-----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, GJ+HxRrAeHVFjFRkeyCQm6xIciDOrXv2l3FUnXE3zwM3IRzUR4q6MsPG3d2ew6a+ 5uYXv2XTKNThwSkxr2+JoQ== 0000950130-01-503861.txt : 20010815 0000950130-01-503861.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950130-01-503861 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10827 FILM NUMBER: 1710399 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-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ FORM 10Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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 offices) (Zip Code) Registrant's telephone number, including area code: (845) 425-7100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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_______ ---- 30,526,151 Number of shares of Common Stock outstanding as of August 8, 2001. This is page 1 of 37 pages. The exhibit index is on page 20. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
June 30, December 31, ASSETS 2001 2000 ------ (Unaudited) (Audited) ---------- ------------ Current assets: Cash and cash equivalents $ 235 $ 222 Accounts receivable, net of allowances of $5,773 and $3,954 29,653 22,306 Inventories 22,884 20,249 Prepaid expenses and other current assets 5,714 4,023 -------- -------- Total current assets 58,486 46,800 Property, plant and equipment, at cost less accumulated depreciation and amortization 23,829 23,560 Deferred charges and other assets 3,930 4,182 Non-current deferred tax benefit, net 13,399 14,608 -------- -------- Total assets $ 99,644 $ 89,150 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $ 142 $ 1,049 Short-term debt 15,733 10,021 Accounts payable 11,058 13,163 Accrued salaries and employee benefits 1,802 1,566 Accrued expenses and other current liabilities 2,486 2,489 -------- -------- Total current liabilities 31,221 28,288 Long-term debt, less current portion 936 163 Accrued pension liability 614 614 Shareholders' equity: Common Stock, par value $.01 per share; authorized 90,000,000 shares; issued and outstanding 29,940,769 and 29,647,135 shares 299 297 Additional paid-in capital 92,366 89,642 Accumulated deficit (25,561) (29,623) Additional minimum liability related to defined benefit pension plan (231) (231) -------- -------- Total shareholders' equity 66,873 60,085 -------- -------- Total liabilities and shareholders' equity $ 99,644 $ 89,150 ======== ========
The accompanying notes are an integral part of these statements. -2- PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (In Thousands, Except Per Share Amounts) (Unaudited)
Six Months Ended Three Months Ended -------------------- -------------------- June 30, July 1, June 30, July 1, 2001 2000 2001 2000 -------- -------- -------- -------- Net sales $ 55,001 $ 40,853 $ 29,297 $ 22,714 Cost of goods sold 35,452 30,828 18,176 16,111 -------- -------- -------- -------- Gross margin 19,549 10,025 11,121 6,603 Operating expenses: Research and development 3,657 4,455 2,119 2,316 Selling, general and administrative 8,592 7,360 4,578 4,040 -------- -------- -------- -------- Total operating expenses 12,249 11,815 6,697 6,356 -------- -------- -------- -------- Operating income (loss) 7,300 (1,790) 4,424 247 Other income, net 364 392 45 303 Interest expense, net (442) (381) (222) (233) -------- -------- -------- -------- Income (loss) before provision for income taxes 7,222 (1,779) 4,247 317 Provision for income taxes 3,160 - 1,862 - -------- -------- -------- -------- Net income (loss) 4,062 (1,779) 2,385 317 Accumulated deficit, beginning of period (29,623) (28,694) (27,946) (30,790) -------- -------- -------- -------- Accumulated deficit, end of period $(25,561) $(30,473) $(25,561) $(30,473) ======== ======== ======== ======== Net income (loss) per share of common stock: Basic $.14 $(.06) $.08 $.01 ======== ======== ======== ======== Diluted $.13 $(.06) $.08 $.01 ======== ======== ======== ======== Weighted average number of common and common equivalent shares outstanding: Basic 29,725 29,575 29,790 29,585 ======== ======== ======== ======== Diluted 31,442 29,575 31,637 30,614 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. -3- PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Six Months Ended ---------------- June 30, July 1, 2001 2000 -------- ------- Cash flows from operating activities: Net income (loss) $ 4,062 $(1,779) Adjustments to reconcile net income (loss) to net cash used in operating activities: Provision for income taxes 3,160 - Depreciation and amortization 1,263 1,082 Allowances against accounts receivable 1,819 588 Write-off of inventories 466 830 Other 149 133 Changes in assets and liabilities: (Increase) in accounts receivable (9,166) (5,820) (Increase) in inventories (3,101) (3,652) (Increase) decrease in prepaid expenses and other assets (1,439) 692 (Decrease) increase in accounts payable (2,105) 139 (Decrease) increase in accrued expenses and other liabilities (50) 60 ------- ------- Net cash used in operating activities (4,942) (7,727) Cash flows from investing activities: Capital expenditures (1,569) (1,424) Proceeds from sale of fixed assets 17 11 ------- ------- Net cash used in investing activities (1,552) (1,413) Cash flows from financing activities: Proceeds from issuances of Common Stock 929 112 Net proceeds from revolving credit line 5,712 9,136 Principal payments under long-term debt and other borrowings (134) (120) ------- ------- Net cash provided by financing activities 6,507 9,128 Net increase (decrease) in cash and cash equivalents 13 (12) Cash and cash equivalents at beginning of period 222 176 ------- ------- Cash and cash equivalents at end of period $ 235 $ 164 ======= =======
The accompanying notes are an integral part of these statements. -4- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS June 30, 2001 (Unaudited) Pharmaceutical Resources, Inc. (the "Company" or "PRI") operates, primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"), in one business segment, the manufacture and distribution of generic pharmaceuticals in the United States. Marketed products are principally in solid oral dosage form (tablet, caplet and two-piece hard-shell capsule). The Company also distributes one product in the semi-solid form of a cream and one oral suspension. Basis of Preparation: The accompanying consolidated financial statements at June 30, 2001 and for the six-month and three-month periods ended June 30, 2001 and July 1, 2000 are unaudited; however, in the opinion of the Company's management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present a fair statement of the information presented therein. The balance sheet at December 31, 2000 was derived from the Company's audited financial statements at such date. Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying financial statements and these notes do not include all disclosures required by accounting principles generally accepted in the United States for audited financial statements. Accordingly, these statements should be read in conjunction with PRI's most recent annual financial statements. Results of operations for interim periods are not necessarily indicative of those to be achieved for a full fiscal year. Certain items on the consolidated financial statements for the prior year have been reclassified to conform to the current year financial statement presentation. Strategic Alliance: On June 30, 1998, the Company completed a strategic alliance with Merck KGaA, a pharmaceutical and chemical company located in Darmstadt, Germany. Pursuant to the Stock Purchase Agreement, dated March 25, 1998, Merck KGaA, through its subsidiary EMD, Inc. (formerly known as Lipha Americas, Inc.,) purchased 10,400,000 newly issued shares of the Company's Common Stock for $20,800,000. In addition, the Company issued to Merck KGaA and Genpharm, Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA, five-year options to purchase an aggregate of 1,171,040 additional shares of the Company's Common Stock at an exercise price of $2.00 per share. The options expire in April 2003 and became exercisable in July 2001. As part of the alliance, the Company obtained the exclusive United States distribution rights to a portfolio of products covered by a distribution agreement with Genpharm (see "-Distribution and Supply Agreements-Genpharm, Inc."). Merck KGaA also purchased 1,813,272 shares of the Company's Common Stock from Clal Pharmaceutical Industries Ltd., PRI's largest shareholder prior to the transaction. Research and Development Agreement: The Company, Israel Pharmaceutical Resources L.P. ("IPR"), and Generics (UK) Ltd. ("Generics"), a subsidiary of Merck KGaA, entered into an agreement (the "Development Agreement"), dated as of August 11, 1998, pursuant to which Generics agreed to fund one-half the costs of the operating budget of IPR, the Company's research and development operation in Israel, in exchange for the exclusive distribution rights outside of the United States to products developed by IPR after the date of the Development Agreement. In addition, Generics agreed to pay IPR a perpetual royalty for all sales of the products by Generics or its affiliates outside the United States. To date, no such products have been brought to market by Generics and no royalty has been paid. The Development Agreement has an initial term of five years and automatically renews for additional periods of one year subject to earlier termination upon six months' notice in certain circumstances. Pursuant to the Development Agreement, Generics funded approximately $800,000 for fiscal year 2000 and $413,000 for the first six months of fiscal year 2001, fulfilling their funding requirements through June 30, 2001. Under the Development Agreement, Generics is not required to fund more than $1,000,000 in any one calendar year. -5- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS June 30, 2001 (Unaudited) Profit Sharing Agreement: In January 1999, the Company entered into a profit sharing agreement (the "Genpharm Profit Sharing Agreement") with Genpharm pursuant to which the Company will receive a portion of the profits generated from the sale of products sold under a separate agreement between Genpharm and an unaffiliated United States based pharmaceutical company in exchange for a non-refundable fee of $2,500,000 paid by the Company. The fee, included in deferred charges and other assets on the consolidated balance sheets, will be amortized over a projected revenue stream from the products when launched by the third party. To date there are two abbreviated new drug applications ("ANDAs") for potential products covered by the Genpharm Profit Sharing Agreement awaiting U.S. Food and Drug Administration ("FDA") approval. The agreement between Genpharm and the unaffiliated third party covers 15 products that are not included in the Company's distribution agreement with Genpharm resulting from its strategic alliance with Merck KGaA (see "-Distribution and Supply Agreements-Genpharm, Inc."). Lease Agreement: In March 1999, Par entered into an agreement (the "Lease Agreement") to lease its manufacturing facility and related machinery and equipment located in Congers, New York (the "Congers Facility") to Halsey Drug Co., Inc. ("Halsey"), a manufacturer of generic pharmaceutical products. The Lease Agreement has an initial term of three years, subject to an additional two-year renewal period and contains a purchase option (for which Halsey paid $100,000 in March 1999) permitting Halsey to purchase the Congers Facility and substantially all the equipment thereof at any time during the lease terms for a specified amount. The Lease Agreement provides for annual fixed rent during the initial term of $500,000 per year and $600,000 per year during the renewal period. Under the Halsey Supply Agreement (as hereinafter defined), Halsey is required to perform certain manufacturing operations for the Company at the Congers Facility (see "-Distribution and Supply Agreements-Halsey Drug Co., Inc."). Distribution and Supply Agreements: Dr. Reddy's Laboratories Ltd. In April 2001, the Company and Dr. Reddy's Laboratories Ltd. ("Reddy"), a producer of bulk active ingredients for the pharmaceutical industry and a developer and manufacturer of finished dosage forms located in India, entered into a broad-based co-marketing and development agreement (the "Reddy Development and Supply Agreement") covering 14 generic pharmaceutical products, four of which have been filed with the FDA awaiting approval, to be marketed exclusively by Par in the United States and certain other United States territories upon FDA approval. Reddy is required to use commercially reasonable efforts to develop the products, which are subject to the Reddy Development and Supply Agreement, and is responsible for the completion of product development and for obtaining