SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For Fiscal Year Ended October 1, 1994
Commission File Number 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Ram Ridge Road, Spring Valley, New York 10977
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (914) 425-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
The New York Stock Exchange, Inc.
Common Stock $.01 par value The Pacific Stock Exchange, Inc.
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The New York Stock Exchange, Inc.
Common Stock Purchase Rights The Pacific Stock Exchange, Inc.
---------------------------- --------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Series A Convertible Preferred Stock, $.0001 par value
-----------------------------------------------------------
(Title of Class)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
$130,772,610
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 19, 1994 (assuming solely for purposes of this
calculation that all directors and executive officers of the Registrant are
"affiliates").
14,593,395
Number of shares of common stock outstanding as of December 19, 1994
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into
this Annual Report on Form 10-K:
IDENTITY OF DOCUMENTS PARTS OF FORM 10-K INTO WHICH
DOCUMENT IS INCORPORATED
Proxy Statement for the Part III
1995 Annual Meeting of Common
Shareholders of Registrant
PART I
ITEM 1. Business.
- - - - - - - ------ --------
GENERAL
Pharmaceutical Resources, Inc. ("PRI") is a holding company which, through
its subsidiaries, is in the business of manufacturing and distributing a broad
line of generic drugs. PRI operates primarily through its wholly-owned
subsidiary, Par Pharmaceutical, Inc. ("Par"), a manufacturer and distributor of
generic drugs. In addition to Par, PRI has seven other subsidiaries, the
activities of which are not significant. PRI was organized, as a subsidiary of
Par, under the laws of the State of New Jersey on August 2, 1991. On August 12,
1991, Par effected a reorganization of its corporate structure, pursuant to
which PRI became Par's parent company. References herein to the "Registrant" or
the "Company" shall be deemed to refer to PRI and all of its subsidiaries since
August 12, 1991, or Par and all of its subsidiaries prior thereto, as the
context may require. The Company's executive offices are located at One Ram
Ridge Road, Spring Valley, New York 10977, and its telephone number is
(914) 425-7100.
The Company's current product line consists of prescription and, to a
much lesser extent, over-the-counter drugs. Approximately 86 products
(representing 34 drugs) are currently being marketed (see "--Product Line
Information"). Generic drugs are the pharmaceutical and therapeutic
equivalents of brand name drugs and are usually marketed under their
generic (chemical) name rather than by a brand name. Normally, a generic
drug cannot be marketed until the expiration of applicable patents on the
brand name drug. Generic drugs must meet the same government standards as
brand name drugs, but are typically sold at prices below those of brand
name drugs.
Issuance by the U.S. Food and Drug Administration (the "FDA") of new
product approvals had slowed dramatically over the last several years
because of investigations into the generic drug industry and the FDA
approval process. The findings of these investigations led to, and are
expected to continue to lead to, legislative, regulatory, and/or policy
changes to strengthen the effectiveness of the approval process. As a
result, the new drug approval process is more stringent and difficult, as
well as more costly and time-consuming.
The Company markets its products primarily to drug distributors,
wholesalers and retail drug store chains through its own sales staff, which
has been assisted by independent, commissioned sales representatives. The
Company intends to increase its marketing efforts to clinics, government
agencies and other managed health care organizations. The Company has
further developed its internal sales staff in order to lessen its reliance
on outside sales representatives (see "--Recent Developments" and
"--Marketing and Customers").
Recent Developments:
In October 1993, the Company was informed by the FDA that it had
completed the Application Integrity Assessment Program (the "Assessment
Program") for Par and that the FDA would review Abbreviated New Drug
Applications ("ANDAs") submitted by Par for the approval of generic drugs.
Par also became eligible to bid again on government contracts (see
"--Government Regulation" and "Notes to Financial Statements-- Settlements
- - - - - - - --Fiscal Year 1993").
During the first and second quarters of fiscal year 1994, the Company
settled three significant lawsuits against it. These settlements and
related expenses were reflected in the Company's consolidated financial
statements for the fiscal year ended October 2, 1993 (See "--Legal
Proceedings", "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--Settlements" and "Notes
to Financial Statements--Settlements--Fiscal Year 1993").
1
The Company expanded its research and development capabilities (see
"--Research and Development" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--
Operating Expenses--Research and Development"), and as a result, the
Company filed three submissions for ANDAs and expects to file additional
submissions. Additionally, the Company reintroduced Metronidazole, an
anti-bacterial drug, in November 1993, and Indomethacin, an anti-
inflammatory drug, in January 1994 (see "--Product Line Information").
To further expand its product line, the Company, in fiscal year 1994,
entered into several additional distribution agreements, a joint
development agreement and an option agreement to acquire the rights to a
herpes viral lesion drug (see "--Product Line Information", "--Research and
Development" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Operating
Expenses--Research and Development", "--Financial Condition--Liquidity and
Capital Resources").
The Company completed its strategy to revamp its marketing and sales
organizations by replacing all but one of its outside sales representatives
with its own internal sales force (see "--Marketing and Customers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Sales"). The remaining outside sales
representative's role is to provide support to the internal sales
organization. These changes were made as the Company shifted toward
emphasizing Par label sales and reducing its dependence upon private label
sales.
PRODUCT LINE INFORMATION
The Company operates in one industry segment, namely, the manufacture
and distribution of generic pharmaceuticals. Products are marketed
principally in oral solid form consisting of tablets, caplets, and two-
piece hard-shell capsules, and to a lesser extent the Company distributes a
small number of products in the forms of creams and liquids (see
"--Research and Development").
Par holds approved ANDAs for approximately 125 products, representing
various dosage strengths of 48 drugs. In addition, the Company markets
certain products that are manufactured for it by other companies (see
"--Research and Development", "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--
Sales", "--Gross Margins" and "Notes to Financial Statements--Distribution
Agreements"). The Company is currently marketing the 26 manufactured and 8
distributed drugs scheduled below. The names of all of the drugs under the
caption "Competitive Brand-Name Drug" are trademarked. The holders of the
trademarks are non-affiliated, pharmaceutical manufacturers.
Name Competitive Brand-Name Drug
---- ---------------------------
Central Nervous System:
Alprazolam Xanax
Benztropine Mesylate Cogentin
Carisoprodol and Aspirin Soma Compound
Chlorzoxazone Paraflex
Cyproheptadine Hydrochloride Periactin
Doxepin Hydrochloride Sinequan, Adapin
Fluphenazine Hydrochloride Prolixin
Flurazepam Hydrochloride Dalmane
Haloperidol Haldol
Imipramine Hydrochloride Tofranil
Meclizine Hydrochloride Antivert
Methocarbamol and Aspirin Robaxisal
Temazepam Restoril
Triazolam Halcion
2
Name (Continued) Competitive Brand-Name Drug (Continued)
---------------- ---------------------------------------
Cardiovascular:
Clonidine and Chlorthalidone Combipres
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
Isosorbide Dinitrate Isordil
Methyldopa and Hydrochlorothiazide Aldoril
Minoxidil Loniten
Pindolol Visken
Triamterene and Hydrochlorothiazide Maxzide
Anti-Inflammatory:
Ibuprofen Advil, Nuprin, Motrin
Indomethacin Indocin
Piroxicam Feldene
Anti-Infective:
Metronidazole Flagyl
Nystatin Mycostatin
Anti-Cancer:
Megestrol Acetate Megace
Other:
Albuterol Sulfate Syrup Proventil/Ventolin
Allopurinol Zyloprim
Metaproterenol Sulfate Alupent
Dexamethasone Decadron
Propantheline Bromide Pro-Banthine
Silver Sulfadiazine Silvadene
Par also holds approved ANDAs for 22 drugs in addition to those listed
above which are not being marketed at the present time. The Company may
introduce some of these drugs into the market.
In September 1994, Mova Pharmaceutical Corporation ("Mova") and the
Company entered into five-year non-exclusive distribution agreements for
two products. The ANDA for the first product, Albuterol Sulfate Syrup,
received FDA approval in September 1994 and the Company has commenced
marketing the product. The Company will pay to Mova a base price for each
product plus a percentage of net profits, as defined in the distribution
agreements (see "--General--Recent Developments", "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations--Operating Expenses--Research and Development" and "Notes to
Financial Statements--Distribution Agreements").
In February 1994, the Company entered into a ten-year exclusive U.S.
licensing agreement with Sano Corporation ("Sano") for two generic drug
products utilizing a transdermal delivery system (see "--General--Recent
Developments", "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--Operating Expenses--
Research and Development" and "Notes to Financial Statements--Distribution
Agreements"). Under the terms of the agreement, the Company advanced
$1,000,000 to Sano for the development of two products and, after receiving
FDA approval, will market the licensed products and participate in the
sharing of gross profits. The Company renegotiated the agreement in August
to enable the advance to be recovered within three years by obtaining a
greater share of gross profits. As these monies are repaid, they will be
treated as income in the periods received. It is anticipated that ANDAs
could be filed in the second quarter of fiscal year 1995 which would be
expected to result in new products available for sale in late fiscal year
1996, or early fiscal year 1997. In November 1994, the Company advanced an
additional $228,000 to Sano to support research and development expenses
for a third product. The Company also purchased $1,000,000 of Sano
preferred stock.
3
In January 1994, the Company entered into a joint development agreement
with Minnesota Mining and Manufacturing Company ("3M") pursuant to which
the Company will develop, under joint control, several generic versions of
pharmaceutical products. 3M holds all rights respecting any product
developed, and once developed, 3M is obligated to pay certain sums to Par
for the development of, and for the manufacture of, the products (see
"--General--Recent Developments").
In May 1993, the Company was appointed by The Generics Group B.V. (the
"Group"), an international pharmaceutical business, exclusive United States
distributor for up to five generic pharmaceutical products upon receipt of
ANDA approvals (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Sales",
"--Gross Margins" and "Notes to Financial Statements--Distribution
Agreements"). ANDA approvals for Alprazolam and Triazolam were received in
October 1993 and January 1994, respectively, and the Company began
distribution of the drugs. The ANDA for Atenolol received FDA approval in
early 1994 and the Company will market the drug in fiscal year 1995. Two
additional products, which will be made available to the Company, have yet
to be designated by the Group. The agreement also contains provisions for
the development of additional generic pharmaceuticals for distribution by
the Company. The Company is obligated to issue a warrant to purchase
150,000 shares of common stock of the Company ("Common Stock") for $10 per
share. The terms of the warrant will be similar to the warrant issued to
Genpharm, Inc. (see below); however, the warrant will become exercisable
only upon reaching certain levels of sales for the distributed products.
The Company, in October 1992, entered into a distribution agreement (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Sales", "--Gross Margins" and "Notes to
Financial Statements--Distribution Agreements") with Genpharm, Inc.
("Genpharm"), a Canadian manufacturer of generic drugs (which is an
affiliate of the Group). Pursuant to the agreement, the Company is the
exclusive United States distributor of Piroxicam and Pindolol, two products
for which ANDA approvals had already been received. The agreement
has an initial term of ten years (subject to earlier termination by either
party as provided therein), and thereafter automatically renews from year
to year unless either party gives notice of non-renewal. The cost to the
Company of such products is based upon a percentage of gross profits as
defined in the distribution agreement. The Company issued a warrant to the
manufacturer to purchase 150,000 shares of Common Stock for $6 per share.
The warrant became exercisable in March 1993, has an initial term of five
years (subject to earlier termination in the event the Company ceases to be
Genpharm's exclusive distributor of the products covered by the agreement),
and may be extended for up to an additional five years in the event that
the closing price of Common Stock has not reached levels specified in the
warrant agreement. In March 1994, Genpharm exercised the warrant to
purchase 5,300 shares of Common Stock.
RESEARCH AND DEVELOPMENT
The Company's research and development activities consist of (i)
identifying and conducting patent and market research on brand name drugs
for which patent protection has expired or is to expire, (ii) researching
and developing new product formulations based upon such drugs, and (iii)
obtaining timely approval from the FDA for such new product formulations.
The Company contracts with outside laboratories to conduct biostudies
which, in the case of oral solids, generally are required for FDA approval.
Biostudies are used to demonstrate that the rate and extent of absorption
of a generic drug are not significantly different from the corresponding
brand name drug and currently cost in the range of $75,000 to $300,000 per
study. During the 1994 fiscal year, the Company contracted with outside
laboratories to conduct biostudies for potential new products and will
continue to do so in the future. The Company may also contract with
outside laboratories to conduct clinical studies. Clinical studies test
the safety and/or efficacy of a drug and may cost $1,000,000 or more per
study. To date, the Company has not contracted to conduct any clinical
studies. Biostudies and clinical studies must be conducted and documented
in conformity with FDA standards (see "--Government Regulation").
The research and development of oral solid products, including
preformulation research, formulation, required studies, and FDA approval,
has historically taken approximately two to three years. Accordingly, Par
typically selects for development products it intends to market several
years in the future.
4
For its 1994, 1993, and 1992 fiscal years, the research and development
expenses of the Company's continuing operations were approximately
$3,874,000, $1,959,000 and $1,299,000, respectively, reflecting an increase
in research and development activities which began in fiscal year 1993 and
continued in 1994. The Company plans that its expenditures will continue
to increase significantly (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--
Operating Expenses--Research and Development").
