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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
Commission File Number: 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3122182
(State or other jurisdiction of (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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)
OF THE SECURITIES EXCHANGE ACT OF 1934:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value The New York Stock Exchange, Inc.
---------------------------- ---------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes X No
--- ---
The aggregate market value of the common equity held by non-affiliates of
the Registrant was $1,626,398,410 as of June 29, 2003 (assuming, solely for
purposes of this calculation, that all directors and executive officers of the
Registrant were "affiliates").
Number of shares of the Registrant's common stock outstanding
as of March 10, 2004: 34,992,488
Part III of this Form 10-K incorporates by reference certain portions of the
Registrant's Proxy Statement for its Annual Meeting of Stockholders to be filed
within 120 days after December 31, 2003.
TABLE OF CONTENTS
PHARMACEUTICAL RESOURCES, INC.
FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2003
PAGE
----
PART I
Item 1 Business............................................................3
Item 2 Properties.........................................................14
Item 3 Legal Proceedings..................................................15
Item 4 Submission of Matters to a Vote of Security Holders................17
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters...........................................................18
Item 6 Selected Financial Data............................................19
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................20
Item 7A Quantitative and Qualitative Disclosures about Market Risk.........34
Item 8 Consolidated Financial Statements and Supplementary Data...........34
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................34
Item 9A Controls and Procedures............................................35
PART III
Item 10 Directors and Executive Officers of Registrant.....................36
Item 11 Executive Compensation.............................................36
Item 12 Security Ownership of Certain Beneficial Owners and Management.....36
Item 13 Certain Relationships and Related Transactions.....................36
Item 14 Principal Accountant Fees and Services.............................36
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K....37
SIGNATURES
PART I
ITEM 1. BUSINESS.
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GENERAL
Pharmaceutical Resources, Inc. (the "Company" or "PRX") is a Delaware
holding company that, principally through its wholly owned subsidiary, Par
Pharmaceutical, Inc. ("Par"), is in the business of manufacturing and
distributing generic drugs in the United States. In addition, the Company
develops and manufactures, in small quantities, complex synthetic active
pharmaceutical ingredients through its wholly owned subsidiary, FineTech
Laboratories, Ltd. ("FineTech") based in Haifa, Israel. The Company also sells a
limited number of mature brand name drugs through an agreement between Par and
Bristol-Myers Squibb Company ("BMS"). Effective as of June 24, 2003, the Company
changed its state of incorporation from New Jersey to Delaware. The Company's
principal executive offices are located at One Ram Ridge Road, Spring Valley,
New York 10977, and its telephone number is (845) 425-7100. Additional
information concerning the Company can be found on the Company's website at
WWW.PARPHARM.COM. The Company makes its electronic filings with the United
States Securities and Exchange Commission (the "Commission"), including its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to these reports, available through its website, free of
charge, as soon as practicable after it files or furnishes them with the
Commission. Information on the website is not part of this Form 10-K.
Generic drugs are the pharmaceutical and therapeutic equivalents of brand
name drugs and are usually marketed under their generic (chemical) names rather
than by brand names. Typically, a generic drug may not be marketed until the
expiration of applicable patent(s) on the corresponding brand name drug. Generic
drugs must meet the same governmental standards as brand name drugs, but they
are generally sold at prices below those of the corresponding brand name drugs.
Generic drugs provide a cost-effective alternative for consumers, while
maintaining the safety and effectiveness of the brand name pharmaceutical
product.
The Company's product line comprises prescription generic drugs consisting
of 170 products representing various dosage strengths for 71 separate drugs. The
Company's products are manufactured principally in the solid oral dosage form
(tablet, caplet and two-piece hard shell capsule). In addition, the Company
markets an oral suspension product and one product in the semi-solid form of a
cream. The Company develops and manufactures some of its own products. The
Company also has strategic alliances and relationships with several
pharmaceutical and chemical companies that provide it with products for sale
through various distribution, manufacture, development and licensing agreements.
In addition to developing generic equivalents of existing drugs, the
Company has recently expanded its efforts to develop new dosage strengths and
drug delivery forms through a specialty pharmaceutical product line, which it
believes will improve existing pharmaceutical products. The Company believes
that these products may have limited competition and longer product life cycles
than its existing products. In addition, the Company is exploring potential
acquisitions of complementary products and businesses and expects to enter into
additional strategic alliances and relationships.
The Company markets its products primarily to wholesalers, retail drug
store chains, managed health care providers and drug distributors, principally
through its internal sales staff. The Company also promotes the sales efforts of
wholesalers and drug distributors that sell its products to clinics,
governmental agencies and other managed health care organizations.
The Company has adopted a code of ethics that applies to all of its
directors, officers, employees and representatives. This code is publicly
available on the Company's website. Amendments to the code of ethics and any
grant of a waiver from a provision of the code requiring disclosure under
applicable Commission rules will be available on the Company's website. The
Company's corporate governance principles and the charters of the Audit,
Nominating and Corporate Governance and Compensation and Stock Option Committees
of its Board of Directors' (the "Board") are also available on the Company's
website. Any of these materials may also be requested in print by writing to the
Company, Attention: Thomas Haughey, Vice President, General Counsel and
Secretary, at One Ram Ridge Road, Spring Valley, NY 10977.
3
As further described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", certain statements made in this document
may constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, including those concerning
management's expectations with respect to future financial performance,
expenditures and future events. Such statements involve risks, uncertainties,
trends and contingencies, many of which are beyond the control of the Company
and which could cause actual results and performance to differ materially from
those stated herein. Any forward-looking statements included in this document
are made only as of the date hereof, based on information available to the
Company as of the date hereof, and, subject to any applicable law to the
contrary, the Company assumes no obligation to update any forward-looking
statements.
