<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 28, 1998
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_______
------
18,890,153
Number of shares of Common Stock outstanding as of May 8, 1998.
This is page 1 of 25 pages. The exhibit index is on page 17.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
MARCH 28, SEPTEMBER 30,
ASSETS 1998 1997
------ --------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 67 $ 181
Accounts receivable, net of allowances of
$3,190 and $5,109 9,823 11,414
Inventories 16,213 13,239
Prepaid expenses and other current assets 3,579 3,321
-------- --------
Total current assets 29,682 28,155
Property, plant and equipment, at cost less
accumulated depreciation and amortization 26,904 27,832
Deferred charges and other assets 3,004 2,102
Non-current deferred tax benefit 14,608 14,608
-------- --------
Total assets $ 74,198 $ 72,697
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 202 $ 218
Short-term debt 12,118 3,947
Accounts payable 3,668 5,120
Accrued salaries and employee benefits 1,842 1,755
Accrued expenses and other current liabilities 1,206 1,156
-------- --------
Total current liabilities 19,036 12,196
Long-term debt, less current portion 2,547 2,651
Accrued pension liability 582 582
Shareholders' equity:
Common Stock, par value $.01 per share; authorized 60,000,000 shares;
issued and outstanding 18,886,098 and 18,874,216 shares 189 189
Additional paid in capital 67,540 67,520
Accumulated deficit (15,665) (10,410)
Additional minimum liability related to defined benefit pension plan (31) (31)
-------- --------
Total shareholders' equity 52,033 57,268
-------- --------
Total liabilities and shareholders' equity $ 74,198 $ 72,697
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
--------------------- ---------------------
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 25,708 $ 24,252 $ 13,574 $ 11,782
Cost of goods sold 23,575 23,494 12,945 12,256
-------- -------- -------- --------
Gross margin 2,133 758 629 (474)
Operating expenses:
Research and development 1,769 3,777 861 3,073
Selling, general and administrative 5,312 6,346 2,724 3,222
-------- -------- -------- --------
Total operating expenses 7,081 10,123 3,585 6,295
-------- -------- -------- --------
Operating loss (4,948) (9,365) (2,956) (6,769)
Other income 146 249 71 140
Interest expense (453) (218) (258) (136)
-------- -------- -------- --------
Loss before provision for income taxes (5,255) (9,334) (3,143) (6,765)
Provision for income taxes - 410 - -
-------- -------- -------- --------
NET LOSS (5,255) (9,744) (3,143) (6,765)
Accumulated deficit, beginning of period (10,410) (1,509) (12,522) (4,488)
-------- -------- -------- --------
Accumulated deficit, end of period $(15,665) $(11,253) $(15,665) $(11,253)
-------- -------- -------- --------
(1) BASIC AND DILUTED NET LOSS PER
SHARE OF COMMON STOCK $(.28) $(.52) $(.17) $(.36)
======== ======== ======== ========
(1) Weighted average number of common and
common equivalent shares outstanding 18,881 18,667 18,883 18,700
======== ======== ======== ========
</TABLE>
(1) There were no effects of dilutive options in the six and three-month periods
ended March 28, 1998 and March 29, 1997.
The accompanying notes are an integral part of these statements.
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<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
MARCH 28, MARCH 29,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,255) $(9,744)
Adjustments to reconcile net loss to net
cash used in operating activities:
Joint venture research and development - 379
Depreciation and amortization 1,436 1,365
Allowances against accounts receivable 1,919 (657)
Write-off of inventories 495 634
Gain on sale of marketable securities - (170)
(Gain) loss on sale of fixed assets 1 (18)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (328) 952
(Increase) decrease in inventories (3,469) 2,004
(Increase) decrease in prepaid expenses and other assets (1,156) 2,636
Decrease in accounts payable (1,452) (1,561)
Increase (decrease) in accrued expenses and other liabilities 137 (594)
------- --------
Net cash used in operating activities (7,672) (4,774)
Cash flows from investing activities:
Capital expenditures (549) (552)
Proceeds from sale of fixed assets 36 293
Proceeds from sale of marketable securities - 272
------- -------
Net cash (used in) provided by investing activities (513) 13
Cash flows from financing activities:
Proceeds from issuance of Common Stock 20 36
Net proceeds from revolving credit line and proceeds
from issuance of other debt 8,171 8,059
Principal payments under long-term debt and other borrowings (120) (3,633)
------- -------
Net cash provided by financing activities 8,071 4,462
Net decrease in cash and cash equivalents (114) (299)
Cash and cash equivalents at beginning of period 181 $ 299
------- -------
Cash and cash equivalents at end of period $ 67 -
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 28, 1998
(UNAUDITED)
Pharmaceutical Resources, Inc. (the "Company" or "PRI") operates in one
business segment, the manufacture and distribution of generic pharmaceuticals.
Marketed products are principally in solid oral dosage form (tablet, caplet and
capsule), with one product in the semi-solid form of a cream and one transdermal
patch.
BASIS OF PREPARATION:
The accompanying financial statements at March 28, 1998 and for the six-month
and three-month periods ended March 28, 1998 and March 29, 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, 1997 was derived from the Company's audited financial statements at such
date.
Pursuant to accounting requirements of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, the accompanying financial
statements and these notes do not include all disclosures required by 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 of the prior year have been reclassified to conform to the
current year financial statement presentation.
ACQUISITION OF JOINT VENTURE:
In August 1997, the Company acquired from Clal Pharmaceutical Industries Ltd.
("Clal") its 51% ownership interest in their research and development joint
venture in which PRI previously had owned 49%. The Company and Clal had formed
the joint venture located in Israel to research and develop generic
pharmaceutical products. The joint venture was renamed Israel Pharmaceutical
Resources L.P. ("IPR"). The Company acquired Clal's ownership interest in IPR
for $447,000 in cash obtained from the sale of its holdings in Fine-Tech Ltd.