The Company has obtained from Bio-Pharma, Inc. and CT Holdings SA
(collectively, "Bio-Pharma") an exclusive option to acquire all worldwide
ownership, development, marketing and distribution rights to a
pharmaceutical compound being studied for the treatment of herpes viral
lesions. In exchange for the option, the Company paid $250,000 to date and
agreed to pay $200,000, plus 15,000 shares of Common Stock, on January 1, 1995,
to enable further evaluation of the compound. Additional amounts will be paid
out as various testing stages are completed (see "--General--Recent
Developments" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition--Liquidity and Capital
Resources"). If the Company chooses to exercise its option, it will be required
to make $3,000,000 cash payments at the time of exercise and pay certain
royalties to Bio-Pharma. Further research on the compound, which can be
delivered topically, will determine whether it can significantly reduce the
healing time of oral and genital herpes lesions. The compound represents the
first new drug that the Company intends to develop commercially for which the
Company would have to file a full New Drug Application ("NDA") (see "--
Government Regulation") to obtain approval from the FDA. The Company intends to
initially seek regulatory approval outside the United States if it exercises its
option.
MARKETING AND CUSTOMERS
The Company currently sells its products primarily through its own sales
staff. The Company also sells through one company that acts as an
independent commissioned sales representative. In 1994, the Company
completed its plans to reduce its dependence upon outside sales
representatives and add additional internal sales personnel. These changes
were part of the strategy of the Company to (i) emphasize sales of products
under the Par label to reduce its dependence upon products under private
(customer) labels and (ii) broaden channels of distribution (see
"--General--Recent Developments" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations
- - - - - - - --Sales"). The Company also reorganized its internal sales, marketing and
customer service departments in 1994.
The Company markets its products under both Par and private labels
principally to distributors, wholesalers, retail drug store chains and, to
a lesser extent, drug manufacturers, repackagers, and government agencies.
The Company has been and will continue to increase its marketing efforts to
the entities concentrating in the managed health care market. These
entities include: nursing homes, hospitals, clinics, pharmacy benefit
management companies and mail order customers.
The Company has approximately 200 customers. During fiscal year 1994,
sales to the Company's two largest customers, Rugby Laboratories, Inc., a
subsidiary of Marion Merrill Dow, Inc., and Goldline Laboratories, Inc., a
subsidiary of Ivax Corporation, amounted to 12% and 10%, respectively, of
net sales. The Company's sales to other customers have increased during
the last two years, resulting in a steady decline in the percentages of
these two customers. Management anticipates that its strategy to penetrate
targeted markets and the broadening of its product line will continue to
result in a reduction of the percentages of sales attributable to these two
customers in future years (see "Notes to Financial Statements Accounts
Receivable Major Customers"). Neither of such customers has written
agreements with the Company. The Company believes that the loss of any of
its major customers may have an adverse effect upon its business.
ORDER BACKLOG
The dollar amount of open orders, as of October 1, 1994, believed
by management to be firm, was approximately $9,900,000, as compared with
approximately $7,600,000 at October 2, 1993. The 30% increase in open
orders is primarily attributable to price increases for two products and
significant volume increases for
5
four products. Although these orders are subject to cancellation without
penalty, management expects to fill substantially all of them in the near
future. The Company has orders for shipments for its customers which are
consistent with the seasonal purchasing patterns of its customers.
COMPETITION
The generic pharmaceutical industry is highly competitive. The Company
has been able to identify at least ten principal competitors, and
experiences varying degrees of competition from numerous other companies in
the health care industry. The Company's competitors include many generic
drug manufacturers and a number of major branded pharmaceutical companies
which, as part of their business, market both brand-name prescription drugs
and generic versions of these brand-name drugs.
Many major branded pharmaceutical companies have directly launched, or
have formed alliances to market, their patented drugs prior to patent
expiration as generic drugs. This competitive effort has had a negative
impact on the ability of the Company to sell to its customers and to
generate customary revenues from the launch of its new products, as the
channel of distribution is either closed or severely limited or the Company
is forced to meet lower market pricing.
The principal competitive factors in the generic pharmaceutical market
are (i) level of service (including maintenance of sufficient inventories
for timely deliveries), (ii) reputation as a manufacturer with integrity
and quality products, (iii) the ability to introduce generic versions of
brand-name drugs promptly after their patents expire, (iv) price, (v)
product appearance, and (vi) breadth of product line. In the future, the
Company plans to expend more effort and resources, including financial, in
the areas of marketing and research and development to better its
competitive position in the industry.
RAW MATERIALS
The raw materials essential to the Company's business are purchased
primarily from United States distributors of bulk pharmaceutical chemicals
manufactured by foreign companies. To date, the Company has experienced no
significant difficulty in obtaining raw materials and expects that raw
materials will generally continue to be readily available in the future.
However, since the federal drug application process requires specification
of raw material suppliers, if raw materials from a specified supplier were
to become unavailable, FDA approval of a new supplier would be required.
While a new supplier becomes qualified by the FDA and its manufacturing
process is judged to meet FDA standards, a delay of six months or more in
the manufacture and marketing of the drug involved could result, which
could in turn have an adverse effect on the Company's financial condition.
The Company attempts to minimize the effects of any such situation by
specifying, where possible, two or more suppliers for its drug approvals.
EMPLOYEES
As of October 1, 1994, the Company had approximately 430 employees.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by
the Federal government, principally by the FDA, and, to a lesser extent, by
the Drug Enforcement Administration and state governments. The Federal
Food, Drug, and Cosmetic Act, the Controlled Substances Act, and other
Federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, recordkeeping, approval,
advertising and promotion of the Company's products. Noncompliance with
applicable requirements can result in judicially and/or administratively
imposed sanctions including the initiation of product seizures, injunction
actions, fines and criminal prosecutions. Administrative enforcement
measures can involve the recall of products, as well as the refusal of the
government to enter into supply contracts or to approve new drug
applications. The FDA also has the authority to withdraw approval of drugs
in accordance with regulatory due process procedures.
FDA approval is required before any new drug, including a generic
equivalent of a previously approved drug, can be marketed. To obtain FDA
approval for a new drug, a prospective manufacturer must, among other
6
things, demonstrate that its manufacturing facilities comply with the FDA's
good manufacturing practice ("GMP") regulations. The FDA may inspect the
manufacturer's facilities to assure such compliance prior to approval or at
any other reasonable time. GMP regulations must be followed at all times
during the manufacture and other processing of drugs. To comply with the
standards set forth in these regulations, the Company must continue to
expend significant time, money and effort in the areas of production,
quality control and quality assurance.
To obtain FDA approval of a new drug, a manufacturer must demonstrate,
among other requirements, the safety and effectiveness of the proposed
drug. There are currently three basic ways to satisfy the FDA's safety and
effectiveness requirements:
1. New Drug Applications ("NDA" or "full NDA"): Unless either of the
procedures discussed in paragraphs 2 and 3 below is available, a
prospective manufacturer must submit to the FDA full reports of well-
controlled clinical studies and other data to prove that a drug is
safe and effective and meets other requirements for approval.
2. "Paper" NDAs: In certain instances in the past, the FDA permitted
safety and effectiveness to be shown by submission of published
literature and journal articles in a so-called "paper" NDA. As a
result of passage of the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman-Hatch Act"), "paper" NDAs are
now recognized in the statute, although they are infrequently used
because of the lack of sufficient information in the literature on
the majority of drugs.
3. Abbreviated New Drug Applications ("ANDAs"): The Waxman-Hatch Act
established a statutory procedure for submission and FDA review and
approval of ANDAs for generic versions of drugs previously approved
by the FDA (such previously approved drugs are hereinafter referred
to as "listed drugs"). In place of clinical studies to establish the
generic drug's safety and effectiveness, an ANDA applicant typically
is required to submit bioavailability data generated from biostudies
demonstrating that the proposed product is bioequivalent to the
listed drug. Bioavailability data indicate the rate and extent of
absorption of a drug's active ingredient and its availability at the
site of drug action, typically measured through blood levels. A
generic drug usually is deemed to be bioequivalent to the listed drug
if the rate and extent of absorption of the generic drug are not
significantly different from those of the listed drug. For some drugs
(e.g., topical antifungals), other means of demonstrating
bioequivalence may be required by the FDA, especially where rate
and/or extent of absorption are difficult or impossible to measure.
In addition to the bioequivalence data, an ANDA must contain
virtually all other information required of a full NDA (e.g.,
chemistry, manufacturing, labeling, and stability data).
The Waxman-Hatch Act also established certain statutory protections for
listed drugs. Under the Waxman-Hatch Act, an ANDA for a generic drug may
be approved, but such approval may not be made effective for interstate
marketing until all relevant patents for the listed drug have expired or
been determined to be invalid or not infringed by the generic drug. Prior
to enactment of the Waxman-Hatch Act, the FDA did not consider the patent
status of a previously approved drug. In addition, under the Waxman-Hatch
Act, statutory non-patent exclusivity periods are established following
approval of certain listed drugs, where specific criteria are met by the
drug. If exclusivity is applicable to a particular listed drug, the
effective date of approval of ANDAs (and, in at least one case, submission
of an ANDA) for the generic version of the listed drug is usually delayed
until the expiration of the exclusivity period, which, for newly approved
drugs, can be either three or five years. The Waxman-Hatch Act also
provides for extensions of up to five years of certain patents covering
drugs to compensate the patent holder for reduction of the effective market
life of the patented drug resulting from the time involved in the Federal
regulatory review process.
In addition to the Federal government, states have laws regulating the
manufacture and distribution of pharmaceuticals, as well as regulations
dealing with the substitution of generic for brand-name drugs. The
Company's operations are also subject to regulation, licensure and
inspection by the states in which they are located and/or do business.
The Company also is governed by Federal and state laws of general
applicability, including laws regulating matters of environmental quality,
working conditions, and equal employment opportunity.
7
The Federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990
("OBRA"). Generally, OBRA provides that a generic drug manufacturer must
offer the states an 11% rebate on drugs dispensed under the Medicaid
program and must have entered into a formal drug rebate agreement, as the
Company has, with the Federal Health Care Financing Administration.
Although not required under OBRA, the Company has also entered into similar
state agreements.
In October 1993, the Company was informed by the FDA that it had
completed the Assessment Program for Par and that the FDA would review
applications submitted by Par for the approval of generic drugs (see "--
General--Recent Developments" and "Notes to Financial Statements --
Settlements -- Fiscal Year 1993"). The Assessment Program was initiated as
a result of investigations by the Federal government in 1989 resulting in
guilty pleas by Par and by certain former executives of Par to charges of
providing an unlawful gratuity to a public official. The FDA stopped
reviewing applications submitted by Par for review pending the completion
of the Assessment Program with respect to Par's approved ANDAs. The
Assessment Program was directed, among other things, towards (i) reviewing
the conclusions reached by Par's independent regulatory consultant in its
audits of Par's product development activities and recordkeeping systems
and (ii) assessing any other available, relevant information that might
bear on Par's ANDAs. As a result of the completion of the Assessment
Program, Par became eligible to again bid on government contracts without
previous limitations.
The Company received a warning letter in May 1994 from the FDA setting
forth certain alleged deviations from current GMP regulations and alleged
violations of related provisions of the Federal Food, Drug and Cosmetic
Act. The warning letter does not limit the manufacture of the Company's
product line nor suspend the review and approval of applications pending
at the FDA. The FDA indicated that it will shortly complete its review of
the Company's response and that a mutually amenable working relationship
continues between the FDA and the Company. No assurances can be given that
the outcome of the FDA review will not have a material adverse effect upon
the Company (see "Notes to Financial Statements--Contingencies and Other
Matters--Legal Proceedings").
ITEM 2. Properties.
- - - - - - - ------ ----------
The Company's executive offices and a substantial portion of its
research and production facilities are housed in a 92,000 square foot
facility built to Par's specifications and occupied since fiscal 1986.
This building also includes research and quality control laboratories, as
well as packaging and warehouse facilities. The building is located in
Chestnut Ridge, New York, on a parcel of land of approximately 24 acres, of
which approximately 15 acres are available for future expansion. The
purchase of the land, facility and equipment was financed, in part, by
Industrial Development Bonds issued by the County of Rockland Industrial
Development Agency in October 1984. The real estate and certain equipment
serve as collateral for the bond (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Financial Condition--
Financing" and "Notes to Financial Statements--Long Term Debt").
The Company purchased, in fiscal year 1994, a 36,000 square foot
building on 2 acres of land in Chestnut Ridge, New York, across the street
from its main building. Fifty percent of this facility had previously been
leased by the Company and used for office space. The purchase of the land
and building was financed by a mortgage loan (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Condition--Financing" and "Notes to Financial Statements--Long Term Debt").
Par owns a third facility consisting of six acres of land and a 33,000
square foot building located in Congers, New York, which is used for tablet
coating operations and product manufacturing. The purchase of the facility
and related renovations and equipment were financed in full by term loans.
The real estate, equipment and other assets serve as collateral for the
loans (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition--Financing" and "Notes to
Financial Statements--Long Term Debt").
Par leases an 11,000 square foot facility in Upper Saddle River, New
Jersey, for certain of its manufacturing operations. The lease covering
this facility expires November 1998, and has three two-year renewal
options. Par also occupies, as lessee, office, warehouse and research and
development space in Chestnut Ridge, New York, aggregating approximately
77,000 square feet, under a lease expiring December
8
1997, with three five-year extension options (see "Notes to Financial
Statements--Commitments--Leases").
The Company believes that its owned and leased properties are sufficient
in size, scope and nature to meet its anticipated needs for the reasonably
foreseeable future.
ITEM 3. Legal Proceedings.
