-----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, AK32LjNGN7+NP289zWhaSLL6YdkdbZnC4Iw3WGuJsdoGpRtHk8iQQSc7yPP3HpIV cMUU0vor0L8Mfu/GQYBxxA== 0000950130-98-002570.txt : 19980513 0000950130-98-002570.hdr.sgml : 19980513 ACCESSION NUMBER: 0000950130-98-002570 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980328 FILED AS OF DATE: 19980512 SROS: NYSE SROS: PCX 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-Q SEC ACT: SEC FILE NUMBER: 001-10827 FILM NUMBER: 98617080 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-Q 1 FORM 10-Q Commission File Number 1-10827 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM 10--Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 28, 1998 PHARMACEUTICAL RESOURCES, INC. (Exact name of registrant as specified in its charter) NEW JERSEY 22-3122182 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (914) 425-7100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_______ ------ 18,890,153 Number of shares of Common Stock outstanding as of May 8, 1998. This is page 1 of 25 pages. The exhibit index is on page 17. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
MARCH 28, SEPTEMBER 30, ASSETS 1998 1997 ------ --------- ------------- (Unaudited) (Audited) Current assets: Cash and cash equivalents $ 67 $ 181 Accounts receivable, net of allowances of $3,190 and $5,109 9,823 11,414 Inventories 16,213 13,239 Prepaid expenses and other current assets 3,579 3,321 -------- -------- Total current assets 29,682 28,155 Property, plant and equipment, at cost less accumulated depreciation and amortization 26,904 27,832 Deferred charges and other assets 3,004 2,102 Non-current deferred tax benefit 14,608 14,608 -------- -------- Total assets $ 74,198 $ 72,697 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $ 202 $ 218 Short-term debt 12,118 3,947 Accounts payable 3,668 5,120 Accrued salaries and employee benefits 1,842 1,755 Accrued expenses and other current liabilities 1,206 1,156 -------- -------- Total current liabilities 19,036 12,196 Long-term debt, less current portion 2,547 2,651 Accrued pension liability 582 582 Shareholders' equity: Common Stock, par value $.01 per share; authorized 60,000,000 shares; issued and outstanding 18,886,098 and 18,874,216 shares 189 189 Additional paid in capital 67,540 67,520 Accumulated deficit (15,665) (10,410) Additional minimum liability related to defined benefit pension plan (31) (31) -------- -------- Total shareholders' equity 52,033 57,268 -------- -------- Total liabilities and shareholders' equity $ 74,198 $ 72,697 ======== ========
The accompanying notes are an integral part of these statements. -2- PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (In Thousands, Except Per Share Amounts) (Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED --------------------- --------------------- MARCH 28, MARCH 29, MARCH 28, MARCH 29, 1998 1997 1998 1997 -------- -------- -------- -------- Net sales $ 25,708 $ 24,252 $ 13,574 $ 11,782 Cost of goods sold 23,575 23,494 12,945 12,256 -------- -------- -------- -------- Gross margin 2,133 758 629 (474) Operating expenses: Research and development 1,769 3,777 861 3,073 Selling, general and administrative 5,312 6,346 2,724 3,222 -------- -------- -------- -------- Total operating expenses 7,081 10,123 3,585 6,295 -------- -------- -------- -------- Operating loss (4,948) (9,365) (2,956) (6,769) Other income 146 249 71 140 Interest expense (453) (218) (258) (136) -------- -------- -------- -------- Loss before provision for income taxes (5,255) (9,334) (3,143) (6,765) Provision for income taxes - 410 - - -------- -------- -------- -------- NET LOSS (5,255) (9,744) (3,143) (6,765) Accumulated deficit, beginning of period (10,410) (1,509) (12,522) (4,488) -------- -------- -------- -------- Accumulated deficit, end of period $(15,665) $(11,253) $(15,665) $(11,253) -------- -------- -------- -------- (1) BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK $(.28) $(.52) $(.17) $(.36) ======== ======== ======== ======== (1) Weighted average number of common and common equivalent shares outstanding 18,881 18,667 18,883 18,700 ======== ======== ======== ========
(1) There were no effects of dilutive options in the six and three-month periods ended March 28, 1998 and March 29, 1997. The accompanying notes are an integral part of these statements. -3- PHARMACEUTICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
SIX MONTHS ENDED ---------------------- MARCH 28, MARCH 29, 1998 1997 ---------- ---------- Cash flows from operating activities: Net loss $(5,255) $(9,744) Adjustments to reconcile net loss to net cash used in operating activities: Joint venture research and development - 379 Depreciation and amortization 1,436 1,365 Allowances against accounts receivable 1,919 (657) Write-off of inventories 495 634 Gain on sale of marketable securities - (170) (Gain) loss on sale of fixed assets 1 (18) Changes in assets and liabilities: (Increase) decrease in accounts receivable (328) 952 (Increase) decrease in inventories (3,469) 2,004 (Increase) decrease in prepaid expenses and other assets (1,156) 2,636 Decrease in accounts payable (1,452) (1,561) Increase (decrease) in accrued expenses and other liabilities 137 (594) ------- -------- Net cash used in operating activities (7,672) (4,774) Cash flows from investing activities: Capital expenditures (549) (552) Proceeds from sale of fixed assets 36 293 Proceeds from sale of marketable securities - 272 ------- ------- Net cash (used in) provided by investing activities (513) 13 Cash flows from financing activities: Proceeds from issuance of Common Stock 20 36 Net proceeds from revolving credit line and proceeds from issuance of other debt 8,171 8,059 Principal payments under long-term debt and other borrowings (120) (3,633) ------- ------- Net cash provided by financing activities 8,071 4,462 Net decrease in cash and cash equivalents (114) (299) Cash and cash equivalents at beginning of period 181 $ 299 ------- ------- Cash and cash equivalents at end of period $ 67 - ======= =======
