-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, s0ZYfgxsfdN+XlURJUEU/7PF7AVOddXfldC+V5GNrjUmAa3CT1Ltzurynlfoilig 0M9XtkK/b0zoMVRXkj3SZw== 0000950109-94-002410.txt : 19950530 0000950109-94-002410.hdr.sgml : 19950530 ACCESSION NUMBER: 0000950109-94-002410 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19941001 FILED AS OF DATE: 19941229 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACEUTICAL RESOURCES INC CENTRAL INDEX KEY: 0000878088 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 223122182 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10827 FILM NUMBER: 94566946 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 ROAD CITY: SPRING VALLEY STATE: NY ZIP: 10977 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Fiscal Year Ended October 1, 1994 Commission File Number 1-10827 PHARMACEUTICAL RESOURCES, INC. (Exact name of registrant as specified in its charter) NEW JERSEY 22-3122182 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One Ram Ridge Road, Spring Valley, New York 10977 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (914) 425-7100 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of each exchange on which registered The New York Stock Exchange, Inc. Common Stock $.01 par value The Pacific Stock Exchange, Inc. --------------------------- -------------------------------- The New York Stock Exchange, Inc. Common Stock Purchase Rights The Pacific Stock Exchange, Inc. ---------------------------- -------------------------------- Securities registered pursuant to Section 12(g) of the Act: Series A Convertible Preferred Stock, $.0001 par value ----------------------------------------------------------- (Title of Class) ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] $130,772,610 Aggregate market value of the voting stock held by non-affiliates of the registrant as of December 19, 1994 (assuming solely for purposes of this calculation that all directors and executive officers of the Registrant are "affiliates"). 14,593,395 Number of shares of common stock outstanding as of December 19, 1994 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents have been incorporated by reference into this Annual Report on Form 10-K: IDENTITY OF DOCUMENTS PARTS OF FORM 10-K INTO WHICH DOCUMENT IS INCORPORATED Proxy Statement for the Part III 1995 Annual Meeting of Common Shareholders of Registrant PART I ITEM 1. Business. - - - - - - - ------ -------- GENERAL Pharmaceutical Resources, Inc. ("PRI") is a holding company which, through its subsidiaries, is in the business of manufacturing and distributing a broad line of generic drugs. PRI operates primarily through its wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par"), a manufacturer and distributor of generic drugs. In addition to Par, PRI has seven other subsidiaries, the activities of which are not significant. PRI was organized, as a subsidiary of Par, under the laws of the State of New Jersey on August 2, 1991. On August 12, 1991, Par effected a reorganization of its corporate structure, pursuant to which PRI became Par's parent company. References herein to the "Registrant" or the "Company" shall be deemed to refer to PRI and all of its subsidiaries since August 12, 1991, or Par and all of its subsidiaries prior thereto, as the context may require. The Company's executive offices are located at One Ram Ridge Road, Spring Valley, New York 10977, and its telephone number is (914) 425-7100. The Company's current product line consists of prescription and, to a much lesser extent, over-the-counter drugs. Approximately 86 products (representing 34 drugs) are currently being marketed (see "--Product Line Information"). Generic drugs are the pharmaceutical and therapeutic equivalents of brand name drugs and are usually marketed under their generic (chemical) name rather than by a brand name. Normally, a generic drug cannot be marketed until the expiration of applicable patents on the brand name drug. Generic drugs must meet the same government standards as brand name drugs, but are typically sold at prices below those of brand name drugs. Issuance by the U.S. Food and Drug Administration (the "FDA") of new product approvals had slowed dramatically over the last several years because of investigations into the generic drug industry and the FDA approval process. The findings of these investigations led to, and are expected to continue to lead to, legislative, regulatory, and/or policy changes to strengthen the effectiveness of the approval process. As a result, the new drug approval process is more stringent and difficult, as well as more costly and time-consuming. The Company markets its products primarily to drug distributors, wholesalers and retail drug store chains through its own sales staff, which has been assisted by independent, commissioned sales representatives. The Company intends to increase its marketing efforts to clinics, government agencies and other managed health care organizations. The Company has further developed its internal sales staff in order to lessen its reliance on outside sales representatives (see "--Recent Developments" and "--Marketing and Customers"). Recent Developments: In October 1993, the Company was informed by the FDA that it had completed the Application Integrity Assessment Program (the "Assessment Program") for Par and that the FDA would review Abbreviated New Drug Applications ("ANDAs") submitted by Par for the approval of generic drugs. Par also became eligible to bid again on government contracts (see "--Government Regulation" and "Notes to Financial Statements-- Settlements - - - - - - - --Fiscal Year 1993"). During the first and second quarters of fiscal year 1994, the Company settled three significant lawsuits against it. These settlements and related expenses were reflected in the Company's consolidated financial statements for the fiscal year ended October 2, 1993 (See "--Legal Proceedings", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Settlements" and "Notes to Financial Statements--Settlements--Fiscal Year 1993"). 1 The Company expanded its research and development capabilities (see "--Research and Development" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations-- Operating Expenses--Research and Development"), and as a result, the Company filed three submissions for ANDAs and expects to file additional submissions. Additionally, the Company reintroduced Metronidazole, an anti-bacterial drug, in November 1993, and Indomethacin, an anti- inflammatory drug, in January 1994 (see "--Product Line Information"). To further expand its product line, the Company, in fiscal year 1994, entered into several additional distribution agreements, a joint development agreement and an option agreement to acquire the rights to a herpes viral lesion drug (see "--Product Line Information", "--Research and Development" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Operating Expenses--Research and Development", "--Financial Condition--Liquidity and Capital Resources"). The Company completed its strategy to revamp its marketing and sales organizations by replacing all but one of its outside sales representatives with its own internal sales force (see "--Marketing and Customers" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Sales"). The remaining outside sales representative's role is to provide support to the internal sales organization. These changes were made as the Company shifted toward emphasizing Par label sales and reducing its dependence upon private label sales. PRODUCT LINE INFORMATION The Company operates in one industry segment, namely, the manufacture and distribution of generic pharmaceuticals. Products are marketed principally in oral solid form consisting of tablets, caplets, and two- piece hard-shell capsules, and to a lesser extent the Company distributes a small number of products in the forms of creams and liquids (see "--Research and Development"). Par holds approved ANDAs for approximately 125 products, representing various dosage strengths of 48 drugs. In addition, the Company markets certain products that are manufactured for it by other companies (see "--Research and Development", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations-- Sales", "--Gross Margins" and "Notes to Financial Statements--Distribution Agreements"). The Company is currently marketing the 26 manufactured and 8 distributed drugs scheduled below. The names of all of the drugs under the caption "Competitive Brand-Name Drug" are trademarked. The holders of the trademarks are non-affiliated, pharmaceutical manufacturers. Name Competitive Brand-Name Drug ---- --------------------------- Central Nervous System: Alprazolam Xanax Benztropine Mesylate Cogentin Carisoprodol and Aspirin Soma Compound Chlorzoxazone Paraflex Cyproheptadine Hydrochloride Periactin Doxepin Hydrochloride Sinequan, Adapin Fluphenazine Hydrochloride Prolixin Flurazepam Hydrochloride Dalmane Haloperidol Haldol Imipramine Hydrochloride Tofranil Meclizine Hydrochloride Antivert Methocarbamol and Aspirin Robaxisal Temazepam Restoril Triazolam Halcion 2 Name (Continued) Competitive Brand-Name Drug (Continued) ---------------- --------------------------------------- Cardiovascular: Clonidine and Chlorthalidone Combipres Hydralazine Hydrochloride Apresoline Hydra-Zide Apresazide Isosorbide Dinitrate Isordil Methyldopa and Hydrochlorothiazide Aldoril Minoxidil Loniten Pindolol Visken Triamterene and Hydrochlorothiazide Maxzide Anti-Inflammatory: Ibuprofen Advil, Nuprin, Motrin Indomethacin Indocin Piroxicam Feldene Anti-Infective: Metronidazole Flagyl Nystatin Mycostatin Anti-Cancer: Megestrol Acetate Megace Other: Albuterol Sulfate Syrup Proventil/Ventolin Allopurinol Zyloprim Metaproterenol Sulfate Alupent Dexamethasone Decadron Propantheline Bromide Pro-Banthine Silver Sulfadiazine Silvadene Par also holds approved ANDAs for 22 drugs in addition to those listed above which are not being marketed at the present time. The Company may introduce some of these drugs into the market. In September 1994, Mova Pharmaceutical Corporation ("Mova") and the Company entered into five-year non-exclusive distribution agreements for two products. The ANDA for the first product, Albuterol Sulfate Syrup, received FDA approval in September 1994 and the Company has commenced marketing the product. The Company will pay to Mova a base price for each product plus a percentage of net profits, as defined in the distribution agreements (see "--General--Recent Developments", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Operating Expenses--Research and Development" and "Notes to Financial Statements--Distribution Agreements"). In February 1994, the Company entered into a ten-year exclusive U.S. licensing agreement with Sano Corporation ("Sano") for two generic drug products utilizing a transdermal delivery system (see "--General--Recent Developments", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Operating Expenses-- Research and Development" and "Notes to Financial Statements--Distribution Agreements"). Under the terms of the agreement, the Company advanced $1,000,000 to Sano for the development of two products and, after receiving FDA approval, will market the licensed products and participate in the sharing of gross profits. The Company renegotiated the agreement in August to enable the advance to be recovered within three years by obtaining a greater share of gross profits. As these monies are repaid, they will be treated as income in the periods received. It is anticipated that ANDAs could be filed in the second quarter of fiscal year 1995 which would be expected to result in new products available for sale in late fiscal year 1996, or early fiscal year 1997. In November 1994, the Company advanced an additional $228,000 to Sano to support research and development expenses for a third product. The Company also purchased $1,000,000 of Sano preferred stock. 3 In January 1994, the Company entered into a joint development agreement with Minnesota Mining and Manufacturing Company ("3M") pursuant to which the Company will develop, under joint control, several generic versions of pharmaceutical products. 3M holds all rights respecting any product developed, and once developed, 3M is obligated to pay certain sums to Par for the development of, and for the manufacture of, the products (see "--General--Recent Developments"). In May 1993, the Company was appointed by The Generics Group B.V. (the "Group"), an international pharmaceutical business, exclusive United States distributor for up to five generic pharmaceutical products upon receipt of ANDA approvals (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Sales", "--Gross Margins" and "Notes to Financial Statements--Distribution Agreements"). ANDA approvals for Alprazolam and Triazolam were received in October 1993 and January 1994, respectively, and the Company began distribution of the drugs. The ANDA for Atenolol received FDA approval in early 1994 and the Company will market the drug in fiscal year 1995. Two additional products, which will be made available to the Company, have yet to be designated by the Group. The agreement also contains provisions for the development of additional generic pharmaceuticals for distribution by the Company. The Company is obligated to issue a warrant to purchase 150,000 shares of common stock of the Company ("Common Stock") for $10 per share. The terms of the warrant will be similar to the warrant issued to Genpharm, Inc. (see below); however, the warrant will become exercisable only upon reaching certain levels of sales for the distributed products. The Company, in October 1992, entered into a distribution agreement (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Sales", "--Gross Margins" and "Notes to Financial Statements--Distribution Agreements") with Genpharm, Inc. ("Genpharm"), a Canadian manufacturer of generic drugs (which is an affiliate of the Group). Pursuant to the agreement, the Company is the exclusive United States distributor of Piroxicam and Pindolol, two products for which ANDA approvals had already been received. The agreement has an initial term of ten years (subject to earlier termination by either party as provided therein), and thereafter automatically renews from year to year unless either party gives notice of non-renewal. The cost to the Company of such products is based upon a percentage of gross profits as defined in the distribution agreement. The Company issued a warrant to the manufacturer to purchase 150,000 shares of Common Stock for $6 per share. The warrant became exercisable in March 1993, has an initial term of five years (subject to earlier termination in the event the Company ceases to be Genpharm's exclusive distributor of the products covered by the agreement), and may be extended for up to an additional five years in the event that the closing price of Common Stock has not reached levels specified in the warrant agreement. In March 1994, Genpharm exercised the warrant to purchase 5,300 shares of Common Stock. RESEARCH AND DEVELOPMENT The Company's research and development activities consist of (i) identifying and conducting patent and market research on brand name drugs for which patent protection has expired or is to expire, (ii) researching and developing new product formulations based upon such drugs, and (iii) obtaining timely approval from the FDA for such new product formulations. The Company contracts with outside laboratories to conduct biostudies which, in the case of oral solids, generally are required for FDA approval. Biostudies are used to demonstrate that the rate and extent of absorption of a generic drug are not significantly different from the corresponding brand name drug and currently cost in the range of $75,000 to $300,000 per study. During the 1994 fiscal year, the Company contracted with outside laboratories to conduct biostudies for potential new products and will continue to do so in the future. The Company may also contract with outside laboratories to conduct clinical studies. Clinical studies test the safety and/or efficacy of a drug and may cost $1,000,000 or more per study. To date, the Company has not contracted to conduct any clinical studies. Biostudies and clinical studies must be conducted and documented in conformity with FDA standards (see "--Government Regulation"). The research and development of oral solid products, including preformulation research, formulation, required studies, and FDA approval, has historically taken approximately two to three years. Accordingly, Par typically selects for development products it intends to market several years in the future. 4 For its 1994, 1993, and 1992 fiscal years, the research and development expenses of the Company's continuing operations were approximately $3,874,000, $1,959,000 and $1,299,000, respectively, reflecting an increase in research and development activities which began in fiscal year 1993 and continued in 1994. The Company plans that its expenditures will continue to increase significantly (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations-- Operating Expenses--Research and Development"). The Company has obtained from Bio-Pharma, Inc. and CT Holdings SA (collectively, "Bio-Pharma") an exclusive option to acquire all worldwide ownership, development, marketing and distribution rights to a pharmaceutical compound being studied for the treatment of herpes viral lesions. In exchange for the option, the Company paid $250,000 to date and agreed to pay $200,000, plus 15,000 shares of Common Stock, on January 1, 1995, to enable further evaluation of the compound. Additional amounts will be paid out as various testing stages are completed (see "--General--Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Liquidity and Capital Resources"). If the Company chooses to exercise its option, it will be required to make $3,000,000 cash payments at the time of exercise and pay certain royalties to Bio-Pharma. Further research on the compound, which can be delivered topically, will determine whether it can significantly reduce the healing time of oral and genital herpes lesions. The compound represents the first new drug that the Company intends to develop commercially for which the Company would have to file a full New Drug Application ("NDA") (see "-- Government Regulation") to obtain approval from the FDA. The Company intends to initially seek regulatory approval outside the United States if it exercises its option. MARKETING AND CUSTOMERS The Company currently sells its products primarily through its own sales staff. The Company also sells through one company that acts as an independent commissioned sales representative. In 1994, the Company completed its plans to reduce its dependence upon outside sales representatives and add additional internal sales personnel. These changes were part of the strategy of the Company to (i) emphasize sales of products under the Par label to reduce its dependence upon products under private (customer) labels and (ii) broaden channels of distribution (see "--General--Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations - - - - - - - --Sales"). The Company also reorganized its internal sales, marketing and customer service departments in 1994. The Company markets its products under both Par and private labels principally to distributors, wholesalers, retail drug store chains and, to a lesser extent, drug manufacturers, repackagers, and government agencies. The Company has been and will continue to increase its marketing efforts to the entities concentrating in the managed health care market. These entities include: nursing homes, hospitals, clinics, pharmacy benefit management companies and mail order customers. The Company has approximately 200 customers. During fiscal year 1994, sales to the Company's two largest customers, Rugby Laboratories, Inc., a subsidiary of Marion Merrill Dow, Inc., and Goldline Laboratories, Inc., a subsidiary of Ivax Corporation, amounted to 12% and 10%, respectively, of net sales. The Company's sales to other customers have increased during the last two years, resulting in a steady decline in the percentages of these two customers. Management anticipates that its strategy to penetrate targeted markets and the broadening of its product line will continue to result in a reduction of the percentages of sales attributable to these two customers in future years (see "Notes to Financial Statements Accounts Receivable Major Customers"). Neither of such customers has written agreements with the Company. The Company believes that the loss of any of its major customers may have an adverse effect upon its business. ORDER BACKLOG The dollar amount of open orders, as of October 1, 1994, believed by management to be firm, was approximately $9,900,000, as compared with approximately $7,600,000 at October 2, 1993. The 30% increase in open orders is primarily attributable to price increases for two products and significant volume increases for 5 four products. Although these orders are subject to cancellation without penalty, management expects to fill substantially all of them in the near future. The Company has orders for shipments for its customers which are consistent with the seasonal purchasing patterns of its customers. COMPETITION The generic pharmaceutical industry is highly competitive. The Company has been able to identify at least ten principal competitors, and experiences varying degrees of competition from numerous other companies in the health care industry. The Company's competitors include many generic drug manufacturers and a number of major branded pharmaceutical companies which, as part of their business, market both brand-name prescription drugs and generic versions of these brand-name drugs. Many major branded pharmaceutical companies have directly launched, or have formed alliances to market, their patented drugs prior to patent expiration as generic drugs. This competitive effort has had a negative impact on the ability of the Company to sell to its customers and to generate customary revenues from the launch of its new products, as the channel of distribution is either closed or severely limited or the Company is forced to meet lower market pricing. The principal competitive factors in the generic pharmaceutical market are (i) level of service (including maintenance of sufficient inventories for timely deliveries), (ii) reputation as a manufacturer with integrity and quality products, (iii) the ability to introduce generic versions of brand-name drugs promptly after their patents expire, (iv) price, (v) product appearance, and (vi) breadth of product line. In the future, the Company plans to expend more effort and resources, including financial, in the areas of marketing and research and development to better its competitive position in the industry. RAW MATERIALS The raw materials essential to the Company's business are purchased primarily from United States distributors of bulk pharmaceutical chemicals manufactured by foreign companies. To date, the Company has experienced no significant difficulty in obtaining raw materials and expects that raw materials will generally continue to be readily available in the future. However, since the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. While a new supplier becomes qualified by the FDA and its manufacturing process is judged to meet FDA standards, a delay of six months or more in the manufacture and marketing of the drug involved could result, which could in turn have an adverse effect on the Company's financial condition. The Company attempts to minimize the effects of any such situation by specifying, where possible, two or more suppliers for its drug approvals. EMPLOYEES As of October 1, 1994, the Company had approximately 430 employees. GOVERNMENT REGULATION All pharmaceutical manufacturers are subject to extensive regulation by the Federal government, principally by the FDA, and, to a lesser extent, by the Drug Enforcement Administration and state governments. The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act, and other Federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, recordkeeping, approval, advertising and promotion of the Company's products. Noncompliance with applicable requirements can result in judicially and/or administratively imposed sanctions including the initiation of product seizures, injunction actions, fines and criminal prosecutions. Administrative enforcement measures can involve the recall of products, as well as the refusal of the government to enter into supply contracts or to approve new drug applications. The FDA also has the authority to withdraw approval of drugs in accordance with regulatory due process procedures. FDA approval is required before any new drug, including a generic equivalent of a previously approved drug, can be marketed. To obtain FDA approval for a new drug, a prospective manufacturer must, among other 6 things, demonstrate that its manufacturing facilities comply with the FDA's good manufacturing practice ("GMP") regulations. The FDA may inspect the manufacturer's facilities to assure such compliance prior to approval or at any other reasonable time. GMP regulations must be followed at all times during the manufacture and other processing of drugs. To comply with the standards set forth in these regulations, the Company must continue to expend significant time, money and effort in the areas of production, quality control and quality assurance. To obtain FDA approval of a new drug, a manufacturer must demonstrate, among other requirements, the safety and effectiveness of the proposed drug. There are currently three basic ways to satisfy the FDA's safety and effectiveness requirements: 1. New Drug Applications ("NDA" or "full NDA"): Unless either of the procedures discussed in paragraphs 2 and 3 below is available, a prospective manufacturer must submit to the FDA full reports of well- controlled clinical studies and other data to prove that a drug is safe and effective and meets other requirements for approval. 2. "Paper" NDAs: In certain instances in the past, the FDA permitted safety and effectiveness to be shown by submission of published literature and journal articles in a so-called "paper" NDA. As a result of passage of the Drug Price Competition and Patent Term Restoration Act of 1984 (the "Waxman-Hatch Act"), "paper" NDAs are now recognized in the statute, although they are infrequently used because of the lack of sufficient information in the literature on the majority of drugs. 3. Abbreviated New Drug Applications ("ANDAs"): The Waxman-Hatch Act established a statutory procedure for submission and FDA review and approval of ANDAs for generic versions of drugs previously approved by the FDA (such previously approved drugs are hereinafter referred to as "listed drugs"). In place of clinical studies to establish the generic drug's safety and effectiveness, an ANDA applicant typically is required to submit bioavailability data generated from biostudies demonstrating that the proposed product is bioequivalent to the listed drug. Bioavailability data indicate the rate and extent of absorption of a drug's active ingredient and its availability at the site of drug action, typically measured through blood levels. A generic drug usually is deemed to be bioequivalent to the listed drug if the rate and extent of absorption of the generic drug are not significantly different from those of the listed drug. For some drugs (e.g., topical antifungals), other means of demonstrating bioequivalence may be required by the FDA, especially where rate and/or extent of absorption are difficult or impossible to measure. In addition to the bioequivalence data, an ANDA must contain virtually all other information required of a full NDA (e.g., chemistry, manufacturing, labeling, and stability data). The Waxman-Hatch Act also established certain statutory protections for listed drugs. Under the Waxman-Hatch Act, an ANDA for a generic drug may be approved, but such approval may not be made effective for interstate marketing until all relevant patents for the listed drug have expired or been determined to be invalid or not infringed by the generic drug. Prior to enactment of the Waxman-Hatch Act, the FDA did not consider the patent status of a previously approved drug. In addition, under the Waxman-Hatch Act, statutory non-patent exclusivity periods are established following approval of certain listed drugs, where specific criteria are met by the drug. If exclusivity is applicable to a particular listed drug, the effective date of approval of ANDAs (and, in at least one case, submission of an ANDA) for the generic version of the listed drug is usually delayed until the expiration of the exclusivity period, which, for newly approved drugs, can be either three or five years. The Waxman-Hatch Act also provides for extensions of up to five years of certain patents covering drugs to compensate the patent holder for reduction of the effective market life of the patented drug resulting from the time involved in the Federal regulatory review process. In addition to the Federal government, states have laws regulating the manufacture and distribution of pharmaceuticals, as well as regulations dealing with the substitution of generic for brand-name drugs. The Company's operations are also subject to regulation, licensure and inspection by the states in which they are located and/or do business. The Company also is governed by Federal and state laws of general applicability, including laws regulating matters of environmental quality, working conditions, and equal employment opportunity. 7 The Federal government made significant changes to Medicaid drug reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA"). Generally, OBRA provides that a generic drug manufacturer must offer the states an 11% rebate on drugs dispensed under the Medicaid program and must have entered into a formal drug rebate agreement, as the Company has, with the Federal Health Care Financing Administration. Although not required under OBRA, the Company has also entered into similar state agreements. In October 1993, the Company was informed by the FDA that it had completed the Assessment Program for Par and that the FDA would review applications submitted by Par for the approval of generic drugs (see "-- General--Recent Developments" and "Notes to Financial Statements -- Settlements -- Fiscal Year 1993"). The Assessment Program was initiated as a result of investigations by the Federal government in 1989 resulting in guilty pleas by Par and by certain former executives of Par to charges of providing an unlawful gratuity to a public official. The FDA stopped reviewing applications submitted by Par for review pending the completion of the Assessment Program with respect to Par's approved ANDAs. The Assessment Program was directed, among other things, towards (i) reviewing the conclusions reached by Par's independent regulatory consultant in its audits of Par's product development activities and recordkeeping systems and (ii) assessing any other available, relevant information that might bear on Par's ANDAs. As a result of the completion of the Assessment Program, Par became eligible to again bid on government contracts without previous limitations. The Company received a warning letter in May 1994 from the FDA setting forth certain alleged deviations from current GMP regulations and alleged violations of related provisions of the Federal Food, Drug and Cosmetic Act. The warning letter does not limit the manufacture of the Company's product line nor suspend the review and approval of applications pending at the FDA. The FDA indicated that it will shortly complete its review of the Company's response and that a mutually amenable working relationship continues between the FDA and the Company. No assurances can be given that the outcome of the FDA review will not have a material adverse effect upon the Company (see "Notes to Financial Statements--Contingencies and Other Matters--Legal Proceedings"). ITEM 2. Properties. - - - - - - - ------ ---------- The Company's executive offices and a substantial portion of its research and production facilities are housed in a 92,000 square foot facility built to Par's specifications and occupied since fiscal 1986. This building also includes research and quality control laboratories, as well as packaging and warehouse facilities. The building is located in Chestnut Ridge, New York, on a parcel of land of approximately 24 acres, of which approximately 15 acres are available for future expansion. The purchase of the land, facility and equipment was financed, in part, by Industrial Development Bonds issued by the County of Rockland Industrial Development Agency in October 1984. The real estate and certain equipment serve as collateral for the bond (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition-- Financing" and "Notes to Financial Statements--Long Term Debt"). The Company purchased, in fiscal year 1994, a 36,000 square foot building on 2 acres of land in Chestnut Ridge, New York, across the street from its main building. Fifty percent of this facility had previously been leased by the Company and used for office space. The purchase of the land and building was financed by a mortgage loan (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Financing" and "Notes to Financial Statements--Long Term Debt"). Par owns a third facility consisting of six acres of land and a 33,000 square foot building located in Congers, New York, which is used for tablet coating operations and product manufacturing. The purchase of the facility and related renovations and equipment were financed in full by term loans. The real estate, equipment and other assets serve as collateral for the loans (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Financing" and "Notes to Financial Statements--Long Term Debt"). Par leases an 11,000 square foot facility in Upper Saddle River, New Jersey, for certain of its manufacturing operations. The lease covering this facility expires November 1998, and has three two-year renewal options. Par also occupies, as lessee, office, warehouse and research and development space in Chestnut Ridge, New York, aggregating approximately 77,000 square feet, under a lease expiring December 8 1997, with three five-year extension options (see "Notes to Financial Statements--Commitments--Leases"). The Company believes that its owned and leased properties are sufficient in size, scope and nature to meet its anticipated needs for the reasonably foreseeable future. ITEM 3. Legal Proceedings. - - - - - - - ------ ----------------- The Company is involved in certain litigation matters, including certain product liability actions, incidental to the conduct of its business, but does not believe that the ultimate resolution thereof will have a material effect on its financial condition. In fiscal year 1994, the Company settled several significant litigation matters which are reflected in fiscal 1993 financial statements (see "Business--General--Recent Developments", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Settlements" and "Notes to Financial Statements--Settlements-- Fiscal Year 1993"). The Company is a plaintiff in several proceedings against former management members, seeking recovery of, among other things, salaries and amounts paid for indemnification, in connection with their actions as former managers of Par. The Company is seeking unspecified damages. Although the Company is vigorously pursuing such claims, there is no assurance that the Company will recover any amounts or that any recoveries will be material (see "Notes to Financial Statements--Contingencies and Other Matters"). ITEM 4. Submission of Matters to a Vote of Security Holders. - - - - - - - ------ --------------------------------------------------- Inapplicable. 9 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters. - - - - - - - ------ --------------------------------------------------------------------- (a) Market information. The Company's Common Stock is traded on The New York Stock Exchange ("NYSE") and the Pacific Stock Exchange under the ticker symbol PRX. The following table shows the range of prices for the Common Stock as reported by the NYSE for each calendar quarter during the Company's two most recent fiscal years.
