-----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, Jevhu4Y+Px2ZVqs3c5B33LLt1wBJsNqTOvnDsdDA2mOQ3cObNdPaq2Ez27F7d9Nx 8qWidWQjaeDmBXfE5O1JVQ== 0000898432-04-000653.txt : 20040813 0000898432-04-000653.hdr.sgml : 20040813 20040813171623 ACCESSION NUMBER: 0000898432-04-000653 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040704 FILED AS OF DATE: 20040813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAR PHARMACEUTICAL COMPANIES, INC. CENTRAL INDEX KEY: 0000878088 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 223122182 STATE OF INCORPORATION: NH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10827 FILM NUMBER: 04975290 BUSINESS ADDRESS: STREET 1: 300 TICE BOULEVARD CITY: WOODCLIFF LAKE STATE: NJ ZIP: 07677 BUSINESS PHONE: 845-425-7100 MAIL ADDRESS: STREET 1: 300 TICE BOULEVARD CITY: WOODCLIFF LAKE STATE: NJ ZIP: 07677 FORMER COMPANY: FORMER CONFORMED NAME: PHARMACEUTICAL RESOURCES INC DATE OF NAME CHANGE: 19940526 10-Q 1 form10-q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: July 4, 2004 COMMISSION FILE NUMBER: 1-10827 PAR PHARMACEUTICAL COMPANIES, 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes X No ----- ----- Number of shares of Common Stock outstanding as of August 9, 2004: 33,945,956
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAR PHARMACEUTICAL COMPANIES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data) (Unaudited) JULY 4, DECEMBER 31, ASSETS 2004 2003 ------ ---- ---- Current assets: Cash and cash equivalents $51,088 $162,549 Available-for-sale securities 198,955 195,500 Accounts receivable, net of allowances of $41,958 and $40,357 178,578 157,707 Inventories, net 73,713 66,713 Prepaid expenses and other current assets 9,619 10,033 Unallocated purchase price 142,960 - Deferred income tax assets 37,419 34,473 ------ ------ Total current assets 692,332 626,975 Property, plant and equipment, at cost less accumulated depreciation and amortization 53,411 46,813 Investment - Advancis 7,420 7,500 Intangible assets, net 32,860 35,564 Goodwill 24,662 24,662 Deferred charges and other assets 6,261 6,899 Non-current deferred income tax assets, net 15,012 14,399 ------ ------ Total assets $831,958 $762,812 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $206 $122 Accounts payable 26,987 20,157 Payables due to distribution agreement partners 94,881 88,625 Accrued salaries and employee benefits 5,401 7,363 Accrued expenses and other current liabilities 18,783 24,654 Income taxes payable 38,922 26,252 ------ ------ Total current liabilities 185,180 167,173 Long-term debt, less current portion 200,360 200,211 Other long-term liabilities 347 347 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: 34,608,947 and 34,318,163 shares 346 343 Additional paid-in capital 183,744 171,931 Retained earnings 284,546 224,480 Accumulated other comprehensive loss (2,488) (1,673) Treasury stock at cost: 500,000 shares (20,077) - ------ -------- Total stockholders' equity 446,071 395,081 ------- ------- Total liabilities and stockholders' equity $831,958 $762,812 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 2
PAR PHARMACEUTICAL COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (In Thousands, Except Per Share Amounts) (Unaudited) SIX MONTHS ENDED THREE MONTHS ENDED ---------------- ------------------ JULY 4, JUNE 29, JULY 4, JUNE 29, 2004 2003 2004 2003 ---- ---- ---- ---- Revenues: Net product sales $422,099 $209,485 $211,060 $108,801 Other product related revenues 2,199 12,788 1,471 7,060 ----- ------ ----- ----- Total revenues 424,298 222,273 212,531 115,861 Cost of goods sold 280,629 106,000 139,414 54,891 ------- ------- ------- ------ Gross margin 143,669 116,273 73,117 60,970 Operating expenses (income): Research and development 16,662 11,120 10,184 4,651 Selling, general and administrative 30,736 30,105 16,481 18,215 Settlements (2,846) - (2,846) - ----- ------ ----- ------ Total operating expenses 44,552 41,225 23,819 22,866 Operating income 99,117 75,048 49,298 38,104 Other expense, net (75) (44) (53) (10) Interest (expense) income, net (573) 333 (294) 164 --- --- --- --- Income before provision for income taxes 98,469 75,337 48,951 38,258 Provision for income taxes 38,403 29,758 19,091 15,112 ------ ------ ------ ------ Net income 60,066 45,579 29,860 23,146 Retained earnings, beginning of period 224,480 101,947 254,686 124,380 ------- ------- ------- ------- Retained earnings, end of period $284,546 $147,526 $284,546 $147,526 ======= ======= ======= ======= Net income per share of common stock: Basic $1.75 $1.38 $.87 $.70 ==== ==== === === Diluted $1.70 $1.34 $.85 $.68 ==== ==== === === Weighted average number of common shares outstanding: Basic 34,359 33,021 34,267 33,153 ====== ====== ====== ====== Diluted 35,247 33,953 34,930 34,197 ====== ====== ====== ====== The accompanying notes are an integral part of these consolidated financial statements. 3
PAR PHARMACEUTICAL COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) SIX MONTHS ENDED ---------------- JULY 4, JUNE 29, 2004 2003 ---- ---- Cash flows provided by operating activities: Net income $60,066 $45,579 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (3,528) 2,186 Depreciation and amortization 5,681 3,916 Inventory reserves 196 602 Allowances against accounts receivable 1,601 (4,492) Stock option activity 397 2,961 Gain on sale of property (2,812) - Other 77 - Changes in assets and liabilities: Increase in accounts receivable (22,472) (39,338) Increase in inventories (7,196) (6,587) Increase in prepaid expenses and other assets (1,514) (1,024) Increase in accounts payable 6,755 8,017 Increase in payables due to distribution agreement partners 6,256 2,278 (Decrease) increase in accrued expenses and other liabilities (7,833) 3,504 Increase in income taxes payable 15,437 25,988 ------ ------ Net cash provided by operating activities 51,111 43,590 ------ ------ Cash flows from investing activities: Capital expenditures (11,243) (11,727) Acquisition of Kali Laboratories, Inc., net of cash acquired (138,366) - Acquisition of available-for-sale securities (252,871) - Proceeds from sale of available-for-sale securities 248,650 - Proceeds from sale of fixed assets 4,980 - ----- ------ Net cash used in investing activities (148,850) (11,727) -------- ------ Cash flows from financing activities: Proceeds from issuances of common stock 6,122 11,212 Repurchases of common stock (20,077) - Issuance of debt 399 - Principal payments under long-term debt and other borrowings (166) (1,073) --- ----- Net cash (used in) provided by financing activities (13,722) 10,139 ------ ------ Net (decrease) increase in cash and cash equivalents (111,461) 42,002 Cash and cash equivalents at beginning of period 162,549 65,121 ------- ------ Cash and cash equivalents at end of period $51,088 $107,123 ====== ======= Supplemental disclosure of cash flow information: Cash paid during the year for: Taxes $26,492 $1,583 ====== ===== Interest $2,962 $58 ===== == Non-cash transactions: Tax benefit from exercise of stock options $2,767 $5,940 ===== ===== Issuance of warrants $2,530 $- ===== Decrease in fair value of available-for-sale securities $(815) $- and investments === = The accompanying notes are an integral part of these consolidated financial statements. 4
PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Par Pharmaceutical Companies, 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 Company ("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 product in oral suspension form. On June 9, 2004, the Company acquired Kali Laboratories, Inc. ("Kali"), a generic pharmaceutical research and development company located in Somerset, New Jersey, for $140,430 in cash and $2,530 in warrants. Under the terms of the agreement, the Company purchased all of the capital stock of Kali. The acquisition did not require the approval of PRX's stockholders. The transaction will be accounted for using the purchase method. On May 26, 2004, the Company changed its name from Pharmaceutical Resources, Inc. to Par Pharmaceutical Companies, Inc. by amending its Certificate of Incorporation, following approval of the name change by the Company's stockholders at the Company's annual stockholders meeting on that date. NOTE 1 - BASIS OF PREPARATION: The accompanying consolidated financial statements at July 4, 2004 and for the six-month and three-month periods ended July 4, 2004 and June 29, 2003 are unaudited; in the opinion of the Company's management, however, such statements include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the information presented therein. The consolidated balance sheet at December 31, 2003 was derived from the Company's audited consolidated financial statements at such date. Pursuant to accounting requirements of the Securities and Exchange Commission (the "Commission") applicable to quarterly reports on Form 10-Q, the accompanying consolidated financial statements and these notes do not include all disclosures required by accounting principles generally accepted in the United States for audited financial statements. Accordingly, these statements should be read in conjunction with the Company's most recent annual consolidated financial statements. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. Certain items in the consolidated financial statements for the prior period have been reclassified to conform to the current period's financial statement presentation. NOTE 2 - STOCK-BASED COMPENSATION: The Company accounts for stock-based employee compensation arrangements in accordance with the 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 Statement of Financial Accounting Standards ("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. SFAS 148 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. 5 PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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:
SIX MONTHS ENDED THREE MONTHS ENDED ---------------- ------------------ JULY 4, JUNE 29, JULY 4, JUNE 29, 2004 2003 2004 2003 ---- ---- ---- ---- Net income, as reported $60,066 $45,579 $29,860 $23,146 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects - 1,263 - 1,263 Deduct: Stock-based employee compensation expense determined under the fair value based method, net of related tax effects (11,185) (5,311) (3,551) (2,672) ------ ----- ----- ----- Pro forma net income $48,881 $41,531 $26,309 $21,737 ====== ====== ====== ====== Net income per share of common stock: As reported -Basic $1.75 $1.38 $.87 $.70 ==== ==== === === As reported -Diluted $1.70 $1.34 $.85 $.68 ==== ==== === === Pro forma -Basic $1.42 $1.26 $.77 $.66 ==== ==== === === Pro forma -Diluted $1.39 $1.22 $.75 $.64 ==== ==== === ===
