<PAGE>
Commission File Number 1-10827
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10--Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1996
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_______
------
18,234,931
Number of shares of Common Stock outstanding as of May 9, 1996
This is page 1 of 13 pages. The exhibit index is on page 11.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
MARCH 30, SEPTEMBER 30,
ASSETS 1996 1995
------ ----------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,622 $ 17,986
Temporary investments 186 271
Accounts receivable, net of allowances of
$1,599 and $1,588 7,833 9,011
Inventories 17,241 15,364
Prepaid expenses and other current assets 2,067 1,866
Current deferred tax benefit 3,830 4,172
----------- -------------
Total current assets 44,779 48,670
Property, plant and equipment, at cost less
accumulated depreciation and amortization 25,317 24,371
Deferred charges and other assets 1,899 1,883
Investments 8,377 3,520
Investment in joint venture 1,704 2,037
Non-current deferred tax benefit 9,864 10,436
----------- -------------
Total assets $ 91,940 $ 90,917
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,687 $ 1,470
Accounts payable 6,262 6,422
Accrued salaries and employee benefits 2,596 2,336
Accrued expenses and other current liabilities 424 705
Estimated current liabilities of discontinued operations 2,825 2,830
----------- -------------
Total current liabilities 13,794 13,763
Long-term debt, less current portion 3,746 4,259
Accrued pension liability 941 941
Shareholders' equity:
Common Stock, par value $.01 per share; authorized 60,000,000 shares;
issued and outstanding 18,189,581 and 18,168,625 shares 182 182
Additional paid in capital 65,393 65,276
Retained earnings 5,845 6,783
Additional minimum liability related to defined benefit pension plan (287) (287)
Unrealized gain on investment 2,326 -
----------- -------------
Total shareholders' equity 73,459 71,954
----------- -------------
Total liabilities and shareholders' equity $ 91,940 $ 90,917
=========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
-------------------- ---------------------
MARCH 30, APRIL 1, MARCH 30, APRIL 1,
1996 1995 1996 1995
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 30,220 $ 33,183 $ 15,361 $ 16,152
Cost of goods sold 21,953 21,210 11,191 10,479
--------- -------- --------- ---------
Gross margin 8,267 11,973 4,170 5,673
Operating expenses:
Research and development 1,582 1,977 1,219 1,161
Selling, general and administrative 8,510 7,988 4,279 3,819
--------- -------- --------- ---------
Total operating expenses 10,092 9,965 5,498 4,980
--------- -------- --------- ---------
Operating income (loss) (1,825) 2,008 (1,328) 693
Settlements - 2,029 - 29
Other income 471 149 182 50
Interest expense (206) (246) ( 85) (118)
--------- -------- --------- ---------
Income (loss) before provision (credit) for income taxes (1,560) 3,940 (1,231) 654
Provision (credit) for income taxes (622) 1,405 (491) 233
--------- -------- --------- ---------
NET INCOME (LOSS) (938) 2,535 (740) 421
Dividend on preferred stock - (291) - 12
Retained earnings, beginning of period 6,783 6,164 6,585 7,975
--------- -------- --------- ---------
Retained earnings, end of period $ 5,845 $ 8,408 $ 5,845 $ 8,408
========= ======== ========= =========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ (.05) $ .16 $ (.04) $ .03
=== === === ===
Weighted average number of common and
common equivalent shares outstanding 18,403 16,095 18,434 16,096
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
MARCH 30, APRIL 1,
1996 1995
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (938) $ 2,535
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision (credit) for income tax expense (622) 1,405
Joint venture research and development 353 -
Common stock for research and development - 150
Depreciation and amortization 1,417 1,233
Allowances against accounts receivable (11) (905)
Write-off of inventories 629 805
Other (10) (2)
Changes in assets and liabilities:
Decrease in accounts receivable 1,189 3,755