The accompanying notes are an integral part of these statements. -4- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS MARCH 28, 1998 (UNAUDITED) Pharmaceutical Resources, Inc. (the "Company" or "PRI") operates in one business segment, the manufacture and distribution of generic pharmaceuticals. Marketed products are principally in solid oral dosage form (tablet, caplet and capsule), with one product in the semi-solid form of a cream and one transdermal patch. BASIS OF PREPARATION: The accompanying financial statements at March 28, 1998 and for the six-month and three-month periods ended March 28, 1998 and March 29, 1997 are unaudited; however, in the opinion of management of PRI, such statements include all adjustments (consisting of normal recurring accruals) necessary to a fair statement of the information presented therein. The balance sheet at September 30, 1997 was derived from the Company's audited financial statements at such date. Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying financial statements and these notes do not include all disclosures required by generally accepted accounting principles for audited financial statements. Accordingly, these statements should be read in conjunction with PRI's most recent annual financial statements. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. Certain items on the consolidated financial statements of the prior year have been reclassified to conform to the current year financial statement presentation. ACQUISITION OF JOINT VENTURE: In August 1997, the Company acquired from Clal Pharmaceutical Industries Ltd. ("Clal") its 51% ownership interest in their research and development joint venture in which PRI previously had owned 49%. The Company and Clal had formed the joint venture located in Israel to research and develop generic pharmaceutical products. The joint venture was renamed Israel Pharmaceutical Resources L.P. ("IPR"). The Company acquired Clal's ownership interest in IPR for $447,000 in cash obtained from the sale of its holdings in Fine-Tech Ltd. ("Fine-Tech"), an Israeli pharmaceutical research and development company in which Clal had a significant ownership interest, and a non-recourse, secured promissory note in the principal amount of $1,500,000. The note bears interest at 7% per annum and is payable in eight equal installments starting in July 1999. The Company may prepay the note in full if it makes a payment of $600,000 before August 13, 1998. The Company is obligated to invest not less than $1,500,000 each year in IPR until the note is repaid. Merck KGaA and the Company have reached an agreement in principle for Merck KGaA to prepay the note in full prior to August 13, 1998 on behalf of the Company in exchange for consideration relating to IPR to be agreed upon in the future (See "--Equity Investment"). In addition, the Company and Clal agreed to modify certain terms of Clal's investment in the Company, including the surrender by Clal of warrants to purchase approximately 2,005,000 shares of Common Stock of the Company in exchange for the issuance to Clal of 186,000 shares of the Company's Common Stock for nominal consideration. At March 28, 1998 Clal owned approximately 12% of PRI's outstanding Common Stock. DISTRIBUTION AGREEMENTS: In April 1997, Par Pharmaceutical, Inc. ("Par"), the Company's principal operating subsidiary, entered into a Manufacturing and Supply Agreement (the "Supply Agreement") with BASF Corporation ("BASF"), a manufacturer of pharmaceutical products. Under the Supply Agreement, Par agreed to purchase certain minimum quantities of certain products manufactured by BASF at one of its facilities, and phase out Par's manufacturing of those products. BASF agreed to discontinue its direct sale of those products. The agreement has an initial term of three years (subject to earlier termination upon the occurrence of certain events as provided therein) and thereafter renews automatically for successive two-year periods to December 31, 2005, if Par has met certain purchase thresholds. In the event that Par's purchases do not equal or exceed the thresholds, BASF may elect to terminate the Supply Agreement effective one year later. The Company began selling drugs manufactured by BASF and BASF transferred to Par the marketing and sales of certain products covered by the Supply Agreement in June 1997 and the agreement became fully implemented in August 1997. -5- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--CONTINUED MARCH 28, 1998 (UNAUDITED) The Company has a distribution agreement, as amended, with Sano Corporation ("Sano") which gives Par the right to exclusively distribute Sano's nicotine transdermal patch and an option to distribute, when approved, a nitroglycerin transdermal patch developed by Sano, in the United States (see "--Subsequent Events-Distribution Agreement"). Sano develops transdermal delivery systems utilizing a patch that incorporates the appropriate drug dosage into an adhesive that attaches the patch to the skin. Sano received U.S. Food and Drug Administration ("FDA") approval for its nicotine patch in October 1997 and the Company began selling the patch in January 1998. The Company is purchasing the manufactured product from Sano at cost and sharing in the gross profits from the sales. SHORT-TERM DEBT: In December 1996, Par entered into a Loan and Security Agreement (the "Loan Agreement") with General Electric Capital Corporation ("GECC") which provided Par with a three-year revolving line of credit. The Company was in breach of the Loan Agreement during the current quarter related to borrowings that exceeded the borrowing base as calculated at that time. On March 4, 1998, the Company and GECC amended the Loan Agreement. Pursuant to the Loan Agreement, as amended, Par is permitted to borrow up to the lesser of (i) the sum of the borrowing base and the overadvancement limit of $2,000,000 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 overadvancement limit increases to $2,500,000 through June 19, 1998 if GECC consents to the form and substance of an equity investment in the Company (see "--Equity Investment"). The interest rate charge on the line of credit is based upon a per annum rate of 3.50% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par and PRI other than real property and is guaranteed by PRI. In connection with such facility, Par, PRI, and their affiliates have established a cash management system pursuant to which all cash and cash equivalents received by any of such entities are deposited into a lockbox account over which GECC has sole operating control and which are applied on a daily basis to reduce amounts outstanding under the line of credit. A portion of the proceeds from the equity investment shall be immediately applied by the Company to pay all outstanding revolving credit advances pursuant to the Loan Agreement. The revolving credit facility is subject to covenants based on various financial benchmarks. In fiscal year 1997, GECC waived events of default on three occasions unrelated to the repayment of debt under the Loan Agreement. As of May 7, 1998, the borrowing base was approximately $13,000,000 and $5,300,000 was outstanding under the line of credit. Any significant reduction in the borrowing base from current levels will adversely affect the Company's liquidity and operations. INCOME TAXES: Based on the Company's recent performance and the uncertainty of the generic drug business in which it operates, management believes that future operating income might not be sufficient to recognize fully the net operating loss carryforwards of the Company. Therefore, the Company did not recognize a benefit for its operating losses in any of the six-month and three-month periods ended March 28, 1998 or March 29, 1997. 