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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For Fiscal Year Ended December 31, 1999
Commission File Number 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Ram Ridge Road, Spring Valley, New York 10977
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (914) 425-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
-------------- -----------------------------------------
Common Stock, $.01 par value The New York Stock Exchange, Inc.
The Pacific Stock Exchange, Inc.
Common Stock Purchase Rights The New York Stock Exchange, Inc.
The Pacific Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
The aggregate market value of the voting stock and non-voting common equity
held by non-affiliates of the Registrant was $189,300,284 as of March 15, 2000
(assuming solely for purposes of this calculation
that all directors and executive officers of the Registrant are "affiliates").
Number of shares of the Registrant's common stock outstanding as of March 15,
2000: 29,567,225
DOCUMENTS INCORPORATED BY REFERENCE: NONE
This is page 1 of 73 pages. The exhibit index is on page 33.
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PART I
ITEM 1. Business.
General
Pharmaceutical Resources, Inc. ("PRI" or the "Company") is a holding company
which, through its subsidiaries, is in the business of manufacturing and
distributing a broad line of generic drugs in the United States. PRI operates
primarily through its wholly-owned subsidiary, Par Pharmaceutical, Inc.
("Par"), a manufacturer and distributor of generic drugs.
The Company's current product line consists of prescription and over-the-
counter drugs. Approximately 102 products representing various dosage
strengths of 42 drugs are currently marketed by the Company. Generic drugs are
the pharmaceutical and therapeutic equivalents of brand name drugs and are
usually marketed under their generic (chemical) names rather than by a brand
name. Generally, a generic drug cannot be marketed until the expiration of
applicable patents on the brand name drug. Generic drugs must meet the same
government standards as brand name drugs, but are typically sold at prices
below those of brand name drugs. Generic drugs provide a cost effective
alternative for consumers while maintaining the safety and effectiveness of
the brand name pharmaceutical product (see "--Product Line Information").
The Company markets its products primarily to wholesalers, retail drug store
chains, drug distributors and repackagers principally through its own sales
staff. Par also has a significant over-the-counter business through which it
sells its products to specific marketing sales organizations that repackage
and sell private label products to large chain drug stores. In addition, the
Company promotes the sales efforts of wholesalers and drug distributors that
sell the Company's products to clinics, government agencies and other managed
health care organizations (see "--Marketing and Customers").
PRI was organized as a subsidiary of Par under the laws of the State of New
Jersey on August 2, 1991. On August 12, 1991, Par effected a reorganization of
its corporate structure, pursuant to which PRI became Par's parent company.
References herein to the "Company" shall be deemed to refer to PRI and all of
its subsidiaries since August 12, 1991, or Par and all of its subsidiaries
prior thereto, as the context may require. The Company's executive offices are
located at One Ram Ridge Road, Spring Valley, New York 10977, and its
telephone number is (914) 425-7100.
Significant Developments:
Change in Accounting Period. In December 1998, the Company changed its
annual reporting period to a fiscal year ending December 31 from a fiscal year
ending September 30. Accordingly, the most recent fiscal year reported in this
Form 10-K began on January 1, 1999 and ended on December 31, 1999 ("fiscal
year 1999") and comparative results include amounts for the twelve-month
fiscal periods ended September 30, 1998 ("fiscal year 1998") and September 30,
1997 ("fiscal year 1997"). As a result of the change in accounting period, the
Company also previously reported results for the three-month period ended
December 31, 1998 ("transition period") and the comparative three-month period
ended December 27, 1997.
Results of Operations. In fiscal year 1999, the Company achieved its highest
sales levels since fiscal year 1989, which led to significant improvements in
gross margin and operating results compared to fiscal years 1998 and 1997.
Beginning in the latter half of 1998, and continuing into 1999, the generic
drug industry began experiencing a more favorable pricing environment after
many years of severe price erosion. In addition to benefiting from the
favorable pricing environment, the Company introduced several new manufactured
products and additional products under distribution agreements. The improved
results were also aided by a recent Company restructuring designed to reduce
costs and increase operating efficiencies. The Company expects to continue to
search for additional measures to improve its operations in order to reduce
costs and obtain other operating efficiencies. Further, the Company plans to
continue to seek new products through joint ventures, distribution and other
agreements with pharmaceutical companies located throughout the world.
2
Restructuring. In fiscal year 1998 and the transition period, the Company
recorded asset impairment and restructuring charges totaling $3,118,000 and
began implementing restructuring plans that included discontinuing certain
unprofitable products and outsourcing certain other products previously
manufactured by the Company, reducing the work force related to producing
those products and eliminating or writing down the assets of under-utilized
facilities. Following that plan, the Company terminated approximately 50
employees in fiscal year 1999, primarily in manufacturing and various
manufacturing support functions, reduced certain related expenses, and leased,
with an option to purchase, its facility and related machinery and equipment
located in Congers, New York.
Patent for Unique Formulation Granted. On March 1, 2000, Par was granted a
patent by the U.S. Patent Office regarding its unique formulation of megestrol
acetate oral suspension. Par has filed with the United States Food and Drug
Administration ("FDA") an abbreviated new drug application ("ANDA") for
megestrol acetate oral suspension, the generic version of Bristol Myers
Squibb's ("BMS") Megace(R) Oral Suspension, including a paragraph IV
certification regarding the formulation patent as part of its ANDA submission.
Par has reason to believe that it is the first to file an ANDA for megestrol
acetate oral suspension and, based upon current legislation, could be entitled
to up to 180 days of generic marketing exclusivity after final approval by the
FDA. BMS sued Par in October 1999, claiming that Par's formulation of its
megestrol acetate oral suspension infringes a BMS patent. Par intends to
vigorously pursue its pending litigation with BMS and to defend its patent
rights and ensure that other generic companies do not infringe the Par patent.
Par believes that the issuance of its new patent, which establishes the
uniqueness of Par's formulation compared to the BMS patent, should
significantly help Par's defense in the BMS patent infringement case.
Par's patent broadly covers its unique approach to the formulation of the
product. Par believes that based upon the BMS patent and the Par patent, it
will be more difficult for other generic companies to develop a product that
does not infringe either patent. Non-infringement of both the Par patent and
the BMS patent are a requirement for other generic companies to lawfully enter
this market. Although Par anticipates that other generic products may
ultimately be approved for megestrol acetate oral suspension, it is now
possible that there will be fewer market entries over time than typical of a
product of this size. Based on Par's market research, the Company believes
U.S. sales of Megace Oral Suspension were approximately $100 million over the
last twelve months.
Marketing of the product may occur after Par receives final FDA approval.
Based on current legislation, final approval will occur when (i) its ANDA
submission is approved (the application was filed in July 1999 and normally
takes 12-24 months) and (ii) the earlier of 30 months from the date litigation
commenced (October 1999) or at the conclusion of successful litigation with
BMS. The duration and/or final outcome of the litigation and the FDA's
treatment of exclusivity are subject to many factors beyond the direct control
of Par. At this time, it is not possible for the Company to predict the
probable outcome of this litigation and the impact, if any, that it might have
on the Company (see "--Legal Proceedings").
Lease Agreement. On March 17, 1999, Par entered into an agreement to lease
(the "Lease Agreement") its manufacturing facility and related machinery and
equipment located in Congers, New York (the "Congers Facility") to Halsey Drug
Co., Inc. ("Halsey"), a manufacturer of generic pharmaceutical products. The
Lease Agreement has an initial term of three years, subject to an additional
two-year renewal period and contains a purchase option permitting Halsey to
purchase the Congers Facility and substantially all the equipment thereof at
any time during the lease terms for a specified amount. Under the Halsey
Supply Agreement (as hereinafter defined), Halsey is required to perform
certain manufacturing operations for the Company at the Congers Facility (see
"--Product Line Information" and "--Properties").
Profit Sharing Agreement. In January 1999, the Company entered into a profit
sharing agreement (the "Genpharm Profit Sharing Agreement") with Genpharm,
Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA pursuant to which PRI
will receive a portion of the profits resulting from a separate agreement
between Genpharm and an unaffiliated United States based pharmaceutical
company in exchange for a non-refundable
3
$2,500,000 fee, which the Company completed paying in January 2000. The
Genpharm Profit Sharing Agreement covers 15 products that are not included in
the Company's distribution agreement with Genpharm resulting from its
strategic alliance with Merck KGaA.
Strategic Alliance. In 1998, the Company began a strategic alliance with
Merck KGaA, a pharmaceutical, laboratory and chemical company located in
Darmstadt, Germany. As part of the alliance, the Company sold Common Stock to
a subsidiary of Merck KGaA and received the exclusive United States
distribution rights to approximately 40 generic pharmaceutical products,
covered by a distribution agreement between the Company and Genpharm (the
"Genpharm Distribution Agreement"). To date, ten of such products have
received FDA approval and are currently being marketed by Par. The remaining
products are either being developed, have been identified for development, or
have been submitted to the FDA for approval. There are currently ANDAs for
nine potential products covered by the Genpharm Distribution Agreement, one of
which has been tentatively approved, pending with and awaiting approval from,
the FDA. The Company anticipates introducing several of these products in
2000. Genpharm pays the research and development costs associated with the
products and the Company is obligated to pay Genpharm a certain percentage of
the gross margin on sales of the products. The alliance provides the Company
with a significant number of potential products for its development pipeline
without the substantial resource commitment, including financial, it would
normally take to develop such a pipeline, improved financial condition and
access to Merck KGaA's expertise and experience in the industry (see "--
Product Line Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
PRODUCT LINE INFORMATION
The Company operates in one industry segment, namely the manufacture and
distribution of generic pharmaceuticals. Products are marketed principally in
solid oral dosage form consisting of tablets, caplets and two-piece hard-shell
capsules. The Company also distributes products in the semi-solid form of
creams and reconstituted suspensions/solutions (see "--Research and
Development").
Par markets approximately 51 products, representing various dosage strengths
of 19 drugs that are manufactured by the Company and approximately 51
additional products, representing various dosage strengths of 23 drugs that
are manufactured for it by other companies (see "--Research and Development"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations"). Par holds ANDAs for the drugs which it manufactures. Below is
a list of drugs manufactured and/or distributed by Par. The names of all of
the drugs under the caption "Competitive Brand-Name Drug" are trademarked. The
holders of the trademarks are non-affiliated pharmaceutical manufacturers.
