<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1999
Commission File Number 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Ram Ridge Road, Spring Valley, New York 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 425-7100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
29,540,746
Number of shares of Common Stock outstanding as of November 10, 1999.
This is page 1 of 23 pages. The exhibit index is on page 17.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
October 2, December 31,
ASSETS 1999 1998
------ ----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 151 $ 6,424
Accounts receivable, net of allowances of
$4,079 and $2,226 17,306 14,513
Inventories 18,466 15,611
Prepaid expenses and other current assets 2,393 2,597
-------- --------
Total current assets 38,316 39,145
Property, plant and equipment, at cost less
accumulated depreciation and amortization 22,709 22,789
Deferred charges and other assets 4,510 1,405
Non-current deferred tax benefit, net 14,608 14,608
-------- --------
Total assets $ 80,143 $ 77,947
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 235 $ 225
Short-term debt 3,476 -
Accounts payable 10,282 10,411
Accrued salaries and employee benefits 1,738 1,705
Accrued expenses and other current liabilities 1,607 2,596
-------- --------
Total current liabilities 17,338 14,937
Long-term debt, less current portion 1,094 1,102
Accrued pension liability 874 717
Shareholders' equity:
Common Stock, par value $.01 per share; authorized 90,000,000 shares;
issued and outstanding 29,538,513 and 29,322,659 shares 295 293
Additional paid in capital 88,869 88,036
Accumulated deficit (27,939) (26,920)
Additional minimum liability related to defined benefit pension plan (388) (218)
-------- --------
Total shareholders' equity 60,837 61,191
-------- --------
Total liabilities and shareholders' equity $ 80,143 $ 77,947
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------------- ---------------------------
October 2, September 30, October 2, September 30,
1999 1998 1999 1998
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Net sales $ 60,692 $ 48,246 $ 19,317 $ 16,786
Cost of goods sold 48,347 45,505 15,247 16,710
-------- -------- -------- --------
Gross margin 12,345 2,741 4,070 76
Operating expenses:
Research and development 4,755 4,867 2,038 3,106
Selling, general and administrative 9,328 10,177 2,862 4,206
Asset impairment - 1,212 - 1,212
-------- -------- -------- --------
Total operating expenses 14,083 16,256 4,900 8,524
-------- -------- -------- --------
Operating loss (1,738) (13,515) (830) (8,448)
Other income, net 658 6,261 497 2,663
Interest income (expense) 61 (262) 7 112
-------- -------- -------- --------
Net loss (1,019) (7,516) (326) (5,673)
Accumulated deficit, beginning of period (26,920) (12,522) (27,613) (14,365)
-------- -------- -------- --------
Accumulated deficit, end of period $(27,939) $(20,038) $(27,939) $(20,038)
======== ======== ======== ========
Basic and diluted net loss per share
of common stock $(.03) $(.34) $(.01) $(.20)
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding 29,433 22,415 29,526 29,091
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
October 2, September 30,
1999 1998
---------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,019) $(7,516)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,822 2,058
Allowances against accounts receivable 1,853 1,062
Write-off of inventories 870 1,936
Asset impairment - 1,212
Other 190 110
Changes in assets and liabilities:
Increase in accounts receivable (4,646) (8,438)
(Increase) decrease in inventories (3,725) 1,421
Increase in prepaid expenses and other assets (2,901) (199)
(Decrease) increase in accounts payable (129) 4,516
(Decrease) increase in accrued expenses and other liabilities (969) 1,415
------- -------
Net cash used in operating activities (8,654) (2,423)
Cash flows from investing activities:
Capital expenditures (1,796) (975)
Proceeds from sale of fixed assets 57 81
------- -------
Net cash used in investing activities (1,739) (894)
Cash flows from financing activities:
Proceeds from issuances of Common Stock 642 20,470
Net proceeds (payments) from revolving credit line
and proceeds from issuances of other debt 3,691 (6,572)
Principal payments under long-term debt and other borrowings (213) (840)
------- -------
Net cash provided by financing activities 4,120 13,058
Net (decrease) increase in cash and cash equivalents (6,273) 9,741
Cash and cash equivalents at beginning of period 6,424 52
------- -------
Cash and cash equivalents at end of period $ 151 $ 9,793
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
October 2, 1999
(Unaudited)
Pharmaceutical Resources, Inc. (the "Company" or "PRI") operates in one
business segment, the manufacture and distribution of generic pharmaceuticals.
Marketed products are principally in solid oral dosage form (tablet, caplet and
capsule). The Company also distributes products in the semi-solid form of a
cream and reconstituted suspensions/solutions.
Basis of Preparation:
The accompanying consolidated financial statements at October 2, 1999 and
December 31, 1998 and for the nine-month and three-month periods ended October
2, 1999 and the comparative periods ended September 30, 1998 are unaudited;
however, in the opinion of the management of PRI, such statements include all
adjustments (consisting of normal recurring accruals) necessary to a fair
statement of the information presented therein.
Pursuant to accounting requirements of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, the accompanying financial
statements and these notes do not include all disclosures required by generally
accepted accounting principles for audited financial statements. Accordingly,
these statements should be read in conjunction with PRI's most recent annual
financial statements.
Results of operations for interim periods are not necessarily indicative of
those that may be achieved for a full fiscal year. Certain items on the
consolidated financial statements of the prior year have been reclassified to
conform to the current year financial statement presentation. Certain items in
previous periods of the current year have also been reclassified.
In December 1998, the Company changed its annual reporting period to a fiscal
year ending December 31 from a fiscal year ending September 30. Accordingly,
the current fiscal year began on January 1, 1999 and will end on December 31,
1999. Comparative results in this Form 10-Q include amounts from the
corresponding nine-month and three-month calendar periods of last year.