Fiscal Year Ended In ------------------------------------------- 1994 1993 ------------------ ------------------- Quarter Ended High Low High Low ------------- ------- ------ ------------------- December 31 $19.63 $12.88 $9.63 $6.13 March 31 16.50 8.38 13.00 8.50 June 30 9.75 7.38 10.88 7.63 September 30 10.38 6.38 12.75 8.63
(b) Holders. As of December 19, 1994, there were approximately 5,000 holders of record of the Common Stock. The Company believes that, in addition, there are a significant number of beneficial owners of its Common Stock whose shares are held in "street name." (c) Dividends. During the five most recent fiscal years, the Company paid no cash dividends on its Common Stock. The payment of future dividends on its Common Stock is subject to the discretion of the Board of Directors and is dependent upon many factors, including the Company's earnings, its capital needs, the terms of its financing agreements and its general financial condition (see "Notes to Financial Statements--Long Term Debt", "--Shareholders Equity--Preferred Stock"). (d) Recent Stock Price. On December 19, 1994, the closing price of the Common Stock on the NYSE was $9.00 per share. 10 ITEM 6. Selected Financial Data. - - - - - - - ------ ------------------------
Fiscal Year Ended In ------------------------------------------------- 1994 1993* 1992* 1991* 1990* ------- -------- -------- --------- --------- (In thousands, except per share amounts) INCOME STATEMENT DATA Net sales $69,169 $74,535 $52,493 $ 34,226 $ 22,884 Other revenues 425 347 142 649 1,133 ------- ------- ------- -------- -------- Total revenues 69,594 74,882 52,635 34,875 24,017 Costs and expenses: Cost of goods sold 45,774 48,387 32,448 26,062 20,256 Research and development 3,874 1,959 1,299 2,282 2,126 Selling, general and administrative 13,463 12,673 11,486 12,554 12,646 Interest 465 602 923 1,175 1,102 Settlements - 10,500 230 12,465 - ------- ------- ------- -------- -------- 63,576 74,121 46,386 54,538 36,130 Income (loss) from continuing operations before income taxes 6,018 761 6,249 (19,663) (12,113) Provision (credit) for income taxes 1,785 650 2,150 (1,736) (5,000) ------- ------- ------- -------- -------- Income (loss) from continuing operations 4,233 111 4,099 (17,927) (7,113) Income (loss) from discontinued operations 466 - 1,696 (24,158) (7,640) ------- ------- ------- -------- -------- Income (loss) before extraordinary item 4,699 111 5,795 (42,085) (14,753) Extraordinary item--tax benefit of utilization of net operating loss carryforward - 300 2,150 - - ------- ------- ------- -------- -------- Income (loss) before change in accounting principle 4,699 411 7,945 (42,085) (14,753) Cumulative effect of change in accounting principle 14,128 - - - - ------- ------- ------- -------- -------- Net income (loss) $18,827 $ 411 $ 7,945 $(42,085) $(14,753) ======= ======= ======= ======== ======== Income (loss) per share of Common Stock: Continuing operations $.26 $.01 $.28 $(1.54) $(.63) Discontinued operations .03 - .11 (2.07) (.68) Extraordinary item - .02 .15 - - Change in accounting principle .85 - - - - ----- ---- ---- ------ ------ Net income (loss) $1.14 $.03 $.54 $(3.61) $(1.31) ===== ==== ==== ====== ====== Weighted average number of common shares and equivalents 16,495 15,814 14,826 11,644 11,285 ====== ====== ====== ====== ====== BALANCE SHEET DATA Working capital $19,732 $13,141 $ 8,061 $ 2,908 $ 21,116 Property, plant and equipment (net) 23,004 20,037 19,579 21,219 36,081 Total assets 69,202 57,239 45,089 46,651 74,712 Long-term debt, less current portion 5,490 5,820 7,528 15,253 13,951 Shareholders' equity 49,276 24,081 21,087 12,340 44,012
* Reclassified certain items to conform to current year's presentation. 11 ITEM 7. Management's Discussion and Analysis of Financial Condition and - - - - - - - ------ --------------------------------------------------------------- Results of Operations. - - - - - - - --------------------- RESULTS OF OPERATIONS Sales Net sales of manufactured products for the year ended October 1, 1994 increased by $1,878,000, or 3%, to $59,118,000, while net sales of distributed product decreased $7,244,000, or 42%, from the $17,295,000 achieved in fiscal year 1993, resulting in total net sales declining $5,366,000, or 7%, to $69,169,000. Sales of manufactured products increased primarily due to price increases for several products and decreased competition for one product. Dollar sales of distributed products were reduced principally as a result of intense price competition while the unit volume increased significantly as two products were introduced. To achieve a long term strategy of increasing market share, the Company, in fiscal year 1994, undertook to (i) increase its manufacturing capacity over time as sales grow, (ii) add distribution arrangements to broaden its product line, and (iii) restructure its marketing and sales efforts by hiring its own sales force to penetrate additional channels of distribution. The table below summarizes net sales derived from the Company's manufacturing and distribution activities (dollars in thousands).
1994 1993 ---- ---- % of % of Amount Total Amount Total ------- ------- ------- ------ Manufacturing activities $59,118 85% $57,240 77% Distribution activities $10,051 15% $17,295 23%
Sales for the fourth quarter of fiscal 1994 were $17,792,000, an increase of 16% or $2,443,000, from the $15,349,000 for the fourth quarter fiscal of 1993. This growth was a result of the successful implementation of the Company's plan to (i) increase the quality of service to its customers, and (ii) change its marketing and sales organizations. The sales growth was also the principal reason for the increase in the dollar amount of accounts receivable at fiscal year end, $9,347,000, as compared to $6,856,000 at the prior fiscal year end. Sales for the year ended October 2, 1993 of $74,535,000 increased $22,042,000, or 42%, from the year ended October 3, 1992, primarily as a result of the introduction of two products under distribution agreements. Increases in sales are principally dependent on, among other things (i) successful approval of ANDAs, (ii) continued introduction of distributed product, (iii) increased market penetration of the existing product line, (iv) reintroduction of previously manufactured product, and (v) the level of customer service. Gross Margins The Company's gross margin for the year ended October 1, 1994 was $23,395,000 (34% of net sales) compared to $26,148,000 (35% of net sales) for the prior fiscal year. The manufactured product gross margin of $21,648,000, or 37% of net sales, was $770,000 less than the $22,418,000, or 39% of net sales, achieved last year. Current year margin was affected by the loss of a major customer for Ibuprofen, which resulted in unfavorable overhead absorption for the year. The Company has been successful in securing new customer sales to replace the lost business, and the level of underabsorbed overhead has been steadily declining. The gross margin percentages derived from distribution activities were only 17% of net sales due principally to the intense price competition versus 22% of net sales in fiscal year 1993. The gross margin for the quarter ended October 1, 1994 increased $783,000 to $6,229,000 (35% of net sales) from the $5,446,000 (35% of net sales) recorded in the fourth quarter of the prior fiscal year. Both gross margins and sales have been negatively impacted recently by the trend of major branded pharmaceutical companies to directly launch their patented drugs as generics prior to patent expiration. This added competition has had a negative impact on the Company's sales and margins as distribution channels are either closed or severely limited and the Company lowers its prices in response to these additional competitive pressures. 12 Inventory allowances, which have the effect of reducing gross margins, amounted to $1,333,000, or 2% of net sales, for the year ended October 1, 1994 as compared to $1,732,000, or 2% of net sales, in the prior year. Inventory allowances are related to manufacturing operations and are taken in the normal course of business. To properly service its customer base, the Company is required to sell a breadth of product and it is often necessary to sell certain products at little or no margin in order to balance the products offered to customers. These products, as a result of changes in market conditions, may at a future time become primary contributors to gross margin and therefore remain in the current product line. During fiscal year 1994, three of the Company's products accounted for approximately 46% of its net sales and yielded the substantial portion of the gross margin of the Company, with one of such products representing a substantial portion of both net sales and gross margin. There can be no assurances that these products will continue to provide such significant, or even similar, portions of the Company's net sales and/or gross margin or that, if they fail to do so, another product or other products will adequately offset any decline(s) thereof. While the Company has no present expectation thereof, there can be no assurance that other new and/or different Company products will not, in the future, provide at least the above percentages of the Company's net sales and/or gross margin (see "Business--Product Line Information"). Gross margin in fiscal year 1993 increased $6,103,000 from $20,045,000 (38% of net sales) in 1992 primarily as a result of increased sales in 1993. The lower gross margin percentage in fiscal year 1993 was primarily the result of a less favorable product sales mix. Operating Expenses Research and Development For the year ended October 1, 1994, research and development costs increased $1,915,000, or 98%, to $3,874,000 from the prior fiscal year, and as a percentage of net sales were 6% compared to 3% in the prior year as management continued investment in research and development efforts to position the Company for future growth. These expenditures are expected to increase further in fiscal year 1995. In fiscal 1993, research and development costs increased $660,000, or 51%, to $1,959,000 as management anticipated receiving FDA clearance for the Assessment Program and commenced reinvesting significant amounts in research and development. In addition, the Company continued to pursue alternatives to its internal product development efforts, such as joint ventures, licensing and distribution agreements (see "Business--General--Recent Developments", "-- Research and Development", "--Financial Condition--Liquidity and Capital Resources" and "Notes to Financial Statements--Distribution Agreements"). There can be no assurance that these efforts will be successful. Selling, General and Administrative Selling, general and administrative costs for the fiscal year ended October 1, 1994 increased 6% to $13,463,000 (19% of net sales) from $12,673,000 (17% of net sales) for the year ended October 2, 1993. The increase for the year was primarily attributable to higher consulting and information systems costs. Although management expects the dollar amounts of selling, general and administrative costs to continue to increase, they are expected to remain constant as a percent of sales. Selling, general and administrative costs for the year ended October 2, 1993 increased $1,187,000, or 10%, from $11,486,000 (22% of net sales) in fiscal year 1992. The increase was due to higher personnel, consulting and royalty costs, partially offset by an insurance settlement and an adjustment to outside selling commissions. Interest Interest expense decreased $137,000, or 23%, to $465,000 in the current fiscal year and remained at 1% of net sales as a result of lower interest rates on the outstanding debt and the reduction of total debt (see "-- Financial Condition--Financing" and "Notes to Financial Statements--Long Term Debt"). 13 Settlements In fiscal year 1994, the Company settled three lawsuits against it by 3M, United States Trading Corporation, and Mylan Laboratories, Inc. for an aggregate of $10,500,000 which was reflected in fiscal 1993 financial statements (see "Business--General--Recent Developments", "Legal Proceedings" and "Notes to Financial Statements--Settlements--Fiscal Year 1993"). With the settlement of these actions, the Company resolved all of the significant litigation against it. While the Company has settled such lawsuits and other regulatory proceedings, there can be no assurance that other lawsuits or proceedings will not be instituted against it in respect of the actions of the prior management of Par. Such lawsuits or proceedings, if any, could have an adverse effect on the Company's financial condition and operations. Fiscal year 1992 included a charge of $230,000 which represented a civil fine the Company paid to the State of New York (see "Notes to Financial Statements--Settlements--Fiscal Year 1992"). Income Taxes At October 1, 1994, the Company had net operating loss carryforwards for tax purposes of approximately $40,000,000 (see "Notes to Financial Statements--Income Taxes"). In fiscal year 1994, the Company adopted Financial Accounting Standards No. 109, "Accounting For Income Taxes" ("FAS 109"), resulting in income of $14,128,000 which is reflected as the cumulative effect of a change in accounting principle in the financial statements. Significant portions of the income recognized consist of net operating loss carryforwards and have been included to the extent that the realization of such benefits is more likely than not. The Company has retained special tax counsel and is contesting the Internal Revenue Service ("IRS") position that certain credits taken by it for research activities are not permitted. In the event a determination is made that the Company was not entitled to such credits, a reserve of approximately $1,000,000 was provided upon implementation of FAS 109. The Company believes that any such disallowance, and the resultant charge, would not have any material adverse effect on the Company's operations, liquidity or cash flow. Discontinued Operations In fiscal year 1994, the Company completed the disposition of Quad Pharmaceuticals, Inc. ("Quad") when its building leases were terminated. As a result of these terminations, the Company was able to reverse approximately $466,000 of expenses previously charged as losses (see "Notes to Financial Statements--Discontinued Operations"). FINANCIAL CONDITION Liquidity and Capital Resources The Company had working capital of $19,732,000 at October 1, 1994, representing an increase of $6,591,000 from the prior fiscal year as a result of reductions in legal settlement liabilities, increases in receivables and inventories, and the addition of current deferred tax benefits. The working capital ratio at the current year end was 2.4:1, as compared to 1.6:1 for the prior fiscal year end. Cash and cash equivalents and temporary investments aggregated $3,306,000 at October 1, 1994. The Company experienced a reduction from the prior year in cash and cash equivalents and temporary investments amounting to $10,007,000. Cash was used primarily to (i) pay for legal settlements, (ii) invest in property, plant and equipment, (iii) build inventories to continue to improve customer service, (iv) support the increase in receivables, and (v) invest in a pharmaceutical company which may provide product for the Company (see "Business--Product Line Information" and "Notes to Financial Statements-- Distribution Agreements"). The increase in cash and cash equivalents in fiscal year 1993 stemmed from cash from operations partially offset by capital expenditures, debt reductions and discontinued operations. 14 The Company's obligations, in the short term, to fund research and development under various option and joint development agreements are not expected to have a material effect upon cash flow or liquidity. With regard to the exclusive option from Bio-Pharma, the Company paid $250,000 to date, and agreed to pay $200,000, plus 15,000 shares of Common Stock, on January 1, 1995, to enable further evaluation of the compound. Additional amounts will be paid out as various testing stages are completed. If it exercises its option (see "Business--Research and Development"), under the Bio- Pharma option agreement, it will be required to pay $3,000,000 and incur significant additional expenses for the necessary clinical trials and bio- studies in order to file a NDA with the FDA. If the Company incurs such capital commitments, or if it incurs additional funding obligations under similar agreements which it may enter into in the future, the Company expects to fund any obligations with cash provided by operations to the extent such cash is available. In the absence of sufficient cash from operations, the Company may be required to seek funds from other sources. The Company is currently exploring various possible strategic business transactions designed to strengthen and expand its operations, including joint ventures, equity infusions by third parties and business combinations. If the Company were to consummate any such strategic transaction, it could have a material effect on the Company's operations and/or financial condition. There can be no assurances that any such transaction will be effected in the reasonably foreseeable future or, if a transaction is effected, what the terms and conditions thereof would be. While it is anticipated that operating activities during fiscal year 1995 will generate cash, the Company expects to expend significant funds for increased research and development efforts (see "--Results of Operations--Operating Expenses--Research and Development") and further capital improvements. Although the Company expects its cash on hand and cash to be generated from operating activities to be sufficient to fund its operations, research and development efforts, and capital expenditures, it obtained an intermediate term bank financing to help ensure implementation of its plans (see "--Financing" and "Notes to Financial Statements--Long Term Debt"). The operations of Quad were discontinued in 1991 and it conducts no business (see" --Results of Operations--Discontinued Operations" and "Notes to Financial Statements--Discontinued Operations"). The Company does not expect there to be any Quad activities requiring cash outlays in the future. Quad has liabilities totalling approximately $2,844,000, which are reflected on the Company's October 1, 1994 consolidated balance sheet and has virtually no assets with which to satisfy such liabilities. These liabilities, although reflected on the Company's consolidated balance sheets, are not expected to have any material impact upon the Company's cash flow or liquidity because they are direct obligations of Quad and the Company believes that neither it nor any of its subsidiaries (other than Quad) have any obligation to satisfy the liabilities. Financing At October 1, 1994, the Company's debt of $6,743,000 is on a long-term basis, due to two banks, of which $5,766,000 is scheduled to be repaid in monthly installments through fiscal 1999. The Company recently revised and extended its $7,000,000 revolving credit facility with one bank which now expires no earlier than March 1996. At October 1, 1994, no borrowings were outstanding under the revolving credit facility. The Company and the same bank have also entered into a $4,000,000 term loan facility for capital expenditures, which may be borrowed during the first half of fiscal 1995 (see "Notes to Financial Statements--Long Term Debt"). The new term loan and the existing term loans, which are from the same bank, are secured. In May, the Company borrowed, from another bank, $1,340,000 through a seven- year mortgage to purchase a building (see "Properties" and "Notes to Financial Statements--Long Term Debt"). At this second bank, $196,000 is also outstanding under a $250,000 line of credit which is utilized to acquire equipment. ITEM 8. Financial Statements and Supplementary Data. - - - - - - - ------ ------------------------------------------- See Index to Financial Statements after Signature Page. 15 ITEM 9. Changes in and Disagreements With Accountants on Accounting and - - - - - - - ------ --------------------------------------------------------------- Financial Disclosure. - - - - - - - -------------------- Inapplicable. 16 PART III ITEM 10. Directors and Executive Officers of the Registrant. - - - - - - - ------- -------------------------------------------------- The information set forth under the caption "Election of Directors" in the Company's Proxy Statement relating to its 1995 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A under the Securities Exchange Act of 1934, is incorporated herein by reference. ITEM 11. Executive Compensation. - - - - - - - ------- ---------------------- The information set forth under the caption "Executive Compensation" in the Company's Proxy Statement relating to its 1995 Annual Meeting of Shareholders, to be filed with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. - - - - - - - ------- -------------------------------------------------------------- The information set forth under the caption "Voting Securities and Principal Shareholders" in the Company's Proxy Statement relating to its 1995 Annual Meeting of Shareholders, to be filed with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions. - - - - - - - ------- ----------------------------------------------- The information set forth under the caption "Certain Transactions" in the Company's Proxy Statement relating to its 1995 Annual Meeting of Shareholders, to be filed with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, is incorporated herein by reference. 17 PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - - - - - - - ------- ---------------------------------------------------------------- (a)(1)&(2) Financial Statements. See Index to Financial Statements after Signature Page. (a)(3) Exhibits. 3.1 Certificate of Incorporation of the Registrant. (4) 3.1.1 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 6, 1992--incorporated by reference to the Registrant's Registration Statement on Form 8-A (Commission File No. 0-20834), filed with the Commission November 10, 1992. 3.2 By-Laws of the Registrant, as amended and restated. (3) 4 Rights Agreement, dated August 6, 1991, between the Registrant and Midlantic National Bank, as Rights Agent. (5) 4.1 Amendment to Rights Agreement, dated as of April 27, 1992. (3) 10.1 1983 Stock Option Plan of the Registrant, as amended. (2) 10.2 1986 Stock Option Plan of the Registrant, as amended. (2) 10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (5) 10.4 1989 Employee Stock Purchase Program of the Registrant. (7) 10.5 1990 Stock Incentive Plan of the Registrant, as amended. (2) 10.6 Form of Retirement Plan of Par. (12) 10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984. (6) 10.7 Form of Retirement Savings Plan of Par. (12) 10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984. (13) 10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984. (13) 10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985. (13) 10.8 Par Pension Plan, effective October 1, 1984. (4) 10.9 Employment Agreement, dated as of October 4, 1992, among the Registrant, Par and Kenneth I. Sawyer. (1) 10.10 Lease Agreement between Par and the County of Rockland Industrial Development Agency, dated as of October 1, 1984. (6) 10.10.1 Lessee Guaranty between Par and Midlantic National Bank, dated as of October 1, 1984. (6)
18 10.10.2 Mortgage from County of Rockland Industrial Development Agency to Midlantic National Bank, as Trustee, dated as of October 1, 1984. (13) 10.10.3 Security Agreement between County of Rockland Industrial Development Agency and Midlantic National Bank, as Trustee, dated as of October 1, 1984. (13) 10.11 Term Loan Agreement, dated September 18, 1987, between Midlantic National Bank/North and Par. (11) 10.11.1 Note and Indenture, dated September 18, 1987, between Midlantic National Bank/North and Par. (11) 10.12 Revolving Credit Agreement, dated February 20, 1992, between Par and Midlantic National Bank. (1) 10.13 Agreement Concerning Term Loans, dated February 20, 1992, between Par and Midlantic National Bank. (1) 10.14 Amendments to Term Note, dated February 20, 1992. (1) 10.15 Lease for premises located at 12 Industrial Avenue, Upper Saddle River, New Jersey, between Par and Charles and Dorothy Horton, dated October 21, 1978 and extension dated September 15, 1983. (12) 10.15.1 Extension of Lease, dated November 8, 1989, between Par and Charles and Dorothy Horton relating to premises at 12 Industrial Avenue, Upper Saddle River, New Jersey. (9) 10.16 Lease, dated November 7, 1986, between Ramapo Corporate Park, Inc. as landlord, and Par as tenant. (4) 10.16.1 Amendment by letter dated March 10, 1988 to the lease, dated November 7, 1986, between Ramapo Corporate Park, Inc. as lessor and Par as lessee. (10) 10.17 Lease, dated December 15, 1987, between Ram Ridge Estates Corp. as lessor and Par as lessee. (10) 10.18 Standstill Agreements and Irrevocable Proxies, each dated May 29, 1990, between Par and each of Asrar Burney, Dulal Chatterji, and Raja Feroz. (8) 10.19 Agreement of Purchase and Sale, dated June 4, 1992, among Quad, Par, and The Liposome Company, Inc. (1) 10.19.1 Modification of Agreement of Purchase and Sale, dated July 24, 1992, among Quad, Par, and The Liposome Company, Inc. (1) 10.20 Employment Agreement, dated as of April 1, 1993, between Par and Diana L. Sloane. (14) 10.21 Employment Agreement, dated as of May 19, 1993, between the Registrant and Robert I. Edinger. (14) 10.22 Distribution Agreement, dated as of October 16, 1993, between Genpharm, Inc., the Registrant and PRX Distributors, Ltd. (14) 10.23 Agreement, dated as of September 30, 1993, between National Union Fire Insurance Company of Pittsburgh and Par. (14)
