ITEM 1. Business. ------ --------
GENERAL
Pharmaceutical Resources, Inc. ("PRI") is a holding company which, through its subsidiaries, is in the business of manufacturing and distributing a broad line of generic drugs. PRI operates primarily through its wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par"), a manufacturer and distributor of generic drugs. In May 1995, PRI-Research, Inc., a newly created subsidiary of PRI, formed a joint venture, Clal Pharmaceutical Resources Limited Partnership (the "Joint Venture"), with Clal Pharmaceutical Industries Ltd. ("Clal") to research and develop generic pharmaceutical products. PRI has five other subsidiaries, the activities of which are not significant. 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 "Registrant" or 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.
The Company's current product line consists of prescription and, to a much lesser extent, over-the-counter drugs. Recently, the Company also has introduced one nutritional supplement. Approximately 102 products representing various dosage strengths of 38 drugs are currently being marketed (see "--Product Line Information"). Generic drugs are the pharmaceutical and therapeutic equivalents of brand name drugs and are usually marketed under their generic (chemical) names rather than by a brand name. Normally, a generic drug cannot be marketed until the expiration of applicable patents on the brand name drug. Generic drugs must meet the same government standards as brand name drugs, but are typically sold at prices below those of brand name drugs.
The Company markets its products primarily to wholesalers, drug distributors and retail drug store chains principally through its own sales staff. In addition, the Company, through its ParCare subsidiary, 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. The Company has developed its internal sales staff in order to lessen its reliance on outside sales representatives (see "-- Marketing and Customers").
Significant Developments:
Financial Condition. The Company, in fiscal year 1996, continued to experience declines in sales and gross margins which resulted in continued net losses of $8,292,000. Net sales declined by 13% and gross margins declined by 54% from the prior fiscal year. The decreases in sales and gross margins continue to be attributable to lower pricing of the Company's products as a result of intense competition and a less profitable product mix (see "--Competition" and "Management's Discussion and Analysis of Financial Condition--Results of Operations").
Continuing losses incurred by the Company would adversely affect the Company's liquidity and, accordingly, its ability to fund its research and development operations as well as ventures relating to the development or distribution of new products (see "--Product Line Information", "-- Research and Development" and "Management's Discussion and Analysis of Financial Condition and Results of Operations"). The Company, in December 1996, entered into a new three-year loan arrangement providing for a revolving line of credit up to the lesser of $20,000,000 or the borrowing base as provided in the loan agreement. The loan is secured by substantially all of the assets of the Company other than real property and the Company has entered into a new cash management system requiring the deposit of all receipts into a lockbox under the lender's control. The new loan arrangement replaces the Company's previous revolving and term loan facility with a separate bank (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition-- Liquidity and Capital Resources").
In response to its operating results and industry trends, the Company implemented measures in the third quarter of fiscal year 1996 to reduce costs and increase operating efficiencies. Such measures included employee reductions of 49 people in various senior management and other positions and reductions in certain expenses. This restructuring involved a charge of $549,000 for fiscal year 1996, which consisted principally of severance
payments and other employee termination benefits (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Results of Operations--Operating Expenses"). The Company has also intensified its search for strategic alliances which would enable the Company, among other things, to expand its product line, increase research and development activities and obtain additional capital (see "--Product Line Information" and "--Research and Development").
Changes in Senior Management. The Company made significant changes in senior management during fiscal year 1996, including changes of its chief financial officer and executives in charge of operations, regulatory and scientific affairs, human resources and sales and marketing. Generally, such changes were associated with the Company's efforts to improve efficiencies and reduce costs in key areas of operations. As a result of these changes, a significant portion of the Company's senior management have been promoted from within the Company and are currently in the process of assuming greater responsibility (see "Directors and Executive Officers of the Registrant--Executive Officers"). The Company is also seeking to hire a president of Par to assume the day-to-day responsibilities for Par's operations and is negotiating with a candidate.
PRODUCT LINE INFORMATION
The Company operates primarily in one industry segment, namely, the manufacture and distribution of generic pharmaceuticals. Products are marketed principally in oral solid form consisting of tablets, caplets and two-piece hard-shell capsules, and to a lesser extent the Company distributes a small number of products in the forms of creams and liquids (see "--Research and Development").
Par markets approximately 84 products, representing various dosage strengths of 29 drugs manufactured by the Company and approximately 18 products, representing various dosage strengths of 9 drugs, that are manufactured for it by other companies (see "--Research and Development", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Sales", "--Gross Margins" and "Notes to Financial Statements--Distribution Agreements"). Par holds ANDAs (as defined below) for the drugs which it manufactures. The names of all of the drugs under the caption "Competitive Brand-Name Drug" are trademarked. The holders of the trademarks are non-affiliated pharmaceutical manufacturers.
Name Competitive Brand-Name Drug ---- --------------------------- Central Nervous System: Alprazolam Xanax Benztropine Mesylate Cogentin Carisoprodol and Aspirin Soma Compound Chlorzoxazone Paraflex Cyproheptadine Hydrochloride Periactin Doxepin Hydrochloride Sinequan, Adapin Fluphenazine Hydrochloride Prolixin Flurazepam Hydrochloride Dalmane Haloperidol Haldol Imipramine Hydrochloride Tofranil Meclizine Hydrochloride Antivert Methocarbamol and Aspirin Robaxisal Temazepam Restoril Triazolam Halcion
Cardiovascular: Atenolol Tenormin Captopril Capoten Clonidine and Chlorthalidone Combipres Hydralazine Hydrochloride Apresoline Hydra-Zide Apresazide Isosorbide Dinitrate Isordil
Cardiovascular (continued): Methyldopa and Hydrochlorothiazide Aldoril Metoprolol Tartrate Lopressor Minoxidil Loniten Pindolol Visken Triamterene and Hydrochlorothiazide Maxzide
Anti-Inflammatory: Ibuprofen Advil, Nuprin, Motrin Indomethacin Indocin Piroxicam Feldene
Anti-Infective: Metronidazole Flagyl Nystatin Mycostatin
Anti-Cancer: Megestrol Acetate Megace
Other: Allopurinol Zyloprim Dexamethasone Decadron Glipizide Glucotrol Metaproterenol Sulfate Alupent Propantheline Bromide Pro-Banthine Silver Sulfadiazine (Thermazene) Silvadene
In January 1996, the Company established a subsidiary, Nutriceutical Resources, Inc., to focus on the development and manufacture of pharmaceutical quality nutritional supplements. To date, the Company has introduced one nutritional supplement, melatonin. Revenues generated from this product have not been significant.
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 (collectively, "Collaborative Agreements"). As part of that strategy, it has pursued and continues to pursue arrangements or affiliations which it believes, in general, will 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 has various Collaborative Agreements, none of which in fiscal year 1996 generated, or currently generates, significant revenues (see "Notes to Financial Statements--Distribution Agreements").
In May 1995, the Company formed a strategic alliance with Clal, an Israeli company, to develop, manufacture and distribute generic pharmaceuticals worldwide. The alliance included an equity investment by Clal in the Company and the establishment of the Joint Venture, which is owned 49% by the Company and 51% by Clal. As part of the equity investment in the Company, Mony Ben-Dor of Clal Industries Ltd. was elected to the Company's Board of Directors in May 1995 (see "Directors and Officers of the Registrant" and "Certain Relationships and Related Transactions"). While approximately 35 compounds have been identified for development by the Joint Venture, eight currently are under active development. The Company has not filed any ANDAs with respect to such potential products at this time. The scientific process of developing new products is complex and time consuming, as is obtaining U.S. Food and Drug Administration ("FDA") approval, and the development of products by the Joint Venture may be curtailed in the early or later stages of development due to the introduction of competing generic products or for other reasons (see "-- Research and Development" and "--Competition"). In fiscal year 1996, the Company and Clal only made contributions of $1,470,000 and $1,530,000, respectively, to the Joint Venture, although their funding commitments for the fiscal year were $2,935,000 and $3,055,000, respectively. The Company and Clal are negotiating to amend their remaining funding commitments for 1996 in order to reflect the present and contemplated capital requirements of the Joint Venture, although they have not yet amended their written agreement. The Company and Clal currently have additional funding commitments of $2,455,000 and $2,555,000, respectively, in 1997. In the event that the Company and Clal do not reach a written agreement and either party makes an additional capital contribution to the Joint Venture, the other party's share in the profits and capital of the Joint Venture will be diluted.
The Company has a distribution agreement with Sano Corporation ("Sano") which gives Par the right to exclusively distribute Sano's generic transdermal products in the United States, and the right of first refusal in other markets. Sano develops transdermal delivery systems utilizing a patch that incorporates the appropriate drug dosage into an adhesive that attaches the patch to the skin. Transdermal delivery offers significant benefits over oral delivery, including improved efficacy, increased patient compliance, reduced side effects, reduced interaction with other drugs in use by a patient and a more consistent and appropriate drug level in the bloodstream, all of which generally result in lower overall patient care costs. Sano is developing two generic nitroglycerin patches, one generic nicotine patch and one generic clonidine patch which are covered by the agreement. Par has paid Sano a portion of the development expense for such products. To date, Sano has submitted three ANDAs to the FDA and anticipates submitting additional ANDAs in the future. The Company intends to purchase manufactured products from Sano, when approved by the FDA, at cost and share in the gross profits from the sale. However, there can be no assurance that the products under Sano's ANDAs will obtain FDA approval or, if brought to market, will generate significant revenues (see "--Research and Development", "--Competition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition-- Liquidity and Capital Resources").
RESEARCH AND DEVELOPMENT
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 state-of-the-art 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 the 1996 fiscal year, the Company contracted with outside laboratories to conduct biostudies for two 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").
The research and development of oral solid products, including preformulation research, process and formulation development, required studies and FDA 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 or problems relating to formulation, safety or efficacy (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Liquidity and Capital Resources"). Currently, the Company has ANDAs pending with the FDA for three potential products, one application of which is subject to litigation with a brand name pharmaceutical company. 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. The Company's profitability depends on the introduction of successful new products to replace declining revenues from older products. The failure of the Company to introduce new products in a timely manner could have a material adverse effect on the Company's operating results and financial condition.
The Company entered into a distribution agreement with Sano which gives Par the right to exclusively distribute Sano's generic transdermal drug products in the United States and the right of first refusal in other markets. Under the terms of the agreement, the Company advanced to date $5,371,000 to Sano for the development of four products, of which $2,942,000 was advanced in fiscal year 1996. Sano has submitted an ANDA to the FDA for one of its nicotine patches and two ANDAs for nitroglycerin patches. Sano has advised the Company that, assuming approval by the FDA in a timely manner, the nicotine patch may be available for sale during the first six months of calendar 1997. After an initial public offering of Sano's common stock, Sano repaid $1,500,000 of the
advances in November 1995 which was treated as a credit to research and development expenses in fiscal year 1996 (see "--Product Line Information", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Liquidity and Capital Resources" and "Notes to Financial Statements--Distribution Agreements").
For its 1996, 1995 and 1994 fiscal years, the net research and development expenses of the Company's continuing operations were approximately $5,160,000, $5,487,000 and $3,874,000, respectively. The Company plans that its expenditures will remain at approximately current levels over the next fiscal year (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Operating Results-- Research and Development" and "--Financial Condition--Liquidity and Capital Resources").
In May 1995, the Company formed the Joint Venture with Clal. The Joint Venture has identified approximately 35 products for research and eight are currently under development by the Joint Venture. The Joint Venture continues to build its staff and has begun the preliminary stages of research on certain of the identified products (see "--Product Line Information" and "Management's Discussion and Analysis of Financial Condition and Results of operations--Financial Condition--Liquidity and Capital Resources").
MARKETING AND CUSTOMERS
The Company markets its products to drug wholesalers, distributors and retail drug chains principally through its own sales staff. In 1995, the Company completed its plans to eliminate its dependence upon outside sales representatives and add additional internal sales personnel. These changes were part of the strategy of the Company to emphasize sales of Par products to wholesalers versus distributors (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Sales").
The Company markets its products under both Par and private labels principally to wholesalers, distributors, retail drug store chains and, to a lesser extent, drug manufacturers, repackagers and government agencies. The Company plans to increase its sales and marketing efforts to increase sales to customers in the managed health care market through ParCare, a subsidiary established in September 1995 to focus on meeting the specialized needs of managed health care organizations. Such customers include health maintenance organizations, nursing homes, hospitals, clinics, pharmacy benefit management companies and mail order customers.