Competitive
Name Brand-Name Drug
---- ----------------
Central Nervous System:
Alprazolam............................................... Xanax
Benztropine Mesylate..................................... Cogentin
Carisoprodol and Aspirin................................. Soma Compound
Clonazepam............................................... Klonopin
Doxepin Hydrochloride.................................... Sinequan, Adapin
Fluphenazine Hydrochloride............................... Prolixin
Flurazepam Hydrochloride................................. Dalmane
Imipramine Hydrochloride................................. Tofranil
Meclizine Hydrochloride.................................. Antivert
Prochlorperazine Maleate................................. Compazine
Temazepam................................................ Restoril
Triazolam................................................ Halcion
4
Competitive
Name Brand-Name Drug
---- -----------------------
Cardiovascular:
Acebutolol........................................ Sectral
Amiloride Hydrochloride........................... Midamor
Amiodarone Hydrochloride.......................... Cordarone
Captopril......................................... Capoten
Guanfacine........................................ Tenex
Hydralazine Hydrochloride......................... Apresoline
Hydra-Zide........................................ Apresazide
Indapamide........................................ Lozol
Isosorbide Dinitrate.............................. Isordil
Minoxidil......................................... Loniten
Nicardipine Hydrochloride......................... Cardene
Anti-Inflammatory:
Aspirin (zero order release)...................... Zorprin
Dexamethasone..................................... Decadron
Etodolac.......................................... Lodine
Ibuprofen......................................... Advil, Nuprin, Motrin
Naproxen Sodium................................... Aleve
Orphengesic/Orphengesic Forte..................... Norgesic/Norgesic Forte
Anti-Infective:
Acyclovir......................................... Zovirax
Amoxicillin....................................... Amoxil
Ampicillin........................................ Principen
Minocycline....................................... Minocin
Penicillin V Potassium............................ V-Cillin K
Silver Sulfadiazine (SSD)......................... Silvadene
Anti-Cancer:
Hydroxyurea....................................... Hydrea
Megestrol Acetate................................. Megace
Anti-Parkinson:
Selegiline........................................ Eldepryl
Anti-Platelet:
Ticlopidine....................................... Ticlid
Anti-Gout:
Allopurinol....................................... Zyloprim
Histamine:
Ranitidine........................................ Zantac
Ovulation Stimulant:
Clomiphene........................................ Clomid
The Company seeks to introduce new products not only through internal
research and development, but also through joint venture, distribution and
other agreements with pharmaceutical companies located throughout the world.
As part of that strategy, the Company has pursued and continues to pursue
arrangements or affiliations which it believes could provide access to raw
materials at favorable prices, share development costs, generate profits from
jointly developed products and expand distribution channels for new and
existing products. The Company's material distribution agreements are
described below.
5
In April 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 has agreed to
purchase certain minimum quantities of certain products manufactured by BASF
at one of its facilities, and phase out Par's manufacturing of those products.
BASF agreed to discontinue its direct sale of those products. The Supply
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 each of the first three years of
the Supply Agreement, Par agreed to purchase at least $24,500,000 worth of
three products. Further, if Par does not purchase at least $29,000,000 worth
of one of those products in the third and final year of the agreement, BASF
has the right to terminate the agreement with a notice period of one year. The
Company met the minimum purchase requirements for fiscal year 1999. The
Company and BASF are currently negotiating a new agreement and have agreed in
principle on terms substantially similar to the current agreement.
Genpharm and the Company entered into the Genpharm Distribution Agreement,
dated March 25, 1998, pursuant to which Genpharm granted exclusive
distribution rights to the Company within the United States and certain United
States territories with respect to approximately 40 generic pharmaceutical
products. To date, ten of such products have received FDA approval and are
currently being marketed by Par. The remaining products are either being
developed, have been identified for development, or have been submitted to the
FDA for approval. There are currently ANDAs for nine potential products
covered by the Genpharm Distribution Agreement, one of which has been
tentatively approved, pending with and awaiting approval from, the FDA. The
Company anticipates introducing several of these products in 2000. Products
may be added to or removed from the Genpharm Distribution Agreement by mutual
agreement of the parties. Genpharm is required to use commercially reasonable
efforts to develop the products which are subject to the Genpharm Distribution
Agreement and is responsible for the completion of product development and for
obtaining all applicable regulatory approvals. The Company is obligated to pay
Genpharm a percentage of the gross profits attributable to the sales of such
products.
On September 29, 1998, the Company and Elan Transdermal Technologies, Inc.,
formerly known as Sano Corporation, and Elan Corporation, plc (collectively
"Elan") entered into a termination agreement (the "Termination Agreement")
with respect to their prior distribution agreement. Pursuant to the
Termination Agreement, the Company's exclusive right to distribute in the
United States a transdermal nicotine patch manufactured by Elan ended on May
31, 1999. The Company paid Elan a percentage of gross profits from the sale of
the nicotine patch through the termination date. In exchange for relinquishing
long-term distribution rights to the nicotine patch and a nitroglycerin patch,
the Company received a cash payment of $2,000,000 in October 1998 and an
additional payment of $1,000,000 in the third quarter of fiscal year 1999. In
fiscal year 1999, Elan began to pay the Company a perpetual royalty pursuant
to the Termination Agreement on all non-prescription sales of the transdermal
nicotine patch by Elan in the United States and Israel.
On March 17, 1999, Par and Halsey entered into a Manufacturing and Supply
Agreement (the "Halsey Supply Agreement"). The Halsey Supply Agreement
requires Halsey to manufacture exclusively for Par certain products previously
manufactured by Par at the Congers Facility prior to the Agreement. The Halsey
Supply Agreement has an initial term of three years subject to earlier
termination upon the occurrence of certain events as provided therein.
Pursuant to the Lease Agreement, Par agreed to purchase not less than
$1,150,000 of Halsey products during the initial 18 months of the Halsey
Supply Agreement, subject to Par's agreement to credit any deficiency under
the Lease Agreement. In addition, the Halsey Supply Agreement prohibits Halsey
from manufacturing, supplying, developing or distributing products produced
under such Agreement for anyone other than Par for a period of three years
from the date of the Halsey Supply Agreement.
Research and Development
The Company is actively developing approximately 12 products as part of its
development program. The Company expects that approximately six of these
products will be the subject of a biostudy in 2000, but has not
6
filed any ANDAs with respect to such potential products. The Company expects
its expenditures for research and development in 2000 to increase to
approximately $8,500,000. The scientific process of developing new products
and obtaining FDA approval is complex and time consuming. The development of
products may be curtailed in the early or later stages of development due to
the introduction of competing generic products or for other strategic reasons.
The Company conducts part of its research and development in Israel through
Israel Pharmaceutical Resources L.P. ("IPR"). Following the acquisition of the
remaining interests of IPR in 1997, the Company's domestic research and
development program was integrated with that of IPR.
The Company, IPR, and Generics (UK) Ltd. ("Generics"), a subsidiary of Merck
KGaA, entered into an agreement (the "Development Agreement"), dated as of
August 11, 1998, pursuant to which Generics agreed to fund one-half the costs
of the operating budget of IPR in exchange for the exclusive distribution
rights outside of the United States to products developed by IPR after the
date of the Development Agreement. In addition, Generics agreed to pay IPR a
perpetual royalty for all sales of the products by Generics or its affiliates
outside the United States.
The Company's research and development activities consist of (i) identifying
and conducting patent and market research on brand name drugs for which patent
protection has expired or is to expire in the near future, (ii) researching
and developing new product formulations based upon such drugs, (iii) obtaining
approval from the FDA for such new product formulations, and (iv) introducing
technology to improve production efficiency and enhance product quality. The
Company contracts with outside laboratories to conduct biostudies which, in
the case of oral solids, generally are required for FDA approval. Biostudies
are used to demonstrate that the rate and extent of absorption of a generic
drug are not significantly different from the corresponding brand name drug
and currently cost in the range of $100,000 to $500,000 per study. During
fiscal year 1999, the Company contracted with outside laboratories to conduct
biostudies for five potential new products and will continue to do so in the
future. Biostudies must be conducted and documented in conformity with FDA
standards (see "--Government Regulation"). In addition, the Company from time
to time enters into agreements with third parties with respect to the
development of new products and technologies. To date, the Company has entered
into agreements and advanced funds to several companies for products in
various stages of development.
The research and development of oral solid and suspension products,
including preformulation research, process and formulation development,
required studies and FDA review and approval, has historically taken
approximately two to three years. Accordingly, Par typically selects for
development products that it intends to market several years in the future.
However, the length of time necessary to bring a product to market can vary
significantly and can depend on, among other things, availability of funding,
problems relating to formulation, safety or efficacy or patent issues
associated with the product. Currently, the Company has ANDAs pending with the
FDA, one of which has received tentative approval, for four proposed products.
No assurance can be given that the Company will successfully complete the
development of products currently under development or proposed for
development, that it will obtain regulatory approval for any such product or
that any approved product will be produced in commercial quantities.
Improvement in the Company's financial condition depends upon the acquisition
and introduction of new products at profitable prices to replace the loss of
revenues from certain older or discontinued products. The failure of the
Company to introduce profitable new products in a timely manner could have a
material adverse effect on the Company's operating results, prospects and
financial condition (see "--Competition").
For fiscal years 1999, 1998 and 1997, and the transition period, the Company
incurred research and development expenses of $6,005,000, $5,775,000,
$5,843,000 and $1,125,000, respectively. In fiscal year 1999, the Company
increased payments for purchase rights to pharmaceutical chemical processes
and for formulation development work performed for PRI by unaffiliated
companies and recorded reimbursements from Genpharm for work performed by PRI
related to products covered by the Genpharm Distribution Agreement. Fiscal
year 1999 and the transition period costs are net of funding from Generics
pursuant to the Development Agreement (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Operating Results-
Research and Development").
7
Marketing and Customers
The Company primarily markets its products under the Par label to
wholesalers, retail drug store chains, distributors and, to a lesser extent,
drug manufacturers and government agencies, primarily through its own sales
staff. The Company also markets to customers in the managed health care
market. Such customers include health maintenance organizations, nursing
homes, hospitals, clinics, pharmacy benefit management companies and mail
order customers. Par has a significant over-the-counter business through which
it sells products to specific marketing sales organizations that repackage and
sell private label products to large chain drug stores.
The Company has experienced a significant change in its distribution
channels in the last several years as sales of generic drugs to wholesalers
and drug store chains have increased and sales to distributors have declined.
The Company believes that consolidation among wholesalers and retailers, the
formation of large buying groups and competition between distributors has
resulted in additional pricing pressures. Additionally, aggressive pricing
strategies by some distributors attempting to maintain or increase market
share have adversely affected the Company's ability to market its products.
After years of severe price deterioration in the generic drug market certain
industry leaders began raising prices on selected products in 1998, which
continued in 1999. Although the Company continues to experience low margins on
many of its products, the current pricing environment has contributed to the
improvement in the Company's overall gross margin and operating results in
fiscal year 1999 (see "--Competition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
In fiscal year 1999, the Company continued to strengthen its internal sales
and marketing team by hiring additional experienced personnel. After reducing
selling costs in fiscal year 1997, the Company increased such costs in fiscal
years 1998 and 1999 to capitalize on anticipated product introductions from
the Merck KGaA relationship, its research and development program and
additional licensing opportunities that may become available in the future.
The Company has approximately 160 customers. During fiscal year 1999, sales
to the Company's three largest customers, McKesson Drug Co., Bergen Brunswig
Corporation and Leiner Health Products Inc. accounted for approximately 15%,
11% and 9%, respectively, of net sales. None of these customers has written
agreements with the Company. The loss of any of these customers or the
substantial reduction in orders from any of such customers could have a
material adverse effect upon the Company's operating results and financial
condition (see "Notes to Financial Statements--Accounts Receivable-Major
Customers").
