-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BDnWvBE9/pQWHebZWSI3mwCf5azVLOBC8aVufL5qlNfYvGL6SqN0khPEDZ/xQ+SQ lCH65xXVFU2DNGIdINzUsw== 0000950130-97-005698.txt : 19971224 0000950130-97-005698.hdr.sgml : 19971224 ACCESSION NUMBER: 0000950130-97-005698 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971223 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACEUTICAL RESOURCES INC CENTRAL INDEX KEY: 0000878088 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 223122182 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10827 FILM NUMBER: 97742983 BUSINESS ADDRESS: STREET 1: ONE RAM RIDGE RD CITY: SPRING VALLEY STATE: NY ZIP: 10977 BUSINESS PHONE: 9144257100 MAIL ADDRESS: STREET 1: ONE RAM RIDGE RD CITY: SPRING VALLEY STATE: NY ZIP: 10977 10-K 1 FORM 10-K FOR THE PERIOD ENDED SEPTEMBER 30, 1997 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 September 30, 1997 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. ---------------------------- -------------------------------- 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. _____ $28,101,719 AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF DECEMBER 17, 1997 (ASSUMING SOLELY FOR PURPOSES OF THIS CALCULATION THAT ALL DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ARE "AFFILIATES"). 18,897,629 Number of shares of common stock outstanding as of December 17, 1997 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE FOLLOWING DOCUMENTS HAVE BEEN INCORPORATED BY REFERENCE INTO THIS ANNUAL REPORT ON FORM 10-K: NONE This is page 1 of 165 pages. The exhibit index is on page 29. PART I ITEM 1. BUSINESS. - ------ -------- GENERAL Pharmaceutical Resources, Inc. ("PRI" or the "Company") 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. The Company's current product line consists of prescription and, to a much lesser extent, over-the-counter drugs. Approximately 100 products representing various dosage strengths of 37 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) names 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. The Company markets its products primarily to wholesalers, drug distributors, repackagers and retail drug store chains principally through its own sales staff. In addition, the Company promotes the sales efforts of wholesalers and drug distributors that sell the Company's products to clinics, government agencies and other managed health care organizations (see "--Marketing and Customers"). 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 "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. Significant Developments: Financial Condition. The Company, in the fiscal year ended September 30, 1997, continued to experience declines in sales and gross margins which resulted in net losses of $8,901,000. Net sales in fiscal year 1997 declined by 8% and gross margins declined by 64% from the prior fiscal year. The decreases in sales and gross margins continue to be attributable to lower pricing of the Company's products as a result of intense competition and a less profitable product mix. The trend in decreasing sales and gross margins was partially offset by the implementation in the fourth quarter of fiscal year 1997 of a new manufacturing and supply agreement with BASF Corporation (see "--Product Line Information", "--Competition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations"). In response to its operating results and industry trends, the Company implemented measures in the fourth quarter of fiscal year 1996, which have continued in fiscal year 1997, to reduce costs and increase operating efficiencies. Such measures resulted in a decrease in selling, general and administrative costs of 27% during fiscal year 1997 and included reductions of work force, changes in various senior management, a reorganization of certain existing personnel and reductions in certain expenses. In fiscal year 1997, the Company further reduced its work force primarily as a result of the Company's new manufacturing and supply agreement with BASF Corporation described below. The Company is continuing its search for strategic alliances which would enable the Company, among other things, to expand its product line, increase research and development activities and obtain additional capital. The Company, in fiscal year 1997, increased its spending on research and development by 13%. In August 1997, the Company purchased the 51% interest in its research and development joint venture, now named Israel Pharmaceutical Resources L.P. ("IPR"), it did not previously own, giving the Company full control over the 2 research and development operation located in Israel. IPR was formed in May 1995 to research and develop generic pharmaceutical products (see "--Product Line Information" and "--Research and Development"). The continuing losses incurred by the Company have adversely affected and will continue to adversely affect the Company's liquidity and, accordingly, its ability to fund its operations, including research and development as well as ventures relating to the development or distribution of new products. The Company, in fiscal year 1997, entered into a new three-year loan arrangement providing for a revolving line of credit up to the lesser of $20,000,000 or the borrowing base as provided in the loan agreement. The loan is secured by substantially all of the assets of the Company other than real property and the Company has entered into a new cash management system requiring the deposit of all receipts into a lockbox under the lender's control. The new loan arrangement replaced the Company's previous revolving and term loan facility (see "--Research and Development" and "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Manufacturing Agreement. On April 30, 1997, Par and BASF Corporation ("BASF"), a manufacturer of pharmaceutical products, entered into a Manufacturing and Supply Agreement (the "Supply Agreement"). Under the Supply Agreement, Par agreed to purchase certain minimum quantities of certain products manufactured by BASF and to discontinue manufacturing those products. BASF agreed to discontinue direct sale of those products. As a result of the Supply Agreement, the Company has reduced its operating expenses and increased the gross margin with respect to the products covered by the Supply Agreement (see "--Product Line Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations"). PRODUCT LINE INFORMATION The Company operates primarily in one industry segment, namely, the manufacture and distribution of generic pharmaceuticals. Products are marketed principally in solid oral dosage form consisting of tablets, caplets and two- piece hard-shell capsules. The Company also distributes one product in the semi-solid form of a cream (see "--Research and Development"). Par markets approximately 77 products, representing various dosage strengths of 26 drugs manufactured by the Company and approximately 23 products, representing various dosage strengths of 11 drugs, 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" and "Notes to Financial Statements--Distribution Agreements"). Par holds abbreviated new drug applications ("ANDAs") for the drugs which it manufactures. Below is a list of drugs manufactured and/or distributed by Par. 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 3 Cardiovascular: Atenolol Tenormin Captopril Capoten Clonidine and Chlorthalidone Combipres Hydralazine Hydrochloride Apresoline Hydra-Zide Apresazide Isosorbide Dinitrate Isordil Methyldopa and Hydrochlorothiazide Aldoril Metoprolol Tartrate Lopressor Minoxidil Loniten Pindolol Visken Triamterene and Hydrochlorothiazide Maxzide Anti-Inflammatory: Ibuprofen Advil, Nuprin, Motrin Piroxicam Feldene Anti-Infective: Acyclovir Zovirax Metronidazole Flagyl Nystatin Mycostatin Anti-Cancer: Megestrol Acetate Megace Other: Allopurinol Zyloprim Dexamethasone Decadron Glipizide Glucotrol Metaproterenol Sulfate Alupent Silver Sulfadiazine (SSD) Silvadene The Company seeks to introduce new products not only through internal research and development, but also through joint venture, distribution and other agreements with pharmaceutical companies located throughout the world. As part of that strategy, it has pursued and continues to pursue arrangements or affiliations which it believes, in general, will provide access to raw materials at favorable prices, share development costs, generate profits from jointly developed products and expand distribution channels for new and existing products (see "Notes to Financial Statements--Distribution Agreements"). In April 1997, Par entered into the Supply Agreement with BASF. Under the Supply Agreement, Par agreed to purchase certain minimum quantities of certain products manufactured by BASF at one of its facilities, and Par agreed to phase out its manufacturing of those products. BASF agreed to discontinue its direct sale of those products. The Supply Agreement has an initial term of three years (subject to earlier termination upon the occurrence of certain events as provided therein) and thereafter renews automatically for successive two-year periods to December 31, 2005, if Par has met certain purchase thresholds. In the event that Par's purchases do not equal or exceed the thresholds, BASF may elect to terminate the Supply Agreement effective one year later. If BASF elected to terminate the agreement, Par could either seek another contract manufacturer or reestablish its manufacturing capacity for certain of those products. The Company began selling drugs manufactured by BASF and BASF had transferred to Par the marketing and sales of certain products covered by the Supply Agreement in June 1997. The Supply Agreement became fully implemented in August 1997. In May 1995, the Company formed a joint venture located in Israel with Clal Pharmaceutical Industries Ltd. ("Clal") to research and develop generic pharmaceutical products. Clal beneficially owns approximately 12% of the Company's Common Stock. In August 1997, the Company acquired Clal's 51% interest in the joint venture in which the Company previously owned 49%. The joint venture was renamed Israel Pharmaceutical Resources, L.P. Eight compounds currently are under active development by IPR. (see "--Research and Development", 4 "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition" and "Certain Relationships and Related Transactions--Clal Agreements"). In July 1997, Par amended its 1994 distribution agreement with Sano Corporation ("Sano"). Par has retained the right to exclusively distribute three of Sano's generic transdermal products in the United States. Sano develops transdermal delivery systems utilizing a patch that incorporates the appropriate drug dosage into an adhesive that attaches the patch to the skin. Transdermal delivery offers significant benefits over oral delivery, including increased patient compliance, reduced side effects, reduced interaction with other drugs in use by a patient and a more consistent and appropriate drug level in the bloodstream, all of which generally result in lower overall patient care costs. Sano is developing two generic nitroglycerin patches and one generic nicotine patch which are covered by the agreement. Par has paid Sano a portion of the development expense for such products. To date, Sano received U.S. Food and Drug Administration ("FDA") approval for its nicotine patch in October 1997 and awaits approval on two ANDAs for its nitroglycerin patches. The Company intends to begin marketing the nicotine patch in fiscal year 1998. Under the agreement, Par will purchase manufactured products from Sano, when approved by the FDA, at cost and share in the gross profits from the sales. However, there can be no assurance that any other products under Sano's ANDAs will obtain FDA approval or that any Sano products, if brought to market, will generate significant revenues. Under the July 1997 amendment to the distribution agreement, Par ceded its distribution rights to three products for which submissions have not been filed yet with the FDA. PRI also released distribution rights outside of the United States for the retained products (see "--Research and Development", "--Competition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition"). 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 in the near future, (ii) researching and developing new product formulations based upon such drugs, (iii) obtaining approval from the FDA for such new product formulations, and (iv) introducing technology to improve production efficiency and enhance product quality. The 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 $100,000 to $500,000 per study. During the 1997 fiscal year, the Company contracted with outside laboratories to conduct biostudies for three potential new products and will continue to do so in the future. Biostudies must be conducted and documented in conformity with FDA standards (see "--Government Regulation"). The research and development of oral solid products, including preformulation research, process and formulation development, required studies and FDA approval, has historically taken approximately two to three years. Accordingly, Par typically selects for development products that it intends to market several years in the future. However, the length of time necessary to bring a product to market can vary significantly and can depend on, among other things, availability of funding or problems relating to formulation, safety or efficacy (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Liquidity and Capital Resources"). Currently, the Company has ANDAs pending with the FDA for four potential products and Sano has ANDAs pending with the FDA for two potential products which the Company has exclusive rights to distribute in the United States. No assurance can be given that the Company or Sano will successfully complete the development of products currently under development or proposed for development, that they will obtain regulatory approval for any such product or that any approved product will be produced in commercial quantities. Improvement in the Company's financial condition depends upon the acquisition and introduction of new products at profitable prices to replace declining revenues from older products. The failure of the Company to introduce profitable new products in a timely manner could have a material adverse effect on the Company's operating results and financial condition (see "--Competition"). 5 For its 1997, 1996 and 1995 fiscal years, the Company incurred research and development expenses of $5,843,000, $5,160,000 and $5,487,000, respectively, including the amounts expended by the Company for IPR and under the distribution agreement with Sano. The Company plans that its expenditures will remain at approximately the same levels over the next fiscal year (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Operating Results--Research and Development" and "--Financial Condition-- Liquidity and Capital Resources"). IPR has identified approximately 35 products for research, eight of which are currently under active development by IPR. The Company expects that approximately six of such products will be the subject of a biostudy in fiscal year 1998. The Company has not filed any ANDAs with respect to such potential products. The scientific process of developing new products is complex and time consuming, as is obtaining FDA approval, and the development of products by IPR may be curtailed in the early or later stages of development due to the introduction of competing generic products or for other reasons. At the present time, there is uncertainty under Israeli law as to whether some research functions can be conducted prior to patent expiration in Israel. The outcome of this could affect the research being done by IPR. Legislation is currently pending in Israel which would expressly permit such research. Depending on the outcome of the legislation, among other things, the Company may relocate IPR's operations to the United States in the future. Since its formation in May 1995, IPR has received an aggregate of approximately $7,000,000 in funding from the Company and Clal. The Company is obligated to invest in IPR not less than $1,500,000 each year until the Company repays the $1,500,000 promissory note delivered as part of the purchase price for IPR (see "--Product Line Information" and "Management's Discussion and Analysis of Financial Condition and Results of operations--Financial Condition-- Liquidity and Capital Resources"). Following the acquisition of all of the interests in IPR, the Company's domestic research and development program was reorganized and integrated with that of IPR. Under the terms of the distribution agreement with Sano, the Company advanced to date $7,629,000 to Sano for the development of products, of which $2,258,000 was advanced in fiscal year 1997. In return for relinquishing the rights described above, the Company received in July 1997 $1,950,000 in cash and an interest-bearing promissory note for $1,950,000 due in September 1998. The Company has also retained the rights to recover certain of its prior payments to Sano, including $1,500,000 from the gross profits earned on sales of two of the retained products. Sano repaid $1,500,000 of the advances on the retained products in November 1995 which was treated as a credit to research and development expenses in fiscal year 1996 (see "--Product Line Information", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Liquidity and Capital Resources" and "Notes to Financial Statements--Investments"). MARKETING AND CUSTOMERS The Company markets its products under both Par and private labels principally to wholesalers, distributors, repackagers, retail drug store chains and, to a lesser extent, drug manufacturers and government agencies primarily through its own sales staff. The Company sells to customers in the managed health care market. Such customers include health maintenance organizations, nursing homes, hospitals, clinics, pharmacy benefit management companies and mail order customers. The Company has experienced a significant change in its distribution channels in the last several years. In general, sales of generic drugs to distributors have been decreasing, while sales to wholesalers and repackagers have been increasing. The Company believes that competition between distributors and consolidation among wholesalers and retailers have resulted in additional pressure to decrease prices. Additionally, aggressive pricing strategies by distributors which are attempting to maintain or increase market share have adversely affected the Company's ability to market its products. Consequently, price reductions have resulted in lower gross margins for the Company (see "-- Competition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations"). The Company has approximately 200 customers. During fiscal year 1997, sales to the Company's three largest customers, Leiner Health Products Inc., McKesson Drug Co. and Bergen Brunswig Corporation accounted for 6 approximately 16%, 11% and 10%, respectively, of net sales (see "Notes to Financial Statements--Accounts Receivable--Major Customers"). None of these customers has written agreements with the Company. ORDER BACKLOG The dollar amount of open orders, as of September 30, 1997, believed by management to be firm, was approximately $3,300,000, as compared to approximately $4,200,000 at September 30, 1996. Although these orders are subject to cancellation without penalty, management expects to fill substantially all of them in the near future. COMPETITION The generic pharmaceutical industry is highly and increasingly competitive. The Company has identified at least ten principal competitors, and experiences varying degrees of competition from numerous other companies in the health care industry. The Company'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 of the Company's competitors have greater financial and other resources than the Company and are able to expend more for product development and marketing. Many major branded pharmaceutical companies have directly launched, or have formed alliances to market, their patented drugs prior to patent expiration as generic drugs. Because branded pharmaceutical companies do not have to wait until the expiration of patent protection before manufacturing such generic drugs, they have a distinct timing advantage over strictly generic drug manufacturers. This competitive effort has had a negative impact on the Company's ability to sell certain generic drugs 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. As other manufacturers introduce generic products in competition with the Company's existing products, market share and prices with respect to such existing products typically decline. Similarly, the Company's potential for profits is significantly reduced, if not eliminated, as competitors introduce products prior to the Company. Accordingly, the level of revenues and gross profit generated by the Company's current and prospective products depends, in part, on the number and timing of introductions of competing products and the Company's timely development and introduction of new products (see "--Research and Development"). During fiscal year 1997, four of the Company's products accounted for approximately 59% of its net sales compared to 58% and 63%, respectively, of net sales in fiscal years 1996 and 1995. One of such products contributed significantly to the sales and gross margin in all three periods. A competitor of the Company received FDA approval for this product in fiscal year 1996 where, prior to that time, the Company had been the sole generic manufacturer. During the second half of calendar 1995, two generic pharmaceutical manufacturers received FDA approval for a product in which the Company had also been the sole generic manufacturer. These products, along with one other product, had historically accounted for a significant percentage of the Company's net sales and gross margin. Due to the increased competition with respect to these products, the Company's sales and gross margins have been materially and adversely affected (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--General", "--Sales", "--Gross Margins" and "Notes to Financial Statements--Distribution Agreements"). The principal competitive factors in the generic pharmaceutical market are (i) price, (ii) the ability to introduce generic versions of brand name drugs promptly after their patents expire, (iii) reputation as a manufacturer with integrity and quality products, (iv) level of service (including maintaining sufficient inventory levels for timely deliveries), (v) product appearance, and (vi) breadth of product line. 7 RAW MATERIALS The raw materials essential to the Company's manufacturing business are purchased primarily from United States distributors of bulk pharmaceutical chemicals manufactured by foreign companies. To date, the Company has experienced no significant difficulty in obtaining raw materials and expects that raw materials will generally continue to be available in the future. However, since the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. 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. Generally the Company attempts to minimize the effects of any such situation by specifying, where economical and feasible, two or more suppliers for its drug approvals. EMPLOYEES As of September 30, 1997, the Company had approximately 335 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, record keeping, 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 things, demonstrate that its manufacturing facilities comply with the FDA's current Good Manufacturing Practices ("cGMP") regulations. The FDA may inspect the manufacturer's facilities to assure such compliance prior to approval or at any other reasonable time. CGMP 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 or otherwise useable information in the literature on the majority of drugs. 3. Abbreviated New Drug Applications: The Waxman-Hatch Act established a statutory procedure for submission and FDA review and approval of ANDAs for generic versions of drugs previously approved 8 by the FDA (such previously approved drugs are hereinafter referred to as "listed drugs"). As the safety and efficacy have already been established by the innovator company, the FDA waives the right for complete clinical trials. However, a generic manufacturer is typically required to conduct bioavailability/bioequivalence studies of its test product against the listed drug. The bioavailability/bioequivalence studies assess the rate and extent of absorption and concentration levels of a drug in the blood stream required to produce a therapeutic effect. Bioequivalence is established when the rate of absorption and concentration levels of a generic product are substantially equivalent to the listed drug. For some drugs (e.g., topical antifungals), other means of demonstrating bioequivalence may be required by the FDA, especially where rate and/or extent of absorption are difficult or impossible to measure. In addition to the bioequivalence data, an ANDA must contain chemistry, manufacturing, labeling, and stability data. The Waxman-Hatch Act also established certain statutory protections for listed drugs. Under the Waxman-Hatch Act, approval of an ANDA for a generic drug may not be made effective for interstate marketing until all relevant patents for the listed drug have expired or been determined to be invalid or not infringed by the generic drug. Prior to enactment of the 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. During 1995, patent terms for a number of listed drugs were extended when the Uruguay Round Agreements Act (the "URAA") went into effect to implement the latest General Agreement on Tariffs and Trade (the "GATT") to which the United States became a treaty signatory in 1994. Under GATT, the term of patents was established as 20 years from the date of patent application. In the United States, the patent terms historically have been calculated at 17 years from the date of patent grant. The URAA provided that the term of issued patents be either the existing 17 years from the date of patent grant or 20 years from the date of application, whichever was longer. The effect generally was to add patent life to already issued patents, thus delaying FDA approvals of applications for generic products. In addition to the Federal government, states have laws regulating the manufacture and distribution of pharmaceuticals, as well as regulations dealing with the substitution of generic 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. 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. ITEM 2. PROPERTIES. - ------ ---------- The Company owns its executive offices and a substantial portion of its research and production facilities which are housed in an approximately 92,000 square foot facility built to Par's specifications. This building, occupied by Par since fiscal year 1986, also includes research and quality control laboratories, as well as packaging and warehouse facilities. The building is located in Chestnut Ridge, New York, on a parcel of land of approximately 24 acres, of which approximately 15 acres are available for future expansion. 9 The Company owns an approximately 36,000 square foot building on two acres in Chestnut Ridge, New York, across the street from its executive offices. This property was acquired in fiscal year 1994 and is used for offices. The purchase of the land and building was financed by a mortgage loan. Par owns a third facility consisting of an approximately 33,000 square foot building located on six acres in Congers, New York, which is used for tablet coating operations and product manufacturing. Par occupies approximately 47,000 square feet of a building in Chestnut Ridge, New York for office, warehouse, and research and development space under a lease which expires December 2004. The Company has the option to extend the lease for two additional five-year periods. This lease replaces a lease for 77,000 square feet which expires January 1, 1998. Par also 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. IPR leases approximately 13,000 square feet in Even Yehuda, Israel for product research and development. The lease expires May 1998 and has two two- year renewal options and one thirty-five month renewal option. The Company guarantees the lease. The Company believes that its owned and leased properties are sufficient in size, scope and nature to meet its anticipated needs for the reasonably foreseeable future (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition" and "Notes to Financial Statements--Long Term Debt" and "--Commitments, Contingencies and Other Matters--Leases"). ITEM 3. LEGAL PROCEEDINGS. - ------ ----------------- The Company is involved in certain litigation matters, including certain product liability actions and actions by two former employees for, among other things, breach of contract. Such actions seek damages from the Company, including compensatory and punitive damages. The Company intends to defend these actions vigorously. The Company believes that these actions are incidental to the conduct of its business, and that the ultimate resolution thereof will not have a material adverse effect on its financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- --------------------------------------------------- An Annual Meeting of Shareholders of the Company was held on October 28, 1997. The following matter was voted on and approved by the holders of shares of the Company's Common Stock: The proposal to elect two members of the Company's Board of Directors, which consists of six members, to serve for a three-year term and until their successors are duly elected and qualified. There were 13,568,992 and 13,556,478 shares of Common Stock cast in favor of electing Mark Auerbach and H. Spencer Matthews, respectively, which represented a majority of the shares of the Company's Common Stock cast for such proposal, and 3,089,400 and 3,101,914, shares were withheld, respectively. There were no broker non- votes. The terms of office of the other directors, Melvin Van Woert, Andrew Maguire, Kenneth I. Sawyer and Robin O. Motz, continued after the meeting. 10 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 closing 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 --------------------------- QUARTER ENDED 1997 1996 ------------- ------------- ------------ HIGH LOW HIGH LOW ------ ----- ----- ----- December 31 $6.00 $3.38 $9.13 $7.25 March 31 4.38 2.88 8.00 6.75 June 30 3.75 2.13 8.50 5.00 September 30 2.88 1.94 5.50 3.38 (b) Holders. As of December 19, 1997, there were approximately 3,500 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 two 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"). The Company's current loan agreement prohibits the declaration or payment of any dividend, or the making of any distribution to any of the Company's stockholders. (d) Recent Stock Price. On December 17, 1997, the closing price of the Common Stock on the NYSE was $1.50 per share. (e) Recent Sales of Unregistered Securities. Pursuant to the Third Amendment to Stock Purchase Agreement, dated July 28, 1997, between the Company and Clal, the Company sold 186,000 shares of its Common Stock (the "New Shares") to Clal. The New Shares were issued in consideration of the surrender by Clal for cancellation of warrants to purchase an aggregate of 2,005,107 shares of Common Stock, nominal cash consideration, and the amendment of certain provisions of the Stock Purchase Agreement, dated March 25, 1995, between the Company and Clal. The New Shares were issued pursuant to an exemption provided by Section 4(2) and/or Section 4(6) of the Securities Act of 1933 (see "Certain Relationships and Related Transactions--Clal Agreements"). 11 ITEM 6. SELECTED FINANCIAL DATA - ------ -----------------------
FISCAL YEAR ENDED IN -------------------- 1997 1996 1995 1994 1993 --------- -------- ------- ------- -------- INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales $ 53,172 $ 57,959 $66,503 $69,169 $ 74,535 Cost of goods sold 49,740 48,299 45,514 45,774 48,387 -------- -------- ------- ------- -------- Gross margin 3,432 9,660 20,989 23,395 26,148 Operating expenses: Research and development 5,843 5,160 5,487 3,874 1,959 Selling, general and administrative 12,461 17,168 16,192 13,463 12,673 Restructuring charge - 549 - - - -------- -------- ------- ------- -------- Total operating expenses 18,304 22,877 21,679 17,337 14,632 -------- -------- ------- ------- -------- Operating income (loss) (14,872) (13,217) (690) 6,058 11,516 Settlements - - 2,029 - (10,500) Other income 6,968 2,557 608 425 347 Interest expense (587) (432) (499) (465) (602) -------- -------- ------- ------- -------- Income (loss) from continuing operations before provision for income taxes (8,491) (11,092) 1,448 6,018 761 Provision for income taxes 410 - 836 1,785 650 -------- -------- ------- ------- -------- Income (loss) from continuing operations (8,901) (11,092) 612 4,233 111 Income from discontinued operations - 2,800 - 466 - -------- -------- ------- ------- -------- Income (loss) before extraordinary item (8,901) (8,292) 612 4,699 111 Extraordinary item - tax benefit of utilization of net operating loss carryforward - - - - 300 -------- -------- ------- ------- -------- Income (loss) before change in accounting principle (8,901) (8,292) 612 4,699 411 Cumulative effect of change in accounting principle - - - 14,128 - -------- -------- ------- ------- -------- Net income (loss) $ (8,901) $ (8,292) $ 612 $18,827 $ 411 ======== ======== ======= ======= ======== Income (loss) per share of common stock: Continuing operations $(.48) $(.60) $.04 $.26 $.01 Discontinued operations - .15 - .03 - Extraordinary item - - - - .02 Change in accounting principle - - - .85 - -------- -------- ------- ------- -------- Net income (loss) $(.48) $(.45) $.04 $1.14 $.03 ======== ======== ======= ======= ======== Weighted average number of common and common equivalent shares outstanding 18,681 18,467 17,143 16,495 15,814 ======== ======== ======= ======= ======== BALANCE SHEET DATA Working capital $ 15,959 $ 20,716 $34,907 $19,996 $ 13,141 Property, plant and equipment (net) 27,832 26,068 24,371 23,004 20,037 Total assets 72,697 84,946 90,917 69,202 57,239 Long-term debt, less current portion 2,651 2,971 4,259 5,490 5,820 Shareholders' equity 57,268 70,624 71,954 49,276 24,081
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------ ----------------------------------------------------------------------- OF OPERATIONS. ------------- CERTAIN STATEMENTS IN THIS FORM 10-K CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES OF CURRENT PRODUCTS AS WELL AS THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN THIS FORM 10-K INCLUDE, AMONG OTHERS, (I) INCREASED COMPETITION FROM NEW AND EXISTING COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS, (II) PRICING PRESSURES RESULTING FROM THE CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (III) THE AMOUNT OF FUNDS CONTINUING TO BE AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND DEVELOPMENT JOINT VENTURES, (IV) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR DELAYS IN OBTAINING REGULATORY APPROVALS, (V) THE ABILITY OF THE COMPANY TO RETAIN AND ATTRACT MANAGEMENT PERSONNEL IN KEY OPERATIONAL AREAS AND (VI) CONTINUED AVAILABILITY OF BORROWINGS UNDER THE COMPANY'S CREDIT LINE WITHOUT SIGNIFICANT REDUCTION. RESULTS OF OPERATIONS GENERAL The Company incurred an operating loss of $14,872,000 for the fiscal year ended September 30, 1997 compared to $13,217,000 for the fiscal year ended September 30, 1996 and $690,000 for the fiscal year ended September 30, 1995. The losses were principally due to sales and gross margin declines, as described below, partially offset by decreases in operating expenses in fiscal year 1997 and the latter part of fiscal year 1996. The Company's gross margin decline to $3,432,000 for the current fiscal year from $9,660,000 and $20,989,000 in fiscal years 1996 and 1995, respectively, was attributable to the continuing trend of lower pricing on certain manufactured products. The trend was partially offset in the last two months of fiscal year 1997 by increased sales and margins generated from certain distributed products under the Supply Agreement with BASF described above. If sales declines of certain manufactured products are not offset by increased sales of new distributed or manufactured products, lower net sales and gross margins will continue and, accordingly, result in further losses. As a result of the recent losses, the Company is continuing to search for strategic alternatives to strengthen its financial condition and product line while working on process improvements to reduce its current manufacturing costs. For the three-month period ended September 30, 1997, the Company's operating loss of $2,142,000 decreased 67% from $6,450,000 for the three-month period ended September 30, 1996. The improvement was primarily related to increased sales and margins generated from certain products as a result of the Supply Agreement with BASF and cost reductions and process improvements implemented throughout the year. The continued price and profit margin erosion on certain of the Company's products reflects a continuing trend in the generic drug industry in the United States. The factors contributing to the intense competition and affecting both the introduction of new products and the pricing and profit margins of the Company, include, among other things, (i) introduction of other generic drug manufacturer's products in direct competition with the Company's significant products, (ii) consolidation among distribution outlets, (iii) increased ability of generic competitors to enter the market after patent expiration, diminishing the amount and duration of significant profits, (iv) willingness of generic drug customers, including wholesale and retail customers, to switch among pharmaceutical manufacturers, and (v) competition from brand name drug manufacturers selling generic versions of their drugs. In response to these conditions, the Company has continued to reduce operating costs and entered into several significant agreements, as described elsewhere in this Form 10-K, which should enable the Company to better compete in the current environment (see "Business-Marketing and Customers" and "Competition"). In the fourth quarter of fiscal year 1996, the Company began implementing cost reduction measures which continued throughout fiscal year 1997. Such measures have provided for a reduction in the work force, changes in senior management, a reorganization of certain existing personnel, reductions in certain operating expenses and the implementation of several process improvements (see "Notes to Financial Statements-Commitments, 13 Contingencies and Other Matters-Restructuring and Cost Reductions"). These measures have reduced certain operating costs in fiscal year 1997. No assurances can be given that reduced costs will return the Company to profitability. Critical to significant improvement in the Company's financial condition is the introduction and acquisition of new manufactured and distributed products at profitable prices. The Company plans to continue to invest in research and development efforts in addition to pursuing additional products for sale through new and existing distribution agreements. There were no significant sales of any new manufactured or distributed products, other than those sold under the Supply Agreement with BASF, introduced during the current fiscal year. The Company is engaged in efforts, subject to FDA approval and other factors, to introduce new products as a result of its research and development efforts and distribution agreements. No assurance can be given that any additional products for sale by the Company will occur or that sales of additional products will reduce losses or return the Company to profitability. Continuing losses will adversely affect the Company's liquidity and, accordingly, its ability to fund research and development or ventures relating to the sale of new products (see "-Financial Condition-Liquidity and Capital Resources"). SALES Net sales of $53,172,000 for the fiscal year ended September 30, 1997 decreased $4,787,000, or 8%, from sales for the same period in the prior fiscal year. The decline was due principally to decreased sales of manufactured products which resulted primarily from lower pricing and continuing decreases in volume of one of the Company's significant products, and to a lesser extent, two other significant products, partially offset by higher volumes of a lower margin product due to increased demand from one customer. The reductions in pricing and volume resulted from increased competition from other drug manufacturers. Net sales in the fourth quarter of fiscal year 1997 of two distributed products manufactured by BASF under the Supply Agreement experienced significant increases over the same period of the prior year helping to offset the decline in sales of certain manufactured products in the current fiscal year. Sales for the fourth quarter of fiscal year 1997 of $17,171,000 increased $4,220,000, or 33%, from $12,951,000 for the fourth quarter of fiscal year 1996. The increase was primarily due to higher volumes of a lower margin manufactured product and two products manufactured by BASF. The increase was partially offset by the continuing lower sales of certain of the Company's significant products as previously discussed. Net sales of $57,959,000 for the year ended September 30, 1996 decreased $8,544,000, or 13%, from $66,503,000 for the year ended September 30, 1995. The decline primarily resulted from decreased sales of manufactured product due to lower pricing and decreases in volume of one of the Company's significant products, and to a lesser extent, two other significant products, which was caused principally by the introduction of competitive products by other drug manufacturers. The decline in sales of manufactured products was partially offset by higher volumes of a lower margin distributed product. Levels of sales are principally dependent upon, among other things, (i) pricing levels and competition, (ii) market penetration for the existing product line, (iii) approval of ANDAs and introduction of new manufactured products, (iv) introduction of new distributed products and (v) the level of customer service (see "Business--Competition"). GROSS MARGINS The Company's gross margin for the year ended September 30, 1997 was $3,432,000 (6% of net sales) compared to $9,660,000 (17% of net sales) for the prior fiscal year. The gross margin decline is primarily due to continued lower selling prices and decreased volumes of certain significant manufactured products resulting from the introduction of other generic drug manufacturers' products in direct competition with the Company's significant products. The gross margin on distributed products for the current year increased primarily due to the contribution from the additional sales in the fourth quarter of fiscal year 1997 of products manufactured by BASF, however, the effect on the total margin for the year was negligible. 14 The gross margin for the three-month period ended September 30, 1997 increased $3,374,000 to $2,057,000 (12% of net sales) from ($1,317,000) (-10% of net sales) recorded in the corresponding period of the prior fiscal year. The improvement in margin is primarily due to the increased volumes of a lower margin manufactured product together with more favorable raw material pricing, and the contribution from additional sales of distributed product manufactured by BASF. In addition, an inventory adjustment was recorded in the corresponding quarter of last year which lowered the cost of one of the Company's manufactured products to its market value, adversely affecting the margin in that period. Lower sales in the current three-month period of certain significant manufactured products, as discussed above, partially offset the increases in margin. Inventory write-offs, taken in the normal course of business, amounted to $1,630,000, $1,395,000 and $2,203,000 for the fiscal years ended September 30, 1997, September 30, 1996 and September 30, 1995, respectively, and $482,000, $463,000 and $632,000 for the fourth quarters of fiscal years 1997, 1996 and 1995, respectively. The inventory write-offs are related principally to the disposal of finished products due to short shelf life. During fiscal year 1997, four of the Company's products accounted for approximately 59% of its net sales compared to 58% and 63%, respectively, of net sales in fiscal 1996 and 1995. One of such products contributed significantly to the sales and gross margin in all three periods. A competitor of the Company received FDA approval for this product in fiscal year 1996 where, prior to that time, the Company had been the sole generic manufacturer. As a result of the increased competition, net sales of that product decreased from $20,834,000 in fiscal year 1995 to $13,581,000 in fiscal year 1996 to $6,098,000 in fiscal year 1997 with decreases in gross margin. During the second half of calendar 1995, two generic pharmaceutical manufacturers received FDA approval for a product which the Company had also been the sole generic manufacturer. As a result of the increased competition on that product, net sales decreased from $5,652,000 in fiscal year 1995 to $3,959,000 in fiscal year 1996 to $2,110,000 in fiscal year 1997 with decreases in gross margin. These products, along with one other product, had historically accounted for a significant percentage of the Company's net sales and gross margin. Due to the increased competition with respect to these products, the Company's sales and gross margins have been materially and adversely affected. During the current fiscal year, the Company has implemented measures to lessen the overall impact of these products by increasing margins on higher volume products through the Supply Agreement with BASF, manufacturing process improvements and cost reductions. There can be no assurances that these measures will return the Company to profitability. Gross margin of $9,660,000 (17% of net sales) in fiscal year 1996 decreased $11,329,000 from $20,989,000 (32% of net sales) in fiscal year 1995 primarily due to lower selling prices and decreased volumes of certain significant manufactured products resulting from the introduction of other generic drug manufacturers' products in direct competition with the Company's significant products. Gross margins on distributed products decreased principally due to lower sales levels of higher margin products and increased sales of a lower margin product. OPERATING EXPENSES Research and Development Research and development expenses for the twelve-month period ended September 30, 1997 increased $683,000, or 13%, to $5,843,000 from $5,160,000 for the twelve-month period ended September 30, 1996. In the current period, advances to Sano for the development of certain generic transdermal products amounted to $2,258,000, while in the prior year payments of $2,942,000 were partially offset by a reimbursement from Sano of $1,500,000. In August 1997, the Company acquired Clal's 51% ownership interest in IPR in which PRI previously had owned 49% (see "Notes to Financial Statements-Acquisition of Joint Venture"). The Company recorded an aggregate of $1,030,000 in research and development expenses for IPR in fiscal year 1997 compared to $499,000 in the prior year. The higher cost of the Sano transactions and IPR were partially offset by lower personnel costs. 