Strategic Alliance:
On June 30, 1998, the Company completed a strategic alliance with Merck KGaA,
a pharmaceutical and chemical company located in Darmstadt, Germany ("Merck
KGaA"). Pursuant to a Stock Purchase Agreement, dated March 25, 1998, Merck
KGaA, through its subsidiary Lipha Americas, Inc. ("Lipha"), purchased
10,400,000 newly issued shares of the Company's Common Stock for $20,800,000.
In addition, the Company issued to Merck KGaA and Genpharm, Inc. ("Genpharm"), a
Canadian subsidiary of Merck KGaA, five-year options to purchase an aggregate of
1,171,040 additional shares of the Company's Common Stock at an exercise price
of $2.00 per share in exchange for consulting services. The options expire in
April 2003 and become exercisable commencing in July 2001. As part of the
alliance, the Company obtained the exclusive United States distribution rights
to a portfolio of products covered by a distribution agreement with Genpharm
(see "--Distribution and Supply Agreements-Genpharm, Inc."). Merck KGaA also
purchased 1,813,272 shares of the Company's Common Stock from Clal
Pharmaceutical Industries Ltd. ("Clal"), PRI's largest shareholder prior to the
transaction. Clal has the right to cause Merck KGaA and/or the Company to
purchase an additional 500,000 shares of Common Stock from Clal at a price of
$2.50 per share in July 2001.
Research and Development Agreement:
The Company, Israel Pharmaceutical Resources L.P. ("IPR"), a subsidiary of
PRI, and Generics (UK) Ltd. ("Generics"), a subsidiary of Merck KGaA, entered
into an agreement (the "Development Agreement"), dated as of August 11, 1998,
pursuant to which Generics agreed to fund one-half the costs of the operating
budget of IPR, the Company's research and development operation in Israel, in
exchange for the exclusive distribution rights outside of the United States to
products developed by IPR after the date of the Development Agreement. In
addition, Generics agreed to pay IPR a perpetual royalty for all sales of the
products by Generics or its affiliates outside the United States. The
Development Agreement has an initial term of five years and automatically renews
for additional periods of one year subject to earlier termination upon six
months' notice in certain circumstances. Pursuant to the Development Agreement,
Generics paid the Company an initial fee of $600,000 in August 1998 and has
fulfilled their funding requirements through October 2, 1999. Under the
Development Agreement, Generics is not required to fund more than $1,000,000 in
any one calendar year.
Profit Sharing Agreement:
Included in deferred charges and other assets is $2,500,000 resulting from a
profit sharing agreement the Company entered into with Genpharm (the "Genpharm
Profit Sharing Agreement") in January 1999. Pursuant to the Genpharm Profit
-5-
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
October 2, 1999
(Unaudited)
Sharing Agreement the Company will receive a portion of the profits resulting
from a separate agreement between Genpharm and an unaffiliated United States
based pharmaceutical company in exchange for a non-refundable fee of $2,500,000
from the Company. To date, the Company has paid $951,000 pursuant to the
Genpharm Profit Sharing Agreement and is negotiating a payment schedule of the
remainder of the fee. The agreement between Genpharm and the unaffiliated third
party covers fifteen products that are not included in the Genpharm Distribution
Agreement (see "--Distribution and Supply Agreements-Genpharm, Inc.").
Lease Agreement:
On March 17, 1999, Par Pharmaceutical, Inc. ("Par"), the Company's wholly-
owned operating subsidiary, entered into an agreement to lease (the "Lease
Agreement") its manufacturing facility and related machinery and equipment
located in Congers, New York (the "Congers Facility") to Halsey Drug Co., Inc.
("Halsey"), a manufacturer of generic pharmaceutical products. The Lease
Agreement has an initial term of three years, subject to an additional two-year
renewal period and contains a purchase option permitting Halsey to purchase the
Congers Facility and substantially all the equipment thereof at any time during
the lease terms for a specified amount. The Lease Agreement provides for annual
fixed rent during the initial term of $500,000 per year and $600,000 per year
during the renewal period. Pursuant to the Lease Agreement, Halsey paid the
purchase option of $100,000 in March 1999. Under the Halsey Supply Agreement
(as hereinafter defined), Halsey is required to perform certain manufacturing
operations for the Company at the Congers Facility. Pursuant to the Lease
Agreement, Par agreed that if its purchases are less than $1,150,000 worth of
the products during the initial eighteen months of the Halsey Supply Agreement,
the amount of the deficiency will be credited against rent payments due under
the Lease Agreement (see "--Distribution and Supply Agreements-Halsey Drug Co.,
Inc.").
Distribution and Supply Agreements:
Halsey Drug Co., Inc.:
On March 17, 1999, Par entered into a Manufacturing and Supply Agreement with
Halsey (the "Halsey Supply Agreement"). The Halsey Supply Agreement requires
Halsey to manufacture exclusively for Par certain products previously
manufactured by Par at the Congers Facility prior to the Agreement. The Halsey
Supply Agreement has an initial term of three years subject to earlier
termination upon the occurrence of certain events as provided therein. Pursuant
to the Lease Agreement, Par agreed to purchase not less than $1,150,000 worth of
the products during the initial eighteen months of the Halsey Supply Agreement,
subject to Par's agreement to credit any deficiency under the Lease Agreement.
In addition, the Halsey Supply Agreement prohibits Halsey from manufacturing,
supplying, developing or distributing products produced under such Agreement for
anyone other than Par for a period of three years.
Genpharm, Inc.:
The Company has a distribution agreement with Genpharm (the "Genpharm
Distribution Agreement") pursuant to which Genpharm granted exclusive
distribution rights to the Company within the United States and certain other
United States territories with respect to approximately 40 generic
pharmaceutical products. To date, seven of such products have obtained U.S.
Food and Drug Administration ("FDA") approval and are being marketed by Par.
