-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NtHmRrEC7XYu1MP5u90nTxGunBXfiZyslVBjulSri5vqiWX6MOxLuOsjc/tzbxmb U1BSdIW6G4Z2T+fFXgnaBw== 0000898432-01-000273.txt : 20010402 0000898432-01-000273.hdr.sgml : 20010402 ACCESSION NUMBER: 0000898432-01-000273 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACEUTICAL RESOURCES INC CENTRAL INDEX KEY: 0000878088 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 223122182 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10827 FILM NUMBER: 1585785 BUSINESS ADDRESS: STREET 1: ONE RAM RIDGE RD CITY: SPRING VALLEY STATE: NY ZIP: 10977 BUSINESS PHONE: 9144257100 MAIL ADDRESS: STREET 1: ONE RAM RIDGE RD CITY: SPRING VALLEY STATE: NY ZIP: 10977 10-K405 1 0001.txt DECEMBER 31, 2000 UNITED STATES 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 December 31, 2000 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: (845) 425-7100 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of each exchange on which registered Common Stock, $.01 par value The New York Stock Exchange, Inc. The Pacific Exchange, Inc. Common Stock Purchase Rights The New York Stock Exchange, Inc. The Pacific 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. Yes x No --- --- The aggregate market value of the voting stock and non-voting common equity held by non-affiliates of the Registrant was $373,111,383 as of March 15, 2001 (assuming solely for purposes of this calculation that all directors and executive officers of the Registrant are "affiliates"). Number of shares of the Registrant's common stock outstanding as of March 15, 2001: 29,678,156 DOCUMENTS INCORPORATED BY REFERENCE : NONE This is page 1 of 87 pages. The exhibit index is on page 33. 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 developing, manufacturing and distributing a broad line of generic drugs in the United States. PRI operates primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"), a manufacturer and distributor of generic drugs. PRI was originally 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 (845) 425-7100. The Company has strategic alliances with several pharmaceutical and chemical companies providing it with products for sale through distribution, development or licensing agreements. In 1998, the Company entered into the most significant of these alliances when Merck KGaA, a pharmaceutical and chemical company located in Darmstadt, Germany, through its subsidiary Lipha Americas Inc. ("Lipha"), purchased 10,400,000 newly issued shares of the Company's Common Stock. As part of the alliance, the Company obtained the exclusive United States distribution rights to approximately 40 generic pharmaceutical products, pursuant to a distribution agreement between the Company and Genpharm Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA. The Company's current product line consists of both prescription and over-the-counter generic drugs. Approximately 103 products representing various dosage strengths for 45 drugs are currently marketed by the Company. Generic drugs are the pharmaceutical and therapeutic equivalents of brand name drugs and are usually marketed under their generic (chemical) names rather than by a brand name. Generally, a generic drug cannot be marketed until the expiration of applicable patents on the brand name drug. Generic drugs must meet the same government standards as brand name drugs, but are typically sold at prices below those of brand name drugs. Generic drugs provide a cost-effective alternative for consumers while maintaining the safety and effectiveness of the brand name pharmaceutical product (see "-Product Line Information"). The Company markets its products primarily to wholesalers, retail drug store chains, drug distributors and repackagers principally through its own sales staff. Par also has an over-the-counter business through which it sells its products to specific marketing sales organizations that repackage and sell private label products to large chain drug stores. In addition, the Company promotes the sales efforts of wholesalers and drug distributors that sell the Company's products to clinics, government agencies and other managed health care organizations (see "-Marketing and Customers"). Recent Developments: Results of Operations. In fiscal year 2000, the Company continued to build on the improvements made in fiscal years 1999 and 1998. Sales and gross margin growth, primarily from the introduction of new products, more than offset additional legal costs related to several patent infringement actions and an increased investment in research and development. Gross margins in fiscal year 2000 were 27% of net sales compared to 20% in fiscal year 1999 and 6% in fiscal year 1998, as higher margin contributions from new products more than offset lower contributions from older or discontinued products. The margin growth further reduced operating losses to the lowest level since fiscal year 1994. The improved results were also aided by recent Company restructuring measures designed to reduce costs and increase operating efficiencies. The Company expects to continue its investment in research and development, in addition to seeking new products through joint ventures, distribution, licensing or other agreements. There are currently 19 abbreviated new drug applications ("ANDAs") awaiting approval from the United States Food and Drug Administration ("FDA") that were filed by either the Company or one of its strategic partners for potential products to be sold by the Company upon approval. The Company believes that up to nine of these products could be approved by the FDA and introduced to market during fiscal year 2001. In December 1998, the Company changed its annual reporting period to a fiscal year ending December 31 from a fiscal year ending September 30. Accordingly, this Form 10-K includes the financial results for the comparative twelve-month periods ended December 31, 2000, December 31, 1999 and 2 September 30, 1998, as well as the three-month period ended December 31, 1998 (the "transition period"). First-to-File Opportunities. The Company believes three ANDAs, one by Par and two by Alphapharm Pty Ltd. ("Alphapharm"), an Australian subsidiary of Merck KGaA, are first-to-file opportunities. Based on current legislation, the Company could have up to 180 days to market the products exclusively upon FDA approval. Par's ANDA filing for megestrol acetate oral suspension, the generic version of Bristol-Myers Squibb's ("BMS") Megace(R) Oral Suspension which had an estimated $180 million of annual sales in 2000, has received tentative approval from the FDA. Alphapharm's ANDA filings, currently under review by the FDA, for flecainide acetate tablets, the generic version of 3M Pharmaceuticals' Tambocor(R) which had an estimated $60 million of annual sales in 2000, and fluoxetine tablets, the generic version of Eli Lilly and Company's ("Eli Lilly") Prozac(R) tablets which had an estimated $65 million of annual sales in 2000, are covered under distribution agreements with the Company. Currently, the Company and Alphapharm are each involved in litigation over these products with their brand-name pharmaceutical companies. The duration and/or final outcome of the litigation and the FDA's treatment of exclusivity are subject to many factors beyond the direct control of Par or Alphapharm. At this time, it is not possible for the Company to predict the probable outcome of these litigations and the impact, if any, that it might have on the Company. Par received tentative approval of its ANDA for megestrol acetate oral suspension from the FDA in October 2000. A tentative approval is issued by the FDA following the satisfactory conclusion of the regulatory review process. Although there can be no assurance, final approval by the FDA is expected to be granted following court resolution of the patent infringement litigation between Par and BMS. As part of its ANDA submission for megestrol acetate oral suspension, Par filed a paragraph IV certification regarding the formulation patent. The basic compound patent for Megace(R) has expired. Megace(R) Oral Suspension received orphan drug exclusivity from the FDA that expired September 10, 2000 and BMS has a formulation patent for Megace(R) Oral Suspension that expires in 2011. Par believes that its distinct and unique formulation does not infringe the BMS formulation patent. In October 1999, BMS initiated a patent infringement action against Par. On March 1, 2000, Par was granted a patent by the U.S. Patent and Trademark Office for Par's unique formulation of megestrol acetate oral suspension. Par believes that the issuance of this patent, which establishes the uniqueness of Par's formulation compared to the BMS patent, should significantly help Par's defense in the patent infringement case. On December 14, 2000, the U.S. District Court for the Southern District of New York dismissed the patent infringement complaint brought by BMS regarding Par's megestrol acetate oral suspension formulation. The Court granted summary judgment in favor of Par for reasons explained in an Opinion filed under seal. A Notice of Appeal was filed by BMS on March 6, 2001. Although the Court has disposed of all infringement issues, Par's counterclaims for patent invalidity, unfair competition and tortious interference remain. Par's counterclaims seek an injunction and an award of compensatory and punitive damages. Par intends to vigorously pursue its pending litigation with BMS and to defend its patent rights and ensure that other generic companies do not infringe Par's megestrol acetate oral suspension formulation patent (see "-Legal Proceedings"). Marketing of megestrol acetate oral suspension may occur after Par receives final FDA approval. Based on current legislation, final approval will occur when (i) its ANDA submission is approved and (ii) the earlier of 30 months from the date litigation between Par and BMS (commenced October 1999) or the conclusion of successful litigation for Par. However, the granting of a summary judgment in favor of Par, together with the tentative approval received in October 2000 from the FDA are significant positive steps in Par's ability to launch the product. Par's patent broadly covers its unique approach to the formulation of the product. Par believes that as a result of the BMS patent and the Par patent, it could be more difficult for other generic companies to develop a product that does not infringe either patent. Non-infringement of both the Par patent and the BMS patent are a requirement for other generic companies to lawfully enter this market. Although Par anticipates that other generic products may ultimately be approved for megestrol acetate oral suspension, it is now possible that there will be fewer market entries over time than typical of a product of this size. A generic competitor of the Company will receive 180 days marketing exclusivity for fluoxetine capsules. The Company believes that its fluoxetine tablets, upon receiving FDA approval and the anticipated 180 days of marketing 3 exclusivity as noted above, should be able to compete for a share of the fluoxetine capsule market. Fluoxetine capsules, the generic version of Eli Lilly's Prozac(R) capsules, had estimated annual sales exceeding $2 billion in 2000. Prozac(R) is indicated for the treatment of depression and is one of the worlds largest selling drugs. Genpharm/Andrx Agreement. Under an existing profit sharing agreement with Genpharm, PRI will receive an ongoing portion of the profits resulting from Genpharm's recently announced multi-year arrangement with Andrx Corporation ("Andrx"), a pharmaceutical company located in Fort Lauderdale, Florida. The arrangement, which has not been finalized, is expected to settle a dispute between Genpharm and Andrx confirming Andrx' status as the first filer of an ANDA for omeprazole, the generic version of Astra Zeneca's Prilosec(R) which had estimated annual sales in excess of $3.5 billion in 2000. Under the profit sharing agreement with Genpharm, PRI is entitled to receive 30% of the profits Genpharm derives from its arrangement with Andrx regarding omeprazole, including its share of the profits in the event Andrx receives up to 180 days of marketing exclusivity generally granted to first filers. Change in Composition of the Board of Directors. At a meeting of the Company's Board of Directors (the "Board") held on March 28, 2001, three members of the Board, Anthony S. Tabaznik and J. Neil Tabaznik (both existing Class I directors) and Stephen A. Ollendorff (one of the Class II directors) resigned and were immediately and simultaneously replaced by Thomas J. Drago, Matthew W. Emmens (the new Class I directors) and John D. Abernathy (the new Class II director). The two former Class I directors had been affiliated with Merck KGaA, which beneficially owns 41.8% of the Company's Common Stock. The Class II director voluntarily resigned from the Board at the request of the Company in order to assist the Company and the Board in satisfying New York Stock Exchange and Securities and Exchange Commission director independence requirements while at the same time retaining the current number of directors on the Board. Vesting of Employee Stock Options. At a meeting of the Company's Board held on March 28, 2001, the Board adopted a proposal accelerating the vesting of all stock options held by an employee who is terminated by the Company without cause during the period commencing on the date of such Board meeting and ending on May 31, 2002. PRODUCT LINE INFORMATION The Company operates in one industry segment, namely the manufacture and distribution of generic pharmaceuticals. Products are marketed principally in solid oral dosage form consisting of tablets, caplets and two-piece hard-shell capsules. The Company also distributes one product in the semi-solid form of a cream (see "-Research and Development"). Par markets approximately 58 products, representing various dosage strengths for 22 drugs that are manufactured by the Company and approximately 45 additional products, representing various dosage strengths for 23 drugs that are manufactured for it by other companies (see "-Research and Development" and "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Par holds ANDAs for the drugs which it manufactures. Below is a list of drugs manufactured and/or distributed by Par. The names of all of the drugs under the caption "Competitive Brand-Name Drug" are trademarked. The holders of the trademarks are non-affiliated pharmaceutical manufacturers. Name Competitive Brand-Name Drug ---- --------------------------- Central Nervous System: Akineton Akineton Benztropine Mesylate Cogentin Carisoprodol and Aspirin Soma Compound Clonazepam Klonopin Cyproheptadine Hydrochloride Periactin Doxazosin Mesylate Cardura Doxepin Hydrochloride Sinequan, Adapin Fluphenazine Hydrochloride Prolixin Imipramine Hydrochloride Tofranil Meclizine Hydrochloride Antivert Metaproterenol Sulfate Alupent Prochlorperazine Maleate Compazine Triazolam Halcion 4 Cardiovascular: Acebutolol Sectral Amiloride Hydrochloride Midamor Amiodarone Hydrochloride Cordarone Captopril Capoten Enalapril Vasotec Guanfacine Tenex Hydralazine Hydrochloride Apresoline Hydra-Zide Apresazide Indapamide Lozol Isosorbide Dinitrate Isordil Minoxidil Loniten Nicardipine Hydrochloride Cardene Sotalol Betapace Anti-Inflammatory: Aspirin (zero order release) Zorprin Dexamethasone Decadron Etodolac Lodine Ibuprofen Advil, Nuprin, Motrin Naproxen Sodium Aleve Orphengesic/Orphengesic Forte Norgesic/Norgesic Forte Oxaprozin Daypro Anti-Infective: Acyclovir Zovirax Doxycycline Monohydrate Monodox Silver Sulfadiazine (SSD) Silvadene Anti-Cancer: Hydroxyurea Hydrea Megestrol Acetate Megace Anti-Parkinson: Selegiline Eldepryl Anti-Diarrhea: Diphenoxylate Hydrochloride w/Atrulfate Lomotil Anti-Platelet: Ticlopidine Hydrochloride Ticlid Anti-Gout: Allopurinol Zyloprim Histamine: Ranitidine Zantac Anti-Thyroid: Methimazole Tapazole Ovulation Stimulant: Clomiphene Clomid The Company seeks to introduce new products not only through its internal research and development program, but also through joint venture, distribution and other agreements with pharmaceutical companies located throughout the world. As part of that strategy, the Company has pursued and continues to pursue 5 arrangements or affiliations which it believes could provide access to raw materials at favorable prices, share development costs, generate profits from jointly-developed products and expand distribution channels for new and existing products. The Company's material distribution agreements are described below. In March 1999, Par entered into agreements with Halsey Drug Co., Inc. ("Halsey"), a manufacturer of generic pharmaceutical products, to lease (the "Lease Agreement") its manufacturing facility and related machinery and equipment located in Congers, New York (the "Congers Facility") and to have Halsey manufacture (the "Halsey Supply Agreement") exclusively for Par certain products previously manufactured by Par at the Congers Facility. The Halsey Supply Agreement has an initial term of three years subject to earlier termination upon the occurrence of certain events as provided therein. Par has credited any deficiency of minimum purchases required under the Halsey Supply Agreement through September 2000 against the rent payments due pursuant to the Lease Agreement. In addition, the Halsey Supply Agreement prohibits Halsey from manufacturing, supplying, developing or distributing products produced under the agreement for anyone other than Par for a period of three years from the date of the Halsey Supply Agreement. The Company has a distribution agreement with Genpharm (the "Genpharm Distribution Agreement"), dated March 25, 1998, pursuant to which Genpharm granted exclusive distribution rights to the Company within the United States and certain other United States territories with respect to approximately 40 generic pharmaceutical products. To date, 14 of such products have obtained FDA approval and are currently being marketed by Par. The remaining products are either currently being developed, have been identified for development, or have been submitted to the FDA for approval. Products may be added to or removed from the Genpharm Distribution Agreement by mutual agreement of the parties. Genpharm is required to use commercially reasonable efforts to develop the products, which are subject to the Genpharm Distribution Agreement, and is responsible for the completion of product development and for obtaining all applicable regulatory approvals. The Company pays Genpharm a percentage of the gross profits on all its sales of the products included in the Genpharm Distribution Agreement. In April 1997, Par and BASF Corporation ("BASF"), a manufacturer of pharmaceutical products, entered into a Manufacturing and Supply Agreement (the "BASF Supply Agreement"). Under the BASF Supply Agreement, Par agreed to purchase certain minimum quantities of three products manufactured by BASF at one of its facilities, and to phase out Par's manufacturing of those products. BASF agreed to discontinue its direct sale of those products. The agreement had an initial term of three years and would have renewed automatically for successive two-year periods until December 31, 2005, if Par had met certain purchase thresholds. Since Par did not meet the minimum purchase requirement of $29,000,000 worth of one product in the third and final year of the Agreement, BASF had the right to terminate the agreement with a notice period of one year. However, to ensure continuance of product supply, BASF and the Company have agreed in principle to, and are operating under, the terms of a new agreement similar to the terms of the prior agreement, but with lower minimum purchase requirements. In June 2000, the Company and Elan Transdermal Technologies, Inc., formerly known as Sano Corporation, and Elan Corporation, plc (collectively "Elan") entered into an agreement pursuant to which the Company sold back to Elan all of the Company's remaining distribution rights for a non-prescription transdermal nicotine patch and terminated its right to royalty payments under the September 1998 termination agreement (the "Termination Agreement"). Pursuant to this agreement, the Company will receive a minimum payment of $500,000 on or before July 31, 2001 and could receive up to an additional $1,000,000 to $1,500,000 subject to certain conditions as set forth in the agreement, including Elan's introduction of the product in the United States and Israel on or before certain dates. In July 2000, Elan paid the Company $150,000 under the agreement. Pursuant to the Termination Agreement, the Company's exclusive right to distribute an Elan manufactured prescription transdermal nicotine patch in the United States ended on May 31, 1999. The Company began selling Elan's prescription transdermal nicotine patch in January 1998 and paid Elan a percentage of gross profits through the termination date. In exchange for relinquishing long-term distribution rights to the prescription transdermal nicotine patch and a nitroglycerin patch under the Termination Agreement, the Company received payments of $2,000,000 in October 1998 and $1,000,000 in the third quarter of 1999. RESEARCH AND DEVELOPMENT At this time, the Company has approximately 12 products in active development as part of its internal research and development program. The Company expects that approximately seven of these products will be the subject of a biostudy in 2001, but has not filed any ANDAs with respect to such potential products. The Company expects its expenditures for research and 6 development in 2001 to increase to approximately $8,500,000. The scientific process of developing new products and obtaining FDA approval is complex, costly and time consuming. The development of products may be curtailed in the early or later stages of development due to the introduction of competing generic products or for other strategic reasons. The Company's domestic research and development program is integrated with that of Israel Pharmaceutical Resources L.P. ("IPR"), its research facility in Israel. The Company, IPR, and Generics (UK) Ltd. ("Generics"), a subsidiary of Merck KGaA, entered into an agreement (the "Development Agreement"), dated August 11, 1998, pursuant to which Generics agreed to fund one-half the costs of the operating budget of IPR in exchange for the exclusive distribution rights outside of the United States to products developed by IPR after the date of the Development Agreement. In addition, Generics agreed to pay IPR a perpetual royalty for all sales of the products by Generics or its affiliates outside the United States. To date, no such products have been brought to market by Generics or its affiliates and no royalty has been paid to IPR. 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 will 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 between $100,000 to $500,000 per study. During 2000, the Company contracted with outside laboratories to conduct biostudies for six potential new products and will continue to do so in the future. Biostudies must be conducted and documented in conformity with FDA standards (see "-Government Regulation"). In addition, the Company from time to time enters into agreements with third parties with respect to the development of new products and technologies. To date, the Company has entered into agreements and has advanced funds to several companies for products in various stages of development. The research and development of oral solid and suspension products, including preformulation research, process and formulation development, required studies and FDA review and approval, has historically taken approximately two to three years. Accordingly, Par typically selects for development products that it intends to market several years in the future. However, the length of time necessary to bring a product to market can vary significantly and can depend on, among other things, availability of funding, problems relating to formulation, safety or efficacy or patent issues associated with the product. As a result of its internal product development program, the Company currently has four ANDAs pending with the FDA, two of which have received tentative approval, for potential products which are not subject to any distribution agreements. In addition, there are 15 ANDAs pending with the FDA, that have been filed by the Company or one of its strategic partners, for potential products covered under various distribution agreements. No assurance can be given that the Company will successfully complete the development of products either under development or proposed for development, that it will obtain regulatory approval for any such product, that any approved product will be produced in commercial quantities or that any approved product can be sold at a profit. Continued improvement in the Company's financial condition depends upon the acquisition and introduction of new products at profitable prices to replace the loss of revenues from certain older or discontinued products. The failure of the Company to introduce profitable new products in a timely manner could have a material adverse effect on the Company's operating results, prospects and financial condition (see "-Competition"). For fiscal year 2000, the Company increased research and development spending to $7,634,000 from $6,005,000 and $5,775,000 in fiscal years 1999 and 1998, respectively, and $1,125,000 in the transition period. The current year reflects increased biostudy activity, personnel and material costs. In fiscal years 1999 and 1998, the Company incurred higher payments for purchase rights to pharmaceutical chemical processes and for formulation development work performed for PRI by unaffiliated companies. Costs in fiscal years 2000 and 1999, and the transition period are net of funding from Generics pursuant to the Development Agreement and reimbursements from Genpharm for work performed by PRI related to products covered by the Genpharm Distribution Agreement (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Operating Results-Research and Development"). MARKETING AND CUSTOMERS The Company primarily markets its products under the Par label to wholesalers, retail drug store chains, distributors and, to a lesser extent, drug manufacturers and government agencies, primarily through its own sales 7 staff. Some of the Company's wholesalers and distributors purchase products that are warehoused for certain drug chains, independent pharmacies and managed health care organizations. Customers in the managed health care market include health maintenance organizations, nursing homes, hospitals, clinics, pharmacy benefit management companies and mail order customers. Par's over-the-counter business includes selling products to specific marketing sales organizations that repackage and sell private label products to large chain drug stores. The Company promotes its products primarily through incentive programs with its customers, trade shows and advertisements in trade journals. The Company has approximately 150 customers, some of which are part of larger buying groups. In fiscal year 2000, the Company's three largest customers in sales volume, McKesson Drug Co., Bergen Brunswig Corporation and AmeriSource Health Corp. accounted for approximately 21%, 9% and 8%, respectively, of its net sales. McKesson Drug Co. sales in fiscal year 2000 include a significant amount related to one of the Company's non-warehousing drug store chain customers. None of these customers has written agreements with the Company. The loss of any of these customers or the substantial reduction in orders from any of such customers could have a material adverse effect upon the Company's operating results and financial condition (see "Notes to Financial Statements-Accounts Receivable-Major Customers"). ORDER BACKLOG The dollar amount of open orders, believed by management to be firm, as of December 31, 2000 was approximately $4,400,000, as compared to approximately $4,000,000 at December 31, 1999 and $5,000,000 at December 31, 1998. As the Company's distribution channels have changed in the last several years as a result of an increase in sales of generic drugs to wholesalers and drug store chains and a decrease in sales to distributors, the Company's Par label business has increased while the private label business has declined. This change has led to a shift in ordering patterns as Par label products require less lead-time than private label. Although the current open orders are subject to cancellation without penalty, management expects to fill substantially all of them in the near future. COMPETITION The generic pharmaceutical industry is highly competitive due principally to the number of competitors in the market and the consolidation of the Company's distribution outlets through mergers, acquisitions and the formation of buying groups. The Company has identified at least ten principal competitors, and experiences varying degrees of competition from numerous other companies in the health care industry. Many of the Company's competitors have greater financial and other resources than the Company and are able to spend more for product development and marketing. As other manufacturers introduce generic products in competition with the Company's existing products, its 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 depend, in large part, on the number and timing of introductions of competing products and the Company's timely development and introduction of new products. The Company believes that consolidation among wholesalers and retailers, the formation of large buying groups and competition between distributors have resulted in additional pricing pressures. In addition, aggressive pricing strategies by some distributors attempting to maintain or increase market share have adversely affected the Company's ability to market its products. After years of severe price deterioration in the generic drug market, certain industry leaders began raising prices on selected products in 1998 and 1999. Although the Company continues to experience low margins on some of its products, the current pricing environment has contributed to the continued improvement in the Company's overall gross margin and operating results over the last several years (see "Management's Discussion and Analysis of Financial Condition and Results of Operations"). The principal competitive factors in the generic pharmaceutical market are (i) price, (ii) the ability to introduce generic versions of brand name drugs promptly after their patents expire, (iii) reputation as a manufacturer of quality products, (iv) level of service (including maintaining sufficient inventory levels for timely deliveries), (v) product appearance, and (vi) breadth of product line. 8 RAW MATERIALS The raw materials essential to the Company's manufacturing business are purchased primarily from United States distributors of bulk pharmaceutical chemicals manufactured by foreign companies. To date, the Company has experienced no significant difficulty in obtaining raw materials and expects that raw materials will generally continue to be available in the future. However, since the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. While a new supplier becomes qualified by the FDA and its manufacturing process is judged to meet FDA standards, a delay of six months or more in the manufacture and marketing of the drug involved could result, which, depending on the particular product, could have a material adverse effect on the Company's financial condition. Generally the Company attempts to minimize the effects of any such situation by specifying, where economical and feasible, two or more suppliers of raw materials for its drug approvals. EMPLOYEES As of December 31, 2000, the Company had approximately 297 employees compared to 275 and 321, respectively, at December 31, 1999 and 1998 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Asset Impairment/Restructuring Charge"). GOVERNMENT REGULATION All pharmaceutical manufacturers are subject to extensive regulation by the Federal government, principally by the FDA, and, to a lesser extent, by the Drug Enforcement Administration and state governments. The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act, and other Federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Noncompliance with applicable requirements can result in judicially and/or administratively imposed sanctions including the initiation of product seizures, injunction actions, fines and criminal prosecutions. Administrative enforcement measures can involve the recall of products, as well as the refusal of the government to enter into supply contracts or to approve new drug applications. The FDA also has the authority to withdraw approval of drugs in accordance with regulatory due process procedures. FDA approval is required before any new drug, including a generic equivalent of a previously approved branded drug, can be marketed. To obtain FDA approval for a new drug, a prospective manufacturer must, among other things, demonstrate that its manufacturing facilities comply with the FDA's current Good Manufacturing Practices ("cGMP") regulations. The FDA may inspect the manufacturer's facilities to assure such compliance prior to approval or at any other reasonable time. CGMP regulations must be followed at all times during the manufacture and processing of drugs. To comply with the standards set forth in these regulations, the Company must continue to expend significant time, money and effort in the areas of production, quality control and quality assurance. To obtain FDA approval of a new drug, a manufacturer must demonstrate, among other requirements, the safety and effectiveness of the proposed drug. There are currently two basic ways to satisfy the FDA's safety and effectiveness requirements: 1. New Drug Applications ("NDA"): Unless the procedure discussed in paragraph 2 below is available, a prospective manufacturer must submit to the FDA an NDA containing complete pre-clinical and clinical safety and efficacy data or a right of reference to such data. The pre-clinical data must provide an adequate basis for evaluating the safety and scientific rationale for the initiation of clinical trials. Clinical trials are conducted in three sequential phases and may take several years to complete. At times, the phases may overlap. Data from pre-clinical testing and clinical trials is submitted to the FDA as an NDA for marketing approval. 