-----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, T60mloBxjAkC6Ygqk4PYt/ka/rx9eozJVf/0u9wjX1d6EDO0dqyskDp6DOIs9fpF 43Qbzfh7PXO5lGw+7QOQPw== 0000898432-04-000256.txt : 20040315 0000898432-04-000256.hdr.sgml : 20040315 20040315151004 ACCESSION NUMBER: 0000898432-04-000256 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 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: 04669219 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 form-10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10 - K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2003 Commission File Number: 1-10827 PHARMACEUTICAL RESOURCES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 22-3122182 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (845) 425-7100 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT OF 1934: 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 (the "Exchange Act") during the preceding 12 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 the 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. [X] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes X No --- --- The aggregate market value of the common equity held by non-affiliates of the Registrant was $1,626,398,410 as of June 29, 2003 (assuming, solely for purposes of this calculation, that all directors and executive officers of the Registrant were "affiliates"). Number of shares of the Registrant's common stock outstanding as of March 10, 2004: 34,992,488 Part III of this Form 10-K incorporates by reference certain portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be filed within 120 days after December 31, 2003. TABLE OF CONTENTS PHARMACEUTICAL RESOURCES, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 PAGE ---- PART I Item 1 Business............................................................3 Item 2 Properties.........................................................14 Item 3 Legal Proceedings..................................................15 Item 4 Submission of Matters to a Vote of Security Holders................17 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters...........................................................18 Item 6 Selected Financial Data............................................19 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................20 Item 7A Quantitative and Qualitative Disclosures about Market Risk.........34 Item 8 Consolidated Financial Statements and Supplementary Data...........34 Item 9 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure..........................................34 Item 9A Controls and Procedures............................................35 PART III Item 10 Directors and Executive Officers of Registrant.....................36 Item 11 Executive Compensation.............................................36 Item 12 Security Ownership of Certain Beneficial Owners and Management.....36 Item 13 Certain Relationships and Related Transactions.....................36 Item 14 Principal Accountant Fees and Services.............................36 PART IV Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K....37 SIGNATURES PART I ITEM 1. BUSINESS. - ------- --------- GENERAL Pharmaceutical Resources, Inc. (the "Company" or "PRX") is a Delaware holding company that, principally through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"), is in the business of manufacturing and distributing generic drugs in the United States. In addition, the Company develops and manufactures, in small quantities, complex synthetic active pharmaceutical ingredients through its wholly owned subsidiary, FineTech Laboratories, Ltd. ("FineTech") based in Haifa, Israel. The Company also sells a limited number of mature brand name drugs through an agreement between Par and Bristol-Myers Squibb Company ("BMS"). Effective as of June 24, 2003, the Company changed its state of incorporation from New Jersey to Delaware. The Company's principal executive offices are located at One Ram Ridge Road, Spring Valley, New York 10977, and its telephone number is (845) 425-7100. Additional information concerning the Company can be found on the Company's website at WWW.PARPHARM.COM. The Company makes its electronic filings with the United States Securities and Exchange Commission (the "Commission"), including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, available through its website, free of charge, as soon as practicable after it files or furnishes them with the Commission. Information on the website is not part of this Form 10-K. Generic drugs are the pharmaceutical and therapeutic equivalents of brand name drugs and are usually marketed under their generic (chemical) names rather than by brand names. Typically, a generic drug may not be marketed until the expiration of applicable patent(s) on the corresponding brand name drug. Generic drugs must meet the same governmental standards as brand name drugs, but they are generally sold at prices below those of the corresponding 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 comprises prescription generic drugs consisting of 170 products representing various dosage strengths for 71 separate drugs. The Company's products are manufactured principally in the solid oral dosage form (tablet, caplet and two-piece hard shell capsule). In addition, the Company markets an oral suspension product and one product in the semi-solid form of a cream. The Company develops and manufactures some of its own products. The Company also has strategic alliances and relationships with several pharmaceutical and chemical companies that provide it with products for sale through various distribution, manufacture, development and licensing agreements. In addition to developing generic equivalents of existing drugs, the Company has recently expanded its efforts to develop new dosage strengths and drug delivery forms through a specialty pharmaceutical product line, which it believes will improve existing pharmaceutical products. The Company believes that these products may have limited competition and longer product life cycles than its existing products. In addition, the Company is exploring potential acquisitions of complementary products and businesses and expects to enter into additional strategic alliances and relationships. The Company markets its products primarily to wholesalers, retail drug store chains, managed health care providers and drug distributors, principally through its internal sales staff. The Company also promotes the sales efforts of wholesalers and drug distributors that sell its products to clinics, governmental agencies and other managed health care organizations. The Company has adopted a code of ethics that applies to all of its directors, officers, employees and representatives. This code is publicly available on the Company's website. Amendments to the code of ethics and any grant of a waiver from a provision of the code requiring disclosure under applicable Commission rules will be available on the Company's website. The Company's corporate governance principles and the charters of the Audit, Nominating and Corporate Governance and Compensation and Stock Option Committees of its Board of Directors' (the "Board") are also available on the Company's website. Any of these materials may also be requested in print by writing to the Company, Attention: Thomas Haughey, Vice President, General Counsel and Secretary, at One Ram Ridge Road, Spring Valley, NY 10977. 3 As further described in "Management's Discussion and Analysis of Financial Condition and Results of Operations", certain statements made 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, expenditures and future events. Such statements involve risks, uncertainties, trends and contingencies, many of which are beyond the control of the Company and which could cause actual results and performance to differ materially from those stated 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 any 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 stockholder numbers, contained in Parts I and II are in thousands. FISCAL YEAR 2003 HIGHLIGHTS: RESULTS OF OPERATIONS. Fiscal year 2003 marked the Company's third consecutive record year in terms of revenues and earnings. The Company's net income in 2003 of $122,533 increased $43,079, or 54%, from $79,454 in fiscal year 2002. In fiscal year 2001, the Company's net income was $53,922. The earnings improvement in fiscal year 2003 was driven by record revenues of $661,688, up from $381,603 in fiscal year 2002 and $271,035 in 2001. The revenue growth in 2003 was largely due to the Company's introduction of paroxetine, the generic version of GlaxoSmithKline's ("GSK's") Paxil(R), in the United States in September 2003 through a distribution agreement with GSK, and the introduction of other products throughout the year. In addition, the Company continued to have success with megestrol acetate oral suspension, the generic version of BMS's Megace(R) Oral Suspension, and fluoxetine 40 mg capsules, the generic version of Eli Lilly and Company's Prozac(R), despite its loss of marketing exclusivity with respect to both products in January 2002. In fiscal year 2003, the Company continued to invest in research and development and its infrastructure in order to better position itself for continued growth. PRODUCT DEVELOPMENT. The Company recognizes that 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, which increased 37% in fiscal year 2003 from 2002, and is expected to increase by as much as 50% in fiscal year 2004 from 2003, reflects its commitment to continue to develop new products and/or technologies through its internal development programs, in addition to projects with strategic partners. The Company further expanded its capabilities in product development by entering into new development agreements with Nortec Development Associates, Inc. (a Glatt company) ("Nortec"), Advancis Pharmaceutical Corporation ("Advancis"), and Mead Johnson & Company ("Mead") and BMS in fiscal year 2003. Together with its strategic partners, the Company has at least 40 drugs in development and 25 Abbreviated New Drug Applications ("ANDAs") filed with the United States Food and Drug Administration ("FDA") awaiting approval. Among the 25 ANDAs are several that the Company believes may represent first-to-file opportunities entitling the Company, or its strategic partners, up to 180 days of marketing exclusivity or co-exclusivity. However, it is difficult to determine with certainty that an ANDA filing has exclusivity, or co-exclusivity, until final approval is received from the FDA. These products include: olanzapine 20 mg (Zyprexa(R)); latanoprost (Xalatan(R)); ribavirin (Rebetol(R)); and tramadol with acetaminophen (Ultracet(R)). Together with its strategic partners, the Company expects to file as many as 15 additional ANDAs, in which the Company holds the marketing rights to the potential products, in fiscal year 2004. The process of bringing new products to market and the costs associated with research and development involve many uncertainties, including unforeseeable changes in market conditions and regulatory or legal challenges. As such, no assurance can be given that the Company will file additional ANDAs with the FDA, obtain FDA approval or launch any of the products that are currently in development. FINANCING: In September 2003, the Company sold an aggregate principal amount of $200,000 of senior subordinated convertible notes pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company intends to use the net proceeds from the offering to support the expansion of its business, including increasing research and development activities, entering into product license arrangements, possibly acquiring complementary businesses and products and for general corporate purposes. 4 ADVANCIS: In October 2003, the Company purchased one million shares of the common stock of Advancis, a pharmaceutical company based in Germantown, Maryland, in its initial public offering of six million shares on October 16, 2003. The purchase price was $10 per share and the transaction closed on October 22, 2003. The Company's investment represents an ownership position of 4.4% of the outstanding common stock of Advancis. Advancis has stated that its business focus is on developing and commercializing pulsatile drug products that fulfill unmet medical needs in the treatment of infectious disease. Unlike immediate release antibiotics, Advancis' antibiotics are delivered in three to five sequential pulses within the first six to eight hours following initial dosing. In September 2003, Par had also entered into a licensing agreement with Advancis, to market the antibiotic Clarithromycin XL. Clarithromycin XL is being developed as a generic equivalent to Abbott Laboratories' ("Abbott") Biaxin XL(R). PAROXETINE: In fiscal year 2003, the Company obtained the marketing rights to paroxetine, the generic version of GSK's Paxil(R), in connection with a litigation settlement (the "GSK Settlement") between the Company, GSK and certain of its affiliates, and Pentech Pharmaceuticals, Inc. ("Pentech"). As a result of the GSK Settlement, Par and GSK entered into an agreement, pursuant to which Par began marketing paroxetine, supplied and licensed from GSK, in the United States in September 2003 and the Commonwealth of Puerto Rico in May 2003. The GSK Settlement provides that the Company's right to distribute paroxetine will be suspended if at any time there is not another generic version fully substitutable for Paxil available for purchase in the United States. On September 8, 2003, another generic drug manufacturer, Apotex Pharmaceutical Healthcare, Inc. ("Apotex") launched a generic version of Paxil(R). GSK has sued Apotex for patent infringement and is currently appealing a district court decision adverse to GSK. In April 2002, GSK launched a longer-lasting, newly patented version of the drug, Paxil CR(R). The Company expects Paxil CR(R)'s market share to grow in fiscal year 2004, which may cause the Company's sales and gross margins in respect of paroxetine tablets to decrease. The Company understands that other generic drug manufactures have filed ANDAs in respect of paroxetine and that the marketing exclusivity period thereof ended on March 8, 2004 but, at this time, cannot predict the timing of launches by these competitors or the potential effects on its sales. RIBAVIRIN: On July 16, 2003, the Company announced that the United States District Court for the Central District of California had granted a summary judgment of non-infringement against ICN Pharmaceuticals, Inc. ("ICN") and in favor of Three Rivers Pharmaceutical LLC ("Three Rivers") regarding ribavirin, Three Rivers' generic version of Schering-Plough Pharmaceutical's ("Schering's") Rebetol(R). The District Court determined that Three Rivers' ribavirin product does not infringe any of the three patents asserted by ICN in the litigation. Par has exclusive marketing rights for Three Rivers' ribavirin product. Three Rivers had earlier reached a settlement of its patent litigation with Schering. The Company believes that this decision appears to resolve the remaining ongoing patent barriers to FDA approval of the ANDA filed by Three Rivers in respect of ribavirin. Such decision by the District Court is subject to affirmance by the Court of Appeals for the Federal Circuit, and ICN has taken that appeal. The timing of any launch by Par of this product is uncertain at this time. Three Rivers has not obtained FDA approval of the ANDA, and the FDA has not determined whether a generic 180-day exclusivity period will be awarded solely to a generic competitor involved in the lawsuit or Three Rivers jointly with one or both of the other two generic competitors involved in the lawsuit. ORGANIZATION: On September 16, 2003, Scott Tarriff, formerly the Company's Executive Vice President and the President and Chief Executive Officer of Par, was selected by the Board as the Company's President and Chief Executive Officer. Kenneth I. Sawyer, the Company's former Chairman, President and Chief Executive Officer, had retired effective July 1, 2003 and had resigned as a member of the Board effective September 16, 2003. Additionally, on September 16, 2003, Mark Auerbach, formerly the Company's lead outside director, was selected by the Board to be the Executive Chairman of the Board. On November 13, 2003, Peter W. Williams, Esq. was selected to fill the vacancy on the Company's Board. On November 24, 2003, the Company entered into an employment agreement with Thomas Haughey, pursuant to which Mr. Haughey has agreed to serve in the capacities of Vice President, General Counsel and Secretary for PRX and Par. 5 REINCORPORATION. In fiscal year 2003, the Company changed its state of incorporation from New Jersey to Delaware (the "Reincorporation"), effective as of June 24, 2003. The Reincorporation was 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, were not affected by the Reincorporation. The surviving corporation of the Reincorporation retained the name "Pharmaceutical Resources, Inc." and the Company's common stock continues to be listed and traded on the New York Stock Exchange (the "NYSE") under the symbol "PRX". In addition to the Reincorporation, the Company changed 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 80 products, representing various dosage strengths for 29 separate drugs, that are manufactured by the Company and 90 additional products, representing various dosage strengths for 42 separate drugs, that are manufactured for it by other companies. Par holds ANDAs for the drugs that it manufactures. Set forth below is a list of the drugs manufactured and/or distributed by Par, including the brand name products, Capoten(R), Capozide(R), Questran(R) and Questran Light(R), and Sumycin(R), that 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 Mercaptopurine Purinethol Mirtazapine Remeron Nefazodone Serzone Paroxetine Paxil 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 Guanfacine Tenex Hydralazine Hydrochloride Apresoline Hydra-Zide Apresazide Indapamide Lozol Isosorbide Dinitrate Isordil Lisinopril Zestril Minoxidil Loniten Nicardipine Hydrochloride Cardene Sotalol Hydrochloride Betapace Torsemide Demadex 6 ANALGESIC/ANTI-INFLAMMATORY: Aspirin (zero order release) Zorprin Carisoprodol & Aspirin Soma Compound Dexamethasone Decadron Etodolac Lodine Ibuprofen Advil, Nuprin, Motrin Orphengesic Norgesic Orphengesic Forte Norgesic Forte Oxaprozin Daypro Tramadol Hydrochloride Ultram ANTI-BACTERIAL: Doxycycline Monohydrate Monodox Minocycline Minocin Ofloxacin Floxin Silver Sulfadiazine (SSD) Silvadene Tetracycline Tablets and Syrup Sumycin ANTI-DIABETIC: Metformin Hydrochloride Glucophage Metformin ER Glucophage XR 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 ANTI-VIRAL: Acyclovir Zovirax ANTI-HYPERTHYROID: Methimazole Tapazole 7 BRONCODILATOR: Metaproterenol Sulfate Alupent CHOLESTEROL LOWERING: Lovastatin Mevacor Cholestyramine Questran Cholestyramine Light Questran Light GENTRO-URINARY (DIURETIC): Amiloride Hydrochloride Midamor GLUCORTICOID: Methylprednisolone Medrol OVULATION STIMULANT: Clomiphene Citrate Clomid From January 1, 2003 to March 1, 2004, the FDA approved ANDAs, filed by either the Company or its strategic partners, for the following products that the Company is currently marketing or has the right to market in the future: benazepril HCL 5 mg, 10 mg, 20 mg and 40 mg tablets; benazepril HCL and HCTZ 5 mg/6.25 mg, 10 mg/12.5 mg, 20 mg/12.5 mg and 20 mg/25 mg tablets; flutamide 125 mg capsules; loratadine 10 mg tablets; mercaptopurine 50 mg tablets; minocycline 50 mg, 75 mg and 100 mg tablets; mirtazapine 15 mg, 30 mg and 45 mg tablets; nefazodone 50 mg, 100 mg, 150 mg, 200 mg and 250 mg tablets; ofloxacin 200 mg, 300 mg and 400 mg tablets; and torsemide 5 mg, 10 mg, 20 mg and 100 mg tablets. In fiscal year 2003, the Company also began marketing paroxetine 10 mg, 20 mg, 30 mg and 40 mg tablets through a distribution agreement with GSK. In addition, the Company began marketing in December 2003 Metformin ER 500 mg tablets as an authorized generic product through a licensing agreement with BMS. The Company or its strategic partners received tentative FDA approvals during the same period for the following drugs: fluconazole tablets 50 mg, 100 mg, 150 mg and 200 mg tablets; and topiramate 25 mg, 100 mg and 200 mg tablets. The Company or its strategic partners also have tentative FDA approvals, received in prior periods, for the following products: ciprofloxacin 100 mg, 250 mg, 500 mg and 750 mg tablets; quinapril 5 mg, 10 mg, 20 mg and 40 mg tablets; and zolpidem tartrate 5 mg and 10 mg tablets. On July 15, 2003, the U.S. Patent and Trademark Office issued U.S. Patent Nos. 6,593,318 and 6,593,320 to the Company relating to its unique formulation of megestrol acetate oral suspension. The Company has two other patents related to its unique formulation of megestrol acetate oral suspension, U.S. Patent Nos. 6,028,065 and No. 6,268,356, which were granted on February 22, 2000 and July 31, 2001, respectively. The Company seeks to introduce new products through its internal research and development program and through joint venture, distribution and other agreements with pharmaceutical companies located throughout the world. As such, the Company has pursued and continues to pursue arrangements and relationships that 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 distribution and supply agreements that it believes are material to its business are described in "Notes to Consolidated Financial Statements - Note 9 - Distribution and Supply Agreements". In fiscal year 2003, the Company entered into several new agreements, which are summarized below. In connection with the legal settlement referred to in "Notes to Consolidated Financial Statements - Note 14 - Commitments, Contingencies and Other Matters-Legal Proceedings", Par and GSK and certain of its affiliates entered into a license and supply agreement (the "GSK Supply Agreement"), dated April 16, 2003, pursuant to which Par is marketing paroxetine, supplied and licensed from GSK, in the United States, including the Commonwealth of Puerto Rico. Under the GSK Supply Agreement, GSK has agreed to manufacture the product and Par has agreed to pay GSK a percentage of Par's net sales, as defined in the agreement. Pursuant to the GSK Supply Agreement, GSK is entitled to suspend Par's right to distribute paroxetine if at any time another generic version of Paxil(R) is not being marketed. 8 In November 2002, the Company amended its agreement (the "Pentech Supply and Marketing Agreement") with Pentech, dated November 2001, to market paroxetine capsules. Pursuant to the Pentech Supply and Marketing Agreement, the Company paid all legal expenses up to $2,000, which were expensed as incurred, to obtain final regulatory approval. Legal expenses in excess of $2,000 were to be fully creditable against future profit payments to Pentech. The Company had agreed to reimburse Pentech for its costs associated with the project of up to $1,300. In fiscal year 2003, the Company paid Pentech $771 of these costs, which were charged to research and development expenses as incurred. Pursuant to the Pentech Supply and Marketing Agreement, the Company had agreed to pay Pentech a percentage of the gross profits, as defined in such agreement, on all its sales of paroxetine. At this time, the Company is negotiating with Pentech to further amend the Pentech Supply and Marketing Agreement concerning the gross profits split, reimbursement of research and development expenses and sharing of legal expenses related to paroxetine. RESEARCH AND DEVELOPMENT The Company's research and development activities consist principally 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 approvals 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; 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 reasons. The research and development of oral solid and suspension products, including pre-formulation 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, the 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 to obtain 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 can cost between $100 to $1,000 for each biostudy. During fiscal year 2003, the Company contracted with outside laboratories, expending $5,370 to conduct biostudies for 15 potential new products, and intends to continue to contract for biostudies in the future. In addition, the Company's share of certain costs for biostudies totaled $1,928 in fiscal year 2003 for products in development with one if 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 at least 15 products in active development. The Company expects that at least ten of these products will be the subject of biostudies in fiscal year 2004, 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 unaffiliated companies for products in various stages of development. Although there can be no such assurance, annual research and development expenses for fiscal year 2004, including certain payments to unaffiliated companies, are expected to increase by approximately 50% from fiscal year 2003. As a result of its internal product development program, the Company currently has 11 ANDAs pending with the FDA, two of which have received tentative approval, for potential products that are not subject to any distribution or profit sharing agreements. In addition, there are 14 ANDAs pending with the FDA, three of which have received tentative approval, that have been filed by the Company or its strategic partners for potential products covered under various distribution agreements. No assurances 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 approvals for any such product, that any approved product will be produced in commercial quantities or that any approved product can be sold profitably. 9 In April 2002, the Company purchased FineTech, a research facility based in Haifa, Israel. 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. FineTech operates as an independent, wholly-owned subsidiary of PRX and provides immediate chemical synthesis capabilities and strategic opportunities to the Company and other customers. In order to supplement its own internal development program, the Company has entered into development and license agreements with third parties with respect to the development and marketing of new products and technologies. The Company's product development agreements that it believes are material to its business are described in "Notes to Consolidated Financial Statements - Note 8 - Research and Development Agreements". In fiscal year 2003, the Company (or Par) entered into the following agreements, which are summarized below. Par entered into a licensing agreement (the "Advancis Licensing Agreement"), dated September 4, 2003, with Advancis to market the antibiotic Clarithromycin XL. Clarithromycin XL is being developed as a generic equivalent to Abbott's Biaxin XL(R). Pursuant to the Advancis Licensing Agreement, Advancis will be responsible for the development and manufacture of the product, while Par will be responsible for marketing, sales and distribution. Provided certain conditions in the Advancis Licensing Agreement are met, Par agreed to pay Advancis an aggregate amount of up to $6,000 based on the achievement of certain milestones contained in the agreement. An ANDA for the product is expected to be submitted to the FDA in the near future. Pursuant to the Advancis Licensing Agreement, Par has agreed to pay Advancis a certain percentage of the gross profits, as defined in the agreement, on all sales if the product is successfully developed and introduced into the market. Par and Nortec entered into an agreement, dated October 22, 2003, pursuant to which the two companies have agreed to develop additional products that are not part of the two previous agreements between Par and Nortec. During the first two years of the agreement, Par is obligated to make aggregate initial research and development payments to Nortec in the amount of $3,000, of which $1,500 was paid by Par in fiscal year 2003, $1,000 is due in fiscal year 2004 and $500 is due in fiscal year 2005. On or before October 15, 2005, Par will have the option to either (i) terminate the arrangement with Nortec, in which case the initial research and development payments will be credited against any development costs that Par shall owe Nortec at that time, or (ii) acquire all of the capital stock of Nortec over the subsequent two years, including the first fifty (50%) percent of the capital stock of Nortec over the third and fourth years of the agreement for $4,000, and the remaining capital stock of Nortec from its owners at the end of the fourth year for an additional $11,000. On August 6, 2003, Par entered into an agreement with Mead and BMS, through which Mead agreed to license the use of the Megace(R) trade name in connection with a potential new product being developed by Par. If successfully developed, the new product is expected to increase Par's sales of megestrol acetate oral suspension. Under the terms of the agreement, Par provided funding to support BMS's active promotion of Megace O/S(R) (megestrol acetate oral suspension) brand during fiscal year 2003 and agreed to provide funding throughout 2004 to help retain its brand awareness among physicians. Megace O/S(R) is indicated for the treatment of anorexia and cachexia, the unexplained weight loss in patients diagnosed with acquired immune deficiency syndrome (AIDS). Par also will make certain payments to Mead, including royalties, based on net sales of the new product. MARKETING AND CUSTOMERS The Company markets its products under the Par label principally 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. 10 The Company has approximately 140 customers, some of which are part of larger buying groups. During fiscal year 2003, the Company's four largest customers in terms of net sales dollars, Cardinal Health, Inc., AmerisourceBergen Corporation, McKesson Drug Co. and Walgreen Co., accounted for approximately 17%, 13%, 11% and 11%, respectively, of its total revenues. In fiscal year 2002, the Company's four largest customers in terms of net sales dollars, McKesson Drug Co., Cardinal Health, Inc., AmerisourceBergen Corporation and Walgreen Co. accounted for approximately 17%, 16%, 15% and 10%, respectively, of its total revenues. The Company does not have written agreements with any of these customers and 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 effect on the Company's operating results, prospects and financial condition (see "Notes to Consolidated Financial Statements - Note 3 -Accounts Receivable-Major Customers"). ORDER BACKLOG The approximate dollar amount of open orders, believed by management to be firm, at December 31, 2003, was $34,800, as compared to $18,185 at December 31, 2002 and $12,800 at December 31, 2001. Although open orders are subject to cancellation without penalty, management expects that it will fill substantially all of such open orders at December 31, 2003 in the near future. COMPETITION The pharmaceutical industry is highly competitive. Most of the Company's significant competitors have longer operating histories and greater financial, research and development, marketing and other resources. Consequently, many of the Company's competitors may develop products and/or processes competitive with, or superior to, those of the Company. Furthermore, the Company may not be able to differentiate its products from its competitors, successfully develop or introduce new products that are less costly than those of its competitors or offer purchasers of its products payment and other commercial terms as favorable as those offered by its competitors. The Company believes its principal generic competitors are Mylan Laboratories, Inc., Teva Pharmaceutical Industries Limited, Watson Pharmaceuticals, Inc., Barr Laboratories, Inc., Apotex, Eon Labs, Inc., Geneva Pharmaceuticals, Inc. and Roxane Laboratories, Inc. ("Roxane"). The Company's principal strategy in addressing its competition is to offer customers a consistent supply of a broad line of generic drugs at competitive pricing. There can be no assurance, however, that this strategy will enable the Company to continue to compete successfully in the industry or that it will be able to develop and implement any new or additional viable strategies. Certain manufacturers of brand name drugs and/or their affiliates have introduced generic pharmaceutical products equivalent to their brand name drugs at relatively lower prices or partnered with generic companies to introduce generic products. Such actions have the effect of reducing the potential market share and profitability of generic products developed by the Company and may inhibit it from developing and introducing generic pharmaceutical products comparable to certain brand name drugs. The Company also faces significant price competition generally as other generic manufacturers enter the market, and as a result of consolidation among wholesalers and retailers and the formation of large buying groups, any of which, in turn, could result in reductions in sales prices and gross margin. This increased price competition has led to an increase in customer demand for downward price adjustments by the manufacturers of generic pharmaceutical products, including the Company, for certain products that have already been delivered. There can be no assurance that such price reductions for these products or others, will not continue, or even increase, with a consequent material adverse effect on the Company's revenues and gross margin. 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 manufacturer 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, price declines have 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 customer's remaining inventory at the expiration of the exclusivity period. As a result, the total price protection that the Company will credit customers at the expiration of an exclusivity 11 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 that customers have at the expiration of the exclusivity period. The 180-day marketing exclusivity period in respect of fluoxetine 10 mg and 20 mg tablets, which Par sells pursuant to a distribution agreement with Genpharm Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA, and the 180-day marketing exclusivity period granted in respect of fluoxetine 40 mg capsules, which Par sells pursuant to an agreement with Dr. Reddy's Laboratories, Ltd. ("Dr. Reddy"), both expired at the end of January 2002. In addition, the 180-day marketing exclusivity period granted to the Company by the FDA in respect of megestrol acetate oral suspension, which is not subject to any profit sharing agreement, expired in mid-January 2002. As the Company expected, additional generic competitors, with products comparable to all three strengths of its fluoxetine products, began entering the market in the first quarter of 2002, eroding the pricing that the Company had received during the exclusivity periods, particularly on the 10 mg and 20 mg strengths. Nevertheless, the Company maintained a significant market share for fluoxetine 40 mg capsules and, despite FDA approvals obtained for two competing generic megestrol acetate oral suspension products in the first quarter of 2002 and the second quarter of 2003, the Company also maintained a significant market share for megestrol acetate oral suspension as of December 31, 2003. Although megestrol acetate oral suspension and fluoxetine 40 mg capsules are expected to continue to contribute significantly to the Company's overall performance in fiscal year 2004, the growth of the Company's product line through new product introductions has somewhat reduced the Company's reliance on these products. The Company understands that other generic drug manufactures have filed ANDAs in respect of paroxetine and that the marketing exclusivity period in respect thereof ended on March 8, 2004 but, at this time, cannot predict the timing of launches by these competitors or the potential effects on its sales. The principal competitive factors in the generic pharmaceutical market include: (i) introduction of other generic drug manufacturers' products in direct competition with the Company's products, (ii) consolidation among distribution outlets through mergers and 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) the willingness of generic drug customers, including wholesale and retail customers, to switch among pharmaceutical manufacturers, (v) pricing pressures and product deletions by competitors, (vi) a company's reputation as a manufacturer of quality products, (vii) a company's level of service (including maintaining sufficient inventory levels for timely deliveries), (viii) product appearance and (ix) a company's 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 while a new supplier becomes qualified by the FDA and its manufacturing process is found to meet FDA standards could, depending on the particular product, 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 providing for, where economically and otherwise feasible, two or more suppliers of raw materials for the drugs it manufactures. In addition, the Company may attempt to enter into a contract with a raw material supplier in an effort to ensure adequate supply for its products. EMPLOYEES At December 31, 2003, the Company had 531 employees compared to 456 and 393, respectively, at December 31, 2002 and 2001. The increased headcount levels in fiscal years 2003 and 2002, primarily in the research and development and administrative functions, reflect the continued growth of the Company from fiscal year 2001. 12 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 (the "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. Non-compliance 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 applicable government authority to enter into supply contracts or to approve new drug applications. The FDA also has the authority to withdraw its 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 brand name drug, may 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. In order 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"). Because the safety and efficacy of listed drugs 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 anti-fungals), 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 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 13 reduction of the effective market life of the patented drug resulting from the time spent 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 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 lives to already issued patents, thus delaying FDA approvals of applications for generic products. FDA issued a final rule on June 18, 2003, which became effective on August 18, 2003, streamlining the generic drug approval process by limiting a drug company to only one 30-month stay of a generic drug's entry into the market for resolution of a patent challenge. This will help maintain a balance between the innovator companies intellectual property rights and the desire to get generic drugs on the market in a timely fashion. The rule clarifies the types of patents that innovators must submit for listing and prohibits the submission of patents claiming packaging, intermediates or metabolite innovations. Patents claiming a different polymorphic form of the active ingredient described in a NDA must be submitted if the NDA holder has test data demonstrating that the drug product containing the polymorph will perform in the same way as the drug product described in the NDA. These changes are consistent with concerns raised in 2002 by the FTC in its report on generic drugs. The final rule also clarifies the type of patent information required to be submitted and revises the declaration that NDA applicants must provide regarding their patents to help ensure that NDA applicants submit only appropriate patents. The final rule is intended to make the patent submission and listing process more efficient, as well as enhance the ANDA and 505(b)(2) application approval process. The changes are designed to enable consumers to save billions of dollars each year by making it easier for generic drug manufacturers to get safe and effective products on the market when the appropriate patent protection expires. In addition to the federal government, various 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 its operations are located and/or it conducts business. Certain activities of the Company may also be subject to FTC enforcement. The FTC enforces a variety of antitrust and consumer protection laws designed 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. As a public company, the Company is subject to the recently enacted Sarbanes-Oxley Act of 2002 (the "SOX Act"), including regulations to be promulgated thereunder. The SOX Act contains a variety of provisions affecting public companies, including the relationship with its auditors, prohibiting loans to executive officers and requiring an evaluation of its 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 agreements with various states. ITEM 2. PROPERTIES. - ------- ----------- The Company owns an approximately 92,000 square foot facility built to Par's specifications that contains its manufacturing and domestic research and development operations. The building, occupied by Par since fiscal year 1986, 14 also includes packaging and warehouse facilities. The building is located in Spring Valley, New York, on an approximately 24 acre parcel of land, of which approximately 15 acres are available for future expansion. The Company owns another facility in Spring Valley, New York, across the street from its manufacturing facility, occupying approximately 36,000 square feet on two acres. This property was acquired in fiscal year 1994 and was remodeled in fiscal year 2003 for use as research and quality control laboratories and additional office space. Par owns a third facility (the "Congers Facility") of approximately 33,000 square feet located on six acres in Congers, New York. In March 1999, Par entered into an agreement to lease the Congers Facility and related machinery and equipment to Halsey Drug Co., Inc. ("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 2002 and 1999. The lease agreement provides for annual fixed rent of $600 per year during its two-year renewal period. In fiscal year 2003, the Company moved 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 such 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 in December 2004. The Company has the option to extend the lease for two additional five-year periods. The Company leases office space in Woodcliff Lake, New Jersey covering approximately 41,000 square feet. The lease expires in January 2010. This facility houses the majority of the Company's administrative functions. FineTech entered into a lease in March 2003 covering approximately 11,000 square feet of a building in Nesher, Israel, which contains its laboratories and administrative offices. The term of the lease is for nine years and 11 months, with an additional two-year and 11-month renewal period. 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 - Note 14 - Commitments, Contingencies and Other Matters-Leases"). ITEM 3. LEGAL PROCEEDINGS. - ------- ------------------ On September 25, 2003, the Office of the Attorney General of the Commonwealth of Massachusetts filed a complaint in federal district court in Boston against Par and 12 other leading generic pharmaceutical companies alleging principally that Par and such other companies violated, through their marketing and sales practices, state and federal laws, including allegations of common law fraud and violations of Massachusetts false statements statutes, by inflating generic pharmaceutical product prices paid for by the Massachusetts Medicaid program. The Company has waived service of process with respect to the complaint. The complaint seeks injunctive relief, treble damages, disgorgement of excessive profits, civil penalties, reimbursement of investigative and litigation costs (including experts' fees) and attorneys' fees. In addition, on September 25, 2003, the Company and a number of other generic and brand pharmaceutical companies were sued by a New York county, which has alleged violations of laws (including the Racketeer Influenced and Corrupt Organizations Act, common law fraud and obtaining funds by false statements), related to participation in the Medicaid program. The complaint seeks declaratory relief; actual, statutory and treble damages, with interest; punitive damages; an accounting; a constructive trust and restitution; attorneys' and experts' fees and costs. This case was transferred to the District of Massachusetts for coordinated and consolidated pretrial proceedings. Par and the other defendants involved in the litigation filed a motion to dismiss on January 29, 2004. Par intends to defend vigorously the claims asserted in both complaints. The Company cannot predict with certainty at this time the outcome or the effect on the Company of such litigations. Accordingly, no assurance can be given that such litigations or any other similar litigation by other states or jurisdictions, if instituted, will not have a material adverse effect on the Company's financial condition, results of operations, prospects or business. 15 In October 2003, Apotex filed a complaint against Par in the United States District Court for the Eastern District of Pennsylvania alleging violations of state and federal antitrust laws as a result of the Company's settlement with GSK and the GSK Supply Agreement. Par filed a motion to dismiss the action in its entirety in December 2003 and a briefing on that motion is expected to be completed in April 2004. Par intends to defend vigorously this action, and may assert counterclaims against Apotex and claims against third parties. In August 2003, Teva Pharmaceuticals USA, Inc. ("Teva USA") filed a lawsuit against the Company and Par in the United States District Court for the District of Delaware, after having received approval from the FDA to launch a generic version of BMS's Megace(R), which generic product will compete with the Company's megestrol acetate oral suspension product. In the lawsuit, Teva USA seeks a declaration that its product has not infringed and will not infringe any of Par's four patents relating to megestrol acetate oral suspension. On August 22, 2003, Par filed a counterclaim against Teva USA alleging willful infringement of one of its four patents relating to megestrol acetate oral suspension and moved to dismiss the action with respect to the other three patents for lack of subject matter jurisdiction. The Company intends to pursue its counterclaim against Teva USA and to vigorously defend the lawsuit. A trial date has been scheduled by the Court for April 2005. On July 15, 2003, the Company and Par (collectively, "Par") filed a lawsuit against Roxane in the United States District Court for the District of New Jersey. Par alleged that Roxane infringed Par's U.S. Patents numbered 6,593,318 and 6,593,320 relating to megestrol acetate oral suspension. Roxane has denied these allegations and has counterclaimed for declaratory judgments of non-infringement and invalidity of both patents. On May 28, 2003, Asahi Glass Company ("Asahi Glass") filed a lawsuit against Par and several other parties in the United States District Court for the Northern District of Illinois alleging, among other things, violations of state and federal antitrust laws relating to the settlement of GSK's patent action against Pentech in respect of paroxetine. Pentech had granted Par rights under Pentech's ANDA for paroxetine capsules. Pursuant to the settlement, reached between the parties on April 18, 2003, Pentech and Par acknowledged that the patent held by GSK is valid and enforceable and would be infringed by Pentech's proposed capsule product and GSK agreed to allow Par to distribute in the Commonwealth of Puerto Rico substitutable generic paroxetine immediate release tablets supplied and licensed from GSK for a royalty payable to GSK. In addition, Par was granted the right under the settlement to distribute the drug in the United States if another generic version fully substitutable for Paxil(R) became available in the United States. Par denied any wrongdoing in connection with the Asahi Glass antitrust action and filed a motion to dismiss the complaint on August 22, 2003. In October 2003, the court dismissed all of the state and federal antitrust claims against Par. The only remaining claim in this action involving Par is a state law contract claim relating to the payment of certain attorneys' fees to Asahi Glass in connection with the prior lawsuit. Par intends to defend vigorously this claim and may assert counterclaims against Asahi Glass and claims against third parties. In February 2003, Abbott, Fornier Industrie et Sante and Laboratoires Fournier S.A. filed a complaint in the United States District Court for the District of New Jersey against Par, alleging that Par's generic version of TriCor(R) (fenofibrate) infringes one or more claims of their patents. The Company had filed an ANDA for the product in October 2002. Par intends to defend vigorously this lawsuit and has filed an answer and a counterclaim, alleging non-infringement and patent invalidity. At this time, it is not possible for the Company to predict the outcome of this litigation with certainty. On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil") filed a lawsuit against Kali Laboratories, Inc. ("Kali") in the United States District Court for the District of New Jersey. Ortho-McNeil alleged that Kali infringed U.S. Patent No. 5,336,691 (the "`691 patent") by submitting a Paragraph IV certification to the FDA for approval of tablets containing tramadol hydrochloride and acetaminophen. Par is Kali's exclusive marketing partner for these tablets. Kali has denied Ortho-McNeil's allegation, asserting that the `691 patent was not infringed and is invalid and/or unenforceable, and that the lawsuit is barred by unclean hands. Kali also has counterclaimed for declaratory judgments of non-infringement, invalidity, and unenforceability of the `691 patent. Breath Ltd. of the Arrow Group filed an ANDA (currently pending with the FDA) for latanoprost (Xalatan(R)), which was developed by Breath Ltd. pursuant to a joint manufacturing and marketing agreement with the Company, seeking approval to engage in the commercial manufacture, sale and use of one latanoprost drug product in the United States. Par subsequently acquired ownership of the ANDA, which includes a Paragraph IV certification that the patents in connection with Xalatan(R) identified in "Approved Drug Products with Therapeutic Equivalence Evaluations" are invalid, unenforceable and/or will not 16 be infringed by Par's generic version of Xalatan(R). 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 (collectively, "Pharmacia") and the Trustees of Columbia University in the City of New York ("Columbia"), filed a lawsuit against Par 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 enjoining approval of the Company's ANDA and the marketing of its generic product prior to the expiration of their patents. On February 8, 2002, Par answered the complaint and filed a counterclaim, which seeks a declaration that the patents-in-suit are invalid, unenforceable and/or not infringed by Par's products and that the extension of the term of one of the patents is invalid. All parties are seeking to recover their respective attorneys' fees. Discovery in the case has now been completed and a pretrial conference has been scheduled for March 15, 2004. Par intends to defend vigorously against the claims and to pursue its counterclaim. At this time, it is not possible for the Company to predict the outcome of this litigation with certainty. Par entered into a licensing agreement with developer Paddock Laboratories ("Paddock") to market a generic version of Unimed Pharmaceuticals, Inc.'s ("Unimed") product Androgel(R). The product will be manufactured by Paddock and marketed by Par. Paddock has filed an ANDA (which is currently pending with the FDA) for the testosterone 1% gel product. As a result of the filing of the ANDA, Unimed and Laboratories Besins Iscovesco ("Besins"), co-assignees of the patent-in-suit, filed a lawsuit against Paddock in the United States District Court for the Northern District of Georgia alleging patent infringement on August 22, 2003. Par has an economic interest in the outcome of this litigation by virtue of its licensing agreement with Paddock. Unimed and Besins are seeking an injunction to prevent Paddock from manufacturing the generic product. On November 18, 2003, Paddock answered the complaint and filed a counterclaim, which seeks a declaration that the patent-in-suit is invalid and/or not infringed by Paddock's product. This case is currently in fact discovery. At this time, it is not possible for the Company to predict the outcome of this action. The Company and/or Par are parties to certain other litigation matters, including product liability and patent actions; the Company believes that these actions are incidental to the conduct of its business and that their 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 or, in cases where the Company is plaintiff, prosecute these actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------ --------------------------------------------------- No matters were submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 2003. 17 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 (ticker symbol: PRX). The following table shows the range of the closing prices for the Common Stock, as reported by the NYSE, for each calendar quarter during the Company's two most recent fiscal years. 2003 2002 ------------- ------------- QUARTER ENDED (APPROXIMATELY) HIGH LOW HIGH LOW ----------------------------- ----- --- ---- --- March 31 $42.80 $29.35 $33.20 $16.10 June 30 52.03 37.57 29.00 20.91 September 30 72.30 48.20 28.60 21.85 December 31 74.71 64.30 30.55 20.05 (b) HOLDERS. As of March 10, 2004, there were approximately 1,829 holders of record of the Company's 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 2003, 2002 and 2001, 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 and is dependent upon many factors, including the Company's earnings, its capital needs, the terms of any financing agreements and its financial condition. (d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE ISSUED UPON EXERCISE PRICE EXERCISE OF OF OUTSTANDING OUTSTANDING OPTIONS, NUMBER OF SECURITIES OPTIONS, WARRANTS WARRANTS AND REMAINING AVAILABLE PLAN CATEGORY AND RIGHTS RIGHTS FOR FUTURE ISSUANCE -------------- ---------- ------ ------------------- EQUITY COMPENSATION PLANS APPROVED BY STOCKHOLDERS: 2001 Performance Equity Plan 2,797 $32.45 1,637 1997 Directors Stock Option Plan 139 $25.98 187 1990 Stock Incentive Plan 2 $4.13 - EQUITY COMPENSATION PLANS NOT APPROVED BY STOCKHOLDERS: 2000 Performance Equity Plan 438 $6.81 88 --- -- Total 3,376 $28.83 1,912
In fiscal year 2000, the 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 stockholder approval. The 2000 Plan provides for the granting of incentive and non-qualified stock options to employees of the Company and others. The 2000 Plan became effective on 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% of the total combined voting power of all the classes of capital stock of the Company. (e) RECENT STOCK PRICE. On March 10, 2004, the closing price of the Common Stock on the NYSE was $59.36. 18 ITEM 6. SELECTED FINANCIAL DATA. - ------- ------------------------
AS OF AND FOR THE FISCAL YEARS ENDED 12/31/03 12/31/02 12/31/01 12/31/00 12/31/99 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Net product sales $646,023 $380,848 $271,035 $85,022 $80,315 Other product related revenues 15,665 755 - - - ------ ------- ------- ------ ------ Total Revenues 661,688 381,603 271,035 85,022 80,315 Cost of goods sold 378,513 198,313 161,306 62,332 64,140 ------- ------- ------- ------ ------ Gross margin 283,175 183,290 109,729 22,690 16,175 ------- ------- ------- ------ ------ Operating expenses (income): Research and development 24,581 17,910 11,113 7,634 6,005 Selling, general and administrative 57,575 40,215 21,878 16,297 13,509 Settlements - (9,051) - - - Acquisition termination charges - 4,262 - - - ------ ----- ------ ------ ------ Total operating expenses 82,156 53,336 32,991 23,931 19,514 ------ ------ ------ ------ ------ Operating income (loss) 201,019 129,954 76,738 (1,241) (3,339) Other (expense) income (95) (305) (364) 506 906 Interest (expense) income (281) 604 (442) (916) (63) --- --- --- --- -- Income (loss) before provision for income taxes 200,643 130,253 75,932 (1,651) (2,496) Provision for income taxes 78,110 50,799 22,010 - - ------ ------ ------ ----- ----- Net income (loss) $122,533 $79,454 $53,922 $(1,651) $(2,496) ======== ====== ====== ===== ===== Net income (loss) per share of common stock: Basic $3.66 $2.46 $1.76 $(.06) $(.08) ===== ==== ==== === === Diluted $3.54 $2.40 $1.68 $(.06) $(.08) ===== ==== ==== === === Weighted average number of common shares outstanding: Basic 33,483 32,337 30,595 29,604 29,461 ====== ====== ====== ====== ====== Diluted 34,638 33,051 32,190 29,604 29,461 ====== ====== ====== ====== ====== BALANCE SHEET DATA: Working capital $459,802 $136,305 $102,867 $18,512 $21,221 Property, plant and equipment (net) 46,813 27,055 24,345 23,560 22,681 Total assets 762,812 301,457 216,926 93,844 92,435 Long-term debt, less current portion 200,211 2,426 1,060 163 1,075 Total stockholders' equity 395,081 220,790 138,423 64,779 65,755
19 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, THE INTRODUCTION OF NEW MANUFACTURED, LICENSED AND DISTRIBUTED PRODUCTS AND RESEARCH AND DEVELOPMENT EXPENDITURES. SUCH STATEMENTS INVOLVE RISKS, UNCERTAINTIES, TRENDS AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY AND COULD CAUSE ACTUAL RESULTS AND PERFORMANCE TO DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN. THESE STATEMENTS ARE MADE TYPICALLY BY USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS," "ANTICIPATES," "CONTINUING," "COULD," "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, AND THE SUCCESS OF, 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, (x) THE ABILITY OF THE COMPANY TO DIVERSIFY PRODUCT OFFERINGS AND (xi) 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. THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS. OVERVIEW Although the Company achieved the most successful year in its history in fiscal year 2003, there are many industry and economic factors and risks that can affect the growth of the Company. The most significant of these factors include: (i) intense competition from brand name and generic manufacturers, (ii) the Company's introduction of new manufactured and distributed products at selling prices that generate significant gross margins, (iii) resources and/or funding available to the Company for the research and development of new products, (iv) the Company's dependence on a limited number of products and the duration of those products as significant revenue generators, (v) the actions of brand name manufacturers to introduce their own generic versions of brand drugs and to prevent or discourage the use of generic equivalent products or delay and/or prevent entry of the Company's products into the market through litigation or other means, (vi) funding available to the Company for litigation which can be protracted and expensive, (vii) the Company's dependence upon revenues from products distributed through agreements with third parties and potential supply disruptions resulting from the inability by third party suppliers to meet expected demand and (viii) the Company's ability to continue its licensing of authorized generics from brand companies. As described below, the Company believes it has a comprehensive business plan in place to address these challenges and mitigate such risks. In order to secure financing to support the expansion of its business, the Company obtained additional funds through the issuance of $200,000 of senior subordinated convertible debt in September 2003. Implementation of these strategies could also require additional debt and/or equity financing; there can be no assurance that the Company will be able to obtain any additional required financing when needed and on terms acceptable or favorable to it. The pharmaceutical industry is highly competitive. Many of the Company's competitors have longer operating histories and greater financial, research and development, marketing and other resources. Consequently, many of the Company's competitors may be able to develop products and/or processes competitive with, or superior to, those of the Company. Furthermore, the Company may not be able to differentiate its products from those of its competitors, successfully develop or introduce new products that are less costly than those of its competitors or offer purchasers of its products payment and other commercial terms as favorable as those offered by its competitors. The Company's principal strategy, in addressing its competition, is to offer customers a consistent supply of a broad line of generic drugs at competitive pricing. 20 Revenues and gross margin derived from generic pharmaceutical products often follow a pattern based on regulatory and competitive factors believed to be unique to the generic pharmaceutical industry. As the patent(s) for a brand name product and the related exclusivity period expires, the first generic manufacturer to receive regulatory approval for a generic equivalent of the product is often able to capture a substantial share of the market. However, as other generic manufacturers receive regulatory approvals for competing products, that market share, and the price of that product, will typically decline depending on several factors, including the number of competitors, the price of the brand product and the pricing strategy of the new competitors. A large portion of the Company's revenues has been derived from the sales of generic drugs during the 180-day marketing exclusivity period and from the sale of generic products where there is limited competition. The Company, through its internal development program and strategic alliances and relationships, is committed to developing new products that have limited competition and longer product life cycles. In addition to expected new product introductions as part of its various strategic alliances and relationships, the Company plans to continue to invest significantly in its internal research and development efforts while, at the same time, seeking additional products for sale through new and existing distribution agreements or acquisitions of complementary products and businesses, additional first-to-file opportunities, selective vertical integration with raw material suppliers and unique dosage forms to differentiate its products in the marketplace. In addition to its own product development program, the Company has several strategic alliances through which it co-develops and distributes products. These strategic alliances offer the Company many advantages including additional resources for increased activity, expertise for dissimilar products or technologies, and a sharing of both the costs and risks of new product development. As a result of its internal program and these strategic alliances, the Company's pipeline of potential products includes 25 ANDAs (five of which have been tentatively approved), pending with, and awaiting approval from, the FDA. The Company pays a percentage of the gross profits or sales to its strategic partners on sales of products covered by its distribution agreements. Generally, products that the Company develops internally, without having to split any profits with its strategic partners, contribute higher gross margins than products covered under distribution agreements. The Company is engaged in efforts, subject to FDA approval and other factors, to introduce new products through its research and development efforts and distribution and development agreements with third parties. In fiscal year 2003, the Company obtained the marketing rights to paroxetine, the generic version of GSK's Paxil(R), in connection with the GSK Settlement between the Company, GSK and certain of its affiliates, and Pentech. As a result of the settlement, Par and GSK entered into the GSK Supply Agreement, pursuant to which Par began marketing paroxetine, supplied and licensed from GSK, in the United States in September 2003 and the Commonwealth of Puerto Rico in May 2003. The GSK Settlement also provides that the Company's right to distribute paroxetine will be suspended if at any time there is not another generic version fully substitutable for Paxil available for purchase in the United States. On September 8, 2003, another generic drug manufacturer, Apotex, launched a generic version of Paxil(R). GSK has sued Apotex for patent infringement and is currently appealing a district court decision adverse to GSK. In April 2002, GSK launched a longer-lasting, newly patented version of the drug, Paxil CR(R). The Company expects Paxil CR(R)'s market share to continue to grow in fiscal year 2004, which may cause the Company's sales of paroxetine tablets to decrease. The Company understands that other generic drug manufactures have filed ANDAs in respect of paroxetine and that the marketing exclusivity period ended on March 8, 2004 but, at this time, cannot predict the timing of launches by these competitors or the potential effect of such competition on its sales. The 180-day marketing exclusivity period in respect of fluoxetine 10 mg and 20 mg tablets, which Par sells pursuant to a distribution agreement with Genpharm, and the 180-day marketing exclusivity period granted in respect of fluoxetine 40 mg capsules, which Par sells pursuant to a development and supply agreement with Dr. Reddy, both expired at the end of January 2002. In addition, the 180-day marketing exclusivity period granted to the Company by the FDA in respect of megestrol acetate oral suspension, which is not subject to any profit sharing agreement, expired in mid-January 2002. As the Company expected, additional generic competitors, with products comparable to all three strengths of its fluoxetine products, began entering the market in the first quarter of 2002, eroding the pricing that the Company had received during the exclusivity periods, particularly on the 10 mg and 20 mg strengths. Nevertheless, the Company maintained a significant market share for fluoxetine 40 mg capsules and, despite FDA approvals for two competing generic megestrol acetate oral suspension products received in the first quarter of 2002 and the second quarter of 2003, the Company also maintained a significant share of the market for megestrol acetate oral suspension as of December 31, 2003. Although megestrol acetate oral suspension and fluoxetine 40 mg capsules are expected to continue to contribute significantly to the Company's overall performance in fiscal year 21 2004, the growth of the Company's product line through new product introductions has somewhat reduced the Company's reliance on these products. In fiscal year 2003, the Company's top four selling products accounted for approximately 61% of its total revenues, as compared to 56% and 70%, respectively, of its total revenues in fiscal years 2002 and 2001. One of the products, paroxetine, which the Company began marketing in fiscal year 2003, was not one of the top four products in either of the preceding years and accounted for approximately 29% of the Company's total 2003 revenues and a significant portion of its gross margin. The aggregate net sales and gross margins generated by two other products, fluoxetine and megestrol acetate oral suspension, accounted for a significant portion of the Company's overall revenues and gross margins in all three fiscal years and any reduction in pricing for these products, without the addition of new products, could adversely affect the Company's overall financial performance. The percentage of the Company's total revenues that these two products represent, excluding paroxetine, has decreased to 38% in fiscal year 2003 from 44% and 61%, respectively in fiscal years 2002 and 2001. Although there can be no such assurance, the Company anticipates continuing to introduce new products in fiscal year 2004 while seeking to increase sales of certain existing products in an effort to offset sales and gross margin declines resulting from competition on any of its significant products. The Company seeks to reduce its financial dependence with respect to the top four products, by adding additional products through, its internal development program, new and existing distribution agreements or acquisitions of complementary products or businesses. Litigation concerning patents and proprietary rights is often protracted and expensive. Pharmaceutical companies with patented brand products are increasingly suing companies that produce generic forms of their patented brand name products for alleged patent infringement or other violations of intellectual property rights, which may delay or prevent the entry of such generic products into the market. Generally, a generic drug may not be marketed until the applicable patent(s) on the brand name drug expires. When an ANDA is filed with the FDA for approval of a generic drug, the filing person may either certify that the patent listed by the FDA as covering the generic product is about to expire, in which case the ANDA will not become effective until the expiration of such patent, or that the patent listed as covering the generic drug is invalid or will not be infringed by the manufacture, sale or use of the new drug for which the ANDA is filed. Under either circumstance, there is a risk that a branded pharmaceutical company may sue the filing person for alleged patent infringement or other violations of intellectual property rights. Also, other companies that compete with the Company by manufacturing, developing and/or selling the same generic pharmaceutical products may similarly file lawsuits against the Company or its strategic partners claiming patent infringement or invalidity. Because substantially all of the Company's business involves the marketing and development of off-patent products, the threat of litigation, the outcome of which is inherently uncertain, is always present. Such litigation is often costly and time consuming, and could result in a substantial delay in, or prevent, the introduction and/or marketing of products, which could have a material adverse effect on the Company's business, condition (financial and other), prospects and results of operations. The Company's strategy to broaden its product line also includes the licensing of authorized generic products from brand companies. On November 28, 2003, the Company commenced shipment of substitutable generic metformin hydrochloride extended-release tablets supplied and licensed from BMS. Release of the metformin hydrochloride extended-release tablets occurred simultaneously with the release of this product by another generic company. Metformin hydrochloride extended-release tablets are the generic version of BMS's Glucophage XR(R) tablets, which is used in the treatment of type 2 diabetes. The Company has broadened its product line by entering into distribution and marketing agreements, as well as contract manufacturing agreements, through which it distributes generic pharmaceutical products manufactured by others. The Company has entered into distribution agreements with several companies to develop, distribute and promote such generic pharmaceutical products. The Company cannot give assurance that the efforts of its contractual partners will continue to be successful or that it will be able to renew such agreements or that it will be able to enter into new agreements with additional companies. Any alteration to or termination of the Company's current material distribution and marketing agreements, or any failure to enter into new and similar agreements, could materially adversely affect its business, condition (financial and other), prospects or results of operations. The Company seeks to mitigate potential supply issues from its third-party suppliers through regular communication and planning or entering into contracts when possible. 22 RESULTS OF OPERATIONS GENERAL The Company's net income of $122,533 in fiscal year 2003 increased $43,079 from $79,454 in fiscal year 2002. Total revenues of $661,688 in 2003 increased $280,085 from $381,603 in fiscal year 2002, driven primarily by additional net sales of new products introduced in 2003. The revenue growth produced higher gross margin dollars in 2003, which increased $99,885 to $283,175, from $183,290 in fiscal year 2002. In addition, the Company continued to invest significantly in its research and development activities and infrastructure. Spending of $24,581 on research and development for fiscal year 2003 increased 37% from $17,910 for fiscal year 2002, while selling, general and administrative costs of $57,575 for fiscal year 2003 increased $17,360 from the prior year. The Company believes that the increased costs will be required to support its future growth. In addition, the Company recorded a charge of $3,712 in selling, general and administrative expenses in 2003 related to a retirement package for the Company's former chairman, president and chief executive officer. Fiscal year 2002 results include income from settlements of $9,051 related to the Company's termination of its litigation with BMS and acquisition termination charges of $4,262 in connection with its termination of negotiations with International Specialty Products ("ISP") related to the Company's then proposed purchase of the combined ISP FineTech fine chemical business based in Haifa, Israel and Columbus, Ohio. The Company also 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 fiscal year 2002 increased $25,532 from $53,922 for fiscal year 2001. Net income in 2001 included the favorable impact on the tax provision related to the reversal of a previously established valuation allowance of $9,092 related to net operating loss ("NOL") carryforwards. Net sales of $381,603 in fiscal year 2002 increased $110,568, or 41%, from fiscal year 2001. The increased revenues were primarily the result of new product introductions in fiscal year 2002 combined with the success of megestrol acetate oral suspension, introduced in the third quarter of 2001. The increase in revenues was achieved despite lower sales of fluoxetine 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 development partners, and additional legal fees, personnel costs, product liability insurance and shipping costs associated with new product launches. Sales and gross margins of the Company's products are principally dependent upon (i) the pricing practices of competitors or their removal of competing products from the market, (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) the approval of ANDAs and introduction of new manufactured products, (ix) the granting of potential marketing exclusivity periods, (x) the extent of market penetration for the existing product line and (xi) the level and amount of customer service (see "Business-Competition"). REVENUES Total revenues of $661,688 for fiscal year 2003 increased $280,085, or 73%, from $381,603 for fiscal year 2002. The revenue growth in 2003 was driven largely by the September 2003 introduction of paroxetine in the United States, sold through the GSK Supply Agreement, which totaled approximately $192,500 in net sales for fiscal year 2003. Additionally, net sales of other new products, including metformin ER (Glucophage XR(R)), introduced in December 2003 and sold under a distribution agreement with BMS, tizanidine (Zanaflex(R)), introduced in July 2002 and sold under a distribution agreement with Dr. Reddy, torsemide (Demadex(R)) and minocycline (Minocin(R)), introduced in the second quarter of 2003 and manufactured by the Company, contributed to the revenue growth in 2003. Net sales of fluoxetine and megestrol acetate oral suspension were approximately $91,100 and $88,200, respectively, for the most recent year, reflecting a small increase over the prior fiscal year. Net sales of distributed products, which consist of products manufactured under contract and licensed products, were 23 approximately 69% and 60%, respectively, of the Company's total revenues in fiscal years 2003 and 2002. The Company is substantially dependent upon distributed products for its overall sales and, as the Company continues to introduce new products under its distribution agreements, it expects that this dependence will continue. Any inability by suppliers to meet expected demand could adversely affect the Company's future sales. At this time, it is difficult to predict with accuracy the effects of potential competition on future sales of paroxetine. Several market uncertainties currently exist including the possibility and timing of additional generic competitors entering the market or the ability of GSK, under the GSK Supply Agreement, to suspend Par's right to distribute paroxetine if at any time another generic version of Paxil(R) is not being marketed. Two generic competitors have been granted FDA approval to market generic versions of megestrol acetate oral suspension since the expiration of the Company's 180-day marketing exclusivity period, but, as of December 31, 2003, did not have a significant effect on the Company's net sales of the product. At this time, the Company cannot accurately predict the effect the generic competition will have on future periods; however, the Company believes that megestrol acetate oral suspension will be a significant sales and gross margin contributor in fiscal year 2004, despite the competition. The Company will continue to evaluate the effects of such competition and will record a price protection reserve when, if and to the extent it deems necessary. As a result of generic competition beginning in the first quarter of 2002 following the expiration of the Company's 180-day marketing exclusivity period, the sales price for fluoxetine had substantially declined from the price that the Company had charged during the exclusivity period. Accordingly, the Company's sales and gross margins generated by fluoxetine following the expiration of the exclusivity period were adversely affected. Despite pricing declines, fluoxetine 40 mg continued to be a significant sales and gross margin contributor in fiscal year 2003. If additional competitors enter the market in fiscal year 2004, the Company expects that its sales and gross margins for the product will decline. Pursuant to an agreement with Genpharm, the Company receives a portion of the profits, as defined in the agreement, generated from Kremers Urban Development Co.'s ("KUDCo"), a subsidiary of Schwarz Pharma AG of Germany, sale of omeprazole, the generic version of Astra Zeneca's Prilosec(R). In the third quarter of 2003, two generic competitors began selling forms of omeprazole that also compete with the prescription form of Prilosec(R), significantly reducing the Company's share of profits related to omeprazole from approximately $12,800 for the first six months of fiscal year 2003 to $2,900 for the remainder of the year. The Company expects that the impact of this competition will continue to have an adverse effect on its omeprazole revenues in future periods. Total revenues of $381,603 for fiscal year 2002 increased $110,568, or 41%, from total revenues in fiscal year 2001. The revenue increase was primarily due to higher net sales of megestrol acetate oral suspension, introduced in late July 2001, new 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 $85,800 and $83,000, respectively, compared to $122,300 and $43,900, respectively, in the prior year. Net sales of distributed products represented approximately 60% and 66%, respectively, of the Company's total revenues in fiscal years 2002 and 2001. GROSS MARGINS The Company's gross margin of $283,175 (43% of total revenues) for fiscal year 2003 increased $99,885 from $183,290 (48% of total revenues) for fiscal year 2002. The gross margin dollar increase was achieved primarily as a result of contributions from sales of new products, as described above, and, to a lesser extent, higher sales of certain existing products and additional revenues from omeprazole pursuant to an agreement with Genpharm. In accordance with the GSK Settlement and the Pentech Supply and Marketing Agreement, Par pays royalties to GSK and Pentech on sales of paroxetine. As a result of these arrangements, the gross margin as a percentage of total revenues declined as net sales of paroxetine after profit splits yielded a significantly lower gross margin percentage than the Company's average gross margin as a percentage of total revenues of its other products over the last three fiscal years. 