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. The Company incurred income tax expense of $410,000 in the first quarter of fiscal 1997 due to interest relating to a settlement with the Internal Revenue Service in fiscal 1995 for the disallowance of tax credits taken by the Company in prior periods with respect to certain research and development costs. PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--CONTINUED -6- MARCH 28, 1998 (UNAUDITED) EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128"), which is effective for financial statements for periods ending after December 15, 1997, and requires replacement of primary and fully diluted earnings per share with basic and diluted earnings per share including retroactive restatement of all prior 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. The Company adopted the new accounting standard during the first quarter of fiscal 1998 and, accordingly, has presented or restated all earnings per share data to conform to the requirements of SFAS 128. Outstanding options and warrants of 1,817,100 and 812,200 at the end of the current six and three-month periods, respectively, and 3,681,307 in each of the corresponding periods of the prior year 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 156,394 and 219,145 for the current six and three-month periods, respectively, were excluded from diluted earnings per share because they were antidilutive. EQUITY INVESTMENT: In March 1998, the Company entered into a strategic alliance with Merck KGaA, Darmstadt, Germany ("Merck KGaA"), a multinational pharmaceutical, laboratory and chemical company. Pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), dated March 25, 1998, between the Company and Lipha Americas, Inc. ("Lipha"), a subsidiary of Merck KGaA, the Company agreed to sell 10,400,000 newly-issued shares of PRI's Common Stock to Lipha at $2.00 per share. In addition, the Company agreed to issue 5-year options to purchase up to 1,171,040 additional shares of the Company's Common Stock at an exercise price of $2.00 per share to Merck KGaA and Genpharm, Inc. ("Genpharm"), a subsidiary of Merck KGaA, in exchange for certain management services to be provided to the Company. In connection with the Stock Purchase Agreement, the Company also obtained from Genpharm exclusive distribution rights in the United States for up to approximately 40 generic pharmaceutical products currently being developed, some of which have obtained FDA approval and others of which have been or will be submitted to the FDA for approval. The purchase of the 10,400,000 shares will give Merck KGaA a 36% ownership interest in PRI. The Company intends to use a portion of the net proceeds of $20,800,000 from the stock sale to repay advances made to it under its existing line of credit and the remainder will be used for working capital, including possible business expansion. As part of the transaction described above, Merck KGaA also agreed to purchase an additional 1,813,272 shares of the Company's Common Stock from Clal, PRI's largest current stockholder, at a price of $2.00 per share. In addition, Clal has the right to cause Merck KGaA and/or the Company to purchase an additional 500,000 shares of Common Stock from Clal in three years. Genpharm is required to pay all of the research and development costs associated with the approximately 40 products covered by a distribution agreement with Genpharm. PRI will pay to Genpharm a certain percentage of the gross margin on the sales of the products. Under the Stock Purchase Agreement, Lipha will have the right, subject to the closing of the transaction, to designate a majority of the Company's directors and the Company's current Board of Directors will have the right to designate three persons to continue as directors of the Company, one of whom will be Kenneth I. Sawyer (the current Chairman, President and Chief Executive Officer of the Company). Lipha and its affiliates have agreed to not engage in certain business combinations including the Company for a period of three years, unless a majority of the three directors designated by the Company's current Board of Directors consent. Lipha will have certain rights of first refusal to acquire equity stock of the Company in the event of future equity offerings. PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--CONTINUED -7- MARCH 28, 1998 (UNAUDITED) Merck KGaA and its affiliates have, as a result of and subject to the closing of the transactions discussed above, the right to purchase up to approximately 46% of the Company's Common Stock after giving effect to such transactions. The completion of the transaction with Merck, Lipha and Genpharm is subject to certain conditions set forth in the Stock Purchase Agreement, including the obtaining of all necessary government consents, approval by the Company's stockholders of the issuance of the Common Stock and grant of stock options and the election of the Merck KGaA designated directors. However, the distribution agreement is effective immediately, and if the stock purchase transaction does not close by July 15, 1998, Genpharm has the option to terminate the distribution agreement with respect to certain products and otherwise it will terminate at the option of Genpharm on March 25, 1999. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: Retirement Plans: The Company has a defined contribution, social security integrated Retirement Plan providing retirement benefits to eligible employees as defined in the Retirement Plan. The Board of Directors of Par directed the cessation of employer contributions effective December 30, 1996. Consequently, participants in the Retirement Plan will no longer be entitled to any employer contributions under such plan for 1996 or subsequent years. The Company also maintains a Retirement Savings Plan whereby eligible employees are permitted to contribute from 1% to 12% of pay to this Plan. The Company contributes an amount equal to 50% of the first 6% of the pay contributed by the employee. In fiscal 1998, the Company intends to merge the Retirement Plan into the Retirement Savings Plan. Legal Proceedings: The Company is involved in certain litigation matters, including certain product liability actions and actions by a former officer for, among other things, breach of contract. Such actions seek damages from the Company, including compensatory and punitive damages. The Company intends to defend these actions vigorously. The Company believes that these actions are incidental to the conduct of its business and that the ultimate resolution thereof will not have a material adverse effect on its financial condition or results of operations. Restructuring and Cost Reductions: The Company implemented measures beginning in the fourth quarter of fiscal 1996, which continued throughout fiscal 1997, to reduce costs and increase operating efficiencies. Such measures have provided for a reduction of the work force, changes in