The financial data and share amounts, except per share, employee and
stockholder numbers, contained in Parts I and II are in thousands.
FISCAL YEAR 2003 HIGHLIGHTS:
RESULTS OF OPERATIONS. Fiscal year 2003 marked the Company's third
consecutive record year in terms of revenues and earnings. The Company's net
income in 2003 of $122,533 increased $43,079, or 54%, from $79,454 in fiscal
year 2002. In fiscal year 2001, the Company's net income was $53,922. The
earnings improvement in fiscal year 2003 was driven by record revenues of
$661,688, up from $381,603 in fiscal year 2002 and $271,035 in 2001. The revenue
growth in 2003 was largely due to the Company's introduction of paroxetine, the
generic version of GlaxoSmithKline's ("GSK's") Paxil(R), in the United States in
September 2003 through a distribution agreement with GSK, and the introduction
of other products throughout the year. In addition, the Company continued to
have success with megestrol acetate oral suspension, the generic version of
BMS's Megace(R) Oral Suspension, and fluoxetine 40 mg capsules, the generic
version of Eli Lilly and Company's Prozac(R), despite its loss of marketing
exclusivity with respect to both products in January 2002. In fiscal year 2003,
the Company continued to invest in research and development and its
infrastructure in order to better position itself for continued growth.
PRODUCT DEVELOPMENT. The Company recognizes that development of successful
new products is critical to achieving its goal of sustainable growth over the
long term. As such, the Company's investment in research and development, which
increased 37% in fiscal year 2003 from 2002, and is expected to increase by as
much as 50% in fiscal year 2004 from 2003, reflects its commitment to continue
to develop new products and/or technologies through its internal development
programs, in addition to projects with strategic partners. The Company further
expanded its capabilities in product development by entering into new
development agreements with Nortec Development Associates, Inc. (a Glatt
company) ("Nortec"), Advancis Pharmaceutical Corporation ("Advancis"), and Mead
Johnson & Company ("Mead") and BMS in fiscal year 2003. Together with its
strategic partners, the Company has at least 40 drugs in development and 25
Abbreviated New Drug Applications ("ANDAs") filed with the United States Food
and Drug Administration ("FDA") awaiting approval. Among the 25 ANDAs are
several that the Company believes may represent first-to-file opportunities
entitling the Company, or its strategic partners, up to 180 days of marketing
exclusivity or co-exclusivity. However, it is difficult to determine with
certainty that an ANDA filing has exclusivity, or co-exclusivity, until final
approval is received from the FDA. These products include: olanzapine 20 mg
(Zyprexa(R)); latanoprost (Xalatan(R)); ribavirin (Rebetol(R)); and tramadol
with acetaminophen (Ultracet(R)). Together with its strategic partners, the
Company expects to file as many as 15 additional ANDAs, in which the Company
holds the marketing rights to the potential products, in fiscal year 2004. The
process of bringing new products to market and the costs associated with
research and development involve many uncertainties, including unforeseeable
changes in market conditions and regulatory or legal challenges. As such, no
assurance can be given that the Company will file additional ANDAs with the FDA,
obtain FDA approval or launch any of the products that are currently in
development.
FINANCING: In September 2003, the Company sold an aggregate principal
amount of $200,000 of senior subordinated convertible notes pursuant to Rule
144A under the Securities Act of 1933, as amended. The Company intends to use
the net proceeds from the offering to support the expansion of its business,
including increasing research and development activities, entering into product
license arrangements, possibly acquiring complementary businesses and products
and for general corporate purposes.
4
ADVANCIS: In October 2003, the Company purchased one million shares of the
common stock of Advancis, a pharmaceutical company based in Germantown,
Maryland, in its initial public offering of six million shares on October 16,
2003. The purchase price was $10 per share and the transaction closed on October
22, 2003. The Company's investment represents an ownership position of 4.4% of
the outstanding common stock of Advancis. Advancis has stated that its business
focus is on developing and commercializing pulsatile drug products that fulfill
unmet medical needs in the treatment of infectious disease. Unlike immediate
release antibiotics, Advancis' antibiotics are delivered in three to five
sequential pulses within the first six to eight hours following initial dosing.
In September 2003, Par had also entered into a licensing agreement with
Advancis, to market the antibiotic Clarithromycin XL. Clarithromycin XL is being
developed as a generic equivalent to Abbott Laboratories' ("Abbott") Biaxin
XL(R).
PAROXETINE: In fiscal year 2003, the Company obtained the marketing rights
to paroxetine, the generic version of GSK's Paxil(R), in connection with a
litigation settlement (the "GSK Settlement") between the Company, GSK and
certain of its affiliates, and Pentech Pharmaceuticals, Inc. ("Pentech"). As a
result of the GSK Settlement, Par and GSK entered into an agreement, pursuant to
which Par began marketing paroxetine, supplied and licensed from GSK, in the
United States in September 2003 and the Commonwealth of Puerto Rico in May 2003.
The GSK Settlement provides that the Company's right to distribute paroxetine
will be suspended if at any time there is not another generic version fully
substitutable for Paxil available for purchase in the United States. On
September 8, 2003, another generic drug manufacturer, Apotex Pharmaceutical
Healthcare, Inc. ("Apotex") launched a generic version of Paxil(R). GSK has sued
Apotex for patent infringement and is currently appealing a district court
decision adverse to GSK. In April 2002, GSK launched a longer-lasting, newly
patented version of the drug, Paxil CR(R). The Company expects Paxil CR(R)'s
market share to grow in fiscal year 2004, which may cause the Company's sales
and gross margins in respect of paroxetine tablets to decrease. The Company
understands that other generic drug manufactures have filed ANDAs in respect of
paroxetine and that the marketing exclusivity period thereof ended on March 8,
2004 but, at this time, cannot predict the timing of launches by these
competitors or the potential effects on its sales.