(Increase) in inventories (2,506) (822)
(Increase) in prepaid expenses and other assets (268) (2,344)
Increase (decrease) in accounts payable (160) 184
(Decrease) in accrued expenses and other liabilities (21) (336)
---------- ---------
Net cash provided by (used in) operating activities (948) 5,658
Cash flows from investing activities:
Capital expenditures (2,314) (1,813)
(Increase) in investments (1,000) -
(Increase) decrease in temporary investments 85 (5)
Cash (used in) discontinued operations (4) (8)
---------- ---------
Net cash (used in) investing activities (3,233) (1,826)
Cash flows from financing activities:
Proceeds from issuance of capital stock 118 716
Proceeds from issuance of notes payable and other debt 4,307 -
Principal payments under long-term debt and other borrowings (4,603) (1,131)
Preferred dividends paid - (310)
Payments due to stock conversion (5) -
---------- ---------
Net cash (used in) financing activities (183) (725)
Net increase (decrease) in cash and cash equivalents (4,364) 3,107
Cash and cash equivalents at beginning of period 17,986 3,130
---------- ---------
Cash and cash equivalents at end of period $ 13,622 $ 6,237
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 30, 1996
(UNAUDITED)
Pharmaceutical Resources, Inc. (the "Company" or "PRI") operates in
one business segment, the manufacture and distribution of generic
pharmaceuticals. Marketed products are principally sold in oral solid (tablet,
caplet and capsule) form, with a small number of products in the form of creams
and liquids.
BASIS OF PREPARATION:
The accompanying financial statements at March 30, 1996 and for the
six month and three month periods ended March 30, 1996 and April 1, 1995 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, 1995 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.
INVESTMENTS:
The Company has a distribution agreement with Sano Corporation
("Sano") which gives the Company the right of first refusal to exclusively
distribute Sano's generic transdermal products in the United States, Canada, and
several other international markets. As part of the agreement, the Company
invested $3,500,000 in the preferred stock of Sano during fiscal 1994 and 1995.
In November 1995, Sano sold common stock through an initial public offering and
the Company's preferred stock of Sano converted into 513,888 shares of common
stock. The investment is classified as an "available for sale security" pursuant
to Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). This Standard
requires that certain investments in debt and equity securities be adjusted to
fair market value at the end of each accounting period and unrealized gains or
losses, net of tax, recorded as a separate component of shareholders' equity.
In accordance with SFAS No. 115, the investment is recorded at its fair market
value on March 30, 1996 of $14 3/8 per share, or $7,377,000, and the unrealized
gain on the investment of $3,877,000, recorded net of taxes of $1,551,000, as a
separate component in shareholders' equity.
Additionally, the Company advanced Sano $1,075,000 in the current six
month period and $2,429,000 in prior fiscal years as funding for the research
and development costs of certain generic transdermal products. Due to the
uncertainty with respect to the collectability of such advances, the Company has
expensed them and will offset research and development costs if repaid. In
November 1995, the Company received $1,500,000 from the proceeds of Sano's
initial public offering in repayment of a portion of outstanding advances from
the Company. The Company has reflected this as a reduction of research and
development cost in the six month period ended March 30, 1996. Until
outstanding advances to Sano are repaid in full, the Company is entitled to
receive a greater share of gross profits than it would otherwise be entitled to
on products distributed under its agreement with Sano. Any such greater share of
gross profits paid to the Company will be applied to offset the advances to
Sano. As of March 30, 1996, there were outstanding advances to Sano of
$2,000,000.
