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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For Fiscal Year Ended September 30, 1997
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
The New York Stock Exchange, Inc.
Common Stock, $.01 par value The Pacific Stock Exchange, Inc.
---------------------------- --------------------------------
The New York Stock Exchange, Inc.
Common Stock Purchase Rights 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. _____
$28,101,719
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF DECEMBER 17, 1997 (ASSUMING SOLELY FOR PURPOSES OF THIS
CALCULATION THAT ALL DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ARE
"AFFILIATES").
18,897,629
Number of shares of common stock outstanding as of December 17, 1997
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE FOLLOWING DOCUMENTS HAVE BEEN INCORPORATED BY REFERENCE INTO
THIS ANNUAL REPORT ON FORM 10-K: NONE
This is page 1 of 165 pages. The exhibit index is on page 29.
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. 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, to a much
lesser extent, over-the-counter drugs. Approximately 100 products representing
various dosage strengths of 37 drugs are currently being marketed (see "--
Product Line Information"). 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. Normally, 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.
The Company markets its products primarily to wholesalers, drug distributors,
repackagers and retail drug store chains principally through its own sales
staff. 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:
Financial Condition. The Company, in the fiscal year ended September 30,
1997, continued to experience declines in sales and gross margins which resulted
in net losses of $8,901,000. Net sales in fiscal year 1997 declined by 8% and
gross margins declined by 64% from the prior fiscal year. The decreases in
sales and gross margins continue to be attributable to lower pricing of the
Company's products as a result of intense competition and a less profitable
product mix. The trend in decreasing sales and gross margins was partially
offset by the implementation in the fourth quarter of fiscal year 1997 of a new
manufacturing and supply agreement with BASF Corporation (see "--Product Line
Information", "--Competition" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
In response to its operating results and industry trends, the Company
implemented measures in the fourth quarter of fiscal year 1996, which have
continued in fiscal year 1997, to reduce costs and increase operating
efficiencies. Such measures resulted in a decrease in selling, general and
administrative costs of 27% during fiscal year 1997 and included reductions of
work force, changes in various senior management, a reorganization of certain
existing personnel and reductions in certain expenses. In fiscal year 1997, the
Company further reduced its work force primarily as a result of the Company's
new manufacturing and supply agreement with BASF Corporation described below.
The Company is continuing its search for strategic alliances which would
enable the Company, among other things, to expand its product line, increase
research and development activities and obtain additional capital. The Company,
in fiscal year 1997, increased its spending on research and development by 13%.
In August 1997, the Company purchased the 51% interest in its research and
development joint venture, now named Israel Pharmaceutical Resources L.P.
("IPR"), it did not previously own, giving the Company full control over the
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research and development operation located in Israel. IPR was formed in May
1995 to research and develop generic pharmaceutical products (see "--Product
Line Information" and "--Research and Development").
The continuing losses incurred by the Company have adversely affected and
will continue to adversely affect the Company's liquidity and, accordingly, its
ability to fund its operations, including research and development as well as
ventures relating to the development or distribution of new products. The
Company, in fiscal year 1997, entered into a new three-year loan arrangement
providing for a revolving line of credit up to the lesser of $20,000,000 or the
borrowing base as provided in the loan agreement. The loan is secured by
substantially all of the assets of the Company other than real property and the
Company has entered into a new cash management system requiring the deposit of
all receipts into a lockbox under the lender's control. The new loan
arrangement replaced the Company's previous revolving and term loan facility
(see "--Research and Development" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
Manufacturing Agreement. On April 30, 1997, Par and BASF Corporation
("BASF"), a manufacturer of pharmaceutical products, entered into a
Manufacturing and Supply Agreement (the "Supply Agreement"). Under the Supply
Agreement, Par agreed to purchase certain minimum quantities of certain products
manufactured by BASF and to discontinue manufacturing those products. BASF
agreed to discontinue direct sale of those products. As a result of the Supply
Agreement, the Company has reduced its operating expenses and increased the
gross margin with respect to the products covered by the Supply Agreement (see
"--Product Line Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
PRODUCT LINE INFORMATION
The Company operates primarily 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 one product in the
semi-solid form of a cream (see "--Research and Development").
Par markets approximately 77 products, representing various dosage strengths
of 26 drugs manufactured by the Company and approximately 23 products,
representing various dosage strengths of 11 drugs, that are manufactured for it
by other companies (see "--Research and Development", "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations" and "Notes to Financial Statements--Distribution Agreements"). Par
holds abbreviated new drug applications ("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.
NAME COMPETITIVE BRAND-NAME DRUG
---- ---------------------------
Central Nervous System:
Alprazolam Xanax
Benztropine Mesylate Cogentin
Carisoprodol and Aspirin Soma Compound
Chlorzoxazone Paraflex
Cyproheptadine Hydrochloride Periactin
Doxepin Hydrochloride Sinequan, Adapin
Fluphenazine Hydrochloride Prolixin
Flurazepam Hydrochloride Dalmane
Haloperidol Haldol
Imipramine Hydrochloride Tofranil
Meclizine Hydrochloride Antivert
Methocarbamol and Aspirin Robaxisal
Temazepam Restoril
Triazolam Halcion
3
Cardiovascular:
Atenolol Tenormin
Captopril Capoten
Clonidine and Chlorthalidone Combipres
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
Isosorbide Dinitrate Isordil
Methyldopa and
Hydrochlorothiazide Aldoril
Metoprolol Tartrate Lopressor
Minoxidil Loniten
Pindolol Visken
Triamterene and
Hydrochlorothiazide Maxzide
Anti-Inflammatory:
Ibuprofen Advil, Nuprin, Motrin
Piroxicam Feldene
Anti-Infective:
Acyclovir Zovirax
Metronidazole Flagyl
Nystatin Mycostatin
Anti-Cancer:
Megestrol Acetate Megace
Other:
Allopurinol Zyloprim
Dexamethasone Decadron
Glipizide Glucotrol
Metaproterenol Sulfate Alupent
Silver Sulfadiazine (SSD) Silvadene
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, it has pursued and continues to pursue arrangements or
affiliations which it believes, in general, will 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 (see "Notes to Financial Statements--Distribution Agreements").
In April 1997, Par entered into the Supply Agreement with BASF. Under the
Supply Agreement, Par agreed to purchase certain minimum quantities of certain
products manufactured by BASF at one of its facilities, and Par agreed to phase
out its 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
the event that Par's purchases do not equal or exceed the thresholds, BASF may
elect to terminate the Supply Agreement effective one year later. If BASF
elected to terminate the agreement, Par could either seek another contract
manufacturer or reestablish its manufacturing capacity for certain of those
products. The Company began selling drugs manufactured by BASF and BASF had
transferred to Par the marketing and sales of certain products covered by the
Supply Agreement in June 1997. The Supply Agreement became fully implemented in
August 1997.
In May 1995, the Company formed a joint venture located in Israel with Clal
Pharmaceutical Industries Ltd. ("Clal") to research and develop generic
pharmaceutical products. Clal beneficially owns approximately 12% of the
Company's Common Stock. In August 1997, the Company acquired Clal's 51% interest
in the joint venture in which the Company previously owned 49%. The joint
venture was renamed Israel Pharmaceutical Resources, L.P. Eight compounds
currently are under active development by IPR. (see "--Research and
Development",
4
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition" and "Certain Relationships and Related
Transactions--Clal Agreements").
In July 1997, Par amended its 1994 distribution agreement with Sano
Corporation ("Sano"). Par has retained the right to exclusively distribute
three of Sano's generic transdermal products in the United States. Sano
develops transdermal delivery systems utilizing a patch that incorporates the
appropriate drug dosage into an adhesive that attaches the patch to the skin.
Transdermal delivery offers significant benefits over oral delivery, including
increased patient compliance, reduced side effects, reduced interaction with
other drugs in use by a patient and a more consistent and appropriate drug level
in the bloodstream, all of which generally result in lower overall patient care
costs. Sano is developing two generic nitroglycerin patches and one generic
nicotine patch which are covered by the agreement. Par has paid Sano a portion
of the development expense for such products. To date, Sano received U.S. Food
and Drug Administration ("FDA") approval for its nicotine patch in October 1997
and awaits approval on two ANDAs for its nitroglycerin patches. The Company
intends to begin marketing the nicotine patch in fiscal year 1998. Under the
agreement, Par will purchase manufactured products from Sano, when approved by
the FDA, at cost and share in the gross profits from the sales. However, there
can be no assurance that any other products under Sano's ANDAs will obtain FDA
approval or that any Sano products, if brought to market, will generate
significant revenues. Under the July 1997 amendment to the distribution
agreement, Par ceded its distribution rights to three products for which
submissions have not been filed yet with the FDA. PRI also released
distribution rights outside of the United States for the retained products (see
"--Research and Development", "--Competition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Condition").
