UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A
AMENDMENT NO. 2
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2001
COMMISSION FILE NUMBER 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 425-7100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
32,016,652
Number of shares of Common Stock outstanding as of November 7, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS IN THIS FORM 10-Q MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO
FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES
OF CURRENT PRODUCTS AND THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED
PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD
CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED
HEREIN. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN
THIS FORM 10-Q INCLUDE, AMONG OTHERS, (I) INCREASED COMPETITION FROM NEW AND
EXISTING COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS (ESPECIALLY
UPON COMPLETION OF EXCLUSIVITY PERIODS), (II) PRICING PRESSURES RESULTING FROM
THE CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (III) THE
AMOUNT OF FUNDS AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND
DEVELOPMENT JOINT VENTURES, (IV) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR
DELAYS AND UNANTICIPATED COSTS IN OBTAINING REGULATORY APPROVALS, (V)
CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT AGREEMENTS, (VI) THE
CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET FUTURE DEMAND, (VII)
THE COSTS AND OUTCOME OF ANY THREATENED OR PENDING LITIGATION, INCLUDING PATENT
AND INFRINGEMENT CLAIMS AND (VIII) GENERAL INDUSTRY AND ECONOMIC CONDITIONS. ANY
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q ARE MADE AS OF THE DATE
HEREOF, BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF, AND
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
GENERAL
Net income of $30,912,000 for the nine-month period ended September 29,
2001 increased $32,417,000 from a net loss of ($1,505,000) for the nine months
ended September 30, 2000. The net income in the most recent period was favorably
impacted by the reversal of a previously established valuation allowance of
$8,370,000 related to NOL carryforwards. The Company did not recognize a tax
benefit for its losses in fiscal year 2000. A revenue increase of $93,436,000,
or 152%, from revenues realized during the nine months ended September 30, 2000
led to the significant improvement, reflecting the successful launch of
fluoxetine (Prozac(R)) 10 mg and 20 mg tablets, fluoxetine 40 mg capsules, and
megestrol acetate oral suspension (Megace(R) Oral Suspension). Net sales reached
an all time high of $154,725,000 for the first nine months of fiscal year 2001
compared to net sales of $61,289,000 for the same period of last year. Following
the sales growth, the gross margins increased to $61,112,000, or 39% of net
sales, for the nine-month period of 2001, from $15,188,000, or 25% of net sales,
in the same period of the prior year. The improved results included an increased
investment in research and development in 2001 totaling $7,436,000 for the nine
months, an increase of $2,102,000 from the comparable period of 2000. Selling,
general and administrative costs for the most recent nine-month period of
$15,385,000 increased by an absolute dollar amount of $4,180,000 from the
corresponding period of the prior year, primarily due to the additional
marketing programs, shipping costs and legal fees associated with new product
launches.
Third quarter 2001 net income of $26,850,000, including the income tax
benefit of $8,370,000 related to previously unrecognized NOL carryforwards,
increased $26,576,000 from the corresponding quarter of the prior year,
reflecting the increased sales and gross margin growth described above. In the
third quarter of 2001, the Company incurred higher costs for research and
development, marketing, legal fees, shipping and personnel compared to the third
quarter of 2000. Third quarter 2001 revenues and net income represent record
highs for any quarter in the Company's history and exceed the annual totals for
any fiscal year since 1989.
In addition to its own product development program, the Company has
several strategic alliances through which it co-develops and distributes
products. As a result of its internal program and strategic alliances, the
Company's pipeline of potential products includes 23 ANDAs (five of which have
been tentatively approved), pending with, and awaiting approval from, the FDA.
The Company pays a percentage of the gross profits to its strategic partners on
sales of products covered by its distribution agreements (see "Notes to
Financial Statements-Distribution and Supply Agreements").
In July 2001 and August 2001, the FDA granted approvals for three ANDA
submissions, one each by Par, Reddy and Alphapharm, for megestrol acetate oral
suspension and fluoxetine 40 mg capsules and 10 and 20 mg tablets, which as
first-to-file opportunities entitled the Company up to 180 days of marketing
exclusivity for the products. Par's ANDA approval for megestrol acetate oral
suspension, which had an estimated $180 million of annual brand sales in 2000,
is not subject to any profit sharing agreements. Reddy's ANDA approval for
fluoxetine 40mg capsules, which had an estimated $275 million of annual brand
sales in 2000, is covered under the Reddy Development and Supply Agreement.
