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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For Fiscal Year Ended December 31, 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 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
-------------- -----------------------------------------
Common Stock, $.01 par value The New York Stock Exchange, Inc.
The Pacific Stock Exchange, Inc.
Common Stock Purchase Rights The New York Stock Exchange, Inc.
The Pacific Stock Exchange, Inc.
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
--- ---
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.
---
The aggregate market value of the voting stock and non-voting common equity
held by non-affiliates of the Registrant was $189,300,284 as of March 15, 2000
(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 March 15,
2000: 29,567,225
DOCUMENTS INCORPORATED BY REFERENCE: NONE
This is page 1 of 73 pages. The exhibit index is on page 33.
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PART I
ITEM 1. Business.
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 over-the-
counter drugs. Approximately 102 products representing various dosage
strengths of 42 drugs are currently marketed by the Company. 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. Generally, 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. Generic drugs provide a cost effective
alternative for consumers while maintaining the safety and effectiveness of
the brand name pharmaceutical product (see "--Product Line Information").
The Company markets its products primarily to wholesalers, retail drug store
chains, drug distributors and repackagers 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:
Change in Accounting Period. 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 most recent fiscal year reported in this
Form 10-K began on January 1, 1999 and ended on December 31, 1999 ("fiscal
year 1999") and comparative results include amounts for the twelve-month
fiscal periods ended September 30, 1998 ("fiscal year 1998") and September 30,
1997 ("fiscal year 1997"). As a result of the change in accounting period, the
Company also previously reported results for the three-month period ended
December 31, 1998 ("transition period") and the comparative three-month period
ended December 27, 1997.
Results of Operations. In fiscal year 1999, the Company achieved its highest
sales levels since fiscal year 1989, which led to significant improvements in
gross margin and operating results compared to fiscal years 1998 and 1997.
Beginning in the latter half of 1998, and continuing into 1999, the generic
drug industry began experiencing a more favorable pricing environment after
many years of severe price erosion. In addition to benefiting from the
favorable pricing environment, the Company introduced several new manufactured
products and additional products under distribution agreements. The improved
results were also aided by a recent Company restructuring designed to reduce
costs and increase operating efficiencies. 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.
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Restructuring. In fiscal year 1998 and the transition period, the Company
recorded asset impairment and restructuring charges totaling $3,118,000 and
began implementing restructuring plans that included discontinuing certain
unprofitable products and outsourcing certain other products previously
manufactured by the Company, reducing the work force related to producing
those products and eliminating or writing down the assets of under-utilized
facilities. Following that plan, the Company terminated approximately 50
employees in fiscal year 1999, primarily in manufacturing and various
manufacturing support functions, reduced certain related expenses, and leased,
with an option to purchase, its facility and related machinery and equipment
located in Congers, New York.
Patent for Unique Formulation Granted. On March 1, 2000, Par was granted a
patent by the U.S. Patent Office regarding its unique formulation of megestrol
acetate oral suspension. Par has filed with the United States Food and Drug
Administration ("FDA") an abbreviated new drug application ("ANDA") for
megestrol acetate oral suspension, the generic version of Bristol Myers
Squibb's ("BMS") Megace(R) Oral Suspension, including a paragraph IV
certification regarding the formulation patent as part of its ANDA submission.
Par has reason to believe that it is the first to file an ANDA for megestrol
acetate oral suspension and, based upon current legislation, could be entitled
to up to 180 days of generic marketing exclusivity after final approval by the
FDA. BMS sued Par in October 1999, claiming that Par's formulation of its
megestrol acetate oral suspension infringes a BMS patent. Par intends to
vigorously pursue its pending litigation with BMS and to defend its patent
rights and ensure that other generic companies do not infringe the Par patent.
Par believes that the issuance of its new patent, which establishes the
uniqueness of Par's formulation compared to the BMS patent, should
significantly help Par's defense in the BMS patent infringement case.
Par's patent broadly covers its unique approach to the formulation of the
product. Par believes that based upon the BMS patent and the Par patent, it
will be more difficult for other generic companies to develop a product that
does not infringe either patent. Non-infringement of both the Par patent and
the BMS patent are a requirement for other generic companies to lawfully enter
this market. Although Par anticipates that other generic products may
ultimately be approved for megestrol acetate oral suspension, it is now
possible that there will be fewer market entries over time than typical of a
product of this size. Based on Par's market research, the Company believes
U.S. sales of Megace Oral Suspension were approximately $100 million over the
last twelve months.
Marketing of the product may occur after Par receives final FDA approval.
Based on current legislation, final approval will occur when (i) its ANDA
submission is approved (the application was filed in July 1999 and normally
takes 12-24 months) and (ii) the earlier of 30 months from the date litigation
commenced (October 1999) or at the conclusion of successful litigation with
BMS. The duration and/or final outcome of the litigation and the FDA's
treatment of exclusivity are subject to many factors beyond the direct control
of Par. 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 (see "--Legal Proceedings").
Lease Agreement. On March 17, 1999, Par 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. Under the Halsey
Supply Agreement (as hereinafter defined), Halsey is required to perform
certain manufacturing operations for the Company at the Congers Facility (see
"--Product Line Information" and "--Properties").
Profit Sharing Agreement. In January 1999, the Company entered into a profit
sharing agreement (the "Genpharm Profit Sharing Agreement") with Genpharm,
Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA 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
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$2,500,000 fee, which the Company completed paying in January 2000. The
Genpharm Profit Sharing Agreement covers 15 products that are not included in
the Company's distribution agreement with Genpharm resulting from its
strategic alliance with Merck KGaA.
Strategic Alliance. In 1998, the Company began a strategic alliance with
Merck KGaA, a pharmaceutical, laboratory and chemical company located in
Darmstadt, Germany. As part of the alliance, the Company sold Common Stock to
a subsidiary of Merck KGaA and received the exclusive United States
distribution rights to approximately 40 generic pharmaceutical products,
covered by a distribution agreement between the Company and Genpharm (the
"Genpharm Distribution Agreement"). To date, ten of such products have
received FDA approval and are currently being marketed by Par. The remaining
products are either being developed, have been identified for development, or
have been submitted to the FDA for approval. There are currently ANDAs for
nine potential products covered by the Genpharm Distribution Agreement, one of
which has been tentatively approved, pending with and awaiting approval from,
the FDA. The Company anticipates introducing several of these products in
2000. Genpharm pays the research and development costs associated with the
products and the Company is obligated to pay Genpharm a certain percentage of
the gross margin on sales of the products. 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
access to Merck KGaA's expertise and experience in the industry (see "--
Product Line Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
PRODUCT LINE INFORMATION
The Company operates 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
creams and reconstituted suspensions/solutions (see "--Research and
Development").
Par markets approximately 51 products, representing various dosage strengths
of 19 drugs that are manufactured by the Company and approximately 51
additional products, representing various dosage strengths of 23 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 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.
<TABLE>
<CAPTION>
Competitive
Name Brand-Name Drug
---- ----------------
<S> <C>
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
Imipramine Hydrochloride................................. Tofranil
Meclizine Hydrochloride.................................. Antivert
Prochlorperazine Maleate................................. Compazine
Temazepam................................................ Restoril
Triazolam................................................ Halcion
</TABLE>
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<TABLE>
<CAPTION>
Competitive
Name Brand-Name Drug
---- -----------------------
<S> <C>
Cardiovascular:
Acebutolol........................................ Sectral
Amiloride Hydrochloride........................... Midamor
Amiodarone Hydrochloride.......................... Cordarone
Captopril......................................... Capoten
Guanfacine........................................ Tenex
Hydralazine Hydrochloride......................... Apresoline
Hydra-Zide........................................ Apresazide
Indapamide........................................ Lozol
Isosorbide Dinitrate.............................. Isordil
Minoxidil......................................... Loniten
Nicardipine Hydrochloride......................... Cardene
Anti-Inflammatory:
Aspirin (zero order release)...................... Zorprin
Dexamethasone..................................... Decadron
Etodolac.......................................... Lodine
Ibuprofen......................................... Advil, Nuprin, Motrin
Naproxen Sodium................................... Aleve
Orphengesic/Orphengesic Forte..................... Norgesic/Norgesic Forte
Anti-Infective:
Acyclovir......................................... Zovirax
Amoxicillin....................................... Amoxil
Ampicillin........................................ Principen
Minocycline....................................... Minocin
Penicillin V Potassium............................ V-Cillin K
Silver Sulfadiazine (SSD)......................... Silvadene
Anti-Cancer:
Hydroxyurea....................................... Hydrea
Megestrol Acetate................................. Megace
Anti-Parkinson:
Selegiline........................................ Eldepryl
Anti-Platelet:
Ticlopidine....................................... Ticlid
Anti-Gout:
Allopurinol....................................... Zyloprim
Histamine:
Ranitidine........................................ Zantac
Ovulation Stimulant:
Clomiphene........................................ Clomid
</TABLE>
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 companies located throughout the world.
As part of that strategy, the Company has pursued and continues to pursue
arrangements or affiliations which it believes could 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. The Company's material distribution agreements are
described below.
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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 has 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 met the minimum purchase requirements for fiscal year 1999. The
Company and BASF are currently negotiating a new agreement and have agreed in
principle on terms substantially similar to the current agreement.
Genpharm and the Company entered into the Genpharm Distribution Agreement,
dated March 25, 1998, pursuant to which Genpharm granted exclusive
distribution rights to the Company within the United States and certain United
States territories with respect to approximately 40 generic pharmaceutical
products. To date, ten of such products have received FDA approval and are
currently being marketed by Par. The remaining products are either being
developed, have been identified for development, or have been submitted to the
FDA for approval. There are currently ANDAs for nine potential products
covered by the Genpharm Distribution Agreement, one of which has been
tentatively approved, pending with and awaiting approval from, the FDA. The
Company anticipates introducing several of these products in 2000. 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 is obligated to pay
Genpharm a percentage of the gross profits attributable to the sales of such
products.
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, the Company's exclusive right to distribute in the
United States a transdermal nicotine patch manufactured by Elan ended on May
31, 1999. The Company 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,
the Company received a cash payment of $2,000,000 in October 1998 and an
additional payment of $1,000,000 in the third quarter of fiscal year 1999. In
fiscal year 1999, Elan began to pay the Company a perpetual royalty pursuant
to the Termination Agreement on all non-prescription sales of the transdermal
nicotine patch by Elan in the United States and Israel.
On March 17, 1999, Par and Halsey entered into a Manufacturing and Supply
Agreement (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 of Halsey products during the initial 18 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
from the date of the Halsey Supply Agreement.
Research and Development
The Company is actively developing approximately 12 products as part of its
development program. The Company expects that approximately six of these
products will be the subject of a biostudy in 2000, but has not
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filed any ANDAs with respect to such potential products. The Company expects
its expenditures for research and development in 2000 to increase to
approximately $8,500,000. The scientific process of developing new products
and obtaining FDA approval is complex and time consuming. 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 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, IPR, 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 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 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 1999, the Company contracted with outside laboratories to conduct
biostudies for five 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 third parties 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 and suspension 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, one of which has received tentative approval, for four 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 the loss of
revenues from certain older or discontinued 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, prospects and
financial condition (see "--Competition").
For fiscal years 1999, 1998 and 1997, and the transition period, the Company
incurred research and development expenses of $6,005,000, $5,775,000,
$5,843,000 and $1,125,000, respectively. In fiscal year 1999, the Company
increased payments for purchase rights to pharmaceutical chemical processes
and for formulation development work performed for PRI by unaffiliated
companies and recorded reimbursements from Genpharm for work performed by PRI
related to products covered by the Genpharm Distribution Agreement. Fiscal
year 1999 and the transition period costs are net of funding from Generics
pursuant to the Development Agreement (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Operating Results-
Research and Development").
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Marketing and Customers
The Company primarily markets its products under the Par label to
wholesalers, retail drug store chains, distributors 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. Par has a significant over-the-counter business through which
it sells products to specific marketing sales organizations that repackage and
sell private label products to large chain drug stores.
The Company has experienced a significant change in its distribution
channels in the last several years as sales of generic drugs to wholesalers
and drug store chains have increased and sales to distributors have declined.
The Company believes that consolidation among wholesalers and retailers, the
formation of large buying groups and competition between distributors has
resulted in additional pricing pressures. Additionally, aggressive pricing
strategies by some distributors attempting to maintain or increase market
share have adversely affected the Company's ability to market its products.
After years of severe price deterioration in the generic drug market certain
industry leaders began raising prices on selected products in 1998, which
continued in 1999. Although the Company continues to experience low margins on
many of its products, the current pricing environment has contributed to the
improvement in the Company's overall gross margin and operating results in
fiscal year 1999 (see "--Competition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
In fiscal year 1999, the Company continued to strengthen its internal sales
and marketing team by hiring additional experienced personnel. After reducing
selling costs in fiscal year 1997, the Company increased such costs in fiscal
years 1998 and 1999 to capitalize on anticipated product introductions from
the Merck KGaA relationship, its research and development program and
additional licensing opportunities that may become available in the future.
The Company has approximately 160 customers. During fiscal year 1999, sales
to the Company's three largest customers, McKesson Drug Co., Bergen Brunswig
Corporation and Leiner Health Products Inc. accounted for approximately 15%,
11% and 9%, 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 could 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, believed by management to be firm, as of
December 31, 1999 was approximately $4,000,000, as compared to approximately
$5,000,000 at December 31, 1998 and $7,700,000 at September 30, 1998.
Following the change in distribution channels over the last several years, the
Company's Par label business has increased while the private label business
has decreased. This change has led to a shift in ordering patterns as Par
label product requires less lead time than private label. Although the current
open 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 competitive due principally to
the number of competitors in the market and the consolidation of the Company's
distribution outlets through mergers, acquisitions and the formation of buying
groups. The Company has identified at least ten principal competitors, and
experiences varying degrees of competition from numerous other companies in
the health care industry. 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.
