SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): January 11, 2002
PHARMACEUTICAL RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY FILE NUMBER 1-10827 22-3122182
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (845) 425-7100
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On December 28, 2001, we entered into a letter agreement with
ISP Hungary Holdings Limited, ISP Investments Inc., ISP Chemicals Inc. and ISP
Technologies Inc. (we refer to these four companies as the ISP Group). A form of
purchase agreement, which may be entered into by us, as purchaser, and the ISP
Group, as sellers, was attached to the letter agreement. Under the form of
purchase agreement, we would acquire from the ISP Group part of its fine
chemicals business, consisting of a manufacturing facility in Columbus, Ohio,
inventory, intellectual property and other assets related to the manufacture,
sale, research and development of advanced intermediates and active
pharmaceutical ingredients for brand name and generic pharmaceutical companies,
and all of the outstanding capital stock of ISP FineTech Ltd., an Israeli
corporation specializing in the design and manufacture of proprietary synthetic
chemical processes used in the production of highly complex and valuable organic
compounds for the pharmaceutical industry (we refer to the acquired part of the
fine chemicals business as the ISP Business). The form of purchase agreement
contains customary and deal specific representations, warranties and covenants
in respect of the proposed acquisition.
The letter agreement does not obligate any of the parties to
execute the form of purchase agreement or to complete the proposed acquisition.
The letter agreement, however, provides for a break-up fee of $3,000,000 to be
paid by us to the ISP Group if, after the earliest of three dates, the ISP Group
were to decide to execute the form of purchase agreement and we do not. Those
three dates, the earliest of which we refer to as the no shop termination date,
are:
o the date we sell any of our equity securities;
o the eighth business day after which the Registration
Statement on Form S-3 (File No. 333-74606) that we
initially filed with the SEC on December 5, 2001 is
declared effective; and
o February 15, 2002.
The ISP Group, in turn, has agreed in the letter agreement
that, from December 28, 2001 until the no shop termination date, it will not
solicit from any entity, other than us, any proposal or offer relating to the
acquisition of the ISP Business or deliver confidential information or engage in
any negotiations concerning any such proposal or offer. The proposed acquisition
would terminate, without further liability to us, if we chose to pay the
break-up fee.
Our Board of Directors authorized our management to proceed
with the proposed transaction, subject to its determination that the conditions
provided in the form of purchase agreement are reasonably likely to be satisfied
and, therefore, that the proposed acquisition is reasonably likely to be
completed. As of the date of this Form 8-K, our management has determined that
it is reasonably likely that such conditions may be satisfied and that the
proposed acquisition may be completed, and, accordingly, we are now filing this
Form 8-K.
2
If we complete the proposed acquisition, we will purchase
specifically:
(i) from ISP Hungary Holdings Limited, all of the outstanding
capital stock of ISP FineTech Ltd. (formerly, International Specialty Products
(Israel) Ltd.);
(ii) from ISP Chemicals Inc., a manufacturing and research and
development facility located in Columbus, Ohio, consisting of approximately
45,000 square feet, along with all of the equipment, improvements, fixtures and
machinery located at that facility;
(iii) from ISP Technologies Inc., inventory consisting of raw
materials and finished pharmaceutical products;
(iv) from the ISP Group, intellectual property exclusively
used in connection with the ISP Business and a perpetual, royalty-free,
irrevocable license for certain other intellectual property currently being used
by the ISP Group in connection with the ISP Business; and
(v) certain other tangible and intangible assets principally
relating to the ISP Business being acquired.
The form of purchase agreement would require us to pay the ISP
Group $107,820,000 and to assume certain limited liabilities that we identify in
the purchase agreement. The purchase price may be adjusted, up or down, on a
dollar-for-dollar basis, depending on whether the value of the inventory being
sold to us is higher or lower than an identified target. We also would pay
$1,500,000 to the ISP Group in consideration for an agreement from the ISP Group
not to compete with the ISP Business for a five-year period.
In determining the purchase price, we considered, among
several factors, comparative businesses of the ISP Business and the estimated
cost and time required to start a comparable business. The purchase price was
also determined on the basis of the ISP Business's projected cash flows and
taking into account expected synergies between our existing businesses and the
assets and businesses that might be acquired.
If the form of purchase agreement were to be executed, the
closing of the proposed acquisition will be subject to, in addition to customary
conditions, including consents, the following:
o obtaining requisite approvals of the Israeli Chief
Scientist and Israel Investment Center and expiration of
the waiting period mandated under the Hart-Scott-Rodino
Act;
o no material adverse change in our operations, financial
condition, prospects or assets until a specified time;
o no material adverse change in the operations, financial
condition or assets of the ISP Business;
3
o our Registration Statement being declared effective by
the Commission and eight (8) business days having
elapsed; and
o the transfer of certain environmental permits.
If we determine to proceed with the proposed acquisition, it
is presently contemplated that the proposed acquisition would close in the first
quarter ended 2002.
Currently, we intend to finance the proposed acquisition
through the sale of our equity securities and the use of available cash and/or
borrowings under our existing credit agreement with General Electric Capital
Corporation. We are evaluating the terms and conditions, and relative mix, of
our equity and debt financing alternatives.
If we complete the proposed acquisition, Dr. Arie Gutman,
founder of FineTech Ltd. and currently president of ISP FineTech Ltd., will
become the chief executive officer of the ISP Business, which will become one of
our subsidiaries. We contemplate a five-year employment arrangement with Dr.
Gutman with appropriate non-competition provisions, stock option grants and a
negotiated salary. Upon the completion of the proposed acquisition, Dr. Gutman
would agree to relinquish to us his rights with respect to royalties to certain
of our yet to be launched products that he retained when he sold the FineTech
Ltd. business to the ISP Group. We have agreed that, upon completion of the
proposed acquisition, we will nominate Dr. Gutman to our Board of Directors.
If we complete the proposed acquisition, we expect to operate
the ISP Business on a stand-alone basis, as a separate subsidiary. We intend to
use the assets and operate the businesses acquired in substantially the same
manner as the ISP Group is currently using those assets and operating those
businesses, and we have no intention of selling any of those assets or divesting
any portion of those businesses.
The proposed acquisition will be accounted for using the
purchase method. Our management believes that the proposed acquisition will have
neither a materially accretive nor a materially dilutive effect on our earnings
in 2002.
