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 March 29, 1997
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 (check mark) No
------------ --------
18,696,629
Number of shares of Common Stock outstanding as of May 8, 1997.
This is page 1 of 27 pages. The exhibit index is on page 14.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
MARCH 29, SEPTEMBER 30,
ASSETS 1997 1996
------ --------- -----------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents - $ 299
Temporary investments $ 123 158
Accounts receivable, net of allowances of
$3,300 and $2,643 7,350 7,645
Inventories 16,714 19,352
Prepaid expenses and other current assets 1,045 3,894
-------- -------
Total current assets 25,232 31,348
Property, plant and equipment, at cost less
accumulated depreciation and amortization 24,980 26,068
Deferred charges and other assets 1,470 1,222
Investments 5,297 8,672
Investment in joint venture 2,649 3,028
Non-current deferred tax benefit 14,608 14,608
-------- -------
Total assets $ 74,236 $84,946
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 241 $ 2,142
Short term debt 8,059 -
Accounts payable 2,602 4,163
Accrued salaries and employee benefits 2,601 3,299
Accrued expenses and other current liabilities 1,132 1,028
-------- -------
Total current liabilities 14,635 10,632
Long-term debt, less current portion 1,239 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 67,117 67,081
Accumulated (deficit) (11,253) (1,509)
Additional minimum liability related to defined benefit pension plan (117) (117)
Unrealized gain on investment 1,709 4,982
-------- -------
Total shareholders' equity 57,643 70,624
-------- -------
Total liabilities and shareholders' equity $ 74,236 $84,946
======== =======
The accompanying notes are an integral part of these statements.
--2--
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(In Thousands, Except Per Share Amounts)
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
---------------------- ----------------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net sales $ 24,252 $30,220 $ 11,782 $15,361
Cost of goods sold 23,494 21,953 12,256 11,191
-------- ------- -------- -------
Gross margin 758 8,267 (474) 4,170
Operating expenses:
Research and development 3,777 1,582 3,073 1,219
Selling, general and administrative 6,346 8,510 3,222 4,279
-------- ------- -------- -------
Total operating expenses 10,123 10,092 6,295 5,498
-------- ------- -------- -------
Operating (loss) (9,365) (1,825) (6,769) (1,328)
Other income 249 471 140 182
Interest expense (218) (206) (136) (85)
-------- ------- -------- -------
(Loss) before provision (credit) for income taxes (9,334) (1,560) (6,765) (1,231)
Provision (credit) for income taxes 410 (622) - (491)
-------- ------- -------- -------
NET (LOSS) (9,744) (938) (6,765) (740)
Retained earnings (deficit), beginning of period (1,509) 6,783 (4,488) 6,585
-------- ------- ------- -------
Retained earnings (deficit), end of period $(11,253) $ 5,845 $(11,253) $ 5,845
======== ======= ======= =======
NET (LOSS) PER SHARE OF COMMON STOCK $(.52) $(.05) $(.36) $(.04)
Weighted average number of common and
common equivalent shares outstanding 18,668 18,403 18,701 18,434
======== ======= ======== =======
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
-------------------------------------------
MARCH 29, MARCH 30,
1997 1996
------------- --------------
Cash flows from operating activities:
Net (loss) $(9,744) $ (938)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
(Credit) for income tax expense - (622)
Joint venture research and development 379 353
Depreciation and amortization 1,365 1,417
Allowances against accounts receivable (657) (11)
Write-off of inventories 634 629
Other - (10)
Changes in assets and liabilities:
Decrease in accounts receivable 952 1,189
Decrease (increase) in inventories 2,004 (2,506)
Decrease (increase) in prepaid expenses and other assets 2,876 (268)
(Decrease) in accounts payable (1,561) (160)
(Decrease) in accrued expenses and other liabilities (594) (25)
------- -------
Net cash (used in) operating activities (4,346) (952)
Cash flows from investing activities:
Capital expenditures (552) (2,314)
Decrease (increase) in investments 102 (1,000)
Decrease in temporary investments 35 85
------- -------
Net cash (used in) investing activities (415) (3,229)
Cash flows from financing activities:
Proceeds from issuance of capital stock 36 118
Net proceeds from revolving credit line, proceeds from issuance
of notes payable and other debt 8,059 4,307
Principal payments under long-term debt and other borrowings (3,633) (4,603)
Payments due to stock conversion - (5)
------- -------
Net cash provided by (used in) financing activities 4,462 (183)
Net (decrease) in cash and cash equivalents (299) (4,364)
Cash and cash equivalents at beginning of period $ 299 17,986
------- -------
Cash and cash equivalents at end of period - $13,622
======= =======
The accompanying notes are an integral part of these statements.
--4--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 29, 1997
(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 March 29, 1997 and for the
six-month and three-month periods ended March 29, 1997 and March 30, 1996 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 Pharmaceutical, Inc., the Company's
operating subsidiary ("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. In connection with 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 March 29, 1997, approximately $8,100,000 was outstanding under such line
of credit. The revolving credit facility is subject to covenants based on
various financial benchmarks. Any significant reduction in the borrowing base
from current levels will adversely affect the Company's liquidity.
On March 29, 1997, the Company was in violation of financial covenants
contained in the Loan Agreement. The Company has an understanding with GECC for
the waiver by GECC of such breaches and the amendment of the Loan Agreement with
respect to such covenants. The Company and GECC are in the process of finalizing
the amendment and waiver.
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 in the six-month period ended March 29, 1997. 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 first quarter of fiscal
1997 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
MARCH 29, 1997
(UNAUDITED)
EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128"), which is effective for financial statements for periods ending after
December 15, 1997, and requires retroactive restatement of all earnings per
share data. SFAS 128 requires replacement of primary and fully diluted earnings
per share with basic and diluted earnings per share. For the current and
comparative prior six and three-month periods, SFAS 128 would have had no impact
on earnings per share.
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 Retirement 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 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.
SUBSEQUENT EVENTS:
On April 30, 1997, Par entered into a Manufacturing and Supply
Agreement (the "Supply Agreement") with BASF Corporation ("BASF"), a
manufacturer of pharmaceutical products. Under the Supply Agreement, Par agreed
to purchase certain minimum quantities of certain products manufactured by BASF
at one of its facilities, and Par will phase out its manufacturing of those
products. BASF will discontinue its direct sale of those products at the
particular facility. The agreement has an initial term of three years (subject
to earlier termination upon the occurrence of certain events as provided
therein) and thereafter renews automatically for successive two-year periods to
December 31, 2005, if Par has met certain purchase thresholds. In the event
that Par's purchases do not equal or exceed the thresholds, BASF may elect to
terminate the Supply Agreement effective one year later. The Company expects it
will commence selling drugs manufactured by BASF and that BASF will transfer the
marketing and sales of certain products covered by the Supply Agreement in the
fourth quarter of fiscal 1997.
