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 April 1, 1995
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
---- ----
16,861,725
Number of shares of Common Stock outstanding as of May 5, 1995
This is page 1 of 14 pages. The exhibit index is on page 12.
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
APRIL 1, OCTOBER 1,
1995 1994
---- ----
A S S E T S
-----------
Current assets:
Cash and cash equivalents $ 6,237 $ 3,130
Temporary investments 181 176
Accounts receivable, net of allowances of
$1,863,000 and $2,768,000 6,497 9,347
Inventories 16,369 16,352
Prepaid expenses and other current assets 3,831 1,500
Current deferred tax benefit 2,448 3,090
Current assets of discontinued operations 20 20
------- -------
Total current assets 35,583 33,615
Property, plant and equipment, at cost less
accumulated depreciation and amortization 23,592 23,004
Deferred charges and other assets 1,092 1,086
Investment in non-marketable securities 1,000 1,000
Long-term deferred tax benefit 10,021 10,497
------- -------
Total assets $71,288 $69,202
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,371 $ 1,870
Accounts payable 5,524 5,340
Salaries and employee benefits 2,869 2,908
Accrued expenses and other current liabilities 605 921
Estimated current liabilities of discontinued
operations 2,836 2,844
------- -------
Total current liabilities 13,205 13,883
Long-term debt, less current portion 4,858 5,490
Pension 553 553
Commitments, contingencies and other matters - -
Shareholders' equity:
Preferred Stock, par value $.0001 per share;
authorized 6,000,000 shares; issued and outstanding
-- 995,751 and 1,058,400 shares of Series A
Convertible Preferred Stock (aggregate liquidation
preference-$4,979,000 and $5,292,000) 1 1
Common Stock, par value $.01 per share;
authorized 60,000,000 shares; issued and outstanding
14,706,897 and 14,482,632 shares 147 145
Additional capital 44,216 43,066
Retained earnings 8,408 6,164
Additional minimum liability related to
defined benefit pension plan (100) (100)
------- -------
Total shareholders' equity 52,672 49,276
------- -------
Total liabilities and shareholders' equity $71,288 $69,202
======= =======
The accompanying notes are an integral part of these statements.
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PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(In Thousands, Except Per Share Amounts)
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
----------------- -------------------
APRIL 1, APRIL 2, APRIL 1, APRIL 2,
1995 1994 1995 1994
---- ---- ---- ----
Net sales $33,183 $ 34,306 $16,152 $16,386
Other revenues 149 261 50 56
------- -------- ------- -------
Total revenues 33,332 34,567 16,202 16,442
Costs and expenses:
Cost of goods sold 21,210 22,935 10,479 11,150
Research and development 1,977 1,987 1,161 1,298
Selling, general and administrative 7,988 6,412 3,819 3,022
Interest 246 215 118 91
Settlement (2,029) - (29) -
------- -------- ------- -------
29,392 31,549 15,548 15,561
Income before provision for income taxes 3,940 3,018 654 881
Provision for income taxes 1,405 1,015 233 316
------- -------- ------- -------
Income from continuing operations 2,535 2,003 421 565
Income from discontinued operations - 466 - 466
------- -------- ------- -------
Income before change in accounting principle 2,535 2,469 421 1,031
Cumulative effect of change in accounting principle - 14,128 - -
------- -------- ------- -------
NET INCOME 2,535 16,597 421 1,031
Dividend on preferred stock ($.30 per share) (291) (350) 12 (350)
Retained earnings (deficit), beginning of period 6,164 (12,351) 7,975 3,215
------- -------- ------- -------
Retained earnings, end of period $ 8,408 $ 3,896 $ 8,408 $ 3,896
======= ======== ======= =======
Income per share of common stock:
Continuing operations $ .16 $ .12 $ .03 $ .03
Discontinued operations - .03 - .03
Cumulative effect of change in accounting principle - .86* - -
------- -------- ------- -------
NET INCOME $ .16 $ 1.01* $ .03 $ .06
======= ======== ======= =======
Weighted average number of common and
common equivalent shares outstanding 16,095 16,440* 16,096 16,336*
======= ======== ======= =======
* Revised
The accompanying notes are an integral part of these statements.