As permitted under SFAS 123, the Company has 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-based method of SFAS 148. The fair value of the options granted during each of the six and three-month periods has been estimated at the date of grant using the Black-Scholes stock option pricing model, based on the following assumptions: SIX MONTHS ENDED THREE MONTHS ENDED ---------------- ------------------ JULY 4, JUNE 29, JULY 4, JUNE 29, 2004 2003 2004 2003 ---- ---- ---- ---- Risk-free interest rate 4.0% 4.0% 4.0% 4.0% Expected term 4.9 years 4.8 years 4.9 years 3.5 years Expected volatility 62.1% 63.6% 61.9% 64.0% It is also assumed that no dividends will be paid during the entire term of the options. The weighted average fair values of options granted in the six-month periods ended July 4, 2004 and June 29, 2003 were $33.27 and $18.42, respectively. The weighted average fair values of options granted in the three-month periods ended July 4, 2004 and June 29, 2003 were $24.46 and $23.51, respectively. NOTE 3 - AVAILABLE-FOR-SALE SECURITIES: At July 4, 2004 and 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 at July 4, 2004:
UNREALIZED ---------- FAIR COST GAIN LOSS VALUE ---- ---- ---- ----- Debt securities issued by various state and local municipalities and agencies $128,900 $- $(128) $128,772 Securities issued by United States government and agencies 70,851 - (668) 70,183 ------ - ---- ------ Total $199,751 - $(796) $198,955 ======= = === ======= 6
PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The following is a summary of the Company's available-for-sale securities 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 ======= = == ======= All of the securities are available for immediate sale and have been classified as short-term. The following table summarizes the contractual maturities of debt securities at July 4, 2004 and December 31, 2003: JULY 4, 2004 DECEMBER 31, 2003 ------------ ----------------- FAIR FAIR COST VALUE COST VALUE ---- ----- ---- ----- Less than one year $70,851 $70,183 $10,080 $10,050 Due in 1-2 years - - - - Due in 2-5 years 10,600 10,600 - - Due after 5 years 118,300 118,172 185,450 185,450 ------- ------- ------- ------- Total $199,751 $198,955 $195,530 $195,500 ======= ======= ======= ======= In addition to the short-term investments described above, the Company paid $10,000 to purchase 1,000 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 6,000 shares on October 16, 2003. The transaction closed on October 22, 2003. The Company's investment represented an ownership position of 4.4% of the outstanding common stock of Advancis. As of July 4, 2004, the fair value of the Company's investment in Advancis was $7,420, based on the market value of the common stock of Advancis at that date. To date, the Company has recorded an unrealized loss on the investment of $2,580 that was charged to accumulated other comprehensive loss, net of taxes of $1,006, at July 4, 2004. NOTE 4 - ACCOUNTS RECEIVABLE: JULY 4, DECEMBER 31, 2004 2003 ---- ---- Trade accounts receivable, net of customer rebates and chargebacks $218,344 $196,888 Other accounts receivable 2,192 1,176 ----- ----- 220,536 198,064 ------- ------- Allowances: Doubtful accounts 1,847 1,756 Returns 13,506 13,256 Price adjustments and allowances 26,605 25,345 ------ ------ 41,958 40,357 ------ ------ Accounts receivable, net of allowances $178,578 $157,707 ======= ======= The trade accounts receivable amounts presented above at July 4, 2004 and December 31, 2003 are net of provisions for customer rebates of $18,883 and $23,793, and of chargebacks of $143,919 and $75,598, 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 increase in the chargeback reserve is primarily attributable to ribavirin, the generic version of Schering-Plough Corporation's ("Schering's") Rebetol(R), which the Company began selling in April 2004. 7 PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The accounts receivable allowances include provisions for doubtful accounts, returns and price adjustments and allowances. Price adjustments include cash discounts, sales promotions and shelf-stock adjustments. Cash or terms discounts are given to customers that pay within a specified period of time. The Company may conduct sales or trade-show promotions through which 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 market exclusivity periods. 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 shelf-stock adjustments 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 to the customer. 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 since been granted United States Food and Drug Administration ("FDA") approval to market generic versions of megestrol acetate oral suspension and have launched products that compete with the Company's product. In July 2004, Par entered into a legal settlement with one of the competitors, Teva Pharmaceuticals USA, Inc. ("Teva USA"), pursuant to which Par will grant a license to Teva USA for a limited number of units and Par will receive a royalty on Teva USA's net sales of megestrol acetate oral suspension (see "Note 12 -Commitments, Contingencies and Other Matters-Legal Proceedings" and "Note 13 - Subsequent Events"). Sales and gross margins on megestrol acetate oral suspension continued to decline in fiscal year 2004 due to the effects of competition; however the product is expected to continue to be a significant contributor to the Company's overall results in future periods. Net sales of megestrol acetate oral suspension were approximately $18,300 for the second quarter of 2004, decreasing $3,700 from approximately $22,000 for the second quarter of 2003. Megestrol acetate oral suspension net sales were approximately $37,000 for the six-month period ended July 4, 2004 compared to $42,600 for the same six-month period in 2003. 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. 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 10 mg and 20 mg tablets and 40 mg capsules substantially declined from the price that the Company had charged during the exclusivity period. Despite pricing declines, fluoxetine 40 mg capsules was a significant sales and gross margin contributor in fiscal years 2002 and 2003. In the first quarter of 2004, however, competitive factors led to additional pricing pressure on fluoxetine 40 mg capsules, resulting in lower net sales and gross margins. Net sales of fluoxetine were approximately $8,400 and $23,200, respectively, for the three and six-month periods ended July 4, 2004 compared to approximately $24,600 and $44,500, respectively, for the corresponding periods of 2003. 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. In fiscal year 2003, Par obtained the marketing rights to paroxetine, the generic version of GlaxoSmithKline's ("GSK") 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 (the "GSK Supply Agreement") pursuant to which Par began marketing paroxetine, supplied and licensed from GSK, in the Commonwealth of Puerto Rico in May 2003 and the United States in September 2003. The marketing exclusivity period in respect of paroxetine ended on March 8, 2004 and two additional competitors launched competing paroxetine products in the second quarter of 2004. The additional competition had an adverse effect on the Company's revenues and gross margins derived from paroxetine in the second quarter of 2004, which will continue in subsequent periods. As a result of the competition, the Company had price 8 PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) protection reserves of approximately $5,900 for paroxetine at July 4, 2004. The Company will continue to evaluate the effects of competition and will record additional price protection reserves when, if and to the extent that it deems necessary. NOTE 5 -INVENTORIES, NET: JULY 4, DECEMBER 31, 2004 2003 ---- ---- Raw materials and supplies, net $24,104 $21,551 Work-in-process and finished goods, net 49,609 45,162 ------ ------ $73,713 $66,713 ====== ====== NOTE 6 - ACQUISITION OF KALI: On June 9, 2004, the Company completed its acquisition of Kali for $140,430 in cash and $2,530 in warrants. The purchase price included forgiving a $10,000 loan made by the Company to Kali in March 2004. Under the terms of the agreement, the Company purchased all of the capital stock of Kali. With 25 products in development, another 14 filed and awaiting FDA approval, and a research and development organization of 55 employees, the acquisition of Kali expands the Company's research and development capabilities. Included as part of the Company's purchase of Kali is a lease, with a purchase option, of a 45,000-square foot manufacturing facility in Somerset, New Jersey. The Company's results for the six months ended July 4, 2004 include the results of Kali from the acquisition date. The pro forma adjustments in the tables below are based upon available information and assumptions that the Company believes are reasonable. The unaudited condensed consolidated pro forma financial statements do not purport to represent what the consolidated results of operations of the Company would actually have been if the acquisition had occurred on the dates referred to below, nor do they purport to project the results of operations of the Company for any future period. The unaudited condensed consolidated pro forma statements of operations data were prepared by combining the Company's statement of operations for the twelve months ended December 31, 2003 and for the six and three month periods ended July 4, 2004 and June 29, 2003 with Kali's statements of operations for the same periods, giving effect to the acquisition as though it occurred on January 1, 2003. The unaudited condensed consolidated pro forma statements of operations do not give effect to any restructuring costs or any potential cost savings or other operating efficiencies that could result from the acquisition, or any non-recurring charges or credits resulting from the transaction such as in-process research and development charges. The unaudited condensed consolidated pro forma financial statements should be read in conjunction with the historical financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2003.
