<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from October 1, 1998 to December 31, 1998
Commission File Number 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Ram Ridge Road, Spring Valley, New York 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 425-7100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
29,375,746
Number of shares of Common Stock outstanding as of February 12, 1999.
This is page 1 of 36 pages. The exhibit index is on page 16.
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
December 31, September 30,
ASSETS 1998 1998
------ ---------- ---------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $6,424 $9,793
Accounts receivable, net of allowances of
$2,226 and $3,041 14,513 15,344
Inventories 15,611 13,093
Prepaid expenses and other current assets 2,597 3,949
----- -----
Total current assets 39,145 42,179
Property, plant and equipment, at cost less
accumulated depreciation and amortization 22,789 24,283
Deferred charges and other assets 1,405 1,854
Non-current deferred tax benefit, net 14,608 14,608
------ ------
Total assets $77,947 $82,924
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $225 $267
Accounts payable 10,411 8,786
Accrued salaries and employee benefits 1,705 2,010
Accrued expenses and other current liabilities 2,596 1,992
----- -----
Total current liabilities 14,937 13,055
Long-term debt, less current portion 1,102 1,143
Accrued pension liability 717 717
Shareholders' equity:
Common Stock, par value $.01 per share; authorized 90,000,000 shares;
issued and outstanding 29,322,659 and 29,316,467 shares 293 293
Additional paid in capital 88,036 87,972
Accumulated deficit (26,920) (20,038)
Additional minimum liability related to defined benefit pension plan (218) (218)
--- ---
Total shareholders' equity 61,191 68,009
------ ------
Total liabilities and shareholders' equity $77,947 $82,924
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
--2--
<PAGE>
<TABLE>
<CAPTION>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
--------------------------
December 31, December 27,
1998 1997
-------------- ----------
<S> <C> <C>
Net sales $16,775 $12,134
Cost of goods sold 17,105 10,630
-------- ------
Gross margin (330) 1,504
Operating expenses:
Research and development 1,125 908
Selling, general and administrative 3,611 2,588
Asset impairment/restructuring charge 1,906 -
----- -----
Total operating expenses 6,642 3,496
------ -----
Operating loss (6,972) (1,992)
Other income 1 -
Interest income (expense) 89 (120)
-- ---
Net loss (6,882) (2,112)
Accumulated deficit, beginning of period (20,038) (10,410)
------ ------
Accumulated deficit, end of period $(26,920) (12,522)
====== ======
Basic and diluted net loss per share of common stock $(.23) $(.11)
=== ===
Weighted average number of common and
common equivalent shares outstanding 29,320 18,878
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
--3--
<PAGE>
<TABLE>
<CAPTION>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
----------------------------
December 31, December 27,
1998 1997
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,882) $(2,112)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 680 654
Allowances against accounts receivable (815) (484)
Write-off of inventories 1,478 293
Asset impairment/restructuring charge 1,906 -
Other 54 2
Changes in assets and liabilities:
Decrease in accounts receivable 1,646 3,930
Increase in inventories (3,996) (3,504)
Decrease (increase) in prepaid expenses and other assets 1,801 (350)
Increase (decrease) in accounts payable 1,625 (850)
Decrease in accrued expenses and other liabilities (579) (376)
--- ---
Net cash used in operating activities (3,082) (2,797)
Cash flows from investing activities:
Capital expenditures (214) (285)
Proceeds from sale of fixed assets - 36
----- --
Net cash used in investing activities (214) (249)
Cash flows from financing activities:
Proceeds from issuances of Common Stock 10 11
Net proceeds from revolving credit line - 2,968
Principal payments under long-term debt and other borrowings (83) (62)
-- --
Net cash (used in) provided by financing activities (73) 2,917
Net decrease in cash and cash equivalents (3,369) (129)
Cash and cash equivalents at beginning of period 9,793 181
----- ---
Cash and cash equivalents at end of period $6,424 $52
===== ==
</TABLE>
The accompanying notes are an integral part of these statements.
--4--
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
Pharmaceutical Resources, Inc. (the "Company" or "PRI") operates in one
business segment, the manufacture and distribution of generic pharmaceuticals in
the United States. Marketed products are principally in solid oral dosage form
(tablet, caplet and two-piece hard-shell capsule). The Company also distributes
products in the semi-solid form of a cream, reconstituted suspensions/solutions
and transdermal delivery systems.
Basis of Preparation:
The accompanying financial statements at December 31, 1998 and for the
three-month periods ended December 31, 1998 and December 27, 1997 are unaudited;
however, in the opinion of management of PRI, such statements include all
adjustments (consisting of normal recurring accruals) necessary to a fair
statement of the information presented therein. The balance sheet at September
30, 1998 was derived from the audited financial statements at such date.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required by
generally accepted accounting principles for audited financial statements.
Accordingly, these statements should be read in conjunction with PRI's most
recent annual financial statements.
Results of operations for interim periods are not necessarily indicative
of those to be achieved for full fiscal years. Certain items on the consolidated
financial statements for the prior years have been reclassified to conform to
the current year financial statement presentation.
In December 1998, the Company changed its annual reporting period to a
fiscal year ending December 31 from a fiscal year ending September 30.
Accordingly, the next fiscal year will commence on January 1, 1999 and will end
on December 31, 1999, and the fiscal quarters will end on April 3, 1999, July 3,
1999, October 2, 1999 and December 31, 1999. The results of operations for the
transition period from October 1, 1998 to December 31, 1998 are included in this
filing of Form 10-Q.
Strategic Alliance:
On June 30, 1998, the Company completed a strategic alliance with Merck
KGaA, a pharmaceutical, laboratory and chemical company located in Darmstadt,
Germany ("Merck KGaA"). Pursuant to a Stock Purchase Agreement, dated March 25,
1998, Merck KGaA, through its subsidiary Lipha Americas, Inc. ("Lipha"),
purchased 10,400,000 newly issued shares of the Company's Common Stock for
$20,800,000. In addition, the Company issued to Merck KGaA and Genpharm, Inc.
("Genpharm"), a Canadian subsidiary of Merck KGaA, five-year options to purchase
an aggregate of 1,171,040 shares of the Company's Common Stock at an exercise
price of $2.00 per share in exchange for consulting services. The options expire
in April 2003 and become exercisable commencing in July 2001. As part of the
alliance, the Company received the exclusive United States distribution rights
to the portfolio of products covered by a distribution agreement with Genpharm
(see "--Distribution Agreements-Genpharm, Inc."). Merck KGaA also purchased
1,813,272 shares of the Company's Common Stock from Clal Pharmaceutical
Industries Ltd. ("Clal"), PRI's largest shareholder prior to the transaction.
Clal has the right to cause Merck KGaA and/or the Company to purchase an
additional 500,000 shares of Common Stock from Clal at a price of $2.50 per
share in July 2001.
Development Agreement:
The Company, Israel Pharmaceutical Resources L.P. ("IPR") and Generics
(UK) Ltd. ("Generics"), a subsidiary of Merck KGaA, have a development agreement
(the "Development Agreement"), dated August 11, 1998, in which Generics will
fund one-half the costs of the operating budget of IPR, the Company's research
and development operation in Israel, in exchange for the exclusive distribution
rights outside of the United States to products developed by IPR after the date
of the Development Agreement. The Development Agreement has an initial term of
five years and shall automatically renew for additional periods of one year or
earlier termination upon six months notice in certain circumstances. Pursuant to
the Development Agreement, Generics paid the Company an initial fee of $600,000
in August 1998 and fulfilled the funding requirements for the three-month period
ended December 31, 1998. Under the agreement, Generics is not required to fund
more than $1,000,000 in any one calendar year.
--5--
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
Distribution Agreements:
Genpharm, Inc.
The Company has a distribution agreement with Genpharm (the "Genpharm
Distribution Agreement") pursuant to which Genpharm granted exclusive
distribution rights to the Company within the United States and certain other
United States territories with respect to approximately 40 generic
pharmaceutical products currently being developed or identified for development,
some of which have obtained U.S. Food and Drug Administration ("FDA") approval
and others of which have been or will be submitted to the FDA for approval.
Products may be added to or removed from the Genpharm Distribution Agreement by
mutual agreement of the parties. Genpharm is required to use commercially
reasonable efforts to develop the products, which are subject to the Genpharm
Distribution Agreement, and is responsible for the completion of product
development and for obtaining all applicable regulatory approvals. The Company
will pay Genpharm a percentage of the gross profits attributable to the sales of
such products by the Company.
BASF Corporation
In April 1997, Par Pharmaceutical, Inc. ("Par"), the Company's operating
subsidiary, entered into a Manufacturing and Supply Agreement (the "Supply
Agreement") with BASF Corporation ("BASF"), a manufacturer of pharmaceutical
products. Under the Supply Agreement, Par agreed to purchase certain minimum
quantities of certain products manufactured by BASF at one of its facilities,
and phase out Par's manufacturing of those products. BASF agreed to discontinue
its direct sale of those products. The agreement has an initial term of three
years (subject to earlier termination upon the occurrence of certain events as
provided therein) and thereafter renews automatically for successive two-year
periods to December 31, 2005, if Par has met certain purchase thresholds. In
each of the first three years of the initial term of the Supply Agreement, Par
agreed to purchase at least $24,500,000 worth of three products. Further, if Par
does not purchase at least $29,000,000 worth of one of those products in the
third and final year of the agreement, BASF has the right to terminate the
agreement with a notice period of one year. The Company has met the minimum
purchase requirements of calendar year 1998 for two of the higher volume
products and BASF has waived the minimum purchase requirements in calendar year
1998 for the third product.
Elan Corporation
On September 29, 1998, the Company and Elan Transdermal Technologies,
Inc., formerly known as Sano Corporation, and Elan Corporation, plc
(collectively "Elan") entered into a termination agreement (the "Termination
Agreement") with respect to their prior distribution agreement. Pursuant to the
Termination Agreement Par has the exclusive right to distribute in the United
States a transdermal nicotine patch manufactured by Elan for a twelve-month
period ending September 29, 1999 or earlier termination upon three months notice
in certain circumstances. In January 1999, Elan notified the Company that its
distribution rights with respect to the nicotine patch will be terminated
effective April 30, 1999. Par must pay Elan a certain percentage of gross
profits from the sale of the nicotine patch through the termination date. In
exchange for relinquishing long-term distribution rights for the nicotine patch
and a nitroglycerin patch, PRI received a cash payment of $2,000,000 in October
1998 and will receive an additional payment of $2,000,000, upon the termination
of the Company's distribution rights, less any gross profit generated by sales
of the product subject to a minimum payment of $1,000,000. Pursuant to the
Termination Agreement, Elan agreed to pay Par a perpetual royalty for all non-
prescription sales of the transdermal nicotine patch by Elan in the United
States and Israel.
The Company began selling Elan's nicotine patch in January 1998.
Short-Term Debt:
In December 1996, Par entered into a Loan and Security Agreement (the
"Loan Agreement") with General Electric Capital Corporation ("GECC") which
provided Par with a three-year revolving line of credit. Pursuant to the Loan
Agreement, as amended, Par is permitted to borrow up to the lesser of (i) the
borrowing base established under the Loan Agreement or (ii) $20,000,000. The
borrowing base is limited to 85% of eligible accounts receivable plus 50% of
eligible inventory of Par, each as determined from time to time by GECC. The
interest rate charge on the line of credit is based upon a per annum rate of
2 1/4% 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
--6--
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
is guaranteed by PRI. In connection with such facility, GECC can require the
Company and its affiliates to establish a cash management system pursuant to
which all cash and cash equivalents received by any of such entities are
deposited into a lockbox account over which GECC has sole operating control. On
June 30, 1998, the Company paid all remaining outstanding revolving credit
advances pursuant to the Loan Agreement with GECC with a portion of the proceeds
from an equity investment and GECC relinquished operating control over the
Company's cash receipts. As of February 12, 1999, the borrowing base was
approximately $13,441,000 and no amounts were outstanding under the line of
credit. The revolving credit facility is subject to covenants based on various
financial benchmarks.
