-----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, ImJy7+mr4RCEx/8s36NXBb1m09olFgTdOi9DRUNraXmuv0G5Q8U+ONENwWUWZceG UZSp/T9zSrnfn7KFKdAEpA== 0000904440-98-000055.txt : 19980720 0000904440-98-000055.hdr.sgml : 19980720 ACCESSION NUMBER: 0000904440-98-000055 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19980630 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980714 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACEUTICAL RESOURCES INC CENTRAL INDEX KEY: 0000878088 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 223122182 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-10827 FILM NUMBER: 98665842 BUSINESS ADDRESS: STREET 1: ONE RAM RIDGE RD CITY: SPRING VALLEY STATE: NY ZIP: 10977 BUSINESS PHONE: 9144257100 MAIL ADDRESS: STREET 1: ONE RAM RIDGE RD CITY: SPRING VALLEY STATE: NY ZIP: 10977 8-K 1 8-K DATED JUNE 30, 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 205497 ---------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): June 30, 1998 PHARMACEUTICAL RESOURCES, INC. (Exact name of registrant as specified in its charter) NEW JERSEY File Number 1-10827 22-3122182 - -------------------------------- ------------------------- ------------------- (State or other jurisdiction of (Commission File Number) (I.R.S. Employer incorporation or organization) Identification No.) One Ram Ridge Road, Spring Valley, New York 10977 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (914) 425-7100 TOTAL NUMBER OF PAGES -- 252 EXHIBIT INDEX IS LOCATED ON PAGE 9 Item 1. Change of Control. - ------- ------------------ Introduction On June 30, 1998 (the "Closing Date"), Pharmaceutical Resources, Inc., a New Jersey corporation (the "Company" or the "Registrant"), completed the sale of 10,400,000 shares (the "Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), to Lipha Americas, Inc., a Delaware corporation ("Lipha"), at a price of $2.00 per share or $20,800,000 in the aggregate. Also on the Closing Date, the Company issued options (the "Options") to purchase up to an aggregate of 1,171,040 shares of Common Stock (the "Option Shares") at an exercise price of $2.00 per share to Merck KGaA, Darmstadt, Germany, a Kommanditgesellschaft auf Aktien organized under the laws of Germany ("Merck KGaA"), and Genpharm Inc., a Canadian corporation ("Genpharm"), in exchange for certain services to be provided to the Company. Lipha and Genpharm are subsidiaries of Merck KGaA. Simultaneously with the sale of the Shares and the issuance of the Options, Merck KGaA purchased 1,813,272 shares of Common Stock from Clal Pharmaceutical Industries Ltd. ("Clal"). Such transactions and certain related transactions are referred to in this Form 8-K as the "Transaction." Immediately following the closing of the Transaction, Merck KGaA beneficially owned approximately 42% of the outstanding Common Stock. If Merck KGaA and its affiliates exercise the Options and Merck KGaA acquires from Clal an additional 500,000 shares of Common stock it has rights to in the future, Merck KGaA would beneficially own approximately 46% of the outstanding Common Stock. Through its subsidiary Lipha, Merck KGaA designated a majority of the directors on the Company's Board of Directors. As a result of its large stock ownership and ability to appoint directors of the Company, Merck KGaA is likely to be able to exercise control over matters requiring shareholder approval. The Company believes that the source of funds for the purchase price for the Shares and the shares purchased from Clal was the working capital of Lipha and Merck KGaA. The following is a description of certain terms of the Stock Purchase Agreement, dated March 25, 1998, between the Company and Lipha (the "Stock Purchase Agreement") and related agreements. Such agreements are attached to this Form 8-K as exhibits. The following description of the terms of such agreements is qualified in their entirety by reference to such exhibits. General Stock Purchase Agreement. On the Closing Date, the Company sold to Lipha the Shares at an aggregate purchase price of $20,800,000 in cash, or $2.00 per Share. The closing price of the Common Stock on The New York Stock Exchange on March 25, 1998, the day the Stock Purchase Agreement was executed, was $2.625 per share. The Shares are not registered under the Securities Act of 1933, as amended (the "Securities Act"). However, Lipha has certain demand and piggy-back registration rights with respect to the Shares. See "--Registration Rights Agreement" below. The Stock Purchase Agreement contains certain significant terms, obligations and other agreements, as described below, including the obligation to grant and issue the Options in return for the right to receive certain services, Lipha's right to designate a majority of the members of the Company's Board of Directors (the "Board"), Lipha's right of first refusal in respect of certain equity offerings, and Lipha's agreement not to engage in certain extraordinary transactions. Board Representation. Lipha has the right to designate a majority of the members of the Board. Pursuant to this right, Lipha has designated Bernhard Scheuble, Anthony S. Tabatznik, J. Neil Tabatznik and Klaus Jander. Three -2- members of the Board are comprised of Kenneth I. Sawyer, the Chairman, President and Chief Executive Officer of the Company, and two additional designees of the Board prior to the consummation of the Stock Purchase Agreement (collectively, the "Company Designees"). Mark Auerbach and Stephen A. Ollendorff are the two other Company Designees. All of such seven persons have been elected by the shareholders at the Annual Meeting of Shareholders of the Company held on June 26, 1998 (the "Annual Meeting"). In addition, Lipha has the right to designate (i) jointly with the Company Designees, two members of the Board to comprise the Audit Committee of the Board and (ii) the President and Chief Operating Officer of the Company. Mr. Sawyer will continue to serve as Chairman and Chief Executive Officer of the Company and each of its subsidiaries upon Lipha's designation of a President. The effect of the foregoing agreement is to afford voting control to the designees of Lipha with respect to matters determined by the Board. Mr. J. Neil Tabatznik, a director of the Company, is the Chairman of Genpharm, which will develop, manufacture and distribute products to the Company pursuant to the Distribution Agreement, dated March 25, 1998, between the Company and Genpharm (the "Distribution Agreement"). See "--Distribution Agreement" below. Mr. Anthony S. Tabatznik, a director of the Company, is a board member of Merck Pharma which controls the pharmaceutical operations of Merck KGaA, including Genpharm. Dr. Bernhard Scheuble, a director of the Company, is Deputy Member of the Executive Board of Merck KGaA. The Company and Genpharm and its affiliate are presently parties to distribution agreements entered into in 1992 and 1993. Under such distribution agreements, payments by the Company to Genpharm and an affiliate in fiscal year 1997 accounted for less than five percent of the Company's and Genpharm's consolidated gross revenues. However, in fiscal year 1998, it is expected that, under the Distribution Agreement and the other distribution agreements, payments by the Company to Genpharm and its affiliate would exceed five percent of the Company's consolidated gross revenues. Right of First Refusal. Lipha has a right of first refusal for a period of six years following the Closing Date to purchase all, but not less than all, of any equity securities to be sold by the Company pursuant to any proposed non-registered offering or any registered offering solely for cash. If Lipha does not exercise its first refusal rights within 30 days of notice from the Company, the Company may sell such securities to any third party on substantially the same terms and conditions as first offered to Lipha. The Shares and the Option Shares do not have any preemptive rights. Limitations on Related Party Transactions and Business Combinations; Lock-up. Lipha has agreed, for a period of three years following the Closing Date, not to cause or permit the Company to engage in any transactions or enter into any agreements or arrangements with, or make any distributions to, any Affiliate or Associate (each as defined in the Stock Purchase Agreement) of Lipha without the prior written consent of a majority of the Company Designees. In addition, Lipha has agreed, for a period of three years following the Closing Date, not to propose that the Company, or to cause or permit the Company to, engage in business combinations or other extraordinary transactions, including mergers and tender offers, without the prior written consent of a majority of the Company Designees and the prior receipt of a fairness opinion from an independent nationally recognized investment bank. As a condition to the closing of the Stock Purchase Agreement, certain holders of options to purchase Common Stock, including Mr. Sawyer, and the other executive officers of the Company, have agreed not to exercise their options for a period of three years and 10 days from the Closing Date and certain other holders, including the non-employee directors of the Company immediately prior to the Closing Date, have agreed not to exercise more than one-third of their options annually commencing on the first anniversary of the Closing Date. -3- Merck KGaA and the Company have reached an agreement in principle for Merck KGaA to prepay in full a promissory note of a subsidiary of the Company in the principal amount of $600,000 on behalf of such subsidiary in exchange for consideration relating to the Company's Israel-based research and development facility to be agreed upon in the future. Distribution Agreement. In connection with the Stock Purchase Agreement, Genpharm and the Company have entered into a Distribution Agreement, dated March 25, 1998 (the "Distribution Agreement") pursuant to which Genpharm granted exclusive distribution rights to the Company within the United States and certain other U.S. territories with respect to approximately 40 generic pharmaceutical products currently under development or being sold by Genpharm and its affiliates outside of the United States. Products may be added to or removed from the Distribution Agreement by mutual agreement of the parties. Genpharm is required to use commercially reasonable efforts to develop the products which are subject to the Distribution Agreement and is responsible for the completion of product development and for obtaining all applicable regulatory approvals. The Company will pay Genpharm a percentage of gross profits attributable to sales of such products. Services Agreements. On the Closing Date, each of Merck KGaA and Genpharm entered into separate Services Agreements to provide various services to the Company for a period of 36 months, including, but not limited to, rendering advice and providing technical support and assistance in the areas of research and development, regulatory compliance, manufacturing, quality control and quality assurance, administration, marketing and promotion (collectively, the "Services"). In consideration of providing the Services, the Company issued on the Closing Date, an Option to Merck KGaA to purchase up to 820,000 shares of Common Stock and an Option to Genpharm to purchase up to 351,040 shares of Common Stock. Options. The Options entitle Merck KGaA and Genpharm to purchase up to an aggregate of 1,171,040 Option Shares at an exercise price of $2.00 per share with one-third of the total Option Shares vesting annually commencing on the first anniversary of the Closing Date. The Options are exercisable at any time beginning three years and 10 days following the Closing Date and will terminate, to the extent unexercised, on April 30, 2003. The Options contain provisions that protect the holder against dilution by adjustment of the exercise price and the number of Option Shares issuable upon exercise in certain events, such as stock dividends, stock splits, consolidation, merger, or sale of all or substantially all of the Company's assets. The holders of the Options do not have any rights as shareholders of the Company unless and until the Options have been exercised. The Options are not and the Option Shares will not be registered under the Securities Act. However, the Option Shares may be registered upon the exercise of registration rights by the holders of the Options and/or Option Shares pursuant to certain demand and piggy-back registration rights under the Registration Rights Agreement described below. Clal Sale Agreement. Pursuant to a letter agreement, dated March 25, 1998 (the "Clal Sale Agreement"), between the Company, Merck KGaA and Clal, Clal sold to Lipha on the Closing Date, an aggregate of 1,813,272 shares of Common Stock at a price of $2.00 per share. Pursuant to the Clal Sale Agreement, Merck KGaA agreed to pay Clal, on the second anniversary of the Closing Date, an amount equal to the excess, if any, of the weighted average trading price of all trades in shares of Common Stock on The New York Stock Exchange during the 30 trading days preceding such date over $2.00, multiplied by 500,000. In addition, Clal has the right to cause Merck KGaA and/or the Company to purchase Clal's -4- remaining 500,000 shares of Common Stock during the five-day period commencing three years and five days after the Closing Date, in certain circumstances, at a price of $2.50 per share. If Clal does not exercise such right, then Merck KGaA and the Company have the right to cause Clal to sell its remaining shares in open market transactions and Merck KGaA and the Company will purchase from Clal all shares which have not been sold within 90 days. The shares of Common Stock to be purchased from Clal under the Clal Sale Agreement are referred to herein as the "Clal Shares." Clal has agreed, for the three-year and five-day period following the Closing Date, not to acquire or sell, directly or indirectly, any shares of Common Stock, other than pursuant to the Clal Sale Agreement, enter into any agreement with respect to the voting, holding or transferring of any shares of Common Stock or to propose or participate in any transactions involving the Company or recommend others to take any of such actions. All of Clal's rights under the Stock Purchase Agreement, dated March 25, 1995, between the Company and Clal, including the right to appoint directors of the Company, terminated on the Closing Date. Registration Rights Agreement. In consideration of the rights and benefits obtained by the Company under the Stock Purchase Agreement and the services that will be provided to the Company pursuant to the Services Agreements, the Company, on the Closing Date, granted to Lipha, Merck KGaA and Genpharm (collectively, the "Holders") certain registration rights under a registration rights agreement (the "Registration Rights Agreement"). In general, the Holders will not be able to freely sell the Shares, the Option Shares or the Clal Shares (collectively, the "Registrable Shares") without registration under applicable securities laws or unless an exemption from registration is available. Starting nine months after the Closing Date, the Holders will be entitled to three demand registrations of Registrable Shares and two additional demand registrations if the Options are exercised. In addition, the Holders have the right to register the Registrable Shares on each occasion that the Company registers shares of Common Stock, subject to certain limitations and exceptions. If the Company at any time registers shares of Common Stock for sale to the public, the Holders have agreed not to sell publicly, make any short sale, grant any option for the purchase of or otherwise publicly dispose of shares of Common Stock during the same period during which directors and executive officers of the Company are similarly limited in selling the Company's securities up to 180 days after the effective date of the applicable registration statement. Amendment to Certificate of Incorporation At the Annual Meeting, the shareholders of the Company approved an amendment to Article IV of the Company's Certificate of Incorporation to increase the authorized number of shares of Common Stock from 60,000,000 to 90,000,000 (the "Common Stock Amendment"). The purpose of the Common Stock Amendment is to provide additional shares of Common Stock for the consummation of the Transaction and for other valid corporate purposes without further shareholder approval unless required by applicable law or regulation. The Common Stock Amendment was filed with the Secretary of State of New Jersey on June 26, 1998, a copy of which is attached as an exhibit to this Form 8-K. 1997 Directors Stock Option Plan At the Annual Meeting, the shareholders of the Company approved the Company's 1997 Directors Stock Option Plan (the "Directors Plan"). The Company has reserved for issuance under the Directors Plan 500,000 shares of Common Stock. Options granted under the Directors Plan may be granted only to directors of the Company who are not employees of the Company or otherwise eligible to receive options under any other plan adopted by the Company. A copy of the Directors Plan is attached as an exhibit to this Form 8-K. The 1995 Directors Stock Option Plan terminated upon shareholder approval of the Directors Plan at the Annual Meeting. A total of 100,000 shares of Common Stock were reserved and available for issuance under the 1995 Directors Stock Option Plan. -5- Item 5. Other Events. - ------- ------------- See Item 1 above. Item 7. Financial Statements and Exhibits. - ------- ---------------------------------- (c) Exhibits. 3.1 Certificate of Incorporation of the Registrant. 3.2 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 3, 1993. 3.3 Articles of Amendment to Certificate of Incorporation of the Registrant, dated June 26, 1998. 3.4 By-Laws of the Registrant, as amended. 10.1 Stock Purchase Agreement, dated March 25, 1998, between the Company and Lipha Americas, Inc. 10.2 Distribution Amendment, dated March 25, 1998, between the Company and Genpharm, Inc.* 10.3 Services Agreement, dated June 26, 1998, between the Company and Merck KGaA. 10.4 Stock Option Agreement, dated June 26, 1998, between the Company and Merck KGaA. 10.5 Services Agreement, dated June 26, 1998, between the Company and Genpharm Inc. 10.6 Stock Option Agreement, dated June 26, 1998, between the Company and Genpharm Inc. 10.7 Registration Rights Agreement, dated June 26, 1998, among the Company, Lipha Americas, Inc., Merck KGaA and Genpharm Inc. 10.8 Letter Agreement, dated March 25, 1998, among the Company, Merck KGaA and Clal Pharmaceutical Industries Ltd. 10.9 1997 Directors Stock Option Plan. 10.10 Fourth Amendment and Consent to Loan and Security Agreement, dated May 5, 1998, among the Company, General Electric Capital Corporation, and the other parties named therein. -6- 10.11 Amendment to Employment Agreement, dated as of April 30, 1998, among the Company, Par Pharmaceutical, Inc. and Kenneth I. Sawyer. 10.12 Amended and Restated Distribution Agreement, dated as of May 1, 1998, among the Company, Par Pharmaceutical, Inc. and SANO Corporation.* 10.13 Release and Amendment Agreement, dated May 1, 1998, among the Company, Par Pharmaceutical, Inc., SANO Corporation, and Elan Corporation, plc.* 10.14 Press Release of the Registrant, dated June 26, 1998. 10.15 Press Release of the Registrant, dated June 30, 1998. * Certain portions of Exhibits 10.2, 10.12 and 10.13 have been omitted and have been filed with the Securities and Exchange Commission pursuant to a request for confidential treatment thereof. -7- SIGNATURES Pursuant to the requirements of the Securities Exchange of Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. July 14, 1998 PHARMACEUTICAL RESOURCES, INC. (Registrant) /s/Dennis J. O'Connor --------------------------------------- Dennis J. O'Connor Vice President, Chief Financial Office and Secretary -8- Exhibit Index Exhibit No. Description ------- ----------- 3.1 Certificate of Incorporation of the Registrant. 3.2 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 3, 1993. 3.3 Articles of Amendment to Certificate of Incorporation of the Registrant, dated June 26, 1998. 3.4 By-Laws of the Registrant, as amended. 10.1 Stock Purchase Agreement, dated March 25, 1998, between the Company and Lipha Americas, Inc. 10.2 Distribution Amendment, dated March 25, 1998, between the Company and Genpharm, Inc.* 10.3 Services Agreement, dated June 26, 1998, between the Company and Merck KGaA. 10.4 Stock Option Agreement, dated June 26, 1998, between the Company and Merck KGaA. 10.5 Services Agreement, dated June 26, 1998, between the Company and Genpharm Inc. 10.6 Stock Option Agreement, dated June 26, 1998, between the Company and Genpharm Inc. 10.7 Registration Rights Agreement, dated June 26, 1998, among the Company, Lipha Americas, Inc., Merck KGaA and Genpharm Inc. 10.8 Letter Agreement, dated March 25, 1998, among the Company, Merck KGaA and Clal Pharmaceutical Industries Ltd. 10.9 1997 Directors Stock Option Plan. 10.10 Fourth Amendment and Consent to Loan and Security Agreement, dated May 5, 1998, among the Company, General Electric Capital Corporation, and the other parties named therein. -9- 10.11 Amendment to Employment Agreement, dated as of April 30, 1998, among the Company, Par Pharmaceutical, Inc. and Kenneth I. Sawyer. 10.12 Amended and Restated Distribution Agreement, dated as of May 1, 1998, among the Company, Par Pharmaceutical, Inc. and SANO Corporation.* 10.13 Release and Amendment Agreement, dated May 1, 1998, among the Company, Par Pharmaceutical, Inc., SANO Corporation, and Elan Corporation, plc.* 10.14 Press Release of the Registrant, dated June 26, 1998. 10.15 Press Release of the Registrant, dated June 30, 1998. * Certain portions of Exhibits 10.2, 10.12 and 10.13 have been omitted and have been filed with the Securities and Exchange Commission pursuant to a request for confidential treatment thereof. -10- EX-3.(I) 2 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION Exhibit 3.1 CERTIFICATE OF INCORPORATION OF PHARMACEUTICAL RESOURCES, INC. ARTICLE I The name of the corporation is Pharmaceutical Resources, Inc. (hereinafter the "Corporation"). ARTICLE II The registered office of the Corporation within the State of New Jersey is located at 14 Leslie Place, Tenafly, New Jersey 07670. The name of the Corporation's registered agent at such address is Mr. Stephen A. Ollendorff. ARTICLE III The purpose of the Corporation is to engage in any activity within the purposes for which corporations may be organized under the "New Jersey Business Corporation Act," N.J.S.A. 14A:l-1 et seq. ARTICLE IV (a) The Corporation is authorized to issue 60,000,000 shares of capital stock which shall be designated the Common Stock, par value $.01 per share. Each holder of Common Stock of the Corporation entitled to vote shall have one vote for each share held thereof. (b) The Corporation is authorized to issue 6,000,000 shares of capital stock which shall be designated the Preferred Stock, par value $.0001 per share. The Preferred Stock may be issued in one or more series. The Board of Directors is hereby authorized to issue the shares of Preferred Stock in such series and to fix from time to time before issuance the number of shares to be included in any series and the designation, relative rights, preferences and limitations of all shares of such series. The authority of the Board of Directors with respect to each series shall include, without limiting the generality of the foregoing, the determination of any or all of the following: (i) The number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series; 1 (ii) The voting powers, if any, and whether such voting powers are full or limited in such series; (iii) The redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (iv) Whether dividends, if any, shall be cumulative or noncumulative, the dividend rate or rates of such series and the manner of determining the same, and the dates and preferences of dividends on such series; (v) The rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (vi) The provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of shares, or any other security, of the Corporation or any other corporation, and the price or prices or the rates of exchange applicable thereto; (vii) The right, if any, to subscribe for or to purchase any securities of the Corporation or any other corporation; (viii) The provisions, if any, of a sinking fund applicable to such series; and (ix) Any other relative, participating, optional or other special powers, preferences, rights, qualifications, limitations, or restrictions thereof; all as shall be determined from time to time by the Board of Directors and shall be stated in said resolution or resolutions providing for the issuance of such Preferred Stock (a "Preferred Stock Designation"). (c) Except as may be provided in this Certificate of Incorporation or by the Board of Directors in a Preferred Stock Designation or by law, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of shareholders at which they are not entitled to vote or consent. (d) The Corporation shall be entitled to treat the person in whose name any share of its capital stock is registered as the owner thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. 2 ARTICLE V (a) The Board of Directors shall have the power to remove directors for cause and to suspend directors pending a final determination that cause exists for removal. (b) Subject to the rights of the holders of any class or series of capital stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specific circumstances, the number of directors which shall constitute the whole Board of Directors of the Corporation shall not be more than fifteen, the exact number of directors to be determined from time to time by the Board of Directors in accordance with the By-Laws of the Corporation. Any decrease in the number of directors will not shorten the term of any incumbent director. (c) Commencing with the directors elected at the annual meeting of shareholders in 1991, the directors, other than those who may be elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, shall be classified with respect to the time for which they severally hold office into three classes, as nearly equal in number as possible, as shall be provided in the manner specified in the By-Laws of the Corporation. One class shall be originally elected for a term expiring at the annual meeting of shareholders to be held in 1992, another class shall be originally elected for a term expiring at the annual meeting of shareholders to be held in 1993, and another class shall be originally elected for a term expiring at the annual meeting of shareholders to be held in 1994, with the members of each class to hold office until their successors are elected and qualified. Commencing at the 1992 annual meeting of the shareholders of the Corporation, and at each succeeding annual meeting of the shareholders thereafter, the successors of the class of directors whose term expires at that meeting shall be elected by plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. (d) Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the shareholders holding at least sixtysix and two-thirds percent of the outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, change, amend, repeal, or adopt any provision inconsistent with, this Article Fifth. (e) For the purpose of this Article Fifth, "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. In any vote required by or provided for in this Article Fifth, each share of Voting Stock shall have the number of votes granted to it generally in the election of directors. 3 ARTICLE VI The number of directors constituting the first Board of Directors of the Corporation shall be one and the name of the person serving as such director is Kenneth I. Sawyer, whose address is c/o One Ram Ridge Road, Spring Valley, New York 10977. ARTICLE VII The sole incorporator of the Corporation is Kenneth I. Sawyer, whose address is c/o One Ram Ridge Road Spring Valley, New York 10977. ARTICLE VIII To the fullest extent permitted by law, no director or officer of the Corporation shall be personally liable to the Corporation or its shareholders. Neither the amendment or repeal of this Article Eighth, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article Eighth, shall eliminate or reduce the protection afforded by this Article Eighth to a director or officer of the Corporation in respect to any matter which occurred, or any cause of action, suit or claim which but for this Article Eighth would have accrued or arisen, prior to such amendment, repeal or adoption. ARTICLE IX (a) The Corporation shall, to the fullest extent permitted by law, from time to time, indemnify directors and officers of the Corporation against expenses and liabilities incurred by such persons in connection with any proceeding involving such person as a party or witness by reason of such persons' serving as an officer or director of the Corporation. (b) The indemnification and advancement of expenses provided by or granted pursuant to this Article Ninth shall not exclude any other rights to which a person may be entitled under the Certificate of Incorporation, the By-Laws, an agreement, vote of shareholders, or otherwise. (c) Expenses incurred by a director or officer in connection with a proceeding shall be paid in advance of the final disposition of the proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount unless it shall ultimately be determined that such person is entitled to be indemnified as provided in this Article Ninth, the Certificate of Incorporation, the By-Laws, by vote of shareholders, or otherwise. (d) The Corporation shall have the power to purchase and maintain insurance on behalf of any director or officer against any expenses incurred in any proceeding in which such person is a party or a witness and any liabilities asserted against such person, whether or not the Corporation would have the power to indemnify such person against such 4 expenses and liabilities under this Article Ninth or otherwise. The Corporation may purchase such insurance from, or such insurance may be reinsured in whole or in part by, an insurer owned by or otherwise affiliated with the Corporation. (e) Neither the amendment or repeal of this Article Ninth, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article Ninth, shall eliminate or reduce the protection or rights afforded by this Article Ninth to any person in respect to any matter which occurred, or any claim or proceeding which but for this Article Ninth would have been made or arisen, prior to such amendment, repeal or adoption. IN WITNESS WHEREOF, the sole incorporator, being over eighteen years of age, has signed this Certificate of Incorporation on this 29th day of July, 1991. By /s/ Kenneth I. Sawyer ----------------------- Kenneth I. Sawyer 5 EX-3.(I) 3 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT Exhibit 3.2 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF PHARMACEUTICAL RESOURCES, INC. (Pursuant to Section (2) 14A:7-2(2) and 14A:9-2(2) of the Business Corporation Act of the State of New Jersey) ARTICLE ONE: The name of the Corporation is Pharmaceutical Resources, Inc. (the "Corporation"). ARTICLE TWO: The resolutions adopted by the Board of Directors of the Corporation, pursuant to subsections 14A:6-10(3) and 14A:7-2(3) of the Business Corporation Act of the State of New Jersey are as follows: WHEREAS, the Certificate of Incorporation of the Corporation provides for a class of shares known as Preferred Stock, consisting of 6,000,000 shares; and WHEREAS, said Certificate of Incorporation authorizes issuance of the Preferred Stock from time to time in one or more series and authorizes the Board of Directors to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, to fix the number of shares constituting any such series, and to determine the designation thereof, or any of them; and WHEREAS, the Corporation has not issued any shares of such Preferred Stock and the Board of Directors of the Corporation desires, pursuant to its authority as aforesaid, to determine and fix the rights, preferences, privileges, and restrictions relating to the initial series of said Preferred Stock and the number of shares constituting, and the designation of, said series: WHEREAS, in connection with the Settlement Agreement, dated as of March 3, 1992, in connection with the Securities Litigation of Par Pharmaceutical, Inc. ("Par") and the Par Derivative Litigation, Par entered into an Indemnity Agreement, among Par, Perry Levine and Jeffrey Levine, dated as of March 3, 1992, as amended, providing for, among other things, the issuance by the Corporation to the plaintiffs in such litigation, on behalf of Messrs. Levine and Levine, of 140,000 shares of its common stock, par value $.0l per share ("Common Stock"), and up to 13,333 options to purchase the Corporation's Common Stock in exchange for the assignment of their claims against certain insurance companies and their cooperation in pursuing claims against such insurers (the "Indemnity Agreement"), and the Corporation wishes to ratify and affirm such Indemnity Agreement; 1 NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby amends the Corporation's Certificate of Incorporation to fix and determine the designation of, the number of shares constituting, and the rights, preferences, privileges, and restrictions relating to, said initial series of Preferred Stock, as follows: 1. Designation and Number. 2,000,000 shares of Preferred Stock will be designated the "Series A Convertible Preferred Stock" (hereinafter referred to as the "Series A Preferred Stock") with the rights, preferences and privileges specified herein. 2. Voting Rights. The holders of Series A Preferred Stock shall not have any voting rights except as otherwise from time to time required by law. 3. Dividends. (a) The holders of record of shares of Series A Preferred Stock at the close of business on the first day of January of each year commencing after the issue date of the Series A Preferred Stock (each such date being hereinafter referred to as a "Dividend Record Date") shall be entitled to receive cash dividends at the per annum rate of the Dividend Rate (as defined below) per share, and no more, payable annually on the first day of February of each year commencing after the issue date of the Series A Preferred Stock (each a "Dividend Payment Date"). The "Dividend Rate" with respect to each Dividend Payment Date shall equal the amount, if any, of the Corporation's Net Income (as defined below) in excess of $1,500,000 for its fiscal year preceding the fiscal year which includes such Dividend Payment Date, divided by the number of shares of Series A Preferred Stock then issued and outstanding; provided, however, that the Dividend Rate shall not exceed $.30 per share with respect to any Dividend Payment Date. Notwithstanding the foregoing, the Dividend Rate for the first Dividend Payment Date shall be equal to the Dividend Rate, as determined in the preceding sentence, multiplied by a fraction, the numerator of which is the number of days elapsed from the entry of the final order pursuant to the Settlement Agreement, dated as of March 3, 1992, in connection with the Par Pharmaceutical, Inc. Securities Litigation and the Par Pharmaceutical, Inc. Derivative Litigation (the "Issue Date") to the last day of the Corporation's fiscal year immediately preceding such first Dividend Payment Date, inclusive, and the denominator of which shall be 365. For purposes of this Paragraph 3, "Net Income" shall mean, with respect to any fiscal year of the Corporation, the amount shown as the net income of the Corporation on the Consolidated Statement of Operations and Retained Earnings contained 2 in the Corporation's Form 10-K, Annual Report filed with the Securities and Exchange Commission for such fiscal year (before any amounts identified as extraordinary items thereon). Dividends upon the Series A Preferred Stock, if any, shall be preferential and cumulative (whether or not on any Dividend Payment Date there shall be funds of the Corporation legally available for the payment of such dividends), so that if at any time all prior dividends upon the Series A Preferred Stock through the immediately preceding Dividend Payment Date shall not have been paid or set apart for payment at the per annum rate specified above, the amount of the arrearage shall be fully paid, but without interest, before any dividends, other than dividends payable solely in shares of common stock, par value $.01 per share (the "Common Stock"), or other capital stock of the Corporation ranking junior as to dividends to the Series A Preferred Stock (the "Junior Dividend Stock"), shall be paid or set apart for payment on any shares of Common Stock or Junior Dividend Stock. (b) Any reference to "distribution" contained in this Paragraph 3 shall not be deemed to include any distributions made in connection with any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. 4. Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment of the debts and other liabilities of the Corporation, the holders of Series A Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets are stated capital or surplus of any nature, a sum equal to $5.00 per share together with any accrued but unpaid dividends thereon, but without interest, before any payments shall be made or any assets distributed to the holders of Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights to the Series A Preferred Stock (the "Junior Liquidation Stock"); provided, however, that such rights shall accrue to the holders of Series A Preferred Stock only in the event that the Corporation's payments with respect to the liquidation preferences of the holders of capital stock of the Corporation ranking senior as to liquidation rights to the Series A Preferred Stock (the "Senior Liquidation Stock") are fully met. The entire assets of the Corporation available for distribution after the liquidation preferences of the Senior Liquidation Stock are fully met shall be distributed ratably among the holders of the Series A Preferred Stock and any other 3 class or series of the Corporation's capital stock which may hereafter be created having parity as to liquidation rights with the Series A Preferred Stock, in proportion to the respective preferential amounts to which each is entitled (but only to the extent of such preferential amounts). Except as otherwise provided in this Paragraph 4, holders of Series A Preferred Stock shall not be entitled to any distribution in the event of a liquidation, dissolution or winding up of the Corporation. For purposes of this Paragraph 4, neither a consolidation or merger of the Corporation with one or more other corporations nor a sale or transfer of all or part of the Corporation's assets for cash, securities or other property will be considered a liquidation, dissolution or winding up of the Corporation unless such a transaction is entered into for the purpose of liquidating, dissolving or winding up the Corporation. 5. Redemption of Series A Preferred Stock. (a) Subject to the provisions of this Paragraph 5, the Corporation will, if required to facilitate a merger or consolidation of the Corporation in which the Common Stock will no longer be publicly traded (other than a merger or consolidation in which the common stock of the surviving corporation is owned by the holders of the Common Stock in substantially the same proportions in which they held such Common Stock before such merger or consolidation), redeem all, but not less than all, of the Series A Preferred Stock at the price specified in subparagraph (b) below. The Corporation shall provide, not less than 60 days prior to such redemption, notice by first class mail, postage prepaid, to each holder of Series A Preferred Stock at the address of such holder on the books of the Corporation, of the Corporation's election to redeem hereunder and shall publish such notice in the national edition of the Wall Street Journal and furnish a copy of such notice to Dow Jones & Company for inclusion in its news ticker. Any such notice by the Corporation shall specify the date fixed for the redemption, shall notify the holders of the Series A Preferred Stock of the conversion rights granted to them pursuant to subparagraph (e) below, and shall inform such holders of the consideration the holders of the Common Stock are entitled to receive pursuant to the merger or consolidation. Such notice shall be conclusively presumed to have been duly given, whether or not the holder of Series A Preferred Stock actually receives such notice; and failure to give such notice, or any defect in such notice, to any holder of any shares shall not affect the validity of any notice with respect to the redemption of any shares owned by any other holder of Series A Preferred Stock. 4 (b) Any redemption of the Series A Preferred Stock in accordance with subparagraph (a) above shall be for a price equal to $5.00 per share plus the amount all accrued and unpaid dividends thereon, but without interest, and no more. (c) On or after the date fixed for redemption as stated in any notice delivered by the Corporation in accordance with subparagraph (a), each holder of the shares called for redemption shall surrender the certificates evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the relevant redemption price in accordance with the terms of this Paragraph 5. If, on the date fixed for redemption under any provision of this Paragraph 5, funds necessary for the redemption shall be available therefor, then such shares shall no longer be deemed outstanding, the holders thereof shall cease to be stockholders with respect thereto, and all rights whatsoever with respect to such shares (except the right of the holders to receive the relevant redemption price without interest upon surrender of their certificates thereof) shall terminate. Shares of Series A Preferred Stock redeemed by the Corporation will be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to class, and thereafter may be issued, but not as shares of Series A Preferred Stock. (d) The shares of Series A Preferred Stock shall not be subject to the operation of a purchase, retirement or sinking fund. (e) Notwithstanding any other provision of this Paragraph 5 to the contrary, each holder of record of any shares of Series A Preferred Stock shall be entitled to convert all or a portion of such shares into Common Stock, in accordance with and subject to the provisions of Paragraph 6 hereof, at any time prior to the date fixed for redemption specified in accordance with subparagraph (a) hereof. (f) Nothing contained herein to the contrary shall preclude the Corporation from acquiring shares of Series A Preferred Stock in open-market transactions in compliance with any applicable federal or state securities laws. 6. Conversion. (a) Each share of Series A Preferred Stock may, at the option of the holder of record thereof, at any time, be converted into shares of Common Stock at the conversion rate in effect at the time 5 of such conversion. Each share of Series A Preferred Stock shall initially be convertible into one share of Common Stock, subject to adjustment as provided in subparagraph (f) hereof. The Corporation shall not be required to issue fractional shares of Common Stock upon any conversion, but shall pay in lieu thereof, as soon as practicable after the date the Series A Preferred Stock is surrendered for conversion pursuant to subparagraph (d) hereof, an amount in cash equal to the same fraction of the market value of a full share of Common Stock. For such purpose, the market value of a share of Common Stock shall be the last recorded sale price of such a share on the primary exchange on which the Common Stock is traded if such shares are listed on one or more securities exchanges, or if the shares of Common Stock are not listed on one or more securities exchanges, the last recorded sale price of a share of Common Stock if such shares are quoted on the National Market System of the National Association of Securities Dealers' Automated Quotation System ("NASDAQ"), or if the shares of Common Stock are not so listed or quoted, the closing bid price as reported by NASDAQ (other than the National Market System), on the day immediately preceding the date upon which such shares are surrendered for conversion. All shares of Common Stock which may be issued upon the conversion of the Series A Preferred Stock will, upon issuance, be fully paid and nonassessable. (b) Subsequent to the third anniversary of the Issue Date, the Corporation may, at its option, which option may be exercised on any date on which the market value of a share of Common Stock (as determined pursuant to subparagraph (a)) shall have been at least $10.00 on each day during the twenty-day period ending on the date such option is exercised, require all of the shares of Series A Preferred Stock to be converted into Common Stock. The Corporation shall exercise the conversion option granted pursuant to this subparagraph (b) by publishing a notice to such effect in the national edition of the Wall Street Journal and furnishing a copy of such notice to Dow Jones & Company for inclusion in its news ticker. On the date of such publication (the "Effective Date"), each outstanding share of Series A Preferred Stock shall automatically, without any action on the part of the holders thereof, be converted into a number of shares of Common Stock equal to the product of (i) 110% and (ii) the conversion rate (as determined pursuant to subparagraph (f)) in effect on the Effective Date. The Corporation shall not be required to issue any fractional shares of Common Stock upon any conversion pursuant to this subparagraph (b), but shall pay in lieu thereof, as soon as practicable after the Effective Date, 6 an amount in cash equal to the same fraction of the market value of a full share of Common Stock (as determined pursuant to subparagraph (a)) on the Effective Date. The Corporation shall, as soon as practicable after the Effective Date, issue each holder of shares of Series A Preferred Stock, a certificate representing the shares of Common Stock issuable to such holder upon the conversion of such holder's Series A Preferred Stock. (c) As promptly as practicable after any conversion of shares of Series A Preferred Stock pursuant to subparagraph (a) or (b), the Corporation shall pay, with respect to each share of Series A Preferred Stock which has been so converted, to the holder thereof, the amount, if any, of all accrued and unpaid dividends with respect to such share (including any dividends declared after the Effective Date or, if applicable, the Conversion Date, as defined in subparagraph (e) below, having a record date prior to such Effective Date or Conversion Date). Such amount shall be payable, at the option of the Corporation, either in cash or in shares of Common Stock valued at the market value thereof (as determined pursuant to subparagraph (a)) on the date such payment is made. (d) In order to exercise the conversion rights set forth in subparagraph (a), a holder of record of shares of Series A Preferred Stock shall surrender the certificate or certificates representing such shares, duly endorsed to the Corporation or in blank, signature guaranteed, at the office of the Corporation's transfer agent, or at such other office as the Corporation may designate, and shall give written notice to the Corporation that such holder elects to convert the Series A Preferred Stock or, subject to the provisions of subparagraph (g) below, a specified portion thereof and the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. As promptly as practicable after receipt of such notice, surrender of the certificate or certificates representing the Series A Preferred Stock, receipt of properly executed instruments of transfer satisfactory to the Corporation, if requested by the Corporation, and payment by the holder of any applicable transfer taxes, the Corporation shall issue and deliver (i) a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, in the name or names and to the address or addresses specified in the notice, and (ii) cash in respect of any fractional shares, as set forth in subparagraph (a), above. In case of the conversion of less than the entire number of shares of Series A Preferred Stock represented by the certificate 7 or certificates surrendered in accordance with the provisions of subparagraph (g) below, the Corporation shall cancel the certificate or certificates upon the surrender thereof and shall execute and deliver a new certificate for Series A Preferred Stock for the balance of the number of shares evidenced by such certificate or certificates not so converted. Each notice of election to convert pursuant hereto shall constitute a contract between the holder of shares of Series A Preferred Stock and the Corporation, whereby the holder of such shares shall be deemed to subscribe for the amount of Common Stock which he shall be entitled to receive upon such conversion, and to release the Corporation from all liability thereunder, and whereby the Corporation shall be deemed to agree that the amount paid to it for such shares, together with the surrender of the certificate or certificates therefor and the extinguishment of liability thereon, shall constitute full payment of such subscription for Common Stock to be issued upon such conversion. (e) A conversion pursuant to subparagraph (a) shall be deemed to have been effected at the close of business on the date on which the certificate or certificates of Series A Preferred Stock shall have been surrendered and notice shall have been given to the Corporation in accordance with subparagraph (d) (the "Conversion Date"). The holders of shares of Series A Preferred Stock whose shares are converted pursuant to subparagraph (a) or (b) shall cease to be shareholders with respect thereto on the Conversion Date or the Effective Date (whichever is applicable) and all rights whatsoever with respect to such shares (except the rights of the holders to receive shares of Common Stock and cash in respect of fractional shares) shall terminate, and the person or persons in whose name any certificate or certificates for Common Stock are issuable upon such conversion shall be deemed to have become the holder of record of the shares represented thereby on such date. On the Conversion Date or the Effective Date (whichever is applicable), all shares of Series A Preferred Stock which shall have been surrendered for conversion or automatically converted as herein provided shall no longer be deemed outstanding. Any shares of Series A Preferred Stock so converted shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to class, and may be issued thereafter, but not as shares of Series A Preferred Stock. (f) The conversion rate shall be subject to adjustment from time to time as follows: 8 (i) If the Corporation shall, at any time or from time to time while shares of Series A Preferred Stock shall be outstanding, (1) pay a dividend on Common Stock in Common Stock, (2) subdivide its outstanding shares of Common Stock into a greater number of shares, or (3) combine its outstanding shares of Common Stock into a smaller number of shares, then the number of shares of Common Stock into which shares of Series A Preferred Stock may be converted shall be proportionately increased or decreased, as the case may be, and the conversion rate in effect immediately prior to the record date fixed for the determination of shareholders entitled to such dividend, or immediately prior to such subdivision or conversion, as the case may be, shall be correspondingly increased or decreased, as the case may be, to produce such results (taking into account fractional interests in shares of the Common Stock to the nearest thousandth of a share, and for the purposes of the foregoing, considering such fractional interests as outstanding fractional shares). Similar adjustments shall be made if any of the events described hereinabove shall thereafter occur or reoccur. An adjustment made pursuant hereto shall become effective immediately after the record date, in the case of a dividend payable in Common Stock and immediately after the effective date, in the case of a subdivision or combination thereof. (ii) If, at any time or from time to time while shares of the Series A Preferred Stock shall be outstanding, the outstanding shares of Common Stock are changed into, in whole or part, a different kind or class of stock (or other securities representing, or payable in, or convertible into, or entitling the holder to purchase or subscribe for, stock of any class) as a result of a reclassification, the Corporation shall execute and deliver to the holders of record of shares of Series A Preferred Stock, agreements providing that such holders shall have the right immediately thereafter to convert their shares of Series A Preferred Stock into the kind and number or amount of shares of stock and other securities and property which are receivable upon such reclassification by a holder of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such change, and which new shares of stock, securities and other property shall thereafter be subject to adjustment, as nearly as practicable, in the same manner as provided herein. (iii) Whenever any adjustment is made in the number of shares of Common Stock into which shares of Series A Preferred Stock may be converted pursuant to any 9 of the foregoing provisions, the Corporation shall, as soon as reasonably practicable thereafter, prepare a written statement signed by an officer of the Corporation, setting forth the adjusted rate of conversion, determined as provided herein, and, in reasonable detail, the fact requiring such adjustment. The Corporation shall mail such statement to all holders of record of shares of Series A Preferred Stock then outstanding at their respective addresses appearing on the stock records of the Corporation. (iv) If the Corporation shall at any time merge or consolidate with or into another corporation, each holder of shares of the Series A Preferred Stock then outstanding shall, subject to the provisions of subparagraph 5(a), receive an equivalent preferred stock in the surviving company with the same or equivalent features, yield, parity, conversion rights, and protections as those of the Series A Preferred Stock. Alternatively, each holder of shares of Series A Preferred Stock may, immediately prior to such merger or consolidation, convert such shares into Common Stock in accordance with Paragraph 6 hereof. (g) The conversion of shares of the Series A Preferred Stock into shares of Common Stock pursuant to subparagraph (a) must be made in minimum multiples of 100 shares by the holder of record thereof, or, if less than 100 shares shall be owned of record by such holder, for all the outstanding shares then held by him. The Corporation shall be under no obligation to convert into Common Stock, any shares of Series A Preferred Stock which are not surrendered to it in whole multiples of 100 shares, or which do not constitute all the shares of such stock then held of record by the surrendering shareholder. (h) The Corporation shall at all times reserve and keep available out of authorized Common Stock, solely for the purpose of effecting the conversion of the Series A Preferred Stock, the full number of shares of Common Stock issuable upon conversion of all Series A Preferred Stock at any time outstanding. 7. Pre-emptive Rights. The holders of shares of Series A Preferred Stock shall have no pre-emptive rights. 8. Mutilated or Missing Certificate. In case a certificate representing Series A Preferred Stock shall be mutilated, lost, stolen or destroyed, the Corporation shall issue and deliver in lieu of and substitution for 10 the certificate so mutilated, lost, stolen or destroyed, a new certificate of like tenor and representing an equivalent number of shares of Series A Preferred Stock; but only upon receipt of evidence reasonably satisfactory to the Corporation of such mutilation, loss, theft or destruction of such certificate and indemnity with surety, if requested, also reasonably satisfactory to the Corporation. An applicant for a substitute certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Corporation may prescribe. FURTHER RES0LVED, that the appropriate officers of the Corporation be, and they hereby are, authorized and directed to file a certificate of amendment to the Certificate of Incorporation, amending the provisions of Article IV(b) of said Certificate of Incorporation to reflect the designation and number of shares of Series A Preferred Stock and the relative rights, preferences and limitations thereof, as set forth in the foregoing Resolution. ARTICLE THREE: The Resolutions set forth in Article Two hereof were duly adopted by the Board of Directors of the Corporation, by a telephonic meeting, pursuant to subsections 14A:6-10(3) and 14A:7-2(3) of the Business Corporation Act of the State of New Jersey on July 29, 1992. ARTICLE FOUR: Article IV(b) of the Certificate of Incorporation of the Corporation is hereby amended so that the designation and number of shares of Series A Preferred Stock and the relative rights, preferences and limitations thereof be as set forth in the resolutions contained in Article Two hereof. IN WITNESS WHEREOF, I have executed this Certificate of Amendment to the Certificate of Incorporation of the Corporation and do affirm the foregoing as true, under the penalties of perjury, this third day of August, 1992. /s/ Richard J. Nadler ------------------------------ Richard J. Nadler Vice President-Finance and Administrator 11 EX-3.(I) 4 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT 6-26-98 Exhibit 3.3 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF PHARMACEUTICAL RESOURCES, INC. To: The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3), Corporations, General, of the New Jersey Statutes, the undersigned Corporation executes the following Certificate of Amendment to its Certificate of Incorporation: 1. The name of the Corporation is Pharmaceutical Resources, Inc. 2. The following amendment to the Certificate of Incorporation was approved by the directors and thereafter duly adopted by the shareholders of the Corporation on the 26th day of June, 1998: Resolved, that Article IV(a) of the Certificate of Incorporation be amended to read as follows: "(a) The Corporation is authorized to issue 90,000,000 shares of capital stock which shall be designated the Common Stock, par value $.01 per share. Each holder of Common Stock of the Corporation entitled to vote shall have one vote for each share held thereof." 3. The number of shares entitled to vote upon the amendment was 18,890,153. 4. The number of shares voting for and against such amendment is as follows: Number of Shares Voting For Amendment Number of Shares Voting Against Amendment - ------------------------------------- ----------------------------------------- 11,368,619 5,424,154 Dated this 26 day of June, 1998. PHARMACEUTICAL RESOURCES, INC. By /s/ Kenneth I. Sawyer ---------------------------- Kenneth I. Sawyer Chairman and Chief Executive Officer EX-3.(II) 5 EXHIBIT 3.4 AMENDED & RESTATED BY-LAWS 6-30-98 Exhibit 3.4 BY-LAWS OF PHARMACEUTICAL RESOURCES, INC. ARTICLE I---OFFICES 1. Registered Office and Agent. The Registered Office and Registered Agent of the Corporation in the State of New Jersey shall be as determined from time to time by the Board of Directors of the Corporation. 2. Principal Place of Business. The principal place of business of the Corporation is One Ram Ridge Road, Spring Valley, New York 10977. 3. Other Places of Business. Branches or subordinate places of business or offices may be established at any time by the Board at any place or places where the Corporation is qualified to do business. ARTICLE II---SHAREHOLDERS 1. Annual Meetings. The annual meeting of shareholders shall be held upon not less than ten nor more than sixty days written notice of the time, place and purpose of the meeting at 11:00 a.m. on the 15th day of the month of November of each year at the principal office of the Corporation, or at such other time and place as shall be specified in the notice of meeting, in order to elect directors and transact such other business as shall come before the meeting. If that date is a legal holiday, the meeting shall be held at the same hour on the next succeeding business day. 2. Special Meetings. A special meeting of shareholders may be called for any purpose by the president or the Board. A special meeting shall be held upon not less than ten or more than sixty days written notice of the time, place and purpose of the meeting. 3. Action Without Meeting. The shareholders may act without a meeting if, prior or subsequent to such action, each shareholder who would have been entitled to vote upon such action shall consent in writing to such action. Such consent shall be filed in the minute book. 4. Quorum. The presence at a meeting in person or by proxy of the holders of shares entitled to cast a majority of the votes shall constitute a quorum. 5. Voting. Except as otherwise provided by statute or the Certificate of Incorporation, at all meetings of the shareholders, every registered owner of shares entitled to vote may vote in person or by proxy and shall have one vote for each such share standing in his name on the books of the Company. At all elections of directors, the voting shall be by ballot. The Board of Directors, or, if the Board shall not have made the appointment, the chairman presiding at any meeting of shareholders, shall have the power to appoint two or more persons to act as inspectors or tellers, to receive, canvass, and report the votes cast by the shareholders at such meeting; but no candidate for the office of director shall be appointed as inspector or teller at any meeting for the election of directors. 6. Conduct of Meeting. The chairman or, in his absence, the president or a vice president shall preside at all meetings of the shareholders; and, the secretary, or in his absence, the person whom the chairman or, in his absence, such president or vice president may appoint, shall act as secretary of the meeting and keep the minutes thereof. ARTICLE III---BOARD OF DIRECTORS 1. Number and Term of Office. Subject to the rights of the holders of any class or series of capital stock having a preference over the common stock of the Company as to dividends or upon liquidation to elect additional directors under specific circumstances, the number of directors which shall constitute the whole Board of Directors of the Corporation shall not be less than three nor more than fifteen directors. Subject to the foregoing, the actual number of directors shall be determined from time to time by the Board of Directors. The directors, other than those who may be elected by the holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, shall be classified with respect to the time for which they severally hold office into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the annual meeting of shareholders to be held in 1994, the term of office of the second class to expire at the annual meeting of shareholders to be held in 1992, and term of office of the third class to expire at the annual meeting of shareholders to be held in 1993, with the members of each class to hold office until their successors are elected and qualified. Commencing at the 1992 annual meeting of the shareholders of the Corporation, and at each succeeding annual meeting of the shareholders thereafter, the successors of the class of directors whose term expires at that meeting shall be elected by plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of shareholders in the third year following the year of their election, with each director to hold office until his successor shall have been duly elected and qualified. 2. Regular Meetings. A regular meeting of the Board shall be held without notice and immediately following and at the same place as the annual shareholders' meeting for the purposes of electing officers and conducting such other business as may come before the meeting. The Board, by resolution, may provide for additional regular meetings which may be held without notice, except to members not present at the time of the adoption of the resolution. 3. Special Meetings. A special meeting of the Board may be called at any time by the president or by three directors for any purpose. Such meeting shall be held upon two days' notice if given orally (either by telephone or in person), by telefacsimile or by overnight courier, or upon not less than three days' notice if given by depositing the notice in the United States mails, postage prepaid. Such notice shall specify the time and place of the meeting, which may be by means of 2 conference, telephone or any means of communication by which all persons participating in the meeting are able to hear each other. 4. Action Without Meeting. The Board may act without a meeting if, prior or subsequent to such action, each member of the Board shall consent in writing to such action. Such written consent or consents shall be filed in the minute book. 5. Quorum. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. 6. Vacancies in Board of Directors. Except as otherwise provided in this Section, any vacancy on the Board, or a vacancy caused by an increase in the number of directors, may be filled by the affirmative majority of the remaining directors or by a sole remaining director, even though less than a quorum of the Board. The sole and exclusive manner of filling a vacancy of a "Company Designee" (as such term is defined in the Stock Purchase Agreement, dated March 25, 1998, between the Corporation and Lipha Americas, Inc.), including a successor to a Company Designee, shall be by an affirmative majority of the remaining Company Designees or any successors or by a sole remaining Company Designee or any successor, even though less than a quorum of the Board. This Section shall not be amended or repealed, except with the consent of a majority of the Company Designees or their successors. 7. Executive Committee. There shall be an executive committee of the Board of Directors which shall consist of not more than three directors, which shall have the power and authority to manage the day-to-day affairs of the Corporation without the necessity of a meeting of the whole Board of Directors, or approval of said Board. 8. Conduct of Meetings: Voting. At meetings of the Board of Directors, the chairman or, in his absence, the president or a designated vice president shall preside. The act of the majority of the directors present at any meeting in which a quorum is present shall be the act of the Board of Directors. At any meeting at which every director shall be present, even though without any notice, any business may be transacted. 9. Compensation. The directors shall receive such compensation for their services as directors and as members of any committee appointed by the Board as may be prescribed by the Board of Directors and shall be reimbursed by the Company for ordinary and reasonable expenses incurred in the performance of their duties. 10. Manifestation of Dissent. A director of the Company who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action. 3 ARTICLE IV---WAIVERS OF NOTICE Any notice required by these By-Laws, by the Certificate of Incorporation, or by the New Jersey Business Corporation Act may be waived in writing by any person entitled to notice. The waiver or waivers may be executed either before or after the event with respect to which notice is waived. Each director or shareholder attending a meeting without protesting, prior to its conclusion, the lack of proper notice shall be deemed conclusively to have waived notice of the meeting. ARTICLE V---OFFICERS 1. Election. At its regular meeting following the annual meeting of shareholders, the Board shall elect a president, a treasurer, a secretary, and it may elect such other officers, including a chairman of the Board, and one or more vice presidents, assistant secretaries and assistant treasurers, who will have such duties and authority as determined by the Board. One person may hold two or more offices. 2. Duties and Authority of President. The president shall be the chief executive officer of the Corporation. Subject only to the authority of the Board, he shall have general charge and supervision over, and responsibility for, the business and affairs of the Corporation. Unless otherwise directed by the Board, all other officers shall be subject to the authority and supervision of the president. The president may enter into and execute in the name of the Corporation contracts or other instruments in the regular course of business or contracts or other instruments not in the regular course of business which are authorized, either generally or specifically, by the Board. He shall have the general powers and duties of management usually vested in the office of president of a corporation. 3. Duties and Authority of Vice President. Each vice president shall perform such duties and have such authority as from time to time may be delegated to him by the president or by the Board. 4. Duties and Authority of Treasurer. The treasurer shall have the custody of the funds and securities of the Corporation and shall keep or cause to be kept regular books of account for the Corporation. The treasurer shall perform such other duties and possess such other powers as are incident to the office or as shall be assigned by the president or the Board. 5. Duties and Authority of Secretary. The secretary shall cause notices of all meetings to be served as prescribed in these By-Laws and shall keep or cause to be kept the minutes of all meetings of the shareholders and the Board. The secretary shall have charge of the seal of the Corporation. The secretary shall perform such other duties and possess such other powers as are incident to the office or as shall be assigned by the president or the Board. 4 6. Vacancies. In case any office shall become vacant, the Board of Directors shall have the power to fill such vacancies. In case of the absence or disability of any officer, the Board of Directors may delegate the powers or duties of any officer to another officer or a director for the time being. 7. Exercise of Rights as Shareholder. Unless otherwise ordered by the Board of Directors, the president, or a vice president thereunto duly authorized by the president, shall have full power and authority on behalf of the Corporation to attend and to vote at any meeting of shareholders of any corporation in which this Corporation may hold stock, and may exercise on behalf of this Corporation any and all of the rights and powers incident to the ownership of such stock at any such meeting, and shall have power and authority to execute and deliver proxies and consents on behalf of this Corporation in connection with the exercise by this Corporation of the rights and powers incident to the ownership of such stock. The Board of Directors, from time to time, may confer like powers upon any other person or persons. ARTICLE VI---CAPITAL STOCK 1. Stock Certificates. Certificates for stock of the Corporation shall be in such form as the Board of Directors may from time to time prescribe and shall be signed by the president or a vice president and by the treasurer or an assistant treasurer or the secretary or an assistant secretary. If certificates are signed by a transfer agent, acting in behalf of the Corporation and a registrar, the signatures of the officers of the Corporation may be facsimile. 2. Transfer Agent. The Board of Directors shall have the power to appoint one or more transfer agents and registrars for the transfer and registration of certificates of stock of any class, and may require that stock certificates be countersigned and registered by one or more of such transfer agents and registrars. 3. Transfer of Stock. Shares of capital stock of the Corporation shall be transferable on the books of the Corporation only by the holder of record thereof in person or by a duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares. 4. Lost Certificates. In case any certificate for the capital stock of the Corporation shall be lost, stolen, or destroyed, the Corporation may require such proof of the fact and such indemnity to be given to it and to its transfer agent and registrar, if any, as shall be deemed necessary and advisable by it. 5. Holder of Record. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law. 5 6. Closing of Books. The Board of Directors shall have power to close the stock transfer books of the Corporation for a period not exceeding fifty days preceding the date of any meeting of shareholders or the date for payment of any dividend or the date for allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect; provided that, in lieu of closing the stock transfer books, the Board of Directors may fix in advance a date, not exceeding fifty days preceding the date of any meeting of shareholders, or the date for payment of any dividend or the date for allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of shareholders entitled to notice of and to vote at any such meeting, or entitled to receive payment of any such dividends, or any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, and in such case only shareholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting, or to receive payment of such dividend, or allotment of rights, or exercise such rights, as the case may be, and notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as herein provided. ARTICLE VII---INDEMNIFICATION OF DIRECTORS AND OFFICERS 1. The Corporation shall, to the fullest extent, from time to time, permitted by law, indemnify directors and officers of the Corporation against expenses and liabilities incurred by such persons in connection with any proceeding involving such person as a party or witness by reason of such person's serving as an officer or director of the Corporation. 2. The indemnification and advancement of expenses provided by or granted pursuant to this Article VII shall not exclude any other rights to which a person may be entitled under the Certificate of Incorporation, these By-Laws, an agreement, vote of shareholders, or otherwise. 3. Expenses incurred by a director or officer in connection with a proceeding shall be paid in advance of the final disposition of the proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount unless it shall ultimately be determined that such person is entitled to be indemnified as provided in this Article VII, the Certificate of Incorporation, these By-Laws, by vote of shareholders, or otherwise. 4. The Corporation shall have the power to purchase and maintain insurance on behalf of any director or officer against any expenses incurred in any proceeding in which such person is a party or witness and any liabilities asserted against such person, whether or not the Corporation would have the power to indemnify such person against such expenses and liabilities under this Article VII or otherwise. The Corporation may purchase such insurance from, or such insurance may be reinsured in whole or in part by, an insurer owned by or otherwise affiliated with the Corporation. 5. Neither the amendment or repeal of this Article VII, nor the adoption of any provision of the Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the protection or rights afforded by this Article VII to any person in respect to any matter which 6 occurred, or any claim or proceeding which but for this Article VII would have been made or arisen, prior to such amendment, repeal, or adoption. ARTICLE VIII---QUALIFICATIONS OF DIRECTORS AND OFFICERS 1. Definitions. For purposes of this Article VIII, the following terms shall have the following meanings: (a) "Affiliate", "Associate" and "control" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 (the "Exchange Act"). (b) "Principal Party" shall mean any person or entity which, pursuant to an agreement, understanding or otherwise, is represented by another person. (c) "Regulatory Approvals" shall mean any governmental or regulatory approvals, agreements, permits, licenses or registrations of the Corporation or any of its subsidiaries necessary for the conduct of their business. 2. Qualifications. No person shall serve as a director or officer of the Corporation or shall be elected or appointed to serve in any such capacity if, in the good faith judgment of the Board of Directors, there is a reasonable likelihood that service by such person as a director or officer (whether based on the qualifications of such person or on the qualifications of any Affiliate, Associate or Principal Party of such person) will result in (i) the loss of any existing Regulatory Approvals, (ii) the inability of the Corporation or any subsidiary to renew any Regulatory Approvals or (iii) the inability of the Corporation or any subsidiary to obtain new Regulatory Approvals. 