24 In fiscal year 2003, a higher gross margin contribution from fluoxetine 40 mg due to increases in net sales and in the Company's profit sharing percentage under its agreement with Dr. Reddy following the end of the Company's exclusivity period more than offset lower gross margin contributions from fluoxetine 10 mg and 20 mg tablets, which are subject to profit sharing agreements with Genpharm. As discussed above, additional generic manufacturers introduced and began marketing comparable fluoxetine products following the expiration of the Company's exclusivity period in January 2002, adversely effecting the Company's sales volumes, selling prices and gross margins for the products, particularly the 10 mg and 20 mg strengths. The Company's gross margin for paroxetine, megestrol acetate oral suspension and fluoxetine 40 mg could also decline when, and as, additional manufacturers introduce and market comparable generic products. The Company's gross margin for fiscal year 2002 of $183,290 (48% of total revenues) increased $73,561 from $109,729 (40% of total revenues) 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 approximately $33,600 in additional gross margin for fiscal year 2002 when compared to fiscal year 2001. The effects of gross margin declines resulting from lower pricing on the fluoxetine 40 mg capsule were partially offset by an increase in the Company's profit sharing percentage under an agreement with Dr. Reddy. Although net 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 tablets. Inventory write-offs were $3,059, $3,096 and $1,790, respectively, for fiscal years 2003, 2002 and 2001. The inventory write-offs, taken in the normal course of business, were related primarily to the disposal of finished products due to short shelf lives and work in process inventory not meeting the Company's quality control standards. The write-offs in fiscal year 2002 included the write-off of inventory for a product whose launch was delayed due to unexpected patent issues and certain raw material not meeting the Company's quality control standards. The increase from fiscal year 2001 was primarily attributable to normally occurring write-offs resulting from increased production required to meet higher sales and inventory levels. The Company maintains inventory levels that it believes are appropriate to optimize customer service. OPERATING EXPENSES/INCOME RESEARCH AND DEVELOPMENT Research and development expenses of $24,581 for fiscal year 2003 increased $6,671, or 37%, from $17,910 for fiscal year 2002. The higher expenses were primarily attributable to biostudies, including the Company's share of Genpharm's biostudy costs for products covered under their distribution agreements. In addition, higher costs were incurred for raw material and additional personnel to support increased research and development activity in fiscal year 2003 and in the future. Although there can be no such assurance, the Company expects its total annual research and development expenses for fiscal year 2004 to exceed the total for fiscal year 2003 by approximately 50%. The increase is expected as a result of increased internal development activity, third-party projects and research and development joint venture activity. The Company currently has 11 ANDAs for potential products (two tentatively approved) pending with, and awaiting approval from, the FDA as a result of its own product development program. In fiscal year 2004, the Company expects that at least ten of the potential products in active development will be the subjects of biostudies throughout fiscal year 2004. The Company and Genpharm have entered into a distribution agreement (the "Genpharm 11 Product Agreement"), dated April 2002, pursuant to which Genpharm is developing products and submitting the corresponding ANDAs to the FDA and, subsequently, has agreed to manufacture the potential products covered under the Agreement. Par will serve as the 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 by this Agreement. Currently, there is one ANDA for a potential product that is covered by the Genpharm 11 Product Agreement pending with, and awaiting approval from, the FDA. The Company is currently marketing one product and receiving royalties on another product covered under the Genpharm 11 Product Agreement. 25 The Company and Genpharm have also entered into a distribution agreement (the "Genpharm Distribution Agreement"), dated March 25, 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 (three 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. Genpharm and the Company share the costs of developing products covered under an agreement (the "Genpharm Additional Product Agreement"), dated November 27, 2000. Currently, there is one ANDA for a potential product covered by the Genpharm Additional Product Agreement pending with, and awaiting approval from, the FDA. The Company is currently marketing two products under the Genpharm Additional Product Agreement. 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 Aveva Drug Delivery Systems, (formerly Elan Transdermal Technologies, Inc.) ("Aveva"), a U.S. subsidiary of Nitto Denko, 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, a joint venture partnership between the Company and Rhodes Technologies, Inc., an affiliated company of Purdue Pharma L.P. These expenses were partially offset by lower biostudy costs, primarily related to products covered under distribution agreements with Genpharm, in fiscal year 2001. The Company purchased FineTech, based in Haifa, Israel, from ISP in April 2002. One of the Company's potential first-to-file products, latanoprost, resulted from the Company's relationship with FineTech prior to its acquisition. 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 - Note 7 - Acquisition of FineTech"). SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative costs of $57,575 (9% of total revenues) for fiscal year 2003 increased $17,360 from $40,215 (11% of total revenues) for fiscal year 2002. The increase in 2003 was primarily attributable to higher costs for product liability and directors and officers insurance of approximately $3,700, a charge of $3,712 related to a retirement package for the Company's former chairman, president and chief executive officer, and marketing expenses of approximately $1,100. In addition, the Company incurred increased expenses it believes are necessary to support the Company's growth, including costs for additional personnel of approximately $5,000, additional warehouse and administrative office facilities of $1,800, corporate strategic planning of $1,700 and information systems assessments. Distribution costs include those related to shipping products to the Company's customers, primarily through the use of common carriers or external distribution services. Shipping costs of approximately $2,700 in fiscal year 2003 were comparable to costs of $2,800 in fiscal year 2002. Although overall sales volumes increased in fiscal year 2003, shipping costs remained at approximately the same level as fiscal year 2002 due to a reduced amount of reliance on an external distribution service. The Company's legal expenses in fiscal year 2003 were lower than those incurred in fiscal year 2002 due to the sharing of certain costs with a strategic partner. The Company anticipates that it will continue to incur a high level of legal expenses related to litigations connected with potential new product introductions (see "Notes to Consolidated Financial Statements- Note 14 - -Commitments, Contingencies and Other Matters-Legal Proceedings"). Selling, general and administrative costs are expected to increase by 10% to 20% in fiscal year 2004 primarily due to increased marketing activity. The Company's former chairman, president and chief executive officer, Kenneth I. Sawyer, retired, effective July 2003, and resigned from the Board, effective September 2003. Mr. Sawyer will continue to be available to consult with the Company through 2004. A charge of approximately $3,712 associated with Mr. Sawyer's retirement package was recorded in 2003. The retirement package consists of expenses for accelerated stock options, a severance payment and the remainder of his 2003 salary and benefits. 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) for fiscal year 2001. The increase in 2002 was primarily attributable to additional legal fees of approximately $6,000, personnel costs of $4,200 and, to a lesser extent, product liability insurance and distribution costs associated with new product 26 introductions and higher sales volumes. Distribution costs include those related to shipping products to the Company's customers, primarily through the use of common carriers or external distribution services. Shipping costs totaled approximately $2,800 in fiscal year 2002, an increase of $1,500 from the prior year. SETTLEMENTS On March 5, 2002, the Company entered into an agreement with BMS acquiring the United States rights to five brand products from BMS. The products were 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 these five products, the Company agreed to terminate its outstanding litigation against BMS involving megestrol acetate oral suspension and buspirone, and paid $1,024 in March 2002 and $1,025 in April 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 recorded as 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 the seven-year period beginning in March 2002, with the net amount included in intangible assets on the Company's 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. INTEREST INCOME/EXPENSE Net interest expense of $281 for fiscal year 2003 includes interest payable on the convertible debt partially offset by interest income derived primarily from short-term investments. 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 in fiscal year 2001 was primarily due to outstanding balances on the Company's line of credit with General Electric Capital Corporation ("GECC") during the year. INCOME TAXES The Company recorded provisions for income taxes of $78,110, $50,799 and $22,010, respectively, for the fiscal years 2003, 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 (see "Notes to Consolidated Financial Statements - - Note 13 - Income Taxes"). FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents of $162,549 at December 31, 2003 increased $97,428 from $65,121 at December 31, 2002, primarily due to cash provided by operations and, to a lesser extent, proceeds from the issuance of shares of Common Stock, primarily from the exercise of stock options. The Company invested $24,035 in capital improvements in fiscal year 2003, up from $6,921 in the prior year, primarily for the expansion of its laboratories in Spring Valley, New York, its administrative offices in Woodcliff Lake, New Jersey and its warehouse facilities in Montebello, New York. In addition, the Company purchased new production machinery for its packaging lines and made improvements in its information technology. The Company's cash balances are deposited primarily with financial institutions in money market funds and overnight investments. Working capital, which is current assets minus current liabilities, of $459,802 at December 31, 2003 increased $323,497, from $136,305 at December 31, 2002, primarily due to available for sale securities purchased with the net proceeds from the issuance of convertible debt, and increases in the Company's cash position and accounts receivable, partially offset by higher payables due to distribution agreement partners, particularly those due to GSK. The available 27 for sale securities include debt securities issued by state and local municipalities and agencies and securities issued by the United States government and agencies and all are available for immediate sale. The working capital ratio of 3.75x at December 31, 2003, which is calculated by dividing current assets by current liabilities, improved from 2.83x at December 31, 2002. The Company believes that its strong working capital ratio indicates an ability to meet its ongoing and foreseeable future obligations. In September 2003, the Company sold an aggregate principal amount of $200,000 of senior subordinated convertible notes pursuant to Rule 144A under the Securities Act of 1933, as amended. Net proceeds from the notes of $177,945 were net of underwriting costs of $5,250 and the net payment for the call option and warrant transactions described below, and were used to purchase available for sale securities in October 2003. The Company intends to use its current liquid position to support the expansion of its business, including increasing its research and development activities, entering into product license arrangements and possibly acquiring complementary businesses and products, and for general corporate purposes (see "Notes to Consolidated Financial Statements - - Note 10 - Long-Term Debt"). Concurrently with the sale of the convertible notes, the Company purchased call options on its Common Stock (the "purchased call options") that are designed to mitigate the potential dilution from conversion of the convertible notes. The cost of the purchased call options of $49,368 was recognized in additional paid-in-capital on the Company's consolidated balance sheets in fiscal year 2003. The cost of the purchased call options was partially offset by the sale of warrants (the "sold warrants") to acquire shares of the Common Stock to the counterparty with whom the Company entered into the purchased call options. The gross proceeds from the sale of the sold warrants of $32,563 were also recognized in additional paid-in-capital on the Company's consolidated balance sheets in fiscal year 2003. In October 2003, the Company purchased one million shares of the common stock of Advancis in its initial public offering of six million shares on October 16, 2003. The purchase price was $10 per share and the transaction closed on October 22, 2003. The Company's investment represents an ownership position of 4.4% of the outstanding common stock of Advancis. Advancis' has stated that its focus is on developing and commercializing pulsatile drug products that fulfill unmet medical needs in the treatment of infectious disease. Unlike immediate release antibiotics, Advancis' antibiotics are delivered in three to five sequential pulses within the first six to eight hours following initial dosing. As referred to in "Notes to Consolidated Financial Statements - Note 8 - Research and Development Agreements", Par and Advancis have a licensing agreement providing Par the marketing rights to the antibiotic Clarithromycin XL. Clarithromycin XL is being developed as a generic equivalent to Abbott's Biaxin XL(R). As of December 31, 2003, the Company had payables owed to distribution agreement partners of $88,625, related primarily to amounts due pursuant to profit sharing agreements, particularly amounts owed to GSK on paroxetine. The Company expects to pay these amounts out of its working capital during the first quarter of 2004. The dollar values of the Company's material contractual obligations and commercial commitments as of December 31, 2003 were as follows: AMOUNTS DUE BY PERIOD --------------------- TOTAL MONETARY 2005 TO 2008 TO 2010 AND OBLIGATION OBLIGATION 2004 2007 2009 THEREAFTER - ---------- ---------- ---- ---- ---- ---------- Operating leases $17,795 $3,017 $7,199 $4,485 $3,094 Convertible notes* 200,000 - - - 200,000 Other 333 122 211 - - --- --- --- - ----- Total obligations $218,128 $3,139 $7,410 $4,485 $203,094 ======= ===== ===== ===== ======= *The convertible notes mature on September 30, 2010, unless earlier converted or repurchased. 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 or has commitments with several non-affiliated companies for products in various stages of development. These types of payments or commitments are generally dependent on a third party achieving certain milestones or the timing of third party research and development or legal expenses. Due to the uncertainty of the timing or realization of such commitments, these obligations are not included in the table 28 above; however, agreements that contain such commitments that the Company believes are material are described below. Payments made pursuant to these agreements are either capitalized or expensed according to the Company's accounting policies. Par and Nortec entered into an agreement, dated October 22, 2003, in which the two companies agreed to develop additional products that are not part of the two previous agreements between Par and Nortec. During the first two years of the agreement, Par is obligated to make aggregate initial research and development payments to Nortec in the amount of $3,000, of which $1,500 was paid by Par in fiscal year 2003, $1,000 is due in fiscal year 2004 and $500 is due in fiscal year 2005. On or before October 15, 2005, Par has the option to either (i) terminate the arrangement with Nortec, in which case the initial research and development payments will be credited against any development costs that Par shall owe Nortec at that time or (ii) acquire all of the capital stock of Nortec over the subsequent two years, including the first fifty (50%) percent of the capital stock of Nortec over the third and fourth years of the agreement for $4,000, and the remaining capital stock of Nortec from its owners at the end of the fourth year for an additional $11,000. The parties have agreed to certain revenue and royalty sharing arrangements before and after Par's acquisition, if any, of Nortec. In the second quarter of 2002, the Company made non-refundable payments totaling $1,000 pursuant to other agreements with Nortec, which were charged to research and development expenses as incurred. Pursuant to the agreements, 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 its first commercial sale. Par entered into the Advancis Licensing Agreement, dated September 4, 2003, with Advancis to market the antibiotic Clarithromycin XL. Pursuant to the Advancis Licensing Agreement, Advancis is responsible for the development and manufacture of the product, while Par will be responsible for marketing, sales and distribution. If certain provisions in the Advancis Licensing Agreement are met, Par has agreed to pay Advancis an aggregate amount of up to $6,000 based on the achievement of certain milestones contained in the Agreement. An ANDA for the product is expected to be submitted to the FDA in the near future. Pursuant to the Advancis Licensing Agreement, Par agreed to pay Advancis a certain percentage of the gross profits, as defined in the Agreement, on all sales of the product if it is successfully developed and introduced into the market. Par entered into an agreement with BMS, dated August 6, 2003, to license the brand name Megace(R) to be used for a potential new product currently in development. The product, if successfully developed, would be a line extension of the Company's megestrol acetate oral suspension products. Pursuant to this agreement, Par paid BMS $5,000 in August 2003, which is included in intangible assets on the Company's consolidated balance sheets at December 31, 2003. As part of this agreement, Par also provided BMS with funding of approximately $400 in fiscal year 2003 to support the active promotion of the brand, which was expensed as incurred, and will provide an additional $1,600 throughout 2004 to help retain brand equity and awareness among physicians. In November 2002, the Company amended its agreement, dated November 2001, with Pentech to market paroxetine capsules. Pursuant to the Pentech Supply and Marketing Agreement, the Company paid all legal expenses up to $2,000, which were expensed as incurred, to obtain final regulatory approval. Legal expenses in excess of $2,000 are fully creditable against future profit payments to Pentech. The Company had agreed to reimburse Pentech for costs associated with the project of up to $1,300 for fiscal year 2003. In fiscal year 2003, the Company paid Pentech $771 of these costs, which were charged to research and development expenses as incurred, pursuant to the Pentech Supply and Marketing Agreement. The Company is negotiating with Pentech to further amend the Pentech Supply and Marketing Agreement concerning gross profit splits, reimbursement of research and development expenses and sharing of legal expenses and other costs related to paroxetine. In July 2002, the Company and Three Rivers entered into a 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'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 expense, and has agreed to pay Three Rivers $500 at such time as Par commercially launches the product. 29 Pursuant to the Genpharm 11 Product Agreement, Genpharm has agreed to develop products, submit all corresponding ANDAs to the FDA and subsequently manufacture the products covered under the agreement. 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. The Company will also be required to pay an additional non-refundable fee of up to $414 based upon FDA acceptance of certain filings, as defined in the agreement. In December 2001, the Company made its first payment of a potential equity investment of up to $2,438 to be made over a period of time in High Rapids, Inc. ("HighRapids"), a Delaware corporation. High Rapids is a software developer and the 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 of 1,330 shares of the common stock of HighRapids. HighRapids is to utilize the Company's cash infusion for working capital and operating expenses. Through December 31, 2003, the Company had invested $1,386 of its potential investment. Due to HighRapids' current operating losses and the Company's evaluation of its short-term prospects for profitability, the investments were expensed as incurred and included in other expense on the Company's consolidated statements of operations (see "Notes to Consolidated Financial Statements - Note 14 - Commitments, Contingencies and Other Matters-Other Matters"). In April 2001, Par entered into a licensing agreement with Aveva to market a generic clonidine transdermal patch (Catapres TTS(R)). Under such agreement, Aveva is responsible for the development and manufacture of the product, while Par is responsible for marketing, sales and distribution. Pursuant to the agreement, Par paid Aveva $1,167 in fiscal year 2001 and $833 in 2002, which were charged to research and development expenses in the respective years. In addition, Par has agreed to pay Aveva $1,000 upon FDA approval of the product and a royalty on all sales of the product. 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, including the proceeds from the issuance of its convertible debt. The Company anticipates that its capital spending in fiscal year 2004 will not exceed its levels of fiscal year 2003. Implementation of the Company's business plan may require additional debt and/or equity financing and there can be no assurance that the Company will be able to obtain any additional required financing when needed and on terms acceptable or favorable to it. FINANCING At December 31, 2003, the Company's total outstanding long-term debt, including the current portion, was $200,333. The amount consisted primarily of senior subordinated convertible notes and capital leases for computer equipment. In September 2003, the Company sold an aggregate principal amount of $200,000 of senior subordinated convertible notes pursuant to Rule 144A under the Securities Act of 1933, as amended. The notes bear interest at an annual rate of 2.875%, payable semi-annually on March 30 and September 30 of each year, with the first payment due on March 30, 2004. The notes are convertible into Common Stock at an initial conversion price of $88.76 per share, upon the occurrence of certain events. The notes mature on September 30, 2010, unless earlier converted or repurchased. The Company may not redeem the notes prior to their maturity date. The Company decided not to move a portion of FineTech's operation, including personnel and technological resources to a laboratory facility in Rhode Island and, in October 2003, paid the outstanding balance on the industrial revenue bond that was to be used for this operation. In December 1996, Par entered into a loan agreement with GECC. The loan agreement, as amended in December 2002, provided Par with a revolving line of credit expiring in March 2005, pursuant to which Par was permitted to borrow up to the lesser of (i) the borrowing base established under the Loan Agreement or (ii) $30,000. The Company terminated the loan agreement in October 2003. 30 At December 31, 2002, the Company's total outstanding long-term debt, including the current portion, amounted to $3,022. The amount consisted primarily of an outstanding mortgage loan with a bank, an industrial revenue bond and capital leases for computer equipment. The Company paid the remaining balance on the mortgage loan in February 2003. 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 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 uncertainties 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 ALLOWANCES: The Company recognizes revenues for product sales when title and risk of loss pass to its customers, and simultaneously records estimates for sales returns, chargebacks, rebates, shelf-stock or price protection adjustments or other sales allowances, as reductions in revenues, with corresponding adjustments to the accounts receivable allowances (see "Notes to Consolidated Financial Statements- Note 3 - Accounts Receivable"). The Company has the historical experience and access to other information, including the total demand for each drug that the Company manufactures or distributes, the Company's market share, recent or pending new drug introductions, inventory practices of the Company's customers, 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 its reserves accordingly if and when actual experience differs from previous estimates. The Company's reserves related to the items described above at December 31, 2003 and 2002 totaled $139,748 and $113,008, 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 providers. The accounts receivable allowances include provisions for returns. 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 and (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. The accounts receivable allowances also include provisions for doubtful accounts and price adjustments, including terms discounts, sales promotions and shelf-stock adjustments. Terms discounts are given to customers that pay within a specific period of time. The Company may conduct sales or trade show promotions 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. Shelf-stock adjustments are typically provided to a customer when the Company lowers its invoice pricing and provides a credit for the difference between the old and new invoice prices for the inventory that the customer had on hand at the time of the price reduction. 31 The Company will generally offer price protection for sales of new generic drugs for which it has a market exclusivity period. Such price protection accounts for the fact that the prices of such drugs typically will decline, sometimes substantially, when additional generic manufacturers introduce and market a comparable generic product following the expiration of an exclusivity period. Such price protection plans, which are common in the Company's industry, generally provide for a shelf-stock adjustment 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 may also offer price protection with respect to existing products for which it anticipates significant price erosion through an increase in competition. 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 that 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 that 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, 2003 and 2002, the Company did not have any significant price protection reserves. 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 third parties 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 payments related to each agreement. Capitalized costs are amortized over the estimated useful lives over which the related cash flows are expected to be generated and charged to cost of goods sold. Market, regulatory or legal factors, among other things, may affect the realizability of the projected cash flows that an agreement was initially 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 valuations performed by independent third-party valuation firms. 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 $35,564 and $35,692, respectively, at December 31, 2003 and 2002. 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 - Note 14 - - 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 that 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 or, in cases where the Company is plaintiff, prosecute these actions vigorously. 32 NEW ACCOUNTING PRONOUNCEMENTS: In June 2003, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company completed its evaluation of the impact of the adoption of this statement and determined that it did not have a material impact on the Company's consolidated financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends Statement 133 for decisions made (1) as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, (2) in connection with other FASB projects dealing with financial instruments and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative, in particular, the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, the meaning of underlying, and the characteristics of a derivative that contains financing components. This Statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of this Statement should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions, which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The Company determined the adoption of this Statement did not have a material impact on the Company's consolidated financial position or results of operations. In January 2003, the FASB issued Financial Interpretation Number ("FIN") No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements". FIN 46 establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46 (revised December 2003) ("FIN 46R"). In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. This revised interpretation is effective for all entities no later than the end of the first reporting period that ends after March 15, 2004. The Company does not have any investments in or contractual relationship or other business relationship with a variable interest entity and, therefore, the adoption of this interpretation will not have any impact on its financial position or results of operations. In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" ("FIN 45"), an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. FIN 45 elaborates on the disclosures required to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this interpretation did not have a material impact on the Company's consolidated financial position or results of operations. SUBSEQUENT EVENTS Par and Advancis have signed a letter of intent, dated March 1, 2004, subject to execution of a definitive agreement, to enter into an agreement to develop and market a novel formulation of the antibiotic amoxicillin. The companies intend to develop a low dose pulsatile form of amoxicillin, utilizing Advancis' proprietary PULSYS(TM) technology. A 505(b)(2) NDA seeking marketing clearance for amoxicillin PULSYS(TM) is expected to be submitted to the FDA by Advancis in 2005. The companies expect to add additional products to their collaboration in the future. Under the terms of a definitive agreement, Par would pay Advancis $5,000 over 12 months and fund development expenses going forward. Advancis will grant Par the exclusive right to sell and distribute the product and the co-exclusive right to promote and market the product. Advancis will be responsible for the manufacturing program. Par and Advancis will share equally in marketing expenses 33 and profits. The companies expect to finalize the agreement in the second quarter of 2004. On March 9, 2004, the Congress of California Seniors brought an action against GSK and the Company concerning the sale of paroxetine in the State of California. The Company intends to defend vigorously the claims set forth in the complaint. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------------------------------------------------------------------- The Company is subject to market risk primarily from changes in the market values of investments in marketable debt and government agency securities. These instruments are classified as available for sale securities for financial reporting purposes and have minimal or no interest risk due to their short-term nature. Professional portfolio managers managed 100% of these available for sale securities at December 31, 2003. Additional investments are made in overnight deposits and money market funds. These instruments are classified as cash and cash equivalents for financial reporting purposes and have minimal or no interest risk due to their short-term nature. The following table summarizes the available for sale securities that subject the Company to market risk at December 31, 2003 and 2002: 2003 2002 ---- ---- Debt securities issued by various state and local municipalities and agencies $185,450 $- Securities issued by United States government and agencies 10,050 - ------ Total $195,500 $- ======= = AVAILABLE FOR SALE SECURITIES: The primary objectives for the Company's investment portfolio are liquidity and safety of principal. Investments are made to achieve the highest rate of return while retaining safety of principal. The investment policy limits investments to certain types of instruments issued by institutions and governmental agencies with investment-grade credit ratings. A significant change in interest rates could affect the market value of the $195,500 of available for sale securities that have a maturity greater than one year. The Company is also subject to market risk in respect of its investment in Advancis, which is subject to fluctuations in the price of Advancis common stock, which is publicly traded. The Company paid $10,000 to purchase one million shares of the common stock of Advancis at $10 per share in its initial public offering of six million shares on October 16, 2003. The transaction closed on October 22, 2003. The value of the Company's investment in Advancis as of December 31, 2003 was $7,500. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------- --------------------------------------------------------- See Index to Consolidated Financial Statements and Schedule. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------- ----------------------------------------------------------- AND FINANCIAL DISCLOSURE. ------------------------- In May 2002, the Company engaged Deloitte & Touche LLP ("Deloitte & Touche") to serve as the Company'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 fiscal year 2001 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 the Company's consolidated financial statements for 2001 was issued on an unqualified basis in conjunction with the filing of the Company's Annual Report on Form 10-K. During fiscal year 2001, 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 that, 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. 34 The decision to change accountants was recommended by the Audit Committee, and approved by the Board, on May 1, 2002. During 2003, there were no disagreements with Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure, or 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 2003 and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K. ITEM 9A. CONTROLS AND PROCEDURES. - -------- ------------------------ Based on an evaluation under the supervision and with the participation of the Company's management, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of December 31, 2003 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. There were no changes in the Company's internal control over financial reporting identified in management's evaluation during the fourth quarter of fiscal 2003 that have materially affected or are reasonably likely to materially affect the Company's internal controls over financial reporting. 35 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------- -------------------------------------------------- The Company hereby incorporates by reference the information set forth under the caption "Election of Directors" from its definitive Proxy Statement to be delivered to stockholders of the Company in connection with its 2004 Annual Meeting of Stockholders scheduled to be held on May 26, 2004. ITEM 11. EXECUTIVE COMPENSATION. - -------- ----------------------- The Company hereby incorporates by reference the information set forth under the caption "Executive Compensation" from its definitive Proxy Statement to be delivered to stockholders of the Company in connection with its 2004 Annual Meeting of Stockholders scheduled to be held on May 26, 2004. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- --------------------------------------------------------------- The Company hereby incorporates by reference the information set forth under the caption "Security Ownership" from its definitive Proxy Statement to be delivered to stockholders of the Company in connection with its 2004 Annual Meeting of Stockholders scheduled to be held on May 26, 2004. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- ----------------------------------------------- The Company hereby incorporates by reference the information set forth under the caption "Certain Relationships and Related Transactions" from its definitive Proxy Statement to be delivered to stockholders of the Company in connection with its 2004 Annual Meeting of Stockholders scheduled to be held on May 26, 2004. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. - -------- --------------------------------------- Information required by Item 14 of this Form and the audit committee's pre-approval policies and procedures regarding the engagement of the principal accountant is incorporated herein by reference to the caption "Audit Committee Report - Independent Auditor Fees" from the Company's definitive Proxy Statement to be delivered to stockholders of the Company in connection with its 2004 Annual Meeting of Stockholders scheduled to be held on May 26, 2004. 36 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 Agreement and Plan of Merger, dated as of May 12, 2003 - previously filed as an exhibit to the Registrant's Report on Form 8-K dated July 9, 2003 and incorporated herein by reference. 3.1 Certificate of Incorporation of the Company, dated May 9, 2003 - previously filed as an exhibit to the Registrant's Report on Form 8-K dated July 9, 2003 and incorporated herein by reference. 3.2 By-Laws of the Company, as last amended on June 18, 2003 - previously filed as an exhibit to the Registrant's Report on Form 8-K dated July 9, 2003 and incorporated herein by reference. 10.1 1989 Employee Stock Purchase Program of the Company - 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 Company, 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 Amended and Restated 1997 Directors' Stock Option Plan - previously filed on July 1, 2003 as an exhibit to the Registrant's Registration Statement on Form S-8 (File No. 333-106685) 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 (As Amended on April 26, 2002, January 14, 2003, May 6, 2003 and June 18, 2003) - previously filed on June 30, 2003 as an exhibit to the Registrant's Registration Statement on Form S-8 (File No. 333-106681) 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. 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. 37 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 Terms of Separation from Employment, Consulting, and Post-Employment Obligations, dated as of June 18, 2003, between Pharmaceutical Resources, Inc. and Kenneth I. Sawyer - previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 and incorporated herein by reference. 10.9.1 Employment Agreement, dated as of February 9, 2004, by and between Pharmaceutical Resources, Inc., and Scott L. Tarriff. 10.9.2 First Amendment to Employment Agreement, dated as of February 20, 2004, between Pharmaceutical Resources, Inc., and Dennis J. O'Connor. 10.9.3 Employment Agreement, dated as of February 6, 2003, by and between Pharmaceutical Resources, Inc., and Dennis J. O'Connor - previously filed as an exhibit to the Registrant's Annual Report for the 2002 fiscal year and incorporated herein by reference. 10.9.4 Employment Agreement, dated as of December 18, 2002, by and between Pharmaceutical Resources, Inc., and Dr. Arie Gutman - previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 2003 and incorporated herein by reference. 10.9.5 Employment Agreement, dated as of November 24, 2003, by and between Pharmaceutical Resources, Inc. and Thomas Haughey. 10.10 Lease Agreement, dated as of January 1, 1993, between Par Pharmaceutical, Inc. 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. 10.11 Lease Agreement, dated as of May 24, 2002, between Par Pharmaceutical, Inc. and 300 Tice Realty Associates L.L.C. 10.11.1 Second Amendment to Lease Agreement, dated as of December 19, 2002, between Par Pharmaceutical, Inc. and 300 Tice Realty Associates L.L.C. 10.11.2 Third Amendment to Lease Agreement, dated as of December 20, 2002, between Par Pharmaceutical, Inc. and 300 Tice Realty Associates L.L.C. 10.12 Lease Extension and Modification Agreement, dated as of August 30, 1997, between Par Pharmaceutical, Inc. 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. 10.14 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.* 10.19 Distribution Agreement, dated March 25, 1998, between the Company and Genpharm, Inc. - previously filed as an exhibit to the 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 the Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. 38 10.22 Manufacturing and Supply Agreement, dated April 30, 1997, between Par and BASF Corporation - previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997 and incorporated herein by reference. 10.23 Agreement of Lease, dated as of March 17, 1999, between Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. - previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated herein by reference. 10.24 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 the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated herein by reference. 10.25 Letter Agreement, dated as of January 21, 1999, between the Registrant and Genpharm, Inc. - previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated herein by reference.* 10.26 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 the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference. 10.27 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 the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference.* 10.28 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 the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference.* 10.29 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 the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference. 10.30 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 the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference.* 10.31 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 the Registrant's Report on Form 8-K dated January 11, 2002 and incorporated herein by reference. 10.32 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 the 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 the 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 the Registrant's Report on Form 8-K, dated March 7, 2002, and incorporated herein by reference. 39 10.37 11 Product Development Agreement, effective April 2002, between Pharmaceutical Resources, Inc. and Genpharm, Inc. - previously filed as an exhibit to the 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 Par SVC, LLC, SVC Pharma Inc., and UDF LP, a Delaware limited partnership, and the other parties named therein - previously filed as an exhibit to the 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 the 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 the 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 the 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 Par Pharmaceutical, Inc. and Three Rivers Pharmaceuticals, LLC. - previously filed as an exhibit to the 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 Par Pharmaceutical, Inc. and Three Rivers Pharmaceuticals, LLC. - previously filed as an exhibit to the 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. - previously filed as an exhibit to the Registrant's Annual Report for the 2002 fiscal year and incorporated herein by reference. * 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. - previously filed as an exhibit to the Registrant's Annual Report for the 2002 fiscal year and incorporated herein by reference * 10.46 Asset Purchase Agreement, dated December 5, 2002, by and between Israel Pharmaceutical Resources L.P. and Trima, Israel Pharmaceutical Products, Maabarot LTD- previously filed as an exhibit to the Registrant's Annual Report for the 2002 fiscal year and incorporated herein by reference. 10.47 Supply and Distribution Agreement, dated as of December 20, 2002, between Genpharm, Inc., Leiner Health Products, LLC and Par Pharmaceutical, Inc. - previously filed as an exhibit to the Registrant's Annual Report for the 2002 fiscal year and incorporated herein by reference. * 10.48 Amended and Restated License and Supply Agreement, dated as of April 16, 2003, among SB Pharmco Puerto Rico Inc., SmithKline Beecham Corporation, Beecham Group p.l.c. and Par Pharmaceutical, Inc.* - previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 and incorporated herein by reference. 10.49 Amended and Restated Settlement Agreement, dated as of April 16, 2003, among SmithKline Beecham Corporation, Beecham Group p.l.c. and Par Pharmaceutical, Inc. and Pentech Pharmaceuticals, Inc.* - 40 previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 and incorporated herein by reference. 10.50 License Agreement, dated as of August 6, 2003, by and between Mead Johnson & Company, Bristol-Myers Squibb Company and Par Pharmaceutical, Inc.* - previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 2003 and incorporated herein by reference. 10.51 Supply and Distribution Agreement, dated as of September 4, 2003, by and between Advancis Pharmaceutical Corporation and Par Pharmaceutical, Inc.* - previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 2003 and incorporated herein by reference. 10.52 Purchase Agreement between the Company, Bear, Stearns & Co. Inc., CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray Inc., dated September 25, 2003 - previously filed on December 24, 2003 as an exhibit to the Registrant's Registration Statement on Form S-3 (File No. 333-111567) and incorporated herein by reference. 10.53 Indenture between the Company and American Stock Transfer & Trust Company, dated September 30, 2003 - previously filed on December 24, 2003 as an exhibit to the Registrant's Registration Statement on Form S-3 (File No. 333-111567) and incorporated herein by reference. 10.54 Registration Rights Agreement between the Company, Bear, Stearns & Co. Inc., CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray Inc., dated September 30, 2003- previously filed on December 24, 2003 as an exhibit to the Registrant's Registration Statement on Form S -3 (File No. 333-111567) and incorporated herein by reference. 10.55 Product Development and Patent License Agreement, dated as of October 22, 2003, by and between Nortec Development Associates, Inc. and Par Pharmaceutical, Inc.* 10.56 Stock Purchase and Shareholders Agreement, dated as of October 22, 2003, by and between Nortec Development Associates, Inc., Nortec Holding LLC and Par Pharmaceutical, Inc.* 21 List of Subsidiaries. 31.1 Certification of Principal Executive Officer 31.2 Certification of Principal Financial Officer 32.1 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. 32.2 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 fourth quarter ended December 31, 2003, the Company filed a Current Report on Form 8-K on September 29, 2003. - ------------------------------------------ * Certain portions have been omitted and have been filed with the Commission pursuant to a request for confidential treatment thereof. 41 SIGNATURES Pursuant to the requirements of Section 13 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 15, 2004 PHARMACEUTICAL RESOURCES, INC. ------------------------------ (REGISTRANT) /s/ Scott L. Tarriff ------------------------------ Scott L. Tarriff PRESIDENT AND CHIEF 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/ Mark Auerbach Executive Chairman of the March 15, 2004 - ----------------- Board of Directors Mark Auerbach /s/ Scott L. Tarriff President, Chief Executive March 15, 2004 - -------------------- Officer and Director Scott L. Tarriff /s/ Dennis J. O'Connor Vice President and Chief March 15, 2004 - ---------------------- Financial Officer Dennis J. O'Connor (Principal Accounting and Financial Officer) /s/ John D. Abernathy Director March 15, 2004 - --------------------- John D. Abernathy /s/ Arie Gutman Director March 15, 2004 - --------------- Arie Gutman /s/ Peter S. Knight Director March 15, 2004 - ------------------- Peter S. Knight /s/ Ronald M. Nordmann Director March 15, 2004 - ---------------------- Ronald M. Nordmann /s/ Peter W. Williams Director March 15, 2004 - --------------------- Peter W. Williams 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, 2003, 2002 AND 2001 PAGE ---- INCLUDED IN PART II: -------------------- Independent Auditors' Reports F-2 and F-3 Consolidated Balance Sheets at December 31, 2003 and 2002 F-4 Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit) for the years ended December 31, 2003, 2002 and 2001 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 F-6 Notes to Consolidated Financial Statements F-7 through F-30 INCLUDED IN PART IV: -------------------- SCHEDULE: II Valuation and qualifying accounts F-31 ------------------------------------------------- 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 Stockholders of Pharmaceutical Resources, Inc.: We have audited the accompanying consolidated balance sheets of Pharmaceutical Resources, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations and retained earnings (accumulated deficit) and cash flows for the two years in the period ended December 31, 2003. Our audits also included the financial statement schedule for the two years in the period ended December 31, 2003, listed in the Index at Item 15. 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 audits. Pharmaceutical Resources, Inc.'s consolidated financial statements and financial statement schedule for the year 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 a restatement to the consolidated financial statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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. 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, 2003 and 2002, and the results of their operations and their cash flows for the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule for the two years ended December 31, 2003, 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 February 25, 2004 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, 2003 AND 2002 (In Thousands, Except Share Data) ASSETS 2003 2002 ------ ---- ---- Current assets: Cash and cash equivalents $162,549 $65,121 Available for sale securities 195,500 - Accounts receivable, net of allowances of $40,357 and $36,257 157,707 55,310 Inventories, net 66,713 51,591 Prepaid expenses and other current assets 10,033 6,089 Deferred income tax assets 34,473 32,873 ------ ------ Total current assets 626,975 210,984 Property, plant and equipment, at cost, less accumulated depreciation and amortization 46,813 27,055 Investment - Advancis 7,500 - Intangible assets, net 35,564 35,692 Goodwill 24,662 24,662 Deferred charges and other assets 6,899 1,064 Unexpended industrial revenue bond proceeds - 2,000 Non-current deferred income tax assets, net 14,399 - ------ ----- Total assets $762,812 $301,457 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $122 $596 Accounts payable 20,157 14,637 Payables due to distribution agreement partners 88,625 18,163 Accrued salaries and employee benefits 7,363 5,175 Accrued expenses and other current liabilities 24,654 10,034 Income taxes payable 26,252 26,074 ------ ------ Total current liabilities 167,173 74,679 ------- ------ Long-term debt, less current portion 200,211 2,426 Deferred income tax liabilities, net - 3,562 Other long-term liabilities 347 - Commitments and contingencies Stockholders' equity: Preferred Stock, par value $.0001 per share; authorized 6,000,000 shares; none issued and outstanding - - Common Stock, par value $.01 per share; authorized 90,000,000 shares; issued and outstanding 34,318,163 and 32,804,480 shares 343 328 Additional paid-in capital 171,931 118,515 Retained earnings 224,480 101,947 Accumulated other comprehensive loss (1,673) - ----- ------------ Total stockholders' equity 395,081 220,790 ------- ------- Total liabilities and stockholders' equity $762,812 $301,457 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. F-4 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (In Thousands, Except Per Share Amounts) 2003 2002 2001 ---- ---- ---- Revenues: Net product sales $646,023 $380,848 $271,035 Other product related revenues 15,665 755 - ------ --- ----------- Total revenues 661,688 381,603 271,035 Cost of goods sold 378,513 198,313 161,306 ------- ------- ------- Gross margin 283,175 183,290 109,729 ------- ------- ------- Operating expenses (income): Research and development 24,581 17,910 11,113 Selling, general and administrative 57,575 40,215 21,878 Settlements - (9,051) - Acquisition termination charges - 4,262 - ------ ----- ------ Total operating expenses 82,156 53,336 32,991 ------ ------ ------ Operating income 201,019 129,954 76,738 Other expense, net (95) (305) (364) Interest (expense) income (281) 604 (442) --- --- --- Income before provision for income taxes 200,643 130,253 75,932 Provision for income taxes 78,110 50,799 22,010 ------ ------ ------ NET INCOME 122,533 79,454 53,922 Retained earnings (accumulated deficit), beginning of year 101,947 22,493 (31,429) ------- ------ ------ Retained earnings, end of year $224,480 $101,947 $22,493 ======== ======= ====== NET INCOME PER SHARE OF COMMON STOCK: BASIC $3.66 $2.46 $1.76 ==== ==== ==== DILUTED $3.54 $2.40 $1.68 ==== ==== ==== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: BASIC 33,483 32,337 30,595 ====== ====== ====== DILUTED 34,638 33,051 32,190 ====== ====== ====== 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, 2003, 2002 AND 2001 (In Thousands) 2003 2002 2001 ---- ---- ---- Cash flows from operating activities: Net income $122,533 $79,454 $53,922 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 667 1,045 (20,081) Depreciation and amortization 10,131 5,775 3,349 Inventory reserves (748) 1,073 1,498 Allowances against accounts receivable 4,100 (10,911) 43,214 Settlements - (9,051) - Stock option activity 4,173 37 - Other 628 991 181 Changes in assets and liabilities: Increase in accounts receivable (106,497) (6,390) (58,917) Increase in inventories (14,374) (21,138) (12,707) Increase in prepaid expenses and other assets (8,041) (10,634) (4,377) Increase (decrease) in accounts payable 5,520 (3,469) 6,532 Increase (decrease) in payables due to distribution agreement partners 70,462 (14,132) 30,607 Increase in accrued expenses and other liabilities 16,808 7,610 3,569 Increase in income taxes payable 12,794 11,528 26,531 ------ ------ ------ Net cash provided by operating activities 118,156 31,788 73,321 ------- ------ ------ Cash flows from investing activities: Capital expenditures (24,035) (6,921 ) (4,622) Purchases of available for sale securities (195,530) - - Purchase of investments - Advancis (10,000) - - Acquisition of FineTech, net of cash acquired - (32,618) - Proceeds from sale of fixed assets - 751 1,158 ------- --- ----- Net cash used in investing activities (229,565) (38,788) (3,464) ------- ------ ----- Cash flows from financing activities: Proceeds from issuances of Common Stock 34,194 2,656 7,597 Sales of warrants 32,563 - - Purchase of call options (49,368) - - Debt issuance costs (5,863) - - Issuance of long-term debt 200,301 - - Restricted proceeds from industrial revenue bond - 2,000 - Net payments from revolving credit line - - (9,666) Principal payments under long-term debt and other borrowings (2,990) (277) (268) ----- --- --- Net cash provided by (used in) financing activities 208,837 4,379 (2,337) ------- ----- ----- Net increase (decrease) in cash and cash equivalents 97,428 (2,621) 67,520 Cash and cash equivalents at beginning of year 65,121 67,742 222 ------ ------ --- Cash and cash equivalents at end of year $162,549 $65,121 $67,742 ======= ====== ====== Supplemental disclosure of cash flow information: Cash paid during the year for: Taxes $64,790 $38,211 $15,620 ====== ====== ====== Interest $168 $148 $626 === === === Non-cash transactions: Tax benefit from exercise of stock options $12,616 $220 $11,765 ====== === ====== Tax benefit from purchased call options $19,253 $- $- ====== = = Decrease in fair value of available for sale securities $2,530 $- $- ===== = =
The accompanying notes are an integral part of these consolidated financial statements. F-6 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 (Amounts 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 principally in the United States. In addition, the Company develops and manufactures, in small quantities, complex synthetic active pharmaceutical ingredients through its wholly-owned subsidiary, FineTech Laboratories Ltd. ("FineTech"), based in Haifa, Israel, and sells a limited number of mature brand name drugs through an agreement between Par and Bristol Myers Squibb ("BMS"). Marketed products are principally in the 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. As of June 24, 2003, the Company changed its state of incorporation from New Jersey to Delaware. The reincorporation was approved by the holders of a majority of the Company's outstanding shares of common stock, voting in person or by proxy, at its Annual Meeting of Shareholders held on June 19, 2003. The reincorporation was effected by merging the Company with and into Pharmaceutical Resources, Inc., a Delaware corporation and then a wholly-owned subsidiary of the Company, with the Delaware corporation surviving (the "Merger"). The reincorporation was effected primarily because the Company's board of directors believed that governance under Delaware law would permit the Company to manage its corporate affairs more effectively and efficiently than under New Jersey law. The reincorporation did not result in any change in the Company's business, management, assets, liabilities, board of directors or locations of its principal facilities or headquarters. Pursuant to the Merger, each share of common stock of the New Jersey corporation was automatically converted into one share of common stock, $.01 par value, of the Delaware corporation. As a result of its reincorporation, the Company became the successor issuer to the New Jersey corporation under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and succeeded to the New Jersey corporation's reporting obligations thereunder. Pursuant to Rule 12g-3(a) under the Exchange Act, the Company's common stock is registered under Section 12(b) of the Exchange Act. On May 23, 2003, Par also changed its state of incorporation from New Jersey to Delaware. The Par reincorporation was effected by merging Par with and into Par Pharmaceutical, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, with the Delaware corporation surviving. The Par reincorporation was approved by the Company as the sole shareholder of each of the merging entities. 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. On April 17, 2002, the Company purchased FineTech 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 chargebacks, 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 its results of operations or financial condition. F-7 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. The Company records distribution costs related to shipping product to the Company's customers, primarily through the use of common carriers or external distribution services, in selling, general and administrative expenses. Distribution costs for fiscal years 2003, 2002 and 2001 were approximately $2,700, $2,800 and $1,300, respectively. 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, including intangible assets with definitive lives, 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. 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 (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 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 valuations performed by independent third party valuation firms. 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. F-8 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 that 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 ALLOWANCES: The Company recognizes revenues for product sales when title and risk of loss pass to its customers, and simultaneously records estimates for sales returns, chargebacks, rebates, shelf-stock or price protection adjustments or other sales allowances, as a reduction in revenues, with a corresponding adjustment to the accounts receivable allowances. 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 HMOs, which have contracts with the Company. The Company also generally offers price protection for sales of new generic drugs for which it has a market exclusivity period. Such price protection accounts for the fact that the prices of such drugs typically will decline, sometimes substantially, when additional generic manufacturers introduce and market a comparable generic product following the expiration of an exclusivity period. Such price protection plans, which are common in the Company's industry, generally provide for a shelf-stock adjustment 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 may also offer price protection with respect to existing products for which it anticipates significant price erosion through an increase in competition. The Company records charges (reductions of revenue) 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 expiration of the exclusivity period. In each of the instances described above, 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 sales allowances and returns, and records reserves for such sales allowances and returns at the time of sale. EARNINGS PER COMMON SHARE DATA: Earnings per common share were computed by dividing earnings by the weighted average number of common shares outstanding. Earnings per common share assuming dilution, were computed assuming that all potentially dilutive securities, including "in-the-money" stock options, were converted into common shares. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of the Company's accounts receivable, accounts payable and accrued liabilities approximate fair market values 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 "Note 3 - Accounts Receivable-Major Customers"). CASH EQUIVALENTS: 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, 2003, cash equivalents were deposited in financial institutions and consisted of immediately available fund balances. F-9 MARKETABLE SECURITIES: The Company determines the appropriate classification of all marketable securities as held-to-maturity, available-for-sale or trading at the time of purchase, and re-evaluates such classification as of each balance sheet date in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Investments in equity securities that have readily determinable fair values are classified and accounted for as available for sale. The Company assesses whether temporary or other-than-temporary gains or losses on its marketable securities have occurred due to increases or declines in fair value or other market conditions. Because the Company has determined that all of its marketable securities are available for sale, unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders' equity. 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 of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under APB Opinion 25, compensation expense is based on any difference, as of the date of a stock option grant, between the fair value of the Company's common stock and the option's per share 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 disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effects of the method used on reported results. The following table illustrates the effects on net income and net income per share of common stock if the Company had applied the fair value recognition provisions of SFAS 123 to its stock-based employee compensation: FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Net income as reported $122,533 $79,454 $53,922 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 1,263 - - Deduct: Stock-based employee compensation expense determined under the fair value based method, net of related tax effects (10,372) (7,702) (5,137) ------ ----- ----- Pro forma net income $113,424 $71,752 $48,785 ======= ====== ====== Net income per share of common stock: As reported -Basic $3.66 $2.46 $1.76 ==== ==== ==== As reported -Diluted $3.54 $2.40 $1.68 ==== ==== ==== Pro forma -Basic $3.39 $2.22 $1.59 ==== ==== ==== Pro forma -Diluted $3.27 $2.17 $1.52 ==== ==== ==== 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 segment entity. RECLASSIFICATIONS: Certain items in the consolidated financial statements and in the Notes to Consolidated Financial Statements for the prior periods have been reclassified to conform to the current period's consolidated financial statement presentation. F-10 NEW ACCOUNTING PRONOUNCEMENTS: In June 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company completed its evaluation of the impact of the adoption of this statement and determined that it did not have a material impact on the Company's consolidated financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends Statement 133 for decisions made (1) as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, (2) in connection with other FASB projects dealing with financial instruments and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative, in particular, the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, the meaning of underlying, and the characteristics of a derivative that contains financing components. This Statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of this Statement should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions, which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The Company determined that the adoption of this Statement did not have a material impact on the Company's consolidated financial position or results of operations. In January 2003, the FASB issued Financial Interpretation Number ("FIN") No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements". FIN 46 establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46 (revised December 2003) ("FIN 46R"). In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. This revised interpretation is effective for all entities no later than the end of the first reporting period that ends after March 15, 2004. The Company does not have any investments in or contractual relationship or other business relationship with a variable interest entity and, therefore, the adoption of this interpretation will not have any impact on its financial position or results of operations. In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" ("FIN 45"), an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this interpretation did not have a material impact on the Company's consolidated financial position or results of operations. NOTE 2 - AVAILABLE FOR SALE SECURITIES: At December 31, 2003, all of the Company's investments in marketable securities were classified as available-for-sale, and as a result, were reported at fair value. The following is a summary of the Company's available for sale securities, classified as short-term, at December 31, 2003: UNREALIZED FAIR COST GAIN LOSS VALUE ---- ---- ---- ----- Debt securities issued by various state and local municipalities and agencies $185,450 $- $- $185,450 Securities issued by United States government and agencies 10,080 - (30) 10,050 ------ -- -- ------ Total $195,530 - $(30) $195,500 ======= == == ======= F-11 All of the securities are available for immediate sale and have been classified as short-term. There were no proceeds from the sale of securities in fiscal year 2003. The following table summarizes the contractual maturities of debt securities at December 31, 2003: FAIR COST VALUE ---- ----- Less than one year $10,080 $10,050 Due in 1-2 years - - Due in 2-5 years - - Due after 5 years 185,450 185,450 ------- ------- Total $195,530 $195,500 ======= ======= In addition to the short-term investments described above, the Company paid $10,000 to purchase one million shares of the common stock of Advancis Pharmaceutical Corporation ("Advancis"), a pharmaceutical company based in Germantown, Maryland, at $10 per share in its initial public offering of six million shares on October 16, 2003. The transaction closed on October 22, 2003. The Company's investment represents an ownership position of 4.4% of the outstanding common stock of Advancis. As of December 31, 2003, the fair value of the Company's investment in Advancis was $7,500 based on the market value of the common stock of Advancis at that date. The Company recorded an unrealized loss of $2,500 in the investment that was charged to accumulated other comprehensive loss, net of taxes of $975, at December 31, 2003. Advancis' has stated that its focus is on developing and commercializing pulsatile drug products that fulfill unmet medical needs in the treatment of infectious disease. Unlike immediate release antibiotics, Advancis' antibiotics are delivered in three to five sequential pulses within the first six to eight hours following initial dosing. As referred to in "Note 8 - Research and Development Agreements", Par and Advancis have entered into a licensing agreement providing Par with the marketing rights to the antibiotic Clarithromycin XL. Clarithromycin XL is being developed as a generic equivalent to Abbott Laboratories' ("Abbott") Biaxin XL(R). NOTE 3 - ACCOUNTS RECEIVABLE: DECEMBER 31, DECEMBER 31, 2003 2002 ---- ---- Trade accounts receivable, net of customer rebates and chargebacks $196,888 $90,812 Other accounts receivable 1,176 755 ----- --- Allowances: Doubtful accounts 1,756 1,156 Returns 13,256 18,868 Price adjustments and allowances 25,345 16,233 ------ ------ 40,357 36,257 Accounts receivable, net of allowances $157,707 $55,310 ======= ====== The trade accounts receivable amounts presented above at December 31, 2003 and 2002 are net of provisions for customer rebates of $23,793 and $13,610, and for chargebacks of $75,598 and $63,141, respectively. Customer rebates are price reductions generally given to customers as an incentive to increase sales volume. Rebates are generally based on a customer's volume of purchases made during an applicable monthly, quarterly or annual period. Chargebacks are price adjustments provided to wholesale customers for product that they resell to specific healthcare providers on the basis of prices negotiated between the Company and the providers. The Company accepts returns of product in accordance with 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 and (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. F-12 In addition to returns, the accounts receivable allowances include provisions for doubtful accounts and price adjustments. Price adjustments include terms discounts, sales promotions and shelf-stock adjustments. Terms discounts are given to customers that pay within a specified period of time. The Company may conduct sales or trade show promotions 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. Shelf-stock adjustments are typically provided to a customer when the Company lowers its invoice pricing and provides a credit for the difference between the old and new invoice prices for the inventory that the customer has on hand at the time of the price reduction. The Company will generally offer price protection for sales of new generic drugs for which it has a market exclusivity period. Such price protection accounts for the fact that the prices of such drugs typically will decline, sometimes substantially, when additional generic manufacturers introduce and market a comparable generic product following the expiration of an exclusivity period. Such price protection plans, which are common in the Company's industry, generally provide for a shelf-stock adjustment 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. In addition, the Company may offer price protection with respect to existing products for which it anticipates significant price erosion through increases in competition. 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. Two generic competitors have been granted FDA approval to market generic versions of megestrol acetate oral suspension, but, as of December 31, 2003, did not have a significant effect on the Company's net sales of the product. The Company will continue to evaluate the effects of competition and will record a price protection reserve when, if and to the extent that it deems necessary. MAJOR CUSTOMERS: The Company's top four customers by sales volume accounted for approximately 17%, 13%, 11% and 11% of net sales in fiscal year 2003, 17%, 16%, 15% and 10% of net sales in fiscal year 2002 and 14%, 14%, 13% and 8% of net sales in fiscal year 2001. The amounts due from these four customers accounted for approximately 19%, 17%, 16% and 9% of the accounts receivable balance at December 31, 2003 and 8%, 11%, 7% and 2% of the accounts receivable balance at December 31, 2002. NOTE 4 -INVENTORIES, NET: DECEMBER 31, DECEMBER 31, 2003 2002 ---- ---- Raw materials and supplies, net $21,551 $17,400 Work in process and finished goods, net 45,162 34,191 ------ ------ $66,713 $51,591 ====== ====== NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET: DECEMBER 31, DECEMBER 31, 2003 2002 ---- ---- Land $2,231 $2,231 Buildings 26,445 21,509 Machinery and equipment 30,359 21,858 Office equipment, furniture and fixtures 15,271 8,284 Leasehold improvements 4,052 928 ----- --- 78,358 54,810 Less accumulated depreciation and amortization 31,545 27,755 ------ ------ $46,813 $27,055 ====== ====== Depreciation and amortization expense related to the property, plant and equipment was $3,896, $3,183 and $2,627, respectively, for the years ended December 31, 2003, 2002 and 2001. F-13 NOTE 6 - INTANGIBLE ASSETS, NET: DECEMBER 31, DECEMBER 31, 2003 2002 ---- ---- Trademark licensed from BMS $5,000 $- BMS Asset Purchase Agreement, net of accumulated amortization of $3,064 and $1,393 8,636 10,307 Product License fees, net of accumulated amortization of $1,135 and $0 9,170 9,199 Genpharm Distribution Agreement, net of accumulated amortization of $3,972 and $3,250 6,861 7,583 Intellectual property, net of accumulated amortization of $1,202 and $451 5,378 6,129 Genpharm Profit Sharing Agreement, net of accumulated amortization of $1,981 and $26 519 2,474 --- ----- $35,564 $35,692 ====== ====== 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 Inc. ("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, the Genpharm Profit Sharing Agreement and the trademark licensed from BMS are, or 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 acquired with the purchase of FineTech, 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. The Company's intangible assets included on its consolidated balance sheets at December 31, 2003 include the following: Par entered into an agreement with Mead Johnson & Company ("Mead") and BMS, dated August 6, 2003, to license the use of the Megace(R) trade name in connection with a potential new product being developed by Par in exchange for $5,000 paid by the Company in August 2003. Under the terms of the agreement, Par provided BMS funding of approximately $400 in fiscal year 2003 to support BMS's active promotion of Megace O/S(R) (megestrol acetate oral suspension), which was expensed as incurred, and has agreed to provide an additional $1,600 in fiscal 2004 to help retain its brand awareness among physicians. 