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
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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 large part, on the number and timing of introductions of
competing products and the Company's timely development and introduction of
new products.
During fiscal year 1999, four of the Company's products accounted for
approximately 47% of its net sales compared to 63%, 56% and 55%, respectively,
of net sales for the same four products in fiscal years 1998, 1997 and the
transition period. One such product, the transdermal nicotine patch whose
product rights had been sold effective May 31, 1999, was not sold in fiscal
year 1997. The transdermal nicotine patch accounted for approximately 5% of
net sales in each fiscal year 1999 and 1998, 10% of net sales in the
transition period and a significant portion of the gross margin in those
respective periods. Although the termination of the distribution rights for
the transdermal nicotine patch in fiscal year 1999 is expected to negatively
affect the Company's sales and gross margin, it is anticipated that the sales
and gross margins generated by new products in 2000 may offset this expected
decrease. The Company has implemented measures to reduce the overall impact of
these four products including adding additional products through new and
existing distribution agreements, manufacturing process improvements and cost
reductions.
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 of
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, depending on the
particular product, could have a material 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 of raw materials for its drug approvals.
Employees
As of December 31, 1999, the Company had approximately 275 employees
compared to 321 at December 31, 1998 (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset
Impairment/Restructuring Charge").
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.
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FDA approval is required before any new drug, including a generic equivalent
of a previously approved branded 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 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 two basic ways to satisfy the FDA's safety and effectiveness
requirements:
1. New Drug Applications ("NDA"): Unless the procedure discussed in
paragraph 2 below is available, a prospective manufacturer must submit to
the FDA an NDA containing complete pre-clinical and clinical safety and
efficacy data or a right of reference to such data. The pre-clinical data
must provide an adequate basis for evaluating the safety and scientific
rationale for the initiation of clinical trials. Clinical trials are
conducted in three sequential phases and may take several years to
complete. At times, the phases may overlap. Data from pre-clinical testing
and clinical trials is submitted to the FDA as an NDA for marketing
approval.
2. 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
10
<PAGE>
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, licensing requirements 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.
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. The
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 another building in Chestnut Ridge, New York, across the
street from its executive offices, occupying approximately 36,000 square feet
on two acres. 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 of approximately 33,000 square feet located on six
acres in Congers, New York, which was used for tablet coating operations and
product manufacturing. During fiscal year 1998, the Company outsourced a
substantial portion of the manufacturing at this facility to BASF. On March
17, 1999, Par entered into an agreement to lease the facility and related
machinery and equipment to Halsey. 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. Pursuant to the Lease Agreement, Halsey paid the purchase
option of $100,000 in March 1999. 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. Under the Halsey Supply Agreement, Halsey is
required to perform certain manufacturing operations for the Company at the
Congers Facility (see "Notes to the Financial Statements--Lease Agreement" and
"--Distribution and Supply Agreements--Halsey Drug Co., Inc.").
Par occupies approximately 47,000 square feet of a building in Chestnut
Ridge, New York for warehouse space under a lease that 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. In
December 1999, Genpharm began manufacturing for the Company the product that
was previously produced at this facility. The Company does not expect to renew
the lease at its expiration.
11
<PAGE>
IPR leases approximately 13,000 square feet in Even Yehuda, Israel for
product research and development. The lease expires in May 2000 and has a two-
year renewal option and one 35 month renewal option. The Company guarantees
IPR's obligations under 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.
Par has filed with the FDA an ANDA for megestrol acetate oral suspension,
the generic version of BMS's 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 BMS has a formulation patent for Megace(R) Oral
Suspension expiring in 2011. Par believes that its distinct and unique
formulation does not infringe the BMS formulation patent. In October 1999, BMS
initiated a patent infringement action against Par. On March 1, 2000, Par was
granted a patent by the U.S. Patent Office regarding Par's unique formulation
of megestrol acetate oral suspension. Par believes that the issuance of this
patent, which establishes the uniqueness of Par's formulation compared to the
BMS patent, should significantly help Par's defense in the patent infringement
case. Par intends to vigorously pursue its pending litigation with BMS and to
defend its patent rights and ensure that other generic companies do not
infringe the Par patent. 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 former employees, and
believes 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. The Company intends to defend these actions
vigorously. In fiscal year 1999, the Company settled an action by a former
officer for, among other things, breach of contract that did not have a
material effect on its financial condition, results of operations or
liquidity.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
The rules promulgated by the Securities and Exchange Commission may permit the
Company to exercise discretionary authority to vote on shareholder proposals at
the 2000 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 May 8, 2000.
12
<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 Stock 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
three most recent calendar years.
<TABLE>
<CAPTION>
Year Ended In
-----------------------------------
Quarter Ended 1999 1998 1997
------------- ----------- ----------- -----------
High Low High Low High Low
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
March 31............................... $7.69 $4.13 $4.75 $1.44 $4.38 $2.88
June 30................................ 8.69 6.50 5.00 3.56 3.75 2.13
September 30........................... 8.44 5.06 6.31 3.81 2.88 1.94
December 31............................ 6.38 4.56 4.75 3.25 2.50 1.13
</TABLE>
(b) Holders. As of March 15, 2000, there were approximately 2,800 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 fiscal years 1999 and 1998, and the transition period,
the Company did not pay any 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 March 15, 2000, the closing price of a share of
the Common Stock on the NYSE was $6.44 per share.
(e) Recent Sales of Unregistered Securities. The Company, on June 30, 1998,
sold 10,400,000 shares of Common Stock to Lipha Americas, Inc. ("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, as amended. Lipha, Merck KGaA and Genpharm have
certain registration rights with respect to the shares of Common Stock they
own (see "Certain Relationships and Related Transactions").
13
<PAGE>
ITEM 6. Selected Financial Data
<TABLE>
<CAPTION>
Twelve Three
Months Months Twelve Months Ended
Ended Ended ----------------------------------
12/31/99 12/31/98 9/30/98 9/30/97 9/30/96 9/30/95
-------- -------- ------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales.................. $80,315 $16,775 $59,705 $52,572 $57,451 $65,824
Cost of goods sold......... 64,140 17,105 56,135 49,740 48,299 45,514
------- ------- ------- ------- ------- -------
Gross margin........... 16,175 (330) 3,570 2,832 9,152 20,310
Operating expenses:
Research and
development............. 6,005 1,125 5,775 5,843 5,160 5,487
Selling, general and
administrative.......... 12,787 3,611 12,090 11,861 16,660 15,513
Asset
impairment/restructuring
charge.................. -- 1,906 1,212 -- 549 --
------- ------- ------- ------- ------- -------
Total operating
expenses.............. 18,792 6,642 19,077 17,704 22,369 21,000
------- ------- ------- ------- ------- -------
Operating loss......... (2,617) (6,972) (15,507) (14,872) (13,217) (690)
Settlements................ -- -- -- -- -- 2,029
Other income, net.......... 906 1 6,261 6,926 2,007 77
Interest (expense) income.. (63) (89) (382) (545) 118 32
------- ------- ------- ------- ------- -------
(Loss) income from
continuing operations
before provision for
income taxes.............. (1,774) (6,882) (9,628) (8,491) (11,092) 1,448
Provision for income
taxes..................... -- -- -- 410 -- 836
------- ------- ------- ------- ------- -------
(Loss) income from
continuing operations..... (1,774) (6,882) (9,628) (8,901) (11,092) 612
Income from discontinued
operations................ -- -- -- -- 2,800 --
------- ------- ------- ------- ------- -------
Net (loss) income.......... $(1,774) $(6,882) $(9,628) $(8,901) $(8,292) $ 612
======= ======= ======= ======= ======= =======
Net (loss) income per share
of common stock:
Continuing operations:
Basic.................... $ (.06) $ (.23) $ (.45) $ (.48) $ (.60) $ .04
Diluted.................. $ (.06) $ (.23) $ (.45) $ (.48) $ (.60) $ .04
Discontinued operations:
Basic.................... -- -- -- -- .15 --
Diluted.................. -- -- -- -- .15 --
------- ------- ------- ------- ------- -------
Net (loss) income:
Basic.................... $ (.06) $ (.23) $ (.45) $ (.48) $ (.45) $ .04
======= ======= ======= ======= ======= =======
Diluted.................. $ (.06) $ (.23) $ (.45) $ (.48) $ (.45) $ .04
======= ======= ======= ======= ======= =======
Weighted average number of
common and common
equivalent shares
outstanding:
Basic.................... 29,461 29,320 21,521 18,681 18,340 16,670
======= ======= ======= ======= ======= =======
Diluted.................. 29,461 29,320 21,521 18,681 18,340 17,143
======= ======= ======= ======= ======= =======
BALANCE SHEET DATA
Working capital............ $21,221 $24,208 $29,124 $15,959 $20,716 $34,907
Property, plant and
equipment (net)........... 22,681 22,789 24,283 27,832 26,068 24,371
Total assets............... 82,686 77,947 82,924 72,697 84,946 90,917
Long-term debt, less
current portion........... 1,075 1,102 1,143 2,651 2,971 4,259
Shareholders' equity....... 60,339 61,191 68,009 57,268 70,624 71,954
</TABLE>
14
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Certain statements in this Form 10-K 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 certain cost cutting and restructuring measures
and 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 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-K 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
The Company showed significant progress in fiscal year 1999 when compared to
fiscal years 1998 and 1997. Improvements were achieved through increased sales
levels, higher gross margins, and the effects of a recent restructuring.
Operating losses in fiscal year 1999 of $2,617,000 were reduced considerably
from $15,507,000 and $14,872,000 in fiscal years 1998 and 1997, respectively.
Revenue and margin growth were obtained primarily through a more favorable
pricing environment in the market, reversing prior year trends of price
erosion on certain products, and additional sales from new products. Operating
expenses in fiscal year 1999 increased over fiscal years 1998 and 1997 due to
additional emphasis on product development and marketing. Operating expenses
in fiscal year 1998 included a non-recurring charge of $1,212,000 for asset
impairment of the Congers Facility resulting from outsourcing its production
volume and subsequently leasing the facility to Halsey. The Company incurred
net losses of $1,774,000, $9,628,000 and $8,901,000 in fiscal years 1999, 1998
and 1997, respectively. Fiscal years 1998 and 1997 net results included non-
recurring income of approximately $6,100,000 and $3,900,000, respectively,
from the sale and release of product rights to Elan. Fiscal year 1997 net
results also included a gain of approximately $3,433,000 on the sale of Sano
Corporation common stock (see "Notes to Financial Statements--Distribution and
Supply Agreements--Elan Corporation").
In December 1998, the Company changed its annual reporting period to a
fiscal year ending December 31 from a fiscal year ending September 30 and,
accordingly, reported results for the three-month transition period. The
operating loss in the transition period was $6,972,000 compared to $1,992,000
for the corresponding three-month period ended December 27, 1997. Although the
Company experienced 38% net sales growth in the transition period, compared to
the corresponding period of the prior year, primarily from sales of new
products, the gross margin declined significantly due to unfavorable
manufacturing variances and additional inventory write-offs. In addition,
increased product development activity and higher selling and administrative
expenses, as described below, adversely impacted the operating results for the
transition period. During the transition period, the Company began
implementing certain measures, including discontinuing its manufacturing of
certain unprofitable products, in an attempt to reduce operating losses.
Accordingly, the Company recorded charges of $1,906,000 in the transition
period for asset impairment and restructuring, and $630,000 of additional
inventory reserves (see "Notes to Financial Statements--Commitments,
Contingencies and Other Matters--Asset Impairment/Restructuring").
15
<PAGE>
As part of 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 two under-utilized facilities and subsequently leased, with
an option to purchase, one such facility. 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 gross margin levels
are not increased by sales of more profitable products or volume increases and
favorable pricing on existing products, the Company will continue to experience
losses.
In order to improve the Company's 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 exclusive United States distribution
rights for up to approximately 40 generic pharmaceutical products covered by
the Genpharm Distribution Agreement. To date, ten of such products have
received FDA approval and are currently being marketed by Par. The remaining
products are either being developed, have been identified for development, or
have been submitted to the FDA for approval. There are currently ANDAs for
nine potential products covered by the Genpharm Distribution Agreement, one of
which has been tentatively approved, pending with and awaiting approval from,
the FDA. The Company anticipates introducing several of these products in
2000. Genpharm pays the research and development costs associated with the
products and the Company is obligated to pay Genpharm a certain percentage of
the gross margin on sales of the products. 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
access to Merck KGaA's expertise and experience in the industry (see "Notes to
Financial Statements--Strategic Alliance" and "--Distribution and Supply
Agreements--Genpharm, Inc.").
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 additional
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
obtain 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 on 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, and
(iv) willingness of generic drug customers, including wholesale and retail
customers, to switch among pharmaceutical manufacturers (see "Business--
Marketing and Customers" and "--Competition").
Net Sales
Net sales of $80,315,000 in fiscal year 1999 increased $20,610,000, or 35%,
from fiscal year 1998. The sales increase was primarily attributable to a more
favorable pricing environment and additional sales from new manufactured
products and products sold under the Genpharm Distribution Agreement. Net
sales in fiscal year 1999 of distributed products, which consist of products
manufactured under contract and licensed products,
16
<PAGE>
increased to approximately 64% of the Company's net sales compared to
approximately 44% of net sales in fiscal year 1998, 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 Supply Agreement with BASF. 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. The transdermal nicotine patch
accounted for approximately 5% of sales in both fiscal year 1999 and 1998. As
a result of the continued evaluation of its existing product line, the Company
discontinued certain unprofitable products during fiscal year 1999. Although
there can be no assurance, it is anticipated that new product introductions
and the continued effect of the current pricing environment could offset
decreased sales from the termination of the transdermal nicotine patch
distribution rights, and to a lesser extent, the discontinued manufactured
products.