--6--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MARCH 29, 1997
(UNAUDITED)
In April 1997, the Company entered into an agreement (the "Lek
Agreement") with Lek Pharmaceutical and Chemical Company d.d. ("Lek"), a
European manufacturer of pharmaceutical products located in Slovenia. Under the
Lek Agreement, the Company became a non-exclusive distributor of one of Lek's
pharmaceutical products in the United States and any other United States
territories. Par also agreed to purchase its requirements of that product
exclusively from Lek or one of its affiliates. Lek has received from the U.S.
Food and Drug Administration ("FDA") Abbreviated New Drug Application ("ANDA")
approvals for three strengths of Acyclovir, the generic equivalent of
Zovirax(R), and the Company began shipping the product in the third quarter of
fiscal 1997. The Lek Agreement has an initial term of five years (subject to
earlier termination by either party as provided therein), and thereafter
automatically renews from year to year unless either party gives written notice
of non-renewal. The cost to the Company of the product is subject to a base
price plus a percentage of the net profit as defined in the Lek Agreement.
--7--
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 operating losses for the six-month and three-
month periods ended March 29, 1997 of $9,365,000 and $6,769,000, respectively,
compared to losses of $1,825,000 and $1,328,000 in the corresponding periods of
the prior fiscal year. The losses are principally due to sales and gross margin
declines, as described below, and an advance to Sano Corporation ("Sano") in the
current three-month period for the development of transdermal products. The
Company's gross margins for the six-month and three-month periods ended March
29, 1997 were $758,000 and $(474,000), respectively, compared to $8,267,000 and
$4,170,000 for the corresponding periods of the prior fiscal year. The negative
gross margin experienced in the current quarter is the result of the continuing
trend of lower pricing on certain manufactured products. 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
certain operating costs in fiscal 1997. No assurances can be given that reduced
costs will return the Company to profitability.
On April 30, 1997, Par entered into a Manufacturing and Supply
Agreement (the "Supply Agreement") with BASF Corporation ("BASF"), a
manufacturer of pharmaceutical products (see "Notes to Financial Statements-
Subsequent Events"). Under the Supply Agreement, Par agreed to purchase certain
minimum quantities of certain products manufactured by BASF at one of its
facilities, and Par will phase out its manufacturing of those products. BASF
will discontinue its direct sale of those products manufactured at the
particular facility. The Company expects it will commence selling drugs
manufactured by BASF and that BASF will transfer the marketing and sales of
certain products covered by the Supply Agreement in the fourth quarter of fiscal
1997.
In April 1997, the Company entered into an agreement with Lek
Pharmaceutical and Chemical Company d.d. ("Lek"), in which it has obtained
rights to distribute Acyclovir, the generic equivalent of Zovirax(R) (see "Notes
to Financial Statements-Subsequent Events"). The non-exclusive distribution
agreement covers three dosage forms manufactured by Lek. The product was
introduced by the Company in third quarter of fiscal 1997.
--8--
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 projects.
There have been no significant sales of any new manufactured or distributed
products introduced in the first six months of the current fiscal year. The
Company is engaged in efforts, subject to FDA approval and other factors, to
introduce new products as a result of its research and development efforts and
distribution agreements. Sano has advised the Company that the FDA has not yet
approved its previously submitted Abbreviated New Drug Applications ("ANDAs")
for the nicotine and nitroglycerine patches and, accordingly, such patches will
not be available for marketing during the first six months of calendar 1997. As
the submission is at the FDA, Sano cannot determine when or if approvals will be
granted. 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 $24,252,000 for the six months ended March 29, 1997
decreased $5,968,000, or 20%, 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 decreases in volume of one
of the Company's significant products, and to a lesser extent, two other
significant products, partially offset by higher volume of a lower margin
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.
Net sales for the current quarter are $11,782,000 compared to
$15,361,000 (or 23% lower) in the corresponding quarter of last year. The
decline is principally attributable to the continuing lower sales of certain
significant products, partially offset by higher volume of a lower margin
product.
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 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 $758,000 (3% of net sales) for the six
months ended March 29, 1997 decreased by $7,509,000 from $8,267,000 (27% 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 for distributed product continue
to be immaterial.
The gross margin in the current quarter of $(474,000), or -4% of net
sales, is $4,644,000 lower than the margin of $4,170,000, or 27% of net sales,
in the corresponding quarter of the prior year. The decline is primarily
attributable to the lower sales and pricing of certain manufactured products
which continued the trend of decreasing margins.
Inventory write-offs, taken in the normal course of business, amounted
to $634,000 and $301,000 for the six-month and three-month periods ended March
29, 1997, compared to $629,000 and $313,000 in the corresponding periods 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 six months ended March 29,
1997 were $3,777,000 versus $1,582,000 for the six months ended March 30, 1996.
In the current period, advances to Sano amounted to $1,957,000, while in the
prior year payments of $1,075,000 were more than offset by a reimbursement from
Sano of
--9--
$1,500,000. The Company has a distribution agreement with Sano to distribute
generic transdermal products developed by Sano. The Company is engaged in
ongoing discussions with Sano with respect to interpretations of the rights and
obligations of the respective parties under the Distribution Agreement. The
Company recorded its share of the Clal Pharmaceutical Industries, Ltd. ("Clal")
joint venture's (see below) research and development expenses of $379,000 and
$231,000 for the current six-month and three-month periods, respectively,
compared to $353,000 and $200,000 for the corresponding periods of the prior
year.
Research and development expenses in the current three-month period of
$3,073,000 increased from $1,219,000 for the corresponding period in the prior
year primarily as result of advances to Sano not incurred in the corresponding
quarter 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 projects. In May 1995, the Company formed an alliance with 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 several
products for research.
Selling, General and Administrative
Selling, general and administrative costs are $6,346,000 (26% of net
sales) for the six month period ended March 29, 1997 versus $8,510,000 (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 retirement
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 year. The prior year's costs included severance expenses related
to management reorganization at that time.
In the current quarter, selling, general and administrative costs of
$3,222,000 (27% of net sales) decreased $1,057,000 from $4,279,000 (28% of net
sales) in the corresponding quarter of last year. The decrease is primarily the
result of decreased personnel costs, professional fees and advertising and
marketing costs, as discussed above.
Income Taxes
Management has determined, based on the Company's recent 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 for the six-month period ended March 29, 1997.
The Company incurred income tax expense of $410,000 in the first quarter of
fiscal 1997 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 income tax benefit of $622,000 and $491,000 for the six-month
and three-month periods of fiscal 1996, respectively, which were reversed during
the fourth quarter of the same year.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $10,597,000 at March 29, 1997 represents a decrease
of $10,119,000 from September 30, 1996. The decrease is principally due to the
use of funds to fund operating losses and advances to Sano. 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 March 29, 1997 (see "-Financing"). The working capital ratio of
1.7x declined from 2.9x at fiscal year end.
During the six months ended March 29, 1997, the Company sold 17,000
shares of Sano stock yielding net proceeds of approximately $272,000. In
January 1997, the Company advanced to Sano $1,957,000 as funding for the
research and development costs of certain generic transdermal products.