19 10.24 Settlement Agreement and Release, dated as of November 29, 1993, between Mylan Laboratories, Inc., the Registrant, Par and Quad. (14) 10.25 Settlement Agreement and Release, dated as of January 6, 1994, between Minnesota Mining & Manufacturing Company, Riker Laboratories, Inc., the Registrant and Par. (14) 10.26 Settlement Agreement and Release, dated as of December 22, 1993, between United States Trading Corporation, Marvin Sugarman, Liquipharm, Inc., the Registrant and Par. (14) 10.27 Letter Agreement, dated April 30, 1993, between the Generics Group B.V. and Par. 10.28 Distribution Agreement, dated as of February 24, 1994, between Sano Corporation, the Registrant and Par, as amended. 10.29 Mortgage and Security Agreement, dated May 4, 1994, between Urban National Bank and Par. (15) 10.29.1 Mortgage Loan Note, dated May 4, 1994. (15) 10.29.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban National Bank. (15) 10.30 Non-exclusive Distribution, Exclusive Supply Agreement, dated as of September 13, 1994, between Mova Pharmaceutical Corporation and Par. 10.31 Non-exclusive Distribution, Exclusive Supply Agreement, dated as of September 13, 1994, between Mova Pharmaceutical Corporation and Par. 10.32 Letter Agreement, dated as of October 13, 1994, between Par and Robert I. Edinger. 10.33 Term Loan Agreement, dated as of November 29, 1994, between Midlantic Bank, NA and Par, to be filed by amendment. 10.34 Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994, between Midlantic Bank, NA and Par, to be filed by amendment. 10.34.1 Revolving Loan Note, dated November 29, 1994, to be filed by amendment. 10.35 Amended and Restated Agreement Concerning Term Loans, dated as of November 29, 1994, between Midlantic Bank, NA and Par, to be filed by amendment. 11 Computation of per share data. 13 1994 Annual Report to Shareholders, to be filed by amendment. 21 Subsidiaries of the Registrant. 23 Consent of Richard A. Eisner & Company, LLP. __________________________________________ 20 (1) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 3, 1992 and incorporated herein by reference. (2) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Proxy Statement dated August 10, 1992 and incorporated herein by reference. (3) Previously filed with the Securities and Exchange Commission as an Exhibit to Amendment No. 1 on Form 8 to the Registrant's Registration Statement on Form 8-B, filed May 15, 1992, and incorporated herein by reference. (4) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended September 28, 1991 and incorporated herein by reference. (5) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Proxy Statement dated August 14, 1991 and incorporated herein by reference. (6) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K (Commission File No. 1-9449) for the year ended September 29, 1990 and incorporated herein by reference. (7) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Proxy Statement dated August 16, 1990 and incorporated herein by reference. (8) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Current Report on Form 8-K dated May 29, 1990 and incorporated herein by reference. (9) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1989 and incorporated herein by reference. (10) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1988 and incorporated herein by reference. (11) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1987 and incorporated herein by reference. (12) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Registration Statement on Form S-1 (No. 2- 86614) and incorporated herein by reference. (13) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Registration Statement on Form S-1 (No. 33- 4533) and incorporated herein by reference. (14) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrants' Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 2, 1993 and incorporated herein by reference. (15) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 1-10827) for the quarter ended April 2, 1994 and incorporated herein by reference. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 27, 1994 PHARMACEUTICAL RESOURCES, INC. ------------------------------ (Registrant) By: /s/ Kenneth I. Sawyer ------------------------------ Kenneth I. Sawyer President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Kenneth I. Sawyer President, Chief Executive Officer, and Chairman - - - - - - - ------------------------- of the Board of Directors December 27, 1994 Kenneth I. Sawyer Vice President, Chief Financial Officer and /s/ Robert I. Edinger Secretary (Principal Accounting and Financial December 27, 1994 - - - - - - - ------------------------- Officer) Robert I. Edinger /s/ Diana L. Sloane Vice President--Regulatory and Scientific Af- December 27, 1994 - - - - - - - ------------------------- fairs and Director Diana L. Sloane /s/ Mark Auerbach December 27, 1994 - - - - - - - ------------------------- Mark Auerbach Director /s/ Andrew Maguire December 27, 1994 - - - - - - - ------------------------- Andrew Maguire Director /s/ H. Spencer Matthews December 27, 1994 - - - - - - - ------------------------- H. Spencer Matthews Director /s/ Robin O. Motz December 27, 1994 - - - - - - - ------------------------- Robin O. Motz Director /s/ Melvin Van Woert December 27, 1994 - - - - - - - ------------------------- Melvin Van Woert Director
PHARMACEUTICAL RESOURCES, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 1, 1994
Page ---- Included in Part II: - - - - - - - -------------------- Accountants' Report F-2 Consolidated Balance Sheets as at October 1, 1994 and October 2, 1993 F-3 Consolidated Statements of Operations and Retained Earnings (Deficit) for the years ended October 1, 1994, October 2, 1993 and October 3, 1992 F-4 Consolidated Statements of Cash Flows for the years ended October 1, 1994, October 2, 1993 and October 3, 1992 F-5 Notes to Financial Statements F-6 through F-17 Included in Part IV: - - - - - - - -------------------- Accountants' Report with respect to schedules F-18 SCHEDULES: III Condensed financial information of registrant F-19 and F-20 VIII Valuation and qualifying accounts F-21
_________________________________________________ Other financial statement schedules and inapplicable periods with respect to the schedules listed above are omitted because the conditions requiring their filing do not exist or the information required thereby is included in the financial statements filed, including the notes thereto. F-1 Richard A. Eisner & Company ___________________________________________________________________ Accountants and Consultants REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Pharmaceutical Resources, Inc. Spring Valley, New York We have audited the accompanying consolidated balance sheets of Pharmaceutical Resources, Inc. and subsidiaries as at October 1, 1994 and October 2, 1993, and the related consolidated statements of operations and retained earnings (deficit) and cash flows for each of the years in the three-year period ended October 1, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Pharmaceutical Resources, Inc. and subsidiaries at October 1, 1994 and October 2, 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended October 1, 1994, in conformity with generally accepted accounting principles. /s/ Richard A. Eisner & Company, LLP New York, New York November 30, 1994 575 Madison Avenue, New York, N.Y. 10022-2597 Member of Summit International Associates, Inc. New York, NY . Melville, NY . Cambridge, MA . Florham Park, NJ F-2 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS
October 1, October 2, ASSETS 1994 1993 ------ ---------- ---------- Current assets: Cash and cash equivalents $ 3,130,000 $12,134,000 Temporary investments 176,000 1,179,000 Accounts receivable, net of allowances of $2,768,000 and $2,628,000 9,347,000 6,856,000 Inventories 16,352,000 14,117,000 Prepaid expenses and other current assets 1,500,000 1,799,000 Current deferred tax benefit 3,090,000 - Current assets of discontinued operations 20,000 71,000 ---------- ---------- Total current assets 33,615,000 36,156,000 Property, plant and equipment, at cost less accumulated depreciation and amortization 23,004,000 20,037,000 Deferred charges and other assets 1,086,000 1,046,000 Investment in non-marketable securities 1,000,000 - Long-term deferred tax benefit 10,497,000 - ---------- ---------- $69,202,000 $57,239,000 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $ 1,870,000 $ 1,834,000 Accounts payable 5,340,000 6,769,000 Salaries and employee benefits 2,908,000 3,479,000 Accrued expenses and other current liabilities 921,000 805,000 Estimated current liabilities of discontinued operations 2,844,000 3,628,000 Settlements - 6,500,000 ---------- ---------- Total current liabilities 13,883,000 23,015,000 Long-term debt, less current portion 5,490,000 5,820,000 Long-term portion of settlements - 4,000,000 Pension 553,000 323,000 Commitments, contingencies and other matters - - Shareholders' equity: Preferred Stock, par value $.0001 per share; authorized 6,000,000 shares; issued and outstanding -- 1,058,400 and 1,479,070 shares of Series A Convertible Preferred Stock (aggregate liquidation preference- $5,292,000 and $7,395,000) 1,000 1,000 Common Stock, par value $.01 per share; authorized 60,000,000 shares; outstanding 14,482,632 and 13,466,182 shares 145,000 135,000 Additional capital 43,066,000 36,296,000 Retained earnings (deficit) 6,164,000 (12,351,000) Additional minimum liability related to defined benefit pension plan (100,000) - ---------- ---------- Total shareholders' equity 49,276,000 24,081,000 ---------- ---------- $69,202,000 $57,239,000 ========== ==========
The accompanying notes are an integral part of these statements. F-3 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
Year Ended ------------------------------------------------ October 1, October 2, October 3, 1994 1993* 1992* ------------- ------------- ------------- Net sales $69,169,000 $74,535,000 $52,493,000 Other income 425,000 347,000 142,000 ---------- ---------- ---------- Total revenues 69,594,000 74,882,000 52,635,000 Costs and expenses: Cost of goods sold 45,774,000 48,387,000 32,448,000 Research and development 3,874,000 1,959,000 1,299,000 Selling, general and administrative 13,463,000 12,673,000 11,486,000 Interest 465,000 602,000 923,000 Settlements - 10,500,000 230,000 ---------- ---------- ---------- 63,576,000 74,121,000 46,386,000 Income from continuing operations before income taxes 6,018,000 761,000 6,249,000 Provision for income taxes 1,785,000 650,000 2,150,000 ---------- ---------- ---------- Income from continuing operations 4,233,000 111,000 4,099,000 Income from discontinued operations 466,000 - 1,696,000 ---------- ---------- ---------- Income before extraordinary item 4,699,000 111,000 5,795,000 Extraordinary item -- tax benefit of utilization of net operating loss carryforward - 300,000 2,150,000 ---------- ---------- ---------- Income before change in accounting principle 4,699,000 411,000 7,945,000 Cumulative effect of change in accounting principle 14,128,000 - - ---------- ---------- ---------- Net income 18,827,000 411,000 7,945,000 Dividend on preferred stock (312,000) - (140,000) (Deficit), beginning of year (12,351,000) (12,762,000) (20,567,000) ---------- ---------- ---------- Retained earnings (deficit), end of year $6,164,000 $(12,351,000) $(12,762,000) ========= ========== ========== Income per share of common stock: Continuing operations $ .26 $.01 $.28 Discontinued operations .03 - .11 Extraordinary item - .02 .15 Change in accounting principle .85 - - ---- ---- ---- Net income $1.14 $.03 $.54 ==== === === Weighted average number of common and common equivalent shares outstanding 16,494,898 15,814,278 14,825,761 ========== ========== ==========
* Reclassified certain items to conform to current year's presentation. The accompanying notes are an integral part of these statements. F-4 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended ------------------------------------------- October 1, October 2, October 3, 1994 1993* 1992* ------------- ------------ ------------ Cash flows from operating activities: Net income $18,827,000 $411,000 $7,945,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Cumulative effect of accounting change (14,128,000) - - Net operating loss carryforward - (300,000) (2,150,000) Income from discontinued operations (466,000) - (1,696,000) Provision for income taxes 1,785,000 650,000 2,150,000 Provision for settlements - 10,500,000 230,000 Depreciation and amortization 2,391,000 2,479,000 2,572,000 Allowances against accounts receivable 140,000 551,000 227,000 Write-off of inventories 1,333,000 1,732,000 950,000 Other 213,000 550,000 458,000 Changes in assets and liabilities: (Increase) in accounts receivable (2,631,000) (1,134,000) (1,572,000) (Increase) in inventories (3,568,000) (3,602,000) (6,518,000) Decrease (increase) in prepaid expenses and other assets 581,000 (857,000) 298,000 (Decrease) increase in accounts payable (1,429,000) 2,083,000 1,384,000 (Decrease) in accrued expenses and other liabilities (930,000) (641,000) (72,000) (Decrease) in settlements (6,500,000) - - --------- ---------- --------- Net cash (used in) provided by operating activities (4,382,000) 12,422,000 4,206,000 Cash flows from financing activities: Proceeds from issuance of common stock 1,679,000 2,125,000 382,000 Proceeds from issuance of notes payable and other debt 4,552,000 - - Principal payments under long-term debt and other borrowings (4,901,000) (1,676,000) (6,139,000) Preferred dividends paid - (135,000) - --------- ---------- --------- Net cash provided by (used in) financing activities 1,330,000 314,000 (5,757,000) Cash flows from investing activities: Capital expenditures (5,688,000) (2,718,000) (576,000) (Increase) in non-marketable securities (1,000,000) - - Decrease (increase) in temporary investments 1,003,000 (1,179,000) - Cash (used in) provided by discontinued operations (267,000) (1,298,000) 421,000 --------- --------- -------- Net cash (used in) investing activities (5,952,000) (5,195,000) (155,000) Net (decrease) increase in cash and cash equivalents (9,004,000) 7,541,000 (1,706,000) Cash and cash equivalents at beginning of year 12,134,000 4,593,000 6,299,000 ---------- --------- --------- Cash and cash equivalents at end of year $3,130,000 $12,134,000 $4,593,000 ========= ========== =========
*Reclassified certain items to conform to current year's presentation. The accompanying notes are an integral part of these statements. F-5 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS October 1, 1994 Pharmaceutical Resources, Inc. ("PRI") operates in one business segment, the manufacture and distribution of generic pharmaceuticals. Marketed products are principally in oral solid (tablet, caplet, and capsule) form, with a small number of products in the form of creams and liquids. Summary of Significant Accounting Policies: Principles of Consolidation: The consolidated financial statements include the accounts of PRI and its wholly-owned subsidiaries, Par Pharmaceutical, Inc. ("Par"), and seven others, the activities of which are not significant. References herein to the "Company" refer to PRI and its subsidiaries. Temporary Investments: Investments are stated at the lower of cost or market value. These investments are classified as "available for sale securities" pursuant to Financial Accounting Standards No. 115. Inventories: Inventories are stated at the lower of cost (first-in, first-out basis) or market value. Depreciation and Amortization: Property, plant and equipment are depreciated straight-line over their estimated useful lives. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease. Research and Development: Research and development expenses represent costs incurred by the Company to develop new products and obtain premarketing regulatory approval for such products. All such costs are expensed as incurred. Income Taxes: Deferred income taxes are provided for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Business tax credits and net operating loss carryforwards are recognized to the extent that realization of such benefit is more likely than not. Revenue Recognition: The Company recognizes revenue at the time it ships product and it provides for returns and allowances based upon actual subsequent allowances and historical trends. Per Share Data: Per share data is based upon the weighted average number of common shares and equivalents outstanding. For purposes of per share data, the Series A Convertible Preferred Stock is considered to be a common stock equivalent. The dilutive effect of outstanding options and warrants is computed using the "treasury stock" method. Cash Equivalents: For purposes of the statement of cash flows, the Company considers all highly liquid money market instruments to be cash equivalents. At October 1, 1994, cash equivalents were deposited in a financial institution and consisted of immediately available fund balances. F-6 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 Concentration of Credit Risk: Financial instruments that potentially subject the Company to credit risk consist of trade receivables and interest-bearing investments. The Company markets its products primarily to domestic distributors, wholesalers and retail drug store chains. The risk associated with this concentration is believed by the Company to be limited due to the large number of distributors, wholesalers, and drug store chains, their geographic dispersion and the performance of certain credit evaluation procedures (see "Accounts Receivable-Major Customers" ). Discontinued Operations: In July 1992, Quad Pharmaceuticals, Inc. ("Quad"), a wholly owned subsidiary, sold its manufacturing facility, the adjoining real property, and certain fixtures related to the facility having a carrying amount of approximately $1,900,000 in the aggregate, to an unrelated company for approximately $3,600,000, resulting in a net gain of $1,696,000. In March 1994, the Company completed the disposition of Quad, and, as a result, has reversed estimated operating losses by $466,000. The assets and liabilities of discontinued operations have been classified on the balance sheet as such to separately identify them. Quad has virtually no assets with which to satisfy such liabilities. These liabilities, although reflected on the Company's consolidated balance sheets, are not expected to have any material impact upon the Company's cash flow or liquidity because they are direct obligations of Quad and the Company believes that neither it nor its subsidiaries (other than Quad) have any obligation to satisfy these liabilities. The principal components of the liabilities are shown in the table below.
1994 1993 ------ ------ (In Thousands) Notes payable $ 813 $ 813 Amounts due to customers 1,657 1,657 Provision for estimated losses - 457 Accrued expenses and accounts payable 374 701 ------ ------ $2,844 $3,628 ====== ======
Settlements: Fiscal Year 1993: Minnesota Mining and Manufacturing Settlement: The Company, in January 1994, reached a settlement agreement with Minnesota Mining & Manufacturing Company ("3M") and its subsidiary Riker Laboratories, Inc. ("Riker", collectively with 3M, "3M/Riker"). The settlement was reflected in fiscal year 1993 results of operations. In fiscal year 1994, in accordance with the terms of the settlement, the Company paid 3M/Riker approximately $5,000,000 in cash and issued 119,500 shares of common stock of the Company ("Common Stock"). The lawsuit brought in 1993 by 3M/Riker against Par stemmed from actions occurring during the tenure of prior management at Par. 3M/Riker alleged that Par improperly obtained United States Food and Drug Administration (the "FDA") approvals by bribing FDA officials and submitting false information to the FDA, as a result of which 3M/Riker claimed to have suffered competitive injury in an amount up to $24,000,000. F-7 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 U.S. Trading Settlement: In December 1993, the Company and United States Trading Corporation ("UST") settled their respective suits. This settlement was also reflected in fiscal year 1993 results of operations. In fiscal year 1994, in accordance with the terms of the settlement, the Company paid $250,000 in cash and issued $250,000 in merchandise credit to UST. The lawsuit stemmed from actions occurring during the tenure of prior management at Par. Mylan Settlement: In November 1993, the Company reached a settlement agreement with Mylan Laboratories, Inc. ("Mylan") with respect to a lawsuit brought in 1989 by Mylan against Par, Quad and others. This settlement was reflected in fiscal year 1993 results of operations. In fiscal year 1994, in accordance with the terms of the settlement, the Company paid Mylan $1,000,000 in cash and issued it approximately 111,000 shares of Common Stock. The lawsuit stemmed from actions occurring during the tenure of prior management at Par. Mylan alleged that two of the Company's subsidiaries improperly obtained FDA approvals by bribing FDA officials and submitting false information to the FDA, as a result of which Mylan claimed to have suffered competitive injury in an amount of up to $600,000,000. Application Integrity Assessment Program: In October 1993, the Company was informed by the FDA that it had completed the Application Integrity Assessment Program (the "Assessment Program") for Par and that the FDA would review Abbreviated New Drug Applications ("ANDAs") submitted by Par for the approval of generic drugs. In addition, the Company became eligible to again bid on government contracts, without previous limitation. The Assessment Program was initiated as a result of investigations by the Federal government in 1989 resulting in guilty pleas by Par and by certain former executives of Par to charges of providing an unlawful gratuity to a public official. Directors' and Officers' Liability Insurance Settlement: In September 1993, the Company reached a settlement agreement with the former insurance carrier of its directors' and officers' liability policy pursuant to which the Company, in exchange for $650,000, settled all claims against the insurer. The Company's claims were for the advancement and payment of legal expenses and settlement costs on behalf of former officers and directors relating to shareholder litigation. Fiscal Year 1992: United States Defense Logistics Agency: In June 1992, the Company entered into an agreement with the United States Defense Logistics Agency under which Par is regarded by the Defense Department as eligible to contract with the Federal government. The agreement ended both Par's suspension and proposed debarment from Federal government contracting and allowed Par to actively seek to sell products to the Federal government and agencies thereof. New York State Manufacturing License: In May 1992, the Company consented to an order by the Board of Regents of the State of New York under which the State terminated a proposed disciplinary proceeding against Par and regarded Par as fully responsible to continue to be registered as a pharmaceutical manufacturer in the State of New York. Pursuant to the consent order, Par agreed to pay a civil fine of $230,000 to the State over a period of 30 months, and to be on probation for three years. Since entering into this settlement, New York has issued three-year renewal licenses to Par for its two manufacturing facilities located in New York. Temporary Investments: Investments include certificates of deposit of $176,000 in fiscal year 1994 and $1,179,000 in fiscal year 1993 consisting of a treasury note of $1,009,000 and a certificate of deposit of $170,000. F-8 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994
Accounts Receivable: 1994 1993 ---- ---- (In Thousands) Accounts receivable $12,115 $9,484 ------- ------ Allowances: Doubtful accounts 124 137 Returns and allowances 349 625* Price adjustments 2,295 1,866* ------- ------ 2,768 2,628 ------- ------ Accounts receivable, net of allowances $ 9,347 $6,856 ======= ======
* Restated to conform to current year's presentation. Major Customers: Two of the Company's customers accounted for approximately 12% and 10%, 16% and 11%, and 20% and 12% of net sales from continuing operations in fiscal years 1994, 1993 and 1992, respectively. At October 1, 1994, amounts due from these same two customers accounted for approximately 17% and 15% of the accounts receivable balance. At October 2, 1993, the amounts due from these same two customers accounted for approximately 26% and 16% of the accounts receivable balance.
Inventories: 1994 1993 ---- ---- (In Thousands) Raw materials and supplies $ 7,407 $ 6,242 Work in process and finished goods 8,945 7,875 ------- ------- $16,352 $14,117 ======= ======= Property, Plant and Equipment: 1994 1993 ---- ---- (In Thousands) Land $ 2,230 $ 2,044 Buildings 15,581 12,024 Machinery and equipment 16,979 16,005 Office equipment, furniture and fixtures 3,521 2,946 Leasehold improvements 794 1,729 ------- ------- 39,105 34,748 Less accumulated depreciation and amortization 16,101 14,711 ------- ------- $23,004 $20,037 ======= =======
Distribution Agreements: In September 1994, the Company signed two agreements (the "September 1994 Agreements") with Mova Pharmaceutical Corporation ("Mova"), a domestic pharmaceutical company. Under the September 1994 Agreements, the Company was appointed as the distributor of the two generic pharmaceuticals to be developed and manufactured by Mova once they are approved by the FDA. The first product received FDA approval in September 1994, and the Company has commenced marketing the product. The distribution agreements cover five year periods commencing with the FDA approval of the respective product. The Company will pay to Mova a base price for each product plus a percentage of net profits as defined in the September 1994 Agreements. F-9 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 In February 1994, the Company entered into an agreement (the "February 1994 Agreement") with Sano Corporation ("Sano"), a domestic pharmaceutical company which is developing generic drug transdermal delivery systems. Under the agreement, Par became the exclusive United States distributor for two products which Sano is developing (subsequent to fiscal year end 1994, the Company exercised one of three options for an additional product). It is planned that ANDAs for the initial two products will be filed in the second quarter of fiscal 1995. The agreement has a term of ten years (subject to earlier termination by either party) and thereafter, automatically renews from year to year unless either party provides notice of non-renewal. Once the Company commences to distribute the product, it will make payments based upon a percentage of gross profits to Sano. The Company advanced $1,000,000 to Sano in fiscal year 1994 as payment for research and development costs for the initial two products. The Company renegotiated the agreement to enable the advance to be recovered within three years by obtaining a greater share of gross profits. As this advance is repaid, it will be treated as income in the periods received. In November, an additional $228,000 was advanced for the third product. Additionally, the Company made a long term investment by purchasing $1,000,000 of Sano Series D Preferred Stock (issued through a private placement). The investment is classified as an "available for sale security" pursuant to Financial Accounting Standards No. 115. In May 1993, the Company was appointed by The Generics Group B.V. (the "Group"), an international pharmaceutical business, as the exclusive United States distributor of up to five generic pharmaceuticals to be manufactured by the Group's affiliates pending approval by the FDA (the "May 1993 Agreement"). ANDA approvals for Alprazolam, Triazolam, and Atenolol were received in fiscal year 1994 and the Company began distributing Alprazolam and Triazolam. Two additional drugs, which will be made available to the Company for distribution, have yet to be designated by the Group. The May 1993 Agreement also contains provisions for the development by the Group of additional generic pharmaceuticals for distribution by the Company. Under the May 1993 Agreement, the Company is obligated to issue a warrant to purchase 150,000 shares of Common Stock for $10 per share. The terms of the warrant will be similar to the warrant issued pursuant to the October 1992 Agreement (see below); however, the warrant to be granted under the May 1993 Agreement will become exercisable only upon reaching certain levels of sales for the distributed products. In October 1992, the Company entered into an agreement (the "October 1992 Agreement") with Genpharm Inc. ("Genpharm"), a Canadian manufacturer of generic pharmaceuticals (which is an affiliate of the Group) under which Par became the exclusive United States distributor of two of Genpharm's pharmaceutical products, Piroxicam and Pindolol. The agreement has an initial term of ten years (subject to earlier termination by either party as provided therein), and thereafter automatically renews from year to year unless either party gives notice of non-renewal. The cost to the Company of such products is based upon a percentage of gross profits as defined in the October 1992 Agreement. In connection with the October 1992 Agreement, the Company issued a warrant to Genpharm to purchase 150,000 shares of PRI's common stock for $6 per share. The warrant became exercisable in March 1993, has an initial term of five years (subject to earlier termination in the event the Company ceases to be Genpharm's exclusive distributor of the products covered by the October 1992 Agreement), and may be extended for up to an additional five years in the event that the closing price of Common Stock has not reached levels specified in the warrant agreement. In fiscal year 1994, the warrant was exercised to purchase 5,300 shares of Common Stock. Long Term Debt: Under an agreement entered into in 1992 concerning two term loans and a $7,000,000 revolving credit facility, all of which were collateralized by the assets of the Company, the bank had the ability to demand prepayment of the long-term debt in an amount equal to fifty percent of excess cash flows, as defined, up to $500,000 per year. The bank waived its right to demand this prepayment for the 1994 and 1993 fiscal years. F-10 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 In December 1993, the Company and the bank agreed to (i) reduce the interest rates on the term loans and the $7,000,000 revolving credit to the prime rate, (ii) eliminate the facility fee, (iii) reduce the committment fee on unused balances to 1/4 of 1%, and (iv) make the revolving credit facility unsecured. Additionally, the agreements permitted a portion of earnings to be paid as dividends on common stock. The Company, in May 1994, borrowed $1,340,000 under a seven-year 8.5% fixed rate (the rate will be readjusted in 1999) mortgage loan from another bank to purchase a building.