15 During fiscal year 1997 the Company's domestic research and development program was fully integrated with the research operations in Israel. Currently, the Company's research program has eight products in various stages of development. The Company has ANDAs for four potential products pending with the FDA and Sano has ANDAs for two potential products, which are covered by the distribution agreement with Sano, filed with the FDA and awaiting approval (see "Notes to Financial Statements-Distribution Agreements"). Research and development expenses of $1,216,000 for the three-month period ended September 30, 1997 increased $375,000, or 45%, from $841,000 in the corresponding period in the prior year primarily as a result of payments to Sano of $301,000 in the fourth quarter. In addition, expenses for IPR in the fourth quarter were $421,000 compared to $175,000 for the corresponding period of the prior year. For the fiscal year ended September 30, 1996 research and development expenses of $5,160,000 decreased $327,000, or 6% from $5,487,000 in the fiscal year 1995. During the first quarter of fiscal year 1996, the Company received a $1,500,000 reimbursement from Sano for advances made to them in prior fiscal years for research and development expenses. Payments to Sano amounted to $2,942,000 in fiscal year 1996 compared to $1,429,000 in the prior year. Selling, General and Administrative Selling, general and administrative costs were $12,461,000 (23% of net sales) for the fiscal year ended September 30, 1997 compared to $17,168,000 (30% of net sales) for the corresponding period in the prior fiscal year. The decrease of 27% in the period was primarily attributable to a decline in personnel costs resulting from recent head count reductions and the amendment of a retirement plan (see "--Restructuring Charge" and "Notes to Financial Statements- Commitments, Contingencies and Other Matters-Retirement Plans" and "- Restructuring and Cost Reductions"). In addition, fees for consulting and professional services, costs for advertising and developmental marketing, and bad debt expense have been reduced in fiscal year 1997. In the fourth quarter of fiscal year 1997, selling, general and administrative costs of $2,983,000 (17% of net sales) decreased $1,309,000 from $4,292,000 (33% of net sales) in the corresponding quarter of last year. The decrease of 30% was primarily the result of decreased personnel costs, professional fees, advertising and marketing costs and bad debt expense, as discussed above. Selling, general and administrative costs were $17,168,000 (30% of net sales) for the year ended September 30, 1996 versus $16,192,000 (24% of net sales) for the fiscal year ended September 30, 1995. The increase was primarily attributable to fees for consulting and professional services, higher advertising and developmental marketing costs, severance costs, increased bad debt expense and costs related to implementing information systems to support the Company's operations. In addition, the Company incurred costs in strengthening its in-house sales force in an effort to compete more effectively under the market conditions. Restructuring Charge The Company recorded a restructuring charge of $549,000 in fiscal year 1996 to provide for costs associated with the reduction and reorganization of personnel. The implementation of the restructuring plan also included reductions in spending on advertising, marketing, professional services and, to a lesser extent, certain internal and external research and development expenses (see "Notes to Financial Statements-Commitments, Contingencies and Other Matters-Restructuring and Cost Reductions"). SETTLEMENTS In fiscal year 1995, the Company resolved claims against certain former management members of the Company for recovery of, among other items, salaries and money paid for indemnification. The settlements, in the form of cash and securities of the Company, were valued at $2,029,000. 16 OTHER INCOME Other income of $6,968,000 for the fiscal year ended September 30, 1997 increased $4,411,000, or 173%, from $2,557,000 in the prior fiscal year. The increase is attributable to approximately $3,900,000 of income resulting from the amendment in fiscal year 1997 of a distribution agreement with Sano (see "Notes to Financial Statements-Distribution Agreements") and a gain of $1,574,000 on the sale of Sano common stock (see "--Financial Condition-- Liquidity and Capital Resources"). The income from the Sano transactions was partially offset by a loss on the sale of Fine-Tech Ltd. stock in the third quarter of fiscal year 1997. For the three-month period ended September 30, 1997, other income was $6,996,000 compared to $1,926,000 in the corresponding period of the prior year. The increase was attributable to the $3,900,000 of income recorded pursuant to the amendment of the distribution agreement with Sano and a gain on the sale of Sano common stock in the current period of $1,218,000. Other income in fiscal year 1996 increased to $2,557,000 from $608,000 in fiscal year 1995 due to the sale of Sano common stock during the fiscal 1996 fourth quarter (see "--Financial Condition--Liquidity and Capital Resources"). INCOME TAXES Management has determined, based on the Company's recent performance and the uncertainty of the generic business in which the Company operates, that future operating income might not be sufficient to recognize fully the net operating loss carryforwards of the Company. Therefore, the Company did not recognize a benefit for its operating losses in either fiscal 1997 or 1996 (see "Notes to Financial Statements-Income Taxes"). The Company incurred income tax expense of $410,000 in the first quarter of fiscal year 1997 due to interest relating to a settlement with the Internal Revenue Service in fiscal year 1995 for the disallowance of the Company's tax credit for prior periods with respect to certain research and development credits. In fiscal year 1995, the Company recorded income tax expense of $836,000. DISCONTINUED OPERATIONS In fiscal year 1996, the Company recorded income from discontinued operations of $2,800,000, reversing the remaining reserves which had been provided for Quad Pharmaceuticals, Inc., whose operations were discontinued in fiscal year 1991 (see "Notes to Financial Statements-Discontinued Operations"). FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Working capital of $15,959,000 at September 30, 1997 decreased $4,757,000 from $20,716,000 at September 30, 1996. The decrease is principally due to the use of capital to fund operating losses. As a result of a cash management system pursuant to the financing agreement that the Company entered into with General Electric Capital Corporation ("GECC"), the only remaining cash balance at September 30, 1997 was cash at IPR (see "--Financing"). The working capital ratio of 2.3x in the current period declined from 2.9x at fiscal 1996 year end. During fiscal year 1997, the Company reduced inventory levels to $13,239,000 from $19,352,000. In August 1997, the Company, through one of its subsidiaries, acquired Clal's 51% ownership interest in their research and development joint venture in Israel for $447,000 in cash obtained from the sale of Fine-Tech Ltd. ("Fine-Tech") stock and a non-recourse secured promissory note for $1,500,000 (see "Notes to Financial Statements-Acquisition of Joint Venture"). The Company has the option to prepay the note for $600,000 by August 12, 1998. The Company is obligated to invest not less than $1,500,000 each year in IPR until the note is repaid. 17 During the twelve months ended September 30, 1997, the Company sold its remaining 378,887 shares of Sano stock yielding net proceeds of approximately $6,123,000 which was used to reduce the revolving credit balance. In September 1996, the Company sold 135,000 shares of its holdings in Sano receiving net proceeds of $2,669,000. In return for relinquishing certain rights pursuant to the amendment of the Company's distribution agreement with Sano (see "Notes to Financial Statements-Distribution Agreement"), PRI received $1,950,000 in cash in the fourth quarter of fiscal year 1997, which was used to reduce the revolving credit line balance, and an interest bearing promissory note for $1,950,000 which will be due in September 1998. In June 1997, the Company sold all of its shares of Fine-Tech, an Israeli chemical manufacturer, for $447,000. The Company purchased 10% of the shares of Fine-Tech in December 1995 for $1,000,000. The Company expects to fund its operations, including research and development activities and its obligations under the existing distribution and development arrangements discussed above, out of its working capital, and if necessary with borrowings against its line of credit, to the extent then available (see "--Financing"). If, however, the Company continues to experience significant losses, its liquidity and, accordingly, its ability to fund research and development or ventures relating to the distribution of new products will be materially and adversely affected. FINANCING At September 30, 1997, the Company's total outstanding short-term and long- term debt amounted to $3,947,000 and $2,869,000, respectively. The short-term debt consists of the outstanding amount under the Company's line of credit with GECC and the long-term debt consists primarily of an outstanding mortgage loan with a bank and a non-recourse secured promissory note resulting from the acquisition of Clal's interest in IPR in fiscal year 1997. In December 1996, Par entered into a Loan and Security Agreement (the "Loan Agreement") with GECC which provided Par with a three-year revolving line of credit. Pursuant to the Loan Agreement, as amended, Par is permitted to borrow up to the lesser of (i) the borrowing base established under the Loan Agreement or (ii) $20,000,000. The borrowing base is limited to 85% of eligible accounts receivable plus 50% of eligible inventory of Par, each as determined from time to time by GECC. The interest rate charge on the line of credit is based upon a per annum rate of 3.50% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par and PRI other than real property and is guaranteed by PRI. In connection with such facility, Par, PRI and their affiliates have established a cash management system pursuant to which all cash and cash equivalents received by any of such entities are deposited into a lockbox account over which GECC has sole operating control and which are applied on a daily basis to reduce amounts outstanding under the line of credit. The revolving credit facility is subject to covenants based on various financial benchmarks. In fiscal year 1997, GECC waived events of default on three occasions unrelated to the repayment of debt under the Loan Agreement. As of September 30, 1997, the borrowing base was approximately $10,900,000 and $3,947,000 was outstanding under the line of credit. Any significant reduction in the borrowing base from its current levels will adversely affect the Company's liquidity. At September 30, 1997, the Company has a non-recourse secured promissory note for $1,500,000 bearing interest at 7% payable in eight equal installments to a subsidiary of Clal (see "Notes to Financial Statements-Acquisition of Joint Venture" and "-Long-Term Debt"). The first installment is due in July, 1999, with the remaining seven payments due each January and July through and including January, 2003. The Company has the option to prepay the note for $600,000 on or before August 12, 1998. Additionally, the Company has a mortgage loan with a bank in the original principal amount of $1,340,000. The loan bears interest during the first five years of its term at a rate of 8.5% per annum and thereafter at the prime rate plus 1.75%. It is due in equal monthly installments until May 1, 2001, at which time the remaining principal balance with interest is due. The loan is secured by certain real property (see "Business-Property"). At September 30, 1997, the outstanding balance of the loan was $1,117,000. At September 30, 1997, the Company had also borrowed $167,000 under a line of credit maintained at the same bank, which line is secured by equipment purchased. The interest rate is based on the prime rate plus a premium (see "Notes to Financial Statements-Long-Term Debt"). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - ------- ---------------------------------------------------------- 18 Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------ ------------------------------------------- See Index to Financial Statements after Signature Page. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------ --------------------------------------------------------------- FINANCIAL DISCLOSURE. - -------------------- Not applicable. 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------- -------------------------------------------------- DIRECTORS The Company's Certificate of Incorporation provides that the Board shall be divided into three classes, with the term of office of one class expiring each year. The Class I, Class II and Class III directors of the Company have terms which expire in 2000, 1998 and 1999, respectively. The following table sets forth certain information with respect to each of Class I, II and III directors and the year each was first elected as a director:
YEAR OF FIRST NAME AGE (AS OF 12/97) ELECTION ---- ----------------- -------- CLASS I Mark Auerbach(1)(2) 59 1990 Since June 1993, the Senior Vice President and Chief Financial Officer of Central Lewmar L.P., a distributor of fine papers. From August 1992 to June 1993, a partner of Marron Capital L.P., an investment banking firm. From July 1990 to August 1992, President, Chief Executive Officer and Director of Implant Technology Inc., a manufacturer of artificial hips and knees. Director of Acorn Venture Capital Corporation, a closed-end investment company, and a director of Oakhurst Company, Inc., a holding company for automotive after-market distributors. H. Spencer Matthews(2) 76 1990 Since 1986, President and Chief Executive Officer of Dispense-All South Coast, Inc., and Dispense-All of Central Florida, Inc., two companies which are wholesalers of juice concentrates. Rear Admiral, United States Navy (Retired). CLASS II Andrew Maguire, Ph.D.(1)(3)(4) 57 1990 Since January 1990, President and Chief Executive Officer of Appropriate Technology International, a not-for-profit development assistance corporation. From January 1989 to December 1994, Senior Vice President of Washington Financial Group, an investment banking firm. From June 1987 to January 1989, Executive Vice President of the North American Securities Administration Association. Melvin H. Van Woert, M.D.(1)(3)(4)(5) 68 1990 Since 1974, Physician and Professor of Neurology and Pharmacology and Doctoral Faculty, Mount Sinai Medical Center, New York.
20
YEAR OF FIRST NAME AGE (AS OF 12/97) ELECTION ---- ----------------- -------- CLASS III Kenneth I. Sawyer(3)(4)(5) 52 1989 Since October 1990, Chairman of the Board of the Company. Since October 1989, President and Chief Executive Officer of the Company. From September 1989 to October 1989, Interim President and Chief Executive Officer of the Company. From August 1989 to September 1989, counsel to the Company. Director of Acorn Venture Capital Corporation, a closed-end investment company. Robin O. Motz, M.D., Ph.D.(1)(2)(4)(5) 58 1992 Since July 1978, Assistant Professor of Clinical Medicine, Columbia University College of Physicians and Surgeons. Physician engaged in a private practice of internal medicine.
- ------------ (1) A member of the Audit Committee of the Board of the Company. (2) A member of the Compensation and Stock Option Committee of the Board of the Company. (3) A member of the Strategic Planning Committee of the Board of the Company. (4) A member of the Nominating Committee of the Board of the Company. (5) A member of the Executive Committee of the Board of the Company. Clal has the right to designate up to two-sevenths of the members of the Board of the Company (see "Certain Relationships and Related Transactions-- Clal Agreements"). No member of the Board has been designated by Clal. EXECUTIVE OFFICERS The executive officers of the Company consist of Mr. Sawyer as President, Chief Executive Officer and Chairman of the Board and Dennis J. O'Connor as Vice President, Chief Financial Officer and Secretary. The executive officers of Par consist of Mr. Sawyer, Mr. O'Connor and Joseph Gokkes as Chief Operating Officer. Par is currently negotiating a modification of Mr. Gokkes' responsibilities. Mr. O'Connor has served as Vice President, Chief Financial Officer and Secretary of the Company since October 1996. From June 1995 to October 1996, he served as Controller of Par. Mr. O'Connor served as Vice President--Controller of Tambrands, Inc., a consumer products company, from November 1989 to June 1995. Mr. Gokkes has served as Chief Operating Officer of Par since May 1997. From April 1996 until May 1997, he was employed by Clal in its international operations and from February 1990 to February 1996, he served in several capacities, including Vice President for International Marketing and General Manager of Taro Pharmaceutical Industries Ltd. (Israel) and Taro International, respectively. SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE As a public company, the Company's directors, executive officer and 10% beneficial owners are subject to reporting requirements under Section 16(a) of the Securities Exchange Act of 1934, as amended. Under such Act, Mr. Gokkes delinquently filed one Initial Statement of Beneficial Ownership of Securities during fiscal year 1997. 21 ITEM 11. EXECUTIVE COMPENSATION. - ------- ---------------------- The following table sets forth compensation earned by or paid, during fiscal years 1995 through 1997, to the Chief Executive Officer of the Company and the most highly compensated executive officers of the Company and/or Par who earned over $100,000 in salary and bonus at the end of fiscal year 1997 (the "Named Executives"). The Company awarded or paid such compensation to all such persons for services rendered in all capacities during the applicable fiscal years. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------ ---------------------------- RESTRICTED SECURITIES NAME AND STOCK UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) OPTIONS(#) COMPENSATION($)(2) - -------------------- ---- -------- -------- ------------ ---------- ---------------------- Kenneth I. Sawyer, 1997 350,000 - - - 12,985 President, Chief 1996 370,692 - - 75,000 38,530 Executive Officer 1995 427,153 200,000 - - 49,806 and Chairman Dennis J. O'Connor 1997 137,994 - - 30,000 2,121 Vice President Chief Financial Officer and Secretary Joseph Gokkes 1997 56,883 10,000 - 30,000 6,787 Chief Operating Officer of Par(3)
- -------------------------- (1) The Named Executives did not hold any shares of restricted stock at the end of fiscal year 1997. (2) For fiscal year 1997, includes insurance premiums paid by the Company for term life insurance for the benefit of the Named Executives as follows: Mr. Sawyer-$74, Mr. O'Connor-$51 and Mr. Gokkes-$25. The amounts for Mr. Sawyer include the maximum potential estimated dollar value of the Company's portion of insurance premium payments from a split-dollar life insurance policy as if premiums were advanced to the executive without interest until the earliest time the premiums may be refunded by Mr. Sawyer to the Company. Includes $6,762 paid to Mr. Gokkes for relocation. Also includes the following amounts contributed by the Company to the Company 401(k) plan: Mr. O'Connor-$2,070. (3) Par is currently negotiating a modification of Mr. Gokkes' responsibilities. The following table sets forth stock options granted to the Named Executives during fiscal year 1997. STOCK OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term ------------------------------------------------------ ------------------ Shares % of Total Underlying Options Granted Options to Employees in Exercise Expiration Name Granted(#) Fiscal Year Price ($) Date 0%($) 5%($) 10%($) - --------------------------- ---------- ---------------- --------- ---------- ---- -------- -------- Dennis J. O'Connor(1) 20,000 6.37% $3.375 10/22/01 - $ 86,149 $108,709 Dennis J. O'Connor(2) 10,000 3.19% $2.125 9/7/02 - $ 27,121 $ 34,223 Joseph Gokkes(3) 30,000 9.56% $2.625 5/29/02 - $100,507 $126,828
22 (1) Represents options granted pursuant to the Company's 1990 Incentive Option Plan on October 23, 1996, of which 10,000 became exercisable October 23, 1997 and 10,000 become exercisable on October 23, 1998. (2) Represents options granted pursuant to the Company's 1990 Incentive Option Plan on September 8, 1997 of which 3,333 become exercisable on March 8, 1998, 3,333 become exercisable on March 8, 1999, and 3,334 become exercisable on March 8, 2000. (3) Represents options granted pursuant to the Company's 1990 Incentive Option Plan on May 30, 1997, of which 10,000 become exercisable on May 30, 1998, 10,000 become exercisable on May 30, 1999 and 10,000 become exercisable on May 30, 2000. The following table sets forth the stock options exercised by the Named Executives during fiscal year 1997 and the value, as of September 30, 1997, of unexercised stock options held by the Named Executives. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at FY-End (#) at FY-End ($) ---------------------- -------------------- Shares Acquired on Value Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable - ---- ------------ ----------- ----------- ------------- ----------- ------------- Kenneth I. Sawyer 0 0 550,000 25,000 -- -- Dennis J. O'Connor 0 0 15,833 31,667 -- -- Joseph Gokkes 0 0 0 30,000 -- --
On October 28, 1997, the Board approved the grant of new 5-year options to the Named Executives at an exercise price of $2.25, upon surrender for cancellation of certain options set forth above in the table. Pursuant to the Board action, the Named Executives hold repriced options as follows: Mr. Sawyer-500,000, Mr. O'Connor-37,500 and Mr. Gokkes-30,000. Of the repriced options held by Mr. Sawyer, 50,000 are immediately exercisable. The balance of Mr. Sawyer's repriced options and all of the repriced options held by Mr. O'Connor and Mr. Gokkes will become exercisable as follows: one third become exercisable on April 28, 1998, one third become exercisable on April 28, 1999 and one third become exercisable on April 28, 2000. COMPENSATION OF DIRECTORS For service on the Board in fiscal year 1997, Directors who are not employees of the Company or any of its subsidiaries receive an annual retainer of $12,000, a fee of $1,000 for each meeting of the Board attended in person or by teleconference, and a fee of $750 for each committee meeting attended in person or by teleconference, subject to a maximum of $1,750 per day. Chairmen of committees receive an additional annual retainer of $5,000 per committee. New Directors are granted options to purchase shares on the date initially elected to the Board. Directors who are employees of the Company or any of its subsidiaries or are designated by Clal receive no additional remuneration for serving as directors or as members of committees of the Board. All directors are entitled to reimbursement for out-of-pocket expenses incurred in connection with their attendance at Board and committee meetings. EMPLOYMENT AGREEMENTS AND TERMINATION ARRANGEMENTS The Company has entered into an Employment Agreement with Mr. Sawyer, which provides for his employment in his current position through October 4, 1996, subject to earlier termination by the Company for Cause (as such term is defined in the agreement). Mr. Sawyer's term of employment will be automatically extended each year for an additional one-year period unless either party provides written notice by July 4th of such year that he or it desires to terminate the agreement. Under the agreement with Mr. Sawyer, the Company is required to use its best efforts to cause him to be reelected to the Board of Directors during his term of employment. Mr. Sawyer, pursuant to the terms of his employment agreement, is and will be required to serve, if so elected, on the Board of Directors of the Company as well as any committees thereof. 23 Mr. Sawyer's agreement provides for certain payments upon termination of his employment as a result of a material breach by the Company of his employment agreement following a Change of Control (as such term is defined in the agreement) of the Company. A material breach by the Company of the employment agreement includes, but is not limited to, termination without Cause and a change of his responsibilities. Mr. Sawyer is entitled to receive, if such a termination occurs within two years following the Change of Control of the Company, a lump sum payment equal to the lesser of three times the sum of his annual base salary and most recent bonus or the maximum amount permitted without the imposition of an excise tax on Mr. Sawyer or the loss of a deduction to the Company under the Internal Revenue Code of 1986, as amended (the "Code"), plus reimbursement of certain legal and relocation expenses incurred by Mr. Sawyer as a result of the termination of his employment and maintenance of insurance, medical and other benefits for 24 months or until Mr. Sawyer is covered by another employer for such benefits. The Company has entered into a severance agreement with Mr. O'Connor dated October 23, 1996. The agreement provides, with certain limitations, that upon the termination of Mr. O'Connor's employment by the Company for any reason other than For Cause or by Mr. O'Connor for Good Reason or following a Change of Control (as such terms are defined in the agreement), Mr. O'Connor is entitled to receive a severance payment. The amount of the payment is to be equal to six months of his salary at the date of termination, with such amount to be increased by an additional month of salary for every full month he is employed by the Company in his present position, up to a maximum of six additional months salary. Under the stock option agreements between Mr. O'Connor and the Company, any unexercised portion of the options becomes immediately exercisable in the event of a Change of Control (as such term is defined in the agreement). Par has entered into an employment agreement with Mr. Gokkes, dated May 30, 1997. The agreement provides that upon termination of Mr. Gokkes' employment by Par for any reason except For Cause (as such term is defined in the agreement), Mr. Gokkes is entitled to receive severance pay equal to 12 months of his base salary in effect for the year prior to his termination. In the event of a voluntary termination of employment by Mr. Gokkes, he is not entitled to receive severance pay except in the event that a President of Par other than Mr. Gokkes is put in place who is not the President of the Company. Par is currently negotiating a modification of Mr. Gokkes' responsibilities. PENSION PLAN The Company maintains a defined benefit plan (the "Pension Plan") intended to qualify under Section 401(a) of the Code. Effective October 1, 1989, the Company ceased benefit accruals under the Pension Plan with respect to service after such date. The Company intends that distributions will be made, in accordance with the terms of the Plan, to participants as of such date and/or their beneficiaries. The Company will continue to make contributions to the Pension Plan to fund its past service obligations. Generally, all employees of the Company or a participating subsidiary who completed at least one year of continuous service and attained 21 years of age were eligible to participate in the Pension Plan. For benefit and vesting purposes, the Pension Plan's "Normal Retirement Date" is the date on which a participant attains age 65 or, if later, the date of completion of 10 years of service. Service is measured from the date of employment. The retirement income formula is 45% of the highest consecutive five-year average basic earnings during the last 10 years of employment, less 83 1/3% of the participant's Social Security benefit, reduced proportionately for years of service less than 10 at retirement. The normal form of benefit is life annuity, or for married persons, a joint survivor annuity. None of the Named Executives had any years of credited service under the pension plan. Par currently maintains a retirement plan (the "Retirement Plan") and a retirement savings plan. The Board of Directors of Par has authorized the cessation of employer contributions to the Retirement Plan effective December 30, 1996. Consequently, participants in the Retirement Plan will no longer be entitled to any employer contributions under such plan for 1996 or subsequent years. COMPENSATION AND STOCK OPTION COMMITTEE The compensation and stock option committee consists of Mark Auerbach, H. Spencer Matthews, and Robin O. Motz. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- --------------------------------------------------------------- 24 The following table sets forth, as of the close of business on December 12, 1997, the beneficial ownership of the Common Stock by (i) each person known (based solely on a review of Schedules 13D) to the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) each director of the Company, (iii) the Named Executives, as defined in the "Executive Compensation" section of this report, and (iv) all directors and current executive officers of the Company and Par as a group (based upon information furnished by such persons). Under the rules of the Securities and Exchange Commission, a person is deemed to be a beneficial owner of a security if such person has or shares the power to vote or direct the voting of such security or the power to dispose of or to direct the disposition of such security. In general, a person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days. Accordingly, more than one person may be deemed to be a beneficial owner of the same securities.
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES % OF - -------------------------------------------------------------------- OF COMMON COMMON STOCK STOCK Clal Pharmaceutical Industries Ltd.(1) 2,313,272 12.2 Kenneth I. Sawyer(2)(3)(4) 206,900 1.1 Melvin H. Van Woert, M.D.(2)(3) 70,050 * Andrew Maguire, Ph.D.(2)(3) 36,300 * H. Spencer Matthews(2)(3) 36,900 * Mark Auerbach(2)(3) 49,000 * Robin O. Motz, M.D., Ph.D.(2)(3) 42,000 * Dennis J. O'Connor(2)(4) 1,619 * Joseph Gokkes(2)(4) 381 * All directors and current executive officers (as of 12/12/97) as a 443,150 2.3 group (8 persons)(2)
- ------------------------ * Less than 1%. (1) The address of Clal is Clal House, 5 Druyanov Street, Tel Aviv 63143, Israel. All 2,313,272 shares of Common Stock shown as beneficially owned by Clal are issued and outstanding. (2) The business address of each of these individuals, for the purposes hereof, is in care of Pharmaceutical Resources, Inc., One Ram Ridge Road, Spring Valley, New York 10977. Includes shares of Common Stock which may be acquired upon the exercise of options which are exercisable on or prior to February 10, 1998, under the Company's stock option plans as follows: Mr. Sawyer, 50,000 shares; Dr. Van Woert, 69,000 shares; Mr. Maguire, 36,000 shares; Mr. Matthews, 36,000 shares; Mr. Auerbach, 47,000 shares; and Dr. Motz, 42,000 shares. (3) A director of the Company. (4) Reflects the repricing of stock options approved by the Board on October 28, 1997 (see "Executive Compensation"). On October 28, 1997, the Board of Directors approved the adoption of the 1997 Directors' Stock Option Plan (the "1997 Plan"). The 1997 Plan is subject to the approval of the Company's shareholders. Pursuant to the 1997 Plan, each current non-executive director would be entitled to receive stock options to purchase 10,000 shares of Common Stock for each year of service as a director, but not in excess of the number of stock options held by them at October 28, 1997. The options would have an exercise price of $2.25 per share and would be issued only upon surrender for cancellation by the director of an equal number of stock options held by them. Each stock option to be issued under the 1997 Plan would become exercisable one year after the date of grant. The 1997 Plan also provides for the automatic grant of stock options to non-executive directors each year, subject to certain conditions. 25 Under the 1997 Plan, non-executive directors would be granted options to purchase 5,000 shares of Common Stock each year on the date of the Company's annual meeting of shareholders and would be entitled to receive an additional grant of up to 6,000 options each year if such directors continuously owned 2,500 shares of Common Stock for each additional grant received. Further, the Plan provides for the grant of options for 5,000 shares as of October 28, 1997 and an additional grant of options for up to 6,000 shares if the director owns 2,500 shares of Common Stock on March 31, 1998. VOTING ARRANGEMENTS The Company and Clal entered into a Stock Purchase Agreement, dated March 25, 1995 (as amended, the "Stock Purchase Agreement"), pursuant to which Clal, among other things, purchased 2,027,272 shares of Common Stock on May 1, 1995. Clal acquired 100,000 shares of Common Stock in June 1996 from Mr. Sawyer and acquired an additional 186,000 shares of Common Stock from the Company in connection with an amendment of the Stock Purchase Agreement in July 1997. Under the Stock Purchase Agreement, Clal agreed to vote all of the shares of Common Stock held by it in favor of certain business combination transactions of the Company and certain sales of assets or securities of the Company. In addition, Clal has certain rights under the Stock Purchase Agreement to nominate directors to the Company's Board and committees thereof (see "Certain Relationships and Related Transactions--Clal Agreements"). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- ----------------------------------------------- Clal Agreements. On May 1, 1995, the Company consummated several transactions with Clal consisting primarily of (i) the sale by the Company of 2,027,272 shares of the Company's Common Stock for $20,000,000, or $9.87 per share, (ii) the issuance by the Company of warrants to purchase 2,005,107 shares of Common Stock (the "Warrants") and (iii) the formation of a joint venture to research and develop generic pharmaceutical products. The Stock Purchase Agreement included terms of the Company's and Clal's business relationship, including issuance to Clal of 2,027,272 shares of Common Stock, rights to nominate Board members, rights of first refusal, voting agreements, rights to invest in others, standstill agreements and agreements with respect to the issuance of the Warrants. In accordance with the terms of the Stock Purchase Agreement, Clal has the right to designate one-seventh of the members of the Board as long as Clal owns 8% of the issued and outstanding Common Stock, and a total of two-sevenths of the members of the Board if Clal owns at least 16% of the issued and outstanding Common Stock. The Company has the right to reject a designee of Clal if such person is not satisfactory to the Company for good faith reasons. The Company also agreed to elect Clal's designee to the Audit Committee, Compensation and Stock Option Committee and Strategic Planning Committee of the Board. In the event that Clal does not nominate directors to the Board or its committees or if Clal's designees are not elected to the Board or its committees, Clal is permitted, under the Stock Purchase Agreement, to designate representatives who may attend meetings of the Board and its committees. Additionally, if Clal's appointment of a director to the Audit Committee is prohibited by the rules and regulations of the New York Stock Exchange, Inc., the Company will provide Clal materials which are provided to committee members, the appointment of the Company's auditors will be approved by the entire Board, the Company will consult with directors nominated by Clal with respect to Audit Committee actions and the directors nominated by Clal will have the right to consent to certain changes in the Company's accounting principles. Pursuant to the Stock Purchase Agreement, Clal has designated an observer to meetings of the Board and its committees. Clal also has the right to designate a member of the Company's management. Clal has a right of first refusal with respect to certain business combination transactions of the Company and certain sales of the assets or securities of the Company. Such right extends until May 1, 2000, provided that Clal, when exercising such right (i) has not sold or disposed of shares of Common Stock representing more than 337,045 shares of Common Stock and (ii) owns or has the right to acquire 16% of the Common Stock (the "Restricted Period"). If Clal does not exercise its right of first refusal with respect to any of the above-mentioned transactions, Clal will, subject to certain exceptions, be required to vote its shares of Common Stock in favor of such transactions. Such obligation will terminate upon the expiration of the Restricted Period. Clal has no obligation to vote its shares of Common Stock in favor of such a transaction if (i) Clal exercises its right of first refusal with respect to such transaction, (ii) fewer than 75% of the members of the Board (excluding member(s) of the Board nominated by Clal) vote in favor of the transaction or (iii) any member of the Board (excluding 26 member(s) of the Board nominated by Clal) votes against the transaction. In the event that Clal has an obligation to vote its shares in favor of such a transaction, Clal also has agreed to take such other actions reasonably required or appropriate to facilitate the consummation of the transaction. Clal has no obligation to vote its shares in favor of, or take other actions to facilitate, any such transaction if Clal notifies the Company that, in Clal's opinion, the consummation of such a transaction would be detrimental to the Company and/or its shareholders, except if the Company, in response to such a notice, delivers to Clal a fairness opinion from a nationally recognized investment banking firm. Clal has agreed to limit acquisitions of the Company's securities to 19.99% of the issued and outstanding Common Stock prior to May 1, 1998. In addition, Clal has agreed to limit such acquisitions to 25% of the issued and outstanding Common Stock after May 1, 1998. Clal has the right to tender for or purchase no less than 70% of the issued and outstanding Common Stock after May 1, 2000. These limitations expire six months following the expiration of the Restricted Period (the "Consent Period"). Clal also has the right to acquire up to 20% of any equity securities issued by the Company in an underwritten public offering so long as Clal, at the time, owns 10% of the issued and outstanding Common Stock (assuming, for this purpose, the full exercise of the Warrants). Clal has also agreed not to sell or otherwise dispose of Common Stock or other securities convertible into Common Stock during the Consent Period unless such securities are registered or may be sold without registration under Rule 144 promulgated under the Securities Act of 1933, as amended, or are sold in certain business combination transactions, unless the sale is approved by the Board (excluding member(s) of the Board nominated by Clal). Clal will limit, during the Consent Period, sales of Common Stock to any one person, entity or group to no more than 3% of the issued and outstanding Common Stock, except as otherwise permitted under the Stock Purchase Agreement. In consideration of the rights and benefits obtained by the Company under the Stock Purchase Agreement, the Company also granted to Clal certain registration rights under a registration rights agreement (the "Registration Rights Agreement"). In general, Clal will not be able to sell freely the shares of Common Stock purchased by Clal without registration under applicable securities laws or unless an exemption from registration is available. Clal is entitled to two demand registrations. In addition, the Company granted to Clal the right to register shares of Common Stock owned by Clal on each occasion that the Company registers shares of Common Stock, subject to certain limitations and exceptions. In May 1995, the Company and Clal formed IPR in Israel to research and develop generic pharmaceutical products. On August 14, 1997, the Company acquired Clal's 51% ownership interest in IPR for $447,000 in cash obtained from the sale of Fine-Tech Ltd. ("Fine-Tech") stock owned by the Company and a non- recourse secured promissory note for $1,500,000. The note bears interest of 7% per annum, and is payable in eight semi-annual installments commencing in July 1999. The Company has the unconditional option to prepay the note for $600,000 on or before August 12, 1998. Until the note is repaid in full, the Company is obligated to invest $1,500,000 each year in IPR. In addition, the Company and Clal agreed to modify certain terms of Clal's investment in the Company, including the surrender by Clal of the Warrants in exchange for the issuance to Clal of 186,000 shares of the Company's Common Stock for nominal cash consideration. As of December 12, 1997, Clal beneficially owned, to the Company's knowledge, 2,313,272 shares of Common Stock. Of such shares, 100,000 were purchased from Mr. Sawyer at a price of $7.125 per share on June 3, 1996. Prior to becoming an officer of Par in May 1997, Mr. Gokkes served as a consultant to Par, during which time he was an employee of Clal. The Company reimbursed Clal $115,000 in fiscal year 1997 for Mr. Gokkes' wages and expenses during that period. 27 Investment in Fine-Tech. Under the Stock Purchase Agreement, the Company obtained the right to participate with Clal and certain of its affiliates in connection with pharmaceutical acquisitions and transactions. In December 1995, the Company paid $1,000,000 to purchase 10% of the shares of Fine-Tech, an Israeli pharmaceutical research and development company in which Clal had a significant ownership interest. In addition, the Company obtained the exclusive right to purchase products not commonly sold in North America, South America and the Caribbean. In June 1997, the Company sold all of the shares of Fine-Tech for approximately $447,000 and terminated its exclusive purchase rights. The foregoing descriptions of certain terms of the Stock Purchase Agreement, the Warrants, the Registration Rights Agreement and the amendments thereto do not purport to be complete and are qualified in their entirety by reference to such documents, copies of which were filed as exhibits to the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on May 12, 1995 or are filed as exhibits to this Report on Form 10-K. Transactions with Officers and Directors. At various times during fiscal years 1996 and 1997, the Company made unsecured loans to Mr. Sawyer. Such loans currently are evidenced by a single promissory note, which bears interest at the rate of 8.25% per annum. Interest and principal are due on the earlier of August 14, 2002, or the termination of Mr. Sawyer's employment with the Company. As of December 19, 1997, the outstanding balance of the note, with interest, was approximately $372,000. The Company believes that all of the above transactions were on terms that were fair and reasonable to the Company. 28 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. (1) 3.1.1 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 6, 1992. (2) 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. (4) 4.1 Amendment to Rights Agreement between the Registrant and Midlantic National Bank, as Rights Agent, dated as of April 27, 1992. (3) 4.2 Amendment to Rights Agreement, dated as of March 24, 1995, between the Registrant and Midlantic National Bank, as Rights Agent. 4.3 Amendment to Rights Agreement, dated as of September 18, 1997, between the Registrant and First City Transfer Company, as Rights Agent. 10.1 1983 Stock Option Plan of the Registrant, as amended. (5) 10.2 1986 Stock Option Plan of the Registrant, as amended. (5) 10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (6) 10.4 1989 Employee Stock Purchase Program of the Registrant. (7) 10.5 1990 Stock Incentive Plan of the Registrant, as amended. 