The Company has experienced in the last several years a significant change in its distribution channels. In general, sales of generic drugs to distributors have been decreasing, while sales to wholesalers has been increasing. The Company believes that competition between distributors and wholesalers and consolidation among retailers has resulted in additional and separate pressures to decrease prices. Additionally, aggressive pricing strategies by distributors which are attempting to maintain or increase market share have adversely affected the Company's ability to market its products. Consequently, price reductions have resulted in lower gross margins for the Company (see "--Competition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations").
The Company has approximately 200 customers. During fiscal year 1996, sales to the Company's two largest customers, McKesson Drug Co., a subsidiary of McKesson Corporation, and Goldline Laboratories, Inc., a subsidiary of Ivax Corporation, amounted to 11% and 9%, respectively, of net sales (see "Notes to Financial Statements--Accounts Receivable--Major Customers"). Neither of such customers has written agreements with the Company.
ORDER BACKLOG
The dollar amount of open orders, as of September 30, 1996, believed by management to be firm, was approximately $7,800,000 and compares to approximately $8,100,000 at September 30, 1995. Although these orders are subject to cancellation without penalty, management expects to fill substantially all of them in the near future. The Company has orders for shipments for its customers which are consistent with the seasonal purchasing patterns of its customers.
COMPETITION
The generic pharmaceutical industry is highly and increasingly competitive. The Company has identified at least ten principal competitors, and experiences varying degrees of competition from numerous other companies in the health care industry. The Company's competitors include many generic drug manufacturers and a number of major branded pharmaceutical companies which, as part of their business, market both brand-name prescription drugs and generic versions of these brand-name drugs. Many of the Company's competitors have greater financial and other resources than the Company and are able to expend more for product development and marketing.
Many major branded pharmaceutical companies have directly launched, or have formed alliances to market, their patented drugs prior to patent expiration as generic drugs. Because branded pharmaceutical companies do not have to wait until the expiration of patent protection before manufacturing such generic drugs, they have a distinct timing advantage over strictly generic drug manufacturers. This competitive effort has had a negative impact on the Company's ability to sell certain generic drugs to its customers and to generate customary revenues from the launch of its new products, as the channel of distribution is either closed or severely limited or the Company is forced to meet lower market pricing.
As other manufacturers introduce generic products in competition with the Company's existing products, market share and prices with respect to such existing products typically decline. Similarly, the Company's potential for profits is significantly reduced, if not eliminated, as competitors introduce products prior to the Company. Accordingly, the level of revenues and gross profit generated by the Company's current and prospective products depends, in part, on the number and timing of introductions of competing products and the Company's timely development and introduction of new products (see"--Research and Development").
During fiscal year 1996, four of the Company's products accounted for approximately 58% of its net sales and yielded the substantial portion of the gross margin of the Company, with one of such products representing a substantial portion of both net sales and gross margin. During the second half of calendar year 1995, two generic pharmaceutical manufacturers received FDA approval of a product for which the Company previously had been the sole generic manufacturer. This product, along with two other products, historically had accounted for a significant portion of net sales and gross margin of the Company. Further, a competitor of the Company in fiscal year 1996 received FDA approval for a very significant product of the Company for which the Company previously had been the sole generic manufacturer. Due to the increased competition with respect to these products, the Company's sales and gross margins have been materially and adversely affected.
The principal competitive factors in the generic pharmaceutical market are (i) price, (ii) the ability to introduce generic versions of brand name drugs promptly after their patents expire, (iii) reputation as a manufacturer with integrity and quality products, (iv) level of service (including maintenance of sufficient inventories for timely deliveries), (v) product appearance, and (vi) breadth of product line. The Company has expended more effort and resources, including financial, in the areas of sales, marketing, and research and development to better its competitive position in the industry over the last three years.
RAW MATERIALS
The raw materials essential to the Company's manufacturing business are purchased primarily from United States distributors of bulk pharmaceutical chemicals manufactured by foreign companies. To date, the Company has experienced no significant difficulty in obtaining raw materials and expects that raw materials will generally continue to be available in the future. However, since the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. While a new supplier becomes qualified by the FDA and its manufacturing process is judged to meet FDA standards, a delay of six months or more in the manufacture and marketing of the drug involved could result, which could in turn have an adverse effect on the Company's financial condition. Generally the Company attempts to minimize the effects of any such situation by specifying, where economical and feasible two or more suppliers for its drug approvals.
EMPLOYEES
As of September 30, 1996, the Company had approximately 390 employees.
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, recordkeeping, approval, advertising and promotion of the Company's products. Noncompliance with applicable requirements can result in judicially and/or administratively imposed sanctions including the initiation of product seizures, injunction actions, fines and criminal prosecutions. Administrative enforcement measures can involve the recall of products, as well as the refusal of the government to enter into supply contracts or to approve new drug applications. The FDA also has the authority to withdraw approval of drugs in accordance with regulatory due process procedures.
FDA approval is required before any new drug, including a generic equivalent of a previously approved drug, can be marketed. To obtain FDA approval for a new drug, a prospective manufacturer must, among other things, demonstrate that its manufacturing facilities comply with the FDA's current Good Manufacturing Practices ("cGMP") regulations. The FDA may inspect the manufacturer's facilities to assure such compliance prior to approval or at any other reasonable time. CGMP regulations must be followed at all times during the manufacture and other processing of drugs. To comply with the standards set forth in these regulations, the Company must continue to expend significant time, money and effort in the areas of production, quality control and quality assurance.
To obtain FDA approval of a new drug, a manufacturer must demonstrate, among other requirements, the safety and effectiveness of the proposed drug. There are currently three basic ways to satisfy the FDA's safety and effectiveness requirements:
1. New Drug Applications ("NDA" or "full NDA"): Unless either of the procedures discussed in paragraphs 2 and 3 below is available, a prospective manufacturer must submit to the FDA full reports of well-controlled clinical studies and other data to prove that a drug is safe and effective and meets other requirements for approval.
2. "Paper" NDAs: In certain instances in the past, the FDA permitted safety and effectiveness to be shown by submission of published literature and journal articles in a so-called "paper" NDA. As a result of passage of the Drug Price Competition and Patent Term Restoration Act of 1984 (the "Waxman-Hatch Act"), "paper" NDAs are now recognized in the statute, although they are infrequently used because of the lack of sufficient or otherwise useable information in the literature on the majority of drugs.
3. Abbreviated New Drug Applications ("ANDAs"): 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"). In place of clinical studies to establish the generic drug's safety and effectiveness, an ANDA applicant typically is required to submit bioavailability data generated from biostudies demonstrating that the proposed product is bioequivalent to the listed drug. Bioavailability data indicate the rate and extent of absorption of a drug's active ingredient and its availability at the site of drug action, typically measured through blood levels. A generic drug usually is deemed to be bioequivalent to the listed drug if the rate and extent of absorption of the generic drug are not significantly different from those of 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 virtually all other information required of a full NDA (e.g., chemistry, manufacturing, labeling, and stability data).
The Waxman-Hatch Act also established certain statutory protections for listed drugs. Under the Waxman-Hatch Act approval of an ANDA for a generic drug may not be made effective for interstate marketing until all relevant patents for the listed drug have expired or been determined to be invalid or not infringed by the generic drug. Prior to enactment of the Waxman-Hatch Act, the FDA did not consider the patent status of a previously
approved drug. In addition, under the Waxman-Hatch Act, statutory non- patent exclusivity periods are established following approval of certain listed drugs, where specific criteria are met by the drug. If exclusivity is applicable to a particular listed drug, the effective date of approval of ANDAs (and, in at least one case, submission of an ANDA) for the generic version of the listed drug is usually delayed until the expiration of the exclusivity period, which, for newly approved drugs, can be either three or five years. The Waxman-Hatch Act also provides for extensions of up to five years of certain patents covering drugs to compensate the patent holder for reduction of the effective market life of the patented drug resulting from the time involved in the Federal regulatory review process.
During 1995, patent terms for a number of listed drugs were extended when the Uruguay Round Agreements Act (the "URAA") went into effect to implement the latest General Agreement on Tariffs and Trade (the "GATT") to which the United States became a treaty signatory in 1994. Under GATT, the term of patents was established as 20 years from the date of patent application. In the United States, the patent terms historically have been calculated at 17 years from the date of patent grant. The URAA provided that the term of issued patents be either the existing 17 years from the date of patent grant or 20 years from the date of application, whichever was longer. The effect generally was to add patent life to already issued patents, thus delaying FDA approvals of applications for generic products.
In addition to the Federal government, states have laws regulating the manufacture and distribution of pharmaceuticals, as well as regulations dealing with the substitution of generic for brand-name drugs. The Company's operations are also subject to regulation, licensure and inspection by the states in which they are located and/or do business.
The Company also is governed by Federal and state laws of general applicability, including laws regulating matters of environmental quality, working conditions, and equal employment opportunity.
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.
The Company received a warning letter in May 1994 from the FDA setting forth certain alleged deviations from cGMP regulations and alleged violations of related provisions of the Federal Food, Drug and Cosmetic Act. In March of 1995, the FDA completed a reinspection of the Company's main facility and confirmed that the Company is in substantial compliance with cGMP. The reinspection confirmed effective correction of all violations noted in the warning letter.
ITEM 2.
ITEM 2. Properties. ------ ----------
The Company's executive offices and a substantial portion of its research and production facilities are housed in a 92,000 square foot facility built to Par's specifications and occupied since fiscal 1986. This building 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 purchase of the land, facility and equipment was financed, in part,
by Industrial Development Bonds issued by the County of Rockland Industrial Development Agency in October 1984. The Bonds were fully paid in fiscal year 1996, and the collateral documents associated with such bonds are in the process of being released. Upon their release, title to the property will formally transfer from the Industrial Development Agency to the Company (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Financing" and "Notes to Financial Statements--Long Term Debt").
The Company purchased, in fiscal year 1994, a 36,000 square foot building on two acres of land in Chestnut Ridge, New York, across the street from its executive offices for office space. The purchase of the land and building was financed by a mortgage loan (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Financial Condition--Financing" and "Notes to Financial Statements--Long Term Debt").
Par owns a third facility consisting of six acres of land and a 33,000 square foot building located in Congers, New York, which is used for tablet coating operations and product manufacturing. The purchase of the facility and related renovations and equipment were financed in full by term loans. The equipment serves as collateral for the loan (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Financial Condition--Financing" and "Notes to Financial Statements--Long Term Debt").
Under a lease expiring December 1997, with three five year extension options, Par occupies approximately 77,000 square feet for office, warehouse, and research and development space in Chestnut Ridge, New York (see "Notes to Financial Statements--Commitments--Leases").
Par 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 1998, and has three two-year renewal options. (see "Notes to Financial Statements--Commitments--Leases").
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.
ITEM 3.
ITEM 3. Legal Proceedings. ------ -----------------
The Company is involved in certain litigation matters, including certain product liability actions and actions by two former employees for, among other things, breach of contract. Such actions seek damages from the Company, including compensatory and punitive damages. The Company intends to defend these actions vigorously. The Company believes that these actions are incidental to the conduct of its business, and that the ultimate resolution thereof will not have a material adverse effect on its financial condition, results of operations or liquidity.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders. ------- ---------------------------------------------------
A Meeting of Shareholders of the Company was held on October 23, 1996. The following matters were voted on and approved by the holders of shares of the Company's Common Stock:
1. The first proposal presented to the shareholders was to elect two members of the Company's Board of Directors, which consists of seven members, to serve for a three-year term and until their successors are duly elected and qualified. There were 14,590,177 and 14,584,170 shares of Common Stock cast in favor of electing Kenneth I. Sawyer and Robin O. Motz, respectively, which represented a majority of the shares of the Company's Common Stock cast for such proposal, and 1,267,369 and 1,273,376 shares were withheld, respectively. There were no broker non- votes. The terms of office of Melvin Van Woert, Andrew Maguire, Mark Auerbach, H. Spencer Matthews and Mony Ben-Dor continued as directors after the meeting.
2. The second proposal presented to the shareholders was to approve an amendment to the Company's 1990 Stock Incentive Plan to increase the number of shares of the Company's Common Stock for which options
may be granted thereunder. There were 14,220,041 shares of Common Stock cast in favor of such proposal, which represented a majority of the shares of the Company's Common Stock cast for such proposal, 1,514,033 shares of Common Stock cast against such proposal, and 123,472 shares abstained.
PART II
ITEM 5.
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 two most recent fiscal years.
(b) Holders. As of December 20, 1996, there were approximately 3,700 holders of record of the Common Stock. The Company believes that, in addition, there are a significant number of beneficial owners of its Common Stock whose shares are held in "street name."
(c) Dividends. During the two most recent fiscal years, the Company paid no cash dividends on its Common Stock. The payment of future dividends on its Common Stock is subject to the discretion of the Board of Directors and is dependent upon many factors, including the Company's earnings, its capital needs, the terms of its financing agreements and its general financial condition (see "Notes to Financial Statements--Long Term Debt"). 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.
