Commission File Number 1-10827
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 1995
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 2-3122182
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
One Ram Ridge Road, Spring Valley, New York 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 425-7100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- ------
18,179,810
Number of shares of Common Stock outstanding as of February 5, 1996
This is page 1 of 84 pages. The exhibit index is on page 11.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 30, September 30,
ASSETS 1995 1995
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 15,138 $ 17,986
Temporary investments 188 271
Accounts receivable, net of allowances of
$2,285,000 and $1,588,000 8,072 9,011
Inventories 16,724 15,364
Prepaid expenses and other current assets 2,071 1,866
Current deferred tax benefit 3,598 4,172
--------- ---------
Total current assets 45,791 48,670
Property, plant and equipment, at cost less
accumulated depreciation and amortization 24,767 24,371
Deferred charges and other assets 1,904 1,883
Investments 6,900 3,520
Investment in joint venture 1,913 2,037
Non-current deferred tax benefit 10,193 10,436
--------- ---------
Total assets $ 91,468 $ 90,917
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,612 $ 1,470
Accounts payable 5,932 6,422
Accrued salaries and employee benefits 2,252 2,336
Accrued expenses and other current
liabilities 689 705
Estimated current liabilities of
discontinued operations 2,830 2,830
--------- ---------
Total current liabilities 13,315 13,763
Long-term debt, less current portion 3,971 4,259
Accrued pension liability 941 941
Shareholders' equity:
Common Stock, par value $.01 per share;
authorized 60,000,000 shares; issued and
outstanding 18,179,560 and 18,168,625 shares 182 182
Additional paid in capital 65,321 65,276
Retained earnings 6,585 6,783
Additional minimum liability related to defined
benefit pension plan (287) (287)
Unrealized gain on investment 1,440 -
Total shareholders' equity 73,241 71,954
--------- ---------
Total liabilities and shareholders'
equity $ 91,468 $ 90,917
========= =========
The accompanying notes are an integral part of these statements.
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
December 30 December 31
1995 1994
Net sales $14,859 $17,031
Cost of goods sold 10,762 10,731
------- -------
Gross margin 4,097 6,300
Operating expenses:
Research and development 363 816
Selling, general and administrative 4,231 4,169
------- -------
Total operating expenses 4,594 4,985
------- -------
Operating income (loss) (497) 1,315
Settlements - 2,000
Other income 289 99
Interest expense (121) (128)
------- ------
Income (loss) before provision (credit) for
income taxes (329) 3,286
Provision (credit) for income taxes (131) 1,172
------- ------
Net income (loss) (198) 2,114
Dividend on preferred stock - (303)
Retained earnings, beginning of year 6,783 6,164
------- ------
Retained earnings, end of year $6,585 $7,975
======= ======
Income (loss) per share of common stock:
Net income (loss) $(.01) $.13
======= ======
Weighted average number of common and
common equivalent shares outstanding 18,448 16,312
======= ======
The accompanying notes are an integral part of these statements.
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
December 30, December 31,
1995 1994
Cash flows from operating activities:
Net income (loss) $(198) $2,114
Adjustments to reconcile net income (loss) to net
cash provided by (used in) by operating
activities:
Provision (credit) for income tax expense (131) 1,172
Joint venture research and development 153 -
Depreciation and amortization 730 621
Allowances against accounts receivable (697) (450)
Write-off of inventories 316 279
Other (10) 8
Changes in assets and liabilities:
Decrease in accounts receivable 1,636 2,066
(Increase) in inventories (1,676) (102)
(Increase) in prepaid expenses and other assets (233) (2,480)
(Decrease) in accounts payable (490) (378)
(Decrease) in accrued expenses and other
liabilities (101) (461)
------- -------
Net cash provided by (used in) operating
activities (701) 2,389
Cash flows from investing activities:
Capital expenditures (1,117) (916)
(Increase) in investment (1,000) -
(Increase) decrease in temporary investments 83 (2)
Cash (used in) discontinued operations (1) (6)
------- -------
Net cash (used in) investing activities (2,035) (924)
Cash flows from financing activities:
Proceeds from issuance of capital stock 39 345
Proceeds from issuance of notes payable and
other debt 4,050 -
Principal payments under long-term debt and other
borrowings (4,196) (819)
Payments due to stock conversion (5) -
------- -------
Net cash (used in) financing activities (112) (474)
Net increase (decrease) in cash and cash equivalents (2,848) 991
Cash and cash equivalents at beginning of period 17,986 3,130
------- -------
Cash and cash equivalents at end of period $15,138 $4,121
======== =======
The accompanying notes are an integral part of these statements.