RESEARCH AND DEVELOPMENT
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 the 1997 fiscal
year, the Company contracted with outside laboratories to conduct biostudies for
three 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").
The research and development of oral solid products, including preformulation
research, process and formulation development, required studies and FDA
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 or problems relating to formulation, safety or efficacy
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Liquidity and Capital Resources"). Currently,
the Company has ANDAs pending with the FDA for four potential products and Sano
has ANDAs pending with the FDA for two potential products which the Company has
exclusive rights to distribute in the United States. No assurance can be given
that the Company or Sano will successfully complete the development of products
currently under development or proposed for development, that they 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 declining revenues from older 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 and
financial condition (see "--Competition").
5
For its 1997, 1996 and 1995 fiscal years, the Company incurred research and
development expenses of $5,843,000, $5,160,000 and $5,487,000, respectively,
including the amounts expended by the Company for IPR and under the distribution
agreement with Sano. The Company plans that its expenditures will remain at
approximately the same levels over the next fiscal year (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Operating Results--Research and Development" and "--Financial Condition--
Liquidity and Capital Resources").
IPR has identified approximately 35 products for research, eight of which are
currently under active development by IPR. The Company expects that
approximately six of such products will be the subject of a biostudy in fiscal
year 1998. The Company has not filed any ANDAs with respect to such potential
products. The scientific process of developing new products is complex and time
consuming, as is obtaining FDA approval, and the development of products by IPR
may be curtailed in the early or later stages of development due to the
introduction of competing generic products or for other reasons. At the present
time, there is uncertainty under Israeli law as to whether some research
functions can be conducted prior to patent expiration in Israel. The outcome of
this could affect the research being done by IPR. Legislation is currently
pending in Israel which would expressly permit such research. Depending on the
outcome of the legislation, among other things, the Company may relocate IPR's
operations to the United States in the future.
Since its formation in May 1995, IPR has received an aggregate of
approximately $7,000,000 in funding from the Company and Clal. The Company is
obligated to invest in IPR not less than $1,500,000 each year until the Company
repays the $1,500,000 promissory note delivered as part of the purchase price
for IPR (see "--Product Line Information" and "Management's Discussion and
Analysis of Financial Condition and Results of operations--Financial Condition--
Liquidity and Capital Resources"). Following the acquisition of all of the
interests in IPR, the Company's domestic research and development program was
reorganized and integrated with that of IPR.
Under the terms of the distribution agreement with Sano, the Company advanced
to date $7,629,000 to Sano for the development of products, of which $2,258,000
was advanced in fiscal year 1997. In return for relinquishing the rights
described above, the Company received in July 1997 $1,950,000 in cash and an
interest-bearing promissory note for $1,950,000 due in September 1998. The
Company has also retained the rights to recover certain of its prior payments to
Sano, including $1,500,000 from the gross profits earned on sales of two of the
retained products. Sano repaid $1,500,000 of the advances on the retained
products in November 1995 which was treated as a credit to research and
development expenses in fiscal year 1996 (see "--Product Line Information",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Liquidity and Capital Resources" and "Notes to
Financial Statements--Investments").
MARKETING AND CUSTOMERS
The Company markets its products under both Par and private labels
principally to wholesalers, distributors, repackagers, retail drug store chains
and, to a lesser extent, drug manufacturers and government agencies primarily
through its own sales staff. The Company sells 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.
The Company has experienced a significant change in its distribution channels
in the last several years. In general, sales of generic drugs to distributors
have been decreasing, while sales to wholesalers and repackagers have been
increasing. The Company believes that competition between distributors and
consolidation among wholesalers and retailers have resulted in additional
pressure to decrease prices. Additionally, aggressive pricing strategies by
distributors which are attempting to maintain or increase market share have
adversely affected the Company's ability to market its products. Consequently,
price reductions have resulted in lower gross margins for the Company (see "--
Competition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations").
The Company has approximately 200 customers. During fiscal year 1997, sales
to the Company's three largest customers, Leiner Health Products Inc., McKesson
Drug Co. and Bergen Brunswig Corporation accounted for
6
approximately 16%, 11% and 10%, respectively, of net sales (see "Notes to
Financial Statements--Accounts Receivable--Major Customers"). None of these
customers has written agreements with the Company.
ORDER BACKLOG
The dollar amount of open orders, as of September 30, 1997, believed by
management to be firm, was approximately $3,300,000, as compared to
approximately $4,200,000 at September 30, 1996. Although these 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 and increasingly competitive.
The Company has identified at least ten principal competitors, and experiences
varying degrees of competition from numerous other companies in the health care
industry. The Company's competitors include many generic drug manufacturers and
a number of major branded pharmaceutical companies which, as part of their
business, market both brand-name prescription drugs and generic versions of
these brand-name drugs. Many of the Company's competitors have greater
financial and other resources than the Company and are able to expend more for
product development and marketing.
Many major branded pharmaceutical companies have directly launched, or have
formed alliances to market, their patented drugs prior to patent expiration as
generic drugs. Because branded pharmaceutical companies do not have to wait
until the expiration of patent protection before manufacturing such generic
drugs, they have a distinct timing advantage over strictly generic drug
manufacturers. This competitive effort has had a negative impact on the
Company's ability to sell certain generic drugs to its customers and to generate
customary revenues from the launch of its new products, as the channel of
distribution is either closed or severely limited or the Company is forced to
meet lower market pricing.
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 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
part, on the number and timing of introductions of competing products and the
Company's timely development and introduction of new products (see "--Research
and Development").
During fiscal year 1997, four of the Company's products accounted for
approximately 59% of its net sales compared to 58% and 63%, respectively, of net
sales in fiscal years 1996 and 1995. One of such products contributed
significantly to the sales and gross margin in all three periods. A competitor
of the Company received FDA approval for this product in fiscal year 1996 where,
prior to that time, the Company had been the sole generic manufacturer. During
the second half of calendar 1995, two generic pharmaceutical manufacturers
received FDA approval for a product in which the Company had also been the sole
generic manufacturer. These products, along with one other product, had
historically accounted for a significant percentage of the Company's net sales
and gross margin. Due to the increased competition with respect to these
products, the Company's sales and gross margins have been materially and
adversely affected (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--General", "--Sales",
"--Gross Margins" and "Notes to Financial Statements--Distribution Agreements").
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 with
integrity and quality products, (iv) level of service (including maintaining
sufficient inventory levels for timely deliveries), (v) product appearance, and
(vi) breadth of product line.
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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 could in turn have an
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 for its drug approvals.
EMPLOYEES
As of September 30, 1997, the Company had approximately 335 employees.
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.
FDA approval is required before any new drug, including a generic equivalent
of a previously approved 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 other 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 three basic ways to satisfy the FDA's safety and effectiveness
requirements:
1. New Drug Applications ("NDA" or "full NDA"): Unless either of the
procedures discussed in paragraphs 2 and 3 below is available, a
prospective manufacturer must submit to the FDA full reports of well-
controlled clinical studies and other data to prove that a drug is safe
and effective and meets other requirements for approval.
2. "Paper" NDAs: In certain instances in the past, the FDA permitted safety
and effectiveness to be shown by submission of published literature and
journal articles in a so-called "paper" NDA. As a result of passage of the
Drug Price Competition and Patent Term Restoration Act of 1984 (the
"Waxman-Hatch Act"), "paper" NDAs are now recognized in the statute,
although they are infrequently used because of the lack of sufficient or
otherwise useable information in the literature on the majority of drugs.
3. 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
8
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 right 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 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, licensure 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
research and production facilities which are housed in an approximately 92,000
square foot facility built to Par's specifications. This 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.
9
The Company owns an approximately 36,000 square foot building on two acres in
Chestnut Ridge, New York, across the street from its executive offices. This
property was acquired in fiscal year 1994 and is used for offices. The purchase
of the land and building was financed by a mortgage loan.
Par owns a third facility consisting of an approximately 33,000 square foot
building located on six acres in Congers, New York, which is used for tablet
coating operations and product manufacturing.
Par occupies approximately 47,000 square feet of a building in Chestnut
Ridge, New York for office, warehouse, and research and development space under
a lease which expires December 2004. The Company has the option to extend the
lease for two additional five-year periods. This lease replaces a lease for
77,000 square feet which expires January 1, 1998.
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 1998, and has three two-year renewal options.
IPR leases approximately 13,000 square feet in Even Yehuda, Israel for
product research and development. The lease expires May 1998 and has two two-
year renewal options and one thirty-five month renewal option. The Company
guarantees 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.