In December 1995, the Company purchased a 10% interest in Fine-Tech
Ltd., an Israeli pharmaceutical research and development company in which Clal
Pharmaceutical Industries Ltd. has a significant ownership interest, for
$1,000,000. Clal Pharmaceutical Industries Ltd. is a significant stockholder of
the Company and, through its subsidiary, owns 51% of a research and development
joint venture in which the Company, through its subsidiary, owns 49%. In
addition, the Company obtained certain exclusive rights to purchase products
from Fine-Tech Ltd. not commonly sold in North America, South America or the
Caribbean.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The Company incurred operating losses for the six month and three
month periods ended March 30, 1996 of $1,825,000 and $1,328,000, respectively,
compared to operating income of $2,008,000 and $693,000 in the corresponding
periods of the prior fiscal year. The losses are principally due to sales and
gross margin declines, as described below. Due principally to increased
competition, the Company expects a continued decline in sales of its currently
distributed products and in manufactured products which, if not offset by
increased sales of other currently manufactured products or sales of new
distributed or manufactured products, will result in continued declines in net
sales and gross margins and, accordingly, result in further losses.
The Company plans to increase investments in research and development
efforts. In addition, the Company is pursuing additional products for sale
through new and existing distribution agreements and research and development
joint ventures. The Company anticipates introducing one or more new products in
the next fiscal year as a result of its research and development efforts and
distribution agreements. No assurance can be given that any additional products
for sale by the Company will result or that sales of additional products will
reduce expected losses or return the Company to profitability.
This Management's Discussion and Analysis of Results of Operations and
Financial Condition contains forward-looking statements, including those
concerning management's expectations regarding future financial performance and
future events. Actual results may differ materially from those anticipated by
such forward-looking statements.
NET SALES
Net sales of $30,220,000 for the six months ended March 30, 1996
decreased $2,963,000, or 9%, from the corresponding period of the prior fiscal
year. The decline is primarily due to decreased sales of manufactured products
which resulted in large part from lower pricing and decreased volumes of one of
the Company's significant products. The sales decline was caused principally by
the introduction of competitive products by other drug manufacturers. Increased
sales of a lower margin distributed product partially offset the decline in
sales of manufactured products.
Net sales for the current quarter are $15,361,000 compared to
$16,152,000 (or 5% lower) in the corresponding quarter of last year. The
decline is principally attributable to the lower sales of a certain significant
manufactured product, as discussed above, partially offset by increased sales of
a lower margin distributed product.
Levels of sales are principally dependent upon, among other things,
(i) pricing levels and competition, (ii) market penetration for the existing
product line, (iii) approval of Abbreviated New Drug Applications ("ANDAs") and
introduction of new manufactured products, (iv) introduction of new distributed
products and (v) the level of customer service.
GROSS MARGIN
The Company's gross margin of $8,267,000 (27% of net sales) for the
six months ended March 30, 1996 decreased $3,706,000 from $11,973,000 (36% of
net sales) in the prior fiscal year. The gross margin decline is primarily due
to lower selling prices and decreased volumes of certain significant
manufactured products resulting from increased competition. Gross margins on
distributed products for the current six month period also decreased from the
comparable period of last year principally due to lower sales levels of higher
margin products and increased sales of a lower margin product.
6
<PAGE>
The gross margin in the current quarter of $4,170,000 (27% of net
sales) is $1,503,000 lower than the margin of $5,673,000 (35% of net sales) in
the corresponding quarter of the prior year. The decline is primarily
attributable to the lower sales of a certain significant manufactured product
discussed above.
Inventory write-offs, taken in the normal course of business, amounted
to $629,000 and $313,000 for the six and three month periods, respectively,
ended March 30, 1996 compared to $805,000 and $526,000 in the corresponding
periods of the prior year. The inventory write-offs are related to the disposal
of products due to short shelf life and inventory not meeting the Company's
standards.
OPERATING EXPENSES
Research and Development
Gross research and development expenses for the six months ended March
30, 1996 were $3,082,000 versus $1,977,000 for the six months ended April 1,
1995. The increase is primarily the result of payments made to Sano Corporation
("Sano") of $1,075,000 for the development of certain generic transdermal
products. During the first quarter of fiscal 1996, the Company received from
Sano a reimbursement of $1,500,000 for advances made to them in prior fiscal
years for research and development expenses. As a result of this reimbursement,
net research and development expenses for the six months ended March 30, 1996
equalled $1,582,000. The Company has a distribution agreement with Sano to
distribute generic transdermal products developed by Sano (see "Notes to
Financial Statements - Investments").