("Fine-Tech"), an Israeli pharmaceutical research and development company in
which Clal had a significant ownership interest, and a non-recourse, secured
promissory note in the principal amount of $1,500,000. The note bears interest
at 7% per annum and is payable in eight equal installments starting in July
1999. The Company may prepay the note in full if it makes a payment of $600,000
before August 13, 1998. The Company is obligated to invest not less than
$1,500,000 each year in IPR until the note is repaid. Merck KGaA and the Company
have reached an agreement in principle for Merck KGaA to prepay the note in full
prior to August 13, 1998 on behalf of the Company in exchange for consideration
relating to IPR to be agreed upon in the future (See "--Equity Investment"). In
addition, the Company and Clal agreed to modify certain terms of Clal's
investment in the Company, including the surrender by Clal of warrants to
purchase approximately 2,005,000 shares of Common Stock of the Company in
exchange for the issuance to Clal of 186,000 shares of the Company's Common
Stock for nominal consideration. At March 28, 1998 Clal owned approximately 12%
of PRI's outstanding Common Stock.
DISTRIBUTION AGREEMENTS:
In April 1997, Par Pharmaceutical, Inc. ("Par"), the Company's principal
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 the event that Par's purchases do not equal or exceed
the thresholds, BASF may elect to terminate the Supply Agreement effective one
year later. The Company began selling drugs manufactured by BASF and BASF
transferred to Par the marketing and sales of certain products covered by the
Supply Agreement in June 1997 and the agreement became fully implemented in
August 1997.
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<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MARCH 28, 1998
(UNAUDITED)
The Company has a distribution agreement, as amended, with Sano Corporation
("Sano") which gives Par the right to exclusively distribute Sano's nicotine
transdermal patch and an option to distribute, when approved, a nitroglycerin
transdermal patch developed by Sano, in the United States (see "--Subsequent
Events-Distribution Agreement"). Sano develops transdermal delivery systems
utilizing a patch that incorporates the appropriate drug dosage into an adhesive
that attaches the patch to the skin. Sano received U.S. Food and Drug
Administration ("FDA") approval for its nicotine patch in October 1997 and the
Company began selling the patch in January 1998. The Company is purchasing the
manufactured product from Sano at cost and sharing in the gross profits from the
sales.
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. The Company was in breach of
the Loan Agreement during the current quarter related to borrowings that
exceeded the borrowing base as calculated at that time. On March 4, 1998, the
Company and GECC amended the Loan Agreement. Pursuant to the Loan Agreement, as
amended, Par is permitted to borrow up to the lesser of (i) the sum of the
borrowing base and the overadvancement limit of $2,000,000 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 overadvancement limit increases to
$2,500,000 through June 19, 1998 if GECC consents to the form and substance of
an equity investment in the Company (see "--Equity Investment"). The interest
rate charge on the line of credit is based upon a per annum rate of 3.50% above
the 30-day commercial paper rate for high-grade unsecured notes adjusted
monthly. The line of credit with GECC is secured by the assets of Par and PRI
other than real property and is guaranteed by PRI. In connection with such
facility, Par, PRI, and their affiliates have established a cash management
system pursuant to which all cash and cash equivalents received by any of such
entities are deposited into a lockbox account over which GECC has sole operating
control and which are applied on a daily basis to reduce amounts outstanding
under the line of credit. A portion of the proceeds from the equity investment
shall be immediately applied by the Company to pay all outstanding revolving
credit advances pursuant to the Loan Agreement. The revolving credit facility
is subject to covenants based on various financial benchmarks. In fiscal year
1997, GECC waived events of default on three occasions unrelated to the
repayment of debt under the Loan Agreement. As of May 7, 1998, the borrowing
base was approximately $13,000,000 and $5,300,000 was outstanding under the line
of credit. Any significant reduction in the borrowing base from current levels
will adversely affect the Company's liquidity and operations.
INCOME TAXES:
Based on the Company's recent performance and the uncertainty of the generic
drug 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 any of the six-month and three-month periods
ended March 28, 1998 or March 29, 1997. If the Company is unable to generate
sufficient taxable income in the future, increases in the valuation allowance
will be required through a charge to expense. The Company incurred income tax
expense of $410,000 in the first quarter of fiscal 1997 due to interest relating
to a settlement with the Internal Revenue Service in fiscal 1995 for the
disallowance of tax credits taken by the Company in prior periods with respect
to certain research and development costs.
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
-6-
<PAGE>
MARCH 28, 1998
(UNAUDITED)
EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS
128"), which is effective for financial statements for periods ending after
December 15, 1997, and requires 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 new accounting standard during the first quarter of fiscal 1998 and,
accordingly, has presented or restated all earnings per share data to conform to
the requirements of SFAS 128.
Outstanding options and warrants of 1,817,100 and 812,200 at the end of the
current six and three-month periods, respectively, and 3,681,307 in each of the
corresponding periods of the prior year 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 156,394 and 219,145 for
the current six and three-month periods, respectively, were excluded from
diluted earnings per share because they were antidilutive.