1994 1993 ------ ------ (In Thousands) Industrial Revenue Bond (a) $1,822 $2,243 Term loans (b) 4,921 4,192 Other (c) 617 1,219 ----- ----- 7,360 7,654 Less current portion 1,870 1,834 ----- ----- $5,490 $5,820 ===== =====
(a) The bond bears interest at 70% of the prime rate, subject to adjustment based on subsequent changes in tax laws, and is repayable in monthly installments into 1999. (b) All of these loans, except the mortgage loan for which the rate is fixed, bear interest at the prime rate, and amortize in monthly installments through 1999. (c) Primarily represents the balance of the settlement reached by the U.S. Attorney of an investigation in 1991, which balance was paid in the first quarter of fiscal year 1995. In November 1994, the Company and the bank formalized the arrangement reached in December 1993, and entered into a new term loan agreement, revised its revolving credit agreement, and renewed and amended the two existing term loan agreements. The new term loan agreement will provide up to $4,000,000 for capital expenditures and may be borrowed in the first half of fiscal year 1995. The revolving credit facility, which provides up to $7,000,000 was extended to March 31, 1996. The covenants of the revolving credit agreement and the previously existing term loans have been conformed to the covenants negotiated for the new term loan. The term loans are collateralized by the assets of the Company. Interest on all bank loans is at the prime rate, and any unused portion of the revolving credit bears a fee of 1/4 of 1% per annum. At October 1, 1994, $196,000 was outstanding, at the bank which provided the $1,340,000 mortgage (see above), under a $250,000 line of credit which is utilized to acquire equipment. Interest, based upon the prime rate, is fixed at the time of each borrowing. Long-term debt maturities during the next five years, including the portion classified as current, are $1,870,000 in 1995, $1,358,000 in 1996, $1,305,000 in 1997, $1,381,000 in 1998, and $1,446,000 in 1999 and thereafter. During the fiscal years ended 1994, 1993 and 1992, the Company incurred total interest expense of $465,000, $602,000, and $923,000, respectively. Interest paid in each year approximated interest expense. F-11 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 Shareholders' Equity: Preferred Stock: In 1990, the Company's shareholders authorized 6,000,000 shares of a newly created class of preferred stock with a par value of $.0001 per share. The preferred stock is issuable in such series and with such dividend rates, redemption prices, preferences and conversion or other rights as the Board of Directors may determine at the time of issuance. Pursuant to a settlement reached in 1991 of shareholder litigation, the Company, in July 1992, issued 2,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock"). The Preferred Stock is nonvoting, is convertible into Common Stock on a share-for-share basis at any time at the option of the holder, has a liquidation preference of $5.00 per share, and is entitled to an annual dividend of up to $.30 per share, to the extent that net earnings (as defined) of the Company exceed $1,500,000. Dividends, to the extent earned, are preferential and cumulative. The Preferred Stock may be redeemed by the Company under certain circumstances. In addition, after the third anniversary of the issuance date of the Preferred Stock, the Company may, under certain circumstances, require all of the Preferred Stock to be converted into Common Stock on a 1.1 for 1 share basis. Dividend: In fiscal year 1994, net earnings (as defined) exceeded $1,500,000. The preferred dividend of $.30 per share was accrued and is scheduled to be paid on February 1, 1995. Changes in Shareholders' Equity: Changes in the Company's Common Stock, Preferred Stock and Additional Capital accounts during the fiscal years ended in 1992, 1993, and 1994 were as follows:
Series A Convertible Preferred Stock Common Stock Additional Shares Amount Shares Amount Capital ------ ------ ------ ------ ---------- Balance, September 28, 1991 2,000,000 $1,000 12,184,237 $122,000 $32,784,000 Exercise of stock options - - 105,500 1,000 361,000 Compensatory arrangements - - 60,293 1,000 349,000 Stock issued pursuant to settlement of shareholder litigation - - 40,000 - 230,000 Conversion of preferred shares (3,163) - 3,163 - - --------- ----- ---------- ------- ---------- Balance, October 3, 1992 1,996,837 1,000 12,393,193 124,000 33,724,000 Issuance of warrant - - - - 300,000 Exercise of stock options - - 527,125 6,000 2,040,000 Compensatory arrangements - - 28,097 - 237,000 Conversion of preferred shares (517,767) - 517,767 5,000 (5,000) --------- ----- ---------- ------- ---------- Balance, October 2, 1993 1,479,070 1,000 13,466,182 135,000 36,296,000 Exercise of stock options - - 343,000 3,000 1,495,000 Exercise of warrant - - 5,300 - 32,000 Issuance of warrant - - - - 250,000 Conversion of preferred shares (420,670) - 420,670 4,000 (4,000) Compensatory arrangements - - 16,869 1,000 1,392,000 Stock issued pursuant to settlements - - 230,611 2,000 3,605,000 --------- ----- ---------- ------- ---------- Balance, October 1, 1994 1,058,400 $1,000 14,482,632 $145,000 $43,066,000 ========= ===== ========== ======= ==========
F-12 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 Share Purchase Rights Plan: Each share of Common Stock outstanding carries with it one Common Share Purchase Right ("Right"). Generally, the Rights will become exercisable only if a person or group has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the Common Stock, or if the Board of Directors has determined that a person or group has sought control of the Company with the result that control by such person or group ("Disqualifying Persons") would be detrimental to the maintenance, renewal or acquisition of the Company's governmental or regulatory approvals. If a person or group thereafter acquires beneficial ownership of 25% or more of the outstanding Common Stock or if the Board of Directors determines that there is a reasonable likelihood that control of the Company by a Disqualifying Person would result in the loss of, or denial of approval for, any governmental or regulatory approval of the Company, each outstanding Right not owned by such person or group would entitle the holder to purchase, for $25 (the exercise price of the Right), Common Stock having a market value of $50. Under certain other circumstances, including the acquisition of the Company in a merger or other business combination, each Right not owned by the acquiring party will entitle the holder to purchase for $25, securities of the acquirer having a market value of $50. The Rights are subject to redemption by the Company at a redemption price of $.01 per Right. Employee Stock Purchase Program: The Company maintains an Employee Stock Purchase Program ("Program"). The Program is designed to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. It enables eligible employees to purchase shares of Common Stock at a discount of up to 15% from the fair market value. An aggregate of 1,000,000 shares of Common Stock have been reserved for sale to employees under the Program. Employees purchased 16,928 shares, 9,739 shares and 3,973 shares during fiscal years 1994, 1993 and 1992, respectively. At October 1, 1994, 958,610 shares remain available for sale under the Program. Stock Options: The following is a summary of stock option activity during the fiscal years ended in 1994, 1993 and 1992:
1994 1993 1992 ---------- --------- ---------- Price Per Price Per Price Per Shares Share Shares Share Shares Share ---------- --------- ---------- -------- ---------- -------- Outstanding at beginning of year 2,699,250 $2.63 to 2,359,494 $2.63 to 1,984,244 $2.63 to $10.50 $13.25 $13.25 Granted 266,500 $7.00 to 998,000 $6.50 to 608,750 $5.75 to $14.13 $10.50 $7.00 Exercised (343,000) $2.63 to (527,125) $3.50 to (105,500) $3.13 to $10.13 $7.88 $3.50 Cancelled (65,500) $3.50 to (63,750) $3.50 to (128,000) $3.13 to $14.13 $13.25 $10.33 Surrendered (23,750) $3.50 to (67,369) $3.50 to - --------- --------- --------- $14.13 $6.25 Outstanding at end of year 2,533,500 $2.63 to 2,699,250 $2.63 to 2,359,494 $2.63 to ========= ========= ========= $14.13 $10.50 $13.25
The Company's 1990 Stock Incentive Plan (the "1990 Plan") provides for the granting of stock options, restricted stock awards, deferred stock awards, stock appreciation rights and other stock based awards or any combination thereof to employees of the Company or to others. The Company has reserved 1,700,000 shares of Common Stock for issuance under the 1990 Plan. F-13 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 Under the 1989 Directors' Stock Option Plan (the "Directors' Plan"), options are granted to directors of the Company who are not employees of the Company or are otherwise ineligible to receive options under any other plan adopted by the Company. Eligible directors are granted options upon their initial election to the Board and once in each fiscal year thereafter on the earlier of June 30 or the date on which the shareholders elect directors at an annual meeting. The Company has reserved 550,000 shares of Common Stock for issuance under the Directors' Plan. The Company's 1986 Stock Option Plan provides that options may be granted to employees of the Company or to others for the purchase of up to 900,000 shares of the Company's Common Stock. Options granted under the plan may be incentive stock options or nonqualified options. The 1983 Stock Option Plan terminated in August 1993, and no further options have been, or will be, granted. At October 1, 1994 and October 2, 1993, options for 312,663 and 694,663 shares, respectively, were available for future grant under the various plans. Options for 2,066,768 shares were exercisable at October 1, 1994. Income Taxes: In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"), which required the Company to recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, FAS 109 required the recognition of future tax benefits, such as net operating loss ("NOL") carryforwards, to the extent that realization of such benefits is more likely than not. The Company adopted the new accounting standard during the quarter ended January 1, 1994 and, as a result, recognized future tax benefits of $14,128,000. This amount is reflected in the net income of the Company as the cumulative effect of a change in accounting principle. The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities are as follows:
October 1, October 3, 1994 1993 -------------- -------------- (In Thousands) Deferred assets: NOL carryforwards $13,795 $11,386 Accrued legal settlements - 3,570 Accounts receivable 923 870 Accrued employee benefits 623 689 Tax credit carryforward - 463 Inventory 299 - State tax NOL 800 - Other 481 382 ------- ------- 16,921 17,360 Valuation allowance (1,000) (1,000) ------- ------- 15,921 16,360 Deferred liabilities: Fixed assets 2,329 2,221 Other 5 11 ------- ------- 2,334 2,232 Net deferred assets $13,587 $14,128 ======= =======
F-14 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 Included in the recognition of future tax benefits is approximately $1,244,000 of stock option compensation credited to additional capital. The components of income tax expense (credit) follow:
1994 1993 1992 ------- ------ ------ (In Thousands) Federal: Current - $300 $2,117 Deferred $2,585 - - ------ ---- ------ $2,585 $300 $2,117 ------ ---- ------ State: Current - 350 33 Deferred (800)* - - ------ ---- ------ (800) 350 33 ------ ---- ------ $1,785 $650 $2,150 ====== ==== ======
* During fiscal year 1994, there was a change in state tax laws which permitted recognition of NOL carryforwards. The table below provides the details of the differences, if any, between the provision for income taxes and the amount determined by multiplying income before income taxes by the applicable federal statutory rate:
1994 1993 1992 ------ ----- ----- Statutory tax rate 34% 34% 34% State tax NOL generated (13%) - - State alternative minimum tax - 46% - Other - non-deductible 9% 5% - ---- ---- ---- Effective tax rate 30% 85% 34% ==== ==== ====
At October 1, 1994, the Company had NOL carryforwards for tax purposes of approximately $40,000,000 that expire in September 2005 through September 2009. The Internal Revenue Service has indicated that it intends to disallow the Company's credit for increased research activities. The Company is vigorously contesting the Internal Revenue Service's position that credits for research activities are not permitted. In the event a determination is made that the Company was not entitled to such credit, a reserve of approximately $1,000,000 was provided upon implementation of FAS 109. Commitments: Leases: At October 1, 1994, the Company had minimum rental commitments aggregating $2,347,000 under noncancelable operating leases expiring through 1998. Amounts payable thereunder are $781,000 in 1995, $713,000 in 1996, $622,000 in 1997, and $231,000 in 1998. Rent expense charged to operations in fiscal years 1994, 1993 and 1992 was $907,000, $860,000, and $1,012,000, respectively. Retirement Plans: The Company has a defined contribution, Social Security integrated Retirement Plan providing retirement benefits to eligible employees as defined in the Plan. It also maintains a Retirement Savings Plan whereby eligible employees are permitted to contribute from 1% to 12% of pay to this Plan. The Company contributes an amount equal to 50% of the first 6% of the pay contributed by the employee. The Company's provisions for these plans were $598,000 in 1994 (reduced by $250,000 in forfeitures), $962,000 in 1993, and $669,000 in 1992. F-15 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 The Company maintains a Defined Benefit Pension Plan covering eligible employees as defined in the Plan, which was frozen October 1, 1989. Since the benefits under this Plan are based on the participants' length of service and compensation (subject to Employee Retirement Income Security Act of 1974 and Internal Revenue Service limitations), service costs subsequent to October 1, 1989 are excluded from benefit accruals under the plan. The funding policy for this Plan is to contribute amounts actuarially determined as necessary to provide sufficient assets to meet the benefit requirements of the Plan retirees. The assets of the plan are invested in mortgages and bonds. Net pension expense for fiscal years 1994, 1993 and 1992 included the following components:
1994 1993 1992 ------- ------- ------ (In Thousands) Interest cost $ 128 $ 128 $ 126 Actual return on assets 129 (178) (152) Net amortization and deferral: Asset (loss) gain (266) 52 35 Amortization of initial unrecognized transition obligation 51 51 51 Amortization of unrecognized net gain - (1) - ------ ------ ----- Net pension expense $ 42 $ 52 $ 60 ====== ====== =====
The discount rate used to measure the projected benefit obligation for the Plan is 7%. The assumed long-term rate of return on plan assets in 1994 was 9%. The Plan's funded status and the amounts recorded on the Company's consolidated balance sheets are as follows:
1994 1993 ------ ------ (In Thousands) Vested benefit obligations $1,900 $1,888 ====== ====== Accumulated benefit obligations $1,900 $1,888 ====== ====== Projected benefit obligations $1,900 $1,888 Market value of assets 1,347 1,565 ------ ------ Projected benefit obligation in excess of market value (553) (323) Unrecognized net obligation 705 757 Unrecognized net loss (gain) 112 (151) Adjustment for minimum liability (817) (606) ------ ------ Net recorded pension (liability) $ (553) $ (323) ====== ======
Contingencies and Other Matters: Legal Proceedings: The Company is involved in minor litigation matters, including certain products liability actions, incidental to the conduct of its business, but does not believe that the ultimate resolution thereof will have a material adverse effect on its financial statements, considered as a whole. The Company received a warning letter in May 1994 from the FDA setting forth certain alleged deviations from current good manufacturing practice regulations and alleged violations of related provisions of the Federal Food, Drug and Cosmetic Act. The warning letter does not limit the manufacture of the Company's product line nor suspend the review and approval of applications pending at the FDA. The FDA indicated that it would shortly complete its review of the Company response and that a mutually amenable working relationship continues between the FDA and the Company. No assurances can be given that the outcome of the FDA review will not have a material adverse affect upon the Company. F-16 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued October 1, 1994 The Company is a plaintiff in several proceedings against former management members seeking recovery of, among other things, salaries and amounts paid for indemnification, in connection with their actions as former managers of Par. The Company is seeking unspecified damages. Although the Company is vigorously pursuing such claims, there is no assurance that the Company will recover any amounts or that any recoveries will be material. F-17 Richard A. Eisner & Company, LLP ____________________________________________________________________ Accountants and Consultants REPORT OF INDEPENDENT AUDITORS WITH RESPECT TO SUPPLEMENTARY SCHEDULES Board of Directors and Shareholders Pharmaceutical Resources, Inc. Spring Valley, New York The audits referred to in our report dated November 30, 1994 included Schedules III and VIII, for the years ended October 1, 1994, October 2, 1993, and October 3, 1992. In our opinion, the schedules referred to above present fairly the information set forth therein, in conformity with the applicable accounting regulation of the Securities and Exchange Commission. /s/ Richard A. Eisner & Company, LLP New York, New York November 30, 1994 575 Madison Avenue, New York, N.Y. 10022-2597 Member of Summit International Associates, Inc. New York, NY . Melville, NY . Cambridge, MA . Florham Park, NJ F-18 SCHEDULE III PHARMACEUTICAL RESOURCES, INC. SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
October 1, October 2, 1994 1993 ------------ ------------ ASSETS ------ Cash and cash equivalents $ 777,000 $ 2,454,000 Other current assets 171,000 58,000 ----------- ------------ Total current assets 948,000 2,512,000 Due from subsidiaries 12,946,000 20,400,000 Investment in subsidiaries 34,680,000 11,674,000 Investment in non-marketable securities 1,000,000 - Other assets 20,000 - ----------- ------------ $49,594,000 $ 34,586,000 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Settlements - $ 6,500,000 Preferred stock dividend $ 318,000 5,000 ----------- ------------ Total current liabilities 318,000 6,505,000 Long term settlements - 4,000,000 Commitments, contingencies and other matters - - Shareholders' equity: Preferred Stock, par value $.0001 per share; authorized 6,000,000 shares; issued and outstanding 1,058,400 and 1,479,070 shares of Series A Convertible Preferred Stock (aggregate liquidation preference-$5,292,000 and $7,395,000) 1,000 1,000 Common Stock, par value $.01 per share; authorized 60,000,000 shares; outstanding 14,482,632 and 13,466,182 shares 145,000 135,000 Additional capital 43,066,000 36,296,000 Retained earnings (deficit) 6,164,000 (12,351,000) Additional minimum liability related to defined benefit pension plan (100,000) - ----------- ------------ Total shareholders' equity 49,276,000 24,081,000 ----------- ------------ $49,594,000 $ 34,586,000 =========== ============
The Registrant guarantees the bank debt of its subsidiary, Par Pharmaceutical, Inc. ("Par"). Bank debt of Par at October 1, 1994 and October 2, 1993 aggregated $6,743,000 and $6,466,000 respectively. In addition, the Company is a party to employment agreements with Par and executive officers and directors of both companies. The Notes to Financial Statements in Part II are an integral part of this Schedule. F-19 SCHEDULE III PHARMACEUTICAL RESOURCES, INC. SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS
Year Ended Year Ended October 1, October 2, 1994 1993 ------------ ----------- Other income $ 37,000 $ 42,000 Costs and expenses: General and administrative 703,000 553,000 Interest 2,000 4,000 ----------- --------- 705,000 557,000 ----------- --------- (Loss) before equity in net earnings of subsidiaries (668,000) (515,000) Equity in net earnings of subsidiaries 5,367,000 626,000 ----------- --------- Income before extraordinary item 4,699,000 111,000 Equity in extraordinary item of subsidiaries - 300,000 ----------- --------- Income before cumulative effect of change in accounting principle 4,699,000 411,000 Equity in cumulative effect of change in accounting principle of subsidiaries 14,128,000 - ----------- --------- Net income $18,827,000 $ 411,000 =========== =========
STATEMENTS OF CASH FLOWS
Year Ended Year Ended October 1, October 2, 1994 1993 ------------ ------------- Net cash (used in) provided by operating activities $(6,299,000) $ 10,453,000 Cash flows from financing activities: Proceeds from issuance of capital stock 1,679,000 2,125,000 Preferred dividends paid - (135,000) Cash flows from investing activities: Net advances from (to) subsidiaries 3,943,000 (10,355,000) Investment in non-marketable securities (1,000,000) - ----------- ------------ Net (decrease) increase in cash (1,677,000) 2,088,000 Cash and cash equivalents at beginning of period 2,454,000 366,000 ----------- ------------ Cash and cash equivalents at end of period $ 777,000 $ 2,454,000 =========== ============
The Notes to Financial Statements in Part II are an integral part of this Schedule. F-20 SCHEDULE VIII PHARMACEUTICAL RESOURCES, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E - - - - - - - ----------- ---------- --------- ----------- --------- Additions Balance at charged to Balance beginning costs and at end of Description of period expenses Deductions period - - - - - - - ----------- ---------- ---------- ----------- --------- Allowance for doubtful accounts: Year ended October 1, 1994 $137,000 $(9,000) (a) $4,000 (b) $124,000 Year ended October 2, 1993 $212,000 $(72,000) (a) $3,000 (b) $137,000 Year ended October 3, 1992 $186,000 $47,000 $21,000 (b) $212,000 Allowance for returns and other: Year ended October 1, 1994 $2,491,000 $5,481,000 $5,328,000 (c) $2,644,000 Year ended October 2, 1993 $1,865,000 $4,231,000 $3,605,000 (c) $2,491,000 Year ended October 3, 1992 $1,663,000 $807,000 $605,000 (c) $1,865,000
(a) Reduction of allowance no longer necessary. (b) Write-off of uncollectible accounts. (c) Returns and allowances charged against allowance provided therefor. The Notes to Financial Statements in Part II are an integral part of this Schedule. F-21
EXHIBIT INDEX EXHIBIT NO. PAGE NO. 3.1 Certificate of Incorporation of the Registrant. (4) 3.1.1 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 6, 1992-- incorporated by reference to the Registrant's Registration Statement on Form 8-A (Commission File No. 0-20834), filed with the Commission November 10, 1992. 3.2 By-Laws of the Registrant, as amended and restated. (3) 4 Rights Agreement, dated August 6, 1991, between the Registrant and Midlantic National Bank, as Rights Agent. (5) 4.1 Amendment to Rights Agreement, dated as of April 27, 1992. (3) 10.1 1983 Stock Option Plan of the Registrant, as amended. (2) 10.2 1986 Stock Option Plan of the Registrant, as amended. (2) 10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (5) 10.4 1989 Employee Stock Purchase Program of the Registrant. (7) 10.5 1990 Stock Incentive Plan of the Registrant, as amended. (2) 10.6 Form of Retirement Plan of Par. (12) 10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984. (6) 10.7 Form of Retirement Savings Plan of Par. (12) 10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984. (13) 10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984. (13) 10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985. (13) 10.8 Par Pension Plan, effective October 1, 1984. (4) 10.9 Employment Agreement, dated as of October 4, 1992, among the Registrant, Par and Kenneth I. Sawyer. (1) 10.10 Lease Agreement between Par and the County of Rockland Industrial Development Agency, dated as of October 1, 1984. (6) 10.10.1 Lessee Guaranty between Par and Midlantic National Bank, dated as of October 1, 1984. (6) 10.10.2 Mortgage from County of Rockland Industrial Development Agency to Midlantic National Bank, as Trustee, dated as of October 1, 1984. (13) 10.10.3 Security Agreement between County of Rockland Industrial Development Agency and Midlantic National Bank, as Trustee, dated as of October 1, 1984. (13) 10.11 Term Loan Agreement, dated September 18, 1987, between Midlantic National Bank/North and Par. (11)
EXHIBIT NO. PAGE NO. 10.11.1 Note and Indenture, dated September 18, 1987, between Midlantic National Bank/North and Par. (11) 10.12 Revolving Credit Agreement, dated February 20, 1992, between Par and Midlantic National Bank. (1) 10.13 Agreement Concerning Term Loans, dated February 20, 1992, between Par and Midlantic National Bank. (1) 10.14 Amendments to Term Note, dated February 20, 1992. (1) 10.15 Lease for premises located at 12 Industrial Avenue, Upper Saddle River, New Jersey, between Par and Charles and Dorothy Horton, dated October 21, 1978 and extension dated September 15, 1983. (12) 10.15.1 Extension of Lease, dated November 8, 1989, between Par and Charles and Dorothy Horton relating to premises at 12 Industrial Avenue, Upper Saddle River, New Jersey. (9) 10.16 Lease, dated November 7, 1986, between Ramapo Corporate Park, Inc. as landlord, and Par as tenant. (4) 10.16.1 Amendment by letter dated March 10, 1988 to the lease, dated November 7, 1986, between Ramapo Corporate Park, Inc. as lessor and Par as lessee. (10) 10.17 Lease, dated December 15, 1987, between Ram Ridge Estates Corp. as lessor and Par as lessee. (10) 10.18 Standstill Agreements and Irrevocable Proxies, each dated May 29, 1990, between Par and each of Asrar Burney, Dulal Chatterji, and Raja Feroz. (8) 10.19 Agreement of Purchase and Sale, dated June 4, 1992, among Quad, Par, and The Liposome Company, Inc. (1) 10.19.1 Modification of Agreement of Purchase and Sale, dated July 24, 1992, among Quad, Par, and The Liposome Company, Inc. (1) 10.20 Employment Agreement, dated as of April 1, 1993, between Par and Diana L. Sloane. (14) 10.21 Employment Agreement, dated as of May 19, 1993, between the Registrant and Robert I. Edinger. (14) 10.22 Distribution Agreement, dated as of October 16, 1993, between Genpharm, Inc., the Registrant and PRX Distributors, Ltd. (14) 10.23 Agreement, dated as of September 30, 1993, between National Union Fire Insurance Company of Pittsburgh and Par. (14) 10.24 Settlement Agreement and Release, dated as of November 29, 1993, between Mylan Laboratories, Inc., the Registrant, Par and Quad. (14) 10.25 Settlement Agreement and Release, dated as of January 6, 1994, between Minnesota Mining & Manufacturing Company, Riker Laboratories, Inc., the Registrant and Par. (14)
EXHIBIT NO. PAGE NO. 10.26 Settlement Agreement and Release, dated as of December 22, 1993, between United States Trading Corporation, Marvin Sugarman, Liquipharm, Inc., the Registrant and Par. (14) 10.27 Letter Agreement, dated April 30, 1993, between the Generics Group B.V. and Par. 10.28 Distribution Agreement, dated as of February 24, 1994, between Sano Corporation, the Registrant and Par, as amended. 10.29 Mortgage and Security Agreement, dated May 4, 1994, between Urban National Bank and Par. (15) 10.29.1 Mortgage Loan Note, dated May 4, 1994. (15) 10.29.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban National Bank. (15) 10.30 Non-exclusive Distribution, Exclusive Supply Agreement, dated as of September 13, 1994, between Mova Pharmaceutical Corporation and Par. 10.31 Non-exclusive Distribution, Exclusive Supply Agreement, dated as of September 13, 1994, between Mova Pharmaceutical Corporation and Par. 10.32 Letter Agreement, dated as of October 13, 1994, between Par and Robert I. Edinger. 10.33 Term Loan Agreement, dated as of November 29, 1994, between Midlantic Bank, NA and Par, to be filed by amendment. 10.34 Amended and Restated Revolving Credit Agreement, dated as of November 29, 1994, between Midlantic Bank, NA and Par, to be filed by amendment. 10.34.1 Revolving Loan Note, dated November 29, 1994, to be filed by amendment. 10.35 Amended and Restated Agreement Concerning Term Loans, dated as of November 29, 1994, between Midlantic Bank, NA and Par, to be filed by amendment. 11 Computation of per share data. 13 1994 Annual Report to Shareholders, to be filed by amendment. 21 Subsidiaries of the Registrant. 23 Consent of Richard A. Eisner & Company, LLP.