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 and paid $1,024 in March 2002 and $1,025 in April 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. The amortization is included as a non-cash charge to cost of goods sold. In April 2002, the Company entered into an agreement (the "Genpharm 11 Product Agreement") with Genpharm, a Canadian subsidiary of Merck KGaA, 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 as product license fees, for two products, loratadine 10 mg tablets and mirtazapine tablets, both of which were brought to market in fiscal year 2003. The Company is marketing one of the products and receives a royalty on sales of the other product, which is being sold by another company. F-14 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 Abbreviated New Drug Application ("ANDA") for latanoprost, including a Paragraph IV certification that the existing patents for the product will not be infringed by Par's generic product. Par has reason to believe that its ANDA is the first to be filed for this drug with a Paragraph IV certification. In December 2001, Pharmacia, among others, initiated a patent infringement action against Par. Par intends to vigorously defend its position in the pending litigation with Pharmacia (see "Note 14 -Commitments, Contingencies and Other Matters-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 as product license fees. 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 as product license fees, 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 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 set of products covered by a distribution agreement with Genpharm (the "Genpharm Distribution Agreement") (see "Note 9 - 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 stockholders' 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". The aggregate value of $10,833 assigned to the Genpharm Distribution Agreement is being amortized on a straight-line basis over 15 years beginning in the third quarter of fiscal 1998. 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 Prilosec(R), and 15 other 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. The fee is being amortized over the estimated useful life in which cash flows are expected to be generated from products in the agreement. The Company recorded amortization expense related to intangible assets of $6,235, $2,592 and $722 respectively, for fiscal years 2003, 2002 and 2001. Amortization expense related to the intangible assets currently being amortized is expected to total approximately $5,128 in 2004, $3,792 in 2005, $3,115 in 2006, $3,115 in 2007, $3,115 in 2008 and $5,300 thereafter. Intangible assets not being amortized were product license fees of $6,999 and a trademark licensed from BMS of $5,000 at December 31, 2003 and product license fees of $9,199 at December 31, 2002. F-15 NOTE 7 - ACQUISITION OF FINETECH: On March 15, 2002, the Company terminated its negotiations with ISP related to the Company's proposed 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 for 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. 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. 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 No. 142, "Accounting for Goodwill and Other Intangible Assets", the goodwill will not be amortized, but will be tested for impairment using a fair value approach at least annually. NOTE 8 - 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. The Company believes that the following product development agreements are those that are the most significant to its business. ADVANCIS PHARMACEUTICAL CORPORATION: Par entered into a licensing agreement (the "Advancis Licensing Agreement"), dated September 4, 2003, with Advancis, to market the antibiotic Clarithromycin XL. Clarithromycin XL is being developed as a generic equivalent to Abbott's Biaxin XL(R). Pursuant to the Advancis Licensing Agreement, Advancis will be responsible for the development and manufacture of the product, while Par will be responsible for marketing, sales and distribution. If certain conditions in the Advancis Licensing Agreement are met, Par has agreed to pay Advancis an aggregate amount of up to $6,000 based on the achievement of certain milestones contained in the agreement. Pursuant to the Advancis Licensing Agreement, the Company has agreed to pay Advancis a certain percentage of the gross profits, as defined in the agreement, on all sales of the product if the product is successfully developed and introduced into the market. F-16 NORTEC DEVELOPMENT ASSOCIATES, INC.: Par and Nortec Development Associates, Inc. (a Glatt company) ("Nortec") entered into an agreement, dated October 22, 2003, pursuant to which the two companies have agreed to develop additional products that are not part of the two previous agreements between Par and Nortec. During the first two years of the agreement, Par is obligated to make aggregate initial research and development payments to Nortec in the amount of $3,000, of which $1,500 was paid by the Company in fiscal year 2003, $1,000 is due in fiscal year 2004 and $500 is due in fiscal year 2005. On or before October 15, 2005, Par will have the option to either (i) terminate the arrangement with Nortec, in which case the initial research and development payments will be credited against any development costs that Par shall owe Nortec at that time or (ii) acquire all of the capital stock of Nortec over the subsequent two years, including the first fifty (50%) percent of the capital stock of Nortec over the third and fourth years of the agreement for $4,000, and the remaining capital stock of Nortec from its owners at the end of the fourth year for an additional $11,000. The parties have agreed to certain revenue and royalty sharing arrangements before and after Par's acquisition, if any, of Nortec. In May 2002, Par 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, Par obtained the right to utilize Nortec/Glatt's drug delivery system technology in its ANDA submission for the potential product covered in the agreement. Par and Nortec have agreed to collaborate on the formulation, and Par has agreed to serve as the exclusive marketer and distributor of the product. In June 2002, Par 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. Par and Nortec have agreed to collaborate on the formulation, while Par will serve as the exclusive marketer and distributor of the product. Pursuant to the May and June 2002 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 has agreed to pay Nortec a royalty on net sales of the products, as defined in the agreements. 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 ("Schering'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 (see "Note 14 -Commitments, Contingencies and Other Matters-Legal Proceedings"). According to current FDA practice, Par believes that 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. 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, both of which were brought to market in fiscal year 2003. The Company is marketing one of the products and receives a royalty on sales of the other F-17 product, which is being sold by another company. 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 is one other ANDA for a product 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 certain filings, as defined in the agreement. AVEVA DRUG DELIVERY SYSTEMS (FORMERLY ELAN TRANSDERMAL TECHNOLOGIES, INC.): In April 2001, Par entered into a licensing agreement with Aveva Drug Delivery Systems, (formerly Elan Transdermal Technologies, Inc.) ("Aveva"), a U.S. subsidiary of Nitto Denko, to market a clonidine transdermal patch, a generic version of Boehringer Ingelheim's Catapres TTS(R). Aveva 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 expired in May 2003. Aveva will be responsible for the development and manufacture of the products, while Par will be responsible for marketing, sales and distribution. Par has agreed to reimburse Aveva for research and development costs and Aveva will receive a royalty from the sale of the product. Pursuant to the agreement, the Company paid Aveva $1,167 and $833, respectively, in fiscal years 2001 and 2002, which was charged to research and development expenses. In addition, Par has agreed to pay to Aveva $1,000 upon FDA approval of the product, and a royalty on all future sales of the product. NOTE 9 - DISTRIBUTION AND SUPPLY AGREEMENTS: The Company enters into marketing and license agreements with third parties to market new products and technologies in an effort to broaden its product line. To date, the Company has entered into and is selling product through several of these agreements. The Company believes that the following agreements are those that are the most significant to its business. SMITHKLINE BEECHAM CORPORATION. In connection with the legal settlement referred to in "Note 14 - Commitments, Contingencies and Other Matters-Legal Proceedings", Par and GlaxoSmithKline ("GSK") and certain of its affiliates entered into a license and supply agreement (the "GSK Supply Agreement"), dated April 16, 2003, pursuant to which Par is marketing paroxetine, supplied and licensed from GSK, in the United States, including the Commonwealth of Puerto Rico. Under the GSK Supply Agreement, GSK has agreed to manufacture the product and Par has agreed to pay GSK a percentage of Par's net sales of the product, as defined in the agreement. Pursuant to the GSK Supply Agreement, GSK is entitled to suspend Par's right to distribute paroxetine if at any time another generic version of Paxil(R) is not being marketed. PENTECH PHARMACEUTICALS, INC.: In November 2002, the Company amended its agreement (the "Pentech Supply and Marketing Agreement") with Pentech Pharmaceuticals, Inc. ("Pentech"), dated November 2001, to market paroxetine capsules. Pursuant to the Pentech Supply and Marketing Agreement, the Company paid all legal expenses up to $2,000, which were expensed as incurred, to obtain final regulatory approval. Legal expenses in excess of $2,000 are fully creditable against future profit payments to Pentech. The Company had agreed to reimburse Pentech for costs associated with the project of up to $1,300. In fiscal year 2003, the Company paid Pentech $771 of these costs, which were charged to research and development expenses as incurred. Pursuant to the Pentech Supply and Marketing Agreement, the Company had agreed to pay Pentech a percentage of the gross profits, as defined in such agreement, on all its sales of paroxetine. The Company is negotiating with Pentech to further amend the Pentech Supply and Marketing Agreement concerning the gross profit splits, reimbursement of research and development expenses and sharing of the legal expenses and other costs related to paroxetine. DR. REDDY'S LABORATORIES LTD.: In April 2001, the Company and Dr. Reddy's Laboratories Ltd. ("Dr. 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. Four products covered under this agreement are being marketed by Par. Dr. 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 being marketed by the Company under prior agreements with Dr. Reddy. Pursuant to these agreements with Dr. Reddy, the Company has agreed to pay Dr. Reddy a certain F-18 percentage of the gross profits, as defined in each agreement, on sales of products covered by such agreements. GENPHARM, INC.: Pursuant to the Genpharm Distribution Agreement, the Company has the exclusive distribution rights within the United States and certain 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 (three 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 has agreed to pay Genpharm a percentage of the gross profits, as defined in the agreement, on 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 obtaining all applicable regulatory approvals. The Company has agreed to pay Genpharm a percentage of the gross profits, as defined in the agreement, on sales made by the Company of products included in the Genpharm Additional Product 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, 2003 and 2002, the Company had payables due to distribution agreement partners of $88,625 and $18,163, respectively. The increase was related primarily to amounts due pursuant to new profit sharing agreements, particularly amounts owed to GSK in respect of paroxetine. NOTE 10 - LONG-TERM DEBT: DECEMBER 31, DECEMBER 31, 2003 2002 ---- ---- Senior subordinated convertible notes (a) $200,000 - Industrial revenue bond (b) - $2,000 Mortgage loan (c) - 809 Other (d) 333 213 --- --- 200,333 3,022 Less current portion (122) (596) --- --- $200,211 $2,426 ======= ===== (a) Senior subordinated convertible notes in the aggregate principal amount of $200,000. The notes bear interest at an annual rate of 2.875%, payable semi-annually on March 30 and September 30 of each year, with the first payment due on March 30, 2004. The notes are convertible into the Common Stock at an initial conversion price of $88.76 per share, upon the occurrence of certain events. The notes mature on September 30, 2010, unless earlier converted or repurchased. The Company may not redeem the notes prior to their maturity date. (b) The Company decided not to move a portion of FineTech's operation, including personnel and technological resources to a laboratory facility in Rhode Island and, in October 2003, paid the remaining balance on the industrial revenue bond that was to be used for this operation. (c) The Company paid the remaining balance on the mortgage loan in February 2003. (d) Includes primarily amounts due under capital leases for computer equipment. In December 1996, PRX and Par entered into a loan agreement with General Electric Capital Corporation. The loan agreement, as amended in December 2002, provided Par with a revolving line of credit expiring in March 2005, pursuant to which Par was permitted to borrow up to the lesser of (i) the borrowing base established under the Loan Agreement or (ii) $30,000. The Company terminated the loan agreement in October 2003. F-19 Long-term debt maturities during the next five years, including the portion classified as current, are as follows: $122 in 2004, $75 in 2005, $77 in 2006 and $59 in 2007. In addition, the Company has senior subordinated convertible notes in the aggregate principal amount of $200,000 that will mature on September 30, 2010, unless earlier converted or repurchased. During fiscal years 2003, 2002 and 2001, the Company incurred interest expense of $1,606, $148 and $626, respectively. In fiscal year 2003, interest accrued on the senior subordinated convertible notes is payable on March 30, 2004. NOTE 11 - EARNINGS PER SHARE: The following is a reconciliation of the amounts used to calculate basic and diluted earnings per share: FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- NET INCOME $122,533 $79,454 $53,922 BASIC: Weighted average number of common shares outstanding 33,483 32,337 30,595 ------ ------ ------ NET INCOME PER SHARE OF COMMON STOCK $3.66 $2.46 $1.76 ==== ==== ==== ASSUMING DILUTION: Weighted average number of common shares outstanding 33,483 32,337 30,595 Effect of dilutive options 1,155 714 1,595 ----- --- ----- Weighted average number of common and common equivalent shares outstanding 34,638 33,051 32,190 ------ ------ ------ NET INCOME PER SHARE OF COMMON STOCK $3.54 $2.40 $1.68 ==== ==== ==== Outstanding options of 175, 2,298 and 2,056 as of December 31, 2003, 2002 and 2001, 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 during the respective periods and, therefore, would have been anti-dilutive. In addition, outstanding warrants sold concurrently with the sale of the subordinated convertible notes were not included in the computation of diluted earnings per share as of December 31, 2003. The warrants are exercisable for an aggregate of 2,253 shares at an exercise price of $105.20 per share. NOTE 12 - STOCKHOLDERS' EQUITY: PREFERRED STOCK: In 1990, the Company's stockholders authorized 6,000 shares of a newly created class of preferred stock, par value $.0001 per share. The preferred stock is issuable in such classes and series and with such dividend rates, redemption prices, preferences and conversion, and other rights as the Company's board of directors (the "Board") may determine at the time of issuance. At December 31, 2003 and 2002, the Company did not have preferred stock issued and outstanding. DIVIDEND: The Company did not pay any dividends on its Common Stock in fiscal years 2003, 2002 and 2001. F-20 CHANGES IN SHAREHOLDERS' EQUITY: Changes in the Company's Common Stock and Additional Paid-in Capital accounts during fiscal years 2003, 2002 and 2001 were as follows: ACCUMULATED ADDITIONAL OTHER COMMON STOCK PAID-IN COMPREHENSIVE SHARES AMOUNT CAPITAL LOSSES ------ ------ ------- ------ Balance, January 1, 2001 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 - Tax benefit from exercise of stock options - - 11,765 - Employee stock purchase program 6 - 56 - ------ --- -- - Balance, December 31, 2001 32,035 320 115,610 - Exercise of stock options 761 8 2,471 - Employee stock purchase program 8 - 177 - - Tax benefit from exercise of stock options - - 220 - Compensatory arrangements - - 37 - ------ --- -- - Balance, December 31, 2002 32,804 328 118,515 - Comprehensive income: Defined benefit pension plan - - - (118) Unrealized losses on marketable securities, net of tax - - - (1,555) Exercise of stock options 1,506 15 33,871 - Sold warrants - - 32,563 - Purchased call options - - (49,368) - Tax benefit from purchased call options - - 19,253 - Tax benefit from exercise of stock options - - 12,616 - Employee stock purchase program 8 - 308 - Compensatory arrangements - - 4,173 - ------ --- ----- ----- Balance, December 31, 2003 34,318 $343 $171,931 $(1,673) ====== === ======= ===== FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Comprehensive income: Net income $122,533 $79,454 $53,922 Other comprehensive losses: Defined benefit pension plan (118) - - Unrealized loss on marketable securities, net of tax (1,555) - - ----- Other comprehensive losses (1,673) - - ----- - - Comprehensive income $120,860 $79,454 $53,922 ======= ====== ====== Concurrently with the sale of the subordinated convertible notes described above, the Company purchased call options on its Common Stock (the "purchased call options") designed to mitigate the potential dilution from conversion of the convertible notes. Under the terms of the purchased call options, the Company has the right to purchase from an affiliate of one of the initial purchasers (the "counterparty") at a purchase price of $88.76 per share the aggregate number of shares that the Company would be obligated to issue upon conversion of the convertible notes, which is a maximum of 2,253 shares. The Company has the option to settle the purchased call options with the counterparty through a net share settlement or net cash settlement, either of which would be based on the extent to which the then-current market price of the Common Stock exceeds $88.76 per share. The cost of the purchased call options of $49,368 was recognized as additional paid-in-capital on the Company's consolidated balance sheets. The cost of the purchased call options was partially offset by the sale of warrants (the "sold warrants") to acquire shares of the Common Stock to the counterparty with which the Company entered into the purchased call options. The sold warrants are exercisable for an aggregate of 2,253 shares at an exercise price of $105.20 per share. The sold warrants may be settled, at the Company's option, either through a net share settlement or a net cash settlement, either of which would be based on the extent to which the F-21 then-current market price of the Common Stock exceeds $105.20 per share. The gross proceeds from the sale of the sold warrants of $32,563 were recognized as additional paid-in-capital on the Company's consolidated balance sheets. The net effect of the purchased call options and the sold warrants is to either reduce the potential dilution from the conversion of the convertible notes if the Company elects a net share settlement or to increase the net cash proceeds of the offering, if a net cash settlement is elected if the convertible notes are converted at a time when the market price of the Common Stock exceeds $88.76 per share. If the market price of the Common Stock at the maturity of the sold warrants exceeds $105.20, the dilution mitigation under the purchased call options will be capped, meaning that there would be dilution from the conversion of the convertible notes to the extent that the then market price per share of the Common Stock exceeds $105.20 at the time of conversion. EMPLOYEE STOCK PURCHASE PROGRAM: The Company maintains an Employee Stock Purchase Program (the "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 shares in each of fiscal years 2003 and 2002. At December 31, 2003, 805 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, 2003 2002 2001 ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 3,764 $23.04 3,754 $18.88 2,197 $3.40 Granted 1,242 $38.38 891 $23.99 2,576 $25.95 Exercised (1,506) $22.56 (761) $3.26 (961) $3.23 Canceled/Surrendered (124) $24.69 (120) $25.38 (58) $5.73 --- --- -- Outstanding at end of year 3,376 $28.83 3,764 $23.04 3,754 $18.88 ===== ===== ===== At December 31, 2003, 2002 and 2001 exercisable options amounted to 463, 931 and 834, respectively. The weighted average exercise prices of the options for these periods were $24.18, $20.23 and $2.76, respectively. Exercise price ranges and additional information regarding the 3,376 options outstanding at December 31, 2003 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 28 $2.38 4.0 years 26 $2.25 $5.13 to $7.63 435 $6.67 6.8 years 92 $6.18 $21.65 to $24.33 403 $22.16 8.3 years 1 $22.68 $25.85 to $29.90 278 $26.80 5.9 years 50 $28.46 $30.55 to $36.60 1,947 $31.14 7.1 years 294 $31.06 $41.12 to $71.01 285 $60.95 8.0 years - -
In fiscal year 2001, the Company's stockholders approved the 2001 Performance Equity Plan (the "2001 Plan"), which was subsequently amended at the 2003 Annual Meeting of Shareholders. The 2001 Plan provides for the granting of incentive and non-qualified 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. Pursuant to the amendment, the Company increased the shares of Common Stock reserved for issuance under the 2001 Plan to 5,500. 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. F-22 In fiscal year 2000, the 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 stockholder approval. The 2000 Plan provides for the granting of incentive and non-qualified 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% of the total combined voting power of all the classes of capital stock of the Company. In fiscal year 1998, the Company's stockholders approved the 1997 Directors' Stock Option Plan (the "1997 Directors' Plan"), which was subsequently amended at the 2003 Annual Meeting of Shareholders, 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 October 28, 2013 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. Pursuant to the amendment, the Company increased the number of shares of Common Stock for issuance under the 1997 Directors' Plan to 650 and extended the expiration date of the 1997 Directors' Plan from October 28, 2007 to October 28, 2013. 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, 2003 and 2002, options for 1,911 and 1,330 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 compensation to its employees. Pro forma information regarding net income is required by SFAS 123, as amended by SFAS 148. This required information is to be determined as if the Company had accounted for its stock-based compensation to employees under the fair value method of that Standard. The fair value of the options granted during each of the years ended December 31, 2003, 2002 and 2001 has been estimated at the date of grant using the Black-Scholes stock option pricing model, based on the following assumptions: FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Risk-free interest rate 4.0% 4.3% 4.5% Expected term 4.8 years 5.5 years 5.2 years Expected volatility 61.2% 68.6% 69.4% It is assumed that no dividends will be paid for the entire term of the option. The weighted-average fair value of options granted in fiscal years 2003, 2002 and 2001 were $24.04, $14.89 and $15.74, respectively. NOTE 13 - INCOME TAXES: The components of the Company's provision for income taxes for the years ended December 31, 2003, 2002 and 2001 are as follows: FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Current income tax provision: Federal $66,915 $43,682 $34,807 State 10,528 6,072 5,723 ------ ----- ----- 77,443 49,754 40,530 ------ ------ ------ Deferred income tax provision (benefit): Federal 581 938 (16,075) State 86 107 (2,445) -- --- ----- $78,110 $50,799 $22,010 ====== ====== ====== F-23 Deferred tax assets and (liabilities) as of December 31, 2003 and 2002 are as follows: DEFERRED TAX ASSET, NET: DECEMBER 31, DECEMBER 31, 2003 2002 ---- ---- CURRENT DEFERRED ASSETS: Accounts receivable $28,559 $29,608 Inventories 2,152 2,076 Accrued expenses 1,768 913 Purchased call options 1,689 - Other 305 276 --- --- 34,473 32,873 NON-CURRENT DEFERRED ASSETS: Purchased call options 16,496 - Investments 975 - Asset impairment reserve 381 431 Research and development expenses 377 377 BMS asset purchase agreement 637 - Other 988 487 --- --- 19,854 1,295 ------ ----- DEFERRED TAX ASSETS 54,327 34,168 ------ ------ DEFERRED LIABILITIES: Fixed assets (1,674) (1,900) Genpharm distribution agreement (2,676) (2,957) FineTech intangible assets (1,105) - ----- -------- (5,455) (4,857) ----- ----- Net deferred tax asset $48,872 $29,311 ====== ====== The exercise of stock options in fiscal years 2003 and 2002, respectively, resulted in credits to additional paid-in capital of $12,616 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 years shown as follows: FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Federal statutory tax rate 35% 35% 35% State tax - net of Federal benefit 4 4 3 Other - - 3 Decrease in valuation reserve for deferred tax assets - - (12) - - -- Effective tax rate 39% 39% 29% === === === NOTE 14 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: LEASES: At December 31, 2003, the Company had minimum rental commitments aggregating $17,795 under non-cancelable operating leases expiring through fiscal year 2013. Amounts payable thereunder are $3,017 in 2004, $2,559 in 2005, $2,490 in 2006, $2,150 in 2007, $2,239 in 2008 and $5,340 thereafter. Rent expense charged to operations in fiscal years 2003, 2002 and 2001 was $2,820, $1,513 and $611, 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 F-24 equal to 50% of up to the first 6% of compensation contributed by the employee. Participants in 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. The Company's provisions for these plans and the defined benefit plan discussed below were $2,046 in fiscal year 2003, $1,895 in fiscal year 2002 and $559 in fiscal year 2001. In fiscal year 1998, the Company merged a defined contribution social security integrated retirement plan into the Retirement Savings Plan. In February 2003 and June 2002, respectively, the Company made discretionary contributions to the Retirement Savings Plan of approximately $1,500 for Plan year 2002 and $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. For fiscal 2004, the contribution is estimated to be $9. The measurement date of November 1 is used to value the assets and liabilities each year. The primary investment objectives of the Pension Plan are as follows: (i) to obtain a reasonable long-term return consistent with the level of risk assumed (specific return objectives may include fund performance that exceeds the rate of inflation, the assumed actuarial discount rate and/or the total fund policy return, which is typically defined as the return of a passively managed benchmark comprised of the target portfolio weights to each asset class); (ii) to control the cost of funding the Pension Plan within prudent levels of risk through the investment of Pension Plan assets; and (iii) to provide diversification of assets in an effort to avoid the risk of large losses and to maximize the investment return to the Pension Plan consistent with market and economic risk. The majority of the Pension Plan assets are invested in short-term, high quality debt securities including money market funds, stable value funds, and guaranteed interest arrangements. The fair value of the assets of the Pension Plan at December 31, 2003 and 2002 are set forth in the table below. DECEMBER 31, DECEMBER 31, 2003 2002 ---- ---- Equity securities $243 $217 Debt securities 1,894 1,931 ----- ----- Total assets $2,137 $2,148 ===== ===== Net pension expense for fiscal years 2003, 2002 and 2001 included the components set forth in the table below. FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Interest cost $130 $125 $132 Expected return on Pension Plan assets (135) (216) (405) Recognized actuarial loss - - 2 Net amortization and deferral asset gain - 78 290 Amortization of initial unrecognized transition obligation 51 51 51 -- -- -- Net pension expense $46 $38 $70 == == == The weighted-average assumptions used to determine benefit obligations for the Pension Plan at December 31, 2003 and 2002 included discount rates of 5.75% and 6.5% respectively. The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2003, 2002 and 2001 included discount rates of 6.5%, 6.25% and 6.75%, respectively, and the expected long-term rates of return on plan assets of 6.5%, 7% and 7%, respectively. F-25 The following provides a reconciliation of the Pension Plan's benefit obligations, assets and funded status. DECEMBER 31, DECEMBER 31, 2003 2002 ---- ---- CHANGE IN BENEFIT OBLIGATION Benefit obligation at the beginning of the year $2,063 $2,070 Interest cost 130 125 Actuarial loss 176 4 Benefits paid (141) (136) --- --- Benefit obligation at the end of the year $2,228 $2,063 ===== ===== CHANGE IN PLAN ASSETS Fair value of Pension Plan assets at the beginning of the year $2,148 $2,051 Actual return on assets 118 216 Employer contributions 12 17 Benefits paid (141) (136) --- --- Fair value of Pension Plan assets at the end of the year $2,137 $2,148 ===== ===== FUNDED STATUS OF PLAN Over/(under) funded status $(91) $85 Unrecognized net actuarial loss (gain) 118 (75) Unrecognized transition obligation 229 280 --- --- Net amount recognized $256 $290 === === Amounts recognized in the consolidated balance sheets consist of: DECEMBER 31, DECEMBER 31, 2003 2002 ---- ---- (Accrued) prepaid benefit cost $(91) $290 Intangible assets 229 - Accumulated other comprehensive loss 118 - --- --- Net amount recognized $256 $290 === === Pension benefits payable under the Pension Plan are expected to be $180 in 2004, $230 in 2005, $230 in 2006, $240 in 2007, $250 in 2008 and $1,280 in the aggregate from 2009 through 2013. In accordance with SFAS No. 87, "Employer's Accounting for Pensions", the Company recorded an additional minimum pension liability for underfunded plans of $347 for fiscal year 2003 representing the excess of underfunded 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. As of December 31, 2003, $118 of the excess minimum pension liability resulted in a charge to equity. As of December 31, 2002, the Company had no additional minimum pension liability because the Pension Plan Assets exceeded the benefit obligations at the end of such year. LEGAL PROCEEDINGS: On September 25, 2003, the Office of the Attorney General of the Commonwealth of Massachusetts filed a complaint in federal district court in Boston against Par and 12 other leading generic pharmaceutical companies alleging principally that Par and such other companies violated, through their marketing and sales practices, state and federal laws, including allegations of common law fraud and violations of Massachusetts false statements statutes, by inflating generic pharmaceutical product prices paid for by the Massachusetts Medicaid program. The Company has waived service of process with respect to the complaint. The complaint seeks injunctive relief, treble damages, disgorgement of excessive profits, civil penalties, reimbursement of investigative and litigation costs (including experts' fees) and attorneys' fees. In addition, on September 25, 2003, the Company and a number of other generic and brand pharmaceutical companies were sued by a New York county, which has alleged violations of laws (including the Racketeer Influenced and Corrupt Organizations Act, common law fraud and obtaining funds by false statements), related to participation in the Medicaid program. The complaint seeks declaratory relief; actual, statutory and treble damages, with interest; punitive damages; an accounting; a constructive trust and restitution; attorneys' and experts' fees and costs. This case was transferred to the District of Massachusetts for coordinated and consolidated pretrial proceedings. Par and the other defendants involved in the litigation filed a motion to dismiss on January 29, 2004. Par F-26 intends to defend vigorously the claims asserted in both complaints. The Company cannot predict with certainty at this time the outcome or the effect on the Company of such litigations. Accordingly, no assurance can be given that such litigations or any other similar litigation by other states or jurisdictions, if instituted, will not have a material adverse effect on the Company's financial condition, results of operations, prospects or business. In October 2003, Apotex Pharmaceutical Healthcare, Inc. ("Apotex") filed a complaint against Par in the United States District Court for the Eastern District of Pennsylvania alleging violations of state and federal antitrust laws as a result of the Company's settlement with GSK and the GSK Supply Agreement. Par filed a motion to dismiss the action in its entirety in December 2003 and a briefing on that motion is expected to be completed in April 2004. Par intends to defend vigorously this action, and may assert counterclaims against Apotex and claims against third parties. In August 2003, Teva Pharmaceuticals USA, Inc. ("Teva USA") filed a lawsuit against the Company and Par in the United States District Court for the District of Delaware, after having received approval from the FDA to launch a generic version of BMS's Megace(R), which generic product will compete with the Company's megestrol acetate oral suspension product. In the lawsuit, Teva USA seeks a declaration that its product has not infringed and will not infringe any of Par's four patents relating to megestrol acetate oral suspension. On August 22, 2003, Par filed a counterclaim against Teva USA alleging willful infringement of one of its four patents relating to megestrol acetate oral suspension and moved to dismiss the action with respect to the other three patents for lack of subject matter jurisdiction. The Company intends to pursue its counterclaim against Teva USA and vigorously defend the lawsuit. A trial date has been scheduled by the Court for April 2005. On July 15, 2003, the Company and Par (collectively, "Par") filed a lawsuit against Roxane Laboratories, Inc. ("Roxane") in the United States District Court for the District of New Jersey. Par alleged that Roxane infringed Par's U.S. Patents numbered 6,593,318 and 6,593,320 relating to megestrol acetate. Roxane has denied these allegations and has counterclaimed for declaratory judgments of non-infringement and invalidity of both patents. On May 28, 2003, Asahi Glass Company ("Asahi Glass") filed a lawsuit against Par and several other parties in the United States District Court for the Northern District of Illinois alleging, among other things, violations of state and federal antitrust laws relating to the settlement of GSK's patent action against Pentech in respect of paroxetine. Pentech had granted Par rights under Pentech's ANDA for paroxetine capsules. Pursuant to the settlement, reached between the parties on April 18, 2003, Pentech and Par acknowledged that the patent held by GSK is valid and enforceable and would be infringed by Pentech's proposed capsule product and GSK agreed to allow Par to distribute in Puerto Rico substitutable generic paroxetine immediate release tablets supplied and licensed from GSK for a royalty payable to GSK. In addition, Par was granted the right under the settlement to distribute the drug in the United States if another generic version fully substitutable for Paxil(R) became available in the United States. Par denied any wrongdoing in connection with the Asahi Glass antitrust action and it filed a motion to dismiss the complaint on August 22, 2003. In October 2003, the court dismissed all of the state and federal antitrust claims against Par. The only remaining claim in this action involving Par is a state law contract claim relating to the payment of certain attorneys' fees to Asahi Glass in connection with the prior lawsuit. Par intends to defend vigorously this claim and may assert counterclaims against Asahi Glass and claims against third parties. In February 2003, Abbott, Fornier Industrie et Sante and Laboratoires Fournier S.A. filed a complaint in the United States District Court for the District of New Jersey against Par, alleging that Par's generic version of TriCor(R) (fenofibrate) infringes one or more claims of their patents. The Company had filed an ANDA for the product in October 2002. Par intends to defend vigorously this lawsuit and has filed an answer and a counterclaim, alleging non-infringement and patent invalidity. At this time, it is not possible for the Company to predict the outcome of this litigation with certainty. On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil") filed a lawsuit against Kali Laboratories, Inc. ("Kali") in the United States District Court for the District of New Jersey. Ortho-McNeil alleged that Kali infringed U.S. Patent No. 5,336,691 (the "`691 patent") by submitting a Paragraph IV certification to the FDA for approval of tablets containing tramadol hydrochloride and acetaminophen. Par is Kali's exclusive marketing partner for these tablets. Kali has denied Ortho-McNeil's allegation, asserting that the `691 patent was not infringed and is invalid and/or unenforceable, and that the lawsuit is barred by unclean hands. Kali also has counterclaimed for declaratory judgments of non-infringement, invalidity, and unenforceability of the `691 patent. F-27 Breath Ltd. of the Arrow Group filed an ANDA (currently pending with the FDA) for latanoprost (Xalatan(R)), which was developed by Breath Ltd. pursuant to a joint manufacturing and marketing agreement with the Company, seeking approval to engage in the commercial manufacture, sale and use of one latanoprost drug product in the United States. Par subsequently acquired ownership of the ANDA, which includes a Paragraph IV certification that the patents in connection with Xalatan(R) identified in "Approved Drug Products with Therapeutic Equivalence Evaluations" are invalid, unenforceable and/or will not be infringed by Par's generic version of Xalatan(R). 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 (collectively, "Pharmacia") and the Trustees of Columbia University in the City of New York, ("Columbia"), filed a lawsuit against Par 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 enjoining approval of the Company's ANDA and the marketing of its generic product prior to the expiration of their patents. On February 8, 2002, Par answered the complaint and filed a counterclaim, which seeks a declaration that the patents-in-suit are invalid, unenforceable and/or not infringed by Par's products and that the extension of the term of one of the patents is invalid. All parties are seeking to recover their respective attorneys' fees. Discovery in the case has now been completed and a pre-trial conference has been scheduled for March 15, 2004. Par intends to defend vigorously against the claims and to pursue its counterclaim. At this time, it is not possible for the Company to predict the outcome of this litigation with certainty. Par entered into a licensing agreement with developer Paddock Laboratories ("Paddock") to market a generic version of Unimed Pharmaceuticals, Inc.'s ("Unimed") product Androgel(R). The product will be manufactured by Paddock and marketed by Par. Paddock has filed an ANDA (which is currently pending with the FDA) for the testosterone 1% gel product. As a result of the filing of the ANDA, Unimed and Laboratories Besins Iscovesco ("Besins"), co-assignees of the patent-in-suit, filed a lawsuit against Paddock in the United States District Court for the Northern District of Georgia alleging patent infringement on August 22, 2003. Par has an economic interest in the outcome of this litigation by virtue of its licensing agreement with Paddock. Unimed and Besins are seeking an injunction to prevent Paddock from manufacturing the generic product. On November 18, 2003, Paddock answered the complaint and filed a counterclaim, which seeks a declaration that the patent-in-suit is invalid and/or not infringed by Paddock's product. This case is currently in fact discovery. At this time, it is not possible for the Company to predict the outcome of this action. The Company and/or Par are parties to certain other litigation matters, including product liability and patent actions; the Company believes that these actions are incidental to the conduct of its business and that their 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 or, in cases where the Company is plaintiff, prosecute these actions. OTHER MATTERS: In June 2003, the Company received notice from the U.S. Congress that the Committee on Energy and Commerce (the "Committee") had begun an industry-wide (brand and generic) investigation into pharmaceutical reimbursements and rebates under Medicaid, to which the Company has responded. In order to conduct the investigation, the Committee has requested certain pricing and other information, which the Company delivered in August 2003, relating to certain drugs produced by these pharmaceutical manufacturers. Because the investigation has only recently begun, it is premature to speculate what action, if any, the federal government may take and what impact such action could have on the Company's business, prospects or financial condition. On July 15, 2003, the Company announced that two additional patents relating to megestrol acetate oral suspension have been issued to it by the U.S. Patent Office. The Patent Office has issued U.S. Patent Nos. 6,593,318 and 6,593,320 to the Company. The Company presently holds four patents relating to megestrol oral suspension. The first two patents, U.S. Patent No. 6,028,065 and U.S. Patent No. 6,268,356, were issued on February 22, 2000 and July 31, 2001, respectively. The Company's former chairman, president and chief executive officer, Kenneth I. Sawyer, retired, effective July 2003, and resigned from the Board, effective September 2003. Mr. Sawyer is available to consult with the Company through fiscal year 2004. The Company recorded a charge of $3,712, included in selling, general and administrative expenses on its consolidated statements of operations, in 2003 for Mr. Sawyer's retirement package, consisting of expenses for accelerated stock options, a severance payment, the remainder of his 2003 salary and benefits. In September 2003, the Board selected Mark Auerbach to the position of executive chairman of the Board and Scott Tarriff to the positions of president and chief executive officer of the Company. Mr. Tarriff and Arie L. Gutman, Ph.D., President and Chief Executive Officer of the Company's FineTech subsidiary, both report to Mr. Auerbach. In December 2003, the Company announced Peter W. Williams had been selected to its Board. Mr. Williams has recently F-28 joined the law firm of Winston & Strawn LLP, following his retirement as a partner in the law firm of Clifford, Chance, Rogers & Wells, LLP. In December 2001, the Company made its 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. High Rapids is a software developer and the 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 of 1,330 shares of the common stock of HighRapids. HighRapids is the surviving corporation of a merger with Authorgenics, Inc., a Florida corporation. HighRapids is to utilize the Company's cash infusion for working capital and operating expenses. Through December 31, 2003, the Company had invested $1,386. Due to HighRapids' current operating losses and the Company's evaluation of its short-term prospects for profitability, the investment is expensed as incurred and included in other expense on the consolidated statements of operations. As of December 31, 2003, the Company held approximately 44% of the outstanding common stock of HighRapids, and it has the exclusive right to market to the pharmaceutical industry certain regulatory compliance and laboratory software currently in development. HighRapids has provided, and is currently providing, certain software services to the Company. The Company and Three Rivers entered into a license and distribution agreement under which the Company has agreed to market and distribute ribavirin 200 mg capsules, the generic version of Schering's Rebetol(R), which is indicated for the treatment of chronic hepatitis, following its approval by the FDA. In February 2003, Three Rivers reached a settlement with Schering in a patent litigation case involving Rebetol(R) brand ribavirin. Under the terms of the settlement, Schering 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. On July 16, 2003, the Company announced that the United States District Court for the Central District of California had granted a summary judgment of non-infringement against ICN Pharmaceuticals Inc. ("ICN") in favor of Three Rivers regarding ribavirin. The District Court determined that Three Rivers' ribavirin product does not infringe any of the three patents asserted by ICN in the litigation. Par has exclusive marketing rights for Three Rivers' ribavirin product. Three Rivers had earlier reached a settlement of its patent litigation with Schering. The Company believes that this decision appears to resolve the remaining ongoing patent barriers to FDA approval of the ANDA filed by Three Rivers in respect of ribavirin. Such decision by the District Court is subject to affirmance by the Court of Appeals for the Federal Circuit, and ICN has taken that appeal. The timing of any launch by Par of this product is uncertain at this time. Three Rivers has not obtained FDA approval of the ANDA, and the FDA has not made a determination of whether a generic 180-day exclusivity period will be awarded solely to a generic competitor involved in the lawsuit or Three Rivers jointly with one or both of the other two generic competitors involved in the lawsuit. NOTE 15 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA: Unaudited selected quarterly financial data for fiscal years 2003 and 2002 is included in the table below: FISCAL QUARTERS ENDED ------------------------------------------------------------ MARCH 30, 2003 JUNE 29, 2003 SEPT. 28, 2003 DEC. 31, 2003 -------------- ------------- -------------- ------------- Net sales $106,412 $115,861 $216,635 $222,780 Gross margin 55,303 60,970 84,926 81,976 Net income 22,433 23,146 38,742 38,212 Net income per common share: Basic $.68 $.70 $1.15 $1.12 Diluted $.67 $.68 $1.11 $1.08 F-29 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 NOTE 16 - SUBSEQUENT EVENTS Par and Advancis have signed a letter of intent, dated March 1, 2004, subject to execution of a definitive agreement, to enter an agreement to develop and market a novel formulation of the antibiotic amoxicillin. The companies intend to develop a low dose pulsatile form of amoxicillin, utilizing Advancis' proprietary PULSYS(TM) technology. A 505(b)(2) New Drug Application ("NDA") seeking marketing clearance fOR amoxicillin PULSYS(TM) is expected to be submitted to the FDA by Advancis in 2005. The companies expect to aDD additional products to their collaboration in the near future. Under the terms of a definitive agreement, Par would pay Advancis $5,000 over 12 months and fund development expenses going forward. Advancis will grant Par the exclusive right to sell and distribute the product and the co-exclusive right to promote and market the product. Advancis will be responsible for the manufacturing program. Par and Advancis will share equally in marketing expenses and profits. The companies expect to finalize the agreement in the second quarter of 2004. On March 9, 2004, the Congress of California Seniors brought an action against GSK and the Company concerning the sale of generic paroxetine in the State of California. The Company intends to defend vigorously the claims set forth in the complaint. F-30 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, 2003 $1,156 $600 - $1,756 Year ended December 31, 2002 $998 $547 $389(a) $1,156 Year ended December 31, 2001 $914 $84 - $998 Allowance for returns and price adjustments: Year ended December 31, 2003 $35,101 $119,184 $115,684(b) $38,601 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 (a) Write-off of uncollectible accounts. (b) Returns and allowances charged against allowance provided therefor.
F-31 EX-10 3 tarriffempl-agrmt_exh.txt EXHIBIT 10.9.1 Exhibit 10.9.1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of February 9, 2004, by and between Pharmaceutical Resources, Inc., a Delaware corporation ("Employer"), and Scott L. Tarriff ("Executive"). R E C I T A L S : A. WHEREAS, Executive is presently employed by Employer in the capacities of President and Chief Executive Officer of Employer and President and Chief Executive Officer of Employer's wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par"), and currently serves as a member of the Board of Directors of Employer (the "Board"); and B. WHEREAS, effective as of September 16, 2003, Employer and Executive desire to cancel and replace Executive's existing employment agreement, dated February 6, 2003, as modified by that certain amendment to his existing employment agreement, dated June 18, 2003 (as amended, 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 and Par 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. Employer hereby employs Executive in the capacities of President and Chief Executive Officer of Employer 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 that are reasonably consistent with Executive's positions and responsibilities and this Agreement, and shall report to the Executive Chairman of the Board (the "Executive Chairman"), if there shall be one, and the Board. 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 and Par. 1.3. CERTIFICATIONS. Whenever the Chief Executive Officer and/or Chief Financial Officer of Employer are required by law, rule or regulation or requested by any governmental authority or by Employer's or Par's auditors to provide certifications with respect to Employer's or Par's financial statements or filings with the Securities and Exchange Commission (the "SEC") or any other governmental authority, Executive shall sign such certifications as may be reasonably requested by Employer 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 subsidiaries, entities and organizations presently existing or 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 $600,000, or at such increased rate as the Board (through its Compensation and 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 (through its Compensation and Stock Option Committee) in its sole discretion, 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. Subject to the preceding sentence, the target amount of Executive's annual bonus shall be seventy-five (75%) percent of the Base Salary. 2.4. STOCK OPTIONS. Executive shall be entitled to participate in stock option and similar equity plans of Employer. 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 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 in the amount of $1,050 (gross) per month. 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 as of September 16, 2003 (the "Commencement Date") 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 3.4.1 hereof) in respect of his or its 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 3.2.1 through 3.2.6 hereof, inclusive, Executive shall be released from any duties hereunder (except as set forth in Sections 4 and 5 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 or no reason whatsoever by giving a Notice of Termination to Employer. The Date of Termination (as defined in Section 3.4.2) 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 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 that 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) a continuing failure by Executive 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 (the approval of the Executive Chairman shall be deemed appropriate authority); (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 in connection with Employer that involves personal profit. 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 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. 4 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 any 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. All unexercised stock options granted by Employer to Executive prior to the Commencement Date ("Existing Options"), whether vested or unvested, shall not be terminated if Executive is terminated by Employer for Cause and such options shall continue to be exercisable in accordance with their normal vesting schedules during the period commencing on the grant dates and terminating on the expiration dates specified in Executive's Stock Option Agreements (defined in Section 3.3.6(a) below). 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 Sections 4 and 5 hereof, an amount equal to the Severance Amount. For purposes hereof, "Severance Amount" shall mean two (2) times the Base Salary in effect at such applicable time. 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. Each of the payments, to be made to Executive in accordance with the immediately preceding sentence, shall be subject to Executive's compliance with Sections 4 and 5 of this Agreement. Nothing in this Section 3.3.2 shall limit or restrict Employer from pursuing or obtaining any other remedies which may be available to it in law, contract or otherwise, in addition to the remedies set forth herein, in response to any improper conduct of Executive, or conduct in violation of the parties' agreements. 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. 5 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 Sections 4 and 5 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 Sections 4 and 5 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 Executive was entitled to receive under such plans and programs for the remainder of the Benefits Period. 3.3.6. STOCK OPTIONS. (a) Subject to Section 3.3.6(b) hereof, notwithstanding anything to the contrary contained in Executive's stock option agreements (collectively, the "Stock Option Agreements"), which set forth the terms of all stock options granted to Executive by Employer, all Existing Options, whether vested or unvested, shall not be terminated for any reason and such options shall continue to be exercisable in accordance with their normal vesting schedules during the period commencing on the grant dates and terminating on the expiration dates specified in Executive's Stock Option Agreements. For purposes of clarity, subject only to Section 3.3.6(b) hereof, this Section 3.3.6(a) would be applicable to Executive's Existing Options even if, for example, the Employment Term were to be terminated by Employer for Cause (pursuant to Section 3.2.4 hereof) or by Executive without cause (pursuant to Section 3.2.2 hereof). (b) If the Board determines, in good faith, that Executive breached his obligations under Section 4 or 5 hereof, all unexercised stock options (except for the Existing Options) granted by Employer to Executive, whether vested or unvested, shall terminate immediately and be of no further force or effect. The Existing Options shall not be terminated for any reason and such options shall continue to be exercisable in accordance with their normal vesting schedules during the period commencing on the grant dates and terminating on the expiration dates specified in Executive's Stock Option Agreements. 6 (c) In the event the present Executive Chairman resigns or is otherwise removed and a new Executive Chairman is selected that is not acceptable to Executive at the time of the selection, and Executive terminates the Employment Term as a result thereof, then Employer's Compensation and Stock Option Committee shall consider whether to accelerate all of Executives unvested stock options. 3.4. DEFINITIONS. 3.4.1. "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. 3.4.2. "DATE OF TERMINATION" DEFINED. "Date of Termination" means such date as the Employment Term expires if not renewed or terminated in accordance with Sections 3.1 or 3.2 hereof. 4. PROTECTION OF CONFIDENTIAL INFORMATION AND TRADE SECRETS; NON-COMPETITION; NO SOLICITATION. 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 affiliates, including, but not limited to, information relating to: 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. Without limiting the foregoing, Confidential Information shall also include all information related to products targeted for development by Employer, subjects of research and development, projected launch dates, the United States Food and Drug Administration ("FDA") protocols, projected dates for regulatory filings, consumer studies, market research, clinical research, business plans, content of the New Product Planning Committee meetings, planned expenditures, profit margins, strategic evaluation plans and initiatives, and those commissioned by Employer through outside vendors or consultants, such as IBM, Cap Gemini and LEK, and the content of all business and strategic planning conducted with or through Third Party Relationships (as defined in Section 4.4 hereof). Executive's obligation not to disclose Confidential Information shall be as set forth in Section 4.2 of this Agreement, and shall include but not be limited to his obligation not to place himself in any business position in which use or disclosure of Employer's confidences would be likely, expected or inevitable, for his own benefit or the benefit of any other person or entity. 7 4.2. EMPLOYER'S PROTECTIBLE INTEREST IN ITS 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). Executive acknowledges that he has been employed by Employer in executive and chief executive capacities since 1998. Executive acknowledges that, in those fiduciary capacities, he has been afforded unimpeded access to Employer's trade secrets, intellectual property, business opportunities, confidences, business and strategic plans, methods of operation, formulas and formulations, research and development programs, and all other confidential, internal and proprietary information of Employer upon which Employer's business is premised, and which Executive acknowledges is essential for Employer's business success. Executive further acknowledges that such Confidential Information includes and constitutes trade secrets and information not readily available to the general public, which would not have been disclosed to or learned of by Executive had he not been employed by Employer in executive capacities and positions of trust. Executive acknowledges that the Confidential Information is a protectible interest of Employer under applicable law. 4.3. INTELLECTUAL PROPERTY. Executive acknowledges that, as part of Employer's confidences and trust reposed in him, he has been afforded unimpeded access to Employer's Intellectual Property. As used herein "Intellectual Property" shall mean and include all research and development, patent applications, patent research and development strategies and planning, protocols for design and approval of products, development plans for manufacturing, sites and raw materials, and all other or related intellectual property of Employer or generated on Employer's behalf or for its benefit with or through others. Executive further acknowledges that all such Intellectual Property is valuable property of Employer, not of Executive, and constitutes Confidential Information and trade secrets in which Employer has a protectible interest under applicable law. 4.4. BUSINESS RELATIONSHIPS WITH THIRD PARTIES. Executive acknowledges that, in significant part, Employer conducts its business and intends to conduct future business through business relationships with third parties such as agents, contractors, vendors, business partners or affiliates, or joint-venturers ("Third Parties") who, with Employer or on its behalf or for its benefit, engage, inter alia, in research and development, patent strategy or applications, manufacturing, distribution, or similar business enterprises significant to Employer's business ("Third Party Relationships"). Executive agrees that the work product and content of Employer's business plans, relationships, financial arrangements, product development and business confidences involved in the Third Party Relationships, and those planned for or engaged in the future, are Confidential Information in which Employer has a protectible interest under applicable law. 4.5. UNIQUE CHARACTER OF EXECUTIVE'S POSITION. Executive further acknowledges that his duties for Employer in his executive capacities are and were of a special, unique, extraordinary and intellectual character which placed him in a position of trust and responsibility with Employer in relation to its specialized business, including, without limitation, trust and responsibility relating to conceptualization and/or implementation of Employer's marketing and sales strategies, business relationships developed by Executive with the clients 8 and potential clients of Employer, public and investor communications, strategic plans, business targets, projects, partners, and product developments in the unique aspects of the pharmaceutical and generic pharmaceutical business conducted by Employer. Therefore, Executive acknowledges that each of the restrictions set forth in Section 4.7 below are reasonable and necessary to protect Employer from unfair competition by any party using or seeking to use the Employer's Confidential Information and trade secrets, or using or seeking to use Executive's unique skills and knowledge acquired with and for Employer, or his position of trust with Employer, to Employer's disadvantage. 4.6. NATIONAL AND INTERNATIONAL SCOPE OF BUSINESS. Executive acknowledges that Employer's business includes the manufacture, distribution and/or sale of its products on its own behalf and through Third Party Relationships, is nation-wide in scope among the fifty United States, and also includes Israel and other locations or markets in which Employer has or is developing a Market Presence (as defined in Section 4.7.1 hereof). Accordingly, Executive acknowledges that the restrictions set forth in Sections 4.7 and 4.7.1 below are reasonable in their national and international scope and geographic territory. 4.7. COVENANT NOT TO COMPETE. Executive agrees that, at all times during his employment by Employer, and for a period of not less than one (1) year following the Date of Termination (the "Non-competition Period"), irrespective of the reason for the termination of the employment relationship, Executive shall not, directly or indirectly, on his own behalf or for his own benefit, or on behalf of or for the benefit of another (other than the Employer), own, operate, manage, engage in, participate in, be employed by, affiliate with, or provide material assistance to, contract for services for or with, render advice or services to or otherwise assist in any capacity, directly or indirectly (whether as an officer, director, partner, agent, investor, consultant, contractor, employee, equityholder, lender, counselor, or otherwise) any Competitive Enterprise, as defined in Section 4.7.1 below. Notwithstanding the foregoing, so long as Executive refrains from participating in any of the business affairs of a Competitive Enterprise that relate to a Competitive Product (as defined in Section 4.7.1 below), Executive shall be able to provide any other type of assistance to such Competitive Enterprise during the Non-competition Period. In addition, this Section 4.7 shall not apply if Executive's Employment Term is terminated (i) without cause by Employer pursuant to Section 3.2.5 or (ii) upon Employer's material breach of this Agreement pursuant to Section 3.2.6. Furthermore, nothing herein shall prevent Executive from owning up to 2% of publicly traded securities in a Competitive Enterprise. 4.7.1. DEFINITION OF COMPETITIVE ENTERPRISE AND GEOGRAPHIC TERRITORY COVERED. As used herein, the term "Competitive Enterprise" means and includes any person, association, business, or entity: (a) that manufactures, markets, licenses, distributes, contracts for the sale of, or sells (or causes to be manufactured, marketed, licensed, distributed, contracted for or sold through others) any product that competes with, or is developing any product that is intended to compete with (i) any product manufactured, marketed, distributed, licensed, contracted for sale or sold by Employer or through its Third Party Relationships, or (ii) any product which the Employer has developed, targeted for development, or is developing for manufacture, marketing, license, distribution, contract, or sale and which is projected to reach the wholesale or retail market within five (5) years of the date of this Agreement (each, a "Competitive Product"); or (b) that obtains finished goods, source materials, or research and development (i) from any source or supplier with whom Employer 9 regularly does business ("Employer Source"), or (ii) to formulate any Competitive Product. The geographic territory covered by the term "Competitive Enterprises" includes any such person, association, business or entity (a) doing business in the United States or in Israel or any other location or market in which Employer has a Market Presence (defined as more than DE MINIMUS gross revenue as to any product line or business of Employer as of the Date of Termination), whether or not through a Third Party Relationship, or (b) obtaining finished goods, source materials, or resources and development for a Competitive Product in any location or market in which Employer does so, or from any Employer Source, wherever located; and includes any person, association, business or entity, (c) outside the United States or Israel which manufactures, markets, licenses, contracts for, distributes or sells (or causes to be manufactured, marketed, licensed, contracted for, distributed or sold through others) any Competitive Product, or engages in the development of any Competitive Product intended to be manufactured, distributed, licensed, contracted for or sold in the United States, Israel or any other location or market in which Employer has a Market Presence. 4.8. COVENANT NOT TO SOLICIT SUPPLIERS AND OTHERS. Executive shall not, while employed by Employer and for a period of one (1) year following the Date of Termination, directly or indirectly solicit or divert (or seek to divert) or entice away, for the benefit of Executive or any other person or entity, or cause (or attempt to cause) or persuade in any manner to cease doing business with Employer or reduce its level of business with Employer, any Third Party Relationship, client, supplier, vendor, contractor, business partner, licensee, licensor, agent or investor, or supplier of source materials or finished goods, product lines or research, who was doing business with Employer at any time within twelve (12) months prior to the Date of Termination, or who was actively engaged in discussions in contemplation of any such business relationship during such period. During the above-referenced one- (1) year period, Executive may not accept business from any of the above-referenced entities where doing so would have the effect of diverting Employer's existing business, or would have the effect of reducing its existing level of business with such entities. 4.9. COVENANT NOT TO HIRE OR SOLICIT EMPLOYEES. Except with the express written permission of Employer, Executive shall not, while employed by Employer and for a period of two (2) years following the Date of Termination, directly or indirectly hire, retain or engage, or offer to hire, retain or engage, or solicit for employment or other retention or engagement of services, or otherwise induce to leave Employer, for the benefit of Executive or any other person or entity, any employee, consultant or contractor who is then employed by or engaged by Employer or was so employed or engaged as of the Date of Termination. 4.10. TOLLING DURING PERIODS OF VIOLATION. The parties agree that, in the event Executive violates any of the provisions of Sections 4.7, 4.8 or 4.9 hereof during the time periods of restriction set forth respectively therein, any such period of restriction shall be tolled for the duration of such violation, and the applicable period of restriction shall not expire, and shall be extended for a period of time commensurate with the duration of the violation. 4.11. GOODWILL. Executive acknowledges that, through and solely as a result of his employment by Employer, he has acquired a continuing equity stake in the Employer's business in the form of substantial and valuable stock options granted by Employer, portions of which grants have been exercised by Executive 10 to his significant economic advantage. Accordingly, solely for purposes of enforcement of the covenants contained in this Section 4, Executive agrees to be deemed and regarded under applicable legal precedent as if he were in the same position as a seller of a business interest and goodwill appurtenant thereto. 4.12. APPLICATION IRRESPECTIVE OF REASON FOR TERMINATION OF EMPLOYMENT. In light of the acknowledgements set forth in this Section 4, the parties agree that the provisions of this Section 4 shall apply in the event of Executive's termination from employment, whether by Employer or Executive, whether for Cause or without Cause, or for any other reason or asserted reasons. 4.13. EMPLOYER DEFINED. For purposes of Section 4 hereof, "Employer" shall mean and include Employer, Par, FineTech Laboratories Ltd., and any parent corporations, affiliates, subsidiaries and joint ventures. 4.14. 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 Employer 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 11 (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 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. 5. CONTINUED COOPERATION; RETURN OF DOCUMENTS AND PROPERTY; INJUNCTIVE RELIEF; NON-EXCLUSIVITY AND SURVIVAL. 5.1. CONTINUED COOPERATION. Executive shall, during and after the conclusion of his employment relationship for any reason, cooperate fully with Employer with respect to any internal or external agency or legal investigation (whether conducted by the FDA, SEC, or otherwise), lawsuits, financial reports, or with respect to other matters within his knowledge, responsibilities or purview. Employer will pay a reasonable per diem for post-termination services rendered by Executive in compliance herewith, based on Executive's Base Salary (in effect at such applicable time) and time reasonably expended by him. Executive shall execute all lawful documents reasonably necessary for Employer to secure or maintain its Intellectual Property, Confidential Information, or other business requirements. 5.2. RETURN OF DOCUMENTS AND PROPERTY. Executive shall, upon the conclusion of the employment relationship for any reason, participate in an exit interview, and shall deliver promptly to Employer all documents, records, files, customer or client materials, computer files or discs, and Confidential Information fixed in any tangible medium of expression, together with all computers and harddrives, employee identification cards, Employer credit cards, keys, and any other physical property of Employer. 5.3. 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 Sections 4 and 5 hereof; (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 Sections 4 and 5 hereof. All of the parties' covenants and Employer's rights to specific enforcement, injunctive relief, and other remedies as set forth herein shall apply in the event of any breach or threatened breach by Executive of any of the provisions of Sections 4 and 5 hereof, without the requirement of posting a bond or other security in connection with any such application for specific performance or injunctive relief, which is hereby waived. The parties further agree that any action concerning alleged breach of Sections 4 and 5 hereof shall not be brought or addressed in arbitration, and the existence of any demand for arbitration or pendency of any dispute in arbitration under this Agreement shall not be a basis to delay or defer adjudication by a court of any demand for specific performance, injunctive relief, or other remedies in relation to any alleged breach of Sections 4 and 5 hereof. 5.4. NON-EXCLUSIVITY AND SURVIVAL. The covenants of Executive contained in Sections 4 and 5 hereof 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 12 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. 6. MISCELLANEOUS PROVISIONS. 6.1. 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. 6.2. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the two parties hereto in separate counterparts, each of which shall be deemed to be an original and 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. 6.3. 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 facsimile (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. 300 Tice Boulevard Woodcliff Lake, New Jersey 07677 Attention: Dennis J. O'Connor, Vice President - Finance and Administration Telecopy No.: (201) 391-7693 E-mail: doconnor@parpharm.com Copy to: Stephen A. Ollendorff, Esq. Kirkpatrick & Lockhart LLP 599 Lexington Avenue New York, New York 10022 Telecopy No.: (212) 536-3901 E-mail: sollendorff@kl.com 13 If to Executive, to: Scott L. Tarriff c/o Pharmaceutical Resources, Inc. 300 Tice Boulevard Woodcliff Lake, New Jersey 07677 or to such other address(es) as a party hereto shall have designated by like notice to the other parties hereto. 6.4. AMENDMENT. No provision of this Agreement may be modified, amended, waived or discharged in any manner except by a written instrument executed by both Employer and Executive. 6.5. 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, Section 3.3.6 shall govern. Employer and Executive shall execute and deliver all such further documents as may be necessary to carry out the intent of the preceding sentence. 6.6. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to contracts made and to be wholly performed therein. 6.7. 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. 6.8. 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 and beneficiaries, 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. 6.9. 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 14 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 construed or deemed to be a waiver of any other or subsequent breach. 6.10. CAPACITY, ETC. Each of Executive and Employer hereby represents and warrants 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 or violate the law; and (c) this Agreement is his or its valid and binding obligation enforceable in accordance with its terms. 6.11. 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. Subject to Section 6.12 hereof, 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. 6.12. 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 6.3 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 15 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 6.12, 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 of competent jurisdiction. [SIGNATURE PAGE FOLLOWS] 16 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/ Peter S. Knight ----------------------------------------- Name: Peter S. Knight Title: Chairman of the Compensation and Stock Option Committee /s/ Scott L. Tarriff --------------------------------------------- Scott L. Tarriff 17 EX-10 4 haugheyempl-agrmt_exh.txt EXHIBIT 10.9.5 Exhibit 10.9.5 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of November 24, 2003, by and between Pharmaceutical Resources, Inc., a Delaware corporation ("Resources"), and Thomas Haughey ("Executive"). R E C I T A L S : A. WHEREAS, Executive desires to provide services to Resources and Resources's wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par" and, together with Resources, "Employer"); and B. WHEREAS, Resources and Executive desire to formalize the terms and conditions of Executive's employment with the Company. In consideration of the mutual promises herein contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT. 1.1. GENERAL. (a) Resources hereby employs Executive, effective as of the Effective Date (as defined in Section 3.1 hereof), in the capacities of Vice President, General Counsel and Secretary of Resources and Vice President, General Counsel 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, effective as of the Effective Date, subject to the terms and conditions herein contained. In all such capacities, Executive shall be responsible for all aspects of the legal affairs of Employer, including, without limitation, compliance with applicable laws and regulations, and shall perform and carry out such duties and responsibilities that are reasonably consistent with Executive's positions and responsibilities and this Agreement as may be assigned to him by the Executive Chairman of the Board of Directors of Resources (the "Board"), who will be authorized by a Board resolution as the authorized person for such purpose, the President and the Chief Executive Officer of Resources and, with respect to certain special projects, such person(s) as may be designated by the Executive Chairman of the Board. Executive shall report to the Executive Chairman of the Board. (b) In connection with Executive's duties hereunder, Executive shall act as the ethics officer pursuant to Employer's corporate Code of Conduct as may be amended from time to time, and hereby acknowledges that in such capacity as well as other complaint or whistleblower procedures of Employer, Executive may become privy to allegations of unethical or unlawful conduct of employees, officers or directors of Employer. Executive shall conduct a preliminary investigation of any such allegations as may be reasonable under the circumstances and shall report any such allegation and the results of Executive's investigation to Resource's Audit Committee. 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 or the Chief Executive Officer and/or Chief Financial 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 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 subsidiaries, entities and organizations presently existing or hereafter formed, organized or acquired, directly or indirectly, by Employer (each, a "Subsidiary" and collectively, the "Subsidiaries"), the following: (i) a base salary at the annual rate of $230,000, or at such increased rate as the Board (through its Compensation and Stock Option Committee), in its sole discretion, may hereafter from time to time grant to Executive (as so adjusted, the "Base Salary"); and (ii) any bonus and the benefits set forth in Sections 2.2, 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. 2.2. 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, in its sole discretion, 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; PROVIDED, HOWEVER, that so long as the Employment Term shall not have been terminated during the Initial Term (as defined in Section 3.1 hereof) by Employer pursuant to Section 3.2.4 hereof or by Executive pursuant to Section 3.2.2 hereof, Executive shall be entitled to receive an annual bonus, upon expiration of the Initial Term, in an amount equal to at least twenty five (25%) percent of the Base Salary. 