Income Taxes:
Based on the Company's recent performance and uncertainty of the generic
business in which it operates, management believes that future operating income
might not be sufficient to recognize fully the net operating loss carryforwards
of the Company. Therefore, the Company did not recognize a benefit for its
operating losses in either of the three-month periods ended December 31, 1998 or
December 27, 1997. If the Company is unable to generate sufficient taxable
income in the future, the Company expects that increases in the valuation
allowance will be required through a charge to expense.
Earnings Per Share:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which is effective for financial statements for periods ending after
December 15, 1997, and requires replacement of primary and fully diluted
earnings per share with basic and diluted earnings per share including
retroactive restatement of all prior earnings per share data. Under SFAS 128,
the dilutive effect of stock options is excluded from the calculation of basic
earnings per share but included in diluted earnings per share. The Company
adopted the accounting standard during the quarter ended December 27, 1997 and,
accordingly, has presented all earnings per share data to conform to the
requirements of SFAS 128.
Outstanding options and warrants of 514,700 as of December 31, 1998 and
1,996,250 as of December 27, 1997 were not included in the computation of
diluted earnings per share because the exercise prices were greater than the
average market price of the Common Stock in the respective periods. In addition,
incremental shares from assumed conversions of 756,290 as of December 31, 1998
were excluded from diluted earnings per share because they were nondilutive.
Comprehensive Income:
During the three months ended December 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for the reporting and
display of comprehensive income and its components. There was no impact on the
financial statements as a result of the adoption of SFAS 130.
Commitments, Contingencies and Other Matters:
Retirement Plans:
The Company has a defined contribution, social security integrated
Retirement Plan (the "Retirement Plan") providing retirement benefits to
eligible employees as defined in the Retirement Plan. The Company suspended
employer contributions to the Retirement Plan effective December 30, 1996.
Consequently, participants in the Retirement Plan will no longer be entitled to
any employer contributions under such plan for 1996 or subsequent years. The
Company also maintains a Retirement Savings Plan (the "Retirement Savings Plan")
whereby eligible employees are permitted to contribute from 1% to 12% of pay to
the Retirement Savings Plan. The Company contributes an amount equal to 50% of
the first 6% of the pay contributed by the employee. In fiscal year 1998, the
Company merged the Retirement Plan into the Retirement Savings Plan.
--7--
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
Legal Proceedings:
The Company is involved in certain litigation matters, including certain
product liability actions and actions by a former officer 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 or liquidity.
Asset Impairment/Restructuring:
In an attempt to reduce operating losses, the Company is implementing
measures during the three-month transition period ended December 31, 1998 and
during 1999 to reduce costs and increase operating efficiencies. The Company
will discontinue six unprofitable products from its product line, eliminate
approximately 70 positions, primarily in manufacturing and various manufacturing
support functions, and reduce certain related expenses. These measures resulted
in a charge of $1,906,000 in the transition period, which included provisions of
approximately $1,200,000 for write-downs related to the impairment of assets
affected by the termination of the six products, and $705,000 for severance
payments and other employee termination benefits. The Company began the work
force reduction with the layoff of approximately forty employees, primarily in
manufacturing functions and a smaller number in administrative positions, in
January 1999.
Additionally, the Company recorded inventory reserves of $630,000
relating to the six discontinued products. This reserve is included as part of
cost of goods sold.
The Company recorded a charge of $1,212,000 in fiscal year ended
September 30, 1998 for asset impairment of its Congers, New York facility as a
result of outsourcing the manufacture of most of the products from such
facility. The charge is based on the difference between the appraised value of
the property less the net book value at September 30, 1998. The Company is
currently planning to move the remaining manufacturing volume and coating
operation to another location and will attempt to sell or lease the facility in
fiscal year 1999.
--8--
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Certain statements in this Form 10-Q 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-Q include, among others, (i) increased
competition from new and existing competitors and pricing practices from such
competitors, (ii) pricing pressures resulting from the continued consolidation
by the Company's distribution channels, (iii) the amount of funds continuing to
be available for internal research and development and research and development
joint ventures, (iv) research and development project delays or delays in
obtaining regulatory approvals, (v) continuation of distribution rights under
significant agreements and (vi) the effectiveness of restructuring measures to
reduce losses and increase efficiencies.
RESULTS OF OPERATIONS
General
The Company's operating loss was $6,972,000 for the three-month period
ended December 31, 1998 compared to $1,992,000 for the three-month period ended
December 27, 1997. Although the Company experienced 38% net sales growth from
sales of new distributed products, the gross margin for the period declined
significantly due to unfavorable manufacturing variances caused by excess
capacity and, to a lesser extent, additional inventory write-offs. In addition,
increased product development activity and higher selling and administrative
expenses, as described below, adversely impacted the operating loss for the
period. In an attempt to reduce operating losses, the Company is implementing
measures during the three-month transition period ended December 31, 1998 and
during 1999 in an attempt to reduce costs and increase operating efficiencies,
and accordingly, has recorded charges of $1,906,000 in the transition period for
restructuring and asset impairment, and inventory reserves of $630,000 following
a decision to discontinue six unprofitable products manufactured by the Company
(see "Notes to Financial Statements-Commitments, Contingencies and Other
Matters-Asset Impairment/Restructuring"). The Company expects to continue to
search for additional measures to improve its operations in order to reduce
costs and obtain other operating efficiencies. Further, the Company plans to
continue to seek new products through joint ventures, distribution and other
agreements with pharmaceutical companies located throughout the world. If
current sales and gross margin levels are not increased by sales of
substantially profitable new distributed or manufactured products, the Company
will continue to experience losses.
In an effort to improve the Company's growth prospects through the
introduction of new products at profitable pricing and strengthen its financial
condition, PRI entered into a strategic alliance with Merck KGaA, which was
completed on June 30, 1998. As part of the alliance, the Company received the
sole rights to the portfolio of products covered by the Genpharm Distribution
Agreement, granting the Company exclusive United States distribution rights for
up to approximately 40 generic pharmaceutical products currently being developed
or identified for development, some of which have obtained FDA approval and
others of which have been or are expected to be submitted to the FDA for
approval. Genpharm pays the research and development costs associated with the
products and PRI will pay Genpharm a certain percentage of the gross margin on
sales of the products (see "Notes to Financial Statements-Strategic Alliance"
and "-Distribution Agreements-Genpharm, Inc."). This alliance provides the
Company with a significant number of potential products for its product
development pipeline without the substantial resource commitment, including
financial, it would normally take to develop such a pipeline, working capital
for possible business expansion, improved financial condition through
elimination of certain significant outstanding debt and access to Merck KGaA's
expertise and experience in the industry. To date, four products introduced
under the Genpharm Distribution Agreement did not have a significant impact on
the Company's operating results.
The generic drug industry in the United States continues to be highly
competitive. The factors contributing to the intense competition and affecting
both the introduction of new products and the pricing and profit margins of the
Company, include, among other things; (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's significant
products, (ii) consolidation among distribution outlets, (iii) increased ability
--9--
<PAGE>
of generic competitors to enter the market after patent expiration, diminishing
the amount and duration of significant profits, (iv) willingness of generic drug
customers, including wholesale and retail customers, to switch among
pharmaceutical manufacturers, and (v) competition from brand name drug
manufacturers selling generic versions of their drugs.
Critical to any significant improvement in the Company's financial
condition is the introduction and acquisition of new manufactured and
distributed products at selling prices that generate significant gross margin.
In addition to new product introductions expected as part of the strategic
alliance with Merck KGaA, the Company plans to continue to invest in research
and development efforts and pursue additional products for sale through new and
existing distribution agreements. The Company is engaged in efforts, subject to
FDA approval and other factors, to introduce new products as a result of its
research and development efforts and distribution and development agreements. No
assurance can be given that any additional products for sale by the Company will
occur or that sales of additional products will reduce losses or return the
Company to profitability. Continuing losses will adversely affect the Company's
liquidity and, accordingly, its ability to fund research and development or
ventures relating to the sale of new products (see "--Financial
Condition-Liquidity and Capital Resources").
Net Sales
Net sales for the three months ended December 31, 1998 of $16,775,000
increased $4,641,000, or 38%, from sales of $12,134,000 for the corresponding
period of the prior fiscal year. The sales growth was primarily attributable to
sales of new products, primarily the transdermal nicotine patch manufactured by
Elan and Naproxen Sodium manufactured by the Company and introduced in October
1998. Net sales of distributed product for the most recent fiscal year increased
to approximately 68% of the Company's total net sales compared to approximately
31% of the total for the same period of the prior year continuing the trend of
greater reliance upon sales of distributed product. The Company is substantially
dependent upon distributed products for its sales and, as the Company introduces
new distributed products under its distribution agreements, it is expected that
this trend will continue. Pursuant to the Termination Agreement with Elan, the
Company will no longer have the transdermal nicotine patch to market after April
30, 1999. As a result of the continued evaluation of the existing product line,
the Company will discontinue six unprofitable products during fiscal year 1999
as existing inventory for those products is depleted. It is expected that the
termination of the transdermal nicotine patch distribution rights will adversely
affect the Company's annual net sales after April 1999. To a lesser extent, the
discontinued manufactured products will also negatively affect net sales.
However, it is anticipated that new product introductions in fiscal 1999 can
offset this expected net sales decrease.
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 abbreviated new drug applications ("ANDAs") and
introduction of new manufactured products, (iv) introduction of new distributed
products (v) the level of customer service, and (v) the continuation of existing
distribution agreements.
Gross Margin
The Company's gross margin was $(330,000) (-2% of net sales) for the
three months ended December 31, 1998 compared to $1,504,000 (12% of net sales)
in the corresponding period of the prior fiscal year. Unfavorable manufacturing
variances due to excess capacity, caused by outsourcing or discontinuing
manufactured products in prior periods and higher inventory write-offs related
to discontinued products, adversely affected the gross margin in the current
period. The Company has attempted to address its excess capacity with the
restructuring implemented in the most recent quarter which resulted in layoffs
of manufacturing personnel in January 1999 and the write-down of certain assets
which will be under utilized as a result of discontinued products (see "Notes to
Financial Statements-Asset Impairment/Restructuring").
Inventory write-offs amounted to $1,478,000 and $293,000 for the
three-month periods ended December 31, 1998 and December 27, 1997, respectively.
The increase in the current period was primarily attributable to the write-off
of material and work in process inventory not meeting the Company's quality
control standards and additional inventory reserves due to discontinued
products. The inventory write-offs, which have increased significantly over the
prior six months, are expected to return to a more normalized level in
subsequent periods. Inventory write-offs taken in the normal course of business
are related primarily to the disposal of finished products due to short shelf
life.
The termination of the transdermal nicotine patch distribution rights,
discussed above, will negatively affect the Company's gross margin. However, it
is anticipated that the gross margins generated by sales of new product in
fiscal 1999 can offset this expected decrease.
