Commission File Number 1-10827
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10--Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 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
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18,696,629
Number of shares of Common Stock outstanding as of February 5, 1997.
This is page 1 of 97 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)
DECEMBER 28, SEPTEMBER 30,
ASSETS 1996 1996
- ------ -------------- -------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents - $ 299
Temporary investments $ 123 158
Accounts receivable, net of allowances of
$3,474 and $2,643 7,835 7,645
Inventories 18,263 19,352
Prepaid expenses and other current assets 1,120 3,894
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Total current assets 27,341 31,348
Property, plant and equipment, at cost less
accumulated depreciation and amortization 25,569 26,068
Deferred charges and other assets 1,170 1,222
Investments 6,904 8,672
Investment in joint venture 2,880 3,028
Non-current deferred tax benefit 14,608 14,608
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Total assets $78,472 $84,946
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 261 $ 2,142
Short term debt 3,624 -
Accounts payable 3,026 4,163
Accrued salaries and employee benefits 2,584 3,299
Accrued expenses and other current liabilities 1,017 1,028
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Total current liabilities 10,512 10,632
Long-term debt, less current portion 1,308 2,971
Accrued pension liability 719 719
Shareholders' equity:
Common Stock, par value $.01 per share; authorized 60,000,000 shares;
issued and outstanding 18,696,629 and 18,661,869 shares 187 187
Additional paid in capital 67,095 67,081
Accumulated (deficit) (4,488) (1,509)
Additional minimum liability related to defined benefit pension plan (117) (117)
Unrealized gain on investment 3,256 4,982
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Total shareholders' equity 65,933 70,624
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Total liabilities and shareholders' equity $78,472 $84,946
======= =======
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)
THREE MONTHS ENDED
----------------------------
DECEMBER 28, DECEMBER 30,
1996 1995
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Net sales $12,470 $14,859
Cost of goods sold
11,238 10,762
Gross margin ------- -------
1,232 4,097
Operating expenses:
Research and development 704 363
Selling, general and administrative 3,124 4,231
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Total operating expenses 3,828 4,594
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Operating (loss) (2,596) (497)
Other income 109 289
Interest expense (82) (121)
(Loss) before provision (credit) for income taxes (2,569) (329)
Provision (credit) for income taxes 410 (131)
-------
NET (LOSS) (2,979) (198)
Retained earnings (deficit), beginning of period (1,509) 6,783
------- -------
Retained earnings (deficit), end of period $(4,488) $ 6,585
======= =======
NET (LOSS) PER SHARE OF COMMON STOCK $(.16) $(.01)
Weighted average number of common and
common equivalent shares outstanding 18,667 18,448
======= =======
The accompanying notes are an integral part of these statements.
--3--
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
----------------------------
DECEMBER 28, DECEMBER 30,
1996 1995
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Cash flows from operating activities:
Net (loss) $(2,979) $ (198)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
(Credit) for income tax expense - (131)
Joint venture research and development 148 153
Depreciation and amortization 686 730
Allowances against accounts receivable (831) (697)
Write-off of inventories 333 316
Other - (10)
Changes in assets and liabilities:
Decrease in accounts receivable 641 1,636
Decrease (increase) in inventories 756 (1,676)
Decrease (increase) in prepaid expenses and other assets 2,908 (233)
(Decrease) in accounts payable (1,137) (490)
(Decrease) in accrued expenses and other liabilities (726) (102)
------- -------
Net cash (used in) operating activities (201) (702)
Cash flows from investing activities:
Capital expenditures (269) (1,117)
Decrease (increase) in investments 42 (1,000)
Decrease in temporary investments 35 83
------- -------
Net cash (used in) investing activities (192) (2,034)
Cash flows from financing activities:
Proceeds from issuance of capital stock 14 39
Net proceeds from revolving credit line, proceeds from issuance
of notes payable and other debt 3,624 4,050
Principal payments under long-term debt and other borrowings (3,544) (4,196)
Payments due to stock conversion - (5)
------- -------
Net cash provided by (used in) financing activities 94 (112)
Net (decrease) in cash and cash equivalents (299) (2,848)
Cash and cash equivalents at beginning of period $ 299 17,986
------- -------
Cash and cash equivalents at end of period - $15,138
======= =======
The accompanying notes are an integral part of these statements.
--4--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 28, 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 in oral solid (tablet, caplet and capsule)
form, with a small number of products in the form of creams and liquids.