Order Backlog
The dollar amount of open orders, believed by management to be firm, as of
December 31, 1999 was approximately $4,000,000, as compared to approximately
$5,000,000 at December 31, 1998 and $7,700,000 at September 30, 1998.
Following the change in distribution channels over the last several years, the
Company's Par label business has increased while the private label business
has decreased. This change has led to a shift in ordering patterns as Par
label product requires less lead time than private label. Although the current
open orders are subject to cancellation without penalty, management expects to
fill substantially all of them in the near future.
Competition
The generic pharmaceutical industry is highly competitive due principally to
the number of competitors in the market and the consolidation of the Company's
distribution outlets through mergers, acquisitions and the formation of buying
groups. The Company has identified at least ten principal competitors, and
experiences varying degrees of competition from numerous other companies in
the health care industry. Many of the Company's competitors have greater
financial and other resources than the Company and are able to spend more for
product development and marketing.
As other manufacturers introduce generic products in competition with the
Company's existing products, market share and prices with respect to such
existing products typically decline. Similarly, the Company's
8
potential for profits is significantly reduced, if not eliminated, as
competitors introduce products prior to the Company. Accordingly, the level of
revenues and gross profit generated by the Company's current and prospective
products depends, in large part, on the number and timing of introductions of
competing products and the Company's timely development and introduction of
new products.
During fiscal year 1999, four of the Company's products accounted for
approximately 47% of its net sales compared to 63%, 56% and 55%, respectively,
of net sales for the same four products in fiscal years 1998, 1997 and the
transition period. One such product, the transdermal nicotine patch whose
product rights had been sold effective May 31, 1999, was not sold in fiscal
year 1997. The transdermal nicotine patch accounted for approximately 5% of
net sales in each fiscal year 1999 and 1998, 10% of net sales in the
transition period and a significant portion of the gross margin in those
respective periods. Although the termination of the distribution rights for
the transdermal nicotine patch in fiscal year 1999 is expected to negatively
affect the Company's sales and gross margin, it is anticipated that the sales
and gross margins generated by new products in 2000 may offset this expected
decrease. The Company has implemented measures to reduce the overall impact of
these four products including adding additional products through new and
existing distribution agreements, manufacturing process improvements and cost
reductions.
The principal competitive factors in the generic pharmaceutical market are
(i) price, (ii) the ability to introduce generic versions of brand name drugs
promptly after their patents expire, (iii) reputation as a manufacturer of
quality products, (iv) level of service (including maintaining sufficient
inventory levels for timely deliveries), (v) product appearance, and (vi)
breadth of product line.
Raw Materials
The raw materials essential to the Company's manufacturing business are
purchased primarily from United States distributors of bulk pharmaceutical
chemicals manufactured by foreign companies. To date, the Company has
experienced no significant difficulty in obtaining raw materials and expects
that raw materials will generally continue to be available in the future.
However, since the federal drug application process requires specification of
raw material suppliers, if raw materials from a specified supplier were to
become unavailable, FDA approval of a new supplier would be required. While a
new supplier becomes qualified by the FDA and its manufacturing process is
judged to meet FDA standards, a delay of six months or more in the manufacture
and marketing of the drug involved could result, which, depending on the
particular product, could have a material adverse effect on the Company's
financial condition. Generally the Company attempts to minimize the effects of
any such situation by specifying, where economical and feasible, two or more
suppliers of raw materials for its drug approvals.
Employees
As of December 31, 1999, the Company had approximately 275 employees
compared to 321 at December 31, 1998 (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset
Impairment/Restructuring Charge").
Government Regulation
All pharmaceutical manufacturers are subject to extensive regulation by the
Federal government, principally by the FDA, and, to a lesser extent, by the
Drug Enforcement Administration and state governments. The Federal Food, Drug,
and Cosmetic Act, the Controlled Substances Act, and other Federal statutes
and regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products. Noncompliance with applicable requirements can result in
judicially and/or administratively imposed sanctions including the initiation
of product seizures, injunction actions, fines and criminal prosecutions.
Administrative enforcement measures can involve the recall of products, as
well as the refusal of the government to enter into supply contracts or to
approve new drug applications. The FDA also has the authority to withdraw
approval of drugs in accordance with regulatory due process procedures.
9
FDA approval is required before any new drug, including a generic equivalent
of a previously approved branded drug, can be marketed. To obtain FDA approval
for a new drug, a prospective manufacturer must, among other things,
demonstrate that its manufacturing facilities comply with the FDA's current
Good Manufacturing Practices ("cGMP") regulations. The FDA may inspect the
manufacturer's facilities to assure such compliance prior to approval or at
any other reasonable time. CGMP regulations must be followed at all times
during the manufacture and processing of drugs. To comply with the standards
set forth in these regulations, the Company must continue to expend
significant time, money and effort in the areas of production, quality control
and quality assurance.
To obtain FDA approval of a new drug, a manufacturer must demonstrate, among
other requirements, the safety and effectiveness of the proposed drug. There
are currently two basic ways to satisfy the FDA's safety and effectiveness
requirements:
1. New Drug Applications ("NDA"): Unless the procedure discussed in
paragraph 2 below is available, a prospective manufacturer must submit to
the FDA an NDA containing complete pre-clinical and clinical safety and
efficacy data or a right of reference to such data. The pre-clinical data
must provide an adequate basis for evaluating the safety and scientific
rationale for the initiation of clinical trials. Clinical trials are
conducted in three sequential phases and may take several years to
complete. At times, the phases may overlap. Data from pre-clinical testing
and clinical trials is submitted to the FDA as an NDA for marketing
approval.
2. Abbreviated New Drug Applications: The Waxman-Hatch Act established a
statutory procedure for submission and FDA review and approval of ANDAs for
generic versions of drugs previously approved by the FDA (such previously
approved drugs are hereinafter referred to as "listed drugs"). As the
safety and efficacy have already been established by the innovator company,
the FDA waives the need for complete clinical trials. However, a generic
manufacturer is typically required to conduct
bioavailability/bioequivalence studies of its test product against the
listed drug. The bioavailability/bioequivalence studies assess the rate and
extent of absorption and concentration levels of a drug in the blood stream
required to produce a therapeutic effect. Bioequivalence is established
when the rate of absorption and concentration levels of a generic product
are substantially equivalent to the listed drug. For some drugs (e.g.,
topical antifungals), other means of demonstrating bioequivalence may be
required by the FDA, especially where rate and/or extent of absorption are
difficult or impossible to measure. In addition to the bioequivalence data,
an ANDA must contain chemistry, manufacturing, labeling and stability data.
The Waxman-Hatch Act also established certain statutory protections for
listed drugs. Under the Waxman-Hatch Act, approval of an ANDA for a generic
drug may not be made effective for interstate marketing until all relevant
patents for the listed drug have expired or been determined to be invalid or
not infringed by the generic drug. Prior to enactment of the Waxman-Hatch Act,
the FDA did not consider the patent status of a previously approved drug. In
addition, under the Waxman-Hatch Act, statutory non-patent exclusivity periods
are established following approval of certain listed drugs, where specific
criteria are met by the drug. If exclusivity is applicable to a particular
listed drug, the effective date of approval of ANDAs (and, in at least one
case, submission of an ANDA) for the generic version of the listed drug is
usually delayed until the expiration of the exclusivity period, which, for
newly approved drugs, can be either three or five years. The Waxman-Hatch Act
also provides for extensions of up to five years of certain patents covering
drugs to compensate the patent holder for reduction of the effective market
life of the patented drug resulting from the time involved in the Federal
regulatory review process.
During 1995, patent terms for a number of listed drugs were extended when
the Uruguay Round Agreements Act (the "URAA") went into effect to implement
the latest General Agreement on Tariffs and Trade (the "GATT") to which the
United States became a treaty signatory in 1994. Under GATT, the term of
patents was established as 20 years from the date of patent application. In
the United States, the patent terms historically have been calculated at 17
years from the date of patent grant. The URAA provided that the term of issued
10
patents be either the existing 17 years from the date of patent grant or 20
years from the date of application, whichever was longer. The effect generally
was to add patent life to already issued patents, thus delaying FDA approvals
of applications for generic products.
In addition to the Federal government, states have laws regulating the
manufacture and distribution of pharmaceuticals, as well as regulations
dealing with the substitution of generic for brand-name drugs. The Company's
operations are also subject to regulation, licensing requirements and
inspection by the states in which they are located and/or do business.
The Company also is governed by Federal and state laws of general
applicability, including laws regulating matters of environmental quality,
working conditions, and equal employment opportunity.
The Federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990
("OBRA"). Generally, OBRA provides that a generic drug manufacturer must offer
the states an 11% rebate on drugs dispensed under the Medicaid program and
must have entered into a formal drug rebate agreement, as the Company has,
with the Federal Health Care Financing Administration. Although not required
under OBRA, the Company has also entered into similar state agreements.
ITEM 2. Properties.
The Company owns its executive offices and a substantial portion of its
production and domestic research facilities which are housed in an
approximately 92,000 square foot facility built to Par's specifications. The
building, occupied by Par since fiscal year 1986, also includes research and
quality control laboratories, as well as packaging and warehouse facilities.
The building is located in Chestnut Ridge, New York, on a parcel of land of
approximately 24 acres, of which approximately 15 acres are available for
future expansion.
The Company owns another building in Chestnut Ridge, New York, across the
street from its executive offices, occupying approximately 36,000 square feet
on two acres. This property was acquired in fiscal year 1994 and is used for
offices and warehousing. The purchase of the land and building was financed by
a mortgage loan.
Par owns a third facility of approximately 33,000 square feet located on six
acres in Congers, New York, which was used for tablet coating operations and
product manufacturing. During fiscal year 1998, the Company outsourced a
substantial portion of the manufacturing at this facility to BASF. On March
17, 1999, Par entered into an agreement to lease the facility and related
machinery and equipment to Halsey. The Lease Agreement has an initial term of
three years, subject to an additional two-year renewal period and contains a
purchase option permitting Halsey to purchase the Congers Facility and
substantially all the equipment thereof at any time during the lease terms for
a specified amount. Pursuant to the Lease Agreement, Halsey paid the purchase
option of $100,000 in March 1999. The Lease Agreement provides for annual
fixed rent during the initial term of $500,000 per year and $600,000 per year
during the renewal period. Under the Halsey Supply Agreement, Halsey is
required to perform certain manufacturing operations for the Company at the
Congers Facility (see "Notes to the Financial Statements--Lease Agreement" and
"--Distribution and Supply Agreements--Halsey Drug Co., Inc.").
Par occupies approximately 47,000 square feet of a building in Chestnut
Ridge, New York for warehouse space under a lease that expires December 2004.
The Company has the option to extend the lease for two additional five-year
periods.
Par also leases an 11,000 square foot facility in Upper Saddle River, New
Jersey, for certain of its manufacturing operations. The lease covering this
facility expires November 2000, and has two two-year renewal options. In
December 1999, Genpharm began manufacturing for the Company the product that
was previously produced at this facility. The Company does not expect to renew
the lease at its expiration.
