8-K 1 pharma-8k.txt JANUARY 14, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): January 11, 2002 PHARMACEUTICAL RESOURCES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW JERSEY FILE NUMBER 1-10827 22-3122182 (STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (845) 425-7100 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On December 28, 2001, we entered into a letter agreement with ISP Hungary Holdings Limited, ISP Investments Inc., ISP Chemicals Inc. and ISP Technologies Inc. (we refer to these four companies as the ISP Group). A form of purchase agreement, which may be entered into by us, as purchaser, and the ISP Group, as sellers, was attached to the letter agreement. Under the form of purchase agreement, we would acquire from the ISP Group part of its fine chemicals business, consisting of a manufacturing facility in Columbus, Ohio, inventory, intellectual property and other assets related to the manufacture, sale, research and development of advanced intermediates and active pharmaceutical ingredients for brand name and generic pharmaceutical companies, and all of the outstanding capital stock of ISP FineTech Ltd., an Israeli corporation specializing in the design and manufacture of proprietary synthetic chemical processes used in the production of highly complex and valuable organic compounds for the pharmaceutical industry (we refer to the acquired part of the fine chemicals business as the ISP Business). The form of purchase agreement contains customary and deal specific representations, warranties and covenants in respect of the proposed acquisition. The letter agreement does not obligate any of the parties to execute the form of purchase agreement or to complete the proposed acquisition. The letter agreement, however, provides for a break-up fee of $3,000,000 to be paid by us to the ISP Group if, after the earliest of three dates, the ISP Group were to decide to execute the form of purchase agreement and we do not. Those three dates, the earliest of which we refer to as the no shop termination date, are: o the date we sell any of our equity securities; o the eighth business day after which the Registration Statement on Form S-3 (File No. 333-74606) that we initially filed with the SEC on December 5, 2001 is declared effective; and o February 15, 2002. The ISP Group, in turn, has agreed in the letter agreement that, from December 28, 2001 until the no shop termination date, it will not solicit from any entity, other than us, any proposal or offer relating to the acquisition of the ISP Business or deliver confidential information or engage in any negotiations concerning any such proposal or offer. The proposed acquisition would terminate, without further liability to us, if we chose to pay the break-up fee. Our Board of Directors authorized our management to proceed with the proposed transaction, subject to its determination that the conditions provided in the form of purchase agreement are reasonably likely to be satisfied and, therefore, that the proposed acquisition is reasonably likely to be completed. As of the date of this Form 8-K, our management has determined that it is reasonably likely that such conditions may be satisfied and that the proposed acquisition may be completed, and, accordingly, we are now filing this Form 8-K. 2 If we complete the proposed acquisition, we will purchase specifically: (i) from ISP Hungary Holdings Limited, all of the outstanding capital stock of ISP FineTech Ltd. (formerly, International Specialty Products (Israel) Ltd.); (ii) from ISP Chemicals Inc., a manufacturing and research and development facility located in Columbus, Ohio, consisting of approximately 45,000 square feet, along with all of the equipment, improvements, fixtures and machinery located at that facility; (iii) from ISP Technologies Inc., inventory consisting of raw materials and finished pharmaceutical products; (iv) from the ISP Group, intellectual property exclusively used in connection with the ISP Business and a perpetual, royalty-free, irrevocable license for certain other intellectual property currently being used by the ISP Group in connection with the ISP Business; and (v) certain other tangible and intangible assets principally relating to the ISP Business being acquired. The form of purchase agreement would require us to pay the ISP Group $107,820,000 and to assume certain limited liabilities that we identify in the purchase agreement. The purchase price may be adjusted, up or down, on a dollar-for-dollar basis, depending on whether the value of the inventory being sold to us is higher or lower than an identified target. We also would pay $1,500,000 to the ISP Group in consideration for an agreement from the ISP Group not to compete with the ISP Business for a five-year period. In determining the purchase price, we considered, among several factors, comparative businesses of the ISP Business and the estimated cost and time required to start a comparable business. The purchase price was also determined on the basis of the ISP Business's projected cash flows and taking into account expected synergies between our existing businesses and the assets and businesses that might be acquired. If the form of purchase agreement were to be executed, the closing of the proposed acquisition will be subject to, in addition to customary conditions, including consents, the following: o obtaining requisite approvals of the Israeli Chief Scientist and Israel Investment Center and expiration of the waiting period mandated under the Hart-Scott-Rodino Act; o no material adverse change in our operations, financial condition, prospects or assets until a specified time; o no material adverse change in the operations, financial condition or assets of the ISP Business; 3 o our Registration Statement being declared effective by the Commission and eight (8) business days having elapsed; and o the transfer of certain environmental permits. If we determine to proceed with the proposed acquisition, it is presently contemplated that the proposed acquisition would close in the first quarter ended 2002. Currently, we intend to finance the proposed acquisition through the sale of our equity securities and the use of available cash and/or borrowings under our existing credit agreement with General Electric Capital Corporation. We are evaluating the terms and conditions, and relative mix, of our equity and debt financing alternatives. If we complete the proposed acquisition, Dr. Arie Gutman, founder of FineTech Ltd. and currently president of ISP FineTech Ltd., will become the chief executive officer of the ISP Business, which will become one of our subsidiaries. We contemplate a five-year employment arrangement with Dr. Gutman with appropriate non-competition provisions, stock option grants and a negotiated salary. Upon the completion of the proposed acquisition, Dr. Gutman would agree to relinquish to us his rights with respect to royalties to certain of our yet to be launched products that he retained when he sold the FineTech Ltd. business to the ISP Group. We have agreed that, upon completion of the proposed acquisition, we will nominate Dr. Gutman to our Board of Directors. If we complete the proposed acquisition, we expect to operate the ISP Business on a stand-alone basis, as a separate subsidiary. We intend to use the assets and operate the businesses acquired in substantially the same manner as the ISP Group is currently using those assets and operating those businesses, and we have no intention of selling any of those assets or divesting any portion of those businesses. The proposed acquisition will be accounted for using the purchase method. Our management believes that the proposed acquisition will have neither a materially accretive nor a materially dilutive effect on our earnings in 2002. The above description is a summary of the principal terms of the letter agreement and the form of purchase agreement. We have attached complete copies of both agreements to this Form 8-K as exhibits. Our description of the terms and conditions of these agreements is qualified in its entirety by reference to such exhibits. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Business Acquired. (i) The audited combined balance sheets of ISP FineTech as of September 30, 2001 and December 31, 2000 and the related combined statements of operations, equity and cash flows for the nine-month period ended September 30, 2001 and the years ended December 31, 2000 and 1999: 4 ISP FINETECH FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To International Specialty Products Inc.: We have audited the accompanying combined balance sheets of ISP FineTech (the "Company") (see Note 1) as of September 30, 2001 and December 31, 2000, and the related combined statements of operations, equity and cash flows for the nine-month period ended September 30, 2001 and the years ended December 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 ISP FineTech, as of September 30, 2001 and December 31, 2000, and the results of its operations and cash flows for the nine-month period ended September 30, 2001 and the years ended December 31, 2000 and 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Roseland, New Jersey December 12, 2001 1
ISP FINETECH COMBINED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------------------------- 2001 2000 1999 ---------------- ----------------- ----------------- (Thousands) Net sales: Customer sales ................. $ 12,789 $ 16,290 $ 42,636 Intercompany sales to ISP ...... 2,026 2,032 53 ---------------- ----------------- ----------------- Total net sales ............. 14,815 18,322 42,689 ---------------- ----------------- ----------------- Costs and expenses: Cost of products sold .......... 11,095 17,511 26,394 Selling, general and administrative ............... 3,789 1,786 2,239 ---------------- ----------------- ----------------- Total costs and expenses .... 14,884 19,297 28,633 ---------------- ----------------- ----------------- Operating income (loss) ............ (69) (975) 14,056 Intercompany interest expense ...... (318) (552) (554) ---------------- ----------------- ----------------- Income (loss) before income taxes .. (387) (1,527) 13,502 Income tax (provision) benefit ..... 134 471 (4,861) ---------------- ----------------- ----------------- Net income (loss) .................. $(253) $ (1,056) $ 8,641 ================ ================= ================= The accompanying Notes to Combined Financial Statements are an integral part of these statements.