- ------ -----------------
The Company is involved in certain litigation matters, including certain
product liability actions and actions by two former employees for, among other
things, breach of contract. Such actions seek damages from the Company,
including compensatory and punitive damages. The Company intends to defend
these actions vigorously. The Company believes that these actions are
incidental to the conduct of its business, and that the ultimate resolution
thereof will not have a material adverse effect on its financial condition,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ---------------------------------------------------
An Annual Meeting of Shareholders of the Company was held on October 28,
1997. The following matter was voted on and approved by the holders of shares
of the Company's Common Stock:
The proposal to elect two members of the Company's Board of Directors, which
consists of six members, to serve for a three-year term and until their
successors are duly elected and qualified. There were 13,568,992 and
13,556,478 shares of Common Stock cast in favor of electing Mark Auerbach and
H. Spencer Matthews, respectively, which represented a majority of the shares
of the Company's Common Stock cast for such proposal, and 3,089,400 and
3,101,914, shares were withheld, respectively. There were no broker non-
votes. The terms of office of the other directors, Melvin Van Woert, Andrew
Maguire, Kenneth I. Sawyer and Robin O. Motz, continued after the meeting.
10
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 two most recent fiscal years.
FISCAL YEAR ENDED IN
---------------------------
QUARTER ENDED 1997 1996
------------- ------------- ------------
HIGH LOW HIGH LOW
------ ----- ----- -----
December 31 $6.00 $3.38 $9.13 $7.25
March 31 4.38 2.88 8.00 6.75
June 30 3.75 2.13 8.50 5.00
September 30 2.88 1.94 5.50 3.38
(b) Holders. As of December 19, 1997, there were approximately 3,500 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 the two most recent fiscal years, the Company paid no
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 (see "Notes to Financial Statements--Long Term
Debt"). 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.
(d) Recent Stock Price. On December 17, 1997, the closing price of the Common
Stock on the NYSE was $1.50 per share.
(e) Recent Sales of Unregistered Securities. Pursuant to the Third Amendment
to Stock Purchase Agreement, dated July 28, 1997, between the Company and
Clal, the Company sold 186,000 shares of its Common Stock (the "New
Shares") to Clal. The New Shares were issued in consideration of the
surrender by Clal for cancellation of warrants to purchase an aggregate of
2,005,107 shares of Common Stock, nominal cash consideration, and the
amendment of certain provisions of the Stock Purchase Agreement, dated
March 25, 1995, between the Company and Clal. The New Shares were issued
pursuant to an exemption provided by Section 4(2) and/or Section 4(6) of
the Securities Act of 1933 (see "Certain Relationships and Related
Transactions--Clal Agreements").
11
ITEM 6. SELECTED FINANCIAL DATA
- ------ -----------------------
FISCAL YEAR ENDED IN
--------------------
1997 1996 1995 1994 1993
--------- -------- ------- ------- --------
INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 53,172 $ 57,959 $66,503 $69,169 $ 74,535
Cost of goods sold 49,740 48,299 45,514 45,774 48,387
-------- -------- ------- ------- --------
Gross margin 3,432 9,660 20,989 23,395 26,148
Operating expenses:
Research and development 5,843 5,160 5,487 3,874 1,959
Selling, general and administrative 12,461 17,168 16,192 13,463 12,673
Restructuring charge - 549 - - -
-------- -------- ------- ------- --------
Total operating expenses 18,304 22,877 21,679 17,337 14,632
-------- -------- ------- ------- --------
Operating income (loss) (14,872) (13,217) (690) 6,058 11,516
Settlements - - 2,029 - (10,500)
Other income 6,968 2,557 608 425 347
Interest expense (587) (432) (499) (465) (602)
-------- -------- ------- ------- --------
Income (loss) from continuing operations
before provision for income taxes (8,491) (11,092) 1,448 6,018 761
Provision for income taxes 410 - 836 1,785 650
-------- -------- ------- ------- --------
Income (loss) from continuing operations (8,901) (11,092) 612 4,233 111
Income from discontinued operations - 2,800 - 466 -
-------- -------- ------- ------- --------
Income (loss) before extraordinary item (8,901) (8,292) 612 4,699 111
Extraordinary item - tax benefit of utilization
of net operating loss carryforward - - - - 300
-------- -------- ------- ------- --------
Income (loss) before change in accounting principle (8,901) (8,292) 612 4,699 411
Cumulative effect of change in accounting principle - - - 14,128 -
-------- -------- ------- ------- --------
Net income (loss) $ (8,901) $ (8,292) $ 612 $18,827 $ 411
======== ======== ======= ======= ========
Income (loss) per share of common stock:
Continuing operations $(.48) $(.60) $.04 $.26 $.01
Discontinued operations - .15 - .03 -
Extraordinary item - - - - .02
Change in accounting principle - - - .85 -
-------- -------- ------- ------- --------
Net income (loss) $(.48) $(.45) $.04 $1.14 $.03
======== ======== ======= ======= ========
Weighted average number of common and
common equivalent shares outstanding 18,681 18,467 17,143 16,495 15,814
======== ======== ======= ======= ========
BALANCE SHEET DATA
Working capital $ 15,959 $ 20,716 $34,907 $19,996 $ 13,141
Property, plant and equipment (net) 27,832 26,068 24,371 23,004 20,037
Total assets 72,697 84,946 90,917 69,202 57,239
Long-term debt, less current portion 2,651 2,971 4,259 5,490 5,820
Shareholders' equity 57,268 70,624 71,954 49,276 24,081
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS.
-------------
CERTAIN STATEMENTS IN THIS FORM 10-K CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,
INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO FUTURE
FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES OF
CURRENT PRODUCTS AS WELL AS THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED
PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD
CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED
HEREIN. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN
THIS FORM 10-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 CONTINUING TO BE AVAILABLE FOR
INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND DEVELOPMENT JOINT VENTURES,
(IV) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR DELAYS IN OBTAINING REGULATORY
APPROVALS, (V) THE ABILITY OF THE COMPANY TO RETAIN AND ATTRACT MANAGEMENT
PERSONNEL IN KEY OPERATIONAL AREAS AND (VI) CONTINUED AVAILABILITY OF BORROWINGS
UNDER THE COMPANY'S CREDIT LINE WITHOUT SIGNIFICANT REDUCTION.
RESULTS OF OPERATIONS
GENERAL
The Company incurred an operating loss of $14,872,000 for the fiscal year
ended September 30, 1997 compared to $13,217,000 for the fiscal year ended
September 30, 1996 and $690,000 for the fiscal year ended September 30, 1995.
The losses were principally due to sales and gross margin declines, as described
below, partially offset by decreases in operating expenses in fiscal year 1997
and the latter part of fiscal year 1996. The Company's gross margin decline to
$3,432,000 for the current fiscal year from $9,660,000 and $20,989,000 in fiscal
years 1996 and 1995, respectively, was attributable to the continuing trend of
lower pricing on certain manufactured products. The trend was partially offset
in the last two months of fiscal year 1997 by increased sales and margins
generated from certain distributed products under the Supply Agreement with BASF
described above. If sales declines of certain manufactured products are not
offset by increased sales of new distributed or manufactured products, lower net
sales and gross margins will continue and, accordingly, result in further
losses. As a result of the recent losses, the Company is continuing to search
for strategic alternatives to strengthen its financial condition and product
line while working on process improvements to reduce its current manufacturing
costs.
For the three-month period ended September 30, 1997, the Company's operating
loss of $2,142,000 decreased 67% from $6,450,000 for the three-month period
ended September 30, 1996. The improvement was primarily related to increased
sales and margins generated from certain products as a result of the Supply
Agreement with BASF and cost reductions and process improvements implemented
throughout the year.
The continued price and profit margin erosion on certain of the Company's
products reflects a continuing trend in the generic drug industry in the United
States. The factors contributing to the intense competition and affecting both
the introduction of new products and the pricing and profit margins of the
Company, include, among other things, (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's significant
products, (ii) consolidation among distribution outlets, (iii) increased ability
of generic competitors to enter the market after patent expiration, diminishing
the amount and duration of significant profits, (iv) willingness of generic drug
customers, including wholesale and retail customers, to switch among
pharmaceutical manufacturers, and (v) competition from brand name drug
manufacturers selling generic versions of their drugs. In response to these
conditions, the Company has continued to reduce operating costs and entered into
several significant agreements, as described elsewhere in this Form 10-K, which
should enable the Company to better compete in the current environment (see
"Business-Marketing and Customers" and "Competition").
In the fourth quarter of fiscal year 1996, the Company began implementing
cost reduction measures which continued throughout fiscal year 1997. Such
measures have provided for a reduction in the work force, changes in senior
management, a reorganization of certain existing personnel, reductions in
certain operating expenses and the implementation of several process
improvements (see "Notes to Financial Statements-Commitments,
13
Contingencies and Other Matters-Restructuring and Cost Reductions"). These
measures have reduced certain operating costs in fiscal year 1997. No assurances
can be given that reduced costs will return the Company to profitability.