10.6 Form of Retirement Plan of Par. (8) 10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984. (9) 10.7 Form of Retirement Savings Plan of Par. (8) 10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984. (10) 10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984. (10) 10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985. (10) 10.8 Par Pension Plan, effective October 1, 1984. (1) 10.9 Employment Agreement, dated as of October 4, 1992, among the Registrant, Par and Kenneth I. Sawyer. (10) 29 10.10 Severance Agreement, dated as of October 23, 1996, between the Registrant and Dennis J. O'Connor. 10.11 Lease for premises located at 12 Industrial Avenue, Upper Saddle River, New Jersey, dated October 21, 1978, between Par and Charles and Dorothy Horton, and extension dated September 15, 1983. (12) 10.12 Lease Agreement, dated as of January 1, 1993, between Par and Ramapo Corporate Park Associates. (13) 10.13 Lease Extension and Modification Agreement, dated as of August 30, 1997, between Par and Ramapo Corporate Park Associates. 10.14 Amended and Restated Distribution Agreement, dated as of July 28, 1997, among Sano Corporation, the Registrant and Par./*/ 10.15 Mortgage and Security Agreement, dated May 4, 1994, between Urban National Bank and Par. (15) 10.15.1 Mortgage Loan Note, dated May 4, 1994. (15) 10.15.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban National Bank. (15) 10.16 1995 Directors Stock Option Plan. (16) 10.17 Stock Purchase Agreement, dated March 25, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17) 10.18 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17) 10.19 Registration Rights Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17) 10.20 Non-Recourse Secured Promissory Note, July 28, 1997, of PRI Research, Inc. 10.21 Third Amendment to Stock Purchase Agreement, dated July 28, 1997, between the Registrant and Clal Pharmaceutical Industries Ltd. 10.22 Pledge Agreement, dated December 27, 1996, between Par and General Electric Capital Corporation. (18) 10.23 Pledge Agreement, dated December 27, 1996, between the Registrant and General Electric Capital Corporation. (18) 10.24 Loan and Security Agreement, dated December 27, 1996, between Par and General Electric Capital Corporation. (18) 10.25 Manufacturing and Supply Agreement, dated April 30, 1997, between Par and BASF Corporation. (19) 10.26 First Amendment and Waiver to Loan and Security Agreement, dated May 22, 1997, between Par and General Electric Capital Corporation. (20) 30 10.27 Second Amendment and Waiver to Loan and Security Agreement, dated as of August 22, 1997, between Par and General Electric Capital Corporation. 11 Computation of per share data. 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. (a)(4) Reports on Form 8-K. No reports on Form 8-K were filed in the fourth quarter of the fiscal year ended September 30, 1997. __________________________________________ (1) Previously filed with the Securities and Exchange Commission (the "Commission") as an exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for 1991 and incorporated herein by reference. (2) Previously filed with the Commission as an exhibit to the Registrant's Statement on Form 8-A (Commission File No. 0-20834) filed on November 10, 1992 and incorporated herein by reference. (3) Previously filed with the Commission as an exhibit to Amendment No. 1 on Form 8 to the Registrant's Registration Statement on Form 8-B filed on May 15, 1992 and incorporated herein by reference. (4) Previously filed with the Commission as an exhibit to the Registrant's Registration Statement on Form 8-B dated August 6, 1991 and incorporated herein by reference. (5) Previously filed with the Commission as an exhibit to the Registrant's Proxy Statement dated August 10, 1992 and incorporated herein by reference. (6) Previously filed with the Commission as an exhibit to the Registrant's Proxy Statement dated August 14, 1991 and incorporated herein by reference. (7) Previously filed with the Commission as an exhibit to Par's Proxy Statement dated August 16, 1990 and incorporated herein by reference. (8) Previously filed with the Commission as an exhibit to Par's Registration Statement on Form S-1 (Commission No. 2-86614) and incorporated herein by reference. (9) Previously filed with the Commission as an Exhibit to Par's Annual Report on Form 10-K for 1990 and incorporated herein by reference. (10) Previously filed with the Commission as an exhibit to Par's Registration Statement on Form S-1 (Commission No. 33-4533) and incorporated herein by reference. (11) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1992 and incorporated herein by reference. (12) Previously filed with the Commission as an exhibit to Par's Annual Report on Form 10-K for 1989 and incorporated herein by reference. (13) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1996 and incorporated herein by reference. 31 (14) Intentionally omitted. (15) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 1994 and incorporated herein by reference. (16) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1995 and incorporated herein by reference. (17) Previously filed with the Commission as an exhibit to the Registrant's Report on Form 8-K dated May 2, 1995 and incorporated herein by reference. (18) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 28, 1996 and incorporated herein by reference. (19) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997 and incorporated herein by reference. (20) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997 and incorporated herein by reference. * Certain portions of Exhibit 10.14 have been omitted and have been filed with the Commission pursuant to a request for confidential treatment thereof. 32 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 19, 1997 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, December 19, 1997 - ------------------------ and Chairman of the Board of Kenneth I. Sawyer Directors /s/ Dennis J. O'Connor Vice President, Chief Financial December 19, 1997 - ------------------------ Officer and Secretary (Principal Dennis J. O'Connor Accounting and Financial Officer) /s/ Mark Auerbach Director December 19, 1997 - ------------------------ Mark Auerbach /s/ Andrew Maguire Director December 19, 1997 - ------------------------ Andrew Maguire /s/ H. Spencer Matthews Director December 19, 1997 - ------------------------ H. Spencer Matthews /s/ Robin O. Motz Director December 19, 1997 - ------------------------ Robin O. Motz /s/ Melvin Van Woert Director December 19, 1997 - ------------------------ Melvin Van Woert 33 PHARMACEUTICAL RESOURCES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 PAGE ---- INCLUDED IN PART II: - ------------------- Report of Independent Public Accountants F-2 Consolidated Balance Sheets at September 30, 1997 and September 30, 1996 F-3 Consolidated Statements of Operations and Retained Earnings (Deficit) for the years ended September 30, 1997, September 30, 1996 and September 30, 1995 F-4 Consolidated Statements of Cash Flows for the years ended September 30, 1997, September 30, 1996 and September 30, 1995 F-5 Notes to Consolidated Financial Statements F-6 through F-18 INCLUDED IN PART IV: - ------------------- SCHEDULE: II Valuation and qualifying accounts F-19 _________________________________________________ Other financial statement schedules are omitted because the conditions requiring their filing do not exist or the information required thereby is included in the financial statements filed, including the notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Pharmaceutical Resources, Inc.: We have audited the accompanying consolidated balance sheets of Pharmaceutical Resources, Inc. (a New Jersey corporation) and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations and retained earnings (deficit) and cash flows for each of the three years in the period ended September 30, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with 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 referred to above present fairly, in all material respects, the financial position of Pharmaceutical Resources, Inc. and subsidiaries as of September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP New York, New York November 25, 1997 F-2 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30, ASSETS 1997 1996 ------ -------------- ------------- Current assets: Cash and cash equivalents $ 181,000 $ 299,000 Temporary investments 15,000 158,000 Accounts receivable, net of allowances of $5,109,000 and $2,643,000 11,414,000 7,645,000 Inventories 13,239,000 19,352,000 Prepaid expenses and other current assets 3,306,000 3,894,000 ------------ ----------- Total current assets 28,155,000 31,348,000 Property, plant and equipment, at cost less accumulated depreciation and amortization 27,832,000 26,068,000 Deferred charges and other assets 2,102,000 1,222,000 Investment in marketable securities - 8,672,000 Investment in joint venture - 3,028,000 Non-current deferred tax benefit, net 14,608,000 14,608,000 ------------ ----------- Total Assets $ 72,697,000 $84,946,000 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $ 218,000 $ 2,142,000 Short-term debt 3,947,000 - Accounts payable 5,120,000 4,163,000 Accrued salaries and employee benefits 1,755,000 3,299,000 Accrued expenses and other current liabilities 1,156,000 1,028,000 ------------ ----------- Total current liabilities 12,196,000 10,632,000 Long-term debt, less current portion 2,651,000 2,971,000 Accrued pension liability 582,000 719,000 Shareholders' equity: Common Stock, par value $.01 per share; authorized 60,000,000 shares; issued and outstanding 18,874,216 and 18,661,869 shares 189,000 187,000 Additional paid in capital 67,520,000 67,081,000 Accumulated deficit (10,410,000) (1,509,000) Additional minimum liability related to defined benefit pension plan (31,000) (117,000) Unrealized gain on investment - 4,982,000 ------------ ----------- Total shareholders' equity 57,268,000 70,624,000 ------------ ----------- Total liabilities and shareholders' equity $ 72,697,000 $84,946,000 ============ ===========
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 ---------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1995 -------------- -------------- -------------- Net sales $ 53,172,000 $ 57,959,000 $66,503,000 Cost of goods sold 49,740,000 48,299,000 45,514,000 ------------ ------------ ----------- Gross margin 3,432,000 9,660,000 20,989,000 Operating expenses: Research and development 5,843,000 5,160,000 5,487,000 Selling, general and administrative 12,461,000 17,168,000 16,192,000 Restructuring charge - 549,000 - ------------ ------------ ----------- Total operating expenses 18,304,000 22,877,000 21,679,000 ------------ ------------ ----------- Operating loss (14,872,000) (13,217,000) (690,000) Settlements - - 2,029,000 Other income 6,968,000 2,557,000 608,000 Interest expense (587,000) (432,000) (499,000) ------------ ------------ ----------- Income (loss) from continuing operations before provision for income taxes (8,491,000) (11,092,000) 1,448,000 Provision for income taxes 410,000 - 836,000 ------------ ------------ ----------- Income (loss) from continuing operations (8,901,000) (11,092,000) 612,000 Income from discontinued operations - 2,800,000 - ------------ ------------ ----------- NET INCOME (LOSS) (8,901,000) (8,292,000) 612,000 Dividend on preferred stock - - 7,000 Retained earnings (deficit), beginning of year (1,509,000) 6,783,000 6,164,000 ------------ ------------ ----------- Retained earnings (deficit), end of year $(10,410,000) $ (1,509,000) $ 6,783,000 ============ ============ =========== Income (loss) per share of common stock: Continuing operations $(.48) $(.60) $.04 Discontinued operations - .15 - ----- ----- ---- NET INCOME (LOSS) $(.48) $(.45) $.04 ===== ===== ==== Weighted average number of common and common equivalent shares outstanding 18,681,017 18,467,248 17,143,381 ============ ============ ===========
The accompanying notes are an integral part of these statements. F-4 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED ---------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1995 -------------- -------------- -------------- Cash flows from operating activities: Net income (loss) $(8,901,000) $ (8,292,000) $ 612,000 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Common stock for research and development expense - - 150,000 Payment of tax audit settlement - - (995,000) Income from discontinued operations - (2,800,000) - Restructuring charge - 549,000 - Gain on sale of investments (2,880,000) (1,859,000) - Gain on sale of fixed assets (100,000) (53,000) (52,000) Joint venture research and development 773,000 499,000 - Provision for income taxes - - 836,000 Depreciation and amortization 2,758,000 2,873,000 2,588,000 Allowances against accounts receivable (2,466,000) (1,055,000) (1,180,000) Write-off of inventories 1,630,000 1,395,000 2,203,000 Other - 158,000 - Changes in assets and liabilities: (Increase) decrease in accounts receivable (1,303,000) 2,421,000 1,516,000 Decrease (increase) in inventories 4,483,000 (5,383,000) (1,215,000) Decrease (increase) in prepaid expenses and other assets 533,000 (1,431,000) (899,000) Increase (decrease) in accounts payable 732,000 (2,398,000) 822,000 (Decrease) increase in accrued expenses and other liabilities (1,467,000) 625,000 (734,000) ---------- ----------- --------- Net cash (used in) provided by operating activities (6,208,000) (14,751,000) 3,652,000 Cash flows from investing activities: Capital expenditures (1,049,000) (4,746,000) (3,975,000) Proceeds from sale of fixed assets 477,000 293,000 106,000 Investment in joint venture - (1,470,000) (2,037,000) Acquisition of businesses net of cash acquired (311,000) - - Decrease (increase) in marketable securities 6,570,000 1,669,000 (2,520,000) Decrease (increase) in temporary investments 143,000 113,000 (95,000) --------- ---------- ---------- Net cash provided by (used in) investing activities 5,830,000 (4,141,000) (8,521,000) Cash flows from financing activities: Proceeds from issuance of common stock 72,000 1,826,000 21,661,000 Net proceeds from revolving credit line, proceeds from issuance of notes payable and other debt 3,947,000 4,843,000 2,315,000 Principal payments under long-term debt and other borrowings (3,759,000) (5,459,000) (3,946,000) Payments due to stock conversion - (5,000) - Preferred dividends paid - - (305,000) ---------- ---------- --------- Net cash provided by financing activities 260,000 1,205,000 19,725,000 Net (decrease) increase in cash and cash equivalents (118,000) (17,687,000) 14,856,000 Cash and cash equivalents at beginning of year 299,000 17,986,000 3,130,000 ----------- ------------ ----------- Cash and cash equivalents at end of year $ 181,000 $ 299,000 $17,986,000 =========== ============ =========== Supplemental disclosure of cash flow information Non-cash investing activities: Assets assumed in the acquisition of business $ 4,233,000 - - Liabilities assumed in the acquisition of business 240,000 - -
The accompanying notes are an integral part of these statements. F-5 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 Pharmaceutical Resources, Inc. ("PRI") operates in one business segment, the manufacture and distribution of generic pharmaceuticals. Marketed products are principally in solid oral dosage form (tablet, caplet and two-piece hard-shell capsule), with one product in the semi-solid form of a cream. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation: The consolidated financial statements include the accounts of PRI and its wholly-owned subsidiaries, of which Par Pharmaceutical, Inc. ("Par") is its principal operating subsidiary. References herein to the "Company" refer to PRI and its subsidiaries. In August 1997, the Company purchased the 51% ownership interest of Clal Pharmaceutical Industries Ltd. ("Clal") in its research and development joint venture, located in Israel, in which PRI had previously owned 49%. The acquisition was accounted for as a purchase and the consolidated financial statements include the operating results from the date of acquisition. The consolidated balance sheet at September 30, 1997 reflects the allocation of the purchase price at the date of acquisition. Prior to acquisition the investment in the joint venture was accounted for by the equity method. Certain items on the consolidated financial statements for the prior years have been reclassified to conform to the current year financial statement presentation. Use of Estimates: The financial statements are prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management's best estimates and judgments. Accounting Period: In fiscal 1996, the Company changed its fiscal year end from the Saturday nearest to September 30 to September 30. This change had no material impact on the fiscal 1996 year end results. 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 which range from three to forty years. 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 the ultimate realization of such benefit is more likely than not. F-6 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 Revenue Recognition: The Company recognizes revenue at the time product is shipped 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 was considered to be a Common Stock equivalent. The dilutive effect of outstanding options and warrants is computed using the "treasury stock" method. Fully dilutive has not been presented because it is not materially different from primary amounts. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" ("SFAS 128"), which is effective for financial statements for periods ending after December 15, 1997, and requires retroactive restatement of all earnings per share data. SFAS 128 requires replacement of primary and fully diluted earnings per share with basic and diluted earnings per share. For fiscal 1997, SFAS 128 would not have had an impact on reported earnings per share. Cash Equivalents: For purposes of the statement of cash flows, the Company considers all highly liquid money market instruments with original maturity of three months or less to be cash equivalents. At September 30, 1997, cash equivalents were deposited in financial institutions and consisted of immediately available fund balances. Fair Value of Financial Instruments: The carrying amounts of the Company's accounts receivable, accounts payable, accrued liabilities and debt approximate fair market value based upon the relatively short-term nature of these financial instruments. Concentration of Credit Risk: Financial instruments that potentially subject the Company to credit risk consist of trade receivables. The Company markets its products primarily to domestic wholesalers, distributors, repackagers and retail drug store chains. The risk associated with this concentration is believed by the Company to be limited due to the number of wholesalers, distributors, repackagers and drug store chains, their geographic dispersion and the performance of certain credit evaluation procedures (see "Accounts Receivable-Major Customers"). ACQUISITION OF JOINT VENTURE: In May 1995, the Company and Clal formed a limited partnership located in Israel and organized under the laws of the State of Israel, to develop, manufacture and distribute generic pharmaceutical products worldwide. In August 1997, the Company acquired Clal's 51% ownership interest in the joint venture in which PRI previously had owned 49%. The joint venture was renamed Israel Pharmaceutical Resources L.P. ("IPR"). The Company, through one of its subsidiaries, acquired Clal's ownership interest for $447,000 in cash obtained from the sale of its holdings in Fine-Tech Ltd. ("Fine-Tech"), an Israeli pharmaceutical research and development company in which Clal had a significant ownership interest, and a non-recourse secured promissory note for $1,500,000 due in January 2003. The Company has the unconditional option to prepay the note for $600,000 by August 12, 1998. The Company is obligated to invest not less than $1,500,000 each year in IPR until the note is repaid. PRI may relocate part of IPR's operations to the United States. In addition, the Company and Clal agreed to modify certain terms of Clal's investment in the Company, including the surrender by Clal of warrants to purchase approximately 2,005,000 shares of Common Stock of the Company in exchange for the issuance to Clal of 186,000 shares of the Company's Common Stock for nominal consideration. At September 30, 1997, Clal owned approximately 12% of PRI's outstanding Common Stock. IPR assets included cash, equipment, formulation and research on products currently under development, all future rights to potential revenues and profits and all international marketing and distribution rights of products F-7 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 developed by IPR. The estimated fair market value of the assets and liabilities of IPR at acquisition were as follows (in thousands): ASSETS: Cash and cash equivalents $ 407 Current assets 79 ------ 486 Property, plant and equipment (net) 4,154 LIABILITIES: Accounts payable and accrued expenses $ 225 Long term liability 15 DISCONTINUED OPERATIONS: In September 1996, the Company recorded $2,800,000 as income from discontinued operations, reversing the remaining reserves of Quad Pharmaceuticals, Inc., a wholly owned subsidiary of Par whose operations were discontinued in fiscal 1991. The income from discontinued operations does not reflect any tax effect. SETTLEMENTS: In fiscal 1995, the Company settled claims against former management members of the Company for recovery of, among other things, salaries and money paid for indemnification. The total amount of the settlement was $2,029,000, which was collected between February and April of 1995. ACCOUNTS RECEIVABLE: 1997 1996 ------- ------- (In Thousands) Accounts receivable $16,523 $10,288 ------- ------- Allowances: Doubtful accounts 685 694 Returns and allowances 544 251 Price adjustments 3,880 1,698 ------- ------- 5.109 2,643 ------- ------- Accounts receivable, net of allowances $11,414 $ 7,645 ======= ======= Major Customers: Three of the Company's customers accounted for approximately 16%, 11% and 10% of net sales in fiscal 1997, 7%, 7% and 11% of net sales in fiscal 1996, and 5%, 3% and 6% of net sales in fiscal 1995. At September 30, 1997, amounts due from these same three customers accounted for approximately 10%, 26% and 12% of the net accounts receivable balance. At September 30, 1996, the amounts due from these same three customers accounted for approximately 6%, 16% and 23% of the net accounts receivable balance. F-8 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 INVENTORIES: 1997 1996 ------- ------- (In Thousands) Raw materials and supplies $ 6,439 $11,130 Work in process and finished goods 6,800 8,222 ------- ------- $13,239 $19,352 ======= ======= INVESTMENTS: As part of a 1994 distribution agreement with Sano Corporation ("Sano), the Company invested $3,500,000 in the preferred stock of Sano in the prior years (see "--Distribution Agreements"). In November 1995, Sano sold common stock through an initial public offering and the Company's preferred stock converted into 513,887 shares of common stock. In fiscal 1996, the Company sold 135,000 shares of its Sano stock resulting in a gain of $1,859,000. In fiscal 1997, the Company sold the remaining 378,887 shares of the stock resulting in a gain of $3,433,000 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Other Income"). The investment was classified as an "available for sale security" pursuant to SFAS No. 115. This standard requires that certain investments in debt and equity securities be adjusted to fair market value at the end of each accounting period and unrealized gains or losses recorded as a separate component of shareholders' equity. In accordance with SFAS No. 115, the investment was carried at its fair market value on September 30, 1996 of $20 1/4 per share, or $7,672,000, and the unrealized gain on the investment of $4,982,000 was reflected as a separate component in shareholders' equity. The Company has advanced $2,258,000, $2,942,000 and $1,429,000 in fiscal 1997, 1996 and 1995, respectively, to Sano as funding for the research and development costs of the generic transdermal products. Due to the uncertainty with respect to the collectability of such advances, the Company has expensed them and will treat them as a reduction of research and development expense if repaid. In November 1995, the Company received $1,500,000 from the proceeds of Sano's initial public offering in repayment of a portion of total advances outstanding from the Company. The Company has reflected this as a reduction of research and development expense in fiscal 1996. Pursuant to an amendment to the Sano distribution agreement in which the Company ceded certain distribution rights, the Company has recorded $3,900,000 in other income in fiscal 1997 (see "--Distribution Agreements"). In December 1995, the Company purchased a 10% interest in Fine-Tech, an Israeli pharmaceutical research and development company in which Clal had a significant ownership interest, for $1,000,000. In addition, the Company obtained certain exclusive rights to purchase products from Fine-Tech not commonly sold in North America, South America or the Caribbean. In June 1997, the Company sold all the shares of Fine-Tech for $447,000 and recorded a loss on the sale in the current period. During fiscal 1997, the Company did not purchase raw materials from Fine-Tech compared to approximately $1,500,000 of raw materials purchased in fiscal 1996. PROPERTY, PLANT AND EQUIPMENT: 1997 1996 ------- ------- (In Thousands) Land $ 2,230 $ 2,230 Buildings 18,509 17,237 Machinery and equipment 16,810 20,532 Office equipment, furniture and fixtures 3,838 5,863 Leasehold improvements 4,297 944 ------- ------- 45,684 46,806 Less accumulated depreciation and amortization 17,852 20,738 ------- ------- $27,832 $26,068 ======= ======= F-9 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 DISTRIBUTION AGREEMENTS: In April, 1997, Par entered into a Manufacturing and Supply Agreement (the "Supply Agreement") with BASF Corporation ("BASF"), a manufacturer of pharmaceutical products. Under the Supply Agreement, Par agreed to purchase certain minimum quantities of certain products manufactured by BASF at one of its facilities, and Par agreed to phase out its manufacturing of those products. BASF agreed to discontinue its direct sale of those products. The agreement has an initial term of three years (subject to earlier termination upon the occurrence of certain events as provided therein) and thereafter renews automatically for successive two-year periods to December 31, 2005, if Par has met certain purchase thresholds. In the event that Par's purchases do not equal or exceed the thresholds, BASF may elect to terminate the Supply Agreement effective one year later. The Company began selling drugs manufactured by BASF and BASF transferred to Par the marketing and sales of certain products covered by the Supply Agreement in June 1997 and the agreement became fully implemented in August 1997. The Company has a distribution agreement with Sano which gives Par the right to exclusively distribute three of Sano's generic transdermal products in the United States. Sano develops transdermal delivery systems utilizing a patch that incorporates the appropriate drug dosage into an adhesive that attaches the patch to the skin. The Company amended its 1994 distribution agreement in July 1997 ceding its distribution rights to three products for which submissions have not yet been filed with the U.S. Food and Drug Administration ("FDA"), while retaining exclusive United States distribution rights to three products, a nicotine transdermal patch and two nitroglycerin transdermal patches. In addition, PRI released distribution rights outside the United States for the retained products. In return for relinquishing the rights described above, PRI received in July 1997 $1,950,000 in cash and an interest bearing promissory note for $1,950,000 which will be due in September 1998. PRI has also retained the rights to recover up to $1,500,000 of certain of its prior payments to Sano from the gross profits earned on sales of two of the retained products. The Company intends to purchase manufactured products from Sano, when approved by the FDA, at cost and share in the gross profits from the sale. SHORT-TERM DEBT: In December 1996, Par entered into a Loan and Security Agreement (the "Loan Agreement") with General Electric Capital Corporation ("GECC") which provided Par with a three-year revolving line of credit. Pursuant to the Loan Agreement, as amended, Par is permitted to borrow up to the lesser of (i) the borrowing base established under the Loan Agreement or (ii) $20,000,000. The borrowing base is limited to 85% of eligible accounts receivable plus 50% of eligible inventory of Par, each as determined from time to time by GECC. The interest rate charge on the line of credit is based upon a per annum rate of 3.50% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par and PRI other than real property and is guaranteed by PRI. In connection with such facility, Par, PRI, and their affiliates have established a cash management system pursuant to which all cash and cash equivalents received by any of such entities are deposited into a lockbox account over which GECC has sole operating control and which are applied on a daily basis to reduce amounts outstanding under the line of credit. The revolving credit facility is subject to covenants based on various financial benchmarks. In fiscal year 1997, GECC waived events of default on three occasions unrelated to the repayment of debt under the Loan Agreement. As of September 30, 1997, the borrowing base was approximately $10,900,000 and $3,947,000 was outstanding under the line of credit. Any significant reduction in the borrowing base from current levels will adversely affect the Company's liquidity. LONG-TERM DEBT: F-10 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 At September 30, 1997, the Company's long-term debt of $2,869,000 consisted primarily of a non-recourse promissory note secured by the 51% interest in IPR purchased from Clal (see "--Acquisition of Joint Venture") and a mortgage loan, secured by the assets of the Company. At September 30, 1997, the Company had also borrowed $167,000 under a line of credit. The interest rate is based on the prime rate plus a premium and the line of credit is collateralized by the equipment purchased. 1997 1996 ------ ----- (In Thousands) Term loans (a) $1,117 4,683 Promissory note (b) 1,500 - Other (c) 252 430 ------ ------ 2,869 5,113 Less current portion 218 2,142 ------ ------ $2,651 $2,971 ====== ====== (a) Mortgage loan with a fixed rate of 8.5% until May 1999, at which time the fixed rate will be reset, paid in monthly installments until May 2001 when the remaining balance of $877,000 becomes due. Two additional loans in fiscal 1996 were paid in full pursuant to the Loan Agreement with GECC (see "--Short-Term Debt"). (b) Non-recourse secured promissory note bearing interest at 7%. The first installment is due in July 1999, with the remaining seven installments due each January and July through and including January 2003. The Company has the unconditional option to prepay the note for $600,000 on or before August 12, 1998. (c) Includes amount outstanding under line of credit with interest based upon prime rate in effect at the time of borrowing, with a minimum of 1/2 of 1% per annum premium which increases based upon the length of time the loan is outstanding. Also includes amounts due under a capital lease. Long-term debt maturities during the next five years, including the portion classified as current, are $218,000 in 1998, $356,000 in 1999, $442,000 in 2000, $1,291,000 in 2001, $375,000 in 2002 and $187,000 thereafter. During the fiscal 1997, 1996 and 1995, the Company incurred total interest expense of $587,000, $432,000, and $499,000, respectively. Interest paid approximated interest expense in each of the years. 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 of shareholder litigation reached in 1991, 2,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock") had been issued in 1992. In fiscal 1995, the Company converted each remaining outstanding share of Preferred Stock into 1.1 shares of Common Stock for an aggregate of 1,055,815 shares of Common Stock. Common Stock: In May 1995, the Company sold 2,027,272 shares of Common Stock for $20,000,000 ($9.87 per share) to Clal as part of a strategic alliance and formation of a research and development joint venture with Clal. Clal also F-11 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 received two three-year warrants to purchase up to 2,005,107 shares of Common Stock at prices between $11 and $12 per share. In connection with the acquisition of Clal's interest in IPR by the Company in August 1997, the Company and Clal agreed to modify certain terms of Clal's investment in the Company, including the surrender by Clal of the warrants in exchange for the issuance to Clal of 186,000 shares of the Company's Common Stock (see "--Acquisition of Joint Venture"). In fiscal 1996, Clal purchased an additional 100,000 shares of the Company's Common Stock from a third party. At September 30, 1997, Clal owned approximately 12% of the Company's outstanding Common Stock. Dividend: The fiscal 1994 dividend on Preferred Stock was paid in February 1995. There was no dividend on Common Stock in fiscal 1995, 1996 or 1997. Changes in Shareholders' Equity: Changes in the Company's Common Stock, Preferred Stock and Additional Paid in Capital accounts during fiscal 1995, 1996 and 1997 were as follows:
Series A Convertible Additional Preferred Stock Common Stock Paid In Shares Amount Shares Amount Capital ---------------- ------------- ---------- -------- ------------ Balance, October 1, 1994 1,058,400 $ 1,000 14,482,632 $145,000 $43,066,000 Exercise of stock options - - 424,750 4,000 2,247,000 Exercise of warrants - - 45,000 - 270,000 Investment shares issued - - 2,042,272 21,000 19,139,000 Conversion of preferred shares (1,058,400) (1,000) 1,153,647 12,000 (32,000) Compensatory arrangements - - 20,324 - 586,000 --------------- ------------ ---------- -------- ----------- Balance, September 30, 1995 - - 18,168,625 182,000 65,276,000 Exercise of stock options - - 470,000 5,000 1,017,000 Investment shares issued - - - - (12,000) Conversion of preferred shares - - - - (5,000) Compensatory arrangements - - 23,244 - 805,000 --------------- ------------ ---------- -------- ----------- Balance, September 30, 1996 - - 18,661,869 187,000 67,081,000 Investment shares issued - - 186,000 2,000 370,000 Compensatory arrangements - - 26,347 - 69,000 --------------- ------------ ---------- -------- ----------- Balance, September 30, 1997 - - 18,874,216 $189,000 $67,520,000 =============== ============ ========== ======== ===========
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. F-12 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 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 26,347 shares, 23,244 shares and 18,074 shares during fiscal 1997, 1996 and 1995, respectively. At September 30, 1997, 890,944 shares remain available for sale under the Program. Stock Options: The following is a summary of stock option activity during fiscal 1997, 1996 and 1995:
1997 1996 1995 --------------------- -------------------- --------------------- Price Per Price Per Price Per Shares Share Shares Share Shares Share ---------- -------- ---------- -------- ---------- --------- Outstanding at beginning of year 2,013,750 $3.13 to 2,357,750 $2.63 to 2,533,500 $2.63 to $13.88 $14.13 $14.13 Granted 313,900 $2.13 to 210,500 $7.00 to 289,500 $8.50 to $3.38 $7.38 $10.63 Exercised - - (470,000) $3.50 to (424,750) $2.63 to - $7.00 $10.50 Cancelled/Surrendered (576,250) $6.25 to (84,500) $2.63 to (40,500) $7.38 to --------- $13.88 --------- $14.13 --------- $14.13 Outstanding at end of year 1,751,400 $2.13 to 2,013,750 $3.13 to 2,357,750 $2.63 to ========= ========= ========= $10.63 $13.88 $14.13
Shareholders approved the 1995 Directors' Stock Option Plan (the "1995 Directors' Plan") through which options will be awarded to future non-employee directors upon the date elected to the Board. Current directors are not eligible for awards under the 1995 Directors' Plan. The Company has reserved 100,000 shares of Common Stock for issuance under the 1995 Directors' Plan. 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 2,800,000 shares of Common Stock for issuance under the 1990 Plan. Under the 1989 Directors' Stock Option Plan (the "Directors' Plan"), options were 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. The Company has reserved 550,000 shares of Common Stock for issuance under the Directors' Plan. The Company does not intend to grant further options under this 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 Company may not grant further options under this Plan. At September 30, 1997 and September 30, 1996, options for 1,120,850 and 388,000 shares, respectively, were available for future grant under the various stock option plans. F-13 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company adopted the disclosure provisions of SFAS 123 in 1997, but opted to remain under the expense recognition provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for stock option plans. Had compensation expense for stock options granted under the Plan been determined based on fair value at the grant dates consistent with the disclosure method required for 1997 in accordance with SFAS 123, the Company's net loss for 1997 and 1996 would have increased to the pro forma amounts shown below: 1997 1996 ---- ---- Net loss: (In Thousands) As reported $(8,901) $(8,292) Pro forma $(9,076) $(8,568) Net loss per share: As reported $ (.48) $ (.45) Pro forma $ (.49) $ (.46) The weighted average fair value of options granted in 1997 and 1996 was estimated as of the date of grant using the Black-Scholes stock option pricing model, based on the following weighted average assumptions: 1997 1996 ---- ---- Risk free interest rate 6.3% 6.0% Expected term 5.0 years 3.4 years Expected volatility 64.1% 64.1% No dividend will be paid for the entire term of the option. INCOME TAXES: In February 1992, the FASB issued SFAS No. 109 "Accounting for Income Taxes" ("SFAS 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, SFAS 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 which were reflected as the cumulative effect of a change in accounting principle in fiscal 1994. Based on the Company's recent performance and the uncertainty of the generic business in which it operates, management believes that future operating income might not be sufficient to recognize fully the net operating loss carryforwards of the Company. Therefore, the Company did not recognize a benefit for its operating losses in either fiscal 1997 or 1996. Based on recent events including the Supply Agreement with BASF, cost reductions and process improvements, and a commitment to research and development of new products management believes that its valuation allowance is adequate. However, there can be no assurance that the Company will generate taxable earnings or any specific level of continuing earnings in the future. If the Company is unable to generate sufficient taxable income in the future, increases in the valuation allowance will be required through a charge to expense. At September 30, 1997, the Company had NOL carryforwards for tax purposes of approximately $56,000,000 that expire in September 2006 through September 2012. The Company incurred income tax expense of $410,000 in the first quarter of fiscal 1997 due to interest relating to a settlement with the Internal Revenue Service in fiscal 1995 for the disallowance of the Company's tax credit in prior periods with respect to certain research and development credits. F-14 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities are as follows: September 30, September 30, 1997 1996 ------------- ------------- Deferred assets: (In Thousands) Federal NOL carryforwards $19,250 $17,598 Accounts receivable 2,044 1,058 Accrued expenses 448 830 Research and development expenses 637 1,194 Inventory 463 302 State tax NOL 2,192 1,603 Taxes payable to the IRS - 171 Other 629 630 ------- ------- 25,663 23,386 Valuation allowance (8,308) (5,978) ------- ------- 17,355 17,408 Deferred liabilities: Fixed assets 2,747 2,800 ------- ------- Net deferred assets $14,608 $14,608 ======= ======= Included in the recognition of future tax benefits is approximately $1,678,000 of stock option compensation credited to additional capital. Of this amount, $1,244,000 was recorded upon adoption of SFAS 109 and $434,000 was credited in fiscal 1995. A valuation allowance was recorded in fiscal 1996 and 1995 for an additional $683,000 and $558,000, respectively, related to stock option compensation which will be credited to equity upon utilization of tax carryforwards. The components of income tax expense are as follows: 1997 1995 ---- ---- (In Thousands) Federal: Current $ 410 $1,769 Deferred - (995) ----- ------ $ 410 $ 774 ----- ------ State: Current - 62 Deferred - - ----- ------ - 62 ----- ------ $ 410 $ 836 ===== ====== The table below provides the details of the differences between the provision for income taxes and the amount determined by multiplying income before income taxes by the applicable federal statutory rate: 1997 1995 ----- ----- Statutory tax rate - 34% State tax - net - 6% Interest on IRS settlement - net 5% 18% ---- ---- Effective tax rate 5% 58% ==== ==== F-15 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: Leases: At September 30, 1997, the Company had minimum rental commitments aggregating $2,674,000 under noncancelable operating leases expiring through 2004. Amounts payable thereunder are $615,000 in fiscal 1998, $375,000 in fiscal 1999, $311,000 in fiscal 2000, $314,000 in fiscal 2001, $319,000 in fiscal 2002, and $740,000 thereafter. Rent expense charged to operations in fiscal 1997, 1996 and 1995 was $932,000, $863,000, and $811,000, 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. The Board of Directors of Par authorized the cessation of employer contributions effective December 30, 1996. Consequently, participants in the Retirement Plan are no longer entitled to any employer contributions under such plan for 1996 or subsequent years. The Company 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 and the defined benefit plan discussed below were $344,000 (reduced by $22,000 in forfeitures) in fiscal 1997, $729,000 in fiscal 1996 (reduced by $24,000 in forfeitures) and $1,107,000 in fiscal 1995 (reduced by $289,000 in forfeitures). In fiscal 1998, the Company intends to merge the Retirement Plan into the Retirement Savings Plan. 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 1997, 1996 and 1995 included the following components:
1997 1996 1995 ------ ------ ------ (In Thousands) Interest cost $ 135 $ 132 $ 129 Actual return on assets (167) (71) (200) Net amortization and deferral: Asset gain (loss) 58 (34) 77 Amortization of initial unrecognized transition obligation 51 51 51 Amortization of unrecognized net gain - 3 - ----- ----- ----- Net pension expense $ 77 $ 81 $ 57 ===== ===== =====
The discount rate used to measure the projected benefit obligation for the Plan is 6.75%. The assumed long-term rate of return on plan assets in fiscal 1997 was 7%. F-16 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 The Plan's funded status and the amounts recorded on the Company's consolidated balance sheets are as follows: 1997 1996 ------- ------- (In Thousands) Vested benefit obligations $1,961 $1,989 ====== ====== Accumulated benefit obligations $1,961 $1,989 ====== ====== Projected benefit obligations $1,961 $1,989 Market value of assets 1,643 1,594 ------ ------ Projected benefit obligation in excess of market value (318) (395) Unrecognized net obligation 551 602 Unrecognized net loss 31 117 Adjustment for minimum liability (582) (719) ------ ------ Net recorded pension (liability) $ (318) $ (395) In accordance with SFAS 87, the Company has recorded an additional minimum pension liability for underfunded plans of $582,000 in fiscal 1997 and $719,000 in fiscal 1996, representing the excess of underfunded accumulated benefit obligations over previously recorded pension cost liabilities. A corresponding amount is recognized as an intangible asset except to the extent that these additional liabilities exceed related unrecognized prior service cost and net transition obligation, in which case the increase in liabilities is charged directly to shareholders' equity. As of September 30, 1997, $31,000 of the excess minimum pension liability resulted in a charge to equity. As of September 30, 1996, the excess minimum liability was $117,000. Legal Proceedings: The Company is involved in certain litigation matters, including certain product liability actions and actions by two former employees for, among other things, breach of contract. Such actions seek damages from the Company, including compensatory and punitive damages. The Company intends to defend these actions vigorously. The Company believes that these actions are incidental to the conduct of its business, and that the ultimate resolution thereof will not have a material adverse effect on its financial condition, results of operations or liquidity. In June 1996, the Company settled a claim with its insurance carrier, filed in 1995, for $1,455,000 related to the interruption of business at one of its manufacturing facilities. The settlement favorably affected gross margins by $618,000 in the third quarter of fiscal year 1996, but did not have a material effect on its financial condition, results of operations or liquidity for the fiscal year. Restructuring and Cost Reductions: Primarily as a result of the Supply Agreement, the Company further reduced the work force during the third quarter of fiscal 1997 by approximately forty- five employees, primarily in manufacturing functions and a smaller number in administrative and product development positions (see "--Distribution Agreements"). The work force reduction included a layoff of employees at the end of June 1997 and the elimination of positions currently open. The Company established a provision for the work force reduction of $280,000 and subsequent charges are included in the fiscal 1997 operating results. The charge includes $231,000 for severance pay, employee benefits and out placement services and $49,000 in legal fees. The Company began implementing measures during the fourth quarter of fiscal 1996, which continued in fiscal 1997, in an effort to reduce costs and increase operating efficiencies. Such measures have provided for a reduction in the work force, changes in senior management, a reorganization of certain existing personnel and reductions in certain expenses. A provision of $549,000 was established for the cost of a restructuring during fiscal 1996 and the subsequent charge to expense was classified as "Restructuring charge" on the statement of operations. The charge F-17 PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS-CONTINUED SEPTEMBER 30, 1997 included $424,000 for severance pay, employee benefits, and out placement services and $125,000 in consulting and legal fees. The amount of actual termination benefits paid approximated the original provision and, consequently, no restructuring liability exists on the balance sheet at September 30, 1997. Other Matters: During fiscal 1997, four of the Company's products accounted for approximately 59% of its net sales compared to 58% and 63%, respectively, of net sales in fiscal 1996 and 1995. One of such products contributed significantly to the sales and gross margin in all three periods. A competitor of the Company received FDA approval for this product in fiscal 1996 where, prior to that time, the Company had been the sole generic manufacturer. During the second half of calendar 1995, two generic pharmaceutical manufacturers received FDA approval for a product in which the Company had also been the sole generic manufacturer. These products, along with one other product, had historically accounted for a significant percentage of the Company's net sales and gross margin. Due to the increased competition with respect to these products, the Company's sales and gross margins have been materially and adversely affected. F-18 SCHEDULE II PHARMACEUTICAL RESOURCES, INC. SCHEDULE II--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 September 30, 1997 $694,000 $ 3,000 12,000 (a) $685,000 Year ended September 30, 1996 $208,000 $486,000 - $694,000 Year ended September 30, 1995 $124,000 $108,000 24,000 (a) $208,000