3. Removal. Any director specified in Section 2 of this ARTICLE VIII may be removed, for cause, at any time, by the affirmative vote of a majority of the directors present at any meeting in which a quorum is present. Any such affected director shall be counted for purposes of a quorum at any such meeting, but shall not be counted for purposes of determining the vote of directors present at such meeting. Any vacancy caused by the removal of a director pursuant to this Section 3 may be filled by the affirmative vote of the majority of the remaining directors then in office. 4. Determination of the Board of Directors. Any determination by the Board of Directors with respect to the qualifications of any person to serve as a director or officer of the Corporation pursuant to this ARTICLE VIII, whether based on the qualifications of such person or the qualifications of any Affiliate, Associate or Principal Party of such person, shall, among other things, take into account the involvement of any of such persons in legal actions or proceedings or governmental investigations. Persons, or their Affiliates, Associates or Principal Parties, covered by Section 2 shall include, but shall not be limited to, any (i) directors, officers or employees of the Corporation or its subsidiaries whose actions the Board of Directors has determined in good faith were detrimental to the maintenance, renewal or acquisition of the Regulatory Approvals, whether 7 they resigned or were dismissed for cause, (ii) persons or entities who were convicted in criminal proceedings or are named defendants of pending criminal proceedings (excluding minor offenses) relating to the pharmaceutical industry or any other business regulated by any Federal, state or local governmental agency or (iii) persons or entities who are subject to any order, judgment, decree or debarment, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or governmental or regulatory authority permanently or temporarily enjoining them from, or otherwise limiting such person or entity from engaging in, any type of business practice relating to the pharmaceutical industry or any other business regulated by any Federal, state or local governmental agency. ARTICLE IX---AMENDMENTS TO AND EFFECT OF BY-LAWS; FISCAL YEAR 1. Force and Effect of By-Laws. These By-Laws are subject to the provisions of the New Jersey Business Corporation Act and the Corporation's Certificate of Incorporation, as it may be amended from time to time. If any provision in these By-Laws is inconsistent with a provision in that Act or the Certificate of Incorporation, the provision of that Act or the Certificate of Incorporation shall govern. 2. Amendments to By-Laws. These By-Laws may be altered, amended or repealed by the shareholders or the Board. Any By-Laws adopted, amended or repealed by the shareholders may be amended or repealed by the Board, unless the resolution of the shareholders adopting such By-Laws expressly reserves to the shareholders the right to amend or repeal it. 3. Fiscal Year. The fiscal year of the Corporation shall end on September 30th of each year. Amended and restated through June 30, 1998. 8 EX-10 6 EXHIBIT 10.1 STOCK PURCHASE AGREEMENT 3-25-98 Exhibit 10.1 STOCK PURCHASE AGREEMENT, dated March 25, 1998, between Pharmaceutical Resources, Inc., a New Jersey corporation (the "Company"), whose principal offices are located at One Ram Ridge Road, Spring Valley, New York 10977, and Lipha Americas, Inc., a Delaware corporation (the "Purchaser"), whose principal offices are located at 1209 Orange Street, Wilmington, Delaware 19801. WHEREAS, the Company desires to issue and sell to the Purchaser, and the Purchaser desires to purchase from the Company, 10,400,000 restricted shares (the "Shares") of the Company's common stock, par value $.01 per share ("Common Stock"); WHEREAS, concurrently with the execution and delivery of this Agreement, Merck KGaA, an affiliate of the Purchaser ("Merck"), and Clal Pharmaceutical Industries, Ltd. ("Clal") are entering into a stock purchase agreement pursuant to which Merck (or its designees) will, subject to the terms and conditions thereof, purchase from Clal certain shares of Common Stock beneficially owned by Clal (the "Clal Stock Purchase Agreement"), the consummation of which transaction shall occur at the time of the consummation of the transactions contemplated by this Agreement; WHEREAS, concurrently with the execution and delivery of this Agreement and as an inducement to the Company to enter into this Agreement, the Company and Genpharm, Inc. ("Genpharm"), an affiliate of the Purchaser, are entering into a distribution agreement pursuant to which, and subject to the conditions contained therein, the Company shall distribute certain products of Genpharm, substantially in the form of Exhibit A hereto (the "Distribution Agreement"); WHEREAS, at the Closing (as defined in Section 1.2 hereof), the Company and Genpharm and Merck shall enter into services agreements substantially in the form of Exhibit B hereto (collectively, the "Services Agreements"; each individually referred to herein as a "Services Agreement") pursuant to which Merck and Genpharm shall render certain significant services to the Company, in consideration of, among other things, the issuance by the Company to Merck and Genpharm of certain five-year stock options exercisable commencing in the year 2001 to acquire up to an aggregate of 1,171,040 additional shares of Common Stock (the "Option Shares"), substantially in the form of Exhibit C hereto (collectively, the "Options"; each individually referred to herein as an "Option"); WHEREAS, the Company has received a fairness opinion from Gruntal & Co., L.L.C. ("Gruntal") to the effect that the Purchase Price (as defined in Section 1.1 hereof) and the transactions contemplated by this Agreement, the Distribution Agreement, the Services Agreements and the Options are, taken as a whole, from a financial point of view, fair to the holders of Common Stock; WHEREAS, the Company's Board of Directors has approved the execution and performance of this Agreement, the Distribution Agreement, the Services Agreements and the Options, and has determined that the transactions contemplated hereby and thereby are in the best interests of the Company and its shareholders; and WHEREAS, the Company and the Purchaser desire to set forth their mutual agreements with respect to the sale and purchase of the Shares and as to the other matters set forth herein. 1 NOW, THEREFORE, in consideration of the premises and of the mutual agreements set forth herein, the parties hereto agree as follows: SECTION 1. Closing Transactions. 1.1 Purchase and Sale of Shares. At the Closing, the Company shall sell to the Purchaser, and the Purchaser shall, or shall cause its designee to, purchase from the Company, upon the terms and subject to the conditions hereinafter set forth, the Shares for an aggregate cash purchase price of $20,800,000 (the "Purchase Price"), or $2.00 per Share. 1.2 The Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Hertzog, Calamari & Gleason, 100 Park Avenue, 23rd Floor, New York, New York, at 10:00 A.M., on the second business day following the date on which all of the conditions set forth in Sections 4 and 5 hereof shall have been satisfied or, to the extent permitted, waived, or at such other place, time and/or date as the parties may agree (the "Closing Date"); provided, that the Closing Date shall not occur before June 1, 1998. 1.3 Closing Deliveries. (a) At the Closing, the Company shall deliver to the Purchaser, Merck and Genpharm, as applicable: (i) a stock certificate or certificates representing the Shares, registered in the name of the Purchaser or, subject to Section 13.2 hereof, its designee on the Company's books and containing no legends other than as set forth in Section 9.2 hereof and as required under the Rights Agreement (as defined in Section 7.11 hereof); (ii) a registration rights agreement, duly executed by the Company, substantially in the form of Exhibit D hereto (the "Registration Rights Agreement"); (iii) the certificates of officers of the Company referred to in Sections 5.1 and 5.2 hereof; (iv) the agreements covering the Options, duly executed by the Company; (v) the opinion of counsel referred to in Section 5.3 hereof; (vi) the Services Agreements, duly executed by the Company; (vii) the agreement of the Chairman of the Company referred to in Section 7.10 hereof; and (viii) the agreement of Kenneth Sawyer referred to in Section 7.3(e) hereof. 2 (b) At the Closing, the Purchaser, Merck and Genpharm, as applicable, shall deliver to the Company: (i) the Purchase Price, in the form of a wire transfer of immediately available funds to an account designated by the Company; (ii) the Registration Rights Agreement, duly executed by the Purchaser, Merck and Genpharm; (iii) the certificates of officers of the Purchaser referred to in Sections 4.1 and 4.2 hereof; (iv) the opinion of counsel referred to in Section 4.3 hereof; (v) the Services Agreements, duly executed by Merck or Genpharm, as applicable; (vi) the agreements covering the Options, duly executed by Merck or Genpharm, as applicable; and (vii) the agreement of the Purchaser (and its Affiliates) referred to in Section 7.3(e) hereof. SECTION 2. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser as follows: 2.1 Organization. Each of the Company, and any corporation with respect to which the Company owns a majority of the common stock, or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors, or has the power to control or direct the actions of such corporation, all of which are set forth on Schedule 2.11 hereto (collectively, the "Subsidiaries", each individually referred to herein as a "Subsidiary"), is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, as set forth on Schedule 2.11. Each of the Company and its Subsidiaries has all necessary corporate power and authority to own or lease its properties and to conduct its business as now being conducted. Each of the Company and its Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the property owned, leased or operated by it, or the nature of the business conducted by it, requires such qualification under applicable law, except where the failure to be so qualified would not result in a Material Adverse Effect (as defined in Section 2.10 hereof). 3 2.2 Authorization. The execution, delivery and, subject to obtaining the approval (the "Shareholders' Approval") of the holders of (i) a majority of the outstanding shares of Common Stock for the issuance of the Shares, the delivery of the Options and the issuance of the Option Shares, (ii) a majority of the outstanding shares of Common Stock for the amendment of the Company's certificate of incorporation in order to increase the number of authorized shares of Common Stock and (iii) a plurality of the shares of Common Stock voted at a meeting for the election of the Nominees (as defined in Section 7.3 hereof) (the preceding clauses (i), (ii) and (iii) to be individually referred to herein as a "Proposal" and collectively as the "Proposals"), the performance by the Company of this Agreement, the other agreements referred to herein and the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action by the Company. This Agreement constitutes, and each other agreement referred to herein, upon due execution and delivery, will constitute, the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) bankruptcy laws and other similar laws affecting creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law. 2.3 Non-contravention. Neither the execution, delivery or performance of this Agreement and the other agreements referred to herein nor the consummation of the transactions contemplated hereby or thereby will, subject to obtaining the Shareholders' Approval, violate or be in conflict with any provision of the certificate of incorporation or by-laws of any of the Company and its Subsidiaries; subject to obtaining the Shareholders' Approval, and except as set forth on Schedule 2.3 hereto, violate or be in conflict with any material note, bond, lease, mortgage, indenture, license, contract, commitment, franchise, permit, instrument or other material agreement or obligation to which any of the Company and its Subsidiaries is a party or by which it is bound; violate or be in conflict with any law, judgment, decree, order, regulation or ordinance by which any of the Company and its Subsidiaries is bound or affected; or result in the creation or imposition of any liens, charges, pledges or other encumbrances ("Liens") in favor of any third party upon any property or assets of the Company and its Subsidiaries. 2.4 Authorization of the Shares. Subject to obtaining the Shareholders' Approval, all corporate action necessary for the issuance, sale and delivery of the Shares has been taken by the Company and, when issued and delivered upon payment in full of the Purchase Price, the Shares will be validly issued, fully paid and nonassessable, free and clear of any and all Liens. Subject to obtaining the Shareholders' Approval, the Option Shares will be validly authorized for issuance and, when and if issued upon payment in full of the exercise price for the Option Shares in accordance with the terms of the Options, the Option Shares will be validly issued, fully-paid and nonassessable, free and clear of any and all Liens. 2.5 Capitalization. The authorized capital stock of the Company consists of 60,000,000 shares of Common Stock, of which no more than 18,923,000 shares are issued and outstanding as of the date hereof, and 6,000,000 shares of preferred stock, par value $.0001 per share, of which no shares are issued and outstanding as of the date hereof. The Company holds no treasury shares. All outstanding shares of Common Stock have been duly and validly issued and are fully-paid and nonassessable. There are no outstanding securities exchangeable or convertible into, or options, warrants, or rights to subscribe for, or to purchase, or commitments to issue, any unissued shares of capital stock of any of the Company and its Subsidiaries, except as set forth on Schedule 2.5 hereto. 4 2.6 Reports Under the Exchange Act. Since October 1, 1994, except as set forth on Schedule 2.6 hereto, the Company has filed with the Securities and Exchange Commission (the "SEC") in timely fashion all reports required to be filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") (as such reports may have been amended or supplemented, the "SEC Reports"). The Common Stock is registered under Section 12(b) of the Exchange Act. As of their respective filing dates with the SEC, the SEC Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances in which they were made, not misleading. 2.7 No Brokers or Finders. No person, firm or corporation has or will have, as a result of any act or omission by any of the Company and its Subsidiaries, any right, interest or valid claim against the Purchaser or any of the Company and its Subsidiaries for any commission, fee or other compensation as a finder or broker, or in any similar capacity, other than with respect to the opinion referred to in Section 4.9 hereof (the costs of which will be borne by the Company), in connection with the transactions contemplated by this Agreement. 2.8 Governmental Authorizations; Third-Party Consents. No approval, consent, authorization or other action by, or notice to or filing with, any governmental authority or any other person or entity, and no lapse of a waiting period, is necessary or required in connection with the execution, delivery or performance by the Company of this Agreement, the other agreements referred to herein or the transactions contemplated hereby or thereby, except for (i) such filings or approvals required pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations promulgated thereunder (the "HSR Act"), (ii) such filings or approvals as may be required to be obtained in connection with the manufacture and sale of products pursuant to the Distribution Agreement, (iii) the Shareholders' Approval of the Proposals by the requisite votes, (iv) such filings or approvals required to list the Shares and the Option Shares on the New York Stock Exchange and the Pacific Stock Exchange and (v) the matters set forth on Schedule 2.8 hereto. 2.9 Financial Statements. The audited financial statements of the Company included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the "Audited Statements") and the unaudited financial statements of the Company included in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1997 (the "Unaudited Statements") complied as to form with the requirements of the Exchange Act and except as disclosed therein or in the footnotes thereto and, except for the absence of notes and subject to year-end adjustments in the case of the Unaudited Statements, were prepared in accordance with United States generally accepted accounting principles. The Audited Statements and the Unaudited Statements fairly present, in all material respects, the consolidated financial condition and the consolidated results of operations of the Company as of the dates and for the periods indicated therein. 2.10 Absence of Material Adverse Effect. Except as disclosed in the SEC Reports, since January 1, 1998, the business of the Company and its Subsidiaries has been operated in the ordinary 5 course and substantially consistent with past practice. Since January 1, 1998, there has been no event or circumstance resulting in a material adverse effect on the properties, business and assets, liabilities, condition (financial or otherwise) or operations of the Company and its Subsidiaries, considered as a whole (a "Material Adverse Effect"). There has been no event or circumstance, since January 1, 1998, which would materially adversely affect the ability of the Company to perform its obligations under this Agreement, or any of the other agreements to be entered into in connection with this Agreement, or to consummate the transactions contemplated hereby and thereby. 2.11 Subsidiaries; Other Equity Interests. Each Subsidiary of the Company and each other person in which the Company or any of its Subsidiaries has an equity interest is set forth on Schedule 2.11 hereto. Each Subsidiary is wholly (100%) owned by the Company. The authorized, issued and outstanding shares of the capital stock of each Subsidiary, and the record and beneficial ownership of the outstanding shares thereof, is as set forth on Schedule 2.11. There are no agreements or arrangements to which any Subsidiary is a party or by which it is bound for the redemption, repurchase or issuance of, and there are no options, warrants, puts, calls or other rights to subscribe for or purchase, shares of such Subsidiary's capital stock. 2.12 No Third-Party Options. Except as contemplated hereby, as set forth on Schedule 2.12 hereto, or as disclosed in the SEC Reports, there are no existing agreements, contracts, commitments, options, warrants or rights with, of or to any person which are binding on the Company or its Subsidiaries to acquire any of the Company's and its Subsidiaries' assets, properties, or rights or any interest therein (whether real, personal or mixed, tangible or intangible, wherever located and whether in the possession of the Company and its Subsidiaries or any other person), except for those entered into in the ordinary course of business consistent with past practice for the sale of inventory and/or which could not reasonably be expected to result in a Material Adverse Effect. 2.13 Employee Matters. (a) The Company has delivered to the Purchaser a list of its and its Subsidiaries' current employees (the "Employees"). This list, attached hereto as Schedule 2.13(a), sets forth the current compensation, commissions or hourly rate of pay, date of birth, date and location of employment and job title for each Employee. Schedule 2.13(a) lists all agreements between the Company and its Subsidiaries and any Employee(s) with respect to the employment of any Employee(s). Except as set forth on Schedule 2.13(a), there are no outstanding loans with outstanding principal amounts in excess of $50,000 from the Company or any of its Subsidiaries to any Employees. Except as set forth on Schedule 2.13(a), no Employee is on disability or other leave of absence and the Company is not aware of the intent of any officer, executive employee or head of a department of any of the Company and its Subsidiaries to terminate his/her employment. (b) Schedule 2.13(b) hereto lists each "employee benefit plan", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not covered by ERISA, that any of the Company and its Subsidiaries sponsors or has 6 sponsored to which the Company or any of its Subsidiaries is or has been in the past three years required to make contributions, including without limitation any pension, profit-sharing, retirement or deferred compensation plan, each other benefit plan, policy, arrangement or practice, whether covering one or more employees, which provides deferred compensation, bonus, stock purchase, stock option, vacation, severance, disability, hospitalization, medical insurance or life insurance payments or benefits and any other material employee benefit plans, agreements, arrangements or understandings maintained for the benefit of the Employees or former employees of any of the Company and its Subsidiaries ("Former Employees") (collectively, together with any related trusts, the "Employee Benefit Plans"). Except as set forth on Schedule 2.13(b), no Employee Benefit Plan constitutes a multi-employer plan (as defined under Section 400(a)(3) of ERISA). Except as set forth on Schedule 2.13(b), all participants in the Employee Benefit Plans are Employees or Former Employees (or their dependents or beneficiaries). The Company has previously delivered or made available to the Purchaser true and complete copies of all documents or instruments establishing or constituting each such Employee Benefit Plan and all summary plan descriptions or other descriptive materials relating thereto distributed by the Company and its Subsidiaries to Employees. Except as set forth on Schedule 2.13(b), all Employee Benefit Plans are currently in compliance with all applicable funding requirements under law. Schedule 2.13(b) also sets forth a list of those Former Employees (or their dependents or beneficiaries) who are receiving continuation coverage under the Company's or any of its Subsidiaries' medical plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the dates upon which those individuals commenced receiving such continuation coverage. Except as set forth on Schedule 2.13(b), none of the Company, its Subsidiaries or the Purchaser will incur any liability under any Employee Benefit Plan or agreement with an Employee solely as a result of the transactions contemplated by this Agreement. (c) Except as set forth on Schedule 2.13 (c) hereto, (i) each Employee Benefit Plan which is an "employee pension benefit plan", as defined in Section 3(2) of ERISA, meets the requirements of Section 401(a) of the Code and any related trust is exempt from U.S. federal income tax under Section 501(a) of the Code and (ii) the Company and its Subsidiaries are in compliance in all material respects with the terms of such Employee Benefit Plans and with the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), and ERISA in respect thereto. None of the Company or its Subsidiaries has any obligation under any Employee Benefit Plan or otherwise to provide post-retirement health benefits (exclusive of obligations under COBRA) with respect to any of the Employees or Former Employees. (d) The Employees are not and have not in the past three years been covered by any labor or collective bargaining agreement. No strike, work stoppage, picketing, slowdown, lockout or material labor dispute involving the Company's or its Subsidiaries' operations has occurred during the past three years or, to the Company's knowledge, is threatened. To the Company's knowledge, no attempt at the organization of a union involving the Company or its Subsidiaries has occurred during the past three years or is threatened. (e) None of the Company or its Subsidiaries has incurred any material liability under, and has complied in all material respects with, the Worker Adjustment Retraining and 7 Notification Act and the regulations promulgated thereunder and any similar state laws and does not reasonably expect to incur any such liability as a result of actions taken or not taken prior to the date hereof. (f) Except as set forth on Schedule 2.13(f) hereto or as disclosed in the SEC Reports, the Company and its Subsidiaries have complied in all material respects with all applicable laws, rules, regulations and executive orders governing the terms and conditions of employment, discriminatory practices with respect to employment, hiring and discharge, the employment of aliens, the payment of minimum wages and overtime, workplace health and safety or otherwise relating to the conduct of employers with respect to employees and potential employees, and except as set forth on Schedule 2.13, there have been no claims made or, to the Company's knowledge, threatened against the Company or its Subsidiaries arising out of, relating to or alleging any material violation of the foregoing. 2.14 Permits. The Company and its Subsidiaries have all licenses, permits, orders, certificates, authorizations, consents and approvals of all governmental and regulatory authorities and bodies, whether federal, state or local, domestic or foreign, which are necessary for the operation of its business as currently conducted ("Permits"), except for the failure to have such Permits that could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. Except as could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect, the Permits are in full force and effect and no suspension or cancellation of any of them is pending or, to the Company's knowledge, threatened. 2.15 Intellectual Property. Schedule 2.15 hereto sets forth all of the patents, registered copyrights and registered trademarks of the Company and its Subsidiaries, all of which are owned by the Company or its Subsidiaries free and clear of any Liens. None of the Company or its Subsidiaries has infringed upon or unlawfully used, in any material respect, any patent, trademark, service mark, tradename, copyright, or trade secret ("Intellectual Property") owned by another person. None of the Company or its Subsidiaries has received any written notice of any claim of infringement or other material claim relating to any of its Intellectual Property. No shareholder of the Company or its Subsidiaries or member of any such shareholder's family or any entity controlled by them, or any Employee or Former Employee owns or has any proprietary, financial or other material interest, directly or indirectly, in any Intellectual Property which the Company or its Subsidiaries owns, possesses or materially uses in its operations. Schedule 2.15 sets forth all confidentiality or non-disclosure agreements to which either the Company or its Subsidiaries or any of its Employees or Former Employees is a party and which relate to the Company's or its Subsidiaries' business and were executed in the past seven years. 2.16 No Pending Litigation or Proceedings. Except as set forth on Schedule 2.16 hereto or as disclosed in the SEC Reports, there are no material actions, suits, proceedings (including arbitral proceedings) or investigations pending or, to the Company's knowledge, threatened against the Company or its Subsidiaries or directly relating to or otherwise directly affecting the business, assets or properties of the Company and its Subsidiaries. Except as set forth on Schedule 2.16 or as 8 disclosed in the SEC Reports, there is no outstanding judgment, writ, injunction, decree, award or order of any court or any governmental or regulatory authority or body against or directly affecting the business, assets or properties of the Company and its Subsidiaries. 2.17 Insurance Coverage. Each of the Company and its Subsidiaries has during the past three years maintained liability, casualty, property loss and other insurance policies with respect to the conduct of its business in such amounts, of such kinds and with such insurance carriers as the Company and it Subsidiaries, as applicable, has deemed appropriate and sufficient for companies of a similar size engaged in similar types of businesses and operations. Schedule 2.17 hereto sets forth a summary description of each such insurance policy, listing for each policy the risks insured against, coverage limits, any deductible amounts, any pending claims thereunder and the term of each such policy. Each such policy is in full force and effect, and no written notice of cancellation has been received with respect to any such policy, nor will the consummation of the transactions contemplated by this Agreement cause the cancellation of, or the right to cancel, any such policy pursuant to the terms of such policy. The Company and its Subsidiaries have filed all notices or reports required under such policies, except such filings the failure of which to make could not reasonably be expected to result in a Material Adverse Effect. 2.18 Compliance with Laws. Except as set forth on Schedule 2.18 hereto or as disclosed in the SEC Reports, each of the Company's and its Subsidiaries' business and operations are being conducted in compliance with all applicable laws, statutes, rules, regulations, ordinances, codes, orders, franchises and Permits of all governmental entities, including without limitation, those relating to occupational safety and health and equal employment practices, except for such instances of noncompliance that could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. No notice, citation, summons or order has been assessed and no investigation or review is pending or, to the Company's knowledge, threatened by any governmental or other entity with respect to any alleged material violation by any of the Company and its Subsidiaries of any of the foregoing. 2.19 Environmental Matters. Except as set forth on Schedule 2.19 hereto or as disclosed in the SEC Reports, and except for such matters that could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect, (a) there are no investigations, inquiries or other proceedings pending or, to the Company's knowledge, threatened with regard to the current or prior conduct of the business and operations of the Company and its Subsidiaries, or relating to (x) any properties owned or previously owned by the Company and its Subsidiaries, (y) any properties at which any of the Company and its Subsidiaries has conducted operations or (z) any sites at which any of the Company and its Subsidiaries has disposed of, or arranged for the disposal of, waste materials, and arising out of or relating to any actual or alleged failure to comply with any requirement of any law, statute, rule, regulation, code or ordinance relating to air or water quality, waste management, hazardous or toxic substances, or the protection of health or the environment ("Environmental Laws"); (b) the Company and its Subsidiaries are in compliance with the requirements of all Environmental Laws in connection with its business, operations and otherwise; and (c) none of the properties or sites referred to in clauses (x), (y) or (z) above is contaminated with 9 any hazardous waste or substance as a result of any act or omission of the Company and any of its Subsidiaries, or, to the Company's knowledge, any agent, servant or bailee of the Company and any of its Subsidiaries, to a degree that poses a risk to health or the environment or could impose a liability on the Company. With regard to compliance with Environmental Laws, the representations and warranties set forth in this Section 2.19 shall supersede the provisions of Section 2.18 hereof. 2.20 Tax Returns and Taxes. (a) The Company and its Subsidiaries have filed all Tax Returns (as hereinafter defined) required to be filed by it. Except with respect to any contested liability for Taxes (as hereinafter defined), as set forth on Schedule 2.20 hereto, all such Tax Returns were correct and complete in all material respects. All Taxes owed by the Company and any of its Subsidiaries (whether or not shown on any Tax Return) have been paid except for (i) Taxes accrued but not yet payable, (ii) Taxes which are being contested in good faith, and (iii) Taxes, the non-payment of which could not reasonably be expected to result in a Material Adverse Effect. Except as set forth on Schedule 2.20, none of the Company and its Subsidiaries has received any notice of assessment of additional Taxes that is currently pending. Except as set forth on Schedule 2.20, none of the Company and its Subsidiaries has waived any statute of limitations in respect of Taxes or executed or filed with any Tax authority any agreement or document extending the period of assessment of any Taxes, and the Company and its Subsidiaries are not currently the beneficiary of any extension of time within which to file any Tax Return. Except as set forth on Schedule 2.20, there are no claims, examinations, audits, proceedings or proposed deficiencies for or in respect of Taxes pending or, to the Company's knowledge, threatened against the Company or its Subsidiaries. No claim has been made in writing to the Company or its Subsidiaries in the past three years by an authority in a jurisdiction where the Company and its Subsidiaries do not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no recorded Tax Liens on any of the assets of the Company and its Subsidiaries, nor are there any security interests on any of the assets of the Company and its Subsidiaries that arose in connection with any failure (or alleged failure) of the Company or any of its Subsidiaries to pay any Tax (other than Liens and security interests for Taxes not yet due and payable or for Taxes that the Company (or any of its Subsidiaries, as applicable) is contesting in good faith). (b) The Company (and each of its Subsidiaries, as applicable) has withheld and paid all Taxes required by applicable law to have been withheld and paid in connection with amounts paid or owing to any Employee or Former Employee, independent contractor, creditor, stockholder or other third party, except where the failure to do so could not reasonably be expected to result in a Material Adverse Effect. (c) Except as set forth on Schedule 2.20, there is no dispute or claim concerning any Tax liability of the Company (or any of its Subsidiaries, as applicable) either (i) claimed or raised by any governmental authority in writing or (ii) as to which the Company or any of its executive officers (or employees principally responsible for Tax matters) has knowledge based upon personal contact with any agent of such authority. Schedule 2.20 lists those federal, state, local, and foreign 10 income Tax Returns filed with respect to the Company (or any of its Subsidiaries, as applicable) that have been audited in the past three years, and indicates those Tax Returns that currently are the subject of audit. (d) The Company (or any of its Subsidiaries, as applicable) has not filed a consent under Section 341(f) of the Code concerning collapsible corporations. Except as set forth on Schedule 2.20(f) hereto, the Company (or any of its Subsidiaries, as applicable) has not made any payments, nor is it obligated to make any payments, nor is it a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Section 280G of the Code. The Company has disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Code. The Company (or any of its Subsidiaries, as applicable) is not a party to any Tax allocation or sharing agreement. The Company has not been a member of an Affiliated Group filing a consolidated federal income tax return (other than a group the common parent of which is the Company). (e) The Company (or any of its Subsidiaries, as applicable) does not have (i) income reportable for a period ending after the Closing Date but attributable to a transaction (e.g., an installment sale) occurring in or a change in accounting method made for a period ending on or prior to the Closing Date which resulted in a deferred reporting of income from such transaction or from such change in accounting method (other than a deferred intercompany transaction); or (ii) deferred gain or loss arising out of any deferred intercompany transaction. No "ownership change" (within the meaning of Section 382(g) of the Code) has, to the Company's knowledge, occurred prior to the date hereof which currently limits the Company's ability to utilize any net operating loss carryovers under Section 382 of the Code. For purposes of this Agreement, "Tax" or "Taxes" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, deficiency or addition thereto, whether disputed or not, and "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. 2.21 Outstanding Registration Rights. Except as set forth on Schedule 2.21 hereto or as disclosed in the SEC Reports, the Company has not in the past three years granted (or incurred any obligations or commitments to grant) to any holder or holders of any capital stock (or rights to acquire any capital stock) of the Company (i) any rights to request or demand registration of, or the filing of an offering circular with respect to, outstanding shares of capital stock of the Company under any securities laws or rules, (ii) any rights to include any outstanding shares of capital stock of the Company in any registration or filing effected by the Company pursuant to any securities laws or 11 rules, or (iii) any rights to require the Company to take action under any securities laws or rules in order to permit or otherwise facilitate disposition of any outstanding shares of the Company's capital stock. 2.22 Certain Beneficial Owners. (a) Schedule 2.22(a) hereto sets forth an analysis prepared by the Company's auditors stating the stock ownership of 5-percent shareholders (as such term is defined in Section 382 of the Code) in the Company as of the dates indicated therein. To the Company's knowledge, such Schedule correctly sets forth in all material respects the stock ownership of such shareholders and the changes in such stock ownership as of each fiscal year-end indicated therein. (b) Schedule 2.22(b) lists all options, warrants, or other stock rights issued by the Company and outstanding as of the date hereof to any person, whether or not a 5-Percent Shareholder, that have not yet been exercised as of the date hereof, together with the exercise dates, exercise prices, any consideration paid therefor and expiration dates. 2.23 FDA Compliance. The products manufactured, sold, distributed or supplied by each of the Company and its Subsidiaries, as applicable, are not adulterated or misbranded within the meaning of the United States Federal Food, Drug and Cosmetic Act, as amended ("USFFDCA"), and comply with any monograph or other requirements of the United States Food and Drug Administration ("FDA") applicable to the products or their manufacture, except for instances of noncompliance that could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. Such products have been and continue to be manufactured in compliance with all applicable statutes, ordinances and regulations, including but not limited to, the USFFDCA and the regulations thereunder, including the current Good Manufacturing Practices which have been adopted by the FDA, except for instances of noncompliance that could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. Current Good Manufacturing Practice means current good manufacturing practice regulations established in 21 C.F.R. Parts 210 and 211, as amended and in effect from time to time, and other applicable FDA policies relating thereto. Except as set forth on Schedule 2.23 hereto or as disclosed in the SEC Reports, none of the Company and its Subsidiaries has in the past three years received any notice or summons in respect of a material violation or alleged material violation of any statute or regulation from the FDA or other similar authorities. 2.24 Reliance. The representations, warranties, covenants and agreements of the Company contained herein and in the certificates and schedules required to be delivered in accordance with the terms of this Agreement shall, subject to Section 11 hereof, survive any investigation made by the Purchaser and are made by the Company with the expectation that the Purchaser is relying thereon in entering this Agreement and the same shall not be deemed waived by any investigation conducted by the Purchaser or its employees, advisors, consultants or representatives, whether before or after the consummation of the transactions contemplated hereby. 12 SECTION 3. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: 3.1 Organization. The Purchaser is a corporation duly organized and validly existing and in good standing under the laws of Delaware and is a wholly-owned subsidiary of Merck. The Purchaser has all necessary corporate power and authority to own or lease its properties and to conduct its business as now being conducted. 3.2 Authorization. The execution, delivery and performance by the Purchaser of this Agreement, the other agreements referred to herein and the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action by the Purchaser and, in the case of the Distribution Agreement and the Services Agreement to which it is a party, by Merck and Genpharm, as the case may be. This Agreement constitutes, and each of the other agreements referred to herein, upon execution and delivery, will constitute, a valid and binding obligation of the Purchaser and, in the case of the Distribution Agreement and the Services Agreement to which it is a party, of Merck and Genpharm, enforceable against the Purchaser, Merck or Genpharm, as the case may be, in accordance with its terms, except as such enforceability may be limited by (i) bankruptcy laws and other similar laws affecting creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law. 3.3 Non-contravention. Neither the execution, delivery and performance of this Agreement and the other agreements referred to herein nor the consummation of the transactions contemplated hereby or thereby will violate or be in conflict with any provision of the articles of organization of the Purchaser or, in the case of the Distribution Agreement and the Services Agreement to which it is a party, of Merck or Genpharm, as the case may be; violate or be in conflict with any material note, bond, lease, mortgage, indenture, license, contract, commitment, franchise, permit, instrument or other material agreement or obligation to which the Purchaser, Merck or Genpharm is a party or by which either of them is bound; violate or be in conflict with any law, judgment, decree, order, regulation or ordinance by which the Purchaser, Merck or Genpharm is bound or affected; or result in the creation or imposition of any Liens in favor of any third party upon any property or assets of the Purchaser, Merck or Genpharm. 3.4 No Brokers or Finders. No person, firm or corporation has or will have, as a result of any act or omission by the Purchaser, Merck or Genpharm, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. 3.5 Governmental Authorizations; Third-Party Consents. No approval, consent, authorization or other action by, or notice to or filing with, any governmental authority or any other person or entity, and no lapse of a waiting period, is necessary or required in connection with the execution, delivery or performance by the Purchaser or, in the case of the Distribution Agreement and the Services Agreement to which it is a party, by Merck or Genpharm, as the case may be, of this 13 Agreement, the other agreements referred to herein or the transactions contemplated hereby or thereby, except for such filings or approvals (a) required pursuant to the HSR Act and (b) as may be required (by the FDA or other governmental authorities) to be obtained in connection with the Distribution Agreement. 3.6 Investment Representations. (a) The Purchaser and its Affiliates (as defined in Rule 405 of the Securities Act of 1933, as amended (the "Securities Act")) are acquiring the Shares and the Options and, upon exercise of the Options, will be acquiring the Option Shares solely for their own accounts and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act. Each of the Purchaser, Merck and Genpharm is an "accredited investor" (as defined in Rule 501(a) of Regulation D promulgated under the Securities Act). (b) The Purchaser, on behalf of itself and its Affiliates, understands that (i) the Shares and the Option have not been registered, and the Option Shares, when issued, will not be registered under the Securities Act or any applicable state securities laws, by reason of their issuance by the Company in a transaction exempt from the registration requirements of the Securities Act and applicable state securities laws and (ii) the Shares, the Options and the Option Shares must be held by the Purchaser (or Merck or Genpharm, as applicable) indefinitely unless a subsequent disposition thereof is registered under the Securities Act and applicable state securities laws or is exempt from such registrations. (c) The Purchaser, on behalf of itself and its Affiliates, acknowledges that no representations or warranties have been made or furnished to, or relied on by, the Purchaser or any of its representatives in connection with its purchase of the Shares except as expressly provided herein. The Purchaser has such knowledge and experience in financial and business matters that it is capable of evaluating the risks and merits of this investment. (d) The Purchaser, on behalf of itself and its Affiliates, acknowledges that, following its acquisition of the Shares, the Purchaser will be an Affiliate of the Company and will be subject to all requirements and restrictions applicable to Affiliates under the Securities Act and the Exchange Act (including the rules and regulations promulgated thereunder). SECTION 4. Conditions to the Company's Obligation. The obligation of the Company to consummate the transactions contemplated hereby shall be subject to the satisfaction or waiver (other than in respect of Sections 4.4, 4.6 and 4.8 hereof) by the Company, at or prior to the Closing, of all the following conditions: 4.1 Representations and Warranties. The representations and warranties of the Purchaser set forth in this Agreement shall be true and correct in all material respects on and as of the date hereof and on and as of the Closing Date (with the same effect as though such representations and warranties had been made on and as of such Closing Date), and officers of the Purchaser shall have certified to such effect to the Company in writing. 14 4.2 Performance of Obligations. The Purchaser shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by it on or before the Closing Date, and officers of the Purchaser shall have certified to such effect to the Company in writing. 4.3 Opinion of Counsel. The Company shall have received from Coudert Brothers, counsel for the Purchaser, an opinion addressed to the Company, dated the Closing Date, in form and substance reasonably satisfactory to the Company, it being understood that Coudert Brothers may rely upon the opinion of Klaus-Peter Brandis, Head of the Legal Department of Merck, for all matters of German law, if applicable. 4.4 No Litigation or Legislation. No federal, state, local or foreign statute, rule or regulation shall have been enacted after the date hereof, and no litigation, proceeding, governmental inquiry or investigation shall be pending, which prohibits or seeks to prohibit or materially restricts the consummation of the transactions contemplated by this Agreement or the other agreements provided for herein. 4.5 Clal Sale of Shares. Merck (or its designee) shall have purchased those certain shares of Common Stock beneficially owned by Clal in accordance with the terms of the Clal Stock Purchase Agreement, and all agreements between Clal and the Company relating to or arising out of Clal's acquisitions of Common Stock shall be terminated by the parties thereto and be of no further force and effect. 4.6 HSR Act. All applicable waiting periods under the HSR Act shall have expired or been terminated with respect to the transactions contemplated by this Agreement. 4.7 Distribution Agreement in Effect. The Distribution Agreement shall be in full force and effect and there shall exist no facts or circumstances which, with the giving of notice or the passage of time or both, would constitute a material default thereunder by Genpharm. 4.8 Shareholders' Approval. The Shareholders' Approval of each of the Proposals shall have been obtained and all of the Nominees (as defined in Section 7.3 hereof) shall have been elected. 4.9 Fairness Opinion. The fairness opinion of Gruntal, the Company's financial advisor, rendered with regard to this Agreement and the other agreements to be entered into in connection herewith and the transactions contemplated hereby and thereby shall have been reconfirmed by Gruntal as of the date of mailing to the Company's shareholders of the definitive proxy statement (the "Proxy Statement") in respect of the Company's meeting of its shareholders to be held in connection with the Proposals (the "Meeting"). 4.10 Purchase Price and Other Closing Deliveries. The Purchaser shall have paid the Purchase Price and delivered, or cause to be delivered, the agreements, instruments and certificates specified in Section 1.3(b) hereof. 15 4.11 Consents and Waivers. The Company shall have obtained all material consents and waivers necessary or appropriate for its consummation of the transactions contemplated by this Agreement, as specified in Section 2.8 hereof and Schedule 2.8 hereto, and the other agreements referred to herein after using its reasonable best efforts to obtain them. 4.12 Services Agreements. Merck and Genpharm shall have duly executed and delivered to the Company the Services Agreements. 4.13 Purchaser Board Approval. The Board of Directors of Merck shall have approved this Agreement and the transactions contemplated hereby prior to April 3, 1998. SECTION 5. Conditions to the Purchaser's Obligation. The obligation of the Purchaser to consummate the transactions contemplated hereby shall be subject to the satisfaction or waiver (other than in respect of Sections 5.4, 5.5 and 5.9 hereof) by the Purchaser, at or prior to the Closing, of all the following conditions: 5.1 Representations and Warranties. The representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects on and as of the date hereof and on and as of the Closing Date (with the same effect as though such representations and warranties had been made on and as of such Closing Date), and officers of the Company shall have certified to such effect to the Purchaser in writing. 5.2 Performance of Obligations. The Company shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by it on or before the Closing Date, and officers of the Company shall have certified to such effect to the Purchaser in writing. 5.3 Opinion of Counsel. The Purchaser shall have received from Hertzog, Calamari & Gleason, counsel for the Company, an opinion addressed to the Purchaser, dated the Closing Date, in form and substance reasonably satisfactory to the Purchaser. 5.4 No Litigation or Legislation. No federal, state, local or foreign statute, rule or regulation shall have been enacted after the date hereof, and no litigation, proceeding, governmental inquiry or investigation shall be pending, which prohibits or seeks to prohibit or materially restricts the consummation of the transactions contemplated by this Agreement or the other agreements provided for herein, or materially restricts or impairs the ability of the Purchaser to own an equity interest in the Company. 5.5 HSR Act. All applicable waiting periods under the HSR Act shall have expired or been terminated with respect to the transactions contemplated by this Agreement. 16 5.6 Board Resignations. The Purchaser shall have received the resignations of the current members of the Board of Directors of the Company, subject to their re-election in accordance with Section 7.3 hereof. 5.7 No Material Adverse Effect. Since the date hereof, there shall not have occurred a condition or event constituting a Material Adverse Effect (other than in respect of the matter set forth on Schedule 2.10 hereto). 5.8 ISRA. The Company shall have delivered to the Purchaser evidence of the Company's having obtained an ISRA Clearance (as defined in Section 7.4 hereof). 5.9 Shareholders' Approval. The Shareholders' Approval of each of the Proposals shall have been obtained and all of the Nominees shall have been elected. 5.10 Closing Deliveries. The Company shall have delivered the Shares, the Options and the agreements, instruments and certificates specified in Section 1.3(a) hereof. 5.11 Distribution Agreement. There shall exist no facts or circumstances which, with the giving of notice or the passage of time or both, would constitute a material default by the Company under the Distribution Agreement. 5.12 Services Agreements; Options. The Company shall have duly executed and delivered to Merck and Genpharm the Services Agreements and the Options. 5.13 Board Approval. The Board of Directors of Merck shall have approved this Agreement and the transactions contemplated hereby prior to April 3, 1998. 5.14 Option Standstill Agreements. At least fifteen (15) days prior to Closing, the Company shall have duly executed and delivered to the Purchaser agreements in writing, in form reasonably satisfactory to the Purchaser, from (i) the four persons listed on Schedule 5.14(a) hereto that, notwithstanding the terms of any stock option plan or any option heretofore granted, not to exercise or seek to exercise such options until three (3) years and ten (10) U.S. business days from the Closing Date and (ii) substantially all other persons who then hold unexercised options, warrants or other stock rights to purchase Common Stock, other than those persons set forth on Schedule 5.14(b) hereto, not, notwithstanding the terms of any stock option plan or any option theretofore granted, to exercise or seek to exercise such options, warrants or other stock rights, except to the extent indicated on Schedule 5.14(b). 5.15 Section 7.10 Agreement. The Company shall have delivered the agreement of the Chairman of the Company referred to in Section 7.10 hereof. 17 5.16 Clal Share Purchase. The Purchaser shall have purchased, after using its reasonable best efforts to do so, those certain shares of Common Stock beneficially owned by Clal in accordance with the terms of the Clal Stock Purchase Agreement. 5.17 Consent. The Company shall have obtained the approvals set forth on Schedule 2.3, Item 1, hereto. SECTION 6. Covenants of the Parties. The Company and the Purchaser hereby covenant as follows: 6.1 Hart-Scott-Rodino Notification. As soon as practicable after the execution of this Agreement, the Company and the Purchaser shall each file, or cause to be filed, with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice, pursuant to the HSR Act, the notifications and documentary materials required in connection with the transactions contemplated by this Agreement. Thereafter, the Company and the Purchaser will file any additional information requested as soon as practicable after any receipt of a request for additional information and shall use reasonable best efforts to obtain early termination of the applicable waiting period under the HSR Act. The Company and the Purchaser shall coordinate and cooperate with each other in exchanging such information and providing such reasonable assistance as may be requested in connection with such filings. All filing fees in connection with the HSR Act shall be paid by the Purchaser. 6.2 Publicity. The Company and the Purchaser shall consult with each other, to the extent reasonably practicable, as to the form and substance of any press releases and other third-party communications or disclosures relating to the negotiation, execution, delivery and consummation of this Agreement, the other agreements referred to herein, and the transactions contemplated hereby or thereby. No party shall be prohibited from issuing or filing any press release or other third-party communication or disclosure which, upon advice of its legal counsel, shall be deemed necessary or appropriate under applicable law or the applicable rules of any stock exchange; provided, however, that such party shall have first consulted with the other party as to the form and content of such disclosure. This covenant shall survive the Closing or any termination of this Agreement. 6.3 Confidentiality. All information to which access is given or furnished by one party to the other in connection with the negotiation, execution, delivery and consummation of this Agreement, the other agreements referred to herein, and the transactions contemplated hereby or thereby shall be kept confidential by each party and shall be used only in connection with this Agreement, such other agreements and the transactions contemplated hereby and thereby; provided, however, that the foregoing shall not apply to any information that (a) shall be publicly available as of the date hereof, (b) shall become publicly available other than as a result of prohibited disclosure by such party, (c) shall be disclosed to such party by any person or entity that is not known to such party to be subject to any confidentiality restrictions imposed by the other party or (d) shall be 18 required to be disclosed by law, the applicable rules of any stock exchange or by order of any court of competent jurisdiction. Without limiting the foregoing, the Purchaser shall not disclose, and shall use its reasonable best efforts to cause its Affiliates not to disclose, any such confidential information to any person or entity that is not an Affiliate or a director or officer of such Affiliate or any advisor thereto. This covenant shall survive the Closing or any termination of this Agreement. 6.4 Further Assurances. Upon reasonable request of a party and without further consideration, the other party, whether prior to or after the Closing, shall execute, acknowledge and deliver all such other instruments and documents, and shall take all such other actions for the purpose of effecting and evidencing the consummation of the transactions contemplated by this Agreement and the other agreements referred to herein. Without limiting the generality of the foregoing, the Company shall, and shall cause its Subsidiaries to, from the date hereof until the earlier of the Closing Date or the termination of this Agreement pursuant to Section 13.11 hereof, provide all information and documents reasonably requested by the Purchaser relating to a determination of the Company's status as a United States real property holding corporation, as defined under the Code. SECTION 7. Covenants of the Company. The Company (and the Purchaser, to the extent expressly provided in this Section 7) hereby covenants as follows: 7.1 Exchange Act Filings. From and after the date hereof to the Closing Date or the earlier termination of this Agreement pursuant to Section 13.11 hereof, the Company shall use its best efforts to file in a timely manner all reports required to be filed by it with the SEC under the Exchange Act and shall, promptly upon filing, deliver copies of such reports to the Purchaser. 7.2 Proxy Statement; Meeting; Listing Applications. (a) The Company shall prepare, review with the Purchaser and its counsel, and file with the SEC the Proxy Statement as soon as reasonably practicable after the date hereof. Each party shall furnish all information concerning itself and related persons which is required or customary for inclusion in the Proxy Statement. The Company shall, as soon as reasonably practicable after the date hereof, (i) take all steps necessary to duly call, give notice of, convene and hold a meeting of its shareholders for the purpose of securing the Shareholders' Approval to the Proposals (such meeting is presently contemplated by the parties to be held in June 1998); (ii) distribute to its shareholders the Proxy Statement in accordance with applicable Federal and state laws and with its Certificate of Incorporation and By-Laws; and (iii) recommend (in the Proxy Statement and, if deemed appropriate by the Company, otherwise) to its shareholders approval of the Proposals. Notwithstanding anything to the contrary contained herein, if the Agreement shall be terminated (or is subject to termination) pursuant to Section 13.11 hereof, the Company may postpone, adjourn or cancel the Meeting, withdraw or change its recommendation to its shareholders and/or withdraw or delay distribution of the Proxy Statement. (b) The Company shall use its commercial best efforts to have the Shares and the Option Shares listed on The New York Stock Exchange and The Pacific Stock Exchange. 19 7.3 Board Representation. (a) Subject to the conditions set forth herein, the Company shall nominate, and the Company and the Purchaser shall use their best efforts to cause the election at the Meeting of, certain persons to be designated by each of the Purchaser and the Company (collectively, the "Nominees"), as provided herein, to serve as directors on the Board of Directors of the Company such that: (i) a majority of the members of such Board shall be comprised of the Purchaser's designated representatives; and (ii) three of the members of such Board shall be comprised of the Company's designated representatives consisting of Kenneth I. Sawyer ("Sawyer") and two additional representatives designated by the current Board of Directors of the Company (collectively, the "Company Designees"). Notwithstanding anything to the contrary contained herein, each representative designated by the Purchaser in accordance with Section 7.3(f) hereof shall be nominated for election to serve on the Board of Directors unless such representative shall not be satisfactory to the Company's current Board of Directors for good faith reasons and each Company Designee shall be nominated to serve on the Board of Directors unless such Designee (other than Sawyer) shall not be satisfactory to the Purchaser for good faith reasons. All current members of the Company's Board of Directors not nominated as set forth above shall resign effective upon the Closing. Any current members of such Board nominated as set forth above shall resign effective upon the Closing, subject to their renomination and re-election as set forth herein. All Nominees shall take office if, and only if, the Closing shall occur. (b) Any director designated hereunder shall serve subject to the terms of the Company's Certificate of Incorporation and By-laws, each as in effect on the Closing Date, and the provisions of applicable law. (c) The Company Designees and the Purchaser shall jointly designate two of the Company's directors to comprise the audit committee of the Company. Each of such directors must qualify as independent, outside directors in accordance with the rules and regulations of The New York Stock Exchange. (d) The directors designated by the Purchaser shall serve as Class I and Class III directors of the Company (as allocated by the Purchaser) whose terms shall expire in the years 2000 and 1999, respectively. The Company Designees shall serve as Class II directors of the Company whose terms shall expire in the year 2001. There shall be no Class II directors other than the Company Designees (and their respective successors selected in accordance with Section 8.1 hereof) through May 31, 2001. (e) The Company shall include in the Proxy Statement distributed in respect of the Meeting the Proposals and shall recommend its approval of each Proposal (including approval of all 20 Nominees) by the shareholders of the Company. Sawyer and the Purchaser (and its Affiliates) agree to vote any shares of Common Stock which they own or otherwise have the power to vote in favor of each of the Proposals (including approval of all Nominees). (f) The Company shall give the Purchaser written notice not less than 10 days prior to the filing with the SEC of the preliminary Proxy Statement in respect of the Meeting to allow the Purchaser to designate its nominees for director for inclusion in such Proxy Statement. The Company shall have no obligation to include such nominees in the Proxy Statement unless the Company receives written notice from the Purchaser setting forth its designated nominees (along with all biographical and other information necessary for inclusion in the Proxy Statement) not later than five days after the Company's notice to the Purchaser. 7.4 Environmental Matters. For each parcel of real property which is owned, operated, leased or used by the Company and any of its Subsidiaries in the State of New Jersey, the Company shall, and shall cause each of its Subsidiaries to, as applicable, comply with the obligations imposed by the New Jersey Industrial Site Recovery Act and any regulations promulgated thereunder, at or prior to the Closing, by either (a) securing any of the following: (i) a letter of nonapplicability from the New Jersey Department of Environmental Protection ("NJDEP"); (ii) approval by NJDEP of a negative declaration submitted by the Company; (iii) a no further action letter from NJDEP; (iv) a letter of authorization for the transfer of ownership from NJDEP without any material conditions thereto; or (v) approval from NJDEP of a remediation agreement reasonably acceptable to the Purchaser; or (b) filing a De Minimis Quantity Exemption Affidavit with NJDEP (any of the items listed in clauses (a) and (b) above being an "ISRA Clearance"). 7.5 Conduct of Business Prior to Closing. From and after the date hereof to the Closing Date or the earlier termination of this Agreement pursuant to Section 13.11 hereof, except as set forth on Schedule 7.5 hereto, neither the Company nor its Subsidiaries shall (a) conduct their respective businesses other than in the ordinary course, except as contemplated by this Agreement; (b) amend its charter or by-laws; (c) sell, lease or otherwise dispose of any material assets or properties owned or used in the operation of their respective businesses, except for the sale of inventory and disposition of obsolete equipment in the ordinary course of business; (d) dissolve, or agree to dissolve, or merge or consolidate with, or agree to merge or consolidate with, or purchase or agree to purchase all or substantially all of the assets of, or otherwise acquire, any other business entity; (e) authorize for issuance, issue or sell any additional shares of its capital stock or any securities or obligations convertible into shares of its capital stock or issue or grant any option, warrant or other right to purchase any shares of its capital stock, except for (i) the granting of options, warrants or rights under the Company's existing stock or other plans (as such are set forth on Schedule 2.13 hereto) and (ii) the issuance or sale of capital stock pursuant to the exercise of any options, warrants, or rights granted prior to the date hereof to any of the Company's employees, directors, independent contractors or other agents and listed on Schedule 2.12 hereto; (f) redeem, buy back, or cancel any shares, securities, options, warrants or other stock rights in the Company; or (g) other than in the ordinary course of business, enter into any material contract or agreement, or incur any material capital expenditure, which has not been approved by the Purchaser. 21 7.6 Options, Warrants or Other Stock Rights. From and after the date hereof to the Closing Date or the earlier termination of this Agreement pursuant to Section 13.11 hereof, the Company shall issue options and warrants, or other stock rights under the Company's existing stock option or stock purchase plans only if the exercise date is no earlier than three years from the Closing Date and the options, warrants or other stock rights are issued in connection with the performance of services for the Company and qualify as "compensatory options" within the meaning of Treas. Reg. Sec. 1.382-4(d)(8)(iii). 7.7 Other Agreements. At the Closing, upon satisfaction or permitted waiver of the conditions set forth in Section 4 hereof, the Company shall execute and deliver the agreements, instruments and certificates specified in Section 1.3(a) hereof. 7.8 Right of First Refusal. (a) Subject to the conditions and other provisions set forth in this Section 7.8 and in Section 8.4 hereof, the Company, for a period of six years following the Closing, shall give the Purchaser written notice (the "Transaction Notice") of the Company's intention to sell equity securities of the Company in any offering not subject to registration under the Securities Act (or, if subject to registration under the Securities Act, in any offering for cash only) specifying the terms and conditions of such offering, including the type and amount of consideration to be received by the Company. Subject to the conditions and other provisions set forth in this Section 7.8 and in Section 8.4 hereof, the Purchaser shall have the right, exercisable by giving written notice to the Company within 30 days after receipt of the Transaction Notice, to purchase all, but not less than all, of the equity securities described in the Transaction Notice on substantially the same terms and conditions as specified in such Transaction Notice. In the event that the Purchaser shall not provide notice of its election to consummate such transaction within such 30-day period, the Company may sell the equity securities to any third party or parties (a "Third-Party Transaction") on substantially the same terms and conditions as specified in the Transaction Notice at any time within 90 days after the expiration of such 30-day period. If the Company shall not consummate a Third-Party Transaction within such 90-day period, the consummation of such Transaction or any other Third-Party Transaction shall again be subject to the Purchaser's rights under this Section 7.8(a). (b) The closing of any transaction to be consummated with the Purchaser pursuant to this Section 7.8 shall take place at the offices of the Company or its counsel on a date designated by the Company and reasonably acceptable to the Purchaser not later than 60 days after the Purchaser's receipt of the Transaction Notice. 7.9 Appointment of COO. As soon as practicable following the Closing, the Board of Directors of the Company shall duly elect a designee of the Purchaser as the President and Chief Operating Officer (COO) of the Company and each of its Subsidiaries. 7.10 Agreement of the Chairman of the Company. At the Closing, the Company shall deliver a fully executed agreement to the Purchaser reasonably satisfactory to the Purchaser whereby the Chairman of the Company, Kenneth I. Sawyer, shall expressly (i) agree to the appointment referred to in Section 7.9 above; (ii) agree that he shall serve as the Chairman and Chief Executive 22 Officer of the Company and each of its Subsidiaries; and (iii) acknowledge that Section 7.9 hereof and this Section 7.10 hereof do not constitute a breach or a violation by the Employer (as such term is used in the below mentioned Employment Agreement) of the terms of his employment pursuant to the Employment Agreement between the Company and Sawyer, dated as of October 4, 1992, as amended. 7.11 Rights Agreement. Each of the Company and First City Transfer Company (as successor rights agent) shall, prior to the Closing, execute and deliver an amendment to the Rights Agreement, dated August 6, 1991, as amended (the "Rights Agreement"), exempting from operation under the Rights Agreement the acquisitions of shares of Common Stock pursuant to this Agreement and the Options. Such amendment shall be in full force and effect and constitute a valid and binding agreement of the Company enforceable against the Company in accordance with its terms. 7.12 U.S. Real Property Holding Corporation. From and after the date hereof to the Closing Date or the earlier termination of this Agreement pursuant to Section 13.11 hereof, the Company shall (a) use reasonable efforts to avoid making any changes in the composition of its assets which would cause the Company to be classified as a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code and (b) obtain the consent of the Purchaser prior to the acquisition of any United States Real Property Interest (as defined in Section 897 of the Code). SECTION 8. Covenants of the Purchaser. The Purchaser (and the Company following the Closing, to the extent expressly provided in this Section 8) hereby covenants as follows: 8.1 Company Designees. For a period of three years following the Closing, the Purchaser shall not cause, and shall use its best efforts not to permit, (i) the removal, except for cause (as such term is defined and used under New Jersey corporate law), of any of the Company Designees serving as directors of the Company prior to the scheduled expiration of their terms or (ii) the shortening of any of such Designees' terms as directors. In the event that any Company Designee shall resign or cannot otherwise continue to serve as a director, the remaining Company Designee(s) shall designate a replacement therefor and, upon such designation, unless such designee shall not be reasonably satisfactory to the Purchaser, the Company and the Purchaser shall use their reasonable best efforts to cause the appointment and/or election of such designated replacement to the Company's Board of Directors. Such replacement directors shall be deemed to be Company Designees for the purpose of this Agreement. 8.2 No Modification. For a period of three years following the Closing, the Purchaser shall not cause, and shall use its reasonable best efforts not to permit, the Company to agree to any amendment, modification or waiver of or take any action in respect of this Agreement, the Distribution Agreement or the other agreements referred to herein, including, without limitation, in respect of any agreement or settlement relating to a dispute or claim for indemnification hereunder 23 or thereunder, without the prior written consent of at least a majority of the Company Designees (including any replacements therefor as provided in Section 8.1 hereof). 8.3 Other Agreements. At the Closing, upon satisfaction or permitted waiver of the conditions set forth in Section 5 hereof, the Purchaser shall pay the Purchase Price and execute and deliver the agreements, instruments and certificates specified in Section 1.3(b) hereof. 8.4 Related Party Transactions. For a period of three years following the Closing, except as expressly permitted by this Agreement or any other agreements referred to herein, the Purchaser shall not cause or permit the Company or its Subsidiaries existing on the date of the Agreement, directly or indirectly, to engage in or enter into any, or to amend or terminate any then validly existing, transaction, arrangement or agreement with, or to make any distribution or dividend of property or monies to, the Purchaser or any Affiliate or associate (as defined in Rule 405 of the Securities Act ("Associate") of the Purchaser, without the prior written consent of a majority of the Company Designees (including any replacements therefor as provided in Section 8.1 hereof). 8.5 Business Combinations. For a period of three years following the Closing, neither the Purchaser nor any of its Affiliates or Associates shall, without the prior written consent of a majority of the Company Designees (including any replacements therefor as provided in Section 8.1 hereof) and the prior receipt from an independent nationally recognized investment bank of a written fairness opinion to the effect that the proposed transaction is fair (from a financial point of view) to all shareholders of the Company, (i) propose that the Company, or cause or permit the Company to, merge, consolidate or enter into any other business combination with or into another entity (including, without limitation, any "short-form" merger), (ii) propose that the Company, or cause or permit the Company to, sell, lease, pledge or otherwise dispose of all or any material portion of the assets of the Company, (iii) propose or make, or cause or permit the Company to propose or make, any exchange offer or tender offer for, or repurchase of, any securities of the Company or (iv) propose that the Company, or cause or permit the Company to, recapitalize, liquidate, dissolve or, to the extent it would cause the Company not to be publicly-held, reorganize. 