EQUITY INVESTMENT:
In March 1998, the Company entered into a strategic alliance with Merck KGaA,
Darmstadt, Germany ("Merck KGaA"), a multinational pharmaceutical, laboratory
and chemical company. Pursuant to a Stock Purchase Agreement (the "Stock
Purchase Agreement"), dated March 25, 1998, between the Company and Lipha
Americas, Inc. ("Lipha"), a subsidiary of Merck KGaA, the Company agreed to
sell 10,400,000 newly-issued shares of PRI's Common Stock to Lipha at $2.00 per
share. In addition, the Company agreed to issue 5-year options to purchase up
to 1,171,040 additional shares of the Company's Common Stock at an exercise
price of $2.00 per share to Merck KGaA and Genpharm, Inc. ("Genpharm"), a
subsidiary of Merck KGaA, in exchange for certain management services to be
provided to the Company. In connection with the Stock Purchase Agreement, the
Company also obtained from Genpharm exclusive distribution rights in the United
States for up to approximately 40 generic pharmaceutical products currently
being developed, some of which have obtained FDA approval and others of which
have been or will be submitted to the FDA for approval. The purchase of the
10,400,000 shares will give Merck KGaA a 36% ownership interest in PRI. The
Company intends to use a portion of the net proceeds of $20,800,000 from the
stock sale to repay advances made to it under its existing line of credit and
the remainder will be used for working capital, including possible business
expansion.
As part of the transaction described above, Merck KGaA also agreed to
purchase an additional 1,813,272 shares of the Company's Common Stock from Clal,
PRI's largest current stockholder, at a price of $2.00 per share. In addition,
Clal has the right to cause Merck KGaA and/or the Company to purchase an
additional 500,000 shares of Common Stock from Clal in three years.
Genpharm is required to pay all of the research and development costs
associated with the approximately 40 products covered by a distribution
agreement with Genpharm. PRI will pay to Genpharm a certain percentage of the
gross margin on the sales of the products.
Under the Stock Purchase Agreement, Lipha will have the right, subject to the
closing of the transaction, to designate a majority of the Company's directors
and the Company's current Board of Directors will have the right to designate
three persons to continue as directors of the Company, one of whom will be
Kenneth I. Sawyer (the current Chairman, President and Chief Executive Officer
of the Company). Lipha and its affiliates have agreed to not engage in certain
business combinations including the Company for a period of three years, unless
a majority of the three directors designated by the Company's current Board of
Directors consent. Lipha will have certain rights of first refusal to acquire
equity stock of the Company in the event of future equity offerings.
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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<PAGE>
MARCH 28, 1998
(UNAUDITED)
Merck KGaA and its affiliates have, as a result of and subject to the closing
of the transactions discussed above, the right to purchase up to approximately
46% of the Company's Common Stock after giving effect to such transactions. The
completion of the transaction with Merck, Lipha and Genpharm is subject to
certain conditions set forth in the Stock Purchase Agreement, including the
obtaining of all necessary government consents, approval by the Company's
stockholders of the issuance of the Common Stock and grant of stock options and
the election of the Merck KGaA designated directors. However, the distribution
agreement is effective immediately, and if the stock purchase transaction does
not close by July 15, 1998, Genpharm has the option to terminate the
distribution agreement with respect to certain products and otherwise it will
terminate at the option of Genpharm on March 25, 1999.
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Retirement Plans:
The Company has a defined contribution, social security integrated Retirement
Plan providing retirement benefits to eligible employees as defined in the
Retirement Plan. The Board of Directors of Par directed the cessation of
employer contributions effective December 30, 1996. Consequently, participants
in the Retirement Plan will no longer be entitled to any employer contributions
under such plan for 1996 or subsequent years. The Company also maintains a
Retirement Savings Plan whereby eligible employees are permitted to contribute
from 1% to 12% of pay to this Plan. The Company contributes an amount equal to
50% of the first 6% of the pay contributed by the employee. In fiscal 1998, the
Company intends to merge the Retirement Plan into the Retirement Savings Plan.
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
results of operations.
Restructuring and Cost Reductions:
The Company implemented measures beginning in the fourth quarter of fiscal
1996, which continued throughout fiscal 1997, to reduce costs and increase
operating efficiencies. Such measures have provided for a reduction of the work
force, changes in various senior management, a reorganization of certain
existing personnel and reductions in certain expenses.
Other Matters:
Through March 1998, the Company loaned $875,000 to another generic drug
manufacturer for working capital purposes. In March and April 1998, the loan
plus interest, was repaid in full.
-8-
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MARCH 28, 1998
(UNAUDITED)
SUBSEQUENT EVENTS:
Distribution Agreement :
In May 1998, the Company amended its existing distribution agreement with
Sano. Pursuant to the amendment, the Company ceded its distribution rights to
two nitroglycerin transdermal patches, one unconditionally and one
conditionally, currently filed with the FDA and awaiting approval. In return
for relinquishing these rights, PRI received cash payments of approximately
$5,700,000 in May 1998, which included approximately $2,100,000 as a
prepayment, with accrued interest, of a promissory note which was due from Sano
in September 1998. PRI will also receive a royalty on all future net sales of
one of the nitroglycerin transdermal patches by Sano or any transferee of rights
by Sano, and any distributors and licensees of the product, as defined in the
agreement, in the United States and Israel. In addition, Sano will increase the
Company's share of the gross profit on sales of the nicotine patch whose United
States distribution rights remain covered by the agreement.
-9-
<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 OF THE COMPANY'S
DISTRIBUTION CHANNELS, (III) THE AMOUNT OF FUNDS CONTINUING TO BE AVAILABLE FOR
INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND DEVELOPMENT JOINT VENTURES,
(IV) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR DELAYS IN OBTAINING REGULATORY
APPROVALS, (V) THE ABILITY OF THE COMPANY TO RETAIN AND ATTRACT MANAGEMENT
PERSONNEL IN KEY OPERATIONAL AREAS, (VI) CONTINUED AVAILABILITY OF BORROWINGS
UNDER THE COMPANY'S CREDIT LINE WITHOUT SIGNIFICANT REDUCTION, AND (VII)
CONSUMMATION OF THE PROPOSED STRATEGIC ALLIANCE WITH MERCK KGAA AND ITS
AFFILIATES (SEE "NOTES TO FINANCIAL STATEMENTS-EQUITY INVESTMENT").