(1) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 3, 1992 and incorporated herein by reference. (2) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Proxy Statement dated August 10, 1992 and incorporated herein by reference. (3) Previously filed with the Securities and Exchange Commission as an Exhibit to Amendment No. 1 on Form 8 to the Registrant's Registration Statement on Form 8-B, filed May 15, 1992, and incorporated herein by reference. (4) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended September 28, 1991 and incorporated herein by reference. (5) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Proxy Statement dated August 14, 1991 and incorporated herein by reference. (6) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K (Commission File No. 1-9449) for the year ended September 29, 1990 and incorporated herein by reference. (7) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Proxy Statement dated August 16, 1990 and incorporated herein by reference. (8) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Current Report on Form 8-K dated May 29, 1990 and incorporated herein by reference. (9) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1989 and incorporated herein by reference. (10) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1988 and incorporated herein by reference. (11) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1987 and incorporated herein by reference. (12) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Registration Statement on Form S-1 (No. 2-86614) and incorporated herein by reference. (13) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Registration Statement on Form S-1 (No. 33-4533) and incorporated herein by reference. (14) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrants' Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 2, 1993 and incorporated herein by reference. (15) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 1-10827) for the quarter ended April 2, 1994 and incorporated herein by reference. EX-10.27 2 LETTER AGREEMENT DTD 4/30/93 THE GENERICS GROUP, B.V. Exhibit 10.27 April 30, 1993 Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, New York 10977 Attn: Kenneth Sawyer, President Dear Ken: We are writing to confirm our agreement on the following matters: New Products - - - - - - - ------------ The Generics Group B.V. and its affiliates (collectively referred to herein as "Amerpharm") will appoint Pharmaceutical Resources, Inc. and its affiliates (collectively referred to herein as "Par") as its exclusive U.S. distributor for the products listed on Schedule A hereto (collectively the "New Products"). Subject to the following provisions, definitive distribution agreements and related documentation to be entered into in furtherance of this Letter Agreement with respect to the New Products (collectively the "Distribution Agreements") shall be upon substantially the same terms and conditions as those previously executed and delivered in connection with the distribution arrangements between our affiliate, Genpharm, Inc. and Par for Piroxicam and Pindolol (the "Prior Transaction"). Capitalized terms used herein and not defined herein shall have the meanings given the Prior Transaction. While the Distribution Agreements will be executed and delivered in advance, the obligations of the parties thereto thereunder will only become effective (on a product by product basis) upon the appropriate approval letters being issued in respect of ANDAs as filed by Amerpharm in respect of the New Products. With the exception for Product 1 and certain Substantial Customer sales, Gross Profits (as defined in the Prior Transaction) will be allocated to Amerpharm and to Par (except on Excluded Contracts [as defined in the Prior Transaction] where the allocation will be % and except that the first __ million of aggregate Gross Profits from Net Sales of the New Products will be allocated to Amerpharm and to Par). The Distribution Agreements will also provide that if, after the expiry of six months from the initial shipment of a New Product in a commercial quantity to you, you have not sold any of that product to a Substantial Customer (as defined below) or Par at any time has received notice or other reasonably reliable information ("Termination Notice") indicating that such Substantial Customer will not reorder a New Product, Amerpharm, at its option, may give you thirty days (ninety days in the case of a Termination Notice) prior written notice of its intention to sell such New Product to the named Substantial Customer in question, or, as the case may be, have had the Termination Notice rescinded within the notice period, Amerpharm will be free to sell the Product in question to that Substantial Customer directly. In the event Amerpharm shall determine to sell such Product to such Substantial Customer, it shall, in the following order of priority, (i) sell, package and deliver such Product itself directly to such Substantial Customer, (ii) to the extent practicable, put the order from such Substantial Customer through Par (for repackaging and/or distribution or otherwise) or (iii) if Par, in its discretion, refuses or it shall be impracticable for Amerpharm to put such order through Par, sell, package and deliver such Product to such Substantial Party through a third party. In the event of (ii) above, the Gross Profits from such sale will be allocated to Amerpharm and to Par. In the event of (i) or (iii) above, the Gross Profits from such sale shall be allocated to Amerpharm and to Par. "Substantial Customer" shall mean any chain, wholesaler or other purchaser having significant combined purchasing power and constituting one of the top 100 generic drug purchasers in the United States. Gross Profits from Net Sales of Product 1 will be allocated to Amerpharm, to Par until the earlier of two years from the first commercialization of the product by Par and the date that other generic competition commences selling the same product in the market and thereafter Gross Profits will be allocated to Amerpharm and to Par (subject to the other exceptions herein described). The Distribution Agreements shall contemplate the following Product's Sales Thresholds (as that term is defined in the Prior Transaction) in respect of the following New Products: (a) for Product 1 (i) for the first twelve months ("Year 1") commencing on the Commencement Date, the sum of (A) _______ multiplied by the number of months ("NonComp Months") during Year 1 for which there is no generic competition plus (B) _______ multiplied by the number of months ("Comp Months") in Year 1 for which there is generic competition, (ii) for the second twelve months ("Year 2") after the Commencement Date (subject to the following proviso) the sum of (A) ________ multiplied by the number of NonComp Months in Year 2 plus (B) _______ multiplied by the number of Comp Months in Year 2, (iii) for the third twelve months, 80% of the number of Annualized Units (as defined below) sold in the preceding twelve months and (iv) for each twelve month period thereafter, 90% of the number of units sold in the preceding twelve months; provided, however, that if any generic competition shall commence in Year 1, the threshold for Year 2 shall be as set forth in (iii) above and the threshold for all succeeding periods as will be set forth in (iii) above and the threshold for all succeeding periods as will be set forth in (iv) above. For purposes hereof, "Annualized Units" shall mean (a) with respect to any twelve month period consisting of only NonComp Months, the number of units sold in such twelve-month period and (b) with respect to any other twelve month period, the number of units which would be required to be sold in such twelve month period in order to meet the applicable threshold therefor if such period consisted solely of Comp Months. (b) for Product 3 (i) _______ in the first twelve month period commencing on the Commencement Date; (ii) eighty percent of the number of units sold in such initial twelve-month period for the second twelve month period and (iii) for each twelve month period thereafter, ninety percent of the number of units sold in the preceding twelve month period. With respect to the other New Products, the Product Sales Threshold shall be as set forth in (b) above except that the following shall be used for purpose of (b)(i) above: Product 2 ________ Product 4 ________ Product 5 ________ It is understood and agreed that the Distribution Agreement shall provide that Par shall use reasonable efforts to develop a market for and sell the New Products in the United States, such efforts to be at least as good as those used by Par in relation to their other products and that the satisfaction of a Product Sales Threshold in respect of a New Product for a period shall only be a prima facie evidence that Par has satisfied its ----------- obligation to use reasonable efforts, as aforesaid, in respect of such period. The Distribution Agreements shall also contemplate that if a pharmaceutical company carrying on business in the United States (the "Competitor") acquires securities of Pharmaceutical Resources, Inc. or either of its subsidiaries, Para Pharmaceutical, Inc. of PRX Distributors, Ltd., to which are attached more than fifty percent of the votes attaching to all of its outstanding securities having full voting rights under all circumstances, or which otherwise provide it with de facto control, or -- ----- acquires all or substantially all of the operating assets of Par Pharmaceutical, Inc. and the Competitor or any of its affiliates is marketing a product which directly competes with the New Products or any other products which Par is then marketing or is under a commitment to market on behalf of Amerpharm, then, Amerpharm shall have the right to convert Par to a non-exclusive distributor of the affected New Products or products upon terms similar to those in the Prior Transaction for the conversion of Par from an exclusive to a non-exclusive distributor for failure to satisfy a Product Sales Threshold. In the event of any such conversion, Par's obligations with respect to market development and sales of the affected product will be to use reasonable efforts consistent with efforts used in relation to other Par Products, taking into consideration the changed circumstances then obtaining; provided, however, that if Amerpharm, in its -------- ------- discretion, is not satisfied with the results of Par's efforts at any time, it may terminate the agreement with respect to such product on 60 days' written notice. Warrants - - - - - - - -------- In consideration of Amerpharm entering into this Letter Agreement and the above-captioned Distribution Agreements in furtherance hereof, Pharmaceutical Resources, Inc., has agreed to grant to Amerpharm a warrant to acquire 150,000 common shares of Pharmaceutical Resources, Inc. at a price equal to $__ per share. The warrant as to 100,000 shares will become vested upon Par achieving aggregate sales of the New Products of $__ million and the balance of the shares will become vested when Par's sales of these products reaches $__ million. The terms of the warrant will be substantially similar to those contained in the Warrant Agreement which was executed and delivered in connection with the Prior Transaction (the "Warrant Agreement"). The price to Amerpharm for the option shall be the sum of $_______, which price shall be satisfied by the allocation of Gross Profits on the first $__ million of New Products sales (i.e., that Amerpharm has foregone $_______ of profit by reducing its share of Gross Profits from to in respect of the first $__ million of Gross Profits). Additional Products of Amerpharm - - - - - - - -------------------------------- Amerpharm shall have the right to require Par to distribute in the United States on behalf of Amerpharm up to fourteen additional products (the "Additional Products") upon the following terms and the parties shall incorporate the terms herein contemplated and the terms relating to the sharing of profit (as defined below) from Third Party Products and from _______, as contemplated below, into a definitive agreement or agreements (the "Additional Products Agreement") which shall be executed and delivered simultaneously with the Distribution Agreements. Within three months from the date hereof, Amerpharm shall deliver to Par a list of up to the fourteen Additional Products, which list shall include only products in solid dosage form, but shall not include the products listed on product list ("List") signed by the parties which List and the Additional Products list the parties agree to keep confidential. At any time prior to the first anniversary of the date on which the Additional Products list is delivered, Amerpharm shall be entitled to replace, from time to time, up to four products in the aggregate named on the Additional Products list (which Amerpharm, acting reasonably, determines to be a problem product) with another product (which again is in solid dosage form and does not appear on the List) and provided Par, at the time of being notified of the proposed substitution, has not commenced in a substantial way (and is continuing diligently) to develop such product nor has it entered into an agreement with a third party to distribute such product on behalf of the third party. The product so substituted shall be treated as an Additional Product (notwithstanding that is was not initially included on the Additional Product list for which it was substituted shall thereupon cease to be an Additional Product. Par will distribute exclusively for Amerpharm (as Amerpharm's exclusive distributor in the United States) the Additional Products upon the same terms as are contemplated above for the New Products (on a - basis, subject to Excluded Contracts and Significant Customer exceptions contemplated above provided that the Product Sales Threshold for each such product shall be established in a manner contemplated below) provided that Amerpharm diligently proceeds to develop, test and obtain regulatory approval of the manufacture, importation and sale thereof in the United States, within time periods specified in the Additional Products Agreement to be executed in furtherance hereof or, failing agreement of the parties as to such time periods, within such reasonable period of time as shall reasonably be required to obtain such approvals having regard to the circumstances and the diligent and good faith efforts made by Amerpharm to obtain same. The Product Sales Threshold for each Additional Product for the first twelve months after the Commencement Date shall be the aggregate of, as applicable: (i) 25% of the total market units (both brand name and generic) of such product sold in the United States for the period within the first twelve months that such Additional Product of Amerpharm is the only generic product being marketed in the United States; (ii) 10% of the total market units (both brand name and generic) of such product sold in the United States for the period within the first twelve months where there are not more than two other competitive generic products (including Amerpharm's Additional Product) being marketed in the United States; (iii) 5% of the total market units (both brand name and generic) of such product sold in the United States for the period within the first twelve months where there are more than two other competitive generic products (including Amerpharm's Additional Product) but less than 5 being marketed in the United States; (iv) 1% of the total market units (both brand name and generic) of such product sold in the United States for the period within the first twelve months in any case not contemplated in (i), (ii) or (iii) above. Second year thresholds will be 80% of the annualized number of units required to have been sold by Par in the first twelve months on the assumption that the competition which existed in such last month of such twelve month period existed for the entire initial twelve months. For the third year and each succeeding year, the thresholds will be 90% of the number of units sold in the year preceding it. Notwithstanding the foregoing, at the time each Additional product is designated the parties shall consider the particular circumstances then existing with respect to such Additional Product in order to determine whether adjustments should be made to the above thresholds. Third Party Products - - - - - - - -------------------- If Amerpharm introduces Par to a third party (for whom Par is not then distributing any products at the time of the introduction and has not distributed a product for such third party within the prior two years) who agrees to use Par for the distribution of a product in the United States and Par, directly or indirectly, enters into an agreement with such third party for the distribution of that product (and/or within two years of such introduction, directly or indirectly, enters into or is negotiating (and subsequently enters into) any other agreement to distribute any other products of such third party) then Par shall split profits earned from the distribution of those products with Amerpharm on a basis. Once introduced to Par, Amerpharm will not introduce such third party to any other party for marketing the same product in the United States so long as Par is diligently and in good faith negotiating the agreement. For purposes hereof, "profits" shall mean the net revenue of Par from the distribution of products minus, without duplication, (i) Par's direct out- of-pocket costs in connection with the distribution of such products (including, without limitation, acquisition costs (including net duties), royalties, testing, promotion, packaging, labeling, shipping and any other out-of-pocket costs it incurs in connection with the agreement), (ii) a reasonable allowance for overhead (in an amount to be specified in the agreement with Amerpharm but not to exceed 2% of sales of such products by Par) and (iii) any other payments (not specifically referred to or contemplated above) which it makes to the third party for the product on account of such sales. Joint Products - - - - - - - -------------- Par and Amerpharm shall each endeavor, in good faith, to independently develop and file an ANDA seeking regulatory approval to market the products set forth on Schedule B ("Joint Products") hereto in the United States. If Par files and receives an ANDA on a Joint Product prior to any filing by Amerpharm, the parties shall have no further rights or obligations to each other with respect to such Joint Product. If Amerpharm files and receives an ANDA on a Joint Product prior to Par filing, such Joint Product shall be treated as an Additional Product for purposes hereof with profits to be split to Amerpharm and to Par. If both parties have filed on a Joint Product, and one receives an ANDA and final FDA marketing clearance ("Clearance"), such Joint Product will be manufactured (by the ANDA and Clearance holder) and marketed by Par under the first issued ANDA and Clearance thereon and the party to whom such ANDA and Clearance is first issued shall receive of profits thereon and the other party shall receive . If problems arise with the ANDA in use with respect to a Joint Product as the result of which the parties utilize an ANDA and Clearance issued to the other, the percentage split of profits and manufacturing obligations will reverse. For purposes hereof, "profits" shall mean the net revenue of Par from the distribution of products minus, without duplication, (i) Par's direct out-of-pocket costs in connection with the distribution of such products (including, without limitation, acquisition costs (including net duties), royalties, testing, promotion, packaging, labeling and shipping, (ii) a reasonable allowance for overhead related to distribution (the amount to be specified in the agreement with Amerpharm but not to exceed 2% of sales of such products by Par) and (iii) the fully loaded manufacturing cost for manufacturing the product (which shall be paid to whichever of Par of Amerpharm manufactures the product pursuant to the regulatory approval) determined in accordance with generally accepted accounting principles and the usual business practices of such party, consistently applied. Fixed Price Contracts - - - - - - - --------------------- Where Par has entered into a fixed price contract to supply a Amerpharm product for which Amerpharm may be liable for excess re- procurement costs if it fails to deliver the required product and Par fulfills their contract to their customer by sourcing the products from a third party (which sourcing was required because of Amerpharm's inability to deliver the product), any profit (being revenue less out-of-pocket costs and expenses) which Par earns from its fulfillment of such contract shall be split % between Par and Amerpharm. Amending Prior Transactions - - - - - - - --------------------------- The distribution agreement executed and delivered in respect of the Prior Transactions shall be amended to (i) correct any typographical errors or omissions in such agreement including incorrect cross-references, (ii) to add the provisions herein contemplated for the Fixed Price Contracts, for Substantial Customers and for the right of Amerpharm's affiliate, Genpharm Inc. to convert Par into a non-exclusive distributor upon a pharmaceutical company acquiring the shares or assets of Par as hereinabove contemplated and the parties shall execute and deliver an amending agreement (the "Amending Agreement") amending the terms of the distribution agreement as herein contemplate. * * * It is understood and agreed that the terms of this Letter Agreement shall be legally binding upon us and shall regulate the conduct of negotiations for finalization of the Distribution Agreements, the Warrant Agreement, if applicable, the Additional Products Agreement, if necessary, and the Amending Agreement (collectively, the "Definitive Agreements"). Upon signing this Letter Agreement we shall both negotiate in good faith and as expeditiously as possible the detailed terms of the Definitive Agreements, which shall include the provisions based on the terms outlined in this Letter Agreement. During negotiations for the Definitive Agreements the parties shall conduct business according to the terms of this Letter Agreement to the extent practicable. Each party shall bear its own costs and expenses relating to the negotiation and execution of the Definitive Agreements and shall share the costs of any mediator. Please confirm your agreement with the foregoing by signing and returning to the undersigned the duplicate copy of this letter enclosed herewith. THE GENERICS GROUP B.V. by its authorized signatory Name: ____________________ Title: ____________________ Accepted and Agreed PHARMACEUTICAL RESOURCES, INC. by its authorized officer Name: ____________________ Title: ____________________ Date: ____________________ EX-10.28 3 DISTRIBUTION AGREEMENT 2/24/94 DISTRIBUTION AGREEMENT ---------------------- EXHIBIT 10.28 This Distribution Agreement (the "Agreement") is entered into as of the 24th day of February, 1994 (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 ("PPI"). WHEREAS, SANO has two transdermal generic drug delivery products in clinical testing, more fully described in Appendix I hereto as Product "A" and Product "B" (the "Licensed Products"); and WHEREAS, SANO has three other transdermal generic drug delivery products at less advanced stages of development and testing, as more fully described in Appendix II hereto, and may develop other transdermal generic drug delivery products during the term of this Agreement (collectively, the "Option Products"); and WHEREAS, SANO desires to implement the program described in Exhibit A with respect to the Licensed Products (the "Development Program"); and WHEREAS, PPI desires to purchase certain rights with respect to the distribution of the Licensed Products and the Option Products, subject to the terms and conditions of this Agreement; NOW, therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 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. (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, in substantial conformity with the program described in Exhibit A. (d) "Exclusive" shall mean, with respect to any right herein granted, that no other party shall have such right, directly or indirectly. (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 any Transdermal Generic Drug Delivery System listed on Exhibit A hereto, or which may become a Licensed Product pursuant to Article XII hereof. (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 abbreviated new drug application ("ANDA") approved by the United States Food and Drug Administration (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 PPI and containing any labels and labelling 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, labelling and packaging materials being as specified in the ANDA therefor. (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 Island, 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 PPI), (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. 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 successfully completed all ------------------- phases of the Development Program scheduled on Exhibit A hereto for completion on or prior to the Execution Date and has no knowledge of any fact or circumstance which is reasonably likely to delay or prevent completion of the Development Program, other than general conditions related to the approval process; SANO does not hereby represent or warrant that the Development Program will be completed in accordance with the schedule set forth in the Development Program, or at all. 2.1.5 Information. All data and other information relating to ----------- SANO and/or the Licensed Products provided by SANO, or its agents, to PPI 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. 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, extend to not earlier than [December 31, 1996]. 2.1.7 SANO represents and warrants to PPI 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). SANO further represents and warrants that it is not aware of any claims of infringement against the Licensed Products or of any requirement that it obtain licenses to patents or other proprietary rights with respect thereto. SANO shall use its reasonable efforts to have all its employees and, to the extent reasonably practicable, its agents and consultants employed in or for any Development Program, execute written agreements requiring assignment to SANO of any developments, discoveries, improvements and/or inventions in any Licensed Product made by such employees under and during the course of the Development Program. 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 complete the Development Program for each Licensed Product as set forth in Exhibit A. 3.2 Progress Reports. SANO shall, on a monthly basis, by the tenth ---------------- day of each month, inform PPI 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 PPI shall meet to review the progress and status of the Development Program then underway. At such meetings, PPI 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 Bioavailability Study; Use of Funds. SANO will commence a single ----------------------------------- dose bioavailability study with respect to the relevant Licensed Product promptly upon its receipt of the payments specified in Section 7.1(a)(ii) and Section 7.1(b)(ii), respectively, and shall use such amounts in respect thereof, to the extent necessary. All payments under Section 7.1 will be added to SANO's general funds and will not be specifically set aside for the development of any other product of SANO or to fund costs specific to the distribution of a Licensed Product outside the United States. 3.5 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 PPI shall be subject to the confidentiality obligations of Section 14.4. 3.6 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 sole expense. 3.7 Governmental Approvals. SANO shall file all appropriate requests ---------------------- and other filings with the appropriate government agencies within the United States in order 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 PPI 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. 3.8 Other Products. SANO shall reasonably apportion or allocate its -------------- resources among its products to accommodate the Development Programs for Licensed Products. 3.9 Title. SANO will protect and defend its rights to all Licensed ----- Products and SANO's Technology, and will indemnify and hold PPI, PRI and their Affiliates, harmless, from and against any claims of infringement or other claim that SANO is not the owner thereof. 3.10 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 and Option Products. ARTICLE IV EXCLUSIVE DISTRIBUTOR --------------------- 4.1 Subject to the provisions of this Agreement, SANO hereby appoints PPI as the exclusive distributor of the Licensed Products for the United States and PPI hereby accepts such appointment and agrees to act as such exclusive distributor. The rights and licenses granted to PPI under this Agreement shall henceforth be referred to as "the Right." PPI 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 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 PPI all inquiries concerning potential purchases of Licensed Products received by it from Persons located in the United 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 PPI 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). PPI acknowledges that SANO will use reasonable efforts to prevent the sale of Licensed Products in United States by Persons other than PPI, 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 PPI 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. PPI 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. The foregoing shall not apply to a Licensed Product that is not then available from SANO for commercial sale by PPI and is substantially behind the schedule set forth in the relevant Development Program. Notwithstanding the foregoing, if PPI 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 that PPI is then distributing pursuant to the provisions of this Agreement, PPI 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 PPI, against delivery of appropriate instruments of release and transfer, its promissory note in form and substance reasonably acceptable to PPI, payable to the order of PPI, 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, PPI 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 the Competitive Product. PPI shall have no rights with respect to an Option Product as to which a Merger Partner has a Competitive Product. PPI shall notify SANO promptly if any Merger Partner has a Competitive Product with respect to an Option Product. 4.2.4 PPI 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 PPI 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 PPI is notified by SANO that one of its customers or a customer of PPI or any of its Affiliates is exporting the Licensed Product out of the United States in any material respect PPI 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 PPI or any such Affiliate is precluded from taking such action under applicable law). SANO acknowledges that PPI 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 PPI shall refer to SANO any inquiry or order for Licensed Products which PPI 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 PPI 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 PPI 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. ARTICLE V REPRESENTATIONS OF PPI AND PRI; OBLIGATIONS ------------------------------------------- 5.1 PPI and PRI represent and warrant 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 to execute, deliver and perform their obligations under this Agreement. This Agreement has been duly authorized, executed and delivered by PPI and PRI and represents a valid and binding obligation enforceable against PPI and PRI in accordance with its terms. 5.1.2 No Conflicts; Consents. Execution and delivery hereof, or ---------------------- performance by either PPI or PRI hereunder, will not (a) violate or create a default under (i) PPI'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 or any material portion of PPI's and PRI's assets. 5.1.3 Information. All data and other information relating to ----------- PPI and PRI provided to SANO by PPI and PRI, or their agents, was derived from PPI'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. PPI 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). PPI 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 PPI shall purchase the Products from SANO as contemplated in Section 6.1 hereof. 5.3 PPI 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 PPI in relation to its leading or principal products. PPI 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. SANO shall not engage in marketing and promotion of the Licensed Products unless reasonably requested to do so by PPI. 5.4 PPI shall have sole discretion in setting the sales price for the sale of the Licensed Products, provided that PPI shall not specifically discount the price of the Licensed Products for the benefit of PPI 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 PPI'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 PPI's or any of its Affiliates' other products) generally available to PPI'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. 5.5 PPI 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 PPI 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 PPI 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 PPI 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 PPI being publicly listed or otherwise. 5.8 PPI shall consult with SANO from time to time with respect to opportunities of which it becomes aware for the development of transdermal applications for generic or proprietary drugs or of opportunities for the development of ingredients in transdermal form. In the event that PPI or its Affiliates intend to engage in the development of a transdermal product, PPI or such Affiliate shall afford SANO the opportunity to participate in such development, shall negotiate with SANO on the terms of such participation, and shall not enter into an agreement with any other manufacturer of transdermal delivery systems without offering SANO the right of first refusal in accordance with the following procedure: PPI shall notify SANO of the material terms and conditions on which it proposes to enter into such agreement. Within 30 days of its receipt of such notice, SANO shall notify PPI whether it wishes to enter into such an agreement on such terms and conditions. If SANO notifies PPI within such 30 days that it does wish to enter into such an agreement, PPI and SANO shall prepare and enter into a definitive agreement on substantially the terms and conditions set forth in the notice. If SANO fails to so notify PPI within such 30 days, PPI may enter into such an agreement with a third party on substantially the terms and conditions set forth in the notice. The foregoing shall not be deemed to require PPI (i) to divulge confidential information of other manufacturers, (ii) to disclose to SANO the contents of confidential proposals made to PPI by other Persons, or (iii) to refrain from dealing with manufacturers of transdermal delivery systems under development by such manufacturers that are not a Competitive Product with respect to any Licensed Product or Option Products under active development. 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 PPI, which consent shall not be unreasonably withheld or delayed, and SANO shall use its reasonable efforts to make available to PPI 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 labelled 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, PPI shall provide to SANO, quarterly, a nine month rolling forecast of its requirements for a Licensed Product. The first forecast shall be provided by PPI 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 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 PPI 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 PPI shall arrange for shipping and/or transportation of the Licensed Products from SANO's facility to PPI'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 PPI upon pick-up of the Licensed Products by, on behalf of or for the account of PPI at SANO's facility. 