8.6 Executive Committee. For a period of three years following the Closing, the Purchaser shall cause the Company to, and the Company shall, constitute and maintain an executive committee of the Company's Board of Directors to manage the fundamental matters concerning the Company in the intervals between Board meetings, and each shall use its reasonable best efforts to cause Sawyer (or his designee who shall be a member of the Company's Board of Directors) to be, and remain for such period, a duly appointed, full member of such committee. SECTION 9. Transfer of Securities. The Purchaser, for itself and each of its Affiliates, agrees as follows: 9.1 Transfer Restrictions. The Purchaser and its Affiliates shall not transfer any of the Shares or the Option Shares unless such transfer shall be in full compliance with all applicable provisions of the Securities Act and all applicable provisions of state securities laws. 24 9.2 Legends. Each certificate for the Shares and the Option Shares shall be endorsed with the following legend: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE TRANSFER IS EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS." SECTION 10. Exchanges; Lost, Stolen or Mutilated Certificates. Upon surrender by the Purchaser (or Merck or Genpharm, as applicable) to the Company of any certificates representing the Shares or the Option Shares, the Company, at its expense, shall issue in exchange therefor, and deliver to the Purchaser (or Merck or Genpharm, as applicable), a new certificate or certificates representing such Shares or Option Shares, in such denominations as may be requested in writing by the Purchaser (or Merck or Genpharm, as applicable). Every surrendered certificate representing the Shares or the Option Shares shall be duly endorsed or be accompanied by a written instrument of the Purchaser's (or Merck's or Genpharm's, as applicable) attorney duly authorized in writing. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any certificate representing any Shares or Option Shares, and in case of any such loss, theft or destruction, upon delivery of an indemnity agreement satisfactory to the Company, or in case of any such mutilation, upon surrender and cancellation of such certificate, the Company shall issue and deliver to the Purchaser (or Merck or Genpharm, as applicable) a new certificate for such Shares or Option Shares of like tenor and in the same amount and name in lieu of such lost, stolen or mutilated certificate. SECTION 11. Survival of Representations, Warranties and Agreements. The representations and warranties (including the Schedules hereto) of the parties contained herein and the agreements and covenants contained in Section 7 hereof (excluding Sections 7.3, 7.8 and 7.9 hereof) shall survive the date hereof for a period of 12 months following the Closing Date (the "Survival Period"); provided, that (i) a party shall not be liable to the other party hereto for any claim for indemnification under Section 12 hereof in respect of a breach of a representation or warranty unless written notice thereof describing such claim with reasonable specificity shall be delivered to the Indemnitor (as defined in Section 12.1 hereof) prior to the expiration of the Survival Period and (ii) the representations and warranties relating to Taxes contained in Section 2.20 hereof shall survive until the expiration of the appropriate statute of limitation. SECTION 12. Indemnification. 12.1 Indemnitors; Indemnified Persons. For purposes of this Section 12, each party which, pursuant to this Section 12, agrees to indemnify any other person or entity shall be referred to as the 25 "Indemnitor" with respect to such person or entity, and each such person or entity who is indemnified shall be referred to as the "Indemnified Person" with respect to such Indemnitor. 12.2 Company Indemnity. The Company hereby agrees to indemnify and hold harmless each of the Purchaser and it Affiliates, and its directors, officers, employees, agents and controlling persons (within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act), from and against any and all claims, liabilities, losses, damages and expenses (including, without limitation, reasonable attorneys' fees and disbursements) asserted against or incurred by any such Indemnified Person which are caused by or are related to or arise out of (a) subject to Section 11 hereof, the Company's material breach of any of its representations, warranties, covenants or agreements contained in this Agreement, (b) any untrue statement or alleged untrue statement of a material fact contained in the Proxy Statement or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading (a "Violation") or (c) (i) any material violation by the Company or any Subsidiary thereof of any Environmental Laws, or the disposal, discharge or release of solid wastes, pollutants or hazardous substances, whether in compliance with Environmental Laws or not, other than in respect of those matters set forth on Schedule 12.2 hereto (ii) the ownership, operation or use of any landfill, wastewater treatment plant, air pollution control equipment, storage lagoon or other waste management or pollution control facility, whether in compliance with Environmental Laws or not, other than in respect of those matters set forth on Schedule 12.2 hereto, or (iii) exposure of any person to any chemical substances, noises or vibrations generated by the Company, any of its Subsidiaries, or any of their respective predecessors, whether in compliance with Environmental Laws or not, other than in respect of those matters set forth on Schedule 12.2 hereto; provided, however, that no indemnification shall be provided hereunder for any decrease in the market price of the shares of Common Stock purchased or owned by the Purchaser or any of its Affiliates; and provided, further, that no indemnification shall be provided hereunder with respect to the preceding clause 12.2(b) to the extent an untrue or alleged untrue statement or omission or alleged omission was made by the Company in reliance upon and in conformity with information furnished by or on behalf of the Purchaser for use in the Proxy Statement. The Company shall reimburse any such Indemnified Person for all costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements and costs of investigation) incurred in connection with preparing for, bringing or defending any action, claim, investigation, suit or other proceeding, whether or not in connection with pending or threatened litigation, which shall be caused by or related to or arise out of the foregoing, whether or not such Indemnified Person shall be named as a party thereto. 12.3 Purchaser Indemnity. The Purchaser hereby agrees to indemnify and hold harmless each of the Company, and its directors, officers, employees and agents, from and against any and all claims, liabilities, losses, damages and expenses (including, without limitation, reasonable attorneys' fees and disbursements and costs of investigation) asserted against or incurred by any such Indemnified Person which are caused by or are related to or arise out of (a) subject to Section 11 hereof, the Purchaser's material breach of any representation, warranty, covenant or agreement of the Purchaser contained in this Agreement or (b) a Violation to the extent that such Violation shall occur in respect of information furnished to the Company by or on behalf of the Purchaser for use in the 26 Proxy Statement. The Purchaser shall reimburse any such Indemnified Person for all costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements and costs of investigation) incurred in connection with preparing for, bringing or defending any action, claim, investigation, suit or other proceeding, whether or not in connection with pending or threatened litigation, which shall be caused by or related to or arise out of the foregoing, whether or not such Indemnified Person shall be named as a party thereto. 12.4 Defense. Promptly after receipt by an Indemnified Person of notice of any claim or demand or the commencement of any suit, action or proceeding by any third party with respect to which indemnification may be sought hereunder, such Indemnified Person shall notify in writing the Indemnitor of such claim or demand or the commencement of such suit, action or proceeding, but failure so to notify the Indemnitor shall not relieve the Indemnitor from any liability which the Indemnitor may have hereunder or otherwise, unless the Indemnitor shall be actually prejudiced by such failure. If the Indemnitor shall so elect, the Indemnitor shall assume the defense of such claim, demand, action, suit or proceeding, including the employment of counsel reasonably satisfactory to such Indemnified Person, and shall pay the fees and disbursements of such counsel. In the event, however, that such Indemnified Person shall reasonably determine that having common counsel would present such counsel with a conflict of interest or alternative defenses shall be available to an Indemnified Person or if the Indemnitor shall fail to assume the defense of the claim, demand, action, suit or proceeding in a timely manner, then such Indemnified Person may employ separate counsel to represent or defend such Person against any such claim, demand, action, suit or proceeding and the Indemnitor shall pay the reasonable fees and disbursements of such counsel; provided, however, that the Indemnitor shall not be required to pay the fees and disbursements of more than one separate counsel for all Indemnified Persons in any jurisdiction in any single action, suit or proceeding. For any claim, demand, action, suit or proceeding the defense of which the Indemnitor shall assume, the Indemnified Person shall have the right to participate therein and to retain its own counsel at such Indemnified Person's own expense (except as otherwise specifically provided in this Section 12.4), so long as such participation does not interfere with the Indemnitor's control of such claim, demand, action, suit or proceeding. The Indemnitor shall not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder unless such settlement, compromise or consent shall include an unconditional release of such Indemnified Person from all liability arising out of such claim, demand, action, suit or proceeding and would not prohibit, restrict or impair the Indemnified Person from engaging in any business. 12.5 Purchaser Claims. If there shall be any claim for indemnification by the Purchaser under this Section 12 or under the Distribution Agreement, all determinations by the Company relating thereto, including, without limitation, the choice and engagement of counsel, the defense and/or prosecution of any action and the terms and conditions of any settlement or compromise thereof, shall be made solely by the Company Designees (by majority vote thereof). 12.6 Exclusive Remedy. The parties hereto agree that the sole and exclusive remedy and recourse with respect to any and all claims, suits, actions, demands, liabilities, losses, expenses and 27 damages relating to or arising out of the subject matter of this Agreement (excluding the Distribution Agreement and the Services Agreements) shall be pursuant, and subject, to the indemnification provisions set forth in this Section 12, subject to the provisions of Section 13.11 hereof and except for the remedy of injunctive relief set forth in Section 13.12 hereof. SECTION 13. Miscellaneous. 13.1 Expenses. The parties shall bear their own respective expenses (including, but not limited to, all fees and expenses of counsel, financial advisers and independent accountants) incurred in connection with the preparation, negotiation and execution of this Agreement and the other agreements referred to herein and the consummation of the transactions contemplated hereby and thereby. To the extent that a Company Designee shall be required to make any determination or take any action hereunder (including, without limitation, with respect to indemnification under Section 12 hereof or reviewing the compliance of the Purchaser with its covenants and agreements contained herein) in his/her capacity as a Company Designee, the Purchaser shall cause the Company to, and the Company shall, promptly reimburse and/or pay any reasonable out-of-pocket expenses incurred by the Company Designee in acting in such capacity. The Company Designees are intended third-party beneficiaries of this provision. 13.2 Assignment; Binding Effect. All terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned or delegated by any party hereto without the prior written consent of the other party; provided, that the Purchaser shall have the right to designate an Affiliate of the Purchaser to purchase and take delivery of the Shares at the Closing pursuant to Section 1.1 hereof. The obligations and agreements of the Purchaser hereunder shall succeed to and bind any purchaser or transferee, whether or not such purchaser or transferee shall be an Affiliate of the Purchaser, of the Shares and/or the Option Shares, but shall also remain binding on the Purchaser if the transferee is an Affiliate thereof. Notwithstanding the foregoing, the Options shall be at all times nontransferable and nonassignable by the Purchaser or Genpharm. 13.3 Entire Agreement. This Agreement (including the Exhibits and Schedules hereto) and the other agreements referred to herein or delivered pursuant hereto contain the entire agreement between the parties with respect to the subject matter hereof and thereof and supersede all prior arrangements or understandings, written or oral, with respect thereto, including, without limitation, the Confidentiality Agreement, dated December 16, 1997, by and between the parties. The parties hereto agree that the only representations and warranties made in connection with the transactions contemplated hereby and thereby are those expressly made in writing in this Agreement. The Purchaser expressly disclaims reliance upon any representations or warranties other than those expressly made in writing by the Company in this Agreement. The Purchaser acknowledges and agrees that it is sophisticated in matters concerning the subject matter of this Agreement and the business of the Company, that the Purchaser and the Company have an ordinary business relationship 28 of seller-purchaser and that no special relationship of trust exists between the Purchaser and the Company which could give rise to a special duty of care. 13.4 Notices. All notices hereunder shall be in writing and shall be given: (a) if to the Company, at One Ram Ridge Road, Spring Valley, New York 10977 (attention: Kenneth I. Sawyer, President), fax number: (914) 425-5097, or such other address or fax number as the Company shall have designated in writing to the Purchaser in accordance with this Section 13.4, with a copy to Hertzog, Calamari & Gleason, 100 Park Avenue, New York, New York 10017 (attention: Stephen Ollendorff, Esq. and Stephen R. Connoni, Esq.), fax number: (212) 213-1199, or (b) if to the Purchaser, at c/o Merck KGaA, Frankfurter Strasse 250, 64271 Darmstadt Germany (attention: Dr. Rudi Neirinckx), fax number 011 49 6151 72 3435, or such other address or fax number as the Purchaser shall have designated in writing to the Company in accordance with this Section 13.4, with a copy to Coudert Brothers, 1114 Avenue of the Americas, New York, New York 10036-7703 (attention: Edwin S. Matthews, Jr., Esq.), fax number: (212) 626-4120. Any notice shall be deemed to have been given if personally delivered or sent by express commercial courier or delivery service or by telegram, telefax, telex or facsimile transmission. Any notice given in any other manner shall be deemed given when actually received. 13.5 Amendments; Waiver. Prior to the Closing, this Agreement may not be amended or, subject to Section 13.11 hereof, terminated, and no provision hereof may be waived, except pursuant to a written instrument executed by the Company and the Purchaser. For a period of three years following the Closing, neither this Agreement nor the Distribution Agreement may be amended, and no provision hereof or thereof may be waived, without the prior written consent of at least a majority of the Company Designees (on behalf of the Company) and except pursuant to a written instrument executed by both parties. 13.6 Counterparts. This Agreement may be executed in counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 13.7 Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. As used herein, the phrase "to the Company's knowledge" shall mean the actual knowledge of any of the executive officers of the Company only. 13.8 Governing 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 performed wholly therein. 13.9 Severability. If any term or provision hereof shall be invalid or unenforceable, (i) the remaining terms and provisions hereof shall be unimpaired, (ii) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such term or provision in any other jurisdiction and (iii) the invalid or unenforceable term or provision shall be deemed replaced by a term 29 or provision as determined by a court to be valid and enforceable and to express, to the fullest extent legally permissible, the intention of the parties with respect to the invalid or unenforceable term or provision. 13.10 Consent to Jurisdiction. In connection with any dispute which may arise under this Agreement or under any other agreement referred to herein (except for the Distribution Agreement), each of the parties hereby irrevocably submits to, consents to, and waives any objection to the exclusive jurisdiction of the courts of the State of New York located in the County of New York and of the United States District Court for the Southern District of New York, and waives any objection to the laying of venue in such courts. Each such party admits that any such dispute may be resolved at least as conveniently in such a court as in any other court, and shall not seek dismissal or a change of venue on the ground that resolution of such a dispute in any such court shall not be convenient or in the interests of justice. The Purchaser hereby appoints Coudert Brothers as its agent upon whom service of process may be made with the same force and effect as if such service shall have been made personally upon the Purchaser. The Company hereby appoints Hertzog, Calamari & Gleason as its agent upon whom service of process may be made with the same force and effect as if such service shall have been made personally upon the Company. 13.11 Termination. (a) This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (i) by the mutual written consent of the Purchaser and the Company, (ii) by either party to this Agreement, if the Shareholders' Approval shall not have been obtained with respect to each of the Proposals at the Meeting, including any adjournments thereof, (iii) by either party to this Agreement, if there shall have been a material breach of a representation or warranty contained in this Agreement by the other party, or a material breach by the other party of any covenant or agreement set forth herein and such breach shall not have been cured within ten (10) days following the occurrence thereof, and such shall not have been waived by the other party hereto, (iv) by either party to this Agreement, if the Closing shall not have occurred by July 15, 1998 or (v) by the Company, if the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that failure to terminate this Agreement would create a substantial risk of liability for breach of its fiduciary duties to the Company's shareholders under applicable law. Upon any such termination, all further obligations of the parties shall become null and void and no party shall have any liability to the other party, except that the obligations of the parties hereto pursuant to Sections 6.2, 6.3 and 13, including Section 13.11(b), hereof shall survive such termination indefinitely. (b) Notwithstanding anything to the contrary contained herein, if this Agreement (i) is terminated by either party pursuant to Section 13.11(a) (iii) hereof, then the breaching party shall promptly pay to the non-breaching party in cash an amount equal to $750,000, or (ii) is 30 terminated by the Company pursuant to Section 13.11(a) (v) hereof, then the Company shall promptly pay to the Purchaser in cash an amount equal to $1,000,000. The parties acknowledge and agree that the provisions of this Section 13.11(b) provide for liquidated damages (and not a penalty) and shall be the sole and exclusive remedy and recourse of the parties hereto in respect of a termination of this Agreement pursuant to Sections 13.11(a)(iii) or (v) hereof. 13.12 Injunctive Relief. (a) The Purchaser hereby acknowledges and agrees that a breach by it of its covenants or agreements hereunder will cause irreparable harm to the Company. Accordingly, the Purchaser acknowledges and agrees that a remedy at law for a breach of its obligations hereunder (including, but not limited to, its obligations under Sections 6.3, 7.3 and 8 hereof) will be inadequate and agrees, in the event of a breach or threatened breach by the Purchaser of the provisions of this Agreement (including, but not limited to, its obligations pursuant to Sections 6.3, 7.3 and 8 hereof), that the Company and, in the case of Sections 7.3, 8.1, 8.5 and 8.6 hereof, the shareholders of the Company (other than the Purchaser) and the Company Designees, shall be entitled, in addition to all other available remedies, to an injunction restraining any actual or threatened breach and/or the remedy of specific performance. (b) The Company hereby acknowledges and agrees that a breach by it of its covenants or agreements hereunder will cause irreparable harm to the Purchaser. Accordingly, the Company acknowledges and agrees that a remedy at law for a breach of its obligations hereunder (including, but not limited to, its obligations under Sections 6.3 and 7 hereof) will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement (including, but not limited to, its obligations pursuant to Sections 6.3, 7.3 and 7.8 hereof), that the Purchaser shall be entitled, in addition to all other available remedies, to an injunction restraining any actual or threatened breach and/or the remedy of specific performance. 31 IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed as of the date first written above. PHARMACEUTICAL RESOURCES, INC. By: /s/ Kenneth I. Sawyer ___________________________ Name: Kenneth I. Sawyer Title: President LIPHA AMERICAS, INC. By: /s/ Rudi Neirinckx ___________________________ Name: Rudi Neirinckx Title: Head, New Business Merck KGaA 32 Exhibit A Distribution Agreement [Intentionally Omitted] Exhibit B Services Agreements [Intentionally Omitted] Exhibit C Options [Intentionally Omitted] Exhibit D Registration Rights Agreement [Intentionally Omitted] EX-10 7 EXHIBIT 10.2 DISTRIBUTION AGREEMENT Exhibit 10.2 THIS AGREEMENT made as of this 25th day of March, 1998 (the "Effective Date"), by and between Pharmaceutical Resources, Inc., a New Jersey corporation, with offices at One Ram Ridge Road, Spring Valley, New York, United States of America, 10977 (hereinafter referred to as "Resources") and Genpharm Inc., an Ontario corporation, with offices at 85 Advance Road, Etobicoke, Ontario, M8Z 2S6, (hereinafter referred to as "Genpharm"). R E C I T A L S WHEREAS Genpharm and its Affiliates (as hereafter defined) are engaged in research, development, manufacture and distribution of pharmaceutical products and have submitted to the United States Food and Drug Administration abbreviated new drug applications (and/or have compiled or intend to compile data for submission of abbreviated new drug applications) for certain of the Products (as hereafter defined); AND WHEREAS, as between Genpharm and its Affiliates, Genpharm has the exclusive right to supply, market and distribute such Products in North America, which right permits Genpharm to appoint distributors, exclusive or otherwise, in respect of all or any of the Products for the whole or any part of such territory; AND WHEREAS Resources and its Affiliate are engaged in, inter alia, manufacturing, marketing and distributing generic pharmaceutical products throughout the Territory (as hereafter defined) and own and operate FDA approved manufacturing facilities and possess qualified marketing and distribution systems and organizations to enable it to repackage bulk Products and effectively promote, market and distribute such Products throughout the Territory; AND WHEREAS Genpharm desires to grant to Resources the exclusive right to purchase, market, promote and distribute the Products in the Territory and Resources desires to accept and exercise such right, all subject to the terms and conditions set forth in this agreement; AND WHEREAS the parties wish to enter into this agreement to set forth herein the arrangements regarding their respective rights and obligations with respect to the development, registration, supply and distribution of the Products for the Territory; NOW THEREFORE the parties hereto agree as follows: ARTICLE 1 DEFINITIONS AND INTERPRETATION 1.1 Definitions: Wherever used in this agreement the words and terms, "Affiliate", "ANDA", "Applicable Percentage", "Approved Listing Fee", "business day", "CGMP", "Competing Product", "Confidential Information", "Deductible Listing Fee", "Development Cost", "Excess Reprocurement Costs", "FDA", "Gross Profits", "Gross Sales", "Manufacturer", "Manufacturing Cost","Marketing Costs", "Net Sales", "Person", "Plant","Products", "Product Approval", "Product Information", "Product Manufacturing Requirements", "Recall", "Recall Expenses", "Repackaging Expenses", "Specifications", "Stock Purchase Agreement", "Territory", "Third Party Licensor", "Third Party Royalty", "Transfer Price", "Threshold Amount" and "Unit" shall have the respective meanings set out in Schedule "A" annexed hereto. In addition, words and expressions parenthetically defined elsewhere in this agreement shall, throughout this agreement, have the meanings therein provided. Defined terms shall be used in the singular or in the plural, as sense shall require. 1.2 Headings: The headings of all Articles and Sections hereof are inserted for convenience of reference only, are not intended to be full or accurate descriptions of the contents hereof and shall not be considered part of this agreement or affect the construction or interpretation of this agreement. 1.3 No Strict Construction: The language used in this agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent and no rule of strict construction against any party shall apply to any term or condition of this agreement. ARTICLE 2 EXCLUSIVE APPOINTMENT 2.1 Exclusive Distributor: Subject to the provisions of this agreement and to the receipt by Genpharm or its Affiliate, as the case may be, of a Product Approval for such Product, Genpharm hereby appoints Resources as the sole and exclusive distributor of the Products for the Territory and Resources hereby accepts such appointment and agrees to act as such sole distributor upon such terms and conditions. Except for its right to delegate to an Affiliate of Resources any duty, obligation or right hereunder in relation to a Product in accordance with the provisions of Section 14.8 below (but only for so long as such Person remains an Affiliate of Resources), Resources shall not delegate to any Person any duty or obligation of Resources hereunder in relation to a Product without the prior written consent of Genpharm (which consent may be withheld in the sole discretion of Genpharm). 2.2 Additional Products: The parties may, by mutual agreement, add any other generic pharmaceutical product to or delete a Product from this agreement and, in such event, the parties shall date and initial such alteration on Schedule "B" for purposes of identification and thereafter the terms of this agreement shall govern the products so added and shall terminate in respect of the products so deleted (except to the extent of continuing obligations following termination as hereinafter contemplated). The foregoing right to terminate this agreement as regards a specific Product by mutual agreement is in addition to and not in substitution or derogation of any right of a party hereunder to unilaterally terminate this agreement as regards any Product pursuant to Section 3.4 or 3.7 or Article 10 hereof. The foregoing right to add any product by mutual agreement to Schedule "B" is in addition to and not in substitution or derogation of the rights and obligations contemplated in Sections 3.4 or 3.10 hereof. 2.3 Nature of Relationship: This agreement does not constitute or create (and the parties do not intend to create hereby) a joint venture, pooling arrangement, partnership, or formal business organization of any kind between and among any of the parties, and the rights and obligations of the parties shall be only those expressly set forth herein. The relationship hereby established between Resources and Genpharm is solely that of buyer and seller, each is an independent contractor engaged in the operation of its own respective business. Neither party shall be considered to be an agent of the other for any purpose whatsoever. Each party shall be responsible for providing its own personnel and workers' compensation, medical coverage or similar benefits, any life, disability or other insurance protection; and shall be solely responsible 2 for the payment of social security benefits, unemployment insurance, pension benefits, withholding any required amounts for income and other employment-related taxes and benefits of its own employees, and shall make its own arrangements for injury, illness or other insurance coverage to protect itself; its Affiliates, its subcontractors and personnel from any damages, loss and/or liability arising out of the performance of this agreement. Neither party has the power or authority to act for, represent, or bind the other (or its Affiliates) in any manner. 2.4 Territorial and Product Restrictions Applicable to Resources: During the term of this agreement applicable to a Product neither Resources nor any of its Affiliates will directly or indirectly sell such Product outside of the Territory or to any Person in the Territory where it knows or has reason to believe that such Product will be resold by such Person outside of the Territory. In the event the foregoing provision is or becomes unenforceable or is unlawful in the Territory, then it shall be deemed replaced by the most restrictive provision on marketing or sale of the Product outside of the Territory as shall be lawful and enforceable in the Territory. If Genpharm establishes that one of Resources' customers or a customer of any of its Affiliates is exporting such Product out of the Territory, Resources shall (and shall cause its Affiliates to) either cease to supply such customer or obtain (and enforce, if necessary) an undertaking from such customer not to sell the Product outside of the Territory (unless Resources [or its Affiliate, as the case may be] is precluded from taking such action under applicable law). In addition, Resources shall not (and it shall not authorize, permit or suffer any of its Affiliates to), directly or indirectly, manufacture, purchase, sell or distribute a Competing Product in the Territory at any time during the term of this agreement applicable to a Product (including, for greater certainty, prior to receipt by Genpharm or any of its Affiliate of a Product Approval for such Product). 2.5 Product Restrictions Applicable to Genpharm: Genpharm agrees that, during the term of this agreement applicable to a Product, neither it nor any of its Affiliates shall, directly or indirectly, sell such Product in the Territory or to any Person outside of the Territory where it knows or has reason to believe that such Product will be resold by such Person in the Territory. In the event the foregoing provision is or becomes unenforceable or unlawful in the Territory it shall be deemed to be replaced by the most restrictive provision on marketing or sale of the Product in the Territory as shall be lawful or enforceable in the Territory. If Resources notifies Genpharm that one of its customers (or a customer of its Affiliate) is marketing the Product in the Territory, Genpharm shall (and shall cause its Affiliates to) either cease to supply such customer or obtain (and enforce if necessary) an undertaking from such customer not to market such Product in the Territory (unless Genpharm [or its Affiliate, as the case may be] is precluded from taking such action under applicable law). Genpharm further agrees that, so long as Merck KGaA and its Affiliates hold collectively at least 33-1/3% of the issued and outstanding shares of Resources' common stock, neither Genpharm nor any of its Affiliates will sell, market or distribute in the Territory any generic pharmaceutical product which has the same active ingredient, same strengths, is in the same dosage form and is for the same indication as a generic pharmaceutical product currently marketed and distributed by Resources and its Affiliates in the Territory as described in Schedule "C" annexed hereto so long as Resources or any of its Affiliates are actively marketing and selling such Product in the Territory; provided that where a product identified on Schedule "C" is one in respect of which Genpharm or any of its Affiliates holds the ANDA approval and is being distributed by Resources and its Affiliates in the Territory pursuant to an agreement with Genpharm or any of its Affiliates then Genpharm and its Affiliates shall be free to sell, market and distribute such product in the Territory at such time as its agreement with Resources and its Affiliates terminates in respect of such product or Resources and/or its Affiliates' exclusive right to distribute such 3 product by or on behalf of Genpharm and its Affiliates pursuant to such agreement is terminated in accordance with the provisions thereof. ARTICLE 3 PRODUCT DEVELOPMENT AND REGISTRATION 3.1 Obligations to Develop and Register Products: Subject to Section 3.4 below, Genpharm shall, or shall cause its Affiliates to, use commercially reasonable best efforts to develop the Products for the Territory in such order of priority as is determined by Genpharm and to submit ANDA's to the FDA to obtain Product Approvals for such Products as soon as reasonably practicable following successful development, provided that Genpharm shall have the right, in its discretion, to alter the priority to be given to development and/or registration of the Products and nothing herein contained shall constitute a guarantee or warranty of Genpharm that development of any Product will be commenced or continued, that a submission for a Product Approval for such Product will be filed within any specific time period or that a Product Approval for any Product will be obtained. Notwithstanding the foregoing, Genpharm and its Affiliate may, at their option, in lieu of independently developing a Product (directly or through any other Affiliate) obtain a licence of the Product Information of any Person who is not an Affiliate of Merck KGaA (the "Third Party Licensor") and submit an ANDA for such Product based upon such licenced Product Information. It is understood and agreed by Resources that where Genpharm or its Affiliate licences its Product Information for a Product from a Third Party Licensor it may be required to pay to the Third Party Licensor a royalty or other compensation (including, without limitation, profit sharing) for its right to use such Product Information (the "Third Party Royalty"). Genpharm shall hereafter advise Resources of its intention or the intention of its Affiliate to licence any Product Information in relation to a Product for the Territory from a Third Party Licensor and shall consult with Resources prior to entering into any agreement with such Third Party Licensor to licence such Product Information so that Resources shall be fully informed as to the nature and terms of such relationship. 3.2 Development Responsibility: Subject to Section 3.4 below, it shall be the responsibility of Genpharm and/or its Affiliates, (i) to complete the development of the Products in accordance with the applicable requirements of the FDA, (ii) where such development has been successfully completed, to file an ANDA for the Product with the FDA and, (iii) where an ANDA for such Product has been submitted, to use commercially reasonable efforts to ensure that it receives a Product Approval for such Product from the FDA on the earliest possible schedule given the FDA process. It is understood and agreed that the Product Approval granted in respect of a Product will be registered in Genpharm's name or the name of one of its Affiliates. 4 3.3 Status Reporting: Genpharm shall from time to time: (i) advise Resources in writing of any unforeseen material problems or delays encountered or additional requirements imposed upon Genpharm or its Affiliate, as the case may be, since the date of its last report in connection with the development and/or registration of a Product (and of which Resources has not been otherwise advised pursuant to (ii) below); and (ii) provide Resources with such information as Resources may reasonably request in writing from time to time with respect to the status of the development and/or registration of a particular Product. 3.4 Right to Terminate Obligations Prior to Product Approval: Notwithstanding Section 3.1 hereof or any other provision contained in this agreement but subject to the limitations set forth in the final sentence of this Section, Genpharm shall have the right, upon written notice to Resources, to immediately terminate its obligations hereunder to develop, and/or seek a Product Approval for a Product or Products if, in the reasonable opinion of Genpharm, it is not commercially reasonable to develop such Product or to seek to obtain or maintain a Product Approval therefor, including, by way of illustration only and without limiting the generality of the foregoing, by reason of: (i) technical factors relating to the development of the Product including, without limitation, the failure of clinical trials/bioavailability studies previously conducted by Genpharm or its Affiliate, as the case may be, in relation to the Territory or elsewhere or the introduction by the FDA of new technical requirements, in each case, which materially increase the cost of developing the Product or of obtaining or maintaining a Product Approval therefore; (ii) withdrawal from the market of the branded counterpart of the Product in the Territory; (iii) the existence of contra indications relating to the Product not currently known which may adversely affect the marketability of such Product; (iv) the high cost of manufacturing the Product; (v) the shortage of supply of the active ingredient or other components essential to the manufacture of such Product; (vi) the presence or anticipated presence on the market of Competing Products in the Territory at the time when a Product Approval for such Product is expected to be obtained or within a reasonable time period thereafter which may affect the potential selling price of the Product or Resources' potential share of the market having regard for the volume required to obtain reasonable economies of scale for Genpharm or the Manufacturer; 5 (vii) the introduction into the Territory of new branded products which materially adversely affect or may potentially materially adversely affect the market for the Product in the Territory; (viii) the introduction into the Territory or the anticipated introduction into the Territory of a product which has the same active ingredient and is for the same indication as a Product but which is in a different dosage form and which materially adversely affects or may materially adversely affect the market for such Product in the Territory; or (ix) the institution of any suit, action or other legal proceeding against Genpharm or its Affiliates, as the case may be, or against any other Person alleging that the development of the Product as contemplated by Genpharm or the Affiliate in question breaches the proprietary rights of any Person which proceeding, in the reasonable opinion of Genpharm, could delay the ability of Genpharm or such Affiliate to obtain a Product Approval for the Product to a point in time where marketing the Product will no longer be economically feasible and/or the costs of litigating, even if successful, will materially adversely affect the potential economic benefit which Genpharm or its Affiliate may derive through the distribution of the Product pursuant to this agreement or could result in the liability of Genpharm or such Affiliate for material damages or affect their right to develop, manufacture or sell such Product. Upon the exercise of such right by Genpharm this agreement, except Sections 3.5 and 3.6 below, shall terminate in respect of the Product in question. Provided that if Genpharm exercises the rights hereunder to terminate this agreement as regards more than 10 of the Products to which this agreement applies on the Effective Date then it shall, upon any further exercise of such right pursuant to this Section, substitute for the Product in respect of which this agreement is to be terminated (the "Replaced Product") a generic pharmaceutical product which in the opinion of Genpharm, acting reasonably, is a commercially reasonable substitute (the "Substitute Product") for such Replaced Product. Genpharm shall consult with Resources prior to selecting the Substitute Product and shall advise Resources in writing of the identity of the Substitute Product within 30 days of the exercise of its right of termination as regards the Replaced Product pursuant to this Section, whereupon Schedule "B" hereto shall be amended by the addition of the Substitute Product, which addition shall be dated and initialled by Genpharm and Resources for purposes of identification and thereafter this agreement shall apply to the Substitute Product. Genpharm acknowledges and agrees that once a clinical trial/bioavailability study has been successfully completed with respect to a Product Genpharm shall be obligated to file (or cause its Affiliate to file) an ANDA with the FDA for such Product unless Resources consents to Genpharm (and its Affiliates) not filing such an ANDA, which consent of Resources shall not be unreasonably withheld or unduly delayed. 3.5 Licence of Product Information to Resources: (a) If Genpharm exercises its right pursuant to Section 3.4 for any reason (other than pursuant to Paragraphs 3.4 (iii) or (ix) above) to terminate this agreement in respect of a Product, Resources shall have the right for a period of 20 business days following receipt by it of the notice contemplated in Section 3.4 hereof to require Genpharm to grant (or cause the applicable Affiliate to grant) to Resources an exclusive licence upon the terms herein contemplated to use the Product 6 Information to obtain a Product Approval for such Product in the Territory and to market and sell such Product in the Territory, the right of Resources hereunder to be exercised by notice in writing to Genpharm (which notice, to be effective, shall reference this Section, shall specify the Product to be licenced and shall be received by Genpharm within such 20 business day period). The rights of Resources and the obligations of Genpharm pursuant to this Subsection (a) shall not apply to any Products in respect of which Genpharm (or the applicable Affiliate, as the case may be) licenses Product Information from a Third Party Licensor if the agreement with such Third Party Licensor prohibits Genpharm (or such Affiliate) from so licensing such Product Information to Resources (whether absolutely or without the consent of the Third Party Licensor, which consent Genpharm (or such Affiliate) has been unable to obtain notwithstanding its use of reasonable commercial efforts to obtain such consent). (b) Following the proper exercise by Resources of its rights pursuant to Subsection (a) above, Resources and Genpharm (on its own behalf or on behalf of its applicable Affiliate, as the case may be) shall negotiate in good faith the provisions of an exclusive licence agreement in relation to such Product Information and the Product, which agreement shall be executed and delivered by the licensor and Resources within 60 days of the receipt by Genpharm of the notice contemplated in Subsection (a) above or within 15 days of the final determination of the provisions of such licence agreement as contemplated in Subsection (c) below. Such agreement shall be prepared initially by Genpharm and shall be submitted by Genpharm to Resources within 30 days of its receipt of such notice. Such agreement shall provide that: (i) Resources shall not have the right to sublicence any Product Information or to authorize any other Person to use Product Information for any purpose (other than to a Person who is then and who continues thereafter to be an Affiliate of Resources and who agrees to be bound by the provisions of the licence agreement); (ii) all information, tests and studies not contained in the Product Information and which are required by Resources to obtain a Product Approval for such Product shall be developed and conducted by Resources and/or its Affiliate at their sole cost and expense; (iii) the licensor will answer Resources' reasonable inquiries concerning such Product Information so as to enable Resources to obtain a Product Approval for the Product in question but it shall not be required to compile or develop information which is not already available to or possessed by it; (iv) Resources will not use the Product Information licenced to it pursuant hereto to obtain a regulatory licence or approval to market the Product outside of the Territory nor will it sell such Product outside of the Territory or to any Person in the Territory where Resources knows or has reason to believe such Person will resell the same outside of the Territory (and the agreement will contain restrictions similar to those contained in Section 2.4 hereof); 7 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (v) Resources will pay to the licensor (and to Genpharm, where Genpharm is not the licensor, in the proportions directed by Genpharm) an aggregate royalty equal to [****] of the Gross Profits derived from Net Sales of the licensed Product made by or on behalf of Resources or its Affiliates in the Territory (determined in the manner contemplated in this agreement with the proviso that Resources or its Affiliates manufacturing cost of such product calculated in the manner contemplated in the definition "Manufacturing Cost" herein contemplated shall be treated as the Transfer Price hereunder), provided that no royalty shall be payable on Gross Profits earned from Net Sales of the licensed Product until such Gross Profits exceed an amount equal to the reasonable Development Costs incurred by Resources and its Affiliates to develop such Product and to obtain the Product Approval for such Product. (c) Such agreement shall also contain such other terms and provisions customarily included in license agreements for product information as Genpharm and Resources may mutually agree upon and in the event of a dispute between such parties as to the inclusion of any provision in such agreement or the manner of expressing any concept, such dispute shall be resolved through arbitration to be conducted in accordance with the provisions of Article 13 hereof. 3.6 Withdrawal from Market: If Genpharm terminates this agreement with respect to a Product pursuant to Section 3.4 hereof and Resources does not exercise its rights pursuant to Section 3.5 in respect of such Product then neither Genpharm nor its Affiliate will seek a Product Approval for such Product for a period of 18 months from the date upon which this agreement terminates in respect of such Product without offering Resources the right to reinstate this agreement as regards such Product. 3.7 Election of Resources: (a) At least 90 days prior to Genpharm commencing to manufacture the validation batches of the Product required to obtain the Product Approval for such Product, Genpharm shall notify Resources in writing of its estimated Transfer Price of such Product (it being acknowledged and agreed by Resources that Genpharm shall have no obligation to manufacture or cause its Affiliates to manufacture the validation batches until such time as Resources has waived in writing its rights with respect to such Product pursuant to Subsection (b) below and submitted to Genpharm [or such right has expired and Resources is deemed to have submitted to Genpharm pursuant to Subsection (b) below] a purchase order for the Product to be so manufactured in such validation batches). (b) Notwithstanding the provisions of 2.1 hereof, within 30 days of the receipt by Resources of the notice contemplated in Subsection (a) above, Resources shall have the right, to be exercised by written notice to Genpharm, to immediately terminate its obligations to distribute such Product hereunder if, in the reasonable opinion of Resources: 8 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (i) it is not commercially reasonable to sell and distribute such Product by reason of those factors, events or circumstances contemplated in clauses 3.4 (ii), (iii), (vii) or (viii); or (ii) the Gross Profit which may be earned by Resources and its Affiliates pursuant to this agreement from the distribution of such Product will be less than [****] of Gross Sales having regard to the estimated Transfer Price of the Product and taking into account the presence or anticipated presence in the market of Competing Products at the time when the Product Approval for such Product is expected to be obtained by Genpharm or its Affiliate or within a reasonable time period thereafter which may affect the potential selling price of the Product or Resources' potential share of the market; Upon the exercise of such right by Resources, this agreement, except Subsection (c) below, shall terminate in respect of the Product in question. In the event that Resources does not exercise such right of termination within the time and in the manner hereinbefore contemplated, Resources shall be deemed to have placed a purchase order with Genpharm for the products manufactured as part of the validation batches, which products shall be made available to Resources for pickup as contemplated in Section 5.3 hereof as soon as possible following receipt by Genpharm or its Affiliates of the Product Approval therefore. (c) If Resources exercises the right pursuant to Subsection (b) above to terminate this agreement in respect of a Product and within 30 days of Genpharm or its Affiliate receiving a Product Approval for such Product Genpharm, despite reasonable commercial efforts in that regard, remains unable to engage any other Person reasonably acceptable to Genpharm to exclusively distribute such Product in the Territory on its behalf upon terms and provisions at least as favourable to Genpharm as those contained herein, Resources shall pay to Genpharm [****] of the reasonable Development Costs incurred by Genpharm and its Affiliates to develop the Product and to obtain a Product Approval for such Product. In addition, Resources shall not, and shall not authorize, permit or suffer any of its Affiliates to sell, market or distribute a Competing Product in the Territory for a period of 3 years from the date upon which Resources shall have elected to terminate this agreement in respect of such Product. 3.8 Representation and Warranties re Status: (a) Resources represents and warrants to Genpharm that neither it nor any of its Affiliates is prohibited by any law, rules or regulation or by any order, directive or policy from selling any of the Products (assuming that the Product Approvals have been obtained) or other pharmaceutical products within the Territory and that neither Resources nor any of its Affiliates is a Person who is listed by a United States federal agency as debarred, suspended, proposed for debarment or otherwise ineligible for federal programs in the United States or other jurisdictions within the Territory (an "Ineligible Person"). 9 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (b) Genpharm represents and warrants to Resources that neither it nor any of its Affiliates who have or are developing a Product for the Territory or who is or will be a Manufacturer thereof is currently prohibited by any law, rule or regulation or by any order, directive or policy from selling the Products within the Territory (on the assumption that it holds whatever licenses are required for a foreign corporation to carry on business generally within such jurisdiction and holds Product Approvals for such Products) and that neither Genpharm nor any such Affiliate is an Ineligible Person. 3.9 Expenses of Patent Challenges: Resources shall pay to Genpharm, within 30 days of the receipt of an invoice therefor (which invoice shall be accompanied with a copy of the third party invoice evidencing the expense in question), [****] of the legal fees and disbursements and other reasonable expenses actually incurred by Genpharm and its Affiliates to investigate and defend the claim of any Person (hereafter referred to as a "Claim") that the Product as developed by Genpharm (and/or its Affiliates) infringes any patent or other proprietary right of such Person enforceable in the Territory (such legal fees, disbursements and other expenses incurred by Genpharm and its Affiliates to investigate and defend a Claim being herein referred to as the "Patent Defence Expenses"). If the Patent Defence Expenses incurred by Genpharm and its Affiliates in respect of a Product exceeds [****] then, at any time thereafter, Resources shall have the right terminate its obligation to fund [****] of any future Patent Defence Expenses incurred by Genpharm and its Affiliates with respect to such Product by notice in writing to Genpharm (a "Notice"), which Notice shall be effective upon its receipt by Genpharm and shall terminate the obligation of Resources to fund any Patent Defence Expenses incurred by Genpharm and its Affiliates with respect to such Product after the date upon which such Notice is received by Genpharm but, for greater certainty, Resources shall remain liable to Genpharm for [****] of the Patent Defence Expenses incurred by Genpharm and its Affiliates to and including the date upon which such Notice is so received by Genpharm. Termination by Resources hereunder of its obligation to fund Patent Defence Expenses incurred by Genpharm and its Affiliates in respect of one or more Products shall not affect the obligation of Resources to fund Patent Defence Expenses incurred by Genpharm and its Affiliates with respect to other Products (subject to Resources' rights to terminate its obligations to fund such expenses with respect to any other Product or Products in accordance with the provisions hereof). The obligation of Resources to fund Patent Defence Expenses incurred in respect of a Product shall terminate upon termination of this agreement in respect of such Product provided that Resources shall remain liable to Genpharm for the Patent Defence Expenses relating to such Product incurred prior to such date of termination (to the extent it is otherwise liable therefor), which liability shall survive the termination of this agreement. Upon a written request of Resources Genpharm will authorize the lawyer or other representative of Genpharm or its applicable Affiliate engaged in the defense or investigation of such Claim to discuss with and disclose to Resources possible future Patent Defense Expenses to be incurred in the investigation or defense of the Claim. 3.10 Right of First Refusal - Development: Resources acknowledges and agrees on its own behalf and on behalf of its Affiliates that they shall not commence to develop any generic pharmaceutical product for the Territory not under active 10 development by Resources or any of its Affiliates on the Effective Date without first offering to Genpharm, by notice in writing (which notice shall specify in respect of such product, its dosage form, indications and strengths) the right to develop such product (either itself or through one of its Affiliates) as an additional product to which this agreement shall apply. Genpharm shall, within 45 days of the receipt of such notice, notify Resources whether or not it wishes to add such product to this agreement (and, in the absence of any such reply, Genpharm shall be deemed to have declined such offer). If Genpharm declines or is deemed to have declined such offer Resources and Genpharm (and their respective Affiliates) shall each be free to develop such product for the Territory free of any rights of the other. Subject to the final sentence of this Section, if Genpharm accepts such offer within the time and in the manner herein provided such product shall be added to Schedule "B" hereto as a product to be developed for the Territory by Genpharm and/or its Affiliate (which addition shall be dated and initialled by the parties for purposes of identification) and thereafter the terms of this agreement shall govern such product. Provided that from and after the date, if ever, upon which Merck KGaA and its Affiliates hold collectively less than 33-1/3% of the issued and outstanding shares of Resources' common stock, Resources shall have no further obligation pursuant to this section to offer to Genpharm the first right to develop products which Resources and its Affiliates proposes to develop as herein contemplated. Where Resources' proposes to develop such product and obtain an ANDA approval therefor from the FDA based upon a licence of Product Information from a third party then any exercise by Genpharm of its right pursuant to this Section to have such product added to this agreement shall be null and void (and such product shall not be added to this agreement with each such party being free to develop such product independently as hereinbefore contemplated) if Resources, within 60 days of the exercise by Genpharm of such right hereunder, can provide reasonable evidence that Genpharm and its Affiliates do not have the ability to develop and have such product available to market within a reasonably comparative time frame to that within which Resources could reasonably develop and have such product available to market based upon the third party's licenced information. ARTICLE 4 MANUFACTURE AND SUPPLY OF PRODUCT 4.1 Exclusive Supplier: Subject to receipt by Genpharm or its Affiliate of a Product Approval for a Product Genpharm shall use commercially reasonable efforts to manufacture (or cause to be manufactured) and supply to Resources, in accordance with the terms and conditions set forth herein and in a timely fashion, reasonable quantities of such Product. Resources shall order from Genpharm all of its and its Affiliate's requirements of the Product for the Territory in accordance with the terms and conditions set forth herein. 4.2 Manufacturing Responsibilities: Each Product supplied by Genpharm hereunder shall be manufactured (which shall include, without limitation, all testing, bulk packaging and labelling) in an FDA approved facility and in accordance with the following (collectively, the "Product Manufacturing Requirements"), (i) the Specifications for the Product, (ii) applicable cGMP and good laboratory practices and (iii) all other applicable rules, regulations and requirements of the FDA relative to the manufacture of such Product. 4.3 Storage of Products Pending Shipment: The finished bulk Product to be made available to Resources hereunder shall be stored by Genpharm and/or the Manufacturer, pending shipment, in accordance with the Specifications for such Product and applicable cGMP. 11 4.4 Quality Control and Assurances and Release Documentation: Genpharm shall or, shall cause the Manufacturer to, perform all in-process quality control tests and quality assurance reviews on the Product as required by the Product Manufacturing Requirements and shall, or shall cause the Manufacturer to, certify in writing that each batch of the Product delivered to Resources was manufactured in strict conformity with the Product Manufacturing Requirements and the other terms of this agreement. 4.5 Product Warranty: Genpharm warrants that all Product supplied by it to Resources pursuant to this agreement shall be manufactured, packaged, tested, stored and handled in accordance with the Product Manufacturing Requirements and that at the time of the delivery of such Product to the carrier at Genpharm's or the Manufacturer's Plant, as the case may be, such Product: (i) will not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act ("Act"), as amended, or within the meaning of any applicable state or municipal law in which the definitions of adulteration and misbranding are substantially the same as those contained in the Act, as such Act and such laws are constituted and effective at the time of delivery and (ii) will not be an article which may not, under the provisions of Sections 404 and 505 of such Act, be introduced into interstate commerce. NEITHER GENPHARM NOR THE MANUFACTURER MAKES ANY REPRESENTATION THAT THE PRODUCT IS USEFUL FOR THE INTENDED PURPOSE OR THAT IT IS FREE FROM INHERENT SIDE EFFECTS EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT. ARTICLE 5 PRODUCTION FORECASTS, ORDERS AND DELIVERIES 5.1 Forecasts and Commitments: To assist Genpharm to schedule production of the Products, Resources shall provide to Genpharm (or as it directs) for each Product to be manufactured and supplied to Resources hereunder, quarterly (at least 45 days in advance of the commencement of the first calendar month forecasted thereunder), a 12 month rolling forecast of Resources' estimated requirements of the Product, which forecast shall represent a commitment of Resources to purchase the quantity of Product projected for the first month thereunder and a commitment, subject to a 20% variance, to purchase the quantity of Product forecasted for the second and third months forecasted thereunder. Subject to the foregoing, all forecasts are estimates only and Resources shall only be bound to purchase the Product pursuant to purchase orders submitted, or deemed hereunder to be submitted, by it to Genpharm (or to such person as Genpharm may direct). All purchase orders for a Product shall specify the delivery date therefor, which delivery date shall be no sooner than 16 weeks following the receipt of such order by Genpharm or such other period of time as Genpharm shall specify in writing to Resources within a reasonable period of time following receipt by Genpharm or the Manufacturer of the Product Approval for such Product. Resources shall deliver the first such forecast within a reasonable period of time following receipt of such Product Approval by Genpharm or the Manufacturer and shall deliver the updated and extended forecasts every 3 months thereafter. 5.2 Purchase Orders: All orders for Product shall be placed using Resources' standard form of purchase order and shall be invoiced using Genpharm's standard 12 form of invoice. All purchase orders submitted by Resources shall contemplate the purchase of Product in minimum batch sizes as contemplated in the applicable Product Approval or multiples thereof (unless Genpharm agrees in writing to smaller quantities [either generally or in respect of any particular purchase order]) and shall specify, amongst other things, the required delivery date. In the event of any conflict between the terms of any purchase order and the terms of any invoice related thereto, the terms of the purchase order shall govern. In the event of any conflict between the terms of any purchase order and the terms of this agreement, the terms of this agreement shall govern (unless the parties shall have mutually agreed to the contrary in writing in respect of a particular instance). 5.3 Delivery of Product: (a) Products shall be made available to Resources for pickup in bulk containers (where applicable) at Genpharm's or the Manufacturer's Plant, as the case may be. Resources shall arrange for shipping and/or transportation of the Products from such Plant to Resources' Spring Valley, New York facility and pay all shipping and related costs, including insurance, and any customs duties and other taxes imposed on the importation of the Product into the Territory. Genpharm shall (or shall cause the Manufacturer to) promptly notify Resources by fax that any order (or part thereof) is available for pick-up at its or at such Manufacturer's Plant (this notice shall hereafter be referred to as the "Availability Notice"). Resources shall use reasonable commercial efforts to pick up the Products that are the subject of an Availability Notice within 10 business days of receipt of the Availability Notice; provided that, if such pickup has not occurred on or prior to the expiry of such 10 day period, Resources shall, for purposes of its payment obligations to Genpharm pursuant to Sections 6.1 and 6.2 below, be deemed to have picked up the Products which are the subject of the Availability Notice on the last business day of such 10 day period. If the Products in question have not been picked up by or on behalf of Resources within 20 business days of an Availability Notice, Genpharm may, but shall not be obligated to, cause the Products to be delivered to Resources' Spring Valley, New York, facility at Resources' sole cost and expense and risk of loss and title to the Products shall pass to Resources upon pickup of the Products at Genpharm's or such Manufacturer's Plant, as the case may be, in the same manner as if the pickup had been effected by Resources itself, provided that Genpharm shall provide for the Products to be insured during transit in a commercially reasonable manner at Resources' sole cost and expense. (b) Genpharm shall, or shall cause the Manufacturer to, supply to Resources all documentation necessary to export such Product from the jurisdiction where its Plant is located and all documentation required by Resources to import such Product into the Territory to the extent that same is available to Genpharm (or such Manufacturer) or is reasonably capable of being generated by it. (c) Risk of loss and title to the Products shall pass to Resources upon pickup of the Product by, on behalf of, or for the account of Resources at Genpharm's or such Manufacturer's Plant as aforesaid. (d) Products supplied by Genpharm hereunder shall have a minimum shelf life of 20 months which shall run from the date that the Availability Notice in respect of such Product is received by Resources. 13 5.4 Cancellation of Order: Notwithstanding anything herein contained, if an Availability Notice in respect of any Product subject to a purchase order has not been given within 60 days following the required delivery date hereunder Resources shall be entitled to cancel such order (or portion thereof in respect of which no Availability Notice has so been given) by notice in writing to Genpharm. 5.5 Documentation to Accompany Deliveries: All deliveries of Product by or on behalf of Genpharm shall be accompanied by all documentation required under applicable law to import the Product into, and for Resources to offer the Product for sale in, the Territory including, without limitation, any quality assurance or quality control audit results and/or certifications that the Product Approval for the Product have been audited to ensure that any Product supplied hereunder has been manufactured in conformity with cGMP and applicable FDA regulations. 5.6 Assistance With Export & Import Laws: Resources and Genpharm shall provide such commercially reasonable assistance as the other may request relative to the exportation or importation of Products not expressly provided in this agreement. ARTICLE 6 PAYMENTS, REPORTS AND AUDIT 6.1 Purchase Price: (a) The purchase price payable by Resources for Product supplied to it by or on behalf of Genpharm shall be the aggregate of (i) the Transfer Price of such Product and (ii) the additional consideration to be paid to Genpharm pursuant to Section 6.3 hereof in respect of Net Sales of such Product. (b) In addition to such purchase price Resources shall pay all applicable sales tax, use tax, consumption tax, goods and services tax, value added tax or similar tax, imposts or duties levied upon the sale of the Product by Genpharm to Resources whether that tax, impost or duty is levied under the laws of the jurisdiction where the Manufacturer's Plant is located or the jurisdiction where Resources or Genpharm is located (or of any state, province, territory or other political subdivision thereof) and whether it is currently in force or comes into force after the Effective Date of this agreement. (c) The Transfer Price shall be invoiced and all payments hereunder shall be made in U.S. dollars. Any costs or expenses which are to be paid by Resources hereunder or which were incurred by Genpharm (or a Manufacturer, as the case may be) in a currency other than U.S. dollars shall be converted into its U.S. dollar equivalent in accordance with the usual procedures therefore used by Genpharm or the applicable Manufacturer in determining its Manufacturing Costs. 6.2 Invoicing and Payment: Genpharm shall invoice Resources for the Transfer Price of the Product at the time such product is picked up or is deemed to be picked up by or on behalf of Resources as contemplated in Section 5.3 hereof or 14 within a reasonable period of time thereafter. The Transfer Price shall be due and payable within 45 days following the date of such invoice. Each shipment of Product to Resources shall constitute a separate sale, obligating Resources to pay the purchase price therefor, whether such shipment be in whole or only partial fulfilment of any order. 6.3 Additional Consideration: (a) As additional consideration for the Products Resources shall pay to Genpharm the Applicable Percentage of the Gross Profits arising out of Net Sales in the Territory by Resources or its Affiliates of Product supplied by or on behalf of Genpharm pursuant hereto, which additional consideration shall be paid to Genpharm as part of the purchase price for the Product sold and shall not be treated as a royalty or similar payment. (b) The payment to Genpharm of its share of Gross Profits shall be made in U.S dollars. For the purposes of determining Gross Profits, any delivery costs or other expenses incurred by Resources which are relevant to the calculation of Gross Profits and which are payable or were paid in a currency other than U.S. Dollars shall be converted into their U.S. dollar equivalent based upon the rate of exchange between the currency in question and U.S. dollars as reported in the Wall Street Journal on the 2nd business day preceding the day on which any such payment on account of Gross Profits is due. 6.4 Payment of Additional Consideration and Accompanying Documentation: Genpharm's share of Gross Profits shall be paid by Resources to Genpharm quarterly, within 30 days following the end of each calendar quarter (being the last day of March, June, August and December in each year) with respect to Net Sales made by Resources or its Affiliates of such Products during such calendar quarter. Each such payment shall be accompanied by the following in respect of each Product supplied by or on behalf of Genpharm: (a) a sales summary reasonably satisfactory to Genpharm showing all sales of such Product by Units (sku's) and dollars made by Resources and its Affiliates during the quarter in question; (b) a detailed statement showing all returns, adjustments, credits, rebates and other debits and credits relevant to the calculation of Net Sales of such Product for the quarter in question together with copies of all documentation to support allowable deductions used in computing Net Sales during such quarter; (c) a detailed statement showing Repackaging Expenses, Recall Expenses and Excess Reprocurement Costs incurred by Resources and its Affiliates and duties and taxes recovered by Resources and its Affiliates which are relevant to the calculation of Gross Profits for the quarter in question; (d) a certificate signed by the Chief Financial Officer of Resources certifying that, to the best of his knowledge, information and belief, after reasonable investigation, the foregoing statements contemplated in (a), (b) and (c) above are true and correct and do not omit any material information required to be provided pursuant to this Section; and (e) a summary of the calculation of the Gross Profits payable to Genpharm on such date. 15 For purposes of this agreement a sale shall be considered to have been made at the time the Product is shipped by Resources' or its Affiliate's to its customer. For purposes of computing Net Sales, all sales and other transactions between Resources and its Affiliates shall be disregarded. 6.5 Additional Information: Resources shall provide to Genpharm and shall cause its Affiliates to provide to Genpharm, promptly following a request therefor, such additional information concerning any sales of a specific Product (including, without limitation, in respect of any sale, the date of the shipment, the name of the customer, the number of Units of the Product (by sku, if requested) sold to such customer and the invoice price charged by Resources or its Affiliates), chargebacks, credits, returns, adjustments and other credits and debits relevant to the calculation of Net Sales and Gross Profits in respect of a Product including information relating to Repackaging Expenses, Recall Expenses and Excess Reprocurement Costs incurred in or applicable to any period in respect of such Product, as Genpharm may reasonably request. Genpharm shall, or shall cause the applicable Manufacturer to, provide to Resources, promptly following a request therefor, such additional information concerning the calculation of the Transfer Price of Products previously supplied to Resources hereunder as Resources may reasonably request. 6.6 Interest: All payments to be made to Genpharm under this agreement shall bear interest from and after the Applicable Day (as that term is defined below) until paid at the annualized rate equal to the daily (as at the close of business on each such day) prime rate as quoted from time to time by Citibank N.A., New York, New York plus 5%, compounded daily. For purposes of this Section the term "Applicable Day" shall mean: (i) where the payment is on account of the Transfer Price of a Product which has not been made on its due date and Resources has not on 2 or more occasions during the same calendar year failed to pay a Transfer Price to Genpharm on its due date, 30 days after the due date therefore; (ii) in any other case, the due date therefore. 6.7 Maintenance of Records: Each of Genpharm and Resources agrees that it shall keep (and shall cause its Affiliates to keep) complete and accurate books and records of account containing all information required for the computation and verification of all amounts on which payments hereunder are based and shall, upon reasonable written notice from the other, make such records available for examination by such other party or, at the requesting party's expense, supply copies of such records to such other party. 6.8 Examination of Records: Each of Genpharm and Resources shall have the right, upon reasonable written notice to the other, to designate an independent certified public or chartered accountant (except one to whom the other has a reasonable objection) to have access during ordinary working hours to such records as may be necessary to audit the correctness of any invoice, report or payment made under this agreement. Genpharm and Resources shall provide and shall cause its Affiliates to provide to the accountant engaged by the other full and complete access to their pertinent books and records. In the event that any accountant shall have questions which are not in his judgment answered by such books and records, the accountant shall have the right to confer with representatives of the Person whose books and records are under review including its Chief Financial Officer. If any audit under this Section 6.8 shall reveal a 16 discrepancy by more than 3% of any amount payable hereunder or $10,000.00 US, whichever is greater, the costs and expenses relating to such investigation/audit shall be borne by the party creating such discrepancy. Genpharm and Resources shall each have the right to audit such books and records of the other pursuant to this Section 6.8 no more often than twice in any contract year (as hereinafter defined) unless in any of the prior 3 contract years such investigation revealed a discrepancy by more than 3% or $10,000.00 US, as aforesaid, in which case Genpharm or Resources shall have the right to audit such books and records of the other 3 times in such contract year. For the purposes hereof, a contract year shall be a period of 12 months commencing on the Effective Date of this agreement or on an anniversary thereof. Any Person whose books and records are to be audited in accordance with the foregoing may, as a condition to providing any accountant access to its books and records, require such accountant to execute a reasonable confidentiality agreement. 