various senior management, a reorganization of certain existing personnel and reductions in certain expenses. Other Matters: Through March 1998, the Company loaned $875,000 to another generic drug manufacturer for working capital purposes. In March and April 1998, the loan plus interest, was repaid in full. -8- PHARMACEUTICAL RESOURCES, INC. NOTES TO FINANCIAL STATEMENTS--CONTINUED MARCH 28, 1998 (UNAUDITED) SUBSEQUENT EVENTS: Distribution Agreement : In May 1998, the Company amended its existing distribution agreement with Sano. Pursuant to the amendment, the Company ceded its distribution rights to two nitroglycerin transdermal patches, one unconditionally and one conditionally, currently filed with the FDA and awaiting approval. In return for relinquishing these rights, PRI received cash payments of approximately $5,700,000 in May 1998, which included approximately $2,100,000 as a prepayment, with accrued interest, of a promissory note which was due from Sano in September 1998. PRI will also receive a royalty on all future net sales of one of the nitroglycerin transdermal patches by Sano or any transferee of rights by Sano, and any distributors and licensees of the product, as defined in the agreement, in the United States and Israel. In addition, Sano will increase the Company's share of the gross profit on sales of the nicotine patch whose United States distribution rights remain covered by the agreement. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS IN THIS FORM 10-Q CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES OF CURRENT PRODUCTS AS WELL AS THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN THIS FORM 10-Q INCLUDE, AMONG OTHERS, (I) INCREASED COMPETITION FROM NEW AND EXISTING COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS, (II) PRICING PRESSURES RESULTING FROM THE CONTINUED CONSOLIDATION OF THE COMPANY'S DISTRIBUTION CHANNELS, (III) THE AMOUNT OF FUNDS CONTINUING TO BE AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND DEVELOPMENT JOINT VENTURES, (IV) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR DELAYS IN OBTAINING REGULATORY APPROVALS, (V) THE ABILITY OF THE COMPANY TO RETAIN AND ATTRACT MANAGEMENT PERSONNEL IN KEY OPERATIONAL AREAS, (VI) CONTINUED AVAILABILITY OF BORROWINGS UNDER THE COMPANY'S CREDIT LINE WITHOUT SIGNIFICANT REDUCTION, AND (VII) CONSUMMATION OF THE PROPOSED STRATEGIC ALLIANCE WITH MERCK KGAA AND ITS AFFILIATES (SEE "NOTES TO FINANCIAL STATEMENTS-EQUITY INVESTMENT"). RESULTS OF OPERATIONS GENERAL The Company's operating losses were $4,948,000 and $2,956,000 for the six- month and three-month periods ended March 28, 1998, respectively, compared to operating losses of $9,365,000 and $6,769,000 in the corresponding periods of the prior fiscal year. The improvement was due to increased sales and gross margins, and lower operating expenses, as described below. If current sales and gross margin levels are not increased from sales of new distributed or manufactured products, the Company will continue to experience losses. In an effort to position the Company for future growth while strengthening its current financial condition and near and long-term product line, PRI entered into a strategic alliance on March 25, 1998 with Merck KGaA, a pharmaceutical, laboratory and chemical company located in Darmstadt, Germany. Under the agreement, Merck KGaA, through its subsidiary Lipha, will pay the Company $20,800,000, or $2.00 per share, for 10,400,000 newly-issued shares of PRI's Common Stock. The alliance will give the Company an immediate cash infusion which will be used to repay advances made to it under its existing line of credit with the remainder used for working capital, including possible business expansion. In addition, the Company will receive the sole rights to the portfolio of products covered by a distribution agreement with Merck KGaA's Canadian subsidiary Genpharm, granting the Company exclusive United States distribution rights for up to approximately 40 generic pharmaceutical products currently being developed, some of which have obtained FDA approval and others of which have been or will be submitted to the FDA for approval. Genpharm will pay all of the research and development costs associated with the approximately 40 products and PRI will pay Genpharm a certain percentage of the gross margin on sales of the products. The completion of the transaction with Merck KGaA, Lipha and Genpharm is subject to certain conditions set forth in the Stock Purchase Agreement (see "Notes to Financial Statements-Equity Investment"). The continued price and profit margin erosion on certain of the Company's products reflects the continuing trend in the generic drug industry in the United States. The factors contributing to the intense competition and affecting both the introduction of new products and the pricing and profit margins of the Company, include, among other things, (i) introduction of other generic drug manufacturer's products in direct competition with the Company's significant products, (ii) consolidation among distribution outlets, (iii) increased ability of generic competitors to enter the market after patent expiration, diminishing the amount and duration of significant profits, (iv) willingness of generic drug customers, including wholesale and retail customers, to switch among pharmaceutical manufacturers, and (v) competition from brand name drug manufacturers selling generic versions of their drugs. In response to these conditions, the Company has reduced operating costs and entered into several significant agreements, as described elsewhere in this Form 10-Q (see "Notes to Financial Statements-Distribution Agreements", "-Commitments, Contingencies and Other Matters-Restructuring and Cost Reductions" and "-Equity Investment"). -10- Critical to any significant improvement in the Company's financial condition is the introduction and acquisition of new manufactured and distributed products at profitable prices. The strategic alliance with Merck KGaA is expected to provide, in the near-term, the Company with a significant number of new products in its product development pipeline without the substantial resource commitment, including financial, it would normally take to develop such a pipeline. The Company plans to continue to invest in research and development efforts in addition to pursuing additional products for sale through new and existing distribution agreements. The Company is engaged in efforts, subject to FDA approval and other factors, to introduce new products as a result of its research and development efforts and distribution agreements. No assurance can be given that any additional products for sale by the Company will occur or that sales of additional products will reduce losses or return the Company to profitability. Continuing losses will adversely affect the Company's liquidity and, accordingly, its ability to fund research and development or