11
IPR leases approximately 13,000 square feet in Even Yehuda, Israel for
product research and development. The lease expires in May 2000 and has a two-
year renewal option and one 35 month renewal option. The Company guarantees
IPR's obligations under the lease.
The Company believes that its owned and leased properties are sufficient in
size, scope and nature to meet its anticipated needs for the reasonably
foreseeable future (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition" and "Notes to
Financial Statements--Long-Term Debt" and "--Commitments, Contingencies and
Other Matters--Leases").
ITEM 3. Legal Proceedings.
Par has filed with the FDA an ANDA for megestrol acetate oral suspension,
the generic version of BMS's Megace(R) Oral Suspension. Par filed a paragraph
IV certification regarding the formulation patent as part of its ANDA
submission. The basic compound patent for Megace(R) has expired. Megace(R)
Oral Suspension received orphan drug exclusivity from the FDA that expires
September 10, 2000 and BMS has a formulation patent for Megace(R) Oral
Suspension expiring in 2011. Par believes that its distinct and unique
formulation does not infringe the BMS formulation patent. In October 1999, BMS
initiated a patent infringement action against Par. On March 1, 2000, Par was
granted a patent by the U.S. Patent Office regarding Par's unique formulation
of megestrol acetate oral suspension. Par believes that the issuance of this
patent, which establishes the uniqueness of Par's formulation compared to the
BMS patent, should significantly help Par's defense in the patent infringement
case. Par intends to vigorously pursue its pending litigation with BMS and to
defend its patent rights and ensure that other generic companies do not
infringe the Par patent. At this time, it is not possible for the Company to
predict the probable outcome of this litigation and the impact, if any, that
it might have on the Company.
The Company is involved in certain other litigation matters, including
certain product liability actions and actions by former employees, and
believes 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 liquidity. The Company intends to defend these actions
vigorously. In fiscal year 1999, the Company settled an action by a former
officer for, among other things, breach of contract that did not have a
material effect on its financial condition, results of operations or
liquidity.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
The rules promulgated by the Securities and Exchange Commission may permit the
Company to exercise discretionary authority to vote on shareholder proposals at
the 2000 Annual Meeting of Shareholders if proposals are not included in the
proxy statement relating to such meeting and the Company does not have notice of
the proposal before May 8, 2000.
12
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market information. The Company's Common Stock is traded on The New York
Stock Exchange ("NYSE") and the Pacific Stock Exchange under the ticker symbol
"PRX". The following table shows the range of closing prices for the Common
Stock as reported by the NYSE for each calendar quarter during the Company's
three most recent calendar years.
Year Ended In
-----------------------------------
Quarter Ended 1999 1998 1997
------------- ----------- ----------- -----------
High Low High Low High Low
----- ----- ----- ----- ----- -----
March 31............................... $7.69 $4.13 $4.75 $1.44 $4.38 $2.88
June 30................................ 8.69 6.50 5.00 3.56 3.75 2.13
September 30........................... 8.44 5.06 6.31 3.81 2.88 1.94
December 31............................ 6.38 4.56 4.75 3.25 2.50 1.13
(b) Holders. As of March 15, 2000, there were approximately 2,800 holders of
record of the Common Stock. The Company believes that, in addition, there are
a significant number of beneficial owners of its Common Stock whose shares are
held in "street name".
(c) Dividends. During fiscal years 1999 and 1998, and the transition period,
the Company did not pay any cash dividends on its Common Stock. The payment of
future dividends on its Common Stock is subject to the discretion of the Board
of Directors and is dependent upon many factors, including the Company's
earnings, its capital needs, the terms of its financing agreements and its
general financial condition. The Company's current loan agreement prohibits
the declaration or payment of any dividend, or the making of any distribution,
to any of the Company's stockholders (see "Notes to Financial Statements--
Short-Term Debt").
(d) Recent Stock Price. On March 15, 2000, the closing price of a share of
the Common Stock on the NYSE was $6.44 per share.
(e) Recent Sales of Unregistered Securities. The Company, on June 30, 1998,
sold 10,400,000 shares of Common Stock to Lipha Americas, Inc. ("Lipha") at a
purchase price of $2.00 per share, and issued stock options to purchase an
aggregate of 1,171,040 shares of Common Stock to Merck KGaA and Genpharm at an
exercise price of $2.00 per share in exchange for consulting services to be
provided to the Company. The options are exercisable commencing on July 10,
2001 and expire on April 30, 2003. Such shares and stock options were issued
pursuant to an exemption provided by Section 4(2) and/or Section 4(6) of the
Securities Act of 1933, as amended. Lipha, Merck KGaA and Genpharm have
certain registration rights with respect to the shares of Common Stock they
own (see "Certain Relationships and Related Transactions").
13
ITEM 6. Selected Financial Data
Twelve Three
Months Months Twelve Months Ended
Ended Ended ----------------------------------
12/31/99 12/31/98 9/30/98 9/30/97 9/30/96 9/30/95
-------- -------- ------- ------- ------- -------
(In thousands, except per share amounts)
INCOME STATEMENT DATA
Net sales.................. $80,315 $16,775 $59,705 $52,572 $57,451 $65,824
Cost of goods sold......... 64,140 17,105 56,135 49,740 48,299 45,514
------- ------- ------- ------- ------- -------
Gross margin........... 16,175 (330) 3,570 2,832 9,152 20,310
Operating expenses:
Research and
development............. 6,005 1,125 5,775 5,843 5,160 5,487
Selling, general and
administrative.......... 12,787 3,611 12,090 11,861 16,660 15,513
Asset
impairment/restructuring
charge.................. -- 1,906 1,212 -- 549 --
------- ------- ------- ------- ------- -------
Total operating
expenses.............. 18,792 6,642 19,077 17,704 22,369 21,000
------- ------- ------- ------- ------- -------
Operating loss......... (2,617) (6,972) (15,507) (14,872) (13,217) (690)
Settlements................ -- -- -- -- -- 2,029
Other income, net.......... 906 1 6,261 6,926 2,007 77
Interest (expense) income.. (63) (89) (382) (545) 118 32
------- ------- ------- ------- ------- -------
(Loss) income from
continuing operations
before provision for
income taxes.............. (1,774) (6,882) (9,628) (8,491) (11,092) 1,448
Provision for income
taxes..................... -- -- -- 410 -- 836
------- ------- ------- ------- ------- -------
(Loss) income from
continuing operations..... (1,774) (6,882) (9,628) (8,901) (11,092) 612
Income from discontinued
operations................ -- -- -- -- 2,800 --
------- ------- ------- ------- ------- -------
Net (loss) income.......... $(1,774) $(6,882) $(9,628) $(8,901) $(8,292) $ 612
======= ======= ======= ======= ======= =======
Net (loss) income per share
of common stock:
Continuing operations:
Basic.................... $ (.06) $ (.23) $ (.45) $ (.48) $ (.60) $ .04
Diluted.................. $ (.06) $ (.23) $ (.45) $ (.48) $ (.60) $ .04
Discontinued operations:
Basic.................... -- -- -- -- .15 --
Diluted.................. -- -- -- -- .15 --
------- ------- ------- ------- ------- -------
Net (loss) income:
Basic.................... $ (.06) $ (.23) $ (.45) $ (.48) $ (.45) $ .04
======= ======= ======= ======= ======= =======
Diluted.................. $ (.06) $ (.23) $ (.45) $ (.48) $ (.45) $ .04
======= ======= ======= ======= ======= =======
Weighted average number of
common and common
equivalent shares
outstanding:
Basic.................... 29,461 29,320 21,521 18,681 18,340 16,670
======= ======= ======= ======= ======= =======
Diluted.................. 29,461 29,320 21,521 18,681 18,340 17,143
======= ======= ======= ======= ======= =======
BALANCE SHEET DATA
Working capital............ $21,221 $24,208 $29,124 $15,959 $20,716 $34,907
Property, plant and
equipment (net)........... 22,681 22,789 24,283 27,832 26,068 24,371
Total assets............... 82,686 77,947 82,924 72,697 84,946 90,917
Long-term debt, less
current portion........... 1,075 1,102 1,143 2,651 2,971 4,259
Shareholders' equity....... 60,339 61,191 68,009 57,268 70,624 71,954
14
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Certain statements in this Form 10-K may 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 certain cost cutting and restructuring measures
and 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-K
include, among others, (i) increased competition from new and existing
competitors and pricing practices from such competitors, (ii) pricing
pressures resulting from the continued consolidation by the Company's
distribution channels, (iii) the amount of funds available for internal
research and development and research and development joint ventures, (iv)
research and development project delays or delays and unanticipated costs in
obtaining regulatory approvals, (v) continuation of distribution rights under
significant agreements, (vi) the effectiveness of restructuring measures to
reduce losses and increase efficiencies, (vii) the continued ability of
distributed product suppliers to meet future demand and (viii) general
industry and economic conditions. Any forward-looking statements included in
this Form 10-K are made as of the date hereof, based on information available
to the Company as of the date hereof, and the Company assumes no obligation to
update any forward-looking statements.
Results Of Operations
General
The Company showed significant progress in fiscal year 1999 when compared to
fiscal years 1998 and 1997. Improvements were achieved through increased sales
levels, higher gross margins, and the effects of a recent restructuring.
Operating losses in fiscal year 1999 of $2,617,000 were reduced considerably
from $15,507,000 and $14,872,000 in fiscal years 1998 and 1997, respectively.
Revenue and margin growth were obtained primarily through a more favorable
pricing environment in the market, reversing prior year trends of price
erosion on certain products, and additional sales from new products. Operating
expenses in fiscal year 1999 increased over fiscal years 1998 and 1997 due to
additional emphasis on product development and marketing. Operating expenses
in fiscal year 1998 included a non-recurring charge of $1,212,000 for asset
impairment of the Congers Facility resulting from outsourcing its production
volume and subsequently leasing the facility to Halsey. The Company incurred
net losses of $1,774,000, $9,628,000 and $8,901,000 in fiscal years 1999, 1998
and 1997, respectively. Fiscal years 1998 and 1997 net results included non-
recurring income of approximately $6,100,000 and $3,900,000, respectively,
from the sale and release of product rights to Elan. Fiscal year 1997 net
results also included a gain of approximately $3,433,000 on the sale of Sano
Corporation common stock (see "Notes to Financial Statements--Distribution and
Supply Agreements--Elan Corporation").
In December 1998, the Company changed its annual reporting period to a
fiscal year ending December 31 from a fiscal year ending September 30 and,
accordingly, reported results for the three-month transition period. The
operating loss in the transition period was $6,972,000 compared to $1,992,000
for the corresponding three-month period ended December 27, 1997. Although the
Company experienced 38% net sales growth in the transition period, compared to
the corresponding period of the prior year, primarily from sales of new
products, the gross margin declined significantly due to unfavorable
manufacturing variances and additional inventory write-offs. In addition,
increased product development activity and higher selling and administrative
expenses, as described below, adversely impacted the operating results for the
transition period. During the transition period, the Company began
implementing certain measures, including discontinuing its manufacturing of
certain unprofitable products, in an attempt to reduce operating losses.
