERS ----------------- *****-***** (and any successor company thereto) CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXHIBIT A FORM OF PURCHASE ORDER ---------------------- -----END PRIVACY-ENHANCED MESSAGE-----