2. Abbreviated New Drug Applications: The Waxman-Hatch Act established a statutory procedure for submission and FDA review and approval of ANDAs for generic versions of drugs previously approved by the FDA (such previously approved drugs are hereinafter referred to as "listed drugs"). As the safety and efficacy have already been established by the innovator company, the FDA waives the need for complete clinical trials. However, a generic manufacturer is typically required to conduct bioavailability/bioequivalence studies of its test product 9 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 drugs for brand-name drugs. The Company's operations are also subject to regulation, licensing requirements and inspection by the states in which they are located and/or conduct 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 enter into a formal drug rebate agreement, as the Company has, with the Federal Health Care Financing Administration. Although not required under OBRA, the Company has also entered into similar state agreements. ITEM 2. Properties. The Company owns its executive offices and a substantial portion of its production and domestic research facilities which are housed in an approximately 92,000 square foot facility built to Par's specifications. The building, occupied by Par since fiscal year 1986, also includes research and quality control laboratories, as well as packaging and warehouse facilities. The building is located in Spring Valley, New York, on a parcel of land of approximately 24 acres, of which approximately 15 acres are available for future expansion. The Company owns another building in Spring Valley, New York, across the street from its executive offices, occupying approximately 36,000 square feet on two acres. This property was acquired in fiscal year 1994 and is used for offices and warehousing. The purchase of the land and building was financed by a mortgage loan. Par owns a third facility of approximately 33,000 square feet located on six acres in Congers, New York, which prior to March 1999, was used by the Company for product manufacturing and tablet coating. Beginning in fiscal year 1998 through 2000, the Company outsourced these operations to BASF and Halsey. 10 In March 1999, Par entered into an agreement to lease the facility and related machinery and equipment to Halsey. The Lease Agreement has an initial term of three years, subject to an additional two-year renewal period and contains a purchase option permitting Halsey to purchase the Congers Facility and substantially all the equipment thereof at any time during the lease terms for a specified amount. Pursuant to the Lease Agreement, Halsey paid the purchase option of $100,000 in March 1999. The Lease Agreement provides for annual fixed rent during the initial term of $500,000 per year and $600,000 per year during the renewal period. Under the Halsey Supply Agreement, Halsey is required to perform certain manufacturing operations for the Company at the Congers Facility (see "Notes to the Financial Statements-Lease Agreement" and "-Distribution and Supply Agreements-Halsey Drug Co., Inc."). Par occupies approximately 47,000 square feet in a building located in Spring Valley, New York for warehouse space under a lease that expires December 2004. The Company has the option to extend the lease for two additional five-year periods. The Company did not renew its lease, which expired in November 2000, for an 11,000 square foot facility in Upper Saddle River, New Jersey, used for certain manufacturing operations. In December 1999, Genpharm began manufacturing the product for the Company that was previously produced at this facility. IPR leases approximately 13,000 square feet in Even Yehuda, Israel for product research and development. The lease expires in May 2002 and has one 35-month renewal option. The Company guarantees IPR's obligations under the lease. The Company believes that its owned and leased properties are sufficient in size, scope and nature to meet its anticipated needs for the reasonably foreseeable future (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition" and "Notes to Financial Statements-Long-Term Debt" and "-Commitments, Contingencies and Other Matters-Leases"). ITEM 3. Legal Proceedings. Par has filed with the FDA an ANDA for megestrol acetate oral suspension, the generic version of BMS's Megace(R) Oral Suspension. Par filed a paragraph IV certification regarding the formulation patent as part of its ANDA submission. The basic compound patent for Megace(R) has expired. Megace(R) Oral Suspension received orphan drug exclusivity from the FDA that expired September 10, 2000 and BMS has a formulation patent for Megace(R) Oral Suspension expiring in 2011. Par believes that its distinct and unique formulation does not infringe the BMS formulation patent. In October 1999, BMS initiated a patent infringement action against Par. On March 1, 2000, Par was granted a patent by the U.S. Patent and Trademark Office for Par's unique formulation of megestrol acetate oral suspension. Par believes that the issuance of this patent, which establishes the uniqueness of Par's formulation compared to the BMS patent, should significantly help Par's defense in the patent infringement case. On December 14, 2000, the U.S. District Court for the Southern District of New York dismissed the patent infringement complaint brought by BMS regarding Par's megestrol acetate oral suspension formulation. The Court granted summary judgment in favor of Par for reasons explained in an Opinion filed under seal. A Notice of Appeal was filed by BMS on March 6, 2001. Although the Court has disposed of all infringement issues, Par's counterclaims for patent invalidity, unfair competition and tortious interference remain. Par's counterclaims seek an injunction and an award of compensatory and punitive damages, and may ultimately be tried before a jury. Par intends to vigorously pursue its pending litigation with BMS and to defend its patent rights and ensure that other generic companies do not infringe the Par patent. At this time, it is not possible for the Company to predict the probable outcome of this litigation and the impact, if any, that it might have on the Company. Par received tentative approval of its ANDA for megestrol acetate oral suspension from the FDA in October 2000. A tentative approval is issued by the FDA following the satisfactory conclusion of the regulatory review process. Although there can be no assurance, final approval by the FDA is expected to be granted following court resolution of the patent infringement litigation between Par and BMS. The Company is involved in certain other litigation matters, including certain product liability actions and actions by former employees, and believes these actions are incidental to the conduct of its business and that the ultimate resolution thereof will not have a material adverse effect on its financial condition, results of operations or liquidity. The Company intends to vigorously defend these actions. 11 ITEM 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2000. The rules promulgated by the Securities and Exchange Commission may permit the Company to exercise discretionary authority to vote on shareholder proposals at the 2001 Annual Meeting of Shareholders if proposals are not included in the proxy statement relating to such meeting and the Company does not have notice of the proposal a reasonable time before the Company mails its proxy materials for such Meeting. 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 Exchange under the ticker symbol "PRX." The following table shows the range of closing prices for the Common Stock as reported by the NYSE for each calendar quarter during the Company's three most recent calendar years. Year Ended In Quarter Ended 2000 1999 1998 - ------------- -------------------- -------------------- ------------------ High Low High Low High Low ----- --- ---- --- ---- --- March 31 $7.63 $4.06 $7.69 $4.13 $4.75 $1.44 June 30 7.06 4.44 8.69 6.50 5.00 3.56 September 30 7.44 4.75 8.44 5.06 6.31 3.81 December 31 8.13 6.06 6.38 4.56 4.75 3.25 (b) Holders. As of March 15, 2001, there were approximately 2,549 holders of record of the Common Stock. The Company believes that, in addition, there are a significant number of beneficial owners of its Common Stock whose shares are held in "street name". (c)Dividends. During fiscal years 2000, 1999, 1998 and the transition period, the Company did not pay any cash dividends on its Common Stock. The payment of future dividends on its Common Stock is subject to the discretion of the Board of Directors and is dependent upon many factors, including the Company's earnings, its capital needs, the terms of its financing agreements and its general financial condition. The Company's current loan agreement with General Electric Capital Corporation ("GECC") prohibits the declaration or payment of any dividend, or the making of any distribution, to any of the Company's stockholders (see "Notes to Financial Statements Short-Term Debt"). (d) Recent Stock Price. On March 15, 2001, the closing price of a share of the Common Stock on the NYSE was $12.65 per share. (e) Recent Sales of Unregistered Securities. The Company, on June 30, 1998, sold 10,400,000 shares of Common Stock to Lipha at a purchase price of $2.00 per share, and issued stock options to purchase an aggregate of 1,171,040 shares of Common Stock to Merck KGaA and Genpharm at an exercise price of $2.00 per share in exchange for consulting services to be provided to the Company. The options are exercisable commencing on July 10, 2001 and expire on April 30, 2003. Such shares and stock options were issued pursuant to an exemption provided by Section 4(2) and/or Section 4(6) of the Securities Act of 1933, as amended. Lipha, Merck KGaA and Genpharm have certain registration rights with respect to the shares of Common Stock they own (see "Certain Relationships and Related Transactions"). 12 ITEM 6. Selected Financial Data
Three Twelve Months Ended Months Twelve Months Ended ------------------- Ended ----------------------------- 12/31/00 12/31/99 12/31/98 9/30/98 9/30/97 9/30/96 -------- -------- -------- ------- ------- ------- INCOME STATEMENT DATA (In thousands, except per share amounts) Net sales $ 85,022 $ 80,315 $ 16,775 $ 59,705 $ 52,572 $ 57,451 Cost of goods sold 62,332 64,140 17,105 56,135 49,740 48,299 -------- -------- -------- -------- -------- -------- Gross margin 22,690 16,175 (330) 3,570 2,832 9,152 Operating expenses: Research and development 7,634 6,005 1,125 5,775 5,843 5,160 Selling, general and administrative 15,575 12,787 3,611 12,090 11,861 16,660 Asset impairment/restructuring charge -- -- 1,906 1,212 -- 549 -------- -------- -------- -------- -------- -------- Total operating expenses 23,209 18,792 6,642 19,077 17,704 22,369 -------- -------- -------- -------- -------- -------- Operating loss (519) (2,617) (6,972) (15,507) (14,872) (13,217) Other income, net 506 906 1 6,261 6,926 2,007 Interest (expense) income (916) (63) 89 (382) (545) 118 -------- -------- -------- -------- -------- -------- Loss from continuing operations before provision for income taxes (929) (1,774) (6,882) (9,628) (8,491) (11,092) Provision for income taxes -- -- -- -- 410 -- -------- -------- -------- -------- -------- -------- Loss income from continuing operations (929) (1,774) (6,882) (9,628) (8,901) (11,092) Income from discontinued operations -- -- -- -- -- 2,800 -------- -------- -------- -------- -------- -------- Net loss $ (929) $ (1,774) $ (6,882) $ (9,628) $ (8,901) $ (8,292) ======== ======== ======== ======== ======== ======== Basic and diluted net loss per share of common stock: Continuing operations $ (.03) $ (.06) $ (.23) $ (.45) $ (.48) $ (.60) Discontinued operations -- -- -- -- -- .15 -------- -------- -------- -------- -------- -------- Net loss $ (.03) $ (.06) $ (.23) $ (.45) $ (.48) $ (.45) ======== ======== ======== ======== ======== ======== Weighted average number of common and common equivalent shares outstanding 29,604 29,461 29,320 21,521 18,681 18,340 ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA Working capital $ 18,512 $ 21,221 $ 24,208 $ 29,124 $ 15,959 $ 20,716 Property, plant and equipment (net) 23,560 22,681 22,789 24,283 27,832 26,068 Total assets 89,150 82,686 77,947 82,924 72,697 84,946 Long-term debt, less current portion 163 1,075 1,102 1,143 2,651 2,971 Shareholders' equity 60,085 60,339 61,191 68,009 57,268 70,624
13 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ------ ---------------------------------------------------------------- Certain statements in this Form 10-K may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including those concerning management's expectations with respect to future financial performance and future events, particularly relating to sales of current products as well as certain cost cutting and restructuring measures and the introduction of new manufactured and distributed products. Such statements involve known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which could cause actual results and outcomes to differ materially from those expressed herein. Factors that might affect such forward-looking statements set forth in this Form 10-K include, among others, (i) increased competition from new and existing competitors and pricing practices from such competitors, (ii) pricing pressures resulting from the continued consolidation by the Company's distribution channels, (iii) the amount of funds available for internal research and development and research and development joint ventures, (iv) research and development project delays or delays and unanticipated costs in obtaining regulatory approvals, (v) continuation of distribution rights under significant agreements, (vi) the continued ability of distributed product suppliers to meet future demand, (vii) the outcome of any threatened or pending litigation and (viii) general industry and economic conditions. Any forward-looking statements included in this Form 10-K are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statements. RESULTS OF OPERATIONS General The Company's financial results continued to improve in fiscal year 2000 when compared to fiscal years 1999 and 1998. Higher sales and gross margins more than offset additional legal costs related to several patent infringement actions and increased research and development spending. Gross margins in fiscal year 2000 improved to 27% of net sales compared to 20% in fiscal year 1999 and 6% in fiscal year 1998, as higher margin contributions from new products more than offset lower contributions from older or discontinued products. The improved margins further reduced operating losses in fiscal year 2000 to $519,000 from $2,617,000 and $15,507,000 in fiscal years 1999 and 1998, respectively. Operating expenses in fiscal year 1998 included a non-recurring charge of $1,212,000 for asset impairment of the Congers Facility resulting from outsourcing its production volume and subsequently leasing the facility to Halsey. The Company incurred net losses of $929,000, $1,774,000 and $9,628,000 in fiscal years 2000, 1999 and 1998, respectively. The net results in fiscal year 2000 included additional interest expense from higher levels of short-term debt while fiscal year 1998 included non-recurring income of approximately $6,100,000 from the sale and release of product rights to Elan. In December 1998, the Company changed its annual reporting period to a fiscal year ending December 31 from a fiscal year ending September 30 and, accordingly, reported results for the three-month transition period. The operating loss in the transition period was $6,972,000 compared to $1,992,000 for the corresponding period of the prior year. Although the Company experienced 38% net sales growth in the transition period, primarily from sales of new products, the gross margin declined significantly due to unfavorable overhead variances and additional inventory write-offs. In addition, increased product development activity and higher selling and administrative expenses, as described below, adversely impacted the operating results in the transition period. During the transition period, the Company began implementing certain measures, including discontinuing its manufacturing of certain unprofitable products, in an attempt to reduce operating losses. Accordingly, the Company recorded charges of $1,906,000 in the transition period for asset impairment and restructuring, and $630,000 of additional inventory reserves (see "Notes to Financial Statements Commitments, Contingencies and Other Matters-Asset Impairment/Restructuring"). In 1998, the Company and Merck KGaA formed a strategic alliance as a means to improve the Company's prospects and strengthen its financial condition through the introduction of new products at profitable pricing. As part of the alliance, the Company sold Common Stock to a subsidiary of Merck KGaA and received exclusive United States distribution rights for up to approximately 40 generic pharmaceutical products covered by the Genpharm Distribution Agreement. To date, 14 such products have received FDA approval and are currently being marketed by Par. The remaining products are either being developed, have been identified for development, or have been submitted to the FDA for approval. There are currently 11 ANDAs for additional products, one of which has been tentatively approved, covered by the Genpharm Distribution Agreement pending 14 with and awaiting approval from, the FDA. Genpharm pays the research and development costs associated with the products and the Company is obligated to pay Genpharm a certain percentage of the gross margin on sales of the products. The alliance provides the Company with a significant number of potential products for its new product pipeline without the substantial resource commitment, including financial, it would normally take to develop such a pipeline, improved financial condition and access to Merck KGaA's expertise and experience in the industry (see "Notes to Financial Statements-Strategic Alliance" and "-Distribution and Supply Agreements-Genpharm, Inc."). Critical to any significant improvement in the Company's financial condition is the introduction of new manufactured and distributed products at selling prices that generate significant gross margin. In addition to product introductions expected as part of the strategic alliance with Merck KGaA, the Company plans to continue to invest in research and development efforts, subject to liquidity concerns, and pursue additional products for sale through new and existing distribution agreements. The Company is engaged in efforts, subject to FDA approval and other factors, to introduce new products as a result of its research and development efforts and distribution and development agreements. No assurance can be given that the Company will obtain any additional products for sale. Continuing operating losses will have a materially adverse affect on the Company's liquidity and, accordingly, limit its ability to fund research and development or ventures relating to the sale of new products and market existing products (see "-Financial Condition-Liquidity and Capital Resources"). The generic drug industry in the United States continues to be highly competitive. The factors contributing to the intense competition and affecting both the introduction of new products and the pricing and profit margins of the Company, include, among other things: (i) introduction of other generic drug manufacturer's products in direct competition with the Company's significant products, (ii) consolidation among distribution outlets through mergers, acquisitions and the formation of buying groups, (iii) ability of generic competitors to quickly 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) pricing and product deletions by competitors (see "Business Marketing and Customers" and "Competition"). Net Sales Net sales of $85,022,000 in fiscal year 2000 increased $4,707,000, or 6%, from fiscal year 1999. Additional sales from new products, primarily products sold under distribution agreements with Genpharm, offset the termination of the prescription transdermal nicotine patch distribution rights, effective May 31, 1999, and reduced sales of antibiotics, which decreased due to an inability by suppliers to meet the Company's production requirements. The Company discontinued its antibiotic product line in fiscal year 2000 due to continued production issues with suppliers. Total sales of antibiotics were approximately $4,088,000, or 5% of the Company's total net sales in fiscal year 1999. Net sales of distributed products, which consist of products manufactured under contract and licensed products, were approximately 64% of the Company's net sales in both fiscal years 2000 and 1999. The Company is substantially dependent upon distributed products for its sales, and as the Company introduces new products under its distribution agreements, it is expected that this trend will continue. Any inability by suppliers to meet expected demand could adversely affect future sales. The Company discontinued certain unprofitable products following the continued evaluation of its product line. Although there can be no assurance, it is anticipated that new product introductions will continue to offset decreased sales from the termination of the prescription transdermal nicotine patch distribution rights, loss of the antibiotics business, and to a lesser extent, the discontinued manufactured products. Net sales of $80,315,000 in fiscal year 1999 increased $20,610,000, or 35%, from fiscal year 1998. The sales increase was primarily attributable to a more favorable pricing environment and additional sales from new manufactured products and products sold under the Genpharm Distribution Agreement. Net sales in fiscal year 1999 of distributed products increased to approximately 64% of the Company's net sales compared to approximately 44% of net sales in fiscal year 1998. The increased percentage of distributed product sales was primarily due to increased sales of products manufactured under the Supply Agreement with BASF. Pursuant to the Termination Agreement with Elan, the Company ceased distributing Elan's transdermal nicotine patch after May 31, 1999. The transdermal nicotine patch accounted for approximately 5% of sales in both fiscal years 1999 and 1998. As a result of an evaluation of its product line, the Company discontinued certain unprofitable products during fiscal year 1999. 15 Net sales in the transition period of $16,775,000 increased $4,641,000, or 38%, from net sales in the comparable three-month period of the prior year. The sales growth was primarily attributable to sales of new products, primarily the transdermal nicotine patch manufactured by Elan, and naproxen sodium manufactured by the Company and introduced in October 1998. Net sales of distributed product for the transition period increased to approximately 68% of the Company's total net sales compared to approximately 31% of the total for the same period of the prior year. Sales of the Company's products are principally dependent upon, among other things, (i) pricing levels and competition, (ii) market penetration for the existing product line, (iii) the continuation of existing distribution agreements, (iv) introduction of new distributed products, (v) approval of ANDAs and introduction of new manufactured products, and (vi) the level of customer service (see "Business Competition"). Gross Margins The gross margin in fiscal year 2000 increased $6,515,000 to $22,690,000 (27% of net sales) from $16,175,000 (20% of net sales) in the prior year. Gross margin improvements were attained principally through the sale of new products and lower manufacturing costs, primarily due to the leasing of the Congers Facility in March 1999. The loss of gross margin from the termination of the prescription transdermal nicotine patch distribution rights was partially offset by the sale of distribution rights for a non-prescription transdermal nicotine patch (see "Notes to Financial Statements-Distribution and Supply Agreements-Elan Corporation Inc."). The gross margin of $16,175,000 (20% of net sales) in fiscal year 1999 increased $12,605,000 from $3,570,000 (6% of net sales) in fiscal year 1998. Gross margin gains were attained principally through a more favorable pricing environment, additional margin contributions from new products and lower inventory write-offs. Although unfavorable overhead variances, due to excess capacity earlier in 1999, adversely affected the overall gross margin, the magnitude of these variances decreased from the prior fiscal year. The Company addressed its excess capacity issues by leasing its under-utilized Congers Facility in March 1999, work force reductions and write-downs of certain under-utilized assets (see "Notes to Financial Statements Asset Impairment/Restructuring"). The Company's gross margin was $(330,000) (-2% of net sales) in the transition period compared to $1,504,000 (12% of net sales) in the corresponding quarter of the prior year. Unfavorable overhead variances due to excess capacity following the outsourcing or discontinuing of manufactured products in prior periods, and higher inventory write-offs related to the discontinued products, adversely affected the gross margin in the transition period. Inventory write-offs were $1,645,000 in fiscal year 2000 compared to $1,157,000 in the prior year. The higher inventory write-offs in the most recent fiscal year were primarily attributable to a delayed product launch caused by a brand-name company obtaining an additional patent for a product and the discontinuance of additional low margin products. Inventory write-offs taken in the normal course of business are related primarily to the disposal of finished products due to short shelf lives. Inventory write-offs also include work in process inventory not meeting the Company's quality control standards. Inventory write-offs of $1,157,000 in fiscal year 1999 returned to more normalized levels from $2,229,000 in fiscal year 1998. Fiscal year 1998 included additional write-offs of material and obsolete inventory of approximately $768,000 due to discontinued products. In the transition period, inventory write-offs amounted to $1,478,000 compared to $293,000 in the comparable three-month period of the prior year. The increase was primarily attributable to additional inventory reserves due to discontinued products and the write-off of material and work in process inventory not meeting the Company's quality control standards. In fiscal year 2000, the Company's top four selling products accounted for approximately 45% of net sales compared to 47%, 63% and 55%, respectively, of net sales in fiscal years 1999 and 1998, and the transition period. Two of the products in the most recent year were not part of the top four in any of the preceding periods. Although the Company's reliance on its top four products has lessened in 2000, the aggregate sales and gross margin generated by these products continued to account for a significant portion of the Company's overall sales and gross margin. One of the top four products in the three periods preceding 2000, the prescription transdermal nicotine patch, which the Company stopped distributing May 31, 1999, accounted for approximately 5% of net sales in fiscal years 1999 and 1998, 10% of net sales in the transition period and a significant portion of the gross margin in those respective periods. The Company will continue to implement measures to reduce the overall impact of the top four products, including adding additional products through new and existing distribution agreements, manufacturing process improvements and cost reductions. 16 Operating Expenses Research and Development In fiscal year 2000, research and development expenses of $7,634,000 increased $1,629,000, or 27%, from the prior year. The higher expenditures, primarily attributable to increased bio-study activity, personnel and material costs, were partially offset by lower payments to purchase rights to pharmaceutical processes and for formulation development work performed for PRI by unaffiliated companies. The Company's domestic research and development program is integrated with IPR, its research operation in Israel. Research and development expenses at IPR in the most recent year were $1,299,000, net of Generics funding, compared to expenses of $1,075,000 for last year. The Company, IPR and Generics have an agreement pursuant to which Generics shares one-half of the costs of IPR's operating budget up to $1,000,000 in exchange for the exclusive distribution rights outside of the United States to the products developed by IPR after the date of the agreement (see "Notes to Financial Statements-Development Agreement"). Research and development expenses of $6,005,000 in fiscal year 1999 increased $230,000 from similar expenses in fiscal year 1998. Increased payments in 1999 to purchase rights to pharmaceutical chemical processes and for formulation development work performed for PRI by unaffiliated companies and increased costs by the domestic operation were partially offset by the funding of certain research and development expenses by Generics and Genpharm. In fiscal year 1999, Genpharm reimbursed the Company $587,000 for work performed by PRI related to products covered by the Genpharm Distribution Agreement. Research and development expenses in fiscal year 1999 at IPR were $1,075,000, net of Generics funding, compared to expenses of $1,763,000 in fiscal year 1998. Costs for research and development in the transition period of $1,125,000 increased $217,000 from the three-month period ended December 27, 1997. The increased costs were primarily due to bio-study activity by the domestic operation during the transition period. Transition period research and development expenses at IPR were $374,000, net of funding from Generics, compared to $442,000 in the corresponding period of the prior year. The Company currently has four ANDAs for potential products, two of which have been tentatively approved, pending with and awaiting approval from, the FDA as a result of its internal product development program. The Company has in process or expects to commence biostudies for at least seven additional products in fiscal year 2001. None of these products are included in any of the Company's distribution agreements. Under the Genpharm Distribution Agreement, Genpharm pays the research and development costs associated with the products covered by the Genpharm Distribution Agreement. Currently, there are 11 ANDAs for potential products, one of which has been tentatively approved, that are covered by the Genpharm Distribution Agreement pending with and awaiting approval from, the FDA. To date, the Company is marketing 14 products under the Genpharm Distribution Agreement (see "Notes to Financial Statements-Distribution and Supply Agreements-Genpharm, Inc."). Selling, General and Administrative Selling, general and administrative costs in fiscal year 2000 of $15,575,000 (18% of net sales) increased $2,788,000, or 22%, from last year's cost of $12,787,000 (16% of net sales). The increase was primarily attributable to higher legal costs, primarily for a patent infringement action by BMS following the Company's ANDA filing for megestrol acetate oral suspension and, to a lesser extent, for part of the cost of the litigation related to two products covered under the Company's distribution agreements. In addition, the most recent year included higher personnel and accounts receivable collection costs. On December 14, 2000, the U.S. District Court for the Southern District of New York dismissed the patent infringement complaint brought by BMS regarding Par's megestrol acetate oral suspension formulation. The Court granted summary judgment in favor of Par for reasons explained in an Opinion filed under seal. A Notice of Appeal was filed by BMS on March 6, 2001 (see "Notes to Financial Statements-Commitments, Contingencies and Other Matters-Legal Proceedings"). 