Condensed Consolidated Pro Forma Statement of Operations Data Six Months Ended Three Months Ended Twelve Months ---------------- ------------------ Ended Dec. 31, July 4, June 29, July 4, June 29, 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- Total revenue $662,695 $425,082 $223,907 $212,989 $116,700 Net income $121,125 $56,990 $45,540 $27,511 $23,052 Net income per basic share of common stock $3.62 $1.66 $1.38 $.80 $.70 ==== ==== ==== === === Net income per diluted share of common stock $3.50 $1.62 $1.34 $.79 $.67 ==== ==== ==== === === 9
PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) NOTE 7 - UNALLOCATED PURCHASE PRICE: The estimated fair value of the Kali assets acquired was not readily determinable at July 4, 2004. Therefore, the net purchase price of Kali is currently being reflected on Par's balance sheet as unallocated purchase price of $142,960. A valuation is being performed by independent specialists to determine the fair value of Kali's research and development organization as of the date of acquisition. The Company believes that a substantial portion of the unallocated purchase price will be valued as in-process research and development and will be written off in 2004 in accordance with purchase accounting for acquisitions. NOTE 8 - INTANGIBLE ASSETS, NET: JULY 4, DECEMBER 31, 2004 2003 ---- ---- Trademark licensed from BMS $5,000 $5,000 BMS Asset Purchase Agreement, net of accumulated amortization of $3,900 and $3,064 7,800 8,636 Product license fees, net of accumulated amortization of $2,449 and $1,135 8,356 9,170 Genpharm Distribution Agreement, net of accumulated amortization of $4,333 and $3,972 6,500 6,861 Intellectual property, net of accumulated amortization of $1,563 and $1,202 5,017 5,378 Genpharm Profit Sharing Agreement, net of accumulated amortization of $2,313 and $1,981 187 519 --- --- $32,860 $35,564 ====== ====== The Company recorded amortization expense related to intangible assets of $3,204 and $2,457, respectively, for the six-month periods, and $1,692 and $1,448, respectively, for the three-month periods, ended July 4, 2004 and June 29, 2003. Amortization expense related to the intangible assets currently being amortized is expected to total approximately $5,647 in 2004, $3,773 in 2005, $3,115 in 2006, $3,115 in 2007, $3,115 in 2008 and $5,300 thereafter. Intangible assets not being amortized at July 4, 2004 and December 31, 2003 were product license fees of $6,999 and a trademark licensed from BMS of $5,000. The product license fees of $6,999 consist of payments made by Par pursuant to agreements with Breath Ltd. of the Arrow Group ("Breath") and FineTech related to latanoprost ophthalmic solution 0.005%, the generic equivalent of Pharmacia Corporation's Xalatan(R), a glaucoma medication. Breath filed an Abbreviated New Drug Application ("ANDA") (currently pending with the FDA) for latanoprost, which was developed by Breath 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. In July 2004, the District Court for the District of New Jersey issued an Opinion and Order dismissing Pharmacia's Corporation's claim of infringement on one patent; however, the Court also ruled that two other patents included in the litigation are valid, enforceable and infringed by Par. Par intends to appeal certain portions of the Court's decision and if unsuccessful in that appeal, Par will reevaluate the recoverability of the product license fees related to latanoprost (see "Note 12 -Commitments, Contingencies and Other Matters-Legal Proceedings" and "Note 13 -Subsequent Events"). NOTE 9 - INCOME TAXES: The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes", which requires the Company to recognize deferred tax assets and liabilities for the future tax consequences 10 PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Current deferred income tax assets in both periods consisted primarily of temporary differences related to accounts receivable reserves, and non-current deferred income tax assets in both periods included the tax benefit related to purchased call options. NOTE 10 - CHANGES IN STOCKHOLDERS' EQUITY: Changes in the Company's common stock and additional paid-in capital accounts during the six-month period ended July 4, 2004 were as follows:
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TREASURY STOCK ------------ PAID-IN COMPREHENSIVE -------------- SHARES AMOUNT CAPITAL LOSS SHARES AMOUNT ------ ------ ------- ---- ------ ------ Balance, January 1, 2004 34,318 $343 $171,931 $(1,673) - - Comprehensive loss: Unrealized loss on marketable securities, net of tax - - - (815) - - Exercise of stock options 242 3 5,965 - - - Issuance of warrants - - 2,530 - - - Tax benefit from exercise of stock options - - 2,767 - - - Employee stock purchase program 4 - 154 - - - Compensatory arrangements 45 - 397 - - - Common stock acquired for treasury - - - - 500 (20,077) ------ ---- -------- ----- --- ------ Balance, July 4, 2004 34,609 $346 $183,744 $(2,488) 500 $(20,077) ====== === ======= ===== === ======
COMPREHENSIVE LOSS: SIX MONTHS ENDED THREE MONTHS ENDED ---------------- ------------------ JULY 4, JUNE 29, JULY 4, JUNE 29, 2004 2003 2004 2003 ---- ---- ---- ---- Net income $60,066 $45,579 $29,860 $23,146 Other comprehensive loss: Unrealized loss on marketable securities, net of tax (815) - (1,885) - --- --------- ----- --------- Comprehensive loss $59,251 $45,579 $27,975 $23,146 ====== ====== ====== ======
In April 2004, the Company's board of directors (the "board") authorized the purchase of up to $50,000 worth of the Company's common stock. The purchases are made, subject to compliance with applicable securities laws, from time to time in the open market or in privately negotiated transactions. Common stock acquired through the buyback program will be available for general corporate purposes. At July 4, 2004, the Company had purchased 500 shares of its common stock for approximately $20,077 pursuant to the buyback program. The following table sets forth (a) the number of shares purchased, (b) the average price paid per share, (c) the total number of shares purchased as part of a publicly announced plan and (d) the approximate dollar value that may yet be purchased under the plan.
TOTAL TOTAL NUMBER OF APPROXIMATE DOLLAR NUMBER OF AVERAGE SHARES PURCHASED VALUE THAT MAY SHARES PRICE PAID AS PART OF A PUBLICLY YET BE PURCHASED PURCHASED (a) PER SHARE (b) ANNOUNCED PLAN (c) UNDER THE PLAN (d) ------------- ------------- --------------------- ------------------- May 2, 2004 through May 29, 2004 406 $40.08 406 $33,712 May 30, 2004 through July 4, 2004 94 $40.49 94 $29,922 -- -- For the three-month period ended July 4, 2004 500 500 === === 11
PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) NOTE 11 - EARNINGS PER SHARE: The following is a reconciliation of the amounts used to calculate basic and diluted earnings per share:
SIX MONTHS ENDED THREE MONTHS ENDED ---------------- ------------------ JULY 4, JUNE 29, JULY 4, JUNE 29, 2004 2003 2004 2003 ---- ---- ---- ---- Net income $60,066 $45,579 $29,860 $23,146 Basic: Weighted average number of common shares outstanding 34,359 33,021 34,267 33,153 Net income per share of common stock $1.75 $1.38 $.87 $.70 ==== ==== === === Assuming dilution: Weighted average number of common shares outstanding 34,359 33,021 34,267 33,153 Effect of dilutive options 888 932 663 1,044 --- --- --- ----- Weighted average number of common shares outstanding 35,247 33,953 34,930 34,197 Net income per share of common stock $1.70 $1.34 $.85 $.68 ==== ==== === ===
Outstanding options and warrants of 1,270 and 110 at the end of the six-month periods ended July 4, 2004 and June 29, 2003, respectively, and 1,420 and 105 at the end of the three-month periods ended July 4, 2004 and June 29, 2003, 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. In addition, outstanding warrants sold concurrently with the prior sale of senior subordinated convertible notes in September 2003 were not included in the computation of diluted earnings per share as of July 4, 2004. The warrants are exercisable for an aggregate of 2,253 shares at an exercise price of $105.20 per share. NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: LEGAL PROCEEDINGS: On May 3, 2004, Pentech filed an action against the Company in the United States District Court for the Northern District of Illinois. This action alleges that the Company is in breach of its contract with Pentech relating to the supply and marketing of paroxetine. The Company believes that it is in compliance with its agreement with Pentech and intends to vigorously defend this action. 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. On April 28, 2004, GSK, with the consent of the Company, removed the action from state court to federal court in California. The Company intends to defend vigorously the claims set forth in the complaint. 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. Par 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, Par 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 12 PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) transferred to the District of Massachusetts for coordinated and consolidated pre-trial proceedings. Par and the other defendants involved in the litigation filed a motion to dismiss on January 29, 2004. On August 4, 2004, Par and a number of other generic and brand pharmaceutical companies were also sued by the City of New York, which has alleged violations of laws related to participation in its Medicaid program. Par intends to defend vigorously the claims asserted in such complaints. The Company cannot predict with certainty at this time the outcome or the effects 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 was 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 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 competes with the Company's megestrol acetate oral suspension product. In the lawsuit, Teva USA sought 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 Par's four patents in the lawsuit, U.S. Patent No. 6,593,318 (the "`318 patent"). In July 2004, Par and Teva USA entered into a settlement of the lawsuit (see "Note 13 -Subsequent Events"). On July 15, 2003, the Company and Par filed a lawsuit against Roxane Laboratories, Inc. ("Roxane") in the United States District Court for the District of New Jersey. The Company and Par alleged that Roxane had 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 GSK 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 GSK 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. Subsequent to the October 2003 decision in the District Court, the remaining state law claims were dismissed with prejudice and Asahi filed an appeal with the United States Court of Appeals for the Federal Circuit. Par and Asahi entered into a settlement agreement on June 18, 2004, pursuant to which Par and Pentech paid Asahi $1,100. 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 any certainty. 13 PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil") filed a lawsuit against 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. Summary judgment papers were served on opposing counsel on May 28, 2004; however under New Jersey practice the summary judgment papers will not be filed with the Court until the briefing is complete. As a result of Par's filing of the ANDA for latanoprost, Pharmacia and 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 sought 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 sought 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 was invalid. All parties sought to recover their respective attorneys' fees. The trial concluded in March 2004 and in July 2004, the District Court for the District of New Jersey issued an Opinion and Order dismissing Pharmacia's Corporation's claim of infringement on one patent; however, the Court also ruled that two other patents included in the litigation are valid, enforceable and infringed by Par. Par intends to appeal certain portions of the Court's decision. Pursuant to agreements with Breath and FineTech related to latanoprost, the Company had recorded product license fees of $6,999, which are included in intangible assets on its consolidated balance sheets. If unsuccessful in its appeal, Par will reevaluate the recoverability of these product license fees (see "Note 13 -Subsequent Events"). Par entered into a licensing agreement with developer Paddock Laboratories ("Paddock") to market testosterone 1% gel, a generic version of Unimed Pharmaceuticals, Inc.'s ("Unimed") product Androgel(R). The product, if successfully brought to market, would 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 discovery. At this time, the Company is not able to predict with any certainty the outcome of this litigation. 