The remaining products are either currently being developed, have been
identified for development, or have been 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
"BASF Supply Agreement") with BASF Corporation ("BASF"), a manufacturer of
pharmaceutical products. Under the BASF Supply Agreement, Par agreed to
purchase certain minimum quantities of certain products manufactured by BASF at
one of its facilities, and to 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 until December 31, 2005, if Par
has met certain purchase thresholds. In each of the first three years of the
initial term of the BASF Supply Agreement, Par agreed to purchase an aggregate
of at least $24,500,000 worth of three products. Although the Company currently
expects to meet the minimum purchase requirements
-6-
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
October 2, 1999
(Unaudited)
for calendar year 1999, there can be no assurance that the Company will meet
such requirements. 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.
Elan Corporation:
On September 29, 1998, the Company and Elan Transdermal Technologies, Inc.,
formerly known as Sano Corporation, and Elan Corporation, plc (collectively
"Elan") entered into a termination agreement (the "Termination Agreement") with
respect to their prior distribution agreement. Pursuant to the Termination
Agreement, Par's exclusive right to distribute in the United States a
transdermal nicotine patch manufactured by Elan ended on May 31, 1999. Par paid
Elan a percentage of gross profits from the sale of the nicotine patch through
the termination date. In exchange for relinquishing long-term distribution
rights to the nicotine patch and a nitroglycerin patch, PRI received a cash
payment of $2,000,000 in October 1998 and an additional payment of $1,000,000 in
the third quarter of 1999. Pursuant to the Termination Agreement, Elan has
agreed to pay Par a perpetual royalty on all non-prescription sales of the
transdermal nicotine patch by Elan in the United States and Israel.
Short-Term Debt:
In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with General Electric Capital Corporation ("GECC") which provided
Par with a three-year revolving line of credit. Pursuant to the Loan Agreement,
as amended, Par is permitted to borrow up to the lesser of (i) the borrowing
base established under the Loan Agreement or (ii) $20,000,000. The borrowing
base is limited to 85% of eligible accounts receivable plus 50% of eligible
inventory of Par, each as determined from time to time by GECC. The interest
rate charge on the line of credit is based upon a per annum rate of 2 1/4% above
the 30-day commercial paper rate for high-grade unsecured notes adjusted
monthly. The line of credit with GECC is secured by the assets of Par and PRI
other than real property and is guaranteed by PRI. In connection with such
facility, Par, PRI and their affiliates have established a cash management
system pursuant to which all cash and cash equivalents received by any of such
entities are deposited into a lockbox account over which GECC has sole operating
control and which are applied on a daily basis to reduce amounts outstanding
under the line of credit. The revolving credit facility is subject to covenants
based on various financial benchmarks. In August 1999, GECC waived certain
events of default related to financial covenants and amended the financial
covenants in the Loan Agreement. As of October 2, 1999, the borrowing base was
approximately $17,100,000 and $3,476,000 was outstanding under the line of
credit. The Company has begun negotiations with GECC to extend the Loan
Agreement on substantially similar terms.
Income Taxes:
Based on the Company's recent performance and uncertainty of the generic
pharmaceutical business in which it operates, management believes that future
operating income might not be sufficient to recognize fully the net operating
loss carryforwards of the Company. Therefore, the Company did not recognize a
benefit for its operating losses in any of the nine-month and three-month
periods ended October 2, 1999 or the comparable periods ended September 30,
1998. If the Company is unable to generate sufficient taxable income in the
future, the Company expects that increases in the valuation allowance will be
required through a charge to expense.
Earnings Per Share:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("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 quarter ended December 27, 1997
and, accordingly, has presented or restated all earnings per share data to
conform to the requirements of SFAS 128.
Outstanding options and warrants of 288,500 and 283,500 at the end of the
nine-month and three-month periods ended October 2, 1999, respectively, and
449,700 at the end of each of the corresponding periods of the prior year were
not included in the computation of diluted earnings per share because their
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 1,132,414 and 1,150,943 at the end of the current nine-month and
three-month periods, respectively, and 756,135 and 929,941 at the end of
-7-
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
October 2, 1999
(Unaudited)
the corresponding periods of last year were excluded from diluted earnings per
share because they were non-dilutive.
Comprehensive Income:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
130") during the period ended December 31, 1998, which establishes standards for
the reporting and display of comprehensive income and its components. There was
no impact on the financial statements as a result of the adoption of SFAS 130 in
the nine-month and three-month periods ended October 2, 1999.
Commitments, Contingencies and Other Matters:
Retirement Plans:
The Company has a defined contribution, social security integrated Retirement
Plan (the "Retirement Plan") providing retirement benefits to eligible employees
as defined in the Retirement Plan. The Company suspended employer contributions
to the Retirement Plan effective December 30, 1996. Consequently, participants
in the Retirement Plan will no longer be entitled to any employer contributions
under such plan for 1996 or subsequent years. The Company also maintains a
Retirement Savings Plan (the "Retirement Savings Plan") whereby eligible
employees are permitted to contribute from 1% to 12% of pay to the Retirement
Savings Plan. The Company contributes an amount equal to 50% of the first 6% of
the pay contributed by the employee. The Company merged the Retirement Plan
into the Retirement Savings Plan in fiscal year 1998.
Legal Proceedings:
Par has filed with the FDA an abbreviated new drug application ("ANDA") for
megestrol acetate oral suspension, the generic version of Bristol Myers Squibb's
("Bristol") Megace(R) Oral Suspension. Par filed a paragraph IV certification
regarding the formulation patent as part of its ANDA submission. The basic
compound patent for Megace(R) has expired. Megace(R) Oral Suspension received
orphan drug exclusivity from the FDA that expires September 10, 2000 and Bristol
has a formulation patent for Megace(R) Oral Suspension expiring in 2011. Par
believes that its distinct and unique formulation does not infringe the Bristol
formulation patent. Bristol has initiated a patent infringement action against
Par, which the Company intends to defend vigorously. At this time, it is not
possible for the Company to predict the probable outcome of this litigation and
the impact, if any, that it might have on the Company.