--10--
<PAGE>
Operating Expenses
Research and Development
Research and development expenses of $1,125,000 for the three-month
period ended December 31, 1998 increased $217,000 from the three-month period
ended December 27, 1997. The Company conducts a significant part of its research
and development in Israel through IPR. Following the acquisition of the
remaining interests of IPR in 1997, the Company's domestic research and
development program was integrated with that of IPR. The increased costs in the
current period were primarily due to biostudy activity by the domestic
operation. The current year costs for research and development expenses at IPR
were $374,000, net of $209,000 in funding from Generics, compared to $442,000 in
the prior year. Generics, a subsidiary of Merck KGaA, the Company and IPR have
an agreement pursuant to which Generics will share one-half of the costs of
IPR's operating budget, beginning in the three-month period ended December 31,
1998, in exchange for the exclusive distribution rights outside of the United
States to the products developed by IPR after the date of the agreement (see
"Notes to Financial Statements-Development Agreement").
The Company has ANDAs for three potential products pending with the FDA
and awaiting approval. The Company expects to commence biostudies for eight
additional product submissions in fiscal year 1999. Recently, PRI has received
FDA approval of its ANDAs for three products, two of which the Company began
marketing in the quarter ended December 31, 1998, and the other is expected to
be introduced shortly.
As part of the Genpharm Distribution Agreement, Genpharm pays the
research and development costs associated with the products covered by the
Genpharm Distribution Agreement. To date, the Company has introduced four
products under the Genpharm Distribution Agreement and anticipates introducing
several more in fiscal year 1999 (see "Notes to Financial
Statements-Distribution Agreements-Genpharm, Inc.").
Selling, General and Administrative
Selling, general and administrative costs for the three-month period
ended December 31, 1998 of $3,611,000 (22% of net sales) increased $1,023,000
from $2,588,000 (21% of net sales) for the corresponding period in the prior
fiscal year. The higher costs in the current period were primarily attributable
to strengthening the sales force and expanding marketing efforts, beginning in
the later half of the prior year, in anticipation of product introductions and
further market penetration of the existing product line, and to a lesser extent,
higher professional fees.
Asset Impairment/Restructuring
In an attempt to reduce operating losses, the Company is implementing
measures during the three month transition period ended December 31, 1998 and
during 1999 to reduce costs and increase operating efficiencies. The Company
will discontinue six unprofitable products from its product line, eliminate
approximately 70 positions, primarily in manufacturing and various manufacturing
support functions, and reduce certain related expenses. These measures resulted
in a charge of $1,906,000 in the transition period, which included provisions of
approximately $1,200,000 for write-downs related to the impairment of assets
affected by the termination of the six products, and $705,000 for severance
payments and other employee termination benefits. The Company began the work
force reduction with the layoff of approximately forty employees, primarily in
manufacturing functions and a smaller number in administrative positions, in
January 1999.
Income Taxes
Management has determined, based on the Company's recent performance and
uncertainty of the generic business in which the Company operates, that future
operating income might not be sufficient to recognize fully the net operating
loss carryforwards of the Company. Therefore, the Company did not recognize a
benefit for its operating losses in either of the three-month periods ended
December 31, 1998 or December 27, 1997 (see "Notes to Financial
Statements-Income Taxes").
--11--
<PAGE>
FINANCIAL CONDITION
Liquidity and Capital Resources
Working capital of $24,208,000 at December 31, 1998 decreased $4,916,000
from $29,124,000 at September 30, 1998. The decrease is principally due to the
use of funds to finance operating losses and to build inventory on higher volume
products. The working capital ratio of 2.6x in the current period declined from
3.2x at fiscal 1998 year end.
The Company, IPR and Generics have entered into an agreement, dated
August 11, 1998, pursuant to which Generics will fund one-half of the costs of
IPR's operating budget in exchange for the exclusive distribution rights outside
of the United States to the products developed by IPR after the date of the
agreement. The funding commenced in the three-month period ended December 31,
1998. Generics is not required to fund more than $1,000,000 in any one calendar
year (see "Notes to Financial Statements-Development Agreement").
On September 29, 1998, the Company and Elan entered into the Termination
Agreement in which the Company would retain the exclusive distribution rights in
the United States to a transdermal nicotine patch for a period of up to twelve
months or earlier termination upon three months notice in certain circumstances.
In January 1999, Elan notified the Company that its distribution rights with
respect to the nicotine patch will be terminated effective April 30, 1999.
Pursuant to the Termination Agreement, PRI received a cash payment of $2,000,000
in October 1998 and will receive an additional $2,000,000 upon the termination
of the Company's distribution rights, less any gross profit generated by sales
of the product subject to a minimum payment of $1,000,000. In future periods, it
is anticipated that the Company will not receive any additional funds from the
sale of product rights to Elan (see "Notes to Financial Statements-Distribution
Agreements-Elan Corporation").
The Company will attempt to sell or lease its manufacturing facility in
Congers, New York during fiscal year 1999 after moving a substantial portion of
its manufacturing volume to BASF. There can be no assurance that the Company
will be able to sell or lease the facility and, if sold, there can be no
assurance that the Company would receive its appraised value.
The Company expects to fund its operations, including research and
development activities and its obligations under the existing distribution and
development arrangements discussed herein, out of its working capital and if
necessary with borrowings against its line of credit, to the extent then
available (see "Financing"). If, however, the Company continues to experience
significant losses over the next year, its liquidity and, accordingly, its
ability to fund research and development or ventures relating to the
distribution of new products would likely be materially and adversely affected.
Financing
At December 31, 1998, the Company's total outstanding long-term debt,
including the current portion, amounted to $1,327,000. The amount consists
primarily of an outstanding mortgage loan with a bank and capital leases for
computer equipment.
In December 1996, Par entered into the Loan Agreement with GECC which
provided Par with a three-year revolving line of credit. Pursuant to the Loan
Agreement, as amended, Par is permitted to borrow up to the lesser of (i) the
borrowing base established under the Loan Agreement or (ii) $20,000,000. The
borrowing base is limited to 85% of eligible accounts receivable plus 50% of
eligible inventory of Par, each as determined from time to time by GECC. The
interest rate charge on the line of credit is based upon a per annum rate of
2 1/4% above the 30-day commercial paper rate for high-grade unsecured notes
adjusted monthly. The line of credit with GECC is secured by the assets of Par
and PRI other than real property and is guaranteed by PRI. In connection with
such facility, GECC can require the Company and its affiliates to establish a
cash management system pursuant to which all cash and cash equivalents received
by any of such entities are deposited into a lockbox account over which GECC has
sole operating control. On June 30, 1998, the Company paid all remaining
outstanding revolving credit advances pursuant to the Loan Agreement with a
portion of the proceeds from the equity investment by Merck KGaA. As of February
12, 1999, the borrowing base was approximately $13,441,000 and no amounts were
outstanding under the line of credit. The revolving credit facility is subject
to covenants based on various financial benchmarks.
--12--
<PAGE>
Year 2000
The Company has completed an assessment of its internal systems related
to Year 2000 compliance and is in the process of evaluating the status of its
customers, suppliers and banks. The Company has implemented a plan it believes
will enable its computerized information systems to be Year 2000 compliant
without any material disruption in business. The costs of addressing this issue
have been expended when incurred and have not, and the Company believes will not
in the future, have a materially adverse effect on its financial condition.
However, if third parties upon which the Company relies are unable to address
this issue in a timely manner, it could result in a material financial risk to
the Company. The Company anticipates devoting all resources necessary to resolve
any additional significant Year 2000 issues in a timely manner.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
--13--
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
10.1 - Sixth Amendment to Loan and Security Agreement, dated as of
February 2, 1999, among the Company, General Electric
Capital Corporation, and the other parties named therein.
10.2 - Development Agreement, dated as of August 11, 1998, among
the Company, Generics (UK) Ltd., and Israel Pharmaceutical
Resources L.P.
27 - Financial Data Schedule.
(b) Reports on Form 8-K:
On December 29, 1998, the Company filed a Current Report on Form 8-K
relating to item 8, a change in its fiscal year.
--14--
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
February 16, 1999 /s/ Kenneth I. Sawyer
------------------------------------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
February 16, 1999 /s/ Dennis J. O'Connor
------------------------------------------------------
Dennis J. O'Connor
Vice President - Chief Financial Officer and Secretary
(Principal Accounting and Financial Officer)
--15--
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number Description Page Number
-------------- ----------- -----------
<C> <S> <C>
10.1 Sixth Amendment to Loan and Security Agreement, dated as 17
of February 2, 1999, among the Company, General Electric
Capital Corporation, and the other parties named therein.
10.2 Development Agreement, dated as of August 11, 1998, among 21
the Company, Generics (UK) Ltd., and Israel Pharmaceutical
Resources L.P.
27 Financial Data Schedule. 36
</TABLE>
--16--
<PAGE>
Exhibit 10.1
SIXTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
---------------------------
SIXTH AMENDMENT, dated as of February 2, 1999 (this "Amendment"), to
---------
the Loan and Security Agreement referred to below by and among GENERAL ELECTRIC
CAPITAL CORPORATION, a New York corporation ("Lender"), PAR PHARMACEUTICAL,
------
INC., a New Jersey corporation ("Borrower"), PHARMACEUTICAL RESOURCES, INC., a
--------
New Jersey corporation ("Parent"), NUTRICEUTICAL RESOURCES, INC., a New York
------
corporation ("NRI"), and PARCARE, LTD., a New York corporation ("ParCare").
--- -------
Parent, NRI and ParCare are hereinafter referred to as "Guarantors".
----------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Lender, Borrower and Guarantors are parties to that certain
Loan and Security Agreement, dated as of December 15, 1996 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Loan
----
Agreement"); and
- ---------
WHEREAS, Lender, Borrower and Guarantors have agreed to amend the Loan
Agreement in the manner, and on the terms and conditions, provided for herein.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties to this Amendment hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall
-----------
have the meanings ascribed to them in the Loan Agreement.
2. Amendment to Schedule F of the Loan Agreement. Schedule F of the
--------------------------------------------- ----------
Loan Agreement is hereby amended as of Amendment Effective Date (as hereinafter
defined) by deleting Section 1 in its entirety and inserting in lieu thereof the
following new section:
"1. Minimum EBIT. Parent and its Subsidiaries on a consolidated
------------
basis shall maintain for each four Fiscal Quarter period, commencing with the
four Fiscal Quarter period ending on or about December 31, 1998, EBIT for
such period of not less than the amount for such period set forth below:
Four Fiscal Quarter Period Ending
---------------------------------
on or about: Minimum EBIT
----------- ------------
December 31, 1998 $(17,000,000)
March 30, 1999 (13,000,000)
June 30, 1999 (13,000,000)
September 30, 1999 (6,000,000)
December 31, 1999 3,500,000
and thereafter"
3. Representations and Warranties. To induce Lender to enter into
------------------------------
this Amendment, each Credit Party hereby represents and warrants that:
A. The execution, delivery and performance by each Credit Party of
this Amendment and the performance of the Loan Agreement, as amended hereby (the
"Amended Loan Agreement"): (i) are within their respective corporate powers;
----------------------
(ii) have been duly authorized by all necessary corporate and shareholder
action; and (iii) are not in contravention of any provision of their respective
certificates or articles of incorporation or by-laws or other organizational
documents.
B. This Amendment has been duly executed and delivered by or on
behalf of each Credit Party.
C. Each of this Amendment and the Amended Loan Agreement
constitutes a legal, valid and
--17--
<PAGE>
binding obligation of each Credit Party enforceable against each Credit Party in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
D. No Default has occurred and is continuing both before and after
giving effect to this Amendment.