RESULTS OF OPERATIONS
GENERAL
The Company's operating losses were $4,948,000 and $2,956,000 for the six-
month and three-month periods ended March 28, 1998, respectively, compared to
operating losses of $9,365,000 and $6,769,000 in the corresponding periods of
the prior fiscal year. The improvement was due to increased sales and gross
margins, and lower operating expenses, as described below. If current sales
and gross margin levels are not increased from sales of new distributed or
manufactured products, the Company will continue to experience losses.
In an effort to position the Company for future growth while strengthening
its current financial condition and near and long-term product line, PRI entered
into a strategic alliance on March 25, 1998 with Merck KGaA, a pharmaceutical,
laboratory and chemical company located in Darmstadt, Germany. Under the
agreement, Merck KGaA, through its subsidiary Lipha, will pay the Company
$20,800,000, or $2.00 per share, for 10,400,000 newly-issued shares of PRI's
Common Stock. The alliance will give the Company an immediate cash infusion
which will be used to repay advances made to it under its existing line of
credit with the remainder used for working capital, including possible business
expansion. In addition, the Company will receive the sole rights to the
portfolio of products covered by a distribution agreement with Merck KGaA's
Canadian subsidiary Genpharm, granting the Company exclusive United States
distribution rights for up to approximately 40 generic pharmaceutical products
currently being developed, some of which have obtained FDA approval and others
of which have been or will be submitted to the FDA for approval. Genpharm will
pay all of the research and development costs associated with the approximately
40 products and PRI will pay Genpharm a certain percentage of the gross margin
on sales of the products. The completion of the transaction with Merck KGaA,
Lipha and Genpharm is subject to certain conditions set forth in the Stock
Purchase Agreement (see "Notes to Financial Statements-Equity Investment").
The continued price and profit margin erosion on certain of the Company's
products reflects the continuing trend in the generic drug industry in the
United States. The factors contributing to the intense competition and
affecting both the introduction of new products and the pricing and profit
margins of the Company, include, among other things, (i) introduction of other
generic drug manufacturer's products in direct competition with the Company's
significant products, (ii) consolidation among distribution outlets, (iii)
increased ability of generic competitors to enter the market after patent
expiration, diminishing the amount and duration of significant profits, (iv)
willingness of generic drug customers, including wholesale and retail customers,
to switch among pharmaceutical manufacturers, and (v) competition from brand
name drug manufacturers selling generic versions of their drugs. In response to
these conditions, the Company has reduced operating costs and entered into
several significant agreements, as described elsewhere in this Form 10-Q (see
"Notes to Financial Statements-Distribution Agreements", "-Commitments,
Contingencies and Other Matters-Restructuring and Cost Reductions" and "-Equity
Investment").
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<PAGE>
Critical to any significant improvement in the Company's financial condition
is the introduction and acquisition of new manufactured and distributed products
at profitable prices. The strategic alliance with Merck KGaA is expected to
provide, in the near-term, the Company with a significant number of new products
in its product development pipeline without the substantial resource commitment,
including financial, it would normally take to develop such a pipeline. The
Company plans to continue to invest in research and development efforts in
addition to pursuing additional products for sale through new and existing
distribution agreements. The Company is engaged in efforts, subject to FDA
approval and other factors, to introduce new products as a result of its
research and development efforts and distribution agreements. No assurance can
be given that any additional products for sale by the Company will occur or that
sales of additional products will reduce losses or return the Company to
profitability. Continuing losses will adversely affect the Company's liquidity
and, accordingly, its ability to fund research and development or ventures
relating to the sale of new products (see "--Financial Condition-Liquidity and
Capital Resources").
NET SALES
Net sales of $25,708,000 for the six months ended March 28, 1998 increased
$1,456,000, or 6%, from $24,252,000 for the corresponding period ended March 29,
1997. The sales growth was primarily due to the continuing increase in sales of
two distributed products manufactured by BASF under the Supply Agreement and the
introduction of two new products in January 1998, the nicotine patch
manufactured by Sano and Zorprin(R) manufactured by BASF. Net sales of these
four products, in addition to significantly higher volumes of a lower margin
manufactured product due to increased demand from three customers, more than
offset the decline in sales of certain manufactured products. Certain
manufactured products continued to experience decreased sales which resulted
primarily from lower pricing and continuing decreases in volume of three of the
Company's significant products. The reductions in pricing and volume resulted
principally from the introduction of other generic drug manufacturers' products
in direct competition with the Company's significant products.
Net sales for the current three-month period of $13,574,000 increased
$1,792,000, or 15%, compared to sales for the corresponding period of last year.
The increase is principally attributable to higher sales of two distributed
products, the introduction of two new products and a higher volume of a lower
margin product offsetting the continuing lower sales of certain significant
products, as described above.
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 gross margin of $2,133,000 (8% of net sales) for the six-month period
ended March 28, 1998 increased $1,375,000 from $758,000 (3% of net sales) in the
corresponding period of the prior fiscal year. The gross margin improvement was
principally due to increased margin contributions from higher margin products
manufactured by BASF under the Supply Agreement, higher volumes of a lower
margin manufactured product together with more favorable raw material pricing,
decreased manufacturing costs and the introduction of two new products. These
improvements more than offset the continuing lower selling prices and decreased
volumes of certain significant manufactured products resulting from increased
competition from other generic drug manufacturers.