Alphapharm's ANDA approval for fluoxetine 10 mg tablets, which had an estimated
$70 million of annual brand sales in 2000, and 20 mg tablets, which the Company
believes should be able to compete for a share of the fluoxetine capsule market,
are covered under the Genpharm Additional Product Agreement. Generic competitors
of the Company received 180 days marketing exclusivity for fluoxetine 10 mg and
20 mg capsules. Fluoxetine 20 mg capsules had an estimated annual brand sales of
nearly $2 billion in 2000. Annual brand sales are based on the Company's market
research. The Company began marketing megestrol acetate oral suspension in July
2001 and all three strengths of fluoxetine in August 2001 (see "Notes to
Financial Statements-Distribution and Supply Agreements" ).
Critical to the continued improvement in the Company's financial
condition is the introduction of new manufactured and distributed products at
selling prices that generate significant gross margin. The Company, through its
internal development program and strategic alliances, is committed to developing
new products that have limited competition and longer product life cycles. In
addition to new product introductions expected as part of its various strategic
alliances, the Company plans to continue to invest in research and development
efforts while seeking additional products for sale through new and existing
distribution agreements, additional first-to-file opportunities, vertical
integration with raw material suppliers and unique dosage forms and strengths to
differentiate its products in the marketplace. The Company is engaged in
efforts, subject to FDA approval and other factors, to introduce new products as
a result of its research and development efforts and distribution and
development agreements with third parties. No assurance can be given that the
Company will obtain or develop any additional products for sale.
The generic drug industry in the United States continues to be highly
competitive. The factors contributing to the intense competition and affecting
both the introduction of new products and the pricing and profit margins of the
Company, include, among other things: (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's significant
products, (ii) consolidation among distribution outlets through mergers,
acquisitions and the formation of buying groups, (iii) ability of generic
competitors to quickly enter the market after patent expiration or exclusivity
periods, diminishing the amount and duration of significant profits, (iv)
willingness of generic drug customers, including wholesale and retail customers,
to switch among pharmaceutical manufacturers and (v) pricing and product
deletions by competitors.
NET SALES
Net sales for the nine months ended September 29, 2001 of $154,725,000
increased $93,436,000, or 152%, from net sales of $61,289,000 for the
corresponding nine-month period of 2000. The sales increase was due to the
launch of fluoxetine 10 mg and 20 mg tablets sold under a distribution agreement
with Genpharm, fluoxetine 40 mg capsules sold under a distribution agreement
with Reddy, and megestrol acetate oral suspension manufactured by the Company.
Net sales of distributed products, which consist of products manufactured under
contract and licensed products, were approximately 63% of the Company's net
sales in each of the comparable nine-month periods. The Company is substantially
dependent upon distributed products for its sales, and as the Company introduces
new products under its distribution agreements, it is expected that this trend
will continue. Any inability by suppliers to meet expected demand could
adversely affect future sales.
Net sales of $99,724,000 for the third quarter of 2001 increased
$79,288,000, or 388%, from $20,436,000 for the corresponding quarter of 2000,
primarily due to the introduction of new products during the quarter. Net sales
of distributed products were approximately 67% of the Company's total net sales
in the most recent quarter compared to approximately 66% of the total for the
same quarter of last year.
For the nine and three-month periods ended September 29, 2001, net sales
of fluoxetine and megestrol acetate oral suspension were $56,521,000 and
$21,906,000, respectively. Based on the Company's market research for the twelve
weeks ended October 26, 2001, Par had captured approximately 79.7 percent of new
generic and brand prescriptions in the U.S. market for 40 mg fluoxetine and 22.6
percent of new generic prescriptions in the U.S. market for 10 and 20 mg
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fluoxetine. In addition, the Company held a 43.8 percent share of new generic
and brand prescriptions in the U.S. market for megestrol acetate oral suspension
for the thirteen weeks ended October 26, 2001.