2
ISP FINETECH COMBINED BALANCE SHEETS ASSETS SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------------- ------------------- (Thousands) Current Assets: Cash and cash equivalents ............ $ 3,297 $ 116 Accounts receivable, trade ........... 1,358 4,379 Accounts receivable, other ........... 67 2 Inventories .......................... 9,707 4,003 Other current assets ................. 178 113 -------------- -------------- Total Current Assets ............. 14,607 8,613 Property, plant and equipment, net ...... 39,166 36,371 Goodwill, net of accumulated amortization of $271 .................. 15,316 - Intangible assets, net of accumulated amortization of $333 ...... 9,167 - -------------- -------------- Total Assets ............................ $ 78,256 $ 44,984 ============== ============== LIABILITIES AND EQUITY Current Liabilities: Accounts payable . $ 1,078 $ 1,270 Accrued liabilities 845 48 Intercompany payable to ISP . 5,760 20,278 Foreign income taxes payable 145 - -------------- -------------- Total Current Liabilities 7,828 21,596 -------------- -------------- Long-term notes payable to ISP - 6,850 -------------- -------------- Other liabilities 2,400 - -------------- -------------- Commitments and contingencies 3 ISP FINETECH COMBINED BALANCE SHEETS (Continued) SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------------- ------------------- (Thousands) Equity: Division equity 68,058 16,315 Retained earnings (accumulated deficit) (30) 223 -------------- -------------- Total Equity 68,028 16,538 -------------- -------------- Total Liabilities and Equity $ 78,256 $ 44,984 ============== ============== The accompanying Notes to Combined Financial Statements are an integral part of these statements.
4
ISP FINETECH COMBINED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER YEAR ENDED DECEMBER 31, 30, --------------------------------------- 2001 2000 1999 ------------------ ------------------ ------------------- (Thousands) Cash and cash equivalents, beginning of period ...... $ 116 $ 229 $ 21 ------------------ ------------------ ------------------- Cash provided by operating activities: Net income (loss) ................................... (253) (1,056) 8,641 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ................................... 1,923 2,060 1,748 Amortization of goodwill and intangible assets . 604 - - (Increase) decrease in working capital items ... (2,676) 2,918 848 Decrease in other liabilities .................. - - (145) Increase (decrease) in payable to ISP .......... 13,512 3,308 (625) Other, net ..................................... 8 201 43 ------------------ ------------------ ------------------- Net cash provided by operating activities ........... 13,118 7,431 10,510 ------------------ ------------------ ------------------- Cash used in investing activities: Capital expenditures ........................... (3,937) (7,544) (10,302) Acquisition of FineTech Ltd. ................... (22,450) - - ------------------ ------------------ ------------------- Net cash used in investing activities ............... (26,387) (7,544) (10,302) ------------------ ------------------ ------------------- Cash provided by financing activities: Capital contribution from parent company ....... 16,450 - - ------------------ ------------------ ------------------- Net change in cash and cash equivalents ............. 3,181 (113) 208 ------------------ ------------------ ------------------- Cash and cash equivalents, end of period ............ $ 3,297 $ 116 $ 229 ================== ================== =================== 5 ISP FINETECH COMBINED STATEMENTS OF CASH FLOWS - (Continued) NINE MONTHS ENDED SEPTEMBER YEAR ENDED DECEMBER 31, 30, --------------------------------------- 2001 2000 1999 ------------------ ------------------ ------------------- (Thousands) Supplemental Cash Flow Information: Effect on cash from (increase) decrease in working capital items: .......................... Accounts receivable ............................ $ 2,998 $ 3,398 $ (1,914) Inventories .................................... (5,623) (423) 2,215 Other current assets ........................... (50) 22 23 Accounts payable ............................... (427) 139 363 Accrued liabilities ............................ 281 (218) 161 Foreign income taxes ........................... 145 - - ------------------ --------------- ---------------- Net effect on cash from (increase) decrease in working capital items ........................... $ (2,676) $ 2,918 $ 848 ================== =============== ================ Acquisition of FineTech Ltd: Fair market value of assets acquired and intangibles recorded ........................................ $ 26,014 Purchase price of acquisition ....................... 22,450 ------------------ Liabilities assumed ................................. $ 3,564 ================== Note: See Note 9 to Combined Financial Statements for discussion of a non-cash capital contribution from the parent company. The accompanying Notes to Combined Financial Statements are an integral part of these statements.
6
ISP FINETECH COMBINED STATEMENTS OF EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Thousands) RETAINED EARNINGS DIVISION (ACCUMULATED EQUITY DEFICIT) ----------------------- ------------------------- Balance, December 31, 1998 $ 16,315 $ (7,362) Net income - 8,641 ------------- -------------- Balance, December 31, 1999 16,315 1,279 Net loss - (1,056) ------------- -------------- Balance, December 31, 2000 16,315 223 Net loss for the period ended September 30, 2001 - (253) Capital contribution from parent company 51,743 - ------------- -------------- Balance, September 30, 2001 $ 68,058 $ (30) ============= ============== The accompanying Notes to Combined Financial Statements are an integral part of these statements.
7 ISP FINETECH NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1. THE COMPANY International Specialty Products Inc. ("ISP") is principally engaged in the manufacture and sale of a wide range of specialty chemicals and mineral products. After its acquisition of FineTech Ltd. (see Note 2), ISP organized its fine chemicals business and FineTech Ltd. into its ISP FineTech division (the "Company"), effective June 2001. This combined division, which is wholly owned by ISP, formulates and manufactures a broad range of fine chemical products for the pharmaceutical, biotechnology and agricultural markets. NOTE 2. ACQUISITION OF FINETECH LTD. On June 7, 2001, ISP completed the acquisition of the assets of FineTech Ltd. ("FineTech"), a pharmaceutical research company based in Haifa, Israel. FineTech is engaged in the development, manufacturing and distribution of fine chemicals intended primarily for the pharmaceutical industry. The acquisition was accounted for under the purchase method of accounting. Accordingly, the total purchase price of $22.5 million has been allocated to the identifiable net assets acquired, with the excess of $15.6 million recorded as goodwill pending management's valuation of the fair values of the net assets acquired as of the date of acquisition. Therefore, the purchase price allocation may be revised. Included in the total purchase price of $22.5 million was a $6.0 million payment made pursuant to an "Intellectual Property Sale Agreement" under which the Company acquired the intellectual property of FineTech, including knowledge, patents, trademarks, product logos, trade names, copyrights, registrations and other rights. This amount has been recorded as an intangible asset and is being amortized over a period of 20 years pending the final purchase valuation as discussed above. Also included in the purchase price was $500,000 attributable to a five-year non-compete agreement, which has also been recorded as an intangible asset. In connection with the acquisition of FineTech, ISP Chemco Inc. ("ISP Chemco"), formerly known as ISP Opco Holdings Inc., a wholly owned indirect subsidiary of ISP, entered into a "Non-competition and Goodwill Acquisition Agreement" (the "Agreement") with the President of FineTech whereby the Company recorded $3.0 million as an intangible asset, with $600,000 included in accrued liabilities and $2.4 million included in other liabilities. The minimum guaranteed amount of $3.0 million will be paid over a period of five years beginning in May 2002 at the rate of $600,000 per year multiplied by a ratio of the book value (as defined in the Agreement) of the Company at each valuation date to the initial book value at the time of the FineTech acquisition. In the event of a change in control (as defined in the Agreement) of the Company, all remaining amounts to be paid to such officer in accordance with the Agreement will become immediately payable, subject to indemnification obligations of such officer. 