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, to 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 product) investigation into pharmaceutical reimbursements and rebates under Medicaid, to which the Company has responded. In order to conduct the investigation, the Committee 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 any such action could have on the Company's business, prospects or financial condition. L. William Seidman and Joseph E. Smith were selected to the Company's board, effective April 15, 2004 and May 26, 2004, respectively. Mr. Seidman served as Chairman of the Federal Deposit Insurance Corporation from October 1985 to October 1991 and Chairman of the Resolution Trust Company from 1989 to October 1991. From 1982 to 1985, he was Dean of the College of Business at 14 PAR PHARMACEUTICAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 4, 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Arizona State University, Tempe, Arizona. For more than the past five years, Mr. Seidman has been Chief Commentator for CNBC-TV, Publisher of Bank Director magazine and an independent consultant in the financial services industry. Mr. Smith possesses over thirty years of experience as an executive in the pharmaceutical industry and, prior to his retirement in 1997, served in various leadership positions with Warner-Lambert Company since 1989. In June 2004, Par named Shankar Hariharan, Ph.D. as executive vice president and chief scientific officer ("CSO"). Dr. Hariharan becomes Par's first CSO and will be responsible for research and development, scientific and regulatory affairs and quality assurance. Dr. Hariharan joins Par from Forest Laboratories, Inc. where he most recently served as senior vice president, Forest Research Institute. NOTE 13 - SUBSEQUENT EVENTS: The trial related to latanoprost following the Pharmacia and Columbia (collectively, the "Plaintiffs") lawsuit against Par on December 21, 2001 in the United States District Court for the District of New Jersey, alleging patent infringement, concluded in March 2004 and on July 6, 2004 the Court issued an Opinion and Order ordering that judgment be entered in favor of the Plaintiffs on their claims of infringement of U.S. Patent Nos. 4,599,353 (expires July 28, 2006) and 5,296,504 (expires March 22, 2011); that the effective date of approval of Par's ANDA shall be a date which is not earlier than the dates of expiration of those patents; and that Par is enjoined from engaging in the commercial manufacture, use, offer to sell, or sale within the United States, or importation into the United States, of any drug product covered by, or the use of which is covered by, those two patents. As to the third patent asserted by the Plaintiffs, U.S. Patent No. 5,422,368, the Court dismissed the Plaintiffs' infringements claims and declared that the patent is unenforceable due to inequitable conduct. The Court further dismissed all parties' claims for attorneys' fees. Both Par and the Plaintiffs have filed notices of appeal. Par is appealing the Court's decision only insofar as it relates to U.S. Patent No. 5,296,504. In July 2004, Par and Teva USA entered into a settlement of the lawsuit regarding megestrol acetate oral suspension. As part of the judgment and order of permanent injunction entered by the parties, Teva USA acknowledged that the claims of the `318 patent are valid and enforceable in all respects and that Teva USA's product infringes the `318 patent. As part of the settlement, Par has granted a license to Teva USA for a limited number of units, and in return, Par will receive a royalty on Teva USA's sales of megestrol acetate oral suspension. On August 5, 2004, the Company purchased 875 shares of common stock of New River Pharmaceuticals Inc. ("New River") in an initial public offering for $8 per share. Par's investment of $7,000 represents an ownership position of 4.9 percent of the outstanding common stock of New River. New River, based in Radford, Virginia, is a specialty pharmaceutical company focused on developing novel pharmaceuticals that are safer and improved versions of widely-prescribed drugs, including amphetamines and opioids. Utilizing its proprietary Carrierwave(TM) technology, New River is currently developing versions of amphetamines and opioids that are designed to provide overdose protection, abuse resistance and less potential for addiction while providing efficacy comparable to the active pharmaceutical ingredients on which they are based. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CERTAIN STATEMENTS IN THIS DOCUMENT MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES OF CURRENT PRODUCTS AND THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, TRENDS AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE TYPICALLY BY USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS," "ANTICIPATES," "CONTINUING," "ONGOING," "EXPECTS," "BELIEVES," OR SIMILAR WORDS AND PHRASES. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN THIS DOCUMENT INCLUDE (i) INCREASED COMPETITION FROM NEW AND EXISTING COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS (ESPECIALLY UPON COMPLETION OF EXCLUSIVITY PERIODS), (ii) PRICING PRESSURES RESULTING FROM THE CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (iii) THE AMOUNT OF FUNDS AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND DEVELOPMENT JOINT VENTURES, (iv) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR DELAYS AND UNANTICIPATED COSTS IN OBTAINING REGULATORY APPROVALS, (v) CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT AGREEMENTS, (vi) THE CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET FUTURE DEMAND, (vii) THE COSTS AND OUTCOME OF ANY THREATENED OR PENDING LITIGATIONS, INCLUDING PATENT AND INFRINGEMENT CLAIMS, (viii) UNANTICIPATED COSTS, DELAYS AND LIABILITIES IN INTEGRATING ACQUISITIONS, (ix) OBTAINING OR LOSING 180-DAY MARKETING EXCLUSIVITY ON PRODUCTS AND (x) GENERAL INDUSTRY AND ECONOMIC CONDITIONS. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE MADE ONLY AS OF THE DATE HEREOF, BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF, AND, SUBJECT TO APPLICABLE LAW TO THE CONTRARY, THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS. OVERVIEW For the six and three-month periods ended July 4, 2004, the Company increased total revenues and earnings over the corresponding periods of 2003; however, due to competition involving certain key products, including paroxetine tablets, fluoxetine 40 mg capsules and megestrol acetate oral suspension, and lower than expected sales of ribavirin, the Company could not match its results for the third and fourth quarters of 2003. Net sales of the Company's top selling product, paroxetine, which the Company began selling in the United States through a distribution agreement with GSK in September 2003, began to receive pricing pressure in the second quarter 2004, as additional competition entered the market following the marketing exclusivity period. In addition, several market factors contributed to a less than successful launch of ribavirin, which the Company had anticipated replacing a portion of the lost revenues from competition on other products in fiscal year 2004. The Company is making an effort to introduce new products during the remainder of fiscal year 2004 and beyond to offset sales and gross margin declines resulting from competition involving certain of its significant products. The Company seeks to reduce its dependence on its top selling products, by adding additional products through its internal development program, new and existing distribution agreements or acquisitions of complementary products or businesses. Net sales and gross margin derived from generic pharmaceutical products often follow a pattern based on regulatory and competitive factors believed by management 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, the market share, and the price, of that product, will typically decline, often significantly, 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 historical 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. In April 2004, the Company's marketing partner, Three Rivers Pharmaceutical LLC ("Three Rivers"), received final approval from the FDA for ribavirin 200 mg capsules, the generic version of Schering's Rebetol(R), which is indicated for the treatment of chronic hepatitis. Three Rivers was awarded 180 days of shared marketing exclusivity, commencing at launch, for being the first to file an ANDA containing a Paragraph IV certification. Under the terms of its agreement with Three Rivers, Par has exclusive marketing rights to sell Three Rivers' ribavirin product, which Par launched in early April 2004. In addition to the competitor with shared exclusivity, Warrick Pharmaceuticals, a subsidiary of Schering, also 16 launched a generic ribavirin product in the United States in April 2004. As a result of launching the product, Schering will not receive a royalty from Three Rivers on net sales of Three Rivers' and Par's generic ribavirin. Due to the additional competition, the pricing pressure on ribavirin at launch was more substantial than the Company had previously anticipated. Additionally, the market size for Rebetol has declined due to the success of Copegus(R), a new product introduced by Hoffman La-Roche Inc. in 2003, which has taken significant market share from Rebetol(R). In fiscal year 2003, Par obtained the marketing rights to paroxetine in connection with the GSK Settlement. As a result of the GSK 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 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). 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 total market for paroxetine tablets to decrease. The marketing exclusivity period in respect of paroxetine ended on March 8, 2004 and two additional competitors launched competing paroxetine products in the second quarter of 2004. The additional competition had an adverse effect on the Company's revenues and gross margins derived from paroxetine in the second quarter of 2004, which will continue in subsequent periods. 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 since been granted FDA approval to market generic versions of megestrol acetate oral suspension and have launched products that compete with the Company's product. In July 2004, Par entered into a legal settlement with one of the competitors, Teva USA, pursuant to which Par will grant a license to Teva USA for a limited number of units and Par will receive a royalty on Teva USA's net sales of megestrol acetate oral suspension. Sales and gross margins on megestrol acetate oral suspension continued to decline in fiscal year 2004 due to the effects of competition; however the product is expected to continue to be a significant contributor to the Company's overall results in future periods. Net sales of megestrol acetate oral suspension were approximately $18,300 for the second quarter of 2004, decreasing $3,700 from approximately $22,000 for the second quarter of 2003. Megestrol acetate oral suspension net sales were approximately $37,000 for the six-month period ended July 4, 2004 compared to $42,600 for the same six-month period in 2003. 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 prices for fluoxetine 10 mg and 20 mg tablets and 40 mg capsules had substantially declined from the prices that the Company had charged during the exclusivity period. Despite pricing declines, fluoxetine 40 mg capsules was a significant sales and gross margin contributor in fiscal years 2002 and 2003. In the first quarter of 2004, however, competitive factors led to additional pricing pressure on fluoxetine 40 mg capsules, resulting in lower net sales and gross margins. Net sales of fluoxetine were approximately $8,400 and $23,200, respectively, for the three and six-month periods ended July 4, 2004 compared to approximately $24,600 and $44,500, respectively, for the corresponding periods of 2003. Critical to the growth of the Company is the introduction of new manufactured and distributed products at selling prices that generate significant gross margins. The Company, through its internal development program and strategic alliances 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 afford 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, including the integration of Kali, and these strategic alliances, the Company's pipeline of potential products includes 38 ANDAs (five of which have been tentatively approved), pending with, and awaiting approval from, the FDA. The Kali ANDAs include those 17 for potential products that would be marketed by other companies through licensing agreements entered into before the Company's acquisition of Kali, where the Company would be due royalty income. 