Net sales for the transition period of $16,775,000 increased $4,641,000, or
38%, from net sales of $12,134,000 for the three-month period ended December
27, 1997. The sales growth was primarily attributable to sales of new
products, primarily the transdermal nicotine patch manufactured by Elan and
Naproxen Sodium manufactured by the Company and introduced in October 1998.
Net sales of distributed product for the transition period increased to
approximately 68% of the Company's total net sales compared to approximately
31% of the total for the same period of the prior year.
Net sales for fiscal year 1998 of $59,705,000 increased $7,133,000, or 14%,
from $52,572,000 for fiscal year 1997. The sales growth was primarily
attributable to increased sales of two distributed products manufactured by
BASF under the Supply Agreement and the introduction of three new products,
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 decreased pricing and
volume of three of the Company's manufactured products following the
introduction of other generic drug manufacturers' products in direct
competition with those products. Net sales of distributed product in fiscal
year 1998 increased to approximately 44% of the Company's total net sales
compared to approximately 22% of the total for fiscal year 1997. In the latter
part of fiscal year 1998, the Company increased prices on a limited number of
products that did not generate adequate gross profit and discontinued certain
unprofitable products.
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 (see "Business--Competition").
Gross Margins
The gross margin for fiscal year 1999 increased $12,605,000 to $16,175,000
(20% of net sales) from $3,570,000 (6% of net sales) in fiscal year 1998.
Significant gross margin gains were attained principally through a more
favorable pricing environment, additional margin contributions from new
products and lower inventory write-offs. Although unfavorable manufacturing
variances due to excess capacity earlier in fiscal year 1999 adversely
affected the gross margin, the magnitude of these variances decreased from the
prior fiscal year. The Company has attempted to address its excess capacity
issues by leasing its under-utilized Congers Facility in March 1999, work
force reductions and write downs of certain under-utilized assets (see "Notes
to Financial Statements--Asset Impairment/Restructuring").
The Company's gross margin was $(330,000) (-2% of net sales) in the
transition period compared to $1,504,000 (12% of net sales) in the
corresponding period of the prior year. Unfavorable manufacturing variances
due to excess capacity following the outsourcing or discontinuing of
manufactured products in prior
17
<PAGE>
periods, and higher inventory write-offs related to the discontinued products,
adversely affected the gross margin in the transition period.
The gross margin for fiscal year 1998 was $3,570,000 (6% of net sales)
compared to $2,832,000 (5% of net sales) for fiscal year 1997. 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. The 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 of the largest volume manufactured product from the Congers
Facility to BASF during the latter part of fiscal year 1998, and additional
inventory write-offs resulting from discontinued and slow moving products.
Inventory write-offs for fiscal year 1999 of $1,157,000 returned to more
normalized levels from $2,229,000 and $1,630,000 for fiscal years 1998 and
1997, respectively. Fiscal year 1998 included additional write-offs 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
lives.
Inventory write-offs amounted to $1,478,000 for the transition period
compared to $293,000 for the three-month period ended December 27, 1997. The
increase was primarily attributable to additional inventory reserves due to
discontinued products and the write-off of material and work in process
inventory not meeting the Company's quality control standards.
Four of the Company's products accounted for approximately 47% of its net
sales in fiscal year 1999 compared to 63%, 56% and 55%, respectively, of net
sales for the same four products in fiscal years 1998, 1997 and the transition
period. One such product, the transdermal nicotine patch whose product rights
had been sold effective May 31, 1999, was not sold in fiscal year 1997. The
transdermal nicotine patch accounted for approximately 5% of net sales in each
fiscal year 1999 and 1998, 10% of net sales in the transition period and a
significant portion of the gross margin in those respective periods. Although
the termination of the distribution rights for the transdermal nicotine patch
in fiscal year 1999 is expected to negatively affect the Company's gross
margin, it is anticipated that the gross margins generated by sales of new
products in 2000 may offset this expected decrease. The Company has
implemented measures to reduce the overall impact of these products including
adding additional products through new and existing distribution agreements,
manufacturing process improvements and cost reductions. There can be no
assurances that these measures will return the Company to profitability.
Operating Expenses
Research and Development
Research and development expenses of $6,005,000 for fiscal year 1999
increased $230,000 from similar expenses in fiscal year 1998. Increased
payments in fiscal year 1999 to purchase rights to pharmaceutical chemical
processes and for formulation development work performed for PRI by
unaffiliated companies and increased costs by the domestic operation were
partially offset by the funding of certain research and development expenses
by Generics and Genpharm. In fiscal 1999, Genpharm reimbursed the Company
$587,000 for work performed by PRI related to products covered by the Genpharm
Distribution Agreement. The Company conducts a 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 in
fiscal year 1999 at IPR were $1,075,000, net of Generics funding, compared to
expenses of $1,763,000 in fiscal year 1998. The Company, IPR and Generics 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--Acquisition of Joint Venture"
and "--Development Agreement").
18
<PAGE>
Costs for research and development in the transition period of $1,125,000
increased $217,000 from the three-month period ended December 27, 1997. The
increased costs were primarily due to biostudy activity by the domestic
operation during the transition period. Transition period research and
development expenses at IPR were $374,000, net of funding from Generics,
compared to $442,000 in the corresponding period of the prior year.
Research and development expenses of $5,775,000 for fiscal year 1998
decreased $68,000 from fiscal year 1997. In fiscal year 1998, the Company
expensed $967,000 to purchase rights to certain pharmaceutical chemical
processes, and incurred increased costs for IPR and biostudy activity. In
fiscal year 1997, the Company made advances to Elan for the development of
transdermal products, however similar advances were not made in fiscal year
1998. In August 1997, the Company acquired the 51% ownership interest in IPR
that it did not already own from Clal Pharmaceutical Industries Ltd. ("Clal"),
its former partner in the research and development joint venture. Research and
development expenses at IPR in fiscal year 1998 increased $733,000 over the
aggregate cost in fiscal year 1997 due in part to the Company absorbing 100% of
such expenses in fiscal year 1998 compared to 49% in the fiscal year 1997.
The Company has ANDAs for four potential products, one of which has been
tentatively approved, pending with and awaiting approval from, the FDA as a
result of its product development program. The Company has in process or
expects to commence biostudies for six additional products in 2000. In fiscal
year 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 nine potential
products, one of which has been tentatively approved, that are covered by the
Genpharm Distribution Agreement pending with and awaiting approval from, the
FDA. To date, the Company is marketing ten products under the Genpharm
Distribution Agreement and anticipates introducing several more in 2000 (see
"Notes to Financial Statements--Distribution and Supply Agreements--Genpharm,
Inc.").
Selling, General and Administrative
Selling, general and administrative costs of $12,787,000 (16% of net sales)
in fiscal year 1999 increased $697,000 from expenses in fiscal year 1998. The
fiscal year 1999 costs reflect increased advertising and marketing, and
strengthening the sales force in anticipation of product introductions and
increasing market share of the existing product line, higher legal expenses,
and to a lesser extent, higher shipping costs associated with the increased
sales level.
The transition period's selling, general and administrative costs of
$3,611,000 (22% of net sales) increased $1,023,000 from $2,588,000 (21% of net
sales) for the corresponding period in the prior year. The higher costs were
primarily attributable to strengthening the sales force and expanding
marketing efforts, which began in the latter half of fiscal year 1998, and to
a lesser extent, higher professional fees.
Selling, general and administrative costs in fiscal year 1998 of $12,090,000
(20% of net sales) increased $229,000 from $11,861,000 (23% of net sales) in
fiscal year 1997. The increased costs were primarily attributable to
additional sales force and marketing expenses in anticipation of product
introductions.
Asset Impairment/Restructuring Charge
In an attempt to reduce operating losses, the Company implemented measures
during the transition period, which continued in fiscal year 1999, to reduce
costs and increase operating efficiencies. The Company discontinued certain
unprofitable products from its product line, terminated approximately 50
employees, primarily in manufacturing and various manufacturing support
functions and reduced certain related expenses. These measures resulted in a
charge of $1,906,000 in the transition period, which included approximately
$1,200,000 for write-downs related to the impairment of assets affected by the
discontinued products, and a provision of $706,000 for severance payments and
other employee termination benefits.
19
<PAGE>
The Company recorded a charge of $1,212,000 in fiscal year 1998 for asset
impairment of its Congers Facility as a result of outsourcing the
manufacturing of most of the products from such facility. The charge is 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 (see "Notes to Financial
Statements--Commitments, Contingencies and Other Matters--Restructuring and
Cost Reductions").
Other Income
Other income of $906,000 in fiscal year 1999 decreased $5,355,000 from
fiscal year 1998. Other income in fiscal year 1999 consisted primarily of
payments from Genpharm to reimburse the Company for research costs incurred in
prior periods in return for a share of gross margin from three products
currently awaiting approval from the FDA. The decrease from fiscal year 1998
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").
Other income of $6,261,000 for fiscal year 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 pursuant to the
Development Agreement partially offset by the write-off of a $421,000
investment in a software company. Other income of $6,926,000 for fiscal year
1997 included approximately $3,900,000 of income from the sale and release of
product rights to Elan and a gain of $3,433,000 on the sale of Sano
Corporation common stock partially offset by a loss on the sale of Fine-Tech
Ltd. stock (see "--Liquidity and Capital Resources" and "Notes to Financial
Statements--Distribution and Supply 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. The Company did not recognize a benefit for
its operating losses in fiscal years 1999, 1998 and 1997, and the transition
period. 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").
Financial Condition
Liquidity and Capital Resources
The Company's cash and cash equivalents of $222,000 at December 31, 1999
decreased $6,202,000 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 December 31,
1999 of $21,221,000, which includes cash and cash equivalents, decreased
$2,987,000 from $24,208,000 at December 31, 1998. The working capital ratio
was 2.03x at December 31, 1999 compared to 2.62x at December 31, 1998.
At December 31, 1998 the Company's cash and cash equivalents decreased
$3,369,000 from $9,793,000 at September 30, 1998. The decrease was principally
due to the use of funds to finance operating losses and to build inventory on
higher volume products. Working capital, including cash and cash equivalents,
at December 31, 1998 decreased $4,916,000 from $29,124,000 at September 30,
1998. The Company's working capital ratio was 3.23x at September 30, 1998.
The Company, from time to time, enters into agreements with third parties
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. Research and
development expenses are expected to be approximately $8,500,000 in 2000.
20
<PAGE>
On March 17, 1999, the Company entered into an agreement to lease, with an
option to purchase, 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 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 from the Company of $2,500,000. Pursuant to the Genpharm Profit Sharing
Agreement, the Company paid $951,000 of the fee in year 1999 and the remainder
in January 2000 (see "Notes to Financial Statements--Profit Sharing
Agreement").
The Company, IPR and Generics entered into the Development Agreement, dated
August 11, 1998, pursuant to which Generics agreed to 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 Development Agreement, Generics commenced funding
during the transition period and had fulfilled their requirements through
December 31, 1999. Generics is not required to fund more than $1,000,000 in
any one calendar year (see "Notes to Financial Statements--Development
Agreement").
On September 29, 1998, the Company and Elan entered into the Termination
Agreement 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, the Company received a cash payment of
$2,000,000 in October 1998 and an additional $1,000,000 in the third quarter
of 1999. In fiscal year 1999, Elan began to pay the Company a perpetual
royalty pursuant to the Termination Agreement on all non-prescription sales of
the transdermal nicotine patch by Elan in the United States and Israel. In
return for relinquishing certain product distribution rights to Elan under a
prior distribution agreement, the Company 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 outstanding revolving credit line balances at that time (see
"Notes to Financial Statements--Distribution Agreements--Elan Corporation").
On June 30 1998, Merck KGaA, through its subsidiary Lipha, paid the Company
$20,800,000, or $2.00 per share, 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 outstanding advances made to it under its
existing line of credit and the remainder was used for working capital (see
"Notes to Financial Statements--Strategic Alliance").
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. 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
be materially and adversely affected (see "--Financing").
Financing
At December 31, 1999, the Company's total outstanding short-term and long-
term debt, including the current portion, amounted to $4,398,000 and
$1,313,000, respectively. The short-term debt consists of the outstanding
amount due under the Company's line of credit with General Electric Capital
Corporation ("GECC") and the long-term debt consists primarily of an
outstanding mortgage loan with a bank and capital leases for computer
equipment (see "Notes to Financial Statements--Long-Term Debt").
21
<PAGE>
In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with GECC, which was further amended in December 1999, that
provides Par with a five-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
2.25% 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 the earnings before interest
and taxes financial covenant and amended the financial covenants of Par. As of
December 31,1999, the borrowing base was approximately $11,700,000 and
$4,398,000 was outstanding under the line of credit.
At December 31, 1999 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
December 31, 1999, the outstanding balance of the loan was $960,000. In
addition, the Company had amounts outstanding under capital leases of $353,000
(see "Notes to Financial Statements--Long-Term Debt").
Year 2000
The Company completed implementation of its Year 2000 ("Y2K") compliance
plan on a timely basis and did not experience any disruption in business or
significant issues resulting from Y2K. The plan included an assessment of
critical internal computerized information systems, manufacturing equipment,
physical plant and computerized processes and remedial action or replacement
of systems which were not Y2K compliant. The plan also involved evaluation of
the Company's suppliers, customers and banks regarding their Y2K readiness,
and contingency plans for addressing complications as they may arise. As of
the date of this Form 10-K filing, the Company had not experienced any
significant Y2K issues related to its suppliers, customers, bank or other
service providers. The costs of addressing Y2K have consisted primarily of
internal personnel costs and have been expensed as incurred and have not, and
the Company believes will not, have a materially adverse affect on its
financial condition.