-3-
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED
------------------
APRIL 1, APRIL 2,
1995 1994
---- ----
Cash flows from operating activities:
Net income $ 2,535 16,597
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Income from discontinued operations - (466)
Provision for income tax expense 1,405 1,015
Cumulative effect of accounting change - (14,128)
Common stock for research and development expense 150 -
Depreciation and amortization 1,233 1,250
Accounts receivable allowances (905) 623
Write-off of inventories 805 533
Other (2) 287
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 3,755 (590)
(Increase) in inventories (822) (4,117)
(Increase) in prepaid expenses and other assets (2,344) (167)
Increase in accounts payable 184 584
(Decrease) in accrued expenses and other liabilities (336) (633)
(Decrease) in settlements - (6,392)
------- --------
Net cash provided (used) by operating activities 5,658 (5,604)
Cash flows from financing activities:
Proceeds from issuance of capital stock 716 1,211
Proceeds from issuance of note payable - 168
Principal payments under long-term debt (1,131) (1,228)
Preferred dividends paid (310) -
------- --------
Net cash (used) provided by financing activities (725) 151
Cash flows from investing activities:
Capital expenditures (1,813) (2,925)
Cash (used) by discontinued operations (8) (249)
(Increase) decrease in temporary investments (5) 1,006
------- --------
Net cash (used) by investing activities (1,826) (2,168)
Net increase (decrease) in cash and cash equivalents 3,107 (7,621)
Cash and cash equivalents at beginning of period 3,130 12,134
------- --------
Cash and cash equivalents at end of period $ 6,237 $ 4,513
======= ========
The accompanying notes are an integral part of these statements.
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PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 1, 1995
(UNAUDITED)
Pharmaceutical Resources, Inc. ("PRI") operates in one business segment, the
manufacture and distribution of generic pharmaceuticals. Marketed products are
principally in oral solid form (tablet, caplet and capsule), with a small
number in the form of creams and liquids.
BASIS OF PREPARATION:
The accompanying financial statements at April 1, 1995 and for the six-month
and three-month periods ended April 1, 1995 and April 2, 1994 are unaudited;
however, in the opinion of management of PRI, such statements include all
adjustments (consisting of normal recurring accruals) necessary to a fair
statement of the information presented therein. The balance sheet at October
1, 1994 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.
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 numerous others,
the activities of which are not significant. References herein to the "Company"
refer to PRI and its subsidiaries.
DISCONTINUED OPERATIONS:
The remaining assets and liabilities of Quad Pharmaceuticals, Inc., a wholly-
owned subsidiary of Par, discontinued in a prior year, have been classified on
the balance sheet as such to separately identify them. Estimated current
liabilities of discontinued operations at April 1, 1995 consist of notes
payable of $813,000, amounts due to customers of $1,657,000, and accrued
expenses and accounts payable of $366,000.
SETTLEMENT:
The Company has received $2,029,000 in settlement of claims against former
management members for recovery of, among other things, salaries and monies paid
for indemnification.
TEMPORARY INVESTMENTS:
Investments include certificates of deposit of $181,000 in the quarter ended
April 1, 1995 and $176,000 at fiscal year end 1994.
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PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS----CONTINUED
APRIL 1, 1995
(Unaudited)
ACCOUNTS RECEIVABLE:
April 1, October 1,
1995 1994
---- ----
(In Thousands)
Accounts receivable $ 8,360 $12,115
Allowances:
Doubtful accounts 80 124
Returns and allowances 421 349
Price adjustments 1,362 2,295
------- -------
1,863 2,768
------- -------
Accounts receivable,
net of allowances $ 6,497 $ 9,347
======= =======
INVENTORIES:
April 1, October 1,
1995 1994
---- ----
(In Thousands)
Raw materials and supplies $ 6,430 $ 7,407
Work in process and finished goods 9,939 8,945
------- -------
$16,369 $16,352
======= =======
CONTINGENCIES:
Legal Proceedings:
The Company is involved in minor litigation matters, including a certain product
liability action, 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.