17 Selling, general and administrative costs of $12,787,000 (16% of net sales) in fiscal year 1999 increased $697,000 from expenses in fiscal year 1998. The 1999 costs reflect increased advertising and marketing, and strengthening the sales force in anticipation of product introductions and increasing market share of the existing product line, higher legal expenses, and to a lesser extent, additional shipping costs associated with the increased sales level. The transition period's selling, general and administrative costs of $3,611,000 (22% of net sales) increased $1,023,000 from $2,588,000 (21% of net sales) in the corresponding period in the prior year. The higher costs were primarily attributable to strengthening the sales force and expanding marketing efforts, which began in the latter half of fiscal year 1998, and to a lesser extent, higher professional fees. Asset Impairment/Restructuring Charge The Company implemented measures during the transition period, which continued in fiscal year 1999, to reduce costs and increase operating efficiencies. The Company discontinued certain unprofitable products from its product line, terminated approximately 50 employees, primarily in manufacturing and various manufacturing support functions and reduced certain related expenses. These measures resulted in a charge of $1,906,000 in the transition period, which included approximately $1,200,000 for write-downs related to the impairment of assets affected by the discontinued products, and a provision of $706,000 for severance payments and other employee termination benefits. The Company recorded a charge of $1,212,000 in fiscal year 1998 for asset impairment of its Congers Facility as a result of outsourcing the manufacturing of the products from such facility. The charge was based on the difference between the appraised value of the property less its net book value at September 30, 1998. In March 1999, the Company entered into an agreement with Halsey to lease, with an option to purchase, the Congers Facility and related machinery and equipment (see "Notes to Financial Statements-Lease Agreement" and "-Commitments, Contingencies and Other Matters-Restructuring and Cost Reductions"). Other Income Other income of $506,000 in fiscal year 2000 decreased $400,000 from fiscal year 1999, primarily due to lower payments from strategic partners to reimburse the Company for research costs incurred in prior periods in return for a share of the gross margin of certain products awaiting FDA approval. Other income in fiscal year 1999 of $906,000 decreased $5,355,000 from fiscal year 1998. Other income in 1999 consisted primarily of payments from Genpharm to reimburse the Company for research costs incurred in prior periods in return for a share of gross margin from three products currently awaiting approval from the FDA. The decrease from the prior year was primarily attributable to income from the sale and release of product rights to Elan in fiscal year 1998 (see "Notes to Financial Statements-Distribution and Supply Agreements-Elan Corporation"). Income Taxes Management has determined, based on the Company's recent performance and the uncertainty of the generic drug business in which it operates, that future operating income might not be sufficient to recognize fully the net operating loss carryforwards of the Company. Accordingly, the Company did not recognize a benefit for its operating losses in fiscal years 2000, 1999, 1998 and the transition period (see "Notes to Financial Statements Income Taxes"). FINANCIAL CONDITION Liquidity and Capital Resources The Company's cash and cash equivalents increased to $222,000 at December 31, 2000 from $176,000 at December 31, 1999. In fiscal year 2000, increases in accounts receivable, research and development, legal expenses and capital investments were funded by borrowings of $5,775,000, primarily from the Company's credit line with GECC. Capital investments include expenditures for product development and production equipment and system improvements. Working capital at December 31, 2000 of $18,512,000, which includes cash and cash equivalents, decreased $2,709,000 from $21,221,000 at December 31, 1999. The working capital ratio was 1.65x at December 31, 2000 compared to 2.03x at December 31, 1999. The Company, from time to time, enters into agreements with third parties with respect to the development of new products and technologies. To date, the Company has entered into agreements and advanced funds to several non-affiliated companies for products in various stages of development. The payments are expensed as incurred and included in research and development costs. At this 18 time, research and development expenses, including payments to non-affiliated companies, are expected to total approximately $8,500,000 in fiscal year 2001. In June 2000, the Company agreed to sell its remaining distribution rights back to Elan for a non-prescription transdermal nicotine patch and to terminate Par's right to royalty payments under the September 1998 Termination Agreement. Pursuant to this agreement, the Company will receive a minimum payment of $500,000 on or before July 31, 2001 and could receive an additional $1,000,000 to $1,500,000, subject to certain conditions as set forth in the agreement, including Elan's introduction of the product in the United States and Israel on or before certain dates. In July 2000, Elan paid the Company $150,000 under the agreement. Pursuant to the Termination Agreement, the Company's exclusive distribution rights in the United States for a prescription transdermal nicotine patch ended on May 31, 1999 and the Company received payments of $2,000,000 and $1,000,000, respectively in October 1998 and the third quarter of 1999. The Company also received payments of approximately $5,700,000 in May 1998, which included approximately $2,100,000 as a prepayment of a promissory note, in return for relinquishing certain product distribution rights to Elan under a prior distribution agreement. The proceeds from these payments were used to reduce outstanding revolving credit line balances at that time (see "Notes to Financial Statements-Distribution and Supply Agreements-Elan Corporation"). In March 1999, the Company entered into an agreement to lease, with an option to purchase, its Congers Facility to Halsey. Halsey paid the Company a purchase option of $100,000 in March 1999 and is obligated to pay rent of $500,000 annually during the initial three-year term of the lease. The rent is expected to continue to cover the Company's fixed costs of the facility in subsequent periods. Under the purchase option, Halsey may purchase the facility and substantially all the machinery and equipment at any time during the lease for a specified amount (see "Notes to Financial Statements-Leasing Agreement"). In January 1999, the Company entered into the Genpharm Profit Sharing Agreement pursuant to which the Company will receive a portion of the profits resulting from a separate agreement between Genpharm and an unaffiliated United States based pharmaceutical company in exchange for a non-refundable fee of $2,500,000 paid by the Company. The fee will be amortized by the Company over a projected revenue stream from the products when launched by the third party (see "Notes to Financial Statements-Profit Sharing Agreement"). The Company, IPR and Generics entered into the Development Agreement, dated August 11, 1998, pursuant to which Generics agreed to fund one-half of the costs of IPR's operating budget in exchange for the exclusive distribution rights outside of the United States to the products developed by IPR after the date of the agreement. In addition, Generics agreed to pay IPR a perpetual royalty for all sales of the products by Generics or its affiliates outside the United States. To date, no such products have been brought to market by Generics and no royalty has been paid to IPR. Pursuant to the Development Agreement, Generics paid the Company an initial fee of $600,000 in August 1998, funded approximately $200,000 for IPR for fiscal year 1998, $800,000 for fiscal year 1999 and $800,000 for fiscal year 2000, fulfilling their requirements through December 31, 2000. Generics is not required to fund more than $1,000,000 for any one-calendar year (see "Notes to Financial Statements-Research and Development Agreement"). On June 30 1998, Merck KGaA, through its subsidiary Lipha, paid the Company $20,800,000, or $2.00 per share, for 10,400,000 newly issued shares of PRI's Common Stock. The Company used approximately $3,600,000 of the net proceeds from the stock sale to repay outstanding advances made to it under its existing line of credit and the remainder was used for working capital (see "Notes to Financial Statements Strategic Alliance"). The Company expects to fund its operations, including research and development activities and its obligations under the existing distribution and development arrangements discussed herein, out of its working capital and, if necessary, with available borrowings against its line of credit, if and to the extent then available. If, however, the Company continues to experience operating losses, its liquidity and, accordingly, its ability to fund research and development or ventures relating to the distribution of new products would be materially and adversely affected (see "-Financing"). 19 Financing At December 31, 2000, the Company's total outstanding short-term and long-term debt, including the current portion, amounted to $10,021,000 and $1,212,000, respectively. The short-term debt consists of the outstanding amount due under the Company's line of credit with GECC and the long-term debt consists of an outstanding mortgage loan with a bank and capital leases for computer equipment (see "Notes to Financial Statements-Long-Term Debt"). Par entered into a Loan and Security Agreement (the "Loan Agreement") with GECC in December 1996, which as amended, provides Par with a five-year revolving line of credit. Pursuant to the Loan Agreement, Par is permitted to borrow up to the lesser of (i) the borrowing base established under the Loan Agreement or (ii) $20,000,000. The borrowing base is limited to 85% of eligible account receivable plus 50% of eligible inventory of Par, each as determined from time to time by GECC. The interest rate charge on the line of credit is based upon a per annum rate of 2.25% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par and PRI other than real property and is guaranteed by PRI. In connection with such facility, Par, PRI and their affiliates have established a cash management system pursuant to which all cash and cash equivalents received by any of such entities are deposited into a lockbox account over which GECC has sole operating control and which are applied on a daily basis to reduce amounts outstanding under the line of credit. The revolving credit facility is subject to covenants based on various financial benchmarks. In March 2001, GECC waived certain events of default related to the earnings before interest and taxes financial covenant and amended the financial covenants of Par. As of December 31, 2000, the borrowing base was approximately $18,600,000 and $10,021,000 was outstanding under the line of credit. At December 31, 2000, the Company's outstanding balance on a mortgage loan with a bank was $893,000. The mortgage loan, in the original principal amount of $1,340,000, was borrowed in May 1994. 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"). In addition, the Company had amounts outstanding under capital leases of $319,000 (see "Notes to Financial Statements Long-Term Debt"). ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. - ------- ---------------------------------------------------------- Not applicable. ITEM 8. Financial Statements and Supplementary Data. - ------- -------------------------------------------- See Index to Financial Statements. ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. - ------ --------------------------------------------------------------- Not applicable. 20 PART III ITEM 10. Directors and Executive Officers of the Registrant. - ------- -------------------------------------------------- Directors The Company's Certificate of Incorporation provides that its Board of Directors (the "Board") is divided into three classes, with the term of office of one class expiring each year. The Class I directors of the Company have terms which expired in 2000, and Class II and Class III directors of the Company have terms which expire in 2001 and 2002, respectively. The following table sets forth certain information with respect to each of the current Class I, II and III directors (taking into account the resignation and replacement of the three directors on March 28, 2001) and the year each was first elected as a director: Class I Name Age (as Year of First of 3/01) Election Thomas J. Drago(1)............................... 43 2001 Since 1990, a partner of Coudert Brothers, a law firm. Matthew W. Emmens(1)............................. 49 2001 Since June 1999, President and Chief Executive Officer of EMD Pharmaceuticals, Inc., a pharmaceutical company and an affiliate of Merck KGaA. From January 1997 to June 1999, President and Chief Executive Officer of Astra Merck Pharmaceuticals, Inc., a pharmaceutical company. From January 1992 to January 1997, Vice President of Sales and Marketing of Astra Merck Pharmaceuticals, Inc. Class II Kenneth I. Sawyer(1)............................. 55 1989 Since October 1990, Chairman of the Board of the Company. Since October 1989, Chief Executive Officer of the Company. From October 1989 until January 2001, President of the Company. Mark Auerbach(1)(2).............................. 62 1990 Since June 1993, Senior Vice President and Chief Financial Officer of Central Lewmar L.P., a distributor of fine papers. From December 1995 to January 1999, Chief Financial Officer of Oakhurst Company, Inc., and Steel City Products, Inc., each a distributor of automotive products, and Chief Executive Officer of Oakhurst Company, Inc. from December 1995 to May 1997. Also a director of Oakhurst Company, Inc. 21 John D. Abernathy(1)(2)........................... 63 2001 Since January 1995, Chief Operating Officer of Patton Boggs LLP, a law firm. Director of Oakhurst Company, Inc., a distributor of automotive products, Steel City Products, Inc., a distributor of automotive products and Barringer Technologies, Inc., a manufacturer of analytical instruments for chemical sensing. Class III Francis Michael J. Urwin(1)...................... 48 1998 Since April 1999, Chief Executive Officer, and from 1991 until April 1999, Group Financial Director (Chief Financial Officer), of Merck Generics Group BV; director of Merck Generics Group BV, Merck Generics Limited, Generics (UK) Ltd., Generics Pharmaceuticals Limited, Genpharm Limited, Biokinetix Limited, MacDermot Laboratories Limited, Merck Hoei Ltd., MDCI Ltd. and Merck Generics Holding GmbH. Klaus H. Jander(1)(2)............................ 60 1998 Since 1990, a partner of Clifford Chance Rogers & Wells LLP, a law firm. Since 1997, a member of the Executive Committee of Clifford Chance Rogers & Wells LLP. (1) A member of the Compensation and Stock Option Committee of the Board. (2) A member of the Audit Committee of the Board. Executive Officers The executive officers of the Company consist of Mr. Sawyer as Chief Executive Officer and Chairman of the Board and Dennis J. O'Connor as Vice President, Chief Financial Officer and Secretary. The executive officers of Par consist of Mr. Sawyer as Chief Executive Officer and Chairman, Mr. O'Connor as Vice President, Chief Financial Officer and Secretary and Scott Tarriff as Executive Vice President of Business, Sales and Marketing. Mr. O'Connor, age 49, 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. Since January 1998, Mr. Tarriff has served as Executive Vice President of Business, Sales and Marketing of Par. From June 1989 to January 1998, Mr. Tarriff, age 41, was an employee of Bristol-Myers Squibb Company, a drug manufacturer, serving as Senior Director of Marketing, Business Development and Strategic Planning from 1995 to 1997 and Director of Marketing from 1992 to 1995. Section 16(a) Beneficial Ownership Reporting Compliance As a public company, the Company's directors, executive officer and more than 10% beneficial owners of the Company's Common Stock are subject to reporting requirements under Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and are required to file certain reports with the Securities and Exchange Commission (the "Commission") in respect of their ownership of Company securities. The Company believes that during fiscal year 2000, all such required reports were filed on a timely basis. 22 ITEM 11. Executive Compensation. The following table sets forth compensation earned by or paid, during fiscal years 2000, 1999 and 1998, to the Chief Executive Officer of the Company and the two other most highly compensated executive officers of the Company and/or Par who earned over $100,000 in salary and bonus at the end of fiscal year 2000 (the "Named Executives"). The Company awarded or paid such compensation to all such persons for services rendered in all capacities during the applicable fiscal years. The amounts set forth in the table do not include compensation earned by or paid to the Named Executives during the transition period.
Summary Compensation Table Annual Compensation Long-Term Compensation ----------------------------- ----------------------------- Restricted Securities Name and Fiscal Stock Underlying All Other Principal Position Year Salary ($) Bonus($) Awards($)(1) Options(#) Compensation($) - ------------------ ---- ---------- -------- ------------ ---------- --------------- Kenneth I. Sawyer, 2000 $355,175 - - - $176,482(2) Chief Executive Officer 1999 $350,000 - - - $132,464(2) and Chairman 1998 $350,000 - - 500,000 $2,901(2) Dennis J. O'Connor 2000 $150,700 $5,000 - 30,000(5) $3,506(3) Vice President 1999 $143,150 - - - $2,199(3) Chief Financial 1998 $142,500 - - 37,500 $2,191(3) Officer and Secretary Scott Tarriff 2000 $185,000 $42,000 - - $5,318(4) Executive Vice 1999 $185,000 $50,000 - - $3,574(4) President of Business, 1998 $124,519 - - 200,000 $46(4) Sales and Marketing (Par)
(1) The Named Executives did not hold any shares of restricted stock at the end of 2000. (2) Includes insurance premiums paid by the Company for term life insurance for the benefit of Mr. Sawyer of $74 for each of the fiscal years 2000, 1999 and 1998 and $5,250 for contributions to the Company's 401k Plan for fiscal year 2000. In addition, includes $129,477 for each of the fiscal years 2000 and 1999 for the forgiveness of a loan from the Company and $40,000 paid to Mr. Sawyer for a portion of the $83,509 owed to him pursuant to his employment agreement for annual cost of living increases since 1996. Also includes $1,681, $2,913 and $2,827 in fiscal years 2000, 1999 and 1998, respectively, for the maximum potential estimated dollar value of the Company's portion of insurance premium payments from a split-dollar life insurance policy as if premiums were advanced to Mr. Sawyer without interest until the earliest time the premiums may be refunded by Mr. Sawyer to the Company. (3) Includes $56, $53 and $53 for insurance premiums paid by the Company for term life insurance for the benefit of Mr. O'Connor for fiscal years 2000, 1999 and 1998, respectively, and $3,450, $2,146 and $2,138 for contributions to the Company's 401k Plan for fiscal years 2000, 1999 and 1998, respectively. (4) Includes $68, $68 and $46 for insurance premiums paid by the Company for term life insurance for the benefit of Mr. Tarriff in fiscal years 2000, 1999 and 1998, respectively, and $5,250 and $3,506 for contributions to the Company's 401k Plan for fiscal years 2000 and 1999. (5) Represents options granted under the Company's 2000 Performance Equity Plan (the "2000 Plan"). In the transition period, the compensation earned by or paid to Messrs. Sawyer, O'Connor and Tarriff amounted to $94,230, $37,692 and $49,807, respectively. Other compensation for Mr. Sawyer in the transition period included $26,500 for the forgiveness of a loan from the Company. 23 The following table sets forth stock options granted to the Named Executives during fiscal year 2000.
Stock Option Grants in Last Fiscal Year Potential Realizable Value at Assumed Annual Rates of Stock Individual Grants Price Appreciation for Option Term ------------------- ----------------------------------- % of Total Shares Options Underlying Granted to Options Employees in Exercise Expiration Name Granted(#) Fiscal Year(1) Price ($) Date 0%($) 5%($) 10%($) - ---- ---------- ------------ --------- ---------- ------ ------ ------ Dennis J. O'Connor (2) 15,000 2.73% $5.500 4/16/05 - $22,793 $50,367 Dennis J. O'Connor (3) 15,000 2.73% $5.125 7/17/10 - $48,346 $122,519
(1) Represents the percentage of total options granted to employees of the Company during fiscal year 2000. (2) Represents options granted pursuant to the 2000 Plan on April 17, 2000, one-third of which became exercisable October 17, 2000, one-third of which become exercisable on October 17, 2001 and one-third of which become exercisable on October 17, 2002. (3) Represents options granted pursuant to the 2000 Plan on July 18, 2000, one-fifth of which becomes exercisable each year on the anniversary date of the grant. The following table sets forth certain information with respect to the number of unexercised stock options and the value of in-the-money options held by the Named Executives as of December 31, 2000. There were no stock options exercised by the Named Executives during fiscal year 2000.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at FY-End (#) at FY-End ($)(1) Shares Acquired on Value Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable - ---- ------------ ----------- ----------- ------------- ----------- ------------- Kenneth I. Sawyer - - - 500,000 - $2,343,750 Scott Tarriff - - - 200,000 - 1,087,500 Dennis J. O'Connor - - 47,500 43,334 $191,823 131,253
(1)Based upon the closing price of the Common Stock on December 31, 2000 of $6.94. Compensation of Directors For service on the Board, Directors who are not employees of the Company or any of its subsidiaries and who are deemed to be independent under the Audit Committee Rules of the New York Stock Exchange 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 received an additional annual retainer of $5,000 per committee. New non-employee Directors are granted options to purchase 5,000 shares Common Stock on the date initially elected to the Board and on each following day on which the shareholders elect directors pursuant to the Company's 1997 Directors' Stock Option Plan (the "Directors' Plan"). Non-employee Directors are entitled to only one automatic option grant each year but are also entitled to an annual grant of an option to purchase an additional 6,000 shares of Common Stock if, for such year, they own at least 2,500 shares of issued Common Stock for each series of additional 6,000 options granted under the Directors' Plan. These additional options are subject to forfeiture if, in certain circumstances, the non-employee Director sells Common Stock of the Company. Directors who are employees of the Company received no additional remuneration for serving as directors or as members of committees of the Board. All directors are entitled to reimbursement for out-of-pocket expenses incurred in connection with their attendance at Board and committee meetings. Messrs. A. Tabatznik and N. Tabatznik, former Directors of the Company, and Messrs. Urwin and Jander waived their rights to receive options to purchase Common Stock under the Directors' Plan for fiscal years 2000, 1999 and 1998. In addition, Messrs. Ollendorff, A. Tabatznik, and N. Tabatznik, former Directors of the Company, and Mr. Urwin waived their receipt 24 of cash compensation for service on the Board for the same periods. Messrs. Abernathy, Drago and Emmens were not Directors in fiscal year 2000 and consequently were not entitled to receive any compensation in fiscal year 2000. Employment Agreements and Termination Arrangements The Company and Mr. Sawyer entered into an amended and restated employment agreement, dated as of January 12, 2001, which provides for his employment until the earlier to occur of a change in control as (as such term is defined in the Agreement), the election of a new chief executive officer, September 30, 2001, or termination of his employment. After September 30, 2001, Mr. Sawyer's role with the Company will be solely as its Chairman of the Board and he will be permitted to engage in other employment activities so long as such activities do not directly compete with the Company's business. As long as Mr. Sawyer is employed under the agreement in any capacity, he will be paid a base annual salary equal to $395,163. Mr. Sawyer's agreement provides for certain payments upon termination of his employment. Upon termination of his employment for Cause (as such term is defined in the Agreement) prior to September 30, 2001, the Company will pay Mr. Sawyer his base salary through the termination date. If Mr. Sawyer's employment is terminated for Cause after September 30, 2001, the Company will pay him a single lump sum equal to his base salary through the termination date and $1,000,000. Upon termination of Mr. Sawyer's employment without Cause by the Company or for the Company's material breach, or by reason of his death or disability, Mr. Sawyer, or his estate, as the case may be, will be entitled to receive a single lump sum equal to his base salary through the termination date and $1,000,000. In addition, the Company will continue to pay for one year from the termination date all life insurance, medical, health and accident, and disability plans and programs for his benefit. If Mr. Sawyer terminates his employment with the Company prior to September 30, 2001 (other than for the Company's material breach), the Company will pay him his base salary and benefits through the termination date. If Mr. Sawyer terminates his employment after September 30, 2001 (for any reason), the Company will pay him a single lump sum equal to his base salary and benefits through the termination date and $1,000,000. In addition, the Company has agreed to forgive, in equal monthly amounts until September 30, 2001, the final one-third principal amount (plus accrued interest on the forgiven portion) of a promissory note pertaining to a loan made by the Company to Mr. Sawyer in 1998. If, however, his employment is terminated prior to September 30, 2001 for Cause, the principal amount (and accrued interest) outstanding as of the termination date will not be forgiven. At a meeting of the Board in March 2001, a committee of directors of the Board consisting of Messrs. Jander and Auerbach was formed to address what Mr. Sawyer's continuing role will be with the Company, including his responsibilities and time commitment, subsequent to September 30, 2001 in his capacity as Chairman of the Board. The Company 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 twelve months of his salary at the date of termination. The Company entered into an employment agreement with Mr. Tarriff, dated February 20, 1998. In the event of termination of Mr. Tarriff's employment after one year of employment by Mr. Tarriff for good reason or by the Company without cause (as such terms are defined therein), Mr. Tarriff is entitled to receive a severance payment equal to one year of his then current salary less any amount of compensation paid by a new employer for the balance of the year from the termination date. In connection with Mr. Tarriff's employment by the Company, he was granted options to purchase 200,000 shares of Common Stock at an exercise price of $1.50 per share. 25 Under the stock option agreements with Messrs. Sawyer, O'Connor and Tarriff, any unexercised portion of the options becomes immediately exercisable in the event of a change of control (as such term is defined in their agreements). However, each of such persons has agreed that the consummation of the strategic alliance with Merck KGaA did not constitute a change in control under his stock option agreement. Pension Plan The Company maintains a defined benefit plan (the "Pension Plan") intended to qualify under Section 401(a) of the Code. Effective October 1, 1989, the Company ceased benefit accruals under the Pension Plan with respect to service after such date. The Company intends that distributions will be made, in accordance with the terms of the Pension Plan, to participants as of such date and/or their beneficiaries. The Company will continue to make contributions to the Pension Plan to fund its past service obligations. Generally, all employees of the Company or a participating subsidiary who completed at least one year of continuous service and attained 21 years of age were eligible to participate in the Pension Plan. For benefit and vesting purposes, the Pension Plan's "Normal Retirement Date" is the date on which a participant attains age 65 or, if later, the date of completion of 10 years of service. Service is measured from the date of employment. The retirement income formula is 45% of the highest consecutive five-year average basic earnings during the last 10 years of employment, less 83 1/3% of the participant's Social Security benefit, reduced proportionately for years of service less than 10 at retirement. The normal form of benefit is life annuity, or for married persons, a joint survivor annuity. None of the Named Executives had any years of credited service under the Pension Plan. The Company has a defined contribution, social security integrated Retirement Plan (the "Retirement Plan") providing retirement benefits to eligible employees as defined in the Retirement Plan. The Company has suspended employer contributions to the Retirement Plan effective December 30, 1996. Consequently, participants in the Retirement Plan are no longer entitled to any employer contributions under such plan for 1996 or subsequent years. The Company also maintains a Retirement Savings Plan (the "Retirement Savings Plan") whereby eligible employees are permitted to contribute from 1% to 15% of their compensation to the Retirement Savings Plan. The Company contributes an amount equal to 50% of the first 6% of compensation contributed by the employee. Participants of the Retirement Savings Plan become vested with respect to 20% of the Company's contributions for each full year of employment with the Company and thus become fully vested after five full years. In fiscal year 1998, the Company merged the Retirement Plan into the Retirement Savings Plan. Additional Information With Respect To Compensation Committee Interlocks and Insider Participation The Compensation and Stock Option Committee (the "Compensation Committee") of the Board consists of the entire Board of Directors, namely, Messrs. Drago, Emmens, Sawyer, Auerbach, Abernathy, Urwin and Jander. Thomas J. Drago, a director of the Company, is a partner of Coudert Brothers, a law firm that provides legal services to Merck KGaA, which beneficially owns 41.8% of the Company's Common Stock. Mr. Francis Michael J. Urwin, a director of the Company, is Chief Executive Officer and director of Merck Generics Group BV, a subsidiary of Merck KGaA. Matthew W. Emmens, a director of the Company, is President and Chief Executive Officer of EMD Pharmaceuticals, Inc., an affiliate of Merck KGaA. The Company, Genpharm and its affiliate are presently parties to distribution agreements entered into in 1992, 1993 and 1998. Under such distribution agreements, payments by the Company to Genpharm and an affiliate amounting to approximately $9,200,000, and $4,400,000 in fiscal years 2000 and 1999, respectively, accounted for more than five percent (5%) of the Company's consolidated revenues for those respective years. Further, Generics and the Company are parties to a development agreement pursuant to which each of Generics and the Company are funding one-half of the costs of the operating budget of IPR in exchange for the exclusive rights to manufacture and distribute products developed by IPR worldwide (except for the United States). Both Generics and Genpharm are subsidiaries of Merck KGaA. Mr. Kenneth I. Sawyer, the Chairman and Chief Executive Officer of the Company, serves as a director of Authorgenics, Inc., a developer of software ("Authorgenics"), and until September 1998, Mr. Stephen A. Ollendorff, a former director of the Company, served as a director and Executive Vice President of Authorgenics. Mr. Ollendorff was not granted any cash compensation for his service as director or Executive Vice President of Authorgenics. At December 31, 2000, the Company owned approximately 1% of Authorgenics and has the exclusive rights to market to the pharmaceutical industry certain software currently in development. At various times during fiscal years 1996 and 1997, the Company made unsecured loans to Mr. Sawyer. Such loans are evidenced by a single promissory note bearing interest at the rate of 8.25% per annum. Interest and principal are due on the earlier of September 30, 2001, or the termination of Mr. Sawyer's employment with the Company. As of December 31, 2000, the outstanding principal balance of the note, plus accrued interest, was approximately $103,000. As part of Mr. Sawyer's compensation, the Company agreed to forgive the note over a three-year period, provided that Mr. Sawyer remains employed by the Company (see "Executive Compensation Employment Agreements and Termination Arrangements"). 