BASIS OF PREPARATION:
The accompanying financial statements at December 28, 1996 and for the three-
month periods ended December 28, 1996 and December 30, 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, 1996 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.
SHORT TERM DEBT:
On December 27, 1996, Par entered into a Loan and Security Agreement (the
"Loan Agreement") with General Electric Capital Corporation ("GECC") which
provides Par with a three-year revolving line of credit. Pursuant to the Loan
Agreement, Par is permitted to borrow up to the lesser of (i) the borrowing base
established under the Loan Agreement or (ii) $20,000,000. The borrowing base is
limited to 85% of eligible accounts receivable plus 50% of eligible inventory of
Par as determined from time to time by GECC. The interest rate charge on the
line of credit is based upon a per annum rate of 2.50% above the 30-day
commercial paper rate for high-grade unsecured notes adjusted monthly. The line
of credit with GECC is secured by the assets of Par and PRI other than real
property and is guaranteed by PRI. As a condition to such facility, Par, PRI,
and their affiliates have established a cash management system pursuant to which
all cash and cash equivalents received by any of such entities are deposited
into a lockbox account over which GECC has sole operating control and which are
applied on a daily basis to reduce amounts outstanding under the line of credit.
As of December 28, 1996, approximately $3,600,000 was outstanding under such
line of credit. The revolving credit facility, which is subject to covenants
which are based on various financial benchmarks, replaced PRI's previous
$16,000,000 revolving facility and $4,000,000 term loan facility with Fleet
Bank, N.A. Any significant reduction in the borrowing base will adversely
affect the Company's liquidity.
INCOME TAXES:
Based on the Company's recent performance and the uncertainty of the generic
business in which it operates, management believes that future operating income
might not be sufficient to recognize fully the net operating loss carryforwards
of the Company. Therefore, the Company is not recognizing a benefit for its
operating loss this quarter. If the Company is unable to generate sufficient
taxable income in the future, increases in the valuation will be required
through a charge to expense. The Company incurred income tax expense of
$410,000 in the current quarter due to interest relating to a settlement with
the Internal Revenue Service in fiscal 1995 for the disallowance of the
Company's tax credit in prior periods with respect to certain research and
development credits.
--5--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 28, 1996
(UNAUDITED)
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Retirement Plans:
The Company has a defined contribution, social security integrated Retirement
Plan providing retirement benefits to eligible employees as defined in the Plan.
The Board of Directors of Par authorized the cessation of employer contributions
effective December 30, 1996. Consequently, participants in the Retirement Plan
will no longer be entitled to any employer contributions under such plan for
1996 or subsequent years. The Company 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. In fiscal 1997, the Company intends to
merge the Retirement Plan into the Retirement Savings Plan.
Legal Proceedings:
The Company is involved in certain litigation matters, including certain
product liability actions and actions by two former officers for, among other
things, breach of contract. Such actions seek damages from the Company,
including compensatory and punitive damages. The Company intends to defend
these actions vigorously. The Company believes that these actions are
incidental to the conduct of its business and that the ultimate resolution
thereof will not have a material adverse effect on its financial condition or
results of operations.
Restructuring and Cost Reductions:
The Company implemented measures during the fourth quarter of fiscal
1996, which continued in the first quarter of fiscal 1997, in an effort to
reduce costs and increase operating efficiencies. Such measures provided for a
reduction of the work force, changes in senior management, a reorganization of
certain existing personnel and reductions in certain expenses.
--6--
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, (III) RESEARCH AND DEVELOPMENT
PROJECT DELAYS OR DELAYS IN OBTAINING REGULATORY APPROVALS, AND (IV) THE ABILITY
OF THE COMPANY TO RETAIN AND ATTRACT MANAGEMENT PERSONNEL IN KEY OPERATIONAL
AREAS.
RESULTS OF OPERATIONS
GENERAL
The Company incurred an operating loss for the three-month period ended
December 28, 1996 of $2,596,000 compared to a loss of $497,000 in the
corresponding period of the prior fiscal year. The loss is principally due to
sales and gross margin declines, as described below. If sales declines are not
offset by increased sales of new distributed or manufactured products, net sales
and gross margin declines will continue and, accordingly, result in continuing
losses. As a result of the recent losses, the Company is continuing to search
for strategic alternatives to improve its financial condition and product line.