- - - - - - - ------ -----------------
The Company is involved in certain litigation matters, including certain
product liability actions, incidental to the conduct of its business, but
does not believe that the ultimate resolution thereof will have a material
effect on its financial condition.
In fiscal year 1994, the Company settled several significant litigation
matters which are reflected in fiscal 1993 financial statements (see
"Business--General--Recent Developments", "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Settlements" and "Notes to Financial Statements--Settlements--
Fiscal Year 1993").
The Company is a plaintiff in several proceedings against former
management members, seeking recovery of, among other things, salaries and
amounts paid for indemnification, in connection with their actions as
former managers of Par. The Company is seeking unspecified damages.
Although the Company is vigorously pursuing such claims, there is no
assurance that the Company will recover any amounts or that any recoveries
will be material (see "Notes to Financial Statements--Contingencies and
Other Matters").
ITEM 4. Submission of Matters to a Vote of Security Holders.
- - - - - - - ------ ---------------------------------------------------
Inapplicable.
9
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- - - - - - - ------ ---------------------------------------------------------------------
(a) Market information. The Company's Common Stock is traded on The New
York Stock Exchange ("NYSE") and the Pacific Stock Exchange under the
ticker symbol PRX. The following table shows the range of prices for the
Common Stock as reported by the NYSE for each calendar quarter during the
Company's two most recent fiscal years.
Fiscal Year Ended In
-------------------------------------------
1994 1993
------------------ -------------------
Quarter Ended High Low High Low
------------- ------- ------ -------------------
December 31 $19.63 $12.88 $9.63 $6.13
March 31 16.50 8.38 13.00 8.50
June 30 9.75 7.38 10.88 7.63
September 30 10.38 6.38 12.75 8.63
(b) Holders. As of December 19, 1994, there were approximately 5,000
holders of record of the Common Stock. The Company believes that, in
addition, there are a significant number of beneficial owners of its
Common Stock whose shares are held in "street name."
(c) Dividends. During the five most recent fiscal years, the Company
paid no cash dividends on its Common Stock. The payment of future
dividends on its Common Stock is subject to the discretion of the Board of
Directors and is dependent upon many factors, including the Company's
earnings, its capital needs, the terms of its financing agreements and its
general financial condition (see "Notes to Financial Statements--Long Term
Debt", "--Shareholders Equity--Preferred Stock").
(d) Recent Stock Price. On December 19, 1994, the closing price of the
Common Stock on the NYSE was $9.00 per share.
10
ITEM 6. Selected Financial Data.
- - - - - - - ------ ------------------------
Fiscal Year Ended In
-------------------------------------------------
1994 1993* 1992* 1991* 1990*
------- -------- -------- --------- ---------
(In thousands, except per share amounts)
INCOME STATEMENT DATA
Net sales $69,169 $74,535 $52,493 $ 34,226 $ 22,884
Other revenues 425 347 142 649 1,133
------- ------- ------- -------- --------
Total revenues 69,594 74,882 52,635 34,875 24,017
Costs and expenses:
Cost of goods sold 45,774 48,387 32,448 26,062 20,256
Research and
development 3,874 1,959 1,299 2,282 2,126
Selling, general and
administrative 13,463 12,673 11,486 12,554 12,646
Interest 465 602 923 1,175 1,102
Settlements - 10,500 230 12,465 -
------- ------- ------- -------- --------
63,576 74,121 46,386 54,538 36,130
Income (loss) from
continuing operations
before income taxes 6,018 761 6,249 (19,663) (12,113)
Provision (credit) for
income taxes 1,785 650 2,150 (1,736) (5,000)
------- ------- ------- -------- --------
Income (loss) from
continuing operations 4,233 111 4,099 (17,927) (7,113)
Income (loss) from
discontinued
operations 466 - 1,696 (24,158) (7,640)
------- ------- ------- -------- --------
Income (loss) before
extraordinary item 4,699 111 5,795 (42,085) (14,753)
Extraordinary
item--tax benefit of
utilization
of net operating
loss carryforward - 300 2,150 - -
------- ------- ------- -------- --------
Income (loss) before
change in accounting
principle 4,699 411 7,945 (42,085) (14,753)
Cumulative effect of
change in accounting
principle 14,128 - - - -
------- ------- ------- -------- --------
Net income (loss) $18,827 $ 411 $ 7,945 $(42,085) $(14,753)
======= ======= ======= ======== ========
Income (loss) per
share of Common Stock:
Continuing operations $.26 $.01 $.28 $(1.54) $(.63)
Discontinued
operations .03 - .11 (2.07) (.68)
Extraordinary item - .02 .15 - -
Change in accounting
principle .85 - - - -
----- ---- ---- ------ ------
Net income (loss) $1.14 $.03 $.54 $(3.61) $(1.31)
===== ==== ==== ====== ======
Weighted average
number of common
shares and
equivalents 16,495 15,814 14,826 11,644 11,285
====== ====== ====== ====== ======
BALANCE SHEET DATA
Working capital $19,732 $13,141 $ 8,061 $ 2,908 $ 21,116
Property, plant and
equipment (net) 23,004 20,037 19,579 21,219 36,081
Total assets 69,202 57,239 45,089 46,651 74,712
Long-term debt, less
current portion 5,490 5,820 7,528 15,253 13,951
Shareholders' equity 49,276 24,081 21,087 12,340 44,012
* Reclassified certain items to conform to current year's presentation.
11
ITEM 7. Management's Discussion and Analysis of Financial Condition and
- - - - - - - ------ ---------------------------------------------------------------
Results of Operations.
- - - - - - - ---------------------
RESULTS OF OPERATIONS
Sales
Net sales of manufactured products for the year ended October 1, 1994
increased by $1,878,000, or 3%, to $59,118,000, while net sales of
distributed product decreased $7,244,000, or 42%, from the $17,295,000
achieved in fiscal year 1993, resulting in total net sales declining
$5,366,000, or 7%, to $69,169,000. Sales of manufactured products
increased primarily due to price increases for several products and
decreased competition for one product. Dollar sales of distributed
products were reduced principally as a result of intense price competition
while the unit volume increased significantly as two products were
introduced. To achieve a long term strategy of increasing market share,
the Company, in fiscal year 1994, undertook to (i) increase its
manufacturing capacity over time as sales grow, (ii) add distribution
arrangements to broaden its product line, and (iii) restructure its
marketing and sales efforts by hiring its own sales force to penetrate
additional channels of distribution. The table below summarizes net sales
derived from the Company's manufacturing and distribution activities
(dollars in thousands).
1994 1993
---- ----
% of % of
Amount Total Amount Total
------- ------- ------- ------
Manufacturing activities $59,118 85% $57,240 77%
Distribution activities $10,051 15% $17,295 23%
Sales for the fourth quarter of fiscal 1994 were $17,792,000, an
increase of 16% or $2,443,000, from the $15,349,000 for the fourth quarter
fiscal of 1993. This growth was a result of the successful implementation
of the Company's plan to (i) increase the quality of service to its
customers, and (ii) change its marketing and sales organizations. The
sales growth was also the principal reason for the increase in the dollar
amount of accounts receivable at fiscal year end, $9,347,000, as compared
to $6,856,000 at the prior fiscal year end.
Sales for the year ended October 2, 1993 of $74,535,000 increased
$22,042,000, or 42%, from the year ended October 3, 1992, primarily as a
result of the introduction of two products under distribution agreements.
Increases in sales are principally dependent on, among other things (i)
successful approval of ANDAs, (ii) continued introduction of distributed
product, (iii) increased market penetration of the existing product
line, (iv) reintroduction of previously manufactured product, and (v) the
level of customer service.
Gross Margins
The Company's gross margin for the year ended October 1, 1994 was
$23,395,000 (34% of net sales) compared to $26,148,000 (35% of net sales)
for the prior fiscal year. The manufactured product gross margin of
$21,648,000, or 37% of net sales, was $770,000 less than the $22,418,000,
or 39% of net sales, achieved last year. Current year margin was affected
by the loss of a major customer for Ibuprofen, which resulted in
unfavorable overhead absorption for the year. The Company has been
successful in securing new customer sales to replace the lost business, and
the level of underabsorbed overhead has been steadily declining. The gross
margin percentages derived from distribution activities were only 17% of
net sales due principally to the intense price competition versus 22% of
net sales in fiscal year 1993.
The gross margin for the quarter ended October 1, 1994 increased
$783,000 to $6,229,000 (35% of net sales) from the $5,446,000 (35% of net
sales) recorded in the fourth quarter of the prior fiscal year.
Both gross margins and sales have been negatively impacted recently by
the trend of major branded pharmaceutical companies to directly launch
their patented drugs as generics prior to patent expiration. This added
competition has had a negative impact on the Company's sales and margins as
distribution channels are either closed or severely limited and the Company
lowers its prices in response to these additional competitive pressures.
12
Inventory allowances, which have the effect of reducing gross margins,
amounted to $1,333,000, or 2% of net sales, for the year ended October 1,
1994 as compared to $1,732,000, or 2% of net sales, in the prior year.
Inventory allowances are related to manufacturing operations and are taken
in the normal course of business.
To properly service its customer base, the Company is required to sell a
breadth of product and it is often necessary to sell certain products at
little or no margin in order to balance the products offered to customers.
These products, as a result of changes in market conditions, may at a
future time become primary contributors to gross margin and therefore
remain in the current product line. During fiscal year 1994, three of the
Company's products accounted for approximately 46% of its net sales and
yielded the substantial portion of the gross margin of the Company, with
one of such products representing a substantial portion of both net sales
and gross margin. There can be no assurances that these products will
continue to provide such significant, or even similar, portions of the
Company's net sales and/or gross margin or that, if they fail to do so,
another product or other products will adequately offset any decline(s)
thereof. While the Company has no present expectation thereof, there can
be no assurance that other new and/or different Company products will not,
in the future, provide at least the above percentages of the Company's net
sales and/or gross margin (see "Business--Product Line Information").
Gross margin in fiscal year 1993 increased $6,103,000 from $20,045,000
(38% of net sales) in 1992 primarily as a result of increased sales in
1993. The lower gross margin percentage in fiscal year 1993 was primarily
the result of a less favorable product sales mix.
Operating Expenses
Research and Development
For the year ended October 1, 1994, research and development costs
increased $1,915,000, or 98%, to $3,874,000 from the prior fiscal year, and
as a percentage of net sales were 6% compared to 3% in the prior year as
management continued investment in research and development efforts to
position the Company for future growth. These expenditures are expected to
increase further in fiscal year 1995. In fiscal 1993, research and
development costs increased $660,000, or 51%, to $1,959,000 as management
anticipated receiving FDA clearance for the Assessment Program and
commenced reinvesting significant amounts in research and development. In
addition, the Company continued to pursue alternatives to its internal
product development efforts, such as joint ventures, licensing and
distribution agreements (see "Business--General--Recent Developments", "--
Research and Development", "--Financial Condition--Liquidity and Capital
Resources" and "Notes to Financial Statements--Distribution Agreements").
There can be no assurance that these efforts will be successful.
Selling, General and Administrative
Selling, general and administrative costs for the fiscal year ended
October 1, 1994 increased 6% to $13,463,000 (19% of net sales) from
$12,673,000 (17% of net sales) for the year ended October 2, 1993. The
increase for the year was primarily attributable to higher consulting and
information systems costs. Although management expects the dollar
amounts of selling, general and administrative costs to continue to
increase, they are expected to remain constant as a percent of sales.
Selling, general and administrative costs for the year ended October 2,
1993 increased $1,187,000, or 10%, from $11,486,000 (22% of net sales) in
fiscal year 1992. The increase was due to higher personnel, consulting and
royalty costs, partially offset by an insurance settlement and an
adjustment to outside selling commissions.
Interest
Interest expense decreased $137,000, or 23%, to $465,000 in the current
fiscal year and remained at 1% of net sales as a result of lower interest
rates on the outstanding debt and the reduction of total debt (see "--
Financial Condition--Financing" and "Notes to Financial Statements--Long
Term Debt").
13
Settlements
In fiscal year 1994, the Company settled three lawsuits against it by
3M, United States Trading Corporation, and Mylan Laboratories, Inc. for an
aggregate of $10,500,000 which was reflected in fiscal 1993 financial
statements (see "Business--General--Recent Developments", "Legal
Proceedings" and "Notes to Financial Statements--Settlements--Fiscal Year
1993"). With the settlement of these actions, the Company resolved all of
the significant litigation against it. While the Company has settled such
lawsuits and other regulatory proceedings, there can be no assurance that
other lawsuits or proceedings will not be instituted against it in respect
of the actions of the prior management of Par. Such lawsuits or
proceedings, if any, could have an adverse effect on the Company's
financial condition and operations.
Fiscal year 1992 included a charge of $230,000 which represented a civil
fine the Company paid to the State of New York (see "Notes to Financial
Statements--Settlements--Fiscal Year 1992").
Income Taxes
At October 1, 1994, the Company had net operating loss carryforwards for
tax purposes of approximately $40,000,000 (see "Notes to Financial
Statements--Income Taxes"). In fiscal year 1994, the Company adopted
Financial Accounting Standards No. 109, "Accounting For Income Taxes" ("FAS
109"), resulting in income of $14,128,000 which is reflected as the
cumulative effect of a change in accounting principle in the financial
statements. Significant portions of the income recognized consist of net
operating loss carryforwards and have been included to the extent that the
realization of such benefits is more likely than not.
