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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For Fiscal Year Ended September 30, 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 office) (Zip Code)
Registrant's telephone number, including area code: (914) 425-7100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
The New York Stock Exchange, Inc.
Common Stock, $.01 par value The Pacific Stock Exchange, Inc.
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The New York Stock Exchange, Inc.
Common Stock Purchase Rights The Pacific Stock Exchange, Inc.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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The aggregate market value of the voting stock and non-voting common equity
held by non-affiliates of the Registrant was $131,174,874 as of December 22,
1998 (assuming solely for purposes of this calculation that all directors and
executive officers of the Registrant are "affiliates").
Number of shares of the Registrant's common stock outstanding as of
December 22, 1998: 29,321,044
DOCUMENTS INCORPORATED BY REFERENCE : NONE
This is page 1 of 65 pages. The exhibit index is on page 31.
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PART I
ITEM 1. BUSINESS.
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GENERAL
Pharmaceutical Resources, Inc. ("PRI" or the "Company") is a holding company
which, through its subsidiaries, is in the business of manufacturing and
distributing a broad line of generic drugs in the United States. PRI operates
primarily through its wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par"),
a manufacturer and distributor of generic drugs.
The Company's current product line consists of prescription and, to a much
lesser extent, over-the-counter drugs. Approximately 91 products representing
various dosage strengths of 34 drugs are currently being marketed (see "--
Product Line Information"). Generic drugs are the pharmaceutical and
therapeutic equivalents of brand name drugs and are usually marketed under their
generic (chemical) names rather than by a brand name. Normally, a generic drug
cannot be marketed until the expiration of applicable patents on the brand name
drug. Generic drugs must meet the same government standards as brand name
drugs, but are typically sold at prices below those of brand name drugs.
The Company markets its products primarily to wholesalers, drug distributors,
repackagers and retail drug store chains principally through its own sales
staff. Par also has a significant over the counter business through which it
sells its products to specific marketing sales organizations that repackage and
sell private label products to large chain drug stores. In addition, the
Company promotes the sales efforts of wholesalers and drug distributors that
sell the Company's products to clinics, government agencies and other managed
health care organizations (see "--Marketing and Customers").
PRI was organized as a subsidiary of Par under the laws of the State of New
Jersey on August 2, 1991. On August 12, 1991, Par effected a reorganization of
its corporate structure, pursuant to which PRI became Par's parent company.
References herein to the "Company" shall be deemed to refer to PRI and all of
its subsidiaries since August 12, 1991, or Par and all of its subsidiaries prior
thereto, as the context may require. The Company's executive offices are
located at One Ram Ridge Road, Spring Valley, New York 10977, and its telephone
number is (914) 425-7100.
Significant Developments:
Results of Operations. Although the Company continued to be unprofitable in
the fiscal year ended September 30, 1998, PRI experienced net sales growth and
gross margin improvements for the first year in several years. In the most
recent fiscal year, several products were introduced through new and existing
distribution agreements, and together with increased sales of certain existing
distributed products sold under a supply agreement with BASF Corporation
("BASF"), led to sales growth of 14% over the prior fiscal year. The recent
trend of decreased selling, general and administrative costs ended during the
second half of the last fiscal year as the Company strengthened its sales force
and expanded marketing efforts in anticipation of product introductions. In
addition, the Company recorded a charge of $1,212,000 in fiscal year 1998 for
asset impairment after moving a substantial portion of the manufacturing volume
at its facility in Congers, New York to BASF (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
Product Line Restructuring. In an attempt to reduce operating losses, the
Company plans to implement measures during fiscal year 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 are expected to result in a charge of
approximately $3,000,000 in the quarter ended December 31, 1998 including
severance payments and other employee termination benefits, inventory reserves
and write-downs for the impairment of assets affected by the termination of the
six products. 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
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agreements with pharmaceutical companies located throughout the world (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
Equity Investment. The Company consummated a strategic alliance on June 30,
1998 with Merck KGaA, a pharmaceutical, laboratory and chemical company located
in Darmstadt, Germany. Pursuant to a Stock Purchase Agreement (the "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. A portion of the proceeds from the
stock sale were used to repay advances made to the Company under its existing
line of credit. 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 to be
provided to the Company. Under the Stock Purchase Agreement, Lipha has
appointed a majority of the members of the Company's Board of Directors. As
part of the agreement, the Company received the exclusive United States
distribution rights to the portfolio of products covered by a distribution
agreement with Genpharm. Genpharm will pay all of 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 in the United States.
To date the Company has introduced three of such products and anticipates
introducing several more in fiscal 1999 (see "--Product Line Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
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, and 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 July 2001.
After giving effect to such transactions, Merck KGaA and its affiliates
currently have a 42% stake in the Company and have the right to purchase up to
an aggregate of approximately 46% of the Company's Common Stock.
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.
Transdermal Distribution Rights. On September 29, 1998, the Company and Elan
Transdermal Technologies, Inc., formerly known as Sano Corporation, and Elan
Corporation, plc (together "Elan") entered into a termination agreement (the
"Termination Agreement") with respect to their prior distribution agreement.
Under the Termination Agreement, the Company retained exclusive distribution
rights in the United States for a transdermal nicotine patch developed by Elan
for a period of up to twelve months. 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 less any profit generated by sales of the product between
September 29, 1998 and the termination date in consideration of the termination
of Par's long-term distribution rights for a nicotine patch and a nitroglycerin
patch (see "--Product Line Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
Sales and Marketing Organization. During fiscal year 1998, the Company
strengthened its internal sales force by hiring additional experienced personnel
in several key positions to help the Company distribute the products generated
from the Merck KGaA relationship, the internal research and development program
and additional licensing opportunities that may become available in the future
(see "--Marketing and Customers").
PRODUCT LINE INFORMATION
The Company operates primarily in one industry segment, namely the
manufacture and distribution of generic pharmaceuticals. Products are marketed
principally in solid oral dosage form consisting of tablets, caplets and two-
piece hard-shell capsules. The Company also distributes products in the semi-
solid form of a cream, reconstituted suspensions/solutions and transdermal
delivery systems (see "--Research and Development").
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Par markets approximately 57 products, representing various dosage strengths
of 19 drugs that are manufactured by the Company and approximately 34 products,
representing various dosage strengths of 15 drugs that are manufactured for it
by other companies (see "--Research and Development" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"). Par
holds abbreviated new drug applications ("ANDAs") for the drugs which it
manufactures. Below is a list of drugs manufactured and/or distributed by Par.
The names of all of the drugs under the caption "Competitive Brand-Name Drug"
are trademarked. The holders of the trademarks are non-affiliated
pharmaceutical manufacturers.
Name COMPETITIVE BRAND-NAME DRUG
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Central Nervous System:
Alprazolam Xanax
Benztropine Mesylate Cogentin
Carisoprodol and Aspirin Soma Compound
Clonazepam Klonopin
Doxepin Hydrochloride Sinequan, Adapin
Fluphenazine Hydrochloride Prolixin
Flurazepam Hydrochloride Dalmane
Haloperidol Haldol
Imipramine Hydrochloride Tofranil
Meclizine Hydrochloride Antivert
Methocarbamol and Aspirin Robaxisal
Prochlorperazine Maleate Compazine
Temazepam Restoril
Triazolam Halcion
Cardiovascular:
Amiloride Hydrochloride Midamor
Atenolol Tenormin
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
Indapamide Lozol
Isosorbide Dinitrate Isordil
Minoxidil Loniten
Nicardipine Hydrochloride Cardene
Anti-Inflammatory:
Aspirin (zero order release) Zorprin
Ibuprofen Advil, Nuprin, Motrin
Naproxen Sodium Aleve
Anti-Infective:
Amoxicillin Amoxil
Ampicillin Principen
Penicillin V Potassium V-Cillin K
Anti-Cancer:
Megestrol Acetate Megace
Transdermal:
Nicotine Habitrol
Other:
Allopurinol Zyloprim
Dexamethasone Decadron
Methylprednisolone Medrol
Silver Sulfadiazine (SSD) Silvadene
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The Company seeks to introduce new products not only through internal
research and development, but also through joint venture, distribution and other
agreements with pharmaceutical comp anies located throughout the world. The
Company's material distribution agreements are described below. As part of that
strategy, it has pursued and continues to pursue arrangements or affiliations
which it believes, in general, should provide access to raw materials at
favorable prices, share development costs, generate profits from jointly
developed products and expand distribution channels for new and existing
products.
In April 1997, Par entered into a Manufacturing and Supply Agreement (the
"Supply Agreement") with 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 Supply 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 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 agreed to
waive the minimum requirement in calendar 1998 for the third product. 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.
In connection with the Stock Purchase Agreement, Genpharm and the Company
have entered into a distribution agreement, dated March 25, 1998 (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 FDA approval and others of which have been or are
expected to 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. The Company is
currently marketing three products under the Genpharm Distribution Agreement and
anticipates introducing several more in fiscal 1999.
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. Elan may terminate the distribution rights earlier upon three months
notice in certain circumstances. Par pays to Elan a certain percentage of gross
profits from the sale of the transdermal nicotine patch. 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. Under the Termination Agreement, the Company's percentage
share of the gross profit on sales of the nicotine patch was increased, subject
to certain conditions. 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 less any profit generated by sales of the product between September
29, 1998 and the termination date, subject to a minimum payment of $1,000,000,
in consideration of the termination of Par's long-term distribution rights for a
nicotine patch and a nitroglycerin patch. Elan 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. Elan develops transdermal
delivery systems utilizing a patch that incorporates the appropriate drug dosage
into an adhesive that attaches the patch to the skin.
RESEARCH AND DEVELOPMENT
The Company is actively developing thirteen products. The Company expects
that approximately six of these products will be the subject of a biostudy in
fiscal year 1999, but has not filed any ANDAs with respect to such potential
products. The Company plans that its expenditures in fiscal year 1999 will
remain at approximately the same levels from the prior fiscal year. The
scientific process of developing new products is complex and time
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consuming, as is obtaining FDA approval, and the development of products may be
curtailed in the early or later stages of development due to the introduction of
competing generic products or for other strategic reasons. The Company conducts
a significant part of its research and development in Israel through Israel
Pharmaceutical Resources L.P. ("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 Company and Merck KGaA
have an agreement in principle in which Merck KGaA will share one-half of the
costs of IPR's operating budget, beginning in fiscal year 1999, in exchange for
the non-United States distribution rights to the products developed by IPR.
The Company's research and development activities consist of (i) identifying
and conducting patent and market research on brand name drugs for which patent
protection has expired or is to expire in the near future, (ii) researching and
developing new product formulations based upon such drugs, (iii) obtaining
approval from the FDA for such new product formulations, and (iv) introducing
technology to improve production efficiency and enhance product quality. The
Company contracts with outside laboratories to conduct biostudies which, in the
case of oral solids, generally are required for FDA approval. Biostudies are
used to demonstrate that the rate and extent of absorption of a generic drug are
not significantly different from the corresponding brand name drug and currently
cost in the range of $100,000 to $500,000 per study. During fiscal year 1998,
the Company contracted with outside laboratories to conduct biostudies for three
potential new products and will continue to do so in the future. Biostudies
must be conducted and documented in conformity with FDA standards (see "--
Government Regulation"). In addition, the Company from time to time enters into
agreements with others with respect to the development of new products and
technologies. To date, the Company has entered into agreements and advanced
funds to several companies for products in various stages of development.
The research and development of oral solid products, including preformulation
research, process and formulation development, required studies and FDA review
and approval, has historically taken approximately two to three years.
Accordingly, Par typically selects for development products that it intends to
market several years in the future. However, the length of time necessary to
bring a product to market can vary significantly and can depend on, among other
things, availability of funding, problems relating to formulation, safety or
efficacy or patent issues associated with the product. Currently, the Company
has ANDAs pending with the FDA for three proposed products. No assurance can be
given that the Company will successfully complete the development of products
currently under development or proposed for development, that it will obtain
regulatory approval for any such product or that any approved product will be
produced in commercial quantities. Improvement in the Company's financial
condition depends upon the acquisition and introduction of new products at
profitable prices to replace declining revenues from older products. The
failure of the Company to introduce profitable new products in a timely manner
could have a material adverse effect on the Company's operating results and
financial condition (see "--Competition").
For its 1998, 1997 and 1996 fiscal years, the Company incurred research and
development expenses of $5,775,000, $5,843,000 and $5,160,000, respectively.
The Company had advanced $7,629,000 to Elan in prior fiscal years for the
development of transdermal products. No advances were made to Elan in fiscal
year 1998. The advances were recorded as research and development expenses in
the periods they were made (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Operating Results-Research and
Development").
MARKETING AND CUSTOMERS
The Company markets its products under both Par and private labels
principally to wholesalers, distributors, repackagers, retail drug store chains
and, to a lesser extent, drug manufacturers and government agencies primarily
through its own sales staff. The Company also markets to customers in the
managed health care market. Such customers include health maintenance
organizations, nursing homes, hospitals, clinics, pharmacy benefit management
companies and mail order customers.
Following industry trends, the Company has experienced a significant change
in its distribution channels in the last several years. In general, sales of
generic drugs to distributors have been decreasing, while sales to
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wholesalers, repackagers and chains have been increasing. The Company believes
that competition between distributors and consolidation among wholesalers and
retailers have resulted in additional pressure to decrease prices. Additionally,
aggressive pricing strategies by distributors which are attempting to maintain
or increase market share have adversely affected the Company's ability to market
its products. Consequently, price reductions have resulted in lower gross
margins for the Company (see "--Competition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
The Company strengthened its internal sales force in fiscal year 1998 by
hiring additional experienced personnel in several key positions. After
reducing selling costs in fiscal year 1997, the Company reversed the trend to
capitalize on anticipated product introductions from the Merck KGaA
relationship, the internal research and development program and additional
licensing opportunities that may become available in the future.
The Company has approximately 185 customers. During fiscal year 1998, sales
to the Company's three largest customers, Bergen Brunswig Corporation, Leiner
Health Products Inc. and McKesson Drug Co. accounted for approximately 15%, 14%
and 12%, respectively, of net sales. None of these customers has written
agreements with the Company. The loss of any of these customers or the
substantial reduction in orders from any of such customers would have a material
adverse effect upon the Company's operating results and financial condition (see
"Notes to Financial Statements-Accounts Receivable-Major Customers").
ORDER BACKLOG
The dollar amount of open orders, as of September 30, 1998, believed by
management to be firm, was approximately $7,700,000, as compared to
approximately $3,300,000 at September 30, 1997. Although these orders are
subject to cancellation without penalty, management expects to fill
substantially all of them in the near future.
COMPETITION
The generic pharmaceutical industry is highly and increasingly competitive.
The Company has identified at least ten principal competitors, and experiences
varying degrees of competition from numerous other companies in the health care
industry. The Company's competitors include many generic drug manufacturers and
a number of major branded pharmaceutical companies which, as part of their
business, market both brand-name prescription drugs and generic versions of
these brand-name drugs. Many of the Company's competitors have greater
financial and other resources than the Company and are able to spend more for
product development and marketing.
Many major branded pharmaceutical companies have directly launched, or have
formed alliances to market, their patented drugs prior to patent expiration as
generic drugs. Because branded pharmaceutical companies do not have to wait
until the expiration of patent protection before manufacturing such generic
drugs, they have a distinct timing advantage over strictly generic drug
manufacturers. This competitive effort has had a negative impact on the
Company's ability to sell certain generic drugs to its customers and to generate
customary revenues from the launch of its new products, as the channel of
distribution is either closed or severely limited or the Company is forced to
meet lower market pricing.
As other manufacturers introduce generic products in competition with the
Company's existing products, market share and prices with respect to such
existing products typically decline. Similarly, the Company's potential for
profits is significantly reduced, if not eliminated, as competitors introduce
products prior to the Company. Accordingly, the level of revenues and gross
profit generated by the Company's current and prospective products depends, in
part, on the number and timing of introductions of competing products and the
Company's timely development and introduction of new products (see "--Research
and Development").
During fiscal year 1998, four of the Company's products accounted for
approximately 63% of its net sales compared to 56% and 48%, respectively, of net
sales in fiscal years 1997 and 1996. One of these products has historically
accounted for a significant percentage of the Company's sales and gross margins.
A competitor of
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the Company received FDA approval for this product in fiscal year 1996 when,
prior to that time, the Company had been the sole generic manufacturer. Due to
the increased competition with respect to this and other products, the Company's
sales and gross margins have been materially and adversely affected (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations-General", "-Net Sales" and "-Gross Margins").
The principal competitive factors in the generic pharmaceutical market are
(i) price, (ii) the ability to introduce generic versions of brand name drugs
promptly after their patents expire, (iii) reputation as a manufacturer with
integrity and quality products, (iv) level of service (including maintaining
sufficient inventory levels for timely deliveries), (v) product appearance, and
(vi) breadth of product line.
RAW MATERIALS
The raw materials essential to the Company's manufacturing business are
purchased primarily from United States distributors of bulk pharmaceutical
chemicals manufactured by foreign companies. To date, the Company has
experienced no significant difficulty in obtaining raw materials and expects
that raw materials will generally continue to be available in the future.
However, since the federal drug application process requires specification of
raw material suppliers, if raw materials from a specified supplier were to
become unavailable, FDA approval of a new supplier would be required. While a
new supplier becomes qualified by the FDA and its manufacturing process is
judged to meet FDA standards, a delay of six months or more in the manufacture
and marketing of the drug involved could result, which could in turn have an
adverse effect on the Company's financial condition. Generally the Company
attempts to minimize the effects of any such situation by specifying, where
economical and feasible, two or more suppliers for its drug approvals.
EMPLOYEES
As of September 30, 1998, the Company had approximately 320 employees (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Subsequent Event").
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the
Federal government, principally by the FDA, and, to a lesser extent, by the Drug
Enforcement Administration and state governments. The Federal Food, Drug, and
Cosmetic Act, the Controlled Substances Act, and other Federal statutes and
regulations govern or influence the testing, manufacture, safety, labeling,
storage, record keeping, approval, advertising and promotion of the Company's
products. Noncompliance with applicable requirements can result in judicially
and/or administratively imposed sanctions including the initiation of product
seizures, injunction actions, fines and criminal prosecutions. Administrative
enforcement measures can involve the recall of products, as well as the refusal
of the government to enter into supply contracts or to approve new drug
applications. The FDA also has the authority to withdraw approval of drugs in
accordance with regulatory due process procedures.