2.3. EQUITY COMPENSATION. Executive shall be entitled to participate in long-term incentive plans, including, without limitation, stock option, restricted stock and similar equity plans of Employer as may be offered from time to time. In connection herewith, Executive has been granted options to purchase 35,000 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 2.4. EXECUTIVE BENEFITS. 2.4.1. 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. 2.4.2. 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 in accordance with the terms and conditions of such plans and programs. 2.4.3. VACATION. Executive shall be entitled to three (3) weeks of paid vacation per calendar year, prorated for any partial year. 2.4.4. AUTOMOBILE. Employer shall provide Executive with an automobile cash allowance in the amount of $1,050 (gross) per month. 2.5. SIGNING BONUS. On the date hereof, Employer shall pay to Executive a one-time signing bonus (the "Signing Bonus") in the amount of $50,000, less such deductions as shall be required to be withheld by applicable law and regulations. In the event Executive's employment is terminated during the Initial Term by Executive pursuant to Section 3.2.2 hereof or by Employer pursuant to Section 3.2.4 hereof, Executive shall repay to Employer the Signing Bonus, less one-twelfth (1/12) of such amount for each full thirty (30) day period during which Executive shall have been employed hereunder. 3. EMPLOYMENT TERM; TERMINATION. 3.1. EMPLOYMENT TERM. Executive's employment hereunder shall commence on November 24, 2003 (the "Effective Date") and, except as otherwise provided in Section 3.2 hereof, shall continue until the first (1st) anniversary of the Effective Date (the "Initial Term"). Thereafter, this Agreement shall automatically be renewed for successive one-year periods commencing on the first (1st) anniversary of the Effective Date (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 3.4.1 hereof) in respect of its or his election not to renew the Employment Term to the other party at least 45 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 forth in Sections 2.5 and 4 hereof) and the obligations of Employer to Executive shall be as set forth in Section 3.3 hereof only. A non-renewal of the Employment Term pursuant to this Section 3.1 shall not constitute a termination of Executive's employment for purposes of Section 3.3 hereof. 3.2. EVENTS OF TERMINATION. The Employment Term shall terminate upon the occurrence of any one or more of the following events: 3 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 or no reason whatsoever by giving a Notice of Termination to Employer. The Date of Termination (as defined in Section 3.4.2 hereof) for 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 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 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 that 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) a continuing or other material failure by Executive 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 in connection with Employer that involves personal profit. 3.2.5. WITHOUT CAUSE BY EMPLOYER. Employer may 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 or such shorter period if Employer shall pay to Executive that amount of the full annual Base Salary amount that would have been earned between the 30-day period and such shorter period. 4 3.2.6. EMPLOYER'S MATERIAL BREACH. Executive may 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; (ii) the assignment to Executive, without Executive's express written consent, of duties materially inconsistent with his positions, responsibilities and status with Employer, or a significant change in Executive's reporting responsibilities, titles or offices (it being agreed that Executive's change in reporting to the Chief Executive Officer and President of Resources shall not be deemed a significant change in Executive's reporting responsibilities), except in connection with the termination of the Employment Term by Employer for Cause, without Cause or Disability or as a result of Executive's death or voluntary resignation; (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. Any lump-sum payments owed by Employer shall be made to Executive within ten (10) business days of the Date of Termination. 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 any 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. 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, Employer shall pay to Executive, subject to Executive's continued compliance with the terms of Section 4 hereof, an amount equal to the Severance Amount. For purposes hereof, "Severance Amount" shall mean the full annual Base Salary amount in effect at such applicable time. Any payments made in accordance with this Section 3.3.2 shall be made in twelve (12) equal monthly installments from the Date of Termination in accordance with Employer's regular payroll practices. 3.3.3 WITHOUT CAUSE BY EXECUTIVE. In the event that the Employment Term is terminated by Executive pursuant to Section 3.2.2 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. 5 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 and/or disability insurance proceeds received by Executive or his estate pursuant to insurance policies provided by Employer, 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 2.4.1 hereof and if Executive is terminated pursuant to Sections 3.2.3, 3.2.5 or 3.2.6 hereof, Executive shall be entitled to participate, at Employer's expense, in all medical and health plans and programs of Employer in accordance with COBRA during such time as Executive, his spouse and dependents, if any, are entitled to continued health care coverage under COBRA (the "Benefits Period"), subject to Executive's continued compliance with the terms of Section 4 hereof; PROVIDED, that Executive's continued participation is permissible under the terms and provisions of such plans and programs; and PROVIDED, FURTHER, that in the event and when 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. 3.4. DEFINITIONS. 3.4.1. "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. 3.4.2. "DATE OF TERMINATION" DEFINED. "Date of Termination" means such date as the Employment Term expires (if not renewed) or is 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: technology; research, test procedures and results; business strategies and plans; 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. 6 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, exploit, 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 one (1) year 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 expiration or 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 two parties hereto in separate counterparts, each of which shall be deemed to be an original and 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 7 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. 300 Tice Boulevard Woodcliff Lake, New Jersey 07677 Attention: Chairman Telecopy No.: (201) 802-4620 Copy to (which shall not constitute notice): 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: Thomas Haughey c/o Pharmaceutical Resources, Inc. 300 Tice Boulevard Woodcliff Lake, New Jersey 07677 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 constitutes 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, with respect to the subject matter hereof. 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. 8 5.8. BINDING EFFECT; SUCCESSORS AND ASSIGNS. Executive may not delegate any of his duties or assign any of his rights hereunder. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives and beneficiaries, 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 such breach shall be construed or deemed to be a waiver of any other or subsequent breach. 5.10. REPRESENTATIONS AND WARRANTIES. 5.10.1. CAPACITY, ETC. Each of Executive and Employer hereby represents and warrants 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 or violate the law; and (c) this Agreement is his or its valid and binding obligation enforceable in accordance with its terms. 5.10.2. BAR ADMISSION. Executive hereby represents and warrants that he is duly licensed as an attorney and in good standing in the State of New York. 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. Subject to Section 5.12 hereof, 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 Borough of Manhattan, City 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 9 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 of competent jurisdiction. [SIGNATURE PAGE FOLLOWS] 10 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. PHARMACEUTICAL RESOURCES, INC. /s/ Steve Montalto By: ---------------------------------------- Name: Steve Montalto Title: Vice President of Human Resources /s/ Thomas Haughey --------------------------------------------- Thomas Haughey 11 EX-10 5 lease.txt EXHIBIT 10.11 Exhibit 10.11 LEASE FROM: 300 TICE REALTY ASSOCIATES L.L.C. LESSOR TO: PAR PHARMACEUTICAL, INC. LESSEE BUILDING: 300 TICE BOULEVARD WOODCLIFF LAKE, NEW JERSEY TABLE OF CONTENTS ----------------- 1. DESCRIPTION:..........................................................3 2. TERM:.................................................................3 3. BASIC RENT:...........................................................3 4. USE AND OCCUPANCY:....................................................3 5. CARE AND REPAIR OF PREMISES/ENVIRONMENTAL:............................3 6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS:...............................5 7. ACTIVITIES INCREASING FIRE INSURANCE RATES:...........................6 8. ASSIGNMENT AND SUBLEASE:..............................................6 9. COMPLIANCE WITH RULES AND REGULATIONS:................................9 10. DMAGES TO BUILDING:...................................................9 11. EMINENT DOMAIN:......................................................10 12. INSOLVENCY OF LESSEE:................................................10 13. LESSOR'S REMEDIES ON DEFAULT:........................................10 14. DEFICIENCY:.......................................................11 15. SUBORDINATION OF LEASE:...........................................12 16. SECURITY DEPOSIT:.................................................12 17. RIGHT TO CURE LESSEE'S BREACH:....................................13 18. MECHANIC'S LIENS:.................................................13 19. RIGHT TO INSPECT AND REPAIR:......................................13 20. SERVICES TO BE PROVIDED BY LESSOR/LESSOR'S EXCULPATION:...........13 21. INTERRUPTION OF SERVICES OR USE:..................................14 22. BUILDING STANDARD OFFICE ELECTRICAL SERVICE:......................14 23. ADDITIONAL RENT:..................................................15 24. LESSEE'S ESTOPPEL:................................................18 25. HOLDOVER TENANCY:.................................................18 26. RIGHT TO SHOW PREMISES:...........................................18 27. LESSOR'S WORK - LESSEE'S DRAWINGS:................................19 28. WAIVER OF TRIAL BY JURY:..........................................19 29. LATE CHARGE:......................................................19 i 30. LESSEE'S INSURANCE:...............................................19 31. NO OTHER REPRESENTATIONS:.........................................21 32. QUIET ENJOYMENT:..................................................21 33. INDEMNITY:........................................................21 34. ARTICLE HEADINGS:.................................................22 35. APPLICABILITY TO HEIRS AND ASSIGNS:...............................22 36. OUTSIDE PARKING SPACES:...........................................22 37. LESSOR'S LIABILITY FOR LOSS OF PROPERTY:..........................22 38. PARTIAL INVALIDITY:...............................................22 39. LESSEE'S BROKER:..................................................22 40. PERSONAL LIABILITY:...............................................23 41. NO OPTION:........................................................23 42. DEFINITIONS:......................................................23 43. LEASE COMMENCEMENT:...............................................24 44. NOTICES:.............................................................24 45. ACCORD AND SATISFACTION:.............................................24 46. EFFECT OF WAIVERS:...................................................25 47. LEASE CONDITION:.....................................................25 48. MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE:..........................25 49. LESSOR'S RESERVED RIGHT:.............................................25 50. CORPORATE AUTHORITY:.................................................25 51. AFTER-HOURS USE:.....................................................25 52. LESSEE'S EXPANSION/RELOCATION:.......................................26 53. BUILDING PERMIT:.....................................................26 54. MISCELLANEOUS:.......................................................27 55. OPTION TO EXTEND.....................................................27 ii LEASE, is made the 24th day of May, 2002 between 300 TICE REALTY ASSOCIATES L.L.C. (herein referred to as "Lessor") whose address is c/o Mack-Cali Realty Corporation, 11 Commerce Drive, Cranford, New Jersey 07016 and PAR PHARMACEUTICAL, INC. (herein referred to as "Lessee") whose address is 1 Ram Ridge Road, Chestnut Ridge, New York 10977. PREAMBLE -------- BASIC LEASE PROVISIONS AND DEFINITIONS In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have only the meanings set forth in this section, unless such meanings are expressly modified, limited or expanded elsewhere herein. 1. ADDITIONAL RENT shall mean all sums in addition to Fixed Basic Rent payable by Lessee to Lessor pursuant to the provisions of the Lease. 2. BASE PERIOD COSTS shall mean the following: A. Base Operating Costs: Those Operating Costs incurred during Calendar Year 2002. B. Base Real Estate Taxes: Those Real Estate Taxes incurred during Calendar Year 2002. C. Insurance Cost Expense Stop: $32,630.00. D. Utility and Energy Costs Expense Stop: $230,000.00. Notwithstanding anything hereinabove to the contrary, Lessee shall have no obligation to pay Additional Rent based upon increases over Base Period Costs prior to January 1, 2003.* 3. BUILDING shall mean 300 Tice Boulevard, Woodcliff Lake, New Jersey. 4. BUILDING HOLIDAYS shall be those shown on Exhibit F. 5. BUILDING HOURS shall be Monday through Friday, 8:00 a.m. to 6:00 p.m. and on Saturdays from 8:00 a.m. to 1:00 p.m., but excluding those holidays as set forth on Exhibit F attached hereto and made a part hereof, except that Common Facilities, lighting in the Building and Office Building Area shall be maintained for such additional hours as, in Lessor's sole judgment, is necessary or desirable to insure proper operating of the Building and Office Building Area. 6. COMMENCEMENT DATE is June 1, 2002, and shall for purposes hereof be subject to Articles 27 and 43 hereof. 7. DEMISED PREMISES OR PREMISES shall be deemed to be 10,420 gross rentable square feet on the second (2nd) floor as shown on Exhibit A hereto, which includes an allocable share of the Common Facilities as defined in Article 42(b). 8. EXHIBITS shall be the following, attached to this Lease and incorporated herein and made a part hereof. Exhibit A Location of Premises Exhibit A-1 Office Building Area Exhibit B Rules and Regulations Exhibit C Lessor's Work Exhibit C-1 Air Conditioning & Heating Design Standards Exhibit D Cleaning Services Exhibit E Building Holidays Exhibit F Tenant Estoppel Certificate Exhibit G Commencement Date Agreement Exhibit H Form of Letter of Credit 1 9. EXPIRATION DATE shall be the last day of the month in which the day before the fifth (5th) anniversary of the Rent Commencement Date occurs. 10. FIXED BASIC RENT shall mean: TWO MILLION ONE HUNDRED SIXTY NINE THOUSAND NINE HUNDRED SIXTY FIVE AND 00/100 DOLLARS ($2,169,965.00) for the Term payable as follows: Yearly Rate: $286,550.00 per annum for years 1 through 5. $296,970.00 per annum for years 6 through 7. Monthly Installment: $23,879.17 per month for years 1 through 5. $24,747.50 per month for years 6 through 7. Notwithstanding anything hereinabove to the contrary, payment of the Fixed Basic Rent shall commence on the six (6) month anniversary of the Commencement Date (the "Rent Commencement Date"). If such day is other than the first day of a calendar month, the first monthly installment of Fixed Basic Rent shall be prorated to the end of said calendar month and shall be payable on such day.* 11. LESSEE'S BROKER shall mean Strategic Alliance Partners, LLC. 12. LESSEE'S PERCENTAGE shall be 4.53% subject to adjustment as provided for in Article 42(d). 13. OFFICE BUILDING AREA is as set forth on Exhibit A-1. 14. PARKING SPACES shall mean a total of forty two (42) spaces, as follows: Assigned: nine (9) spaces located in the garage Unassigned: thirty three (33) spaces in the outdoor parking lot 15. PERMITTED USE shall be general office use and for no other purpose. 16. SECURITY DEPOSIT shall be SIXTY FIVE THOUSAND ONE HUNDRED TWENTY FIVE AND 00/100 DOLLARS ($65,125.00). 17. TERM shall mean five (5) years from the Rent Commencement Date, plus the number of days, if any, to have the Lease expire on the last day of a calendar month, unless extended pursuant to any option contained herein. -- End of Preamble -- 2 W I T N E S S E T H - - - - - - - - - - For and in consideration of the covenants herein contained, and upon the terms and conditions herein set forth, Lessor and Lessee agree as follows: 1. DESCRIPTION: ----------- Lessor hereby leases to Lessee, and Lessee hereby hires from Lessor, the Premises as defined in the Preamble which includes an allocable share of the Common Facilities, as shown on the plan or plans, initialed by the parties hereto, marked Exhibit A attached hereto and made part of this Lease in the Building as defined in the Preamble, (hereinafter called the "Building") which is situated on that certain parcel of land (hereinafter called "Office Building Area") as described on Exhibit A-1 attached hereto and made part of this Lease, together, with the right to use in common with other lessees of the Building, their invitees, customers and employees, those public areas of the Common Facilities as hereinafter defined. 2. TERM: ---- The Premises are leased for a term to commence on the Commencement Date, and to end at 12:00 midnight on the Expiration Date, all as defined in the Preamble. 3. BASIC RENT: ---------- The Lessee shall pay to the Lessor during the Term, the Fixed Basic Rent as defined in the Preamble (hereinafter called "Fixed Basic Rent") payable in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The Fixed Basic Rent shall accrue at the Yearly Rate as defined in the Preamble and shall be payable, in advance, on the first day of each calendar month during the Term at the Monthly Installments as defined in the Preamble, except that a proportionately lesser sum may be paid for the first and last months of the Term of this Lease if the Term commences on a day other than the first day of the month, in accordance with the provisions of this Lease herein set forth. Lessor acknowledges receipt from Lessee of the first monthly installment by check, subject to collection, for Fixed Basic Rent for the first month of the Lease Term. Lessee shall pay Fixed Basic Rent, and any Additional Rent as hereinafter provided, to Lessor at Lessor's above stated address, or at such other place as Lessor may designate in writing, without demand and without counterclaim, deduction or set off. 4. USE AND OCCUPANCY: ----------------- Lessee shall use and occupy the Premises for the Permitted Use as defined in the Preamble. If at any time during the Term of this Lease, Lessee adopts a policy prohibiting Lessee, its employees, agents or invitees from smoking within the Premises, Lessee shall establish a designated area within the Premises where Lessee shall permit smoking. Lessee shall establish such designated area at Lessee's sole expense in accordance with Article 6 of this Lease. Such designated area shall include, among other things, adequate area, ventilation and fire safety equipment. Lessee hereby acknowledges that such designated area is necessary and reasonable to prevent smoking by Lessee, Lessee's employees, agents and invitees in unauthorized areas of the Building or Common Facilities in violation of relevant fire and safety laws and regulations and to prevent fire hazards within the Premises. 5. CARE AND REPAIR OF PREMISES/ENVIRONMENTAL: (a) Lessee shall commit no act of waste and shall take good care of the Premises and the fixtures and appurtenances therein, and shall, in the use and occupancy of the Premises, conform to all laws, orders and regulations of the federal, state and municipal governments or any of their departments affecting the Premises and with any and all environmental requirements resulting from the Lessee's use of the Premises, this covenant to survive the 3 expiration or sooner termination of the Lease. Lessor shall, subject to the same being included in Operating Costs, make all necessary repairs to the Premises, Common Facilities and to the assigned parking areas, if any, except where the repair has been made necessary by misuse or neglect by Lessee or Lessee's agents, servants, visitors or licensees, in which event Lessor shall nevertheless make the repair but Lessee shall pay to Lessor, as Additional Rent, immediately upon demand, the costs therefor. All improvements made by Lessee to the Premises, which are so attached to the Premises, shall become the property of Lessor upon installation. Not later than the last day of the Term, Lessee shall, at Lessee's expense, remove all Lessee's personal property and those improvements made by Lessee which have not become the property of Lessor, including trade fixtures, cabinetwork, movable paneling, partitions and the like; repair all injury done by or in connection with the installation or removal of said property and improvements; and surrender the Premises in as good condition as they were at the beginning of the Term, reasonable wear and damage by fire, the elements, casualty or other cause not due to the misuse or neglect by Lessee, Lessee's agents, servants, visitors or licensees excepted. All other property of Lessee remaining on the Premises after the last day of the Term of this Lease shall be conclusively deemed abandoned and may be removed by Lessor, and Lessee shall reimburse Lessor for the cost of such removal. Lessor may have any such property stored at Lessee's risk and expense. ENVIRONMENTAL ------------- (b) COMPLIANCE WITH ENVIRONMENTAL LAWS. Lessee shall, at Lessee's own expense, promptly comply with each and every federal, state, county and municipal environmental law, ordinance, rule, regulation, order, directive and requirement, now or hereafter existing ("Environmental Laws"), applicable to the Premises, Lessee, Lessee's operations at the Premises, or all of them. (c) ISRA COMPLIANCE. Lessee shall, at Lessee's own expense, comply with the Industrial Site Recovery Act, N.J.S.A. 13:1K-6 ET SEQ., the regulations promulgated thereunder and any amending and successor legislation and regulations ("ISRA"). (d) INFORMATION TO LESSOR. At no expense to Lessor, Lessee shall promptly provide all information and sign all documents requested by Lessor with respect to compliance with Environmental Laws. (e) LESSOR AUDIT. Lessee shall permit Lessor and its representatives access to the Premises, from time to time, to conduct an environmental assessment, investigation and sampling, all at Lessee's own expense. (f) LESSEE REMEDIATION. Should any assessment, investigation or sampling reveal the existence of any spill, discharge or placement of Contaminants in, on, under, or about, or migrating from or onto the Premises, the Building or the Office Building Area, as a result of the action or omission of Lessee or a "Lessee Representative", then, in addition to being in default under this Lease and Lessor having all rights available to Lessor under this Lease and by law by reason of such default, Lessee shall, at Lessee's own expense, in accordance with Environmental Laws, undertake all action required by Lessor and any governmental authority, including, without limitation, promptly obtaining and delivering to Lessor an unconditional No Further Action Letter. For purposes of this Article, the term "Lessee's Representative" shall mean any shareholder, officer, director, member, partner, employee, agent, licensee, assignee, sublessee or invitee of Lessee, or any third party other than Lessor, or another lessee of the Building, or a shareholder, officer, director, member, partner, employee, agent, licensee, assignee, sublessee or invitee of such other lessee. In no event shall any of Lessee's remedial action involve engineering or institutional controls, a groundwater classification exception area or well restriction area, and Lessee's remedial action shall meet the most stringent published or unpublished remediation standards for soil, surface water, groundwater and drinking water. Promptly upon completion of all required investigatory and remedial activities, Lessee shall, at Lessee's own expense, to Lessor's satisfaction, restore the affected areas of the Premises, the Building or the Office Building Area, as the case may be, from any damage or condition caused by the investigatory or remedial work. Notwithstanding 4 anything to the contrary herein, Lessee shall not be responsible for any Contaminants on, in, under or affecting all or any portion of the Premises or Office Building Area which occurred or were present on the Premises or Office Building Area prior to the Commencement Date.* (g) ENVIRONMENTAL QUESTIONNAIRE. Upon Lessor's request, contemporaneously with the signing and delivery of this Lease, and thereafter upon renewal of the lease, if at all, Lessee shall complete, execute and deliver to Lessor an environmental questionnaire in form and substance satisfactory to Lessor. (h) ENVIRONMENTAL DOCUMENTS AND CONDITIONS. For purposes of this Article, the term "Environmental Documents" shall mean all environmental documentation concerning the Building or the Office Building Area, of which the Premises is a part, or its environs, in the possession or under the control of Lessee, including, without limitation, plans, reports, correspondence and submissions. During the term of this Lease and subsequently, promptly upon receipt by Lessee or Lessee's Representatives, Lessee shall deliver to Lessor all Environmental Documents concerning or generated by or on behalf of Lessee, whether currently or hereafter existing. In addition, Lessee shall promptly notify Lessor of any environmental condition of which Lessee has knowledge, which may exist in, on, under, or about, or may be migrating from or onto the Building or the Office Building Area. (i) LESSOR'S RIGHT TO PERFORM LESSEE'S OBLIGATIONS. Notwithstanding anything to the contrary set forth in this Lease, in the event, pursuant to this Lease, Lessee is required to undertake any sampling, assessment, investigation or remediation with respect to the Premises, the Building or the Office Building Area, as the case may be, then, at Lessor's discretion, Lessor shall have the right, upon notice to Lessee, from time to time, to perform such activities at Lessee's expense, and all sums incurred by Lessor shall be paid by Lessee, as Additional Rent, upon demand. (j) INDEMNITY. Lessee shall indemnify, defend and hold harmless Lessor, Lessor's officers, directors, shareholders, employees and personal or legal representatives from and against any and all claims, liabilities, losses, damages, penalties and costs, foreseen or unforeseen, including, without limitation, counsel, engineering and other professional or expert fees, which an indemnified party may incur resulting directly or indirectly, wholly or partly from Lessee's actions or omissions with regard to Lessee's obligations under this Article. (k) SURVIVAL. This Article shall survive the expiration or earlier termination of this lease. Lessee's failure to abide by the terms of this Article shall be restrainable or enforceable, as the case may be, by injunction. (l) INTERPRETATION. The obligations imposed upon Lessee under subparagraphs (a) through (j) above are in addition to and are not intended to limit, but to expand upon, the obligations imposed upon Lessee under this Article 5. As used in this Article, the term "Contaminants" shall include, without limitation, any regulated substance, toxic substance, hazardous substance, hazardous waste, pollution, pollutant, contaminant, petroleum, asbestos or polychlorinated biphenyls, as defined or referred to in any Environmental Laws. Where a law or regulation defines any of these terms more broadly then another, the broader definition shall apply. 6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS: -------------------------------------- Lessee shall not, without first obtaining the written consent of Lessor, make any structural or Building Systems alterations, additions or improvements in, to or about the Premises. Building Systems shall mean any structural, life safety, plumbing, electrical, heating, ventilation or air conditioning system or its components. Lessee shall not, without first obtaining the written consent of Lessor (which shall not be unreasonably withheld or delayed) make any non-Building Systems alterations, additions or improvements in, to or about the Premises. Lessee may, upon notification to Lessor, but without prior consent of Lessor perform minor cosmetic improvements, such as painting and wallpapering, and make alterations that do not (a) exceed, in the aggregate, $10,000.00 in cost, (b) require a building permit, or (c) adversely affect the Building's utility or mechanical systems.* 5 7. ACTIVITIES INCREASING FIRE INSURANCE RATES: ------------------------------------------ Lessee shall not do or suffer anything to be done on the Premises which will increase the rate of fire insurance on the Building. 8. ASSIGNMENT AND SUBLEASE: ----------------------- Provided Lessee is not in default of any provisions of this Lease, Lessee may assign or sublease the within Lease to any party subject to the following: a. In the event Lessee desires to assign this Lease or sublease all or part of the Premises to any other party, the terms and conditions of such assignment or sublease shall be communicated to the Lessor in writing no less than thirty (30) days prior to the effective date of any such sublease or assignment, and, prior to such effective date, the Lessor shall have the option, exercisable in writing to the Lessee, to: (i) sublease such space from Lessee at the lower rate of (a) the rental rate per rentable square foot of Fixed Basic Rent and Additional Rent then payable pursuant to this Lease or (b) the terms set forth in the proposed sublease, (ii) recapture in the case of subletting, that portion of the Premises to be sublet or all of the Premises in the case of an assignment ("Recapture Space") so that such prospective sublessee or assignee shall then become the sole Lessee of Lessor hereunder, or (iii) recapture the Recapture Space for Lessor's own use and the within Lessee shall be fully released from any and all obligations hereunder with respect to the Recapture Space. b. In the event that the Lessor elects not to recapture the Lease or relet the Premises as hereinabove provided, the Lessee may nevertheless assign this Lease or sublet the whole or any portion of the Premises, subject to the Lessor's prior written consent, which consent shall not be unreasonably withheld, on the basis of the following terms and conditions: i. The Lessee shall provide to the Lessor the name and address of the assignee or sublessee. ii. The assignee or sublessee shall assume, by written instrument, all of the obligations of this Lease, and a copy of such assumption agreement shall be furnished to the Lessor within ten (10) days of its execution. Any sublease shall expressly acknowledge that said sublessee's rights against Lessor shall be no greater than those of Lessee. Lessee further agrees that notwithstanding any such subletting, no other and further subletting of the Premises by Lessee or any person claiming through or under Lessee shall or will be made except upon compliance with and subject to the provisions of this Article 8. iii. Each sublease shall provide that it is subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and that in the event of default by Lessee under this Lease, Lessor may, at its option, take over all of the right, title and interest of Lessee, as sublessor, under such sublease, and such sublessee shall, at Lessor's option, attorn to Lessor pursuant to the then executory provisions of such sublease, except that Lessor shall not (i) be liable for any previous act or omission of Lessee under such sublease or, (ii) be subject to any offset not expressly provided in such sublease which theretofore accrued to such sublease to which Lessor has not specifically consented in writing or by any previous prepayment of more than one month's rent. iv. The Lessee and each assignee shall be and remain liable for the observance of all the covenants and provisions of this Lease, including, but not limited to, the payment of Fixed Basic Rent and Additional Rent reserved herein, through the entire Term of this Lease, as the same may be renewed, extended or otherwise modified. 6 v. The Lessee and any assignee shall promptly pay to Lessor fifty percent (50%) of any consideration received for any assignment and/or fifty percent (50%) of all of the rent, as and when received, in excess of the Rent required to be paid by Lessee for the area sublet computed on the basis of an average square foot rent for the gross square footage Lessee has leased.* vi. In any event, the acceptance by the Lessor of any rent from the assignee or from any of the subtenants or the failure of the Lessor to insist upon a strict performance of any of the terms, conditions and covenants herein shall not release the Lessee herein, nor any assignee assuming this Lease, from any and all of the obligations herein during and for the entire Term of this Lease. vii. In Lessor's reasonable judgment, the proposed assignee or subtenant is engaged in a business or activity, and the Premises, or the relevant part thereof, will be used in a manner, which (a) is in keeping with the then standard of the Building and (b) is limited to the use of the Premises as general offices. viii. The proposed assignee or subtenant shall be an entity which has existed for at least one (1) year and provided Lessor has comparable space available for leasing in the Building, is not then an occupant of any part of the Building or any other building then owned by Lessor or its affiliates within a five-mile radius of the Building.* ix. Provided Lessor has comparable space available for leasing in the Building, the proposed assignee or subtenant is not an entity or a person with whom Lessor is or has been, within the preceding twelve (12) month period, negotiating to lease space in the Building or any other building owned by Lessor or its affiliates within a five-mile radius of the Building.* x. There shall not be more than one (1) subtenant in the Premises. xi. Lessee shall not publicly advertise the subtenancy for less than the then current market rent per rentable square foot for the Premises as though the Premises were vacant.* xii. Lessee shall not have (a) publicly advertised the availability of the Premises without prior notice to and approval by Lessor, nor shall any advertisement state the name (as distinguished from the address) of the Building or (b) listed the Premises for subletting or assignment with other than a broker, agent or representative who waives any entitlement to a commission or other fee from Lessor in the event of a recapturing of the Premises; xiii. The proposed occupancy shall not, in Lessor's reasonable opinion, increase the density of population using the Demised Premises to exceed one (1) person per 250 gross rentable square feet of space or exceed the parking allocation presently provided for in this Lease; xiv. The proposed assignee or subtenant shall only use the Premises for general offices and shall not be engaged in any of the following: (a) educational, including but not limited to, instructional facilities and correspondence schools; (b) employment agencies; (c) model agencies; (d) photographic studios or laboratories; (e) spas, health, physical fitness or exercise salons; (f) small loan offices; (g) real estate brokerage or real estate sales offices open to the general public or construction offices; (h) medical or dental facilities, including professional offices, treatment facilities, dispensaries or laboratories; (i) federal, state or local government offices; (j) so-called boiler room operations; 7 (k) retail stock brokerage offices; and (l) religious organizations making facilities available to congregations for uses other than business purposes; and (m) executive office suite use. xv. The proposed assignee or subtenant shall not be entitled, directly or indirectly, to diplomatic or sovereign immunity and shall be subject to the service of process in, and the jurisdiction of, the state courts of New Jersey. xvi. Lessor shall require a FIVE HUNDRED AND 00/100 DOLLAR ($500.00) payment to cover its handling charges for each request for consent to any sublet or assignment prior to its consideration of the same. Lessee acknowledges that its sole remedy with respect to any assertion that Lessor's failure to consent to any sublet or assignment is unreasonable shall be the remedy of specific performance and Lessee shall have no other claim or cause of action against Lessor as a result of Lessor's actions in refusing to consent thereto. c. If Lessee is a corporation other than a corporation whose stock is listed and traded on a nationally recognized stock exchange, the provisions of Sub-section a. shall apply to a transfer (however accomplished, whether in a single transaction or in a series of related or unrelated transactions) of stock (or any other mechanism such as, by way of example, the issuance of additional stock, a stock voting agreement or change in class(es) of stock) which results in a change of control of Lessee as if such transfer of stock (or other mechanism) which results in a change of control of Lessee were an assignment of this Lease, and if Lessee is a partnership or joint venture, said provisions shall apply with respect to a transfer (by one or more transfers) of an interest in the distributions of profits and losses of such partnership or joint venture (or other mechanism, such as, by way of example, the creation of additional general partnership or limited partnership interests) which results in a change of control of such a partnership or joint venture, as if such transfer of an interest in the distributions of profits and losses of such partnership or joint venture which results in a change of control of such partnership or joint venture were an assignment of this Lease; but said provisions shall not apply to transactions with a corporation into or with which Lessee is merged or consolidated or to which all or substantially all of Lessee's assets are transferred or to any corporation which controls or is controlled by Lessee or is under common control with Lessee, provided that in the event of such merger, consolidation or transfer of all or substantially all of Lessee's assets (i) the successor to Lessee has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater of (1) the net worth of Lessee immediately prior to such merger, consolidation or transfer, or (2) the net worth of Lessee herein named on the date of this Lease, and (ii) proof satisfactory to Lessor of such net worth shall have been delivered to Lessor at least 10 days prior to the effective date of any such transaction. Lessee may assign this Lease or sublet any portion of all the Premises to any corporation, partnership, trust, association or other business organization directly or indirectly controlling or controlled by Lessee or under common control with Lessee, or to any successor by merger, consolidation, corporate reorganization or acquisition of all or substantially all of the assets of Lessee provided that any such successor by merger, consolidation, corporate reorganization or acquisition of assets has a net worth at the time of such merger, consolidation, reorganization or acquisition (herein, "Merger") equal to or greater than the lesser of (A) the net worth of Lessee immediately preceding the Merger or (B) the net worth of Lessee as of the Commencement Date. Any other assignment or subleasing of Lessee's interest under this Lease shall be subject to Lessor's approval, which approval shall not be unreasonably withheld or delayed.* d. In the event that any or all of Lessee's interest in the Premises and/or this Lease is transferred by operation of law to any trustee, receiver, or other representative or agent of Lessee, or to Lessee as a debtor in possession, and subsequently any or all of Lessee's interest in the Premises and/or this Lease is offered or to be offered by Lessee or any trustee, receiver, or other representative or agent of Lessee as to its estate or property (such person, firm or entity being hereinafter referred to as the "Grantor"), for assignment, conveyance, lease, or other disposition to a person, firm or entity other than Lessor (each such transaction being hereinafter referred to as a 8 "Disposition"), it is agreed that Lessor has and shall have a right of first refusal to purchase, take, or otherwise acquire, the same upon the same terms and conditions as the Grantor thereof shall accept upon such Disposition to such other person, firm, or entity; and as to each such Disposition the Grantor shall give written notice to Lessor in reasonable detail of all of the terms and conditions of such Disposition within twenty (20) days next following its determination to accept the same but prior to accepting the same, and Grantor shall not make the Disposition until and unless Lessor has failed or refused to accept such right of first refusal as to the Disposition, as set forth herein. Lessor shall have thirty (30) days next following its receipt of the written notice as to such Disposition in which to exercise the option to acquire Lessee's interest by such Disposition, and the exercise of the option by Lessor shall be effected by notice to that effect sent to the Grantor; but nothing herein shall require Lessor to accept a particular Disposition or any Disposition, nor does the rejection of any one such offer of first refusal constitute a waiver or release of the obligation of the Grantor to submit other offers hereunder to Lessor. In the event Lessor accept such offer of first refusal, the transaction shall be consummated pursuant to the terms and conditions of the Disposition described in the notice to Lessor. In the event Lessor rejects such offer of first refusal, Grantor may consummate the Disposition with such other person, firm, or entity; but any decrease in price of more than two percent (2%) of the price sought from Lessor or any change in the terms of payment for such Disposition shall constitute a new transaction requiring a further option of first refusal to be given to Lessor hereunder.* e. Without limiting any of the provisions of Articles 12 and 13, if pursuant to the Federal Bankruptcy Code (herein referred to as the "Code"), or any similar law hereafter enacted having the same general purpose, Lessee is permitted to assign this Lease notwithstanding the restrictions contained in this Lease, adequate assurance of future performance by an assignee expressly permitted under such Code shall be deemed to mean the deposit of cash security in an amount equal to the sum of six month's Fixed Basic Rent plus an amount equal to the Additional Rent for the calendar year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Lessor for the balance of the Term, without interest, as security for the full performance of all of Lessee's obligations under this Lease, to be held and applied in the manner specified for security in Article 16.* f. Except as specifically set forth above, no portion of the Premises or of Lessee's interest in this Lease may be acquired by any other person or entity, whether by assignment, mortgage, sublease, transfer, operation of law or act of the Lessee, nor shall Lessee pledge its interest in this Lease or in any security deposit required hereunder. 9. COMPLIANCE WITH RULES AND REGULATIONS: ------------------------------------- Lessee shall observe and comply with the rules and regulations hereinafter set forth in Exhibit B attached hereto and made a part hereof and with such further reasonable rules and regulations as Lessor may prescribe, on written notice to the Lessee, for the safety, care and cleanliness of the Building and the comfort, quiet and convenience of other occupants of the Building. Lessee shall not place a load upon any floor of the Premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Lessor reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Lessee, at Lessee's expense, in settings sufficient, in Lessor's judgement, to absorb and prevent vibration, noise and annoyance. 10. DAMAGES TO BUILDING: ------------------- If the Building is damaged by fire or any other cause to such extent the cost of restoration, as reasonably estimated by Lessor, will equal or exceed twenty-five percent (25%) of the replacement value of the Building (exclusive of foundations) just prior to the occurrence of the damage, then Lessor may, no later than the sixtieth (60th) day following the date of damage, give Lessee a notice of election to 9 terminate this Lease, or if the cost of restoration will equal or exceed fifty percent (50%) of such replacement value and if the Premises shall not be reasonably usable for the purpose for which they are leased hereunder, and if restoration of the damage will require more than one hundred eighty (180) days to complete or if such damage is not fully repaired and reasonable access to the Premises restored within one hundred eighty (180) days from the date of damage, then, in any such event Lessee may, no later than the sixtieth (60th) day following the date of damage or following the end of said one hundred eighty (180) day period, give Lessor a notice of election to terminate this Lease. In either said event of election, this Lease shall be deemed to terminate on the tenth (10th) day after the giving of said notice, and Lessee shall surrender possession of the Premises within a reasonable time thereafter, and the Fixed Basic Rent, and any Additional Rent, shall be apportioned as of the date of said surrender and any Fixed Basic Rent or Additional Rent paid for any period beyond said date shall be repaid to Lessee. If the cost of restoration shall not entitle Lessor to terminate this Lease, or if, despite the cost, Lessor does not elect to terminate this Lease, Lessor shall restore the Building and the Premises with reasonable promptness, subject to Force Majeure, and Lessee shall have no right to terminate this Lease, except as set forth above. Lessor need not restore fixtures and improvements owned by Lessee.* In any case in which use of the Premises is affected by any damage to the Building, there shall be either an abatement or an equitable reduction in Fixed Basic Rent, depending on the period for which and the extent to which the Premises are not reasonably usable for the purpose for which they are leased hereunder. The words "restoration" and "restore" as used in this Article 10 shall include repairs. If the damage results from the fault of the Lessee, Lessee's agents, servants, visitors or licensees, Lessee shall not be entitled to any abatement or reduction in Fixed Basic Rent, except to the extent of any rent insurance received by Lessor. 11. EMINENT DOMAIN: -------------- If Lessee's use of the Premises is materially affected due to the taking by eminent domain of (a) the Premises or any part thereof or any estate therein; or (b) any other part of the Building; then, in either event, this Lease shall terminate on the date when title vests pursuant to such taking. The Fixed Basic Rent, and any Additional Rent, shall be apportioned as of said termination date and any Fixed Basic Rent or Additional Rent paid for any period beyond said date, shall be repaid to Lessee. Lessee shall not be entitled to any part of the award for such taking or any payment in lieu thereof, but Lessee may file a separate claim for any taking of fixtures and improvements owned by Lessee which have not become the Lessor's property, and for moving expenses, provided the same shall, in no way, affect or diminish Lessor's award. In the event of a partial taking which does not effect a termination of this Lease but does deprive Lessee of the use of a portion of the Premises, there shall either be an abatement or an equitable reduction of the Fixed Basic Rent, and an equitable adjustment reducing the Base Period Costs as hereinafter defined depending on the period for which and the extent to which the Premises so taken are not reasonably usable for the purpose for which they are leased hereunder. 12. INSOLVENCY OF LESSEE: -------------------- Either (a) the appointment of a receiver to take possession of all or substantially all of the assets of Lessee, or, (b) a general assignment by Lessee for the benefit of creditors, or, (c) any action taken or suffered by Lessee under any insolvency or bankruptcy act, shall constitute a default of this Lease by Lessee, and Lessor may terminate this Lease forthwith and upon notice of such termination Lessee's right to possession of the Premises shall cease, and Lessee shall then quit and surrender the Premises to Lessor but Lessee shall remain liable as hereinafter provided in Article 14 hereof. 13. LESSOR'S REMEDIES ON DEFAULT: ---------------------------- If Lessee defaults in the payment of Fixed Basic Rent, or any Additional Rent, or defaults in the performance of any of the other covenants and conditions hereof or permits the Premises to become deserted, abandoned or vacated, Lessor may give Lessee notice of such default, and if Lessee does not cure any Fixed Basic Rent or Additional 10 Rent default within ten (10) days or other default within twenty (20) days after giving of such notice (or if such other default is of such nature that it cannot be completely cured within such period, if Lessee does not commence such curing within such twenty (20) days and thereafter proceed with reasonable diligence and in good faith to cure such default), then Lessor may terminate this Lease on not less than ten (10) days notice to Lessee, and on the date specified in said notice, Lessee's right to possession of the Premises shall cease but Lessee shall remain liable as hereinafter provided. If this Lease shall have been so terminated by Lessor pursuant to Articles 12 or 13 hereof, Lessor may at any time thereafter resume possession of the Premises by any lawful means and remove Lessee or other occupants and their effects. Lessee shall pay to Lessor, on demand, such expenses as Lessor may incur, including, without limitation, court costs and reasonable attorney's fees and disbursements, in enforcing the performance of any obligation of Lessee under this Lease.* 14. DEFICIENCY: ---------- In any case where Lessor has recovered possession of the Premises by reason of Lessee's default, Lessor may, at Lessor's option, occupy the Premises or cause the Premises to be redecorated, altered, divided, consolidated with other adjoining premises or otherwise changed or prepared for reletting, and may relet the Premises or any part thereof, as agent of Lessee or otherwise, for a term or terms to expire prior to, at the same time as or subsequent to, the original Expiration Date of this Lease, at Lessor's option and receive the rent therefor. Rent so received shall be applied first to the payment of such expenses as Lessor may have incurred in connection with the recovery of possession, redecorating, altering, dividing, consolidating with other adjoining premises, or otherwise changing or preparing for reletting, and the reletting, including brokerage and reasonable attorney's fees, and then to the payment of damages in amounts equal to the Fixed Basic Rent and Additional Rent hereunder and to the costs and expenses of performance of the other covenants of Lessee as herein provided. Lessee agrees, in any such case, whether or not Lessor has relet, to pay to Lessor damages equal to the Fixed Basic Rent and Additional Rent from the date of such default to the date of expiration of the term demised and other sums herein agreed to be paid by Lessee, less the net proceeds of the reletting, if any, received by Lessor during the remainder of the unexpired term hereof, as ascertained from time to time, and the same shall be payable by Lessee on the several rent days above specified. Lessee shall not be entitled to any surplus accruing as a result of any such reletting. In reletting the Premises as aforesaid, Lessor may grant rent concessions, and Lessee shall not be credited therewith. No such reletting shall constitute a surrender and acceptance or be deemed evidence thereof. If Lessor elects, pursuant hereto, actually to occupy and use the Premises or any part thereof during any part of the balance of the Term as originally fixed or since extended, there shall be allowed against Lessee's obligation for rent or damages as herein defined, during the period of Lessor's occupancy, the reasonable value of such occupancy, not to exceed, in any event, the Fixed Basic Rent and Additional Rent herein reserved and such occupancy shall not be construed as a release of Lessee's liability hereunder. Alternatively, in any case where Lessor has recovered possession of the Premises by reason of Lessee's default, Lessor may at Lessor's option, and at any time thereafter, and without notice or other action by Lessor, and without prejudice to any other rights or remedies it might have hereunder or at law or equity, become entitled to recover from Lessee, as Damages for such breach, in addition to such other sums herein agreed to be paid by Lessee, to the date of re-entry, expiration and/or dispossess, an amount equal to the difference between the Fixed Basic Rent and Additional Rent reserved in this Lease from the date of such default to the date of Expiration of the original Term demised and the then fair and reasonable rental value of the Premises for the same period. Said Damages shall become due and payable to Lessor immediately upon such breach of this Lease and without regard to whether this Lease be terminated or not, and if this Lease be terminated, without regard to the manner in which it is terminated. In the computation of such Damages, the difference between an installment of Fixed Basic Rent and Additional Rent thereafter becoming due and the fair and reasonable rental value of the Premises for the period for which such installment was payable shall be discounted to the date of such default at the rate of not more than six percent (6%) per annum. Lessee hereby waives all right of redemption to which Lessee or any person under Lessee might be entitled by any law now or hereafter in force. 11 Lessor's remedies hereunder are in addition to any remedy allowed by law. Lessor shall use commercially reasonable efforts to mitigate damages to the extent required by law.* 15. SUBORDINATION OF LEASE: ---------------------- This Lease shall, at Lessor's option, or at the option of any holder of any underlying lease or holder of any mortgages or trust deed, be subject and subordinate to any such underlying leases and to any such mortgages or trust deed which may now or hereafter affect the real property of which the Premises form a part, and also to all renewals, modifications, consolidations and replacements of said underlying leases and said mortgages or trust deed. Although no instrument or act on the part of Lessee shall be necessary to effectuate such subordination, Lessee will, nevertheless, execute and deliver such further instruments confirming such subordination of this Lease as may be desired by the holders of said mortgages or trust deed or by any of the lessor's under such underlying leases. Lessee hereby appoints Lessor attorney-in-fact, irrevocably, to execute and deliver any such instrument for Lessee. If any underlying lease to which this Lease is subject terminates, Lessee shall, on timely request, attorn to the owner of the reversion. 16. SECURITY DEPOSIT: ---------------- Lessee shall deposit with Lessor on the signing of this Lease, the Security Deposit as defined in the Preamble for the full and faithful performance of Lessee's obligations under this Lease, including without limitation, the surrender of possession of the Premises to Lessor as herein provided. If Lessor applies any part of said Security Deposit to cure any default of Lessee, Lessee shall, on demand, deposit with Lessor the amount so applied so that Lessor shall have the full Security Deposit on hand at all times during the Term of this Lease. In the event a bona fide sale, subject to this Lease, Lessor shall have the right to transfer the Security Deposit to the vendee, and Lessor shall be considered released by Lessee from all liability for the return of the Security Deposit; and Lessee agrees to look solely to the new lessor for the return of the Security Deposit, and it is agreed that this shall apply to every transfer or assignment made of the Security Deposit to the new lessor. Provided this Lease is not in default, the Security Deposit (less any portions thereof used, applied or retained by Lessor in accordance with the provisions of this Article 16), shall be returned to Lessee after the expiration or sooner termination of this Lease and after delivery of the entire Premises to Lessor in accordance with the provisions of this Lease. Lessee covenants that it will not assign or encumber or attempt to assign or encumber the Security Deposit and Lessor shall not be bound by any such assignment, encumbrance or attempt thereof. Lessee may deliver to Lessor, in lieu of the cash deposit set forth in this Article an irrevocable negotiable letter of credit issued by and drawn upon such commercial bank selected by Lessee and acceptable to Lessor (at its sole discretion) and in form and content acceptable to Lessor (also at its sole discretion) (the form attached hereto as Exhibit H shall be deemed acceptable to Lessor) for the account of Lessor, in the sum of SIXTY FIVE THOUSAND ONE HUNDRED TWENTY FIVE AND 00/100 ($65,125.00) DOLLARS. Said letter of credit shall be for a term of not less than one (l) year and shall be renewed by Lessee (without notice from Lessor) no later than sixty (60) days prior to its expiration, and the expiration of each replacement thereof, until Lessor shall be required to return the security to Lessee pursuant to the terms of this Lease but in no event earlier than ninety (90) days after the Expiration Date, and each such renewed letter of credit shall be delivered to Lessor no later than sixty (60) days prior to the expiration of the letter of credit then held by Lessor. If any portion of the security deposit shall be utilized by Lessor in the manner permitted by this Lease, Lessee shall, within five (5) days after request by Lessor, replenish the security account by depositing with Lessor, in cash or by letter of credit, an amount equal to that utilized by Lessor. Failure of Lessee to comply strictly with the provisions of this Article shall constitute a material breach of this Lease and Lessor shall be entitled to present the letter of credit then held by it for payment (without notice to Lessee). If the cash security is converted into a letter of credit, the provisions with respect to letters of credit shall apply (with the necessary changes in points of detail) to such letter of credit deposit. In the event of a bank failure or insolvency affecting the letter of credit, Lessee shall replace same within twenty (20) days after being requested to do so by Lessor.* 12 In the event of the insolvency of Lessee, or in the event of the entry of a material judgment in any court against Lessee which is not discharged or appealed within thirty (30) days after entry, or in the event a petition is filed by or against Lessee under any chapter of the bankruptcy laws of the State of New Jersey or the United States of America, then in such event, Lessor may require the Lessee to deposit additional security in an amount which in Lessor's sole judgement would be sufficient to adequately assure Lessee's performance of all of its obligations under this Lease including all payments subsequently accruing. Failure of Lessee to deposit the security required by this Article 16 within ten (10) days after Lessor's written demand shall constitute a material breach of this Lease by Lessee.* 17. RIGHT TO CURE LESSEE'S BREACH: ----------------------------- If Lessee breaches any covenant or condition of this Lease, Lessor may, on reasonable notice to Lessee (except that no notice need be given in case of emergency), cure such breach at the expense of Lessee and the reasonable amount of all expenses, including attorney's fees, incurred by Lessor in so doing (whether paid by Lessor or not) shall be deemed Additional Rent payable on demand. 18. MECHANIC'S LIENS: ---------------- Lessee shall, within fifteen (15) days after notice from Lessor, discharge or satisfy by bonding or otherwise any mechanic liens for materials or labor claimed to have been furnished to the Premises on Lessee's behalf. 19. RIGHT TO INSPECT AND REPAIR: --------------------------- Lessor may enter the Premises but shall not be obligated to do so (except as required by any specific provision of this Lease) at any reasonable time on reasonable notice to Lessee (except that no notice need be given in case of emergency) for the purpose of inspection or the making of such repairs, replacement or additions in, to, on and about the Premises or the Building, as Lessor deems necessary or desirable. Lessee shall have no claims or cause of action against Lessor by reason thereof. In no event shall Lessee have any claim against Lessor for interruption of Lessee's business, however occurring, including but not limited to that arising from the negligence of Lessor, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Premises and/or the Building, including the structural and non-structural portions thereof. 20. SERVICES TO BE PROVIDED BY LESSOR/LESSOR'S EXCULPATION: ------------------------------------------------------ Subject to intervening laws, ordinances, regulations and executive orders, while Lessee is not in default under any of the provisions of this Lease, Lessor agrees to furnish, except on holidays, as set forth on Exhibit E attached hereto and made a part hereof: a. The cleaning services, as set forth on Exhibit D attached hereto and made a part hereof, and subject to the conditions therein stated. Except as set forth on Exhibit D, Lessee shall pay the cost of all other cleaning services required by Lessee. b. Heating, ventilating and air conditioning (herein "HVAC") as appropriate for the season, and as set forth on Exhibit C-1, attached hereto and made a part hereof, together with Common Facilities lighting and electric energy all during Building Hours, as defined in the Preamble. c. Cold and hot water for drinking and lavatory purposes. d. Elevator service during Building Hours (if the Building contains an elevator or elevators for the use of the occupants thereof). e. Restroom supplies and exterior window cleaning when reasonably required. 13 f. Notwithstanding the requirements of Exhibit C-1 (as to HVAC) or D or any other provision of this Lease, Lessor shall not be liable for failure to furnish any of the aforesaid services when such failure is due to Force Majeure, as hereinafter defined. Lessor shall not be liable, under any circumstances, including, but not limited to, that arising from the negligence of Lessor, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Premises and/or the Building, including the structural and non-structural portions thereof, for loss of or injury to Lessee or to property, however occurring, through or in connection with or incidental to the furnishings of, or failure to furnish, any of the aforesaid services or for any interruption to Lessee's business, however occurring. 21. INTERRUPTION OF SERVICES OR USE: ------------------------------- Interruption or curtailment of any service maintained in the Building or at the Office Building Area, if caused by Force Majeure, as hereinafter defined, shall not entitle Lessee to any claim against Lessor or to any abatement in rent, and shall not constitute a constructive or partial eviction, unless Lessor fails to take measures as may be reasonable under the circumstances to restore the service without undue delay. If the Premises are rendered untenantable in whole or in part, for a period of ten (10) consecutive business days, by the making of repairs, replacements or additions, other than those made with Lessee's consent or caused by misuse or neglect by Lessee, or Lessee's agents, servants, visitors or licensees, there shall be a proportionate abatement of Rent from and after said tenth (10th) consecutive business day and continuing for the period of such untenantability. In no event, shall Lessee be entitled to claim a constructive eviction from the Premises unless Lessee shall first have notified Lessor in writing of the condition or conditions giving rise thereto, and if the complaints be justified, unless Lessor shall have failed, within a reasonable time after receipt of such notice, to remedy, or commence and proceed with due diligence to remedy such condition or conditions, all subject to Force Majeure as hereinafter defined. 22. BUILDING STANDARD OFFICE ELECTRICAL SERVICE: ------------------------------------------- The cost of electric current which is supplied by the Lessor for use by the Lessee in the Premises, other than for heating or air conditioning purposes, shall be reimbursed to the Lessor at terms, classification and rates normally charged by the public utilities corporation serving that part of the municipality where the subject Premises are located. a. From and after the Commencement Date, Lessee agrees to pay as Additional Rent an estimated electrical charge of $.10 per square foot per month, payable on the first day of each and every month, until such time as an electrical survey can be performed pursuant to Article 22(b) below. b. Lessee agrees that an independent electrical engineering consultant shall make a survey of electric power demand of the electric lighting fixtures and the electric equipment of Lessee used in the Premises to determine the average monthly electric consumption thereof, and the costs of said survey shall be borne by Lessee. The findings of said consultant as to the average monthly electric consumption of Lessee shall, unless objected to by Lessee within forty-five (45) days, be conclusive and binding on Lessor and Lessee. After Lessor's consultant has submitted its report, Lessee shall pay to Lessor, within ten (10) days after demand therefor by Lessor, the amount (based on the monthly consumption found by such consultant) as owing from the Lease Term's Commencement Date, and the then expired months, to include the then current month and thereafter adjusted for the estimated electrical charges already paid pursuant to Article 22(a), on the first day of every month, in advance, the amount set forth as the monthly consumption in said report. Said amounts shall be treated as Additional Rent due hereunder. Proportionate sums shall be payable for periods of less than a full month if the Term commences or ends on any other than the first or last day of the month. If Lessee objects to said findings, Lessee shall nevertheless pay and continue to pay the amount determined by Lessor's consultant until the issue is finally resolved, but Lessee may, at its expense, seek the services of an independent electrical consultant who shall make a survey as provided above. If Lessor's and Lessee's consultant cannot agree as to Lessee's consumption within thirty (30) days of Lessee's consultant's findings either Lessor or Lessee may request the American 14 Arbitration Association in Somerset, New Jersey to appoint an electrical engineering consultant whose decision shall be final and binding on Lessor and Lessee, and whose cost shall be shared equally. Upon the issue being finally resolved, any overpayment made by Lessee shall be promptly refunded. c. In the event that there shall be an increase or decrease in the rate schedule (including surcharges or demand adjustments), of the public utility for the supply of Building Standard Office Electrical Service, or the imposition of any tax with respect to such service or increase in any such tax following the Lease Term's commencement, the Additional Rent payable hereunder shall be adjusted equitably to reflect the increase or decrease in rate or imposition or increase in the aforesaid tax. All computations shall be made on the basis of Lessee's surveyed usage as if a meter exclusively measuring such usage to the Premises was in place. d. Lessee covenants that it shall notify Lessor immediately upon the introduction of any office equipment or lighting different from that on the Premises as of Lessor's electrical survey or in addition to the aforesaid equipment or lighting on the Premises as of said survey. The introduction of any new or different equipment or lighting shall be cause for, at Lessor's election, a resurveying of the Premises at Lessee's expense. Lessor reserves the right to inspect the Premises to insure compliance with this provision. e. Lessor shall not be liable in any way to Lessee for any loss, damage or expense which Lessee may sustain or incur as a result of any failure, defect or change in the quantity or character of electrical energy available for redistribution to the Premises pursuant to this Article 22 nor for any interruption in the supply, and Lessee agrees that such supply may be interrupted for inspection, repairs and replacement and in emergencies. In any event, the full measure of Lessor's liability for any interruption in the supply due to Lessor's acts or omissions shall be an abatement of Fixed Basic Rent and Additional Rent, unless Lessor fails to take such measures as may be reasonable under the circumstances to restore such service without undue delay. In no event shall Lessor be liable for any business interruption suffered by Lessee. f. Lessor, at Lessee's expense, shall furnish and install all replacement lighting tubes, lamps, ballasts and bulbs required in the Premises. Lessee, however, shall have the right to furnish and/or install any or all of the items mentioned in this Article 22(f). g. Lessee's use of electrical service as contemplated herein shall be during Building Hours, and any use in excess of said Building Hours may result in a resurveying of Lessee's usage set forth above to reflect such additional consumption.* 23. ADDITIONAL RENT: --------------- It is expressly agreed that Lessee will pay in addition to the Fixed Basic Rent provided in Article 3 hereof, an Additional Rent to cover Lessee's Percentage as defined in the Preamble, of the increased cost to Lessor, for each of the categories enumerated herein, over the "Base Period Costs", as defined in the Preamble for said categories. a. OPERATING COST ESCALATION -- If the Operating Costs incurred for the Building in which the Premises are located and Office Building Area for any Lease Year or Partial Lease Year during the Lease Term shall be greater than the Base Operating Costs (adjusted proportionately for periods less than a Lease Year), then Lessee shall pay to Lessor, as Additional Rent, Lessee's Percentage of all such excess Operating Costs. Operating Costs shall include, by way of illustration and not of limitation: personal property taxes; management fees; labor, including all wages and salaries; social security taxes, and other taxes which may be levied against Lessor upon such wages and salaries; supplies; repairs and maintenance; maintenance and service contracts; painting; wall and window washing; laundry and towel service; tools and equipment (which are not required to be capitalized for federal income tax purposes); trash removal; lawn care; snow removal and all other items properly constituting direct operating costs according to standard accounting practices (hereinafter collectively referred to as the "Operating Costs"), but not including depreciation of Building or equipment; interest; income or excess profits taxes; costs of maintaining the Lessor's corporate existence; franchise 15 taxes; any expenditures required to be capitalized for federal income tax purposes, unless said expenditures are for the purpose of reducing Operating Costs within the Building and Office Building Area, or those which under generally applied real estate practice are expensed or regarded as deferred expenses or are required under any governmental or quasi-governmental law, statute, ordinance, rule, order, requirements or regulation, in which event the costs thereof shall be included. Notwithstanding anything contained herein to the contrary, any additional costs incurred by Lessor during the 2002 Calendar Year by reason of Lessor or any of its vendors entering into new labor contracts or renewals or modifications of existing labor contracts shall not be included in Base Operating Costs. The Base Operating Costs shall be as defined in the Preamble. b. FUEL, UTILITIES AND ELECTRIC COST ESCALATION (hereinafter referred to as "Utility and Energy Costs") -- If the Utility and Energy Costs, including any fuel surcharges or adjustments with respect thereto, incurred for water, sewer, gas, electric, other utilities and heating, ventilating and air conditioning for the Building, to include all leased and leasable areas (not separately billed or metered within the Building) and Common Facilities electric, lighting, water, sewer and other utilities for the Building and Office Building Area, for any Lease Year or Partial Lease Year, during the Term, shall be greater than the Utility and Energy Costs Expense Stop (adjusted proportionately for periods less than a Lease Year), then Lessee shall pay to Lessor as Additional Rent, Lessee's Percentage of all such excess Utility and Energy Costs. As used in this Article 23, the Utility and Energy Costs Expense Stop shall be as defined in the Preamble. c. TAX ESCALATION -- If the Real Estate Taxes for the Building and Office Building Area at which the Premises are located for any Lease Year or Partial Lease Year, during the Lease Term, shall be greater than the Base Real Estate Taxes (adjusted proportionately for periods less than a Lease Year), then Lessee shall pay to Lessor as Additional Rent, Lessee's Percentage as hereinafter defined, of all such excess Real Estate Taxes. As used in this Article 23(c), the words and terms which follow mean and include the following: i. "Base Real Estate Taxes" shall be as defined in the Preamble. ii. "Real Estate Taxes" shall mean the property taxes and assessments imposed upon the Building and Office Building Area, or upon the rent, as such, payable to the Lessor, including, but not limited to, real estate, city, county, village, school and transit taxes, or taxes, assessments, or charges levied, imposed or assessed against the Building and Office Building Area by any other taxing authority, whether general or specific, ordinary or extraordinary, foreseen or unforeseen. If due to a future change in the method of taxation, any franchise, income or profit tax shall be levied against Lessor in substitution for, or in lieu of, or in addition to, any tax which would otherwise constitute a Real Estate Tax, such franchise, income or profit tax shall be deemed to be a Real Estate Tax for the purposes hereof; conversely, any additional real estate tax hereafter imposed in substitution for, or in lieu of, any franchise, income or profit tax (which is not in substitution for, or in lieu of, or in addition to, a Real Estate Tax as hereinbefore provided) shall not be deemed a Real Estate Tax for the purposes hereof. d. INSURANCE COST ESCALATION - If the Insurance Costs for the Building and Office Building Area for any Lease Year or partial Lease Year during the Term shall be greater than the Insurance Expense Stop (adjusted proportionately for periods less than a Lease Year), Lessee shall pay to Lessor as Additional Rent for each Lease Year or partial Lease Year commencing from and after the Commencement Date, Lessee's Percentage of such excess Insurance Costs. As used in this Article 23(d), the words and terms which follow mean and include the following: 16 i. "Insurance Expense Stop" shall be as defined in the Preamble. ii. "Insurance Costs" shall mean all fire and other insurance costs incurred by Lessor in connection with its operation and maintenance of the Building and Office Building Area, for any Lease Year or Partial Lease Year, during the Term. e. LEASE YEAR -- As used in this Article 23, Lease Year shall mean a calendar year. Any portion of the Term which is less than a Lease Year as hereinbefore defined, that is, from the Commencement Date through the following December 31, and from the last January 1, falling within the Term to the end of the Term, shall be deemed a "Partial Lease Year". Any reference in this Lease to a Lease Year shall, unless the context clearly indicates otherwise, be deemed to be a reference to a Partial Lease Year if the period in question involves a Partial Lease Year. f. PAYMENT -- At any time, and from time to time, after the establishment of the Base Period Costs for each of the categories referred to above, Lessor shall advise Lessee in writing of Lessee's Percentage share with respect to each of the categories as estimated for the next twelve (12) month period (or proportionate part thereof if the last period prior to the Lease's expiration is less than twelve (12) months) as then known to the Lessor, and thereafter, the Lessee shall pay as Additional Rent, Lessee's Percentage share of these costs for the then current period affected by such advice (as the same may be periodically revised by Lessor as additional costs are incurred) in equal monthly installments, such new rates being applied to any months, for which the Fixed Basic Rent shall have already been paid which are affected by the Operating Cost Escalation and/or Utility and Energy Cost Escalation and/or Tax Escalation Costs and/or Insurance Costs above referred to, as well as the unexpired months of the current period, the adjustment for the then expired months to be made at the payment of the next succeeding monthly rental, all subject to final adjustment at the expiration of each Lease Year as defined in Article 23(e) hereof (or Partial Lease Year if the last period prior to the Lease's termination is less than twelve (12) months). In the event the last period prior to the Lease's termination is less than twelve (12) months, the Base Period Costs during said period shall be proportionately reduced to correspond to the duration of said final period. g. BOOKS AND REPORTS -- For the protection of Lessee, Lessor shall maintain books of account which shall be open to Lessee and its representatives at all reasonable times so that Lessee can determine that such Operating, Utility and Energy, Real Estate Tax and Insurance Costs have, in fact, been paid or incurred. Lessee's representatives shall mean only (i) Lessee's employees or (ii) a Certified Public Accounting firm, and neither Lessee's employees nor any Certified Public Accounting firm shall be permitted to (i) perform such inspection and/or audit on a contingency basis, or (ii) perform such an inspection and/or audit for any other tenant in the Building. At Lessor's request, Lessee shall execute a confidentiality agreement reasonably acceptable to Lessor prior to any examination of Lessor's books and records. In the event Lessee disputes any one or more of said charges, Lessee shall attempt to resolve such dispute with Lessor, provided that if such dispute shall not be satisfactorily settled between Lessor and Lessee, the dispute shall be referred by either party to an independent certified public accountant to be mutually agreed upon, and if such an accountant cannot be agreed upon, The American Arbitration Association may be asked by either party to select an arbitrator, whose decision on the dispute will be final and binding upon both parties, who shall jointly share any cost of such arbitration. Pending resolution of said dispute the Lessee shall pay to Lessor the sum so billed by Lessor subject to its ultimate resolution as aforesaid. h. RIGHT OF REVIEW -- Once Lessor shall have finally determined said Operating, Utility and Energy, Real Estate Tax and Insurance Costs at the expiration of a Lease Year, then as to the item so established, Lessee shall only be entitled to dispute said charge as finally established for a period of six (6) months after such charge is finally established, and Lessee specifically waives any right to dispute any such charge at the expiration of said six (6) month period. 