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 June 2004, the Company acquired Kali for $140,430 in cash and $2,530 in warrants. Under the terms of the agreement, the Company purchased all of the capital stock of Kali. The Company believes its acquisition of Kali fits into its business plan by expanding its research and development capabilities and increasing the size of its product portfolio. The acquisition also diversifies the Company's development pipeline and provides four additional first-to-file product opportunities, enhancing the prospects for sustained long-term growth. Kali's operation includes 25 products in development, another 14 filed and awaiting FDA approval, and a research and development organization of 55 employees. Kali's 14 ANDAs include three potential products the Company plans to market and other potential products from which the Company will be due royalty income, if successfully launched by third parties. Included as part of the Company's purchase of Kali is a lease, with a purchase option, of a 45,000-square foot manufacturing facility in Somerset, New Jersey. In June 2004, the Company submitted its first New Drug Application ("NDA") for a next-generation megestrol acetate oral suspension product. If cleared for marketing, the product will utilize the Megace(R) brand name, which Par licensed from BMS. In addition, a second 505(b)(2) NDA submission is planned for 2005 through Advancis. The Company has an agreement with Advancis to develop and market a low dose pulsatile form of the antibiotic amoxicillin, utilizing Advancis' proprietary PULSYS(TM) technology. If successfully developed, amoxicillin PULSYS(TM) would be a once-daily version of the antibiotic amoxicillin that is administered for fewer days with improved therapeutic effect. RESULTS OF OPERATIONS GENERAL The Company's net income of $60,066 for the six-month period ended July 4, 2004 increased $14,487, from $45,579, for the six-month period ended June 29, 2003. Total revenues of $424,298 in the six-month period of 2004 increased $202,025, or 91%, from $222,273 in the first six months of 2003, primarily due to additional net sales of new products. The revenue growth resulted in higher gross margin dollars, which increased to $143,669, or 34% of total revenues, in the most recent period, from $116,273, or 52% of total revenues, in the corresponding period of 2003. Research and development spending in 2004 of $16,662 increased 50% from $11,120 in the prior year and the Company expects to continue to significantly increase its research and development spending over the remainder of 2004. Selling, general and administrative costs were $30,736 compared to $30,105 in the corresponding six-month period of 2003. Selling, general and administrative costs in 2004 are net of a $2,812 gain on the sale of the Company's facility in Congers, New York and 2003 costs include a charge of $3,635 in the second quarter of 2003 related to a retirement package for the Company's former chairman, president and chief executive officer. Included in the six-month operating expenses was net settlement income of $2,846, recorded in the second quarter of 2004, resulting primarily from the settlement of claims against Akzo Nobel NV and Organon USA Inc. relating to anticompetitive practices that delayed the availability of mirtazapine, a generic version of Remeron(R). Net income for the three-month period ended July 4, 2004 was $29,860 compared to $23,146 for the corresponding period of the prior year reflecting both revenue and gross margin increases, primarily from new products. Second quarter 2004 revenues and gross margin of $212,531 and $73,117 (34% of total revenues), respectively, improved over the prior year's second quarter revenues and gross margin of $115,861 and $60,970 (53% of total revenues). Research and development spending of $10,184 in the second quarter of 2004 increased 119% from $4,651 in the prior year, primarily due to a payment to Advancis to fund the development of a potential new product. Selling, general and administrative costs were $16,481 in the second quarter of 2004 compared to $18,215, which included a charge for a retirement package, in the corresponding quarter of 2003. Included in the second quarter 2004 gross margin is income of $6,200, which reflects a change in accounting estimate used in the calculation of the profit split due to Pentech on paroxetine. The change in accounting estimate has 18 effectively reduced payables due under Par's agreement with Pentech relating to the supply and marketing of paroxetine. The change in accounting estimate follows Pentech's filing of an action against Par during the second quarter of 2004. Par believes that it is in compliance with its agreement with Pentech and intends to vigorously defend this action. Sales and gross margins of the Company's products are principally dependent upon (i) the pricing practices of competitors and any 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 to the Company 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. REVENUES Total revenues for the six-month period ended July 4, 2004 were $424,298, increasing $202,025, or 91%, from revenues of $222,273 for the same six-month period of 2003, primarily due to additional sales from paroxetine and other new products. Net sales of paroxetine, which the Company launched in September 2003 in the United States and is sold through the GSK Supply Agreement, totaled approximately $181,900 in 2004. Additionally, net sales of other new products, including glyburide and metformin hydrochloride (Glucovance(R)), introduced in May 2004, metformin ER (Glucophage XR(R)), introduced in December 2003, mercaptopurine (Purinethol(R)), introduced in February 2004, ribavirin, introduced in April 2004, and torsemide (Demadex(R)), introduced in the second quarter of 2003, contributed to the growth of revenues in 2004 and partially offset lower sales of certain existing products, particularly fluoxetine and tizanidine (Zanaflex(R)). The sales growth also benefited from increased sales of lovastatin (Mevacor(R)). Net sales of fluoxetine and megestrol acetate oral suspension were approximately $23,200 and $37,000, respectively, for the most recent six-month period, decreasing $21,300 and $5,600, respectively, compared to the first six-months of the prior year. The Company's other product related revenues in 2004 of $2,199, generated from a profit sharing agreement with Genpharm related to omeprazole and royalties received on Three Rivers sales of ribavirin, decreased $10,589 from $12,788 in the corresponding period of 2003. Net sales of distributed products, which consist of products manufactured under contract and licensed products, were approximately 79% and 54%, respectively, of the Company's total revenues in the first six-months of fiscal years 2004 and 2003. Presently, 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 its suppliers to meet expected demand could adversely affect the Company's future sales. Total revenues in the second quarter 2004 of $212,531 increased $96,670, or 83%, from revenues in the second quarter of 2003, primarily due to additional sales from paroxetine and other new products, and increased sales of lovastatin. Second quarter 2004 net sales of paroxetine totaled approximately $77,300, while net sales of megestrol acetate oral suspension decreased $3,700 to $18,300 from $22,000 in the same period a year ago, and net sales of fluoxetine decreased $16,200 to $8,400 from $24,600 in the second quarter of 2004. Second quarter sales of fluoxetine reflect the impact of increased generic competition and its corresponding effect on pricing and market share. Net sales of ribavirin, which was launched during the most recent quarter, totaled $12,600. The Company's other product related revenues of $1,471 in the second quarter 2004 also decreased from $7,060 in the corresponding period of 2003. Net sales of distributed products were approximately 78% and 52%, respectively, of the Company's total revenues in the second quarter of fiscal years 2004 and 2003. 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, sales 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 last six-months 19 of 2003. The Company expects that the impact of this competition will continue to have an adverse effect on its omeprazole revenues in future periods. GROSS MARGIN The Company's gross margin of $143,669 (34% of total revenues) for the first six-month period of 2004 increased $27,396 from $116,273 (52% of total revenues) for the same period a year ago. The gross margin dollar increase was achieved primarily as a result of contributions from sales of new products. In accordance with the GSK Settlement and the Pentech Supply and Marketing Agreement, Par pays profit splits to GSK and Pentech on sales of paroxetine. In addition, Par pays profit splits on glyburide and metformin HCl tablets and metformin HCl extended-release tablets pursuant to agreements with BMS and Genpharm Inc. of Toronto, Canada. As a result of these agreements, the Company's gross margin as a percentage of its total revenues declined as net sales of these products after the allocation of 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 in the corresponding period of 2003. In addition, Par's gross margin was also impacted by the decline in royalty revenue from omeprazole. The gross margin of $73,117 (34% of total revenues) in the second quarter of 2004 increased $12,147 from $60,970 (53% of total revenues) for the second quarter of 2003. The gross margin dollar increase was achieved primarily as a result of contributions from sales of new products, particularly paroxetine, partially offsetting increased competition on certain of the Company's key products. The gross margin in the second quarter of 2004 included income of $6,200 related to a change in accounting estimate used in the calculation of the profit share due to Pentech on paroxetine. As discussed above, the Company experienced lower sales and gross margins for fluoxetine and megestrol acetate oral suspension in each of the periods reported above. The Company's gross margin contribution from paroxetine has also declined due to additional manufacturers introducing and marketing comparable generic products. Despite existing market conditions and the possibility of additional competition on these products, the Company anticipates all three products will remain significant contributors to its overall performance in fiscal year 2004. Inventory write-offs of $5,036 and $3,056, respectively, in the six and three-month periods ended July 4, 2004, increased from $1,317 and $905 in the corresponding periods of 2003. 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 increase write-offs in each of the current periods included the write-off of inventory for a product whose launch was delayed, as well as 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 its customer service. OPERATING EXPENSES RESEARCH AND DEVELOPMENT The Company's research and development expenses of $16,662 for the six-month period ended July 4, 2004 increased $5,542, or 50%, from the comparable period of the prior fiscal year. The increase was primarily attributable to a payment to Advancis to fund the development of a potential new product and higher biostudy costs. The Company expects its research and development spending to increase substantially over the last two quarters of 2004 with the addition of Kali and other planned expenditures. As previously discussed, the Company acquired Kali in June 2004. The Company expects to utilize Kali to develop products principally for its own new product pipeline. Although there can be no such assurance, the Company believes that its research and development expenses could approach $50,000 for fiscal year 2004. In addition to the $50,000, Par believes that a substantial portion of the unallocated purchase price for Kali will be valued as in-process research and development and will be written off in 2004 in accordance with purchase accounting for acquisitions. Research and development expenses for the second quarter of 2004 were $10,184, increasing $5,533 from $4,651 for the corresponding quarter of 2003. The increase was primarily due to higher costs for outside development projects and biostudies. 20 In addition to ANDAs filed by Kali for potential products that are subject to licensing agreements with other companies entered into before the Kali acquisition, 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. The Company expects that at least eight of the potential products in active development will be the subjects of biostudies during the remainder of 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 is to 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 are three ANDAs for potential products covered by the Genpharm 11 Product Agreement pending with, and awaiting approval from, the FDA. Under the Genpharm 11 Product Agreement, the Company is currently marketing one product and receiving royalties on another product marketed by an unaffiliated company. 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 eight 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 20 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. SELLING, GENERAL AND ADMINISTRATIVE Total selling, general and administrative expenses were $30,736 for the first six-months of 2004, which included a gain of $2,812 on the sale of the Company's facility in Congers, New York. In the prior year, total costs of $30,105 included a charge of $3,635 related to a retirement package for the Company's former chairman, president and chief executive officer. Excluding these items, current year costs of $33,548 (8% of total revenues) increased $7,078, or 27%, from $26,470 (12% of total revenues) in the corresponding period of last year. The increase in 2004 was primarily attributable to higher personnel costs of $2,166, including those for information systems assessments, marketing costs of $2,509, legal fees of $1,824, and, to a lesser extent, product liability insurance of $732 and facility costs of $617. Distribution costs include those related to shipping product to the Company's customers, primarily through the use of a common carrier or an external distribution service. Shipping costs of $1,251 in the current six-month period was comparable to $1,349 in the corresponding period of the prior year. Although overall sales volumes increased in fiscal year 2004, shipping costs remained at approximately the same level as fiscal year 2003 due to a reduced amount of reliance on an external distribution service. The Company anticipates it will continue to incur a high level of legal expenses related to the costs of litigation relating to potential new product introductions (see "Notes to Consolidated Financial Statements-Note 12-Commitments, Contingencies and Other Matters-Legal Proceedings"). Although there can be no such assurance, selling, general and administrative costs in fiscal year 2004 are expected to increase by 15% to 20% from fiscal year 2003 primarily due to increased legal fees, personnel costs and marketing activities. Selling, general and administrative costs of $16,481 (8% of total revenues) for the second quarter of 2004 increased $1,901, or 13%, from $14,580 (13% of total revenues), excluding a charge of $3,635 related to a retirement package, for the corresponding quarter of last year. The increased expenses in the second quarter 2004 consisted of higher costs for personnel of $1,295, marketing of $836 and legal fees of $490. Shipping costs of $617 in the second quarter 2004 were lower than costs of $742 in the corresponding quarter of the prior year due to a reduced amount of reliance on an external distribution service. Par owned a facility of approximately 33,000 square feet located on six acres in Congers, New York (the "Congers Facility"). In March 2004, the Company sold the Congers Facility to Ivax Pharmaceuticals New York, LLC for $4,980 and recorded a gain on the sale of $2,812. 