all applicable regulatory approvals. The Company will pay Reddy a percentage of the gross profits on sales of the products sold by Par in accordance with the Reddy Development and Supply Agreement. Pursuant to the Reddy Development and Supply Agreement, the Company began marketing fluoxetine 40 mg capsules (Prozac(R)), in August 2001 (see "-Subsequent Events"). The products covered by the Reddy Development and Supply Agreement are in addition to products currently being marketed by the Company under prior agreements with Reddy. Pursuant to these agreements, the Company pays Reddy a certain percentage of the gross profits on sales of any products covered under such agreements. Halsey Drug Co., Inc. In March 1999, Par entered into a Manufacturing and Supply Agreement with Halsey (the "Halsey Supply Agreement"). The Halsey Supply Agreement requires Halsey to manufacture exclusively for Par certain products previously manufactured by Par at the Congers Facility. The Halsey Supply Agreement has an initial term of three years subject to earlier termination upon the occurrence of certain events as provided therein. The Halsey Supply Agreement prohibits Halsey from manufacturing, supplying, developing or distributing products produced under the agreement for anyone other than Par for a period of three years from the date of the Halsey Supply Agreement. -6- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS June 30, 2001 (Unaudited) Genpharm, Inc.: The Company and Genpharm have a distribution agreement (the "Genpharm Distribution Agreement"), dated March 25, 1998, pursuant to which Genpharm granted to the Company exclusive distribution rights within the United States and certain other United States territories with respect to approximately 40 generic pharmaceutical products. To date, 15 of such products have obtained FDA approval and 14 are currently being marketed by Par. Flecainide acetate tablets (Tambocor(R)), which will be distributed by the Company under the Genpharm Distribution Agreement, received final approval from the FDA in July 2001. The Company anticipates marketing the product during 2001 (see "-Subsequent Events"). The remaining products are either being developed, have been identified for development, or have been submitted to the FDA for approval. Currently, there are 11 ANDAs for potential products (four of which have been tentatively approved) that are covered by the Genpharm Distribution Agreement pending with, and awaiting approval from, the FDA. Genpharm is required to use commercially reasonable efforts to develop the products and is responsible for the completion of product development and obtaining all applicable regulatory approvals. The Company pays Genpharm a percentage of the gross profits on all sales of products included in the Genpharm Distribution Agreement. The Company and Genpharm have a second distribution agreement for additional products (the "Genpharm Additional Product Agreement"), dated November 27, 2000, pursuant to which Genpharm granted the Company exclusive distribution rights within the United States and certain other United States territories with respect to six additional generic pharmaceutical products. The products are either being developed, have been identified for development, or have been submitted to the FDA for approval. Currently, there is one ANDA for a potential product covered by the Genpharm Additional Product Agreement pending with, and awaiting approval from, the FDA. Genpharm and the Company are sharing the costs of developing the products and for obtaining all applicable regulatory approvals. The Company will pay Genpharm a percentage of the gross profits on all sales of products included in the Genpharm Additional Product Agreement. The Company began marketing fluoxetine 10 mg and 20 mg tablets (Prozac(R)), covered under the Genpharm Additional Product Agreement, in August 2001 (see "- Subsequent Events"). In August 1999, Par entered into a separate agreement with Genpharm pursuant to which Par purchased the United States distribution rights for methimazole (Tapazole(R)) for a one-time payment of $707,000, which was made in fiscal year 2000. The agreement has an initial term of three years and is renewable by mutual consent of the parties for successive one-year terms. The Company began marketing the product in April 2000 and is amortizing the fee, the net amount of which is included on the consolidated balance sheets in deferred charges and other assets, over the initial term of the agreement. BASF Corporation: In April 1997, Par entered into a Manufacturing and Supply Agreement (the "BASF Supply Agreement") with BASF Corporation ("BASF"), a manufacturer of pharmaceutical products. Under the BASF Supply Agreement, Par agreed to purchase minimum quantities of certain products manufactured by BASF, and to phase out Par's manufacturing of those products. As part of the agreement, BASF discontinued its direct sale of those products. The agreement had an initial term of three years and would have renewed automatically for successive two-year periods until December 31, 2005, if Par had met certain purchase thresholds. Since Par did not meet the minimum purchase requirement of one product in the third and final year of the agreement, BASF had the right to terminate the agreement with a notice period of one year. BASF has not given Par such notice and to ensure continuance of product supply, BASF and the Company have agreed to continue to operate under terms similar to those of the BASF Supply Agreement. Elan Corporation: In June 2000, the Company agreed to sell its remaining distribution rights for a non-prescription transdermal nicotine patch back to Elan Transdermal Technologies, Inc., formerly known as Sano Corporation, and Elan Corporation, plc (collectively "Elan") and to terminate Par's right to royalty payments under a previous agreement. Pursuant to this agreement, the Company received a $500,000 payment in July 2001. -7- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS June 30, 2001 (Unaudited) Short-Term Debt: In December 1996, Par entered into a Loan and Security Agreement (the "Loan Agreement") with General Electric Capital Corporation ("GECC"). The Loan Agreement, as amended, provides Par with a five-year revolving line of credit expiring December 2001. Pursuant to the Loan Agreement, 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 charged on the line of credit is based upon a per annum rate of 2.25% 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. As of June 30, 2001, the borrowing base was approximately $18,574,000 and $15,733,000 was outstanding under the line of credit. The Company and GECC are currently in the process of amending the Loan Agreement to extend the term of the revolving line of credit to June 2003. Income Taxes: The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires 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 requires 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. At June 30, 2001, the Company's net deferred tax asset was $13,399,000, net of a valuation allowance of $15,979,000. In addition, additional paid-in capital includes the recognition of future tax benefits of approximately $3,346,000, net of a valuation allowance of $1,609,000, related to stock option compensation. Based on recent developments, including improved financial results, strategic alliances and the continued commitment to the development and introduction of new products, management believes that its valuation allowances are adequate. The Company utilized part of its net deferred tax asset and recorded provisions for income taxes of $3,160,000 and $1,862,000, respectively, for the six and three-month periods ended June 30, 2001. The provisions, which are primarily non-cash expenses, were established using the applicable rates for federal, state and alternative minimum taxes. At June 30, 2001, the Company had NOL carryforwards for tax purposes of approximately $53,600,000 that expire 2006 through 2019. If the Company generates sufficient taxable income in the future to fully utilize its net deferred tax asset, decreases in the valuation allowance will be reflected through a credit to the provision for income taxes. However, there can be no assurance that the Company will continue to 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. The Company did not recognize a benefit for its operating losses in either of the six and three-month periods ended July 1, 2000. Based on the Company's performance in prior years and other competitive factors pertaining to the generic drug industry, management believes that future operating income might not be sufficient to recognize fully the NOL carryforwards of the Company. The Company is continually assessing the need for a valuation allowance against its NOL carryforwards. Earnings Per Share: The Company's computation and presentation of basic and diluted earnings per share data is in accordance with the provisions of SFAS No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128, the dilutive effect of stock options is excluded from the calculation of basic earnings per share but included in diluted earnings per share. The following table is a reconciliation of the amounts used to calculate basic and diluted earnings per share: -8- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS June 30, 2001 (Unaudited)
Six Months Ended Three Months Ended ---------------------- ------------------ June 30, July 1, June 30, July 1, 2001 2000 2001 2000 ------- ------- ------- ------- (In Thousands, Except Per Share Amounts) Net income (loss) $ 4,062 $(1,779) $ 2,385 $ 317 Basic: Weighted average number of common shares outstanding 29,725 29,575 29,790 29,585 Net income (loss) per share of common stock $ .14 $ (.06) $ .08 $ .01 ======= ======= ======= ======= Assuming dilution: Weighted average number of common shares outstanding 29,725 29,575 29,790 29,585 Effect of dilutive options 1,717 - 1,847 1,029 ------- ------- ------- ------- Weighted average number of common and common equivalent shares outstanding 31,442 29,575 31,637 30,614 Net income (loss) per share of common stock $ .13 $ (.06) $ .08 $ .01 ======= ======= ======= =======
As of June 30, 2001, incremental shares from assumed conversions of all of the Company's outstanding options and warrants were included in the computation of diluted earnings per share. The Company had outstanding options and warrants of 548,700 and 420,200 at the end of the six-month and three-month periods ended July 1, 2000 that were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the Common Stock in the respective periods. In addition, incremental shares from assumed conversions of 980,714 at the end of the six-month period ended July 1, 2000 were excluded from diluted earnings per share because they were anti-dilutive. New Accounting Standards: In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 changes the accounting for business combinations, requiring that all business combinations be accounted for using the purchase method and is effective for all business combinations initiated after June 30, 2001. SFAS 142 specifies the financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. SFAS 142 is effective for fiscal years beginning after December 15, 2001. SFAS 142 requires that the useful lives of intangible assets acquired on or before June 30, 2001 be reassessed and the remaining amortization periods adjusted accordingly. Previously recognized intangible assets deemed to have indefinite lives shall be tested for impairment. Goodwill recognized on or before June 30, 2001 shall be tested for impairment as of the beginning of the fiscal year in which SFAS 142 is initially applied in its entirety. The Company has not fully assessed the potential impact of the adoption of SFAS 142, which is effective for the Company as of January 1, 2002, however, the Company anticipates the adoption of these statements will not have a material impact on its financial position and results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS -9- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS June 30, 2001 (Unaudited) No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133", which delayed the Company's required adoption of SFAS 133 to January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment to SFAS 133" ("SFAS 138"), which is effective concurrently with SFAS 133. There was no impact on the Company's financial position and results of operations for the six and three-month periods ended June 30, 2001 as a result of the adoption of SFAS 133 and SFAS 138. Commitments, Contingencies and Other Matters: Retirement Plans: The Company has a defined contribution social security integrated retirement plan (the "Retirement Plan") which provides retirement benefits to eligible employees as defined in the