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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For Fiscal Year Ended September 30, 1996
Commission File Number 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Ram Ridge Road, Spring Valley, New York 10977
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (914) 425-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
The New York Stock Exchange, Inc.
Common Stock $.01 par value The Pacific Stock Exchange, Inc.
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The New York Stock Exchange, Inc.
Common Stock Purchase Rights The Pacific Stock Exchange, Inc.
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K x
---
$73,988,128
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 20, 1996 (assuming
solely for purposes of this calculation that all directors and executive
officers of the Registrant are "affiliates").
18,696,652
Number of shares of common stock outstanding as of December 20, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into
this Annual Report on Form 10-K:
IDENTITY OF DOCUMENTS PARTS OF FORM 10-K
INTO WHICH DOCUMENT
IS INCORPORATED
Form 8-K of Registrant Filed September 8, 1995,
as amended on October 4, 1995 and October 12, 1995 Part II, Item 9
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PART I
ITEM 1. Business.
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GENERAL
Pharmaceutical Resources, Inc. ("PRI") is a holding company
which, through its subsidiaries, is in the business of manufacturing and
distributing a broad line of generic drugs. PRI operates primarily through
its wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par"), a
manufacturer and distributor of generic drugs. In May 1995, PRI-Research,
Inc., a newly created subsidiary of PRI, formed a joint venture, Clal
Pharmaceutical Resources Limited Partnership (the "Joint Venture"), with
Clal Pharmaceutical Industries Ltd. ("Clal") to research and develop
generic pharmaceutical products. PRI has five other subsidiaries, the
activities of which are not significant. PRI was organized as a subsidiary
of Par under the laws of the State of New Jersey on August 2, 1991. On
August 12, 1991, Par effected a reorganization of its corporate structure,
pursuant to which PRI became Par's parent company. References herein to
the "Registrant" or the "Company" shall be deemed to refer to PRI and all
of its subsidiaries since August 12, 1991, or Par and all of its
subsidiaries prior thereto, as the context may require. The Company's
executive offices are located at One Ram Ridge Road, Spring Valley, New
York 10977, and its telephone number is (914) 425-7100.
The Company's current product line consists of prescription and,
to a much lesser extent, over-the-counter drugs. Recently, the Company
also has introduced one nutritional supplement. Approximately 102 products
representing various dosage strengths of 38 drugs are currently being
marketed (see "--Product Line Information"). Generic drugs are the
pharmaceutical and therapeutic equivalents of brand name drugs and are
usually marketed under their generic (chemical) names rather than by a
brand name. Normally, a generic drug cannot be marketed until the
expiration of applicable patents on the brand name drug. Generic drugs
must meet the same government standards as brand name drugs, but are
typically sold at prices below those of brand name drugs.
The Company markets its products primarily to wholesalers, drug
distributors and retail drug store chains principally through its own sales
staff. In addition, the Company, through its ParCare subsidiary, promotes
the sales efforts of wholesalers and drug distributors that sell the
Company's products to clinics, government agencies and other managed health
care organizations. The Company has developed its internal sales staff in
order to lessen its reliance on outside sales representatives (see "--
Marketing and Customers").
Significant Developments:
Financial Condition. The Company, in fiscal year 1996, continued
to experience declines in sales and gross margins which resulted in
continued net losses of $8,292,000. Net sales declined by 13% and gross
margins declined by 54% from the prior fiscal year. The decreases in sales
and gross margins continue to be attributable to lower pricing of the
Company's products as a result of intense competition and a less profitable
product mix (see "--Competition" and "Management's Discussion and Analysis
of Financial Condition--Results of Operations").
Continuing losses incurred by the Company would adversely affect
the Company's liquidity and, accordingly, its ability to fund its research
and development operations as well as ventures relating to the development
or distribution of new products (see "--Product Line Information", "--
Research and Development" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations"). The Company, in
December 1996, entered into a new three-year loan arrangement providing for
a revolving line of credit up to the lesser of $20,000,000 or the borrowing
base as provided in the loan agreement. The loan is secured by
substantially all of the assets of the Company other than real property and
the Company has entered into a new cash management system requiring the
deposit of all receipts into a lockbox under the lender's control. The new
loan arrangement replaces the Company's previous revolving and term loan
facility with a separate bank (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition--
Liquidity and Capital Resources").
In response to its operating results and industry trends, the
Company implemented measures in the third quarter of fiscal year 1996 to
reduce costs and increase operating efficiencies. Such measures included
employee reductions of 49 people in various senior management and other
positions and reductions in certain expenses. This restructuring involved
a charge of $549,000 for fiscal year 1996, which consisted principally of
severance
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payments and other employee termination benefits (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Operating Expenses"). The Company has also
intensified its search for strategic alliances which would enable the
Company, among other things, to expand its product line, increase research
and development activities and obtain additional capital (see "--Product
Line Information" and "--Research and Development").
Changes in Senior Management. The Company made significant
changes in senior management during fiscal year 1996, including changes of
its chief financial officer and executives in charge of operations,
regulatory and scientific affairs, human resources and sales and marketing.
Generally, such changes were associated with the Company's efforts to
improve efficiencies and reduce costs in key areas of operations. As a
result of these changes, a significant portion of the Company's senior
management have been promoted from within the Company and are currently in
the process of assuming greater responsibility (see "Directors and
Executive Officers of the Registrant--Executive Officers"). The Company is
also seeking to hire a president of Par to assume the day-to-day
responsibilities for Par's operations and is negotiating with a candidate.
PRODUCT LINE INFORMATION
The Company operates primarily in one industry segment, namely,
the manufacture and distribution of generic pharmaceuticals. Products are
marketed principally in oral solid form consisting of tablets, caplets and
two-piece hard-shell capsules, and to a lesser extent the Company
distributes a small number of products in the forms of creams and liquids
(see "--Research and Development").
Par markets approximately 84 products, representing various
dosage strengths of 29 drugs manufactured by the Company and approximately
18 products, representing various dosage strengths of 9 drugs, that are
manufactured for it by other companies (see "--Research and Development",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Sales", "--Gross Margins" and "Notes to
Financial Statements--Distribution Agreements"). Par holds ANDAs (as
defined below) for the drugs which it manufactures. The names of all of
the drugs under the caption "Competitive Brand-Name Drug" are trademarked.
The holders of the trademarks are non-affiliated pharmaceutical
manufacturers.
Name Competitive Brand-Name Drug
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Central Nervous System:
Alprazolam Xanax
Benztropine Mesylate Cogentin
Carisoprodol and Aspirin Soma Compound
Chlorzoxazone Paraflex
Cyproheptadine Hydrochloride Periactin
Doxepin Hydrochloride Sinequan, Adapin
Fluphenazine Hydrochloride Prolixin
Flurazepam Hydrochloride Dalmane
Haloperidol Haldol
Imipramine Hydrochloride Tofranil
Meclizine Hydrochloride Antivert
Methocarbamol and Aspirin Robaxisal
Temazepam Restoril
Triazolam Halcion
Cardiovascular:
Atenolol Tenormin
Captopril Capoten
Clonidine and Chlorthalidone Combipres
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
Isosorbide Dinitrate Isordil
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Cardiovascular (continued):
Methyldopa and Hydrochlorothiazide Aldoril
Metoprolol Tartrate Lopressor
Minoxidil Loniten
Pindolol Visken
Triamterene and Hydrochlorothiazide Maxzide
Anti-Inflammatory:
Ibuprofen Advil, Nuprin, Motrin
Indomethacin Indocin
Piroxicam Feldene
Anti-Infective:
Metronidazole Flagyl
Nystatin Mycostatin
Anti-Cancer:
Megestrol Acetate Megace
Other:
Allopurinol Zyloprim
Dexamethasone Decadron
Glipizide Glucotrol
Metaproterenol Sulfate Alupent
Propantheline Bromide Pro-Banthine
Silver Sulfadiazine (Thermazene) Silvadene
In January 1996, the Company established a subsidiary, Nutriceutical
Resources, Inc., to focus on the development and manufacture of
pharmaceutical quality nutritional supplements. To date, the Company has
introduced one nutritional supplement, melatonin. Revenues generated from
this product have not been significant.
The Company seeks to introduce new products not only through internal
research and development, but also through joint venture, distribution and
other agreements with pharmaceutical companies located throughout the world
(collectively, "Collaborative Agreements"). As part of that strategy, it
has pursued and continues to pursue arrangements or affiliations which it
believes, in general, will provide access to raw materials at favorable
prices, share development costs, generate profits from jointly developed
products and expand distribution channels for new and existing products.
The Company has various Collaborative Agreements, none of which in fiscal
year 1996 generated, or currently generates, significant revenues (see
"Notes to Financial Statements--Distribution Agreements").
In May 1995, the Company formed a strategic alliance with Clal, an
Israeli company, to develop, manufacture and distribute generic
pharmaceuticals worldwide. The alliance included an equity investment by
Clal in the Company and the establishment of the Joint Venture, which is
owned 49% by the Company and 51% by Clal. As part of the equity investment
in the Company, Mony Ben-Dor of Clal Industries Ltd. was elected to the
Company's Board of Directors in May 1995 (see "Directors and Officers of
the Registrant" and "Certain Relationships and Related Transactions").
While approximately 35 compounds have been identified for development by
the Joint Venture, eight currently are under active development. The
Company has not filed any ANDAs with respect to such potential products at
this time. The scientific process of developing new products is complex and
time consuming, as is obtaining U.S. Food and Drug Administration ("FDA")
approval, and the development of products by the Joint Venture may be
curtailed in the early or later stages of development due to the
introduction of competing generic products or for other reasons (see "--
Research and Development" and "--Competition"). In fiscal year 1996, the
Company and Clal only made contributions of $1,470,000 and $1,530,000,
respectively, to the Joint Venture, although their funding commitments for
the fiscal year were $2,935,000 and $3,055,000, respectively. The Company
and Clal are negotiating to amend their remaining funding commitments for
1996 in order to reflect the present and contemplated capital requirements
of the Joint Venture, although they have not yet amended their written
agreement. The Company and Clal currently have additional funding
commitments of $2,455,000 and $2,555,000, respectively, in 1997. In the
event that the Company and Clal do not reach a written agreement and either
party makes an additional capital contribution to the Joint Venture, the
other party's share in the profits and capital of the Joint Venture will be
diluted.
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The Company has a distribution agreement with Sano Corporation
("Sano") which gives Par the right to exclusively distribute Sano's generic
transdermal products in the United States, and the right of first refusal
in other markets. Sano develops transdermal delivery systems utilizing a
patch that incorporates the appropriate drug dosage into an adhesive that
attaches the patch to the skin. Transdermal delivery offers significant
benefits over oral delivery, including improved efficacy, increased patient
compliance, reduced side effects, reduced interaction with other drugs in
use by a patient and a more consistent and appropriate drug level in the
bloodstream, all of which generally result in lower overall patient care
costs. Sano is developing two generic nitroglycerin patches, one generic
nicotine patch and one generic clonidine patch which are covered by the
agreement. Par has paid Sano a portion of the development expense for such
products. To date, Sano has submitted three ANDAs to the FDA and
anticipates submitting additional ANDAs in the future. The Company intends
to purchase manufactured products from Sano, when approved by the FDA, at
cost and share in the gross profits from the sale. However, there can be no
assurance that the products under Sano's ANDAs will obtain FDA approval or,
if brought to market, will generate significant revenues (see "--Research
and Development", "--Competition" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Financial Condition--
Liquidity and Capital Resources").
RESEARCH AND DEVELOPMENT
The Company's research and development activities consist of (i)
identifying and conducting patent and market research on brand name drugs
for which patent protection has expired or is to expire in the near future,
(ii) researching and developing new product formulations based upon such
drugs, (iii) obtaining approval from the FDA for such new product
formulations, and (iv) introducing state-of-the-art technology to improve
production efficiency and enhance product quality. The Company contracts
with outside laboratories to conduct biostudies which, in the case of oral
solids, generally are required for FDA approval. Biostudies are used to
demonstrate that the rate and extent of absorption of a generic drug are
not significantly different from the corresponding brand name drug and
currently cost in the range of $100,000 to $500,000 per study. During the
1996 fiscal year, the Company contracted with outside laboratories to
conduct biostudies for two potential new products and will continue to do
so in the future. Biostudies must be conducted and documented in
conformity with FDA standards (see "--Government Regulation").
The research and development of oral solid products, including
preformulation research, process and formulation development, required
studies and FDA approval, has historically taken approximately two to three
years. Accordingly, Par typically selects for development products that it
intends to market several years in the future. However, the length of time
necessary to bring a product to market can vary significantly and can
depend on, among other things, availability of funding or problems relating
to formulation, safety or efficacy (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Condition--Liquidity and Capital Resources"). Currently, the Company has
ANDAs pending with the FDA for three potential products, one application of
which is subject to litigation with a brand name pharmaceutical company.
No assurance can be given that the Company will successfully complete the
development of products currently under development or proposed for
development, that it will obtain regulatory approval for any such product
or that any approved product will be produced in commercial quantities.
The Company's profitability depends on the introduction of successful new
products to replace declining revenues from older products. The
failure of the Company to introduce new products in a timely manner could
have a material adverse effect on the Company's operating results and
financial condition.
The Company entered into a distribution agreement with Sano which
gives Par the right to exclusively distribute Sano's generic transdermal
drug products in the United States and the right of first refusal in other
markets. Under the terms of the agreement, the Company advanced to date
$5,371,000 to Sano for the development of four products, of which
$2,942,000 was advanced in fiscal year 1996. Sano has submitted an ANDA to
the FDA for one of its nicotine patches and two ANDAs for nitroglycerin
patches. Sano has advised the Company that, assuming approval by the FDA
in a timely manner, the nicotine patch may be available for sale during the
first six months of calendar 1997. After an initial public offering of
Sano's common stock, Sano repaid $1,500,000 of the
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advances in November 1995 which was treated as a credit to research and
development expenses in fiscal year 1996 (see "--Product Line Information",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Liquidity and Capital Resources" and
"Notes to Financial Statements--Distribution Agreements").
For its 1996, 1995 and 1994 fiscal years, the net research and
development expenses of the Company's continuing operations were
approximately $5,160,000, $5,487,000 and $3,874,000, respectively. The
Company plans that its expenditures will remain at approximately current
levels over the next fiscal year (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Operating Results--
Research and Development" and "--Financial Condition--Liquidity and Capital
Resources").
In May 1995, the Company formed the Joint Venture with Clal. The
Joint Venture has identified approximately 35 products for research and
eight are currently under development by the Joint Venture. The Joint
Venture continues to build its staff and has begun the preliminary stages
of research on certain of the identified products (see "--Product Line
Information" and "Management's Discussion and Analysis of Financial
Condition and Results of operations--Financial Condition--Liquidity and
Capital Resources").
MARKETING AND CUSTOMERS
The Company markets its products to drug wholesalers, distributors and
retail drug chains principally through its own sales staff. In 1995, the
Company completed its plans to eliminate its dependence upon outside sales
representatives and add additional internal sales personnel. These changes
were part of the strategy of the Company to emphasize sales of Par
products to wholesalers versus distributors (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations--Sales").
The Company markets its products under both Par and private labels
principally to wholesalers, distributors, retail drug store chains and, to
a lesser extent, drug manufacturers, repackagers and government agencies.
The Company plans to increase its sales and marketing efforts to increase
sales to customers in the managed health care market through ParCare, a
subsidiary established in September 1995 to focus on meeting the
specialized needs of managed health care organizations. Such customers
include health maintenance organizations, nursing homes, hospitals,
clinics, pharmacy benefit management companies and mail order customers.
The Company has experienced in the last several years a significant
change in its distribution channels. In general, sales of generic drugs to
distributors have been decreasing, while sales to wholesalers has been
increasing. The Company believes that competition between distributors and
wholesalers and consolidation among retailers has resulted in additional
and separate pressures to decrease prices. Additionally, aggressive
pricing strategies by distributors which are attempting to maintain or
increase market share have adversely affected the Company's ability to
market its products. Consequently, price reductions have resulted in lower
gross margins for the Company (see "--Competition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
The Company has approximately 200 customers. During fiscal year 1996,
sales to the Company's two largest customers, McKesson Drug Co., a
subsidiary of McKesson Corporation, and Goldline Laboratories, Inc., a
subsidiary of Ivax Corporation, amounted to 11% and 9%, respectively, of
net sales (see "Notes to Financial Statements--Accounts Receivable--Major
Customers"). Neither of such customers has written agreements with the
Company.
ORDER BACKLOG
The dollar amount of open orders, as of September 30, 1996, believed
by management to be firm, was approximately $7,800,000 and compares to
approximately $8,100,000 at September 30, 1995. Although these orders are
subject to cancellation without penalty, management expects to fill
substantially all of them in the near future. The Company has orders for
shipments for its customers which are consistent with the seasonal
purchasing patterns of its customers.
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COMPETITION
The generic pharmaceutical industry is highly and increasingly
competitive. The Company has identified at least ten principal
competitors, and experiences varying degrees of competition from numerous
other companies in the health care industry. The Company's competitors
include many generic drug manufacturers and a number of major branded
pharmaceutical companies which, as part of their business, market both
brand-name prescription drugs and generic versions of these brand-name
drugs. Many of the Company's competitors have greater financial and other
resources than the Company and are able to expend more for product
development and marketing.
Many major branded pharmaceutical companies have directly launched, or
have formed alliances to market, their patented drugs prior to patent
expiration as generic drugs. Because branded pharmaceutical companies do
not have to wait until the expiration of patent protection before
manufacturing such generic drugs, they have a distinct timing advantage
over strictly generic drug manufacturers. This competitive effort has had
a negative impact on the Company's ability to sell certain generic drugs to
its customers and to generate customary revenues from the launch of its new
products, as the channel of distribution is either closed or severely
limited or the Company is forced to meet lower market pricing.
As other manufacturers introduce generic products in competition with
the Company's existing products, market share and prices with respect to
such existing products typically decline. Similarly, the Company's
potential for profits is significantly reduced, if not eliminated, as
competitors introduce products prior to the Company. Accordingly, the
level of revenues and gross profit generated by the Company's current and
prospective products depends, in part, on the number and timing of
introductions of competing products and the Company's timely development
and introduction of new products (see"--Research and Development").
During fiscal year 1996, four of the Company's products accounted for
approximately 58% of its net sales and yielded the substantial portion of
the gross margin of the Company, with one of such products representing a
substantial portion of both net sales and gross margin. During the second
half of calendar year 1995, two generic pharmaceutical manufacturers
received FDA approval of a product for which the Company previously had
been the sole generic manufacturer. This product, along with two other
products, historically had accounted for a significant portion of net sales
and gross margin of the Company. Further, a competitor of the Company in
fiscal year 1996 received FDA approval for a very significant product of
the Company for which the Company previously had been the sole generic
manufacturer. Due to the increased competition with respect to these
products, the Company's sales and gross margins have been materially and
adversely affected.
The principal competitive factors in the generic pharmaceutical market
are (i) price, (ii) the ability to introduce generic versions of brand name
drugs promptly after their patents expire, (iii) reputation as a
manufacturer with integrity and quality products, (iv) level of service
(including maintenance of sufficient inventories for timely deliveries),
(v) product appearance, and (vi) breadth of product line. The Company has
expended more effort and resources, including financial, in the areas of
sales, marketing, and research and development to better its competitive
position in the industry over the last three years.
RAW MATERIALS
The raw materials essential to the Company's manufacturing business
are purchased primarily from United States distributors of bulk
pharmaceutical chemicals manufactured by foreign companies. To date, the
Company has experienced no significant difficulty in obtaining raw
materials and expects that raw materials will generally continue to be
available in the future. However, since the federal drug application
process requires specification of raw material suppliers, if raw materials
from a specified supplier were to become unavailable, FDA approval of a new
supplier would be required. While a new supplier becomes qualified by the
FDA and its manufacturing process is judged to meet FDA standards, a delay
of six months or more in the manufacture and marketing of the drug involved
could result, which could in turn have an adverse effect on the Company's
financial condition. Generally the Company attempts to minimize the effects
of any such situation by specifying, where economical and feasible two or
more suppliers for its drug approvals.
EMPLOYEES
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As of September 30, 1996, the Company had approximately 390 employees.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation
by the Federal government, principally by the FDA, and, to a lesser extent,
by the Drug Enforcement Administration and state governments. The Federal
Food, Drug, and Cosmetic Act, the Controlled Substances Act, and other
Federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, recordkeeping, approval,
advertising and promotion of the Company's products. Noncompliance with
applicable requirements can result in judicially and/or administratively
imposed sanctions including the initiation of product seizures, injunction
actions, fines and criminal prosecutions. Administrative enforcement
measures can involve the recall of products, as well as the refusal of the
government to enter into supply contracts or to approve new drug
applications. The FDA also has the authority to withdraw approval of drugs
in accordance with regulatory due process procedures.
FDA approval is required before any new drug, including a generic
equivalent of a previously approved drug, can be marketed. To obtain FDA
approval for a new drug, a prospective manufacturer must, among other
things, demonstrate that its manufacturing facilities comply with the FDA's
current Good Manufacturing Practices ("cGMP") regulations. The FDA may
inspect the manufacturer's facilities to assure such compliance prior to
approval or at any other reasonable time. CGMP regulations must be
followed at all times during the manufacture and other processing of drugs.
To comply with the standards set forth in these regulations, the Company
must continue to expend significant time, money and effort in the areas of
production, quality control and quality assurance.
To obtain FDA approval of a new drug, a manufacturer must demonstrate,
among other requirements, the safety and effectiveness of the proposed
drug. There are currently three basic ways to satisfy the FDA's safety and
effectiveness requirements:
1. New Drug Applications ("NDA" or "full NDA"):
Unless either of the procedures discussed in paragraphs 2 and 3 below is
available, a prospective manufacturer must submit to the FDA full reports
of well-controlled clinical studies and other data to prove that a drug is
safe and effective and meets other requirements for approval.
2. "Paper" NDAs: In certain instances in the past,
the FDA permitted safety and effectiveness to be shown by submission of
published literature and journal articles in a so-called "paper" NDA. As a
result of passage of the Drug Price Competition and Patent Term Restoration
Act of 1984 (the "Waxman-Hatch Act"), "paper" NDAs are now recognized in
the statute, although they are infrequently used because of the lack of
sufficient or otherwise useable information in the literature on the
majority of drugs.
3. Abbreviated New Drug Applications ("ANDAs"): The
Waxman-Hatch Act established a statutory procedure for submission and FDA
review and approval of ANDAs for generic versions of drugs previously
approved by the FDA (such previously approved drugs are hereinafter
referred to as "listed drugs"). In place of clinical studies to establish
the generic drug's safety and effectiveness, an ANDA applicant typically is
required to submit bioavailability data generated from biostudies
demonstrating that the proposed product is bioequivalent to the listed
drug. Bioavailability data indicate the rate and extent of absorption of a
drug's active ingredient and its availability at the site of drug action,
typically measured through blood levels. A generic drug usually is deemed
to be bioequivalent to the listed drug if the rate and extent of absorption
of the generic drug are not significantly different from those of the
listed drug. For some drugs (e.g., topical antifungals), other means of
demonstrating bioequivalence may be required by the FDA, especially where
rate and/or extent of absorption are difficult or impossible to measure. In
addition to the bioequivalence data, an ANDA must contain virtually all
other information required of a full NDA (e.g., chemistry, manufacturing,
labeling, and stability data).
The Waxman-Hatch Act also established certain statutory protections
for listed drugs. Under the Waxman-Hatch Act approval of an ANDA for a
generic drug may not be made effective for interstate marketing until all
relevant patents for the listed drug have expired or been determined to be
invalid or not infringed by the generic drug. Prior to enactment of the
Waxman-Hatch Act, the FDA did not consider the patent status of a
previously
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approved drug. In addition, under the Waxman-Hatch Act, statutory non-
patent exclusivity periods are established following approval of certain
listed drugs, where specific criteria are met by the drug. If exclusivity
is applicable to a particular listed drug, the effective date of approval
of ANDAs (and, in at least one case, submission of an ANDA) for the generic
version of the listed drug is usually delayed until the expiration of the
exclusivity period, which, for newly approved drugs, can be either three or
five years. The Waxman-Hatch Act also provides for extensions of up to five
years of certain patents covering drugs to compensate the patent holder for
reduction of the effective market life of the patented drug resulting from
the time involved in the Federal regulatory review process.
During 1995, patent terms for a number of listed drugs were extended
when the Uruguay Round Agreements Act (the "URAA") went into effect to
implement the latest General Agreement on Tariffs and Trade (the "GATT") to
which the United States became a treaty signatory in 1994. Under GATT, the
term of patents was established as 20 years from the date of patent
application. In the United States, the patent terms historically have been
calculated at 17 years from the date of patent grant. The URAA provided
that the term of issued patents be either the existing 17 years from the
date of patent grant or 20 years from the date of application, whichever
was longer. The effect generally was to add patent life to already issued
patents, thus delaying FDA approvals of applications for generic products.
In addition to the Federal government, states have laws regulating the
manufacture and distribution of pharmaceuticals, as well as regulations
dealing with the substitution of generic for brand-name drugs. The
Company's operations are also subject to regulation, licensure and
inspection by the states in which they are located and/or do business.
The Company also is governed by Federal and state laws of general
applicability, including laws regulating matters of environmental quality,
working conditions, and equal employment opportunity.
The Federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990
("OBRA"). Generally, OBRA provides that a generic drug manufacturer must
offer the states an 11% rebate on drugs dispensed under the Medicaid
program and must have entered into a formal drug rebate agreement, as the
Company has, with the Federal Health Care Financing Administration.
Although not required under OBRA, the Company has also entered into similar
state agreements.
The Company received a warning letter in May 1994 from the FDA setting
forth certain alleged deviations from cGMP regulations and alleged
violations of related provisions of the Federal Food, Drug and Cosmetic
Act. In March of 1995, the FDA completed a reinspection of the Company's
main facility and confirmed that the Company is in substantial compliance
with cGMP. The reinspection confirmed effective correction of all
violations noted in the warning letter.
ITEM 2. Properties.
------ ----------
The Company's executive offices and a substantial portion of its
research and production facilities are housed in a 92,000 square foot
facility built to Par's specifications and occupied since fiscal 1986.
This building also includes research and quality control laboratories, as
well as packaging and warehouse facilities. The building is located in
Chestnut Ridge, New York, on a parcel of land of approximately 24 acres, of
which approximately 15 acres are available for future expansion. The
purchase of the land, facility and equipment was financed, in part,
9
<PAGE>
by Industrial Development Bonds issued by the County of Rockland Industrial
Development Agency in October 1984. The Bonds were fully paid in fiscal
year 1996, and the collateral documents associated with such bonds are in
the process of being released. Upon their release, title to the property
will formally transfer from the Industrial Development Agency to the
Company (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition--Financing" and "Notes to
Financial Statements--Long Term Debt").
The Company purchased, in fiscal year 1994, a 36,000 square foot
building on two acres of land in Chestnut Ridge, New York, across the
street from its executive offices for office space. The purchase of the
land and building was financed by a mortgage loan (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition--Financing" and "Notes to Financial Statements--Long
Term Debt").
Par owns a third facility consisting of six acres of land and a 33,000
square foot building located in Congers, New York, which is used for tablet
coating operations and product manufacturing. The purchase of the facility
and related renovations and equipment were financed in full by term loans.
The equipment serves as collateral for the loan (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition--Financing" and "Notes to Financial Statements--Long
Term Debt").
Under a lease expiring December 1997, with three five year extension
options, Par occupies approximately 77,000 square feet for office,
warehouse, and research and development space in Chestnut Ridge, New York
(see "Notes to Financial Statements--Commitments--Leases").
Par leases an 11,000 square foot facility in Upper Saddle River, New
Jersey, for certain of its manufacturing operations. The lease covering
this facility expires November 1998, and has three two-year renewal
options. (see "Notes to Financial Statements--Commitments--Leases").
The Company believes that its owned and leased properties are
sufficient in size, scope and nature to meet its anticipated needs for the
reasonably foreseeable future.
ITEM 3. Legal Proceedings.
------ -----------------
The Company is involved in certain litigation matters, including
certain product liability actions and actions by two former employees for,
among other things, breach of contract. Such actions seek damages from the
Company, including compensatory and punitive damages. The Company intends
to defend these actions vigorously. The Company believes that these
actions are incidental to the conduct of its business, and that the
ultimate resolution thereof will not have a material adverse effect on its
financial condition, results of operations or liquidity.
ITEM 4. Submission of Matters to a Vote of Security Holders.
------- ---------------------------------------------------
A Meeting of Shareholders of the Company was held on October 23, 1996.
The following matters were voted on and approved by the holders of shares
of the Company's Common Stock:
1. The first proposal presented to the shareholders
was to elect two members of the Company's Board of Directors, which
consists of seven members, to serve for a three-year term and until their
successors are duly elected and qualified. There were 14,590,177 and
14,584,170 shares of Common Stock cast in favor of electing Kenneth I.
Sawyer and Robin O. Motz, respectively, which represented a majority of the
shares of the Company's Common Stock cast for such proposal, and 1,267,369
and 1,273,376 shares were withheld, respectively. There were no broker non-
votes. The terms of office of Melvin Van Woert, Andrew Maguire, Mark
Auerbach, H. Spencer Matthews and Mony Ben-Dor continued as directors after
the meeting.
2. The second proposal presented to the shareholders
was to approve an amendment to the Company's 1990 Stock Incentive Plan to
increase the number of shares of the Company's Common Stock for which
options
10
<PAGE>
may be granted thereunder. There were 14,220,041 shares of Common Stock
cast in favor of such proposal, which represented a majority of the shares
of the Company's Common Stock cast for such proposal, 1,514,033 shares of
Common Stock cast against such proposal, and 123,472 shares abstained.
11
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
------ -------------------------------------------------------------
Matters.
-------
(a) Market information. The Company's Common Stock is traded on The New
York Stock Exchange ("NYSE") and the Pacific Stock Exchange under the
ticker symbol PRX. The following table shows the range of closing prices
for the Common Stock as reported by the NYSE for each calendar quarter
during the Company's two most recent fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended In
--------------------------
Quarter Ended 1996 1995
------------- ------------ ------------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
December 31 $9.13 $7.25 11.50 $7.50
March 31 8.00 6.75 11.13 7.75
June 30 8.50 5.00 12.88 9.88
September 30 5.50 3.38 11.38 8.38
</TABLE>
(b) Holders. As of December 20, 1996, there were approximately 3,700
holders of record of the Common Stock. The Company believes that, in
addition, there are a significant number of beneficial owners of its Common
Stock whose shares are held in "street name."