26 Stephen A. Ollendorff, a former director of the Company and a director for the entire fiscal year 2000, is Of Counsel to the law firm of Kirkpatrick & Lockhart LLP, which currently provides legal services to the Company, and provided legal services to the Company in fiscal years 2000 and 1999. During the Company's 1998 fiscal year, Mr. Ollendorff was Of Counsel to the law firm of Hertzog, Calamari & Gleason, which received fees and expenses in fiscal year 1998 for various legal services rendered to the Company. In addition, Mr. Ollendorff is a consultant to the Company and was paid approximately $79,000 and $77,000 in fiscal years 2000 and 1999, respectively, pursuant to a renewable one-year consulting agreement. In March 2001, the Board requested that Mr. Ollendorff voluntarily resign from the Board at the request of the Company in order to assist the Company and the Board in satisfying New York Stock Exchange and Securities and Exchange Commission director independence requirements, while at the same time retaining the current number of directors on the Board. In connection with his resignation from the Board, Mr. Ollendorff's consulting agreement with the Company has been renewed for an additional one-year period and, as long as the consulting agreement is in effect, he will continue to receive stock options as if he were still a member of the Board. In addition, the Board waived all potential penalty provisions, including forfeiture provisions, under the Directors' Plan with regard to his currently held stock options as a result of his resignation from the Board. Compensation and Stock Option Committee Report The Compensation Committee approves the policies and programs pursuant to which compensation is paid or awarded to the Company's executive officers and key employees. In fiscal year 2000, the Board, acting in its role as the Compensation Committee, at one of its Board meetings acted on matters requiring Compensation Committee action. The Board also acted by unanimous written consent on one additional matter requiring Compensation Committee action. In reviewing overall compensation for fiscal year 2000, the Compensation Committee focused on the Company's objectives to attract executive officers of high caliber from larger, well-established pharmaceutical manufacturers, to retain the Company's executive officers, to encourage the highest level of performance from such executive officers and to align the financial interests of the Company's management with that of its shareholders by offering awards that can result in the ownership of Common Stock. The Company did not utilize specific formulae or guidelines in reviewing and approving executive compensation. Elements of Executive Officer Compensation Program. The key elements of the Company's executive officer compensation program consist of base salary, annual bonus, stock options and other incentive awards through participation in the Company's 1990 Stock Incentive Plan and 2000 Plan. In awarding or approving compensation to executive officers in fiscal year 2000, the Compensation Committee considered the present and potential contribution of the executive officer to the Company and the ability of the Company to attract and retain qualified executive officers in light of the competitive environment of the Company's industry and the Company's financial condition. Base Salary and Annual Bonus. Base salary and annual bonus for executive officers are determined by reference to Company-wide and individual performances for the previous fiscal year. The factors considered by the Compensation Committee included both strategic and operational factors, such as efforts in responding to regulatory challenges, in exploring strategic alternatives for the Company, in research and development, in reviewing and implementing updated systems and operational procedures, as well as the Company's financial performance. In addition to Company-wide measures of performance, the Compensation Committee considers those performance factors particular to each executive officer, including the performance of the area for which such officer had management responsibility and individual accomplishments. Base salaries for executive officers were determined primarily by reference to industry norms, the principal job duties and responsibilities undertaken by such persons, individual performance and other relevant criteria. Base salary comparisons for most executive officers were made to a group of pharmaceutical manufacturers in the United States. Such group was selected by the Compensation Committee based upon several factors, including, but not limited to, the duties and responsibilities of the executive officer used in the comparison, size and complexity of operations, reputation and number of employees of other companies. With respect to Mr. Sawyer, the Company's Chief Executive Officer, a comparison was made by an independent consulting firm, prior to the signing of his employment agreement in 1992, to generic pharmaceutical companies and turnaround situations selected by the consulting firm. In keeping with its goal of recruiting executive officers from larger, well-established pharmaceutical manufacturers, the Compensation Committee considered the performance of the companies used in the comparisons, as measured by their quality and regulatory profile, as well as competitive necessity in determining base salaries. The Compensation Committee considered it appropriate and in the best interest of the Company and its shareholders to set the levels 27 of base salary for the Company's Chief Executive Officer and other executive officers at the median of comparable companies in order to attract and retain high caliber managers for the Company so as to position the Company for future growth and improved performance. The Compensation Committee, in determining the annual bonuses to be paid to the Company's executive officers for fiscal year 2000, considered the individual's contribution to the Company's performance as well as the Company's financial performance and assessments of each executive officer's participation and contribution to the other factors described above, as opposed to determination by reference to a formal, goal-based plan. The non-financial measures varied among executive officers depending upon the operations under their management and direction. Stock Options and Other Awards. The Company's 2000 Plan, as amended by the Board to be a non-qualified, broad-based option plan not subject to shareholder approval, provides for stock option and other equity-based awards. Under such Plan, the size of each award and the persons to whom such awards are granted is determined by the Compensation Committee based upon the nature of services rendered by the executive officer, the present and potential contribution of the grantee to the Company and the overall performance of the Company. The Compensation Committee believes that grants of stock options will enable the Company to attract and retain the best available talent and to encourage the highest level of performance in order to continue to serve the best interests of the Company and its shareholders. Stock options and other equity-based awards provide executive officers with the opportunity to acquire equity interests in the Company and to participate in the creation of shareholder value and benefit correspondingly with increases in the price of the Common Stock. Compensation Committee's Actions for fiscal year 2000. In determining the amount and form of executive officer compensation to be paid or awarded for fiscal year 2000, the Compensation Committee considered the criteria discussed above. Based upon the Compensation Committee's review of the Company's performance following the conclusion of fiscal year 2000, the Company granted a cash bonus to Messrs. Tarriff and O'Connor, two of the Named Executives, in the amounts of $42,000 and $5,000, respectively. The Compensation Committee did not award cash bonuses or stock options to any other Named Executive in fiscal year 2000. Chief Executive Officer Compensation. The Compensation Committee approved an employment agreement in October 1992 for Mr. Sawyer, which agreement was amended in April 1998 and further amended on January 12, 2001. In approving such employment agreement, the Compensation Committee authorized a base annual salary for Mr. Sawyer of $395,163. The employment agreement provides for an annual increase based on the Consumer Price Index during Mr. Sawyer's employment. Compensation and Stock Option Committee The Compensation and Stock Option Committee members include Kenneth I. Sawyer, Mark Auerbach, Klaus H. Jander, Thomas J. Drago, Matthew W. Emmens, John D. Abernathy and Francis Michael J. Urwin. Stephen A. Ollendorff, Anthony S. Tabatznik and J. Neil Tabatznik, former members of the Board, were members of the Compensation and Stock Option Committee during fiscal year 2000. Performance Graph The graph below compares the cumulative total return of the Company's Common Stock with the cumulative total return of the NYSE Composite Index and the S&P(R) Health Care Drugs Index--Major Pharmaceuticals for the fiscal periods from September 30, 1995 to December 31, 2000, including the transition period ended December 31, 1998. The graph assumes $100 was invested on September 30, 1995 in the Company's Common Stock and $100 was invested on such date in each of the Indexes. The comparison assumes that all dividends were reinvested. 28 INSERT GRAPH
Company / Index Sep-95 Sep-96 Sep-97 Sep-98 Dec-98 Dec-99 Dec-00 - ------------------ ------ ------ ------ ------ ------ ------ ------ PHARMACEUTICAL RES INC $100 $45 $22 $45 $50 $52 $73 NY STOCK EXCHANGE-COMPOSITE $100 $117 $159 $161 $190 $208 $210 HLTH CARE (DRUGS-MJR PH)-500 $100 $135 $205 $312 $356 $293 $404
ITEM 12. Security Ownership of Certain Beneficial Owners and Management. - ------- -------------------------------------------------------------- The following tables set forth, as of the close of business on March 26, 2001, the beneficial ownership of the Common Stock by (i) each person known (based solely on a review of Schedule 13D or Schedule 13G filed with the Commission pursuant to Section 13 of the Exchange Act) to the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) each Director of the Company, (iii) each Named Executive, as defined in the "Executive Compensation" section of this report, and (iv) all directors and executive officers of the Company as a group (based solely in respect of clauses (ii), (iii) and (iv) upon information furnished by such persons). Under the rules of the 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 equity 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. Security Ownership of Certain Beneficial Owners Shares of % Common Common Name of Beneficial Owner Stock Stock ------------------------ ----- ----- Merck KGaA(1)........................ 12,462,972 41.8 John P. Curran (1). Curran Partners, L.P. (2)........... 1,829,400 6.2 (1) The business address of Merck KGaA is Frankfurter Strasse 250, 64271, Darmstadt, Germany. Includes 249,700 shares of Common Stock, which may be acquired by Genpharm, a subsidiary of Merck KGaA, upon exercise of warrants exercisable on or before April 29, 2001. Warrants for 99,700 of such shares have an exercise price of $6.00 per share and warrants for 150,000 of such shares have an exercise price of $10.00 per share. Does not include an additional 1,171,040 shares Common Stock which may be acquired upon exercise of options granted to Merck KGaA and Genpharm. Such options are not exercisable on or before May 25, 2001. (2) The business address of John P. Curran and Curran Partners, L.P. is 237 Park Avenue, New York, NY 10017. Mr. Curran and Curran Partners, L.P. share voting and dispositive power of 1,653,500 shares of Common Stock, and Mr. Curran has sole voting and dispositive power of an additional 175,900 shares of Common Stock. Mr. Curran is the General Partner of Curran Partners, L.P. 29 Security Ownership of Management Shares of % Common Common Name of Beneficial Owner Stock Stock ------------------------ ----- ----- Kenneth I. Sawyer(1).......... 133,900 * Mark Auerbach (1)(2).......... 62,666 * Dennis J. O'Connor(2)......... 49,119 * Scott Tarriff................. 25,166 * Klaus H. Jander(1)............ 0 * Francis Michael J. Urwin(1)... 0 * John D. Abernathy(1).......... 0 * Thomas J. Drago(1)............ 0 * Matthew W. Emmens(1).......... 0 * All directors and executive officers (as of 3/26/01) as a group (nine persons)(2) 270,851 * - ------------------------ * Less than 1%. (1) A current Director of the Company. (2) Includes the following shares of Common Stock which may be acquired upon the exercise of options which are exercisable on or before May 25, 2001 under the Company's stock option plans: Mr. Auerbach - 54,666; Mr. O'Connor - 47,500; and all directors and executive officers as a group (nine persons) - 102,166. The business address of each Director and Named Executive of the Company, for the purposes hereof, is in care of Pharmaceutical Resources, Inc., One Ram Ridge Road, Spring Valley, New York 10977. ITEM 13. Certain Relationships and Related Transactions. Merck KGaA Transactions. On June 30, 1998, the Company completed a strategic alliance with Merck KGaA, Darmstadt, Germany, following approval by the shareholders of the Company at its Annual Meeting of Shareholders held in June 1998. The strategic alliance included the sale of 10,400,000 shares of Common Stock (the "Shares") to Lipha, a subsidiary of Merck KGaA, at $2.00 per Share, and the issuance to Merck KGaA and Genpharm, another subsidiary of Merck KGaA, of options (each, an "Option" and collectively, the "Options") to purchase up to an aggregate of 1,171,040 shares of Common Stock (the "Option Shares") at an exercise price of $2.00 per share in exchange for certain services. The sale of the Shares was made pursuant to the terms and conditions of the Stock Purchase Agreement, dated March 25, 1998, between the Company and Lipha (the "Stock Purchase Agreement"). The issuance of the Options was made pursuant to terms and conditions of separate Services Agreements entered into with each of Merck KGaA and Genpharm. The Company used a significant portion of the net cash proceeds from the sale of the Shares to repay certain advances made to it under its existing line of credit at that time. The agreement by the Company to sell the Shares and to grant and issue the Options was part of an overall transaction in which certain exclusive distribution rights and services are to be provided to the Company under the Genpharm Distribution Agreement and the Services Agreements, as described below. 30 Stock Purchase Agreement. The Stock Purchase Agreement contains certain significant terms, obligations and other agreements, as described below, including Lipha's right to designate a majority of the Board members, Lipha's right of first refusal in respect of certain equity offerings and Lipha's agreement not to engage in certain extraordinary transactions. Lipha had the right to designate a majority of the members of the Board as of the closing of the transactions set forth in the Stock Purchase Agreement. Pursuant to this right, Lipha designated Messrs. A. Tabatznik, N. Tabatznik, Jander and Urwin, each of whom was elected by the shareholders of the Company at the Company's annual meetings held in June 1998 or July 1999. Three members of the Board are comprised of Mr. Sawyer and two additional designees of the Board who were in place prior to the closing of the Stock Purchase Agreement (collectively, the "Company Designees"). Such Board had designated Messrs. Auerbach and Ollendorff, each of whom, together with Mr. Sawyer, were elected by the shareholders of the Company at the Company's annual meeting held in June 1998. In addition, Lipha has the right to designate (i) jointly with the Company Designees, two members of the Board to comprise the Audit Committee of the Board and (ii) the President and Chief Operating Officer of the Company. The effect of the foregoing agreement is to afford voting control to the designees of Lipha with respect to matters determinable solely by the Board. Lipha has a right of first refusal for a period ending on June 30, 2004 to purchase all, but not less than all, of any equity securities to be sold by the Company pursuant to any proposed non-registered offering or any registered offering solely for cash. If Lipha does not exercise its first refusal rights within 30 days of notice from the Company, the Company may sell such securities to any third party on substantially the same terms and conditions as first offered to Lipha. The holders of the Shares and the Option Shares do not have any preemptive rights. Lipha has agreed, for a period ending on June 30, 2001, not to cause or permit the Company to engage in any transactions or enter into any agreements or arrangements with, or make any distributions to, any Affiliate or Associate (each as defined in the Stock Purchase Agreement) of Lipha without the prior written consent of a majority of the Company Designees. In addition, Lipha has agreed, for a period ending on June 30, 2001, not to propose that the Company, or to cause or permit the Company to, engage in business combinations or other extraordinary transactions, including mergers and tender offers, without the prior written consent of a majority of the Company Designees and the prior receipt of a fairness opinion from an independent nationally recognized investment bank. The Company and Lipha have agreed that an executive committee of the Board continue in existence until June 30, 2001, and to cause Mr. Sawyer to be appointed to the executive committee. As a condition to the closing of the Stock Purchase Agreement, certain holders of options to purchase Common Stock, including Mr. Sawyer and Mr. Tarriff, have agreed not to exercise their options during the period ending on July 10, 2001, and certain other holders, including the Directors of the Company, have agreed not to exercise more than one-third of their options annually commencing on June 30, 1999. Distribution Agreement. In connection with the Stock Purchase Agreement, Genpharm and the Company have entered into the Genpharm Distribution Agreement. Services Agreements. Each of Merck KGaA and Genpharm entered into separate Services Agreements on June 30, 1998 to provide various services to the Company for a period of 36 months, including, but not limited to, rendering advice and providing technical support and assistance in the areas of research and development, regulatory compliance, manufacturing, quality control and quality assurance, administration, marketing and promotion (collectively, the "Services"). In consideration of providing the Services, the Company issued an Option to Merck KGaA to purchase up to 820,000 shares of Common Stock and an Option to Genpharm to purchase up to 351,040 shares of Common Stock. Options. The Options entitle Merck KGaA and Genpharm to purchase up to an aggregate of 1,171,040 Option Shares at an exercise price of $2.00 per share with one-third of the total Option Shares vesting annually commencing on June 30, 1999. The Options are exercisable at any time beginning on July 10, 2001, and will terminate, to the extent unexercised, on April 30, 2003. The Options contain provisions that protect the holder against dilution by adjustment of the exercise price and the number of Option Shares issuable upon exercise in certain events, such as stock dividends, stock splits, consolidation, merger, or sale of all or substantially all of the Company's assets. The holders of the Options do not have any rights as shareholders of the Company unless and until the Options have been exercised. 31 Clal Sale Agreement. Pursuant to a letter agreement, dated March 25, 1998, between the Company, Merck KGaA and Clal Pharmaceutical Industries Ltd. ("Clal") (the "Clal Sale Agreement"), Clal sold to Lipha on June 30, 1998, 1,813,272 shares of Common Stock at a price of $2.00 per share. Merck KGaA paid to Clal an additional $1,729,071 on June 30, 2000 for such shares. In addition, Clal has the right to cause Merck KGaA and/or the Company to purchase Clal's remaining 500,000 shares of Common Stock during the five-day period commencing July 5, 2001, in certain circumstances, at a price of $2.50 per share. If Clal does not exercise such right, then Merck KGaA and the Company have the right to cause Clal to sell its remaining shares in open market transactions and Merck KGaA and the Company will purchase from Clal all shares which have not been sold within 90 days. Clal has agreed, for the period ending on July 5, 2001, not to acquire or sell, directly or indirectly, any shares of Common Stock, other than pursuant to the Clal Sale Agreement, enter into any agreement with respect to the voting, holding or transferring of any shares of Common Stock or to propose or participate in any transactions involving the Company or recommend others to take any of such actions. Registration Rights Agreement. The Company granted to Lipha, Merck KGaA and Genpharm (collectively, the "Holders") certain registration rights under a registration rights agreement (the "Registration Rights Agreement"). None of the Shares, the Options or the Option Shares are registered under the Securities Act of 1933, as amended. The Holders are entitled to three demand registrations of the Shares, the Option Shares and the Clal Shares (the "Registrable Shares") and two additional demand registrations if the Options are exercised. In addition, the Company has granted to the Holders the right to register the Registrable Shares on each occasion that the Company registers shares of Common Stock, subject to certain limitations and exceptions. If the Company at any time registers shares of Common Stock for sale to the public, the Holders will agree not to sell publicly, make any short sale, grant any option for the purchase of or otherwise publicly dispose of shares of Common Stock during the same period during which directors and executive officers of the Company are similarly limited in selling the Company's securities up to 180 days after the effective date of the applicable registration statement. Development Agreement. The Company, IPR, and Generics entered into the Development Agreement, dated August 11, 1998, pursuant to which Generics agreed to fund one-half of the operating budget of IPR in exchange for the exclusive distribution rights outside of the United States to products developed by IPR after the date of the Development Agreement. In addition, Generics agreed to pay IPR a perpetual royalty for all sales of the products by Generics or its affiliates outside the United States. To date, no such products have been brought to market by Generics or its affiliates and no royalty has been paid to IPR. The Development Agreement has an initial term of five years and automatically renews for additional periods of one year subject to earlier termination upon six months' notice in certain circumstances. Pursuant to the Development Agreement, Generics paid the Company an initial fee of $600,000 in August 1998 and funded IPR approximately $200,000 for the transition period, $800,000 for 1999 and $800,000 for 2000, fulfilling their requirements through December 31, 2000. Under the Development Agreement, Generics is not required to fund more than $1,000,000 for any one calendar year. 32 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - ------- ---------------------------------------------------------------- (a)(1)&(2) Financial Statements and Schedules. See Index to Consolidated Financial Statements and Schedules after Signature Page. (a)(3) Exhibits. 3.1.1 Certificate of Incorporation of the Registrant, dated July 29, 1991. (1) 3.1.2 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 3, 1992. (1) 3.1.3 Articles of Amendment to the Certificate of Incorporation of the Registrant, dated June 26, 1998. (1) 3.2 By-Laws of the Registrant, as amended. (1) 4 Rights Agreement, dated August 6, 1991, between the Registrant and Midlantic National Bank, as Rights Agent. (2) 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) 4.3 Amendment to Rights Agreement, dated as of September 18, 1997, between the Registrant and First City Transfer Company, as Rights Agent. (4) 4.4 Amendment to Rights Agreement, dated as of September 30, 1997, between the Registrant and First City Transfer Company, as Rights Agent. (5) 4.5 Amendment to Rights Agreement, dated as of March 25, 1998, between the Registrant and First City Transfer Company, as Rights Agent. (5) 10.1 1983 Stock Option Plan of the Registrant, as amended. (6) 10.2 1986 Stock Option Plan of the Registrant, as amended. (6) 10.3 1989 Directors' Stock Option Plan of the Registrant, as amended. (7) 10.4 1989 Employee Stock Purchase Program of the Registrant. (8) 10.5 1990 Stock Incentive Plan of the Registrant, as amended. (4) 10.6 Form of Retirement Plan of Par. (9) 10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984. (10) 10.7 Form of Retirement Savings Plan of Par. (9) 10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984. (11) 10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984. (11) 33 10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985. (11) 10.8 Par Pension Plan, effective October 1, 1984. (12) 10.9 Employment Agreement, dated as of October 4, 1992, among the Registrant, Par and Kenneth I. Sawyer. (11) 10.9.1 Amendment to Employment Agreement, dated as of April 30, 1998, among the Company, Par Pharmaceutical, Inc. and Kenneth I. Sawyer. (1) 10.9.2 Amended and Restated Employment Agreement, dated as of January 12, 2001, among the Company and Kenneth I. Sawyer. 10.10 Severance Agreement, dated as of October 23, 1996, between the Registrant and Dennis J. O'Connor. (4) 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. (13) 10.12 Lease Agreement, dated as of January 1, 1993, between Par and po Corporate Park Associates.(14) 10.13 Lease Extension and Modification Agreement, dated as of August 30, 1997, between Par and Ramapo Corporate Park Associates. (4) 10.14 Amended and Restated Distribution Agreement, dated as of July 28, 1997, among Sano Corporation, the Registrant and Par.* (4) 10.14.1 Amended and Restated Distribution Agreement, dated as of May 1, 1998, among the Company, Par Pharmaceutical, Inc. and Sano Corporation.* (1) 10.14.2 Release and Amendment Agreement, dated as of May 1, 1998, among the Company, Par Pharmaceutical, Inc., Sano Corporation, and Elan Corporation, plc.* (1) 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 1997 Directors' Stock Option Plan. (1) 10.16.1 2000 Performance Equity Plan. 10.17 Stock Purchase Agreement, dated March 25, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (16) 10.18 Amendment No. 1 to Stock Purchase Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (16) 10.19 Registration Rights Agreement, dated May 1, 1995, between the Registrant and Clal Pharmaceutical Industries Ltd. (16) 10.21 Third Amendment to Stock Purchase Agreement, dated July 28, 1997, between the Registrant and Clal Pharmaceutical Industries Ltd. (4) 34 10.22 Pledge Agreement, dated December 27, 1996, between Par and General Electric Capital Corporation. (17) 10.23 Pledge Agreement, dated December 27, 1996, between the Registrant and General Electric Capital Corporation. (17) 10.24 Loan and Security Agreement, dated December 27, 1996, between Par and General Electric Capital Corporation. (17) 10.25.1 First Amendment and Waiver to Loan and Security Agreement, dated May 22, 1997, between Par and General Electric Capital Corporation. (18) 10.25.2 Second Amendment and Waiver to Loan and Security Agreement, dated as of August 22, 1997, between Par and General Electric Capital Corporation. (4) 10.25.3 Third Amendment and Consent to Loan and Security Agreement, dated as of March 4, 1998, between Par and General Electric Capital Corporation. (19) 10.25.4 Fourth Amendment and Consent to Loan and Security Agreement, dated as of May 5, 1998, among the Company, General Electric Capital Corporation, and the other parties named therein. (1) 10.25.5 Fifth Amendment to Loan and Security Agreement, dated as of October 30, 1998, among the Company, General Electric Capital Corporation, and the other parties named therein. (21) 10.25.6 Sixth Amendment to Loan and Security Agreement, dated as of February 2, 1999, among the Company, General Electric Capital Corporation, and the other parties named therein. (22) 10.25.7 Seventh Amendment and Waiver to Loan and Security Agreement, dated as of August 13, 1999, among the Company, General Electric Capital Corporation, and the other parties named therein. (24) 10.25.8 Eighth Amendment to Loan and Security Agreement, dated as of December 28, 1999, among the Company, General Electric Capital Corporation, and the other parties named therein. (25) 10.25.9 Ninth Amendment and Waiver to Loan and Security Agreement, dated as of March 27, 2001, among the Company, General Electric Capital Corporation, and the other parties named therein. 10.26 Stock Purchase Agreement, dated March 25, 1998, between the Company and Lipha Americas, Inc. (1) 10.27 Distribution Agreement, dated March 25, 1998, between the Company and Genpharm, Inc. * (1) 10.28 Services Agreement, dated June 26, 1998, between the Company and Merck KGaA. (1) 10.29 Stock Option Agreement, dated June 26, 1998, between the Company and Merck KGaA. (1) 10.30 Services Agreement, dated June 26, 1998, between the Company and Genpharm, Inc. (1) 10.31 Stock Option Agreement, dated June 26, 1998, between the Company and Merck KGaA. (1) 10.32 Registration Rights Agreement, dated June 26, 1998, among the Company, Lipha Americas, Inc., Merck KGaA and Genpharm Inc. (1) 10.33 Letter Agreement, dated March 25, 1998, among the Company and Merck KGaA and Clal Pharmaceutical Industries Ltd. (1) 10.34 Manufacturing and Supply Agreement, dated April 30, 1997, between Par and BASF Corporation. (20) 35 10.35 Development Agreement, dated as of August 11, 1998, among the Company, Generics (UK) Ltd., and Israel Pharmaceutical Resources L.P. (22) 10.36 Agreement of Lease, dated as of March 17, 1999, between Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. (23) 10.37 Manufacturing and Supply Agreement, dated as of March 17, 1999, between Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. (23) 10.38 Letter Agreement, dated as of January 21, 1999, between the Registrant and Genpharm, Inc. * (23). 