ITEM 6. Defaults Upon Senior Securities.
At July 3, 1999, the Company was in breach of the earnings before interest
and taxes financial covenant contained in the Loan Agreement with GECC. GECC
waived such breach in August 1999 and amended the financial covenants of Par.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
ITEM 8. Financial Statements and Supplementary Data.
See Index to Financial Statements.
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
22
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Directors
The Company's Certificate of Incorporation provides that its 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 2002, 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
Name Age (as of 3/00) First Election
- ---- ---------------- --------------
<S> <C> <C>
Class I
Anthony S. Tabatznik(1)........................ 52 1998
Until December 1999, Chairman and director of
Generics (UK) Ltd.; director of Generics Group
BV, now known as Merck Generics Group BV, and
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)........................... 50 1998
Since July 1993, Chairman of Genpharm, a
Canadian manufacturer and distributor of
generic pharmaceutical products. Brother of
Anthony S. Tabatznik.
Class II
Kenneth I. Sawyer(1)........................... 54 1989
Since October 1990, Chairman of the Board of
the Company. Since October 1989, President and
Chief Executive Officer of the Company.
Mark Auerbach(1)(2)............................ 61 1990
Since June 1993, Senior Vice President and
Chief Financial Officer of Central Lewmar
L.P., a distributor of fine papers. From
December 1995 to January 1999, 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)....................... 61 1998
Practicing attorney for more than the past
five years. From February 1999, Of Counsel to
Kirkpatrick & Lockhart LLP, a law firm; from
December 1990 to January 1999, Of Counsel to
Hertzog, Calamari & Gleason, a law firm. Chief
Executive Officer and director of Acorn
Holding Corp., a publicly-traded holding
company, for more than the past five years.
Director of Artesyn Technologies, Inc., a
publicly-traded designer, manufacturer and
seller of power supplies.
Class III
Francis Michael J. Urwin(1).................... 47 1998
Since April 1999, Chief Executive Officer, and
from 1991 until April 1999, Group Financial
Director (Chief Financial Officer), of Merck
Generics Group BV; director of Merck Generics
Group BV, Merck Generics Limited, Generics
(UK) Ltd., Resolution Chemicals Limited,
Generics Pharmaceuticals Limited, Genpharm
Limited, Biokinetix Limited and MacDermot
Laboratories Limited.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Year of
Name Age (as of 3/00) First Election
- ---- ---------------- --------------
<S> <C> <C>
Klaus H. Jander(1)(2)......................... 59 1998
Since 1990, a partner of Clifford Chance
Rogers & Wells LLP, a law firm. Since 1997, a
member of the Executive Committee of Clifford
Chance 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.
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 executive officers
of Par consist of Mr. Sawyer as Chief Executive Officer and Chairman, Mr.
O'Connor as Vice President, Chief Financial Officer and Secretary and Scott
Tarriff as Executive Vice President of Business, Sales and Marketing. Mr.
O'Connor, age 48, 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. From June 1989 to January
1998, Mr. Tarriff, age 40, 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 Reporting Compliance
As a public company, the Company's directors, executive officer and more
than 10% beneficial owners of the Company's Common Stock are subject to
reporting requirements under Section 16(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and are required to file certain reports
with the Securities and Exchange Commission (the "Commission") in respect of
their ownership of Company securities. The Company believes that during fiscal
year 1999, other than with respect to one report required to be filed by
Kenneth I. Sawyer and one report required to be filed by Scott L. Tarriff, all
such required reports were filed on a timely basis. Mr. Sawyer did not file a
Form 5 and Mr. Tarriff did not file a Form 4 on a timely basis.
24
<PAGE>
ITEM 11. Executive Compensation.
The following table sets forth compensation earned by or paid, during fiscal
years 1999, 1998 and 1997, to the Chief Executive Officer of the Company and
the two other most highly compensated executive officers of the Company and/or
Par who earned over $100,000 in salary and bonus at the end of fiscal year
1999 (the "Named Executives"). The Company awarded or paid such compensation
to all such persons for services rendered in all capacities during the
applicable fiscal years. The amounts set forth in the table do not include
compensation earned by or paid to the Named Executives during the transition
period.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------- -----------------------
Restricted Securities
Name and Principal Stock Underlying All Other
Position Year Salary($) Bonus($) Awards($)(1) Options(#) Compensation($)
- ------------------ ---- --------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer,...... 1999 $350,000 -- -- -- $132,464(2)
President, Chief 1998 $350,000 -- -- 500,000 $ 2,901(2)
Executive Officer and 1997 $350,000 -- -- -- $ 2,707(2)
Chairman
Dennis J. O'Connor...... 1999 $143,150 -- -- -- $ 2,199(3)
Vice President, Chief 1998 $142,500 -- -- 37,500 $ 2,191(3)
Financial Officer and 1997 $137,994 -- -- 30,000 $ 2,121(3)
Secretary
Scott Tarriff........... 1999 $185,000 $50,000 -- -- $ 3,574(4)
Executive Vice 1998 $124,519 -- -- 200,000 $ 46(4)
President of Business, 1997 NA NA NA NA NA
Sales and Marketing
(Par)
</TABLE>
- --------
(1) The Named Executives did not hold any shares of restricted stock at the
end of fiscal year 1999.
(2) Includes insurance premiums paid by the Company for term life insurance
for the benefit of Mr. Sawyer of $74 for each of the fiscal years 1999,
1998 and 1997; also includes $129,477 for the forgiveness of a loan from
the Company for fiscal year 1999 and $2,913, $2,827 and $2,633 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 Mr. Sawyer without interest until the
earliest time the premiums may be refunded by Mr. Sawyer to the Company
for the fiscal years 1999, 1998 and 1997, respectively.
(3) Includes $53, $53 and $51 for insurance premiums paid by the Company for
term life insurance for the benefit of Mr. O'Connor for fiscal years
1999, 1998 and 1997, respectively; also includes $2,146, $2,138 and
$2,070 for contributions by the Company to the Company's 401k Plan for
fiscal years 1999, 1998 and 1997, respectively.
(4) Includes $68 and $46 for insurance premiums paid by the Company for term
life insurance for the benefit of Mr. Tarriff for fiscal years 1999 and
1998, respectively; also includes $3,506 for a contribution by the
Company to the Company's 401k Plan for fiscal year 1999.
In the transition period, the compensation earned by or paid to Messrs.
Sawyer, O'Connor and Tarriff amounted to $94,230, $37,692 and $49,807,
respectively. Other compensation for Mr. Sawyer in the transition period
included $112,301 for the forgiveness of a loan from the Company.
During fiscal year 1999 and the transition period, there were no stock
option grants or stock appreciation rights granted to any Named Executives.
The following table sets forth certain information with respect to stock
options exercised by the Named Executives during fiscal year 1999 and, as of
December 31, 1999, the number of unexercised stock options and the value of
in-the-money options held by the Named Executives. There were no options
exercised by the Named Executives in the transition period.
25
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End (#) at FY-End ($)(1)
Acquired on Value ------------------------- ------------------------- ---
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer....... -- -- -- 500,000 -- $1,343,750
Scott Tarriff........... -- -- -- 200,000 -- 687,500
Dennis J. O'Connor...... 6,666 $39,163 32,500 28,334 $68,594 84,064
</TABLE>
- --------
(1) Based upon the closing price of the Common Stock on December 31, 1999 of
$4.94.
Compensation of Directors
For service on the Board in fiscal year 1999, 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
but are also entitled to an annual grant of an option to purchase an
additional 6,500 shares of Common Stock if, for such year, they own at least
2,500 shares of issued Common Stock for each series of additional 6,500
options granted under the Directors 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, Urwin and Jander
waived their rights to receive options to purchase Common Stock under the
Directors Plan for fiscal years 1999 and 1998. In addition, Messrs.
Ollendorff, A. Tabatznik, N. Tabatznik and Urwin have waived their receipt of
cash compensation for service on the Board for the same periods.
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
26
<PAGE>
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 have arisen out of consummation of the strategic alliance with
Merck KGaA, and to relinquish his title and position as President of the
Company and each of its subsidiaries if Lipha exercised 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 a promissory note, plus accrued interest on
the forgiven portion, pertaining to a loan in the original amount, including
interest, equal to approximately $379,000 made by the Company to Mr. Sawyer in
April 1998. The outstanding balance of the note, including interest, was
approximately $163,000 at December 31, 1999. 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.
The Company has entered into an employment agreement with Mr. Tarriff, dated
February 20, 1998. In the event of termination of Mr. Tarriff's employment
after one year of employment by Mr. Tarriff for good reason or by the Company
without cause (as such terms are defined therein), 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 Mr. Tarriff's 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 Pension 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.
27
<PAGE>
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 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 the entire Board of Directors, namely, Messrs. A.
Tabatznik, N. Tabatznik, Sawyer, Auerbach, Ollendorff, Urwin 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. Francis Michael J. Urwin,
a director of the Company, is Chief Executive Officer and director of Merck
Generics Group BV, a subsidiary of Merck KGaA, which beneficially owns 42.5%
of the Company's Common Stock. Mr. Anthony S. Tabatznik, a director of the
company, resigned from his position as Chairman and director of Generics,
effective December 31, 1999. The Company, Genpharm and its affiliate are
presently parties to distribution agreements entered into in 1992, 1993 and
1998. Under such distribution agreements, payments by the Company to Genpharm
and an affiliate amounting to approximately $4,400,000 in fiscal year 1999
accounted for more than five percent (5%) of the Company's consolidated
revenues. Further, Generics and the Company are parties to a development
agreement pursuant to which each of Generics and the Company are funding one-
half of the costs of the operating budget of IPR in exchange for the exclusive
rights to manufacture and distribute products developed by IPR worldwide
(except for the United States).
Mr. Kenneth I. Sawyer, the Chairman, President and Chief Executive Officer
of the Company, serves as a director of Authorgenics, Inc., a developer of
software ("Authorgenics"), and until September 1998, 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
or Executive Vice President of Authorgenics. At December 31, 1999, the Company
owned approximately 1% of Authorgenics and has the exclusive rights to market
to the pharmaceutical industry certain software currently in development.
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 December 31, 1999, the outstanding
principal balance of the note, plus accrued interest, was approximately
$163,000. As part of Mr. Sawyer's compensation, 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").
Stephen A. Ollendorff, a director of the Company, is Of Counsel to the law
firm of Kirkpatrick & Lockhart LLP, which currently provides legal services to
the Company, and provided legal services to the Company in fiscal year 1999.
During the Company's 1998 fiscal year, Mr. Ollendorff was Of Counsel to the
law firm of Hertzog, Calamari & Gleason, which received fees and expenses in
fiscal year 1998 for various legal services rendered to the Company. In
addition, Mr. Ollendorff is a consultant to the Company and was paid
approximately $77,000 in fiscal year 1999, pursuant to a renewable one-year
consulting agreement. Mr. Ollendorff owns 5,000 shares of Common Stock of the
Company and also holds stock options to purchase 82,000 shares of Common
Stock, of which 31,000 are presently exercisable.
28
<PAGE>
Compensation and Stock Option Committee Report
The Compensation Committee, approves the policies and programs pursuant to
which compensation is paid or awarded to the Company's executive officers and
key employees. In fiscal 1999, the Board, acting in its role as the Compensation
Committee, at one of its Board meetings acted on matters requiring Compensation
Committee action. The Board also acted by unanimous written consent on one
additional matter requiring Compensation Committee action. In reviewing overall
compensation for fiscal year 1999, the Compensation Committee focused on the
Company's objectives to attract executive officers of high caliber from larger,
well-established pharmaceutical manufacturers, to retain the Company's executive
officers, to encourage the highest level of performance from such executive
officers and to align the financial interests of the Company's management with
that of its shareholders by offering awards that can result in the ownership of
Common Stock. The Company did not utilize specific formulae or guidelines in
reviewing and approving executive compensation.
Elements of Executive Officer Compensation Program. The key elements of the
Company's executive officer compensation program consist of base salary,
annual bonus, stock options and other incentive awards through participation
in the Company's 1990 Stock Incentive Plan. In awarding or approving
compensation to executive officers in fiscal year 1999, the Compensation
Committee considered the present and potential contribution of the executive
officer to the Company and the ability of the Company to attract and retain
qualified executive officers in light of the competitive environment of the
Company's industry and the Company's financial condition.
Base Salary and Annual Bonus. Base salary and annual bonus for executive
officers are determined by reference to Company-wide and individual
performances for the previous fiscal year. The factors considered by the
Compensation Committee included both strategic and operational factors, such
as efforts in responding to regulatory challenges, in exploring strategic
alternatives for the Company, in research and development, in reviewing and
implementing updated systems and operational procedures, as well as the
Company's financial performance. In addition to Company-wide measures of
performance, the Compensation Committee considers those performance factors
particular to each executive officer, including the performance of the area
for which such officer had management responsibility and individual
accomplishments.
Base salaries for executive officers were determined primarily by reference
to industry norms, the principal job duties and responsibilities undertaken by
such persons, individual performance and other relevant criteria. Base salary
comparisons for most executive officers were made to a group of pharmaceutical
manufacturers in the United States. Such group was selected by the
Compensation Committee based upon several factors, including, but not limited
to, the duties and responsibilities of the executive officer used in the
comparison, size and complexity of operations, reputation and number of
employees of other companies. With respect to Mr. Sawyer, the Company's Chief
Executive Officer, a comparison was made by an independent consulting firm,
prior to the signing of his employment agreement in 1992, to generic
pharmaceutical companies and turnaround situations selected by the consulting
firm. In keeping with its goal of recruiting executive officers from larger,
well-established pharmaceutical manufacturers, the Compensation Committee
considered the performance of the companies used in the comparisons, as
measured by their quality and regulatory profile, as well as competitive
necessity in determining base salaries. The Compensation Committee considered
it appropriate and in the best interest of the Company and its shareholders to
set the levels of base salary for the Company's Chief Executive Officer and
other executive officers at the median of comparable companies in order to
attract and retain high caliber managers for the Company so as to position the
Company for future growth and improved performance.
