Commission File Number 1-10827
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10--Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 1996
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Ram Ridge Road, Spring Valley, New York 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 425-7100
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ ------
18,666,629
Number of shares of Common Stock outstanding as of August 5 , 1996
This is page 1 of 15 pages. The exhibit index is on page 13.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
June 29, September 30,
ASSETS 1996 1995
------ -------- --------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 5,163 $17,986
Temporary investments 189 271
Accounts receivable, net of allowances of
$1,314 and $1,588 8,700 9,011
Inventories 19,968 15,364
Prepaid expenses and other current assets 1,558 1,866
Current deferred tax benefit 4,897 4,172
------- -------
Total current assets 40,475 48,670
Property, plant and equipment, at cost less
accumulated depreciation and amortization 25,901 24,371
Deferred charges and other assets 1,234 1,883
Investments 8,955 3,520
Investment in joint venture 3,203 2,037
Non-current deferred tax benefit 11,191 10,436
------- -------
Total assets $90,959 $90,917
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,680 $ 1,470
Accounts payable 5,189 6,422
Accrued salaries and employee benefits 3,023 2,336
Accrued expenses and other current liabilities 723 705
Estimated current liabilities of discontinued
operations 2,823 2,830
------- -------
Total current liabilities 13,438 13,763
Long-term debt, less current portion 3,359 4,259
Accrued pension liability 941 941
Shareholders' equity:
Common Stock, par value $.01 per share; authorized
60,000,000 shares; issued and outstanding
18,654,062 and 18,168,625 shares 186 182
Additional paid in capital 67,734 65,276
Retained earnings 2,915 6,783
Additional minimum liability related to defined
benefit pension plan (287) (287)
Unrealized gain on investment 2,673 -
------- -------
Total shareholders' equity 73,221 71,954
------- -------
Total liabilities and shareholders' equity $90,959 $90,917
======= =======
The accompanying notes are an integral part of these statements.
--2--
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In Thousands, Except Per Share Amounts)
(Unaudited)
Nine Months Ended Three Months Ended
------------------- --------------------
June 29, July 1, June 29, July 1,
1996 1995/a/ 1996 1995/a/
-------- --------- --------- ---------
Net sales $45,008 $49,013 $14,788 $15,830
Cost of goods sold 34,031 32,833 12,078 11,623
------- ------- ------- -------
Gross margin 10,977 16,180 2,710 4,207
Operating expenses:
Research and development 4,319 3,385 2,737 1,408
Selling, general and
administrative 12,876 11,944 4,366 3,956
Restructuring charge 549 - 549 -
------- ------- ------- -------
Total operating expenses 17,744 15,329 7,652 5,364
------- ------- ------- -------
Operating income (loss) (6,767) 851 (4,942) (1,157)
Settlements - 2,029 - -
Other income 631 338 160 189
Interest expense (310) (381) ( 104) (135)
--- --- ---- ---
Income (loss) before
provision (credit) for
income taxes (6,446) 2,837 (4,886) (1,103)
Provision (credit) for
income taxes (2,578) 1,045 (1,956) (360)
----- ----- ------- ---
Net income (loss) (3,868) 1,792 (2,930) (743)
Dividend on preferred stock - 8/b/ - 299/c/
Retained earnings,
beginning of period 6,783 6,164 5,845 8,408
----- ----- ----- -----
Retained earnings, end of
period $2,915 $7,964 $2,915 $7,964
===== ===== ===== =====
Net income (loss) per
share of common stock $(.21) $.11 $(.16) $(.04)
=== === === ===
Weighted average number of
common and common equivalent
shares outstanding 18,453 16,784 18,505 17,382
====== ====== ====== ======
/a/Reclassified certain items to conform to current year's presentation.
/b/Reversal of dividend previously recorded due to preferred stock conversions.
/c/Reversal of dividend previously recorded due to the mandatory conversion of
preferred shares on July 31, 1995.
The accompanying notes are an integral part of these statements.