FDA approval is required before any new drug, including a generic equivalent
of a previously approved drug, can be marketed. To obtain FDA approval for a
new drug, a prospective manufacturer must, among other things, demonstrate that
its manufacturing facilities comply with the FDA's current Good Manufacturing
Practices ("cGMP") regulations. The FDA may inspect the manufacturer's
facilities to assure such compliance prior to approval or at any other
reasonable time. CGMP regulations must be followed at all times during the
manufacture and other processing of drugs. To comply with the standards set
forth in these regulations, the Company must continue to expend significant
time, money and effort in the areas of production, quality control and quality
assurance.
To obtain FDA approval of a new drug, a manufacturer must demonstrate, among
other requirements, the safety and effectiveness of the proposed drug. There
are currently three basic ways to satisfy the FDA's safety and effectiveness
requirements:
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1. New Drug Applications ("NDA" or "full NDA"): Unless either of the
procedures discussed in paragraphs 2 and 3 below is available, a
prospective manufacturer must submit to the FDA full reports of
well-controlled clinical studies and other data to prove that a drug
is safe and effective and meets other requirements for approval.
2. "Paper" NDAs: In certain instances in the past, the FDA permitted
safety and effectiveness to be shown by submission of published
literature and journal articles in a so-called "paper" NDA. As a
result of passage of the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman-Hatch Act"), "paper" NDAs are
now recognized in the statute, although they are infrequently used
because of the lack of sufficient or otherwise useable information
in the literature on the majority of drugs.
3. Abbreviated New Drug Applications: The Waxman-Hatch Act established
a statutory procedure for submission and FDA review and approval of
ANDAs for generic versions of drugs previously approved by the FDA
(such previously approved drugs are hereinafter referred to as
"listed drugs"). As the safety and efficacy have already been
established by the innovator company, the FDA waives the need for
complete clinical trials. However, a generic manufacturer is
typically required to conduct bioavailability/bioequivalence studies
of its test product against the listed drug. The
bioavailability/bioequivalence studies assess the rate and extent of
absorption and concentration levels of a drug in the blood stream
required to produce a therapeutic effect. Bioequivalence is
established when the rate of absorption and concentration levels of
a generic product are substantially equivalent to the listed drug.
For some drugs (e.g., topical antifungals), other means of
demonstrating bioequivalence may be required by the FDA, especially
where rate and/or extent of absorption are difficult or impossible
to measure. In addition to the bioequivalence data, an ANDA must
contain chemistry, manufacturing, labeling, and stability data.
The Waxman-Hatch Act also established certain statutory protections for
listed drugs. Under the Waxman-Hatch Act, approval of an ANDA for a generic
drug may not be made effective for interstate marketing until all relevant
patents for the listed drug have expired or been determined to be invalid or not
infringed by the generic drug. Prior to enactment of the Waxman-Hatch Act, the
FDA did not consider the patent status of a previously approved drug. In
addition, under the Waxman-Hatch Act, statutory non-patent exclusivity periods
are established following approval of certain listed drugs, where specific
criteria are met by the drug. If exclusivity is applicable to a particular
listed drug, the effective date of approval of ANDAs (and, in at least one case,
submission of an ANDA) for the generic version of the listed drug is usually
delayed until the expiration of the exclusivity period, which, for newly
approved drugs, can be either three or five years. The Waxman-Hatch Act also
provides for extensions of up to five years of certain patents covering drugs to
compensate the patent holder for reduction of the effective market life of the
patented drug resulting from the time involved in the Federal regulatory review
process.
During 1995, patent terms for a number of listed drugs were extended when the
Uruguay Round Agreements Act (the "URAA") went into effect to implement the
latest General Agreement on Tariffs and Trade (the "GATT") to which the United
States became a treaty signatory in 1994. Under GATT, the term of patents was
established as 20 years from the date of patent application. In the United
States, the patent terms historically have been calculated at 17 years from the
date of patent grant. The URAA provided that the term of issued patents be
either the existing 17 years from the date of patent grant or 20 years from the
date of application, whichever was longer. The effect generally was to add
patent life to already issued patents, thus delaying FDA approvals of
applications for generic products.
In addition to the Federal government, states have laws regulating the
manufacture and distribution of pharmaceuticals, as well as regulations dealing
with the substitution of generic for brand-name drugs. The Company's operations
are also subject to regulation, licensure and inspection by the states in which
they are located and/or do business.
The Company also is governed by Federal and state laws of general
applicability, including laws regulating matters of environmental quality,
working conditions, and equal employment opportunity.
9
<PAGE>
The Federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA").
Generally, OBRA provides that a generic drug manufacturer must offer the states
an 11% rebate on drugs dispensed under the Medicaid program and must have
entered into a formal drug rebate agreement, as the Company has, with the
Federal Health Care Financing Administration. Although not required under OBRA,
the Company has also entered into similar state agreements.
ITEM 2. PROPERTIES.
- ------ ----------
The Company owns its executive offices and a substantial portion of its
production and domestic research facilities which are housed in an approximately
92,000 square foot facility built to Par's specifications. This building,
occupied by Par since fiscal year 1986, also includes research and quality
control laboratories, as well as packaging and warehouse facilities. The
building is located in Chestnut Ridge, New York, on a parcel of land of
approximately 24 acres, of which approximately 15 acres are available for future
expansion.
The Company owns an approximately 36,000 square foot building on two acres in
Chestnut Ridge, New York, across the street from its executive offices. This
property was acquired in fiscal year 1994 and is used for offices and
warehousing. The purchase of the land and building was financed by a mortgage
loan.
Par owns a third facility consisting of an approximately 33,000 square foot
building located on six acres in Congers, New York, which is used for tablet
coating operations and product manufacturing. During fiscal year 1998, the
Company moved a substantial portion of the manufacturing at this facility to
BASF and will attempt to move the remaining production and tablet coating
operations to another location. The Company will attempt to sell or lease the
facility in fiscal year 1999.
Par occupies approximately 47,000 square feet of a building in Chestnut
Ridge, New York for warehouse space under a lease which expires December 2004.
The Company has the option to extend the lease for two additional five-year
periods.
Par also leases an 11,000 square foot facility in Upper Saddle River, New
Jersey, for certain of its manufacturing operations. The lease covering this
facility expires November 2000, and has two two-year renewal options.
IPR leases approximately 13,000 square feet in Even Yehuda, Israel for
product research and development. The lease expires May 2000 and has a two-year
renewal option and one thirty-five month renewal option. The Company guarantees
the lease.
The Company believes that its owned and leased properties are sufficient in
size, scope and nature to meet its anticipated needs for the reasonably
foreseeable future (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Financial Condition" and "Notes to Financial
Statements-Long- Term Debt" and "-Commitments, Contingencies and Other Matters-
Leases").
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ---------------------------------------------------
10
<PAGE>
An Annual Meeting of Shareholders of the Company was held on June 26, 1998.
The following matters were voted on and approved by the holders of shares of the
Company's Common Stock:
The first proposal presented to the shareholders was the election of seven
members of the Company's Board of Directors which is divided into three classes:
Class I serves until 2000, Class II serves until 2001 and Class III serves until
1999. There were 11,541,739 and 11,544,774 shares of Common Stock cast in favor
of electing Anthony S. Tabatznik and J. Neil Tabatznik, respectively, as Class I
Directors which represented a plurality of the shares cast and 537,240 and
534,205 shares, respectively, were withheld. There were 11,464,072, 11,519,932
and 11,515,375 shares of Common Stock cast in favor of electing Kenneth I.
Sawyer, Mark Auerbach and Stephen A. Ollendorff, respectively, as Class II
Directors which represented a plurality of the shares cast and 614,907, 559,047
and 563,604 shares, respectively, were withheld. There were 11,542,223 and
11,543,935 shares of Common Stock cast in favor of electing Bernhard Scheuble
and Klaus H. Jander, respectively, as Class III Directors which represented a
plurality of the shares cast and 536,756 and 535,044 shares, respectively, were
withheld. There were no broker non-votes.
The second proposal presented to the shareholders was the approval of the
sale of 10,400,000 shares of the Company's Common Stock to Lipha at a price of
$2.00 per share and the grant of stock options to Merck KGaA and Genpharm to
purchase an aggregate of 1,171,040 shares of the Company's Common Stock at an
exercise price of $2.00 per share. There were 11,734,992 shares cast in favor
of such proposal which represented a majority of the outstanding shares of the
Company's Common Stock, and 5,057,781 shares voted against such proposal,
including 4,775,130 abstentions and non-voted broker shares.
The third proposal presented to the shareholders was to approve an amendment
to the Company's Certificate of Incorporation to increase the authorized number
of shares of Common Stock from 60,000,000 to 90,000,000. There were 11,368,619
shares cast in favor of such proposal which represented a majority of the
outstanding shares of the Company's Common Stock, and 5,424,154 shares voted
against such proposal, including 4,792,700 abstentions and non-voted broker
shares.
The fourth proposal presented to the shareholders was the approval and
adoption of the Company's 1997 Directors Stock Option Plan. There were
14,892,583 shares cast in favor of such proposal which represented a majority of
the shares of the Company's Common Stock cast for such proposal, 1,441,854
shares voted against such proposal, and 459,136 shares abstained. There were no
non-voted broker shares.
Any proposal which is intended to be presented by any shareholder of the
Company for action at the 1999 Annual Meeting of Shareholders must be received
in writing by the Secretary of the Company, at One Ram Ridge Road, Spring
Valley, New York, 10977, not later than January 5, 1999 in order for such
proposal to be considered for inclusion in the proxy statement and form of proxy
relating to the 1999 Annual Meeting of Shareholders. The rules promulgated by
the Securities and Exchange Commission may permit the Company to exercise
discretionary authority to vote on shareholder proposals at the 1999 Annual
Meeting of Shareholders if proposals are not included in the proxy statement
relating to such meeting and the Company does not have notice of the proposal
before March 21, 1999.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------ ---------------------------------------------------------------------
(a) Market information. The Company's Common Stock is traded on The New
York Stock Exchange ("NYSE") and the Pacific Exchange under the ticker
symbol "PRX". The following table shows the range of closing prices for
the Common Stock as reported by the NYSE for each calendar quarter
during the Company's two most recent fiscal years.
FISCAL YEAR ENDED IN
------------------------------
QUARTER ENDED 1998 1997
-------------- --------------
HIGH LOW HIGH LOW
------- ------ ------- ------
December 31 $2.50 $1.13 $6.00 $3.38
March 31 4.75 1.44 4.38 2.88
June 30 5.00 3.56 3.75 2.13
September 30 6.31 3.81 2.88 1.94
(b) Holders. As of December 22, 1998, there were approximately 3,200
holders of record of the Common Stock. The Company believes that, in
addition, there are a significant number of beneficial owners of its
Common Stock whose shares are held in "street name".
(c) Dividends. During the two most recent fiscal years, the Company paid
no cash dividends on its Common Stock. The payment of future
dividends on its Common Stock is subject to the discretion of the
Board of Directors and is dependent upon many factors, including the
Company's earnings, its capital needs, the terms of its financing
agreements and its general financial condition. The Company's current
loan agreement prohibits the declaration or payment of any dividend,
or the making of any distribution, to any of the Company's
stockholders (see "Notes to Financial Statements-Short-Term Debt").
(d) Recent Stock Price. On December 22, 1998, the closing price of a
share of the Common Stock on the NYSE was $4.50 per share.
(e) Recent Sales of Unregistered Securities. The Company, on June 30,
1998, sold 10,400,000 shares of Common Stock to Lipha at a purchase
price of $2.00 per share, and issued stock options to purchase an
aggregate of 1,171,040 shares of Common Stock to Merck KGaA and
Genpharm at an exercise price of $2.00 per share in exchange for
consulting services to be provided to the Company. The options are
exercisable commencing on July 10, 2001 and expire on April 30, 2003.
Such shares and stock options were issued pursuant to an exemption
provided by Section 4(2) and/or Section 4(6) of the Securities Act of
1933. Lipha, Merck KGaA and Genpharm have registration rights with
respect to the shares of Common Stock they own (see "Certain
Relationships and Related Transactions").
12
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
- ------ -----------------------
Fiscal Year Ended In
---------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales $ 60,380 $ 53,172 $ 57,959 $66,503 $69,169
Cost of goods sold 56,135 49,740 48,299 45,514 45,774
-------- -------- -------- ------- -------
Gross margin 4,245 3,432 9,660 20,989 23,395
Operating expenses:
Research and development 5,775 5,843 5,160 5,487 3,874
Selling, general and administrative 12,765 12,461 17,168 16,192 13,463
Asset impairment\restructuring charge 1,212 - 549 - -
-------- -------- -------- ------- -------
Total operating expenses 19,752 18,304 22,877 21,679 17,337
-------- -------- -------- ------- -------
Operating (loss) income (15,507) (14,872) (13,217) (690) 6,058
Settlements - - - 2,029 -
Other income-net 6,261 6,926 2,007 77 269
Interest (expense) income (382) (545) 118 32 (309)
-------- -------- -------- ------- -------
(Loss) income from continuing operations
before provision for income taxes (9,628) (8,491) (11,092) 1,448 6,018
Provision for income taxes - 410 - 836 1,785
-------- -------- -------- ------- -------
(Loss) income from continuing operations (9,628) (8,901) (11,092) 612 4,233
Income from discontinued operations - - 2,800 - 466
-------- -------- -------- ------- -------
(Loss) income before change in accounting principle (9,628) (8,901) (8,292) 612 4,699
Cumulative effect of change in accounting principle - - - - 14,128
-------- -------- -------- ------- -------
Net (loss) income $ (9,628) $ (8,901) $ (8,292) $ 612 $18,827
======== ========= ======== ======= =======
NET (LOSS) INCOME PER SHARE OF COMMON STOCK:
Continuing operations:
Basic $ (.45) $ (.48) $ (.60) $.04 $ .29
Diluted $ (.45) $ (.48) $ (.60) $.04 $ .26
Discontinued operations:
Basic - - .15 - .03
Diluted - - .15 - .03
Change in accounting principle:
Basic - - - - .99
-------- -------- -------- ------- -------
Diluted - - - - .85
-------- -------- -------- ------- -------
Net (loss) income
Basic $ (.45) $ (.48) $ (.45) $.04 $ 1.31
======== ========= ======== ======= =======
Diluted $ (.45) $ (.48) $ (.45) $.04 $ 1.14
======== ========= ======== ======= =======
Weighted average number of common and
common equivalent shares outstanding:
Basic 21,521 18,681 18,340 16,670 14,321
======== ======== ======== ======= =======
Diluted 21,521 18,681 18,340 17,143 16,495
======== ======== ======== ======= =======
BALANCE SHEET DATA
Working capital $ 29,124 $ 15,959 $ 20,716 $34,907 $19,996
Property, plant and equipment (net) 24,283 27,832 26,068 24,371 23,004
Total assets 82,924 72,697 84,946 90,917 69,202
Long-term debt, less current portion 1,143 2,651 2,971 4,259 5,490
Shareholders' equity 68,009 57,268 70,624 71,954 49,276
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS.
-------------
CERTAIN STATEMENTS IN THIS FORM 10-K CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,
INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO FUTURE
FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES OF
CURRENT PRODUCTS AS WELL AS THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED
PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD
CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED
HEREIN. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN
THIS FORM 10-K INCLUDE, AMONG OTHERS, (I) INCREASED COMPETITION FROM NEW AND
EXISTING COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS, (II) 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 AND (V) CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT
AGREEMENTS.
RESULTS OF OPERATIONS
General
The Company experienced operating losses of $15,507,000, $14,872,000 and
$13,217,000 for the fiscal years ended September 30, 1998, 1997 and 1996,
respectively. The losses were principally due to the continued volume and price
erosion on certain existing manufactured products without significant new
products at higher gross margins. Included in the net loss for fiscal year 1998
was a charge of $1,212,000 for asset impairment of the Company's Congers,
New York facility as a result of outsourcing the manufacture of most of the
products from such facility. Net sales growth in the current year was
attributable to new distributed products and increased sales of products sold
under the Supply Agreement with BASF. The sales growth led to some improvement
in gross margins in fiscal year 1998 compared to fiscal year 1997. Net sales and
gross margin declines in fiscal year 1997 from fiscal year 1996 were partially
offset by a reduction in operating expenses. 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 current
financial condition, PRI entered into a strategic alliance, completed on June
30, 1998, with Merck KGaA. Pursuant to the Stock Purchase Agreement, Merck
KGaA, through its subsidiary Lipha, purchased 10,400,000 newly-issued shares of
the Company's Common Stock for $20,800,000. A portion of the proceeds from the
stock sale were used to repay advances made to the Company under its existing
line of credit. In addition, the Company issued to Merck KGaA and 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 to be provided to the Company. As
part of the agreement, 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 will pay all of 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. To
date the Company has introduced three products under the Genpharm Distribution
Agreement and anticipates introducing several more in fiscal year 1999 (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.
14
<PAGE>
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
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 (see "Business-Marketing
and Customers" and "-Competition").
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 fiscal year ended September 30, 1998 of $60,380,000
increased $7,208,000, or 14%, from the corresponding period of the prior fiscal
year. The sales growth was primarily attributable to the continuing increase in
sales of two distributed products manufactured by BASF under the Supply
Agreement and the introduction of three new products. These include the
transdermal nicotine patch manufactured by Elan, Zorprin(R) manufactured by BASF
and the first product distributed by the Company under the Genpharm Distribution
Agreement. Net sales of these five products more than offset the discontinuance
of certain unprofitable products and the continuing decreases in pricing and
volume of three of the Company's manufactured products which had historically
accounted for a significant percentage of the Company's sales and gross margins.