The Compensation Committee, in determining the annual bonuses to be paid to
the Company's executive officers for fiscal year 1999, considered the
individual's contribution to the Company's performance as well as the
Company's financial performance and assessments of each executive officer's
participation and contribution to the other factors described above, as
opposed to determination by reference to a formal, goal-based plan. The non-
financial measures varied among executive officers depending upon the
operations under their management and direction.
29
<PAGE>
Stock Options and Other Awards. The Company's 1990 Stock Incentive Plan
provides for stock option and other equity-based awards. Under such Plan, the
size of each award and the persons to whom such awards are granted is
determined by the Compensation Committee based upon the nature of services
rendered by the executive officer, the present and potential contribution of
the grantee to the Company and the overall performance of the Company. The
Compensation Committee believes that grants of stock options will enable the
Company to attract and retain the best available talent and to encourage the
highest level of performance in order to continue to serve the best interests
of the Company and its shareholders. Stock options and other equity-based
awards provide executive officers with the opportunity to acquire equity
interests in the Company and to participate in the creation of shareholder
value and benefit correspondingly with increases in the price of the Common
Stock.
Compensation Committee's Actions for Fiscal Year 1999. In determining the
amount and form of executive officer compensation to be paid or awarded for
fiscal year 1999, the Compensation Committee considered the criteria discussed
above. Based upon the Compensation Committee's review of the Company's
performance following the conclusion of the 1999 fiscal year, the Company
granted a cash bonus to Scott Tarriff, one of the Named Executives, in the
amount of $50,000. The Compensation Committee did not award cash bonuses to
any of the other Named Executives in fiscal year 1999. In addition, the
Compensation Committee did not award any stock options to the Named Executives
in fiscal year 1999.
Chief Executive Officer Compensation. The Compensation Committee approved an
employment agreement in October 1992 for Mr. Sawyer, which agreement was
amended in April 1998. In approving such employment agreement, the
Compensation Committee authorized a base annual salary of $366,993 for Mr.
Sawyer. Mr. Sawyer agreed to reduce his salary effective July 1, 1996 to
$350,000 per year.
Compensation and Stock Option Committee
The Compensation and Stock Option Committee members include Kenneth I.
Sawyer, Mark Auerbach, Klaus H. Jander, Stephen A. Ollendorff, Anthony S.
Tabatznik, J. Neil Tabatznik and Francis Michael J. Urwin.
30
<PAGE>
Performance Graph
The graph below compares the cumulative total return of the Company's Common
Stock with the cumulative total return of the NYSE Composite Index and the
S&P(R) Health Care Drugs Index--Major Pharmaceuticals for the fiscal periods
from September 30, 1994 to December 31, 1999, including the transition period
ended December 31, 1998. The graph assumes $100 was invested on September 30,
1994 in the Company's Common Stock and $100 was invested on such date in each
of the Indexes. The comparison assumes that all dividends were reinvested.
CUMULATIVE TOTAL RETURN
Based on initial investment of $100 on September 30, 1994
with dividends reinvested
Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Dec-98 Dec-99
Pharmaceutical Resources Inc. $100 $109 $ 49 $ 24 $ 49 $ 54 $ 56
NYSE Composite Index $100 $122 $146 $202 $208 $246 $273
S&P(R)Health Care (Drugs-Major $100 $158 $213 $324 $492 $562 $462
Pharmaceuticals) Index
31
<PAGE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of the close of business on March 1,
2000, the beneficial ownership of the Common Stock by (i) each person known
(based solely on a review of Schedule 13D or Schedule 13G filed with the
Commission pursuant to Section 13 of the Exchange Act) to the Company to be
the beneficial owner of more than 5% of the Common Stock, (ii) each Director
of the Company, (iii) each Named Executive, as defined in the "Executive
Compensation" section of this report, and (iv) all directors and executive
officers of the Company as a group (based solely in respect of clauses (ii),
(iii) and (iv) upon information furnished by such persons). Under the rules of
the 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
equity 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.
<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)..................................... 140,900 *
Mark Auerbach(2)(3)...................................... 46,166 *
Dennis J. O'Connor(3).................................... 37,452 *
Stephen A. Ollendorff(2)(3).............................. 36,000 *
Scott Tarriff............................................ 17,752 *
Anthony S. Tabatznik(2)(4)............................... 2,500 *
J. Neil Tabatznik(2)..................................... 2,500 *
Klaus H. Jander(2)....................................... 0 *
Francis Michael J. Urwin (2)............................. 0 *
All directors and executive officers (as of 3/1/00) as a
group (nine persons)(3)................................. 283,270 *
</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 before April 29, 2000. 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 Common Stock which may be
acquired upon exercise of options granted to Merck KGaA and Genpharm. Such
options are not exercisable on or before April 29, 2000.
(2) A current Director of the Company.
(3) Includes the following shares of Common Stock which may be acquired upon
the exercise of options which are exercisable on or before April 29, 2000
under the Company's stock option plans: Mr. Ollendorff--31,000; Mr.
Auerbach--43,666; Mr. O'Connor--35,833; and all directors and executive
officers as a group (nine persons)--110,499.
(4) 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.
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.
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
32
<PAGE>
and Genpharm, another 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 $2.00 per
share in exchange for certain services. The sale of the Shares was made
pursuant to the terms and conditions of the 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 at that time. 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. A. Tabatznik, N.
Tabatznik, Jander and Urwin, each of whom was elected by the shareholders of
the Company at the Company's annual meetings held in June 1998 or July 1999.
Three members of the Board are comprised of Mr. Sawyer and two additional
designees of the Board who were 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 Company's
annual meeting held in June 1998. 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
determinable solely 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, 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, 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 have 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").
33
<PAGE>
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 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 are 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. 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 Holders are 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 has granted 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 entered into the
Development Agreement, dated as of August 11, 1998, pursuant to which Generics
agreed to fund one-half of the operating budget of IPR 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 had
fulfilled their funding requirements through December 31, 1999. Under the
Development Agreement, Generics is not required to fund more than $1,000,000
in any one calendar year.
34
<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.
<TABLE>
<CAPTION>
<C> <S>
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)
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)
<CAPTION>
<C> <S>
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)
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
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)
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. (21)
10.25.6 Sixth Amendment to Loan and Security Agreement, dated as of
February 2, 1999, among the Company, General Electric Capital
Corporation, and the other parties named therein. (22)
<CAPTION>
<C> <S>
10.25.7 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. (24)
10.25.8 Eighth Amendment to Loan and Security Agreement, dated as of
December 28, 1999, 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)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
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)
10.35 Development Agreement, dated as of August 11, 1998, among the
Company, Generics (UK) Ltd., and Israel Pharmaceutical Resources
L.P. (22)
10.36 Agreement of Lease, dated as of March 17, 1999, between Par
Pharmaceutical, Inc. and Halsey Drug Co., Inc. (23)
10.37 Manufacturing and Supply Agreement, dated as of March 17, 1999,
between Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. (23)
10.38 Letter Agreement, dated as of January 21, 1999, between the
Registrant and Genpharm, Inc. * (23).
27 Financial Data Schedule.
(a)(4) Reports on Form 8-K. During the quarter ended December 31, 1999,
the Company did not file any reports on Form 8-K.
- --------
<CAPTION>
<C> <S>
(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.
<CAPTION>
<C> <S>
(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 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.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
(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.
(21) Previously filed with the Commission as an exhibit to the
Registrant's Annual Report on Form 10-K for 1998 and incorporated
herein by reference.
(22) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the transition period
ended December 31, 1998 and incorporated herein by reference.
(23) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 3, 1999 and incorporated herein by reference.
(24) Previously filed with the Commission as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 2, 1999 and incorporated herein by reference.
</TABLE>
* Certain portions of Exhibits 10.14, 10.14.1, 10.14.2, 10.27 and 10.38
have been omitted and have been filed with the Commission pursuant to
a request for confidential treatment thereof.
38
<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: March 30, 2000
Pharmaceutical Resources, Inc.
(Registrant)
/s/ Kenneth I. Sawyer
By: _________________________________
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>
<S> <C>
Title Date
Signature
/s/ Kenneth I. Sawyer President, Chief March 30, 2000
- ------------------------------------- Executive Officer,
Kenneth I. Sawyer and Chairman of the
Board of Directors
/s/ Dennis J. O'Connor Vice President, March 30, 2000
- ------------------------------------- Chief Financial
Dennis J. O'Connor Officer and
Secretary
(Principal
Accounting and
Financial Officer)
/s/ Mark Auerbach Director March 30, 2000
- -------------------------------------
Mark Auerbach
/s/ Klaus H. Jander Director March 30, 2000
- -------------------------------------
Klaus H. Jander
/s/ Stephen A. Ollendorff Director March 30, 2000
- -------------------------------------
Stephen A. Ollendorff
/s/ Anthony S. Tabatznik Director March 30, 2000
- -------------------------------------
Anthony S. Tabatznik
/s/ J. Neil Tabatznik Director March 30, 2000
- -------------------------------------
J. Neil Tabatznik
/s/ Michael J. Urwin Director March 30, 2000
- -------------------------------------
Michael J. Urwin
</TABLE>
39
<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 Years Ended December 31, 1999, September 30, 1998 And 1997, and
the Three-Month Period Ended December 31, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C>
Included in Part II:
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets at December 31, 1999, December
31, 1998 and September 30, 1998............................ F-3
Consolidated Statements of Operations and Accumulated
Deficit for the year ended December 31, 1999, the three-
month period ended December 31, 1998 and for the years
ended September 30, 1998 and September 30, 1997............ F-4
Consolidated Statements of Cash Flows for the year ended
December 31, 1999, the three-month period ended December
31, 1998 and for the years ended September 30, 1998 and
September 30, 1997......................................... F-5
Notes to Consolidated Financial Statements.................. F-6 through F-22
Included in Part IV:
SCHEDULE:
II Valuation and qualifying accounts...................... F-23
</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.