6.3.1 SANO shall promptly notify PPI by both fax and telephone that any order (or part thereof acceptable to PPI) is available for pick-up at SANO (this notice shall hereafter be referred to as the "Availability Notice"). 6.3.2 PPI 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, PPI 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 PPI within twenty business days of an Availability Notice, SANO may, but shall not be obligated to, cause the Licensed Products to be delivered to PPI's Spring Valley, New York, facility by truck or other overland delivery at PPI's sole cost and expense and risk of loss and title to the Products shall pass to PPI upon pickup of the Products at SANO's facility in the same manner as if the pickup had been effected by PPI itself, provided that SANO shall provide for the Licensed Products to be insured during transit in a commercially reasonable manner at PPI's sole cost and expense. ARTICLE VII FEE PRICE AND PAYMENT TERMS --------------------------- 7.1 Initial Fee Payment. As consideration for the rights herein granted, ------------------- in addition to all payments hereinafter described, PRI shall pay to SANO a fee (each, a "Licensed Product Fee") of _________________________ for each of the Licensed Products listed in Appendix I hereto, payable by wire transfer or certified check, as follows: (a) Product "A" - (i) ________ upon execution of this Agreement. - (ii) ________ within seven days after receipt of notice from SANO that it is prepared to commence a single-dose bioavailability study. (b) Product "B" - (i) ________ upon execution of this Agreement. - (ii) ________ within seven days after receipt of notice from SANO that it is prepared to commence a single-dose bioavailability study. 7.2 Price. The price to PRI for each order, or part thereof ----- 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. PPI 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 PPI to SANO, SANO shall be solely responsible for remitting the amount so paid on account of such taxes to the relevant governmental collecting authorities. Promptly upon PPI's request, SANO shall provide PPI 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 PPI shall be due within 35 days of pick-up (whether actual or deemed pursuant to Section 6.3.2) by PPI at SANO's facility. ARTICLE VIII PRODUCT ACCEPTANCE ------------------ 8.1 SANO shall manufacture the Licensed Products and make them available for pickup by PPI 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 PPI 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 PPI, 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 PPI 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 PPI. If the Licensed Products meet the applicable provisions of Section 8.1 and are in quantities specified in a purchase order, PPI 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 PPI on the Licensed Product batch rejected. (b) Upon receipt of such Rejection Notice, SANO may require PPI 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 PPI 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 PPI was not justified in rejecting the Licensed Products or that PPI or its Affiliates were the cause of or were responsible for the problem, PPI 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) PPI's test results or basis for rejection shall be conclusive unless SANO notifies PPI, 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 PPI, PPI'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 PPI 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 PPI 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 PPI (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 PPI or its Affiliates), SANO shall replace such Licensed Products with conforming goods or, if requested by PPI, shall provide a credit to PPI for the amount, if any, previously paid by PPI to SANO on account of the Licensed Products in question. The credit shall be provided by SANO to PPI 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 PPI). Replacement Licensed Products, as aforesaid, shall be delivered to PPI at no cost to PPI if PPI has already paid for the rejected Licensed Products and not received a credit therefor, as aforesaid. All delivery costs, including insurance, incident to the return of Licensed Products to SANO and delivery of the replacement Licensed Products to PPI'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 PPI, 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, PPI 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 PPI by its customers because the Licensed Product is alleged to be defective and PPI reasonably believes that such defect is due to the fault of SANO, PPI 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. PPI 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 9.2(b) below, or by PPI 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 PPI 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 PPI without charge or appropriate credit shall be given therefor (giving account to any adjustment made pursuant to Section 9.1 hereof); (ii) all delivery costs, including insurance, incident to the delivery of the replacement Licensed Products to PPI's Spring Valley facility shall be paid by SANO or appropriate credit shall be given therefor; and (iii) SANO shall provide a credit to PPI for the reasonable costs incurred by PPI (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 PPI 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 PPI, then no credit or other payment of costs shall be due from SANO, and PPI 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 PPI 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 PPI 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 PPI or its Affiliates) or the conditions, if any, set forth on its package label. 9.5 PPI 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 PPI and of any PPI 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 PPI promptly and in no event later than 30 days after receipt of the ADE or complaint from PPI (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 PPI 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. 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 PPI, 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 wilful 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 PPI is in breach of its duties or obligations hereunder and such duties or obligations, if delegated by PPI to any of its Affiliates, could reasonably be performed by such Affiliate and PPI 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 PPI shall be deemed to have willfully breached such duty or obligation hereunder. Similarly, whenever in this Agreement PPI 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 PPI 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 PPI 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, labelling, storage or handling of the Product by SANO, SANO shall be responsible therefor and shall indemnify and hold PPI 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 Product by PPI or its Affiliates, then PPI 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 PPI'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 PPI not contemplated herein or authorized hereby) and shall indemnify and hold PPI and its affiliates harmless from the cost of the defense thereof. PPI 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 PPI or any of its Affiliates to make payments of any kind without the prior written consent of PPI or an unconditional release of PPI 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 PPI in any such Action, provided that the foregoing shall not be construed as or deemed a waiver of any rights PPI 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 PPI shall carry product liability --------- insurance in an amount at least equal to ________________________ with an insurance carrier reasonably acceptable to the other party, such insurance to 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 PPI to sell the Licensed Products in the United States in accordance with the provisions hereof, PPI agrees to pay to SANO the additional amounts more particularly described in Exhibit B to this Agreement in respect of the aggregate Net Sales (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." PPI 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 PPI 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 PPI and shall not be treated as a royalty or similar payment. 11.2 Reporting and Information Obligations of PPI. -------------------------------------------- (a) Approved Contracts. PPI 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 PPI 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, PPI may delete (e.g., by blacking out) any information in the Approved Contract that tends to indicate the identity or location of the PPI customer; provided, however, that PPI marks each such Approved Contract with a unique customer code relative to the customer that is the party to that Approved Contract. (b) Net Sales and Gross Profits. PPI 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 PPI 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 PPI 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 PPI shall make available for inspection by SANO at PPI'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 [e.g., 18 boxes of 30 patches of Product A], and the invoice price charged by PPI 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 PPI 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 PPI or its Affiliates pursuant to Section 11.4 hereof). 11.4 PPI shall keep and shall cause its Affiliates to 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 SANO hereunder. PPI 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 PPI 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 PPI 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 PPI except that which is reasonably necessary to inform SANO of: (i) the accuracy or inaccuracy of PPI's reports and payments; (ii) compliance or non-compliance by PPI 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 PPI 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. PPI shall provide and shall cause its Affiliates to provide full and complete access to the accountant to PPI'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 PPI's payments or non- compliance by PPI or its Affiliates with any of such terms and conditions, and should PPI 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 PPI). 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 PPI or such Affiliate, including PPI'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, PPI 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 PPI 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 not reveal to SANO the name or address (or other information reasonably tending to identify the location of a customer) of any customer of PPI 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 PPI in its reporting obligations to SANO [and PPI and its Affiliates shall make such information known to the accountant]. PPI 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 PPI 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 PPI by SANO prior to the effective date of the termination or expiration of this Agreement (or made available to PPI after such date pursuant to any provision of this Agreement) notwithstanding that such Licensed Products may have been resold by PPI 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 PPI pay to SANO the Additional Consideration applicable to Net Sales of all Licensed Products supplied by SANO to PPI pursuant to this Agreement (in respect of which the purchase price charged by SANO to PPI therefor [whether paid or owing] was determined in accordance with the provisions of Section 7.2 hereof or was provided to PPI free of such charge pursuant to any other provision of this Agreement) irrespective of whether such Licensed Product is resold by PPI 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 PPI 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 PPI to inspect those facilities of PPI and any of its Affiliates which are used in the storage of any of the Licensed Products to ensure compliance by PPI 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 PPI or its Affiliates. SANO shall cooperate with PPI in providing access to its facilities and PPI shall cooperate and shall cause its Affiliates 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 PPI by SANO pursuant hereto. SANO further agrees that at the request of PPI it will permit one or more accountants selected by PPI 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 PPI pursuant to Section 7.2 hereof. Such accountant shall not disclose to PPI 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 PPI may have been overcharged or undercharged with respect to Licensed Products made available to it. Should any such accountant discover information indicating that PPI has been overcharged for Products made available to it, and should SANO fail to acknowledge in writing to PPI 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 PPI for all costs and expenses relating to such investigation/audit. It is understood and agreed that PPI shall only have the right to audit such books and 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 PPI 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 PPI in connection with any litigation or arbitration arising out of such audit, the accountant shall not reveal to PPI 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 PPI 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 PPI to execute a reasonable confidentiality agreement consistent with the terms of this Section 11.8. The rights of PPI pursuant to this Section 11.8 shall survive the termination or expiration of this Agreement for a period of one year. ARTICLE XII OPTION PRODUCTS --------------- 12.1 Option Products. With respect to the Option Products, including --------------- for the purposes of this Section 12.1, any product developed by SANO within ten years of the Effective Date which is a generic version of an existing marketed transdermal drug, PPI shall have the option, in its sole and absolute discretion, to include such products, on a product-by-product basis, as Licensed Products hereunder, in accordance with the following provisions. 12.2 Option Product Development Program. For each Option Product, ---------------------------------- SANO shall devise and communicate to PPI a clinical and product development program and a related budget, setting forth (i) a proposed schedule for pre-clinical and clinical activities required or reasonably necessary to obtain governmental approvals for such Option Product, (ii) the Licensed Product Fee for which it is willing to include such product as a Licensed Product hereunder (which shall be reasonably related to the Costs of product development and shall include only ____% [but not more than _________] of the costs of pre-clinical activities); (iii) the developmental milestones that would trigger payment of appropriate portions of such Licensed Product Fee, which payments shall reflect the related expenditures involved in the pre-clinical activities (to the limits set forth above) and the clinical testing program and (iv) any special storage or shipping requirements (the "Option Product Development Program"). SANO shall also advise PPI of a reasonable Product Sales Threshold (as hereinafter defined) for the initial 24-month period after the product is to be made available for commercial sale, that would be applicable to the product if it were included as a Licensed Product hereunder. Within 30 days of its receipt of an Option Product Development Program, PPI shall notify SANO whether it wishes to exercise its option to have the relevant product included hereunder as a Licensed Product. If PPI notifies SANO within such 30 days that it wishes to exercise such option, the product will be treated for all purposes as a Licensed Product hereunder, the Option Product Development Program shall become a part of this Agreement and PPI shall become obligated to make the payments described therein. If PPI fails to notify SANO of its election to exercise such option within such 30 days, SANO may enter into a license or distribution agreement with respect to such Option Product with a third party on substantially the same terms as set forth in the Option Product Development Program, and providing for payments for products and additional consideration consistent with the provisions hereof. SANO may not enter into such an agreement with a third party on terms substantially different from those set forth in the relevant Option Product Development Program and herein without first offering such terms to PPI for a period of thirty days. 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 PPI to pay to SANO any amount due to SANO hereunder [whether on account of 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 PPI, terminate this Agreement if PPI fails to pay to SANO any amount payable by PPI 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 PPI 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 PPI; provided that PPI 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 PPI 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 PPI, 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 Gross Profit (as that term is defined in Exhibit B annexed hereto) attributable to 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 PPI 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 PPI 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"): (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 of its Affiliates. 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 PPI 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 PPI hereunder, the aggregate Net Sales of Licensed Product "B" for such B Period is less than the Product Sales Threshold; or (iii) in any twenty-four (24) month period (such period being herein referred to as the "O Period") beginning on the date (the "O Commencement Date") the first of any shipments of each other Licensed Product, if any, hereunder is made available to PPI hereunder, the aggregate Net Sales of any such other Licensed Product for such Period is less than the Product Sales Threshold; or (iv) in any twelve month period commencing on the second and each subsequent anniversary of the A Commencement Date, the B Commencement Date or any O Commencement Date, the Net Sales of the relevant Licensed Product sold by PPI 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 PPI's Right hereunder from an exclusive to a non-exclusive right to distribute such Licensed Product upon ninety days prior written notice to PPI. As used herein, as to any Licensed Product, the Product Sales Threshold shall mean an amount reasonably agreed upon by PPI and SANO after consideration of relevant market factors and conditions, provided that if PPI 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 PPI to a non- exclusive distributor hereunder, PPI 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 PPI in accordance with the provisions hereof, provided that the obligation of SANO to use its reasonable best efforts to supply PPI with its requirements of the Licensed Products shall take into account PPI'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 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 PPI 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) PPI shall have thirty days from the date of receipt of such notice to notify SANO whether PPI desires to have the benefit of the MFP, which can be accepted only if PPI 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. PPI's entitlement to seek the benefit of the MFP shall be conditioned upon and subject to PPI 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 PPI shall dispute such assessment, PPI shall so notify SANO, whereupon the issue shall be deemed to be a dispute between the parties and subject to resolution pursuant to Section 16.2 hereof. 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 PPI 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 PPI 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 PPI, repurchase all Licensed Products then in the possession, custody or control of PPI and available for sale (and which have not been adulterated since they were made available for pick up by PPI) and all packaging material in the possession, custody or control of PPI which were specifically acquired by PPI for these Licensed Products and which cannot be used by PPI or its Affiliates for any other products sold by any of them, at the price originally paid by PPI therefor plus all transportation costs previously incurred (even if not yet paid) by PPI payable in cash on delivery by PPI 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 PPI 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 PPI 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 PPI was a Prohibited Party. 13.12 If SANO terminates this Agreement pursuant to Section 13.2, 13.3 and 13.7 hereof then PPI 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 pursuant to Section 13.5 hereof, SANO shall, at the request of PPI, make available to PPI within a reasonable period of time of such termination, such number of units of each Licensed Product as shall be equal to the net number of units of such Licensed Product sold by PPI 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 Product as PPI shall advise SANO in writing within ten business days of such termination. Such Licensed Products shall be made available to PPI in accordance with the provisions of this Agreement and the provisions of this Agreement shall apply to all such Licensed Products as if such Licensed Products had been supplied by SANO during the term of this Agreement. 13.14 If SANO has not received at least one approval of an ANDA for a Licensed Product prior to November 30, 1996, PPI may terminate this Agreement and neither party shall have any obligation hereunder (other than applicable confidentiality provisions). 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 Product manufactured by SANO and sold by PPI or its Affiliates the following provisions shall govern such a recall: (a) After consulting with SANO, and on terms and conditions reasonably satisfactory to SANO, PPI shall conduct (and shall cause its Affiliate to conduct) the recall and shall have primary responsibility therefore and SANO and PPI shall each cooperate with the other in recalling any affected Licensed Product(s). PPI covenants and agrees to maintain and to cause its Affiliates to maintain such records of all sales of the Products made by PPI 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 PPI 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 PPI 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 PPI or SANO in connection with performing any such recall, provided that expenses incurred by PPI 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 PPI or its Affiliates, then PPI 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 PPI 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 PPI 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 PPI 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 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 PPI 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 wilful 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 PPI 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 PPI 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 PPI, 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, PPI by a customer of PPI pursuant to an Approved Contract (as that term is defined below) due to PPI'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 PPI with respect to any legal or administrative proceedings that arise pursuant to the Approved Contracts as a result of PPI'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 PPI 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 PPI on or after the Execution Date with one of its customers: (i) pursuant to which PPI agrees to supply such customer with pharmaceutical products which include the Licensed Products (or any of them), and which provides that if PPI 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 PPI has failed to supply to such customer in accordance with the provisions of its agreement and to charge back to PPI 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 PPI 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 PPI 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, PPI shall have provided to SANO, in accordance with the provisions of this paragraph, a complete copy of the proposed final agreement between PPI 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 PPI 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. 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) PPI 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 PPI 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 PPI, beyond the control and without the fault or negligence of any of its Affiliates) including, but not limited to, explosion, flood, war (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 PPI to cause any of its respective Affiliates to comply with any of the provisions of this Agreement expressed to 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 PPI 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, PPI 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 PPI 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 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 1700 N. W. 65th Avenue Suite 13 Plantation, Florida 33313 Attn: President Fax: 305-587-9909 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. 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 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 jurisdiction of the state and federal courts located in Miami, Florida. Notwithstanding the foregoing, each party also agrees to the jurisdiction of any court in which any third party claim may be 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 PPI 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: (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 PPI of all of the obligations of every nature whatsoever to be performed by PPI 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 PPI, 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 PPI shall have satisfactorily performed or fully discharged all of the Guaranteed Obligations. No performance or payment made by PPI, PRI, any other guarantor or any other Person, or received or collected by SANO from PPI, 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 PPI 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 PPI or any other guarantor in respect of payments made by PRI under this Guarantee. PRI HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVERS 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 PPI OR ANY OTHER GUARANTOR. THE 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 PPI or any other guarantor, and any failure by SANO to make any such demand or to collect any payments from PPI or any such other guarantor or any release of PPI 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 PPI 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 PPI herefrom. Accordingly, PRI acknowledges that it will not assert, and hereby waivers to the fullest extent permitted by law, any rights to avoid performance hereunder available to it as guarantor which are not also available to PPI. PRI waivers 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 PPI 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 waivers diligence, presentment, protest, demand for payment and notice of default or nonpayment or nonperformance to or upon PPI 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 such rights and remedies as it may have against PPI 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 PPI or any such other Person or to realize upon any such collateral security or guarantee, or any release of PPI 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 PPI or PRI, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, PPI 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 PPI 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. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the Execution Date. SANO CORPORATION By: ------------------------------ (Signature) Name: ---------------------------- Title: --------------------------- PHARMACEUTICAL RESOURCES, INC. By: ------------------------------ (Signature) Name: ---------------------------- Title: --------------------------- PAR PHARMACEUTICAL, INC. By: ------------------------------ (Signature) Name: ---------------------------- Title: --------------------------- EX-10.30 4 NON-EXCLUSIVE DISTRIBUTION, DTD 9/13/94 Exhibit 10.30 NON EXCLUSIVE DISTRIBUTION AGREEMENT EXCLUSIVE SUPPLY AGREEMENT This Agreement, entered into as of the day of September, 1994, by and between MOVA PHARMACEUTICAL CORPORATION ("MOVA"), a Puerto Rico corporation, having offices in Caguas, Puerto Rico, and PAR PHARMACEUTICAL, INC., a New York corporation, having offices in One Ram Ridge Road, Spring Valley, New York 10977 ("PAR"). WITNESSETH: WHEREAS, MOVA manufactures and sells pharmaceutical products and has represented that it has developed a generic version of Albuterol Sulfate Syrup (defined hereinafter as the "Product"); and WHEREAS, PAR distributes a line of generic versions of branded pharmaceutical products such as the Product; and WHEREAS, PAR would like to distribute the Product as manufactured by MOVA and MOVA is willing to supply the Product to PAR for such purpose, all upon the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the foregoing premises, which are hereby incorporated as substantive part of this Agreement, and in consideration of the performance of the mutual covenants and promises herein contained, MOVA and PAR have agreed as follows: ARTICLE 1 - DEFINITIONS ----------------------- 1.1 The Product. The "Product" shall mean Albuterol Sulfate Syrup for ----------- which the FDA approves an Abbreviated New Drug Application with an AA rating when compared with Proventil Syrup. 1.2 The ANDA. The "ANDA" shall mean the Abbreviated New Drug Application -------- for the Product which has been submitted to the FDA by MOVA, including any amendments or supplements thereto. 1.3 The FDA. The "FDA" shall mean the United States Food and Drug ------- Administration. 1.4 Patents. The "Patents" shall mean any issued patents or patent rights ------- held by third parties which would be infringed by the manufacture, use or sale of the Product to be sold by MOVA to PAR pursuant to the terms of this Agreement. 1.5 Approval Date. The "Approval Date" shall mean the date on which MOVA ------------- is in receipt of all required regulatory approvals for the manufacture and sale of the Product. 1.6 Purchase Term. The "Purchase Term" shall mean the five (5) year ------------- period that begins on the date the first order for Product is shipped after the Approval Date. 1.7 Average Selling Price. The "Average Selling Price" shall mean the --------------------- actual Net Sales of Product by shelf keeping unit sold by PAR to unrelated third parties per calendar quarter divided by the total number of units of each shelf keeping unit of Product sold in the said calendar quarter. 1.8 Net Sales. "Net Sales" shall mean the gross sales for each shelf --------- keeping unit of Product less the following: (i) trade, quantity or cash discounts, if any, allowed or paid; (ii) chargebacks, shelf stock adjustments, returns, credits or allowances, if any, given or made on account of Products previously delivered; and (iii) Federal, State or local government rebates whether in effect now or enacted at any time during the term of this Agreement. 1.9 Net Profit. "Net Profit" shall mean the Net Sales for each shelf ---------- keeping unit of Product less the Base Price as specified in Exhibit A hereof. 1.10 Purchase Price. The "Purchase Price" shall mean the base price as -------------- specified in Exhibit A hereof, plus ____________________ of actual Net Profits per shelf keeping unit. 1.11 Base Price. "The Base Price" shall mean the base price per shelf ---------- keeping unit as specified in Exhibit A hereof. The Base Price set forth in Exhibit A shall remain firm through December 31, 1994. The Base Price will be adjusted on January 1st. every year, commencing on January 1, 1995 for the annual change in the CPI for the previous year. 1.12 Affiliate. "Affiliate" shall mean, with respect to either party, all --------- corporations or other business entities which, directly or indirectly, are controlled by, control or are under the common control with that party. For this purpose, the meaning of the word "control" shall include, but not be limited to, ownership of more than fifty percent (50%) of the voting shares or interest of such corporation or other business entity. 1.13 CPI. "CPI" shall mean the Consumer Price Index published by the --- Puerto Rico Department of Labor. ARTICLE 2 - SUPPLY ------------------ 2.1 Purchase and Sale. Subject to the terms and conditions of this ----------------- Agreement, MOVA shall supply and PAR shall purchase from MOVA substantially all of PAR's requirements for the Product from the Approval Date and throughout the Purchase Term. PAR shall not purchase the Product or any product having the same active ingredient, strength and indication as the Product, from any party other than MOVA after the Approval Date and throughout the Purchase Term except that PAR may purchase the Product or any such product from any party pursuant to Paragraph 2.4 and Article 14 hereunder. PAR shall have the non-exclusive right to sell, market and distribute the Product except in the Commonwealth of Puerto Rico and the U.S. Virgin Islands. 2.2 Forecasts. As early as reasonably possible (but no later than thirty --------- (30) days prior to the date which MOVA notifies PAR should be the Availability Date) and thirty (30) days prior to every calendar quarter thereafter, PAR shall give to MOVA a written forecast of the quantities of the Product, including quantities for each strength and unit size of the Product, and delivery dates that PAR anticipates it will order from MOVA during the two (2) calendar quarters following the date of the written forecast. Such forecast shall not create a binding obligation on the part of either MOVA or PAR, except as provided in Paragraph 2.3 hereof. However, PAR shall use all reasonable efforts to make each forecast as accurate as possible. PAR shall promptly advise MOVA of any significant changes in its estimated forecast of Product. 2.3 Orders. PAR shall submit written purchase orders to MOVA for the ------ quantities of the Product, including the quantity of each strength and unit size and delivery dates, which PAR desires to purchase under this Agreement. For the first three (3) month period of each forecast given by PAR pursuant to Paragraph 2.2 hereof, PAR shall submit purchase orders to MOVA for at least the greater of: seventy-five percent (75%) of the forecasted quantities for that period on the then current forecast or fifty percent (50%) of the forecasted quantities for that period as shown on the immediately preceding forecast. If applicable, each purchase order shall specify the country in which the Product is to be resold by PAR. Regardless of the quantities ordered, MOVA shall use all reasonable efforts to deliver the full quantities of the Product ordered by PAR. Deliveries of the Product ordered by PAR to the destination designated by PAR will be made within sixty (60) days following the date on which PAR submitted the purchase order unless a later delivery date has been specified by PAR. 2.4 Inability to Supply. Within thirty (30) days following its receipt of ------------------- each forecast according to Paragraph 2.2 hereof, MOVA shall advise PAR in writing if it is unable to supply the entire quantity forecasted. PAR shall have the right to purchase from third parties such quantities of the Product for which MOVA shall have advised that it will be unable to supply, for as long as MOVA's inability to supply continues. 