ventures relating to the sale of new products (see "--Financial Condition-Liquidity and Capital Resources"). NET SALES Net sales of $25,708,000 for the six months ended March 28, 1998 increased $1,456,000, or 6%, from $24,252,000 for the corresponding period ended March 29, 1997. The sales growth was primarily due to the continuing increase in sales of two distributed products manufactured by BASF under the Supply Agreement and the introduction of two new products in January 1998, the nicotine patch manufactured by Sano and Zorprin(R) manufactured by BASF. Net sales of these four products, in addition to significantly higher volumes of a lower margin manufactured product due to increased demand from three customers, more than offset the decline in sales of certain manufactured products. Certain manufactured products continued to experience decreased sales which resulted primarily from lower pricing and continuing decreases in volume of three of the Company's significant products. The reductions in pricing and volume resulted principally from the introduction of other generic drug manufacturers' products in direct competition with the Company's significant products. Net sales for the current three-month period of $13,574,000 increased $1,792,000, or 15%, compared to sales for the corresponding period of last year. The increase is principally attributable to higher sales of two distributed products, the introduction of two new products and a higher volume of a lower margin product offsetting the continuing lower sales of certain significant products, as described above. Levels of sales are principally dependent upon, among other things, (i) pricing levels and competition, (ii) market penetration for the existing product line, (iii) approval of Abbreviated New Drug Applications ("ANDAs") and introduction of new manufactured products, (iv) introduction of new distributed products, and (v) the level of customer service. GROSS MARGIN The gross margin of $2,133,000 (8% of net sales) for the six-month period ended March 28, 1998 increased $1,375,000 from $758,000 (3% of net sales) in the corresponding period of the prior fiscal year. The gross margin improvement was principally due to increased margin contributions from higher margin products manufactured by BASF under the Supply Agreement, higher volumes of a lower margin manufactured product together with more favorable raw material pricing, decreased manufacturing costs and the introduction of two new products. These improvements more than offset the continuing lower selling prices and decreased volumes of certain significant manufactured products resulting from increased competition from other generic drug manufacturers. In the current quarter, the Company's gross margin of $629,000 (5% of net sales) increased from ($474,000) (-4% of net sales) in the corresponding quarter of the prior year. The improvement is primarily attributable to increased margin contributions from products manufactured by BASF, a higher volume of a lower margin manufactured product and the introduction of two new products in the current quarter. These factors along with reduced manufacturing costs more than offset the continuing lower sales of certain significant products, as described above. -11- Inventory write-offs, taken in the normal course of business, amounted to $495,000 and $202,000 for the six-month and three-month periods ended March 29, 1998, respectively, decreasing from $634,000 and $301,000 in the corresponding periods of the prior year. The inventory write-offs are related primarily to the disposal of finished products due to short shelf life. OPERATING EXPENSES Research and Development Research and development expenses for the six and three-month periods ended March 28, 1998 were $1,769,000 and $861,000, respectively, versus $3,777,000 and $3,073,000 for the respective corresponding periods of the prior fiscal year. In August 1997, the Company acquired Clal's 51% ownership interest in IPR in which PRI previously had owned 49% (see "Notes to Financial Statements- Acquisition of Joint Venture"). The Company recorded an aggregate of $729,000 and $287,000 in research and development expenses for IPR for the current six and three-month periods, respectively, compared to $379,000 and $231,000 for the respective corresponding periods of the prior year. The higher costs of IPR were more than offset by lower domestic spending on research and development. Additionally, prior year costs included advances to Sano of $1,957,000 which were not incurred in the current fiscal year. During fiscal year 1997, the Company's domestic research and development program was fully integrated with the research operations in Israel. The Company has ANDAs for five potential products pending with the FDA and awaiting approval. The Company expects to complete two additional product submissions by the end of the current fiscal year. The Company has a distribution agreement with Sano to distribute a generic nicotine transdermal product developed by Sano. Sano received FDA approval for its nicotine patch in October 1997 and the Company began selling the patch manufactured by Sano in January 1998 (see "Notes to Financial Statements- Distribution Agreements"). As part of the distribution agreement entered into with Genpharm, Genpharm is required to pay all of the research and development costs associated with a portfolio of products covered by the distribution agreement. The distribution agreement will grant the Company exclusive United States distribution rights for up to approximately 40 generic pharmaceutical products currently being developed, some of which have obtained FDA approval and others of which have been or will be submitted to the FDA for approval. The Company will pay Genpharm a certain percentage of the gross margin on sales of those products. The distribution agreement is effective immediately, and if the stock purchase transaction does not close by July 15, 1998, Genpharm has the option to terminate the distribution agreement with respect to certain products and otherwise it will terminate at the option of Genpharm on March 25, 1999 (see "Notes to Financial Statements-Equity Investment"). Selling, General and Administrative Selling, general and administrative costs of $5,312,000 (21% of net sales) for the six-month period ended March 28, 1998 were reduced $1,034,000, or 16%, from $6,346,000 (26% of net sales) in the six-month period ended March 29, 1997. The lower expenses in the current period were primarily attributable to a decline in personnel costs resulting from head count reductions (see "Notes to Financial Statements-Restructuring and Cost Reductions"). In the second quarter of fiscal year 1998, selling, general and administrative costs of $2,724,000 (20% of net sales) decreased $498,000, or 15%, from $3,222,000 (27% of net sales) in the corresponding quarter of the last fiscal year. The reduced expenses are primarily the result of decreased personnel costs, as discussed above. -12- INCOME TAXES Management has determined, based on the Company's recent performance and the uncertainty of the generic drug business in which the Company operates, that future operating income might not be sufficient to recognize fully the net operating loss carryforwards of the Company. Therefore, the Company did not recognize a benefit for its operating losses in any of the six-month and three- month periods ended March 28, 1998 or March 29, 1997 (see "Notes to Financial Statements-Income Taxes"). The Company incurred income tax expense of $410,000 in the first quarter of fiscal year 1997 due to interest relating to a settlement with the Internal Revenue Service in fiscal year 1995 for the disallowance of tax credits taken by the Company in prior periods with respect to certain research and development costs. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Working capital of $10,646,000 at March 28, 1998 decreased $5,313,000 from $15,959,000 at September 30, 1997. The decrease is principally due to the use of funds to finance operating losses. As a result of a cash management system pursuant to the financing agreement that the Company entered into with GECC, the only remaining cash balance at March 28, 1998 was cash at IPR (see "-- Financing"). The working capital ratio of 1.6x in the current period declined from 2.3x at fiscal 1997 year end. In August 1997, the Company, through one of its subsidiaries, acquired Clal's 51% ownership interest in their research and development joint venture in Israel for $447,000 in cash obtained from the sale of Fine-Tech stock and a non- recourse secured promissory note for $1,500,000 bearing interest at 7% per annum. The Company may prepay the note in full if it makes a payment of $600,000 before August 13, 1998. The Company is obligated to invest not less than $1,500,000 each year in IPR until the note is repaid. Merck KGaA and the Company have reached an agreement in principle for Merck KGaA to prepay the note in full prior to August 13, 1998 on behalf of the Company in exchange for consideration relating to IPR to be agreed upon in the future (see "Notes to Financial Statements-Acquisition of Joint Venture"). Through March 1998, the Company loaned $875,000 to another generic drug manufacturer for working capital purposes. In March and April 1998, the loan, plus interest, was repaid in full (see "Notes to Financial Statements- Commitments, Contingencies and Other Matters-Other Matters"). On March 25, 1998 the Company formed a strategic alliance with Merck KGaA, a pharmaceutical, laboratory and chemical company located in Darmstadt, Germany. Under the agreement, Merck KGaA, through its subsidiary Lipha, will pay the Company $20,800,000, or $2.00 per share, for 10,400,000 newly-issued shares of PRI's Common Stock. The Company intends to use a portion of the net proceeds of the stock sale to repay advances made to it under its existing line of credit and the remainder will be used for working capital, including possible business expansion. The completion of the transaction with Merck, Lipha and Genpharm is subject to certain conditions set forth in the Stock Purchase Agreement, including the obtaining of all necessary government consents, approval by the Company's stockholders of the issuance of the Common Stock and the grant of stock options and the election of the Merck KGaA designated directors (see "Notes to Financial Statements-Equity Investment"). In May 1998, the Company amended its existing distribution agreement with Sano ceding its distribution rights to two products, one unconditionally and one conditionally, covered under the agreement. In return for relinquishing these rights, PRI received cash payments of approximately $5,700,000 in May 1998, which included approximately $2,100,000 as a prepayment, with accrued interest, of a promissory note which was due from Sano in September 1998. The proceeds from this transaction were used to reduce the revolving credit line balance (see "Notes to Financial Statements-Subsequent Events-Distribution Agreement"). -13- The Company expects to fund its operations, including research and development activities and its obligations under the existing distribution and development arrangements discussed above, out of its working capital, (including proceeds from the stock sale to Lipha if it is consummated) and if necessary with borrowings against its line of credit, to the extent then available (see "- - -Financing"). If, however, the Company continues to experience significant losses, its liquidity and, accordingly, its ability to fund research and development or ventures relating to the distribution of new products would likely be materially and adversely affected. FINANCING At March 28, 1998, the Company's total outstanding short-term and long-term debt amounted to $12,118,000 and $2,749,000, respectively. The short-term debt consists of the outstanding amount under the Company's line of credit with GECC and the long-term debt consists primarily of an outstanding mortgage loan with a bank and a non-recourse secured promissory note resulting from the acquisition of Clal's interest in IPR in fiscal year 1997. In December 1996, Par entered into the Loan Agreement with GECC which provided Par with a three-year revolving line of credit. The Company was in breach of the Loan Agreement during the second quarter of fiscal 1998 and on March 4, 1998, the Company and GECC amended the Loan Agreement (see "Item 6- Defaults Upon Senior Securities"). Pursuant to the Loan Agreement, as amended, Par is permitted to borrow up to the lesser of (i) the sum of the borrowing base and the overadvancement limit of $2,000,000 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 overadvancement limit increases to $2,500,000 through June 19, 1998 if GECC consents to the form and substance of an equity investment in the Company (see "Notes to the Financial Statements-Equity Investment"). The interest rate charge on the line of credit is based upon a per annum rate of 3.50% above the 30-day commercial paper rate for high-grade unsecured notes adjusted monthly. The line of credit with GECC is secured by the assets of Par and PRI other than real property and is guaranteed by PRI. In connection with such facility, Par, PRI, and their affiliates have established a cash management system pursuant to which all cash and cash equivalents received by any of such entities are deposited into a lockbox account over which GECC has sole operating control and which are applied on a daily basis to reduce amounts outstanding under the line of credit. A portion of the proceeds from the equity investment shall be immediately applied by the Company to pay all outstanding revolving credit advances pursuant to the Loan Agreement. The revolving credit facility is subject to covenants based on various financial benchmarks. In fiscal year 1997, GECC waived events of default on three occasions unrelated to the repayment of debt under the Loan Agreement. As of May 7, 1998, the borrowing base was approximately $13,000,000 and $5,300,000 was outstanding under the line of credit. Any significant reduction in the borrowing base from current levels will adversely affect the Company's liquidity and operations. ITEM 6. DEFAULTS UPON SENIOR SECURITIES. In February 1998, the Company was in breach of the Loan Agreement related to borrowings that exceeded the borrowing base as calculated at that time. On March 4, 1998, the Company and GECC amended the Loan Agreement with respect to overadvancement limits and prepayment of the revolving credit facility. -14- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. - ------ -------------------------------- (a) Exhibits: 10.28 - Third Amendment and Consent to Loan and Security Agreement, dated as of March 4, 1998, between Par and General Electric Capital Corporation. 