Critical to significant improvement in the Company's financial condition is
the introduction and acquisition of new manufactured and distributed products at
profitable prices. The Company plans to continue to invest in research and
development efforts in addition to pursuing additional products for sale through
new and existing distribution agreements. There were no significant sales of
any new manufactured or distributed products, other than those sold under the
Supply Agreement with BASF, introduced during the current fiscal year. The
Company is engaged in efforts, subject to FDA approval and other factors, to
introduce new products as a result of its research and development efforts and
distribution agreements. No assurance can be given that any additional products
for sale by the Company will occur or that sales of additional products will
reduce losses or return the Company to profitability. Continuing losses will
adversely affect the Company's liquidity and, accordingly, its ability to fund
research and development or ventures relating to the sale of new products (see
"-Financial Condition-Liquidity and Capital Resources").
SALES
Net sales of $53,172,000 for the fiscal year ended September 30, 1997
decreased $4,787,000, or 8%, from sales for the same period in the prior fiscal
year. The decline was due principally to decreased sales of manufactured
products which resulted primarily from lower pricing and continuing decreases in
volume of one of the Company's significant products, and to a lesser extent, two
other significant products, partially offset by higher volumes of a lower margin
product due to increased demand from one customer. The reductions in pricing
and volume resulted from increased competition from other drug manufacturers.
Net sales in the fourth quarter of fiscal year 1997 of two distributed products
manufactured by BASF under the Supply Agreement experienced significant
increases over the same period of the prior year helping to offset the decline
in sales of certain manufactured products in the current fiscal year.
Sales for the fourth quarter of fiscal year 1997 of $17,171,000 increased
$4,220,000, or 33%, from $12,951,000 for the fourth quarter of fiscal year 1996.
The increase was primarily due to higher volumes of a lower margin manufactured
product and two products manufactured by BASF. The increase was partially
offset by the continuing lower sales of certain of the Company's significant
products as previously discussed.
Net sales of $57,959,000 for the year ended September 30, 1996 decreased
$8,544,000, or 13%, from $66,503,000 for the year ended September 30, 1995. The
decline primarily resulted from decreased sales of manufactured product due to
lower pricing and decreases in volume of one of the Company's significant
products, and to a lesser extent, two other significant products, which was
caused principally by the introduction of competitive products by other drug
manufacturers. The decline in sales of manufactured products was partially
offset by higher volumes of a lower margin distributed product.
Levels of sales are principally dependent upon, among other things, (i)
pricing levels and competition, (ii) market penetration for the existing product
line, (iii) approval of ANDAs and introduction of new manufactured products,
(iv) introduction of new distributed products and (v) the level of customer
service (see "Business--Competition").
GROSS MARGINS
The Company's gross margin for the year ended September 30, 1997 was
$3,432,000 (6% of net sales) compared to $9,660,000 (17% of net sales) for the
prior fiscal year. The gross margin decline is primarily due to continued lower
selling prices and decreased volumes of certain significant manufactured
products resulting from the introduction of other generic drug manufacturers'
products in direct competition with the Company's significant products. The
gross margin on distributed products for the current year increased primarily
due to the contribution from the additional sales in the fourth quarter of
fiscal year 1997 of products manufactured by BASF, however, the effect on the
total margin for the year was negligible.
14
The gross margin for the three-month period ended September 30, 1997
increased $3,374,000 to $2,057,000 (12% of net sales) from ($1,317,000) (-10% of
net sales) recorded in the corresponding period of the prior fiscal year. The
improvement in margin is primarily due to the increased volumes of a lower
margin manufactured product together with more favorable raw material pricing,
and the contribution from additional sales of distributed product manufactured
by BASF. In addition, an inventory adjustment was recorded in the corresponding
quarter of last year which lowered the cost of one of the Company's manufactured
products to its market value, adversely affecting the margin in that period.
Lower sales in the current three-month period of certain significant
manufactured products, as discussed above, partially offset the increases in
margin.
Inventory write-offs, taken in the normal course of business, amounted to
$1,630,000, $1,395,000 and $2,203,000 for the fiscal years ended September 30,
1997, September 30, 1996 and September 30, 1995, respectively, and $482,000,
$463,000 and $632,000 for the fourth quarters of fiscal years 1997, 1996 and
1995, respectively. The inventory write-offs are related principally to the
disposal of finished products due to short shelf life.
During fiscal year 1997, four of the Company's products accounted for
approximately 59% of its net sales compared to 58% and 63%, respectively, of net
sales in fiscal 1996 and 1995. One of such products contributed significantly
to the sales and gross margin in all three periods. A competitor of the Company
received FDA approval for this product in fiscal year 1996 where, prior to that
time, the Company had been the sole generic manufacturer. As a result of the
increased competition, net sales of that product decreased from $20,834,000 in
fiscal year 1995 to $13,581,000 in fiscal year 1996 to $6,098,000 in fiscal year
1997 with decreases in gross margin. During the second half of calendar 1995,
two generic pharmaceutical manufacturers received FDA approval for a product
which the Company had also been the sole generic manufacturer. As a result of
the increased competition on that product, net sales decreased from $5,652,000
in fiscal year 1995 to $3,959,000 in fiscal year 1996 to $2,110,000 in fiscal
year 1997 with decreases in gross margin. These products, along with one other
product, had historically accounted for a significant percentage of the
Company's net sales and gross margin. Due to the increased competition with
respect to these products, the Company's sales and gross margins have been
materially and adversely affected. During the current fiscal year, the Company
has implemented measures to lessen the overall impact of these products by
increasing margins on higher volume products through the Supply Agreement with
BASF, manufacturing process improvements and cost reductions. There can be no
assurances that these measures will return the Company to profitability.
Gross margin of $9,660,000 (17% of net sales) in fiscal year 1996 decreased
$11,329,000 from $20,989,000 (32% of net sales) in fiscal year 1995 primarily
due to lower selling prices and decreased volumes of certain significant
manufactured products resulting from the introduction of other generic drug
manufacturers' products in direct competition with the Company's significant
products. Gross margins on distributed products decreased principally due to
lower sales levels of higher margin products and increased sales of a lower
margin product.
OPERATING EXPENSES
Research and Development
Research and development expenses for the twelve-month period ended September
30, 1997 increased $683,000, or 13%, to $5,843,000 from $5,160,000 for the
twelve-month period ended September 30, 1996. In the current period, advances
to Sano for the development of certain generic transdermal products amounted to
$2,258,000, while in the prior year payments of $2,942,000 were partially offset
by a reimbursement from Sano of $1,500,000. In August 1997, the Company
acquired Clal's 51% ownership interest in IPR in which PRI previously had owned
49% (see "Notes to Financial Statements-Acquisition of Joint Venture"). The
Company recorded an aggregate of $1,030,000 in research and development expenses
for IPR in fiscal year 1997 compared to $499,000 in the prior year. The higher
cost of the Sano transactions and IPR were partially offset by lower personnel
costs.
15
During fiscal year 1997 the Company's domestic research and development
program was fully integrated with the research operations in Israel. Currently,
the Company's research program has eight products in various stages of
development. The Company has ANDAs for four potential products pending with the
FDA and Sano has ANDAs for two potential products, which are covered by the
distribution agreement with Sano, filed with the FDA and awaiting approval (see
"Notes to Financial Statements-Distribution Agreements").
Research and development expenses of $1,216,000 for the three-month period
ended September 30, 1997 increased $375,000, or 45%, from $841,000 in the
corresponding period in the prior year primarily as a result of payments to Sano
of $301,000 in the fourth quarter. In addition, expenses for IPR in the fourth
quarter were $421,000 compared to $175,000 for the corresponding period of the
prior year.
For the fiscal year ended September 30, 1996 research and development
expenses of $5,160,000 decreased $327,000, or 6% from $5,487,000 in the fiscal
year 1995. During the first quarter of fiscal year 1996, the Company received a
$1,500,000 reimbursement from Sano for advances made to them in prior fiscal
years for research and development expenses. Payments to Sano amounted to
$2,942,000 in fiscal year 1996 compared to $1,429,000 in the prior year.
Selling, General and Administrative
Selling, general and administrative costs were $12,461,000 (23% of net sales)
for the fiscal year ended September 30, 1997 compared to $17,168,000 (30% of net
sales) for the corresponding period in the prior fiscal year. The decrease of
27% in the period was primarily attributable to a decline in personnel costs
resulting from recent head count reductions and the amendment of a retirement
plan (see "--Restructuring Charge" and "Notes to Financial Statements-
Commitments, Contingencies and Other Matters-Retirement Plans" and "-
Restructuring and Cost Reductions"). In addition, fees for consulting and
professional services, costs for advertising and developmental marketing, and
bad debt expense have been reduced in fiscal year 1997.