RIBAVIRIN: On July 16, 2003, the Company announced that the United States
District Court for the Central District of California had granted a summary
judgment of non-infringement against ICN Pharmaceuticals, Inc. ("ICN") and in
favor of Three Rivers Pharmaceutical LLC ("Three Rivers") regarding ribavirin,
Three Rivers' generic version of Schering-Plough Pharmaceutical's ("Schering's")
Rebetol(R). The District Court determined that Three Rivers' ribavirin product
does not infringe any of the three patents asserted by ICN in the litigation.
Par has exclusive marketing rights for Three Rivers' ribavirin product. Three
Rivers had earlier reached a settlement of its patent litigation with Schering.
The Company believes that this decision appears to resolve the remaining ongoing
patent barriers to FDA approval of the ANDA filed by Three Rivers in respect of
ribavirin. Such decision by the District Court is subject to affirmance by the
Court of Appeals for the Federal Circuit, and ICN has taken that appeal. The
timing of any launch by Par of this product is uncertain at this time. Three
Rivers has not obtained FDA approval of the ANDA, and the FDA has not determined
whether a generic 180-day exclusivity period will be awarded solely to a generic
competitor involved in the lawsuit or Three Rivers jointly with one or both of
the other two generic competitors involved in the lawsuit.
ORGANIZATION: On September 16, 2003, Scott Tarriff, formerly the Company's
Executive Vice President and the President and Chief Executive Officer of Par,
was selected by the Board as the Company's President and Chief Executive
Officer. Kenneth I. Sawyer, the Company's former Chairman, President and Chief
Executive Officer, had retired effective July 1, 2003 and had resigned as a
member of the Board effective September 16, 2003. Additionally, on September 16,
2003, Mark Auerbach, formerly the Company's lead outside director, was selected
by the Board to be the Executive Chairman of the Board.
On November 13, 2003, Peter W. Williams, Esq. was selected to fill the
vacancy on the Company's Board. On November 24, 2003, the Company entered into
an employment agreement with Thomas Haughey, pursuant to which Mr. Haughey has
agreed to serve in the capacities of Vice President, General Counsel and
Secretary for PRX and Par.
5
REINCORPORATION. In fiscal year 2003, the Company changed its state of
incorporation from New Jersey to Delaware (the "Reincorporation"), effective as
of June 24, 2003. The Reincorporation was effected by the merger of the Company
with and into a wholly-owned Delaware subsidiary of the Company formed solely
for the purpose of consummating the Reincorporation. The operations, business,
assets and liabilities of the Company, as well as its directors and officers,
were not affected by the Reincorporation. The surviving corporation of the
Reincorporation retained the name "Pharmaceutical Resources, Inc." and the
Company's common stock continues to be listed and traded on the New York Stock
Exchange (the "NYSE") under the symbol "PRX". In addition to the
Reincorporation, the Company changed the state of incorporation of Par from New
Jersey to Delaware.
PRODUCT LINE INFORMATION
The Company operates in one industry segment, namely the manufacture and
distribution of generic pharmaceuticals. Products are marketed principally in
solid oral dosage form consisting of tablets, caplets and two-piece hard-shell
capsules. The Company also distributes one product in the semi-solid form of a
cream and one oral suspension product.
Par markets 80 products, representing various dosage strengths for 29
separate drugs, that are manufactured by the Company and 90 additional products,
representing various dosage strengths for 42 separate drugs, that are
manufactured for it by other companies. Par holds ANDAs for the drugs that it
manufactures. Set forth below is a list of the drugs manufactured and/or
distributed by Par, including the brand name products, Capoten(R), Capozide(R),
Questran(R) and Questran Light(R), and Sumycin(R), that the Company sells
through an agreement with BMS. The names of all of the drugs under the caption
"Competitive Brand-Name Drug" are trademarked. The holders of the trademarks are
non-affiliated pharmaceutical manufacturers.