In the current quarter, the Company's gross margin of $629,000 (5% of net
sales) increased from ($474,000) (-4% of net sales) in the corresponding quarter
of the prior year. The improvement is primarily attributable to increased margin
contributions from products manufactured by BASF, a higher volume of a lower
margin manufactured product and the introduction of two new products in the
current quarter. These factors along with reduced manufacturing costs more than
offset the continuing lower sales of certain significant products, as described
above.
-11-
<PAGE>
Inventory write-offs, taken in the normal course of business, amounted to
$495,000 and $202,000 for the six-month and three-month periods ended March 29,
1998, respectively, decreasing from $634,000 and $301,000 in the corresponding
periods of the prior year. The inventory write-offs are related primarily to
the disposal of finished products due to short shelf life.
OPERATING EXPENSES
Research and Development
Research and development expenses for the six and three-month periods ended
March 28, 1998 were $1,769,000 and $861,000, respectively, versus $3,777,000 and
$3,073,000 for the respective corresponding periods of the prior fiscal year.
In August 1997, the Company acquired Clal's 51% ownership interest in IPR in
which PRI previously had owned 49% (see "Notes to Financial Statements-
Acquisition of Joint Venture"). The Company recorded an aggregate of $729,000
and $287,000 in research and development expenses for IPR for the current six
and three-month periods, respectively, compared to $379,000 and $231,000 for the
respective corresponding periods of the prior year. The higher costs of IPR
were more than offset by lower domestic spending on research and development.
Additionally, prior year costs included advances to Sano of $1,957,000 which
were not incurred in the current fiscal year.
During fiscal year 1997, the Company's domestic research and development
program was fully integrated with the research operations in Israel. The
Company has ANDAs for five potential products pending with the FDA and awaiting
approval. The Company expects to complete two additional product submissions by
the end of the current fiscal year.
The Company has a distribution agreement with Sano to distribute a generic
nicotine transdermal product developed by Sano. Sano received FDA approval for
its nicotine patch in October 1997 and the Company began selling the patch
manufactured by Sano in January 1998 (see "Notes to Financial Statements-
Distribution Agreements").
As part of the distribution agreement entered into with Genpharm, Genpharm is
required to pay all of the research and development costs associated with a
portfolio of products covered by the distribution agreement. The distribution
agreement will grant the Company exclusive United States distribution rights for
up to approximately 40 generic pharmaceutical products currently being
developed, some of which have obtained FDA approval and others of which have
been or will be submitted to the FDA for approval. The Company will pay
Genpharm a certain percentage of the gross margin on sales of those products.
The distribution agreement is effective immediately, and if the stock purchase
transaction does not close by July 15, 1998, Genpharm has the option to
terminate the distribution agreement with respect to certain products and
otherwise it will terminate at the option of Genpharm on March 25, 1999 (see
"Notes to Financial Statements-Equity Investment").
Selling, General and Administrative
Selling, general and administrative costs of $5,312,000 (21% of net sales)
for the six-month period ended March 28, 1998 were reduced $1,034,000, or 16%,
from $6,346,000 (26% of net sales) in the six-month period ended March 29, 1997.
The lower expenses in the current period were primarily attributable to a
decline in personnel costs resulting from head count reductions (see "Notes to
Financial Statements-Restructuring and Cost Reductions").
In the second quarter of fiscal year 1998, selling, general and
administrative costs of $2,724,000 (20% of net sales) decreased $498,000, or
15%, from $3,222,000 (27% of net sales) in the corresponding quarter of the last
fiscal year. The reduced expenses are primarily the result of decreased
personnel costs, as discussed above.
-12-
<PAGE>
INCOME TAXES
Management has determined, based on the Company's recent performance and the
uncertainty of the generic drug 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 any of the six-month and three-
month periods ended March 28, 1998 or March 29, 1997 (see "Notes to Financial
Statements-Income Taxes"). The Company incurred income tax expense of $410,000
in the first quarter of fiscal year 1997 due to interest relating to a
settlement with the Internal Revenue Service in fiscal year 1995 for the
disallowance of tax credits taken by the Company in prior periods with respect
to certain research and development costs.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $10,646,000 at March 28, 1998 decreased $5,313,000 from
$15,959,000 at September 30, 1997. The decrease is principally due to the use
of funds to finance operating losses. As a result of a cash management system
pursuant to the financing agreement that the Company entered into with GECC, the
only remaining cash balance at March 28, 1998 was cash at IPR (see "--
Financing"). The working capital ratio of 1.6x in the current period declined
from 2.3x at fiscal 1997 year end.
In August 1997, the Company, through one of its subsidiaries, acquired Clal's
51% ownership interest in their research and development joint venture in Israel
for $447,000 in cash obtained from the sale of Fine-Tech stock and a non-
recourse secured promissory note for $1,500,000 bearing interest at 7% per
annum. The Company may prepay the note in full if it makes a payment of
$600,000 before August 13, 1998. The Company is obligated to invest not less
than $1,500,000 each year in IPR until the note is repaid. Merck KGaA and the
Company have reached an agreement in principle for Merck KGaA to prepay the note
in full prior to August 13, 1998 on behalf of the Company in exchange for
consideration relating to IPR to be agreed upon in the future (see "Notes to
Financial Statements-Acquisition of Joint Venture").
Through March 1998, the Company loaned $875,000 to another generic drug
manufacturer for working capital purposes. In March and April 1998, the loan,
plus interest, was repaid in full (see "Notes to Financial Statements-
Commitments, Contingencies and Other Matters-Other Matters").
On March 25, 1998 the Company formed a strategic alliance with Merck KGaA, a
pharmaceutical, laboratory and chemical company located in Darmstadt, Germany.