The Company is involved in certain other litigation matters, including
certain product liability actions and actions by a former officer for, among
other things, breach of contract. Such actions seek damages from the Company,
including compensatory and punitive damages. The Company intends to defend
these actions vigorously. The Company believes that these actions are
incidental to the conduct of its business and that the ultimate resolution
thereof will not have a material adverse effect on its financial condition or
liquidity.
Asset Impairment/Restructuring:
The Company has discontinued the sale of certain unprofitable products,
terminated approximately 40 employees in January 1999, primarily in
manufacturing and various manufacturing support functions, and reduced certain
related operating expenses as part of previously announced measures to reduce
costs and increase operating efficiencies. These measures resulted in a charge
of $1,906,000 in the three-month transition period ended December 31, 1998,
which included approximately $1,200,000 for write-downs related to the
impairment of assets affected by the discontinuance of the products and a
provision of $706,000 for severance payments and other employee termination
benefits. Additionally, the Company established inventory reserves of $630,000
relating to the discontinued products which was recorded as part of cost of
goods sold during the transition period. At October 2, 1999, the remaining
provisions for the severance payments and other employee termination benefits
and discontinued product inventory amounted to $112,000 and $342,000,
respectively. The Company expects the remaining reserves to be sufficient and
fully utilized.
The Company recorded a charge of $1,212,000 in the fiscal year ended
September 30, 1998 for asset impairment of its Congers Facility as a result of
outsourcing the manufacture of the products from such facility. The charge was
based on the difference between the appraised value of the property less its net
book value at September 30, 1998. In March 1999, the Company entered into an
agreement with Halsey to lease, with an option to purchase, the Congers Facility
and related machinery and equipment.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this Form 10-Q may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including those concerning management's expectations with respect to
future financial performance and future events, particularly relating to sales
of current products as well as the introduction of new manufactured and
distributed products. Such statements involve known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of the
Company, which could cause actual results and outcomes to differ materially from
those expressed herein. Factors that might affect such forward-looking
statements set forth in this Form 10-Q include, among others, (i) increased
competition from new and existing competitors and pricing practices from such
competitors, (ii) pricing pressures resulting from the continued consolidation
by the Company's distribution channels, (iii) the amount of funds available for
internal research and development and research and development joint ventures,
(iv) research and development project delays or delays and unanticipated costs
in obtaining regulatory approvals, (v) continuation of distribution rights under
significant agreements, (vi) the effectiveness of restructuring measures to
reduce losses and increase efficiencies, (vii) the continued ability of
distributed product suppliers to meet future demand and (viii) general industry
and economic conditions. Any forward-looking statements included in this Form
10-Q are made as of the date hereof, based on information available to the
Company as of the date hereof, and the Company assumes no obligation to update
any forward-looking statements.
RESULTS OF OPERATIONS
General
Overall results have significantly improved during 1999, when compared to
corresponding 1998 periods, through increased sales levels, improved margins,
lower operating expenses and recent restructuring. Operating losses for the
nine-month and three-month periods ended October 2, 1999 of $1,738,000 and
$830,000, respectively, were reduced considerably from $13,515,000 and
$8,448,000 in the corresponding periods ended September 30, 1998. Revenue and
margin growth in both periods were obtained primarily through volume increases
on certain existing products, a more favorable pricing environment in the market
and additional sales of products introduced during the last year, including
seven new products in 1999. Reduced operating expenses in 1999 included lower
product development costs, net of funding from strategic partners, and lower
selling and administrative costs, as described below. Operating expenses in the
prior year included a non-recurring charge of $1,212,000 for asset impairment of
the Congers Facility resulting from outsourcing the production from such
facility. The Company incurred net losses of $1,019,000 and $326,000 for the
nine-month and three-month periods ended October 2, 1999, respectively, compared
to net losses of $7,516,000 and $5,673,000 in the corresponding periods of the
prior year. 1998 net results included non-recurring income of approximately
$6,100,000 and $2,500,000 in the nine-month and three-month periods,
respectively, from the sale and release of product rights to Elan (see "Notes to
Financial Statements-Distribution and Supply Agreements-Elan Corporation").
As part of a recent restructuring designed to increase operating efficiencies
and improve operating results, the Company has reduced its work force,
discontinued certain unprofitable manufactured products, discontinued
manufacturing at an under-utilized facility and subsequently leased the facility
(see "Notes to Financial Statements-Commitments, Contingencies and Other
Matters-Asset Impairment/Restructuring"). The Company plans to continue to
search for additional measures to improve results, including pursuing new
products through joint ventures, and distribution and other agreements with
pharmaceutical companies located throughout the world. If current gross margin
levels are not increased by sales of more profitable products or continued
volume increases and favorable pricing on existing products, the Company will
continue to experience losses.
In order to improve the Company's growth prospects through the introduction
of new products at profitable pricing and strengthen its financial condition,
the Company entered into a strategic alliance with Merck KGaA, which was
completed on June 30, 1998. As part of the alliance, the Company sold Common
Stock to a subsidiary of Merck KGaA and 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. To date, seven of such products have
received FDA approval and are being marketed by Par. The remaining products are
either currently being developed, have been identified for development, or have
been submitted to the FDA for approval. Genpharm pays the research and
development costs associated with the products and the Company will pay Genpharm
a certain percentage of the gross margin on sales of the products (see "Notes to
Financial Statements-Strategic Alliance" and "-Distribution and Supply
Agreements-Genpharm, Inc."). The alliance provides the Company with a
significant number of potential products for its development pipeline without
the substantial resource commitment, including financial, it would normally take
to develop such a pipeline, improved financial condition and working capital for
possible business expansion, and access to Merck KGaA's expertise and experience
in the industry.
-9-
<PAGE>
Critical to any significant improvement in the Company's financial condition
is the introduction 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, subject
to liquidity concerns, 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 the Company will acquire any additional products
for sale or that sales of additional products will reduce losses or return the
Company to profitability. Continuing operating losses will have a materially
adverse affect to the Company's liquidity and, accordingly, limit its ability to
fund research and development or ventures relating to the sale of new products
and market existing products (see "--Financial Condition-Liquidity and Capital
Resources").