SUBSEQUENT EVENT:
In May 1995, the Company formed a strategic alliance with Clal Pharmaceutical
Industries Ltd. ("Clal"), an Israeli company, to develop, manufacture and
distribute generic pharmaceuticals worldwide. The Company sold approximately
2,027,000 shares of PRI common stock ("Common Stock") to Clal for $20,000,000,
and issued to Clal a three-year warrant to purchase up to approximately 936,000
shares of Common Stock at prices between $10 and $12 per share. The Company
also invested $1,960,000 in a research and development joint venture with Clal.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In May 1995, the Company formed a strategic alliance with Clal (see "Notes to
Financial Statements--Subsequent Event", "Results of Operations--Operating
Expenses--Research and Development" and "Financial Condition--Liquidity and
Capital Resources") which has four major components: (i) a significant equity
investment by Clal, providing financial strength to the Company; (ii)
establishment of a research and development joint venture; (iii) creation of
international manufacturing and distribution agreements; and (iv) initiation of
a long-term strategic relationship.
The Company, in April 1995, also received its first Abbreviated New Drug
Application ("ANDA") approval, for Metoprolol Tartrate, from the U.S. Food and
Drug Administration ("FDA") since completing the Application Integrity
Assessment Program in October 1993.
The FDA completed a re-inspection of the Company's main facility and confirmed
that the Company is in substantial compliance with current Good Manufacturing
Practices. The re-inspection confirmed effective correction of all violations
noted in the warning letter issued to the Company in May 1994.
RESULTS OF OPERATIONS
SALES
Net sales for the six months ended April 1, 1995 decreased $1,123,000 (3%) to
$33,183,000 from the comparable period one year earlier. Although sales of
manufactured product increased $3,002,000 (11%), sales of distributed product
decreased $4,125,000 (62%). For the three months ended April 1, 1995, net sales
declined $234,000 (1%) to $16,152,000. Manufactured product sales increased
$1,595,000 (12%), the fourth consecutive quarter of increasing sales over the
comparable prior year period, while distributed product sales decreased
$1,829,000 (63%). The increases in manufactured product sales are due to greater
quantity of product sold, generally higher prices, and reduced competition for
one product. Distributed product sales have steadily decreased each quarter,
excepting one quarter when new product was introduced, over the last two years.
This continued decline, in both units and price, is due to continued pricing
pressures, and the reduced order rates from those necessary to satisfy initial
market demand.
Sales for manufacturing and distribution activities were derived as follows
(dollars in thousands):
Six Months Ended
-----------------
April 1, 1995 April 2, 1994
------------- -------------
Amount % of Total Amount % of Total
------- ---------- ------ ----------
Manufacturing $30,621 92% $27,619 81%
Distribution $ 2,562 8% $ 6,687 19%
Three Months Ended
------------------
April 1, 1995 April 2, 1994
------------- -------------
Amount % of Total Amount % of Total
------- ---------- ------ ----------
Manufacturing $15,080 93% $13,485 82%
Distribution $ 1,072 7% $ 2,901 18%
Increases in sales are dependent on, among other things, (i) approval of ANDAs,
(ii) increased market penetration for the existing product line , (iii)
continued introduction of new distributed product, (iv) reintroduction of
previously manufactured product, and (v) the level of customer service.
GROSS MARGIN
Although net sales were 3% lower in the first six months of fiscal year 1995,
the Company had a gross margin of $11,973,000 (36% of net sales) versus
$11,371,000 (33% of net sales) for the comparable period of fiscal 1994. The
improvement in gross margin was due to the greater proportion of manufactured
product sold in fiscal 1995 than in fiscal 1994. Manufactured products in
general have higher gross margins than distributed products.