--10--
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 modify their
contractual rights and obligations under the joint venture agreement, 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 March 29, 1997, the Company's total outstanding short-term and
long-term debt amounted to $8,059,000 and $1,480,000, 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 with 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. In
connection with 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. The revolving credit facility is subject
to covenants based on various financial benchmarks. Any significant reduction
in the borrowing base from its current levels will adversely affect the
Company's liquidity. The Company was in breach of the Loan Agreement during the
second quarter of fiscal 1997 (see "Item 6-Defaults Upon Senior Securities"
below).
ITEM 6. DEFAULTS UPON SENIOR SECURITIES.
On March 29, 1997, the Company was in violation of financial covenants
contained in the Loan Agreement. The Company has an understanding with GECC for
the waiver by GECC of such breaches and the amendment of the Loan Agreement
with respect to such covenants. The Company and GECC are in the process of
finalizing the amendment and waiver.
--11--
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits:
10.40 - Manufacturing and Supply Agreement between Par
Pharmaceutical, Inc. and BASF Corporation, dated April
30, 1997.
11 - Computation of per share data.
27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None.
--12--
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 13, 1997 /s/ Kenneth I. Sawyer
---------------------------------------------
Kenneth I. Sawyer
President and Chief Executive Officer
(Principal Executive Officer)
May 13, 1997 /s/ Dennis J. O'Connor
---------------------------------------------
Dennis J. O'Connor
Vice President - Chief Financial Officer and
Secretary
(Principal Accounting and Financial Officer)
--13--
EXHIBIT INDEX
-------------
Exhibit Number Description Page Number
- -------------- ------------ -----------
10.40 Manufacturing and Supply Agreement
between Par Pharmaceutical, Inc. and BASF
Corporation, dated April 30, 1997 15
11 Computation of per share data 26
27 Financial Data Schedule 27
--14--
EXHIBIT 10.40
MANUFACTURING AND SUPPLY AGREEMENT
THIS MANUFACTURING AND SUPPLY AGREEMENT (the "Agreement"), dated as of
April 30, 1997, is by and between BASF CORPORATION, having offices at 3000
Continental Drive-North, Mount Olive, New Jersey 07828-1234 ("BC"), and PAR
PHARMACEUTICAL, INC., having offices at One Ram Ridge Road, Spring Valley, New
York 10977 ("PAR").
WHEREAS, PAR is currently manufacturing and/or marketing the
pharmaceutical products listed on Schedule 1 hereto;
WHEREAS, BC maintains a facility capable of manufacturing the products
listed on Schedule 1 hereto (subject to receiving certain regulatory approval as
set forth herein); and
WHEREAS, the parties desire to provide for the manufacture of all
such products by BC, subject to the terms and conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS. For purposes hereof, the following terms shall
have the meanings set forth:
"Affiliates" shall mean, with respect to any Person, any other Person
controlled by, controlling or under common control with such Person, where
control means more than 50% ownership or voting rights or the power to direct
management or policy.
"ANDA" shall mean the abbreviated new drug application for each Product as
approved by the FDA.
"BC Customer" shall have the meaning set forth in Section 2.2 hereof.
"BHC" shall mean a New York partnership originally established between
Hoecel Corporation and Boots Manufacturing Inc., with a plant located in Bishop,
Texas.
"Confidential Information" shall mean any information which in any way
shall relate to a party, including, without limitation, its products, business,
know-how, methods, trade secrets and technology, or to any Affiliate thereof,
that shall be furnished in connection with this Agreement.
"Contract Customer" shall mean the Person to which BC (or BHC) currently
sells any Ibuprofen Product manufactured at the Shreveport Facility.
"Excess Orders" shall have the meaning set forth in Section 3.2 hereof.
"FDA" shall mean the United States Food and Drug Administration.
"Manufacturing Records" shall mean all Specifications, formulations,
processes and controls, including all supporting and historical data, product
samples, technology transfer, laboratory data, development documentation and all
related regulatory and compliance documents and information and such further
information and documentation as BC shall reasonably request to enable it to
manufacture and supply Products in accordance with the terms and conditions set
forth herein.
"Minimum Purchase Requirements" shall mean the minimum quantities of each
Product set forth on Schedule 2 hereto which PAR must purchase from BC pursuant
to Section 2.1 hereof.
"Net Sales Price" shall mean the total amount invoiced on sales of each
Product by PAR or any of its Affiliates to independent, unrelated third parties
in bona fide arms' length transactions, less the following deductions, in each
case related specifically to the Products in question and actually allowed and
taken by such third
--15--
parties and not otherwise recovered by or reimbursed to PAR or its Affiliates:
(a) taxes on sales (such as sales or use taxes), insurance and other
transportation charges to the extent added to the sales price and set forth
separately as such in the total amount invoiced; and (b) trade, cash and
quantity discounts and rebates, shelf stock adjustments, mandated state and
federal rebates, chargebacks, return goods allowances and promotional allowances
as agreed to by parties in advance; provided, however, that if a change of
-------- -------
control of PAR shall occur and thereafter PAR shall continue to sell Products on
a wholesale basis, Net Sales Price for a Product shall mean the highest
wholesale price at which PAR sells such Product; and provided, further that if a
-------- -------
change of control of PAR shall occur and thereafter PAR shall sell Products on a
retail basis, Net Sales Price for each Product shall be mutually determined by
the parties, with such determination to reflect wholesale prices in the industry
of similar products. In the event that the parties hereto cannot agree on Net
Sales Price as set forth in the preceding sentence within sixty (60) days
following notice of a change of control, which notice shall be given promptly by
PAR, the parties shall submit such matter to a mutually agreed to independent
accounting firm or other qualified professional, the decision of which shall be
final and binding.
"Person" shall mean an individual, corporation, partnership or other
entity.
"Products" shall mean the pharmaceutical products listed on Schedule 1
hereto and such other pharmaceutical products as the parties may, from time to
time, designate in writing.
"Sales Materials" shall mean all sales and marketing literature and
materials relating to Products, lists setting forth the names, addresses and
contacts of all BC Customers, schedules of sales of Products and such further
information and documentation as PAR shall reasonably request with respect to
the Products.
"Shreveport Facility" shall mean the manufacturing facility at Shreveport,
Louisiana currently owned by a wholly owned subsidiary of BC.
"Specifications" shall mean the terms and conditions applicable to each
Product and described in the ANDA for such Product, as the same may be
supplemented from time to time.
"SUPAC" shall mean the necessary scale up and post approval change
submission required by the FDA for a change of manufacturing site from PAR's
manufacturing facility for the Transition Product to the Shreveport Facility to
permit BC to manufacture and supply such Product to PAR in accordance with the
terms and conditions hereof under PAR's ANDAs therefor.
"Trademarks" shall mean SSD (U.S. Serial No. 75/090,142), SSD RP (U.S.
Registration No. 1,782,008), SSD AF (U.S. Registration No. 1,767,867 for use
with silver sulfadiazine Products, and IBU (U.S. Registration No. 1,444,784) for
use with ibuprofen Products.
"Transition Date" shall mean the date as of which BC shall be able to ship
commercial quantities of the Transition Product.
"Transition Product" shall mean, collectively, the Product, in all colors
and shapes, specified in Item 1(a) of Schedule 1 hereto.