The reductions in pricing and volume of these three products resulted
principally from the introduction of other generic drug manufacturers' products
in direct competition with the products. Net sales of distributed product for
the most recent fiscal year increased to approximately 44% of the Company's
total net sales compared to approximately 22% of the total for the same period
of the prior year continuing the trend of greater reliance upon sales of
distributed product. As the Company introduces new distributed products under
its distribution agreements, it is expected that this trend will continue. In
the later part of the year, prices were increased on a limited number of
products which do not generate adequate gross profit while discontinuing certain
unprofitable products. The Company is continuing the evaluation of its existing
product line and expects additional price increases and product deletions during
the first half of fiscal year 1999.
Net sales of $53,172,000 for the fiscal year ended September 30, 1997
decreased $4,787,000, or 8%, from sales of $57,959,000 for the year ended
September 30, 1996. The decline was due principally to lower pricing and volume
of one of the Company's significant products, and to a lesser extent, two other
significant products as described above, partially offset by higher volumes of a
lower margin manufactured product due to increased demand from one customer.
The reductions in pricing and volume resulted from increased competition from
other drug manufacturers. Net sales in the fourth quarter of fiscal year 1997
of two distributed products manufactured by BASF under the Supply Agreement
experienced significant increases over the same period of the prior year helping
to offset the decline in sales of certain manufactured products. Net sales of
distributed product as a percentage of the Company's total net sales for the
fiscal year 1997 increased to approximately 22% from approximately 16% in fiscal
year 1996.
Levels of sales are principally dependent upon, among other things, (i)
pricing levels and competition, (ii) market penetration for the existing product
line, (iii) approval of ANDAs and introduction of new manufactured products,
(iv) introduction of new distributed products and (v) the level of customer
service (see "Business-Competition").
15
<PAGE>
GROSS MARGINS
The gross margin for the twelve-month period ended September 30, 1998 was
$4,245,000 (7% of net sales) compared to $3,432,000 (6% of net sales) for the
same period of the prior fiscal year. The gross margin improvement was
primarily due to increased margin contributions from higher margin products
manufactured by BASF under the Supply Agreement and the introduction of three
new products. These improvements more than offset the continuing lower selling
prices and decreased volumes of certain significant manufactured products,
unfavorable manufacturing variances caused by a shift in production during the
later part of fiscal year 1998 of the largest volume manufactured product from
the Company's Congers facility to BASF and higher inventory write-offs resulting
from the write-off of discontinued and slow moving products.
Inventory write-offs amounted to $2,229,000, $1,630,000 and $1,395,000 for
the twelve-month periods ended September 30, 1998, 1997 and 1996, respectively.
The increase in the current period was primarily attributable to the write-off
of material and obsolete inventory of approximately $768,000 due to discontinued
products. Inventory write-offs taken in the normal course of business are
related primarily to the disposal of finished products due to short shelf life.
During fiscal year 1998, four of the Company's products accounted for
approximately 63% of its net sales compared to 56% and 48%, respectively, of net
sales in fiscal years 1997 and 1996. One of such products has historically
accounted for a significant percentage of the Company's net sales and gross
margin. A competitor of the Company received FDA approval for this product in
fiscal year 1996 when, prior to that time, the Company had been the sole generic
manufacturer. As a result of the increased competition, net sales of that
product decreased from $13,581,000 in fiscal year 1996 to $6,098,000 in fiscal
year 1997 to $3,969,000 in fiscal year 1998 with corresponding decreases in
gross margin. Due to the increased competition with respect to this and other
products, the Company's sales and gross margins have been materially and
adversely affected. The Company has implemented measures to lessen the overall
impact of these products including adding additional products through new and
existing distribution agreements, increasing margins and volumes on certain
existing products through the Supply Agreement with BASF, manufacturing process
improvements and cost reductions. There can be no assurances that these
measures will return the Company to profitability.
The Company's gross margin of $3,432,000 (6% of net sales) for the fiscal
year ended September 30, 1997 decreased significantly from $9,660,000 (17% of
net sales) in the corresponding period of the prior fiscal year. The gross
margin decline was attributable to the continued lower selling prices and
decreased volumes of certain significant manufactured products resulting from
increased competition. The increased gross margin contribution from the
additional fourth quarter fiscal 1997 sales of products manufactured by BASF
partially offset the decline in margins, however, the effect on the total margin
for the year was negligible.
OPERATING EXPENSES
Research and Development
Research and development expenses of $5,775,000 for the twelve-month period
ended September 30, 1998 decreased $68,000 from the corresponding period of the
prior fiscal year. In fiscal year 1998, the Company expensed $967,000 for
advances made to Fine-Tech Ltd. ("Fine-Tech") for the development of raw
material being utilized in the development of a finished dosage form of a
generic product. The Company, in fiscal year 1997, made advances to Elan for the
development of transdermal products, however similar advances were not made in
fiscal year 1998. In fiscal year 1998, the Company incurred higher costs for IPR
and increased biostudy activity. In August 1997, the Company acquired Clal's 51%
ownership interest in IPR in which PRI previously had owned 49%. The current
year cost of $1,763,000 for research and development expenses at IPR increased
$733,000 over the aggregate cost in fiscal year 1997 due in part to the Company
absorbing 100% of the expenses in the current year compared to 49% in the prior
year. During the fourth quarter of fiscal year 1997, the Company's domestic
research and development program was fully integrated with the research
operations in Israel with IPR assuming responsibility for certain functions
previously performed in the United States (see "Notes to Financial Statements-
Acquisition of Joint Venture").
16
<PAGE>
The Company has ANDAs for three proposed products pending with the FDA and
awaiting approval. The Company expects to commence biostudies for six
additional product submissions in fiscal year 1999. Recently, PRI received FDA
approval of its ANDAs for two products, one 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 is required to pay
all of the research and development costs associated with a portfolio of
products covered by the Genpharm Distribution Agreement (see "Notes to Financial
Statements-Distribution Agreements-Genpharm, Inc.").
Research and development expenses for the twelve-month period ended September
30, 1997 of $5,843,000 increased $683,000 from $5,160,000 for the twelve-month
period ended September 30, 1996. In fiscal year 1997, advances to Elan amounted
to $2,258,000, while in fiscal year 1996 payments of $2,942,000 were partially
offset by a reimbursement from Elan of $1,500,000. The Company recorded an
aggregate of $1,030,000 in research and development expenses for IPR in fiscal
year 1997 compared to $499,000 in the fiscal year 1996. The higher cost of the
Elan transactions and IPR were partially offset by lower personnel costs in the
domestic operation.
Selling, General and Administrative
Selling, general and administrative costs of $12,765,000 (21% of net sales)
for the twelve months ended September 30, 1998 increased $304,000 from expenses
in the corresponding period of the prior fiscal year. The higher costs in the
current period were primarily attributable to strengthening the sales force and
expanding marketing efforts in anticipation of product introductions.
Selling, general and administrative costs for the fiscal year ended September
30, 1997 of $12,461,000 (23% of net sales) decreased from $17,168,000 (30% of
net sales) for the corresponding period ended September 30, 1996. The 27%
decrease was primarily attributable to a decline in personnel costs resulting
from head count reductions and the amendment of a retirement plan (see "--
Restructuring Charge" and "Notes to Financial Statements-Commitments,
Contingencies and Other Matters-Retirement Plans" and "-Restructuring and Cost
Reductions"). In addition, fees for consulting and professional services, costs
for advertising and developmental marketing, and bad debt expense were reduced
in fiscal year 1997.
Asset Impairment
The Company recorded a charge of $1,212,000 in fiscal year 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 of
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, although there
can be no assurance the Company will be able to sell or lease the facility.
Restructuring Charge
The Company recorded a restructuring charge of $549,000 in fiscal year 1996
to provide for costs associated with the reduction and reorganization of
personnel. The implementation of the restructuring plan also included
reductions in spending on advertising, marketing, professional services and, to
a lesser extent, certain internal and external research and development expenses
(see "Notes to Financial Statements-Commitments, Contingencies and Other
Matters-Restructuring and Cost Reductions").
OTHER INCOME
Other income of $6,261,000 for the year ended September 30, 1998 included
income of approximately $6,100,000 from the sale and release of product rights
to Elan in fiscal year 1998 and a $600,000 fee paid by Generics (UK) Ltd., a
subsidiary of Merck KGaA ("Generics"), pursuant to an agreement to share costs
in the research and development operation in Israel partially offset by a write-
off of a $421,000 investment in a software company. Other income of $6,926,000
for the fiscal year ended September 30, 1997 included approximately $3,900,000
of income from the sale and release of product rights to Elan in fiscal year
1997 and a gain of
17
<PAGE>
$3,433,000 on the sale of Sano Corporation common stock partially offset by a
loss on the sale of stock of Fine-Tech. In future periods, it is anticipated
that there will no additional income from the sale of assets to Elan (see "--
Liquidity and Capital Resources" and "Notes to Financial Statements-Distribution
Agreements-Elan Corporation").
Other income for the fiscal year ended September 30, 1997 increased
$4,919,000 from $2,007,000 in the corresponding period of the prior fiscal year.
The increase is attributable to income resulting from an amendment in fiscal
year 1997 of a distribution agreement with Elan and a gain on the sale of Sano
Corporation common stock partially offset by a loss on the sale of Fine-Tech
stock (see "--Liquidity and Capital Resources" and "Notes to Financial
Statements-Distribution Agreements-Elan Corporation").
INCOME TAXES
Management has determined, based on the Company's recent performance and the
uncertainty of the generic drug business in which it 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 twelve-month periods ended
September 30, 1998, 1997 or 1996. 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 (see "Notes to Financial Statements-
Income Taxes").
DISCONTINUED OPERATIONS
In September 1991, the Company's Board of Directors determined to discontinue
the operations of Quad Pharmaceuticals, Inc. ("Quad"), a wholly-owned subsidiary
of Par. The Board based its decision in large part on the judgement that the
time, resources and financial commitment required to rehabilitate Quad's
operations would not be economically prudent. Accordingly, it was determined to
sell all of Quad's assets on an orderly basis. At that time, the Company
provided for an estimated loss on the disposition of Quad, which included a net
loss on the disposition of Quad's assets based upon their estimated realizable
value. The measurement date was the date the Board determined not to attempt to
rehabilitate Quad's operations.
The remaining reserve in fiscal year 1996 for the liabilities of Quad was
approximately $2,800,000. The reserve included amounts for notes payable to
former officers, amounts due to customers, accrued expenses and accounts
payable. Such liabilities were direct liabilities of Quad which the Company
believed it had no obligation to satisfy. In fiscal year 1996, the Company
recorded the $2,800,000 as income from discontinued operations, reversing the
remaining reserves of Quad as the statute of limitations for them expired. The
income from discontinued operations does not reflect any tax effect (see "Notes
to Financial Statements-Discontinued Operations").
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $13,165,000 to $29,124,000 at September 30, 1998
from $15,959,000 at September 30, 1997. The increase was principally due to the
equity investment by Merck KGaA in June 1998 and an increase in accounts
receivable. The working capital ratio improved in the current period to 3.2x
from 2.3x at fiscal 1997 year end.
Merck KGaA, through its subsidiary Lipha, paid the Company $20,800,000, or
$2.00 per share, on June 30 1998 for 10,400,000 newly-issued shares of PRI's
Common Stock. The Company used approximately $3,600,000 of the net proceeds
from the stock sale to repay advances made to it under its existing line of
credit and the remainder is planned to be used for working capital, including
possible business expansion. The Company's liquidity in fiscal year 1998
significantly improved as a result of the sale of Common Stock to Merck KGaA and
18
<PAGE>
the payments received by the Company for releasing certain product rights to
Elan (see "Notes to Financial Statements-Strategic Alliance").
In return for relinquishing certain product distribution rights to Elan
under a prior distribution agreement, PRI received cash payments of
approximately $5,700,000 in May 1998, which included approximately $2,100,000 as
a prepayment of a promissory note. The proceeds from these payments were used
to reduce revolving credit line balances. On September 29, 1998, the Company
and Elan entered into the Termination Agreement with respect to their
distribution agreement in which the Company would retain the exclusive
distribution rights in the United States to the nicotine patch for a period of
up to twelve months. 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
less any profit generated by sales of the product between September 29, 1998 and
the termination date in consideration of the termination of Par's long-term
distribution rights for a nicotine patch and a nitroglycerin patch (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 1999 and recorded a charge of $1,212,000 in fiscal
year 1998 for asset impairment 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 (including
proceeds from the stock sale to Lipha) 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
The Company's total outstanding debt of $1,410,000 is classified as long-term
at September 30, 1998. The amount consists primarily of capital leases and an
outstanding mortgage loan with a bank (see "Notes to Financial Statements-Long-
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 Loan Agreement was amended
in October 1998. 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. The revolving credit facility is subject to covenants based on
various financial benchmarks. In December 1998, GECC waived events of default
related to financial covenants. As of December 22, 1998, the borrowing base was
approximately $15,700,000 and no amounts were outstanding under the line of
credit.
At September 30, 1998 the Company has a mortgage loan with a bank in the
original principal amount of $1,340,000. The loan bears interest during the
first five years of its term at a rate of 8.5% per annum and thereafter at the
prime rate plus 1.75%. It is due in equal monthly installments until May 1,
2001, at which time the remaining principal balance with interest is due. The
loan is secured by certain real property (see "Business-Property"). At
September 30, 1998, the outstanding balance of the loan was $1,050,000. At
September 30, 1998, the Company had outstanding balances of $317,000 under
capital leases and $32,000 under a line of credit maintained at the same bank as
the mortgage loan, which line is secured by equipment purchased. The
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<PAGE>
interest rate on the line of credit is based on the prime rate plus a premium
(see "Notes to Financial Statements-Long-Term Debt").
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 expensed 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.
SUBSEQUENT EVENT
In an attempt to reduce operating losses, the Company plans to implement
measures during fiscal year 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 are expected to result in a charge of approximately
$3,000,000 in the quarter ended December 31, 1998, including severance
payments and other employee termination benefits, inventory reserves and write-
downs for the impairment of assets affected by the termination of the six
products. 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.
ITEM 6. DEFAULTS UPON SENIOR SECURITIES.
- ------ -------------------------------
At September 30, 1998, the Company was in breach of financial covenants
contained in the Loan Agreement with GECC and GECC waived such breaches in
December 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ------- ----------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------ -------------------------------------------
See Index to Financial Statements after Signature Page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------------------
Not applicable.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------- --------------------------------------------------
DIRECTORS
The Company's Certificate of Incorporation provides that the Board of
Directors (the "Board") is divided into three classes, with the term of office
of one class expiring each year. The Class I, Class II and Class III directors
of the Company have terms which expire in 2000, 2001 and 1999, respectively.
The following table sets forth certain information with respect to each of Class
I, II and III directors and the year each was first elected as a director:
<TABLE>
<CAPTION>
YEAR
OF FIRST
NAME AGE (AS OF 12/98) ELECTION
---- ---------------- --------
Class I
<S> <C> <C>
Anthony S. Tabatznik(1)............................................... 51 1998
Since 1983, Chairman and director of Generics (UK) Ltd.; since 1989,
director of Generics Group BV, now known as Merck Generics Group BV
and since 1994, Chairman and director of Merck Generics Ltd. Such
companies are involved in the manufacture and distribution of
generic pharmaceutical products. Founder of The Generics Group
Ltd. and brother of J. Neil Tabatznik.
J. Neil Tabatznik(1).................................................. 49 1998
Since July 1993, Chairman of Genpharm, a Canadian manufacturer and
distributor of generic pharmaceutical products. Prior to July
1993, an attorney in private practice. Brother of Anthony S.
Tabatznik.
Class II
Kenneth I. Sawyer(1)................................................... 53 1989
Since October 1990, Chairman of the Board of the Company. Since
October 1989, President and Chief Executive Officer of the Company.
From September 1989 to October 1989, Interim President and Chief
Executive Officer of the Company. From August 1989 to September
1989, counsel to the Company. From May 1989 to August 1989, an
attorney in private practice. From prior to 1987 to May 1989, Vice
President and General Counsel of Orlove Enterprises, Inc., a
company engaged in the manufacture and distribution of
pharmaceutical and other products.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
YEAR
OF FIRST
NAME AGE (AS OF 12/98) ELECTION
---- ---------------- --------
<S> <C> <C>
Mark Auerbach(1)(2)................................................... 60 1990
Since June 1993, the Senior Vice President and Chief Financial
Officer of Central Lewmar L.P., a distributor of fine papers. From
August 1992 to June 1993, a partner of Marron Capital L.P., an
investment banking firm. Since December 1995, Chief Financial
Officer of Oakhurst Company, Inc., and Steel City Products, Inc.,
each a publicly traded distributor of automotive products, and
Chief Executive Officer of Oakhurst Company, Inc. from December
1995 to May 1997. Also a director of Oakhurst Company, Inc.
Stephen A. Ollendorff(1)............................................... 60 1998
Practicing attorney for more than the past five years. Since
December 1990, of counsel to Hertzog, Calamari & Gleason, a law
firm. Chief Executive Office and director of Acorn Venture Capital
Corporation, a publicly traded holding company, for more than the
past five years. Director of Computer Products, Inc., a publicly
traded designer, manufacturer and seller of power supplies.
Class III
Bernhard Scheuble(1)..................................................... 45 1998
Since 1998, member of the Executive Board of Merck KGaA, Darmstadt,
Germany. From 1996 to 1998, Head of Pharma Ethicals, Merck KGaA,
from 1994 to 1995, Head of Pharma International, E. Merck,
Darmstadt, Germany, and from 1992 to 1994, General Manager, Liquid
Crystals Unit, E. Merck.
Klaus H. Jander(1)(2)................................................... 58 1998
Since 1990, a partner of Rogers & Wells LLP, a law firm. Since
1997, a member of the Executive Committee of Rogers & Wells LLP.
</TABLE>
- --------------------------------------------
(1) A member of the Compensation and Stock Option Committee of the Board.
(2) A member of the Audit Committee of the Board.
Pursuant to the Stock Purchase Agreement, Lipha has the right to designate
a majority of the directors on the Board and the Company has agreed to use its
best efforts to cause such designees to be elected to the Board (see "Certain
Relationships and Related Transactions"). Mr. Scheuble has submitted his
resignation from the Board. The resignation is effective January 1, 1999. Lipha
has the right to designate a nominee to fill the vacancy pursuant to the Stock
Purchase Agreement. Lipha has indicated its intent to name Michael Urwin, Chief
Executive Officer designee of Merck Generics, to fill the vacancy. The Board
anticipates acting on this matter prior to the effective date of Mr. Scheuble's
resignation.