Accordingly, the Company recorded charges of $1,906,000 in the transition
period for asset impairment and restructuring, and $630,000 of additional
inventory reserves (see "Notes to Financial Statements--Commitments,
Contingencies and Other Matters--Asset Impairment/Restructuring").
15
As part of recent restructuring designed to increase operating efficiencies
and improve operating results, the Company has reduced its work force,
discontinued certain unprofitable manufactured products, discontinued
manufacturing at two under-utilized facilities and subsequently leased, with
an option to purchase, one such facility. The Company plans to continue to
search for additional measures to improve results, including pursuing new
products through joint ventures, and distribution and other agreements with
pharmaceutical companies located throughout the world. If gross margin levels
are not increased by sales of more profitable products or volume increases and
favorable pricing on existing products, the Company will continue to experience
losses.
In order to improve the Company's prospects through the introduction of new
products at profitable pricing and strengthen its financial condition, the
Company entered into a strategic alliance with Merck KGaA, which was completed
on June 30, 1998. As part of the alliance, the Company sold Common Stock to a
subsidiary of Merck KGaA and received exclusive United States distribution
rights for up to approximately 40 generic pharmaceutical products covered by
the Genpharm Distribution Agreement. To date, ten of such products have
received FDA approval and are currently being marketed by Par. The remaining
products are either being developed, have been identified for development, or
have been submitted to the FDA for approval. There are currently ANDAs for
nine potential products covered by the Genpharm Distribution Agreement, one of
which has been tentatively approved, pending with and awaiting approval from,
the FDA. The Company anticipates introducing several of these products in
2000. Genpharm pays the research and development costs associated with the
products and the Company is obligated to pay Genpharm a certain percentage of
the gross margin on sales of the products. The alliance provides the Company
with a significant number of potential products for its development pipeline
without the substantial resource commitment, including financial, it would
normally take to develop such a pipeline, improved financial condition and
access to Merck KGaA's expertise and experience in the industry (see "Notes to
Financial Statements--Strategic Alliance" and "--Distribution and Supply
Agreements--Genpharm, Inc.").
Critical to any significant improvement in the Company's financial condition
is the introduction of new manufactured and distributed products at selling
prices that generate significant gross margin. In addition to additional
product introductions expected as part of the strategic alliance with Merck
KGaA, the Company plans to continue to invest in research and development
efforts, subject to liquidity concerns, and pursue additional products for
sale through new and existing distribution agreements. 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
and development agreements. No assurance can be given that the Company will
obtain any additional products for sale or that sales of additional products
will reduce losses or return the Company to profitability. Continuing
operating losses will have a materially adverse affect on the Company's
liquidity and, accordingly, limit its ability to fund research and development
or ventures relating to the sale of new products and market existing products
(see "--Financial Condition--Liquidity and Capital Resources").
The generic drug industry in the United States continues to be highly
competitive. 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) consolidation among distribution outlets, (iii)
ability of generic competitors to quickly 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 (see "Business--
Marketing and Customers" and "--Competition").
Net Sales
Net sales of $80,315,000 in fiscal year 1999 increased $20,610,000, or 35%,
from fiscal year 1998. The sales increase was primarily attributable to a more
favorable pricing environment and additional sales from new manufactured
products and products sold under the Genpharm Distribution Agreement. Net
sales in fiscal year 1999 of distributed products, which consist of products
manufactured under contract and licensed products,
16
increased to approximately 64% of the Company's net sales compared to
approximately 44% of net sales in fiscal year 1998, continuing the trend of
greater reliance on sales of distributed products. The increased percentage of
distributed product sales is primarily due to increased sales of products
manufactured under the Supply Agreement with BASF. The Company is
substantially dependent upon distributed products for its sales, and as the
Company introduces new distributed products under its distribution agreements,
it is expected that this trend will continue. Any inability by suppliers to
meet expected demand could adversely affect future sales. Pursuant to the
Termination Agreement with Elan, the Company ceased distributing Elan's
transdermal nicotine patch after May 31, 1999. The transdermal nicotine patch
accounted for approximately 5% of sales in both fiscal year 1999 and 1998. As
a result of the continued evaluation of its existing product line, the Company
discontinued certain unprofitable products during fiscal year 1999. Although
there can be no assurance, it is anticipated that new product introductions
and the continued effect of the current pricing environment could offset
decreased sales from the termination of the transdermal nicotine patch
distribution rights, and to a lesser extent, the discontinued manufactured
products.
Net sales for the transition period of $16,775,000 increased $4,641,000, or
38%, from net sales of $12,134,000 for the three-month period ended December
27, 1997. The sales growth was primarily attributable to sales of new
products, primarily the transdermal nicotine patch manufactured by Elan and
Naproxen Sodium manufactured by the Company and introduced in October 1998.
Net sales of distributed product for the transition period increased to
approximately 68% of the Company's total net sales compared to approximately
31% of the total for the same period of the prior year.
Net sales for fiscal year 1998 of $59,705,000 increased $7,133,000, or 14%,
from $52,572,000 for fiscal year 1997. The sales growth was primarily
attributable to increased sales of two distributed products manufactured by
BASF under the Supply Agreement and the introduction of three new products,
the transdermal nicotine patch manufactured by Elan, Zorprin(R) manufactured
by BASF, and the first product distributed by the Company under the Genpharm
Distribution Agreement. Net sales of these five products more than offset the
discontinuance of certain unprofitable products and decreased pricing and
volume of three of the Company's manufactured products following the
introduction of other generic drug manufacturers' products in direct
competition with those products. Net sales of distributed product in fiscal
year 1998 increased to approximately 44% of the Company's total net sales
compared to approximately 22% of the total for fiscal year 1997. In the latter
part of fiscal year 1998, the Company increased prices on a limited number of
products that did not generate adequate gross profit and discontinued certain
unprofitable products.
Sales of the Company's products are principally dependent upon, among other
things, (i) pricing levels and competition, (ii) market penetration for the
existing product line, (iii) the continuation of existing distribution
agreements, (iv) introduction of new distributed products, (v) approval of
ANDAs and introduction of new manufactured products, and (vi) the level of
customer service (see "Business--Competition").
Gross Margins
The gross margin for fiscal year 1999 increased $12,605,000 to $16,175,000
(20% of net sales) from $3,570,000 (6% of net sales) in fiscal year 1998.
Significant gross margin gains were attained principally through a more
favorable pricing environment, additional margin contributions from new
products and lower inventory write-offs. Although unfavorable manufacturing
variances due to excess capacity earlier in fiscal year 1999 adversely
affected the gross margin, the magnitude of these variances decreased from the
prior fiscal year. The Company has attempted to address its excess capacity
issues by leasing its under-utilized Congers Facility in March 1999, work
force reductions and write downs of certain under-utilized assets (see "Notes
to Financial Statements--Asset Impairment/Restructuring").
The Company's gross margin was $(330,000) (-2% of net sales) in the
transition period compared to $1,504,000 (12% of net sales) in the
corresponding period of the prior year. Unfavorable manufacturing variances
due to excess capacity following the outsourcing or discontinuing of
manufactured products in prior
17
periods, and higher inventory write-offs related to the discontinued products,
adversely affected the gross margin in the transition period.
The gross margin for fiscal year 1998 was $3,570,000 (6% of net sales)
compared to $2,832,000 (5% of net sales) for fiscal year 1997. The gross
margin improvement was primarily due to increased margin contributions from
higher margin products manufactured by BASF under the Supply Agreement and the
introduction of three new products. The improvements more than offset the
continuing lower selling prices and decreased volumes of certain significant
manufactured products, unfavorable manufacturing variances caused by a shift
in production of the largest volume manufactured product from the Congers
Facility to BASF during the latter part of fiscal year 1998, and additional
inventory write-offs resulting from discontinued and slow moving products.
Inventory write-offs for fiscal year 1999 of $1,157,000 returned to more
normalized levels from $2,229,000 and $1,630,000 for fiscal years 1998 and
1997, respectively. Fiscal year 1998 included additional write-offs of
material and obsolete inventory of approximately $768,000 due to discontinued
products. Inventory write-offs taken in the normal course of business are
related primarily to the disposal of finished products due to short shelf
lives.
Inventory write-offs amounted to $1,478,000 for the transition period
compared to $293,000 for the three-month period ended December 27, 1997. The
increase was primarily attributable to additional inventory reserves due to
discontinued products and the write-off of material and work in process
inventory not meeting the Company's quality control standards.
Four of the Company's products accounted for approximately 47% of its net
sales in fiscal year 1999 compared to 63%, 56% and 55%, respectively, of net
sales for the same four products in fiscal years 1998, 1997 and the transition
period. One such product, the transdermal nicotine patch whose product rights
had been sold effective May 31, 1999, was not sold in fiscal year 1997. The
transdermal nicotine patch accounted for approximately 5% of net sales in each
fiscal year 1999 and 1998, 10% of net sales in the transition period and a
significant portion of the gross margin in those respective periods. Although
the termination of the distribution rights for the transdermal nicotine patch
in fiscal year 1999 is expected to negatively affect the Company's gross
margin, it is anticipated that the gross margins generated by sales of new
products in 2000 may offset this expected decrease. The Company has
implemented measures to reduce the overall impact of these products including
adding additional products through new and existing distribution agreements,
manufacturing process improvements and cost reductions. There can be no
assurances that these measures will return the Company to profitability.
Operating Expenses
Research and Development
Research and development expenses of $6,005,000 for fiscal year 1999
increased $230,000 from similar expenses in fiscal year 1998. Increased
payments in fiscal year 1999 to purchase rights to pharmaceutical chemical
processes and for formulation development work performed for PRI by
unaffiliated companies and increased costs by the domestic operation were
partially offset by the funding of certain research and development expenses
by Generics and Genpharm. In fiscal 1999, Genpharm reimbursed the Company
$587,000 for work performed by PRI related to products covered by the Genpharm
Distribution Agreement. The Company conducts a part of its research and
development in Israel through IPR. Following the acquisition of the remaining
interests of IPR in 1997, the Company's domestic research and development
program was integrated with that of IPR. Research and development expenses in
fiscal year 1999 at IPR were $1,075,000, net of Generics funding, compared to
expenses of $1,763,000 in fiscal year 1998. The Company, IPR and Generics have
an agreement, pursuant to which Generics shares one-half of the costs of IPR's
operating budget in exchange for the exclusive distribution rights outside of
the United States to the products developed by IPR after the date of the
agreement (see "Notes to Financial Statements--Acquisition of Joint Venture"
and "--Development Agreement").
18
Costs for research and development in the transition period of $1,125,000
increased $217,000 from the three-month period ended December 27, 1997. The
increased costs were primarily due to biostudy activity by the domestic
operation during the transition period. Transition period research and
development expenses at IPR were $374,000, net of funding from Generics,
compared to $442,000 in the corresponding period of the prior year.