"Transition Period" shall mean the period commencing on the date hereof and
ending on the Transition Date.
2. PURCHASE OF PRODUCTS.
2.1 AGREEMENT TO PURCHASE. PAR hereby agrees to purchase, subject
to Sections 3.4 and 3.5 hereof, all its requirements for each Product from BC;
provided, however, that such requirements shall not be less than the Minimum
- -------- -------
Purchase Requirements for such Product for the periods specified therein; and,
provided, further, that (i) if BC, or an Affiliate thereof, shall introduce any
- -------- -------
product competitive (i.e., a substitute product having the same indication and
----
same active ingredient) with any Product and PAR's sales of such Product decline
as a percentage of total sales of such Product in the United States, then the
Minimum Purchase Requirements for each period following such introduction shall
be decreased proportionately, and (ii) if PAR shall demonstrate that total sales
of a Product in the United States shall decrease by 10% or more and PAR's sales
of such Product in the United States
--16--
remain substantially the same on a percentage of total U.S. sales basis, the
parties hereto shall reduce the Minimum Purchase Requirements with respect to
such Product to a level which reflects such decrease in total U.S. sales. In
the event that the Minimum Purchase Requirements are not purchased by PAR, PAR
shall pay BC, as liquidation damages, an amount equal to the price then in
effect which would have applied to purchases by PAR under this Agreement.
2.2 TRANSITIONAL ASSISTANCE-SALES. On or before the date hereof, BC
has delivered to PAR true and correct copies of all its Sales Materials.
Promptly upon the execution hereof, BC shall deliver to PAR a list of each
Person (except for Contract Customers) which has purchased Products from BC or
any of its Affiliates ("BC Customer") since January 1, 1995. Additionally, BC
shall deliver, promptly upon the execution hereof, a notice, in a form mutually
agreed upon by the parties hereto, to each BC Customer since January 1, 1996,
advising each of BC's discontinuance of the direct sale of those Products which
BC previously produced in its Shreveport Facility, availability of the Products
from PAR and (iii) BC shall offer to continue to supply Products to such
customer until July 31, 1997 or such earlier date as PAR and such customer agree
to a supply arrangement for the Products. BC shall cooperate with and assist
PAR in its efforts to market to BC Customers Products to be manufactured and
supplied hereunder upon the obtaining of all requisite regulatory approvals
therefor, including, but not limited to, coordination of meetings with and
providing introductions to such customers.
2.3 ADDITIONAL PRODUCTS. BC and PAR shall negotiate in good faith
to provide for the manufacture and supply of the products listed on Schedule 3
hereto, on terms consistent with those set forth in this Agreement.
3. MANUFACTURE AND SUPPLY; TRADEMARK LICENSE.
3.1 OBLIGATION TO SUPPLY. BC shall manufacture and supply to PAR
all PAR's requirements for each Product, subject to Sections 3.2 and 3.4 below,
in accordance with the terms and conditions set forth herein. BC shall not, and
shall cause its Affiliates not to, manufacture at the Shreveport Facility for or
supply any of the Products to any Person other than PAR, except for the Contract
Customers. BC shall not, and shall cause its Affiliates not to, sell any
Products to Contract Customers on terms more favorable than those of PAR
hereunder. Notwithstanding anything to the contrary contained herein, BC shall
not be required to supply quantities of Products which, together with quantities
of Products required to be sold to Contract Customers, exceed the quantities
which the Shreveport Facility currently is capable of manufacturing.
3.2 FORECASTS; EXCESS ORDERS. Not later than the tenth day of each
calendar quarter, PAR shall provide BC with a written rolling forecast of the
quantities of each Product that PAR expects to order for delivery during each of
the next three (3) succeeding calendar quarters. Each forecast shall indicate
the amounts of each Product expected for delivery in the relevant quarter. The
first such forecast of each Product that PAR expects to order shall be provided
on the date hereof and, until January 1, 1998, shall not include forecasts for
sales of Products to BC Customers. In the event that PAR shall, in any calendar
quarter, submit purchase orders ("Excess Orders") for a Product in excess of one
hundred twenty (120%) percent of the forecast for such Product as set forth in
the second most recent forecast delivered to BC prior to the date of such Excess
Order, BC shall use commercially reasonable efforts to fill such Excess Orders
as promptly as practicable, but shall not be in breach hereof if,
notwithstanding such efforts, it shall be unable to fill such Excess Orders.
3.3 TRANSITIONAL ASSISTANCE-MANUFACTURING. PAR shall, as promptly
as practicable upon the execution hereof, use its best efforts to prepare and
file with the FDA the SUPAC. Additionally, PAR shall assist BC in the filing by
BC of ANDAs for the Transition Product. The parties shall cooperate in all
respects in the preparation and filing of the SUPAC and such ANDAs and to obtain
the prompt approval thereof by the FDA, including, without limitation, providing
each other with all information and/or expertise necessary therefor. It is the
understanding of the parties that additional biostudies on the Transition
Product shall not be required therefor. The parties shall share equally (as
nearly as practicable) the out-of-pocket expenses and responsibilities incurred
with respect to the preparation, filing and approval of the SUPAC and such
ANDAs. PAR shall, at its expense, deliver to BC true and correct copies of all
Manufacturing Records and shall cooperate with BC and provide to BC such
assistance as shall be reasonably necessary to enable BC to manufacture and
supply the Transition Product in accordance with the terms and conditions
hereof.
--17--
3.4 CONTINUED MANUFACTURING OF PRODUCTS. (a) Until such time as BC
shall be able to manufacture all of PAR's requirements for the Transition
Product at the Shreveport Facility in accordance with the terms and conditions
hereof, PAR may continue to manufacture, or purchase from third parties, such of
the Transition Product as BC shall be unable to so manufacture; provided,
--------
however, that PAR shall offer to purchase all active ingredients used by it in
- -------
the manufacture thereof from BC to the extent such raw material is manufactured
or sold by BC and the purchase price therefor shall be as set forth in item 1(a)
of Schedule 1 hereto.
(b) Until such time as PAR shall have exhausted its inventory (including,
without limitation, inventory covered by firm purchase orders) of active
ingredients used in PAR's manufacture of the Products and of finished goods set
forth in Items 2 and 3 of Schedule 1 hereto, PAR may continue to manufacture
such Products.
3.5 PAR MANUFACTURING ON FAILURE TO SUPPLY. Subject to the
limitations set forth in Section 3.1, in the event that BC shall fail or shall
be unable to supply PAR's requirements for any Product hereunder for a period
exceeding, or likely to exceed, thirty (30) days, PAR may, in its discretion,
elect to manufacture, or cause to be manufactured, such Product until such time
as BC shall again be able to fully supply PAR's requirements therefor. Any
quantities manufactured by, or on behalf of, PAR due to such a failure to supply
shall be included for purposes of determining whether PAR has achieved the
Minimum Purchase Requirements with respect to such Product. In the event that
such failure or inability shall continue for six (6) months or more, PAR shall
have a right to terminate this Agreement pursuant to Section 9.4 hereof with
respect to such Product.