The above description is a summary of the principal terms of
the letter agreement and the form of purchase agreement. We have attached
complete copies of both agreements to this Form 8-K as exhibits. Our description
of the terms and conditions of these agreements is qualified in its entirety by
reference to such exhibits.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
(i) The audited combined balance sheets of ISP FineTech as of
September 30, 2001 and December 31, 2000 and the related combined statements of
operations, equity and cash flows for the nine-month period ended September 30,
2001 and the years ended December 31, 2000 and 1999:
4
ISP FINETECH
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To International Specialty Products Inc.:
We have audited the accompanying combined balance sheets of ISP
FineTech (the "Company") (see Note 1) as of September 30, 2001 and December 31,
2000, and the related combined statements of operations, equity and cash flows
for the nine-month period ended September 30, 2001 and the years ended December
31, 2000 and 1999. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 ISP FineTech, as of
September 30, 2001 and December 31, 2000, and the results of its operations and
cash flows for the nine-month period ended September 30, 2001 and the years
ended December 31, 2000 and 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 12, 2001
1
ISP FINETECH
COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
---------------- ----------------- -----------------
(Thousands)
Net sales:
Customer sales ................. $ 12,789 $ 16,290 $ 42,636
Intercompany sales to ISP ...... 2,026 2,032 53
---------------- ----------------- -----------------
Total net sales ............. 14,815 18,322 42,689
---------------- ----------------- -----------------
Costs and expenses:
Cost of products sold .......... 11,095 17,511 26,394
Selling, general and
administrative ............... 3,789 1,786 2,239
---------------- ----------------- -----------------
Total costs and expenses .... 14,884 19,297 28,633
---------------- ----------------- -----------------
Operating income (loss) ............ (69) (975) 14,056
Intercompany interest expense ...... (318) (552) (554)
---------------- ----------------- -----------------
Income (loss) before income taxes .. (387) (1,527) 13,502
Income tax (provision) benefit ..... 134 471 (4,861)
---------------- ----------------- -----------------
Net income (loss) .................. $(253) $ (1,056) $ 8,641
================ ================= =================
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
2
ISP FINETECH
COMBINED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------- -------------------
(Thousands)
Current Assets:
Cash and cash equivalents ............ $ 3,297 $ 116
Accounts receivable, trade ........... 1,358 4,379
Accounts receivable, other ........... 67 2
Inventories .......................... 9,707 4,003
Other current assets ................. 178 113
-------------- --------------
Total Current Assets ............. 14,607 8,613
Property, plant and equipment, net ...... 39,166 36,371
Goodwill, net of accumulated
amortization of $271 .................. 15,316 -
Intangible assets, net of
accumulated amortization of $333 ...... 9,167 -
-------------- --------------
Total Assets ............................ $ 78,256 $ 44,984
============== ==============
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable . $ 1,078 $ 1,270
Accrued liabilities 845 48
Intercompany payable to ISP . 5,760 20,278
Foreign income taxes payable 145 -
-------------- --------------
Total Current Liabilities 7,828 21,596
-------------- --------------
Long-term notes payable to ISP - 6,850
-------------- --------------
Other liabilities 2,400 -
-------------- --------------
Commitments and contingencies
3
ISP FINETECH
COMBINED BALANCE SHEETS (Continued)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------- -------------------
(Thousands)
Equity:
Division equity 68,058 16,315
Retained earnings (accumulated deficit) (30) 223
-------------- --------------
Total Equity 68,028 16,538
-------------- --------------
Total Liabilities and Equity $ 78,256 $ 44,984
============== ==============
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
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ISP FINETECH
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS
ENDED SEPTEMBER YEAR ENDED DECEMBER 31,
30, ---------------------------------------
2001 2000 1999
------------------ ------------------ -------------------
(Thousands)
Cash and cash equivalents, beginning of period ...... $ 116 $ 229 $ 21
------------------ ------------------ -------------------
Cash provided by operating activities:
Net income (loss) ................................... (253) (1,056) 8,641
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ................................... 1,923 2,060 1,748
Amortization of goodwill and intangible assets . 604 - -
(Increase) decrease in working capital items ... (2,676) 2,918 848
Decrease in other liabilities .................. - - (145)
Increase (decrease) in payable to ISP .......... 13,512 3,308 (625)
Other, net ..................................... 8 201 43
------------------ ------------------ -------------------
Net cash provided by operating activities ........... 13,118 7,431 10,510
------------------ ------------------ -------------------
Cash used in investing activities:
Capital expenditures ........................... (3,937) (7,544) (10,302)
Acquisition of FineTech Ltd. ................... (22,450) - -
------------------ ------------------ -------------------
Net cash used in investing activities ............... (26,387) (7,544) (10,302)
------------------ ------------------ -------------------
Cash provided by financing activities:
Capital contribution from parent company ....... 16,450 - -
------------------ ------------------ -------------------
Net change in cash and cash equivalents ............. 3,181 (113) 208
------------------ ------------------ -------------------
Cash and cash equivalents, end of period ............ $ 3,297 $ 116 $ 229
================== ================== ===================
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ISP FINETECH
COMBINED STATEMENTS OF CASH FLOWS - (Continued)
NINE MONTHS
ENDED SEPTEMBER YEAR ENDED DECEMBER 31,
30, ---------------------------------------
2001 2000 1999
------------------ ------------------ -------------------
(Thousands)
Supplemental Cash Flow Information:
Effect on cash from (increase) decrease in
working capital items: ..........................
Accounts receivable ............................ $ 2,998 $ 3,398 $ (1,914)
Inventories .................................... (5,623) (423) 2,215
Other current assets ........................... (50) 22 23
Accounts payable ............................... (427) 139 363
Accrued liabilities ............................ 281 (218) 161
Foreign income taxes ........................... 145 - -
------------------ --------------- ----------------
Net effect on cash from (increase) decrease in
working capital items ........................... $ (2,676) $ 2,918 $ 848
================== =============== ================
Acquisition of FineTech Ltd:
Fair market value of assets acquired and intangibles
recorded ........................................ $ 26,014
Purchase price of acquisition ....................... 22,450
------------------
Liabilities assumed ................................. $ 3,564
==================
Note: See Note 9 to Combined Financial Statements for discussion of a non-cash capital
contribution from the parent company.
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
6
ISP FINETECH
COMBINED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(Thousands)
RETAINED EARNINGS
DIVISION (ACCUMULATED
EQUITY DEFICIT)
----------------------- -------------------------
Balance, December 31, 1998 $ 16,315 $ (7,362)
Net income - 8,641
------------- --------------
Balance, December 31, 1999 16,315 1,279
Net loss - (1,056)
------------- --------------
Balance, December 31, 2000 16,315 223
Net loss for the period ended
September 30, 2001 - (253)
Capital contribution from parent
company 51,743 -
------------- --------------
Balance, September 30, 2001 $ 68,058 $ (30)
============= ==============
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
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ISP FINETECH
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
International Specialty Products Inc. ("ISP") is principally engaged in
the manufacture and sale of a wide range of specialty chemicals and mineral
products. After its acquisition of FineTech Ltd. (see Note 2), ISP organized its
fine chemicals business and FineTech Ltd. into its ISP FineTech division (the
"Company"), effective June 2001. This combined division, which is wholly owned
by ISP, formulates and manufactures a broad range of fine chemical products for
the pharmaceutical, biotechnology and agricultural markets.
NOTE 2. ACQUISITION OF FINETECH LTD.
On June 7, 2001, ISP completed the acquisition of the assets of
FineTech Ltd. ("FineTech"), a pharmaceutical research company based in Haifa,
Israel. FineTech is engaged in the development, manufacturing and distribution
of fine chemicals intended primarily for the pharmaceutical industry. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the total purchase price of $22.5 million has been allocated to the
identifiable net assets acquired, with the excess of $15.6 million recorded as
goodwill pending management's valuation of the fair values of the net assets
acquired as of the date of acquisition. Therefore, the purchase price allocation
may be revised.
Included in the total purchase price of $22.5 million was a $6.0
million payment made pursuant to an "Intellectual Property Sale Agreement" under
which the Company acquired the intellectual property of FineTech, including
knowledge, patents, trademarks, product logos, trade names, copyrights,
registrations and other rights. This amount has been recorded as an intangible
asset and is being amortized over a period of 20 years pending the final
purchase valuation as discussed above. Also included in the purchase price was
$500,000 attributable to a five-year non-compete agreement, which has also been
recorded as an intangible asset.
In connection with the acquisition of FineTech, ISP Chemco Inc. ("ISP
Chemco"), formerly known as ISP Opco Holdings Inc., a wholly owned indirect
subsidiary of ISP, entered into a "Non-competition and Goodwill Acquisition
Agreement" (the "Agreement") with the President of FineTech whereby the Company
recorded $3.0 million as an intangible asset, with $600,000 included in accrued
liabilities and $2.4 million included in other liabilities. The minimum
guaranteed amount of $3.0 million will be paid over a period of five years
beginning in May 2002 at the rate of $600,000 per year multiplied by a ratio of
the book value (as defined in the Agreement) of the Company at each valuation
date to the initial book value at the time of the FineTech acquisition. In the
event of a change in control (as defined in the Agreement) of the Company, all
remaining amounts to be paid to such officer in accordance with the Agreement
will become immediately payable, subject to indemnification obligations of such
officer.
8
ISP FINETECH
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2. ACQUISITION OF FINETECH LTD. (CONTINUED)
The results of FineTech are included in the Company's results of
operations from the date of its acquisition. The following unaudited pro forma
combined results of operations for the nine months ended September 30, 2001 and
the year ended December 31, 2000 assume the FineTech acquisition had occurred as
of January 1, 2000, giving effect to purchase accounting adjustments. The pro
forma data is for informational purposes only and may not necessarily reflect
the actual results of operations had FineTech been acquired on January 1, 2000.
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------- --------------
(Thousands)
(Unaudited)
Net sales $17,888 $21,841
Net income/(loss) $847 $ (759)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
All entities of the Company are combined and intercompany transactions
between such entities have been eliminated.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates. Actual results could differ from those estimates. The Company
has a policy to review the recoverability of long-lived assets and identify and
measure any potential impairments. The Company does not anticipate any changes
in management estimates that would have a material impact on operations,
liquidity or capital resources.
9
ISP FINETECH
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market, determined based
on the FIFO (first-in, first-out) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed principally on the straight-line method
based on the estimated economic lives of the assets. The Company uses an
economic life of 10-20 years for land improvements, 40 years for buildings and
3-20 years for machinery and equipment. Interest charges are capitalized during
the period of construction as part of the cost of property, plant and equipment.
GOODWILL
Goodwill, which arose from the acquisition of FineTech (see Note 2),
is being amortized on the straight-line method over a period of 20 years. The
Company believes that the goodwill is recoverable. If goodwill is not
recoverable, the Company would record an impairment based on the difference
between the net carrying amount and fair value.
BASIS OF PRESENTATION OF FINETECH
The financial statements of FineTech since the date of its acquisition
have been prepared in its functional currency, the U.S. dollar. The U.S. dollar
is the currency of the primary economic environment in which the entity in
Israel operates. Balances in other currencies are remeasured into U.S. dollars
in accordance with the Statement of Financial Accounting Standards ("SFAS") No.