Retirement Plan. The Company suspended 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. The Company also maintains a retirement savings plan (the "Retirement Savings Plan") whereby eligible employees are permitted to contribute from 1% to 15% of their compensation to the Retirement Savings Plan. The Company contributes an amount equal to 50% of the first 6% of compensation contributed by the employee. Participants of the Retirement Savings Plan become vested with respect to 20% of the Company's contributions for each full year of employment with the Company and thus become fully vested after five full years. In fiscal year 1998, the Company merged the Retirement Plan into the Retirement Savings Plan. Legal Proceedings: Par has filed with the FDA an ANDA for megestrol acetate oral suspension, the generic version of Bristol Myers Squibb's ("BMS") Megace Oral Suspension. Par filed a paragraph IV certification regarding the formulation patent as part of its ANDA submission. The basic compound patent for Megace has expired. Megace Oral Suspension received orphan drug exclusivity from the FDA that expired on September 10, 2000 and BMS has a formulation patent for Megace Oral Suspension that expires in 2011. Par believes that its distinct and unique formulation does not infringe the BMS formulation patent. In October 1999, BMS initiated a patent infringement action against Par. On March 1, 2000, Par was granted a patent by the U.S. Patent Office regarding Par's unique formulation of megestrol acetate oral suspension. Par believes that the issuance of this patent, which establishes the uniqueness of Par's formulation compared to the BMS patent, should significantly help Par's defense in the patent infringement case. On December 14, 2000, the U.S. District Court for the Southern District of New York dismissed the patent infringement complaint brought by BMS regarding Par's megestrol acetate oral suspension formulation. The Court granted summary judgment in favor of Par for reasons explained in an Opinion filed under seal. A Notice of Appeal was filed by BMS on March 6, 2001. On July 16, 2001, the Federal Circuit Court of Appeals in Washington D.C. affirmed the Company's summary judgment victory (see "-Subsequent Events"). Although the Court has disposed of all infringement issues, Par's counterclaims for patent invalidity, unfair competition and tortious interference remain. Par's counterclaims seek an injunction and an award of compensatory and punitive damages. Par intends to vigorously pursue its pending litigation with BMS and to defend its patent rights and ensure that other generic companies do not infringe the Par patent. At this time, it is not possible for the Company to predict the probable outcome of this litigation and the impact, if any, that it might have on the Company. On March 30, 2001, the Company reached an agreement with Minnesota Mining and Manufacturing Company ("3M") with respect to a previous product agreement (the "Product Co-development, Supply and Distribution Agreement") entered into between the parties on January 6, 1994. Under the terms of the agreement, 3M agreed to pay the Company $750,000 in April 2001 in exchange for the mutual termination of the Product Co-development, Supply and Distribution Agreement. The Company recorded $500,000 of the payment related to product royalties in net sales and the remaining $250,000 in other income in the first quarter 2001. -10- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS June 30, 2001 (Unaudited) The Company is involved in certain other litigation matters, including certain product liability actions and actions by former employees, and believes 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. The Company intends to vigorously defend these actions. Subsequent Events: On July 16, 2001, the Federal Circuit Court of Appeals in Washington D.C. affirmed the Company's summary judgment victory in its case against BMS over megestrol acetate oral suspension. On July 25, 2001, the FDA granted the Company final approval for megestrol acetate oral suspension with marketing exclusivity until mid-January 2002 and the Company began shipping the product to its customers. On July 31, 2001, Alphapharm Pty Ltd. ("Alphapharm"), an Australian subsidiary of Merck KGaA, was granted final approval by the FDA for flecainide acetate tablets, the generic version of 3Ms' Tambocor, which will be distributed by the Company under the Genpharm Distribution Agreement. Alphapharm was first- to-file an ANDA with paragraph IV certification and therefore the Company anticipates receiving up to 180 days of marketing exclusivity for the product. The Company anticipates shipping the product during 2001. On August 2, 2001, the Company began marketing fluoxetine 10 mg and 20 mg tablets, and fluoxetine 40 mg capsules, the generic versions of Eli Lilly and Company's Prozac, through its distribution agreements with Genpharm and Reddy. The Company has received 180 days marketing exclusivity for the products, which will extend into late January 2002. Generic competitors of the Company received 180 days marketing exclusivity for fluoxetine 10 mg and 20 mg capsules. The Company believes that its fluoxetine tablets should be able to compete for a share of the fluoxetine capsule market. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Form 10-Q may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including those concerning management's expectations with respect to future financial performance and future events, particularly relating to sales of current products and the introduction of new manufactured and distributed products. Such statements involve known and unknown risks, uncertainties 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-Q 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 available for internal research and development and research and development joint ventures, (iv) research and development project delays or delays and unanticipated costs in obtaining regulatory approvals, (v) continuation of distribution rights under significant agreements, (vi) the continued ability of distributed product suppliers to meet future demand, (vii) the costs and outcome of any threatened or pending litigation, including patent and infringement claims and (viii) general industry and economic conditions. Any forward-looking statements included in this Form 10-Q are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statements. RESULTS OF OPERATIONS General The Company's net income for the six-month period ended June 30, 2001 was $4,062,000 compared to a net loss of ($1,779,000) in the corresponding six-month period ended July 1, 2000. Net sales in 2001 increased $14,148,000, or 35%, to $55,001,000, primarily due to additional sales from new products. Following the sales growth, the gross margins increased to $19,549,000, or 36% of net sales, for the six-month period of 2001, from $10,025,000, or 25% of net sales, in the same period of the prior year. Research and development expenses in 2001 of $3,657,000 decreased $798,000 from the comparable period of 2000, primarily due to the timing of bio-studies. For the most recent six-month period, selling, general and administrative costs of $8,592,000 increased $1,232,000 from the corresponding period of the prior year, primarily due to additional marketing programs associated with new products and, to a lesser extent, higher costs for personnel, increased shipping volumes and legal fees. The income tax provision for the six months ended June 30, 2001 is primarily a non-cash expense due to NOL carryforwards. The Company did not recognize a tax benefit for its losses in the year 2000. The Company's net income for the second quarter 2001 of $2,385,000 increased from $317,000 for the second quarter of the prior year, reflecting the increased sales and gross margin growth described above. Research and development expenses of $2,119,000 for the second quarter 2001 were comparable to $2,316,000 incurred in the same quarter of 2000. Selling, general and administrative costs of $4,578,000 for the three-month period of 2001 increased $538,000 from the prior year, primarily due to increased marketing expenses. In order to improve the Company's prospects and strengthen its financial condition through the introduction of new products at profitable pricing the Company has entered into several strategic alliances through which it co- develops and distributes products. The Company's pipeline of potential products for the future includes 19 ANDAs (four of which have been tentatively approved), pending with, and awaiting approval from, the FDA, as a result of its internal product development program and strategic alliances. The Company pays a percentage of the gross profits to its strategic partners on sales of products covered by its distribution agreements (see "Notes to Financial Statements- Strategic Alliance" and "Distribution and Supply Agreements"). On December 14, 2000, the U.S. District Court for the Southern District of New York dismissed the patent infringement complaint brought by BMS regarding Par's megestrol acetate oral suspension formulation. The Court granted summary judgment in favor of Par for reasons explained in an Opinion filed under seal. A Notice of Appeal was filed by BMS on March 6, 2001. On July 16, 2001, the Federal Circuit Court of Appeals in Washington D.C. affirmed the Company's summary judgment victory in its case against BMS (see "Notes to Financial Statements-Commitments, Contingencies and Other Matters-Legal Proceedings" and "-Subsequent Events"). -12- In July 2001 and August 2001, the FDA granted approvals for three ANDA submissions, one each by Par, Reddy and Alphapharm, which as first-to-file opportunities, the Company received up to 180 days of marketing exclusivity for the products. Par's ANDA approval for megestrol acetate oral suspension (Megace Oral Suspension), which had an estimated $180 million of annual brand sales in 2000, is not subject to any profit split agreements. Alphapharm's ANDA approval for fluoxetine 10 mg tablets (Prozac(R)), which had an estimated $70 million of annual brand sales in 2000, and 20 mg tablets, which the Company believes should be able to compete for a share of the fluoxetine capsule market, are covered under the Genpharm Additional Product Agreement. Fluoxetine 20 mg capsules had an estimated annual brand sales of nearly $2 billion in 2000. Reddy's ANDA approval for fluoxetine 40mg capsules, which had an estimated $275 million of annual brand sales in 2000, is covered under the Reddy Development and Supply Agreement. Annual brand sales are based on the Company's market research. The Company began marketing megestrol acetate oral suspension in July 2001 and all three strengths of fluoxetine in August 2001. Sales of these products are expected to have a significant impact on sales and gross margins in the third quarter 2001 (see "Notes to Financial Statements-Distribution and Supply Agreements" and "-Subsequent Events"). Critical to the continued improvement in the Company's financial condition is the introduction of new manufactured and distributed products at selling prices that generate significant gross margin. In addition to new product introductions expected as part of its various strategic alliances, the Company plans to continue to invest in research and development efforts, subject to liquidity concerns, while seeking additional products for sale through new and existing distribution agreements, additional first-to-file opportunities, vertical integration with raw material suppliers and unique dosage forms and strengths to differentiate its products in the marketplace. 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 and development agreements with third parties. No assurance can be given that the Company will obtain any additional products for sale (see "Financial Condition-Liquidity and Capital Resources"). The generic drug industry in the United States continues to be highly competitive. 