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) ability of
generic competitors to quickly 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 branded drugs.
Net Sales
Net sales for the nine-month period ended October 2, 1999 of $60,692,000
increased $12,446,000, or 26%, from net sales of $48,246,000 for the nine-month
period ended September 30, 1998. The sales increase was primarily attributable
to volume increases on several existing products combined with a more favorable
pricing environment and additional sales from new manufactured products and
products sold under the Genpharm Distribution Agreement. Net sales of
distributed products in the most recent nine-month period, which consist of
products manufactured under contract and licensed products, increased to
approximately 66% of the Company's total net sales compared to approximately 47%
of the total for the same period of the prior year, continuing the trend of
greater reliance on sales of distributed products. The increased percentage of
distributed product sales is primarily due to increased sales of products
manufactured under the BASF Supply Agreement. The Company is substantially
dependent upon distributed products for its sales and, as the Company introduces
new distributed products under its distribution agreements, it is expected that
this trend will continue. Any inability by suppliers to meet expected demand
could adversely affect future sales. Pursuant to the Termination Agreement with
Elan, the Company ceased distributing Elan's transdermal nicotine patch after
May 31, 1999. As a result of the continued evaluation of its existing product
line, the Company discontinued certain unprofitable products during 1999 and is
attempting to sell all remaining inventory of those products. Although there
can be no assurance, it is anticipated that new product introductions, the
effect of recent volume increases on certain products and the current pricing
environment should offset decreased sales from the termination of the
transdermal nicotine patch distribution rights, and to a lesser extent, the
discontinued manufactured products.
Net sales of $19,317,000 in the third quarter of 1999 increased $2,531,000,
or 15%, compared to $16,786,000 for the corresponding quarter of 1998 following
volume increases on certain products, a more favorable pricing environment and
sales of new products which more than offset decreased sales due to the
termination of the transdermal nicotine patch distribution rights. Net sales of
distributed products for the most recent quarter increased to approximately 65%
of the Company's total net sales compared to approximately 61% of the total for
the comparable quarter of last year.
Sales of the Company's products are principally dependent upon, among other
things, (i) pricing levels and competition, (ii) market penetration for the
existing product line, (iii) the continuation of existing distribution
agreements, (iv) introduction of new distributed products, (v) approval of ANDAs
and introduction of new manufactured products, and (vi) the level of customer
service.
Gross Margin
The gross margin for the nine-month period ended October 2, 1999 increased
$9,604,000 to $12,345,000 (20% of net sales) from $2,741,000 (6% of net sales)
in the corresponding period of the prior year. Significant gross margin gains
were attained principally through increased volumes on certain products, a more
favorable pricing environment, additional contributions from new products and
lower inventory write-offs. Although unfavorable manufacturing variances due to
excess capacity earlier in the year adversely affected the gross margin, the
magnitude of these variances has decreased from the prior year. The Company has
attempted to address its excess capacity by leasing its under-utilized Congers
Facility in March 1999, through layoffs of manufacturing personnel in January
1999 and by writing down certain under-utilized assets (see "Notes to Financial
Statements-Asset Impairment/Restructuring").
-10-
<PAGE>
The third quarter 1999 gross margin of $4,070,000 (21% of net sales)
increased $3,994,000 from $76,000 (less than 1% of net sales) in the
corresponding quarter of the prior year. Increased pricing or volumes on certain
products, additional contributions from new products, lower manufacturing costs
and lower inventory write-offs contributed to the improved margins.
In addition to having a negative impact on net sales in the third quarter of
1999 and in future periods, the termination of the transdermal nicotine patch
distribution rights, discussed above, will also negatively affect the Company's
gross margin. Although there can be no assurance, it is anticipated that the
gross margins generated by sales of new products and the effect of recent price
and volume increases on certain products should offset this expected decrease.
Inventory write-offs amounted to $870,000 and $342,000 for the nine-month and
three-month periods ended October 2, 1999, respectively, compared to $1,936,000
and $857,000 in the corresponding periods of the prior year. The decrease in
both periods was primarily attributable to the magnitude of the write-offs in
the prior year related to obsolete inventory from the discontinuance of certain
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.
Operating Expenses
Research and Development
Research and development expenses of $4,755,000 for the nine-month period
ended October 2, 1999 decreased from $4,867,000 in the corresponding period of
the prior year. Partial funding of certain research and development expenses by
Generics and Genpharm in 1999 offset increased payments to purchase rights to
pharmaceutical chemical processes and for formulation development work
performed for PRI by unaffiliated companies. The Company conducts a significant
part of its research and development in Israel through IPR. Following the
acquisition of the remaining interests of IPR in 1997, the Company's domestic
research and development program was integrated with that of IPR. Research and
development expenses at IPR were $831,000, net of Generics funding, compared to
expenses of $1,322,000 in the prior year. Generics, a subsidiary of Merck KGaA,
the Company and IPR have an agreement pursuant to which Generics shares one-half
of the costs of IPR's operating budget in exchange for the exclusive
distribution rights outside of the United States to the products developed by
IPR after the date of the agreement (see "Notes to Financial
Statements-Development Agreement").
In the three-month period ended October 2, 1999, research and development
expenses were $2,038,000 compared to $3,106,000 in the same period of last year.
Lower payments to unaffiliated development companies due to additional costs in
the prior year to purchase rights to pharmaceutical chemical processes, the
timing of bio-studies and partial funding of certain expenses by Generics
resulted in lower spending in the most recent three-month period. Third quarter
1999 research and development expenses were $302,000 for IPR, net of funding
from Generics, compared to the $550,000 spent in the corresponding quarter of
the prior year.
The Company has ANDAs for three potential products pending with and awaiting
approval from, the FDA as a result of its internal product development program.
The Company has in process or expects to commence biostudies for three
additional products in 1999. In 1999, PRI received FDA approval of its ANDAs
for three products that it is currently marketing.