Research and development expenses in the current three month period of
$1,219,000 are comparable to $1,161,000 for the corresponding period in the
prior year.
To further expand its product line, the Company continues to pursue
alternatives to internal research and development, including joint ventures,
licensing agreements and distribution agreements. In May 1995, the Company
formed an alliance with Clal Pharmaceutical Industries Ltd. ("Clal") to develop,
manufacture and distribute generic pharmaceuticals worldwide. A research and
development joint venture, formed in Israel and owned 49% by the Company and 51%
by Clal, has commenced operations and identified approximately 35 products for
research. The Company recorded its share of such joint venture's research and
development expenses of $353,000 and $201,000 in the current six and three month
periods, respectively.
Selling, General and Administrative
Selling, general and administrative costs were $8,510,000 (28% of net
sales) for the six month period ended March 30, 1996 versus $7,988,000 (24% of
net sales) for the corresponding period in the prior fiscal year. The increase
in the period is primarily attributable to severance costs, costs related to
implementing information systems, increased marketing costs and professional
fees. The corresponding period for last year included certain non-recurring
charges incurred in connection with the Company's response to FDA inquiries with
respect to current Good Manufacturing Practices and costs associated with the
termination of the broker network used by the Company to sell its products.
In the current quarter, selling, general and administrative costs of
$4,279,000 (28% of net sales) increased $460,000 from $3,819,000 (24% of net
sales) in the corresponding quarter of last year. The increase is primarily the
result of marketing costs related to the planned introduction of two new
products and the implementation of information systems to support the Company's
sales, marketing, and manufacturing operations.
Settlements
In fiscal 1995, the Company resolved claims against former management
members for recovery of, among other items, salaries and monies paid for
indemnification. The settlements, in the form of cash and securities of the
Company, were valued at $2,029,000.
7
<PAGE>
Other Income
Other income for the six and three month periods increased to $471,000
and $182,000, respectively, from $149,000 and $50,000 in the corresponding
periods of the prior fiscal year primarily due to interest income on short term
treasury obligations.
Income Taxes
As a result of the operating losses incurred for the six and three
month periods ended March 30, 1996, the Company recorded an income tax benefit
of $622,000 and $491,000, respectively, which had the effect of reducing the
Company's operating losses. In the corresponding periods of the prior year, the
Company recorded income tax expense of $1,405,000 and $233,000, respectively.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $30,985,000 at March 30, 1996 represents a decrease
of $3,922,000 from September 30, 1995 principally due to cash used for capital
expenditures and for its investment in Fine-Tech Ltd., as discussed below. The
working capital ratio of 3.2x declined from 3.5x at fiscal year end.
As part of the alliance formed with Clal, the Company invested
$1,960,000 in the research and development joint venture in fiscal 1995. The
Company is required to invest an additional $5,390,000 in the joint venture
during fiscal years 1996 and 1997. The Company also estimates that it could
spend up to $2,000,000, subject to certain contingent events, in further
research and development expenses with Sano during the third and fourth fiscal
quarters of 1996.
In December 1995, the Company purchased 10% of the shares of Fine-Tech
Ltd., an Israeli pharmaceutical research and development company in which Clal
has a significant ownership interest, for $1,000,000 and obtained certain
exclusive rights to purchase products from Fine-Tech Ltd. not commonly sold in
North America, South America or the Caribbean.
If the Company incurs additional funding obligations under the
existing or any new distribution and product development agreements, the Company
expects to fund such obligations with its working capital, including cash
provided by operations, and if necessary by borrowings against its line of
credit (see"--Financing"). The Company also intends to fund future possible
acquisitions to expand its product line out of working capital, current
borrowing capacity or additional sources of funding which may be available at
such time. There can be no assurance that the Company will complete any
acquisition in the future.