27 Financial Data Schedule. (a)(4) Reports on Form 8-K. During the quarter ended December 31, 1999, the Company did not file any reports on Form 8-K. - ------------------------------------------ (1) Previously filed with the Commission as an exhibit to the Registrant's Report on Form 8-K dated June 30, 1998 and incorporated herein by reference. (2) Previously filed with the Commission as an exhibit to the Registrant's Registration Statement on Form 8-B dated August 6, 1991 and incorporated herein by reference. (3) Previously filed with the Commission as an exhibit to Amendment No. 1 on Form 8 to the Registrant's Registration Statement on Form 8-B filed on May 15, 1992 and incorporated herein by reference. (4) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1997 and incorporated herein by reference. (5) Previously filed with the Commission as an exhibit to the Registrant's Report on Form 8-K dated March 25, 1998 and incorporated herein by reference. (6) Previously filed with the Commission as an exhibit to the Registrant's Proxy Statement dated August 10, 1992 and incorporated herein by reference. (7) Previously filed with the Commission as an exhibit to the Registrant's Proxy Statement dated August 14, 1991 and incorporated herein by reference. (8) Previously filed with the Commission as an exhibit to Par's Proxy Statement dated August 16, 1990 and incorporated herein by reference. (9) Previously filed with the Commission as an exhibit to Par's Registration Statement on Form S-1 (Commission No. 2-86614) and incorporated herein by reference. (10) Previously filed with the Commission as an Exhibit to Par's Annual Report on Form 10-K for 1990 and incorporated herein by reference. (11) Previously filed with the Commission as an exhibit to Par's Registration Statement on Form S-1 (Commission No. 33-4533) and incorporated herein by reference. (12) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K (Commission File No. 1-10827) for 1991 and incorporated herein by reference. (13) Previously filed with the Commission as an exhibit to Par's Annual Report on Form 10-K for 1989 and incorporated herein by reference. 36 (14) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1996 and incorporated herein by reference. (15) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 1994 and incorporated herein by reference. (16) Previously filed with the Commission as an exhibit to the Registrant's Report on Form 8-K dated May 2, 1995 and incorporated herein by reference. (17) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 28, 1996 and incorporated herein by reference. (18) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997 and incorporated herein by reference. (19) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 28, 1998 and incorporated herein by reference. (20) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997 and incorporated herein by reference. (21) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1998 and incorporated herein by reference. (22) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the transition period ended December 31, 1998 and incorporated herein by reference. (23) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated herein by reference. (24) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999 and incorporated herein by reference. (25) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for 1999 and incorporated herein by reference. * Certain portions of Exhibits 10.14, 10.14.1, 10.14.2, 10.27 and 10.38 have been omitted and have been filed with the Commission pursuant to a request for confidential treatment thereof. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 2001 PHARMACEUTICAL RESOURCES, INC. (Registrant) By: /s/ Kenneth I. Sawyer ---------------------------------- Kenneth I. Sawyer Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Kenneth I. Sawyer Chief Executive Officer, March 30, 2001 - --------------------------------- and Chairman of the Kenneth I. Sawyer Board of Directors /s/ Dennis J. O'Connor Vice President, Chief March 30, 2001 - --------------------------------- Financial Officer and Dennis J. O'Connor Secretary (Principal Accounting and Financial Officer) /s/ Mark Auerbach Director March 30, 2001 - --------------------------------- Mark Auerbach /s/ Klaus H. Jander Director March 30, 2001 - --------------------------------- Klaus H. Jander /s/ Michael J. Urwin Director March 30, 2001 - --------------------------------- Michael J. Urwin Director March 30, 2001 - --------------------------------- John D. Abernathy Director March 30, 2001 - --------------------------------- Thomas J. Drago Director March 30, 2001 - --------------------------------- Matthew W. Emmens 38 PHARMACEUTICAL RESOURCES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999, THE THREE-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1998 AND THE YEAR ENDED SEPTEMBER 30, 1998 Page Included in Part II: Report of Independent Public Accountants F-2 Consolidated Balance Sheets at December 31, 2000 and December 31, 1999 F-3 Consolidated Statements of Operations and Accumulated Deficit for the years ended December 31, 2000 and December 31, 1999, the three-month transition period ended December 31, 1998 and the year ended September 30, 1998 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000 and December 31, 1999, the three-month transition period ended December 31, 1998 and the year ended September 30, 1998 F-5 Notes to Consolidated Financial Statements F-6 through F-19 Included in Part IV: SCHEDULE: II Valuation and qualifying accounts F-20 ------------------------------------------------- Other financial statement schedules are omitted because the conditions requiring their filing do not exist or the information required thereby is included in the financial statements filed, including the notes thereto. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Pharmaceutical Resources, Inc.: We have audited the accompanying consolidated balance sheets of Pharmaceutical Resources, Inc. (a New Jersey corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations and accumulated deficit and cash flows for the years ended December 31, 2000 and 1999, the three-month transition period ended December 31, 1998 and the year ended September 30, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pharmaceutical Resources, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows the years ended December 31, 2000 and 1999, the three-month transition period ended December 31, 1998 and the year ended September 30, 1998, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP New York, New York March 9, 2001 F-2 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS December 31, December 31, ASSETS 2000 1999 ------ ------------ ------------ Current assets: Cash and cash equivalents $ 222,000 $ 176,000 Accounts receivable, net of allowances of $3,954,000 and $2,559,000 22,306,000 17,528,000 Inventories 20,249,000 19,903,000 Prepaid expenses and other current assets 4,023,000 4,186,000 ------------ ------------ Total current assets 46,800,000 41,793,000 Property, plant and equipment, at cost less accumulated depreciation and amortization 23,560,000 22,681,000 Deferred charges and other assets 4,182,000 3,604,000 Non-current deferred tax benefit, net 14,608,000 14,608,000 ------------ ------------ Total assets $ 89,150,000 $ 82,686,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,049,000 $ 238,000 Short-term debt 10,021,000 4,398,000 Accounts payable 13,163,000 12,718,000 Accrued salaries and employee benefits 1,566,000 1,507,000 Accrued expenses and other current liabilities 2,489,000 1,711,000 ------------ ------------ Total current liabilities 28,288,000 20,572,000 Long-term debt, less current portion 163,000 1,075,000 Accrued pension liability 614,000 700,000 Shareholders' equity: Common Stock, par value $.01 per share; authorized 90,000,000 shares; issued and outstanding 29,647,135 and 29,562,025 shares 297,000 296,000 Additional paid-in capital 89,642,000 89,003,000 Accumulated deficit (29,623,000) (28,694,000) Additional minimum liability related to defined benefit pension plan (231,000) (266,000) ------------ ------------ Total shareholders' equity 60,085,000 60,339,000 ------------ ------------ Total liabilities and shareholders' equity $ 89,150,000 $ 82,686,000 ============ ============ The accompanying notes are an integral part of these consolidated statements. F-3 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
Twelve Twelve Three Twelve Months Ended Months Ended Months Ended Months Ended December 31, December 31, December 31, September 30, 2000 1999 1998 1998 ---------------- -------------- ------------- ------------- Net sales $85,022,000 $80,315,000 $16,775,000 $59,705,000 Cost of goods sold 62,332,000 64,140,000 17,105,000 56,135,000 ---------- ---------- ---------- ---------- Gross margin 22,690,000 16,175,000 (330,000) 3,570,000 Operating expenses: Research and development 7,634,000 6,005,000 1,125,000 5,775,000 Selling, general and administrative 15,575,000 12,787,000 3,611,000 12,090,000 Asset impairment/restructuring charge - - 1,906,000 1,212,000 ---------- ----------- ----------- ----------- Total operating expenses 23,209,000 18,792,000 6,642,000 19,077,000 ---------- ---------- --------- ---------- Operating loss (519,000) (2,617,000) (6,972,000) (15,507,000) Other income, net 506,000 906,000 1,000 6,261,000 Interest (expense) income (916,000) (63,000) 89,000 (382,000) ---------- ---------- ---------- ---------- Net loss (929,000) (1,774,000) (6,882,000) (9,628,000) Accumulated deficit, beginning of year (28,694,000) (26,920,000) (20,038,000) (10,410,000) ---------- ---------- ---------- ---------- Accumulated deficit, end of year $(29,623,000) $(28,694,000) $(26,920,000) $(20,038,000) ========== ========== ========== ========== Basic and diluted net loss per share of common stock $(.03) $(.06) $(.23) $(.45) === === === === Weighted average number of common and common equivalent shares outstanding 29,604,444 29,461,081 29,319,918 21,521,372 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. F-4 PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Twelve Three Twelve Months Ended Months Ended Months Ended Months Ended December 31 December 31, December 31, September 30, 2000 1999 1998 1998 --------------- -------------- -------------- ------------- Cash flows from operating activities: Net loss $(929,000) $(1,774,000) $(6,882,000) $(9,628,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,308,000 2,370,000 680,000 2,712,000 Write-off of inventories 1,645,000 1,157,000 1,478,000 2,229,000 Allowances against accounts receivable 1,395,000 333,000 (815,000) 579,000 Asset impairment/restructuring charge - - 1,906,000 1,212,000 Other 234,000 221,000 54,000 112,000 Changes in assets and liabilities: (Increase) decrease in accounts receivable (6,173,000) (3,348,000) 1,646,000 (4,509,000) (Increase) in inventories (1,991,000) (5,449,000) (3,996,000) (2,083,000) (Increase) decrease in prepaid expenses and other assets (415,000) (3,788,000) 1,801,000 (549,000) Increase in accounts payable 445,000 2,307,000 1,625,000 3,666,000 Increase (decrease) in accrued expenses and other liabilities 786,000 (1,148,000) (579,000) 1,039,000 ----------- ---------- ---------- ----------- Net cash used in operating activities (2,695,000) (9,119,000) (3,082,000) (5,220,000) Cash flows from investing activities: Capital expenditures (3,207,000) (2,352,000) (214,000) (1,260,000) Proceeds from sale of fixed assets 44,000 127,000 - 117,000 ----------- ---------- ---------- ----------- Net cash used in investing activities (3,163,000) (2,225,000) (214,000) (1,143,000) Cash flows from financing activities: Proceeds from issuances of Common Stock 382,000 712,000 10,000 20,481,000 Net proceeds (payments) from revolving credit line and proceeds from issuance of other debt 5,775,000 4,652,000 - (3,604,000) Principal payments under long-term debt and other borrowings (253,000) (268,000) (83,000) (902,000) ----------- ---------- ---------- ----------- Net cash provided by (used in) financing activities 5,904,000 5,096,000 (73,000) 15,975,000 Net increase (decrease) in cash and cash equivalents 46,000 (6,248,000) (3,369,000) 9,612,000 Cash and cash equivalents at beginning of year 176,000 6,424,000 9,793,000 181,000 ----------- ---------- ---------- ---------- Cash and cash equivalents at end of year $222,000 $176,000 $6,424,000 $ 9,793,000 =========== ========== ========== ===========
The accompanying notes are an integral part of these consolidated statements. F-5 PHARMACEUTICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Pharmaceutical Resources, Inc. ("PRI") operates in one business segment, the manufacture and distribution of generic pharmaceuticals in the United States. Marketed products are principally sold in solid oral dosage form (tablet, caplet and two-piece hard-shell capsule). The Company also distributes one product in the semi-solid form of a cream. Summary of Significant Accounting Policies: Principles of Consolidation: The consolidated financial statements include the accounts of PRI and its wholly owned subsidiaries, of which Par Pharmaceutical, Inc. ("Par") is its principal operating subsidiary. References herein to the "Company" refer to PRI and its subsidiaries. Certain items on the consolidated financial statements and the notes to consolidated financial statements for the prior years have been reclassified to conform to the current year financial statement presentation. Use of Estimates: The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and, accordingly, include amounts that are based on management's best estimates and judgments. Actual results may differ from those estimates. Accounting Period: In December 1998, the Company changed its annual reporting period to a fiscal year ending December 31 from a fiscal year ending September 30. Accordingly, this Form 10-K includes consolidated statements of operations and accumulated deficit and cash flows for the twelve-month periods ended December 31, 2000, December 31, 1999 and September 30, 1998, as well as the three-month period ended December 31, 1998 (the "transition period"). Inventories: Inventories are stated at the lower of cost (first-in, first-out basis) or market value. The Company makes provisions for obsolete and slow moving inventories as necessary to properly reflect inventory value. Depreciation and Amortization: Property, plant and equipment are depreciated straight-line over their estimated useful lives which range from three to forty years. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease. Long-lived Assets: The provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets" ("SFAS 121"), require, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Research and Development: Research and development expenses represent costs incurred by the Company to develop new products and obtain premarketing regulatory approval for such products. All such costs are expensed as incurred. Income Taxes: Deferred income taxes are provided for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Business tax credits and net operating loss carryforwards are recognized to the extent that the ultimate realization of such benefit is more likely than not. F-6 Revenue Recognition: The Company recognizes revenue at the time product is shipped and it provides for returns and allowances based upon actual subsequent allowances and historical trends. Per Share Data: During fiscal year 1998, the Company adopted SFAS No. 128, "Earnings Per Share" ("SFAS 128"), which establishes the standards for the computation and presentation of basic and diluted earnings per share data. Under SFAS 128, the dilutive effect of stock options is excluded from the calculation of basic earnings per share but included in diluted earnings per share except in periods of net loss where inclusion would be anti-dilutive. Accordingly, the Company has presented or restated all earnings per share data to conform to the requirements of SFAS 128. Outstanding options and warrants of 263,000, 288,500, 514,700 and 469,700 as of December 31, 2000, 1999 and 1998, and September 30, 1998, respectively, were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the Common Stock in the respective periods. In addition, incremental shares from assumed conversions of 1,058,826, 1,092,967, 756,290 and 627,318 as of December 31, 2000, 1999 and 1998, and September 30, 1998, respectively, were excluded from diluted earnings per share because they were anti-dilutive. Fair Value of Financial Instruments: The carrying amounts of the Company's accounts receivable, accounts payable, accrued liabilities and debt approximate fair market value based upon the relatively short-term nature of these financial instruments. Concentration of Credit Risk: Financial instruments that potentially subject the Company to credit risk consist of trade receivables. The Company markets its products primarily to domestic wholesalers, retail drug store chains, distributors and repackagers. The risk associated with this concentration is believed by the Company to be limited due to the number of wholesalers, drug store chains, distributors and repackagers, and their geographic dispersion and the performance of certain credit evaluation procedures (see "-Accounts Receivable-Major Customers"). New Accounting Standards: In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133", which delayed the Company's required adoption of SFAS 133 to January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment to SFAS 133" ("SFAS 138"), which is effective concurrently with SFAS 133. The Company has evaluated the impact of the adoption of SFAS 133 and SFAS 138 and does not believe the adoption of these Standards will have a material impact on its financial position and results of operations. Accounts Receivable: December 31, December 31, 2000 1999 ------------ ----------- (In Thousands) Accounts receivable $26,260 $20,087 ------ ------ Allowances: Doubtful accounts 914 773 Returns and allowances 1,602 1,001 Price adjustments 1,438 785 ----- --- 3,954 2,559 ----- ----- Accounts receivable, net of allowances $22,306 $17,528 ====== ====== F-7 The accounts receivable amounts are net of provisions for customer rebates and chargebacks. Customer rebates are price reductions generally given to customers as an incentive to increase sales volume. Chargebacks are price adjustments generated from the differential between the invoice or list price and a separate price agreed to in a contract with a customer. Price adjustments include provisions for cash discounts, sales promotions, introductory price protection and shelf stock adjustments. When introducing a new product, customers receive price protection during the introductory period, generally one to three months, where price competition is a factor in placing the product with that customer. The practice is customary in the industry when several manufacturers attempt to capture significant market share on a new product. A shelf stock adjustment occurs when there is a reduction in the invoice or list price of a product and the Company provides an allowance on the customer's existing inventory for the difference between the old and new invoice prices. Major Customers: The Company's top three customers by sales volume accounted for approximately 21%, 9% and 8% of net sales in fiscal year 2000, 15%, 11% and 7% of net sales in fiscal year 1999, 15%, 8% and 6% of net sales in the transition period and 11%, 13% and 6% of net sales in fiscal year 1998. The amounts due from these same three customers accounted for approximately 36%, 8% and 8% of the net accounts receivable balance at December 31, 2000 and 20%, 1% and 6% of the net accounts receivable balance at December 31, 1999. Two additional customers accounted for approximately 10% and 9% of the net accounts receivable balance at December 31, 2000 and approximately 5% and 7% of net sales in fiscal year 2000. Inventories: December 31, December 31, 2000 1999 ----------- ----------- (In Thousands) Raw materials and supplies $9,610 $7,531 Work in process and finished goods 10,639 12,372 ------ ------ $20,249 $19,903 ====== ====== Property, Plant and Equipment: December 31, December 31, 2000 1999 ----------- ----------- (In Thousands) Land $2,231 $2,231 Buildings 19,449 18,579 Machinery and equipment 20,792 19,507 Office equipment, furniture and fixtures 5,197 4,766 Leasehold improvements 2,648 2,605 ----- ----- 50,317 47,688 Less accumulated depreciation and amortizatio 26,757 25,007 ------ ------ $23,560 $22,681 ====== ====== The Company recorded a write-down of approximately $1,200,000 in the transition period for the impairment of assets related to discontinuing or outsourcing products previously manufactured at its Spring Valley and Upper Saddle River facilities. The Company recorded a write-down of $1,212,000 in fiscal year 1998 for asset impairment of its facility located in Congers, New York as a result of outsourcing the manufacture of products previously produced at the facility. The reserve was based on the difference between the appraised value of the property less the net book value at September 30, 1998. In March 1999, Par entered into an agreement to lease the Congers facility and related machinery and equipment (the "Congers Facility") to Halsey Drug Co., Inc. ("Halsey"), a manufacturer of generic pharmaceutical products. F-8 Deferred Charges and Other Assets: December 31, December 31, 2000 1999 ----------- ----------- (In Thousands) Profit sharing agreement $2,500 $2,500 Product license fees 614 15 Defined benefit pension 383 435 Cash surrender value of officer l ife insurance 298 290 Employee loans and advances 66 199 Security deposit for leases 133 33 Other 188 132 --- --- $4,182 $3,604 ===== ===== In January 1999, the Company entered into a profit sharing agreement (the "Genpharm Profit Sharing Agreement") with Genpharm, Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA, pursuant to which the Company is to receive a portion of the profits resulting from a separate agreement between Genpharm and an unaffiliated United States based pharmaceutical company in exchange for the non-refundable fee of $2,500,000 paid by the Company. The fee will be amortized by the Company over a projected revenue stream from the products when launched by the third party. Currently, there are abbreviated new drug applications ("ANDAs") for two potential products covered by the Genpharm Profit Sharing Agreement awaiting U.S. Food and Drug Administration ("FDA") approval. The agreement between Genpharm and the unaffiliated third party covers 15 products that are not included in the Company's distribution agreement with Genpharm resulting from its strategic alliance with Merck KGaA (see "-Distribution and Supply Agreements-Genpharm, Inc."). In August 1999, Par entered into a separate agreement with Genpharm pursuant to which Par purchased the United States distribution rights for methimazole (Tapazole(R)) for a fee of $707,000 paid in fiscal year 2000. The agreement has an initial term of three years and is renewable by mutual consent of the parties for successive one-year terms. The Company began marketing the product in April 2000 and is amortizing the fee over the initial term of the agreement. Strategic Alliance: On June 30, 1998, the Company completed a strategic alliance with Merck KGaA, a pharmaceutical and chemical company located in Darmstadt, Germany. Pursuant to a Stock Purchase Agreement, dated March 25, 1998, Merck KGaA, through its subsidiary Lipha Americas, Inc. ("Lipha"), purchased 10,400,000 newly issued shares of the Company's Common Stock for $20,800,000. In addition, the Company issued to Merck KGaA and Genpharm, five-year options to purchase an aggregate of 1,171,040 additional shares of the Company's Common Stock at an exercise price of $2.00 per share in exchange for consulting services. The options expire in April 2003 and become exercisable commencing in July 2001. As part of the alliance, the Company obtained the exclusive United States distribution rights to a portfolio of products covered by a distribution agreement with Genpharm (see "-Distribution and Supply Agreements-Genpharm, Inc."). Merck KGaA also purchased 1,813,272 shares of the Company's Common Stock from Clal Pharmaceutical Industries Ltd. ("Clal"), PRI's largest shareholder prior to the transaction. Clal has the right to cause Merck KGaA and/or the Company to purchase an additional 500,000 shares of Common Stock from Clal at a price of $2.50 per share in July 2001. Research and Development Agreement: The Company, Israel Pharmaceutical Resources L.P. ("IPR"), the Company's research and development operation in Israel, and Generics (UK) Ltd. ("Generics"), a subsidiary of Merck KGaA, entered into an agreement (the "Development Agreement"), dated August 11, 1998, pursuant to which Generics agreed to fund one-half the cost of the operating budget of IPR in exchange for the exclusive distribution rights outside of the United States to products developed by IPR after the date of the Development Agreement. In addition, Generics agreed to pay IPR a perpetual royalty for all sales of the products by Generics or its affiliates outside the United States. To date, no such products have been brought to market by Generics or its affiliates and no royalty has been paid to IPR. The Development Agreement has an initial term of five years and automatically renews for additional periods of one year subject to earlier termination upon six months' notice in certain circumstances. Pursuant to the Development Agreement, Generics paid the Company an initial fee of $600,000 in August 1998 and funded IPR approximately $200,000 for the transition period, $800,000 for fiscal year 1999 and $800,000 for fiscal year 2000, fulfilling their requirements through December 31, 2000. Under the Development Agreement, Generics is not required to fund more than $1,000,000 for any one calendar year. F-9 Lease Agreement: In March 1999, Par entered into an agreement to lease (the "Lease Agreement") the Congers Facility to Halsey. The Lease Agreement has an initial term of three years, subject to an additional two-year renewal period and contains a purchase option permitting Halsey to purchase the Congers Facility and substantially all the equipment thereof at any time during the lease terms for a specified amount. The Lease Agreement provides for annual fixed rent during the initial term of $500,000 per year and $600,000 per year during the renewal period. Pursuant to the Lease Agreement, Halsey paid the purchase option of $100,000 in March 1999. Under the Halsey Supply Agreement (as hereinafter defined), Halsey is required to perform certain manufacturing operations for the Company at the Congers Facility. Pursuant to the Lease Agreement, Par agreed to purchase $1,150,000 worth of products manufactured under the Halsey Supply Agreement between April 1999 and September 2000 and has credited any deficiency of products purchased against the rent payments (see "-Distribution and Supply Agreements-Halsey Drug Co., Inc."). Distribution and Supply Agreements: Halsey Drug Co., Inc.: In March 1999, Par entered into a Manufacturing and Supply Agreement with Halsey (the "Halsey Supply Agreement"). The Halsey Supply Agreement requires Halsey to manufacture exclusively for Par certain products previously manufactured by Par at the Congers Facility. The Halsey Supply Agreement has an initial term of three years subject to earlier termination upon the occurrence of certain events as provided therein. Par has credited any deficiency of minimum purchases required under the Halsey Supply Agreement through September 2000 against the rent payments due pursuant to the Lease Agreement. In addition, the Halsey Supply Agreement prohibits Halsey from manufacturing, supplying, developing or distributing products produced under the agreement for anyone other than Par for a period of three years from the date of the Halsey Supply Agreement. Genpharm, Inc.: The Company has a distribution agreement with Genpharm (the "Genpharm Distribution Agreement"), dated March 25, 1998, pursuant to which Genpharm granted exclusive distribution rights to the Company within the United States and certain other United States territories with respect to approximately 40 generic pharmaceutical products. To date, 14 of such products have obtained FDA approval and are currently being marketed by Par. The remaining products are either being developed, have been identified for development, or have been submitted to the FDA for approval. Products may be added to or removed from the Genpharm Distribution Agreement by mutual agreement of the parties. Genpharm is required to use commercially reasonable efforts to develop the products, which are subject to the Genpharm Distribution Agreement, and is responsible for the completion of product development and for obtaining all applicable regulatory approvals. The Company pays Genpharm a percentage of the gross profits on all its sales of the products included in the Genpharm Distribution Agreement. BASF Corporation: In April 1997, Par and BASF Corporation ("BASF"), a manufacturer of pharmaceutical products, entered into a Manufacturing and Supply Agreement (the "BASF Supply Agreement"). Under the BASF Supply Agreement, Par agreed to purchase certain minimum quantities of three products manufactured by BASF at one of its facilities, and to phase out Par's manufacturing of those products. BASF agreed to discontinue its direct sale of those products. The agreement had an initial term of three years and would have renewed automatically for successive two-year periods until December 31, 2005, if Par had met certain purchase thresholds. Since Par did not meet the minimum purchase requirement of $29,000,000 worth of one product in the third and final year of the agreement, BASF had the right to terminate the agreement with a notice period of one year. However, to ensure continuance of product supply, BASF and the Company have agreed in principle to, and are operating under, the terms of a new agreement similar to the terms of the prior agreement, but with lower minimum purchase requirements. Elan Corporation: In September 1998, the Company and Elan Transdermal Technologies, Inc., formerly known as Sano Corporation, and Elan Corporation, plc (collectively "Elan") entered into a termination agreement (the "Termination Agreement") with respect to their prior distribution agreement. Pursuant to the Termination Agreement, the Company's exclusive right to distribute in the United States a prescription transdermal nicotine patch manufactured by Elan ended on May 31, F-10 1999. The Company began selling Elan's prescription transdermal nicotine patch in January 1998 and paid Elan a percentage of gross profits through the termination date. In exchange for relinquishing long-term distribution rights to the prescription transdermal nicotine patch and a nitroglycerin patch, the Company received payments of $2,000,000 in October 1998 and $1,000,000 in the third quarter of 1999. In June 2000, the Company agreed to sell its remaining distribution rights for a non-prescription transdermal nicotine patch back to Elan and to terminate Par's right to royalty payments under the Termination Agreement. Pursuant to this agreement, the Company will receive a minimum payment of $500,000 on or before July 31, 2001 and could receive an additional $1,000,000 to $1,500,000 subject to certain conditions as set forth in the agreement, including Elan's introduction of the product in the United States and Israel on or before certain dates. In July 2000, Elan paid the Company $150,000 under the agreement. In May 1998, the Company terminated its distribution rights to two nitroglycerin transdermal patches, one unconditionally and one conditionally and received payments of approximately $5,700,000, pursuant to an amendment to its distribution agreement with Elan. The payments included approximately $2,100,000 as a prepayment, with accrued interest, of a promissory note which was due from Elan in September 1998. Pursuant to the Termination Agreement and amendments to the distribution agreement with Elan, the Company recorded other income of $6,100,000 and $3,900,000 in fiscal years 1998 and 1997, respectively. Between fiscal years 1994 and 1997, the Company had advanced Elan $7,629,000 as funding for research and development of generic transdermal products and expensed the payments in the periods they were paid. Short-Term Debt: In December 1996, Par entered into a Loan and Security Agreement (the "Loan Agreement") with General Electric Capital Corporation ("GECC"). The Loan Agreement, as amended, provides Par with a five-year revolving line of credit. Pursuant to the Loan Agreement, Par is permitted to borrow up to the lesser of (i) the borrowing base established under the Loan Agreement or (ii) $20,000,000. The