(d) Recent Stock Price. On December 20, 1996, the closing price of the Common Stock on the NYSE was $4.00 per share.
ITEM 6.
ITEM 6. Selected Financial Data ------ -----------------------
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and ------ --------------------------------------------------------------- Results of Operations. ---------------------
Certain statements in this Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including those concerning management's expectations with respect to future financial performance and future events, particularly relating to sales of current products as well as the introduction of new manufactured and distributed products. Such statements involve known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which could cause actual results and outcomes to differ materially from those expressed herein. Factors that might affect such forward-looking statements set forth in this Form 10-K include, among others, (i) increased competition from new and existing competitors and pricing practices from such competitors, (ii) the amount of funds continuing to be available for internal research and development and research and development joint ventures, (iii) research and development project delays or delays in obtaining regulatory approvals and (iv) the ability of the Company to retain and attract management personnel in key operational areas.
RESULTS OF OPERATIONS
General
The Company incurred operating losses for the fiscal year ended September 30, 1996 of $13,217,000 compared to operating losses of $690,000 in the prior fiscal year. The losses are principally due to sales and gross margin declines, as described below. If sales declines are not offset by increased sales of new distributed or manufactured products, lower net sales and gross margins will continue and, accordingly, result in further losses. In response to recent results and industry trends, the Company has implemented measures to reduce costs and increase operating efficiencies (see "Notes to Financial Statements--Commitments, Contingencies and Other Matters--Restructuring").
The continued price and profit margin erosion on certain of the Company's products reflects a trend currently being experienced in the generic drug industry in general in the United States. The factors contributing to the intense competition and affecting both the introduction of new products and the pricing and profit margins of the Company, include, among other things, (i) introduction of other generic drug manufacturers' products in direct competition with the Company's significant products, (ii) competition from brand name drug manufacturers selling generic versions of their drugs, (iii) increased ability of generic competitors to enter the market after patent expiration, diminishing the amount and duration of significant profits, and (iv) willingness of generic drug customers, including wholesalers and retail customers, to switch among pharmaceutical manufacturers.
The Company plans to continue to invest in its internal research and development efforts in addition to pursuing additional products for sale through new and existing distribution agreements and research and development joint ventures. There were no significant sales of any new manufactured or distributed products introduced in the current fiscal year. The Company hopes that it will, subject to FDA approval and other factors, introduce new products in the next fiscal year as a result of its research and development efforts and distribution agreements, including nicotine and nitroglycerine patches from Sano and an internally developed product for which ANDAs have been filed (see "--Research and Development"). No assurance can be given that any additional products for sale by the Company will result or that sales of additional products will reduce losses or return the Company to profitability. Continuing losses would adversely affect the Company's liquidity and, accordingly, its ability to fund research and development or ventures relating to the distribution of new products (see "--Financial Condition--Liquidity and Capital Resources").
Sales
Net sales of $57,959,000 for the fiscal year ended September 30, 1996 decreased $8,544,000, or 13%, from the prior fiscal year. The decline is primarily due to decreased sales of manufactured products which resulted in large part from lower pricing and continuing decreases in volume of one of the Company's significant products, and to a lesser extent, two other significant products. The sales decline was caused principally by the introduction of competitive products by other drug manufacturers. Increased sales of a lower margin distributed product
partially offset the decline in sales of manufactured products. This product contributed significantly to the increase in sales of distributed products to $9,035,000 in fiscal year 1996 from $5,881,000 in the prior fiscal year.
Sales for the fourth quarter of fiscal 1996 were $12,951,000, a decrease of $4,539,000, or 26%, from $17,490,000 for the fourth fiscal quarter of 1995. The decrease was primarily due to lower pricing and decreased volume of certain of the Company's significant products as previously discussed, caused principally by the introduction of competitive products by other drug manufacturers.
Sales for the year ended September 30, 1995 of $66,503,000 decreased $2,666,000, or 4%, from the year ended October 1, 1994. Distributed product sales decreased $5,492,000 principally due to decreased demand and lower pricing resulting from intense competition from both generic and brand name pharmaceutical companies. Sales of manufactured products increased $2,826,000 primarily due to higher volume of one of the Company's lower margin products and higher pricing of one of the Company's significant products.
Levels of sales are principally dependent upon, among other things, (i) pricing levels and competition, (ii) market penetration for the existing product line, (iii) approval of ANDAs and introduction of new manufactured products, (iv) introduction of new distributed products and (v) the level of customer service (see "Business--Competition").
Gross Margins
The Company's gross margin for the year ended September 30, 1996 was $9,660,000 (17% of net sales) compared to $20,989,000 (32% of net sales) for the prior fiscal year. The gross margin decline is primarily due to continued lower selling prices and decreased volumes of certain significant manufactured products resulting from the introduction of other generic drug manufacturers' products in direct competition with the Company's significant products. Gross margins on distributed products for the current year also decreased from the prior year principally due to continuing lower sales levels of higher margin products and increased sales of a lower margin product.
The gross margin for the quarter ended September 30, 1996 decreased $6,126,000 to $(1,317,000) (-10% of net sales) from the $4,809,000 (27% of net sales) recorded in the fourth quarter of the prior fiscal year. The decline is primarily due to the continuing lower sales of certain significant manufactured products, as discussed above. In addition, an inventory adjustment, which lowered the cost of one of the Company's products to its current market value, adversely affected the margin during the current period.
Inventory write-offs, which are taken in the normal course of business, amounted to $1,395,000 and $2,203,000 for the years ended September 30, 1996 and September 30, 1995, respectively, and $463,000 and $632,000 for the fourth quarters of fiscal years 1996 and 1995, respectively. The inventory write-offs are related to the disposal of finished products due to short shelf life and work in process inventory not meeting the Company's quality control standards.
During fiscal year 1996, four of the Company's products accounted for approximately 58% of its net sales and yielded the substantial portion of the gross margin of the Company, with one of such products representing a substantial portion of both net sales and gross margin. During the second half of calendar year 1995, two generic pharmaceutical manufacturers received FDA approval of a product for which the Company previously had been the sole generic manufacturer. This product, along with two other products, historically had accounted for a significant percentage of net sales and gross margin of the Company. Primarily as a result of this increased competition, net sales of this product decreased from $5,652,000 in fiscal year 1995 to $3,959,000 in fiscal year 1996, and gross margin declined from $5,073,000 in fiscal year 1995 to $3,427,000 in fiscal year 1996. Further, a competitor of the Company in fiscal year 1996 received FDA approval for a very significant product of the Company for which the Company previously had been the sole generic manufacturer. As a result of the increased competition, net sales of that product decreased from $20,834,000 in fiscal year 1995 to $13,581,000 in fiscal year 1996, and gross margin declined from $16,893,000 in fiscal year 1995 to $10,223,000 in fiscal year 1996. Due to the increased competition with respect to these products, the Company's sales and gross margins have been materially and adversely affected.
Gross margin of $20,989,000 (32% of net sales) in fiscal year 1995 decreased $2,406,000 from $23,395,000 (34% of net sales) in 1994 primarily as a result of lower pricing and a decline in sales of distributed product, as well as increased inventory write-offs and a shift in product mix of manufactured product reflecting an increase in sales of lower margin products and a decrease in sales of certain higher margin products.
Operating Expenses
Research and Development
During the first quarter of fiscal year 1996, the Company received a $1,500,000 reimbursement from Sano Corporation ("Sano") for advances made to them in prior fiscal years for research and development expenses. As a result of this reimbursement, net research and development expenses for the year ended September 30, 1996 equalled $5,160,000 compared to $5,487,000 in the prior fiscal year. Gross research and development expenses for the year ended September 30, 1996 were $6,660,000 including payments to Sano of $2,942,000 for the development of certain generic transdermal products compared to $1,429,000 in the prior year. The Company has a distribution agreement with Sano to distribute generic transdermal products developed by Sano (see "Notes to Financial Statements- Investments").
Research and development expenses for the fourth quarter ended September 30, 1996 were $841,000 versus $2,102,000 in the corresponding quarter of the prior fiscal year. The decrease is primarily attributable to $996,000 of Sano payments incurred in the prior year.
To further expand its product line, the Company is continuing its efforts to introduce new products from internal research and development and from existing joint ventures, as well as searching for additional research and development joint ventures. In May 1995, the Company formed an alliance with Clal to develop, manufacture and distribute generic pharmaceuticals worldwide (see "Business--Product Line Information" and "Notes to Financial Statements--Investment in Joint Venture", "Shareholders' Equity" and "--Financial Condition--Liquidity and Capital Resources"). A research and development joint venture, formed in Israel and owned 49% by the Company and 51% by Clal, has commenced operations and identified approximately 35 products for research. The Company recorded its share of such joint venture's research and development expenses of $499,000 for the current fiscal year.
For the year ended September 30, 1995, research and development costs increased $1,613,000 to $5,487,000 from the prior fiscal year reflecting management's efforts to expand its product line under various internal and co-development programs.
Selling, General and Administrative
Selling, general and administrative costs were $17,168,000 (30% of net sales) for the year ended September 30, 1996 versus $16,192,000 (24% of net sales) for the prior fiscal year. The increase is primarily attributable to fees for consulting and professional services, increased advertising and developmental marketing costs, severance costs, increased bad debt expense and costs related to implementing information systems to support the Company's operations. In addition, the Company incurred costs in strengthening its managed care and in-house sales force in an effort to compete more effectively under the current market conditions.
Selling, general and administrative costs were $4,292,000 (33% of net sales) for the three month period ended September 30, 1996 compared to $4,248,000 (24% of net sales) for the corresponding period in the prior fiscal year.
Selling, general and administrative costs for the fiscal year ended September 30, 1995 increased 20% to $16,192,000 (24% of net sales) from $13,463,000 (19% of net sales) for the year ended October 1, 1994 principally due to certain non-recurring charges including legal and accounting expenses related to merger and acquisition or other strategic alliance negotiations, expenses incurred in connection with the Company's response to FDA inquiries with respect to current Good Manufacturing Practices and costs associated with the termination of the broker network used by the Company to sell its products.
Restructuring Charge
The Company recorded a restructuring charge of $549,000 in the current period to provide for costs associated with the reduction and reorganization of current personnel (see "Business--General--Significant Developments"). The implementation of measures to reduce costs and expenses, including a reduction in spending on advertising, marketing, and professional services, is expected to reduce operating costs in subsequent periods due to established efficiencies and lower head count (see "Notes to Financial Statements-Commitments, Contingencies and Other Matters- Restructuring").
Settlements
In fiscal year 1995, the Company resolved claims against certain former management members of the Company for recovery of, among other items, salaries and money paid for indemnification. The settlements, in the form of cash and securities of the Company, were valued at $2,029,000.
Other Income
Other income for the fiscal year ended September 30, 1996 increased to $2,557,000 from $608,000 in the prior fiscal year. The increase is attributable to a gain on the sale of Sano common stock sold during the fourth quarter of fiscal year 1996 (see "--Financial Condition-- Liquidity and Capital Resources").
Income Taxes
Management has determined, based on the Company's performance this year and the uncertainty of the generic business in which the Company operates, that future operating income might not be sufficient to recognize fully the net operating loss carryforwards of the Company. Therefore, the Company is not recognizing a benefit for its operating losses this year (see "Notes to Financial Statements--Income Taxes"). In the prior fiscal year, the Company recorded income tax expense of $836,000.
In fiscal year 1994, the Company adopted SFAS 109, "Accounting For Income Taxes" ("SFAS 109") and recorded income of $14,128,000 which is reflected as the cumulative effect of a change in accounting principle in the financial statements. Significant portions of the income recognized consist of net operating loss carryforwards and have been included to the extent that the realization of such benefits is more likely than not.
The Internal Revenue Service ("IRS") has determined that certain credits taken by the Company in prior years for research activities are not permitted. A reserve of approximately $1,000,000 was provided upon implementation of SFAS 109 in fiscal 1994. The Company paid to the IRS approximately $1,000,000 during fiscal 1995 for the disallowed credits and such payments were charged against the reserve which was previously provided.
Discontinued Operations
In fiscal year 1996, the Company recorded income from discontinued operations of $2,800,000, reversing the remaining reserves which had been provided for Quad Pharmaceuticals, Inc. ("Quad"), whose operations were discontinued in 1991 (see "Notes to Financial Statements-- Discontinued Operations").