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 through mergers, acquisitions and the formation of buying groups, (iii) ability of generic competitors to quickly 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) pricing and product deletions by competitors. Net Sales Net sales for the six months ended June 30, 2001 of $55,001,000 increased $14,148,000, or 35%, from net sales of $40,853,000 for the six months ended July 1, 2000. The sales increase was primarily due to additional sales from new products, including products sold under distribution agreements with Genpharm and Reddy, and, to a lesser extent, increased volumes and more favorable pricing on certain existing products. Net sales of distributed products in the most recent six months, which consist of products manufactured under contract and licensed products, were approximately 56% of the Company's net sales compared to approximately 62% of net sales in 2000. The Company is substantially dependent upon distributed products for its sales, and as the Company introduces new products under its distribution agreements, it is expected that this trend will continue. Any inability by suppliers to meet expected demand could adversely affect future sales. Second quarter 2001 net sales of $29,297,000 increased $6,583,000, or 29%, from $22,714,000 for the corresponding quarter of 2000, primarily due to the sale of new products and increased volumes and more favorable pricing on certain existing products. Net sales of distributed products were approximately 54% of the Company's total net sales in the most recent quarter compared to approximately 64% of the total for the same quarter of last year. Sales of the Company's products continue to be principally dependent upon, among other things, (i) pricing levels and competition, (ii) market penetration for the existing product line, (iii) the continuation of existing distribution agreements, (iv) introduction of new distributed products, (v) approval of ANDAs and introduction of new manufactured products, including potential exclusivity periods, and (vi) the level of customer service. -13- Gross Margin The gross margin of $19,549,000 (36% of net sales) for the six-month period ended June 30, 2001 increased $9,524,000 from $10,025,000 (25% of net sales) in the corresponding period of the prior year. The gross margin improvement was attained primarily through additional contributions from sales of higher margin new products, increased sales of certain existing products and more favorable overhead variances. The gross margin for the second quarter 2001 was $11,121,000 (38% of net sales) compared to $6,603,000 (29% of net sales) in the corresponding quarter of the prior year. Additional gross margin contributions from higher margin new products, increased sales of certain existing products, more favorable overhead variances and lower inventory write-offs generated the higher margins in the second quarter of 2001. Inventory write-offs amounted to $466,000 and $181,000 for the six-month and three-month periods ended June 30, 2001, respectively, compared to $830,000 and $695,000 in the corresponding periods of the prior year. The inventory write-offs, taken in the normal course of business, are related primarily to work in process inventory not meeting the Company's quality control standards and the disposal of finished products due to short shelf lives. The higher inventory write-offs in the prior year were primarily attributable to an increase in the disposal of short-dated finished products and obsolete inventory from the discontinuance of a low margin product. Operating Expenses Research and Development Research and development expenses of $3,657,000 for the six months ended June 30, 2001 decreased $798,000, from $4,455,000 for the corresponding period of the prior year. The lower costs were primarily attributable to the timing of bio-study activity and lower payments for formulation development work performed for PRI by unaffiliated companies partially offset by higher material costs. Annual research and development costs in 2001 are expected to be comparable to fiscal year 2000. The Company's domestic research and development program is integrated with IPR, its research operation in Israel. Research and development expenses at IPR for the most recent six-month period were $576,000, net of Generics funding, compared to expenses of $622,000 for the comparable period of last year. The Company, IPR and Generics have an agreement pursuant to which Generics shares one-half of the costs of IPR's operating budget up to a maximum payment of $1,000,000 in exchange for the exclusive distribution rights outside of the United States to the products developed by IPR after the date of the agreement (see "Notes to Financial Statements-Research and Development Agreement"). Second quarter 2001 research and development expenses of $2,119,000 were comparable to $2,316,000 for the second quarter 2000. Increased material costs were more than offset by lower bio-study and outside development costs. Research and development expenses at IPR in the most recent quarter were $291,000, net of Generics funding, compared to expenses of $293,000 in the same quarter of the prior year. The Company currently has two ANDAs for potential products pending with, and awaiting approval from, the FDA as a result of its own product development program. In March 2001, the Company received FDA approval with marketing exclusivity until late-September 2001 for buspirone 7.5mg tablets (BuSpar(R)) and began marketing the product. In July 2001, the Company began marketing megestrol acetate oral suspension following final FDA approval with marketing exclusivity until mid-January 2002. The Company has in process or expects to commence biostudies for at least five additional products during the remainder of 2001. None of these products is included in any of the Company's distribution agreements. Under the Genpharm Distribution Agreement, Genpharm pays the research and development costs associated with the products covered by the Genpharm Distribution Agreement. Currently, there are 11 ANDAs for potential products (four of which have been tentatively approved) that are covered by the Genpharm Distribution Agreement pending with, and awaiting approval from, the FDA. To date, the Company is marketing 14 products under the Genpharm Distribution Agreement. Flecainide acetate tablets (Tambocor(R)), which will be distributed by the Company under the Genpharm Distribution Agreement, received final approval from the FDA in July 2001. The Company anticipates marketing the product during 2001 (see "Notes to Financial Statements-Distribution and Supply Agreements-Genpharm, Inc."). -14- Genpharm and the Company share the costs of developing the products covered under the Genpharm Additional Product Agreement. Currently, there is one ANDA for a potential product covered by the Genpharm Additional Product Agreement pending with, and awaiting approval from, the FDA. The Company began marketing fluoxetine 10 mg and 20 mg tablets, covered under the Genpharm Additional Product Agreement, in August 2001 (see "Notes to Financial Statements- Distribution and Supply Agreements-Genpharm, Inc."). Selling, General and Administrative Selling, general and administrative costs of $8,592,000 (16% of net sales) for the six months ended June 30, 2001 increased $1,232,000, or 17%, from $7,360,000 (18% of net sales) in the corresponding period ended July 1, 2000. The higher costs in the current period were primarily attributable to additional marketing programs associated with new products and, to a lesser extent, higher cost for personnel, shipping increased volumes and legal fees. The Company anticipates it will continue to incur a high level of legal expenses related to the costs of litigation connected to certain products covered under the Company's distribution agreements and the patent infringement action with BMS (see "Notes to Financial Statements-Commitments, Contingencies and Other Matters-Legal Proceedings" and "-Subsequent Events"). For the three-month period ended June 30, 2001, selling, general and administrative costs increased $538,000, or 13%, to $4,578,000 (16% of net sales) from $4,040,000 (18% of net sales) for the corresponding three-month period of the prior year primarily due to higher marketing expenses. Other Income Other income of $364,000 and $45,000 for the six-month and three-month periods ended June 30, 2001, respectively, decreased from $392,000 and $303,000 in the corresponding periods of 2000. Included in 2001 was a payment from 3M to the Company releasing the parties from a prior product agreement recorded in the first quarter of 2001. Other income for the six-month and three-month periods of 2000 consisted primarily of payments from strategic partners to reimburse the Company for research costs incurred in prior periods. Income Taxes The Company recorded provisions for income taxes of $3,160,000 and $1,862,000, respectively, for the six and three months ended June 30, 2001. The provisions, which are primarily non-cash expenses, were established using the applicable rates for federal, state and alternative minimum taxes. The Company did not recognize a benefit for its operating losses in either of the six or three months ended July 1, 2000. Based on the Company's performance in prior years and other competitive factors pertaining to the generic drug industry, management believes future operating income might not be sufficient to recognize fully the NOL carryforwards of the Company (see "Notes to Financial Statements- Income Taxes"). FINANCIAL CONDITION Liquidity and Capital Resources The Company's cash and cash equivalents of $235,000 at June 30, 2001 were comparable to $222,000 at December 31, 2000. Additional borrowings from the Company's credit line with GECC of $5,712,000 for the six months ended June 30, 2001 were used primarily to fund operations and, to a lesser extent, capital projects. Working capital of $27,265,000 at June 30, 2001, which includes cash and cash equivalents, increased $8,753,000 from $18,512,000 at December 31, 2000, primarily due to increased accounts receivable, inventories and agreements with customers related to stocking new products. The working capital ratio improved to 1.87x at June 30, 2001 compared to 1.65x at December 31, 2000. The Company, from time to time, enters into agreements with third parties with respect to the development of new products and technologies. To date, the Company has entered into agreements and advanced funds to several non-affiliated companies for products in various stages of development. The payments are expensed as incurred and included in research and development costs. Annual research and development expenses, including payments to non-affiliated companies, are expected to total approximately $8,000,000 for the entire fiscal year 2001. -15- On March 30, 2001, the Company reached an agreement with 3M pursuant to which 3M paid the Company $750,000 in April 2001, releasing the parties from a prior product agreement (see "Notes to Financial Statements-Commitments, Contingencies and Other Matters-Legal Proceedings"). In June 2000, the Company agreed to sell its remaining distribution rights back to Elan for a non-prescription transdermal nicotine patch and to terminate Par's right to royalty payments under a prior agreement. Pursuant to this agreement, the Company received a $500,000 payment in July 2001 (see "Notes to Financial Statements-Distribution and Supply Agreements-Elan Corporation"). In March 1999, the Company entered into an agreement to lease, with an option to purchase, its Congers Facility to Halsey. Halsey paid the Company a purchase option of $100,000 in March 1999 and is obligated to pay rent of $500,000 annually during the initial three-year term of the lease. The rent is expected to continue to cover the Company's fixed costs of the facility in subsequent periods. Under the purchase option, Halsey may purchase the facility and substantially all the machinery and equipment at any time during the lease for a specified amount (see "Notes to Financial Statements-Leasing Agreement"). In January 1999, the Company entered into the Genpharm Profit Sharing Agreement pursuant to which the Company will receive a portion of the profits generated from the sale of products sold under a separate agreement between Genpharm and an unaffiliated United States based pharmaceutical company in exchange for a non-refundable fee of $2,500,000 paid by the Company. The Company will amortize the fee over a projected revenue stream from the sale of such products when launched by the third party (see "Notes to Financial Statements- Profit Sharing Agreement"). The Company, IPR and Generics entered into the Development Agreement, dated August 11, 1998, pursuant to which Generics agreed to fund one-half of the costs of IPR's operating budget in exchange for the exclusive distribution rights outside of the United States to the products developed by IPR after the date of the agreement. In addition, Generics agreed to pay IPR a perpetual royalty for all sales of the products by Generics or its affiliates outside the United States. To date, no such products have been brought to market by Generics and no royalty has been paid to IPR. Pursuant to the Development Agreement, Generics paid the Company $800,000 for fiscal year 2000 and $413,000 for the first six months of 2001, fulfilling their funding requirements through June 30, 2001. Generics is not required to fund more than $1,000,000 for any one calendar year (see "Notes to Financial Statements-Research and Development Agreement"). The Company expects to fund its operations, including research and development activities and its obligations under the existing distribution and development arrangements discussed herein, out of its working capital and, if necessary, with available borrowings against its line of credit, if and to the extent available (see "Financing"). Financing At June 30, 2001, the Company's total outstanding long-term debt, including the current portion, amounted to $1,078,000. The amount consists primarily of an outstanding mortgage loan with a bank and capital leases for computer equipment. In June 2001, the Company and the bank entered into an agreement that extended the terms of the mortgage loan of which the remaining balance was originally due in May 2001. The mortgage loan extension, in the principal amount of $877,000, is to be paid in equal monthly installments over a term of 13 years maturing May 1, 2014. The mortgage loan has a fixed interest rate of 8.5% per annum, with rate resets after the fifth and tenth years based upon a per annum rate of 3.25% over the five-year Federal Home Loan Bank of NY rate. Par entered into the Loan Agreement with GECC in December 1996, which as amended, provides Par with a five- year revolving line of credit expiring December 2001. Pursuant to the Loan Agreement, 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 charged on the line of credit is based upon a per annum rate of 2.25% 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 -16- daily basis to reduce amounts outstanding under the line of credit. The revolving credit facility is subject to covenants based on various financial benchmarks. As of June 30, 2001, the borrowing base was approximately $18,574,000 and $15,733,000 was outstanding under the line of credit. The Company and GECC are currently in the process of amending the Loan Agreement to extend the term of the revolving line of credit to June 2003. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. -17- PART II. OTHER INFORMATION Item 1. Legal Proceedings. - ------ ----------------- Par has filed with the FDA an ANDA for megestrol acetate oral suspension, the generic version of BMS Megace Oral Suspension. Par filed a paragraph IV certification regarding the formulation patent as part of its ANDA submission. The basic compound patent for Megace has expired. Megace Oral Suspension received orphan drug exclusivity from the FDA that expired on September 10, 2000 and BMS has a formulation patent for Megace Oral Suspension that expires in 2011. Par believes that its distinct and unique formulation does not infringe the BMS formulation patent. In October 1999, BMS initiated a patent infringement action against Par. On March 1, 2000, Par was granted a patent by the U.S. Patent Office regarding Par's unique formulation of megestrol acetate oral suspension. Par believes that the issuance of this patent, which establishes the uniqueness of Par's formulation compared to the BMS patent, should significantly help Par's defense in the patent infringement case. On December 14, 2000, the U.S. District Court for the Southern District of New York dismissed the patent infringement complaint brought by BMS regarding Par's megestrol acetate oral suspension formulation. The Court granted summary judgment in favor of Par for reasons explained in an Opinion filed under seal. A Notice of Appeal was filed by BMS on March 6, 2001. On July 16, 2001, the Federal Circuit Court of Appeals in Washington D.C. affirmed the Company's summary judgment victory in its case against BMS over megestrol acetate oral suspension. On July 25, 2001, the FDA granted the Company final approval for megestrol acetate oral suspension with marketing exclusivity until mid-January 2002 and the Company began shipping the product to its customers. Item 6. Exhibits and Reports on Form 8-K. - ------ -------------------------------- (a) Exhibits: 10.15.3 Mortgage Modification Agreement and Restated Mortgage Loan Note, dated May 1, 2001, between Hudson United Bank and Par. 10.16.2 2001 Performance Equity Plan. (b) Reports on Form 8-K: None. -18- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHARMACEUTICAL RESOURCES, INC. ------------------------------ (Registrant) August 14, 2001 /s/ Kenneth I. Sawyer --------------------- Kenneth I. Sawyer Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) August 14, 2001 /s/ Dennis J. O'Connor ---------------------- Dennis J. O'Connor Vice President - Chief Financial Officer and Secretary (Principal Accounting and Financial Officer) -19- EXHIBIT INDEX ------------- Exhibit Number Description Page Number -------------- ----------- ----------- 10.15.3 Mortgage Modification Agreement and Restated 21 Mortgage Loan Note, dated May 1, 2001, between Hudson United Bank and Par. 10.16.2 2001 Performance Equity Plan. 30 -20- EX-10.15.3 3 dex10153.txt MORTGAGE MODIFICATION AGREEMENT DATED MAY 1, 2001 Exhibit 10.15.3 Record and Return to: Clinton A. Poff, Esq. Poff & Bowman LLC P.O. Box 24 Hawthorne, New Jersey 07507 MORTGAGE MODIFICATION AGREEMENT ------------------------------- This Agreement made as of the first day of May 2001 between PAR PHARMACEUTICAL, INC., a New Jersey corporation, located at 1 Ram Ridge Road, Spring Valley, New York 10977 (the "Borrower"); and HUDSON UNITED BANK, a New Jersey corporation, having its administrative headquarters at 1000 MacArthur Boulevard, Mahwah, New Jersey 07430, successor in interest to Urban National Bank (the "Bank"); W I T N E S S E T H: ------------------- WHEREAS: A. The Borrower executed and delivered to the Bank its promissory note in the original principal amount of $1,340,000.00 dated May 4, 1994 (the "Note"); B. Such Note is secured by a mortgage dated May 4, 1994 on property commonly known as 2 Ram Ridge Road, shown and designated as Lot 1 on a certain map entitled "Subdivision Map Prepared For Ramapo Development Assoc., Town of Ramapo, Rockland County, New York," made by Ostertag & McDougall, Surveyors, dated August 9, 1974, last revised December 20, 1974, and filed in the Rockland County Clerk's Office on January 14, 1975 as Map No. 4585, which mortgage was recorded in the Rockland County Registrar's Office on May 13, 1994 in Liber 708 Page 1803, etc (the "Mortgage"); C. The outstanding principal balance of the mortgage obligation is $876,662.81; and D. The Borrower has requested and the Bank has agreed to extend the maturity date of the Note secured by the Mortgage from "May 1, 2001" to "May 1, 2014" and to make certain other modifications and amendments to the Note and Mortgage as set forth herein. NOW, THEREFORE, in consideration of the above premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Notwithstanding anything to the contrary set forth in the Mortgage, the maturity date of the Note is changed from "May 1, 2001" to "May 1, 2014." 2. Further, the interest rate payable on the Note for the period from May 1, 2001 through and including April 30, 2006 shall be eight and one-half (8-1/2) percent; commencing May 1, 2006 through and including April 30, 2011 the interest rate payable on the Note shall be at a fixed rate of interest equal to 325 basis points above the interest rate charged by the Federal Home Loan Bank Board of New York on mortgage loans having a maturity of five (5) years rounded up to the nearest one-eighth of one (1/8) percent in effect forty-five (45) days before May 1, 2006; and commencing from May 1, 2011 and continuing until the Note is paid in full the interest rate payable on the Note shall be at a fixed rate of interest equal to 325 basis points above the interest rate charged by the Federal Home Loan Bank Board of New York on mortgage loans having a maturity of five (5) years rounded up to the nearest one-eighth of one (1/8) percent in effect forty-five (45) days before May 1, 2011. 3. The Borrower shall be responsible for any and all fees incurred by the Bank in connection with the transactions contemplated by this Agreement including, without limitation, any mortgage recording tax and the fees and disbursements of the Bank's counsel. 4. The Borrower does hereby affirm and ratify the extent and validity of the Note, the Mortgage and all other documents executed by the Borrower including, but not limited to, any and all commitment letters (all such documents being herein collectively referred to as, the "Loan Documents"). The Borrower hereby confirms that such Loan Documents remain in full force and effect as of the date hereof. The Borrower does hereby represent, warrant and confirm that there are no defenses, set-offs, rights, claims or causes of action of any nature whatsoever which the Borrower has or may assert against the Bank with respect to the Note, the Mortgage securing such Note and/or any of the other Loan Documents. 5. The undersigned Borrower and Guarantor by executing this Agreement, with respect to any claims arising prior to the date of the execution of this Agreement, expressly waives any and all right to assert a claim, counterclaim or defense against the Bank arising out of or in any way connected with the mortgage transaction between the Bank and the Borrower relating to the mortgaged premises, whether such claim, counterclaim or defense now exists. The foregoing waiver shall apply to any action instituted by any of the undersigned and to any action or proceeding brought against any of the undersigned by the Bank including, without limitation, any action brought in connection with any guarantee executed in connection with the Mortgage. 6. THE UNDERSIGNED BORROWER BY EXECUTING THIS DOCUMENT ACKNOWLEDGES THAT ITS HAS HAD FULL AND FAIR OPPORTUNITY TO REVIEW THIS AGREEMENT AND THE DOCUMENTS REFERRED TO HEREIN WITH INDEPENDENT COUNSEL OF ITS CHOICE AND THAT IT HAS BEEN INDEPENDENTLY ADVISED AS TO THEIR TERMS AND CONDITIONS WHICH ARE ACCEPTABLE TO IT. FURTHER, IT CONFIRMS THAT IN DELIVERING THIS AGREEMENT TO THE BANK, IT IS NOT RELYING ON ANY PROMISE, COMMITMENT, REPRESENTATION OR UNDERSTANDING, EITHER EXPRESS OR IMPLIED, MADE BY OR ON BEHALF OF THE BANK THAT IS NOT EXPRESSLY SET FORTH HEREIN, THE EXISTING MORTGAGE DOCUMENTS OR THE DOCUMENTS REFERRED TO HEREIN. THE BORROWER BY EXECUTING THIS AGREEMENT ACKNOWLEDGES AND UNDERSTANDS THAT ALL OBLIGATIONS UNDER THE NOTE AND THE MORTGAGE ARE DUE AND PAYABLE ON MAY 1, 2014, UNLESS THE BANK, IN ITS SOLE AND ABSOLUTE DISCRETION, EXTENDS THE MATURITY DATE OF SUCH OBLIGATION AND THAT THE BANK HAS NOT MADE ANY REPRESENTATION THAT IT WILL EXTEND THE MATURITY DATE OF SUCH OBLIGATION. 7. This Agreement shall be binding on the parties hereto and their successors and assigns or heirs and personal representatives, as the case may be. IN WITNESS WHEREOF, the parties have executed this document the day and year first above written. WITNESS: PAR PHARMACEUTICAL, INC. /s/ Peter H. Streelman by /s/ Dennis J. O'Connor - ---------------------- ---------------------- Dennis J. O'Connor Vice President, CFO and Secretary WITNESS: HUDSON UNITED BANK /s/ Kristen Hamilton by /s/ Peter H. Streelman - -------------------- ---------------------- Peter H. Streelman Senior Vice President The undersigned guarantor of performance and payment does hereby approve all of the terms of this agreement, does hereby approve the execution and delivery of the agreement by Par Pharmaceutical, Inc. and does hereby acknowledge and confirm its continuing liability and responsibility to Hudson United Bank, with respect to the debt referred to in the agreement in accordance with its guaranty. WITNESS: PHARMACEUTICAL RESOURCES, INC. /s/ Peter H. Streelman by /s/ Dennis J. O'Connor - ---------------------- ---------------------- Dennis J. O'Connor Vice President, CFO and Secretary STATE OF NEW YORK ) : SS.: COUNTY OF ROCKLAND) On this 28 day of June, in the year two thousand and one, before me, the -- undersigned, personally appeared Dennis J. O'Connor, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed same in his capacity and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument and that such individual made such appearance before the undersigned in the Town of Spring Valley, County of Rockland, State of New York. ---- ------------- -------- -------- /s/ Peter H. Streelman ---------------------------------- (Signature and Office of individual taking acknowledgement) STATE OF NEW YORK ) ) ss.: COUNTY OF ROCKLAND ) On this 28 day of June, in the year two thousand and one, before me, the -- undersigned, personally appeared Peter H. Streelman personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed same in his capacity and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument and that such individual made such appearance before the undersigned in the Town of Spring Valley, County of Rockland, State of New York. ---- ------------- /s/ Kristen Hamilton ---------------------------------- (Signature and Office of individual