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 the United States. The factors contributing to the intense
competition and affecting both the introduction of new products and the pricing
and profit margins of the Company, include, among other things, (i) introduction
of other generic drug manufacturer's products in direct competition with the
Company's significant products, (ii) competition from brand name drug
manufacturers selling generic versions of their drugs, (iii) increased ability
of generic competitors to enter the market after patent expiration, diminishing
the amount and duration of significant profits, and (iv) willingness of generic
drug customers, including wholesale and retail customers, to switch among
pharmaceutical manufacturers.
In response to recent results and industry trends, the Company has
implemented measures to reduce costs and increase operating efficiencies (see
"Notes to Financial Statements-Commitments, Contingencies and Other Matters-
Restructuring and Cost Reductions"). These measures have begun to reduce
operating costs in fiscal 1997. No assurances can be given that reduced costs
will return the Company to profitability.
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 first quarter of the current fiscal year.
The Company is engaged in efforts, subject to U.S. Food and Drug Administration
("FDA") approval and other factors, to introduce new products 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 happen or
that sales of additional products will reduce losses or return the Company to
profitability. Continuing losses will adversely affect the Company's liquidity
and, accordingly, its ability to fund research and development or ventures
relating to the sale of new products (see "-Financial Condition-Liquidity and
Capital Resources").
NET SALES
Net sales of $12,470,000 for the three months ended December 28, 1996
decreased $2,389,000, or 16%, from the corresponding period of the prior fiscal
year. The decline is primarily due to decreased sales of manufactured
--7--
products which resulted, in large, part from lower pricing and decreases in
volume of one of the Company's significant products, and to a lesser extent, one
other significant product. The reduction in pricing and volume results from
increased competition from other drug manufacturers. Sales of distributed
products were consistent with the levels achieved in the corresponding period of
the prior fiscal year.
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 $1,232,000 (10% of net sales) for the three
months ended December 28, 1996 decreased by $2,865,000 from $4,097,000 (28% of
net sales) in the corresponding period of the prior fiscal year. The gross
margin decline is primarily due to lower selling prices and decreased volumes of
certain significant manufactured products resulting from the introduction of
other generic drug manufacturers' products in direct competition with the
Company's significant products. Gross margins on distributed products for the
current three-month period were comparable to gross margins for the quarter
ended December 30, 1995.
Inventory write-offs, taken in the normal course of business, amounted to
$333,000 for the three-month period ended December 28, 1996, compared to
$316,000 in the corresponding period of the prior year. The inventory write-
offs are related to the disposal of finished products due to short shelf life
and work in process inventory not meeting the Company's quality control
standards.
OPERATING EXPENSES
Research and Development
Research and development expenses for the three months ended December 28,
1996 were $704,000 versus $363,000 for the three months ended December 30, 1995.
In the current quarter, there were no payments to or reimbursements from Sano
Corporation ("Sano"), while in the prior year payments of $1,075,000 were more
than offset by a reimbursement from Sano of $1,500,000. The Company has a
distribution agreement with Sano to distribute generic transdermal products
developed by Sano. The Company recorded its share of the Clal joint venture's
(see below) research and development expenses of $148,000 for the current three-
month period compared to $153,000 for the corresponding period of the prior
year.
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.
Selling, General and Administrative
Selling, general and administrative costs are $3,124,000 (25% of net sales)
for the three month period ended December 28, 1996 versus $4,231,000 (28% of net
sales) for the corresponding period in the prior fiscal year. The decrease in
the period is primarily attributable to a decline in personnel costs resulting
from recent headcount reductions and the amendment of a pension plan (see "Notes
to Financial Statements-Commitments, Contingencies and Other Matters-Retirement
Plans" and "-Restructuring and Cost Reductions"). In addition, fees for
consulting and professional services, costs for advertising and developmental
marketing and bad debt expense have been reduced in the current fiscal quarter.
The prior year's costs included severance expenses related to management
reorganization at that time.
--8--
Income Taxes
Management has determined, based on the Company's performance and the
uncertainty of the generic business in which it operates, that future operating
income might not be sufficient to recognize fully the net operating loss
carryforwards of the Company. Therefore, the Company is not recognizing a
benefit for its operating loss this quarter. The Company incurred income tax
expense of $410,000 in the current quarter due to interest relating to a
settlement with the Internal Revenue Service in fiscal 1995 for the disallowance
of the Company's tax credit for prior periods with respect to certain research
and development credits. The Company recorded an income tax benefit of $131,000
during the first quarter of fiscal 1996 which was reversed during the fourth
quarter of the same year.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $16,829,000 at December 28, 1996 represents a decrease
of $3,887,000 from September 30, 1996. The decrease is principally due to the
use of funds to fund operating losses. As a result of a cash management system
pursuant to the financing agreement that the Company entered into with General
Electric Capital Corporation ("GECC"), there is no cash balance at December 28,
1996 (see "-Financing"). The working capital ratio of 2.6x declined from 2.9x
at fiscal year end.