FINANCIAL CONDITION
Liquidity and Capital Resources
Working capital of $20,716,000 at September 30, 1996 represents a decrease of $14,191,000 from the last fiscal year end principally due to the use of cash for capital expenditures of $4,746,000, for investments in research and development joint ventures of $1,470,000 and in Fine-Tech Ltd. of $1,000,000, as discussed below, and to fund operating losses. The working capital ratio of 2.9x declined from 3.5x at the prior fiscal year end. Inventory levels increased to $19,352,000 from $15,364,000 in the prior fiscal year, primarily due to the building of inventories of certain manufactured products.
In September 1996, the Company sold 135,000 shares of its holdings in Sano Corporation at average prices ranging from $19.50 to $19.88 per share. Net proceeds received from the transactions amounted to approximately $2,669,000.
As part of the alliance formed with Clal, the Company invested $1,960,000 in the research and development joint venture in fiscal 1995 and $1,470,000 was invested during fiscal 1996. The Company is committed to invest an additional $3,920,000 (which includes the balance of the commitment from fiscal year 1996) in the joint venture through fiscal 1997. The Company and Clal are negotiating to amend their remaining funding commitments for 1996 in order to reflect the present and contemplated capital requirements of the Joint Venture, although they have not yet amended yet their written agreement (see "Business--Product Line Information").
In December 1995, the Company purchased 10% of the shares of Fine-Tech Ltd., an Israeli pharmaceutical research and development company in which Clal has a significant ownership interest, for $1,000,000 and obtained certain exclusive rights to purchase products from Fine-Tech Ltd. not commonly sold in North America, South America or the Caribbean.
The Company expects to fund its research and development activities, including its obligations under the existing distribution and development arrangements discussed above, out of its working capital, and if necessary with borrowings against its line of credit, to the extent then available (see "--Financing"). If, however, the Company continues to experience significant losses, its liquidity and, accordingly, its ability to fund research and development or ventures relating to the distribution of new products will be materially and adversely affected.
Financing
At September 30, 1996, the Company's total outstanding long-term debt was $5,113,000. The long-term debt consists principally of outstanding loans to two banks of $4,683,000 which are secured by certain assets of the Company and are to be repaid in monthly installments through 2001.
On December 27, 1996, Par Pharmaceutical, Inc. ("Par") entered into a Loan and Security Agreement (the "Loan Agreement") with General Electric Capital Corporation ("GECC") which provides Par with a three-year revolving line of credit. Pursuant to the Loan Agreement, 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 as determined from time to time by GECC. The interest rate charge on the line of credit is based upon a rate per annum of 2.50% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par and Pharmaceutical Resources, Inc. ("PRI") other than real property and is guaranteed by PRI. As a condition to 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 locked accounts over which GECC has sole operating control and which are applied on a daily basis to reduce amounts outstanding under the line of credit. As of December 30, 1996, approximately $3,500,000 was outstanding under such line of credit. The revolving credit facility, which is subject to covenants based on various financial benchmarks, replaced PRI's previous $16,000,000 revolving facility and $4,000,000 term loan facility, with Fleet Bank, N.A. Any significant reduction in the borrowing base will adversely affect the Company's liquidity.
At September 30, 1996, the Company had borrowed $355,000 under a line of credit maintained at a second bank, which line is secured by equipment purchased. The interest rate is based on the prime rate plus a premium. Additionally, the Company has a mortgage loan with this lender in the original principal amount of $1,340,000. The loan bears interest during the first five years of its term at a rate of 8.5% per annum and thereafter at the Prime Rate plus 1.75%. It is due in equal monthly installments until May 1, 2001, at which time the remaining principal balance with interest is due. The loan is secured by certain real property (see "Business--Property"). At September 30, 1996, the outstanding balance of the loan was $1,183,000 (see "Notes to Financial Statements--Long-Term Debt").
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data. ------ ------------------------------------------- See Index to Financial Statements after Signature Page.
ITEM 9.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and ------ --------------------------------------------------------------- Financial Disclosure. --------------------
In September 1995, the Company changed accountants, from Richard A. Eisner and Co., LLP. to Arthur Andersen LLP. The Company filed a Report on Form 8-K in connection with such change with the Securities and Exchange Commission on September 8, 1995 - which Form 8-K subsequently was amended on October 4, 1995 and on October 12, 1995, all of which are hereby incorporated herein by reference.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant. ------- -------------------------------------------------- Directors
The Company's Certificate of Incorporation provides that the Board shall be 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 1997, 1998 and 1999, respectively. The following table sets forth certain information with respect to each of Class I, II and III directors and the year each was first elected as a director:
(1) A member of the Audit Committee of the Board of the Company. (2) A member of the Compensation and Stock Option Committee of the Board of the Company. (3) A member of the Nominating Committee of the Board of the Company. (4) A member of the Strategic Planning Committee of the Board of the Company. (5) A member of the Executive Committee of the Board of the Company.
In June 1995, Mony Ben-Dor was elected by the Board to fill a vacancy on the Board as a Class I director in accordance with the terms of the Stock Purchase Agreement (as defined below). Under such agreement, Clal has the right to designate one-seventh of the members of the Board as long as Clal owns 8% of the issued and outstanding Common Stock, and a total of two-sevenths of the members of the Board if Clal owns at least 16% of the issued and outstanding Common Stock. The Company has the right to reject a designee of Clal if such person is not satisfactory to the Company for good faith reasons. The Company also agreed to elect Clal's designee to the Audit Committee, Compensation and Stock Option Committee and Strategic Planning Committee of the Board. In the event that Clal does not nominate directors to the Board or its committees or if Clal's designees are not elected to the Board or its committees, Clal is permitted, under the Stock Purchase Agreement, to designate representatives who may attend meetings of the Board and its committees. Additionally, if Clal's appointment of a director to the Audit Committee is prohibited by the rules and regulations of the New York Stock Exchange, Inc., the Company will provide Clal materials which are provided to committee members, the appointment of the Company's auditors will be approved by the entire Board, the Company will consult with directors nominated by Clal with respect to Audit Committee actions and the directors nominated by Clal will have the right to consent to certain changes in the Company's accounting principles.
Clal designated Mr. Ben-Dor, a director of Clal and a vice president of Clal Industries Ltd., as its representative to serve on the Board. Clal Industries Ltd. owns all of Clal's stock. Mr. Ben-Dor serves on the Audit, Strategic Planning, and Compensation and Stock Option Committees of the Board of Directors.
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 (elected October 23, 1996). The executive officers of Par consist of Mr. Sawyer and Mr. O'Connor. Mr. O'Connor 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. The Company is currently negotiating to hire a president of Par who would assume the day-to-day responsibilities for the operations.
ITEM 11.
ITEM 11. Executive Compensation. ------- ----------------------
The following table sets forth compensation earned by or paid to during fiscal years 1994 through 1996, the Chief Executive Officer of the Company, and the most highly compensated executive officers of the Company and/or Par at the end of fiscal year 1996 who earned over $100,000 in salary and bonus. The Company awarded or paid such compensation to all such persons for services rendered in all capacities during the applicable fiscal years.
- -------------------------- (1) The Named Executives did not hold any shares of restricted stock at the end of fiscal year 1996.
(2) For fiscal year 1996, includes insurance premiums paid by the Company for term life insurance for the benefit of the Named Executives as follows: Mr. Sawyer-$80; Mr. Edinger-$70; and Mr. Fisher-$63. The amount for Mr. Sawyer also includes $38,376, representing the maximum potential estimated dollar value of the Company's portion of insurance premium payments from a split-dollar life insurance policy as if 1996 premiums were advanced to the executive without interest until the earliest time the premiums may be refunded by Mr. Sawyer to the Company. Also includes the following amounts contributed by the Company to the Company 401(k) plan: Mr. Edinger-$3,411 and Mr. Fisher-$3,169. Messrs. Sawyer, Edinger and Fisher waived contributions of $11,865 each to be made on their behalf in fiscal year 1996 by the Company with respect to the Par Pharmaceutical Inc. Retirement Plan.
(3) Effective October 7, 1996, Mr. Edinger's employment with the Company terminated (see "--Employment Agreements and Termination Arrangements").
(4) Effective November 15, 1996, Mr. Fisher's employment with the Company terminated (see "--Employment Agreements and Termination Arrangements").
The following table sets forth stock options granted to the Named Executives during fiscal year 1996.
Stock Option Grants in Last Fiscal Year
(1) Represents options granted pursuant to the Company's 1990 Incentive Option Plan on May 24, 1996 of which 25,000 became exercisable immediately and 25,000 become exercisable on each of May 24, 1997 and May 24, 1998, respectively.
(2) Represents options granted pursuant to the Company's 1990 Incentive Option Plan on March 14, 1996. Such options terminated on October 7, 1996 (see "--Employment Agreements and Termination Arrangements").
(3) Represents options granted pursuant to the Company's 1990 Incentive Option Plan on March 14, 1996 of which 6,666 become exercisable on March 14, 1997 and 6,667 become exercisable on each of March, 14, 1998 and March 14, 1999, respectively. Such options will terminate earlier than the expiration date in connection with Mr. Fisher's termination of employment on November 15, 1996 (see "--Employment Agreements and Termination Arrangements").
The following table sets forth the stock options exercised by the Named Executives during fiscal year 1996 and the value, as of September 30, 1996, of unexercised stock options held by the Named Executives.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Compensation of Directors
For service on the Board, Directors who are not employees of the Company or any of its subsidiaries receive an annual retainer of $12,000, a fee of $1,000 for each meeting of the Board attended, and a fee of $750 for each committee meeting attended, subject to a maximum of $1,750 per day. Chairmen of committees receive an additional annual retainer of $5,000 per committee. New Directors are granted options to purchase shares on the date initially elected to the Board. Directors who are employees of the Company or any of its subsidiaries or are designated by Clal receive 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.
Employment Agreements and Termination Arrangements
The Company has entered into an Employment Agreement with Mr. Sawyer, which provides for his employment in his current position through October 4, 1996, subject to earlier termination by the Company for Cause (as such term is defined in the agreement). Mr. Sawyer's term of employment will be automatically extended each year for an additional one-year period unless either party provides written notice by July 4th of such year that he or it desires to terminate 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 of Directors 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 of the Company and subsidiary, as well as any committees thereof.
Mr. Sawyer's agreement provides for certain payments upon termination of his employment 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. A material breach by the Company of the employment agreement includes, but is not limited to, termination without Cause and a change of his responsibilities. Mr. Sawyer is entitled to receive, if such a termination occurs within two years following the Change of Control of the Company, a lump sum payment equal to the lesser of three times the sum of his annual base salary and most recent bonus or the maximum amount permitted without the imposition of an excise tax on Mr. Sawyer or the loss of a deduction to the Company under the Internal Revenue Code of 1986, as amended (the "Code"), plus reimbursement of certain legal and relocation expenses incurred by Mr. Sawyer as a result of the termination of his employment and maintenance of insurance, medical and other benefits for 24 months or until Mr. Sawyer is covered by another employer for such benefits.
In addition, Mr. Sawyer's employment agreement provides for the Company to purchase a residence within the vicinity of the Company's principal offices for Mr. Sawyer to occupy for the duration of his term of employment. In this connection, the Company purchased a condominium for the price of $192,500, which Mr. Sawyer leased from the Company from February 1995 until July 1996. The Company sold the condominium on July 31, 1996, and has no further obligation to provide a residence for Mr. Sawyer (see "Certain Relationships and Related Transactions"). In fiscal year 1996, Mr. Sawyer voluntarily agreed to reduce his salary, effective July 1, 1996, to $350,000 per year.
The Company terminated Mr. Edinger's employment on October 7, 1996, and is not currently making severance payments to him. The severance arrangement of Mr. Edinger is the subject of a lawsuit filed against the Company seeking $427,500 plus punitive damages of at least $106,875 (see "Legal Proceedings").
The Company is paying Mr. Fisher severance payments of 12 months continuation of his prevailing base salary, payable in weekly installments from the date of termination of his employment. The Company also has agreed to pay medical and other benefits for twelve months or until he is covered by another employer for such benefits.
Pension Plan
The Company maintains a defined benefit plan (the "Pension Plan") intended to qualify under Section 401(a) of the Code. Effective October 1, 1989, the Company ceased benefit accruals under the Pension Plan with respect to service after such date. The Company intends that distributions will be made, in accordance with the terms of the Plan, to participants as of such date and/or their beneficiaries. The Company will continue to make contributions to the Pension Plan to fund its past service obligations. Generally, all employees of the Company or a participating subsidiary who completed at least one year of continuous service and attained 21 years of age were eligible to participate in the Pension Plan. For benefit and vesting purposes, the Pension Plan's "Normal Retirement Date" is the date on which a participant attains age 65 or, if later, the date of completion of 10 years of service. Service is measured from the date of employment. The retirement income formula is 45% of the highest consecutive five-year average basic earnings during the last 10 years of employment, less 83 1/3% of the participant's Social Security benefit, reduced proportionately for years of service less than 10 at retirement. The normal form of benefit is life annuity, or for married persons, a joint survivor annuity. None of the Named Executives had any years of credited service under the pension plan.