Allowance for returns and price adjustments:
Year ended September 30, 1997 $1,949,000 $9,698,000 7,223,000 (b) $4,424,000 Year ended September 30, 1996 $1,380,000 $5,886,000 5,317,000 (b) $1,949,000 Year ended September 30, 1995 $2,644,000 $3,632,000 4,896,000 (b) $1,380,000
(a) Write-off of uncollectible accounts. (b) Returns and allowances charged against allowance provided therefor. F-19 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 3.1 Certificate of Incorporation of the Registrant. (1) 3.1.1 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 6, 1992. (2) 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. (4) 4.1 Amendment to Rights Agreement between the Registrant and Midlantic National Bank, as Rights Agent, dated as of April 27, 1992. (3) 4.2 Amendment to Rights Agreement, dated as of March 24, 1995, between the Registrant and Midlantic National Bank, as Rights Agent. 4.3 Amendment to Rights Agreement, dated as of September 18, 1997, between the Registrant and First City Transfer Company, as Rights Agent. 10.1 1983 Stock Option Plan of the Registrant, as amended. (5) 10.2 1986 Stock Option Plan of the Registrant, as amended. (5) 10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (6) 10.4 1989 Employee Stock Purchase Program of the Registrant. (7) 10.5 1990 Stock Incentive Plan of the Registrant, as amended. 10.6 Form of Retirement Plan of Par. (8) 10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984. (9) 10.7 Form of Retirement Savings Plan of Par. (8) 10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984. (10) 10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984. (10) 10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985. (10) 10.8 Par Pension Plan, effective October 1, 1984. (1) 10.9 Employment Agreement, dated as of October 4, 1992, among the Registrant, Par and Kenneth I. Sawyer. (10) 10.10 Severance Agreement, dated as of October 23, 1996, between the Registrant and Dennis J. O'Connor. 10.11 Lease for premises located at 12 Industrial Avenue, Upper Saddle River, New Jersey, dated October 21, 1978, between Par and Charles and Dorothy Horton, and extension dated September 15, 1983. (12) 10.12 Lease Agreement, dated as of January 1, 1993, between Par and Ramapo Corporate Park Associates. (13) 10.13 Lease Extension and Modification Agreement, dated as of August 30, 1997, between Par and Ramapo Corporate Park Associates. 10.14 Amended and Restated Distribution Agreement, dated as of July 28, 1997, among Sano Corporation, the Registrant and Par./*/ 10.15 Mortgage and Security Agreement, dated May 4, 1994, between Urban National Bank and Par. (15) 10.15.1 Mortgage Loan Note, dated May 4, 1994. (15) 10.15.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban National Bank. (15) 10.16 1995 Directors Stock Option Plan. (16) 10.17 Stock Purchase Agreement, dated March 25, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17) 10.18 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17) 10.19 Registration Rights Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17) 10.20 Non-Recourse Secured Promissory Note, July 28, 1997, of PRI Research, Inc. 10.21 Third Amendment to Stock Purchase Agreement, dated July 28, 1997, between the Registrant and Clal Pharmaceutical Industries Ltd. 10.22 Pledge Agreement, dated December 27, 1996, between Par and General Electric Capital Corporation. (18) 10.23 Pledge Agreement, dated December 27, 1996, between the Registrant and General Electric Capital Corporation. (18) 10.24 Loan and Security Agreement, dated December 27, 1996, between Par and General Electric Capital Corporation. (18) 10.25 Manufacturing and Supply Agreement, dated April 30, 1997, between Par and BASF Corporation. (19) 10.26 First Amendment and Waiver to Loan and Security Agreement, dated May 22, 1997, between Par and General Electric Capital Corporation. (20) 10.27 Second Amendment and Waiver to Loan and Security Agreement, dated as of August 22, 1997, between Par and General Electric Capital Corporation. 11 Computation of per share data. 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. ___________ (1) Previously filed with the Securities and Exchange Commission (the "Commission") as an exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for 1991 and incorporated herein by reference. (2) Previously filed with the Commission as an exhibit to the Registrant's Statement on Form 8-A (Commission File No. 0-20834) filed on November 10, 1992 and incorporated herein by reference. (3) Previously filed with the Commission as an exhibit to Amendment No. 1 on Form 8 to the Registrant's Registration Statement on Form 8-B filed on May 15, 1992 and incorporated herein by reference. (4) Previously filed with the Commission as an exhibit to the Registrant's Registration Statement on Form 8-B dated August 6, 1991 and incorporated herein by reference. (5) Previously filed with the Commission as an exhibit to the Registrant's Proxy Statement dated August 10, 1992 and incorporated herein by reference. (6) Previously filed with the Commission as an exhibit to the Registrant's Proxy Statement dated August 14, 1991 and incorporated herein by reference. (7) Previously filed with the Commission as an exhibit to Par's Proxy Statement dated August 16, 1990 and incorporated herein by reference. (8) Previously filed with the Commission as an exhibit to Par's Registration Statement on Form S-1 (Commission No. 2-86614) and incorporated herein by reference. (9) Previously filed with the Commission as an Exhibit to Par's Annual Report on Form 10-K for 1990 and incorporated herein by reference. (10) Previously filed with the Commission as an exhibit to Par's Registration Statement on Form S-1 (Commission No. 33-4533) and incorporated herein by reference. (11) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1992 and incorporated herein by reference. (12) Previously filed with the Commission as an exhibit to Par's Annual Report on Form 10-K for 1989 and incorporated herein by reference. (13) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1996 and incorporated herein by reference. (14) Intentionally omitted. (15) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 1994 and incorporated herein by reference. (16) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1995 and incorporated herein by reference. (17) Previously filed with the Commission as an exhibit to the Registrant's Report on Form 8-K dated May 2, 1995 and incorporated herein by reference. (18) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 28, 1996 and incorporated herein by reference. (19) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997 and incorporated herein by reference. (20) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997 and incorporated herein by reference. * Certain portions of Exhibit 10.14 have been omitted and have been filed with the Commission pursuant to a request for confidential treatment thereof. EX-4.2 2 AMENDMENT TO RIGHTS AGREEMENT DATED MARCH 25, 1997 EXHIBIT 4.2 AMENDMENT TO RIGHTS AGREEMENT dated March 24, 1995, to the Rights Agreement dated August 6, 1991, as amended (the "Rights Agreement"), by and between Pharmaceutical Resources, Inc., a New Jersey corporation ("the "Company"), and Midlantic Bank, a national banking association (the "rights Agent"). WHEREAS, the Board of Directors of the Company, on August 6, 1991, authorized and adopted a share purchase rights plan (the "Plan") to protect the Company's shareholders against unsolicited and hostile attempts to acquire control of the Company and, in connection therewith, executed and delivered the Rights Agreement to effectuate the terms of the Plan; WHEREAS, the Board of Directors of the Company, on March 23, 1995, approved and adopted an amendment to the Plan as described herein in contemplation of a certain negotiated transaction; WHEREAS, the Board of Directors of the Company authorized and directed the proper officers of the Company as well as the Rights Agent to execute and deliver this Amendment to the Rights Agreement in order to effectuate the foregoing amendments to the Plan; and WHEREAS, all capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Rights Agreement. NOW, THEREFORE, in consideration of the premises, the Rights Agreement is hereby amended as follows: Section 1. Certain Definitions. (a) The definition of "Acquiring ------------------- Person" as set forth in the first sentence in Section 1(a) shall be amended by deleting "or" before "(iv)" and inserting in its stead "," and by inserting the following at the end of the first sentence thereof before the ".": "and (v) Clal Pharmaceutical Industries Ltd. and its permitted assigns (collectively, "Clal") under a stock purchase agreement approved by the Board of Directors of the Company, as amended from time to time, between the Company and Clal, so long as any acquisition or tender offer is permitted under such stock purchase agreement" (b) The definition of "Permitted Offer" in Section 1(n) shall be amended in its entirety as follows: "(n) "Permitted Offer" shall mean the following tender offers made in the manner prescribed by Section 14(d) of the Exchange Act and the rules and regulations promulgated thereunder: (i) a tender offer for all outstanding Common Shares; provided, however, that such tender offer occurs -------- ------- at a time when Continuing Directors are in office and a majority of the Continuing Directors has determined that the offer is fair to, and otherwise in the best interests of, the Company and its stockholders, and (ii) a tender offer for Common Shares as permitted by a stock purchase agreement approved by the Board of Directors of the Company, as amended from time to time, between the Company and Clal." 1 (c) The following shall be inserted before the "." in the definition of "Person" in Section 1(o): "; provided, however, that "Person" shall exclude Clal until such time as -------- ------- any acquisition of or tender offer for Common Shares by Clal shall not be permitted under a stock purchase agreement approved by the Board of Directors of the Company, as amended from time to time, between the Company and Clal" (d) The following shall be inserted before the "." in the definition of "Section 11(a)(ii)(A) Event" in Section 1(v): "; provided, however, in no event shall an acquisition of or tender offer -------- ------- for Common Shares by Clal constitute a Section 11(a)(ii)(A) Event until such time as any such acquisition or tender offer shall no longer be permitted under a stock purchase agreement approved by the Board of Directors of the Company, as amended from time to time, between the Company and Clal" (e) The following shall be inserted before the "." in the definition of "Section 13 Event" in Section 1(w): "; provided, however, in no event shall an acquisition of or tender offer -------- ------- for Common Shares by Clal constitute a Section 13 Event until such time as any such acquisition or tender offer shall no longer be permitted under a stock purchase agreement approved by the Board of Directors of the Company, as amended from time to time, between the Company and Clal" Section 2. Authority for Amendment. This Amendment is being ------------------------ executed and delivered as of the date hereof by the Company and the Rights Agent pursuant to and in accordance with Section 27 of the Rights Agreement. By executing this Amendment, the Company hereby certifies to the Rights Agent that this Amendment is in compliance with Section 27 of the Rights Agreement. Except as otherwise amended hereby, all the provisions of the Rights Agreement shall remain in full force and effect. This Amendment shall be deemed to be a part of, and shall be construed as part of, the Rights Agreement. IN WITNESS HEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first above written. PHARMACEUTICAL RESOURCES, INC. By/s/Kenneth I. Sawyer -------------------------------- Title: President MIDLANTIC BANK, N.A. By/s/Devorah H. Rosen -------------------------------- Title: Devorah H. Rosen Assistant Vice President 2 EX-4.3 3 AMENDMENT TO RIGHTS AGREEMENT DATED SEPTEMBER 18, EXHIBIT 4.3 AMENDMENT TO RIGHTS AGREEMENT dated September 18, 1997, to the Rights Agreement dated August 6, 1991, as amended (the "Rights Agreement"), by and between Pharmaceutical Resources, Inc., a New Jersey corporation (the "Company"), and First City Transfer Company (the "Rights Agreement"), as successor to Midlantic Bank. WHEREAS, the Board of Directors of the Company, on August 6, 1991, authorized and adopted a share purchase rights plan (the "Plan") to protect the Company's shareholders against unsolicited and hostile attempts to acquire control of the Company and, in connection therewith, executed and delivered the Rights Agreement to effectuate the terms of the Plan; WHEREAS, the Plan was amended, on March 23, 1995, in contemplation of a certain negotiated transaction with Clal Pharmaceutical Industries Ltd.; WHEREAS, the Board of Directors of the Company, on July 28, 1997, approved an amendment to the Plan as described herein in contemplation of modifications to such negotiated transaction; WHEREAS, the Board of Directors of the Company authorized and directed the proper officers of the Company as well as the Rights Agent to execute and deliver this Amendment to the Rights Agreement in order to effectuate the foregoing amendments to the Plan; and WHEREAS, all capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Rights Agreement. NOW, THEREFORE, in consideration of the premises, the Rights Agreement is hereby amended as follows: Section 1. Certain Definitions. Section 1(a)(v) of the Rights ------------------- Agreement shall be amended in its entirety as follows: "(v) Clal Pharmaceutical Industries Ltd. and its permitted assigns under Section 16 of the Stock Purchase Agreement, dated March 25, 1995, between the Company and Clal Pharmaceutical Industries Ltd., as amended (the "Stock Purchase Agreement") (Clal Pharmaceutical Industries Ltd. and its permitted assigns under such Section 16 shall be collectively referred to herein as "Clal"), so long as any acquisition or tender offer by Clal is permitted under the Stock Purchase Agreement" (b) The definition of "Permitted Offer" in Section 1(n) of the Rights Agreement shall be amended in its entirety as follows: 1 "(n) "Permitted Offer" shall mean the following tender offers made in the manner prescribed by Section 14(d) of the Exchange Act and the rules and regulations promulgated thereunder: (i) a tender offer for all outstanding Common Shares; provided, however, that such tender offer occurs at a time --------- ------- when Continuing Directors are in office and a majority of the Continuing Directors has determined that the offer is fair to, and otherwise in the best interests of, the Company and its stockholders, and (ii) a tender offer for Common Shares as permitted by the Stock Purchase Agreement." (c) The proviso in the definition of "Section 11(a)(ii)(A) Event" in Section 1(v) of the Rights Agreement shall be amended in its entirety as follows: "; provided, however, in no event shall an acquisition of or tender offer --------- ------- for Common Shares by Clal constitute a Section 11(a)(ii)(A) Event until such time as any such acquisition or tender offer by Clal shall no longer be permitted under the Stock Purchase Agreement" (d) The proviso in the definition of "Section 13 Event" in Section 1(w) of the Rights Agreement shall be amended in its entirety as follows: "; provided, however, in no event shall an acquisition of or tender offer --------- ------- for Common shares by Clal constitute a Section 13 Event until such time as any such acquisition or tender offer by Clal shall no longer be permitted under the Stock Purchase Agreement" Section 2. Authority for Amendment. This Amendment is being executed ----------------------- and delivered as of the date hereof by the Company and the Rights Agent pursuant to and in accordance with Section 27 of the Rights Agreement. By executing this Amendment, the Company hereby certifies to the Rights Agent that this Amendment is in compliance with Section 27 of the Rights Agreement. Except as otherwise amended hereby, all the provisions of the Rights Agreement shall remain in full force and effect. This Amendment shall be deemed to be a part of, and shall be construed as part of, the Rights Agreement. IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first above written. PHARMACEUTICAL RESOURCES, INC. By:/s/Kenneth I. Sawyer -------------------- Title: President FIRST CITY TRANSFER COMPANY By:/s/Kathleen M. Zaleske ---------------------- Title: Assistant Vice President 2 EX-10.5 4 1990 STOCK INCENTIVE PLAN EXHIBIT 10.5 1990 STOCK INCENTIVE PLAN PHARMACEUTICAL RESOURCES, INC. SECTION 1. PURPOSE; DEFINITIONS. The purpose of the Pharmaceutical Resources, Inc. 1990 Stock Incentive Plan (the "Plan") is to enable Pharmaceutical Resources, Inc. (the "Company") to offer to officers, other employees and independent agents, consultants and attorneys of the Company and its subsidiaries, long-term performance-based stock and/or other equity interests in the Company thereby enhancing their ability to attract, retain and reward such individuals. The various types of long-term incentive awards which may be provided under the Plan will enable Pharmaceutical Resources, Inc. to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of its businesses. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Agents" means those persons who are not employees of the Company or any subsidiary, including independent agents, consultants and attorneys for the Company. (b) "Board" means the Board of Directors of Pharmaceutical Resources, Inc. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (d) "Committee" means the Stock Option Committee of the Board or any other committee of the Board which the Board may designate. (e) "Company" means Pharmaceutical Resources, Inc., a corporation organized under the laws of the State of New Jersey. (f) "Deferred Stock" means Stock to be received, under an award made pursuant to Section 8 below, at the end of a specified deferral period. (g) "Disability" means disability as determined under procedures established by the Committee for purposes of the Plan. (h) "Early Retirement" means retirement, with the approval of the Committee for purposes of one or more award(s) hereunder, from active employment with the Company or any Subsidiary prior to age 65. (i) "Fair Market Value", unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, means, as of any given date: (i) if the Stock is listed on a national securities exchange or quoted on the NASDAQ National Market System, the closing price of the Stock on the last preceding day on which the Stock was traded, as reported on the composite tape or by NASDAQ/NMS System Statistics, as the case may be; 1 (ii) if the Stock is not listed on a national securities exchange or quoted on the NASDAQ National Market System, but is traded in the over-the-counter market, the average of the closing bid and asked prices for the Stock on the last preceding day for which such quotations are reported by NASDAQ; and (iii) if the Fair Market Value of the Stock cannot be determined pursuant to clause (i) or (ii) above, such price as the Committee shall determine. (j) "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. (k) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (l) "Normal Retirement" means retirement from active employment with the Company or any Subsidiary on or after age 65. (m) "Other Stock-Based Award" means an award under Section 9 below that is valued in whole or in part by reference to, or is otherwise based upon, Stock. (n) "Plan" means this Pharmaceutical Resources, Inc. 1990 Stock Incentive Plan, as hereinafter amended from time to time. (o) "Qualified Domestic Relations Order" shall have the meaning assigned to such term under the Code. (p) "Restricted Stock" means Stock, received under an award made pursuant to Section 7 below, that is subject to restrictions under said Section 7. (q) "Retirement" means Normal Retirement or Early Retirement. (r) "SAR Value" means the value of the excess of the Fair Market Value of one share of Stock over the option price per share specified in a related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall be exercised, on the date of exercise. (s) "Stock" means the Common Stock of the Company, par value $.01 per share. (t) "Stock Appreciation Right" means the right, pursuant to an award granted under Section 6 below, to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount equal to the SAR Value. (u) "Stock Option" or "Option" means any option to purchase shares of Stock which is granted pursuant to the Plan. (v) "Subsidiary" means any present or future subsidiary corporation of the Company, as such term is defined in Section 424(f) of the Code, or any successor thereto. 2 SECTION 2. ADMINISTRATION. The Plan shall be administered by the Committee, the membership of which shall be at all times constituted so as to not adversely affect the compliance of the Plan with the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"), as in effect from time to time, or with the requirements of any other applicable law, rule or regulation. The Committee shall have full authority to grant, pursuant to the terms of the Plan, to officers, other employees and Agents under Section 4 below: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, (iv) Deferred Stock, and/or (v) Other Stock- Based Awards. For purposes of illustration and not of limitation, the Committee shall have the authority (subject to the express provisions of this Plan): (i) to select the officers, other employees and Agents of the Company or any Subsidiary to whom Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock and/or Other Stock-Based Awards may from time to time be granted hereunder; (ii) to determine the Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock and/or Other Stock-Based Awards, or any combination thereof, if any, to be granted hereunder to one or more officers, other employees and Agents; (iii) to determine the number of shares to be covered by each award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, share price, any restrictions or limitations, and any vesting, acceleration or forfeiture provisions, as the Committee shall determine); (v) to determine the terms and conditions under which awards granted hereunder are to operate on a tandem basis and/or in conjunction with or apart from other awards made by the Company or any Subsidiary outside of this Plan; (vi) to determine the extent and circumstances under which Stock and other amounts payable with respect to an award hereunder shall be deferred, which may be either automatic or at the election of the participant; and (vii) to substitute (A) new Stock Options for previously granted Stock Options, which previously granted Stock Options have higher option exercise prices and/or contain other less favorable terms, and (B) new awards of any other type for previously granted awards of the same type, which previously granted awards are upon less favorable terms. Subject to Section 11 hereof, the Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from 3 time to time, deem advisable, to interpret the terms and provisions of the Plan and any award issued under the Plan (and to determine the form and substance of all agreements relating thereto), and to otherwise supervise the administration of the Plan. Subject to Section 11 hereof, all decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding upon all persons, including the Company, its Subsidiaries and Plan participants. SECTION 3. STOCK SUBJECT TO PLAN. The total number of shares of Stock reserved and available for distribution under the Plan shall be 2,050,000 shares. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any shares of Stock that have been optioned cease to be subject to a Stock Option, or if any shares of Stock that are subject to any Stock Appreciation Right, Restricted Stock, Deferred Stock award or Other Stock-Based Award granted hereunder are forfeited or any such award otherwise terminates without a payment being made to the participant in the form of cash and/or Stock, such shares shall again be available for distribution in connection with future grants and awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, dividend (other than a dividend or its equivalent which is credited to a Plan participant or a regular cash dividend), Stock split, or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan, and in the number of shares subject to other outstanding awards (including but not limited to awards of Restricted Stock, Deferred Stock and Other Stock-Based Awards) granted under the Plan as may be determined to be appropriate by the Committee in order to prevent dilution or enlargement of rights, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY. Officers and other employees of the Company or any Subsidiary (but excluding members of the Committee and any person who serves only as a director) who are at the time of the grant of an award under this Plan regularly employed by the Company or any Subsidiary on a full-time basis and who are responsible for or contribute to the management, growth and/or profitability of the business of the Company or any Subsidiary, are eligible to be granted Options and awards under the Plan. Eligibility under the Plan for such officers and other employees, and Agents, shall be determined by the Committee. SECTION 5. STOCK OPTIONS. (a) Grant and Exercise. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (iii) Non-Qualified Stock Options. Any Stock Option granted 4 under the Plan shall contain such terms as the Committee may from time to time approve. The Committee shall have the authority to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights), which may be granted alone or in addition to other awards granted by the Company. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options or any agreement providing for Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. (b) Terms and Conditions. Stock Options granted under the Plan shall be subject to the following terms and conditions: (i) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% of the Fair Market Value at the time of grant (110%, in the case of an Incentive Stock Option granted to an optionee ("10% Stockholder") who, at the time of grant, owns Stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent (if any) or subsidiary corporations, as those terms are defined in Sections 424(e) and (f) of the Code). (ii) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years (five years, in the case of an Incentive Stock Option granted to a 10% Stockholder) after the date on which the Option is granted, and no Non-Qualified Stock Option shall be exercisable more than ten years and one day after the date on which the Option is granted. (iii) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after the time of grant in whole or in part, based upon such factors as the Committee shall determine. (iv) Method of Exercise. Subject to whatever installment, exercise and waiting period provisions are applicable in a particular case, Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares of Stock to be purchased. Such notice shall be accompanied by payment in full of the purchase price, which shall be in cash or, unless otherwise provided in the Stock Option agreement referred to in Section 5(b)(xii) below, in whole shares of Stock which are already owned by the holder of the Option or, unless otherwise provided in the Stock Option agreement referred to in Section 5(b)(xii) below, partly in cash and partly in such Stock. Cash payments shall be made by wire transfer, certified or bank check or personal check, in each case payable to the order of the Company; provided, 5 however, that the Company shall not be required to deliver certificates for shares of Stock with respect to which an Option is exercised until the Company has confirmed the receipt of good and available funds in payment of the purchase price thereof. Payments in the form of Stock (which shall be valued at the Fair Market Value of a share of Stock on the date of exercise) shall be made by delivery of stock certificates in negotiable form which are effective to transfer good and valid title thereto to the Company, free of any liens or encumbrances. The holder of an Option shall have none of the rights of a stockholder with respect to the shares subject to the Option until such shares shall be transferred to the holder upon the exercise of the Option. At the discretion of the Board or the Committee, as the case may be, an Option may be exercised with respect to a specified number of shares of Stock by written notice of exercise to the Company stating that (i) the option price for the shares and any withholding tax due thereon will be paid to the Company directly by a broker-dealer designated by the optionee and irrevocable instructions to such effect have been furnished by the optionee to such broker-dealer; and (ii) an advice from the broker-dealer confirming payment to the Company will be promptly delivered to the Company. The exercise of any such option shall be irrevocable at the time of notice to the Company; provided, however, that the Company shall not be required to deliver certificates for shares of Stock with respect to the exercise of the option until the Company has confirmed the receipt of good and sufficient funds in payment of the purchase price thereof. (v) Transferability; Exercisability. No Stock Option shall be transferable by the optionee otherwise than by will, by the laws of descent and distribution or by a Qualified Domestic Relations Order, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee or by his spouse to whom the Option has been transferred pursuant to the terms of a Qualified Domestic Relations Order. (vi) Termination by Reason of Death. Subject to Section 5(b)(x) below, in the event of the death of an optionee, any Stock Option held by such optionee, unless otherwise determined by the Committee, shall be exercisable by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such other period as the Committee may specify) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter, to the extent such Stock Option was exercisable at the time of death. (vii) Termination by Reason of Disability of Employee Optionee. Subject to Section 5(b)(x) below, any Stock Options held by an optionee who is an officer or employee and whose employment by the Company or any Subsidiary terminates by reason of Disability, unless otherwise determined by the Committee, shall be exercisable by the optionee for a period of one year (or such other period as the Committee may specify) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter, to the extent such Stock Option was exercisable at the time of such disability; provided, however, that if the optionee dies within such one-year period (or such other period as the Committee shall specify), any unexercised Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. 6 (viii) Termination by Reason of Retirement of Employee Optionee. Subject to Section 5(b)(x) below, any Stock Options held by an optionee who is an officer or employee and whose employment by the Company or a Subsidiary terminates by reason of Normal Retirement, unless otherwise determined by the Committee, shall be exercisable by the optionee for a period of one year (or such other period as the Committee may specify) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter, to the extent such Stock Option was exercisable at the time of such Normal Retirement; provided, however, that if the optionee dies within such one-year period, any unexercised Stock Option held by such optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. If an optionee's employment with the Company or any Subsidiary terminates by reason of Early Retirement, the Stock Option shall thereupon terminate, provided if the Committee so approves at the time of Early Retirement, any Stock Option held by the optionee shall be fully vested and may thereafter be exercised by the optionee as provided above in connection with termination of employment by reason of Normal Retirement. (ix) Other Termination of Employment of Employee Optionee. Subject to the provisions of Section 13(g) below and unless otherwise determined by the Committee, if an optionee who is an officer or employee whose employment by the Company or any Subsidiary terminates for any reason other than death, Disability or Retirement, any Stock Options held by him shall thereupon automatically terminate, except that if the optionee's employment is involuntarily terminated by the Company or a Subsidiary, without cause, such Stock Option may be exercised for the lesser of three months after termination of employment or the balance of such Stock Option's term. (x) Additional Incentive Stock Option Limitation. In the case of an Incentive Stock Option, the amount of Stock (determined at the time of grant of the Option using the Fair Market Value of the Stock as of such date) with respect to which Incentive Stock Options are exercisable for the first time by an optionee during any calendar year (under all such plans of optionee's employer corporation and its parent and subsidiary corporations, as defined in Sections 424(e) and (f) of the Code) shall not exceed $100,000. (xi) Buy out and Settlement Provisions. The Committee may at any time offer to buy out a Stock Option previously granted, based upon such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made. (xii) Stock Option Agreement. Each grant of a Stock Option shall be confirmed by, and shall be subject to the terms of, an agreement executed by the Company and the participant. SECTION 6. STOCK APPRECIATION RIGHTS. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted by the Company. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such 7 Non-Qualified Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Incentive Stock Option. A Stock Appreciation Right which is granted with respect to a given Stock Option shall terminate and shall no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise determined by the Committee at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall not be reduced until after the number of shares remaining under the related Stock Option equals the number of shares covered by the Stock Appreciation Right. A Stock Appreciation Right may be exercised by an optionee, in accordance with Section 6(b) below, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount (and in the form) determined in the manner prescribed in Section 6(b) below. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to the following terms and conditions: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 above and this Section 6 of the Plan; provided, however, that any Stock Appreciation Right granted subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of the term of such Stock Appreciation Right, except that this special limitation shall not apply in the event of Disability or Termination of an employee optionee or death of an optionee prior to the expiration of the six-month period. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive up to, but not more than, an amount in cash and/or shares of Stock equal to the SAR Value with the Committee having the right to determine the form of payment, subject to Section 6(b)(v) below. For purposes of this paragraph, the shares of Stock will be valued at their Fair Market Value at the date of exercise of the Stock Appreciation Right. (iii) Stock Appreciation Rights shall be transferable and exercisable only when and to the extent that the underlying Stock Option would be transferable and exercisable under Section 5(b)(v) of this Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan, but only to the extent of the number of shares issued under the Stock Appreciation Right at the time of exercise based upon the SAR Value. (v) The Committee may grant "Limited Stock Appreciation Rights", i.e., Stock Appreciation Rights that become exercisable only in the event of a Change in Control as defined in Section 10 below, subject to such terms and conditions as the Committee may 8 specify at the time of grant. Said Limited Stock Appreciation Rights shall be settled solely in cash, in an amount equal to the SAR Value. Each grant of Stock Appreciation Rights shall be confirmed by, and shall be subject to the terms of, an agreement, executed by the Company and the participant. SECTION 7. RESTRICTED STOCK. (a) Grant and Exercise. Shares of Restricted Stock may be issued either alone or in addition to other awards granted by the Company. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient, the time or times within which such awards may be subject to forfeiture (the "Restriction Period"), the vesting schedule and rights to acceleration thereof, and all other terms and conditions of the awards. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine. (b) Terms and Conditions. Each Restricted Stock award shall be subject to the following terms and conditions: (i) Restricted Stock, when issued, will be represented by a stock certificate or certificates registered in the name of the holder to whom such Restricted Stock shall have been awarded. During the Restriction Period, certificates representing the Restricted Stock and any securities constituting Retained Distributions (as defined below) shall bear a restrictive legend to the effect that ownership of the Restricted Stock (and such Retained Distributions), and the enjoyment of all rights appurtenant thereto, are subject to the restrictions, terms and conditions provided in the Plan and the applicable Restricted Stock agreement. Such certificates shall be deposited by the holder with the Company, together with stock powers or other instruments of assignment, each endorsed in blank, which will permit transfer to the Company of all or any portion of the Restricted Stock and any securities constituting Retained Distributions that shall be forfeited or that shall not become vested in accordance with the Plan and the applicable Restricted Stock agreement. (ii) Restricted Stock shall constitute issued and outstanding shares of Common Stock for all corporate purposes. The holder will have the right to vote such Restricted Stock, to receive and retain all regular cash dividends and other cash equivalent distributions as the Board may in its sole discretion designate, pay or distribute on such Restricted Stock and to exercise all other rights, powers and privileges of a holder of Common Stock with respect to such Restricted Stock, with the exceptions that (A) the holder will not be entitled to delivery of the stock certificate or certificates representing such Restricted Stock until the Restriction Period shall have expired and unless all other vesting requirements with respect thereto shall have been fulfilled; (B) the Company will retain custody of the stock certificate or certificates representing the Restricted Stock during the Restriction Period; (C) other than regular cash dividends and other cash equivalent distributions as the Board may in its sole discretion designate, pay or distribute, the Company will retain custody of all distributions ("Retained Distributions") made or declared with respect to the Restricted Stock (and such Retained 9 Distributions will be subject to the same restrictions, terms and conditions as are applicable to the Restricted Stock) until such time, if ever, as the Restricted Stock with respect to which such Retained Distributions shall have been made, paid or declared shall have become vested and with respect to which the Restriction Period shall have expired; (D) the holder may not sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted Shares or any Retained Distributions during the Restriction Period; and (E) a breach by the holder of any of the restrictions, terms or conditions contained in this Plan or the Restricted Stock agreement referred to in the following clause (iv) or otherwise established by the Committee with respect to any Restricted Stock or Retained Distributions will cause a forfeiture of such Restricted Stock and any Retained Distributions with respect thereto. (iii) Upon the expiration of the Restriction Period with respect to each award of Restricted Stock and the satisfaction of any other applicable restrictions, terms and conditions (A) all or part of such Restricted Stock shall become vested in accordance with the terms of the Restricted Stock agreement referred to in the following clause (iv), and (B) any Retained Distributions with respect to such Restricted Stock shall become vested to the extent that the Restricted Stock related thereto shall have become vested. Any such Restricted Stock and Retained Distributions that do not vest shall be forfeited to the Company and the holder shall not thereafter have any rights with respect to such Restricted Stock and Retained Distributions that shall have been so forfeited. (iv) Each Restricted Stock award shall be confirmed by, and shall be subject to the terms of, an agreement executed by the Company and the participant. SECTION 8. DEFERRED STOCK. (a) Grant and Exercise. Deferred Stock may be awarded either alone or in addition to other awards granted by the Company. The Committee shall determine the eligible persons to whom and the time or times at which Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any person, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and all the other terms and conditions of the awards. The Committee may condition the grant of Deferred Stock upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine. (b) Terms and Conditions. Each Deferred Stock award shall be subject to the following terms and conditions: (i) Subject to the provisions of this Plan and the award agreement referred to in Section 8(b)(vii) below, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or the Additional Deferral Period referred to in Section 8(b)(vi) below, where applicable), share certificates shall be delivered to the participant, or his legal representative, in a number equal to the shares covered by the Deferred Stock award. (ii) As determined by the Committee at the time of award, amounts equal to any dividends declared during the Deferral Period (or the Additional Deferral Period referred to 10 in Section 8(b)(vi) below, where applicable) with respect to the number of shares covered by a Deferred Stock award may be paid to the participant currently or deferred and deemed to be reinvested in additional Deferred Stock. (iii) Subject to the provisions of the award agreement and this Section 8 and Section 13(g) below, upon termination of a participant who is an officer or employee whose employment with the Company or any Subsidiary is terminated for any reason during the Deferral Period (or the Additional Deferral Period referred to in Section 8(b)(vi) below, where applicable) for a given award, the Deferred Stock in question will vest or be forfeited in accordance with the terms and conditions established by the Committee at the time of grant. (iv) The Committee may, after grant, accelerate the vesting of all or any part of any Deferred Stock award and/or waive the deferral limitations for all or any part of a Deferred Stock award. (v) In the event of hardship or other special circumstances of an Agent or a participant who is an officer or employee whose employment with the Company or any Subsidiary is involuntarily terminated (other than for cause), the Committee may waive in whole or in part any or all of the remaining deferral limitations imposed hereunder or pursuant to the award agreement referred to in Section 8(b)(vii) below with respect to any or all of the participant's Deferred Stock. (vi) A participant may request to, and the Committee may at any time, defer the receipt of an award (or an installment of an award) for an additional specified period or until a specified event (the "Additional Deferral Period"). Subject to any exceptions adopted by the Committee, such request must generally be made at least one year prior to expiration of the Deferral Period for such Deferred Stock award (or such installment). (vii) Each Deferred Stock award shall be confirmed by, and shall be subject to the terms of, an agreement executed by the Company and the participant. SECTION 9. OTHER STOCK-BASED AWARDS. (a) Grant and Exercise. Other Stock-Based Awards which may include performance shares, and shares valued by reference to the performance of the Company or any Subsidiary, may be granted either alone or in addition to or in tandem with Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock under this or any other plan. The Committee shall determine the eligible persons to whom, and the time or times at which, such awards shall be made, the number of shares of Stock to be awarded pursuant to such awards, and all other terms and conditions of the awards. The Committee may also provide for the grant of Stock under such awards upon the completion of a specified performance period. (b) Terms and Conditions. Each Other Stock-Based Award shall be subject to the following terms and conditions: 11 (i) Shares of Stock subject to an Other Stock-Based Award may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. (ii) The recipient of an Other Stock-Based Award shall be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to the number of shares covered by the award, as determined by the Committee at the time of the award. The Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Stock. (iii) Any Other Stock-Based Award and any Stock covered by any Other Stock-Based Award shall vest or be forfeited to the extent so provided in the award agreement, as determined by the Committee. (iv) In the event of Retirement, Disability or death of a participant who is an officer or employee of the Company or any Subsidiary, or in cases of special circumstances of any participant, the Committee may waive in whole or in part any or all of the limitations imposed hereunder (if any) with respect to any or all of an Other Stock-Based Award. (v) Each Other Stock-Based Award shall be confirmed by, and shall be subject to the terms of, an agreement executed by the Company and by the participant. SECTION 10. CHANGE IN CONTROL PROVISIONS. (a) A "Change of Control" shall be deemed to have occurred on the tenth day after: (i) any individual, firm, corporation or other entity, or any group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934) (the "Act") becomes, directly or indirectly, the beneficial owner (as defined in the General Rules and Regulations of the Securities and Exchange Commission with respect to Sections 13(d) and 13(g) of the Act) of more than 20% of the then outstanding shares of the Company's capital stock entitled to vote generally in the election of directors of the Company; or (i) the commencement of, or the first public announcement of the intention of any individual, firm, corporation or other entity or of any group (as defined in Section 13(d)(3) of the Act) to commence, a tender or exchange offer subject to Section 14(d)(1) of the Act for any class of the Company's capital stock; or (ii) the stockholders of the Company approve (A) a definitive agreement for the merger or other business combination of the Company with or into another corporation pursuant to which the stockholders of the Company do not own, immediately after the transaction, more than 50% of the voting power of the corporation that survives and is a publicly owned corporation and not a subsidiary of another corporation, or (B) a definitive agreement for the sale, exchange or other disposition of all or substantially all of the assets of the Company, or (C) any plan or proposal for the liquidation or dissolution of the Company; 12 provided, however, that a "Change of Control" shall not be deemed to have taken place if beneficial ownership is acquired by, or a tender or exchange offer is commenced or announced by, the Company, any profit-sharing, employee ownership or other employee benefit plan of the Company, any trustee of or fiduciary with respect to any such plan when acting in such capacity, or any group comprised solely of such entities. (b) In the event of a "Change of Control" as defined in Subsection (a) above, awards granted under the Plan will be subject to the following provisions, unless the provisions of this Section 10 are suspended or terminated by an affirmative vote of a majority of the Board prior to the occurrence of such a "Change of Control": (i) all outstanding Stock Options, and all Stock Appreciation Rights (including Limited Stock Appreciation Rights) shall become exercisable in full, whether or not otherwise exercisable at such time, and any such Stock Option or Stock Appreciation Right shall remain exercisable in full thereafter until it expires pursuant to its terms; and (ii) all restrictions and deferral limitations contained in Restricted Stock awards, Deferred Stock awards and Other Stock-Based Awards granted under the Plan shall lapse. SECTION 11. AMENDMENTS AND TERMINATION. The Board may at any time, and from time to time, amend any of the provisions of the Plan, and may at any time suspend or terminate the Plan; provided, however, that no such amendment shall be effective unless and until it has been duly approved by the holders of the outstanding shares of Stock if (a) it increases the aggregate number of shares of Stock which are issued pursuant to the Plan, (except as provided in Section 3 above) or (b) the failure to obtain such approval would adversely affect the compliance of the Plan with the requirements of Rule 16b-3 under the Act, as in effect from time to time, or with the requirements of any other applicable law, rule or regulation. The Committee may amend the terms of any award theretofore granted under the Plan; provided, however, that subject to Section 3 above, no such amendment may be made by the Committee which in any material respect impairs the rights of the participant without the participant's consent. SECTION 12. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. SECTION 13. GENERAL PROVISIONS. (a) Investment Representations. The Committee may require each person acquiring shares of Stock pursuant to a Stock Option or other award under the Plan to represent to and agree with the Company in writing that the optionee or participant is acquiring the shares for investment without a view to distribution thereof. 13 All certificates for shares of Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, any applicable Federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Additional Incentive Arrangements. Nothing contained in the Plan shall prevent the Board from adopting such other or additional incentive arrangements as it may deem desirable, including, but not limited to, the granting of stock options and the awarding of stock and cash otherwise than under the Plan; and such arrangements may be either generally applicable or applicable only in specific cases. (c) Continued Employment. Nothing contained in the Plan or in any award hereunder shall be deemed to confer upon any officer, employee or Agent of the Company or any Subsidiary any right to continued employment with the Company or any Subsidiary, nor shall it interfere in any way with the right of the Company or any Subsidiary to terminate the employment of any of its officers, employees or Agents at any time. (d) Withholding. Not later than the date as of which an amount first becomes includable in the gross income of the participant for Federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state and local taxes of any kind required by law to be withheld or paid with respect to such amount. If permitted by the Committee, tax withholding or payment obligations may be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional upon such payment or arrangements and the Company or the participant's employer (if not the Company) shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant from the Company or any Subsidiary. (e) Governing Law. The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of New York (without regard to choice of law provisions). (f) Other Benefit Plans. Any Stock Option granted or other award made under the Plan shall not be deemed compensation for purposes of computing benefits under any retirement plan of the Company or any Subsidiary and shall not affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation (unless required by specific reference in any such other plan to awards under this Plan). (g) Employee Status. A leave of absence, unless otherwise determined by the Committee prior to the commencement thereof, shall not be considered a termination of employment. Any Stock Option granted or awards made under the Plan to officers and employees of the Company or any Subsidiary shall not be affected by any change of employment, so long as the holder continues to be an employee of the Company or any Subsidiary. 14 (h) Non-Transferability. Except as otherwise expressly provided in the Plan, no right or benefit under the Plan may be alienated, sold, assigned, hypothecated, pledged, exchanged, transferred, encumbered or charged, otherwise than by will, by the laws of decent and distribution or by a Qualified Domestic Relations Order, and any attempt otherwise to alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefit. (i) Applicable Laws. The obligations of the Company with respect to all Stock Options and awards under the Plan shall be subject to (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of a registration statement under the Securities Act of 1933, and (ii) the rules and regulations of any securities exchange on which the Stock may be listed. (j) Conflicts. If any of the terms or provisions of the Plan conflict with the requirements of Rule 16b-3 under the Act, as in effect from time to time, or with the requirements of any other applicable law, rule or regulation, and/or with respect to Incentive Stock Options, Section 422 of the Code, then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of said Rule 16b-3, and/or with respect to Incentive Stock Options, Section 422 of the Code. With respect to Incentive Stock Options, if this Plan does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein, with the same force and effect as if such provision had been set out at length herein. (k) Written Agreements. The Committee may terminate any Stock Option or other award made under the Plan if a written agreement relating thereto is not executed and returned to the Company within 30 days after such agreement has been delivered to the participant for his or her execution. (l) Consideration for Stock. The Committee may not grant any awards under the Plan pursuant to which the Company will be required to issue any shares of Stock unless the Company will receive consideration for the shares of Stock sufficient under the laws of the State of New Jersey so that such shares of Stock will be fully paid and nonassessable when issued. SECTION 14. EFFECTIVE DATE OF PLAN. The Plan was deemed adopted on the date it was approved by the stockholders of Par and became effective as to Par as of March 23, 1990. The Plan was adopted as to the Company on the date of adoption and assumption by the Board, and the Plan became effective as to the Company on the effective date of the merger of Par Merging Corp., a subsidiary of the Company, with and into Par. 15 SECTION 15. TERM OF PLAN. No Stock Option, Stock Appreciation Rights Restricted Stock award, Deferred Stock award or Other Stock-Based Award shall be granted pursuant to the Plan on or after March 23, 2000, but awards granted prior to such date may extend beyond that date. AS OF JUNE 1995 16 EX-10.10 5 SEVERANCE AGREEMENT OF DENNIS J. O'CONNOR EXHIBIT 10.10 SEVERANCE AGREEMENT ------------------- AGREEMENT made this 23rd day of October, 1996, between PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation (the "Company"), and DENNIS J. O'CONNOR (the "Executive"). W I T N E S S E T H : ------------------- WHEREAS, the Executive has been elected as Vice President and Chief Financial Officer of the Company, and to induce the Executive to continue his employment with the Company, the Company desires to offer the Executive, and the Executive desires to accept, the severance benefits set forth herein, on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and promises herein contained, the parties hereby agree as follows: 1. Severance Benefits. ------------------ (a) Upon either: (i) the termination of the Executive's employment with the Company for Good Reason (as hereinafter defined), or by the Company for any reason other than the death or Disability (as hereinafter defined) of the Executive or For Cause (as hereinafter defined) or (ii) the termination of Executive's employment with the Company within eight months following a Change of Control (as hereinafter defined) for any reason (other than the death or Disability of the Executive or For Cause) so long as written notice of such termination shall be given to the Company not later than the 180th day following the date on which a Change of Control shall occur, the Company will pay to the Executive: an amount equal to six months of his then current annual salary at the date of termination, with such amount to be increased by an additional month of salary for every full month he is employed by the Company in his present position, up to a maximum of six additional months' salary (collectively, "Compensation"); provided, however, if the Executive's employment by the Company -------- ------- is terminated (i) voluntarily by him (except for Good Reason); (ii) due to his death or disability, (iii) For Cause, then, in any of such events, the Company will have no obligation to pay the Compensation to the Executive; provided, -------- further, that in the event of the Executive's breach of the covenants set forth - ------- in Section 2 hereof, the Company's obligation to pay the Compensation or provide any severance benefits (except as otherwise provided by law) will terminate as of the date of his breach, as determined in accordance with this Agreement. (b) Severance Payments. (i) The Compensation, if any, shall be payable ------------------ in accordance with the normal salary payment procedures of the Company. In addition, in the event that the Executive's employment is terminated pursuant to subsection 1(a), then the Executive shall be entitled to, in addition to the Compensation: (x) COBRA benefits, at the Company's expense, until the earlier of twelve (12) months or the date he is covered for such benefits by reason of his being employed with any other person or entity and (y) purchase, for its cash surrender value(s), all insurance policies owned by the Company insuring the life of the Executive. The Executive acknowledges and agrees that the Compensation, if any, is in full 1 satisfaction and final settlement of any and all severance claims that the Executive now has or hereafter may have against the Company and/or any of its subsidiaries. (c) Definitions. (i) As used in this Agreement, "Good Reason" shall ----------- mean a termination of the Executive's employment, (a) based on the assignment by the President of the Company to the Executive, without the Executive's express written consent, of any duties inconsistent with his positions, duties, responsibilities and status with the Company as Vice President and Chief Financial Officer or any plan, act, scheme or design to constructively terminate the Executive, or a material decrease in the Executive's reporting responsibilities, titles or offices as Vice President and Chief Financial Officer, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of the Executive's employment by the Company For Cause, as a result of the Executive's death or disability or by the Executive other than for Good Reason; or (b) based on a reduction by the Company in the Executive's base salary or substantial change in his benefits as in effect immediately prior such termination. (ii) As used in this Agreement, "Disability" shall mean the inability of the Executive for 180 consecutive days to substantially perform his duties hereunder as a result of a physical or mental illness, all as determined in good faith by the Board of Directors of the Company. (iii) As used in this Agreement, "For Cause" shall be based on objective factors determined in good faith by the President of the Company as set forth in a written notice from the Company specifying the reasons for said determination ("For Cause Notice"), and the failure of the Executive to cure same within ten (10) days of his receiving the For Cause Notice; provided, that, -------- ---- in the event the President of the Company in good faith determines that the underlying reasons giving rise to such termination cannot be cured, then said cure period shall not apply and the Executive's employment hereunder shall terminate on the date of his receipt of the For Cause Notice. (iv) As used in this Agreement, "Change of Control" means (A) the sale, lease, exchange or other transfer (other than pursuant to internal reorganization) by the Company of all or substantially all of its assets to a single purchaser or to a group of associated purchasers; (B) the first purchase of shares of securities of the Company pursuant to a tender offer or exchange offer (other than an offer by the Company) for all, or any substantial part of, the securities of the Company; (C) the merger or consolidation in which the Company does not survive as an independent, publicly owned corporation (other than a merger or consolidation with a wholly owned subsidiary of the Company); (D) a single purchaser or a group of associated purchasers acquires securities of the Company representing thirty-five (35%) percent or more of the combined voting power of the Company's then outstanding securities in one or a related series of transactions (other than pursuant to an internal reorganization); or (E) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board of Directors of the Company shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of the period. 2. Nondisclosure: Nonsolicitation. ------------------------------ 2 2.1 "Confidential Information" Defined. As used in this ---------------------------------- Agreement, "Confidential Information" shall mean any and all information (oral or written) relating to the Company, any of its subsidiaries (existing as of the date of the Executive's termination of employment with the Company for whatever reason) or any person controlling, controlled by, or under common control with the Company or any of its subsidiaries, or any of its or their activities, except such information which can be shown by the Executive to be generally in the public domain (such information not being deemed to be in the public domain merely because it is embraced by more general information which is in the public domain), other than as the result of a breach of the provisions of Section 2.2 hereof, including, but not limited to, information relating to technology; research; test procedures and results; machinery and equipment; manufacturing processes; financial information; products; identity and description of raw materials and services used; purchasing; costs; pricing; customers and prospects; advertising, promotion and marketing; selling, servicing and information pertaining to any governmental investigation. 2.2 Nondisclosure of Confidential Information. The Executive ----------------------------------------- will not, at any time, directly or indirectly, use, communicate, disclose or disseminate any Confidential Information in any manner whatsoever, except pursuant to a subpoena or other duly issued court process or order, or by prior written agreement of the Company; provided, that, the Executive shall first give -------- ---- notice to the Company in the event of a subpoena, court process or order in order that the Company may seek a protective order with respect thereto. 2.3 Nonsolicitation. In addition to, and not in lieu of, the --------------- provisions contained in Sections 2.1 and 2.2 hereof, inclusive, the Executive will not, at any time, directly or indirectly hire, offer to hire, entice away of in any other manner persuade or attempt to persuade any officer, employee, agent, lessor, lessee, licensor, licensee, customer, prospective customer or supplier or prospective supplier of the Company of any of its subsidiaries to discontinue or alter his, her or its relationship with the Company or any of its subsidiaries. 2.4 Injunctive Relief, etc. The parties hereto hereby ---------------------- acknowledge and agree that: (i) the Company and/or one or more if its subsidiaries would be irreparably injured in the event of a breach by the Executive of any of his obligations under this Section 2; (ii) monetary damages might not be an adequate remedy for any such breach; and (iii) the Company will be entitled to injunctive relief, in addition to any other remedy which it may have, in the event of any such breach. 2.5 Nonexclusivity. The undertakings of the Executive contained -------------- in this Section 2 are in addition to, and not in lieu of, any obligations which he may have with respect to the subject matter hereof, whether by contract, as a matter of law or otherwise. 3. Miscellaneous Provisions. ------------------------ 3.1 Execution in Counterparts. This Agreement may be executed ------------------------- in one or more counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same document. 3.2 Notices. All notices, requests, demands and other ------- communications hereunder shall be in writing and shall be deemed duly given when delivered by hand or mailed 3 by registered or certified mail, postage prepaid, return receipt requested, via facsimile (with confirmed answerback) or sent by private courier, as follows: If to the Company, to: Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, NY 10977 Attn: President With a copy to: Hertzog, Calamari & Gleason 100 Park Avenue New York, NY 10017 Attn: Stephen A. Ollendorff, Esq. If to the Executive, to: Dennis J. O'Connor 765 West Road New Canaan, CT 06840 or to such other address as either party hereto shall have designated by like notice to the other party hereto, except that notices for changes of address shall be effective only upon receipt. 3.3 Amendment. This Agreement may only be supplemented, --------- terminated, discharged or amended by a written instrument executed by each of the parties hereto. 3.4 Entire Agreement. This Agreement constitutes the entire ---------------- agreement and understanding of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties hereto, oral or written, with respect to the subject matter hereof. 3.5 Applicable Law. This Agreement will be governed by and -------------- construed in accordance with the laws of the State of New York applicable to contracts made and to be wholly performed therein without regard to its conflict or choice of law provisions. 3.6 Headings. The headings contained herein are for the sole -------- purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 3.7 Binding Effect: Successors and Assigns. The Executive may -------------------------------------- not delegate any of his duties or assign his rights hereunder. This Agreement will inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. The Company shall require any successor (whether direct or indirect and whether by purchase, merger, consolidation or otherwise) to all or substantially all 4 of the business or assets of the Company, by an agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 3.8 Waiver, etc. The failure of either of the parties hereto at ----------- any time to enforce any of the provisions of this Agreement will not be deemed or construed to be a waiver of any such provision, not to in any way affect the validity of this Agreement or any provision hereof or the right of either of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach of any of the provisions of this Agreement will be effective unless set forth in a written instrument executed by the party against whom or which enforcement of such waiver is sought and no waiver of any such breach shall be construed or deemed to be a waiver of any other or subsequent breach. 3.9 Capacity, etc. The Executive hereby represents and warrants ------------- to the Company that: (i) he has capacity to execute and deliver this Agreement, and to perform his obligations hereunder, (ii) said execution, delivery and performance will not (and with the giving of notice or lapse of time or both would not) result in the breach of any agreements or other obligations to which he is a party or otherwise bound and (iii) this Agreement is his valid and binding obligation, enforceable against him in accordance with its terms. 3.10 Enforcement. If any party institutes legal action to enforce or ----------- interpret the terms and conditions of this Agreement, the prevailing party shall be awarded reasonable attorneys' fees at all trial and appellate levels, and the expenses and costs incurred by such prevailing party in connection therewith. Venue for any such action shall exclusively be the Borough of Manhattan, City of New York. 3.11 Arbitration. ----------- (a) Any dispute under Section 1 of this Agreement, including but not limited to the termination by the President of a termination For Cause or in respect of the breach thereof will be settled by arbitration in the Borough of Manhattan, City of New York. The arbitration will be accomplished in the following manner. Either party may serve upon the other party written demand that the dispute, specifying the nature thereof, shall be submitted to arbitration. Within ten (10) days after the service of such demand, each of the parties will designate an arbitrator and serve written notice of such appointment upon the other party. If either party fails within the specified time to appoint such arbitrator, the other party will be entitled to appoint both arbitrators. The two arbitrators so appointed will appoint a third arbitrator. If the two arbitrators appointed fail to agree upon a third arbitrator within ten (10) days after their appointment, then an application may be made by either party hereto, upon notice to the other party, to the American Arbitration Association (the "AAA"), or any successor thereto, or if the AAA or its successor fail to appoint a third arbitrator within ten (10) days after such request, then either party may apply, with notice to the other, to the Supreme Court of the State of New York, New York County (the "Court"), for the appointment of a third arbitrator, and any such appointment so made will be binding upon both parties hereto. (b) The decision of the arbitrators will be final and binding upon the parties. The party against whom the award is rendered (the "non-prevailing party") will pay 5 all fees and expenses incurred by the prevailing party in connection with the arbitration (including fees and disbursements of the prevailing party's counsel), as well as the expenses of the arbitration proceeding. The arbitrators will determine in their decision and award which of the parties is the prevailing party, which is the non-prevailing party, the amount of the fees and expenses of the prevailing party and the amount of the arbitration expenses. The arbitration will be conducted, to the extent consistent with this Section 3.11, in accordance with the then prevailing rules of commercial arbitration of the AAA or its successor. The arbitrators will have the right to retain and consult experts and competent authorities skilled in the matters under arbitration, but all consultations will be made in the presence of both parties, who will have full right to cross-examine the experts and authorities. The arbitrators will render their award, upon the concurrence of at least two (2) of their number, not later than thirty (30) days after the appointment of the third arbitrator. The decision and award shall be in writing, and counterpart copies shall be delivered to each of the parties. In rendering an award, the arbitrators will have no power to modify any of the provisions of this Agreement, and the jurisdiction of the arbitrators is expressly limited accordingly. Judgment may be entered on the award of the arbitrators and may be enforced in any court having jurisdiction. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. PHARMACEUTICAL RESOURCES, INC. By:/s/Kenneth I. Sawyer, President -------------------------------- Kenneth I. Sawyer, President /s/Dennis J. O'Connor ----------------------------------- DENNIS J. O'CONNOR 6 EX-10.13 6 LEASE EXTENSION AND MODIFICATION AGREEMENT EXHIBIT 10.13 LEASE EXTENSION AND MODIFICATION AGREEMENT This Lease Extension and Modification Agreement (this "Agreement") is made as of the 30 day of August, 1997, by and between RAMAPO CORPORATE PARK -- ASSOCIATES, a New York general partnership, having an office at 100 Red Schoolhouse Road, Chestnut Ridge, New York 10977-6715 ("Landlord") and PAR PHARMACEUTICAL, INC., a New Jersey corporation, having an office at One Ram Ridge Road, Chestnut Ridge, New York 10977 ("Tenant"). RECITALS -------- A. Landlord and Tenant (by its predecessor-in-interest) have entered into a certain lease (the "Original Lease") dated as of January 1, 1993, relating to certain space in the buildings (the "Building") located at and known as 100 Red Schoolhouse Road, Chestnut Ridge, New York (the "Original Leased Premises"). B. By its terms, the Original Lease expires as of December 31, 1997. C. The Tenant has (a) exercised its rights pursuant to Section 1.2 of the Original Lease to extend the term of the Original Lease solely as to that portion of the Original Demised Premises shown as attributed to "Par" on the exhibit annexed hereto as Exhibit A (the "New Leased Premises"), (b) agreed to surrender to the Landlord the remaining portion of the Original Leased Premises, and (c) agreed to certain other modifications of the Original Lease. D. Landlord and Tenant have agreed to modify the Lease as set forth herein. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: AGREEMENT --------- 1. DEFINITIONS. (a) Except as herein modified, all capitalized terms used in this Agreement shall have the same meanings as set forth in the Original Lease. (b) From and after the Effective Date (hereinbelow defined) the following terms used in the Lease or in this Agreement shall have the following meanings: (i) "Base Rent" shall mean the following annual amounts, payable in equal monthly installments, in advance on the first day of each calendar month: (A) During the Initial Extension Term --------------------------------- 1 (1) January 1, 1998 to and including December 31, 1999 - Two Hundred Sixty-Seven One Hundred Eighty-Eight and 50/100 ($267,188.50) Dollars, payable at the rate of Twenty-Two Thousand Two Hundred Sixty-Five and 70/100 ($22,265.70) Dollars per month. (2) January 1, 2000 to and including May 31, 2002 - Two Hundred Seventy-Nine Thousand Eleven ($279,011.00) Dollars, payable at the rate of Twenty-Three Thousand Two Hundred Fifty ($23,250.00) Dollars per month. (3) June 1, 2002 to and including December 31, 2004 - Two Hundred Ninety Thousand Eight Hundred Thirty-Three and 50/100 ($290,833.50) Dollars, payable at the rate of Twenty-Four Thousand Two Hundred Thirty-Six and 12/100 Dollars per month. (B) During Each Additional Extension Term ------------------------------------- Base Rent shall be equal to the fair market rental value of the Leased Premises as of the date which is six (6) months prior to each Additional Extension Term, determined as set forth in Section 4 below. (ii) "Lease" shall mean the Original Lease as modified by this Agreement. (iii) "Leased Premises" shall mean the New Leased Premises. (iv) "Effective Date" shall mean January 1, 1998. (v) "Excess Space" shall mean that portion of the Original Leased Premises which is not included in the New Leased Premises. (vi) "Expiration Date" shall mean December 31, 2004. (vii) "Tenant's Proportionate Share" shall mean 30.79% as of the date of this Agreement. (viii) "Security Deposit" shall mean an amount equal to one month's Base Rent, together with the letter of credit described in Section 6 below, so long as such letter of credit is required pursuant to such section. (ix) "Initial Extension Term" shall mean January 1, 1998 to and including December 31, 2004. (x) "Additional Extension Term" shall mean each of the two five- year periods following the Initial Extension Term. 2. EXTENSION OF LEASE. The parties hereby agree that the Original Lease is extended for the Initial Extension Term upon all the same terms and conditions contained in the Original Lease, as modified by this Agreement. Tenant shall have the right to further extend the Lease for two additional five- year periods ("Additional Extension Terms"), upon the same terms and conditions as contained in the Lease, by giving written notice to Landlord of its intention 2 to further extend the Lease. Such notice must be given not later than the later of: (a) nine (9) months prior to expiration of the then-current term or (b) if Tenant shall not have given such notice by that date, then thirty (30) days after written notice from landlord that such extension notice date has passed. 3. TENANT'S OBLIGATION TO VACATE. Subject to the provisions of Section 9 below, the Tenant shall vacate the Excess Space prior to the Effective Date, leaving the same in vacant and broom-clean condition, but otherwise in its "as is" condition at such date. 4. DETERMINATION OF FAIR MARKET RENTAL VALUE. In the event that the Landlord and Tenant shall not have agreed upon the fair market rental value of the Leased Premises at least six (6) months prior to the commencement date of the applicable Additional Extension Term, such value shall be determined by two commercial real estate MAI appraisers, one of whom is selected by the Landlord and one of whom is selected by the Tenant. If the appraisals of such two appraisers shall differ by less than 10%, the two appraisals shall be averaged and the result thereof shall constitute the agreed upon fair market rental value of the Leased Premises for the purposes of this Agreement. If the two appraisals shall differ by 10% or more, then the two appraisers so selected shall select another mutually acceptable MAI appraiser who shall select from the two existing appraisals that appraisal which the third appraiser believes to be the most fair and accurate appraisal of the fair market rental, which appraisal shall constitute the agreed upon fair market rental value of the Leased Premises for the purposes of this Agreement. The cost and expense of such third appraiser, if required, shall be shared equally by Landlord and Tenant. 5. BROKER. Landlord and Tenant each warrant to the other that it has not consulted or dealt with any broker in connection with this Agreement other than CB Commercial Real Estate Inc. and Strategic Alliance Realty, Inc. Landlord shall pay the commission of such brokers in accordance with Landlord's separate agreement and agrees to indemnify and hold Tenant harmless from any claims, costs, actions or other expenses (including attorneys' fees and expenses) arising therefrom. Landlord and Tenant shall each indemnify, defend and hold the other harmless from any and all liability or expense, including but not limited to attorneys' fees, incurred due to any claim for commissions, fees or other compensation which arises from a breach of covenant or misrepresentation herein. 6. REDUCTION OF SECURITY DEPOSIT. Not later than the Effective Date, (a) Landlord shall refund to Tenant the entire amount of the Security Deposit being held by it pursuant to the Original Lease, except for the sum of Twenty-Two Thousand Two Hundred Sixty-Five and 70/100 ($22,265.70) Dollars which it shall continue to hold and (b) Tenant shall deliver to Landlord a letter of credit from a New York bank, substantially in the form attached to this Agreement as Exhibit B, but conditioned for payment upon the default by Tenant under the Lease (after expiration of any applicable grace period) (the "L/C"), in an amount equal to two months' Base Rent, to be held by Landlord as additional Security Deposit under the Original Lease, to be in effect for the Extension Term and each Additional Extension Term; provided however, that if the L/C is not effective for the entire Extension Term and each applicable Additional Extension Term, Tenant shall cause the L/C to be renewed from time to time, or Landlord may draw down under the L/C; and provided further, that the L/C shall be returned to Tenant which shall cause the same to be cancelled promptly following Tenant's parent company, 3 Pharmaceutical Resources, Inc., having two consecutive profitable fiscal quarters and written notice of such profitable fiscal quarters is given to Landlord. 7. CERTAIN PAYMENTS DUE OR PAID TO TENANT. The parties acknowledge that Tenant: (a) has received a $120,000 payment pursuant to Section 4.4 of the Original Lease, (b) is or may be entitled to an additional payment pursuant to Section 4.5 of the Original Lease upon the execution and delivery of this Agreement and (c) is entitled to receive from Landlord an amount equal to one- half (1/2) of the interest earned by Landlord on the Security Deposit paid under the Original Lease. Tenant shall be entitled to retain the payment described in subsection (a) above. Tenant hereby agrees to waive its right to receive the payment described in subsection (b) above. Landlord shall pay to Tenant, within thirty (30) days after execution and delivery of this Agreement, the amount due pursuant to subsection (c) above. 8. CAM CHARGES. The amount of CAM charges payable during the first year of the Initial Extension Term shall be equal to Thirty Thousand One Hundred Seventy-Seven and 17/100 ($30,177.17) Dollars per annum, payable in equal monthly installments of Two Thousand Five Hundred Fourteen and 76/100 ($2,514.76) Dollars each, beginning on the Effective Date. Such amount shall be increased annually by five (5%) percent per annum, beginning January 1, 1999. 9. LANDLORD'S WORK. Promptly following the date of this Agreement, Landlord shall, at its sole cost and expense, perform the following alterations to the New Leased Premises (collectively, "Landlord's Work"): (a) Remove and erect partition walls as shown on the plan attached to this Agreement as Exhibit A (the "Plan"); (b) Re-locate the existing "Mixing Room" as shown on the Plan; (c) Add the "Pharmacy Room", as shown on the Plan; (d) Separate existing utilities serving the Leased Premises, so that such utilities serve only the New Leased Premises shall serving the New Leased Premises exclusively. In connection with the performance of Landlord's Work, Landlord shall construct all partitions, doors and ceilings. All Landlord's Work shall be performed in accordance with all applicable laws, codes and regulations, and otherwise in a good and workmanlike manner. Without limiting the foregoing, Landlord covenants that the exterior access to the New Leased Premises shall comply with the Americans with Disabilities Act, and regulations thereunder. All Landlord's Work shall be completed by December 1, 1997, time of the essence. In the event that Landlord's Work is not completed by that date, in addition to all other rights and remedies then available to Tenant, Tenant shall not be required to vacate the Excess Space prior to the Effective Date, notwithstanding that Base Rent shall be reduced to the amount specified in this Agreement from and after the Effective Date. 10. NON-DISTURBANCE. Landlord covenants and agrees to obtain and to deliver to Tenant on or prior to the Effective Date, a "non-disturbance" agreement in writing executed by the holders of any mortgage and any ground lessor affecting the Demised Premises at that date 4 which, in substance, shall provide that any mortgagee or ground lessor shall recognize the validity and continuance of the Lease in the event of a foreclosure of the Landlord's interest in and to the Demised Premises so long as Tenant shall not be in default under the Lease, including applicable grace period (but subject to no other conditions or qualifications) or to exhibit to Tenant a true copy of any mortgage or mortgages or ground lease affecting the fee, which shall provide in a separate clause that the holder of said mortgage or mortgages or ground lease shall recognize the validity and continuance of the Lease in the event of a foreclosure of the Landlord's interest in and to the Demised Premises so long as Tenant herein shall not be in default, including applicable grace period (but subject to no other conditions or qualifications). If and only if such a "non-disturbance" agreement is delivered to Tenant, the Lease shall be subject and subordinate to the mortgages or ground leases which may affect the real property of which the Demised Premises forms a part. This clause shall be self-operative and no further instrument or subordination shall be required. 11. AFFIRMATION OF LEASE. In the event that any of the terms or provisions of this Agreement are inconsistent with any of the terms or provisions of the Original Lease, the terms and provisions of this Agreement shall govern and supersede the terms and provisions of the Original Lease. As herein specifically and expressly modified, the Original Lease shall remain in full force and effect, in accordance with its terms. The parties each hereby represent and warrant that it has no claims of default by the other under the Original Lease. 12. MULTIPLE COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall constitute an original but all of which, taken together, shall constitute but one and the same instrument. 13. HEADINGS. The captions of the individual sections of this Agreement are for convenience of reference only and shall not affect the construction to be given any provision hereof. 14. NON-BINDING EFFECT. This Agreement shall not be binding upon, or inure to the benefit of, either party hereto unless and until this Agreement shall have been duly executed by or on behalf of both parties. Upon such due execution, this Agreement and the Original Lease shall contain the fully- integrated understanding of the parties and no provisions may be modified, waived or revoked in any respect except in writing signed by the party to be charged. 15. DUE AUTHORITY. The persons executing this Agreement on behalf of each of the parties hereby represent and warrant that they are duly authorized to enter into this Agreement without further consent, authorization or approval. 5 IN WITNESS WHEREOF, the parties hereto have caused these presents to be duly executed and delivered as of the date first above written. RAMAPO CORPORATE PARK ASSOCIATES By:/s/Steven Iser -------------------------------- Steven Iser, General Partner PAR PHARMACEUTICAL, INC. By:/s/Dennis O'Connor -------------------------------- 6 EXHIBIT A ARCHITECTURAL DRAWING OF THE LEASED PREMISES 7 FORM OF LETTER OF CREDIT ------------------------ 8 EX-10.14 7 AMENDED AND RESTATED DISTRIBUTION AGREEMENT EXHIBIT 10.14 AMENDED AND RESTATED DISTRIBUTION AGREEMENT ------------------------------------------- This Amended and Restated Distribution Agreement (the "Agreement") is entered into as of the 28th day of July , 1997 (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, PRI and PPI have previously entered into that certain Distribution Agreement as of the 24/th/ day of February, 1994 (the "Original Agreement"); and WHEREAS, SANO, PRI and PPI wish to amend and restate their agreement with respect to the subject matter of the Original Agreement, and supersede the Original Agreement in its entirety; NOW, therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION ARTICLE I TERMS AND CONDITIONS -------------------- 1.1 Definitions. As used in this Agreement, the following terms shall have ----------- the meaning ascribed to them below: (a) "Affiliate," as to any Person, shall have the meaning set forth in Rule 405 under the Securities Act of 1933. (b) "Costs" shall mean, with respect to production of a Licensed Product, the cost of goods incurred by SANO in the production thereof determined in accordance with generally accepted accounting principles applied on a consistent basis, as determined by SANO's independent certified public accountants; provided, however, that notwithstanding the foregoing, it being the intent of the parties that Costs make SANO whole with respect to all reasonable expenditures related to the Licensed Product, Costs shall include, without limitation, (i) the delivered cost of all ingredients and other raw materials used therein, (ii) a percentage of SANO's overall labor cost equal to the portion which labor hours devoted to the Licensed Product's production bears to total labor hours devoted to all SANO product production, (iii) packaging and other direct manufacturing and quality control costs and (iv) ratably allocated costs of marketing and promotion (if any), product liability insurance and general overhead; provided, further, that, notwithstanding the foregoing, Costs shall not include (i) any cost incurred by SANO in completing the Development Program, (ii) any royalties or similar payments paid or payable by SANO with respect to any Licensed Product, or (iii) any cost specifically related to the distribution of the Licensed Product outside the United States; additionally, (x) with respect to the transdermal nicotine Licensed Product (generic of Habitrol(R)) described herein as Product B, Costs shall be reduced on a one-time basis by [*****], (y) with respect to the transdermal nitroglycerin Licensed Product (generic of Nitro Dur(R)) described herein as Product A, Costs shall be reduced on a one-time basis by the sum of the amount set forth in Section 7.1 hereof as the Licensed Product Fee for such Licensed Product and the amount set forth as an additional Licensed Product Fee for that Licensed Product pursuant to Section 7.4 hereof, and (z) with respect to the transdermal nitroglycerin Licensed Product (generic of Transderm Nitro(R)) described herein as Product C, Costs shall be reduced on a one-time basis by the sum of the amount set forth in Section 7.1 hereof as the Licensed Product Fee for such Licensed Product and the amounts set forth as an Additional Licensed Product Fee for that Licensed Product pursuant to Section 7.4 hereof. (c) "Development Program" shall mean all actions, including, without limitation, research conducted as a part of SANO's pre-clinical and clinical activities, which is required or reasonably necessary to obtain all requisite governmental approvals for the testing, manufacture and sale of Licensed Products during the term of this Agreement. 