NAME COMPETITIVE BRAND NAME DRUG
---- ---------------------------
CENTRAL NERVOUS SYSTEM:
Biperiden Hydrochloride Akineton
Benztropine Mesylate Cogentin
Buspirone Hydrochloride BuSpar
Doxepin Hydrochloride Sinequan, Adapin
Fluoxetine Prozac
Fluphenazine Hydrochloride Prolixin
Imipramine Hydrochloride Tofranil
Mercaptopurine Purinethol
Mirtazapine Remeron
Nefazodone Serzone
Paroxetine Paxil
Tizanidine Hydrochloride Zanaflex
Triazolam Halcion
CARDIOVASCULAR:
Acebutolol Hydrochloride Sectral
Amiodarone Hydrochloride Cordarone
Captopril Capoten
Captopril & HCTZ Capozide
Doxazosin Mesylate Cardura
Enalapril Maleate Vasotec
Enalapril Maleate & HCTZ Vaseretic
Flecainide Acetate Tambocor
Guanfacine Tenex
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
Indapamide Lozol
Isosorbide Dinitrate Isordil
Lisinopril Zestril
Minoxidil Loniten
Nicardipine Hydrochloride Cardene
Sotalol Hydrochloride Betapace
Torsemide Demadex
6
ANALGESIC/ANTI-INFLAMMATORY:
Aspirin (zero order release) Zorprin
Carisoprodol & Aspirin Soma Compound
Dexamethasone Decadron
Etodolac Lodine
Ibuprofen Advil, Nuprin, Motrin
Orphengesic Norgesic
Orphengesic Forte Norgesic Forte
Oxaprozin Daypro
Tramadol Hydrochloride Ultram
ANTI-BACTERIAL:
Doxycycline Monohydrate Monodox
Minocycline Minocin
Ofloxacin Floxin
Silver Sulfadiazine (SSD) Silvadene
Tetracycline Tablets and Syrup Sumycin
ANTI-DIABETIC:
Metformin Hydrochloride Glucophage
Metformin ER Glucophage XR
ANTI-DIARRHEAL:
Diphenoxylate Hydrochloride & Atropine Sulfate Lomotil
ANTIEMETIC:
Meclizine Hydrochloride Antivert
Prochlorperazine Maleate Compazine
ANTI-GOUT:
Allopurinol Zyloprim
ANTI-HISTAMINIC:
Cyproheptadine Hydrochloride Periactin
ANTI-NEOPLASTIC:
Hydroxyurea Hydrea
Megestrol Acetate Megace
Megestrol Acetate Oral Suspension Megace Oral Suspension
ANTI-PARKINSON:
Selegiline Hydrochloride Eldepryl
ANTI-THROMBOTIC:
Ticlopidine Hydrochloride Ticlid
ANTI-ULCERATIVE:
Ranitidine Hydrochloride Zantac
Famotidine Pepcid
Nizatidine Axid
ANTI-VIRAL:
Acyclovir Zovirax
ANTI-HYPERTHYROID:
Methimazole Tapazole
7
BRONCODILATOR:
Metaproterenol Sulfate Alupent
CHOLESTEROL LOWERING:
Lovastatin Mevacor
Cholestyramine Questran
Cholestyramine Light Questran Light
GENTRO-URINARY (DIURETIC):
Amiloride Hydrochloride Midamor
GLUCORTICOID:
Methylprednisolone Medrol
OVULATION STIMULANT:
Clomiphene Citrate Clomid
From January 1, 2003 to March 1, 2004, the FDA approved ANDAs, filed by
either the Company or its strategic partners, for the following products that
the Company is currently marketing or has the right to market in the future:
benazepril HCL 5 mg, 10 mg, 20 mg and 40 mg tablets; benazepril HCL and HCTZ 5
mg/6.25 mg, 10 mg/12.5 mg, 20 mg/12.5 mg and 20 mg/25 mg tablets; flutamide 125
mg capsules; loratadine 10 mg tablets; mercaptopurine 50 mg tablets; minocycline
50 mg, 75 mg and 100 mg tablets; mirtazapine 15 mg, 30 mg and 45 mg tablets;
nefazodone 50 mg, 100 mg, 150 mg, 200 mg and 250 mg tablets; ofloxacin 200 mg,
300 mg and 400 mg tablets; and torsemide 5 mg, 10 mg, 20 mg and 100 mg tablets.
In fiscal year 2003, the Company also began marketing paroxetine 10 mg, 20 mg,
30 mg and 40 mg tablets through a distribution agreement with GSK. In addition,
the Company began marketing in December 2003 Metformin ER 500 mg tablets as an
authorized generic product through a licensing agreement with BMS. The Company
or its strategic partners received tentative FDA approvals during the same
period for the following drugs: fluconazole tablets 50 mg, 100 mg, 150 mg and
200 mg tablets; and topiramate 25 mg, 100 mg and 200 mg tablets. The Company or
its strategic partners also have tentative FDA approvals, received in prior
periods, for the following products: ciprofloxacin 100 mg, 250 mg, 500 mg and
750 mg tablets; quinapril 5 mg, 10 mg, 20 mg and 40 mg tablets; and zolpidem
tartrate 5 mg and 10 mg tablets.
On July 15, 2003, the U.S. Patent and Trademark Office issued U.S. Patent
Nos. 6,593,318 and 6,593,320 to the Company relating to its unique formulation
of megestrol acetate oral suspension. The Company has two other patents related
to its unique formulation of megestrol acetate oral suspension, U.S. Patent Nos.
6,028,065 and No. 6,268,356, which were granted on February 22, 2000 and July
31, 2001, respectively.
The Company seeks to introduce new products through its internal research
and development program and through joint venture, distribution and other
agreements with pharmaceutical companies located throughout the world. As such,
the Company has pursued and continues to pursue arrangements and relationships
that it believes could provide access to raw materials at favorable prices,
share development costs, generate profits from jointly-developed products and
expand distribution channels for new and existing products. The Company's
distribution and supply agreements that it believes are material to its business
are described in "Notes to Consolidated Financial Statements - Note 9 -
Distribution and Supply Agreements". In fiscal year 2003, the Company entered
into several new agreements, which are summarized below.
In connection with the legal settlement referred to in "Notes to
Consolidated Financial Statements - Note 14 - Commitments, Contingencies and
Other Matters-Legal Proceedings", Par and GSK and certain of its affiliates
entered into a license and supply agreement (the "GSK Supply Agreement"), dated
April 16, 2003, pursuant to which Par is marketing paroxetine, supplied and
licensed from GSK, in the United States, including the Commonwealth of Puerto
Rico. Under the GSK Supply Agreement, GSK has agreed to manufacture the product
and Par has agreed to pay GSK a percentage of Par's net sales, as defined in the
agreement. Pursuant to the GSK Supply Agreement, GSK is entitled to suspend
Par's right to distribute paroxetine if at any time another generic version of
Paxil(R) is not being marketed.