In the fourth quarter of fiscal year 1997, selling, general and
administrative costs of $2,983,000 (17% of net sales) decreased $1,309,000 from
$4,292,000 (33% of net sales) in the corresponding quarter of last year. The
decrease of 30% was primarily the result of decreased personnel costs,
professional fees, advertising and marketing costs and bad debt expense, as
discussed above.
Selling, general and administrative costs were $17,168,000 (30% of net sales)
for the year ended September 30, 1996 versus $16,192,000 (24% of net sales) for
the fiscal year ended September 30, 1995. The increase was primarily
attributable to fees for consulting and professional services, higher
advertising and developmental marketing costs, severance costs, increased bad
debt expense and costs related to implementing information systems to support
the Company's operations. In addition, the Company incurred costs in
strengthening its in-house sales force in an effort to compete more effectively
under the market conditions.
Restructuring Charge
The Company recorded a restructuring charge of $549,000 in fiscal year 1996
to provide for costs associated with the reduction and reorganization of
personnel. The implementation of the restructuring plan also included
reductions in spending on advertising, marketing, professional services and, to
a lesser extent, certain internal and external research and development expenses
(see "Notes to Financial Statements-Commitments, Contingencies and Other
Matters-Restructuring and Cost Reductions").
SETTLEMENTS
In fiscal year 1995, the Company resolved claims against certain former
management members of the Company for recovery of, among other items, salaries
and money paid for indemnification. The settlements, in the form of cash and
securities of the Company, were valued at $2,029,000.
16
OTHER INCOME
Other income of $6,968,000 for the fiscal year ended September 30, 1997
increased $4,411,000, or 173%, from $2,557,000 in the prior fiscal year. The
increase is attributable to approximately $3,900,000 of income resulting from
the amendment in fiscal year 1997 of a distribution agreement with Sano (see
"Notes to Financial Statements-Distribution Agreements") and a gain of
$1,574,000 on the sale of Sano common stock (see "--Financial Condition--
Liquidity and Capital Resources"). The income from the Sano transactions was
partially offset by a loss on the sale of Fine-Tech Ltd. stock in the third
quarter of fiscal year 1997.
For the three-month period ended September 30, 1997, other income was
$6,996,000 compared to $1,926,000 in the corresponding period of the prior
year. The increase was attributable to the $3,900,000 of income recorded
pursuant to the amendment of the distribution agreement with Sano and a gain on
the sale of Sano common stock in the current period of $1,218,000.
Other income in fiscal year 1996 increased to $2,557,000 from $608,000 in
fiscal year 1995 due to the sale of Sano common stock during the fiscal 1996
fourth quarter (see "--Financial Condition--Liquidity and Capital Resources").
INCOME TAXES
Management has determined, based on the Company's recent performance and the
uncertainty of the generic business in which the Company operates, that future
operating income might not be sufficient to recognize fully the net operating
loss carryforwards of the Company. Therefore, the Company did not recognize a
benefit for its operating losses in either fiscal 1997 or 1996 (see "Notes to
Financial Statements-Income Taxes"). 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 the Company's tax credit for prior periods with respect to
certain research and development credits. In fiscal year 1995, the Company
recorded income tax expense of $836,000.
DISCONTINUED OPERATIONS
In fiscal year 1996, the Company recorded income from discontinued operations
of $2,800,000, reversing the remaining reserves which had been provided for Quad
Pharmaceuticals, Inc., whose operations were discontinued in fiscal year 1991
(see "Notes to Financial Statements-Discontinued Operations").
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $15,959,000 at September 30, 1997 decreased $4,757,000
from $20,716,000 at September 30, 1996. The decrease is principally due to the
use of capital to fund operating losses. As a result of a cash management
system pursuant to the financing agreement that the Company entered into with
General Electric Capital Corporation ("GECC"), the only remaining cash balance
at September 30, 1997 was cash at IPR (see "--Financing"). The working capital
ratio of 2.3x in the current period declined from 2.9x at fiscal 1996 year end.
During fiscal year 1997, the Company reduced inventory levels to $13,239,000
from $19,352,000.
In August 1997, the Company, through one of its subsidiaries, acquired Clal's
51% ownership interest in their research and development joint venture in
Israel for $447,000 in cash obtained from the sale of Fine-Tech Ltd.
("Fine-Tech") stock and a non-recourse secured promissory note for $1,500,000
(see "Notes to Financial Statements-Acquisition of Joint Venture"). The Company
has the option to prepay the note for $600,000 by August 12, 1998. The Company
is obligated to invest not less than $1,500,000 each year in IPR until the note
is repaid.
17
During the twelve months ended September 30, 1997, the Company sold its
remaining 378,887 shares of Sano stock yielding net proceeds of approximately
$6,123,000 which was used to reduce the revolving credit balance. In September
1996, the Company sold 135,000 shares of its holdings in Sano receiving net
proceeds of $2,669,000. In return for relinquishing certain rights pursuant to
the amendment of the Company's distribution agreement with Sano (see "Notes to
Financial Statements-Distribution Agreement"), PRI received $1,950,000 in cash
in the fourth quarter of fiscal year 1997, which was used to reduce the
revolving credit line balance, and an interest bearing promissory note for
$1,950,000 which will be due in September 1998.
In June 1997, the Company sold all of its shares of Fine-Tech, an Israeli
chemical manufacturer, for $447,000. The Company purchased 10% of the shares of
Fine-Tech in December 1995 for $1,000,000.
The Company expects to fund its operations, including research and
development activities and its obligations under the existing distribution and
development arrangements discussed above, out of its working capital, and if
necessary with borrowings against its line of credit, to the extent then
available (see "--Financing"). If, however, the Company continues to experience
significant losses, its liquidity and, accordingly, its ability to fund research
and development or ventures relating to the distribution of new products will be
materially and adversely affected.
FINANCING
At September 30, 1997, the Company's total outstanding short-term and long-
term debt amounted to $3,947,000 and $2,869,000, respectively. The short-term
debt consists of the outstanding amount under the Company's line of credit with
GECC and the long-term debt consists primarily of an outstanding mortgage loan
with a bank and a non-recourse secured promissory note resulting from the
acquisition of Clal's interest in IPR in fiscal year 1997.
In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with GECC which provided Par with a three-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 3.50% above the 30-day commercial paper rate for high-grade
unsecured notes adjusted monthly. The line of credit with GECC is secured by
the assets of Par and PRI other than real property and is guaranteed by PRI. In
connection with such facility, Par, PRI and their affiliates have established a
cash management system pursuant to which all cash and cash equivalents received
by any of such entities are deposited into a lockbox account over which GECC has
sole operating control and which are applied on a daily basis to reduce amounts
outstanding under the line of credit. The revolving credit facility is subject
to covenants based on various financial benchmarks. In fiscal year 1997, GECC
waived events of default on three occasions unrelated to the repayment of debt
under the Loan Agreement. As of September 30, 1997, the borrowing base was
approximately $10,900,000 and $3,947,000 was outstanding under the line of
credit. Any significant reduction in the borrowing base from its current levels
will adversely affect the Company's liquidity.
At September 30, 1997, the Company has a non-recourse secured promissory note
for $1,500,000 bearing interest at 7% payable in eight equal installments to a
subsidiary of Clal (see "Notes to Financial Statements-Acquisition of Joint
Venture" and "-Long-Term Debt"). The first installment is due in July, 1999,
with the remaining seven payments due each January and July through and
including January, 2003. The Company has the option to prepay the note for
$600,000 on or before August 12, 1998. Additionally, 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 September 30, 1997, the outstanding balance of the
loan was $1,117,000. At September 30, 1997, the Company had also borrowed
$167,000 under a line of credit maintained at the same bank, which line is
secured by equipment purchased. The interest rate is based on the prime rate
plus a premium (see "Notes to Financial Statements-Long-Term Debt").
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ------- ----------------------------------------------------------
18
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------ -------------------------------------------
See Index to Financial Statements after Signature Page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------------------
Not applicable.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------- --------------------------------------------------
DIRECTORS
The Company's Certificate of Incorporation provides that the Board shall be
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, 1998 and 1999, 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 FIRST
NAME AGE (AS OF 12/97) ELECTION
---- ----------------- --------
CLASS I
Mark Auerbach(1)(2) 59 1990
Since June 1993, the Senior Vice President and Chief
Financial Officer of Central Lewmar L.P., a distributor of
fine papers. From August 1992 to June 1993, a partner of
Marron Capital L.P., an investment banking firm. From July
1990 to August 1992, President, Chief Executive Officer and
Director of Implant Technology Inc., a manufacturer of
artificial hips and knees. Director of Acorn Venture Capital
Corporation, a closed-end investment company, and a director
of Oakhurst Company, Inc., a holding company for
automotive after-market distributors.