3.6 FACILITY MAINTENANCE. BC shall, at all times, maintain and
operate the Shreveport Facility, and implement such quality control procedures,
so as to be able to perform its obligations hereunder. BC shall permit quality
assurance representatives of PAR and representatives of the FDA to inspect the
Shreveport Facility at all times upon reasonable notice, during normal business
hours and on a confidential basis; provided, that PAR shall not conduct
--------
inspections of the Shreveport Facility more than once per calendar year, unless
otherwise legally required or unless there shall be specific, reasonable cause
shown for more frequent inspections. Notwithstanding the foregoing, PAR shall
be permitted reasonable periodic visits (not to exceed one per quarter) to the
Shreveport Facility to discuss manufacturing and supply issues with management
of BC.
3.7 TRADEMARK LICENSE. (a) BC hereby grants to PAR for the term of
this Agreement a non-transferable, non-exclusive, revocable license to use the
Trademarks in the United States in connection with the Products. BC hereby
represents and warrants to PAR that the Trademarks are the only trademarks
currently used by BC prior to the date of this Agreement solely with respect to
any of the Products. BC does not confer any other right, express or implied, to
use any other trademarks of BC or its Affiliates. PAR agrees that it will use
the Trademarks only in connection with the Products manufactured by BC under
this Agreement. Such use shall be in accordance with good trademark practice
and subject to instruction (relating to proper appearance for maintenance and
protection of the Trademarks) provided by BC from time to time.
(b) Sales and marketing aids, product identification and labels which
include the Trademarks shall be used exclusively in connection with Products
which shall have been manufactured under this Agreement. PAR shall always
identify the Trademarks as being registered trademarks of BC, used under license
from BC.
(c) PAR agrees to inform BC of any misuse or infringement of the Trademarks
of which PAR shall become aware. BC shall take such action as it shall deem
necessary and appropriate, in its sole discretion, to maintain and protect the
Trademarks. PAR agrees to cooperate with BC in pursuing any action to enforce
the Trademarks against any third party infringer, and BC agrees to reimburse PAR
for its reasonable expenses associated with such cooperation.
(d) BC shall fully indemnify and hold harmless PAR and its Affiliates from
and against any and all claims, liabilities, losses, damages and expenses
(including reasonable attorneys' fees) with respect to infringement,
misappropriation and similar claims by third parties relating to rights of
ownership or use of the Trademarks.
(e) Upon termination or expiry of this Agreement for any reason as set
forth in Section 9 hereof, PAR agrees to immediately cease use of the Trademarks
on any packaging or printed material, except however that PAR may continue to
sell any existing inventory of Products on which the Trademarks appear, for a
period of up to
--18--
six (6) months following such termination or expiry. If PAR continues selling
inventory after termination in connection with this provision, the obligations
of paragraphs 3.7(a) and (b) herein shall survive termination of this Agreement,
and PAR agrees to continue to abide by such terms for six (6) months following
termination, or until the existing inventory is sold, whichever comes first.
4. PURCHASING; DELIVERY; PAYMENT TERMS.
4.1 PURCHASE ORDERS. (a) From time to time, and subject to the
other provisions of this Agreement, PAR shall place orders for Products and
identify the requested delivery dates for each such order. The delivery dates
specified in any such orders shall not be less than sixty (60) days or more than
ninety (90) days from the dates of such orders; provided that the first order
--------
hereunder for each Product shall be placed as early as practicable after the
date hereof but at least ninety (90) days prior to the requested date of the
first shipment of such Product. Shipping logistics shall be as set forth on
Schedule 4 hereto. Each order placed pursuant to this Section 4.1 which is not
modified or cancelled by PAR within sixty (60) days of the requested delivery
date thereof shall constitute a firm obligation to purchase the ordered
quantities of Products. Orders may be modified or cancelled by PAR upon written
notice to BC; provided, however, that if modification or cancellation shall
-------- -------
occur less than sixty (60) days prior to the delivery date, PAR shall pay BC
within forty-five (45) days after invoice therefor out-of-pocket costs incurred
by BC as a result of such modification or cancellation and which would not
otherwise be recovered by BC hereunder. The terms and conditions of this
Agreement shall be controlling over any conflicting terms and conditions used by
PAR in ordering Products or by BC in accepting or confirming orders and any term
or condition of such purchase order, acceptance or other document which shall
conflict with or be in addition to the terms and conditions of this Agreement is
hereby expressly rejected.
(b) BC shall base its production planning on the forecasts provided to it
by PAR pursuant to Section 3.2 hereof. BC shall have the right, at any time, to
order materials and supplies to manufacture one hundred twenty percent (120%) of
those quantities of Products forecast to be ordered by PAR under Section 3.2 and
forecast by PAR under Section 3.2 for the then current and next one calendar
quarters. In addition to the extent any materials necessary for the manufacture
of the Products require a longer lead time, BC shall be entitled to order such
materials. If any of such materials or, if any work in process becomes unusable
due to a change in Specifications required by PAR, default by PAR or termination
of this Agreement, and BC is unable, despite reasonable efforts, to use such
materials in a cost-effective manner for its other manufacturing activities, BC
shall have the right to invoice PAR for the full cost of such unusable materials
or work in process and PAR shall pay such invoice within forty-five (45) days.
PAR shall have full rights and title to such materials that are unusable by BC.
Such materials and work in process shall be delivered by BC to PAR, at the
Shreveport Facility, upon the written request of PAR to be made within 30 days
of the date of BC's invoice; if no request is made by PAR within such period, BC
may destroy or dispose of (or have destroyed or disposed of) such materials or
work in process at PAR's expense.
4.2 DELIVERY. BC shall use commercially reasonable efforts to
ensure that Products ordered by PAR in accordance with this Agreement are
shipped in accordance with the delivery dates specified in PAR's purchase orders
accepted by BC, and BC shall notify PAR promptly of any significant anticipated
delay. All Products shall be delivered F.O.B., Shreveport Facility. PAR shall
arrange for shipping and transporting Products from the Shreveport Facility and
shall be responsible for the payment of shipping, insurance and related costs
from delivery to PAR's carrier. PAR, through its carrier, shall pick up
Products within five (5) business days of the delivery date specified in the
purchase order therefor. Title and risk of loss shall pass to PAR upon the
earlier of delivery to PAR's carrier or five (5) business days following such
specified delivery date. BC shall give PAR reasonable prior written notice of
the date on which Products subject to each purchase order shall first become
available for delivery. BC shall include in each shipment of Products hereunder
a certificate of analysis which shall certify that the Products contained in
such shipment comply with the provisions of Section 5.1 hereof.