8
In November 2002, the Company amended its agreement (the "Pentech Supply
and Marketing Agreement") with Pentech, dated November 2001, to market
paroxetine capsules. Pursuant to the Pentech Supply and Marketing Agreement, the
Company paid all legal expenses up to $2,000, which were expensed as incurred,
to obtain final regulatory approval. Legal expenses in excess of $2,000 were to
be fully creditable against future profit payments to Pentech. The Company had
agreed to reimburse Pentech for its costs associated with the project of up to
$1,300. In fiscal year 2003, the Company paid Pentech $771 of these costs, which
were charged to research and development expenses as incurred. Pursuant to the
Pentech Supply and Marketing Agreement, the Company had agreed to pay Pentech a
percentage of the gross profits, as defined in such agreement, on all its sales
of paroxetine. At this time, the Company is negotiating with Pentech to further
amend the Pentech Supply and Marketing Agreement concerning the gross profits
split, reimbursement of research and development expenses and sharing of legal
expenses related to paroxetine.
RESEARCH AND DEVELOPMENT
The Company's research and development activities consist principally of
(i) identifying and conducting patent and market research on brand name drugs
for which patent protection has expired or is expected to expire in the near
future, (ii) researching and developing new product formulations based upon such
drugs, (iii) obtaining approvals from the FDA for such new product formulations
and (iv) introducing technology to improve production efficiency and enhance
product quality. The scientific process of developing new products and obtaining
FDA approval is complex, costly and time-consuming; there can be no assurance
that any products will be developed despite the amount of time and money spent
on research and development. The development of products may be curtailed in the
early or later stages of development due to the introduction of competing
generic products or for other reasons.
The research and development of oral solid and suspension products,
including pre-formulation research, process and formulation development,
required studies and FDA review and approval, has historically taken
approximately two to three years. Accordingly, Par typically selects for
development products that it intends to market several years in the future.
However, the length of time necessary to bring a product to market can vary
significantly and depends on, among other things, the availability of funding,
problems relating to formulation and safety or efficacy or patent issues
associated with the product.
The Company contracts with outside laboratories to conduct biostudies,
which, in the case of oral solids, generally are required to obtain FDA
approval. Biostudies are used to demonstrate that the rate and extent of
absorption of a generic drug are not significantly different from the
corresponding brand name drug and can cost between $100 to $1,000 for each
biostudy. During fiscal year 2003, the Company contracted with outside
laboratories, expending $5,370 to conduct biostudies for 15 potential new
products, and intends to continue to contract for biostudies in the future. In
addition, the Company's share of certain costs for biostudies totaled $1,928 in
fiscal year 2003 for products in development with one if its strategic partners.
Biostudies must be conducted and documented in conformity with FDA standards
(see "-Government Regulation").
As part of its internal research and development program, the Company has
at least 15 products in active development. The Company expects that at least
ten of these products will be the subject of biostudies in fiscal year 2004, but
has not filed any ANDAs with respect to such potential products. In addition,
the Company from time to time enters into agreements with third parties with
respect to the development of new products and technologies. To date, the
Company has entered into agreements and advanced funds to several unaffiliated
companies for products in various stages of development. Although there can be
no such assurance, annual research and development expenses for fiscal year
2004, including certain payments to unaffiliated companies, are expected to
increase by approximately 50% from fiscal year 2003.
As a result of its internal product development program, the Company
currently has 11 ANDAs pending with the FDA, two of which have received
tentative approval, for potential products that are not subject to any
distribution or profit sharing agreements. In addition, there are 14 ANDAs
pending with the FDA, three of which have received tentative approval, that have
been filed by the Company or its strategic partners for potential products
covered under various distribution agreements. No assurances can be given that
the Company or any of its strategic partners will successfully complete the
development of products either under development or proposed for development,
that they will obtain regulatory approvals for any such product, that any
approved product will be produced in commercial quantities or that any approved
product can be sold profitably.
9
In April 2002, the Company purchased FineTech, a research facility based
in Haifa, Israel. FineTech specializes in the design and manufacture of
proprietary synthetic chemical processes used in the production of complex
organic compounds for the pharmaceutical industry. FineTech also has the ability
to manufacture in small quantities complex synthetic active pharmaceutical
ingredients at its manufacturing facility in Haifa, Israel. This facility
operates in compliance with FDA current Good Manufacturing Practices ("cGMP")
standards. FineTech operates as an independent, wholly-owned subsidiary of PRX
and provides immediate chemical synthesis capabilities and strategic
opportunities to the Company and other customers.
In order to supplement its own internal development program, the Company
has entered into development and license agreements with third parties with
respect to the development and marketing of new products and technologies. The
Company's product development agreements that it believes are material to its
business are described in "Notes to Consolidated Financial Statements - Note 8 -
Research and Development Agreements". In fiscal year 2003, the Company (or Par)
entered into the following agreements, which are summarized below.
Par entered into a licensing agreement (the "Advancis Licensing
Agreement"), dated September 4, 2003, with Advancis to market the antibiotic
Clarithromycin XL. Clarithromycin XL is being developed as a generic equivalent
to Abbott's Biaxin XL(R). Pursuant to the Advancis Licensing Agreement, Advancis
will be responsible for the development and manufacture of the product, while
Par will be responsible for marketing, sales and distribution. Provided certain
conditions in the Advancis Licensing Agreement are met, Par agreed to pay
Advancis an aggregate amount of up to $6,000 based on the achievement of certain
milestones contained in the agreement. An ANDA for the product is expected to be
submitted to the FDA in the near future. Pursuant to the Advancis Licensing
Agreement, Par has agreed to pay Advancis a certain percentage of the gross
profits, as defined in the agreement, on all sales if the product is
successfully developed and introduced into the market.