H. Spencer Matthews(2) 76 1990
Since 1986, President and Chief Executive Officer of
Dispense-All South Coast, Inc., and Dispense-All of Central
Florida, Inc., two companies which are wholesalers of juice
concentrates. Rear Admiral, United States Navy (Retired).
CLASS II
Andrew Maguire, Ph.D.(1)(3)(4) 57 1990
Since January 1990, President and Chief Executive Officer of
Appropriate Technology International, a not-for-profit
development assistance corporation. From January 1989 to
December 1994, Senior Vice President of Washington
Financial Group, an investment banking firm. From June
1987 to January 1989, Executive Vice President of the North
American Securities Administration Association.
Melvin H. Van Woert, M.D.(1)(3)(4)(5) 68 1990
Since 1974, Physician and Professor of Neurology and
Pharmacology and Doctoral Faculty, Mount Sinai Medical
Center, New York.
20
YEAR
OF FIRST
NAME AGE (AS OF 12/97) ELECTION
---- ----------------- --------
CLASS III
Kenneth I. Sawyer(3)(4)(5) 52 1989
Since October 1990, Chairman of the Board of the Company.
Since October 1989, President and Chief Executive Officer of
the Company. From September 1989 to October 1989,
Interim President and Chief Executive Officer of the
Company. From August 1989 to September 1989, counsel to
the Company. Director of Acorn Venture Capital Corporation,
a closed-end investment company.
Robin O. Motz, M.D., Ph.D.(1)(2)(4)(5) 58 1992
Since July 1978, Assistant Professor of Clinical Medicine,
Columbia University College of Physicians and Surgeons.
Physician engaged in a private practice of internal medicine.
- ------------
(1) A member of the Audit Committee of the Board of the Company.
(2) A member of the Compensation and Stock Option Committee of the Board of the
Company.
(3) A member of the Strategic Planning Committee of the Board of the Company.
(4) A member of the Nominating Committee of the Board of the Company.
(5) A member of the Executive Committee of the Board of the Company.
Clal has the right to designate up to two-sevenths of the members of the
Board of the Company (see "Certain Relationships and Related Transactions-- Clal
Agreements"). No member of the Board has been designated by Clal.
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, Mr. O'Connor and Joseph Gokkes as Chief Operating
Officer. Par is currently negotiating a modification of Mr. Gokkes'
responsibilities. Mr. O'Connor 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. Mr. Gokkes has served as Chief Operating Officer of
Par since May 1997. From April 1996 until May 1997, he was employed by Clal in
its international operations and from February 1990 to February 1996, he served
in several capacities, including Vice President for International Marketing and
General Manager of Taro Pharmaceutical Industries Ltd. (Israel) and Taro
International, respectively.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
As a public company, the Company's directors, executive officer and 10%
beneficial owners are subject to reporting requirements under Section 16(a) of
the Securities Exchange Act of 1934, as amended. Under such Act, Mr. Gokkes
delinquently filed one Initial Statement of Beneficial Ownership of Securities
during fiscal year 1997.
21
ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------
The following table sets forth compensation earned by or paid, during fiscal
years 1995 through 1997, to the Chief Executive Officer of the Company and the
most highly compensated executive officers of the Company and/or Par who earned
over $100,000 in salary and bonus at the end of fiscal year 1997 (the "Named
Executives"). The Company awarded or paid such compensation to all such persons
for services rendered in all capacities during the applicable fiscal years.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------ ----------------------------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) OPTIONS(#) COMPENSATION($)(2)
- -------------------- ---- -------- -------- ------------ ---------- ----------------------
Kenneth I. Sawyer, 1997 350,000 - - - 12,985
President, Chief 1996 370,692 - - 75,000 38,530
Executive Officer 1995 427,153 200,000 - - 49,806
and Chairman
Dennis J. O'Connor 1997 137,994 - - 30,000 2,121
Vice President
Chief Financial
Officer and
Secretary
Joseph Gokkes 1997 56,883 10,000 - 30,000 6,787
Chief Operating
Officer of Par(3)
- --------------------------
(1) The Named Executives did not hold any shares of restricted stock at the end
of fiscal year 1997.
(2) For fiscal year 1997, includes insurance premiums paid by the Company for
term life insurance for the benefit of the Named Executives as follows: Mr.
Sawyer-$74, Mr. O'Connor-$51 and Mr. Gokkes-$25. The amounts for Mr. Sawyer
include 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 the executive without interest until
the earliest time the premiums may be refunded by Mr. Sawyer to the Company.
Includes $6,762 paid to Mr. Gokkes for relocation. Also includes the
following amounts contributed by the Company to the Company 401(k) plan:
Mr. O'Connor-$2,070.
(3) Par is currently negotiating a modification of Mr. Gokkes' responsibilities.
The following table sets forth stock options granted to the Named Executives
during fiscal year 1997.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term
------------------------------------------------------ ------------------
Shares % of Total
Underlying Options Granted
Options to Employees in Exercise Expiration
Name Granted(#) Fiscal Year Price ($) Date 0%($) 5%($) 10%($)
- --------------------------- ---------- ---------------- --------- ---------- ---- -------- --------
Dennis J. O'Connor(1) 20,000 6.37% $3.375 10/22/01 - $ 86,149 $108,709
Dennis J. O'Connor(2) 10,000 3.19% $2.125 9/7/02 - $ 27,121 $ 34,223
Joseph Gokkes(3) 30,000 9.56% $2.625 5/29/02 - $100,507 $126,828
22
(1) Represents options granted pursuant to the Company's 1990 Incentive Option
Plan on October 23, 1996, of which 10,000 became exercisable October 23,
1997 and 10,000 become exercisable on October 23, 1998.
(2) Represents options granted pursuant to the Company's 1990 Incentive Option
Plan on September 8, 1997 of which 3,333 become exercisable on March 8,
1998, 3,333 become exercisable on March 8, 1999, and 3,334 become
exercisable on March 8, 2000.
(3) Represents options granted pursuant to the Company's 1990 Incentive Option
Plan on May 30, 1997, of which 10,000 become exercisable on May 30, 1998,
10,000 become exercisable on May 30, 1999 and 10,000 become exercisable on
May 30, 2000.
The following table sets forth the stock options exercised by the Named
Executives during fiscal year 1997 and the value, as of September 30, 1997, of
unexercised stock options held by the Named Executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)
---------------------- --------------------
Shares
Acquired on Value
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ----------- ----------- ------------- ----------- -------------
Kenneth I. Sawyer 0 0 550,000 25,000 -- --
Dennis J. O'Connor 0 0 15,833 31,667 -- --
Joseph Gokkes 0 0 0 30,000 -- --
On October 28, 1997, the Board approved the grant of new 5-year options to
the Named Executives at an exercise price of $2.25, upon surrender for
cancellation of certain options set forth above in the table. Pursuant to the
Board action, the Named Executives hold repriced options as follows: Mr.
Sawyer-500,000, Mr. O'Connor-37,500 and Mr. Gokkes-30,000. Of the repriced
options held by Mr. Sawyer, 50,000 are immediately exercisable. The balance of
Mr. Sawyer's repriced options and all of the repriced options held by Mr.
O'Connor and Mr. Gokkes will become exercisable as follows: one third become
exercisable on April 28, 1998, one third become exercisable on April 28, 1999
and one third become exercisable on April 28, 2000.
COMPENSATION OF DIRECTORS
For service on the Board in fiscal year 1997, Directors who are not
employees of the Company or any of its subsidiaries receive 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 receive an additional annual retainer of $5,000 per committee.
New Directors are granted options to purchase shares on the date initially
elected to the Board. Directors who are employees of the Company or any of its
subsidiaries or are designated by Clal receive 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.
EMPLOYMENT AGREEMENTS AND TERMINATION ARRANGEMENTS
The Company has entered into an Employment Agreement with Mr. Sawyer, which
provides for his employment in his current position through October 4, 1996,
subject to earlier termination by the Company for Cause (as such term is defined
in the agreement). Mr. Sawyer's term of employment will be automatically
extended each year for an additional one-year period unless either party
provides written notice by July 4th of such year that he or it desires to
terminate 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 of
Directors 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 of the Company as well as any committees thereof.
23
Mr. Sawyer's agreement provides for certain payments upon termination of
his employment 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. A material breach by the Company of the employment
agreement includes, but is not limited to, termination without Cause and a
change of his responsibilities. 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 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.
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 is employed
by the Company in his present position, up to a maximum of six additional months
salary. Under the stock option agreements between Mr. O'Connor and the Company,
any unexercised portion of the options becomes immediately exercisable in the
event of a Change of Control (as such term is defined in the agreement).