(c) Dividends. During the two most recent fiscal years, the Company
paid no cash dividends on its Common Stock. The payment of future
dividends on its Common Stock is subject to the discretion of the Board of
Directors and is dependent upon many factors, including the Company's
earnings, its capital needs, the terms of its financing agreements and its
general financial condition (see "Notes to Financial Statements--Long Term
Debt"). The Company's current loan agreement prohibits the declaration or
payment of any dividend, or the making of any distribution to any of the
Company's stockholders.
(d) Recent Stock Price. On December 20, 1996, the closing price of the
Common Stock on the NYSE was $4.00 per share.
12
<PAGE>
ITEM 6. Selected Financial Data
------ -----------------------
<TABLE>
<CAPTION>
Fiscal Year Ended In
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------- -------- -------- -------------------- --------------------
INCOME STATEMENT DATA (In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $ 57,959 $66,503 $69,169 $ 74,535 $52,493
Cost of goods sold 48,299 45,514 45,774 48,387 32,448
-------- ------- ------- -------- -------
Gross margin 9,660 20,989 23,395 26,148 20,045
Operating expenses:
Research and development 5,160 5,487 3,874 1,959 1,299
Selling, general and administrative 17,168 16,192 13,463 12,673 11,486
Restructuring charge 549 - - - -
-------- ------- ------- -------- -------
Total operating expenses 22,877 21,679 17,337 14,632 12,785
-------- ------- ------- -------- -------
Operating income (loss) (13,217) (690) 6,058 11,516 7,260
Settlements - 2,029 - (10,500) (230)
Other income 2,557 608 425 347 142
Interest expense (432) (499) (465) (602) (923)
-------- ------- ------- -------- -------
Income (loss) from continuing operations
before provision for income taxes (11,092) 1,448 6,018 761 6,249
Provision for income taxes - 836 1,785 650 2,150
-------- ------- ------- -------- -------
Income (loss) from continuing operations (11,092) 612 4,233 111 4,099
Income from discontinued operations 2,800 - 466 - 1,696
-------- ------- ------- -------- -------
Income (loss) before extraordinary item (8,292) 612 4,699 111 5,795
Extraordinary item - tax benefit of
utilization
of net operating loss carryforward - - - 300 2,150
-------- ------- ------- -------- -------
Income (loss) before change in accounting
principle (8,292) 612 4,699 411 7,945
Cumulative effect of change in accounting
principle - - 14,128 - -
-------- ------- ------- -------- -------
Net income (loss) $ (8,292) $ 612 $18,827 $ 411 $ 7,945
======== ======= ======= ======== =======
Income (loss) per share of common stock:
Continuing operations $(.60) $.04 $.26 $.01 $.28
Discontinued operations .15 - .03 - .11
Extraordinary item - - - .02 .15
Change in accounting principle - - .85 - -
-------- ------- ------- -------- -------
Net income (loss) $(.45) $.04 $1.14 $.03 $.54
======== ======= ======= ======== =======
Weighted average number of common and
common equivalent shares outstanding 18,467 17,143 16,495 15,814 14,826
======== ======= ======= ======== =======
BALANCE SHEET DATA
Working capital $ 20,716 $34,907 $19,996 $ 13,141 $ 8,061
Property, plant and equipment (net) 26,068 24,371 23,004 20,037 19,579
Total assets 84,946 90,917 69,202 57,239 45,089
Long-term debt, less current portion 2,971 4,259 5,490 5,820 7,528
Shareholders' equity 70,624 71,954 49,276 24,081 21,087
</TABLE>
13
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations.
---------------------
Certain statements in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995, including those concerning management's expectations with
respect to future financial performance and future events, particularly
relating to sales of current products as well as the introduction of new
manufactured and distributed products. Such statements involve known and
unknown risks, uncertainties and contingencies, many of which are beyond
the control of the Company, which could cause actual results and outcomes
to differ materially from those expressed herein. Factors that might
affect such forward-looking statements set forth in this Form 10-K include,
among others, (i) increased competition from new and existing competitors
and pricing practices from such competitors, (ii) the amount of funds
continuing to be available for internal research and development and
research and development joint ventures, (iii) research and development
project delays or delays in obtaining regulatory approvals and (iv) the
ability of the Company to retain and attract management personnel in key
operational areas.
RESULTS OF OPERATIONS
General
The Company incurred operating losses for the fiscal year ended
September 30, 1996 of $13,217,000 compared to operating losses of $690,000
in the prior fiscal year. The losses are principally due to sales and
gross margin declines, as described below. If sales declines are not
offset by increased sales of new distributed or manufactured products,
lower net sales and gross margins will continue and, accordingly, result in
further losses. In response to recent results and industry trends, the
Company has implemented measures to reduce costs and increase operating
efficiencies (see "Notes to Financial Statements--Commitments,
Contingencies and Other Matters--Restructuring").
The continued price and profit margin erosion on certain of the
Company's products reflects a trend currently being experienced in the
generic drug industry in general in the United States. The factors
contributing to the intense competition and affecting both the introduction
of new products and the pricing and profit margins of the Company, include,
among other things, (i) introduction of other generic drug manufacturers'
products in direct competition with the Company's significant products,
(ii) competition from brand name drug manufacturers selling generic
versions of their drugs, (iii) increased ability of generic competitors to
enter the market after patent expiration, diminishing the amount and
duration of significant profits, and (iv) willingness of generic drug
customers, including wholesalers and retail customers, to switch among
pharmaceutical manufacturers.
The Company plans to continue to invest in its internal research
and development efforts in addition to pursuing additional products for
sale through new and existing distribution agreements and research and
development joint ventures. There were no significant sales of any new
manufactured or distributed products introduced in the current fiscal year.
The Company hopes that it will, subject to FDA approval and other factors,
introduce new products in the next fiscal year as a result of its research
and development efforts and distribution agreements, including nicotine and
nitroglycerine patches from Sano and an internally developed product for
which ANDAs have been filed (see "--Research and Development"). No
assurance can be given that any additional products for sale by the Company
will result or that sales of additional products will reduce losses or
return the Company to profitability. Continuing losses would adversely
affect the Company's liquidity and, accordingly, its ability to fund
research and development or ventures relating to the distribution of new
products (see "--Financial Condition--Liquidity and Capital Resources").
Sales
Net sales of $57,959,000 for the fiscal year ended September 30,
1996 decreased $8,544,000, or 13%, from the prior fiscal year. The decline
is primarily due to decreased sales of manufactured products which resulted
in large part from lower pricing and continuing decreases in volume of one
of the Company's significant products, and to a lesser extent, two other
significant products. The sales decline was caused principally by the
introduction of competitive products by other drug manufacturers.
Increased sales of a lower margin distributed product
14
<PAGE>
partially offset the decline in sales of manufactured products. This
product contributed significantly to the increase in sales of distributed
products to $9,035,000 in fiscal year 1996 from $5,881,000 in the prior
fiscal year.
Sales for the fourth quarter of fiscal 1996 were $12,951,000, a
decrease of $4,539,000, or 26%, from $17,490,000 for the fourth fiscal
quarter of 1995. The decrease was primarily due to lower pricing and
decreased volume of certain of the Company's significant products as
previously discussed, caused principally by the introduction of competitive
products by other drug manufacturers.
Sales for the year ended September 30, 1995 of $66,503,000
decreased $2,666,000, or 4%, from the year ended October 1, 1994.
Distributed product sales decreased $5,492,000 principally due to decreased
demand and lower pricing resulting from intense competition from both
generic and brand name pharmaceutical companies. Sales of manufactured
products increased $2,826,000 primarily due to higher volume of one of the
Company's lower margin products and higher pricing of one of the Company's
significant products.
Levels of sales are principally dependent upon, among other
things, (i) pricing levels and competition, (ii) market penetration for the
existing product line, (iii) approval of ANDAs and introduction of new
manufactured products, (iv) introduction of new distributed products and
(v) the level of customer service (see "Business--Competition").
Gross Margins
The Company's gross margin for the year ended September 30, 1996
was $9,660,000 (17% of net sales) compared to $20,989,000 (32% of net
sales) for the prior fiscal year. The gross margin decline is primarily
due to continued lower selling prices and decreased volumes of certain
significant manufactured products resulting from the introduction of other
generic drug manufacturers' products in direct competition with the
Company's significant products. Gross margins on distributed products for
the current year also decreased from the prior year principally due to
continuing lower sales levels of higher margin products and increased sales
of a lower margin product.
The gross margin for the quarter ended September 30, 1996
decreased $6,126,000 to $(1,317,000) (-10% of net sales) from the
$4,809,000 (27% of net sales) recorded in the fourth quarter of the prior
fiscal year. The decline is primarily due to the continuing lower sales of
certain significant manufactured products, as discussed above. In
addition, an inventory adjustment, which lowered the cost of one of the
Company's products to its current market value, adversely affected the
margin during the current period.
Inventory write-offs, which are taken in the normal course of
business, amounted to $1,395,000 and $2,203,000 for the years ended
September 30, 1996 and September 30, 1995, respectively, and $463,000 and
$632,000 for the fourth quarters of fiscal years 1996 and 1995,
respectively. The inventory write-offs are related to the disposal of
finished products due to short shelf life and work in process inventory not
meeting the Company's quality control standards.
During fiscal year 1996, four of the Company's products accounted
for approximately 58% of its net sales and yielded the substantial portion
of the gross margin of the Company, with one of such products representing
a substantial portion of both net sales and gross margin. During the
second half of calendar year 1995, two generic pharmaceutical manufacturers
received FDA approval of a product for which the Company previously had
been the sole generic manufacturer. This product, along with two other
products, historically had accounted for a significant percentage of net
sales and gross margin of the Company. Primarily as a result of this
increased competition, net sales of this product decreased from $5,652,000
in fiscal year 1995 to $3,959,000 in fiscal year 1996, and gross margin
declined from $5,073,000 in fiscal year 1995 to $3,427,000 in fiscal year
1996. Further, a competitor of the Company in fiscal year 1996 received
FDA approval for a very significant product of the Company for which the
Company previously had been the sole generic manufacturer. As a result of
the increased competition, net sales of that product decreased from
$20,834,000 in fiscal year 1995 to $13,581,000 in fiscal year 1996, and
gross margin declined from $16,893,000 in fiscal year 1995 to $10,223,000
in fiscal year 1996. Due to the increased competition with respect to
these products, the Company's sales and gross margins have been materially
and adversely affected.
15
<PAGE>
Gross margin of $20,989,000 (32% of net sales) in fiscal year
1995 decreased $2,406,000 from $23,395,000 (34% of net sales) in 1994
primarily as a result of lower pricing and a decline in sales of
distributed product, as well as increased inventory write-offs and a shift
in product mix of manufactured product reflecting an increase in sales of
lower margin products and a decrease in sales of certain higher margin
products.
Operating Expenses
Research and Development
During the first quarter of fiscal year 1996, the Company
received a $1,500,000 reimbursement from Sano Corporation ("Sano") for
advances made to them in prior fiscal years for research and development
expenses. As a result of this reimbursement, net research and development
expenses for the year ended September 30, 1996 equalled $5,160,000 compared
to $5,487,000 in the prior fiscal year. Gross research and development
expenses for the year ended September 30, 1996 were $6,660,000 including
payments to Sano of $2,942,000 for the development of certain generic
transdermal products compared to $1,429,000 in the prior year. The Company
has a distribution agreement with Sano to distribute generic transdermal
products developed by Sano (see "Notes to Financial Statements-
Investments").
Research and development expenses for the fourth quarter ended
September 30, 1996 were $841,000 versus $2,102,000 in the corresponding
quarter of the prior fiscal year. The decrease is primarily attributable
to $996,000 of Sano payments incurred in the prior year.
To further expand its product line, the Company is continuing its
efforts to introduce new products from internal research and development
and from existing joint ventures, as well as searching for additional
research and development joint ventures. In May 1995, the Company formed
an alliance with Clal to develop, manufacture and distribute generic
pharmaceuticals worldwide (see "Business--Product Line Information" and
"Notes to Financial Statements--Investment in Joint Venture",
"Shareholders' Equity" and "--Financial Condition--Liquidity and Capital
Resources"). A research and development joint venture, formed in Israel
and owned 49% by the Company and 51% by Clal, has commenced operations and
identified approximately 35 products for research. The Company recorded its
share of such joint venture's research and development expenses of $499,000
for the current fiscal year.
For the year ended September 30, 1995, research and development
costs increased $1,613,000 to $5,487,000 from the prior fiscal year
reflecting management's efforts to expand its product line under various
internal and co-development programs.
Selling, General and Administrative
Selling, general and administrative costs were $17,168,000 (30%
of net sales) for the year ended September 30, 1996 versus $16,192,000 (24%
of net sales) for the prior fiscal year. The increase is primarily
attributable to fees for consulting and professional services, increased
advertising and developmental marketing costs, severance costs, increased
bad debt expense and costs related to implementing information systems to
support the Company's operations. In addition, the Company incurred costs
in strengthening its managed care and in-house sales force in an effort to
compete more effectively under the current market conditions.
Selling, general and administrative costs were $4,292,000 (33% of
net sales) for the three month period ended September 30, 1996 compared to
$4,248,000 (24% of net sales) for the corresponding period in the prior
fiscal year.
Selling, general and administrative costs for the fiscal year
ended September 30, 1995 increased 20% to $16,192,000 (24% of net sales)
from $13,463,000 (19% of net sales) for the year ended October 1, 1994
principally due to certain non-recurring charges including legal and
accounting expenses related to merger and acquisition or other strategic
alliance negotiations, expenses incurred in connection with the Company's
response to FDA inquiries with respect to current Good Manufacturing
Practices and costs associated with the termination of the broker network
used by the Company to sell its products.
Restructuring Charge
16
<PAGE>
The Company recorded a restructuring charge of $549,000 in the
current period to provide for costs associated with the reduction and
reorganization of current personnel (see "Business--General--Significant
Developments"). The implementation of measures to reduce costs and
expenses, including a reduction in spending on advertising, marketing, and
professional services, is expected to reduce operating costs in subsequent
periods due to established efficiencies and lower head count (see "Notes to
Financial Statements-Commitments, Contingencies and Other Matters-
Restructuring").
Settlements
In fiscal year 1995, the Company resolved claims against certain
former management members of the Company for recovery of, among other
items, salaries and money paid for indemnification. The settlements, in
the form of cash and securities of the Company, were valued at $2,029,000.
Other Income
Other income for the fiscal year ended September 30, 1996
increased to $2,557,000 from $608,000 in the prior fiscal year. The
increase is attributable to a gain on the sale of Sano common stock sold
during the fourth quarter of fiscal year 1996 (see "--Financial Condition--
Liquidity and Capital Resources").
Income Taxes
Management has determined, based on the Company's performance
this year and the uncertainty of the generic business in which the Company
operates, that future operating income might not be sufficient to recognize
fully the net operating loss carryforwards of the Company. Therefore, the
Company is not recognizing a benefit for its operating losses this year
(see "Notes to Financial Statements--Income Taxes"). In the prior fiscal
year, the Company recorded income tax expense of $836,000.
In fiscal year 1994, the Company adopted SFAS 109, "Accounting
For Income Taxes" ("SFAS 109") and recorded income of $14,128,000 which is
reflected as the cumulative effect of a change in accounting principle in
the financial statements. Significant portions of the income recognized
consist of net operating loss carryforwards and have been included to the
extent that the realization of such benefits is more likely than not.
The Internal Revenue Service ("IRS") has determined that certain
credits taken by the Company in prior years for research activities are not
permitted. A reserve of approximately $1,000,000 was provided upon
implementation of SFAS 109 in fiscal 1994. The Company paid to the IRS
approximately $1,000,000 during fiscal 1995 for the disallowed credits and
such payments were charged against the reserve which was previously
provided.
Discontinued Operations
In fiscal year 1996, the Company recorded income from
discontinued operations of $2,800,000, reversing the remaining reserves
which had been provided for Quad Pharmaceuticals, Inc. ("Quad"), whose
operations were discontinued in 1991 (see "Notes to Financial Statements--
Discontinued Operations").
FINANCIAL CONDITION
Liquidity and Capital Resources
Working capital of $20,716,000 at September 30, 1996 represents a
decrease of $14,191,000 from the last fiscal year end principally due to
the use of cash for capital expenditures of $4,746,000, for investments in
research and development joint ventures of $1,470,000 and in Fine-Tech Ltd.
of $1,000,000, as discussed below, and to fund operating losses. The
working capital ratio of 2.9x declined from 3.5x at the prior fiscal year
end. Inventory levels increased to $19,352,000 from $15,364,000 in the
prior fiscal year, primarily due to the building of inventories of certain
manufactured products.
17
<PAGE>
In September 1996, the Company sold 135,000 shares of its
holdings in Sano Corporation at average prices ranging from $19.50 to
$19.88 per share. Net proceeds received from the transactions amounted to
approximately $2,669,000.
As part of the alliance formed with Clal, the Company invested
$1,960,000 in the research and development joint venture in fiscal 1995 and
$1,470,000 was invested during fiscal 1996. The Company is committed to
invest an additional $3,920,000 (which includes the balance of the
commitment from fiscal year 1996) in the joint venture through fiscal 1997.
The Company and Clal are negotiating to amend their remaining funding
commitments for 1996 in order to reflect the present and contemplated
capital requirements of the Joint Venture, although they have not yet
amended yet their written agreement (see "Business--Product Line
Information").
In December 1995, the Company purchased 10% of the shares of
Fine-Tech Ltd., an Israeli pharmaceutical research and development company
in which Clal has a significant ownership interest, for $1,000,000 and
obtained certain exclusive rights to purchase products from Fine-Tech Ltd.
not commonly sold in North America, South America or the Caribbean.
The Company expects to fund its research and development
activities, including its obligations under the existing distribution and
development arrangements discussed above, out of its working capital, and
if necessary with borrowings against its line of credit, to the extent then
available (see "--Financing"). If, however, the Company continues to
experience significant losses, its liquidity and, accordingly, its ability
to fund research and development or ventures relating to the distribution
of new products will be materially and adversely affected.
Financing
At September 30, 1996, the Company's total outstanding long-term
debt was $5,113,000. The long-term debt consists principally of
outstanding loans to two banks of $4,683,000 which are secured by certain
assets of the Company and are to be repaid in monthly installments through
2001.
On December 27, 1996, Par Pharmaceutical, Inc. ("Par") entered
into a Loan and Security Agreement (the "Loan Agreement") with General
Electric Capital Corporation ("GECC") which provides Par with a three-year
revolving line of credit. 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 as
determined from time to time by GECC. The interest rate charge on the line
of credit is based upon a rate per annum of 2.50% above the 30-day
commercial paper rate for high-grade unsecured notes adjusted monthly. The
line of credit with GECC is secured by the assets of Par and Pharmaceutical
Resources, Inc. ("PRI") other than real property and is guaranteed by PRI.
As a condition to 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 locked
accounts over which GECC has sole operating control and which are applied
on a daily basis to reduce amounts outstanding under the line of credit. As
of December 30, 1996, approximately $3,500,000 was outstanding under such
line of credit. The revolving credit facility, which is subject to
covenants based on various financial benchmarks, replaced PRI's previous
$16,000,000 revolving facility and $4,000,000 term loan facility, with
Fleet Bank, N.A. Any significant reduction in the borrowing base will
adversely affect the Company's liquidity.
At September 30, 1996, the Company had borrowed $355,000 under a
line of credit maintained at a second bank, which line is secured by
equipment purchased. The interest rate is based on the prime rate plus a
premium. Additionally, the Company has a mortgage loan with this lender in
the original principal amount of $1,340,000. The loan bears interest during
the first five years of its term at a rate of 8.5% per annum and thereafter
at the Prime Rate plus 1.75%. It is due in equal monthly installments
until May 1, 2001, at which time the remaining principal balance with
interest is due. The loan is secured by certain real property (see
"Business--Property"). At September 30, 1996, the outstanding balance of
the loan was $1,183,000 (see "Notes to Financial Statements--Long-Term
Debt").
ITEM 8. Financial Statements and Supplementary Data.
------ -------------------------------------------
See Index to Financial Statements after Signature Page.
18
<PAGE>
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
------ ---------------------------------------------------------------
Financial Disclosure.
--------------------
In September 1995, the Company changed accountants, from Richard
A. Eisner and Co., LLP. to Arthur Andersen LLP. The Company filed a Report
on Form 8-K in connection with such change with the Securities and Exchange
Commission on September 8, 1995 - which Form 8-K subsequently was amended
on October 4, 1995 and on October 12, 1995, all of which are hereby
incorporated herein by reference.
19
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
------- --------------------------------------------------
Directors
The Company's Certificate of Incorporation provides that the
Board shall be divided into three classes, with the term of office of one
class expiring each year. The Class I, Class II and Class III directors of
the Company have terms which expire in 1997, 1998 and 1999, respectively.
The following table sets forth certain information with respect to each of
Class I, II and III directors and the year each was first elected as a
director:
<TABLE>
<CAPTION>
Year
of First
Name Age (as of 12/96) Election
---- ----------------- --------
Class I
<S> <C> <C>
Mark Auerbach (1)(2)............................................. 58 1990
Since June 1993, the Senior Vice President and Chief Financial
Officer of Central Lewmar L.P., a distributor of fine papers.
From August 1992 to June 1993, a partner of Marron Capital
L.P., an investment banking firm. From July 1990 to August
1992, President, Chief Executive Officer and Director of
Implant Technology Inc., a manufacturer of artificial hips and
knees. Director of Acorn Venture Capital Corporation, a
closed end investment company, and director and Chairman of
the Board of Oakhurst Company, Inc., a holding company
whose subsidiaries operate automotive after-market
distributors.
H. Spencer Matthews(2)........................................... 75 1990
Since 1986, President and Chief Executive Officer of
Dispense-All South Coast, Inc., and Dispense-All of Central
Florida, Inc., two companies which are wholesalers of juice
concentrates. Rear Admiral, United States Navy (Retired).
Mony Ben-Dor(1)(2)(4)............................................ 50 1995
Since August 1993, Vice President, New Business
Development of Clal Industries, Ltd., a holding company based
in Israel which owns all of the stock of Clal, and since
December 1995, a director of Clal. From 1988 to August 1993,
Mr. Ben-Dor was an executive with Eisenberg Group of
Companies, a holding company based in Israel.
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Class II
Andrew Maguire, Ph.D.(1)(3)(4)................................... 56 1990
Since January 1990, President and Chief Executive Officer of
Appropriate Technology International, a not-for profit
development assistance corporation.
Melvin H. Van Woert, M.D.(1)(4)(5)............................... 67 1990
Since 1974, Physician and Professor of Neurology and
Pharmacology and Doctoral Faculty, Mount Sinai Medical
Center, New York.
Class III
Kenneth I. Sawyer(3)(4)(5)....................................... 51 1989
Since October 1990, Chairman of the Board of the Company.
Since October 1989, President and Chief Executive Officer of
the Company. From September 1989 to October 1989, Interim
President and Chief Executive Officer of the Company. From
August 1989 to September 1989, counsel to the Company.
Director of Acorn Venture Capital Corporation, a closed-end
investment company.
Robin O. Motz, M.D., Ph.D. (2)(3)(5)............................. 57 1992
Since July 1978, Assistant Professor of Clinical Medicine,
Columbia University College of Physicians and Surgeons.
Physician engaged in a private practice of internal medicine.
</TABLE>
(1) A member of the Audit Committee of the Board of the Company.
(2) A member of the Compensation and Stock Option Committee of the Board of
the Company.
(3) A member of the Nominating Committee of the Board of the Company.
(4) A member of the Strategic Planning Committee of the Board of the
Company.
(5) A member of the Executive Committee of the Board of the Company.
In June 1995, Mony Ben-Dor was elected by the Board to fill a
vacancy on the Board as a Class I director in accordance with the terms of
the Stock Purchase Agreement (as defined below). Under such agreement,
Clal has the right to designate one-seventh of the members of the Board as
long as Clal owns 8% of the issued and outstanding Common Stock, and a
total of two-sevenths of the members of the Board if Clal owns at least 16%
of the issued and outstanding Common Stock. The Company has the right to
reject a designee of Clal if such person is not satisfactory to the Company
for good faith reasons. The Company also agreed to elect Clal's designee
to the Audit Committee, Compensation and Stock Option Committee and
Strategic Planning Committee of the Board. In the event that Clal does not
nominate directors to the Board or its committees or if Clal's designees
are not elected to the Board or its committees, Clal is permitted, under
the Stock Purchase Agreement, to designate representatives who may attend
meetings of the Board and its committees. Additionally, if Clal's
appointment of a director to the Audit Committee is prohibited by the rules
and regulations of the New York Stock Exchange, Inc., the Company will
provide Clal materials which are provided to committee members, the
appointment of the Company's auditors will be approved by the entire Board,
the Company will consult with directors nominated by Clal with respect to
Audit Committee actions and the directors nominated by Clal will have the
right to consent to certain changes in the Company's accounting principles.
Clal designated Mr. Ben-Dor, a director of Clal and a vice
president of Clal Industries Ltd., as its representative to serve on the
Board. Clal Industries Ltd. owns all of Clal's stock. Mr. Ben-Dor serves
on the Audit, Strategic Planning, and Compensation and Stock Option
Committees of the Board of Directors.
21
<PAGE>
Executive Officers
The executive officers of the Company consist of Mr. Sawyer as
President, Chief Executive Officer and Chairman of the Board and Dennis J.
O'Connor as Vice President, Chief Financial Officer and Secretary (elected
October 23, 1996). The executive officers of Par consist of Mr. Sawyer and
Mr. O'Connor. Mr. O'Connor has served as Vice President, Chief Financial
Officer and Secretary of the Company since October 1996. From June 1995 to
October 1996, he served as Controller of Par. Mr. O'Connor served as Vice
President--Controller of Tambrands, Inc., a consumer products company, from
November 1989 to June 1995. The Company is currently negotiating to hire a
president of Par who would assume the day-to-day responsibilities for the
operations.
22
<PAGE>
ITEM 11. Executive Compensation.
------- ----------------------
The following table sets forth compensation earned by or paid to
during fiscal years 1994 through 1996, the Chief Executive Officer of the
Company, and the most highly compensated executive officers of the Company
and/or Par at the end of fiscal year 1996 who earned over $100,000 in
salary and bonus. The Company awarded or paid such compensation to all
such persons for services rendered in all capacities during the applicable
fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
---------------------- --------------------------
Restricted Securities
Name and Stock Underlying All Other
Principal Position Year Salary ($) Bonus($) Awards($)(1) Options(#) Compensation($)(2)
- ---------------------- ---- ---------- -------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer, 1996 370,692 - - 75,000 38,530
President, Chief 1995 427,153 200,000 - - 49,806
Executive Officer 1994 407,253 100,000 - - 59,018
and Chairman
Robert I. Edinger, 1996 190,000 - - 20,000 3,481
Executive Vice 1995 189,038 - - 40,000 19,628
President, Chief 1994 180,000 50,000 - - 11,072
Financial Officer
and Secretary(3)
Robert M. Fisher, 1996 170,000 - - 20,000 3,232
Jr., 1995 188,691 - - 20,000 15,898
Executive Vice 1994 122,359 23,500 - 10,000 3,504
President, Corporate
Development, Sales
& Marketing (4)
</TABLE>
- --------------------------
(1) The Named Executives did not hold any shares of restricted stock at the
end of fiscal year 1996.
(2) For fiscal year 1996, includes insurance premiums paid by the Company
for term life insurance for the benefit of the Named Executives as follows:
Mr. Sawyer-$80; Mr. Edinger-$70; and Mr. Fisher-$63. The amount for Mr.
Sawyer also includes $38,376, representing the maximum potential estimated
dollar value of the Company's portion of insurance premium payments from a
split-dollar life insurance policy as if 1996 premiums were advanced to the
executive without interest until the earliest time the premiums may be
refunded by Mr. Sawyer to the Company. Also includes the following amounts
contributed by the Company to the Company 401(k) plan: Mr. Edinger-$3,411
and Mr. Fisher-$3,169. Messrs. Sawyer, Edinger and Fisher waived
contributions of $11,865 each to be made on their behalf in fiscal year
1996 by the Company with respect to the Par Pharmaceutical Inc. Retirement
Plan.
(3) Effective October 7, 1996, Mr. Edinger's employment with the Company
terminated (see "--Employment Agreements and Termination Arrangements").
(4) Effective November 15, 1996, Mr. Fisher's employment with the Company
terminated (see "--Employment Agreements and Termination Arrangements").
23
<PAGE>
The following table sets forth stock options granted to the Named
Executives during fiscal year 1996.
Stock Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term
--------------------------------------------------- ---------------------------------------
% of Total
Shares Options
Underlying Granted to
Options Employees Exercise Expiration
Name Granted (#) in Fiscal Year Price ($) Date 0%($) 5%($) 10%($)
---------------- -------------- -------------- ---------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer(1) 75,000 15.96% $7.125 5/23/01 $0 $682,013 $860,616
Robert I. Edinger (2) 20,000 4.26% $ 7.00 3/13/01 $0 $178,679 $225,471
Robert M. Fisher, Jr. (3) 20,000 4.26% $ 7.00 3/13/01 $0 $178,679 $225,471
</TABLE>
(1) Represents options granted pursuant to the Company's 1990 Incentive
Option Plan on May 24, 1996 of which 25,000 became exercisable immediately
and 25,000 become exercisable on each of May 24, 1997 and May 24, 1998,
respectively.
(2) Represents options granted pursuant to the Company's 1990 Incentive
Option Plan on March 14, 1996. Such options terminated on October 7, 1996
(see "--Employment Agreements and Termination Arrangements").
(3) Represents options granted pursuant to the Company's 1990 Incentive
Option Plan on March 14, 1996 of which 6,666 become exercisable on March
14, 1997 and 6,667 become exercisable on each of March, 14, 1998 and March
14, 1999, respectively. Such options will terminate earlier than the
expiration date in connection with Mr. Fisher's termination of employment
on November 15, 1996 (see "--Employment Agreements and Termination
Arrangements").