The Company recognizes revenue at the time its products are shipped to
its customers as, at that time, the risk of loss or physical damage to the
product passes to the customer, and the obligations of customers to pay for the
products are not dependent on the resale of the product or the Company's
assistance in such resale. As is common in the Company's industry, customers are
permitted to return unused product, after approval from the Company, up to 180
days before and one year after the expiration date for the product's lot.
Additionally, certain customers are eligible for price rebates, offered as an
incentive to increase sales volume, on the basis of the volume of purchases of a
product over a specified period which generally ranges from one to three months,
and certain customers are credited with chargebacks on the basis of their
resales to end-use customers, such as HMO's, which have contracted with the
Company for quantity discounts. In each instance the Company has the historical
experience and access to other information, including the total demand for each
drug the Company manufactures, the Company's market share, the recent or pending
introduction of new drugs, the inventory practices of the Company's customers
and the resales by its customers to end-users having contracts with the Company,
necessary to reasonably estimate the amount of such returns or allowances, and
records reserves for such returns or allowances at the time of sale.
In addition to granting the returns or price adjustments discussed
above, the Company may offer price protection, or shelf-stock adjustment, with
respect to sales of new generic drugs for which it has a market exclusivity
period. To account for the fact that the price of such drugs may decline when
additional generic manufacturers introduce and market a comparable generic
product at the end of the exclusivity period, such plans, which are common in
the industry, generally provide the Company will credit its customers for the
difference between the Company's new price at the end of the exclusivity period
and the price at which the Company sold the customers the product with respect
to the quantity remaining on the customer's shelf at the end of the exclusivity
period. As a result, the total price protection the Company will credit
customers with at the end of an exclusivity period will depend on the amount by
which the price declines as the result of the introduction of comparable generic
products by additional manufacturers, and the shelf stock customers will have at
the end of the exclusivity period. In the Company's experience the amount by
which the price of a drug may decline at the end of an exclusivity period will
depend in part on the number of additional generic manufacturers that introduce
and market a comparable product, and Company estimates the amount by which
prices will decline based on its monitoring of the number and status of FDA
applications and tentative approvals and its historical experience with other
drugs for which the Company had market exclusivity. The Company estimates the
amount of shelf stock that will remain at the end of an exclusivity period based
on both its knowledge of the inventory practices for wholesalers and retail
distributors and conversations it has with its major wholesale customers. Using
these factors, the Company can reasonably estimate the total price protection
credit it will have to issue at the end of an exclusivity period. The Company
records periodic charges (reductions of sales) to accrue this amount over the
exclusivity period, with the aggregate charge allocated to each period based on
the Company's projection of its sales, over the exclusivity period, of the drug
in question.
At September 30, 2001 the Company was within the exclusivity period
with respect to two drugs; megestrol acetate oral suspension and fluoxetine.
With respect to megestrol acetate oral suspension, for which the exclusivity
period ends in mid-January, 2002, the Company did not record a reserve for price
protection credits, as the Company does not foresee that other generic
manufacturers will introduce and market a comparable product in the near future.
With respect to fluoxetine, for which the exclusivity period ends in
late-January, 2002, at September 30, 2001 the Company had established a price
protection reserve of approximately $28 million, based on its estimate that at
the end of its exclusivity period between eight and ten additional generic
manufacturers will introduce and market comparable products for the 10mg and
20mg tablets and between one and three additional manufacturers will introduce
and market a comparable product for the 40 mg capsules.
Sales of the Company's products continue to be principally dependent
upon, among other things, (i) pricing levels and competition, (ii) market
penetration for the existing product line, (iii) the continuation of existing
distribution agreements, (iv) introduction of new distributed products, (v)
approval of ANDAs and introduction of new manufactured products, including
potential exclusivity periods, and (vi) the level of customer service.
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GROSS MARGIN
The gross margin of $61,112,000 (39% of net sales) for the nine-month
period ended September 29, 2001 increased $45,924,000 from $15,188,000 (25% of
net sales) in the corresponding period of the prior year. The gross margin
improvement was achieved through additional contributions from sales of higher
margin new products, and to a lesser extent, increased sales of certain existing
products and more favorable manufacturing overhead variances.