taking acknowledgement) STATE OF NEW YORK ) : SS.: COUNTY OF ROCKLAND) On this 28 day of June, in the year two thousand and one, before me, the -- undersigned, personally appeared Dennis J. O'Connor, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed same in his capacity and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument and that such individual made such appearance before the undersigned in the Town of Spring Valley, County of Rockland, State of New York. ---- ------------- -------- -------- /s/ Peter H. Streelman ---------------------------------- (Signature and Office of individual taking acknowledgement) RESTATED MORTGAGE LOAN NOTE $1,340,000.00 Dated as of May 1, 2001 Hawthorne, New Jersey The undersigned, PAR PHARMACEUTICAL, INC., with an address at One Ram Ridge Road, Spring Valley, New York 10977, promises to pay to the order of Hudson United Bank, successor in interest to Urban National Bank (the "Bank"), having its principal office located at 1000 MacArthur Boulevard, Mahwah, New Jersey, the principal sum of ONE MILLION THREE HUNDRED FORTY THOUSAND and NO/100 (1,340,000.00) DOLLARS as hereinafter provided or so much thereof as may be outstanding, and to pay interest as hereinafter provided on the unpaid principal balance of this Note from time to time, from the date hereof until the principal balance is paid in full. 1. The unpaid principal balance shall earn interest (i) during the first five (5) years of the term of this Note at the fixed rate of eight and one-half (8-1/2) percent per annum; and (ii) during the next two (2) years of the term hereof at a fixed rate of 8.5% percent per annum; (iii) during the next five (5) years of the term of this Note at a fixed rate of interest equal to eight and one-half (8-1/2) percent per annum; (iv) from May 1, 2006 through and including April 30, 2011 at a fixed rate of interest equal to 325 basis points above the interest rate charged by the Federal Home Loan Bank Board of New York on mortgage loans having a maturity of five (5) years rounded up to the nearest one-eighth of one (1/8) percent in effect forty-five (45) days before May 1, 2006; and (v) from May 1, 2011 until this Note is paid in full at a fixed rate of interest equal to 325 basis points above the interest rate charged by the Federal Home Loan Bank Board of New York on mortgage loans having a maturity of five (5) years rounded up to the nearest one-eighth of one (1/8) percent in effect forty-five (45) days before May 1, 2011. 2. All computations of interest shall be calculated on the basis of the actual number of days elapsed divided by 360. 3. Payment of principal shall be made in eighty-three equal consecutive monthly installments of $5,583.33, together with accrued and unpaid interest, commencing on June 1, 1994 and continuing on the first day of each month thereafter until May 1, 2001; and commencing on June 1, 2001 and continuing on the same day of each and every month thereafter, the undersigned shall make a periodic payment of principal and interest until May 1, 2014 (the "Maturity Date") at which time the entire unpaid principal balance of this Note together with all accrued but unpaid interest and all other amounts due under this Note and the Mortgage shall be immediately due and payable. From June 1, 2001 through May 1, 2006, the undersigned shall make a periodic payment and interest of $9,366.05. The periodic payment of principal and interest shall be recalculated on May 1, 2006 and May 1, 2011 based on the new interest rate then in effect, the unpaid principal balance of this Note and the remaining term of this Note. 4. This Note which replaces and supersedes (but shall not be considered a repayment of) a note of the undersigned dated May 4, 1994 in the original principal amount of $1,340,000.00, (the "Prior Note"). Any and all amounts evidenced by the Prior Note shall hereafter be evidenced by this Note and any accrued but unpaid interest due and owing under the Prior Note shall be payable on the first interest payment date hereunder. 5. If required by the Bank, on the first day of each month the undersigned shall pay to the Bank one-twelfth (1/12th) of the sum of (a) the taxes on the Mortgaged Premises (as defined below and (b) the aggregate premiums for insurance coverage on the Mortgaged Premises payable within the succeeding twelve months. The Bank shall hold such monies in an escrow account and apply same to the payment of taxes and insurance premiums as same become payable. 6. As security for the payment of the money owing thereon, as well as the performance of all items and conditions of this Note, the undersigned has delivered to the Bank a first mortgage and security agreement of even date herewith on real property located in the Town of Ramapo, Rockland County, New York (the "Mortgage"). The real property encumbered by the Mortgage are hereinafter referred to as the "Mortgaged Premises." The terms, covenants and conditions of the Mortgage are hereby made a part of this Note, to the extent and with the same effect as if set forth herein at length and the undersigned shall be bound and shall comply with all terms, covenants and conditions of the Mortgage. 7. The Bank may charge and the undersigned agrees to pay a penalty of five (5) percent of any installment of interest and/or principal of any portion thereof which is not paid within fifteen (15) days after the same become due and payable under this Note. 8. Notwithstanding the foregoing, the unpaid balance of the principal amount owing hereunder, together with interest thereon, shall immediately become due and payable, at the election of the holder hereof, in the event of: (a) A failure to make any payment of principal or interest hereunder within ten (10) days after written notice of such non-payment form the Bank to the undersigned; (b) Failure to observe or perform any term, covenant or condition of this Note or the Mortgage (other than with respect to the payment of the principal or interest which shall be governed by (a) above) and, if no other grace period is applicable, within thirty (30) days after written notice of such default from the Ban to the undersigned and/or; (c) Any event of default as defined in the Mortgage. 9. In the event of default, the Bank shall have the right immediately, and without notice or other action, to set-off against the undersigned's liability to the Bank any money owed by the Bank to the undersigned, whether due or not, and the Bank shall be deemed to have exercised such right of set-off and to have made a charge against any such money immediately upon the occurrence of a default under this Note, even thought the actual book entries may be made at some time subsequent thereto. 10. In addition to any late payment charge which may be due under this Note, if the debt evidenced hereby is declared immediately due and payable by the Bank pursuant to the provisions of this Note, or the Mortgage, or if the debt evidenced hereby is not paid in full on the Maturity Date, the undersigned shall hereafter pay interest on the principal balance form the date of such declaration or the Maturity Date, as the case may be, until the date the principal balance is paid in full, at the rate per annum (calculated for the actual number of days elapsed on the basis of a 360-day year) equal to five (5) percent per annum above the interest rate then in effect as set forth herein, provided, however, that such interest rate shall in no event exceed the maximum interest rate which the undersigned may by law pay (the "Default Rate"). 11. This Note is subject to the express condition that at no time shall the undersigned by obligated or required to pay interest on the principal balance at the rate which could subject the Bank to either civil or criminal liability as a result of being in excess of the maximum rate which the undersigned is permitted by law to contract or agree to pay. If by the terms of this Note, the undersigned is at any time required or obligated to pay interest on the principal balance at a rate in excess of such maximum rate, the rate of interest under this Note shall be deemed to be immediately reduced to such maximum rate and interest payable hereunder shall be computed at such maximum rate and interest payable hereunder shall be computed at such maximum rate and the portion of al prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance. 12. Upon the continuance of any default in the payment of any installment of interest and/or principal due hereunder, or of any portion thereof, or of any penalty, or upon any default in the performance of any covenant, agreement or conditions contained in the Mortgage within the time limits established in the Mortgage, then at the option of the holder hereof, the whole principal sum with accrued interest shall become and be immediately due and payable without further notice, demand or presentment for payment. 13. Except as otherwise provided in this Note or the Mortgage, the undersigned and all other parties who at any time may be liable hereon in any capacity, jointly and severally, waive presentment, demand for payment, protest and notice of dishonor of this Note, and authorize the Bank without notice, but only with the consent of the undersigned, to grant extensions in the time of payment of and reduction or increase in the rate of interest on any money owing on this Note. 14. This Note may be prepaid, at any time, together with interest due to the date of such prepayment, in increments of $25,000.00 without prepayment penalty or additional premium. 15. The undersigned shall not enter into any additional financing with respect to the Mortgaged Premises during the term of the loan evidenced by this Note. 16. The undersigned hereby waives its right to a jury trial. 17. This Note shall be construed according to and governed by the laws of the State of New Jersey. 18. This Note may only be modified, amended, changed or terminated by an agreement in writing signed by the Bank and the undersigned. No waiver of any term, covenant or provisions of the Note shall be effective unless given in writing by the Bank and if so given by the Bank shall only be effective in the specific instance in which given. 19. The undersigned expressly covenants and agrees that it will abide by the terms and conditions of the commitment letter of the Bank to the undersigned dated April 13, 1994, to the extent that such terms and conditions have not been incorporated in this Note or the Mortgage. 20. No delay n the part of the Bank in exercising any right or remedy under this Note or failure to exercise the same shall operate as a waiver in whole or in part of any such right by or remedy. IN WITNESS WHEREOF, the undersigned has hereunto set its hand and seal or caused these presents to be signed by its proper corporate officers and its proper corporate seal to be hereto affixed the day and year first written above. PAR PHARMACEUTICAL, INC. by: /s/ Dennis J. O'Connor ------------------------------- Dennis J. O'Connor Vice President, CFO and Secretary STATE OF NEW YORK ) : SS.: COUNTY OF ROCKLAND) On this 28 day of June, in the year two thousand and one, before me, the -- undersigned, personally appeared Dennis J. O'Connor, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed same in his capacity and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument and that such individual made such appearance before the undersigned in the Town of Spring Valley, County of Rockland, State of New York. ---- ------------- -------- -------- /s/ Peter H. Streelman ---------------------------------- (Signature and Office of individual taking acknowledgement) EX-10.16.2 4 dex10162.txt 2001 PERFORMANCE EQUITY PLAN Exhibit 10.16.2 PHARMACEUTICAL RESOURCES, INC. 2001 PERFORMANCE EQUITY PLAN Section 1. Purpose; Definitions. 1.1. Purpose. The purpose of the Pharmaceutical Resources, Inc. (the "Company") 2001 Performance Equity Plan (the "Plan"), adopted for the term set forth in Section 9 hereof, is to enable the Company to offer to its key employees and to key employees of its subsidiaries, and independent agents and consultants of the Company and its subsidiaries, Stock Options in the Company, thereby enhancing its ability to attract, retain and reward such key employees and individuals, and to increase the mutuality of interests between those employees and individuals and the shareholders of the Company. The Company previously adopted the 1990 Stock Incentive Plan and the 2000 Performance Equity Plan (the "Prior Plans"). Awards granted under the Prior Plans prior to the effective date of this Plan ("Prior Awards") shall not be affected by the adoption of this Plan, and the Prior Plans shall remain in effect following the effective date to the extent necessary to administer the Prior Awards. 