The following table sets forth the stock options exercised by the
Named Executives during fiscal year 1996 and the value, as of September 30,
1996, of unexercised stock options held by the Named Executives.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)
-------------------------- ---------------------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- ----------- ---------- ------------- ------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer 380,000 $1,378,862 645,000 50,000 -- --
Robert I. Edinger 0 0 60,000 40,000 -- --
Robert M. Fisher, Jr. 0 0 20,000 30,000 -- --
</TABLE>
Compensation of Directors
For service on the Board, Directors who are not employees of the Company
or any of its subsidiaries receive an annual retainer of $12,000, a fee of
$1,000 for each meeting of the Board attended, and a fee of $750 for each
committee meeting attended, subject to a maximum of $1,750 per day.
Chairmen of committees receive an additional annual retainer of $5,000 per
committee. New Directors are granted options to purchase shares on the
date initially elected to the Board. Directors who are employees of the
Company or any of its subsidiaries or are designated by Clal receive no
additional remuneration for serving as directors or as members of
committees of the Board. All directors are entitled to reimbursement for
out-of-pocket expenses incurred in connection with their attendance at
Board and committee meetings.
24
<PAGE>
Employment Agreements and Termination Arrangements
The Company has entered into an Employment Agreement with Mr. Sawyer,
which provides for his employment in his current position through October
4, 1996, subject to earlier termination by the Company for Cause (as such
term is defined in the agreement). Mr. Sawyer's term of employment will be
automatically extended each year for an additional one-year period unless
either party provides written notice by July 4th of such year that he or it
desires to terminate the agreement. Under the agreement with Mr. Sawyer,
the Company is required to use its best efforts to cause him to be
reelected to the Board of Directors during his term of employment. Mr.
Sawyer, pursuant to the terms of his employment agreement, is and will be
required to serve, if so elected, on the Board of Directors of the Company
and subsidiary, as well as any committees thereof.
Mr. Sawyer's agreement provides for certain payments upon termination of
his employment as a result of a material breach by the Company of his
employment agreement following a Change of Control (as such term is defined
in the agreement) of the Company. A material breach by the Company of the
employment agreement includes, but is not limited to, termination without
Cause and a change of his responsibilities. Mr. Sawyer is entitled to
receive, if such a termination occurs within two years following the Change
of Control of the Company, a lump sum payment equal to the lesser of three
times the sum of his annual base salary and most recent bonus or the
maximum amount permitted without the imposition of an excise tax on Mr.
Sawyer or the loss of a deduction to the Company under the Internal Revenue
Code of 1986, as amended (the "Code"), plus reimbursement of certain legal
and relocation expenses incurred by Mr. Sawyer as a result of the
termination of his employment and maintenance of insurance, medical and
other benefits for 24 months or until Mr. Sawyer is covered by another
employer for such benefits.
In addition, Mr. Sawyer's employment agreement provides for the Company
to purchase a residence within the vicinity of the Company's principal
offices for Mr. Sawyer to occupy for the duration of his term of
employment. In this connection, the Company purchased a condominium for
the price of $192,500, which Mr. Sawyer leased from the Company from
February 1995 until July 1996. The Company sold the condominium on July
31, 1996, and has no further obligation to provide a residence for Mr.
Sawyer (see "Certain Relationships and Related Transactions"). In fiscal
year 1996, Mr. Sawyer voluntarily agreed to reduce his salary, effective
July 1, 1996, to $350,000 per year.
The Company terminated Mr. Edinger's employment on October 7, 1996, and
is not currently making severance payments to him. The severance
arrangement of Mr. Edinger is the subject of a lawsuit filed against the
Company seeking $427,500 plus punitive damages of at least $106,875 (see
"Legal Proceedings").
The Company is paying Mr. Fisher severance payments of 12 months
continuation of his prevailing base salary, payable in weekly installments
from the date of termination of his employment. The Company also has
agreed to pay medical and other benefits for twelve months or until he is
covered by another employer for such benefits.
Pension Plan
The Company maintains a defined benefit plan (the "Pension Plan")
intended to qualify under Section 401(a) of the Code. Effective October 1,
1989, the Company ceased benefit accruals under the Pension Plan with
respect to service after such date. The Company intends that distributions
will be made, in accordance with the terms of the Plan, to participants as
of such date and/or their beneficiaries. The Company will continue to make
contributions to the Pension Plan to fund its past service obligations.
Generally, all employees of the Company or a participating subsidiary who
completed at least one year of continuous service and attained 21 years of
age were eligible to participate in the Pension Plan. For benefit and
vesting purposes, the Pension Plan's "Normal Retirement Date" is the date
on which a participant attains age 65 or, if later, the date of completion
of 10 years of service. Service is measured from the date of employment.
The retirement income formula is 45% of the highest consecutive five-year
average basic earnings during the last 10 years of employment, less 83 1/3%
of the participant's Social Security benefit, reduced proportionately for
years of service less than 10 at retirement. The normal form of benefit is
life annuity, or for married persons, a joint survivor annuity. None of
the Named Executives had any years of credited service under the pension
plan.
25
<PAGE>
Par currently maintains a retirement plan (the "Retirement Plan") and a
retirement savings plan. The Board of Directors of Par has authorized the
cessation of employer contributions to the Retirement Plan effective
December 30, 1996. Consequently, participants in the Retirement Plan will
no longer be entitled to any employer contributions under such plan for
1996 or subsequent years.
Compensation and Stock Option Committee
The compensation and stock option committee consists of Mark Auerbach,
Mony Ben-Dor, H. Spencer Matthews, and Robin O. Motz.
26
<PAGE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
-------- ---------------------------------------------------------------
The following table sets forth, as of the close of business on December
20, 1996, the beneficial ownership of the Common Stock by (i) each person
known (based solely on a review of Schedules 13D) to the Company to be the
beneficial owner of more than 5% of the Common Stock, (ii) each director of
the Company, (iii) the Named Executives, as defined in the "Executive
Compensation" section of this report, and (iv) all directors and current
executive officers of the Company and Par as a group (based upon
information furnished by such persons). Under the rules of the Securities
and Exchange Commission, a person is deemed to be a beneficial owner of a
security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose of or to direct the
disposition of such security. In general, a person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days. Accordingly, more than one
person may be deemed to be a beneficial owner of the same securities.
<TABLE>
<CAPTION>
Shares of % of
Common Common
Name and Address of Beneficial Owner Stock Stock
------------------------------------ ---------- --------
<S> <C> <C>
Clal Pharmaceutical Industries Ltd.(1)(2)..................... 4,032,379 19.6
Kenneth I. Sawyer(3)(4)....................................... 801,900 4.2
Melvin H. Van Woert, M.D.(3)(4)............................... 70,050 *
Andrew Maguire, Ph.D.(3)(4)................................... 36,300 *
H. Spencer Matthews(3)(4)..................................... 36,300 *
Mark Auerbach(3)(4)........................................... 47,000 *
Mony Ben Dor(1)(2)(4)......................................... 0 *
Robin O. Motz, M.D., Ph.D.(3)(4).............................. 42,000 *
Robert I. Edinger(5).......................................... 40,200 *
Robert M. Fisher, Jr.(6)...................................... 30,870 *
All directors and current executive officers (as of 12/20/96)
as a group (8 persons)(3)(7)................................ 1,044,212 6.0
</TABLE>
- ----------------------
* Less than 1%.
(1) The address of Clal Pharmaceutical Industries Ltd. ("Clal") and Mr. Ben Dor
is Clal House, 5 Druyanov Street, Tel Aviv 63143, Israel. Of the 4,032,379
shares of Common Stock shown as beneficially owned by Clal, 2,127,272 shares
are issued and outstanding, and 1,905,107 shares are issuable upon exercise
of issued and outstanding warrants owned by Clal.
(2) Mr. Ben Dor disclaims beneficial ownership of shares owned by Clal, of which
he is a director (see "Directors and Executive Officers of the Registrant"
and "Certain Relationships and Related Transactions").
(3) The business address of each of these individuals, for the purposes hereof,
is in care of Pharmaceutical Resources, Inc., One Ram Ridge Road, Spring
Valley, New York 10977. Includes shares of Common Stock which may be
acquired upon the exercise of options which are exercisable on or prior to
February 18, 1997, under the Company's stock option plans as follows: Mr.
Sawyer, 645,000 shares; Dr. Van Woert 69,000 shares; Mr. Maguire, 36,000
shares; Mr. Matthews, 36,000 shares; Mr. Auerbach, 47,000 shares; Dr. Motz,
42,000 shares; and Mr. O'Connor, 10,000 shares.
(4) A director of the Company.
(5) A former executive officer of the Company (see "Executive Compensation").
Mr. Edinger's address is 60 Old Crown Road, Old Tappan, New Jersey 07675.
(6) A former executive officer of the Company. Includes 30,000 shares which may
be acquired upon the exercise of options which are exercisable on or prior
to February 18, 1997 (see "Executive Compensation"). Mr. Fisher's address is
74 Turtleback Lane West, New Canaan, Connecticut 06840.
27
<PAGE>
(7) Current executive officers consist of Kenneth I. Sawyer and Dennis O'Connor
(see "Directors and Executive Officers of the Registrant--Executive
Officers"). Includes 10,662 shares beneficially owned by Dennis O'Connor, of
which 10,000 shares may be acquired on the exercise of options which are
exercisable on or prior to February 18, 1997.
Voting Arrangements
The Company and Clal entered into a Stock Purchase Agreement, dated
March 25, 1995, as amended on May 1, 1995 (the "Stock Purchase Agreement"),
pursuant to which Clal, on May 1, 1995, purchased 2,027,272 shares of
Common Stock and the Company issued to Clal two three-year warrants to
purchase an aggregate of 2,005,107 shares of Common Stock (the "Warrants").
Under the Stock Purchase Agreement, Clal agreed to vote all of the shares
of Common Stock held by it in favor of certain business combination
transactions of the Company and certain sales of assets or securities of
the Company (see "Certain Relationships and Related Transactions"). In
addition, Clal has certain rights under the Stock Purchase Agreement to
nominate directors to the Company's Board and committees thereof (see
"Directors and Executive Officers of the Registrant--Directors").
28
<PAGE>
ITEM 13. Certain Relationships and Related Transactions.
-------- -----------------------------------------------
Clal Agreements. On May 1, 1995, the Company consummated a strategic
alliance with Clal consisting primarily of (i) the sale by the Company of
2,027,272 shares of the Company's Common Stock for $20,000,000, or $9.87
per share, (ii) the issuance by the Company of the Warrants and (iii) the
formation of the Joint Venture. Mony Ben Dor, a director of the Company, is
also a director of Clal. Prior to the closing of the Stock Purchase
Agreement, Clal owned no shares of the Common Stock (see "Business--Product
Line Information", "Directors and Executive Officers of the Registrant" and
"Security Ownership of Certain Beneficial Owners and Management").
The Stock Purchase Agreement includes terms of the Company's and
Clal's business relationship, including issuance to Clal of 2,027,272
shares of Common Stock, rights to nominate Board members, rights of first
refusal, voting agreements, rights to invest in others, standstill
agreements and agreements with respect to the issuance of the Warrants.
Subject to the satisfaction of certain conditions, Clal obtained the
right to designate one or more of the members of the Company's Board of
Directors and committees thereof and the right to designate a member of the
Company's management.
Clal has a right of first refusal with respect to certain business
combination transactions of the Company and certain sales of the assets or
securities of the Company. Such right extends until May 1, 2000, provided
that Clal, when exercising such right (i) has not sold or disposed of
shares of Common Stock representing more than 337,045 shares of Common
Stock and (ii) owns or has the right to acquire 16% of the Common Stock
(the "Restricted Period"). If Clal does not exercise its right of first
refusal with respect to any of the above-mentioned transactions, Clal will,
subject to certain exceptions, be required to vote its shares of Common
Stock in favor of such transactions. Such obligation will terminate upon
the expiration of the Restricted Period. Clal has no obligation to vote
its shares of Common Stock in favor of such a transaction if (i) Clal
exercises its right of first refusal with respect to such transaction, (ii)
fewer than 75% of the members of the Board (excluding member(s) of the
Board nominated by Clal) vote in favor of the transaction or (iii) any
member of the Board (excluding member(s) of the Board nominated by Clal)
votes against the transaction. In the event that Clal has an obligation to
vote its shares in favor of such a transaction, Clal also has agreed to
take such other actions reasonably required or appropriate to facilitate
the consummation of the transaction. Clal has no obligation to vote its
shares in favor of, or take other actions to facilitate, any such
transaction if Clal notifies the Company that, in Clal's opinion, the
consummation of such a transaction would be detrimental to the Company
and/or its shareholders, except if the Company, in response to such a
notice, delivers to Clal a fairness opinion from a nationally recognized
investment banking firm.
Clal has agreed to limit acquisitions, including acquisitions under
the Warrants, of the Company's securities to 19.99% of the issued and
outstanding Common Stock prior to May 1, 1998. In addition, Clal has
agreed to limit such acquisitions to 25% of the issued and outstanding
Common Stock after May 1, 1998. Clal has the right to tender for or
purchase no less than 70% of the issued and outstanding Common Stock after
May 1, 2000. These limitations expire six months following the expiration
of the Restricted Period (the "Consent Period"). Clal also has the right
to acquire up to 20% of any equity securities issued by the Company in an
underwritten public offering so long as Clal, at the time, owns 10% of the
issued and outstanding Common Stock (assuming, for this purpose, the full
exercise of the Warrants). Clal has also agreed not to sell or otherwise
dispose of Common Stock or other securities convertible into Common Stock
during the Consent Period unless such securities are registered or may be
sold without registration under Rule 144 promulgated under the Securities
Act of 1933, as amended, or are sold in certain business combination
transactions, unless the sale is approved by the Board (excluding member(s)
of the Board nominated by Clal). Clal will limit, during the Consent
Period, sales of Common Stock to any one person, entity or group to no more
than 3% of the issued and outstanding Common Stock, except as otherwise
permitted under the Stock Purchase Agreement.
In consideration of the rights and benefits obtained by the Company
under the Stock Purchase Agreement, the Company issued to Clal the
Warrants. The Warrants entitle Clal to purchase up to 1,905,107 shares of
Common Stock at an exercise price of $12.00 per share. The Warrants are
exercisable at any time until May 1, 1998, subject to earlier termination
or redemption in certain circumstances. The Warrants provide that the
number of shares of Common Stock issuable upon their exercise will be
reduced by the number of shares of Common Stock, or
29
<PAGE>
securities exercisable or exchangeable for or convertible into shares of
Common Stock, acquired by Clal in open market transactions and certain
other transactions.
In consideration of the rights and benefits obtained by the Company
under the Stock Purchase Agreement, the Company also granted to Clal
certain registration rights under a registration rights agreement (the
"Registration Rights Agreement"). In general, Clal will not be able to
sell freely the shares of Common Stock purchased by Clal or the shares of
Common Stock issuable upon exercise of the Warrants without registration
under applicable securities laws or unless an exemption from registration
is available. Clal is entitled to two demand registrations. In addition,
if the Warrants are exercised Clal is entitled to an additional demand
registration. In addition, the Company granted to Clal the right to
register shares of Common Stock owned by Clal on each occasion that the
Company registers shares of Common Stock, subject to certain limitations
and exceptions.
Clal currently owns 2,127,272 shares of Common Stock. Of such shares,
100,000 were purchased from Mr. Sawyer at a price of $7.125 per share on
June 3, 1996.
As part of the alliance formed by the Company and Clal on May 1, 1995,
the Company and Clal formed the Joint Venture to develop, manufacture and
distribute generic pharmaceutical products worldwide. In connection with
the Joint Venture, the Company and Clal have granted each other certain
manufacturing and distribution rights for products developed by the other
and for products developed by the Joint Venture (see "Business--Product
Line Information" and "--Research and Development").
Investment in FineTech. Under the Stock Purchase Agreement, the
Company obtained the right to participate with Clal and certain of its
affiliates in connection with pharmaceutical acquisitions and transactions.
In connection therewith, the Company purchased 10% of the shares of
FineTech Ltd. ("FineTech") in December 1995 for $1,000,000. FineTech is an
Israeli pharmaceutical research and development company in which Clal has a
significant ownership interest. The Company also obtained the exclusive
right to purchase products not commonly sold in North America, South
America and the Caribbean. Mony Ben Dor, a director of Clal and a director
of the Company, is also a director of FineTech. The Company's purchases of
chemical components from FineTech in fiscal year 1996 totalled
approximately $1,500,000. The Company's purchases have been and will be on
terms no less favorable than could be obtained from non-affiliated third
parties.
The foregoing descriptions of certain terms of the Stock Purchase
Agreement, the Warrants, the Registration Rights Agreement and the Joint
Venture do not purport to be complete and are qualified in their entirety
by reference to such documents, copies of which were filed as exhibits to
the Form 8-K filed by the Company with the Securities and Exchange
Commission on May 12, 1995.
Transactions with Officers and Directors. In February 1995, the
Company purchased a condominium for $192,500. The Company leased the
condominium to Mr. Sawyer for $1,800 per month, which represented the fair
market value as determined by a disinterested third party. The Company
sold the condominium on July 31, 1996 for $225,000 (see "Executive
Compensation").
At various times during fiscal year 1996, the Company made certain
unsecured loans to Mr. Sawyer in connection with the exercise of his
options. Such loans currently are evidenced by a single promissory note,
which replaces a series of previously issued notes, in the aggregate
principal amount of $128,607. The note bears interest at the rate of 8.25%
per annum. Interest and principal are due on April 14, 1997. As of November
22, 1996, the outstanding balance of the note, with interest, was
approximately $129,548.
During 1996, Bio-Dar Ltd., an Israeli company and affiliate of Clal
Industries Ltd., sold chemicals to the Company for approximately $500,000.
The Company believes that all of the above transactions were on terms
that were fair and reasonable to the Company.
30
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
------- ----------------------------------------------------------------
(a)(1)&(2) Financial Statements.
See Index to Financial Statements after Signature Page.
(a)(3) Exhibits.
3.1 Certificate of Incorporation of the Registrant. (4)
3.1.1 Certificate of Amendment to the Certificate of Incorporation of
the Registrant, dated August 6, 1992--incorporated by reference
to the Registrant's Registration Statement on Form 8-A
(Commission File No. 0-20834), filed with the Commission November
10, 1992.
3.2 By-Laws of the Registrant, as amended and restated. (3)
4 Rights Agreement, dated August 6, 1991, between the Registrant
and Midlantic National Bank, as Rights Agent. (5)
4.1 Amendment to Rights Agreement, dated as of April 27, 1992. (3)
10.1 1983 Stock Option Plan of the Registrant, as amended. (2)
10.2 1986 Stock Option Plan of the Registrant, as amended. (2)
10.3 1989 Directors' Stock Option Plan of the Registrant, as amended.
(5)
10.4 1989 Employee Stock Purchase Program of the Registrant. (7)
10.5 1990 Stock Incentive Plan of the Registrant, as amended. (2)
10.6 Form of Retirement Plan of Par. (11)
10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984.
(6)
10.7 Form of Retirement Savings Plan of Par. (11)
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984.
(12)
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1,
1984. (12)
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30,
1985. (12)
10.8 Par Pension Plan, effective October 1, 1984. (4)
10.9 Employment Agreement, dated as of October 4, 1992, among the
Registrant, Par and Kenneth I. Sawyer. (1)
10.10 Lease Agreement between Par and the County of Rockland Industrial
Development Agency, dated as of October 1, 1984. (6)
10.10.1 Lessee Guaranty between Par and Midlantic National Bank, dated
as of October 1, 1984. (6)
31
<PAGE>
10.10.2 Mortgage from County of Rockland Industrial Development Agency
to Midlantic National Bank, as Trustee, dated as of October 1,
1984. (12)
10.10.3 Security Agreement between County of Rockland Industrial
Development Agency and Midlantic National Bank, as Trustee,
dated as of October 1, 1984. (12)
10.11 Lease for premises located at 12 Industrial Avenue, Upper Saddle
River, New Jersey, between Par and Charles and Dorothy Horton,
dated October 21, 1978 and extension dated September 15, 1983.
(11)
10.12 Lease agreement between Par and Ramapo Corporate Park Associates,
dated as of January 1, 1993.
10.13 Employment Agreement, dated as of May 19, 1993, between the
Registrant and Robert I. Edinger. (13)
10.14 Distribution Agreement, dated as of October 16, 1993, between
Genpharm, Inc., the Registrant and PRX Distributors, Ltd. (13)
10.15 Letter Agreement, dated April 30, 1993, between the Generics
Group B.V. and Par. (15)
10.16 Distribution Agreement, dated as of February 24, 1994, between
Sano Corporation, the Registrant and Par, as amended. (15)
10.17 Mortgage and Security Agreement, dated May 4, 1994, between Urban
National Bank and Par. (14)
10.17.1 Mortgage Loan Note, dated May 4, 1994. (14)
10.17.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to
Urban National Bank. (14)
10.18 Letter Agreement, dated as of October 13, 1994, between Par and
Robert I. Edinger. (15)
10.19 1995 Directors Stock Option Plan. (19)
10.20 Stock Purchase Agreement, dated March 25, 1995, between the
Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.21 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995,
between the Registrant and Clal Pharmaceutical Industries Ltd.
(17)
10.22 Warrant to Purchase Common Stock, dated May 1, 1995, delivered by
the Registrant to Clal Pharmaceutical Industries Ltd. (17)
10.23 Registration Rights Agreement, dated May 1, 1995, between the
Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.24 Clal Pharmaceutical Resources L.P. Limited Partnership Agreement,
dated as of May 1, 1995, among PRI-Research, Inc., C.T.P.
Research and Development (1995) Ltd. and Clal Pharmaceutical
Resources (1995) Ltd. (17)
10.25 Clal Pharmaceutical Resources (1995) Ltd. Stockholders Agreement,
dated May 1, 1995, among PRI Research, Inc., C.T.P. Research and
Development (1995) Ltd. and Clal Pharmaceutical Resources Ltd.
(17)
10.26 Supplemental Agreement, dated as of May 1, 1995, among the
Registrant, Clal Pharmaceutical Industries Ltd. and Clal
Pharmaceutical Resources L.P. (17)
32
<PAGE>
10.27 Guarantee of the Registrant, dated May 1, 1995. (17)
10.28 Guarantee of Clal Pharmaceutical Industries Ltd., dated May 1,
1995. (17)
10.29 Warrant to Purchase Common Stock, dated September 21, 1995,
delivered by the Registrant to Clal Pharmaceutical Industries
Ltd.
10.30 Commercial Revolving Loan and Term Loan Agreement, dated December
28, 1995, between Fleet Bank, N.A. and the Registrant. (20)
10.31 Master Security Agreement, dated December 28, 1995, between Fleet
Bank, N.A. and Par. (20)
10.32 Equipment Security Agreement, dated December 28, 1995, between
Fleet Bank, N.A. and Par. (20)
10.33 Promissory Note, dated December 28, 1995, of the Registrant. (20)
10.34 Master Security Agreement, dated December 28, 1995, between Fleet
Bank, N.A. and Par. (20)
10.35 Equipment Security Agreement, dated December 28, 1995, between
Fleet Bank, N.A. and Par. (20)
10.36 Cross Acceleration Agreement, dated December 28, 1995, between
Fleet Bank, N.A. and the Registrant. (20)
11 Computation of per share data.
16 Letter regarding change in accountants (18).
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Richard A. Eisner and Company, LLP.
27 Financial Data Schedule.
(a)(4) Reports on Form 8-K. No reports on Form 8-K were filed in the
last quarter of the fiscal year ended September 30, 1996.
__________________________________________
(1) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended October 3, 1992
and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Proxy Statement dated August 10,
1992 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as
an Exhibit to Amendment No. 1 on Form 8 to the Registrant's
Registration Statement on Form 8-B, filed May 15, 1992, and
incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant'sAnnual Report on Form 10-K
(Commission File No. 1-10827) for the year ended September 28,
1991 and incorporated herein by reference.
33
<PAGE>
(5) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Proxy Statement dated August 14,
1991 and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Annual Report on Form 10-K (Commission File
No. 1-9449) for the year ended September 29, 1990 and
incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Proxy Statement dated August 16, 1990 and
incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Annual Report on Form 10-K for 1989 and
incorporated herein by reference.
(9) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Annual Report on Form 10-K for 1988 and
incorporated herein by reference.
(10) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Annual Report on Form 10-K for 1987 and
incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Registration Statement on Form S-1 (No.
2-86614) and incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Registration Statement on Form S-1 (No.
33-4533) and incorporated herein by reference.
(13) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrants' Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended October 2, 1993
and incorporated herein by reference.
(14) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Quarterly Report on Form 10-Q
(Commission File No. 1-10827) for the quarter ended April 2,
1994 and incorporated herein by reference.
(15) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended October 1, 1994
and incorporated herein by reference.
(16) Previously filed by amendment with the Securities and Exchange
Commission as an Exhibit to the Registrant's Annual Report on
Form 10-K (Commission File No. 1-10827) for the year ended
October 1,1994 and incorporated herein by reference.
(17) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Report on Form 8-K (Commission
File No. 1-10827) dated May 2, 1995.
(18) Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrant's Report on Form 8-K (Commission
File No. 1-10827) dated September 8,1995 and subsequently
amended on October 4, 1995 and October 12, 1995 and
incorporated herein by reference.
(19) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended September 30,
1995.
(20) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Quarterly Report on Form 10-Q
(Commission File No. 1-10827) for the quarter ended December 30,
1995 and incorporated herein by reference.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 30, 1996 PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
By: /s/ Kenneth I. Sawyer
-------------------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kenneth I. Sawyer President, Chief Executive Officer, and December 30, 1996
- ------------------------------- Chairman of the Board of Directors
Kenneth I. Sawyer
/s/ Dennis J. O'Connor Vice President, Chief Financial Officer December 30, 1996
- -------------------------------- and Secretary (Principal Accounting and Financial
Dennis J. O'Connor Officer)
/s/ Mark Auerbach Director December 30, 1996
- ------------------------------
Mark Auerbach
/s/ Mony Ben-Dor Director December 30, 1996
- ------------------------------
Mony Ben-Dor
/s/ Andrew Maguire Director December 30, 1996
- ------------------
Andrew Maguire
/s/ H. Spencer Matthews Director December 30, 1996
- ----------------------------
H. Spencer Matthews
/s/ Robin O. Motz Director December 30, 1996
- -------------------------------
Robin O. Motz
/s/ Melvin Van Woert Director December 30, 1996
- -----------------------------
Melvin Van Woert
</TABLE>
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Included in Part II:
- --------------------
Reports of Independent Public Accountants F-2, F-3
Consolidated Balance Sheets at September 30, 1996 and September 30, 1995 F-4
Consolidated Statements of Operations and Retained Earnings (Deficit) for
the years ended September 30, 1996, September 30, 1995 and October 1, 1994 F-5
Consolidated Statements of Cash Flows for the years ended September 30, 1996,
September 30, 1995 and October 1, 1994 F-6
Notes to Consolidated Financial Statements F-7 through F-18
Included in Part IV:
- -------------------
SCHEDULE:
II Valuation and qualifying accounts F-19
</TABLE>
_________________________________________________
Other financial statement schedules are omitted because the conditions
requiring their filing do not exist or the information required thereby is
included in the financial statements filed, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITOR
Board of Directors and Shareholders
Pharmaceutical Resources, Inc.
Spring Valley, New York
We have audited the accompanying consolidated statements of operations,
retained earnings (deficit) and cash flows for Pharmaceutical Resources, Inc.
and subsidiaries for the year ended October 1, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the results of operations and cash flows of
Pharmaceutical Resources, Inc. and subsidiaries for the year ended October 1,
1994, in conformity with generally accepted accounting principles.
The above audit includes Schedule II, for the year ended October 1, 1994. In
our opinion, the schedule referred to above presents fairly the information set
forth therein, in conformity with the applicable accounting regulation of the
Securities and Exchange Commission.