2.5 Shipments. Delivery shall be f.o.b. Caguas, Puerto Rico, freight and --------- insurance prepaid by MOVA. Product shall be shipped by MOVA according to PAR's instructions, to PAR's facility at One Ram Ridge Road, Spring Valley, NY 10977; provided, however, that should PAR instruct MOVA to ship to -------- ------- another location, MOVA shall do so and PAR shall reimburse for any incremental costs involved. 2.6 Purchase Price and Payment. MOVA shall invoice PAR the Base Price for --------------------------- all shelf keeping units in each shipment of Product delivered to PAR. Such amount shall be payable sixty (60) days from receipt of the invoice therefor. At the end of each calendar quarter, PAR shall determine and advise MOVA of the Actual Net Profits obtained from the sale of the Product by PAR during such calendar quarter. Within twenty (20) days after the end of each such quarter, PAR shall pay to MOVA, the difference between the Base Price and the Purchase Price times the actual number of shelf keeping units actually sold during said calendar quarter. Payment will be made only with respect to Product actually shipped by PAR during such calendar quarter. In addition, within thirty (30) days after the end of each calendar quarter, PAR shall provide MOVA with a report of the number of units of Product shipped and returned, gross sales of Product and Net Sales of Product during such calendar quarter and the number of units of Product inventory remaining under PAR's control at the end of such calendar quarter. 2.7 Conflicting Terms. In ordering and delivering the Product, PAR and ----------------- MOVA may use their standard forms, but nothing in such forms shall be construed to amend or modify the terms of this Agreement and in case of conflict herewith, the terms of this Agreement shall control. ARTICLE 3 - QUALITY ------------------- 3.1 Quality Control. Prior to each shipment of the Product, MOVA shall --------------- perform such quality control procedures to verify that each shipment of the Product made under this Agreement conforms to the specifications for the Product contained in the approved ANDA and otherwise complies with the representations and warranties given by MOVA in Article 4 hereof. Each shipment of the Product shall be accompanied by a quality assurance analytical data sheet (the "Q.A. Certificate of Analysis"). 3.2 Rejection. PAR shall have thirty (30) days following the day on which --------- it receives a shipment to reject same because all or part of the shipment fails to conform to the applicable specifications or otherwise fails to conform to the representations and warranties given by MOVA herein, by giving written notice to MOVA specifying the manner in which all or part of such shipment fails to meet the foregoing requirements. If PAR rejects a shipment before the date on which payment therefor is due according to Paragraph 2.6 hereof, it may withhold payment for that shipment or the rejected portion thereof. All shipments or portions thereof not rejected by PAR before such date shall be paid for in accordance with Paragraph 2.6 hereof. All shipments or portions thereof which PAR rejected but, as determined pursuant to Paragraph 3.4 hereof, did not have the right to reject, shall be paid within fifteen (15) days following the day on which such determination was made, unless PAR had paid earlier. In the event PAR rejects a shipment or portion thereof within such thirty (30) day period in accordance with the terms hereof but after payment therefor had been made, PAR shall be entitled to recoup the payment amount by, at PAR's election, MOVA's issuing a prompt refund or by PAR's offsetting such amount against the payment of future invoices or other payments that may become due hereunder. The representations and warranties given by MOVA hereunder shall survive any failure to reject by PAR under this Paragraph. 3.3 Recalls. If the Product is recalled pursuant to FDA regulation or ------- other applicable laws and returned as a result of any such recall and such recall is due to MOVA's negligence or willful misconduct or a breach of any representation or warranty of MOVA hereunder, then MOVA shall bear all incremental out-of-pocket direct costs in connection with the recall, including, but not limited to, all notification letters and all shipping expenses. In no event shall MOVA be responsible for any indirect expenses incurred by PAR. If the recalled Product is to be destroyed, MOVA, at PAR's request, shall replace free of charge said Product or issue a credit to PAR's account or refund payment to PAR. If the recalled Product is to be reworked, MOVA shall bear all costs of reworking said product. If the Product is recalled and such recall is due to PAR's negligence or willful misconduct or a breach of any representation or warranty of PAR hereunder, then PAR shall bear all incremental out-of-pocket direct costs in connection with the recall, including, but not limited to, all notification letters and all shipping expenses. In no event shall PAR be responsible for any indirect expenses incurred by MOVA. 3.4 Disputes. If MOVA disputes PAR's right to reject all or part of any -------- shipment of the Product as set forth in Paragraph 3.2 or 3.3 hereof, such dispute shall be resolved by an independent approved FDA testing organization or consultant of recognized repute within the U.S. pharmaceutical industry mutually agreed upon by the parties, the appointment of which shall not be unreasonable withheld or delayed by either party. The determination of such entity with respect to all or part of any shipment of the Product shall be final and binding upon the parties, but only as to the reasons given by PAR in rejecting the shipment or portion thereof and shall have no effect on any matter for which said entity did not render a determination. The fees and expenses of the third party making the determination shall be paid by the party against which the determination is made. 3.5 Obligation to Inform the Other. Parties agree to keep each other ------------------------------ regularly and fully informed of any notification or other information, whether received directly or indirectly, which might in any way affect the marketability, safety or effectiveness of the Product, or which might result in potential liability for either party, or which might necessitate action on the part of either party, or which might result in recall of the Product, or which might otherwise in any way affect either of the parties' interest with respect to the distribution or use of the Product. Nothing contained in this Paragraph shall obligate either party to provide the other with any information other than information regarding the quality of the Product. 3.6 Inspections. Upon reasonable notice given to MOVA, PAR shall have the ----------- right to have a reasonable number of its employees inspect any facility at which the Product to be sold to PAR hereunder is manufactured, packaged, stored or shipped. 3.7 Packaging. MOVA shall supply the Product to PAR in finished bottles --------- bearing the PAR label as specified by PAR and approved by the FDA. ARTICLE 4 - REPRESENTATIONS AND WARRANTIES ------------------------------------------ MOVA hereby covenants, represents and warrants to PAR that: (a) on the date of shipment, all of the Product sold by MOVA to PAR hereunder will comply with the specifications for the Product contained in the approved ANDA, conform with the information shown on the Q.A. Data Sheet and, when applicable, the sample provided for the particular shipment according to Paragraph 3.1 hereof; (b) all of the Product sold by MOVA to PAR hereunder shall have been manufactured, packaged and stored and shipped in conformance with all applicable current Good Manufacturing Practices which are in force or hereinafter adopted by the FDA or any successor agency thereto; (c) on the date of shipment, all of the Product shipped by MOVA to PAR hereunder will not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as amended and in effect at the time of shipment (the "Act"), or within the meaning of any applicable state or municipal laws in the USA under which such terms have the same meaning as set forth under the Act; (d) on the date of shipment, all of the Product sold by MOVA to PAR hereunder may be legally distributed or sold in the USA; (e) title to all the Product sold by MOVA to PAR hereunder shall pass to PAR as provided herein free and clear of any security interest, lien or other encumbrance; (f) the Product sold hereunder shall have been manufactured, packaged and stored in facilities which are approved by the FDA at the time of such manufacture, packaging and storage, to the extent such approval is required by law; (g) to the best of MOVA's knowledge and belief, the manufacture, use or sale of the Product sold by MOVA to PAR hereunder shall not constitute an infringement of any Patents; and (h) to the best of MOVA's knowledge and belief, MOVA and its employees, affiliates and agents have never been (i) debarred or (ii) convicted of a crime for which a person can be debarred, under Section 306(a) of the U.S. Federal Generic Drug Enforcement Act of 1992 ("Section 306(a) or (b)") and, to the best of MOVA's knowledge and belief, MOVA and its employees, affiliates and agents has ever been threatened to be (i) debarred or (ii) indicted for a crime or otherwise engaged in conduct for which a person can be debarred under Section 306(a) or (b), and it will promptly notify PAR in the event of any such debarment, conviction, threat or indictment. ARTICLE 5 - APPROVALS --------------------- 5.1 ANDA. MOVA shall be responsible for obtaining the approval of the ---- ANDA by the FDA and in so doing shall exercise what it in good faith believes to be reasonable commercial effort to obtain such approval at the earliest possible date. 5.2 Inspections by Government Agencies. Without limiting the generality ---------------------------------- of Paragraph 5.1 hereof, MOVA shall permit the FDA to conduct whatever inspections of the facilities at which the Product is to be manufactured, packaged and/or stored and shall cooperate with the FDA during any such inspections. 5.3 Administration of the ANDA and other Approvals. MOVA shall be ---------------------------------------------- responsible for maintaining the ANDA and any other approvals current and in effect. In so doing, MOVA shall comply with all applicable requirements of the FDA and counterpart governmental agencies outside of the USA. 5.4 Product Complaints. Each party shall immediately inform the other of ------------------ product quality, health or safety related concerns or inquiries that raise potentially serious and unexpected quality, health or safety concerns. All such other information not involving the above described situation shall be transmitted to the other party within three (3) business days following receipt. ARTICLE 6 - ADJUSTMENTS ----------------------- 6.1 Adjustment. In the event that PAR's average selling price for the ---------- Product to any other party becomes less than _____ per bottle of 16 ounces, adjusted on January 1st. every year, commencing on January 1, 1995 for the annual change in the CPI as set forth in Exhibit A, the parties shall negotiate such modification to this Agreement as may be necessary to enable each to perform thereunder on terms fair and reasonable under the circumstances and if no agreement thereon can be reached within a reasonable time, either party may terminate this agreement by giving ninety (90) days prior notice. 6.2 Independent Prices. Each of the parties shall establish the prices at ------------------ which it sells the Product to its customers independently of the other party. ARTICLE 7 - INDEMNIFICATION --------------------------- 7.1 MOVA's Obligation to Indemnify. MOVA agrees to indemnify, defend, and ------------------------------ hold harmless PAR, its affiliates and subsidiaries and their respective employees against any and all claims, losses, damages and liabilities, including reasonable attorneys' fees and costs associated with a recall of the Product as defined in Paragraph 3.3 hereof, incurred by any of them arising out of any breach of any obligation hereunder or any representation or warranty by MOVA hereunder or any act or omission of MOVA in connection with its obligations hereunder. 7.2 PAR's Obligation to Indemnify. PAR agrees to indemnify, defend and ----------------------------- hold harmless MOVA, its affiliates and subsidiaries and their respective employees against any and all claims, losses, damages and liabilities, including reasonable attorneys' fees and costs associated with a recall of the Product as defined in Paragraph 3.3 hereof, incurred by any of them arising out of any breach of any obligation hereunder or any representation or warranty by PAR hereunder or any act or omission of PAR in connection with its obligations hereunder. 7.3 Obligations of the Party Seeking to be Indemnified. If PAR or any of --------------------------------------------------- its affiliates or subsidiaries or MOVA or any of its affiliates or subsidiaries (in each case an "Indemnified Party") receive any written claims which it believes is the subject of indemnity hereunder by MOVA or PAR, as the case may be (in each case an "Indemnifying Party"), the Indemnified Party shall, as soon as reasonably practicable after forming such belief, give notice thereof to the Indemnifying Party, including full particulars of such claim to the extent known to the Indemnified Party; provided, that the failure to give timely notice to the Indemnifying Party as contemplated hereby shall not release the Indemnifying Party from any liability to the Indemnified Party except to the extent that the Indemnifying Party is injured by such delay. The Indemnifying Party shall have the right, by prompt notice to the Indemnified Party, to assume the defense of such claim with counsel reasonably satisfactory to the Indemnified Party, and at the cost of the Indemnifying Party. If the Indemnifying Party does not assume the defense of such claim, or, having done so, does not diligently pursue such defense, the Indemnified Party may assume such defense, with counsel of its choice, but for the account of the Indemnifying Party. If the Indemnifying Party so assumes such defense, the Indemnified Party may participate therein through counsel of its choice, but the cost of such counsel shall be for the account of the Indemnified Party. The party not assuming the defense of any such claim shall render all reasonable assistance to the party assuming such defense, and all out- of-pocket costs of such assistance shall be for the account of the Indemnifying Party. No such claim shall be settled other than by the party defending the same, and then only with the consent of the other party, which shall not be unreasonably withheld; provided, that the Indemnified Party shall have no obligation to consent to any settlement of any such claim which imposes on the Indemnified Party and liability or obligation which cannot be assumed and performed in full by the Indemnifying Party. 7.4 Insurance. Each party and its Affiliates shall carry products --------- liability insurance in an amount at least equal to _________ with an insurance carrier reasonably acceptable to the other party. Such insurance shall cover the indemnifications set forth in Article 7 hereof. Each party shall name the other party as additional insured under such policy. A copy of such policy or policies shall be delivered to the other party within ten (10) days prior to the date any such Product is first commercially sold by such party, and shall provide among other things, that such insurance shall not be canceled or modified without giving the other party at least thirty (30) days prior written notice. ARTICLE 8 - CONFIDENTIALITY --------------------------- 8.1 Each party shall at all times maintain as confidential any know-how or other business information received from the other party under this Agreement during the term of this Agreement, shall only use such information in furtherance of this Agreement shall only disclose such information to those of its employees with a need to know in furtherance of this Agreement, provided, however, that nothing contained herein shall prevent a -------- ------- party from submitting information to a governmental instrumentality in connection with seeking approval to market the Product. Said obligation of confidentiality shall not apply, however, to any information which: (a) was known to the receiving party, as evidenced by its written records, prior to receipt from the other party; (b) is in the public domain at time of receipt or subsequently enters the public domain through no breach of this Agreement by the receiving party; (c) after the date of receipt from the disclosing party, is received without cover of secrecy from a third party with a bona fide right to disclose without violating any right of the disclosing party; or (d) is independently developed by the receiving party without the aid, application or use of any information for which it is obligated to maintain as confidential according to this Paragraph. The respective obligations of MOVA and PAR under this Paragraph shall be in effect during the term of this Agreement and for the three (3) years thereafter. ARTICLE 9 - RECORDS ------------------- 9.1 PAR shall keep appropriate and complete records in sufficient detail so that the payments due hereunder can be properly ascertained. PAR shall, on the request of MOVA, permit a certified public accountant, selected by MOVA and to whom PAR has no reasonable objection, to have access during normal business hours, to such books and records as may be necessary to determine, in respect of any accounting period ending not more than three (3) years prior to the date of such request, the correctness of any payment under this Agreement. Any such accountant shall not disclose any information to MOVA except that which specifically relates to the payment obligations hereunder. ARTICLE 10 - TERM, TERMINATION ------------------------------ 10.1 Term. This Agreement shall become effective as of the date first ---- written above and shall remain in full force and effect through the end of the Purchase Term. 10.2 Termination for Cause. This Agreement may be terminated at any time --------------------- by either party: (a) upon breach of this Agreement by the other party, on sixty (60) days' prior written notice to the breaching party, this notice to become effective at the end of such sixty (60) day period unless the breach is sooner cured by the breaching party; or (b) upon bankruptcy or insolvency of the other party or placing of the business of such party in receivership. 10.3 Waiver. Failure to terminate this Agreement following a breach or ------ failure to comply with terms and conditions of this Agreement shall not be deemed a waiver of the nonbreaching party's defenses, rights or causes of action arising from such or any future breach or noncompliance. ARTICLE 11 - TRADE NAMES AND TRADEMARKS --------------------------------------- 11.1 PAR and MOVA hereby acknowledge that they do not have, and shall not acquire by virtue of this Agreement, any rights to or in any goodwill, trademark, trade name, copyright, patent or other property of the other, nor in any of the other's trademarks or trade names appearing on the label or packaging materials of the Product. PAR and MOVA each agrees to do nothing by act or omission which would impair, the rights, ownership and title to the other, including its Affiliates, in the aforementioned. ARTICLE 12 - NOTICES -------------------- 12.1 Any notice required or permitted to be given or made under this Agreement by either of the parties to the other shall be in writing and delivered to the other party at its address indicated below or to such other address as the addressee shall have theretofore furnished in writing to the addressor by hand, courier or by registered or certified mail (postage prepaid) or by telefax, provided all telefax notices shall be promptly confirmed, in writing, by registered or certified mail (postage prepaid): If to MOVA: MOVA Pharmaceutical Corporation P. O. Box 8639 Caguas, Puerto Rico 00626 Telefax: (809) 258-6405 Attention: Joaquin B. Viso President With a Copy to: Ledesma, Palou & Miranda Hato Rey Tower, Suite 1103 268 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 Telefax: (809) 754-6344 Attention: Silvestre M. Miranda If to PAR: Par Pharmaceutical, Inc. One Ram Ridge Road Spring Valley, New York 10977 Telefax: (914) 425-7907 Attention: Ken Sawyer President All notices shall be effective as of the date received by the addressee. ARTICLE 13 - NON ASSIGNABILITY ------------------------------ 13.1 This Agreement and the rights of the parties hereunder shall not be assignable nor shall the obligations of either party be delegable, except as to affiliates of PAR or MOVA, without the prior written consent of the other party, which consent shall not be unreasonably withheld. In the event either party seeks and obtains the other party's consent to assign or delegate its rights or obligations to another party, or in the event of an assignment or delegation to an affiliate, the obligations of the assignee or transferee must be guaranteed in writing by the party who is the assignor or transferor. ARTICLE 14 - FORCE MAJEURE -------------------------- 14.1 Force Majeure. No failure or omission by the parties in the ------------- performance of any obligation according to this Agreement shall be deemed a breach of this Agreement or create any liability if the same shall arise from any cause or causes beyond the control of the party, including, but not limited to, strikes, riots, war, acts of God, invasion, fire, explosion, floods, delay of carrier, shortage or failure in the supply of materials, energy shortage and acts of government or governmental agencies or instrumentalities. 14.2 Obligations of the Parties in case of Force Majeure. In the event --------------------------------------------------- that due to force majeure either party hereto shall be delayed or hindered in or prevented from the performance of its duties or doing acts required under the terms of this Agreement, the performance of such act, except for the obligation to pay amounts due under this Agreement, shall be excused for the period of the delay. Notwithstanding the aforementioned, the party subject to force majeure shall take all reasonable steps to resolve the condition(s) forming the basis of force majeure. ARTICLE 15 - MISCELLANEOUS -------------------------- 15.1 Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the laws of the Commonwealth of Puerto Rico. 15.2 Independent Contractor. The parties shall be considered independent ---------------------- contractors, and neither the making of this Agreement nor the performance of any of the provisions hereof shall be construed to make either party an agent, employee or legal representative of the other, nor shall this Agreement be deemed to establish a joint venture or partnership. 15.3 Public Announcements. MOVA and PAR shall consult with each other -------------------- before issuing any press releases or otherwise making any public statements with respect to this Agreement and neither of them shall issue any press release or make any public statement prior to obtaining the other party's approval, which approval shall not be unreasonably withheld, except that no such approval shall be necessary to the extent disclosure may be required by law. 15.4 Severability. Should any section, or portion thereof, of this ------------ Agreement be held invalid by reason of any law, statute or regulation existing now or in the future in any jurisdiction by any court of competent authority or by a legally enforceable directive of any governmental body, then such section or portion thereof shall be validly reformed so as to approximate the intent of the parties as nearly as possible and, if unreformable, shall be deemed divisible and deleted with respect to such jurisdiction; this Agreement shall not otherwise be affected. 15.5 Taxes. Each party shall be responsible for its own taxes. ----- 15.6 Entire Agreement. The terms and provisions contained in this ---------------- Agreement, including the Exhibit hereto, constitute the entire agreement between the parties and shall supersede all previous communications, representations, agreements or understandings, either oral or written, between the parties with respect to the subject matter hereof. No agreement or understanding varying or extending this Agreement shall be binding upon either party hereto, unless set forth in a writing which specifically refers to this Agreement, signed by duly authorized officers or representatives of the respective parties, and the provisions hereof not specifically amended thereby shall remain in full force and effect. IN WITNESS WHEREOF, MOVA and PAR have executed this Agreement in duplicate as of the day and year first above written. MOVA PHARMACEUTICAL CORPORATION PAR PHARMACEUTICAL, INC. By:____________________________ By:___________________________ Joaquin B. Viso Ken Sawyer President EX-10.31 5 NON-EXCLUSIVE DISTRIBUTION, DTD 9/13/94 Exhibit 10.31 NON EXCLUSIVE DISTRIBUTION AGREEMENT EXCLUSIVE SUPPLY AGREEMENT This Agreement, entered into as of the 13th day of September, 1994, by and between MOVA PHARMACEUTICAL CORPORATION ("MOVA"), a Puerto Rico corporation, having offices in Caguas, Puerto Rico, and PAR PHARMACEUTICAL, INC., a New York corporation, having offices in One Ram Ridge Road, Spring Valley, New York 10977 ("PAR"). WITNESSETH: WHEREAS, MOVA manufactures and sells pharmaceutical products and has represented that it has developed a generic version of _____________ (defined hereinafter as the "Product"); and WHEREAS, PAR distributes a line of generic versions of branded pharmaceutical products such as the Product; and WHEREAS, PAR would like to distribute the Product as manufactured by MOVA and MOVA is willing to supply the Product to PAR for such purpose, all upon the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the foregoing premises, which are hereby incorporated as substantive part of this Agreement, and in consideration of the performance of the mutual covenants and promises herein contained, MOVA and PAR have agreed as follows: ARTICLE 1 - DEFINITIONS ----------------------- 1.1 The Product. The "Product" shall mean ______________(300mg., 400mg., ----------- and 800mg.) and any future dosage strength for which the FDA approves an Abbreviated New Drug Application with an AB rating when compared with the corresponding strength of _______________. 1.2 The ANDA. The "ANDA" shall mean the Abbreviated New Drug Application -------- for the Product which has been submitted to the FDA by MOVA, including any amendments or supplements thereto. 1.3 The FDA. The "FDA" shall mean the United States Food and Drug ------- Administration. 1.4 Patents. The "Patents" shall mean any issued patents or patent rights ------- held by third parties which would be infringed by the manufacture, use or sale of the Product to be sold by MOVA to PAR pursuant to the terms of this Agreement. 1.5 Patents Expiration Day. The "Patents Expiration Day" shall mean the ---------------------- day on which all of the Patents have expired or are no longer in effect. 1.6 Availability Date. The "Availability Date" shall mean the date on ----------------- which MOVA is first legally permitted and able to ship commercial quantities of the Product in the interstate commerce of the USA. 1.7 Approval Date. The "Approval Date" shall mean the date on which MOVA ------------- is in receipt of all required regulatory approvals for the manufacture and sale of the Product. 1.8 Purchase Term. The "Purchase Term" shall mean the five (5) year ------------- period that begins on the date the first order for Product is shipped after the Approval Date. 1.9 Average Selling Price. The "Average Selling Price" shall mean the --------------------- actual Net Sales of Product by shelf keeping unit sold by PAR to unrelated third parties per calendar quarter divided by the total number of units of each shelf keeping unit of Product sold in the said calendar quarter. 1.10 Net Sales. "Net Sales" shall mean the gross sales for each shelf --------- keeping unit of Product less the following: (i) trade, quantity or cash discounts, if any, allowed or paid; (ii) chargebacks, shelf stock adjustments, returns, credits or allowances, if any, given or made on account of Products previously delivered; and (iii) Federal, State or local government rebates whether in effect now or enacted at any time during the term of this Agreement. 1.11 Net Profit. "Net Profit" shall mean the Net Sales for each shelf ---------- keeping unit of Product less the Base Price as specified in Exhibit A hereof. 1.12 Purchase Price. The "Purchase Price" shall mean the base price as -------------- specified in Exhibit A hereof, plus a percent of Actual Net Profits per shelf keeping unit to be determined as follows: (i) __% in the event the Availability Date occurs by Patents Expiration Day; (ii) __% in the event the Availability Date occurs within the first sixty (60) days following the Patents Expiration Day; (iii) __% in the event the Availability Date occurs during the second sixty (60) days following the Patents Expiration Day; or (iv) __% in the event the Availability Date occurs more than one hundred twenty (120) days following the Patents Expiration Day. 1.13 Base Price. "The Base Price" shall mean the base price per shelf ---------- keeping unit as specified in Exhibit A hereof. The Base Price set forth in Exhibit A shall remain firm through December 31, 1994. The Base Price will be adjusted on January 1st. every year, commencing on January 1, 1995 for the annual change in the CPI for the previous year. 1.14 USA. The "USA" shall mean the United States of America and the --- District of Columbia, its territories and possessions, excluding the Commonwealth of Puerto Rico and the U.S. Virgin Islands. 1.16 Affiliate. "Affiliate" shall mean, with respect to either party, all --------- corporations or other business entities which, directly or indirectly, are controlled by, control or are under the common control with that party. For this purpose, the meaning of the word "control" shall include, but not be limited to, ownership of more than fifty percent (50%) of the voting shares or interest of such corporation or other business entity. 1.17 CPI. "CPI" shall mean the Consumer Price Index published by the --- Puerto Rico Department of Labor. 1.18 Competitive Product. "Competitive Product" shall mean versions of the ------------------- Product which are manufactured by other pharmaceutical companies for which the FDA approves an Abbreviated New Drug Application with an AB rating when compared with the corresponding strength of ________________ tablets. 1.19 Active Ingredient. "Active Ingredient" shall mean __________ as defined ----------------- in the USP. ARTICLE 2 - SUPPLY ------------------ 2.1 Purchase and Sale. Subject to the terms and conditions of this ----------------- Agreement, MOVA shall supply and PAR shall purchase from MOVA substantially all of PAR's requirements for the Product in the USA from the Approval Date and throughout the Purchase Term. PAR shall not purchase the Product or any product having the same active ingredient, strength and indication as the Product, from any party other than MOVA after the Approval Date and throughout the Purchase Term except that PAR may purchase the Product or any such product from any party pursuant to Paragraph 2.4 and Article 14 hereunder. It is understood and agreed that PAR may purchase the Product from third parties before the Approval Date, including accepting shipments of the Product made after the Approval Date pursuant to orders submitted by PAR before the Approval Date. PAR shall have the non-exclusive right to sell, market and distribute the Product in the USA. It is understood and agreed further that PAR may, but is not obligated to, purchase the Product for sale in countries outside of the USA. Notwithstanding the foregoing purchase obligations, if as a result of a merger, acquisition or other similar extraordinary corporate transaction PAR becomes an Affiliate of a corporate entity (a "Merger Party") who at the time of such transaction either manufactures or has filed an ANDA for the manufacture of a Competitive Product, then PAR may purchase such Competitive Product from the Merger Party one (1) year after giving MOVA written notice of such intent, and provided further that, within ninety (90) days from the date of the merger, acquisition or other similar extraordinary transaction, PAR notifies MOVA of the occurrence of such transaction and of its intent of purchasing the Competitive Product from the Merger Party. At the time of such notice, the restrictions contained in Paragraph 2.7 hereof, with respect to sales by MOVA to certain parties, shall no longer be applicable. 2.2 Forecasts. As early as reasonably possible (but no later than thirty --------- (30) days prior to the date which MOVA notifies PAR should be the Availability Date) and thirty (30) days prior to every calendar quarter thereafter, PAR shall give to MOVA a written forecast of the quantities of the Product, including quantities for each strength and unit size of the Product, and delivery dates that PAR anticipates it will order from MOVA during the two (2) calendar quarters following the date of the written forecast. Such forecast shall not create a binding obligation on the part of either MOVA or PAR, except as provided in Paragraph 2.3 hereof. However, PAR shall use all reasonable efforts to make each forecast as accurate as possible. PAR shall promptly advise MOVA of any significant changes in its estimated forecast of Product. 2.3 Orders. PAR shall submit written purchase orders to MOVA for the ------ quantities of the Product, including the quantity of each strength and unit size and delivery dates, which PAR desires to purchase under this Agreement. For the first three (3) month period of each forecast given by PAR pursuant to Paragraph 2.2 hereof, PAR shall submit purchase orders to MOVA for at least the greater of: seventy-five percent (75%) of the forecasted quantities for that period on the then current forecast or fifty percent (50%) of the forecasted quantities for that period as shown on the immediately preceding forecast. If applicable, each purchase order shall specify the country in which the Product is to be resold by PAR. Regardless of the quantities ordered, MOVA shall use all reasonable efforts to deliver the full quantities of the Product (each strength and unit size) ordered by PAR. Deliveries of the Product ordered by PAR to the destination designated by PAR will be made within sixty (60) days following the date on which PAR submitted the purchase order unless a later delivery date has been specified by PAR. 2.4 Inability to Supply. Within thirty (30) days following its receipt of ------------------- each forecast according to Paragraph 2.2 hereof, MOVA shall advise PAR in writing if it is unable to supply the entire quantity forecasted. PAR shall have the right to purchase from third parties such quantities of the Product for which MOVA shall have advised that it will be unable to supply, for as long as MOVA's inability to supply continues. 2.5 Shipments. Delivery shall be f.o.b. Caguas, Puerto Rico, freight and --------- insurance prepaid by MOVA. Product shall be shipped by MOVA according to PAR's instructions, to PAR's facility at One Ram Ridge Road, Spring Valley, NY 10977; provided, however, that should PAR instruct MOVA to ship to -------- ------- another location, MOVA shall do so and PAR shall reimburse for any incremental costs involved. 