2 (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 the Transdermal Generic Drug Delivery Systems listed on Exhibit A hereto. (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 Islands, Guam, Samoa and any other territory which, on the Execution Date, is a United States 3 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. Except as set forth in Schedule 2.1.3, SANO has received no notice, and is not aware, that any portion of SANO's Technology infringes upon the rights of any other Person. 2.1.4 Development Program. SANO has filed an ANDA with respect to ------------------- each of the Licensed Products and has no knowledge of any fact or circumstance which is reasonably likely to prevent approval by the FDA, other than general conditions related to the approval process; SANO does not hereby represent or warrant that any Licensed Product will be approved for commercial sale, or will ultimately be marketed. 2.1.5 Information. All data and other information relating to ----------- SANO and/or the Licensed Products provided by SANO, or its agents, to 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, extended at least until December 31, 1996. 2.1.7 Status. 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 4 jurisdiction with respect to the distribution of pharmaceutical products within its territorial jurisdiction from selling the Licensed Products within the territorial jurisdiction of such government, regulatory agency or authority (on the assumption that it holds whatever licenses are required for a foreign corporation to carry on business generally within such jurisdiction) and that SANO is not an Ineligible Person or Person from whom any United States federal, state or local government, regulatory authority or agency which purchases pharmaceutical products (including, without limitation, the federal Defense Logistics Agency) will or may not purchase any products manufactured by it or with whom it will or may not otherwise conduct business as a result its being publicly listed or otherwise (except for the fact that it is a foreign corporation). ARTICLE III OBLIGATIONS OF SANO ------------------- 3.1 Level of Effort. SANO shall use its reasonable efforts, including, --------------- without limitation, the employment of a sufficient number of technically qualified officers and employees, to attempt to complete the Development Program for each Licensed Product. 3.2 Progress Reports. SANO shall, on a monthly basis, by the tenth day of ---------------- each month, inform 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 Intentionally omitted. 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 expense unless otherwise set forth herein. 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 seek to obtain all requisite approvals for the testing, manufacture, sale and use of the Licensed Product(s). The decision regarding the timing of said filings shall be in SANO's sole discretion. SANO shall have full and complete ownership of all governmental approvals relating to 5 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. 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, or PPI, as applicable, covenants and agrees that, during the term of this Agreement or until the Right (or its exclusive nature) is terminated in accordance with the provisions hereof: 4.2.1 SANO will refer to 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, 6 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. 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, 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 that Competitive Product. PPI shall notify SANO promptly if any Merger Partner has a Competitive 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 from 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 7 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. 4.2.7 SANO shall not engage in marketing and promotion of the Licensed Products in the United States unless reasonably requested to do so by PPI. ARTICLE V REPRESENTATIONS OF PPI AND PRI; OBLIGATIONS ------------------------------------------- 5.1 PPI and PRI jointly and severally represent, warrant and covenant as follows: 5.1.1 Organization, etc. They are duly organized and validly ------------------ existing under the laws of the State of New Jersey, have all requisite power and authority to conduct their business as now and as proposed to be conducted and 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 on 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 8 organization and qualified sales persons to promote the sale of the Licensed Products in the United States. 5.2 PPI shall purchase the Licensed Products from SANO as contemplated in Article VI 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. 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) 9 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. 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 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 10 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 (20) 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 PAYMENTS AND PAYMENT TERMS -------------------------- 7.1 Licensed Product Fee. As consideration for the rights herein granted, -------------------- upon execution hereof, PRI shall pay to SANO a fee (each, a "Licensed Product Fee") as follows: Product A (described in SANO's pending ANDA for transdermal nitroglycerin- -generic to Nitro Dur(R))---[*****] Product B (described in SANO's pending ANDA for transdermal nicotine-- generic to Habitrol(R))---[*****] Product C (described in SANO's pending ANDA for transdermal nitroglycerin- -generic to Transderm Nitro(R))---[*****] 7.2 Price. The price to PRI for each order, or part thereof reasonably ----- acceptable to PRI as contemplated in Section 8.2(d), of Licensed Products made available to PRI hereunder shall be SANO's Costs related to such order or part thereof. 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. 7.4 Additional Licensed Product Fee. Upon request by SANO, PPI will remit ------------------------------- up to an aggregate of [*****] to fund skin irritation studies required by the FDA for any of the Licensed CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 11 Products. Such request shall specify the amount to be paid for the specific Licensed Product which is the subject of such study or studies, and the amount so paid by PPI shall be deemed an addition to and part of the Licensed Product Fee for such Licensed Product. 7.5 Additional Consideration. PPI shall pay to SANO the Additional ------------------------ Consideration described in Section 11.1 and Schedule B hereto, in accordance with the provisions of said Section 11.1. 7.6 Payments by SANO. As consideration for prior payments by PPI and for ---------------- PPI's and PRI's agreements set forth herein, upon execution hereof, SANO will (i) pay PPI [*****], and (ii) deliver its promissory note in the form attached hereto as Schedule C. 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. 12 (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. 13 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 9.3(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 14 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 willful material breach by a party of any of its duties or obligations hereunder, the claim of an aggrieved party for Damages arising out of the breach shall be limited to claiming the amounts owing or payable to it in accordance with the provisions of this Agreement and any out- of-pocket costs and expenses (including amounts paid or payable by it to third parties, other than re-procurement costs [except to the extent contemplated in 15 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 r 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. 16 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 Ten Million Dollars ($10,000,000) 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 Gross Profit (as that term is defined in Exhibit B) of the Licensed Products. The amount payable to SANO determined in accordance with Exhibit B is herein and in Exhibit B annexed hereto referred to as the "Additional Consideration." 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" 17 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 D, 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, 18 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 PRI 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 19 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 20 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 ad records of SANO pursuant to this Section 11.8 no more often than twice in any contract year unless earlier in such contract year or in any of the prior three contract years such investigation revealed a discrepancy of more than $10,000.00, as aforesaid, in which case 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 21 RIGHT OF FIRST REFUSAL ---------------------- 12.1 Right of First Refusal. During the term hereof, PPI shall have the ---------------------- right of first refusal to distribute the Licensed Products in the State of Israel, on a product by product basis, in accordance with the following procedures. 12.2 Procedures. For each Licensed Product with respect to which SANO ---------- proposes to enter into a distribution agreement in Israel with a third party, SANO shall communicate to PPI in writing a reasonably detailed description of the provisions of such agreement (a "Proposed Israeli Distribution Agreement"). Within 30 days of its receipt of a Proposed Israeli Distribution Agreement (the "Acceptance Period"), PPI shall notify SANO whether it wishes to enter into an agreement with SANO on such terms. If PPI notifies SANO within the Acceptance Period that it wishes to do so, PPI and SANO will enter into a distribution agreement on such terms. If PPI fails to notify SANO of its election to enter into such an agreement within the Acceptance Period, SANO may enter into a license or distribution agreement with respect to such Licensed Product with a third party on substantially the same terms as set forth in the Proposed Israeli Distribution Agreement and PPI's rights under this Article XII will terminate. SANO may not enter into such an agreement with a third party on terms substantially different from those set forth in the relevant Proposed Israeli Distribution Agreement without first offering such terms to PPI for a period of thirty days. If SANO shall not enter into the Proposed Israeli Distribution Agreement within 30 days following the expiration of the Acceptance Period or any extension thereof as set forth in the preceding sentence, SANO's execution of any such Agreement or any other Proposed Israeli Distribution Agreement shall again be subject to PPI's rights under this Article XII. Each Proposed Israeli Distribution Agreement for each Licensed Product shall be subject to PPI's rights of first refusal in accordance with the procedures set forth in this Section 12.2. ARTICLE XIII TERMS AND TERMINATION --------------------- 13.1 This Agreement shall become effective on the date hereof and shall remain in effect for a period of ten years per Licensed Product starting on the date such Licensed Product becomes available for sale in commercial quantities, unless earlier terminated in accordance with the provisions of this Agreement. Thereafter, this Agreement shall automatically be renewed as to each Licensed Product from year to year unless either party gives notice of termination to the other party at least one hundred and twenty days prior to the expiry of the initial term or of any renewal term. 13.2 Either party may, by notice in writing to the other party, terminate this Agreement if such other party shall have breached any of its material duties or obligations under this Agreement (other than the obligations of 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. 22 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 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 23 take advantage of or shelter under any statute in force in the United States for the protection of debtors; (c) if any proceeding is taken with respect to a compromise or arrangement, or to have such Party declared bankrupt or to have a receiver appointed in respect of such Party or a substantial portion of its property and such proceeding is instituted by such Party or is not opposed by such Party or if such proceeding is instituted by a Person other than such Party, such Party does not proceed diligently and in good faith to have such proceeding withdrawn forthwith; (d) a receiver or a receiver and manager of any of the assets of such Party is appointed and such receiver or receiver and manager is not removed within ninety days of such appointment; (e) such Party ceases or takes steps to cease to carry on its business. SANO shall similarly have the right to terminate this Agreement upon written notice to PRI if any of the foregoing events becomes applicable to any Affiliate of PRI that has been expressly assigned obligations under this Agreement. 13.8 (a) If (i) in the twenty-four (24) month period (such period being herein referred to as the "A Period") beginning on the date (the "A Commencement Date") the first of any shipments of Licensed Product "A" is made available to PPI hereunder, the aggregate Net Sales of Licensed Product "A" for such A Period is less than the Product Sales Threshold (as hereinafter defined); CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION (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 "C Period") beginning on the date (the "C Commencement Date") the first of any shipments of Licensed Product "C" is made available to PPI hereunder, the aggregate Net Sales of Licensed Product "C" for such Period is less than [*****]; (iv) in any twelve month period commencing on the second and each subsequent anniversary of the A Commencement Date or the B Commencement Date the Net Sales of the relevant Licensed Product sold by PPI and its Affiliates in such period is less than the Product Sales Threshold; or 24 (v) in any twelve month period commencing on the second and each subsequent anniversary of the C Commencement Date, the Net Sales of Licensed Product "C" sold by PPI and its Affiliates in such period is less than [*****]; 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 Licensed Products in the United States on royalty, payment or other cash equivalent or otherwise readily economically measured terms more favorable to the Third Party Licensee (such more favorable terms being herein referred to as the "MFP") then: (i) SANO shall promptly notify 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 15.2 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 25 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 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION 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. 26 13.13 In the event that SANO terminates this Agreement in respect of a Specific Product pursuant to Section 13.5 hereof, SANO shall, at the request of PPI, make available to PPI within a reasonable period of time of such termination, such number of units of such Specific Product as shall be equal to the net number of units of such Specific Product sold by 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 Specific Product as PPI shall advise SANO in writing within ten business days of such termination. Such Specific Product 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 Specific Product as if such Specific Product had been supplied by SANO during the term of this Agreement. 13.14 (a) If SANO has not received an approval of an ANDA for Licensed Product A prior to the later of [*****] PPI may terminate this Agreement with respect to Licensed Product A by providing SANO with written notice of such termination and neither party shall have any obligation hereunder with respect to Licensed Product A other than applicable confidentiality provisions and the payment by SANO described in the following sentence. In the event of such termination, SANO shall pay PPI the sum of (i) [*****] and (ii) the amount paid by PPI in respect of Licensed Product A pursuant to Section 7.1 and Section 7.4 hereof, with half of such sum payable three (3) months after SANO's receipt of notice of such termination and half of such sum payable fifteen (15) months after SANO's receipt of notice of such termination. (b) If SANO has not received an approval of an ANDA for Licensed Product B prior to the later of [*****] PPI may terminate this Agreement with respect to Licensed Product B by providing SANO with written notice of such termination and neither party shall have any CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION obligation hereunder with respect to Licensed Product B other than applicable confidentiality provisions and the payment by SANO described in the following sentence. In the event of such termination, SANO shall pay PPI the sum of (i) [*****] and (ii) the amount paid by PPI in respect of Licensed Product B pursuant to Section 7.4 hereof, with half of such sum payable three (3) months after SANO's receipt of notice of such termination and half of such sum payable fifteen (15) months after SANO's receipt of notice of such termination. (c) If SANO has not received an approval of an ANDA for Licensed Product C prior to the later of [*****] PPI may terminate this Agreement with respect to Licensed Product C by providing SANO with written notice of such termination and neither party shall have any obligation hereunder with respect to Licensed Product C other than applicable confidentiality provisions and the payment by SANO described in the following sentence. In the event of such termination, SANO shall pay PPI the sum of (i) [*****] and (ii) the amount paid by PPI in respect of Licensed Product C pursuant to Section 7.1 and Section 7.4 hereof, with half of such sum payable three (3) months after SANO's receipt of such termination and half of such sum payable fifteen (15) months after SANO's receipt of notice of such termination. 27 (d) For the purposes of this Section 13.14, the dates on which ANDAs were filed for the respective Licensed Products shall be as set forth on Exhibit E attached hereto. ARTICLE XIV RECALLS, ADMINISTRATIVE MATTERS AND CONFIDENTIALITY --------------------------------------------------- 14.1 Recalls. In the event that it becomes necessary to conduct a recall, ------- market withdrawal or field correction (hereafter collectively referred to as "recall") of any Licensed Product manufactured by SANO and sold by 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 Licensed 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 28 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 willful material breach by a party of any of its duties or obligations hereunder (in each case, as contemplated in Section 10.1 hereof), neither party shall have a claim against the other party for any damages, losses or expenses which it suffers or incurs as a result thereof except to the extent permitted or contemplated in this Section 14. (f) Each party shall provide reasonable evidence to the other of the out-of-pocket expenses being claimed by it and the rights of SANO pursuant to Section 11.4 and the rights of 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 29 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. 30 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. 31 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 o be applicable to its Affiliates or which require such party to cause the Affiliate to do or not to do something shall not be considered Force Majeure unless the Affiliate in question is unable to comply by reason of unforeseeable or unavoidable causes beyond the control and without the fault or negligence of such Affiliate. 15.2 Arbitration. All disputes arising out of, or in relation to, this ----------- Agreement (other than disputes arising out of any claim by a third party in an action commenced against a party), shall be referred for decision forthwith to a senior executive of each party not involved in the dispute. If no agreement can be reached through this process within thirty days of request by one party to the other to nominate a senior executive for dispute resolution, then either party hereto shall be entitled to refer such dispute to a single arbitrator for arbitration under Florida law, such arbitration to be held in Miami, Florida on an expedited basis in accordance with the rules and regulations of the American Arbitration Association. Any party demanding arbitration shall with service of its demand for arbitration propose a neutral arbitrator selected by it. In the event that the parties cannot agree upon a neutral arbitrator within thirty (30) days after the demand for arbitration, an arbitrator shall be appointed by the American Arbitration Association who shall be a partner in a Miami, Florida law firm having at least ten (10) partners. 15.3 Assignment. This Agreement may not be assigned nor can the performance ---------- of any duties hereunder be delegated by 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 32 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 3250 Commerce Parkway Miramar, Florida 33025 Attn: President Fax: (954) 430-3390 with a copy to (other than regularly prepared notices, reports, etc. required to be delivered hereunder): Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. 1221 Brickell Avenue Miami, Florida 33131 Attn: Gary Epstein, Esq. Fax: 305-579-0717 If to PRI c/o PRI Distributors, Ltd. One Ram Ridge Road Spring Valley, NY 10977 Attn: President Fax: 914-425-7922 with a copy to (other than regularly prepared notices, reports, etc. required to be delivered hereunder): Hertzog, Calamari & Gleason 100 Park Avenue New York, New York 10017 Attn: Stephen A. Ollendorff, Esq. Fax: (212) 213-1199 33 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 exclusive jurisdiction of the state and federal courts located in Miami, Florida. Notwithstanding the foregoing, each party also agrees to the jurisdiction of any court which a third party claim has been brought. 15.6 Binding Agreement. This Agreement shall be binding upon the parties ----------------- hereto, and their respective successors and permitted assigns. 15.7 Entire Agreement. This Agreement and all other documents and ---------------- instruments delivered by any of the parties or their Affiliates pursuant hereto or in connection with the execution and delivery of this Agreement contain the entire agreement and understanding of the parties with respect to the subject matter hereof and thereof and supersedes all negotiations, prior discussions and agreements relating to the Licensed Products or the Right. This Agreement may not be amended or modified except by a written instrument signed by all of the parties hereto. 15.8 Headings. The headings to the various articles and paragraphs of this -------- Agreement have been inserted for convenience only and shall not affect the meaning of the language contained in this Agreement. 15.9 Waiver. The waiver by any party of any breach by another party of any ------ term or condition of this Agreement shall not constitute a waiver of any subsequent breach or nullify the effectiveness of that term or condition. 15.10 Counterparts. This Agreement may be executed in identical ------------ duplicate copies. The parties agree to execute at least two identical original copies of the Agreement. Each identical counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. 15.11 Severability of Provisions. If, for any reason whatsoever, any -------------------------- term, covenant or condition of this Agreement or of any other document or instrument executed and delivered by either PPI or SANO pursuant hereto or in connection with the completion of the transaction 34 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 WAIVES ANY AND ALL RIGHTS AND CLAIMS WHICH PRI MAY NOW HAVE OR 35 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 waives to the fullest extent permitted by law, any rights to avoid performance hereunder available to it as guarantor which are not also available to PPI. PRI waives any and all notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by SANO upon this Guarantee or acceptance of this Guarantee; the Guaranteed Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee; and all dealings between 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 waives 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 36 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 remedes, 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:/s/ Reginald Hardy ------------------------------------------ (Signature) Name: Reginald Hardy ---------------------------------------- Title: President --------------------------------------- PHARMACEUTICAL RESOURCES, INC. By:/s/Kenneth I. Sawyer ------------------------------------------ (Signature) 37 Name: Kenneth I. Sawyer ---------------------------------------- Title: President and Chief Executive Officer --------------------------------------- PAR PHARMACEUTICAL, INC. By:/s/Kenneth I. Sawyer ------------------------------------------ (Signature) Name: Kenneth I. Sawyer ---------------------------------------- Title: President and Chief Executive Officer --------------------------------------- 38 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXHIBIT A LICENSED PRODUCTS PRODUCT "A" - ------------------------------------------------------------------------------ DRUG NAME ANDA# SANO FILING DATE FDA ACCEPTED DATE Nitroglycerin Transdermal System [*****]* [ ***** ] Nitroglycerin Transdermal System [*****]* [ ***** ] Nitroglycerin Transdermal System [*****]* [ ***** ] Nitroglycerin Transdermal System [*****]* [ ***** ] Nitroglycerin Transdermal System [*****]* [ ***** ] Nitroglycerin Transdermal System [*****]* [ ***** ] *Generically equivalent to such strengths in Nitro Dur(R). PRODUCT "B" - ------------------------------------------------------------------------------ DRUG NAME ANDA# SANO FILING DATE FDA ACCEPTED DATE Nicotine Transdermal System [*****]* [ ***** ] Nicotine Transdermal System [*****]* [ ***** ] Nicotine Transdermal System [*****]* [ ***** ] *Generically equivalent to such strengths in Habitrol(R). PRODUCT "C" - ----------------------------------------------------------------------------- DRUG NAME ANDA# SANO FILING DATE FDA ACCEPTED DATE Nitroglycerin Transdermal System [*****]* [ ***** ] Nitroglycerin Transdermal System [*****]* [ ***** ] Nitroglycerin Transdermal System [*****]* [ ***** ] Nitroglycerin Transdermal System [*****]* [ ***** ] *Generically equivalent to such strengths in Transderm-Nitro(R). CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION 39 ASTERISKS DENOTE SUCH OMISSION EXHIBIT B As used herein, the term "Net Sales" shall mean the gross amount invoiced for sales of Licensed Product(s) made by PRI or its Affiliates to independent third parties, reduced by the following to the extent that they are properly allocable to the quantity of Licensed Product(s) so sold: all trade, quantity and cash discounts allowed; credits or allowances actually granted on account of rejections; returns, billing errors and retroactive price reductions (including, without limitation, shelf stock adjustments); credits, rebates, chargeback rebates, fees, reimbursements or similar payments granted or given to wholesalers and other distributors, buying groups, health care insurance carriers, governmental agencies and other institutions in respect of the purchase price; freight, transportation, insurance or other delivery charges; and all taxes (except income taxes), tariffs, duties and other similar governmental charges paid by the seller on sales of the Licensed Product(s) and not reimbursed by the purchaser. "Gross Profit" shall mean the difference between Net Sales for any amount of Licensed Product(s) and the price paid to SANO pursuant to Section 7.2 hereof in respect of such Licensed Product(s). Product A. During the term of the Agreement, the Additional Consideration payable to SANO with respect to Product A shall be [*****] of Gross Profit, until aggregate Gross Profit with respect to that Licensed Product shall have reached [*****], and [*****] of all Gross Profit thereafter. Payment of Additional Consideration is to be made in respect of the third preceding month, as set forth in Section 11.1. The following illustrates payments to SANO under the foregoing formula, assuming that sales of Product A commenced in January 1998:
JAN. FEB., MARCH APRIL MAY JUNE JULY AUGUST SEPT. OCT. NOV. DEC. 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 NET SALES [***** ***** ***** ***** ***** ***** ***** ***** *****] PRICE TO PRI [***** ***** ***** ***** ***** ***** ***** ***** *****] GROSS PROFIT [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ****** PAYMENT TO SANO [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** *****] RETAINED BY PPI [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** *****] 15% INCREMENT [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** *****]
____________________________ * [*****] of [*****]; [*****] of [*****]. (total increment--[*****]) 40 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION Product B. During the term of the Agreement, the Additional Consideration payable to SANO with respect to Product B shall be [*****] of all Gross Profit. Payment of Additional Consideration is to be made in respect of the third preceding month, as set forth in Section 11.1. The following illustrates payments to SANO under the foregoing formula, assuming that sales of Product B commenced in January 1998:
JAN. FEB., MARCH APRIL MAY JUNE JULY AUGUST SEPT. OCT. NOV. 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 NET SALES [***** ***** ***** ***** ***** ***** ***** *****] PRICE TO PRI [***** ***** ***** ***** ***** ***** ***** *****] GROSS PROFIT [***** ***** ***** ***** ***** ***** ***** *****] PAYMENT TO SANO [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** *****] RETAINED BY PPI [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** *****] 15% INCREMENT [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** *****]
Product C. During the term of the Agreement, the Additional Consideration payable to SANO with respect to Product C shall be [*****] of Gross Profit, until aggregate Gross Profit with respect to that Licensed Product shall have reached [*****], and [*****] of all Gross Profit thereafter. Payment of Additional Consideration is to be made in respect of the third preceding month, as set forth in Section 11.1. The following illustrates payments to SANO under the foregoing formula, assuming that sales of Product C commenced in January 1998:
JAN. FEB., MARCH APRIL MAY JUNE JULY AUGUST SEPT. OCT. NOV. DEC. 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 NET SALES [***** ***** ***** ***** ***** ***** ***** ***** *****] PRICE TO PRI [***** ***** ***** ***** ***** ***** ***** ***** *****] GROSS PROFIT [***** ***** ***** ***** ***** ***** ***** ***** *****] PAYMENT TO SANO [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** *****] RETAINED BY PPI [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** *****] 15% INCREMENT [***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** *****]
____________________________ * [*****] of [*****]; [*****] of [*****]. (total increment--[*****]) 41 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ASTERISKS DENOTE SUCH OMISSION EXHIBIT C PROMISSORY NOTE --------------- [*****] July 28 , 1997 -------------- FOR VALUE RECEIVED, SANO CORPORATION, a Florida corporation (the "Maker"), hereby unconditionally promises to pay to Par Pharmaceutical, Inc., a New Jersey corporation (the "Payee"), at its offices located at One Ram Ridge Road, Spring Valley, New York 10977 or at such other address as the Payee may from time to time designate in writing to the Maker, the principal amount of [*****], together with interest on the principal amount outstanding from time to time at the rate per annum announced from time to time by Citibank N.A. as its "Prime Rate." The principal amount of this Note, together with interest accrued thereon, shall be due and payable on September 30, 1998. This Promissory Note is delivered pursuant to that certain Amended and Restated Distribution Agreement dated the 28th day of July , 1997 by and ---- --------- among Maker, Payee and Pharmaceutical Resources, Inc., (the "Agreement"). This Promissory Note may be prepaid in whole or in part at any time and from time to time prior to maturity without premium or penalty and shall be prepaid as and to the extent set forth in the Agreement. If any of the following events of default shall occur, the outstanding principal amount of this Note, together with interest accrued and unpaid thereon, shall become immediately due and payable: (1) Maker shall default in the payment of principal of or interest on this Note when and as due and payable; and (2) Maker (a) generally shall not pay its debts as they become due, shall become insolvent, shall suspend its usual business or shall cease to exist; (b) shall enter into an agreement with its creditors to reduce its obligations to them or to defer their fulfillment, make a general assignment for the benefit of its creditors, commence any proceeding relating to it under any Chapter of Title 11 of the United States Code or seek discharge or reduction of its debts, an arrangement, composition, reorganization or any other form of relief from its creditors or from a court or governmental agency pursuant to any bankruptcy, reorganization, arrangement, readjustment of debt, receivership, dissolution, or liquidation law, statute or procedure of any jurisdiction (federal, state or foreign) for the relief of financially distressed debtors (each of the foregoing a "Debtor Relief Procedure"): (c) shall have instituted, initiated or commenced against it a Debtor Relief Procedure and, if under Title 11 of the United States Code, an order for relief is entered or the petition is controverted but is not dismissed within 30 days after the commencement of the case or, if under another Debtor Relief Procedure, the substantial equivalent occurs or the Debtor Relief Procedure is not dismissed or otherwise 42 terminated within 30 days of its commencement; or (d) shall take any action to effect any event described in clauses (a), (b) or (c) above. In the event that the Maker shall default in payment of this Promissory Note when due, simple interest shall accrue on the then unpaid principal amount hereof, from the date of any such default until the date the unpaid principal amount hereof is paid in full, at the rate of ten percent (10%) per annum and the Maker shall pay all reasonable costs of collection, paid or incurred by the Payee, whether paid or incurred in connection with collection by suit or otherwise. The Maker of this Promissory Note hereby waives demand, protest, notice of dishonor and notice of maturity, non-payment or protest and any and all requirements necessary to hold it liable as a maker of this Promissory Note. All payments of principal, interest and any other amounts due hereunder shall be made in the amounts required hereby without any reduction or set off of any kind whatsoever, including, without limitation, any reduction or set off with respect to any claim, counterclaim, defense or other right which Maker may have against the Payee. The waiver by the Payee of the Maker's prompt and complete performance of, or default under, any provision of this Promissory Note shall not operate nor be construed as a waiver of any subsequent breach or default, and the failure by the Payee to exercise any right or remedy which it may possess hereunder shall not operate nor be construed as a bar to the exercise of any such right or remedy upon the occurrence of any subsequent breach or default. This Promissory Note shall be governed by and construed in accordance with the laws of the State of Florida. This Promissory Note may not be modified, amended or terminated, except in a writing executed by the Maker and the Payee. IN WITNESS WHEREOF, the Maker, by and through its undersigned office thereunto duly authorized, has executed and delivered this Promissory Note the 28th day of July , 1997. - ---- ------ Attested By: Sano Corporation By: - --------------------------- -------------------------------- Asst. Secretary Reginald L. Hardy, President 43 EXHIBIT D [SALES SUMMARY FORM] 44 Schedule 2.1.3 On March 6, 1996, Key filed a complaint in the United States District Court of Florida alleging that one of the Company's transdermal nitroglycerin patches, for which the Company has filed an ANDA with the FDA, infringed certain patents owned by Key. The Company had previously obtained non-infringement opinions with regard to its product and believes that there is no merit to the allegations in the complaint. The Company has filed an answer and counterclaim to the complaint and intends to vigorously defend this lawsuit. However, patent litigation is extremely costly, protracted and burdensome, and there can be no assurance that the outcome of the lawsuit will be favorable to the Company. If the Company is found in violation of Key's patents, it may not be able to market its generic version of Nitro-Dur(R) on a commercially acceptable basis or at all. 45 EXHIBIT 10.20 NON-RECOURSE SECURED PROMISSORY NOTE July 28, 1997 US$1,500,000.00 =============== FOR VALUE RECEIVED, PRI RESEARCH, INC. a Delaware corporation ("Maker"), hereby promises to pay to the order of C.T.P. RESEARCH AND DEVELOPMENT (1995) LTD., an Israeli company or its permitted assignee ("Holder"), the principal sum of ONE MILLION FIVE HUNDRED THOUSAND United States Dollars (US$1,500,000), together with interest accrued at the rate of 7% per annum on the unpaid principal balance hereof from the date hereof. Payments shall be made in lawful money of the United States of America in immediately available funds and shall be made at such place as may be designated in writing from time to time by Holder. Payments of principal and interest shall be made as follows: (a) The principal amount hereof shall be paid in eight equal installments of US$187,500. The first installment shall become due and payable on July 5, 1999, with the remaining seven installments being due and payable on each January 5 and July 5 thereafter through and including January 5, 2003 (the "Maturity Date"). (b) Accrued interest shall become due and payable on January 5, 1998 and shall be due and payable on each July 5 and January 5 through and including the Maturity Date. Notwithstanding the foregoing, payments of interest on or any installment of the principal amount of this Note shall be made only on days in which banks in New York City are not permitted by applicable law to be closed ("Business Days"). If any interest on or any installment of the principal amount of this Note becomes due and payable on a day that is not a Business Day, then the relevant payment obligation shall be extended to the next succeeding Business Day and interest shall be payable during such extension. This Note may, at the option of Maker, be prepaid, in whole or in part (but only in amounts of at least $100,000), at any time and any such prepayment shall be applied to the installments of principal in reverse order of maturity. Any such prepayment shall be without premium or penalty but shall include the payment of accrued interest on the amount prepaid to and including the date of prepayment. This Note is the Note referred to in and is being issued in connection with the purchase by Maker of Holder's limited partnership interest in Clal Pharmaceutical Resources Limited Partnership ("CPR") and shares of Clal Pharmaceutical Resources (1995) Ltd. ("CPRC"). This Maker in fulfillment of its undertaking shall enter into the Mortgage Documents annexed hereto ("Mortgage") and shall cause CPR and CPRC to pledge their assets to the benefit of the Holder in accordance with the terms of the Mortgage. 46 This note shall be non-recourse as against Maker. Holder shall look solely to the collateral subject to the Mortgage as Holder's exclusive remedy in the event of any default in payment or performance hereof. Holder shall not make claim or institute any action or proceeding against Maker in respect hereof, and expressly waives any right to a deficiency judgment in the event of foreclosure or sale of such collateral. Nothing herein shall prevent the Holder from instituting an action to enforce its rights to the collateral subject to the Mortgage. The unpaid principal sum of this Note, together with all accrued interest thereon, shall, at the option of Holder, by written demand to Maker, become immediately due and payable, (without presentment for payment, demand, protest and notice of protest or any further notice or demand of any kind, all of which are hereby expressly waived), 15 days after written notice of any of the following events has been given by Holder to Maker, provided however that after said 15 day cure period Maker shall have additional 5 days in which to pay off in full all amounts due under this Note, including all accrued interest and costs, if any of the following events shall occur (15 days written notice shall apply only to Sections (1), (2); 10 days to pay off shall apply to all sections). (1) Maker's failure to pay, when due, any installments of principal or interest on this Note. (2) The breach by Maker of any term or provision of this Note. (3) Any of Maker, CPRC or CPR makes an assignment for the benefit of creditors or admits in writing its or its inability to pay its debts generally as they become due; (4) Any of Maker, CPRC or CPR applies to any tribunal for the appointment of a custodian of any substantial part of its assets, or commences any proceedings relating to it under any bankruptcy, insolvency, reorganization or moratorium law or any other law for the relief of debtors of any jurisdiction (any of the foregoing being a "Bankruptcy Proceeding"); (5) Any application is filed in respect of a Bankruptcy Proceeding, or any Bankruptcy Proceeding is commenced, against any of Maker, CPRC or CPR by one or more persons other than Maker, CPRC or CPR, and Maker, CPRC or CPR, as the case may be, indicates its consent, approval, acquiescence thereto or the Bankruptcy Proceeding is not dismissed within 60 days of its institution; (6) A court of competent jurisdiction enters an order, judgment or decree appointing a custodian for the whole or to a substantial portion of the property of Maker, CPRC or CPR, or approving a petition filed against any of them seeking reorganization or arrangement in any Bankruptcy Proceeding, and such order, judgment or decree shall not be vacated or set aside or stayed within 90 days from the date of entry thereof; (7) Any of Maker, CPRC or CPR shall wind up its affairs, dissolve or liquidate, or take corporate or partnership action to effect any of the foregoing; 47 (8) Any of Maker, CPRC or CPR shall enter into or be a party to any merger, consolidation or reorganization with any other entity which may impair in any respect the rights of Holder under this Note, provided that Maker, CPRC or CPR may enter into any merger, consolidation or reorganization with any subsidiary or affiliate of Pharmaceutical Resources, Inc. which does not impair the rights of the Holder under this Note and its rights to Collateral under the Mortgage. (9) If one or more judgments, decrees or orders is entered against Maker, CPRC or CPR which, together with judgments, decrees or orders against any one or more of them, total US$50,000 or more, which judgments or decrees are not vacated, discharged, stayed or bonded pending appeal within 45 days from the later of date of entry or the date upon which Maker receives notice of same. (10) If Maker, directly or indirectly, declares, makes or agrees to make (or sets apart any assets for) any distribution, dividend or other payment of any kind to any of its stockholders, affiliates, officers or directors of Maker including, without limitation, any distribution or application of Maker's assets through the purchase, redemption or retirement of any loans or advances, principal or interest payments, other than loan and interest payment as hereinafter permitted, or unreasonable management consulting or like fees or compensation. (11) If any preliminary attachment, lien or additional security interest which is superior as a matter of law to the security for this Note is placed upon any of the property which is security for this Note and not set aside within the earlier of (i) a period of 60 days or (ii) the date on which a judgment is entered. (11) If, at any time or from time to time, title to or any interest in the whole or any part of the property which is security for this Note is acquired by any person, partnership, corporation, trust, joint venture or other entity other than the Maker ("Other Entity") unless said Other Entity assumes the terms of this Note, provided that this shall not prohibit the Sale of assets which do not constitute a material portion of such entity's assets, in the ordinary course of such entity's business and for fair consideration; (12) If any loss, theft, damage or destruction of any material part of the property which is security for this Note, as set forth in the Mortgage, occurs which is not covered by insurance; (13) If CPR or CPRC fail to make any rent or other undisputed payments to its landlord under the lease agreements when due against Maker, CPR or CPRC and if in dispute upon conversion to an unstayed judgment. (14) If CPR or CPRC fail to make any material Israeli tax payments (withholding tax, social security tax, VAT or any other tax) when due or as otherwise advised by its outside auditors. 