Par currently maintains a retirement plan (the "Retirement Plan") and a retirement savings plan. The Board of Directors of Par has authorized the cessation of employer contributions to the Retirement Plan effective December 30, 1996. Consequently, participants in the Retirement Plan will no longer be entitled to any employer contributions under such plan for 1996 or subsequent years.
Compensation and Stock Option Committee
The compensation and stock option committee consists of Mark Auerbach, Mony Ben-Dor, H. Spencer Matthews, and Robin O. Motz.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management. -------- ---------------------------------------------------------------
The following table sets forth, as of the close of business on December 20, 1996, the beneficial ownership of the Common Stock by (i) each person known (based solely on a review of Schedules 13D) to the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) each director of the Company, (iii) the Named Executives, as defined in the "Executive Compensation" section of this report, and (iv) all directors and current executive officers of the Company and Par as a group (based upon information furnished by such persons). Under the rules of the Securities and Exchange Commission, a person is deemed to be a beneficial owner of a security if such person has or shares the power to vote or direct the voting of such security or the power to dispose of or to direct the disposition of such security. In general, a person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days. Accordingly, more than one person may be deemed to be a beneficial owner of the same securities.
- ---------------------- * Less than 1%. (1) The address of Clal Pharmaceutical Industries Ltd. ("Clal") and Mr. Ben Dor is Clal House, 5 Druyanov Street, Tel Aviv 63143, Israel. Of the 4,032,379 shares of Common Stock shown as beneficially owned by Clal, 2,127,272 shares are issued and outstanding, and 1,905,107 shares are issuable upon exercise of issued and outstanding warrants owned by Clal. (2) Mr. Ben Dor disclaims beneficial ownership of shares owned by Clal, of which he is a director (see "Directors and Executive Officers of the Registrant" and "Certain Relationships and Related Transactions"). (3) The business address of each of these individuals, for the purposes hereof, is in care of Pharmaceutical Resources, Inc., One Ram Ridge Road, Spring Valley, New York 10977. Includes shares of Common Stock which may be acquired upon the exercise of options which are exercisable on or prior to February 18, 1997, under the Company's stock option plans as follows: Mr. Sawyer, 645,000 shares; Dr. Van Woert 69,000 shares; Mr. Maguire, 36,000 shares; Mr. Matthews, 36,000 shares; Mr. Auerbach, 47,000 shares; Dr. Motz, 42,000 shares; and Mr. O'Connor, 10,000 shares. (4) A director of the Company. (5) A former executive officer of the Company (see "Executive Compensation"). Mr. Edinger's address is 60 Old Crown Road, Old Tappan, New Jersey 07675. (6) A former executive officer of the Company. Includes 30,000 shares which may be acquired upon the exercise of options which are exercisable on or prior to February 18, 1997 (see "Executive Compensation"). Mr. Fisher's address is 74 Turtleback Lane West, New Canaan, Connecticut 06840.
(7) Current executive officers consist of Kenneth I. Sawyer and Dennis O'Connor (see "Directors and Executive Officers of the Registrant--Executive Officers"). Includes 10,662 shares beneficially owned by Dennis O'Connor, of which 10,000 shares may be acquired on the exercise of options which are exercisable on or prior to February 18, 1997.
Voting Arrangements
The Company and Clal entered into a Stock Purchase Agreement, dated March 25, 1995, as amended on May 1, 1995 (the "Stock Purchase Agreement"), pursuant to which Clal, on May 1, 1995, purchased 2,027,272 shares of Common Stock and the Company issued to Clal two three-year warrants to purchase an aggregate of 2,005,107 shares of Common Stock (the "Warrants"). Under the Stock Purchase Agreement, Clal agreed to vote all of the shares of Common Stock held by it in favor of certain business combination transactions of the Company and certain sales of assets or securities of the Company (see "Certain Relationships and Related Transactions"). In addition, Clal has certain rights under the Stock Purchase Agreement to nominate directors to the Company's Board and committees thereof (see "Directors and Executive Officers of the Registrant--Directors").
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions. -------- -----------------------------------------------
Clal Agreements. On May 1, 1995, the Company consummated a strategic alliance with Clal consisting primarily of (i) the sale by the Company of 2,027,272 shares of the Company's Common Stock for $20,000,000, or $9.87 per share, (ii) the issuance by the Company of the Warrants and (iii) the formation of the Joint Venture. Mony Ben Dor, a director of the Company, is also a director of Clal. Prior to the closing of the Stock Purchase Agreement, Clal owned no shares of the Common Stock (see "Business--Product Line Information", "Directors and Executive Officers of the Registrant" and "Security Ownership of Certain Beneficial Owners and Management").
The Stock Purchase Agreement includes terms of the Company's and Clal's business relationship, including issuance to Clal of 2,027,272 shares of Common Stock, rights to nominate Board members, rights of first refusal, voting agreements, rights to invest in others, standstill agreements and agreements with respect to the issuance of the Warrants.
Subject to the satisfaction of certain conditions, Clal obtained the right to designate one or more of the members of the Company's Board of Directors and committees thereof and the right to designate a member of the Company's management.
Clal has a right of first refusal with respect to certain business combination transactions of the Company and certain sales of the assets or securities of the Company. Such right extends until May 1, 2000, provided that Clal, when exercising such right (i) has not sold or disposed of shares of Common Stock representing more than 337,045 shares of Common Stock and (ii) owns or has the right to acquire 16% of the Common Stock (the "Restricted Period"). If Clal does not exercise its right of first refusal with respect to any of the above-mentioned transactions, Clal will, subject to certain exceptions, be required to vote its shares of Common Stock in favor of such transactions. Such obligation will terminate upon the expiration of the Restricted Period. Clal has no obligation to vote its shares of Common Stock in favor of such a transaction if (i) Clal exercises its right of first refusal with respect to such transaction, (ii) fewer than 75% of the members of the Board (excluding member(s) of the Board nominated by Clal) vote in favor of the transaction or (iii) any member of the Board (excluding member(s) of the Board nominated by Clal) votes against the transaction. In the event that Clal has an obligation to vote its shares in favor of such a transaction, Clal also has agreed to take such other actions reasonably required or appropriate to facilitate the consummation of the transaction. Clal has no obligation to vote its shares in favor of, or take other actions to facilitate, any such transaction if Clal notifies the Company that, in Clal's opinion, the consummation of such a transaction would be detrimental to the Company and/or its shareholders, except if the Company, in response to such a notice, delivers to Clal a fairness opinion from a nationally recognized investment banking firm.
Clal has agreed to limit acquisitions, including acquisitions under the Warrants, of the Company's securities to 19.99% of the issued and outstanding Common Stock prior to May 1, 1998. In addition, Clal has agreed to limit such acquisitions to 25% of the issued and outstanding Common Stock after May 1, 1998. Clal has the right to tender for or purchase no less than 70% of the issued and outstanding Common Stock after May 1, 2000. These limitations expire six months following the expiration of the Restricted Period (the "Consent Period"). Clal also has the right to acquire up to 20% of any equity securities issued by the Company in an underwritten public offering so long as Clal, at the time, owns 10% of the issued and outstanding Common Stock (assuming, for this purpose, the full exercise of the Warrants). Clal has also agreed not to sell or otherwise dispose of Common Stock or other securities convertible into Common Stock during the Consent Period unless such securities are registered or may be sold without registration under Rule 144 promulgated under the Securities Act of 1933, as amended, or are sold in certain business combination transactions, unless the sale is approved by the Board (excluding member(s) of the Board nominated by Clal). Clal will limit, during the Consent Period, sales of Common Stock to any one person, entity or group to no more than 3% of the issued and outstanding Common Stock, except as otherwise permitted under the Stock Purchase Agreement.
In consideration of the rights and benefits obtained by the Company under the Stock Purchase Agreement, the Company issued to Clal the Warrants. The Warrants entitle Clal to purchase up to 1,905,107 shares of Common Stock at an exercise price of $12.00 per share. The Warrants are exercisable at any time until May 1, 1998, subject to earlier termination or redemption in certain circumstances. The Warrants provide that the number of shares of Common Stock issuable upon their exercise will be reduced by the number of shares of Common Stock, or
securities exercisable or exchangeable for or convertible into shares of Common Stock, acquired by Clal in open market transactions and certain other transactions.
In consideration of the rights and benefits obtained by the Company under the Stock Purchase Agreement, the Company also granted to Clal certain registration rights under a registration rights agreement (the "Registration Rights Agreement"). In general, Clal will not be able to sell freely the shares of Common Stock purchased by Clal or the shares of Common Stock issuable upon exercise of the Warrants without registration under applicable securities laws or unless an exemption from registration is available. Clal is entitled to two demand registrations. In addition, if the Warrants are exercised Clal is entitled to an additional demand registration. In addition, the Company granted to Clal the right to register shares of Common Stock owned by Clal on each occasion that the Company registers shares of Common Stock, subject to certain limitations and exceptions.
Clal currently owns 2,127,272 shares of Common Stock. Of such shares, 100,000 were purchased from Mr. Sawyer at a price of $7.125 per share on June 3, 1996.
As part of the alliance formed by the Company and Clal on May 1, 1995, the Company and Clal formed the Joint Venture to develop, manufacture and distribute generic pharmaceutical products worldwide. In connection with the Joint Venture, the Company and Clal have granted each other certain manufacturing and distribution rights for products developed by the other and for products developed by the Joint Venture (see "Business--Product Line Information" and "--Research and Development").
Investment in FineTech. Under the Stock Purchase Agreement, the Company obtained the right to participate with Clal and certain of its affiliates in connection with pharmaceutical acquisitions and transactions. In connection therewith, the Company purchased 10% of the shares of FineTech Ltd. ("FineTech") in December 1995 for $1,000,000. FineTech is an Israeli pharmaceutical research and development company in which Clal has a significant ownership interest. The Company also obtained the exclusive right to purchase products not commonly sold in North America, South America and the Caribbean. Mony Ben Dor, a director of Clal and a director of the Company, is also a director of FineTech. The Company's purchases of chemical components from FineTech in fiscal year 1996 totalled approximately $1,500,000. The Company's purchases have been and will be on terms no less favorable than could be obtained from non-affiliated third parties.
The foregoing descriptions of certain terms of the Stock Purchase Agreement, the Warrants, the Registration Rights Agreement and the Joint Venture do not purport to be complete and are qualified in their entirety by reference to such documents, copies of which were filed as exhibits to the Form 8-K filed by the Company with the Securities and Exchange Commission on May 12, 1995.
Transactions with Officers and Directors. In February 1995, the Company purchased a condominium for $192,500. The Company leased the condominium to Mr. Sawyer for $1,800 per month, which represented the fair market value as determined by a disinterested third party. The Company sold the condominium on July 31, 1996 for $225,000 (see "Executive Compensation").
At various times during fiscal year 1996, the Company made certain unsecured loans to Mr. Sawyer in connection with the exercise of his options. Such loans currently are evidenced by a single promissory note, which replaces a series of previously issued notes, in the aggregate principal amount of $128,607. The note bears interest at the rate of 8.25% per annum. Interest and principal are due on April 14, 1997. As of November 22, 1996, the outstanding balance of the note, with interest, was approximately $129,548.
During 1996, Bio-Dar Ltd., an Israeli company and affiliate of Clal Industries Ltd., sold chemicals to the Company for approximately $500,000.
The Company believes that all of the above transactions were on terms that were fair and reasonable to the Company.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. ------- ----------------------------------------------------------------
(a)(1)&(2) Financial Statements.
See Index to Financial Statements after Signature Page.
(a)(3) Exhibits.
3.1 Certificate of Incorporation of the Registrant. (4)
3.1.1 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 6, 1992--incorporated by reference to the Registrant's Registration Statement on Form 8-A (Commission File No. 0-20834), filed with the Commission November 10, 1992.