/s/ Richard A. Eisner & Company, LLP
New York, New York
November 30, 1994
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Pharmaceutical Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Pharmaceutical
Resources, Inc. (a New Jersey corporation) and subsidiaries as of September 30,
1996 and 1995, and the related consolidated statements of operations and
retained earnings (deficit) and cash flows for each of the two years in the
period ended September 30, 1996. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pharmaceutical Resources, Inc.
and subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York
December 27, 1996
F-3
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, September 30,
ASSETS 1996 1995
------ ------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 299,000 $17,986,000
Temporary investments 158,000 271,000
Accounts receivable, net of allowances of $2,643,000
and $1,588,000 7,645,000 9,011,000
Inventories 19,352,000 15,364,000
Prepaid expenses and other current assets 3,894,000 1,866,000
Current deferred tax benefit
- 4,172,000
----------- -----------
Total current assets 31,348,000 48,670,000
Property, plant and equipment, at cost less
accumulated depreciation and amortization 26,068,000 24,371,000
Deferred charges and other assets 1,222,000 1,883,000
Investment in marketable securities 8,672,000 3,520,000
Investment in joint venture 3,028,000 2,037,000
Non-current deferred tax benefit, net 14,608,000 10,436,000
----------- -----------
$84,946,000 $90,917,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,142,000 $ 1,470,000
Accounts payable 4,163,000 6,422,000
Accrued salaries and employee benefits 3,299,000 2,336,000
Accrued expenses and other current liabilities 1,028,000 705,000
Estimated current liabilities of discontinued operations - 2,830,000
----------- -----------
Total current liabilities 10,632,000 13,763,000
Long-term debt, less current portion 2,971,000 4,259,000
Accrued pension liability 719,000 941,000
Shareholders' equity:
Common Stock, par value $.01 per share; authorized 60,000,000 shares;
issued and outstanding 18,661,869 and 18,168,625 shares 187,000 182,000
Additional paid in capital 67,081,000 65,276,000
Retained earnings (deficit) (1,509,000) 6,783,000
Additional minimum liability related to defined benefit pension plan (117,000) (287,000)
Unrealized gain on investment 4,982,000 -
----------- -----------
Total shareholders' equity 70,624,000 71,954,000
----------- -----------
$84,946,000 $90,917,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
September 30, September 30, October 1,
1996 1995 1994
-------------- -------------- -------------
<S> <C> <C> <C>
Net sales $ 57,959,000 $66,503,000 $ 69,169,000
Cost of goods sold 48,299,000 45,514,000 45,774,000
------------ ----------- ------------
Gross margin 9,660,000 20,989,000 23,395,000
Operating expenses:
Research and development 5,160,000 5,487,000 3,874,000
Selling, general and administrative 17,168,000 16,192,000 13,463,000
Restructuring charge 549,000 - -
------------ ----------- ------------
Total operating expenses 22,877,000 21,679,000 17,337,000
------------ ----------- ------------
Operating income (loss) (13,217,000) (690,000) 6,058,000
Settlements - 2,029,000 -
Other income 2,557,000 608,000 425,000
Interest expense (432,000) (499,000) (465,000)
------------ ----------- ------------
Income (loss) from continuing operations
before provision for income taxes (11,092,000) 1,448,000 6,018,000
Provision for income taxes - 836,000 1,785,000
------------ ----------- ------------
Income (loss) from continuing operations (11,092,000) 612,000 4,233,000
Income from discontinued operations 2,800,000 - 466,000
------------ ----------- ------------
Income (loss) before change in accounting principle (8,292,000) 612,000 4,699,000
Cumulative effect of change in accounting principle - - 14,128,000
------------ ----------- ------------
Net income (loss) (8,292,000) 612,000 18,827,000
Dividend on preferred stock - 7,000 (312,000)
Retained earnings (deficit), beginning of year 6,783,000 6,164,000 (12,351,000)
------------ ----------- ------------
Retained earnings (deficit), end of year $ (1,509,000) $ 6,783,000 $ 6,164,000
============ =========== ============
Income (loss) per share of common stock:
Continuing operations $(.60) $.04 $.26
Discontinued operations .15 - .03
Change in accounting principle - - .85
----- ---- ------
Net income (loss) $(.45) $.04 $1.14
==== ==== =====
Weighted average number of common and
common equivalent shares outstanding 18,467,248 17,143,381 16,494,898
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------
September 30, September 30, October 1,
1996 1995 1994
-------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,292,000) $ 612,000 $ 18,827,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Cumulative effect of accounting change - - (14,128,000)
Common stock for research and development expense - 150,000 -
Payment of tax audit settlement - (995,000) -
Income from discontinued operations (2,800,000) - (466,000)
Restructuring charge 549,000 - -
Joint venture research and development 499,000 - -
Provision for income taxes - 836,000 1,785,000
Depreciation and amortization 2,873,000 2,588,000 2,391,000
Allowances against accounts receivable (1,055,000) (1,180,000) 140,000
Write-off of inventories 1,395,000 2,203,000 1,333,000
Other 158,000 - 213,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 2,421,000 1,516,000 (2,631,000)
(Increase) in inventories (5,383,000) (1,215,000) (3,568,000)
(Increase) decrease in prepaid expenses
and other assets (1,191,000) (845,000) 581,000
(Decrease) increase in accounts payable (2,398,000) 822,000 (1,429,000)
Increase (decrease) in accrued expenses
and other liabilities 633,000 (722,000) (930,000)
(Decrease) in settlements - - (6,500,000)
------------ ----------- ------------
Net cash (used in) provided by operating activities (12,591,000) 3,770,000 (4,382,000)
Cash flows from investing activities:
Capital expenditures (4,746,000) (3,975,000) (5,688,000)
Investment in joint venture (1,470,000) (2,037,000) -
(Increase) in marketable securities (190,000) (2,520,000) (1,000,000)
Decrease (increase) in temporary investments 113,000 (95,000) 1,003,000
Cash (used in) discontinued operations (8,000) (12,000) (267,000)
------------ ----------- ------------
Net cash (used in) investing activities (6,301,000) (8,639,000) (5,952,000)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,826,000 21,661,000 1,679,000
Proceeds from issuance of notes payable
and other debt 4,843,000 2,315,000 4,552,000
Principal payments under long-term debt
and other borrowings (5,459,000) (3,946,000) (4,901,000)
Payments due to stock conversion (5,000) - -
Preferred dividends paid - (305,000) -
------------ ----------- ------------
Net cash provided by financing activities 1,205,000 19,725,000 1,330,000
Net (decrease) increase in cash and cash equivalents (17,687,000) 14,856,000 (9,004,000)
Cash and cash equivalents at beginning of year 17,986,000 3,130,000 12,134,000
------------ ----------- ------------
Cash and cash equivalents at end of year $ 299,000 $17,986,000 $ 3,130,000
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Pharmaceutical Resources, Inc. ("PRI") operates in one business segment,
the manufacture and distribution of generic pharmaceuticals. Marketed products
are principally in oral solid (tablet, caplet and capsule) form, with a small
number of products in the form of creams and liquids.
Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of PRI and its
wholly-owned subsidiaries, of which Par Pharmaceutical, Inc. ("Par") is its
principal operating subsidiary. References herein to the "Company" refer to PRI
and its subsidiaries. The investment in a corporate joint venture with Clal
Pharmaceutical Industries Ltd. ("Clal") in which PRI has 49% ownership is
accounted for by the equity method.
Certain items on the consolidated financial statements for the prior years
have been reclassified to conform to the current year financial statement
presentation.
Use of Estimates:
The financial statements are prepared in conformity with generally accepted
accounting principles and, accordingly, include amounts that are based on
management's best estimates and judgements.
Accounting Period:
In fiscal 1996, the Company changed its fiscal year end from the Saturday
nearest to September 30 to September 30. This change had no material impact on
the fiscal 1996 year end results. Fiscal years 1996, 1995 and 1994 ended on
September 30, 1996, September 30, 1995 and October 1, 1994, respectively.
Temporary Investments:
Investments are stated at the lower of cost or market value. These
investments are classified as "available for sale securities" pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities".
Inventories:
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value.
Depreciation and Amortization:
Property, plant and equipment are depreciated straight-line over their
estimated useful lives which are from three to forty years. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
term of the lease.
Research and Development:
Research and development expenses represent costs incurred by the Company
to develop new products and obtain premarketing regulatory approval for such
products. All such costs are expensed as incurred.
Income Taxes:
Deferred income taxes are provided for the future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases. Business tax
credits and net operating loss carryforwards are recognized to the extent that
realization of such benefit is more likely than not.
Revenue Recognition:
The Company recognizes revenue at the time it ships product and it provides
for returns and allowances based upon actual subsequent allowances and
historical trends.
Per Share Data:
Per share data is based upon the weighted average number of common shares
and equivalents outstanding. For purposes of per share data, the Series A
Convertible Preferred Stock is considered to be a common stock equivalent. The
dilutive effect of
F-7
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
outstanding options and warrants is computed using the "treasury stock" method.
Fully dilutive has not been presented because it is not materially different
from primary amounts.
Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid money market instruments with original maturity of three months or
less to be cash equivalents. At September 30, 1996, cash equivalents were
deposited in financial institutions and consisted of immediately available fund
balances.
Fair Value of Financial Instruments:
The carrying amounts of the Company's accounts receivable, accounts
payable, accrued liabilities and debt approximate fair market value based upon
the relatively short-term nature of these financial instruments.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to credit risk
consist of trade receivables and interest-bearing short-term treasury
obligations. The Company markets its products primarily to domestic
distributors, wholesalers and retail drug store chains. The risk associated
with this concentration is believed by the Company to be limited due to the
large number of distributors, wholesalers, and drug store chains, their
geographic dispersion and the performance of certain credit evaluation
procedures (see "Accounts Receivable--Major Customers").
Discontinued Operations:
In September 1996, the Company recorded $2,800,000 as income from
discontinued operations, reversing the remaining reserves of Quad
Pharmaceuticals, Inc. ("Quad"), a wholly owned subsidiary of Par whose
operations were discontinued in fiscal year 1991. The principal components of
the liabilities in the prior year were notes payable to former officers of
$813,000, amounts due to customers of $1,657,000, and accrued expenses and
accounts payable $360,000.
The income from discontinued operations does not reflect any tax effect in
the current period.
In March 1994, the Company completed the disposition of Quad and, at that
time, reversed into income the remaining reserve for operating losses of
$466,000.
Settlements:
Fiscal Year 1995:
The Company settled claims against former management members of the Company
for recovery of, among other things, salaries and money paid for
indemnification. The total amount of the settlement was $2,029,000, which was
collected between February and April of 1995.
Fiscal Year 1993:
Minnesota Mining and Manufacturing Settlement:
The Company, in January 1994, reached a settlement agreement with Minnesota
Mining & Manufacturing Company ("3M") and its subsidiary Riker Laboratories,
Inc. ("Riker", collectively with 3M, "3M/Riker"). The settlement was reflected
in fiscal year 1993 results of operations. In fiscal year 1994, in accordance
with the terms of the settlement, the Company paid 3M/Riker approximately
$5,000,000 in cash and issued 119,500 shares of common stock of the Company
("Common Stock"). The lawsuit brought in 1993 by 3M/Riker against Par stemmed
from actions occurring during the tenure of prior management at Par. 3M/Riker
alleged that Par improperly obtained United States Food and Drug Administration
(the "FDA") approvals by bribing FDA officials and submitting false information
to FDA, as a result of which 3M/Riker claimed to have suffered competitive
injury in an amount up to $24,000,000.
U.S. Trading Settlement:
F-8
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
In December 1993, the Company and United States Trading Corporation ("UST")
settled their respective suits. This settlement was also reflected in fiscal
year 1993 results of operations. In fiscal year 1994, in accordance with the
terms of the settlement, the Company paid $250,000 in cash and issued $250,000
in merchandise credit to UST. The lawsuit stemmed from actions occurring during
the tenure of prior management at Par.
Mylan Settlement:
In November 1993, the Company reached a settlement agreement with Mylan
Laboratories, Inc. ("Mylan") with respect to a lawsuit brought in 1989 by Mylan
against Par, Quad and others. This settlement was reflected in fiscal year 1993
results of operations. In fiscal year 1994, in accordance with the terms of the
settlement, the Company paid Mylan $1,000,000 in cash and issued it
approximately 111,000 shares of Common Stock. The lawsuit stemmed from actions
occurring during the tenure of prior management at Par. Mylan alleged that two
of the Company's subsidiaries improperly obtained FDA approvals by bribing FDA
officials and submitting false information to the FDA, as a result of which
Mylan claimed to have suffered competitive injury in an amount of up to
$600,000,000.
Accounts Receivable:
<TABLE>
<CAPTION>
1996 1995
------- -------
(In Thousands)
<S> <C> <C>
Accounts receivable $10,288 $10,599
------- -------
Allowances:
Doubtful accounts 694 208
Returns and allowances 251 227
Price adjustments 1,698 1,153
------- -------
2,643 1,588
------- -------
Accounts receivable,
net of allowances $ 7,645 $ 9,011
======= =======
</TABLE>
Major Customers:
Two of the Company's customers accounted for approximately 11% and 9%, 6%
and 8%, and 3% and 9% of net sales from continuing operations in fiscal years
1996, 1995 and 1994, respectively.
At September 30, 1996, amounts due from these same two customers accounted
for approximately 23% and 3% of the net accounts receivable balance. At
September 30, 1995, the amounts due from these same two customers accounted for
approximately 13% and 10% of the net accounts receivable balance.
Inventories:
<TABLE>
<CAPTION>
1996 1995
------- -------
(In Thousands)
<S> <C> <C>
Raw materials and supplies $11,130 $ 8,157
Work in process and finished goods 8,222 7,207
------- -------
$19,352 $15,364
======= =======
</TABLE>
Investment in Joint Venture:
As part of a strategic alliance in May 1995, the Company and Clal formed
the Joint Venture, a limited partnership formed under the laws of the State of
Israel, to develop, manufacture and distribute generic pharmaceutical products
worldwide. The Company and Clal to date have funded the Joint Venture in the
amount of $3,430,000 and $3,570,000, respectively. Including the additional
fiscal 1996 commitment not yet funded, the Company has committed to invest
$3,920,000 in the Joint Venture during the next year. The Company and Clal are
negotiating to amend their remaining funding commitments for 1996 in order to
reflect the present and contemplated capital requirements of the Joint Venture,
although they have not yet amended their written agreement. In the event that
the Company and Clal do not reach a written agreement and either party makes an
additional contribution to the Joint Venture,
F-9
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
the other party's share in the profits and capital of the Joint Venture will be
diluted. The Joint Venture is owned 49% by the Company and 51% by Clal and is
located primarily in Israel. The investment is accounted for by the equity
method.
Investments:
The Company has a distribution agreement with Sano which gives Par the
right of first refusal to exclusively distribute Sano's generic transdermal
products in the United States, Canada, and several other international markets.
Sano develops transdermal delivery systems utilizing a patch that incorporates
the appropriate drug dosage into an adhesive that attaches the patch to the
skin. According to Sano, transdermal delivery offers significant benefits over
oral delivery, including improved efficacy, increased patient compliance,
reduced side effects, reduced interaction with other drugs in use by a patient
and a more consistent and appropriate drug level in the bloodstream, all of
which generally result in lower overall patient care costs. Sano is developing
two generic nitroglycerin patches, one generic nicotine patch and one generic
clonidine patch which are covered by the agreement. For each product the
Company elects to distribute, Par must pay Sano a portion of the development
expenses. To date, Sano has submitted three ANDAs to the FDA and anticipates
submitting additional ANDAs in the future. The Company intends to purchase
manufactured products from Sano, when approved by the FDA, at cost and share in
the gross profits from the sale.
As part of the Sano agreement, the Company invested $3,500,000 in the
preferred stock of Sano in the prior years. In November 1995, Sano sold common
stock through an initial public offering and the Company's preferred stock
converted into 513,887 shares of common stock. In September 1996, the Company
sold 135,000 shares of its Sano stock resulting in a gain of $1,859,000 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Other Income"). The investment is
classified as an "available for sale security" pursuant to SFAS No. 115. This
standard requires that certain investments in debt and equity securities be
adjusted to fair market value at the end of each accounting period and
unrealized gains or losses recorded as a separate component of shareholders'
equity. In accordance with SFAS No. 115, the remaining investment is carried at
its fair market value on September 30, 1996 of $20 1/4 per share, or $7,672,000,
and the unrealized gain on the investment of $4,982,000 is reflected as a
separate component in shareholders' equity.
Additionally, the Company advanced $2,942,000 and $1,429,000 in 1996 and
1995, respectively, to Sano as funding for the research and development costs of
the generic transdermal products. The Company renegotiated the agreement to
enable the advances to be recovered within three years by obtaining a greater
share of gross profits. Due to the uncertainty with respect to the
collectability of such advances, the Company has expensed them and will treat
them as a reduction of research and development expense if repaid. In November
1995, the Company received $1,500,000 from the proceeds of Sano's initial public
offering in repayment of a portion of total advances outstanding from the
Company. The Company has reflected this as a reduction of research and
development expense in fiscal 1996.
In December 1995, the Company purchased a 10% interest in Fine-Tech Ltd.,
an Israeli pharmaceutical research and development company in which Clal
Pharmaceutical Industries Ltd. ("Clal") has a significant ownership interest,
for $1,000,000. Clal is a significant stockholder of the Company and, through
its subsidiary, owns 51% of a research and development joint venture in which
the Company, through its subsidiary, owns 49%. In addition, the Company
obtained certain exclusive rights to purchase products from Fine-Tech Ltd. not
commonly sold in North America, South America or the Caribbean. During 1996, the
Company purchased raw materials of approximately $1,500,000 at the market value
at the time of purchase.
F-10
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
Property, Plant and Equipment:
<TABLE>
<CAPTION>
1996 1995
------- -------
(In Thousands)
<S> <C> <C>
Land $ 2,230 $ 2,230
Buildings 17,237 16,859
Machinery and equipment 20,532 17,987
Office equipment, furniture and fixtures 5,863 4,825
Leasehold improvements 944 950
------- -------
46,806 42,851
Less accumulated depreciation
and amortization 20,738 18,480
------- -------
$26,068 $24,371
======= =======
</TABLE>
Distribution Agreements:
As described in a previous note, the Company entered into a distribution
agreement with Sano in February 1994, which gives Par the right of first refusal
to exclusively distribute Sano's generic transdermal products in the United
States, Canada, and several other international markets.
In May 1993, the Company was appointed by The Generics Group B.V. (the
"Group"), an international pharmaceutical business, as the exclusive United
States distributor of up to five generic pharmaceuticals to be manufactured by
the Group's affiliates pending approval by the FDA (the "May 1993 Agreement").
ANDA approvals for Alprazolam, Triazolam, and Atenolol were received in fiscal
year 1994 and the Company began distributing them. Two additional drugs, which
will be made available to the Company for distribution, have yet to be
designated by the Group. The May 1993 Agreement also contains provisions for
development by the Group of additional generic pharmaceuticals for distribution
by the Company. Under the May 1993 Agreement, the Company is obligated to issue
a warrant to purchase 150,000 shares of Common Stock for $10 per share. The
terms of the warrant will be similar to the warrant issued pursuant to the
October 1992 Agreement (see below); however, the warrant granted under the May
1993 Agreement will become exercisable only upon reaching certain levels of
sales for the distributed products.
In October 1992, the Company entered into an agreement (the "October 1992
Agreement") with Genpharm Inc. ("Genpharm"), a Canadian manufacturer of generic
pharmaceuticals (which is an affiliate of the Group) under which Par became the
exclusive United States distributor of two of Genpharm's pharmaceutical
products. The agreement has an initial term of ten years (subject to earlier
termination by either party as provided therein), and thereafter automatically
renews from year to year unless either party gives notice of non-renewal. The
cost to the Company of such products is based upon a percentage of gross profits
as defined in the October 1992 Agreement. In connection with the October 1992
Agreement, the Company issued a warrant to Genpharm to purchase 150,000 shares
of PRI's common stock for $6 per share. The warrant became exercisable in March
1993, has an initial term of five years (subject to earlier termination in the
event the Company ceases to be Genpharm's exclusive distributor of the products
covered by the October 1992 Agreement), and may be extended for up to an
additional five years in the event that the closing price of Common Stock has
not reached levels specified in the warrant agreement. In fiscal year 1994, the
warrant was exercised to purchase 5,300 shares of Common Stock.
Long Term Debt:
At September 30, 1996, the Company's debt of $5,113,000 is on a long-term
basis, due to two banks, to be repaid in monthly installments through May 2001.
The outstanding loans are secured by the assets of the Company.
The Company has a line of credit it uses to acquire equipment. The line of
credit is collateralized by the equipment purchased. Borrowings under this line
are at a fixed rate based upon the prime rate in effect at the time of
borrowing, with a minimum 1/2% premium which increases based on the length of
time the loan is outstanding. At September 30, 1996, $355,000 was outstanding
under this line. This bank also provides an 8.5% fixed rate mortgage loan. The
loan was made in fiscal 1994, and at September 30, 1996, $1,184,000 was
outstanding.
F-11
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
<TABLE>
<CAPTION>
1996 1995
------ ------
(In Thousands)
<S> <C> <C>
Industrial Revenue Bond (a) - $1,437
Term loans (b) $4,683 3,936
Other (c) 430 356
------ ------
5,113 5,729
Less current portion 2,142 1,470
------ ------
$2,971 $4,259
====== ======
</TABLE>
(a) The bond was repaid in full in fiscal 1996.
(b) All of these loans, except the mortgage loan, bear interest at the
prime rate, Libor or cost of funds, and amortize in monthly installments through
2001, when the remaining balance of $877,000 becomes due. The mortgage loan has
a fixed rate of 8.5% until May 1999, at which time the fixed rate will be reset.
(c) Includes amount outstanding under line of credit , with interest based
upon prime rate in effect at the time of borrowing, with a minimum of 1/2 of 1%
per annum premium which increases based upon the length of time the loan is
outstanding. Also includes amounts due under a capital lease.
Long-term debt maturities during the next five years, including the portion
classified as current, are $2,142,000 in 1997, $1,577,000 in 1998, $395,000 in
1999, $61,000 in 2000 and $938,000 in 2001.
On December 27, 1996, Par entered into a Loan and Security Agreement (the
"Loan Agreement") with General Electric Capital Corporation ("GECC") which
provides Par with a three-year revolving line of credit. 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 as determined from time to time by GECC. The interest rate charge on the
line of credit is based upon a rate per annum of 2.50% above the 30-day
commercial paper rate for high-grade unsecured notes adjusted monthly. The line
of credit with GECC is secured by the assets of Par and PRI other than real
property and is guaranteed by PRI. As a condition to 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 locked accounts over which GECC has sole operating control and which are
applied on a daily basis to reduce amounts outstanding under the line of credit.
As of December 30, 1996, approximately $3,500,000 was outstanding under such
line of credit. The revolving credit facility, which is subject to covenants
which are based on various financial benchmarks, replaced PRI's previous
$16,000,000 revolving facility and $4,000,000 term loan facility with Fleet
Bank, N.A. Any significant reduction in the borrowing base will adversely affect
the Company's liquidity.
During the fiscal years ended 1996, 1995 and 1994, the Company incurred
total interest expense of $432,000, $499,000, and $465,000, respectively.
Interest paid approximated interest expense in each of the years.
Shareholders' Equity:
Preferred Stock:
In 1990, the Company's shareholders authorized 6,000,000 shares of a
newly created class of preferred stock with a par value of $.0001 per share.
The preferred stock is issuable in such series and with such dividend rates,
redemption prices, preferences and conversion or other rights as the Board of
Directors may determine at the time of issuance.
Pursuant to a settlement of shareholder litigation reached in 1991,
2,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock")
had been issued in 1992. In fiscal 1995, the Company converted each remaining
outstanding share of Preferred Stock into 1.1 shares of Common Stock for an
aggregate of 1,055,815 common shares.
Common Stock:
In May 1995, the Company formed a strategic alliance with Clal
Pharmaceutical Industries Ltd. ("Clal"), an Israeli company, to develop,
manufacture and distribute generic pharmaceuticals worldwide. The Company sold
2,027,272 shares of PRI Common
F-12
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
Stock, representing 12% of the Company's Common Stock, to Clal for $20,000,000
($9.87 per share). Clal also received two three year warrants to purchase up to
2,005,107 shares of Common Stock at prices between $11 and $12 per share. The
shares and two warrants will allow Clal to purchase up to 19.9% of the Company's
Common Stock. During fiscal 1996, Clal purchased an additional 100,000 shares of
the Company's Common Stock.
Dividend:
The fiscal 1994 dividend on Preferred Stock was paid in February 1995.
There was no dividend on common stock in fiscal 1994, 1995, or 1996.
Changes in Shareholders' Equity:
Changes in the Company's Common Stock, Preferred Stock and Additional Paid
in Capital accounts during the fiscal years ended in 1994, 1995, and 1996 were
as follows:
<TABLE>
<CAPTION>
Series A Convertible Additional
Preferred Stock Common Stock Paid In
Shares Amount Shares Amount Capital
------ ------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance, October 2, 1993 1,479,070 $ 1,000 13,466,182 $135,000 $36,296,000
Exercise of stock options - - 343,000 3,000 1,495,000
Exercise of warrants - - 5,300 - 32,000
Issuance of warrants - - - - 250,000
Conversion of preferred shares (420,670) - 420,670 4,000 (4,000)
Compensatory arrangements - - 16,869 1,000 1,392,000
Stock issued pursuant to settlement - - 230,611 2,000 3,605,000
----------- -------- ---------- -------- -----------
Balance, October 1, 1994 1,058,400 1,000 14,482,632 145,000 43,066,000
Exercise of stock options - - 424,750 4,000 2,247,000
Exercise of warrants - - 45,000 - 270,000
Investment shares issued - - 2,042,272 21,000 19,139,000
Conversion of preferred shares (1,058,400) $(1,000) 1,153,647 12,000 (32,000)
Compensatory arrangements - - 20,324 - 586,000
----------- -------- ---------- -------- -----------
Balance, September 30, 1995 - - 18,168,625 182,000 65,276,000
Exercise of stock options - - 470,000 5,000 1,017,000
Investment shares issued - - - - (12,000)
Conversion of preferred shares - - - - (5,000)
Compensatory arrangements - - 23,244 - 805,000
----------- -------- ---------- -------- -----------
Balance, September 30, 1996 - - 18,661,869 $187,000 $67,081,000
=========== ======== ========== ======== ===========
</TABLE>
Share Purchase Rights Plan:
Each share of Common Stock outstanding carries with it one Common
Share Purchase Right ("Right"). Generally, the Rights will become exercisable
only if a person or group has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the Common Stock, or if the Board of
Directors has determined that a person or group has sought control of the
Company with the result that control by such person or group ("Disqualifying
Persons") would be detrimental to the maintenance, renewal or acquisition of the
Company's governmental or regulatory approvals. If a person or group thereafter
acquires beneficial ownership of 25% or more of the outstanding Common Stock or
if the Board of Directors determines that there is a reasonable likelihood that
control of the Company by a Disqualifying Person would result in the loss of, or
denial of approval for, any governmental or regulatory approval of the Company,
each outstanding Right not owned by such person or group would entitle the
holder to purchase, for $25 (the exercise price of the Right), Common Stock
having a market value of $50. Under certain other circumstances, including the
acquisition of the Company in a merger or other business combination, each Right
not owned by the acquiring party will entitle the holder to purchase for $25,
securities of the acquirer having a market value of $50. The Rights are subject
to redemption by the Company at a redemption price of $.01 per Right.
F-13
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
Employee Stock Purchase Program:
The Company maintains an Employee Stock Purchase Program ("Program").
The Program is designed to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as amended. It enables
eligible employees to purchase shares of Common Stock at a discount of up to 15%
from the fair market value. An aggregate of 1,000,000 shares of Common Stock
have been reserved for sale to employees under the Program. Employees purchased
22,796 shares, 18,074 shares and 16,928 shares during fiscal years 1996, 1995
and 1994, respectively. At September 30, 1996, 917,740 shares remain available
for sale under the Program.
Stock Options:
The following is a summary of stock option activity during the
fiscal years ended in 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Price Per Price Per Price Per
Shares Share Shares Share Shares Share
---------- -------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,357,750 $2.63 to 2,533,500 $2.63 to 2,699,250 $2.63 to
$14.13 $14.13 $10.50
Granted 210,500 $7.00 to 289,500 $8.50 to 266,500 $7.00 to
$ 7.38 $10.63 $14.13
Exercised (470,000) $3.50 to (424,750) $2.63 to (343,000) $2.63 to
$ 7.00 $10.50 $10.13
Cancelled/Surrendered (84,500) $2.63 to (40,500) $7.38 to (89,250) $3.50 to
--------- $14.13 --------- $14.13 --------- $14.13
Outstanding at end of year 2,013,750 $3.13 to 2,357,750 $2.63 to 2,533,500 $2.63 to
========= $13.88 ========= $14.13 ========= $14.13
</TABLE>
Shareholders approved the 1995 Directors' Stock Option Plan (the "1995
Directors' Plan") through which options will be awarded to future non-employee
directors upon the date elected to the Board. Current directors are not
eligible for awards under the 1995 Directors' Plan. The Company has reserved
100,000 shares of Common Stock for issuance under the 1995 Directors' Plan.
The Company's 1990 Stock Incentive Plan (the "1990 Plan") provides for
the granting of stock options, restricted stock awards, deferred stock awards,
stock appreciation rights and other stock based awards or any combination
thereof to employees of the Company or to others. The Company has reserved
2,050,000 shares of Common Stock for issuance under the 1990 Plan.
Under the 1989 Directors' Stock Option Plan (the "Directors' Plan"),
options were granted to directors of the Company who are not employees of the
Company or are otherwise ineligible to receive options under any other plan
adopted by the Company. The Company has reserved 550,000 shares of Common Stock
for issuance under the Directors' Plan. The Company does not intend to grant
further options under this plan.
The Company's 1986 Stock Option Plan provides that options may be
granted to employees of the Company or to others for the purchase of up to
900,000 shares of the Company's Common Stock. Options granted under the Plan
may be incentive stock options or nonqualified options.
At September 30, 1996 and September 30, 1995, options for 388,000 and
568,625 shares, respectively, were available for future grant under the various
plans.
F-14
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
Income Taxes:
In February 1992, the Financial Accounting Standards Board issued SFAS
No. 109 "Accounting for Income Taxes" ("SFAS 109"), which required the Company
to recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition,
SFAS 109 required the recognition of future tax benefits, such as net operating
loss ("NOL") carryforwards, to the extent that realization of such benefits is
more likely than not. The Company adopted the new accounting standard during
the quarter ended January 1, 1994 and, as a result, recognized future tax
benefits of $14,128,000. This amount is reflected in the net income of the
Company in fiscal 1994 as the cumulative effect of a change in accounting
principle.
Management believes, based on its formation of strategic alliances and
commitment to research and development of new products, it is more likely than
not that the Company will generate taxable income sufficient to utilize the tax
benefit of its NOL carryforwards prior to their expiration. However, there can
be no assurance that the Company will generate taxable earnings or any specific
level of continuing earnings in the future. Consequently, the Company is not
recognizing benefit for its operating losses this year. Management believes,
based on its formation of strategic alliances, this year's restructuring,
commitments to research and development of new product, and its investments in
equity securities, that its valuation allowance is adequate. If the Company is
unable to generate sufficient taxable income in the future, increases in the
valuation allowance will be required through a charge to expense. At September
30, 1996, the Company had NOL carryforwards for tax purposes of approximately
$50,000,000 that expire in September 2005 through September 2010.
The tax effects of the significant temporary differences which
comprise the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
-------------- --------------
(In Thousands)
<S> <C> <C>
Deferred assets:
Federal NOL carryforwards $17,598 $14,068
Accounts receivable 1,058 636
Accrued expenses 830 732
Research and development expenses 1,194 600
Inventory 302 499
State tax NOL 1,603 1,053
Taxes payable to the IRS 171 171
Other 630 490
------- -------
23,386 18,249
Valuation allowance (5,978) (861)
------- -------
17,408 17,388
Deferred liabilities:
Fixed assets 2,800 2,780
------- -------
Net deferred assets $14,608 $14,608
======= =======
</TABLE>
Included in the recognition of future tax benefits is approximately
$1,678,000 of stock option compensation credited to additional capital. Of this
amount, $1,244,000 was recorded upon adoption of SFAS 109 and $434,000 was
credited in fiscal 1995. A valuation allowance was recorded in fiscal 1996 and
fiscal 1995 for an additional $683,000 and $558,000, respectively, related to
stock option compensation which will be credited to equity upon utilization of
tax carryforwards.
F-15
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
The components of income tax expense follow:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Federal:
Current $1,769 -
Deferred (995) $ 2,585
------ -------
$ 774 $ 2,585
------ -------
State:
Current 62 -
Deferred - (800)*
------ -------
62 (800)
------ -------
$ 836 $ 1,785
====== =======
</TABLE>
* During fiscal year 1994, there was a change in state tax laws which permitted
recognition of NOL carryforwards.