Par and Nortec entered into an agreement, dated October 22, 2003, pursuant
to which the two companies have agreed to develop additional products that are
not part of the two previous agreements between Par and Nortec. During the first
two years of the agreement, Par is obligated to make aggregate initial research
and development payments to Nortec in the amount of $3,000, of which $1,500 was
paid by Par in fiscal year 2003, $1,000 is due in fiscal year 2004 and $500 is
due in fiscal year 2005. On or before October 15, 2005, Par will have the option
to either (i) terminate the arrangement with Nortec, in which case the initial
research and development payments will be credited against any development costs
that Par shall owe Nortec at that time, or (ii) acquire all of the capital stock
of Nortec over the subsequent two years, including the first fifty (50%) percent
of the capital stock of Nortec over the third and fourth years of the agreement
for $4,000, and the remaining capital stock of Nortec from its owners at the end
of the fourth year for an additional $11,000.
On August 6, 2003, Par entered into an agreement with Mead and BMS,
through which Mead agreed to license the use of the Megace(R) trade name in
connection with a potential new product being developed by Par. If successfully
developed, the new product is expected to increase Par's sales of megestrol
acetate oral suspension. Under the terms of the agreement, Par provided funding
to support BMS's active promotion of Megace O/S(R) (megestrol acetate oral
suspension) brand during fiscal year 2003 and agreed to provide funding
throughout 2004 to help retain its brand awareness among physicians. Megace
O/S(R) is indicated for the treatment of anorexia and cachexia, the unexplained
weight loss in patients diagnosed with acquired immune deficiency syndrome
(AIDS). Par also will make certain payments to Mead, including royalties, based
on net sales of the new product.
MARKETING AND CUSTOMERS
The Company markets its products under the Par label principally to
wholesalers, retail drug store chains, managed health care providers,
distributors and, to a lesser extent, drug manufacturers and government
agencies, primarily through its own sales staff. Some of the Company's
wholesalers and distributors purchase products that are warehoused for certain
drug chains, independent pharmacies and managed health care organizations.
Customers in the managed health care market include health maintenance
organizations, nursing homes, hospitals, clinics, pharmacy benefit management
companies and mail order customers. The Company promotes its products primarily
through incentive programs with its customers, at trade shows and through
advertisements in trade journals.
10
The Company has approximately 140 customers, some of which are part of
larger buying groups. During fiscal year 2003, the Company's four largest
customers in terms of net sales dollars, Cardinal Health, Inc.,
AmerisourceBergen Corporation, McKesson Drug Co. and Walgreen Co., accounted for
approximately 17%, 13%, 11% and 11%, respectively, of its total revenues. In
fiscal year 2002, the Company's four largest customers in terms of net sales
dollars, McKesson Drug Co., Cardinal Health, Inc., AmerisourceBergen Corporation
and Walgreen Co. accounted for approximately 17%, 16%, 15% and 10%,
respectively, of its total revenues. The Company does not have written
agreements with any of these customers and the loss of any one or more of these
customers or the substantial reduction in orders from any of such customers
could have a material adverse effect on the Company's operating results,
prospects and financial condition (see "Notes to Consolidated Financial
Statements - Note 3 -Accounts Receivable-Major Customers").
ORDER BACKLOG
The approximate dollar amount of open orders, believed by management to be
firm, at December 31, 2003, was $34,800, as compared to $18,185 at December 31,
2002 and $12,800 at December 31, 2001. Although open orders are subject to
cancellation without penalty, management expects that it will fill substantially
all of such open orders at December 31, 2003 in the near future.
COMPETITION
The pharmaceutical industry is highly competitive. Most of the Company's
significant competitors have longer operating histories and greater financial,
research and development, marketing and other resources. Consequently, many of
the Company's competitors may develop products and/or processes competitive
with, or superior to, those of the Company. Furthermore, the Company may not be
able to differentiate its products from its competitors, successfully develop or
introduce new products that are less costly than those of its competitors or
offer purchasers of its products payment and other commercial terms as favorable
as those offered by its competitors. The Company believes its principal generic
competitors are Mylan Laboratories, Inc., Teva Pharmaceutical Industries
Limited, Watson Pharmaceuticals, Inc., Barr Laboratories, Inc., Apotex, Eon
Labs, Inc., Geneva Pharmaceuticals, Inc. and Roxane Laboratories, Inc.
("Roxane"). The Company's principal strategy in addressing its competition is to
offer customers a consistent supply of a broad line of generic drugs at
competitive pricing. There can be no assurance, however, that this strategy will
enable the Company to continue to compete successfully in the industry or that
it will be able to develop and implement any new or additional viable
strategies.
Certain manufacturers of brand name drugs and/or their affiliates have
introduced generic pharmaceutical products equivalent to their brand name drugs
at relatively lower prices or partnered with generic companies to introduce
generic products. Such actions have the effect of reducing the potential market
share and profitability of generic products developed by the Company and may
inhibit it from developing and introducing generic pharmaceutical products
comparable to certain brand name drugs.
The Company also faces significant price competition generally as other
generic manufacturers enter the market, and as a result of consolidation among
wholesalers and retailers and the formation of large buying groups, any of
which, in turn, could result in reductions in sales prices and gross margin.
This increased price competition has led to an increase in customer demand for
downward price adjustments by the manufacturers of generic pharmaceutical
products, including the Company, for certain products that have already been
delivered. There can be no assurance that such price reductions for these
products or others, will not continue, or even increase, with a consequent
material adverse effect on the Company's revenues and gross margin.