--3--
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
-------------------
June 29, July 1,
1996 1995/a/
--------- --------
Cash flows from operating activities:
Net income (loss) $ (3,868) $ 1,792
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision (credit) for income tax expense (2,578) 1,045
Payment of tax audit settlement - (995)
Joint venture research and development 324 -
Restructuring charge 549 -
Common stock for research and development - 150
Depreciation and amortization 2,138 1,904
Allowances against accounts receivable 274 (1,167)
Write-off of inventories 932 1,571
Other (12) -
Changes in assets and liabilities:
Decrease in accounts receivable 37 1,682
(Increase) in inventories (5,536) (2,134)
(Increase) decrease in prepaid expenses and other assets 936 (622)
Increase (decrease) in accounts payable (1,371) 325
Increase (decrease) in accrued expenses and other
liabilities 294 (357)
-------- -------
Net cash provided by (used in) operating activities (7,881) 3,194
Cash flows from investing activities:
Capital expenditures (3,650) (3,048)
(Increase) in investments (2,470) (4,610)
(Increase) decrease in temporary investments 82 (4)
Cash (used in) discontinued operations (6) (10)
-------- -------
Net cash (used in) investing activities (6,044) (7,672)
Cash flows from financing activities:
Proceeds from issuance of capital stock 1,797 21,524
Proceeds from issuance of notes payable and other debt 4,342 1,000
Principal payments under long-term debt and other
borrowings (5,032) (2,461)
Preferred dividends paid - (310)
Payments due to stock conversion (5) -
-------- -------
Net cash provided by financing activities 1,102 19,753
Net increase (decrease) in cash and cash equivalents (12,823) 15,275
Cash and cash equivalents at beginning of period 17,986 3,130
-------- -------
Cash and cash equivalents at end of period $ 5,163 $18,405
======== =======
/a/Reclassified certain items to conform to current year's presentation.
The accompanying notes are an integral part of these statements.
--4--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
June 29, 1996
(Unaudited)
Pharmaceutical Resources, Inc. (the "Company" or "PRI") operates in
one business segment, the manufacture and distribution of generic
pharmaceuticals. Marketed products are principally sold in oral solid (tablet,
caplet and capsule) form, with a small number of products in the form of creams
and liquids.
Basis of Preparation:
The accompanying financial statements at June 29, 1996 and for the
nine month and three month periods ended June 29, 1996 and July 1, 1995 are
unaudited; however, in the opinion of management of PRI, such statements include
all adjustments (consisting of normal recurring accruals) necessary to a fair
statement of the information presented therein. The balance sheet at September
30, 1995 was derived from the audited financial statements at such date.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required by
generally accepted accounting principles for audited financial statements.
Accordingly, these statements should be read in conjunction with PRI's most
recent annual financial statements.
Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.
Investments:
The Company has a distribution agreement with Sano Corporation
("Sano") which gives the Company the right of first refusal to exclusively
distribute Sano's generic transdermal products in the United States, Canada, and
several other international markets. As part of the agreement, the Company
invested $3,500,000 in the preferred stock of Sano during fiscal 1994 and 1995.
In November 1995, Sano sold common stock through an initial public offering and
the Company's preferred stock of Sano converted into 513,888 shares of common
stock. The investment is classified as an "available for sale security" pursuant
to Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). This Standard
requires that certain investments in debt and equity securities be adjusted to
fair market value at the end of each accounting period and unrealized gains or
losses, net of tax, recorded as a separate component of shareholders' equity.
In accordance with SFAS No. 115, the investment is recorded at its fair market
value on June 29, 1996 of $15 1/2 per share, or $7,955,000, and the unrealized
gain on the investment of $4,455,000, recorded net of taxes of $1,782,000, as a
separate component in shareholders' equity.
Additionally, the Company advanced Sano $2,942,000 in the current nine
month period and $2,429,000 in prior fiscal years as funding for the research
and development costs of certain generic transdermal products. Due to the
uncertainty with respect to the collectability of such advances, the Company has
expensed them and will offset research and development costs if repaid. In
November 1995, the Company received $1,500,000 from the proceeds of Sano's
initial public offering in repayment of a portion of outstanding advances from
the Company. The Company has reflected this as a reduction of research and
development cost in the nine month period ended June 29, 1996. Until
outstanding advances to Sano are repaid in full, the Company is entitled to
receive a greater share of gross profits than it would otherwise be entitled to
on products distributed under its agreement with Sano. Any such greater share of
gross profits paid to the Company will be applied to offset the advances to
Sano. As of June 29, 1996, there were outstanding advances to Sano of
$3,871,000.