Par has entered into an employment agreement with Mr. Gokkes, dated May 30,
1997. The agreement provides that upon termination of Mr. Gokkes' employment by
Par for any reason except For Cause (as such term is defined in the agreement),
Mr. Gokkes is entitled to receive severance pay equal to 12 months of his base
salary in effect for the year prior to his termination. In the event of a
voluntary termination of employment by Mr. Gokkes, he is not entitled to receive
severance pay except in the event that a President of Par other than Mr. Gokkes
is put in place who is not the President of the Company. Par is currently
negotiating a modification of Mr. Gokkes' responsibilities.
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 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.
Par currently maintains a retirement plan (the "Retirement Plan") and a
retirement savings plan. The Board of Directors of Par has authorized the
cessation of employer contributions to the Retirement Plan effective December
30, 1996. Consequently, participants in the Retirement Plan will no longer be
entitled to any employer contributions under such plan for 1996 or subsequent
years.
COMPENSATION AND STOCK OPTION COMMITTEE
The compensation and stock option committee consists of Mark Auerbach, H.
Spencer Matthews, and Robin O. Motz.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
24
The following table sets forth, as of the close of business on December 12,
1997, the beneficial ownership of the Common Stock by (i) each person known
(based solely on a review of Schedules 13D) to the Company to be the beneficial
owner of more than 5% of the Common Stock, (ii) each director of the Company,
(iii) the Named Executives, as defined in the "Executive Compensation" section
of this report, and (iv) all directors and current executive officers of the
Company and Par as a group (based upon information furnished by such persons).
Under the rules of the Securities and Exchange Commission, a person is deemed to
be a beneficial owner of a security if such person has or shares the power to
vote or direct the voting of such security or the power to dispose of or to
direct the disposition of such security. In general, a person is also deemed to
be a beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days. Accordingly, more than one person
may be deemed to be a beneficial owner of the same securities.
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES % OF
- -------------------------------------------------------------------- OF COMMON
COMMON STOCK
STOCK
Clal Pharmaceutical Industries Ltd.(1) 2,313,272 12.2
Kenneth I. Sawyer(2)(3)(4) 206,900 1.1
Melvin H. Van Woert, M.D.(2)(3) 70,050 *
Andrew Maguire, Ph.D.(2)(3) 36,300 *
H. Spencer Matthews(2)(3) 36,900 *
Mark Auerbach(2)(3) 49,000 *
Robin O. Motz, M.D., Ph.D.(2)(3) 42,000 *
Dennis J. O'Connor(2)(4) 1,619 *
Joseph Gokkes(2)(4) 381 *
All directors and current executive officers (as of 12/12/97) as a 443,150 2.3
group (8 persons)(2)
- ------------------------
* Less than 1%.
(1) The address of Clal is Clal House, 5 Druyanov Street, Tel Aviv 63143,
Israel. All 2,313,272 shares of Common Stock shown as beneficially owned
by Clal are issued and outstanding.
(2) The business address of each of these individuals, for the purposes hereof,
is in care of Pharmaceutical Resources, Inc., One Ram Ridge Road, Spring
Valley, New York 10977. Includes shares of Common Stock which may be
acquired upon the exercise of options which are exercisable on or prior to
February 10, 1998, under the Company's stock option plans as follows: Mr.
Sawyer, 50,000 shares; Dr. Van Woert, 69,000 shares; Mr. Maguire, 36,000
shares; Mr. Matthews, 36,000 shares; Mr. Auerbach, 47,000 shares; and Dr.
Motz, 42,000 shares.
(3) A director of the Company.
(4) Reflects the repricing of stock options approved by the Board on October
28, 1997 (see "Executive Compensation").
On October 28, 1997, the Board of Directors approved the adoption of the
1997 Directors' Stock Option Plan (the "1997 Plan"). The 1997 Plan is subject
to the approval of the Company's shareholders. Pursuant to the 1997 Plan, each
current non-executive director would be entitled to receive stock options to
purchase 10,000 shares of Common Stock for each year of service as a director,
but not in excess of the number of stock options held by them at October 28,
1997. The options would have an exercise price of $2.25 per share and would be
issued only upon surrender for cancellation by the director of an equal number
of stock options held by them. Each stock option to be issued under the 1997
Plan would become exercisable one year after the date of grant. The 1997 Plan
also provides for the automatic grant of stock options to non-executive
directors each year, subject to certain conditions.
25
Under the 1997 Plan, non-executive directors would be granted options to
purchase 5,000 shares of Common Stock each year on the date of the Company's
annual meeting of shareholders and would be entitled to receive an additional
grant of up to 6,000 options each year if such directors continuously owned
2,500 shares of Common Stock for each additional grant received. Further, the
Plan provides for the grant of options for 5,000 shares as of October 28, 1997
and an additional grant of options for up to 6,000 shares if the director owns
2,500 shares of Common Stock on March 31, 1998.
VOTING ARRANGEMENTS
The Company and Clal entered into a Stock Purchase Agreement, dated March
25, 1995 (as amended, the "Stock Purchase Agreement"), pursuant to which Clal,
among other things, purchased 2,027,272 shares of Common Stock on May 1, 1995.
Clal acquired 100,000 shares of Common Stock in June 1996 from Mr. Sawyer and
acquired an additional 186,000 shares of Common Stock from the Company in
connection with an amendment of the Stock Purchase Agreement in July 1997.
Under the Stock Purchase Agreement, Clal agreed to vote all of the shares of
Common Stock held by it in favor of certain business combination transactions of
the Company and certain sales of assets or securities of the Company. In
addition, Clal has certain rights under the Stock Purchase Agreement to nominate
directors to the Company's Board and committees thereof (see "Certain
Relationships and Related Transactions--Clal Agreements").
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
Clal Agreements. On May 1, 1995, the Company consummated several
transactions with Clal consisting primarily of (i) the sale by the Company of
2,027,272 shares of the Company's Common Stock for $20,000,000, or $9.87 per
share, (ii) the issuance by the Company of warrants to purchase 2,005,107 shares
of Common Stock (the "Warrants") and (iii) the formation of a joint venture to
research and develop generic pharmaceutical products. The Stock Purchase
Agreement included terms of the Company's and Clal's business relationship,
including issuance to Clal of 2,027,272 shares of Common Stock, rights to
nominate Board members, rights of first refusal, voting agreements, rights to
invest in others, standstill agreements and agreements with respect to the
issuance of the Warrants.
In accordance with the terms of the Stock Purchase Agreement, Clal has the
right to designate one-seventh of the members of the Board as long as Clal owns
8% of the issued and outstanding Common Stock, and a total of two-sevenths of
the members of the Board if Clal owns at least 16% of the issued and outstanding
Common Stock. The Company has the right to reject a designee of Clal if such
person is not satisfactory to the Company for good faith reasons. The Company
also agreed to elect Clal's designee to the Audit Committee, Compensation and
Stock Option Committee and Strategic Planning Committee of the Board. In the
event that Clal does not nominate directors to the Board or its committees or if
Clal's designees are not elected to the Board or its committees, Clal is
permitted, under the Stock Purchase Agreement, to designate representatives who
may attend meetings of the Board and its committees. Additionally, if Clal's
appointment of a director to the Audit Committee is prohibited by the rules and
regulations of the New York Stock Exchange, Inc., the Company will provide Clal
materials which are provided to committee members, the appointment of the
Company's auditors will be approved by the entire Board, the Company will
consult with directors nominated by Clal with respect to Audit Committee actions
and the directors nominated by Clal will have the right to consent to certain
changes in the Company's accounting principles. Pursuant to the Stock Purchase
Agreement, Clal has designated an observer to meetings of the Board and its
committees. Clal also has the right to designate a member of the Company's
management.
Clal has a right of first refusal with respect to certain business
combination transactions of the Company and certain sales of the assets or
securities of the Company. Such right extends until May 1, 2000, provided that
Clal, when exercising such right (i) has not sold or disposed of shares of
Common Stock representing more than 337,045 shares of Common Stock and (ii) owns
or has the right to acquire 16% of the Common Stock (the "Restricted Period").
If Clal does not exercise its right of first refusal with respect to any of the
above-mentioned transactions, Clal will, subject to certain exceptions, be
required to vote its shares of Common Stock in favor of such transactions. Such
obligation will terminate upon the expiration of the Restricted Period. Clal
has no obligation to vote its shares of Common Stock in favor of such a
transaction if (i) Clal exercises its right of first refusal with respect to
such transaction, (ii) fewer than 75% of the members of the Board (excluding
member(s) of the Board nominated by Clal) vote in favor of the transaction or
(iii) any member of the Board (excluding
26
member(s) of the Board nominated by Clal) votes against the transaction. In the
event that Clal has an obligation to vote its shares in favor of such a
transaction, Clal also has agreed to take such other actions reasonably required
or appropriate to facilitate the consummation of the transaction. Clal has no
obligation to vote its shares in favor of, or take other actions to facilitate,
any such transaction if Clal notifies the Company that, in Clal's opinion, the
consummation of such a transaction would be detrimental to the Company and/or
its shareholders, except if the Company, in response to such a notice, delivers
to Clal a fairness opinion from a nationally recognized investment banking firm.