Under the agreement, Merck KGaA, through its subsidiary Lipha, will pay the
Company $20,800,000, or $2.00 per share, for 10,400,000 newly-issued shares of
PRI's Common Stock. The Company intends to use a portion of the net proceeds of
the stock sale to repay advances made to it under its existing line of credit
and the remainder will be used for working capital, including possible business
expansion. The completion of the transaction with Merck, Lipha and Genpharm is
subject to certain conditions set forth in the Stock Purchase Agreement,
including the obtaining of all necessary government consents, approval by the
Company's stockholders of the issuance of the Common Stock and the grant of
stock options and the election of the Merck KGaA designated directors (see
"Notes to Financial Statements-Equity Investment").
In May 1998, the Company amended its existing distribution agreement with
Sano ceding its distribution rights to two products, one unconditionally and one
conditionally, covered under the agreement. In return for relinquishing these
rights, PRI received cash payments of approximately $5,700,000 in May 1998,
which included approximately $2,100,000 as a prepayment, with accrued interest,
of a promissory note which was due from Sano in September 1998. The proceeds
from this transaction were used to reduce the revolving credit line balance (see
"Notes to Financial Statements-Subsequent Events-Distribution Agreement").
-13-
<PAGE>
The Company expects to fund its operations, including research and
development activities and its obligations under the existing distribution and
development arrangements discussed above, out of its working capital, (including
proceeds from the stock sale to Lipha if it is consummated) and if necessary
with borrowings against its line of credit, to the extent then available (see "-
- -Financing"). If, however, the Company continues to experience significant
losses, its liquidity and, accordingly, its ability to fund research and
development or ventures relating to the distribution of new products would
likely be materially and adversely affected.
FINANCING
At March 28, 1998, the Company's total outstanding short-term and long-term
debt amounted to $12,118,000 and $2,749,000, respectively. The short-term debt
consists of the outstanding amount under the Company's line of credit with GECC
and the long-term debt consists primarily of an outstanding mortgage loan with a
bank and a non-recourse secured promissory note resulting from the acquisition
of Clal's interest in IPR in fiscal year 1997.
In December 1996, Par entered into the Loan Agreement with GECC which
provided Par with a three-year revolving line of credit. The Company was in
breach of the Loan Agreement during the second quarter of fiscal 1998 and on
March 4, 1998, the Company and GECC amended the Loan Agreement (see "Item 6-
Defaults Upon Senior Securities"). Pursuant to the Loan Agreement, as amended,
Par is permitted to borrow up to the lesser of (i) the sum of the borrowing base
and the overadvancement limit of $2,000,000 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 overadvancement limit increases to $2,500,000 through June
19, 1998 if GECC consents to the form and substance of an equity investment in
the Company (see "Notes to the Financial Statements-Equity Investment"). The
interest rate charge on the line of credit is based upon a per annum rate of
3.50% above the 30-day commercial paper rate for high-grade unsecured notes
adjusted monthly. The line of credit with GECC is secured by the assets of Par
and PRI other than real property and is guaranteed by PRI. In connection with
such facility, Par, PRI, and their affiliates have established a cash management
system pursuant to which all cash and cash equivalents received by any of such
entities are deposited into a lockbox account over which GECC has sole operating
control and which are applied on a daily basis to reduce amounts outstanding
under the line of credit. A portion of the proceeds from the equity investment
shall be immediately applied by the Company to pay all outstanding revolving
credit advances pursuant to the Loan Agreement. The revolving credit facility
is subject to covenants based on various financial benchmarks. In fiscal year
1997, GECC waived events of default on three occasions unrelated to the
repayment of debt under the Loan Agreement. As of May 7, 1998, the borrowing
base was approximately $13,000,000 and $5,300,000 was outstanding under the line
of credit. Any significant reduction in the borrowing base from current levels
will adversely affect the Company's liquidity and operations.
ITEM 6. DEFAULTS UPON SENIOR SECURITIES.
In February 1998, the Company was in breach of the Loan Agreement related to
borrowings that exceeded the borrowing base as calculated at that time. On
March 4, 1998, the Company and GECC amended the Loan Agreement with respect to
overadvancement limits and prepayment of the revolving credit facility.
-14-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits:
10.28 - Third Amendment and Consent to Loan and Security Agreement,
dated as of March 4, 1998, between Par and General Electric
Capital Corporation.
27 - Financial Data Schedule.
(b) Reports on Form 8-K:
The Company, on March 31, 1998, filed a current report on Form 8-K, relating
to the proposed transactions with Merck KGaA and its affiliates.
-15-
<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 12, 1998 /s/ Kenneth I. Sawyer
-------------------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
May 12, 1998 /s/ Dennis J. O'Connor
-------------------------------------
Dennis J. O'Connor
Vice President - Chief Financial Officer
and Secretary
(Principal Accounting and Financial Officer)
-16-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description Page Number
- -------------- ----------- -----------
10.28 Third Amendment and Consent to Loan and
Security Agreement, dated as of March 4, 1998,
between Par and General Electric Capital
Corporation 18
27 Financial Data Schedule 25
<PAGE>
Exhibit 10.28
THIRD AMENDMENT AND CONSENT
TO LOAN AND SECURITY AGREEMENT
------------------------------
THIRD AMENDMENT AND CONSENT, dated as of March 4, 1998 (this
"Amendment"), to the Loan and Security Agreement referred to below by and among
- ----------
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"), PAR
------
PHARMACEUTICAL, INC., a New Jersey corporation ("Borrower"), PHARMACEUTICAL
--------
RESOURCES, INC., a New Jersey corporation ("Parent"), NUTRICEUTICAL RESOURCES,
------
INC., a New York Corporation ("NRI"), and PARCARE, LTD., a New York corporation
---
("ParCare"). Parent, NRI and ParCare are hereinafter referred to as
-------
"Guarantors".