EXECUTIVE OFFICERS
The executive officers of the Company consist of Mr. Sawyer as President,
Chief Executive Officer and Chairman of the Board and Dennis J. O'Connor as Vice
President, Chief Financial Officer and Secretary. The
22
<PAGE>
executive officers of Par consist of Mr. Sawyer, Mr. O'Connor and Scott Tarriff
as Executive Vice President of Business, Sales and Marketing. Mr. O'Connor, age
46, has served as Vice President, Chief Financial Officer and Secretary of the
Company since October 1996. From June 1995 to October 1996, he served as
Controller of Par. Mr. O'Connor served as Vice President-Controller of
Tambrands, Inc., a consumer products company, from November 1989 to June 1995.
Since January 1998, Mr. Tarriff has served as Executive Vice President of
Business, Sales and Marketing of Par. Since June 1989, Mr. Tarriff, age 39, was
an employee of Bristol-Myers Squibb Company, a drug manufacturer, serving as
Senior Director of Marketing, Business Development and Strategic Planning from
1995 to 1997 and Director of Marketing from 1992 to 1995.
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
As a public company, the Company's directors, executive officer and 10%
beneficial owners are subject to reporting requirements under Section 16(a) of
the Securities Exchange Act of 1934, as amended. To the Company's knowledge,
there were no delinquent filers under such Section 16(a) during fiscal year
1998.
ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------
The following table sets forth compensation earned by or paid, during fiscal
years 1996 through 1998, to the Chief Executive Officer of the Company and the
most highly compensated executive officers of the Company and/or Par who earned
over $100,000 in salary and bonus at the end of fiscal year 1998 (the "Named
Executives"). The Company awarded or paid such compensation to all such persons
for services rendered in all capacities during the applicable fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- ---------------------------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) OPTIONS(#) COMPENSATION($)(2)
- ------------------ ---- --------- -------- ------------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer, 1998 $350,000 - - 500,000 $78,401
President, Chief 1997 $350,000 - - - $ 2,707
Executive Officer 1996 $370,692 - - 75,000 $ 2,674
and Chairman
Dennis J. O'Connor (3) 1998 $142,500 - - 37,500 $ 2,191
Vice President 1997 $137,994 - - 30,000 $ 2,121
Chief Financial
Officer and
Secretary
Scott Tariff 1998 $124,519 - - 200,000 $ 46
Executive Vice
President of Business,
Sales and Marketing
</TABLE>
- --------------------------
(1) The Named Executives did not hold any shares of restricted stock at the
end of fiscal year 1998.
(2) For fiscal year 1998, includes insurance premiums paid by the Company
for term life insurance for the benefit of the Named Executives as
follows: Mr. Sawyer-$74, Mr. O'Connor-$53 and Mr. Tariff-$46. The
amounts for Mr. Sawyer include $75,500 for the forgiveness of a loan
from the Company and $2,827 for the maximum potential estimated dollar
value of the Company's portion of insurance premium payments from a
split-dollar life insurance policy as if premiums were advanced to the
executive without interest until the earliest time the premiums may be
refunded by Mr. Sawyer to the Company. Also includes the following
amounts contributed by the Company to the Company 401(k) plan: Mr.
O'Connor-$2,138.
(3) Mr. O'Connor did not become a Named Executive until fiscal year 1997,
even though he was previously employed by the Company.
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<PAGE>
The following table sets forth stock options granted to the Named Executives
during fiscal year 1998.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Stock
Individual Grants Price Appreciation for Option Term
--------------------------------------------------------- -----------------------------------
Shares % of Total
Underlying Options Granted
Options to Employees in Exercise Expiration
Name Granted(#) Fiscal Year Price ($) Date 0%($) 5%($) 10%($)
- ---- ----------- ----------- --------- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer (1) 500,000 33.79% $2.250 10/27/02 - $310,817 $686,824
Scott Tariff (2) 200,000 13.51% $1.500 1/5/03 - $ 82,884 $183,153
Dennis J. O'Connor (3) 5,000 0.34% $2.250 10/27/02 - $ 3,108 $ 6,868
Dennis J. O'Connor (1) 17,500 1.18% $2.250 10/27/02 - $ 10,879 $ 24,039
Dennis J. O'Connor (2) 15,000 1.01% $1.500 1/5/03 - $ 6,216 $ 13,736
</TABLE>
- --------------------------
(1) Represents options granted pursuant to the Company's 1990 Incentive
Option Plan on October 28, 1997, one-third of which become exercisable
on July 1, 1999 and two-thirds of which become exercisable on July 1,
2001. On October 28, 1997, the Board approved the grant of new five-
year options to the Named Executives at an exercise price of $2.25, upon
surrender for cancellation of certain outstanding options.
(2) Represents options granted pursuant to the Company's 1990 Incentive
Option Plan on January 1, 1998, one-third of which became exercisable
July 1, 1998, one-third of which become exercisable on July 1, 1999 and
one-third of which become exercisable on July 1, 2000.
(3) Represents options granted pursuant to the Company's 1990 Incentive
Option Plan on October 28, 1997, one-third of which became exercisable
on April 28, 1998, one-third of which become exercisable on April 28,
1999, and one-third of which become exercisable on April 28, 2000.
In connection with the strategic alliance with Merck KGaA, each of Messrs.
Sawyer and Tarriff have agreed not to exercise his stock options for a period
ending on July 10, 2001, and Mr. O'Connor has agreed not to exercise certain of
his stock options until June 30, 2001, except for installments of one-third of
his stock options on each of June 30, 1999, 2000 and 2001.
The following table sets forth the stock options exercised by the Named
Executives during fiscal year 1998 and the value, as of September 30, 1998, of
unexercised stock options held by the Named Executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)
--------------------- -------------
Shares
Acquired on Value
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer - - - 500,000 - $1,000,000
Scott Tariff - - - 200,000 - $ 550,000
Dennis J. O'Connor - - 23,333 44,167 $24,583 $ 100,417
</TABLE>
COMPENSATION OF DIRECTORS
For service on the Board in fiscal year 1998, Directors who are not employees
of the Company or any of its subsidiaries received an annual retainer of
$12,000, a fee of $1,000 for each meeting of the Board attended in person or by
teleconference, and a fee of $750 for each committee meeting attended in person
or by teleconference, subject to a maximum of $1,750 per day. Chairmen of
committees received an additional annual retainer of $5,000 per committee. New
non-employee Directors are granted options to purchase 5,000 shares Common Stock
on the date initially elected to the Board and on each following day on which
the shareholders elect directors pursuant to the Company's 1997 Directors Stock
Option Plan (the "Directors Plan"). Non-employee Directors are entitled to only
one automatic option grant each year and are entitled to the grant of an
24
<PAGE>
option to purchase an additional 6,500 shares of Common Stock each year if they
own at least 2,500 shares of issued Common Stock for each year they are granted
options under the Plan. These additional options are subject to forfeiture if,
in certain circumstances, the non-employee Director sells Common Stock of the
Company. Directors who are employees of the Company received no additional
remuneration for serving as directors or as members of committees of the Board.
All directors are entitled to reimbursement for out-of-pocket expenses incurred
in connection with their attendance at Board and committee meetings. Messrs. A.
Tabatznik, N. Tabatznik, Scheuble and Jander have waived their rights to receive
options to purchase Common Stock under the Directors Plan. In addition, Messrs.
Ollendorff, A. Tabatznik, N. Tabatznik and Scheuble have waived their receipt of
cash compensation for service on the Board.
EMPLOYMENT AGREEMENTS AND TERMINATION ARRANGEMENTS
The Company has entered into an employment agreement with Mr. Sawyer, which
provides for his employment through October 4, 2000, subject to earlier
termination by the Company for Cause (as such term is defined in the agreement).
Mr. Sawyer's agreement provides for a rolling three-year term of employment
which is automatically extended each year for an additional one year unless
either party provides written notice by July 4th of such year that he or it
desires not to renew the agreement. Under the agreement with Mr. Sawyer, the
Company is required to use its best efforts to cause him to be reelected to the
Board during his term of employment. Mr. Sawyer, pursuant to the terms of his
employment agreement, is and will be required to serve, if so elected, on the
Board of Directors as well as any committees thereof.
Mr. Sawyer's agreement provides for certain payments upon termination of his
employment. Upon termination of Mr. Sawyer's employment without cause (as such
term is defined in the agreement) by the Company or for the Company's material
breach, Mr. Sawyer is entitled to receive the balance of his current salary for
the remainder of the employment term and the amount of his current bonus
multiplied by the number of years remaining under his agreement. A material
breach by the Company of the employment agreement includes, but is not limited
to, a termination without cause and a change of his responsibilities. In the
event of termination of Mr. Sawyer's employment for death, disability or for
cause, Mr. Sawyer is entitled to receive his current base salary through the
date of termination and, in the event of death or disability, a pro-rated amount
of his last annual bonus. As a result of a material breach by the Company of his
employment agreement following a change of control (as such term is defined in
the agreement) of the Company, Mr. Sawyer is entitled to receive, if such a
termination occurs within two years following the change of control of the
Company, a lump sum payment equal to the lesser of three times the sum of his
annual base salary and most recent bonus or the maximum amount permitted without
the imposition of an excise tax on Mr. Sawyer or the loss of a deduction to the
Company under the Internal Revenue Code of 1986, as amended (the "Code"), plus
reimbursement of certain legal and relocation expenses incurred by Mr. Sawyer as
a result of the termination of his employment and maintenance of insurance,
medical and other benefits for 24 months or until Mr. Sawyer is covered by
another employer for such benefits.
In April 1998, Mr. Sawyer and the Company amended Mr. Sawyer's employment
agreement. Mr. Sawyer agreed to waive breaches of his employment agreement which
would arise out of consummation of the strategic alliance with Merck KGaA, to
relinquish his title and position as President of the Company and each of its
subsidiaries if Lipha exercises its right to designate the President of the
Company and each of its subsidiaries. The Company agreed to forgive, in each
year that Mr. Sawyer remains employed by the Company, one-third of the principal
amount of his promissory note, plus accrued interest on the forgiven portion.
The outstanding balance of the note, including interest, was approximately
$318,000 at September 30, 1998. The entire unpaid principal of the promissory
note and accrued interest would be canceled upon certain events, including
termination of Mr. Sawyer's employment without cause and the expiration of this
employment agreement in accordance with its terms.
The Company has entered into a severance agreement with Mr. O'Connor, dated
October 23, 1996. The agreement provides, with certain limitations, that upon
the termination of Mr. O'Connor's employment by the Company for any reason other
than for cause or by Mr. O'Connor for good reason or following a change of
control (as such terms are defined in the agreement), Mr. O'Connor is entitled
to receive a severance payment. The amount of the payment is to be equal to six
months of his salary at the date of termination, with such amount to be
increased by an additional month of salary for every full month he has been
employed by the Company in his present position, up to a maximum of six
additional month's salary.
25
<PAGE>
The Company has entered into an employment agreement with Mr. Tarriff, dated
February 20, 1998. Upon termination of Mr. Tarriff's employment within the first
year of employment other than by the Company for cause (as such term is defined
in the agreement), Mr. Tarriff is entitled to receive the balance, if any, of
his salary for the first year of employment. In the event of termination of Mr.
Tarriff's employment after one year of employment by Mr. Tarriff for good reason
(as such term is defined in the agreement) or by the Company without cause, Mr.
Tarriff is entitled to receive a severance payment equal to one year of his then
current salary less any amount of compensation paid by a new employer for the
balance of the year from the termination date. In connection with his employment
by the Company, he was granted options to purchase 200,000 shares of Common
Stock at an exercise price of $1.50 per share.
Under the stock option agreements with Messrs. Sawyer, O'Connor and Tarriff,
any unexercised portion of the options becomes immediately exercisable in the
event of a change of control (as such term is defined in their agreements).
However, each of such persons has agreed that the consummation of the strategic
alliance with Merck KGaA did not constitute a change in control under his stock
option agreement.
PENSION PLAN
The Company maintains a defined benefit plan (the "Pension Plan") intended to
qualify under Section 401(a) of the Code. Effective October 1, 1989, the
Company ceased benefit accruals under the Pension Plan with respect to service
after such date. The Company intends that distributions will be made, in
accordance with the terms of the Plan, to participants as of such date and/or
their beneficiaries. The Company will continue to make contributions to the
Pension Plan to fund its past service obligations. Generally, all employees of
the Company or a participating subsidiary who completed at least one year of
continuous service and attained 21 years of age were eligible to participate in
the Pension Plan. For benefit and vesting purposes, the Pension Plan's "Normal
Retirement Date" is the date on which a participant attains age 65 or, if later,
the date of completion of 10 years of service. Service is measured from the
date of employment. The retirement income formula is 45% of the highest
consecutive five-year average basic earnings during the last 10 years of
employment, less 83 1/3% of the participant's Social Security benefit, reduced
proportionately for years of service less than 10 at retirement. The normal
form of benefit is life annuity, or for married persons, a joint survivor
annuity. None of the Named Executives had any years of credited service under
the pension plan.
The Company has a defined contribution, social security integrated Retirement
Plan (the "Retirement Plan") providing retirement benefits to eligible employees
as defined in the Plan. The Company has suspended employer contributions to the
Retirement Plan effective December 30, 1996. Consequently, participants in the
Retirement Plan are no longer 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 this 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.
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
The Compensation and Stock Option Committee (the "Compensation Committee") of
the Board consists of Messrs. A. Tabatznik, N. Tabatznik, Sawyer, Auerbach,
Ollendorff, Scheuble and Jander.
Mr. J. Neil Tabatznik, a director of the Company, is the Chairman of
Genpharm, which develops, manufactures and distributes products to the Company
pursuant to the Genpharm Distribution Agreement. Mr. Anthony S. Tabatznik, a
director of the Company, is a director of Generics, a subsidiary of Merck KGaA.
Dr. Bernhard Scheuble, a director of the Company, is a member of the Executive
Board of Merck KGaA, which beneficially owns 42.5% of the Common Stock. The
Company and Genpharm and its affiliate are presently parties to distribution
agreements entered into in 1992 and 1993. Under such distribution agreements,
payments by the Company to Genpharm and an affiliate in fiscal year 1998
accounted for less than five percent (5%) of the Company's and Genpharm's
consolidated gross revenues. Further, Generics and the Company are negotiating
a development agreement pursuant to which each of Generics and the Company would
fund one-half of the
26
<PAGE>
research budget of IPR each year. The budget to be funded would not exceed
$2,000,000. In exchange for the funding and a previous payment by Generics of
$600,000, Generics would receive the exclusive rights to manufacture and
distribute products developed by IPR after the effective date of the agreement
worldwide, except for the United States, where the Company would have exclusive
manufacturing and distribution rights. The Company anticipates signing an
agreement with Generics in fiscal year 1999.
Until September 1998, Mr. Kenneth I. Sawyer, the Chairman, President and
Chief Executive Officer of the Company, served as a director of Authorgenics,
Inc., a developer of software ("Authorgenics"), and Mr. Stephen A. Ollendorff
served as a director and Executive Vice President of Authorgenics. Mr.
Ollendorff was not granted any cash compensation for his service as director and
Executive Vice President of Authorgenics.
At various times during fiscal years 1996 and 1997, the Company made
unsecured loans to Mr. Sawyer. Such loans are evidenced by a single promissory
note, which bears interest at the rate of 8.25% per annum. Interest and
principal are due on the earlier of August 14, 2002, or the termination of Mr.
Sawyer's employment with the Company. As of September 30, 1998, the outstanding
principal balance of the note, plus accrued interest, was approximately
$318,000. The Company has agreed to forgive the note over a three-year period,
provided that Mr. Sawyer remains employed by the Company (see "--Executive
Compensation--Employment Agreements and Termination Arrangements").
Mr. Stephen A. Ollendorff, a director of the Company, is of counsel to the
law firm of Hertzog, Calamari & Gleason, which acts as counsel for the Company
and which received fees in fiscal year 1998 of approximately $600,000, including
representation of the Company in the negotiation of the transactions with Merck
KGaA and the shareholder approval thereof. Such firm represents the Company in
the current fiscal year and has represented the Company in prior fiscal years
for various legal matters. Mr. Ollendorff is a consultant to the Company and
was paid $76,550 in fiscal year 1998. Pursuant to a renewable one-year
consulting agreement, the Company has agreed to pay Mr. Ollendorff $76,800 per
year. Mr. Ollendorff holds stock options to purchase 60,000 shares of Common
Stock, none of which are presently exercisable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
The following table sets forth, as of the close of business on December 17,
1998, the beneficial ownership of the Common Stock by (i) each person known
(based solely on a review of Schedules 13Ds) to the Company to be the beneficial
owner of more than 5% of the Common Stock, (ii) each Director of the Company,
(iii) the Named Executives as defined in the "Executive Compensation" section of
this report, and (iv) all directors and current executive officers of the
Company and Par as a group (based solely in respect of clauses (ii),(iii) and
(iv) upon information furnished by such persons). Under the rules of the
Securities and Exchange Commission, a person is deemed to be a beneficial owner
of a security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose of or to direct the disposition
of such security. In general, a person is also deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership within 60 days. Accordingly, more than one person may be deemed to be
a beneficial owner of the same securities.
27
<PAGE>
<TABLE>
<CAPTION>
SHARES OF % OF
COMMON COMMON
NAME OF BENEFICIAL OWNER STOCK STOCK
------------------------ ----- -----
<S> <C> <C>
Merck KGaA(1)............................................................. 12,462,972 42.5
Kenneth I. Sawyer(2)...................................................... 151,900 *
Stephen A. Ollendorff(2).................................................. 2,975 *
Anthony S. Tabatznik(2)(3)................................................ 2,500 *
J. Neil Tabatznik(2)...................................................... 2,500 *
Mark Auerbach(2).......................................................... 2,500 *
Klaus H. Jander(2)........................................................ 0 *
Bernhard Scheuble(2)...................................................... 0 *
Dennis J. O'Connor(4)..................................................... 24,952 *
Scott Tariff.............................................................. 7,078 *
All directors and current executive officers (as of 12/17/98) as a
group (nine persons)(4).................................................. 194,405 *
</TABLE>
________________________
* Less than 1%.