6.9 Survival of Obligation: The obligation to make the payments and to provide the reports contemplated in this Article 6 and the rights of Resources and Genpharm to conduct audits or investigations pursuant to Section 6.8 hereof shall survive the termination or expiration of this agreement or thereafter and shall apply to all Products supplied to Resources by or on behalf of Genpharm pursuant hereto prior to the effective date of the termination or expiration of this agreement or thereafter notwithstanding that such Product may have been resold by Resources or its Affiliates to its customers after the termination or expiration of this agreement. For greater certainty, the parties acknowledge and agree that Resources shall pay to Genpharm the Applicable Percentage of the Gross Profit derived from Net Sale of all Products supplied by or on behalf of Genpharm to Resources pursuant to this agreement irrespective of whether such Product is resold by Resources or its Affiliate prior to or subsequent to the termination or expiration of this agreement. ARTICLE 7 REPACKAGING AND DISTRIBUTION 7.1 Resources' Repackaging Responsibilities: (a) Resources shall repackage and relabel the Product into finished labelled Units for sale in the Territory in an FDA approved facility and shall be solely responsible for the contents of the labels and artwork on all Units of finished labelled Product sold or otherwise released by Resources (except for information contained in such labels which are also contained on the labels of the bulk Product supplied by or on behalf of Genpharm to Resources pursuant hereto). In repackaging and relabelling the Product Resources shall comply with (i) the Specifications for such Product, (ii) applicable FDA cGMP and (iii) all other applicable rules, regulations and requirements of the FDA and any other applicable governmental or regulatory bodies, agencies and officials in the Territory relative to repackaging and labelling of the Product for sale in the Territory. All labels and all artwork concepts on all packaging material used by Resources in connection with relabelling and packaging of a Product shall be subject to the prior reasonable approval of Genpharm, provided that the approval by Genpharm 17 of any label or artwork concept shall not relieve or otherwise affect Resources' obligations or responsibilities hereunder in relation to relabelling and packaging of the Product or arising out of the use of such labels or packaging material or the release of Product in the Territory so labelled and packaged (or impose any obligation or responsibility on Genpharm in connection with such labels or packaging material or their use or release, as aforesaid, except as expressly contemplated above with respect to the contents of information contained on the labels which was provided by or on behalf of Genpharm). (b) Genpharm shall, or shall cause the Manufacturer to, supply to Resources all information and data relating to a Product which it is obligated to provide to Resources and its Affiliates as a repackager and relabeller of such Product pursuant to applicable laws. Genpharm shall, or shall cause the Manufacturer to, deliver to Resources, upon reasonable request of Resources, a copy of all correspondence which it receives from or forwards to the FDA or other regulatory authority with respect to a Product following receipt of its Product Approval therefor provided that such correspondence does not contain Confidential Information of Genpharm or such Manufacturer which it desires to maintain confidential and which it is not obligated by law to disclose to Resources. 7.2 Resources' Obligation re Marketing: Resources shall use reasonable best commercial efforts (utilizing its marketing, distribution and management systems and those of its Affiliate) to develop a market for the Products in the Territory and to actively and continuously promote the sale of the Products in the Territory, such efforts shall be not less than those used by Resources and its Affiliates to promote the sale of other products which they market. Resources shall be solely responsible for advertising and promotion of the Product and shall comply with all applicable laws, rules and regulations in that regard including, without limitation, applicable FDA regulations and guidelines. 7.3 Pricing: Resources shall have sole discretion in setting the price for the sale of the Products in the Territory, provided that it shall not discount the price of any Product to enhance the sale of Resources' or any of its Affiliates' Other Products (as that term is defined below) or use any Product as a loss leader or incentive to procure the sale of Resources' or any of its Affiliates' Other Products (including, without limitation, through tied or bundled sales). Rebate and other discount programs (excluding any pricing programs where the price of the Product is discounted to enhance the sale of Resources' or any of its Affiliates' Other Products or where a Product is used as such loss leader or incentive or to procure the sale of Resources' or its Affiliates' Other Products) generally available to Resources' or its Affiliates' customers in connection with the purchase of pharmaceutical products shall not be prohibited by this Section. Any discounts to a price below what is reasonably necessary to secure sales of any Product or discounts that are used to secure sale of Other Products of Resources' or its Affiliate's (through bundled sales or otherwise) will be fully absorbed by Resources out of its share of Gross Profits in relation to the Product or will be charged to those Other Products of Resources 18 or its Affiliates that are in the product bundles, as the case may be, and will not directly or indirectly reduce Genpharm's share of Gross Profits hereunder. For purposes of this Section 7.3, the term "Other Products" shall mean pharmaceutical products sold, marketed and distributed by Resources or its Affiliates other than the Products. 7.4 Storage and Handling by Resources: Resources shall ensure that all Products made available to it by or on behalf of Genpharm pursuant to this agreement are transported, received, handled, stored and delivered in accordance with the Specifications for the Product applicable thereto and applicable cGMP and other FDA requirements (and the requirements of all other applicable governmental or regulatory bodies, agencies or affiliates in the Territory) so that such Products do not become adulterated or otherwise cease to meet their Specifications as a result of any acts or omissions of Resources, its Affiliates, and their respective agents, employees, transporters or those for whom Resources or its Affiliates are responsible. 7.5 Release of Product By Resources: Resources shall conduct or cause to be conducted such quality control tests as it deems necessary or as are required by law (including any rules, regulations and requirements of the FDA and the requirements of all other applicable governmental or regulatory body, agency or officials in the Territory) prior to sale or other release of a Product in the Territory. 7.6 Credit Risks: Resources shall assume sole responsibility for all credit risks and collections of receivables in respect of Products sold by it or its Affiliates in the Territory and in respect of all dealings between Resources or its Affiliates and its customers and any third parties from whom Resources and/or its Affiliates sources any goods and services required by it in connection with repackaging, labelling, transporting, storing, promoting, marketing, selling or delivering the Product. 7.7 Repackaging and Marketing Expenses: For greater certainty, Resources acknowledges and agrees that it shall be solely responsible for all costs and expenses incurred by it or its Affiliates in connection with relabelling, packaging, promoting, marketing and selling the Products in the Territory (or otherwise performing its obligations hereunder) without any right to recover same directly or indirectly from Genpharm (save and except for partial recovery of permitted listing fees and other similar payments contemplated in Paragraph (iv) of the definition "Net Sales" and Repackaging Expenses through the calculation and sharing of Gross Profits hereunder). ARTICLE 8 PRODUCT REJECTIONS AND RETURNS 8.1 Product Rejection: (a) Within 35 days from the date of receipt of each delivery of Product Resources shall inspect the Product (Resources hereby acknowledging 19 that its failure to inspect shall not release it from the obligations it would otherwise have had it conducted an inspection as herein contemplated, or provide it with additional rights). Resources shall advise Genpharm in writing (a "Rejection Notice") if a shipment of Product is not in conformity with Genpharm's obligations hereunder or is otherwise defective, provided, however, that Resources' failure to advise Genpharm in a timely manner that a shipment of Product does not conform shall not prejudice Resources' right to reject or return the Product if the defect or other non-conforming condition which justifies rejection or return could not have been detected by Resources' inspection in accordance with cGMP standards. If Resources delivers a Rejection Notice in respect of all or any part of a shipment of Product, then Genpharm and Resources shall have 60 days from the date of Genpharm's receipt of such notice to resolve any dispute regarding whether all or any part of such shipment of Product fails to conform with the Product Specifications or is otherwise defective. Disputes between such parties as to whether all or any part of a shipment rejected by Resources conforms with Product Specifications not resolved in the 60 day period shall be resolved by an independent testing laboratory or a consultant ( if not a laboratory analysis issue), the cost of which shall be paid by the party least successful in such dispute. (b) In the event any Product is appropriately rejected by Resources (being Product which does not satisfy the Product warranty contemplated in Section 4.5 as a result of any act by or omission of Genpharm or the Manufacturer), Genpharm shall replace such Products with conforming goods within 16 weeks or, if requested by Resources, provide a credit to Resources for the Transfer Price previously paid by Resources to Genpharm on account of the Product in question, and for all transportation and insurance costs, duties, taxes and fees paid or payable by Resources to import and deliver the Product in question from Genpharm's or the Manufacturer's Plant, as the case may be, to Resources' facility in Spring Valley, New York. The credit shall be provided immediately following the expiry of the period during which Genpharm may dispute a Rejection Notice as contemplated in Subsection (a) above (unless the Rejection Notice is disputed by Genpharm, in which event such credit shall only be given upon resolution of the dispute). Replacement Products shall be delivered to Resources at no cost to Resources if Resources has already paid for the rejected Products and not received a credit therefor, as aforesaid. (c) For purposes of Section 10.2 hereof, once a Product is rejected by Resources, Resources' obligation to pay for such Product shall be suspended until such time as it is determined: (i) by the independent laboratory or consultant that the Product should not have been rejected by Resources; or (ii) by the parties or by any arbitration conducted pursuant hereto or by a final order of a court of competent jurisdiction (which is not subject to further appeal) that no act by or omission of Genpharm or the Manufacturer was the cause of the problem. 20 8.2 Products Returns: (a) Notwithstanding the provisions of Section 8.1 hereof, Genpharm shall accept the return of any Product which is returned to Resources by its customers because of defects (including failure to meet the Product's Specifications) which are due to any act or omission of Genpharm. In the event of such an accepted return, Genpharm shall provide a credit to Resources for the Transfer Price paid by Resources to Genpharm for the returned Product and all transportation and insurance costs and custom duties, taxes and fees paid by Resources upon the importation and delivery of such Product from Genpharm's or the Manufacturer's Plant, as the case may be, to Resources' facility in Spring Valley, New York (or an allowance on account thereof) or, at Resources' request, shall make available to Resources, without charge, replacement Product within a period of 16 weeks. At Resources' option, and with the consent of Genpharm, which shall not be unreasonably withheld, Resources may destroy any Product returned to it. (b) Any return of Product accepted by Resources from its customers in the ordinary course of business, including without limitation, Product returned as defective due to acts or omissions attributable to Resources, its Affiliates or their respective agents or employees, shall be treated as returns for the purpose of calculating Net Sales so that when Resources next calculates the share of Gross Profits payable to Genpharm in respect of the Product in question, it shall not include (if the sale of the returned Product was not previously included in a prior reporting period) or it shall deduct from Net Sales (if previously included in respect of a prior reporting period), as the case may be, an amount equal to the Gross Profit attributable to returned Product, it being the intention of Genpharm and Resources that no share of Gross Profit shall be paid or payable to Genpharm in respect of the sale of a returned Product. (c) In the event any Product is returned to Genpharm by its customers because the Product is alleged to be defective and Resources believes that such defect is due to an act or omission of Genpharm or the Manufacturer, Resources shall notify Genpharm within a reasonable period of any such return and shall provide or make available to Genpharm (or, at Genpharm's direction, the Manufacturer) such samples (if available) and other information concerning the returned Product available to Resources or its Affiliate so as to allow Genpharm (or such Manufacturer) to test and evaluate the allegedly defective Product. Resources shall retain a sufficient number of samples of the allegedly defective Product so that additional samples are available at a later date should additional testing be required by an independent testing laboratory or consultant as contemplated in Subsection (d) below, or by Resources or by Genpharm (or such Manufacturer) for their own purposes. If not enough samples exist to be so divided, then Resources and Genpharm shall confer and reach agreement as to the handling of any available samples. 21 (d) Genpharm shall complete its review and evaluation of the returned Products (or cause the Manufacturer to complete such review and evaluation) within 20 business days of receiving the returned Products from Resources or such longer period of time as may be reasonable in the circumstances to enable Genpharm (or such Manufacturer) to conduct or cause to be conducted such tests, studies or investigations (and to receive the results therefrom) as may be required to confirm or dispute the existence of the problem or to identify the cause or source thereof. If Genpharm asserts that the returned Product satisfies the Product Manufacturing Requirements or that the defect is not due to any act or omission of Genpharm or the Manufacturer, representative samples of the Product shall be submitted to a mutually acceptable independent testing laboratory or consultant (if not a laboratory analysis issue) for analysis or review, the costs of which shall be paid by the party against whom the discrepancy is resolved. If it is determined by the independent laboratory or consultant that the returned Product does not satisfy the Product warranty contemplated in Section 4.5 and that such failure is due to any act by or omission of Genpharm or the Manufacturer, then the replacement Product in respect of the returned Product shall be delivered to Resources without charge or appropriate credit (or allowance) shall be given therefor as contemplated in Subsection 8.2(a) hereof. 8.3 Exclusive Remedy: Subject to Section 9.1 and 9.2 hereof and to its rights, if any, to recover expenses associated with a Recall as herein contemplated, Resources hereby acknowledges and agrees (on its own behalf or on behalf of its Affiliates) that the sole remedy for Genpharm's failure to supply Product in accordance with the provisions of this agreement (unless such failure is wilful or due to gross negligence of Genpharm or the Manufacturer, if applicable) shall be to require Genpharm to replace the Product that does not meet such Product's warranty hereunder with conforming goods within the time periods hereinbefore contemplated or to provide Resources with a credit in the amount contemplated in this Article and that Genpharm (and its Affiliates) shall not be liable to Resources for consequential or incidental damages including, without limitation, loss of profits or prospective profits of any kind (and that neither Resources nor any of its Affiliates shall have any rights or recourse whatsoever against the Manufacturer, all of which rights and recourses, if any, are herein waived and released); provided that in the event that Genpharm fails to supply Product (or replacement Product) to Resources in accordance with its obligations hereunder and, as a result of such failure, a customer of Resources or its Affiliate is entitled to cancel an order for such Product from Resources or its Affiliate and to source a Competing Product from an alternate source (being a Person other than Resources or any of its Affiliates) and to require Resources or its Affiliate to pay to such customer the reasonable excess reprocurement costs incurred by such customer, then Genpharm's responsibility shall be limited to reimbursing Resources for the Applicable Percentage of such excess reprocurement costs actually paid or credited by Resources or its Affiliate to its customer (such costs being the difference between the landed cost to such customer of such Competing Product over and above the sale price of the Product in question from Resources to such customer [the "Excess Reprocurement Costs"]). 22 8.4 Return Policy: Other than Product which have been appropriately rejected by Resources pursuant to Section 8.1 above or returned Product as contemplated in Subsection 8.2(a) above Resources shall not have the right to return to Genpharm any Product purchased by it without Genpharm's prior written consent. 8.5 Survival of Provisions: The provisions of this Article 8 shall survive the termination or expiration of this agreement. ARTICLE 9 DAMAGES, INDEMNIFICATION AND INSURANCE 9.1 Limitation re Claims: Subject to the limitations set forth in this Section 9.1, Resources and Genpharm covenant and agree to indemnify, save harmless and compensate the other (and its Affiliates, for whose benefit such other party shall hold the benefit of this provision in trust) from, against or for, as the case may be, any and all claims, demands, actions, causes of action, suits, proceedings, judgements, damages, expenses (including reasonable attorney's fees and expenses), losses, fines, penalties and other similar assessments, as the case may be, (the "Damages") relating to or arising out of a breach by Genpharm or Resources, as the case may be, of any of the representations, warranties, covenants or agreements herein; provided that, except where the breach arises out of the representation or warranty being intentionally false or inaccurate or constitutes a wilful material breach by Genpharm or Resources of its duties or obligations hereunder or an act or omission constituting gross negligence, the claim of the aggrieved party for Damages arising out of the breach shall be limited to claiming the amounts owing or payable to it in accordance with the provisions of this agreement and any out of pocket costs and expenses (including amounts paid or payable by it to third parties, other than Excess Reprocurement Costs [except to the extent contemplated in Section 8.3 hereof]) which it has incurred and the aggrieved party shall not be entitled to recover from the defaulting or breaching party any lost profits or consequential or punitive damages, including loss or damage to its goodwill or reputation. 9.2 Third Party Claims: In the event that the sale or other release in the Territory by Resources or its Affiliates of any Product supplied by or on behalf of Genpharm to Resources pursuant to this agreement results in a third party claim: (a) to the extent that the Damages awarded or incurred relate to or arise out of the manufacturing, testing, bulk packaging, labelling (if applicable), storage or handling of a Product by Genpharm or a Manufacturer or any other act by or omission of Genpharm, a Manufacturer or any other Persons for whose acts or omissions they are responsible at law Genpharm shall be responsible therefor and shall defend, indemnify and hold harmless Resources and its Affiliate from and against all such Damages; and 23 (b) to the extent that the Damages awarded or incurred relate to or arise out of transporting, receiving, manufacturing (if applicable), repackaging, labelling (if applicable), testing, storage, handling, use, marketing, distribution, sale or delivery of a Product by Resources or its Affiliates or any other act by or omission of Resources, any of its Affiliate or any other Person for whose acts or omissions they or any one or more of them is responsible at law, Resources shall be responsible therefor and shall defend, indemnify and hold harmless Genpharm and its Affiliates from and against all such Damages; Upon the assertion of any third party claim against Genpharm or Resources (or their respective Affiliates) that may give rise to right of indemnification under this agreement, the Person claiming a right to indemnification (the "Indemnified Party") shall give prompt notice to the Person alleged to have the duty to indemnify (the "Indemnifying Party") of the existence of such claim (provided that the failure to give such notice in timely fashion shall not release the Indemnifying Party of its obligations of indemnification hereunder except to the extent that the Indemnifying Party has been prejudiced thereby) and shall give the Indemnifying Party reasonable opportunity to control, defend and/or settle such claim at its own expense and with counsel of its own selection; provided, however, that the Indemnified Party shall, at all times, have the right to fully participate in such defense at its own expense with separate counsel and, provided that both parties to the extent that they are not contractually or legally excluded therefrom, or otherwise prejudiced in a legal position by so doing, shall co-operate with each other and with their respective insurers in relation to the defense of such third party claim. The Indemnifying Party shall consult with the Indemnified Party with respect to settlement of any claim. The Indemnifying Party shall have the right to settle any claim without the consent of the Indemnified Party, provided that the Indemnified Party is unconditionally released from such claim and it is not otherwise prejudiced by the terms of settlement. In the event the Indemnifying Party elects to defend such claim, the Indemnified Party may not settle such claim without the prior written consent of the Indemnifying Party. If the Indemnifying Party shall, within a reasonable time after such notice has been given, fail to defend, compromise or settle such claim, (or thereafter fails to diligently defend such claim) then the Indemnified Party shall have the right to defend, compromise or settle such claim without prejudice to its rights of indemnification hereunder. Notwithstanding the foregoing, in the event of any dispute with respect to indemnity hereunder, each party shall be entitled to participate in the defence of such claim and to join and implead the other in any such action. 9.3 Insurance: Each of Resources and Genpharm shall (and shall cause their respective Affiliates, as required, to) during the term of this agreement and for a period of not less than 36 months following the termination of this agreement, carry or be subject to coverage under (as a named insured) product liability insurance (including blanket contractual liability) in an amount of not less than $10 Million U.S. combined single limit, which insurance will be written on an occurrence policy form with an insurance carrier reasonably acceptable to the other party. Each of Genpharm and Resources shall, at the request of the other, provide evidence to such requesting party of compliance with its insurance obligations (and those of its Affiliate) under this Section and evidence of renewals of any such policy, from time to time. 24 9.4 Survival: The provisions of this Article 9 shall survive termination or expiration of this agreement. ARTICLE 10 TERM AND TERMINATION 10.1 Term: The initial term of this agreement shall commence on the Effective Date and, for each particular Product, shall terminate on the 10th anniversary of the date upon which Genpharm or its Affiliate receives the Product Approval for such Product, unless earlier terminated in accordance with the provisions of this agreement. Thereafter, this agreement shall, in respect of such Product, automatically renew from year to year unless Resources or Genpharm gives written notice of termination to the other at least 180 days prior to the expiration of the initial term or any renewal term, as the case may be, subject to earlier termination as provided in this agreement. 10.2 Payment and Reporting Defaults: Genpharm may, by notice in writing to Resources, terminate this agreement or, at its option, terminate this agreement in respect of the particular Product or Products to which the default herein contemplated relates, if Resources fails to pay to Genpharm any amount payable by it to Genpharm hereunder as and when the same shall have become due and payable or shall have failed to deliver (or caused to be delivered, as the case may be), in timely fashion, the reports or information contemplated in Sections 6.4 or 6.5 hereof, and in either case, such breach shall have continued unremedied for a period of 15 business days after written notice of such breach has been given by Genpharm to Resources; provided that Resources shall not have the right to such 15 business day grace period within which to cure such default and Genpharm shall have the immediate right to terminate the agreement for such breach if Resources shall have previously breached Section 6.4 or 6.5, or failed to remit any sums of at least $100,000.00 to Genpharm when due, in the aggregate, three times in the 12 month period immediately preceding the default in question In the event that Resources has been given notice pursuant to this Section 10.2 and it disputes the alleged breach, the dispute shall be submitted to arbitration pursuant to Article 13 below and this agreement shall continue in full force until such time as the arbitrator renders his decision. Termination of this agreement pursuant hereto shall be without prejudice to any other right or remedy which Genpharm may have against Resources arising out of the breach in question including the right to obtain compensation for its damages (provided that such right shall be subject to the limitations set forth in Section 9.1 hereof). 10.3 Material Breach: Subject to the provisions of Section 10.2 above, Genpharm or Resources may, by notice in writing to the other, terminate this agreement or, at its option, terminate this agreement in respect only of those Products to which the default in question relates, if such other party shall have breached any of its material duties or obligations under this agreement and such default continues unremedied for a period of 60 days following receipt of notice of such default (or, if such default is capable of being remedied but is not reasonably capable of being remedied within such 60 day period, such longer period of time 25 as is reasonable in the circumstances, not exceeding 90 days in the aggregate, provided that the defaulting party has, within such 60 day period, commenced and thereafter actively and diligently pursues the remedying of such default). In the event that a party has been given notice pursuant to this Section 10.3 and such party disputes the alleged breach, the dispute shall be submitted to arbitration pursuant to Article 13 hereof and this agreement shall continue in full force until such time as the arbitrator renders his decision. The arbitrator shall determine whether or not there has been a breach and/or whether or not the same has been remedied within the required cure period. Termination of this agreement pursuant hereto shall be without prejudice to any other right or remedy the party terminating this agreement may have against the defaulting party arising out of the breach in question including the right to obtain compensation for its damages (provided that such right shall be subject to the limitations set forth in Section 9.1 hereof). 10.4 Events of Default: Genpharm shall have the right to terminate this agreement upon written notice to Resources in the event that any one or more of the following events shall become applicable to Resources or any of its Affiliates to whom any material duty or obligations of Resources hereunder has been delegated or assigned and Resources may terminate this agreement in the event that any one or more of the following events shall become applicable to Genpharm or, at its option, may terminate this agreement in respect only to those Products which are being manufactured by a Manufacturer (other than Genpharm) if any of the following events shall become applicable to a Manufacturer (Resources, its Affiliate, Genpharm or the Manufacturer affected by such event being referred to as the "Party"): (i) an order is made or a resolution or other action of such Party is taken for the dissolution, liquidation, winding up or other termination of its corporate existence; (ii) the Party commits a voluntary act of bankruptcy, becomes insolvent, makes an assignment for the benefit of its creditors or proposes to its creditors a reorganization, arrangement, composition or readjustment of its debts or obligations or otherwise proposes to take advantage of or shelter under any statute in force in the United States or in the governing jurisdiction of such Party for the protection of debtors; (iii) if any proceeding is commenced with respect to a compromise or arrangement, or to have such Party declared bankrupt or to have a receiver appointed in respect of such Party or a substantial portion of its property and such proceeding is not fully stayed or dismissed within 30 days after such commencement; (iv) a receiver or a receiver and manager of any of the assets of such Party is appointed and such receiver or receiver and manager is not removed within 30 days of such appointment; or 26 (v) such Party ceases or takes steps to cease to carry on its business. 10.5 Ineligible Person: Genpharm or Resources may terminate this agreement in respect of a Product upon 30 days prior written notice to the other party if such party (otherwise than by reason of a breach of its obligations hereunder in respect of such Product) is legally prohibited from performing its obligations hereunder or becomes (or, in case of Resources, its Affiliates become and in the case of Genpharm, a Manufacturer thereof becomes) an Ineligible Person in respect of such Product (and, where the party purporting to terminate this agreement is also the party prohibited from performing or it or its Affiliate as hereinbefore contemplated is the Ineligible Person, it [or such Affiliate, as the case may be], has made diligent best efforts to remove the prohibition or its status as an Ineligible Person) and such prohibition or status as an Ineligible Person has continued uninterrupted for a period of 120 days. 10.6 Force Majeure: Either party may terminate this agreement with respect to a particular Product materially affected by an event of Force Majeure in accordance with the provisions of Section 14.2 hereof (but this agreement shall continue in respect of the other Products which remain subject to this agreement and which are not effected by such Force Majeure event). 10.7 Price Erosion: Either Genpharm or Resources may terminate this agreement in respect of a particular Product (the "Specific Product") on 120 days prior written notice to the other party if, in any calendar year, the Gross Profits derived from Net Sale of such Specific Product is less than 20% of the Gross Sales of the Specific Product during such period. 10.8 Minimum Threshold Sales: If, with respect to a Product: (i) in the first 12 month period (such period being herein referred to as the "Period") commencing on the date (the "Commencement Date") which is the 2nd business days immediately following the date upon which the first Availability Notice (as contemplated in Subsection 5.3(a) hereof) is given to Resources hereunder in respect of such Product, the aggregate Net Sales of such Product for such Period is less than the Threshold Amount applicable thereto; or (ii) in any subsequent 12 month period (a "Subsequent Period") commencing on the anniversary of the Commencement Date the aggregate number of Units of such Product sold (excluding, for greater certainty, free goods) by Resources and its Affiliates in such Subsequent Period (and included in the Net Sales of such Product for such Subsequent Period) is, without reasonable justification (having regard to such factors as, by way of illustration only but without limitation, the Market Factors [as defined below]) less than 70% of the Units of such Product sold (excluding, for greater certainty, free goods) by Resources and its Affiliates during the Period; and the shortfall in sales cannot be attributable primarily to the fault of Genpharm, then Genpharm shall have the right to terminate this agreement in 27 respect of such Product upon 90 days prior written notice to Resources. For purposes of this Section, the term "Market Factor" means: (A) the introduction into the Territory of a Competing Product or additional Competing Products during that or a preceding Subsequent Period which had a material adverse effect on the market share of Resources and any other manufacturers and distributors who were at the time of such introduction marketing Competing Products in the Territory; (B) a significant price erosion relating to the Product and Competing Products as a result of market forces resulting in a decision by Resources, acting reasonably, not to seek additional and less profitable sales of such Product merely to increase Unit sales of such Product at the expense of Gross Profit; (C) the introduction into the Territory of new branded products which materially adversely affected the market for such Product and Competing Products, if any, in the Territory during that or a preceding Subsequent Period; (D) the introduction into the Territory of a product which has the same active ingredient and is for the same indication as such Product but which is in a different dosage form and which materially adversely affected the market for such Product and Competing Products, if any, in the Territory in that or a preceding Subsequent Period; (E) Force Majeure (as defined in Section 14.2 hereof). 10.9 Closing Share Purchase: If the closing pursuant to the Stock Purchase Agreement has not occurred on or before July 15, 1998, or if prior to July 15, 1998, the Stock Purchase Agreement is terminated in accordance with the provisions of Section 13.11 thereof, Genpharm may deliver a notice in writing to Resources on or before July 31, 1998 and thereupon this agreement shall immediately terminate in respect of those Products for which Product Approvals have not been received by Genpharm or its Affiliate on or before July 15, 1998 or the date upon which the Stock Purchase Agreement is terminated, whichever is earlier, and shall terminate in respect of all other Products on the first anniversary of the Execution Date (without further notice or formality). 10.10 Non-Compete Obligation of Resources: If Genpharm terminates this agreement (or terminates this agreement in respect of a particular Product or Products only) pursuant to Section 10.2, 10.3 or 10.8 hereof or if Resources terminates this agreement pursuant to Section 10.7 hereof, Resources shall not (and shall not authorize, cause, permit or suffer any of its Affiliates to) directly or indirectly, manufacture, purchase, sell or distribute in the Territory any Competing Products to any Product(s) as to which this agreement has been so terminated for a period of 24 months following the effective date of such termination. 28 10.11 Non-Compete Obligation of Genpharm: If Resources terminates this agreement (or terminates this agreement in respect of a particular Product or Products only) pursuant to Section 10.3 hereof or if Genpharm terminates this agreement pursuant to Section 10.7 hereof, Genpharm shall not (and shall not authorize, cause, permit or suffer any of its Affiliates to) directly or indirectly, sell or distribute such Product(s) in the Territory for a period of 24 months following the effective date of such termination. 10.12 Purchase of Materials and Stock: Upon termination of this agreement by Resources (or termination of this agreement by Resources in respect of certain Products only) pursuant to Sections 10.3 or 10.5 (as a result of Genpharm or a Manufacturer becoming an Ineligible Person or being legally prohibited from performing its obligations hereunder), Genpharm shall, at the request of Resources, repurchase all such Products in respect of which this agreement has so terminated which were supplied by it or on its behalf and which are then in the possession, custody or control of Resources and available for sale (and which have not been adulterated or damaged since they were picked up by the carrier at Genpharm's or a Manufacturer's Plant for delivery to Resources and which remain qualified for sale in the Territory) and all packaging material in the possession, custody or control of Resources which were specifically acquired by Resources for the Products in question and which cannot be used by Resources or its Affiliates for any other products sold by any of them, at the landed cost to Resources of such Products and materials (determined in accordance with generally accepted accounting principles), which purchase price shall be paid within 30 days following delivery of such products and materials by Resources to the carrier for delivery to Genpharm. Genpharm shall also pay all transportation costs associated with shipping or transporting the repurchased Product or materials to Genpharm or to such other place as Genpharm may require. 10.13 Survival: Any cause of action for breach of contract shall survive the termination or expiration of this agreement. The termination or expiration of this agreement shall not affect any right or obligation of Genpharm or Resources existing prior to the effective date of termination or expiration and which is by expressed hereunder to survive termination. Termination or expiration of this agreement shall not affect any right, duty or obligation arising pursuant to Section 11.3, 11.4, 11.5, 11.6 or 11.7 hereof or Articles 6, 8, 9 or 12 hereof (which shall survive termination). ARTICLE 11 REGULATORY MATTERS AND ACCESS TO FACILITIES 11.1 Access to Genpharm's and Manufacturer's Facilities: Resources shall have the right, upon reasonable advance written notice to Genpharm to inspect each Plant where a Product is being manufactured or stored to monitor compliance by Genpharm and the Manufacturer with the Product Manufacturing Requirements and to otherwise confirm that the Product is being manufactured, and that Genpharm is operating, in compliance with the provisions of this agreement in all material 29 respects. Genpharm shall have the right to have its representatives and/or those of its Affiliate present throughout such inspections. Resources shall promptly notify Genpharm of any non-compliance at such Plant determined through an inspection herein contemplated and upon receipt of such notice, Genpharm shall, or shall cause the applicable Manufacturer to promptly and diligently rectify any non-compliance and implement appropriate procedures with a view to avoiding repetition of such non-compliance prior to commencing or continuing to manufacture the Product(s) in question. Genpharm shall, or shall cause each Manufacturer to, promptly notify Resources, in writing, of any circumstances relating to its Plant that may affect the quality of the Product being manufactured thereat. 11.2 Access to Resources' Storage Facilities: Genpharm shall have the right (through its own representatives and/or by representatives of a Manufacturer), upon reasonable advance notice to Resources, to inspect Resources' and its Affiliate's manufacturing and warehouse facilities which are used to receive, repackage, label, store or handle any Product to ensure compliance with the provisions of this agreement including, without limitation, that the Products are being received, repackaged, labelled, stored and handled in accordance with the Specifications for the Product relating thereto and applicable laws and regulations (including FDA cGMP guidelines) and to otherwise ensure that the Products do not become adulterated or otherwise cease to meet their Specifications as a result of any acts by or omissions of Resources, its Affiliates and their respective agents, employees or those for whom they are at law responsible. Resources shall have the right to have its representatives or those of its Affiliate present throughout such inspection. Genpharm shall promptly notify Resources of any non-compliance determined through an inspection herein contemplated and, upon receipt of such notice, Resources shall promptly and diligently rectify or cause the rectification of any non-compliance and implement or cause the implementation of appropriate procedures with a view to avoiding repetition of such non-compliance. Resources shall promptly notify Genpharm, in writing, of any circumstances relating to its facilities or those of its Affiliates where any of the Products are received, repackaged, labelled, stored or handled that may affect the quality of any Product. 11.3 Detention of Technical Records and Samples: Each of Genpharm and Resources shall keep, or cause its Affiliates to keep, as required, such samples and such records (or copies thereof) in respect of the Products being manufactured, supplied or distributed by it as are required by the applicable Product Manufacturing Requirements and/or applicable law for such period of time as may be required thereunder. Resources shall permit and shall cause its Affiliates to permit Genpharm and the Manufacturers to have access to such samples and original records as are required to be maintained by Resources at all reasonable times upon prior reasonable notice and shall, upon written request, promptly provide Genpharm (or any Manufacturer, as directed by Genpharm) with a copy of all such records. 11.4 Co-operation re Product Safety: Genpharm and Resources shall promptly advise the other of any safety or toxicity problem of which such party or its 30 Affiliate becomes aware regarding a Product being manufactured, supplied or distributed by it, intermediates or other ingredients or processes used in the manufacture such Product. 11.5 FDA Correspondence: Following receipt of a Product Approval for a Product Genpharm and Resources shall provide the other (and Genpharm shall cause each Manufacturer to provide Resources) with a copy of any correspondence or notices received by such party from the FDA relating to or referring to such Product within 10 days of receipt and a copy of any response to any such correspondence or notices with 10 days of making a response. 11.6 Customer Complaints: (a) Resources shall notify Genpharm and each Manufacturer, as applicable: (i) of any customer complaints or alleged adverse drug experiences ("ADE") relating to a Product promptly following their receipt by Resources or any of its Affiliates (but in any event within 5 days of receipt thereof, except in the case of a Serious ADE [as defined below] in which event Resources shall notify Genpharm and the Manufacturer of same within 24 hours, which latter notification shall be by telephone with a facsimile confirmation immediately following; or (ii) of any FDA complaints or complaints of any other governmental or regulatory body, agency or official in the Territory within 48 hours, except on weekends and holidays. For purposes of this agreement "Serious ADE" shall mean an adverse event which gives rise to one or more of the following: death, threat to life, new or prolonged in-patient hospitalization, permanent or significant disability or incapacitation, overdose, cancer or congenital abnormality or serious laboratory abnormality which is thought by the reporting physician to be serious or associated with relevant clinical signs or symptoms. Genpharm shall, or shall cause the applicable Manufacturer to, notify Resources in the manner and within the time periods hereinbefore contemplated of any ADE or FDA complaint (or of the complaint of any governmental body, agency or official in the Territory) relating to such Product in respect of the Territory following their receipt by Genpharm or such Manufacturer. (b) Genpharm shall be responsible for filing or causing the Manufacturer to file any necessary complaint report required by the FDA in accordance with applicable FDA regulations. (c) To enable Genpharm or the Manufacturer to respond to any requirements of the FDA in connection with a complaint or ADE, Resources agrees to investigate and respond in writing to any complaint or ADE forwarded to it by or a Manufacturer promptly and, in no event, later than 30 days after receipt of the ADE or complaint from Genpharm or a Manufacturer. In addition, Resources shall provide Genpharm and the applicable Manufacturer with a copy of any correspondence, reports, or other 31 documents relating to a complaint or ADE received by Resources or its Affiliate relating to the Product promptly of the receipt thereof and shall also provide to Genpharm (and such Manufacturer) Resources' response thereto within a reasonable period following generation of such document by Resources. Upon the request of Genpharm, Resources shall use reasonable commercial efforts to retrieve and shall cause its Affiliates to use reasonable commercial efforts to retrieve such samples of the Product which are the object of a complaint or ADE to enable Genpharm and/or the applicable Manufacturer to conduct such tests, studies and investigations as it determines to be necessary to respond to such ADE or complaint or to take appropriate corrective action. 11.7 Recalls: (a) In the event that Genpharm or a Manufacturer shall be required (or shall voluntarily decide) to initiate a recall, product withdrawal or field correction of any Product (a "Recall"), whether or not such Recall has been requested or ordered by the FDA (or any other governmental body, agency or official having jurisdiction in the Territory) or by a court, Genpharm shall, or shall cause the applicable Manufacturer to, notify Resources and Resources shall fully co-operate and shall cause its Affiliates to fully co-operate with Genpharm (and such Manufacturer) in notifying their customers to return all such Product and shall follow any other instructions provided by Genpharm (or such Manufacturer). (b) In the event that Resources believes that a Recall may be necessary and/or appropriate, prior to taking any action Resources shall immediately notify Genpharm and the applicable Manufacturer and Genpharm and Resources shall co-operate and cause their respective Affiliates to co-operate with each other (and the other's Affiliate) in determining the necessity and nature of the action to be taken. (c) With respect to any Recall, Genpharm or the Manufacturer shall make all contacts with the FDA and shall be responsible for co-ordinating all of the necessary activities in connection with such Recall and Resources (and its Affiliates) and Genpharm (and its Affiliate) shall each co-operate with the other (and with the other's Affiliate) in recalling the affected Product. (d) In the event that it is determined by agreement of the parties or by arbitration as herein contemplated that a Recall results solely from any cause or event arising from the manufacture, labelling, storage, handling, or packaging of the Product by Genpharm or a Manufacturer or other cause or event attributable to Genpharm or a Manufacturer, Genpharm shall be responsible for all expenses of such Recall. In the event that it is determined by agreement of the parties or by arbitration as herein contemplated that a Recall results solely from any cause or event arising from the transportation, manufacturing (if applicable), repackaging, labelling, storage, handling, marketing or distribution of the Product by Resources or any of its Affiliates or other cause or event attributable to Resources or any of its Affiliates, Resources shall be responsible for all expenses of such Recall. If: 32 (i) within 60 days of the initiation of a Recall, the parties are unable to agree that the cause of such Recall was solely the responsibility of Resources or its Affiliates or Genpharm or a Manufacturer as hereinbefore contemplated; or (ii) an arbitrator pursuant to an arbitration initiated by one of the parties in respect of such Recall within the 60 day period contemplated in (i) above, determines that the cause of such Recall was not solely the responsibility of Resources or its Affiliates or of Genpharm or a Manufacturer as hereinbefore contemplated; then Resources shall initially pay or reimburse Genpharm and its Affiliates, as the case may be, for the expenses of the Recall but shall be entitled to recover from Genpharm the Applicable Percentage of the expenses so incurred through deductions to and sharing of Gross Profits. (e) For purposes of this agreement, Recall expenses shall include, but not be limited to, the expenses of notification and destruction or return of the recalled Product, as the case may be, and Resources' (and its Affiliates') and Genpharm's and its Affiliates' reasonable out-of-pocket costs in connection with such Recall including but not limited to reasonable attorney's fees and expenses and credits and recall expenses claimed and paid to customers (the "Recall Expenses"). Each of the parties shall use, and shall cause its Affiliates to use, its reasonable best efforts to minimize the Recall Expenses which it incurs and shall provide to the other, upon request, reasonable evidence of the out-of-pocket expenses being claimed by it. The direct out-of-pocket costs and expenses of the Recall contemplated above shall not include the gross amount invoiced by Resources or its Affiliates to the customers on the sale of the Product recalled, which amount shall be dealt with in accordance with the provisions of Sections 8.2 and shall also not include any Excess Reprocurement Costs (within the meaning of Section 8.3 hereof), which costs shall be paid by Resources (subject to its right to partially recover same through deduction from Gross Profits). (f) All Product recalled pursuant to this Section 11.7 shall be treated as Product returned to Resources by its customers and the provisions of Section 8.2 shall apply thereto. (g) All communications relating to a Recall shall be held in confidence and shall be subject to the terms of Article 12 hereof. ARTICLE 12 CONFIDENTIALITY 12.1 Confidential Nature of Agreement: Each of the parties hereto agrees that, without the prior written consent of the other, or except as may be required by 33 law or court order, the existence and terms of this agreement shall remain confidential and shall not be disclosed to any Person other than employees and professional advisers of such party or its Affiliate who reasonably require knowledge of the existence or terms of this agreement and who are bound to such party or its Affiliate by a like obligation of confidentiality. Such employees and advisors will be advised of the nature and existence of the confidentiality undertakings of this agreement and of the applicability of such undertakings to them and will agree to be bound hereby. 12.2 Duty of Confidentiality: Each of Genpharm and Resources agrees to hold in trust and confidence (and to cause its Affiliates to hold in trust and confidence) for the benefit of the other party (and its Affiliates) all Confidential Information of such other party and its Affiliates and each further agree to safeguard, and to cause its Affiliates to safeguard, the Confidential Information of the other (or its Affiliates) to the same extent that it does with its own confidential information and to limit and control copies, extracts and reproductions made of such Confidential Information. Neither party will, without the express written consent of the other, directly or indirectly, use (or authorize, permit or suffer any of its Affiliates to use) any Confidential Information of the other party or of its Affiliates for any purpose other than to implement the provisions of this agreement or in regulatory proceedings or in litigation. Neither party will disclose Confidential Information to any Person, other than its employees or other representatives or those of its Affiliates who have a need to know to fulfill the provisions and intent of this agreement (where such provisions and intent cannot properly be fulfilled without such disclosure) and who have been informed of the confidential nature of the information and have agreed to be bound by the terms hereof. Each of Genpharm and Resources shall use its best efforts to prevent unauthorized use or disclosure of the Confidential Information of the other or its Affiliates and shall use protective measures no less stringent than those used by it in its own business to protect its own confidential information, including segregating such information at all times from the confidential material of others so as to prevent any commingling. 12.3 Compulsory Disclosures: In the event that either Genpharm or Resources (or any of their respective Affiliates) shall be legally compelled or required by a court of competent jurisdiction to disclose all or any part of the Confidential Information of the other (or its Affiliates), it shall provide prompt notice to the other so that such other party (or its Affiliates) may determine whether or not to seek a protective order or any other appropriate remedy. If a protective order or other appropriate remedy is not obtained before such disclosure is required, the party required to make disclosure will disclose only those portions of the Confidential Information in question which it is advised by written opinion of counsel (which opinion shall be addressed to such party and to the other party), it is legally required to disclose and will exercise its best efforts to obtain reliable assurances that confidential treatment will be accorded such Confidential Information. 12.4 Return of Confidential Information: Upon termination of this agreement each of Genpharm and Resources shall immediately return to the other all material containing or reflecting or referring to any Confidential Information of the other party or its Affiliates (including all notes, summaries, analysis or other documents prepared or derived therefrom) and all copies thereof in any form whatsoever under the power or control of such party or its Affiliates, except that one copy may be retained for legal archival purposes, and such party shall 34 delete such Confidential Information from all retrieval systems and data bases or destroy same as directed by the other party and furnish to the other party, if requested, a certificate of a senior officer of such party certifying such return, deletion and/or destruction. Where this agreement is terminated in respect of a particular Product or Products only then the foregoing obligations shall thereupon apply to Confirmation Information relating to such Product or Products. 12.5 Survival: The obligations of confidentiality contained herein shall survive the termination of this agreement. ARTICLE 13 ARBITRATION 13.1 Arbitration: Any controversy or claim arising out of, or relating to, this agreement or the breach thereof shall be referred for decision forthwith to a senior executive of each party not involved in the dispute. If no agreement is reached within 30 days of the request by one party to the other to refer the same to such senior executive, then such controversy or claim shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, such arbitration to be held in New York, New York on an expedited basis. Judgement upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. ARTICLE 14 GENERAL CONTRACT TERMS AND CONDITIONS 14.1 Notice: Subject to the express provisions of this agreement, any notice required or permitted to be given under this agreement shall be sufficiently given if in writing and delivered by facsimile (with confirmation of transmittal) or overnight courier (with confirmation of delivery), as well as by prepaid registered mail (with return receipt requested) or hand delivery to the appropriate party at the address set forth below, or at such other address or to the attention of such other individual as such party may from time to time specify for that purpose in a notice similarly given: To Genpharm at: 85 Advance Road, Etobicoke, Ontario, M8Z 2A6. Attention: Chief Financial Officer Fax Number: (416) 236-2940 35 To Resources at: One Ram Ridge Road, Spring Valley, New York, U.S.A. 10977. Attention: Chief Financial Officer Fax Number: (914) 425-7922 Any such notice shall be effective (i) if sent by mail, as aforesaid, 5 business days after mailing, (ii) if sent by facsimile, as aforesaid, when sent (with confirmation of receipt), and (iii) if sent by courier or hand delivered, as aforesaid, when received, provided that if any such notice shall have been sent by mail and if on the date of mailing thereof or during the period prior to the expiry of the 5th business day following the date of mailing there shall be a general postal disruption (whether as a result of rotating strikes or otherwise) in the country or territory where the sender or the intended recipient is situated then such notice shall not become effective until the 5th business day following the date of resumption of normal mail service. Where Resources is authorized or required to notify or otherwise communicate with a Manufacturer other than Genpharm it shall notify or otherwise communicate with such Manufacturer in the foregoing manner (and the provisions hereof shall apply mutatis mutandis) at the address or facsimile number (and to the attention of such individual) as Genpharm shall notify Resources from time to time in accordance with the foregoing notice provisions or at such other address or facsimile number or the attention of such other individual as such Manufacturer may specify in a notice similarly given, provided that a copy of each such notice or other communication shall be forwarded to Genpharm at its address for notice hereunder. 14.2 Force Majeure: Neither party shall be considered to be in default in respect of any obligation hereunder if failure of performance shall be due to Force Majeure (as hereinafter defined). If either party is affected by a Force Majeure event such party shall, within 20 days of its occurrence, give notice to the other party stating the nature of the event, its anticipated duration and any action being taken to avoid or minimize its effect. The suspension of performance shall be of no greater scope and no longer duration than is required by such Force Majeure and the non-performing party shall use commercially reasonable efforts to remedy its inability to perform. The obligation to pay money in a timely manner is absolute and shall not be subject to the Force Majeure provisions, except to the extent payment is prohibited by governmental rule or regulations other than rules or regulations incident to bankruptcy or insolvency proceedings of a party. Force Majeure shall mean an unforeseeable or unavoidable cause beyond the control and without the fault or negligence of a 36 party or its Affiliate including, but not limited to, explosion, flood, war (whether declared or otherwise), accident, labour strike or other labour disturbance, inability to obtain materials or services, sabotage, acts of God, newly enacted legislation, newly issued orders or decrees of any Court and any binding act or order of any governmental agency. Notwithstanding anything in this Section, the party to whom performance is owned but to whom it is not rendered because of an event of Force Majeure as contemplated in this Section shall, after the passage of 120 days, have the option to terminate this agreement in respect of the Product affected by such event on 30 days prior written notice to the other party hereto. For greater certainty, Force Majeure in relation to Genpharm's obligation to supply Product hereunder to Resources shall include the inability to obtain the required Product from the Manufacturer thereof as a result of events or circumstances relating to such Manufacturer which would otherwise be an Event of Force Majeure had it occurred in relation to Genpharm. 14.3 Governing Law and Consent to Jurisdiction: (a) This agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of New York without giving effect to New York's choice of law provisions. (b) Subject to Article 13, in connection with any action commenced hereunder, each of the undersigned consents to the jurisdiction of the state and federal courts located in New York City. Genpharm hereby appoints Coudert Brothers, 1114 Avenue of the Americas, New York, New York, 10036, (or any successor firm or to such other address as they or Genpharm may designate in writing) and Resources hereby appoints Hertzog, Calamari & Gleason, 100 Park Avenue, New York, New York, l0017, (or any successor firm or to such other address as they or Resources may designate in writing), as their respective agents upon whom service of process may be made with the same force and effect as if service shall have been made personally upon them. 14.4 Entire Agreement: This agreement contains the entire agreement and understanding of the parties with respect to its subject matter and supersedes all negotiations, prior discussions and any agreements relating to the Products. This agreement may not be amended or modified except by a written instrument signed by the parties. 14.5 Waiver: Any waiver of, or consent to depart from, the requirements of any provision of this agreement shall be effective only if it is in writing and signed by the party giving it, and only in the specific instance and for the specific purpose for which it has been given. No failure on the part of any party to exercise, and no delay in exercising, any right under this agreement shall operate as a waiver of such right. No single or partial exercise of any such right shall preclude any other or further exercise of such right or the exercise of any other right. 37 14.6 Counterparts: This agreement may be executed in identical duplicate copies exchanged by facsimile transmission. The parties agree to execute two identical original copies of the agreement after exchanging signed facsimile versions. Each identical counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.7 Severability of Provisions: If, for any reason whatsoever, any term, covenant or provision of this agreement or the application thereof to any party or circumstance or in any jurisdiction is to any extent held or rendered invalid, unenforceable or illegal, then such term, covenant or condition (a) is deemed to be independent of the remainder of this agreement and to be severable and divisible therefrom and its validity, unenforceability or illegality shall not affect, impair or invalidate the remaining provisions hereof; and (b) continue to be applicable and enforceable to the fullest extent permitted by law in every other jurisdiction and against any party and circumstances other than those as to which or in respect of which it has been held or rendered unenforceable or illegal. To the extent permitted by applicable law, Genpharm and Resources hereby waive any provision of law which renders any provision of this agreement prohibited or unenforceable in any respect. Should any provision of this agreement be so held to be unenforceable, such provision, if permitted by law, shall be considered to have been superseded by a legally permissible and enforceable clause which corresponds most closely to the intent of the parties as evidenced by the provision held to be unenforceable. 14.8 Assignment: Neither this agreement nor rights of a party hereunder may be assigned nor may the performance of any duties hereunder be delegated by Resources or by Genpharm without the prior written consent of the other party. Notwithstanding the foregoing, Genpharm and Resources may delegate from time to time some of their respective duties hereunder to any of their respective Affiliates and, in addition, Genpharm and/or its Affiliate may subcontract the manufacturing of a Product, in whole or in part, to any other Person (whether or not an Affiliate), provided that (i) such subcontracting is done in compliance with all applicable requirements of the FDA); (ii) prior to any such delegation, the delegating party gives written notice thereof to the other party hereto (indicating the duties being so delegated and the duration of such delegation) and (iii) no such delegation or subcontracting shall relieve Genpharm or Resources, as the case may be, of any of its obligations hereunder. Subject to the foregoing this agreement shall be binding upon and enure to the benefit of the parties and their respective successors and permitted assigns. 14.9 Non Contravention: Each party represents and warrants that the execution, delivery and performance of this agreement by it will not contravene any other contract or agreement to which it is a party or by which it is bound. 38 14.10 Compliance: Where, in accordance with the provisions of this agreement, the Affiliate of a party is required to do or omit to do or use reasonable commercial (or other) efforts to do or refrain from doing any act or thing such party shall use reasonable best commercial efforts to cause its Affiliates to comply. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized officer as of the date first above written. GENPHARM INC. PHARMACEUTICAL RESOURCES, INC. By: /s/Ian Jacobson By: /s/Kenneth I. Sawyer ------------------------------- ----------------------------------- Name: Ian Jacobson Name: Kenneth I. Sawyer Title: Executive Vice President Title: President By: /s/H. Koziarski ------------------------------- Name: H. Koziarski Title: Chief Financial Officer 39 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION SCHEDULE "A" DEFINITIONS "Affiliate" means, subject to the limitations set forth in (A) and (B) below, any Person which, directly or indirectly, controls, is controlled by or is under common control with such Person. For purposes of this definition, the term "control" (as used in the terms "controls", "controlled by" and "under common control") means either (i) holding 50% or more of the voting securities of such Person or, (ii) in the case of a Person that has no outstanding voting securities, having the right to 50% or more of the profits of such Person or having the right in the event of dissolution to 50% or more of the net assets of such Person or, (iii) the power to direct or cause the direction of the management and policies of such Person, whether pursuant to the ownership of voting securities, by contract or otherwise; provided, however, that (A) Merck KGaA and its Affiliates shall be deemed not to be Affiliates of Genpharm unless such Person is Merck Generics Group B.V. or a subsidiary of Merck Generics Group B.V. so that by way of illustration only and without limiting the generality of the foregoing, Dey Laboratories, Inc. will not be an Affiliate of Genpharm and (B) any Person who (but for the exceptions contemplated herein in (A)) is an Affiliate of Merck KGaA on the Effective Date or at any time thereafter and that but for the completion of the transaction contemplated by the Stock Purchase Agreement or the exercise of any rights granted pursuant thereto or in connection with the completion of such transaction would not be an Affiliate of Resources, such Person shall be deemed not to be an Affiliate of Resources so that, for greater certainty, but without limitation, Genpharm and any of its Affiliates shall not be Affiliates of Resources or any of Resources' Affiliates and vice versa; "ANDA" means the abbreviated new drug application heretofore or hereafter filed by Genpharm or any of its Affiliates with the FDA for or in respect of a Product; "Applicable Percentage" means: (i) subject to (iii) below, in the case of a Product which is developed and registered by Genpharm or its Affiliates based on Product Information provided by a Third Party Licensor, that percentage which will result in Genpharm receiving the aggregate of an amount equal to the Third Party Royalty to be paid to the Third Party Licensor (or as it has directed) by Genpharm and/or its Affiliates in respect of such Products sold in the Territory and [****] of the balance of the Gross Profits; (ii) subject to (iii) below, in the case of any other Product, [****]; and 40 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (iii) where Resources has exercised its right pursuant to Section 3.9 hereto to terminate its obligation to fund any further Patent Defence Expenses (as defined in such Section) in respect of a Product (in this definition referred to as the "Specific Product") such percentage which will result in Genpharm receiving the aggregate of (A) an amount equal to the Third Party Royalty to be paid to the Third Party Licensor (or as it has directed) by Genpharm and/or its Affiliates in respect of sales of the Specific Product in the Territory by Resources and its Affiliates and (B) the same proportion of the balance of such Gross Profits (after deducting from Gross Profits the amount contemplated in (A) above) that the Patent Defense Expenses incurred by Genpharm and its Affiliates in respect of such Specific Product to the extent that the same have not been recovered and are not recoverable from Resources pursuant to Section 3.9 hereof is to the total Patent Defense Expenses incurred by Genpharm and its Affiliates in respect of such Specific Product. "Approved Listing Fee" means, in respect of a Product, listing fees and other similar up-front payments paid by Resources and its Affiliates to unrelated third party customers in consideration for such customers agreeing to buy the Product to the exclusion of other Competing Products for a specified period of time, where: (i) the agreement pursuant to which such payment is to be made has been entered into in compliance with the policy relating to listing fees and other similar up-front payments previously approved by Genpharm, or the proposed agreement has been approved in writing by Genpharm; (ii) the agreement pursuant to which such payment is to be made has been entered into exclusively to enhance the sale of such Product and is not entered into to directly or indirectly enhance the sale of Resources or any of its Affiliates Other Products (within the meaning of Section 7.3 hereof) or as an incentive for such customer to purchase any Other Products of Resources or its Affiliates; (iii) the amount to be paid pursuant to such agreement to such customer plus the amount previously paid to such customer and/or Affiliates of such customer in respect of such Product pursuant to any other similar agreement is less than the sum of [****], or such greater amount as Genpharm may approve in writing, which approval shall not be unreasonably withheld or unduly delayed (and Genpharm shall be deemed to have approved a request for an increased amount to be paid to a customer unless Genpharm notifies Resources within 12 business hours (being hours between 9:00 a.m. and 5:00 p.m., Toronto time, on a business day) of the receipt by Genpharm of a written 41 request for such increased fee or payment that it does not consent to such increased amount; and (iv) not more than 2 unrelated third party customers of Resources and its Affiliates have already been paid (or are entitled to receive from Resources or its Affiliates) a listing fee or other similar upfront payment from Resources or its Affiliates in respect of such Product, unless Genpharm consents to increase the number of customers to whom listing fees or similar upfront payments may be made in accordance with the foregoing, which consent shall not be unreasonably withheld or unduly delayed [and Genpharm shall be deemed to have approved a request to the payment of a listing fee or other similar upfront payment to a specified customer where such payment would otherwise be in breach of this paragraph (iv) unless Genpharm notifies Resources within 12 business hours (being hours between 9:00 a.m. and 5:00 p.m., Toronto time, on a business day) of the receipt by Genpharm of a written request for such a payment to such specified customer that it does not so consent]; "business day" means a day other than a Saturday, a Sunday or a day which is a statutory holiday in the Province of Ontario, Canada or the State of New York, United States of America; "cGMP" means the current Good Manufacturing Practices of the FDA (as in effect from time to time); "Competing Product" means, with respect to a particular Product, a generic pharmaceutical product which is in the same dosage form, has the same active ingredient, the same strength and is for the same indication as such Product but which is manufactured and supplied by or purchased or acquired from any Person other than Genpharm or its Affiliates; "Confidential Information" shall mean information disclosed to or obtained by one party from another party (including information obtained by one party as a result of access to the facilities of the other party) either prior to or during the term of this agreement which is non-public, confidential or proprietary in nature (including, without limitation, trade secrets, financial data, product information, manufacturing methods, market research data, marketing plans, identity of customers, or product information [including the nature and source of raw materials, product formulation and methods of producing, testing and packaging]) and which relates to the disclosing party's past, present or future research, development or business activities Confidential Information shall not, however, include information that a party can demonstrate by written evidence: (i) is in the public domain (provided that information in the public domain has not and does not come into the public domain as a result of a breach by a party hereto (or any of its Affiliates) of its obligations of confidentiality contained herein; (ii) is known by the receiving party prior to disclosure by the other party; or 42 (iii) which has been developed by the receiving party independent of any disclosure by the other party; (iv) is subsequently, lawfully and in good faith obtained by the receiving party on a non-confidential basis from a third party as shown by documentation sufficient to establish the third party as the source of the information, provided that such third party was not under an obligation to treat such information in a confidential manner and had a lawful right to make such disclosure; "Deductible Listing Fee" means, in relation to a Product in respect of a period for which Net Sales is being calculated hereunder, the aggregate of those amounts, each of which is the portion of an Approved Listing Fee paid by Resources or its Affiliates in such period or in any prior period amortized, on a monthly basis, over the period of the agreement pursuant to which such Approved Listing Fee is paid, applicable to such period; "Development Cost" means, in relation to a Product, the out-of-pocket costs and expenses (excluding overhead) incurred in connection with the research and development of such Product for the Territory (which shall include the formulation of such Product, preliminary batch work, analytical development, stability testing and the validation thereof, all comparative work against the branded counterpart of such Product in the Territory and the clinical trials/bioavailability studies) and to obtain a Product Approval for such Product; "FDA" shall mean the United States Food and Drug Administration (or whatever such agency might be called from time to time), or any successor agency having regulatory jurisdiction over the manufacture, distribution and sale of drugs in the United States. "Gross Profits" means, for a Product in respect of any period, Resources' Net Sales of such Product in such period less the aggregate of the following: (a) the landed cost to Resources of such Product sold in such period by Resources and/or its Affiliate to unrelated third party customers, determined in accordance with generally accepted accounting principles consistently applied, to include, without duplication, the Transfer Price of such Product to Resources, import duties and taxes paid or payable by Resources in respect of purchase or importation of such Product and delivery charges (including insurance) incurred by Resources for the delivery of the Product from the Plant to Resources' Spring Valley, New York, facility; (b) Recall Expenses incurred in such period in respect of such Product; (c) Excess Reprocurement Costs incurred in such period in respect of such Product; and 43 (d) Repackaging Expenses incurred by Resources applicable to the quantity of Product sold in such period determined in accordance with generally accepted accounting principles, consistently applied; For greater certainty, where Product sold by Resources or its Affiliates in a period (the "Resale") had previously been sold by Resources or its Affiliates to an unrelated third party customer in that period or any prior period and returned to Resources or its Affiliates by such customer in such period or a prior period and an amount on account of the landed cost of such Product as contemplated in (a) above has been deducted in calculating Gross Profits in respect of the prior sale for such period or a prior period then the amount to be deducted under Paragraph (a) above in respect of the Resale shall be deemed to be nil. It is understood and agreed that where Product purchased by Resources has been returned to Genpharm or otherwise disposed of (in a manner approved of by Genpharm) entitling Resources to claim a reduction, refund, remission or other recovery of the import duties or taxes paid or payable by Resources in respect of the purchase or importation of such Product then Resources shall promptly claim such reduction, refund, remission or other recovery of such duties and taxes (and shall promptly file and submit all required documentation to the applicable fiscal authority therefore) and the Gross Profit for the period in which the reduction, refund, remission or other recovery of such duties and taxes is recognized by Resources (or its Affiliates) in accordance with generally accepted accounting principles shall be increased by the amount of the recognized reduction, refund, remission or other recovery of such duties and taxes. The deduction under (b) and (c) are limited to Recall Expenses or Excess Reprocurement Costs actually incurred in such period and shall not include any amount accrued, provided or reserved for estimated or potential deductions. Excess Reprocurement Costs and Recall Expenses (to the extent they represent amounts payable to unrelated third party customers) shall be considered to be actually incurred only when the payment is made or credit is issued to such customer by Resources or its Affiliates. "Gross Sales" means, in respect of sale of Units of the Product by Resources and its Affiliates in the Territory, the gross invoice price charged by Resources and its Affiliates to unrelated third party customers less freight, postage and insurance related to the delivery of the Product to such customer to the extent that such amount is charged to such customer and shown separately on such invoice and has been included in the gross invoice price and less sales taxes and other governmental charges imposed upon the sale of such Product by Resources or its Affiliates to such customer (to the extent that such amounts have been included in gross invoice price); "Manufacturer" means, in respect of a Product, the Affiliate of Genpharm in whose name the Product Approval for such Product is registered; 44 "Manufacturing Cost" shall mean the cost to Genpharm or the Manufacturer to manufacture (including quality control and testing) and package the Product including, without limitation, the landed cost of raw materials and packaging materials, component costs, energy, labor (salary and benefits) and reasonable overhead charges (not to exceed 20% of the Manufacturing Cost) relating to the manufacture of the Product, and other direct and allocable indirect costs to manufacture such Product, including but not limited to manufacturing charges for material adjustments, for off grade or defective material, handling losses, physical adjustments, salvage and depreciation but specifically excluding costs incurred in research, development, design, marketing, promotion, administration or obtaining the Product Approval, determined in accordance with methods currently employed by Genpharm or such Manufacturer in the manufacture of all products produced in the facility or facilities in which Product is manufactured. If, in the sole discretion of Genpharm or the Manufacturer, all or any portion of the manufacturing or packaging of the Product is subcontracted by such Manufacturer to a third party (or to any Affiliate of Resources) the Manufacturing Costs shall include the amount paid to such third party (or Resources' Affiliate). The Manufacturing Cost of the Product shall be established on the date that the Product Approval for such Product is acquired by Genpharm or the Manufacturer and on the first day of each calendar quarter thereafter, which amount shall be used to determine the Transfer Price of Product manufactured by Genpharm or the Manufacturer for Resources during the period until the next Manufacturing Cost determination date. The parties further acknowledge and agree that where, during a period between Manufacturing Cost determination dates, the variable costs incurred by Genpharm or the Manufacturer to manufacture the Product (and which are included in the Manufacturing Cost) have, in the aggregate, increased or decreased by more than 5%, a pro rata adjustment will be made to the Manufacturing Cost of Products manufactured during such period as agreed upon by Genpharm and Resources or, failing agreement, as determined by arbitration pursuant to Article 13 of this agreement. In determining changes in Manufacturing Cost due to changes in the variable costs incurred by Genpharm or Manufacturer for raw materials and components including active ingredient, such materials shall be used and costed on a first in, first out basis in accordance with generally accepted accounting principles, consistently applied. Within 30 days of the receipt of a Product Approval for such Product, and within 30 days of each Manufacturing Cost determination date, Genpharm shall deliver or cause to be delivered to Resources a statement showing the calculation of the Manufacturing Cost applicable to such period, which statement shall be accompanied by a certificate signed by the Chief Financial Officer of Genpharm or, at Genpharm's option, the Manufacturer of such Product certifying that, to the best of his knowledge, information and belief, after reasonable investigation, such statement is true and correct in all material respects; "Net Sales" means, in respect of a Product for a period, the gross amount invoiced by Resources and its Affiliates in such period to unrelated third party customers on account of the sale of such Product (excluding amounts for freight, postage, insurance, sales tax and other governmental charges imposed upon such sale which are included in the gross amount invoiced and shown separately on such invoice) plus any other form of revenue (other than interest accruing from or paid by such customers on account of outstanding overdue invoices) or expense reimbursement or recovery recognized by Resources or its Affiliates in such 45 period in accordance with generally accepted accounting principles as a result of commercial arrangements relating to such Product less, without duplication: (i) credits issued or payments made by Resources and its Affiliates to unrelated third party customers for or on account of, without duplication, bona fide rebates granted and customary trade discounts (other than prompt payment discounts) actually allowed by Resources or its Affiliates to such customers in the ordinary course of business (except rebates or discounts granted wholly or partially in consideration of such customer's agreement to purchase any service or any product other than the Product unless such rebates or discounts are across-the-board rebates or discounts applied uniformly to the Product and other products or services as part of an overall program of rebates or discounts established by Resources covering substantially all of its products), shelf stock adjustments, chargebacks, returned Product, rejection of damaged Product and billing and shipping errors related to the Product; (ii) out-of-pocket costs for freight, postage and insurance incurred by Resources or its Affiliates in the period to deliver the Product to unrelated third party customers to the extent that such amount is not charged to such customer; (iii) payments made by Resources and its Affiliates for administrative fees, reimbursements or similar payments to or for Medicaid or any other government programs, hospitals, health maintenance organizations, insurance carriers, or other similar arm's length entity or entities in connection with the purchase or utilization of the Product; (iv) Deductible Listing Fees paid by Resources or its Affiliates which are applicable to the period. It is understood and agreed that: (a) deductions under (i), (ii), (iii) and (iv) above from the gross amount invoiced or other revenue recognized shall not include any amounts which would be categorized as packaging, relabelling, selling, promotion, marketing or general or administrative expenses in accordance with generally accepted accounting principles; (b) deductions under (i), (iii) and (iv) above from the gross amount invoiced or other revenue recognized are for actual credits issued or payments made by Resources and its Affiliates and do not include amounts accrued, provided or reserved for estimated or potential deductions; (c) the deduction under (i) above from the gross amount invoiced or other revenue recognized shall not include any Recall Expenses or Excess Reprocurement Costs credited or paid to such customer or any amount paid or credited to the customer on returned or rejected 46 Product to the extent of the Transfer Price of the Product returned or rejected (which amounts shall be dealt with in accordance with the provisions of Sections 8.2 or 8.3 hereof or the definition of "Gross Profit"); (d) no amount shall be deducted under (i), (ii), (iii), (iv) above or otherwise from the gross amount invoiced or other revenue recognized on account of or as an allowance for a bad debt or doubtful account in relation to Product sold by Resources or its Affiliates; (e) no amount shall be deducted under (i), (ii), (iii), (iv) or otherwise from the gross amount invoiced or other revenue recognized where Resources has the right to recover the amount paid or credited to a customer or other Person from Genpharm pursuant to this agreement and, if any amount previously claimed as such deduction in calculating Net Sales in one period is subsequently recovered or becomes recoverable from Genpharm in another period the amount so recovered shall be added to the Net Sales in the period in which it is recovered or becomes recoverable from Genpharm, it being the intention of the parties hereto that Resources shall not have the right to recover the same expense directly from Genpharm and again through the calculation of Gross Profits hereunder; (f) no credit or payment to an unrelated third party customer shall be deducted under (i) from the gross amount invoiced or other revenue recognized where such credit or payment is an attempt to directly or indirectly circumvent the restrictions or limitations contained herein as to the nature or quantum of the items which may be deducted hereunder in calculating Net Sales nor shall Resources or its Affiliates reduce the selling price at which the Product is sold to an unrelated third party customer with a view to circumventing such restrictions or limitations; and (g) in respect of transfers of Product by Resources to its Affiliates (or between Affiliates) for resale, the price at which such products are resold by such Affiliate to third parties (other than other Affiliates) shall be included in Gross Profits and the transfer price between Resources and its Affiliates or between such Affiliates will be disregarded. "Person" shall be broadly interpreted and shall include an individual, partnership, joint venture, association, corporation, company and any other form of business organization, government, regulatory or governmental agency, commission, department and instrumentality; "Plant" means the manufacturing facility and/or warehouse used by Genpharm or any other Manufacturer to manufacture or store a Product which is to be supplied to Resources pursuant hereto; "Product" means the generic pharmaceutical products contemplated in Schedule "B" annexed hereto which are to be developed and manufactured by or on behalf of Genpharm or a Manufacturer and supplied by or on behalf of Genpharm to Resources pursuant hereto; 47 "Product Approval" means, with respect to a Product, the final and unconditional approval of an ANDA by the FDA enabling Genpharm or the Manufacturer to sell such Product in the Territory; "Product Information" means, in respect of any Product, all technical information and data relating to such Product, including the chemistry, manufacture, use, formulation and regulatory approval thereof, heretofore or hereafter during the term of this agreement produced or received by, or known to Genpharm or its applicable Affiliate including, without limiting the generality of the foregoing: (a) where an ANDA approval letter has been issued, a copy of the ANDA as approved and all communication, documents and information relevant to the ANDA submission received from or forwarded to the FDA in connection therewith, including without limitation, any responses to deficiency letters issued by the FDA; (b) if an ANDA submission has been made but no approval letter has been received, the submission to the FDA and all communication, documentation and information received from or forwarded to the FDA in connection therewith including any responses to deficiency letters issued by the FDA; and (c) if no ANDA submission has been made, all data compiled heretofore or hereafter compiled for submission including, all studies and all communications, documents and information received from or forwarded to the FDA. Any reference herein to Product Information of a Third Party Licensor or other Person shall have a corresponding meaning, as applicable. "Product Manufacturing Requirements" shall have the meaning attributed thereto in Section 4.2 hereof; "Recall" shall have the meaning attributable thereto in Section 11.7 hereof; "Recall Expenses" shall have the meaning attributable thereto in Section 11.7 hereof; "Repackaging Expenses" means the cost to Resources or its Affiliates to package the Product including, without limitation, the landed cost of packaging materials and labour (salaries and benefits) and reasonable overhead charges (not to exceed 20% of the Repackaging Expenses) relating to repackaging and labelling of the Product into finished labelled Units, determined in accordance with generally accepted accounting principles, consistently applied. The Repackaging Expenses of a Product shall be determined on the date that the Product Approval for such Product is acquired by Genpharm or the Manufacturer and on the first day of each calendar quarter thereafter, which amount shall be used to determine the Repackaging Expenses of Products packaged into final labelled Units by Resources or its Affiliates during the period until the next Repackaging Expense determination date. The parties further acknowledge and agree that where, during a period between Repackaging Expense determination 48 dates, the variable costs incurred by Resources or an Affiliate to repackage and label a Product (and which are included in the Repackaging Expenses) have, in the aggregate, increased or decreased by more than 5%, a pro rata adjustment will be made to the Repackaging Expenses of Products packaged into final labelled Units during such period as agreed to by Genpharm and Resources or, failing agreement, as determined by arbitration pursuant to Article 13 of this agreement. In determining changes in Repackaging Expenses due to changes in the variable costs incurred by Resources or its Affiliates for packaging material or other supplies, such materials and supplies shall be used and costed on a first in, first out basis in accordance with generally accepted accounting principles, consistently applied; "Specifications" means the terms and conditions applicable to a Product as described in the Product Approval covering such Product, as the same may be supplemented from time to time; "Stock Purchase Agreement" means the Stock Purchase Agreement between Pharmaceutical Resources, Inc. and Lipha Americas, Inc. dated as of the 25th day of March, 1998 relating to the purchase by Lipha Americas, Inc., an Affiliate of Merck KGaA, of certain shares of the common stock of Pharmaceutical Resources, Inc.; "Territory" means the 50 states of the United States of America, plus the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, Samoa and any other territory which, on the Effective Date is a United States government protectorate wherein an ANDA approved by the FDA is required to sell the Product in such territory. "Third Party Licensor" shall have the meaning attributed thereto in Section 3.1 hereof; "Third Party Royalty" shall have the meaning attributed thereto in Section 3.1 hereof; "Transfer Price" means the Manufacturing Cost of the Product supplied by or on behalf of Genpharm to Resources pursuant hereto; "Threshold Amount" means in respect of the Period, the following percentage of the generic market for the Product (measured in dollars) based upon unit sales as determined through IMS reported sales for such Period: 49 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (i) if, on the date the Period (as that term is defined in Section 10.8 hereof) commences, there are not more than [****] other Competing Products being distributed in the Territory, [****]; or (ii) if, on the date the Period commences, there are more than [****] but less than [****] Competing Products being distributed in the Territory, [****]; or (iii) on the date the Period commences, there are more than [****] Competing Products being distributed in the Territory, [****]; "Unit" means an individual packaged finished Product; 50 SCHEDULE "B" PRODUCTS 40 generic pharmaceutical products in solid dosage form (capsules and tablets of the same molecule to be treated as different products but varying strengths of the same molecule to be treated as one product) which are, on the Effective Date, under development for the Territory for or on behalf of Genpharm as separately agreed to by Genpharm and Resources 51 SCHEDULE "C" RESOURCES' CURRENT PRODUCTS ALLOPURINOL 100 MGedact.wpd HALOPERIDOL 0.5 MG ALLOPURINOL 300 MG HALOPERIDOL 1.0 MG HALOPERIDOL 2.0 MG ALPRAZOLAM 0.25 MG HALOPERIDOL 5.0 MG ALPRAZOLAM 0.5 MG HALOPERIDOL 10.0 MG ALPRAZOLAM 1.0 MG HYDRALAZINE/HCTZ 25MG/25MG (HYDRA-ZIDE) ANILORIDE 5MG HYDRALAZINE/HCTZ 50MG/50MG (HYDRA-ZIDE) HYDRALAZINE/HCTZ 100MG/50MG (HYDRA-ZIDE) ATENOLOL 50MG ATENOLOL 100MG IBUPROPEN 200MG IBUPROPEN 400MG BENZTROPINE MESYLATE 0.5MG IBUPROPEN 600MG BENZTROPINE MESYLATE 1MG IBUPROPEN 800MG BENZTROPINE MESYLATE 2MG IMIPRAMINE HCI 10MG CAPTOPRIL 12.5MG IMIPRAMINE HCI 25MG CAPTOPRIL 25.5MG IMIPRAMINE HCI50MG CAPTOPRIL 50.5MG CAPTOPRIL 100MG ISOSORBIDE DINITR. 5MG ORAL ISOSORBIDE DINITR. 10MG ORAL CARISOPRODOL & ASPRIN 200/325MG ISOSORBIDE DINITR. 20MG ORAL ISOSORBIDE DINITR. 30MG ORAL DEXAMETHASONE 0.25MG DEXAMETHASONE 0.50MG MECLIZINE 12.5MG 52 DEXAMETHASONE 0.75MG MECLIZINE 25.0MG DEXAMETHASONE 1.50MG DEXAMETHASONE 4.0MG MEGESTROL ACETATE 20MG DEXAMETHASONE 6.0MG MEGESTROL ACETATE 40MG DOXEPIN 10MG METHOCARBAMOL & ASPIRIN 400/325MG DOXEPIN 25MG DOXEPIN 50MG METOPROLOL TARTRATE 50MG DOXEPIN 75MG METOPROLOL TARTRATE 100MG DOXEPIN 100MG DOXEPIN 150MG MINOXIDIL 2.5MG MINOXIDIL 10.0MG FLUPHENAZINE HCI 1.0MG FLUPHENAZINE HCI 2.5MG NICOTINE PATCH 7MG FLUPHENAZINE HCI 5.0MG NICOTINE PATCH 14MG FLUPHENAZINE HCI 10.0MG NICOTINE PATCH 21MG FLURAZEPAM 15MG NYSTATIN ORAL TABS 500,000 UNITS FLURAZEPAM 30MG PINDOLOL 5MG GLIPIZIDE 5MG PINDOLOL 10MG GLIPIZIDE 10MG PIROXICAM 10MG PIROXICAM 20MG 53 SILVER SULFADIAZINE 1% 25GM TUBE SILVER SULFADIAZINE 1% 50GM JAR SILVER SULFADIAZINE 1% 50GM TUBE SILVER SULFADIAZINE 1% 85GM TUBE SILVER SULFADIAZINE 1% 300GM JAR SILVER SULFADIAZINE 1% 1000GM JAR SILVER SULFADIAZINE AF 1% 50GM JAR SILVER SULFADIAZINE AF 1% 400GM JAR SILVER SULFADIAZINE AF 1% 1000GM JAR TEMAZEPAM 15MG TEMAZEPAM 30MG TRIAZOLAM 0.125MG TRIAZOLAM 0.25MG ZORPRIN (ASPIRIN) 800MG (BRAND) 54 EX-10 8 EXHIBIT 10.3 MERCK SERVICES AGREEMENT Exhibit 10.3 MERCK SERVICES AGREEMENT THIS SERVICES AGREEMENT (the "Agreement") is dated as of June 30, 1998, between Pharmaceutical Resources, Inc., a New Jersey corporation, whose principal offices are located at One Ram Ridge Road, Spring Valley, New York 10977 (the "Company"), and Merck KGaA, a Kommanditgesellschaft auf Aktien organized under the laws of Germany, whose principal offices are located at Frankfurter Strasse 250, 64271 Darmstadt, Germany (the "Service Provider"), each of which may be referred to individually as a "Party" or collectively as the "Parties." This Agreement and the Annex contemplated hereby are collectively referred to as the "Agreement" unless indicated otherwise. WHEREAS, the Service Provider possesses, inter alia, substantial and long acquired technical expertise and know-how in the areas of product development, clinical studies and trials, marketing, distribution, financial and administrative support, and other areas related to the development of ethical and generic drugs; and WHEREAS, the Company wishes to engage certain services of the Service Provider, and the Service Provider is willing to perform the Services defined herein, on the terms and conditions set forth herein, in consideration of the issuance by the Company to the Service Provider of a stock option to acquire 820,000 shares of common stock of the Company (the "Option Shares"), in the form of the Annex hereto (the "Option"). NOW, THEREFORE, in consideration of the mutual obligations and benefits set forth in this Agreement, the receipt and sufficiency of which are hereby acknowledged, the Company and the Service Provider agree to the following terms and conditions: 1. Services -------- 1.1 At the request of the Company and subject to the provisions of this Agreement, the Service Provider will perform some or all of the following services (the "Services") with respect to certain products as agreed to between the parties from time to time (the "Products"): a. providing assistance to conduct, monitor and analyze preclinical investigations. b. rendering advice to the Company's research and development department on the design and development of protocols. -1- c. providing assistance and advice to develop and prepare Product formulations and dosage forms for preclinical, clinical trials and commercial purposes and develop methods for establishing Product stability (including expiration dating). d. providing assistance to develop and transfer to the Company manufacturing methods and procedures for the synthesis, scale-up and process validation for the manufacture of Products and their active ingredients for clinical and commercial purposes. e. assisting in developing methods and procedures for the testing, analysis and quality control of finished dosage forms of Products and their ingredients. f. assisting the Company in the preparation of ANDAs. g. providing periodic status reports on the Services being performed. h. providing assistance, if required, to prepare and file Federal, State and local tax returns. i. advising on the investment of funds and rendering assistance and advice with respect to real property owned or leased by the Company. j. providing various legal support services when required, including advice with respect to product liability claims and actions filed against the Company. k. providing technical support and/or consulting services for the Company to optimize the Company's production capacity. To effectuate such an optimization, the Service Provider may from time to time, transfer industry demand, capacity utilization data to the Company to assist in the production planning process. l. providing assistance in financial planning, budgeting, sales forecasting for the Products, subject to the Service Provider's internal operational constraints. m. providing additional administrative and technical support for new product launches. n. providing computer and/or management information system support for the Company. o. providing quality control and quality assurance services, as needed, including Product testing. p. advising in business planning and analysis. q. providing assistance in certain data processing functions in support of other management services provided pursuant hereto. -2- 1.2 The Service Provider shall use its reasonable efforts to ensure that the Services provided hereunder are consistent with accepted industry standards and in a professionally competent manner. 1.3 The Service Provider shall use its reasonable efforts to render Services in material compliance with all applicable legal requirements. 1.4 In order for the Service Provider to provide the Services hereunder, the Company shall disclose to the Service Provider such information and data which is reasonably requested by the Service Provider. The Service Provider shall use such information and data exclusively in the performance of its obligations hereunder, and such disclosure shall be subject to the terms and conditions of this Agreement, including Section 7, if such disclosure is of Confidential Information as defined herein. 2. Payment Terms ------------- In consideration of the Services to be rendered by the Service Provider hereunder and of its undertaking to perform such Services for the benefit of the Company during the term of this Agreement, the Company shall make full payment of its obligations hereunder in the form of the Option. Such Option shall entitle the Service Provider to acquire, beginning three years and ten days after the date hereof, 820,000 shares of the Company's common stock at the Exercise Price (as specified in the Option) for the Services provided. Such Option shall expire at 5:00 P.M., New York City time, on June 30, 2003 if it shall not have been fully exercised. The Company shall also reimburse the Service Provider for all reasonable out-of-pocket costs and expenses (which shall not include any direct or indirect labor costs) incurred in connection with the performance of such Services, including, without limitation, travel expenses, meals and lodging, cost for supplies directly consumed in rendering such Services, storage and warehousing costs, printing and duplicating costs, and transport and similar costs; provided, any such reimbursement in excess of $10,000 in any calendar quarter, shall require the Company's prior written approval. The Company shall be under no obligation to make any other payments for the Services contemplated herein pursuant to this Agreement. 3. Schedule of Performance ----------------------- During the term of this Agreement, the Service Provider shall perform the Services from time to time, as reasonably required by the Company and as agreed upon between the Company and the Service Provider, upon the Company's advance written notice which shall be received by the Service Provider not less than ten business days before the proposed service date. Upon receipt of such notice, the Service Provider shall have five business days to accept or, in consultation with the Company, reschedule the service date. The Company hereby acknowledges that the Service Provider must take into consideration its own labor constraints and existing commitments of its own business to other parties in determining the service date of such Services. In any event, the Services requested by the Company shall not be more than a total of 200 man hours per calendar quarter unless the Service Provider expressly agrees otherwise. -3- 4. Term ---- This Agreement shall be effective from the date of execution of this Agreement and shall remain in effect for thirty-six (36) months. 5. Representations and Warranties ------------------------------ 5.1 Each Party hereby represents and warrants to the other Party as follows: (a) It is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; (b) It has the corporate power and authority to own its assets, carry on its business and execute and deliver this Agreement and to perform its obligations hereunder; (c) It has taken all appropriate and necessary action to authorize the execution, delivery and performance of this Agreement; (d) All consents, approvals, licenses and authorizations of, and all filings and registrations with, any governmental authority necessary for the due execution, delivery, performance and enforceability of this Agreement, have been obtained and are in full force and effect; and (e) This Agreement constitutes a legal, valid and binding obligation, enforceable in accordance with its terms. The execution, delivery and performance of this Agreement will not violate any provision of any applicable laws or regulations. 6. Independent Contractor ---------------------- This Agreement does not constitute or create (and the Parties do not intend to create hereby) a joint venture, pooling arrangement, partnership, or formal business organization of any kind between and among any of the Parties, and the rights and obligations of the Parties shall be only those expressly set forth herein. The Service Provider will perform the Services as an independent contractor and shall not be considered, for any purpose, to be an agent of the Company or its affiliated companies. Each Party shall be responsible for providing its own personnel and workers' compensation, medical coverage or similar benefits, any life, disability or other insurance protection. Each Party shall be solely responsible for the payment of social security benefits, unemployment insurance, pension benefits, withholding any required amounts for income and other employment-related taxes and benefits of its own employees, and shall make its own arrangements for injury, illness or other insurance coverage to protect itself, its affiliated companies, its subcontractors and personnel from any costs, -4- expenses, damages, loss and/or liability arising out of performance of the Services, or any transportation associated therewith. The Service Provider has no power or authority to act for, represent, or bind the Company or its affiliated companies in any manner. 7. Confidentiality 7.1 (a) The Parties recognize that in the course of performance of the Agreement, either of them may disclose to the other information about the disclosing Party's business or activities which such Party considers proprietary and confidential including, without limitation, trade secrets, marketing and business plans, customer lists, and information concerning the operations of the Parties (all of such proprietary and confidential information is hereinafter referred to as the "Confidential Information"). The Party who receives any Confidential Information (the "Receiving Party") agrees to maintain a confidential status for such Confidential Information, not to use any such Confidential Information for any purpose other than the purpose for which it was originally disclosed to the Receiving Party, and not to disclose any of such Confidential Information to any third party, unless such information: (i) is or has become available to the public from a source other than the Receiving Party; (ii) was already known to the Receiving Party from sources other than the other Party at the time it was disclosed to the Receiving Party and was not obtained by the Receiving Party from such other party in violation of a confidentiality or similar agreement with such other party; (iii) is disclosed to the Receiving Party by a third party who is not under any legal obligation prohibiting such disclosure; (iv) is required to be disclosed by law; (v) is developed independently by the Receiving Party; or (vi) is disclosed to the Receiving Party by a third party pursuant to an obligation of such third party or the exercise of a right by the Receiving Party in circumstances where no obligation of confidentiality applies to the Receiving Party with respect to the information so disclosed. (b) The Parties acknowledge that they may be required to disclose Confidential Information to governmental agencies or authorities by law or in connection with the obtaining of approvals for the -5- Company, and each shall endeavor to limit disclosure to that purpose. If either Party is required to disclose Confidential Information pursuant to this paragraph, such Party will immediately give the other Party written notice of any such disclosure, which notice shall specify the substance of the disclosure. The Party making such a disclosure shall take all reasonable steps to prevent further disclosure of such Confidential Information. 7.2 Survival of Confidentiality: The provisions of this Section 7 shall survive the termination of this Agreement for any reason whatsoever. Upon such termination, the Parties shall return any Confidential Information which may have been transmitted by the other Party, as well as any copy or other reproduction, including, without limitation, electronic data reproductions or representations. 8. Dispute Resolution ------------------ 8.1 In the event of any controversy or claim between the Parties arising out of or in connection with this Agreement or the breach hereof, the Parties shall, in the first instance, make a good faith effort to settle such dispute amicably. 8.2 If such controversy or claim is not settled within thirty (30) days following written notice by one Party to the other Party of the existence thereof, such controversy or claim shall be settled by arbitration in New York, NY, in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award may be entered in any court having jurisdiction thereof. 9. Notices ------- All notices and other communications required or permitted hereunder shall be given in writing by hand delivery, by facsimile, or by registered or certified mail, return receipt requested, postage prepaid, addressed to the Party to receive the same at its respective address set forth below, or at such other address as may from time to time be designated by either Party to the other Party hereunder in accordance with this Section 9: To the Service Provider: Merck KGaA Frankfurter Strasse 250 64271 Darmstadt, Germany Attn: Professor Dr. Bernhard Scheuble Facsimile: 011 49-6151-72-5962 -6- With a copy to: Coudert Brothers 1114 Avenue of the America New York, New York 10036-7703 Attn: Edwin S. Matthews Jr., Esq. Facsimile: 212-626-4120 To the Company: Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, New York 10977 Attn: Kenneth I. Sawyer Facsimile: 914-425-5097 With a copy to: Hertzog, Calamari & Gleason 100 Park Avenue New York, New York 10017 Attn: Stephen Ollendorff, Esq. & Stephen R. Connoni, Esq. Facsimile: 212-213-1199 All notices shall be effective when received. A notice is considered received if a written confirmation of receipt appears thereon or there exists a written fax confirmation. Either Party may by notice to the other Party designate a new address for notices, such new address to be effective ten (10) days after receipt of designation. 10. Indemnity --------- 10.1 Each Party hereby agrees to indemnify and hold harmless the other Party and its respective shareholders, directors, officers and employees from and against any and all costs, losses, claims, actions, demands, damages and liabilities (including attorneys' fees and disbursements) incurred by such other party arising out of or in respect of (i) any act, failure to act, or any assumption of any obligation or responsibility by the indemnifying Party, or by any of its directors, officers or employees, which is in contravention or violation of or in conflict with any of the terms or provisions of this Agreement, or (ii) any material breach of any of the representations or warranties made by the indemnifying Party under this Agreement; provided, however, that an indemnified Party shall not be entitled to indemnification with respect to any costs, losses, claims, actions, demands, damages and liabilities which was caused by its own gross negligence, willful misconduct or reckless disregard of its duties hereunder. 10.2 THE SERVICE PROVIDER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE AGREEMENT OR THE PERFORMANCE OF THE SERVICES PROVIDED -7- HEREUNDER OR THE WORK FURNISHED HEREUNDER, WHETHER ARISING AT LAW OR IN EQUITY, EXCEPT AS SET FORTH HEREIN. 10.3 IN NO EVENT, OTHER THAN BREACH OF THE EXPRESS PROVISIONS OF THIS AGREEMENT, SHALL EITHER PARTY OR A PARTY'S AFFILIATES AND ITS OR THEIR SUBCONTRACTORS AND ITS OR THEIR OFFICERS, EMPLOYEES AND AGENTS, BE LIABLE, IN CONTRACT, IN TORT, OR OTHERWISE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY NATURE ARISING AT ANY TIME UNDER THIS AGREEMENT, INCLUDING SPECIFICALLY, BUT WITHOUT LIMITATION, LOSS OF PROFITS OR REVENUE, LOSS OF FULL OR PARTIAL USE OF ANY EQUIPMENT, DELAYS, COST OF REPLACEMENTS, COST OF CAPITAL, LOSS OF GOODWILL, CLAIMS OF CUSTOMERS, OR OTHER SUCH DAMAGES. 11. Miscellaneous ------------- 11.1 Entire Agreement. This Agreement, together with the Annex hereto, constitute the entire agreement of the Parties hereto with respect to the performance of Services by the Service Provider for the Company and supersedes and terminates all prior arrangements and agreements, if any, between the Service Provider and the Company or any of its affiliates with respect to the subject matter hereof. 11.2 No Waiver. No failure by either Party hereto to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder by either Party preclude any other or future exercise of that right or any other right hereunder by that Party. 11.3 Severability. In case any one or more of the provisions of this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 11.4 Assignment. Neither Party may assign or transfer, in whole or in part, its rights or interests in this Agreement. 11.5 Amendment. This Agreement may not be amended, terminated or superseded except by (i) an agreement in writing between the Company and the Service Provider and (ii) the prior written approval of a majority of the Company Designees (as such term is defined in the Stock Purchase Agreement, dated March 25, 1998, between the Company and Lipha Americas, Inc.). -8- 11.6 Survival: Any provision of this Agreement which can reasonably be construed as surviving the expiration or termination of the Agreement, including but not necessarily limited to the indemnification and confidentiality provisions, shall so survive. 11.7 Governing Law: This Agreement, including the Annex, shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of law provisions thereof. 11.8 Agreement to Execute Documents: The Parties agree in good faith to execute any and all documents required for the performance of this Agreement. 11.9 Counterparts: This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. IN WITNESS WHEREOF, this Agreement has been executed by the Parties, effective as of the date above indicated. PHARMACEUTICAL RESOURCES INC. MERCK, KGaA /s/Kenneth I. Sawyer /s/Bernhard Scheuble - ------------------------------- ------------------------------------ By: Kenneth I. Sawyer By: Prof. Dr. Bernhard Scheuble Name: Name: Title: Chairman & CEO Title: Member of the Executive Board /s/Klaus-Peter Brandis ------------------------------------ By: Klaus-Peter Brandis Name: Title: Head of Legal Department -9- Annex See Exhibit 10.4 EX-10 9 EXHIBIT 10.4 MERCK OPTION Exhibit 10.4 PHARMACEUTICAL RESOURCES, INC. Stock Option Agreement PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation (the "Company"), hereby grants Merck KGaA, a Kommanditgesellschaft auf Aktien organized under the laws of Germany (the "Optionee"), a non-statutory stock option (the "Option") to purchase from the Company up to 820,000 shares of common stock, par value $.01 per share, of the Company ("Option Shares") at a price and on the terms set forth in this Option Agreement. The Option is granted by the Company to the Optionee in consideration for Services (as such term is defined in the Services Agreement) to be provided by the Optionee to the Company pursuant to the Services Agreement, dated June 30, 1998, between the Company and the Optionee (the "Services Agreement"). SECTION 1. Term of Option. The Option is granted as of the date hereof (the "Grant Date") and shall be exercisable at any time beginning three years and ten days after the date hereof; provided that, to the extent not exercised, this Option shall terminate on April 30, 2003. SECTION 2. Vesting. The Option shall vest on the following schedule: Cumulative vested Measured from Grant Date portion of Option Shares - ------------------------ ------------------------ First anniversary one-third Second anniversary two-thirds Third anniversary entire amount SECTION 3. Exercise of Option. Subject to the provisions hereof, this Option may be exercised in whole or in part at any time, or from time to time, to the extent vested, during its term, as set forth in Section 1 herein, by presentation to the Company at its principal office of the Option Exercise Form attached hereto, duly executed and accompanied by payment (either in cash or by United States certified or official bank check payable to the order of the Company) of the Exercise Price for the number of Option Shares specified in such Form. Upon receipt of the Option Exercise Form and such payment, the Company shall, within five (5) business days, cause to be delivered to the Optionee one or more certificates representing the aggregate number of fully-paid and nonassessable Option Shares issuable upon exercise as specified in the Form. SECTION 4. Exercise Price. The exercise price ("Exercise Price") shall be US $2.00 per share. SECTION 5. Reservation of Shares. The Company will reserve for issuance and delivery upon exercise of this Option all authorized but unissued Common Shares or other shares of capital stock of the Company (and other securities and property) from time to time receivable upon exercise of this Option. SECTION 6. Restrictions on Transfer, Exercise and Registration. 6.1 Transferability. This Option may not be sold, transferred, pledged, assigned or otherwise disposed of (collectively, "Transferred") by the Optionee. 6.2 Compliance with Securities Legislation. No Option Shares may be transferred except in full compliance with all applicable provisions of the Securities Act of 1933 and of applicable state securities laws. 6.3 Legend. Each certificate for the Option Shares shall be endorsed with the following legend: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF EFFECTIVE REGISTRATION STATEMENTS UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT THE TRANSFER IS EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS." 6.4 Registration. The Option Shares shall have the benefit of the Registration Rights Agreement, dated March 25, 1998, between the Company, Lipha Americas, Inc., Genpharm Inc. and the Optionee. 6.5 Restrictions on Exercise. The Option may not be exercised if the issuance of the Option Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As 2 a condition to the exercise of the Option, the Company may require the Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. SECTION 7. Rights of the Optionee. The Optionee shall not be entitled to any rights of a shareholder of the Company with respect to the Option Shares solely as a result of the grant of the Option. Such rights shall exist only after issuance of a stock certificate in accordance with Section 3 above following the Optionee's exercise of the Option (or a portion thereof) hereunder. The rights of the Optionee are limited to those expressly provided in this Option. SECTION 8. Termination of Services Agreement (a) If the Services Agreement terminates other than as a result of the Optionee's Breach and the Optionee thereby ceases to provide Services to the Company, this Option may be exercised in full during the remaining balance of the term of the Option (but not in any event before three years and ten days have elapsed from the date hereof or beyond the expiration of the term of this Option), notwithstanding anything to the contrary in this Option Agreement. (b) If the Services Agreement terminates as a result of the Optionee's Breach and the Optionee thereby ceases to provide Services to the Company, the Optionee may exercise the Option, to the extent vested as of the date of such termination, during the remaining balance of the term of the Option (but not in any event before three years and ten days have elapsed from the date hereof or beyond the expiration of the term of the Option). (c) For purposes of this section, "Breach" means willful refusal of the Optionee to provide Services to the Company in accordance with the Services Agreement. SECTION 9. Anti-Dilution Provisions. 9.1 Adjustments for Stock Dividends; Combinations, Etc. In case the Company shall do any of the following (each, an "Event"): (a) declare a dividend or other distribution on its common shares payable in common shares of the Company; (b) effect a subdivision of its outstanding common shares into a greater number of common shares (by reclassification, stock split or otherwise by payment of a dividend in common shares); 3 (c) effect a combination of its outstanding common shares into a lesser number of common shares (by reclassification, reverse split or otherwise); (d) issue by reclassification, exchange or substitution of its common shares any shares of capital stock of the Company; or (e) effect any other transaction having a similar effect, then the Exercise Price in effect at the time of the record date for such Event shall be adjusted to a price determined by multiplying such Exercise Price by a fraction, the numerator of which shall be the number of shares of common stock outstanding immediately prior to such Event and the denominator of which shall be the number of Common Shares outstanding immediately after such Event. Each such adjustment of the Exercise Price shall be calculated to the nearest cent. No such adjustment shall be made in an amount less than One Cent ($.01), but any such amount shall be carried forward and shall be given effect in connection with the next subsequent adjustment. Such adjustment shall be made successively whenever any Event shall occur. 9.2 Adjustment in the Number of Option Shares. Whenever the Exercise Price shall be adjusted pursuant to Section 9.1 hereof, the number of Option Shares which the Optionee may purchase upon exercise of the Service Option shall be adjusted, to the nearest full share, by multiplying such number of Option Shares immediately prior to such adjustment by a fraction, the numerator of which shall be the Exercise Price immediately prior to such adjustment and the denominator of which shall be the Exercise Price immediately thereafter. 9.3 Adjustment for Consolidation or Merger. In case of any consolidation or merger to which the Company shall be a party, other than a consolidation or merger in which the Company shall be the surviving or continuing corporation, or in case of any sale or conveyance to another entity of all or substantially all of the property of the Company, or in the case of any statutory exchange of securities with another entity (including any exchange effected in connection with a merger of any other corporation with the Company), the Optionee shall have the right thereafter to receive from the Company upon exercise of the Option the kind and amount of securities, cash or other property which it would have owned or have been entitled to receive immediately after 4 such consolidation, merger, statutory exchange, sale or conveyance had this Option been exercised immediately prior to the effective date of such transaction and, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 9 with respect to the rights and interests thereafter of the Optionee to the end that the provisions set forth in this Section 9 shall thereafter correspondingly be made applicable, as nearly as then may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Option. Notice of any such consolidation, merger, statutory exchange, sale or conveyance, and of the provisions proposed to be adjusted, shall, to the extent reasonably practicable, be mailed to the Optionee not less than thirty (30) days prior to such event. SECTION 10. Fully Paid Shares; Taxes. The Company agrees that the common shares of the Company represented by each and every certificate for the Option Shares delivered on the exercise of this Option in accordance with the terms hereof shall, at the time of such delivery, be validly issued, fully-paid and nonassessable, free and clear of all liens, pledges, options, claims or other encumbrances. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes (but specifically not including any income taxes) which may be payable in respect of the issue of any Option Shares or certificates therefor. SECTION 11. Notices. All notices hereunder shall be in writing and shall be given: if to the Company, at One Ram Ridge Road, Spring Valley, New York 10977 (attention: Kenneth I. Sawyer), fax number: (914) 425-5097, with a copy to Hertzog, Calamari & Gleason, at 100 Park Avenue, New York, New York 10017 (attention: Stephen Ollendorff, Esq., and Stephen R. Connoni, Esq.), fax number: (212) 213-1199, or if to the Optionee, at Merck KGaA, Frankfurter Strasse 250, 64271 Darmstadt, Germany, (attention: Professor Dr. Bernhard Scheuble), fax number: 011 49-6151-72-5962, with a copy to Coudert Brothers, at 1114 Avenue of the Americas, New York, New York 10036 (attention: Edwin S. Matthews, Jr.), fax number: (212) 626- 4120. Any notice shall be deemed to have been given if personally delivered or sent by express commercial courier or delivery service or by telegram, telefax, telex or facsimile transmission. Any notice given in any other manner shall be deemed given when actually received. 5 SECTION 12. Amendments; Waiver. This Option may not be amended, and no provision hereof may be waived, without the prior written consent of at least a majority of the Company Designees (as defined in the Stock Purchase Agreement, dated March 25, 1998, between the Company and Lipha Americas, Inc.) on behalf of the Company and except pursuant to a written instrument executed by the Company and the Optionee. SECTION 13. Headings. The headings of the Sections of this Option have been inserted for convenience of reference only and shall not be deemed to be a part of this Option. SECTION 14. Governing Law. This Option is issued under, and shall be governed by and construed in accordance with, the laws of the State of New York applicable to contracts made and to be performed wholly within such State. IN WITNESS WHEREOF, the Company has caused this Option to be signed on its behalf, in its corporate name, by its duly authorized officer, on June 30, 1998. PHARMACEUTICAL RESOURCES, INC. By: /s/Kenneth I. Sawyer --------------------------------- Kenneth I. Sawyer President Attest: /s/Dennis J. O'Connor - ------------------------------ Dennis J. O'Connor Secretary MERCK KGaA By:/s/Bernhard Scheuble --------------------------------- Name: Prof. Dr. Bernhard Scheuble Title: Member of the Executive Board By:/s/Klaus-Peter Brandis --------------------------------- Name: Klaus-Peter Brandis Title: Head of Legal Department 6 PHARMACEUTICAL RESOURCES, INC. STOCK OPTION EXERCISE FORM For services performed, the undersigned hereby irrevocably elects to exercise the attached Option to purchase ______ shares of common stock of Pharmaceutical Resources, Inc. at the Exercise Price of $2.00 per share, in accordance with the Option Agreement. Attached hereto is cash or a U.S. certified or official bank check payable to the order of the Company in the amount of the total Exercise Price set forth above. ------------------------------------- Name of Optionee ------------------------------------- Signature of Optionee or Authorized Representative ------------------------------------- Name and Title of Authorized Representative ------------------------------------- Address of Optionee ------------------------------------- Date EX-10 10 EXHIBIT 10.5 GENPHARM SERVICES AGREEMENT Exhibit 10.5 GENPHARM SERVICES AGREEMENT THIS SERVICES AGREEMENT (the "Agreement") is dated as of June 30, 1998, between Pharmaceutical Resources, Inc., a New Jersey corporation, whose principal offices are located at One Ram Ridge Road, Spring Valley, New York 10977 (the "Company"), and Genpharm Inc., a corporation organized and existing under the laws of the Province of Ontario, Canada, whose principal offices are located at 85 Advance Road, Etobicoke, Ontario, M8Z 2S6, Canada (the "Service Provider"), each of which may be referred to individually as a "Party" or collectively as the "Parties." This Agreement and the Annex contemplated hereby are collectively referred to as the "Agreement" unless indicated otherwise. WHEREAS, the Service Provider possesses, inter alia, substantial and long acquired technical expertise and know-how in the areas of product development, clinical studies and trials, marketing, distribution, financial and administrative support, and other areas related to the development of generic drugs; and WHEREAS, the Company wishes to engage certain services of the Service Provider, and the Service Provider is willing to perform the Services defined herein, on the terms and conditions set forth herein, in consideration of the issuance by the Company to the Service Provider of a stock option to acquire 351,040 shares of common stock of the Company (the "Option Shares"), in the form of the Annex hereto (the "Option"). NOW, THEREFORE, in consideration of the mutual obligations and benefits set forth in this Agreement, the receipt and sufficiency of which are hereby acknowledged, the Company and the Service Provider agree to the following terms and conditions: 1. Services -------- 1.1 At the request of the Company and subject to the provisions of this Agreement, the Service Provider will perform some or all of the following services (the "Services") with respect to certain products as agreed to between the parties from time to time (the "Products"): a. providing assistance and advice in the promotion, marketing, and/or distribution of a patented computer software in Electronic Documentation Management System on which the Company has obtained exclusive marketing rights. -1- b. assisting and advising the planning, developing and producing of advertising and promotional programs for the Products, including selection of advertising agencies, advertising media and the type and scope of programs offered. c. assisting the distributing of samples, literature and other direct promotional materials through the mail, sales representatives or other customary methods. d. advising the training and maintaining of sales representatives to make personal presentations of the Products to health care professionals and potential purchasers of the Products in the Territory (as defined in the Distribution Agreement, dated March 25, 1998, between the Company and the Services Provider). e. providing assistance in the development and dissemination of professional education programs and materials. f. providing consulting services for the Company in developing marketing plans for the Products, which will include market research analyses, objectives and strategies, sales forecasts, proposed pricing and promotional programs. g. providing assistance and advice in public relations services, including responses to inquiries, preparation of press releases and announcements regarding the Products. h. advising the Company as to the state of the Product market in the Territory, if such information shall be available from the Service Provider, and important market developments and trends in order to facilitate the Company's production scheduling. Such information shall be provided in periodic reports when available, with important market developments promptly communicated. 1.2 The Service Provider shall use its reasonable efforts to ensure that the Services provided hereunder are consistent with accepted industry standards and in a professionally competent manner. 1.3 The Service Provider shall use its reasonable efforts to render Services in material compliance with all applicable legal requirements. 1.4 In order for the Service Provider to provide the Services hereunder, the Company shall disclose to the Service Provider such information and data which is reasonably requested by the Service Provider. The Service Provider shall use such information and data exclusively in the performance of its obligations hereunder, and such disclosure shall be subject to the terms and conditions of this Agreement, including Section 7, if such disclosure is of Confidential Information as defined herein. -2- 4. Payment Terms ------------- In consideration of the Services to be rendered by the Service Provider hereunder and of its undertaking to perform such Services for the benefit of the Company during the term of this Agreement, the Company shall make full payment of its obligations hereunder in the form of the Option. Such Option shall entitle the Service Provider to acquire, beginning three years and ten days after the date hereof, 351,040 shares of the Company's common stock at the Exercise Price (as specified in the Option) for the Services provided. Such Option shall expire at 5:00 P.M., New York City time, on June 30, 2003 if it shall not have been fully exercised. The Company shall also reimburse the Service Provider for all reasonable out-of-pocket costs and expenses (which shall not include any direct or indirect labor costs) incurred in connection with the performance of such Services, including, without limitation, travel expenses, meals and lodging, cost for supplies directly consumed in rendering such Services, storage and warehousing costs, printing and duplicating costs, and transport and similar costs; provided, any such reimbursement in excess of $10,000 in any calendar quarter, shall require the Company's prior written approval. The Company shall be under no obligation to make any other payments for the Services contemplated herein pursuant to this Agreement. 3. Schedule of Performance ----------------------- During the term of this Agreement, the Service Provider shall perform the Services from time to time, as reasonably required by the Company and as agreed upon between the Company and the Service Provider upon, advance written notice which shall be not less than ten business days before the proposed service date. Upon receipt of such notice, the Service Provider shall have five business days to accept or, in consultation with the Company, reschedule the service date. The Company hereby acknowledges that the Service Provider must take into consideration its own labor constraints and existing commitments of its own business and to other parties in determining the service date of such Services. In any event, the Services requested by the Company shall not be more than a total of 100 man hours per calendar quarter unless the Service Provider expressly agrees otherwise. 4. Term ---- This Agreement shall be effective from the date of execution of this Agreement and shall remain in effect for thirty-six (36) months. 5. Representations and Warranties ------------------------------ 5.1 Each Party hereby represents and warrants to the other Party as follows: (a) It is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; -3- (b) It has the corporate power and authority to own its assets, carry on its business and execute and deliver this Agreement and to perform its obligations hereunder; (c) It has taken all appropriate and necessary action to authorize the execution, delivery and performance of this Agreement; (d) All consents, approvals, licenses and authorizations of, and all filings and registrations with, any governmental authority necessary for the due execution, delivery, performance and enforceability of this Agreement, have been obtained and are in full force and effect; and (e) This Agreement constitutes a legal, valid and binding obligation, enforceable in accordance with its terms. The execution, delivery and performance of this Agreement will not violate any provision of any applicable laws or regulations. 6. Independent Contractor ---------------------- This Agreement does not constitute or create (and the Parties do not intend to create hereby) a joint venture, pooling arrangement, partnership, or formal business organization of any kind between and among any of the Parties, and the rights and obligations of the Parties shall be only those expressly set forth herein. The Service Provider will perform the Services as an independent contractor and shall not be considered, for any purpose, to be an agent of the Company or its affiliated companies. Each Party shall be responsible for providing its own personnel and workers' compensation, medical coverage or similar benefits, any life, disability or other insurance protection. Each Party shall be solely responsible for the payment of social security benefits, unemployment insurance, pension benefits, withholding any required amounts for income and other employment-related taxes and benefits of its own employees, and shall make its own arrangements for injury, illness or other insurance coverage to protect itself, its affiliated companies, its subcontractors and personnel from any costs, expenses, damages, loss and/or liability arising out of performance of the Services, or any transportation associated therewith. The Service Provider has no power or authority to act for, represent, or bind the Company or its affiliated companies in any manner. 7. Confidentiality --------------- 7.1 (a) The Parties recognize that in the course of performance of the Agreement, either of them may disclose to the other information about the disclosing Party's business or activities which such Party considers proprietary and confidential including, without limitation, trade secrets, marketing and business plans, customer lists, and information concerning the operations of the Parties (all of such proprietary and confidential information is hereinafter referred to as the "Confidential Information"). The -4- Party who receives any Confidential Information (the "Receiving Party") agrees to maintain a confidential status for such Confidential Information, not to use any such Confidential Information for any purpose other than the purpose for which it was originally disclosed to the Receiving Party, and not to disclose any of such Confidential Information to any third party, unless such information: (i) is or has become available to the public from a source other than the Receiving Party; (ii) was already known to the Receiving Party from sources other than the other Party at the time it was disclosed to the Receiving Party and was not obtained by the Receiving Party from such other party in violation of a confidentiality or similar agreement with such other party; (iii) is disclosed to the Receiving Party by a third party who is not under any legal obligation prohibiting such disclosure; (iv) is required to be disclosed by law; (v) is developed independently by the Receiving Party; or (vi) is disclosed to the Receiving Party by a third party pursuant to an obligation of such third party or the exercise of a right by the Receiving Party in circumstances where no obligation of confidentiality applies to the Receiving Party with respect to the information so disclosed. (b) The Parties acknowledge that they may be required to disclose Confidential Information to governmental agencies or authorities by law or in connection with the obtaining of approvals for the Company, and each shall endeavor to limit disclosure to that purpose. If either Party is required to disclose Confidential Information pursuant to this paragraph, such Party will immediately give the other Party written notice of any such disclosure, which notice shall specify the substance of the disclosure. The Party making such a disclosure shall take all reasonable steps to prevent further disclosure of such Confidential Information. 7.2 Survival of Confidentiality: The provisions of this Section 7 shall survive the termination of this Agreement for any reason whatsoever. Upon such termination, the Parties shall return any Confidential Information which may have been transmitted by the other Party, as well as any copy or other reproduction, including, without limitation, electronic data reproductions or representations. -5- 8. Dispute Resolution ------------------ 8.1 In the event of any controversy or claim between the Parties arising out of or in connection with this Agreement or the breach hereof, the Parties shall, in the first instance, make a good faith effort to settle such dispute amicably. 8.2 If such controversy or claim is not settled within thirty (30) days following written notice by one Party to the other Party of the existence thereof, such controversy or claim shall be settled by arbitration in New York, NY, in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award may be entered in any court having jurisdiction thereof. 9. Notices ------- All notices and other communications required or permitted hereunder shall be given in writing by hand delivery, by facsimile, or by registered or certified mail, return receipt requested, postage prepaid, addressed to the Party to receive the same at its respective address set forth below, or at such other address as may from time to time be designated by either Party to the other Party hereunder in accordance with this Section 9: To the Service Provider: Genpharm Inc. 85 Advance Road Etobicoke, Ontario, M8Z 2S9 Attn: [Chief Financial Officer] Facsimile: (416) 236-2940 With a copy to: Coudert Brothers 1114 Avenue of the America New York, New York 10036-7703 Attn: Edwin S. Matthews Jr., Esq. Facsimile: 212-626-4120 -6- To the Company: Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, New York 10977 Attn: Kenneth I. Sawyer Facsimile: 914-425-5097 With a copy to: Hertzog, Calamari & Gleason 100 Park Avenue New York, New York 10017 Attn: Stephen Ollendorff, Esq. & Stephen R. Connoni, Esq. Facsimile: 212-213-1199 All notices shall be effective when received. A notice is considered received if a written confirmation of receipt appears thereon or there exists a written fax confirmation. Either Party may by notice to the other Party designate a new address for notices, such new address to be effective ten (10) days after receipt of designation. 10. Indemnity --------- 10.1 Each Party hereby agrees to indemnify and hold harmless the other Party and its respective shareholders, directors, officers and employees from and against any and all costs, losses, claims, actions, demands, damages and liabilities (including attorneys' fees and disbursements) incurred by such other party arising out of or in respect of (i) any act, failure to act, or any assumption of any obligation or responsibility by the indemnifying Party, or by any of its directors, officers or employees, which is in contravention or violation of or in conflict with any of the terms or provisions of this Agreement, or (ii) any material breach of any of the representations or warranties made by the indemnifying Party under this Agreement; provided, however, that an indemnified Party shall not be entitled to indemnification with respect to any costs, losses, claims, actions, demands, damages and liabilities which was caused by its own gross negligence, willful misconduct or reckless disregard of its duties hereunder. 10.2 THE SERVICE PROVIDER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE AGREEMENT OR THE PERFORMANCE OF THE SERVICES PROVIDED HEREUNDER OR THE WORK FURNISHED HEREUNDER, WHETHER ARISING AT LAW OR IN EQUITY, EXCEPT AS SET FORTH HEREIN. 10.3 IN NO EVENT, OTHER THAN BREACH OF THE EXPRESS PROVISIONS OF THIS AGREEMENT, SHALL EITHER PARTY OR A PARTY'S AFFILIATES AND ITS OR THEIR -7- SUBCONTRACTORS AND ITS OR THEIR OFFICERS, EMPLOYEES AND AGENTS, BE LIABLE, IN CONTRACT, IN TORT, OR OTHERWISE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY NATURE ARISING AT ANY TIME UNDER THIS AGREEMENT, INCLUDING SPECIFICALLY, BUT WITHOUT LIMITATION, LOSS OF PROFITS OR REVENUE, LOSS OF FULL OR PARTIAL USE OF ANY EQUIPMENT, DELAYS, COST OF REPLACEMENTS, COST OF CAPITAL, LOSS OF GOODWILL, CLAIMS OF CUSTOMERS, OR OTHER SUCH DAMAGES. 11. Miscellaneous ------------- 11.1 Entire Agreement. This Agreement, together with the Annex hereto, constitute the entire agreement of the Parties hereto with respect to the performance of Services by the Service Provider for the Company and supersedes and terminates all prior arrangements and agreements, if any, between the Service Provider and the Company or any of its affiliates with respect to the subject matter hereof. 11.2 No Waiver. No failure by either Party hereto to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder by either Party preclude any other or future exercise of that right or any other right hereunder by that Party. 11.3 Severability. In case any one or more of the provisions of this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 11.4 Assignment. Neither Party may assign or transfer, in whole or in part, its rights or interests in this Agreement. 11.5 Amendment. This Agreement may not be amended, terminated or superseded except by (i) an agreement in writing between the Company and the Service Provider and (ii) the prior written approval of a majority of the Company Designees (as such term is defined in the Stock Purchase Agreement, dated March 25, 1998, between the Company and Lipha Americas, Inc.). 11.6 Survival: Any provision of this Agreement which can reasonably be construed as surviving the expiration or termination of the Agreement, including but not necessarily limited to the indemnification and confidentiality provisions, shall so survive. 11.7 Governing Law: This Agreement, including the Annex, shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of law provisions thereof. -8- 11.8 Agreement to Execute Documents: The Parties agree in good faith to execute any and all documents required for the performance of this Agreement. 11.9 Counterparts: This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. IN WITNESS WHEREOF, this Agreement has been executed by the Parties, effective as of the date above indicated. PHARMACEUTICAL RESOURCES INC. GENPHARM INC. /s/Kenneth I. Sawyer /s/J.N. Tabatznik - ------------------------------ ----------------------------- By: Kenneth I. Sawyer By: J.N. Tabatznik Name: Name: Title: Chairman & CEO Title: Chief Executive Officer -9- ANNEX See Exhibit 10.6 -10- EX-10 11 EXHIBIT 10-6 GENPHARM OPTION Exhibit 10.6 PHARMACEUTICAL RESOURCES, INC. Stock Option Agreement PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation (the "Company"), hereby grants Genpharm Inc., a corporation organized and existing under the laws of the Province of Ontario, Canada (the "Optionee"), a non-statutory stock option (the "Option") to purchase from the Company up to 351,040 shares of common stock, par value $.01 per share, of the Company ("Option Shares") at a price and on the terms set forth in this Option Agreement. The Option is granted by the Company to the Optionee in consideration for Services (as such term is defined in the Services Agreement) to be provided by the Optionee to the Company pursuant to the Services Agreement, dated June 30, 1998, between the Company and the Optionee (the "Services Agreement"). SECTION 1. Term of Option. The Option is granted as of the date hereof (the "Grant Date") and shall be exercisable at any time beginning three years and ten days after the date hereof; provided that, to the extent not exercised, this Option shall terminate on April 30, 2003. SECTION 2. Vesting. The Option shall vest on the following schedule: Cumulative vested Measured from Grant Date portion of Option Shares - ------------------------ ------------------------ First anniversary one-third Second anniversary two-thirds Third anniversary entire amount SECTION 3. Exercise of Option. Subject to the provisions hereof, this Option may be exercised in whole or in part at any time, or from time to time, to the extent vested, during its term, as set forth in Section 1 herein, by presentation to the Company at its principal office of the Option Exercise Form attached hereto, duly executed and accompanied by payment (either in cash or by United States certified or official bank check payable to the order of the Company) of the Exercise Price for the number of Option Shares specified in such Form. Upon receipt of the Option Exercise Form and such payment, the Company shall, within five (5) business days, cause to be delivered to the Optionee one or more certificates representing the aggregate number of fully-paid and nonassessable Option Shares issuable upon exercise as specified in the Form. SECTION 4. Exercise Price. The exercise price ("Exercise Price") shall be US $2.00 per share. SECTION 5. Reservation of Shares. The Company will reserve for issuance and delivery upon exercise of this Option all authorized but unissued Common Shares or other shares of capital stock of the Company (and other securities and property) from time to time receivable upon exercise of this Option. SECTION 6. Restrictions on Transfer, Exercise and Registration. 6.1 Transferability. This Option may not be sold, transferred, pledged, assigned or otherwise disposed of (collectively, "Transferred") by the Optionee. 6.2 Compliance with Securities Legislation. No Option Shares may be transferred except in full compliance with all applicable provisions of the Securities Act of 1933 and of applicable state securities laws. 6.3 Legend. Each certificate for the Option Shares shall be endorsed with the following legend: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF EFFECTIVE REGISTRATION STATEMENTS UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT THE TRANSFER IS EXEMPT FROM REGISTRATION UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS." 6.4 Registration. The Option Shares shall have the benefit of the Registration Rights Agreement, dated March 25, 1998, between the Company, Lipha Americas, Inc., Merck KGaA and the Optionee. 6.5 Restrictions on Exercise. The Option may not be exercised if the issuance of the Option Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As 2 a condition to the exercise of the Option, the Company may require the Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. SECTION 7. Rights of the Optionee. The Optionee shall not be entitled to any rights of a shareholder of the Company with respect to the Option Shares solely as a result of the grant of the Option. Such rights shall exist only after issuance of a stock certificate in accordance with Section 3 above following the Optionee's exercise of the Option (or a portion thereof) hereunder. The rights of the Optionee are limited to those expressly provided in this Option. SECTION 8. Termination of Services Agreement (a) If the Services Agreement terminates other than as a result of the Optionee's Breach and the Optionee thereby ceases to provide Services to the Company, this Option may be exercised in full during the remaining balance of the term of the Option (but not in any event before three years and ten days have elapsed from the date hereof or beyond the expiration of the term of this Option), notwithstanding anything to the contrary in this Option Agreement. (b) If the Services Agreement terminates as a result of the Optionee's Breach and the Optionee thereby ceases to provide Services to the Company, the Optionee may exercise the Option, to the extent vested as of the date of such termination, during the remaining balance of the term of the Option (but not in any event before three years and ten days have elapsed from the date hereof or beyond the expiration of the term of the Option). (c) For purposes of this section, "Breach" means willful refusal of the Optionee to provide Services to the Company in accordance with the Services Agreement. SECTION 9. Anti-Dilution Provisions. 9.1. Adjustments for Stock Dividends; Combinations, Etc. In case the Company shall do any of the following (each, an "Event"): (a) declare a dividend or other distribution on its common shares payable in common shares of the Company; (b) effect a subdivision of its outstanding common shares into a greater number of common shares (by reclassification, stock split or otherwise by payment of a dividend in common shares); 3 (c) effect a combination of its outstanding common shares into a lesser number of common shares (by reclassification, reverse split or otherwise); (d) issue by reclassification, exchange or substitution of its common shares any shares of capital stock of the Company; or (e) effect any other transaction having a similar effect, then the Exercise Price in effect at the time of the record date for such Event shall be adjusted to a price determined by multiplying such Exercise Price by a fraction, the numerator of which shall be the number of shares of common stock outstanding immediately prior to such Event and the denominator of which shall be the number of Common Shares outstanding immediately after such Event. Each such adjustment of the Exercise Price shall be calculated to the nearest cent. No such adjustment shall be made in an amount less than One Cent ($.01), but any such amount shall be carried forward and shall be given effect in connection with the next subsequent adjustment. Such adjustment shall be made successively whenever any Event shall occur. 