4.3 ACCEPTANCE AND REJECTION. PAR shall give written notice to BC
of any claims that Products manufactured by BC do not comply with the
requirements of Section 5.1 hereof promptly upon its becoming aware of such
noncompliance. In the event that PAR shall fail to notify BC of any such claim
within thirty (30) working days of PAR's receipt thereof at its facility, such
Products shall be deemed accepted by PAR. Any notice by PAR pursuant to this
Section 4.3 that any Products shall not comply with the terms and conditions
hereof shall be accompanied by a true and correct copy of the results of any
tests conducted by PAR thereon. The parties shall cooperate in good faith to
resolve any disputes arising therefrom and in the event that the parties shall
be unable to
--19--
resolve such dispute within thirty (30) days from the date of PAR's notice
pursuant to this Section 4.3, the parties shall submit such dispute to a
mutually agreed to independent laboratory. The determination by such laboratory
shall be final and binding and the costs therefor shall be borne by the
nonprevailing party. PAR shall not dispose of any Product claimed by it not to
comply with the terms and conditions hereof until resolution of any dispute with
respect thereto. BC shall promptly replace any Product which does not comply
with the terms and conditions thereof, at its sole cost and expense, by delivery
thereof to PAR's facility. The parties shall agree to a common set of standards
by which to assess the acceptability of a Product from a "Pharmaceutical
Elegance" viewpoint.
4.4 PRODUCT RECALL. (a) In the event of any recall or seizure of
any Product arising out of, relating to, or occurring as a result of, any act or
omission by BC, BC shall, at the election of PAR, either:
(i) replace the amount of Product recalled or seized; or
(ii) give credit to PAR against outstanding receivables due from PAR in an
amount equal to the amount paid by PAR for the Product so recalled or seized or
otherwise owing by PAR hereunder; plus reimburse (or, at the election of PAR,
credit) PAR for all transportation costs, if any, taxes, insurance, handling and
reasonable and verifiable out-of-pocket costs incurred by PAR in respect of such
recalled or seized Product.
(b) In the event of any recall or seizure of any Product arising out of,
relating to or occurring as a result of any act or omission of PAR, PAR shall be
solely responsible for, and shall not deduct for purposes of calculating the Net
Sales Price for such Product, any transportation costs, import duties, if any,
taxes, insurance, handling and other costs incurred by PAR in respect of such
recalled or seized product.
(c) For purposes of this Section 4.4, "recall" shall mean (i) any action by
BC, PAR or any Affiliate of either to recover title to or possession of any
Product sold or shipped and/or (ii) any decision by PAR not to sell or ship
Product to third parties which would have been subject to recall if it had been
sold or shipped, in each case taken in the good faith belief that such action
was appropriate under the circumstances. For purposes of this Section 4.4,
"seizure" shall mean any action by any government agency to detain or destroy
Product.
(d) BC and PAR shall keep the other fully informed of any notification or
other information, whether received directly or indirectly, which might affect
the marketability, safety or effectiveness of any Product, or which might result
in liability issues or otherwise necessitate action on the party of either
party, or which might result in recall or seizure of any Product. The holder of
the ANDA (or, if applicable, the new drug application) at the time of any recall
will be responsible for assuring that such recall is closed-out with the FDA,
unless the FDA shall otherwise require.
5. QUALITY ASSURANCE; TESTING.
5.1 PRODUCT COMPLIANCE. BC shall produce all Products in accordance
with the Specifications therefor and current Good Manufacturing Practices. All
Products shall be stored, packaged and labelled in accordance with the
requirements of the Federal Food, Drug and Cosmetics Act (the "FFD&C Act") and
the rules and regulations of the FDA promulgated thereunder. Each Product
shall, at the time of shipment, not be adulterated or misbranded within the
meaning of the FFD&C Act. Each finished Product shall have a minimum shelf life
of at least twenty (20) months from the date of delivery hereunder. Each bulk
Product will have a customary shelf life.
5.2 PRODUCT TESTING. BC shall test, or cause to be tested, each
batch of Products to be supplied pursuant hereto prior to delivery thereof to
PAR. BC shall retain a sample of each batch tested for at least the shelf life
of such batch plus one year, or such longer period as may be required by current
Good Manufacturing Practices.
5.3 DISCLAIMER. EXCEPT AS OTHERWISE SPECIFICALLY SET FORTH HEREIN,
BC MAKES NO WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED BY FACT OR LAW,
OTHER THAN BC'S IMPLIED WARRANTIES OF TITLE, FREEDOM OF ENCUMBRANCE AND RIGHT TO
TRANSFER SAME. BC MAKES NO WARRANTY OF MERCHANTABILITY OTHER THAN AS STATED
HEREIN. BC SHALL IN NO EVENT BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL
DAMAGES. EXCEPT FOR THE PROVISIONS OF SECTIONS 3.7, 4.3 AND 4.4 HEREOF, BC'S
LIABILITY FOR ANY BREACH OF WARRANTY UNDER THIS AGREEMENT IS EXPRESSLY LIMITED
TO REPLACEMENT OF NON-CONFORMING
--20--
PRODUCTS OR, AT BC's OPTION, PAYMENT IN AN AMOUNT NOT TO EXCEED PAR'S COST TO
REPLACE SUCH PRODUCTS.
5.4 INSURANCE. During the term of this Agreement, PAR shall obtain
and maintain, at its sole expense, product liability insurance with a minimum
limit of liability of $10,000,000 per occurrence naming BC as an additional
named insured. This coverage shall be provided by insurance companies reasonably
satisfactory to BC. Evidence of coverage, in the form of certificates of
insurance, shall be provided promptly upon execution of this Agreement and as
reasonably requested thereafter. Such certificates shall be provided by written
notice to BC fifteen (15) days prior to any material change, cancellation or
non-renewal of the policy. BC shall maintain product liability insurance with
coverage extending to PAR under the Broad Form Vendors Coverage with limits of
$10 million with respect to any Products manufactured under this Agreement.
6. PRICE AND PAYMENT TERMS.
6.1 PRICE; ADJUSTMENTS. The prices for each Product to be paid to
BC by PAR hereunder are set forth on Schedule 5 hereto. Such prices shall be
adjusted from time to time hereafter as set forth in Schedule 5 hereto. As
promptly as practicable, but in any event within forty-five (45) days after the
end of each six month period, commencing January 1, 1999, or July 1, 1998, in
the event that there has been a material change in the market price of such
Product, PAR shall deliver to BC a detailed report containing the calculations
of all credits and purchase price adjustments required pursuant to this Section
6.1 with respect to each Product sold by it in such six month period, together
with any payment due BC net of credits as reflected in such report.
6.2 PAYMENT. The purchase price for each Product delivered by BC
pursuant hereto shall be paid within forty-five (45) days of PAR's receipt of
invoice therefor, except for Products purchased in the first year of this
Agreement for sale to BC Customers which shall be paid within ninety (90) days
of receipt of invoice therefor; provided, however, that no payment shall be
-------- -------
required thereon during the pendency of any dispute pursuant to Section 4.3
hereof.
7. AUDIT.
PAR shall maintain true and complete books of account containing an
accurate record of all data necessary for proper assessment of the Net Sales
Price for each Product. BC shall have the right, through an independent
certified public accountant, to examine PAR's books of account related to such
Net Sales Price at any time, on reasonable prior notice, within two (2) years
after the end of the calendar year in which the sale was invoiced by PAR for the
purpose of verifying the accuracy of all credits and price adjustments pursuant
to Section 6.1 above. The parties agree that information furnished to BC as a
result of any such examination shall be limited to a written statement by such
certified public accountant to the effect that they have reviewed the books of
account of PAR and either (i) PAR's calculations of all such credits and
adjustments are correct or (ii) setting forth any required adjustments thereto.