The third quarter 2001 gross margin of $41,563,000 (42% of net sales)
increased $36,400,000 from $5,163,000 (25% of net sales) in the corresponding
quarter of the prior year. The higher gross margins in the most recent quarter
reflect the launch of higher margin new products, and to a lesser extent, more
favorable manufacturing overhead variances.
For the nine and three-month periods ended September 29, 2001,
fluoxetine, which is subject to profit sharing agreements with Genpharm and
Reddy, contributed approximately $18,900,000 to the margin improvement while
megestrol acetate oral suspension contributed approximately $17,000,000. As a
result of the 180-day marketing exclusivity granted to the Company for
fluoxetine and megestrol acetate oral suspension, pricing for these products is
such that they yield relatively high gross margins, before applicable profit
splits, (but after the reduction of sales for the price protection reserve
discussed above) during the exclusivity period. The 180 days marketing
exclusivity will extend into late January-2002 for fluoxetine and until
mid-January 2002 for megestrol acetate oral suspension. As discussed above, the
Company currently anticipates that at the end of its exclusivity period
additional generic manufacturers will introduce and market fluoxetine. As a
result, the Company's gross margin, as a percentage of sales, from fluoxetine
may be expected to decline in the future. The Company's gross margin, as a
percentage of sales, for megestrol acetate oral suspension could also decline if
additional manufacturers introduce and market a comparable generic product.
Inventory write-offs amounted to $1,195,000 and $729,000 for the
nine-month and three-month periods ended September 29, 2001, respectively,
compared to $1,010,000 and $180,000 in the corresponding periods of the prior
year. The inventory write-offs, taken in the normal course of business, are
primarily related to work-in-process inventory not meeting the Company's quality
control standards and the disposal of finished products due to short shelf
lives. The higher inventory write-offs in the most recent year include the
disposal of validation batches related to manufacturing process improvements.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
In the nine-month period ended September 29, 2001, the Company incurred
research and development expenses of $7,436,000 compared to $5,334,000 for the
corresponding nine months of the prior year. The increased costs were primarily
attributable to higher material, bio-study and personnel costs, and additional
payments for formulation development work performed for PRI by unaffiliated
companies. Annual research and development costs in 2001 are expected to exceed
the total for fiscal year 2000. The Company's domestic research and development
program is integrated with IPR, its research operation in Israel. Research and
development expenses at IPR for the most recent nine-month period were $865,000,
net of Generics funding, compared to expenses of $935,000 for the comparable
period of last year. The Company, IPR and Generics have an agreement pursuant to
which Generics shares one-half of the costs of IPR's operating budget up to a
maximum payment of $1,000,000 in any one calendar year in exchange for the
exclusive distribution rights outside of the United States to the products
developed by IPR after the date of the agreement (see "Notes to Financial
Statements-Research and Development Agreement").
Research and development expenses of $3,779,000 in the third quarter of
2001 increased $2,900,000 from the third quarter of 2000. The most recent
three-month period included increased costs for bio-studies related to products
co-developed with Genpharm, development materials and personnel. In addition,
the third quarter of the prior year included lower payments to unaffiliated
development companies and the reimbursement of certain expenses by Genpharm.
Research and development expenses at IPR in the most recent quarter were
$289,000, net of Generics funding, compared to expenses of $313,000 in the same
quarter of the prior year.
The Company currently has three ANDAs for potential products pending
with, and awaiting approval from, the FDA as a result of its own product
development program. In addition, the Company has in process or expects to
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commence biostudies for at least four additional products during the remainder
of 2001. None of the potential products described above are subject to any
profit sharing arrangements through the Company's strategic alliances.
Under the Genpharm Distribution Agreement, Genpharm pays the research and
development costs associated with the products covered by the Genpharm
Distribution Agreement. Currently, there are 12 ANDAs for potential products
(five of which have been tentatively approved) that are covered by the Genpharm
Distribution Agreement pending with, and awaiting approval from, the FDA. To
date, the Company is marketing 14 products under the Genpharm Distribution
Agreement. Flecainide acetate tablets (Tambocor(R)), which is covered under the
Genpharm Distribution Agreement, received final approval from the FDA in July
2001. The Company anticipates commencing the marketing of the product in the
first quarter of 2002 (see "Notes to Financial Statements-Distribution and
Supply Agreements-Genpharm, Inc.").