The Company has retained special tax counsel and is contesting the
Internal Revenue Service ("IRS") position that certain credits taken by it
for research activities are not permitted. In the event a determination is
made that the Company was not entitled to such credits, a reserve of
approximately $1,000,000 was provided upon implementation of FAS 109. The
Company believes that any such disallowance, and the resultant charge,
would not have any material adverse effect on the Company's operations,
liquidity or cash flow.
Discontinued Operations
In fiscal year 1994, the Company completed the disposition of Quad
Pharmaceuticals, Inc. ("Quad") when its building leases were terminated.
As a result of these terminations, the Company was able to reverse
approximately $466,000 of expenses previously charged as losses (see "Notes
to Financial Statements--Discontinued Operations").
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company had working capital of $19,732,000 at October 1, 1994,
representing an increase of $6,591,000 from the prior fiscal year as a
result of reductions in legal settlement liabilities, increases in
receivables and inventories, and the addition of current deferred tax
benefits. The working capital ratio at the current year end was 2.4:1, as
compared to 1.6:1 for the prior fiscal year end. Cash and cash equivalents
and temporary investments aggregated $3,306,000 at October 1, 1994.
The Company experienced a reduction from the prior year in cash and cash
equivalents and temporary investments amounting to $10,007,000. Cash was
used primarily to (i) pay for legal settlements, (ii) invest in property,
plant and equipment, (iii) build inventories to continue to improve
customer service, (iv) support the increase in receivables, and (v) invest
in a pharmaceutical company which may provide product for the Company (see
"Business--Product Line Information" and "Notes to Financial Statements--
Distribution Agreements").
The increase in cash and cash equivalents in fiscal year 1993 stemmed
from cash from operations partially offset by capital expenditures, debt
reductions and discontinued operations.
14
The Company's obligations, in the short term, to fund research and
development under various option and joint development agreements are not
expected to have a material effect upon cash flow or liquidity. With
regard to the exclusive option from Bio-Pharma, the Company paid $250,000
to date, and agreed to pay $200,000, plus 15,000 shares of Common Stock, on
January 1, 1995, to enable further evaluation of the compound. Additional
amounts will be paid out as various testing stages are completed. If it
exercises its option (see "Business--Research and Development"), under the Bio-
Pharma option agreement, it will be required to pay $3,000,000 and incur
significant additional expenses for the necessary clinical trials and bio-
studies in order to file a NDA with the FDA. If the Company incurs such capital
commitments, or if it incurs additional funding obligations under similar
agreements which it may enter into in the future, the Company expects to fund
any obligations with cash provided by operations to the extent such cash is
available. In the absence of sufficient cash from operations, the Company may be
required to seek funds from other sources.
The Company is currently exploring various possible strategic business
transactions designed to strengthen and expand its operations, including
joint ventures, equity infusions by third parties and business
combinations. If the Company were to consummate any such strategic
transaction, it could have a material effect on the Company's operations
and/or financial condition. There can be no assurances that any such
transaction will be effected in the reasonably foreseeable future or, if a
transaction is effected, what the terms and conditions thereof would be.
While it is anticipated that operating activities during fiscal year
1995 will generate cash, the Company expects to expend significant funds
for increased research and development efforts (see "--Results of
Operations--Operating Expenses--Research and Development") and further
capital improvements. Although the Company expects its cash on hand and
cash to be generated from operating activities to be sufficient to fund its
operations, research and development efforts, and capital expenditures, it
obtained an intermediate term bank financing to help ensure implementation
of its plans (see "--Financing" and "Notes to Financial Statements--Long
Term Debt").
The operations of Quad were discontinued in 1991 and it conducts no
business (see" --Results of Operations--Discontinued Operations" and "Notes
to Financial Statements--Discontinued Operations"). The Company does not
expect there to be any Quad activities requiring cash outlays in the
future. Quad has liabilities totalling approximately $2,844,000, which are
reflected on the Company's October 1, 1994 consolidated balance sheet and
has virtually no assets with which to satisfy such liabilities. These
liabilities, although reflected on the Company's consolidated balance
sheets, are not expected to have any material impact upon the Company's
cash flow or liquidity because they are direct obligations of Quad and the
Company believes that neither it nor any of its subsidiaries (other than
Quad) have any obligation to satisfy the liabilities.
Financing
At October 1, 1994, the Company's debt of $6,743,000 is on a long-term
basis, due to two banks, of which $5,766,000 is scheduled to be repaid in
monthly installments through fiscal 1999. The Company recently revised and
extended its $7,000,000 revolving credit facility with one bank which now
expires no earlier than March 1996. At October 1, 1994, no borrowings were
outstanding under the revolving credit facility. The Company and the same
bank have also entered into a $4,000,000 term loan facility for capital
expenditures, which may be borrowed during the first half of fiscal 1995
(see "Notes to Financial Statements--Long Term Debt"). The new term loan
and the existing term loans, which are from the same bank, are secured. In
May, the Company borrowed, from another bank, $1,340,000 through a seven-
year mortgage to purchase a building (see "Properties" and "Notes to
Financial Statements--Long Term Debt"). At this second bank, $196,000 is
also outstanding under a $250,000 line of credit which is utilized to
acquire equipment.
ITEM 8. Financial Statements and Supplementary Data.
- - - - - - - ------ -------------------------------------------
See Index to Financial Statements after Signature Page.
15
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
- - - - - - - ------ ---------------------------------------------------------------
Financial Disclosure.
- - - - - - - --------------------
Inapplicable.
16
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
- - - - - - - ------- --------------------------------------------------
The information set forth under the caption "Election of Directors" in
the Company's Proxy Statement relating to its 1995 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission (the
"Commission") pursuant to Regulation 14A under the Securities Exchange Act
of 1934, is incorporated herein by reference.
ITEM 11. Executive Compensation.
- - - - - - - ------- ----------------------
The information set forth under the caption "Executive Compensation" in
the Company's Proxy Statement relating to its 1995 Annual Meeting of
Shareholders, to be filed with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934, is incorporated herein by
reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
- - - - - - - ------- --------------------------------------------------------------
The information set forth under the caption "Voting Securities and
Principal Shareholders" in the Company's Proxy Statement relating to its
1995 Annual Meeting of Shareholders, to be filed with the Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934, is
incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions.
- - - - - - - ------- -----------------------------------------------
The information set forth under the caption "Certain Transactions" in
the Company's Proxy Statement relating to its 1995 Annual Meeting of
Shareholders, to be filed with the Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934, is incorporated herein by
reference.
17
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- - - - - - - ------- ----------------------------------------------------------------
(a)(1)&(2) Financial Statements.
See Index to Financial Statements after Signature Page.
(a)(3) Exhibits.
3.1 Certificate of Incorporation of the Registrant. (4)
3.1.1 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 6,
1992--incorporated by reference to the Registrant's Registration Statement on Form 8-A
(Commission File No. 0-20834), filed with the Commission November 10, 1992.
3.2 By-Laws of the Registrant, as amended and restated. (3)
4 Rights Agreement, dated August 6, 1991, between the Registrant and Midlantic National Bank,
as Rights Agent. (5)
4.1 Amendment to Rights Agreement, dated as of April 27, 1992. (3)
10.1 1983 Stock Option Plan of the Registrant, as amended. (2)
10.2 1986 Stock Option Plan of the Registrant, as amended. (2)
10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (5)
10.4 1989 Employee Stock Purchase Program of the Registrant. (7)
10.5 1990 Stock Incentive Plan of the Registrant, as amended. (2)
10.6 Form of Retirement Plan of Par. (12)
10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984. (6)
10.7 Form of Retirement Savings Plan of Par. (12)
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984. (13)
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984. (13)
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985. (13)
10.8 Par Pension Plan, effective October 1, 1984. (4)
10.9 Employment Agreement, dated as of October 4, 1992, among the Registrant, Par and Kenneth
I. Sawyer. (1)
10.10 Lease Agreement between Par and the County of Rockland Industrial Development Agency,
dated as of October 1, 1984. (6)
10.10.1 Lessee Guaranty between Par and Midlantic National Bank, dated as of October 1, 1984. (6)
18
10.10.2 Mortgage from County of Rockland Industrial Development Agency
to Midlantic National Bank, as Trustee, dated as of October 1,
1984. (13)
10.10.3 Security Agreement between County of Rockland Industrial
Development Agency and Midlantic National Bank, as Trustee, dated
as of October 1, 1984. (13)
10.11 Term Loan Agreement, dated September 18, 1987, between Midlantic
National Bank/North and Par. (11)
10.11.1 Note and Indenture, dated September 18, 1987, between Midlantic
National Bank/North and Par. (11)
10.12 Revolving Credit Agreement, dated February 20, 1992, between Par
and Midlantic National Bank. (1)
10.13 Agreement Concerning Term Loans, dated February 20, 1992, between
Par and Midlantic National Bank. (1)
10.14 Amendments to Term Note, dated February 20, 1992. (1)
10.15 Lease for premises located at 12 Industrial Avenue, Upper Saddle
River, New Jersey, between Par and Charles and Dorothy Horton,
dated October 21, 1978 and extension dated September 15, 1983. (12)
10.15.1 Extension of Lease, dated November 8, 1989, between Par and
Charles and Dorothy Horton relating to premises at 12 Industrial
Avenue, Upper Saddle River, New Jersey. (9)
10.16 Lease, dated November 7, 1986, between Ramapo Corporate Park,
Inc. as landlord, and Par as tenant. (4)
10.16.1 Amendment by letter dated March 10, 1988 to the lease, dated
November 7, 1986, between Ramapo Corporate Park, Inc. as lessor
and Par as lessee. (10)
10.17 Lease, dated December 15, 1987, between Ram Ridge Estates Corp.
as lessor and Par as lessee. (10)
10.18 Standstill Agreements and Irrevocable Proxies, each dated May 29,
1990, between Par and each of Asrar Burney, Dulal Chatterji, and
Raja Feroz. (8)
10.19 Agreement of Purchase and Sale, dated June 4, 1992, among Quad,
Par, and The Liposome Company, Inc. (1)
10.19.1 Modification of Agreement of Purchase and Sale, dated July 24,
1992, among Quad, Par, and The Liposome Company, Inc. (1)
10.20 Employment Agreement, dated as of April 1, 1993, between Par and
Diana L. Sloane. (14)
10.21 Employment Agreement, dated as of May 19, 1993, between the
Registrant and Robert I. Edinger. (14)
10.22 Distribution Agreement, dated as of October 16, 1993, between
Genpharm, Inc., the Registrant and PRX Distributors, Ltd. (14)
10.23 Agreement, dated as of September 30, 1993, between National Union
Fire Insurance Company of Pittsburgh and Par. (14)
19
10.24 Settlement Agreement and Release, dated as of November 29, 1993,
between Mylan Laboratories, Inc., the Registrant, Par and Quad.
(14)
10.25 Settlement Agreement and Release, dated as of January 6, 1994,
between Minnesota Mining & Manufacturing Company, Riker
Laboratories, Inc., the Registrant and Par. (14)
10.26 Settlement Agreement and Release, dated as of December 22, 1993,
between United States Trading Corporation, Marvin Sugarman,
Liquipharm, Inc., the Registrant and Par. (14)
10.27 Letter Agreement, dated April 30, 1993, between the Generics
Group B.V. and Par.
10.28 Distribution Agreement, dated as of February 24, 1994, between
Sano Corporation, the Registrant and Par, as amended.
10.29 Mortgage and Security Agreement, dated May 4, 1994, between Urban
National Bank and Par. (15)
10.29.1 Mortgage Loan Note, dated May 4, 1994. (15)
10.29.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to
Urban National Bank. (15)
10.30 Non-exclusive Distribution, Exclusive Supply Agreement, dated as
of September 13, 1994, between Mova Pharmaceutical Corporation
and Par.
10.31 Non-exclusive Distribution, Exclusive Supply Agreement, dated as
of September 13, 1994, between Mova Pharmaceutical Corporation
and Par.
10.32 Letter Agreement, dated as of October 13, 1994, between Par and
Robert I. Edinger.
10.33 Term Loan Agreement, dated as of November 29, 1994, between
Midlantic Bank, NA and Par, to be filed by amendment.
10.34 Amended and Restated Revolving Credit Agreement, dated as of
November 29, 1994, between Midlantic Bank, NA and Par, to be
filed by amendment.
10.34.1 Revolving Loan Note, dated November 29, 1994, to be filed by
amendment.
10.35 Amended and Restated Agreement Concerning Term Loans, dated as of
November 29, 1994, between Midlantic Bank, NA and Par, to be
filed by amendment.
11 Computation of per share data.
13 1994 Annual Report to Shareholders, to be filed by amendment.
21 Subsidiaries of the Registrant.
23 Consent of Richard A. Eisner & Company, LLP.
__________________________________________
20
(1) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended October 3, 1992
and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Proxy Statement dated August 10,
1992 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as
an Exhibit to Amendment No. 1 on Form 8 to the Registrant's
Registration Statement on Form 8-B, filed May 15, 1992, and
incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended September 28,
1991 and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Proxy Statement dated August 14,
1991 and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Annual Report on Form 10-K (Commission File
No. 1-9449) for the year ended September 29, 1990 and
incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Proxy Statement dated August 16, 1990 and
incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Current Report on Form 8-K dated May 29, 1990
and incorporated herein by reference.
(9) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Annual Report on Form 10-K for 1989 and
incorporated herein by reference.