52.
REVENUE RECOGNITION
Revenue is recognized at the time products are shipped to the customer.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred
and amounted to $1,349,000, $837,000 and $608,000, respectively, for the nine
months ended September 30, 2001 and the years ended December 31, 2000 and 1999.
10
ISP FINETECH
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
On June 30, 2001, the Financial Accounting Standards Board issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of accounting
and eliminates the pooling method of accounting. SFAS No. 141 does not have an
impact on the Company's historical financial statements. With the adoption of
SFAS No. 142, effective January 1, 2002, goodwill will no longer be subject to
amortization over its estimated useful life. However, goodwill will be subject
to at least an annual assessment for impairment and more frequent assessments if
circumstances indicate a possible impairment. Companies must perform a
fair-value-based goodwill impairment test. In addition, under SFAS No. 142,
acquired intangible assets should be separately recognized if they arise from
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged. Intangible assets acquired in the
acquisition of FineTech (see Note 2) amounted to $9.5 million. Intangible assets
are currently being amortized over their useful lives. On an annualized basis,
the Company's income before income taxes will increase by approximately $0.8
million as a result of the elimination of amortization of goodwill, unless any
impairment charges are necessary.
NOTE 4. INCOME TAXES
The results of the domestic operations of the Company are included in
the consolidated income tax returns of ISP. The Company has reflected a
provision for taxes in the accompanying statements of operations on a stand
alone basis. Accordingly, its current and deferred tax assets or liabilities are
reflected in the intercompany account with ISP. Deferred tax assets and
liabilities would reflect temporary differences between assets and liabilities
for financial reporting purposes and income tax purposes. Included in the
September 30, 2001 income tax benefit is a foreign tax provision of
approximately $5,000.
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ISP FINETECH
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5. INVENTORIES
Inventories at September 30, 2001, and December 31, 2000, comprise the
following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------- ------------------
(Thousands)
Finished goods ................ 8,160 $ 4,826
Work in process ............... 4,304 1,573
Raw materials and supplies .... 3,012 2,662
------------------- ------------------
Total .................... 15,476 9,061
Less inventory reserves ....... (5,769) (5,058)
------------------- ------------------
Inventories ................... $ 9,707 $ 4,003
=================== ==================
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2001, and December 31,
2000, comprise the following:
September 30, December 31,
2001 2000
---------------- ---------------
(Thousands)
Land and land improvements ......... $ 1,479 $ 1,453
Buildings and building equipment ... 6,527 5,803
Machinery and equipment ............ 40,176 31,995
Construction in progress ........... 3,100 7,175
---------------- ---------------
Total .......................... 51,282 46,426
Less accumulated depreciation ...... (12,116) (10,055)
---------------- -----------------
Property, plant and equipment, net . $ 39,166 $ 36,371
================ ===============
NOTE 7. BENEFIT PLANS
ISP provides a defined contribution plan for eligible employees. ISP
contributes up to 7% of participants' compensation (any portion of which can be
contributed, at the participants' option, in the form of ISP's common stock),
and also contributes fixed amounts, ranging from $50 to $750 per year depending
on age, to the accounts of participants who are not covered by an ISP-provided
postretirement medical benefit plan. The aggregate contribution by ISP for the
Company, which is charged through the intercompany account, for the first nine
months of 2001 and the years ended December 31, 2000 and 1999, respectively,
were $213,000, $276,000 and $284,000.
12
ISP FINETECH
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7. BENEFIT PLANS (CONTINUED)
In June 2001, the Company adopted an incentive compensation plan known
as the ISP FineTech Incentive Unit Plan (the "Plan"). The Plan permits the grant
of incentive units ("Incentive Units") to eligible employees of the Company.
Incentive Units are valued based on the book value of the Company, as defined,
divided by 1,000,000, with the change in the value of these Incentive Units
vesting cumulatively in 20% increments over five years. Upon a change in control
of the Company, as defined, the outstanding Incentive Units become fully vested
and payable in cash. The Plan provides for a long term incentive system that
supports the Company's business strategy and emphasizes pay-for-performance. The
Plan became effective as of June 1, 2001. During the period from June 1, 2001 to
September 30, 2001, 67,065 Incentive Units were granted, all of which were
outstanding at September 30, 2001, including 10,000 Incentive Units granted to
the President of ISP FineTech in accordance with his employment agreement with
the Company. Such employment agreement provides for such officer to receive
10,000 additional Incentive Units on the anniversary date of each of the next
four years. Compensation expense of $42,000, representing the change in the
value of the Incentive Units outstanding under the Plan, is included in the
results of operations through September 30, 2001.
NOTE 8. RELATED PARTY TRANSACTIONS
Included on the Combined Balance Sheets are intercompany payables to
ISP which arise from operating transactions (at cost) between the Company and
ISP, primarily for inventory purchases and income taxes (see Note 4).
ISP has provided certain general management, administrative, legal,
telecommunications, information and facilities services to the Company. Charges
by ISP for providing such services aggregated $661,000, $540,000, and $1,095,000
for the nine months ended September 30, 2001 and the years ended December 31,
2000 and 1999, respectively, and are included in "Selling, general and
administrative" expense. These charges consist of expenses incurred by ISP for
the direct or indirect benefit of the Company and are based on an estimate of
the costs ISP incurs to provide such services.
In February 2000, ISP loaned the Company $6,850,000 with a term of
seven years at an interest rate of 8.1% per annum. This loan was extinguished
through a contribution to the Company's divisional equity in 2001.
NOTE 9. CAPITAL CONTRIBUTION
In June 2001, upon the formation of the Company, $51.7 million was
contributed to the Company's divisional equity, $35.2 million of which
represented a non-cash contribution of intercompany balances and loans
previously payable to ISP.
13
ISP FINETECH
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates its business as a single business segment, the
formulation and manufacture of a broad range of fine chemical products for the
pharmaceutical, biotechnology and agricultural markets. Sales to geographic
areas outside the United States are insignificant.
The Company's sales are concentrated in a relatively small number of
customers. In the nine-month period ended September 30, 2001, four customers
accounted for 24%, 22%, 12% and 11%, respectively, of total customer sales. In
the year 2000, three customers accounted for 26%, 18% and 14%, respectively, of
total customer sales. In the year 1999, one customer accounted accounted for 77%
of total customer sales.
NOTE 11. COMMITMENT AND CONTINGENCIES
The Company is a party to various claims and routine litigation arising
in the normal course of its business. Management of the Company believes that
the result of such claims and litigation will not have a material adverse effect
on the financial position or results of operations of the Company.
LEASE COMMITMENTS
The Company has operating leases related to buildings, offices and
office equipment. Rental expense on operating leases was $38,000, $16,000 and
$19,000 for the first nine months of 2001 and the years ended December 31, 2000
and 1999, respectively. Future minimum lease payments for properties which were
held under long-term noncancelable leases as of September 30, 2001, were as
follows:
2001.............................. $ 18,000
2002.............................. 24,000
2003.............................. 6,000
2004.............................. 4,000
2005.............................. -
14
(ii) The audited balance sheets of FineTech Ltd. as of
December 31, 2000 and 1999, and the related statements of income, changes in
shareholders' equity and cash flows for each of the fiscal years ended December
31, 2000, December 31, 1999 and December 31, 1998:
FINETECH LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000
FINETECH LTD.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000
C O N T E N T S
---------------
PAGE
--------
AUDITORS' REPORT 2
FINANCIAL STATEMENTS
Balance Sheets 3 - 4
Statements of Income 5
Statements of Changes in Shareholders' Equity 6
Statements of Cash Flows 7
Notes to the Financial Statements 8 - 18
AUDITORS' REPORT TO THE SHAREHOLDERS
OF
FINETECH LTD.
We have audited the accompanying balance sheets of FINETECH LTD. (the "Company")
as of December 31, 2000 and 1999, and the related statements of income, changes
in shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States and in Israel (including those prescribed under the
Auditors' Regulations (Mode of Performance) (Israel), 1973). 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 the Board of
Directors and 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 the Company as of December 31,
2000 and 1999, and the results of its operations, changes in shareholders'
equity and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in Israel (as to reconciliation to the accounting principles generally accepted
in the United States - see Note 16).
LUBOSHITZ KASIERER
MEMBER FIRM OF ARTHUR ANDERSEN
Haifa, Israel, April 1, 2001 (except for the matters discussed in Note 16 as to
which the date is December 10, 2001).
FINETECH LTD.