Genpharm and the Company share the costs of developing the products
covered under the Genpharm Additional Product Agreement. Currently, there is one
ANDA for a potential product covered by the Genpharm Additional Product
Agreement pending with, and awaiting approval from, the FDA. The Company began
marketing fluoxetine 10 mg and 20 mg tablets, covered under the Genpharm
Additional Product Agreement, in August 2001 (see "Notes to Financial
Statements-Distribution and Supply Agreements-Genpharm, Inc.").
SELLING, GENERAL AND ADMINISTRATIVE
Although selling, general and administrative costs of $15,385,000 for the
nine months ended September 29, 2001 increased $4,180,000, or 37%, over the same
period of last year, the cost as a percentage of net sales in the respective
periods decreased to 10% in 2001 from 18% in 2000. The higher dollar amounts in
the current nine-month period were primarily attributable to additional
marketing programs, shipping costs and legal fees associated with new product
introductions, and to a lesser extent, increased personnel costs. The Company
anticipates it will continue to incur a high level of legal expenses related to
the costs of litigation connected with certain potential new product
introductions (see "Notes to Financial Statements-Commitments, Contingencies and
Other Matters-Legal Proceedings").
For the three-month period ended September 29, 2001, selling, general and
administrative costs increased $2,948,000, or 77%, in absolute dollars to
$6,793,000 (7% of net sales) from $3,845,000 (19% of net sales) for the
corresponding three-month period of the prior year primarily due to higher
marketing, shipping, legal and personnel expenses.
OTHER INCOME
Other income of $431,000 and $67,000 for the nine-month and three-month
periods ended September 29, 2001, respectively, decreased from $504,000 and
$112,000 in the corresponding periods of 2000. Included in the nine-month 2001
total was a payment from 3M to the Company releasing the parties from a prior
product agreement recorded in the first quarter of 2001 while the nine-month
period of 2000 included payments from strategic partners to reimburse the
Company for research costs incurred in prior periods.
INCOME TAXES
The Company recorded income tax provisions of $7,230,000 and $4,070,000,
net of tax benefits of $8,370,000 related to previously unrecognized NOL
carryforwards, for the nine and three-month periods, respectively, ended
September 29, 2001. A gross deferred tax asset of $6.0 million related to NOL
carryforwards remained unutilized at September 29, 2001. The Company evaluated
the relevant information related to the realization of the unutilized NOL
carryforwards, including an assessment of the Company's ability to utilize the
NOL carryforwards, in light of potential limitations under Section 382 of the
Internal Revenue Code related to changes in the ownership of the Company's
common stock, and ongoing assessments of the NOL carryforwards generated in
earlier years. Based on these factors, a full valuation allowance of $6.0
million against the unutilized NOL carryforwards was recorded. The Company did
not recognize a benefit for its operating losses for the nine months ended
September 29, 2000 (see "Notes to Financial Statements-Income Taxes").
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FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents of $2,509,000 at September 29,
2001 increased from $222,000 at December 31, 2000. Proceeds from issuance of
Common Stock from the exercise of options and warrants and net cash provided by
operations were used to pay down the Company's credit line with GECC and to fund
capital projects. Working capital, which includes cash and cash equivalents
increased to $80,947,000 at September 29, 2001 from $18,512,000 at December 31,
2000, primarily due to increased accounts receivable and deferred income tax
assets. The working capital ratio improved to 2.13x at September 29, 2001
compared to 1.65x at December 31, 2000.
The Company, from time to time, enters into agreements with third parties
with respect to the development of new products and technologies. To date, the
Company has entered into agreements and advanced funds to several non-affiliated
companies for products in various stages of development. The payments are
expensed as incurred and included in research and development costs. Annual
research and development expenses, including payments to non-affiliated
companies, are expected to total approximately $10,000,000 for the entire fiscal
year 2001.
As of September 29, 2001 the Company's accounts payable balance increased
to $48,621,000 due primarily to a total of approximately $35,600,000 payable to
strategic partners related to profit sharing agreements for fluoxetine. The
Company expects to pay these amounts from its working capital by November 2001.