(10) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Annual Report on Form 10-K for 1988 and
incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Annual Report on Form 10-K for 1987 and
incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Registration Statement on Form S-1 (No. 2-
86614) and incorporated herein by reference.
(13) Previously filed with the Securities and Exchange Commission as
an Exhibit to Par's Registration Statement on Form S-1 (No. 33-
4533) and incorporated herein by reference.
(14) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrants' Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended October 2, 1993
and incorporated herein by reference.
(15) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Registrant's Quarterly Report on Form 10-Q
(Commission File No. 1-10827) for the quarter ended April 2, 1994
and incorporated herein by reference.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 27, 1994 PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
By: /s/ Kenneth I. Sawyer
------------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Kenneth I. Sawyer President, Chief Executive Officer, and Chairman
- - - - - - - ------------------------- of the Board of Directors December 27, 1994
Kenneth I. Sawyer
Vice President, Chief Financial Officer and
/s/ Robert I. Edinger Secretary (Principal Accounting and Financial December 27, 1994
- - - - - - - ------------------------- Officer)
Robert I. Edinger
/s/ Diana L. Sloane Vice President--Regulatory and Scientific Af- December 27, 1994
- - - - - - - ------------------------- fairs and Director
Diana L. Sloane
/s/ Mark Auerbach December 27, 1994
- - - - - - - -------------------------
Mark Auerbach Director
/s/ Andrew Maguire December 27, 1994
- - - - - - - -------------------------
Andrew Maguire Director
/s/ H. Spencer Matthews December 27, 1994
- - - - - - - -------------------------
H. Spencer Matthews Director
/s/ Robin O. Motz December 27, 1994
- - - - - - - -------------------------
Robin O. Motz Director
/s/ Melvin Van Woert December 27, 1994
- - - - - - - -------------------------
Melvin Van Woert Director
PHARMACEUTICAL RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 1, 1994
Page
----
Included in Part II:
- - - - - - - --------------------
Accountants' Report F-2
Consolidated Balance Sheets as at October 1, 1994 and
October 2, 1993 F-3
Consolidated Statements of Operations and Retained
Earnings (Deficit) for the years ended October 1, 1994,
October 2, 1993 and October 3, 1992 F-4
Consolidated Statements of Cash Flows for the years
ended October 1, 1994, October 2, 1993 and
October 3, 1992 F-5
Notes to Financial Statements F-6 through F-17
Included in Part IV:
- - - - - - - --------------------
Accountants' Report with respect to schedules F-18
SCHEDULES:
III Condensed financial information of registrant F-19 and F-20
VIII Valuation and qualifying accounts F-21
_________________________________________________
Other financial statement schedules and inapplicable periods with respect
to the schedules listed above are omitted because the conditions requiring
their filing do not exist or the information required thereby is included
in the financial statements filed, including the notes thereto.
F-1
Richard A. Eisner & Company
___________________________________________________________________
Accountants and Consultants
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Pharmaceutical Resources, Inc.
Spring Valley, New York
We have audited the accompanying consolidated balance sheets of
Pharmaceutical Resources, Inc. and subsidiaries as at October 1, 1994 and
October 2, 1993, and the related consolidated statements of operations and
retained earnings (deficit) and cash flows for each of the years in the
three-year period ended October 1, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of
Pharmaceutical Resources, Inc. and subsidiaries at October 1, 1994 and
October 2, 1993, and the results of their operations and their cash flows
for each of the years in the three-year period ended October 1, 1994, in
conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
November 30, 1994
575 Madison Avenue, New York, N.Y. 10022-2597
Member of Summit International Associates, Inc.
New York, NY . Melville, NY . Cambridge, MA . Florham Park, NJ
F-2
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
October 1, October 2,
ASSETS 1994 1993
------ ---------- ----------
Current assets:
Cash and cash equivalents $ 3,130,000 $12,134,000
Temporary investments 176,000 1,179,000
Accounts receivable, net of allowances of $2,768,000
and $2,628,000 9,347,000 6,856,000
Inventories 16,352,000 14,117,000
Prepaid expenses and other current assets 1,500,000 1,799,000
Current deferred tax benefit 3,090,000 -
Current assets of discontinued operations 20,000 71,000
---------- ----------
Total current assets 33,615,000 36,156,000
Property, plant and equipment, at cost less
accumulated depreciation and amortization 23,004,000 20,037,000
Deferred charges and other assets 1,086,000 1,046,000
Investment in non-marketable securities 1,000,000 -
Long-term deferred tax benefit 10,497,000 -
---------- ----------
$69,202,000 $57,239,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,870,000 $ 1,834,000
Accounts payable 5,340,000 6,769,000
Salaries and employee benefits 2,908,000 3,479,000
Accrued expenses and other current liabilities 921,000 805,000
Estimated current liabilities of discontinued operations 2,844,000 3,628,000
Settlements - 6,500,000
---------- ----------
Total current liabilities 13,883,000 23,015,000
Long-term debt, less current portion 5,490,000 5,820,000
Long-term portion of settlements - 4,000,000
Pension 553,000 323,000
Commitments, contingencies and other matters - -
Shareholders' equity:
Preferred Stock, par value $.0001 per share; authorized 6,000,000 shares;
issued and outstanding -- 1,058,400 and 1,479,070 shares of Series A
Convertible Preferred Stock (aggregate liquidation preference-
$5,292,000 and $7,395,000) 1,000 1,000
Common Stock, par value $.01 per share; authorized 60,000,000 shares;
outstanding 14,482,632 and 13,466,182 shares 145,000 135,000
Additional capital 43,066,000 36,296,000
Retained earnings (deficit) 6,164,000 (12,351,000)
Additional minimum liability related to defined benefit pension plan (100,000) -
---------- ----------
Total shareholders' equity 49,276,000 24,081,000
---------- ----------
$69,202,000 $57,239,000
========== ==========
The accompanying notes are an integral part of these statements.
F-3
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
Year Ended
------------------------------------------------
October 1, October 2, October 3,
1994 1993* 1992*
------------- ------------- -------------
Net sales $69,169,000 $74,535,000 $52,493,000
Other income 425,000 347,000 142,000
---------- ---------- ----------
Total revenues 69,594,000 74,882,000 52,635,000
Costs and expenses:
Cost of goods sold 45,774,000 48,387,000 32,448,000
Research and development 3,874,000 1,959,000 1,299,000
Selling, general and administrative 13,463,000 12,673,000 11,486,000
Interest 465,000 602,000 923,000
Settlements - 10,500,000 230,000
---------- ---------- ----------
63,576,000 74,121,000 46,386,000
Income from continuing operations
before income taxes 6,018,000 761,000 6,249,000
Provision for income taxes 1,785,000 650,000 2,150,000
---------- ---------- ----------
Income from continuing operations 4,233,000 111,000 4,099,000
Income from discontinued operations 466,000 - 1,696,000
---------- ---------- ----------
Income before extraordinary item 4,699,000 111,000 5,795,000
Extraordinary item -- tax benefit of utilization
of net operating loss carryforward - 300,000 2,150,000
---------- ---------- ----------
Income before change in accounting principle 4,699,000 411,000 7,945,000
Cumulative effect of change in accounting principle 14,128,000 - -
---------- ---------- ----------
Net income 18,827,000 411,000 7,945,000
Dividend on preferred stock (312,000) - (140,000)
(Deficit), beginning of year (12,351,000) (12,762,000) (20,567,000)
---------- ---------- ----------
Retained earnings (deficit), end of year $6,164,000 $(12,351,000) $(12,762,000)
========= ========== ==========
Income per share of common stock:
Continuing operations $ .26 $.01 $.28
Discontinued operations .03 - .11
Extraordinary item - .02 .15
Change in accounting principle .85 - -
---- ---- ----
Net income $1.14 $.03 $.54
==== === ===
Weighted average number of common and
common equivalent shares outstanding 16,494,898 15,814,278 14,825,761
========== ========== ==========
* Reclassified certain items to conform to current year's presentation.
The accompanying notes are an integral part of these statements.
F-4
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
-------------------------------------------
October 1, October 2, October 3,
1994 1993* 1992*
------------- ------------ ------------
Cash flows from operating activities:
Net income $18,827,000 $411,000 $7,945,000
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Cumulative effect of accounting change (14,128,000) - -
Net operating loss carryforward - (300,000) (2,150,000)
Income from discontinued operations (466,000) - (1,696,000)
Provision for income taxes 1,785,000 650,000 2,150,000
Provision for settlements - 10,500,000 230,000
Depreciation and amortization 2,391,000 2,479,000 2,572,000
Allowances against accounts receivable 140,000 551,000 227,000
Write-off of inventories 1,333,000 1,732,000 950,000
Other 213,000 550,000 458,000
Changes in assets and liabilities:
(Increase) in accounts receivable (2,631,000) (1,134,000) (1,572,000)
(Increase) in inventories (3,568,000) (3,602,000) (6,518,000)
Decrease (increase) in prepaid expenses
and other assets 581,000 (857,000) 298,000
(Decrease) increase in accounts payable (1,429,000) 2,083,000 1,384,000
(Decrease) in accrued expenses
and other liabilities (930,000) (641,000) (72,000)
(Decrease) in settlements (6,500,000) - -
--------- ---------- ---------
Net cash (used in) provided by operating activities (4,382,000) 12,422,000 4,206,000
Cash flows from financing activities:
Proceeds from issuance of common stock 1,679,000 2,125,000 382,000
Proceeds from issuance of notes payable
and other debt 4,552,000 - -
Principal payments under long-term debt
and other borrowings (4,901,000) (1,676,000) (6,139,000)
Preferred dividends paid - (135,000) -
--------- ---------- ---------
Net cash provided by (used in) financing activities 1,330,000 314,000 (5,757,000)
Cash flows from investing activities:
Capital expenditures (5,688,000) (2,718,000) (576,000)
(Increase) in non-marketable securities (1,000,000) - -
Decrease (increase) in temporary investments 1,003,000 (1,179,000) -
Cash (used in) provided by discontinued operations (267,000) (1,298,000) 421,000
--------- --------- --------
Net cash (used in) investing activities (5,952,000) (5,195,000) (155,000)
Net (decrease) increase in cash and cash equivalents (9,004,000) 7,541,000 (1,706,000)
Cash and cash equivalents at beginning of year 12,134,000 4,593,000 6,299,000
---------- --------- ---------
Cash and cash equivalents at end of year $3,130,000 $12,134,000 $4,593,000
========= ========== =========
*Reclassified certain items to conform to current year's presentation.
The accompanying notes are an integral part of these statements.
F-5
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
October 1, 1994
Pharmaceutical Resources, Inc. ("PRI") operates in one business segment,
the manufacture and distribution of generic pharmaceuticals. Marketed
products are principally in oral solid (tablet, caplet, and capsule) form,
with a small number of products in the form of creams and liquids.
Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of PRI and
its wholly-owned subsidiaries, Par Pharmaceutical, Inc. ("Par"), and seven
others, the activities of which are not significant. References herein to
the "Company" refer to PRI and its subsidiaries.
Temporary Investments:
Investments are stated at the lower of cost or market value. These
investments are classified as "available for sale securities" pursuant to
Financial Accounting Standards No. 115.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out basis)
or market value.
Depreciation and Amortization:
Property, plant and equipment are depreciated straight-line over their
estimated useful lives. Leasehold improvements are amortized over the
shorter of the estimated useful life or the term of the lease.
Research and Development:
Research and development expenses represent costs incurred by the
Company to develop new products and obtain premarketing regulatory approval
for such products. All such costs are expensed as incurred.
Income Taxes:
Deferred income taxes are provided for the future tax consequences
attributable to differences between the financial statement carrying amount
of existing assets and liabilities and their respective tax bases.
Business tax credits and net operating loss carryforwards are recognized to
the extent that realization of such benefit is more likely than not.
Revenue Recognition:
The Company recognizes revenue at the time it ships product and it
provides for returns and allowances based upon actual subsequent allowances
and historical trends.
Per Share Data:
Per share data is based upon the weighted average number of common
shares and equivalents outstanding. For purposes of per share data, the
Series A Convertible Preferred Stock is considered to be a common stock
equivalent. The dilutive effect of outstanding options and warrants is
computed using the "treasury stock" method.
Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid money market instruments to be cash equivalents. At October
1, 1994, cash equivalents were deposited in a financial institution and
consisted of immediately available fund balances.
F-6
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to credit
risk consist of trade receivables and interest-bearing investments. The
Company markets its products primarily to domestic distributors,
wholesalers and retail drug store chains. The risk associated with this
concentration is believed by the Company to be limited due to the large
number of distributors, wholesalers, and drug store chains, their
geographic dispersion and the performance of certain credit evaluation
procedures (see "Accounts Receivable-Major Customers" ).
Discontinued Operations:
In July 1992, Quad Pharmaceuticals, Inc. ("Quad"), a wholly owned
subsidiary, sold its manufacturing facility, the adjoining real property,
and certain fixtures related to the facility having a carrying amount of
approximately $1,900,000 in the aggregate, to an unrelated company for
approximately $3,600,000, resulting in a net gain of $1,696,000.
In March 1994, the Company completed the disposition of Quad, and, as a
result, has reversed estimated operating losses by $466,000.
The assets and liabilities of discontinued operations have been
classified on the balance sheet as such to separately identify them. Quad
has virtually no assets with which to satisfy such liabilities. These
liabilities, although reflected on the Company's consolidated balance
sheets, are not expected to have any material impact upon the Company's
cash flow or liquidity because they are direct obligations of Quad and the
Company believes that neither it nor its subsidiaries (other than Quad)
have any obligation to satisfy these liabilities. The principal components
of the liabilities are shown in the table below.