borrowing base is limited to 85% of eligible accounts receivable plus 50% of eligible inventory of Par, each as determined from time to time by GECC. The interest rate charge on the line of credit is based upon a per annum rate of 2.25% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par and PRI other than real property and is guaranteed by PRI. In connection with such facility, Par, PRI and their affiliates have established a cash management system pursuant to which all cash and cash equivalents received by any of such entities are deposited into a lockbox account over which GECC has sole operating control and which are applied on a daily basis to reduce amounts outstanding under the line of credit. The revolving credit facility is subject to covenants based on various financial benchmarks. In March 2001, GECC waived certain events of default related to the earnings before interest and taxes financial covenant and amended the financial covenants of Par. As of December 31, 2000, the borrowing base was approximately $18,600,000 and $10,021,000 was outstanding under the line of credit. Long-Term Debt: December 31, December 31, 2000 1999 ----------- ----------- (In Thousands) Mortgage loan (a) $893 $960 Other (b) 319 353 --- --- 1,212 1,313 Less current portion 1,049 238 ----- --- $163 $1,075 === ===== (a) Mortgage loan with a fixed rate of 8.5% through May 1999 and thereafter at Prime Rate plus 1.75% paid in monthly installments until May 2001 when the remaining balance of $877,000 becomes due. (b) Includes primarily amounts due under capital leases for computer equipment. At December 31, 2000, the Company's long-term debt, including the current portion, of $1,212,000 consisted primarily of a mortgage loan, secured by certain real property of the Company and outstanding balances under capital leases for computer equipment. All of the Company's long-term debt, including the portion classified as current, will mature during the next three years as follows: $1,049,000 in 2001, $112,000 in 2002 and $51,000 in 2003. F-11 During fiscal years 2000, 1999 and 1998, the Company incurred net interest expense of $916,000, $63,000, and $382,000, respectively. Interest paid approximated interest expense in each of the years. During the transition period, the Company recorded net interest income of $89,000. Shareholders' Equity: Preferred Stock: In 1990, the Company's shareholders authorized 6,000,000 shares of a newly created class of preferred stock with a par value of $.0001 per share. The preferred stock is issuable in such series and with such dividend rates, redemption prices, preferences and conversion, and other rights as the Board of Directors may determine at the time of issuance. At December 31, 2000 and 1999, the Company had no preferred stock issued and outstanding. Common Stock: On June 30, 1998, Merck KGaA, through its subsidiary Lipha, purchased 10,400,000 newly-issued shares of the Company's Common Stock for $20,800,000 ($2.00 per share) as part of a strategic alliance. In addition, the Company issued to Merck KGaA and Genpharm five-year options to purchase an aggregate of 1,171,040 shares of the Company's Common Stock at an exercise price of $2.00 per share. The options expire in April 2003 and become exercisable commencing in July 2001 (see "-Strategic Alliance"). Dividend: The Company did not pay any dividend on Common Stock in fiscal years 2000 and 1999, the transition period or fiscal year 1998. Changes in Shareholders' Equity: Changes in the Company's Common Stock and Additional Paid-in Capital accounts during fiscal years 2000 and 1999 were as follows: Additional Common Stock Paid-In Shares Amount Capital ------ ------ ------- Balance, December 31, 1998 29,322,659 $ 293,000 $88,036,000 Issuance of stock options -- -- 258,000 Exercise of stock options 221,759 3,000 617,000 Compensatory arrangements 17,607 -- 92,000 ----------- ----------- ----------- Balance, December 31, 1999 29,562,025 296,000 89,003,000 Issuance of stock options -- -- 258,000 Exercise of stock options 66,990 1,000 176,000 Compensatory arrangements 18,120 -- 205,000 ----------- ----------- ----------- Balance, December 31, 2000 29,647,135 $ 297,000 $89,642,000 =========== =========== =========== Share Purchase Rights Plan: The Company's Share Purchase Rights Plan, which gave certain rights to holders of the Company's Common Stock, expired on January 19, 2000. Employee Stock Purchase Program: The Company maintains an Employee Stock Purchase Program ("Program"). The Program is designed to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. It enables eligible employees to purchase shares of Common Stock at a discount of up to 15% of the fair market value. An aggregate of 1,000,000 shares of Common Stock have been reserved for sale to employees under the Program. Employees purchased 18,120 and 17,607 shares during fiscal years 2000 and 1999, respectively. At December 31, 2000, 828,803 shares remain available for issuance and sale under the Program. F-12 Stock Options: The following is a summary of stock option activity in each of the periods as follows:
Twelve Twelve Three Twelve Months Ended Months Ended Months Ended Months Ended December 31, 2000 December 31, 1999 December 31, 1998 September 30, 1998 ----------------- ----------------- ----------------- ------------------ Price Per Price Per Price Per Price Per Shares Share Shares Share Shares Share Shares Share ------ ----- ------ ----- ------ ----- ------ ----- Outstanding at beginning of period 1,766,490 $1.50 to 1,921,635 $1.50 to 1,764,436 $1.50 to 1,751,400 $2.13 to $7.88 $8.63 $8.63 $10.63 Granted 550,439 $4.13 to 202,300 $4.81 to 180,000 $2.38 to 1,479,900 $1.50 to $7.38 $7.56 $3.94 $4.94 Exercised (66,990) $1.50 to (221,759) $1.50 to (333) $2.13 (21,696) $2.13 to $4.94 $4.94 - $2.25 Canceled/Surrendered (53,215) $1.50 to (135,686) $1.50 to (22,468) $1.50 to (1,445,168) $1.50 to --------- $7.88 --------- $8.63 --------- $2.44 --------- $10.13 Outstanding at end of period 2,196,724 $1.50 to 1,766,490 $1.50 to 1,921,635 $1.50 to 1,764,436 $1.50 to ========= $7.81 ========= $7.88 ========= $8.63 ========= $8.63
At December 31, 2000, 1999 and 1998, and September 30, 1998 exercisable options amounted to 571,150 337,132, 166,067 and 165,612, respectively. The weighted average exercise prices of the options for these respective periods were $3.82, $3.85, $4.86 and $4.84. Exercise price ranges and additional information regarding the 2,196,724 options outstanding at December 31, 2000 were as follows: Exercise Number Weighted Average Weighted Average Price Range of Options Exercise Price Remaining Life ----------- ---------- -------------- -------------- $1.50 to $2.38 1,327,494 $2.11 2.7 years $3.38 to $5.13 545,230 $4.83 7.4 years $5.50 to $7.81 324,000 $6.31 6.6 years During fiscal year 2000, the Company's Board of Directors adopted the 2000 Performance Equity Plan (the "2000 Plan") which plan was subsequently amended, making it a non-qualified, broad-based plan not subject to shareholder approval. The 2000 Plan provides for the granting of incentive and nonqualified stock options to employees of the Company or to others. The 2000 Plan became effective March 23, 2000 and will continue thereafter until March 22, 2010 unless terminated sooner. The Company has reserved 1,025,000 shares of Common Stock for issuance under the 2000 Plan. The maximum term of an option under the 2000 Plan is ten years. Vesting and option terms are determined in each case by the Compensation and Stock Option Committee of the Board. The maximum term of the option is reduced to five years if an incentive stock option is granted to a holder of more than 10% in the Company. In fiscal year 1998, the Company's shareholders approved the 1997 Directors' Stock Option Plan (the "1997 Directors' Plan") pursuant to which options are granted to non-employee directors of the Company. The 1997 Directors' Plan became effective October 28, 1997 and will continue thereafter until October 28, 2007, unless terminated sooner. Options granted under this Plan will become exercisable in full on the first anniversary of the date of grant, provided that the eligible director has not been removed "for cause" as a member of the Board on or prior to the first anniversary of the date of grant. The maximum term of an option under the 1997 Directors' Plan is ten years. The Company reduced the number of shares of Common Stock for issuance under the 1997 Directors' Plan to 450,000 shares. In connection with the adoption of the 1997 Directors' Plan, the 1995 Directors' Stock Option Plan was terminated. The Company's 1990 Stock Incentive Plan (the "1990 Plan"), which terminated on March 23, 2000, provided for the granting of stock options, restricted stock awards, deferred stock awards, stock appreciation rights and other stock-based awards or any combination thereof to employees of the Company or to others. The Company reserved 2,800,000 shares of Common Stock for issuance F-13 under the 1990 Plan. The maximum term of an option under the 1990 Plan is ten years. Vesting and option terms were determined in each case by the Compensation and Stock Option Committee of the Board. The maximum term of the option would have been reduced to five years if an incentive stock option was granted to a holder of more than 10% in the Company. The Company may not grant further options under the 1990 Plan. Under the 1989 Directors' Stock Option Plan (the "Directors' Plan"), which terminated in November 1999, options were granted to directors of the Company who were not employees of the Company or were otherwise ineligible to receive options under any other plan adopted by the Company. The Company had reserved 550,000 shares of Common Stock for issuance under the Directors' Plan. The maximum term of an option under the Directors' Plan was ten years. Options vested in full on the first anniversary after the date of grant, provided that the eligible director had not voluntarily resigned, or been removed "for cause", as a member of the Board on or prior to the first anniversary of the date of grant. Certain current and former non-employee directors surrendered for cancellation options granted under the Directors' Plan for an equal number of options under the 1997 Directors' Plan. The Company may not grant further options under the Directors' Plan. Under all the stock options plans, the stock option exercise price equaled the market price on the date of grant. At December 31, 2000 and 1999, options for 2,674,436 and 796,972 shares, respectively, were available for future grant under the Company's various stock option plans. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company adopted the disclosure provisions of SFAS 123 in 1997, but opted to remain under the expense recognition provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for stock option plans. Had compensation expense for stock options granted under the Plans above been determined based on fair value at the grant dates consistent with the disclosure method required in accordance with SFAS 123, the Company's net loss for each of the periods would have increased to the pro forma amounts shown below:
Twelve Twelve Three Twelve Months Ended Months Ended Months Ended Months Ended December 31, 2000 December 31, 1999 December 31, 1998 September 30, 1998 ----------------- ----------------- ----------------- ------------------ (In Thousands) Net loss: As reported $(929) $(1,774) $(6,882) $(9,628) Pro forma $(1,899) $(2,590) $(7,013) $(10,019) Net loss per share: As reported $(.03) $(.06) $(.23) $(.45) Pro forma $(.06) $(.09) $(.24) $(.47)
The weighted average fair value of options granted in each of the periods was estimated as of the date of grant using the Black-Scholes stock option pricing model, based on the following weighted average assumptions:
Twelve Twelve Three Twelve Months Ended Months Ended Months Ended Months Ended December 31, 2000 December 31, 1999 December 31, 1998 September 30, 1998 ----------------- ----------------- ----------------- ------------------ Risk free interest rate 4.8% 5.6% 4.5% 5.3% Expected term 5.7 years 4.0 years 4.0 years 4.0 years Expected volatility 68.4% 74.6% 74.6% 63.0%
No dividend will be paid for the entire term of the option. The weighted-average fair value of options granted in fiscal years 2000 and 1999, the transition period and fiscal year 1998 were $3.29, $3.72, $1.78 and $1.24, respectively. Income Taxes: In February 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"), which required the Company to recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS 109 required the F-14 recognition of future tax benefits, such as net operating loss ("NOL") carryforwards, to the extent that realization of such benefits is more likely than not. The Company adopted the new accounting standard during the quarter ended January 1, 1994 and, as a result, recognized future tax benefits of $14,128,000 which were reflected as the cumulative effect of a change in accounting principle in fiscal year 1994. Based on the Company's recent performance and the uncertainty of the generic pharmaceutical business in which it operates, management believes that future operating income might not be sufficient to recognize fully the NOL carryforwards of the Company. The Company did not recognize a benefit for its operating losses in fiscal years 2000 and 1999, the transition period or fiscal year 1998. Based on recent developments, including improved financial results, the equity investment by Merck KGaA in fiscal year 1998, and the Company's continued commitment to the development and introduction of new products, management believes that its valuation allowance is adequate. However, there can be no assurance that the Company will generate taxable earnings or any specific level of continuing earnings in the future. If the Company is unable to generate sufficient taxable income in the future, increases in the valuation allowance will be required through a charge to expense. At December 31, 2000, the Company had NOL carryforwards for tax purposes of approximately $67,700,000 that expire 2005 through 2019. The tax effects of the significant temporary differences that comprise the deferred tax assets and liabilities are as follows: Deferred tax asset, net: December 31, December 31, 2000 1999 ---- ---- (In Thousands) Deferred assets: Federal NOL carryforwards $23,021 $23,553 State NOL carryforwards 2,420 2,592 Accounts receivable 4,450 3,331 Accrued expenses 266 224 Asset impairment reserve 586 702 Research and development expenses 387 387 Inventories 822 596 Other 596 828 --- --- 32,548 32,213 Valuation allowance (16,103) (15,906) ------ ------ 16,445 16,307 Deferred liabilities: Fixed assets 1,837 1,699 ----- ----- Net deferred tax asset $14,608 $14,608 ====== ====== Included in the recognition of future tax benefits is approximately $1,678,000 of stock option compensation credited to additional capital. Of this amount, $1,244,000 was recorded upon adoption of SFAS 109 in fiscal year 1994 and $434,000 was credited in fiscal year 1995. Valuation allowances were recorded in fiscal years 2000, 1999 and 1998 for an additional $20,000, $289,000 and $11,000, respectively, related to stock option compensation which will be credited to equity upon utilization of tax carryforwards. The was no valuation allowance for stock option compensation recorded for the transition period. The table below provides a reconciliation between the statutory federal income tax rate and the effective rate of income tax expense for each of the periods as follows:
Twelve Twelve Three Twelve Months Ended Months Ended Months Ended Months Ended December 31, 2000 December 31, 1999 December 31, 1998 September 30, 1998 ----------------- ----------------- ----------------- ------------------ Federal statutory tax rate (34%) (34%) (34%) (34%) State tax - net 2% (3%) (6%) (6%) Increase in valuation reserve for deferred tax assets 32% 37% 40% 40% --- --- --- --- Effective tax rate - - - - ==== ==== ==== ====
F-15 Commitments, Contingencies and Other Matters: Leases: At December 31, 2000, the Company had minimum rental commitments aggregating $2,098,000 under non-cancelable operating leases expiring through fiscal year 2005. Amounts payable thereunder are $552,000 in 2001, $521,000 in 2002, $494,000 in 2003, $480,000 in 2004 and $51,000 in 2005. Rent expense charged to operations in fiscal years 2000 and 1999, the transition period and fiscal year 1998 was $622,000, $609,000, $171,000, and $732,000, respectively. Retirement Plans: The Company has a defined contribution social security integrated Retirement Plan (the "Retirement Plan") which provides retirement benefits to eligible employees as defined in the Plan. The Company suspended employer contributions to the Retirement Plan effective December 30, 1996. Consequently, participants in the Retirement Plan were no longer entitled to any employer contributions under such plan in 1996 and subsequent years. The Company also maintains a Retirement Savings Plan (the "Retirement Savings Plan") whereby eligible employees are permitted to contribute from 1% to 15% of their compensation to the Retirement Savings Plan. The Company contributes an amount equal to 50% of the first 6% of compensation contributed by the employee. Participants of the Retirement Savings Plan become vested with respect to 20% of the Company's contributions for each full year of employment with the Company and thus become fully vested after five full years. The Company's provisions for these plans and the defined benefit plan discussed below were $317,000 in fiscal year 2000, $264,000 in fiscal year 1999, $63,000 in the transition period and $336,000 in fiscal year 1998. In fiscal year 1998, the Company merged the Retirement Plan into the Retirement Savings Plan. The Company maintains a defined benefit plan (the "Pension Plan") which covers eligible employees as defined in the Pension Plan. The Pension Plan has been frozen since October 1, 1989. Since the benefits under the Pension Plan are based on the participants' length of service and compensation (subject to Employee Retirement Income Security Act of 1974 and Internal Revenue Service limitations), service costs subsequent to October 1, 1989 are excluded from benefit accruals under the Pension Plan. The funding policy for the Pension Plan is to contribute amounts actuarially determined as necessary to provide sufficient assets to meet the benefit requirements of the Pension Plan retirees. The assets of the Pension Plan are invested in mortgages and bonds. Net pension expense for fiscal years 2000, 1999 and 1998 included the components in the table below. The amounts related to the transition period were recorded in the second quarter of 1999.
Twelve Twelve Three Twelve Months Ended Months Ended Months Ended Months Ended December 31, 2000 December 31, 1999 December 31, 1998 September 30, 1998 ----------------- ----------------- ----------------- ------------------ (In Thousands) Interest cost $131 $120 $31 $128 Actual return on Plan assets (132) (1) 7 (188) Recognized actuarial loss 3 8 - - Net amortization and deferral: Asset gain (loss) 23 (115) (37) 77 Amortization of initial unrecognized transition obligation 51 51 13 51 -- -- -- -- Net pension expense $76 $63 $14 $68 === === === ===
For fiscal years 2000 and 1999, the discount rate used to measure the projected benefit obligation for the Pension Plan was 6.75% and 6.50%, respectively, and the assumed long-term rate of return on plan assets was 7.00% for each period. F-16 The following provides a reconciliation of the Pension Plan's benefit obligation, assets and funded status. December 31, December 31, 2000 1999 ----------- ----------- (In Thousands) Change in Benefit Obligation Benefit obligation at the beginning of the year $ 2,081 $ 2,341 Interest cost 131 120 Actuarial gain (8) (230) Benefits paid (184) (150) ------- ------- Benefit obligation at the end of the year $ 2,020 $ 2,081 ======= ======= Change in Plan Assets Fair value of Plan assets at the beginning of the year $ 1,593 $ 1,700 Actual return on assets 132 1 Employer contributions 120 42 Benefits paid (184) (150) ------- ------- Fair value of Plan assets at the end of the year $ 1,661 $ 1,593 ======= ======= Funded Status of Plan Funded status $ (359) $ (488) Unrecognized net actuarial loss 231 266 Unrecognized transition obligation 383 434 Adjustment for minimum liability (614) (700) ------- ------- Net recorded pension liability $ (359) $ (488) ======= ======= In accordance with SFAS 87, the Company has recorded an additional minimum pension liability for under funded plans of $614,000 and $700,000 for fiscal years 2000 and 1999, respectively, representing the excess of under funded accumulated benefit obligations over previously recorded pension cost liabilities. A corresponding amount is recognized as an intangible asset except to the extent that these additional liabilities exceed related unrecognized prior service cost and net transition obligation, in which case the increase in liabilities is charged directly to shareholders' equity. As of December 31, 2000, $231,000 of the excess minimum pension liability resulted in a charge to equity as compared to $266,000 as of December 31, 1999. Legal Proceedings: Par has filed with the FDA an ANDA for megestrol acetate oral suspension, the generic version of Bristol Myers Squibb's ("BMS") Megace(R) Oral Suspension. Par filed a paragraph IV certification regarding the formulation patent as part of its ANDA submission. The basic compound patent for Megace(R) has expired. Megace(R) Oral Suspension received orphan drug exclusivity from the FDA that expired September 10, 2000 and BMS has a formulation patent for Megace(R) Oral Suspension expiring in 2011. Par believes that its distinct and unique formulation does not infringe the BMS formulation patent. In October 1999, BMS initiated a patent infringement action against Par. On March 1, 2000, Par was granted a patent by the U.S. Patent and Trademark Office for Par's unique formulation of megestrol acetate oral suspension. Par believes that the issuance of this patent, which establishes the uniqueness of Par's formulation compared to the BMS patent, should significantly help Par's defense in the patent infringement case. On December 14, 2000, the U.S. District Court for the Southern District of New York dismissed the patent infringement complaint brought by BMS regarding Par's megestrol acetate oral suspension formulation. The Court granted summary judgment in favor of Par for reasons explained in an Opinion filed under seal. A Notice of Appeal was filed by BMS on March 6, 2001. Although the Court has disposed of all infringement issues, Par's counterclaims for patent invalidity, unfair competition and tortious interference remain. Par's counterclaims seek an injunction and an award of compensatory and punitive damages, and may ultimately be tried before a jury. Par intends to vigorously pursue its pending litigation with BMS and to defend its patent rights and ensure that other generic companies do not infringe the Par patent. At this time, it is not possible for the Company to predict the probable outcome of this litigation and the impact, if any, that it might have on the Company. F-17 Par received tentative approval of its ANDA for megestrol acetate oral suspension from the FDA in October 2000. A tentative approval is issued by the FDA following the satisfactory conclusion of the regulatory review process. Although there can be no assurance, final approval by the FDA is expected to be granted following court resolution of the patent infringement litigation between Par and BMS. The Company is involved in certain other litigation matters, including certain product liability actions and actions by former employees, and believes these actions are incidental to the conduct of its business and that the ultimate resolution thereof will not have a material adverse effect on its financial condition, results of operations or liquidity. The Company intends to vigorously defend these actions. Asset Impairment In 1999, the Company discontinued the sale of certain unprofitable products, outsourced the production of other products, and reduced the work force and certain related operating expenses as part of an effort to reduce costs and increase operating efficiencies. These measures resulted in a charge of approximately $1,200,000 in the transition period for write-downs related to the impairment of assets affected by discontinuing or outsourcing products. The Company recorded a charge of $1,212,000 in fiscal year 1998 for asset impairment of its Congers Facility as a result of outsourcing the manufacture of the products previously produced by the Company at the facility. The charge was based on the difference between the appraised value of the property less its net book value at September 30, 1998. In March 1999, the Company entered into an agreement with Halsey to lease, with an option to purchase, the Congers Facility and related machinery and equipment. Restructuring and Cost Reductions: During the transition period, the Company recorded a charge of approximately $706,000 for severance payments and other employee termination benefits. In 1999, the Company terminated approximately 50 employees, primarily in manufacturing and various manufacturing support functions, and reduced certain related operating expenses following the discontinuing or outsourcing of products previously manufactured by the Company. Additionally, the Company established inventory reserves for discontinued products of $630,000 that was recorded as part of cost of goods sold in the transition period. The amounts of actual termination benefits paid and discontinued product write-offs approximated the amounts of the original provisions. Other Matters: In fiscal year 2000, the Company's top four selling products accounted for approximately 45% of net sales compared to 47%, 63% and 55%, respectively, of net sales in fiscal years 1999 and 1998, and the transition period. Two of the products in the most recent year were not part of the top four in any of the preceding periods. Although the Company's reliance on its top four products has lessened in 2000, the aggregate sales and gross margin generated by these products continued to account for a significant portion of the Company's overall sales and gross margin. One of the top four products in the three periods preceding 2000, the prescription transdermal nicotine patch, which the Company stopped distributing May 31, 1999, accounted for approximately 5% of net sales in fiscal years 1999 and 1998, 10% of net sales in the transition period and a significant portion of the gross margin in those respective periods. Unaudited Selected Quarterly Financial Data: Selected quarterly financial data for fiscal years 2000 and 1999 is unaudited and included in the table below. Fiscal Quarters Ended -------------------------------------------------------------- April 1, 2000 July 1, 2000 Sept. 30, 2000 Dec. 31, 2000 ------------- ------------ -------------- ------------- (In Thousands) Net sales $18,139 $22,714 $20,436 $23,733 Gross margin 3,422 6,603 5,163 7,502 Net (loss) income (2,096) 317 274 576 Net (loss) income per common share - basic and diluted $ (.07) $ .01 $ .01 $ .02 F-18 Fiscal Quarters Ended -------------------------------------------------------------- April 3, 1999 July 3, 1999 Oct. 2, 1999 Dec. 31, 1999 ------------- ------------ -------------- ------------- (In Thousands) Net sales $20,164 $21,211 $19,317 $19,623 Gross margin 3,916 4,359 4,070 3,830 Net loss (328) (365) (326) (755) Net loss per common share-basic and diluted $ (.01) $ (.01) $ (.01) $ (.03) F-19 SCHEDULE II PHARMACEUTICAL RESOURCES, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions Balance at charged to Balance beginning costs and at end of Description of period expenses Deductions period ----------- --------- -------- ---------- ------ Allowance for doubtful accounts: Year ended December 31, 2000 $ 773,000 $ 141,000 -- $ 914,000 Year ended December 31, 1999 $ 759,000 $ 39,000 $ 25,000(a) $ 773,000 Three months ended December 31, 1998 $ 735,000 $ 24,000 -- $ 759,000 Year ended September 30, 1998 $ 685,000 $ 50,000 -- $ 735,000 Allowance for returns and price adjustments: Year ended December 31, 2000 $1,786,000 $9,801,000 $8,547,000(b) $3,040,000 Year ended December 31, 1999 $1,467,000 $7,857,000 $7,538,000(b) $1,786,000 Three months ended December 31, 1998 $2,306,000 $1,255,000 $2,094,000(b) $1,467,000 Year ended September 30, 1998 $1,777,000 $4,661,000 $4,132,000(b) $2,306,000
(a) Write-off of uncollectible accounts (b) Returns and allowances charged against allowance provided thereof F-20