(1) The business address of Merck KGaA is Frankfurter Strasse 250, 64271,
Darmstadt, Germany. Includes 249,700 shares of Common Stock which may
be acquired by Genpharm, a subsidiary of Merck KGaA, upon exercise of
warrants exercisable on or prior to February 15, 1999. Warrants for
99,700 of such shares have an exercise price of $6.00 per share and
warrants for 150,000 of such shares have an exercise price of $10.00
per share. Does not include an additional 1,171,040 shares which may
be acquired upon exercise of options granted to Merck KGaA and
Genpharm. Such options are not exercisable on or prior to February 15,
1999. Dr. Scheuble is a member of the Executive Board of Merck KGaA.
(2) A current Director of the Company.
(3) Does not include 501,400 shares of Common Stock held by a family trust,
the corporate trustee of which has the power to direct the disposition
and voting of such shares. Mr. Tabatznik disclaims beneficial ownership
of the aforesaid shares of Common Stock.
(4) Includes 23,333 shares of Common Stock which may be acquired upon the
exercise of options which are exercisable on or prior to February 15,
1999 under the Company's stock option plans.
The business address of each Director and Named Executive of the
Company, for the purposes hereof, is in care of Pharmaceutical Resources, Inc.,
One Ram Ridge Road, Spring Valley, New York 10977.
Under the Stock Purchase Agreement between the Company and Lipha, Lipha
has the right to nominate a majority of the members of the Board. In addition,
Lipha has agreed to refrain from taking certain actions, including proposing
that the Company engage in a business combination or other extraordinary
transactions, subject to certain exceptions (see "Certain Relationships and
Related Transactions").
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
Merck KGaA Transactions. On June 30, 1998, the Company completed a
strategic alliance with Merck KGaA, Darmstadt, Germany, following approval by
the shareholders of the Company at its Annual Meeting of Shareholders held in
June 1998. The strategic alliance included the sale of 10,400,000 shares of
Common Stock (the "Shares") to Lipha, a subsidiary of Merck KGaA, at $2.00 per
Share, and the issuance to Merck KGaA and Genpharm, a subsidiary of Merck KGaA,
of options (each, an "Option" and collectively, the "Options") to purchase up to
an aggregate of 1,171,040 shares of Common Stock (the "Option Shares") at an
exercise price of
28
<PAGE>
$2.00 per share in exchange for certain services. The sale of the Shares was
made pursuant to the terms and conditions of that certain Stock Purchase
Agreement, dated March 25, 1998, between the Company and Lipha (the "Stock
Purchase Agreement"). The issuance of the Options was made pursuant to terms
and conditions of separate Services Agreements entered into with each of Merck
KGaA and Genpharm.
The Company used a significant portion of the net cash proceeds from the sale
of the Shares to repay certain advances made to it under its existing line of
credit and the remainder is being used for working capital, including expansion
of the Company's operations. The agreement by the Company to sell the Shares and
to grant and issue the Options was part of an overall transaction in which
certain exclusive distribution rights and services are to be provided to the
Company under the Genpharm Distribution Agreement and the Services Agreements,
as described below.
Stock Purchase Agreement. The Stock Purchase Agreement contains certain
-------------------------
significant terms, obligations and other agreements, as described below,
including Lipha's right to designate a majority of the Board members, Lipha's
right of first refusal in respect of certain equity offerings and Lipha's
agreement not to engage in certain extraordinary transactions.
Lipha has the right to designate a majority of the members of the Board.
Pursuant to this right, Lipha has designated Messrs. Scheuble, A. Tabatznik, N.
Tabatznik and Jander, each of whom was elected by the shareholders of the
Company at the annual meeting. Three members of the Board are comprised of Mr.
Sawyer and two additional designees of the Board which was in place prior to the
closing of the Stock Purchase Agreement (collectively, the "Company Designees").
Such Board has designated Messrs. Auerbach and Ollendorff, each of whom,
together with Mr. Sawyer, were elected by the shareholders of the Company at the
annual meeting. In addition, Lipha has the right to designate (i) jointly with
the Company Designees, two members of the Board to comprise the Audit Committee
of the Board and (ii) the President and Chief Operating Officer of the Company.
The effect of the foregoing agreement is to afford voting control to the
designees of Lipha with respect to matters determined by the Board.
Lipha has a right of first refusal for a period ending on June 30, 2004 to
purchase all, but not less than all, of any equity securities to be sold by the
Company pursuant to any proposed non-registered offering or any registered
offering solely for cash. If Lipha does not exercise its first refusal rights
within 30 days of notice from the Company, the Company may sell such securities
to any third party on substantially the same terms and conditions as first
offered to Lipha. The Shares and the Option Shares do not have any preemptive
rights.
Lipha has agreed, for a period ending on June 30, 2001, to not to cause or
permit the Company to engage in any transactions or enter into any agreements or
arrangements with, or make any distributions to, any Affiliate or Associate
(each as defined in the Stock Purchase Agreement) of Lipha without the prior
written consent of a majority of the Company Designees. In addition, Lipha has
agreed, for a period ending on June 30, 2001, to not to propose that the
Company, or to cause or permit the Company to, engage in business combinations
or other extraordinary transactions, including mergers and tender offers,
without the prior written consent of a majority of the Company Designees and the
prior receipt of a fairness opinion from an independent nationally recognized
investment bank. The Company and Lipha agreed that an executive committee of
the Board continue in existence until June 30, 2001, and to cause Mr. Sawyer to
be appointed to the executive committee.
As a condition to the closing of the Stock Purchase Agreement, certain
holders of options to purchase Common Stock, including Mr. Sawyer and Mr.
Tarriff, have agreed not to exercise their options during the period ending on
July 10, 2001, and certain other holders, including the Directors of the
Company, have agreed not to exercise more than one-third of their options
annually commencing on June 30, 1999.
Distribution Agreement. In connection with the Stock Purchase Agreement,
-----------------------
Genpharm and the Company have entered into the Genpharm Distribution Agreement
(see "Business-Product Line Information").
Services Agreements. Each of Merck KGaA and Genpharm entered into separate
--------------------
Services Agreements on June 30, 1998 to provide various services to the Company
for a period of 36 months, including, but not limited to, rendering advice and
providing technical support and assistance in the areas of research and
development, regulatory compliance, manufacturing, quality control and quality
assurance, administration, marketing and
29
<PAGE>
promotion (collectively, the "Services"). In consideration of providing the
Services, the Company issued an Option to Merck KGaA to purchase up to 820,000
shares of Common Stock and an Option to Genpharm to purchase up to 351,040
shares of Common Stock.
Options. The Options entitle Merck KGaA and Genpharm to purchase up to an
--------
aggregate of 1,171,040 Option Shares at an exercise price of $2.00 per share
with one-third of the total Option Shares vesting annually commencing on June
30, 1999. The Options will be exercisable at any time beginning on July 10,
2001, and will terminate, to the extent unexercised, on April 30, 2003. The
Options contain provisions that protect the holder against dilution by
adjustment of the exercise price and the number of Option Shares issuable upon
exercise in certain events, such as stock dividends, stock splits,
consolidation, merger, or sale of all or substantially all of the Company's
assets. The holders of the Options do not have any rights as shareholders of the
Company unless and until the Options have been exercised.
Clal Sale Agreement. Pursuant to a letter agreement, dated March 25, 1998,
--------------------
between the Company, Merck KGaA and Clal (the "Clal Sale Agreement"), Clal sold
to Lipha on June 30, 1998, 1,813,272 shares of Common Stock at a price of $2.00
per share. Merck KGaA also agreed to pay Clal, on June 30, 2000, an amount
equal to the excess, if any, of the weighted average trading price of all trades
in shares of Common Stock on The New York Stock Exchange during the 30 trading
days preceding such date over $2.00, multiplied by 500,000. In addition, Clal
has the right to cause Merck KGaA and/or the Company to purchase Clal's
remaining 500,000 shares of Common Stock during the five-day period commencing
July 5, 2001, in certain circumstances, at a price of $2.50 per share. If Clal
does not exercise such right, then Merck KGaA and the Company have the right to
cause Clal to sell its remaining shares in open market transactions and Merck
KGaA and the Company will purchase from Clal all shares which have not been sold
within 90 days. The shares of Common Stock purchased or which may be purchased
from Clal under the Clal Sale Agreement are referred to herein as the "Clal
Shares." Clal has agreed, for the period ending on July 5, 2001, not to acquire
or sell, directly or indirectly, any shares of Common Stock, other than pursuant
to the Clal Sale Agreement, enter into any agreement with respect to the voting,
holding or transferring of any shares of Common Stock or to propose or
participate in any transactions involving the Company or recommend others to
take any of such actions.
Registration Rights Agreement. The Company granted to Lipha, Merck KGaA and
-------------------------------
Genpharm (collectively, the "Holders") certain registration rights under a
registration rights agreement (the "Registration Rights Agreement"). None of
the Shares, the Options or the Option Shares are registered under the Securities
Act of 1933, as amended (the "Securities Act"). Starting on March 30, 1999, the
Holders will be entitled to three demand registrations of the Shares, the Option
Shares and the Clal Shares (the "Registrable Shares") and two additional demand
registrations if the Options are exercised. In addition, the Company will grant
to the Holders the right to register the Registrable Shares on each occasion
that the Company registers shares of Common Stock, subject to certain
limitations and exceptions. If the Company at any time registers shares of
Common Stock for sale to the public, the Holders will agree not to sell
publicly, make any short sale, grant any option for the purchase of or otherwise
publicly dispose of shares of Common Stock during the same period during which
directors and executive officers of the Company are similarly limited in selling
the Company's securities up to 180 days after the effective date of the
applicable registration statement.
Development Agreement. The Company, IPR and Generics, are negotiating a
----------------------
development agreement pursuant to which Generics and the Company would each fund
one-half of the research and development budget of IPR. The Company would have
the rights to distribute products developed by IPR in the United States and
Generics would have the right to distribute products developed by IPR elsewhere.
Although no written agreement has been signed by the parties, Generics has paid
$600,000 to IPR as an initial fee for the grant of certain distribution rights.
IPR used such funds to prepay an outstanding note to Clal, which resulted in the
termination of purchase money liens Clal had on the assets of IPR.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ------- ----------------------------------------------------------------
(a)(1)&(2) Financial Statements and Schedules.
See Index to Consolidated Financial Statements and Schedules after
Signature Page.
(a)(3) Exhibits.
3.1.1 Certificate of Incorporation of the Registrant, dated July 29,
1991.(1)
3.1.2 Certificate of Amendment to the Certificate of Incorporation of the
Registrant, dated August 3, 1992. (1)
3.1.3 Articles of Amendment to the Certificate of Incorporation of the
Registrant, dated June 26, 1998. (1)
3.2 By-Laws of the Registrant, as amended. (1)
4 Rights Agreement, dated August 6, 1991, between the Registrant and
Midlantic National Bank, as Rights Agent. (2)
4.1 Amendment to Rights Agreement between the Registrant and Midlantic
National Bank, as Rights Agent, dated as of April 27, 1992. (3)
4.2 Amendment to Rights Agreement, dated as of March 24, 1995, between
the Registrant and Midlantic National Bank, as Rights Agent. (4)
4.3 Amendment to Rights Agreement, dated as of September 18, 1997,
between the Registrant and First City Transfer Company, as Rights
Agent.(4)
4.4 Amendment to Rights Agreement, dated as of September 30, 1997,
between the Registrant and First City Transfer Company, as Rights
Agent.(5)
4.5 Amendment to Rights Agreement, dated as of March 25, 1998, between
the Registrant and First City Transfer Company, as Rights Agent. (5)
10.1 1983 Stock Option Plan of the Registrant, as amended. (6)
10.2 1986 Stock Option Plan of the Registrant, as amended. (6)
10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (7)
10.4 1989 Employee Stock Purchase Program of the Registrant. (8)
10.5 1990 Stock Incentive Plan of the Registrant, as amended. (4)
10.6 Form of Retirement Plan of Par. (9)
10.6.1 First Amendment to Par's Retirement Plan, dated October 26,
1984.(10)
10.7 Form of Retirement Savings Plan of Par. (9)
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984.(11)
31
<PAGE>
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984.
(11)
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30,
1985. (11)
10.8 Par Pension Plan, effective October 1, 1984. (12)
10.9 Employment Agreement, dated as of October 4, 1992, among the
Registrant, Par and Kenneth I. Sawyer. (11)
10.9.1 Amendment to Employment Agreement, dated as of April 30, 1998, among
the Company, Par Pharmaceutical, Inc. and Kenneth I. Sawyer. (1)
10.10 Severance Agreement, dated as of October 23, 1996, between the
Registrant and Dennis J. O'Connor. (4)
10.11 Lease for premises located at 12 Industrial Avenue, Upper Saddle
River, New Jersey, dated October 21, 1978, between Par and
Charles and Dorothy Horton, and extension dated September 15,
1983. (13)
10.12 Lease Agreement, dated as of January 1, 1993, between Par and Ramapo
Corporate Park Associates. (14)
10.13 Lease Extension and Modification Agreement, dated as of August 30,
1997, between Par and Ramapo Corporate Park Associates. (4)
10.14 Amended and Restated Distribution Agreement, dated as of July 28,
1997, among Sano Corporation, the Registrant and Par.* (4)
10.14.1 Amended and Restated Distribution Agreement, dated as of May 1,
1998, among the Company, Par Pharmaceutical, Inc. and Sano
Corporation.* (1)
10.14.2 Release and Amendment Agreement, dated as of May 1, 1998, among the
Company, Par Pharmaceutical, Inc., Sano Corporation, and Elan
Corporation, plc.* (1)
10.15 Mortgage and Security Agreement, dated May 4, 1994, between Urban
National Bank and Par. (15)
10.15.1 Mortgage Loan Note, dated May 4, 1994. (15)
10.15.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban
National Bank. (15)
10.16 1997 Directors Stock Option Plan. (1)
10.17 Stock Purchase Agreement, dated March 25, 1995, between the
Registrant and Clal Pharmaceutical Industries Ltd. (16)
10.18 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995,
between the Registrant and Clal Pharmaceutical Industries Ltd.
(16)
10.19 Registration Rights Agreement, dated May 1, 1995, between the
Registrant and Clal Pharmaceutical Industries Ltd. (16)
10.21 Third Amendment to Stock Purchase Agreement, dated July 28,
1997, between the Registrant and Clal Pharmaceutical Industries
Ltd. (4)
32
<PAGE>
10.22 Pledge Agreement, dated December 27, 1996, between Par and General
Electric Capital Corporation. (17)
10.23 Pledge Agreement, dated December 27, 1996, between the Registrant
and General Electric Capital Corporation. (17)
10.24 Loan and Security Agreement, dated December 27, 1996, between Par
and General Electric Capital Corporation. (17)
10.25.1 First Amendment and Waiver to Loan and Security Agreement, dated
May 22, 1997, between Par and General Electric Capital
Corporation. (18)
10.25.2 Second Amendment and Waiver to Loan and Security Agreement, dated
as of August 22, 1997, between Par and General Electric Capital
Corporation. (4)
10.25.3 Third Amendment and Consent to Loan and Security Agreement, dated
as of March 4, 1998, between Par and General Electric Capital
Corporation. (19)
10.25.4 Fourth Amendment and Consent to Loan and Security Agreement, dated
as of May 5, 1998, among the Company, General Electric Capital
Corporation, and the other parties named therein. (1)
10.25.5 Fifth Amendment to Loan and Security Agreement, dated as of October
30, 1998, among the Company, General Electric Capital
Corporation, and the other parties named therein.
10.26 Stock Purchase Agreement, dated March 25, 1998, between the Company
and Lipha Americas, Inc. (1)
10.27 Distribution Agreement, dated March 25, 1998, between the Company
and Genpharm, Inc. * (1)
10.28 Services Agreement, dated June 26, 1998, between the Company and
Merck KGaA. (1)
10.29 Stock Option Agreement, dated June 26, 1998, between the Company and
Merck KGaA. (1)
10.30 Services Agreement, dated June 26, 1998, between the Company and
Genpharm, Inc. (1)
10.31 Stock Option Agreement, dated June 26, 1998, between the Company and
Merck KGaA. (1)
10.32 Registration Rights Agreement, dated June 26, 1998, among the
Company, Lipha Americas, Inc., Merck KGaA and Genpharm Inc. (1)
10.33 Letter Agreement, dated March 25, 1998, among the Company and Merck
KGaA and Clal Pharmaceutical Industries Ltd. (1)
10.34 Manufacturing and Supply Agreement, dated April 30, 1997, between
Par and BASF Corporation. (20)
27 Financial Data Schedule.
(a)(4) Reports on Form 8-K. On July 14, 1998, the Company filed a
Current Report on Form 8-K relating to the consummation of the
transactions with Merck KGaA and its affiliates.
__________________________________________
33
<PAGE>
(1) Previously filed with the Commission as an exhibit to the
Registrant's Report on Form 8-K dated June 30, 1998 and
incorporated herein by reference.
(2) Previously filed with the Commission as an exhibit to the
Registrant's Registration Statement on Form 8-B dated August 6,
1991 and incorporated herein by reference.
(3) Previously filed with the Commission as an exhibit to Amendment
No. 1 on Form 8 to the Registrant's Registration Statement on
Form 8-B filed on May 15, 1992 and incorporated herein by
reference.
(4) Previously filed with the Commission as an exhibit to the
Registrant's Annual Report on Form 10-K for 1997 and incorporated
herein by reference.
(5) Previously filed with the Commission as an exhibit to the
Registrant's Report on Form 8-K dated March 25, 1998 and
incorporated herein by reference.
(6) Previously filed with the Commission as an exhibit to the
Registrant's Proxy Statement dated August 10, 1992 and
incorporated herein by reference.