1994 1993
------ ------
(In Thousands)
Notes payable $ 813 $ 813
Amounts due to customers 1,657 1,657
Provision for estimated losses - 457
Accrued expenses and accounts payable 374 701
------ ------
$2,844 $3,628
====== ======
Settlements:
Fiscal Year 1993:
Minnesota Mining and Manufacturing Settlement:
The Company, in January 1994, reached a settlement agreement with
Minnesota Mining & Manufacturing Company ("3M") and its subsidiary Riker
Laboratories, Inc. ("Riker", collectively with 3M, "3M/Riker"). The
settlement was reflected in fiscal year 1993 results of operations. In
fiscal year 1994, in accordance with the terms of the settlement,
the Company paid 3M/Riker approximately $5,000,000 in cash and issued
119,500 shares of common stock of the Company ("Common Stock"). The
lawsuit brought in 1993 by 3M/Riker against Par stemmed from actions
occurring during the tenure of prior management at Par. 3M/Riker alleged
that Par improperly obtained United States Food and Drug Administration
(the "FDA") approvals by bribing FDA officials and submitting false
information to the FDA, as a result of which 3M/Riker claimed to have
suffered competitive injury in an amount up to $24,000,000.
F-7
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
U.S. Trading Settlement:
In December 1993, the Company and United States Trading Corporation
("UST") settled their respective suits. This settlement was also reflected
in fiscal year 1993 results of operations. In fiscal year 1994, in
accordance with the terms of the settlement, the Company paid $250,000 in
cash and issued $250,000 in merchandise credit to UST. The lawsuit stemmed
from actions occurring during the tenure of prior management at Par.
Mylan Settlement:
In November 1993, the Company reached a settlement agreement with
Mylan Laboratories, Inc. ("Mylan") with respect to a lawsuit brought in
1989 by Mylan against Par, Quad and others. This settlement was reflected
in fiscal year 1993 results of operations. In fiscal year 1994, in
accordance with the terms of the settlement, the Company paid Mylan
$1,000,000 in cash and issued it approximately 111,000 shares of Common
Stock. The lawsuit stemmed from actions occurring during the tenure of
prior management at Par. Mylan alleged that two of the Company's
subsidiaries improperly obtained FDA approvals by bribing FDA officials and
submitting false information to the FDA, as a result of which Mylan claimed
to have suffered competitive injury in an amount of up to $600,000,000.
Application Integrity Assessment Program:
In October 1993, the Company was informed by the FDA that it had
completed the Application Integrity Assessment Program (the "Assessment
Program") for Par and that the FDA would review Abbreviated New Drug
Applications ("ANDAs") submitted by Par for the approval of generic drugs.
In addition, the Company became eligible to again bid on government
contracts, without previous limitation. The Assessment Program was
initiated as a result of investigations by the Federal government in 1989
resulting in guilty pleas by Par and by certain former executives of Par to
charges of providing an unlawful gratuity to a public official.
Directors' and Officers' Liability Insurance Settlement:
In September 1993, the Company reached a settlement agreement with the
former insurance carrier of its directors' and officers' liability policy
pursuant to which the Company, in exchange for $650,000, settled all claims
against the insurer. The Company's claims were for the advancement and
payment of legal expenses and settlement costs on behalf of former officers
and directors relating to shareholder litigation.
Fiscal Year 1992:
United States Defense Logistics Agency:
In June 1992, the Company entered into an agreement with the United
States Defense Logistics Agency under which Par is regarded by the Defense
Department as eligible to contract with the Federal government. The
agreement ended both Par's suspension and proposed debarment from Federal
government contracting and allowed Par to actively seek to sell products to
the Federal government and agencies thereof.
New York State Manufacturing License:
In May 1992, the Company consented to an order by the Board of Regents
of the State of New York under which the State terminated a proposed
disciplinary proceeding against Par and regarded Par as fully responsible
to continue to be registered as a pharmaceutical manufacturer in the State
of New York. Pursuant to the consent order, Par agreed to pay a civil fine
of $230,000 to the State over a period of 30 months, and to be on probation
for three years. Since entering into this settlement, New York has issued
three-year renewal licenses to Par for its two manufacturing facilities
located in New York.
Temporary Investments:
Investments include certificates of deposit of $176,000 in fiscal year
1994 and $1,179,000 in fiscal year 1993 consisting of a treasury note of
$1,009,000 and a certificate of deposit of $170,000.
F-8
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
Accounts Receivable:
1994 1993
---- ----
(In Thousands)
Accounts receivable $12,115 $9,484
------- ------
Allowances:
Doubtful accounts 124 137
Returns and allowances 349 625*
Price adjustments 2,295 1,866*
------- ------
2,768 2,628
------- ------
Accounts receivable,
net of allowances $ 9,347 $6,856
======= ======
* Restated to conform to current year's presentation.
Major Customers:
Two of the Company's customers accounted for approximately 12% and 10%,
16% and 11%, and 20% and 12% of net sales from continuing operations in
fiscal years 1994, 1993 and 1992, respectively.
At October 1, 1994, amounts due from these same two customers accounted
for approximately 17% and 15% of the accounts receivable balance. At
October 2, 1993, the amounts due from these same two customers accounted
for approximately 26% and 16% of the accounts receivable balance.
Inventories:
1994 1993
---- ----
(In Thousands)
Raw materials and supplies $ 7,407 $ 6,242
Work in process and finished goods 8,945 7,875
------- -------
$16,352 $14,117
======= =======
Property, Plant and Equipment:
1994 1993
---- ----
(In Thousands)
Land $ 2,230 $ 2,044
Buildings 15,581 12,024
Machinery and equipment 16,979 16,005
Office equipment, furniture and fixtures 3,521 2,946
Leasehold improvements 794 1,729
------- -------
39,105 34,748
Less accumulated depreciation
and amortization 16,101 14,711
------- -------
$23,004 $20,037
======= =======
Distribution Agreements:
In September 1994, the Company signed two agreements (the "September
1994 Agreements") with Mova Pharmaceutical Corporation ("Mova"), a domestic
pharmaceutical company. Under the September 1994 Agreements, the Company
was appointed as the distributor of the two generic pharmaceuticals to be
developed and manufactured by Mova once they are approved by the FDA. The
first product received FDA approval in September 1994, and the Company has
commenced marketing the product. The distribution agreements cover five
year periods commencing with the FDA approval of the respective product.
The Company will pay to Mova a base price for each product plus a
percentage of net profits as defined in the September 1994 Agreements.
F-9
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
In February 1994, the Company entered into an agreement (the "February
1994 Agreement") with Sano Corporation ("Sano"), a domestic pharmaceutical
company which is developing generic drug transdermal delivery systems.
Under the agreement, Par became the exclusive United States distributor for
two products which Sano is developing (subsequent to fiscal year end 1994,
the Company exercised one of three options for an additional product). It
is planned that ANDAs for the initial two products will be filed in the
second quarter of fiscal 1995. The agreement has a term of ten years
(subject to earlier termination by either party) and thereafter,
automatically renews from year to year unless either party provides notice
of non-renewal. Once the Company commences to distribute the product, it
will make payments based upon a percentage of gross profits to Sano.
The Company advanced $1,000,000 to Sano in fiscal year 1994 as payment
for research and development costs for the initial two products. The
Company renegotiated the agreement to enable the advance to be recovered
within three years by obtaining a greater share of gross profits. As this
advance is repaid, it will be treated as income in the periods received.
In November, an additional $228,000 was advanced for the third product.
Additionally, the Company made a long term investment by purchasing
$1,000,000 of Sano Series D Preferred Stock (issued through a private
placement). The investment is classified as an "available for sale
security" pursuant to Financial Accounting Standards No. 115.
In May 1993, the Company was appointed by The Generics Group B.V. (the
"Group"), an international pharmaceutical business, as the exclusive United
States distributor of up to five generic pharmaceuticals to be manufactured
by the Group's affiliates pending approval by the FDA (the "May 1993
Agreement"). ANDA approvals for Alprazolam, Triazolam, and Atenolol were
received in fiscal year 1994 and the Company began distributing Alprazolam
and Triazolam. Two additional drugs, which will be made available to the
Company for distribution, have yet to be designated by the Group. The May
1993 Agreement also contains provisions for the development by the Group of
additional generic pharmaceuticals for distribution by the Company. Under
the May 1993 Agreement, the Company is obligated to issue a warrant to
purchase 150,000 shares of Common Stock for $10 per share. The terms of
the warrant will be similar to the warrant issued pursuant to the October
1992 Agreement (see below); however, the warrant to be granted under the
May 1993 Agreement will become exercisable only upon reaching certain
levels of sales for the distributed products.
In October 1992, the Company entered into an agreement (the "October
1992 Agreement") with Genpharm Inc. ("Genpharm"), a Canadian manufacturer
of generic pharmaceuticals (which is an affiliate of the Group) under
which Par became the exclusive United States distributor of two of
Genpharm's pharmaceutical products, Piroxicam and Pindolol. The agreement
has an initial term of ten years (subject to earlier termination by either
party as provided therein), and thereafter automatically renews from year
to year unless either party gives notice of non-renewal. The cost to the
Company of such products is based upon a percentage of gross profits as
defined in the October 1992 Agreement. In connection with the October 1992
Agreement, the Company issued a warrant to Genpharm to purchase 150,000
shares of PRI's common stock for $6 per share. The warrant became
exercisable in March 1993, has an initial term of five years (subject to
earlier termination in the event the Company ceases to be Genpharm's
exclusive distributor of the products covered by the October 1992
Agreement), and may be extended for up to an additional five years in the
event that the closing price of Common Stock has not reached levels
specified in the warrant agreement. In fiscal year 1994, the warrant was
exercised to purchase 5,300 shares of Common Stock.
Long Term Debt:
Under an agreement entered into in 1992 concerning two term loans and a
$7,000,000 revolving credit facility, all of which were collateralized by
the assets of the Company, the bank had the ability to demand prepayment of
the long-term debt in an amount equal to fifty percent of excess cash
flows, as defined, up to $500,000 per year. The bank waived its right to
demand this prepayment for the 1994 and 1993 fiscal years.
F-10
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
In December 1993, the Company and the bank agreed to (i) reduce the
interest rates on the term loans and the $7,000,000 revolving credit to the
prime rate, (ii) eliminate the facility fee, (iii) reduce the committment
fee on unused balances to 1/4 of 1%, and (iv) make the revolving credit
facility unsecured. Additionally, the agreements permitted a portion of
earnings to be paid as dividends on common stock.
The Company, in May 1994, borrowed $1,340,000 under a seven-year 8.5%
fixed rate (the rate will be readjusted in 1999) mortgage loan from another
bank to purchase a building.
1994 1993
------ ------
(In Thousands)
Industrial Revenue Bond (a) $1,822 $2,243
Term loans (b) 4,921 4,192
Other (c) 617 1,219
----- -----
7,360 7,654
Less current portion 1,870 1,834
----- -----
$5,490 $5,820
===== =====
(a) The bond bears interest at 70% of the prime rate, subject to
adjustment based on subsequent changes in tax laws, and is repayable
in monthly installments into 1999.
(b) All of these loans, except the mortgage loan for which the rate is
fixed, bear interest at the prime rate, and amortize in monthly
installments through 1999.
(c) Primarily represents the balance of the settlement reached by the
U.S. Attorney of an investigation in 1991, which balance was paid in
the first quarter of fiscal year 1995.
In November 1994, the Company and the bank formalized the arrangement
reached in December 1993, and entered into a new term loan agreement, revised
its revolving credit agreement, and renewed and amended the two existing term
loan agreements. The new term loan agreement will provide up to $4,000,000 for
capital expenditures and may be borrowed in the first half of fiscal year 1995.
The revolving credit facility, which provides up to $7,000,000 was extended to
March 31, 1996. The covenants of the revolving credit agreement and the
previously existing term loans have been conformed to the covenants negotiated
for the new term loan. The term loans are collateralized by the assets of the
Company. Interest on all bank loans is at the prime rate, and any unused
portion of the revolving credit bears a fee of 1/4 of 1% per annum.
At October 1, 1994, $196,000 was outstanding, at the bank which provided
the $1,340,000 mortgage (see above), under a $250,000 line of credit which
is utilized to acquire equipment. Interest, based upon the prime rate, is
fixed at the time of each borrowing.
Long-term debt maturities during the next five years, including the
portion classified as current, are $1,870,000 in 1995, $1,358,000 in 1996,
$1,305,000 in 1997, $1,381,000 in 1998, and $1,446,000 in 1999 and
thereafter.
During the fiscal years ended 1994, 1993 and 1992, the Company incurred
total interest expense of $465,000, $602,000, and $923,000, respectively.
Interest paid in each year approximated interest expense.
F-11
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
Shareholders' Equity:
Preferred Stock:
In 1990, the Company's shareholders authorized 6,000,000 shares of a
newly created class of preferred stock with a par value of $.0001 per
share. The preferred stock is issuable in such series and with such
dividend rates, redemption prices, preferences and conversion or other
rights as the Board of Directors may determine at the time of issuance.