Clal has agreed to limit acquisitions of the Company's securities to 19.99%
of the issued and outstanding Common Stock prior to May 1, 1998. In addition,
Clal has agreed to limit such acquisitions to 25% of the issued and outstanding
Common Stock after May 1, 1998. Clal has the right to tender for or purchase no
less than 70% of the issued and outstanding Common Stock after May 1, 2000.
These limitations expire six months following the expiration of the Restricted
Period (the "Consent Period"). Clal also has the right to acquire up to 20% of
any equity securities issued by the Company in an underwritten public offering
so long as Clal, at the time, owns 10% of the issued and outstanding Common
Stock (assuming, for this purpose, the full exercise of the Warrants). Clal has
also agreed not to sell or otherwise dispose of Common Stock or other securities
convertible into Common Stock during the Consent Period unless such securities
are registered or may be sold without registration under Rule 144 promulgated
under the Securities Act of 1933, as amended, or are sold in certain business
combination transactions, unless the sale is approved by the Board (excluding
member(s) of the Board nominated by Clal). Clal will limit, during the Consent
Period, sales of Common Stock to any one person, entity or group to no more than
3% of the issued and outstanding Common Stock, except as otherwise permitted
under the Stock Purchase Agreement.
In consideration of the rights and benefits obtained by the Company under
the Stock Purchase Agreement, the Company also granted to Clal certain
registration rights under a registration rights agreement (the "Registration
Rights Agreement"). In general, Clal will not be able to sell freely the shares
of Common Stock purchased by Clal without registration under applicable
securities laws or unless an exemption from registration is available. Clal is
entitled to two demand registrations. In addition, the Company granted to Clal
the right to register shares of Common Stock owned by Clal on each occasion that
the Company registers shares of Common Stock, subject to certain limitations and
exceptions.
In May 1995, the Company and Clal formed IPR in Israel to research and
develop generic pharmaceutical products. On August 14, 1997, the Company
acquired Clal's 51% ownership interest in IPR for $447,000 in cash obtained from
the sale of Fine-Tech Ltd. ("Fine-Tech") stock owned by the Company and a non-
recourse secured promissory note for $1,500,000. The note bears interest of 7%
per annum, and is payable in eight semi-annual installments commencing in July
1999. The Company has the unconditional option to prepay the note for $600,000
on or before August 12, 1998. Until the note is repaid in full, the Company is
obligated to invest $1,500,000 each year in IPR. In addition, the Company and
Clal agreed to modify certain terms of Clal's investment in the Company,
including the surrender by Clal of the Warrants in exchange for the issuance to
Clal of 186,000 shares of the Company's Common Stock for nominal cash
consideration.
As of December 12, 1997, Clal beneficially owned, to the Company's
knowledge, 2,313,272 shares of Common Stock. Of such shares, 100,000 were
purchased from Mr. Sawyer at a price of $7.125 per share on June 3, 1996.
Prior to becoming an officer of Par in May 1997, Mr. Gokkes served as a
consultant to Par, during which time he was an employee of Clal. The Company
reimbursed Clal $115,000 in fiscal year 1997 for Mr. Gokkes' wages and expenses
during that period.
27
Investment in Fine-Tech. Under the Stock Purchase Agreement, the Company
obtained the right to participate with Clal and certain of its affiliates in
connection with pharmaceutical acquisitions and transactions. In December 1995,
the Company paid $1,000,000 to purchase 10% of the shares of Fine-Tech, an
Israeli pharmaceutical research and development company in which Clal had a
significant ownership interest. In addition, the Company obtained the exclusive
right to purchase products not commonly sold in North America, South America and
the Caribbean. In June 1997, the Company sold all of the shares of Fine-Tech
for approximately $447,000 and terminated its exclusive purchase rights.
The foregoing descriptions of certain terms of the Stock Purchase
Agreement, the Warrants, the Registration Rights Agreement and the amendments
thereto do not purport to be complete and are qualified in their entirety by
reference to such documents, copies of which were filed as exhibits to the
Current Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on May 12, 1995 or are filed as exhibits to this Report on Form 10-K.
Transactions with Officers and Directors. At various times during fiscal
years 1996 and 1997, the Company made unsecured loans to Mr. Sawyer. Such loans
currently 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 19, 1997, the outstanding balance of the note, with interest, was
approximately $372,000.
The Company believes that all of the above transactions were on terms that
were fair and reasonable to the Company.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
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(a)(1)&(2) Financial Statements.
See Index to Financial Statements after Signature Page.
(a)(3) Exhibits.
3.1 Certificate of Incorporation of the Registrant. (1)
3.1.1 Certificate of Amendment to the Certificate of Incorporation of
the Registrant, dated August 6, 1992. (2)
3.2 By-Laws of the Registrant, as amended and restated. (3)
4 Rights Agreement, dated August 6, 1991, between the Registrant and
Midlantic National Bank, as Rights Agent. (4)
4.1 Amendment to Rights Agreement between the Registrant and Midlantic
National Bank, as Rights Agent, dated as of April 27, 1992. (3)
4.2 Amendment to Rights Agreement, dated as of March 24, 1995,
between the Registrant and Midlantic National Bank, as Rights
Agent.
4.3 Amendment to Rights Agreement, dated as of September 18, 1997,
between the Registrant and First City Transfer Company, as
Rights Agent.
10.1 1983 Stock Option Plan of the Registrant, as amended. (5)
10.2 1986 Stock Option Plan of the Registrant, as amended. (5)
10.3 1989 Directors' Stock Option Plan of the Registrant, as amended.
(6)
10.4 1989 Employee Stock Purchase Program of the Registrant. (7)
10.5 1990 Stock Incentive Plan of the Registrant, as amended.
10.6 Form of Retirement Plan of Par. (8)
10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984.
(9)
10.7 Form of Retirement Savings Plan of Par. (8)
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984.
(10)
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1,
1984. (10)
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30,
1985. (10)
10.8 Par Pension Plan, effective October 1, 1984. (1)
10.9 Employment Agreement, dated as of October 4, 1992, among the
Registrant, Par and Kenneth I. Sawyer. (10)
29
10.10 Severance Agreement, dated as of October 23, 1996, between the
Registrant and Dennis J. O'Connor.
10.11 Lease for premises located at 12 Industrial Avenue, Upper Saddle
River, New Jersey, dated October 21, 1978, between Par and Charles
and Dorothy Horton, and extension dated September 15, 1983. (12)
10.12 Lease Agreement, dated as of January 1, 1993, between Par and
Ramapo Corporate Park Associates. (13)
10.13 Lease Extension and Modification Agreement, dated as of August 30,
1997, between Par and Ramapo Corporate Park Associates.
10.14 Amended and Restated Distribution Agreement, dated as of July 28,
1997, among Sano Corporation, the Registrant and Par./*/
10.15 Mortgage and Security Agreement, dated May 4, 1994, between Urban
National Bank and Par. (15)
10.15.1 Mortgage Loan Note, dated May 4, 1994. (15)
10.15.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban
National Bank. (15)
10.16 1995 Directors Stock Option Plan. (16)
10.17 Stock Purchase Agreement, dated March 25, 1995, between the
Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.18 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995,
between the Registrant and Clal Pharmaceutical Industries Ltd.
(17)
10.19 Registration Rights Agreement, dated May 1, 1995, between the
Registrant and Clal Pharmaceutical Industries Ltd. (17)
10.20 Non-Recourse Secured Promissory Note, July 28, 1997, of PRI
Research, Inc.
10.21 Third Amendment to Stock Purchase Agreement, dated July 28, 1997,
between the Registrant and Clal Pharmaceutical Industries Ltd.
10.22 Pledge Agreement, dated December 27, 1996, between Par and General
Electric Capital Corporation. (18)
10.23 Pledge Agreement, dated December 27, 1996, between the Registrant
and General Electric Capital Corporation. (18)
10.24 Loan and Security Agreement, dated December 27, 1996, between Par
and General Electric Capital Corporation. (18)
10.25 Manufacturing and Supply Agreement, dated April 30, 1997, between
Par and BASF Corporation. (19)
10.26 First Amendment and Waiver to Loan and Security Agreement, dated
May 22, 1997, between Par and General Electric Capi