As part of the Genpharm Distribution Agreement, Genpharm pays the research
and development costs associated with the products covered by the Genpharm
Distribution Agreement. Currently, there are ANDAs for eight potential products
that are covered by the Genpharm Distribution Agreement pending with and
awaiting approval from, the FDA. To date, the Company is marketing seven
products under the Genpharm Distribution Agreement (see "Notes to Financial
Statements-Distribution and Supply Agreements-Genpharm, Inc.").
Selling, General and Administrative
Selling, general and administrative costs for the nine-month period ended
October 2, 1999 of $9,328,000 (15% of net sales) decreased from $10,177,000 (21%
of net sales) in the corresponding prior year period. One-time expenses in the
prior year for an introductory marketing program, certain selling expenses and
additional administrative costs related to Merck KGaA's equity investment in the
Company were not incurred in 1999. The absence of these expenses more than
offset higher costs in the current period related to strengthening the sales
force in anticipation of product introductions and increasing market share of
the existing product line, and to a lesser extent, higher shipping costs
associated with the increased sales levels.
For the three-month period ended October 2, 1999, selling, general and
administrative costs of $2,862,000 (15% of net sales) decreased $1,344,000, or
32% from $4,206,000 (25% of net sales) for the corresponding three-month period
of last year. The lower costs in the current quarter were primarily attributable
to the absence of certain prior year marketing and selling expenses, and
administrative expenses associated with Merck KGaA's equity investment in the
Company.
-11-
<PAGE>
Asset Impairment
The Company recorded a charge of $1,212,000 for the nine and three-month
periods ended September 30, 1998 for asset impairment of its Congers Facility as
a result of outsourcing the manufacture 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. In March 1999, the Company
entered into an agreement with Halsey to lease, with an option to purchase, the
Congers Facility and related machinery and equipment.
Other Income
Other income of $658,000 and $497,000 for the nine-month and three-month
periods ended October 2, 1999, respectively, decreased $5,603,000 and $2,166,000
from the corresponding periods in 1998. Other income in the nine-month and
three-month periods of 1999 consisted primarily of a payment from Genpharm in
return for a share of gross margin from a product currently awaiting approval
from the FDA. The decrease in both periods was primarily attributable to income
from the sale and release of product rights to Elan in 1998 (see "Notes to
Financial Statements-Distribution and Supply Agreements-Elan Corporation").
Income Taxes
Management has determined, based on the Company's recent performance and
uncertainty of the generic pharmaceutical business in which the Company
operates, that future operating income might not be sufficient to recognize
fully the net operating loss carryforwards of the Company. Therefore, the
Company did not recognize a benefit for its operating losses in any of the nine-
month and three-month periods ended October 2, 1999 or the comparable periods
ended September 30, 1998 (see "Notes to Financial Statements-Income Taxes").
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased to $151,000 at October 2,
1999 from $6,424,000 at December 31, 1998. The decrease was primarily
attributable to increased inventory levels, funding of outside development
projects and capital expenditures. Working capital at October 2, 1999,
including cash and cash equivalents, of $20,978,000 decreased $3,230,000 from
$24,208,000 at December 31, 1998. The working capital ratio was 2.21x in the
most recent period compared to 2.62x at December 31, 1998.
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 payments are expensed as
incurred and included in research and development costs. Total research and
development expenses, projected to reach approximately $6,000,000 in 1999, are
expected to increase in 2000.
On March 17, 1999, the Company entered into an agreement to lease its Congers
Facility to Halsey. Halsey paid the Company a purchase option of $100,000 in
March 1999 and is obligated to pay rent of $500,000 annually during the initial
three-year term of the lease. The rent is expected to cover the Company's fixed
costs of the facility. Under the purchase option, Halsey may purchase the
facility and substantially all the machinery and equipment at any time during
the lease for a specified amount (see "Notes to Financial Statements-Leasing
Agreement").
In January 1999, the Company entered into the Genpharm Profit Sharing
Agreement pursuant to which PRI will receive a portion of the profits resulting
from a separate agreement between Genpharm and an unaffiliated United States
based pharmaceutical company in exchange for a non-refundable fee of $2,500,000
from the Company. To date, the Company has paid $951,000 pursuant to the
Genpharm Profit Sharing Agreement and is negotiating a payment schedule for the
remainder of the fee (see "Notes to Financial Statements-Profit Sharing
Agreement").
The Company, IPR and Generics have entered into an agreement, dated August
11, 1998, pursuant to which Generics will fund one-half of the costs of IPR's
operating budget in exchange for the exclusive distribution rights outside of
the United States to the products developed by IPR after the date of the
agreement. In addition, Generics agreed to pay IPR a perpetual royalty for all
sales of the products by Generics or its affiliates outside the United States.
Under the Agreement, Generics commenced funding in the three-month period ended
December 31, 1998 and had fulfilled their requirements through October 2, 1999.
Generics is not required to fund more than $1,000,000 in any one calendar year
(see "Notes to Financial Statements-Development Agreement").
-12-
<PAGE>
On September 29, 1998, the Company and Elan entered into the Termination
Agreement pursuant to which the Company's exclusive distribution rights in the
United States to a transdermal nicotine patch ended on May 31, 1999. Pursuant
to the Termination Agreement, PRI received a cash payment of $2,000,000 in
October 1998 and an additional $1,000,000 in the third quarter of 1999. In
future periods, the Company will not receive any additional funds from the sale
of product rights to Elan. Pursuant to the Termination Agreement, Elan agreed
to pay Par a perpetual royalty on all non-prescription sales of the transdermal
nicotine patch by Elan in the United States and Israel (see "Notes to Financial
Statements-Distribution Agreements-Elan Corporation").
The Company expects to fund its operations, including research and
development activities and its obligations under the existing distribution and
development arrangements discussed herein, out of its working capital and if
necessary with available borrowings against its line of credit, if and to the
extent then available (see "Financing"). If, however, the Company continues to
experience operating losses, its liquidity and, accordingly, its ability to fund
research and development or ventures relating to the distribution of new
products would likely be materially and adversely affected.