(7) Previously filed with the Commission as an exhibit to the
Registrant's Proxy Statement dated August 14, 1991 and
incorporated herein by reference.
(8) Previously filed with the Commission as an exhibit to Par's Proxy
Statement dated August 16, 1990 and incorporated herein by
reference.
(9) Previously filed with the Commission as an exhibit to Par's
Registration Statement on Form S-1 (Commission No. 2-86614) and
incorporated herein by reference.
(10) Previously filed with the Commission as an Exhibit to Par's
Annual Report on Form 10-K for 1990 and incorporated herein by
reference.
(11) Previously filed with the Commission as an exhibit to Par's
Registration Statement on Form S-1 (Commission No. 33-4533) and
incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission (the
"Commission") as an exhibit to the Registrant's Annual Report on
Form 10-K (Commission File No. 1-10827) for 1991 and incorporated
herein by reference.
(13) Previously filed with the Commission as an exhibit to Par's
Annual Report on Form 10-K for 1989 and incorporated herein by
reference.
(14) Previously filed with the Commission as an exhibit to the
Registrant's Annual Report on Form 10-K for 1996 and incorporated
herein by reference.
(15) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 2, 1994 and incorporated herein by reference.
(16) Previously filed with the Commission as an exhibit to the
Registrant's Report on Form 8-K dated May 2, 1995 and
incorporated herein by reference.
(17) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 28, 1996 and incorporated herein by reference.
(18) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 28, 1997 and incorporated herein by reference.
34
<PAGE>
(19) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 28, 1998 and incorporated herein by reference.
(20) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 29, 1997 and incorporated herein by reference.
* Certain portions of Exhibits 10.14, 10.14.1, 10.14.2 and 10.27 have been
omitted and have been filed with the Commission pursuant to a request for
confidential treatment thereof.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: December 29, 1998 PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
By: /s/ Kenneth I. Sawyer
---------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Kenneth I. Sawyer
------------------------------- President, Chief Executive Officer, and December 29, 1998
Kenneth I. Sawyer Chairman of the Board of Directors
/s/ Dennis J. O'Connor Vice President, Chief Financial Officer and December 29, 1998
-------------------------------- Secretary (Principal Accounting and
Dennis J. O'Connor Financial Officer)
/s/ Mark Auerbach Director December 29, 1998
----------------------------------
Mark Auerbach
/s/ Klaus H. Jander Director December 29, 1998
------------------------------------
Klaus H. Jander
/s/ Stephen A. Ollendorff Director December 29, 1998
-------------------------------
Stephen A. Ollendorff
/s/ Bernhard Scheuble Director December 29, 1998
--------------------------------
Bernhard Scheuble
Director December 29, 1998
------------------------------
Anthony S. Tabatznik
Director December 29, 1998
------------------------------------
J. Neil Tabatznik
</TABLE>
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Page
----
<S> <C>
INCLUDED IN PART II:
- -------------------
Report of Independent Public Accountants F-2
Consolidated Balance Sheets at September 30, 1998 and September 30, 1997 F-3
Consolidated Statements of Operations and Accumulated (Deficit) Retained Earnings
for the years ended September 30, 1998, September 30, 1997 and September 30, 1996 F-4
Consolidated Statements of Cash Flows for the years ended September 30, 1998,
September 30, 1997 and September 30, 1996 F-5
Notes to Consolidated Financial Statements F-6 through F-18
<CAPTION>
INCLUDED IN PART IV:
- -------------------
SCHEDULE:
II Valuation and qualifying accounts F-19
</TABLE>
_________________________________________________
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
financial statements filed, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Pharmaceutical Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Pharmaceutical
Resources, Inc. (a New Jersey corporation) and subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of operations and
accumulated (deficit) retained earnings and cash flows for each of the three
years in the period ended September 30, 1998. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pharmaceutical Resources, Inc.
and subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York
December 15, 1998
F-2
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
ASSETS ------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,793,000 $ 181,000
Accounts receivable, net of allowances of
$3,041,000 and $2,462,000 15,344,000 11,414,000
Inventories 13,093,000 13,239,000
Prepaid expenses and other current assets 3,949,000 3,321,000
------------ ------------
Total current assets 42,179,000 28,155,000
Property, plant and equipment, at cost less
accumulated depreciation and amortization 24,283,000 27,832,000
Deferred charges and other assets 1,854,000 2,102,000
Non-current deferred tax benefit, net 14,608,000 14,608,000
------------ ------------
Total Assets $ 82,924,000 $ 72,697,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 267,000 $ 218,000
Short-term debt - 3,947,000
Accounts payable 8,786,000 5,120,000
Accrued salaries and employee benefits 2,010,000 1,755,000
Accrued expenses and other current liabilities 1,992,000 1,156,000
------------ ------------
Total current liabilities 13,055,000 12,196,000
Long-term debt, less current portion 1,143,000 2,651,000
Accrued pension liability 717,000 582,000
Shareholders' equity:
Common Stock, par value $.01 per share; authorized 90,000,000
shares; issued and outstanding 29,316,467 and 18,874,216 shares 293,000 189,000
Additional paid in capital 87,972,000 67,520,000
Accumulated deficit (20,038,000) (10,410,000)
Additional minimum liability related to defined benefit pension plan (218,000) (31,000)
------------ ------------
Total shareholders' equity 68,009,000 57,268,000
------------ ------------
Total liabilities and shareholders' equity $ 82,924,000 $ 72,697,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED (DEFICIT) RETAINED EARNINGS
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------
September 30, September 30, September 30,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales $ 60,380,000 $ 53,172,000 $ 57,959,000
Cost of goods sold 56,135,000 49,740,000 48,299,000
------------ ------------ ------------
Gross margin 4,245,000 3,432,000 9,660,000
Operating expenses:
Research and development 5,775,000 5,843,000 5,160,000
Selling, general and administrative 12,765,000 12,461,000 17,168,000
Asset impairment\restructuring charge 1,212,000 - 549,000
------------ ------------ ------------
Total operating expenses 19,752,000 18,304,000 22,877,000
------------ ------------ ------------
Operating loss (15,507,000) (14,872,000) (13,217,000)
Other income-net 6,261,000 6,926,000 2,007,000
Interest (expense) income (382,000) (545,000) 118,000
-------------- -------------- --------------
Loss from continuing operations
before provision for income taxes (9,628,000) (8,491,000) (11,092,000)
Provision for income taxes - 410,000 -
------------ ------------ ------------
Loss from continuing operations (9,628,000) (8,901,000) (11,092,000)
Income from discontinued operations - - 2,800,000
------------ ------------ ------------
NET LOSS (9,628,000) (8,901,000) (8,292,000)
Accumulated (deficit) retained earnings, beginning of year $(10,410,000) (1,509,000) 6,783,000
------------ ------------ ------------
Accumulated deficit, end of year $(20,038,000) $(10,410,000) $ (1,509,000)
============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK:
Continuing operations: $(.45) $(.48) $(.60)
Discontinued operations: - - .15
----- ----- -----
NET LOSS $(.45) $(.48) $(.45)
===== ===== =====
WEIGHTED AVERAGE NUMBER OF COMMON AND
common equivalent shares outstanding 21,521,372 18,681,017 18,340,248
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------
September 30, September 30, September 30,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(9,628,000) $(8,901,000) $ (8,292,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Income from discontinued operations - - (2,800,000)
Asset impairment\restructuring charge 1,212,000 - 549,000
Gain on sale of investments - (2,880,000) (1,859,000)
Loss (gain) on sale of fixed assets 37,000 (100,000) (53,000)
Joint venture research and development - 773,000 499,000
Depreciation and amortization 2,712,000 2,758,000 2,873,000
Allowances against accounts receivable 579,000 803,000 177,000
Write-off of inventories 2,229,000 1,630,000 1,395,000
Issuance of stock options 75,000 - -
Other - - 158,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (4,509,000) (4,572,000) 1,189,000
(Increase) decrease in inventories (2,083,000) 4,483,000 (5,383,000)
(Increase) decrease in prepaid expenses
and other assets (549,000) 533,000 (1,431,000)
Increase (decrease) in accounts payable 3,666,000 732,000 (2,398,000)
Increase (decrease) in accrued expenses
and other liabilities 1,039,000 (1,467,000) 625,000
----------- ----------- ------------
Net cash used in operating activities (5,220,000) (6,208,000) (14,751,000)
Cash flows from investing activities:
Capital expenditures (1,260,000) (1,049,000) (4,746,000)
Proceeds from sale of fixed assets 117,000 477,000 293,000
Investment in joint venture - - (1,470,000)
Acquisition of businesses net of cash acquired - (311,000) -
Decrease in marketable securities - 6,570,000 1,669,000
Decrease in temporary investments - 143,000 113,000
----------- ----------- ------------
Net cash (used in) provided by investing activities (1,143,000) 5,830,000 (4,141,000)
Cash flows from financing activities:
Proceeds from issuances of Common Stock 20,481,000 72,000 1,826,000
Net (payments) proceeds from revolving credit line,
proceeds from issuance of notes payable and other debt (3,604,000) 3,947,000 4,843,000
Principal payments under long-term debt
and other borrowings (902,000) (3,759,000) (5,459,000)
Payments due to stock conversion - - (5,000)
----------- ----------- -----------
Net cash provided by financing activities 15,975,000 260,000 1,205,000
Net increase (decrease) in cash and cash equivalents 9,612,000 (118,000) (17,687,000)
Cash and cash equivalents at beginning of year 181,000 299,000 17,986,000
----------- ----------- ------------
Cash and cash equivalents at end of year $ 9,793,000 $ 181,000 $ 299,000
=========== =========== ============
Supplemental disclosure of cash flow information
Non-cash investing activities:
Assets assumed in the acquisition of business - $ 4,233,000 -
Liabilities assumed in the acquisition of business - 240,000 -
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
Pharmaceutical Resources, Inc. ("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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of PRI and its
wholly-owned subsidiaries, of which Par Pharmaceutical, Inc. ("Par") is its
principal operating subsidiary. References herein to the "Company" refer to PRI
and its subsidiaries. In August 1997, the Company purchased the 51% ownership
interest of Clal Pharmaceutical Industries Ltd. ("Clal") in its research and
development joint venture, located in Israel, in which PRI had previously owned
49%. Prior to acquisition the investment in the joint venture was accounted for
by the equity method.
Certain items on the consolidated financial statements and the notes to
financial statements for the prior years have been reclassified to conform to
the current year financial statement presentation.
Use of Estimates:
The financial statements are prepared in conformity with generally accepted
accounting principles and, accordingly, include amounts that are based on
management's best estimates and judgments.
Accounting Period:
In fiscal 1996, the Company changed its fiscal year end from the Saturday
nearest to September 30 to September 30. This change had no material impact on
the fiscal 1996 year end results.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value. The Company makes provisions for obsolete and slow moving
inventories as necessary to properly reflect inventory value.
Depreciation and Amortization:
Property, plant and equipment are depreciated straight-line over their
estimated useful lives which range from three to forty years. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
term of the lease.
Research and Development:
Research and development expenses represent costs incurred by the Company to
develop new products and obtain premarketing regulatory approval for such
products. All such costs are expensed as incurred.
Income Taxes:
Deferred income taxes are provided for the future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases. Business tax
credits and net operating loss carryforwards are recognized to the extent that
the ultimate realization of such benefit is more likely than not.
Revenue Recognition:
The Company recognizes revenue at the time product is shipped and it provides
for returns and allowances based upon actual subsequent allowances and
historical trends.
F-6
<PAGE>
Per Share Data:
In February 1997, the Financial Accounting Standards Board ("FASB") 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 year 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 469,700, 3,597,307 and 3,465,691 at the
end of the twelve-month periods ended September 30, 1998, 1997 and 1996,
respectively, 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 627,318, 49,091 and 127,000 for the fiscal years 1998,
1997 and 1996, respectively, were excluded from diluted earnings per share
because they were antidilutive.
Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all highly
liquid money market instruments with original maturity of three months or less
when purchased to be cash equivalents. At September 30, 1998, cash equivalents
were deposited in financial institutions and consisted of immediately available
fund balances.
Fair Value of Financial Instruments:
The carrying amounts of the Company's accounts receivable, accounts payable,
accrued liabilities and debt approximate fair market value based upon the
relatively short-term nature of these financial instruments.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to credit risk
consist of trade receivables and interest bearing short-term commercial paper
which matures within thirty days. The Company markets its products primarily to
domestic wholesalers, distributors, repackagers and retail drug store chains.
The risk associated with this concentration is believed by the Company to be
limited due to the number of wholesalers, distributors, repackagers and drug
store chains, their geographic dispersion and the performance of certain credit
evaluation procedures (see "--Accounts Receivable-Major Customers").
New Accounting Standards:
The FASB has recently issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130") and SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 130 and SFAS 131 are effective for
fiscal year 1999. The Company does not expect the impact of the adoption of
SFAS 130 and SFAS 131 on its financial position or results of operations to be
material.
ACQUISITION OF JOINT VENTURE:
In May 1995, the Company and Clal formed a limited partnership located in
Israel and organized under the laws of the State of Israel, to develop,
manufacture and distribute generic pharmaceutical products worldwide. In August
1997, the Company acquired Clal's 51% ownership interest in the joint venture in
which PRI previously had owned 49%. The joint venture was renamed Israel
Pharmaceutical Resources L.P. ("IPR"). The Company, through one of its
subsidiaries, acquired Clal's ownership interest 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 for $1,500,000
due in January 2003. 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.
F-7
<PAGE>
IPR's assets included cash, equipment, formulation and research on products
under development, all future rights to potential revenues and profits and all
international marketing and distribution rights of products developed by IPR.
The estimated fair market value of the assets and liabilities of IPR at
acquisition were as follows (in thousands):
ASSETS:
Cash and cash equivalents $ 407
Current assets 79
------
486
Property, plant and equipment (net) 4,154
LIABILITIES:
Accounts payable and accrued expenses $ 225
Long term liability 15
In August 1998, the Company prepaid the non-recourse secured promissory note
at a discounted principal amount of $600,000 plus unpaid interest. The
estimated fair market value of the assets and liabilities of IPR at such time
exceeded the purchase price. In fiscal year 1998, a final purchase price
allocation was recorded which reduced the assigned value of the property, plant
and equipment by $727,000.
DISCONTINUED OPERATIONS:
In September 1991, the Company's Board of Directors determined to discontinue
the operations of Quad Pharmaceuticals, Inc. ("Quad"), a wholly-owned subsidiary
of Par. The Board based its decision in large part on the judgement that the
time, resources and financial commitment required to rehabilitate Quad's
operations would not be economically prudent. Accordingly, it was determined to
sell all of Quad's assets on an orderly basis. At that time, the Company
provided for an estimated loss on the disposition of Quad, which included a net
loss on the disposition of Quad's assets based upon their estimated realizable
value. The measurement date was the date the Board determined not to attempt to
rehabilitate Quad's operations.
The remaining reserve in fiscal year 1996 for the liabilities of Quad was
approximately $2,800,000. The reserve included amounts for notes payable to
former officers, amounts due to customers, accrued expenses and accounts
payable. Such liabilities were direct liabilities of Quad which the Company
believed it had no obligation to satisfy. In September 1996, the Company
recorded the $2,800,000 as income from discontinued operations, reversing the
remaining reserves of Quad as the statute of limitations for them expired. The
income from discontinued operations does not reflect any tax effect.
ACCOUNTS RECEIVABLE:
1998 1997
------- -------
(In Thousands)
Accounts receivable $18,385 $13,876
------- -------
Allowances:
Doubtful accounts 735 685
Returns and allowances 759 544
Price adjustments 1,547 1,233
------- -------
3,041 2,462
------- -------
Accounts receivable,
net of allowances $15,344 $11,414
======= =======
The accounts receivable amount is net of provisions for customer rebates and
chargebacks. Customer rebates are price reductions generally given to customers
as an incentive to increase sales volume. Chargebacks are price adjustments
generated from the differential between the invoice or list price and a separate
price agreed to in a contract with a customer. In fiscal year 1997, the Company
began to expand the number of contracts with
F-8
<PAGE>
drug wholesalers as distribution channels constricted which resulted in lower
pricing and decreased margins on certain products.
Price adjustments include provisions for cash discounts, sales promotions,
introductory price protection and shelf stock adjustments. When introducing a
new product, customers receive price protection during the introductory period,
generally one to three months, where price competition is a factor in placing
the product with that customer. The practice is customary in the industry when
several manufacturers attempt to capture significant market share on a new
product. A shelf stock adjustment occurs when there is a reduction in the
invoice or list price of a product and the Company provides an allowance on the
customer's existing inventory level for the difference between the old and new
invoice prices.
Major Customers:
Three of the Company's customers accounted for approximately 15%, 14% and 12%
of net sales in fiscal year 1998, 11%, 16% and 10% of net sales in fiscal year
1997, and 7%, 7% and 11% of net sales in fiscal year 1996.
At September 30, 1998, amounts due from these same three customers accounted
for approximately 18%, 11% and 19% of the net accounts receivable balance. At
September 30, 1997, the amounts due from these same three customers accounted
for approximately 26%, 10% and 12% of the net accounts receivable balance.
INVENTORIES: 1998 1997
------- -------
(In Thousands)
Raw materials and supplies $ 5,210 $ 6,439
Work in process and finished goods 7,883 6,800
------- -------
$13,093 $13,239
======= =======
Property, Plant and Equipment: 1998 1997
------- -------
(In Thousands)
Land $ 2,231 $ 2,231
Buildings 18,555 18,508
Machinery and equipment 18,339 18,386
Office equipment, furniture and fixtures 4,318 4,139
Leasehold improvements 2,454 2,420
------- -------
45,897 45,684
Less accumulated depreciation
and amortization 21,614 17,852
------- -------
$24,283 $27,832
======= =======
The Company recorded a reserve of $1,212,000 in fiscal year 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 reserve is based of
the difference between the appraised value of the property less the net book
value at September 30, 1998.