For the quarter ended April 1, 1995, the gross margin was $5,673,000 (35% of net
sales) compared to $5,236,000 (32% of net sales) achieved in the same quarter of
fiscal year 1994. The result in the quarter, as in the case of the
-7-
encompassing six months, was due to a higher proportion of manufactured product
sales versus distributed product sales.
Both gross margin and sales, principally for distributed product, continue to be
negatively impacted by price erosion due to increased competition, however,
distributed products continue to provide positive gross margin. The increased
competition has come from both other generic pharmaceutical companies and from
branded pharmaceutical companies which have directly launched their patented
products as generics prior to patent expiration.
Inventory write-offs, which reduce gross margin and are taken in the normal
course of business, amounted to $805,000 (2% of net sales) and $533,000 (2% of
net sales) for the for the six-month periods and $526,000 (3% of net sales) and
$173,000 (1% of net sales) for the three-month periods ended April 1, 1995 and
April 2, 1994, respectively. The 200% increase in write-offs in the second 1995
fiscal quarter versus the prior year period was due to short dated product for
an anticipated order which did not materialize, the destruction of short dated
material from validation batches of reintroduced product, and the destruction of
aged raw materials.
OPERATING EXPENSES
Research and Development
Research and development costs for the six months and three months ended April
1, 1995 were $1,977,000 (6% of net sales) and $1,161,000 (7% of net sales),
respectively, versus $1,987,000 (6% of net sales) and $1,298,000 (8% of net
sales) for the six months and three months ended April 2, 1994. These costs
reflect the continued commitment of management to investments in research and
development efforts. The 11 % decrease in expenses, in the quarter ended April
1, 1995 versus the quarter ended April 2, 1994, merely reflects the timing of
expenditures made under various programs for development and co-development of
new products.
To further expand its product line, the Company continues to pursue alternatives
to internal research and development, including joint ventures, licensing
agreements and distribution agreements. In May 1995, the Company formed an
alliance with Clal Pharmaceutical Industries Ltd. ("Clal") to develop,
manufacture and distribute generic pharmaceuticals worldwide (see "Notes to
Financial Statements--Subsequent Event " and "Financial Condition--Liquidity and
Capital Resources"). A research and development joint venture (owned 49% by the
Company and 51% by Clal) has been formed in Israel with an initial
investment of $4,000,000 (see "Financial Condition--Liquidity and Capital
Resources"). It is anticipated that up to an additional $11,000,000 may be
invested over the next two years. Over 35 compounds have been identified for
development by the joint venture.
An additional $15,000,000 is anticipated to be invested during the next three
years by the Company in research and development efforts which it plans to
conduct in development of approximately 25 more compounds.
Selling, General and Administrative
Selling, general and administrative costs were $7,988,000 and $3,819,000 (both
24% of respective net sales), for the six and three-month periods ended April
1, 1995, versus $6,412,000 (19% of net sales) and $3,022,000 (18% of net sales)
for the corresponding periods in the prior fiscal year. The 25% increase for
the six month period is primarily attributable to expenses related to
negotiations which were conducted during the Company's search for a strategic
alliance prior to culminating in the agreements with Clal (see "--Research and
Development" and "Financial Condition--Liquidity and Capital Resources") (the
expenses relating to the Clal alliance have been capitalized); nonrecurring
charges incurred in connection with the Company's response to the FDA's warning
letter; costs related to further hiring and relocation of key operating
personnel including an Executive Vice President of Operations; the phase-out
of independent sales organizations which were replaced by the internal sales
force; and the initiation of a new advertising campaign for the Company's
products.
In the quarter, selling, general and administrative expenses increased 26%,
primarily as a result of expenses which related to the Company's search for a
strategic alliance.
Settlement
In February, March and April, the Company collected $2,029,000 in settlement of
claims against former management members for recovery of, among other things,
salaries and monies paid for indemnification.