Research and development expenses of $5,775,000 for fiscal year 1998
decreased $68,000 from fiscal year 1997. In fiscal year 1998, the Company
expensed $967,000 to purchase rights to certain pharmaceutical chemical
processes, and incurred increased costs for IPR and biostudy activity. In
fiscal year 1997, the Company made advances to Elan for the development of
transdermal products, however similar advances were not made in fiscal year
1998. In August 1997, the Company acquired the 51% ownership interest in IPR
that it did not already own from Clal Pharmaceutical Industries Ltd. ("Clal"),
its former partner in the research and development joint venture. Research and
development expenses at IPR in fiscal year 1998 increased $733,000 over the
aggregate cost in fiscal year 1997 due in part to the Company absorbing 100% of
such expenses in fiscal year 1998 compared to 49% in the fiscal year 1997.
The Company has ANDAs for four potential products, one of which has been
tentatively approved, pending with and awaiting approval from, the FDA as a
result of its product development program. The Company has in process or
expects to commence biostudies for six additional products in 2000. In fiscal
year 1999, PRI received FDA approval of its ANDAs for three products that it
is currently marketing.
As part of the Genpharm Distribution Agreement, Genpharm pays the research
and development costs associated with the products covered by the Genpharm
Distribution Agreement. Currently, there are ANDAs for nine potential
products, one of which has been tentatively approved, that are covered by the
Genpharm Distribution Agreement pending with and awaiting approval from, the
FDA. To date, the Company is marketing ten products under the Genpharm
Distribution Agreement and anticipates introducing several more in 2000 (see
"Notes to Financial Statements--Distribution and Supply Agreements--Genpharm,
Inc.").
Selling, General and Administrative
Selling, general and administrative costs of $12,787,000 (16% of net sales)
in fiscal year 1999 increased $697,000 from expenses in fiscal year 1998. The
fiscal year 1999 costs reflect increased advertising and marketing, and
strengthening the sales force in anticipation of product introductions and
increasing market share of the existing product line, higher legal expenses,
and to a lesser extent, higher shipping costs associated with the increased
sales level.
The transition period's selling, general and administrative costs of
$3,611,000 (22% of net sales) increased $1,023,000 from $2,588,000 (21% of net
sales) for the corresponding period in the prior year. The higher costs were
primarily attributable to strengthening the sales force and expanding
marketing efforts, which began in the latter half of fiscal year 1998, and to
a lesser extent, higher professional fees.
Selling, general and administrative costs in fiscal year 1998 of $12,090,000
(20% of net sales) increased $229,000 from $11,861,000 (23% of net sales) in
fiscal year 1997. The increased costs were primarily attributable to
additional sales force and marketing expenses in anticipation of product
introductions.
Asset Impairment/Restructuring Charge
In an attempt to reduce operating losses, the Company implemented measures
during the transition period, which continued in fiscal year 1999, to reduce
costs and increase operating efficiencies. The Company discontinued certain
unprofitable products from its product line, terminated approximately 50
employees, primarily in manufacturing and various manufacturing support
functions and reduced certain related expenses. These measures resulted in a
charge of $1,906,000 in the transition period, which included approximately
$1,200,000 for write-downs related to the impairment of assets affected by the
discontinued products, and a provision of $706,000 for severance payments and
other employee termination benefits.
19
The Company recorded a charge of $1,212,000 in fiscal year 1998 for asset
impairment of its Congers Facility as a result of outsourcing the
manufacturing of most of the products from such facility. The charge is based
on the difference between the appraised value of the property less its net
book value at September 30, 1998. In March 1999, the Company entered into an
agreement with Halsey to lease, with an option to purchase, the Congers
Facility and related machinery and equipment (see "Notes to Financial
Statements--Commitments, Contingencies and Other Matters--Restructuring and
Cost Reductions").
Other Income
Other income of $906,000 in fiscal year 1999 decreased $5,355,000 from
fiscal year 1998. Other income in fiscal year 1999 consisted primarily of
payments from Genpharm to reimburse the Company for research costs incurred in
prior periods in return for a share of gross margin from three products
currently awaiting approval from the FDA. The decrease from fiscal year 1998
was primarily attributable to income from the sale and release of product
rights to Elan in 1998 (see "Notes to Financial Statements--Distribution and
Supply Agreements--Elan Corporation").
Other income of $6,261,000 for fiscal year 1998 included income of
approximately $6,100,000 from the sale and release of product rights to Elan
in fiscal year 1998 and a $600,000 fee paid by Generics pursuant to the
Development Agreement partially offset by the write-off of a $421,000
investment in a software company. Other income of $6,926,000 for fiscal year
1997 included approximately $3,900,000 of income from the sale and release of
product rights to Elan and a gain of $3,433,000 on the sale of Sano
Corporation common stock partially offset by a loss on the sale of Fine-Tech
Ltd. stock (see "--Liquidity and Capital Resources" and "Notes to Financial
Statements--Distribution and Supply Agreements--Elan Corporation").
Income Taxes
Management has determined, based on the Company's recent performance and the
uncertainty of the generic drug business in which it operates, that future
operating income might not be sufficient to recognize fully the net operating
loss carryforwards of the Company. The Company did not recognize a benefit for
its operating losses in fiscal years 1999, 1998 and 1997, and the transition
period. The Company incurred income tax expense of $410,000 in the first
quarter of fiscal year 1997 due to interest relating to a settlement with the
Internal Revenue Service in fiscal year 1995 for the disallowance of tax
credits taken by the Company in prior periods with respect to certain research
and development costs (see "Notes to Financial Statements--Income Taxes").
Financial Condition
Liquidity and Capital Resources
The Company's cash and cash equivalents of $222,000 at December 31, 1999
decreased $6,202,000 from $6,424,000 at December 31, 1998. The decrease was
primarily attributable to increased inventory levels, funding of outside
development projects and capital expenditures. Working capital at December 31,
1999 of $21,221,000, which includes cash and cash equivalents, decreased
$2,987,000 from $24,208,000 at December 31, 1998. The working capital ratio
was 2.03x at December 31, 1999 compared to 2.62x at December 31, 1998.
At December 31, 1998 the Company's cash and cash equivalents decreased
$3,369,000 from $9,793,000 at September 30, 1998. The decrease was principally
due to the use of funds to finance operating losses and to build inventory on
higher volume products. Working capital, including cash and cash equivalents,
at December 31, 1998 decreased $4,916,000 from $29,124,000 at September 30,
1998. The Company's working capital ratio was 3.23x at September 30, 1998.
The Company, from time to time, enters into agreements with third parties
with respect to the development of new products and technologies. To date, the
Company has entered into agreements and advanced funds to several companies
for products in various stages of development. The payments are expensed as
incurred and included in research and development costs. Research and
development expenses are expected to be approximately $8,500,000 in 2000.
20
On March 17, 1999, the Company entered into an agreement to lease, with an
option to purchase, its Congers Facility to Halsey. Halsey paid the Company a
purchase option of $100,000 in March 1999 and is obligated to pay rent of
$500,000 annually during the initial three-year term of the lease. The rent is
expected to cover the Company's fixed costs of the facility. Under the
purchase option, Halsey may purchase the facility and substantially all the
machinery and equipment at any time during the lease for a specified amount
(see "Notes to Financial Statements--Leasing Agreement").
In January 1999, the Company entered into the Genpharm Profit Sharing
Agreement pursuant to which the Company will receive a portion of the profits
resulting from a separate agreement between Genpharm and an unaffiliated
United States based pharmaceutical company in exchange for a non-refundable
fee from the Company of $2,500,000. Pursuant to the Genpharm Profit Sharing
Agreement, the Company paid $951,000 of the fee in year 1999 and the remainder
in January 2000 (see "Notes to Financial Statements--Profit Sharing
Agreement").
The Company, IPR and Generics entered into the Development Agreement, dated
August 11, 1998, pursuant to which Generics agreed to fund one-half of the
costs of IPR's operating budget in exchange for the exclusive distribution
rights outside of the United States to the products developed by IPR after the
date of the agreement. In addition, Generics agreed to pay IPR a perpetual
royalty for all sales of the products by Generics or its affiliates outside
the United States. Under the Development Agreement, Generics commenced funding
during the transition period and had fulfilled their requirements through
December 31, 1999. Generics is not required to fund more than $1,000,000 in
any one calendar year (see "Notes to Financial Statements--Development
Agreement").
On September 29, 1998, the Company and Elan entered into the Termination
Agreement pursuant to which the Company's exclusive distribution rights in the
United States to a transdermal nicotine patch ended on May 31, 1999. Pursuant
to the Termination Agreement, the Company received a cash payment of
$2,000,000 in October 1998 and an additional $1,000,000 in the third quarter
of 1999. In fiscal year 1999, Elan began to pay the Company a perpetual
royalty pursuant to the Termination Agreement on all non-prescription sales of
the transdermal nicotine patch by Elan in the United States and Israel. In
return for relinquishing certain product distribution rights to Elan under a
prior distribution agreement, the Company received cash payments of
approximately $5,700,000 in May 1998, which included approximately $2,100,000
as a prepayment of a promissory note. The proceeds from these payments were
used to reduce outstanding revolving credit line balances at that time (see
"Notes to Financial Statements--Distribution Agreements--Elan Corporation").
On June 30 1998, Merck KGaA, through its subsidiary Lipha, paid the Company
$20,800,000, or $2.00 per share, for 10,400,000 newly-issued shares of PRI's
Common Stock. The Company used approximately $3,600,000 of the net proceeds
from the stock sale to repay outstanding advances made to it under its
existing line of credit and the remainder was used for working capital (see
"Notes to Financial Statements--Strategic Alliance").
The Company expects to fund its operations, including research and
development activities and its obligations under the existing distribution and
development arrangements discussed herein, out of its working capital and, if
necessary, with available borrowings against its line of credit, if and to the
extent then available. If, however, the Company continues to experience
operating losses, its liquidity and, accordingly, its ability to fund research
and development or ventures relating to the distribution of new products would
be materially and adversely affected (see "--Financing").
Financing
At December 31, 1999, the Company's total outstanding short-term and long-
term debt, including the current portion, amounted to $4,398,000 and
$1,313,000, respectively. The short-term debt consists of the outstanding
amount due under the Company's line of credit with General Electric Capital
Corporation ("GECC") and the long-term debt consists primarily of an
outstanding mortgage loan with a bank and capital leases for computer
equipment (see "Notes to Financial Statements--Long-Term Debt").
21
In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with GECC, which was further amended in December 1999, that
provides Par with a five-year revolving line of credit. Pursuant to the Loan
Agreement, as amended, 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 charge on the line of credit is based upon a per annum rate of
2.25% 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. In August 1999,
GECC waived certain events of default related to the earnings before interest
and taxes financial covenant and amended the financial covenants of Par. As of
December 31,1999, the borrowing base was approximately $11,700,000 and
$4,398,000 was outstanding under the line of credit.