E. No action, claim or proceeding is now pending or, to the
knowledge of each Credit Party, threatened against any Credit Party, at law, in
equity or otherwise, before any court, board, commission, agency or
instrumentality of any federal, state, or local government or of any agency or
subdivision thereof, or before any arbitrator or panel of arbitrators, which
challenges any Credit Party's right, power, or competence to enter into this
Amendment or, to the extent applicable, perform any of its obligations under
this Amendment, the Amended Loan Agreement or any other Loan Document, or the
validity or enforceability of this Amendment, the Amended Loan Agreement or any
other Loan Document or any action taken under this Amendment, the Amended Loan
Agreement or any other Loan Document.
4. No Other Amendments. Except as otherwise amended herein, the
-------------------
Loan Agreement shall be unmodified and shall continue to be in full force and
effect in accordance with its terms. This Amendment shall not be deemed a
waiver of, or consent under, any term or condition of any Loan Document and
shall not be deemed to prejudice any right or rights which Lender may now have
or may have in the future under or in connection with any Loan Document or any
of the instruments or agreements referred to therein, as the same may be amended
from time to time.
5. Outstanding Indebtedness; Waiver of Claims. Each Credit Party
------------------------------------------
hereby acknowledges and agrees that as of February 2, 1999 the aggregate
outstanding principal amount of the Revolving Credit Loan is $0. Each Credit
Party hereby waives, releases, remises and forever discharges Lender and each
other Indemnified Person from any and all Claims of any kind or character, known
or unknown, which each Credit Party ever had, now has or might hereafter have
against Lender which relates, directly or indirectly, to any acts or omissions
of Lender or any other Indemnified Person on or prior to the date hereof.
6. Expenses. Borrower hereby reconfirms its obligations pursuant to
--------
Section 10.2 of the Loan Agreement to pay and reimburse Lender for all
reasonable out-of-pocket expenses (including, without limitation, reasonable
fees of counsel) incurred in connection with the negotiation, preparation,
execution and delivery of this Amendment and all other documents and instruments
delivered in connection herewith.
7. Effectiveness. This Amendment shall become effective as of
-------------
February 2, 1999 (the "Amendment Effective Date") only upon satisfaction in full
------------------------
in the judgment of the Lender of each of the following conditions on or prior to
February 5, 1999:
A. Amendment. Lender shall have received four original
---------
copies of this Amendment duly executed and delivered by Lender and each Credit
Party.
B. Representations and Warranties. All representations and
------------------------------
warranties of or on behalf of each Credit Party in this Amendment and all the
other Loan Documents shall be true and correct in all respects with the same
effect as though such representations and warranties had been made on and as of
the date hereof and on and as of the date that the other conditions precedent in
this Section 7 have been satisfied, except to the extent that any such
---------
representation or warranty expressly relates to an earlier date.
8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
-------------
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
9. Counterparts. This Amendment may be executed by the parties
------------
hereto on any number of separate counterparts and all of said counterparts taken
together shall be deemed to constitute one and the same instrument.
(SIGNATURE PAGES FOLLOW)
--18--
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered as of the day and year first above written.
Borrower:
--------
PAR PHARMACEUTICAL, INC.
By:/s/ Dennis O'Connor
-------------------
Name: Dennis O'Connor
Title: VP-CFO
Lender:
------
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Martin S. Greenberg
-----------------------
Name: Martin S. Greenberg
Its: Duly Authorized Signatory
Parent:
------
PHARMACEUTICAL RESOURCES, INC.
By:/s/ Dennis O'Connor
-------------------
Name: Dennis O'Connor
Title: VP-CFO
(SIGNATURES CONTINUED ON NEXT PAGE)
--19--
<PAGE>
Subsidiary Guarantors:
---------------------
NUTRICEUTICAL RESOURCES, INC.
By:/s/ Dennis O'Connor
----------------------------
Name: Dennis O'Connor
Title: VP-CFO
PARCARE, LTD.
By:/s/ Dennis O'Connor
----------------------------
Name: Dennis O'Connor
Title: VP-CFO
--20--
<PAGE>
Exhibit 10.2
DEVELOPMENT AGREEMENT, dated as of August 11, 1998, among
---------
PHARMACEUTICAL RESOURCES, INC. ("PRI"), GENERICS (UK) LIMITED ("G(UK)"), and
ISRAEL PHARMACEUTICAL RESOURCES L.P. (the "Partnership").
WHEREAS, the Partnership is engaged in researching and developing
generic pharmaceutical products in Israel;
WHEREAS, PRI and G(UK) and their respective Affiliates (as hereafter
defined) are engaged in manufacturing, marketing and distributing generic
pharmaceutical products, and they own and operate approved manufacturing
facilities and possess qualified marketing distribution systems and
organizations to enable them to manufacture and effectively promote, market and
distribute products worldwide;
WHEREAS, PRI and G(UK) desire the Partnership to develop
pharmaceutical products for manufacture and distribution by PRI and G(UK) and
their respective Affiliates; and
WHEREAS, the parties hereto desire to set forth their mutual
agreements with respect to certain matters relating to the parties hereto,
including the development, registration and distribution of products to be
developed by the Partnership.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions: Wherever used in this agreement the words and
terms, "Affiliate", "ANDA", "Bio-Availability Studies", "Budget", "business
day", "Competing Product", "Confidential Information", "FDA", "G(UK) Territory
", "Gross Sales", "License Fees", "Net Sales", "Partnership Products", "Person",
"Product Approval", "Product Information", "PRI Board", "PRI Territory" and
"Unit" shall have the respective meanings set out in Schedule "A" annexed
hereto. In addition, words and expressions parenthetically defined elsewhere in
this agreement shall, throughout this agreement, have the meanings therein
provided. Defined terms shall be used in the singular or in the plural, as
sense shall require.
ARTICLE 2
FUNDING AND PRODUCT SELECTION
2.1 Initial Fee: In consideration of the grant of rights by the
Partnership to G(UK) hereunder, G(UK) has paid previously to the Partnership or
its designee the sum of $600,000 US. Such fee shall be non-refundable.
2.2 Product Selection Committee:
(a) A committee (the "Committee") shall be established to select
generic pharmaceutical products to be developed by the Partnership and
manufactured and distributed by PRI and G(UK) and their Affiliates pursuant to
this agreement (the "Products"); provided, that, none of the Partnership
-------- ----
Products shall be eligible for selection as a Product. The Committee shall
initially consist of two directors. The number of members of the Committee
shall not be changed without the written consent of PRI and G(UK). PRI and
G(UK) each shall have the right to designate one Committee member. In the event
of the death disability, resignation or other withdrawal of any Committee
member, the party that appointed such Committee member shall have the right to
designate a replacement. The PRI Board shall be entitled to cast the deciding
vote to resolve tie votes of the Committee. Members of the Committee shall not
be paid any compensation for their services as members nor shall they be
entitled to reimbursement of any expenses incurred in connection therewith. The
Committee shall meet and report to the PRI Board at least once each calendar
year.
(b) The Committee will have the following additional responsibilities:
(i) modifying the list of Products from time to time, including
adding generic pharmaceutical products;
(ii) determining the priority of the development of the Products;
(iii) approving the Budget each year not later than July 30; and
--21--
<PAGE>
(iv) determining whether to discontinue development of one or more
Products.
(c) Unless otherwise agreed by the Committee, the "Products" selected
shall be generic pharmaceutical products for which a US patent on the innovator
product or reference product is not due to expire for six years or more from the
date of selection.
2.3 Funding Obligations:
(a) Each year during the term of this agreement, each of PRI and G(UK)
shall pay to the Partnership an annual development fee equal to sum of the 50%
of the Budget approved by the Committee for the year, less the costs of active
and inactive raw materials and Bio-Availability Studies for the Products and the
Partnership Products and amortization and depreciation (the "Annual Fee"). It
is agreed that the Budget, less the costs of active and inactive raw materials
and Bio-Availability Studies for the Products and the Partnership Products and
amortization and depreciation, shall not exceed $2,000,000 US in any fiscal year
of the Partnership. The Annual Fee shall be paid by each of PRI and G(UK) in
equal quarterly installments not later than on January 1, April 1, July 1 and
October 1 of each year.
(b) The Annual Fee shall be paid in immediately available funds to an
account designated by the Partnership and shall be non-refundable. The Annual
Fee obligations of PRI and G(UK) shall continue until the termination of this
Agreement. The Annual Fee shall not be a loan unless PRI and G(UK) otherwise
agree in writing. No additional fees, other than the payment each year of the
Annual Fee and as set forth in Sections 2.1 and 2.3(c) and (d) hereof, will be
required to be made by PRI and G(UK) to the Partnership and any amounts paid in
any year in excess of the allocation of the Annual Fee will not reduce the
amount to be paid by such party in future years in respect of its Annual Fee.
(c) PRI and G(UK) shall pay for or reimburse the Partnership for all
costs of all active and inactive raw materials used in connection with the
development of Products for the PRI Territory and G(UK) Territory, respectively.
(d) PRI and G(UK) shall also be solely responsible for all out of
pocket costs and expenses relating to the registration, manufacture,
distribution, marketing and sale of Products (e.g., Bio-Availability Studies,
Product Approval expenses and lawsuits) in the PRI Territory and G(UK)
Territory, respectively.
ARTICLE 3
EXCLUSIVE APPOINTMENT
3.1 Exclusive Distributor: Subject to the provisions of this
agreement and to the receipt by PRI, G(UK) or their respective Affiliates, as
the case may be, of a Product Approval for such Product, the Partnership hereby
appoints (a) PRI as the sole and exclusive distributor of the Products for the
PRI Territory and PRI hereby accepts such appointment and agrees to act as such
sole distributor upon such terms and conditions and (b) G(UK) as the sole and
exclusive distributor of the Products for the G(UK) Territory and G(UK) hereby
accepts such appointment and agrees to act as such sole distributor upon such
terms and conditions.
3.2 Nature of Relationship: This agreement does not constitute or
create (and the parties do not intend to create hereby) a joint venture, pooling
arrangement, partnership, or formal business organization of any kind between
and among any of the parties, and the rights and obligations of the parties
shall be only those expressly set forth herein. The relationship hereby
established between the Partnership, on the one hand, and PRI and G(UK), on the
other hand, is solely that of an independent contractor engaged in the operation
of its own respective business. None of the parties hereto shall be considered
to be an agent of any other (or any of its Affiliates) for any purpose
whatsoever.
3.3 Territorial and Product Restrictions Applicable to PRI: During
the term of this agreement applicable to a Product, neither PRI nor any of its
Affiliates will directly or indirectly sell or license such Product outside of
the PRI Territory or to any Person in the PRI Territory where it knows or has
reason to believe that such Product will be resold by such Person outside of the
PRI Territory. In the event the foregoing provision is or becomes unenforceable
or is unlawful in the PRI Territory, then it shall be deemed replaced by the
most restrictive provision on marketing or sale of the Product outside of the
PRI Territory as shall be lawful and enforceable in the PRI Territory. If G(UK)
establishes that one of PRI's customers or licensees or a customer or licensee
of any of its Affiliates is exporting such Product out of the PRI Territory, PRI
shall (and shall cause its Affiliates to) either cease to supply such customer
or obtain (and enforce, if necessary) an undertaking from such customer not to
sell the Product outside of the PRI Territory
--22--
<PAGE>
(unless PRI [or its Affiliate, as the case may be] is precluded from taking such
action under applicable law). Notwithstanding the foregoing, PRI shall not be in
violation of this Section 3.3 if G(UK) shall forfeit to PRI G(UK)'s exclusive
distribution and manufacturing rights pursuant to Section 5.1 below.