17 i. OCCUPANCY ADJUSTMENT -- If, with respect to Operating Cost Escalation, as established in Article 23(a) hereof, and Utility and Energy Cost Escalation, as established in Article 23(b) hereof and Insurance Cost Escalation, as established in Article 23(d), the Building is less than ninety-five percent (95%) occupied during the establishment of the respective Base Periods, then the Base Period Costs incurred with respect to said Operating Cost, Utility and Energy Cost and Insurance Cost shall be adjusted during any such period within the Base Period so as to reflect ninety-five percent (95%) occupancy. Similarly, if during any Lease Year or Partial Lease Year, subsequent to the Base Period the Building is less than ninety-five percent (95%) occupied, then the actual costs incurred for Operating Cost, Utility and Energy Cost and Insurance Cost shall be increased during any such period to reflect ninety-five percent (95%) occupancy so that at all times after the Base Period the Operating Cost, Utility and Energy Cost or Insurance Cost shall be actual costs, but in the event less than ninety-five percent (95%) of the Building is occupied during all or part of the Lease Year involved, the Operating Cost, Utility and Energy Cost or Insurance Cost shall not be less than that which would have been incurred had ninety-five percent (95%) of the Building been occupied. The aforesaid adjustment shall only be made with respect to those items that are in fact affected by variations in occupancy levels.* 24. LESSEE'S ESTOPPEL: ----------------- Lessee shall, from time to time, on not less that ten (10) days prior written request by Lessor, execute, acknowledge and deliver to Lessor a written statement certifying that the Lease is unmodified and in full force and effect, or that the Lease is in full force and effect as modified and listing the instruments of modification; the dates to which the rents and charges have been paid; and, to the best of Lessee's knowledge, whether or not Lessor is in default hereunder, and if so, specifying the nature of the default. It is intended that any such statement delivered pursuant to this Article 24 may be relied on by a prospective purchaser of Lessor's interest or mortgagee of Lessor's interest or assignee of any mortgage of Lessor's interest. Lessee shall also execute and deliver the form "Lessee Estoppel Certificate" attached hereto as Exhibit F. 25. HOLDOVER TENANCY: ---------------- If Lessee holds possession of the Premises after the Expiration Date of this Lease, Lessee shall (i) become a tenant from month to month under the provisions herein provided, but at one hundred fifty percent (150%) percent of the monthly fixed basic rental for the last month of the term plus the Additional Rent for the first month and two hundred percent (200%) of the monthly fixed basic rental for the last month of the term plus the Additional Rent thereafter which shall continue as provided in the Lease which sum shall be payable in advance on the first day of each month, and without the requirement for demand or notice by Lessor to Lessee demanding delivery of possession of said Premises, and such tenancy shall continue until terminated by Lessor, or until Lessee shall have given to Lessor, at least sixty (60) days prior to the intended date of termination, a written notice of intent to terminate such tenancy, which termination date must be as of the end of a calendar month; and (ii) indemnify Lessor against loss or liability resulting from the delay by Lessee in so surrendering the Premises including, without limitation, any claims made by any succeeding occupant founded on such delay. Lessee's obligations under this Section shall survive the expiration or sooner termination of the Lease. The time limitations described in this Article 25 shall not be subject to extension for Force Majeure.* 26. RIGHT TO SHOW PREMISES: ---------------------- Lessor may show the Premises to prospective purchasers and mortgagees; and during the twelve (12) months prior to termination of this Lease, to prospective tenants, during Building Hours on reasonable notice to Lessee. 18 27. LESSOR'S WORK - LESSEE'S DRAWINGS: --------------------------------- a. Lessor agrees that, prior to the commencement of the Term of this Lease, it will do substantially all of the work in the Premises in accordance with Exhibit C attached hereto and made a part hereof. b. Lessee will timely supply such drawings and information to Lessor as set forth in Exhibit C. Any delay occasioned by Lessee's failure to timely supply such drawings and information shall not delay the Commencement Date of the Term and Lessee's obligations hereunder, and the same shall commence on the date the Premises would have been delivered to Lessee pursuant to Article 2, but for Lessee's delay. c. Lease commencement shall occur and the Commencement Date is defined as that date when Lessor has done substantially all of the work to be done by Lessor in accordance with Exhibit C, unless Lessor has been precluded from completing said work as a result of Lessee's acts or omissions including, but not limited to, its failure to comply with Article 27(b) hereof. Occupancy by Lessee or the delivery of a Certificate of Occupancy by Lessor (if required pursuant to local law) shall be prima facie evidence that Lessor has done substantially all of the work. 28. WAIVER OF TRIAL BY JURY: ----------------------- To the extent such waiver is permitted by law, the parties waive trial by jury in any action or proceeding brought in connection with this Lease or the Premises. 29. LATE CHARGE: ----------- Anything in this Lease to the contrary notwithstanding, at Lessor's option, Lessee shall pay a "Late Charge" of eight percent (8%) of any installment of Fixed Basic Rent or Additional Rent paid more than five (5) days after the due date thereof, to cover the extra expense involved in handling delinquent payments, said Late Charge to be considered Additional Rent. The amount of the Late Charge to be paid by Lessee shall be reassessed and added to Lessee's obligations for each successive monthly period until paid. Notwithstanding anything in this Article to the contrary, Lessor shall waive a Late Charge one time during each Lease Year provided, however, the installment of Fixed Basic Rent or Additional Rent so due is paid by the fifteenth (15th) day of the month. Payment received subsequent to the fifteenth (15th) of the month during these grace periods shall require a Late Charge to be reassessed and added to Lessee's obligations hereunder.* 30. LESSEE'S INSURANCE: ------------------ a. Lessee covenants to provide at Lessee's cost and expense on or before the earlier of (i) the Commencement Date, or (ii) Lessee's taking actual possession for the purpose of completing any improvement work, and to keep in full force and effect during the entire Term and so long thereafter as Lessee, or anyone claiming by, through or under Lessee, shall occupy the Premises, insurance coverage as follows: i. Commercial General Liability insurance with contractual liability endorsements with respect to the Premises and the business of Lessee in which Lessee shall be adequately covered under limits of liability of not less than THREE MILLION AND 00/100 DOLLARS ($3,000,000.00) combined single limit per occurrence for bodily or personal injury (including death) and property damage. Such insurance may be carried (x) under a blanket policy covering the Premises and other locations of Lessee, if any, provided that each such policy shall in all respects comply with this Article and shall specify that the portion of the total coverage of such policy that is allocated to the Premises is in the amounts required pursuant to this Article 30 and (y) under a primary liability policy of not less than ONE MILLION AND 00/100 DOLLARS ($1,000,000.00) and the balance under an umbrella policy. Notwithstanding anything to the contrary contained in this Lease, the carrying of insurance by Lessee in compliance with this Article 30 shall not modify, reduce, limit or impair 19 Lessee's obligations and liability under Article 33 hereof. ii. Fire and Extended Coverage, Vandalism, Malicious Mischief, Sprinkler Leakage and Special Extended Coverage Insurance in an amount adequate to cover the cost of replacement of all personal property, decoration, trade fixtures, furnishings, equipment in the Premises and all contents therein. Lessor shall not be liable for any damage to such property of Lessee by fire or other peril includable in the coverage afforded by the standard form of fire insurance policy with extended coverage endorsement attached (whether or not such coverage is in effect), no matter how caused, it being understood that the Lessee will look solely to its insurer for reimbursement. iii. Worker's Compensation Insurance in the minimum statutory amount covering all persons employed by Lessee. iv. Said limits shall be subject to periodic review and Lessor reserves the right to increase said coverage limits if, in the reasonable opinion of Lessor, said coverage becomes inadequate and is less than that commonly maintained by tenants in similar buildings in the area by tenants making similar uses. On or before the Commencement Date, and thereafter at Lessor's request, Lessee shall provide Lessor evidence of the insurance coverage required herein in the form of a duplicate original insurance policy, an insurance binder (countersigned by the insurer), or Evidence of Insurance (in form ACORD 27 with respect to property insurance and ACORD 25-S with respect to liability insurance) for each of the insurance policies Lessee is required to carry in compliance with its obligations under this Lease. b. All of the aforesaid insurance shall (i) name Lessor as an additional insured; (ii) be written by one or more responsible insurance companies licensed in the State of New Jersey satisfactory to Lessor and in form satisfactory to Lessor; (iii) contain endorsements substantially as follows: "It is understood and agreed that the insurer will give to Lessor, or any successor lessor, c/o Mack-Cali Realty Corporation, 11 Commerce Drive, Cranford, New Jersey, thirty (30) days prior written notice of any material change in or cancellation of this policy."; (iv) shall be written on an "occurrence" basis and not on a "claims made" basis. c. Lessee shall be solely responsible for payment of premium and Lessor (or its designee) shall not be required to pay any premium for such insurance. Lessee shall deliver to Lessor at least fifteen (15) days prior to the expiration of such policy, either a duplicate original or a certificate it being the intention of the parties hereto that the insurance required under the terms hereof shall be continuous during the entire Term of this Lease and any other period of time during which pursuant to the Term hereof, said insurance is required. Any insurance carried by Lessee shall be in excess of and will not contribute with the insurance carried by Lessor for injuries or damage arising out of the Premises. d. Lessee agrees, at its own cost and expense, to comply with all rules and regulations of the National Fire Protection Association (NFPA) National Fire Code. If, at any time or from time to time, as a result of or in connection with any failure by Lessee to comply with the foregoing sentence or any act or omission or commission by Lessee, its employees, agents, contractors or licensees, or a result of or in connection with the use to which the Premises are put (notwithstanding that such use may be for the purposes hereinbefore permitted or that such use may have been consented to by Lessor), the fire insurance rate(s) applicable to the Premises shall be higher than that which would be applicable for a business office legally permitted therein, Lessee agrees that it will pay to Lessor as Additional Rent, such portion of the premiums for all Lessor's fire insurance policies in force with respect to the building and the contents of any occupant thereof as shall be attributable to such higher rate(s). e. Lessor makes no representation that the limits of liability specified to be carried by Lessee or Lessor under the terms of this Lease are adequate to protect Lessee against Lessee's undertaking under this Article 30, and in the event Lessee believes that any such insurance coverage called for under this 20 Lease is insufficient, Lessee shall provide, at is own expense, such additional insurance as Lessee deems adequate. f. In the event the Premises or its contents are damaged or destroyed by fire or other insured casualty, (i) Lessor, to the extent of the coverage of Lessor's policies of fire insurance, hereby waives its rights, if any, against Lessee with respect to such damage or destruction, even if said fire or other casualty shall have been caused, in whole or in part, by the negligence of Lessee, and (ii) Lessee, to the extent of the coverage of Lessee's policies of fire insurance with extended coverage, hereby waives its rights, if any, against Lessor with respect to such damage, or destruction, even if said fire or other casualty shall have been caused, in whole or in part, by the negligence of Lessor; provided, however, such waivers of subrogation shall only be effective with respect to loss or damage occurring during such time as Lessor's or Lessee's policies of fire insurance (as the case may be) shall contain a clause or endorsement providing in substance that the aforesaid waiver of subrogation shall not prejudice the type and amount of coverage under such policies or the right of Lessor or Lessee (as the case may be) to recover thereunder. If, at any time, Lessor's or Lessee's insurance carrier refuses to write insurance which contains a consent to the foregoing waiver of subrogation, Lessor or Lessee, as the case may be, shall notify the party thereof in writing, and upon the giving of such notice, the provisions of this Section shall be null and void as to any casualty which occurs after such notice. If Lessor's or Lessee's insurance carrier shall make a charge for the incorporation of the aforesaid waiver of subrogation in its policies, then the party requesting the waiver shall promptly pay such charge to the other party upon demand. In the event the party requesting their waiver fails to pay such charge upon demand, the other party shall be released of its obligation to supply such waiver. g. Should Lessee fail to maintain the insurance coverage as set forth in this Article 30, then Lessee shall be in default hereunder and shall be deemed to have breached its covenants as set forth herein. 31. NO OTHER REPRESENTATIONS: ------------------------ No representations or promises shall be binding on the parties hereto except those representations and promises contained herein or in some future writing signed by the party making such representation(s) or promise(s). 32. QUIET ENJOYMENT: --------------- Lessor covenants that if, and so long as, Lessee pays Fixed Basic Rent, and any Additional Rent as herein provided, and performs Lessee's covenants hereof, Lessor shall do nothing to affect Lessee's right to peaceably and quietly have, hold and enjoy the Premises for the Term herein mentioned, subject to the provisions of this Lease. 33. INDEMNITY: --------- Lessee shall defend, indemnify and save harmless Lessor and its agents against and from; (a) any and all claims (i) arising from (x) the conduct or management by Lessee, its subtenants, licensees, its or their employees, agents, contractors or invitees on the Premises or of any business therein, or (y) any work or thing whatsoever done, or any condition created (other than by Lessor for Lessor's or Lessee's account) in or about the Premises during the Term of this Lease, or during the period of time, if any, prior to the Commencement Date that Lessee may have been given access to the Premises, (z) any default by Lessee under the terms, covenants and conditions of this Lease or (ii) arising from any negligent or otherwise wrongful act or omission of Lessee or any of its subtenants or licensees or its or their employees, agents, contractors or invitees, and (b) all costs, expenses and liabilities including attorneys fees and disbursements incurred in or in connection with each such claim, action or proceeding brought thereon. In case any action or proceeding be brought against Lessor by reason of any such claim, Lessee, upon notice from Lessor, shall resist and defend such action or proceeding. 21 34. ARTICLE HEADINGS: ---------------- The article headings in this Lease and position of its provisions are intended for convenience only and shall not be taken into consideration in any construction or interpretation of this Lease or any of its provisions. 35. APPLICABILITY TO HEIRS AND ASSIGNS: ---------------------------------- The provisions of this Lease shall apply to, bind and inure to the benefit of Lessor and Lessee, and their respective heirs, successors, legal representatives and assigns. It is understood that the term "Lessor" as used in this Lease means only the owner, a mortgagee in possession or a term lessee of the Building, so that in the event of any sale of the Building or of any lease thereof, or if a mortgagee shall take possession of the Premises, the Lessor herein shall be and hereby is entirely freed and relieved of all covenants and obligations of Lessor hereunder accruing thereafter, and it shall be deemed without further agreement that the purchaser, the term lessee of the Building, or the mortgagee in possession has assumed and agreed to carry out any and all covenants and obligations of Lessor hereunder. 36. OUTSIDE PARKING SPACES: ---------------------- Lessee's occupancy of the Premises shall include the use of the number of outside parking spaces as set forth in the Preamble, all of which will be unassigned. Lessor shall not be responsible for any damage or theft of any vehicle in the parking area and shall not be required to keep parking spaces clear of unauthorized vehicles or to otherwise supervise the use of the parking area. Lessee shall, upon request, promptly furnish to Lessor the license numbers of the cars operated by Lessee and its subtenants, licensees, invitees, concessionaires, officers and employees. If any vehicle of the Lessee, or of any subtenant, licensee, concessionaire, or of their respective officers, agents or employees, is parked in any part of the Common Facilities other than the employee parking area(s) designated therefor by Lessor, Lessee shall pay to Lessor such penalty as may be fixed by Lessor from time to time. All amounts due under the provisions of this Article 36 shall be deemed to be Additional Rent. 37. LESSOR'S LIABILITY FOR LOSS OF PROPERTY: --------------------------------------- Lessor shall not be liable for any loss of property from any cause whatsoever, including but not limited to theft or burglary from the Premises, and any such loss arising from the negligence of Lessor, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Premises and/or the Building, including the structural and non-structural portions thereof, and Lessee covenants and agrees to make no claim for any such loss at any time. 38. PARTIAL INVALIDITY: ------------------ If any of the provisions of this Lease, or the application thereof to any person or circumstances, shall to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 39. LESSEE'S BROKER: --------------- Lessee and Lessor each represents and warrants to the other that Lessee's broker, as defined in the Preamble is the sole broker with whom it has negotiated in bringing about this Lease and Lessee and Lessor each agrees to indemnify and hold the other and Lessor's mortgagee(s) harmless from any and all claims of other brokers claiming to have dealt with it, and expenses in connection therewith arising out of or in connection with the negotiation of or the entering into this 22 Lease by Lessor and Lessee. In no event shall Lessor's mortgagee(s) have any obligation to any broker involved in this transaction. In the event that no broker was involved as aforesaid, then Lessee represents and warrants to the Lessor that no broker brought about this transaction, and Lessee agrees to indemnify and hold Lessor harmless from any and all claims of any broker arising out of or in connection with the negotiations of, or entering into of, this Lease by Lessee and Lessor.* 40. PERSONAL LIABILITY: ------------------ Notwithstanding anything to the contrary provided in this Lease, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Lease by Lessor, that there shall be absolutely no personal liability on the part of Lessor, its constituent members (to include but not be limited to, officers, directors, partners and trustees) their respective successors, assigns or any mortgagee in possession (for the purposes of this Article, collectively referred to as "Lessor"), with respect to any of the terms, covenants and conditions of this Lease, and that Lessee shall look solely to the equity of Lessor in the Building for the satisfaction of each and every remedy of Lessee in the event of any breach by Lessor of any of the terms, covenants and conditions of this Lease to be performed by Lessor, such exculpation of liability to be absolute and without any exceptions whatsoever. 41. NO OPTION: --------- The submission of this Lease Agreement for examination does not constitute a reservation of, or option for, the Premises, and this Lease Agreement becomes effective as a Lease Agreement only upon execution and delivery thereof by Lessor and Lessee. 42. DEFINITIONS: ----------- a. AFFILIATE -- Affiliate shall mean any corporation related to Lessee as a parent, subsidiary or brother-sister corporation so that such corporation and such party and other corporations constitute a controlled group as determined under Section 1563 of the Internal Revenue Code of 1986, as amended and as elaborated by the Treasury Regulations promulgated thereunder or any business entity in which Lessee has more than a fifty percent (50%) interest. b. COMMON FACILITIES -- Common Facilities shall mean the non-assigned parking areas; lobby; elevator(s); fire stairs; public hallways; public lavatories; all other general Building facilities that service all Building tenants; air conditioning rooms; fan rooms; janitors' closets; electrical closets; telephone closets; elevator shafts and machine rooms; flues; stacks; pipe shafts and vertical ducts with their enclosing walls. Lessor may at any time close temporarily any Common Facilities to make repairs or changes therein or to effect construction, repairs or changes within the Building, or to discourage non-tenant parking, and may do such other acts in and to the Common Facilities as in its judgement may be desirable to improve the convenience thereof, but shall always in connection therewith, endeavor to minimize any inconvenience to Lessee. c. FORCE MAJEURE -- Force Majeure shall mean and include those situations beyond Lessor's reasonable control, including by way of example and not by way of limitation, acts of God; accidents; repairs; strikes; shortages of labor, supplies or materials; inclement weather; or, where applicable, the passage of time while waiting for an adjustment or insurance proceeds. Any time limits required to be met by either party hereunder, whether specifically made subject to Force Majeure or not, except those related to the payment of Fixed Basic Rent or Additional Rent, shall, unless specifically stated to the contrary elsewhere in this Lease, be automatically extended by the number of days by which any performance called for is delayed due to Force Majeure. d. LESSEE'S PERCENTAGE -- The parties agree that Lessee's Percentage, as defined in the Preamble, reflects and will be continually adjusted to reflect the ratio of the gross square feet of the area rented to Lessee (including an allocable share of all Common 23 Facilities) [the numerator] as compared with the total number of gross square feet of the entire Building (or additional buildings that may be constructed within the Office Building Area) [the denominator] measured outside wall to outside wall, but excluding therefrom any storage areas. Lessor shall have the right to make changes or revisions in the Common Facilities of the Building so as to provide additional leasing area. Lessor shall also have the right to construct additional buildings in the Office Building Area for such purposes as Lessor may deem appropriate, and subdivide the lands for that purpose if necessary, and upon so doing, the Office Building Area shall become the subdivided lot on which the Building in which the Premises is located. However, if any service provided for in Article 23(a) or any utility provided for in Article 23(b) is separately billed or separately metered within the Building, then the square footage so billed or metered shall be subtracted from the denominator and the Lessee's proportionate share for such service and/or utility shall be separately computed, and the Base Costs for such item shall not include any charges attributable to said square footage. Lessee understands that as a result of changes in the layout of the Common Facilities from time to time occurring due to, by way of example and not by way of limitation, the rearrangement of corridors, the aggregate of all Building tenant proportionate shares may be equal to, less than or greater than one hundred percent (100%). 43. LEASE COMMENCEMENT: ------------------ Notwithstanding anything contained herein to the contrary, if Lessor, for any reason whatsoever, including Lessor's negligence except as provided for in Article 27(b), cannot deliver possession of the Premises, as provided for in Article 27(a), to Lessee at the commencement of the agreed Term as set forth in Article 2, this Lease shall not be void or voidable, nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom, but in that event, the Term shall be for the full term as specified above to commence from and after the date Lessor shall have delivered possession of the Premises to Lessee or from the date Lessor would have delivered possession of the Premises to Lessee but for Lessee's failure to timely supply to Lessor such drawings and/or information required by Exhibit C or for any other reason attributable to Lessee (herein the "Commencement Date") and to expire midnight of the day immediately preceding Term anniversary of the Commencement Date, and if requested by Lessor, Lessor and Lessee shall, ratify and confirm said Commencement and Expiration Dates by completing and signing Exhibit G attached hereto and made a part hereof. Notwithstanding anything hereinabove to the contrary, in the event Lessor shall not have entered into a agreement with the existing tenant (Hawk Holdings) on or before June 1, 2002 (the "Outside Date"), for any reason whatsoever, then, Lessee, as its sole remedy may elect to terminate this lease, provided that notice of such election shall be given to Lessor no later than June 10, 2002, TIME BEING OF THE ESSENCE in the giving of such notice. If Lessee shall so elect, Lessor shall return any security deposit or moneys paid by Lessee to Lessor on account of this lease and the parties shall then be released of all liabilities hereunder, each to the other.* 44. NOTICES: ------- Any notice by either party to the other shall be in writing and shall be deemed to have been duly given only if (i) delivered personally or (ii) sent by registered mail or certified mail return receipt requested in a postage paid envelope addressed or (iii) sent by nationally recognized overnight delivery service, if to Lessee, at the above described Building; if to Lessor, at Lessor's address as set forth above; or, to either at such other address as Lessee or Lessor, respectively, may designate in writing. Notice shall be deemed to have been duly given, if delivered personally, on delivery thereof, if mailed, upon the tenth (10th) day after the mailing thereof or if sent by overnight delivery service, the next business day. 45. ACCORD AND SATISFACTION: ----------------------- No payment by Lessee or receipt by Lessor of a lesser amount than the rent and additional charges payable hereunder shall be deemed to be other than a payment on account of the earliest stipulated Fixed Basic Rent and Additional Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment for Fixed Basic 24 Rent or Additional Rent be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance of such Fixed Basic Rent and Additional Rent or pursue any other remedy provided herein or by law. 46. EFFECT OF WAIVERS: ----------------- No failure by Lessor to insist upon the strict performance of any covenant, agreement, term or condition of this Lease, or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No consent, or waiver, express or implied, by Lessor to or of any breach of any covenant, condition or duty of Lessee shall be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty, unless in writing signed by Lessor. 47. LEASE CONDITION: --------------- Intentionally omitted. 48. MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE: ------------------------------------------ Lessee agrees to give any mortgagees and/or trust deed holders, by registered mail, a copy of any notice of default served upon Lessor, provided that, prior to such notice, Lessee has been notified in writing (by way of notice of assignment of rents and leases or otherwise) of the address of such mortgagees and/or trust deed holders. Lessee further agrees that, if Lessor shall have failed to cure such default within the time provided for in this Lease, then the mortgagees and/or trust deed holders shall have an additional thirty (30) days within which to cure such default, or if such default cannot be cured within that time, then such additional time as may be necessary, if within such thirty (30) days, any mortgagee and/or trust deed holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. 49. LESSOR'S RESERVED RIGHT: ----------------------- Lessor and Lessee acknowledge that the Premises are in a Building which is not open to the general public. Access to the Building is restricted to Lessor, Lessee, their agents, employees and contractors and to their invited visitors. In the event of a labor dispute including a strike, picketing, informational or associational activities directed at Lessee or any other tenant, Lessor reserves the right unilaterally to alter Lessee's ingress and egress to the Building or make any change in operating conditions to restrict pedestrian, vehicular or delivery ingress and egress to a particular location. 50. CORPORATE AUTHORITY: ------------------- If Lessee is a corporation, Lessee represents and warrants that this Lease has been duly authorized and approved by the corporation's Board of Directors. The undersigned officers and representatives of the corporation represent and warrant that they are officers of the corporation with authority to execute this Lease on behalf of the corporation, and within fifteen (15) days of execution hereof, Lessee will provide Lessor with a corporate resolution confirming the aforesaid. 51. AFTER-HOURS USE: --------------- Lessee shall be entitled to make use of said Standard Electric Service and HVAC beyond the Building Hours, at Lessee's sole cost and expense, provided Lessee shall notify the Lessor by 3:00 p.m. on the day that Lessee shall require said overtime use if said overtime use is required 25 on any weekday, and by 3:00 p.m. on Friday for Saturday and/or Sunday overtime use. It is understood and agreed that Lessee shall pay the sum of FORTY-FIVE AND 00/100 DOLLARS ($45.00) per hour per zone for air-conditioning service and THIRTY AND 00/100 DOLLARS ($30.00) per hour per zone for heating services, plus such additional percentage increase of the aforesaid hourly sum computed by measuring the percentage increase between the rate in effect (including fuel surcharges or adjustments) during the month for which such overtime use is requested and the Base Rate. The Base Rate for purposes hereof shall be the average of the rates in effect (including surcharges and/or adjustments) during Calendar Year 2001. In no event shall the Lessee pay less than the sum of FORTY-FIVE AND 00/100 DOLLARS ($45.00) per hour per zone for such overtime air-conditioning service or less than THIRTY AND 00/100 DOLLARS ($30.00) per hour per zone for such overtime heating service. 52. LESSEE'S EXPANSION/RELOCATION: ----------------------------- The Lessor, in its sole discretion, shall have the right from time to time, before or after the Commencement Date, to change the location of the Premises to other space (the "Substituted Leased Premises") within the Building, subject to the terms and conditions set forth below. a. The Substituted Leased Premises shall contain a minimum floor area of approximately the same number of square feet as are contained in the Premises and shall be comparable to the Premises with the same level of finishes as the Premises.* b. If the total square footage comprised by the Substituted Leased Premises and its attributable Common Facilities exceed the total of the Premises, the Lessee shall not be required to pay any increase in the Fixed Basic Rent and Lessee's Percentage shall not be increased. If, however, such total square footage shall be less, Lessee's Fixed Basic Rent and Lessee's Percentage shall be decreased proportionately. c. The Lessor shall give the Lessee not less than forty-five (45) days prior notice of Lessor's decision to relocate the Lessee; and the Lessee agrees that no later than forty-five (45) days from the date of its receipt of such notice it shall relocate to the Substituted Leased Premises. d. The Lessor shall bear and pay for the cost and expense of any such relocation from the Premises to the Substituted Leased Premises including, without limitation, printing of new stationary or business cards if necessitated by such relocation; provided, however, that the Lessee shall not be entitled to any compensation for damages for any interference with or interruption of its business during or resulting from such relocation. The Lessor shall make reasonable efforts to minimize such interference. e. In connection with any such relocation, the Lessor shall, at its own cost and expense, furnish and install in (or, if practicable, relocate to) the Substituted Leased Premises all walls, partitions, floors, floor coverings, ceilings, fixtures, wiring and plumbing, if any, (as distinguished from trade fixtures, equipment, furniture, furnishings and other personal property belonging to Lessee) required to be installed by Lessor in the Premises or comparable in quality to those situated in the Premises at the time such notice of substitution is given by Lessor, whichever is applicable. f. The payments of new monthly minimum rent shall commence on the three (3) months anniversary of the day Lessor has completed the physical relocation and installation of permanent improvements in the Substituted Leased Premises.* g. Lessor and Lessee shall promptly execute an amendment to this Lease reciting the relocation of the Premises and any changes in the monthly Fixed Basic Rent payable hereunder. 53. BUILDING PERMIT: --------------- 26 This Lease is expressly conditioned upon Lessor obtaining a building permit from the appropriate government official for Lessee's Premises. Lessor hereby agrees to make application to said government official within five (5) days following the execution of the construction drawings for the Premises. As used herein, construction drawings shall mean the final plans and specifications required pursuant to Article 27(b). 54. MISCELLANEOUS: ------------- a. This Lease shall not be recorded. b. This Lease contains the entire agreement between Lessor and Lessee relating to the leasing of the Demised Premises. Lessee expressly acknowledges and agrees that Lessor has not made and is not making, and, in executing and delivering this Lease Lessee is not relying upon, any warranties, representations, promises or statements, except to the extent that the same may be expressly set forth in this Lease. c. If any term or provision of this Lease, or the application thereof to any person or circumstance, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this lease shall be valid and enforceable to the fullest extent permitted by law. d. This Lease shall be deemed to have been made in Bergen County, and shall be construed according to, and governed by, the law of the State of New Jersey . e. This Lease is submitted to Lessee for signature, with the understanding that it shall not bind Lessor unless and until it has been executed by Lessor and delivered to Lessee or Lessee's attorney or agent. f. Lessee agrees not to disclose the terms, covenants, conditions or other facts with respect to this Lease, including, but not limited to, the Fixed Basic Rent, to any person, corporation, partnership, association, newspaper, periodical or other entity. This non-disclosure and confidentiality agreement shall be binding upon Lessee without limitation as to time, and a breach of this paragraph shall constitute a material breach under this Lease. 55. OPTION TO EXTEND. ---------------- (a) (i) If the term of this lease shall then be in full force and effect and Lessee has complied fully with its obligations hereunder, Lessee shall have the option to extend the term of this lease for a period of five (5) years (the "Extension Term") commencing on the day immediately following the Expiration Date, provided however that Lessee shall give Lessor notice of its election to extend the term no earlier than eighteen (18) months prior to the Expiration Date nor later than twelve (12) months prior to the Expiration Date of the term. TIME SHALL BE OF THE ESSENCE in connection with the exercise of Lessee's option pursuant to this Article. (ii) Notwithstanding anything contained herein to the contrary, if Lessee exercises its option to extend the term of this lease, Lessor may elect to cause Lessee to rescind such notice if Lessor intends to lease the Premises to a tenant in the Building then leasing more than 10,420 gross rentable square feet (a "Larger Tenant"). If Lessor intends to lease the Premises to a Larger Tenant, Lessor shall notify Lessee within thirty (30) days after Lessor's receipt of Lessee's election to extend the term of this lease, in which event, Lessee's election shall be deemed rescinded, Lessee shall no longer have any option to extend the term of this lease and this lease shall expire on the Expiration Date. The provisions of this Section 55(a)(ii) shall no longer be applicable in the event Lessor relocates Lessee to Substituted Leased Premises (pursuant to Article 52 above) after the three (3) year anniversary of the Rent Commencement Date.* (b) Such extension of the term of this lease shall be upon the same covenants and conditions, as herein set forth except for 27 the Fixed Basic Rent (which shall be determined in the manner set forth below), and except that Lessee shall have no further right to extend the term of this lease after the exercise of the single option described in paragraph (a) of this Section. If Lessee shall duly give notice of its election to extend the term of this lease, the Extension Term shall be added to and become a part of the term of this lease (but shall not be considered a part of the initial term), and any reference in this lease to the "term of this lease", the "term hereof", or any similar expression shall be deemed to include such Extension Term, and, in addition, the term "Expiration Date" shall thereafter mean the last day of such Extension Term. Lessor shall have no obligation to perform any alteration or preparatory or other work in and to the Premises and Lessee shall continue possession thereof in its "as is" condition. (c) If Lessee exercises its option for the Extension Term, the Fixed Basic Rent during the Extension Term shall be the fair market rent for the Premises, as hereinafter defined. (d) Lessor and Lessee shall use their best efforts, within 30 days after Lessor receives Lessee's notice of its election to extend the term of this lease for the Extension Term ("Negotiation Period"), to agree upon the Fixed Basic Rent to be paid by Lessee during the Extension Term. If Lessor and Lessee shall agree upon the Fixed Basic Rent for the Extension Term, the parties shall promptly execute an amendment to this lease stating the Fixed Basic Rent for the Extension Term. (e) If the parties are unable to agree on the Fixed Basic Rent for the Extension Term during the Negotiation Period, then within 15 days after notice from the other party, given after expiration of the Negotiation Period, each party, at its cost and upon notice to the other party, shall appoint a person to act as an appraiser hereunder, to determine the fair market rent for the premises for the Extension Term. Each such person shall be a real estate broker or appraiser with at least ten years' active commercial real estate appraisal or brokerage experience (involving the leasing of office space as agent for both landlords and tenants) in Bergen County. If a party does not appoint a person to act as an appraiser within said 15 day period, the person appointed by the other party shall be the sole appraiser and shall determine the aforesaid fair market rent. Each notice containing the name of a person to act as appraiser shall contain also the person's address. Before proceeding to establish the fair market rent, the appraisers shall subscribe and swear to an oath fairly and impartially to determine such rent. If the two appraisers are appointed by the parties as stated in the immediately preceding paragraph, they shall meet promptly and attempt to determine the fair market rent. If they are unable to agree within 45 days after the appointment of the second appraiser, they shall attempt to select a third person meeting the qualifications stated in the immediately preceding paragraph within 15 days after the last day the two appraisers are given to determine the fair market rent. If they are unable to agree on the third person to act as appraiser within said 15 day period, the third person shall be appointed by the American Arbitration Association, upon the application of Lessor or Lessee to the office of the Association nearest the Building. The person appointed to act as appraiser by the Association shall be required to meet the qualifications stated in the immediately preceding paragraph. Each of the parties shall bear 50% of the cost of appointing the third person and of paying the third person's fees. The third person, however selected, shall be required to take an oath similar to that described above. The three appraisers shall meet and determine the fair market rent. A decision in which two of the three appraisers concur shall be binding and conclusive upon the parties. In deciding the dispute, the appraisers shall act in accordance with the rules then in force of the American Arbitration Association, subject however, to such limitations as may be placed on them by the provisions of this lease. Notwithstanding the foregoing, in no event shall the Fixed Basic Rent during the Extension Term be less than the Fixed Basic Rent during the last year of the initial term of this lease. (f) After the fair market rent for the Extension Term has been determined by the appraiser or appraisers and the appraiser 28 or appraisers shall have notified the parties, at the request of either party, both parties shall execute and deliver to each other an amendment of this lease stating the Fixed Basic Rent for the Extension Term. (g) If the Fixed Basic Rent for the Extension Term has not been agreed to or established prior to the commencement of the Extension Term, then Lessee shall pay to Lessor an Fixed rent ("Temporary Rent") which Temporary Rent shall be equal to 200% of the Fixed Basic Rent payable by Lessee for the last year of the initial term. Thereafter, if the parties shall agree upon a Fixed Basic Rent, or the Fixed Basic Rent shall be established upon the determination of the fair market rent by the appraiser or appraisers, at a rate at variance with the Temporary Rent (i) if such Fixed Basic Rent is greater than the Temporary Rent, Lessee shall promptly pay to Lessor the difference between the Fixed Basic Rent determined by agreement or the appraisal process and the Temporary Rent, or (ii) if such Fixed Basic Rent is less than the Temporary Rent, Lessor shall credit to Lessee's subsequent monthly installments of Fixed Basic Rent the difference between the Temporary Rent and the Fixed Basic Rent determined by agreement or the appraisal process. (h) In describing the fair market rent during the Extension Term, the appraiser or appraisers shall be required to take into account the rentals at which leases are then being concluded (as of the last day of the initial term) (for 5 year leases without renewal options with the lessor and lessee each acting prudently, with knowledge and for self-interest, and assuming that neither is under undue duress) for comparable space in the Building and in comparable office buildings in the County of Bergen. (i) The option granted to Lessee under this Article 55 may be exercised only by Lessee, its affiliates, permitted successors and assigns, and not by any subLessee or any successor to the interest of Lessee by reason of any action under the Bankruptcy Code, or by any public officer, custodian, receiver, United States Trustee, trustee or liquidator of Lessee or substantially all of Lessee's property. Lessee shall have no right to exercise this option subsequent to the date Lessor shall have the right to give the notice of termination referred to in Article 13 unless Lessee cures the default within the applicable grace period. Notwithstanding the foregoing, Lessee shall have no right to extend the term if, at the time it gives notice of its election, Lessee shall not be in occupancy of substantially all of the Premises. EACH PARTY AGREES that it will not raise or assert as a defense to any obligation under the Lease or this Agreement or make any claim that the Lease or this Agreement is invalid or unenforceable due to any failure of this document to comply with ministerial requirements including, but not limited to, requirements for corporate seals, attestations, witnesses, notarizations, or other similar requirements, and each party hereby waives the right to assert any such defense or make any claim of invalidity or unenforceability due to any of the foregoing. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written. LESSOR: LESSEE: 300 TICE REALTY ASSOCIATES L.L.C. PAR PHARMACEUTICAL, INC. By: Mack-Cali Realty, L.P. Member By: Mack-Cali Realty Corporation, General Partner By: Michael A. Grossman By: Dennis O'Connor ------------------- --------------- Michael A. Grossman Name: Dennis O'Connor Executive Vice President Title:VP-CFO 29 EXHIBIT A --------- LOCATION OF PREMISES Exhibit A - Page 1 EXHIBIT A-1 ----------- OFFICE BUILDING AREA Being known and designated as Lot 3.3 in Block 301 as shown on Final Subdivision Plat entitled: "Tice Campus, Borough of Woodcliff Lake, Bergen County, State of New Jersey" prepared by Earle W. Bailey, P.E., L.S. dated June 15, 1978 and filed in the Bergen County Clerk's Office on October 20, 1978 as Map No. 7683; said parcel being more particularly described as follows: Beginning at a point in the northerly line of Tice Boulevard as shown on the above mentioned plat, where same is intersected by the dividing line between Lots 3.2 and 3.3 in Block 3.01. Said beginning point being further describ3ed as the terminus of the following courses and distances form a concrete monument set at the intersection of the northerly line of Tice Boulevard with the westerly line of Chestnut Ridge Road, said courses being: a) North 58 degrees 30 minutes 28 seconds West, 38.21 feet to a point of curvature, thence; b) Southwesterly on a curve to the right, said curve having a radius of 80.00 feet, a central angle of 77 degrees 07 minutes 17 seconds, an arc length of 107.68 feet to a point of tangency in the northerly line of Tice Boulevard, thence; c) North 74 degrees 09 minutes 35 seconds West 95.81 feet to a point of curvature, thence; d) Southwesterly on a curve to the right, said curve having a radius of 990.00 feet, a central angle of 09 degrees 11 minutes 58 seconds an arc length of 158.95 feet to a point of tangency in the northerly line of Tice Boulevard, thence; e) North 61 degrees 20 minutes 10 seconds West 1724.56 feet to the point and place of Beginning and running thence; 1) North 67 degrees 20 minutes 10 seconds West 148.16 feet to a point of curvature; thence 2) Northwesterly on a curve to the right, said curve having a radius of 60.00 feet, a central angle of 41 degrees 24 minutes 35 seconds an arc length of 43.36 feet to a point of reverse curvature; thence 3) On a curve to the left, said curve having a radius of 60.00 feet, a central angle of 200 degrees 14 minutes 58 seconds an arc length of 209.70 feet to a point; thence 4) South 37 degrees 14 minutes 11 seconds West 808,.84 feet to a point; thence 5) North 48 degrees 51 minutes 52 seconds West 406.27 feet to a point; thence 6) North 38 degrees 30 minutes 56 seconds East 81.86 feet to a concrete monument; thence 7) North 26 degrees 37 minutes 32 seconds East 1141.62 feet to a point; thence 8) South 60 degrees 01 minutes 58 seconds East 72.27 feet to a point; thence 9) North 30 degrees 10 minutes 28 seconds East 221.88 feet to a point; thence 10) South 59 degrees 49 minutes 32 seconds East 371.63 feet to a point; thence 11) South 66 degrees 29 minutes 02 seconds East 72.65 feet to a point; thence 12) North 74 degrees 35 minutes 18 seconds East 110.22 feet to a point; thence 13) South 66 degrees 21 minutes 42 seconds East 132.99 feet to a point; thence 14) South 24 degrees 00 minutes 10 second West 731.15 feet to the point and place of Beginning. Exhibit A-1 - Page 1 EXHIBIT B RULES AND REGULATIONS 1. OBSTRUCTION OF PASSAGEWAYS: The sidewalks, entrance, passages, courts, elevators, vestibules, stairways, corridors and public parts of the Building shall not be obstructed or encumbered by Lessee or used by Lessee for any purpose other than ingress and egress. If the Premises are situated on the ground floor with direct access to the street, then Lessor shall, at Lessor's expense, keep the sidewalks and curbs directly in front of the Premises clean and free from ice, snow and refuse. 2. WINDOWS: Windows in the Premises shall not be covered or obstructed by Lessee. No bottles, parcels or other articles shall be placed on the windowsills, in the halls, or in any other part of the Building other than the Premises. No article shall be thrown out of the doors or windows of the Premises. 3. PROJECTIONS FROM BUILDING: No awnings, air-conditioning units, or other fixtures shall be attached to the outside walls or the window sills of the Building or otherwise affixed so as to project from the Building, without prior written consent of Lessor. 4. SIGNS: No sign or lettering shall be affixed by Lessee to any part of the outside of the Premises, or any part of the inside of the Premises so as to be clearly visible from the outside of the Premises, without the prior written consent of Lessor. However, Lessee shall have the right to place its name on any door leading into the Premises the size, color and style thereof to be subject to the Lessor's approval. Lessee shall not have the right to have additional names placed on the Building directory without Lessor's prior written consent. 5. FLOOR COVERING: Lessee shall not lay linoleum or other similar floor covering so that the same shall come in direct contact with the floor of the Premises. If linoleum or other similar floor covering is desired to be used, an interlining of builder's deadening felt shall first be fixed to the floor by a paste or other material that may easily be removed with water, the use of cement or other similar adhesive material being expressly prohibited. 6. INTERFERENCE WITH OCCUPANTS OF BUILDING: Lessee shall not make, or permit to be made, any unseemly or disturbing noises or odors and shall not interfere with other tenants or those having business with them. Lessee will keep all mechanical apparatus in the Premises free of vibration and noise which may be transmitted beyond the limits of the Premises. 7. LOCK KEYS: No additional locks or bolts of any kind shall be placed on any of the doors or windows by Lessee. Lessee shall, on the termination of Lessee's tenancy, deliver to Lessor all keys to any space within the Building either furnished to or otherwise procured by Lessee, and in the event of the loss of any keys furnished, Lessee shall pay to Lessor the cost thereof. Lessee, before closing and leaving the Premises, shall ensure that all windows are closed and entrance doors locked. Nothing in this Paragraph 7 shall be deemed to prohibit Lessee from installing a burglar alarm within the Premises, provided: (1) Lessee obtains Lessor's consent which will not be unreasonably withheld or delayed; (2) Lessee supplies Lessor with copies of the plans and specifications of the system; (3) such installation shall not damage the Building; and (4) all costs of installation shall be borne solely by Lessee. 8. CONTRACTORS: No contract of any kind with any supplier of towels, water, toilet articles, waxing, rug shampooing, venetian blind washing, furniture polishing, lamp servicing, cleaning of electrical fixtures, removal of waste paper, rubbish, garbage, or other like service shall be entered into by Lessee, nor shall any machine of any kind be installed in the Building or the Office Building Area without the prior written consent of the Lessor. Lessee shall not employ any persons other than Lessor's janitors for the purpose of cleaning the Premises without prior written consent of Lessor. Lessor shall not be responsible to Lessee for any loss of property from the Premises however occurring, or for any damage to the effects of Lessee by such janitors or any of its employees, or by any other person or any other cause. 9. PROHIBITED ON PREMISES: Lessee shall not conduct, or permit any other person to conduct, any auction upon the Premises, manufacture or store goods, wares or merchandise upon the Premises without the prior written approval of Exhibit B - Page 1 Lessor, except the storage of usual supplies and inventory to be used by Lessee in the conduct of his business, permit the Premises to be used for gambling, make any unusual noises in the Building, permit to be played musical instrument on the Premises, permit any radio to be played, or television, recorded or wired music in such loud manner as to disturb or annoy other tenants, or permit any unusual odors to be produced on the Premises. Lessee shall not permit any portion of the Premises to be occupied as an office for a public stenographer or typewriter, or for the storage, manufacture, or sale of intoxicating beverages, narcotics, tobacco in any form or as a barber or manicure shop. Canvassing, soliciting and peddling in the Building and the Office Building Area are prohibited and Lessee shall cooperate to prevent the same. No bicycles, vehicles or animals of any kind shall be brought into or kept in or about the Premises. 10. PLUMBING, ELECTRIC AND TELEPHONE WORK: Plumbing facilities shall not be used for any purpose other than those for which they were constructed; and no sweepings, rubbish, ashes, newspaper or other substances of any kind shall be thrown into them. Waste and excessive or unusual amounts of electricity or water is prohibited. When electric wiring of any kind is introduced, it must be connected as directed by Lessor, and no stringing or cutting of wires will be allowed, except by prior written consent of Lessor, and shall be done by contractors approved by Lessor. The number and locations of telephones, telegraph instruments, electrical appliances, call boxes, etc. shall be subject to Lessor's approval. 11. MOVEMENT OF FURNITURE, FREIGHT OR BULKY MATTER: The carrying in or out of freight, furniture or bulky matter of any description must take place during such hours as Lessor may from time to time reasonably determine and only after advance notice to the superintendent of the Building. The persons employed by Lessee for such work must be reasonably acceptable to the Lessor. Lessee may, subject to these provisions, move freight, furniture, bulky matter, and other material into or out of the Premises on Saturdays between the hours of 9:00 a.m. and 1:00 p.m., provided Lessee pays additional costs, if any, incurred by Lessor for elevator operators or security guards, and for any other expenses occasioned by such activity of Lessee. If, at least three (3) days prior to such activity, Lessor requests that Lessee deposit with Lessor, as security of Lessee's obligations to pay such additional costs, a sum of which Lessor reasonably estimates to be the amount of such additional cost, the Lessee shall deposit such sum with Lessor as security of such cost. There shall not be used in the Building or Premises, either by Lessee or by others in the delivery or receipt of merchandise, any hand trucks except those equipped with rubber tires and side guards, and no hand trucks will be allowed in the elevators without the consent of the superintendent of the Building. 12. SAFES AND OTHER HEAVY EQUIPMENT: Lessor reserves the right to prescribe the weight and position of all safes and other heavy equipment so as to distribute properly the weight thereof and to prevent any unsafe condition from arising. 13. ADVERTISING: Lessor shall have the right to prohibit any advertising by Lessee which in Lessor's reasonable opinion tends to impair the reputation of the Building or its desirability as a building for offices, and upon written notice from Lessor, Lessee shall refrain from or discontinue such advertising. 14. NON-OBSERVANCE OR VIOLATION OF RULES BY OTHER TENANTS: Lessor shall not be responsible to Lessee for non-observance or violation of any of these rules and regulations by any other tenant. 15. AFTER HOURS USE: Lessor reserves the right to exclude from the Building between the hours of 6:00 p.m. and 8:00 a.m. and at all hours on Saturdays, Sundays and Building Holidays, all persons who do not present a pass to the Building signed by the Lessee. Each Lessee shall be responsible for all persons for whom such a pass is issued and shall be liable to the Lessor for the acts of such persons. 16. PARKING: Lessee and its employees shall park their cars only in those portions of the parking area designated by Lessor. 17. Lessor hereby reserves to itself any and all rights not granted to Lessee hereunder, including, but not limited to, the following rights which are reserved to Lessor for its purposes in operating the Building: Exhibit B - Page 2 a) the exclusive right to the use of the name of the Building for all purposes, except that Lessee may use the name as its business address and for no other purposes; and b) the right to change the name or address of the Building, without incurring any liability to Lessee for doing so; and c) the right to install and maintain a sign on the exterior of the Building; and d) the exclusive right to use or dispose of the use of the roof of the Building; and e) the right to limit the space on the directory of the Building to be allotted to Lessee; and f) the right to grant to anyone the right to conduct any particular business or undertaking in the Building. 18. The Lessee shall be responsible for initiating, maintaining and supervising all health and safety precautions and/or programs required by Law in connection with the Lessee's use and occupancy of the Premises. 19. The Lessee shall not store, introduce or otherwise permit any material known to be hazardous within the Premises. Any material within the Premises which is determined to be hazardous shall be removed and properly disposed of by the Lessee at the Lessee's sole expense. -- END -- Exhibit B - Page 3 EXHIBIT C --------- NOTES RE: Workletter Agreement for office space on the second floor at 300 Tice Boulevard, Woodcliff Lake, New Jersey. , 2002 LESSEE: PAR PHARMACEUTICAL, INC. You ("Lessee") and we ("Lessor") are executing simultaneously with this Workletter Agreement a written lease ("Lease"), covering the space referred to above, as more particularly described in the Lease ("Premises"). To induce Lessee to enter into the Lease (which is hereby incorporated by reference) and in consideration of the covenants hereinafter contained, Lessor and Lessee mutually agree as follows: 1. Lessee shall have its architect prepare the following architectural and mechanical drawings and specifications based upon the sketch layout supplied to Lessor by Lessee, attached hereto and made a part hereof, upon full execution of this Lease. a. Architectural drawings and specifications for Lessee's partition layout, reflected ceiling, placement of electrical outlets and other installations for the work to be done by Lessor. b. Mechanical plans and specifications where necessary for installation of air conditioning systems, ductwork and heating. All such plans and specifications are expressly subject to Lessor's written approval, which Lessor covenants it will not unreasonably withhold. 2. Upon approval of the plans by Lessor, Lessor shall file said plans with the appropriate governmental agencies. 3. Lessor agrees, at its expense and without charge to Lessee (unless otherwise provided), to do the work in the Premises as shown on the plans attached hereto and described on the "Description of Materials" schedule attached hereto which shall hereinafter be referred to as "The Work". "Building Standard" shall mean the type and grade of material, equipment and/or device designated by Lessor as standard for the Building. All items are Building Standard unless otherwise noted. The provisions of Article 6 of the Lease shall apply to any alterations made to the Premises after the initial work to be performed herein. 4. Intentionally omitted.* 5. All low partitioning, workstation modules, bank screen partitions and prefabricated partition systems shall be furnished and installed by Lessee. 6. The installation or wiring of telephone and computer (data) outlets is not part of The Work. Lessee shall bear the responsibility to provide its own telephone and data systems at Lessee's sole cost and expense. Upon expiration or sooner termination of the Lease, Lessee shall remove all telephone and data equipment and wiring from the Premises and the Building risers prior to vacation of same. 7. Changes in The Work, if necessary or requested by the Lessee, shall be accomplished after the execution of the Lease and this Workletter Agreement, and without invalidating any part of the Lease or Workletter Agreement, by written agreement between Lessor and Lessee hereinafter referred to as a Change Order. Each Change Order shall be prepared by Lessor and signed by both Lessee and Lessor stating their agreement upon all of the following: a. The scope of the change in The Work; and Exhibit C - Page 1 b. The cost of the change; and c. Manner in which the cost will be paid or credited; and d. The estimated extent of any adjustment to the Commencement Date as a result of the change in The Work. Each and every Change Order shall be signed by Lessor's and Lessee's respective construction representatives. In no event shall any Change Order(s) be permitted without such authorizations. A 10% supervision plus 10% overhead charge will be added to the cost of any Change Order. If Lessee shall fail to approve any such Change Order within one (1) week, the same shall be deemed disapproved in all respects by Lessee and Lessor shall not be authorized to proceed thereon. Any increase in the cost of The Work or the change in The Work stated in a Change Order which results from Lessee's failure to timely approve and return said Change Order shall be paid by the Lessee. Lessee agrees to pay to Lessor the cost of any Change Order promptly upon receipt of an invoice for same. 8. If Lessee elects to use the architect suggested by Lessor, this architect becomes the Lessee's agent solely with respect to the plans, specifications and The Work. If any change is made prior to completion of schematic drawings and final construction documents which result in a Change Order and additional costs, such costs shall be the responsibility of the Lessee. Similarly, any cost savings resulting from such Change Order(s) shall be credited to the Lessee. 9. Prior to Lessee's occupancy of the Premises, Lessee shall identify and list any portion of The Work which does not conform to this Workletter Agreement ("Punch List"). The Lessor shall review with the Lessee all of the items so listed and correct or complete any portion of The Work which fails to conform to the requirements of this Workletter Agreement. 10. The terms contained in the Lease (which include all exhibits attached thereto) constitute Lessor's agreement with Lessee with respect to the work to be performed by Lessor on Lessee's behalf. If the architectural drawings are in conflict with the terms of the Lease, then the Lease shall be deemed the controlling document. 11. All materials and installations constructed for the Lessee within the Premises shall become the property of the Lessor upon installation. No refund, credit or removal of said items is to be permitted at the termination of the Lease. Items installed that are not integrated in any such way with other common building materials do not fall under this provision (e.g. shelving, furniture, etc.). 12. It is agreed that notwithstanding the date provided in the Lease for the Commencement Date, the term shall not commence until Lessor has "substantially completed" all work to be performed by Lessor as hereinbefore set forth in Paragraph 3 above and as set forth in the Lease; provided, however, that if Lessor shall be delayed in substantially completing said work as a result of: a. Lessee's failure to approve the plans and specifications in accordance with Paragraph 2 hereof; or b. Lessee's failure to furnish interior finish specifications, i.e., paint colors, carpet selection, etc., to Lessor by the fifth (5th) working day after Lessor has approved the plans and specifications submitted by Lessee referred to in Paragraph 2 hereof; or c. Lessee's request for materials, finishes or installations other than Lessor's Building Standard; or d. Lessee's changes in The Work; or e. The performance of a person, firm, partnership or corporation employed by Lessee and the completion of the said work by said person, firm, partnership or corporation; then the Commencement Date of the term of said Lease shall be accelerated by the number of days of such delay and Lessee's obligation to pay Fixed Basic Rent and Additional Rent shall commence as of such earlier date. Exhibit C - Page 2 13. Lessor shall permit Lessee and its agents to enter the Premises prior to the Commencement Date in order that Lessee may perform through its own union contractors such other work and decorations as Lessee may desire at the same time Lessor's contractors are working in the Premises. The foregoing license to enter prior to the Commencement Date, however, is conditioned upon: a. Lessee's workmen and mechanics working in harmony and not interfering with the labor employed by Lessor, Lessor's mechanics or contractors or by any other Lessee or its mechanics or contractors; and b. Lessee providing Lessor with evidence of Lessee's contractors and subcontractors carrying such worker's compensation, general liability, personal and property insurance as required by law and in amounts no less than the amounts set forth in Article 30 of the Lease. If at any time such entry shall cause disharmony or interference therewith, this license may be withdrawn by Lessor upon forty-eight (48) hours written notice to Lessee. Such entry shall be deemed controlled by all of the terms, covenants, provisions and conditions of said Lease, except as to the covenant to pay Fixed Basic Rent and Additional Rent. Lessor shall not be liable in any way for any injury, loss or damage which may occur to any of Lessee's decorations or installations so made prior to the Commencement Date, the same being solely at Lessee's risk. 14. No part of the Premises shall be deemed unavailable for occupancy by the Lessee, or shall any work which the Lessor is obligated to perform in such part of the Premises be deemed incomplete for the purpose of any adjustment of Fixed Basic Rent payable hereunder, solely due to the non-completion of details of construction, decoration or mechanical adjustments which are minor in character and the non-completion of which does not materially interfere with the Lessee's use of such part of the Premises. 15. Lessee is responsible for all costs related to the repairs and maintenance of any additional or supplemental HVAC systems, appliances and equipment installed to meet Lessee's specific requirements. Lessee shall purchase a service contract for this equipment so that the equipment is covered by such service contract each year of the term of the Lease. 16. If construction is to occur in a space occupied by Lessee's employees, Lessee shall be liable for all costs associated with a delay if Lessee shall fail to comply with a submitted construction schedule to relocate personnel, furniture, or equipment. These costs shall include, but not be limited to the following: a. cost of construction workers time wasted; and b. cost of any overtime work necessary to meet schedule deadlines; and c. any other costs associated with delays in final completion. 17. This workletter is based on the quantities and specifications listed herein. Any change to these specifications shall require the recalculation of the construction costs. Such recalculation shall not negate any other section of this Lease. 18. With respect to the construction work being conducted in or about the Premises, each party agrees to be bound by the approval and actions of their respective construction representatives. Unless changed by written notification, the parties hereby designate the following individuals as their respective construction representatives: FOR LESSOR: _____________________________ FOR LESSEE: _________________________ c/o Mack-Cali Realty Corporation _________________________ _____________________________ _________________________ _____________________________ _________________________ If the foregoing correctly sets forth our understanding, kindly sign this letter agreement where indicated. Exhibit C - Page 3 LESSOR: LESSEE: 300 TICE REALTY ASSOCIATES L.L.C. PAR PHARMACEUTICAL, INC. By: Mack-Cali Realty, L.P. Member By: Mack-Cali Realty Corporation, General Partner By: Michael A. Grossman By: Dennis O'Connor ----------------------------- --------------------------- Michael A. Grossman Name: Dennis O'Connor Executive Vice President Title:VP-CFO Exhibit C - Page 4 EXHIBIT C - 1 ------------- AIR CONDITIONING & HEATING DESIGN STANDARDS The following are design standards for the building air-conditioning system for cooling and heating in the air in the subject building: 1. During the normal heating season to maintain an average indoor dry bulb temperature of not less than 70 degrees F (21 degrees C) or more than 76 degrees (24.4 degrees C) when the outdoor dry bulb temperature is lower than 65 degrees F (18 degrees C) but not lower than 0 degrees F (-13 degrees C). 2. To maintain comfort cooling for an average indoor dry bulb temperature of not more than 78 degrees F when the outside dry bulb temperature is 95 degrees F (24 degrees C). 3. During the intermediate seasons, when the outside dry bulb temperature is below 55 degrees (13 degrees C), cooling will be provided by outside air usage in conjunction with operating of return air, outside air and exhaust air dampers. 4. To furnish not less than .10 cubic foot of fresh air per minute per square foot of rentable area, and between .20 and 1.0 cubic feet of total air per minute, per square foot of rentable occupied space. 5. Lessor will not be responsible for the failure of the air-conditioning system if such failure results from (i) the occupancy of the Premises with more than an average of one (1) person for each one hundred (100) usable square feet of floor area (ii) the installation or operation by Lessee of machines and appliances, the installed electrical load of which when combined with the load of all lighting fixtures exceeds five (5) watts per square foot of floor area and in any manner exceeding the aforementioned occupancy and electrical load criteria, or (iii) rearrangement of partitioning after the initial preparation of the Premises. If interference with normal operation of the air-conditioning system in the Premises results, necessitating changes in the air conditioning system servicing the Premises, such changes shall be made by Lessor upon written notice to Lessee at Lessee's sole cost and expense. Lessee agrees to lower and close window coverings when necessary because of the sun's position whenever the air conditioning system is in operation, and Lessee agrees at all times to cooperate fully with Lessor and to abide by all the Rules and Regulations attached hereto as well as reasonable rules and regulations which Lessor may hereafter prescribe involving the air-conditioning system. -- END -- Exhibit C-1 - Page 1 EXHIBIT D --------- CLEANING SERVICES (Five Nights Per Week) LESSEE'S PREMISES - ----------------- 1. Vacuum clean all carpeted areas. 2. Sweep and dust mop all non-carpeted areas. Wet mop whenever necessary. 3. All office furniture such as desks, chairs, files, filing cabinets, etc. shall be dusted with a clean treated dust cloth whenever necessary and only if such surfaces are clear of Lessee's personal property including but not limited to plants. 4. Empty and wash ashtrays. 5. Empty wastepaper baskets and remove waste to the designated areas. 6. All vertical surfaces within arms reach shall be spot cleaned to remove finger marks and smudges. Baseboard and window sills are to be spot cleaned whenever necessary. 7. All cleaning of cafeterias, vending areas, kitchen facilities are excluded. Lessee may make necessary arrangements for same directly with Lessor's cleaning maintenance company. 8. Cleaning hours shall be Monday through Friday between 5:30 p.m. and 11:00 p.m. 9. No cleaning service is provided on Saturday, Sunday and Building Holidays. 10. Cartons or refuse in excess which can not be placed in wastebaskets will not be removed. Lessee is responsible to place such unusual refuse in trash dumpster. 11. Cleaning maintenance company will not remove nor clean tea, office cups or similar containers. If such liquids are spilled in waste baskets, the waste baskets will be emptied but not otherwise cleaned. Lessor will not be responsible for any stained carpet caused from liquids leaking or spilling from Lessee's wastepaper receptacles. 12. Upon completion of cleaning, all lights will be turned off and doors locked leaving the Premises in an orderly condition. 13. Glass entrance doors will be cleaned nightly. Interior glass doors or glass partitions are excluded. Lessee may make arrangements for same with Lessor's cleaning maintenance company. COMMON AREAS - ------------ 1. Vacuum all carpeting in entrance lobbies, outdoor mats and all corridors. 2. Wash glass doors in entrance lobby with a clean damp cloth and dry towel. 3. Clean cigarette urns. Sweep and/or wet mop all resilient tile flooring. Hard surface floors such as quarry tile, etc., shall be cleaned nightly. 4. Wash, clean and disinfect water fountains. 5. Clean all elevators and stairwells. 6. Lavatories -- Men and Women. a. Floors in all lavatories shall be wet mopped each evening with a germicidal detergent to ensure a clean and germ free surface. b. Wash and polish all mirrors, shelves, bright work including any piping and toilet seats. c. Wash and disinfect wash basins and sinks using a germicidal detergent. d. Wash and disinfect toilet bowls and urinals. e. Keep lavatory partitions, tiled walls, dispensers and receptacles in a clean condition using a germicidal detergent when necessary. f. Empty and sanitize sanitary disposal receptacles. g. Fill toilet tissue holders, towel dispensers and soap dispensers. Refills to be supplied by Lessor. 