The table below provides the details of the differences between the provision
for income taxes and the amount determined by multiplying income before income
taxes by the applicable federal statutory rate:
<TABLE>
<CAPTION>
1995 1994
----- ------
<S> <C> <C>
Statutory tax rate 34% 34%
State tax NOL generated - (13%)
State tax - net 6% -
Interest on IRS settlement - net 18% -
Other - non-deductible - 9%
---- ----
Effective tax rate 58% 30%
==== ====
</TABLE>
The Internal Revenue Service has determined that certain credits taken by the
Company in prior years for research activities are not permitted. A reserve of
approximately $1,000,000 was provided upon implementation of FAS 109 in fiscal
1994. The Company paid to the Internal Revenue Service approximately $1,000,000
during fiscal 1995 for the disallowed credits and such payments were charged
against the reserve which was previously provided.
Commitments, Contingencies and Other Matters:
Leases:
At September 30, 1996, the Company had minimum rental commitments aggregating
$1,881,000 under noncancelable operating leases expiring through 2004. Amounts
payable thereunder are $805,000 in 1997, $381,000 in 1998, $151,000 in 1999,
$107,000 in 2000, $107,000 in 2001, and $330,000 thereafter. Rent expense
charged to operations in fiscal years 1996, 1995 and 1994 was $612,000,
$811,000, and $907,000, respectively.
Retirement Plans:
The Company has a defined contribution, social security integrated Retirement
Plan providing retirement benefits to eligible employees as defined in the Plan.
The Board of Directors of Par has authorized the cessation of employer
contributions 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. It also maintains a Retirement Savings
Plan whereby eligible employees are permitted to contribute from 1% to 12% of
pay to this Plan. The Company contributes an amount equal to 50% of the first
6% of the pay contributed by the employee. The Company's provisions for these
plans and the defined benefit plan discussed below were $1,229,000 in 1996
(reduced by $24,000 in forfeitures), $1,107,000 in 1995 (reduced by $289,000 in
forfeitures) and $598,000 in 1994 (reduced by $250,000 in forfeitures). In
fiscal 1997, the Company intends to merge the Retirement Plan into the
Retirement Savings Plan.
The Company maintains a Defined Benefit Pension Plan covering eligible
employees as defined in the Plan,
F-16
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
which was frozen October 1, 1989. Since the benefits under this Plan are based
on the participants' length of service and compensation (subject to Employee
Retirement Income Security Act of 1974 and Internal Revenue Service
limitations), service costs subsequent to October 1, 1989 are excluded from
benefit accruals under the Plan. The funding policy for this Plan is to
contribute amounts actuarially determined as necessary to provide sufficient
assets to meet the benefit requirements of the Plan retirees. The assets of the
Plan are invested in mortgages and bonds.
Net pension expense for fiscal years 1996, 1995 and 1994 included the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Interest cost $ 132 $ 129 $ 128
Actual return on assets (71) (200) 129
Net amortization and deferral:
Asset (loss) gain (34) 77 (266)
Amortization of initial unrecognized transition obligation 51 51 51
Amortization of unrecognized net gain 3 - -
----- ----- -----
Net pension expense $ 81 $ 57 $ 42
===== ===== =====
</TABLE>
The discount rate used to measure the projected benefit obligation for
the Plan is 7%. The assumed long-term rate of return on plan assets in 1996 was
7%.
The Plan's funded status and the amounts recorded on the Company's
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(In Thousands)
<S> <C> <C>
Vested benefit obligations $1,989 $2,175
====== ======
Accumulated benefit obligations $1,989 $2,175
====== ======
Projected benefit obligations $1,989 $2,175
Market value of assets 1,594 1,565
------ ------
Projected benefit obligation in excess of market value (395) (610)
Unrecognized net obligation 602 654
Unrecognized net loss 117 287
Adjustment for minimum liability (719) (941)
------ ------
Net recorded pension (liability) $ (395) $ (610)
====== ======
</TABLE>
In accordance with SFAS 87, the Company has recorded an additional
minimum pension liability for underfunded plans of $719,000 in fiscal 1996 and
$941,000 in fiscal 1995, representing the excess of underfunded accumulated
benefit obligations over previously recorded pension cost liabilities. A
corresponding amount is recognized as an intangible asset except to the extent
that these additional liabilities exceed related unrecognized prior service cost
and net transition obligation, in which case the increase in liabilities is
charged directly to shareholders' equity. As of September 30, 1996, $117,000 of
the excess minimum pension liability resulted in a charge to equity. As of
September 30, 1995, the excess minimum liability was $287,000.
Legal Proceedings:
The Company is involved in certain litigation matters, including
certain product liability actions and actions by two former employees for, among
other things, breach of contract. Such actions seek damages from the Company,
including compensatory and punitive damages. The Company intends to defend
these actions vigorously. The Company believes that these actions are
incidental to the conduct of its business, and that the ultimate resolution
thereof will not have a material adverse effect on its financial condition,
results of operations or liquidity.
In June 1996, the Company settled a claim with its insurance carrier,
filed in 1995, for $1,455,000 related to the interruption of business at one of
its manufacturing facilities. The settlement favorably affected gross margins
by $618,000 in the third quarter of fiscal year 1996, but did not have a
material effect on its financial condition, results of operations or liquidity
for the fiscal year.
F-17
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
September 30, 1996
Restructuring:
Recently, the Company implemented measures in an effort to reduce
costs and increase operating efficiencies. Such measures provided for a
reduction of the work force including the layoff of forty nine employees in
various manufacturing, administrative, and development functions, a
reorganization of certain personnel, and a planned reduction in spending on
advertising, marketing and professional services which is expected to reduce
operating costs in subsequent periods.
A liability of $549,000 was established in the current period for the
cost of the restructuring and the subsequent charge to expense is classified as
"Restructuring charge" on the statement of operations. The charge includes
$424,000 for severance pay, employee benefits, and outplacement services and
$125,000 in consulting and legal fees. The amount of actual termination
benefits paid will be charged against the liability as they are incurred.
Other Matters:
During fiscal year 1996, four of the Company's products accounted for
approximately 58% of its net sales and yielded the substantial portion of the
gross margin of the Company, with one of such products representing a
substantial portion of both net sales and gross margin. During the second half
of calendar 1995, two generic pharmaceutical manufacturers received FDA approval
of a product for which the Company previously had been the sole generic
manufacturer. This product, along with two other products, historically had
accounted for a significant percentage of net sales and gross margin of the
Company. Further, a competitor of the Company in fiscal year 1996 received FDA
approval for a very significant product of the Company for which the Company
previously had been the sole generic manufacturer.
The raw materials essential to the Company's manufacturing business
are purchased primarily from United States distributors of bulk pharmaceutical
chemicals manufactured by foreign companies. To date, the Company has
experienced no significant difficulty in obtaining raw materials and expects
that raw materials will generally continue to be available in the future.
F-18
<PAGE>
SCHEDULE II
PHARMACEUTICAL RESOURCES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------- ---------- --------- ----------- ----------
Additions
Balance at charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
- ----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended September 30, 1996 $208,000 $486,000 $0 $694,000
Year ended September 30, 1995 $124,000 $108,000 $24,000 (b) $208,000
Year ended October 1, 1994 $137,000 $ (9,000)(a) $ 4,000 (b) $124,000
Allowance for returns and price
adjustments:
Year ended September 30, 1996 $1,380,000 $5,886,000 5,317,000 (c) $1,949,000
Year ended September 30, 1995 $2,644,000 $3,632,000 4,896,000 (c) $1,380,000
Year ended October 1, 1994 $2,491,000 $5,481,000 5,328,000 (c) $2,644,000
</TABLE>
(a) Reduction of allowance no longer necessary.
(b) Write-off of uncollectible accounts.
(c) Returns and allowances charged against allowance provided therefor.
F-19
<PAGE>
EXHIBIT INDEX
EXHIBIT NO.
3.1 Certificate of Incorporation of the Registrant. (4)
3.1.1 Certificate of Amendment to the Certificate of Incorporation of the
Registrant, dated August 6, 1992--incorporated by reference to the
Registrant's Registration Statement on Form 8-A (Commission File No.
0-20834), filed with the Commission November 10, 1992.
3.2 By-Laws of the Registrant, as amended and restated. (3)
4 Rights Agreement, dated August 6, 1991, between the Registrant and
Midlantic National Bank, as Rights Agent. (5)
4.1 Amendment to Rights Agreement, dated as of April 27, 1992. (3)
10.1 1983 Stock Option Plan of the Registrant, as amended. (2)
10.2 1986 Stock Option Plan of the Registrant, as amended. (2)
10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (5)
10.4 1989 Employee Stock Purchase Program of the Registrant. (7)
10.5 1990 Stock Incentive Plan of the Registrant, as amended. (2)
10.6 Form of Retirement Plan of Par. (11)
10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984. (6)
10.7 Form of Retirement Savings Plan of Par. (11)
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984. (12)
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984.
(12)
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985.
(12)
10.8 Par Pension Plan, effective October 1, 1984. (4)
10.9 Employment Agreement, dated as of October 4, 1992, among the
Registrant, Par and Kenneth I. Sawyer. (1)
10.10 Lease Agreement between Par and the County of Rockland Industrial
Development Agency, dated as of October 1, 1984. (6)
10.10.1 Lessee Guaranty between Par and Midlantic National Bank, dated as of
October 1, 1984. (6)
10.10.2 Mortgage from County of Rockland Industrial Development Agency to
Midlantic National Bank, as Trustee, dated as of October 1, 1984. (12)
10.10.3 Security Agreement between County of Rockland Industrial Development
Agency and Midlantic National Bank, as Trustee, dated as of October 1,
1984. (12)
<PAGE>
10.11 Lease for premises located at 12 Industrial Avenue, Upper
Saddle River, New Jersey, between Par and Charles and Dorothy Horton,
dated October 21, 1978 and extension dated September 15, 1983. (11)
10.12 Lease Agreement between Par and Ramapo Corporate Park Associates,
dated as of January 1, 1993.
10.13 Employment Agreement, dated as of May 19, 1993, between
the Registrant and Robert I. Edinger. (13)
10.14 Distribution Agreement, dated as of October 16, 1993,
between Genpharm, Inc., the Registrant and PRX Distributors, Ltd. (13)
10.15 Letter Agreement, dated April 30, 1993, between the Generics Group
B.V. and Par. (15)
10.16 Distribution Agreement, dated as of February 24, 1994, between Sano
Corporation, the Registrant and Par, as amended. (15)
10.17 Mortgage and Security Agreement, dated May 4, 1994, between Urban
National Bank and Par. (14)
10.17.1 Mortgage Loan Note, dated May 4, 1994. (14)
10.17.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban
National Bank. (14)
10.18 Letter Agreement, dated as of October 13, 1994, between Par and Robert
I. Edinger. (15)
10.19 1995 Directors Stock Option Plan. (19)
10.20 Stock Purchase Agreement, dated March 25, 1995, between the Registrant
and Clal Pharmaceutical Industries Ltd. (17)
10.21 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995, between
the Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.22 Warrant to Purchase Common Stock, dated May 1, 1995, delivered by the
Registrant to Clal Pharmaceutical Industries Ltd. (17)
10.23 Registration Rights Agreement, dated May 1, 1995, between the
Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.24 Clal Pharmaceutical Resources L.P. Limited Partnership Agreement, dated
as of May 1, 1995, among PRI-Research, Inc., C.T.P. Research and
Development (1995) Ltd. and Clal Pharmaceutical Resources (1995) Ltd.
(17)
10.25 Clal Pharmaceutical Resources (1995) Ltd. Stockholders Agreement, dated
May 1, 1995, among PRI Research, Inc., C.T.P. Research and Development
(1995) Ltd. and Clal Pharmaceutical Resources Ltd. (17)
10.26 Supplemental Agreement, dated as of May 1, 1995, among the Registrant,
Clal Pharmaceutical Industries Ltd. and Clal Pharmaceutical Resources
L.P. (17)
10.27 Guarantee of the Registrant, dated May 1, 1995. (17)
10.28 Guarantee of Clal Pharmaceutical Industries Ltd., dated May 1, 1995.
(17)
10.29 Warrant to Purchase Common Stock, dated September 21, 1995,
delivered by the Registrant to Clal Pharmaceutical Industries Ltd.
<PAGE>
10.30 Commercial Revolving Loan and Term Loan Agreement, dated December
28, 1995, between Fleet Bank, N.A. and the Registrant. (20)
10.31 Master Security Agreement, dated December 28, 1995, between Fleet Bank,
N.A. and Par. (20)
10.32 Equipment Security Agreement, dated December 28, 1995, between Fleet
Bank, N.A. and Par. (20)
10.33 Promissory Note, dated December 28, 1995, of the Registrant. (20)
10.34 Master Security Agreement, dated December 28, 1995, between Fleet Bank,
N.A. and Par. (20)
10.35 Equipment Security Agreement, dated December 28, 1995, between Fleet
Bank, N.A. and Par. (20)
10.36 Cross Acceleration Agreement, dated December 28, 1995, between Fleet
Bank, N.A. and the Registrant. (20)
11 Computation of per share data.
16 Letter regarding change in accountants (18).
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Richard A. Eisner and Company, LLP.
27 Financial Data Schedule.
__________________________________________________
(1) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827)
for the year ended October 3, 1992 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Proxy Statement dated August 10, 1992 and incorporated
herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an Exhibit
to Amendment No. 1 on Form 8 to the Registrant's Registration Statement on
Form 8-B, filed May 15, 1992, and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827)
for the year ended September 28, 1991 and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Proxy Statement dated August 14, 1991 and incorporated
herein by reference.
(6) Previously filed with the Securities and Exchange Commission as an Exhibit
to Par's Annual Report on Form 10-K (Commission File No. 1-9449) for the
year ended September 29, 1990 and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as an Exhibit
to Par's Proxy Statement dated August 16, 1990 and incorporated herein by
reference.
(8) Previously filed with the Securities and Exchange Commission as an Exhibit
to Par's Annual Report on Form 10-K for 1989 and incorporated herein by
reference.
(9) Previously filed with the Securities and Exchange Commission as an Exhibit
to Par's Annual Report on Form 10-K for 1988 and incorporated herein by
reference.
<PAGE>
(10) Previously filed with the Securities and Exchange Commission as an Exhibit
to Par's Annual Report on Form 10-K for 1987 and incorporated herein by
reference.
(11) Previously filed with the Securities and Exchange Commission as an Exhibit
to Par's Registration Statement on Form S-1 (No. 2-86614) and incorporated
herein by reference.
(12) Previously filed with the Securities and Exchange Commission as an Exhibit
to Par's Registration Statement on Form S-1 (No. 33-4533) and incorporated
herein by reference.
(13) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrants' Annual Report on Form 10-K (Commission File No. 1-
10827) for the year ended October 2, 1993 and incorporated herein by
reference.
(14) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 1-
10827) for the quarter ended April 2, 1994 and incorporated herein by
reference.
(15) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 10-K (Commission File No. 1-
10827) for the year ended October 1, 1994 and incorporated herein by
reference.
(16) Previously filed by amendment with the Securities and Exchange Commission
as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission
File No. 1-10827) for the year ended October 1, 1994 and incorporated
herein by reference.
(17) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 8-K (Commission File No. 1-10827)
dated May 2, 1995.
(18) Previously filed with the Securities and Exchange Commission as on exhibit
to the Registrant's Report Form 8-K (Commission File No. 1-10827) dated
September 8,1995 and subsequently amended on October 4, 1995 and October
12, 1995 and incorporated herein by reference.
(19) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Annual Report on Form 10-K (Commission File No.
1-10827) for the year ended September 30, 1995.
(20) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 1-
10827) for the quarter ended December 30, 1995 and incorporated herein by
reference.
<PAGE>
Exhibit 10.12
================================================================================
LEASE
between
RAMAPO CORPORATE PARK ASSOCIATES,
Landlord
and
PAR PHARMACEUTICAL, INC.,
Tenant
For Premises at
100 Red Schoolhouse Road
Chestnut Ridge, New York 10977-6715
================================================================================
10
<PAGE>
TABLE OF CONTENTS
Section Page
- --------------------------------------------------------------------------------
PREAMBLE.................................................................... 2
TERMS AND CONDITIONS........................................................ 2
1. TERM..................................................................... 2
1.1 Initial Term...................................................... 2
1.2 Extension Options................................................. 2
2. USE OF THE LEASED PREMISES............................................... 3
3. RIGHT OF FIRST REFUSAL................................................... 3
4. RENT AND SECURITY DEPOSIT................................................ 4
4.1 Base Rent......................................................... 4
4.2 Payment of Base Rent.............................................. 5
4.3 Security Deposit.................................................. 5
4.4 Lease Allowance................................................... 6
4.5 LANDLORD's Refund of Portion of Base Rent......................... 6
4.6 Late Charges...................................................... 6
5. ADDITIONAL RENT......................................................... 7
5.1 Real Property Taxes............................................... 7
5.2 Common Area Maintenance ("CAM") Charges........................... 10
6. INSURANCE AND INDEMNITY.................................................. 10
6.1 Liability Insurance............................................... 10
6.2 Indemnity by TENANT............................................... 11
6.3 Indemnity by LANDLORD............................................. 11
6.4 Hazard and Rental Income Insurance................................ 12
6.5 Payment of Insurance Premiums..................................... 12
6.6 Insurance Certificate............................................. 12
6.7 LANDLORD's Obligation to Maintain Property and
Liability Insurance............................................... 13
7. COMMON AREAS AND COMMON AREA CHARGES.................................... 13
7.1 Common Areas:..................................................... 13
7.2 Use of Common Areas............................................... 13
7.3 Specific Provisions Re: Vehicle Parking........................... 14
7.4 Maintenance of Common Areas....................................... 14
8. USE OF THE LEASED PREMISES.............................................. 14
8.1 Manner of Use..................................................... 14
8.2 Signs, Auctions, Retail Sales, Etc................................ 15
8.3 LANDLORD's Access................................................. 15
8.4 Quiet Possession.................................................. 15
9. CONDITION OF LEASED PREMISES, MAINTENANCE, TENANT REPAIRS AND
ALTERATIONS............................................................. 16
9.1 Existing Conditions............................................... 16
i
<PAGE>
9.2 Compliance with Laws.............................................. 16
9.3 Obligation to Maintain Leased Premises............................ 16
9.4 Additional Electrical Requirements of TENANT...................... 16
9.5 Exemption of LANDLORD from Liability.............................. 17
9.6 TENANT's Obligations.............................................. 18
10. DAMAGE OR DESTRUCTION.................................................. 19
10.1 Notice by TENANT to LANDLORD of Damage to Leased
Premises.......................................................... 19
10.2 Partial Damage to Leased Premises................................. 19
10.3 Total or Substantial Destruction.................................. 20
10.4 Waiver of Subrogation............................................. 20
10.6 Waiver of RPL Section 227......................................... 21
11. CONDEMNATION........................................................... 21
12. ASSIGNMENT AND SUBLETTING.............................................. 22
12.1 LANDLORD's Consent Required....................................... 22
12.2 TENANT Affiliate.................................................. 22
12.3 No Release of TENANT.............................................. 22
12.4 LANDLORD's Election............................................... 22
12.5 No Merger......................................................... 23
13. DEFAULTS; REMEDIES..................................................... 23
13.1 Events of Default................................................. 23
13.2 Eviction Proceedings.............................................. 23
13.3 Liquidated Damages................................................ 24
14. PROTECTION OF LENDER................................................... 25
14.1 Subordination..................................................... 25
14.2 Successor LANDLORD................................................ 25
14.3 Signing of Documents.............................................. 25
14.4 Estoppel Certificates............................................. 25
14.5 Non-Disturbance Agreement......................................... 26
14.6 Collateral Assignment of Lease.................................... 27
15. CONDITION OF LEASED PREMISES UPON END OR TERMINATION OF LEASE.......... 27
16. LEGAL COSTS............................................................ 27
16.1 TENANT's Duties to LANDLORD Regarding Legal
Proceedings....................................................... 27
16.2 LANDLORD's Duties to TENANT Regarding Legal
Proceedings....................................................... 28
17. BROKERAGE.............................................................. 28
17.1 No Other Brokers.................................................. 29
17.2 TENANT's Right to Pay Broker...................................... 29
18. MISCELLANEOUS PROVISIONS............................................... 29
18.1 Non-Discrimination................................................ 29
18.2 Definition of LANDLORD............................................ 30
ii
<PAGE>
18.3 TENANT's Duty to Give Notice of LANDLORD's Breach of
Lease............................................................. 30
18.4 Severability...................................................... 30
18.5 Interpretation.................................................... 30
18.6 Incorporation of Prior Agreements: Modifications.................. 31
18.7 Notices........................................................... 31
18.8 Waivers........................................................... 31
18.9 No Recordation.................................................... 32
18.10 Binding Effect: Choice of Law.................................... 32
18.11 Corporate Authority; Partnership Authority....................... 32
18.12 Force Majeure.................................................... 32
18.13 Confidentiality.................................................. 33
18.14 Execution of Lease............................................... 33
18.15 Fire Protection.................................................. 33
18.16 Blinds and Door Sidelights....................................... 33
18.17 Glass Replacement................................................ 34
18.18 Waiver of Trial by Jury.......................................... 34
18.19 Compliance with Laws............................................. 34
iii
<PAGE>
LEASE AGREEMENT
---------------
LEASE AGREEMENT made as of this 1st day of January, 1993, between RAMAPO
CORPORATE PARK ASSOCIATES ("LANDLORD"), with offices at 100 Red Schoolhouse
Road, Chestnut Ridge, New York 10977-6715, and PAR PHARMACEUTICAL, INC.
("TENANT") at One Ram Ridge Road, Chestnut Ridge, New York 10977.
PREAMBLE
--------
The TENANT is leasing, pursuant to a certain written lease, part of the
premises located at 100 Red Schoolhouse Road, Chestnut Ridge, New York
10977-6715. The LANDLORD represents and TENANT accepts that the leased
premises consist of approximately 77,180 square feet of floor area, being such
portions of Buildings "A" and "B" at that location as follows: Building "A" -
Units, 1, 2, 3, 4, 5, 6, 7B, 7D, 8, 10 and 11 and Building "B" - Units 2, 3, 4,
5, 6, 7, and 8, all as more particularly described in the schedule attached
hereto as Exhibit A, which is incorporated by reference herein. The leased
premises shall hereafter be referred to in this Lease as "the Leased Premises."
The term of the previous lease governing the Leased Premises expired on or
about December 31, 1992, and such lease is of no further force and effect;
TENANT and LANDLORD desire to enter into a new lease to govern their
relationship for at least the next five years upon the terms and conditions
contained in this Agreement.
TENANT and LANDLORD, therefore, agree as follows:
TERMS AND CONDITIONS
--------------------
1. TERM
1.1 Initial Term
------------
The lease term shall be for a period of 5 years starting as of
January 1, 1993 and ending on December 31, 1997 (hereafter: the
"Initial Term"), subject to extension under Paragraph 1.2 below.
1.2 Extension Options
-----------------
TENANT shall have the option to extend the lease term for at least
three (3) periods of five (5) years each subject to all of the other
provisions of this Lease, by giving written notice of its intent to
renew the lease at least nine (9) months prior to the expiration of
the Initial Term (or any extension thereof).
<PAGE>
2. USE OF THE LEASED PREMISES
The Leased Premises may be used for any lawful purpose including, but not
limited to, office, warehousing, distribution and receiving of goods and
manufacturing; provided however, that as a result of any change in the present
use of the Leased Premises TENANT shall not be entitled to any substantially
greater portion of the existing parking facilities than it uses at the date of
this Lease.
3. RIGHT OF FIRST REFUSAL
In the event that any space in Buildings A or B (but not Building C) at 100
Schoolhouse Road that is not currently part of the Leased Premises should, from
time to time, become unoccupied or otherwise available ("Available Space"), the
following shall apply:
3.1 The LANDLORD shall not offer to lease Available Space to any
person, including without limitation, any other tenant of LANDLORD,
unless and until LANDLORD shall have first offered to lease the same
to TENANT, in writing ("First Offer"), specifying the rent, term,
designated space and other material terms acceptable to LANDLORD.
Unless TENANT accepts such offer in writing within thirty (30) days
after receipt by TENANT of the First Offer (subject to the
negotiation in good faith, execution and delivery of a written lease
for the Available Space), LANDLORD shall have the right to enter into
a lease for such space with a third party; provided however, that
such lease with a third party shall: (i) include terms and conditions
no more favorable to the tenant than those specified in the First
Offer, and (ii) be executed and delivered within six (6) months after
the date of the First Offer.
3.2 Notwithstanding that TENANT shall not have accepted the First
Offer pursuant to Section 3.1 above, the LANDLORD shall not enter
into any lease with a third party for the Available Space, which
lease provides for an effective rent (after giving effect to all
concessions, allowances, abatements and the cost of any LANDLORD's
work) less than ninety (90%) percent of the effective rent provided
in the First Offer, unless and until LANDLORD shall have first
offered to TENANT in writing (the "Offer of First Refusal") the right
to enter into a lease for such space upon substantially all of the
same terms and conditions as contained in the lease offered and
acceptable to such third party. Unless TENANT accepts such Offer of
First Refusal within seven (7) days after its receipt of the same,
the LANDLORD shall have the right to enter into such lease with such
third party; provided however, that unless LANDLORD enters into such
lease within the next succeeding forty-five (45) days, the
then-current lease offered to a third party shall again become
subject to the foregoing restrictions.
12
<PAGE>
4. RENT AND SECURITY DEPOSIT
4.1 Base Rent
---------
4.1.1 During the Initial Term, TENANT shall pay as Base Rent the
following:
Months 1-30 an annual rent of $416,772.00 or $34,731.00 per
month.
Months 31-60 an annual rent of $436,067.00 or $36,338.92 per
month.
4.1.2 During the extension periods under Paragraph 1.2, TENANT
shall pay the following as annual Base Rent:
4.1.2.1 During the first thirty (30) months of the first
extension period, an annual Base Rent of
$455,362. During the second thirty (30) months of
the first extension period, an annual Base Rent
of $474,657.
4.1.2.2 During the second and third extension periods,
the annual rent shall be equal to 95% of the
projected fair market rental value of the Leased
Premises as of the commencement date of the
applicable extension period.
4.1.2.2.1 In the event that the LANDLORD and
TENANT shall not have agreed upon the
fair market value of the Leased
Premises at least four (4) months prior
to the commencement date of the second
or third extension periods, as
applicable, such value shall be
determined by commercial real estate
MAI appraisers, one of which is
selected by the LANDLORD and one of
which is selected by the TENANT.
4.1.2.2.2 If the appraisals of such two
appraisers shall differ by less than
10%, the two appraisals shall be
averaged and the result thereof shall
constitute the agreed upon fair market
rental
13
<PAGE>
value of the Leased Premises for the
purposes hereof. If the two appraisals
shall differ by 10% or more, then the
two appraisers so selected shall select
another mutually acceptable MAI
appraiser who shall select from the two
existing appraisals that appraisal
which the third appraiser believes to
be the most fair and accurate appraisal
of the fair market rental, which
appraisal shall constitute the agreed
upon fair market rental value of the
Leased Premises for the purposes
hereof. The cost and expense of the
third licensed appraiser, if required,
shall be shared equally by LANDLORD and
TENANT.
4.2 Payment of Base Rent
--------------------
Upon execution of this Lease, TENANT shall pay LANDLORD the Base Rent in
the amount stated in Paragraph 4.1 above for the first month of the Initial
Term. On the first day of the second month of the Lease Term and each month
thereafter (and during any extension period), TENANT shall pay LANDLORD the
applicable Base Rent, in advance, without offset (except as expressly
provided in this Lease), deduction and/or prior demand. The Base Rent shall
be payable at LANDLORD's address first set forth above or at such other
place as LANDLORD may designate in writing, except as expressly provided
for in this Lease.
4.3 Security Deposit
----------------
LANDLORD and TENANT acknowledge that TENANT previously had deposited the
sum of $42,000 as a security deposit (hereafter: "security deposit")
relative to TENANT'S prior lease of the Leased Premises and that this sum
shall continue to be retained by LANDLORD as security against TENANT's
performance of its duties under this Lease. Commencing as of January 1,
1993, LANDLORD shall retain the security deposit in an interest bearing
account separate from all other funds of or held by LANDLORD, with one-half
of the interest accruing to the benefit of TENANT and paid to TENANT
annually. Upon ten (10) days prior notice to TENANT, the LANDLORD may
apply all or part of the Security Deposit under this lease as and to the
extent necessary to cure any outstanding material default of TENANT
provided that any applicable grace period shall have expired. If LANDLORD
uses any part of the Security Deposit, TENANT shall restore the Security
Deposit to its full amount with thirty (30) days after
14
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LANDLORD's written request. TENANT's failure to do so shall be a material
default under this Lease.
4.4 Lease Allowance
---------------
Within fifteen (15) days after the execution of this Lease, LANDLORD shall
pay to TENANT the sum of $120,000 in consideration of this Lease. If the
Term is not extended after the Initial Term, except due to the default of
LANDLORD, TENANT shall refund to LANDLORD, within fifteen days of the
expiration of the Initial Term, the sum of $60,000; provided however, that
if the Initial Term is terminated by reason of the default of TENANT, such
refund shall be due within fifteen (15) days after such termination.
4.5 LANDLORD's Refund of Portion of Base Rent
-----------------------------------------
LANDLORD shall pay to TENANT a lump sum payment equal to one percent (1%)
of the total aggregate Base Rent for the balance of the then current Term
upon the occurrence of either and each of the following events: (a) the
execution of this Lease and (b) the commencement of any extension period
under this Lease.- In addition, in the event that an agreement is executed
whereby TENANT leases space at the Project in addition to the Leased
Premises, LANDLORD shall pay to TENANT a lump sum payment equal to one (1%)
percent of the aggregate Base Rent payable with respect to such additional
space for the balance of the then current Term. In the event any payment
due by reason of this Section 4.5 is not received by TENANT within thirty
(30) days after it is due, in addition to such other rights and remedies
available at law or in equity, TENANT shall have the right to offset
against the rent or additional rent next coming due to LANDLORD the amount
due under this section together with interest, thereon at the rate of
eighteen (18%) percent per annum (the "Default Rate") from the date which
is thirty (30) days after the due date, to and including the date payment
in full is actually so applied.