F-1
<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 December 31, 1999 and 1998 and September 30, 1998, and the related
consolidated statements of operations and accumulated deficit and cash flows
for each of the three years in the periods ended December 31, 1999, September
30, 1998 and 1997 and the three-month transition period ended December 31,
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 December 31, 1999, December 31, 1998 and September
30, 1998, and the results of their operations and their cash flows for each of
the three years in the periods ended December 31, 1999, September 30, 1998 and
1997, and the three-month transition period ended December 31, 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
March 16, 2000
F-2
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1999 1998 1998
------------- ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 222,000 $ 6,424,000 $ 9,793,000
Accounts receivable, net of
allowances of $2,559,000,
$2,226,000 and $3,041,000......... 17,528,000 14,513,000 15,344,000
Inventories........................ 19,903,000 15,611,000 13,093,000
Prepaid expenses and other current
assets............................ 4,140,000 2,597,000 3,949,000
------------ ------------ ------------
Total current assets............. 41,793,000 39,145,000 42,179,000
Property, plant and equipment, at
cost less accumulated depreciation
and amortization.................... 22,681,000 22,789,000 24,283,000
Deferred charges and other assets.... 3,604,000 1,405,000 1,854,000
Non-current deferred tax benefit,
net................................. 14,608,000 14,608,000 14,608,000
------------ ------------ ------------
Total Assets..................... $ 82,686,000 $ 77,947,000 $ 82,924,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.. $ 238,000 $ 225,000 $ 267,000
Short-term debt.................... 4,398,000 -- --
Accounts payable................... 12,718,000 10,411,000 8,786,000
Accrued salaries and employee
benefits.......................... 1,507,000 1,705,000 2,010,000
Accrued expenses and other current
liabilities....................... 1,711,000 2,596,000 1,992,000
------------ ------------ ------------
Total current liabilities........ 20,572,000 14,937,000 13,055,000
Long-term debt, less current
portion............................. 1,075,000 1,102,000 1,143,000
Accrued pension liability............ 700,000 717,000 717,000
Shareholders' equity:
Common Stock, par value $.01 per
share; authorized 90,000,000
shares; issued and outstanding
29,562,025, 29,322,659 and
29,316,467 shares................. 296,000 293,000 293,000
Additional paid in capital......... 89,003,000 88,036,000 87,972,000
Accumulated deficit................ (28,694,000) (26,920,000) (20,038,000)
Additional minimum liability
related to defined benefit pension
plan.............................. (266,000) (218,000) (218,000)
------------ ------------ ------------
Total shareholders' equity....... 60,339,000 61,191,000 68,009,000
------------ ------------ ------------
Total liabilities and
shareholders' equity............ $ 82,686,000 $ 77,947,000 $ 82,924,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Three Twelve Twelve Twelve
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, September 30, September 30,
1999 1998 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales.................. $ 80,315,000 $ 16,775,000 $ 59,705,000 $ 52,572,000
Cost of goods sold......... 64,140,000 17,105,000 56,135,000 49,740,000
------------ ------------ ------------ ------------
Gross margin........... 16,175,000 (330,000) 3,570,000 2,832,000
Operating expenses:
Research and
development............. 6,005,000 1,125,000 5,775,000 5,843,000
Selling, general and
administrative.......... 12,787,000 3,611,000 12,090,000 11,861,000
Asset
impairment/restructuring
charge.................. -- 1,906,000 1,212,000 --
------------ ------------ ------------ ------------
Total operating
expenses.............. 18,792,000 6,642,000 19,077,000 17,704,000
------------ ------------ ------------ ------------
Operating loss......... (2,617,000) (6,972,000) (15,507,000) (14,872,000)
Other income, net.......... 906,000 1,000 6,261,000 6,926,000
Interest (expense) income.. (63,000) 89,000 (382,000) (545,000)
------------ ------------ ------------ ------------
Loss before provision
for income taxes.......... (1,774,000) (6,882,000) (9,628,000) (8,491,000)
Provision for income
taxes..................... -- -- -- 410,000
------------ ------------ ------------ ------------
Net loss................... (1,774,000) (6,882,000) (9,628,000) (8,901,000)
Accumulated deficit,
beginning of year......... (26,920,000) (20,038,000) (10,410,000) (1,509,000)
------------ ------------ ------------ ------------
Accumulated deficit, end of
year...................... $(28,694,000) $(26,920,000) $(20,038,000) $(10,410,000)
============ ============ ============ ============
Basic and diluted net loss
per share of common
stock..................... $(.06) $(.23) $(.45) $(.48)
============ ============ ============ ============
Weighted average number of
common and common
equivalent shares
outstanding............... 29,461,081 29,319,918 21,521,372 18,681,017
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twelve Three Twelve Twelve
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, September September
1999 1998 30, 1998 30, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $(1,774,000) $(6,882,000) $(9,628,000) $(8,901,000)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............ 2,370,000 680,000 2,712,000 2,758,000
Write-off of
inventories............. 1,157,000 1,478,000 2,229,000 1,630,000
Allowances against
accounts receivable..... 333,000 (815,000) 579,000 803,000
Asset
impairment/restructuring
charge.................. -- 1,906,000 1,212,000 --
Gain on sale of
investments............. -- -- -- (2,880,000)
Joint venture research
and development......... -- -- -- 773,000
Other.................... 221,000 54,000 112,000 (100,000)
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable..... (3,348,000) 1,646,000 (4,509,000) (4,572,000)
(Increase) decrease in
inventories............. (5,449,000) (3,996,000) (2,083,000) 4,483,000
(Increase) decrease in
prepaid expenses and
other assets............ (3,742,000) 1,801,000 (549,000) 533,000
Increase in accounts
payable................. 2,307,000 1,625,000 3,666,000 732,000
(Decrease) increase in
accrued expenses and
other liabilities....... (1,148,000) (579,000) 1,039,000 (1,467,000)
----------- ------------ ----------- -----------
Net cash used in operating
activities................ (9,073,000) (3,082,000) (5,220,000) (6,208,000)
Cash flows from investing
activities:
Capital expenditures....... (2,352,000) (214,000) (1,260,000) (1,049,000)
Proceeds from sale of fixed
assets.................... 127,000 -- 117,000 477,000
Decrease in marketable
securities................ -- -- -- 6,570,000
Acquisition of businesses
net of cash acquired...... -- -- -- (311,000)
Decrease in temporary
investments............... -- -- -- 143,000
----------- ------------ ----------- -----------
Net cash (used in)
provided by investing
activities.............. (2,225,000) (214,000) (1,143,000) 5,830,000
Cash flows from financing
activities:
Proceeds from issuances of
Common Stock.............. 712,000 10,000 20,481,000 72,000
Net (payments) proceeds
from revolving credit line
and proceeds from issuance
of other debt............. 4,652,000 -- (3,604,000) 3,947,000
Principal payments under
long-term debt and other
borrowings................ (268,000) (83,000) (902,000) (3,759,000)
----------- ------------ ----------- -----------
Net cash provided by
(used in) financing
activities.............. 5,096,000 (73,000) 15,975,000 260,000
Net (decrease) increase in
cash and cash equivalents... (6,202,000) (3,369,000) 9,612,000 (118,000)
Cash and cash equivalents at
beginning of year........... 6,424,000 9,793,000 181,000 299,000
----------- ------------ ----------- -----------
Cash and cash equivalents at
end of year................. $ 222,000 $ 6,424,000 $ 9,793,000 $ 181,000
=========== ============ =========== ===========
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
December 31, 1999
Pharmaceutical Resources, Inc. ("PRI") operates in one business segment, the
manufacture and distribution of generic pharmaceuticals in the United States.
Marketed products are principally sold 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 and reconstituted
suspensions/solutions.
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 a
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 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 most recent year reported in this Form 10-K began on January
1, 1999 and ended on December 31, 1999 ("fiscal year 1999") as well as the
three-month period ended December 31, 1998 ("transition period"). Comparative
results in this Form 10-K include amounts from the twelve-month fiscal periods
ended September 30, 1998 ("fiscal year 1998") and September 30, 1997 ("fiscal
year 1997").
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.
F-6
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 288,500, 469,700, and 3,597,307 as of
December 31, 1999 and September 30, 1998 and 1997, 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 1,092,967, 627,318 and 49,091 as of December 31, 1999 and September 30,
1998 and 1997, respectively, were excluded from diluted earnings per share
because they were anti-dilutive.
Outstanding options and warrants of 514,700 as of December 31, 1998 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
period. In addition, incremental shares from assumed conversions of 756,290 as
of December 31, 1998 were excluded from diluted earnings per share because
they were anti-dilutive.
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 December 31, 1999, 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. The Company markets its products primarily to
domestic wholesalers, retail drug store chains, distributors and
F-7
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
repackagers. The risk associated with this concentration is believed by the
Company to be limited due to the number of wholesalers, drug store chains,
distributors and repackagers and, their geographic dispersion and the
performance of certain credit evaluation procedures (see "Accounts Receivable-
Major Customers").
New Accounting Standards:
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 fiscal year 1999 and the transition period, respectively.
In June 1998, the FASB issued SFAS No.133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 will be effective for fiscal years beginning after
June 15, 2000. The Company is currently evaluating the impact of the adoption
of SFAS 133 on its financial position and results of operations.
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 prior joint venture entity
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. 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 which was due in January 2003. In addition, the Company and Clal
agreed to modify certain terms of Clal's prior 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.
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):
<TABLE>
<S> <C>
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
</TABLE>
In August 1998, the Company prepaid the non-recourse secured promissory note
owed to Clal 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.
F-8
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounts Receivable:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1999 1998 1998
------------ ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Accounts receivable................ $20,087 $16,739 $18,385
------- ------- -------
Allowances:
Doubtful accounts................ 773 759 735
Returns and allowances........... 1,001 431 759
Price adjustments................ 785 1,036 1,547
------- ------- -------
2,559 2,226 3,041
------- ------- -------
Accounts receivable, net of
allowances........................ $17,528 $14,513 $15,344
======= ======= =======
</TABLE>
The accounts receivable amounts are 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 drug
wholesalers as distribution channels constricted which resulted in lower
pricing and decreased margins on certain products. Beginning in the latter
part of 1998 and continuing in 1999, the pricing environment for certain
products in the generic drug market became more favorable to the Company.
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 for the difference between
the old and new invoice prices.
F-9
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Major Customers:
Three of the Company's customers accounted for approximately 15%, 11% and 9%
of net sales in fiscal year 1999, 11%, 13% and 12% of net sales in fiscal year
1998 and 10%, 11% and 16% of net sales in fiscal year 1997. The same three
customers accounted for 15%, 8% and 15% of net sales in the transition period.
At December 31, 1999, amounts due from these same three customers accounted
for approximately 20%, 1% and 8% of the net accounts receivable balance. The
amounts due from these same three customers accounted for approximately 21%,
9% and 18% of the net accounts receivable balance at December 31, 1998 and
19%, 18% and 11% of the net accounts receivable balance at September 30, 1998.
An additional customer accounted for approximately 22% of the net accounts
receivable balance at December 31, 1999 and approximately 7% of net sales in
fiscal year 1999.
Inventories:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1999 1998 1998
------------ ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Raw materials and
supplies............... $ 7,531 $ 4,769 $ 5,330
Work in process and
finished goods......... 12,372 10,842 7,763
------- ------- -------
$19,903 $15,611 $13,093
======= ======= =======
</TABLE>
Property, Plant and Equipment:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1999 1998 1998
------------ ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Land............................... $ 2,231 $ 2,231 $ 2,231
Buildings.......................... 18,579 18,400 18,555
Machinery and equipment............ 19,507 18,352 18,339
Office equipment, furniture and
fixtures.......................... 4,766 4,452 4,318
Leasehold improvements............. 2,605 2,372 2,454
------- ------- -------
47,688 45,807 45,897
Less accumulated depreciation and
amortization...................... 25,007 23,018 21,614
------- ------- -------
$22,681 $22,789 $24,283
======= ======= =======
</TABLE>
The Company recorded a write-down of approximately $1,200,000 in the
transition period for the impairment of assets related to discontinuing or
outsourcing products previously manufactured at its Spring Valley and Upper
Saddle River facilities.
The Company recorded a write-down of $1,212,000 in fiscal year 1998 for
asset impairment of its facility located in Congers, New York (the "Congers
Facility") as a result of outsourcing the manufacture of the products from
such facility. The reserve is based on the difference between the appraised
value of the property less the net book value at September 30, 1998.
F-10
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred Charges and Other Assets:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1999 1998 1998
------------ ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Profit sharing agreement........... $2,500 -- --
Defined benefit pension............ 435 $ 499 $ 499
Cash surrender value of officer
life insurance.................... 290 280 283
Employee loans and advances........ 199 322 356
Security deposit for leases........ 33 36 58
Product license fees............... 15 260 400
Other.............................. 132 8 258
------ ------ ------
$3,604 $1,405 $1,854
====== ====== ======
</TABLE>
In January 1999, the Company entered into a profit sharing agreement (the
"Genpharm Profit Sharing Agreement") with Genpharm, Inc. ("Genpharm"), a
Canadian subsidiary of Merck KGaA, pursuant to which the Company is to receive
a portion of the profits resulting from a separate agreement between Genpharm
and an unaffiliated United States based pharmaceutical company in exchange for
the non-refundable fee of $2,500,000 paid by the Company. The agreement
between Genpharm and the unaffiliated third party covers 15 products that are
not included in the Company's distribution agreement with Genpharm resulting
from its strategic alliance with Merck KGaA (see "--Distribution and Supply
Agreements--Genpharm, Inc."). The charge recorded pursuant to the Genpharm
Profit Sharing Agreement will be amortized over a projected revenue stream
from the products when launched by the third party.
Strategic Alliance:
On June 30, 1998, the Company completed a strategic alliance with Merck
KGaA, a pharmaceutical 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, 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, 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, IPR, 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
F-11
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
paid the Company an initial fee of $600,000 in August 1998 and had fulfilled
their funding requirements through December 31, 1999. Under the Development
Agreement, Generics is not required to fund more than $1,000,000 in any one
calendar year.
Lease Agreement:
On March 17, 1999, Par 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 of Halsey products during the initial 18 months of the Halsey
Supply Agreement, subject to Par's agreement to credit any deficiency of
products purchased 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 from the date of the Halsey Supply Agreement.
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, ten of such products have obtained U.S. Food
and Drug Administration ("FDA") approval and are currently 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.
F-12
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 has 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. 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 met the minimum
purchase requirements for fiscal year 1999.
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, the Company's exclusive right to distribute in the
United States a transdermal nicotine patch manufactured by Elan ended on May
31, 1999. The Company 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,
the Company 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. In fiscal year
1999, Elan began to pay the Company a perpetual royalty, pursuant to the
Termination Agreement, on all non-prescription sales of the transdermal
nicotine patch by Elan in the United States and Israel. The Company began
selling Elan's nicotine patch in January 1998.
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 had advanced Elan $7,629,000 as funding for the research and
development of the generic transdermal products which the Company expensed in
the periods they were paid.
Short-Term Debt:
In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with General Electric Capital Corporation ("GECC"), which was
further amended in December 1999, that provides Par with a five-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 2.25% 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
F-13
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 the earnings
before interest and taxes financial covenant and amended the financial
covenants of Par. As of December 31,1999, the borrowing base was approximately
$11,700,000 and $4,398,000 was outstanding under the line of credit.
Long-Term Debt:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1999 1998 1998
------------ ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Term loans (a)....................... $ 960 $1,033 $1,050
Other (b)............................ 353 294 360
------ ------ ------
1,313 1,327 1,410
Less current portion................. 238 225 267
------ ------ ------
$1,075 $1,102 $1,143
====== ====== ======
</TABLE>
- --------
(a) Mortgage loan with a fixed rate of 8.5% through May 1999 and thereafter at
Prime Rate plus 1.75% paid in monthly installments until May 2001 when the
remaining balance of $877,000 becomes due.
(b) Includes primarily amounts due under capital leases for computer
equipment.
At December 31, 1999, the Company's long-term debt, including the current
portion, of $1,313,000 consisted primarily of a mortgage loan, secured by
certain real property of the Company and outstanding balances under capital
leases for computer equipment. All of the Company's long-term debt, including
the portion classified as current, will mature during the next three years as
follows: $238,000 in 2000, $1,045,000 in 2001 and $30,000 in 2002.
During fiscal years 1999, 1998 and 1997, the Company incurred total interest
expense of $63,000, $382,000, and $545,000, respectively. Interest paid
approximated interest expense in each of the years. During the transition
period, the Company recorded interest income of $89,000.
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, and other rights as the Board
of Directors may determine at the time of issuance. At December 31, 1999, the
Company had no preferred stock issued and outstanding.
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:
The Company did not pay any dividend on Common Stock in fiscal years 1999,
1998 and 1997, or the transition period.