If any such audit shows any underpayment by PAR, a correcting payment or refund
shall be made within thirty (30) days after receipt of the written statement
described above and, if such underpayment shall exceed $10,000, PAR shall bear
all reasonable costs of the audit.
8. [Intentionally Omitted]
9. TERM AND TERMINATION.
9.1 TERM. This Agreement shall commence on the date hereof and
continue for a period of three (3) years (the "Initial Term"). Thereafter, this
Agreement shall be automatically renewed for successive two (2) year periods
(each a "Renewal Term") if (i) with respect to the first Renewal Term, PAR's
purchases from BC equal or exceed a quantity of any combination of the Products
set forth in Item 1 of Schedule 1 containing an aggregate of 900 metric tons of
such Product in bulk (the "Renewal Threshold") for the last twelve (12) months
of the Initial Term or (ii) with respect to any subsequent Renewal Term, PAR's
purchases from BC of such Products during the prior Renewal Term equalled or
exceeded the Renewal Threshold, on average, for each twelve (12) month period of
such prior Renewal Term. In the event that PAR's purchases shall not equal or
exceed the Renewal Threshold, BC may elect, within 45 days of the expiration of
the Initial Term or a Renewal Term, as the case may be, to terminate this
Agreement effective as of the first anniversary of such expiration.
Notwithstanding anything to the
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contrary contained herein, this Agreement may not be renewed beyond December 31,
2005.
9.2 TERMINATION FOR BREACH. If either party breaches or defaults in
the performance or observance of any of its material obligations under this
Agreement and such breach or default is not cured within thirty (30) days after
receipt by such party of the written notice from the non-breaching party
specifying the breach or default, then the non-breaching or non-defaulting party
shall have the right to terminate this Agreement with immediate effect by giving
written notice to the breaching or defaulting party. In the event that any such
breach or default hereunder relates exclusively to the obligations of a party
with respect to a Product, the right of termination provided in this Section 9.2
shall be limited to termination hereof in respect of such Product only.
9.3 TERMINATION FOR BANKRUPTCY. This Agreement may be terminated by
either party, on fifteen (15) days written notice, if any proceeding in
bankruptcy, reorganization or arrangement for the appointment of a receiver or
trustee to take possession of the other party's assets or by similar proceeding
under the law for release of creditors shall be instituted by or against the
other party or if the other party shall make an assignment for the benefit of
its creditors.
9.4 TERMINATION FOR SUPPLY INTERRUPTION. This Agreement may be
terminated by PAR with respect to a particular Product, on thirty (30) days
written notice, if BC shall fail or be unable to supply PAR's requirements for
such Product for a period likely to exceed six (6) months or more. If such
failure or inability is due to a force majeure as provided in Section 12.1 and
such termination results in the decrease of BC's revenues under this Agreement
by more than 50 percent, BC may terminate this Agreement by giving twelve (12)
months' notice to PAR.
9.5 TERMINATION FOR REGULATORY CHANGE. This Agreement may be
terminated by either party upon six (6) months written notice in the event that
any statute, rule or regulation (a "New Regulation") is enacted, promulgated or
deemed applicable to the transactions contemplated by this Agreement and such
New Regulation has a substantial economic burden with respect to the continued
performance under this Agreement by such party.
9.6 POST-TERMINATION. (a) At termination of this Agreement for any
of the above reasons, the parties shall be permitted to continue in their
respective businesses as if the Agreement had not be entered into in the first
place.
(b) Termination of this Agreement shall not affect any payment obligations
or other liabilities which have accrued as of the date of such termination.
10. CONFIDENTIALITY. (a) During the Initial Term of this Agreement
and any renewal hereof, and for a period of five (5) years thereafter, each
party shall hold in confidence, and may use but may not disclose to a third
party, except with the express prior written consent of the disclosing party,
any and all Confidential Information provided by the disclosing party, provided
--------
that such party shall not be prevented from disclosing information which:
(i) at, prior or subsequent to the time of such disclosure, is
independently known to such party without obligation of secrecy or non-use to a
third party;
(ii) at, prior or subsequent to the time of disclosure, becomes part of the
public knowledge through no breach hereof by such party;
(iii) subsequent to the time of such disclosure is the subject of
another agreement between the parties hereto which explicitly permits use or
disclosure; or
(iv) is required by law or judicial process to be disclosed.
Specific information received by either party hereunder shall not be deemed to
fall within any of the foregoing exceptions merely because it is embraced by
general information within any such exceptions. In addition, any combination of
features received as Confidential Information by either party hereunder shall
not be deemed to fall within any of the foregoing exceptions merely because
individual features are separately within any such exception, but only if the
combination itself, and its principles of operation, are within such exception.
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(b) Without limiting the generality of the foregoing, each party shall
limit disclosure of the Confidential Information to its employees who need to
receive the Confidential Information in order to further the activities
contemplated in this Agreement. Each party shall take sufficient precautions to
safeguard the Confidential Information, including obtaining appropriate
commitments and enforceable confidentiality agreements. Each party understands
and agrees that the wrongful disclosure of Confidential Information will result
in serious and irreparable damage to the other party, that the remedy at law or
any breach of this covenant may be inadequate, and that the party seeking
redress hereunder shall be entitled to injunctive relief, without prejudice to
any other rights and remedies to which such party may be entitled.
(c) It is acknowledged that Confidential Information may be disclosed not
only in writing or other tangible form, but also through discussions between
each party's respective representatives, demonstrations, observations and other
intangible methods.
(d) The above notwithstanding, each party shall have the right, with the
exercise of discretion, and insofar as practical under written confidentiality
agreements having provisions no less stringent than those contained herein, to
make disclosures of such portions of Confidential Information to third party
consultants, attorneys, contractors, advisors, Affiliates and governmental
agencies where, in the recipient's judgment, such disclosure is essential to
development, approval or marketing of a Product pursuant to this Agreement.
(e) Except as otherwise set forth in this Agreement, upon termination of
this Agreement and at the written request of the disclosing party, the receiving
party shall return all the Confidential Information of the disclosing party
(including all copies, excerpts and summaries thereof contain on any media) or
destroy such Confidential Information at the option of the disclosing party.
11. PROPOSED SALE; POST-SALE APPROVALS. (a) In the event that BC
shall intend to sell or otherwise convey or transfer the Shreveport Facility to
an unrelated third party, BC shall first deliver to PAR written notice setting
forth such intent and its target sale price (the "Proposed Sale"), which notice
shall constitute Confidential Information under this Agreement. PAR shall have
fifteen (15) days following receipt of the notice to make an offer to purchase
the Shreveport Facility. BC shall then consider such offer, but shall be under
no obligation to accept it and may proceed with the Proposed Sale or any other
transaction with respect to the Shreveport Facility as it, in its sole
discretion, shall determine.