DEFERRED CHARGES AND OTHER ASSETS: 1998 1997
------ ------
(In Thousands)
Defined benefit pension $ 499 $ 551
Product license fees 400 -
Employee loans and advances 356 463
Cash surrender value of officer life insurance 283 272
Security deposit for leases 58 57
Long term portion of prepaid loan fees 41 168
Investment in a software company - 271
Advanced royalty payments - 150
Other 217 170
------ ------
$1,854 $2,102
====== ======
F-9
<PAGE>
STRATEGIC ALLIANCE:
The Company completed on June 30, 1998 a strategic alliance with Merck KGaA,
a pharmaceutical, laboratory and chemical company located in Darmstadt, Germany.
Pursuant to a Stock Purchase Agreement, dated March 25, 1998 (the "Stock
Purchase Agreement"), 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 to be provided to the Company. The options expire in April 2003 and
become exercisable commencing in July 2001. 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, PRI's largest shareholder prior to the transaction, and 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.
DISTRIBUTION AGREEMENTS:
Genpharm, Inc.
In connection with the Stock Purchase Agreement, Genpharm and the Company
have entered into a distribution agreement, dated March 25, 1998 (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 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 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 agreed to waive the minimum purchase
requirements in calendar year 1998 for the third product.
Elan Corporation
Par has the exclusive right to distribute in the United States a transdermal
nicotine patch manufactured by Elan Transdermal Technologies, Inc., formerly
known as Sano Corporation ("Elan"), for a twelve-month period ending September
29, 1999. Elan may terminate the distribution rights earlier upon three months
notice in certain circumstances. Par must pay to Elan a certain percentage of
gross profits from the sale of the nicotine patch. Pursuant to a September 29,
1998 agreement with Elan (the "Termination Agreement"), Elan agreed to pay Par a
perpetual royalty for all non-prescription sales by Elan in the United States
and Israel. 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.
The Company began selling Elan's nicotine patch in January 1998.
F-10
<PAGE>
Pursuant to a May 1998 amendment to a distribution agreement with Elan, the
Company ceded its distribution rights to two nitroglycerin transdermal patches,
one unconditionally and one conditionally and received cash payments of
approximately $5,700,000. The payments included approximately $2,100,000 as a
prepayment, with accrued interest, of a promissory note which was due from Elan
in September 1998.
Pursuant to the Termination Agreement and amendments to the distribution
agreement with Elan, the Company recorded other income of $6,100,000 and
$3,900,000 in fiscal years 1998 and 1997, respectively. Through September 30,
1998, the Company advanced Elan $7,629,000 as funding for the research and
development of the generic transdermal products. Due to the uncertainty with
respect to the collectability of such advances, the Company expended them in the
periods they were paid. In November 1995, the Company received $1,500,000 from
the proceeds of Elan's initial public offering in repayment of a portion of
total advances outstanding from the Company which were reflected as a reduction
of research and development expense in fiscal year 1996.
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 Loan Agreement was amended
in October 1998. 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 GECC with a portion of the proceeds from the equity
investment and GECC relinquished operating control over the Company's cash
receipts. As of December 22, 1998, the borrowing base was approximately
$15,700,000 and no amounts were outstanding under the line of credit. The
revolving credit facility is subject to covenants based on various financial
benchmarks. In December 1998, GECC waived events of default related to financial
covenants.
LONG-TERM DEBT:
At September 30, 1998, the Company's long-term debt of $1,410,000 consisted
primarily of a mortgage loan, secured by the assets of the Company. In
addition, the Company had outstanding balances of $317,000 under capital leases
and $32,000 under a line of credit.
1998 1997
------ ------
(In Thousands)
Term loans (a) $1,050 $1,117
Promissory note (b) - 1,500
Other (c) 360 252
------ ------
1,410 2,869
Less current portion 267 218
------ ------
$1,143 $2,651
====== ======
(a) Mortgage loan with a fixed rate of 8.5% until May 1999, at which
time the fixed rate will be reset, paid in monthly installments
until May 2001 when the remaining balance of $877,000 becomes due.
(b) Non-recourse secured promissory note bearing interest at 7%. The
Company prepaid the note in August 1998 for $600,000 plus accrued
interest.
F-11
<PAGE>
(c) Includes amounts due under capital leases for computer equipment and
amounts outstanding under a line of credit. The interest rate on
the line of credit is based upon prime rate in effect at the time of
borrowing, with a minimum of 1/2 of 1% per annum premium which
increases based upon the length of time the loan is outstanding.
The line of credit is collateralized by the equipment purchased.
All of the Company's long-term debt, including the portion classified as
current, will mature during the next three fiscal years as follows: $267,000 in
1999, $173,000 in 2000 and $970,000 in 2001.
During the fiscal years 1998, 1997 and 1996, the Company incurred total
interest expense of $721,000, $587,000, and $432,000, respectively. Interest
paid approximated interest expense in each of the years.
SHAREHOLDERS' EQUITY:
Preferred Stock:
In 1990, the Company's shareholders authorized 6,000,000 shares of a newly
created class of preferred stock with a par value of $.0001 per share. The
preferred stock is issuable in such series and with such dividend rates,
redemption prices, preferences and conversion or other rights as the Board of
Directors may determine at the time of issuance.
Common Stock:
On June 30, 1998, Merck KGaA, through its subsidiary Lipha, purchased
10,400,000 newly-issued shares of the Company's Common Stock for $20,800,000
($2.00 per share) as part of a strategic alliance. In addition, the Company
issued to Merck KGaA and Genpharm 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 (see "--Strategic Alliance").
Dividend:
There was no dividend on Common Stock in fiscal years 1998, 1997 or 1996.
Changes in Shareholders' Equity:
Changes in the Company's Common Stock and Additional Paid in Capital accounts
during fiscal years 1996, 1997 and 1998 were as follows:
Additional
Common Stock Paid In
Shares Amount Capital
---------- -------- ------------
Balance, September 30, 1995 18,168,625 $182,000 $65,276,000
Exercise of stock options 470,000 5,000 1,017,000
Investment shares issued - - (12,000)
Conversion of preferred shares - - (5,000)
Compensatory arrangements 23,244 - 805,000
---------- -------- -----------
Balance, September 30, 1996 18,661,869 187,000 67,081,000
Investment shares issued 186,000 2,000 370,000
Compensatory arrangements 26,347 - 69,000
---------- -------- -----------
Balance, September 30, 1997 18,874,216 189,000 67,520,000
Exercise of stock options 21,696 - 48,000
Investment shares issued 10,400,000 104,000 20,274,000
Issuance of stock options - - 75,000
Compensatory arrangements 20,555 - 55,000
---------- -------- -----------
Balance, September 30, 1998 29,316,467 $293,000 $87,972,000
========== ======== ===========
Share Purchase Rights Plan:
Each share of Common Stock outstanding carries with it one Common Share
Purchase Right ("Right"). Generally, the Rights will become exercisable only if
a person or group has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the Common Stock (with certain exceptions), or if
the Board of Directors has determined that a person or group has sought control
of the Company with the result that control by such person or group
("Disqualifying Persons") would be detrimental to the maintenance, renewal or
acquisition of the Company's governmental or regulatory approvals. If a person
or group thereafter acquires beneficial
F-12
<PAGE>
ownership of 25% or more of the outstanding Common Stock or if the Board of
Directors determines that there is a reasonable likelihood that control of the
Company by a Disqualifying Person would result in the loss of, or denial of
approval for, any governmental or regulatory approval of the Company, each
outstanding Right not owned by such person or group would entitle the holder to
purchase, for $25 (the exercise price of the Right), Common Stock having a
market value of $50. Under certain other circumstances, including the
acquisition of the Company in a merger or other business combination, each Right
not owned by the acquiring party will entitle the holder to purchase for $25,
securities of the acquirer having a market value of $50. The Rights are subject
to redemption by the Company at a redemption price of $.01 per Right.
Employee Stock Purchase Program:
The Company maintains an Employee Stock Purchase Program ("Program"). The
Program is designed to qualify as an employee stock purchase plan under Section
423 of the Internal Revenue Code of 1986, as amended. It enables eligible
employees to purchase shares of Common Stock at a discount of up to 15% from the
fair market value. An aggregate of 1,000,000 shares of Common Stock have been
reserved for sale to employees under the Program. Employees purchased 20,555,
26,347 shares and 23,244 shares during fiscal years 1998, 1997 and 1996,
respectively. At September 30, 1998, 870,389 shares remain available for sale
under the Program.
Stock Options:
The following is a summary of stock option activity during fiscal years 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
Price Per Price Per Price Per
Shares Share Shares Share Shares Share
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,751,400 2.13 to 2,013,750 $3.13 to 2,357,750 $2.63 to
$10.63 $13.88 $14.13
Granted 1,479,900 1.50 to 313,900 $2.13 to 210,500 $7.00 to
$ 4.94 $3.38 $7.38
Exercised (21,696) 2.13 to - - (470,000) $3.50 to
$ 2.25 - $7.00
Canceled/Surrendered (1,445,168) 1.50 to (576,250) $6.25 to (84,500) $2.63 to
---------- $10.13 --------- $13.88 --------- $14.13
Outstanding at end of year 1,764,436 1.50 to 1,751,400 $2.13 to 2,013,750 $3.13 to
========== ========= =========
$ 8.63 $10.63 $13.88
</TABLE>
At September 30, 1998, 1997 and 1996 exercisable options amounted to 165,612,
1,388,333 and 1,754,056, respectively. The weighted average exercise price of
the options for the respective periods is $4.84, $8.69 and $8.48. Exercise
price ranges and additional information regarding the 1,764,436 options
outstanding at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Exercise Number Weighted Average Weighted Average
Price Range of Options Exercise Price Remaining Life
----------- ---------- -------------- --------------
<S> <C> <C> <C>
$1.50 to $3.38 1,564,436 $2.12 5.0 years
$4.81 to $5.75 136,000 $5.04 4.7 years
$6.88 to $8.63 64,000 $7.70 1.7 years
</TABLE>
In fiscal year 1998, the Company's shareholders approved the 1997 Directors'
Stock Option Plan (the "1997 Directors Plan") through which options are granted
to non-employee directors of the Company. The 1997 Directors Plan became
effective October 28, 1997 and will continue thereafter until October 28, 2007,
unless terminated sooner. Options granted under this Plan will become
exercisable in full on the first anniversary of the date of grant, provided that
the eligible director has not been removed "for cause" as a member of the Board
on or prior to the first anniversary of the date of grant. The maximum term of
an option under the 1997 Directors Plan is ten years. The Company has reserved
500,000 shares of Common Stock for issuance under the 1997 Directors Plan. In
connection with the adoption of the 1997 Directors Plan, the 1995 Directors'
Stock Option Plan has been terminated.
F-13
<PAGE>
The Company's 1990 Stock Incentive Plan (the "1990 Plan") provides for the
granting of stock options, restricted stock awards, deferred stock awards, stock
appreciation rights and other stock based awards or any combination thereof to
employees of the Company or to others. The maximum term of an option under the
1990 Plan is ten years. Vesting and option terms are determined in each case by
the Compensation and Stock Option Committee of the Board. The maximum term of
the option is reduced to five years if an incentive stock option is granted to a
10% stockholder in the Company. The Company has reserved 2,800,000 shares of
Common Stock for issuance under the 1990 Plan, which terminates in March 2000.
Under the 1989 Directors' Stock Option Plan (the "Directors' Plan"), options
were granted to directors of the Company who are not employees of the Company or
are otherwise ineligible to receive options under any other plan adopted by the
Company. The Company has reserved 550,000 shares of Common Stock for issuance
under the Directors' Plan. The maximum term of an option under the Directors
Plan is ten years. Options vest in full on the first anniversary after the date
of grant, provided that the eligible director has not voluntarily resigned, or
been removed "for cause", as a member of the Board on or prior to the first
anniversary of the date of grant. Certain current and former non-employee
directors surrendered for cancellation options granted under the Directors' Plan
for an equal number of options under the 1997 Directors Plan. The Company does
not intend to grant further options under this Plan, which terminates in
November 1999.
The Company's 1986 Stock Option Plan ("1986 Plan") provides that options may
be granted to employees of the Company or to others for the purchase of up to
900,000 shares of the Company's Common Stock. Options granted under the Plan
may be incentive stock options or nonqualified options with vesting in each case
determined by the Board, however, options are exercisable in full at the
earliest of the holders death or the fourth anniversary of the date of grant.
The maximum term of an option under the 1986 Plan was ten years. The Company
may not grant further options under the 1986 Plan.
Under all the stock options plans, the stock option exercise price equaled
the market price on the date of grant. At September 30, 1998 and September 30,
1997, options for 1,056,118 and 1,120,850 shares, respectively, were available
for future grant under the various stock option plans.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company adopted the disclosure provisions of
SFAS 123 in 1997, but opted to remain under the expense recognition provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", in accounting for stock option plans. Had compensation expense for
stock options granted under the Plans above been determined based on fair value
at the grant dates consistent with the disclosure method required for 1997 in
accordance with SFAS 123, the Company's net loss for fiscal years 1998, 1997 and
1996 would have increased to the pro forma amounts shown below:
1998 1997 1996
---- ---- ----
Net loss: (In Thousands)
As reported $ (9,628) $(8,901) $(8,292)
Pro forma $(10,019) $(9,076) $(8,568)
Net loss per share:
As reported $ (.45) $ (.48) $ (.45)
Pro forma $ (.47) $ (.49) $ (.46)
The weighted average fair value of options granted in fiscal years 1998,
1997 and 1996 was estimated as of the date of grant using the Black-Scholes
stock option pricing model, based on the following weighted average assumptions:
1998 1997 1996
---- ---- ----
Risk free interest rate 5.3% 6.3% 6.0%
Expected term 4.0 years 5.0 years 3.4 years
Expected volatility 63.0% 64.1% 64.1%
F-14
<PAGE>
No dividend will be paid for the entire term of the option. The weighted-
average fair value of options granted in fiscal years 1998 and 1997 were $1.24
and $2.14, respectively.
INCOME TAXES:
In February 1992, the FASB issued SFAS No. 109 "Accounting for Income Taxes"
("SFAS 109"), which required the Company to recognize deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. In addition, SFAS 109 required the recognition of
future tax benefits, such as net operating loss ("NOL") carryforwards, to the
extent that realization of such benefits is more likely than not. The Company
adopted the new accounting standard during the quarter ended January 1, 1994
and, as a result, recognized future tax benefits of $14,128,000 which were
reflected as the cumulative effect of a change in accounting principle in fiscal
year 1994.
Based on the Company's recent performance and the uncertainty of the generic
business in which it operates, management believes that future operating income
might not be sufficient to recognize fully the NOL carryforwards of the Company.
Therefore, the Company did not recognize a benefit for its operating losses in
either fiscal years 1998, 1997 or 1996. Based on recent occurrences, including
the equity investment by Merck KGaA, the Supply Agreement with BASF, cost
reductions and process improvements, and a commitment to research and
development of new products, management believes that its valuation allowance is
adequate. However, there can be no assurance that the Company will generate
taxable earnings or any specific level of continuing earnings in the future. If
the Company is unable to generate sufficient taxable income in the future,
increases in the valuation allowance will be required through a charge to
expense. At September 30, 1998, the Company had NOL carryforwards for tax
purposes of approximately $63,000,000 that expire in September 2006 through
September 2013.
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.
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities are as follows:
1998 1997
--------- --------
(In Thousands)
Deferred assets:
Federal NOL carryforwards $ 21,588 $19,250
State NOL carryforwards 2,447 2,192
Accounts receivable 2,171 2,044
Accrued expenses 254 448
Asset impairment reserve 485 -
Research and development expenses 387 637
Inventory 543 463
Other 856 629
-------- -------
28,731 25,663
Valuation allowance (12,388) (8,308)
-------- -------
16,343 17,355
Deferred liabilities:
Fixed assets 1,735 2,747
-------- -------
Net deferred assets $ 14,608 $14,608
======== =======
Included in the recognition of future tax benefits is approximately
$1,678,000 of stock option compensation credited to additional capital. Of this
amount, $1,244,000 was recorded upon adoption of SFAS 109 and $434,000 was
credited in fiscal year 1995. Valuation allowances were recorded in fiscal
years 1998, 1996 and 1995 for an additional $11,000, $683,000 and $558,000,
respectively, related to stock option compensation which will be credited to
equity upon utilization of tax carryforwards.
F-15
<PAGE>
The table below provides a reconciliation between the statutory federal
income tax rate and the effective rate of income tax expense for each of the
three years during the fiscal years ended 1998, 1997 and 1996:
1998 1997 1996
------ ------ ------
Federal statutory tax rate (34%) (34%) (34%)
State tax - net (6%) (6%) (6%)
Increase in NOL carryforwards 40% 40% 40%
Interest on IRS settlement - net - 5% -
---- ---- ----
Effective tax rate - 5% -
==== ==== ====
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Leases:
At September 30, 1998, the Company had minimum rental commitments aggregating
$2,964,000 under noncancelable operating leases expiring through 2005. Amounts
payable thereunder are $560,000 in fiscal year 1999, $510,000 in fiscal year
2000, $438,000 in fiscal year 2001, $426,000 in fiscal year 2002, $428,000 in
fiscal year 2003, and $602,000 thereafter. Rent expense charged to operations
in fiscal years 1998, 1997 and 1996 was $732,000, $932,000, and $863,000,
respectively.
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 Plan. The Company suspended employer contributions to the
Retirement Plan effective December 30, 1996. Consequently, participants in the
Retirement Plan are no longer 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 this Plan. The Company
contributes an amount equal to 50% of the first 6% of the pay contributed by the
employee. The Company's provisions for these plans and the defined benefit plan
discussed below were $336,000 in fiscal year 1998, $344,000 (adjusted for
$22,000 in forfeitures) in fiscal year 1997 and $729,000 (adjusted for $24,000
in forfeitures) in fiscal year 1996. In fiscal year 1998, the Company merged
the Retirement Plan into the Retirement Savings Plan.
The Company maintains a defined benefit plan (the "Pension Plan") covering
eligible employees as defined in the Plan, which was frozen October 1, 1989.