4.6 Late Charges
------------
TENANT's failure to pay rent or additional rent promptly may cause LANDLORD
to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include,
but are not limited to, processing and accounting charges and late charges
which may be imposed on LANDLORD by any ground lease, mortgage or trust
deed encumbering the Leased Premises. Therefore, if LANDLORD does not
receive any rent payment within ten (10) days after it becomes due, TENANT
shall pay LANDLORD a late charge equal to five percent (5%) of the overdue
amount. The parties agree that such late charge represents a fair and
reasonable estimate of
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the costs LANDLORD will incur by reason of such late payment. In addition
to the foregoing late charge, in the event that such rent payment is not
paid within (90) days after it becomes due, LANDLORD shall be entitled to
interest on the unpaid amount from and after such 90th day at the Default
Rate (as defined in Section 4.5 above).
5. ADDITIONAL RENT
All charges payable by TENANT to LANDLORD, other than Base Rent are called
Additional Rent. All Additional Rent that has been billed shall be paid within
thirty (30) days (fifteen (15) days with respect to TENANT's Tax share)
following receipt by TENANT of the invoice relating thereto. TENANT shall be
entitled to receive from LANDLORD such documentation to support a demand for
payment of Additional Rent as TENANT may reasonably require. Additional Rent
shall include the items described in this Article 5.
5.1 Real Property Taxes:
-------------------
5.1.1 For purposes of this Section 5.1, the following terms
shall have the following meanings:
5.1.1.1 "Real Property Taxes" shall mean (i) any fee, license
fee, license tax, commercial rental tax, levy, charge,
assessment, or tax imposed by any taxing authority on
the LANDLORD relative to the Leased Premises or the
land upon which the Leased Premises are located; (ii)
any tax or charge for fire protection, streets,
sidewalks, road maintenance, refuse or other services
provided to the Leased Premises by any governmental
agency; (iii) any tax imposed upon this transaction or
based upon a reassessment of the Leased Premises due
to a change in ownership or transfer of all or part of
LANDLORD's interest in the Leased Premises; and (iv)
any charge or fee replacing any tax previously
included within the definition of Real Property Taxes.
"Real Property Taxes" do not, however, include
LANDLORD's federal, state, or local income, franchise,
inheritance or estate taxes, or any other tax not
related to the Leased Premises.
5.1.1.2 "TENANT's Proportionate Share" shall mean an amount
calculated by the LANDLORD based upon the following:
5.1.1.2.1 The land assessment for the entire Project
shall be allocated to the
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Leased Premises based upon the ratio of the
floor area of the Leased Premises to the
entire floor area for all of the buildings
comprising the Project, which the parties
acknowledge is equal to 50.2% as of the
date of this Lease; plus
5.1.1.2.2 The assessment for the buildings in which
the Leased Premises are located shall be
allocated to the Leased Premises based upon
the assessment for each building as
determined by the municipal records and the
portion of such assessment for the Leased
Premises shall be based upon the ratio of
the floor area of the Leased Premises to
the entire floor area for each building.
5.1.1.2.3 The amount (a) determined pursuant to
Section 5.1.1.2.1 plus the amount
determined by Section 5.1.1.2.2 (b) divided
by the total assessment for the entire
Project shall be the TENANT's Proportionate
Share.
5.1.1.2.4 If the above formula for the allocation
of taxes must be discontinued because of
the unavailability of adequate information
from municipal records, a similar formula
for the equitable allocation of the taxes
shall be developed by the LANDLORD, using
any reasonable method to allocate TENANT's
Proportionate Share.
5.1.1.2.5 Notwithstanding the foregoing, if the
taxing authority discontinues the separate
assessment of the improvements (for its
internal worksheet purposes) at the
Project, then, based upon improvements
existing as of the date of this Lease,
"Tenant's Proportionate Share" shall mean
50.2% provided however, that such
percentage is intended to represent the
percentage of floor area comprising the
Leased Premises divided by the total floor
area comprising the Project (hereinbelow
defined). In the
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event that the Project is expanded, or the
amount of floor area included in the
Project is increased, the TENANT's
Proportionate Share shall be reduced
accordingly.
5.1.1.2.6 In any event, LANDLORD shall apply the same
method of determining the share of Real
Property Taxes payable by all Tenants at
the Project in the same manner.
5.1.1.3 "TENANT's Tax Share" shall mean TENANT's
Proportionate Share of Real Property Taxes.
5.1.2 At any time during the Term, LANDLORD shall render to TENANT
a statement or statements ("LANDLORD's Statement") showing the
amount of TENANT's Tax Share, together with the calculation of
same and a copy of the information available from the taxing
authorities in support of the information contained in such
LANDLORD's Statement. LANDLORD's failure to render a
LANDLORD's Statement during or with respect to any period
shall not prejudice LANDLORD's right to render a LANDLORD's
Statement during or with respect to any subsequent period, and
shall not eliminate or reduce TENANT's obligation to pay
TENANT's Tax Share.
5.1.3 TENANT shall pay the TENANT's Tax Share to LANDLORD
within fifteen (15) days following receipt by TENANT of
LANDLORD's Statement.
5.1.4 LANDLORD's determination of TENANT's Tax Share pursuant
to a LANDLORD's statement shall be binding on TENANT unless
TENANT objects in writing to such statement within ninety (90)
days after receipt thereof by TENANT.
5.1.5
5.1.5.1 If, as a result of any application or proceeding
brought by or on behalf of LANDLORD, LANDLORD shall
receive a refund of Taxes for any tax year in respect
of which TENANT shall have paid TENANT's Tax Share,
LANDLORD shall promptly notify TENANT thereof and
shall either pay to TENANT, or permit TENANT to credit
against subsequent payments of Rent under this Lease,
TENANT's Proportionate Share of the refund, less
TENANT's Proportionate Share of any reasonable
attorney's or consultant's fees and expenses incurred
by LANDLORD by reason of such application;
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5.1.5.2 In the event that (a) LANDLORD elects not to make
timely application to contest or review by appropriate
legal proceedings the amount of the assessment for
Real Property Taxes during each year of the term of
this Lease and to prosecute such application with due
diligence in order to seek a reduction in such
assessment, and (b) TENANT shall have notified
LANDLORD that TENANT would like the opportunity to
make such application for any given year, unless
LANDLORD shall have notified TENANT of its election to
make such application no later than seven (7) days
prior to the last date for the filing of such
application, TENANT shall have the right to file such
application and LANDLORD shall cooperate with TENANT
and shall execute any documents reasonably required in
furtherance thereof. TENANT shall be entitled to
receive TENANT's Proportionate Share of any refund
resulting from such application, after deducting from
such refund the fees and expenses incurred by TENANT
in connection therewith. LANDLORD shall pay to TENANT
such amount if the refund is initially received by
LANDLORD.
5.2 Common Area Maintenance ("CAM") Charges
---------------------------------------
5.2.1 As and for its share of the LANDLORD's cost of repairing,
maintaining, replacing and operating the Common Areas (as
defined in Section 7.1 below), the TENANT shall pay to
LANDLORD an amount ("CAM Charges") equal to Thirty-eight
Thousand, Five Hundred Ninety ($38,590.00) Dollars per annum,
in equal monthly installments of Three Thousand, Two Hundred
Fifteen and Eighty Three Hundredths ($3,215.83) Dollars each,
beginning as of the first day of January, 1993.
5.2.2 The amount of CAM Charges shall be increased as of January 1
of each year during the Term (including each extension term)
beginning January 1, 1994 by an amount equal to Five (5%)
percent of the amount of CAM Charges for the prior year.
5.2.3 The amount of CAM Charges as determined pursuant to this
Section 5.2 shall be the sole responsibility of the TENANT
with respect to LANDLORD's cost of operating, maintaining,
repairing or replacing the Common Areas, notwithstanding the
actual cost thereof incurred by LANDLORD.
6. INSURANCE AND INDEMNITY
6.1 Liability Insurance
-------------------
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During the Lease Term, TENANT shall maintain policies of
comprehensive public liability insurance at TENANT's expense,
insuring LANDLORD against liability arising out of the use or
occupancy or maintenance of the Leased Premises. The initial amount
of such liability insurance shall be at least $1,000,000 per
occurrence combined single limit with at least a $2,000,000 annual
aggregate. If TENANT has operations at more than one location, the
TENANT's policy should be endorsed to provide that the aggregate
apply to the Leased Premises separately from such other locations.
6.2 Indemnity by TENANT
-------------------
Except as provided below, TENANT shall indemnify LANDLORD against and
hold LANDLORD harmless from any and all costs, claims or liability
(hereafter collectively referred to as "Damages") arising from: (a)
TENANT's negligent or willful misuse of the Leased Premises, (b) the
conduct of TENANT's business or anything else done or permitted by
TENANT to be done in or about the Leased Premises; (c) any material
breach or default in the performance of TENANT's obligations under
this Lease; (d) any knowing misrepresentation or material breach of
warranty by TENANT under this lease; or (e) other wrongful acts or
omissions of TENANT causing injury to LANDLORD; provided, however,
that no such duty to indemnify or hold harmless shall arise to the
extent that the Damages arise out of the negligent or willful
misconduct of LANDLORD or LANDLORD's breach of this Lease. TENANT
shall defend LANDLORD against any such Damages at TENANT's expense
with counsel reasonably acceptable to LANDLORD. As a material part of
the consideration to LANDLORD, TENANT hereby assumes all risk of
damage to property or injury to persons in or about the Leased
Premises arising from any cause, and TENANT hereby waives all claims
in respect thereof against LANDLORD, except for any claim arising out
of LANDLORD's negligence or wilful misconduct. This Indemnity and
Hold Harmless clause must be included in the public liability and
property damage insurance policies and should be so stated on the
Certificate of Insurance.
6.3 Indemnity by LANDLORD
---------------------
Except as provided below, LANDLORD shall indemnify TENANT against and
hold TENANT harmless from any and all Damages arising from: (a)
LANDLORD's negligent or willful misuse of the Leased Premises, (b)
the conduct of LANDLORD's business or anything else done or permitted
by LANDLORD to be done in or about the Leased Premises; (c) any
material breach or default in the performance of LANDLORD's
obligations under this Lease; (d) any knowing misrepresentation or
material breach of warranty by LANDLORD under this lease; or (e)
other wrongful acts or omissions of LANDLORD causing injury to
TENANT; provided, however, that no such duty to indemnify or hold
harmless shall
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<PAGE>
arise to the extent that the Damages arise out of the negligent or
willful misconduct of TENANT or TENANT's breach of this Lease.
LANDLORD shall defend TENANT against any such Damages at LANDLORD's
expense with counsel reasonably acceptable to TENANT.
6.4 Hazard and Rental Income Insurance
----------------------------------
During the term of the lease and any extension period, TENANT shall
maintain a policy(ies) of insurance at TENANT's expense for the
benefit of the LANDLORD, covering all leasehold improvements and
betterments of the Leased Premises, to the extent that said
improvements or betterments belong to the LANDLORD under this Lease,
for full replacement value of not less than $100,000.00 and loss of
business income coverage of not less than at least one years rent,
estimated pro-rata share of real property taxes and common area
charges. Such policies shall be written under a "special perils" or
broader form of insurance and shall name the LANDLORD as an
additional insured and loss payee as respects the above subjects of
insurance. Such policy(ies) shall contain a provision obligating the
insurer(s) to provide a 30 day written notice of non-renewal or
material change of coverage and a provision stating that the LANDLORD
has no obligation of any kind for the payments of premiums under the
policy(ies). Deductibles, if any, under the policy(ies) shall apply
to TENANT's portion of any losses.
6.5 Payment of Insurance Premiums
-----------------------------
TENANT shall pay all premiums for the insurance policies covering the
Leased Premises described above and evidence of payment of the
insurance premiums for all of the aforementioned policies must be
submitted to the LANDLORD within twenty (20) days after commencement
date of the policies or the due date of premium, whichever is later.
All insurance shall be maintained with companies, licensed to do
business in New York on an admitted basis by the New York State
Insurance Department, holding a "General Policyholder's Rating" of B+
or better, as set forth in the most current issue of "Best's
Insurance Guide." TENANT shall be liable for the payment of any
deductible amount under insurance policies.
6.6 Insurance Certificate
---------------------
The LANDLORD shall be an additional assured under the policies
required by this Section 6. The TENANT shall, within five (5) days of
signing a Lease, supply the LANDLORD with Certificates of Insurance,
reflecting the stated limits of insurance carried and excess, if any,
naming the LANDLORD as an assured, and such Certificates shall have
thirty (30) days written notice of cancellation to the LANDLORD
without any obligation for premium payments by LANDLORD.
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6.7 LANDLORD's Obligation to Maintain Property and Liability Insurance
------------------------------------------------------------------
At all times during the Term, LANDLORD shall, at its sole cost and
expense, maintain policies of comprehensive public liability
insurance having a coverage limit of not less than $2,000,000 and
property damage insurance for the full replacement value of the
Project.
7. COMMON AREAS AND COMMON AREA CHARGES
7.1 Common Areas:
------------
As used in this Lease, "Common Areas" means, with respect to the
contiguous properties owned by LANDLORD at 100 Rusten Corporate Park
("the Project") in which the Leased Premises are located, those
areas, equipment and facilities which are or become available for the
common use of tenants of the Project and which are not leased or held
for the exclusive use of TENANT or other tenants under existing
agreements, including, but not limited to, building systems, parking
areas, driveways, sidewalks, loading areas, access roads, corridors
landscaping and planted areas. LANDLORD may from time to time change
the size, location, nature and use of any of the Common Areas into
leasable areas, constructing additional parking facilities (including
parking structures) in the Common Areas, and increasing or decreasing
Common Area land and/or facilities. TENANT acknowledges that such
activities may result in occasional inconvenience to TENANT from time
to time. Such activities and changes shall be expressly permitted if
they do not materially affect TENANT's use, occupancy and enjoyment
of the Leased Premises.
7.2 Use of Common Areas
-------------------
TENANT shall have the nonexclusive right (in common with other
tenants and all others to whom LANDLORD has granted or may grant such
rights) to use the Common Areas for the purposes intended, subject to
such reasonable rules and regulations as LANDLORD may establish from
time to time on notice to TENANT; provided however, that such rules
and regulations shall be applied to all tenants of LANDLORD in a
non-discriminatory manner; and provided further, however, that, any
rules and regulations shall not increase the rent or other charges
due hereunder or in any way materially increase TENANT's duties or
materially decrease TENANT's rights under this Lease. TENANT shall
abide by such rules and regulations and shall use its reasonable best
efforts to cause others who use the Common Areas with TENANT's
expressed or implied permission to abide by LANDLORD's rules and
regulations. At any time, LANDLORD may close any Common Areas to
perform any acts in and to the Common Areas as, in LANDLORD's
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<PAGE>
reasonable judgement, may be desirable to improve the Project;
provided that the same do not materially or adversely affect TENANT's
use, occupancy or enjoyment of the Leased Premises. TENANT shall not,
at any time, interfere with the rights of LANDLORD, other tenants, or
any other person entitled to use the Common Areas.
7.3 Specific Provisions Re: Vehicle Parking
---------------------------------------
TENANT shall be entitled to use the vehicle parking spaces in the
Project without payment of any additional rent. TENANT's parking
shall not be reserved (provided however, that the parking available
to TENANT as of the date hereof shall not be materially reduced or
restricted) and shall be limited to vehicles no larger than standard
size automobiles or pickup utility vehicles. TENANT shall not cause
large trucks or other large vehicles to be parked within the front of
Project or on the adjacent streets. Temporary parking of large
delivery vehicles in the Project shall be permitted by the rules and
regulations established by LANDLORD. Vehicles shall be parked only in
striped parking spaces and not in driveways, loading areas or other
locations not specifically designed for parking.
7.4 Maintenance of Common Areas
---------------------------
LANDLORD shall maintain the Common Areas in good order, condition and
repair, free of ice, snow, or other physical barriers or obstacles to
TENANT'S free use of the Leased Premises, and shall operate the
Project, as a first class industrial/commercial real property
development. TENANT shall pay for any increase in the property
insurance premiums for such buildings to the extent caused by
TENANT's acts, omissions, use or occupancy of the Leased Premises.
The LANDLORD will insure all common areas for liability and property
damage two million dollars ($2,000,000.00) per occurrence.
8. USE OF THE LEASED PREMISES
8.1 Manner of Use
-------------
TENANT shall not cause or permit the space to be used in any way
which constitutes a violation of any law, ordinance, or governmental
regulation or order; provided that the foregoing shall not apply to
any violation of laws, rules, codes or other legal requirements
applicable to TENANT's pharmaceutical operations within the Demised
Premises.
TENANT covenants and agrees not to suffer, permit, introduce or
maintain in, on or about any portion of the Leased Premises, any
asbestos, polychlorinated biphenyls or any other hazardous or toxic
materials, wastes and substances which are defined, determined or
identified as such (including petroleum products
23
<PAGE>
if they are defined, determined or identified as such) in any
federal, state or local laws, rules or regulations (whether now
existing or hereafter enacted or promulgated) or any judicial or
administrative interpretation of any thereof, including any judicial
or administrative orders or judgments applicable to the Leased
Premises (collectively, "Environmental Laws"), if and to the extent
the same constitutes a violation of any Environmental Laws.
8.2 Signs, Auctions, Retail Sales, Etc.
-----------------------------------
No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted, or affixed by any TENANT on any part of the
outside or inside of the demised premises or building without the
prior written consent of the LANDLORD, which shall not be
unreasonably withheld, and, if required, any appropriate local
governmental body. In the event of the violation of the foregoing by
any TENANT, LANDLORD may remove same without any liability, and may
charge the expense incurred by such removal to the TENANT or TENANTs
violating these rules. Interior signs on doors shall be inscribed,
painted or affixed at the expense of the TENANT, and shall be of a
size, color and style acceptable to the LANDLORD, such acceptability
to not be unreasonably withheld, and, if required, by Municipal
Agencies and Departments. TENANT shall not conduct or permit, unless
required by law or court order, any retail sales, auctions, or
sheriff's sales at the Leased Premises. The LANDLORD will maintain a
Building Directory and the TENANT will be given two (2) listings at
no charge. If the TENANT will require additional listings, the
TENANT will pay the LANDLORD the cost for each additional listing.
8.3 LANDLORD's Access
-----------------
LANDLORD or its agents may enter the Leased Premises during business
hours to show the Leased Premises to potential buyers, investors, or
other parties, or for any other purpose LANDLORD deems necessary or,
during the last nine (9) months of the Lease Term, to show the Leased
Premises to potential tenants, . LANDLORD shall give TENANT prior
written notice of such entry, except in the case of an emergency and
shall use its best efforts to minimize disruption of TENANT's
business. LANDLORD may place customary "For Sale" or "For Lease"
signs on the Leased Premises no earlier than 9 months prior to the
termination of this Lease. During the Lease Term, except as
specifically authorized in writing by TENANT, LANDLORD shall not take
photographs, make drawings of, or in any other way reproduce the
interior of the Leased Premises. Any action taken by the LANDLORD
under this Paragraph shall not disrupt the TENANT's business.
8.4 Quiet Possession
----------------
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If TENANT pays the rent and complies with all other terms of this
Lease, TENANT may occupy and enjoy the Leased Premises for the full
Term, subject to the provisions of this Lease.
9. CONDITION OF LEASED PREMISES, MAINTENANCE, TENANT REPAIRS AND ALTERATIONS
9.1 Existing Conditions
-------------------
Except with respect to the roof, and as otherwise provided in
Sections 9.2, 9.3 and 9.4 and 9.6.1 in this Lease, TENANT accepts the
Leased Premises in its current condition. TENANT shall be
responsible for watertightness of any installation of any equipment
heretofore or hereafter installed by TENANT on the roof of any
building. TENANT shall be responsible for any damage caused to the
roof due solely to the installation or maintenance of any equipment
by TENANT. Except as provided in this Paragraph 9.1, nothing herein
contained shall be deemed or construed to relieve the LANDLORD of its
liability to maintain the roof in good repair and condition.
9.2 Compliance with Laws
--------------------
LANDLORD shall perform all alterations, structural or non-
structural, which shall be required or appropriate in order that the
current main, exterior entrances to the Leased Premises (one in each
of the buildings) comply with the provisions of the Americans With
Disabilities Act, to the extent applicable to the Leased Premises.
9.3 Obligation to Maintain Leased Premises
--------------------------------------
Subject to the other provisions of this Lease, TENANT shall have
responsibility to repair, maintain or replace all portions of the
Leased Premises; provided however, that, subject to the provisions of
Section 9.6.1 below, LANDLORD shall have responsibility to repair,
maintain or replace the sprinkler system (except to the extent the
same shall be due to TENANT's improper installation of the same), and
structural elements of the Building, including without limitation
roof, exterior walls (excluding windows and exterior doors and
overhead doors, which shall be the obligation of TENANT to maintain,
repair or replace) and floor slabs. In the event that LANDLORD fails
to perform any obligation on its part to be performed within ninety
(90) days after notice from TENANT (or within such lesser period of
time as may be reasonable in the event of any emergency), TENANT
shall have the right to perform such obligation. In that event,
LANDLORD shall reimburse TENANT for the reasonable cost thereof, with
interest thereon at the Default Rate.
9.4 Additional Electrical Requirements of TENANT
--------------------------------------------
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The TENANT will notify the LANDLORD by July 15, 1993 of any
additional electrical supply requirements of TENANT. The LANDLORD
shall cause such additional electrical supply to be provided to
TENANT within ninety (90) days after such notice into the meter room
of buildings "A" and "B". During the term of the Lease the LANDLORD
shall have no further obligation to provide any modification to the
electrical power system. The TENANT will provide it's own
distribution of the electrical power from the meter rooms to its
Premises.
9.5 Exemption of LANDLORD from Liability
------------------------------------
9.5.1
LANDLORD shall not be liable for any damage or injury to the person,
business (or any loss of income therefrom), goods, wares, merchandise
or other property of TENANT, TENANT's employees, invitees, customers
or any other person in or about the Leased Premises, whether such
damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures or any other cause;
(c) conditions arising in or about the Leased Premises or upon other
portions of the Project of which the Leased Premises is a part, or
from other sources or places; or (d) any act or omission of any other
tenant of the Project which the Leased Premises is a part. LANDLORD
shall not be liable for any such damage or injury even though the
cause of or the means of repairing such damage or injury are not
accessible to TENANT. The provisions of this Section shall not,
however, exempt LANDLORD from any damage, injury or other liability
arising out of LANDLORD's negligence, willful misconduct, or breach
of this Lease.
9.5.2
LANDLORD (and, in case LANDLORD shall be a joint venture,
partnership, tenancy-in-common, association or other form of joint
ownership and the members of any such joint venture, partnership,
tenancy-in-common, association or other form of joint ownership)
shall have absolutely no personal liability with respect to any
provision of this Lease, or any obligation or liability arising
therefrom or in connection herewith. TENANT shall look solely to the
equity of the then owner of the Demised Premises in the Demised
Premises (or, if the interest of LANDLORD and the Demised Premises is
only a leasehold interest, TENANT shall look solely to such leasehold
interest) for the satisfaction of any remedies of TENANT in the event
of a breach by LANDLORD of any of its obligations. Such exculpation
of liability shall be absolute and without any exception whatsoever.
Notwithstanding the foregoing, TENANT shall have the right to offset
or deduct from amounts otherwise due and
26
<PAGE>
owing to LANDLORD under this Lease, amounts due from LANDLORD to
TENANT under this Lease.
9.6 TENANT's Obligations
--------------------
9.6.1 Maintenance
Without limiting the LANDLORD's responsibility to maintain the
building, TENANT shall keep the Leased Premises (including any
systems and equipment constituting a part of the Leased Premises, but
excluding any Common Area or building systems which are intended to
service more than one tenant at the Project) in good order during the
Lease Term. TENANT shall also maintain a preventive maintenance
contract providing for the regular inspection and maintenance of the
heating and air conditioning system by a licensed heating and air
conditioning contractor. However, in the event that TENANT fails to
do so, LANDLORD shall have the right, upon thirty (30) days prior
written notice to TENANT, to undertake the responsibility for
preventive maintenance of the heating and air conditioning system, at
TENANT's reasonable expense. It is the intention of the LANDLORD and
TENANT that, at all times during the Lease Term, TENANT shall
maintain the Leased Premises in an attractive, first-class and fully
operative condition. TENANT may not do any non-structural
alterations to the exterior of the Leased Premises or the Common
Areas. TENANT may not do or make any structural alterations to the
interior of the leased areas (including the sprinkler system) without
written consent of the LANDLORD; provided that such consent shall not
be unreasonably withheld. LANDLORD hereby consents to TENANT making
those improvements set forth on the schedule annexed hereto as
Exhibit B, subject to compliance by TENANT with all applicable
municipal laws, regulations and requirements.
In the event that TENANT undertakes any alterations to the sprinkler
system in the Leased Premises, TENANT shall use such contractor as
LANDLORD shall designate or approve; provided however, that if the
estimated cost of such alterations exceeds $7,500 (plus 5% per annum
of such amount to the date TENANT seeks to make such alterations)
TENANT shall use such contractor as LANDLORD shall approve, which
approval shall not be unreasonably withheld or delayed.
Notwithstanding anything contained in Section 9.3 of the Lease,
TENANT shall be responsible for any defects in and the maintenance of
any alterations to the sprinkler system which it has heretofore, or
shall hereafter make, unless such alterations are made pursuant to
TENANT's right to cure a default by LANDLORD under this Lease.
9.6.2 Liens or Encumbrances
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The TENANT shall use its reasonable best efforts to not cause any
liens or encumbrances to be filed against the Leased Premises. If
any liens or encumbrances are be filed, the TENANT will remove any
liens or encumbrances of record, by bonding or otherwise, within
thirty (30) days after written notice to TENANT. TENANT shall pay
when due all proper claims for labor and material furnished at its
request to the Leased Premises. TENANT shall give LANDLORD at least
ten (10) days prior written notice of the commencement of any
non-regular maintenance work by outside contractors on the Leased
Premises or any work by its employees that involves any material
change to the Leased Premises. Nothing contained in this paragraph
shall be construed to allow LANDLORD to prevent any such lawful work
from being performed provided that the work does not cause any damage
to the Leased Premises. LANDLORD may elect to record and post
notices of non-responsibility on the Leased Premises.
9.6.3 LANDLORD's Right to Perform Repairs
If TENANT fails to maintain and repair the Leased Premises as and to
the extent required under this Lease, LANDLORD may, on ten (10) days
prior written notice (except that no written notice shall be required
in case of emergency provided that LANDLORD shall have unsuccessfully
made a good faith effort to notify TENANT other than in writing)
enter the Leased Premises and perform such repair and maintenance on
behalf of TENANT. In such case, TENANT shall reimburse LANDLORD for
all reasonable costs so incurred within ten (10) days after demand by
LANDLORD.
10. DAMAGE OR DESTRUCTION
---------------------
10.1 Notice by TENANT to LANDLORD of Damage to Leased Premises
TENANT shall notify LANDLORD in writing immediately upon the
occurrence of any damage to the Leased Premises of greater than
$1,000.
10.2 Partial Damage to Leased Premises
10.2.1
If the Leased Premises or any part thereof shall be damaged by
fire or other casualty, TENANT shall give immediate notice
thereof to LANDLORD and this Lease shall continue in full
force and effect except as hereinafter set forth.
10.2.2
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If the Leased Premises are partially damaged or rendered
partially unusable by fire or other casualty, the damages
thereto shall be repaired by and at the expense of LANDLORD
and the rent, until such repair shall be substantially
completed, shall be abated from the day following the casualty
according to the part of the premises which is unusable.
10.3 Total or Substantial Destruction
--------------------------------
If the Leased Premises are totally damaged or rendered wholly
unusable by fire or other casualty, then the rent shall be
proportionately paid up to the time of the casualty and thenceforth
shall cease until the date when the premises shall have been repaired
and restored by LANDLORD. LANDLORD shall make the repairs and
restorations under the conditions of 10.2.2 hereof, with all
reasonable expedition subject to delays due to adjustment of
insurance claims, labor troubles and causes beyond LANDLORD's
control. After any such casualty, TENANT shall cooperate with
LANDLORD's restoration by removing from the premises as promptly as
reasonably possible, all of TENANT's salvageable inventory and
movable equipment, furniture, and other property. Tenant's liability
for rent shall resume (30) days after written notice from LANDLORD
that the premises are substantially ready for TENANT's occupancy. For
purposes of this section, the term "substantially ready" shall mean
that LANDLORD shall have restored the Leased Premises to
substantially the same condition as at January 1, 1993. TENANT shall
have the right to enter upon the Leased Premises during the period
that LANDLORD is restoring the Leased Premises for the purpose of
performing work or installations as it may elect in order to prepare
the Leased Premises for occupancy. Nothing herein is intended to
affect the TENANT's obligation to maintain business interruption
insurance pursuant to Section 6.4 above.
10.4 Waiver of Subrogation
---------------------
Nothing contained hereinabove shall relieve TENANT from liability
that may exist as a result of damage from fire or other casualty.
Notwithstanding the foregoing, each party shall look first to any
insurance in its favor before making any claim against the other
party for recovery for loss or damage resulting from fire or other
casualty, and to the extent that such insurance is in force and
collectible and to the extent permitted by law, Owner and TENANT each
hereby releases and waives all right of recovery against the other or
any one claiming through or under each of them by way of subrogation
or otherwise. The foregoing release and waiver shall be in force
only if both releasors' insurance policies contain a clause providing
that such a release or waiver shall not invalidate the insurance;
provided that Owner and TENANT each covenants to
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obtain such waiver of subrogation clause. TENANT acknowledges that
Owner will not carry insurance of TENANT's furniture and/or
furnishings, on any fixtures or equipment, improvements, or
appurtenances removable by TENANT and agrees that Owner will not be
obligated to repair any damage thereto or replace the same.
10.5 Obligation For Rent Following Casualty
--------------------------------------
Notwithstanding the provisions of Sections 10.2.2 or 10.3, in the
event of a casualty loss or damage to the Leased Premises, except due
to the acts or omissions of LANDLORD, TENANT shall be liable to
LANDLORD for the payment of rent, notwithstanding that the Leased
Premises are not then tenantable, if and only to the extent of
insurance proceeds actually paid to or on behalf of TENANT by
TENANT's insurance company. Nothing herein contained is intended to
reduce or otherwise affect TENANT's obligation to maintain loss of
business income insurance coverage pursuant to Section 6.4 of this
Lease.
10.6 Waiver of RPL Section 227
-------------------------
TENANT hereby waives the provisions of Section 227 of the Real
Property Law and agrees that the provisions of this article shall
govern and control in lieu thereof.