F-14
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Changes in Shareholders' Equity:
Changes in the Company's Common Stock and Additional Paid in Capital
accounts during fiscal years 1999, 1998 and 1997, and the transition period
were as follows:
<TABLE>
<CAPTION>
Additional
Common Stock Paid In
Shares Amount Capital
---------- -------- -----------
<S> <C> <C> <C>
Balance, September 30, 1997................. 18,874,216 189,000 $67,520,000
Investment shares issued.................. 10,400,000 104,000 20,274,000
Issuance of stock options................. -- -- 75,000
Exercise of stock options................. 21,696 -- 48,000
Compensatory arrangements................. 20,555 -- 55,000
---------- -------- -----------
Balance, September 30, 1998................. 29,316,467 293,000 87,972,000
Investment shares issued.................. -- -- (10,000)
Issuance of stock options................. -- -- 54,000
Exercise of stock options................. 333 -- 1,000
Compensatory arrangements................. 5,859 -- 19,000
---------- -------- -----------
Balance, December 31, 1998.................. 29,322,659 293,000 88,036,000
Issuance of stock options................. -- -- 258,000
Exercise of stock options................. 221,759 3,000 617,000
Compensatory arrangements................. 17,607 -- 92,000
---------- -------- -----------
Balance, December 31, 1999.................. 29,562,025 $296,000 $89,003,000
========== ======== ===========
</TABLE>
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
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 17,607, 20,555 and 26,347 shares during fiscal years 1999, 1998 and
1997, respectively and 5,859 shares during the transition period. At December
31, 1999, 846,923 shares remain available for sale under the Program.
F-15
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Options:
The following is a summary of stock option activity in each of the periods
as follows:
<TABLE>
<CAPTION>
Twelve Three Twelve Twelve
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, September 30, September 30,
1999 1998 1998 1997
------------------------- ------------------------- --------------------------- --------------------------
Price Per Price Per Price Per Price Per
Shares Share Shares Share Shares Share Shares Share
--------- -------------- --------- -------------- ---------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period......... 1,921,635 $1.50 to $8.63 1,764,436 $1.50 to $8.63 1,751,400 $2.13 to $10.63 2,013,750 $3.13 to $13.88
Granted......... 202,300 $4.81 to $7.56 180,000 $2.38 to $3.94 1,479,900 $ 1.50 to $4.94 313,900 $ 2.13 to $3.38
Exercised....... (221,759) $1.50 to $4.94 (333) $2.13 (21,696) $ 2.13 to $2.25 -- --
Canceled/Surrendered.. (135,686) $1.50 to $8.63 (22,468) $1.50 to $2.44 (1,445,168) $1.50 to $10.13 (576,250) $6.25 to $13.88
--------- --------- ---------- ---------
Outstanding at
end of period.. 1,766,490 $1.50 to $7.88 1,921,635 $1.50 to $8.63 1,764,436 $ 1.50 to $8.63 1,751,400 $2.13 to $10.63
========= ========= ========== =========
</TABLE>
At December 31, 1999, September 30, 1998 and 1997 and December 31, 1998
exercisable options amounted to 337,132, 165,612, 1,388,333 and 166,067,
respectively. The weighted average exercise price of the options for these
respective periods is $3.85, $4.84, $8.69 and $4.86. Exercise price ranges and
additional information regarding the 1,766,490 options outstanding at December
31, 1999 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 $3.94 1,472,490 $2.21 3.7 years
$4.81 to $5.94 149,500 $5.25 4.4 years
$6.88 to $7.88 144,500 $7.55 3.7 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 was terminated.
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 had 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 may not grant further options under the Directors'
Plan, which terminated in November 1999.
F-16
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 December 31, 1999, December 31, 1998
and September 30, 1998, options for 796,972, 898,586 and 1,056,118 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 in
accordance with SFAS 123, the Company's net loss for each of the periods would
have increased to the pro forma amounts shown below:
<TABLE>
<CAPTION>
Twelve Three Twelve Twelve
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, September September
1999 1998 30, 1998 30, 1997
------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
Net loss:
As reported........... $ (1,774) $ (6,882) $ (9,628) $ (8,901)
Pro forma............. $ (2,590) $ (7,013) $ (10,019) $ (9,076)
Net loss per share:
As reported........... $ (.06) $ (.23) $ (.45) $ (.48)
Pro forma............. $ (.09) $ (.24) $ (.47) $ (.49)
The weighted average fair value of options granted in each of the periods
was estimated as of the date of grant using the Black-Scholes stock option
pricing model, based on the following weighted average assumptions:
<CAPTION>
Twelve Three Twelve Twelve
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, September September
1999 1998 30, 1998 30, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Risk free interest
rate................... 5.6% 4.5% 5.3% 6.3%
Expected term........... 4.0 years 4.0 years 4.0 years 5.0 years
Expected volatility..... 74.6% 74.6% 63.0% 64.1%
</TABLE>
No dividend will be paid for the entire term of the option. The weighted-
average fair value of options granted in year 1999, fiscal 1998 and 1997, and
the transition period were $3.72, $1.24, $2.14 and $1.78, 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
F-17
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. The Company did not recognize a benefit for its operating losses in
fiscal years 1999, 1998 and 1997, or the transition period. Based on recent
developments, 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 December 31, 1999, the
Company had NOL carryforwards for tax purposes of approximately $69,300,000
that expire 2005 through 2019.
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:
Deferred tax asset, net:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1999 1998 1998
------------ ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Deferred assets:
Federal NOL carryforwards........ $23,553 $23,390 $21,588
State NOL carryforwards.......... 2,592 2,765 2,447
Accounts receivable.............. 3,331 1,924 2,171
Accrued expenses................. 224 484 254
Asset impairment reserve......... 702 896 485
Research and development
expenses........................ 387 387 387
Inventory........................ 596 773 543
Other............................ 828 856 856
------- ------- -------
32,213 31,475 28,731
Valuation allowance................ (15,906) (15,139) (12,388)
------- ------- -------
16,307 16,336 16,343
Deferred liabilities:
Fixed assets..................... 1,699 1,728 1,735
------- ------- -------
Net deferred tax asset............. $14,608 $14,608 $14,608
======= ======= =======
</TABLE>
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 1999 and 1998 for an additional $289,000 and $11,000, respectively,
related to stock option compensation which will be credited to equity upon
utilization of tax carryforwards.
F-18
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
periods as follows:
<TABLE>
<CAPTION>
Twelve Three Twelve Twelve
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, September September
1999 1998 30, 1998 30, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Federal statutory tax
rate................... (34%) (34%) (34%) (34%)
State tax--net.......... (3%) (6%) (6%) (6%)
Increase in valuation
reserve for
unrecognized NOL
carryforwards.......... 37% 40% 40% 40%
Interest on IRS
settlement--net........ -- -- -- 5%
--- --- --- ---
Effective tax rate...... -- -- -- 5%
=== === === ===
</TABLE>
Commitments, Contingencies and Other Matters:
Leases:
At December 31, 1999, the Company had minimum rental commitments aggregating
$2,628,000 under noncancelable operating leases expiring through 2005. Amounts
payable thereunder are $633,000 in 2000, $532,000 in 2001, $491,000 in 2002,
$463,000 in 2003, $463,000 in 2004, and $46,000 thereafter. Rent expense
charged to operations in fiscal years 1999, 1998 and 1997, and the transition
period was $609,000, $732,000, $932,000, and $171,000, 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 were no longer entitled to any employer contributions
under such plan in 1996 and 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 $264,000 in fiscal year 1999,
$336,000 in fiscal year 1998 and $344,000 (adjusted for $22,000 in
forfeitures). The Company provided $63,000 for these Plans during the
transition period. 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.
F-19
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Net pension expense for fiscal years 1999, 1998 and 1997 included the
components in the table below. The amounts related to the transition period
were recorded in the second quarter of year 1999.
<TABLE>
<CAPTION>
Twelve Three Twelve Twelve
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, September 30, September 30,
1999 1998 1998 1997
------------ ------------ ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
Interest cost........... $120 $31 $128 $135
Actual return on
assets................. (1) 7 (188) (167)
Recognized actuarial
loss................... 8 -- -- --
Net amortization and
deferral:
Asset (loss) gain..... (115) (37) 77 58
Amortization of
initial unrecognized
transition
obligation........... 51 13 51 51
---- --- ---- ----
Net pension expense... $ 63 $14 $ 68 $ 77
==== === ==== ====
</TABLE>
For fiscal year 1999 and the transition period, the discount rate used to
measure the projected benefit obligation for the Pension Plan was 6.50% and
5.25%, respectively, and the assumed long-term rate of return on Plan assets
was 7.00% for each period.
The Pension Plan's funded status for each of the periods is included in the
table below. The amounts for the periods ended December 31, 1999 and September
30, 1998 are recorded on the Company' consolidated balance sheets at those
respective dates. The Pension Plan's funded status for December 31, 1998 was
reflected on the consolidated balance sheet in the second quarter of fiscal
year 1999.
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1999 1998 1998
------------ ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Vested benefit obligations......... $2,081 $2,341 $2,209
====== ====== ======
Accumulated benefit obligations.... $2,081 $2,341 $2,209
====== ====== ======
Projected benefit obligations...... $2,081 $2,341 $2,209
Market value of assets............. 1,593 1,700 1,739
------ ------ ------
Projected benefit obligation in
excess of market value............ (488) (641) (470)
Unrecognized net obligation........ 434 486 499
Unrecognized net loss.............. 266 388 218
Adjustment for minimum liability... (700) (874) (717)
------ ------ ------
Net recorded pension liability..... $ (488) $ (641) $ (470)
====== ====== ======
</TABLE>
In accordance with SFAS 87, the Company has recorded an additional minimum
pension liability for under funded plans of $700,000, $874,000 and $717,000
for fiscal year 1999, the transition period and fiscal year 1998,
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 December 31, 1999, $266,000 of the
excess minimum pension liability resulted in a charge to equity as compared to
$388,000 as of December 31, 1998 and $218,000 as of September 30, 1998. For
the transition period, the additional minimum pension liability and charge to
equity were recorded in the second quarter of fiscal year 1999.
F-20
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 ("BMS") 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 BMS has a formulation patent for Megace(R) Oral Suspension expiring in
2011. Par believes that its distinct and unique formulation does not infringe
the BMS formulation patent. In October 1999, BMS initiated a patent
infringement action against Par. On March 1, 2000, Par was granted a patent by
the U.S. Patent Office regarding Par's unique formulation of megestrol acetate
oral suspension. Par believes that the issuance of this patent, which
establishes the uniqueness of Par's formulation compared to the BMS patent,
should significantly help Par's defense in the patent infringement case. Par
intends to vigorously pursue its pending litigation with BMS and to defend its
patent rights and ensure that other generic companies do not infringe the Par
patent. 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 former employees, and
believes 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, results of operations or liquidity. The Company intends
to defend these actions vigorously. In fiscal year 1999, the Company settled
an action by a former officer for, among other things, breach of contract that
did not have a material effect on the results for fiscal year 1999.
Asset Impairment
In fiscal year 1999, the Company has discontinued the sale of certain
unprofitable products, outsourced the production of other products, and
reduced the work force and certain related operating expenses as part of
previously announced measures to reduce costs and increase operating
efficiencies. These measures resulted in a charge of approximately $1,200,000
in the transition period for write-downs related to the impairment of assets
affected by discontinuing or outsourcing products.
The Company recorded a charge of $1,212,000 in fiscal year 1998 for asset
impairment of its Congers 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 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.
Restructuring and Cost Reductions:
During the transition period, the Company recorded a charge of approximately
$706,000 for severance payments and other employee termination benefits. In
fiscal year 1999, the Company terminated approximately 50 employees, primarily
in manufacturing and various manufacturing support functions, and reduced
certain related operating expenses following the discontinuing or outsourcing
of products previously manufactured by the Company. Additionally, the Company
established inventory reserves for discontinued products of $630,000 that was
recorded as part of cost of goods sold in the transition period. At December
31, 1999, the remaining provisions for the severance payments and other
employee termination benefits and discontinued products inventory amounted to
$58,000 and $128,000, respectively. The Company expects the remaining reserves
to be sufficient and fully utilized.
Primarily as a result of the Supply Agreement, the Company reduced its work
force during the third quarter of fiscal year 1997 by approximately 45
employees, primarily in manufacturing functions and a smaller number
F-21
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 included provisions of $231,000 for severance pay, employee
benefits and out placement services and $49,000 in legal fees. The amount of
actual termination benefits paid approximated the original provision. In an
effort to improve results, the Company began implementing these restructuring
measures, including work force reductions, changes in senior management, and a
reorganization of certain existing personnel, during the fourth quarter of
fiscal year 1996
Other Matters:
During fiscal year 1999, four of the Company's products accounted for
approximately 47% of its net sales compared to 63%, 56% and 55%, respectively,
of net sales for the same four products in fiscal years 1998, 1997 and the
transition period. One such product, the transdermal nicotine patch whose
product rights have been sold effective May 31, 1999, was not sold in fiscal
year 1997. The transdermal nicotine patch accounted for approximately 5% of
net sales in both fiscal years 1999 and 1998, 10% of net sales in the
transition period and a significant portion of the gross margin in those
respective periods.
F-22
<PAGE>
SCHEDULE II
PHARMACEUTICAL RESOURCES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Additions Balance
beginning charged to costs at end of
Description of period and expenses Deductions period
----------- ---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31,
1999.................. $ 759,000 $ 39,000 $ 25,000(a) $ 773,000
Three months ended
December 31, 1998..... $ 735,000 $ 24,000 -- $ 759,000
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
Allowance for returns and
price adjustments:
Year ended December 31,
1999.................. $1,467,000 $7,857,000 $7,538,000(b) $1,786,000
Three months ended
December 31, 1998..... $2,306,000 $1,255,000 $2,094,000(b) $1,467,000
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
</TABLE>
- --------
(a) Write-off of uncollectible accounts.
(b) Returns and allowances charged against allowance provided therefor.