1.2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth herein: (a) "Agents" means those persons who are not employees of the Company or any subsidiary, including independent agents and consultants. (b) "Agreement" means the agreement between the Company and the Holder setting forth the terms and conditions of an award under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Change of Control" means a change of control of the Company pursuant to Section 6 hereof. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute or statutes thereto. (f) "Committee" means the Compensation and Stock Option Committee of the Board or any other committee of the Board which the Board may designate. (g) "Common Stock" means the Common Stock of the Company, par value $.01 per share. (h) "Company" means Pharmaceutical Resources, Inc., a corporation organized under the laws of the State of New Jersey, and any successor thereto. (i) "Disability" means disability as determined under procedures established by the Committee for purposes of the Plan. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. (k) "Exchange Act Holder" means such officer or director or 10% beneficial owner of Common Stock subject to Section 16(b) of the Exchange Act. (l) "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 Common Stock (as hereinafter defined) is listed on a national securities exchange or quoted on the NASDAQ National Market System, the closing price of the Common Stock on the last preceding day on which the Common Stock was traded, as reported on the composite tape or by NASDAQ/NMS 1 System Statistics, as the case may be; (ii) if the Common 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 bid and asked prices for the Common Stock on the last preceding day for which such quotations are reported by NASDAQ; and (iii) if the fair market value of the Common Stock cannot be determined pursuant to clause (i) or (ii) hereof, such price as the Committee shall determine. (m) "Holder" means an eligible employee, prospective employee or Agent of the Company or a Subsidiary who has received an award under the Plan. (n) "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. (o) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (p) "Plan" means this Pharmaceutical Resources, Inc. 2001 Performance Equity Plan, as hereinafter amended from time to time. (q) "Prior Awards" and "Prior Plans" shall have the respective meanings given to those terms in Section 1.1. (r) "Stock Option" or "Option" means any Non-Qualified Stock Option or Incentive Stock Option to purchase shares of Stock which is awarded pursuant to the Plan. (s) "Subsidiary" means any present or future subsidiary corporation of the Company, as such term is defined in Section 424(f) of the Code. Section 2. Administration. 2.1. Committee Membership. 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 awards under the Plan with the requirements of Rule 16b-3 under the Exchange Act, Section 162(m) of the Code, or with the requirements of any other applicable law, rule or regulation. 2.2. Powers of Committee. The Committee shall have full authority to award Stock Options pursuant to the terms of the Plan, to eligible employees and prospective employees described under Section 4 hereof. For purposes of illustration and not of limitation, the Committee shall have the authority (subject to the express provisions of this Plan): (a) to select the eligible employees, prospective employees and Agents to whom Stock Options may from time to time be awarded hereunder; (b) to determine the Incentive Stock Options and Non-Qualified Stock Options, if any, to be awarded hereunder to one or more eligible employees, prospective employees and Agents; (c) to determine the number of shares to be covered by each award granted hereunder; (d) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award hereunder (including, but not limited to, share price, any restrictions or limitations, and any vesting, settlement, surrender, cancellation, acceleration, termination, exercise or forfeiture provisions, as the Committee shall determine); (e) to determine any specified performance goals or such other factors or criteria which need to be attained for the vesting of an award granted hereunder; and 2 (f) to determine the terms and conditions under which awards hereunder are to operate in conjunction with or apart from other equity awarded, and cash awards made by the Company or any Subsidiary outside of this Plan. 2.3. Interpretation of Plan. Subject to Section 8 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 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. Notwithstanding any provision in the Plan to the contrary, 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 Holder(s) affected, to disqualify any Incentive Stock Option under such Section 422. Subject to Section 7 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 the Holders. Section 3. Common Stock Subject to Plan. 3.1. Number of Shares. The total number of shares of Common Stock reserved and available for distribution under the Plan shall be 2,500,000 shares. In addition, Common Stock covered by any unexercised portions of terminated Options or Prior Awards (including canceled Options or Prior Awards), or Prior Awards which are otherwise surrendered by the Holder may again be subject to new awards under this Plan. The number of shares of Common Stock deemed to be issued under the Plan upon the exercise of an Option in the nature of a stock purchase right shall be reduced by the number of shares of Common Stock surrendered by the Holder in payment of the exercise or purchase price of the award and withholding taxes thereon. 3.2. Character of Shares. Shares of Common Stock under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. 3.3. Adjustment Upon Changes in Capitalization, Etc. In the event of any acquisition, merger, reorganization, consolidation, recapitalization, dividend (other than a dividend or its equivalent which is credited to a Holder or a regular cash dividend), stock split, reverse stock split, or other change in corporate structure affecting the Common Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the maximum number of shares with respect to which awards may be granted to any employee in any year, in the number and exercise price of shares subject to outstanding Options, as may be determined to be appropriate by the Committee in order to prevent the dilution or enlargement of each Holder's rights, provided that the number of shares subject to any award shall always be a whole number. Section 4. Eligibility. 4.1. General. Awards under the Plan may be made to (i) officers and other key employees of the Company or any Subsidiary (including officers and key employees serving as directors of the Company) who are at the time of the grant of an award under this Plan regularly employed by the Company or any Subsidiary; (ii) prospective employees of the Company or its Subsidiaries and (iii) Agents of the Company. The exercise of any Stock Option and the vesting of any award hereunder granted to a prospective employee shall be conditioned upon such person becoming an employee of the Company or a Subsidiary. The term "prospective employee" shall mean any person who holds an outstanding offer of regular employment on specific terms from the Company or a Subsidiary. Section 5. Stock Options. 5.1. Grant and Exercise. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. Any Stock Option granted under the Plan shall contain such terms, not inconsistent with this Plan, as the Committee may from time to time approve. The Committee shall have the authority to grant to any Holder hereof Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options. To the extent that any Stock Option (or portion thereof) does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock 3 Option. 5.2. Terms and Conditions. Stock Options granted under the Plan shall be subject to the following terms and conditions: (a) Exercise Price. The exercise price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but except as otherwise provided in Section 5.3 in the case of Options granted to replace stock options issued by acquired companies, shall be not less than 100% of the Fair Market Value of the Common Stock at the time of grant (110%, in the case of an Incentive Stock Option granted to a Holder ("10% Shareholder") 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). (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten years after the date on which the Option is granted. (c) 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. (d) 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 term of the Option, by giving written notice of exercise to the Company specifying the number of shares of Common 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 Agreement, in whole shares of Common Stock which are already owned by the Holder of the Stock Option or, unless otherwise provided in the Stock Option Agreement, partly in cash and partly in such Common 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, however, that the Company shall not be required to deliver certificates for shares of Common Stock with respect to which a Stock 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 Common Stock (which shall be valued at the Fair Market Value of a share of Common 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 Committee, free of any liens or encumbrances. Payment may also be made, in the discretion of the Company, by the delivery (including, without limitation, by fax) to the Company or its designated agent of an executed irrevocable option exercise form together with irrevocable instructions to a broker-dealer to sell or margin a sufficient portion of the shares and deliver the sale or margin loan proceeds directly to the Company to pay for the exercise price. Except as otherwise expressly provided in this Plan or in the Agreement, no Stock Option granted to an employee or prospective employee may be exercised at any time unless the Holder thereof is then an employee of the Company or of a Subsidiary. The Holder of a Stock Option shall have none of the rights of a shareholder with respect to the shares subject to the Stock Option until such shares shall be transferred to the Holder upon the exercise of the Stock Option. (e) Buyout and Settlement Provisions. The Committee may at any time offer to buy out for cash or otherwise settle a Stock Option previously granted, based upon such terms and conditions as the Committee shall establish and communicate to the Holder at the time that such offer is made. 5.3. Awards for Acquired Companies. After any merger, consolidation, reorganization, stock or asset purchase or similar transaction in which the Company or a Subsidiary shall be a surviving corporation, the Committee may grant Options under the provisions of the Plan, pursuant to Section 424 of the Code or as is otherwise permitted under the Code, in full or partial replacement of or substitution for stock options granted under a plan of another party to the transaction whose shares of stock subject to the old options may no longer be issued following the transaction. The manner of application of the foregoing provisions to such options and any appropriate adjustments in the terms of such awards shall be determined by the Company in its sole discretion. Any such adjustments may provide for the elimination of any fractional shares which might otherwise become subject to any awards. The foregoing shall not be deemed to preclude the Company from assuming or substituting for stock options of acquired companies other than pursuant to this Plan. 4 Section 6. Acceleration. 6.1. Acceleration Upon Change of Control. Unless the award Agreement provides otherwise or unless the Holder waives the application of this Section 6.1 prior to a Change of Control (as hereinafter defined), in the event of a Change of Control, each outstanding Stock Option granted under the Plan shall immediately become exercisable in full notwithstanding the vesting or exercise provisions contained in the Agreement. 