(b) In the event that BC shall sell or otherwise convey or transfer the
Shreveport Facility to an unrelated third party, no Products shall, without the
consent of PAR, be manufactured under the SUPAC or the ANDAs obtained by BC with
PAR's assistance pursuant to Section 3.3 of this Agreement.
12. MISCELLANEOUS.
12.1 FORCE MAJEURE. Neither party to this Agreement shall be liable
for failure or delay in the performance of any of its obligations hereunder
(with the exception of payment obligations), if such failure or delay is due to
causes beyond its reasonable control, including, without limitation, acts of
God, earthquakes, fires, strikes, acts of war, or intervention of any
governmental authority, whether affecting such party or any of its Affiliates.
In the event of such failure or delay, BC shall have no obligation under this
Agreement to supply PAR with Products manufactured by it, or by a third party,
at a location other than the Shreveport Facility.
12.2 ASSIGNMENT. This Agreement shall not be assigned by either
party without the prior written consent of the other party except that either
party may assign this Agreement, in whole or in part, to any Affiliate of such
party or to the successor (involving the surviving company in any consolidation,
reorganization or merger) or assignee of all or substantially all of its
business or, in the case of BC, the Shreveport Facility.
12.3 GOVERNING LAW. This contract shall be governed by, and
construed in accordance with, the laws of the State of New Jersey, without
giving effect to its choice of laws principles.
12.4 NOTICE. All notices required to be given hereunder shall be in
writing and shall be given by personal delivery, via facsimile transmission, by
a nationally recognized overnight carrier or by registered or certified mail,
postage prepaid with return receipt requested. Notices shall be addressed to
the parties as follows:
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If to BC: BASF Corporation
3000 Continental Drive-North
Mount Olive, New Jersey 07828-1234
Attn: Group Vice President - NVN
Facsimile No.: (201) 426-5309
If to PAR: Pharmaceutical Resources, Inc.
One Ram Ridge Road
Spring Valley, New York 10977
Attn: President
Facsimile No.: (914) 425-7922
Notices delivered personally shall be deemed communicated as of actual receipt;
notices sent via facsimile transmission shall be deemed communicated as of
receipt by the sender of written confirmation of transmission thereof; notices
sent via overnight courier shall be deemed received as of one business day
following sending; and notices mailed shall be deemed communicated as of three
business days after proper mailing. A party may change his or its address by
written notice in accordance with this Section 12.4.
12.5 AMENDMENTS. Any amendment or modification of this Agreement
shall only be valid if made in writing and signed by or on behalf of the parties
hereto.
12.6 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original and all of which shall constitute a
single document.
12.7 ENTIRE AGREEMENT. This Agreement (including the Schedules
hereto) represents the entire agreement of the parties with respect to the
subject matter hereof, superseding all prior agreements and understandings,
written or oral.
12.8 BENEFIT; BINDING EFFECT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
12.9 SURVIVAL. Notwithstanding anything to the contrary contained in
this Agreement, the provisions of Sections 3.7(d), 5.1, 9.6 and 10 shall survive
any termination of this Agreement.
12.10 FINANCIAL ASSURANCES. (a) In the event that there shall be (i)
any judgment, attachment, execution or order against PAR's assets for an amount
which, in the aggregate, would constitute a material amount in relation to PAR's
and its Affiliates' financial condition, taken as a whole, and such judgment,
attachment, execution or order remains unsatisfied for thirty (30) days, or (ii)
a default by PAR with respect to any obligation for borrowed money in amounts
which, in the aggregate, would constitute a material amount in relation to PAR's
and its Affiliates' financial condition, taken as a whole, and remains uncured
for thirty (30) days, then BC may require cash or satisfactory security upon
subsequent shipments or deliveries made under this Agreement. The election by
BC to require such cash or security shall not impair the obligations of PAR with
respect to the Minimum Purchase Requirements, or any other Products in excess
thereof, purchased under this Agreement.
(b) In the event that PAR shall not be subject to the reporting
requirements under Section 13 or Section 15(d) of the Securities Exchange Act of
1934, PAR shall continue to provide BC with financial statements of similar type
and at comparable times as would have been required under such reporting
requirements.
12.11 FURTHER ASSURANCES. The parties hereto agree that they shall
take all appropriate actions, including, without limitation, the execution or
filing of any documents or instruments, which may be reasonably necessary or
advisable to carry out the intent and accomplish the purposes of any of the
provisions hereof.
12.12 SEVERABILITY. In the event that any provision of this Agreement
shall be held invalid or unenforceable for any reason by a court of competent
jurisdiction, such provision or part thereof shall be considered separate from
the remaining provisions of this Agreement, which shall remain in full force and
effect. Such invalid or unenforceable provision shall be deemed revised to
effect, to the fullest extent permitted by law, the intent of the
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parties as set forth therein.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written by their duly authorized
representatives.
BASF CORPORATION
By:_____________________________
Name: Hans Kast
Title: Executive Vice President
PAR PHARMACEUTICAL, INC.
By:_____________________________
Name: Kenneth Sawyer
Title: President
GUARANTEE
The undersigned, the sole stockholder of PAR, and as such deriving
substantial benefit from the transactions contemplated under this Agreement,
hereby absolutely and unconditionally guarantees the payment obligations of PAR
under this Agreement. The undersigned waives any demand by BC, its successors
and assigns, as well as any notice of non-payment by PAR. This Guarantee is not
transferable or assignable without the written consent of BC. For purposes
hereof, a change of control shall not constitute an assignment.
PHARMACEUTICAL RESOURCES, INC.
By:_____________________________
Name: Kenneth Sawyer
Title: President
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EXHIBIT 11
COMPUTATION OF PER SHARE DATA
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
-------------------------------------- --------------------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
1997 1996 1997 1996
----------------- ------------------- ------------ ------------
NET (LOSS) $(9,744,000) $ (938,000) $(6,765,000) $ (740,000)
=========== =========== =========== ===========
Primary:
Weighted average number of common
common shares outstanding 18,666,628 18,178,205 18,699,600 18,183,750
Shares issuable upon exercise of dilutive stock
options and warrants - net of shares assumed to
be repurchased (at the average market price for
the period) from exercise proceeds 1,783 224,638 1,111 249,850
----------- ----------- ----------- -----------
Shares used for computation 18,668,411 18,402,843 18,700,711 18,433,600
=========== =========== =========== ===========
NET (LOSS) PER SHARE OF COMMON STOCK $(.52) $(.05) $(.36) $(.04)
== == == ==
Assuming full dilution:
Weighted average number of common shares
outstanding 18,668,628 18,178,205 18,699,600 18,183,750
Shares issuable upon exercise of dilutive stock
options and warrants - net of shares assumed to be
repurchased (at the higher of period-end market
price or the average market price for the period)
from exercise proceeds - 224,638 - 249,850
----------- ----------- ----------- -----------
Shares used for computation 18,668,628 18,402,843 18,699,600 18,433,600
=========== =========== =========== ===========
NET (LOSS) PER SHARE OF COMMON STOCK $(.52) $(.05) $(.36) $(.04)
=== === === ===
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