EX-10.9.2 2 0002.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), dated as of January 12, 2001, by and between Pharmaceutical Resources, Inc., a New Jersey corporation ("Resources"), and Kenneth I. Sawyer ("Executive"). R E C I T A L S : A. WHEREAS, Par Pharmaceutical, Inc. ("Par" and together with Resources, the "Employer") and Executive entered into an Employment Agreement, dated as of October 14, 1992 (the "October 1992 Agreement"), pursuant to which Executive provided services to Employer and its existing subsidiaries, entities or organizations hereafter formed, organized or acquired by Resources directly or indirectly (all such existing subsidiaries and all such hereafter formed, organized or acquired corporations, entities or organizations being hereinafter individually referred to as a "Subsidiary" and collectively referred to as the "Subsidiaries"); B. WHEREAS, on April 30, 1998. Employer and Executive entered into an amendment to the October 1992 Agreement (the "April Amendment"); and C. WHEREAS, Resources and Executive desire to supersede the October 1992 Agreement, as previously amended by the April Amendment on the terms and conditions set forth herein. In consideration of the mutual promises herein contained, the parties hereto hereby agree as follows: 1. Employment. 1.1. General. Until the earlier to occur of a Change of Control (as defined below), the election by the Board of Directors of Resources (the "Board") of a new Chief Executive Officer or September 30, 2001 (the "Initial Period"), Resources hereby employs Executive in the capacities of Chairman of the Board and Chief Executive Officer of Resources. Following the Initial Period, unless otherwise terminated pursuant to this Agreement, Resources hereby employs Executive in the capacity of Chairman of the Board at the same compensation rate and benefits which Executive earned during the Initial Period as Chairman of the Board and Chief Executive Officer of Resources. Executive hereby accepts such employment subject to the terms and conditions herein contained. In all such capacities, Executive will perform and carry out such duties and responsibilities as may be assigned to him from time to time by the Board reasonably consistent with Executive's title and this Agreement and shall report only to the Board. 1.2. Board and Board Committees. Resources will use its best efforts to cause Executive to be elected and re-elected to the Board during his period of employment with Resources. 1.3. Time Devoted to Position. Executive, during the Initial Period, will devote substantially all of his business time, attention and skills to the business and affairs of Resources. Following the Initial Period, Executive will devote only such time as Executive, in his sole discretion, determines is reasonably necessary to perform the duties of Chairman of the Board, including those duties assigned to him by the Board in such capacity for which Executive has received reasonable notice, which shall be limited to regulatory and legal matters and strategic planning. In addition, following the Initial Period, Executive will be permitted to engage in other employment activities provided such activities do not directly compete with the business of Resources and its Subsidiaries as such business is conducted on the date of this Agreement. 2. Compensation and Benefits. 2.1. Salary. At all times Executive is employed hereunder (both during and following the Initial Period and regardless of the title Executive then has) Employer will pay to Executive, and Executive will accept, as full compensation for any and all services rendered and to be rendered by him during such period to Resources in all capacities, including, but not limited to, all services which may be rendered by him to any Subsidiary and all services which may be rendered by him as an officer of Resources or member of the Board or any committee thereof, (i) a base salary at the annual rate of $395,163, or at such increased rate as the Board of Resources (through its Compensation and Stock Option Committee), in its sole discretion, may hereafter from time to time grant to Executive, subject to adjustment in accordance with Section 2.1.1 hereof (as so adjusted, the "Base Salary"); and (ii) the additional bonus and benefits hereinafter set forth in this Section 2. The Base Salary shall be payable in accordance with the regular payroll practices of Resources applicable to senior executives, less such deductions as shall be required to be withheld by applicable law and regulations or otherwise. 2.1.1 Adjustments in Base Salary. Commencing on October 1, 2001, and on each October 1 thereafter during the Employment Period (as defined below) or any extension thereof, the Base Salary shall be increased by that percentage, if any, by which the Consumer Price Index, Urban Wage Earners and Clerical Workers, for the New York City metropolitan area, published by the United States Government for the month of September of such year exceeds such Index for the immediately preceding September. 2.2 Bonus. Subject to Section 3.3 hereof, Executive shall be entitled to an annual bonus during the Employment Period in such amount (if any) as determined by the Board of Resources based on such performance criteria as it deems appropriate, including Employer's earnings, financial condition, rate of return on equity and compliance with regulatory requirements. 2.3. Executive Benefits. 2.3.1. Expenses. Resources will promptly reimburse Executive for expenses he reasonably incurs in connection with the performance of his duties (including business travel and entertainment expenses) hereunder, all in accordance with Resources' policy with respect thereto as in effect from time to time. 2.3.2. Employer Plans. Executive will be entitled to participate in such employee benefit and welfare plans and programs as Resources may from time to time offer or provide to executive officers of Resources or its Subsidiaries, including, but not limited to, participation in life insurance, health and accident, medical plans and programs and profit sharing and retirement plans. 2.3.3. Vacation. During the Initial Period, Executive will be entitled to such vacation time as may be determined to be in the best interests of Executive and Resources, but in no case less than a pro rated amount of vacation equal to four weeks vacation for a 12-month period. 2.3.4. Automobile. Resources will either buy or lease an automobile for Executive's use and reimburse Executive for all expenses related thereto, all in accordance with Employer's policy for its executive officers as in effect from time to time. 2.3.5. Note Forgiveness. Resources shall forgive the final one-third principal amount of that certain Amended and Restated Promissory Note dated January 1, 1999, made by Executive in favor of Resources (plus accrued interest on the forgiven portion thereof) in equal monthly amounts until September 30, 2001 at which time said Note shall be deemed fully paid and cancelled; provided, that, if Executive is terminated prior to such date the entire remaining unpaid balance, including accrued interest thereon, shall be forgiven and cancelled unless such termination was for Cause (as defined below) prior to the end of the Initial Period. 3. Employment Period; Termination. 3.1. Employment Period. Executive's employment hereunder shall commence on the date hereof and shall continue until terminated pursuant to Section 3.2 hereof (the Initial Period, together with any subsequent employment period, being referred to herein as the "Employment Period"). If the Employment Period is extended beyond the Initial Period, such employment shall be as Chairman of the Board of Resources only but at the compensation rates and benefits set forth in Section 2 of this Agreement. Upon termination of the Employment Period pursuant to Sections 3.2.1 through 3.2.6 hereof, inclusive, Executive will be released from any duties hereunder (except as set forth in Section 4 hereof) and the obligations of Resources to Executive will be as set forth in Section 3.3 hereof. 2 3.2. Events of Termination. The Employment Period will terminate upon the occurrence of any one or more of the following events: 3.2.1. Death. In the event of Executive's death, the Employment Period will terminate on the date of his death. 3.2.2. Without Cause By Executive. Executive may terminate the Employment Period at any time during such Period for any reason whatsoever by giving a Notice of Termination to Resources. The date of termination of the Employment Period pursuant to this Section 3.2.2 shall be 30 days after the date of receipt by Resources of the Notice of Termination. 3.2.3. Disability. In the event of Executive's Disability (as hereinafter defined), Resources will have the option to terminate the Employment Period by giving a Notice of Termination (as defined in Section 3.4.2 hereof) to Executive. The Notice of Termination shall specify the date of termination, which date shall not be earlier than thirty (30) days after the Notice of Termination is given. For purposes of this Agreement, "Disability" means the inability of Executive for 180 consecutive days to substantially perform his duties hereunder as a result of a physical or mental illness, all as determined in good faith by the Board of Resources. 3.2.4. Cause. Resources may, at its option, terminate the Employment Period for "Cause" based on objective factors determined in good faith by a majority of the Board of Resources as set forth in a Notice of Termination to Executive specifying the reasons for termination and the failure of the Executive to cure the same within ten (10) days of his receiving the Notice of Termination; provided, that in the event the Board of Resources in good faith determines that the underlying reasons giving rise to such determination cannot be cured, then said cure period shall not apply and the Employment Period shall terminate on the date of Executive's receipt of the Notice of Termination. For purposes of this Agreement, "Cause" shall be limited to willful misconduct by Executive which results in material harm to Resources and/or a material violation by Executive of the provisions of Section 4 hereof. 3.2.5. Without Cause By Resources. Resources may, at its option, terminate the Employment Period for any reason or no reason whatsoever (other than for the reasons set forth elsewhere in this Section 3.2) by giving a Notice of Termination to Executive. The Notice of Termination shall specify the date of termination, which date shall not be earlier than thirty (30) days after the Notice of Termination is given. 3.2.6. Resources' Material Breach. Executive may, at his option, terminate the Employment Period upon Resources' material breach of this Agreement and the continuation of such breach for more than ten (10) days after written demand for cure of said breach is given to Resources by Executive (which demand will identify the manner in which Employer has materially breached this Agreement); provided, that no such demand will be required if Executive determines in good faith that such material breach is not capable of being cured by Employer within said ten (10) day period. Employer's material breach of this Agreement shall include, but not be limited to, (i) the failure of Employer to make any payment which it is required to make hereunder to Executive when such payment is due or within two business days thereafter; (ii) the assignment to Executive without Executive's express written consent of any duties inconsistent with his positions, duties, responsibilities and status with Employer, or a change in Executive's reporting responsibilities, titles or offices or any plan, act, scheme or design to constructively terminate the Executive, or any removal of Executive from or any failure to use its best efforts to re-elect Executive to any of such positions, except in connection with the termination of the Employment Period by Employer for Cause or Disability or as a result of Executive's death or voluntary resignation or by Executive other than pursuant to this Section 3.2.6; and (iii) a reduction by the Employer in Executive's Base Salary. 3 3.3. Certain Obligations of Employer Following Termination of the Employment Period. Following termination of the Employment Period under the circumstances described below, Employer will pay to Executive the following compensation and provide the following benefits in full satisfaction and final settlement of any and all claims and demands that Executive now has or hereafter may have hereunder against Resources. 3.3.1. For Cause. In the event that the Employment Period is terminated (i) For Cause prior to the end of the Initial Period, then Resources will pay to Executive or his estate, as the case may be, Base Salary through the date of termination or (ii) For Cause subsequent to the Initial Period then Resources will pay to Executive in a single lump sum (x) Base Salary through the date of termination and (y) $1,000,000. 3.3.2. Without Cause by Resources; Material Breach by Employer; Death, Disability. In the event that the Employment Period is terminated by Resources pursuant to Section 3.2.5 hereof, by Executive pursuant to Section 3.2.6 hereof, by reason of Executive's death pursuant to Section 3.2.1 hereof or by reason of Executive's Disability pursuant to Section 3.2.3. hereof, Employer will pay to Executive, following the Date of Termination, a lump sum amount equal to (x) the aggregate Base Salary through such Date of Termination and (y) $1,000,000. In addition, Resources shall pay, on behalf of Executive for a period equal to 12 months from the Date of Termination, all life insurance, medical, health and accident, and disability plans and programs in which Executive was entitled to participate immediately prior to the Date of Termination; provided, that Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that Executive's participation in any such plan or program is barred, Resources, at its sole cost and expense, will use its reasonable efforts to provide Executive with benefits substantially similar to those which Executive was entitled to receive under such plans and programs. In the event that the Employment Period is terminated pursuant to Section 3.2.3 hereof (Disability), the Executive will also be entitled to receive any unpaid disability benefits under any insurance program in effect on the date of termination. 3.3.3. Without Cause By Executive. In the event that the Employment Period is terminated by Executive pursuant to Section 3.2.2 hereof, (i) prior to the end of the Initial Period, then Resources will pay to Executive the Base Salary and the benefits set forth in Sections 2.3.1 and 2.3.2 hereof through the Date of Termination or (ii) subsequent to the Initial Period, then Resources will pay to Executive in a single lump sum an amount equal to (x) the Base Salary and the benefits set forth in Section 2.3.1 and 2.3.2 through such Date of Termination and (y) $1,000,000. 3.4 Definitions. 3.4.1. "Change of Control" Defined. A "Change in Control" of Resources means (A) the approval by the stockholder(s) of Resources of the sale, lease, exchange or other transfer (other than pursuant to internal reorganization) by Resources or Par of all or substantially all of its assets to a single purchaser or to a group of associated purchasers; (B) the first purchase of shares of equity securities of Par or Resources pursuant to a tender offer or exchange offer (other than an offer by Par or Resources) for at least fifteen (15%) of the equity securities of Par or Resources; (C) the approval by the stockholder(s) of Resources of an agreement for a merger or consolidation in which neither Par nor Resources will survive as an independent, publicly-owned corporation; (D) the acquisition (including by means of a merger) by a single purchaser or a group of associated purchasers of securities of Par or Resources from either Par or Resources or any third party representing thirty-five (35%) percent or more of the combined voting power of Par's (or Resources') then outstanding equity securities in one or a related series of transactions (other than pursuant to an internal reorganization); or (E) the change of the membership of a majority of the Board of Par or Resources during any period of two consecutive years, unless the election, or the nomination for election by Par's or Resources' stockholders, of each new director was approved by a vote of at least two-thirds of the directors of Resources' Board still in office who were directors of Resources at the beginning of the period. 3.4.2. "Notice of Termination" Defined. "Notice of Termination" means a written notice which indicates the specific termination provision relied upon by Resources or Executive and, except in the case of termination pursuant to Sections 3.2.1, 3.2.2 or 3.2.5 hereof, which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employment Period under the termination provision so indicated. 3.4.3. "Date of Termination" Defined. "Date of Termination" means such date as the Employment Period is terminated in accordance with Section 3.2 hereof; provided, however, that in the event that within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination will be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction entered upon an arbitration award rendered in an arbitration proceeding pursuant to Section 5.13 hereof. 4 4. Confidentiality and Nonsolicitation. 4.1. "Confidential Information" Defined. "Confidential Information" means any and all information (oral or written) relating to Resources or any Subsidiary or any person controlling, controlled by, or under common control with Resources or any Subsidiary or any of their respective activities, including, but not limited to, information relating to: technology, research, test procedures and results, machinery and equipment; manufacturing processes; financial information; products; identity and description of materials and services used; purchasing; costs; pricing; customers and prospects; advertising, promotion and marketing; and selling, servicing and information pertaining to any governmental investigation, except such information generally in the public domain (such information not being deemed to be in the public domain merely because it is embraced by more general information which is in the public domain), other than as a result of a breach of the provisions of Section 4.2 hereof. 4.2. Non-disclosure of Confidential Information. Executive will not at any time (other than as may be required or appropriate in connection with the performance by him of his duties hereunder), directly or indirectly, use, communicate, disclose or disseminate any Confidential Information in any manner whatsoever (except as may be required under legal process by subpoena or other court order). 4.3. Certain Activities. Executive will not, while employed by Resources and for the period, if any, during which he is paid on a timely basis (subject to any legal offsets by Resources) pursuant to Section 3.3 (unless he shall be terminated for cause pursuant to Section 3.2.4 hereof, in which case for a period of one (1) year following the Date of Termination), directly or indirectly, hire, offer to hire, entice away or in any other manner persuade or attempt to persuade any officer, employee, agent, lessor, lessee, licensor, licensee, customer, prospective customer or supplier of Resources or any of its Subsidiaries to discontinue or alter his or its relationship with Resources or any of its Subsidiaries. 4.4 Non-Competition. Executive will not, while employed by Resources and for the period, if any, during which he is paid on a timely basis (subject to any legal offsets by the Resources) pursuant to Section 3.3 (unless he shall be terminated for cause pursuant to Section 3.2.4 hereof, in which case for a period of one (1) year following the Date of Termination), engage or participate in, directly or indirectly (whether as an officer, director, employee, partner, consultant, equityholder, lender or otherwise), any business in the generic drug industry within the States of New York or New Jersey. 4.5. Injunctive Relief. The parties hereby acknowledge and agree that (a) Resources will be irreparably injured in the event of a breach by Executive of any of his obligations under this Section 4; (b) monetary damages will not be an adequate remedy for any such breach; (c) Resources will be entitled to injunctive relief, in addition to any other remedy which it may have, in the event of any such breach, and (d) the existence of any claims which Executive may have against Resources or the Subsidiaries, whether under this Agreement or otherwise, will not be a defense to the enforcement by Resources of any of its rights under this Section 4. 4.6. Non-exclusivity and Survival. The covenants of Executive contained in this Section 4 are in addition to, and not in lieu of, any obligations which Executive may have with respect to the subject matter hereof, whether by contract, as a matter of law or otherwise, and such covenants and their enforceability will survive any termination of the Employment Period by either party and any investigation made with respect to the breach thereof by Resources at any time. 5 5. Miscellaneous Provisions. 5.1. Severability. If, in any jurisdiction, any term or provision hereof is determined to be invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired, (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction, and (c) the invalid or unenforceable term or provision shall, for purposes of such jurisdiction, be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. 5.2. Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement (and all signatures need not appear on any one counterpart), and this Agreement shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. 5.3. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed duly given when delivered by hand, or when delivered if mailed by registered or certified mail or private courier service, postage prepaid, return receipt requested, via facsimile (with confirmed answerback) as follows: If to Resources, to: Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, New York 10977 Attention: Vice President - Finance and Administration Telecopy No.: (845) 425-7922 Copy to: Stephen A. Ollendorff, Esq. c/o Kirkpatrick & Lockhart LLP 1251 Avenue of the Americas New York, NY 10022 Telecopy No.: (212) 536-3901 If to Executive, to: Kenneth I. Sawyer c/o Pharmaceutical Resources, Inc. One Ram Ridge Road Spring Valley, New York 10977 or to such other address(es) as a party hereto shall have designated by like notice to the other parties hereto. 6 5.4. Amendment. No provision of this Agreement may be modified, amended, waived or discharged in any manner except by a written instrument executed by both Resources and Executive. 5.5. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties hereto, oral or written, including but not limited to the October, July, January, May and October 1992 Agreements, with respect to the subject matter hereof. Executive and Employee hereby agree that the October 1992 Agreement is hereby superseded and of no further force and effect, and that this Agreement shall be effective as of the date hereof. 5.6. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be wholly performed therein, without regard to its conflicts or choice of law provisions. 5.7. Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 5.8. Binding Effect; Successors and Assigns. Executive may not delegate his duties or assign his rights hereunder. This Agreement will inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. Resources shall require any successor (whether direct or indirect and whether by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Resources, by an agreement in form and substance reasonably satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Resources would be required to perform if no such succession had taken place. 5.9. Waiver, etc. The failure of either of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Agreement or any provision hereof or the right of either of the parties hereto thereafter to enforce each and every provision of this Agreement. No waiver of any breach of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party against whom or which enforcement of such waiver is sought, and no waiver of any such breach shall be construed or deemed to be a waiver of any other or subsequent breach. 5.10. Capacity, etc. Executive and Resources hereby represent and warrant to the other that, as the case may be: (a) he or it has full power, authority and capacity to execute and deliver this Agreement, and to perform his or its obligations hereunder; (b) such execution, delivery and performance will not (and with the giving of notice or lapse of time or both would not) result in the breach of any agreements or other obligations to which he or it is a party or he or it is otherwise bound; and (c) this Agreement is his or its valid and binding obligation in accordance with its terms. 5.12. Enforcement. If any party institutes legal action to enforce or interpret the terms and conditions of this Agreement, the prevailing party shall be awarded reasonable attorneys' fees at all trial and appellate levels, and the expenses and costs incurred by such prevailing party in connection therewith. Venue for any such action shall exclusively be New York City, New York. 7 5.13. Arbitration. (a) Any dispute under Section 3 of this Agreement, including but not limited to the determination by the Board of Resources of a termination for Cause pursuant to Section 3.2.4 hereof, or in respect of the breach thereof will be settled by arbitration in the Borough of Manhattan, City of New York. The arbitration will be accomplished in the following manner. Either party may serve upon the other party written demand that the dispute, specifying the nature thereof, shall be submitted to arbitration. Within 10 days after the service of such demand, each of the parties will designate an arbitrator and serve written notice of such appointment upon the other party. If either party fails within the specified time to appoint such arbitrator, the other party will be entitled to appoint both arbitrators. The two arbitrators so appointed will appoint a third arbitrator. If the two arbitrators appointed fail to agree upon a third arbitrator within 10 days after their appointment, then an application may be made by either party hereto, upon notice to the other party, to the American Arbitration Association (the "AAA"), or any successor thereto, or if the AAA or its successor fail to appoint a third arbitrator within ten (10) days after such request, then either party may apply, with notice to the other, to the Supreme Court of the State of New York, New York County (the "Court"), for the appointment of a third arbitrator, and any such appointment so made will be binding upon both parties hereto. (b) The decision of the arbitrators will be final and binding upon the parties. The party against whom the award is rendered (the "non-prevailing party") will pay all fees and expenses incurred by the prevailing party in connection with the arbitration (including fees and disbursements of the prevailing party's counsel), as well as the expenses of the arbitration proceeding. The arbitrators will determine in their decision and award which of the parties is the prevailing party, which is the non-prevailing party, the amount of the fees and expenses of the prevailing party and the amount of the arbitration expenses. The arbitration will be conducted, to the extent consistent with this Section 5.13, in accordance with the then prevailing rules of commercial arbitration of the AAA or its successor. The arbitrators will have the right to retain and consult experts and competent authorities skilled in the matters under arbitration, but all consultations will be made in the presence of both parties, who will have full right to cross-examine the experts and authorities. The arbitrators will render their award, upon the concurrence of at least two of their number, not later than thirty (30) days after the appointment of the third arbitrator. The decision and award shall be in writing, and counterpart copies shall be delivered to each of the parties. In rendering an award, the arbitrators will have no power to modify any of the provisions of this Agreement, and the jurisdiction of the arbitrators is expressly limited accordingly. Judgment may be entered on the award of the arbitrators and may be enforced in any court having jurisdiction. 8 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. PHARMACEUTICAL RESOURCES, INC. By: /s/ Mark Auerbach -------------------------------- Name: Mark Auerbach Authorized Signatory /s/ Kenneth I. Sawyer ------------------------------------- KENNETH I. SAWYER 8 EX-10.16.1 3 0003.txt AMENDED AND RESTATED PHARMACEUTICAL RESOURCES, INC. 2000 PERFORMANCE EQUITY PLAN Section 1. Purpose; Definitions. 1.1. Purpose. The purpose of the Amended and Restated Pharmaceutical Resources, Inc. (the "Company") 2000 Performance Equity Plan (the "Plan"), adopted for the term set forth in Section 9 hereof, is to enable the Company to offer to its key employees and to key employees of its subsidiaries, Stock Options in the Company, thereby enhancing its ability to attract, retain and reward such key employees, and to increase the mutuality of interests between those employees and the stockholders of the Company. The Company previously adopted the 1990 Stock Incentive Plan (the "Prior Plan"). Awards granted under the Prior Plan prior to the effective date of this Plan ("Prior Awards") shall not be affected by the adoption of this Plan, and the Prior Plan shall remain in effect following the effective date to the extent necessary to administer the Prior Awards. 1.2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth herein: (a) "Agreement" means the agreement between the Company and the Holder setting forth the terms and conditions of an award under the Plan. (b) "Board" means the Board of Directors of the Company. (c) "Change of Control" means a change of control of the Company pursuant to Section 6 hereof. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute or statutes thereto. (e) "Committee" means the Stock Option Committee of the Board or any other committee of the Board which the Board may designate. (f) "Common Stock" means the Common Stock of the Company, par value $.01 per share. (g) "Company" means Pharmaceutical Resources, Inc., a corporation organized under the laws of the State of New Jersey, and any successor thereto. (h) "Disability" means disability as determined under procedures established by the Committee for purposes of the Plan. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. (j) "Exchange Act Holder" means such officer or director or 10% beneficial owner of Common Stock subject to Section 16(b) of the Exchange Act. (k) "Fair Market Value," unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, means, as of any given date: (i) if the Common Stock (as hereinafter defined) is listed on a national securities exchange or quoted on the NASDAQ National Market System, the closing price of the Common Stock on the last preceding day on which the Common Stock was traded, as reported on the composite tape or by NASDAQ/NMS System Statistics, as the case may be; (ii) if the Common Stock is not listed on a national securities exchange or quoted on the NASDAQ National Market System, but is traded in the over-the-counter market, the average of the bid and asked prices for the Common Stock on the last preceding day for which such quotations are reported by NASDAQ; and (iii) if the fair market value of the Common Stock cannot be determined pursuant to clause (i) or (ii) hereof, such price as the Committee shall determine. (l) "Holder" means an eligible employee or prospective employee of the Company or a Subsidiary who has received an award under the Plan. (m) "Non-Qualified Stock Option" means any Stock Option that is granted under the Plan. (n) "Plan" means this Amended and Restated Pharmaceutical Resources, Inc. 2000 Performance Equity Plan, as hereafter amended from time to time. (o) "Prior Awards" and "Prior Plan" shall have the respective meanings given to those terms in Section 1.1. (p) "Stock Option" or "Option" means any Non-Qualified Stock Option to purchase shares of Stock which is awarded pursuant to the Plan. (q) "Subsidiary" means any present or future subsidiary corporation of the Company, as such term is defined in Section 424(f) of the Code. Section 2. Administration. 2.1. Committee Membership. The Plan shall be administered by the Committee, the membership of which shall be at all times constituted so as to not adversely affect the compliance of awards under the Plan with the requirements of Rule 16b-3 under the Exchange Act or with the requirements of any other applicable law, rule or regulation. 2.2. Powers of Committee. The Committee shall have full authority to award Stock Options pursuant to the terms of the Plan, to eligible employees and prospective employees described under Section 4 hereof. For purposes of illustration and not of limitation, the Committee shall have the authority (subject to the express provisions of this Plan): 2 (a) to select the eligible employees and prospective employees to whom Stock Options may from time to time be awarded hereunder; (b) to determine the Non-Qualified Stock Options, if any, to be awarded hereunder to one or more eligible employees; (c) to determine the number of shares to be covered by each award granted hereunder; (d) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award hereunder (including, but not limited to, share price, any restrictions or limitations, and any vesting, settlement, surrender, cancellation, acceleration, termination, exercise or forfeiture provisions, as the Committee shall determine); (e) to determine any specified performance goals or such other factors or criteria which need to be attained for the vesting of an award granted hereunder; and (f) to determine the terms and conditions under which awards hereunder are to operate in conjunction with or apart from other equity awarded, and cash awards made by the Company or any Subsidiary outside of this Plan. 2.3. Interpretation of Plan. Subject to Section 8 hereof, the Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any award issued under the Plan (and to determine the form and substance of all Agreements relating thereto), and to otherwise supervise the administration of the Plan. Subject to Section 7 hereof, all decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding upon all persons, including the Company, its Subsidiaries and the Holders. Section 3. Common Stock Subject to Plan. 3.1. Number of Shares. The total number of shares of Common Stock reserved and available for distribution under the Plan shall be 1,025,000 shares. In addition, Common Stock covered by any unexercised portions of terminated Options or Prior Awards (including canceled Options or Prior Awards), or Prior Awards which are otherwise surrendered by the Holder may again be subject to new awards under this Plan. The number of shares of Common Stock deemed to be issued under the Plan upon the exercise of an Option in the nature of a stock purchase right shall be reduced by the number of shares of Common Stock surrendered by the Holder in payment of the exercise or purchase price of the award and withholding taxes thereon. 3.2. Character of Shares. Shares of Common Stock under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. 3.3. Adjustment Upon Changes in Capitalization, Etc. In the event of any acquisition, merger, reorganization, consolidation, recapitalization, dividend 3 (other than a dividend or its equivalent which is credited to a Holder or a regular cash dividend), stock split, reverse stock split, or other change in corporate structure affecting the Common Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the maximum number of shares with respect to which awards may be granted to any employee in any year, in the number and exercise price of shares subject to outstanding Options, as may be determined to be appropriate by the Committee in order to prevent the dilution or enlargement of each Holder's rights, provided that the number of shares subject to any award shall always be a whole number. Section 4. Eligibility. 