BALANCE SHEETS
In U.S. Dollars
- 3 -
DECEMBER 31
---------------------------
NOTE 2000 1999
------ ---------- --------------
CURRENT ASSETS
Cash and cash equivalents 8,598,596 1,320,010
Short-term bank deposits - 5,891,328
Receivables and prepayments (3) 509,598 337,458
Inventories - raw materials 67,829 58,594
---------- ----------
9,176,023 7,607,390
---------- ----------
FIXED ASSETS (4)
Cost 1,809,780 1,665,493
Less - accumulated depreciation 991,976 708,108
---------- ----------
817,804 957,385
---------- ----------
DEFERRED TAXES (14) 42,222 7,662
---------- ----------
Total Assets 10,036,049 8,572,437
========== ==========
- 3 -
DECEMBER 31
-----------------------
NOTE 2000 1999
------ ----------- ----------
CURRENT LIABILITIES
Payables and accrued expenses (5) 698,441 184,862
----------- ----------
LONG-TERM LIABILITIES
Accrued severance pay (6) 120,224 115,685
Capital notes (7) 220,861 214,904
----------- ----------
341,085 330,589
----------- ----------
CONTINGENT LIABILITIES (8)
Total Liabilities 1,039,526 515,451
----------- ----------
SHAREHOLDERS' EQUITY
Share capital (9) 11,678 11,678
Additional paid-in capital 3,145,110 3,151,067
Retained earnings 6,339,735 4,894,241
----------- ----------
9,496,523 8,056,986
Less - treasury stock, at cost 500,000 -
----------- ----------
Total Shareholders' Equity 8,996,523 8,056,986
----------- ----------
Total Liabilities and =========== ==========
Shareholders' Equity 10,036,049 8,572,437
=========== ==========
_________________________
DR. ARIE GUTMAN
President
Date of approval of the financial statements:
April 1, 2001
THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
FORM AN INTEGRAL PART THEREOF.
- 4 -
FINETECH LTD.
STATEMENTS OF INCOME
In U.S. dollars
FOR THE YEAR ENDED
DECEMBER 31
-------------------------------------
NOTE 2000 1999 1998
------- ----------- ---------- ----------
SALES (10) 3,519,575 3,149,092 2,360,195
COST OF SALES (11) 970,453 839,738 671,599
----------- ---------- ----------
Gross profit 2,549,122 2,309,354 1,688,596
----------- ---------- ----------
RESEARCH AND DEVELOPMENT
EXPENSES 758,487 413,077 363,333
LESS - PARTICIPATION OF THE
CHIEF SCIENTIST (8) 291,014 280,334 219,678
----------- ---------- ----------
Research and development
expenses, net (12) 467,473 132,743 143,655
SELLING AND ADMINISTRATIVE
EXPENSES (13) 554,331 448,080 481,820
----------- ---------- ----------
Total expenses 1,021,804 580,823 625,475
----------- ---------- ----------
Operating income 1,527,318 1,728,531 1,063,121
FINANCING INCOME, NET 396,097 275,252 248,315
----------- ---------- ----------
Income before taxes on income 1,923,415 2,003,783 1,311,436
TAXES ON INCOME (14) 477,921 94,556 70,502
----------- ---------- ----------
Net income 1,445,494 1,909,227 1,240,934
=========== ========== ==========
THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
FORM AN INTEGRAL PART THEREOF.
- 5 -
FINETECH LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
In U.S. dollars
ADDITIONAL
SHARE PAID-IN RETAINED SUB TREASURY SHAREHOLDERS'
CAPITAL CAPITAL EARNINGS TOTAL STOCK EQUITY
------- ---------- -------- ------- ---------- -------------
Balance as of
January 1, 1998 11,462 2,618,784 1,744,080 4,374,326 - 4,374,326
Receipts on account
of shares (*) - 495,000 - 495,000 - 495,000
Exchange rate
differences on
capital - 37,860 - 37,860 - 37,860
notes (note 7)
Net income - - 1,240,934 1,240,934 - 1,240,934
------- ---------- --------- --------- --------- -------------
Balance as of
December 31, 1998 11,462 3,151,644 2,985,014 6,148,120 - 6,148,120
Issuance of shares 216 (216) - - - -
Exchange rate
differences on
capital notes (note 7) - (361) - (361) - (361)
Net income - - 1,909,227 1,909,227 - 1,909,227
------- ---------- --------- --------- --------- -------------
Balance as of
December 31, 1999 11,678 3,151,067 4,894,241 8,056,986 - 8,056,986
Exchange rate
differences on
capital
notes (note 7) - (5,957) - (5,957) - (5,957)
Purchase of treasury
stock - - - - (500,000) (500,000)
Net income - - 1,445,494 1,445,494 - 1,445,494
------- ---------- --------- --------- --------- -------------
Balance as of
December 31, 2000 11,678 3,145,110 6,339,735 9,496,523 (500,000) 8,996,523
======= ========== ========= ========= ========= =============
(*) Net of expenses in the amount of $5,000.
THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
FORM AN INTEGRAL PART THEREOF.
- 6 -
FINETECH LTD.
STATEMENTS OF CASH FLOWS
In U.S. dollars
FOR THE YEAR ENDED
DECEMBER 31
--------------------------------
2000 1999 1998
--------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 1,445,494 1,909,227 1,240,934
Adjustments to reconcile net income to net
cash provided by operating activities (see below) 611,563 314,462 286,672
--------- ----------- ----------
Net cash provided by operating activities 2,057,057 2,223,689 1,527,606
--------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (177,045) (311,420) (275,050)
Proceeds from sale of fixed assets 7,246 7,816 -
Short-term bank deposits 5,891,328 (5,891,328) -
--------- ----------- ----------
Net cash provided by (used in) investing
activities 5,721,529 (6,194,932) (275,050)
--------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts on account of shares - - 500,000
Purchase of treasury stock (500,000) - -
--------- ----------- ----------
Net cash used in financing activities (500,000) - 500,000
--------- ----------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,278,586 (3,971,243) 1,752,556
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,320,010 5,291,253 3,538,697
--------- ----------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR 8,598,596 1,320,010 5,291,253
========= =========== ==========
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Revenues and expenses not affecting operating
cash flows:
Depreciation 306,823 278,676 190,202
Severance pay 4,539 (494) (10,359)
Deferred taxes (34,560) 4,100 4,221
Loss (gain) from sale of fixed assets 2,557 (1,807) -
--------- ----------- ----------
279,359 280,475 184,064
--------- ----------- ----------
Changes in operating assets and liabilities:
Decrease (increase) in receivables and
prepayments (172,140) 82,850 68,111
Increase in inventories (9,235) (36,420) 11,241
Increase (decrease) in payables and accrued
expenses 513,579 (12,443) 23,256
--------- ----------- ----------
332,204 33,987 102,608
--------- ----------- ----------
611,563 314,462 286,672
========= =========== ==========
THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
FORM AN INTEGRAL PART THEREOF.
- 7 -
FINETECH LTD.
NOTES TO THE FINANCIAL STATEMENTS
In U.S. dollars
NOTE 1 - GENERAL
The Company is engaged in the development, manufacturing and
distribution of fine chemicals, intended primarily for the
pharmaceutical industry.
NOTE 2 - ACCOUNTING POLICIES
The financial statements have been prepared in conformity with
generally accepted accounting principles in Israel ("Israeli
GAAP"). See Note 16 for a reconciliation to accounting principles
generally accepted in the U.S.
The significant accounting policies followed in the preparation of
the financial statements, on a consistent basis, are:
A. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
U.S. dollars, as the currency of the primary economic
environment in which the operations of the Company are
conducted is the U.S. dollar. The majority of the Company's
sales are made in U.S. dollars, as are the majority of
purchases of materials and components. Thus, the functional
currency of the Company is the U.S. dollar.
Transactions and balances originally denominated in U.S.
dollars are presented at their original amounts.
Transactions and balances in other currencies are
remeasured into U.S. dollars in accordance with principles
identical to those prescribed in Statement No. 52 of the
Financial Accounting Standards Board of the United States
(FASB). Accordingly, items have been remeasured as follows:
- Monetary items - at the current exchange rate at balance
sheet date.
- Nonmonetary items - historical exchange rates.
- Income and expenditure items - at exchange rates as of
date of recognition of those items (excluding
depreciation and other items deriving from nonmonetary
items).
- 8 -
FINETECH LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONT.)
In U.S. dollars
NOTE 2 - ACCOUNTING POLICIES (CONT.)
A. BASIS OF PRESENTATION (Cont.)
Exchange gains and losses from the aforementioned
remeasurement (which are immaterial for each reported period)
are reflected in the statement of income.
B. CASH AND CASH EQUIVALENTS
All highly liquid investments (principally bank deposits) with
an original maturity of three months or less are considered
cash equivalents.
C. INVENTORIES
Inventories are stated at the lower of cost or market, cost
being determined by the "first-in, first-out" method.