21 SETTLEMENTS Net settlement income of $2,846 was recorded pursuant to the settlement of claims against Akzo Nobel NV and Organon USA Inc., relating to anticompetitive practices that delayed the availability of mirtazapine partially offset by legal expenses associated with the settlement of litigation with Asahi related to paroxetine. INTEREST EXPENSE/INCOME Net interest expense was $573 and $294, respectively, for the six and three-month periods ended July 4, 2004, compared to net interest income of $333 and $164 for the corresponding periods of 2003. Net interest expense in both periods of the current year includes interest payable on the Company's convertible notes, partially offset by interest income derived primarily from short-term investments. Net interest income in 2003 was primarily derived from money market and other short-term investments. INCOME TAXES The Company recorded provisions for income taxes of $38,403 and $19,091, respectively, and $29,758 and $15,112, respectively, for the six and three-month periods ended July 4, 2004 and June 29, 2003, based on the applicable federal and state tax rates for those periods (see "Notes to Consolidated Financial Statements-Note 9-Income Taxes"). CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES The Company's critical accounting policies are set forth in its Annual Report on Form 10-K for the year ended December 31, 2003. There has been no change, update or revision to the Company's critical accounting policies subsequent to the filing of the Company's Form 10-K for the year ended December 31, 2003. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents of $51,088 at July 4, 2004 decreased $111,461 from $162,549 at December 31, 2003, primarily due to the acquisition of Kali for $140,430 in cash and $2,530 in warrants. The Company had $51,111 of cash provided by operations, gross proceeds of $4,980 from the sale of fixed assets, primarily the Congers Facility, and $6,122 from the issuance of shares of Common Stock upon the exercise of stock options. In the six-month period ended July 4, 2004, the Company invested $11,243 in capital improvements, primarily for Phase II of the expansion of its laboratories in Spring Valley, New York, and new production machinery. In addition the Company repurchased 500 shares of its common stock for approximately $20,077. 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 $507,152 increased $47,350, from $459,802 at December 31, 2003, primarily due to the unallocated purchase price for Kali partially offset by the decrease in the cash on hand, and increases in the Company's accounts receivables and inventories partially offset by higher income taxes payable. The working capital ratio, which is calculated by dividing current assets by current liabilities, was 3.74x at July 4, 2004 compared to 3.75x at December 31, 2003. The Company believes that its strong working capital ratio indicates the ability to meet its ongoing and foreseeable obligations. In April 2004, the Company's board authorized the purchase of up to $50,000 worth of the Company's common stock. The purchases are made, subject to compliance with applicable securities laws, from time to time in the open market or in privately negotiated transactions. Common stock acquired through the buyback program will be available for general corporate purposes. Pursuant to the buyback program, the Company had purchased approximately 500 shares of its common stock for approximately $20,077 through July 4, 2004. 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 of $177,945 from the notes, which were net of underwriting costs of $5,250 and the net payment of $16,805 from the purchase of call options and sale of warrants, were used to purchase 22 available-for-sale securities in October 2003. Available-for-sale securities of $198,955 at July 4, 2004 are all available for immediate sale. The Company intends to use its current liquidity to support the expansion of its business, which included the acquisition of Kali, increasing its research and development activities, entering into product license arrangements and possibly acquiring other complementary businesses and products, and for general corporate purposes. As of July 4, 2004, the Company had payables owed to distribution agreement partners of $94,881 related primarily to amounts due pursuant to profit sharing agreements, particularly amounts owed to GSK and Pentech on paroxetine and BMS on glyburide and metformin hydrochloride and metformin ER. The Company expects to pay these amounts out of its working capital during the third quarter of 2004. The dollar values of the Company's material contractual obligations and commercial commitments as of July 4, 2004 were as follows:
AMOUNTS DUE BY PERIOD --------------------- TOTAL MONETARY JULY-DEC. 31 2005 TO 2008 TO 2010 AND OBLIGATION OBLIGATION 2004 2007 2009 THEREAFTER - ---------- ---------- ---- ---- ---- ---------- Operating leases $20,537 $1,603 $8,420 $4,991 $5,523 Convertible notes* 200,000 - - - 200,000 Other 566 101 465 - - --- --- --- ----- ------- Total obligations $221,103 $1,704 $8,885 $4,991 $205,523 ======= ===== ===== ===== =======
*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 for 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 above; however, the 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 Development Associates, Inc. (a Glatt company) ("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, $500 was paid in June 2004, $500 is due in September 2004 and $500 is due in January 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 50% 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 June 2004, Par entered into an agreement with Advancis to develop and market a novel formulation of the antibiotic amoxicillin. Pursuant to this agreement, Par paid Advancis a $5,000 upfront license fee, which was charged to research and development expenses in June 2004, and Par will fund future development expenses. Advancis will grant Par the exclusive right to sell and distribute the product and the co-exclusive right to market the product. Advancis will be responsible for the development and manufacture of the product and the two parties will share equally in marketing expenses and profits if the product is successfully developed and brought to market. Par and Advancis also entered into the Advancis Licensing Agreement, dated September 4, 2003, to market the antibiotic Clarithromycin XL. Pursuant to this 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 agreement are met, Par has agreed to pay Advancis an aggregate amount of up to $6,000, based on the achievement of certain milestones 23 contained in the agreement. Pursuant to the agreement, Par has 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 April 4, 2004. 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 name, 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 the Pentech Supply and Marketing Agreement, dated November 2001, with Pentech to market paroxetine capsules. Pursuant to the 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 fully credited against 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 this agreement, Par and Pentech share in net profits on Par's sales of paroxetine. In July 2002, the Company and Three Rivers entered into the Three Rivers Distribution Agreement, which was amended in October 2002, to market and distribute ribavirin 200 mg capsules, the generic version of Schering's Rebetol(R). Under the terms of the agreement, Three Rivers has agreed to supply the product and was responsible for managing the regulatory process and patent litigation. Par has the exclusive right to sell the product in non-hospital markets and has agreed to 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 paid Three Rivers an additional $500 when Par launched the product in April 2004. 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 to Genpharm a percentage of the gross profits, as defined in the agreement, on all sales of products covered by the agreement. In the second quarter of 2002, the Company paid Genpharm a non-refundable fee of $2,000, which is included in intangible assets, net of accumulated amortization, on the Company's consolidated balance sheets, for two of the products. Pursuant to the 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 make an additional non-refundable payment of up to $414 based upon FDA acceptance of certain filings, as described 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 HighRapids, Inc. ("HighRapids"), a Delaware corporation. HighRapids 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 utilizing the Company's cash infusion for working capital and operating expenses. Through July 4, 2004, the Company had invested $1,506 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. 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 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 its marketing, sale and distribution. Pursuant to the agreement, Par has agreed to pay Aveva $1,000 upon FDA approval of the product and royalties on sales of the product. 24 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 notes. The Company anticipates that its capital spending in fiscal year 2004 will not exceed the level in 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 July 4, 2004, the Company's total outstanding long-term debt, including the current portion, was $200,566. 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. The first payment of $2,875 was made on March 29, 2004. The notes are convertible into shares of Common Stock at an initial conversion price of $88.76 per share, only 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. SUBSEQUENT EVENTS The trial related to latanoprost following the Pharmacia and Columbia lawsuit against Par on December 21, 2001 in the United States District Court for the District of New Jersey, alleging patent infringement concluded in March 2004 and on July 6, 2004 the Court issued an Opinion and Order ordering that judgment be entered in favor of the Plaintiffs on their claims of infringement of U.S. Patent Nos. 4,599,353 (expires July 28, 2006) and 5,296,504 (expires March 22, 2011); that the effective date of approval of Par's ANDA shall be a date which is not earlier than the dates of expiration of those patents; and that Par is enjoined from engaging in the commercial manufacture, use, offer to sell, or sale within the United States, or importation into the United States, of any drug product covered by, or the use of which is covered by, those two patents. As to the third patent asserted by Plaintiffs, U.S. Patent No. 5,422,368, the Court dismissed Plaintiffs' infringements claims and declared that the patent is unenforceable due to inequitable conduct. The Court further dismissed all parties' claims for attorneys' fees. Both Par and Plaintiffs have filed notices of appeal. Par is appealing the Court's decision only insofar as it relates to U.S. Patent No. 5,296,504. In July 2004, Par and Teva USA entered into a settlement regarding megestrol acetate oral suspension. As part of the judgment and order of permanent injunction entered by the parties, Teva USA acknowledged that the claims of the `318 patent are valid and enforceable in all respects and that Teva USA's product infringes the `318 patent. As part of that settlement, Par has granted a license to Teva USA for a limited number of units, and in return, Par will receive a royalty on Teva USA's sales of megestrol acetate oral suspension. On August 5, 2004, the Company purchased 875 shares of common stock of New River Pharmaceuticals Inc. ("New River") in an initial public offering for $8 per share. Par's investment of $7,000 represents an ownership position of 4.9 percent of the outstanding common stock of New River. New River, based in Radford, Virginia, is a specialty pharmaceutical company focused on developing novel pharmaceuticals that are safer and improved versions of widely-prescribed drugs, including amphetamines and opioids. Utilizing its proprietary Carrierwave(TM) technology, New River is currently developing versions of amphetamines and opioids that are designed to provide overdose protection, abuse resistance and less potential for addiction while providing efficacy comparable to the active pharmaceutical ingredients on which they are based. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is subject to market risk primarily from changes in the market values of its 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 July 4, 2004. 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. 25 The following table summarizes the available-for-sale securities that subject the Company to market risk at July 4, 2004 and December 31, 2003: JULY 4, DEC. 31, 2004 2003 ---- ---- Debt securities issued by various state and local municipalities and agencies $128,772 $185,450 Securities issued by United States government and agencies 70,183 10,050 ------ ------ Total $198,955 $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 Company's 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 $198,955 in 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 1,000 shares of the common stock of Advancis, at $10 per share, in its initial public offering of 6,000 shares on October 16, 2003. The transaction closed on October 22, 2003. The value of the Company's investment in Advancis as of July 4, 2004 was $7,420. ITEM 4. 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, (the "Exchange Act") were effective as of July 4, 2004 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 second quarter of fiscal 2004 that have materially affected or are reasonably likely to materially affect the Company's internal controls over financial reporting. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. - ------ ----------------- On May 3, 2004, Pentech filed an action against the Company in the United States District Court for the Northern District of Illinois. This action alleges that the Company is in breach of its contract with Pentech relating to the supply and marketing of paroxetine. The Company believes that it is in compliance with its agreement with Pentech and intends to vigorously defend this action. 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. On April 28, 2004, GSK, with the consent of the Company, removed the action from state court to federal court in California. The Company intends to defend vigorously the claims set forth in the complaint. 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. Par 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, Par 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 pre-trial proceedings. Par and the other defendants involved in the litigation filed a motion to dismiss on January 29, 2004. On August 4, 2004, Par and a number of other generic and brand pharmaceutical companies were also sued by the City of New York, which has alleged violations of laws related to participation in its Medicaid program. Par intends to defend vigorously the claims asserted in such complaints. The Company cannot predict with certainty at this time the outcome or the effects 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 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 was 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 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 competes with the Company's megestrol acetate oral suspension product. In the lawsuit, Teva USA sought 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 Par's four patents in the lawsuit, the `318 patent. In July 2004, Par and Teva USA entered into a settlement of the lawsuit regarding megestrol acetate oral suspension. As part of the judgment and order of permanent injunction entered by the parties, Teva USA acknowledged that the claims of the `318 patent are valid and enforceable in all respects and that Teva USA's product infringes the `318 patent. As part of the settlement, Par will grant a license to Teva USA for a limited number of units, and in return, Par will receive a royalty on Teva USA's sales. On July 15, 2003, the Company and Par filed a lawsuit against Roxane in the United States District Court for the District of New Jersey. The Company and Par alleged that Roxane had 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. 27 On May 28, 2003, Asahi 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 GSK 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 GSK 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. Subsequent to the October 2003 decision in the District Court, the remaining state law claims were dismissed with prejudice and Asahi filed an appeal with the United States Court of Appeals for the Federal Circuit. Par and Asahi entered into a settlement agreement on June 18, 2004, pursuant to which Par and Pentech paid Asahi $1,100. 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 any certainty. On November 25, 2002, Ortho-McNeil filed a lawsuit against Kali in the United States District Court for the District of New Jersey. Ortho-McNeil alleged that Kali infringed 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. Summary judgment papers were served on opposing counsel on May 28, 2004; however under New Jersey practice the summary judgment papers will not be filed with the court until the briefing is complete. Breath filed an ANDA (currently pending with the FDA) for latanoprost, which was developed by Breath 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 and 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 sought 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 sought 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 was invalid. All parties sought to recover their respective attorneys' fees. The trial concluded in March 2004 and on July 6, 2004 the Court issued an Opinion and Order ordering that judgment be entered in favor of the Plaintiffs on their claims of infringement of U.S. Patent Nos. 4,599,353 (expires July 28, 2006) and 5,296,504 (expires March 22, 2011); that the effective date of approval of Par's ANDA shall be a date which is not earlier than the dates of expiration of those patents; and that Par is enjoined from engaging in the commercial manufacture, use, offer to sell, or sale within the United States, or importation into the United States, of any drug product covered by, or the use of which is covered by, those two patents. As to the third patent asserted by the Plaintiffs, U.S. Patent No. 5,422,368, the Court dismissed the Plaintiffs' infringements claims and declared that the patent is unenforceable due to inequitable conduct. The Court further dismissed all parties' claims for attorneys' fees. Both Par and the Plaintiffs have filed notices of appeal. Par is appealing the Court's decision only insofar as it relates to U.S. Patent No. 5,296,504. Pursuant to agreements with Breath and FineTech related to latanoprost, the Company had recorded product license fees of $6,999, which are included in intangible assets on its consolidated balance sheets. If unsuccessful in its appeal, Par will reevaluate the recoverability of these product license fees. 28 Par entered into a licensing agreement with developer Paddock to market testosterone 1% gel, a generic version of Unimed's product Androgel(R). The product, if successfully brought to market, 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 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 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 discovery. At this time, the Company is not able to predict with any certainty the outcome of this litigation. 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, to prosecute these actions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. - ------ -------------------------------- (a) Exhibits: 10.9.6 Employment Agreement, dated as of May 28, 2004, by and between Par Pharmaceutical, Inc. and Shankar Hariharan. 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. (b) Reports on Form 8-K: Current Reports on Forms 8-K, dated April 13, 2004 (Items 2 and 7) and June 14, 2004 (Items 2 and 7) reflect the acquisition of Kali; dated June 14, 2004 (Item 5) reflect a change in the Company's name; dated July 30, 2004 (Item 12) reflect the Company's second quarter 2004 earnings release. 29 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAR PHARMACEUTICAL COMPANIES, INC. ---------------------------------- (Registrant) August 13, 2004 /s/ Scott Tarriff ----------------- Scott Tarriff PRESIDENT AND CHIEF EXECUTIVE OFFICER August 13, 2004 /s/ Dennis J. O'Connor ---------------------- Dennis J. O'Connor VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 30 EXHIBIT INDEX ------------- Exhibit Number Description - -------------- ----------- 10.9.6 Employment Agreement, dated as of May 28, 2004, by and between Par Pharmaceutical, Inc. and Shankar Hariharan. 31.1 Certification by the President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act. 31.2 Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act. 32.1 Certification by the President and 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. 31 EX-10 2 exhibit10-9_6.txt EXHIBIT 10.9.6 EXHIBIT 10.9.6 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of May 28, 2004, by and between Par Pharmaceutical, Inc., a Delaware corporation ("Employer"), and Shankar Hariharan ("Executive"). R E C I T A L S : A. WHEREAS, Executive desires to provide services to Employer; and B. WHEREAS, Employer and Executive desire to formalize the terms and conditions of Executive's employment with Employer. In consideration of the mutual promises herein contained, the parties hereto hereby agree as follows: 1. Employment. ---------- 1.1. GENERAL. Employer hereby employs Executive, effective as of the Effective Date (as defined in Section 3.1 hereof), in the capacity of Executive Vice President and Chief Scientific Officer of Employer 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 such capacity, Executive shall be responsible for all aspects of the Employer's research and development activities, regulatory affairs, compliance and quality assurance/quality control, 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 President and the Chief Executive Officer of Employer and Pharmaceutical Resources, Inc., a Delaware corporation and Employer's parent ("Resources"). Executive shall report to the President and Chief Executive Officer of Employer and Resources. 1.2. TIME DEVOTED TO POSITION. Executive, during the Employment Term, shall devote substantially all of his business time, attention and skills to the business and affairs of Employer. 1.3. CERTIFICATIONS. Whenever the Chief Executive Officer and/or Chief Financial Officer of Resources or the Chief Executive Officer and/or Chief Financial Officer of Employer is required by law, rule or regulation or requested by any governmental authority or by Resources's or Employer's auditors to provide certifications with respect to Resources's or Employer'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 Employer, with such exceptions as Executive deems necessary to make such certifications accurate and not misleading. 2. Compensation and Benefits. ------------------------- 2.1. SALARY. At all times Executive is employed hereunder, Employer shall pay to Executive, and Executive shall accept, as full compensation for any and all services rendered and to be rendered by him during such period to Employer in all capacities, including, but not limited to, all services that may be rendered by him to any of Resources's or Employer's subsidiaries, entities and organizations presently existing or hereafter formed, organized or acquired, directly or indirectly, by Resources or Employer (each, a "Subsidiary" and collectively, the "Subsidiaries"), the following: (i) a base salary at the annual rate of $405,000, or at such increased rate as the Board of Directors (the "Board") of Resources (through its Compensation and Stock Option Committee), in its sole discretion, may hereafter from time to time (it being understood that Executive shall have a performance review at least once annually at the beginning of the calendar year) 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 Resources's and Employer's earnings, financial condition, rate of return on equity, successful development of pharmaceutical products and compliance with regulatory requirements; PROVIDED, HOWEVER, on the first anniversary of the Effective Date, Executive shall receive a bonus in an amount not less than $202,500, unless the Employment Term is terminated during the first year of the Initial Term by Employer pursuant to Section 3.2.4 or by Executive pursuant to Section 3.2.2. Subject to the preceding sentence, the target amount of Executive's annual bonus shall be fifty (50%) 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, consistent with Executive's job grade and title. Subject to stockholder approval of the 2004 Performance Equity Plan (the "2004 Equity Plan"), Executive shall be granted (a) on the Effective Date, 45,000 shares of restricted common stock of Resources and (b) on the six (6) month anniversary of the Effective Date, 15,000 shares of restricted common stock of Resources (together, the "Protected Restricted Stock"), each of which shall vest in equal amounts over a four (4) year period on each anniversary of the date of such grant and shall otherwise be subject to the terms and conditions set forth in the 2004 Equity Plan and the award agreement relating to such shares; PROVIDED, HOWEVER, if for any reason the Employment Term is terminated on or prior to the six (6) month anniversary of the Effective Date, Executive shall not be granted such 15,000 shares of restricted common stock. Subject to stockholder approval of the 2004 Equity Plan and Executive's continued employment by Employer at such time, Executive shall be granted on or before January 31, 2005 options to purchase 50,000 shares of common stock of Resources subject to the terms and conditions set forth in the 2004 Equity Plan and the award agreement relating to such stock options (the "Protected Stock Options"). 