3.4 Territorial and Product Restrictions Applicable to G(UK): During
the term of this agreement applicable to a Product, neither G(UK) nor any of its
Affiliates will directly or indirectly sell or license such Product outside of
the G(UK) Territory or to any Person in the G(UK) Territory where it knows or
has reason to believe that such Product will be resold by such Person outside of
the G(UK) Territory. In the event the foregoing provision is or becomes
unenforceable or is unlawful in the G(UK) Territory, then it shall be deemed
replaced by the most restrictive provision on marketing or sale of the Product
outside of the G(UK) Territory as shall be lawful and enforceable in the G(UK)
Territory. If PRI establishes that one of G(UK)'s customers or licensees or a
customer or licensee of any of its Affiliates is exporting such Product out of
the G(UK) Territory, G(UK) shall (and shall cause its Affiliates to) either
cease to supply such customer or obtain (and enforce, if necessary) an
undertaking from such customer not to sell the Product outside of the G(UK)
Territory (unless G(UK) [or its Affiliate, as the case may be] is precluded from
taking such action under applicable law). In addition, G(UK) shall not (and it
shall not authorize, permit or suffer any of its Affiliates to), directly or
indirectly, manufacture, purchase, sell or distribute a Competing Product in the
G(UK) Territory at any time during the term of this agreement applicable to a
Product.
ARTICLE 4
PRODUCT DEVELOPMENT AND REGISTRATION
4.1 Obligations to Develop Products: Subject to the right of the
Committee to terminate the development of a Product, the Partnership shall use
commercially reasonable best efforts to develop the Products in accordance with
the requirements of applicable law in such order of priority as is determined by
the Committee. Nothing in this agreement shall constitute a guarantee or
warranty of the Partnership that development of any Product will be commenced or
continued or successfully completed within any specific time period or that a
Product Approval for any Product will be obtained. All Products developed by
the Partnership and all applicable intellectual property rights shall be the
exclusive property of the Partnership and the Partnership shall be the exclusive
owner of all rights with respect to any Products developed by it, including,
without limitation, any manufacturing methods or intellectual property rights.
G(UK) and PRI agree and acknowledge that the Partnership has the right to
continue development of the Partnership Products concurrently with the
development of the Products; provided, that, the Committee will have the ability
-------- ----
to determine the allocation of resources of the Partnership between the Products
and the Partnership Products. G(UK) shall have no rights with respect to the
Partnership Products. THE PARTNERSHIP MAKES NO REPRESENTATION THAT ANY PRODUCT
WILL BE USEFUL FOR THE INTENDED PURPOSE OR THAT IT IS FREE FROM INHERENT SIDE
EFFECTS.
4.2 Registration Responsibility: If a Product has been successfully
developed (as described below), it will be the sole responsibility of PRI or
G(UK) if PRI or G(UK), respectively, elects to distribute a product in the PRI
Territory or G(UK) Territory, respectively, (i) to file for Product Approvals in
the PRI Territory and G(UK) Territory, respectively, with the appropriate
authorities and (ii) where an application for Product Approval for such Product
has been submitted, to use commercially reasonable efforts to ensure that it
receives a Product Approval for such Product from the appropriate authorities on
the earliest possible schedule given the applicable process; provided, that, if
-------- ----
G(UK) does not apply for Product Approval for a Product in any one or more
jurisdictions within the G(UK) Territory within 180 days of the successful
development of such Product or if G(UK) obtains a Product Approval with respect
to a Product and does not commercially market and sell any Products within 150
days of obtaining a Product Approval, PRI shall have all rights and obligations
of G(UK) as set forth in Articles 3, 4, 5, 7 and 8 hereof with respect to such
Product in the one or more jurisdictions within the G(UK) Territory in which
G(UK) failed to apply for Product Approvals or failed to commercially market and
sell the Product. Product Approvals granted in respect of Products in a
jurisdiction within a territory will be registered in the name of the Party to
this agreement that has the right to distribute the Products within such
jurisdiction pursuant to Articles 3, 4 and 5 hereof. For the purposes of this
agreement, a Product will deemed to be "successfully developed" if the Committee
determines in its sole and good faith judgment that the Product, in its current
state of development and without significant additional development or cost,
could obtain a Product Approval in one or more developed countries in the PRI
Territory or G(UK) Territory. If the Committee cannot agree by a majority vote
of its members whether or not a Product has been "successfully developed," the
Committee shall hire an industry expert who has no business dealings with any of
the parties to this Agreement who will cast the deciding vote. All expenses and
fees of such expert will be paid by the Partnership. PRI and G(UK) shall be
responsible for and pay all expenses incurred by them in seeking Product
Approvals in their respective territories pursuant to Article 3 hereof and the
jurisdictions in which PRI and G(UK) shall have rights under Section 4.2 hereof
to distribute the Product.
--23--
<PAGE>
4.3 Status Reporting: The Partnership shall from time to time:
(a) advise PRI and G(UK) of any unforeseen material problems or
delays encountered or additional requirements imposed upon the
Partnership since the date of its last report in connection with
the development of a Product (and of which PRI and G(UK) have
not been otherwise advised pursuant to (b) below); and
(b) provide PRI and G(UK) with such information as PRI and G(UK) may
reasonably request in writing from time to time with respect to
the status of the development of a particular Product.
4.5 License of Product Information to PRI and G(UK): If PRI and/or
G(UK) desire to manufacture and distribute any successfully developed Product in
the PRI Territory or G(UK) Territory, respectively, PRI and/or G(UK) may require
the Partnership to grant to PRI and/G(UK) a fully paid-up license upon the terms
herein contemplated to use the Product Information to obtain a Product Approval
for such Product in the PRI Territory and G(UK) Territory, respectively, such
right to be exercised by notice in writing to the Partnership. Pursuant to such
license:
(a) all information, tests and studies not contained in the Product
Information and which are required by PRI or G(UK) to obtain a
Product Approval for such Product shall be developed and
conducted by PRI and/or G(UK) and their respective Affiliates at
their sole cost and expense;
(b) the Partnership will answer PRI's and G(UK)'s reasonable
inquiries concerning such Product Information so as to enable
PRI and G(UK) to obtain a Product Approval for the Product in
question but it shall not be required to compile or develop
information which is not already available to or possessed by
it; and
(c) Neither PRI nor G(UK) will use the Product Information licensed
to it pursuant hereto to obtain a regulatory license or approval
to market the Product outside of the PRI Territory or G(UK)
Territory, respectively, except as permitted expressly in this
Agreement.
4.6 Waiver of Right of First Refusal: G(UK) shall cause Genpharm Inc.
to execute and deliver an agreement pursuant to which Genpharm Inc. waives all
of its rights under Section 3.10 of the Distribution Agreement, dated March 25,
1998, between PRI and Genpharm Inc. with respect to all Products to be developed
by the Partnership.
ARTICLE 5
MANUFACTURE OF PRODUCTS
5.1 Rights to Manufacture and Distribute Products: PRI shall have the
exclusive right to manufacture and distribute all Products in the PRI Territory.
G(UK) shall have the exclusive right to manufacture and distribute all Products
in the G(UK) Territory; except, that, if (i) G(UK) shall fail to apply for
------ ----
Product Approval for a Product within 180 days of successful development of a
Product by the Partnership, (ii) G(UK) shall obtain a Product Approval with
respect to a Product and does not commercially market and sell any Products
within 150 days of obtaining a Product Approval or (iii) G(UK) shall cease sales
and marketing efforts with respect to a Product having a Product Approval, G(UK)
shall forfeit such exclusive manufacturing and distribution rights with respect
to such Product in the jurisdiction(s) in which G(UK) shall have failed to file
an application for Product Approval or failed to commercially market and sell
the Product or ceased sales and marketing efforts with respect to a Product
having a Product Approval, and PRI shall have the exclusive right to manufacture
and distribute such Product in such jurisdiction(s) within the G(UK) Territory.
5.2 Manufacturing Responsibilities: Each Product supplied by PRI,
G(UK) or their Affiliates hereunder shall be manufactured (which shall include,
without limitation, all testing, packaging and labeling) in an approved facility
and in accordance with the appropriate practices, rules and regulations of the
appropriate regulatory authorities relative to the manufacture of such Product
where it shall be manufactured, marketed and sold.
ARTICLE 6
ROYALTY PAYMENTS, REPORTS AND AUDIT
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<PAGE>
6.1 Royalties: G(UK) shall pay to the Partnership a perpetual
royalty equal to the sum of (i) 2.0% of Net Sales and arising out of sales in
the G(UK) Territory by G(UK) or its Affiliates of Products in each calendar
quarter (which for the purposes of clarity shall not include the portion of the
License Fees paid pursuant to Section 6(ii)) and (ii) 10.0% of Licensing Fees
paid to G(UK) or its Affiliates arising out of licenses granted by G(UK) or its
Affiliates of Products in the G(UK) Territory in each calendar quarter (which
for the purposes of clarity shall not include the portion of Net Sales paid
pursuant to Section 6(i)). The term "Royalties" shall refer collectively to Net
Sales and License Fees. All Royalties shall be made in US dollars.
6.2 Payment of Royalties: All Royalties shall be paid by G(UK) to the
Partnership quarterly, within 30 days following the end of each calendar quarter
in each year with respect to sales made by G(UK) or its Affiliates of Products
or payments made to G(UK) or its Affiliates by their licensees of Products,
during such calendar quarter. Each such payment shall be accompanied, in respect
of each Product, by a sales summary showing Gross Sales, Net Sales and License
Fees of each Product by Units and US dollars made by G(UK) and its Affiliates
and their licensees during the preceding quarter.
For purposes of this agreement, a sale shall be considered to have
been made at the time the Product is shipped by G(UK)'s or its Affiliate's to
its customer, or by their licensees to their customers. For purposes of
computing Gross Sales and Net Sales, all sales and other transactions between
G(UK) and its Affiliates shall be disregarded and sales and other transactions
between G(UK) and its Affiliates shall not constitute a license by G(UK) or its
Affiliates, but shall be deemed to be a sale generating Gross Sales and Net
Sales.
6.3 Additional Information: G(UK) shall provide to the Partnership
and shall cause its Affiliates to provide to the Partnership, promptly following
a request therefor, such additional information concerning any sales of a
specific Product relevant to the calculation of Net Sales and Gross Sales and
License Fees in respect of a Product as the Partnership may reasonably request.
6.4 Interest: All payments to be made to the Partnership under this
agreement shall bear interest from and after the due date therefor until paid at
the annualized rate equal to the daily (as at the close of business on each such
day) prime rate as quoted from time to time by Citibank N.A., New York, New York
plus 3%, compounded daily.
6.5 Maintenance of Records: Each of the parties hereto agrees that
it shall keep (and shall cause its Affiliates to keep) complete and accurate
books and records of account containing all information required for the
computation and verification of all amounts on which payments hereunder are
based and shall, upon reasonable written notice from the other, make such
records available for examination by such other party or, at the requesting
party's expense, supply copies of such records to such other party.
6.6 Examination of Records: Each of the parties hereto shall have
the right, upon reasonable written notice to the other, to designate an
independent certified public or chartered accountant (except one to whom the
other has a reasonable objection) to have access during ordinary working hours
to such records as may be necessary to audit the correctness of any invoice,
report or payment made under this agreement.