3.2 By-Laws of the Registrant, as amended and restated. (3)
4 Rights Agreement, dated August 6, 1991, between the Registrant and Midlantic National Bank, as Rights Agent. (5)
4.1 Amendment to Rights Agreement, dated as of April 27, 1992. (3)
10.1 1983 Stock Option Plan of the Registrant, as amended. (2)
10.2 1986 Stock Option Plan of the Registrant, as amended. (2)
10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (5)
10.4 1989 Employee Stock Purchase Program of the Registrant. (7)
10.5 1990 Stock Incentive Plan of the Registrant, as amended. (2)
10.6 Form of Retirement Plan of Par. (11)
10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984. (6)
10.7 Form of Retirement Savings Plan of Par. (11)
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984. (12)
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984. (12)
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985. (12)
10.8 Par Pension Plan, effective October 1, 1984. (4)
10.9 Employment Agreement, dated as of October 4, 1992, among the Registrant, Par and Kenneth I. Sawyer. (1)
10.10 Lease Agreement between Par and the County of Rockland Industrial Development Agency, dated as of October 1, 1984. (6)
10.10.1 Lessee Guaranty between Par and Midlantic National Bank, dated as of October 1, 1984. (6)
10.10.2 Mortgage from County of Rockland Industrial Development Agency to Midlantic National Bank, as Trustee, dated as of October 1, 1984. (12)
10.10.3 Security Agreement between County of Rockland Industrial Development Agency and Midlantic National Bank, as Trustee, dated as of October 1, 1984. (12)
10.11 Lease for premises located at 12 Industrial Avenue, Upper Saddle River, New Jersey, between Par and Charles and Dorothy Horton, dated October 21, 1978 and extension dated September 15, 1983. (11)
10.12 Lease agreement between Par and Ramapo Corporate Park Associates, dated as of January 1, 1993.
10.13 Employment Agreement, dated as of May 19, 1993, between the Registrant and Robert I. Edinger. (13)
10.14 Distribution Agreement, dated as of October 16, 1993, between Genpharm, Inc., the Registrant and PRX Distributors, Ltd. (13)
10.15 Letter Agreement, dated April 30, 1993, between the Generics Group B.V. and Par. (15)
10.16 Distribution Agreement, dated as of February 24, 1994, between Sano Corporation, the Registrant and Par, as amended. (15)
10.17 Mortgage and Security Agreement, dated May 4, 1994, between Urban National Bank and Par. (14)
10.17.1 Mortgage Loan Note, dated May 4, 1994. (14)
10.17.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban National Bank. (14)
10.18 Letter Agreement, dated as of October 13, 1994, between Par and Robert I. Edinger. (15)
10.19 1995 Directors Stock Option Plan. (19)
10.20 Stock Purchase Agreement, dated March 25, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.21 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.22 Warrant to Purchase Common Stock, dated May 1, 1995, delivered by the Registrant to Clal Pharmaceutical Industries Ltd. (17)
10.23 Registration Rights Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.24 Clal Pharmaceutical Resources L.P. Limited Partnership Agreement, dated as of May 1, 1995, among PRI-Research, Inc., C.T.P. Research and Development (1995) Ltd. and Clal Pharmaceutical Resources (1995) Ltd. (17)
10.25 Clal Pharmaceutical Resources (1995) Ltd. Stockholders Agreement, dated May 1, 1995, among PRI Research, Inc., C.T.P. Research and Development (1995) Ltd. and Clal Pharmaceutical Resources Ltd. (17)
10.26 Supplemental Agreement, dated as of May 1, 1995, among the Registrant, Clal Pharmaceutical Industries Ltd. and Clal Pharmaceutical Resources L.P. (17)
10.27 Guarantee of the Registrant, dated May 1, 1995. (17)
10.28 Guarantee of Clal Pharmaceutical Industries Ltd., dated May 1, 1995. (17)
10.29 Warrant to Purchase Common Stock, dated September 21, 1995, delivered by the Registrant to Clal Pharmaceutical Industries Ltd.
10.30 Commercial Revolving Loan and Term Loan Agreement, dated December 28, 1995, between Fleet Bank, N.A. and the Registrant. (20)
10.31 Master Security Agreement, dated December 28, 1995, between Fleet Bank, N.A. and Par. (20)
10.32 Equipment Security Agreement, dated December 28, 1995, between Fleet Bank, N.A. and Par. (20)
10.33 Promissory Note, dated December 28, 1995, of the Registrant. (20)
10.34 Master Security Agreement, dated December 28, 1995, between Fleet Bank, N.A. and Par. (20)
10.35 Equipment Security Agreement, dated December 28, 1995, between Fleet Bank, N.A. and Par. (20)
10.36 Cross Acceleration Agreement, dated December 28, 1995, between Fleet Bank, N.A. and the Registrant. (20)
11 Computation of per share data.
16 Letter regarding change in accountants (18).
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Richard A. Eisner and Company, LLP.
27 Financial Data Schedule.
(a)(4) Reports on Form 8-K. No reports on Form 8-K were filed in the last quarter of the fiscal year ended September 30, 1996. __________________________________________
(1) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 3, 1992 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Proxy Statement dated August 10, 1992 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an Exhibit to Amendment No. 1 on Form 8 to the Registrant's Registration Statement on Form 8-B, filed May 15, 1992, and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant'sAnnual Report on Form 10-K (Commission File No. 1-10827) for the year ended September 28, 1991 and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Proxy Statement dated August 14, 1991 and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K (Commission File No. 1-9449) for the year ended September 29, 1990 and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Proxy Statement dated August 16, 1990 and incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1989 and incorporated herein by reference.
(9) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1988 and incorporated herein by reference.
(10) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1987 and incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Registration Statement on Form S-1 (No. 2-86614) and incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Registration Statement on Form S-1 (No. 33-4533) and incorporated herein by reference.
(13) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrants' Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 2, 1993 and incorporated herein by reference.
(14) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 1-10827) for the quarter ended April 2, 1994 and incorporated herein by reference.
(15) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 1, 1994 and incorporated herein by reference.
(16) Previously filed by amendment with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 1,1994 and incorporated herein by reference.
(17) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Report on Form 8-K (Commission File No. 1-10827) dated May 2, 1995.
(18) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Report on Form 8-K (Commission File No. 1-10827) dated September 8,1995 and subsequently amended on October 4, 1995 and October 12, 1995 and incorporated herein by reference.
(19) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended September 30, 1995.
(20) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 1-10827) for the quarter ended December 30, 1995 and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 30, 1996 PHARMACEUTICAL RESOURCES, INC. ------------------------------ (Registrant)
By: /s/ Kenneth I. Sawyer ------------------------------------- Kenneth I. Sawyer President and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
PHARMACEUTICAL RESOURCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
_________________________________________________
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.
REPORT OF INDEPENDENT AUDITOR
Board of Directors and Shareholders Pharmaceutical Resources, Inc. Spring Valley, New York
We have audited the accompanying consolidated statements of operations, retained earnings (deficit) and cash flows for Pharmaceutical Resources, Inc. and subsidiaries for the year ended October 1, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all material respects, the results of operations and cash flows of Pharmaceutical Resources, Inc. and subsidiaries for the year ended October 1, 1994, in conformity with generally accepted accounting principles.
The above audit includes Schedule II, for the year ended October 1, 1994. In our opinion, the schedule referred to above presents fairly the information set forth therein, in conformity with the applicable accounting regulation of the Securities and Exchange Commission.
/s/ Richard A. Eisner & Company, LLP
New York, New York November 30, 1994
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Pharmaceutical Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Pharmaceutical Resources, Inc. (a New Jersey corporation) and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations and retained earnings (deficit) and cash flows for each of the two years in the period ended September 30, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pharmaceutical Resources, Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York December 27, 1996
PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements.
PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
The accompanying notes are an integral part of these statements.
PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these statements.
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS September 30, 1996
Pharmaceutical Resources, Inc. ("PRI") operates in one business segment, the manufacture and distribution of generic pharmaceuticals. Marketed products are principally in oral solid (tablet, caplet and capsule) form, with a small number of products in the form of creams and liquids.
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. The investment in a corporate joint venture with Clal Pharmaceutical Industries Ltd. ("Clal") in which PRI has 49% ownership is accounted for by the equity method.
Certain items on the consolidated 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 judgements.
Accounting Period:
In fiscal 1996, the Company changed its fiscal year end from the Saturday nearest to September 30 to September 30. This change had no material impact on the fiscal 1996 year end results. Fiscal years 1996, 1995 and 1994 ended on September 30, 1996, September 30, 1995 and October 1, 1994, respectively.
Temporary Investments:
Investments are stated at the lower of cost or market value. These investments are classified as "available for sale securities" pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities".
Inventories: Inventories are stated at the lower of cost (first-in, first-out basis) or market value.
Depreciation and Amortization:
Property, plant and equipment are depreciated straight-line over their estimated useful lives which are from three to forty years. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease.
Research and Development:
Research and development expenses represent costs incurred by the Company to develop new products and obtain premarketing regulatory approval for such products. All such costs are expensed as incurred.
Income Taxes:
Deferred income taxes are provided for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Business tax credits and net operating loss carryforwards are recognized to the extent that realization of such benefit is more likely than not.
Revenue Recognition: The Company recognizes revenue at the time it ships product and it provides for returns and allowances based upon actual subsequent allowances and historical trends.
Per Share Data:
Per share data is based upon the weighted average number of common shares and equivalents outstanding. For purposes of per share data, the Series A Convertible Preferred Stock is considered to be a common stock equivalent. The dilutive effect of
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
outstanding options and warrants is computed using the "treasury stock" method. Fully dilutive has not been presented because it is not materially different from primary amounts.
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 to be cash equivalents. At September 30, 1996, cash equivalents were deposited in financial institutions and consisted of immediately available fund balances.
Fair Value of Financial Instruments:
The carrying amounts of the Company's accounts receivable, accounts payable, accrued liabilities and debt approximate fair market value based upon the relatively short-term nature of these financial instruments.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to credit risk consist of trade receivables and interest-bearing short-term treasury obligations. The Company markets its products primarily to domestic distributors, wholesalers and retail drug store chains. The risk associated with this concentration is believed by the Company to be limited due to the large number of distributors, wholesalers, and drug store chains, their geographic dispersion and the performance of certain credit evaluation procedures (see "Accounts Receivable--Major Customers").
Discontinued Operations:
In September 1996, the Company recorded $2,800,000 as income from discontinued operations, reversing the remaining reserves of Quad Pharmaceuticals, Inc. ("Quad"), a wholly owned subsidiary of Par whose operations were discontinued in fiscal year 1991. The principal components of the liabilities in the prior year were notes payable to former officers of $813,000, amounts due to customers of $1,657,000, and accrued expenses and accounts payable $360,000.
The income from discontinued operations does not reflect any tax effect in the current period.
In March 1994, the Company completed the disposition of Quad and, at that time, reversed into income the remaining reserve for operating losses of $466,000.
Settlements:
Fiscal Year 1995:
The Company settled claims against former management members of the Company for recovery of, among other things, salaries and money paid for indemnification. The total amount of the settlement was $2,029,000, which was collected between February and April of 1995.
Fiscal Year 1993:
Minnesota Mining and Manufacturing Settlement:
The Company, in January 1994, reached a settlement agreement with Minnesota Mining & Manufacturing Company ("3M") and its subsidiary Riker Laboratories, Inc. ("Riker", collectively with 3M, "3M/Riker"). The settlement was reflected in fiscal year 1993 results of operations. In fiscal year 1994, in accordance with the terms of the settlement, the Company paid 3M/Riker approximately $5,000,000 in cash and issued 119,500 shares of common stock of the Company ("Common Stock"). The lawsuit brought in 1993 by 3M/Riker against Par stemmed from actions occurring during the tenure of prior management at Par. 3M/Riker alleged that Par improperly obtained United States Food and Drug Administration (the "FDA") approvals by bribing FDA officials and submitting false information to FDA, as a result of which 3M/Riker claimed to have suffered competitive injury in an amount up to $24,000,000.
U.S. Trading Settlement:
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
In December 1993, the Company and United States Trading Corporation ("UST") settled their respective suits. This settlement was also reflected in fiscal year 1993 results of operations. In fiscal year 1994, in accordance with the terms of the settlement, the Company paid $250,000 in cash and issued $250,000 in merchandise credit to UST. The lawsuit stemmed from actions occurring during the tenure of prior management at Par.
Mylan Settlement:
In November 1993, the Company reached a settlement agreement with Mylan Laboratories, Inc. ("Mylan") with respect to a lawsuit brought in 1989 by Mylan against Par, Quad and others. This settlement was reflected in fiscal year 1993 results of operations. In fiscal year 1994, in accordance with the terms of the settlement, the Company paid Mylan $1,000,000 in cash and issued it approximately 111,000 shares of Common Stock. The lawsuit stemmed from actions occurring during the tenure of prior management at Par. Mylan alleged that two of the Company's subsidiaries improperly obtained FDA approvals by bribing FDA officials and submitting false information to the FDA, as a result of which Mylan claimed to have suffered competitive injury in an amount of up to $600,000,000.