8 ISP FINETECH NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) NOTE 2. ACQUISITION OF FINETECH LTD. (CONTINUED) The results of FineTech are included in the Company's results of operations from the date of its acquisition. The following unaudited pro forma combined results of operations for the nine months ended September 30, 2001 and the year ended December 31, 2000 assume the FineTech acquisition had occurred as of January 1, 2000, giving effect to purchase accounting adjustments. The pro forma data is for informational purposes only and may not necessarily reflect the actual results of operations had FineTech been acquired on January 1, 2000. NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------------- -------------- (Thousands) (Unaudited) Net sales $17,888 $21,841 Net income/(loss) $847 $ (759) NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION All entities of the Company are combined and intercompany transactions between such entities have been eliminated. FINANCIAL STATEMENT ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates. Actual results could differ from those estimates. The Company has a policy to review the recoverability of long-lived assets and identify and measure any potential impairments. The Company does not anticipate any changes in management estimates that would have a material impact on operations, liquidity or capital resources. 9 ISP FINETECH NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower of cost or market, determined based on the FIFO (first-in, first-out) method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method based on the estimated economic lives of the assets. The Company uses an economic life of 10-20 years for land improvements, 40 years for buildings and 3-20 years for machinery and equipment. Interest charges are capitalized during the period of construction as part of the cost of property, plant and equipment. GOODWILL Goodwill, which arose from the acquisition of FineTech (see Note 2), is being amortized on the straight-line method over a period of 20 years. The Company believes that the goodwill is recoverable. If goodwill is not recoverable, the Company would record an impairment based on the difference between the net carrying amount and fair value. BASIS OF PRESENTATION OF FINETECH The financial statements of FineTech since the date of its acquisition have been prepared in its functional currency, the U.S. dollar. The U.S. dollar is the currency of the primary economic environment in which the entity in Israel operates. Balances in other currencies are remeasured into U.S. dollars in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 52. REVENUE RECOGNITION Revenue is recognized at the time products are shipped to the customer. RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred and amounted to $1,349,000, $837,000 and $608,000, respectively, for the nine months ended September 30, 2001 and the years ended December 31, 2000 and 1999. 10 ISP FINETECH NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING STANDARDS On June 30, 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and eliminates the pooling method of accounting. SFAS No. 141 does not have an impact on the Company's historical financial statements. With the adoption of SFAS No. 142, effective January 1, 2002, goodwill will no longer be subject to amortization over its estimated useful life. However, goodwill will be subject to at least an annual assessment for impairment and more frequent assessments if circumstances indicate a possible impairment. Companies must perform a fair-value-based goodwill impairment test. In addition, under SFAS No. 142, acquired intangible assets should be separately recognized if they arise from contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged. Intangible assets acquired in the acquisition of FineTech (see Note 2) amounted to $9.5 million. Intangible assets are currently being amortized over their useful lives. On an annualized basis, the Company's income before income taxes will increase by approximately $0.8 million as a result of the elimination of amortization of goodwill, unless any impairment charges are necessary. NOTE 4. INCOME TAXES The results of the domestic operations of the Company are included in the consolidated income tax returns of ISP. The Company has reflected a provision for taxes in the accompanying statements of operations on a stand alone basis. Accordingly, its current and deferred tax assets or liabilities are reflected in the intercompany account with ISP. Deferred tax assets and liabilities would reflect temporary differences between assets and liabilities for financial reporting purposes and income tax purposes. Included in the September 30, 2001 income tax benefit is a foreign tax provision of approximately $5,000. 11 ISP FINETECH NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) NOTE 5. INVENTORIES Inventories at September 30, 2001, and December 31, 2000, comprise the following: SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------------- ------------------ (Thousands) Finished goods ................ 8,160 $ 4,826 Work in process ............... 4,304 1,573 Raw materials and supplies .... 3,012 2,662 ------------------- ------------------ Total .................... 15,476 9,061 Less inventory reserves ....... (5,769) (5,058) ------------------- ------------------ Inventories ................... $ 9,707 $ 4,003 =================== ================== NOTE 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at September 30, 2001, and December 31, 2000, comprise the following: September 30, December 31, 2001 2000 ---------------- --------------- (Thousands) Land and land improvements ......... $ 1,479 $ 1,453 Buildings and building equipment ... 6,527 5,803 Machinery and equipment ............ 40,176 31,995 Construction in progress ........... 3,100 7,175 ---------------- --------------- Total .......................... 51,282 46,426 Less accumulated depreciation ...... (12,116) (10,055) ---------------- ----------------- Property, plant and equipment, net . $ 39,166 $ 36,371 ================ =============== NOTE 7. BENEFIT PLANS ISP provides a defined contribution plan for eligible employees. ISP contributes up to 7% of participants' compensation (any portion of which can be contributed, at the participants' option, in the form of ISP's common stock), and also contributes fixed amounts, ranging from $50 to $750 per year depending on age, to the accounts of participants who are not covered by an ISP-provided postretirement medical benefit plan. The aggregate contribution by ISP for the Company, which is charged through the intercompany account, for the first nine months of 2001 and the years ended December 31, 2000 and 1999, respectively, were $213,000, $276,000 and $284,000. 12 ISP FINETECH NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) NOTE 7. BENEFIT PLANS (CONTINUED) In June 2001, the Company adopted an incentive compensation plan known as the ISP FineTech Incentive Unit Plan (the "Plan"). The Plan permits the grant of incentive units ("Incentive Units") to eligible employees of the Company. Incentive Units are valued based on the book value of the Company, as defined, divided by 1,000,000, with the change in the value of these Incentive Units vesting cumulatively in 20% increments over five years. Upon a change in control of the Company, as defined, the outstanding Incentive Units become fully vested and payable in cash. The Plan provides for a long term incentive system that supports the Company's business strategy and emphasizes pay-for-performance. The Plan became effective as of June 1, 2001. During the period from June 1, 2001 to September 30, 2001, 67,065 Incentive Units were granted, all of which were outstanding at September 30, 2001, including 10,000 Incentive Units granted to the President of ISP FineTech in accordance with his employment agreement with the Company. Such employment agreement provides for such officer to receive 10,000 additional Incentive Units on the anniversary date of each of the next four years. Compensation expense of $42,000, representing the change in the value of the Incentive Units outstanding under the Plan, is included in the results of operations through September 30, 2001. NOTE 8. RELATED PARTY TRANSACTIONS Included on the Combined Balance Sheets are intercompany payables to ISP which arise from operating transactions (at cost) between the Company and ISP, primarily for inventory purchases and income taxes (see Note 4). ISP has provided certain general management, administrative, legal, telecommunications, information and facilities services to the Company. Charges by ISP for providing such services aggregated $661,000, $540,000, and $1,095,000 for the nine months ended September 30, 2001 and the years ended December 31, 2000 and 1999, respectively, and are included in "Selling, general and administrative" expense. These charges consist of expenses incurred by ISP for the direct or indirect benefit of the Company and are based on an estimate of the costs ISP incurs to provide such services. In February 2000, ISP loaned the Company $6,850,000 with a term of seven years at an interest rate of 8.1% per annum. This loan was extinguished through a contribution to the Company's divisional equity in 2001. NOTE 9. CAPITAL CONTRIBUTION In June 2001, upon the formation of the Company, $51.7 million was contributed to the Company's divisional equity, $35.2 million of which represented a non-cash contribution of intercompany balances and loans previously payable to ISP. 13 ISP FINETECH NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) NOTE 10. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company operates its business as a single business segment, the formulation and manufacture of a broad range of fine chemical products for the pharmaceutical, biotechnology and agricultural markets. Sales to geographic areas outside the United States are insignificant. The Company's sales are concentrated in a relatively small number of customers. In the nine-month period ended September 30, 2001, four customers accounted for 24%, 22%, 12% and 11%, respectively, of total customer sales. In the year 2000, three customers accounted for 26%, 18% and 14%, respectively, of total customer sales. In the year 1999, one customer accounted accounted for 77% of total customer sales. NOTE 11. COMMITMENT AND CONTINGENCIES The Company is a party to various claims and routine litigation arising in the normal course of its business. Management of the Company believes that the result of such claims and litigation will not have a material adverse effect on the financial position or results of operations of the Company. LEASE COMMITMENTS The Company has operating leases related to buildings, offices and office equipment. Rental expense on operating leases was $38,000, $16,000 and $19,000 for the first nine months of 2001 and the years ended December 31, 2000 and 1999, respectively. Future minimum lease payments for properties which were held under long-term noncancelable leases as of September 30, 2001, were as follows: 2001.............................. $ 18,000 2002.............................. 24,000 2003.............................. 6,000 2004.............................. 4,000 2005.............................. - 14 (ii) The audited balance sheets of FineTech Ltd. as of December 31, 2000 and 1999, and the related statements of income, changes in shareholders' equity and cash flows for each of the fiscal years ended December 31, 2000, December 31, 1999 and December 31, 1998: FINETECH LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 FINETECH LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 C O N T E N T S --------------- PAGE -------- AUDITORS' REPORT 2 FINANCIAL STATEMENTS Balance Sheets 3 - 4 Statements of Income 5 Statements of Changes in Shareholders' Equity 6 Statements of Cash Flows 7 Notes to the Financial Statements 8 - 18 AUDITORS' REPORT TO THE SHAREHOLDERS OF FINETECH LTD. We have audited the accompanying balance sheets of FINETECH LTD. (the "Company") as of December 31, 2000 and 1999, and the related statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States and in Israel (including those prescribed under the Auditors' Regulations (Mode of Performance) (Israel), 1973). 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 the Board of Directors and 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 the Company as of December 31, 2000 and 1999, and the results of its operations, changes in shareholders' equity and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in Israel (as to reconciliation to the accounting principles generally accepted in the United States - see Note 16). LUBOSHITZ KASIERER MEMBER FIRM OF ARTHUR ANDERSEN Haifa, Israel, April 1, 2001 (except for the matters discussed in Note 16 as to which the date is December 10, 2001). FINETECH LTD. BALANCE SHEETS In U.S. Dollars - 3 - DECEMBER 31 --------------------------- NOTE 2000 1999 ------ ---------- -------------- CURRENT ASSETS Cash and cash equivalents 8,598,596 1,320,010 Short-term bank deposits - 5,891,328 Receivables and prepayments (3) 509,598 337,458 Inventories - raw materials 67,829 58,594 ---------- ---------- 9,176,023 7,607,390 ---------- ---------- FIXED ASSETS (4) Cost 1,809,780 1,665,493 Less - accumulated depreciation 991,976 708,108 ---------- ---------- 817,804 957,385 ---------- ---------- DEFERRED TAXES (14) 42,222 7,662 ---------- ---------- Total Assets 10,036,049 8,572,437 ========== ========== - 3 - DECEMBER 31 ----------------------- NOTE 2000 1999 ------ ----------- ---------- CURRENT LIABILITIES Payables and accrued expenses (5) 698,441 184,862 ----------- ---------- LONG-TERM LIABILITIES Accrued severance pay (6) 120,224 115,685 Capital notes (7) 220,861 214,904 ----------- ---------- 341,085 330,589 ----------- ---------- CONTINGENT LIABILITIES (8) Total Liabilities 1,039,526 515,451 ----------- ---------- SHAREHOLDERS' EQUITY Share capital (9) 11,678 11,678 Additional paid-in capital 3,145,110 3,151,067 Retained earnings 6,339,735 4,894,241 ----------- ---------- 9,496,523 8,056,986 Less - treasury stock, at cost 500,000 - ----------- ---------- Total Shareholders' Equity 8,996,523 8,056,986 ----------- ---------- Total Liabilities and =========== ========== Shareholders' Equity 10,036,049 8,572,437 =========== ========== _________________________ DR. ARIE GUTMAN President Date of approval of the financial statements: April 1, 2001 THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS FORM AN INTEGRAL PART THEREOF. - 4 - FINETECH LTD. STATEMENTS OF INCOME In U.S. dollars
FOR THE YEAR ENDED DECEMBER 31 ------------------------------------- NOTE 2000 1999 1998 ------- ----------- ---------- ---------- SALES (10) 3,519,575 3,149,092 2,360,195 COST OF SALES (11) 970,453 839,738 671,599 ----------- ---------- ---------- Gross profit 2,549,122 2,309,354 1,688,596 ----------- ---------- ---------- RESEARCH AND DEVELOPMENT EXPENSES 758,487 413,077 363,333 LESS - PARTICIPATION OF THE CHIEF SCIENTIST (8) 291,014 280,334 219,678 ----------- ---------- ---------- Research and development expenses, net (12) 467,473 132,743 143,655 SELLING AND ADMINISTRATIVE EXPENSES (13) 554,331 448,080 481,820 ----------- ---------- ---------- Total expenses 1,021,804 580,823 625,475 ----------- ---------- ---------- Operating income 1,527,318 1,728,531 1,063,121 FINANCING INCOME, NET 396,097 275,252 248,315 ----------- ---------- ---------- Income before taxes on income 1,923,415 2,003,783 1,311,436 TAXES ON INCOME (14) 477,921 94,556 70,502 ----------- ---------- ---------- Net income 1,445,494 1,909,227 1,240,934 =========== ========== ========== THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS FORM AN INTEGRAL PART THEREOF.
- 5 - FINETECH LTD. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY In U.S. dollars
ADDITIONAL SHARE PAID-IN RETAINED SUB TREASURY SHAREHOLDERS' CAPITAL CAPITAL EARNINGS TOTAL STOCK EQUITY ------- ---------- -------- ------- ---------- ------------- Balance as of January 1, 1998 11,462 2,618,784 1,744,080 4,374,326 - 4,374,326 Receipts on account of shares (*) - 495,000 - 495,000 - 495,000 Exchange rate differences on capital - 37,860 - 37,860 - 37,860 notes (note 7) Net income - - 1,240,934 1,240,934 - 1,240,934 ------- ---------- --------- --------- --------- ------------- Balance as of December 31, 1998 11,462 3,151,644 2,985,014 6,148,120 - 6,148,120 Issuance of shares 216 (216) - - - - Exchange rate differences on capital notes (note 7) - (361) - (361) - (361) Net income - - 1,909,227 1,909,227 - 1,909,227 ------- ---------- --------- --------- --------- ------------- Balance as of December 31, 1999 11,678 3,151,067 4,894,241 8,056,986 - 8,056,986 Exchange rate differences on capital notes (note 7) - (5,957) - (5,957) - (5,957) Purchase of treasury stock - - - - (500,000) (500,000) Net income - - 1,445,494 1,445,494 - 1,445,494 ------- ---------- --------- --------- --------- ------------- Balance as of December 31, 2000 11,678 3,145,110 6,339,735 9,496,523 (500,000) 8,996,523 ======= ========== ========= ========= ========= ============= (*) Net of expenses in the amount of $5,000. THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS FORM AN INTEGRAL PART THEREOF.
- 6 - FINETECH LTD. STATEMENTS OF CASH FLOWS In U.S. dollars
FOR THE YEAR ENDED DECEMBER 31 -------------------------------- 2000 1999 1998 --------- ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income 1,445,494 1,909,227 1,240,934 Adjustments to reconcile net income to net cash provided by operating activities (see below) 611,563 314,462 286,672 --------- ----------- ---------- Net cash provided by operating activities 2,057,057 2,223,689 1,527,606 --------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (177,045) (311,420) (275,050) Proceeds from sale of fixed assets 7,246 7,816 - Short-term bank deposits 5,891,328 (5,891,328) - --------- ----------- ---------- Net cash provided by (used in) investing activities 5,721,529 (6,194,932) (275,050) --------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Receipts on account of shares - - 500,000 Purchase of treasury stock (500,000) - - --------- ----------- ---------- Net cash used in financing activities (500,000) - 500,000 --------- ----------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,278,586 (3,971,243) 1,752,556 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,320,010 5,291,253 3,538,697 --------- ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR 8,598,596 1,320,010 5,291,253 ========= =========== ========== ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Revenues and expenses not affecting operating cash flows: Depreciation 306,823 278,676 190,202 Severance pay 4,539 (494) (10,359) Deferred taxes (34,560) 4,100 4,221 Loss (gain) from sale of fixed assets 2,557 (1,807) - --------- ----------- ---------- 279,359 280,475 184,064 --------- ----------- ---------- Changes in operating assets and liabilities: Decrease (increase) in receivables and prepayments (172,140) 82,850 68,111 Increase in inventories (9,235) (36,420) 11,241 Increase (decrease) in payables and accrued expenses 513,579 (12,443) 23,256 --------- ----------- ---------- 332,204 33,987 102,608 --------- ----------- ---------- 611,563 314,462 286,672 ========= =========== ========== THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS FORM AN INTEGRAL PART THEREOF.