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 30, 1995
(Unaudited)
Pharmaceutical Resources, Inc. ("PRI") operates in one business segment, the
manufacture and distribution of generic pharmaceuticals. Marketed products are
principally sold in oral solid (tablet, caplet and capsule) form, with a small
number of products in the form of creams and liquids.
Basis of Preparation:
The accompanying financial statements at December 30, 1995 and for the
three month periods ended December 30, 1995 and December 31, 1994 are unaudited;
however, in the opinion of management of PRI, such statements include all
adjustments (consisting of normal recurring accruals) necessary to a fair
statement of the information presented therein. The balance sheet at September
30, 1995 was derived from the audited financial statements at such date.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required
by generally accepted accounting principles for audited financial statements.
Accordingly, these statements should be read in conjunction with PRI's most
recent annual financial statements.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years.
Investments:
The Company has a distribution agreement with Sano Corporation ("Sano")
which gives Par the right of first refusal to exclusively distribute Sano's
generic transdermal products in the United States, Canada, and several other
international markets. As part of the agreement, the Company invested
$3,500,000 in the preferred stock of Sano over the prior two years. In
November 1995, Sano sold common stock through an initial public offering and
the Company's preferred stock converted into 513,888 shares of common stock,
equivalent to an ownership position in Sano of approximately 6%. The
investment is classified as an "available for sale security" pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). This standard
requires that certain investments in debt and equity securities be adjusted to
fair market value at the end of each accounting period and unrealized gains or
losses, net of tax, recorded as a separate component of shareholders' equity.
In accordance with SFAS No. 115, the investment is recorded at its fair market
value on December 30, 1995 of $11 1/2 per share, or $5,900,000, and the
unrealized gain on the investment of $2,400,000, recorded net of taxes of
$960,000, as a separate component in shareholders' equity.
Additionally, the Company advanced Sano $1,075,000 in the current period
and $2,429,000 in prior fiscal years as funding for the research and develop-
ment costs of the generic transdermal products. Due to the uncertainty with re-
spect to the collectability of such advances, the Company has expensed them
and will treat them as income if repaid. In November 1995, the Company received
$1,500,000 from the proceeds of Sano's initial public offering in repayment of
a portion of outstanding advances from the Company. The Company has reflected
this as a reduction of research and development expense in December 1995. The
Company's agreement enables the remaining advances to be recovered through
gross margin by obtaining a greater share of gross profits. As of December 30,
1995, there were outstanding advances to Sano of $2,000,000.
In December 1995, the Company purchased a 10% interest in Fine-Tech Ltd.,
an Israeli pharmaceutical research and development company in which Clal has
significant ownership interest, for $1,000,000. In addition, the Company
obtained the exclusive right to purchase products from Fine-Tech Ltd. not
commonly sold in North America, South America and the Caribbean.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
The operating loss for the quarter ended December 30, 1995 of $497,000,
which compares to operating income of $1,315,000 in the first quarter of fiscal
1995, is principally due to a sales and gross margin decline, as described
below. The Company expects a continued decline in sales of one of its
significant manufactured products which, if not offset by increased sales of
other currently manufactured products or sales of new distributed or
manufactured products, would result in continued declines in net sales, gross
margins and, accordingly, profitability.