27 - Financial Data Schedule. (b) Reports on Form 8-K: The Company, on March 31, 1998, filed a current report on Form 8-K, relating to the proposed transactions with Merck KGaA and its affiliates. -15- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHARMACEUTICAL RESOURCES, INC. ------------------------------ (Registrant) May 12, 1998 /s/ Kenneth I. Sawyer ------------------------------------- Kenneth I. Sawyer President and Chief Executive Officer (Principal Executive Officer) May 12, 1998 /s/ Dennis J. O'Connor ------------------------------------- Dennis J. O'Connor Vice President - Chief Financial Officer and Secretary (Principal Accounting and Financial Officer) -16- EXHIBIT INDEX ------------- Exhibit Number Description Page Number - -------------- ----------- ----------- 10.28 Third Amendment and Consent to Loan and Security Agreement, dated as of March 4, 1998, between Par and General Electric Capital Corporation 18 27 Financial Data Schedule 25 EX-10.28 2 THIRD AMENDMENT & CONSENT TO LOAN & SECURITY AGMNT Exhibit 10.28 THIRD AMENDMENT AND CONSENT TO LOAN AND SECURITY AGREEMENT ------------------------------ THIRD AMENDMENT AND CONSENT, dated as of March 4, 1998 (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"); - --------- WHEREAS, Lender, Borrower and Guarantors have agreed to amend the Loan Agreement in the manner, and on the terms and conditions, provided for herein; and WHEREAS, Lender has agreed to consent to certain violations of 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 Schedule A to the Loan Agreement. Schedule A to --------------------------------------------- ---------- the Loan Agreement is hereby amended as of the Amendment Effective Date (as hereinafter defined) as follows: (a) The following new definitions shall be inserted in the proper alphabetical order: "Merck" shall mean Merck KGaA, a company organized under ----- the laws of the Federal Republic of Germany. "Merck Equity Documents" shall mean, collectively, the ---------------------- Merck Stock Purchase Agreement and any other agreements, instruments and documents executed pursuant thereto or in connection therewith, as any of the foregoing may from time to time be amended, modified or supplemented, all in form and substance satisfactory to Lender. "Merck Stock Purchase Agreement" shall mean that certain Stock ------------------------------ Purchase Agreement to be entered into between Parent and Merck in form and substance satisfactory to Lender, pursuant to which Merck shall make an equity investment in Parent in an amount not less than $20,000,000. "Overadvance Limit" shall mean for each period the amount set ----------------- forth below for such period: Period Overadvance Limit ------ ----------------- 2/17/98 through 6/19/98 $2,000,000 6/20/98 and thereafter $ 0 ; provided, however, that if Lender receives the Merck Equity -------- Documents in form and substance satisfactory to Lender before June 19, 1998, the Overadvance Limit from the date of receipt thereof through June 19, 1998 shall be $2,500,000. "Permitted Holder" shall mean Merck or any other Person ---------------- controlled by Merck. For purposes of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Sano Stock Reserve" shall mean a reserve in the amount of ------------------ $2,852,800, established pursuant to Section 1.15 hereof." ------------ (b) The definition of "Borrowing Availability" shall be amended and ---------------------- restated in its entirety to read as follows: "Borrowing Availability" shall mean, at any time, the ---------------------- lesser at such time of (i) the Maximum Amount and (ii) the sum of the Borrowing Base and the Overadvance Limit then in effect, in each case less any reserves established by Lender from time to time, including, without limitation, the Sano Stock Reserve." (c) The definition of "Change of Control" shall be amended and ----------------- restated in its entirety to read as follows: "Change of Control" shall mean, (i) the replacement of a ----------------- majority of the Board of Directors of Parent, over a two-year period, from the directors who constituted the Board of Directors at the beginning of such period, which replacement shall not have been approved by a vote of at least a majority of the Board of Directors of Parent then still in office who were either members of the Board of Directors at the beginning of such period or whose appointment as a member of the Board of Directors was previously so approved; (ii) as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, a Person (other than a Permitted Holder) or entity or group of Persons acting in concert as a partnership, joint venture, alliance or other group shall have become the "beneficial owner" (within the meaning of Rule 13d-3 under the Exchange Act as in effect on the Closing Date) of securities of Parent representing 30% or more of the combined voting power of the then outstanding securities of Parent ordinarily (and apart from rights arising under special circumstances) having the right to vote in the election of directors thereof; (iii) the acquisition by any Person (or group of Persons acting in concert), other than a Permitted Holder, of the power to direct the management or affairs of the Parent by obtaining proxies, entering into voting agreements or trusts, acquiring securities or otherwise; or (iv) Parent shall fail to directly own all of the Stock of Borrower or any Subsidiary Guarantor." 