- 7 - FINETECH LTD. NOTES TO THE FINANCIAL STATEMENTS In U.S. dollars NOTE 1 - GENERAL The Company is engaged in the development, manufacturing and distribution of fine chemicals, intended primarily for the pharmaceutical industry. NOTE 2 - ACCOUNTING POLICIES The financial statements have been prepared in conformity with generally accepted accounting principles in Israel ("Israeli GAAP"). See Note 16 for a reconciliation to accounting principles generally accepted in the U.S. The significant accounting policies followed in the preparation of the financial statements, on a consistent basis, are: A. BASIS OF PRESENTATION The accompanying financial statements have been prepared in U.S. dollars, as the currency of the primary economic environment in which the operations of the Company are conducted is the U.S. dollar. The majority of the Company's sales are made in U.S. dollars, as are the majority of purchases of materials and components. Thus, the functional currency of the Company is the U.S. dollar. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are remeasured into U.S. dollars in accordance with principles identical to those prescribed in Statement No. 52 of the Financial Accounting Standards Board of the United States (FASB). Accordingly, items have been remeasured as follows: - Monetary items - at the current exchange rate at balance sheet date. - Nonmonetary items - historical exchange rates. - Income and expenditure items - at exchange rates as of date of recognition of those items (excluding depreciation and other items deriving from nonmonetary items). - 8 - FINETECH LTD. NOTES TO THE FINANCIAL STATEMENTS (CONT.) In U.S. dollars NOTE 2 - ACCOUNTING POLICIES (CONT.) A. BASIS OF PRESENTATION (Cont.) Exchange gains and losses from the aforementioned remeasurement (which are immaterial for each reported period) are reflected in the statement of income. B. CASH AND CASH EQUIVALENTS All highly liquid investments (principally bank deposits) with an original maturity of three months or less are considered cash equivalents. C. INVENTORIES Inventories are stated at the lower of cost or market, cost being determined by the "first-in, first-out" method. D. FIXED ASSETS Fixed assets are stated at cost. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lease period, including renewal options. E. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses, net of participations by the Government of Israel through the Office of the Chief Scientist ("Chief Scientist"), are charged to operations as incurred. F. DEFERRED TAXES Deferred taxes are provided for temporary differences in the recognition of revenues and expenses for financial reporting and income tax purposes. Deferred taxes are calculated at tax rates expected to be in effect at the time the items are recognized in the statement of income. - 9 - NOTE 2 - ACCOUNTING POLICIES (CONT.) G. LINKED BALANCES Balances in currencies other than the U.S. dollar are stated at the exchange rate at balance sheet date. The representative exchange rate at December 31, 2000 - U.S.$1 = New Israeli Shekels ("NIS") 4.041 (1999 - NIS 4.153). Balances linked to the CPI are based on the appropriate index for each linked asset or liability. In the year 2000, there was no change in the CPI (1999 and 1998 - increase of 1.3% and 8.6%, respectively). H. REVENUE RECOGNITION Revenues from the sales of products are recognized upon shipment. I. FAIR VALUE OF FINANCIAL INSTRUMENTS Unless otherwise noted, the carrying value of financial instruments approximates their fair value. J. FINANCIAL STATEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3 - RECEIVABLES AND PREPAYMENTS DECEMBER 31 ------------------------- 2000 1999 ----------- ----------- Trade receivables 405,779 290,480 Government authorities 5,412 760 Chief Scientist 80,000 30,000 Prepaid expenses and other 18,407 16,218 ----------- ----------- 509,598 337,458 =========== =========== - 10 - FINETECH LTD. NOTES TO THE FINANCIAL STATEMENTS (Cont.) In U.S. dollars Note 4 - FIXED ASSETS MACHINERY FURNITURE LEASEHOLD AND MOTOR AND IMPROVEMENTS EQUIPMENT VEHICLES FIXTURES TOTAL ------------ --------- -------- --------- -------- COST - As of January 1, 2000 253,484 1,285,655 82,135 44,219 1,665,493 Additions 32,874 105,222 37,726 1,223 177,045 Disposals - - 32,758 - 32,758 ------------ --------- -------- -------- --------- As of December 31, 2000 286,358 1,390,877 87,103 45,442 1,809,780 ------------ --------- -------- -------- --------- ACCUMULATED DEPRECIATION - As of January 1, 2000 83,120 586,645 24,436 13,907 708,108 Provision for the year 27,885 258,297 14,547 6,094 306,823 Disposals - - 22,955 - 22,955 ------------ --------- -------- -------- --------- As of December 31, 2000 111,005 844,942 16,028 20,001 991,976 ------------ --------- -------- -------- --------- NET BOOK VALUE - As of December 31, 2000 175,353 545,935 71,075 25,441 817,804 ============ ========= ======== ======== ========= Annual rates of depreciation 10-11% 10%-33% 15% 6%-25% ============ ========= ======== ======== (*) The Company has leased premises for a period ending in 2006. The annual rent is approximately $57,600. In addition, the Company leased an office for one year at an annual rent of $3,600. Note 5 - PAYABLES AND ACCRUED EXPENSES DECEMBER 31 -------------------- 2000 1999 --------- --------- Salaries and related expenses (*) 253,862 121,245 Suppliers 51,278 29,406 Government authorities 354,778 1,323 Sundry payables and accruals 38,523 32,888 --------- --------- 698,441 184,862 ========= ========= (*) Includes accrued vacation pay 55,557 31,952 ========= ========= - 11 - FINETECH LTD. NOTES TO THE FINANCIAL STATEMENTS (CONT.) In U.S. dollars NOTE 6 - SEVERANCE PAY The Company's liability for severance pay to employees is covered by deposits with insurance companies in respect of managers' insurance and by the accrual in the balance sheet. As the amounts deposited with the insurance companies are not under the control or management of the Company, such deposits and the respective liability are not reflected in the balance sheet. NOTE 7 - CAPITAL NOTES The capital notes were issued to related companies. The notes are denominated in NIS, are not linked and do not bear interest. The notes are repayable in 2006 and 2007. Exchange rate differences on these capital notes are recorded directly in shareholders' equity. NOTE 8 - CONTINGENT LIABILITIES The Company is obligated to pay royalties to the Chief Scientist in respect of Government participation in research and development expenses, calculated at rates of 3% and 3.5% of sales of the products developed with the Government's participation up to the dollar amount of such participation (from January 1, 1999 - plus interest at libor) or a higher amount under certain circumstances. The amount of participation for which royalties has not been paid, at December 31, 2000, amounts to $1.2 million. NOTE 9 - SHARE CAPITAL A. Composition: AUTHORIZED ISSUED AND OUTSTADING ------------ ----------------------- NUMBER OF SHARES ------------------------------------- December 31, 2000: Voting shares 25,000 (1)17,180 Ordinary shares 25,000 (2)16,956 December 31, 1999: Voting shares 25,000 17,711 Ordinary shares 25,000 17,511 All shares have a par value of NIS 1 each. (1) Net of 531 treasury shares. (2) Net of 555 treasury shares. - 12 - NOTE 9 - SHARE CAPITAL (CONT.) B. In 1997, the Company granted to certain employees options to purchase 200 Ordinary shares at their par value. In 2000, the Company purchased these options from the employees in consideration for $180,000 and recorded the applicable compensation as salary expenses. In January 1999, the Board of Directors of the Company decided to grant certain employees options to purchase 800 Ordinary shares at a price of $820 per share. The options vest over a period of four years and expire seven years after the date of grant. Subsequent to balance sheet date the Board of Directors of the Company approved to grant stock options to certain employees at the same price and conditions as the options granted in 1999. C. In June 2000, the Company purchased 3% of its shares from a shareholder in consideration for $500,000. The cost of these treasury shares is presented as a deduction from shareholders' equity. NOTE 10 - SALES FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------- 2000 1999 1998 ------------ ------------ -------------- A. Composition Foreign 3,111,916 2,535,602 1,533,782 Domestic 407,659 613,490 826,413 --------- --------- --------- 3,519,575 3,149,092 2,360,195 ========= ========= ========= B. The following customers account for 10% or more of sales: Customer A 48% 36% 28% Customer B (*) 14% 21% Customer C (*) 14% 15% Customer D (*) 13% (*) Customer E 12% - (*) Less than 10% - 13 - FINETECH LTD. NOTES TO THE FINANCIAL STATEMENTS (CONT.) In U.S. dollars Note 11 - COST OF SALES FOR THE YEAR ENDED DECEMBER 31 ------------------------------- 2000 1999 1998 -------- --------- ---------- Salaries and related expenses 487,004 363,378 289,152 Materials 89,962 118,341 71,784 Depreciation 277,708 247,514 158,601 Other (*) 115,779 110,505 143,925 -------- --------- ---------- 970,453 839,738 663,462 Changes in inventories of finished products - - 8,137 -------- --------- ---------- 970,453 839,738 671,599 (*) Includes royalties paid to the Chief Scientist 5,916 6,180 5,539 ======== ========= ========== Note 12 - RESEARCH AND DEVELOPMENT EXPENSES, NET FOR THE YEAR ENDED DECEMBER 31 ------------------------------- 2000 1999 1998 -------- --------- ---------- Salaries and related expenses 550,998 282,222 283,557 Materials 66,185 47,108 40,678 Subcontractors 86,403 34,675 21,143 Depreciation 7,587 10,605 10,605 Other 47,314 38,467 7,350 -------- --------- ---------- 758,487 413,077 363,333 Less - participation by the Chief Scientist 291,014 280,334 219,678 -------- --------- ---------- 467,473 132,743 143,655 ======== ========= ========== Note 13 - SELLING AND ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED DECEMBER 31 ------------------------------- 2000 1999 1998 -------- --------- ---------- Salaries and related expenses 345,696 242,913 207,756 Marketing and advertising 77,948 99,861 134,298 Professional fees 40,397 33,497 47,056 Depreciation 21,527 20,558 20,996 Other 68,763 51,251 71,714 -------- --------- ---------- 554,331 448,080 481,820 ======== ========= ========== - 14 - FINETECH LTD. NOTES TO THE FINANCIAL STATEMENTS (CONT.) In U.S. dollars NOTE 14 - TAXES ON INCOME A. TAX LAWS The Company is subject to the Income Tax Law (Inflationary Adjustments), 1985, which provides for adjustments to taxable income for the effects of inflation (based on the Israeli Consumer Price Index) on shareholders' equity not invested in