In December 1995, the Company purchased a 10% interest in Fine-Tech
Ltd., an Israeli pharmaceutical research and development company in which Clal
Pharmaceutical Industries Ltd. ("Clal") has a significant ownership interest,
for $1,000,000. Clal is a significant stockholder of the Company and, through
its subsidiary, owns 51% of a research and development joint venture in which
the Company, through its subsidiary, owns 49%. In addition, the Company obtained
certain exclusive rights to purchase products from Fine-Tech Ltd. not commonly
sold in North America, South America or the Caribbean.
--5--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
June 29, 1996
(Unaudited)
Commitments, Contingencies and Other Matters:
Legal Proceedings:
In June 1996, the Company settled a claim with its insurance carrier,
filed in fiscal 1995, for $1,455,000 related to the interruption of business at
one of its manufacturing facilities. The settlement favorably affected the
gross margin by $618,000 in the current period.
Restructuring:
Recently, the Company implemented a restructuring of its operations
in an effort to reduce costs and increase operating efficiencies. The
restructuring provided for a reduction of the work force including the layoff of
forty nine employees in various manufacturing, administrative, and development
functions, a reorganization of certain personnel, and a planned reduction in
spending on advertising, marketing, professional services and, to a lesser
extent, on internal and external research and development.
A liability of $549,000 was established in the current period for the
cost of the restructuring and the subsequent charge to expense is classified as
"Restructuring charge" on the statement of operations. The charge includes
$424,000 for severance pay, employee benefits, and outplacement services and
$125,000 in consulting and legal fees. The amount of actual termination
benefits paid will be charged against the liability as they are incurred.
--6--
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
The Company incurred operating losses for the nine month and three
month periods ended June 29, 1996 of $6,767,000 and $4,942,000, respectively,
compared to operating income of $851,000 and a loss of $1,157,000 in the
corresponding periods of the prior fiscal year. The losses are principally due
to sales and gross margin declines, as described below. Due principally to
increased competition, the Company expects a continued decline in sales of
certain of its currently distributed products and manufactured products. These
declines, if not offset by increased sales of other currently manufactured
products or sales of new distributed or manufactured products, will result in
continued declines in net sales and gross margins and, accordingly, result in
further losses. In response to recent results and industry trends, the Company
has implemented in the fourth quarter of fiscal 1996 a restructuring of its
operations in an effort to reduce costs and increase operating efficiencies (see
"Notes to Financial Statements--Commitments, Contingencies and Other Matters--
Restructuring").
The continued price and profit margin erosion on certain of the
Company's products reflects a trend currently being experienced in the generic
drug industry in general in the United States. The factors contributing to the
intense competition, which have recently accelerated and affect both the
introduction of new products and the pricing and profit margins of the Company,
include, among other things, (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's significant
products, (ii) competition from brand name drug manufacturers selling generic
versions of their drugs, (iii) increased ability of competitors to quickly enter
the market after patent expiration diminishing the amount and duration of
significant profits, and (iv) willingness of generic drug customers to switch
among pharmaceutical manufacturers.
The Company plans to continue to invest in its internal research and
development efforts in addition to pursuing additional products for sale through
new and existing distribution agreements and research and development joint
ventures. There have been no significant sales of any new manufactured or
distributed products introduced in the current fiscal year. The Company
anticipates introducing one or more new products in the next fiscal year as a
result of its research and development efforts and distribution agreements. No
assurance can be given that any additional products for sale by the Company will
result or that sales of additional products will reduce losses or return the
Company to profitability.
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including those concerning management's expectations with respect to
future financial performance and future events, particularly relating to sales
of current products as well as the introduction of new manufactured and
distributed products. Such statements involve known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of the
Company, which could cause actual results and outcomes to differ materially from
those expressed herein. Factors that might affect such forward-looking
statements set forth in this Form 10-Q include, among others, (i) increased
competition from new and existing competitors and pricing practices from such
competitors, (ii) the amount of funds continuing to be available for internal
research and development and research and development joint ventures and (iii)
research and development project delays or delays in obtaining regulatory
approvals.
Net Sales
Net sales of $45,008,000 for the nine months ended June 29, 1996
decreased $4,005,000, or 8%, from the corresponding period of the prior fiscal
year. The decline is primarily due to decreased sales of manufactured products
which resulted in large part from lower pricing and continuing decreases in
volume of one of the Company's significant products, and to a lesser extent, two
other significant products. The sales decline was caused principally by the
introduction of competitive products by other drug manufacturers. Increased
sales of a lower margin distributed product partially offset the decline in
sales of manufactured products.