Net Sales
Net sales for the three months ended December 30, 1995 decreased
$2,172,000, or 13%, to $14,859,000 from the corresponding period of the prior
fiscal year. Sales of manufactured products decreased due to lower pricing
and decreased volumes of one of the Company's significant products, and
generally lower pricing and decreased volumes of certain other manufactured
products, caused principally by the introduction of competitive products by
other drug manufacturers. Sales of distributed products for the quarter
ended December 30, 1995 approximated the levels achieved in the corresponding
period of the prior fiscal year.
Levels of sales are principally dependent upon, among other things, (i)
market penetration for the existing product line and competition, (ii) approval
of Abbreviated New Drug Applications ("ANDAs") and introduction of new
manufactured products, (iii) introduction of new distributed products, (iv)
reintroduction of previously manufactured products and (v) the level of
customer service.
Gross Margin
The Company's gross margin of $4,097,000 (28% of net sales) for the three
months ended December 30, 1995 decreased $2,203,000 from $6,300,000 (37% of net
sales) in the first quarter of the prior fiscal year. The gross margin for
manufactured products decreased principally due to lower selling prices and
decreased volumes resulting from the increased competition described above.
Distributed products gross margins for the current three- month period
decreased from the corresponding period of the prior fiscal year due
principally to lower levels of sales allowances taken in fiscal 1995.
Inventory write-offs, taken in the normal course of business, amounted to
$316,000 and $279,000 for the three months ended December 30, 1995 and December
31, 1994, respectively. The inventory write-offs are related to the disposal
of products due to short shelf life and inventory not meeting the Company's
standards.
Operating Expenses
Research and Development
- - ------------------------
Gross research and development expenditures for the three months ended
December 30, 1995 were $1,863,000 versus $816,000 for the three months ended
December 31, 1994. The increase for the quarter is primarily the result of
payments made to Sano Corporation ("Sano") in the current period of $1,075,000
for the development of generic transdermal products. During the quarter, the
Company received from Sano a reimbursement of $1,500,000 for advances made to
them in prior fiscal years for research and development expenses. As a result
of this reimbursement, net research and development expenses for the quarter
equalled $363,000. The Company has a distribution agreement with Sano to
distribute generic transdermal products developed by Sano (see "Notes to
Financial Statements - Investments").
To further expand its product line, the Company continues to pursue
alternatives to internal research and development, including joint ventures,
licensing agreements and distribution agreements. In May 1995, the Company
formed an alliance with Clal Pharmaceutical Industries Ltd. ("Clal") to
develop, manufacture and distribute generic pharmaceuticals worldwide. A
research and development Joint Venture, owned 49% by the Company and 51% by
Clal, has been formed in Israel, and has identified approximately 35 products
for research, which are expected to expand its product line in the future. In
the current fiscal quarter, the Company recorded its share, $153,000, of the
Joint Venture's research and development expenses.
It is anticipated that the Company will continue to invest in internal
research and development efforts in addition to pursuing other outside
alternatives during future periods.
Selling, General and Administrative
- - -----------------------------------
Selling, general and administrative costs were $4,231,000 (28% of net
sales) for the three month period ended December 30, 1995 versus $4,169,000
(24% of net sales) for the corresponding period in the prior fiscal year. The
increase in the period is primarily attributable to severance costs associated
with a management reorganization and increased professional fees. Last year's
costs included certain nonrecurring charges incurred in connection with the
Company's response to FDA inquiries with respect to current Good Manufacturing
Practices, and costs associated with the termination of the broker network used
by the Company to sell its products.
Settlement
- - ----------
In fiscal 1995, the Company resolved claims against former management
members for recovery of, among other items, salaries and monies paid for
indemnification. The settlement, in the form of cash and securities of the
Company, was valued at $2,000,000.
FINANCIAL CONDITION
Liquidity and Capital Resources
Working capital of $32,476,000 represents a decrease of $2,431,000 from
the last fiscal year end principally due to cash used for capital expenditures
and for its investment in Fine-Tech Ltd., as discussed below. The working
capital ratio of 3.4x declined from 3.5x at fiscal year end.