Financing
The Company's total outstanding long-term debt, including the current
portion, at October 2, 1999 amounted to $1,329,000. The amount consists
primarily of an outstanding mortgage loan with a bank and capital leases for
computer equipment.
In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with General Electric Capital Corporation ("GECC") which provided
Par with a three-year revolving line of credit. Pursuant to the Loan Agreement,
as amended, Par is permitted to borrow up to the lesser of (i) the borrowing
base established under the Loan Agreement or (ii) $20,000,000. The borrowing
base is limited to 85% of eligible accounts receivable plus 50% of eligible
inventory of Par, each as determined from time to time by GECC. The interest
rate charge on the line of credit is based upon a per annum rate of 2 1/4% above
the 30-day commercial paper rate for high-grade unsecured notes adjusted
monthly. The line of credit with GECC is secured by the assets of Par and PRI
other than real property and is guaranteed by PRI. In connection with such
facility, Par, PRI and their affiliates have established a cash management
system pursuant to which all cash and cash equivalents received by any of such
entities are deposited into a lockbox account over which GECC has sole operating
control and which are applied on a daily basis to reduce amounts outstanding
under the line of credit. The revolving credit facility is subject to covenants
based on various financial benchmarks. In August 1999, GECC waived certain
events of default related to financial covenants and amended the financial
covenants in the Loan Agreement. As of October 2,1999, the borrowing base was
approximately $17,100,000 and $3,476,000 was outstanding under the line of
credit. The Company has begun negotiations with GECC to extend the Loan
Agreement on substantially similar terms.
Year 2000
The Company has completed an assessment of its internal systems related to
Year 2000 ("Y2K") compliance and has implemented a plan it believes will enable
its computerized information systems, manufacturing equipment, physical plant
and computerized processes to be Y2K compliant without any material disruption
in business. As of this Form 10-Q filing, the Company's internal efforts are
nearly complete and are expected to be completed by December 31, 1999. These
efforts include a pilot room testing of all critical computerized systems,
remedial action or replacement of systems which are not Y2K compliant,
evaluation of the Company's suppliers, customers and banks regarding their Y2K
readiness, and contingency plans for addressing complications as they may arise.
The costs of addressing this issue have consisted primarily of internal
personnel costs which have been expensed as incurred and have not, and the
Company believes will not, have a materially adverse effect on its financial
condition. However, a material financial risk could result if third parties
upon which the Company relies are unable to address this issue in a timely
manner. The Company anticipates devoting all resources necessary to resolve any
additional significant Year 2000 issues in a timely manner.
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. 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. A Y2K compliance survey directed to all suppliers, which consist
primarily of domestic distributors, indicates that substantially all expect to
be compliant during the fourth quarter of 1999. In addition, an internal study
was conducted to determine the adequacy of raw material and finished goods
inventory projected to be on hand at the end of 1999, including a contingency
plan to build inventory on certain key products.
-13-
<PAGE>
A Y2K compliance survey was sent to all of the Company's customers and
financial institutions to identify issues that could develop as a result of Y2K.
Certain customers have inquired about obtaining additional inventory before
December 31, 1999. Customer ordering restrictions are currently being
considered to prevent stockpiling of products, however the Company anticipates
filling additional orders where possible which could effect sales levels in the
fourth quarter of 1999 and the early part of 2000. The Company has been
contacted by its key financial institutions which reported that they expect to
be Y2K compliant in a timely manner.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
-14-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
10.4 - Seventh Amendment and Waiver to Loan and Security Agreement,
dated as of August 13, 1999, among the Company, General
Electric Capital Corporation, and the other parties named
therein.
27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None.
-15-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
November 16, 1999 /s/ Kenneth I. Sawyer
---------------------------------------------
Kenneth I. Sawyer
Chief Executive Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
November 16, 1999 /s/ Dennis J. O'Connor
---------------------------------------------
Dennis J. O'Connor
Vice President - Chief Financial Officer and
Secretary
(Principal Accounting and Financial Officer)
-16-
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number Description Page Number
- ------------------- ------------------------------------------------- -----------
<S> <C> <C>
10.4 Seventh Amendment and Waiver to Loan and Security 18
Agreement, dated as of August 13, 1999, among the
Company, General Electric Capital Corporation, and
the other parties named therein.
27 Financial Data Schedule 23
</TABLE>
-17-
<PAGE>
Exhibit 10.4
SEVENTH AMENDMENT AND WAIVER TO
LOAN AND SECURITY AGREEMENT
---------------------------
SEVENTH AMENDMENT AND WAIVER, dated as of August 13, 1999 (this
"Amendment"), to the Loan and Security Agreement referred to below by and among
- ----------
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"), PAR
------
PHARMACEUTICAL, INC., a New Jersey corporation ("Borrower"), PHARMACEUTICAL
--------
RESOURCES, INC., a New Jersey corporation ("Parent"), NUTRICEUTICAL RESOURCES,
------
INC., a New York corporation ("NRI"), and PARCARE, LTD., a New York corporation
---
("ParCare"). Parent, NRI and ParCare are hereinafter referred to as
-------
"Guarantors".
----------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Lender, Borrower and Guarantors are parties to that certain
Loan and Security Agreement, dated as of December 15, 1996 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Loan
----
Agreement"); and
WHEREAS, Lender has agreed to amend, and to waive certain violations
of, the Loan Agreement in the manner, and on the terms and conditions, provided
for herein.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties to this Amendment hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein
-----------
shall have the meanings ascribed to them in the Loan Agreement.