inflation resistant assets. An expansion of the Company's plant has been granted the status of an "Approved Enterprise", in accordance with a letter of approval dated May 9, 1995. Under the terms of the approval, income derived from the approved expansion is tax exempt for a period of 4 years and subject to a reduced income tax rate of 25% for an additional period of 3 years (and up to 6 years and lower tax rate, dependent on the percentage of holdings of foreign investors in the Company as defined in the law). The benefit period commenced in 1996. The Company has been granted status of an "Approved Enterprise" for the second expansion of its plant. Under the terms of the approval, income derived from the approved expansion is tax exempt for period of 2 years and subject to a reduced income tax rate of 25% for an additional period of 5 years. The benefit period commenced in 1999. Currently the Company is in the process of investing in the third expansion of its plant, which is not approved yet. Should the Company pay dividends from tax-exempt income, it will be liable to 25% tax on the amount distributed, and a further 15% withholding tax would be deducted from the amount distributable to the recipient. The Company has received final tax assessments through 1999. Under the terms of the final assessment, the Company has yet to provide tax authorities with an approval from the investment center which will allow the Company to benefit from its full tax holiday. If the Company will fail to provide such approval it will be liable to a tax payment of $607,481. Company's management is of the opinion that such approval will be obtained and therefore no liability was recorded in the financial statements. - 15 - FINETECH LTD. NOTES TO THE FINANCIAL STATEMENTS (CONT.) In U.S. dollars
NOTE 14 - TAXES ON INCOME (CONT.) B. COMPOSITION OF TAX EXPENSE FOR THE YEAR ENDED DECEMBER 31 -------------------------------------- 2000 1999 1998 ----------- ----------- ---------- Current taxes 314,510 105,985 66,281 Deferred taxes (34,560) 4,100 4,221 Taxes in respect of prior years 197,971 (15,529) - ------- ------- ------ 477,921 94,556 70,502 ======= ====== ======
The difference between the tax computed on income before taxes according to the statutory tax rate (36%) and the tax included in the financial statements is primarily a result of the tax benefits in respect of the approved enterprise. C. DEFERRED TAXES Components of deferred tax assets are as follows: ACCRUED VACATION SEVERANCE PAY PAY TOTAL ---------- ----------- ------- Balance as of January 1, 1999 1,723 10,039 11,762 Movement during the year (65) (4,035) (4,100) ---------- ----------- ------- Balance as of December 31, 1999 1,658 6,004 7,662 Movement during the year ---------- ----------- ------- 11,687 22,873 34,560 ---------- ----------- ------- Balance as of December 31, 2000 13,345 28,877 42,222 ========== =========== ======= - 16 - FINETECH LTD. NOTES TO THE FINANCIAL STATEMENTS (CONT.) In U.S dollars NOTE 15 - TRANSACTIONS WITH RELATED PARTIES (*) FOR THE YEAR ENDED DECEMBER 31 ----------------------------- 2000 1999 1998 -------- --------- -------- Cost of sales 15,286 34,488 25,624 Research and development expenses 79,150 26,372 16,550 Selling and administrative expenses 11,493 11,647 30,962 Purchase of treasury stock 500,000 - - (*) Include Dimotech Ltd. and the Technion Institution for research and development Ltd. - direct and indirect shareholders of the Company. NOTE 16 - RECONCILIATION TO U.S. GAAP On June 6, 2001 the Company signed an asset purchase agreement with International Specialty Products (Israel) Ltd. ("ISP"). According to the agreement, the Company transferred substantially all its net assets and activities to ISP in consideration for $15.7 million. In that connection, the Company has prepared the following reconciliation to U.S. GAAP. As described in Note 2, the Company prepares its primary financial statements in Israeli GAAP which differ in certain respects from U.S. GAAP. The main differences with respect to the Company's results of operations and shareholders' equity, are detailed below. 1. Stock - Based Compensation- As provided under U.S. GAAP compensation cost of options issued to employees would be accounted for under Accounting Principles Board Opinion No. 25 ("APB 25"), including FASB Interpretation No. 44. 2. Capital Notes - According to U.S. GAAP the non- interest bearing capital notes issued to related parties should be discounted to their present value based on an interest rate of 12% per annum. The difference between the face value of the notes at the date of issuance and their present value would be credited to shareholders' equity. Under U.S. GAAP the interest expense arising from the amortization of the discount and exchange rate differences on the notes are charged to financing expense. - 17 - FINETECH LTD. NOTES TO THE FINANCIAL STATEMENTS (CONT.) In U.S dollars Note 16 - RECONCILIATION TO U.S. GAAP (CONT.) The effects of the above differences are as follows: FOR THE YEAR ENDED DECEMBER 31 ------------------------------- 2000 1999 1998 ---------- --------- ---------- STATEMENTS OF INCOME Net income as reported according to Israeli GAAP 1,445,494 1,909,227 1,240,934 Effect of implementing APB-25 91,333 (51,722) - Effect of adjustments for capital notes (14,896) (10,715) 4,432 ---------- --------- ---------- Net income according to U.S. GAAP 1,521,931 1,846,790 1,245,366 ========== ========= ========== 2. SHAREHOLDERS' EQUITY As U.S GAAP As per reported Adjustments US GAAP --------- ----------- -------- As of December 31, 2000 8,996,523 107,342 9,103,865 As of December 31, 1999 8,056,986 116,281 8,173,267 As of December 31, 1998 6,148,120 126,635 6,274,755 - 18 - (b) Pro Forma Financial Information. (i) The unaudited pro forma combined balance sheet and the combined statements of operations for the nine months ended September 29, 2001 and year ended December 31, 2000: UNAUDITED PRO FORMA FINANCIAL INFORMATION (dollars in thousands) The unaudited pro forma combined statements of operations for the year ended December 31, 2000 and for the nine months ended September 29, 2001, and the unaudited pro forma combined balance sheet as of September 29, 2001, have been prepared to illustrate the estimated effects of Pharmaceutical Resources, Inc.'s (the Company) potential acquisition of certain assets and assumption of certain liabilities of the fine chemicals business of certain subsidiaries of International Specialty Products Inc. (ISP), including a pharmaceutical manufacturing facility in Columbus, Ohio, inventory, intellectual property and other assets related to the manufacture, sale, research and development of advanced intermediate and active pharmaceutical ingredients for pharmaceutical companies, and all of the outstanding capital stock of ISP FineTech Ltd., an Israeli corporation, all pursuant to a purchase agreement between the Company and such subsidiaries of ISP. On June 7, 2001 ISP acquired FineTech Ltd. and combined it with the pre-existing ISP Fine Chemicals Business Division to form ISP FineTech. As a result, the September 30, 2001 audited ISP FineTech combined financial statements only reflect the operations of FineTech Ltd. for the period from acquisition (June 7, 2001) through September 30, 2001. For pro forma purposes ISP FineTech's September 30, 2001 audited combined statement of operations has been combined with FineTech Ltd.'s unaudited statement of operations for the period January 1, 2001 through June 6, 2001. In addition, for pro forma purposes, ISP's Fine Chemicals Business Division audited statement of operations has been combined with FineTech Ltd.'s audited statement of operations for the twelve months ended December 31, 2000. For pro forma purposes, (a) the Company's unaudited consolidated balance sheet as of September 29, 2001 has been combined with ISP FineTech's audited combined balance sheet as of September 30, 2001 as if the merger had occurred on September 29, 2001, (b) the Company's unaudited consolidated statement of operations for the nine month period ended September 29, 2001 has been combined with ISP FineTech's audited combined statement of operations for the nine month period ended September 30, 2001 and FineTech Ltd.'s unaudited statement of operations for the period from January 1, 2001 through June 6, 2001 as if the acquisition had occurred on January 1, 2001 and (c) the Company's audited consolidated statement of operations for the year ended December 31, 2000 has been combined with ISP Fine Chemicals Business Division and FineTech Ltd.'s audited statement of operations for the year ended December 31, 2000 as if the acquisition had occurred on January 1, 2000. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the acquisition had been consummated on January 1, 2000 or 2001 or September 29, 2001, respectively, nor is it necessarily indicative of future operating results or financial position. The unaudited pro forma combined financial information has been prepared on the basis and assumptions described in the notes thereto and includes assumptions relating to the allocation of the consideration paid by the Company for certain assets and assumption of certain liabilities of ISP FineTech based on preliminary estimates of the fair value of such assets and liabilities. A formal appraisal of the assets and liabilities is currently ongoing. Accordingly, the actual allocation of such consideration may differ from that reflected in the unaudited pro forma combined financial information after the completion of the independent appraisal and any other procedures that are performed. In the opinion of the Company, all adjustments necessary to present fairly such unaudited pro forma combined financial information have been based on the terms and structure of the acquisition. ISP has provided certain general management, administrative, legal, telecommunications, information and facilities services to ISP FineTech and ISP Fine Chemicals Business Division for the nine months ended September 30, 2001 and the year ended December 31, 2000 totaling $661 and $540 respectively. Management of the Company has not yet completed a comprehensive review of the costs which will be incurred to replace the activities previously performed by ISP as a result of the acquisition. These unaudited pro forma combined financial statements should be read in conjunction with the historical consolidated financial statements and the related notes thereto of the Company, included in the Form 10-K, for the year ended December 31, 2000 and the Form 10-Q for the quarter ended September 29, 2001, and the historical financial statements of ISP FineTech and FineTech Ltd. included in this filing on Form 8-K.