As part of the alliance formed with Clal, the Company, during fiscal
1995, invested $1,960,000 in the research and development Joint Venture. The
Company is committed to invest an additional $5,390,000 in the Joint Venture
during the next two years. The Company also estimates that it could spend up
to$1,000,000, subject to certain contingent events, in further research and
development expenses with Sano over the next nine months.
In December 1995 the Company purchased 10% of the shares of Fine-Tech
Ltd., an Israeli pharmaceutical research and development company in which Clal
has a significant ownership interest, for $1,000,000 and obtained the exclusive
right to purchase products from Fine-Tech Ltd. not commonly sold in North
America, South America and the Caribbean.
If the Company incurs additional funding obligations under the exist-
ing, or new, distribution and product development agreements, the Company ex-
pects to fund such obligations with its working capital, including cash
provided by operations, and if necessary by borrowings against its line of
credit (see"-Financing"). The Company also intends to fund future possible
acquisitions to expand its product line out of working capital, current
borrowing capacity or additional sources of funding.
Financing
In December 1995, the Company entered into a three-year, $16,000,000
unsecured revolving credit agreement and two three-year term loans totalling
$4,000,000, replacing an existing revolving credit facility and certain
outstanding term loans and outstanding industrial revenue bonds totalling
approximately $4,000,000. The two term loans are secured by $4,000,000 of
machinery and equipment. The interest rates charged on the revolving credit
and one term loan are based on either Libor, the bank's cost of funds or the
prime rate, all at the Company's option. Any borrowings at Libor or cost of
funds will incur additional interest at spreads ranging from 3/4% to 1-1/4%
based on certain Company financial ratios. The interest rate on the second
term loan is based on Libor plus 1-3/4%. The Company also maintains a $350,000
line of credit at a second bank which is used to acquire and finance
equipment. On December 30, 1995, the $209,000 outstanding under this line is
also secured by certain assets of the Company.
At December 30, 1995, the Company's debt of $5,583,000 is on a long-
term basis to be repaid in monthly installments through 2001 and consists of
the above described loans, a mortgage on one of the Company's properties, and
capital leases.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Commercial Revolving Loan and Term Loan Agreement, dated
December 28, 1995, between Fleet Bank, N.A. and the Registrant
10.2 Master Security Agreement, dated December 28, 1995, between
Fleet Bank, N.A. and Par Pharmaceutical, Inc. ("Par")
10.3 Equipment Security Agreement, dated December 28, 1995, between
Fleet Bank, N.A. and Par
10.4 Promissory Note, dated December 28, 1995, of the Registrant
10.5 Master Security Agreement, dated December 28, 1995, between
Fleet Bank, N.A. and Par Pharmaceutical, Inc. ("Par")
10.6 Equipment Security Agreement, dated December 28, 1995, between
Fleet Bank, N.A. and Par
10.7 Cross Acceleration Agreement, dated December 28, 1995, between
Fleet Bank, N.A. and the Registrant
11 Computation of per share data.
27 Financial Data Schedule.
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)
February 14, 1996 /s/ Kenneth I. Sawyer
-------------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
February 14, 1996 /s/ Robert I. Edinger
--------------------------------
Robert I. Edinger
Executive Vice President -
Chief Financial Officer and Secretary
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit Number Description Page Number
10.1 Commercial Revolving Loan and Term Loan Agreement,
dated December 28, 1995, between Fleet Bank, N.A. and
the Registrant
10.2 Master Security Agreement, dated December 28, 1995,
between Fleet Bank, N.A. and Par Pharmaceutical, Inc.
("Par")
10.3 Equipment Security Agreement, dated December 28,
1995, between Fleet Bank, N.A. and Par
10.4 Promissory Note, dated December 28, 1995, of the
Registrant
10.5 Master Security Agreement, dated December 28, 1995,
between Fleet Bank, N.A. and Par Pharmaceutical, Inc.
("Par")
10.6 Equipment Security Agreement, dated December 28,
1995, between Fleet Bank, N.A. and Par
10.7 Cross Acceleration Agreement, dated December 28,
1995, between Fleet Bank, N.A. and the Registrant
11 Computation of per share data
27 Financial Data Schedule