Since the benefits under the Pension Plan are based on the participants' length
of service and compensation (subject to Employee Retirement Income Security Act
of 1974 and Internal Revenue Service limitations), service costs subsequent to
October 1, 1989 are excluded from benefit accruals under the Pension Plan. The
funding policy for the Pension Plan is to contribute amounts actuarially
determined as necessary to provide sufficient assets to meet the benefit
requirements of the Plan retirees. The assets of the Pension Plan are invested
in mortgages and bonds.
Net pension expense for fiscal years 1998, 1997 and 1996 included the
following components:
1998 1997 1996
------ ------ ------
(In Thousands)
Interest cost $ 128 $ 135 $ 132
Actual return on assets (188) (167) (71)
Net amortization and deferral:
Asset gain (loss) 77 58 (34)
Amortization of initial unrecognized
transition obligation 51 51 51
Amortization of unrecognized net gain - - 3
----- ----- -----
Net pension expense $ 68 $ 77 $ 81
===== ===== =====
For fiscal year 1998, the discount rate used to measure the projected
benefit obligation for the Pension Plan was 5.75% and the assumed long-term rate
of return on Plan assets was 7%.
F-16
<PAGE>
The Pension Plan's funded status and the amounts recorded on the Company's
consolidated balance sheets are as follows:
1998 1997
------- -------
(In Thousands)
Vested benefit obligations $2,209 $1,961
====== ======
Accumulated benefit obligations $2,209 $1,961
====== ======
Projected benefit obligations $2,209 $1,961
Market value of assets 1,739 1,643
------ ------
Projected benefit obligation
in excess of market value (470) (318)
Unrecognized net obligation 499 551
Unrecognized net loss 218 31
Adjustment for minimum liability (717) (582)
Net recorded pension liability $ (470) $ (318)
In accordance with SFAS 87, the Company has recorded an additional minimum
pension liability for under funded plans of $717,000 and $582,000 in fiscal
years 1998 and 1997, respectively, representing the excess of under funded
accumulated benefit obligations over previously recorded pension cost
liabilities. A corresponding amount is recognized as an intangible asset except
to the extent that these additional liabilities exceed related unrecognized
prior service cost and net transition obligation, in which case the increase in
liabilities is charged directly to shareholders' equity. As of September 30,
1998, $218,000 of the excess minimum pension liability resulted in a charge to
equity as compared to $31,000 as of September 30, 1997.
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.
In June 1996, the Company settled a claim with its insurance carrier, filed
in 1995, for $1,455,000 related to the interruption of business at one of its
manufacturing facilities. The settlement favorably affected gross margins by
$618,000 in the third quarter of fiscal year 1996, but did not have a material
effect on its financial condition, results of operations or liquidity for the
fiscal year.
Asset Impairment
The Company recorded a charge of $1,212,000 in fiscal year 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 of
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.
Restructuring and Cost Reductions:
Primarily as a result of the Supply Agreement, the Company further reduced
the work force during the third quarter of fiscal year 1997 by approximately
forty-five employees, primarily in manufacturing functions and a smaller number
in administrative and product development positions (see "--Distribution
Agreements-BASF Corporation"). The work force reduction included a layoff of
employees at the end of June 1997 and the elimination of positions then open.
The Company established a provision for the work force reduction of $280,000 and
subsequent charges are included in the fiscal year 1997 operating results. The
charge includes $231,000 for severance pay, employee benefits and out placement
services and $49,000 in legal fees. The Company began implementing measures
during the fourth quarter of fiscal year 1996, which continued in fiscal year
1997, in an effort to reduce costs and increase operating efficiencies. Such
measures have provided for a reduction in the work force, changes in senior
management, a reorganization of certain existing personnel and reductions in
certain expenses.
F-17
<PAGE>
A provision of $549,000 was established for the cost of a restructuring
during fiscal 1996 and the subsequent charge to expense was classified as
"Restructuring charge" on the statement of operations. The charge included
$424,000 for severance pay, employee benefits, and out placement services and
$125,000 in consulting and legal fees. The amount of actual termination
benefits paid approximated the original provision.
Other Matters:
During fiscal year 1998, four of the Company's products accounted for
approximately 63% of its net sales compared to 56% and 48%, respectively, of net
sales in fiscal years 1997 and 1996. One of these products had historically
accounted for a significant percentage of the Company's net sales and gross
margin. A competitor of the Company received FDA approval for this product in
fiscal year 1996 where, prior to that time, the Company had been the sole
generic manufacturer. Due to the increased competition with respect to these
products, the Company's sales and gross margins have been materially and
adversely affected.
SUBSEQUENT EVENT-UNAUDITED
In an attempt to reduce operating losses, the Company plans to implement
measures during fiscal year 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 are expected to result in a charge of approximately
$3,000,000 in the quarter ended December 31, 1998, including severance
payments and other employee termination benefits, inventory reserves and write-
downs for the impairment of assets affected by the termination of the six
products.
F-18
<PAGE>
SCHEDULE II
PHARMACEUTICAL RESOURCES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ---------- ----------- ---------
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended September 30, 1998 $685,000 $ 50,000 - $735,000
Year ended September 30, 1997 $694,000 $ 3,000 12,000(a) $685,000
Year ended September 30, 1996 $208,000 $486,000 - $694,000
Allowance for returns and price adjustments:
Year ended September 30, 1998 $1,777,000 $4,661,000 4,132,000(b) $2,306,000
Year ended September 30, 1997 $ 965,000 $5,019,000 4,207,000(b) $1,777,000
Year ended September 30, 1996 $1,274,000 $4,579,000 4,888,000(b) $ 965,000
</TABLE>
(a) Write-off of uncollectible accounts.
(b) Returns and allowances charged against allowance provided therefor.
F-19
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1.1 Certificate of Incorporation of the Registrant, dated July 29,
1991. (1)
3.1.2 Certificate of Amendment to the Certificate of Incorporation of the
Registrant, dated August 3, 1992. (1)
3.1.3 Articles of Amendment to the Certificate of Incorporation of the
Registrant, dated June 26, 1998. (1)
3.2 By-Laws of the Registrant, as amended. (1)
4 Rights Agreement, dated August 6, 1991, between the Registrant and
Midlantic National Bank, as Rights Agent. (2)
4.1 Amendment to Rights Agreement between the Registrant and Midlantic
National Bank, as Rights Agent, dated as of April 27, 1992. (3)
4.2 Amendment to Rights Agreement, dated as of March 24, 1995, between
the Registrant and Midlantic National Bank, as Rights Agent. (4)
4.3 Amendment to Rights Agreement, dated as of September 18, 1997,
between the Registrant and First City Transfer Company, as Rights
Agent. (4)
4.4 Amendment to Rights Agreement, dated as of September 30, 1997,
between the Registrant and First City Transfer Company, as Rights
Agent. (5)
4.5 Amendment to Rights Agreement, dated as of March 25, 1998, between
the Registrant and First City Transfer Company, as Rights Agent.
(5)
10.1 1983 Stock Option Plan of the Registrant, as amended. (6)
10.2 1986 Stock Option Plan of the Registrant, as amended. (6)
10.3 1989 Directors' Stock Option Plan of the Registrant, as amended.
(7)
10.4 1989 Employee Stock Purchase Program of the Registrant. (8)
10.5 1990 Stock Incentive Plan of the Registrant, as amended. (4)
10.6 Form of Retirement Plan of Par. (9)
10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984.
(10)
10.7 Form of Retirement Savings Plan of Par. (9)
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984.
(11)
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984.
(11)
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30,
1985. (11)
10.8 Par Pension Plan, effective October 1, 1984. (12)
10.9 Employment Agreement, dated as of October 4, 1992, among the
Registrant, Par and Kenneth I. Sawyer. (11)
<PAGE>
10.9.1 Amendment to Employment Agreement, dated as of April 30, 1998,
among the Company, Par Pharmaceutical, Inc. and Kenneth I. Sawyer.
(1)
10.10 Severance Agreement, dated as of October 23, 1996, between the
Registrant and Dennis J. O'Connor. (4)
10.11 Lease for premises located at 12 Industrial Avenue, Upper Saddle
River, New Jersey, dated October 21, 1978, between Par and
Charles and Dorothy Horton, and extension dated September 15,
1983. (13)
10.12 Lease Agreement, dated as of January 1, 1993, between Par and
Ramapo Corporate Park Associates. (14)
10.13 Lease Extension and Modification Agreement, dated as of August 30,
1997, between Par and Ramapo Corporate Park Associates. (4)
10.14 Amended and Restated Distribution Agreement, dated as of July 28,
1997, among Sano Corporation, the Registrant and Par.* (4)
10.14.1 Amended and Restated Distribution Agreement, dated as of May 1,
1998, among the Company, Par Pharmaceutical, Inc. and Sano
Corporation.* (1)
10.14.2 Release and Amendment Agreement, dated as of May 1, 1998, among the
Company, Par Pharmaceutical, Inc., Sano Corporation, and Elan
Corporation, plc.* (1)
10.15 Mortgage and Security Agreement, dated May 4, 1994, between Urban
National Bank and Par. (15)
10.15.1 Mortgage Loan Note, dated May 4, 1994. (15)
10.15.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban
National Bank. (15)
10.16 1997 Directors Stock Option Plan. (1)
10.17 Stock Purchase Agreement, dated March 25, 1995, between the
Registrant and Clal Pharmaceutical Industries Ltd. (16)
10.18 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995,
between the Registrant and Clal Pharmaceutical Industries Ltd.
(16)
10.19 Registration Rights Agreement, dated May 1, 1995, between the
Registrant and Clal Pharmaceutical Industries Ltd. (16)
10.21 Third Amendment to Stock Purchase Agreement, dated July 28,
1997, between the Registrant and Clal Pharmaceutical Industries
Ltd. (4)
10.22 Pledge Agreement, dated December 27, 1996, between Par and General
Electric Capital Corporation. (17)
10.23 Pledge Agreement, dated December 27, 1996, between the Registrant
and General Electric Capital Corporation. (17)
10.24 Loan and Security Agreement, dated December 27, 1996, between Par
and General Electric Capital Corporation. (17)
10.25.1 First Amendment and Waiver to Loan and Security Agreement, dated
May 22, 1997, between Par and General Electric Capital Corporation.
(18)
<PAGE>
10.25.2 Second Amendment and Waiver to Loan and Security Agreement, dated
as of August 22, 1997, between Par and General Electric Capital
Corporation. (4)
10.25.3 Third Amendment and Consent to Loan and Security Agreement, dated
as of March 4, 1998, between Par and General Electric Capital
Corporation. (19)
10.25.4 Fourth Amendment and Consent to Loan and Security Agreement, dated
as of May 5, 1998, among the Company, General Electric Capital
Corporation, and the other parties named therein. (1)
10.25.5 Fifth Amendment to Loan and Security Agreement, dated as of October
30, 1998, among the Company, General Electric Capital Corporation,
and the other parties named therein.
10.26 Stock Purchase Agreement, dated March 25, 1998, between the Company
and Lipha Americas, Inc. (1)
10.27 Distribution Agreement, dated March 25, 1998, between the Company
and Genpharm, Inc. * (1)
10.28 Services Agreement, dated June 26, 1998, between the Company and
Merck KGaA. (1)
10.29 Stock Option Agreement, dated June 26, 1998, between the Company
and Merck KGaA. (1)
10.30 Services Agreement, dated June 26, 1998, between the Company and
Genpharm, Inc. (1)
10.31 Stock Option Agreement, dated June 26, 1998, between the Company
and Merck KGaA. (1)
10.32 Registration Rights Agreement, dated June 26, 1998, among the
Company, Lipha Americas, Inc., Merck KGaA and Genpharm Inc. (1)
10.33 Letter Agreement, dated March 25, 1998, among the Company and Merck
KGaA and Clal Pharmaceutical Industries Ltd. (1)
10.34 Manufacturing and Supply Agreement, dated April 30, 1997, between
Par and BASF Corporation. (20)
27 Financial Data Schedule.
__________________________________________
(1) Previously filed with the Commission as an exhibit to the
Registrant's Report on Form 8-K dated June 30, 1998 and
incorporated herein by reference.
(2) Previously filed with the Commission as an exhibit to the
Registrant's Registration Statement on Form 8-B dated August 6,
1991 and incorporated herein by reference.
(3) Previously filed with the Commission as an exhibit to Amendment No.
1 on Form 8 to the Registrant's Registration Statement on Form 8-B
filed on May 15, 1992 and incorporated herein by reference.
(4) Previously filed with the Commission as an exhibit to the
Registrant's Annual Report on Form 10-K for 1997 and incorporated
herein by reference.
(5) Previously filed with the Commission as an exhibit to the
Registrant's Report on Form 8-K dated March 25, 1998 and
incorporated herein by reference.
<PAGE>
(6) Previously filed with the Commission as an exhibit to the
Registrant's Proxy Statement dated August 10, 1992 and incorporated
herein by reference.
(7) Previously filed with the Commission as an exhibit to the
Registrant's Proxy Statement dated August 14, 1991 and incorporated
herein by reference.
(8) Previously filed with the Commission as an exhibit to Par's Proxy
Statement dated August 16, 1990 and incorporated herein by
reference.
(9) Previously filed with the Commission as an exhibit to Par's
Registration Statement on Form S-1 (Commission No. 2-86614) and
incorporated herein by reference.
(10) Previously filed with the Commission as an Exhibit to Par's
Annual Report on Form 10-K for 1990 and incorporated herein by
reference.
(11) Previously filed with the Commission as an exhibit to Par's
Registration Statement on Form S-1 (Commission No. 33-4533) and
incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission (the
"Commission") as an exhibit to the Registrant's Annual Report on
Form 10-K (Commission File No. 1-10827) for 1991 and incorporated
herein by reference.
(13) Previously filed with the Commission as an exhibit to Par's
Annual Report on Form 10-K for 1989 and incorporated herein by
reference.
(14) Previously filed with the Commission as an exhibit to the
Registrant's Annual Report on Form 10-K for 1996 and incorporated
herein by reference.
(15) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 2, 1994 and incorporated herein by reference.
(16) Previously filed with the Commission as an exhibit to the
Registrant's Report on Form 8-K dated May 2, 1995 and
incorporated herein by reference.
(17) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 28, 1996 and incorporated herein by reference.
(18) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 28, 1997 and incorporated herein by reference.
(19) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 28, 1998 and incorporated herein by reference.
(20) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 29, 1997 and incorporated herein by reference.
* Certain portions of Exhibits 10.14, 10.14.1, 10.14.2 and 10.27 have been
omitted and have been filed with the Commission pursuant to a request for
confidential treatment thereof.
<PAGE>
EXHIBIT 10.25.5
FIFTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
---------------------------
FIFTH AMENDMENT, dated as of October 30, 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"); 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 Recitals of the Loan Agreement. Recital A of the Loan
------------------------------------------- ---------
Agreement is hereby amended as of Amendment Effective Date (as hereinafter
defined) by (i) deleting the percentage "3.50%" immediately following the
caption "Revolving Credit Rate:" and inserting the percentage "2.25%" in lieu
---------------------
thereof, and (ii) inserting immediately following the text under the caption
"Unused Line Fee" the following proviso: "; provided, that, notwithstanding the
- ---------------- --------
foregoing, the Unused Line Fee shall be 0.250% per annum commencing on November
1, 1998".
3. Amendment to Section 1.5 of the Loan Agreement. Section 1.5(a) of the
---------------------------------------------- --------------
Loan Agreement is hereby amended and restated as of the Amendment Effective Date
to read as follows:
"(a) Borrower shall pay interest to Lender on the aggregate
outstanding Revolving Credit Advances at a floating rate equal to the
Index Rate plus two and one-quarter percent (2.25%) per annum (the
"Revolving Credit Rate)."
4. Amendment to Schedule D to the Loan Agreement. Paragraph 2 of Schedule
--------------------------------------------- --------
D to the Loan Agreement is hereby amended by inserting immediately following the
- -
last sentence thereof a new sentence to read as follows:
"Notwithstanding anything to the contrary contained herein, commencing
on November 1, 1998, the Unused Line Fee shall be 0.250% per annum."
5. 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.
-1-
<PAGE>
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 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.
6. No Other Consents/Waivers. Except as otherwise provided herein, the
-------------------------
Loan Agreement shall be unmodified and shall continue to be in full force and
effect in accordance with its terms, and, except as expressly provided herein,
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.
7. Outstanding Indebtedness; Waiver of Claims. Each Credit Party hereby
------------------------------------------
acknowledges and agrees that as of October 30, 1998 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.
8. 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.
9. Effectiveness. This Amendment shall become effective as of November 1,
-------------
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
November 11, 1998:
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 9 have been satisfied, except to the extent that any such representation
- ---------
or warranty expressly relates to an earlier date.
10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND INTERPRETED IN
-------------
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
-2-
<PAGE>
11. 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)
-3-
<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 J. O'Connor
- --------------------------------------
Name: Dennis J. O'Connor
Title: Vice President and Chief Financial Officer
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 J. O'Connor
- -------------------------------------
Name: Dennis J. O'Connor
Title: Vice President and Chief Financial Officer
(SIGNATURES CONTINUED ON NEXT PAGE)
-4-
<PAGE>
Subsidiary Guarantors:
- ---------------------
NUTRICEUTICAL RESOURCES, INC.
By:/s/ Dennis J. O'Connor
- --------------------------------------
Name: Dennis J. O'Connor
Title: Vice President and Chief Financial Officer
PARCARE, LTD.
By:/s/ Dennis J. O'Connor
- --------------------------------------
Name: Dennis J. O'Connor
Title: Vice President and Chief Financial Officer
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE
TWELVE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,793
<SECURITIES> 0
<RECEIVABLES> 18,385
<ALLOWANCES> (3,041)
<INVENTORY> 13,093
<CURRENT-ASSETS> 42,179
<PP&E> 45,897
<DEPRECIATION> (21,614)
<TOTAL-ASSETS> 82,924
<CURRENT-LIABILITIES> 13,055
<BONDS> 1,143
0
0
<COMMON> 293
<OTHER-SE> 67,716
<TOTAL-LIABILITY-AND-EQUITY> 82,924
<SALES> 60,380
<TOTAL-REVENUES> 66,641
<CGS> 56,135
<TOTAL-COSTS> 19,702
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 382
<INCOME-PRETAX> (9,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,628)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