9.2 Adjustment in the Number of Option Shares. Whenever the Exercise Price shall be adjusted pursuant to Section 9.1 hereof, the number of Option Shares which the Optionee may purchase upon exercise of the Service Option shall be adjusted, to the nearest full share, by multiplying such number of Option Shares immediately prior to such adjustment by a fraction, the numerator of which shall be the Exercise Price immediately prior to such adjustment and the denominator of which shall be the Exercise Price immediately thereafter. 9.3 Adjustment for Consolidation or Merger. In case of any consolidation or merger to which the Company shall be a party, other than a consolidation or merger in which the Company shall be the surviving or continuing corporation, or in case of any sale or conveyance to another entity of all or substantially all of the property of the Company, or in the case of any statutory exchange of securities with another entity (including any exchange effected in connection with a merger of any other corporation with the Company), the Optionee shall have the right thereafter to receive from the Company upon exercise of the Option the kind and amount of securities, cash or other property which it would have owned or have been entitled to receive immediately after 4 such consolidation, merger, statutory exchange, sale or conveyance had this Option been exercised immediately prior to the effective date of such transaction and, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 9 with respect to the rights and interests thereafter of the Optionee to the end that the provisions set forth in this Section 9 shall thereafter correspondingly be made applicable, as nearly as then may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Option. Notice of any such consolidation, merger, statutory exchange, sale or conveyance, and of the provisions proposed to be adjusted, shall, to the extent reasonably practicable, be mailed to the Optionee not less than thirty (30) days prior to such event. SECTION 10. Fully Paid Shares; Taxes. The Company agrees that the common shares of the Company represented by each and every certificate for the Option Shares delivered on the exercise of this Option in accordance with the terms hereof shall, at the time of such delivery, be validly issued, fully-paid and nonassessable, free and clear of all liens, pledges, options, claims or other encumbrances. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes (but specifically not including any income taxes) which may be payable in respect of the issue of any Option Shares or certificates therefor. SECTION 11. Notices. All notices hereunder shall be in writing and shall be given: if to the Company, at One Ram Ridge Road, Spring Valley, New York 10977 (attention: Kenneth I. Sawyer), fax number: (914) 425-5097, with a copy to Hertzog, Calamari & Gleason, at 100 Park Avenue, New York, New York 10017 (attention: Stephen Ollendorff, Esq., and Stephen R. Connoni, Esq.), fax number: (212) 213-1199, or if to the Optionee, at Genpharm Inc., 85 Advance Road, Etobicoke, Ontario M8Z 2S9, Canada (attention: [Chief Financial Officer]), fax number: (416) 236-2940, with a copy to Coudert Brothers, at 1114 Avenue of the Americas, New York, New York 10036 (attention: Edwin S. Matthews, Jr.), fax number: (212) 626-4120. Any notice shall be deemed to have been given if personally delivered or sent by express commercial courier or delivery service or by telegram, telefax, telex or facsimile transmission. Any notice given in any other manner shall be deemed given when actually received. 5 SECTION 12. Amendments; Waiver. This Option may not be amended, and no provision hereof may be waived, without the prior written consent of at least a majority of the Company Designees (as defined in the Stock Purchase Agreement, dated March 25, 1998, between the Company and Lipha Americas, Inc.) on behalf of the Company and except pursuant to a written instrument executed by the Company and the Optionee. SECTION 13. Headings. The headings of the Sections of this Option have been inserted for convenience of reference only and shall not be deemed to be a part of this Option. SECTION 14. Governing Law. This Option is issued under, and shall be governed by and construed in accordance with, the laws of the State of New York applicable to contracts made and to be performed wholly within such State. IN WITNESS WHEREOF, the Company has caused this Option to be signed on its behalf, in its corporate name, by its duly authorized officer, on June 30, 1998. PHARMACEUTICAL RESOURCES, INC. By: /s/Kenneth I. Sawyer -------------------------------- Kenneth I. Sawyer President Attest: /s/Dennis J. O'Connor - ------------------------------ Dennis J. O'Connor Secretary GENPHARM, INC. By:/s/J.N. Tabatznik --------------------------------- Name: J.N. Tabatznik Title: Chief Executive Officer PHARMACEUTICAL RESOURCES, INC. STOCK OPTION EXERCISE FORM For services performed, the undersigned hereby irrevocably elects to exercise the attached Option to purchase ______ shares of common stock of Pharmaceutical Resources, Inc. at the Exercise Price of $2.00 per share, in accordance with the Option Agreement. Attached hereto is cash or a U.S. certified or official bank check payable to the order of the Company in the amount of the total Exercise Price set forth above. ----------------------------------- Name of Optionee ----------------------------------- Signature of Optionee or Authorized Representative ----------------------------------- Name and Title of Authorized Representative ----------------------------------- Address of Optionee ----------------------------------- Date EX-10 12 EXHIBIT 10.7 REGISTRATION RIGHTS AGREEMENT Exhibit 10.7 REGISTRATION RIGHTS AGREEMENT, dated June 30, 1998, between PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation (the "Company"), Lipha Americas, Inc., a Delaware corporation ("Lipha") Merck KGaA, a Kommanditgesellschaft auf Aktien organized under the laws of Germany ("Merck"), and Genpharm, Inc., a corporation organized and existing under the laws of the Province of Ontario, Canada ("Genpharm", together with Merck and Lipha, the "Holders" and each a "Holder"). WHEREAS, Lipha concurrently herewith is purchasing 10,400,000 shares of common stock, par value $.01 per share, of the Company ("Common Stock") pursuant to a Stock Purchase Agreement, dated March 25, 1998, between the Company and the Holder (the "Stock Purchase Agreement"); WHEREAS, Lipha concurrently herewith is purchasing 2,313,000 shares of Common Stock owned by Clal Pharmaceutical Industries Ltd., pursuant to the Clal Stock Purchase Agreement (as such term is defined in the Stock Purchase Agreement); WHEREAS, the Holders may purchase an aggregate of up to an additional 1,171,040 shares of Common Stock upon exercise of the separate Options (as such term is defined in the Stock Purchase Agreement); and WHEREAS, the Stock Purchase Agreement provides that the execution and delivery of this Agreement is a condition precedent to the respective obligations of the Company and Lipha to consummate the transactions contemplated by such Stock Purchase Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements set forth herein, the parties hereto agree as follows: SECTION 1. DEMAND REGISTRATIONS. 1.1 The Company agrees that, commencing on the date nine (9) months from the date hereof, upon receiving a written request (the "Request") from any Holder to register under the Securities Act of 1933, as amended (the "Securities Act"), and under the securities laws of a reasonable number of states specified by the Holder in the Request (the "Specified States"), a specified number of shares of Subject Stock (as hereinafter defined), which number may be all or a material part of the Subject Stock then owned by the Holders, the Company shall, as soon thereafter as practicable, file with the Securities and Exchange Commission (the "Commission") on the appropriate form a registration statement, together with any requisite registration statements or applications under the securities laws of the Specified States, covering the number of shares of Subject Stock specified in the Request. The Company, under no circumstances, shall be required to make more than three effective filings of a registration statement under this Section 1; provided, however, that beginning at such time, if ever, as any Holder shall exercise the Options, in whole or in material part, the Company shall be obligated to effect two additional registrations pursuant to this Section 1 following any Holder's delivery of a Request; provided, further, that the Holders may not deliver more than one Request in total during any 12-month period. For the purpose of the preceding sentence, Requests delivered at the same time by the Holders together shall be counted as one Request. The Company may, in its sole discretion, include additional issued or unissued shares of Common Stock in such registration statement; provided, that the inclusion of any such shares shall not reduce the number of shares of Subject Stock contained in the Request which are covered by such registration statement. 1.2 The term "Subject Stock", as used herein, shall mean the number of shares of Common Stock owned by the Holders which shall have been purchased by any Holder (a) under the Stock Purchase Agreement at the Closing (as such term is defined therein), (b) under the Clal Stock Purchase Agreement or (c) upon any exercise of the Options. "Registration statement" means all registration statements, including all prospectuses contained therein and all amendments or supplements thereto, or any related applications filed under the Securities Act or under the securities laws of the applicable states. 1.3 The Company shall use its best efforts to cause a registration statement including the shares of Subject Stock to become effective under the Securities Act and, if necessary, under the securities laws of the Specified States. The Company shall further use its best efforts to maintain the effectiveness of such registration statement for such period as may be reasonably necessary to complete the distribution of the Subject Stock covered thereby, subject to the limitations set forth in Sections 3 and 4 hereof. 1.4 If the method of disposition requested by a Holder pursuant to this Section 1 shall be an underwritten public offering, such Holder shall have the right to designate the underwriter of such offering. Any underwriter selected by such Holder shall be subject to the approval of the Company, which approval shall not be unreasonably withheld (the "Underwriter"). The Company will join the Holders in entering into an underwriting agreement and related agreements with the Underwriter, which shall be in form and substance reasonably satisfactory to the Company and its counsel and shall contain terms and provisions customarily contained in the underwriting agreements utilized by such Underwriter in connection with comparable public offerings, including an indemnification of the Underwriter by the Company and the Holders. 1.5 All expenses, disbursements, fees (filing fees and others), legal and accounting expenses, and other costs of every kind and nature incurred or borne by the Company and the Holders in connection with a registration requested under this Section 1 (both under the Securities Act and under the securities laws of the Specified States) shall be paid and/or reimbursed by the Holders; provided, however, that if the Company shall include any shares of Common Stock in any 2 such registration, then the Company shall reimburse the Holders, within 10 days following the Holders' written request, for all such expenses, disbursements, fees and other costs using the ratio of net cash received by the Company and any other sellers of shares of Common Stock under such registration statement to the total amount of net cash received by the Holders unless the Holders shall have otherwise agreed to bear such expenses, disbursements, fees and other costs on behalf of any other stockholder of the Holders for whom shares of Common Stock are being included in such registration. SECTION 2. PIGGYBACK REGISTRATIONS. 2.1 The Company agrees that, on each occasion that it shall propose to file a registration statement covering shares of Common Stock, whether on its own behalf or at the request of any other stockholder of the Company (other than a registration statement on Form S-4 or Form S-8 under the Securities Act), with the Commission or under the laws of any state jurisdiction, the Company shall give written notice ("Piggyback Notice") of such proposed filing to the Holders at least 40 days prior to such filing. Upon the written request of any Holder, given within 10 days after the date of the Piggyback Notice, the Company shall use its best efforts to include in any such filing such number of shares of Subject Stock that shall be requested by the Holders, subject to any limitations as to the number of shares of Subject Stock that may be imposed by the Company's underwriter (if any); provided, however, that if such registration statement is being filed at the request of another stockholder of the Company, then the maximum number of shares of Subject Stock included in such registration shall be equal to the lesser of (a) the aggregate number of shares of the Common Stock to be included in such registration multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock owned by the Holders on the date of the Piggyback Notice and the denominator of which shall be the aggregate number of shares of Common Stock that are issued and outstanding on such date, or (b) the number of shares of the Common Stock that the Holders shall have requested to have included in such registration. 2.2 The Company agrees that it shall use its best efforts to cause the registration statement including the shares of Subject Stock to become effective under the Securities Act and under the securities laws of Specified States. The Company shall further use its best efforts to maintain the effectiveness of such registration statement for such period as may be reasonably necessary to complete the distribution of the Subject Stock covered thereby, subject to the limitations set forth in Section 4 hereof. 2.3 The Holders shall pay all fees and expenses of its counsel and accountants who shall not also be representing the Company, and shall reimburse the Company for certain additional expenses incurred by the Company as set forth in this Section 2.3. The Company shall pay all expenses, disbursements, fees (filing and others), legal and accounting and other costs of every kind and nature incurred or borne by the Company in connection with such a registration requested under this Section 2 (both under the Securities Act and under the laws 3 of the Specified States in which shares of the Subject Stock are being sold), except that the Holders shall promptly reimburse the Company for all such expenses, disbursements, fees and other costs using the ratio of net cash received by the Holders to the total amount of net cash received by the Company and any other sellers of shares of Common Stock under such registration statement unless the Company shall have otherwise agreed to bear such expenses, disbursements, fees and other costs on behalf of any other stockholder of the Company for whom shares of Common Stock are being included in such registration. SECTION 3. HOLDBACK AGREEMENT; LIMITATION ON RESALES. If the Company at any time shall register shares of Common Stock under the Securities Act for sale to the public, neither Holder shall sell publicly, make any short sale of, or grant any option for the purchase of, or otherwise dispose publicly of, any of the shares of Subject Stock (other than Subject Stock included in a registration statement pursuant to Sections 1 or 2 hereof), without the prior written consent of the Company, for a period designated by the Company in writing to the Holders, which period shall begin not more than ten (10) days prior to the effectiveness of the registration statement pursuant to which such public offering shall be made and shall terminate at such time as similar restrictions imposed by law and/or Company policy on directors and executive officers of the Company generally shall terminate; provided, however, that, in no event, shall such restrictions last more than 180 days after the effective date of such registration statement. SECTION 4. PREPARATION AND FILING. Whenever the Company shall be under an obligation pursuant to this Agreement to use its best efforts to effect the registration of the shares of Subject Stock, the Company and the Holders agree as follows: (a) The Company shall, in no event, be required to keep such registration effective for longer than nine months after the effective date thereof or during any period in which the trading of any shares of Common Stock shall be suspended for any reason by the Commission. (b) The Company shall use its best efforts to cause all shares of Subject Stock registered pursuant to Sections 1 or 2 hereof to be listed for trading on each securities exchange or other securities market on which the Common Stock shall then be listed. (c) The Company may require each Holder to promptly furnish in writing to the Company such information regarding such Holder, the distribution of the shares of Subject Stock as the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration. 4 (d) The Company shall supply the Holders with such number of copies of registration statements, and amendments and supplements thereto, and any prospectus relating thereto as may be reasonably requested by the Holders, and will supply the Holders with copies of any preliminary and final prospectus filed in connection therewith that may be reasonably required and, if necessary, with copies of a prospectus meeting the requirements of Section 10(a)(3) of the Securities Act; provided, however, that no such prospectus need be supplied more than nine months after the effective date of any such registration statement. (e) The Company shall not be required in connection with any qualification of the shares of Subject Stock to be sold within any state jurisdiction to qualify to do business as a foreign corporation in any state, to execute a general consent to service of process or to subject itself to taxation, registration as a broker-dealer or to any unreasonable regulatory requirements or unreasonable expenses, but shall execute and deliver consents to service of process in the Specified States as to matters relating to the sale of the shares of Subject Stock in such States. (f) The Company shall promptly notify the Holders of any stop order issued or threatened by the Commission or any state regulatory authority with respect to any registration statement covering the shares of Subject Stock and shall take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (g) Each of the Company and each Holder shall promptly notify the other party of the occurrence of any event which shall require the filing of an amendment or supplement to any registration statement and prospectus covering the shares of Subject Stock. Upon receipt of such notice, each party shall refrain from the sale of any shares of Subject Stock pursuant to such registration statement and prospectus until the receipt by such party of copies of the supplemented or amended registration statement and prospectus. SECTION 5. INFORMATION. Each Holder agrees that, promptly upon the request of the Company, it shall furnish to the Company such information regarding itself and its Affiliates, as such term is defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the "Exchange Act"), and its holdings of shares of the Subject Stock as the Company shall specify in such request and as shall be required in connection with any registration statement, proxy or other reporting requirements of the Company. Each Holder further agrees to cooperate with the Company in any way reasonably necessary to accomplish any such registration hereunder and, when participating in any such registration, to comply with all of the requirements of the Securities Act and the securities laws of the states in which the shares of Subject Stock are being sold, including delivery by the Holder to any purchaser of the shares of Subject Stock of a copy of any required prospectus. Notwithstanding anything herein to the 5 contrary, each Holder further agrees that it shall indemnify the Company and hold it harmless from and against, and pay or reimburse it for, any liability, loss, cost or damage, including attorneys' fees, incurred by the Company as a result of any failure on such Holder's part to carry out the foregoing agreement. SECTION 6. INDEMNIFICATION. 6.1 INDEMNITORS; INDEMNIFIED PERSONS. For purposes of this Section 6, each party which, pursuant to this Section 6, agrees to indemnify any other person or entity shall be referred to, as applicable, as the "Indemnitor" with respect to such person or entity, and each such person or entity who is indemnified shall be referred to as the "Indemnified Person" with respect to such Indemnitor. 6.2 COMPANY INDEMNITY. The Company hereby agrees to indemnify and hold harmless each Holder, and their respective directors, officers, employees, agents and controlling persons (within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act), from and against any and all claims, liabilities, losses, damages and expenses (including reasonable attorneys' fees and disbursements) asserted against or incurred by any such Indemnified Person which shall be caused by any untrue statement of a material fact contained in any registration statement or prospectus relating to the Subject Stock, including any amendment or supplement thereto, or shall be caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities and expenses shall be caused by any untrue statement or omission based upon information furnished in writing to the Company by such Holder or on such Holder's behalf for use therein. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6.2 shall not inure to the benefit of any Indemnified Person from whom a person or entity asserting a claim purchased shares if an untrue statement or omission of material fact in any prospectus shall have been corrected by the Company on a timely basis, such person or entity shall have failed to utilize such corrected prospectus and such corrected prospectus would have cured the defect giving rise to such claim. 6.3 HOLDER INDEMNITY. Each Holder hereby agrees to indemnify and hold harmless each of the Company, and its directors, officers, employees, agents and controlling persons (within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act), from and against any and all claims, liabilities, losses, damages and expenses (including reasonable attorneys' fees and disbursements) asserted against or incurred by any such Indemnified Person to the same extent as the foregoing indemnity from the Company to the Holders, but only with respect to information relating to such Holder furnished in writing by such Holder or on such Holder's behalf for use in any registration statement or prospectus relating to the Subject Stock or any amendment or supplement thereto. The total amount payable by such Holder pursuant to this Section 6.3 shall not exceed an amount equal to the number of shares proposed to be sold by such Holder in the registered offering that shall give rise to any such claim for indemnity multiplied by the selling price per share. 6 6.4 Defense. Promptly after receipt by an Indemnified Person of notice of any claim or demand or the commencement of any action or proceeding with respect to which indemnification may be sought hereunder, such Indemnified Person shall notify the Indemnitor of such claim or demand or the commencement of such action or proceeding, but failure so to notify the Indemnitor shall not relieve the Indemnitor from any liability which the Indemnitor may have hereunder or otherwise, unless the Indemnitor shall be actually prejudiced by such failure. If the Indemnitor shall so elect, the Indemnitor shall assume the defense of such claim, demand, action or proceeding, including the employment of counsel reasonably satisfactory to such Indemnified Person, and shall pay the fees and disbursements of such counsel. In the event, however, that such Indemnified Person shall reasonably determine that having common counsel would present such counsel with a conflict of interest or alternative defenses shall be available to an Indemnified Person or if the Indemnitor shall fail to assume the defense of the claim, demand, action or proceeding in a timely manner, then such Indemnified Person may employ separate counsel to represent or defend such Person against any such claim, demand, action or proceeding and the Indemnitor shall pay the reasonable fees and disbursements of such counsel; provided, however, that the Indemnitor shall not be required to pay the fees and disbursements of more than one separate counsel for all Indemnified Persons in any jurisdiction in any single or related action or proceeding. For any claim, demand, action or proceeding the defense of which the Indemnitor shall assume, the Indemnified Person shall have the right to participate therein and to retain its own counsel at such Indemnified Person's own expense (except as otherwise specifically provided in this Section 6.4), so long as such participation shall not interfere with the Indemnitor's control of such claim, demand, action or proceeding. The Indemnitor shall not, without the prior written consent of the Indemnified Person, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder unless such settlement, compromise or consent shall include an unconditional release of such Indemnified Person from all liability arising out of such claim, demand, action or proceeding. 6.5 Contribution. If the indemnification in this Section 6 shall be held by a court of competent jurisdiction to be unavailable to an Indemnified Person with respect to any claim, liability, loss, damage or expense referred to herein, then the Indemnitor shall contribute to the amounts paid or payable by such Indemnified Person as a result of such claim, liability, loss, damage or expense in such proportion as is appropriate to reflect the relative benefits and also the relative fault of the Indemnitor, on the one hand, and the Indemnified Party, on the other, in connection with the transactions giving rise to such claim, liability, loss, damage or expense, as well as any other relevant equitable considerations. The relative benefits received by the Indemnitor, on the one hand, and the Indemnified Party, on the other, shall be deemed to be in 7 the same proportion as the total net proceeds from the sale of Common Stock under the registration statement or prospectus (before deducting expenses) received by the Indemnitor shall bear to the total net proceeds from such sale received by the Indemnified Person. The relative fault of the Indemnitor and of the Indemnified Person shall be determined by reference to, among other things, whether the untrue statement of a material fact or the omission to state a material fact shall relate to information supplied by the Indemnitor or by the Indemnified Person and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and each Holder agree that it would not be just and equitable if contribution were determined by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the foregoing, (a) the total amount payable by a Holder pursuant to this Section 6.5 shall not exceed an amount equal to the number of shares sold by such Holder in the registered offering that give rise to any such claim for contribution multiplied by the selling price per share and (b) no person or entity guilty of or liable for fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of fraudulent misrepresentation. 6.6 HOLDER-RELATED CLAIMS. If there shall be any claim for indemnification by or against any Holder or any of its related persons under this Section 6, all determinations by the Company relating thereto, including, without limitation, the choice and engagement of counsel, the prosecution of any action and the terms and conditions of any settlement or compromise, shall be made solely by the "Company Designees" (as defined in the Stock Purchase Agreement) by majority vote thereof. SECTION 7. TERMINATION. This Agreement shall terminate upon the sale or disposition of beneficial ownership by the Holders of all shares of the Subject Stock; provided, however, this Agreement shall continue in effect as to any indemnification and payment or reimbursement obligations herein. SECTION 8. MISCELLANEOUS. 8.1 ASSIGNMENT. All terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned or delegated by any party hereto without the prior written consent of the other party. 8.2 ENTIRE AGREEMENT. This Agreement and the other agreements referred to herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior arrangements or understandings with respect thereto. 8 8.3 NOTICES. All notices hereunder shall be in writing and shall be given: (a) if to the Company, at One Ram Ridge Road, Spring Valley, New York 10977 (attention: Kenneth I. Sawyer), fax number: (914) 425-5097, or such other address or fax number as the Company shall have designated in writing to the Holders in accordance with this Section 8.3, with a copy to Hertzog, Calamari & Gleason, 100 Park Avenue, New York, New York 10017 (attention: Stephen A. Ollendorff, Esq. and Stephen R. Connoni, Esq.), fax number: (212) 213-1199, (b) if to Merck, at Frankfurter Strasse 250, 64271 Darmstadt, Germany (attention: Dr. Rudi Neirinckx), fax number: 011 49 6151 72 3435 with a copy to Coudert Brothers, 1114 Avenue of the Americas, New York, New York 10036-7703 (attention: Edwin S. Matthews, Jr., Esq.), fax number: (212) 626-4120, (c) if to Genpharm, at 85 Advance Road, Etobicoke, Ontario M8Z 2S9, Canada (attention: Chief Financial Officer), fax number: (416) 236-2940, with a copy to Coudert Brothers, at 1114 Avenue of the Americas, New York, New York 10036 (attention: Edwin S. Matthews, Jr., Esq.), fax number: (212) 626-4120, or (d) if to Lipha, at [ ], with a copy to Coudert Brothers, at 1114 Avenue of the Americas, New York, New York 10036 (attention: Edwin S. Matthews, Jr., Esq.), fax number: (212) 626-4120 or such other address(es) or fax number(s) as a Holder shall have designated in writing to the Company in accordance with this Section 8.3. Any notice shall be deemed to have been given if personally delivered or sent by express commercial courier or delivery service or by telegram, telefax, telex or facsimile transmission. Any notice given in any other manner shall be deemed given when actually received. 8.4 AMENDMENTS; WAIVER. This Agreement may not be amended or terminated, and no provision hereof may be waived, without the prior written consent of at least a majority of the Company Designees (on behalf of the Company) and except pursuant to a written instrument executed by the Company and the Holders. Each Holder shall not cause, and shall use its best efforts not to permit, the Company to agree to any amendment, modification or waiver or take any action in respect of this Agreement, including, without limitation, in respect of any agreement or settlement relating to a dispute or claim for indemnification hereunder, without the prior written consent of at least a majority of the Company Designees, as such term is defined in the Stock Purchase Agreement (including any replacement(s) therefor as provided in Section 8.1 of the Stock Purchase Agreement). 8.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 8.6 HEADINGS. The headings of the Sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. 9 8.7 GOVERNING 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 performed wholly therein. 8.8 SEVERABILITY. If any term or provision hereof shall be invalid or unenforceable, (i) the remaining terms and provisions hereof shall be unimpaired, (ii) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction and (iii) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision as determined by a court to be valid and enforceable and to express, to the fullest extent legally permissible, the intention of the parties with respect to the invalid or unenforceable term or provision. 8.9 EXPENSES. Except as otherwise specifically provided in this Agreement, the parties shall bear their own respective expenses (including, but not limited to, all fees and expenses of counsel, financial advisers and independent accountants) incurred in connection with the preparation, negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby. To the extent that a Company Designee shall be required to make any determination or take any action hereunder (including, without limitation, with respect to indemnification under Section 6 hereof) in his/her capacity as a Company Designee, the Holders shall cause the Company to, and the Company shall, promptly reimburse and/or pay any reasonable expenses incurred by the Company Designee in acting in such capacity. The Company Designees are intended third-party beneficiaries of this provision. 10 IN WITNESS WHEREOF, each of the undersigned has caused this Registration Rights Agreement to be executed as of the date first written above. PHARMACEUTICAL RESOURCES, INC. By: /s/ Kenneth I. Sawyer -------------------------------- Name: Kenneth I. Sawyer Title: Chief Executive Officer & Chairman LIPHA AMERICAS, INC. By: /s/ Edwin S. Matthews -------------------------------- Name: Edwin S. Matthews Title: Asst. Secretary MERCK KGaA By: /s/ Bernhard Scheuble -------------------------------- Name: Bernhard Scheuble Title: Chief Executive Officer Pharma GENPHARM, INC. By: /s/ J.N. Tabatznik -------------------------------- Name: J.N. Tabatznik Title: Chairman 11 EX-10 13 EXHIBIT 10.8 LETTER AGREEMENT Exhibit 10.8 PHARMACEUTICAL RESOURCES, INC. One Ram Ridge Spring Valley, New York 10977 CONFIDENTIAL March 25, 1998 Clal Pharmaceutical Industries Ltd. Merck KGaA Clal House Frankfurter Strasse 250 5, Druyanov Street 64271 Darmstadt Germany Tel Aviv 63143 ISRAEL Gentlemen: This letter agreement sets forth our agreement regarding a possible transaction involving the purchase of shares of common stock, par value $.01 per share (the "Common Stock"), of Pharmaceutical Resources, Inc. (the "Company") owned by Clal Pharmaceutical Industries Ltd. ("Clal"). The Company is in confidential negotiations regarding a possible investment in the Company by Merck KGaA or one of its affiliates (collectively, "Merck"). No agreement between the Company and Merck has been reached. with respect to such transaction (the "Merck Transaction"). In connection with the possible investment in the Company by Merck, the Company, Merck and Clal agree as follows: 1. Concurrently with, and subject to, the closing (the "Closing") of the transactions contemplated by a definitive stock purchase agreement presently being discussed to be entered into between the Company and Merck regarding an investment by Merck in the Company (the "Purchase Agreement"): (a) Clal shall sell to Merck, and Merck shall purchase from Clal, 1,313,272 shares of Common Stock (the "Tranche A Shares"). The per share purchase price for the Tranche A Shares, which shall be payable at the Closing, shall be the greater of (i) $2.00 and (ii) the per share purchase price to be paid by Merck to the Company for the shares of Common Stock to be acquired by Merck at the Closing (such greater price being the "Merck Purchase Price"). (b) Clal shall sell to Merck, and Merck shall purchase from Clal, at the Closing, 500,000 additional shares of Common Stock (the "Tranche B Shares"). The per share purchase price for the Tranche B Shares, which shall be payable at the Closing, shall be the Merck Purchase Price. On the second anniversary of the Closing, Merck shall pay to Clal an amount in respect of each Tranche B Share equal to the excess, if any, of (i) the weighted average price of all trades in the shares of Common Stock on The New York Stock Exchange ("Fair Market Value") during the thirty (30) trading days immediately preceding the second anniversary of the date of the Closing over (ii) the Merck Purchase Price. (c) All payments to Clal pursuant to Paragraphs 1 and 2 hereof shall be by wire transfer of immediately available funds or by certified or official bank check. (d) Merck hereby acknowledges that (i) all shares of Common Stock purchased by Merck from Clal will be purchased for investment purposes only without a view to the resale or distribution thereof and may not be resold or transferred other than in compliance with all applicable securities laws and (ii) in connection with such purchase, Clal is, subject to Paragraph 2(a) hereof, making no representations or warranties of any nature whatsoever other than that Clal is conveying to Merck good and marketable title to such shares which shall be duly authorized, validly issued, fully paid and nonassessable, free and clear of any liens, claims or other encumbrances, and that such conveyance will not conflict with any agreement, law or obligation applicable to Clal. 2. (a) Subject to Paragraph 7 below, during the period commencing on the Closing and ending three years and five U.S. business days thereafter (the "Post-Closing Period"), Clal shall not, directly or indirectly, sell, assign, pledge, transfer, create or purchase any option or warrant on or with respect to, enter into any transaction shifting a substantial portion of the benefits and burdens of ownership of, or otherwise dispose of (collectively, "Transfer"), or enter into a contract or agreement (whether or not contingent) to Transfer, any of the remaining shares of Common Stock beneficially owned by Clal (the "Tranche C Shares"). Clal further represents and warrants that immediately following the Closing, Clal will beneficially own 500,000 shares of Common Stock, all of which shares are 2 subject to the put and call options described in Paragraphs 2(b)(i) and (ii) below. These 500,000 shares of Common Stock will represent Clal's then entire remaining equity interest in the Company, including the 186,000 shares of Common Stock delivered to Clal pursuant to the Third Amendment to the Stock Purchase Agreement, dated July 28, 1997, between the Company, Clal and PRI-Research, Inc., and Clal represents that it holds no unexercised options, warrants or other rights with respect to any Common Stock as of the date hereof. (b)(i) During the five U.S. business day period commencing on the last day of the Post-Closing Period, Clal shall have the right to cause Merck (or the Company, if Merck and the Company shall agree) to purchase, and, if Clal so elects, Merck and/or the Company shall purchase, the Tranche C Shares at a price of $2.50 per share. (ii) In the event that Clal shall not have exercised the right provided in Paragraph 2(b)(i) hereof, Clal, Merck and/or the Company shall have the right to exercise the option provided in this Paragraph 2(b)(ii), in each case by providing written notice of such exercise to each of the other parties hereto within five U.S. business days following the expiration of the five U.S. business day period referred to in Paragraph 2(b) (i). Upon the exercise of such option: (A) Clal shall seek to sell any or all of the Tranche C Shares on The New York Stock Exchange for a period of ninety trading days beginning on the third trading day following exercise of the option; provided, however, that Clal shall not effect any such sale without the prior consent of Merck and the Company, and Clal shall use its best efforts to effect each sale which Merck and the Company shall direct Clal to effect; and (B) within five U.S. business days following the expiration of the 90 trading day period referred to above, Merck and/or the Company shall purchase from Clal all of the Tranche C Shares not sold by Clal during such 90 trading day period (if any), and shall pay to Clal an amount equal to the amount, if any, by which (I) the product of 500,000 multiplied by the Fair Market Value during the 30 trading days immediately preceding the last day of the Post-Closing Period exceeds (II) the aggregate proceeds realized by Clal from sales of Tranche C Shares during the 90 trading day period referred to herein. 3 3. All shares of Common Stock sold by Clal pursuant to this agreement shall be duly authorized, validly issued, fully paid and nonassessable and shall be free and clear from all liens, pledges, claims and other agreements, including warrants, options and voting agreements. 4. Except as otherwise contemplated in Paragraph 1 hereof, and in addition to the restrictions set forth in Paragraph 2(a) hereof, from the date hereof through the occurrence of the first to occur of (i) the termination of this agreement in accordance with Paragraph 7 hereof and (ii) the end of the Post-Closing Period, neither Clal nor any person under Clal's control, shall (w) purchase or otherwise acquire any additional shares of Common Stock, options, warrants or other securities of the Company, (x) Transfer any shares of Common Stock beneficially owned, directly or indirectly, by Clal, (y) enter into any agreement or arrangement with any person or entity (other than the Company) concerning the voting, holding or transferring of any shares of the Company, or initiate, propose or participate in any transaction involving the Company or (z) recommend any person to engage in the activities in (w), (x) or (y) above. 5. Effective upon the Closing: (i) the Stock Purchase Agreement, between the Company and Clal, dated March 25, 1995, as amended (the "Clal Agreement"), shall be terminated in its entirety with no further obligations, liabilities or rights on the part of the parties thereunder, and (ii) the Registration Rights Agreement, between the Company and Clal, dated May 1, 1995, shall be amended hereby and shall provide that Clal shall not be entitled to exercise any of its rights thereunder during the Post-Closing Period. Clal hereby agrees to, notwithstanding any other agreement that it may have with the Company or others, vote all shares of Common Stock which it owns (beneficially and/or of record) in favor of the Merck Transaction (and all related matters) if such Transaction is approved by the Company's Board of Directors. In the event of any conflict between the terms of this agreement and the Clal Agreement, the terms of this agreement shall govern. 6. The execution and delivery of this agreement and the consummation of the transactions contemplated hereby shall in no way affect or modify the obligations of (i) P.R.I. Research, Inc. ("PRI Research") under the Non-Recourse Promissory Note, dated July 28, 1997, (ii) the Company, PRI Research, Clal, C.T.P. Research and Development (1995) Ltd., Clal Pharmaceutical Resources (1995) Ltd. or Clal Pharmaceutical Resources L.P. under the letter agreement, dated July 28, 1997, with respect to the purchase of interests by PRI Research in the joint venture of the Company and Clal and any and all documents executed in connection therewith, or (iii) the transactions contemplated thereby. 4 7. Each of Clal, the Company and Merck shall have the right to terminate this agreement without further obligation to any of the parties hereto (except for Paragraphs 8, 9, 10 and 11 below) by written notice to the other parties hereto (i) after March 27, 1998, unless a definitive Purchase Agreement with respect to the Merck Transaction has theretofore been executed by each party thereto, (ii) after July 15, 1998, unless the Closing has theretofore occurred and (iii) after April 3, 1998, unless the board of directors of Merck has theretofore approved the Purchase Agreement. 8. The Company, Merck and Clal agree to keep strictly confidential the contents of this agreement, the fact that discussions between the Company and Merck have occurred, the terms of such discussions and all of the other matters discussed herein, until after such time as the Company has disclosed such matters under applicable securities laws or the rules of the stock exchanges on which the Common Stock is traded; provided, however, that, notwithstanding the foregoing, Clal may disclose such matters at such time, and to such extent, as required under applicable securities laws. 9. All notices hereunder shall be in writing and shall be given: (a) if to the Company, One Ram Ridge Road Spring Valley, New York 10977 Attention: Kenneth I. Sawyer, President Fax number: (914) 425-7922 with a copy to, Hertzog, Calamari & Gleason 100 Park Avenue New York, New York 10017 Attention: Stephen Ollendorff, Esq. and Stephen R. Connoni, Esq. Fax number: (212) 213-1199 (b) if to Merck, Frankfurter Strasse 250 64271 Darmstadt Germany Attention: Dr. Rudi Neirinckx Fax number: (011 49) 6151 72 3435 5 with a copy to, Coudert Brothers 1114 Avenue of the Americas New York, New York 10036-7703 Attention: Edwin S. Matthews, Jr. Fax number: (212) 626-4120 (c) if to Clal, Clal Pharmaceutical Industries Ltd. Clal House 5 Druyanov Street Tel Aviv 63143 Israel Attention: Ken Lalo, General Counsel Fax number: 011 972 3629 3633 With a copy to, Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: David P. Stone, Esq. Fax number: (212) 310 - 8007 Any notice shall be deemed to have been given, if personally delivered or sent by express commercial courier or delivery service or by telegram, telefax, telefax or facsimile transmission. Any notice given in any other manner shall be deemed given when actually received. 10. This agreement shall be governed in accordance with the laws of the State of New York, without regard to its conflicts of laws principles. For the purpose of this letter agreement, "U.S. Business Day" shall mean any day except Saturday, Sunday and any other day on which commercial banks in New York City are authorized by law to close. 6 11. This agreement shall not be amended or (subject to Paragraph 7 above) terminated, and no provision hereof may be waived, except pursuant to a written instrument executed by each of the parties hereto. Sincerely, PHARMACEUTICAL RESOURCES, INC. By: /s/ Kenneth I. Sawyer __________________________ Name: Kenneth I. Sawyer Title: President ACCEPTED AND AGREED TO: CLAL PHARMACEUTICAL INDUSTRIES LTD. By: /s/ Ken Lalo -------------------------------- Name: Ken Lalo Title: General Counsel DATED: March 25, 1998 ACCEPTED AND AGREED TO: MERCK KGaA By: /s/ Rudi D. Neirinckx -------------------------------- Name: Rudi D. Neirinckx Title: Head New Business, Merck KGaA DATED: March 25, 1998 7 EX-10 14 EXHIBIT 10.9 1997 DIRECTORS STOCK OPTION PLAN Exhibit 10.9 PHARMACEUTICAL RESOURCES, INC. 1997 DIRECTORS STOCK OPTION PLAN ARTICLE I DEFINITIONS As used herein, the following terms have the meanings hereinafter set forth unless the context clearly indicates to the contrary: (a) "Board" shall mean the Board of Directors of the Company. (b) "Company" shall mean Pharmaceutical Resources, Inc. (c) "Date of Grant" shall mean, with respect to any Eligible Director: (a) the Effective Date with respect to those Options granted on the Effective Date, (b) the date such Eligible Director is initially elected to the Board of Directors if such Eligible Director was first elected after the Effective Date, and (c) for each respective fiscal year of the Company thereafter, the date on which the shareholders of the Company shall elect directors at an annual meeting of shareholders or any adjournment thereof. (d) "Effective Date" shall mean October 28, 1997, the date of adoption by the Board. (e) "Eligible Director" shall mean any Director of the Company who is not an employee of the Company or its subsidiaries. (f) "Fair Market Value" on any day shall mean (a) if the principal market for the Stock is The New York Stock Exchange, any other national securities exchange or The NASDAQ Stock Market, the closing sales price regular way of the Stock on such day as reported by such exchange or market, or on a consolidated tape reflecting transactions on such exchange or market, or (b) if the principal market for the Stock is not a national securities exchange and if there are no closing prices reported on The NASDAQ Stock Market, the mean between the closing bid and the closing asked prices for the Stock on such day as quoted on such market, or (c) if there are no such prices quoted on The NASDAQ Stock Market, the price furnished by any New York Stock Exchange member selected by the Company from time to time for such purpose; provided that if clauses (a), (b) and (c) of this paragraph are all inapplicable, or if no trades have been made or no quotes are available for such day, the Fair Market Value of the Stock shall be determined by the Board by any method which it deems, in good faith, to be appropriate. The determination of the Board shall be conclusive as to the Fair Market Value of the Stock. (g) "Option" shall mean an Eligible Director's stock option to purchase Stock granted pursuant to the provisions of Article V hereof. (h) "Optionee" shall mean an Eligible Director to whom an Option has been granted hereunder. (i) "Option Price" shall mean the price at which an Optionee may purchase a share of Stock under a Stock Option Agreement. (j) "Qualified Domestic Relations Order" shall have the meaning assigned to such term under the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. (k) "1997 Plan" shall mean the Pharmaceutical Resources, Inc. 1997 Directors Stock Option Plan, the terms of which are set forth herein, as amended from time to time. (l) "1989 Plan" shall mean the Pharmaceutical Resources, Inc. 1989 Directors' Stock Option Plan. (m) "Sale" shall mean any single transaction or series of related transactions, upon the consummation of the following events: (i) a definitive agreement for the merger or other business combination of the Company with or into another corporation pursuant to which the shareholders of the Company do not own, immediately after the transaction, more than 50% of the voting power of the corporation that survives and is a publicly owned corporation and not a subsidiary of another corporation, or (b) a definitive agreement for the sale, exchange, or other disposition of all or substantially all of the assets of the Company (other than to any wholly-owned subsidiary of the Company); provided, that a Sale shall not be deemed to have occurred if there shall be an affirmative vote of a majority of the Board to suspend the provisions of Section 4.3 of the 1997 Plan with respect to any such event. (n) "Stock" shall mean the common stock, par value $.01 per share, of the Company or, in the event that the outstanding shares of Stock are hereafter changed into or exchanged for different stock or securities of the Company or some other corporation, such other stock or securities. (o) "Stock Option Agreement" shall mean an agreement between the Company and the Optionee under which the Optionee may purchase Stock in accordance with the 1997 Plan. 2 ARTICLE II THE 1997 PLAN 2.1 Name. This 1997 Plan shall be known as the "Pharmaceutical Resources, Inc. 1997 Directors Stock Option Plan." 2.2 Purpose. The purpose of the 1997 Plan is to advance the interests of the Company and its shareholders by affording Eligible Directors of the Company an opportunity to acquire, maintain and increase their ownership interests in the Company, and thereby to encourage their continued service as directors and to provide them additional incentives to achieve the growth objectives of the Company. 2.3 Effective Date. The Effective Date of the 1997 Plan is October 28, 1997. Any Options granted under the 1997 Plan shall only become effective if the shareholders of the Company shall have, on or before October 27, 1998, approved and adopted the 1997 Plan. If the 1997 Plan shall not be so approved and adopted, all Options granted hereunder shall be of no effect. 2.4 Termination Date. The 1997 Plan shall terminate and no further Options shall be granted hereunder upon the tenth anniversary of the Effective Date. ARTICLE III PARTICIPANTS Each Eligible Director shall participate in the 1997 Plan, provided that he is or was elected as a member of the Board at an annual meeting of shareholders, or any adjournment thereof, or was elected by Eligible Directors who were elected as members of the Board at an annual meeting of shareholders to fill a vacancy on the Board. ARTICLE IV SHARES OF STOCK SUBJECT TO 1997 PLAN 4.1 Limitations. Subject to any antidilution adjustment pursuant to the provisions of Section 4.2 hereof, the maximum number of shares of Stock which may be issued and sold hereunder shall not exceed 500,000 shares of Stock. Shares of Stock subject to an Option may be either authorized and unissued shares or shares issued and later acquired by the Company; provided, however, that the shares of Stock with respect to which an Option has been exercised shall not again be available for the grant of an Option hereunder. If any outstanding Options granted hereunder shall terminate or expire 3 for any reason without being wholly exercised prior to the end of the period during which Options may be granted hereunder, new Options may be granted hereunder covering such unexercised shares. 4.2 Anti-dilution. In the event that the outstanding shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of merger, consolidation, reorganization, recapitalization, reclassification, combination of shares, stock split, reverse stock split or stock dividend: (a) The rights under outstanding Options granted hereunder, both as to the number of subject shares and the Option Price, shall be adjusted appropriately; and (b) Where dissolution or liquidation of the Company or any merger or combination in which the Company is not a surviving corporation is involved, each outstanding Option granted hereunder shall terminate, but the Optionee shall have the right, immediately prior to such dissolution, liquidation, merger or combination, to exercise his Option, in whole or in part, to the extent that it shall not have been exercised, without regard to the date on which such Option would otherwise have become exercisable pursuant to Sections 5.4 hereof. The foregoing adjustments and the manner of application thereof shall be determined solely by the Board, and any such adjustment may provide for the elimination of fractional share interests. The adjustments required under this Article shall apply to any successor or successors of the Company and shall be made regardless of the number or type of successive events requiring adjustments hereunder. 4.3 Sale of Company. Each Stock Option Agreement shall provide that, upon a Sale, the Board may elect either (a) to continue the outstanding Options without any payment or (b) to cause to be paid to the Optionee upon consummation of the Sale, a payment equal to the excess, if any, of the sale consideration receivable by the holders of shares of Common Stock in such a Sale (the "Sale Consideration") over the purchase price for his Option for each share of Common Stock the Optionee shall then be entitled to acquire under the 1997 Plan. If the Board elects to continue the Option, then the Company shall cause effective provisions to be made so that the Optionee shall have the right, by exercising the Option prior to the respective Expiration Dates, to purchase the kind and amount of shares of stock and other securities and property receivable upon such a Sale by a holder of the number of shares of Common Stock which might have been purchased upon exercise of the Option immediately prior to the Sale. The value of the Sale Consideration receivable by the holder of a share of Common Stock, if it shall be other than cash, shall be determined, in good faith, by the Board. Upon payment to the Optionee of the Sale Consideration, the Optionee shall have no further rights in connection with the Option granted, the Option shall be terminated and surrendered for cancellation and the Option shall be null and void. 4 ARTICLE V OPTIONS 5.1 Option Grant, Number of Shares and Agreement. (a) Exchange of Existing Options. Subject to the provisions hereof, each Eligible Director on the Effective Date shall be granted an Option to purchase Ten Thousand (10,000) shares of Stock for each year of such Eligible Director's tenure as a director of the Company. Notwithstanding the preceding sentence, the grant of Options to an Eligible Director pursuant to this Section 5.1(a) shall be expressly conditioned upon such Eligible Director surrendering for cancellation all stock options held by such Director which were granted to him under the 1989 Plan, and the number of Options granted to an Eligible Director under this Section 5.1(a) shall in no event exceed the number of such stock options granted under the 1989 Plan surrendered by such Director. (b) Annual Grant of Options. Subject to the provisions hereof, each Eligible Director shall be granted an Option to purchase Five Thousand (5,000) shares of Stock on (i) the Effective Date and (ii) each subsequent Date of Grant (the "Annual Grant"). Notwithstanding anything herein to the contrary, no Eligible Director shall be entitled to receive more than one Annual Grant in any calendar year. (c) Additional Grant. Subject to the provisions hereof, on (i) the Effective Date and (ii) each subsequent Date of Grant, each Eligible Director shall be granted an Option to purchase up to an additional Six Thousand (6,000) shares of Stock (the "Additional Grant") if such Eligible Director owns on the respective Effective Date or subsequent Date of Grant (as the case may be) an amount of issued shares of Common Stock of the Company not less than the product of 2,500 shares of Common Stock multiplied by the sum of one and the number of years in which he was granted previously an Additional Grant. Notwithstanding the foregoing, for purposes of determining each Eligible Director's entitlement to an Additional Grant on the Effective Date, the Eligible Director must own not less than 2,500 shares of Common Stock of the Company by April 1, 1998. An Eligible Director who shall not be entitled to receive an Additional Grant on any particular Date of Grant as a result of the failure to satisfy the conditions set forth in this Section 5.1(c) shall be eligible to receive an Additional Grant pursuant to this Section 5.1(c) on any subsequent Date of Grant. Notwithstanding anything herein to the contrary, no Eligible Director shall be entitled to receive more than one Additional Grant in any calendar year. 5 (d) Agreement. Each Option so granted shall be evidenced by a written Stock Option Agreement, dated as of the Date of Grant and executed by the Company and the Optionee, stating the Option's duration, time of exercise, and exercise price. The terms and conditions of the Option shall be consistent with the 1997 Plan. 5.2 Option Price. The Option Price of the Stock subject to each Option shall be the Fair Market Value of the Stock on its Date of Grant. 5.3 Option Expiration. Each Option shall expire on the tenth anniversary of such Option's Date of Grant (the "Expiration Date"). 5.4 Option Exercise. (a) Any Option granted under the 1997 Plan may not be exercised, in whole or in part, until the first anniversary of the Date of Grant, subject to any additional conditions imposed by the Board and set forth in a Stock Option Agreement. If an Eligible Director shall be removed "for cause" as a member of the Board of Directors on or prior to the first anniversary of the Date of Grant of any Option, such Option shall terminate and be forfeited. Subject to the provisions of this Section 5.4(a), an Option shall remain exercisable at all times until the Expiration Date, regardless of whether the Optionee thereafter continues to serve as a member of the Board. Notwithstanding the foregoing, an Additional Grant shall automatically terminate and be forfeited in the event that the Eligible Director holding such Additional Grant shall fail to continue to own the number of shares of Common Stock which were equal to the number of shares which were a condition of such Additional Grant. Any such termination and forfeiture shall be done on a pro rata basis to the number of shares sold or disposed of. (b) An Option may be exercised at any time or from time to time during the term of the Option as to any or all full shares which have become exercisable in accordance with this Section, but not as to less than one hundred shares of Stock unless the remaining shares of Stock that are so exercisable are less than one hundred shares of Stock. The Option Price is to be paid in full in cash upon the exercise of the Option. The holder of an Option shall not have any of the rights of a shareholder with respect to the shares of Stock subject to the Option until such shares of Stock have been issued or transferred to him upon the exercise of his Option. (c) An Option shall be exercised by written notice of exercise of the Option, with respect to a specified number of shares of Stock, delivered to the Company at its principal office, and by cash payment to the Company at said office of the full amount of the Option Price for such number of shares. In addition to, and prior to the issuance of a certificate for shares pursuant to any Option exercise, the Optionee shall pay to the Company in cash the full amount of any Federal, state or local income or employment taxes required to be withheld by the Company as a result of such exercise. 6 (d) At the discretion of the Board, the Stock Option Agreement may provide that an Option granted under the 1997 Plan may be exercised with respect to a specified number of shares of Stock by written notice of exercise to the Company stating that (i) the option price for the shares and any withholding tax due thereon will be paid to the Company directly by a broker-dealer designated by the Eligible Director and irrevocable instructions to such effect have been furnished by the Eligible Director to such broker-dealer, and (ii) an advice from the broker-dealer confirming payment to the Company will be promptly delivered to the Company. The exercise of any such option shall be irrevocable at the time of notice to the Company; provided, however, that the Company shall not be required to deliver certificates for shares of Stock with respect to the exercise of the option until the Company has confirmed the receipt of good and sufficient funds in payment of the purchase price thereof. 5.5 Nontransferability of Option. Unless otherwise provided in the relevant Stock Option Agreement, options may not be transferred by an Optionee otherwise than by will or the laws of descent and distribution, or by a Qualified Domestic Relations Order. Unless otherwise provided in the relevant Stock Option Agreement, during the lifetime of an Optionee, his Option may be exercised only by him (or by his guardian or legal representative, should one be appointed) or by his spouse to whom the Option has been transferred pursuant to a Qualified Domestic Relations Order. In the event of the death of an Optionee, any Option held by him may be exercised by his legatee(s) or other distributee(s) or by his personal representative(s). ARTICLE VI STOCK CERTIFICATES The Company shall not be required to issue or deliver any certificate for shares of Stock purchased upon the exercise of any Option granted hereunder or any portion thereof unless, in the opinion of counsel to the Company, there has been compliance with all applicable legal requirements. An Option granted under the 1997 Plan will provide that the Company's obligation to deliver shares of Stock upon the exercise thereof may be conditioned upon the receipt by the Company of a representation as to the investment intention of the holder thereof in such form as the Company shall determine to be necessary or advisable solely to comply with the provisions of the Securities Act of 1933, as amended, or any other Federal, state or local securities laws. All certificates for shares of Stock delivered under the 1997 Plan shall be subject to such stop transfer orders and other restrictions as the Company may deem advisable under the rules, 7 regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, any Federal, state or local securities laws and applicable corporate law, and the Company may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. ARTICLE VII TERMINATION, AMENDMENT AND MODIFICATION OF 1997 PLAN The Board may at any time terminate the 1997 Plan, and may at any time and from time to time and, in any respect amend or modify the 1997 Plan. The Board may amend the terms of any award theretofore granted under the 1997 Plan; provided, however, that subject to Section 4.1 hereof, no such amendment may be made by the Board which in any material respect impairs the rights of the participant without the participant's consent. ARTICLE VIII RELATIONSHIP TO OTHER COMPENSATION PLANS The adoption of the 1997 Plan shall neither affect any other stock option, incentive or other compensation plans in effect for the Company or any of its subsidiaries, nor shall the adoption of the 1997 Plan preclude the Company from establishing any other forms of incentive or other compensation plan for directors of the Company. ARTICLE IX MISCELLANEOUS 9.1 1997 Plan Binding on Successors. The 1997 Plan shall be binding upon the successors and assigns of the Company. 9.2 Singular, Plural; Gender. Whenever used herein, nouns in the singular shall include the plural, and the masculine pronoun shall include the feminine gender. 9.3 Headings, etc., Not Part of 1997 Plan. Headings of articles and Sections hereof are inserted for convenience and reference, and do not constitute a part of the 1997 Plan. As of May, 1998 8 EX-10 15 EXH 10.10 4TH AMENDMENT-LOAN AGREEMENT Exhibit 10.10 FOURTH AMENDMENT AND CONSENT TO LOAN AND SECURITY AGREEMENT FOURTH AMENDMENT AND CONSENT, dated as of May 5, 1998 (this "Amendment"), to the Loan and Security Agreement referred to below by and among GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"), PAR PHARMACEUTICAL, INC., a New Jersey corporation ("Borrower"), PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation ("Parent"), NUTRICEUTICAL RESOURCES, INC., a New York corporation ("NRI"), and PARCARE, LTD., a New York corporation ("ParCare"). Parent, NRI and ParCare are hereinafter referred to as "Guarantors". W I T N E S S E T H WHEREAS, Lender, Borrower and Guarantors are parties to that certain Loan and Security Agreement, dated as of December 15, 1996 (as amended, supplemented or otherwise modified prior to the date hereof, the "Loan Agreement"); WHEREAS, Lender, Borrower and Guarantors have agreed to amend the Loan Agreement in the manner, and on the terms and conditions, provided for herein; and WHEREAS, Lender has agreed to consent to certain actions by Borrower and Parent under the Loan Agreement in the manner, and on the terms and conditions, provided for herein. NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties to this Amendment hereby agree as follows: 1. Definitions. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. 2. Amendment to Section 5(d) of the Loan Agreement. Section 5(d) of the Loan Agreement is hereby amended and restated in its entirety as of the Amendment Effective Date (as hereinafter defined) to read as follows: "(d) enter into any lending, borrowing or other commercial transaction with any of its employees, directors, Affiliates or any other Credit Party (including upstreaming and downstreaming of cash and intercompany advances, and payments by a Credit Party on behalf of another Credit Party which are not otherwise permitted hereunder) other than (i) loans to employees in the ordinary course of business in an aggregate outstanding amount not exceeding $50,000, (ii) those transactions contemplated under the Merck Equity Documents and (iii) indebtedness consisting of intercompany loans made by Borrower to Parent provided that (A) Borrower and Parent shall record all intercompany transactions on their books and records in a manner satisfactory to Lender, (B) no Default or Event of Default would occur and be continuing after giving effect to any such proposed intercompany loan, and (C) the aggregate amount of all such intercompany loans made by Borrower to Parent shall not exceed (together with any dividends under Section 5(l)(iv) below) $1,200,000 in any Fiscal Year;" 3. Amendment to Section 5(i) of the Loan Agreement. Section 5(i) of the Loan Agreement is hereby amended and restated in its entirety as of the Amendment Effective Date to read as follows: "(i) sell, transfer, convey, assign or otherwise dispose of any of its assets or properties, including its Accounts, or issue any shares of its Stock; provided, that the foregoing shall not prohibit (i) the sale of Inventory or obsolete or unnecessary Equipment or real estate in the ordinary course of its business, (ii) the sale by Parent of its Common Stock at Fair Market Value for cash consideration so long as the proceeds thereof are applied to prepayment of Revolving Credit Advances pursuant to Section 1.2(c), (iii) issuance by Parent of shares of its Common Stock upon exercise of the Warrants, (iv) issuance by Parent to its employees of options to purchase its Common Stock pursuant to the Stock Option Plans and issuance of Common Stock upon exercise of such options, (v) issuance by Parent to members of its Board of Directors of options to purchase its Common Stock pursuant to the 1997 Directors Stock Option Plan, adopted by the Board of Directors of Parent on October 28, 1997, and issuance of Common Stock upon exercise of such options, and (vi) issuance by Parent to employees of Genpharm Inc. of options to purchase up to an aggregate of 120,000 shares of its Common Stock pursuant to a stock option plan to be adopted by the Board of Directors of Parent and issuance of Common Stock upon exercise of such options." 4. Amendment to Schedule A to the Loan Agreement. Schedule A to the Loan Agreement is hereby amended as of the Amendment Effective Date as follows: (a) The definition of "Merck Equity Documents" is hereby amended and restated in its entirety to read as follows: '"Merck Equity Documents" shall mean, collectively, the Merck Stock Purchase Agreement, the Clal Letter Agreement, the Merck Services Agreements, the Merck Distribution Agreement, the Merck Option Agreements and the Merck Registration Rights Agreement." (b) The definition of "Merck Stock Purchase Agreement" is hereby amended and restated in its entirety to read as follows: '"Merck Stock Purchase Agreement" shall mean that certain Stock Purchase Agreement, dated March 25, 1998, between Parent and Lipha Americas, Inc." -2- (c) The definition of "Overadvance Limit" is hereby amended and restated in its entirety to read as follows: '"Overadvance Limit" shall mean for each period the amount set forth below for such period: Period Overadvance Limit ------ ----------------- 2/17/98 through 4/1/98 $2,000,000 4/1/98 through 6/19/98 $2,500,000 6/20/98 and thereafter $ 0" (d) The following new definitions shall be inserted in the proper alphabetical order: '"Clal Letter Agreement" shall mean that certain letter agreement, dated March 25, 1998, among Parent, Merck and Clal Pharmaceutical Industries Ltd. "Merck Distribution Agreement" shall mean that certain Agreement, dated as of March 25, 1998, between Parent and Genpharm Inc." '"Merck Option Agreements" shall mean, collectively, that certain (i) Stock Option Agreement to be entered into between Parent and Merck, and (ii) Stock Option Agreement to be entered into between Parent and Genpharm Inc., each in the form attached to the Merck Stock Purchase Agreement." '"Merck Registration Rights Agreement" shall mean that certain Registration Rights Agreement to be entered into among Parent, Merck, Genpharm Inc. and Lipha Americas, Inc. in the form attached to the Merck Stock Purchase Agreement." '"Merck Services Agreements" shall mean, collectively, that certain (i) Services Agreement to be entered into between Parent and Merck and (ii) Services Agreement to be entered into between Parent and Genpharm, each substantially in the form attached to the Merck Stock Purchase Agreement." 5. Consent. (a) Lender hereby consents to the amendment by Borrower and Parent of that certain Amended and Restated Distribution Agreement, dated as of July 28, 1997, as amended, supplemented or otherwise modified from time to time, among SANO Corporation ("SANO"), Borrower and Parent, in the manner, and on the terms and conditions set forth in, that certain letter agreement, dated March 31, 1998, among SANO, Borrower and Parent, a copy of which is attached hereto as Exhibit A. (b) Lender hereby acknowledges that the form and substance of the Merck Equity Documents are satisfactory to Lender and further consents, under all -3- provisions of the Loan Agreement, to the execution and delivery thereof by Parent and the consummation of the transactions contemplated therein; provided, that all proceeds received by Parent under the Merck Equity Documents shall be immediately contributed to the capital of Borrower and immediately applied by Borrower to prepayment of Revolving Credit Advances pursuant to Section 1.2(c) of the Loan Agreement. To the extent any proceeds remain after such prepayment, Borrower shall immediately invest such proceeds solely in a "Permitted Investment" until such time as any of the Credit Parties shall use such proceeds for such uses as shall not be prohibited by the Loan Agreement. The parties agree that such an investment and such uses shall not constitute a violation of the Loan Agreement. For purposes of this Amendment, "Permitted Investment" shall mean (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency thereof maturing no more than one year from the date of creation thereof, (ii) commercial paper maturing no more than one year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii) certificates of deposit, maturing no more than one year from the date of creation thereof, issued by commercial banks incorporated under the laws of the United States of America, each having combined capital, surplus and undivided profits of not less than $300,000,000 and having a senior secured rating of "A" or better by a nationally recognize rating Agency (an "A Rated Bank"), and (iv) time deposits, maturing no more than 30 days from the date of creation thereof, with A Rated Banks. Notwithstanding anything to the contrary contained in this Section 4(b), (A) Lender hereby reserves its right under Section 3.25 of the Loan Agreement to perfect its Lien in the above-mentioned proceeds and Permitted Investments and (B) Parent shall not amend, supplement or otherwise modify the Merck Equity Documents after the date hereof, except for those amendments, supplements or modifications (1) of the Merck Equity Documents which do not materially and adversely affect Lender and the Credit Parties and (2) of the Merck Distribution Agreement which are made in the ordinary course of business. Parent shall promptly deliver to Lender all documents relating to such amendments, supplements or modifications. (c) Lender hereby consents to the proposed amendment to Article IV of Parent's Certificate of Incorporation to increase the number of authorized shares of Common Stock from 60,000,000 to 90,000,000 shares, and the amendment to Section 6 of Article III of Parent's By-Laws, each of which shall be in the respective form set forth on Exhibit B hereto. (d) Lender hereby consents to the cancellation by Parent of indebtedness in the original principal amount of $343,057.38 owing to it by Kenneth I. Sawyer in accordance with the terms of the proposed form of Amended and Restated Promissory Note, to be executed by Kenneth I. Sawyer in favor of Parent, the form of which is attached hereto as Exhibit C. 6. Representations and Warranties. To induce Lender to enter into this Amendment, each Credit Party hereby represents and warrants that: A. The execution, delivery and performance by each Credit Party of this Amendment: (i) are within their respective corporate powers; (ii) have been duly authorized by all necessary corporate and shareholder action; and (iii) are not in contravention of any -4- provision of their respective certificates or articles of incorporation or by-laws or other organizational documents. B. This Amendment has been duly executed and delivered by or on behalf of each Credit Party. C. This Amendment constitutes a legal, valid and binding obligation of each Credit Party enforceable against each Credit Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). D. No Default has occurred and is continuing both before and after giving effect to this Amendment. E. No action, claim or proceeding is now pending or, to the knowledge of each Credit Party, threatened against any Credit Party, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any federal, state, or local government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, which challenges any Credit Party's right, power, or competence to enter into this Amendment or, to the extent applicable, perform any of its obligations under this Amendment, the Loan Agreement or any other Loan Document, or the validity or enforceability of this Amendment, the Loan Agreement or any other Loan Document or any action taken under this Amendment, the Loan Agreement or any other Loan Document. 