ARTICLE 7
DISTRIBUTION
7.1 Obligations of PRI and G(UK): PRI and G(UK) shall be responsible
for packaging, labeling, marketing, pricing, storage, handling, quality control
and quality assurance in accordance with Product Approvals and all applicable
laws, and credit risks, collection of receivables, product returns, and product
recalls with respect to the Products manufactured and/or distributed by them or
their Affiliates in their respective territories.
7.2 Pricing: PRI and G(UK) shall have sole discretion in setting the
price for the sale of the Products in the PRI Territory and G(UK) Territory,
respectively.
7.3 Conduct of Business: PRI and G(UK) shall have sole discretion in
the manufacturing, marketing, sale and distribution of Products, subject to
applicable laws and the express terms of this agreement, within the PRI
Territory and G(UK) Territory, respectively, and shall be solely responsible for
all costs, expenses and liabilities arising therefrom in their respective
territories.
--25--
<PAGE>
ARTICLE 8
DAMAGES, INDEMNIFICATION AND INSURANCE
8.1 Limitation re Claims: Subject to the limitations set forth in
this Section 8.1, PRI, G(UK) and the Partnership covenant and agree to
indemnify, save harmless and compensate the other (and its Affiliates, for whose
benefit such other party shall hold the benefit of this provision in trust)
from, against or for, as the case may be, any and all claims, demands, actions,
causes of action, suits, proceedings, judgements, damages, expenses (including
reasonable attorney's fees and expenses), losses, fines, penalties and other
similar assessments, as the case may be, (the "Damages") relating to or arising
out of a breach by PRI, G(UK) or the Partnership, as the case may be, of any of
the representations, warranties, covenants or agreements herein; provided, that,
-------- ----
except where the breach arises out of the representation or warranty being
intentionally false or inaccurate or constitutes a wilful material breach by
PRI, G(UK) or the Partnership of its duties or obligations hereunder or an act
or omission constituting gross negligence, the claim of the aggrieved party for
Damages arising out of the breach shall be limited to claiming the amounts owing
or payable to it in accordance with the provisions of this agreement and any out
of pocket costs and expenses (including amounts paid or payable by it to third
parties) which it has incurred and the aggrieved party shall not be entitled to
recover from the defaulting or breaching party any lost profits or consequential
or punitive damages, including loss or damage to its goodwill or reputation.
8.2 Claims and Challenges: In the event that the actual or proposed
sale, marketing or other release in the PRI Territory by PRI or its Affiliates,
or in the G(UK) Territory by G(UK) or its Affiliates or their licensees, or the
research, development or application for Product Approval, of any Product
results in a third-party claim or results in any challenge under applicable
legislation or regulation:
(a) to the extent that the Damages awarded or incurred relate to or
arise out of any act by or omission of G(UK) or any of its
Affiliates or any other Persons for whose acts or omissions they
are responsible at law, G(UK) shall be responsible therefor and
shall defend, indemnify and hold harmless PRI and its Affiliates
and the Partnership from and against all such Damages;
(b) to the extent that the Damages awarded or incurred relate to or
arise out of any or omission of PRI or any of its Affiliates or
any other Persons for whose acts or omissions they or any one or
more of them is responsible at law, PRI shall be responsible
therefor and shall defend, indemnify and hold harmless G(UK) and
its Affiliates from and against all such Damages;
(c) to the extent that the Damages awarded or incurred relate to or
arise out of an actual or threatened claim, demand, action, cause
of action, suit or proceeding that any Product researched or
developed by the Partnership or application for Product Approval
or proposed marketing or sale of a Product infringes any patent or
other proprietary right of another Person or violates any
applicable law or regulation, the Party to this agreement which
shall have the right to distribute the Product in the jurisdiction
within the PRI Territory or G(UK) Territory in which the lawsuit
shall be filed or other legal or non-legal charge asserted shall
be responsible therefor and shall defend, indemnify and hold
harmless the Partnership and the other Party to this agreement and
their Affiliates from and against any and all Damages; and
(d) to the extent that Damages in the PRI Territory are awarded in
favor of any of the Parties to this agreement or their Affiliates,
PRI shall be entitled to receive all of such Damages and to the
extent that Damages in the G(UK) Territory are awarded in favor of
G(UK) or any of its Affiliates, PRI shall be first reimbursed for
its costs and expenses incurred in connection with the action and
thereafter the Partnership shall be entitled to receive 10% of the
Damages.
Upon the assertion of any third-party claim or other challenge against
G(UK), PRI or the Partnership (or their respective Affiliates) that may give
rise to right of indemnification under this agreement, the Person claiming a
right to indemnification (the "Indemnified Party") shall give prompt notice to
the Person alleged to have the duty to indemnify (the "Indemnifying Party") of
the existence of such claim or other challenge (provided that the failure to
give such notice in timely fashion shall not release the Indemnifying Party of
its obligations of indemnification hereunder except to the extent that the
Indemnifying Party has been prejudiced thereby) and shall give the Indemnifying
Party reasonable opportunity to control, defend and/or settle such claim at its
own expense and with counsel of its own selection; provided, however, that, the
-------- ------- ----
Indemnified Party shall, at all times, have the right to fully participate in
such defense at its own expense with separate counsel and, provided that both
-------- ----
parties to the extent that they are not
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<PAGE>
contractually or legally excluded therefrom, or otherwise prejudiced in a legal
position by so doing, shall co-operate with each other and with their respective
insurers in relation to the defense of such claim or other challenge. The
Indemnifying Party shall consult with the Indemnified Party with respect to
settlement of any claim or other challenge. The Indemnifying Party shall have
the right to settle any claim or other challenge without the consent of the
Indemnified Party, provided, that, the Indemnified Party is unconditionally
-------- ----
released from such claim or other challenge and it is not otherwise prejudiced
by the terms of settlement. In the event the Indemnifying Party elects to defend
such claim or other challenge, the Indemnified Party may not settle such claim
or other challenge without the prior written consent of the Indemnifying Party.
If the Indemnifying Party shall, within a reasonable time after such notice has
been given, fail to defend, compromise or settle such claim or other challenge,
(or thereafter fails to diligently defend such claim or other legal challenge)
then the Indemnified Party shall have the right to defend, compromise or settle
such claim or other legal challenge without prejudice to its rights of
indemnification hereunder. Notwithstanding the foregoing, in the event of any
dispute with respect to indemnity hereunder, each party shall be entitled to
participate in the defense of such claim or other legal challenge and to join
and implead the other in any such action.
8.3 Insurance: Each of PRI and G(UK) shall (and shall cause their
respective Affiliates, as required, to) during the term of this agreement and
for a period of not less than 36 months following the termination or expiration
of this agreement, carry or be subject to coverage under (as a named insured)
product liability insurance (including blanket contractual liability) in an
amount of not less than $10,000,000 US combined single limit, which insurance
will be written on an occurrence policy form with an insurance carrier
reasonably acceptable to the other party. Each of G(UK) and PRI shall, at the
request of the other, provide evidence to such requesting party of compliance
with its insurance obligations (and those of its Affiliate) under this Section
and evidence of renewals of any such policy, from time to time.
ARTICLE 9
TERM AND TERMINATION
9.1 Term: The initial term of this agreement shall commence on the
date of this agreement and continue for a period of five years, and shall
automatically renew for additional periods of one year unless PRI or G(UK) gives
written notice of termination to the other and the Partnership at least 180 days
prior to the expiration of the initial term or any renewal terms, as the case
may be, subject to earlier termination as provided in this agreement; provided,
--------
that, the rights and obligations set forth in Articles 3, 4, and 5 of this
- ----
agreement shall survive any termination or expiration of this agreement with
respect to such Products as have been successfully developed or then under
development by the Partnership at the time of expiration of this agreement,
unless earlier terminated in accordance with the other provisions of this
agreement.
9.2 Payment and Reporting Defaults:
(a) The Partnership or PRI may, by notice in writing to G(UK),
terminate this agreement if G(UK) fails to pay to the Partnership any amount
payable by G(UK) to the Partnership hereunder as and when the same shall have
become due and payable or shall have failed to deliver (or caused to be
delivered, as the case may be), in timely fashion, the reports or information
contemplated in Sections 6.2 or 6.3 hereof, and in either case, such breach
shall have continued unremedied for a period of 30 business days after written
notice of such breach has been given by the Partnership to G(UK); provided,
--------
that, G(UK) shall not have the right to such 30 business day grace period within
- ----
which to cure such default and the Partnership shall have the immediate right to
terminate the agreement for such breach if G(UK) shall have previously breached
Sections 6.2 or 6.3, or failed to remit any sums of at least $100,000 US to the
Partnership when due, in the aggregate, three times in the 12 month period
immediately preceding the default in question.
(b) G(UK) may, by notice in writing to PRI and the Partnership,
terminate this agreement if PRI fails to pay to the Partnership any amount
payable by PRI to the Partnership hereunder as and when the same shall have
become due and payable and such breach shall have continued unremedied for a
period of 30 business days after written notice of such breach has been given by
G(UK) to PRI and the Partnership; provided, that, PRI shall not have the right
-------- ----
to such 30 business day grace period within which to cure such default and G(UK)
shall have the immediate right to terminate the agreement for such breach if PRI
shall have previously failed to remit any sums of at least $100,000 US to the
Partnership when due, in the aggregate, three times in the 12 month period
immediately preceding the default in question.
9.3 Material Breach: Subject to Section 9.2 above, PRI or G(UK) may,
by notice in writing to the
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<PAGE>
other, terminate this agreement or, at its option, terminate this agreement in
respect to only those Products to which the default in question relates, if such
other party shall have breached any of its material duties or obligations under
this agreement and such default continues unremedied for a period of 60 days
following receipt of notice of such default or, if such default is capable of
being remedied but is not reasonably capable of being remedied within such 60
day period, such longer period of time as is reasonable in the circumstances,
not exceeding 90 days in the aggregate, provided, that, the defaulting party
-------- ----
has, within such 60 day period, commenced and thereafter actively and diligently
pursues the remedying of such default.
9.4 Events of Default: G(UK), PRI and the Partnership shall each have
the right to terminate this agreement upon written notice to the other party in
the event that any one or more of the following events shall become applicable
to the other parties to this agreement (G(UK), PRI and the Partnership each
being referred to as the "Party"):
(a) an order is made or a resolution or other action of such Party
is taken for the dissolution, liquidation, winding up or other
termination of its corporate existence;
(b) the Party commits a voluntary act of bankruptcy, becomes
insolvent, makes an assignment for the benefit of its creditors
or proposes to its creditors a reorganization, arrangement,
composition or readjustment of its debts or obligations or
otherwise proposes to take advantage of or shelter under any
statute in force in the United States or in the governing
jurisdiction of such Party for the protection of debtors;
(c) if any proceeding is commenced with respect to a compromise or
arrangement, or to have such Party declared bankrupt or to have
a receiver appointed in respect of such Party or a substantial
portion of its property and such proceeding is not fully stayed
or dismissed within 30 days after such commencement;
(d) a receiver or a receiver and manager of any of the assets of
such Party is appointed and such receiver or receiver and
manager is not removed within 30 days of such appointment; or
(e) such Party ceases or takes steps to cease to carry on its
business.
9.5 Force Majeure: Either Party may terminate this agreement with
respect to a particular Product materially affected by an event of Force Majeure
in accordance with the provisions of Section 12.2 below (but this agreement
shall continue in respect of the other Products which remain subject to this
agreement and which are not effected by such Force Majeure event).
9.6 Survival: Any cause of action for breach of contract shall
survive the termination or expiration of this agreement. The termination or
expiration of this agreement shall not affect any right or obligation of G(UK),
PRI or the Partnership existing prior to the effective date of termination or
expiration and which is by expressed hereunder to survive termination.