11. CONDEMNATION
If all or any portion of the Leased Premises is taken under the power of
eminent domain or sold under the threat of that power (all of which are
called "Condemnation"), this Lease shall terminate as to the part taken or
sold on the date the condemning authority takes title or possession,
whichever occurs first. If more than twenty percent (20%) of the floor
area of the building in which the Leased Premises is located, or which is
located on the Leased Premises, is taken, either LANDLORD or TENANT may
terminate this Lease as of the date the condemning authority takes title
or possession, by delivering written notice to the other within thirty
(30) days after receipt of written notice of such taking (or in the
absence of such notice, within thirty (30) days after the condemning
authority takes possession). If neither LANDLORD nor TENANT terminates
this Lease, this Lease shall remain in effect as to the portion of the
Leased Premises not taken, except that the Base Rent shall be reduced in
proportion to the reduction in the floor area of the Leased Premises.
Any condemnation award or payment shall be distributed in the following
order: (a) first, to any ground lessor, mortgages or beneficiary under a
deed of trust encumbering the Leased Premises, the amount of its interest
in the Leased Premises; (b) second, to TENANT, only the amount of any
award specifically designated for loss of or damage to TENANT's trade
fixtures, leasehold
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improvements, business, or removable personal property, and, even if not
so designated, for TENANT's moving expenses associated with the
condemnation; and (c) third, to LANDLORD, the remainder of such award,
whether as compensation for reduction in the value of the leasehold, the
taking of the fee or otherwise. If this Lease is not terminated, LANDLORD
shall repair any damage to the Leased Premises caused by the Condemnation,
except that LANDLORD shall not be obligated to repair any damage for which
TENANT has been reimbursed by the condemning authority. If the severance
damages received by LANDLORD are not sufficient to pay for such repair,
LANDLORD shall have the right to either terminate this Lease or make such
repair at LANDLORD's expense.
12. ASSIGNMENT AND SUBLETTING
12.1 LANDLORD's Consent Required
---------------------------
No portion of the Leased Premises or of TENANT's interest in this
Lease may be acquired by any other person or entity, whether by
assignment, mortgage, sublease, transfer, operation of law, or act of
TENANT, without LANDLORD's prior written consent, except as provided
in Paragraph 12.2 below, which shall not be unreasonably withheld.
Any attempted transfer without consent shall be void and shall
constitute a non-curable breach of this Lease.
12.2 TENANT Affiliate
----------------
TENANT may assign this Lease or sublease the Leased Premises without
LANDLORD's consent, to any corporation which controls, is controlled
by or is under common control with TENANT, or to any corporation
resulting from the merger of or consolidation with TENANT ("TENANT's
Affiliate"). In such case, any TENANT's Affiliate shall assume in
writing all of TENANT's obligations under this Lease.
12.3 No Release of TENANT
--------------------
No transfer permitted by this Article whether with or without
LANDLORD's consent, shall release TENANT or change TENANT's primary
liability to pay the rent and to perform all other obligations of
TENANT under this Lease. LANDLORD's acceptance of rent from any other
person is not a waiver of any provision of this Article. Consent to
one transfer is not a consent to any subsequent transfer. If
TENANT's transferee defaults under this Lease, LANDLORD may proceed
directly against TENANT without pursuing remedies against the
transferee. Such action shall not relieve TENANT's liability under
this Lease.
12.4 LANDLORD's Election
-------------------
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TENANT's request for consent to any transfer described in Paragraph
12.1 above shall be accompanied by a written statement setting forth
in summary fashion the details of the proposed transfer, including
the name, business and (if available through the reasonable efforts
of TENANT) financial condition of the prospective transferee, and
financial details of the proposed transfer (e.g., the term of and
rent and security deposit payable under any assignment or sublease).
LANDLORD shall have the right (a) to withhold consent, if reasonable;
or (b) to grant consent.
12.5 No Merger
---------
No merger shall result from TENANT's sublease of the Leased Premises
under this Article, TENANT's surrender of this Lease or the
termination of this Lease in any other manner. In any such event,
LANDLORD may terminate any or all subtenancies or succeed to the
interest of TENANT as LANDLORD thereunder.
13. DEFAULTS; REMEDIES
13.1 Events of Default
-----------------
If TENANT shall make default in fulfilling any of the covenants of
this Lease including the covenant for the payment of Rent, and if
such default shall not have been cured within: (a) fifteen (15) days
after receipt by TENANT of written notice with respect to Rent, CAM
Charges or Real Property Taxes or (b) thirty (30) days after receipt
of written notice with respect to either (i) any other payments
herein required to be made by Tenant or (ii) if such default involves
the fulfillment of any of the other covenants of this Lease, then
LANDLORD may give TENANT additional twenty (20) day written notice of
intention to end the term of this Lease and at the expiration of said
twenty (20) days (if said default continues to exist, or if TENANT
shall not then be diligently engaged in good faith in prosecuting any
work necessary to cure such default or in taking the steps necessary
to remedy such default), the term of this Lease shall expire as fully
and completely as if that day were the day herein definitely fixed
for the expiration of the term, and TENANT will then quit and
surrender the Leased Premises to LANDLORD, but TENANT shall remain
liable as hereinafter provided.
13.2 Eviction Proceedings
--------------------
If the last notice provided for in Section 13.1 hereof shall have
been given, and the term shall have expired as aforesaid; or if any
execution of attachment shall be issued against TENANT or any of
TENANT's property whereupon the Leased Premises shall be taken or
occupied by someone other than TENANT' then, and in any of such
events, LANDLORD may
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dispossess TENANT and the legal representative of TENANT or other
occupant of the Leased Premises by summary proceedings and remove
their effects and hold the Leased Premises as if this Lease had not
been made.
13.3 Liquidated Damages
------------------
In case of any default or dispossess by summary proceedings, (i) the
Rent shall become due thereupon and be paid up to the time of such
events, together with such reasonable expenses as LANDLORD may incur
for legal expenses, attorneys' fees, brokerage and/or putting the
Leased Premises in good order, or for preparing the same for
re-rental; (ii) LANDLORD shall use its reasonable efforts to relet
the Leased Premises; either in the name of LANDLORD or otherwise, for
a term or terms which may as LANDLORD's option be less than or exceed
the period which would otherwise have constituted the balance of the
term of this Lease; and/or (iii) TENANT or its legal representatives
shall also pay LANDLORD, as liquidated damages for the failure of
TENANT to observe and perform said TENANT's covenants herein
contained, any deficiency between the Rent hereby reserved and/or
covenanted to be paid and the net amount, if any, of the rents
collected on account of the lease or leases of the Leased Premises
for each month of the period which would otherwise have constituted
the balance of the term of this Lease. In computing such liquidated
damages there shall be added to the said deficiency such reasonable
expenses as LANDLORD may incur in connection with reletting, such as
legal expenses, attorneys' fees, brokerage and for keeping the Leased
Premises in good order or for preparing the same for reletting. Any
such liquidated damages shall be paid in monthly installments by
TENANT on the days specified in this Lease for the payment of Rent,
and any suit brought to collect the amount of the deficiency for any
month shall not prejudice in any way the rights of LANDLORD to
collect the deficiency for any subsequent month by a similar
proceeding. LANDLORD, at its option, may make such reasonable
alterations and/or decorations in the Demised Premises as LANDLORD in
its sole reasonable judgment considers advisable and necessary for
the purpose of reletting the Demised Premises; and the making of such
alterations and/or decorations shall not operate or be construed to
release TENANT from liability hereunder as aforesaid. Provided that
LANDLORD shall have used reasonable efforts to relet the Demised
Premises, LANDLORD shall in no event be liable in any way whatsoever
for failure to relet the Demised Premises, or in the event that the
Demised Premises are relet for failure to collect the rent thereof
under such reletting. In the event of a breach by TENANT of any of
the covenants or provisions hereof, LANDLORD shall have the right of
injunction and the right to invoke any remedy allowed at law or in
equity as if summary proceedings and other remedies were not herein
provided for. Mention in this Lease of any particular remedy, shall
not
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preclude LANDLORD from any other remedy in law or in equity. TENANT
hereby expressly waives any and all rights of redemption granted by
or under any present or future laws in the event of TENANT being
evicted or dispossessed for any cause, or in the event of LANDLORD
obtaining possession of Demised Premises, by reason of the violation
by TENANT of any of the covenants and conditions of this Lease, or
otherwise.
14. PROTECTION OF LENDER
14.1 Subordination
-------------
Upon compliance with the provisions of Section 14.5 below, this Lease
shall be subordinated to any ground lease, deed of trust or mortgage
encumbering the Leased Premises, any advances made on the security
thereof, any renewals, modifications, consolidations, replacements or
extensions thereof, whenever made or recorded. However, TENANT's
right to quiet possession of the Leased Premises during the Lease
Term shall not be disturbed if TENANT pays the rent and performs all
of TENANT's material obligations under this Lease and is not
otherwise in material default.
14.2 Successor LANDLORD
------------------
If LANDLORD's interest in the Leased Premises is acquired by any
ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, TENANT shall execute such reasonable
documents as may be necessary to recognize such transferee or
successor as the LANDLORD under this Lease. TENANT waives the
protection of any statute or rule of law which gives or purports to
give TENANT any right to terminate this lease or surrender possession
of the Leased Premises upon the transfer of LANDLORD's interest. Any
such successor landlord shall be deemed to assume each and every
obligation of LANDLORD under this Lease.
14.3 Signing of Documents
--------------------
TENANT shall sign and deliver any instrument or documents reasonably
necessary to effect the provisions of Paragraphs 14.1 and 14.2
provided the same otherwise complies with the provisions of this
Section 14. Such documents may contain such provisions as are
customarily required by any ground lessor, beneficiary under a deed
or trust or mortgagee. If TENANT fails to do so within thirty (30)
days after receiving written notice and/or request by the landlord
via Certified Mail, TENANT hereby makes, constitutes and irrevocably
appoints LANDLORD, or any transferee or successor of LANDLORD, the
attorney-in-fact for TENANT to execute and deliver any such
instrument or document.
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14.4 Estoppel Certificates
---------------------
Within twenty (20) days after written request, either party shall
execute, acknowledge and deliver to the other a written statement
certifying to the best of their knowledge: (I) that this Lease has
not been cancelled or terminated; (II) the last date of payment of
the Base Rent and other charges and the time period covered by such
payment; (III) that neither is in default under this Lease (or, if
either party is claimed to be in default, stating why); and (IV) such
other matters as may be reasonably required. Any such statement by
TENANT may be given by LANDLORD to any prospective purchaser or
encumbrancer of the Leased Premises. Such purchaser or encumbrancer
may rely conclusively upon such statement as true and correct.
Nothing contained in any such certificate shall be deemed a waiver of
any breach by LANDLORD or an admission that there are no breaches by
LANDLORD if TENANT does not have actual knowledge of an existing
breach that s not disclosed in the certificate.
If TENANT or LANDLORD does not deliver a statement requested by the
other party within such twenty (20) day period, the other party, and
any prospective purchaser or encumbrancer, may conclusively presume
and rely upon the following facts: (I) that the terms and provisions
of this Lease have not been changed except as otherwise represented
by that party; (II) that this Lease has not been cancelled or
terminated except as otherwise represented by that party; (Ill) that
not more than one month's base Rent or other charges have been paid
in advance; and (IV) that that party is not in default under the
Lease. In such event, the party failing to respond to the request of
the other under the prior paragraph for a written statement shall be
estopped from denying the truth of such facts.
14.5 Non-Disturbance Agreement. LANDLORD covenants and agrees to obtain
--------------------------
and to deliver to TENANT on or prior to execution of this Lease, a
"non- disturbance" agreement in writing executed by the holders of
any mortgage and any ground lessor affecting the Demised Premises
which, in substance, shall provide that any mortgagee or ground
lessor shall recognize the validity and continuance of this Lease in
the event of a foreclosure of the LANDLORD's interest in and to the
Demised Premises so long as TENANT shall not be in default hereunder,
including applicable grace period (but subject to no other conditions
or qualifications) or to exhibit to TENANT a true copy of any
mortgage or mortgages or ground lease affecting the fee, which shall
provide in a separate clause that the holder of said mortgage or
mortgages or ground lease shall recognize the validity and
continuance of this lease in the event of a foreclosure of the
LANDLORD's interest in and to the Demised Premises so long as TENANT
herein shall not be in default,
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including applicable grace period (but subject to no other conditions
or qualifications). If and only if such a "non-disturbance"
agreement is delivered to TENANT, this Lease shall be subject and
subordinate to the mortgages or ground leases which may affect the
real property of which the Demised Premises forms a part. This
clause shall be self-operative and no further instrument or
subordination shall be required.
14.6 Collateral Assignment of Lease
------------------------------
Attached to this Lease as Exhibit C is a Collateral Assignment of
Lease which shall be separately executed by LANDLORD. In addition,
LANDLORD shall use its reasonable best efforts to secure the approval
of, and signature to, the Collateral Assignment of Lease by any
present mortgage holder of the property of which the Leased Premises
are a part.
15. CONDITION OF LEASED PREMISES UPON END OR TERMINATION OF LEASE
-------------------------------------------------------------
Upon the termination of the Lease, TENANT shall surrender the Leased
Premises to LANDLORD, broom clean and in substantially the same condition as of
December 31, 1992, except for casualty loss and ordinary wear and tear which
TENANT was not otherwise obligated to remedy under any provision of this Lease
and free of all toxic and hazardous materials; provided however, TENANT shall
not be obligated to either: (a) repair any damage which LANDLORD is required to
repair under Article 9 or (b) except upon at least six (6) months' prior
written notice from LANDLORD, remove any alterations, additions or improvements
made after December 31, 1992 (whether or not made with LANDLORD's consent) at
TENANT's expense; provided that, as to any alterations, additions or
improvements for which LANDLORD's consent shall have been obtained, the
LANDLORD shall not require such removal unless so provided in such consent.
All alterations, additions and improvements shall become LANDLORD's property
and shall be surrendered to LANDLORD upon the termination of the Lease, except
that TENANT shall remove any of TENANT's machinery, trade fixtures or equipment
which can be removed without material damage to the Leased Premises. TENANT
shall repair, at TENANT's expense, any damage to the Leased Premises caused by
the removal of any such machinery, trade fixtures or equipment. In no event,
however, shall TENANT remove any of the following materials or equipment
without LANDLORD's prior written consent: any power wiring or power panels;
lighting or lighting fixtures; wall coverings; drapes; blinds or other window
coverings; carpets or other floor coverings; heaters, air conditioners or any
other heating or air conditioning equipment (except window or other portable
heating or air conditioning units purchased); fencing or security gates; or
other similar building operating equipment.
16. LEGAL COSTS
16.1 TENANT's Duties to LANDLORD Regarding Legal Proceedings
-------------------------------------------------------
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<PAGE>
TENANT shall reimburse LANDLORD, upon demand, for any reasonable costs
or expenses incurred by LANDLORD in connection with any material
breach or default of TENANT under this Lease, whether or not suit is
commenced or judgement entered. Such costs shall include legal fees
and costs incurred for the negotiation of a settlement, enforcement of
rights or otherwise. Furthermore, if any action for material breach of
or to enforce the provisions of this lease is commenced, the court in
such action shall award to the party in whose favor a judgement is
entered, a reasonable sum as attorney's fees and costs. Such
attorneys' fees and costs shall be paid by the losing party in such
action. TENANT shall also indemnify LANDLORD against and hold LANDLORD
harmless from all costs, expenses, demands and liability incurred by
LANDLORD if LANDLORD becomes or is made a party to any claim or action
(a) instituted by TENANT, or by any third party against TENANT, or by
or against any person holding any interest under or using the Leased
Premises by License of or agreement with TENANT; (b) for foreclosure
of any lien for labor or material furnished to or for TENANT or such
other person; (c) otherwise arising out of or resulting from any
wrongful act or transaction of TENANT or such other person; provided,
however, that no such duty shall arise to the extent such claim or
action arises out of the negligence or willful misconduct of LANDLORD.
TENANT shall defend LANDLORD against any such claim or action at
TENANT's expense with counsel reasonably acceptable to LANDLORD.
16.2 LANDLORD's Duties to TENANT Regarding Legal Proceedings
-------------------------------------------------------
LANDLORD shall reimburse TENANT upon demand, for any reasonable costs
or expenses incurred by TENANT in connection with any material breach
or default of LANDLORD under this Lease, whether or not suit is
commenced or judgement entered. Such costs shall include legal fees
and costs incurred for the negotiation of a settlement, enforcement of
rights or otherwise. Furthermore, if any action for material breach of
or to enforce the provisions of this lease is commenced, the court in
such action shall award to the party in whose favor a judgement is
entered, a reasonable sum as attorney's fees and costs. Such
attorneys' fees and costs shall be paid by the losing party in such
action. LANDLORD shall also indemnify TENANT against and hold TENANT
harmless from all costs, expenses, demands and liability incurred by
TENANT if TENANT becomes or is made a party to any claim or action (a)
instituted by LANDLORD, or by any third party against LANDLORD, or by
or against any person alleging to holding any interest under or using
the Leased Premises by License of or agreement with LANDLORD (b) for
foreclosure of any lien for labor or material furnished to or for
LANDLORD or such person other than TENANT; (c) or otherwise arising
out of or resulting from any wrongful act or transaction of LANDLORD
or such other person; provided, however, that no such duty shall arise
to the extent
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such claim or action arises out of the negligence or willful
misconduct of TENANT. LANDLORD shall defend TENANT against any such
claim or action at LANDLORD's expense with counsel reasonably
acceptable to TENANT.
17. BROKERAGE
17.1 No Other Brokers
----------------
Each party warrants that this Lease was brought about by C.B.
Commercial Real Estate Group, Inc. (the "Broker") as real estate
broker and that no other real estate brokers or other person acting as
such, other than the Broker, were consulted or dealt with by it in
connection with or had any part in interesting it to enter into this
Lease. Landlord shall pay the commissions of Broker in accordance with
Landlord's separate written agreement therewith. Each party shall
indemnify, defend and hold the other harmless from any and all
liability or expense, including but not limited to reasonable
attorney's fees, incurred by the other because of any claim for
commissions, fees or other compensation made by any person, other than
the Broker, due to the acts or omissions of such party and arising out
of or in connection with the execution of this Lease or any
conversations or negotiations with respect thereto.
17.2 TENANT's Right to Pay Broker
----------------------------
Notwithstanding any provision to the contrary contained in the Lease,
in the event TENANT is notified by the Broker in writing, by certified
mail, return receipt requested, that LANDLORD has failed to pay any
installment of the commission due to the Broker, by reason of this
Lease, within thirty (30) days after it is due, then at TENANT'S sole
option, TENANT may pay rental payments thereafter due, as the same
becomes due under this Lease, to the Broker until the entire balance
due to Broker has been paid in full. Any payments by TENANT as
provided herein shall be credited by LANDLORD against TENANT'S
obligation for any rent under the terms and conditions set forth in
the Lease. The provisions of this paragraph shall be binding upon the
LANDLORD, its heirs, successors and assigns and shall apply to all
commissions due, or which may become due, to Broker in connection with
the Lease, including commissions which may be, or may become, due upon
any renewal or extension of the Lease, or if the TENANT occupies
additional space in the LANDLORD's premises. In the event that TENANT
elects to pay the Broker as provided in this section, the Broker shall
indemnify, and hold harmless the TENANT from any claims, costs or
expenses (including attorneys' fees) asserted against or incurred by
TENANT as a consequence thereof.
18. MISCELLANEOUS PROVISIONS
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<PAGE>
18.1 Non-Discrimination
------------------
TENANT promises, and it is a condition to the continuance of this
Lease, that there will be no discrimination against, or segregation
of, any person or group of persons on the basis of race, color, age,
sex, caste, creed, religion, national origin, disability, sexual
preference or ancestry in the leasing, subleasing, transferring,
occupancy, tenure or use of the Leased Premises or any portion
thereof.
18.2 Definition of LANDLORD
----------------------
As used in this Lease, the term "LANDLORD means only the current owner
or owners of the fee title to the Leased Premises or the leasehold
estate under a ground lease of the Leased Premises at the time in
question. Each LANDLORD is obligated to perform the obligations of
LANDLORD under this Lease only during the time such LANDLORD owns such
interest or title. Any LANDLORD who transfers its title or interest is
relieved of all liability with respect to the obligations of LANDLORD
under this Lease to be performed on or after the date of transfer, but
not for any claims or actions that arose or accrued prior to such
transfer even if not asserted until after the transfer. However, with
the prior written consent of TENANT, each LANDLORD may and shall
deliver to its transferee all funds previously paid by TENANT if such
funds have not yet been applied under the terms of this Lease.
18.3 TENANT's Duty to Give Notice of LANDLORD's Breach of Lease
----------------------------------------------------------
TENANT shall give written notice of any failure by LANDLORD to perform
any of its obligations under this Lease to LANDLORD and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering
the Leased Premises whose name and address have been furnished to
TENANT in writing. LANDLORD shall not be in default under this Lease
unless LANDLORD (or such ground lessor, mortgagee or beneficiary)
fails to cure such non-performance within thirty (30) days after
receipt of TENANT's notice. However, if such non-performance
reasonably requires more than thirty (30) days to cure, LANDLORD shall
not be in default if such cure is commenced within such thirty (30)
day period and thereafter diligently pursued to completion.
18.4 Severability
------------
A determination by a court of competent jurisdiction that any
provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such
provision of this Lease, which shall remain in full force and effect.
18.5 Interpretation
--------------
39
<PAGE>
The captions of the Articles or Sections of this Lease are to assist
the parties in reading this Lease and are not a part of the terms or
provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall
include the singular. The masculine, feminine and neuter genders shall
each include the other. In any provisions relating to the conduct,
acts or omissions of TENANT, the term "TENANT" shall include TENANT's
agents, employees, contractors, invitees, or successors or others
acting on behalf of TENANT with TENANT's expressed or implied
permission. In any provisions relating to the conduct, acts or
omissions of LANDLORD, the term "LANDLORD" shall include LANDLORD's
agents, employees, contractors, invitees, successors or others acting
on behalf of LANDLORD with LANDLORD's expressed or implied permission.
18.6 Incorporation of Prior Agreements: Modifications
------------------------------------------------
This Lease is the only agreement between the parties pertaining to the
lease of the Leased Premises and no other agreements are effective.
All amendments to this Lease shall be in writing and signed by all
parties. Any other attempted amendment shall be voided.
18.7 Notices
-------
Any notice required or permitted to be given under this Agreement
shall be sufficiently given if in writing and delivered by registered
or certified mail (return receipt requested), facsimile (with
confirmation of transmittal), overnight courier (with confirmation of
delivery), or hand delivery to the appropriate party at the address
set forth below, or a such other address as such party may from time
to time specify for that purpose in a notice similarly given:
If to LANDLORD:
Rusten Corporate Park Associates
100 Red Schoolhouse Road
Chestnut Ridge, NY 10977
Attn: Stephen Iser
If to TENANT:
PAR PHARMACEUTICAL, INC.
One Ram Ridge Road
Spring Valley, NY 10977
Attn: President (with a copy to General Counsel)
Fax: 914-425-7922
Any such notice shall be effective (i) if sent by mail, three business
days after mailing, (ii) if sent by facsimile, when
40
<PAGE>
transmitted, and (iii) if sent by courier or hand delivered, when
received.
18.8 Waivers
-------
All waivers must be in writing and signed by the waiving party.
Neither a party's failure to enforce any provision of this Lease, nor
LANDLORD's acceptance of rent, nor TENANT's continued occupancy of
the Leased Premises or payment of Rent or other charges shall be a
waiver and shall not prevent that party from enforcing any provision
of this Lease in the future. No statement on a payment check from
TENANT or in a letter accompanying a payment check shall be binding
on LANDLORD. LANDLORD may, with or without notice to TENANT,
negotiate such check without being bound to the conditions of such
statement.
18.9 No Recordation
--------------
TENANT shall not record this Lease without prior written consent from
LANDLORD, which consent shall not be unreasonably withheld. However,
LANDLORD and TENANT shall execute a "Short Form" memorandum of this
Lease in the form annexed hereto, which memorandum may be recorded by
either party without further notice
18.10 Binding Effect; Choice of Law
-----------------------------
This Lease binds any party who legally acquires any rights or
interest in this Lease from LANDLORD or TENANT. However, neither
party shall have any obligation to the other's successor unless the
rights or interests of either successor are acquired in accordance
with the terms of this Lease. The laws of the state of New York,
without giving effect to their choice of laws provisions, shall
govern this Lease.
18.11 Corporate Authority; Partnership Authority
------------------------------------------
If either party to this Lease is a corporation, partnership or other
form of business entity, each person signing this Lease on behalf of
that party represents that he/she has full authority to do so and
that this Lease binds the corporation, partnership, or other form of
business entity.
18.12 Force Majeure
-------------
Neither party shall be considered to be in material default in
respect of any obligation hereunder, other than the obligation of a
party to make payment of amounts due to the other party under or
pursuant to this Agreement, if failure of performance shall be due to
Force Majeure as defined below.
41
<PAGE>
18.12.1 If either party is affected by a Force Majeure event, such
party shall, within ten (10) days of its occurrence, give
notice to the other party stating the nature of the event,
its anticipated duration and any action being taken to avoid
or minimize its effect. The suspension of performance shall
be of no greater scope or duration than is required and the
non-performing party shall use its reasonable best efforts to
remedy its inability to perform.
18.12.2 "Force Majeure" shall mean an unforeseeable or unavoidable
cause beyond the control and without the fault or negligence
of a party including, but not limited to, explosion, flood,
war (whether declared or otherwise), accident, labor strike,
or other labor disturbance, sabotage, acts of God, the
unforeseen unavailability of raw materials essential to the
production of a Product, newly enacted legislation, or newly
issued orders or decrees of any court or of any governmental
body.
18.13 Confidentiality
---------------
Except as required by law, process, or other court order, the parties
agree that each will keep confidential and not to disclose to any
person not a party to this Lease any trade secret, confidential
commercial information, or any other information known by one party
to be regarded by the other party as proprietary without the prior
written consent of the party whose information is to be disclosed.
The foregoing sentence shall not restrict disclosure by LANDLORD of
such information reasonably required of it by any lender or mortgager
having an interest in the Leased Premises or by TENANT to any lending
institution named in any Assignment of Lease or similar document.
18.14 Execution of Lease
------------------
This Lease may be executed in counterparts, and, when all counterpart
documents are executed, the counterparts shall constitute a single
binding instrument. The delivery of this Lease by LANDLORD to TENANT
shall not be deemed to be an offer and shall not be binding upon
either party until executed and delivered by both parties.
18.15 Fire Protection
---------------
The TENANT agrees within five (5) days after taking possession to
furnish and maintain any fire extinguishing equipment or similar
apparatus as required by any government or quasi-governmental
agencies.
18.16 Blinds and Door Sidelights
--------------------------
42
<PAGE>
The LANDLORD, at TENANT's expense, shall install vertical blinds on
windows and horizontal blinds on exterior doors and door sidelights.
The TENANT will be responsible to maintain the blinds.
18.17 Glass Replacement
-----------------
TENANT is responsible for glass replacement in windows, doors and
sidelights, and to have this clause inserted in their insurance
policies.
18.18 Waiver of Trial by Jury
-----------------------
It is mutually agreed by and between LANDLORD and TENANT that the
respective parties hereto shall and they hereby do waive trial by
jury in any action, proceeding or counterclaim brought by either of
the parties hereto against the other (except for personal injury or
property damage) on any matters whatsoever arising out of or in any
way connection with this Lease, the relationship of LANDLORD and
TENANT, TENANT's use of or occupancy of the Demised Premises, and any
emergency statutory or any other statutory remedy.
18.19 Compliance with Laws. (a) Except as otherwise provided in
--------------------
this Lease, TENANT shall comply with all requirements of all laws,
orders, ordinances and regulations of the federal, state, county and
municipal authorities, and with any direction, pursuant to law, of
any public officer or officers, which shall impose any duty upon
LANDLORD or TENANT with respect to the Demised Premises, or the use
and occupation thereof, not involving structural changes, except as
herein otherwise provided, and not otherwise involving work which
LANDLORD is obligated hereunder to perform. TENANT shall not bring or
permit to be brought or kept in or on the Demised Premises, any
inflammable, combustible or explosive fluid, material, chemical or
substance, except standard cleaning fluid, or except tear gas and
other protective equipment, or do or permit to be done, any act or
thing upon the Demised Premises which shall or might subject LANDLORD
to any liability or responsibility for injury to any person or
persons or for any injury or damage to any property by person or
persons or for any injury or damage to any property by reason of any
business or operation being carried upon the Demised Premises; and
shall comply with all rules, orders, regulations or requirements of
the New York Board of Fire Underwriters and New York Fire Insurance
Exchange, or any other similar body, not involving structural
changes, except as herein otherwise provided, and shall not do or
permit anything to be done in or upon the Demised Premises, or bring
or keep anything therein which shall increase the rate of fire
insurance on the Building or on the property located therein.
43
<PAGE>
If, by reason of the failure of TENANT to comply with the provisions
of this Section 18.19, or if because of the nature of TENANT's
occupancy, the fire insurance rate shall at any time be higher than it
otherwise would be, then TENANT shall reimburse LANDLORD, as
additional rent hereunder, for that part of all insurance premiums
thereafter paid by LANDLORD which shall have been charged because of
such violation by TENANT, and shall make such reimbursement upon the
first day of the month following such outlay by LANDLORD. In any
action or proceeding wherein LANDLORD and TENANT are parties, a
schedule or "make up" of rates for the Building or the Demised
Premises issued by the New York Fire Insurance Exchange, or other
similar body making fire insurance rates for said premises, shall be
conclusive evidence of the facts therein stated and of the several
items and charges in the fire insurance rate then applicable to said
premises. Notwithstanding the foregoing, the TENANT shall have no
liability to LANDLORD for any matters arising out of the lawful and
proper conduct of business by TENANT for the uses permitted under
Section 2 of this Lease.
(b) If any law, rule, order, regulation or requirement of any
Federal, State, County, or Municipal authority, or of the New York
Board of Fire Underwriters, New York Fire Insurance Exchange, or any
other body having similar functions and exercising jurisdiction over
the Demised Premises, shall require TENANT to perform any work or meet
any condition which TENANT may deem unfair, unreasonable, improper or
otherwise burdensome, TENANT may, at its expense, contest the validity
thereof, and, if non-compliance therewith shall not subject LANDLORD
to prosecution for a criminal offense, such non-compliance by TENANT
during such contest shall not be deemed a breach of the covenants
herein, provided TENANT shall indemnify and hold harmless LANDLORD
against the cost and expenses thereof, and in addition thereto, all
liability for any damages, interest, penalties and expenses
(including, but not limited to, reasonable attorneys' fees of
LANDLORD) resulting from or incurred in connection with such contest,
provided, however, that the conduct of any such proceedings shall be
under the sole control and direction of TENANT.