7. Clean all air ventilation grill work in ceilings. Exhibit D - Page 1 EXHIBIT E BUILDING HOLIDAYS BUILDING CLOSED * NEW YEAR'S DAY * * MEMORIAL DAY * * INDEPENDENCE DAY * * LABOR DAY * * THANKSGIVING DAY * * CHRISTMAS DAY * -- END -- Exhibit E - Page 1 EXHIBIT F --------- TENANT ESTOPPEL CERTIFICATE TO: MORTGAGEE and/or its affiliates and/or whom else it may concern: 1. The undersigned is the Lessee (Tenant) under that certain Lease dated ____ by and between __________ as Lessor (Landlord) and _____________ as Lessee, covering those certain premises commonly known and designated as ____ r.s.f. on the _____ ( ) floor of _________________________________ ,NJ. 2. The Lease has not been modified, changed, altered or amended in any respect (except as indicated following this sentence) and is the only Lease or agreement between the undersigned and the Lessor affecting said premises. If none, state "none". 3. The undersigned has made no agreements with Lessor or its agents or employees concerning free rent, partial rent, rebate of rental payments or any other type of rental concession (except as indicated following this sentence). If none, state "none". 4. The undersigned has accepted and now occupies the premises, and is and has been open for business since , 200_. The Lease term began , 200_, and the rent for said premises has been paid to and including , 200_ in conformity with this Lease agreement. No rent has been prepaid for more than two (2) months. The fixed minimum rent being paid as above is $ __________ per month. If Lessee is not in full possession, whether Lessee has assigned the Lease, sublet all or any portion of the Premises, or otherwise transferred any interest in the Lease or the Premises, Lessee agrees to provide a copy of such assignment, sublease, or transfer upon request. 5. The Lease is not in default and is in full force and effect. As of the date hereof, the undersigned is entitled to no credit, no free rent and no offset or deduction in rent. 6. All alterations, improvements, additions, build-outs, or construction required to be performed under the Lease have been completed in accordance with the terms of the Workletter attached to Lease as Exhibit C. 7. The Lease does not contain and the undersigned doesn't have any outstanding options or rights of first refusal to purchase the premises or any part thereof or the real property of which the premises are a part. 8. No actions, whether voluntary or otherwise, are pending against the undersigned under the bankruptcy laws of the United States or any State thereof. 9. There are currently no valid defenses, counterclaims, off-sets, credits, deductions in rent, or claims against the enforcement of any of the agreements, terms, or conditions of the Lease. 10. The undersigned acknowledges that all the interest of Lessor in and to the above-mentioned Lease is being duly assigned to MORTGAGEE or one of its affiliates hereunder and that pursuant to the terms thereof (i) all rental payments under said Lease shall continue to be paid to Lessor in accordance with the terms of the Lease unless and until you are otherwise notified in writing by MORTGAGEE, or its successor or assigns and (ii) no modification, revision, or cancellation of the Lease or amendments thereto shall be effective unless a written consent thereto of such mortgagee is first obtained. 11. The undersigned is authorized to execute this Tenant Estoppel Certificate on behalf of the Lessee. Dated this ________ day of __________________ , 200_ LESSEE: ____________________________________ Name: Title: Exhibit F - Page 1 EXHIBIT G --------- COMMENCEMENT DATE AGREEMENT 1.0 PARTIES - --- ------- THIS AGREEMENT made the _________day of ________, 200_ is by and between ________________ (hereinafter "Lessor") whose address is c/o Mack-Cali Realty Corporation, 11 Commerce Drive, Cranford, New Jersey 07016 and _________________________ (hereinafter "Lessee") whose address is ________________________________________. 2.0 STATEMENT OF FACTS - --- ------------------ 2.1 Lessor and Lessee entered into a Lease dated ____________, 200_ (hereinafter "Lease") setting forth the terms of occupancy by Lessee of approximately ________ rentable square feet on the _____ (___) floor (hereinafter "Premises") at _____________________________ (hereinafter "Building"); and 3.0 STATEMENT OF TERMS - --- ------------------ NOW, THEREFORE, in consideration of the Premises and the covenants hereinafter set forth, it is agreed: 3.1 The Commencement Date of the Term of the Lease is ___________ , 200_ and the Expiration Date thereof is _____________ , 200_ and the Lease Preamble Articles 6 and 9 shall be deemed modified accordingly. 3.2 This Agreement is executed by the parties hereto for the purpose of providing a record of the Commencement and Expiration Dates of the Lease and the Term of the Lease and Fixed Basic Rent amount shall be adjusted accordingly. EXCEPT as modified herein, the Lease covering the Premises shall remain in full force and effect as if the same were set forth in full herein and Lessor and Lessee hereby ratify and confirm all the terms and conditions thereof. THIS AGREEMENT shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. EACH PARTY AGREES that it will not raise or assert as a defense to any obligation under the Lease or this Agreement or make any claim that the Lease or this Agreement is invalid or unenforceable due to any failure of this document to comply with ministerial requirements including, but not limited to, requirements for corporate seals, attestations, witnesses, notarizations, or other similar requirements, and each party hereby waives the right to assert any such defense or make any claim of invalidity or unenforceability due to any of the foregoing. IN WITNESS THEREOF, Lessor and Lessee have hereunto set their hands and seals the date and year first above written and acknowledge one to the other they possess the requisite authority to enter into this transaction and to sign this Agreement. LESSOR LESSEE By: ________________________________ By: ____________________________ Michael A. Grossman Name: Executive Vice President Title: Exhibit G - Page 1 EXHIBIT H --------- SAMPLE FORM - LETTER OF CREDIT [DATE] TO: [Name of Beneficiary] [Address] Re: Irrevocable Letter of Credit Gentlemen: By order of our client, _________________________, we hereby establish our irrevocable Letter of Credit No. ______ in your favor for a sum or sums not to exceed $__________________- (_________________U.S. Dollars) in the aggregate, effective immediately. This Letter of Credit shall be payable in immediately available funds in U.S. Dollars. Funds under this credit are payable to you upon your presentation to us a sight draft drawn on us in the form annexed hereto. All drafts must be marked: "Drawn under Letter of Credit No. ____ of [Name of Issuing Bank]. This Letter of Credit shall expire twelve (12) months from the date hereof; but is automatically extendable, so that this Letter of Credit shall be deemed automatically extended, from time to time, without amendment, for one year from the expiration date hereof and from each and every future expiration date, unless at least sixty (60) days prior to any expiration date we shall notify you by registered mail that we elect not to consider this Letter of Credit renewed for any such additional period. The final expiration date hereof shall be no EARLIER than [fill in suitable date after expiration of lease]. This Letter of Credit is transferable and may be transferred one or more times. However, no transfer shall be effective unless advice of such transfer is received by us in our standard form. We hereby agree to honor each draft drawn under and in compliance with this Letter of Credit, if duly presented at our offices at ___________________________or at any other of our offices. This Letter of Credit is subject to the International Standby Practices 1998, International Chamber of Commerce Publication No. 590. [Name of Bank] By: [Annex Bank's Form of Sight Draft] Exhibit H - Page 1 EX-10 6 lease-2ndamend.txt EXHIBIT 10.11.1 Exhibit 10.11.1 SECOND AMENDMENT TO LEASE ------------------------- 1. PARTIES ------- 1.1 THIS AGREEMENT made the 19th day of December, 2002 is between 300 TICE REALTY ASSOCIATES L.L.C. ("Lessor") whose address is c/o Mack-Cali Realty Corporation, 11 Commerce Drive, Cranford, New Jersey 07016 and PAR PHARMACEUTICAL, INC. ("Lessee"), whose address is 300 Tice Boulevard, Woodcliff Lake, New Jersey 07675. 2. STATEMENT OF FACTS ------------------ 2.1 Lessor and Lessee previously entered into a Lease dated May 24, 2002, as amended by First Amendment to Lease dated August 5, 2002, (the "Lease") covering approximately 10,420 gross rentable square feet on the second (2nd) floor (hereinafter referred to as the "Existing Premises") in the building located at 300 Tice Boulevard, Woodcliff Lake, New Jersey ("Building"); and 2.2 The Term of the Lease currently expires on January 31, 2010 ("Expiration Date"); and 2.3 Lessee desires to expand the Existing Premises by leasing approximately 25,656 gross rentable square feet on the third (3rd) floor of the Building ("Expansion Premises"), as shown on Exhibit A attached hereto and made a part hereof and by leasing two (2) storage units in the garage, consisting of Unit A of approximately 350 gross rentable square feet and Unit B of approximately 308 gross rentable square feet (the "Storage Space") as shown on Exhibit A-1 attached hereto and made a part hereof; and 2.4 The parties desire to extend the Term of the Lease for a period to commence on February 1, 2010; and 2.5 The parties desire to amend certain terms of the Lease as set forth below. 3. AGREEMENT --------- NOW, THEREFORE, in consideration of the terms, covenants and conditions hereinafter set forth, Lessor and Lessee agree as follows: 3.1 The above recitals are incorporated herein by reference. 3.2 All capitalized and non-capitalized terms used in this Agreement which are not separately defined herein but are defined in the Lease shall have the meaning given to any such term in the Lease. 3.3 The Term applicable to the Expansion Premises and Storage Space shall commence on the Effective Date (as defined below) and shall terminate at 11:59 p.m. on the last day of the month during which the eight (8) year anniversary of the Effective Date occurs. 3.4 The effective date applicable to the Expansion Premises (the "Effective Date") shall be the earlier of (i) the day Lessor substantially completes the improvements to be made to the Expansion Premises in accordance with Exhibit B attached hereto and made part hereof or (ii) the date Lessee or anyone claiming under or through Lessee shall occupy the Expansion Premises. The Storage Space shall be delivered in "as is" condition and therefore the Effective Date applicable to the Storage Space shall be upon its delivery to Lessee. 3.5 From and after the Effective Date, the following shall be effective: a. Lessor shall lease to Lessee and Lessee shall hire from Lessor the Expansion Premises as shown on Exhibit A attached hereto and made part hereof and Storage Space as shown on Exhibit A-1 attached hereto and made part hereof. b. The Premises shall be defined as approximately 36,734 gross rentable square feet consisting of approximately 10,420 gross rentable square feet on the second (2nd) floor and approximately 25,656 gross rentable square feet on the third (3rd) floor of the 1 Building and approximately 658 gross rentable square feet of Storage Space in the garage and Paragraph 7 of the Preamble to the Lease shall be deemed amended accordingly. c. In addition to the Fixed Basic Rent payable applicable to the Existing Premises, Lessee shall pay Lessor Fixed Basic Rent applicable to the Expansion Premises and Storage Space which shall accrue as follows and Paragraph 10 of the Preamble to the Lease shall be deemed amended accordingly: A. Fixed Basic Rent for the Expansion Premises: (i) Commencing on the Effective Date through and including the last day of the month in which the five (5) year anniversary of the Effective Date occurs, the Fixed Rent for the Expansion Premises only shall be SEVEN HUNDRED FIVE THOUSAND FIVE HUNDRED FORTY AND 00/100 DOLLARS ($705,540.00) per annum, payable in advance in equal monthly installments of FIFTY EIGHT THOUSAND SEVEN HUNDRED NINETY FIVE AND 00/100 DOLLARS ($58,795.00) each; (ii) For the next three (3) years through and including the expiration Date, the Fixed Rent for the Expansion Premises only shall be SEVEN HUNDRED THIRTY ONE THOUSAND ONE HUNDRED NINETY SIX AND 00/100 DOLLARS ($731,196.00) per annum, payable in advance in equal monthly installments of SIXTY THOUSAND NINE HUNDRED THIRTY THREE AND 00/100 DOLLARS ($60,933.00) each. B. Fixed Basic Rent for the Storage Space: Commencing on the Effective Date through and including the expiration, the Fixed Rent for the Storage Space only shall be EIGHT THOUSAND TWO HUNDRED TWENTY FIVE AND 00/100 DOLLARS ($8,225.00) per annum, payable in advance in equal monthly installments of SIX HUNDRED EIGHTY FIVE AND 42/100 DOLLARS ($685.42) each. d. Lessee's Percentage applicable to the Expansion Premises shall be 11.15%. Lessee's Percentage applicable to the Storage Space shall be .29%. e. Lessee shall pay Lessor, as Additional Rent, Lessee's Percentage applicable to the Expansion Premises of the increased cost to Lessor for each of the categories set forth in Article 23 ADDITIONAL RENT over the Base Period Costs set forth below. f. Base Period Costs applicable to the Expansion Premises shall be as follows and Paragraph 2 of the Preamble to the Lease shall be deemed amended accordingly: (A) Base Operating Costs: Those costs incurred for the Building and Office Building Area during the Calendar Year 2003. (B) Base Real Estate Taxes: Those Real Estate Taxes incurred for the Building and Office Building Area during Calendar Year 2003. (C) Insurance Cost Expense Stop: $32,630.00. (D) Utility and Energy Costs Expense Stop: $230,000.00. g. Lessee shall pay Lessor the cost of electricity consumed within the Expansion Premises in accordance with Article 22 of the Lease BUILDING STANDARD OFFICE ELECTRICAL SERVICE. h. The number of parking spaces as set forth in Paragraph 14 of the Preamble to Lease shall be increased to a total of one hundred forty five (145) spaces as follows: 2 Assigned: thirty -four (34) spaces located in the garage Unassigned: one hundred eleven (111) spaces in the outdoor parking lot 3.6 The Term applicable to the Existing Premises shall be extended for a period commencing on February 1, 2010 and expiring at 11:59 p.m. on the last day of the month during which the eight (8) year anniversary of the Effective Date (as defined herein) occurs ("Extension Term") and Paragraphs 9 and 17 of the Preamble to the Lease shall be deemed amended accordingly. 3.7 Lessor hereby leases to Lessee and Lessee hereby hires from Lessor the Existing Premises in its "AS-IS" condition for the Extension Term, as defined herein, under the terms and conditions set forth herein. Lessor shall have no obligation to perform any tenant improvement work in the Existing Premises except as set forth on Exhibit B. 3.8 Commencing on February 1, 2010 and during the Extension Term, the following shall be effective: a. The Fixed Basic Rent applicable to the Existing Premises shall continue at the rate of TWO HUNDRED NINETY SIX THOUSAND NINE HUNDRED SEVENTY AND 00/100 DOLLARS ($296,970.00) per annum, payable in advance in equal monthly installments of TWENTY FOUR THOUSAND SEVEN HUNDRED FORTY SEVEN AND 50/100 DOLLARS ($24,747.50) per month and Paragraph 10 of the Preamble shall be deemed supplemented accordingly. b. Lessee shall continue to pay Lessor, as Additional Rent, Lessee's Percentage applicable to the Existing Premises of the increased cost to Lessor for each of the categories set forth in Article 23 of the Lease Additional Rent over the Base Period Costs set forth in Paragraph 3.5 f. of this First Amendment and Paragraph 2 of the Preamble to Lease shall be amended accordingly. c. Lessee shall continue to pay Lessor the cost of electricity consumed within the Existing Premises in accordance with Article 22 of the Lease BUILDING STANDARD OFFICE ELECTRICAL SERVICE. 3.9 Article 15 SUBORDINATION OF LEASE shall be amended by deleting said Article in its entirety and substituting the following in its place: "SUBORDINATION OF LEASE: This Lease shall, at Lessor's option, or at the option of any holder of any underlying lease or holder of any mortgages or trust deed, be subject and subordinate to any such underlying leases and to any such mortgages or trust deed which may now or hereafter affect the real property of which the Premises form a part, and also to all renewals, modifications, consolidations and replacements of said underlying leases and said mortgages or trust deed provided, that Lessor shall obtain a non-disturbance agreement from the future holder of any such underlying lease, mortgage or trust deed in said lender's standard form. Lessee will execute and deliver such further instruments confirming such subordination of this Lease as may be desired by the holders of said mortgages or trust deed or by any of the lessor's under such underlying leases, provided the requirements of the preceding sentence are met. If any underlying lease to which this Lease is subject terminates, Lessee shall, on timely request, attorn to the owner of the reversion. Lessor represents that there currently is no mortgage encumbering the Building." 3.10 Article 52 LESSEE'S EXPANSION/RELOCATION shall be deleted in its entirety. 3.11 A new Article 56 RIGHT OF FIRST OFFER shall be added to the Lease as follows: "56. RIGHT OF FIRST OFFER: a. i. Subject to the provisions of this Article, Lessee shall have the option to lease from Lessor space on the third (3rd) floor contiguous to the Expansion Premises ("Additional Space") at the expiration of the existing space lease for such Additional Space, subject to Lessor's right to renew such lease. If the Term of this Lease shall be in full force and effect on the expiration or 3 termination date of the existing space lease for the Additional Space, subject to Lessor's right to renew such lease, and the date upon which Lessee shall exercise the option hereinafter referred to, Lessee shall have the option to lease all, but not less than all of the Additional Space on an as-is basis, provided Lessee gives Lessor written notice of such election within ten (10) days after Lessee shall receive Lessor's notice that such Additional Space is available for leasing to Lessee. If Lessee fails or refuses to exercise this option within the time period set forth above (TIME BEING OF THE ESSENCE), then and in such event Lessee shall have no further rights under this Section with respect to such Additional Space. If Lessee shall elect to lease said Additional Space: (v) said Additional Space shall be deemed incorporated within and part of the Premises on the date that Lessor shall notify Lessee that such Additional Space is ready for occupancy by Lessee and shall expire on the Expiration Date of this Lease, (x) the Fixed Basic Rent payable under this Lease shall be increased by an amount such that during the balance of the term of this Lease (A) if the Commencement Date applicable to the Additional Space occurs before the three (3) year anniversary of the Effective Date, the Fixed Basic Rent for said Additional Space shall, on a per square foot basis, be equal to the Fixed Basic Rent, on a per square foot basis, as same is increased after the 5th year anniversary hereunder, payable by Lessee for the Premises, and Lessee shall receive an allowance in an amount not to exceed $10.00 per square foot in the Additional Premises toward the cost of work to be performed by Lessee in the Additional Space, which allowance shall be prorated based upon the number of full months remaining in the term divided by 96 months, Lessee's Percentage shall be proportionately increased, and all other terms and provisions set forth in this Lease shall apply or (B) if the Commencement Date applicable to the Additional Space occurs on or after the three (3) year anniversary of the Effective Date, the Fixed Basic Rent for said Additional Space shall be the then fair market rent for the Additional Space, as determined in the manner set forth in clause (ii) below, Lessee's Percentage shall be proportionately increased, and all other terms and provisions set forth in this Lease shall apply, except that Lessor not be required to perform any work with respect to said Additional Space and Lessee shall not be entitled to any allowance. The parties shall promptly execute an amendment of this Lease confirming Lessee's election to lease said Additional Space and the incorporation of said Additional Space into the Premises. If prior to the expiration of the existing space lease for such Additional Space Lessor shall receive notice from the tenant thereof that the Additional Space or portion thereof shall be offered for sublease, then Lessor shall so advise Lessee and Lessor agrees to explore in good faith with Lessee and the tenant under said existing space lease, the terms and provisions of a recapture of said space by Lessor and a lease of said space to Lessee on mutually acceptable terms. Neither party shall have any obligation to enter into said expansion of lease or liability for failure to do so. ii. Lessor and Lessee shall use their best efforts, within thirty (30) days after Lessor receives Lessee's notice of its election to lease said Additional Space, ("Negotiation Period") to agree upon the Fixed Basic Rent to be paid by Lessee for said Additional Space. If Lessor and Lessee shall agree upon the Fixed Basic Rent, the parties shall promptly execute an amendment to this Lease stating the Fixed Basic Rent for the Additional Space. If the parties are unable to agree on the Fixed Basic Rent for said Additional Space during the Negotiation Period, then within fifteen (15) days notice from the other party, given after expiration of the Negotiation Period, each party, at its cost and upon notice to the other party, shall appoint a person to act as an appraiser hereunder, to determine the fair market rent for the Additional Space. Each such person shall be a real estate broker or appraiser with at least ten (10) years' active commercial real estate appraisal or brokerage experience (involving the leasing of similar space as agent for both landlords and tenants) in Bergen County. If a party does not appoint a person to act as an appraiser within said fifteen (15) day period, the person 4 appointed by the other party shall be the sole appraiser and shall determine the aforesaid fair market rent. Each notice containing the name of a person to act as appraiser shall contain the person's address. Before proceeding to establish the fair market rent, the appraisers shall subscribe and swear to an oath fairly and impartially to determine such rent. If the two appraisers are appointed by the parties as stated in the immediately preceding paragraph, they shall meet promptly and attempt to determine the fair market rent. If they are unable to agree within forty-five (45) days after the appointment of the second appraiser, they shall attempt to select a third person meeting the qualifications stated in the immediately preceding paragraph within fifteen (15) days after the last day the two appraisers are given to determine the fair market rent. If they are unable to agree on the third person to act as appraiser within said fifteen (15) day period, the third person shall be appointed by the American Arbitration Association, upon the application of Lessor or Lessee to the office of the Association nearest the Building. The person appointed to act as appraiser by the Association shall be required to meet the qualifications stated in the immediately preceding paragraph. Each of the parties shall bear fifty percent (50%) of the cost of appointing the third person and of paying the third person's fees. The third person, however selected, shall be required to take an oath similar to that described above. The three appraisers shall meet and determine the fair market rent. A decision in which two of the three appraisers concur shall be binding and conclusive upon the parties. In deciding the dispute, the appraisers shall act in accordance with the rules then in force of the American Arbitration Association, subject however, to such limitations as may be placed on them by the provisions of this Lease. After the Fixed Basic Rent for the Additional Space has been determined by the appraiser or appraisers and the appraiser or appraisers shall have notified the parties, at the request of either party, both parties shall execute and deliver to each other an amendment of this Lease stating the Fixed Basic Rent for the Additional Space. If the Fixed Basic Rent for said Additional Space has not been agreed to or established prior to the incorporation of said Additional Space in the Premises, then Lessee shall pay to Lessor an annual rent ("Temporary Rent") which Temporary Rent on a per square foot basis shall be equal to the Fixed Basic Rent, on a per square foot basis, then being paid by Lessee for the Premises. Thereafter, if the parties shall agree upon a Fixed Basic Rent, or the Fixed Basic Rent shall be established upon the determination of the fair market rent by the appraiser or appraisers, at a rate at variance with the Temporary Rent (i) if such Fixed Basic Rent is greater than the Temporary Rent, Lessee shall promptly pay to Lessor the difference between the Fixed Basic Rent determined by agreement or the appraisal process and the Temporary Rent, or (ii) if such Fixed Basic Rent is less than the Temporary Rent, Lessor shall credit to Lessee's subsequent monthly installments of Fixed Basic Rent the difference between the Temporary Rent and the Fixed Basic Rent determined by agreement or the appraisal process. In determining the fair market rent for said Additional Space, the appraiser or appraisers shall be required to take into account the rentals at which leases are then being concluded for comparable space in the Building and in comparable buildings in the County of Bergen, New Jersey and the fact that Lessor is not required to perform any work with respect to said Additional Space. In no event shall the Fixed Basic Rent for the Additional Space, on a per square foot basis, be less than the Fixed Basic Rent for the Premises, on a per square foot basis. b. The option granted to Lessee under this Article 56 may be exercised only by Lessee, its permitted successors and assigns, and not by any subtenant or any successor to the interest of Lessee by reason of any action under the Bankruptcy Code, or by 5 any public officer, custodian, receiver, United States Trustee, trustee or liquidator of Lessee or substantially all of Lessee's property. Lessee shall have no right to exercise any of such options subsequent to the date Lessor shall have the right to give the notice of termination referred to in Article 13. Notwithstanding the foregoing, Lessee shall have no right to exercise the option granted to Lessee hereunder if, at the time it gives notice of such election (i) Lessee or an affiliate of Lessee shall not be in occupancy of substantially all of the Premises or (ii) the Premises or any part thereof shall be the subject of a sublease other than to an affiliate of Lessee. If Lessee shall have elected to exercise its option hereunder, such election shall be deemed withdrawn if, at any time after the giving of notice of such election and prior to the occupancy of the Additional Space, Lessee shall sublease all or any part of the Premises. 3.12 The Option to Extend as set forth in Article 55 of the Lease shall continue in full force and effect and shall be applicable to both the Existing Premises and the Expansion Premises. 3.13 No later than thirty (30) days after the determination of the Effective Date, the parties shall agree to memorialize the Effective Date in writing. 3.14 Lessee and Lessor each represents and warrants to the other that no broker brought about this transaction except Strategic Alliance Partners, LLC, and each party agrees to indemnify, defend and hold the other harmless from any and all claims of any broker claiming to have dealt with such party arising out of or in connection with negotiations of, or entering into of, this Agreement. 3.15 Lessee hereby represents to Lessor that (i) there exists no default under the Lease either by Lessor or Lessee; (ii) Lessee is entitled to no credit, free rent or other offset or abatement of the rents due under the Lease; and (iii) there exists no offset, defense or counterclaim to Lessee's obligation under the Lease. 3.16 Except as expressly amended herein, the Lease dated May 24, 2002, as amended herein, shall remain in full force and effect as if the same had been set forth in full herein, and Lessor and Lessee hereby ratify and confirm all of the terms and conditions thereof. 3.17 This agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. 3.18 Each party agrees that it will not raise or assert as a defense to any obligation under the Lease or this Agreement or make any claim that the Lease or this Agreement is invalid or unenforceable due to any failure of this document to comply with ministerial requirements including, but not limited to, requirements for corporate seals, attestations, witnesses, notarizations, or other similar requirements, and each party hereby waives the right to assert any such defense or make any claim of invalidity or unenforceability due to any of the foregoing. IN WITNESS WHEREOF, Lessor and Lessee have hereunto set their hands and seals the date and year first above written, and acknowledge one to the other that they possess the requisite authority to enter into this transaction and to sign this Agreement. LESSOR: LESSEE: 300 TICE REALTY ASSOCIATES L.L.C. PAR PHARMACEUTICAL, INC. 6 By: Mack-Cali Realty, L.P. Member By: Mack-Cali Realty Corporation, General Partner By: /s/ Michael A. Grossman By: Dennis O'Connor ----------------------- --------------------- Michael A. Grossman Name: Dennis O'Connor Executive Vice President Title:VP-CFO 7 EXHIBIT B --------- LESSOR'S WORK RE: Workletter Agreement for office space on the third floor at 300 Tice Boulevard, Woodcliff Lake, New Jersey. December 19, 2002 PAR PHARMACETICAL, INC., LESSEE You ("Lessee") and we ("Lessor") are executing simultaneously with this Workletter Agreement a written lease amendment ("Lease"), covering the space referred to above, as more particularly described in the Lease ("Expansion Premises"). To induce Lessee to enter into the Lease (which is hereby incorporated by reference) and in consideration of the covenants hereinafter contained, Lessor and Lessee mutually agree as follows: 1. Lessee shall have its architect prepare the following architectural and mechanical drawings and specifications based upon the sketch layout to be supplied to Lessor by Lessee. 1. Architectural drawings and specifications for Lessee's partition layout, reflected ceiling, placement of electrical outlets and other installations for the work to be done by Lessor. 2. Mechanical plans and specifications where necessary for installation of air conditioning systems, ductwork and heating. All such plans and specifications are expressly subject to Lessor's written approval, which Lessor covenants it will not unreasonably withhold. 2. Upon approval of the plans by Lessor, Lessor shall file said plans with the appropriate governmental agencies. 3. Lessor agrees to do the work in the Premises per the drawings stated above and per the terms and conditions of this Exhibit C which shall hereinafter be referred to as "The Work". "Building Standard" shall mean the type and grade of material, equipment and/or device designated by Lessor as standard for the Building. All items are Building Standard unless otherwise noted. The provisions of Article 6 of the Lease shall apply to any alterations made to the Premises after the initial work to be performed herein. 4. Lessor shall deliver to Lessee within fifteen (15) days after the date on which the conceptual plan is delivered to Lessor, a statement including Lessor's 7% supervision plus 7% overhead charges ("Lessor's Estimate") which specifies in detail Lessor's good faith estimate of the total "Lessee Improvement Costs". The "Lessee Improvement Costs" shall be defined as any and all reasonable costs, including hard and soft costs, which are expected to be incurred by Lessor in connection with the construction of The Work. Lessor's Estimate shall be subject to the review and written approval of Lessee, such approval not to be unreasonably withheld. Such approval shall be deemed given if Lessee does not disapprove the same in writing within ten (10) days after its receipt of Lessor's Estimate. Lessor agrees to fund up to TWO HUNDRED FIFTY SIX THOUSAND FIVE HUNDRED SIXTY And 00/100 dollars ($256,560.00) (hereinafter referred to as "Lessor Contribution") for the Lessee Improvement Costs. In the event that the Lessor's Estimate as approved by Lessee, indicates that the Lessee Improvement Costs will exceed the Lessor Contribution, then; Lessee shall pay the "Cost in Excess" (defined as that portion of the Lessee Improvement Costs which exceed the Lessor Contribution) to Lessor prior to occupancy of the Expansion Premises, and will notify Lessor of its intention to do so within fifteen (15) days after Lessee's approval of Lessor's Estimate. 5. All low partitioning, work station modules, bankscreen partitions and prefabricated partition systems shall be furnished and installed by Lessee. 6. The installation or wiring of telephone and computer (data) outlets is not part of The Work. Lessee shall bear the responsibility to provide its own telephone and data systems and any associated municipal permits and Exhibit B - Page 1 inspections, if required, at Lessee's sole cost and expense. Upon expiration or sooner termination of the Lease, Lessee shall remove all telephone and data equipment and wiring from the Expansion Premises and the Building risers prior to vacation of same. 7. Changes in The Work, if necessary or requested by the Lessee, shall be accomplished after submission of Lessee's final approved sketch layout, and without invalidating any part of the Lease or Workletter Agreement, by written agreement between Lessor and Lessee hereinafter referred to as a Change Order. Each Change Order shall be prepared by Lessor and signed by both Lessee and Lessor stating their agreement upon all of the following: 1. The scope of the change in The Work; and 2. The cost of the change; and 3. Manner in which the cost will be paid or credited. Each and every Change Order shall be signed by Lessor's and Lessee's respective construction representatives. In no event shall any Change Order(s) be permitted without such authorizations. A 7% supervision plus 7% overhead charge will be added to the cost of any Change Order. If Lessee shall fail to approve any such Change Order within one (1) week, the same shall be deemed disapproved in all respects by Lessee and Lessor shall not be authorized to proceed thereon. Any increase in the cost of The Work or the change in The Work stated in a Change Order which results from Lessee's failure to timely approve and return said Change Order shall be paid by the Lessee. Lessee agrees to pay to Lessor the cost of any Change Order promptly upon receipt of an invoice for same. 8. If Lessee elects to use the architect suggested by Lessor, this architect becomes the Lessee's agent solely with respect to the plans, specifications and The Work. If any change is made prior to completion of schematic drawings and final construction documents which result in a Change Order and additional costs, such costs shall be the responsibility of the Lessee. Similarly, any cost savings resulting from such Change Order(s) shall be credited to Lessor's Allowance. 9. Prior to Lessee's occupancy of the Expansion Premises, Lessee shall identify and list any portion of The Work which does not conform to this Workletter Agreement ("Punch List"). The Lessor shall review with the Lessee all of the items so listed and correct or complete any portion of The Work which fails to conform to the requirements of this Workletter Agreement. 10. The terms contained in the Lease (which include all exhibits attached thereto) constitute Lessor's agreement with Lessee with respect to the work to be performed by Lessor on Lessee's behalf. If the architectural drawings are in conflict with the terms of the Lease, then the Lease shall be deemed the controlling document. 11. All materials and installations constructed for the Lessee within the Expansion Premises shall become the property of the Lessor upon installation. No refund, credit or removal of said items is to be permitted at the termination of the Lease. Items installed that are not integrated in any such way with other common building materials do not fall under this provision (e.g. shelving, furniture, etc.). 12. It is agreed that notwithstanding the date provided in the Lease for the Effective Date, the term shall not commence until Lessor has "substantially completed" all work to be performed by Lessor as hereinbefore set forth in Paragraph 3 above and as set forth in the Lease; provided, however, that if Lessor shall be delayed in substantially completing said work as a result of: 1. Lessee's failure to approve the plans and specifications in accordance with Paragraph 2 hereof; or 2. Lessee's failure to furnish interior finish specifications, i.e., paint colors, carpet selection, etc., to Lessor by the fifth (5th) working day after Lessor has approved the plans and specifications submitted by Lessee referred to in Paragraph 2 hereof; or 3. Lessee's request for materials, finishes or installations other than Lessor's Building Standard; or Exhibit B - Page 2 4. Lessee's changes in The Work; or 5. The performance of a person, firm, partnership or corporation employed by Lessee and the completion of the said work by said person, firm, partnership or corporation; then the Effective Date of the term of said Lease shall be accelerated by the number of days of such delay and Lessee's obligation to pay Fixed Basic Rent and Additional Rent shall commence as of such earlier date. 13. Lessor shall permit Lessee and its agents to enter the Expansion Premises prior to the Effective Date in order that Lessee may perform through its own union contractors such other work and decorations as Lessee may desire at the same time Lessor's contractors are working in the Expansion Premises. The foregoing license to enter prior to the Effective Date, however, is conditioned upon: 1. Lessee's workmen and mechanics working in harmony and not interfering with the labor employed by Lessor, Lessor's mechanics or contractors or by any other Lessee or its mechanics or contractors; and 2. Lessee providing Lessor with evidence of Lessee's contractors and subcontractors carrying such worker's compensation, general liability, personal and property insurance as required by law and in amounts no less than the amounts set forth in Article 30 of the Lease. If at any time such entry shall cause disharmony or interference therewith, this license may be withdrawn by Lessor upon forty-eight (48) hours written notice to Lessee. Such entry shall be deemed controlled by all of the terms, covenants, provisions and conditions of said Lease, except as to the covenant to pay Fixed Basic Rent and Additional Rent. Lessor shall not be liable in any way for any injury, loss or damage which may occur to any of Lessee's decorations or installations so made prior to the Effective Date, the same being solely at Lessee's risk. 14. No part of the Expansion Premises shall be deemed unavailable for occupancy by the Lessee, or shall any work which the Lessor is obligated to perform in such part of the Expansion Premises be deemed incomplete for the purpose of any adjustment of Fixed Basic Rent payable hereunder, solely due to the non-completion of details of construction, decoration or mechanical adjustments which are minor in character and the non-completion of which does not materially interfere with the Lessee's use of such part of the Expansion Premises. 15. Lessee is responsible for all costs related to the repairs and maintenance of any additional or supplemental HVAC systems, appliances and equipment installed to meet Lessee's specific requirements. Lessee shall purchase a service contract for this equipment so that the equipment is covered by such service contract each year of the term of the Lease. 16. If construction is to occur in a space occupied by Lessee's employees, Lessee shall be liable for all costs associated with a delay if Lessee shall fail to comply with a submitted construction schedule to relocate personnel, furniture, or equipment. These costs shall include, but not be limited to the following: 1. cost of construction workers time wasted; and 2. cost of any overtime work necessary to meet schedule deadlines; and 3. any other costs associated with delays in final completion. 17. With respect to the construction work being conducted in or about the Expansion Premises, each party agrees to be bound by the approval and actions of their respective construction representatives. Unless changed by written notification, the parties hereby designate the following individuals as their respective construction representatives: FOR LESSOR: Frank Shea FOR LESSEE: Bill Bundenthal c/o Mack-Cali Realty Corporation Par Pharmaceutical, Inc. 11 Commerce Drive 1 Ram Ridge Road Cranford, NJ 07016 Chestnut Ridge, NY 10977 If the foregoing correctly sets forth our understanding, kindly sign this letter agreement where indicated. Exhibit B - Page 3 LESSOR: LESSEE: 300 TICE REALTY ASSOCIATES L.L.C. PAR PHARMACEUTICAL, INC. By: Mack-Cali Realty, L.P. Member By: Mack-Cali Realty Corporation, General Partner By: Michael A. Grossman By: Dennis O'Connor ----------------------- ------------------- Michael A. Grossman Name: Dennis O'Connor Executive Vice President Title:VP-CFO Exhibit B - Page 4 EX-10 7 a3rdamend.txt EXHIBIT 10.11.2 Exhibit 10.11.2 THIRD AMENDMENT TO LEASE ------------------------ 1. PARTIES ------- 1.1 THIS AGREEMENT made the 20th day of December, 2002 is between 300 TICE REALTY ASSOCIATES L.L.C. ("Lessor") whose address is c/o Mack-Cali Realty Corporation, 11 Commerce Drive, Cranford, New Jersey 07016 and PAR PHARMACEUTICAL, INC. ("Lessee"), whose address is 300 Tice Boulevard, Woodcliff Lake, New Jersey 07675. 2. STATEMENT OF FACTS ------------------ 2.1 Lessor and Lessee previously entered into a Lease dated May 24, 2002, as amended by First Amendment to Lease dated August 5, 2002 and Second Amendment to Lease dated (the "Lease") covering approximately 10,420 gross rentable square feet on the second (2nd) floor, (hereinafter referred to as the "Existing Premises"), approximately 25,656 gross rentable square feet on the third (3rd) floor (hereinafter referred to as the "First Expansion Premises") and two (2) storage units in the garage, consisting of Unit A of approximately 350 gross rentable square feet and Unit B of approximately 308 gross rentable square feet (the "Storage Space") in the building located at 300 Tice Boulevard, Woodcliff Lake, New Jersey ("Building"); and 2.2 The Term of the Lease currently expires on the last day of the month during which the eight (8) year anniversary of the Effective Date of the First Expansion Premises as defined in the Second Amendment to Lease occurs, which Effective Date has not yet been established ("Expiration Date"); and 2.3 Lessee desires to expand the Premises by leasing approximately 4,733 gross rentable square feet on the second (2nd) floor of the Building ("Second Expansion Premises"), as shown on Exhibit A attached hereto and made a part hereof; and 2.4 The parties desire to amend certain terms of the Lease as set forth below. 3. AGREEMENT --------- NOW, THEREFORE, in consideration of the terms, covenants and conditions hereinafter set forth, Lessor and Lessee agree as follows: 3.1 The above recitals are incorporated herein by reference. 3.2 All capitalized and non-capitalized terms used in this Agreement which are not separately defined herein but are defined in the Lease shall have the meaning given to any such term in the Lease. 3.3 The Term applicable to the Second Expansion Premises shall commence on the Effective Date (as defined below) and shall terminate at 11:59 p.m. on the last day of the month during which the eight (8) year anniversary of the Effective Date of the First Expansion Premises occurs. 3.4 The effective date applicable to the Second Expansion Premises shall be the date Lessor delivers the Second Expansion Premises to Lessee free and clear of all tenancies, rights of third parties and occupancies, but in no event earlier then January 6, 2003 (such date, the "Effective Date"). 3.5 Lessor hereby leases to Lessee and Lessee hereby hires from Lessor the Second Expansion Premises in its "AS-IS" condition, under the terms and conditions set forth herein. Lessor shall have no obligation to perform any improvement work in the Second Expansion Premises. Lessor shall provide an allowance towards such improvements work to be performed by Lessee of up to NINETY FOUR THOUSAND SIX HUNDRED SIXTY SIX AND 00/100 dollars ($94,660.00) ("Lessor's Construction Allowance"). 3.6 From and after the Effective Date, the following shall be effective: 1 a. Lessor shall lease to Lessee and Lessee shall hire from Lessor the Second Expansion Premises as shown on Exhibit A attached hereto. b. The Premises shall be defined as approximately 41,467 gross rentable square feet consisting of approximately 10,420 gross rentable square feet and approximately 4,733 gross rentable square feet on the second (2nd) floor, approximately 25,656 gross rentable square feet on the third (3rd) floor of the Building and approximately 658 gross rentable square feet of Storage Space in the garage and Paragraph 7 of the Preamble to the Lease shall be deemed amended accordingly. c. In addition to the Fixed Basic Rent payable applicable to the Existing Premises, First Expansion Premises and Storage Space, Lessee shall pay Lessor Fixed Basic Rent applicable to the Second Expansion Premises which shall accrue as follows and Paragraph 10 of the Preamble to the Lease shall be deemed amended accordingly: Fixed Basic Rent for the Second Expansion Premises: (i) Commencing on the seventy-sixth (76th) day following the Effective Date through and including the last day of the month in which the five (5) year anniversary of the Effective Date occurs, the Fixed Rent for the Second Expansion Premises only shall be ONE HUNDRED THIRTY THOUSAND ONE HUNDRED FIFTY SEVEN AND 50/100 DOLLARS ($130,157.50) per annum, payable in advance in equal monthly installments of TEN THOUSAND EIGHT HUNDRED FORTY SIX AND 46/100 DOLLARS ($10,846.46) each; (ii) For the balance of the Term through and including the Expiration Date, the Fixed Rent for the Second Expansion Premises only shall be ONE HUNDRED THIRTY FOUR THOUSAND EIGHT HUNDRED NINETY AND 50/100 DOLLARS ($134,890.50) per annum, payable in advance in equal monthly installments of ELEVEN THOUSAND TWO HUNDRED FORTY AND 88/100 DOLLARS ($11,240.88) each. d. Lessee's Percentage applicable to the Second Expansion Premises shall be 2.06 %. e. Lessee shall pay Lessor, as Additional Rent, Lessee's Percentage applicable to the Second Expansion Premises of the increased cost to Lessor for each of the categories set forth in Article 23 ADDITIONAL RENT over the Base Period Costs set forth below. f. Base Period Costs applicable to the Second Expansion Premises shall be as follows and Paragraph 2 of the Preamble to the Lease shall be deemed amended accordingly: (A) Base Operating Costs: Those costs incurred for the Building and Office Building Area during the Calendar Year 2003. (B) Base Real Estate Taxes: Those Real Estate Taxes incurred for the Building and Office Building Area during Calendar Year 2003. (C) Insurance Cost Expense Stop: $32,630.00. (D) Utility and Energy Costs Expense Stop: $230,000.00. g. Lessee shall pay Lessor the cost of electricity consumed within the Second Expansion Premises in accordance with Article 22 of the Lease BUILDING STANDARD OFFICE ELECTRICAL SERVICE. h. The number of parking spaces as set forth in Paragraph 14 of the Preamble to Lease shall be increased to a total of one hundred sixty four (164) spaces as follows: Assigned: thirty eight (38) spaces located in the garage 2 Unassigned: one hundred twenty six (126) spaces in the outdoor parking lot 3.7 The Option to Extend as set forth in Article 55 of the Lease shall continue in full force and effect and shall be applicable to both the Existing Premises, First Expansion Premises, Storage Space and the Second Expansion Premises. 3.8 No later than thirty (30) days after the determination of the Effective Date, the parties shall agree to memorialize the Effective Date in writing. 3.9 Lessee and Lessor each represents and warrants to the other that no broker brought about this transaction except Strategic Alliance Partners, LLC, and each party agrees to indemnify, defend and hold the other harmless from any and all claims of any broker claiming to have dealt with such party arising out of or in connection with negotiations of, or entering into of, this Agreement. 3.10 Lessee hereby represents to Lessor that (i) there exists no default under the Lease either by Lessor or Lessee; (ii) Lessee is entitled to no credit, free rent or other offset or abatement of the rents due under the Lease; and (iii) there exists no offset, defense or counterclaim to Lessee's obligation under the Lease. 3.11 Except as expressly amended herein, the Lease as amended herein, shall remain in full force and effect as if the same had been set forth in full herein, and Lessor and Lessee hereby ratify and confirm all of the terms and conditions thereof. 3.12 This agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. 3.13 Each party agrees that it will not raise or assert as a defense to any obligation under the Lease or this Agreement or make any claim that the Lease or this Agreement is invalid or unenforceable due to any failure of this document to comply with ministerial requirements including, but not limited to, requirements for corporate seals, attestations, witnesses, notarizations, or other similar requirements, and each party hereby waives the right to assert any such defense or make any claim of invalidity or unenforceability due to any of the foregoing. IN WITNESS WHEREOF, Lessor and Lessee have hereunto set their hands and seals the date and year first above written, and acknowledge one to the other that they possess the requisite authority to enter into this transaction and to sign this Agreement. LESSOR: LESSEE: 300 TICE REALTY ASSOCIATES L.L.C. PAR PHARMACEUTICAL, INC. By: Mack-Cali Realty, L.P. Member By: Mack-Cali Realty Corporation, General Partner By: /s/ Michael A. Grossman By: Dennis O'Connor ----------------------- ---------------- Michael A. Grossman Name: Dennis O'Connor Executive Vice President Title: VP-CFO 3 EXHIBIT B --------- LESSEE'S WORK AND ALTERATIONS Lessee may make the alterations required for Lessee's use of the Second Expansion Premises (hereinafter the "Work") after the Effective Date subject to the following: a. Lessee, at its sole cost and expense, shall prepare and submit to Lessor, for Lessor's and governmental approval, the following descriptive information, detailed architectural and engineering drawings and specifications (hereinafter the "Plans") for the Work. The Plans shall be as complete and finished as required to completely describe the Work and shall include, but not be limited to, the following: i. Demolition Plans depicting all existing conditions to be removed, abandoned or cut patched. ii. Architectural floor plans depicting partition locations and types; door location, size, and hardware types. iii. Structural plans, if required, depicting new structural components and their connections to existing elements. iv. Electrical plans depicting all new and existing electrical wiring, devices, fixtures and equipment. v. Mechanical plans depicting all new plumbing, piping, heating, ventilating, air conditioning equipment, and duct work and its connections to existing elements. vi. Life Safety System plans depicting all new or altered alarm system fixtures, devices, detectors and wiring within the Second Expansion Premises and their connection to existing systems. vii. Coordinated reflected ceiling plan showing ceiling systems and materials and all of the above items and their proximity to one another. viii. Finish plans showing locations and types of all interior finishes with a schedule of all proposed materials and manufacturers. The Plans shall provide for all systems and construction components complying with the requirements of all governmental authorities and insurance bodies having jurisdiction over the Building. b. The Plans for the Work are subject to Lessor's prior written approval which shall not be unreasonably withheld, provided, however, that Lessor may in any event disapprove the Plans if they are incomplete, inadequate or inconsistent with the terms of the Lease or with the quality and architecture of the Building. Lessor agrees to approve or disapprove the Plans within three (3) business days of receipt of same (the "Lessor's Approval Period"). If Lessor disapproves the Plans or any portion thereof, Lessor shall promptly notify Lessee thereof and of the revisions which Lessor reasonably requires in order to obtain Lessor's approval Lessee shall, at its sole cost and expense, submit the Plans, in such form as may be necessary, with the appropriate governmental agencies for obtaining required permits and certificates. Any changes required by any governmental agency affecting the Work or the Plans shall be complied with by Lessee in completing said Work at Lessee's sole cost and expense. Lessee shall submit completed Plans to Lessor simultaneously with Lessee's submission of said plans to the local building department. 2. Lessor shall permit Lessee to solicit competitive pricing and select its own general and/or individual subcontractors to perform the Work in its sole cost subject to the following: a. All general contractors shall be subject to Lessor's prior written approval, which shall not be unreasonably withheld. Exhibit B - Page 1 b. Lessor's general contractor shall be requested, but not required, to submit a price for the Work. c. Lessee shall instruct all approved general contractors to exclusively use Lessor's Base Building Sub-Contractors for heating, ventilation, air conditioning, electrical, fire suppression and life safety systems (hereinafter "Building Systems"). Other subcontractors may be used only when specifically approved in writing by Lessor, which approval shall not be unreasonably withheld or delayed. d. The Base Building Sub-Contractors and their respective trades are set forth in Paragraph 6 below. e. Lessee notifies Lessor in writing of Lessee's selection of general and subcontractors. f. All costs associated with the biding process soliciting competitive pricing will be at the sole cost and expense of the Lessee. 3. If Lessee accepts the pricing of Lessor's general contractor and elects to use Lessor's general contractor to perform the Work, (i) Lessee and Lessor's general contractor will enter into a separate agreement, substantially similar to AIA Document A101, and Lessor's general contractor shall become Lessee's agent and (ii) Lessor shall waive all supervisory fees. Lessor hereby agrees that change orders shall be on the basis of cost plus seven percent (7%) for supervision services plus seven percent (7%) for overhead. 4. If Lessee does not accept the pricing of Lessor's general contractor and subject to this Paragraph 4, elects to engage another general contractor, or individual sub-contractors, Lessee shall, at its sole cost and expense, complete the Work. Lessee shall complete such Work through its own contractors in accordance with the following terms and conditions: a. Lessee's workmen and mechanics shall work in harmony and not interfere with the labor employed by Lessor, Lessor's mechanics or contractors or by any other Lessee or their mechanic or contractors, if any. If at any time Lessee and/or its contractors cause disharmony or interference with the operation of the Building, Lessor shall give forty-eight (48) hours written notice to Lessee and within twenty-four (24) hours Lessee shall resolve any dispute so that the tenor of the construction process and the operation of the Building is returned to that which existed prior to Lessor's notice. Such entry by Lessee's contractors shall be deemed controlled by all of the terms, covenants, provisions and conditions of the Lease. b. Prior to the commencement of the Work, Lessee shall provide Lessor with evidence of Lessee's contractors and sub-contractors carrying such worker's compensation, general liability, personal and property insurance required by law and in amounts no less than the amounts set forth in Paragraph 8 herein. Lessor shall not be liable in any way for any injury, loss or damage which may occur to any portion of the Work, Lessee's decorations, or installments so made, the same being solely at Lessee's risk. c. In the event Lessor approves the use of subcontractors other than Lessor's Base Building sub-contractors, all proposed Building System work, including the preparation of the plans and specifications identified herein, shall be approved by Lessor's engineers (the "Engineering Review"), and any cost thereof shall be Lessee's responsibility. d. Lessor shall afford Lessee and its contractors the opportunity to use the Building facilities at reasonable cost in order to enable Lessee and its contractors to perform the Work, provided however, that Lessee and its contractors shall remain responsible for the scheduling and transportation of materials and equipment used in the performance of such work. Lessee shall give Lessor adequate prior notice with regard to the scheduling and transportation of materials in and out of the Building. Lessor shall furnish, at Lessor's expense, water, electricity, heat and ventilation during the performance of the Work during regular construction trade hours of 8:00 a.m. to 5:00 p.m., Monday through Friday, exclusive of trade holidays. Scavenger service shall be provided by Lessor at Lessee's expense. Exhibit B - Page 2 e. All plans, changes to the plans and work installed by Lessee and its sub-contractors shall require inspections to be made by Lessor's Base Building Sub-Contractors at Lessee's or Lessee's contractors expense (the "Inspection Fees"). The Base Building Sub-Contractors shall supply Lessor with certification that work so preformed has been completed in accordance with the Plans which have been previously approved by Lessor. If a Base Building Sub-Contractor is selected and actually installs the work, the Inspection Fees described in this paragraph with respect to such work shall not be required. f. Lessee shall be responsible for all cleaning and removal of debris necessitated by the performance of the Work. If Lessee fails to provide such cleaning and removal, the same may be performed by Lessor on Lessee's behalf and Lessee will pay Lessor an amount equal to the contractor's charge therefore, plus twenty percent (20%) thereof. g. Neither the outside appearance nor the strength of the Building or of any of its structural parts shall be affected by the Work. h. The proper functioning of any of the Building Systems shall not be adversely affected or the usage of such systems by Lessee shall not be materially increased above the projected usage of such systems indicated by the current plans and specifications of the Building. i. Lessee and its general and sub-contractors shall be bound by and observe all of the conditions and covenants contained in the Lease and this Exhibit A. j. Lessor shall designate a "Project Manager" as its representative in the Building who shall be responsible for coordination and supervision of the Work as it pertains to the daily operation of the Building. The Project Manager and his subordinates shall be granted access to the Second Expansion Premises at all times during the construction period. Lessee shall pay to Lessor, with the ten (10) business days of billing, all reasonable costs applicable to Lessor's supervisory and coordination work during the construction period. k. Lessee agrees to pay Lessor five percent (5%) of the contract awarded to Lessee's general contractor and/or any subcontractors to reimburse Lessor for coordination, supervision, and utility costs. 5. Any part of the Work within the Second Expansion Premises shall become the property of the Lessor upon installation. Furthermore, with respect to any material and installation which is part of the Work, Lessee shall not be entitled to remove, pledge or sell same unless otherwise agreed to in writing by Lessor and Lessee. No refund, credit, or removal of said items shall be permitted at the termination of the Lease. Items installed that are not integrated in any such way with other common building materials do not fall under this provision (Example: shelving, furniture, trade fixtures). 6. Lessor shall provide a cash contribution of to NINETY FOUR THOUSAND SIX HUNDRED SIXTY SIX AND 00/100 DOLLARS ($94,660.00) ("Lessor's Construction Allowance") for payment of the costs associated with the completion of The Work. Lessor's Construction Allowance shall be payable within fifteen (15) days of Lessor's receipt of the following: a. Copy of the Certificate of Occupancy (temporary and permanent) issued by the local construction official; b. AIA Document G704, Certificate of substantial completion issued and signed by Lessee's Architect; c. Release of Lien statements from the general and all sub-contractors associated with the Work; and d. Lessee shall provide Lessor a set of reproducible drawings of the Plans and a "CAD" file (in .DWG or .DXF format) of the "As-Built" Plans. Exhibit B - Page 3 7. The Base Building Sub-Contractors are: FIRE SPRINKLER CONTRACTOR "To be provided by Lessor upon request from Lessee." ELECTRICAL CONTRACTOR "To be provided by Lessor upon request from Lessee." PLUMBING CONTRACTOR "To be provided by Lessor upon request from Lessee." HVAC CONTRACTOR "To be provided by Lessor upon request from Lessee." 8. Lessee's Contractor's Insurance: a. The Lessee shall require any and all contractors of the Lessee performing work on or about the Second Expansion Premises to obtain and/or maintain specific insurance coverage for events which could occur while operations are being performed and which could occur after the completion of the work. The insurance coverage of the contractor shall be at least equal to the coverage required by Article 30 of the Lease and the contractor shall name Lessor and, if requested, Mortgagee as additional insureds on all policies of liability insurance. b. The contractor shall purchase and maintain such insurance as will protect itself and Lessor and Lessee from claims set forth below which may arise out of or result from its operations under the contract and after contract completion with Lessee, whether such operations are performed by the contractor or by any subcontractor or by anyone directly or indirectly employed by any of them or by anyone for whose acts any of them may be liable. The insurance coverage shall include but not be limited to protection for: i. Claims under Workers or Workmens Compensation, Disability Benefits, and other Employee Benefit Acts; ii. Claims for damages because of bodily injury, occupational sickness, disease or death of its employees; iii. Claims for damages because of bodily injury, sickness, disease, or death of any person other than its employees; iv. Claims for damages insured by the usual personal injury liability coverages which are sustained by (i) any person as a result of an offense directly or indirectly related to the employment of such person by the contractor, or (ii) by any other person; v. Claims for damages, other than to the work itself, because of injury to or destruction of tangible property, including loss of use resulting therefrom; vi. Claims for damages because of bodily injury or death of any person and/or property damage arising out of the ownership, maintenance, or use of any motor vehicle; and vii. Claims which include the foregoing, but not limited thereto, which may occur while operations are being performed and claims which may occur after operations are completed. c. Lessee shall secure evidence of Lessee's contractor's insurance coverage adequate to protect Lessor and Lessee. d. The contract between the Lessee and its contractor shall require that the Lessee's contractor hold the Lessor harmless in a form and manner equal to the indemnity agreement in Article 12, "Indemnification" of the Lease agreement. Exhibit B - Page 4 e. Lessee shall cause to be executed a waiver of all rights their contractors have or may have against Lessor and any Mortgagee involved in the Second Expansion Premises in any way, for damages caused by fire or other perils so insured. f. If request by Lessor, Lessee shall obtain and furnish surety in a form satisfactory to Lessor, covering the faithful performance of the work and the payment of all obligations arising thereunder. -END- Exhibit B - Page 5 EX-10 8 license-agrmt.txt EXHIBIT 10.55 Exhibit 10.55 Product Development and Patent License Agreement - Page 1 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXECUTION COPY PRODUCT DEVELOPMENT AND PATENT LICENSE AGREEMENT BETWEEN PAR PHARMACEUTICAL, INC. AND NORTEC DEVELOPMENT ASSOCIATES, INC. Dated: As of October 22, 2003 Product Development and Patent License Agreement - Page 2 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION PRODUCT DEVELOPMENT AND PATENT LICENSE AGREEMENT TABLE OF CONTENTS 1. Definitions. 1 2. Development of New Products. 4 3. Par's Exclusivity. 5 4. Patent and Know-How License. 6 5. Compensation to Nortec - Advance Payments and Royalties. 8 6. Additional Obligations Relating to Product Development and Marketing. 9 7. Manufacture of New Products. 10 8. Termination of Development Rights. 12 9. Terminination of License or Individual Product. 15 10. Confidentiality. 16 11. Representations and Warranties. 16 12. Indemnification. 18 13. Limitation on Liability. 19 14. Ownership of Inventions. 19 15. Stock Options. 20 16. Publicity. 21 17. Force Majeure. 21 18. Arbitration. 22 19. Notices. 22 20. Miscellaneous. 23 Product Development and Patent License Agreement - Page 3 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION PRODUCT DEVELOPMENT AND PATENT LICENSE AGREEMENT This PRODUCT DEVELOPMENT AND PATENT LICENSE AGREEMENT (the "AGREEMENT") is dated as of October 22, 2003 (the "Effective Date")and is between NORTEC DEVELOPMENT ASSOCIATES, INC. ("NORTEC"), a New Jersey corporation with an office at 100 Spear Road, Ramsey, NJ 07446, and PAR PHARMACEUTICAL, INC. ("PAR"), a Delaware corporation with an office at 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677. BACKGROUND OF THIS AGREEMENT Par is in the business of manufacturing and selling generic pharmaceutical products. Nortec is in the business of developing pharmaceutical products, including products utilizing the proprietary so-called "CPS Technology". Par is interested in having Nortec develop a number of pharmaceutical products for Par, and Nortec desires to do so. Par and Nortec are entering into this Agreement to set forth the terms and conditions under which Nortec will develop various pharmaceutical products for Par and arrange to manufacture those products for clinical testing and biostudies. In consideration of the mutual promises set forth in this Agreement, Nortec and Par hereby agree to the provisions of this Agreement. 1. DEFINITIONS. The following terms shall have the following meanings when used in this Agreement. (a) "ACTIVE MOIETY" means, with respect to any New Product, the molecules or ions having the chemical structure (the "Base Chemical Structure") which is contained in and is responsible for the physiological or pharmacological action of that New Product. All salts (including salts with hydrogen or coordination bonds), esters, complexes, chelates, clathrates or other such structures which involve the Base Chemical Structure shall be understood to contain such Active Moiety, but such appended portions are not part of the Active Moiety. (b) "ADVANCE PAYMENTS" is defined in Section 5(b) below. (c) "AFFILIATE" with respect to any party means any person, entity or organization which either directly or indirectly controls, is controlled by, or is under common control with that party. For these purposes, the term "control" by a person, entity or organization means possession by that person, entity or organization of the power to direct, or cause the direction of, any other entity or organization. (d) "BULK PRODUCT" means with respect to any New Product that product in an oral solid dosage form, bulk packaged for intermediate use in bulk containers which will subsequently be packaged in its final packaging form by Par for Par's analytical stability studies and pilot and pivotal bio equivalency studies. (e) "CONTRACT YEAR" means each consecutive 12-month period beginning on the Effective Date of this Agreement. (f) "CPS OROCEL" means CPS Orocel LLC, a Delaware limited liability company. Product Development and Patent License Agreement - Page 4 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (g) "CPS PATENT RIGHTS" means collectively all rights licensed by Nortec from CPS Orocel under (1) United States Patent Number 6,354,728 entitled "Device for producing a pourable product with a guide vane therein", issued on March 12, 2002; (2) United States Patent Number 6,449,869 entitled "Device and Method for Drying Pourable Products", issued September 17, 2002, (3) Patent Application, entitled "Method of Preparing Biologically Active Formulations" filed with the USPTO on December 12, 2002, and (4) application for a United States Patent entitled "Method of Preparing Biologically Active Formulations", filed December 12, 2002, and reissues, extensions, continuations, continuations-in-part or divisions of any of the foregoing. (h) "CPS TECHNOLOGY" means the mechanism and technique for developing pharmaceutical products utilizing what is termed "complex perfect sphere" technology and which is currently the subject of the CPS Patent Rights. (i) "DEVELOPMENT FEES" is defined in Section 8(c)(1) below. (j) "DEVELOPMENT WORK" is defined in Section 2(c)(ii) below. (k) "FDA" means the United States Food and Drug Administration. (l) "GAT" means Glatt Air Techniques, Inc., a New York corporation. (m) "KNOW-HOW" means any idea, invention, information, data and other know-how, whether or not patentable, except that which is otherwise claimed in the CPS Patent Rights, which are owned by or to which Nortec has rights to or develops or possesses on or after the date of this Agreement and which are necessary or useful in the evaluation, development, registration, manufacture, use or sale of any of the New Products, including, but not limited to, the following: (1) copies of all papers relating to patents applied for in the Territory which relate in any way to any of the New Products; (2) all data and/or information regarding the procedures for manufacturing any of the New Products; (3) all data and/or information, including summaries and completed case reporting forms, concerning the testing, manufacture, pharmacology and clinical use of any of the New Products; and (4) the CPS Technology to the extent that it is not claimed in the CPS Patent Rights. (n) "MODIFIED ROYALTIES" is defined in Section 8(c)(2) below. Product Development and Patent License Agreement - Page 5 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (o) "NET SALES" with respect to any New Product means the amounts invoiced in the first bona fide arm's-length sales of that New Product to independent unaffiliated third parties by PAR and or by any affiliate or designee of Par, less the following deductions in each case to the extent related specifically to that New Product: (i) any sales, use or excise taxes included in such amount, (ii) discounts allowed and taken, (iii) amounts refunded or credited by reason of returns, allowances for retroactive price adjustments, or payments made by Par to independent unaffiliated third parties as part of rebate arrangements, (iv) charges for freight, handling and transportation separately itemized on the invoice; and (v) charge-back rebates and state or federal Medicare or Medicaid rebates. In the event that a New Product is sold to a customer at a discount which exceeds the discounts afforded such customer for other Par pharmaceutical products, the Net Sales of that New Product to such customer shall be deemed to be the average undiscounted Net Sales of that New Product to all customers for the period in question discounted to a level consistent with the average discount afforded to such customer on other pharmaceutical products. (p) "NEW PRODUCT" means any bulk or finished pharmaceutical product which is developed or manufactured by Nortec and/or its Affiliates pursuant to this Agreement. (q) "NORTEC HOLDING" means Nortec Holding LLC, a Delaware limited liability company that, as of the date of this Agreement, is the sole shareholder of Nortec. (r) "PRIORITY LIST" is defined in Section 3(b) below. (s) "RIGHTS TERMINATION" is defined in Section 8(a) below. (t) "ROYALTIES" is defined in Section 5(c) below. (u) "STOCK PURCHASE AGREEMENT" means the Stock Purchase and Shareholders Agreement, dated as of the date of this Agreement, among Par, Nortec Holding and Nortec. (v) "THIRD PARTY CONTRACT" is defined in Section 4(e) below. (w) "TWO EXISTING AGREEMENTS" means collectively (1) the Patent and Know How License Agreement, dated as of May 24, 2002, between Par and Nortec relating to the development, manufacture and sale of a ********* ******* ********** product and (2) the Patent and Know How License Agreement, dated as of June 14, 2002, between Par and Nortec relating to the development, manufacture and sale of a ********* ******* *********** product. (x) "TERRITORY" means Canada and the United States of America, including its territories and possessions, and the Commonwealth of Puerto Rico. 2. DEVELOPMENT OF NEW PRODUCTS. (a) During each Contract Year, Par shall have right to ask Nortec to start Development Work on up to three New Products selected by Par in Par's reasonable discretion. Par shall make a good faith effort to ask Nortec to start Development Work on at least one New Product each year during the first four Contract Years. Nortec agrees that it will develop such New Products for Par, up to a maximum of twelve New Products, and Nortec shall begin that Development Work on such New Products reasonably promptly after being requested to do so by Par. Product Development and Patent License Agreement - Page 6 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (b) Par shall supply to Nortec all active pharmaceutical ingredients and inactive raw material ingredients reasonably required for Nortec's Development Work in connection with each New Product and for Nortec's manufacture of Bulk Product for Par's pilot and pivotal bio equivalency studies (referred to here as "CLINICAL SUPPLIES MANUFACTURING") under this Agreement. Par shall use reasonable commercial efforts to provide in a timely manner all analytical testing services that are required to support Nortec's development and Clinical Supplies Manufacturing activities under this Agreement. Nortec will notify Par in writing of its requirement for materials, and Par will furnish those materials in a timely manner. Nortec will not charge any additional fee for manufacturing Bulk Product for the pilot and pivotal biostudies, other than the amounts otherwise set forth in this Agreement. (c) Nortec shall develop each New Product in accordance with a development plan, as follows: (1) As soon as reasonably practicable following identification of each New Product for development by Nortec, Par and Nortec shall prepare a mutually acceptable plan for the development of such New Product (referred to here as the "DEVELOPMENT PLAN"). Each Development Plan shall set forth in writing in reasonable detail the responsibilities of Nortec in developing such New Product which shall be responsibilities typical in pharmaceutical product development, including relevant deliverables and timelines. Nortec and Par shall work together to mutually work out the details of each Development Plan. (2) Nortec shall develop each New Product in accordance with the Development Plan for that New Product; such work by Nortec is referred to in this Agreement as the "DEVELOPMENT WORK". (3) Nortec shall use its commercially reasonable efforts to perform the Development Work for each New Product in accordance with the timelines provided in the Development Plan for that New Product and deliver the deliverables to Par as provided in that Development Plan. (4) Nortec shall keep Par fully informed of its progress toward the completion of the Development Work for each New Product and Par shall keep Nortec informed regarding its supply of materials and its regulatory activities. (5) Nortec shall maintain complete and proper records of its Development Work for each New Product. (d) Nortec shall provide all documents and information in its possession that are reasonably required by Par to support Par's filing and prosecution of an ANDA or other application with the FDA to register any New Product. Any such application shall be owned by Par and submitted in its name, and Par shall have the final authority with respect to all decisions concerning the content, compilation, prosecution, amendment or supplementation of any such ANDA. Nortec shall not have any obligation to carry out any analytical, stability or clinical studies in connection with its duty to provide information to Par that Nortec has in its possession. Nortec shall exercise diligent efforts to assist Par in the review and compilation of reports to be included in any such ANDA application. Nortec shall have the right to consult with Par with respect to the preparation of any such ANDA for any New Product to be filed with the FDA. Product Development and Patent License Agreement - Page 7 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (e) Each party shall provide the other party with all information in its possession or control that is necessary for the other party to comply with any applicable reporting requirements. Each party shall promptly notify the other party of any comments, responses or notices received from, or inspections by, the FDA or other applicable competent authorities which relate to or may impact a New Product. Each party shall promptly inform the other party of any responses to such comments, responses, notices or inspections and the resolution of any issue raised by the FDA or other competent authorities. 