48 (15) If CPR or CPRC extends the lease agreements with its Landlord at a time it is in breach of this Note and the Holder has commenced an action for its enforcement. Upon default under this Note, Holder may exercise any and all rights and remedies available under the lien documents to which this Note is attached. Time is of the essence with respect to each of Maker's obligations and agreements evidenced by this Note. If Maker fails to make any payment of principal or interest as and when due under this Note, then the entire outstanding principal balance shall accrue interest from the date of such default until the date of payment at 9% per annum. The nonexercise or delay in exercise by Holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. Maker shall satisfy and perform each of the following agreements and covenants for so long as any amounts of principal or interest due under this Note remain outstanding: (a) Furnish to Holder within 45 days after the end of each fiscal quarter of CPR (other than the fourth fiscal quarter), commencing with the quarter ending June 30, 1997, financial statements of CPR ("Interim Statements"), prepared by CPR in a form substantially the same as that of the previous quarter and thereafter United States Dollar denominated Financial Statements consisting of statements of income and balance sheets of CPR, from the beginning of the then current fiscal year and from the beginning of such quarter to the end of such period, and balance sheets of CPR as of the end of such quarter, certified by the President or Chief Financial Officer of Maker to be true and correct, and accompanied by a certificate of said officer in such form as Holder may reasonably require stating whether any event has occurred which constitutes an event of default or which, with the giving of notice or the lapse of time, or both, would constitute such an event of default and, if so, stating the facts with respect thereto. (b) Furnish to Holder within 90 days after the close of CPR's fiscal year, commencing with the year ending December 31, 1997, United States Dollar-denominated audited (reflecting CPR's business) financial statements of CPR ("Annual Statements") prepared by CPR, consisting of a balance sheet of CPR as of the end of such fiscal year and statements of income, retained earnings, paid-in capital and surplus and changes in financial position of CPR for such fiscal year, certified by the President or Chief Financial Officer of Maker to be true and correct, and accompanied by a certificate stating whether any event has occurred which constitutes an event of default or which, with the giving of notice or the lapse of time, or both, would constitute such an event of default and, if so, stating the facts with respect thereto. (c) Furnish to Holder such other information as Holder may reasonably request regarding the non-confidential business, or the assets, financial condition or income of Maker, CPRC and/or CPR; 49 (d) Permit Holder and any of its representatives or agents, upon reasonable notice and during normal business hours, to examine the books, records and tangible assets of Maker, CPRC and/ CPR, to make copies and notes therefrom, and to speak with the officers and management of each of them for the purposes of ascertaining compliance with the terms hereof or obtaining enforcement; (e) Maintain CPR's equipment and leasehold improvements in operating condition and in a good state of repair, wear and tear excepted, and make any and all replacements, additions and improvements thereto as are necessary for the operation of CPR's business; and maintain and cause CPR to comply at all times with all franchises, licenses, permits and leases held by CPR or to which it is a party and not remove the equipment outside the jurisdiction of the State of Israel except subject to sufficient notice to Holder and execution of the required documents to allow a security interest on the equipment in the jurisdiction to which it is removed; (f) Maintain insurance coverage for Maker, CPRC and CPR from financially sound and reputable insurers approved by Holder, naming Holder as an additional insured, in at least such amounts, with no more than such deductibles and relating to at least such losses and liabilities, including without limitation, business interruption, property damage from theft, fraud, fire and explosions, and liability arising from "errors and omissions", as are currently in effect, and, in addition, maintain the insurance coverage required under the lease agreements; (g) Invest, either by cash, contribution or by reinvestment of CPR's net profits, after tax at least US$1,500,000 during each calendar year for use by CPR as working capital; In addition, for so long as any amounts of principal or interest due under this Note remain outstanding, Maker shall not, and shall not permit CPRC or CPR to: (a) Transfer, sell, pledge or encumber in any way any material tangible assets without prior notice to Holder and Holder's consent or transfer, sell, pledge or encumber in any way any intangible assets (including know-how) other than in the ordinary course and provided that such transfer, sale or encumbrance shall not be fraudulent as to the Holder in any way; (b) Enter into any material agreements which shall constitute an obligation having financial consequences or incurring any liability (other than under (c) below) other than in the ordinary course (it is herein stipulated that development agreements for reasonable duration and under reasonable terms shall be deemed to be in the ordinary course unless shown otherwise) and provided such agreements are not fraudulently made as to the Holder. (c) Borrow any funds from banks or other third parties (other than Permitted Subordinated Debt as defined below, which shall be subordinate to the obligations to Holder under the Note, provided that payments of principal of and interest on such loans may be made as and when due thereunder so long as no event of default under 50 this Note shall have occurred and be continuing, and canceled in the event Holder exercise on the interests in CPR and CPRC provided as collateral) other than with prior notice to Holder and Holder's written consent (if such loans do not materially affect the "asset base"/"equity" of CPR they shall have Holder's consent and be deemed to be reasonable unless Holder shall demonstrate otherwise) or provide any security or guaranty for any obligation of any other person, firm or entity; or (d) Place liens, pledges or security interests ("Encumbrances") on any of its assets, or permit or suffer any Encumbrances to be placed on any assets of CPRC or CPR, except: (i) Encumbrances created under the Mortgage; (ii) Encumbrances on assets acquired or leased subject to purchase money security interests, title retention or conditional sales agreements, financial or other leases or similar financing arrangements; (iii) material men's liens, mechanics' liens and other similar liens arising by operation of law in respect of amounts owed to persons or entities that are not Affiliates. The term "Permitted Subordinated Debt" means loans made to (i) CPR by any partner thereof, (ii) CPRC by any shareholder thereof and (iii) Maker by any shareholder thereof, in each case pursuant to written agreements which shall provide that such loans are expressly subordinated in right of payment to Maker's obligations and Holder's rights hereunder, provided that the intent of such Note is not to violate any of the terms of this Note including Clause (g) herein. This Note and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the internal laws of the State of Israel without any suit, action or proceeding in connection with, or enforcement of, this Note, Maker submits to the non-exclusive jurisdiction of the courts of the State of Israel, expressly waives all objections it may have as to venue in any of such courts or any claim of inconvenient forum and agrees that nothing herein shall affect the right of Holder to effect service of process in any other manner permitted by law. In the event of any action to enforce this Note Holder may collect costs and attorney's fees against the collateral subject to this Note or the Mortgage. The obligations of Maker hereunder shall not be subject to any defense, setoff, counterclaim, recoupment or termination whatsoever based upon the invalidity, illegality or unenforceability of any other agreements between Maker and Holder. This Note shall be binding upon Maker and its successors or assigns provided that Maker shall not assign its obligations under this Note without the express written consent of Holder, which may be withheld or denied in its sole discretion. The invalidity or unenforceability of any provision of this Note shall not affect the other provisions hereof and the remaining provisions of this Note shall remain operative and in full force and effect. This Note may not be assigned by the Holder to any entity or person other to an affiliate of Clal Industries, Ltd. 51 IN WITNESS WHEREOF, the undersigned has cause this Note to be executed and delivered as of the date and year first above written. PRI RESEARCH, INC. By: /s/Kenneth I. Sawyer ------------------------------ , President Attest: /s/Dennis S. O'Connor (SEAL) ------------------------ , Secretary 52 EXHIBIT 10.21 THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT (the "Amendment"), dated July 28, 1997, between PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation (the "Company"), and CLAL PHARMACEUTICAL INDUSTRIAL LTD., a corporation formed under the laws of the State of Israel, (the "Purchaser"). WHEREAS, the Company and the Purchaser entered into a Stock Purchase Agreement, dated March 25, 1995, as amended pursuant to Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995, and Amendment No. 2 to Stock Purchase Agreement (as amended, the "SPA"); and WHEREAS, a subsidiary of the Company is acquiring all of the interests in the Joint Venture (as defined in the SPA) held by a subsidiary of the Purchaser; WHEREAS, incident to such acquisition, the Company and the Purchaser desire to amend certain terms of the SPA and the Registration Rights Agreement between the Company and the Purchaser, dated May 1, 1995, and desire to set forth their mutual agreements with respect thereto. NOW, THEREFORE, in consideration of the premises and of the mutual covenants set forth herein, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, capitalized terms used ------------ herein shall have the same meanings as in the SPA. 2. New Shares. ----------- 2.1 The Company shall execute and deliver to the Purchaser a certificate representing 186,000 shares of Common Stock (the "New Shares") promptly following approval for listing of the New Shares by The New York Stock Exchange, provided that, in the event that the Company shall not deliver the New Shares by the 42nd day following the execution and delivery of this Amendment, (i) PRI Research, Inc. hereby agrees that principal amount of the Non-Recourse Secured Promissory Note, dated the date hereof, of PRI Research, Inc. shall be increased by an amount equal to the product of the closing price of a share of Common Stock on the trading day prior to the execution and delivery of this Amendment multiplied by 186,000 and (ii) the Company's obligation to deliver the New Shares hereunder shall terminate. The Company shall file an application for the listing of the New Shares with The New York Stock Exchange promptly following the execution and deliver of this Amendment. The Purchaser shall pay to the Company the sum of $1,860 (representing the par value of the New Shares) upon the delivery of the New Shares to the Purchaser. If the New Shares shall not be delivered, the other 53 agreements executed and delivered by the Company, the Purchaser and their respective affiliates on the date hereof or contemplated thereby shall remain in full force and effect, except for the Non-Recourse Secured Promissory Note which shall be modified as stated herein. 2.2 Simultaneous with the execution and delivery of this Amendment, the Purchaser shall deliver to the Company the original Warrant and Additional Warrant (or an affidavit of lost security and indemnification agreement in the event the original security is misplaced or destroyed). The New Shares shall be issued, or the principal amount of the Non-Recourse Secured Promissory Note, dated the date hereof, of PRI Research, Inc. shall be increased, in exchange for the surrender and cancellation of the Warrant and the Additional Warrant. 2.3 The Company and the Purchaser hereby agree that references to "Securities" in the SPA shall also include and refer to the New Shares. 3. Third party transactions. ------------------------- 3.1 In Section 10 of the SPA the terms "60 days" and "60-day period" wherever they appear shall be amended to read "30 days" and "30 day period", respectively. 3.2 It is hereby clarified that a bona fide offer made for more than 10% of PRI's securities, but which could result by its express terms in the acquisition of more than 50% of PRI's outstanding voting securities, shall be deemed a Third Party Transaction for the purposes of Section 10 of the SPA. 4. Acquisitions and Dispositions of Securities. -------------------------------------------- 4.1 The first sentence of Section 11.1(a) of the SPA shall be amended in its entirety as follows: (a) During the period ("Consent Period") commencing on May 1, 1995 and terminating six months after the date on which the Purchasers' rights shall terminate under Section 10.1 hereof, the Purchaser shall not sell, assign, pledge, transfer or otherwise dispose of (collectively, a "Transfer") any Securities (as hereinafter defined) without the written consent of the Company (which may be granted or withheld in its sole discretion) unless such Securities (i) shall be registered under the Securities Act and applicable state securities laws, (ii) shall be sold in brokers' transactions pursuant to Rule 144 promulgated under the Securities Act, (iii) shall be sold or transferred in connection with a Third Party Transaction or any other transaction that has been approved by a majority of the members of the Board (exclusive of those members appointed by the Purchaser pursuant to Section 7.2 hereof), (iv) shall be sold or transferred in any transaction which shall comply with the Securities Act and applicable state securities laws, in accordance with Section 11.1(b) hereof or, (v) a Transfer of all Securities owned at the time of Transfer by the Purchaser if the Board has written notice of such Transfer and the Company's Board of Directors does not reject the transferee, it being agreed that the company's Board of Directors may 54 only reject such transferee (but subject to Section 11.1(c) hereof) if such entity is asserted in good faith and then demonstrated by the Board (acting in good faith) to be a competitor or a party with a demonstrated adverse interest to the Company (the Board to act within 7 U.S. business days of the Company's receipt of a notice regarding such contemplated Transfer). 4.2 The following shall be inserted as Section 11.1(e) of the SPA: (e) Notwithstanding the provisions of Section 11.1 hereof, the Purchaser may Transfer 90% or more of the Common Stock then beneficially owned by the Purchaser to a bona fide purchaser if the Company's Board of Directors does not reject the transferee as provided below (a "Permitted Transfer"); provided, however, that the Purchaser shall not be entitled to request or consummate a Permitted Transfer if, at the time of the Purchaser's request to the Company for its consent to the Permitted Transfer, the Purchaser shall have Transferred more than 290,000 shares of Common Stock in any 365-day period or shall have Transferred an aggregate of more than 586,000 shares of Common Stock since May 1, 1995. The Purchaser will advise the Company of the beneficial owner of the proposed transferee. The Company's Board of Directors may reject the tranferee if such entity is asserted in good faith and then demonstrated by the Board (acting in good faith) to be a competitor or a party with a demonstrated adverse interest to the Company (the Board to act within 7 U.S. business days of the Company's receipt of a notice regarding such contemplated sale). 5. Assignment. ---------- (a) Section 16.2 of the SPA shall be amended in its entirety as follows: 16.2 Assignment. All terms and provisions of this Agreement shall be ---------- binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any party hereto without the prior written consent of the other party; provided, that, (a) the Purchaser may assign its rights under this Agreement, in whole or in part, to any subsidiary or related entity "Hevra Kshura" of the Purchaser, within the meaning of the Israel Securities Act 5728-1968, as amended, so long as such (i) subsidiary or related party shall assume and agree to be bound by all of the Purchaser's obligations hereunder and (ii) the Purchaser shall not be relieved of its primary liability to the Company for all of the Purchaser's obligations set forth herein and (b) the Purchaser may assign all, but not less than all, of its rights under this Agreement to any person or entity pursuant to a Permitted Transfer so long as the transferee thereof shall assume and agree to be bound by all of the Purchaser's obligations hereunder (a "Permitted Assignment"). (b) The Company and the Purcahser hereby acknowledge and agree that, for the purposes of the Rights Agreement, between the Company and Midlantic Bank, N.A., dated August 6, 1991, as amended, only transferees and assignees of Purchaser pursuant to Sections 16.2(a) or (b) of the Agreement, as amended, 55 shall constitute "permitted assigns" of Clal Pharmaceutical Industries Ltd. under Section 1(a)(v) of such Rights Agreement. Purchaser shall inform all transferees of Securities of this provision. 6. Registration Rights Agreement. Section 8.1 of the Registration Rights ----------------------------- Agreement shall be amended in its entirety as follows: 8.1 Assignment. All terms and provisions of this Agreement shall be ----------- binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any party hereto without the prior written consent of the other party; provided, that, (a) the Holder may assign this Agreement to any permitted assignee under Section 16.2(a) of the Stock Purchase Agreement without the Company's written consent so long as (i) such assignee shall agree to assume and agree to be bound by all of the Holder's obligations hereunder and (ii) the Holder shall not be relieved of its primary liability to the Company for all of the Holder's obligations set forth herein and (b) the Holder may assign all, but not less than all, of the rights under this Agreement to a person or entity pursuant to a Permitted Transfer as defined in the Stock Purchase Agreement so long as such assignee shall agree to assume and agree to be bound by all of the Holder's obligations hereunder. The Registration Rights Agreement shall also apply to the New Shares. This provision shall constitute an amendment of the Registration Rights Agreement pursuant to Section 8.4 thereof. 7. Representations and Indemnification. ------------------------------------ 7.1 Representations. The Company and the Purchaser each hereby represent ---------------- and warrant to the other as follows: (a) It is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its formation. It has all requisite corporate power and authority to conduct its business and to enter into and perform its obligations under this Amendment in accordance with the terms hereof. (b) It has taken all required corporate actions to approve and adopt this Amendment. This Amendment constitutes a duly authorized, valid and binding agreement on it and enforceable against it in accordance with its terms. Each person executing this Amendment on its behalf is duly authorized and empowered to do so. (c) The execution and delivery of this Amendment and the consummation of the transactions as contemplated hereunder (i) do not, and will not, violate or conflict with any statute, regulation, judgment, order, writ, decree or injunction currently applicable to it or any of its property or assets; and (ii) do not, and will not, violate or conflict with its charter or By-laws and/or Memorandum and 56 Articles of Association, or any existing mortgage, indenture, contract, licensing agreement, financing statement or other agreement binding on it. (d) All required consents and approvals, as well as any approvals or consents of any governmental authorities or any other third parties in connection with the execution and delivery of this Amendment or the performance of the transactions contemplated hereunder, have been obtained by it, except for such approvals required under New York Stock Exchange rules. No contract or agreement binding upon it restricts its ability to fulfill its obligations and responsibilities under this Amendment or to carry out the activities contemplated herein. (e) It is not a party to or, to the best of its knowledge, threatened with any litigation or judicial or administrative proceeding that, if decided adversely to it, would delay or preclude the consummation of the transactions contemplated in this Amendment or have a material adverse effect upon the transactions contemplated hereby. 7.2 Indemnification. The Company and the Purchaser each agree to ---------------- indemnify and hold harmless the other and their respective employees, agents and affiliates against all losses, liabilities, claims, damages, and expenses (including, but not limited to, reasonable counsel fees) resulting from or arising out of any actual or alleged misrepresentation or breach by it of any representation or warranty set forth in Section 8.1 hereof or otherwise set forth in this Amendment. 8. Miscellaneous ------------- 8.1 No Further Amendment. Except as amended herein, the terms and -------------------- provisions of the SPA and the Registration Rights Agreement are hereby ratified, confirmed and approved in all respects. 8.2 Assignment. All terms and provisions of this Amendment shall be ---------- binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Amendment nor any of the rights, interest or obligations hereunder may be assigned by any party hereto without the prior written consent of the other party, other than pursuant to a Permitted Assignment. 8.3 Entire Agreement. This Amendment and the other agreements referred to ---------------- herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous arrangements or understandings with respect thereto. 8.4 Amendments; Waiver. This Amendment may not be amended or terminated, ------------------ and no provision hereof may be waived, except pursuant to a written instrument executed by each of the parties hereto. 57 8.5 Counterparts. This Amendment may be executed in any number of ------------ counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 8.6 Headings. The headings of the Sections of this Amendment have been -------- inserted for convenience of reference only and shall not be deemed to be a part of this Amendment. 8.7 Governing Law. This Amendment shall be governed by and construed in -------------- accordance with the laws of the State of New York applicable to contracts made and to be performed wholly therein. 8.8 Severability. If any term or provision hereof shall be invalid or ------------ unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired, (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction and (c) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision as determined by a court to be valid and enforceable and to express the intention of the parties with respect to the invalid or unenforceable term or provision. 8.9 Consent to Jurisdiction. In connection with any dispute which may ------------------------ arise under this Amendment or under any other agreement referred to herein, each of the parties hereby irrevocably submits to, consents to, and waives any objection to, the jurisdiction of the courts of the State of New York located in the County of New York or of the United States District Court for the Southern District of New York, and waives any objection to the laying of venue in such courts. Each such party admits that any such dispute may be resolved at least as conveniently in such a court as in any other court, and shall not seek dismissal or a change of venue on the ground that resolution of such a dispute in any such court shall not be convenient or in the interests of justice. The Purchaser hereby appoints Proskauer Rose LLP as its agent upon whom service of process may be made with the same force and effect as if such service shall have been made personally upon the Purchaser. The Company hereby appoints Hertzog, Calamari & Gleason as its agent upon; whom service of process may be made with the same force and effect as if such service shall have been made personally upon the Company. IN WITNESS WHEREOF, each of the undersigned has caused this Third Amendment to Stock Purchase Agreement to be executed as of the date first written above. PHARMACEUTICAL RESOURCES, INC. By:/s/Kenneth I. Sawyer, President -------------------------------- CLAL PHARMACEUTICAL INDUSTRIES LTD. By: /s/ -------------------------------- By: /s/ -------------------------------- 58 AGREED AND ACCEPTED AS TO SECTION 2.1 ONLY PRI - RESEARCH, INC. By:/s/Kenneth I. Sawyer, President -------------------------------- 59 EX-10.20 8 NON-RECOURSE SECURED PROMISSORY NOTE EXHIBIT 10.20 NON-RECOURSE SECURED PROMISSORY NOTE July 28, 1997 US$1,500,000.00 =============== FOR VALUE RECEIVED, PRI RESEARCH, INC. a Delaware corporation ("Maker"), hereby promises to pay to the order of C.T.P. RESEARCH AND DEVELOPMENT (1995) LTD., an Israeli company or its permitted assignee ("Holder"), the principal sum of ONE MILLION FIVE HUNDRED THOUSAND United States Dollars (US$1,500,000), together with interest accrued at the rate of 7% per annum on the unpaid principal balance hereof from the date hereof. Payments shall be made in lawful money of the United States of America in immediately available funds and shall be made at such place as may be designated in writing from time to time by Holder. Payments of principal and interest shall be made as follows: (a) The principal amount hereof shall be paid in eight equal installments of US$187,500. The first installment shall become due and payable on July 5, 1999, with the remaining seven installments being due and payable on each January 5 and July 5 thereafter through and including January 5, 2003 (the "Maturity Date"). (b) Accrued interest shall become due and payable on January 5, 1998 and shall be due and payable on each July 5 and January 5 through and including the Maturity Date. Notwithstanding the foregoing, payments of interest on or any installment of the principal amount of this Note shall be made only on days in which banks in New York City are not permitted by applicable law to be closed ("Business Days"). If any interest on or any installment of the principal amount of this Note becomes due and payable on a day that is not a Business Day, then the relevant payment obligation shall be extended to the next succeeding Business Day and interest shall be payable during such extension. This Note may, at the option of Maker, be prepaid, in whole or in part (but only in amounts of at least $100,000), at any time and any such prepayment shall be applied to the installments of principal in reverse order of maturity. Any such prepayment shall be without premium or penalty but shall include the payment of accrued interest on the amount prepaid to and including the date of prepayment. This Note is the Note referred to in and is being issued in connection with the purchase by Maker of Holder's limited partnership interest in Clal Pharmaceutical Resources Limited Partnership ("CPR") and shares of Clal Pharmaceutical Resources (1995) Ltd. ("CPRC"). This Maker in fulfillment of its undertaking shall enter into the Mortgage Documents annexed hereto ("Mortgage") and shall cause CPR and CPRC to pledge their assets to the benefit of the Holder in accordance with the terms of the Mortgage. 1 This note shall be non-recourse as against Maker. Holder shall look solely to the collateral subject to the Mortgage as Holder's exclusive remedy in the event of any default in payment or performance hereof. Holder shall not make claim or institute any action or proceeding against Maker in respect hereof, and expressly waives any right to a deficiency judgment in the event of foreclosure or sale of such collateral. Nothing herein shall prevent the Holder from instituting an action to enforce its rights to the collateral subject to the Mortgage. The unpaid principal sum of this Note, together with all accrued interest thereon, shall, at the option of Holder, by written demand to Maker, become immediately due and payable, (without presentment for payment, demand, protest and notice of protest or any further notice or demand of any kind, all of which are hereby expressly waived), 15 days after written notice of any of the following events has been given by Holder to Maker, provided however that after said 15 day cure period Maker shall have additional 5 days in which to pay off in full all amounts due under this Note, including all accrued interest and costs, if any of the following events shall occur (15 days written notice shall apply only to Sections (1), (2); 10 days to pay off shall apply to all sections). (1) Maker's failure to pay, when due, any installments of principal or interest on this Note. (2) The breach by Maker of any term or provision of this Note. (3) Any of Maker, CPRC or CPR makes an assignment for the benefit of creditors or admits in writing its or its inability to pay its debts generally as they become due; (4) Any of Maker, CPRC or CPR applies to any tribunal for the appointment of a custodian of any substantial part of its assets, or commences any proceedings relating to it under any bankruptcy, insolvency, reorganization or moratorium law or any other law for the relief of debtors of any jurisdiction (any of the foregoing being a "Bankruptcy Proceeding"); (5) Any application is filed in respect of a Bankruptcy Proceeding, or any Bankruptcy Proceeding is commenced, against any of Maker, CPRC or CPR by one or more persons other than Maker, CPRC or CPR, and Maker, CPRC or CPR, as the case may be, indicates its consent, approval, acquiescence thereto or the Bankruptcy Proceeding is not dismissed within 60 days of its institution; (6) A court of competent jurisdiction enters an order, judgment or decree appointing a custodian for the whole or to a substantial portion of the property of Maker, CPRC or CPR, or approving a petition filed against any of them seeking reorganization or arrangement in any Bankruptcy Proceeding, and such order, judgment or decree shall not be vacated or set aside or stayed within 90 days from the date of entry thereof; (7) Any of Maker, CPRC or CPR shall wind up its affairs, dissolve or liquidate, or take corporate or partnership action to effect any of the foregoing; 2 (8) Any of Maker, CPRC or CPR shall enter into or be a party to any merger, consolidation or reorganization with any other entity which may impair in any respect the rights of Holder under this Note, provided that Maker, CPRC or CPR may enter into any merger, consolidation or reorganization with any subsidiary or affiliate of Pharmaceutical Resources, Inc. which does not impair the rights of the Holder under this Note and its rights to Collateral under the Mortgage. (9) If one or more judgments, decrees or orders is entered against Maker, CPRC or CPR which, together with judgments, decrees or orders against any one or more of them, total US$50,000 or more, which judgments or decrees are not vacated, discharged, stayed or bonded pending appeal within 45 days from the later of date of entry or the date upon which Maker receives notice of same. (10) If Maker, directly or indirectly, declares, makes or agrees to make (or sets apart any assets for) any distribution, dividend or other payment of any kind to any of its stockholders, affiliates, officers or directors of Maker including, without limitation, any distribution or application of Maker's assets through the purchase, redemption or retirement of any loans or advances, principal or interest payments, other than loan and interest payment as hereinafter permitted, or unreasonable management consulting or like fees or compensation. (11) If any preliminary attachment, lien or additional security interest which is superior as a matter of law to the security for this Note is placed upon any of the property which is security for this Note and not set aside within the earlier of (i) a period of 60 days or (ii) the date on which a judgment is entered. (11) If, at any time or from time to time, title to or any interest in the whole or any part of the property which is security for this Note is acquired by any person, partnership, corporation, trust, joint venture or other entity other than the Maker ("Other Entity") unless said Other Entity assumes the terms of this Note, provided that this shall not prohibit the Sale of assets which do not constitute a material portion of such entity's assets, in the ordinary course of such entity's business and for fair consideration; (12) If any loss, theft, damage or destruction of any material part of the property which is security for this Note, as set forth in the Mortgage, occurs which is not covered by insurance; (13) If CPR or CPRC fail to make any rent or other undisputed payments to its landlord under the lease agreements when due against Maker, CPR or CPRC and if in dispute upon conversion to an unstayed judgment. (14) If CPR or CPRC fail to make any material Israeli tax payments (withholding tax, social security tax, VAT or any other tax) when due or as otherwise advised by its outside auditors. 3 (15) If CPR or CPRC extends the lease agreements with its Landlord at a time it is in breach of this Note and the Holder has commenced an action for its enforcement. Upon default under this Note, Holder may exercise any and all rights and remedies available under the lien documents to which this Note is attached. Time is of the essence with respect to each of Maker's obligations and agreements evidenced by this Note. If Maker fails to make any payment of principal or interest as and when due under this Note, then the entire outstanding principal balance shall accrue interest from the date of such default until the date of payment at 9% per annum. The nonexercise or delay in exercise by Holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. Maker shall satisfy and perform each of the following agreements and covenants for so long as any amounts of principal or interest due under this Note remain outstanding: (a) Furnish to Holder within 45 days after the end of each fiscal quarter of CPR (other than the fourth fiscal quarter), commencing with the quarter ending June 30, 1997, financial statements of CPR ("Interim Statements"), prepared by CPR in a form substantially the same as that of the previous quarter and thereafter United States Dollar denominated Financial Statements consisting of statements of income and balance sheets of CPR, from the beginning of the then current fiscal year and from the beginning of such quarter to the end of such period, and balance sheets of CPR as of the end of such quarter, certified by the President or Chief Financial Officer of Maker to be true and correct, and accompanied by a certificate of said officer in such form as Holder may reasonably require stating whether any event has occurred which constitutes an event of default or which, with the giving of notice or the lapse of time, or both, would constitute such an event of default and, if so, stating the facts with respect thereto. (b) Furnish to Holder within 90 days after the close of CPR's fiscal year, commencing with the year ending December 31, 1997, United States Dollar- denominated audited (reflecting CPR's business) financial statements of CPR ("Annual Statements") prepared by CPR, consisting of a balance sheet of CPR as of the end of such fiscal year and statements of income, retained earnings, paid-in capital and surplus and changes in financial position of CPR for such fiscal year, certified by the President or Chief Financial Officer of Maker to be true and correct, and accompanied by a certificate stating whether any event has occurred which constitutes an event of default or which, with the giving of notice or the lapse of time, or both, would constitute such an event of default and, if so, stating the facts with respect thereto. (c) Furnish to Holder such other information as Holder may reasonably request regarding the non-confidential business, or the assets, financial condition or income of Maker, CPRC and/or CPR; 4 (d) Permit Holder and any of its representatives or agents, upon reasonable notice and during normal business hours, to examine the books, records and tangible assets of Maker, CPRC and/ CPR, to make copies and notes therefrom, and to speak with the officers and management of each of them for the purposes of ascertaining compliance with the terms hereof or obtaining enforcement; (e) Maintain CPR's equipment and leasehold improvements in operating condition and in a good state of repair, wear and tear excepted, and make any and all replacements, additions and improvements thereto as are necessary for the operation of CPR's business; and maintain and cause CPR to comply at all times with all franchises, licenses, permits and leases held by CPR or to which it is a party and not remove the equipment outside the jurisdiction of the State of Israel except subject to sufficient notice to Holder and execution of the required documents to allow a security interest on the equipment in the jurisdiction to which it is removed; (f) Maintain insurance coverage for Maker, CPRC and CPR from financially sound and reputable insurers approved by Holder, naming Holder as an additional insured, in at least such amounts, with no more than such deductibles and relating to at least such losses and liabilities, including without limitation, business interruption, property damage from theft, fraud, fire and explosions, and liability arising from "errors and omissions", as are currently in effect, and, in addition, maintain the insurance coverage required under the lease agreements; (g) Invest, either by cash, contribution or by reinvestment of CPR's net profits, after tax at least US$1,500,000 during each calendar year for use by CPR as working capital; In addition, for so long as any amounts of principal or interest due under this Note remain outstanding, Maker shall not, and shall not permit CPRC or CPR to: (a) Transfer, sell, pledge or encumber in any way any material tangible assets without prior notice to Holder and Holder's consent or transfer, sell, pledge or encumber in any way any intangible assets (including know-how) other than in the ordinary course and provided that such transfer, sale or encumbrance shall not be fraudulent as to the Holder in any way; (b) Enter into any material agreements which shall constitute an obligation having financial consequences or incurring any liability (other than under (c) below) other than in the ordinary course (it is herein stipulated that development agreements for reasonable duration and under reasonable terms shall be deemed to be in the ordinary course unless shown otherwise) and provided such agreements are not fraudulently made as to the Holder. (c) Borrow any funds from banks or other third parties (other than Permitted Subordinated Debt as defined below, which shall be subordinate to the obligations to Holder under the Note, provided that payments of principal of and interest on such loans may be made as and when due thereunder so long as no event of default under 5 this Note shall have occurred and be continuing, and canceled in the event Holder exercise on the interests in CPR and CPRC provided as collateral) other than with prior notice to Holder and Holder's written consent (if such loans do not materially affect the "asset base"/"equity" of CPR they shall have Holder's consent and be deemed to be reasonable unless Holder shall demonstrate otherwise) or provide any security or guaranty for any obligation of any other person, firm or entity; or (d) Place liens, pledges or security interests ("Encumbrances") on any of its assets, or permit or suffer any Encumbrances to be placed on any assets of CPRC or CPR, except: (i) Encumbrances created under the Mortgage; (ii) Encumbrances on assets acquired or leased subject to purchase money security interests, title retention or conditional sales agreements, financial or other leases or similar financing arrangements; (iii) material men's liens, mechanics' liens and other similar liens arising by operation of law in respect of amounts owed to persons or entities that are not Affiliates. The term "Permitted Subordinated Debt" means loans made to (i) CPR by any partner thereof, (ii) CPRC by any shareholder thereof and (iii) Maker by any shareholder thereof, in each case pursuant to written agreements which shall provide that such loans are expressly subordinated in right of payment to Maker's obligations and Holder's rights hereunder, provided that the intent of such Note is not to violate any of the terms of this Note including Clause (g) herein. This Note and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the internal laws of the State of Israel without any suit, action or proceeding in connection with, or enforcement of, this Note, Maker submits to the non-exclusive jurisdiction of the courts of the State of Israel, expressly waives all objections it may have as to venue in any of such courts or any claim of inconvenient forum and agrees that nothing herein shall affect the right of Holder to effect service of process in any other manner permitted by law. In the event of any action to enforce this Note Holder may collect costs and attorney's fees against the collateral subject to this Note or the Mortgage. The obligations of Maker hereunder shall not be subject to any defense, setoff, counterclaim, recoupment or termination whatsoever based upon the invalidity, illegality or unenforceability of any other agreements between Maker and Holder. This Note shall be binding upon Maker and its successors or assigns provided that Maker shall not assign its obligations under this Note without the express written consent of Holder, which may be withheld or denied in its sole discretion. The invalidity or unenforceability of any provision of this Note shall not affect the other provisions hereof and the remaining provisions of this Note shall remain operative and in full force and effect. This Note may not be assigned by the Holder to any entity or person other to an affiliate of Clal Industries, Ltd. 6 IN WITNESS WHEREOF, the undersigned has cause this Note to be executed and delivered as of the date and year first above written. PRI RESEARCH, INC. By: /s/Kenneth I. Sawyer ------------------------------ , President Attest: /s/Dennis S. O'Connor (SEAL) ----------------------------- , Secretary 7 EX-10.21 9 THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT EXHIBIT 10.21 THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT (the "Amendment"), dated July 28, 1997, between PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation (the "Company"), and CLAL PHARMACEUTICAL INDUSTRIAL LTD., a corporation formed under the laws of the State of Israel, (the "Purchaser"). WHEREAS, the Company and the Purchaser entered into a Stock Purchase Agreement, dated March 25, 1995, as amended pursuant to Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995, and Amendment No. 2 to Stock Purchase Agreement (as amended, the "SPA"); and WHEREAS, a subsidiary of the Company is acquiring all of the interests in the Joint Venture (as defined in the SPA) held by a subsidiary of the Purchaser; WHEREAS, incident to such acquisition, the Company and the Purchaser desire to amend certain terms of the SPA and the Registration Rights Agreement between the Company and the Purchaser, dated May 1, 1995, and desire to set forth their mutual agreements with respect thereto. NOW, THEREFORE, in consideration of the premises and of the mutual covenants set forth herein, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, capitalized terms used ------------ herein shall have the same meanings as in the SPA. 2. New Shares. ----------- 2.1 The Company shall execute and deliver to the Purchaser a certificate representing 186,000 shares of Common Stock (the "New Shares") promptly following approval for listing of the New Shares by The New York Stock Exchange, provided that, in the event that the Company shall not deliver the New Shares by the 42nd day following the execution and delivery of this Amendment, (i) PRI Research, Inc. hereby agrees that principal amount of the Non-Recourse Secured Promissory Note, dated the date hereof, of PRI Research, Inc. shall be increased by an amount equal to the product of the closing price of a share of Common Stock on the trading day prior to the execution and delivery of this Amendment multiplied by 186,000 and (ii) the Company's obligation to deliver the New Shares hereunder shall terminate. The Company shall file an application for the listing of the New Shares with The New York Stock Exchange promptly following the execution and deliver of this Amendment. The Purchaser shall pay to the Company the sum of $1,860 (representing the par value of the New Shares) upon the delivery of the New Shares to the Purchaser. If the New Shares shall not be delivered, the other 1 agreements executed and delivered by the Company, the Purchaser and their respective affiliates on the date hereof or contemplated thereby shall remain in full force and effect, except for the Non-Recourse Secured Promissory Note which shall be modified as stated herein. 