RAMAPO CORPORATE PARK ASSOCIATES PAR PHARMACEUTICAL, INC
(LANDLORD) (TENANT)
By:______________________________ By:__________________________
Name:____________________________ Name:________________________
Title:___________________________ Title:_______________________
Date:____________________________ Date:________________________
44
<PAGE>
CB COMMERCIAL REAL ESTATE GROUP, INC.
(Broker)
(Solely as to Section 17.2)
By:______________________________
Name:____________________________
Title:___________________________
Date:____________________________
45
<PAGE>
February 26, 1993
RUSTEN
CORPORATE
PARK
Exhibit A
---------
Building C
DIAGRAM OF LEASED PREMISES
leased premises consist of
approximately 77,180 square feet of floor area, being such portions of
Buildings "A" and "B" at that location as follows: Building "A" - Units, 1,
2, 3, 4, 5, 6, 7B, 7D, 8, 10 and 11 and Building "B" - Units 2, 3, 4, 5, 6,
---
7, and 8, (excluding maintenance shop)
46
<PAGE>
Exhibit B
---------
IMPROVED TEMPERATURE CONTROL FOR THE WAREHOUSE
In order to more closely comply with GMP guidelines, we may need to install
additional Heating, Ventilating and Air Conditioning equipment for the
warehouse space in both 100A and 100B. This new equipment would most
likely consist of roof mounted equipment with interior mounted duct work.
Installation of such equipment may require additional roof support
structures and power distribution modifications.
CONSTRUCT CAGED IN QUARANTINE STORAGE AREA
------------------------------------------
To construct a quarantine storage area adjacent to the existing Label
Storage room in building 100A. The area will be restricted using open mesh
type partitions which are being relocated from Quad.
BUILDING 100A STABILITY STORAGE EXPANSION IN TEMPERATURE CONTROL
----------------------------------------------------------------
To expand the existing Stability Storage area to an area approximately two
times the existing size. The expanded area will be divided into two rooms.
One room will be used for records storage and the other room will be used
for stability sample retention.
Construction will consist of sheetrock over metal framing for walls and a
2' x 4' lay in ceiling system. The sample retention room will have a
dedicated Heating, Ventilating, and Air Conditioning System.
REGULATORY EXPANSION, BIOSTUDY, ANDA, AND OFFICES
-------------------------------------------------
The existing ANDA and Biostudy rooms need to be expanded two times their
present size. The Regulatory department also needs four additional offices
and a conference room. The anticipated time frame to complete this work is
12 to 18 months from now.
R & D REQUIREMENTS
------------------
It is anticipated that two additional R & D rooms will have to be
constructed. One room will contain wet granulation and equipment and the
other a Fluid Bid Drier. Both operations will also require mechanical
support equipment ie: dust collection, air handlers, etc.
[Tenant shall supply Landlord with plans showing details and location of
the improvements.]
47
<PAGE>
Exhibit C
---------
Prepared by: Josephine R. Griffin
--------------------
COLLATERAL ASSIGNMENT OF LEASE
------------------------------
THIS ASSIGNMENT, made as of the date last signed by a party to this
Assignment, is made by PAR PHARMACEUTICAL, INC., a New Jersey corporation,
located at One Ram Ridge Road, Village of Chestnut Ridge, Spring Valley,
New York 10977 (hereinafter referred to as "Assignor") to MIDLANTIC
NATIONAL BANK, having its principal place of business at 100 Walnut Avenue,
Clark, New Jersey 07066 (hereinafter referred to as "Assignee").
WHEREAS, Assignor and Assignee have contemporaneously herewith entered
into a commercial lending relationship, pursuant to which Assignee has
advanced or shall in the future advance to Assignor, certain sums of money
in accordance with the terms and conditions of the Revolving Credit
Agreement dated and related documents, (hereinafter
referred to as "Loan Agreements"); and
WHEREAS, as additional collateral for the repayment of the said
obligations of Assignor to Assignee, Assignee has required a collateral
assignment of a certain lease entered into between RAMAPO CORPORATE PARK
ASSOCIATES (hereinafter referred to as "Landlord"), dated ,
a true copy of which is attached hereto and made a part hereof*; and
WHEREAS, Assignor has agreed to assign its interest and rights
pursuant to said lease to Assignee pursuant to the terms and conditions
hereinafter set forth,
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and $1.00 and other good and valuable
consideration, it is agreed as follows:
*A legal description of the property is attached and made part hereto in
lieu of a copy of the lease.
1. Assignor hereby sells, assigns, transfers and sets over all of its
rights in and to the said lease, including renewals thereof, provided
however, so long as there exists no default by Assignor in the payment of
the principal sum, interest and indebtedness owed by Assignor to Assignee
under the Loan Agreements or the performance of any obligation, covenant or
agreement therein contained or in said lease contained on the part of the
Assignor to be performed, the Assignor shall have the right to
retain, use and enjoy the premises and the rights accruing to Assignor
under the terms of the said lease.
2. Upon or at any time after default in the payment of the principal
sum, interest and indebtedness of Assignor to Assignee as set forth in said
Loan Agreements or in the performance of any obligation, covenant or
agreement contained therein or in the said lease on the part of the
Assignor to be performed, the Assignee, without waiving any default, may at
its option, without notice or without regard to the
48
<PAGE>
adequacy of the security for the principal sum, interest and indebtedness
securing the Loan Agreements, either in person or by agent, with or without
bringing any action or proceeding or by receiver appointed by a court, take
possession of the premises described in said lease and to have, hold,
manage and maintain possession of the premises in the same manner and under
the same terms and conditions as if Assignee was the lessee thereof. The
exercise by the Assignee of the option granted to it hereunder shall not be
considered a waiver of any default by the Assignor under said Loan
Agreements or under said lease.
3. The Assignee shall not be liable for any loss sustained by
Assignor resulting from Assignee's failure after default to maintain the
lease and Assignee shall not be obligated to perform or discharge nor does
the Assignee undertake to perform or discharge any obligation, duty or
liability under said lease and the Assignor shall, and does hereby agree,
to indemnify the Assignee for, and to hold the Assignee harmless from, any
and all liability, loss or damage which may or might be incurred under said
lease or under or by reason of this Assignment and from any and all claims
and demands whatsoever which may be asserted against the Assignee by reason
of any alleged obligations or undertakings on its part to be performed or
discharge any of the terms, covenants or agreements contained in said
lease. Should the Assignee incur any such liability under said lease or
under or by reason of this assignment or in defense of any such claims or
demands, the amount thereof, including costs, expenses and reasonable
attorney's fees shall be reimbursed by the Assignor immediately upon demand
and upon the failure of the Assignor to do so, the Assignee may, add the
said sums to the amount due under the Loan Agreements.
4. Upon payment in full of the principal sum, interest and
indebtedness of the Loan Agreements, this Assignment shall become and be
null and void and of no effect.
5. The Assignee may take or release other security for the payment of
the principal sum, interest and indebtedness of the Loan Agreements, may
release any party primarily or secondarily liable therefor, and may apply
any other security held by it to the satisfaction of such principal sum,
interest or indebtedness without prejudice to any of its rights under this
Assignment.
6. Nothing contained in this Assignment and no act done or omitted by
the Assignee pursuant to the powers and rights granted to it hereunder
shall be deemed to be a waiver by the Assignee of its rights and remedies
under the Loan Agreements and this Assignment is made and accepted without
prejudice to any of the rights and remedies possessed by the Assignee under
the said Loan Agreements.
7. The Landlord and its mortgagee are joining in this agreement for
the purpose of acknowledging their consent to this Assignment. Assignee
shall, upon its exercise of its right hereunder, have the right to sublet
the premises and assign the lease to a tenant reasonably acceptable to
Landlord and its mortgagee.
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals or caused these presents to be signed by their proper corporate
officers and their proper corporate seal to be hereto affixed the day and
year first written above.
Attest: PAR PHARMACEUTICAL INC.
By:___________________ By:________________________________
Richard J. Nadler Michael A. Swit
Secretary Vice President and General Counsel
AGREED TO BY LANDLORD:
RAMAPO CORPORATE PARK ASSOCIATES
By:______________________________
Steven Iser
General Partner
Date:____________________________
AGREED TO BY LANDLORD's MORTGAGEE:
[Insert name of mortgage holder]
By:______________________________
Print Name:______________________
Title:___________________________
Date:____________________________
50
<PAGE>
STATE OF NEW JERSEY:
ss:
COUNTY OF
BE IT REMEMBERED, that on this DAY OF , 1993, before
---- ------------
me the subscriber, an officer authorized pursuant to N.J.S.A. 46:16-6,
personally appeared Richard J. Nadler, who, being by me duly sworn on his
oath, deposes and makes proof to my satisfaction, that he is the Secretary
of PAR PHARMACEUTICAL, INC., the corporation named in the within
instrument; that Michael A. Swit is the Vice President and General Counsel
of said corporation, that the execution, as well as the making of this
instrument, has been duly authorized by a proper resolution of the Board of
Directors of the said corporation; that deponent well knows the corporate
seal of said corporation; and that the seal affixed to said instrument is
the proper corporate seal and was thereto affixed and said instrument
signed and delivered by said Vice President and General Counsel as and for
the voluntary act and deed of said corporation, in presence of deponent,
who thereupon subscribed his name thereto as attesting witness.
-------------------------------
Notary
RECORD & RETURN TO:
MIDLANTIC NATIONAL BANK
100 Walnut Avenue
Clark, N. J. 07066
Attn: J.R. Griffin
51
<PAGE>
Exhibit 10.22
VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON THE EARLIER OF (A) May 1,
1998, (B) THE EARLY EXPIRATION DATE (AS HEREINAFTER DEFINED) OR (C)
THE FINAL REDEMPTION DATE (AS HEREINAFTER DEFINED).
NEITHER THIS WARRANT NOR THE WARRANT SHARES (AS HEREINAFTER DEFINED)
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. NEITHER THIS WARRANT NOR THE WARRANT SHARES MAY BE
SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
EFFECTIVE REGISTRATION STATEMENTS UNDER FEDERAL AND STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO PHARMACEUTICAL
RESOURCES, INC. THAT THE TRANSFER IS EXEMPT FROM REGISTRATION UNDER
APPLICABLE FEDERAL AND STATE SECURITIES LAWS. THIS LEGEND SHALL BE
ENDORSED UPON ANY WARRANT ISSUED IN EXCHANGE FOR THIS WARRANT. THE
WARRANT SHARES ARE ALSO SUBJECT TO THE LIMITATIONS ON TRANSFER
PURSUANT TO A STOCK PURCHASE AGREEMENT DATED MARCH 25, 1995, BETWEEN
PHARMACEUTICAL RESOURCES, INC. AND THE HOLDER HEREOF (A COPY OF WHICH
IS ON FILE AT THE OFFICES OF THE COMPANY).
PHARMACEUTICAL RESOURCES, INC.
Warrant to Purchase Common Stock
--------------------------------
September 21, 1995
FOR VALUE RECEIVED, PHARMACEUTICAL RESOURCES, INC., a New Jersey
corporation (the "Company"), hereby certifies that CLAL PHARMACEUTICAL
INDUSTRIES LTD., a corporation formed under the laws of the State of Israel
(the "Holder"), together with its permitted assigns, is entitled, subject
to the provisions of this Warrant, to purchase from the Company up to One
Million Sixty-Eight Thousand Eight Hundred Twenty-Five (1,068,825) shares
of common stock, par value $.01 per share, of the Company
("Common Shares") at a price (the "Exercise Price") of Eleven Dollars
($11.00) per share during the period commencing on the date hereof and
expiring at 5:00 P.M., New York City time, on May 1, 1996 (the "First
Period") or Twelve Dollars ($12.00) per share during the period commencing
on May 2, 1996 and expiring at 5:00 P.M., New York City time, on May 1,
1998 (the "Second Period"). This Warrant is being executed and delivered
by the Company in connection with a Stock Purchase Agreement dated
<PAGE>
March 25, 1995, between the Company and the Holder (the "Stock Purchase
Agreement").
SECTION 1. Exercise of Warrant. Subject to the provisions hereof, this
--------------------
Warrant may be exercised in whole or in part at any time, or from time to
time, during the period commencing on the date hereof and expiring at 5:00
p.m., New York City time, on the first to occur of (a) May 1, 1998, (b) the
Early Expiration Date or (c) the Final Redemption Date, by presentation and
surrender of this Warrant to the Company at its principal office, with the
Warrant Exercise Form attached hereto duly executed and accompanied by
payment (either in cash or by United States certified or official bank
check payable to the order of the Company) of the Exercise Price for the
number of shares specified in such Form. Upon receipt thereof, the Company
shall, as soon as practicable but in any case within five business days,
cause to be delivered to the Holder one or more certificates representing
the aggregate number of fully paid and nonassessable shares of Common Stock
issuable upon exercise as specified in the Form. If this Warrant should be
exercised or redeemed in part only, the Company shall, upon surrender of
this Warrant for cancellation, execute and deliver a new Warrant evidencing
the rights of the Holder thereof to purchase the balance of the shares
purchasable hereunder. All such Warrants shall be dated the date of this
Warrant. The shares issuable upon exercise of this Warrant, as adjusted
from time to time, are hereinafter sometimes referred to as "Warrant
Shares". The Warrant Shares and the Exercise Price may be adjusted from
time to time as hereinafter set forth.
SECTION 2. Reservation of Shares. The Company will reserve for
----------------------
issuance and delivery upon exercise of this Warrant all authorized but
unissued Common Shares or other shares of capital stock of the Company (and
other securities and property) from time to time receivable upon exercise
of this Warrant.
SECTION 3. Fractional Shares. The Company shall not be required
------------------
to issue certificates representing fractions of shares, and it shall not be
required to issue scrip or pay cash in lieu of fractional interests, it
being the intent of the Company and the Holder that all fractional
interests shall be eliminated by rounding up or down to the closest whole
number.
SECTION 4. Restrictions on Transfer; Registration.
---------------------------------------
4.1 Limited Transferability. This Warrant may not be sold,
------------------------
transferred, pledged or otherwise disposed of (collectively, "Transferred")
by the Holder, except to any successor firm or corporation of the Holder
and shall be so transferable only upon the books of the Company. The
Company may treat the registered
2
<PAGE>
holder of this Warrant as it appears on the Company's books at any time
as the Holder for all purposes.
4.2 Compliance with Stock Purchase Agreement. No Warrant Shares
-----------------------------------------
may be transferred except in compliance with Section 11.1 of the Stock
Purchase Agreement.
4.3 Legend. Each certificate for the Warrant Shares shall be
-------
endorsed with the following legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS, AND MAY NOT
BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF EFFECTIVE REGISTRATION STATE MENTS UNDER APPLICABLE FEDERAL AND
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT THE TRANSFER IS EXEMPT FROM REGISTRATION UNDER APPLICABLE
FEDERAL AND STATE SECURITIES LAWS. THE SECURITIES REPRESENTED HEREBY
ARE ALSO SUBJECT TO LIMITATIONS ON TRANSFER PURSUANT TO A STOCK
PURCHASE AGREEMENT DATED MARCH 25, 1995, BETWEEN THE COMPANY AND THE
HOLDER HEREOF (A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE
COMPANY)."
4.4 Registration. The Warrant Shares shall have the benefit of
-------------
a Registration Rights Agreement, dated the date of this Warrant, between
the Company and the Holder.
4.5 Listing. The Company shall not be obligated to deliver any
--------
Warrant Shares unless and until such Warrant Shares shall have been listed
on each securities exchange or other self-regulatory body on which the
Common Shares may then be listed or until there shall have been
qualification under or compliance with applicable Federal or state laws.
The Company shall use reasonable efforts to obtain such listing,
qualification and compliance.
SECTION 5. Rights of the Holder. The Holder shall not, by
---------------------
virtue hereof, be entitled to any rights of a shareholder of the Company,
either at law or in equity, and the rights of the Holder are limited to
those expressed in this Warrant.
SECTION 6. Anti-Dilution Provisions.
-------------------------
6.1. Adjustments for Stock Dividends; Combinations, Etc. In case
---------------------------------------------------
the Company shall do any of the following (each, an "Event"):
(a) declare a dividend or other distribution on its Common Shares
payable in Common Shares of the Company;
(b) effect a subdivision of its outstanding Common Shares into a
greater number of Common Shares (by
3
<PAGE>
reclassification, stock split or otherwise than by payment of a dividend
in Common Shares);
(c) effect a combination of its outstanding Common Shares into a
lesser number of Common Shares (by reclassification, reverse split or
otherwise);
(d) issue by reclassification, exchange or substitution of its
Common Shares any shares of capital stock of the Company; or
(e) effect any other transaction having a similar effect,
then the Exercise Price in effect at the time of the record date for such
Event shall be adjusted to a price determined by multiplying such Exercise
Price by a fraction, the numerator of which shall be the number of Common
Shares outstanding immediately prior to such Event and the denominator of
which shall be the number of Common Shares outstanding immediately after
such Event. Each such adjustment of the Exercise Price shall be calculated
to the nearest cent. No such adjustment shall be made in an amount less
than One Cent ($.01), but any such amount shall be carried forward and
shall be given effect in connection with the next subsequent adjustment.
Such adjustment shall be made successively whenever any Event shall occur.
6.2 Adjustment in the Number of Warrant Shares. Whenever the
-------------------------------------------
Exercise Price shall be adjusted pursuant to Section 6.1 hereof, the number
of Warrant Shares which the Holder may purchase upon exercise of the
Warrant shall be adjusted, to the nearest full share, by multiplying such
number of Warrant Shares immediately prior to such adjustment by a
fraction, the numerator of which shall be the Exercise Price immediately
prior to such adjustment and the denominator of which shall be the Exercise
Price immediately thereafter.
6.3 Adjustment for Consolidation or Merger. In case of any
---------------------------------------
consolidation or merger to which the Company shall be a party, other than a
consolidation or merger in which the Company shall be the surviving or
continuing corporation, or in case of any sale or conveyance to another
entity of all or substantially all of the property of the Company, or in
the case of any statutory exchange of securities with another entity
(including any exchange effected in connection with a merger of any other
corporation with the Company), the Holder shall have the right thereafter
to convert this Warrant into the kind and amount of securities, cash or
other property which it would have owned or have been entitled to receive
immediately after such consolidation, merger, statutory exchange, sale or
conveyance had this Warrant been exercised immediately prior to the
effective date of such transaction and, if necessary, appropriate
adjustment shall be made in the application of the
4
<PAGE>
provisions set forth in this Section 6 with respect to the rights and
interests thereafter of the Holder to the end that the provisions set forth
in this Section 6 shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock or other
securities or property thereafter deliverable upon the exercise of this
Warrant. Notice of any such consolidation, merger, statutory exchange, sale
or conveyance, and of the provisions proposed to be adjusted, shall be
mailed to the Holder not less than thirty days prior to such event.
SECTION 7. Redemption.
-----------
7.1 Optional Redemption. The Company may, at any time after
--------------------
December 1, 1995, and from time to time, elect to redeem all or any portion
of this Warrant at a redemption price of One Cent ($.01) per share (the
"Redemption Price") in the event that the average of the closing sale
prices per share of the Common Shares on The New York Stock Exchange for
any forty-five consecutive trading days shall equal or exceed the Target
Price (as hereinafter defined). For purposes hereof, the "Target Price"
shall be Seventeen Dollars ($17.00) per share until May 1, 1996 and
thereafter shall be Eighteen Dollars ($18.00) per share. The Target Price
shall be subject to adjustment in the manner set forth in Section 6.1 if
any of the events set forth therein shall occur. Following any redemption
pursuant to this Section 7.1, a further forty-five consecutive day trading
period in which the closing sale prices per share of the Common Shares on
the New York Stock Exchange shall equal or exceed the Target Price shall
apply to any further right to redemption by the Company.
7.2 Redemption After Sale of Shares. The Company may elect to
--------------------------------
redeem all or a portion of this Warrant at the Redemption Price at any time
after the Holder shall hold less than 8% of the issued and outstanding
Common Shares.
7.3 Redemption Notice. If the Company shall elect to redeem
------------------
this Warrant or any portion thereof pursuant to Sections 7.1 or 7.2 hereof,
notice of redemption shall be given to the Holder not less than thirty days
prior to the date fixed by the Company for redemption (the "Redemption
Date"). Such notice shall specify the portion of the Warrant to be
redeemed, the reason for the redemption, the Redemption Date and the
Redemption Price. Such notice shall also state that payment of such
Redemption Price will be made at the principal office of the Company, upon
presentation and surrender of this Warrant within thirty days following the
Redemption Date and that the right to exercise this Warrant (to the extent
redeemed) shall terminate at 5:00 P.M., New York City time, on the
Redemption Date. "Final Redemption Date" shall mean the Redemption Date
fixed by the Company for redemption of the remaining portion of this
Warrant.
5
<PAGE>
SECTION 8. Early Expiration Date. Notwithstanding anything to
----------------------
the contrary contained herein, this Warrant shall expire on May 1, 1997 and
shall cease to be exercisable, in whole or in part, after such date, if the
Company's net income after tax, as set forth on the Company's year-end
audited financial statements and as adjusted pursuant to this Section 8,
for its fiscal year ended September 28, 1996, shall exceed $5,000,000 (the
"Early Expiration Date"). The Company's net income after tax, for purposes
of this Section 8, shall be recomputed to (a) exclude the amount of any
extraordinary items of income or loss determined in accordance with
generally accepted accounting principles in the United States, and (b)
subtract the amount, if any, by which $6,500,000 exceeds the amount of the
Company's research and development expenses, as shown on its year-end
audited financial statements for its 1996 fiscal year (exclusive of any
amounts included in such research and development expenses attributable to
the Company's investment in the joint venture formed pursuant to that
certain Joint Venture Agreement, dated as of the date hereof between the
Company and the Holder).
SECTION 9. Increase in Exercise Price. [Intentionally Omitted.]
---------------------------
SECTION 10. Reduction in Warrant Shares. If the Holder shall,
----------------------------
at any time and from time to time after the date hereof, purchase or
acquire, in open market transactions, any number of Securities (as
hereinafter defined) in accordance with Section 11.2(b) of the Stock
Purchase Agreement, the number of Warrant Shares issuable upon exercise of
this Warrant shall, as of the date of such acquisition, be reduced in the
manner specified in said Section 11.2(b) of the Stock Purchase Agreement.
For the purposes hereof, "Securities" shall mean and include Common Shares,
and any rights, options, warrants or other securities of the Company
exercisable or exchangeable for, or convertible into Common Shares.
SECTION 11. Fully Paid Shares; Taxes. The Company agrees that
-------------------------
the Common Shares represented by each and every certificate for Warrant
Shares delivered on the exercise of this Warrant in accordance with the
terms hereof shall, at the time of such delivery, be validly issued, fully
paid and nonassessable, free and clear of all liens, pledges, options,
claims or other encumbrances. The Company further covenants and agrees
that it will pay, when due and payable, any and all Federal and state
stamp, original issue or similar taxes (but not including any income
taxes) which may be payable in respect of the issue of any Warrant
Shares or certificates therefor.
SECTION 12. Lost, Stolen or Destroyed Warrants. In the event
-----------------------------------
that the Holder shall notify the Company that this Warrant has been lost,
stolen or destroyed and either (a) provides a letter, in form satisfactory
to the Company, to the effect that it shall indemnify the Company from any
loss incurred by the Company
6
<PAGE>
in connection therewith, and/or (b) provides an indemnity bond in such
amount as shall be reasonably required by the Company, the Company having
the option of electing either (a) or (b) or both, the Company may, in its
sole discretion, accept such letter and/or indemnity bond in lieu of the
surrender of this Warrant as required by Section 1 hereof.
SECTION 13. Notices. All notices hereunder shall be in writing
--------
and shall be given: (a) if to the Company, at One Ram Ridge Road, Spring
Valley, New York 10977 (attention: Kenneth I. Sawyer), fax number: (914)
425-5097, or such other address or fax number as the Company has designated
in writing to the Holder, or (b) if to the Holder, at Clal House, 5
Druyanov Street, Tel Aviv 63143, Israel (attention: Zeev Zahavi), fax
number: (011-972-3) 293633, with a copy to Proskauer Rose Goetz &
Mendelsohn LLP, 1585 Broadway, New York, New York 10036 (attention: Jeffrey
A. Horwitz, Esq.), fax number: (212) 969-2900, or such other address or fax
number as the Holder shall have designated in writing to the Company. Any
notice shall be deemed to have been given if personally delivered or sent
by express commercial courier or delivery service or by telegram, telefax,
telex or facsimile transmission. Any notice given in any other manner
shall be deemed given when actually received.
SECTION 14. Amendments; Waiver. This Warrant may not be amended
-------------------
or terminated, and no provision hereof may be waived, except pursuant to a
written instrument executed by the Company and the Holder.
SECTION 15. Headings. The headings of the Sections of this
---------
Warrant have been inserted for convenience of reference only and shall not
be deemed to be a part of this Warrant.
SECTION 16. Applicable Law. This Warrant is issued under, and
---------------
shall be governed by and construed in accordance with the laws of the
State of New York applicable to contracts made and to be performed wholly
within.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed on its behalf, in its corporate name, by its duly authorized
officer, on September 21, 1995.
PHARMACEUTICAL RESOURCES, INC.
By______________________________
Kenneth I. Sawyer
President
7
<PAGE>
Attest:
- -------------------------
Robert I. Edinger
Secretary
8
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
WARRANT EXERCISE FORM
---------------------
The undersigned hereby irrevocably elects to exercise the within
Warrant dated , 1995, and expiring on , 1998, to
------------- --------------
the extent of purchasing shares of common stock of
-----------
Pharmaceutical Resources, Inc. The undersigned hereby makes a payment of
$ in payment therefor.
----------
------------------------------
Name of Holder
------------------------------
Signature of Holder
or Authorized Representative
------------------------------
Name and Title of Authorized
Representative
------------------------------
Address of Holder
------------------------------
Date
9
<PAGE>
Exhibit 11
COMPUTATION OF PER SHARE DATA
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Year Ended In 1996 1995 1994
- ---------------------------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
Income (loss) from continuing operations $(11,092,000) $ 612,000 $ 4,233,000
Income from discontinued operations 2,800,000 - 466,000
Cumulative effect of change in accounting principle - - 14,128,000
------------ ----------- -----------
Net income (loss) $ (8,292,000) $ 612,000 $18,827,000
============ ========== ===========
Primary:
Weighted average number of common shares outstanding 18,340,248 16,669,827 14,320,969
Shares issuable upon conversion of Series A
Convertible Preferred Stock - - 1,058,400
Shares issuable upon exercise of dilutive stock options
and warrants - net of shares assumed to be
repurchased (at the average market price for the
period) from exercise proceeds 127,000 473,554 1,115,529
------------ ----------- -----------
Shares used for computation 18,467,248 17,143,381 16,494,898
============ =========== ===========
Income (loss) per share of common stock (primary):
Continuing operations $ (.60) $ .04 $ .26
Discontinued operations .15 - .03
Change in accounting principle - - .85
------------ ----------- -----------
Net income (loss) $ ( .45) $ .04 $ 1.14
============ =========== ===========
Assuming full dilution:
Weighted average number of common shares outstanding 18,340,248 16,669,827 14,320,969
Shares issuable upon conversion of Series A
Convertible Preferred Stock - - 1,058,400
Shares issuable upon exercise of dilutive stock options
and warrants - net of shares assumed to be
repurchased (at the higher of period-end market
price or the average market price for the period)
from exercise proceeds 127,000 473,554 1,115,529
------------ ----------- -----------
Shares used for computation 18,467,248 17,143,381 16,494,898
============ =========== ===========
Income (loss) per share of common stock (assuming full dilution):(a)
Continuing operations $ (.60) $ .04 $ .26
Discontinued operations .15 - .03
Change in accounting principle - - .85
------------ ----------- -----------
Net income (loss) $ (.45) $ .04 $ 1.14
============ =========== ===========
</TABLE>
(a) Not presented because dilution is less than 3% from primary amounts.
<PAGE>
Exhibit 21
Subsidiaries of Registrant
<TABLE>
<CAPTION>
State or Other Jurisdiction
Name of Incorporation/Organization
---- -----------------------------
<S> <C>
Par Pharmaceutical, Inc. New Jersey
PRX Distributors, Ltd. Delaware
ParCare, Ltd. New York
PRI-Research, Inc. Delaware
Nutriceutical Resources, Inc. New York
Quad Pharmaceuticals, Inc. Indiana
Par Pharma Group, Ltd. Delaware
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements No. 33-35242 and No. 33-74052 on Forms S-3 and
Registration Statements No. 2-99035, No. 33-15640, No. 33-51914, No. 33-45785,
No. 33-29992, No. 33-79954, No. 33-79956, and No. 333-02885 on Forms S-8.
/s/ ARTHUR ANDERSEN LLP
New York, New York
December 27, 1996
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our report dated November 30, 1994 on
the consolidated financial statements and Schedule II of Pharmaceutical
Resources, Inc. as at and for the year ended October 1, 1994, into the Company's
previously filed Registration Statements No. 33-35242 and No. 33-74052 on Forms
S-3 and Registration Statements No. 2-99035, No. 33-15640, No. 33-51914, No. 33-
45785, No. 33-29992, No. 33-79954, No. 333-02885 and No. 33-79956 on Forms S-8.
/s/ Richard A. Eisner and Company, LLP
New York, New York
December 23, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE TWELVE
MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 299
<SECURITIES> 158
<RECEIVABLES> 10,288
<ALLOWANCES> (2,643)
<INVENTORY> 19,352
<CURRENT-ASSETS> 31,348
<PP&E> 46,806
<DEPRECIATION> (20,738)
<TOTAL-ASSETS> 84,946
<CURRENT-LIABILITIES> 10,632
<BONDS> 2,971
187
0
<COMMON> 0
<OTHER-SE> 70,437
<TOTAL-LIABILITY-AND-EQUITY> 84,946
<SALES> 57,959
<TOTAL-REVENUES> 60,516
<CGS> 48,299
<TOTAL-COSTS> 22,877
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 432
<INCOME-PRETAX> (11,092)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,092)
<DISCONTINUED> 2,800
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,292)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