3. PAR'S EXCLUSIVITY. (a) Commencing on the date that Par asks Nortec to begin development work on any New Product, Nortec shall not, and shall cause its Affiliates not to, develop, make, have made, sell, offer for sale, distribute or otherwise make available (or contract with any third party to do any of the foregoing) that New Product or any other pharmaceutical product that has the same Active Moiety as that New Product in the Territory for its own (or such Affiliates own) benefit or for any other party. The prohibition in the preceding sentence shall automatically end, however, with respect to any New Product (i) immediately if and when Par abandons all work involving that New Product under this Agreement pursuant to Section 9(b) below or (ii) one year following the expiration or termination of this Agreement with respect to that New Product for any other reason. For the avoidance of doubt, nothing in this Section 3(a) shall in any way limit or prohibit Nortec or any Affiliate of Nortec from (1) developing, making, having made, selling, offering for sale, distributing or otherwise making available (or contracting with any third party to do any of the foregoing) any pharmaceutical product that competes with that New Product, as long as that pharmaceutical product does not contain the same Active Moiety as that New Product, and (2) manufacturing, developing, selling, distributing or servicing any Non-CPS Equipment, or providing technical support for any such equipment, even if that equipment is utilized by any other party to manufacture any pharmaceutical product that is the same as that New Product or has the same Active Moiety as that New Product. Non-CPS Equipment is equipment that is not being provided specifically to a customer for the manufacture of products embodying the CPS Technology (b) Within 90 days after the date of this Agreement, Par shall provide to Nortec a written list (referred to here as the "PRIORITY LIST") that identifies up to twelve drugs. Within 45 days after receiving the Priority List, Nortec will notify Par if Nortec or any of its Affiliates have previously granted any option, right or license to any third person or entity with respect to any of CPS Patent Rights or Know-How relating to the manufacture, use or sale within the Territory of any drugs identified in that Priority List; in that event, any such drug shall be removed from the Priority List, and Par shall have the right, within 45 days thereafter, to substitute a different drug for the drug that is so removed from the Priority List. In the event that any third party requests that GAT or any Affiliate of GAT (including CPS Orocel) begin discussions which would involve GAT or that Affiliate developing or producing any drug that is identified on the Priority List utilizing the CPS Technology, Nortec shall promptly notify Par of that request. That notice will identify only the drug involved; that notice will not identify the third party. Par shall have fifteen business days after receiving that notice to provide a notice to Nortec which sets forth a request for Nortec to begin development work (pursuant to Section 2(a) above) on a New Product that utilizes that drug. If Par provides such a notice within that 15-business day period, then Nortec shall begin development work on that New Product for Par (pursuant to Section 2(a) above), and Nortec, GAT and their respective Affiliates shall not perform or permit to be performed by their Affiliates any development work or production of any product that utilizes the drug for that third party or for any other party. If Par does not provide such a notice within that 15-business day period, then that drug will be automatically and permanently be removed from the Priority List, and thereafter Nortec, GAT and their Affiliates may conduct development work and production of any product utilizing the CPS technology involving that drug for that third party or for any other party. The restriction set forth in the fifth sentence of this Section 3(b) shall automatically end, however, with respect to any drug if and when Par abandons all work under this Agreement involving the New Product that utilizes that drug. Product Development and Patent License Agreement - Page 8 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 4. PATENT AND KNOW-HOW LICENSE. (a) Subject to the terms and conditions of this Agreement, Nortec hereby grants to Par, and Par hereby accepts, a license of the CPS Patent Rights and the Know-How to make, import, use and sell each of the New Products in the Territory. No license is granted for any other product than the New Products that are developed by Nortec pursuant to Section 2 above. No license is granted for any New Product anywhere outside the Territory. Except as otherwise provided in Sections 8 or 9 below, this license with respect to any New Product shall remain in effect (1) with respect to any patent, until the expiration of that patent, including any reissues, extensions, continuations, continuations-in-part or divisions of that patent, and (2) with respect to any Know-How, for as long as Par is manufacturing and marketing that New Product. (b) Except as provided in the next sentence, the license set forth in Section 4(a) above is exclusive; in other words, for as long as that license remains in effect under Section 4(a) above with respect to any New Product, Nortec and its Affiliates shall not grant to any other person or entity any license to use the CPS Patent Rights or the Know-How anywhere within the Territory for the purpose of making, using or selling that New Product or any other pharmaceutical product that contains the same Active Moiety as that New Product; provided, however, that nothing herein shall prevent Nortec and its Affiliates from generally selling, distributing or servicing any Non-CPS Equipment, or providing technical support for any such equipment, even if that equipment is utilized by any other party to manufacture any pharmaceutical product that is the same as that New Product or has the same Active Moiety as that New Product. The license set forth in Section 4(a) above shall become non-exclusive with respect to any New Product if at any time after three years from the date of the launch of that New Product, the Net Sales of that New Product fall below *** of the total generic solid dosage market for the drug that is contained in that New Product; in that event, Nortec shall have the right to grant to third parties non-exclusive licenses to the CPS Patent Rights and Know-How in the Territory relating to that New Product under such terms and conditions as Nortec deems appropriate. (c) Within 14 days after Par asks Nortec to start development work on a New Product (pursuant to Section 2(a) above), Nortec will disclose to Par, subject to the confidentiality provisions of Section 10 below, all then-existing Know-How not previously disclosed to PAR to the extent necessary for Par to describe the manufacture of that New Product in connection with any ANDA or equivalent document. Thereafter, Nortec shall promptly identify and disclose to PAR, to the extent PAR requests disclosure, any new or additional Know-How which comes into the possession or control of Nortec or any of its Affiliates, again subject to Section 10 below and to the extent necessary for Par to describe the manufacture of that New Product in connection with any ANDA or equivalent document. Nortec shall provide to Par, at no additional cost to Par, such assistance as Nortec deems necessary for Par to describe the manufacture of that New Product under this Agreement. (d) Par hereby acknowledges that it does not have, and shall not acquire, any interest in any trademarks or trade names owned or licensed by Nortec, GAT or any of their Affiliates that may appear on the labels or packaging materials for any New Product. (e) Except as expressly provided in this Section 4(e), Par shall not assign or sublicense all or any portion of this Agreement or all or any portion of the license set forth in Section 4(a) above without the prior written consent of Nortec, which consent shall not be unreasonably withheld. Par may, however, enter into one or more contracts with third parties (referred to here as "THIRD PARTY CONTRACTS") pursuant to which those third parties have the right to sell one or more New Products, subject to the limitations set forth in subparagraphs (1) through (5) below, inclusive. Product Development and Patent License Agreement - Page 9 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION If those limitations are satisfied with respect to any Third Party Contract, then Par shall have the right to sublicense the CPS Patent Rights and the Know-How to the third party under that Third Party Contract solely for the purpose of enabling that third party to sell any New Product that is covered by such Third Party Contract. The applicable limitations are as follows: (1) Any such sublicense of the CPS Patent Rights and Know-How to any such third party is subject to the prior written consent of Nortec for each subject New Product, which consent shall not be unreasonably withheld or delayed; (2) Prior to entering into any such Third Party Contract, Par shall consult with Nortec regarding the proposed Third Party Contract and shall provide Nortec with such information as Nortec may reasonably request relating to that proposed Third Party Contract; (4) Par shall remain fully liable for all obligations under this Agreement, notwithstanding any sublicense set forth in any Third Party Contract; and (5) Par shall not, and shall not have any right to, sublicense or assign any other rights under this Agreement, including without limitation providing a sublicense to develop or manufacture any products utilizing the CPS Patent Rights or the Know-How, sublicensing or assigning any right under Section 7(c) below to purchase any equipment that embodies the CPS Technology, or assigning any right to utilize any equipment purchased by Par pursuant to Section 7(c) below. 5. COMPENSATION TO NORTEC - ADVANCE PAYMENTS AND ROYALTIES. (a) In consideration for the services to be provided by Nortec under this Agreement and the license of the CPS Patent Rights and Know-How set forth in this Agreement, Nortec hereby acknowledges that Par has paid to Nortec the amount of Five Hundred Thousand Dollars ($500,000) and Par shall additionally pay to Nortec the Advance Payments set forth in Section 5(b) below and the Royalties set forth in Section 5(c) below. (b) Par shall pay to Nortec payments (referred to here as "ADVANCE PAYMENTS") totaling Two Million Five Hundred Thousand Dollars (US$2,500,000). Par will pay the Advance Payments as follows: $500,000 on each of October 15, 2003, December 15, 2003, June 15, 2004, September 15, 2004, January 15, 2005. [In economic terms, the Advance Payments represent advance payments of royalties that would otherwise have been payable with respect to the New Products.]1 (c) Par shall pay to Nortec a royalty (individually a "ROYALTY" and collectively the "ROYALTIES") with respect to each New Product based on the Net Sales and the market share of that New Product, as shown in the following table: - ------------------------------------------------------------------------------ ROYALTY AMOUNT FOR EACH PAR'S MARKET SHARE (MS) OF THE TOTAL NEW PRODUCT SUSTAINED RELEASE SOLID DOSAGE MARKET FOR (% OF NET SALES) THAT NEW PRODUCT - ------------------------------------------------------------------------------ **% MS > **% - - ------------------------------------------------------------------------------ ****% **% > MS > **% - - ------------------------------------------------------------------------------ *% **% > MS > **% - - ------------------------------------------------------------------------------ ***% **% > MS > **% - - ------------------------------------------------------------------------------ ***% MS < **% - ------------------------------------------------------------------------------ Product Development and Patent License Agreement - Page 10 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION For these purposes, the market share of each New Product shall be based on the total sales reported for that New Product divided by the total sales of the branded and generic products in all dosage forms, as reported by IMS at the end of each calendar year (d) In the event that Par enters into any Third Party Contract as permitted pursuant to Section 4(e) above, then solely for purposes of calculating the Royalty applicable to sales of New Product made by a third party under that Third Party Contract, Par shall pay to Nortec the Royalty shown in the table in Section 5(c) above, with the "Net Sales" in that case equal to the total consideration (both cash and non-cash) received by Par under that Third Party Contract. (e) Par shall pay Royalties to Nortec with respect to each New Product during such time as Par (or its subcontractor) offers the New Product for sale in the Territory until the date that is fifteen (15) years from the date of final FDA approval to market such New Product in the Territory. Par shall pay the Royalty to Nortec with respect to each New Product within 45 days after the end of each calendar quarter based on the Net Sales of that New Product made within that calendar quarter and based on Par's reasonable estimate at that time of the market share of that New Product. If at any time after making any quarterly payment Par or Nortec determines that the actual market share of that New Product is different than the market share that was used by Par in determining the amount of that payment, Par and Nortec shall promptly make an appropriate payment to the other to account for that difference. Any other discrepancies in the calculation and payment of the Royalty shall be reconciled promptly after the delivery of each quarterly sales report pursuant to Section 6(e) below. (f) While this Agreement is in effect and for a period of six (6) months thereafter, Nortec shall have the right at its expense to have an independent certified public accounting firm reasonably acceptable to Par examine the records described in Section 6(e) below (excluding those records, if any, which relate to the qualitative commentary of Section 6(e) below) and Section 5.2(c) above. Nortec may have those records examined during reasonable business hours, not more often than once each calendar year for then-current year and for then-preceding three (3) years. That examination shall be made for the sole purpose of determining whether the amount of the Royalties has been correctly calculated and paid. That independent certified public accounting firm shall be required to treat as confidential, and not disclose to Nortec, any information that it has obtained, except such information which would properly be contained in a sales report provided by Par to Nortec under this Agreement. In addition, that independent certified public accounting firm shall not disclose to any other party any information obtained as a result of such examination, except as may be required by binding legal process or government requirements, and then only on reasonable prior notice and in consultation with Par. 6. ADDITIONAL OBLIGATIONS RELATING TO PRODUCT DEVELOPMENT AND MARKETING. The provisions of this Section 6 shall apply with respect to each New Product starting on the date that Par asks Nortec to start development work on that New Product until such time that Par abandons all work involving that New Product under this Agreement. (a) PROCEDURES FOR FILING AN ANDA. (1) Par shall use reasonable commercial efforts to prepare, compile and submit an ANDA for each New Product in the Territory and, following such submission, Par shall diligently prosecute that ANDA with the FDA with a view to obtaining timely approval for that New Product. Product Development and Patent License Agreement - Page 11 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (2) At such time or times as may be reasonably requested by Nortec, Par shall provide Nortec with written reports on its efforts to obtain from the FDA marketing approval in the Territory for that New Product, including supporting documentation reasonably requested by Nortec. Nortec shall have the right to inspect the ANDA and associated correspondence for each New Product at any time on prior notice during normal business hours during the term of this Agreement. (b) MARKETING EFFORTS. Par will use reasonable commercial efforts to market each New Product in the Territory during the term of the Agreement. Par shall furnish and label each New Product in compliance with the specifications and requirements set forth in the FDA's marketing approval documents. (c) ADVERSE DRUG REACTIONS. Par and Nortec shall promptly, after learning thereof, notify the other in writing of any report of adverse, or possible or suspected adverse, effects of any New Product. Whenever either party intends to report the same to any governmental authority, that party shall, when feasible, consult with the other party with respect to such notification. Specifically, and without limiting the foregoing, Par shall provide Nortec with adverse event data for filing with the FDA. (d) MARKET REPORTS. Par and Nortec shall meet on a quarterly basis during the first year following the initial launch of each New Product, on a semi-annual basis during each of the second and third years following that initial launch, and on an annual basis during each of the fourth and fifth years. At those meetings, which will be at a location(s) specified by Par, Par will report on the ongoing sales performance of each New Product in the Territory, including without limitation marketing approaches, promotion and advertising campaigns, sales plans and results, and performance against competitors. Each of Par and Nortec shall bear all of its own costs and expenses relating to those meetings. At Nortec's request, Par shall provide similar information at other times, provided that all information disclosed at any of those meetings or otherwise shall only be information prepared or maintained by Par in the ordinary course of its business. (e) NET SALES REPORTS. Beginning ninety (90) days after the end of the first calendar quarter in which Net Sales of each New Product are first made, and ninety (90) days after the end of each subsequent calendar quarter during the term of this Agreement, Par shall deliver or cause to be delivered to Nortec a written report showing the Net Sales of each New Product during the preceding quarterly period. 7. MANUFACTURE OF NEW PRODUCTS. (a) For all New Products which employ CPS Technology Par will negotiate in good faith with GAT to enter into one or more Supply Agreements with GAT pursuant to which GAT will manufacture, at GAT's facility, all CPS pellets for such New Products (in other words, pellets that are formulated or manufactured utilizing the CPS Technology), except as provided in Section 7(c) below. It is envisioned that those Supply Agreements will, among other things, set forth the terms and conditions under which Par shall purchase all of its requirements for CPS pellets for all New Products exclusively from GAT and GAT shall sell to Par all of Par's requirements for CPS pellets for all New Products for sale in the Territory. It is further envisioned that those Supply Agreements will contain such other provisions with respect to forecasting, orders, quality control, adverse event reporting, warranties and indemnities as is usual and customary in commercial agreements of that type. Within the Territory, GAT shall sell such CPS pellets for each such New Product exclusively to Par. Except as otherwise expressly permitted under this Agreement, Par shall not manufacture any CPS pellets for any New Products itself or purchase any CPS pellets for any New Products from any other source for sale in the Territory while this Agreement is in effect. Product Development and Patent License Agreement - Page 12 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (b) The provisions of this Section 7(b) shall apply for determining the price that Par will pay to GAT for manufacturing CPS pellets for each New Product under the Supply Agreements. On or about, but no later than the later of (1) the date on which Par submits a New Product for pivotal bio equivalency studies and (2) the date on which that New Product demonstrates stability under accelerated stability conditions, GAT will calculate and present to Par GAT's transfer price to supply to Par the CPS pellets for that New Product, based on the process used to manufacture those CPS pellets and Par's anticipated supply requirements for those CPS pellets as defined and known at that time. GAT's transfer price shall not be greater than the transfer price charged by GAT for manufacturing similarly situated products (if any) developed or manufactured by GAT utilizing the CPS Technology. That transfer price for the CPS pellets for that New Product may thereafter only be adjusted by GAT to reflect any subsequent changes in (x) the process used to manufacture those CPS pellets, (y) Par's supply requirements for those CPS pellets, or (z) inflation costs during the period commencing with the establishment of the transfer price and ending with the time of commercial launch of that New Product. In the event that Par and GAT are not able mutually to agree on a transfer price at the time specified in this Section 7(b), Par may, at its sole option, elect to terminate this Agreement with respect to that New Product without any further obligation to Nortec or to GAT with respect to such New Product. (c) At any time after Par has entered into a binding Supply Agreement (or Supply Agreements) with GAT to have GAT manufacture CPS pellets for sale (not development) for two New Products, Par shall have the right to purchase from GAT equipment that embodies the CPS Technology. Par may use that equipment solely for the purpose of producing CPS pellets for New Products, other than the New Products that are the subject of that Supply Agreement (or Supply Agreements) and other than the products developed under the Two Existing Agreements. The purchase price for that equipment will be negotiated in good faith at that time by Par and GAT. In addition to the purchase price for that equipment, and as a condition to that purchase, Par shall pay to GAT an additional amount equal to ***% of the Net Sales of any New Product that is manufactured using that equipment; the calculation and payment of that amount shall be made in the same manner and at the same time that the Royalty is paid to Nortec pursuant to Section 5 above. Except as specifically provided in this Section 7(c), GAT shall not have any obligation to sell any equipment that embodies the CPS Technology, either to Par or to any other party, that would allow Par to have access to equipment that embodies the CPS Technology. (d) To the extent that any part of the process used in manufacturing any New Product for sale (not development) does not involve the manufacture of CPS pellets and Par decides (in its sole discretion) to contract with any party (referred to here as an "UNAFFILIATED PARTY") that is not an Affiliate of Par to provide such manufacturing services for such New Products (referred to here as the "NON-CPS MANUFACTURING SERVICES"), then Par shall give GAT a "right of first refusal" to provide those Non-CPS Manufacturing Services, as follows: Promptly after Par has negotiated with the Unaffiliated Party to provide the Non-CPS Manufacturing Services, Par shall send a notice to GAT (the "INTENT NOTICE") which states that Par intends to enter into a contract with an Unaffiliated Party to provide Non-CPS Manufacturing Services. The Intent Notice shall include a copy of any written offer, term sheet or proposed contract setting forth the price and the other terms and conditions of those Non-CPS Manufacturing Services with that Unaffiliated Party. GAT shall have the right in its sole discretion, to be exercised by notice (the "GAT NOTICE") given to Par within five (5) business days after GAT's receipt of the Intent Notice, to enter into a contract with Par to provide those Non-CPS Manufacturing Services for Par. If GAT provides a GAT Notice within that 5-day period, then Par shall not enter into an agreement with the Unaffiliated Party to provide those Non-CPS Manufacturing Services, but instead Par shall enter into an agreement with GAT pursuant to which GAT shall provide those Non-CPS Manufacturing Services to Par, at the same price and on the same terms and conditions included with the Intent Notice. Product Development and Patent License Agreement - Page 13 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION If GAT does not provide a GAT Notice within that 5-day period, then Par shall have the right to enter into a contract with the Unaffiliated Party to provide those Non-CPS Manufacturing Services, on terms no less favorable to Par than the terms and conditions included with the Intent Notice, provided that such a contract with the Unaffiliated Party is signed within 90 days of the date of the Intent Notice. If for any reason Par does not enter into such a contract with the Unaffiliated Party within that 90-day period, then Par may not enter into such a contract with the Unaffiliated Party as contemplated by the Intent Notice without again providing GAT with the "right of first refusal" under this section 7(d), and any other or future contract for such Non-CPS Manufacturing Services shall again become subject to the provisions of this Section 7(d). (e) Nothing in this Agreement shall in any way restrict, or require payments by Par in respect of, Par's right to conduct coating, packaging, labeling or other post CPS Technology operations for all New Products at any facility (either Par's or any third party). 8. TERMINATION OF DEVELOPMENT RIGHTS. (a) Par shall have the right in its sole discretion, as provided in this Section 8, to terminate its right to have Nortec develop New Products under this Agreement. Such a termination by Par is referred to here as the "RIGHTS TERMINATION". Par shall have the right to exercise the Rights Termination only if that Rights Termination becomes effective on and as of October 15, 2005 and only by providing notice to Nortec of Par's exercise of the Rights Termination not later than October 15, 2005. Nortec shall provide a notice to Par, not earlier than April 1, 2005 and not later than July 15, 2005, reminding Par of Par's right to exercise the Rights Termination. If Par does not exercise the Rights Termination by providing such a notice to Nortec by October 15, 2005, then Par will not have any right to exercise the Rights Termination. If, and only if, Par exercises the Rights Termination by providing such a notice to Nortec by October 15, 2005, then the remaining provisions of this Section 8 shall apply. (b) Par shall not have any further right to have Nortec develop any New Products not previously initiated under this Agreement. Without limiting the forgoing, Par will not have any right to have Nortec develop any New Products based on any of the drugs identified in the Priority List that have not previously been initiated, and there shall not be any restriction under this Agreement on the rights of Nortec, GAT or any of their Affiliates to develop or produce any such drugs for any third parties. (c) Par, Nortec and GAT shall continue to develop any New Products and manufacture CPS pellets for any New Products that are under development prior to the Rights Termination. In that event, however, in lieu of paying Royalties to Nortec as provided in Section 5(c) above, Par shall pay to Nortec the following Development Fees and Modified Royalties with respect to such New Products: (1) Par shall pay to Nortec the following amounts (referred to here as the "DEVELOPMENT FEES") for each such New Product, subject to Section 8(d) below: (i) the sum of $125,000 for each such New Product, payable within ten days after the date of the Rights Termination; Product Development and Patent License Agreement - Page 14 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (ii) the sum of $375,000 for each such New Product on the date that Nortec submits to Par the formulation and physical specifications of immediate release beads produced during Nortec's first immediate release core bead trial campaign for that New Product. In the event that Nortec has submitted such specifications to Par with respect to any New Product on or prior to the date of the Rights Termination, then Par shall pay that amount to Nortec with respect to that New Product within ten days after the date of the Rights Termination. In the event that Nortec has not submitted such specifications to Par with respect to any New Product on or prior to the date of the Rights Termination, then PAR may, at its sole option, elect to terminate all development work with respect that New Product; Par can make this election only by providing a notice of that termination to Nortec after the date of the Rights Termination and prior to the date on which Nortec submits those specifications to Par; (iii) the sum of $400,000 for each such New Product on the completion of both (x) a successful pivotal biostudy that demonstrates bio equivalence of that New Product to the branded sustained release solid dosage form of the drug containing the same active ingredient(s) as that New Product, and (y) the demonstration of stability of that New Product under 90-day accelerated stability conditions; and, (iv) the sum of $600,000 for each such New Product on the date of the first commercial sale of that New Product. (2) Par shall pay to Nortec a royalty (individually a "MODIFIED ROYALTY" and collectively the "MODIFIED ROYALTIES") with respect to each such New Product based on the Net Sales and the market share of that New Product, as shown in the following table, but subject to Section 8(c)(2)(ii) below: - ------------------------------------------------------------------------------ ROYALTY AMOUNT FOR EACH PAR'S MARKET SHARE (MS) OF THE TOTAL NEW PRODUCT SUSTAINED RELEASE SOLID DOSAGE MARKET FOR (% OF NET SALES) THAT NEW PRODUCT - ------------------------------------------------------------------------------ **% MS > **% - - ------------------------------------------------------------------------------ **% **% > MS > **% - - ------------------------------------------------------------------------------ **% **% > MS > **% - - ------------------------------------------------------------------------------ *% **% > MS > **% - - ------------------------------------------------------------------------------ *% MS < **% - ------------------------------------------------------------------------------ For these purposes, the market share of each New Product will be determined at the end of each calendar year from IMS published data relating to total sales of such New Product, including both generic and branded products and including all doses of such products. Par shall pay the Modified Royalties to Nortec on the dates specified in Section 5(e) above. Nortec shall have the right to have the amount of the Modified Royalties examined as provided in Section 5(f) above. (d) The total amount of the Advance Payments that Par has paid to Nortec as of the date of the Rights Termination shall be credited against the amount of any Development Fees that are payable pursuant to Section 8(c)(1). If the total amount of those Advance Payments is greater than the total amount of those Development Fees, Par shall not be entitled to a refund of the excess amount. Product Development and Patent License Agreement - Page 15 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (e) If at any time after the Rights Termination Par wants Nortec or GAT to develop or manufacture any other products utilizing the CPS Technology or the Know-How, neither Nortec nor GAT shall have any obligation to perform such work for Par. If Par wants Nortec or GAT to develop or manufacture any other such product, at that time Par and Nortec or GAT would need to negotiate the terms and conditions of that work. (f) After the exercise of the Rights Termination, Par shall not have any right thereafter to acquire any shares of stock in Nortec as contemplated by the Stock Purchase Agreement or to otherwise share in any of Nortec's profits. 9 TERMINATION RIGHTS. (a) Either Nortec or Par may terminate this Agreement in its entirety if the other party (including its Affiliates) commits a material breach of any of the material terms of the Agreement and does not remedy that breach within ninety (90) days after receipt of a notice demanding that any such breach be remedied, or, if ninety (90) days is an inadequate cure period, such longer period as is reasonably necessary, provided that such breach is capable of cure, the breaching party promptly commences to cure that breach, and the breaching party continues to act with reasonable diligence to cure that breach. (b) In the event that Par in good faith determines that it is no longer economically viable to pursue the development, registration or sale of a New Product in the Territory, then Par may terminate this Agreement solely as it applies to that New Product. In the event that Par exercises this right, then Par shall use reasonable commercial efforts to transfer to Nortec all rights, contracts, data and information associated with that New Product, including all rights under any unapproved or approved ANDA. On that termination, Par shall grant to Nortec, without any cost or fee, a license to any trademark that Par may have selected as a brand trademark for that New Product. Notwithstanding the foregoing, in any subsequent promotion of that New Product, Nortec may utilize in such promotion efforts previously published material, for example clinical results and studies, that reference Par's trademark for that New Product. Nortec's right to use any such trademark does not include the right to use Par's name or any other trademark of Par. (c) If the license granted pursuant to Section 4 above is terminated pursuant to Section 9(a) above or if this Agreement is terminated with respect to any particular New Product pursuant to Section 9(b) above, any such termination shall be without prejudice to Nortec's right to receive payments that are unpaid under this Agreement as of the date of such termination, including but not limited to payment for any New Product delivered to Par and any work in progress under firm purchase orders issued by Par. (d) If the license granted pursuant to Section 4 above is terminated pursuant to Section 9(a) above or if this Agreement is terminated with respect to any particular New Product pursuant to Section 9(b) above, Par will nevertheless have the right to sell or otherwise dispose of any inventory of any such New Product which is then on hand. (e) In the event that this Agreement is terminated pursuant to Section 9(a) above by Par for a breach of this Agreement by Nortec and/or its Affiliates,then (1) except as provided in this Section 9(e) neither Par nor Nortec shall have any further rights or obligations under this Agreement, (2) Par and Nortec shall remain liable to each other for all obligations that have accrued prior to such termination, (3) Sections 3(a), 3(b), 4(a), 4(b), 5(c), 5(d), 5(e), 5(f), and 6(e) of this Agreement shall survive such termination with respect to all New Products for which development has already been initiated prior to such termination, (4) Sections 10, 12, 13, 16, 17, 18, 19 and 20 of this Agreement shall survive such termination, and (5) except Nortec shall not have any obligation to conduct any further Development Work. Product Development and Patent License Agreement - Page 16 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (f) In the event that this Agreement is terminated pursuant to Section 9(a) above by Nortec for a breach of this Agreement by Par, then neither Par nor Nortec shall have any further rights or obligations under this Agreement,EXCEPT that Par and Nortec shall remain liable to each other for all obligations that have accrued prior to such termination, and EXCEPT that Sections 10, 12, 13, 16, 17, 18, 19 and 20 of this Agreement shall survive such termination. (g) Par and Nortec hereby acknowledgethat Par has certain termination rights under Sections 8(a) and 8(b) of the Stock Purchase Agreement arising from a breach of the Stock Purchase Agreement and that those Sections 8(a) and 8(b) provide that, in that event, there will be corresponding changes in the rights and obligations of Par and Nortec under this Agreement. Par and Nortec hereby confirm those provisions of the Stock Purchase Agreement to the extent that those provisions modify this Agreement. (H) FOLLOWING THE FINAL CLOSING AND THE COMPLETE ACQUISITION OF NORTEC BY PAR, PAR SHALL ACQUIRE CERTAIN RIGHTS, AND ASSUME CERTAIN OBLIGATIONS, UNDER THE CPS PATENT RIGHTS AND THE KNOW-HOW AS SET FORTH IN ARTICLE 6 OF THE STOCK PURCHASE AGREEMENT. 10. CONFIDENTIALITY. Par and Nortec shall hold in confidence, and shall cause their respective Affiliates to hold in confidence, all confidential and other proprietary information of the other party disclosed to the receiving party and relating to this Agreement, except for information (a) which is or becomes public knowledge (through no fault of the receiving party), (b) which is made available to the receiving party free of an obligation of confidentiality by an independent third party legally able to do so, (c) which is already in the receiving party's possession at the time of receipt from the disclosing party (and such prior possession can be properly demonstrated), (d) which is required by law or regulation to be disclosed (and only to the extent of such disclosure), or (e) which becomes publicly known as a result of required disclosures made to or as a result of FDA regulations under which any New Product is approved for sale in the Territory. Additionally, each party may provide such information to governmental agencies to the extent legally required by such agencies and such information shall not be further disclosable unless made public as a result of such disclosure to such agencies as required by law. If in connection with studies which are carried out to obtain FDA approval it is necessary to disclose confidential information under this Agreement, the disclosing party will make diligent efforts to bind the receiving party to customary confidentiality and use restrictions. 11. REPRESENTATIONS AND WARRANTIES. (a) Nortec hereby represents and warrants the following to Par as of the date of this Agreement: (1) Nortec is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey and has the corporate power and authority and the legal right to enter into this Agreement and to perform its obligations under this Agreement. Nortec has taken all necessary corporate action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations under this Agreement. This Agreement has been duly executed and delivered by Nortec and does not conflict with any other obligations or contracts to which it is a party. This Agreement constitutes a legal, valid and binding obligation, enforceable against Nortec in accordance with its terms. Product Development and Patent License Agreement - Page 17 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (2) Nortec is the owner of or has sufficient contractual rights to all of the Patent Rights and Know-how licensed to Par under this Agreement, and Nortec has the legal power, authority and right to grant the licenses set forth in Article 4 above and to perform its obligations under this Agreement. (3) To the best of Nortec's knowledge after reasonable investigation, the CPS Technology and the Know-How do not infringe any patent rights held by any third party in the Territory. Nortec does not, however, make any representation as to whether the CPS Technology and/or the Know-How, when applied to develop, formulate, manufacture or sell any particular product, infringes any patent rights held by any third party. (4) To the best of Nortec's knowledge after reasonable investigation, Par does not require any further licenses from Nortec, any of its Affiliates or any third party in order to utilize the CPS Technology or the Know-How in the Territory to develop, formulate, manufacture or sell any New Products as authorized by this Agreement. (5) Nortec does not have any knowledge of any claim or allegation, or any basis of any such claim or allegation, of misuse of any third party's confidential or proprietary information with regard to use of the CPS Patent Rights or the Know-How licensed by Nortec to Par under this Agreement. (6) If Par has provided to Nortec the Priority List on or before the execution and delivery of this Agreement, neither Nortec nor any of its Affiliates have granted any effective option(s) or license(s) to any third person or entity under any of CPS Patent Rights or Know-How with respect to the manufacture, use or sale within the Territory of any drugs identified in the Priority List. (b) Par hereby represents and warrants the following to Nortec as of the date of this Agreement: (1) Par is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority and the legal right to enter into this Agreement and to perform its obligations under this Agreement. Par has taken all necessary corporate action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations under this Agreement. This Agreement has been duly executed and delivered by Par and does not conflict with any other obligations or contracts to which it is a party. This Agreement constitutes a legal, valid and binding obligation, enforceable against Par in accordance with its terms. (2) Par will exercise commercially reasonable care regarding the formulation of each New Product, including but not limited to the design of biostudies, the selection of qualified test facilities, the funding and review of final reports from the qualified test facilities carrying out and evaluating the bioequivalency of the formulation, the storage of the New Product, the labeling of the New Product, the packaging of the New Product, the shipment of the New Product, and the selection and use of trademarks on the New Product. (3) Prior to filing of the ANDA for any New Product, Par will have a study carried out at Par's expense for the purpose of determining if there are any unexpired patents in the Territory that would be infringed as a result of the manufacture, use or sale of that New Product. Following the execution of mutually acceptable agreements for each New Product concerning joint attorney-client privilege, Par will disclose the patents obtained as a result of such studies for each such New Product to Nortec. Product Development and Patent License Agreement - Page 18 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (c) Nortec does not make any representation or warranty as to whether the manufacture, use and sale of any New Product will present any question of infringement of any adversely held patent in the Territory solely as a result of the use of the Know-How or the CPS Patent Rights. 12. INDEMNIFICATION. (a) Par shall indemnify and hold harmless Nortec, GAT and their respective Affiliates and their respective employees, agents, officers and directors from and against any costs, claims, judgments, expenses (including reasonable attorney fees), damages and awards (but not incidental, indirect or consequential damages) arising out ofa breach of its representations, warranties or covenants set forth in this Agreement, or from Par's breach of any of the terms and conditions of this Agreement, whether by act or omission. (b) Par shall defend, indemnify and hold harmless Nortec, GAT and their respective Affiliates and their respective employees, agents, officers and directors from and against any costs, claims, judgments, expenses (including reasonable attorney fees), damages and awards arising out of any claim for product liability relating to any New Product, regardless of the identity of the person or entity making that claim, and regardless of how that claim is characterized (including without limitation as a negligence claim, a claim for strict liability, a breach of warranty, a breach of any express or implied contract, or otherwise), EXCEPT to the extent that any such damages are caused by a breach of this Agreement by Nortec, GAT or any such Affiliate. While this Agreement is in effect, Par shall maintain at its expense product liability coverage covering the manufacture and sale of all New Products, with such insurance to be in the minimum amount of $**********, and Par shall provide Nortec with, and periodically update upon Nortec's request, a certificate of insurance evidencing that insurance. (c) Par shall also defend, indemnify and hold Nortec, GAT and their respective Affiliates harmless for any loss (including reasonable attorneys' fees) arising out of a claim alleging infringement of any patent, except patents embodying the CPS Technology or the Know-How, relating in any way to the New Products or to any of the work performed by Nortec under this Agreement. In any such action, Par shall undertake the defense of such claims. Par shall control the defense of the action and the prosecution of any relevant counterclaims. Notwithstanding the foregoing, Par shall not settle any such action on terms that are materially prejudicial to any right or claim of Nortec in any New Product, in any of the CPS Patents, or any of the Know-How without the consent of Nortec, which consent shall not be withheld or delayed unreasonably. Nortec shall cooperate with Par in the defense of such claims, including without limitation supplying on a timely basis such witnesses, documents and other information as is necessary to assist Par in fulfilling Par's obligations concerning discovery in any such action. (d) Nortec shall indemnify and hold harmless Par and its Affiliates and their respective employees, agents, officers and directors from and against any costs, claims, judgments, expenses (including reasonable attorneys fees), damages and awards (but not any incidental, indirect or consequential damages) arising out of or a breach of its representations, warranties or covenants set forth in this Agreement or from Nortec's breach of any of the terms and conditions of this Agreement, whether by act or omission. While this Agreement is in effect, Nortec shall maintain at its expense a commercially reasonable amount of commercial general liability insurance coverage and shall provide Par with, and periodically provide on Par's request, a certificate of insurance evidencing that insurance. (e) Each party shall give the other party prompt written notice, and in any event within thirty (30) days, of any claims made which may give rise to an indemnification obligation under this Section 12, including any claims asserted or made by any governmental authority having jurisdiction. Product Development and Patent License Agreement - Page 19 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION Each party shall give the other party the opportunity to defend, negotiate and settle such claims and will provide reasonable assistance to such other party's defense of such claim. For any suit covered by a party's indemnification obligation under this Section 12, the indemnified party shall permit the indemnifying party to have control of the conduct of the defense of such suit, including, without limitation, the selection of counsel. 13. LIMITATION ON LIABILITY. None of Par, Nortec or their respective Affiliates shall have any liability to any other party under or with respect to this Agreement or otherwise at law or equity for any indirect, incidental or consequential damages, including, without limitation, lost profits. It is the intention of the parties that any liabilities of one party to another arising from performance or lack of performance under this Agreement shall be limited to direct damages as customarily defined. 14. OWNERSHIP OF INVENTIONS. During the course of this Agreement, it is contemplated that Nortec and Par employees will cooperate in the development of each New Product, and it is recognized that inventions and know-how may be developed which may be applicable in the manufacture of the New Products and other products which are not covered by this Agreement. For these reasons, Par shall be the sole and exclusive owner of all inventions, whether patentable or unpatentable, arising in connection with the parties' performance of their obligations under this Agreement which relate solely to analytical methods or to testing procedures applicable to a New Product and to the particular formulation of each New Product. Nortec, or Affiliates of Nortec, shall be the sole and exclusive owner of all inventions, whether patentable or unpatentable, arising in connection with the parties' performance of their obligations under this Agreement which relate to the CPS Technology and/or the Know-How, and all equipment that embodies any of the CPS Technology or any Know-How, and all improvements and modifications to any of the foregoing; all such inventions relating to the CPS Technology and the Know-How shall be included in the license granted to Par pursuant to Section 4(a) above. Ownership of all other inventions shall be allocated between Par and Nortec, or Affiliates of Nortec, in accordance with United States patent law and, to the extent that they are owned by Nortec or Affiliates or Nortec, shall be included in the license granted to Par pursuant to Section 4(a) above. In the event that Par obtains any patent on any analytical or testing procedure relating to any New Product, Par shall grant to Nortec and GAT a royalty free license to the extent that Nortec and/or GAT uses such patented subject matter in the manufacture of any New Product. 15. STOCK OPTIONS. (a) Subject to the limitations set forth in this Section 15, Pharmaceutical Resources, Inc. (the parent company of Par) ("PRI") shall grant stock options to the following individuals for the following number of shares of PRI's common stock: - -------------------------------------------------------------------------------- NAME NUMBER OF SHARES ISSUED AS NUMBER OF SHARES OF MARCH 13, 2003 ANNUALLY THEREAFTER - -------------------------------------------------------------------------------- Ken Olsen ****** ****** - -------------------------------------------------------------------------------- Reiner Nowak ****** ****** - -------------------------------------------------------------------------------- Oliver Mueller ****** ****** - -------------------------------------------------------------------------------- Orapin Rubino ****** ***** - -------------------------------------------------------------------------------- Dave Jones ****** ***** - -------------------------------------------------------------------------------- Product Development and Patent License Agreement - Page 20 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (b) These stock options will be covered by PRI's existing employee stock option plan which deals with such matters as the annual date that such options are granted, the period of time during which the options will remain in effect, whether and under what conditions the options will be forfeited (other than as specifically set forth in this Agreement), whether the options can be transferred (for example, to a family member), and whether the shares into which the options are exercisable will be registered (under the Securities Act of 1933, as amended) or, if not, whether the option holders will have any "piggyback", "demand" or other registration rights to have their shares registered. (c) The strike price (purchase price) for the shares acquired pursuant to these stock options will be the market price of those shares on the date the option is granted. (d) PRI has the right to discontinue the annual granting of stock options at any time after Par purchases all of the shares of stock of Nortec pursuant to the Stock Purchase Agreement. Such a purchase of Nortec's shares by Par shall not, however, affect any stock options that have already been issued prior to that time. (e) If and when Oliver Mueller, Orapin Rubino or Dave Jones leaves GAT's employment or is otherwise no longer available to work on the New Products, then that employee will forfeit all stock options which have not vested as of that time and that employee will not have any right to receive any future stock options. (f) PRI has the right to discontinue the annual granting of stock options at any time after Par has terminated the Stock Purchase Agreement for any reason. Such a termination by Par shall not, however, affect any stock options that have already been issued prior to that time. 16. PUBLICITY. Neither party shall publicize or disclose the existence or terms of or the termination of this Agreement, except (1) as required by law, (2) solely with respect to information relating to any New Product and the existence (but not the terms) of this Agreement, when the FDA has issued an approvable letter for the ANDA for that New Product, or (3) if consented to in writing in advance of disclosure by an authorized representative of the other party. In addition, neither party shall release information to the press or the public pertaining to this Agreement or its performance without first agreeing with the other party with respect to the content of such disclosure. Notwithstanding the above, both parties agree that Par will release to the press a public statement announcing the agreement of the parties to develop one or more oral sustained release products under an exclusive license to utilize Nortec's intellectual property including Nortec's rights to the CPS Technology on the effective date of this Agreement. 17. FORCE MAJEURE. No failure or omission by a party to this Agreement in the performance of any obligation of this Agreement shall be deemed a breach of this Agreement, nor shall any such failure or omission create any liability, provided that party uses reasonable efforts to resume performance under this Agreement and that party is capable through the exercise of such efforts in resuming such performance, if that failure or omission arises from any cause or causes beyond the control of the affected party, including, but not limited to, the following, which for purposes of the Agreement shall be regarded as beyond the control of the party in question: act of God; acts or omissions of any government; any rules, regulation, or orders issued by any governmental authority or by any officer, department, agency or instrumentality hereof; fire; storm; flood; earthquake; accident; war; rebellion; insurrection; riot; invasion; strikes; and lockouts. This Section 17, however, does not apply to any obligation to pay any Development Fees under Section 8(c)(1) above. Product Development and Patent License Agreement - Page 21 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 18. ARBITRATION. Any and all claims, disputes, controversies, and other matters arising out of or relating to this Agreement, including but not limited to the formation (including any claim as to fraud in the inducement), breach, performance, interpretation, or termination Agreement, shall be resolved by binding arbitration in accordance with the commercial Arbitration Rules of the American Arbitration Association which are then in effect. Three arbitrators shall conduct the arbitration in the English language in the State of New York. The arbitrators must be knowledgeable or experienced in the pharmaceutical industry. Each party will, within 20 days of the date on which arbitration is requested, select one arbitrator and advise the opposite party of the name of that arbitrator, and those two arbitrators will select a third arbitrator. If the two arbitrators selected by the parties are unable to agree on a third arbitrator within forty (40) days of the date on which arbitration is requested, the third arbitrator will be appointed by the American Arbitration Association. The decision of any two of the three arbitrators will be the decision of the arbitrators. The costs of arbitration, including reasonable attorney's fees, shall be borne by as assessed by the Arbitrators. Notwithstanding anything to the contrary contained in this Section 18, the terms and provisions of this Section 18 shall not preclude any party from seeking, or a court of competent jurisdiction from granting, a temporary restraining order, temporary injunction or other equitable relief for any breach of any restrictive covenant or confidentiality covenant in this Agreement. The arbitrators' decision shall be reduced to writing and shall be binding on the parties. Judgment upon the award(s) rendered by the arbitrators may be entered in any court having applicable jurisdiction, and execution of that award may be had in any court of competent jurisdiction or application may be made to such court for a judicial acceptance of the award and an order of enforcement. In that arbitration, all evidentiary privileges under state and federal law, including attorney-client and work-product privileges, shall be preserved and protected to the same extent that such privileges would be protected in a United States district court proceeding applying the internal law of the State of New York (other than Section 5-1401 of the New York General Obligations Laws) without reference to the law of conflicts of any jurisdiction). Any failure of either party to abide by the arbitrators' decision shall permit the other party to terminate this Agreement in whole or in part. 19. NOTICES. Any notice to be given to a party under or in connection with this Agreement shall be in writing and shall be delivered by confirmed facsimile, Express Mail or next day FEDEX to the party at the following address set forth for such party: To Nortec: Nortec Development Associates, Inc. 100 Spear Road Ramsey, NJ 07446 Attention: Kenneth W. Olsen, President Telephone: (201) 934-9600 Fax: 201-327-3354 Product Development and Patent License Agreement - Page 22 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION With copies to: Glatt Air Techniques, Inc. 20 Spear Road Ramsey, NJ 07446 Attention: Oliver W. Mueller, Executive Vice President Telephone: (201) 825-6327 Fax: (201) 934-6213 And: Todd M. Brinberg, Esq. Nadborny & Brinberg LLP 420 Lexington Avenue, Suite 2300 New York, New York 10170 Telephone: 212-922-9080 Fax: 212-656-1660 To Par: Par Pharmaceutical, Inc. 300 Tice Boulevard Woodcliff Lake, New Jersey 07677 Attention: Dennis O'Connor, CFO Telephone: 201-802-4146 Fax: 201-391-5364 or to such other address as to which the party has given notice thereof. Such notices shall be deemed given on receipt. Product Development and Patent License Agreement - Page 23 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 20. MISCELLANEOUS. (a) ENTIRE AGREEMENT. This Agreement together with the Stock Purchase Agreement constitutes the entire understanding and agreement between the parties with respect to the subject matter of this Agreement and supersedes any and all prior agreements, understandings and arrangements, whether oral or written, between the parties relating to the subject matter of this Agreement. No amendment, change, modification or alteration of the terms and conditions of this Agreement shall be binding on either party unless it is in writing and signed by both parties. (b) INDEPENDENT CONTRACTORS. The parties specifically acknowledge the parties are independent contractors and engage in the operation of their own respective businesses, and neither party is the agent or partner of the other party for any purpose whatsoever. Neither party has or shall have any authority (either express or implied) to enter into any contracts or commitments or to assume any obligations for the other party or make any warranties or representations on behalf of the other party. (c) NO ASSIGNMENT. This Agreement shall not be assigned or transferred (in whole or in part) by either party, except to a wholly-owned Affiliate of that party, without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed. Par may, however, assign all (and not less than all) of its rights in and obligations under this Agreement to any entity that acquires all or substantially all of the assets and business of Par, including without limitation as a result of a sale of assets, a merger or a consolidation by or of Par. (d) SURVIVAL. The representations and warranties contained in the Agreement, as well as all other provisions of this Agreement, shall survive the termination or expiration of the Agreement. (e) PARTIAL INVALIDITY. If and to the extent that any court or tribunal of competent jurisdiction holds any of the provisions of this Agreement, or the application of any provisions to any circumstances, to be invalid or unenforceable in a final nonappealable order, the parties shall use their best efforts to reform the provisions of the Agreement that have been declared invalid in order to fully realize, to the extent possible, the intent of the parties, and the remainder of this Agreement and the application of such invalid provision to circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each of the remaining provisions of this Agreement shall be valid and enforceable to the fullest extent of the law. (f) LIMITATION ON WAIVERS. The waiver by either of the parties of any breach of any provision of this Agreement by the other party shall not be construed to be a waiver of any succeeding breach of such provision or a waiver of the provision itself. (g) GOVERNING LAW. This Agreement shall be governed by and construed with the laws of the State of New York, without application of its choice of law principles (other than Section 5-1401 of the New York General Obligations Law) . (h) HEADINGS. The headings in this Agreement have been inserted solely for the convenience of reference and shall not affect the construction, meaning or interpretation of the Agreement or any of its terms. (i) COUNTERPARTS. This Agreement may be signed in counterparts, all of which together shall constitute a single contract. Product Development and Patent License Agreement - Page 24 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION To evidence their agreement to be bound by this Agreement, Par and Nortec have executed and delivered this Agreement as of the date that appears at the beginning of this Agreement. PAR PHARMACEUTICAL, INC. NORTEC DEVELOPMENT ASSOCIATES, INC. By:/s/ Scott Tarriff By:/s/ Ken Olsen -------------------------------- ---------------------------------- Name: Scott Tarriff Name: Ken Olsen Title: President and CEO Title: President Pharmaceutical Resources, Inc. hereby agrees to the provisions of Section 15 of the above Agreement. PHARMACEUTICAL RESOURCES, INC. By: /s/ Scott Tarriff ---------------------------------- Name: Scott Tarriff Title: EX-10 9 stockpur.txt EXHIBIT 10.56 Exhibit 10.56 Stock Purchase and Shareholders Agreement - Page 1 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION STOCK PURCHASE AND SHAREHOLDERS AGREEMENT This STOCK PURCHASE AND SHAREHOLDERS AGREEMENT (the "AGREEMENT") is dated as of October 22, 2003 and is by and among NORTEC DEVELOPMENT ASSOCIATES, INC. (the "CORPORATION"), a New Jersey corporation with an office at 100 Spear Road, Ramsey, New Jersey 07446 and NORTEC HOLDING LLC ("HOLDING"), a Delaware limited liability Corporation with an office at 100 Spear Road, Ramsey, New Jersey 07446, on the one hand, and PAR PHARMACEUTICAL, INC. ("PAR"), a Delaware corporation with an office at 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677, on the other hand. ARTICLE 1: BACKGROUND 1(a) The Corporation is in the business of developing pharmaceutical products, including products utilizing the proprietary so-called "CPS Technology". As of the date of this Agreement and in conjunction with this Agreement, the Corporation and Par are entering into a Product Development and Patent License Agreement pursuant to which (among other things) the Corporation will develop pharmaceutical products for Par. 1(b) Holding is currently the sole shareholder of the Corporation. Par is interested in subscribing for a total of one-half of the shares of a new class of capital stock to be authorized and issued by the Corporation whose holders will be entitled to certain profits derived from the Corporation's activities under the Product Development and Patent License Agreement. Par is also interested thereafter in purchasing from Holding all of the remaining issued and outstanding shares of capital stock of the Corporation. 1(c) The Corporation, Par and Holding have agreed to enter into this Agreement to set forth their agreement regarding Par's subscribing for those newly-issued shares of capital stock and Par's eventual purchase of all of the Corporation's remaining shares of capital stock from Holding. In addition, Par and Holding have agreed to certain arrangements regarding the management of the Corporation, to certain restrictions on the transfer of shares of capital stock of the Corporation, and to certain covenants and obligations following Par's purchase of all of the Corporations shares. In consideration of the mutual agreements set forth in this Agreement, the Corporation, Par and Holding hereby agree to the provisions of this Agreement. ARTICLE 2: DEFINITIONS The following terms shall have the following meanings when used in this Agreement. Stock Purchase and Shareholders Agreement - Page 2 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 2(a)"AFFILIATE" with respect to any party means any person, entity or organization which either directly or indirectly controls, is controlled by, or is under common control with that party. For these purposes, the term "control" by a person, entity or organization means possession by that person, entity or organization of the power to direct, or cause the direction of, such other applicable entity or organization. 2(b)"KNOWLEDGE "shall mean the actual knowledge (not knowledge that is imputed, implied or otherwise deemed known, including without limitation as a matter of public records) of the respective party, in each case without any inquiry or investigation. 2(c) "MAJOR DECISION" is defined in Section 9(c) below. 2(d) "MATERIAL ADVERSE EFFECT" means an event or condition which both (A) has a material adverse effect on the operations, assets, or financial condition of Holding, taken as a whole, but without taking into account any effect resulting from changes in conditions (including economic conditions, or Federal, state or local governmental actions, legislation or regulations) that are applicable to the economy or the industry in which Holding is engaged on a national, regional, state or local basis or any changes in technology affecting Holding's business and (B) results in a new liability (or an increase in an existing liability) of Nortec in an amount at least equal to US$100,000. 2(e) "NORTEC'S CORE BUSINESS" means the business of the Corporation arising out of, or relating to, the activities of the Corporation undertaken pursuant to the Product Development Agreement or either of the Two Existing Agreements. 2(f) "PATENT LICENSE AGREEMENT" means the Amended and Restated Patent License Agreement, dated as of the date of this Agreement, between the Corporation and CPS Orocel LLC. 2(g) "PRODUCT DEVELOPMENT AGREEMENT" means the Product Development and Patent License Agreement, dated as of the date of this Agreement, between the Corporation and Par. 2(h) "PLEDGE" means any pledge, hypothecation or any other manner of encumbrance or the entry into any agreement or the creation of any arrangement that might result in any of the foregoing. 2(i) "SERIES A SHARES" is defined in Section 3(b)(1) below. 2(j) "SERIES B SHARES" is defined in Section 3(b)(1) below. 2(k) "SHARES" means collectively the Series A Shares and the Series B Shares. Stock Purchase and Shareholders Agreement - Page 3 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 2(l) "TRANSFER" means any sale, assignment, conveyance, donation, transfer, any other manner of disposition, or the entry into any agreement or the creation of any arrangement that might result in any of the foregoing. 2(m)"TWO EXISTING AGREEMENTS" means collectively (1) the Patent and Know How License Agreement, dated as of May 24, 2002, between Par and the Corporation relating to the development, manufacture and sale of a ******** ******* ********** product and (2) the Patent and Know How License Agreement, dated as of June 14, 2002, between Par and the Corporation relating to the development, manufacture and sale of a ********* ******* *********** product. ARTICLE 3: THE CORPORATION'S SHARES 3(a) As of the date of this Agreement, the total number of shares of capital stock which the Corporation is authorized to issue is 150,000 shares of Series A Common Stock and 50,000 shares of Series B Common Stock. As of the date of this Agreement, 90,000 shares of the Corporation's Series A Common Stock have been issued and all of these shares are owned by Holding, and there are no other issued and outstanding shares of Series A Common Stock or Series B Common Stock. Par hereby acknowledges that it has reviewed a copy of the Certificate of Incorporation of the Corporation, in effect as of the date of this Agreement, setting forth the preferences, voting powers, qualifications, and special or relative rights or privileges of the Series A Common Stock and Series B Common Stock. 3(b) Within fifteen business days after the execution and delivery of this Agreement, Holding shall cause the Certificate of Incorporation of the Corporation to be amended so that it will be in the form of the Restated Certificate of Incorporation which is attached to this Agreement as Exhibit A. Among other things, that Restated Certificate of Incorporation will effect the following changes: (1) The number of shares of capital stock which the Corporation will be authorized to issue will be 150,000 shares of shares of Series A Common Stock and 50,000 shares of Series B Common Stock. The relative rights and obligations of the holders of the Series A Common Stock and the holders of the Series B Common Stock shall be as set forth in the attached Exhibit A. The shares of Series A Common Stock and the shares of the Series B Common Stock, after making the changes in the Corporation's Certificate of Incorporation as described in this Article 3, are referred to respectively as the "SERIES A SHARES" and the "SERIES B SHARES". (2) The holders of the Series A Shares will have the sole right to receive (as dividends, distributions, liquidating distributions, or otherwise) all Series A Profits (as that term is defined below). Upon the request of the Stock Purchase and Shareholders Agreement - Page 4 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION holder of Series A Shares, the Corporation hereby agrees to promptly distribute to the holder of Series A Shares the proportionate share of such Series A Profits to which such holder is entitled under this Agreement in such reasonable fashion as such holder may request. (3) The holders of the Series B Shares will have the sole right to receive (as dividends, distributions, liquidating distributions, or otherwise) all Series B Profits (as that term is defined below). Upon the request of a holder of Series B Shares, the Corporation hereby agrees to promptly distribute to such holder of Series B Shares, the proportionate share of such Series B Profits to which such holder is entitled under this Agreement in such reasonable fashion as such holder may request. (4) The voting rights of the holders of the Series A Shares shall be identical (on a share-for-share basis) with the voting rights of the holders of the Series B Shares. In other words, each Series A Share and each Series B share shall entitle the holder of each such share to cast one vote at all meetings of the shareholders and all written consents in lieu of shareholder meetings. (5) Except as otherwise described in this Article 3, all other rights of the holders of the Series A Shares shall be identical (on a share-for-share basis) with all other rights of the holders of the Series B Shares. (6) The 90,000 shares of the Corporation's Series A Common Stock which are owned by Holding on the date of this Agreement shall be converted into 100 Series A Shares and 10,000 Series B Shares all of which shall be owned by Holding. 3(c)For the purposes of this Article 3, the following terms shall have the following meanings: (1) "SERIES A PROFITS" means the net profits earned by the Corporation arising out of all of the Corporation's activities, INCLUDING the activities conducted under the Two Existing Agreements, but EXCLUDING all of the Corporation's activities conducted under the Product Development Agreement, and after taking into account (deducting) all of the Corporation's expenses other than those specifically described in Section 3(c)(2). Such net profits shall be determined in accordance with generally accepted accounting principles consistently applied and shall be calculated by the Corporation's regularly engaged independent certified public accountants, which calculation shall be conclusive, absent manifest error. Without limiting the foregoing, such net profits shall reflect the effect of all expenses attributable to the Corporation's activities conducted under the Two Existing License Agreements, including any royalties and other payments due to CPS Orocel LLC and any payments due to Glatt Air Techniques, Inc. and any corporate income taxes attributable to those activities. Stock Purchase and Shareholders Agreement - Page 5 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (2) "SERIES B PROFITS" means all revenue earned by the Corporation arising solely out of the Corporation's activities conducted under the Product Development Agreement and after taking into account (deducting) royalties due to CPS Orocel LLC in the amount of sixty percent (60%) of the royalties received by the Corporation under the Product Development Agreement. ARTICLE 4: SUBSCRIPTION FOR SERIES B SHARES 4(a) SUBSCRIPTION FOR NEW SHARES. Subject to and in reliance upon the representations, warranties, covenants, terms and conditions of this Agreement, Par shall purchase from the Corporation, and the Corporation shall issue and sell to Par, a total of 10,000 Series B Shares, as provided in this Article 4. The purchase and sale shall take place at a series of four closings (the "SERIES B CLOSINGS") at such prices and on such dates as described in sections 4 (b), (c), (d), and (e) below, and at such places and times as may be mutually agreed upon by the parties. 4(b) FIRST SERIES B CLOSING. The Corporation shall issue and sell to Par, and Par shall purchase from the Corporation, one thousand four hundred twenty-eight (1,428) shares of Series B Shares on October 16, 2005, so that, after the issuance of such shares, Par will own (approximately) 12.5% of all of the Series B Shares which are issued and outstanding at that time. The total purchase (subscription) price for those 1,428 Series B Shares shall be one million United States Dollars (US$1,000,000.00). 4(c) SECOND SERIES B CLOSING. The Corporation shall issue and sell to Par, and Par shall purchase from the Corporation, one thousand nine hundred five (1,905) shares of Series B Shares on April 16, 2006, so that, after the issuance of such shares, Par will own a total of 3,333 Series B Shares, representing (approximately) 25% of all of the Series B Shares which are issued and outstanding at that time. The total purchase (subscription) price for those 1,905 Series B Shares shall be one million United States Dollars (US$1,000,000.00). 4(d) THIRD SERIES B CLOSING. The Corporation shall issue and sell to Par, and Par shall purchase from the Corporation, two thousand six hundred sixty-seven (2,667) shares of Series B Shares on October 16, 2006, so that, after the issuance of such shares, Par will own a total of 6,000 Series B Shares, representing 37.5% of all of the Series B Shares which are issued and outstanding at that time. The total purchase (subscription) price for those 2,667 Series B Shares shall be one million United States Dollars (US$1,000,000.00). 4(e) FOURTH SERIES B CLOSING. The Corporation shall issue and sell to Par, and Par shall purchase from the Corporation, four thousand (4,000) shares of Series B Shares on April 16, Stock Purchase and Shareholders Agreement - Page 6 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 2007, so that, after the issuance of such shares, Par will own a total of 10,000 Series B Shares, representing 50% of all of the Series B Shares which are issued and outstanding at that time. The total purchase (subscription) price for those 4,000 Series B Shares shall be one million United States Dollars (US$1,000,000.00). 4(f) At each Series B Closing, the Corporation will issue and deliver certificates evidencing the Series B Shares to be sold at such Closing to Par against payment of the full purchase price therefore by wire transfer of immediately available funds to an account designated by the Corporation. 4(g) The Corporation shall at all times reserve for issuance to Par the number of authorized but unissued Series B Shares that the Corporation has agreed to issue to Par pursuant to this Article 4. 4(h) The Corporation and Holding shall at all times (until the termination of this Agreement pursuant to Article 8 below) and from time to time provide to Par all information that is reasonably requested by Par relating to Nortec and the business of Nortec, including without limitation all such information relating to Nortec's assets, liabilities and financial condition. The providing of that information by the Corporation and/or Holding shall not constitute a representation or warranty as to the accuracy or completeness of any of that information, and neither the Corporation nor Holding is making, or will be deemed to be making, any representation or warranty concerning any of that information, except as may be specifically provided in Article 11 below. Stock Purchase and Shareholders Agreement - Page 7 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION ARTICLE 5: PURCHASE OF HOLDING'S SHARES Subject to and in reliance upon the representations, warranties, covenants, terms and conditions of this Agreement Par shall purchase from Holding, and Holding shall transfer and sell to Par on October 16, 2007 all of the Series A Shares and all of the Series B Shares which Holding owns at that time, which shall constitute all of the issued and outstanding shares of capital stock of the Corporation as of such date, other than shares of capital stock of the Corporation owned by Par. The purchase price for all of those shares shall be eleven million United States Dollars (US$11,000,000.00). The closing (the "FINAL CLOSING") for the purchase of such Shares shall take place on October 16, 2007, or on such other date within ten business days either before or after October 16, 2007 as may be mutually agreed by Par and Holding and at such place and time as may be mutually agreed upon by Par and Holding. At the Final Closing, Holding shall deliver to Par the original stock certificates representing all of those shares, along with a duly executed stock power effective to transfer such shares to Par, and Par shall pay the purchase price for those shares by the wire transfer of immediately available funds to an account designated by Holding. At the Final Closing, Holding shall deliver or cause to be delivered to Par the original books and records of the Corporation, including the minute book, stock transfer ledger and corporate seal, and resignations of all of the officers and directors of the Corporation, other than any officers and directors who are nominees of, or were elected at the request of, Par. ARTICLE 6: SPECIAL CONDITIONS TO THE SUBSCRIPTION FOR AND PURCHASE OF SHARES 6(a) Under Section 3.2 of each of the Two Existing Agreements, Par is required to pay certain royalties to the Corporation based on sales of the products that are developed by the Corporation under the Two Existing Agreements (referred to here as the "PAR-1 ROYALTIES"). The Corporation hereby represents and warrants that the Corporation is then required, pursuant to the Patent License Agreement , to pay to CPS Orocel LLC royalties (referred to here as the "CPS-1 ROYALTIES") equal to **% of the Par-1 Royalties. Notwithstanding the purchase by Par of all of the Series A Shares and Series B Shares owned by Holding, as of and following the Final Closing Par shall thereafter on a going forward basis for such period of time that such applicable Par-1 Royalties are due and payable under each of the Two Existing Agreements, continue to pay all of the Par-1 Royalties as provided in the Two Existing Agreements except that (1) Par shall pay **% of the Par-1 Royalties directly to CPS Orocel LLC ("CPS OROCEL") (rather than to the Corporation), (2) Par shall pay **% of the Par-1 Royalties directly to Holding (rather than to the Corporation), (3) the Corporation shall not have any obligation to pay the CPS-1 Royalties to CPS Orocel as long as Par is making those payments of the Par-1 Royalties to CPS Orocel, and (4) Par shall assume all of the Corporation's obligations under the Stock Purchase and Shareholders Agreement - Page 8 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION Patent License Agreement to the extent those obligations relate to those products developed under the Two Existing Agreements. 