F-23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
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)
</TABLE>
<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. (21)
10.25.6 Sixth Amendment to Loan and Security Agreement, dated as of February 2,
1999, among the Company, General Electric Capital Corporation, and the
other parties named therein. (22)
10.25.7 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. (24)
10.25.8 Eighth Amendment to Loan and Security Agreement, dated as of December
28, 1999, 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)
10.35 Development Agreement, dated as of August 11, 1998, among the Company,
Generics (UK) Ltd., and Israel Pharmaceutical Resources L.P. (22)
10.36 Agreement of Lease, dated as of March 17, 1999, between Par
Pharmaceutical, Inc. and Halsey Drug Co., Inc. (23)
10.37 Manufacturing and Supply Agreement, dated as of March 17, 1999, between
Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. (23)
10.38 Letter Agreement, dated as of January 21, 1999, between the Registrant
and Genpharm, Inc. * (23).
27 Financial Data Schedule.
__________________________________________
<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 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.
<PAGE>
(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.
(21) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for 1998 and incorporated herein by
reference.
(22) Previously filed with the Commission as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the transition period ended December
31, 1998 and incorporated herein by reference.
(23) Previously filed with the Commission as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and
incorporated herein by reference.
(24) Previously filed with the Commission as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 2, 1999
and incorporated herein by reference.
* Certain portions of Exhibits 10.14, 10.14.1, 10.14.2, 10.27 and 10.38 have
been omitted and have been filed with the Commission pursuant to a request
for confidential treatment thereof.
<PAGE>
Exhibit 10.25.8
EIGHTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
---------------------------
EIGHTH AMENDMENT, dated as of December 28, 1999 (this "Amendment"), to
----------
the Loan and Security Agreement referred to below by and among GENERAL ELECTRIC
CAPITAL CORPORATION, a New York corporation ("Lender"), PAR PHARMACEUTICAL,
-------
INC., a New Jersey corporation ("Borrower"), PHARMACEUTICAL RESOURCES, INC., a
---------
New Jersey corporation ("Parent"), NUTRICEUTICAL RESOURCES, INC., a New York
------
corporation ("NRI"), and PARCARE, LTD., a New York corporation ("ParCare").
---- --------
Parent, NRI and ParCare are hereinafter referred to as "Guarantors".
-----------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Lender, Borrower and Guarantors are parties to that certain
Loan and Security Agreement, dated as of December 15, 1996 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Loan
----
Agreement"); and
- ----------
WHEREAS, Lender, Borrower and Guarantors have agreed to amend the Loan
Agreement in the manner, and on the terms and conditions, provided for herein.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties to this Amendment hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein
-----------
shall have the meanings ascribed to them in the Loan Agreement.
2. Amendment to Recitals to the Loan Agreement. Recital A of the
-------------------------------------------
Loan Agreement is hereby amended as of the Amendment Effective Date (as
hereinafter defined) by (a) deleting the text "3 years" set forth under the
caption "Term:" and inserting in lieu thereof the text "5 years", (b) deleting
----
the text under the caption "Unused Line Fee:" and inserting in lieu thereof the
---------------
text "0.25% per annum" and (c) deleting the text under the caption "Prepayment
----------
Fee:" and inserting in lieu thereof the text "1.0% in years three and four; and
- ---
0.75% in year five".
3. Amendments to Section 5 of the Loan Agreement. Section 5 of the
--------------------------------------------- ---------
Loan Agreement is hereby amended as of the Amendment Effective Date as follows:
(a) Section 5(b) is hereby amended and restated in its entirety to
------------
read as follows:
"(c) except as otherwise permitted in this Section 5 below, make any
investment (including any investment in or advance to any other Person
for research and development) in, or make or accrue loans or advances
of money to, any Person, other than investments for research and
development in Persons which are not Credit Parties which, together
with the aggregate amount of research and development expenses of the
Credit Parties, do not exceed (i) $6,500,000 in any Fiscal Year ending
on or before December 31, 1999 and (ii) $10,000,000 in any Fiscal Year
ending thereafter;"
1
<PAGE>
(b) Section 5(c) is amended by deleting clause (v) thereof and the
------------
word "and" appearing immediately before such clause and inserting in lieu
thereof the following new clauses:
"(v) Indebtedness of Borrower secured by Borrower's real property in a
maximum aggregate amount outstanding (together with any such
Indebtedness secured by Borrower's real property set forth as
Disclosure Schedule (5(c))) and (vi) Indebtedness represented by
--------------------------
Capital Lease Obligations; provided, however, that the aggregate
-------- -------
amount of Indebtedness incurred by Borrower under clauses (v) and (vi)
of this Section 5(c) shall not exceed $5,000,000;"
4. Amendment to Schedule A to the Loan Agreement. Schedule A to the
--------------------------------------------- ----------
Loan Agreement is hereby amended as of the Amendment Effective Date as follows:
(a) The definition of "Permitted Encumbrances" is hereby amended by
-----------------------
deleting the word "and" appearing immediately before clause (xiii) thereof and
inserting the following new clause immediately after such clause (xiii):
"; and (xiv) Liens created under Capital Leases securing Capital Lease
Obligations permitted under Section 5(c)(vi) of the Agreement."
(b) The definitions of "Commitment Maturity Date", "Commitment
------------------------- ----------
Termination Date", "Fiscal Year" and "Sano Stock Reserve" set forth in Schedule
- ----------------- ------------ ------------------- --------
A are hereby deleted in their entirety and the following new definitions are
- -
hereby inserted in appropriate alphabetical order:
`"Commitment Maturity Date" shall mean the earliest of (i) December
-------------------------
30, 2001, (ii) the date Lender's obligation to advance funds is
terminated and the Obligations are declared to be due and payable
pursuant to Section 7.2, and (iii) the date of prepayment in full by
Borrower of the Obligations in accordance with the provisions of
Section 1.2(b)."
`"Commitment Termination Date" shall mean the earliest of (i) December
----------------------------
30, 2001, (ii) the date of termination of Lender's obligation to
advance funds pursuant to Section 7.2, and (iii) the date of
prepayment in full by Borrower of the Obligations in accordance with
the provisions of Section 1.2(b)."
`"Fiscal Year" shall mean any of the annual accounting periods of
------------
Parent and its Subsidiaries ending on December 31 of each year.
Subsequent changes of the fiscal year of Parent and its Subsidiaries
shall not change the term "Fiscal Year" unless Lender shall consent in
writing to such change."
`"Sano Stock Reserve" shall mean a reserve in the amount of
-------------------
$2,852,800, established pursuant to Section 1.15 hereof; provided,
------------ --------
however, that such reserve shall be reduced to (a) $1,426,400 upon
-------
receipt by Lender of Borrower's audited Financial Statements and
supporting documentation for the Fiscal Year ending December 31, 1999,
as required by Section 4.2(d) of the Loan Agreement, so long as no
Default shall have occurred and be continuing on the date of such
receipt and (b) $-0- upon receipt by Lender of Borrower's audited
Financial Statements and supporting documentation for the Fiscal Year
ending December 31, 2000, as required by Section 4.2(d) of the Loan
Agreement, so long as no Default shall have occurred and be continuing
on the date of such receipt."
2
<PAGE>
5. Amendment to Schedule D to the Loan Agreement. Schedule D to
--------------------------------------------- ----------
the Loan Agreement is hereby amended as of Amendment Effective Date as follows:
(a) The last two sentences of Section 2 (including the table set
forth therein) is deleted in their entirety and the following new sentence is
hereby inserted in lieu thereof: "The" Unused Line Fee Percentage" shall be,
with respect to any period, 0.25%."
(b) Section 4 is hereby deleted in its entirety and the following new
section is inserted in lieu thereof:
"4. Prepayment Fee: An amount equal to the Maximum Amount multiplied
--------------
by:
1.00% if Lender's obligation to make or incur Revolving Credit
Advances is terminated by Borrower after the second anniversary of the
Closing Date and on or before the fourth anniversary of the Closing
Date, payable on the Commitment Maturity Date; or
0.75% if Lender's obligation to make or incur Revolving Credit
Advances is terminated by Borrower after the fourth anniversary of the
Closing Date and on or before the fifth anniversary of the Closing
Date, payable on the Commitment Maturity Date.
Borrower acknowledges and agrees that (a) it would be difficult or
impractical to calculate Lender's actual damages from Borrower's early
termination of Lender's Revolving Credit Loan obligations pursuant to
Section 1.2(b) of the Agreement, (b) the Prepayment Fees provided
above are intended to be fair and reasonable approximations of such
damages, and (c) the Prepayment Fees are not intended to be
penalties."
6. Amendment to Schedule F to the Loan Agreement. Schedule F to
--------------------------------------------- ----------
the Loan Agreement is hereby amended and restated as of Amendment Effective Date
in its entirety to read as set forth in Schedule F hereto.
7. Amendment to Schedule 1.6 to the Loan Agreement. Schedule 1.6
----------------------------------------------- ------------
to the Loan Agreement is hereby amended as of Amendment Effective Date by
deleting the proviso at the end of such Schedule in its entirety and inserting
in lieu thereof the following new proviso:
"provided, that (i) Lender shall have the right to create and adjust
--------
eligibility standards and related reserves from time to time in its
reasonable credit judgment and (ii) Lender shall establish a reserve
against the amount of Eligible Accounts otherwise used in the
Borrowing Base calculation for each percentage point that the dilution
of Borrower's Accounts (calculated as the average dilution over the
rolling 12-month period then ended) exceeds 5%."
8. 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 signatory thereto: (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.
3
<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
signatory thereto 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.
9. 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.
10. Outstanding Indebtedness; Waiver of Claims. Each Credit Party
------------------------------------------
hereby acknowledges and agrees that as of December 28, 1999 the aggregate
outstanding principal amount of the Revolving Credit Loan is $5,389,464.96.
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.
11. 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.
4
<PAGE>
12. 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
December 29, 1999:
A. Amendment. Lender shall have received two original copies
---------
of this Amendment duly executed and delivered by Lender and each Credit Party.
B. Secretarial Certificate. Lender shall have received in form
-----------------------
and substance satisfactory to it a certificate of the Secretary or an Assistant
Secretary of each Credit Party certifying (i) the resolutions adopted by its
Board of Directors approving this Amendment and the transactions contemplated
hereby and (ii) the names and true signatures of the authorized officers of such
Credit Party.
C. Payment of Expenses. Borrower shall have paid to Lender all
--------------------
costs and expenses (including a non-refundable renewal fee in the amount of
$65,000) owing in connection with this Amendment and the other Loan Documents
and due to Lender (including, without limitation, reasonable legal fees and
expenses).
D. 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.
13. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
-------------
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
14. 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)
5
<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)
6
<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
7
<PAGE>
Schedule F
Financial Covenants
PARAGRAPH NUMBERING REDEFINED HERE
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, 1999, 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, 1999 $(2,500,000)
March 31, 2000 (4,000,000)
June 30, 2000 (3,600,000)
September 30, 2000 (1,500,000)
December 31, 2000 1,800,000
March 31, 2001 3,000,000
June 30, 2001 5,000,000
September 30, 2001 5,500,000
December 31, 2001 6,000,000
2. Minimum Tangible Net Worth. Parent and its Subsidiaries on a
--------------------------
consolidated basis shall maintain, as at the end of each Fiscal Quarter,
Tangible Net Worth of not less than the amount for such period set forth below:
Fiscal Quarter Ending
---------------------
on or about: Minimum Tangible Net Worth
----------- --------------------------
December 31, 1999 $35,000,000
March 31, 2000 34,000,000
June 30, 2000 34,000,000
September 30, 2000 35,000,000
December 31, 2000 36,000,000
March 31, 2001 37,000,000
June 30, 2001 38,000,000
September 30, 2001 39,000,000
December 31, 2001 40,000,000
3. Capital Expenditures. Parent and its Subsidiaries on a
--------------------
consolidated basis shall not make aggregate Capital Expenditures in any Fiscal
Year in excess of (i)$7,000,000 for the Fiscal Year ending on or about December
31, 1999, (ii)$4,700,000 for the Fiscal Year ending on or about December 31,
2000 and (iii)$5,000,000 for the Fiscal Year ending on or about December 31,
2001.
For purposes of this covenant in Schedule F the following terms shall have the
----------
meanings set forth below:
"EBIT" shall mean, for any period, the Net Income (Loss) of Parent and
----
its Subsidiaries on a consolidated basis for such period, plus interest expense,
----
tax expense and extraordinary losses and minus extraordinary gains, in each
-----
case, of Parent and its Subsidiaries on a consolidated basis for such period
determined in accordance with GAAP to the extent included in the determination
of such Net Income (Loss).
"Net Income (Loss)" shall mean with respect to any Person and for any
-----------------
period, the aggregate net income (or loss) after taxes of such Person for such
period, determined in accordance with GAAP.
"Tangible Net Worth" shall mean, with respect to any Person at any
------------------
date, all amounts which, in
-8-
<PAGE>
accordance with GAAP, would be included under stockholders' equity on a
consolidated balance sheet of such Person at such date less the aggregate of all
----
intangibles in conformity with GAAP (including Intellectual Property, goodwill,
organization expenses, treasury stock, all deferred financing and unamortized
debt discount expenses, and all current and non-current deferred tax benefits).
-9-
<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 DECEMBER 31, 1999 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> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 222
<SECURITIES> 0
<RECEIVABLES> 20,087
<ALLOWANCES> (2,559)
<INVENTORY> 19,903
<CURRENT-ASSETS> 41,793
<PP&E> 47,688
<DEPRECIATION> (25,007)
<TOTAL-ASSETS> 82,686
<CURRENT-LIABILITIES> 20,572
<BONDS> 1,075
0
0
<COMMON> 296
<OTHER-SE> 60,043
<TOTAL-LIABILITY-AND-EQUITY> 82,686
<SALES> 80,315
<TOTAL-REVENUES> 81,221
<CGS> 64,140
<TOTAL-COSTS> 18,753
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (1,774)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,774)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,774)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