PHARMACEUTICAL RESOURCES, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 29, 2001 (IN THOUSANDS EXCEPT PER SHARE DATA) HISTORICAL PRO FORMA ADJUSTMENTS ------------------------ ----------------------------------------------- PHARMACEUTICAL EXCLUDED PURCHASE RESOURCES ISP ASSETS AND ACCOUNTING PRO FORMA INC. FINETECH LIABILITIES REFERENCE ADJUSTMENTS REFERENCE COMBINED -------------- --------- ------------ ----------- ------------ ---------- ----------- ASSETS ------ Current assets: Cash and cash equivalents $ 2,509 $ 3,297 $ (6) (A) $ (200) (H) $ 2,675 (2,925) (B) Accounts receivable, net of allowances 84,683 1,358 (1,086) (A) - 84,955 Accounts receivable, other - 67 (1) (A) - 66 Inventories 23,973 9,707 - - 33,680 Prepaid expenses and other assets 5,117 178 (167) (A) (2,249) (G) 2,946 67 (H) Deferred income tax assets 36,424 - - - 36,424 -------------- --------- ------------ ------------ ----------- Total current assets 152,706 14,607 (1,260) (5,307) 160,746 Property, plant and equipment, at cost less accumulated depreciation and amortization 24,329 39,166 - 13,390 (E) 76,885 Deferred charges and other assets 6,936 - - 133 (H) 7,069 Goodwill, net of accumulated amortization - 15,316 (15,316) (A) 20,405 (C) 20,405 Intangibles, net of accumulated amortization - 9,167 (9,167) (A) 26,210 (D) 26,210 -------------- --------- ------------ ------------ ---------- Total assets $ 183,971 $ 78,256 $(25,743) $ 54,831 $291,315 ============== ========= ============ ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion long-term debt $ 252 $ - $ - $ - $ 252 Short-term debt 20 - - 44,320 (B) 44,340 Accounts payable 48,621 1,078 (427) (A) - 49,272 Accrued salaries and employee benefits 2,230 - - - 2,230 Intercompany payable to ISP - 5,760 (5,760) (A) - - Accrued expenses and other current liabilities 4,903 845 (43) (A) 1,200 (F) 6,905 Income taxes payable 15,733 145 (55) (A) - 15,823 -------------- --------- ------------ ------------ ----------- Total current liabilities 71,759 7,828 (6,285) 45,520 118,822 Long-term debt, net of current portion 1,103 - - - 1,103 Accrued pension liability 614 - - - 614 Deferred income tax liabilities, net 753 - - 455 (I) 1,208 Other liabilities - 2,400 (2,400) (A) - - -------------- --------- ------------ ------------ ----------- Total liabilities 74,229 10,228 (8,685) 45,975 121,747 Shareholders' equity: Common stock, par value $.01 per share; authorized 90,000,000 shares; issued and outstanding 32,007,461 shares 320 - - 23 (B) 343 Additional paid-in capital 108,364 - - 64,977 (B) 170,416 (2,925) (B) Division equity - 68,058 (68,058) (A) - - Retained earnings (accumulated deficit) 1,289 (30) 30 (A) (2,249) (G) (960) Additional minimum liability related to defined benefit plan (231) - - - (231) -------------- --------- ------------ ------------ ----------- Total shareholders' equity 109,742 68,028 (68,028) 59,826 169,568 -------------- --------- ------------ ------------ ----------- Total liabilities and shareholders' equity $ 183,971 $ 78,256 $(76,713) $105,801 $291,315 ============== ========= ============ ============ ===========
Pharmaceutical Resources, Inc. Unaudited Pro Forma Combined Statement of Operations For the Year Ended December 31, 2000 (In thousands except per share data) Historical ---------------------------------------------- ISP Fine Pharmaceutical Chemicals Pro Forma Resources Business -------------------------- Pro Forma Inc. Division FineTech Ltd. Adjustments Reference Combined -------------- ------------- -------------- ------------- ----------- --------- Net sales $ 85,022 $ 16,290 $ 3,519 $ (1,426) (R) $ 103,405 Intercompany sales to ISP - 2,032 - 305 (Q) 2,337 Cost of goods sold 62,332 17,511 970 1,159 (P) 81,296 (676) (R) ------------- ----------- ------------ ------------ ---------- Gross margin 22,690 811 2,549 (1,604) 24,446 Operating expenses: Research and development 7,634 - 758 - 8,392 Participation of chief scientist - - (291) - (291) Selling, general and administrative 15,575 1,786 463 1,912 (L) 19,736 ------------- ----------- ----------- ------------ ---------- Total operating expenses 23,209 1,786 930 1,912 27,837 ------------- ----------- ----------- ------------ ---------- Operating (loss) income (519) (975) 1,619 (3,516) (3,391) Other income, net 506 - 396 - 902 Interest expense, net (916) - (15) (4,044) (N) (5,043) (68) (O) Intercompany interest expense - (552) - 552 (J) - ------------- ----------- ----------- ------------ ---------- (Loss) income before provision for income taxes (929) (1,527) 2,000 (7,076) (7,532) Benefit (provision) for income taxes - 471 (478) (471) (K) (478) ------------- ----------- ----------- ------------ ---------- Net (loss) income $ (929) $ (1,056) $ 1,522 $ (7,547) $ (8,010) ============= =========== =========== ============ ========== Net loss per share of common stock: Basic and diluted $ (0.03) $ (0.25) ============= ========== Weighted average number of common and common equivalent shares outstanding: 29,604 2,321 (U) 31,925 ============= ============= ==========
PHARMACEUTICAL RESOURCES, INC. Unaudited Pro Forma Combined Statement of Operations For the Nine Months Ended September 29, 2001 (In thousands except per share data) Historical ------------------------------------------------ FineTech Ltd. Pharmaceutical for the period Pro Forma Resources ISP 1/1/01 Through -------------------------------- Pro Forma Inc. Finetech 6/6/01 Adjustments Reference Combined -------------- ------------ ------------------ --------------- -------------- ----------- Net sales $ 154,725 $ 12,789 $ 3,463 (2,533) (R) $ 168,054 (390) (S) Intercompany sales to ISP - 2,026 - 304 (Q) 2,330 Cost of goods sold 93,613 11,095 571 596 (P) 104,685 (1,034) (R) (156) (S) ----------- -------- ------ ------- -------- Gross margin 61,112 3,720 2,892 (2,025) 65,699 Operating expenses: Research and development 7,436 - 665 (390) (S) 7,711 Selling, general and administrative 15,385 3,789 407 1,101 (L) 20,411 (271) (M) ----------- -------- ------ ------- -------- Total operating expenses 22,821 3,789 1,072 440 28,122 ----------- -------- ------ ------- -------- Operating income (loss) 38,291 (69) 1,820 (2,465) 37,577 Other income, net 431 - - - 431 Interest (expense) income, net (580) - 152 (2,350) (N) (2,829) (51) (O) Intercompany interest expense - (318) - 318 (J) - ----------- -------- ------ ------- -------- Income (loss) before provision for income taxes 38,142 (387) 1,972 (4,548) 35,179 (Provision) benefit for income taxes (7,230) 134 (543) 1,728 (T) (5,911) ----------- -------- ------ ------- -------- Net income (loss) $ 30,912 $ (253) $ 1,429 $ (2,820) $ 29,268 =========== ======== ====== ======= ======== Net income per share of common stock: Basic $ 1.03 $ 0.90 =========== ======== Diluted $ 0.97 $ 0.86 =========== ======== Weighted average number of common and common equivalent shares outstanding: Basic 30,106 2,321 (U) 32,427 =========== ======= ======== Diluted 31,902 2,321 (U) 34,223 =========== ======= ========
Notes to Unaudited Pro Forma Combined Financial Information (dollars in thousands, except share amounts) 1. Basis of Presentation The unaudited pro forma combined balance sheet combines the historical consolidated balance sheet of Pharmaceutical Resources, Inc. (the "Company") as of September 29, 2001 with the historical consolidated balance sheet of ISP FineTech after giving effect to the acquisition as if the transaction occurred on September 29, 2001. The unaudited pro forma combined statement of operations combines the historical consolidated statement of operations of the Company for the year ended December 31, 2000 with the combined statement of operations of ISP FineTech and the statement of operations of FineTech Ltd. for the year ended December 31, 2000 and the Company's unaudited consolidated statement of operations for the nine months ended September 29, 2001 combined with ISP FineTech's combined audited statement of operations for the nine months ended September 30, 2001 and FineTech Ltd.'s unaudited statement of operations for the period January 1, 2001 through June 6, 2001 as if the acquisition had occurred at January 1, 2000 and January 1, 2001. The Company has utilized the purchase accounting method related to the acquisition. The value of the assets acquired by the Company is based on preliminary discussions by management with its outside valuation consultants. The value of these items will be updated upon completion of their valuation. 