Accounts Receivable:
Major Customers:
Two of the Company's customers accounted for approximately 11% and 9%, 6% and 8%, and 3% and 9% of net sales from continuing operations in fiscal years 1996, 1995 and 1994, respectively.
At September 30, 1996, amounts due from these same two customers accounted for approximately 23% and 3% of the net accounts receivable balance. At September 30, 1995, the amounts due from these same two customers accounted for approximately 13% and 10% of the net accounts receivable balance.
Inventories:
Investment in Joint Venture:
As part of a strategic alliance in May 1995, the Company and Clal formed the Joint Venture, a limited partnership formed under the laws of the State of Israel, to develop, manufacture and distribute generic pharmaceutical products worldwide. The Company and Clal to date have funded the Joint Venture in the amount of $3,430,000 and $3,570,000, respectively. Including the additional fiscal 1996 commitment not yet funded, the Company has committed to invest $3,920,000 in the Joint Venture during the next year. The Company and Clal are negotiating to amend their remaining funding commitments for 1996 in order to reflect the present and contemplated capital requirements of the Joint Venture, although they have not yet amended their written agreement. In the event that the Company and Clal do not reach a written agreement and either party makes an additional contribution to the Joint Venture,
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
the other party's share in the profits and capital of the Joint Venture will be diluted. The Joint Venture is owned 49% by the Company and 51% by Clal and is located primarily in Israel. The investment is accounted for by the equity method.
Investments:
The Company has a distribution agreement with Sano which gives Par the right of first refusal to exclusively distribute Sano's generic transdermal products in the United States, Canada, and several other international markets. Sano develops transdermal delivery systems utilizing a patch that incorporates the appropriate drug dosage into an adhesive that attaches the patch to the skin. According to Sano, transdermal delivery offers significant benefits over oral delivery, including improved efficacy, increased patient compliance, reduced side effects, reduced interaction with other drugs in use by a patient and a more consistent and appropriate drug level in the bloodstream, all of which generally result in lower overall patient care costs. Sano is developing two generic nitroglycerin patches, one generic nicotine patch and one generic clonidine patch which are covered by the agreement. For each product the Company elects to distribute, Par must pay Sano a portion of the development expenses. To date, Sano has submitted three ANDAs to the FDA and anticipates submitting additional ANDAs in the future. The Company intends to purchase manufactured products from Sano, when approved by the FDA, at cost and share in the gross profits from the sale.
As part of the Sano agreement, the Company invested $3,500,000 in the preferred stock of Sano in the prior years. In November 1995, Sano sold common stock through an initial public offering and the Company's preferred stock converted into 513,887 shares of common stock. In September 1996, the Company sold 135,000 shares of its Sano stock resulting in a gain of $1,859,000 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Other Income"). The investment is classified as an "available for sale security" pursuant to SFAS No. 115. This standard requires that certain investments in debt and equity securities be adjusted to fair market value at the end of each accounting period and unrealized gains or losses recorded as a separate component of shareholders' equity. In accordance with SFAS No. 115, the remaining investment is carried at its fair market value on September 30, 1996 of $20 1/4 per share, or $7,672,000, and the unrealized gain on the investment of $4,982,000 is reflected as a separate component in shareholders' equity.
Additionally, the Company advanced $2,942,000 and $1,429,000 in 1996 and 1995, respectively, to Sano as funding for the research and development costs of the generic transdermal products. The Company renegotiated the agreement to enable the advances to be recovered within three years by obtaining a greater share of gross profits. Due to the uncertainty with respect to the collectability of such advances, the Company has expensed them and will treat them as a reduction of research and development expense if repaid. In November 1995, the Company received $1,500,000 from the proceeds of Sano's initial public offering in repayment of a portion of total advances outstanding from the Company. The Company has reflected this as a reduction of research and development expense in fiscal 1996.
In December 1995, the Company purchased a 10% interest in Fine-Tech Ltd., an Israeli pharmaceutical research and development company in which Clal Pharmaceutical Industries Ltd. ("Clal") has a significant ownership interest, for $1,000,000. Clal is a significant stockholder of the Company and, through its subsidiary, owns 51% of a research and development joint venture in which the Company, through its subsidiary, owns 49%. In addition, the Company obtained certain exclusive rights to purchase products from Fine-Tech Ltd. not commonly sold in North America, South America or the Caribbean. During 1996, the Company purchased raw materials of approximately $1,500,000 at the market value at the time of purchase.
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
Property, Plant and Equipment:
Distribution Agreements:
As described in a previous note, the Company entered into a distribution agreement with Sano in February 1994, which gives Par the right of first refusal to exclusively distribute Sano's generic transdermal products in the United States, Canada, and several other international markets.
In May 1993, the Company was appointed by The Generics Group B.V. (the "Group"), an international pharmaceutical business, as the exclusive United States distributor of up to five generic pharmaceuticals to be manufactured by the Group's affiliates pending approval by the FDA (the "May 1993 Agreement"). ANDA approvals for Alprazolam, Triazolam, and Atenolol were received in fiscal year 1994 and the Company began distributing them. Two additional drugs, which will be made available to the Company for distribution, have yet to be designated by the Group. The May 1993 Agreement also contains provisions for development by the Group of additional generic pharmaceuticals for distribution by the Company. Under the May 1993 Agreement, the Company is obligated to issue a warrant to purchase 150,000 shares of Common Stock for $10 per share. The terms of the warrant will be similar to the warrant issued pursuant to the October 1992 Agreement (see below); however, the warrant granted under the May 1993 Agreement will become exercisable only upon reaching certain levels of sales for the distributed products.
In October 1992, the Company entered into an agreement (the "October 1992 Agreement") with Genpharm Inc. ("Genpharm"), a Canadian manufacturer of generic pharmaceuticals (which is an affiliate of the Group) under which Par became the exclusive United States distributor of two of Genpharm's pharmaceutical products. The agreement has an initial term of ten years (subject to earlier termination by either party as provided therein), and thereafter automatically renews from year to year unless either party gives notice of non-renewal. The cost to the Company of such products is based upon a percentage of gross profits as defined in the October 1992 Agreement. In connection with the October 1992 Agreement, the Company issued a warrant to Genpharm to purchase 150,000 shares of PRI's common stock for $6 per share. The warrant became exercisable in March 1993, has an initial term of five years (subject to earlier termination in the event the Company ceases to be Genpharm's exclusive distributor of the products covered by the October 1992 Agreement), and may be extended for up to an additional five years in the event that the closing price of Common Stock has not reached levels specified in the warrant agreement. In fiscal year 1994, the warrant was exercised to purchase 5,300 shares of Common Stock.
Long Term Debt:
At September 30, 1996, the Company's debt of $5,113,000 is on a long-term basis, due to two banks, to be repaid in monthly installments through May 2001. The outstanding loans are secured by the assets of the Company.
The Company has a line of credit it uses to acquire equipment. The line of credit is collateralized by the equipment purchased. Borrowings under this line are at a fixed rate based upon the prime rate in effect at the time of borrowing, with a minimum 1/2% premium which increases based on the length of time the loan is outstanding. At September 30, 1996, $355,000 was outstanding under this line. This bank also provides an 8.5% fixed rate mortgage loan. The loan was made in fiscal 1994, and at September 30, 1996, $1,184,000 was outstanding.
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
(a) The bond was repaid in full in fiscal 1996.
(b) All of these loans, except the mortgage loan, bear interest at the prime rate, Libor or cost of funds, and amortize in monthly installments through 2001, when the remaining balance of $877,000 becomes due. The mortgage loan has a fixed rate of 8.5% until May 1999, at which time the fixed rate will be reset.
(c) Includes amount outstanding under line of credit , with interest based upon prime rate in effect at the time of borrowing, with a minimum of 1/2 of 1% per annum premium which increases based upon the length of time the loan is outstanding. Also includes amounts due under a capital lease.
Long-term debt maturities during the next five years, including the portion classified as current, are $2,142,000 in 1997, $1,577,000 in 1998, $395,000 in 1999, $61,000 in 2000 and $938,000 in 2001.
On December 27, 1996, Par entered into a Loan and Security Agreement (the "Loan Agreement") with General Electric Capital Corporation ("GECC") which provides Par with a three-year revolving line of credit. Pursuant to the Loan Agreement, 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 as determined from time to time by GECC. The interest rate charge on the line of credit is based upon a rate per annum of 2.50% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par and PRI other than real property and is guaranteed by PRI. As a condition to 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 locked accounts over which GECC has sole operating control and which are applied on a daily basis to reduce amounts outstanding under the line of credit. As of December 30, 1996, approximately $3,500,000 was outstanding under such line of credit. The revolving credit facility, which is subject to covenants which are based on various financial benchmarks, replaced PRI's previous $16,000,000 revolving facility and $4,000,000 term loan facility with Fleet Bank, N.A. Any significant reduction in the borrowing base will adversely affect the Company's liquidity.
During the fiscal years ended 1996, 1995 and 1994, the Company incurred total interest expense of $432,000, $499,000, and $465,000, respectively. Interest paid approximated interest expense in each of the years.
Shareholders' Equity:
Preferred Stock:
In 1990, the Company's shareholders authorized 6,000,000 shares of a newly created class of preferred stock with a par value of $.0001 per share. The preferred stock is issuable in such series and with such dividend rates, redemption prices, preferences and conversion or other rights as the Board of Directors may determine at the time of issuance.
Pursuant to a settlement of shareholder litigation reached in 1991, 2,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock") had been issued in 1992. In fiscal 1995, the Company converted each remaining outstanding share of Preferred Stock into 1.1 shares of Common Stock for an aggregate of 1,055,815 common shares.
Common Stock:
In May 1995, the Company formed a strategic alliance with Clal Pharmaceutical Industries Ltd. ("Clal"), an Israeli company, to develop, manufacture and distribute generic pharmaceuticals worldwide. The Company sold 2,027,272 shares of PRI Common
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
Stock, representing 12% of the Company's Common Stock, to Clal for $20,000,000 ($9.87 per share). Clal also received two three year warrants to purchase up to 2,005,107 shares of Common Stock at prices between $11 and $12 per share. The shares and two warrants will allow Clal to purchase up to 19.9% of the Company's Common Stock. During fiscal 1996, Clal purchased an additional 100,000 shares of the Company's Common Stock.
Dividend: The fiscal 1994 dividend on Preferred Stock was paid in February 1995. There was no dividend on common stock in fiscal 1994, 1995, or 1996.
Changes in Shareholders' Equity: Changes in the Company's Common Stock, Preferred Stock and Additional Paid in Capital accounts during the fiscal years ended in 1994, 1995, and 1996 were as follows:
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, 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.
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
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 22,796 shares, 18,074 shares and 16,928 shares during fiscal years 1996, 1995 and 1994, respectively. At September 30, 1996, 917,740 shares remain available for sale under the Program.
Stock Options: The following is a summary of stock option activity during the fiscal years ended in 1996, 1995 and 1994:
Shareholders approved the 1995 Directors' Stock Option Plan (the "1995 Directors' Plan") through which options will be awarded to future non-employee directors upon the date elected to the Board. Current directors are not eligible for awards under the 1995 Directors' Plan. The Company has reserved 100,000 shares of Common Stock for issuance under the 1995 Directors' Plan.
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 Company has reserved 2,050,000 shares of Common Stock for issuance under the 1990 Plan.
Under the 1989 Directors' Stock Option Plan (the "Directors' Plan"), options were granted to directors of the Company who are not employees of the Company or are otherwise ineligible to receive options under any other plan adopted by the Company. The Company has reserved 550,000 shares of Common Stock for issuance under the Directors' Plan. The Company does not intend to grant further options under this plan.
The Company's 1986 Stock Option 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.
At September 30, 1996 and September 30, 1995, options for 388,000 and 568,625 shares, respectively, were available for future grant under the various plans.
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
Income Taxes:
In February 1992, the Financial Accounting Standards Board issued SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109"), which required the Company to recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS 109 required the recognition of future tax benefits, such as net operating loss ("NOL") carryforwards, to the extent that realization of such benefits is more likely than not. The Company adopted the new accounting standard during the quarter ended January 1, 1994 and, as a result, recognized future tax benefits of $14,128,000. This amount is reflected in the net income of the Company in fiscal 1994 as the cumulative effect of a change in accounting principle.
Management believes, based on its formation of strategic alliances and commitment to research and development of new products, it is more likely than not that the Company will generate taxable income sufficient to utilize the tax benefit of its NOL carryforwards prior to their expiration. However, there can be no assurance that the Company will generate taxable earnings or any specific level of continuing earnings in the future. Consequently, the Company is not recognizing benefit for its operating losses this year. Management believes, based on its formation of strategic alliances, this year's restructuring, commitments to research and development of new product, and its investments in equity securities, that its valuation allowance is adequate. If the Company is unable to generate sufficient taxable income in the future, increases in the valuation allowance will be required through a charge to expense. At September 30, 1996, the Company had NOL carryforwards for tax purposes of approximately $50,000,000 that expire in September 2005 through September 2010.