4.1. General. Awards under the Plan may be made to (i) officers and other key employees of the Company or any Subsidiary (including officers and key employees serving as directors of the Company) who are at the time of the grant of an award under this Plan regularly employed by the Company or any Subsidiary; and (ii) prospective employees of the Company or its Subsidiaries; provided, however, that all awards must be made in compliance with both (A) a broadly-based(1) Plan and (B) the conditions that (i) no single officer or director may acquire under the Plan more than one (1%) percent of the shares of the issuer's common stock outstanding at the time the Plan is adopted, and (ii) together with the Prior Plan does not authorize the issuance of more than five (5%) percent of the issuer's common stock outstanding at the time the Plan is adopted. The exercise of any Stock Option and the vesting of any award hereunder granted to a prospective employee shall be conditioned upon such person becoming an employee of the Company or a Subsidiary. The term "prospective employee" shall mean any person who holds an outstanding offer of regular employment on specific terms from the Company or a Subsidiary. Section 5. Stock Options. 5.1. Grant and Exercise. Stock Options granted under the Plan are Non-Qualified Stock Options. The Committee shall have the authority to grant to any Holder hereof Non-Qualified Stock Options containing such terms, not inconsistent with this Plan, as the Committee may from time to time approve. 5.2. Terms and Conditions. Stock Options granted under the Plan shall be subject to the following terms and conditions: [FN] - -------- (1) A plan is "broadly-based" if, pursuant to the terms of the plan: (i) at least a majority of the company's full time employees in the United States, who are "exempt employees," as defined under Fair Labor Standards Act of 1938, are eligible to receive stock or options under the plan; and (ii) at least a majority of the shares of stock or shares of stock underlying options awarded under the Plan, during the shorter of the three-year period commencing on the date the Plan is adopted by the company or the term of the Plan, must be awarded to employees who are not officers or directors of the company. 4 (a) Exercise Price. The exercise price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant, provided, however, that the exercise price shall not be less than Fair Market Value. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten years after the date on which the Option is granted. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after the time of grant in whole or in part, based upon such factors as the Committee shall determine. (d) Method of Exercise. Subject to whatever installment, exercise and waiting period provisions are applicable in a particular case, Stock Options may be exercised in whole or in part at any time during the term of the Option, by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased. Such notice shall be accompanied by payment in full of the purchase price, which shall be in cash or, unless otherwise provided in the Agreement, in whole shares of Common Stock which are already owned by the Holder of the Stock Option or, unless otherwise provided in the Stock Option Agreement, partly in cash and partly in such Common Stock. Cash payments shall be made by wire transfer, certified or bank check or personal check, in each case payable to the order of the Company; provided, however, that the Company shall not be required to deliver certificates for shares of Common Stock with respect to which a Stock Option is exercised until the Company has confirmed the receipt of good and available funds in payment of the purchase price thereof. Payments in the form of Common Stock (which shall be valued at the Fair Market Value of a share of Common Stock on the date of exercise) shall be made by delivery of stock certificates in negotiable form which are effective to transfer good and valid title thereto to the Committee, free of any liens or encumbrances. Payment may also be made, in the discretion of the Company, by the delivery (including, without limitation, by fax) to the Company or its designated agent of an executed irrevocable option exercise form together with irrevocable instructions to a broker-dealer to sell or margin a sufficient portion of the shares and deliver the sale or margin loan proceeds directly to the Company to pay for the exercise price. Except as otherwise expressly provided in this Plan or in the Agreement, no Stock Option may be exercised at any time unless the Holder thereof is then an employee of the Company or of a Subsidiary. The Holder of a Stock Option shall have none of the rights of a stockholder with respect to the shares subject to the Stock Option until such shares shall be transferred to the Holder upon the exercise of the Stock Option. (e) Buyout and Settlement Provisions. The Committee may at any time offer to buy out for cash or otherwise settle a Stock Option previously granted, based upon such terms and conditions as the Committee shall establish and communicate to the Holder at the time that such offer is made. 5 5.3. Awards for Acquired Companies. After any merger, consolidation, reorganization, stock or asset purchase or similar transaction in which the Company or a Subsidiary shall be a surviving corporation, the Committee may grant Options under the provisions of the Plan, as permitted under the Code, in full or partial replacement of or substitution for stock options granted under a plan of another party to the transaction whose shares of stock subject to the old options may no longer be issued following the transaction. The manner of application of the foregoing provisions to such options and any appropriate adjustments in the terms of such awards shall be determined by the Committee in its sole discretion. Any such adjustments may provide for the elimination of any fractional shares which might otherwise become subject to any awards. The foregoing shall not be deemed to preclude the Company from assuming or substituting for stock options of acquired companies other than pursuant to this Plan. Section 6. Acceleration. 6.1. Acceleration Upon Change of Control. Unless the award Agreement provides otherwise or unless the Holder waives the application of this Section 6.1 prior to a Change of Control (as hereinafter defined), in the event of a Change of Control, each outstanding Stock Option granted under the Plan shall immediately become exercisable in full notwithstanding the vesting or exercise provisions contained in the Agreement. 6.2. Change of Control Defined. A "Change of Control" shall be deemed to have occurred upon any of the following events: (a) any individual, firm, corporation or other entity, or any group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934) (the "Act) becomes, directly or indirectly, the beneficial owner (as defined in the General Rules and Regulations of the Securities and Exchange Commission with respect to Sections 13(d) and 13(g) of the Act) of more than 20% of the then outstanding shares of the Company's capital stock entitled to vote generally in the election of directors of the Company; or (b) the commencement of, or the first public announcement of the intention of any individual, firm, corporation or other entity or of any group (as defined in Section 13(d)(3) of the Act) to commence, a tender or exchange offer subject to Section 14(d)(1) of the Act for any class of the Company's capital stock; or (c) the stockholders of the Company approve (A) a definitive agreement for the merger or other business combination of the Company with or into another corporation pursuant to which the stockholders of the Company do not own, immediately after the transaction, more than 50% of the voting power of the corporation that survives and is a publicly owned corporation and not a subsidiary of another corporation, or (B) a definitive agreement for the sale, exchange or other disposition of all or substantially all of the assets of the Company, or (C) any plan or proposal for the liquidation or dissolution of the Company; provided, however, that a "Change of Control" shall not be deemed to have taken place if (A) beneficial ownership is acquired by, or a tender or 6 exchange offer is commenced or announced by, the Company, any profit-sharing, employee ownership or other employee benefit plan of the Company, any trustee of or fiduciary with respect to any such plan when acting in such capacity, or any group comprised solely of such entities, or (B) there is an increase by Lipha Americas, Inc. or its affiliates, in its stock ownership in the Company provided that after such increase, the Company is still a publicly owned corporation listed on a national securities exchange or quoted on the NASDAQ National Market System. (d) In the event of a Change of Control, all outstanding Stock Options shall become exercisable in full, whether or not otherwise exercisable at such time, and any such Stock Option shall remain exercisable in full thereafter until it expires pursuant to its terms, unless prior to such Change of Control the provisions of this Section 6 are suspended or terminated by an affirmative vote of a majority of the Board. 6.3. General Waiver by Committee. The Committee may, after grant of an award, accelerate the vesting of all or any part of any Stock Option and/or waive any limitations or restrictions, if any, for all or any part of an award. 6.4. Acceleration Upon Termination of Employment. In the case of a Holder whose employment with the Company or a Subsidiary is involuntarily terminated for any reason (other than for cause), the Committee may accelerate the vesting of all or any part of any award and/or waive in whole or in part any or all of the remaining limitations or restrictions imposed hereunder or pursuant to the Agreement. Section 7. Forfeiture Provisions Following a Termination of Employment. 7.1. This Section 7.1 shall apply to all awards granted under this Plan except to the extent that the applicable Agreement provides otherwise. Notwithstanding any provision in this Plan to the contrary, in any instance where the rights of the Holder of an award granted under the Plan extend past the date of termination of the Holder's employment, all of such rights shall immediately and automatically terminate and be forfeited if, in the determination of the Committee, the Holder at any time during a twenty-four month period following his or her termination of employment, directly or indirectly, either (i) personally or (ii) as an employee, agent, partner, stockholder, officer or director of, consultant to, or otherwise of any entity or person engaged in any business in which the Company or any Subsidiaries is engaged, or is actively proposing to engage at the time of such termination of employment, engages in conduct that breaches his or her duty of loyalty to the Company or any Subsidiaries or that is in material competition with the Company or any Subsidiaries or is materially injurious to the Company or any Subsidiaries, monetarily or otherwise, which conduct shall include, but not be limited to: (i) disclosing or using any confidential information pertaining to the Company or any Subsidiaries; (ii) any attempt, directly or indirectly, to induce any employee of the Company or any Subsidiaries to be employed or perform services elsewhere; or (iii) any attempt, directly or indirectly, to solicit the trade of any customer or supplier or prospective customer or supplier of the Company or any Subsidiaries; or (iv) disparaging the Company or any Subsidiaries or any of their respective officers or directors. The determination of whether any conduct, action or failure to act falls within the scope of activities contemplated by this Section shall be made by the Committee, in its discretion, and shall be final and binding upon the Holder. A determination that any 7 particular conduct, action or failure falls outside the scope of activities contemplated by this Section shall not imply that, or be determinative of whether, such conduct, action or failure is otherwise lawful or appropriate. For purposes of this paragraph, a Holder shall not be deemed to be a stockholder of a competing entity if the Holder's record and beneficial ownership of equity securities of said entity amount to not more than one percent (1%) of the outstanding equity securities of any company subject to the periodic and other reporting requirements of the Securities Exchange Act of 1934, as amended. In the event the existence of any circumstance which would trigger the forfeiture of an award pursuant to this Section 7.1 but for the fact that said award has previously been converted into or exercised for other securities of the Company (e.g., upon the exercise of stock options), or converted into cash or other property (e.g., upon the sale by or for the account of the Holder of Common Stock acquired by him or her upon the exercise of Stock Options), whether before or after the termination of employment, then, in such event, said securities, or cash or other property, as the case may be, shall be deemed to be held in trust for the Company and shall be promptly paid over to the Company upon demand (net of any amounts that may have been theretofore actually paid by the Holder to the Company in respect thereof (e.g., as the cash exercise price of a warrant). By virtue of his or her acceptance of the award under the Plan to which this Agreement relates, the Holder shall be irrevocable deemed to have agreed to be bound by the provisions of this Section 7.1. The Holder further recognizes that (i) the Company would be irreparably injured in the event of a breach by the Employee of any of his obligations under this Section 7; (ii) monetary damages would not be an adequate remedy for any such breach; and (iii) the Company shall be entitled to injunctive relief, in addition to any other remedies that it may have, in the event of any such breach. Section 8. Amendments and Termination. 8.1. Amendments to Plan. The Board may at any time, and from time to time, amend any of the provisions of the Plan, and may at any time suspend or terminate the Plan. 8.2. Amendments to Individual Awards. The Committee may amend the terms of any award granted under the Plan; provided, however, that subject to Section 3 hereof, no such amendment may be made by the Committee which in any material respect impairs the rights of the Holder without the Holder's consent. Section 9. Term of Plan. 9.1. Effective Date. The Plan shall be effective on March 22, 2000. 9.2. Termination Date. No award shall be granted pursuant to the Plan on or after the tenth anniversary of its effective date, but awards granted prior to or on such date may extend beyond that date. The Plan shall terminate at such time as no further awards may be granted and all awards granted under the Plan are no longer outstanding. Section 10. General Provisions. 10.1. Investment Representations. The Committee may require each person acquiring shares of Common Stock pursuant to an award under the Plan to 8 represent to and agree with the Company in writing that the Holder is acquiring the shares for investment without a view to distribution thereof. 10.2. Additional Incentive Arrangements. Nothing contained in the Plan shall prevent the Board from adopting such other or additional incentive arrangements as it may deem desirable, including, but not limited to, the granting of stock options and the awarding of stock and cash otherwise than under the Plan; and such arrangements may be either generally applicable or applicable only in specific cases. 10.3. No Right of Employment. Nothing contained in the Plan or in any award hereunder shall be deemed to confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or any Subsidiary, nor shall it interfere in any way with the right of the Company or any Subsidiary to terminate the employment of any of its employees at any time. 10.4. Withholding Taxes. Not later than the date as of which an amount first becomes includible in the gross income of the Holder for Federal income tax purposes with respect to any award under the Plan, the Holder shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state and local taxes of any kind required by law to be withheld or paid with respect to such amount. If permitted by the Committee, tax withholding or payment obligations may be settled with Common Stock, including Common Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional upon such payment or arrangements and the Company or the Holder's employer (if not the Company) shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Holder from the Company or any Subsidiary. 10.5. Governing Law. To the extent not preempted by the laws of the United States, the laws of the State of New Jersey, without reference to conflict of laws provisions, shall be the controlling law in all matters relating to the Plan and all awards made and actions taken thereunder. 10.6. Other Benefit Plans. Any award granted under the Plan shall not be deemed compensation for purposes of computing benefits under any retirement plan of the Company or any Subsidiary and shall not affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation (unless required by specific reference in any such other plan to awards under this Plan). 10.7. Employee Status. A leave of absence, unless otherwise determined by the Committee prior to the commencement thereof, shall not be considered a termination of employment. Any awards granted under the Plan shall not be affected by any change of employment, so long as the Holder continues to be an employee of the Company or any Subsidiary. 10.8. Non-Transferability. Other than the transfer of a Stock Option by will, by the laws of descent and distribution, or pursuant to the express 9 provisions of the applicable Agreement, no award under the Plan may be alienated, sold, assigned, hypothecated, pledged, exchanged, transferred, encumbered or charged, and any attempt to alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefit. Except as expressly provided in any applicable Agreement, any Stock Option or other award granted under this Plan shall be only exercisable during the lifetime of the Holder by the Holder or by his or her guardian or legal representative. Notwithstanding the foregoing, the Company may grant Non-Qualified Stock Options that are transferable, without payment of consideration, to immediate family members of the Holder, to trusts or partnerships for such family members, or to such other parties as the Committee may approve (as evidenced by the applicable award agreement or an amendment thereto), and the Company may also amend outstanding Non-Qualified Stock Options to provide for such transferability. 10.9. Applicable Laws. The obligations of the Company with respect to all awards under the Plan shall be subject to (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of a registration statement under the Securities Act of 1933, as amended, and (ii) the rules and regulations of any securities exchange on which the Common Stock may be listed or the NASDAQ National Market System if the Common Stock is designated for quotation thereon. 10.10. Conflicts. If any of the terms or provisions of the Plan conflict with the requirements of Rule 16b-3 under the Exchange Act, or with the requirements of any other applicable law, rule or regulation, then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of said Rule 16b-3. 10.11. Written Agreements. Each award granted under the Plan shall be confirmed by, and shall be subject to the terms of the Agreement executed by the Company and the Holder. The Committee may terminate any award made under the Plan if the Agreement relating thereto is not executed and returned to the Company within 60 days after the Agreement has been delivered to the Holder for his or her execution. 10.12. Common Stock Certificates. Notwithstanding anything to the contrary contained herein, whenever certificates representing shares of Common Stock subject to an award are required to be delivered pursuant to the terms of the Plan, the Company may in lieu of such delivery requirement comply with the provisions of Section 14A:7-11 of the New Jersey Business Corporation Act. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed, any applicable Federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 10.13. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments not yet 10 made to a Holder by the Company, nothing contained herein shall give any such Holder any rights that are greater than those of a general creditor of the Company. 10.14. Certain Mergers. If in connection with a merger, reorganization, consolidation, share exchange, transfer of assets or other transaction having similar effect involving the Company ("Merger") in which the Company is not the surviving corporation or pursuant to which a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, or converted into, or otherwise become shares of another corporation, the surviving, continuing, successor or purchasing corporation, as the case may be (the "Acquiring Corporation"), does not assume the Company's rights and obligations under outstanding award agreements or substitute awards in respect of the Acquiring Corporation's stock for outstanding awards, the Board shall provide prior to the Merger that any unexercisable and/or unvested portion of the outstanding awards shall be immediately exercisable and vested as of a date prior to such Merger, as the Board so determines. The exercise and/or vesting of any award that was permissible solely by reason of this Section 10.14 shall be conditioned upon the consummation of the Merger. Any awards which are neither assumed by the Acquiring Corporation nor exercised as of the date of the Merger shall terminate effective as of the effective date of the Merger. EX-10.25.9 4 0004.txt NINTH AMENDMENT AND WAIVER TO LOAN AND SECURITY AGREEMENT NINTH AMENDMENT AND WAIVER, dated as of March 27, 2001 (this "Amendment"), to the Loan and Security Agreement referred to below by and among GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"), PAR PHARMACEUTICAL, INC., a New Jersey corporation ("Borrower"), PHARMACEUTICAL RESOURCES, INC., a New Jersey corporation ("Parent"), NUTRICEUTICAL RESOURCES, INC., a New York corporation ("NRI"), and PARCARE, LTD., a New York corporation ("ParCare"). Parent, NRI and ParCare are hereinafter referred to as "Guarantors". W I T N E S S E T H WHEREAS, Lender, Borrower and Guarantors are parties to that certain Loan and Security Agreement, dated as of December 15, 1996 (as amended, supplemented or otherwise modified prior to the date hereof, the "Loan Agreement"); and WHEREAS, Lender, Borrower and Guarantors have agreed to amend the Loan Agreement, and Lender has agreed to waive the violation of the Minimum EBIT covenant contained in the Loan Agreement in the manner, and on the terms and conditions, provided for herein. NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties to this Amendment hereby agree as follows: 1. Definitions. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. 2. Amendment to Section 5 of the Loan Agreement. As of the Amendment Effective Date (as defined below), Section 5(b) of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "(b) except as otherwise permitted in this Section 5 below, make any investment (including any investment in or advance to any other Person for research and development) in, or make or accrue loans or advances of money to, any Person, other than investments for research and development in Persons which are not Credit Parties which, together with the aggregate amount of research and development expenses of the Credit Parties, do not exceed $10,250,000 in the Fiscal Year ending on or about December 31, 2001;" 3. Amendment to Schedule F to the Loan Agreement. As of the Amendment Effective Date, Schedule F to the Loan Agreement is hereby amended and restated in its entirety to read as set forth in Schedule F hereto. 4. Waiver. Lender hereby waives as of the Amendment Effective Date all Events of Default under Section 8.1(b) of the Loan Agreement solely arising out of the failure of Parent and its Subsidiaries to maintain, on a consolidated basis, the minimum EBIT required by Section 4.2 of the Loan Agreement and paragraph 1 of Schedule F to the Loan Agreement for the four Fiscal Quarter period ended December 31, 2000. 5. Representations and Warranties. To induce Lender to enter into this Amendment, each Credit Party hereby represents and warrants that: A. The execution, delivery and performance of this Amendment and the performance of the Loan Agreement, as amended hereby (the "Amended Loan Agreement"), by each Credit Party: (i) are within their respective corporate powers; (ii) have been duly authorized by all necessary corporate and shareholder action; and (iii) are not in contravention of any provision of their respective certificates or articles of incorporation or by-laws or other organizational documents. B. This Amendment has been duly executed and delivered by or on behalf of each Credit Party. C. Each of this Amendment and the Amended Loan Agreement constitutes a legal, valid and binding obligation of each Credit Party enforceable against each Credit Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). D. No Default (other than those waived pursuant hereto) has occurred and is continuing both before and after giving effect to this Amendment. 2 E. No action, claim or proceeding is now pending or, to the knowledge of each Credit Party, threatened against any Credit Party, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any federal, state, or local government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, which challenges any Credit Party's right, power, or competence to enter into this Amendment or, to the extent applicable, perform any of its obligations under this Amendment, the Amended Loan Agreement or any other Loan Document, or the validity or enforceability of this Amendment, the Amended Loan Agreement or any other Loan Document or any action taken under this Amendment, the Amended Loan Agreement or any other Loan Document. F. The representations and warranties of the Credit Parties contained in the Loan Agreement and each other Loan Document shall be true and correct on and as of the Amendment Effective Date with the same effect as if such representations and warranties had been made on and as of such date, except that any such representation or warranty which is expressly made only as of a specified date need be true only as of such date. 6. No Other Amendment/Waivers. Except as expressly provided in Sections 2 and 3 hereof, the Loan Agreement shall be unmodified and shall continue to be in full force and effect in accordance with its terms. Except as expressly provided in Section 4 hereof, this Amendment shall not be deemed a waiver of any term or condition of any Loan Document and shall not be deemed to prejudice any right or rights which Lender may now have or may have in the future under or in connection with any Loan Document or any of the instruments or agreements referred to therein, as the same may be amended from time to time. 7. Outstanding Indebtedness; Amendment of Claims. Each Credit Party hereby acknowledges and agrees that as of the date hereof the aggregate outstanding principal amount of the Revolving Credit Loan is $10,418,120.68. Each Credit Party hereby waives, releases, remises and forever discharges Lender and each other Indemnified Person from any and all Claims of any kind or character, known or unknown, which each Credit Party ever had, now has or might hereafter have against Lender which relates, directly or indirectly, to any acts or omissions of Lender or any other Indemnified Person on or prior to the date hereof. 8. Expenses. Borrower hereby reconfirms its obligations pursuant to Section 10.2 of the Loan Agreement to pay and reimburse Lender for all reasonable out-of-pocket expenses (including, without limitation, reasonable fees of counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment and all other documents and instruments delivered in connection herewith. 3 9. Effectiveness. This Amendment shall become effective as of the date hereof (the "Amendment Effective Date") only upon satisfaction in full in the judgment of the Lender of each of the following conditions on or prior to March 29, 2001: A. Amendment. Lender shall have received two original copies of this Amendment duly executed and delivered by Lender and each Credit Party. B. Payment of Expenses. Borrower shall have paid to Lender all costs and expenses (including a non-refundable amendment and waiver fee in the amount of $20,000 (which amendment and waiver fee shall be credited to any fees to be paid by Borrower to Lender in the event the Revolving Credit Loan is extended or renewed on or before May 29, 2001) owing in connection with this Amendment and the other Loan Documents and due to Lender (including, without limitation, reasonable legal fees and expenses). C. Representations and Warranties. The representations and warranties of each Credit Party contained in this Amendment shall be true and correct on and as of the Amendment Effective Date. 10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 11. Counterparts. This Amendment may be executed by the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (SIGNATURE PAGE FOLLOWS) 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. Borrower: PAR PHARMACEUTICAL, INC. By: /s/ Dennis J. O'Connor --------------------------------- Name: Dennis J. O'Connor Title: Vice President, Chief Financial Officer Lender: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Michael Lustbader -------------------------------- Name: Michael Lustbader Its: Duly Authorized Signatory Parent: PHARMACEUTICAL RESOURCES, INC. By: /s/ Dennis J. O'Connor --------------------------------- Name: Dennis J. O'Connor Title: Vice President, Chief Financial Officer (SIGNATURES CONTINUED ON NEXT PAGE) 5 Subsidiary Guarantors: --------------------- NUTRICEUTICAL RESOURCES, INC. By: /s/ Dennis J. O'Connor --------------------------------- Name: Dennis J. O'Connor Title: Vice President, Chief Financial Officer PARCARE, LTD. By: /s/ Dennis J. O'Connor --------------------------------- Name: Dennis J. O'Connor Title: Vice President, Chief Financial Officer 6 Schedule F FINANCIAL COVENANTS 1. Minimum EBIT. Parent and its Subsidiaries on a consolidated basis shall maintain for each four Fiscal Quarter period, commencing with the four Fiscal Quarter period ending on or about March 31, 2001, EBIT for such period of not less than the amount for such period set forth below: Four Fiscal Quarter Period Ending on or about: Minimum EBIT ----------- ------------ March 31, 2001 $2,300,000 June 30, 2001 (300,000) September 30, 2001 300,000 December 31, 2001 2,400,000 2. Minimum Tangible Net Worth. Parent and its Subsidiaries on a consolidated basis shall maintain, as at the end of each Fiscal Quarter, Tangible Net Worth of not less than the amount for such period set forth below: Fiscal Quarter Ending on or about: Minimum Tangible Net Worth ----------- -------------------------- March 31, 2001 $44,000,000 June 30, 2001 41,700,000 September 30, 2001 42,600,000 December 31, 2001 45,600,000 3. Capital Expenditures. Parent and its Subsidiaries on a consolidated basis shall not make aggregate Capital Expenditures in excess of $7,500,000 for the Fiscal Year ending on or about December 31, 2001. For purposes of this covenant in Schedule F the following terms shall have the meanings set forth below: "EBIT" shall mean, for any period, the Net Income (Loss) of Parent and its Subsidiaries on a consolidated basis for such period, plus interest expense, tax expense and extraordinary losses and minus extraordinary gains, in each case, of Parent and its Subsidiaries on a consolidated basis for such period determined in accordance with GAAP to the extent included in the determination of such Net Income (Loss). "Net Income (Loss)" shall mean with respect to any Person and for any period, the aggregate net income (or loss) after taxes of such Person for such period, determined in accordance with GAAP. "Tangible Net Worth" shall mean, with respect to any Person at any date, all amounts which, in accordance with GAAP, would be included under stockholders' equity on a consolidated balance sheet of such Person at such date less the aggregate of all intangibles in conformity with GAAP (including Intellectual Property, goodwill, organization expenses, treasury stock, all deferred financing and unamortized debt discount expenses, and all current and non-current deferred tax benefits). EX-27 5 0005.txt FDS --
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-2000 JAN-01-2000 DEC-31-2000 222 0 26,260 (3,954) 20,249 46,800 50,317 (26,757) 89,150 28,288 163 0 0 297 59,788 89,150 85,022 85,528 62,332 23,068 0 141 916 (929) 0 (929) 0 0 0 (929) (.03) (.03)
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