D. FIXED ASSETS
Fixed assets are stated at cost. Depreciation is calculated by
the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the
lease period, including renewal options.
E. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses, net of participations by
the Government of Israel through the Office of the Chief
Scientist ("Chief Scientist"), are charged to operations as
incurred.
F. DEFERRED TAXES
Deferred taxes are provided for temporary differences in the
recognition of revenues and expenses for financial reporting
and income tax purposes. Deferred taxes are calculated at tax
rates expected to be in effect at the time the items are
recognized in the statement of income.
- 9 -
NOTE 2 - ACCOUNTING POLICIES (CONT.)
G. LINKED BALANCES
Balances in currencies other than the U.S. dollar are stated
at the exchange rate at balance sheet date. The representative
exchange rate at December 31, 2000 - U.S.$1 = New Israeli
Shekels ("NIS") 4.041 (1999 - NIS 4.153). Balances linked to
the CPI are based on the appropriate index for each linked
asset or liability. In the year 2000, there was no change in
the CPI (1999 and 1998 - increase of 1.3% and 8.6%,
respectively).
H. REVENUE RECOGNITION
Revenues from the sales of products are recognized upon
shipment.
I. FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise noted, the carrying value of financial
instruments approximates their fair value.
J. FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 3 - RECEIVABLES AND PREPAYMENTS
DECEMBER 31
-------------------------
2000 1999
----------- -----------
Trade receivables 405,779 290,480
Government authorities 5,412 760
Chief Scientist 80,000 30,000
Prepaid expenses and other 18,407 16,218
----------- -----------
509,598 337,458
=========== ===========
- 10 -
FINETECH LTD.
NOTES TO THE FINANCIAL STATEMENTS (Cont.)
In U.S. dollars
Note 4 - FIXED ASSETS
MACHINERY FURNITURE
LEASEHOLD AND MOTOR AND
IMPROVEMENTS EQUIPMENT VEHICLES FIXTURES TOTAL
------------ --------- -------- --------- --------
COST -
As of January 1, 2000 253,484 1,285,655 82,135 44,219 1,665,493
Additions 32,874 105,222 37,726 1,223 177,045
Disposals - - 32,758 - 32,758
------------ --------- -------- -------- ---------
As of December 31, 2000 286,358 1,390,877 87,103 45,442 1,809,780
------------ --------- -------- -------- ---------
ACCUMULATED
DEPRECIATION -
As of January 1, 2000 83,120 586,645 24,436 13,907 708,108
Provision for the year 27,885 258,297 14,547 6,094 306,823
Disposals - - 22,955 - 22,955
------------ --------- -------- -------- ---------
As of December 31, 2000 111,005 844,942 16,028 20,001 991,976
------------ --------- -------- -------- ---------
NET BOOK VALUE -
As of December 31, 2000 175,353 545,935 71,075 25,441 817,804
============ ========= ======== ======== =========
Annual rates of
depreciation 10-11% 10%-33% 15% 6%-25%
============ ========= ======== ========
(*) The Company has leased premises for a period ending in 2006.
The annual rent is approximately $57,600. In addition, the
Company leased an office for one year at an annual rent of
$3,600.
Note 5 - PAYABLES AND ACCRUED EXPENSES
DECEMBER 31
--------------------
2000 1999
--------- ---------
Salaries and related expenses (*) 253,862 121,245
Suppliers 51,278 29,406
Government authorities 354,778 1,323
Sundry payables and accruals 38,523 32,888
--------- ---------
698,441 184,862
========= =========
(*) Includes accrued vacation pay 55,557 31,952
========= =========
- 11 -
FINETECH LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONT.)
In U.S. dollars
NOTE 6 - SEVERANCE PAY
The Company's liability for severance pay to employees is covered
by deposits with insurance companies in respect of managers'
insurance and by the accrual in the balance sheet. As the amounts
deposited with the insurance companies are not under the control
or management of the Company, such deposits and the respective
liability are not reflected in the balance sheet.
NOTE 7 - CAPITAL NOTES
The capital notes were issued to related companies. The notes are
denominated in NIS, are not linked and do not bear interest. The
notes are repayable in 2006 and 2007. Exchange rate differences on
these capital notes are recorded directly in shareholders' equity.
NOTE 8 - CONTINGENT LIABILITIES
The Company is obligated to pay royalties to the Chief Scientist
in respect of Government participation in research and development
expenses, calculated at rates of 3% and 3.5% of sales of the
products developed with the Government's participation up to the
dollar amount of such participation (from January 1, 1999 - plus
interest at libor) or a higher amount under certain circumstances.
The amount of participation for which royalties has not been paid,
at December 31, 2000, amounts to $1.2 million.
NOTE 9 - SHARE CAPITAL
A. Composition:
AUTHORIZED ISSUED AND OUTSTADING
------------ -----------------------
NUMBER OF SHARES
-------------------------------------
December 31, 2000:
Voting shares 25,000 (1)17,180
Ordinary shares 25,000 (2)16,956
December 31, 1999:
Voting shares 25,000 17,711
Ordinary shares 25,000 17,511
All shares have a par value of NIS 1 each.
(1) Net of 531 treasury shares.
(2) Net of 555 treasury shares.
- 12 -
NOTE 9 - SHARE CAPITAL (CONT.)
B. In 1997, the Company granted to certain employees options to
purchase 200 Ordinary shares at their par value. In 2000,
the Company purchased these options from the employees in
consideration for $180,000 and recorded the applicable
compensation as salary expenses.
In January 1999, the Board of Directors of the Company
decided to grant certain employees options to purchase 800
Ordinary shares at a price of $820 per share. The options
vest over a period of four years and expire seven years
after the date of grant.
Subsequent to balance sheet date the Board of Directors of
the Company approved to grant stock options to certain
employees at the same price and conditions as the options
granted in 1999.
C. In June 2000, the Company purchased 3% of its shares from a
shareholder in consideration for $500,000. The cost of these
treasury shares is presented as a deduction from
shareholders' equity.
NOTE 10 - SALES
FOR THE YEAR ENDED
DECEMBER 31
-------------------------------------------
2000 1999 1998
------------ ------------ --------------
A. Composition
Foreign 3,111,916 2,535,602 1,533,782
Domestic 407,659 613,490 826,413
--------- --------- ---------
3,519,575 3,149,092 2,360,195
========= ========= =========
B. The following customers account for 10% or more of sales:
Customer A 48% 36% 28%
Customer B (*) 14% 21%
Customer C (*) 14% 15%
Customer D (*) 13% (*)
Customer E 12% -
(*) Less than 10%
- 13 -
FINETECH LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONT.)
In U.S. dollars
Note 11 - COST OF SALES
FOR THE YEAR ENDED
DECEMBER 31
-------------------------------
2000 1999 1998
-------- --------- ----------
Salaries and related expenses 487,004 363,378 289,152
Materials 89,962 118,341 71,784
Depreciation 277,708 247,514 158,601
Other (*) 115,779 110,505 143,925
-------- --------- ----------
970,453 839,738 663,462
Changes in inventories of finished
products - - 8,137
-------- --------- ----------
970,453 839,738 671,599
(*) Includes royalties paid to the
Chief Scientist 5,916 6,180 5,539
======== ========= ==========
Note 12 - RESEARCH AND DEVELOPMENT EXPENSES, NET
FOR THE YEAR ENDED
DECEMBER 31
-------------------------------
2000 1999 1998
-------- --------- ----------
Salaries and related expenses 550,998 282,222 283,557
Materials 66,185 47,108 40,678
Subcontractors 86,403 34,675 21,143
Depreciation 7,587 10,605 10,605
Other 47,314 38,467 7,350
-------- --------- ----------
758,487 413,077 363,333
Less - participation by the Chief
Scientist 291,014 280,334 219,678
-------- --------- ----------
467,473 132,743 143,655
======== ========= ==========
Note 13 - SELLING AND ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED
DECEMBER 31
-------------------------------
2000 1999 1998
-------- --------- ----------
Salaries and related expenses 345,696 242,913 207,756
Marketing and advertising 77,948 99,861 134,298
Professional fees 40,397 33,497 47,056
Depreciation 21,527 20,558 20,996
Other 68,763 51,251 71,714
-------- --------- ----------
554,331 448,080 481,820
======== ========= ==========
- 14 -
FINETECH LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONT.)
In U.S. dollars
NOTE 14 - TAXES ON INCOME
A. TAX LAWS
The Company is subject to the Income Tax Law (Inflationary
Adjustments), 1985, which provides for adjustments to
taxable income for the effects of inflation (based on the
Israeli Consumer Price Index) on shareholders' equity not
invested in inflation resistant assets.