Net sales for the current quarter are $14,788,000 compared to
$15,830,000 (or 7% lower) in the corresponding quarter of last year. The
decline is principally attributable to the continuing lower sales of certain
significant manufactured products, as discussed above, partially offset by
increased sales of a lower margin distributed product.
--7--
Levels of sales are principally dependent upon, among other things,
(i) pricing levels and competition, (ii) market penetration for the existing
product line, (iii) approval of Abbreviated New Drug Applications ("ANDAs") and
introduction of new manufactured products, (iv) introduction of new distributed
products and (v) the level of customer service.
Gross Margin
The Company's gross margin of $10,977,000 (24% of net sales) for the
nine months ended June 29, 1996 decreased by $5,203,000 from $16,180,000 (33% of
net sales) in the prior fiscal year. The gross margin decline is primarily due
to continuing lower selling prices and decreased volumes of certain significant
manufactured products resulting from increased competition partially offset by
the recording of $618,000 in income from a settlement between the Company and
its insurance carrier for interrupted business at one of its facilities in
fiscal 1995 (see "Notes to Financial Statements--Commitments, Contingencies and
Other Matters--Legal proceedings"). Gross margins on distributed products for
the current nine month period also decreased from the comparable period of last
year principally due to continuing lower sales levels of higher margin products
and increased sales of a lower margin product.
The gross margin in the current quarter of $2,710,000 (18% of net
sales) is $1,497,000 lower than the margin of $4,207,000 (27% of net sales) in
the corresponding quarter of the prior year. The decline is primarily
attributable to the continuing lower sales of certain significant manufactured
products, as discussed above. The decline in the gross margin was partially
offset by the recording of $618,000 in income from an insurance settlement, as
discussed above.
Inventory write-offs, taken in the normal course of business, amounted
to $932,000 and $303,000 for the nine and three month periods ended June 29,
1996, respectively, compared to $1,571,000 and $766,000 in the corresponding
periods of the prior year. The inventory write-offs are related to the disposal
of products due to short shelf life and inventory not meeting the Company's
standards.
Operating Expenses
Research and Development
Gross research and development expenses for the nine months ended June
29, 1996 are $5,819,000 versus $3,385,000 for the nine months ended July 1,
1995. The increase is primarily the result of payments made to Sano Corporation
("Sano") of $2,942,000 for the development of certain generic transdermal
products. During the first quarter of fiscal 1996, the Company received a
reimbursement of $1,500,000 from Sano for advances made to them in prior fiscal
years for research and development expenses. As a result of this reimbursement,
net research and development expenses for the nine months ended June 29, 1996
equalled $4,319,000. The Company has a distribution agreement with Sano to
distribute generic transdermal products developed by Sano (see "Notes to
Financial Statements - Investments").
Research and development expenses in the current three month period of
$2,737,000 increased from $1,408,000 for the corresponding period in the prior
year primarily as a result of increased Sano payments.
To further expand its product line, the Company is continuing its
efforts to introduce new products from internal research and development and
from existing joint ventures, as well as searching for additional research and
development joint ventures. In May 1995, the Company formed an alliance with
Clal Pharmaceutical Industries Ltd. ("Clal") to develop, manufacture and
distribute generic pharmaceuticals worldwide. A research and development joint
venture, formed in Israel and owned 49% by the Company and 51% by Clal, has
commenced operations and identified approximately 35 products for research. The
Company recorded its share of such joint venture's research and development
expenses of $324,000 for the current nine month period.
--8--
Selling, General and Administrative
Selling, general and administrative costs are $12,876,000 (29% of net
sales) for the nine month period ended June 29, 1996 versus $11,944,000 (24% of
net sales) for the corresponding period in the prior fiscal year. The increase
in the period is primarily attributable to severance costs, costs related to
implementing information systems to support the Company's sales, marketing, and
manufacturing operations, increased advertising and developmental marketing
costs and fees for consulting and professional services. The corresponding
period for last year included certain non-recurring charges incurred in
connection with the Company's response to FDA inquiries with respect to current
Good Manufacturing Practices and costs associated with the termination of the
broker network used by the Company to sell its products.
In the current quarter, selling, general and administrative costs of
$4,366,000 (30% of net sales) increased $410,000 from $3,956,000 (25% of net
sales) in the corresponding quarter of last year. The increase is primarily the
result of developmental marketing costs related to the introduction of a new
product and higher professional fees.