At December 31, 1999 the Company has a mortgage loan with a bank in the
original principal amount of $1,340,000. The loan bears interest during the
first five years of its term at a rate of 8.5% per annum and thereafter at the
Prime Rate plus 1.75%. It is due in equal monthly installments until May 1,
2001, at which time the remaining principal balance, with interest, is due.
The loan is secured by certain real property (see "Business Property"). At
December 31, 1999, the outstanding balance of the loan was $960,000. In
addition, the Company had amounts outstanding under capital leases of $353,000
(see "Notes to Financial Statements--Long-Term Debt").
Year 2000
The Company completed implementation of its Year 2000 ("Y2K") compliance
plan on a timely basis and did not experience any disruption in business or
significant issues resulting from Y2K. The plan included an assessment of
critical internal computerized information systems, manufacturing equipment,
physical plant and computerized processes and remedial action or replacement
of systems which were not Y2K compliant. The plan also involved evaluation of
the Company's suppliers, customers and banks regarding their Y2K readiness,
and contingency plans for addressing complications as they may arise. As of
the date of this Form 10-K filing, the Company had not experienced any
significant Y2K issues related to its suppliers, customers, bank or other
service providers. The costs of addressing Y2K have consisted primarily of
internal personnel costs and have been expensed as incurred and have not, and
the Company believes will not, have a materially adverse affect on its
financial condition.
ITEM 6. Defaults Upon Senior Securities.
At July 3, 1999, the Company was in breach of the earnings before interest
and taxes financial covenant contained in the Loan Agreement with GECC. GECC
waived such breach in August 1999 and amended the financial covenants of Par.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
ITEM 8. Financial Statements and Supplementary Data.
See Index to Financial Statements.
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
22
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Directors
The Company's Certificate of Incorporation provides that its Board of
Directors (the "Board") is divided into three classes, with the term of office
of one class expiring each year. The Class I, Class II and Class III directors
of the Company have terms which expire in 2000, 2001 and 2002, respectively.
The following table sets forth certain information with respect to each of
Class I, II and III directors and the year each was first elected as a
director:
Year of
Name Age (as of 3/00) First Election
- ---- ---------------- --------------
Class I
Anthony S. Tabatznik(1)........................ 52 1998
Until December 1999, Chairman and director of
Generics (UK) Ltd.; director of Generics Group
BV, now known as Merck Generics Group BV, and
Chairman and director of Merck Generics Ltd.
Such companies are involved in the manufacture
and distribution of generic pharmaceutical
products. Founder of The Generics Group Ltd.
and brother of J. Neil Tabatznik.
J. Neil Tabatznik(1)........................... 50 1998
Since July 1993, Chairman of Genpharm, a
Canadian manufacturer and distributor of
generic pharmaceutical products. Brother of
Anthony S. Tabatznik.
Class II
Kenneth I. Sawyer(1)........................... 54 1989
Since October 1990, Chairman of the Board of
the Company. Since October 1989, President and
Chief Executive Officer of the Company.
Mark Auerbach(1)(2)............................ 61 1990
Since June 1993, Senior Vice President and
Chief Financial Officer of Central Lewmar
L.P., a distributor of fine papers. From
December 1995 to January 1999, Chief Financial
Officer of Oakhurst Company, Inc., and Steel
City Products, Inc., each a publicly-traded
distributor of automotive products, and Chief
Executive Officer of Oakhurst Company, Inc.
from December 1995 to May 1997. Also a
director of Oakhurst Company, Inc.
Stephen A. Ollendorff(1)....................... 61 1998
Practicing attorney for more than the past
five years. From February 1999, Of Counsel to
Kirkpatrick & Lockhart LLP, a law firm; from
December 1990 to January 1999, Of Counsel to
Hertzog, Calamari & Gleason, a law firm. Chief
Executive Officer and director of Acorn
Holding Corp., a publicly-traded holding
company, for more than the past five years.
Director of Artesyn Technologies, Inc., a
publicly-traded designer, manufacturer and
seller of power supplies.
Class III
Francis Michael J. Urwin(1).................... 47 1998
Since April 1999, Chief Executive Officer, and
from 1991 until April 1999, Group Financial
Director (Chief Financial Officer), of Merck
Generics Group BV; director of Merck Generics
Group BV, Merck Generics Limited, Generics
(UK) Ltd., Resolution Chemicals Limited,
Generics Pharmaceuticals Limited, Genpharm
Limited, Biokinetix Limited and MacDermot
Laboratories Limited.
23
Year of
Name Age (as of 3/00) First Election
- ---- ---------------- --------------
Klaus H. Jander(1)(2)......................... 59 1998
Since 1990, a partner of Clifford Chance
Rogers & Wells LLP, a law firm. Since 1997, a
member of the Executive Committee of Clifford
Chance Rogers & Wells LLP.
- --------
(1)A member of the Compensation and Stock Option Committee of the Board.
(2)A member of the Audit Committee of the Board.
Executive Officers
The executive officers of the Company consist of Mr. Sawyer as President,
Chief Executive Officer and Chairman of the Board and Dennis J. O'Connor as
Vice President, Chief Financial Officer and Secretary. The executive officers
of Par consist of Mr. Sawyer as Chief Executive Officer and Chairman, Mr.
O'Connor as Vice President, Chief Financial Officer and Secretary and Scott
Tarriff as Executive Vice President of Business, Sales and Marketing. Mr.
O'Connor, age 48, has served as Vice President, Chief Financial Officer and
Secretary of the Company since October 1996. From June 1995 to October 1996,
he served as Controller of Par. Mr. O'Connor served as Vice President--
Controller of Tambrands, Inc., a consumer products company, from November 1989
to June 1995. Since January 1998, Mr. Tarriff has served as Executive Vice
President of Business, Sales and Marketing of Par. From June 1989 to January
1998, Mr. Tarriff, age 40, was an employee of Bristol-Myers Squibb Company, a
drug manufacturer, serving as Senior Director of Marketing, Business
Development and Strategic Planning from 1995 to 1997 and Director of Marketing
from 1992 to 1995.
Section 16(a) Beneficial Ownership Reporting Compliance
As a public company, the Company's directors, executive officer and more
than 10% beneficial owners of the Company's Common Stock are subject to
reporting requirements under Section 16(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and are required to file certain reports
with the Securities and Exchange Commission (the "Commission") in respect of
their ownership of Company securities. The Company believes that during fiscal
year 1999, other than with respect to one report required to be filed by
Kenneth I. Sawyer and one report required to be filed by Scott L. Tarriff, all
such required reports were filed on a timely basis. Mr. Sawyer did not file a
Form 5 and Mr. Tarriff did not file a Form 4 on a timely basis.
24
ITEM 11. Executive Compensation.
The following table sets forth compensation earned by or paid, during fiscal
years 1999, 1998 and 1997, to the Chief Executive Officer of the Company and
the two other most highly compensated executive officers of the Company and/or
Par who earned over $100,000 in salary and bonus at the end of fiscal year
1999 (the "Named Executives"). The Company awarded or paid such compensation
to all such persons for services rendered in all capacities during the
applicable fiscal years. The amounts set forth in the table do not include
compensation earned by or paid to the Named Executives during the transition
period.
Summary Compensation Table
Annual Compensation Long-Term Compensation
----------------------- -----------------------
Restricted Securities
Name and Principal Stock Underlying All Other
Position Year Salary($) Bonus($) Awards($)(1) Options(#) Compensation($)
- ------------------ ---- --------- -------- ------------ ---------- ---------------
Kenneth I. Sawyer,...... 1999 $350,000 -- -- -- $132,464(2)
President, Chief 1998 $350,000 -- -- 500,000 $ 2,901(2)
Executive Officer and 1997 $350,000 -- -- -- $ 2,707(2)
Chairman
Dennis J. O'Connor...... 1999 $143,150 -- -- -- $ 2,199(3)
Vice President, Chief 1998 $142,500 -- -- 37,500 $ 2,191(3)
Financial Officer and 1997 $137,994 -- -- 30,000 $ 2,121(3)
Secretary
Scott Tarriff........... 1999 $185,000 $50,000 -- -- $ 3,574(4)
Executive Vice 1998 $124,519 -- -- 200,000 $ 46(4)
President of Business, 1997 NA NA NA NA NA
Sales and Marketing
(Par)
- --------
(1) The Named Executives did not hold any shares of restricted stock at the
end of fiscal year 1999.
(2) Includes insurance premiums paid by the Company for term life insurance
for the benefit of Mr. Sawyer of $74 for each of the fiscal years 1999,
1998 and 1997; also includes $129,477 for the forgiveness of a loan from
the Company for fiscal year 1999 and $2,913, $2,827 and $2,633 for the
maximum potential estimated dollar value of the Company's portion of
insurance premium payments from a split-dollar life insurance policy as
if premiums were advanced to Mr. Sawyer without interest until the
earliest time the premiums may be refunded by Mr. Sawyer to the Company
for the fiscal years 1999, 1998 and 1997, respectively.
(3) Includes $53, $53 and $51 for insurance premiums paid by the Company for
term life insurance for the benefit of Mr. O'Connor for fiscal years
1999, 1998 and 1997, respectively; also includes $2,146, $2,138 and
$2,070 for contributions by the Company to the Company's 401k Plan for
fiscal years 1999, 1998 and 1997, respectively.
(4) Includes $68 and $46 for insurance premiums paid by the Company for term
life insurance for the benefit of Mr. Tarriff for fiscal years 1999 and
1998, respectively; also includes $3,506 for a contribution by the
Company to the Company's 401k Plan for fiscal year 1999.
In the transition period, the compensation earned by or paid to Messrs.
Sawyer, O'Connor and Tarriff amounted to $94,230, $37,692 and $49,807,
respectively. Other compensation for Mr. Sawyer in the transition period
included $112,301 for the forgiveness of a loan from the Company.
During fiscal year 1999 and the transition period, there were no stock
option grants or stock appreciation rights granted to any Named Executives.
The following table sets forth certain information with respect to stock
options exercised by the Named Executives during fiscal year 1999 and, as of
December 31, 1999, the number of unexercised stock options and the value of
in-the-money options held by the Named Executives. There were no options
exercised by the Named Executives in the transition period.
25
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End (#) at FY-End ($)(1)
Acquired on Value ------------------------- ------------------------- ---
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
Kenneth I. Sawyer....... -- -- -- 500,000 -- $1,343,750
Scott Tarriff........... -- -- -- 200,000 -- 687,500
Dennis J. O'Connor...... 6,666 $39,163 32,500 28,334 $68,594 84,064
- --------
(1) Based upon the closing price of the Common Stock on December 31, 1999 of
$4.94.