An expansion of the Company's plant has been granted the
status of an "Approved Enterprise", in accordance with a
letter of approval dated May 9, 1995. Under the terms of
the approval, income derived from the approved expansion is
tax exempt for a period of 4 years and subject to a reduced
income tax rate of 25% for an additional period of 3 years
(and up to 6 years and lower tax rate, dependent on the
percentage of holdings of foreign investors in the Company
as defined in the law). The benefit period commenced in
1996.
The Company has been granted status of an "Approved
Enterprise" for the second expansion of its plant. Under
the terms of the approval, income derived from the approved
expansion is tax exempt for period of 2 years and subject
to a reduced income tax rate of 25% for an additional
period of 5 years. The benefit period commenced in 1999.
Currently the Company is in the process of investing in the
third expansion of its plant, which is not approved yet.
Should the Company pay dividends from tax-exempt income, it
will be liable to 25% tax on the amount distributed, and a
further 15% withholding tax would be deducted from the
amount distributable to the recipient.
The Company has received final tax assessments through
1999. Under the terms of the final assessment, the Company
has yet to provide tax authorities with an approval from
the investment center which will allow the Company to
benefit from its full tax holiday. If the Company will fail
to provide such approval it will be liable to a tax payment
of $607,481. Company's management is of the opinion that
such approval will be obtained and therefore no liability
was recorded in the financial statements.
- 15 -
FINETECH LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONT.)
In U.S. dollars
NOTE 14 - TAXES ON INCOME (CONT.)
B. COMPOSITION OF TAX EXPENSE
FOR THE YEAR ENDED
DECEMBER 31
--------------------------------------
2000 1999 1998
----------- ----------- ----------
Current taxes 314,510 105,985 66,281
Deferred taxes (34,560) 4,100 4,221
Taxes in respect of prior years 197,971 (15,529) -
------- ------- ------
477,921 94,556 70,502
======= ====== ======
The difference between the tax computed on income before taxes
according to the statutory tax rate (36%) and the tax included
in the financial statements is primarily a result of the tax
benefits in respect of the approved enterprise.
C. DEFERRED TAXES
Components of deferred tax assets are as follows:
ACCRUED
VACATION SEVERANCE
PAY PAY TOTAL
---------- ----------- -------
Balance as of
January 1, 1999 1,723 10,039 11,762
Movement during
the year (65) (4,035) (4,100)
---------- ----------- -------
Balance as of
December 31, 1999 1,658 6,004 7,662
Movement during
the year
---------- ----------- -------
11,687 22,873 34,560
---------- ----------- -------
Balance as of
December 31, 2000 13,345 28,877 42,222
========== =========== =======
- 16 -
FINETECH LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONT.)
In U.S dollars
NOTE 15 - TRANSACTIONS WITH RELATED PARTIES (*)
FOR THE YEAR ENDED
DECEMBER 31
-----------------------------
2000 1999 1998
-------- --------- --------
Cost of sales 15,286 34,488 25,624
Research and development expenses 79,150 26,372 16,550
Selling and administrative expenses 11,493 11,647 30,962
Purchase of treasury stock 500,000 - -
(*) Include Dimotech Ltd. and the Technion Institution for research
and development Ltd. - direct and indirect shareholders of the
Company.
NOTE 16 - RECONCILIATION TO U.S. GAAP
On June 6, 2001 the Company signed an asset purchase agreement with
International Specialty Products (Israel) Ltd. ("ISP"). According
to the agreement, the Company transferred substantially all its net
assets and activities to ISP in consideration for $15.7 million. In
that connection, the Company has prepared the following
reconciliation to U.S. GAAP.
As described in Note 2, the Company prepares its primary financial
statements in Israeli GAAP which differ in certain respects from
U.S. GAAP. The main differences with respect to the Company's
results of operations and shareholders' equity, are detailed below.
1. Stock - Based Compensation-
As provided under U.S. GAAP compensation cost of options issued
to employees would be accounted for under Accounting Principles
Board Opinion No. 25 ("APB 25"), including FASB Interpretation
No. 44.
2. Capital Notes -
According to U.S. GAAP the non- interest bearing capital notes
issued to related parties should be discounted to their present
value based on an interest rate of 12% per annum. The difference
between the face value of the notes at the date of issuance and
their present value would be credited to shareholders' equity.
Under U.S. GAAP the interest expense arising from the
amortization of the discount and exchange rate differences on
the notes are charged to financing expense.
- 17 -
FINETECH LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONT.)
In U.S dollars
Note 16 - RECONCILIATION TO U.S. GAAP (CONT.)
The effects of the above differences are as follows:
FOR THE YEAR ENDED DECEMBER 31
-------------------------------
2000 1999 1998
---------- --------- ----------
STATEMENTS OF INCOME
Net income as reported according
to Israeli GAAP 1,445,494 1,909,227 1,240,934
Effect of implementing APB-25 91,333 (51,722) -
Effect of adjustments for
capital notes (14,896) (10,715) 4,432
---------- --------- ----------
Net income according to U.S. GAAP 1,521,931 1,846,790 1,245,366
========== ========= ==========
2. SHAREHOLDERS' EQUITY
As U.S GAAP As per
reported Adjustments US GAAP
--------- ----------- --------
As of December 31, 2000 8,996,523 107,342 9,103,865
As of December 31, 1999 8,056,986 116,281 8,173,267
As of December 31, 1998 6,148,120 126,635 6,274,755
- 18 -
(b) Pro Forma Financial Information.
(i) The unaudited pro forma combined balance sheet and the
combined statements of operations for the nine months ended September 29, 2001
and year ended December 31, 2000:
UNAUDITED PRO FORMA FINANCIAL INFORMATION
(dollars in thousands)
The unaudited pro forma combined statements of operations for the year ended
December 31, 2000 and for the nine months ended September 29, 2001, and the
unaudited pro forma combined balance sheet as of September 29, 2001, have been
prepared to illustrate the estimated effects of Pharmaceutical Resources, Inc.'s
(the Company) potential acquisition of certain assets and assumption of certain
liabilities of the fine chemicals business of certain subsidiaries of
International Specialty Products Inc. (ISP), including a pharmaceutical
manufacturing facility in Columbus, Ohio, inventory, intellectual property and
other assets related to the manufacture, sale, research and development of
advanced intermediate and active pharmaceutical ingredients for pharmaceutical
companies, and all of the outstanding capital stock of ISP FineTech Ltd., an
Israeli corporation, all pursuant to a purchase agreement between the Company
and such subsidiaries of ISP.
On June 7, 2001 ISP acquired FineTech Ltd. and combined it with the pre-existing
ISP Fine Chemicals Business Division to form ISP FineTech. As a result, the
September 30, 2001 audited ISP FineTech combined financial statements only
reflect the operations of FineTech Ltd. for the period from acquisition (June 7,
2001) through September 30, 2001. For pro forma purposes ISP FineTech's
September 30, 2001 audited combined statement of operations has been combined
with FineTech Ltd.'s unaudited statement of operations for the period January 1,
2001 through June 6, 2001. In addition, for pro forma purposes, ISP's Fine
Chemicals Business Division audited statement of operations has been combined
with FineTech Ltd.'s audited statement of operations for the twelve months ended
December 31, 2000.
For pro forma purposes, (a) the Company's unaudited consolidated balance sheet
as of September 29, 2001 has been combined with ISP FineTech's audited combined
balance sheet as of September 30, 2001 as if the merger had occurred on
September 29, 2001, (b) the Company's unaudited consolidated statement of
operations for the nine month period ended September 29, 2001 has been combined
with ISP FineTech's audited combined statement of operations for the nine month
period ended September 30, 2001 and FineTech Ltd.'s unaudited statement of
operations for the period from January 1, 2001 through June 6, 2001 as if the
acquisition had occurred on January 1, 2001 and (c) the Company's audited
consolidated statement of operations for the year ended December 31, 2000 has
been combined with ISP Fine Chemicals Business Division and FineTech Ltd.'s
audited statement of operations for the year ended December 31, 2000 as if the
acquisition had occurred on January 1, 2000.
The pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if the acquisition had been consummated on January 1, 2000 or 2001
or September 29, 2001, respectively, nor is it necessarily indicative of future
operating results or financial position. The unaudited pro forma combined
financial information has been prepared on the basis and assumptions described
in the notes thereto and includes assumptions relating to the allocation of the
consideration paid by the Company for certain assets and assumption of certain
liabilities of ISP FineTech based on preliminary estimates of the fair value of
such assets and liabilities.
A formal appraisal of the assets and liabilities is currently ongoing.
Accordingly, the actual allocation of such consideration may differ from that
reflected in the unaudited pro forma combined financial information after the
completion of the independent appraisal and any other procedures that are
performed. In the opinion of the Company, all adjustments necessary to present
fairly such unaudited pro forma combined financial information have been based
on the terms and structure of the acquisition.