In the generic drug industry, when a company first introduces a generic
drug, it may, under certain circumstances, be granted exclusivity by the FDA to
market a product for a period of time before any other generic manufacturer may
enter the market. At the expiration of such exclusivity periods, other generic
manufacturers may enter the market, and as a result the price of the drug may
decline significantly (in some instances, price declines have exceeded 90%). As
a result of the expected price decline upon the expiration of a marketing
exclusivity period, it has become common in the industry for generic
pharmaceutical manufacturers, like the Company, that have been granted such
exclusivity periods to offer price protection to their customers. Under such
price protection arrangements, the Company will generally provide a credit to
its customers for the difference between the Company's new price at the
expiration of the exclusivity period and the price at which the Company sold the
customers the product with respect to the customer's remaining inventory at the
expiration of the exclusivity period. As a result, the total price protection
that the Company will credit customers at the expiration of an exclusivity
11
period will depend on the amount by which the price declines as the result of
the introduction of comparable generic products by additional manufacturers and
the inventory that customers have at the expiration of the exclusivity period.
The 180-day marketing exclusivity period in respect of fluoxetine 10 mg
and 20 mg tablets, which Par sells pursuant to a distribution agreement with
Genpharm Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA, and the 180-day
marketing exclusivity period granted in respect of fluoxetine 40 mg capsules,
which Par sells pursuant to an agreement with Dr. Reddy's Laboratories, Ltd.
("Dr. Reddy"), both expired at the end of January 2002. In addition, the 180-day
marketing exclusivity period granted to the Company by the FDA in respect of
megestrol acetate oral suspension, which is not subject to any profit sharing
agreement, expired in mid-January 2002. As the Company expected, additional
generic competitors, with products comparable to all three strengths of its
fluoxetine products, began entering the market in the first quarter of 2002,
eroding the pricing that the Company had received during the exclusivity
periods, particularly on the 10 mg and 20 mg strengths. Nevertheless, the
Company maintained a significant market share for fluoxetine 40 mg capsules and,
despite FDA approvals obtained for two competing generic megestrol acetate oral
suspension products in the first quarter of 2002 and the second quarter of 2003,
the Company also maintained a significant market share for megestrol acetate
oral suspension as of December 31, 2003. Although megestrol acetate oral
suspension and fluoxetine 40 mg capsules are expected to continue to contribute
significantly to the Company's overall performance in fiscal year 2004, the
growth of the Company's product line through new product introductions has
somewhat reduced the Company's reliance on these products.
The Company understands that other generic drug manufactures have filed
ANDAs in respect of paroxetine and that the marketing exclusivity period in
respect thereof ended on March 8, 2004 but, at this time, cannot predict the
timing of launches by these competitors or the potential effects on its sales.
The principal competitive factors in the generic pharmaceutical market
include: (i) introduction of other generic drug manufacturers' products in
direct competition with the Company's products, (ii) consolidation among
distribution outlets through mergers and acquisitions and the formation of
buying groups, (iii) ability of generic competitors to quickly enter the market
after patent expiration or exclusivity periods, diminishing the amount and
duration of significant profits, (iv) the willingness of generic drug customers,
including wholesale and retail customers, to switch among pharmaceutical
manufacturers, (v) pricing pressures and product deletions by competitors, (vi)
a company's reputation as a manufacturer of quality products, (vii) a company's
level of service (including maintaining sufficient inventory levels for timely
deliveries), (viii) product appearance and (ix) a company's breadth of product
line.
RAW MATERIALS
The raw materials essential to the Company's manufacturing business are
purchased primarily from United States distributors of bulk pharmaceutical
chemicals manufactured by foreign companies. To date, the Company has
experienced no significant difficulty in obtaining raw materials and expects
that raw materials will generally continue to be available in the future.
However, since the federal drug application process requires specification of
raw material suppliers, if raw materials from a specified supplier were to
become unavailable, FDA approval of a new supplier would be required. A delay of
six months or more in the manufacture and marketing of the drug involved while a
new supplier becomes qualified by the FDA and its manufacturing process is found
to meet FDA standards could, depending on the particular product, have a
material adverse effect on the Company's results of operations and financial
condition. Generally the Company attempts to minimize the effects of any such
situation by providing for, where economically and otherwise feasible, two or
more suppliers of raw materials for the drugs it manufactures. In addition, the
Company may attempt to enter into a contract with a raw material supplier in an
effort to ensure adequate supply for its products.
EMPLOYEES
At December 31, 2003, the Company had 531 employees compared to 456 and
393, respectively, at December 31, 2002 and 2001. The increased headcount levels
in fiscal years 2003 and 2002, primarily in the research and development and
administrative functions, reflect the continued growth of the Company from
fiscal year 2001.
12
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by
the Federal government, principally the FDA, and as appropriate, the Drug
Enforcement Administration, Federal Trade Commission (the "FTC") and state and
local governments. The Federal Food, Drug, and Cosmetic Act (the "Act"), the
Controlled Substances Act and other federal statutes and regulations govern the
development, testing, manufacture, safety/effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of the Company's products.
Non-compliance with applicable regulations can result in judicially and/or
administratively imposed sanctions, including the initiation of product
seizures, injunction actions, fines and criminal prosecutions. Administrative
enforcement measures may involve the recall of products, as well as the refusal
of the applicable government authority to enter into supply contracts or to
approve new drug applications. The FDA also has the authority to withdraw its
approval of drugs in accordance with regulatory due process procedures.
FDA approval is required before any new drug, including a generic
equivalent of a previously approved brand name drug, may be marketed. To obtain
FDA approval for a new drug, a prospective manufacturer must, among other
things, as discussed below, demonstrate that its manufacturing facilities comply
with the FDA's cGMP regulations. The FDA may inspect the manufacturer's
facilities to assure such compliance prior to approval or at any other
reasonable time. The manufacturer must follow cGMP regulations at all times
during the manufacture and processing of drugs. To comply with the standards set
forth in these regulations, the Company must continue to expend significant
time, money and effort in the areas of production, quality control and quality
assurance.