2. Acquisition Based upon a preliminary valuation of tangible and intangible assets and liabilities, the Company has allocated the total cost of the acquisition of ISP FineTech as follows: Estimated Purchase Price $109,320 Plus: Acquisition and Closing Costs 1,200 Deferred Tax Liability 455 Less: Working Capital Acquired 11,804 Property, Plant and Equipment 49,120 Construction in Progress 3,436 Covenant Not to Compete 1,500 Trademarks and Brandnames 2,210 Core Technology 13,900 Product Technology 8,130 Other 470 -------- Goodwill $20,405 3. Pro Forma Adjustments The unaudited pro forma combined balance sheet includes the adjustments necessary to give effect to the acquisition as if it had occurred on September 29, 2001 and to reflect the allocation of the acquisition cost to the fair value of tangible and intangible assets acquired and liabilities assumed. Adjustments included in the pro forma combined balance sheet are summarized as follows: (A) Represents the exclusion of certain assets and liabilities not acquired. (B) The Company purchased ISP FineTech for total consideration of $109,320, comprised of $24,320 in cash, $20,000 in financing under their existing revolving line of credit, which will expire three years from the date of acquisition, and $65,000 in financing through an equity offering. Under certain circumstances the Company could decide not to proceed with the acquisition and pay ISP FineTech a break-up fee of $3,000. The pro forma adjustments reflect a successful equity offering of 2,320,600 shares of common stock at a share price of $28.01 (as of January 10, 2002), for total proceeds of $65,000. The interest rate charged on the revolving line of credit is based upon a per annum rate of 8.6% in 2000 and 6.6% in 2001 (2.25% above the 30 day commercial paper rate). The Company used cash on hand at September 29, 2001 to pay $2,925 of fees associated with the equity offering. As the Company did not have the $27,245 of cash on hand as of January 1, 2000 to fund this acquisition, interest was calculated at the Company's incremental borrowing rate of 8.6% in 2000 and 6.6% in 2001 (2.25% above the average 30-day commercial paper rate). (C) Represents the allocation of the excess purchase price to goodwill based upon the preliminary valuation of the tangible and intangible assets acquired. (D) Represents the allocation of intangibles based upon the preliminary valuation of the tangible and intangible assets acquired. (E) Represents the allocation of the excess estimated fair value of property, plant and equipment acquired. (F) Represents $1,200 of estimated acquisition costs related to the purchase of ISP FineTech. (G) Represents the elimination of $2,249 of prepaid expenses paid by the Company to ISP FineTech for the rights to certain technology. (H) Represents a $200 commitment fee for the revolving line of credit to secure the financing of the acquisition. (I) Represents the deferred tax liability for the differences between the book value and fair market value of the assets acquired through the purchase of the FineTech Ltd. common stock. Adjustments included in the unaudited pro forma consolidated statements of operations for the year ended December 31, 2000 and the nine months ended September 29, 2001 are summarized as follows: (J) Represents the elimination of interest expense on a loan from ISP to ISP FineTech, as the Company is not assuming this liability. (K) Represents the elimination of the intercompany income tax benefit recognized by ISP Fine Chemicals Business Division due to uncertainty of realization in 2000. Realization is probable in 2001. (L) Amortizable intangibles have estimated useful lives ranging between two and twenty years. Additional amortization expense of $1,912 and $1,101 has been included in the unaudited pro forma combined statements of operations for the year ended December 31, 2000 and the nine months ended September 29, 2001. The historical financial statement of operations of ISP FineTech for the nine months ended September 30, 2001 include $333 of amortization expense. Goodwill and Trademarks and Brandnames have indefinite useful lives; as a result for pro forma purposes no amortization expense has been recognized. (M) Represents the elimination of the amortization of goodwill of $271 for the period ended September 29, 2001 in accordance with Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets". (N) The Company acquired ISP FineTech for total consideration of $109,320 comprised of $24,320 in cash, $20,000 in financing under their existing revolving line of credit, which will expire three years from the date of acquisition, and $65,000 in financing through an equity offering. The interest rate charged on the revolving line of credit is based upon a per annum rate of 8.6% in 2000 and 6.6% in 2001 (2.25% above the 30 day commercial paper rate). The Company used cash on hand at September 29, 2001 to pay $2,925 of fees associated with the equity offering. As the Company did not have the $27,245 of cash on hand as of January 1, 2000 to fund this acquisition, interest was calculated at the Company's incremental borrowing rate of 8.6% in 2000 and 6.6% in 2001 (2.25% above the average 30-day commercial paper rate). Interest expense of $4,044 and $2,350 was recorded for pro forma purposes for the year-ended December 31, 2000 and for the nine months ended September 29, 2001. (O) Represents amortization of the commitment fee associated with the revolving line of credit noted in (N) above. The revolving line of credit commitment fee of 1% or $200 was amortized at a rate of approximately $6 per month for pro forma purposes for the year ended December 31, 2000 and the nine months ended September 29, 2001 as the revolving line of credit is for a period of three years ($68 in 2000 and $51 in 2001). (P) Represents additional depreciation related to the acquired property, plant and equipment, which is depreciated over a period between 5 and 30 years. Additional depreciation expense of $1,159 and $596 has been included in cost of goods sold in the unaudited pro forma combined statements of operations for the year ended December 31, 2000 and the nine months ended September 29, 2001. The historical financial statements of operations of ISP FineTech and FineTech Ltd. include depreciation expense of $2,367 and $2,049 for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. (Q) ISP purchases certain inventory from ISP FineTech at cost. The adjustment represents a proposed 15% markup for these sales under a contract expected to be entered into between ISP and the Company at the date of acquisition as part of the Purchase Agreement. (R) Represents the elimination of sales and cost of sales between the Company and FineTech Ltd. (S) Represents the elimination of sales, cost of sales, and research and development expenses between the ISP and FineTech Ltd. for the period between January 1, 2001 through June 6, 2001. (T) Represents the tax effects of pro forma adjustments at the applicable statutory rate in 2001. In 2000 no benefit was recorded due to uncertainty of realization. (U) Represents the effect of the 2,320,600 incremental common shares issued at a share price of $28.01 (as of January 10, 2002) in connection with the $65,000 equity offering. Note 4 - Forward Looking Adjustments ISP has provided certain general management, administrative, legal, telecommunications, information and facilities services to ISP FineTech and ISP Fine Chemicals Business Division for the nine months ended September 30, 2001 and the year ended December 31, 2000 totaling $661 and $540 respectively. Management of the Company has not yet completed a comprehensive review of these costs, which will be incurred to replace the activities previously performed by ISP as a result of the acquisition. These unaudited pro forma combined financial statements should be read in conjunction with the historical consolidated financial statements and the related notes thereto of the Company, included in the Form 10-K, for the year ended December 31, 2000 and the Form 10-Q for the quarter ended September 29, 2001 and the historical financial statements of ISP FineTech and FineTech Ltd. included in this filing on Form 8-K. (c) Exhibits: 10.1 Letter Agreement, dated as of December 28, 2001, among Pharmaceutical Resources, Inc., ISP Hungary Holdings Limited, ISP Investments Inc., ISP Chemicals Inc. and ISP Technologies Inc. (with the attached Form of Purchase Agreement). 23.1 Consent of Arthur Andersen LLP, Independent Accountants. 99.1 Press Release announcing execution of Purchase Agreement among Pharmaceutical Resources, Inc., ISP Hungary Holdings Limited, ISP Investments Inc., ISP Chemicals Inc. and ISP Technologies Inc. 5 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. January 11, 2002 PHARMACEUTICAL RESOURCES, INC. ------------------------------ (Registrant) /s/ Dennis J. O'Connor -------------------------------------------------------- Dennis J. O'Connor Vice President, Chief Financial Officer and Secretary 6