FINANCING
In December 1995, the Company entered into a three-year, $16,000,000
unsecured revolving credit agreement and two three-year term loans totalling
$4,000,000, replacing a prior revolving credit facility and certain outstanding
term loans and outstanding industrial revenue bonds totalling approximately
$4,000,000. The two term loans are secured by certain machinery and equipment.
The interest rates charged on the revolving credit and one term loan are based
on either Libor, the bank's cost of funds or the prime rate, all at the
Company's option. Any borrowings at Libor or cost of funds will incur additional
interest at spreads ranging from 3/4% to 1 1/4% based on certain Company
financial ratios. The interest rate on the second term loan is based on Libor
plus 1 3/4%. At March 30, 1996, the Company had borrowed $427,000, secured by
certain assets of the Company purchased under a line of credit maintained at a
second bank.
At March 30, 1996, the Company's debt of $5,433,000 is being repaid in
monthly installments through 2001 and consists of the above described loans, a
mortgage on one of the Company's properties, and capital leases.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits:
11 - Computation of per share data.
27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None.
9
<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)
May 13, 1996 /s/ Kenneth I. Sawyer
-------------------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
May 13, 1996 /s/ Robert I. Edinger
-------------------------------------
Robert I. Edinger
Executive Vice President - Chief Financial Officer and
Secretary
(Principal Accounting and Financial Officer)
10
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description Page Number
- -------------- ----------- -----------
11 Computation of per share data 12
27 Financial Data Schedule 13
11
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
------------------------------------- -------------------------
MARCH 30, APRIL 1, MARCH 30, APRIL 1,
1996 1995 1996 1995
----------------- ------------------ ------------ -----------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ (938,000) $ 2,535,000 $ (740,000) $ 421,000
=========== =========== =========== ===========
Primary:
Weighted average number of common
common shares outstanding 18,178,205 14,630,161 18,183,750 14,665,090
Shares issuable upon conversion of Series A
Convertible Preferred Stock - 995,751 - 995,751
Shares issuable upon exercise of dilutive stock
options and warrants - net of shares assumed to
be repurchased (at the average market price for
the period) from exercise proceeds 224,638 468,852 249,850 434,993
----------- ----------- ----------- -----------
Shares used for computation 18,402,843 16,094,764 18,433,600 16,095,834
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $(.05) $.16 $(.04) $.03
=== === === ===
Assuming full dilution:
Weighted average number of common shares
outstanding 18,178,205 14,630,161 18,183,750 14,665,090
Shares issuable upon conversion of Series A
Convertible Preferred Stock - 995,751 - 995,751
Shares issuable upon exercise of dilutive stock
options and warrants - net of shares assumed to be
repurchased (at the higher of period-end market
price or the average market price for the period)
from exercise proceeds 224,638 694,201 249,850 684,177
----------- ----------- ----------- -----------
Shares used for computation 18,402,843 16,320,113 18,433,600 16,345,018
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $(.05) $.16 $(.04) $.03
=== === === ===
</TABLE>
12
<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 SIX MONTHS
ENDED MARCH 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-30-1996
<CASH> 13,622
<SECURITIES> 186
<RECEIVABLES> 9,432
<ALLOWANCES> (1,599)
<INVENTORY> 17,241
<CURRENT-ASSETS> 44,779
<PP&E> 44,884
<DEPRECIATION> (19,567)
<TOTAL-ASSETS> 91,940
<CURRENT-LIABILITIES> 13,794
<BONDS> 3,746
0
0
<COMMON> 182
<OTHER-SE> 73,277
<TOTAL-LIABILITY-AND-EQUITY> 91,940
<SALES> 30,220
<TOTAL-REVENUES> 30,691
<CGS> 21,953
<TOTAL-COSTS> 9,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 129
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> (1,560)
<INCOME-TAX> (622)
<INCOME-CONTINUING> (938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (938)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