2. Amendment to Schedule F of the Loan Agreement. Schedule F of
--------------------------------------------- ----------
the Loan Agreement is hereby amended as of Amendment Effective Date (as
hereinafter defined) by deleting Section 1 in its entirety and inserting in lieu
thereof the following new section:
"1. Minimum EBIT. Parent and its Subsidiaries on a
------------
consolidated basis shall maintain for each four Fiscal Quarter period,
commencing with the four Fiscal Quarter period ending on or about
December 31, 1998, EBIT for such period of not less than the amount
for such period set forth below:
Four Fiscal Quarter Period Ending
---------------------------------
on or about: Minimum EBIT
----------- ------------
December 31, 1998 $(17,000,000)
March 30, 1999 (13,000,000)
June 30, 1999 (13,000,000)
September 30, 1999 (8,600,000)
December 31, 1999 (3,000,000)"
3. Waiver. Lender hereby waives as of the Amendment Effective Date
------
all Events of Default under Section 8.1(b) of the Loan Agreement solely arising
--------------
out of the failure of Parent and its Subsidiaries to maintain, on a consolidated
basis, the minimum EBIT required by Section 4.2 of the Loan Agreement and
-----------
paragraph 1 of Schedule F to the Loan Agreement for the four Fiscal Quarter
----------
period ended June 30, 1999.
-18-
<PAGE>
4. Representations and Warranties. To induce Lender to enter into
------------------------------
this Amendment, each Credit Party hereby represents and warrants that:
A. The execution, delivery and performance of this Amendment and
the performance of the Loan Agreement, as amended hereby (the "Amended Loan
------------
Agreement"), by each Credit Party: (i) are within their respective
---------
corporate powers; (ii) have been duly authorized by all necessary corporate
and shareholder action; and (iii) are not in contravention of any provision
of their respective certificates or articles of incorporation or by-laws or
other organizational documents.
B. This Amendment has been duly executed and delivered by or on
behalf of each Credit Party.
C. Each of this Amendment and the Amended Loan Agreement
constitutes a legal, valid and 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 (other than those waived pursuant hereto) 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.
F. The representations and warranties of the Credit Parties
contained in the Loan Agreement and each other Loan Document shall be true
and correct on and as of the Amendment Effective Date with the same effect
as if such representations and warranties had been made on and as of such
date, except that any such representation or warranty which is expressly
made only as of a specified date need be true only as of such date.
5. No Other Amendment/Waivers. Except as expressly provided in
--------------------------
Section 2 hereof, the Loan Agreement shall be unmodified and shall continue to
be in full force and effect in accordance with its terms. Except as expressly
provided in Section 3 hereof, this Amendment shall not be deemed a waiver of any
term or condition of any Loan Document and shall not be deemed to prejudice any
right or rights which Lender may now have or may have in the future under or in
connection with any Loan Document or any of the instruments or agreements
referred to therein, as the same may be amended from time to time.
6. Outstanding Indebtedness; Waiver of Claims. Each Credit Party
------------------------------------------
hereby acknowledges and agrees that as of the date hereof 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.
-19-
<PAGE>
7. Expenses. Borrower hereby reconfirms its obligations pursuant
--------
to Section 10.2 of the Loan Agreement to pay and reimburse Lender for all
reasonable out-of-pocket expenses (including, without limitation, reasonable
fees of counsel) incurred in connection with the negotiation, preparation,
execution and delivery of this Amendment and all other documents and instruments
delivered in connection herewith.
8. Effectiveness. This Amendment shall become effective as of the
-------------
date hereof (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
August 19, 1999:
A. Amendment. Lender shall have received two original copies
---------
of this Amendment duly executed and delivered by Lender and each Credit Party.
B. Payment of Expenses. Borrower shall have paid to Lender all
--------------------
costs and expenses (including a non-refundable waiver fee in the amount of
$15,000) owing in connection with this Amendment and the other Loan Documents
and due to Lender (including, without limitation, reasonable legal fees and
expenses).
C. Representations and Warranties. The representations and
------------------------------
warranties of each Credit Party contained in this Amendment shall be true and
correct on and as of the Amendment Effective Date.
9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
-------------
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
10. Counterparts. This Amendment may be executed by the parties
------------
hereto on any number of separate counterparts and all of said counterparts taken
together shall be deemed to constitute one and the same instrument.
(SIGNATURE PAGE FOLLOWS)
-20-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered as of the day and year first above written.
Borrower:
--------
PAR PHARMACEUTICAL, INC.
By: /s/ Dennis O'Connor
-------------------
Name: Dennis O'Connor
Title: VP-CFO
Lender:
------
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Martin S. Greenberg
-----------------------
Name: Martin S. Greenberg
Its: Duly Authorized Signatory
Parent:
------
PHARMACEUTICAL RESOURCES, INC.
By: /s/ Dennis O'Connor
-------------------
Name: Dennis O'Connor
Title: VP-CFO
(SIGNATURES CONTINUED ON NEXT PAGE)
-21-
<PAGE>
Subsidiary Guarantors:
---------------------
NUTRICEUTICAL RESOURCES, INC.
By: /s/ Dennis O'Connor
-------------------
Name: Dennis O'Connor
Title: VP-CFO
PARCARE, LTD.
By: /s/ Dennis O'Connor
-------------------
Name: Dennis O'Connor
Title: VP-CFO
-22-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS INCLUDED IN THE QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS
ENDED OCTOBER 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-02-1999
<CASH> 151
<SECURITIES> 0
<RECEIVABLES> 21,385
<ALLOWANCES> (4,079)
<INVENTORY> 18,466
<CURRENT-ASSETS> 38,316
<PP&E> 47,465
<DEPRECIATION> (24,756)
<TOTAL-ASSETS> 80,143
<CURRENT-LIABILITIES> 17,338
<BONDS> 1,094
0
0
<COMMON> 295
<OTHER-SE> 60,542
<TOTAL-LIABILITY-AND-EQUITY> 80,143
<SALES> 60,692
<TOTAL-REVENUES> 61,350
<CGS> 48,347
<TOTAL-COSTS> 14,053
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> (61)
<INCOME-PRETAX> (1,019)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,019)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,019)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