7. No Other Consents/Waivers. Except as otherwise provided herein, the Loan Agreement shall be unmodified and shall continue to be in full force and effect in accordance with its terms, and, except as expressly provided herein, this Amendment shall not be deemed a waiver of, or consent under, any term or condition of any Loan Document and shall not be deemed to prejudice any right or rights which Lender may now have or may have in the future under or in connection with any Loan Document or any of the instruments or agreements referred to therein, as the same may be amended from time to time. This Amendment shall constitute notice to Lender, pursuant to Section 3.8(a)(i) and (iii) of the Loan Agreement, of the transactions contemplated by the Merck Equity Documents. 8. Outstanding Indebtedness; Waiver of Claims. Each Credit Party hereby acknowledges and agrees that as of April 29, 1998 the aggregate outstanding principal amount of the Revolving Credit Loan is $10,374,430.37 and that such principal amount is payable pursuant to the Loan Agreement without defense, offset, withholding, counterclaim or deduction of any kind. Each Credit Party hereby waives, releases, remises and forever discharges Lender and each other Indemnified Person from any and all Claims of any kind or character, known or unknown, which each Credit Party ever had, now has or might hereafter have against Lender which relates, directly or indirectly, to any acts or omissions of Lender or any other Indemnified Person on or prior to the date hereof. -5- 9. Expenses. Borrower hereby reconfirms its obligations pursuant to Section 10.2 of the Loan Agreement to pay and reimburse Lender for all reasonable out-of-pocket expenses (including, without limitation, reasonable fees of counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment and all other documents and instruments delivered in connection herewith. 10. Effectiveness. This Amendment shall become effective only upon satisfaction in full in the judgment of the Lender of each of the following conditions on or prior to May 8, 1998: A. Amendment. Lender shall have received four original copies of this Amendment duly executed and delivered by Lender and each Credit Party. B. Representations and Warranties. All representations and warranties of or on behalf of each Credit Party in this Amendment and all the other Loan Documents shall be true and correct in all respects with the same effect as though such representations and warranties had been made on and as of the date hereof and on and as of the date that the other conditions precedent in this Section 10 have been satisfied, except to the extent that any such representation or warranty expressly relates to an earlier date. 11. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 12. Counterparts. This Amendment may be executed by the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (SIGNATURE PAGES FOLLOW) -6- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. Borrower: PAR PHARMACEUTICAL, INC. By: /s/ Dennis O'Connor -------------------------------- Name: Dennis O'Connor Title: Vice President & Chief Financial Officer Lender: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Martin S. Greenberg -------------------------------- Name: Martin S. Greenberg Its: Duly Authorized Signatory Parent: PHARMACEUTICAL RESOURCES, INC. By: /s/ Dennis O'Connor -------------------------------- Name: Dennis O'Connor Title: Vice President & Chief Financial Officer (SIGNATURES CONTINUED ON NEXT PAGE) -7- Subsidiary Guarantors: NUTRICEUTICAL RESOURCES, INC. By: /s/ Dennis O'Connor -------------------------------- Name: Dennis O'Connor Title: Vice President & Chief Financial Officer PARCARE, LTD. By: /s/ Dennis O'Connor -------------------------------- Name: Dennis O'Connor Title: Vice President & Chief Financial Officer -8- EX-10 16 EXH 10.11 AMD TO EMPLOYMENT AGREEMENT Exhibit 10.11 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement, dated as of April 30, 1998, by and between Pharmaceutical Resources, Inc., a New Jersey corporation (the "Company"), Par Pharmaceutical, Inc., a New Jersey corporation and wholly-owned subsidiary of the Company ("Par"), and Kenneth I. Sawyer ("Executive") amends the Employment Agreement, dated as of October 4, 1992, as amended from time to time (the "Employment Agreement"), between the Company, Par and Executive. All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Employment Agreement. WHEREAS, the Company and Lipha Americas, Inc., a Delaware corporation (the "Purchaser"), have entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), dated March 25, 1998, providing, among other things, for the Purchaser and its affiliates to acquire over 38% of the common stock of the Company; WHEREAS, Executive has the right to terminate the Employment Agreement for Employer's material breach as a result of the transactions contemplated by the Stock Purchase Agreement; WHEREAS, the Stock Purchase Agreement requires that, as a condition to closing, that Executive must (i) waive such breach of the Employment Agreement and agree to continue his employment with the Company, (ii) agree to the appointment of a new President and Chief Operating Officer of the Company and/or any of its subsidiaries designated by the Purchaser and relinquish his title and position as President of the Company and/or its subsidiaries in the event that the Purchaser elects to make such designation, (iii) vote his shares of common stock of the Company in favor of the transactions contemplated by the Stock Purchase Agreement, and (iv) agree not to exercise his unexercised stock options previously granted for a period of three years and ten business days from the date of closing of the transactions contemplated by the Stock Purchase Agreement, notwithstanding that otherwise they would have been exercisable during this period; WHEREAS, Executive owes the Company the principal amount of $343,057.38, plus interest, under Executive's promissory note, dated August 14, 1997 (the "Note"); and WHEREAS, in consideration of the foregoing agreements and waivers requested from Executive, the Company has agreed to forgive the Note over a three-year period. NOW THEREFORE, in consideration of the premises and of the mutual agreements set forth herein, the Employment Agreement is hereby amended as follows: 1. Title. Executive agrees that, effective upon the election by the Board of Directors of the Company of a designee of the Purchaser as the President and Chief Operating Officer of the Company and/or any of its subsidiaries and any such designee duly holding such offices, the Company shall employ Executive in the capacities of Chairman of the Board and Chief Executive Officer of the Company and each of its subsidiaries and Executive shall no longer be, or be entitled or required under the Employment Agreement to be, the President of the Company and/or any of its subsidiaries to the extent that the Purchaser shall have so designated. 2. Voting. Executive hereby agrees to vote all of the shares of Common Stock of the Company owned by him or which he otherwise has the power to vote in favor of each of the Proposals (as defined in the Stock Purchase Agreement), including approval of all Nominees (as defined in the Stock Purchase Agreement). 3. Stock Options. Executive hereby agrees not to exercise any of the unexercised stock options owned by him for a period of three years and 10 business days from the date of closing of the Stock Purchase Agreement without the prior written consent of the Purchaser, subject to the Closing (as such term is defined in the Stock Purchase Agreement). Such agreement shall be more fully set forth in a stock option agreement to be executed and delivered by Executive and the Company. 4. Consent and Waiver. Executive hereby consents to the transactions contemplated by the Stock Purchase Agreement, including but not limited to Sections 7.9 and 7.10 thereof, and agrees that such transactions shall not be deemed to constitute or cause a breach, violation or default by the Company under the Employment Agreement. Notwithstanding any thing contained in Section 3.2.6 of the Employment Agreement applicable to the transactions contemplated by the Stock Purchase Agreement, Executive hereby irrevocably waives his rights to terminate the Agreement under Section 3.2.6 of the Employment Agreement, solely with respect to the transactions contemplated by the Stock Purchase Agreement. 5. Note Forgiveness. Commencing on April 30, 1998, the Company shall forgive the payment of the Note at the rate of one-third of the original principal amount each year (plus accrued interest on the forgiven portion thereof), prorated for each month of Executive's employment, as more fully set forth in an amended and restated promissory note to be executed and delivered by Executive and the Company in the form attached as Exhibit A hereto. 2 6. Effect of Termination on Note Forgiveness. The entire remaining principal balance of the Note, if any, including accrued interest thereon, shall be forgiven and canceled, without further action by any party, and Executive shall have no further liability to any party with respect thereto effective immediately upon (i) a termination of Executive's employment prior to the expiration of Executive's term of employment, by Executive for Employer's Material Breach, or by the Company without Cause, (ii) in the event that the Company or Executive elects not to extend Executive's term of employment, the last day of Executive's term of employment, or (iii) the termination of the Employment Agreement by the Company or Par, whether by rejection, pursuant to 11 U.S.C. Section 365, or similar proceedings. In the event of a termination of Executive's employment for any other reason, the remaining principal balance of the Note, including incurred interest thereon, which shall not have been forgiven through the date of termination of Executive's employment shall remain outstanding and shall be repaid by Executive according to the terms of the Note. 7. Governing Law. This Amendment to Employment Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 8. Continued Effect. Except as modified hereby, the Employment Agreement remains in full force and effect. 3 IN WITNESS WHEREOF, this Amendment to Employment Agreement has been executed and delivered by the parties hereto as of the date first above written. PHARMACEUTICAL RESOURCES, INC. By: /s/ Dennis O'Connor ---------------------------------- Name: Dennis O'Connor Title: Vice President & Chief Financial Officer PAR PHARMACEUTICAL, INC. By: /s/ Dennis O'Connor ---------------------------------- Name: Dennis O'Connor Title: Vice President & Chief Financial Officer /s/ Kenneth I. Sawyer ------------------------------------- Kenneth I. Sawyer 4 EX-10 17 EX 10.12 AMENDED & RESTATED DISTRIBUTION AGREEMENT Exhibit 10.12 AMENDED AND RESTATED DISTRIBUTION AGREEMENT This Amended and Restated Distribution Agreement (the "Agreement") is entered into as of the 1st day of May, 1998 (the "Execution Date") by and among SANO Corporation, a Florida corporation ("SANO"), Pharmaceutical Resources, Inc., a New Jersey corporation ("PRI"), and Par Pharmaceutical, Inc., a New Jersey corporation ("Par"). WHEREAS, SANO, PRI and Par have previously entered into that certain Amended and Restated Distribution Agreement as of the 28th day of July, 1997 (the "Prior Agreement"); WHEREAS, SANO, PRI and Par wish to amend and restate their agreement with respect to the subject matter of the Prior Agreement, and supersede the Prior Agreement in its entirety; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION ARTICLE I TERMS AND CONDITIONS 1.1 Definitions. As used in this Agreement, the following terms shall have the meaning ascribed to them below: (a) "Affiliate," as to any Person, shall have the meaning set forth in Rule 405 under the Securities Act of 1933. (b) "Costs" shall mean, with respect to production of a Licensed Product, the cost of goods incurred by SANO in the production thereof determined in accordance with generally accepted accounting principles applied on a consistent basis, as determined by SANO's independent certified public accountants; provided, however, that notwithstanding the foregoing, it being the intent of the parties that Costs make SANO whole with respect to all reasonable expenditures related to the Licensed Product, Costs shall include, without limitation, (i) the delivered cost of all ingredients and other raw materials used therein, (ii) a percentage of SANO's overall labor cost equal to the portion which labor hours devoted to the Licensed Product's production bears to total labor hours devoted to all SANO product production, (iii) packaging and other direct manufacturing and quality control costs and (iv) ratably allocated costs of marketing and promotion (if any), product liability insurance and general overhead; provided, further, that, notwithstanding the foregoing, Costs shall not include (i) any cost incurred by SANO in completing the Development Program, (ii) any royalties or similar payments paid or payable by SANO with respect to any Licensed Product, or (iii) any cost specifically related to the distribution of the Licensed Product outside the United States; additionally, (x) with respect to the transdermal nicotine Licensed Product (generic of Habitrol(R)) described herein as Product B, Costs shall be reduced on a one-time basis by [****], and (y) with respect to the transdermal nitroglycerin product (generic of Nitro Dur(R)) described herein as Product A, Costs shall be reduced on a one-time basis by the sum of the amount set forth as an additional Licensed Product Fee for that Licensed Product pursuant to Section 7.4 hereof. (c) "Development Program" shall mean all actions, including, without limitation, research conducted as a part of SANO's pre-clinical and clinical activities, which is required or reasonably necessary to obtain all requisite governmental approvals for the testing, manufacture and sale of Licensed Products during the term of this Agreement. (d) "Exclusive" shall mean, with respect to any right herein granted, that no other party shall have such right, directly or indirectly. 2 (e) "Generic" shall mean, with respect to any drug or product, that such drug or product does not comprise a substance or compound that is covered by a claim under any unexpired U.S. Patent and/or which is not entitled to any period of market exclusivity under the Orphan Drug Act or the Drug Price Competition and Patent Term Restoration Act of 1984 according to 21 U.S.C.A. 355(j)(4)(D)(i)or (ii). (f) "Licensed Product" shall mean the Transdermal Generic Drug Delivery Systems listed on Exhibit A hereto. Notwithstanding any references to Product A herein, Licensed Product shall not include the transdermal nitroglycerin product(generic of NitroDur(R)) described as Product A, unless and until (i) SANO obtains approval of its abbreviated new drug application ("ANDA") by the United States Food and Drug Administration ("FDA") covering Product A and (ii) PRI elects, by written notice, to include Product A as a Licensed Product. (g) "Net Sales" shall have the meaning set forth in Exhibit B hereto. (h) "Person" shall include any individual, corporation, partnership, association, cooperative, joint venture, or any other form of business entity recognized under the law. (i) "Sale" shall mean any action involving selling. (j) "SANO's Technology" shall mean any and all data, information, technology, know-how, process, technique, method, skill, proprietary information, trade secret, development, discovery, and inventions, owned or controlled by SANO and specifically related to a Transdermal Generic Drug Delivery System for the Licensed Products now existing or developed in the future under and during the course of the Development Program or otherwise, as well as information related to the manufacture of Licensed Product(s) and specifications and procedures related thereto. (k) "Sell" shall mean to, directly or indirectly, sell, distribute, supply, solicit or accept orders for, negotiate for the sale or distribution of, or take any other action that is in furtherance of any of the foregoing. (l) "Specifications" shall mean the terms and conditions applicable to the Licensed Product(s) as described in the ANDA approved by the FDA covering the Licensed Product(s), as the same may be supplemented from time to time. (m) "Standard Packaging" shall mean a Licensed Product packaged in individual pouches and in individual folding cartons consisting of pouch units per carton reasonably specified by Par and containing any labels and labeling required therefor by the FDA and provided in packages that are appropriate for regulatory and marketing purposes, and produced at a SANO facility in the United States, the grade and quality of the labels, labeling and packaging materials being as specified in the ANDA therefor. 3 (n) "Transdermal Generic Drug Delivery System" shall mean a generic version of a branded transdermal adhesive patch. (o) "United States" shall mean the 50 states of the United States of America, plus the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, Samoa and any other territory which, on the Execution Date, is a United States government protectorate wherein an ANDA approved by the FDA is required to sell the Licensed Products in such territory. ARTICLE II REPRESENTATIONS OF SANO 2.1 SANO represents and warrants as follows: 2.1.1 Organization, etc. It is duly organized and validly existing under the laws of the State of Florida, has all requisite power and authority to conduct its business as now, and as proposed to be, conducted and to execute, deliver and perform its obligations under this Agreement. This Agreement has been duly authorized, executed and delivered by SANO and represents a valid and binding obligation enforceable against SANO in accordance with its terms. 2.1.2 No Conflicts; Consents. Execution and delivery hereof, or performance by SANO hereunder, will not (a) violate or create a default under (i) SANO's Articles of Incorporation or by-laws (true and correct copies of which have been delivered to Par), (ii) any mortgage, indenture, agreement, note or other instrument to which it is a party or to which its assets are subject or (iii) any court order or decree or other governmental directive or (b) result in the action of any lien, charge or encumbrance on any material portion of SANO's assets, except as contemplated hereby. 2.1.3 SANO's Technology. SANO's Technology is, to the best knowledge of SANO, sufficient to enable SANO to complete the Development Program as contemplated hereby. Except as set forth in Schedule 2.1.3, SANO has received no notice, and is not aware, that any portion of SANO's Technology infringes upon the rights of any other Person. 2.1.4 Development Program. SANO has filed an ANDA with respect to each of the Licensed Products and has no knowledge of any fact or circumstance which is reasonably likely to prevent approval by the FDA, other than general conditions related to the approval process; SANO does not hereby represent or warrant that any Licensed Product will be approved for commercial sale, or will ultimately be marketed. 2.1.5 Information. All data and other information relating to SANO and/or the Licensed Products provided by SANO, or its agents, to Par was derived from SANO's records (which have been diligently, and to the best of SANO's knowledge, accurately maintained in all material respects) and is an accurate copy or summary thereof in all material respects. 4 2.1.6 Employees. All key employees of SANO have executed appropriate confidentiality agreements with SANO and assignments of intellectual property rights in favor of SANO. All key employees of SANO have executed appropriate non-compete agreements which, by their terms, extended at least until December 31, 2000. 2.1.7 Status. SANO represents and warrants to Par that, to the best of its knowledge, information and belief, it is not prohibited by any federal, state or local law, rule or regulation or by any order, directive or policy of the United States government or any state or local government thereof or any federal, state or local regulatory agency or authority having jurisdiction with respect to the distribution of pharmaceutical products within its territorial jurisdiction from selling the Licensed Products within the territorial jurisdiction of such government, regulatory agency or authority (on the assumption that it holds whatever licenses are required for a foreign corporation to carry on business generally within such jurisdiction) and that SANO is not an Ineligible Person or Person from whom any United States federal, state or local government, regulatory authority or agency which purchases pharmaceutical products (including, without limitation, the federal Defense Logistics Agency) will or may not purchase any products manufactured by it or with whom it will or may not otherwise conduct business as a result its being publicly listed or otherwise (except for the fact that it is a foreign corporation). ARTICLE III OBLIGATIONS OF SANO 3.1 Level of Effort. SANO shall use its reasonable efforts, including, without limitation, the employment of a sufficient number of technically qualified officers and employees, to attempt to complete the Development Program for each Licensed Product. 3.2 Progress Reports. SANO shall, on a monthly basis, by the tenth day of each month, inform Par in writing of the progress of the Development Program and the commencement of any project within the Development Program. 3.3 Program Updates. On a date which shall be approximately three (3) months after the date hereof, and at three-month intervals thereafter, representatives of SANO and of Par shall meet to review the progress and status of the Development Program then underway. At such meetings, Par shall have the right to request the allocation of priorities to the various projects comprising the Development Program and to suggest procedures for their implementation, which requests shall be reasonably considered by SANO. 3.4 Supply and Use of Information. The parties shall, as promptly as possible, provide to each other any information that comes to the knowledge of a responsible officer of any party relating to any adverse reaction or other adverse event occasioned during research on, development or use of a Licensed Product. Any provision of information to Par shall be subject to the confidentiality obligations of Section 14.4. 5 3.5 Clinical Testing. All pre-clinical, clinical and post-clinical testing and stability testing and other actions, including but not limited to completion of the Development Program, required to obtain all requisite government approvals in the United States for the manufacture and sale of each Licensed Product shall be conducted by SANO, at its expense unless otherwise set forth herein. 3.6 Governmental Approvals. SANO shall file all appropriate requests and other filings with the appropriate government agencies within the United States in order to seek to obtain all requisite approvals for the testing, manufacture, sale and use of the Licensed Product(s). The decision regarding the timing of said filings shall be in SANO's sole discretion. SANO shall have full and complete ownership of all governmental approvals relating to Licensed Products. SANO shall provide Par with appropriate sections of and a right of reference to any application for registration in the United States except with respect to those aspects of any formulation or manufacturing process that is reasonably deemed proprietary by SANO. 3.7 Other Products. SANO shall reasonably apportion or allocate its resources among its products to accommodate the Development Programs for Licensed Products. 3.8 Title. SANO will protect and defend its rights to all Licensed Products and SANO's Technology, and will indemnify and hold Par, PRI and their Affiliates, harmless, from and against any claims of infringement or other claim that SANO is not the owner thereof. 3.9 Subsidiaries and Affiliates. SANO will cause its subsidiaries and affiliates to comply with the restrictions and limitations imposed on SANO hereunder with respect to Licensed Products. ARTICLE IV EXCLUSIVE DISTRIBUTOR 4.1 Subject to the provisions of this Agreement, SANO hereby appoints Par as the exclusive distributor of the Licensed Products for the United States and Par hereby accepts such appointment and agrees to act as such exclusive distributor. The rights and licenses granted to Par under this Agreement shall henceforth be referred to as "the Right." Par acknowledges that it has no rights with respect to SANO's Technology or the Licensed Products, except for the distribution rights with respect to the Licensed Products as herein described. 4.2 SANO, or Par, as applicable, covenants and agrees that, during the term of this Agreement or until the Right (or its exclusive nature) is terminated in accordance with the provisions hereof: 4.2.1 SANO will refer to Par all inquiries concerning potential purchases of Licensed Products received by it from Persons located in the United 6 States or from Persons outside the United States if SANO knows or reasonably suspects that such Person intends to resell or export the Licensed Product to the United States; 4.2.2 SANO will not, directly or indirectly, knowingly sell any Licensed Product in the United States nor to any Person outside of the United States if SANO reasonably expects that such Person intends to resell or export the Licensed Product to the United States and, if notified by Par that one of SANO's customers is selling the Licensed Product in the United States in any material respect, SANO shall either cease to supply such customer or obtain (and enforce, if necessary) an undertaking from such customer not to sell the Licensed Product in the United States (unless SANO is precluded from taking such action under applicable law). Par acknowledges that SANO will use reasonable efforts to prevent the sale of Licensed Products in United States by Persons other than Par, but shall not be held responsible if, despite such efforts, it is unsuccessful in so doing (subject to its obligations above to cease to supply or to obtain and enforce the undertaking as and to the extent contemplated above). 4.2.3 Par shall not, and shall not authorize, permit or suffer any of its Affiliates to, purchase any Transdermal Generic Drug Delivery System which has the same strength, contains the same active ingredient and is for the same indication as, and is competitive with, any of the Licensed Products (a "Competitive Product") for distribution, sale or use in the United States from any Person other than SANO. Par shall not, and shall not authorize, permit or suffer any of its Affiliates to, seek regulatory approval in the United States for any Competitive Product or to, directly or indirectly, manufacture, sell, handle, distribute or be financially interested (except as a stockholder with not greater than a 5% interest in a public company) in the sales of such products within the United States for its own account or for the account of any other Person as agent, distributor or otherwise. Notwithstanding the foregoing, if Par or PRI becomes an Affiliate of an entity (the "Merger Partner") as a result of a merger, acquisition, or other similar extraordinary corporate transaction, and such Merger Partner is engaged in the manufacture or distribution of a Competitive Product, Par shall so notify SANO and shall offer (the "Offer") to sell, assign and transfer to SANO the Right with respect to the Licensed Product with which such Competitive Product is competitive in exchange for an amount equal to the Licensed Product Fee (as hereinafter defined) for such Licensed Product. If, within thirty (30) days after its receipt of the Offer, SANO accepts the Offer, SANO shall, within fifteen (15) days of such acceptance, deliver to Par, against delivery of appropriate instruments of release and transfer, its promissory note in form and substance reasonably acceptable to Par, payable to the order of Par, in the principal amount of the Licensed Product Fee, bearing interest at the prime rate of Citibank, N.A., as announced from time to time at its offices in New York City (the "Prime Rate"), with interest and principal payable on the first anniversary of the date of delivery of such note. From and after the date of delivery of such note, Par shall have no rights with respect to the relevant Licensed Product and SANO shall be free to grant any rights related thereto to a third party or to retain such rights for itself. If SANO declines to accept the Offer or fails to accept the Offer within the aforesaid 30-day period, this Agreement shall remain in full force and effect, except that the provisions of this Section 4.2.3 shall not apply to that Competitive Product. Par shall notify SANO promptly if any Merger Partner has a Competitive Product. 7 4.2.4 Par shall not, and shall not authorize, permit or suffer any of its Affiliates to, directly or indirectly, sell any Licensed Product to any Person outside of the United States, nor to any Person in the United States if Par or any of its Affiliates reasonably expects that such Person intends, directly or indirectly, to sell or export the Licensed Product outside of the United States. If Par is notified by SANO that one of its customers or a customer of Par or any of its Affiliates is exporting the Licensed Product from the United States in any material respect Par shall (or shall cause its Affiliates to) either cease to supply such customer or obtain (and enforce, if necessary) an undertaking from such customer not to sell the Product outside of the United States (unless Par or any such Affiliate is precluded from taking such action under applicable law). SANO acknowledges that Par will use (and will cause its Affiliates to use) reasonable efforts to prevent its customers from exporting any Licensed Product out of the United States but shall not be held responsible if, despite such efforts, it is unsuccessful in so doing (subject to its obligations above to cease to supply or to obtain and enforce the undertaking as and to the extent contemplated above). 4.2.5 Par shall refer to SANO any inquiry or order for Licensed Products which Par or any of its Affiliates may receive from any Person located outside of the United States and from any Person located in the United States where Par or any of its Affiliates knows or has reason to suspect that such Person intends to export the Licensed Products outside of the United States. 4.2.6 The parties acknowledge, agree and declare that the relationship hereby established between Par and SANO is solely that of buyer and seller, that each is an independent contractor engaged in the operation of its own respective business, that neither party shall be considered to be the agent of the other party for any purpose whatsoever, except as otherwise expressly indicated in this Agreement, and that, except as otherwise expressly indicated in this Agreement, neither party has any authority to enter into any contract, assume any obligations or make any warranties or representations on behalf of the other party. Nothing in this Agreement shall be construed to establish a partnership or joint venture relationship between or among the parties. 4.2.7 SANO shall not engage in marketing and promotion of the Licensed Products in the United States unless reasonably requested to do so by Par. ARTICLE V REPRESENTATIONS OF PAR AND PRI; OBLIGATIONS 5.1 Par and PRI jointly and severally represent, warrant and covenant as follows: 5.1.1 Organization, etc. They are duly organized and validly existing under the laws of the State of New Jersey, have all requisite power and authority to conduct their business as now and as proposed to be conducted and 8 to execute, deliver and perform their obligations under this Agreement. This Agreement has been duly authorized, executed and delivered by Par and PRI and represents a valid and binding obligation enforceable against Par and PRI in accordance with its terms. 5.1.2 No Conflicts; Consents. Execution and delivery hereof, or performance by either Par or PRI hereunder, will not (a) violate or create a default under (i) Par's and PRI's Certificates of Incorporation or by-laws (true and correct copies of which have been delivered to SANO), (ii) any mortgage, indenture, agreement, note or other instruments to which either is a party or by which either's assets are subject or (iii) any court order or decree or other governmental direction or (b) result in the action of any lien, charge or encumbrance on any material portion of Par's and PRI's assets. 5.1.3 Information. All data and other information relating to Par and PRI provided to SANO by Par and PRI, or their agents, was derived from Par's and PRI's records (which have been diligently maintained) and is an accurate copy or summary thereof in all material respects. 5.1.4 Sufficiency. Par maintains and agrees that it will continue to maintain those places of business and equipment to be used in storing and shipping the Licensed Products in accordance with Current Good Manufacturing Practices of the FDA and all other applicable requirements of the FDA (as the same may be modified from time to time). Par hereby further represents and warrants that it currently has and/or has available to it and maintains and agrees to continue to have and/or to have available to it and maintain an adequate marketing organization and qualified sales persons to promote the sale of the Licensed Products in the United States. 5.2 Par shall purchase the Licensed Products from SANO as contemplated in Article VI hereof. 5.3 Par will use its reasonable efforts (utilizing its marketing, distribution and management systems and those of its Affiliates) to develop a market for and sell the Licensed Products in the United States, such efforts to be not less rigorous than those efforts used by Par in relation to its leading or principal products. Par shall devote particular attention to the marketing and sale of the Licensed Products and shall use its resources in a way it deems most effective in promoting the Licensed Products given market conditions. 5.4 Par shall have sole discretion in setting the sales price for the sale of the Licensed Products, provided that Par shall not specifically discount the price of the Licensed Products for the benefit of Par or any of its Affiliates' other products or to otherwise use the Licensed Products as a loss leader or incentive to procure the sale of Par's or any of its Affiliates' other products. Rebate and other discount programs (excluding any program where the price of the Licensed Products are discounted primarily for the benefit of enhancing the sale of Par's or any of its Affiliates' other products) generally available to Par's customers on the purchase of pharmaceutical products shall not be prohibited by this Section 5.4, provided that such programs shall be in accordance with industry standards for comparable products and shall be designed to promote the sale of the Licensed Products and not other products. 9 5.5 Par shall comply with all applicable laws, rules and regulations relating to transporting, storing, advertising, promoting and selling of the Licensed Products within the United States and shall assume sole responsibility for all credit risks and collection of receivables with respect to Licensed Products sold by it and its Affiliates, and, except as expressly provided herein, in respect of all dealings between itself (and its Affiliates) and its (and their) customers. 5.6 Par shall notify SANO promptly upon becoming aware of any adverse information relating to the safety or effectiveness of a Licensed Product and shall consult from time to time with regard to competition or potentially competitive products. 5.7 Par hereby further represents and warrants to SANO that, to the best of its knowledge, information and belief, neither it nor any of its Affiliates is prohibited by any federal, state or local law, rule or regulation or by any order, directive or policy of the United States government or any state or local government thereof or any federal, state or local regulatory agency or authority having jurisdiction with respect to the distribution of pharmaceutical products within its territorial jurisdiction from selling the Licensed Products within the territorial jurisdiction of such government, regulatory agency or authority and that neither Par nor any of its Affiliates is a Person who, by public notice, is listed by a United States federal agency as debarred, suspended, proposed for debarment or otherwise ineligible for federal programs in the United States (an "Ineligible Person") or Person from whom any United States federal, state or local government, regulatory authority or agency which purchases pharmaceutical products (including, without limitation, the federal Defense Logistics Agency) will or may not purchase any products or with whom it will or may not otherwise conduct business as a result of any of its Affiliates or Par being publicly listed or otherwise. ARTICLE VI DELIVERY 6.1 Licensed Products shall be made available to PRI for pickup ready for shipment in Standard Packaging, or as otherwise permitted by the FDA, at SANO's facilities located in Plantation, Florida, or such other facilities in the continental United States as SANO may utilize with the consent of Par, which consent shall not be unreasonably withheld or delayed, and SANO shall use its reasonable efforts to make available to Par sufficient quantities of the Licensed Products to satisfy orders for the Licensed Products. SANO shall be solely responsible for the contents of the labels and artwork on all finished labeled products sold by PRI and its Affiliates. SANO shall provide all Standard Packaging for the Licensed Products. 6.2 To assist SANO in scheduling production for the manufacture of the Licensed Products, Par shall provide to SANO, quarterly, a nine month rolling forecast of its requirements for a Licensed Product. The first forecast shall be provided by Par to SANO approximately six months prior to the anticipated market launch of a Licensed Product, as reasonably estimated by the parties, and thereafter shall be provided to SANO on or before the 20th day of the first 10 month of each successive quarterly period (to forecast the requirements for the next nine succeeding calendar months). It is understood and agreed that all forecasts are estimates only and Par shall only be bound to purchase the Licensed Products pursuant to purchase orders submitted by it to SANO. All purchase orders shall be for minimum batch size quantities reasonably agreed by the parties and shall anticipate an order/production/availability cycle of approximately twelve weeks during the first two contract years (as defined below) of this Agreement and an order/production/availability cycle of approximately sixteen weeks thereafter. 6.3 Par shall arrange for shipping and/or transportation of the Licensed Products from SANO's facility to Par's Spring Valley, New York facility and pay all shipping and related costs. Risk of loss and title to the Licensed Product(s) shall pass to Par upon pick-up of the Licensed Products by, on behalf of or for the account of Par at SANO's facility. 6.3.1 SANO shall promptly notify Par by both fax and telephone that any order (or part thereof acceptable to Par) is available for pick-up at SANO (this notice shall hereafter be referred to as the "Availability Notice"). 6.3.2 Par shall use reasonable and good faith efforts to pick up the Licensed Products that are the subject of an Availability Notice within ten (10) business days of receipt of the Availability Notice; provided that, if such pickup has not occurred on or prior to the expiry of such ten day period, Par shall, for purposes of its payment obligations to SANO pursuant to Section 7.2 below, be deemed to have picked up the Licensed Products which are the subject of the Availability Notice on the last business day of such ten-day period. If the Licensed Products in question have not been picked up by or on behalf of Par within twenty (20) business days of an Availability Notice, SANO may, but shall not be obligated to, cause the Licensed Products to be delivered to Par's Spring Valley, New York, facility by truck or other overland delivery at Par's sole cost and expense and risk of loss and title to the Products shall pass to Par upon pickup of the Products at SANO's facility in the same manner as if the pickup had been effected by Par itself, provided that SANO shall provide for the Licensed Products to be insured during transit in a commercially reasonable manner at Par's sole cost and expense. ARTICLE VII PAYMENTS AND PAYMENT TERMS 7.1 [INTENTIONALLY OMITTED] 7.2 Price. The price to PRI for each order, or part thereof reasonably acceptable to PRI as contemplated in Section 8.2(d), of Licensed Products made available to PRI hereunder shall be SANO's Costs related to such order or part thereof. Par shall also pay to SANO any applicable federal or state sales or excise tax payable on the purchase of such Licensed Products, which payment shall be remitted with the payment of the price as contemplated in Section 7.3 below and upon payment thereof by Par to SANO, SANO shall be solely responsible for remitting the amount so paid on account of such taxes to the relevant 11 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION governmental collecting authorities. Promptly upon Par's request, SANO shall provide Par with reasonable evidence of such direct costs and applicable taxes and payment of such taxes. 7.3 Payment Terms. Payment for each order of Licensed Products made available by SANO for pick-up by Par shall be due within 35 days of pick-up (whether actual or deemed pursuant to Section 6.3.2) by Par at SANO's facility. 7.4 Additional Licensed Product Fee. Upon request by SANO, Par will remit up to an aggregate of [****] to fund skin irritation studies required by the FDA for any of the Licensed Products. Such request shall specify the amount to be paid for the specific Licensed Product which is the subject of such study or studies, and the amount so paid by Par shall be deemed an addition to and part of the Licensed Product Fee for such Licensed Product. 7.5 Additional Consideration. Par shall pay to SANO the Additional Consideration described in Section 11.1 and Schedule B hereto, in accordance with the provisions of said Section 11.1. ARTICLE VIII PRODUCT ACCEPTANCE 8.1 SANO shall manufacture the Licensed Products and make them available for pickup by Par in accordance with all applicable laws, rules and regulations including, without limitation, the Specifications applicable to the Licensed Product in question, Current Good Manufacturing Practices of the FDA (as the same may change from time to time) and all other applicable requirements of the FDA and other governmental authorities having jurisdiction. 8.2 All Licensed Products made available for pick up by Par shall be accompanied by quality control certificates of analysis signed by a duly authorized laboratory official of SANO confirming that each batch of Licensed Product covered by such certificate meets its release Specifications and shall be deemed accepted by it unless Par, acting reasonably and in good faith, shall give written notice of rejection (hereafter referred to as a "Rejection Notice") to SANO within 35 days after pick up of the Licensed Products by, on behalf of or for the account of Par at SANO's facility. (a) The Rejection Notice shall state in reasonable detail (sufficient to enable SANO to identify the nature of the problem and the tests or studies to be conducted by or on its behalf to confirm or dispute same) the reason why the Licensed Products are not acceptable to Par. If the Licensed Products meet the applicable provisions of Section 8.1 and are in quantities specified in a 12 purchase order, Par shall not be entitled to reject them. Any Rejection Notice shall be accompanied by copies of all written reports relating to tests, studies or investigations performed to that date by or for Par on the Licensed Product batch rejected. (b) Upon receipt of such Rejection Notice, SANO may require Par to return the rejected Licensed Products or samples thereof to SANO for further testing, in which event such Licensed Products or samples thereof, as the case may be, shall be returned by Par to SANO or, at SANO's direction, at SANO's expense. If it is later determined by the parties or by an independent laboratory or consultant that Par was not justified in rejecting the Licensed Products or that Par or its Affiliates were the cause of or were responsible for the problem, Par shall reimburse SANO for the costs of the return, as well as any other costs or expenses incurred by SANO as a result of the rejection or return. (c) Par's test results or basis for rejection shall be conclusive unless SANO notifies Par, within 30 days of receipt by SANO of the rejected Licensed Products or samples or such longer periods of time as may be reasonable in the circumstances to enable SANO to conduct (and receive the results of) the appropriate tests, studies or investigations which SANO should reasonably conduct to confirm the problem in question and to identify the source thereof, that it disagrees with such test results or its responsibility for the problem in question. In the event of such a notice by SANO, representative samples of the batch of the Licensed Product in question shall be submitted to a mutually acceptable independent laboratory or consultant (if not a laboratory analysis issue) for analysis or review, the costs of which shall be paid by the party that is determined by the independent laboratory or consultant to have been responsible for the rejection. (d) If a Licensed Product is rejected by Par, Par's duty to pay the amount payable to SANO pursuant to Section 7.2 hereof in respect of the rejected Licensed Product shall be suspended until such time as it is determined (i) by an independent laboratory or consultant that the Licensed Product in question should not have been rejected by Par or (ii) by the parties or by any arbitration conducted pursuant hereto or by a final order of a court of competent jurisdiction (which is not subject to further appeal) that any act or omission of, on behalf of or for which Par or its Affiliates is responsible was the cause of the problem that was the basis for the rejection. If only a portion of an order is rejected, only the duty to pay the amount allocable to such portion shall be suspended. 8.3 In the event any Licensed Products are appropriately rejected by Par (being Licensed Products that do not meet the applicable provisions of Section 8.1 other than as a result of any act or omission by Par or its Affiliates), SANO shall replace such Licensed Products with conforming goods or, if requested by Par, shall provide a credit to Par for the amount, if any, previously paid by Par to SANO on account of the Licensed Products in question. The credit shall be provided by SANO to Par immediately following the expiry of the period during which SANO may dispute a Rejection Notice as contemplated in Section 8.2(c) above (unless the Rejection Notice is disputed by SANO, in which event such credit shall be given only if the dispute is resolved in favor of Par). Replacement Licensed Products, as aforesaid, shall be delivered to Par at no cost to Par if Par has already paid for the rejected Licensed Products and not received a credit therefor, as aforesaid. All delivery costs, including 13 insurance, incident to the return of Licensed Products to SANO and delivery of the replacement Licensed Products to Par's Spring Valley facility shall be paid by SANO, unless the rejection is determined not to have been appropriately rejected, in which case the last sentence of Section 8.2(a) shall apply. ARTICLE IX RETURNS AND ALLOWANCES 9.1 Returns. If Par, acting reasonably and in good faith, accepts from a customer a return of a Licensed Product and issues to such customer a credit for the invoice price thereof, Par may debit against the amount of Additional Consideration, as hereinafter defined, due to SANO with respect to Net Sales, as hereinafter defined, in the month in which such return occurs, any Gross Profit, as hereinafter defined, previously paid, credited or due to SANO in respect of the sale of such returned Licensed Product. 9.2 Handling of Returns. (a) In the event any Licensed Product is returned to Par by its customers because the Licensed Product is alleged to be defective and Par reasonably believes that such defect is due to the fault of SANO, Par shall notify SANO within ten (10) working days of any such return and provide or make available to SANO such samples (if available) and other information concerning the returned Licensed Product so as to allow SANO to test and evaluate the allegedly defective Licensed Product. Par shall retain a sufficient number of samples of the allegedly defective Licensed Product so that additional samples are available at a later date should additional testing be required by an independent testing laboratory as described in Section 9.3(b) below, or by Par or SANO for their own purposes. If not enough samples exist to be so divided, then the parties shall confer and reach agreement as to the handling of any available samples. (b) SANO shall complete its review and evaluation of the returned Licensed Product within twenty (20) business days of receiving the returned Licensed Product from Par or such longer period of time as may be reasonable in the circumstances to enable SANO to conduct or cause to be conducted such tests, studies or investigations (and to receive the results therefrom) as may be required to confirm or dispute the existence of the problem or to identify the cause or source thereof. 9.3 Costs and Credits. (a) If SANO concludes or it is otherwise determined pursuant to Section 9.3(b) hereof that the returned Licensed Product is defective due to the fault of SANO: (i) any replacement Licensed Product to be provided by SANO in respect of the returned Licensed Product shall be made available to Par without charge or appropriate credit shall be given therefor (giving account to any adjustment made pursuant to Section 9.1 hereof); 14 (ii) all delivery costs, including insurance, incident to the delivery of the replacement Licensed Products to Par's Spring Valley facility shall be paid by SANO or appropriate credit shall be given therefor; and (iii) SANO shall provide a credit to Par for the reasonable costs incurred by Par (or where the duty has been performed by an Affiliate, pursuant to the provisions of this Agreement, for the reasonable costs incurred by such Affiliate) in respect of the defective Licensed Product. (b) If SANO asserts that the returned Licensed Product is defective due primarily to any act or omission of Par or its Affiliates or any agents or other persons acting on their behalf as aforesaid, then representative samples of the Licensed Products shall be submitted to a mutually acceptable independent laboratory or consultant (if not a laboratory analysis issue) for analysis or review, the costs of which shall be paid by the party determined by the independent laboratory or consultant to have been responsible. (c) If it is determined in accordance with Section 9.3(b) above that any such defect is primarily due to any act or omission by Par, then no credit or other payment of costs shall be due from SANO, and Par shall reimburse SANO for all costs and expenses it incurred in connection with the return and investigation. (d) If it is determined in accordance with Section 9.3(b) above that no such defect exists or, if existing, cannot be attributable primarily to an act or omission of either party, then any replacement Licensed Product in respect of the returned Licensed Product shall be made available to Par without additional charge or appropriate credit, if any, shall be given therefor, but no other credits or payments of costs shall be due from SANO. 9.4 Par acknowledges that the Licensed Products may be of a perishable nature and that the Licensed Product must be stored and shipped in accordance with the Specifications applicable thereto (to the extent disclosed in writing to Par or its Affiliates) or the conditions, if any, set forth on its package label. 9.5 Par agrees to notify SANO of any customer complaints with respect to the quality, nature or integrity of a Licensed Product or alleged adverse-drug experiences ("ADE") within five (5) working days of their receipt by Par and of any Par or FDA complaints within 24 hours, except on weekends and holidays. SANO shall have the sole and primary obligation to file any required adverse experience report with FDA. SANO shall also be responsible for maintaining complaint files as required by FDA regulations. SANO agrees to investigate and respond in writing to any complaint or ADE forwarded to it by Par promptly and in no event later than 30 days after receipt of the ADE or complaint from Par (or such longer period as may be required in the circumstances to enable SANO to conduct such tests, studies or investigations as may be reasonably required [and to receive the results therefrom] to enable SANO to appropriately respond). SANO shall provide Par with a copy of any correspondence, reports, or other documents relating to a complaint or ADE within a reasonable period following generation of such document by SANO. 15 9.6 The provisions of this Article 9 shall survive the termination or expiration of this Agreement. ARTICLE X DAMAGES, INDEMNIFICATION AND INSURANCE 10.1 Subject to the limitations set forth in this Article X and to the other provisions of this Agreement, SANO, on the one hand, and Par, on the other hand, covenant and agree to indemnify and save harmless the other of them from and against any and all claims, demands, actions, causes of action, suits, proceedings, judgments, damages, expenses (including reasonable attorney fees and expenses), losses, fines, penalties and other similar assessments (the "Damages") relating to or arising out of a breach by any such party of any of its representations, warranties, covenants or agreements contained herein; provided that, except where the breach arises out of a representation or warranty made by a party in this Agreement being intentionally false or inaccurate, or constitutes a willful material breach by a party of any of its duties or obligations hereunder, the claim of an aggrieved party for Damages arising out of the breach shall be limited to claiming the amounts owing or payable to it in accordance with the provisions of this Agreement and any out-of-pocket costs and expenses (including amounts paid or payable by it to third parties, other than re-procurement costs [except to the extent contemplated in Section 14.3 hereof] which it has incurred and the aggrieved party shall not be entitled to recover from the defaulting or breaching party any lost profits or consequential or punitive damages, including loss or damage to its goodwill or reputation. For purposes of this Agreement where Par is in breach of its duties or obligations hereunder and such duties or obligations, if delegated by Par to any of its Affiliates, could reasonably be performed by such Affiliate and Par has either not delegated such duty or obligation to such Affiliate or such Affiliate has either refused to perform or willfully breached such duty or obligation then Par shall be deemed to have willfully breached such duty or obligation hereunder. Similarly, whenever in this Agreement Par is required to cause any of its respective Affiliates to do or to refrain from doing any thing herein provided and such Affiliate refuses to do or refrain from doing such thing or otherwise willfully breaches the provision herein contemplated (on the assumption that such Affiliate were bound by the provision herein contemplated as if a signatory hereto) then Par will be deemed to have willfully breached the provision of this Agreement in question. 10.2 In the event that the release of a Licensed Product by Par or its Affiliates in the United States results in a third party claim: (a) to the extent that the Damages awarded or incurred relate to or arise out of the safety or effectiveness of the Licensed Product or the manufacturing, packaging, labeling, storage or handling of the Product by SANO, SANO shall be responsible therefor and shall indemnify and hold Par harmless from and against all such damages; and (b) to the extent that the Damages awarded or incurred relate to or arise out of the transportation, storage, handling or selling of the Licensed 16 Product by Par or its Affiliates, then Par shall be responsible therefor and shall indemnify and hold SANO harmless from and against all such damages. Upon the assertion of any third party claim against a party hereto that may give rise to a right of indemnification under this Agreement, the party claiming a right to indemnification (the "Indemnified Party") shall give prompt notice to the party alleged to have the duty to indemnify (the "Indemnifying Party") of the existence of such claim and shall give the Indemnifying Party reasonable opportunity to control, defend and/or settle such claim at its own expense and with counsel of its own selection; provided, however, that the Indemnified Party shall, at all times, have the right fully to participate in such defense at its own expense and with separate counsel and, provided, further, that both parties, to the extent they are not contractually or legally excluded therefrom or otherwise prejudiced in their legal position by so doing, shall cooperate with each other and their respective insurers in relation to the defense of such third party claims. In the event the Indemnifying Party elects to defend such claim, the Indemnified Party may not settle the claim without the prior written consent of the Indemnifying Party. The Indemnifying Party may not settle the claim without the prior written consent of the Indemnified Party unless, as part of such settlement, the Indemnified Party shall be unconditionally released therefrom or the Indemnified Party otherwise consents thereto in writing. If the Indemnifying Party shall, within a reasonable time after such notice has been given, fail to defend, compromise or settle such claim, then the Indemnified Party shall have the right to defend, compromise or settle such claim without prejudice to its rights of indemnification hereunder. Notwithstanding the foregoing, in the event of any dispute with respect to indemnity hereunder, each party shall be entitled to participate in the defense of such claim and to join and implead the other in any such action. In addition to the foregoing, SANO will defend, at its sole cost and expense, its rights with respect to the Licensed Products and Par's rights to distribute the Licensed Products hereunder against any claim, action, suit or proceeding ("Action") by any third party asserting prior or superior rights with respect to the Licensed Product, product infringement or similar claims (other than as may be based on acts of Par not contemplated herein or authorized hereby) and shall indemnify and hold Par and its affiliates harmless from the cost of the defense thereof. Par shall, at all times, have the right fully to participate in such defense at its own expense. SANO shall control such defense and shall, in its reasonable discretion, defend or settle such Action; provided that, notwithstanding the foregoing SANO shall not enter into any settlement or compromise of any such Action which requires Par or any of its Affiliates to make payments of any kind without the prior written consent of Par or an unconditional release of Par and its Affiliates with respect to the subject matter of such Action. The provisions of this paragraph should not be construed as requiring SANO to bear any damages, judgments or other liabilities entered against Par in any such Action, provided that the foregoing shall not be construed as or deemed a waiver of any rights Par may have against SANO as a result of such Action hereunder, at law or otherwise, and all of such rights, if any, are expressly reserved. 10.3 Insurance. Each of SANO and Par shall carry product liability insurance in an amount at least equal to Ten Million Dollars ($10,000,000) with an insurance carrier reasonably acceptable to the other party, such insurance to 17 be in place at times reasonably acceptable to the parties, but not later than the date of the first commercial sale of a Licensed Product. Each party shall promptly furnish to the other evidence of the maintenance of the insurance required by this Section 10.3 and shall name the other as an "additional insured" under such insurance policy. Each party's coverage shall (i) include broad form vendor coverage and such other provisions as are typical in the industry and (ii) name the other party as an additional insured thereunder. SANO shall carry clinical testing insurance in an amount and at times reasonably acceptable to the parties. 10.4 Survival. The provisions of this Article X shall survive the termination or expiration of this Agreement, provided that the requirement to maintain the insurance contemplated in Section 10.3 above shall only survive for a period of 36 months from the effective date of termination or expiration of this Agreement. ARTICLE XI ADDITIONAL CONSIDERATION, REPORTING AND VERIFICATION 11.1 Additional Consideration. As additional consideration for SANO entering into this Agreement and permitting Par to sell the Licensed Products in the United States in accordance with the provisions hereof, Par agrees to pay to SANO the additional amounts more particularly described in Exhibit B to this Agreement in respect of the aggregate Gross Profit (as that term is defined in Exhibit B) of the Licensed Products. The amount payable to SANO determined in accordance with Exhibit B is herein and in Exhibit B annexed hereto referred to as the "Additional Consideration." Par shall pay to SANO, monthly, on the seventh day of each month, commencing on the seventh day of the third month after the month in which sales of the Licensed Products commence, the Additional Consideration payable to SANO in respect of the Net Sales of the Licensed Products made by Par and its Affiliates during the third preceding month. For greater certainty, examples of what constitutes the "third preceding calendar month" are contained in Exhibit B annexed hereto. The consideration payable to SANO pursuant to this Article XI shall be paid to it as part of the sale price of the Licensed Product from SANO to Par and shall not be treated as a royalty or similar payment. 11.2 Reporting and Information Obligations of Par. (a) Approved Contracts. Par shall provide to SANO, monthly, within seven days of the expiry of each calendar month during the term hereof, a copy of each Approved Contract (as hereinafter defined), entered into by Par with its customers during the immediately preceding month irrespective of whether a copy of such contract had previously been forwarded to SANO. If the Approved Contract has a term of less than 18 months, Par may delete (e.g., by blacking out) any information in the Approved Contract that tends to indicate the identity or location of the Par customer; provided, however, that Par marks each such Approved Contract with a unique customer code relative to the customer that is the party to that Approved Contract. 18 (b) Net Sales and Gross Profits. Par shall report to SANO monthly, on the 7th day of each calendar month during the term hereof and for 12 months after the termination hereof: (i) a sales summary, in the form annexed hereto as Exhibit C, showing all sales of the Licensed Products made by Par and its Affiliates during the immediately preceding calendar month; (ii) a detailed statement showing all returns and all credits, rebates, allowances and other debit and credits relevant to the calculation of Net Sales and Gross Profits (as those terms are defined in Exhibit B annexed hereto) for the immediately preceding calendar month together with copies of all documentation to support allowable adjustments used in computing Net Sales during the period in question; (iii) a certificate signed by the Chief Financial Officer of Par certifying that, to the best of his knowledge, information and belief, after reasonable investigation, the foregoing statements contemplated in (i) and (ii) above are true and correct and do not omit any material information required to be provided pursuant to this Section 11.2(b) and (iv) a summary of the calculation of the Additional Consideration payable to SANO on such date. For purposes of this Agreement a sale shall be considered to have been made at the time the Product(s) are shipped to the customer. 11.3 Par shall make available for inspection by SANO at Par's facilities and shall cause its Affiliates to make available for inspection by SANO at their respective facilities, promptly following a reasonable request therefor, such additional information concerning any sales (including, without limitation, in respect of any sale, the date of the shipment, the code number of the customer [or the name of the customer in the case of a customer disclosed to SANO pursuant to Section 11.2(a) hereof and an Approved Contract], the number of units of each Licensed Product in each dosage involved (broken down by container size per Product, and the invoice price charged by Par or its Affiliates), credits, returns, allowances and other credits and debits previously reported to SANO pursuant to Section 11.2(b)(ii) hereof or with respect to Approved Contracts previously reported to SANO pursuant to Section 11.2(a) hereof as SANO may reasonably require from time to time (except information concerning the identity or location of a customer where Par is not already required to disclose that information to SANO pursuant to Section 11.2(a) hereof) to enable SANO to confirm or reconcile the amounts which are or were to have been paid to it pursuant to this Agreement (without the need to audit the books and records of Par or its Affiliates pursuant to Section 11.4 hereof). 11.4 Par shall keep and shall cause its Affiliates to keep complete and accurate records and books of account containing all information required for 19 the computation and verification of the amounts to be paid to SANO hereunder. Par further agrees that at the request of SANO, it will permit and will cause its Affiliates to permit one or more accountants selected by SANO, except any to whom Par or such Affiliate has some reasonable objection, at any time and from time to time, to have access during ordinary working hours to such records as may be necessary to audit, with respect to any payment report period ending prior to such request, the correctness of any report or payment made under this Agreement, or to obtain information as to the payments due for any such period in the case of failure of Par to report or make payment pursuant to the terms of this Agreement. Such accountant shall not disclose to SANO any information relating to the business of PRI except that which is reasonably necessary to inform SANO of: (i) the accuracy or inaccuracy of Par's reports and payments; (ii) compliance or non-compliance by Par with the terms and conditions of this Agreement; and (iii) the extent of any such inaccuracy or non-compliance; provided, that if it is not reasonably possible to separate information relating to the business of Par from that which is reasonably necessary to so inform SANO, the accountant may disclose any information necessary to so inform SANO and SANO shall retain all other information disclosed as confidential. Par shall provide and shall cause its Affiliates to provide full and complete access to the accountant to Par's and such Affiliates' pertinent books and records and the accountant shall have the right to make and retain copies (including photocopies). Should any such accountant discover information indicating inaccuracy in any of Par's payments or non-compliance by Par or its Affiliates with any of such terms and conditions, and should Par fail to acknowledge in writing to SANO the deficiency or non-compliance discovered by such accountant within ten (10) business days of being advised of same in writing by the accountant, the accountant shall have the right to deliver to SANO copies (including photocopies) of any pertinent portions of the records and books of account which relate to or disclose the deficiency or non-compliance (to the extent not acknowledged by Par). In the event that the accountant shall have questions which are not in its judgment answered by the books and records provided to it, the accountant shall have the right to confer with officers of Par or such Affiliate, including Par's or such Affiliate's Chief Financial Officer. If any audit under this Section shall reveal an underpayment or understatement of the amount payable to SANO by more than $10,000.00 for any period in question, Par shall reimburse SANO for all costs and expenses relating to such investigational audit. SANO shall only have the right to audit such books and records of Par and its Affiliates pursuant to this Section 11.4 no more often than twice in any contract year unless earlier in such contract year or in any of the prior three contract years such investigation revealed a discrepancy of more than $10,000.00, as aforesaid, in which case SANO shall have the right to audit such books and records three times in such contract year. For purposes of this Agreement, a contract year shall be a period of twelve months commencing on either the date of this Agreement or on an anniversary thereof. Unless the disclosure of same is reasonably required by SANO in connection with any litigation or arbitration arising out of such audit, the accountant shall 20 not reveal to SANO the name or address (or other information reasonably tending to identify the location of a customer) of any customer of Par or its Affiliates [other than one whose name has been disclosed to SANO pursuant to Section 11.2 hereof], but shall identify such customer to SANO, if necessary, by the customer code number used by Par in its reporting obligations to SANO [and Par and its Affiliates shall make such information known to the accountant]. Par may, as a condition to providing any accountant access to its books and records (or those of its Affiliates), require SANO to execute a reasonable confidentiality agreement consistent with the terms of this Section 11.4. 11.5 Except as specifically set forth to the contrary, all payments to be made under this Agreement shall bear interest equal to two percent above the prime rate as quoted by Citibank N.A., New York, New York, calculated daily (as at the close of business on each such day) and compounded monthly, from the day following the day the payment is due until the date on which it is paid. Any adjustment to the prime rate as quoted by Citibank N.A. from time to time shall result in a corresponding adjustment to the rate of interest payable hereunder, the rate of interest quoted by Citibank N.A. at the close of business on each day to be the rate applicable for such day. 11.6 The obligation of Par to make the payments contemplated in Section 11.1 and to provide the reports and information contemplated in Sections 11.2 and 11.3 and the right of SANO to conduct its audits or investigations pursuant to Section 11.4 hereof shall survive the termination or expiration of this Agreement and shall apply to all Licensed Products made available to Par by SANO prior to the effective date of the termination or expiration of this Agreement (or made available to Par after such date pursuant to any provision of this Agreement) notwithstanding that such Licensed Products may have been resold by Par or its Affiliates to its or their customers after the effective date of termination or expiration. For greater certainty, the parties acknowledge and agree that it is their intention that Par pay to SANO the Additional Consideration applicable to Net Sales of all Licensed Products supplied by SANO to Par pursuant to this Agreement (in respect of which the purchase price charged by SANO to Par therefor [whether paid or owing] was determined in accordance with the provisions of Section 7.2 hereof or was provided to Par free of such charge pursuant to any other provision of this Agreement) irrespective of whether such Licensed Product is resold by Par or its Affiliates prior to or subsequent to the effective date of termination or expiration of this Agreement and that SANO's rights pursuant to Section 11.4 hereof shall continue for a period of twelve (12) months following the final sale of all such Licensed Products. 11.7 Par shall have the right, upon reasonable advance written notice to SANO, to inspect SANO's facilities at which the Licensed Products are being manufactured to monitor compliance by SANO with FDA Good Manufacturing Practices and to otherwise confirm that the Licensed Products are being manufactured in accordance with their respective Specifications. Similarly, SANO shall have the right, upon reasonable advance written notice to Par to inspect those facilities of Par and any of its Affiliates which are used in the storage of any of the Licensed Products to ensure compliance by Par or such Affiliate with FDA Good Manufacturing Practices and to otherwise ensure that the Licensed Products do not cease to meet their Specifications as a result of any storage or shipping conducted by Par or its Affiliates. SANO shall cooperate with Par in providing access to its facilities and Par shall cooperate and shall cause its Affiliates 21 to cooperate in providing access to SANO to its facilities and those of its Affiliates used as aforesaid. 11.8 SANO shall keep complete and accurate records and books of account containing all information required for the computation and verification of SANO's Costs as contemplated in Section 7.2 hereof with respect to the Licensed Product(s) made available to Par by SANO pursuant hereto. SANO further agrees that at the request of Par it will permit one or more accountants selected by Par except any to whom SANO has some reasonable objection, to have access during ordinary working hours to such books and records as may be necessary to audit the amounts previously charged by SANO to Par pursuant to Section 7.2 hereof. Such accountant shall not disclose to Par any information relating to the business of SANO except the accuracy or inaccuracy of SANO's previously reported charges and the amount, if any, that Par may have been overcharged or undercharged with respect to Licensed Products made available to it. Should any such accountant discover information indicating that Par has been overcharged for Products made available to it, and should SANO fail to acknowledge in writing to Par the inaccuracy discovered by such accountant within ten (10) business days of being advised of same in writing by the accountant, the accountant shall have the right to make and retain copies (including photocopies) of any pertinent portions of the records and books of account which relate to or disclose the inaccuracy (to the extent not acknowledged by SANO). SANO shall provide full and complete access to the accountant to SANO's pertinent books and records. In the event that the accountant shall have questions which are not in its judgment answered by such books and records, the accountant shall have the right to confer with officers of SANO, including SANO's Chief Financial Officer. If any audit under this Section shall reveal an overstatement of the amount payable to SANO by more than $10,000.00 for the Licensed Products in question, SANO shall reimburse Par for all costs and expenses relating to such investigation/audit. It is understood and agreed that Par shall only have the right to audit such books ad records of SANO pursuant to this Section 11.8 no more often than twice in any contract year unless earlier in such contract year or in any of the prior three contract years such investigation revealed a discrepancy of more than $10,000.00, as aforesaid, in which case Par shall have the right to audit such books and records three times in such contract year. Unless the disclosure of same is reasonably required by Par in connection with any litigation or arbitration arising out of such audit, the accountant shall not reveal to Par the name or address (or other information reasonably tending to identify the location of a supplier) of any supplier of materials to SANO in the manufacturing or packaging of the Licensed Products (but shall identify such supplier to Par if necessary, by a code name or number supplied by such accountant) or the name of or financial information relating to any employee of SANO. SANO may, as a condition to providing any accountant access to its books and records, require Par to execute a reasonable confidentiality agreement consistent with the terms of this Section 11.8. The rights of Par pursuant to this Section 11.8 shall survive the termination or expiration of this Agreement for a period of one year. 22 ARTICLE XII RIGHT OF FIRST REFUSAL 12.1 Right of First Refusal. During the term hereof, Par shall have the right of first refusal to distribute the Licensed Products in the State of Israel, on a product by product basis, in accordance with the following procedures. 