Termination or expiration of this agreement shall not affect any right, duty or
obligation arising pursuant to Articles 6, 7, 8, 10, 11 and 12 hereof and
Section 9.1 hereof (which shall survive termination or expiration).
ARTICLE 10
CONFIDENTIALITY
10.1 Confidential Nature of Agreement: Each Party agrees that,
without the prior written consent of the other, or except as may be required by
law or court order, the existence and terms of this agreement shall remain
confidential and shall not be disclosed to any Person other than employees and
professional advisers of such Party or its Affiliates who reasonably require
knowledge of the existence or terms of this agreement and who are bound to such
Party or its Affiliates by a like obligation of confidentiality. Such employees
and advisors will be advised of the nature and existence of the confidentiality
undertakings of this agreement and of the applicability of such undertakings to
them and will agree to be bound hereby.
10.2 Duty of Confidentiality: Each Party agrees to hold in trust and
confidence (and to cause its Affiliates to hold in trust and confidence) for the
benefit of the other Parties (and their Affiliates) all Confidential Information
of such other Parties and their Affiliates and each further agrees to safeguard,
and to cause its Affiliates to safeguard, the Confidential Information of the
other (or its Affiliates) to the same extent that it does with its own
--28--
<PAGE>
confidential information and to limit and control copies, extracts and
reproductions made of such Confidential Information. No Party will, without the
express written consent of the others, directly or indirectly, use (or
authorize, permit or suffer any of its Affiliates to use) any Confidential
Information of the other Parties or of their Affiliates for any purpose other
than to implement the provisions of this agreement or in regulatory proceedings
or in litigation. No Party will disclose Confidential Information to any Person,
other than its employees or other representatives or those of its Affiliates who
have a need to know to fulfill the provisions and intent of this agreement
(where such provisions and intent cannot properly be fulfilled without such
disclosure) and who have been informed of the confidential nature of the
information and have agreed to be bound by the terms hereof. Each Party shall
use its best efforts to prevent unauthorized use or disclosure of the
Confidential Information of the other Parties or their Affiliates and shall use
protective measures no less stringent than those used by it in its own business
to protect its own confidential information, including segregating such
information at all times from the confidential material of others so as to
prevent any commingling.
10.3 Compulsory Disclosures: In the event that any Party (or any of
their respective Affiliates) shall be legally compelled or required by a court
of competent jurisdiction to disclose all or any part of the Confidential
Information of another Party (or its Affiliates), it shall provide prompt notice
to the other so that such other Party (or its Affiliates) may determine whether
or not to seek a protective order or any other appropriate remedy. If a
protective order or other appropriate remedy is not obtained before such
disclosure is required, the Party required to make disclosure will disclose only
those portions of the Confidential Information in question which it is advised
by written opinion of counsel (which opinion shall be addressed to such Party
and to the other Party), it is legally required to disclose and will exercise
its best efforts to obtain reliable assurances that confidential treatment will
be accorded such Confidential Information.
10.4 Return of Confidential Information: Upon termination of this
agreement, each Party shall immediately return to the other Parties all material
containing or reflecting or referring to any Confidential Information of the
other Parties or their Affiliates (including all notes, summaries, analysis or
other documents prepared or derived therefrom) and all copies thereof in any
form whatsoever under the power or control of such Party or its Affiliates,
except that one copy may be retained for legal archival purposes, and such Party
shall delete such Confidential Information from all retrieval systems and data
bases or destroy same as directed by the other Parties and furnish to the other
Parties, if requested, a certificate of a senior officer of such Party
certifying such return, deletion and/or destruction. Where this agreement is
terminated in respect of a particular Product or Products only then the
foregoing obligations shall thereupon apply to Confidential Information relating
to such Product or Products.
ARTICLE 11
ARBITRATION
11.1 Arbitration: Any controversy or claim arising out of, or relating
to, this Agreement or the breach thereof shall be referred for decision
forthwith to a senior executive of each Party not involved in the dispute. If no
agreement is reached within 30 days of the request by one Party to the other to
refer the same to such senior executive, then such controversy or claim shall be
settled by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, such arbitration to be held in New York,
New York on an expedited basis. Judgement upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
ARTICLE 12
GENERAL CONTRACT TERMS AND CONDITIONS
12.1 Notice: Subject to the express provisions of this agreement, any
notice required or permitted to be given under this agreement shall be
sufficiently given if in writing and delivered by facsimile (with confirmation
of transmittal) or overnight courier (with confirmation of delivery), as well as
by prepaid registered mail (with return receipt requested) or hand delivery to
the appropriate Party at the address set forth below, or at such other address
or to the attention of such other individual as such Party may from time to time
specify for that purpose in a notice similarly given:
To G(UK) at:
4 Harley Street
London
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<PAGE>
W1N 1AA
United Kingdom
Attention: Chief Executive Officer
Fax Number: 011-44-171-436-4903
To PRI or the Partnership at:
One Ram Ridge Road,
Spring Valley, New York 10977
U.S.A.
Attention: Chief Financial Officer
Fax Number: (914) 425-7922
Any such notice shall be effective (i) if sent by mail, as aforesaid,
5 business days after mailing, (ii) if sent by facsimile, as aforesaid, when
sent (with confirmation of receipt), and (iii) if sent by courier or hand
delivered, as aforesaid, when received, provided that if any such notice shall
have been sent by mail and if on the date of mailing thereof or during the
period prior to the expiry of the 5th business day following the date of mailing
there shall be a general postal disruption (whether as a result of rotating
strikes or otherwise) in the country or territory where the sender or the
intended recipient is situated then such notice shall not become effective until
the 5th business day following the date of resumption of normal mail service.
12.2 Force Majeure: No Party shall be considered to be in default in
respect of any obligation hereunder if failure of performance shall be due to
Force Majeure (as hereinafter defined). If any Party is affected by a Force
Majeure event such Party shall, within 20 days of its occurrence, give notice to
the other Parties stating the nature of the event, its anticipated duration and
any action being taken to avoid or minimize its effect. The suspension of
performance shall be of no greater scope and no longer duration than is required
by such Force Majeure and the non-performing Party shall use commercially
reasonable efforts to remedy its inability to perform. The obligation to pay
money in a timely manner is absolute and shall not be subject to the Force
Majeure provisions, except to the extent payment is prohibited by governmental
rule or regulations other than rules or regulations incident to bankruptcy or
insolvency proceedings of a Party. Force Majeure shall mean an unforeseeable or
unavoidable cause beyond the control and without the fault or negligence of a
Party or its Affiliate including, but not limited to, explosion, flood, war
(whether declared or otherwise), accident, labor strike or other labor
disturbance, inability to obtain materials or services, sabotage, acts of God,
newly enacted legislation, newly issued orders or decrees of any Court and any
binding act or order of any governmental agency. Notwithstanding anything in
this Section, the Party to whom performance is owned but to whom it is not
rendered because of an event of Force Majeure as contemplated in this Section
shall, after the passage of 120 days, have the option to terminate this
agreement in respect of the Product affected by such event on 30 days prior
written notice to the other Parties hereto.
12.3 Governing Law and Consent to Jurisdiction:
(a) This agreement shall be deemed to have been made under, and shall
be governed by, the laws of the State of New York without giving
effect to New York's choice of law provisions.
(b) Subject to Article 11 above, in connection with any action
commenced hereunder, each of the undersigned consents to the
jurisdiction of the state and federal courts located in New York
City. G(UK) hereby appoints Lipha Americas, Inc., 9 W. 57/th/
Street, New York, New York (or any successor firm or to such other
address as they or G(UK) may designate in writing) and PRI and the
Partnership hereby appoint Hertzog, Calamari & Gleason, 100 Park
Avenue, New York, New York, l0017, (or any successor firm or to
such other address as they or PRI or the Partnership may designate
in writing), as their respective agents upon whom service of
process may be made with the same force and effect as if service
shall have been made personally upon them.
12.4 Entire Agreement: This agreement contains the entire agreement
and understanding of the Parties with respect to its subject matter and
supersedes all negotiations, prior discussions and any agreements relating to
the subject matter hereof. This agreement may not be amended or modified
except by a written instrument signed by the Parties.
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<PAGE>
12.5 Waiver: Any waiver of, or consent to depart from, the
requirements of any provision of this agreement shall be effective only if it is
in writing and signed by the Party giving it, and only in the specific instance
and for the specific purpose for which it has been given. No failure on the part
of any Party to exercise, and no delay in exercising, any right under this
agreement shall operate as a waiver of such right. No single or partial exercise
of any such right shall preclude any other or further exercise of such right or
the exercise of any other right.
12.6 Counterparts: This agreement may be executed in identical
duplicate copies exchanged by facsimile transmission. The Parties agree to
execute three identical original copies of the agreement after exchanging signed
facsimile versions. Each identical counterpart shall be deemed an original, but
all of which together shall constitute one and the same instrument.
12.7 Severability of Provisions: If, for any reason whatsoever, any
term, covenant or provision of this agreement or the application thereof to any
Party or circumstance or in any jurisdiction is to any extent held or rendered
invalid, unenforceable or illegal, then such term, covenant or condition (a) is
deemed to be independent of the remainder of this agreement and to be severable
and divisible therefrom and its validity, unenforceability or illegality shall
not affect, impair or invalidate the remaining provisions hereof; and (b)
continue to be applicable and enforceable to the fullest extent permitted by law
in every other jurisdiction and against any Party and circumstances other than
those as to which or in respect of which it has been held or rendered
unenforceable or illegal. To the extent permitted by applicable law, each Party
hereby waives any provision of law which renders any provision of this agreement
prohibited or unenforceable in any respect. Should any provision of this
agreement be so held to be unenforceable, such provision, if permitted by law,
shall be considered to have been superseded by a legally permissible and
enforceable clause which corresponds most closely to the intent of the parties
as evidenced by the provision held to be unenforceable.
12.8 Assignment: Neither this agreement nor rights of a Party
hereunder may be assigned nor may the performance of any duties hereunder be
delegated without the prior written consent of the other Party. Notwithstanding
the foregoing, G(UK) and PRI may delegate from time to time some of their
respective duties hereunder to any of their respective Affiliates and, in
addition, G(UK) and PRI may license the distribution and/or subcontract the
manufacturing of a Product, in whole or in part, to any other Person which is
not an Affiliate after the prior written notice to the other Parties; provided,
--------
that, the Person to whom the license and/or subcontract shall have been granted
- ----
shall agree in writing to be bound by the terms and conditions of this agreement
as a condition to and prior to the license and/or subcontract and that the
license and/or subcontract shall not be detrimental to the interest of the
Partnership or any other Party to this agreement in the reasonable judgment of
the Partnership or such other Party. No such delegation, licensing or
subcontracting will relieve G(UK) or PRI, as the case may be, of any of its
obligations hereunder. Subject to the foregoing this agreement shall be binding
upon and enure to the benefit of the parties and their respective successors and
permitted assigns.
12.9 Non-Contravention: Each Party represents and warrants that the
execution, delivery and performance of this agreement by it will not contravene
any other contract or agreement to which it is a Party or by which it is bound.
12.10 Headings: The headings of all Articles and Sections hereof are
inserted for convenience of reference only, are not intended to be full or
accurate descriptions of the contents hereof and shall not be considered part of
this agreement or affect the construction or interpretation of this agreement.