6(b) Under Section 5(c) of the Product Development Agreement, Par is required to pay certain royalties to the Corporation based on sales of the products that are initiated for development by the Corporation under the Product Development Agreement prior to October 16, 2007 (referred to here as the "PAR-2 ROYALTIES"). The Corporation hereby represents and warrants that the Corporation is then required, pursuant to the Patent License Agreement to pay to CPS Orocel LLC royalties (referred to here as the "CPS-2 ROYALTIES") equal to **% of the Par-2 Royalties. As a result of the purchase by Par of all of the Series A Shares and Series B Shares owned by Holding, as of and following the Final Closing Par shall thereafter on a going forward basis for the period of time that such applicable Par-2 Royalties are due and payable under the Product Development Agreement, continue to pay all of the Par-2 Royalties as provided in the Product Development Agreement except that (1) Par shall pay **% of the Par-2 Royalties directly to CPS Orocel (rather than to the Corporation), (2) Par shall pay **% of the Par-2 Royalties directly to Holding (rather than to the Corporation), (3) the Corporation shall not have any obligation to pay the CPS-2 Royalties to CPS Orocel as long as Par is making those payments of the Par-2 Royalties to CPS Orocel, and (4) Par shall assume all of the Corporation's obligations under the Patent License Agreement to the extent those obligations relate to those products that are initiated for development under the Product Development Agreement prior to October 16, 2007. 6(c) To the extent that additional New Products are initiated for development after October 16, 2007, (1) Par shall pay to CPS Orocel royalties on Par's Net Sales (as defined in the Product Development Agreement), at the same times and otherwise pursuant to the same mechanism set forth in Section 5(c) of the Product Development Agreement, except that the amount of such royalties shall be in an amount equal to ****** percent (**%) of one-half of the royalty rates set forth in Section 5(c) of the Product Development Agreement, (2) the Corporation shall not have any obligation to pay royalties to CPS Orocel with respect to those products, as long as Par is making those royalty payments directly to CPS Orocel, (3) Par shall assume all of the Corporation's obligations under the Patent License Agreement to the extent those obligations relate to those products that are initiated for development under the Product Development Agreement after October 16, 2007, (4) Par shall pay royalties to Ken Olsen personally in the amount of ****** percent (**%) of one-half of the royalty rates set forth in Section 5(c) of the Product Development Agreement, and (5) the Corporation shall not have any further obligation to pay salary or any other employee benefits to Ken Olsen. Such royalty payments to CPS Orocel and Ken Olsen shall be made for a period of fifteen years from the date of final FDA approval to market such New Products in the Territory. Stock Purchase and Shareholders Agreement - Page 9 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 6(d) The Corporation and Holdings hereby represent, warrant and covenant that following the Final Closing all obligations of the Corporation to Kenneth W. Olsen shall be terminated with the exception of the obligation to pay such royalties to Kenneth W. Olsen as provided under Section 6(c) above. Following the Final Closing the Corporation and Par shall have no further obligations to Kenneth W. Olsen. 6(e) The Corporation and Holdings hereby represent, warrant and covenant that pursuant to the Patent License Agreement and following the Final Closing, and assuming the obligation by Par of the Corporation's obligations under the Patent License Agreement as contemplated by Sections 6(a), (b) and (c) above, Par shall have a perpetual, irrevocable (assuming compliance by Par with the terms and conditions of the Patent License Agreement), right to make, have made, use, sell, offer for sale, and import products under the CPS Patent Rights and the Know-How as provided in the Patent License Agreement. 6(f) For the avoidance of doubt, in the event that Par exercises the Rights Termination as provided in Section 8 of the Product Development Agreement, then the provisions of this Article 6 shall not apply. ARTICLE 7: CONDITIONS TO THE PARTIES' OBLIGATION TO PURCHASE AND SELL SHARES UNDER ARTICLES 4 AND 5 The obligation of Par to purchase and pay for the Shares to be purchased by it at each closing described under Articles 4 and 5 (each a "Closing") above is subject to the fulfillment to Par's satisfaction of each of the following conditions as of each Closing date: 7(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of the Corporation and/or of Holding, as applicable, set forth in this Agreement shall be true and correct on the date of each Closing. 7(b) PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Corporation and/or Holding, as applicable, at or prior to each Closing shall have been performed or complied with. 7(c) DOCUMENTATION AT CLOSING. Par shall have received prior to or at each Closing all of the following documents or instruments, or evidence of completion thereof, each in form and substance satisfactory to Par and their counsel: (i) A copy of the Certificate of Incorporation of the Corporation, certified by the secretary of state of the State of Delaware as of a date not more than seven (7) business days prior to each Closing date, a copy of the Stock Purchase and Shareholders Agreement - Page 10 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION resolutions of the Board of Directors evidencing the authorization for the Restated Certificate of Incorporation attached to this Agreement as Exhibit A, the approval of this Agreement and the issuance of the Shares and the other matters contemplated hereby, a copy of the resolutions of the stockholders of the Corporation evidencing the authorization for the Restated Certificate of Incorporation attached to this Agreement as Exhibit A, and a copy of the Bylaws of the Corporation, all of which shall have been certified by the Secretary of the Corporation to be true, complete and correct in every particular and all resolutions shall not be amended and shall be in full force and effect. Alternatively, at each individual Closing, the Corporation may deliver to Par a certificate, executed by an officer of the Corporation, stating in effect that all of such documents that are required to be delivered to Par at that Closing pursuant to this Section 7(i) are the same as the documents that were previously delivered to Par pursuant to a previous Closing and that such documents are still in force and effect. (ii) Certificates of the Secretary of the Corporation and of Holding certifying the names of the officers of the Corporation and Holding authorized to sign this Agreement, the certificates for the applicable Shares, and the other documents, instruments or certificates required to be delivered pursuant to this Agreement by the Corporation and Holding or any of their officers, together with the true signatures of such officers. Alternatively, at each individual Closing, the Corporation and Holding may deliver to Par a certificate, executed by an officer of the Corporation and of Holding, stating in effect that all of such documents that are required to be delivered to Par at that Closing pursuant to this Section 7(ii) are the same as the documents that were previously delivered to Par pursuant to a previous Closing and that such documents are still in force and effect. (iii) Certificates of the Presidents of the Corporation and Holding stating that to their Knowledge the representations and warranties of the Corporation and Holding set forth in Article 11 below are true and correct as of the date of the applicable Closing and that to their Knowledge all conditions set forth in this Agreement required to be performed or complied with by it prior to or at that Closing have been performed or complied with by it as of that Closing. (iv) The Restated Certificate of Incorporation of the Corporation in the form attached to this Agreement as Exhibit A shall have been filed with the Delaware Secretary of State. (v) A Certificate of Good Standing for the Corporation certified by the Secretary of the State of Delaware as of a date not more than seven (7) business days prior to each Closing date. Certificates of good standing with respect to the Corporation, certified by the respective state officer of the states (if any) in which the conduct of the Corporation's business requires it to be licensed or qualified to transact business as a foreign corporation and in good standing, in each case as of a date not more than seven (7) business days prior to each Closing date. Stock Purchase and Shareholders Agreement - Page 11 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 7(e) QUALIFICATIONS. As of each Closing, all authorizations, approvals or permits of or filings with, any governmental authority, including state securities or "Blue Sky" offices, that are required by law in connection with the lawful sale and issuance of the Shares shall have been duly obtained by the Corporation and shall be effective as of each Closing, except for any notice that may be required subsequent to each Closing under applicable state and/or federal securities laws (which, if required, shall be filed on a timely basis). 7(f) CONSENTS, WAIVERS, ETC. Prior to each Closing, Nortec shall have obtained all consents or waivers, if any, necessary to execute and deliver this Agreement and issue the Shares, and to carry out the transactions contemplated by this Agreement, and all such consents and waivers shall be in full force and effect. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement, the Shares and other agreements and instruments executed and delivered by Nortec in connection herewith shall have been made or taken, except for any post-sale filing that may be required under federal or state securities laws. The obligations of each of the Corporation and Holding to issue and sell the Shares to be issued or sold by it at each closing described under Articles 4 and 5 (each a "Closing") above is subject to the fulfillment to the Corporation's and Holding's satisfaction of each of the following conditions as of each Closing date: A. REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of Par set forth in Article 12 of this Agreement shall be true and correct on the date of each Closing. B. PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed or complied with by Par at or prior to each Closing shall have been performed or complied with. C. DOCUMENTATION AT CLOSING. The Corporation and Holding shall have received prior to or at each Closing all of the following documents or instruments, or evidence of completion thereof, each in form and substance satisfactory to the Corporation and Holding and their counsel: (i) A copy of the resolutions of the Board of Directors of Par evidencing the authorization for the execution, delivery and performance of this Agreement and the purchase of the Shares and the other matters contemplated by this Agreement, certified by the Secretary or Assistant Secretary of Par to be true, complete and correct in every particular and all resolutions shall not be amended and shall be in full force and effect. Alternatively, at each individual Closing, Par may Stock Purchase and Shareholders Agreement - Page 12 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION deliver to the Corporation and Holding a certificate, executed by an officer of the Corporation, stating in effect that all of such documents that are required to be delivered at that Closing by Par pursuant to this Section 7C(i) are the same as the documents that were previously delivered by Par pursuant to a previous Closing. (ii) A certificate of the Secretary or Assistant Secretary of Par certifying the names of the officers of Par authorized to sign this Agreement and the other documents, instruments or certificates required to be delivered pursuant to this Agreement by Par or any of their officers, together with the true signatures of such officers. Alternatively, at each individual Closing, Par may deliver to the Corporation and Holding a certificate, executed by an officer of Par, stating in effect that all of such documents that are required to be delivered at that Closing by Par pursuant to this Section 7C(ii) are the same as the documents that were previously delivered to Par pursuant to a previous Closing. (iii) A certificate of a duly authorized officer of Par stating that to his or her actual knowledge the representations and warranties of Par set forth in Article 12 below are true and correct as of the date of the applicable Closing and that to his or her actual knowledge all conditions set forth in this Article 7 required to be performed or complied with by Par prior to or at that Closing have been performed or complied with by Par as of that Closing. (iv) At the first Series B Closing and at the Final Closing, a Certificate of Good Standing for Par certified by the Secretary of the State of Delaware as of a date not more than seven (7) business days prior to the Closing date. D. CONSENTS, WAIVERS, ETC. Prior to each Closing, Par shall have obtained all consents or waivers, if any, necessary to execute and deliver this Agreement and purchase the Shares, and to carry out the transactions contemplated by this Agreement, and all such consents and waivers shall be in full force and effect. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement by Par, the purchase of the Shares and the other agreements and instruments executed and delivered by Par in connection herewith shall have been made or taken, except for any post-sale filing that may be required under federal or state securities laws. ARTICLE 8: TERMINATION 8(a) RIGHTS TERMINATION. Pursuant to Section 8 of the Product Development Agreement, Par has the right, in its discretion, to terminate its right to have the Corporation develop "New Products" under the Product Development Agreement. Such a termination by Par, which must be exercised not later than October 15, 2005, is referred to in the Product Development Agreement as the "RIGHTS Stock Purchase and Shareholders Agreement - Page 13 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION TERMINATION". If Par exercises that Rights Termination under the Product Development Agreement, then effective as of the date that Par exercises the Rights Termination, all of the rights and obligations of the Corporation, Par and Holding under this Agreement shall automatically, and without any further action, be terminated, without any further liability or obligation on the part of any party. Without limiting the foregoing, this means that if Par exercises that Rights Termination under the Product Development Agreement, then effective as of the date that Par exercises that Rights Termination, (a) the Corporation shall not issue and sell, and Par shall not purchase, any Series B Shares as contemplated by Article 4 above, (b) Holding shall not sell, and Par shall not purchase, any shares of any series of capital stock of the Corporation, (c) the restrictions on the Transfer or Pledge of Shares set forth in Article 10 below shall no longer be in effect, and (d) Par shall no longer have any rights under Article 9 below. 8(b) TERMINATION FOR BREACH. In the event of any breach of the Corporation's or Holding's representations, warranties and/or covenants under this Agreement, which breach is not cured within thirty days after written notice of such default from Par, Par's SOLE remedy shall be to exercise the "DEFAULT TERMINATION" under this Section 8(b). If Par does not exercise the Default Termination with respect to any Series B Closing, then Par will be deemed to have waived any such breach that is actually known by Par as of the date of that Series B Closing. If Par does not exercise the Default Termination with respect to the Final Closing, then Par will be deemed to have waived any such breach actually known by Par as of the date of the Final Closing. If Par does exercise the Default Termination, then the following consequences shall occur: (A) Par, the Corporation and Glatt Air Techniques, Inc. shall continue to develop New Products (as that term is defined in the Product Development Agreement) and manufacture CPS pellets for New Products, but only to the extent that those New Products are under development prior to the Default Termination, all in accordance with the Product Development Agreement. Notwithstanding the foregoing, Par shall not have any obligation to pay any further amounts due to the Corporation under the Product Development Agreement, except that (i) Par shall continue to pay to the Corporation all Royalties with respect to those New Products in accordance with Section 5 of the Product Development Agreement, and (ii) Par shall remain obligated to pay any amounts that have accrued under the Product Development Agreement prior to the date of the Default Termination. (B) The Corporation shall have the right to retain (without any offset or claim by Par) all amounts paid by Par to the Corporation prior to the Default Termination, including without limitation all amounts paid under Article 4 of this Agreement and all amounts paid under Sections 5(a) and (b) of the Product Development Agreement. Stock Purchase and Shareholders Agreement - Page 14 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (C) The Corporation shall not have any further obligation to develop any New Products (as that term is defined in the Product Development Agreement) or manufacture CPS pellets for any New Products, except for any New Products that are under development prior to the Default Termination. If at any time after the Default Termination Par wants the Corporation to conduct development, manufacturing or other work on additional New Products, Par and the Corporation may negotiate the terms and conditions of such new work at that time, although neither Par nor the Corporation shall have any obligation to negotiate or to enter into any agreement for such new work, and in any case the terms and conditions of the Product Development Agreement shall not apply to any such work. (D) Par shall transfer (assign) to the Corporation, at no cost to Par or the Corporation, all right, title and interest in all Series B Shares which are then owned by Par. If for any reason the Corporation is not legally permitted to acquire those shares, then Par shall transfer (assign) those Series B Shares to Holding at no cost to Par or Holding. (E) Par, the Corporation and Holding shall not have any further rights, obligations or liabilities under this Agreement, except for the rights, obligations and liabilities under this Section 8(b)(2) and Articles 13 through 16, inclusive, below. Without limiting the foregoing, none of the parties shall have any liability under this Agreement to any of the other parties as a result of the breach that was the basis for the Default Termination. ARTICLE 9: MANAGEMENT 9(a) Except as provided in Section 8(a) above, commencing on October 16, 2005, Holding and Par shall vote their respective Shares so that the Corporation shall have a board of directors consisting of three directors, two of whom shall be designated by Holding, and one of whom shall be designated by Par. Holding and Par may, at any time, either with or without cause, remove and replace the director(s) appointed by that shareholder. The identity of the director(s) appointed by each of Holding and Par is subject to the reasonable approval of the other. Initially, the two directors appointed by Holding shall be Kenneth W. Olsen and Reiner Nowak, and the director appointed by Par shall be Scott Tarriff. 9(b) All decisions by the board of directors of the Corporation shall require the approval of a majority of all of the directors (in other words, two of the three directors), except that any decision that constitutes a "Major Decision" (as defined below) shall require the approval of all three directors. 9(c) The term "MAJOR DECISION" means any decision relating to any of the following matters: Stock Purchase and Shareholders Agreement - Page 15 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (1) the Corporation entering into any new business relationship other than with Par, including without limitation the Corporation entering into any new pharmaceutical development or manufacturing contracts with any other person or entity; (2) any determination that the Corporation needs additional funds invested by its shareholders, either (i) as loans or (ii) as additional equity contributions (without involving the issuance of additional shares of any class of stock of the Corporation); (3) the formation of any subsidiaries of the Corporation; (4) except as provided in Section 9(e) below, the terms of any contracts or arrangements with Kenneth W. Olsen, Glatt Air Techniques, Inc., CPS Orocel LLC, Par or any of their respective Affiliates, and any amendment to, waiver of or termination of any such contracts or arrangements; (5) any merger or consolidation of the Corporation with any other corporation or other entity; (6) the dissolution of the Corporation or the sale, liquidation, lease or pledge of all or substantially all of the assets of the Corporation; (7) any amendment to the Corporation's Certificate of Incorporation or By-Laws, except as provided in Section 2 above; (8) the selection of the Corporation's independent certified public accountants; and (9) except as provided in Section 4 above, the issuance of any shares of any class of the Corporation's capital stock to any person or entity, or the issuance of any options, warrants or other securities that may be exercised or converted into any such shares or are entitled to any voting or consent rights with respect to the Corporation. 9(d) In addition, between the date of this Agreement and October 16, 2005, the Corporation shall not, and Holding shall not permit the Corporation to take any of the actions described in Sections 9(c)(1), (2)(i), (3), (4),(5), (6), (7) or (9) above. 9(e) Par and Holding hereby approve the Product Development Agreement, the Two Existing Agreements. Stock Purchase and Shareholders Agreement - Page 16 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 9(f) The Bylaws of the Corporation may be amended to reflect the provisions set forth in this Section 9. In any event, if there is any conflict between the provisions of the Corporation's By-Laws and the provisions of this Agreement, the provisions of this Agreement shall control. ARTICLE 10: RESTRICTIONS ON TRANSFER OF SHARES 10(a) Holding shall not Transfer or Pledge any of its Shares without the prior written consent of Par. In addition, the Transfer or Pledge of any membership (ownership) interests in Holding or the issuance any new membership (ownership) interests in Holding, shall constitute a material breach of this Agreement if that Transfer or Pledge or issuance would result in ***** and ***** collectively owning either (1) less than 100% of the voting membership interests in Holding or (2) less than 90% of all membership interests (both voting and non-voting) in Holding. 10(b) Par shall not Transfer or Pledge any of its Shares without the prior unanimous approval of the board of directors of the Corporation, which approval shall not be unreasonably withheld or delayed. 10(c) Holding and Par hereby understand and acknowledge that the restrictions against the Transfer of Shares set forth in this Agreement are very stringent. Holding and Par agree that such restrictions are essential to the protection of each of them and that they would not have entered into this Agreement or agreed to any of the transactions contemplated by this Agreement unless those restrictions were agreed to by Holding and Par. 10(d) Any attempted or purported Transfer or Pledge of any Shares which does not comply with the provisions of this Agreement shall be void and unenforceable, and neither the Corporation nor Holding or Par shall be required in any way to recognize that Transfer or Pledge. 10(e) The certificates for all Shares of the Corporation which are now owned or hereafter acquired by either Holding or Par, including any replacement or additional certificates for Shares, shall have the following restrictive legend endorsed directly on those certificates: The sale, transfer, pledge or other disposition or hypothecation of the shares represented by this certificate are substantially restricted and may be made only in accordance with the provisions of the Stock Purchase and Shareholders Agreement among the Corporation and the shareholders of the Corporation. Any purported sale, transfer, pledge or other disposition or hypothecation of the securities represented by this certificate without complying with those restrictions shall be null and void and of no effect. Stock Purchase and Shareholders Agreement - Page 17 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION A copy of that Stock Purchase and Shareholders Agreement is on file at the principal office of the Corporation. ARTICLE 11: REPRESENTATIONS OF THE CORPORATION AND HOLDING In connection with the issuance and sale to Par of the Series B Shares pursuant to Article 4 above and the sale of Holding's Shares to Par pursuant to Article 5 above, each of the Corporation and Holding hereby represent and warrant the following to Par: 11(a) The Series B Shares, when they are issued and sold to Par pursuant to Article 4 above, will be duly authorized and issued to Par and, on the payment of the amounts described in Article 4 above, will be fully paid and non-assessable. 11(b) Holding is, as of the date of this Agreement, and will be, as of the date of each Closing contemplated by Section 4(a) above, the sole owner of all of the issued and outstanding Shares except to the extent of Par's ownership of Shares, free and clear of any security interest, lien or other encumbrance, other than the restrictive legend which appears on the certificate(s) for the Shares. Those Shares have been duly issued to Holding and are fully paid and non-assessable. 11(c) As of the date of this Agreement, the 90,000 shares of the Corporation's Series A Common Stock owned by Holding constitute all of the issued and outstanding shares of all classes of capital stock of the Corporation. There are no options, warrants, rights or other agreements pertaining to, or other securities exercisable or convertible into, any shares of any class of capital stock of the Corporation. 11(d) The Corporation is a duly organized and validly existing corporation in good standing under the laws of the State of Delaware and has all requisite corporate power and authority for the ownership and operation of its properties and for the carrying on of its business as now conducted and as now proposed to be conducted. The Corporation is duly licensed or qualified and in good standing as a foreign corporation authorized to do business in all jurisdictions wherein the character of the property owned or leased, or the nature of the activities conducted, by it makes such licensing or qualification necessary. The officer signing this Agreement on behalf of the Corporation has been duly authorized to execute and deliver this Agreement on behalf of the Corporation. 11(e) Holding has been duly organized and is validly existing as a limited liability company under the laws of the State of Delaware. The manager signing this Agreement on behalf of Holding has been duly authorized to execute and deliver this Agreement on behalf of Holding. Stock Purchase and Shareholders Agreement - Page 18 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 11(f) Neither the execution or delivery of this Agreement, nor the consummation of the transactions contemplated by this Agreement, nor the compliance with or performance of the terms and conditions of this Agreement by either the Corporation or Holding is prohibited by, limited by, conflicts with or will result in the breach or violation of or a default under the terms, conditions or provisions of (1) any mortgage, security agreement, indenture, evidence of indebtedness, loan or financing agreement or other agreement or instrument to which either the Corporation or Holding is a party or by which either of their respective properties or assets may be bound, (2) to the Knowledge of the Corporation and Holding, any provision of law, any order of any court or administrative agency or any rule or regulation applicable to the Corporation or Holding or their respective businesses, properties or assets or (3) any provision of the Certificate of Incorporation, By-laws, Operating Agreement or other organizational document of either the Corporation or Holding. 11(g) The Corporation does not (i) own of record or beneficially, directly or indirectly, (A) any shares of capital stock or securities convertible into capital stock of any other corporation or (B) any participating interest in any partnership, joint venture or other non-corporate business enterprise, or (C) any assets comprising the business or obligations of any other corporation, partnership, joint venture or other non-corporate business enterprise or (ii) control, directly or indirectly, any other entity. 11(h) Each of Holding and the Corporation has all necessary corporate or company power as applicable and has taken all corporate or company action, as applicable, required to duly and validly authorize the execution, delivery and performance of this Agreement and all other agreements and instruments required by this Agreement to be executed and delivered by Holding and/or the Corporation (collectively, the "TRANSACTION DOCUMENTS"). The Transaction Documents, when executed and delivered by Holding and the Corporation, are or will be legal, valid and binding obligations of the Corporation and Holding, enforceable in accordance with their respective terms against each of the Corporation and Holding, as the case may be, assuming the truth, correctness and completeness of the representations set forth in Section 12(e) below. The issuance, sale and delivery of the Shares in accordance with Article 4 of this Agreement, has been duly authorized by all necessary corporate action on the part of the Corporation, subject only to the execution and filing with the Delaware Secretary of State of the Restated Certificate of Incorporation of the Corporation in the form attached to this Agreement as Exhibit A. The Shares, when issued, sold and delivered in accordance with the terms of this Agreement, including the payment by Par of the amounts required to be paid pursuant to Article 4 above, will be duly and validly issued, fully paid, non-assessable and are not, and will not be, subject to preemptive rights or other preferential rights held by any present or future stockholders of the Corporation, will not be, as a result of any action or inaction by the Corporation or Holding, subject to any lien, security interest or other encumbrance (other than the restrictive legend required by Section 10(e) above and restrictions imposed by any Stock Purchase and Shareholders Agreement - Page 19 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION applicable securities laws), and will not conflict with any provision of any agreement or instrument to which the Corporation is a party or by which it or its property or assets are bound. 11(i) Except for the filing of any notice subsequent to a Closing hereunder that may be required under applicable state and/or federal securities laws (which, if required, shall be filed on a timely basis), and assuming the truth and accuracy of the representations and warranties of Par set forth in Article 12 below, no authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or, to the Knowledge of the Corporation, foreign, in effect as of the date of this Agreement is necessary for the execution, delivery or performance by either the Corporation or Holding of the Transaction Documents, for the offer, issue, sale and delivery of the Shares or for the performance by either the Corporation or Holding of either of their respective obligations under the Transaction Documents. 11(j) (A) As of the date of this Agreement, there is no litigation or governmental proceeding or investigation pending or, to the Corporation's or Holding's Knowledge, threatened against the Corporation or Holding, nor are there any disputes or conflicts to which either the Corporation or Holding is a party which could properly result in any such litigation, proceeding or investigation. To the Corporation's and Holding's Knowledge, there is no litigation or governmental proceeding or investigation pending or threatened against any officer, key employee or holder of more than 5% of the capital stock of the Corporation relating to such person's performance of duties for the Corporation or Holding or relating to such person's stock ownership in the Corporation or otherwise relating to the business of the Corporation. Neither the Corporation nor Holding is in default with respect to any order, writ, injunction, decree, ruling or decision of any court, commission, board or other governmental agency to which the Corporation or Holding is a party to by which it is bound. To the Corporation's or Holding's Knowledge, none of the officers, key employees or holders of more than 5% of the capital stock of the Corporation is in default with respect to any order, writ, injunction, decree, ruling or decision of any court, commission, board or other governmental agency relating to the business of the Corporation or the ownership of any shares of stock of the Corporation. The foregoing sentences include, without limiting their generality, actions pending or, to the Knowledge of the Corporation or Holding, threatened involving the prior employment of any of the Corporation's officers or employees or their use in connection with the Corporation's business of any information or techniques allegedly proprietary to any of their former employers. (B) As of the date of each Series B Closing and as of the date of the Final Closing, there is no litigation or governmental proceeding or investigation pending or, to the Corporation's or Holding's Knowledge, threatened against the Corporation or Holding, nor are there any disputes or conflicts to which either the Corporation or Holding is a party which could properly result in any such litigation, proceeding or investigation, in each such case to the extent that such litigation, proceeding or investigation both Stock Purchase and Shareholders Agreement - Page 20 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (1) either (i) does not involve Nortec's Core Business or (ii) involves Nortec's Core Business and arises out of a breach of the Product Development Agreement by Nortec, and (2) would likely result in a Material Adverse Effect. As of the date of each Series B Closing and as of the date of the Final Closing, neither the Corporation or Holding is in default with respect to any order, writ, injunction, decree, ruling or decision of any court, commission, board or other governmental agency to which the Corporation or Holding is a party or by which it is bound, in each case to the extent that such default both (1) either (i) does not involve Nortec's Core Business or (ii) involves Nortec's Core Business and arises out of a breach of the Product Development Agreement by Nortec, and (2) would likely result in a Material Adverse Effect. 11(k) As of the date of this Agreement, except for the Corporation's employment agreement with Kenneth W. Olsen and the assistance provided to the Corporation by Glatt Air Techniques, Inc., the Corporation is not a party to or obligated in connection with its business with respect to (i) outstanding contracts with employees, agents, consultants, advisers, sales representatives, distributors, sales agents or dealers or (ii) collective bargaining agreements or contracts with any labor union or other representative of employees or any employee benefits provided for by any such agreement. As of the date of each Series B Closing and as of the date of the Final Closing, the Corporation is not a party to or obligated in connection with its business with respect to (i) outstanding contracts with employees, agents, consultants, advisers, sales representatives, distributors, sales agents or dealers or (ii) collective bargaining agreements or contracts with any labor union or other representative of employees or any employee benefits provided for by any such agreement, in each case to the extent that any such contracts or agreements do not involve Nortec's Core Business. 11(l) As of the date of this Agreement, to the Knowledge of the Corporation, no officer or employee of the Corporation is in violation of any term of any employment contract, patent disclosure agreement, proprietary information agreement, noncompetition agreement, or any other contract or agreement or any restrictive covenant relating to the right of any such officer or employee to be employed by the Corporation because of the nature of the business conducted or to be conducted by the Corporation or relating to the use of trade secrets or proprietary information of others, and the continued employment of the Corporation's officers and key employees does not subject the Corporation or Par to any liability to third parties as a result of the existence or terms of any such contracts or agreements. As of the date of each Series B Closing and as of the date of the Final Closing, to the Knowledge of the Corporation, no officer or employee of the Corporation is in violation of any term of any employment contract, patent disclosure agreement, proprietary information agreement, noncompetition agreement, or any other contract or agreement or any restrictive covenant relating to the right of any such officer or employee to be employed by the Corporation because of the nature of the business conducted or to be conducted by the Corporation or relating to the use of trade secrets or proprietary information of others, and the continued Stock Purchase and Shareholders Agreement - Page 21 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION employment of the Corporation's officers and key employees does not subject the Corporation or Par to any liability to third parties as a result of the existence or terms of any such contracts or agreements, in each case to the extent that any such contract or agreement does not involve Nortec's Core Business. 11(m) As of the date of this Agreement, the Corporation does not have any employees, other than Kenneth W. Olsen. As of the date of each Series B Closing and as of the date of the Final Closing, the Corporation does not have any employees in Nortec's Core Business, except for Kenneth W. Olsen and any other employees authorized by the Corporation's Board of Directors, and the Corporation does not have any employees who are engaged in employment activity other than activity that involves Nortec's Core Business. 11(n) (A) As of the date of this Agreement, to the Knowledge of the Corporation, the Corporation is in compliance with the terms and provisions of this Agreement and of its certificate of incorporation and bylaws, and with all mortgages, indentures, leases, agreements and other instruments, if any, by which it is bound or to which it or any of its respective properties or assets are subject, except for any such non-compliance that does not have a Material Adverse Effect. As of the date of this Agreement, to the Knowledge of the Corporation, the Corporation is in compliance with all judgments, decrees, governmental orders, statutes, rules or regulations by which it is bound or to which any of its properties or assets are subject. As of the date of this Agreement, to the Knowledge of the Corporation, neither the execution and delivery of this Agreement by the Corporation nor the issuance of the Series B Shares pursuant to Article 4 above, nor the consummation by the Corporation of the transaction contemplated by this Agreement or the performance by the Corporation of any of its obligations hereunder, has constituted or resulted in or will constitute or result in a default or violation of any term or provision of any of the foregoing documents, instruments, judgments, agreements, decrees, orders, statutes, rules and regulations, except to the extent that any such default or violation does not have a Material Adverse Effect. (B) As of the date of each Series B Closing and as of the date of the Final Closing, to the Knowledge of the Corporation, the Corporation is in compliance with the terms and provisions of this Agreement and of its certificate of incorporation and bylaws, except for any such non-compliance that does not have a Material Adverse Effect. As of the date of each Series B Closing and as of the date of the Final Closing, to the Knowledge of the Corporation, the Corporation is in compliance with all mortgages, indentures, leases, agreements and other instruments, if any, by which it is bound or to which it or any of its respective properties or assets are subject, in each such case to the extent that any such non-compliance does not have a Material Adverse Effect. As of the date of each Series B Closing and as of the date of the Final Closing, to the Knowledge of the Corporation, the Corporation is in compliance with all judgments, decrees, governmental orders, statutes, rules or regulations by which it is bound or to which any of its properties or assets are subject, in each Stock Purchase and Shareholders Agreement - Page 22 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION such case to the extent that any such non-compliance does not have a Material Adverse Effect. As of the date of each Series B Closing and as of the date of the Final Closing, to the Knowledge of the Corporation, neither the execution and delivery of this Agreement by the Corporation or the issuance of the Series B Shares pursuant to Article 4 above, nor the consummation by the Corporation of the transaction contemplated by this Agreement or the performance by the Corporation of any of its obligations hereunder, has constituted or resulted in or will constitute or result in a default or violation of any term or provision of any of the foregoing documents, instruments, judgments, agreements, decrees, orders, statutes, rules and regulations, in each such case to the extent that any such default or violation does not have a Material Adverse Effect. (C) Solely for the purpose of applying this Section 11(n) and Section 11(dd) below, for the purposes of determining whether the Corporation is in compliance with, or is in breach of, the Product Development Agreement or the Two Existing Agreements, such non-compliance or breach shall be deemed to have occurred only if (1) there has been a breach of any of those Agreements by the Corporation, (2) Par has provided written notice of that breach to the Corporation, and (3) that breach has not been cured within 30 days after the Corporation's receipt of that notice, except for any such breach which by its nature cannot be cured within 30 days, in which event such non-compliance or breach shall be deemed to have occurred only if the Corporation fails promptly to commence and diligently pursue such cure. Solely for the purposes of this Section 11(n) and Section 11(dd) below, the 30-day period referred to in the first sentence of Section 8(b) above shall not apply to any breach of this Agreement resulting from any breach of the representations or warranties set forth in this Section 11(n) or Section 11(dd) below that arises out of any non-compliance or breach by the Corporation with the Product Development Agreement or the Two Existing Agreements. 11(o) Financial Information. The unaudited financial statements of the Corporation as of and for the period ended June 30, 2003, a copy of which are attached hereto as Schedule 11(o), present fairly the financial position of the Corporation as of the date thereof and the results of operations for the period covered thereby (subject to immaterial year-end audit adjustments) and have been prepared in accordance with generally accepted accounting principles consistently applied, except for the absence of footnotes not customarily included in such statements (the "FINANCIAL STATEMENTS"). As of the date of this Agreement, the Corporation does not have any liability, commitments or obligations contingent or otherwise, which are not reflected in the aforesaid financial statements or in the notes thereto, except to the extent that any such omission would not have a Material Adverse Effect. Since the date of the Financial Statements and up to the date of this Agreement, there has been no change in the business, assets or condition, financial or otherwise, operations or prospects of the Corporation, except to the extent that any such change does not have a Material Adverse Effect. Since the date of the Financial Statements, the Corporation has not entered into any material transaction other than in the course of Nortec's Core Business or redeemed or repurchased any of its capital stock. Stock Purchase and Shareholders Agreement - Page 23 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 11(p) No insolvency proceeding of any character, including, without limitation, bankruptcy, receivership, reorganization, composition or arrangement with creditors, voluntary or involuntary, has been commenced by or against the Corporation or Holding or any of their assets or properties, nor, to the Knowledge of the Corporation or Holding , is any such proceeding threatened. The Corporation has not taken any action in contemplation of the institution of any such insolvency proceedings. 11(q) ERISA. Since January 1, 2000, the Corporation has not had, and does not have, any employees or any employee benefits plans, other than Kenneth W. Olsen and his salary and reasonable employee benefits. 11(r) Except for (1) the Patent License Agreement, (2) this Agreement, (3) the Product Development Agreement, (4) the Product Development Subcontract between the Corporation and Glatt Air Techniques, Inc., (5) the Corporation's employment arrangement with Kenneth W. Olsen, and (6) the Two Existing Agreements, there are no loans, leases, royalty agreements or other continuing transactions between the Corporation and (a) any officer, employee or director of the Corporation, or (b) any Person owning 5% or more of any class of capital stock of the Corporation, or (c) any member of the immediate family of such officer, employee, director or stockholder, or (d) any corporation or other entity controlled by such officer, employee, director or stockholder or a member of the immediate family of such officer, employee, director or stockholder. 11(s) The Corporation has not assumed, guaranteed, endorsed or otherwise become directly or contingently liable on (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in the debtor or otherwise to assure the creditor against loss), any indebtedness of any other person or entity, other than as contemplated by this Agreement, the Product Development Agreement and the Two Existing Agreements. 11(t) The Corporation has not made any loan or advance to any person or entity, nor is it committed to make any such loan or advance. 11(u) Securities Act of 1933. Assuming the truth and accuracy of Par's representations and warranties set forth in Article 12 below, the Corporation has complied and will comply with all applicable federal and state securities laws in connection with the offer, issuance and sale of the Shares. While this Agreement is in effect, neither the Corporation nor anyone acting on its behalf has or will sell, offer to sell or solicit offers to buy Shares, or solicit offers with respect thereto from, or enter into any preliminary conversations or negotiations relating thereto with, any person or entity other than as contemplated by this Agreement. Stock Purchase and Shareholders Agreement - Page 24 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 11(v) No Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or valid claim against or upon the Corporation for any commission, fee or other compensation as a finder or broker because of any act or omission by the Corporation or any of its agents. 11(w) As of the date of this Agreement, the Corporation has a total authorized capitalization consisting of (i) one hundred and fifty thousand (150,000) shares of Series A Common Stock, no par value per share, of which ninety thousand (90,000) shares are issued and outstanding on the date hereof, all of which are held of record and beneficially by Holding; and (ii) fifty thousand (50,000) shares of Series B Common Stock, no par value per share, none of which shares are issued and outstanding on the date hereof, without giving effect to the transactions contemplated hereby. As of the date of this Agreement, all the outstanding shares of capital stock of the Corporation have been duly authorized, and are validly issued, fully paid and non-assessable. No preemptive, conversion or other rights, options, warrants, subscriptions or purchase rights of any nature to acquire from the Corporation shares of capital stock or other securities are authorized, issued or outstanding, nor is the Corporation obligated in any other manner to issue shares of its capital stock or other securities except as contemplated by this Agreement. There are no restrictions on the transfer of shares of capital stock of the Corporation other than those imposed by relevant federal and state securities laws and as otherwise contemplated by this Agreement. Other than as contemplated by this Agreement, there are no agreements, understandings, trusts or other collaborative arrangements or understandings concerning the voting of the capital stock of the Corporation, except that Kenneth W. Olsen and Reiner Nowak are, as of the date of this Agreement, (either legally or beneficially) the sole members of Holding, and any material vote by Holding (in its capacity as a shareholder of the Corporation) in connection with the capital stock of the Corporation requires the consent of both Mr. Olsen and Mr. Nowak. The Corporation will comply with all applicable federal and state securities laws in connection with the offer and sale of the Corporation's capital stock as contemplated by this Agreement. 11(x) No person or entity has demand or other rights to cause the Corporation to file any registration statement under the Securities Act relating to any securities of the Corporation or any right to participate in any such registration statement. 11(y) As of the date of this Agreement, the Corporation has delivered to Par a true, correct and complete list of all insurance carried by the Corporation covering the Corporation's properties and business. 11(z) Title to Assets; Patents. (i) As of the date of this Agreement, the Corporation has no fixed assets, real property or leases. The Corporation has good title to all assets and Stock Purchase and Shareholders Agreement - Page 25 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION properties that are owned by the Corporation, free of any mortgages, pledges, charges, liens, security interests or other encumbrances of any kind, except where any failure of any of the foregoing would not have a Material Adverse Effect. (ii) As of the date of this Agreement, except pursuant to the Patent License Agreement and the Corporation's ownership of United States patent number 5,084,278, the Corporation does not own any patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names and registered copyrights, and applications for such that are in the process of being prepared, owned by or registered in the name of the Corporation, or of which the Corporation is a licensor or licensee or in which the Corporation has any right. To the Corporation's Knowledge, as of the date of this Agreement there is no adverse claim, pending or threatened, that would interfere with the Corporation's right to use the rights it has under the Patent License Agreement. As of the date of this Agreement, no claim is pending or, to the Corporation's or Holding's Knowledge, threatened to the effect that any such intellectual property licensed by the Corporation, or which the Corporation otherwise has the right to use, is invalid or unenforceable by the Corporation, and the Corporation does not have any Knowledge that any such patents or intellectual property rights of the Corporation may be invalid. Except as set forth in the Patent License Agreement, as of the date of this Agreement the Corporation has no obligation to compensate any person or entity for the use of any such patents or rights and the Corporation has not granted any person or entity (except Par) any license or other rights to use in any manner any of the patents or rights of the Corporation, whether requiring the payment of royalties or not. As of the date of this Agreement, the Corporation has not entered into any agreement to indemnify any other person or entity against any charge of infringement of any patent, trademark, trade name, service mark or copyright. 11(aa) As of the date of this Agreement the Corporation is not a party to any material contract or agreement, whether written or oral, other than: (i) the Product Development Agreement and the Two Existing Agreements with Par, (ii) the Patent License Agreement, (iii) the employment agreement with Kenneth W. Olen, and (iv) the Product Development Subcontract with Glatt Air Techniques, Inc. Prior to the Final Closing any and all obligations of the Corporation to Glatt Air Techniques, Kenneth W. Olsen and Holding shall be terminated. 11(bb) Since its date of incorporation and through the date of this Agreement, the Corporation has not been, a "United States real property holding corporation," as defined in Section 897(c)(2) of the Internal Revenue Code of 1986 (the "Code"), and in Section 1.8972(b) of the Treasury Regulations issued thereunder. As of the date of this Agreement, the Corporation has no current plans or intentions which would cause the Corporation to become a "United States real property holding corporation," and the Corporation has filed with the IRS all statements, if any, with its United States income tax returns which are required under Section 1.8972(h) of the Treasury Regulations. Stock Purchase and Shareholders Agreement - Page 26 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 11(cc) The Corporation has filed all tax returns, federal, state, county and local, domestic and, to the Corporation's Knowledge, foreign, required to be filed by it, and the Corporation has paid all taxes shown to be due by such returns as well as, to the Corporation's Knowledge, all other taxes, assessments and governmental charges which have become due or payable, including without limitation all taxes which the Corporation is obligated to withhold from amounts owing to employees, creditors and third parties, except where any failure to file any such tax return or pay any such tax would not have a Material Adverse Effect. The Corporation has established adequate reserves for all taxes accrued but not yet payable to the extent required by generally accepted accounting principles, except where the failure to establish such reserves would not have a Material Adverse Effect. All material tax elections of any type which the Corporation has made as of the date of this Agreement are identified in the financial statements referred to in Section 11(o) above, except where the failure to identify such an election would not have a Material Adverse Effect. The Corporation has not received any deficiency assessment with respect to or, proposed adjustment of the Corporation's federal, state, county or local taxes, domestic and foreign, and, to the Knowledge of the Corporation and of Holding, no such assessment or adjustment is threatened, except for any such assessment or adjustment that would not have a Material Adverse Effect. The Corporation has not received any notice of any tax lien (other than for current taxes not yet due and payable), whether imposed by any federal, state, county or local taxing authority, domestic or foreign, outstanding against the assets, properties or business of the Corporation and, to the Knowledge of the Corporation, no such notice is anticipated. To the Knowledge of the Corporation, any of its present or former stockholders has ever filed an election pursuant to Section 1362 of the Internal Revenue Code of 1986 (the "Code"), that the Corporation be taxed as an S corporation. 11(dd) Subject to Section 11(n)(C) above, the Corporation has not received any notice of default under any agreement or contract now in effect to which the Corporation is a party or by which it or its property is bound and, to the Knowledge of the Corporation, neither the Corporation nor any other party to any such agreement or contract is in default under any such agreement or contract, except where any such default would not have a Material Adverse Effect. As of the date of this Agreement, the Corporation has not made any determination that it will not fully perform all its respective material obligations under each such contract or other agreement, and the Corporation and Holding do not have any Knowledge of any material breach or anticipated breach by the other party to any such contract or agreement. The Corporation is in material compliance with all of the terms and provisions of its certificate of incorporation and bylaws, except where any such non-compliance would not have a Material Adverse Effect. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE CORPORATION AND HOLDING ARE NOT MAKING, AND PAR IS NOT RELYING ON, ANY OTHER REPRESENTATIONS (EITHER EXPRESS Stock Purchase and Shareholders Agreement - Page 27 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION OR IMPLIED) IN CONNECTION WITH THE ISSUANCE OR SALE OF ANY SHARES OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. 12. PAR'S REPRESENTATIONS. In connection with the purchase of shares of the Corporation's stock by Par pursuant to Sections 3 and 4(a) above, Par hereby represents and warrants the following to the Corporation and Par: (a) Par has been duly organized and is validly existing in good standing as a corporation under the laws of the State of Delaware. The officer signing this Agreement on behalf of Par has the authority to execute and deliver this Agreement on behalf of Par. (b) Par has duly executed and delivered this Agreement, and this Agreement is a legal, valid and binding obligation of Par, enforceable against Par in accordance with its terms. (c) Neither the execution or delivery of this Agreement by Par, nor the consummation of the transactions contemplated by this Agreement, nor the compliance with or performance of the terms and conditions of this Agreement by Par is prevented by, limited by, conflicts with or will result in the breach or violation of or a default under the terms, conditions or provisions of (1) any mortgage, security agreement, indenture, evidence of indebtedness, loan or financing agreement, certificate of incorporation, by-laws or other agreement or instrument to which Par is a party or by which it is bound or (2) any provision of law, any order of any court or administrative agency or any rule or regulation applicable to Par or its business. (d) Par is purchasing the Shares under both Sections 3 and 4(a) above for its own account solely for investment with no intention of reselling or distributing any of the Shares. Par will not resell or distribute any of those Shares in violation of any Federal or state securities laws. Par understands that there is no public market for those Shares and that the transferability of those Shares is highly restricted. Par has not made any offer to purchase any securities other than its private offer to purchase the Shares under Sections 3 and 4 above, except for any such offer that is completely unrelated to, and is not integrated with, the transactions contemplated by this Agreement. Par has not participated in any discussions with, or reached any agreements or understandings (either written or oral) with any other party, including without limitation any broker, placement agent, co-investor, joint venturer or other group of investors, relating to the transactions contemplated by this Agreement. (e) Par has all necessary corporate or company power as applicable and has taken all corporate action required to duly and validly authorize the execution, delivery and performance of this Agreement and all other agreements and instruments required by this Agreement to be executed and delivered by Par (collectively, the "PAR TRANSACTION DOCUMENTS"). The Par Transaction Documents, when executed and delivered by Par, are or will be legal, valid and binding obligations of Par, enforceable in accordance with their respective terms Stock Purchase and Shareholders Agreement - Page 28 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION against Par, assuming the truth, correctness and completeness of the representations set forth in Section 11(h) above. The purchase by Par of the Shares in accordance with Article 4 of this Agreement has been duly authorized by all necessary corporate action on the part of Par. (f) No authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or, to the Knowledge of Par, foreign, in effect as of the date of this Agreement is necessary for the execution, delivery or performance by Par of the Par Transaction Documents, for the offer and purchase by Par of the Shares or for the performance by Par of its obligations under the Par Transaction Documents. (g) As of the date of this Agreement, there is no litigation or governmental proceeding or investigation pending or, to Par's Knowledge, threatened against Par, nor are there any disputes or conflicts to which Par is a party which could properly result in any such litigation, proceeding or investigation, where any such litigation, proceeding or investigation could reasonably adversely affect Par's rights or ability to consummate the transactions contemplated by this Agreement. Par is not in default with respect to any order, writ, injunction, decree, ruling or decision of any court, commission, board or other governmental agency where any such default could reasonably adversely affect Par's rights or ability to consummate the transactions contemplated by this Agreement. (h) As of the date of this Agreement, to the actual knowledge of Par's senior officers, Par is in compliance with the terms and provisions of this Agreement and all mortgages, indentures, leases, agreements and other instruments, if any, by which it is bound or to which it or any of its respective properties or assets are subject where any such non-compliance could reasonably adversely affect Par's rights or ability to consummate the transactions contemplated by this Agreement. As of the date of this Agreement, to the actual knowledge of Par's senior officers, Par is in compliance with all judgments, decrees, governmental orders, statutes, rules or regulations by which it is bound or to which any of its properties or assets are subject, where any such non-compliance could reasonably adversely affect Par's rights or ability to consummate the transactions contemplated by this Agreement. (i) No insolvency proceeding of any character, including, without limitation, bankruptcy, receivership, reorganization, composition or arrangement with creditors, voluntary or involuntary, has been commenced by or against Par or any of its assets or properties, nor, to the Knowledge of Par, is any such proceeding threatened. Par has not taken any action in contemplation of the institution of any such insolvency proceedings. (j) No Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or valid claim against or Stock Purchase and Shareholders Agreement - Page 29 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION upon the Corporation or Holding for any commission, fee or other compensation as a finder or broker because of any act or omission by Par or any of its agents. (k) As of the date of this Agreement, Par has not received any notice of default under any agreement or contract now in effect to which Par is a party or by which it or its property is bound and, to the Knowledge of Par, neither Par nor any other party to any such agreement or contract is in default under any such agreement or contract, where any such default could reasonably adversely affect Par's rights or ability to consummate the transactions contemplated by this Agreement. (l) Par has made an independent investigation of the Corporation and the business of the Corporation. Par has received whatever information it deems necessary in order to decide whether to enter into this Agreement and to invest in the Corporation. Par has availed itself of the opportunity to obtain any additional information it believes necessary to verify the accuracy or completeness of the information furnished to it and has determined that it desires no further information. Par has not relied on any representations or warranties from any person with respect purchasing the Corporation's shares as contemplated by this Agreement, except for the representations set forth in this Agreement. (m) Par understands that (1) the acquisition or offering of shares of stock in the Corporation has not been registered, considered or approved by any governmental or other entity in any jurisdiction, (2) there is no public market for any of those shares, (3) the transferability of those shares is highly restricted as provided in this Agreement, (4) there is no right to redeem any of those shares, and (5) the Corporation is not under any obligation to purchase or repurchase any of those shares at any time. (n) Par is purchasing the shares of stock in the Corporation pursuant to this Agreement only for investment for its own account (and not for the account of any other Person) and not with a view towards the transfer, resale or further distribution of those shares. Par shall abide by all restrictions with respect to any transfer of those shares that are contained in this Agreement and in all applicable laws. Par shall not under any circumstances make any public offering or sale of any of those shares. (o) Par's investment advisers have such knowledge and experience in financial and business matters that it is capable of utilizing the information made available to it, evaluating the risks of an investment in the Corporation, and making an informed investment decision. 13. CONFIDENTIALITY; PUBLICITY. (a) The Corporation, Par and Holding shall hold in confidence, and shall cause their respective Affiliates to hold in confidence, all confidential and other proprietary information of the other Stock Purchase and Shareholders Agreement - Page 30 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION party disclosed to the receiving party and relating to this Agreement, except for information (1) which is or becomes public knowledge (through no fault of the receiving party), (2) which is made available to the receiving party by an independent third party, (3) which is already in the receiving party's possession at the time of receipt from the disclosing party (and such prior possession can be properly demonstrated), or (4) which is required by law or regulation to be disclosed (and only to the extent of such disclosure). Additionally, each party may provide such information to governmental agencies to the extent legally required by such agencies and such information shall not be further disclosable unless made public as a result of such disclosure to such agencies as required by law. (b) The Corporation, Par and Holding shall not publicize or disclose the existence or terms of or the termination of this Agreement, except (1) as required by law (including with respect to Par, disclosures required to comply with securities laws and regulations), or (2) if consented to in writing in advance of disclosure by an authorized representative of the other party. In addition, no party to this Agreement shall release information to the press or the public pertaining to this Agreement or its performance without first agreeing with the other parties with respect to the content of such disclosure. The Parties agree to make a mutually acceptable press release within 120 days after the execution of this Agreement. 14. ARBITRATION. Any and all claims, disputes, controversies, and other matters arising out of or relating to this Agreement, including but not limited to the formation (including any claim as to fraud in the inducement), breach, performance, interpretation, or termination of this Agreement, shall be resolved by binding arbitration in accordance with the commercial Arbitration Rules of the American Arbitration Association which are then in effect. Three arbitrators shall conduct the arbitration in the English language in the State of New York. The arbitrators must be knowledgeable or experienced in matters involving corporate law and the pharmaceutical industry. Each party (together with its Affiliates, if any) will, within 20 days of the date on which arbitration is requested, select one arbitrator and advise the opposite party of the name of that arbitrator, and those two arbitrators will select a third arbitrator. If the two arbitrators selected by the parties are unable to agree on a third arbitrator within forty (40) days of the date on which arbitration is requested, the third arbitrator will be appointed by the American Arbitration Association. The decision of any two of the three arbitrators will be the decision of the arbitrators. The costs of arbitration, including reasonable attorney's fees, shall be borne as assessed by the Arbitrators. Notwithstanding anything to the contrary contained in this Section 14, the terms and provisions of this Section 14 shall not preclude any party from seeking, or a court of competent jurisdiction from granting, a temporary restraining order, temporary injunction or other equitable relief for any breach of any restrictive covenant or confidentiality covenant in this Agreement. The arbitrators' decision shall be reduced to writing and shall be binding on the parties. Judgment on the award(s) rendered by the arbitrators may be entered in any court having applicable jurisdiction, and execution of that award may be had in any court of competent jurisdiction or application may be made to such court for a judicial acceptance of the award and an order of enforcement. In that arbitration, all evidentiary Stock Purchase and Shareholders Agreement - Page 31 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION privileges under state and Federal law, including attorney-client and work-product privileges, shall be preserved and protected to the same extent that such privileges would be protected in a United States District Court proceeding applying the internal law of the State of New York (without reference to the law of conflicts of any jurisdiction other than New York General Obligations Law 5-1401). Any failure of either party to abide by the arbitrators' decision shall permit the other party to terminate this Agreement in whole or in part. 15. NOTICES. Any notice to be given to a party under or in connection with this Agreement shall be in writing and shall be delivered by confirmed facsimile Express Mail or next day FEDEX to the party at the following address set forth for such party: TO THE CORPORATION: Nortec Development Associates, Inc. 100 Spear Road Ramsey, NJ 07446 Attention: Kenneth W. Olsen, President Telephone: (201) 934-9600 Fax: 201-327-3354 With a copy to: Todd M. Brinberg, Esq. Nadborny & Brinberg LLP 420 Lexington Avenue, Suite 2300 New York, New York 10170 Telephone: 212-922-9080 Fax: 212-656-1660 TO PAR: Par Pharmaceutical, Inc. 300 Tice Boulevard Woodcliff Lake, NJ 07677 Attention: Dennis O'Connor, CFO Telephone: (201) 802-4146 Fax: 201-391-5364 Stock Purchase and Shareholders Agreement - Page 32 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION TO HOLDING: Nortec Holding LLC 100 Spear Road Ramsey, NJ 07446 Attention: Kenneth W. Olsen, President Telephone: (201) 934-9600 Fax: 201-327-3354 With copies to: Mr. Reiner Novak Glatt Air Techniques, Inc. 20 Spear Road Ramsey, NJ 07446 Telephone: (201) 825-8700 Fax: 201-934-6967 And: Todd M. Brinberg, Esq. Nadborny & Brinberg LLP 420 Lexington Avenue, Suite 2300 New York, New York 10170 Telephone: 212-922-9080 Fax: 212-656-1660 or to such other address as to which the party has given notice thereof. Such notices shall be deemed given on receipt. 16. MISCELLANEOUS. (a) This Agreement shall not be amended or waived except by a written agreement signed by all of the Corporation, Par and Holding setting forth that specific amendment or waiver. (b) This Agreement and the rights and obligations under this Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York, without regard to the application of any choice of law principles other than New York General Obligations Law 5-1401. Stock Purchase and Shareholders Agreement - Page 33 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (c) This Agreement together with the Product Development Agreement contains the entire agreement among the Corporation, Par and Holding with respect to subject matter of this Agreement and supersedes all other agreements and understandings with respect to its subject matter. (d) This Agreement does not constitute a partnership or joint venture between Par and Holding and it merely sets forth certain arrangements between them (1) in their capacities as shareholders of the Corporation with respect to the management of the Corporation and (2) with respect to the transfer or other disposition of their respective Shares. (e) The invalidity or unenforceability of any portion of this Agreement shall not affect any of the remaining portions of this Agreement. (f) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. [* * * BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK * * *] Stock Purchase and Shareholders Agreement - Page 34 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION IN WITNESS WHEREOF, the Corporation, Par and Holding have executed and delivered this Agreement on the date first written above. PAR PHARMACEUTICAL, INC. NORTEC DEVELOPMENT ASSOCIATES, INC. By:/s/ Scott Tarriff /s/ Ken Olsen - ----------------------------- ----------------------------- Name: Scott Tarriff Name: Ken Olsen Title: President and CEI Title: President NORTEC HOLDING LLC By:/s/ Ken Olsen - ----------------------------- Name: Ken Olsen Title: President AGREEMENT BY CPS OROCEL LLC AND KENNETH W. OLSEN CPS Orocel LLC and Kenneth W. Olsen hereby agree to the provisions of Sections 6 and 9(a) above. CPS OROCEL LLC By:/s/ Reiner Nowak /s/ Kenneth W. Olsen - ----------------------------- ----------------------------- Name: Reiner Nowak Kenneth W. Olsen Title: President Attachments - ----------- Exhibit A - Restated Certificate of Incorporation Schedule 11(o) - Current Unaudited Financial Statements Stock Purchase and Shareholders Agreement - Page 35 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY ITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EX-21 10 exhibit-21.txt EXHIBIT 21 ---------- Pharmaceutical Resources, Inc. ------------------------------ List of Subsidiaries -------------------- Percentage of Voting Securities Jurisdiction of Owned by Its Entity Organization Immediate Parent ------ ------------ ---------------- Par Pharmaceutical, Inc. Delaware 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% Israel Pharmaceutical Resources LP Israel 99% FineTech Ltd. Israel 100% Par SVC, LLC. New York 100% Par Pharmaceutical, Inc. ------------------------ List of Subsidiaries -------------------- Percentage of Voting Securities Jurisdiction of Owned by Its Entity Organization Immediate Parent ------ ------------ ---------------- Par, Inc. Delaware 100% EX-31 11 exhibit31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE EXCHANGE ACT I, Scott L. Tarriff, President and 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-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 15, 2004 /s/ Scott L. Tarriff -------------------- Scott L. Tarriff President and Chief Executive Officer (Principal Executive Officer) EX-31 12 exhibit31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE EXCHANGE ACT 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 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-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 15, 2004 /s/ Dennis J. O'Connor ---------------------- Dennis J. O'Connor Chief Financial Officer (Principal Financial Officer) EX-32 13 exhibit32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER 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, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott L. Tarriff, President and 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) 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/ Scott L. Tarriff - -------------------- Scott L. Tarriff President and Chief Executive Officer March 15, 2004 EX-32 14 exhibit32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER 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, 2003 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) 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 15, 2004 -----END PRIVACY-ENHANCED MESSAGE-----