During the first quarter of fiscal 1997, the Company sold 7,000 shares of
Sano stock yielding net proceeds of approximately $135,000. In January 1997,
the Company advanced to Sano $1,957,000 as funding for the research and
development costs of certain generic transdermal products.
The Company is committed to invest $3,920,000 (which includes the balance
of the commitment from fiscal year 1996) in the Clal joint venture through
fiscal 1997. The Company and Clal are negotiating to amend their remaining
funding commitments in order to reflect the present and contemplated capital
requirements of the Joint Venture, although they have not yet amended their
written agreement. In the event that the Company and Clal do not reach a
written agreement and either party makes an additional contribution to the joint
venture, the other party's share in the profits and capital of the joint venture
will be diluted.
The Company expects to fund its research and development activities,
including its obligations under the existing distribution and development
arrangements discussed above, out of its working capital, and if necessary with
borrowings against its line of credit, to the extent then available (see "--
Financing"). If, however, the Company continues to experience significant
losses, its liquidity and, accordingly, its ability to fund research and
development or ventures relating to the distribution of new products will be
materially and adversely affected.
FINANCING
As of December 28, 1996, the Company's total outstanding short-term and
long-term debt amounted to $3,624,000 and $1,569,000, respectively. The short-
term debt consists of the outstanding amount under the Company's line of credit
with GECC and the long-term debt consists primarily of an outstanding mortgage
loan to another bank.
On December 27, 1996, Par entered into a Loan and Security Agreement (the
"Loan Agreement") with GECC which provides Par with a three-year revolving line
of credit. Pursuant to the Loan Agreement, Par is permitted to borrow up to the
lesser of (i) the borrowing base established under the Loan Agreement or (ii)
$20,000,000. The borrowing base is limited to 85% of eligible accounts
receivable plus 50% of eligible inventory of Par, each as determined from time
to time by GECC. The interest rate on the line of credit is based upon a per
annum rate of 2.50% above the 30-day commercial paper rate for high-grade
unsecured notes adjusted monthly. The line of credit with GECC is secured by the
assets of Par and PRI other than real property and is guaranteed by PRI. As a
condition to such facility, Par, PRI and their affiliates have established a
cash management system pursuant to which all cash and cash equivalents received
by any of such entities are deposited into a lockbox
--9--
account over which GECC has sole operating control and which are applied on a
daily basis to reduce amounts outstanding under the line of credit. The
revolving credit facility, which is subject to covenants based on various
financial benchmarks, replaced PRI's previous $16,000,000 revolving facility and
$4,000,000 term loan facility with Fleet Bank, N.A. Any significant reduction in
the borrowing base will adversely affect the Company's liquidity.
--10--
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits:
10.37 - Pledge Agreement, dated December 27, 1996, between Par
Pharmaceutical, Inc. and General Electric Capital
Corporation.
10.38 - Pledge Agreement, dated December 27, 1996, between
Pharmaceutical Resources, Inc. and General Electric Capital
Corporation.
10.39 - Loan and Security Agreement, dated December 27, 1996, between
Par Pharmaceutical, Inc. and General Electric Capital
Corporation.
11 - Computation of per share data.
21 - Subsidiaries of Registrant.
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)
February 11, 1997 /s/ Kenneth I. Sawyer
-----------------------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
February 11, 1997 /s/ Dennis J. O'Connor
--------------------------------------------
Dennis J. O'Connor
Vice President - Chief Financial Officer and
Secretary
(Principal Accounting and Financial Officer)
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EXHIBIT INDEX
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Exhibit Number Description Page Number
-------------- ------------ -----------
10.37 Pledge Agreement, dated December 27, 1996, 14
between Par Pharmaceutical, Inc. and General
Electric Capital Corporation.
10.38 Pledge Agreement, dated December 27, 1996, 25
between Pharmaceutical Resources, Inc. and General
Electric Capital Corporation.
10.39 Loan and Security Agreement, dated December 27, 36
1996, between Par Pharmaceutical, Inc. and General
Electric Capital Corporation.
11 Computation of per share data 95
21 Subsidiaries of Registrant 96
27 Financial Data Schedule 97
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