On March 30, 2001, the Company reached an agreement with 3M pursuant to
which 3M paid the Company $750,000 in April 2001, releasing the parties from a
prior product agreement (see "Notes to Financial Statements-Commitments,
Contingencies and Other Matters-Legal Proceedings").
In June 2000, the Company agreed to sell its remaining distribution
rights back to Elan for a non-prescription transdermal nicotine patch and to
terminate Par's right to royalty payments under a prior agreement. Pursuant to
this agreement, the Company received a $500,000 payment in July 2001 (see "Notes
to Financial Statements-Distribution and Supply Agreements-Elan Corporation").
In March 1999, the Company entered into an agreement to lease, with an
option to purchase, its Congers Facility to Halsey. Halsey paid the Company a
purchase option of $100,000 in March 1999 and is obligated to pay rent of
$500,000 annually during the initial three-year term of the lease. The rent is
expected to continue to cover the Company's fixed costs of the facility in
subsequent periods. Under the purchase option, Halsey may purchase the facility
and substantially all the machinery and equipment at any time during the lease
for a specified amount (see "Notes to Financial Statements-Leasing Agreement").
The Company, IPR and Generics entered into the Development Agreement,
dated August 11, 1998, pursuant to which Generics agreed to fund one-half of the
costs of IPR's operating budget in exchange for the exclusive distribution
rights outside of the United States to the products developed by IPR after the
date of the agreement. In addition, Generics agreed to pay IPR a perpetual
royalty for all sales of the products by Generics or its affiliates outside the
United States. To date, no such products have been brought to market by Generics
and no royalty has been paid to IPR. Pursuant to the Development Agreement,
Generics paid the Company $800,000 for fiscal year 2000 and $587,000 for the
first nine months of 2001, fulfilling their funding requirements through
September 29, 2001. Generics is not required to fund more than $1,000,000 for
any one calendar year (see "Notes to Financial Statements-Research and
Development Agreement").
The Company expects to fund its operations, including research and
development activities and its obligations under the existing distribution and
development arrangements discussed herein, out of its working capital and, if
necessary, with available borrowings against its line of credit, if and to the
extent available (see "-Financing").
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FINANCING
At September 29, 2001, the Company's total outstanding long-term debt,
including the current portion, amounted to $1,355,000. The amount consists
primarily of an outstanding mortgage loan with a bank and capital leases for
computer equipment. In June 2001, the Company and the bank entered into an
agreement that extended the terms of the mortgage loan of which the remaining
balance was originally due in May 2001. The mortgage loan extension, in the
principal amount of $877,000, is to be paid in equal monthly installments over a
term of 13 years maturing May 1, 2014. The mortgage loan has a fixed interest
rate of 8.5% per annum, with rate resets after the fifth and tenth years based
upon a per annum rate of 3.25% over the five-year Federal Home Loan Bank of NY
rate.
Par entered into the Loan Agreement with GECC in December 1996, which as
amended, provides Par with a 78-month revolving line of credit expiring June
2003. 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, each as determined from time
to time by GECC. The interest rate charged on the line of credit is based upon a
per annum rate of 2.25% above the 30-day commercial paper rate for high-grade
unsecured notes adjusted monthly. The line of credit with GECC is secured by the
assets of Par and PRI other than real property and is guaranteed by PRI. In
connection with such facility, Par, PRI and their affiliates have established a
cash management system pursuant to which all cash and cash equivalents received
by any of such entities would be deposited into a lockbox account over which
GECC would have sole operating control if there were amounts outstanding under
the line of credit. The deposits would then be applied on a daily basis to
reduce the amounts outstanding under the line of credit. The revolving credit
facility is subject to covenants based on various financial benchmarks. As of
September 29, 2001, the borrowing base was approximately $19,287,000. To date,
no debt is outstanding under the loan agreement.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
January 24 , 2002 /s/ Kenneth I. Sawyer
----------------------------------------
Kenneth I. Sawyer
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
(Principal Executive Officer)
January 24, 2002 /s/ Dennis J. O'Connor
----------------------------------------
Dennis J. O'Connor
VICE PRESIDENT - CHIEF FINANCIAL OFFICER AND SECRETARY
(Principal Accounting and Financial Officer)
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