6.2. Change of Control Defined. A "Change of Control" shall be deemed to have occurred upon any of the following events: (a) any individual, firm, corporation or other entity, or any group (as defined in Section 13(d)(3) of the Exchange 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 Exchange 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 (b) 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 Exchange Act) to commence, a tender or exchange offer subject to Section 14(d)(1) of the Exchange Act for any class of the Company's capital stock; or (c) the shareholders 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 shareholders of the Company do not own, immediately after the transaction, more than 50% of the voting power of the corporation that survives and is a publicly owned corporation and not a subsidiary of another corporation, or (B) a definitive agreement for the sale, exchange or other disposition of all or substantially all of the assets of the Company, or (C) any plan or proposal for the liquidation or dissolution of the Company; provided, however, that a "Change of Control" shall not be deemed to have taken place if (A) 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, or (B) there is an increase by Lipha Americas, Inc. or its affiliates, in its stock ownership in the Company provided that after such increase, the Company is still a publicly owned corporation listed on a national securities exchange or quoted on the NASDAQ National Market System. (d) In the event of a "Change of Control" as defined in Subsection (a) above, all outstanding Stock Options, shall become exercisable in full, whether or not otherwise exercisable at such time, and any such Stock Option shall remain exercisable in full thereafter until it expires pursuant to its terms, unless the provisions of this Section 6 are suspended or terminated by an affirmative vote of a majority of the Board. 6.3. General Waiver by Committee. The Committee may, after grant of an award, accelerate the vesting of all or any part of any Stock Option and/or waive any limitations or restrictions, if any, for all or any part of an award. 6.4. Acceleration Upon Termination of Employment. In the case of a Holder whose employment with the Company or a Subsidiary is involuntarily terminated for any reason (other than for cause), the Committee may accelerate the vesting of all or any part of any award and/or waive in whole or in part any or all of the remaining limitations or restrictions imposed hereunder or pursuant to the Agreement. Section 7. Forfeiture Provisions Following a Termination of Employment. 7.1. This Section 7.1 shall apply to all awards granted under this Plan except to the extent that the applicable award agreement provides otherwise. Notwithstanding any provision in this Plan to the contrary, in any instance where the rights of the Holder of an award granted under the Plan extend past the date of termination of the Holder's employment, all of such rights shall immediately and automatically terminate and be forfeited if, in the determination of the Committee, the Holder at any time during a twenty-four month period following his or her termination of employment, directly or indirectly, either (i) personally or (ii) as an employee, agent, partner, shareholder, officer or director of, consultant to, or 5 otherwise of any entity or person engaged in any business in which the Company or any Subsidiary is engaged, or is actively proposing to engage at the time of such termination of employment, engages in conduct that breaches his or her duty of loyalty to the Company or any Subsidiary or that is in material competition with the Company or any Subsidiary or is materially injurious to the Company or any Subsidiary, monetarily or otherwise, which conduct shall include, but not be limited to: (i) disclosing or using any confidential information pertaining to the Company or any Subsidiary; (ii) any attempt, directly or indirectly, to induce any employee of the Company or any Subsidiary to be employed or perform services elsewhere; or (iii) any attempt, directly or indirectly, to solicit the trade of any customer or supplier or prospective customer or supplier of the Company or any Subsidiary; or (iv) disparaging the Company or any Subsidiary or any of their respective officers or directors. The determination of whether any conduct, action or failure to act falls within the scope of activities contemplated by this Section shall be made by the Committee, in its discretion, and shall be final and binding upon the Holder. A determination that any particular conduct, action or failure falls outside the scope of activities contemplated by this Section shall not imply that, or be determinative of whether, such conduct, action or failure is otherwise lawful or appropriate. For purposes of this paragraph, a Holder shall not be deemed to be a shareholder of a competing entity if the Holder's record and beneficial ownership of equity securities of said entity amount to not more than one percent (1%) of the outstanding equity securities of any company subject to the periodic and other reporting requirements of the Exchange Act. In the event the existence of any circumstance which would trigger the forfeiture of an award pursuant to this Section 7.1 but for the fact that said award has previously been converted into or exercised for other securities of the Company (e.g., upon the exercise of stock options), or converted into cash or other property (e.g., upon the sale by or for the account of the Holder of Common Stock acquired by him or her upon the exercise of Stock Options), whether before or after the termination of employment, then, in such event, said securities, or cash or other property, as the case may be, shall be deemed to be held in trust for the Company and shall be promptly paid over to the Company upon demand (net of any amounts that may have been theretofore actually paid by the Holder to the Company in respect thereof (e.g., as the cash exercise price of a warrant). By virtue of his or her acceptance of the award under the Plan to which this Agreement relates, the Holder shall be irrevocable deemed to have agreed to be bound by the provisions of this Section 7.1. The Holder further recognizes that (i) the Company would be irreparably injured in the event of a breach by the Employee of any of his obligations under this Section 7; (ii) monetary damages would not be an adequate remedy for any such breach; and (iii) the Company shall be entitled to injunctive relief, in addition to any other remedies that it may have, in the event of any such breach. Section 8. Amendments and Termination. 8.1. Amendments to Plan. 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 shareholders of the requisite number of outstanding shares of Common Stock if (a) it increases the aggregate number of shares of Common Stock which are available pursuant to the Plan, (except as provided in Section 3 hereof) or (b) the failure to obtain such approval would adversely affect the compliance of the Plan with the requirements of any applicable law, rule or regulation. 8.2. Amendments to Individual Awards. The Committee may amend the terms of any award granted under the Plan; provided, however, that subject to Section 3 hereof, no such amendment may be made by the Committee which in any material respect impairs the rights of the Holder without the Holder's consent. Section 9. Term of Plan. 9.1. Effective Date. The Plan shall be effective upon approval of the shareholders of the Company. 9.2. Termination Date. No award shall be granted pursuant to the Plan on or after the tenth anniversary of its effective date, but awards granted prior to or on such date may extend beyond that date. The Plan shall terminate at such time as no further awards may be granted and all awards granted under the Plan are no longer outstanding. 6 Section 10. General Provisions. 10.1. Investment Representations. The Committee may require each person acquiring shares of Common Stock pursuant to an award under the Plan to represent to and agree with the Company in writing that the Holder is acquiring the shares for investment without a view to distribution thereof. 10.2. 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. 10.3. No Right of Employment. Nothing contained in the Plan or in any award hereunder shall be deemed to confer upon any employee 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 employees at any time. 10.4. Withholding Taxes. Not later than the date as of which an amount first becomes includible in the gross income of the Holder for federal income tax purposes with respect to any award under the Plan, the Holder 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 Common Stock, including Common 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 Holder'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 Holder from the Company or any Subsidiary. 10.5. Governing Law. To the extent not preempted by the laws of the United States, the laws of the State of New Jersey, without reference to conflict of laws provisions, shall be the controlling law in all matters relating to the Plan and all awards made and actions taken thereunder. 10.6. Other Benefit Plans. Any award granted 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). 10.7. 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 awards granted under the Plan to an employee 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. 10.8. Non-Transferability. Other than the transfer of a Stock Option by will, by the laws of descent and distribution, or pursuant to the express provisions of the applicable Agreement, no award under the Plan may be alienated, sold, assigned, hypothecated, pledged, exchanged, transferred, encumbered or charged, and any attempt 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. Except as expressly provided in any applicable Agreement, any Stock Option or other award granted under this Plan shall be only exercisable during the lifetime of the Holder by the Holder or by his or her guardian or legal representative. Notwithstanding the foregoing, the Company may grant Non-Qualified Stock Options that are transferable, without payment of consideration, to immediate family members of the Holder, to trusts or partnerships for such family members, or to such other parties as the Committee may approve (as evidenced by the applicable award agreement or an amendment thereto), and the Company may also amend outstanding Non-Qualified Stock Options to provide for such transferability. 10.9. Applicable Laws. The obligations of the Company with respect to all 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, 7 without limitation, the effectiveness of a registration statement under the Securities Act of 1933, as amended, and (ii) the rules and regulations of any securities exchange on which the Common Stock may be listed or the NASDAQ National Market System if the Common Stock is designated for quotation thereon. 10.10. Conflicts. If any of the terms or provisions of the Plan conflict with the requirements of Rule 16b-3 under the Exchange Act, 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. 10.11. Written Agreements. Each award granted under the Plan shall be confirmed by, and shall be subject to the terms of the Agreement executed by the Company and the Holder. The Committee may terminate any award made under the Plan if the Agreement relating thereto is not executed and returned to the Company within 60 days after the Agreement has been delivered to the Holder for his or her execution. 10.12. Common Stock Certificates. Notwithstanding anything to the contrary contained herein, whenever certificates representing shares of Common Stock subject to an award are required to be delivered pursuant to the terms of the Plan, the Company may in lieu of such delivery requirement comply with the provisions of Section 14A:7-11 of the New Jersey Business Corporation Act. All certificates for shares of Common 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 Common 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. 10.13. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Holder by the Company, nothing contained herein shall give any such Holder any rights that are greater than those of a general creditor of the Company. 10.14. Certain Mergers. If in connection with a merger, reorganization, consolidation, share exchange, transfer of assets or other transaction having similar effect involving the Company ("Merger") in which the Company is not the surviving corporation or pursuant to which a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, or converted into, or otherwise become shares of another corporation, the surviving, continuing, successor or purchasing corporation, as the case may be (the "Acquiring Corporation"), does not assume the Company's rights and obligations under outstanding award agreements or substitute awards in respect of the Acquiring Corporation's stock for outstanding awards, the Board shall provide prior to the Merger that any unexercisable and/or unvested portion of the outstanding awards shall be immediately exercisable and vested as of a date prior to such Merger, as the Board so determines. The exercise and/or vesting of any award that was permissible solely by reason of this Section 10.14 shall be conditioned upon the consummation of the Merger. Any awards which are neither assumed by the Acquiring Corporation nor exercised as of the date of the Merger shall terminate effective as of the effective date of the Merger. 8 -----END PRIVACY-ENHANCED MESSAGE-----