Pursuant to a settlement reached in 1991 of shareholder litigation, the
Company, in July 1992, issued 2,000,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock"). The Preferred Stock is nonvoting,
is convertible into Common Stock on a share-for-share basis at any time at
the option of the holder, has a liquidation preference of $5.00 per share,
and is entitled to an annual dividend of up to $.30 per share, to the
extent that net earnings (as defined) of the Company exceed $1,500,000.
Dividends, to the extent earned, are preferential and cumulative. The
Preferred Stock may be redeemed by the Company under certain circumstances.
In addition, after the third anniversary of the issuance date of the
Preferred Stock, the Company may, under certain circumstances, require all
of the Preferred Stock to be converted into Common Stock on a 1.1 for 1
share basis.
Dividend:
In fiscal year 1994, net earnings (as defined) exceeded $1,500,000. The
preferred dividend of $.30 per share was accrued and is scheduled to be
paid on February 1, 1995.
Changes in Shareholders' Equity:
Changes in the Company's Common Stock, Preferred Stock and Additional
Capital accounts during the fiscal years ended in 1992, 1993, and 1994 were
as follows:
Series A Convertible
Preferred Stock Common Stock Additional
Shares Amount Shares Amount Capital
------ ------ ------ ------ ----------
Balance, September 28, 1991 2,000,000 $1,000 12,184,237 $122,000 $32,784,000
Exercise of stock options - - 105,500 1,000 361,000
Compensatory arrangements - - 60,293 1,000 349,000
Stock issued pursuant to
settlement of shareholder litigation - - 40,000 - 230,000
Conversion of preferred shares (3,163) - 3,163 - -
--------- ----- ---------- ------- ----------
Balance, October 3, 1992 1,996,837 1,000 12,393,193 124,000 33,724,000
Issuance of warrant - - - - 300,000
Exercise of stock options - - 527,125 6,000 2,040,000
Compensatory arrangements - - 28,097 - 237,000
Conversion of preferred shares (517,767) - 517,767 5,000 (5,000)
--------- ----- ---------- ------- ----------
Balance, October 2, 1993 1,479,070 1,000 13,466,182 135,000 36,296,000
Exercise of stock options - - 343,000 3,000 1,495,000
Exercise of warrant - - 5,300 - 32,000
Issuance of warrant - - - - 250,000
Conversion of preferred shares (420,670) - 420,670 4,000 (4,000)
Compensatory arrangements - - 16,869 1,000 1,392,000
Stock issued pursuant to settlements - - 230,611 2,000 3,605,000
--------- ----- ---------- ------- ----------
Balance, October 1, 1994 1,058,400 $1,000 14,482,632 $145,000 $43,066,000
========= ===== ========== ======= ==========
F-12
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
Share Purchase Rights Plan:
Each share of Common Stock outstanding carries with it one Common Share
Purchase Right ("Right"). Generally, the Rights will become exercisable
only if a person or group has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the Common Stock, or if the Board of
Directors has determined that a person or group has sought control of the
Company with the result that control by such person or group
("Disqualifying Persons") would be detrimental to the maintenance, renewal
or acquisition of the Company's governmental or regulatory approvals. If a
person or group thereafter acquires beneficial ownership of 25% or more of
the outstanding Common Stock or if the Board of Directors determines that
there is a reasonable likelihood that control of the Company by a
Disqualifying Person would result in the loss of, or denial of approval
for, any governmental or regulatory approval of the Company, each
outstanding Right not owned by such person or group would entitle the
holder to purchase, for $25 (the exercise price of the Right), Common Stock
having a market value of $50. Under certain other circumstances, including
the acquisition of the Company in a merger or other business combination,
each Right not owned by the acquiring party will entitle the holder to
purchase for $25, securities of the acquirer having a market value of $50.
The Rights are subject to redemption by the Company at a redemption price
of $.01 per Right.
Employee Stock Purchase Program:
The Company maintains an Employee Stock Purchase Program ("Program").
The Program is designed to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as amended. It enables
eligible employees to purchase shares of Common Stock at a discount of up
to 15% from the fair market value. An aggregate of 1,000,000 shares of
Common Stock have been reserved for sale to employees under the Program.
Employees purchased 16,928 shares, 9,739 shares and 3,973 shares during
fiscal years 1994, 1993 and 1992, respectively. At October 1, 1994,
958,610 shares remain available for sale under the Program.
Stock Options:
The following is a summary of stock option activity during the fiscal
years ended in 1994, 1993 and 1992:
1994 1993 1992
---------- --------- ----------
Price Per Price Per Price Per
Shares Share Shares Share Shares Share
---------- --------- ---------- -------- ---------- --------
Outstanding at beginning of year 2,699,250 $2.63 to 2,359,494 $2.63 to 1,984,244 $2.63 to
$10.50 $13.25 $13.25
Granted 266,500 $7.00 to 998,000 $6.50 to 608,750 $5.75 to
$14.13 $10.50 $7.00
Exercised (343,000) $2.63 to (527,125) $3.50 to (105,500) $3.13 to
$10.13 $7.88 $3.50
Cancelled (65,500) $3.50 to (63,750) $3.50 to (128,000) $3.13 to
$14.13 $13.25 $10.33
Surrendered (23,750) $3.50 to (67,369) $3.50 to -
--------- --------- ---------
$14.13 $6.25
Outstanding at end of year 2,533,500 $2.63 to 2,699,250 $2.63 to 2,359,494 $2.63 to
========= ========= =========
$14.13 $10.50 $13.25
The Company's 1990 Stock Incentive Plan (the "1990 Plan") provides for
the granting of stock options, restricted stock awards, deferred stock
awards, stock appreciation rights and other stock based awards or any
combination thereof to employees of the Company or to others. The Company
has reserved 1,700,000 shares of Common Stock for issuance under the 1990
Plan.
F-13
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
Under the 1989 Directors' Stock Option Plan (the "Directors' Plan"),
options are granted to directors of the Company who are not employees of the
Company or are otherwise ineligible to receive options under any other plan
adopted by the Company. Eligible directors are granted options upon their
initial election to the Board and once in each fiscal year thereafter on the
earlier of June 30 or the date on which the shareholders elect directors at an
annual meeting. The Company has reserved 550,000 shares of Common Stock for
issuance under the Directors' Plan.
The Company's 1986 Stock Option Plan provides that options may be
granted to employees of the Company or to others for the purchase of up to
900,000 shares of the Company's Common Stock. Options granted under the
plan may be incentive stock options or nonqualified options.
The 1983 Stock Option Plan terminated in August 1993, and no further
options have been, or will be, granted.
At October 1, 1994 and October 2, 1993, options for 312,663 and 694,663
shares, respectively, were available for future grant under the various
plans. Options for 2,066,768 shares were exercisable at October 1, 1994.
Income Taxes:
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("FAS 109"), which required the Company to recognize deferred tax
assets and liabilities for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. In addition, FAS
109 required the recognition of future tax benefits, such as net operating
loss ("NOL") carryforwards, to the extent that realization of such benefits
is more likely than not. The Company adopted the new accounting standard
during the quarter ended January 1, 1994 and, as a result, recognized
future tax benefits of $14,128,000. This amount is reflected in the net
income of the Company as the cumulative effect of a change in accounting
principle.
The tax effects of the significant temporary differences which comprise
the deferred tax assets and liabilities are as follows:
October 1, October 3,
1994 1993
-------------- --------------
(In Thousands)
Deferred assets:
NOL carryforwards $13,795 $11,386
Accrued legal settlements - 3,570
Accounts receivable 923 870
Accrued employee benefits 623 689
Tax credit carryforward - 463
Inventory 299 -
State tax NOL 800 -
Other 481 382
------- -------
16,921 17,360
Valuation allowance (1,000) (1,000)
------- -------
15,921 16,360
Deferred liabilities:
Fixed assets 2,329 2,221
Other 5 11
------- -------
2,334 2,232
Net deferred assets $13,587 $14,128
======= =======
F-14
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
Included in the recognition of future tax benefits is approximately
$1,244,000 of stock option compensation credited to additional capital.
The components of income tax expense (credit) follow:
1994 1993 1992
------- ------ ------
(In Thousands)
Federal:
Current - $300 $2,117
Deferred $2,585 - -
------ ---- ------
$2,585 $300 $2,117
------ ---- ------
State:
Current - 350 33
Deferred (800)* - -
------ ---- ------
(800) 350 33
------ ---- ------
$1,785 $650 $2,150
====== ==== ======
* During fiscal year 1994, there was a change in state tax laws which
permitted recognition of NOL carryforwards.
The table below provides the details of the differences, if any, between
the provision for income taxes and the amount determined by multiplying
income before income taxes by the applicable federal statutory rate:
1994 1993 1992
------ ----- -----
Statutory tax rate 34% 34% 34%
State tax NOL generated (13%) - -
State alternative minimum tax - 46% -
Other - non-deductible 9% 5% -
---- ---- ----
Effective tax rate 30% 85% 34%
==== ==== ====
At October 1, 1994, the Company had NOL carryforwards for tax purposes
of approximately $40,000,000 that expire in September 2005 through September
2009.
The Internal Revenue Service has indicated that it intends to disallow
the Company's credit for increased research activities. The Company is
vigorously contesting the Internal Revenue Service's position that credits
for research activities are not permitted. In the event a determination is
made that the Company was not entitled to such credit, a reserve of
approximately $1,000,000 was provided upon implementation of FAS 109.
Commitments:
Leases:
At October 1, 1994, the Company had minimum rental commitments
aggregating $2,347,000 under noncancelable operating leases expiring
through 1998. Amounts payable thereunder are $781,000 in 1995, $713,000 in
1996, $622,000 in 1997, and $231,000 in 1998. Rent expense charged to
operations in fiscal years 1994, 1993 and 1992 was $907,000, $860,000, and
$1,012,000, respectively.
Retirement Plans:
The Company has a defined contribution, Social Security integrated
Retirement Plan providing retirement benefits to eligible employees as
defined in the Plan. It also maintains a Retirement Savings Plan whereby
eligible employees are permitted to contribute from 1% to 12% of pay to
this Plan. The Company contributes an amount equal to 50% of the first 6%
of the pay contributed by the employee. The Company's provisions for these
plans were $598,000 in 1994 (reduced by $250,000 in forfeitures), $962,000
in 1993, and $669,000 in 1992.
F-15
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
The Company maintains a Defined Benefit Pension Plan covering eligible
employees as defined in the Plan, which was frozen October 1, 1989. Since
the benefits under this Plan are based on the participants' length of
service and compensation (subject to Employee Retirement Income Security
Act of 1974 and Internal Revenue Service limitations), service costs
subsequent to October 1, 1989 are excluded from benefit accruals under the
plan. The funding policy for this Plan is to contribute amounts
actuarially determined as necessary to provide sufficient assets to meet
the benefit requirements of the Plan retirees. The assets of the plan are
invested in mortgages and bonds.
Net pension expense for fiscal years 1994, 1993 and 1992 included the
following components:
1994 1993 1992
------- ------- ------
(In Thousands)
Interest cost $ 128 $ 128 $ 126
Actual return on assets 129 (178) (152)
Net amortization and deferral:
Asset (loss) gain (266) 52 35
Amortization of initial unrecognized transition
obligation 51 51 51
Amortization of unrecognized net gain - (1) -
------ ------ -----
Net pension expense $ 42 $ 52 $ 60
====== ====== =====
The discount rate used to measure the projected benefit obligation for the
Plan is 7%. The assumed long-term rate of return on plan assets in 1994 was 9%.
The Plan's funded status and the amounts recorded on the Company's consolidated
balance sheets are as follows:
1994 1993
------ ------
(In Thousands)
Vested benefit obligations $1,900 $1,888
====== ======
Accumulated benefit obligations $1,900 $1,888
====== ======
Projected benefit obligations $1,900 $1,888
Market value of assets 1,347 1,565
------ ------
Projected benefit obligation in
excess of market value (553) (323)
Unrecognized net obligation 705 757
Unrecognized net loss (gain) 112 (151)
Adjustment for minimum liability (817) (606)
------ ------
Net recorded pension (liability) $ (553) $ (323)
====== ======
Contingencies and Other Matters:
Legal Proceedings:
The Company is involved in minor litigation matters, including certain
products liability actions, incidental to the conduct of its business, but
does not believe that the ultimate resolution thereof will have a material
adverse effect on its financial statements, considered as a whole.
The Company received a warning letter in May 1994 from the FDA setting
forth certain alleged deviations from current good manufacturing practice
regulations and alleged violations of related provisions of the Federal
Food, Drug and Cosmetic Act. The warning letter does not limit the
manufacture of the Company's product line nor suspend the review and
approval of applications pending at the FDA. The FDA indicated that it
would shortly complete its review of the Company response and that a
mutually amenable working relationship continues between the FDA and the
Company. No assurances can be given that the outcome of the FDA review
will not have a material adverse affect upon the Company.
F-16
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
October 1, 1994
The Company is a plaintiff in several proceedings against former
management members seeking recovery of, among other things, salaries and
amounts paid for indemnification, in connection with their actions as
former managers of Par. The Company is seeking unspecified damages.
Although the Company is vigorously pursuing such claims, there is no
assurance that the Company will recover any amounts or that any recoveries
will be material.
F-17
Richard A. Eisner & Company, LLP
____________________________________________________________________
Accountants and Consultants
REPORT OF INDEPENDENT AUDITORS WITH
RESPECT TO SUPPLEMENTARY SCHEDULES
Board of Directors and Shareholders
Pharmaceutical Resources, Inc.