Compensation of Directors
For service on the Board in fiscal year 1999, Directors who are not
employees of the Company or any of its subsidiaries received an annual
retainer of $12,000, a fee of $1,000 for each meeting of the Board attended,
in person or by teleconference, and a fee of $750 for each committee meeting
attended in person or by teleconference, subject to a maximum of $1,750 per
day. Chairmen of committees received an additional annual retainer of $5,000
per committee. New non-employee Directors are granted options to purchase
5,000 shares Common Stock on the date initially elected to the Board and on
each following day on which the shareholders elect directors pursuant to the
Company's 1997 Directors Stock Option Plan (the "Directors Plan"). Non-
employee Directors are entitled to only one automatic option grant each year
but are also entitled to an annual grant of an option to purchase an
additional 6,500 shares of Common Stock if, for such year, they own at least
2,500 shares of issued Common Stock for each series of additional 6,500
options granted under the Directors Plan. These additional options are subject
to forfeiture if, in certain circumstances, the non-employee Director sells
Common Stock of the Company. Directors who are employees of the Company
received no additional remuneration for serving as directors or as members of
committees of the Board. All directors are entitled to reimbursement for out-
of-pocket expenses incurred in connection with their attendance at Board and
committee meetings. Messrs. A. Tabatznik, N. Tabatznik, Urwin and Jander
waived their rights to receive options to purchase Common Stock under the
Directors Plan for fiscal years 1999 and 1998. In addition, Messrs.
Ollendorff, A. Tabatznik, N. Tabatznik and Urwin have waived their receipt of
cash compensation for service on the Board for the same periods.
Employment Agreements and Termination Arrangements
The Company has entered into an employment agreement with Mr. Sawyer, which
provides for his employment through October 4, 2000, subject to earlier
termination by the Company for Cause (as such term is defined in the
agreement). Mr. Sawyer's agreement provides for a rolling three-year term of
employment which is automatically extended each year for an additional one
year unless either party provides written notice by July 4th of such year that
he or it desires not to renew the agreement. Under the agreement with Mr.
Sawyer, the Company is required to use its best efforts to cause him to be
reelected to the Board during his term of employment. Mr. Sawyer, pursuant to
the terms of his employment agreement, is and will be required to serve, if so
elected, on the Board of Directors as well as any committees thereof.
Mr. Sawyer's agreement provides for certain payments upon termination of his
employment. Upon termination of Mr. Sawyer's employment without Cause (as such
term is defined in the agreement) by the Company or for the Company's material
breach, Mr. Sawyer is entitled to receive the balance of his current salary
for the remainder of the employment term and the amount of his current bonus
multiplied by the number of years remaining under his agreement. A material
breach by the Company of the employment agreement includes, but is not limited
to, a termination without Cause and a change of his responsibilities. In the
event of termination of Mr. Sawyer's employment for death, disability or for
Cause, Mr. Sawyer is entitled to receive his current base salary through the
date of termination and, in the event of death or disability, a pro-rated
amount of his last annual bonus. As a result of a material breach by the
Company of his employment agreement following a change of control (as such
term is defined in the agreement) of the Company, Mr. Sawyer is entitled to
receive, if such a termination occurs within two years following the change of
control of the Company, a lump sum payment equal to the lesser of three times
the sum of his annual base salary and most recent bonus or the
26
maximum amount permitted without the imposition of an excise tax on Mr. Sawyer
or the loss of a deduction to the Company under the Internal Revenue Code of
1986, as amended (the "Code"), plus reimbursement of certain legal and
relocation expenses incurred by Mr. Sawyer as a result of the termination of
his employment and maintenance of insurance, medical and other benefits for 24
months or until Mr. Sawyer is covered by another employer for such benefits.
In April 1998, Mr. Sawyer and the Company amended Mr. Sawyer's employment
agreement. Mr. Sawyer agreed to waive breaches of his employment agreement
which would have arisen out of consummation of the strategic alliance with
Merck KGaA, and to relinquish his title and position as President of the
Company and each of its subsidiaries if Lipha exercised its right to designate
the President of the Company and each of its subsidiaries. The Company agreed
to forgive, in each year that Mr. Sawyer remains employed by the Company, one-
third of the principal amount of a promissory note, plus accrued interest on
the forgiven portion, pertaining to a loan in the original amount, including
interest, equal to approximately $379,000 made by the Company to Mr. Sawyer in
April 1998. The outstanding balance of the note, including interest, was
approximately $163,000 at December 31, 1999. The entire unpaid principal of
the promissory note and accrued interest would be canceled upon certain
events, including termination of Mr. Sawyer's employment without Cause and the
expiration of this employment agreement in accordance with its terms.
The Company has entered into a severance agreement with Mr. O'Connor, dated
October 23, 1996. The agreement provides, with certain limitations, that upon
the termination of Mr. O'Connor's employment by the Company for any reason
other than for cause or by Mr. O'Connor for good reason or following a change
of control (as such terms are defined in the agreement), Mr. O'Connor is
entitled to receive a severance payment. The amount of the payment is to be
equal to six months of his salary at the date of termination, with such amount
to be increased by an additional month of salary for every full month he has
been employed by the Company in his present position, up to a maximum of six
additional month's salary.
The Company has entered into an employment agreement with Mr. Tarriff, dated
February 20, 1998. In the event of termination of Mr. Tarriff's employment
after one year of employment by Mr. Tarriff for good reason or by the Company
without cause (as such terms are defined therein), Mr. Tarriff is entitled to
receive a severance payment equal to one year of his then current salary less
any amount of compensation paid by a new employer for the balance of the year
from the termination date. In connection with Mr. Tarriff's employment by the
Company, he was granted options to purchase 200,000 shares of Common Stock at
an exercise price of $1.50 per share.
Under the stock option agreements with Messrs. Sawyer, O'Connor and Tarriff,
any unexercised portion of the options becomes immediately exercisable in the
event of a change of control (as such term is defined in their agreements).
However, each of such persons has agreed that the consummation of the
strategic alliance with Merck KGaA did not constitute a change in control
under his stock option agreement.
Pension Plan
The Company maintains a defined benefit plan (the "Pension Plan") intended
to qualify under Section 401(a) of the Code. Effective October 1, 1989, the
Company ceased benefit accruals under the Pension Plan with respect to service
after such date. The Company intends that distributions will be made, in
accordance with the terms of the Pension Plan, to participants as of such date
and/or their beneficiaries. The Company will continue to make contributions to
the Pension Plan to fund its past service obligations. Generally, all
employees of the Company or a participating subsidiary who completed at least
one year of continuous service and attained 21 years of age were eligible to
participate in the Pension Plan. For benefit and vesting purposes, the Pension
Plan's "Normal Retirement Date" is the date on which a participant attains age
65 or, if later, the date of completion of 10 years of service. Service is
measured from the date of employment. The retirement income formula is 45% of
the highest consecutive five-year average basic earnings during the last 10
years of employment, less 83 1/3% of the participant's Social Security
benefit, reduced proportionately for years of service less than 10 at
retirement. The normal form of benefit is life annuity, or for married
persons, a joint survivor annuity. None of the Named Executives had any years
of credited service under the Pension Plan.
27
The Company has a defined contribution, social security integrated
Retirement Plan (the "Retirement Plan") providing retirement benefits to
eligible employees as defined in the Retirement Plan. The Company has
suspended employer contributions to the Retirement Plan effective December 30,
1996. Consequently, participants in the Retirement Plan are no longer entitled
to any employer contributions under such plan for 1996 or subsequent years.
The Company also maintains a Retirement Savings Plan (the "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 year 1998, the
Company merged the Retirement Plan into the Retirement Savings Plan.
Additional Information With Respect To Compensation Committee Interlocks and
Insider Participation
The Compensation and Stock Option Committee (the "Compensation Committee")
of the Board consists of the entire Board of Directors, namely, Messrs. A.
Tabatznik, N. Tabatznik, Sawyer, Auerbach, Ollendorff, Urwin and Jander.
Mr. J. Neil Tabatznik, a director of the Company, is the Chairman of
Genpharm, which develops, manufactures and distributes products to the Company
pursuant to the Genpharm Distribution Agreement. Mr. Francis Michael J. Urwin,
a director of the Company, is Chief Executive Officer and director of Merck
Generics Group BV, a subsidiary of Merck KGaA, which beneficially owns 42.5%
of the Company's Common Stock. Mr. Anthony S. Tabatznik, a director of the
company, resigned from his position as Chairman and director of Generics,
effective December 31, 1999. The Company, Genpharm and its affiliate are
presently parties to distribution agreements entered into in 1992, 1993 and
1998. Under such distribution agreements, payments by the Company to Genpharm
and an affiliate amounting to approximately $4,400,000 in fiscal year 1999
accounted for more than five percent (5%) of the Company's consolidated
revenues. Further, Generics and the Company are parties to a development
agreement pursuant to which each of Generics and the Company are funding one-
half of the costs of the operating budget of IPR in exchange for the exclusive
rights to manufacture and distribute products developed by IPR worldwide
(except for the United States).
Mr. Kenneth I. Sawyer, the Chairman, President and Chief Executive Officer
of the Company, serves as a director of Authorgenics, Inc., a developer of
software ("Authorgenics"), and until September 1998, Mr. Stephen A. Ollendorff
served as a director and Executive Vice President of Authorgenics. Mr.
Ollendorff was not granted any cash compensation for his service as director
or Executive Vice President of Authorgenics. At December 31, 1999, the Company
owned approximately 1% of Authorgenics and has the exclusive rights to market
to the pharmaceutical industry certain software currently in development.
At various times during fiscal years 1996 and 1997, the Company made
unsecured loans to Mr. Sawyer. Such loans are evidenced by a single promissory
note, which bears interest at the rate of 8.25% per annum. Interest and
principal are due on the earlier of August 14, 2002, or the termination of Mr.
Sawyer's employment with the Company. As of December 31, 1999, the outstanding
principal balance of the note, plus accrued interest, was approximately
$163,000. As part of Mr. Sawyer's compensation, the Company has agreed to
forgive the note over a three-year period, provided that Mr. Sawyer remains
employed by the Company (see "--Executive Compensation--Employment Agreements
and Termination Arrangements").
Stephen A. Ollendorff, a director of the Company, is Of Counsel to the law
firm of Kirkpatrick & Lockhart LLP, which currently provides legal services to
the Company, and provided legal services to the Company in fiscal year 1999.
During the Company's 1998 fiscal year, Mr. Ollendorff was Of Counsel to the
law firm of Hertzog, Calamari & Gleason, which received fees and expenses in
fiscal year 1998 for various legal services rendered to the Company. In
addition, Mr. Ollendorff is a consultant to the Company and was paid
approximately $77,000 in fiscal year 1999, pursuant to a renewable one-year
consulting agreement. Mr. Ollendorff owns 5,000 shares of Common Stock of the
Company and also holds stock options to purchase 82,000 shares of Common
Stock, of which 31,000 are presently exercisable.
28
Compensation and Stock Option Committee Report
The Compensation Committee, approves the policies and programs pursuant to
which compensation is paid or awarded to the Company's executive officers and
key employees. In fiscal 1999, the Board, acting in its role as the Compensation
Committee, at one of its Board meetings acted on matters requiring Compensation
Committee action. The Board also acted by unanimous written consent on one
additional matter requiring Compensation Committee action. In reviewing overall
compensation for fiscal year 1999, the Compensation Committee focused on the
Company's objectives to attract executive officers of high caliber from larger,
well-established pharmaceutical manufacturers, to retain the Company's executive
officers, to encourage the highest level of performance from such executive
officers and to