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, 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 four (4) 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. 2.4.5. RELOCATION EXPENSES; CORPORATE APARTMENT. Employer shall promptly reimburse Executive for reasonable expenses incurred in connection with his relocation to undertake his duties hereunder up to a maximum amount of $100,000, all in accordance with Employer's policies with respect thereto as in effect from time to time. In connection with Executive's relocation, Employer shall provide Executive with a corporate apartment for a period of up to 24 months; PROVIDED, HOWEVER, the aggregate amount Employer reimburses Executive for such apartment shall not exceed $36,000 per calendar year, prorated for any partial year. Employer may, at its option, extend the period of time for which it provides the corporate apartment. 2.4.6. LIFE INSURANCE. Employer shall obtain (PROVIDED, that Executives qualifies on a non-rated basis) a term life insurance policy, the premiums of which shall be borne by Employer and the death benefits of which shall be payable to Executive's estate, or as otherwise directed by Executive, in the amount of $1 million throughout the Employment Term. 2.5. SIGNING BONUS. On the Effective Date, Employer shall pay to Executive a one-time signing bonus (the "Signing Bonus") in the amount of $150,000, 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 first year of 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. Prior to May 28, 2004, Executive shall provide Employer written notice of the date on which Executive's employment hereunder 3 shall commence (the "Effective Date"), which shall not be later than June 28, 2004. Executive's employment shall commence on the Effective Date and, except as otherwise provided in Section 3.2 hereof, shall continue until the third (3rd) anniversary of the Effective Date (the "Initial Term"). Thereafter, this Agreement shall automatically be renewed for successive one-year periods commencing on the third (3rd) 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. 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 Notice of Termination shall specify the Date of Termination (as defined in Section 3.4.2 hereof), which date shall not be earlier than thirty (30) days after the Notice of Termination is given or such shorter period if mutually agreed upon by Executive and Employer. 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 4 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. 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, 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. 5 3.3.1. FOR CAUSE. In the event that the Employment Term is terminated by Employer for Cause, Employer shall pay to Executive, in a single lump-sum, an amount equal to any unpaid but earned Base Salary through the Date of Termination. 3.3.2. WITHOUT CAUSE BY EMPLOYER; MATERIAL BREACH BY EMPLOYER; ELECTION NOT TO RENEW BY EMPLOYER. In the event that the Employment Term is terminated by Employer pursuant to Section 3.2.5 hereof or by Executive pursuant to Section 3.2.6 hereof or Employer elects not to renew this Agreement pursuant to Section 3.1 hereof, Employer shall pay to Executive, subject to Executive's continued compliance with the terms of Section 4 hereof, an amount equal to the Severance Amount. For purposes hereof, "Severance Amount" shall mean two (2) times 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; ELECTION NOT TO RENEW BY EXECUTIVE. In the event that the Employment Term is terminated by Executive pursuant to Section 3.2.2 hereof or Executive elects not to renew this Agreement pursuant to Section 3.1 hereof, Employer shall pay to Executive, in a single lump-sum, an amount equal to any unpaid but earned Base Salary through the Date of Termination. 3.3.4. DEATH, DISABILITY. In the event that the Employment Term is terminated by reason of Executive's death pursuant to Section 3.2.1 hereof or by Employer by reason of Executive's Disability pursuant to Section 3.2.3 hereof, Employer shall pay to Executive, subject to, in the case of Disability, Executive's continued compliance with Section 4 hereof, the Severance Amount, less any life 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 or Employer elects not to renew this Agreement pursuant to Section 3.1 hereof, Executive shall be entitled to participate, at Employer's expense, for a period equal to twenty-four (24) months from the Date of Termination (the "Benefits Period"), subject to Executive's continued compliance with the terms of Section 4 hereof, all life insurance, medical, health and accident, and disability plans and programs in which Executive was entitled to participate immediately prior to the Date of Termination; PROVIDED, that Executive's continued participation is legally possible under the general terms and provisions of such plans and programs; and PROVIDED, FURTHER, that in the event Executive is entitled to equal or comparable benefits from a subsequent employer during the Benefits Period, Employer's obligation with respect thereto pursuant to this Section 3.3.5 shall end as of such date. In the event that Executive's participation in any such plan or program is barred, Employer, at its 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. 6 3.3.6. EQUITY COMPENSATION. (a) Subject to Section 3.3.6(b) hereof, notwithstanding anything to the contrary contained in the applicable award agreements relating to the Protected Restricted Stock and the Protected Stock Options, if Employer elects not to renew the Employment Term pursuant to Section 3.1 or terminates the Employment Term without cause pursuant to Section 3.2.5 hereof, all of the (i) Protected Restricted Stock and (ii) Protected Stock Options (clauses (i) and (ii) above collectively, the "Protected Awards"), whether vested or unvested, shall not be terminated solely as a result of such termination or election not to renew and shall continue to vest otherwise in accordance with the terms of the 2004 Equity Plan and the applicable award agreements; PROVIDED, HOWEVER, each stock option that is a Protected Stock Option shall only be exercisable on or before the second (2nd) anniversary of the date such Protected Stock Option shall vest (an "Option Termination Date"), and each vested and unexercised Protected Stock Option shall terminate and be of no further force and effect as of its Option Termination Date. (b) If the Board determines, in good faith, that Executive breached his obligations under Section 4 hereof, all restricted stock and unexercised stock options (including, without limitation, all Protected Awards) granted to Executive, whether vested or unvested, shall terminate or be cancelled (as applicable) immediately and be of no further force or effect. 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. Certain Covenants. ----------------- 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. 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 7 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. 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). 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 will be 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 of a special, unique, extraordinary and intellectual character which place 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 8 sales strategies, business relationships developed by Executive with the clients 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 nationwide 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, if the Employment Term is terminated for any reason, including expiration of the Employment Term, 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, 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 the later of five (5) years of the date of this Agreement or one (1) year following the date of termination (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 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 9 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 shall acquire an equity stake in the Employer's business. 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 10 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 Resources, Employer, 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 (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. 4.15. CONFIDENTIAL OR PROPRIETARY INFORMATION OF THIRD PARTIES. Executive shall promptly inform Employer if he is in possession of any confidential or proprietary information of a third party relating to any projects and/or products on which Employer is currently working, or plans to be 11 in the near future, and Executive and Employer shall cooperate in taking such reasonable precautionary measures as may be appropriate to avoid any potential violation of such third party's rights. 4.16. 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, the Securities and Exchange Commission, 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. 4.17. 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 hard drives, employee identification cards, Employer credit cards, keys, and any other physical property of Employer. 4.18. 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 Section 4 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 Section 4 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 Section 4 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 Section 4 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 Section 4 hereof. 4.19. NON-EXCLUSIVITY AND SURVIVAL. The covenants of Executive contained in Section 4 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 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. 12 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 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: Shankar Hariharan c/o Pharmaceutical Resources, Inc. 300 Tice Boulevard Woodcliff Lake, New Jersey 07677 13 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 Employer 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. 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. 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 (including any covenants not to compete or similar covenants) or violate the law; and (c) this Agreement is his or its valid and binding obligation enforceable in accordance with its terms. 5.11. ENFORCEMENT; JURISDICTION. If any party institutes legal action to enforce or interpret the terms and conditions of this Agreement, the prevailing party shall be awarded reasonable attorneys' fees at all trial and 14 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 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 15 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. PAR PHARMACEUTICAL, INC. By: /s/ Stephen Montalto --------------------------------------------- Name: Stephen Montalto Title: Vice President Human Resources /s/ Shankar Hariharan -------------------------------------------------- Shankar Hariharan 17 EX-31 3 exhibit31_1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE EXCHANGE ACT I, Scott Tarriff, President and Chief Executive Officer of Par Pharmaceutical Companies, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Par Pharmaceutical Companies, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-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 quarterly 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 most recent 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: August 13, 2004 /s/ Scott Tarriff ----------------- Scott Tarriff President and Chief Executive Officer EX-31 4 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 Par Pharmaceutical Companies, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Par Pharmaceutical Companies, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-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 quarterly 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 most recent 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: August 13, 2004 /s/ Dennis J. O'Connor ---------------------- Dennis J. O'Connor Chief Financial Officer EX-32 5 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 Quarterly Report of Par Pharmaceutical Companies, Inc. (the "Company") on Form 10-Q for the period ended July 4, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott 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 Tarriff - ----------------- Scott Tarriff President and Chief Executive Officer August 13, 2004 EX-32 6 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 Quarterly Report of Par Pharmaceutical Companies, Inc. (the "Company") on Form 10-Q for the period ended July 4, 2004 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 August 13, 2004 -----END PRIVACY-ENHANCED MESSAGE-----