3. Consent. Lender hereby consents to the execution and delivery by ------- Parent of the Merck Equity Documents and the consummation of the transactions contemplated therein; provided, that (i) the Merck Equity Documents shall be in -------- form and substance satisfactory to Lender, (ii) the equity investment to be made by Merck pursuant thereto shall be in an amount not less than $20,000,000 and (iii) all proceeds of such equity investment shall be immediately contributed to the capital of Borrower and immediately applied by Borrower to prepayment of Revolving Credit Advances pursuant to Section 1.2(c) of the Loan Agreement. To -------------- the extent any proceeds remain after such prepayment, Borrower shall immediately invest such proceeds solely in a "Permitted Investment". The parties agree that such an investment shall not constitute a violation of the Loan Agreement. For purposes of this Amendment, "Permitted Investment" shall mean (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency thereof maturing no more than one year from the date of creation thereof, (ii) commercial paper maturing no more than one year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii) certificates of deposit, maturing no more than one year from the date of creation thereof, issued by commercial banks incorporated under the laws of the United States of America, each having combined capital, surplus and undivided profits of not less than $300,000,000 and having a senior secured rating of "A" or better by a nationally recognize rating Agency (an "A Rated Bank"), and (iv) ------------ time deposits, maturing no more than 30 days from the date of creation thereof, with A Rated Banks. Notwithstanding anything to the contrary contained in this Section 3, Lender hereby reserves its right under Section 3.25 of the Loan - --------- ------------ Agreement to perfect its Lien in the above-mentioned proceeds. 4. 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 by each Credit Party of this Amendment: (i) are within its corporate powers; (ii) have been duly authorized by all necessary corporate and shareholder action; and (iii) are not in contravention of any provision of its 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. This Amendment 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 has occurred and is continuing both before and after giving effect to this Amendment. 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 Loan Agreement as amended hereby or any other Loan Document, or the validity or enforceability of this Amendment, the Loan Agreement as amended hereby or any other Loan Document or any action taken under this Amendment, the Loan Agreement as amended hereby or any other Loan Document or which if determined adversely could have or result in a Material Adverse Effect. 5. No Other Amendments/Waivers. Except as expressly specified --------------------------- herein, (i) the Loan Agreement shall be unmodified and shall continue to be in full force and effect in accordance with its terms and (ii) 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. 6. Outstanding Indebtedness; Waiver of Claims. Each Credit Party ------------------------------------------ hereby acknowledges and agrees that as of February 24, 1998 the aggregate outstanding principal amount of the Revolving Credit Loan is $10,195,528.54 and that such principal amount is payable pursuant to the Loan Agreement, as amended hereby, without defense, offset, withholding, counterclaim or deduction of any kind. 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 Amendment Effective Date. 7. 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. 8. Effectiveness. This Amendment shall become effective as of ------------- March 4, 1998 (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 4, 1998: A. Documents. Lender shall have received four (4) original --------- copies of this Amendment duly executed and delivered by Lender and each Credit Party. B. Amendment Fee. Borrower shall have paid to Lender an -------------- amendment fee in the amount of $25,000. C. Representations and Warranties. All representations and ------------------------------ warranties of or on behalf of each Credit Party in this Amendment and all the other Loan Documents shall be true and correct in all respects with the same effect as though such representations and warranties had been made on and as of the date hereof and on and as of the date that the other conditions precedent in this Section 8 have been satisfied, except to the extent that any such --------- representation or warranty expressly relates to an earlier date. D. Secretary's Certificate. Each Credit Party shall have ----------------------- provided Lender with a certificate in form and substance satisfactory to Lender of their respective Secretary or an Assistant Secretary certifying the resolutions adopted by their respective Boards of Directors approving this Amendment and the transactions contemplated herein. 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND ------------- INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 10. 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. 11. Confidentiality. Lender agrees to use commercially reasonable --------------- efforts (equivalent to the efforts Lender applies to maintaining the confidentiality of its own confidential information) to maintain as confidential all terms of this Amendment for a period of two (2) years from the date hereof, except that Lender may disclose such terms (a) to Persons employed or engaged by Lender in evaluating, approving, structuring or administering the Revolving Credit Loan; (b) to any bona fide assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 11 (and any such - ---------- bona fide assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) above); (c) as required or requested by any Governmental Authority or - ---------- reasonably believed by Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, in the opinion of Lender's counsel, required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any action, claim, lawsuit, investigation or proceeding to which Lender is a party; or (f) which ceases to be confidential through no fault of Lender. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 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 O'Connor ----------------------------------- Name: Dennis O'Connor Title: VP - CFO Lender: ------ GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Martin S. Greenberg ----------------------------------- Name: Martin S. Greenberg Its: Duly Authorized Signatory Parent: ------ PHARMACEUTICAL RESOURCES, INC. By: /s/ Dennis O'Connor ----------------------------------- Name: Dennis O'Connor Title: VP - CFO (SIGNATURES CONTINUED ON NEXT PAGE) Subsidiary Guarantors: --------------------- NUTRICEUTICAL RESOURCES, INC. By: /s/ Dennis O'Connor ----------------------------------- Name: Dennis O'Connor Title: VP - CFO PARCARE, LTD. By: /s/ Dennis O'Connor ----------------------------------- Name: Dennis O'Connor Title: VP - CFO EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED MARCH 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS SEP-30-1997 MAR-28-1998 67 0 13,013 (3,190) 16,213 29,682 46,109 (19,205) 74,198 19,036 2,547 189 0 0 51,844 74,198 25,708 25,854 23,575 7,062 0 19 453 (5,255) 0 (5,255) 0 0 0 (5,255) (.28) (.28)
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