12.2 Procedures. For each Licensed Product with respect to which SANO proposes to enter into a distribution agreement in Israel with a third party, SANO shall communicate to Par in writing a reasonably detailed description of the provisions of such agreement (a "Proposed Israeli Distribution Agreement"). Within 30 days of its receipt of a Proposed Israeli Distribution Agreement (the "Acceptance Period"), Par shall notify SANO whether it wishes to enter into an agreement with SANO on such terms. If Par notifies SANO within the Acceptance Period that it wishes to do so, Par and SANO will enter into a distribution agreement on such terms. If Par fails to notify SANO of its election to enter into such an agreement within the Acceptance Period, SANO may enter into a license or distribution agreement with respect to such Licensed Product with a third party on substantially the same terms as set forth in the Proposed Israeli Distribution Agreement and Par's rights under this Article XII will terminate. SANO may not enter into such an agreement with a third party on terms substantially different from those set forth in the relevant Proposed Israeli Distribution Agreement without first offering such terms to Par for a period of thirty days. If SANO shall not enter into the Proposed Israeli Distribution Agreement within 30 days following the expiration of the Acceptance Period or any extension thereof as set forth in the preceding sentence, SANO's execution of any such Agreement or any other Proposed Israeli Distribution Agreement shall again be subject to Par's rights under this Article XII. Each Proposed Israeli Distribution Agreement for each Licensed Product shall be subject to Par's rights of first refusal in accordance with the procedures set forth in this Section 12.2. ARTICLE XIII TERMS AND TERMINATION 13.1 This Agreement shall become effective on the date hereof and shall remain in effect for a period of ten years per Licensed Product starting on the date such Licensed Product becomes available for sale in commercial quantities, unless earlier terminated in accordance with the provisions of this Agreement. Thereafter, this Agreement shall automatically be renewed as to each Licensed Product from year to year unless either party gives notice of termination to the other party at least one hundred and twenty days prior to the expiry of the initial term or of any renewal term. 13.2 Either party may, by notice in writing to the other party, terminate this Agreement if such other party shall have breached any of its material duties or obligations under this Agreement (other than the obligations of Par to pay to SANO any amount due to SANO hereunder [whether on account of 23 Additional Consideration, the price for the Licensed Products or otherwise] or to provide SANO with the reports or information contemplated in Section 11.2 or 11.3 hereof) and such breach shall remain uncured for at least sixty days after the aggrieved party shall have given notice of the breach to the other party. 13.3 SANO may, by notice in writing to Par, terminate this Agreement if Par fails to pay to SANO any amount payable by Par to SANO hereunder, whether on account of the Additional Consideration, the purchase price for the Licensed Products, interest or otherwise, as and when the same shall have become due and payable or Par shall have failed to deliver (or caused to be delivered, as the case may be), in timely fashion, the reports or information contemplated in Section 11.2 or 11.3 hereof, and in either case, such breach shall have continued unremedied for a period of twelve business days after written notice of such breach has been given by SANO to Par; provided that Par shall not have the right to such twelve-day grace period within which to cure such default and SANO shall have the immediate right to terminate the Agreement for such breach if Par shall have previously breached Section 11.2 or 11.3, or failed to remit any sums of at least $10,000.00 to SANO, when due, in the aggregate, one time in the twelve month period immediately preceding the default in question. 13.4 Either party may terminate this Agreement on thirty days prior written notice to the other party if such party or the other party is legally prohibited from performing its obligations hereunder (other than by reason of a breach of its obligations hereunder) or becomes (or, in the case of Par, its Affiliate becomes) an Ineligible Person (and, where the party purporting to terminate the Agreement is also the party prohibited from performing or it or its Affiliate is the Ineligible Person, it [or its Affiliate, as the case may be] has made diligent good faith best efforts to remove the prohibition or its status as an Ineligible Person) and such prohibition or status as an Ineligible Person shall have continued uninterrupted for a period of 120 days. 13.5 Either party may terminate this Agreement in respect of a particular Licensed Product (the "Specific Product"), but this Agreement shall continue in respect of any other Licensed Product, on thirty (30) days prior written notice to the other party (which notice must be delivered within 90 days of the expiration of the applicable contract year) if the aggregate Net Sales of the Specific Product made by PRI and its Affiliates for any complete contract year after the second anniversary of the date on which such Specified Product became available for sale shall be less than the amounts stated in or determined pursuant to Section 13.8; provided, however, SANO may not terminate with respect to any Specific Product pursuant to this Section 13.5 without the consent of Par in the event that SANO shall have previously terminated the exclusive nature of the Right pursuant to Section 13.8 and shall be selling, directly or indirectly, such Licensed Product in the United States. 13.6 Either party may terminate this Agreement in accordance with the provisions of Section 15.1 hereof. 13.7 Par or SANO shall have the right to terminate this Agreement upon written notice to the other in the event that any one or more of the following events shall become applicable to such other party (herein referred to as the "Party"): 24 (a) an order is made or a resolution or other action of such Party is taken for the dissolution, liquidation, winding up or other termination of its corporate existence; (b) the Party commits a voluntary act of bankruptcy, becomes insolvent, makes an assignment for the benefit of its creditors or proposes to its creditors a reorganization, arrangement, composition or readjustment of its debts or obligations or otherwise proposes to take advantage of or shelter under any statute in force in the United States for the protection of debtors; (c) if any proceeding is taken with respect to a compromise or arrangement, or to have such Party declared bankrupt or to have a receiver appointed in respect of such Party or a substantial portion of its property and such proceeding is instituted by such Party or is not opposed by such Party or if such proceeding is instituted by a Person other than such Party, such Party does not proceed diligently and in good faith to have such proceeding withdrawn forthwith; (d) a receiver or a receiver and manager of any of the assets of such Party is appointed and such receiver or receiver and manager is not removed within ninety days of such appointment; (e) such Party ceases or takes steps to cease to carry on its business. SANO shall similarly have the right to terminate this Agreement upon written notice to PRI if any of the foregoing events becomes applicable to any Affiliate of PRI that has been expressly assigned obligations under this Agreement. 13.8 (a) If (i) in the twenty-four (24) month period (such period being herein referred to as the "A Period") beginning on the date (the "A Commencement Date") the first of any shipments of Licensed Product "A" is made available to Par hereunder, the aggregate Net Sales of Licensed Product "A" for such A Period is less than the Product Sales Threshold (as hereinafter defined); (ii) in the twenty-four (24) month period (such period being herein referred to as the "B Period") beginning on the date (the "B Commencement Date") the first of any shipments of Licensed Product "B" is made available to Par hereunder, the aggregate Net Sales of Licensed Product "B" for such B Period is less than the Product Sales Threshold; or (iii) in any twelve month period commencing on the second and each subsequent anniversary of the A Commencement Date or the B Commencement Date the Net Sales of the relevant Licensed Product sold by Par and its Affiliates in such period is less than the Product Sales Threshold; and the shortfall in sales cannot be attributable primarily to the fault of SANO, SANO shall have the right to convert Par's Right hereunder from an exclusive to a non-exclusive right to 25 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION distribute such Licensed Product upon ninety days prior written notice to Par. As used herein, as to any Licensed Product, the Product Sales Threshold shall mean an amount reasonably agreed upon by Par and SANO after consideration of relevant market factors and conditions, provided that if Par and SANO shall fail or be unable to agree as to any Licensed Product for any period in question, the Product Sales Threshold for such period and Licensed Product shall be [****]. (b) Notwithstanding the exercise by SANO of its right pursuant to Section 13.8(a) hereof, and the resultant conversion of Par to a non-exclusive distributor hereunder, Par shall have the right to sell the Licensed Products on a non-exclusive basis on the terms and conditions as set forth herein, except as provided otherwise in this Paragraph 13.8, during the balance of the term of the Agreement (subject to earlier termination as herein provided) and SANO shall continue to supply the Licensed Products to Par in accordance with the provisions hereof, provided that the obligation of SANO to use its reasonable best efforts to supply Par with its requirements of the Licensed Products shall take into account Par's requirements as well as the requirements of SANO and any other third party distributor or distributors appointed by SANO to sell the Licensed Products in the United States. (c) In the event that SANO exercises its rights under Section 13.8(a) and contemporaneously therewith or subsequent thereto enters into an agreement with any Person (herein referred to as a "Third Party Licensee"), authorizing or licensing such Third Party Licensee to sell any of the Licensed Products in the United States on royalty, payment or other cash equivalent or otherwise readily economically measured terms more favorable to the Third Party Licensee (such more favorable terms being herein referred to as the "MFP") then: (i) SANO shall promptly notify Par of such agreement and shall describe in the notice both the MFP and any obligations, duties, undertakings or other consideration to be provided by the Third Party Licensee; and (ii) Par shall have thirty days from the date of receipt of such notice to notify SANO whether Par desires to have the benefit of the MFP, which can be accepted only if Par shall agree (to the extent not already assumed in this Agreement) to any additional obligations, duties, or undertakings, and to provide any consideration to be provided by the Third Party Licensee. Par's entitlement to seek the benefit of the MFP shall be conditioned upon and subject to Par assuming and being capable of fully performing all the non-cash obligations assumed by the Third Party Licensee in a manner substantially as valuable to SANO. If Par shall dispute such assessment, Par shall so notify SANO, whereupon the issue shall be deemed to be a dispute between the parties and subject to resolution pursuant to Section 15.2 hereof. 26 13.9 Notwithstanding the termination or expiration of this Agreement pursuant to this Article XIII or any other provision of this Agreement, all rights and obligations which were incurred or which matured prior to the effective date of termination or expiration, including accrued Additional Consideration and any cause of action for breach of contract, shall survive termination and be subject to enforcement under the terms of this Agreement. Termination of this Agreement shall not affect any duty of Par or SANO existing prior to the effective date of termination or expiration and which is, whether or not by expressed terms, intended to survive termination. Without limiting the generality of the foregoing, termination shall not affect any duty to keep confidential any Confidential Information (within the meaning of Section 14.4 hereof) disclosed by one party to the other (or its Affiliate) as contemplated in Section 14.4 hereof, but rather such Confidential Information shall be held by the receiving party subject to such restrictions on use and disclosure as provided in the said Section. 13.10 Upon termination of this Agreement by Par pursuant to Section 13.2 or 13.7 or pursuant to Section 13.4 as a result of SANO's inability to perform its obligations hereunder or becoming an Ineligible Person or the termination of this Agreement by SANO pursuant to Section 13.5 hereof, SANO shall, at the request of Par, repurchase all Licensed Products then in the possession, custody or control of Par and available for sale (and which have not been adulterated since they were made available for pick up by Par) and all packaging material in the possession, custody or control of Par which were specifically acquired by Par for these Licensed Products and which cannot be used by Par or its Affiliates for any other products sold by any of them, at the price originally paid by Par therefor plus all transportation costs previously incurred (even if not yet paid) by Par payable in cash on delivery by Par to SANO. SANO shall pay all transportation costs associated with shipping the repurchased Licensed Product to SANO or to such other places SANO may require. 13.11 In the event that this Agreement is terminated pursuant to the provisions of Section 13.4 hereof as a result of a party (herein referred to as the "Prohibited Party") being unable to perform its obligations hereunder as therein contemplated or having become (or its Affiliate having become) an Ineligible Person and within twelve (12) months of the effective date of termination of this Agreement the Prohibited Party is again able to perform its obligations hereunder or has ceased (or its Affiliate has ceased) to be an Ineligible Person, then the Prohibited Party shall, by notice in writing, advise the other party (herein referred to as the "Receiving Party") that it is no longer legally prohibited from performing its duties and obligations hereunder or that it has ceased (or that its Affiliate has ceased) to be an Ineligible Person and the Receiving Party shall have the right, to be exercised by notice in writing given to the Prohibited Party within thirty (30) days of receipt of the aforesaid notice from Prohibited Party, to reinstate this Agreement; provided, however, that if the Prohibited Party is Par then SANO shall have the right to reinstate this Agreement as if a proper notice had been given pursuant to Section 13.8 of this Agreement and Par shall be reinstated on a non-exclusive basis, but only to the extent that such reinstatement will not violate the provisions of any agreement SANO shall have entered into during the period Par was a Prohibited Party. 27 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 13.12 If SANO terminates this Agreement pursuant to Section 13.2, 13.3 and 13.7 hereof then Par shall not and shall cause its Affiliates not to, for a period of twelve (12) months following the effective date of termination, sell in the United States any Competitive Product. 13.13 In the event that SANO terminates this Agreement in respect of a Specific Product pursuant to Section 13.5 hereof, SANO shall, at the request of Par, make available to Par within a reasonable period of time of such termination, such number of units of such Specific Product as shall be equal to the net number of units of such Specific Product sold by Par during the entire contract year immediately preceding the year in which this Agreement is so terminated or such lesser number of units of each such Specific Product as Par shall advise SANO in writing within ten business days of such termination. Such Specific Product shall be made available to Par in accordance with the provisions of this Agreement and the provisions of this Agreement shall apply to all such Specific Product as if such Specific Product had been supplied by SANO during the term of this Agreement. (a) If SANO has not received an approval of an ANDA for Licensed Product B prior to the later of [****] for Par may terminate this Agreement with respect to Licensed Product B by providing SANO with written notice of such termination and neither party shall have any obligation hereunder with respect to Licensed Product B other than applicable confidentiality provisions and the payment by SANO described in the following sentence. In the event of such termination, SANO shall pay Par the sum of (i) [****] and (ii) the amount paid by Par in respect of Licensed Product B pursuant to Section 7.4 hereof, with half of such sum payable three (3) months after SANO's receipt of notice of such termination and half of such sum payable fifteen (15) months after SANO's receipt of notice of such termination. (b) For the purposes of this Section 13.14, the dates on which ANDAs were filed for the respective Licensed Products shall be as set forth on Exhibit A attached hereto. ARTICLE XIV RECALLS, ADMINISTRATIVE MATTERS AND CONFIDENTIALITY 14.1 Recalls. In the event that it becomes necessary to conduct a recall, market withdrawal or field correction (hereafter collectively referred to as "recall") of any Licensed Product manufactured by SANO and sold by Par or its Affiliates the following provisions shall govern such a recall: 28 (a) After consulting with SANO, and on terms and conditions reasonably satisfactory to SANO, Par shall conduct (and shall cause its Affiliate to conduct) the recall and shall have primary responsibility therefore and SANO and Par shall each cooperate with the other in recalling any affected Licensed Product(s). Par covenants and agrees to maintain and to cause its Affiliates to maintain such records of all sales of the Licensed Products made by Par or its Affiliates as are required by the FDA or as are reasonably appropriate for a distributor of pharmaceutical products to maintain so as to enable a recall to be properly completed. (b) Irrespective of whether the recall is initiated by Par or by SANO: (i) If it is later demonstrated that the reason for the recall was due primarily to acts or omissions of SANO (or the safety or efficacy of the Licensed Product other than as a result of acts or omissions of Par or its Affiliates), then SANO shall pay or reimburse, as the case may be, all reasonable direct out-of-pocket expenses, including but not limited to reasonable attorney's fees and expenses and credits and recall expenses claimed by and paid to customers, incurred by Par or SANO in connection with performing any such recall, provided that expenses incurred by Par shall be in accordance with the terms and conditions of the recall approved by SANO; or (ii) If it is later determined that the reason for the recall was due primarily to the acts or omissions of Par or its Affiliates, then Par shall pay or reimburse, as the case may be, all direct out-of-pocket expenses, including but not limited to reasonable attorney's fees and expenses and credits and recall expenses claimed by and paid to customers, incurred by Par or SANO in connection with performing any such recall; or (iii) If the parties are unable to agree that the cause of the recall was due primarily to the act or omission of one of the parties (or its Affiliates, as the case may be) within sixty days of the initiation of the recall and have not commenced arbitration proceedings to resolve such dispute within such sixty day period then all direct out-of-pocket costs incurred by Par and SANO, including but not limited to reasonable attorney's fees and expenses and credits and recall expenses claimed by and paid to customers, shall be shared by the parties in proportion to their sharing of Gross Profits in respect of the Licensed Products recalled. Each of the parties shall use its reasonable best efforts to minimize the expenses of recall which it incurs. It is understood and agreed that the direct out-of-pocket costs and expenses of the recall contemplated in Paragraphs (i), (ii) and (iii) above shall not include the invoice price charged by PRI or its Affiliates to the customers for the Products recalled, which amount shall be dealt with in accordance with the provisions of Section 9 hereof and shall also not include any excess re-procurement costs (within the meaning of Paragraph 14.3 hereof) and related penalties and assessments, which costs, penalties and assessments shall be an expense of Par except to the extent that it is an expense of SANO pursuant to Section 14.3 hereof (provided that where the provisions of Paragraph (iii) above apply, the excess reprocurement costs and 29 related penalties and assessments incurred pursuant to Approved Contracts [as that term is defined in Section 14.3 hereof] shall be shared by the parties in the proportion in which Gross Profits are shared in respect of the recalled Products sold pursuant to such Approved Contracts). (c) All Licensed Products recalled pursuant to this Section 14.1 shall be treated as Licensed Products returned to Par by its customers and the provisions of Section 9 shall apply thereto. (d) The party initiating the recall shall inform FDA of the proposed recall; however, nothing contained herein shall preclude either party from informing FDA of any proposed or actual recall by either party should the recalling party fail to inform FDA of that recall within ten (10) days of a written request by the non-recalling party to so inform FDA. (e) For greater certainty, in the event of a recall, neither party or its Affiliates shall profit from any out-of-pocket expenses incurred by it in connection with the recall and for which it is reimbursed by the other party and, except where the recall relates directly to an intentional breach of a representation or warranty contained in this Agreement or arises directly out of a willful material breach by a party of any of its duties or obligations hereunder (in each case, as contemplated in Section 10.1 hereof), neither party shall have a claim against the other party for any damages, losses or expenses which it suffers or incurs as a result thereof except to the extent permitted or contemplated in this Section 14. (f) Each party shall provide reasonable evidence to the other of the out-of-pocket expenses being claimed by it and the rights of SANO pursuant to Section 11.4 and the rights of Par pursuant to Section 11.8 shall apply thereto. 14.2 ANDA-Related FDA Correspondence. Each of the parties shall provide the other with a copy of any correspondence or notices received by such party from FDA relating or referring to the Licensed Product(s) within ten (10) days of receipt. Each party shall also provide the other with copies of any responses to any such correspondence or notices within ten (10) days of making the response. 14.3 Excess Re-procurement Costs. (a) In the event that a recall occurs which recall was necessitated primarily by any act or omission of SANO and SANO does not supply Par with replacement Licensed Product on a timely basis or if SANO, in breach of its obligations under this Agreement, fails to make Licensed Product(s) available to Par, SANO shall, in addition to any reimbursement required under Section 14.1, pay any excess re-procurement costs and/or related penalties or assessments incurred by, or assessed on, Par by a customer of Par pursuant to an Approved Contract (as that term is defined below) due to Par's inability to supply Licensed Product(s) to such customer due to the aforesaid acts, omissions or breaches of SANO. (b) SANO shall cooperate with Par with respect to any legal or administrative proceedings that arise pursuant to the Approved Contracts as a 30 result of Par's inability to supply Licensed Product(s) to such customer due to the aforesaid acts, omissions or breaches by SANO. The foregoing shall be without prejudice to any other damages, expense or costs that Par may have suffered in connection with SANO's inability to supply the Licensed Product as aforesaid, subject to the limitations and other provisions set forth in this Agreement. (c) For purposes hereof the term "Approved Contract" shall mean a contract entered into by Par on or after the Execution Date with one of its customers: (i) pursuant to which Par agrees to supply such customer with pharmaceutical products which include the Licensed Products (or any of them), and which provides that if Par fails to supply such customer with the Licensed Product in accordance with specified terms and conditions therein set forth then such customer shall have the right to procure a comparable replacement product for the Licensed Product in substitution for the Licensed Products that Par has failed to supply to such customer in accordance with the provisions of its agreement and to charge back to Par any costs and expenses incurred by such customer to acquire such comparable replacement product in excess of the price which was to have been charged by Par to the customer for the Licensed Products which it failed to provide (such excess costs and expenses being the excess re-procurement costs contemplated in Section 14.1 and in this Section 14.3); (ii) which has a term of twelve (12) months or less; and (iii) which provides for the supply of the relevant Licensed Product in an amount not greater than the amount forecast by Par pursuant to Section 6.2 hereof, taking into account all other sales of the Licensed Product in the relevant period; or (iv) where the contract has a term of more than 12 months, or provides for an amount greater than that contemplated by Paragraph (iii) above, SANO has approved or has been deemed to have approved such contract in accordance with the provisions of Section 14.3(v) hereof; or (v) if the approval of SANO as contemplated in Paragraph (iv) above is requested, Par shall have provided to SANO, in accordance with the provisions of this paragraph, a complete copy of the proposed final agreement between Par and its customer prior to entering into such contract. A copy of any contract to be provided to SANO as contemplated in this Paragraph (v) shall be forwarded to SANO in the manner contemplated in Section 15.4 hereof. SANO shall have a period of ten business days from the date upon which copies of such contract are actually received by it as aforesaid to notify Par in writing that it does not approve of the contract and failing such notice from SANO within such ten business day period SANO shall be deemed to have approved of such contract. 31 14.4 Confidentiality. (a) The parties agree that, without the prior written consent of the other party (such consent not to be unreasonably withheld) or except as may be required under law or court order, the provisions of the Agreement shall remain confidential and shall not be disclosed to any Person not affiliated with any of the parties. (b) Par and SANO hereby agree not to reveal or disclose any Confidential Information (as defined below) to any Person without first obtaining the written consent of the disclosing party, except as may be necessary in regulatory proceedings or litigation. For purposes hereof Confidential Information shall mean all information, in whatever form, which is or was disclosed by one party to another or to an Affiliate of the other prior to or during the term of this Agreement and which relates in any way to the Products or to the business of the disclosing party, including, without limitation information relating to customers and pricing. Confidential Information shall not include information that a party can demonstrate by written evidence: (i) is in the public domain (provided that information in the public domain has not and does not come into the public domain as a result of the disclosure by the receiving party or any of its Affiliates); (ii) is known to the receiving party or any of its Affiliates prior to the disclosure by the other party: or (iii) becomes available to the party on a non-confidential basis from a source other than an Affiliate of that party or the disclosing party and Par covenants and agrees to cause its Affiliates to comply with the provisions of this Section 14.4. ARTICLE XV GENERAL TERMS AND CONDITIONS 15.1 Force Majeure Clauses. Neither party shall be considered to be in default in respect of any obligation hereunder, other than the obligation of a party to make payment of amounts due to the other party under or pursuant to this Agreement, if failure of performance shall be due to Force Majeure. If either party is affected by a Force Majeure event, such party shall, within 20 days of its occurrence, give notice to the other party stating the nature of the event, its anticipated duration and any action being taken to avoid or minimize its effect. The suspension of performance shall be of no greater scope and not longer duration than is required and the non-performing party shall use its reasonable best efforts to remedy its inability to perform. The obligation to pay money in a timely manner is absolute and shall not be subject to the Force Majeure provisions, except to the extent prohibited by governmental rule or regulations other than rules or regulations incident to bankruptcy or insolvency proceedings of a party. Force Majeure shall mean an unforeseeable or unavoidable cause beyond the control and without the fault or negligence of a party (and, where the party is Par, beyond the control and without the fault or negligence of any of its Affiliates) including, but not limited to, explosion, flood, war 32 (whether declared or otherwise), accident, labor strike, or other labor disturbance, sabotage, acts of God, newly enacted legislation, newly issued orders or decrees of any Court or of any governmental agency. Notwithstanding anything in this Section to the contrary, the party to whom performance is owed but to whom it is not rendered because of any event of Force Majeure as contemplated in this Section 15.1 shall, after the passage of one hundred and twenty days, have the option to terminate this Agreement on thirty days prior written notice to the other party hereto. For greater certainty, the inability or failure of Par to cause any of its respective Affiliates to comply with any of the provisions of this Agreement expressed o be applicable to its Affiliates or which require such party to cause the Affiliate to do or not to do something shall not be considered Force Majeure unless the Affiliate in question is unable to comply by reason of unforeseeable or unavoidable causes beyond the control and without the fault or negligence of such Affiliate. 15.2 Arbitration. All disputes arising out of, or in relation to, this Agreement (other than disputes arising out of any claim by a third party in an action commenced against a party), shall be referred for decision forthwith to a senior executive of each party not involved in the dispute. If no agreement can be reached through this process within thirty days of request by one party to the other to nominate a senior executive for dispute resolution, then either party hereto shall be entitled to refer such dispute to a single arbitrator for arbitration under Florida law, such arbitration to be held in Miami, Florida on an expedited basis in accordance with the rules and regulations of the American Arbitration Association. Any party demanding arbitration shall with service of its demand for arbitration propose a neutral arbitrator selected by it. In the event that the parties cannot agree upon a neutral arbitrator within thirty (30) days after the demand for arbitration, an arbitrator shall be appointed by the American Arbitration Association who shall be a partner in a Miami, Florida law firm having at least ten (10) partners. 15.3 Assignment. This Agreement may not be assigned nor can the performance of any duties hereunder be delegated by Par or by SANO without the prior written consent of the other parties, which consent shall not be unreasonably withheld; provided that any such assignment shall not relieve the assignor from any of its obligations hereunder or under any other document or agreement delivered by such party pursuant to, or delivered (or acknowledged to have been delivered) contemporaneously with or in connection with the execution of, this Agreement, which shall continue to be binding upon such party notwithstanding such assignment. Notwithstanding the foregoing, Par may delegate from time to time some of its duties hereunder to any of its Affiliates provided that, prior to any such delegation, it gives written notice thereof to SANO (indicating the duties being so delegated and the duration of such delegation); provided that no such delegation shall relieve Par from any of its obligations hereunder in respect of the duties being delegated or otherwise. 15.4 Notices. Any notice required or permitted to be given under this Agreement shall be sufficiently given if in writing and delivered by registered or certified mail (return receipt requested), facsimile (with confirmation of transmittal), overnight courier (with confirmation of delivery), or hand 33 delivery to the appropriate party at the address set forth below, or to such other address as such party may from time to time specify for that purpose in a notice similarly given: If to SANO: SANO Corporation 3250 Commerce Parkway Miramar, Florida 33025 Attn: President Fax: (954) 430-3390 with a copy to (other than regularly prepared notices, reports, etc. required to be delivered hereunder): Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. 1221 Brickell Avenue Miami, Florida 33131 Attn: Gary Epstein, Esq. Fax: 305-579-0717 If to PRI c/o PRI Distributors, Ltd. One Ram Ridge Road Spring Valley, NY 10977 Attn: President Fax: 914-425-7922 with a copy to (other than regularly prepared notices, reports, etc. required to be delivered hereunder): Hertzog, Calamari & Gleason 100 Park Avenue New York, New York 10017 Attn: Stephen A. Ollendorff, Esq. and Stephen R. Connoni, Esq. Fax: (212) 213-1199 Any such notice shall be effective (i) if sent by mail, as aforesaid, five business days after mailing, (ii) if sent by facsimile, as aforesaid, when sent, and (iii) if sent by courier or hand delivered, as aforesaid, when received. Provided that if any such notice shall have been sent by mail and if on the date of mailing thereof or during the period prior to the expiry of the third business day following the date of mailing there shall be a general postal disruption (whether as a result of rotating strikes or otherwise) in the United 34 States then such notice shall not become effective until the fifth business day following the date of resumption of normal mail service. 15.5 Governing Law and Consent to Jurisdiction. (a) Except as otherwise provided herein, this Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of Florida in all respects including matters of construction, validity and performance, but without giving effect to Florida's choice of law provisions. (b) In connection with any action commenced hereunder, each of the undersigned consent to the exclusive jurisdiction of the state and federal courts located in Miami, Florida. Notwithstanding the foregoing, each party also agrees to the jurisdiction of any court which a third party claim has been brought. 15.6 Binding Agreement. This Agreement shall be binding upon the parties hereto, and their respective successors and permitted assigns. 15.7 Entire Agreement. This Agreement and all other documents and instruments delivered by any of the parties or their Affiliates pursuant hereto or in connection with the execution and delivery of this Agreement contain the entire agreement and understanding of the parties with respect to the subject matter hereof and thereof and supersedes all negotiations, prior discussions and agreements relating to the Licensed Products or the Right. This Agreement may not be amended or modified except by a written instrument signed by all of the parties hereto. 15.8 Headings. The headings to the various articles and paragraphs of this Agreement have been inserted for convenience only and shall not affect the meaning of the language contained in this Agreement. 15.9 Waiver. The waiver by any party of any breach by another party of any term or condition of this Agreement shall not constitute a waiver of any subsequent breach or nullify the effectiveness of that term or condition. 15.10 Counterparts. This Agreement may be executed in identical duplicate copies. The parties agree to execute at least two identical original copies of the Agreement. Each identical counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. 15.11 Severability of Provisions. If, for any reason whatsoever, any term, covenant or condition of this Agreement or of any other document or instrument executed and delivered by either Par or SANO pursuant hereto or in connection with the completion of the transaction contemplated herein, or the application thereof to any party or circumstance is to any extent held or rendered invalid, unenforceable or illegal, then such term, covenant or condition: 35 (i) is deemed to be independent of the remainder of such document and to be severable and divisible therefrom and its validity, unenforceability or illegality does not affect, impair or invalidate the remainder of such document or any part thereof; and (ii) continue to be applicable and enforceable to the fullest extent permitted by law against any party and circumstances other than those as to which it has been held or rendered invalid, unenforceable or illegal. 15.12 Publicity. Neither party shall issue any press release or other public statement regarding, or disclosing the existence of, this Agreement without the prior written consent of the other party; provided, however, that neither party shall be prevented from complying with any disclosure obligation it may have under applicable law. The parties shall use their best efforts to agree on the form and content of any such public statement. ARTICLE XVI GUARANTEE OF PRI 16.1 Guarantee. PRI does hereby unconditionally guarantee to SANO the full and prompt payment and performance by Par of all of the obligations of every nature whatsoever to be performed by Par under this Agreement (the "Guaranteed Obligations") as and when required to be paid or performed under this Agreement. The guarantee set forth in the preceding sentence (this "Guarantee") is an absolute, unconditional and continuing guarantee of the full and punctual payment and performance of the Guaranteed Obligations and is in no way conditioned upon any requirement that SANO first attempt to enforce any of the Guaranteed Obligations against Par, any other guarantor of the Guaranteed Obligations or any other Person or resort to any other means of obtaining performance of any of the Guaranteed Obligations. This Guarantee shall continue in full force and effect until Par shall have satisfactorily performed or fully discharged all of the Guaranteed Obligations. No performance or payment made by Par, PRI, any other guarantor or any other Person, or received or collected by SANO from Par, PRI, any other guarantor or any other Person in performance of or in payment of the Guaranteed Obligations shall be deemed to modify, reduce (except to the extent that any such performance or payment shall reduce the Guaranteed Obligations), release or otherwise affect the liability of PRI under this Guarantee which shall, notwithstanding any such payment or performance other than those made by PRI in respect of the Guaranteed Obligations or those received or collected from PRI in respect of the Guaranteed Obligations, remain liable for the amount of the Guaranteed Obligations, until the Guaranteed Obligations are paid and performed in full. 16.2 No Subrogation. Notwithstanding any payment or performance by PRI, PRI shall not be entitled to be subrogated to any of the rights of SANO or any other guarantor or any collateral security held by SANO against Par or any other guarantor or any collateral security for the payment of the Guaranteed Obligations, nor shall PRI seek or be entitled to seek any contribution or reimbursement from Par or any other guarantor in respect of payments made by PRI under this Guarantee. PRI HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS AND CLAIMS WHICH PRI MAY NOW HAVE OR HEREAFTER ACQUIRE TO BE SUBROGATED TO ANY SUCH RIGHTS OF SANO AND TO SEEK OR BE ENTITLED TO SEEK ANY SUCH CONTRIBUTION OR REIMBURSEMENT FROM Par OR ANY OTHER GUARANTOR. THE 36 OBLIGATIONS OF AND WAIVERS BY PRI SET FORTH IN THIS SECTION 16.2 SHALL SURVIVE THE TERMINATION OF THIS GUARANTEE AND THE PAYMENT, PERFORMANCE AND SATISFACTION IN FULL OF ALL OF THE GUARANTEED OBLIGATIONS. 16.3 Amendments, etc. with Respect to Guaranteed Obligations; Waiver of Rights. PRI shall remain obligated under this Guarantee notwithstanding that, without any reservation of rights against PRI and without notice to or further assent by PRI, any demand for payment or performance of any of the Guaranteed Obligations made by SANO may be rescinded by SANO and any of the Guaranteed Obligations continued, and the Guaranteed Obligations, or the liability of any other Person upon or for any part thereof, or any collateral security (or guarantee therefor may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by SANO and this Agreement, any collateral security document or other guarantee or document in connection herewith may be amended, modified, supplemented or terminated, in whole or in part, as SANO may deem advisable from time to time, and any collateral security or guarantee at any time held by SANO for the payment or performance of the Guaranteed Obligations may be sold, exchanged, waived, surrendered or released. SANO shall not have any obligation to protect, secure, perfect or insure any lien at any time held by it as security for the Guaranteed Obligations or for this Guarantee or any property subject thereto. When making any demand hereunder against PRI, SANO may, but shall be under no obligation to, make a similar demand on Par or any other guarantor, and any failure by SANO to make any such demand or to collect any payments from Par or any such other guarantor or any release of Par or such other guarantor shall not relieve PRI of its obligations or liabilities under this Guarantee, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of SANO against PRI. 16.4 Extent of Liability and Waivers. PRI understands and agrees that the obligation of guarantee of PRI pursuant to Section 16.1 are intended to render PRI liable hereunder in each instance where Par would be liable under this Agreement, and no more, and except that the obligations of PRI hereunder shall not be discharged by any bankruptcy or similar proceeding which may discharge Par herefrom. Accordingly, PRI acknowledges that it will not assert, and hereby waives to the fullest extent permitted by law, any rights to avoid performance hereunder available to it as guarantor which are not also available to Par. PRI waives any and all notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by SANO upon this Guarantee or acceptance of this Guarantee; the Guaranteed Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee; and all dealings between Par or PRI, on the one hand, and SANO on the other, pursuant to this Agreement shall likewise be conclusively presumed to have been had or consummated in reliance upon this Guarantee. PRI waives diligence, presentment, protest, demand for payment and notice of default or nonpayment or nonperformance to or upon Par or any other guarantors with respect to the Guaranteed Obligations. When pursuing its rights and remedies hereunder against PRI, SANO may, but shall be under no obligation to, pursue 37 such rights and remedies as it may have against Par or any other Person or against any collateral security or guarantee for the Guaranteed Obligations, and any failure by PRI to pursue such other rights or remedies or to collect any payments from Par or any such other Person or to realize upon any such collateral security or guarantee, or any release of Par or any such other Person or any such collateral security or guarantee, shall not relieve PRI of any liability hereunder and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of SANO against PRI. This Guarantee shall remain in full force and effect and be binding upon PRI and its successors and assigns and shall inure to the benefit of SANO and its successors and assigns, until all the Guaranteed Obligations shall have been satisfied by payment and performance in full. 16.5 Reinstatement. This Guarantee shall continue to be effective, or be reinstated, as the case may be, if at any time payment or performance, or any part thereof, of any of the Guaranteed Obligations is rescinded or must otherwise be restored or returned by SANO upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of Par or PRI, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, Par or PRI, or any substantial part of its or their property, or otherwise, all as though such payments had not been made. 16.6 No Waiver; Cumulative Remedies. SANO shall not by any act (except by a written instrument pursuant to Section 15.7), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any breach of any of the terms and conditions of this Agreement. No failure to exercise, nor any delay in exercising, on the part of SANO, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by SANO of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the SANO would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 16.7 Affiliates. To the extent that Par or PRI is obligated hereunder to cause its Affiliates to do or refrain from doing anything, PRI will do all things that it may lawfully and reasonably do to cause such Affiliate to comply. 38 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the Execution Date. SANO CORPORATION By: /s/Reginald Hardy ----------------------------------- (Signature) Name: Reginald Hardy Title: President PHARMACEUTICAL RESOURCES, INC. By: /s/Kenneth I. Sawyer ----------------------------------- (Signature) Name: Kenneth I. Sawyer Title:President and Chief Executive Officer PAR PHARMACEUTICAL, INC. By: /s/Kenneth I. Sawyer ----------------------------------- (Signature) Name: Kenneth I. Sawyer Title:President and Chief Executive Officer 39 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXHIBIT A LICENSED PRODUCTS Product A Sano FDA Drug Name ANDA# Filing Date Accepted Date Nitroglycerin Transdermal System [****] [****] [****] [****]* Nitroglycerin Transdermal System [****] [****] [****] [****]* Nitroglycerin Transdermal System [****] [****] [****] [****]* Nitroglycerin Transdermal System [****] [****] [****] [****]* Nitroglycerin Transdermal System [****] [****] [****] [****]* Nitroglycerin Transdermal System [****] [****] [****] [****]* *Generically equivalent to such strengths in Nitro Dur(R). Product B Sano FDA Drug Name ANDA# Filing Date Accepted Date Nicotine Transdermal System 74-645 03/09/95 04/06/95 7 mg/day* Nicotine Transdermal System 74-611 01/20/95 04/06/95 14 mg/day* Nicotine Transdermal System 74-612 01/20/95 04/06/95 21 mg/day* *Generically equivalent to such strengths in Habitrol(R). 40 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXHIBIT B As used herein, the term "Net Sales" shall mean the gross amount invoiced for sales of Licensed Product(s) made by PRI or its Affiliates to independent third parties, reduced by the following to the extent that they are properly allocable to the quantity of Licensed Product(s) so sold: all trade, quantity and cash discounts allowed; credits or allowances actually granted on account of rejections; returns, billing errors and retroactive price reductions (including, without limitation, shelf stock adjustments); credits, rebates, chargeback rebates, fees, reimbursements or similar payments granted or given to wholesalers and other distributors, buying groups, health care insurance carriers, governmental agencies and other institutions in respect of the purchase price; freight, transportation, insurance or other delivery charges; and all taxes (except income taxes), tariffs, duties and other similar governmental charges paid by the seller on sales of the Licensed Product(s) and not reimbursed by the purchaser. "Gross Profit" shall mean (i) with respect to Product A, the difference between Net Sales for any amount of Product A and the price paid to SANO pursuant to Section 7.2 hereof with a good faith effort by SANO to reduce costs and (ii) with respect to Product B, the difference between Net Sales for any amount of Product B and the lesser of (a) the price paid to SANO pursuant to Section 7.2 hereof with a good faith effort by SANO to reduce the costs thereof or (b) [****] per transdermal patch. Product A. During the term of the Agreement, the Additional Consideration payable to SANO with respect to Product A shall be [****] of Gross Profit. Payment of Additional Consideration is to be made in respect of the third preceding month, as set forth in Section 11.1. The following illustrates payments to SANO under the foregoing formula, assuming that sales of Product A commenced in January 1998:
JAN. FEB. MARCH APRIL MAY JUNE JULY AUGUST SEPT. OCT. NOV. DEC. 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 NET SALES [****] [****] [****] [****] [****] [****] [****] [****] [****] PRICE TO PRI [****] [****] [****] [****] [****] [****] [****] [****] [****] ------ ------ ------ ------ ------ ------ ------ ------ ------ GROSS PROFIT [****] [****] [****] [****] [****] [****] [****] [****] [****] ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ PAYMENT TO SANO [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ RETAINED BY Par [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
41 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION Product B. During the term of the Agreement, the Additional Consideration payable to SANO with respect to Product B shall be[****] of all Gross Profit commencing retroactively to January 1, 1998. Payment of Additional Consideration is to be made in respect of the third preceding month, as set forth in Section 11.1. The following illustrates payments to SANO under the foregoing formula, assuming that sales of Product B commenced in January 1998:
JAN. FEB. MARCH APRIL MAY JUNE JULY AUGUST SEPT. OCT. NOV. DEC. 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 NET SALES [****] [****] [****] [****] [****] [****] [****] [****] [****] PRICE TO PRI [****] [****] [****] [****] [****] [****] [****] [****] [****] ------ ------ ------ ------ ------ ------ ------ ------ ------ GROSS PROFIT [****] [****] [****] [****] [****] [****] [****] [****] [****] ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ PAYMENT TO SANO [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ RETAINED BY Par [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] [****] ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
42 EXHIBIT C [SALES SUMMARY FORM] 43 EX-10 18 EX 10.13 RELEASE & AMENDMENT Exhibit 10.13 RELEASE AND AMENDMENT AGREEMENT This Release and Amendment Agreement (the "Agreement") is made this 1st day of May 1998, by and between Pharmaceutical Resources, Inc., a New Jersey corporation ("PRI"), Par Pharmaceutical, Inc., a New Jersey corporation ("Par"), SANO Corporation, a Florida corporation ("SANO"), and Elan Corporation, plc, an Irish company of Lincoln House, Lincoln Place, Dublin 2, Ireland (together with its affiliates, "ELAN"). All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Prior Distribution Agreement (as defined below). W I T N E S S E T H: WHEREAS, SANO, PRI and Par are parties to the Amended and Restated Distribution Agreement, dated as of July 28, 1997 (the "Prior Distribution Agreement"); WHEREAS, pursuant to the Prior Distribution Agreement, PRI and Par have exclusive rights to distribute, among other products, the transdermal nitroglycerin product (general equivalent of Transderm Nitro(R)) described as Product C therein ("Product C"); and WHEREAS, PRI and Par have agreed to release all of their rights with respect to Product C to ELAN in consideration of the mutual agreements set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual agreements set forth herein, the parties hereto agree as follows: 1. Product C Release. Subject to the terms and conditions hereof (including Sections 3 and 5(a) hereof), PRI and Par hereby release and transfer to ELAN all of their rights under the Prior Distribution Agreement with respect to Product C (the "Product C Release"). Subject to Section 5(a) below, SANO and ELAN hereby acknowledge that PRI and Par have no further obligations or liabilities with respect to Product C. 2. Product A Release. Subject to Section 5(a) hereof and Par's right of election set forth in Section 6 hereof, PRI and Par hereby release and transfer to ELAN all of their rights under the Prior Distribution Agreement with respect to the transdermal nitroglycerin product (generic equivalent of Nitro Dur(R)) described as Product A therein ("Product A"). Subject to Section 5(a) below, SANO and ELAN hereby acknowledge that PRI and Par have no further obligations or liabilities with respect to Product A. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 3. Consideration. (a) The aggregate cash consideration for the Product C Release (the "Consideration") shall be the aggregate of (i) [****] in cash, (ii) the royalty payments described in Section 4 below, (iii) all amounts owing under the promissory note attached as Exhibit C to the Prior Distribution Agreement in the principal amount of $1,953,393 (plus accrued interest of $118,729 from July 28, 1997 to April 15, 1998 plus $454.90 per day until payment of the amounts due pursuant to Section 3(c) hereof is made), plus (iv) all amounts owing under Sections 13.14(a) and (c) of the Prior Distribution Agreement (i.e., [****] and [****], respectively). (b) The Consideration specified in Section 3(a)(i) and (iv) above shall be payable by ELAN to Par in readily available funds in the form of a certified check or wire transfer and shall be due and payable no later than five days from the date hereof. (c) The Consideration specified in Section 3(a)(iii) above shall be payable by SANO to Par in readily available funds in the form of a certified check or wire transfer and shall be due and payable no later than five days from the date hereof. Upon payment of the foregoing amount, Par shall return to SANO the original promissory note referred to in Section 3(a)(iii) above, marked to reflect its cancellation. 4. Royalty Payments. (a) ELAN shall pay Par royalty payments (the "Royalty Payments") equal to [****] of all Net Sales of Product C following the date hereof by ELAN and its Affiliates (and any transferee(s) or successor(s) of the rights to Product C) and/or, where applicable, any distributors and licensees thereof (the "Royalty Parties") in the United States (as defined in the Prior Distribution Agreement) and Israel. Par acknowledges that it is not entitled to Royalty Payments from both ELAN and a distributor or licensee thereof in respect of sales of the same units of Product C. (b) As used herein, the term "Net Sales" shall mean the gross amount invoiced for sales of Product C made by ELAN or any of the other Royalty Parties to any unaffiliated wholesaler, chain, distributor, repackager, or buying or similar group for eventual sale reduced by the 2 following to the extent that they are properly allocable to the quantity of Product C so sold: all trade, quantity and cash discounts allowed; credits or allowances actually granted on account of rejections; returns, billing errors and retroactive price reductions (including, without limitation, shelf stock adjustments); credits, rebates, chargeback rebates, fees, reimbursements or similar payments granted or given to wholesalers and other distributors, buying groups, health care insurance carriers, governmental agencies and other institutions in respect of the purchase price; freight, transportation, insurance or other delivery charges; and all taxes (except income taxes), tariffs, duties and other similar governmental charges paid by the seller on sales of Product C and not reimbursed by the purchaser. (c) Par's rights to the Royalty Payments shall be irrevocable, perpetual, unconditional and, subject to the last sentence of this subsection (c), not subject to offset for any reason. Royalty Payments shall be payable quarterly on the 60th day following the end of each calendar quarter. ELAN reserves the right to deduct before effecting payment to Par the amount of any taxation it is required by law to withhold from Par in respect of the payment of royalties due hereunder to Par. In the event of any such deduction, ELAN shall secure and furnish promptly to Par official tax receipts evidencing the payment of such taxation. (d) ELAN shall deliver to Par quarterly, on the 60th day following the end of each calendar quarter, a sales summary showing all sales of Product C made by ELAN and/or, where applicable, by the other Royalty Parties during the immediately preceding calendar quarter, a statement certifying its calculation of the Net Sales from gross revenues during such calendar quarter, the units of Product C sold, and a computation of the amounts due to Par. (e) Subject to any contractual obligation of ELAN to the other Royalty Parties, ELAN shall make available for inspection by Par at ELAN's facilities such additional information concerning any sales and/or any other information provided pursuant to Section 4(d) above as Par may reasonably request from time to time to enable Par to confirm or reconcile the amounts which are or were to have been paid to it pursuant to this Agreement (without the need to audit the books and records of ELAN pursuant to Section 4(f) hereof). (f) ELAN shall keep complete and accurate records and books of account containing all information required for the computation and verification of the amounts to be paid to Par. Subject to any contractual obligations of ELAN to the other Royalty Parties, ELAN further agrees that at the request of Par, it will permit one or more accountants selected by Par, except any to whom ELAN has some reasonable objection, at any time and from time to time, to have access during ordinary working hours to such records as may be necessary to audit, with respect to any payment report period ending prior to such 3 request, the correctness of any report or payment made under this Agreement, or to obtain information as to the payments due for any such period in the case of failure of ELAN to report or make payment pursuant to the terms of this Agreement. Such accountant shall not disclose to Par any information relating to the business of ELAN except that which is reasonably necessary to inform Par of: (i) the accuracy or inaccuracy of ELAN's reports and payments; (ii) compliance or non-compliance by ELAN with the terms and conditions of this Agreement; and (iii) the extent of any such inaccuracy or non-compliance; provided, that if it is not reasonably possible to separate information relating to the business of ELAN from that which is reasonably necessary to so inform Par, the accountant may disclose any information necessary to so inform Par and Par shall retain all other information disclosed as confidential. ELAN shall provide full and complete access to the accountant to ELAN's pertinent books and records and the accountant shall have the right to make and retain copies (including photocopies). Should any such accountant discover information indicating inaccuracy in any of ELAN's payments or non-compliance by ELAN and should ELAN fail to acknowledge in writing to Par the deficiency or non-compliance discovered by such accountant within ten (10) business days of being advised of same in writing by the accountant, the accountant shall have the right to deliver to Par copies (including photocopies) of any pertinent portions of the records and books of account which relate to or disclose the deficiency or non-compliance (to the extent not acknowledged by ELAN). In the event that the accountant shall have questions which are not in its judgment answered by the books and records provided to it, the accountant shall have the right to confer with officers of ELAN, including ELAN's Chief Financial Officer. If any audit under this Section shall reveal an underpayment or understatement of the amount payable to Par by more than $5,000.00 for any period in question, ELAN shall reimburse Par for all costs and expenses relating to such investigational audit. Par shall only have the right to audit such books and records of ELAN pursuant to this Section 4(f) no more often than twice in any contract year unless earlier in such contract year or in any of the prior three contract years such investigation revealed a discrepancy of more than $5,000.00, as aforesaid, in which case Par shall have the right to audit such books and records three times in such contract year. For purposes of this Agreement, a contract year shall be a period of twelve months commencing on either the date of this Agreement or on an anniversary thereof. Unless the disclosure of same is reasonably required by Par in connection with any litigation or arbitration arising out of such audit, the accountant shall not reveal to Par the name or address (or other information reasonably tending to identify the location of a customer) of any customer of ELAN, but shall identify such customer to Par, if necessary, by the customer code number used by ELAN in its reporting obligations to Par and ELAN shall make such information known to the accountant. ELAN may, as a condition to providing any accountant access to its books and records, require Par to execute a reasonable confidentiality agreement consistent with the terms of this Section 4(f). 4 (g) Except as specifically set forth to the contrary, all payments to be made under this Agreement shall bear interest equal to two (2%) percent above the prime rate as quoted by Citibank N.A., New York, New York, calculated daily (as at the close of business on each such day) and compounded monthly, from the day following the day the payment is due until the date on which it is paid. Any adjustment to the prime rate as quoted by Citibank N.A. from time to time shall result in a corresponding adjustment to the rate of interest payable hereunder, the rate of interest quoted by Citibank N.A. at the close of business on each day to be the rate applicable for such day. (h) ELAN shall have sole discretion in setting the sales price for the sale of Product C, provided that ELAN shall not specifically discount the price of Product C for the benefit of ELAN's other products or to otherwise use Product C as a loss leader or incentive to procure the sale of ELAN's other products. Rebate and other discount programs (excluding any program where the price of Product C is discounted primarily for the benefit of enhancing the sale of ELAN's other products) generally available to ELAN's customers on the purchase of pharmaceutical products shall not be prohibited by this Section 4(h), provided that such programs shall be in accordance with industry standards for comparable products and shall be designed to promote the sale of Product C and no other products. (i) ELAN shall use its reasonable efforts to cause the other Royalty Parties to comply with the provisions of this Section 4, including, without limitation, to provide such information as is necessary to confirm that all necessary royalty payments shall have been made to Par. 5. Amendment to the Prior Distribution Agreement. (a) The Prior Distribution Agreement shall be amended and restated as set forth in the Amended and Restated Distribution Agreement, of even date herewith, by and among SANO, PRI and Par, in the form attached as Exhibit A hereto (the "Amended Distribution Agreement"). The Amended Distribution Agreement shall replace and supersede the Prior Distribution Agreement in its entirety; provided, however, that any agreements relating to or in connection with Product C or Product A which, pursuant to the terms of the Prior Distribution Agreement, survive termination of the Prior Distribution Agreement, including indemnification obligations, shall remain in effect on the same terms and conditions as provided therein. 5 (b) Notwithstanding any references in the Amended Distribution Agreement to Product A, the term "Licensed Product" in the Amended Distribution Agreement shall not include Product A and the provisions thereof shall not apply to Product A, unless and until PRI exercises its right of election set forth in Section 6 below. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 6. Right of Election. In the event that ELAN obtains ANDA approval by the FDA covering Product A, PRI shall have the right to elect, by written notice to ELAN and the payment to ELAN of [****], to include Product A as a "Licensed Product". In the event that PRI, makes such election, the provisions of the Amended Distribution Agreement will be reinstated with respect to Product A on the terms and conditions provided therein as of the date hereof. 7. Notices. Any notice required or permitted to be given under this Agreement shall be sufficiently given if in writing and delivered by registered or certified mail (return receipt requested), facsimile (with confirmation of transmittal), overnight courier (with confirmation of delivery), or hand delivery to the appropriate party at the address set forth below, or to such other address as such party may from time to time specify for that purpose in a notice similarly given: If to SANO: SANO Corporation 3250 Commerce Parkway Miramar, Florida 33025 Attn: President Fax: (954) 430-3390 with a copy to (other than regularly prepared notices, reports, etc. required to be delivered hereunder): Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. 1221 Brickell Avenue Miami, Florida 33131 Attn: Gary Epstein, Esq. Fax: 305-579-0717 If to ELAN: Elan Corporation, plc Lincoln House Lincoln Place Dublin 2, Ireland Attn: Vice President and General Counsel Elan Pharmaceutical Technologies, a division of Elan Corporation, plc Fax: (011) 353-1-662-4960 6 If to PRI or Par: c/o PRI Distributors, Ltd. One Ram Ridge Road Spring Valley, NY 10977 Attn: President Fax: 914-425-7922 with a copy to (other than regularly prepared notices, reports, etc. required to be delivered hereunder): Hertzog, Calamari & Gleason 100 Park Avenue New York, New York 10017 Attn: Stephen A. Ollendorff, Esq. and Stephen R. Connoni, Esq. Fax: (212) 213-1199 Any such notice shall be effective (i) if sent by mail (or in the case of notice to or by ELAN by registered airmail), as aforesaid, five business days after mailing, (ii) if sent by facsimile, as aforesaid, when sent, and (iii) if sent by courier or hand delivered, as aforesaid, when received. Provided that if any such notice shall have been sent by mail and if on the date of mailing thereof or during the period prior to the expiry of the third business day following the date of mailing there shall be a general postal disruption (whether as a result of rotating strikes or otherwise) in the United States then such notice shall not become effective until the fifth business day following the date of resumption of normal mail service. 7 8. Governing Law and Consent to Jurisdiction. (a) Except as otherwise provided herein, this Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of Florida in all respects including matters of construction, validity and performance, but without giving effect to Florida's choice of law provisions. (b) In connection with any action commenced hereunder, each of the undersigned consent to the exclusive jurisdiction of the state and federal courts located in Miami, Florida. Notwithstanding the foregoing, each party also agrees to the jurisdiction of any court which a third party claim has been brought. 9. Binding Agreement. This Agreement shall be binding upon the parties hereto, and their respective successors and permitted assigns. 10. Counterparts. This Agreement may be executed in identical duplicate copies. The parties agree to execute at least two identical original copies of the Agreement. Each identical counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. 11. Severability of Provisions. If, for any reason whatsoever, any term, covenant or condition of this Agreement or of any other document or instrument executed and delivered by either Par or ELAN pursuant hereto or in connection with the completion of the transaction contemplated herein, or the application thereof to any party or circumstance is to any extent held or rendered invalid, unenforceable or illegal, then such term, covenant or condition: (i) is deemed to be independent of the remainder of such document and to be severable and divisible therefrom and its validity, unenforceability or illegality does not affect, impair or invalidate the remainder of such document or any part thereof; and (ii) continue to be applicable and enforceable to the fullest extent permitted by law against any party and circumstances other than those as to which it has been held or rendered invalid, unenforceable or illegal. 12. Entire Agreement. This Agreement, together with the Amended Distribution Agreement, represents the entire agreement of the parties with respect to the subject matter hereof, superseding all prior agreements and understandings, written or oral. 8 IN WITNESS WHEREOF, this Release and Amendment Agreement has been executed and delivered by the parties hereto as of the date first above written. PHARMACEUTICAL RESOURCES, INC. By: /s/Kenneth I. Sawyer -------------------------------------- Name: Kenneth I. Sawyer Title: President and Chief Executive Officer PAR PHARMACEUTICAL, INC. By: /s/Kenneth I. Sawyer -------------------------------------- Name: Kenneth I. Sawyer Title: President and Chief Executive Officer SANO CORPORATION By: /s/Reginald Hardy -------------------------------------- Name: Reginald Hardy Title: President ELAN CORPORATION, PLC By: /s/Thomas G. Lynch -------------------------------------- Name: Thomas G. Lynch Title: Executive Vice President and Chief Financial Officer 9 EX-10 19 EX 10.14 PRESS RELEASE 6-26-98 Exhibit 10.14 Contact: Kenneth I. Sawyer Chairman and Chief Executive Officer Pharmaceutical Resources, Inc. (914) 425-7100 FOR IMMEDIATE RELEASE PHARMACEUTICAL RESOURCES, INC. ANNOUNCES SHAREHOLDERS APPROVE STRATEGIC ALLIANCE WITH MERCK KGaA Spring Valley, New York, June 26, 1998 -- Pharmaceutical Resources, Inc. (NYSE/PSE:PRX) announced today that its shareholders have approved the previously-announced strategic alliance with Merck KGaA, Darmstadt, Germany. Merck KGaA is a German pharmaceutical, laboratory and chemical company. Subject to the satisfaction of certain conditions, the closing of the transaction is expected to occur next week. At the Company's Annual Meeting of Shareholders held today, 62 % of the outstanding shares were voted in favor of the sale of 10,400,000 newly-issued shares to Lipha Americas, Inc. ("Lipha"), a subsidiary of Merck KGaA, and the issuance to Merck KGaA and another of its subsidiaries of five-year options to purchase an aggregate of 1,171,040 shares of the Company's common stock at an exercise price of $2 per share in exchange for consulting services to be provided to the Company. A total of 1% of outstanding shares voted against the stock sale and option issuance. Also at the Annual Meeting, shareholders elected all seven directors proposed by the Company's Board of Directors, including the four directors designated by Lipha. Under the stock purchase agreement signed on March 25, 1998, Lipha has the right to designate a majority of the Company's Board of Directors. Shareholders also voted to increase the number of authorized common shares from 60,000,000 to 90,000,000. Kenneth I. Sawyer, Chairman and Chief Executive Officer of the Company, commented "Today, the shareholders of the Company overwhelmingly approved our strategic alliance with Merck KGaA and endorsed our plan for the future. We look forward to closing the transaction shortly and are excited about working with Merck KGaA to build a profitable generic pharmaceutical company." Merck KGaA is a German specialty pharmaceutical, laboratory and chemical company with sales of $4.4 billion, and 29,000 employees in 47 countries worldwide. Its pharmaceutical sales of $2.5 billion consists mainly of ethicals, generics, contrastmedia and OTC products. Pharmaceutical Resources, Inc. is a holding company with subsidiaries that develop, manufacture and distribute generic pharmaceuticals products. PRI's principal subsidiary, Par Pharmaceutical, located in Spring Valley, New York, manufactures and distributes various dosage strengths of approximately 100 products. # # # EX-10 20 EX 10.15 PRESS RELEASE 6-30-98 Exhibit 10.15 Contact: Kenneth I. Sawyer Chairman and Chief Executive Officer Pharmaceutical Resources, Inc. (914) 425-7100 FOR IMMEDIATE RELEASE PHARMACEUTICAL RESOURCES, INC. COMPLETES PREVIOUSLY ANNOUNCED STRATEGIC ALLIANCE WITH MERCK KGaA Spring Valley, New York, June 30, 1998 -- Pharmaceutical Resources, Inc. (NYSE/PSE:PRX) announced today that it has completed the previously announced strategic alliance with Merck KGaA, Darmstadt, Germany. Merck KGaA is a German pharmaceutical, laboratory and chemical company. Merck KGaA, through its subsidiary Lipha Americas, Inc. ("Lipha"), purchased today 10,400,000 newly-issued shares from the Company. In addition, Merck KGaA today purchased 1,813,272 shares of the Company's common stock from Clal Pharmaceutical Industries Ltd. ("Clal"), the Company's largest stockholder prior to this transaction. As a result of the stock purchases today, Merck KGaA has a 42% stake in Pharmaceutical Resources. The cash purchase price of $2 per share provides Pharmaceutical Resources with $20.8 million for investment in its continuing business. The Company intends to use approximately $3.6 million of the net proceeds of the stock sale to repay advances made to it under its existing line of credit and the remainder will be used for working capital, including business expansion. Today, the Company also issued to Merck KGaA and its Canadian subsidiary, Genpharm Inc. ("Genpharm"), five-year options to purchase an aggregate of 1,171,040 shares of the Company's common stock at an exercise price of $2 per share in exchange for consulting services to be provided to the Company. The Company's shareholders approved the stock sale and option issuance at the Annual Meeting of Shareholders held on June 26, 1998. Kenneth I. Sawyer, Chairman and Chief Executive Officer of the Company, commented "We are excited about the future of the Company now that we have consummated our strategic alliance with Merck KGaA. The cash from the stock sale together with the previously announced Distribution Agreement with Genpharm granting Pharmaceutical Resources the right to distribute the numerous products identified for both near and long term development gives us the ability to achieve our goal of becoming a profitable generic company". - more- Merck KGaA is a German specialty pharmaceuticals, laboratory and chemical company with sales of $4.4 billion, and 29,000 employees in 47 countries worldwide. Its pharmaceutical sales of $2.5 billion consists mainly of ethicals, generics, contrastmedia and OTC products. Within the Ethicals Division Merck spends more than 20% of its sales on R&D and has core research expertise in CV, CNS, oncology and metabolic disease. Merck KGaA owns Merck-Lipha S.A., a French ethical and generic pharmaceutical company, which owns Dey Laboratories, L.P., a U.S. generic pharmaceutical company located in Napa Valley, California. Pharmaceutical Resources, Inc. is a holding company with subsidiaries that develop, manufacture and distribute generic pharmaceuticals products. PRI's principal subsidiary, Par Pharmaceutical, located in Spring Valley, New York, manufactures and distributes various dosage strengths of approximately 100 products. # # # -----END PRIVACY-ENHANCED MESSAGE-----