ISP has provided certain general management, administrative, legal,
telecommunications, information and facilities services to ISP FineTech and ISP
Fine Chemicals Business Division for the nine months ended September 30, 2001
and the year ended December 31, 2000 totaling $661 and $540 respectively.
Management of the Company has not yet completed a comprehensive review of the
costs which will be incurred to replace the activities previously performed by
ISP as a result of the acquisition. These unaudited pro forma combined financial
statements should be read in conjunction with the historical consolidated
financial statements and the related notes thereto of the Company, included in
the Form 10-K, for the year ended December 31, 2000 and the Form 10-Q for the
quarter ended September 29, 2001, and the historical financial statements of ISP
FineTech and FineTech Ltd. included in this filing on Form 8-K.
PHARMACEUTICAL RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 29, 2001
(IN THOUSANDS EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------ -----------------------------------------------
PHARMACEUTICAL EXCLUDED PURCHASE
RESOURCES ISP ASSETS AND ACCOUNTING PRO FORMA
INC. FINETECH LIABILITIES REFERENCE ADJUSTMENTS REFERENCE COMBINED
-------------- --------- ------------ ----------- ------------ ---------- -----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,509 $ 3,297 $ (6) (A) $ (200) (H) $ 2,675
(2,925) (B)
Accounts receivable, net of allowances 84,683 1,358 (1,086) (A) - 84,955
Accounts receivable, other - 67 (1) (A) - 66
Inventories 23,973 9,707 - - 33,680
Prepaid expenses and other assets 5,117 178 (167) (A) (2,249) (G) 2,946
67 (H)
Deferred income tax assets 36,424 - - - 36,424
-------------- --------- ------------ ------------ -----------
Total current assets 152,706 14,607 (1,260) (5,307) 160,746
Property, plant and equipment, at cost less
accumulated depreciation and amortization 24,329 39,166 - 13,390 (E) 76,885
Deferred charges and other assets 6,936 - - 133 (H) 7,069
Goodwill, net of accumulated amortization - 15,316 (15,316) (A) 20,405 (C) 20,405
Intangibles, net of accumulated amortization - 9,167 (9,167) (A) 26,210 (D) 26,210
-------------- --------- ------------ ------------ ----------
Total assets $ 183,971 $ 78,256 $(25,743) $ 54,831 $291,315
============== ========= ============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt $ 252 $ - $ - $ - $ 252
Short-term debt 20 - - 44,320 (B) 44,340
Accounts payable 48,621 1,078 (427) (A) - 49,272
Accrued salaries and employee benefits 2,230 - - - 2,230
Intercompany payable to ISP - 5,760 (5,760) (A) - -
Accrued expenses and other
current liabilities 4,903 845 (43) (A) 1,200 (F) 6,905
Income taxes payable 15,733 145 (55) (A) - 15,823
-------------- --------- ------------ ------------ -----------
Total current liabilities 71,759 7,828 (6,285) 45,520 118,822
Long-term debt, net of current portion 1,103 - - - 1,103
Accrued pension liability 614 - - - 614
Deferred income tax liabilities, net 753 - - 455 (I) 1,208
Other liabilities - 2,400 (2,400) (A) - -
-------------- --------- ------------ ------------ -----------
Total liabilities 74,229 10,228 (8,685) 45,975 121,747
Shareholders' equity:
Common stock, par value $.01 per share;
authorized 90,000,000 shares;
issued and outstanding 32,007,461 shares 320 - - 23 (B) 343
Additional paid-in capital 108,364 - - 64,977 (B) 170,416
(2,925) (B)
Division equity - 68,058 (68,058) (A) - -
Retained earnings (accumulated deficit) 1,289 (30) 30 (A) (2,249) (G) (960)
Additional minimum liability related to
defined benefit plan (231) - - - (231)
-------------- --------- ------------ ------------ -----------
Total shareholders' equity 109,742 68,028 (68,028) 59,826 169,568
-------------- --------- ------------ ------------ -----------
Total liabilities and shareholders'
equity $ 183,971 $ 78,256 $(76,713) $105,801 $291,315
============== ========= ============ ============ ===========
Pharmaceutical Resources, Inc.
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2000
(In thousands except per share data)
Historical
----------------------------------------------
ISP Fine
Pharmaceutical Chemicals Pro Forma
Resources Business -------------------------- Pro Forma
Inc. Division FineTech Ltd. Adjustments Reference Combined
-------------- ------------- -------------- ------------- ----------- ---------
Net sales $ 85,022 $ 16,290 $ 3,519 $ (1,426) (R) $ 103,405
Intercompany sales to ISP - 2,032 - 305 (Q) 2,337
Cost of goods sold 62,332 17,511 970 1,159 (P) 81,296
(676) (R)
------------- ----------- ------------ ------------ ----------
Gross margin 22,690 811 2,549 (1,604) 24,446
Operating expenses:
Research and development 7,634 - 758 - 8,392
Participation of chief scientist - - (291) - (291)
Selling, general and administrative 15,575 1,786 463 1,912 (L) 19,736
------------- ----------- ----------- ------------ ----------
Total operating expenses 23,209 1,786 930 1,912 27,837
------------- ----------- ----------- ------------ ----------
Operating (loss) income (519) (975) 1,619 (3,516) (3,391)
Other income, net 506 - 396 - 902
Interest expense, net (916) - (15) (4,044) (N) (5,043)
(68) (O)
Intercompany interest expense - (552) - 552 (J) -
------------- ----------- ----------- ------------ ----------
(Loss) income before provision for income taxes (929) (1,527) 2,000 (7,076) (7,532)
Benefit (provision) for income taxes - 471 (478) (471) (K) (478)
------------- ----------- ----------- ------------ ----------
Net (loss) income $ (929) $ (1,056) $ 1,522 $ (7,547) $ (8,010)
============= =========== =========== ============ ==========
Net loss per share of common stock:
Basic and diluted $ (0.03) $ (0.25)
============= ==========
Weighted average number of common
and common equivalent shares outstanding: 29,604 2,321 (U) 31,925
============= ============= ==========
PHARMACEUTICAL RESOURCES, INC.
Unaudited Pro Forma Combined Statement of Operations
For the Nine Months Ended September 29, 2001
(In thousands except per share data)
Historical
------------------------------------------------
FineTech Ltd.
Pharmaceutical for the period Pro Forma
Resources ISP 1/1/01 Through -------------------------------- Pro Forma
Inc. Finetech 6/6/01 Adjustments Reference Combined
-------------- ------------ ------------------ --------------- -------------- -----------
Net sales $ 154,725 $ 12,789 $ 3,463 (2,533) (R) $ 168,054
(390) (S)
Intercompany sales to ISP - 2,026 - 304 (Q) 2,330
Cost of goods sold 93,613 11,095 571 596 (P) 104,685
(1,034) (R)
(156) (S)
----------- -------- ------ ------- --------
Gross margin 61,112 3,720 2,892 (2,025) 65,699
Operating expenses:
Research and development 7,436 - 665 (390) (S) 7,711
Selling, general and
administrative 15,385 3,789 407 1,101 (L) 20,411
(271) (M)
----------- -------- ------ ------- --------
Total operating
expenses 22,821 3,789 1,072 440 28,122
----------- -------- ------ ------- --------
Operating income
(loss) 38,291 (69) 1,820 (2,465) 37,577
Other income, net 431 - - - 431
Interest (expense) income,
net (580) - 152 (2,350) (N) (2,829)
(51) (O)
Intercompany interest
expense - (318) - 318 (J) -
----------- -------- ------ ------- --------
Income (loss) before
provision for income
taxes 38,142 (387) 1,972 (4,548) 35,179
(Provision) benefit for
income taxes (7,230) 134 (543) 1,728 (T) (5,911)
----------- -------- ------ ------- --------
Net income (loss) $ 30,912 $ (253) $ 1,429 $ (2,820) $ 29,268
=========== ======== ====== ======= ========
Net income per share of
common stock:
Basic $ 1.03 $ 0.90
=========== ========
Diluted $ 0.97 $ 0.86
=========== ========
Weighted average number
of common and common
equivalent shares
outstanding:
Basic 30,106 2,321 (U) 32,427
=========== ======= ========
Diluted 31,902 2,321 (U) 34,223
=========== ======= ========
Notes to Unaudited Pro Forma Combined Financial Information (dollars in
thousands, except share amounts)
1. Basis of Presentation
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheet of Pharmaceutical Resources, Inc. (the "Company") as
of September 29, 2001 with the historical consolidated balance sheet of ISP
FineTech after giving effect to the acquisition as if the transaction occurred
on September 29, 2001.