----------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Lender, Borrower and Guarantors are parties to that certain
Loan and Security Agreement, dated as of December 15, 1996 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Loan
----
Agreement");
- ---------
WHEREAS, Lender, Borrower and Guarantors have agreed to amend the Loan
Agreement in the manner, and on the terms and conditions, provided for herein;
and
WHEREAS, Lender has agreed to consent to certain violations of the
Loan Agreement in the manner, and on the terms and conditions, provided for
herein;
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties to this Amendment hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement.
2. Amendment to Schedule A to the Loan Agreement. Schedule A to
--------------------------------------------- ----------
the Loan Agreement is hereby amended as of the Amendment Effective Date (as
hereinafter defined) as follows:
(a) The following new definitions shall be inserted in the proper
alphabetical order:
"Merck" shall mean Merck KGaA, a company organized under
-----
the laws of the Federal Republic of Germany.
"Merck Equity Documents" shall mean, collectively, the
----------------------
Merck Stock Purchase Agreement and any other agreements, instruments
and documents executed pursuant thereto or in connection therewith,
as any of the foregoing may from time to time be amended, modified
or supplemented, all in form and substance satisfactory to Lender.
"Merck Stock Purchase Agreement" shall mean that certain Stock
------------------------------
Purchase Agreement to be entered into between Parent and Merck in
form and substance satisfactory to Lender, pursuant to which Merck
shall make an equity investment in Parent in an amount not less than
$20,000,000.
<PAGE>
"Overadvance Limit" shall mean for each period the amount set
-----------------
forth below for such period:
Period Overadvance Limit
------ -----------------
2/17/98 through 6/19/98 $2,000,000
6/20/98 and thereafter $ 0
; provided, however, that if Lender receives the Merck Equity
--------
Documents in form and substance satisfactory to Lender before June
19, 1998, the Overadvance Limit from the date of receipt thereof
through June 19, 1998 shall be $2,500,000.
"Permitted Holder" shall mean Merck or any other Person
----------------
controlled by Merck. For purposes of this definition, "control" of a
Person shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of its management or
policies, whether through the ownership of voting securities, by
contract or otherwise.
"Sano Stock Reserve" shall mean a reserve in the amount of
------------------
$2,852,800, established pursuant to Section 1.15 hereof."
------------
(b) The definition of "Borrowing Availability" shall be amended and
----------------------
restated in its entirety to read as follows:
"Borrowing Availability" shall mean, at any time, the
----------------------
lesser at such time of (i) the Maximum Amount and (ii) the sum of
the Borrowing Base and the Overadvance Limit then in effect, in each
case less any reserves established by Lender from time to time,
including, without limitation, the Sano Stock Reserve."
(c) The definition of "Change of Control" shall be amended and
-----------------
restated in its entirety to read as follows:
"Change of Control" shall mean, (i) the replacement of a
-----------------
majority of the Board of Directors of Parent, over a two-year
period, from the directors who constituted the Board of Directors at
the beginning of such period, which replacement shall not have been
approved by a vote of at least a majority of the Board of Directors
of Parent then still in office who were either members of the Board
of Directors at the beginning of such period or whose appointment as
a member of the Board of Directors was previously so approved; (ii)
as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise, a Person (other than a
Permitted Holder) or entity or group of Persons acting in concert as
a partnership, joint venture, alliance or other group shall have
become the "beneficial owner" (within the meaning of Rule 13d-3
under the Exchange Act as in effect on the Closing Date) of
securities of Parent representing 30% or more of the combined voting
power of the then outstanding securities of Parent ordinarily (and
apart from rights arising under special circumstances) having the
right to vote in the election of directors thereof; (iii) the
acquisition by any Person (or group of Persons acting in concert),
other than a Permitted Holder, of the power to direct the management
or affairs of the Parent by obtaining proxies, entering into voting
agreements or trusts, acquiring securities or otherwise; or (iv)
Parent shall fail to directly own all of the Stock of Borrower or
any Subsidiary Guarantor."
<PAGE>
3. Consent. Lender hereby consents to the execution and delivery by
-------
Parent of the Merck Equity Documents and the consummation of the transactions
contemplated therein; provided, that (i) the Merck Equity Documents shall be in
--------
form and substance satisfactory to Lender, (ii) the equity investment to be made
by Merck pursuant thereto shall be in an amount not less than $20,000,000 and
(iii) all proceeds of such equity investment shall be immediately contributed to
the capital of Borrower and immediately applied by Borrower to prepayment of
Revolving Credit Advances pursuant to Section 1.2(c) of the Loan Agreement. To
--------------
the extent any proceeds remain after such prepayment, Borrower shall immediately
invest such proceeds solely in a "Permitted Investment". The parties agree that
such an investment shall not constitute a violation of the Loan Agreement. For
purposes of this Amendment, "Permitted Investment" shall mean (i) marketable
direct obligations issued or unconditionally guaranteed by the United States of
America or any agency thereof maturing no more than one year from the date of
creation thereof, (ii) commercial paper maturing no more than one year from the
date of creation thereof and currently having the highest rating obtainable from
either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii)
certificates of deposit, maturing no more than one year from the date of
creation thereof, issued by commercial banks incorporated under the laws of the
United States of America, each having combined capital, surplus and undivided
profits of not less than $300,000,000 and having a senior secured rating of "A"
or better by a nationally recognize rating Agency (an "A Rated Bank"), and (iv)
------------
time deposits, maturing no more than 30 days from the date of creation thereof,
with A Rated Banks. Notwithstanding anything to the contrary contained in this
Section 3, Lender hereby reserves its right under Section 3.25 of the Loan
- --------- ------------
Agreement to perfect its Lien in the above-mentioned proceeds.