2.2 Simultaneous with the execution and delivery of this Amendment, the Purchaser shall deliver to the Company the original Warrant and Additional Warrant (or an affidavit of lost security and indemnification agreement in the event the original security is misplaced or destroyed). The New Shares shall be issued, or the principal amount of the Non-Recourse Secured Promissory Note, dated the date hereof, of PRI Research, Inc. shall be increased, in exchange for the surrender and cancellation of the Warrant and the Additional Warrant. 2.3 The Company and the Purchaser hereby agree that references to "Securities" in the SPA shall also include and refer to the New Shares. 3. Third party transactions. ------------------------- 3.1 In Section 10 of the SPA the terms "60 days" and "60-day period" wherever they appear shall be amended to read "30 days" and "30 day period", respectively. 3.2 It is hereby clarified that a bona fide offer made for more than 10% of PRI's securities, but which could result by its express terms in the acquisition of more than 50% of PRI's outstanding voting securities, shall be deemed a Third Party Transaction for the purposes of Section 10 of the SPA. 4. Acquisitions and Dispositions of Securities. -------------------------------------------- 4.1 The first sentence of Section 11.1(a) of the SPA shall be amended in its entirety as follows: (a) During the period ("Consent Period") commencing on May 1, 1995 and terminating six months after the date on which the Purchasers' rights shall terminate under Section 10.1 hereof, the Purchaser shall not sell, assign, pledge, transfer or otherwise dispose of (collectively, a "Transfer") any Securities (as hereinafter defined) without the written consent of the Company (which may be granted or withheld in its sole discretion) unless such Securities (i) shall be registered under the Securities Act and applicable state securities laws, (ii) shall be sold in brokers' transactions pursuant to Rule 144 promulgated under the Securities Act, (iii) shall be sold or transferred in connection with a Third Party Transaction or any other transaction that has been approved by a majority of the members of the Board (exclusive of those members appointed by the Purchaser pursuant to Section 7.2 hereof), (iv) shall be sold or transferred in any transaction which shall comply with the Securities Act and applicable state securities laws, in accordance with Section 11.1(b) hereof or, (v) a Transfer of all Securities owned at the time of Transfer by the Purchaser if the Board has written notice of such Transfer and the Company's Board of Directors does not reject the transferee, it being agreed that the company's Board of Directors may 2 only reject such transferee (but subject to Section 11.1(c) hereof) if such entity is asserted in good faith and then demonstrated by the Board (acting in good faith) to be a competitor or a party with a demonstrated adverse interest to the Company (the Board to act within 7 U.S. business days of the Company's receipt of a notice regarding such contemplated Transfer). 4.2 The following shall be inserted as Section 11.1(e) of the SPA: (e) Notwithstanding the provisions of Section 11.1 hereof, the Purchaser may Transfer 90% or more of the Common Stock then beneficially owned by the Purchaser to a bona fide purchaser if the Company's Board of Directors does not reject the transferee as provided below (a "Permitted Transfer"); provided, however, that the Purchaser shall not be entitled to request or consummate a Permitted Transfer if, at the time of the Purchaser's request to the Company for its consent to the Permitted Transfer, the Purchaser shall have Transferred more than 290,000 shares of Common Stock in any 365-day period or shall have Transferred an aggregate of more than 586,000 shares of Common Stock since May 1, 1995. The Purchaser will advise the Company of the beneficial owner of the proposed transferee. The Company's Board of Directors may reject the tranferee if such entity is asserted in good faith and then demonstrated by the Board (acting in good faith) to be a competitor or a party with a demonstrated adverse interest to the Company (the Board to act within 7 U.S. business days of the Company's receipt of a notice regarding such contemplated sale). 5. Assignment. ---------- (a) Section 16.2 of the SPA shall be amended in its entirety as follows: 16.2 Assignment. All terms and provisions of this Agreement shall be ---------- binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any party hereto without the prior written consent of the other party; provided, that, (a) the Purchaser may assign its rights under this Agreement, in whole or in part, to any subsidiary or related entity "Hevra Kshura" of the Purchaser, within the meaning of the Israel Securities Act 5728-1968, as amended, so long as such (i) subsidiary or related party shall assume and agree to be bound by all of the Purchaser's obligations hereunder and (ii) the Purchaser shall not be relieved of its primary liability to the Company for all of the Purchaser's obligations set forth herein and (b) the Purchaser may assign all, but not less than all, of its rights under this Agreement to any person or entity pursuant to a Permitted Transfer so long as the transferee thereof shall assume and agree to be bound by all of the Purchaser's obligations hereunder (a "Permitted Assignment"). (b) The Company and the Purcahser hereby acknowledge and agree that, for the purposes of the Rights Agreement, between the Company and Midlantic Bank, N.A., dated August 6, 1991, as amended, only transferees and assignees of Purchaser pursuant to Sections 16.2(a) or (b) of the Agreement, as amended, 3 shall constitute "permitted assigns" of Clal Pharmaceutical Industries Ltd. under Section 1(a)(v) of such Rights Agreement. Purchaser shall inform all transferees of Securities of this provision. 6. Registration Rights Agreement. Section 8.1 of the Registration Rights ----------------------------- Agreement shall be amended in its entirety as follows: 8.1 Assignment. All terms and provisions of this Agreement shall be ----------- binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any party hereto without the prior written consent of the other party; provided, that, (a) the Holder may assign this Agreement to any permitted assignee under Section 16.2(a) of the Stock Purchase Agreement without the Company's written consent so long as (i) such assignee shall agree to assume and agree to be bound by all of the Holder's obligations hereunder and (ii) the Holder shall not be relieved of its primary liability to the Company for all of the Holder's obligations set forth herein and (b) the Holder may assign all, but not less than all, of the rights under this Agreement to a person or entity pursuant to a Permitted Transfer as defined in the Stock Purchase Agreement so long as such assignee shall agree to assume and agree to be bound by all of the Holder's obligations hereunder. The Registration Rights Agreement shall also apply to the New Shares. This provision shall constitute an amendment of the Registration Rights Agreement pursuant to Section 8.4 thereof. 7. Representations and Indemnification. ------------------------------------ 7.1 Representations. The Company and the Purchaser each hereby represent ---------------- and warrant to the other as follows: (a) It is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its formation. It has all requisite corporate power and authority to conduct its business and to enter into and perform its obligations under this Amendment in accordance with the terms hereof. (b) It has taken all required corporate actions to approve and adopt this Amendment. This Amendment constitutes a duly authorized, valid and binding agreement on it and enforceable against it in accordance with its terms. Each person executing this Amendment on its behalf is duly authorized and empowered to do so. (c) The execution and delivery of this Amendment and the consummation of the transactions as contemplated hereunder (i) do not, and will not, violate or conflict with any statute, regulation, judgment, order, writ, decree or injunction currently applicable to it or any of its property or assets; and (ii) do not, and will not, violate or conflict with its charter or By-laws and/or Memorandum and 4 Articles of Association, or any existing mortgage, indenture, contract, licensing agreement, financing statement or other agreement binding on it. (d) All required consents and approvals, as well as any approvals or consents of any governmental authorities or any other third parties in connection with the execution and delivery of this Amendment or the performance of the transactions contemplated hereunder, have been obtained by it, except for such approvals required under New York Stock Exchange rules. No contract or agreement binding upon it restricts its ability to fulfill its obligations and responsibilities under this Amendment or to carry out the activities contemplated herein. (e) It is not a party to or, to the best of its knowledge, threatened with any litigation or judicial or administrative proceeding that, if decided adversely to it, would delay or preclude the consummation of the transactions contemplated in this Amendment or have a material adverse effect upon the transactions contemplated hereby. 7.2 Indemnification. The Company and the Purchaser each agree to ---------------- indemnify and hold harmless the other and their respective employees, agents and affiliates against all losses, liabilities, claims, damages, and expenses (including, but not limited to, reasonable counsel fees) resulting from or arising out of any actual or alleged misrepresentation or breach by it of any representation or warranty set forth in Section 8.1 hereof or otherwise set forth in this Amendment. 8. Miscellaneous ------------- 8.1 No Further Amendment. Except as amended herein, the terms and -------------------- provisions of the SPA and the Registration Rights Agreement are hereby ratified, confirmed and approved in all respects. 8.2 Assignment. All terms and provisions of this Amendment shall be ---------- binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Amendment nor any of the rights, interest or obligations hereunder may be assigned by any party hereto without the prior written consent of the other party, other than pursuant to a Permitted Assignment. 8.3 Entire Agreement. This Amendment and the other agreements referred to ---------------- herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous arrangements or understandings with respect thereto. 8.4 Amendments; Waiver. This Amendment may not be amended or terminated, ------------------ and no provision hereof may be waived, except pursuant to a written instrument executed by each of the parties hereto. 5 8.5 Counterparts. This Amendment may be executed in any number of ------------ counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 8.6 Headings. The headings of the Sections of this Amendment have been -------- inserted for convenience of reference only and shall not be deemed to be a part of this Amendment. 8.7 Governing Law. This Amendment shall be governed by and construed in -------------- accordance with the laws of the State of New York applicable to contracts made and to be performed wholly therein. 8.8 Severability. If any term or provision hereof shall be invalid or ------------ unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired, (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction and (c) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision as determined by a court to be valid and enforceable and to express the intention of the parties with respect to the invalid or unenforceable term or provision. 8.9 Consent to Jurisdiction. In connection with any dispute which may ------------------------ arise under this Amendment or under any other agreement referred to herein, each of the parties hereby irrevocably submits to, consents to, and waives any objection to, the jurisdiction of the courts of the State of New York located in the County of New York or of the United States District Court for the Southern District of New York, and waives any objection to the laying of venue in such courts. Each such party admits that any such dispute may be resolved at least as conveniently in such a court as in any other court, and shall not seek dismissal or a change of venue on the ground that resolution of such a dispute in any such court shall not be convenient or in the interests of justice. The Purchaser hereby appoints Proskauer Rose LLP as its agent upon whom service of process may be made with the same force and effect as if such service shall have been made personally upon the Purchaser. The Company hereby appoints Hertzog, Calamari & Gleason as its agent upon; whom service of process may be made with the same force and effect as if such service shall have been made personally upon the Company. IN WITNESS WHEREOF, each of the undersigned has caused this Third Amendment to Stock Purchase Agreement to be executed as of the date first written above. PHARMACEUTICAL RESOURCES, INC. By:/s/Kenneth I. Sawyer, President -------------------------------- CLAL PHARMACEUTICAL INDUSTRIES LTD. By: /s/ -------------------------------- By: /s/ -------------------------------- 6 AGREED AND ACCEPTED AS TO SECTION 2.1 ONLY PRI - RESEARCH, INC. By:/s/Kenneth I. Sawyer, President -------------------------------- 7 EX-10.27 10 SECOND AMENDMENT & WAIVER TO LOAN & SECURITY AGMT EXHIBIT 10.27 SECOND AMENDMENT AND WAIVER TO LOAN AND SECURITY AGREEMENT ------------------------------ SECOND AMENDMENT AND WAIVER, dated as of August 22, 1997 (this "Amendment"), to the Loan and Security Agreement referred to below by and among - ---------- GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"), PAR ------ PHARMACEUTICAL, INC., a New Jersey corporation ("Borrower"), PHARMACEUTICAL -------- RESOURCES, INC., a New Jersey corporation ("Parent"), NUTRICEUTICAL RESOURCES, ------ INC., a New York Corporation ("NRI"), and PARCARE, LTD., a New York corporation --- ("ParCare"). Parent, NRI and ParCare are hereinafter referred to as ------- "Guarantors". ---------- W I T N E S S E T H - - - - - - - - - - WHEREAS, Lender, Borrower and Guarantors are parties to that certain Loan and Security Agreement, dated as of December 15, 1996 (as amended, supplemented or otherwise modified prior to the date hereof, the "Loan ---- Agreement"); WHEREAS, Lender, Borrower and Guarantors have agreed to amend the Loan Agreement in the manner, and on the terms and conditions, provided for herein; and WHEREAS, Lender has agreed to waive and/or consent to certain violations of the Loan Agreement in the manner, and on the terms and conditions, provided for herein. NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties to this Amendment hereby agree as follows: 1. Definitions. Capitalized terms not otherwise defined herein ----------- shall have the meanings ascribed to them in the Loan Agreement. 2. Amendments to Loan Agreement. ---------------------------- A. Recital A of the Loan Agreement is hereby amended by (i) inserting, immediately after the word "loan" in the first line thereof, the following: "(including a subfacility for letters of credit)", (ii) inserting under the caption "Revolving Credit Rate" a new caption to read: "Letter of --------------------- --------- Credit Subfacility: $2,000,000", and (iii) inserting under the caption "Unused - ------------------ ------ Line Fee" a new caption to read: "Letter of Credit Fee: 2%". - -------- -------------------- B. Section 1.1(a) of the Loan Agreement is hereby amended in its entirety to read as follows: "Subject to the terms and conditions of this Agreement, from the Closing Date and until the Commitment Termination Date (i) Lender agrees (A) to make available advances (each, a "Revolving Credit Advance") and (B) to incur Letter of Credit Obligations, in an aggregate outstanding amount not to exceed the Borrowing Availability, and (ii) Borrower may at its request from time to time borrow, repay and reborrow, and may cause Lender to incur Letter of Credit Obligations, under this Section 1.1." 1 C. Section 1.1 of the Loan Agreement is hereby further amended by (i) deleting the caption in its entirety and inserting in lieu thereof a new caption entitled "Loans", and (ii) adding a new Section 1.1(e) at the end ----- thereof to read as follows: "(e) Subject to the terms and conditions of this Agreement, including Schedule G, Borrower shall have the right to request, ---------- and Lender agrees to incur, the Letter of Credit Obligations for the account of Borrower in accordance with Schedule G." ---------- D. Section 1.2 of the Loan Agreement is hereby amended by deleting the second sentence in its entirety and inserting in lieu thereof a new sentence to read as follows: "Upon the Commitment Maturity Date Borrower shall pay to Lender in full, in cash: (i) all outstanding Revolving Credit Advances and all interest earned, but unpaid, thereon; (ii) an amount sufficient to enable Lender to hold cash collateral as specified in Schedule G; and (iii) all other non-contingent Obligations due ---------- to or incurred by Lender." E. Section 1.2(b) of the Loan Agreement is hereby amended by inserting, immediately following the word "Advances", the phrase "and Letter of Credit Obligations". F. Section 1.5(c) of the Loan Agreement is hereby amended by inserting, immediately after the word "interest" in the first line thereof, the phrase ", and all calculations of the Letter of Credit Fee,". G. Section 1.5(d) of the Loan Agreement is hereby amended by inserting (i) immediately after the word "Rate" in the second line thereof, the phrase "and the Letter of Credit Fee", and (ii) immediately after the word "interest" the first place it appears in the third line thereof, the phrase "and Letter of Credit Fees". H. Section 2.2 of the Loan Agreement is hereby amended by inserting, immediately after the word "Advance" in the second line thereof, the phrase "or the incurrence of any Letter of Credit Obligations". I. Section 2.2(b) of the Loan Agreement is hereby amended by inserting, immediately after the word "Advance", the phrase ", or the incurrence of such Letter of Credit Obligation,". J. Section 2.2(c) of the Loan Agreement is hereby amended by inserting, immediately after the word "Advance", the phrase "or the incurrence of such Letter of Credit Obligation,". K. Section 2.2 of the Loan Agreement is hereby further amended by inserting, immediately after the word "Advance" in the last sentence thereof, the phrase ", and the request by Borrower for the incurrence by Lender of any Letter of Credit Obligations, as the case may be,". L. Section 8.2(a) of the Loan Agreement is hereby amended in its entirety to read as follows: "(a) If any Default or Event of Default shall have occurred and be continuing, then Lender may terminate or suspend its obligation to make further Revolving Credit Advances and to incur additional Letter of Credit Obligations. In addition, if any Event of Default shall have occurred and be continuing, Lender may, without notice, take any one or more of the following actions: (1) upon notice to Borrower from Lender, increase the rate of interest applicable to 2 Revolving Credit Advances and the Letter of Credit Fee, as provided in Section 1.5(d), effective as of the date of the initial Default; (2) declare all or any portion of the Obligations to be forthwith due and payable, including contingent liabilities with respect to Letter of Credit Obligations, whereupon such Obligations shall become and be due and payable; (3) require that all Letter of Credit Obligations be fully cash collateralized pursuant to Schedule G; or (4) exercise ---------- any rights and remedies provided to Lender under the Loan Documents or at law or equity, including all remedies provided under the Code; provided, that upon the occurrence of an Event -------- of Default specified in Sections 8.1 (e), (f) or (g), the Obligations shall become immediately due and payable (and any obligation of Lender to make further Revolving Credit Advances or incur additional Letter of Credit Obligations, if not previously terminated, shall immediately be terminated) without declaration, notice or demand by Lender." M. Section 8.4 of the Loan Agreement is hereby amended by inserting, immediately before the phrase "and finally", the phrase "third, to ------- ----- cash collateralize any outstanding Letter of Credit Obligations pursuant to Schedule G;". - ---------- N. The Index of Exhibits and Schedules to the Loan Agreement is hereby amended by inserting under Schedule F a new line to read "Schedule G - Letters of Credit". 3. Amendments to Schedule A to the Loan Agreement. Schedule A to ---------------------------------------------- the Loan Agreement is hereby amended as follows: A. The following new definitions are hereby added immediately following the definition of "Lender": ------ "Letters of Credit" shall mean any and all commercial or standby ----------------- letters of credit issued at the request and for the account of Borrower for which Lender has incurred Letter of Credit Obligations. "Letter of Credit Fee" shall have the meaning assigned to it in -------------------- Schedule D. ---------- "Letter of Credit Obligations" shall mean all outstanding ---------------------------- obligations incurred by Lender at the request of Borrower, contingent or otherwise, due or not due, in connection with the guarantee by Lender of Letters of Credit, all as further set forth in Schedule G. The amount of such Letter of Credit ---------- Obligations at any time shall equal the maximum amount which may be payable by Lender thereupon or pursuant thereto at such time. B. The definition of "Maximum Amount" is hereby amended by -------------- inserting, immediately after the word "Advances", the phrase "and Letter of Credit Obligations". C. The definition of "Obligations" is hereby amended by ----------- inserting, immediately after the word "Advances" in the ninth line thereof, the phrase ", Letter of Credit Obligations". D. The definition of "Prepayment Fee" is hereby amended by -------------- inserting, immediately after the word "Advances", the phrase "or to incur Letter of Credit Obligations". E. The definition of "Revolving Credit Loan" is hereby amended --------------------- in its entirety to read as follows: 3 "Revolving Credit Loan" shall mean at any time the sum of (i) the --------------------- aggregate amount of Revolving Credit Advances then outstanding, plus (ii) the total Letter of Credit Obligations incurred by Lender and outstanding at such time, plus the amount of earned and accrued, but unpaid, interest thereon and Letter of Credit Fees with respect thereto." F. The definition of "Termination Date" is hereby amended by ---------------- inserting, immediately after the word "cash", the parenthetical "(other than amounts in respect of Letter of Credit Obligations if any, then outstanding, provided that Borrower shall have funded such amounts in cash in full into a cash collateral account as contemplated by Schedule G)". ---------- 4. Amendments to Schedule D to the Loan Agreement. Schedule D to ---------------------------------------------- the Loan Agreement is hereby amended by inserting (i) in each of the first three paragraphs in Section 4 thereof, immediately following the word "Advances", the phrase "or Letter of Credit Obligations" and (ii) a new section at the end thereof which shall read as follows: "7. Letter of Credit Fee: For each day for which Lender -------------------- maintains Letter of Credit Obligations outstanding, an amount equal to the amount of the Letter of Credit Obligations outstanding on such day, multiplied by 2%, the product of which is then divided by 360. The Letter of Credit Fee incurred for each month is payable at the same time each payment of the Unused Line Fee is due. Notwithstanding the foregoing, any unpaid Letter of Credit Fee is immediately due and payable on the Commitment Maturity Date." 5. New Schedule G. The Loan Agreement is hereby amended by -------------- inserting, immediately following Schedule F thereto, a new Schedule G in the ---------- ---------- form attached hereto as Annex A. ------- 6. Waiver/Consent. Lender hereby (A) waives any Event of Default -------------- under Section 8.1(b) of the Loan Agreement solely arising out of (i) the sale by -------------- Parent on June 3, 1997 of 1,666 registered ordinary shares, par value NIS 1.00, and 1,666 registered voting shares, par value NIS 1.00, in each case of Fine- Tech Ltd., an Israeli private company limited by shares, (ii) the sale/release by Borrower of distribution rights concerning certain drug delivery products (which were previously granted to Borrower by Sano Corporation, a Florida corporation ("Sano"), pursuant to a certain Distribution Agreement, dated as of ---- February 24, 1994 among, Sano, Borrower and Parent, as amended by a letter agreement dated May 8, 1995) in accordance with the terms and conditions of that certain Amended and Restated Distribution Agreement, dated July 28, 1997, among Sano, Borrower and Parent (it being understood that all of the proceeds from such sale have been deposited into the Collection Account), and (iii) the advance of One Million Nine Hundred Fifty-Three Thousand Three Hundred Ninety- Three Dollars (U.S.$1,953,393) by Borrower to SANO in connection with such sale, as evidenced by that certain Promissory Note made by SANO in favor of Borrower, dated July 28, 1997 ("Note"), and (B) consents to (i) the investment by Parent ---- of Two Hundred Fifty Thousand Dollars (U.S.$250,000) in Authorgenics, Inc. ("Authorgenics") on or before August 29, 1997 (it being understood that such - -------------- investment shall be paid to Authorgenics in exchange for 625 shares of Series A Preferred Stock, $.01 par value, of Authorgenics), (ii) the establishment by Parent of a Delaware limited partnership, the general partner of which shall be a newly-formed Delaware corporation and wholly-owned subsidiary of Parent (it being understood that (a) such limited partnership and corporation are being formed to consummate the transactions contemplated under that certain Marketing and Sales Umbrella Agreement ("Marketing Agreement") to be entered into between ------------------- Authorgenics and Parent, (b) notwithstanding anything to the contrary contained in the Loan Agreement, including Section 5(b) thereof, Parent's aggregate investment in such entities shall not exceed U.S.$1,000, without the prior written consent of Lender, (c) no Credit Party shall or shall be required to provide any collateral to support any liabilities, Indebtedness or other obligations of such entities, (d) no Credit Party shall or shall be required to indemnify in any manner such entities or other Person in connection with any obligation or liability of such entities, and (e) without limiting the foregoing, such investment shall be non-recourse to Borrower and the other Credit Parties (other than to the extent of 4 Parent's initial investment of U.S.$1,000)), and (iii) the expenditure by Parent of no more than One Hundred Fifty Thousand Dollars (U.S.$150,000) on the development of a plan to market/sell the software developed in connection with the Marketing Agreement. The parties agree that the foregoing consent shall be null and void if the Marketing Agreement is not executed and delivered substantially in the form attached hereto as Exhibit A. 7. Representations and Warranties. To induce Lender to enter into ------------------------------ this Amendment, each Credit Party hereby represents and warrants that: A. The execution, delivery and performance by each Credit Party of this Amendment: (i) are within their respective corporate powers; (ii) have been duly authorized by all necessary corporate and shareholder action; and (iii) are not in contravention of any provision of their respective certificates or articles of incorporation or by-laws or other organizational documents. B. This Amendment has been duly executed and delivered by or on behalf of each Credit Party. C. This Amendment constitutes a legal, valid and binding obligation of each Credit Party enforceable against each Credit Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). D. No Default has occurred and is continuing both before and after giving effect to this Amendment. E. No action, claim or proceeding is now pending or, to the knowledge of each Credit Party, threatened against any Credit Party, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any federal, state, or local government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, (i) which challenges any Credit Party's right, power, or competence to enter into this Amendment or, to the extent applicable, perform any of its obligations under this Amendment, the Loan Agreement as amended hereby or any other Loan Document, or the validity or enforceability of this Amendment, the Loan Agreement as amended hereby or any other Loan Document or any action taken under this Amendment, the Loan Agreement as amended hereby or any other Loan Document or (ii which if determined adversely could have or result in a Material Adverse Effect. 8. No Other Amendments/Waivers. Except as expressly amended herein, --------------------------- the Loan Agreement shall be unmodified and shall continue to be in full force and effect in accordance with its terms. In addition, except as expressly provided in Section 6 hereof, this Amendment shall not be deemed a waiver of any term or condition of any Loan Document and shall not be deemed to prejudice any right or rights which Lender may now have or may have in the future under or in connection with any Loan Document or any of the instruments or agreements referred to therein, as the same may be amended from time to time. 9. Outstanding Indebtedness; Waiver of Claims. Each Credit Party ------------------------------------------ hereby acknowledges and agrees that as of August 20, 1997 the aggregate outstanding principal amount of the Revolving Credit Loan is $5,921,548.54 and that such principal amount is payable pursuant to the Loan Agreement, as amended hereby, without defense, offset, withholding, counterclaim or deduction of any kind. Each Credit Party hereby waives, releases, remises and forever discharges Lender and each other Indemnified Person from any and all Claims of any kind or character, known or unknown, which each Credit Party ever had, now has or might hereafter have against Lender which relates, directly or indirectly, 5 to any acts or omissions of Lender or any other Indemnified Person on or prior to the Amendment Effective Date. 10. Expenses. Borrower hereby reconfirms its obligations pursuant to -------- Section 10.2 of the Loan Agreement to pay and reimburse Lender for all reasonable out-of-pocket expenses (including, without limitation, reasonable fees of counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment and all other documents and instruments delivered in connection herewith. 11. Effectiveness. This Amendment shall become effective as of ------------- August 22, 1997 (the "Amendment Effective Date") only upon satisfaction in full ------------------------ in the judgment of the Lender of each of the following conditions on or prior to August 27, 1997: A. Documents. Lender shall have received two original copies --------- of this Amendment duly executed and delivered by Lender and each Credit Party. B. Payment of Expenses. Borrower shall have paid to Lender all -------------------- costs and expenses owing in connection with this Amendment and the other Loan Documents and due to Lender (including, without limitation, reasonable legal fees and expenses). C. Representations and Warranties. All representations and ------------------------------ warranties of or on behalf of each Credit Party in this Amendment and all the other Loan Documents shall be true and correct in all respects with the same effect as though such representations and warranties had been made on and as of the date hereof and on and as of the date that the other conditions precedent in this Section 11 have been satisfied, except to the extent that any such representation or warranty expressly relates to an earlier date. D. Secretary's Certificate. Each Credit Party shall have ----------------------- provided Lender with a certificate in form and substance satisfactory to Lender of their respective Secretary or an Assistant Secretary certifying the resolutions adopted by their respective Boards of Directors approving this Amendment and the transactions contemplated herein. In the event that each of the foregoing conditions precedent has not been satisfied on or prior to August 27, 1997, this Amendment shall become, upon written notice by Lender to Borrower, null and void and of no force or effect. 12. Covenants of Borrower. Borrower shall, within ten (10) Business --------------------- Days of the date hereof, grant to Lender a first priority security interest in the Note and the collateral securing such Note, if any, pursuant to a pledge agreement, in form and substance satisfactory to Lender. Notwithstanding anything to the contrary contained in the Loan Agreement or any other Loan Document, each of the Credit Parties acknowledges and agrees that failure to so provide Lender with such a first priority security interest shall constitute an immediate Event of Default. 13. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND ------------- INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 14. Counterparts. This Amendment may be executed by the parties ------------ hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. Borrower: -------- PAR PHARMACEUTICAL, INC. By:___________________________ Name: Title: Lender: ------ GENERAL ELECTRIC CAPITAL CORPORATION By:___________________________ Martin S. Greenberg Its: Duly Authorized Signatory Parent: ------ PHARMACEUTICAL RESOURCES, INC. By:___________________________ Name: Title: (SIGNATURES CONTINUED ON NEXT PAGE) 7 Subsidiary Guarantors: --------------------- NUTRICEUTICAL RESOURCES, INC. By:_________________________ Name: Title: PARCARE, LTD. By:___________________________ Name: Title: 8 ANNEX A TO SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT ----------------------------------------------- SCHEDULE G - LETTERS OF CREDIT 1. Lender agrees, subject to the terms and conditions hereinafter set forth, to incur Letter of Credit Obligations in respect of the issuance of Letters of Credit issued on terms acceptable to Lender and supporting obligations of Borrower incurred in the ordinary course of Borrower's business, in order to support the payment of Borrower's inventory purchase obligations, insurance premiums, or utility or other operating expenses and obligations, as Borrower shall request by written notice to Lender that is received by Lender not less than five Business Days prior to the requested date of issuance of any such Letter of Credit; provided, that: (a) the aggregate amount of all Letter of -------- Credit Obligations at any one time outstanding (whether or not then due and payable) shall not exceed the lesser of (i) $2,000,000 or (ii) the Net Borrowing Availability at such time; (b) no Letter of Credit shall have an expiry date which is later than one year following the date of issuance thereof; and (c) Lender shall be under no obligation to incur Letter of Credit Obligations in respect of any Letter of Credit having an expiry date that is later than December 30, 1999. The maximum amount payable in respect of each Letter of Credit requested by Borrower will be guaranteed by Lender in favor of the issuing bank under terms of a separate agreement between Lender and the issuing bank, [which agreement (other than as provided for herein) shall not affect Borrower's rights in respect of the issuing bank set forth in the application and agreement referred to in the next succeeding sentence]. Borrower will enter into an application and agreement for such Letter of Credit with the issuing bank selected by Lender. The bank that issues any Letter of Credit pursuant to the Agreement shall be determined by Lender in its sole discretion. 2. The notice to be provided to Lender requesting that Lender incur Letter of Credit Obligations shall be in the form of a Letter of Credit application in the form customarily employed by the issuing bank, together with a written request by Borrower and the bank that Lender approve Borrower's application. Upon receipt of such notice Lender shall establish a reserve against the Borrowing Availability in the amount of 100% of the face amount of the Letter of Credit requested; provided, that such reserve shall be reversed if the requested Letter -------- of Credit is not issued and to the extent the amount available under it is reduced. Approval by Lender in the written form agreed upon between Lender and the issuing bank (a) will authorize the bank to issue the requested Letter of Credit, and (b) will conclusively establish for purposes of determining Net Borrowing Availability the existence of the Letter of Credit Obligation as of the date of such approval; provided, that otherwise such Letter of Credit -------- Obligations shall be deemed to be in existence as of the date the applicable Letter of Credit is issued to its beneficiary. 3. In the event that Lender shall make any payment on or pursuant to any Letter of Credit Obligation, Borrower shall be unconditionally obligated to reimburse Lender therefor, and such payment shall then be deemed to constitute a Revolving Credit Advance. For purposes of computing interest under Section 1.5 of the Agreement, a Revolving Credit Advance made in satisfaction of a Letter of Credit Obligation shall be deemed to have been made as of the date on which the issuer or endorser makes the related payment under the underlying Letter of Credit. 4. In the event that any Letter of Credit Obligations, whether or not then due or payable, shall for any reason be outstanding on the Commitment Maturity Date, Borrower will either (a) cause the underlying Letter of Credit to be returned and canceled and each corresponding Letter of Credit Obligation to be terminated, or (b) pay to Lender, in immediately available funds, an amount equal to 105% of the maximum amount then available to be drawn under all Letters of Credit not so returned and canceled. Such funds shall be held in a cash collateral account maintained at a bank or financial institution acceptable to Lender. Such account shall be in the name of Borrower and shall be pledged to, and subject to the control of, Lender, in a manner satisfactory to Lender. 9 5. In the event that Lender shall incur any Letter of Credit Obligations, Borrower agrees to pay the Letter of Credit Fee to Lender as compensation to Lender for incurring such Letter of Credit Obligations. In addition, Borrower shall reimburse Lender for all fees and charges paid by Lender on account of any such Letters of Credit or Letter of Credit Obligations to the issuing bank. 6. Borrower's Obligations to Lender with respect to any Letter of Credit or Letter of Credit Obligation shall be evidenced by Lender's records and, in the absence of manifest error, shall be absolute, unconditional and irrevocable and shall not be affected, modified or impaired by (i) any lack of validity or enforceability of the transactions contemplated by or related to such Letter of Credit or Letter of Credit Obligation; (ii) any amendment or waiver of or consent to depart from all or any of the terms of the transactions contemplated by or related to such Letter of Credit or Letter of Credit Obligation (other than an amendment of the agreement between Borrower and the issuing bank regarding the Letter of Credit or a waiver by the issuing bank of a right under such agreement which reduces Lender's obligations to the issuing bank); (iii) the existence of any claim, set-off, defense or other right which Borrower or any other Credit Party may have against Lender, the issuer or beneficiary of such Letter of Credit, or any other Person, whether in connection with the Agreement or the transactions contemplated therein or such Letter of Credit or the transactions contemplated thereby or any unrelated transactions; or (iv) the fact that any draft, affidavit, letter, certificate, invoice, bill of lading or other document presented under or delivered in connection with such Letter of Credit or any other Letter of Credit proves to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein proves to have been untrue or incorrect in any respect. 7. In addition to any other indemnity obligations which Borrower may have to Lender under the Agreement and without limiting such other indemnification provisions, Borrower hereby agrees to indemnify Lender from and to hold Lender harmless against any and all claims, liabilities, losses, costs and expenses (including, attorneys' fees and expenses) which Lender may (other than as a result of its own gross negligence or willful misconduct) incur or be subject to as a consequence, directly or indirectly, of (i) the issuance of or payment of or failure to pay under any Letter of Credit or Letter of Credit Obligation or (ii) any suit, investigation or proceeding as to which Lender is or may become a party as a consequence, directly or indirectly, of the issuance of any Letter of Credit, the incurring of any Letter of Credit Obligation or any payment of or failure to pay under any Letter of Credit or Letter of Credit Obligation. The obligations of Borrower under this paragraph shall survive any termination of the Agreement. 8. Borrower hereby assumes all risks of the acts, omissions or misuse of each Letter of Credit by the beneficiary or issuer thereof and, in connection therewith and absent gross negligence or wilful misconduct on Lender's part, Lender shall not be responsible (i) for the validity, sufficiency, genuineness or legal effect of any document submitted in connection with any drawing under any Letter of Credit even if it should in fact prove in any respect to be invalid, insufficient, inaccurate, untrue, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or any rights or benefits thereunder or any proceeds thereof, in whole or in part, even if it should prove to be invalid or ineffective for any reason; (iii) for the failure of any issuer or beneficiary of any Letter of Credit to comply fully with the terms thereof, including the conditions required in order to effect or pay a drawing thereunder; (iv) for any errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, telecopy, telex or otherwise; (v) for any loss or delay in the transmission or otherwise of any document or draft required in order to make a drawing under any Letter of Credit; or (vi) for any consequences arising from causes beyond the control of Lender. 10 EXHIBIT A TO SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT ----------------------------------------------- 11 THIS PAGE MUST BE KEPT AS THE LAST PAGE OF THE DOCUMENT. SoftSolution Network ID: STM-97321.4 Type: AMD 12 EX-11 11 COMPUTATION OF PER SHARE DATA EXHIBIT 11 COMPUTATION OF PER SHARE DATA (UNAUDITED)
YEAR ENDED -------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1995 -------------- -------------- ------------- Income (loss) from continuing operations $(8,901,000) $(11,092,000) $ 612,000 Income from discontinued operations - 2,800,000 - ----------- ------------ ----------- NET INCOME (LOSS) $(8,901,000) $ (8,292,000) $ 612,000 ========= ========= ====== Primary: Weighted average number of common shares outstanding 18,681,017 18,340,248 16,669,827 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 - 127,000 473,554 ----------- ------------ ----------- Shares used for computation 18,681,017 18,467,248 17,143,381 =========== ============ =========== Income (loss) per share of common stock (primary): Continuing operations $ (.48) $ (.60) $ .04 Discontinued operations - .15 - ----------- ------------ ----------- NET INCOME (LOSS) $ (.48) $ (.45) $ .04 === === === Assuming full dilution: Weighted average number of common shares outstanding 18,681,017 18,340,248 16,669,827 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 - 127,000 473,554 ----------- ------------ ----------- Shares used for computation 18,681,017 18,467,248 17,143,381 =========== ============ =========== Income (loss) per share of common stock (assuming full dilution) (a): Continuing operations $ (.48) $ (.60) $ .04 Discontinued operations - .15 - NET INCOME (LOSS) ----------- ------------ ----------- $ (.48) $ (.45) $ .04 === === === (a) Not presented because dilution is less than 3% from primary amounts.
EX-21 12 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT State or Other Jurisdiction Name of Incorporation/Organization ---- ----------------------------- Par Pharmaceutical, Inc. New Jersey PRX Distributors, Ltd. Delaware ParCare, Ltd. New York PRI-Research, Inc. Delaware Nutriceutical Resources, Inc. New York Quad Pharmaceuticals, Inc. Indiana Par Pharma Group, Ltd. Delaware EX-23 13 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements No. 33-35242 and No. 33-74052 on Forms S-3 and Registration Statements No. 2-99035, No. 33-15640, No. 33-51914, No. 33-45785, No. 33-29992, No. 33-79954, No. 33-79956 and No. 333-02885 on Forms S-8. /s/ ARTHUR ANDERSEN LLP New York, New York December 19, 1997 EX-27 14 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1997 SEP-30-1997 181 15 16,523 (5,109) 13,239 28,155 45,684 (17,852) 72,697 12,196 2,651 189 0 0 57,079 72,697 53,172 60,140 49,740 18,301 0 3 587 (8,491) 410 (8,901) 0 0 0 (8,901) (.48) (.48)
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