The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities are as follows:
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 1995. A valuation allowance was recorded in fiscal 1996 and fiscal 1995 for an additional $683,000 and $558,000, respectively, related to stock option compensation which will be credited to equity upon utilization of tax carryforwards.
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
The components of income tax expense follow:
* During fiscal year 1994, there was a change in state tax laws which permitted recognition of NOL carryforwards.
The table below provides the details of the differences between the provision for income taxes and the amount determined by multiplying income before income taxes by the applicable federal statutory rate:
The Internal Revenue Service has determined that certain credits taken by the Company in prior years for research activities are not permitted. A reserve of approximately $1,000,000 was provided upon implementation of FAS 109 in fiscal 1994. The Company paid to the Internal Revenue Service approximately $1,000,000 during fiscal 1995 for the disallowed credits and such payments were charged against the reserve which was previously provided.
Commitments, Contingencies and Other Matters:
Leases: At September 30, 1996, the Company had minimum rental commitments aggregating $1,881,000 under noncancelable operating leases expiring through 2004. Amounts payable thereunder are $805,000 in 1997, $381,000 in 1998, $151,000 in 1999, $107,000 in 2000, $107,000 in 2001, and $330,000 thereafter. Rent expense charged to operations in fiscal years 1996, 1995 and 1994 was $612,000, $811,000, and $907,000, respectively.
Retirement Plans:
The Company has a defined contribution, social security integrated Retirement Plan providing retirement benefits to eligible employees as defined in the Plan. The Board of Directors of Par has authorized the cessation of employer contributions effective December 30, 1996. Consequently, participants in the Retirement Plan will no longer be entitled to any employer contributions under such plan for 1996 or subsequent years. It also maintains a Retirement Savings Plan whereby eligible employees are permitted to contribute from 1% to 12% of pay to this Plan. The Company contributes an amount equal to 50% of the first 6% of the pay contributed by the employee. The Company's provisions for these plans and the defined benefit plan discussed below were $1,229,000 in 1996 (reduced by $24,000 in forfeitures), $1,107,000 in 1995 (reduced by $289,000 in forfeitures) and $598,000 in 1994 (reduced by $250,000 in forfeitures). In fiscal 1997, the Company intends to merge the Retirement Plan into the Retirement Savings Plan.
The Company maintains a Defined Benefit Pension Plan covering eligible employees as defined in the Plan,
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996
which was frozen October 1, 1989. Since the benefits under this 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 Plan. The funding policy for this 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 Plan are invested in mortgages and bonds.
Net pension expense for fiscal years 1996, 1995 and 1994 included the following components:
The discount rate used to measure the projected benefit obligation for the Plan is 7%. The assumed long-term rate of return on plan assets in 1996 was 7%.
The Plan's funded status and the amounts recorded on the Company's consolidated balance sheets are as follows:
In accordance with SFAS 87, the Company has recorded an additional minimum pension liability for underfunded plans of $719,000 in fiscal 1996 and $941,000 in fiscal 1995, representing the excess of underfunded accumulated benefit obligations over previously recorded pension cost liabilities. A corresponding amount is recognized as an intangible asset except to the extent that these additional liabilities exceed related unrecognized prior service cost and net transition obligation, in which case the increase in liabilities is charged directly to shareholders' equity. As of September 30, 1996, $117,000 of the excess minimum pension liability resulted in a charge to equity. As of September 30, 1995, the excess minimum liability was $287,000.
Legal Proceedings:
The Company is involved in certain litigation matters, including certain product liability actions and actions by two former employees for, among other things, breach of contract. Such actions seek damages from the Company, including compensatory and punitive damages. The Company intends to defend these actions vigorously. The Company believes that these actions are incidental to the conduct of its business, and that the ultimate resolution thereof will not have a material adverse effect on its financial condition, results of operations or liquidity.
In June 1996, the Company settled a claim with its insurance carrier, filed in 1995, for $1,455,000 related to the interruption of business at one of its manufacturing facilities. The settlement favorably affected gross margins by $618,000 in the third quarter of fiscal year 1996, but did not have a material effect on its financial condition, results of operations or liquidity for the fiscal year.
PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--Continued September 30, 1996 Restructuring:
Recently, the Company implemented measures in an effort to reduce costs and increase operating efficiencies. Such measures provided for a reduction of the work force including the layoff of forty nine employees in various manufacturing, administrative, and development functions, a reorganization of certain personnel, and a planned reduction in spending on advertising, marketing and professional services which is expected to reduce operating costs in subsequent periods.
A liability of $549,000 was established in the current period for the cost of the restructuring and the subsequent charge to expense is classified as "Restructuring charge" on the statement of operations. The charge includes $424,000 for severance pay, employee benefits, and outplacement services and $125,000 in consulting and legal fees. The amount of actual termination benefits paid will be charged against the liability as they are incurred.
Other Matters:
During fiscal year 1996, four of the Company's products accounted for approximately 58% of its net sales and yielded the substantial portion of the gross margin of the Company, with one of such products representing a substantial portion of both net sales and gross margin. During the second half of calendar 1995, two generic pharmaceutical manufacturers received FDA approval of a product for which the Company previously had been the sole generic manufacturer. This product, along with two other products, historically had accounted for a significant percentage of net sales and gross margin of the Company. Further, a competitor of the Company in fiscal year 1996 received FDA approval for a very significant product of the Company for which the Company previously had been the sole generic manufacturer.
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.
SCHEDULE II PHARMACEUTICAL RESOURCES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(a) Reduction of allowance no longer necessary.
(b) Write-off of uncollectible accounts.
(c) Returns and allowances charged against allowance provided therefor.
EXHIBIT INDEX
EXHIBIT NO.
3.1 Certificate of Incorporation of the Registrant. (4)
3.1.1 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 6, 1992--incorporated by reference to the Registrant's Registration Statement on Form 8-A (Commission File No. 0-20834), filed with the Commission November 10, 1992.
3.2 By-Laws of the Registrant, as amended and restated. (3)
4 Rights Agreement, dated August 6, 1991, between the Registrant and Midlantic National Bank, as Rights Agent. (5)
4.1 Amendment to Rights Agreement, dated as of April 27, 1992. (3)
10.1 1983 Stock Option Plan of the Registrant, as amended. (2)
10.2 1986 Stock Option Plan of the Registrant, as amended. (2)
10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (5)
10.4 1989 Employee Stock Purchase Program of the Registrant. (7)
10.5 1990 Stock Incentive Plan of the Registrant, as amended. (2)
10.6 Form of Retirement Plan of Par. (11)
10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984. (6)
10.7 Form of Retirement Savings Plan of Par. (11)
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984. (12)
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984. (12)
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985. (12)
10.8 Par Pension Plan, effective October 1, 1984. (4)
10.9 Employment Agreement, dated as of October 4, 1992, among the Registrant, Par and Kenneth I. Sawyer. (1)
10.10 Lease Agreement between Par and the County of Rockland Industrial Development Agency, dated as of October 1, 1984. (6)
10.10.1 Lessee Guaranty between Par and Midlantic National Bank, dated as of October 1, 1984. (6)
10.10.2 Mortgage from County of Rockland Industrial Development Agency to Midlantic National Bank, as Trustee, dated as of October 1, 1984. (12)
10.10.3 Security Agreement between County of Rockland Industrial Development Agency and Midlantic National Bank, as Trustee, dated as of October 1, 1984. (12)
10.11 Lease for premises located at 12 Industrial Avenue, Upper Saddle River, New Jersey, between Par and Charles and Dorothy Horton, dated October 21, 1978 and extension dated September 15, 1983. (11)
10.12 Lease Agreement between Par and Ramapo Corporate Park Associates, dated as of January 1, 1993.
10.13 Employment Agreement, dated as of May 19, 1993, between the Registrant and Robert I. Edinger. (13)
10.14 Distribution Agreement, dated as of October 16, 1993, between Genpharm, Inc., the Registrant and PRX Distributors, Ltd. (13)
10.15 Letter Agreement, dated April 30, 1993, between the Generics Group B.V. and Par. (15)
10.16 Distribution Agreement, dated as of February 24, 1994, between Sano Corporation, the Registrant and Par, as amended. (15)
10.17 Mortgage and Security Agreement, dated May 4, 1994, between Urban National Bank and Par. (14)
10.17.1 Mortgage Loan Note, dated May 4, 1994. (14)
10.17.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban National Bank. (14)
10.18 Letter Agreement, dated as of October 13, 1994, between Par and Robert I. Edinger. (15)
10.19 1995 Directors Stock Option Plan. (19)
10.20 Stock Purchase Agreement, dated March 25, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.21 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.22 Warrant to Purchase Common Stock, dated May 1, 1995, delivered by the Registrant to Clal Pharmaceutical Industries Ltd. (17)
10.23 Registration Rights Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.24 Clal Pharmaceutical Resources L.P. Limited Partnership Agreement, dated as of May 1, 1995, among PRI-Research, Inc., C.T.P. Research and Development (1995) Ltd. and Clal Pharmaceutical Resources (1995) Ltd. (17)
10.25 Clal Pharmaceutical Resources (1995) Ltd. Stockholders Agreement, dated May 1, 1995, among PRI Research, Inc., C.T.P. Research and Development (1995) Ltd. and Clal Pharmaceutical Resources Ltd. (17)
10.26 Supplemental Agreement, dated as of May 1, 1995, among the Registrant, Clal Pharmaceutical Industries Ltd. and Clal Pharmaceutical Resources L.P. (17)
10.27 Guarantee of the Registrant, dated May 1, 1995. (17)
10.28 Guarantee of Clal Pharmaceutical Industries Ltd., dated May 1, 1995. (17)
10.29 Warrant to Purchase Common Stock, dated September 21, 1995, delivered by the Registrant to Clal Pharmaceutical Industries Ltd.
10.30 Commercial Revolving Loan and Term Loan Agreement, dated December 28, 1995, between Fleet Bank, N.A. and the Registrant. (20)
10.31 Master Security Agreement, dated December 28, 1995, between Fleet Bank, N.A. and Par. (20)
10.32 Equipment Security Agreement, dated December 28, 1995, between Fleet Bank, N.A. and Par. (20)
10.33 Promissory Note, dated December 28, 1995, of the Registrant. (20)
10.34 Master Security Agreement, dated December 28, 1995, between Fleet Bank, N.A. and Par. (20)
10.35 Equipment Security Agreement, dated December 28, 1995, between Fleet Bank, N.A. and Par. (20)
10.36 Cross Acceleration Agreement, dated December 28, 1995, between Fleet Bank, N.A. and the Registrant. (20)
11 Computation of per share data.
16 Letter regarding change in accountants (18).
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Richard A. Eisner and Company, LLP.
27 Financial Data Schedule. __________________________________________________
(1) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 3, 1992 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Proxy Statement dated August 10, 1992 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an Exhibit to Amendment No. 1 on Form 8 to the Registrant's Registration Statement on Form 8-B, filed May 15, 1992, and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended September 28, 1991 and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Proxy Statement dated August 14, 1991 and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K (Commission File No. 1-9449) for the year ended September 29, 1990 and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Proxy Statement dated August 16, 1990 and incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1989 and incorporated herein by reference.
(9) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1988 and incorporated herein by reference.
(10) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Annual Report on Form 10-K for 1987 and incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Registration Statement on Form S-1 (No. 2-86614) and incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission as an Exhibit to Par's Registration Statement on Form S-1 (No. 33-4533) and incorporated herein by reference.
(13) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrants' Annual Report on Form 10-K (Commission File No. 1- 10827) for the year ended October 2, 1993 and incorporated herein by reference.
(14) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 1- 10827) for the quarter ended April 2, 1994 and incorporated herein by reference.
(15) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1- 10827) for the year ended October 1, 1994 and incorporated herein by reference.
(16) Previously filed by amendment with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended October 1, 1994 and incorporated herein by reference.
(17) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 8-K (Commission File No. 1-10827) dated May 2, 1995.
(18) Previously filed with the Securities and Exchange Commission as on exhibit to the Registrant's Report Form 8-K (Commission File No. 1-10827) dated September 8,1995 and subsequently amended on October 4, 1995 and October 12, 1995 and incorporated herein by reference.
(19) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for the year ended September 30, 1995.
(20) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 1- 10827) for the quarter ended December 30, 1995 and incorporated herein by reference.