4. Representations and Warranties. To induce Lender to enter into
------------------------------
this Amendment, each Credit Party hereby represents and warrants that:
A. The execution, delivery and performance by each Credit Party
of this Amendment: (i) are within its corporate powers; (ii) have been duly
authorized by all necessary corporate and shareholder action; and (iii) are not
in contravention of any provision of its articles of incorporation or by-laws or
other organizational documents.
B. This Amendment has been duly executed and delivered by or on
behalf of each Credit Party.
C. This Amendment constitutes a legal, valid and binding
obligation of each Credit Party enforceable against each Credit Party in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
D. No Default has occurred and is continuing both before and
after giving effect to this Amendment.
E. No action, claim or proceeding is now pending or, to the
knowledge of each Credit Party, threatened against any Credit Party, at law, in
equity or otherwise, before any court, board, commission, agency or
instrumentality of any federal, state, or local government or of any agency or
subdivision thereof, or before any arbitrator or panel of arbitrators, which
challenges any Credit Party's right, power, or competence to enter into this
Amendment or, to the extent applicable, perform any of its obligations under
this Amendment, the Loan Agreement as amended hereby or any other Loan Document,
or the validity or enforceability of this Amendment, the Loan Agreement as
amended hereby or any other Loan Document or any action taken under this
Amendment, the Loan Agreement as amended hereby or any other Loan Document or
which if determined adversely could have or result in a Material Adverse Effect.
5. No Other Amendments/Waivers. Except as expressly specified
---------------------------
herein, (i) the Loan Agreement shall be unmodified and shall continue to be in
full force and effect in accordance with its
<PAGE>
terms and (ii) this Amendment shall not be deemed a waiver of any term or
condition of any Loan Document and shall not be deemed to prejudice any right or
rights which Lender may now have or may have in the future under or in
connection with any Loan Document or any of the instruments or agreements
referred to therein, as the same may be amended from time to time.
6. Outstanding Indebtedness; Waiver of Claims. Each Credit Party
------------------------------------------
hereby acknowledges and agrees that as of February 24, 1998 the aggregate
outstanding principal amount of the Revolving Credit Loan is $10,195,528.54 and
that such principal amount is payable pursuant to the Loan Agreement, as amended
hereby, without defense, offset, withholding, counterclaim or deduction of any
kind. Each Credit Party hereby waives, releases, remises and forever discharges
Lender and each other Indemnified Person from any and all Claims of any kind or
character, known or unknown, which each Credit Party ever had, now has or might
hereafter have against Lender which relates, directly or indirectly, to any acts
or omissions of Lender or any other Indemnified Person on or prior to the
Amendment Effective Date.
7. 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.
8. Effectiveness. This Amendment shall become effective as of
-------------
March 4, 1998 (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
March 4, 1998:
A. Documents. Lender shall have received four (4) original
---------
copies of this Amendment duly executed and delivered by Lender and each Credit
Party.
B. Amendment Fee. Borrower shall have paid to Lender an
--------------
amendment fee in the amount of $25,000.
C. Representations and Warranties. All representations and
------------------------------
warranties of or on behalf of each Credit Party in this Amendment and all the
other Loan Documents shall be true and correct in all respects with the same
effect as though such representations and warranties had been made on and as of
the date hereof and on and as of the date that the other conditions precedent in
this Section 8 have been satisfied, except to the extent that any such
---------
representation or warranty expressly relates to an earlier date.
D. Secretary's Certificate. Each Credit Party shall have
-----------------------
provided Lender with a certificate in form and substance satisfactory to Lender
of their respective Secretary or an Assistant Secretary certifying the
resolutions adopted by their respective Boards of Directors approving this
Amendment and the transactions contemplated herein.
9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
-------------
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
10. 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.
11. Confidentiality. Lender agrees to use commercially reasonable
---------------
efforts (equivalent to the efforts Lender applies to maintaining the
confidentiality of its own confidential information) to maintain as confidential
all terms of this Amendment for a period of two (2) years from the date hereof,
except that Lender may disclose such terms (a) to Persons employed or engaged by
Lender in evaluating, approving, structuring or administering the Revolving
Credit Loan; (b) to any bona fide assignee or participant or potential assignee
or participant that has agreed to comply with the covenant contained in this
Section 11 (and any such
- ----------
<PAGE>
bona fide assignee or participant or potential assignee or participant may
disclose such information to Persons employed or engaged by them as described in
clause (a) above); (c) as required or requested by any Governmental Authority or
- ----------
reasonably believed by Lender to be compelled by any court decree, subpoena or
legal or administrative order or process; (d) as, in the opinion of Lender's
counsel, required by law; (e) in connection with the exercise of any right or
remedy under the Loan Documents or in connection with any action, claim,
lawsuit, investigation or proceeding to which Lender is a party; or (f) which
ceases to be confidential through no fault of Lender.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
<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)
<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
<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 28, 1998 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-30-1997
<PERIOD-END> MAR-28-1998
<CASH> 67
<SECURITIES> 0
<RECEIVABLES> 13,013
<ALLOWANCES> (3,190)
<INVENTORY> 16,213
<CURRENT-ASSETS> 29,682
<PP&E> 46,109
<DEPRECIATION> (19,205)
<TOTAL-ASSETS> 74,198
<CURRENT-LIABILITIES> 19,036
<BONDS> 2,547
189
0
<COMMON> 0
<OTHER-SE> 51,844
<TOTAL-LIABILITY-AND-EQUITY> 74,198
<SALES> 25,708
<TOTAL-REVENUES> 25,854
<CGS> 23,575
<TOTAL-COSTS> 7,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 19
<INTEREST-EXPENSE> 453
<INCOME-PRETAX> (5,255)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,255)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,255)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