Spring Valley, New York
The audits referred to in our report dated November 30, 1994 included
Schedules III and VIII, for the years ended October 1, 1994, October 2,
1993, and October 3, 1992. In our opinion, the schedules referred to above
present fairly the information set forth therein, in conformity with the
applicable accounting regulation of the Securities and Exchange Commission.
/s/ Richard A. Eisner & Company, LLP
New York, New York
November 30, 1994
575 Madison Avenue, New York, N.Y. 10022-2597
Member of Summit International Associates, Inc.
New York, NY . Melville, NY . Cambridge, MA . Florham Park, NJ
F-18
SCHEDULE III
PHARMACEUTICAL RESOURCES, INC.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
October 1, October 2,
1994 1993
------------ ------------
ASSETS
------
Cash and cash equivalents $ 777,000 $ 2,454,000
Other current assets 171,000 58,000
----------- ------------
Total current assets 948,000 2,512,000
Due from subsidiaries 12,946,000 20,400,000
Investment in subsidiaries 34,680,000 11,674,000
Investment in non-marketable securities 1,000,000 -
Other assets 20,000 -
----------- ------------
$49,594,000 $ 34,586,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Settlements - $ 6,500,000
Preferred stock dividend $ 318,000 5,000
----------- ------------
Total current liabilities 318,000 6,505,000
Long term settlements - 4,000,000
Commitments, contingencies and other matters - -
Shareholders' equity:
Preferred Stock, par value $.0001 per share;
authorized 6,000,000 shares; issued and
outstanding 1,058,400 and 1,479,070 shares
of Series A Convertible Preferred Stock
(aggregate liquidation preference-$5,292,000
and $7,395,000) 1,000 1,000
Common Stock, par value $.01 per share;
authorized 60,000,000 shares; outstanding
14,482,632 and 13,466,182 shares 145,000 135,000
Additional capital 43,066,000 36,296,000
Retained earnings (deficit) 6,164,000 (12,351,000)
Additional minimum liability related to
defined benefit pension plan (100,000) -
----------- ------------
Total shareholders' equity 49,276,000 24,081,000
----------- ------------
$49,594,000 $ 34,586,000
=========== ============
The Registrant guarantees the bank debt of its subsidiary, Par
Pharmaceutical, Inc. ("Par"). Bank debt of Par at October 1, 1994 and
October 2, 1993 aggregated $6,743,000 and $6,466,000 respectively. In
addition, the Company is a party to employment agreements with Par and
executive officers and directors of both companies.
The Notes to Financial Statements in Part II
are an integral part of this Schedule.
F-19
SCHEDULE III
PHARMACEUTICAL RESOURCES, INC.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
Year Ended Year Ended
October 1, October 2,
1994 1993
------------ -----------
Other income $ 37,000 $ 42,000
Costs and expenses:
General and administrative 703,000 553,000
Interest 2,000 4,000
----------- ---------
705,000 557,000
----------- ---------
(Loss) before equity in net earnings of
subsidiaries (668,000) (515,000)
Equity in net earnings of subsidiaries 5,367,000 626,000
----------- ---------
Income before extraordinary item 4,699,000 111,000
Equity in extraordinary item of subsidiaries - 300,000
----------- ---------
Income before cumulative effect of change in
accounting principle 4,699,000 411,000
Equity in cumulative effect of change in
accounting principle of subsidiaries 14,128,000 -
----------- ---------
Net income $18,827,000 $ 411,000
=========== =========
STATEMENTS OF CASH FLOWS
Year Ended Year Ended
October 1, October 2,
1994 1993
------------ -------------
Net cash (used in) provided by operating
activities $(6,299,000) $ 10,453,000
Cash flows from financing activities:
Proceeds from issuance of capital stock 1,679,000 2,125,000
Preferred dividends paid - (135,000)
Cash flows from investing activities:
Net advances from (to) subsidiaries 3,943,000 (10,355,000)
Investment in non-marketable securities (1,000,000) -
----------- ------------
Net (decrease) increase in cash (1,677,000) 2,088,000
Cash and cash equivalents at beginning of
period 2,454,000 366,000
----------- ------------
Cash and cash equivalents at end of period $ 777,000 $ 2,454,000
=========== ============
The Notes to Financial Statements in Part II
are an integral part of this Schedule.
F-20
SCHEDULE VIII
PHARMACEUTICAL RESOURCES, INC.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- - - - - - - ----------- ---------- --------- ----------- ---------
Additions
Balance at charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
- - - - - - - ----------- ---------- ---------- ----------- ---------
Allowance for doubtful accounts:
Year ended October 1, 1994 $137,000 $(9,000) (a) $4,000 (b) $124,000
Year ended October 2, 1993 $212,000 $(72,000) (a) $3,000 (b) $137,000
Year ended October 3, 1992 $186,000 $47,000 $21,000 (b) $212,000
Allowance for returns and other:
Year ended October 1, 1994 $2,491,000 $5,481,000 $5,328,000 (c) $2,644,000
Year ended October 2, 1993 $1,865,000 $4,231,000 $3,605,000 (c) $2,491,000
Year ended October 3, 1992 $1,663,000 $807,000 $605,000 (c) $1,865,000
(a) Reduction of allowance no longer necessary.
(b) Write-off of uncollectible accounts.
(c) Returns and allowances charged against allowance provided therefor.
The Notes to Financial Statements in Part II
are an integral part of this Schedule.
F-21
EXHIBIT INDEX
EXHIBIT NO. PAGE NO.
3.1 Certificate of Incorporation of the Registrant. (4)
3.1.1 Certificate of Amendment to the Certificate of
Incorporation of the Registrant, dated August 6, 1992--
incorporated by reference to the Registrant's Registration
Statement on Form 8-A (Commission File No. 0-20834), filed with
the Commission November 10, 1992.
3.2 By-Laws of the Registrant, as amended and restated. (3)
4 Rights Agreement, dated August 6, 1991, between the
Registrant and Midlantic National Bank, as Rights Agent. (5)
4.1 Amendment to Rights Agreement, dated as of April 27, 1992. (3)
10.1 1983 Stock Option Plan of the Registrant, as amended. (2)
10.2 1986 Stock Option Plan of the Registrant, as amended. (2)
10.3 1989 Directors' Stock Option Plan of the Registrant, as
amended. (5)
10.4 1989 Employee Stock Purchase Program of the Registrant. (7)
10.5 1990 Stock Incentive Plan of the Registrant, as amended. (2)
10.6 Form of Retirement Plan of Par. (12)
10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984.
(6)
10.7 Form of Retirement Savings Plan of Par. (12)
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984.
(13)
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1,
1984. (13)
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30,
1985. (13)
10.8 Par Pension Plan, effective October 1, 1984. (4)
10.9 Employment Agreement, dated as of October 4, 1992, among the
Registrant, Par and Kenneth I. Sawyer. (1)
10.10 Lease Agreement between Par and the County of Rockland
Industrial Development Agency, dated as of October 1, 1984. (6)
10.10.1 Lessee Guaranty between Par and Midlantic National Bank, dated as
of October 1, 1984. (6)
10.10.2 Mortgage from County of Rockland Industrial Development
Agency to Midlantic National Bank, as Trustee, dated as of
October 1, 1984. (13)
10.10.3 Security Agreement between County of Rockland Industrial
Development Agency and Midlantic National Bank, as Trustee, dated
as of October 1, 1984. (13)
10.11 Term Loan Agreement, dated September 18, 1987, between Midlantic
National Bank/North and Par. (11)
EXHIBIT NO. PAGE NO.
10.11.1 Note and Indenture, dated September 18, 1987, between Midlantic
National Bank/North and Par. (11)
10.12 Revolving Credit Agreement, dated February 20, 1992, between Par
and Midlantic National Bank. (1)
10.13 Agreement Concerning Term Loans, dated February 20, 1992, between
Par and Midlantic National Bank. (1)
10.14 Amendments to Term Note, dated February 20, 1992. (1)
10.15 Lease for premises located at 12 Industrial Avenue, Upper Saddle
River, New Jersey, between Par and Charles and Dorothy Horton,
dated October 21, 1978 and extension dated September 15, 1983.
(12)
10.15.1 Extension of Lease, dated November 8, 1989, between Par and
Charles and Dorothy Horton relating to premises at 12 Industrial
Avenue, Upper Saddle River, New Jersey. (9)
10.16 Lease, dated November 7, 1986, between Ramapo Corporate Park,
Inc. as landlord, and Par as tenant. (4)
10.16.1 Amendment by letter dated March 10, 1988 to the lease, dated
November 7, 1986, between Ramapo Corporate Park, Inc. as lessor
and Par as lessee. (10)
10.17 Lease, dated December 15, 1987, between Ram Ridge Estates Corp.
as lessor and Par as lessee. (10)
10.18 Standstill Agreements and Irrevocable Proxies, each dated May 29,
1990, between Par and each of Asrar Burney, Dulal Chatterji, and
Raja Feroz. (8)
10.19 Agreement of Purchase and Sale, dated June 4, 1992, among Quad,
Par, and The Liposome Company, Inc. (1)
10.19.1 Modification of Agreement of Purchase and Sale, dated July 24,
1992, among Quad, Par, and The Liposome Company, Inc. (1)
10.20 Employment Agreement, dated as of April 1, 1993, between Par and
Diana L. Sloane. (14)
10.21 Employment Agreement, dated as of May 19, 1993, between the
Registrant and Robert I. Edinger. (14)
10.22 Distribution Agreement, dated as of October 16, 1993, between
Genpharm, Inc., the Registrant and PRX Distributors, Ltd. (14)
10.23 Agreement, dated as of September 30, 1993, between National Union
Fire Insurance Company of Pittsburgh and Par. (14)
10.24 Settlement Agreement and Release, dated as of November 29, 1993,
between Mylan Laboratories, Inc., the Registrant, Par and Quad.
(14)
10.25 Settlement Agreement and Release, dated as of January 6, 1994,
between Minnesota Mining & Manufacturing Company, Riker
Laboratories, Inc., the Registrant and Par. (14)
EXHIBIT NO. PAGE NO.
10.26 Settlement Agreement and Release, dated as of December 22, 1993,
between United States Trading Corporation, Marvin Sugarman,
Liquipharm, Inc., the Registrant and Par. (14)
10.27 Letter Agreement, dated April 30, 1993, between the Generics
Group B.V. and Par.
10.28 Distribution Agreement, dated as of February 24, 1994, between
Sano Corporation, the Registrant and Par, as amended.
10.29 Mortgage and Security Agreement, dated May 4, 1994, between Urban
National Bank and Par. (15)
10.29.1 Mortgage Loan Note, dated May 4, 1994. (15)
10.29.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to
Urban National Bank. (15)
10.30 Non-exclusive Distribution, Exclusive Supply Agreement, dated as
of September 13, 1994, between Mova Pharmaceutical Corporation
and Par.
10.31 Non-exclusive Distribution, Exclusive Supply Agreement, dated as
of September 13, 1994, between Mova Pharmaceutical Corporation
and Par.
10.32 Letter Agreement, dated as of October 13, 1994, between Par and
Robert I. Edinger.
10.33 Term Loan Agreement, dated as of November 29, 1994, between
Midlantic Bank, NA and Par, to be filed by amendment.
10.34 Amended and Restated Revolving Credit Agreement, dated as of
November 29, 1994, between Midlantic Bank, NA and Par, to be
filed by amendment.
10.34.1 Revolving Loan Note, dated November 29, 1994, to be filed by
amendment.
10.35 Amended and Restated Agreement Concerning Term Loans, dated as of
November 29, 1994, between Midlantic Bank, NA and Par, to be
filed by amendment.
11 Computation of per share data.
13 1994 Annual Report to Shareholders, to be filed by amendment.
21 Subsidiaries of the Registrant.
23 Consent of Richard A. Eisner & Company, LLP.
(1) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registrant's Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended October 3, 1992
and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registrant's Proxy Statement dated August
10, 1992 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission
as an Exhibit to Amendment No. 1 on Form 8 to the Registrant's
Registration Statement on Form 8-B, filed May 15, 1992, and
incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registrant's Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended September 28,
1991 and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registrant's Proxy Statement dated August
14, 1991 and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission
as an Exhibit to Par's Annual Report on Form 10-K (Commission
File No. 1-9449) for the year ended September 29, 1990 and
incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission
as an Exhibit to Par's Proxy Statement dated August 16, 1990 and
incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission
as an Exhibit to Par's Current Report on Form 8-K dated May 29,
1990 and incorporated herein by reference.
(9) Previously filed with the Securities and Exchange Commission
as an Exhibit to Par's Annual Report on Form 10-K for 1989 and
incorporated herein by reference.
(10) Previously filed with the Securities and Exchange Commission
as an Exhibit to Par's Annual Report on Form 10-K for 1988 and
incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission
as an Exhibit to Par's Annual Report on Form 10-K for 1987 and
incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission
as an Exhibit to Par's Registration Statement on Form S-1 (No.
2-86614) and incorporated herein by reference.
(13) Previously filed with the Securities and Exchange Commission
as an Exhibit to Par's Registration Statement on Form S-1 (No.
33-4533) and incorporated herein by reference.
(14) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registrants' Annual Report on Form 10-K
(Commission File No. 1-10827) for the year ended October 2, 1993
and incorporated herein by reference.
(15) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registrant's Quarterly Report on Form 10-Q
(Commission File No. 1-10827) for the quarter ended April 2,
1994 and incorporated herein by reference.