-8-
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $22,378,000 represents an increase of $2,646,000 from the
last fiscal year-end principally due to the pending receipt of cash from a
legal action (see "Notes to Financial Statements--Settlement" and "Results of
Operations--Operating Expenses--Settlement"). The working capital ratio of
2.7x improved from 2.4x at fiscal year end. Accounts receivable balances
returned to a normal range for the level of sales versus the high balances at
fiscal year-end 1994, which resulted from the 16% sales growth in the fourth
quarter of fiscal 1994. Working capital for the period ended April 2, 1994, was
$17,575,000 and the working capital ratio was 2.1x.
The alliance formed with Clal (see "Notes to Financial Statements--Subsequent
Event" and "Results of Operations --Operating Expenses-- Research and
Development") includes the sale on May 1, 1995 by the Company to Clal of
approximately 2,027,000 shares of Common Stock for $20,000,000 ($9.87 per
share). Clal also received a three-year warrant to purchase up to approximately
936,000 shares of Common Stock at prices between $10 to $12 per share. Subject
to shareholder approval, the Company will issue a second three-year warrant
entitling Clal to purchase up to approximately 740,000 additional shares of
Common Stock. The shares, which were issued at the closing and which may be
issued through both warrants, will allow Clal to purchase up to 19.9% of Common
Stock. Clal has agreed to limit its ownership of Company shares to 25% under
certain circumstances. The sale of stock to Clal is not included in the results
as of April 1, 1995.
Of the initial $20,000,000 from the Common Stock sale to Clal, $1,960,000 was
invested by the Company in a research and development joint venture with Clal.
The Company plans to invest $5,390,000 more in the joint venture during the next
two years. The remaining $12,650,000 is planned to be used for working capital,
capital expenditures and possible acquisitions to expand the Company's product
line.
Should the Company exercise its option, which expires September 1, 1995, under
an agreement with Bio-Pharma, Inc. and CT Holding S.A for ownership,
development, marketing and distribution rights of a compound for the treatment
of herpes viral lesions, it will pay $3,000,000 and incur significant
additional expenses for the necessary clinical trials and biostudies in order
to file a New Drug Application with the FDA.
If the Company incurs additional funding obligations under the option
agreement and existing, or new, distribution and product development agreements,
the Company expects to fund such obligations with cash provided by operations
and from the Clal investment to the extent cash is available. In the absence of
sufficient cash from operations, the Company will borrow against its line of
credit (see"--Financing").
FINANCING
At April 1, 1995, the Company's debt of $6,229,000 is on a long-term basis and
$5,446,000 is scheduled to be repaid in monthly installments through February
1999. The Company maintains a $7,000,000 revolving credit facility with a bank
which expires March 1996. At April 1, 1995, no borrowings were outstanding
under the revolving credit facility.
The Company and the bank which provides the revolving credit facility had
entered into a $4,000,000 term loan agreement which the Company had anticipated
borrowing against during the quarter ended April 1, 1995. Given the $20,000,000
Clal equity investment, the Company has determined that it will not borrow funds
under the term loan agreement.
A line of credit, which is utilized to acquire equipment, was increased to
$350,000 at a second bank. On April 1, 1995, $225,000 was outstanding under
this line.
The currently outstanding loans are secured by the assets of the Company.
-9-
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- - - - - - - ------ -----------------
None
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:
A report on Form 8-K was filed by the Registrant on April 7, 1995.
-10-
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)
May 10, 1995 /s/ Kenneth I. Sawyer
---------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
May 10, 1995 /s/ Robert I. Edinger
---------------------
Robert I. Edinger
Vice President - Chief Financial Officer and
Secretary
(Principal Financial Officer)
-11-
EXHIBIT INDEX
-------------
Exhibit Number Description Page Number
-------------- ------------ -----------
11 Computation of per share data 13
27 Financial Data Schedule 14
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