The unaudited pro forma combined statement of operations combines the historical
consolidated statement of operations of the Company for the year ended December
31, 2000 with the combined statement of operations of ISP FineTech and the
statement of operations of FineTech Ltd. for the year ended December 31, 2000
and the Company's unaudited consolidated statement of operations for the nine
months ended September 29, 2001 combined with ISP FineTech's combined audited
statement of operations for the nine months ended September 30, 2001 and
FineTech Ltd.'s unaudited statement of operations for the period January 1, 2001
through June 6, 2001 as if the acquisition had occurred at January 1, 2000 and
January 1, 2001.
The Company has utilized the purchase accounting method related to the
acquisition. The value of the assets acquired by the Company is based on
preliminary discussions by management with its outside valuation consultants.
The value of these items will be updated upon completion of their valuation.
2. Acquisition
Based upon a preliminary valuation of tangible and intangible assets and
liabilities, the Company has allocated the total cost of the acquisition of ISP
FineTech as follows:
Estimated Purchase Price $109,320
Plus: Acquisition and Closing Costs 1,200
Deferred Tax Liability 455
Less: Working Capital Acquired 11,804
Property, Plant and Equipment 49,120
Construction in Progress 3,436
Covenant Not to Compete 1,500
Trademarks and Brandnames 2,210
Core Technology 13,900
Product Technology 8,130
Other 470
--------
Goodwill $20,405
3. Pro Forma Adjustments
The unaudited pro forma combined balance sheet includes the adjustments
necessary to give effect to the acquisition as if it had occurred on September
29, 2001 and to reflect the allocation of the acquisition cost to the fair value
of tangible and intangible assets acquired and liabilities assumed. Adjustments
included in the pro forma combined balance sheet are summarized as follows:
(A) Represents the exclusion of certain assets and liabilities not acquired.
(B) The Company purchased ISP FineTech for total consideration of $109,320,
comprised of $24,320 in cash, $20,000 in financing under their existing
revolving line of credit, which will expire three years from the date of
acquisition, and $65,000 in financing through an equity offering. Under
certain circumstances the Company could decide not to proceed with the
acquisition and pay ISP FineTech a break-up fee of $3,000. The pro forma
adjustments reflect a successful equity offering of 2,320,600 shares of
common stock at a share price of $28.01 (as of January 10, 2002), for total
proceeds of $65,000. The interest rate charged on the revolving line of
credit is based upon a per annum rate of 8.6% in 2000 and 6.6% in 2001
(2.25% above the 30 day commercial paper rate). The Company used cash on
hand at September 29, 2001 to pay $2,925 of fees associated with the equity
offering. As the Company did not have the $27,245 of cash on hand as of
January 1, 2000 to fund this acquisition, interest was calculated at the
Company's incremental borrowing rate of 8.6% in 2000 and 6.6% in 2001
(2.25% above the average 30-day commercial paper rate).
(C) Represents the allocation of the excess purchase price to goodwill based
upon the preliminary valuation of the tangible and intangible assets
acquired.
(D) Represents the allocation of intangibles based upon the preliminary
valuation of the tangible and intangible assets acquired.
(E) Represents the allocation of the excess estimated fair value of property,
plant and equipment acquired.
(F) Represents $1,200 of estimated acquisition costs related to the purchase of
ISP FineTech.
(G) Represents the elimination of $2,249 of prepaid expenses paid by the
Company to ISP FineTech for the rights to certain technology.
(H) Represents a $200 commitment fee for the revolving line of credit to secure
the financing of the acquisition.
(I) Represents the deferred tax liability for the differences between the book
value and fair market value of the assets acquired through the purchase of
the FineTech Ltd. common stock.
Adjustments included in the unaudited pro forma consolidated statements of
operations for the year ended December 31, 2000 and the nine months ended
September 29, 2001 are summarized as follows:
(J) Represents the elimination of interest expense on a loan from ISP to ISP
FineTech, as the Company is not assuming this liability.
(K) Represents the elimination of the intercompany income tax benefit
recognized by ISP Fine Chemicals Business Division due to uncertainty of
realization in 2000. Realization is probable in 2001.
(L) Amortizable intangibles have estimated useful lives ranging between two and
twenty years. Additional amortization expense of $1,912 and $1,101 has been
included in the unaudited pro forma combined statements of operations for
the year ended December 31, 2000 and the nine months ended September 29,
2001. The historical financial statement of operations of ISP FineTech for
the nine months ended September 30, 2001 include $333 of amortization
expense. Goodwill and Trademarks and Brandnames have indefinite useful
lives; as a result for pro forma purposes no amortization expense has been
recognized.
(M) Represents the elimination of the amortization of goodwill of $271 for the
period ended September 29, 2001 in accordance with Statement of Financial
Accounting Standard No. 142 "Goodwill and Other Intangible Assets".
(N) The Company acquired ISP FineTech for total consideration of $109,320
comprised of $24,320 in cash, $20,000 in financing under their existing
revolving line of credit, which will expire three years from the date of
acquisition, and $65,000 in financing through an equity offering. The
interest rate charged on the revolving line of credit is based upon a per
annum rate of 8.6% in 2000 and 6.6% in 2001 (2.25% above the 30 day
commercial paper rate). The Company used cash on hand at September 29, 2001
to pay $2,925 of fees associated with the equity offering. As the Company
did not have the $27,245 of cash on hand as of January 1, 2000 to fund this
acquisition, interest was calculated at the Company's incremental borrowing
rate of 8.6% in 2000 and 6.6% in 2001 (2.25% above the average 30-day
commercial paper rate). Interest expense of $4,044 and $2,350 was recorded
for pro forma purposes for the year-ended December 31, 2000 and for the
nine months ended September 29, 2001.
(O) Represents amortization of the commitment fee associated with the revolving
line of credit noted in (N) above. The revolving line of credit commitment
fee of 1% or $200 was amortized at a rate of approximately $6 per month for
pro forma purposes for the year ended December 31, 2000 and the nine months
ended September 29, 2001 as the revolving line of credit is for a period of
three years ($68 in 2000 and $51 in 2001).
(P) Represents additional depreciation related to the acquired property, plant
and equipment, which is depreciated over a period between 5 and 30 years.
Additional depreciation expense of $1,159 and $596 has been included in
cost of goods sold in the unaudited pro forma combined statements of
operations for the year ended December 31, 2000 and the nine months ended
September 29, 2001. The historical financial statements of operations of
ISP FineTech and FineTech Ltd. include depreciation expense of $2,367 and
$2,049 for the year ended December 31, 2000 and the nine months ended
September 30, 2001, respectively.
(Q) ISP purchases certain inventory from ISP FineTech at cost. The adjustment
represents a proposed 15% markup for these sales under a contract expected
to be entered into between ISP and the Company at the date of acquisition
as part of the Purchase Agreement.
(R) Represents the elimination of sales and cost of sales between the Company
and FineTech Ltd.
(S) Represents the elimination of sales, cost of sales, and research and
development expenses between the ISP and FineTech Ltd. for the period
between January 1, 2001 through June 6, 2001.
(T) Represents the tax effects of pro forma adjustments at the applicable
statutory rate in 2001. In 2000 no benefit was recorded due to uncertainty
of realization.
(U) Represents the effect of the 2,320,600 incremental common shares issued at
a share price of $28.01 (as of January 10, 2002) in connection with the
$65,000 equity offering.
Note 4 - Forward Looking Adjustments
ISP has provided certain general management, administrative, legal,
telecommunications, information and facilities services to ISP FineTech and ISP
Fine Chemicals Business Division for the nine months ended September 30, 2001
and the year ended December 31, 2000 totaling $661 and $540 respectively.
Management of the Company has not yet completed a comprehensive review of these
costs, which will be incurred to replace the activities previously performed by
ISP as a result of the acquisition. These unaudited pro forma combined financial
statements should be read in conjunction with the historical consolidated
financial statements and the related notes thereto of the Company, included in
the Form 10-K, for the year ended December 31, 2000 and the Form 10-Q for the
quarter ended September 29, 2001 and the historical financial statements of ISP
FineTech and FineTech Ltd. included in this filing on Form 8-K.
(c) Exhibits:
10.1 Letter Agreement, dated as of December 28, 2001, among
Pharmaceutical Resources, Inc., ISP Hungary Holdings Limited,
ISP Investments Inc., ISP Chemicals Inc. and ISP Technologies
Inc. (with the attached Form of Purchase Agreement).
23.1 Consent of Arthur Andersen LLP, Independent Accountants.
99.1 Press Release announcing execution of Purchase Agreement among
Pharmaceutical Resources, Inc., ISP Hungary Holdings Limited,
ISP Investments Inc., ISP Chemicals Inc. and ISP Technologies
Inc.
5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
January 11, 2002
PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
/s/ Dennis J. O'Connor
--------------------------------------------------------
Dennis J. O'Connor
Vice President, Chief Financial Officer and Secretary
6