12.11 Compliance: Where, in accordance with the provisions of this
agreement, the Affiliate of a Party is required to do or omit to do or use
reasonable commercial (or other) efforts to do or refrain from doing any act or
thing such Party shall use reasonable best commercial efforts to cause its
Affiliates to comply.
--31--
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
agreement to be executed by its duly authorized officer as of the date first
above written.
GENERICS (UK) LIMITED PHARMACEUTICAL
RESOURCES, INC.
By: /s/ Anthony S. Tabatznik By: /s/ Kenneth I. Sawyer
----------------------------- -----------------------------
Name: Anthony S. Tabatznik Name: Kenneth I. Sawyer
--------------------------- ---------------------------
Title: Chairman Title: President
-------------------------- --------------------------
ISRAEL PHARMACEUTICAL RESOURCES L.P.
By: Israel Pharmaceutical Resources (1995) Ltd.,
General Partner
By: /s/ Kenneth I. Sawyer
--------------------------
Name: Kenneth I. Sawyer
-------------------------
Title:
------------------------
--32--
<PAGE>
SCHEDULE "A"
DEFINITIONS
"Affiliate" means, subject to the limitations set forth in (A) and (B)
below, any Person which, directly or indirectly, controls, is controlled by or
is under common control with such Person. For purposes of this definition, the
term "control" (as used in the terms "controls", "controlled by" and "under
common control") means either (i) holding 50% or more of the voting securities
of such Person or (ii) in the case of a Person that has no outstanding voting
securities, having the right to 50% or more of the profits of such Person or
having the right in the event of dissolution to 50% or more of the net assets
of such Person or (iii) the power to direct or cause the direction of the
management and policies of such Person, whether pursuant to the ownership of
voting securities, by contract or otherwise; provided, that (A) any Person who
-------- ----
(but for the exceptions contemplated herein in (A)) is or was an Affiliate of
G(UK) and, but for the completion of the transactions contemplated by the Stock
Purchase Agreement, dated March 25, 1998, between PRI and Lipha Americas Inc. or
the exercise of any rights granted pursuant thereto or in connection with the
completion of such transactions would not be an Affiliate of PRI or the
Partnership, such Person shall be deemed not to be an Affiliate of PRI or the
Partnership so that, for greater certainty, but without limitation, G(UK) and
any of its Affiliates shall not be Affiliates of PRI or the Partnership or any
of their Affiliates and vice versa and (B) the Partnership shall not be deemed
an Affiliate of PRI or any of its Affiliates and vice versa;
"ANDA" means the abbreviated new drug application heretofore or
hereafter filed by PRI or any of its Affiliates with the FDA for or in respect
of a Product;
"Bio-Availability Studies " mean necessary studies performed to
determine the availability of a drug in the bloodstream over time, comparing
that availability to that of another drug;
"Budget" means the annual operating and capital budget of the
Partnership and shall include all funding reasonably necessary to fund
development of the Products and to continue to fund development of the
Partnership Products;
"business day" means a day other than a Saturday, a Sunday or a day
which is a statutory holiday in London, England or the State of New York, United
States of America;
"Competing Product" means, with respect to a particular Product, a
generic pharmaceutical product which is in the same dosage form, has the same
active ingredient and the same strength as such Product but which is
manufactured and supplied by or purchased or acquired from any Person other than
the Parties or any of their Affiliates;
"Confidential Information" shall mean information disclosed to or
obtained by one party from another party (including information obtained by one
party as a result of access to the facilities of the other party) either prior
to or during the term of this agreement which is non-public, confidential or
proprietary in nature (including, without limitation, trade secrets, financial
data, product information, manufacturing methods, market research data,
marketing plans, identity of customers, or product information [including the
nature and source of raw materials, product formulation and methods of
producing, testing and packaging]) and which relates to the disclosing party's
past, present or future research, development or business activities
Confidential Information shall not, however, include information that a party
can demonstrate by written evidence:
(i) is in the public domain (provided that information in the
public domain has not and does not come into the public domain
as a result of a breach by a party hereto (or any of its
Affiliates) of its obligations of confidentiality contained
herein;
(ii) is known by the receiving party prior to disclosure by the
other party;
(iii) which has been developed by the receiving party independent of
any disclosure by the other party; or
(iv) is subsequently, lawfully and in good faith obtained by the
receiving party on a non-confidential basis from a third party
as shown by documentation sufficient to establish the third
party as the source of the information, provided that such
third party was not under an obligation to treat such
information in a confidential manner and had a lawful right to
make such disclosure;
--33--
<PAGE>
"FDA" shall mean the United States Food and Drug Administration (or
whatever such agency might be called from time to time), or any successor agency
having regulatory jurisdiction over the manufacture, distribution and sale of
drugs in the United States;
"G(UK) Territory" means all jurisdictions other than the PRI
Territory; provided, that, with respect to a Product, the G(UK) Territory shall
-------- ----
not include such jurisdictions in the G(UK) Territory in which G(UK) shall have
forfeited to PRI exclusive manufacturing and distribution rights pursuant to
Section 4.2 of the agreement with respect to such Product;
"Gross Sales" means, in respect of a Product for a period, the gross
amount invoiced by G(UK) and its Affiliates in such period to unrelated third
party customers on account of the sale of such Product (excluding amounts for
freight, postage, insurance, sales tax and other governmental charges imposed
upon such sale which are included in the gross amount invoiced and shown
separately on such invoice) plus any other form of revenue (other than interest
accruing from or paid by such customers on account of outstanding overdue
invoices) or expense reimbursement or recovery recognized by G(UK) or its
Affiliates in such period in accordance with generally accepted accounting
principles as a result of commercial arrangements relating to such Product;
"License Fees" means, in respect of a Product for a period, the gross
amount owed to G(UK) and its Affiliates in such period by unrelated third-
parties on account of the sale of such Product pursuant to bona fide licenses to
such unrelated third-parties plus any other form of revenue (other than interest
accruing from or paid by such licensees on account of outstanding overdue
license fees) or expense reimbursement or recovery recognized by G(UK) or its
Affiliates in such period in accordance with generally accepted accounting
principles as a result of licensing or other commercial arrangements relating to
such Product;
"Net Sales" means Gross Sales less without duplication:
(i) credits issued or payments made by G(UK) and its Affiliates
to unrelated third party customers for or on account of,
without duplication, bona fide rebates granted and
customary trade discounts (other than prompt payment
discounts) actually allowed by G(UK) or its Affiliates to
such customers in the ordinary course of business (except
rebates or discounts granted wholly or partially in
consideration of such customer's agreement to purchase any
service or any product other than the Product unless such
rebates or discounts are across-the-board rebates or
discounts applied uniformly to the Product and other
products or services as part of an overall program of
rebates or discounts established by G(UK) covering
substantially all of its products), shelf stock
adjustments, chargebacks, returned Product, rejection of
damaged Product and billing and shipping errors related to
the Product;
(ii) out-of-pocket costs for freight, postage and insurance
incurred by G(UK) or its Affiliates in the period to
deliver the Product to unrelated third party customers to
the extent that such amount is not charged to such
customer; and
(iii) payments made by G(UK) and its Affiliates for
administrative fees, reimbursements or similar payments to
or for Medicaid or any other government programs,
hospitals, health maintenance organizations, insurance
carriers, or other similar arm's length entity or entities
in connection with the purchase or utilization of the
Product;
It is understood and agreed that:
(a) deductions under (i), (ii) and (iii) above from the gross amount
invoiced or other revenue recognized shall not include any
amounts which would be categorized as packaging, relabelling,
selling, promotion, marketing or general or administrative
expenses in accordance with generally accepted accounting
principles;
(b) deductions under (i) and (iii) above from the gross amount
invoiced or other revenue recognized are for actual credits
issued or payments made by G(UK) and its Affiliates and do not
include amounts accrued, provided or reserved for estimated or
potential deductions;
--34--
<PAGE>
(c) the deduction under (i) above from the gross amount invoiced or
other revenue recognized shall not include any recall expenses or
excess reprocurement costs credited or paid to such customer;
(d) no amount shall be deducted under (i), (ii), or (iii) above or
otherwise from the gross amount invoiced or other revenue
recognized on account of or as an allowance for a bad debt or
doubtful account in relation to Product sold by G(UK) or its
Affiliates; and
(e) no credit or payment to an unrelated third party customer shall
be deducted under (i) from the gross amount invoiced or other
revenue recognized where such credit or payment is an attempt to
directly or indirectly circumvent the restrictions or limitations
contained herein as to the nature or quantum of the items which
may be deducted hereunder in calculating Net Sales nor shall
G(UK) or its Affiliates reduce the selling price at which the
Product is sold to an unrelated third party customer with a view
to circumventing such restrictions or limitations;
"Partnership Products" means the products currently being developed by
the Partnership on the date of this agreement;
"Person" shall be broadly interpreted and shall include an individual,
partnership, joint venture, association, corporation, company and any other form
of business organization, government, regulatory or governmental agency,
commission, department and instrumentality;
"Product Approval" means, with respect to a Product, the final and
unconditional approval of an application for the product by the appropriate
regulatory authorities enabling G(UK) or PRI or their Affiliates to sell such
Product in the G(UK) Territory or PRI Territory, as the call may be;
"Product Information" means, in respect of any Product, all technical
information and data relating to such Product, including the chemistry,
manufacture, use, formulation and regulatory approval thereof, heretofore or
hereafter during the term of this agreement produced or received by, or known to
the Partnership or its applicable Affiliate including, without limiting the
generality of the foregoing:
(a) where an approval letter has been issued, a copy of the approval
as approved and all communication, documents and information
relevant to the application submission received from or forwarded
to the regulatory authorities in connection therewith, including
without limitation, any responses to deficiency letters issued by
the regulatory authorities;
(b) if an new drug application submission has been made but no
approval letter has been received, the submission to the
appropriate regulatory authority and all communication,
documentation and information received from or forwarded to the
regulatory authority in connection therewith including any
responses to deficiency letters issued by the regulatory
authority; and
(c) if no new drug application submission has been made, all data
compiled heretofore or hereafter compiled for submission
including, all studies and all communications, documents and
information received from or forwarded to the regulatory
authority.
"PRI Board" means the Board of Directors of PRI;
"PRI Territory" means the 50 states of the United States of America,
plus the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin
Islands, Guam, Samoa and any other territory which, on the Effective Date is a
United States government protectorate wherein an ANDA approved by the FDA is
required to sell the Product in such territory; provided, that, with respect to
-------- ----
a Product, the PRI Territory shall include such jurisdictions in the G(UK)
Territory in which G(UK) shall have forfeited to PRI exclusive manufacturing and
distribution rights pursuant to Section 5.1 of the agreement with respect to
such Product; and
"Unit" means an individual packaged finished Product.
--36--
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS INCLUDED IN THE QUARTERLY REPORT ON FORM 10-Q FOR THE TRANSITION
PERIOD FROM OCTOBER 1, 1998 TO DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,424
<SECURITIES> 0
<RECEIVABLES> 16,739
<ALLOWANCES> (2,226)
<INVENTORY> 15,611
<CURRENT-ASSETS> 39,145
<PP&E> 45,807
<DEPRECIATION> (23,018)
<TOTAL-ASSETS> 77,947
<CURRENT-LIABILITIES> 14,937
<BONDS> 1,102
0
0
<COMMON> 293
<OTHER-SE> 60,898
<TOTAL-LIABILITY-AND-EQUITY> 77,947
<SALES> 16,775
<TOTAL-REVENUES> 16,776
<CGS> 17,105
<TOTAL-COSTS> 6,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> (89)
<INCOME-PRETAX> (6,882)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,882)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,882)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