2.6 Purchase Price and Payment. MOVA shall invoice PAR the Base Price for --------------------------- all shelf keeping units in each shipment of Product delivered to PAR. Such amount shall be payable sixty (60) days from receipt of the invoice therefor. At the end of each calendar quarter, PAR shall determine and advise MOVA of the Actual Net Profits obtained from the sale of the Product by PAR during such calendar quarter. Within twenty (20) days after the end of each such quarter, PAR shall pay to MOVA, the difference between the Base Price and the Purchase Price times the actual number of shelf keeping units actually sold during said calendar quarter. Payment will be made only with respect to Product actually shipped by PAR during such calendar quarter. In addition, within thirty (30) days after the end of each calendar quarter, PAR shall provide MOVA with a report of the number of units of Product shipped and returned, gross sales of Product and Net Sales of Product during such calendar quarter and the number of units of Product inventory remaining under PAR's control at the end of such calendar quarter. 2.7 Sales to certain customers. Throughout the term of this Agreement, -------------------------- MOVA agrees not to knowingly sell the Product to the customers listed in Exhibit B hereof. MOVA shall not knowingly sell the Product to any third party to whom PAR shall have sold the Product under PAR's label within the sixty (60) day period immediately following the Availability Date, provided -------- however, that such restriction shall end one (1) year after the end of the - - - - - - - ------- aforementioned sixty (60) day period. 2.8 Conflicting Terms. In ordering and delivering the Product, PAR and ----------------- MOVA may use their standard forms, but nothing in such forms shall be construed to amend or modify the terms of this Agreement and in case of conflict herewith, the terms of this Agreement shall control. ARTICLE 3 - QUALITY ------------------- 3.1 Quality Control. Prior to each shipment of the Product, MOVA shall --------------- perform such quality control procedures to verify that each shipment of the Product made under this Agreement conforms to the specifications for the Product contained in the approved ANDA and otherwise complies with the representations and warranties given by MOVA in Article 4 hereof. Each shipment of the Product shall be accompanied by a quality assurance analytical data sheet (the "Q.A. Certificate of Analysis"). 3.2 Rejection. PAR shall have thirty (30) days following the day on which --------- it receives a shipment to reject same because all or part of the shipment fails to conform to the applicable specifications or otherwise fails to conform to the representations and warranties given by MOVA herein, by giving written notice to MOVA specifying the manner in which all or part of such shipment fails to meet the foregoing requirements. If PAR rejects a shipment before the date on which payment therefor is due according to Paragraph 2.6 hereof, it may withhold payment for that shipment or the rejected portion thereof. All shipments or portions thereof not rejected by PAR before such date shall be paid for in accordance with Paragraph 2.6 hereof. All shipments or portions thereof which PAR rejected but, as determined pursuant to Paragraph 3.4 hereof, did not have the right to reject, shall be paid within fifteen (15) days following the day on which such determination was made, unless PAR had paid earlier. In the event PAR rejects a shipment or portion thereof within such thirty (30) day period in accordance with the terms hereof but after payment therefor had been made, PAR shall be entitled to recoup the payment amount by, at PAR's election, MOVA's issuing a prompt refund or by PAR's offsetting such amount against the payment of future invoices or other payments that may become due hereunder. The representations and warranties given by MOVA hereunder shall survive any failure to reject by PAR under this Paragraph. 3.3 Recalls. If the Product is recalled pursuant to FDA regulation or ------- other applicable laws and returned as a result of any such recall and such recall is due to MOVA's negligence or willful misconduct or a breach of any representation or warranty of MOVA hereunder, then MOVA shall bear all incremental out-of-pocket direct costs in connection with the recall, including, but not limited to, all notification letters and all shipping expenses. In no event shall MOVA be responsible for any indirect expenses incurred by PAR. If the recalled Product is to be destroyed, MOVA, at PAR's request, shall replace free of charge said Product or issue a credit to PAR's account or refund payment to PAR. If the recalled Product is to be reworked, MOVA shall bear all costs of reworking said product. If the Product is recalled and such recall is due to PAR's negligence or willful misconduct or a breach of any representation or warranty of PAR hereunder, then PAR shall bear all incremental out-of-pocket direct costs in connection with the recall, including, but not limited to, all notification letters and all shipping expenses. In no event shall PAR be responsible for any indirect expenses incurred by MOVA. 3.4 Disputes. If MOVA disputes PAR's right to reject all or part of any -------- shipment of the Product as set forth in Paragraph 3.2 or 3.3 hereof, such dispute shall be resolved by an independent approved FDA testing organization or consultant of recognized repute within the U.S. pharmaceutical industry mutually agreed upon by the parties, the appointment of which shall not be unreasonable withheld or delayed by either party. The determination of such entity with respect to all or part of any shipment of the Product shall be final and binding upon the parties, but only as to the reasons given by PAR in rejecting the shipment or portion thereof and shall have no effect on any matter for which said entity did not render a determination. The fees and expenses of the third party making the determination shall be paid by the party against which the determination is made. 3.5 Obligation to Inform the Other. Parties agree to keep each other ------------------------------ regularly and fully informed of any notification or other information, whether received directly or indirectly, which might in any way affect the marketability, safety or effectiveness of the Product, or which might result in potential liability for either party, or which might necessitate action on the part of either party, or which might result in recall of the Product, or which might otherwise in any way affect either of the parties' interest with respect to the distribution or use of the Product. Nothing contained in this Paragraph shall obligate either party to provide the other with any information other than information regarding the quality of the Product. 3.6 Inspections. Upon reasonable notice given to MOVA, PAR shall have the ----------- right to have a reasonable number of its employees inspect any facility at which the Product to be sold to PAR hereunder is manufactured, packaged, stored or shipped. 3.7 Packaging. MOVA shall supply the Product to PAR in bulk and in --------- finished bottles bearing the PAR label as specified by PAR and approved by the FDA or such other labeling specified by PAR for the Product to be sold outside of the USA. ARTICLE 4 - REPRESENTATIONS AND WARRANTIES ------------------------------------------ MOVA hereby covenants, represents and warrants to PAR that: (a) on the date of shipment, all of the Product sold by MOVA to PAR hereunder will comply with the specifications for the Product contained in the approved ANDA, conform with the information shown on the Q.A. Data Sheet and, when applicable, the sample provided for the particular shipment according to Paragraph 3.1 hereof; (b) all of the Product sold by MOVA to PAR hereunder shall have been manufactured, packaged and stored and shipped in conformance with all applicable current Good Manufacturing Practices which are in force or hereinafter adopted by the FDA or any successor agency thereto; (c) on the date of shipment, all of the Product shipped by MOVA to PAR hereunder will not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as amended and in effect at the time of shipment (the "Act"), or within the meaning of any applicable state or municipal laws in the USA under which such terms have the same meaning as set forth under the Act; (d) on the date of shipment, all of the Product sold by MOVA to PAR hereunder may be legally distributed or sold in the USA; (e) title to all the Product sold by MOVA to PAR hereunder shall pass to PAR as provided herein free and clear of any security interest, lien or other encumbrance; (f) the Product sold hereunder shall have been manufactured, packaged and stored in facilities which are approved by the FDA at the time of such manufacture, packaging and storage, to the extent such approval is required by law; (g) to the best of MOVA's knowledge and belief, the manufacture, use or sale of the Product sold by MOVA to PAR hereunder shall not constitute an infringement of any Patents; and (h) to the best of MOVA's knowledge and belief, MOVA and its employees, affiliates and agents have never been (i) debarred or (ii) convicted of a crime for which a person can be debarred, under Section 306(a) of the U.S. Federal Generic Drug Enforcement Act of 1992 ("Section 306(a) or (b)") and, to the best of MOVA's knowledge and belief, MOVA and its employees, affiliates and agents has ever been threatened to be (i) debarred or (ii) indicted for a crime or otherwise engaged in conduct for which a person can be debarred under Section 306(a) or (b), and it will promptly notify PAR in the event of any such debarment, conviction, threat or indictment. ARTICLE 5 - APPROVALS --------------------- 5.1 ANDA. MOVA shall be responsible for obtaining the approval of the ---- ANDA by the FDA and in so doing shall exercise what it in good faith believes to be reasonable commercial effort to obtain such approval at the earliest possible date. 5.2 Inspections by Government Agencies. Without limiting the generality ---------------------------------- of Paragraph 5.1 hereof, MOVA shall permit the FDA to conduct whatever inspections of the facilities at which the Product is to be manufactured, packaged and/or stored and shall cooperate with the FDA during any such inspections. 5.3 Administration of the ANDA and other Approvals. MOVA shall be ---------------------------------------------- responsible for maintaining the ANDA and any other approvals current and in effect. In so doing, MOVA shall comply with all applicable requirements of the FDA and counterpart governmental agencies outside of the USA. 5.4 Product Complaints. Each party shall immediately inform the other of ------------------ product quality, health or safety related concerns or inquiries that raise potentially serious and unexpected quality, health or safety concerns. All such other information not involving the above described situation shall be transmitted to the other party within three (3) business days following receipt. ARTICLE 6 - ADJUSTMENTS ----------------------- 6.1 Price Protection. Notwithstanding any provision herein to the ---------------- contrary, if at any time MOVA makes sales of the Product to any other party within the USA or for resale in the USA, except sales to federal, state and local government agencies, at a price lower than one hundred twenty-five percent (125%) of the Base Price to PAR then in effect under this Agreement, the Base Price to PAR then in effect under this Agreement shall be reduced to eighty percent (80%) of such lower price given to the other party for so long as MOVA continues to make such sales to such other party at such lower price, unless sale to PAR at such lower price would violate the provisions of any pertinent law, order or regulation. 6.2 Adjustment. In the event that PAR's average selling price for the ---------- Product to any other party becomes less than ______ per bottle of 100 tablets for 300 mg tablets adjusted on January 1st. every year, commencing on January 1, 1995 for the annual change in the CPI (with comparable limits for other strengths as set forth in Exhibit A), the parties shall negotiate such modification to this Agreement as may be necessary to enable each to perform thereunder on terms fair and reasonable under the circumstances and if no agreement thereon can be reached within a reasonable time, either party may terminate this agreement by giving ninety (90) days prior notice. 6.3 Independent Prices. Each of the parties shall establish the prices at ------------------ which it sells the Product to its customers independently of the other party. 6.4 Active Ingredient Cost Fluctuations. In the event that the cost of ----------------------------------- the Active Ingredient purchased from third parties by MOVA, as defined in Exhibit A, increases or decreases by more than 10% at any time, such change shall be added or deducted to the Base Prices paid by PAR to MOVA according to Paragraph 2.6 hereof. MOVA shall provide PAR with the necessary information to verify the changes in the cost of the Active Ingredient. ARTICLE 7 - INDEMNIFICATION --------------------------- 7.1 MOVA's Obligation to Indemnify. MOVA agrees to indemnify, defend, and ------------------------------ hold harmless PAR, its affiliates and subsidiaries and their respective employees against any and all claims, losses, damages and liabilities, including reasonable attorneys' fees and costs associated with a recall of the Product as defined in Paragraph 3.3 hereof, incurred by any of them arising out of any breach of any obligation hereunder or any representation or warranty by MOVA hereunder or any act or omission of MOVA in connection with its obligations hereunder. 7.2 PAR's Obligation to Indemnify. PAR agrees to indemnify, defend and ----------------------------- hold harmless MOVA, its affiliates and subsidiaries and their respective employees against any and all claims, losses, damages and liabilities, including reasonable attorneys' fees and costs associated with a recall of the Product as defined in Paragraph 3.3 hereof, incurred by any of them arising out of any breach of any obligation hereunder or any representation or warranty by PAR hereunder or any act or omission of PAR in connection with its obligations hereunder. 7.3 Obligations of the Party Seeking to be Indemnified. If PAR or any of --------------------------------------------------- its affiliates or subsidiaries or MOVA or any of its affiliates or subsidiaries (in each case an "Indemnified Party") receive any written claims which it believes is the subject of indemnity hereunder by MOVA or PAR, as the case may be (in each case an "Indemnifying Party"), the Indemnified Party shall, as soon as reasonably practicable after forming such belief, give notice thereof to the Indemnifying Party, including full particulars of such claim to the extent known to the Indemnified Party; provided, that the failure to give timely notice to the Indemnifying Party as contemplated hereby shall not release the Indemnifying Party from any liability to the Indemnified Party except to the extent that the Indemnifying Party is injured by such delay. The Indemnifying Party shall have the right, by prompt notice to the Indemnified Party, to assume the defense of such claim with counsel reasonably satisfactory to the Indemnified Party, and at the cost of the Indemnifying Party. If the Indemnifying Party does not assume the defense of such claim, or, having done so, does not diligently pursue such defense, the Indemnified Party may assume such defense, with counsel of its choice, but for the account of the Indemnifying Party. If the Indemnifying Party so assumes such defense, the Indemnified Party may participate therein through counsel of its choice, but the cost of such counsel shall be for the account of the Indemnified Party. The party not assuming the defense of any such claim shall render all reasonable assistance to the party assuming such defense, and all out- of-pocket costs of such assistance shall be for the account of the Indemnifying Party. No such claim shall be settled other than by the party defending the same, and then only with the consent of the other party, which shall not be unreasonably withheld; provided, that the Indemnified Party shall have no obligation to consent to any settlement of any such claim which imposes on the Indemnified Party and liability or obligation which cannot be assumed and performed in full by the Indemnifying Party. 7.4 Insurance. Each party and its Affiliates shall carry products --------- liability insurance in an amount at least equal to _______ with an insurance carrier reasonably acceptable to the other party. Such insurance shall cover the indemnifications set forth in Article 7 hereof. Each party shall name the other party as additional insured under such policy. A copy of such policy or policies shall be delivered to the other party within ten (10) days prior to the date any such Product is first commercially sold by such party, and shall provide among other things, that such insurance shall not be canceled or modified without giving the other party at least thirty (30) days prior written notice. ARTICLE 8 - CONFIDENTIALITY --------------------------- 8.1 Each party shall at all times maintain as confidential any know-how or other business information received from the other party under this Agreement during the term of this Agreement, shall only use such information in furtherance of this Agreement shall only disclose such information to those of its employees with a need to know in furtherance of this Agreement, provided, however, that nothing contained herein shall -------- ------- prevent a party from submitting information to a governmental instrumentality in connection with seeking approval to market the Product. Said obligation of confidentiality shall not apply, however, to any information which: (a) was known to the receiving party, as evidenced by its written records, prior to receipt from the other party; (b) is in the public domain at time of receipt or subsequently enters the public domain through no breach of this Agreement by the receiving party; (c) after the date of receipt from the disclosing party, is received without cover of secrecy from a third party with a bona fide right to disclose without violating any right of the disclosing party; or (d) is independently developed by the receiving party without the aid, application or use of any information for which it is obligated to maintain as confidential according to this Paragraph. The respective obligations of MOVA and PAR under this Paragraph shall be in effect during the term of this Agreement and for the three (3) years thereafter. ARTICLE 9 - RECORDS ------------------- 9.1 PAR shall keep appropriate and complete records in sufficient detail so that the payments due hereunder can be properly ascertained. PAR shall, on the request of MOVA, permit a certified public accountant, selected by MOVA and to whom PAR has no reasonable objection, to have access during normal business hours, to such books and records as may be necessary to determine, in respect of any accounting period ending not more than three (3) years prior to the date of such request, the correctness of any payment under this Agreement. Any such accountant shall not disclose any information to MOVA except that which specifically relates to the payment obligations hereunder. ARTICLE 10 - TERM, TERMINATION ------------------------------ 10.1 Term. This Agreement shall become effective as of the date first ---- written above and shall remain in full force and effect through the end of the Purchase Term. 10.2 Termination for Cause. This Agreement may be terminated at any time --------------------- by either party: (a) upon breach of this Agreement by the other party, on sixty (60) days' prior written notice to the breaching party, this notice to become effective at the end of such sixty (60) day period unless the breach is sooner cured by the breaching party; or (b) upon bankruptcy or insolvency of the other party or placing of the business of such party in receivership. 10.3 Termination Upon Merger. If PAR exercises its right under Paragraph ----------------------- 2.1 to purchase a Competitive Product from a Merger Partner MOVA may terminate this Agreement at any time after one (1) year from the time such notice is given by PAR by giving PAR ninety (90) days' prior written notice. 10.4 Waiver. Failure to terminate this Agreement following a breach or ------ failure to comply with terms and conditions of this Agreement shall not be deemed a waiver of the nonbreaching party's defenses, rights or causes of action arising from such or any future breach or noncompliance. ARTICLE 11 - TRADE NAMES AND TRADEMARKS --------------------------------------- 11.1 PAR and MOVA hereby acknowledge that they do not have, and shall not acquire by virtue of this Agreement, any rights to or in any goodwill, trademark, trade name, copyright, patent or other property of the other, nor in any of the other's trademarks or trade names appearing on the label or packaging materials of the Product. PAR and MOVA each agrees to do nothing by act or omission which would impair, the rights, ownership and title to the other, including its Affiliates, in the aforementioned. ARTICLE 12 - NOTICES -------------------- 12.1 Any notice required or permitted to be given or made under this Agreement by either of the parties to the other shall be in writing and delivered to the other party at its address indicated below or to such other address as the addressee shall have theretofore furnished in writing to the addressor by hand, courier or by registered or certified mail (postage prepaid) or by telefax, provided all telefax notices shall be promptly confirmed, in writing, by registered or certified mail (postage prepaid): If to MOVA: MOVA Pharmaceutical Corporation P. O. Box 8639 Caguas, Puerto Rico 00626 Telefax: (809) 258-6405 Attention: Joaquin B. Viso President With a Copy to: Ledesma, Palou & Miranda Hato Rey Tower, Suite 1103 268 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 Telefax: (809) 754-6344 Attention: Silvestre M. Miranda If to PAR: Par Pharmaceutical, Inc. One Ram Ridge Road Spring Valley, New York 10977 Telefax: (914) 425-7907 Attention: Ken Sawyer President All notices shall be effective as of the date received by the addressee. ARTICLE 13 - NON ASSIGNABILITY ------------------------------ 13.1 This Agreement and the rights of the parties hereunder shall not be assignable nor shall the obligations of either party be delegable, except as to affiliates of PAR or MOVA, without the prior written consent of the other party, which consent shall not be unreasonably withheld. In the event either party seeks and obtains the other party's consent to assign or delegate its rights or obligations to another party, or in the event of an assignment or delegation to an affiliate, the obligations of the assignee or transferee must be guaranteed in writing by the party who is the assignor or transferor. ARTICLE 14 - FORCE MAJEURE -------------------------- 14.1 Force Majeure. No failure or omission by the parties in the ------------- performance of any obligation according to this Agreement shall be deemed a breach of this Agreement or create any liability if the same shall arise from any cause or causes beyond the control of the party, including, but not limited to, strikes, riots, war, acts of God, invasion, fire, explosion, floods, delay of carrier, shortage or failure in the supply of materials, energy shortage and acts of government or governmental agencies or instrumentalities. 14.2 Obligations of the Parties in case of Force Majeure. In the event --------------------------------------------------- that due to force majeure either party hereto shall be delayed or hindered in or prevented from the performance of its duties or doing acts required under the terms of this Agreement, the performance of such act, except for the obligation to pay amounts due under this Agreement, shall be excused for the period of the delay. Notwithstanding the aforementioned, the party subject to force majeure shall take all reasonable steps to resolve the condition(s) forming the basis of force majeure. ARTICLE 15 - MISCELLANEOUS -------------------------- 15.1 Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the laws of the Commonwealth of Puerto Rico. 15.2 Independent Contractor. The parties shall be considered independent ---------------------- contractors, and neither the making of this Agreement nor the performance of any of the provisions hereof shall be construed to make either party an agent, employee or legal representative of the other, nor shall this Agreement be deemed to establish a joint venture or partnership. 15.3 Public Announcements. MOVA and PAR shall consult with each other -------------------- before issuing any press releases or otherwise making any public statements with respect to this Agreement and neither of them shall issue any press release or make any public statement prior to obtaining the other party's approval, which approval shall not be unreasonably withheld, except that no such approval shall be necessary to the extent disclosure may be required by law. 15.4 Severability. Should any section, or portion thereof, of this ------------ Agreement be held invalid by reason of any law, statute or regulation existing now or in the future in any jurisdiction by any court of competent authority or by a legally enforceable directive of any governmental body, then such section or portion thereof shall be validly reformed so as to approximate the intent of the parties as nearly as possible and, if unreformable, shall be deemed divisible and deleted with respect to such jurisdiction; this Agreement shall not otherwise be affected. 15.5 Taxes. Each party shall be responsible for its own taxes. ----- 15.6 Entire Agreement. The terms and provisions contained in this ---------------- Agreement, including the Exhibit hereto, constitute the entire agreement between the parties and shall supersede all previous communications, representations, agreements or understandings, either oral or written, between the parties with respect to the subject matter hereof. No agreement or understanding varying or extending this Agreement shall be binding upon either party hereto, unless set forth in a writing which specifically refers to this Agreement, signed by duly authorized officers or representatives of the respective parties, and the provisions hereof not specifically amended thereby shall remain in full force and effect. IN WITNESS WHEREOF, MOVA and PAR have executed this Agreement in duplicate as of the day and year first above written. MOVA PHARMACEUTICAL CORPORATION PAR PHARMACEUTICAL, INC. By:_________________________ By:_______________________ Joaquin B. Viso Ken Sawyer President President EX-10.32 6 LETTER AGREEMENT DTD 10/13/94 Exhibit 10.32 October 13, 1994 Mr. Robert I. Edinger 60 Old Crown Road Old Tappan, NJ 07675-6803 Dear Bob: I am pleased to provide you with this offer letter which supersedes the employment agreement between you and Pharmaceutical Resources, Inc. (PRI) dated May 19, 1993. All provisions of the May 19, 1993 employment agreement are null and void upon signing this new offer letter. Going forward, following are the basic terms of your employment with Par Pharmaceutical, Inc. and/or Pharmaceutical Resources, Inc. (individually or collectively sometimes referred to as the "Company") as Vice President - Chief Financial Officer: Department: Officers Reporting to: Mr. Kenneth I. Sawyer Effective Date: October 13, 1994 Initial Salary: $15,833 a month, $190,000 annually, to be reviewed on an annual basis and may be considered for an adjustment by Par to reflect performance and responsibilities. Bonus: You will be eligible for consideration for an annual bonus, consistent with a company program, based on both your performance and the performance of the Company. Benefits: Group Insurance: Health, life and long-term disability insurance programs are provided to employees and their dependents by the Company, upon payment of the applicable premium amount. Vacation: You will be entitled to up to four weeks of paid vacation annually. Robert I. Edinger Page 2 Automobile: Par will provide you with the use of an automobile, including reimbursement of all related maintenance, fuel, repairs, insurance and other costs. Other: You will be eligible to participate in the Company's 401(K) Plan, company sponsored retirement plan, and our Employee Stock Purchase Plan upon meeting the Company's specified eligibility requirements for each plan. Stock: In addition to the 40,000 stock options you were granted on May 19, 1993, I will recommend to the Board of Directors that you be granted options to purchase 40,000 additional shares of PRI common stock at an exercise price per share equal to the closing price of PRI common stock on the date of the grant by the Compensation Committee based on standard terms and conditions of the Board of Directors. Termination: Your employment by the Company is subject to the following provisions: If you terminate your employment for "good reason" or are voluntarily terminated by the Company, except for cause, the Company or as the case may be, will provide the other party with 90 days notification prior to termination and the Company will provide you with severance compensation amounting to twelve (12) months continuation of your prevailing base salary, payable in 12 equal monthly installments, from the date of your termination. Except for "good reason" as defined in this paragraph, severance compensation shall not be payable to you if your employment is terminated by the Company for cause, or voluntarily by you, or if you accept employment elsewhere. "Good reason" shall mean a termination by you of your employment (a) based on the assignment to you of any duties materially inconsistent with your position, duties, responsibilities and status with the Company or based on a change in your reporting responsibilities, title or offices as in effect or any removal (other than for cause) of you from or any failure to re-elect you to any of such positions or a reduction in your annual base compensation, except in connection with the termination of your employment for cause, and (b) the failure of the Company to cure the reasons, if curable, causing the termination within twenty (20) days of receiving a written notice from you specifying such reasons. Robert I. Edinger Page 3 In the event of your death or disability, you are entitled only to those benefits described under "Benefits". If you are eligible for severance compensation, as of your termination date, you will be entitled to continue to participate, to the extent permissible, in the Company's 401K Plan, the Company sponsored retirement plan, and Employee Stock Purchase Plan until the expiration of your severance compensation or until you commence employment elsewhere, whichever comes first. Also, as of your termination date, you will be entitled to the extent permissible to continue to participate in the Company's health, dental, life, and disability plans until the expiration of your severance compensation or until covered by a reasonably comparable program, whichever comes first. If you are eligible for severance compensation as defined above, all your unvested stock options, which have been awarded to you, shall become immediately vested on the Termination Date and the date by which all such options must be exercised shall be two years from the Termination Date. If during the first twelve months of the Employment Term you are terminated voluntarily by Par without cause or because of a change of control, you will be eligible for a pro rata share of an annual bonus, if any, at the discretion of your supervisor and dependent upon your performance and the performance of the Company. These terms represent the entirety of any severance, employment or any other agreement between you and "the Company". As a condition of your employment with the Company, you will be required to execute the Company's standard Trade Secret, Non-Disclosure and Restrictive Covenant Agreement attached. If you accept this offer of employment, please sign below and return the signed copy to me as soon as convenient. Once signed by you, this letter will constitute the complete agreement between you and the Company regarding employment matters or oral agreements or understandings on these matters. Robert I. Edinger Page 4 We are extremely excited about the opportunity we have to build Par into a leading generic pharmaceutical company. One of the keys to accomplishing this is talented people. We are looking forward to your continuing contribution to our success. Sincerely, Kenneth I. Sawyer President Chief Executive Officer Agreed to and Accepted on this 13th day of October, 1994 ___________________________ Robert I. Edinger EX-11 7 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 COMPUTATION OF PER SHARE DATA (Unaudited)
Fiscal Year Ended In ------------------------------- 1994 1993 1992 ---- ---- ---- Income from continuing operations $ 4,233,000 $ 111,000 $ 4,099,000 Income from discontinued operations 466,000 - 1,696,000 Extraordinary item - 300,000 2,150,000 Cumulative change in accounting principle 14,128,000 - - ----------- ----------- ----------- Net Income $18,827,000 $ 411,000 $ 7,945,000 =========== =========== =========== Primary: Weighted average number of common shares outstanding 14,320,969 13,239,116 12,264,563 Shares issuable upon conversion of Series A Convertible Preferred Stock 1,058,400 1,479,070 2,000,000 Shares issuable upon exercise of dilutive stock options and warrants - net of shares assumed to be repurchased (at the average market price for the period) from exercise proceeds 1,115,529 1,096,092 561,198 ----------- ----------- ----------- Shares used for computation 16,494,898 15,814,278 14,825,761 =========== =========== =========== Income per share of common stock (primary): Continuing operations $ .26 $ .01 $ .28 Discontinued operations .03 - .11 Extraordinary item - .02 .15 Change in accounting principle .85 - - ----------- ----------- ----------- Net income $ 1.14 $ .03 $ .54 =========== =========== =========== Assuming full dilution: Weighted average number of common shares outstanding 14,320,969 13,239,116 12,264,563 Shares issuable upon conversion of Series A Convertible Preferred Stock 1,058,400 1,479,070 2,000,000 Shares issuable upon exercise of dilutive stock options and warrants - net of shares assumed to be repurchased (at the higher of period-end market price or the average market price for the period) from exercise proceeds 1,115,529 1,540,000 689,196 ----------- ----------- ----------- Shares used for computation 16,494,898 16,258,186 14,953,759 =========== =========== =========== Income per share of common stock (assuming full dilution): (a) Continuing operations $ .26 $ .01 $ .27 Discontinued operations .03 - .11 Extraordinary item - .02 .15 Change in accounting principle .85 - - ----------- ----------- ----------- Net Income $ 1.14 $ .03 $ .53 =========== =========== ===========
(a) Not presented because dilution is less than 3% from primary amounts. EX-21 8 SUBSIDIARIES Exhibit 21 Subsidiaries of Registrant
State or Other Jurisdiction Name Under which Name of Incorporation Business is conducted ---- ------------------------------------------- Pharmaceutical Resources, Inc. Par Pharmaceutical, Inc. New Jersey Par Pharmaceutical, Inc. PRX Distributors, Ltd. Delaware Inactive ParCare, Ltd. New York Newly formed Par Pharmaceutical, Inc. Quad Pharmaceuticals, Inc. Indiana Inactive Par Printing Enterprises, Inc. New Jersey Inactive Generic Innovations, Inc. New Jersey Inactive Advanced Biopharm, Inc. Delaware Inactive PRX Distributors, Ltd. D609 Corporation Delaware Newly formed
EX-23 9 CONSENT/EISNER & CO. Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements on Form S-3 (Registration No. 33-35242 and 33-74052) and Form S-8 (Registration Nos. 2-99035, 33-15640, 33-51914, 33-45785, 33-29992, 33-79954 and 33-79956) of our reports dated November 30, 1994 on consolidated financial statements and schedules included in the annual report on Form 10-K of Pharmaceutical Resources, Inc. as at and for the year ended October 1, 1994. Richard A. Eisner & Company, LLP New York, New York November 30, 1994 -----END PRIVACY-ENHANCED MESSAGE-----