Restructuring Charge
The Company recorded a restructuring charge of $549,000 in the current
period to provide for costs associated with the reduction and reorganization of
current personnel. The implementation of the restructuring plan, which also
includes a reduction in spending in advertising, marketing, professional
services and, to a lesser extent, on internal and external research and
development, will reduce operating costs in subsequent periods (see "Notes to
Financial Statements--Commitments, Contingencies and Other Matters--
Restructuring").
Settlements
In fiscal 1995, the Company resolved claims against former management
members for recovery of, among other items, salaries and monies paid for
indemnification. The settlements, in the form of cash and securities of the
Company, were valued at $2,029,000.
Other Income
Other income for the nine month period increased to $631,000 from
$338,000 in the corresponding period of the prior fiscal year primarily due to
interest income on short term treasury obligations. For the three month period,
other income, principally consisting of interest, is $160,000 compared to
$189,000 for the same period of the prior year.
Income Taxes
As a result of the operating losses incurred for the nine and three
month periods ended June 29, 1996, the Company recorded an income tax benefit of
$2,578,000 and $1,956,000, respectively, which had the effect of reducing the
Company's operating losses. In the corresponding periods of the prior year, the
Company recorded income tax expense of $1,045,000 and a benefit of $360,000,
respectively.
FINANCIAL CONDITION
Liquidity and Capital Resources
Working capital of $27,037,000 at June 29, 1996 represents a decrease
of $7,870,000 from September 30, 1995. The decrease is principally due to the
use of cash for capital expenditures, for investments in the research and
development joint venture and Fine-Tech Ltd., as discussed below, and to fund
the operating loss. The working capital ratio of 3.0x declined from 3.5x at
fiscal year end. Increased inventory levels are related to the building of
inventories of new products and of certain manufactured products to assure
customer service levels.
--9--
As part of the alliance formed with Clal, the Company invested
$1,960,000 in the research and development joint venture in fiscal 1995 and
$1,470,000 was invested during the third quarter of fiscal 1996. The Company is
required to invest an additional $3,920,000 in the joint venture through fiscal
1997. The Company does not anticipate any further payments to Sano for research
and development expenses during the remainder of the current fiscal year.
In December 1995, the Company purchased 10% of the shares of Fine-Tech
Ltd., an Israeli pharmaceutical research and development company in which Clal
has a significant ownership interest, for $1,000,000 and obtained certain
exclusive rights to purchase products from Fine-Tech Ltd. not commonly sold in
North America, South America or the Caribbean.
If the Company continues to incur operating losses or incurs
additional funding obligations under the existing or any new distribution and
product development agreements, the Company expects to fund such obligations
with its working capital, and if necessary by borrowings against its line of
credit, to the extent then available (see"--Financing").
Financing
In December 1995, the Company entered into a three-year, $16,000,000
unsecured revolving credit agreement and two three-year term loans totalling
$4,000,000, replacing a prior revolving credit facility and certain outstanding
term loans and outstanding industrial revenue bonds totalling approximately
$4,000,000. The two term loans are secured by certain machinery and equipment.
The interest rates charged on the revolving credit and one term loan are based
on either Libor, the bank's cost of funds or the prime rate, all at the
Company's option. Any borrowings at Libor or cost of funds will incur additional
interest at spreads ranging from 3/4% to 1 1/4% based on certain Company
financial ratios. The interest rate on the second term loan is based on Libor
plus 1 3/4%. At June 29, 1996, the Company had borrowed $407,000, secured by
certain assets of the Company purchased under a line of credit maintained at a
second bank.
At June 29, 1996, the Company's debt of $5,039,000 is being repaid in
monthly installments through 2001 and consists of the above described loans, a
mortgage on one of the Company's properties, and capital leases.
--10--
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
11 - Computation of per share data.
27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None.
--11--
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
August 13, 1996 /s/ Kenneth I. Sawyer
------------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
August 13, 1996 /s/ Robert I. Edinger
------------------------------
Robert I. Edinger
Executive Vice President - Chief
Financial Officer and Secretary
(Principal Accounting and Financial
Officer)
--12--
EXHIBIT INDEX
-------------
Exhibit Number Description Page Number
- -------------- ------------ -----------
11 Computation of per share data 14
27 Financial Data Schedule 15
--13--