In order to obtain FDA approval of a new drug, a manufacturer must
demonstrate the safety and effectiveness of the proposed drug. There are
currently two basic ways to satisfy the FDA's safety and effectiveness
requirements:
1. NEW DRUG APPLICATIONS ("NDA"): Unless the procedure discussed in
paragraph 2 below is permitted under the Act, a prospective
manufacturer must submit to the FDA an NDA containing complete
pre-clinical and clinical safety and efficacy data or a right of
reference to such data. The pre-clinical data must provide an
adequate basis for evaluating the safety and scientific rationale for
the initiation of clinical trials. Clinical trials are conducted in
three sequential phases and may take several years to complete. At
times, the phases may overlap. Data from pre-clinical testing and
clinical trials is submitted to the FDA as an NDA for marketing
approval.
2. ABBREVIATED NEW DRUG APPLICATIONS: The Hatch-Waxman amendments
established a statutory procedure for submission, FDA review and
approval of ANDAs for generic versions of drugs previously approved
by the FDA (such previously approved drugs are hereinafter referred
to as "listed drugs"). Because the safety and efficacy of listed
drugs have already been established by the innovator company, the FDA
waives the need for complete clinical trials. However, a generic
manufacturer is typically required to conduct
bioavailability/bioequivalence studies of its test product against
the listed drug. The bioavailability/bioequivalence studies assess
the rate and extent of absorption and concentration levels of a drug
in the blood stream required to produce a therapeutic effect.
Bioequivalence is established when the rate of absorption and
concentration levels of a generic product are substantially
equivalent to the listed drug. For some drugs (E.G., topical
anti-fungals), other means of demonstrating bioequivalence may be
required by the FDA, especially where rate and/or extent of
absorption are difficult or impossible to measure. In addition to the
bioequivalence data, an ANDA must contain patent certifications,
chemistry, manufacturing, labeling and stability data.
The Hatch-Waxman amendments also established certain statutory protections
for listed drugs. Under the Hatch-Waxman amendments, approval of an ANDA for a
generic drug may not be made effective for interstate marketing until all
relevant patents for the listed drug have expired or been determined to be
invalid or not infringed by the generic drug. Prior to enactment of the
Hatch-Waxman amendments, the FDA did not consider the patent status of a
previously approved drug. In addition, under the Hatch-Waxman amendments,
statutory non-patent exclusivity periods are established following approval of
certain listed drugs, where specific criteria are met by the drug. If
exclusivity is applicable to a particular listed drug, the effective date of
approval of ANDAs (and, in at least one case, submission of an ANDA) for the
generic version of the listed drug is usually delayed until the expiration of
the exclusivity period, which, for newly approved drugs, can be either three or
five years. The Hatch-Waxman amendments also provide for extensions of up to
five years of certain patents covering drugs to compensate the patent holder for
13
reduction of the effective market life of the patented drug resulting from the
time spent in the federal regulatory review process.
During 1995, patent terms for a number of listed drugs were extended when
the Uruguay Round Agreements Act (the "URAA") went into effect to implement the
General Agreement on Tariffs and Trade (the "GATT") to which the United States
became a treaty signatory in 1994. Under GATT, the term of patents was
established as 20 years from the date of patent application. In the United
States, the patent terms historically have been calculated at 17 years from the
date of patent grant. The URAA provided that the term of issued patents be
either the existing 17 years from the date of patent grant or 20 years from the
date of application, whichever was longer. The effect generally was to add
patent lives to already issued patents, thus delaying FDA approvals of
applications for generic products.
FDA issued a final rule on June 18, 2003, which became effective on August
18, 2003, streamlining the generic drug approval process by limiting a drug
company to only one 30-month stay of a generic drug's entry into the market for
resolution of a patent challenge. This will help maintain a balance between the
innovator companies intellectual property rights and the desire to get generic
drugs on the market in a timely fashion.
The rule clarifies the types of patents that innovators must submit for
listing and prohibits the submission of patents claiming packaging,
intermediates or metabolite innovations. Patents claiming a different
polymorphic form of the active ingredient described in a NDA must be submitted
if the NDA holder has test data demonstrating that the drug product containing
the polymorph will perform in the same way as the drug product described in the
NDA. These changes are consistent with concerns raised in 2002 by the FTC in its
report on generic drugs. The final rule also clarifies the type of patent
information required to be submitted and revises the declaration that NDA
applicants must provide regarding their patents to help ensure that NDA
applicants submit only appropriate patents.
The final rule is intended to make the patent submission and listing
process more efficient, as well as enhance the ANDA and 505(b)(2) application
approval process. The changes are designed to enable consumers to save billions
of dollars each year by making it easier for generic drug manufacturers to get
safe and effective products on the market when the appropriate patent protection
expires.
In addition to the federal government, various states have laws regulating
the manufacture and distribution of pharmaceuticals, as well as regulations
dealing with the substitution of generic drugs for brand name drugs. The
Company's operations are also subject to regulation, licensing requirements and
inspection by the states in which its operations are located and/or it conducts
business.
Certain activities of the Company may also be subject to FTC enforcement.
The FTC enforces a variety of antitrust and consumer protection laws designed to
ensure that the nation's markets function competitively, are vigorous, efficient
and free of undue restrictions.
The Company also is governed by federal and state laws of general
applicability, including laws regulating matters of environmental quality,
working conditions and equal employment opportunity.
As a public company, the Company is subject to the recently enacted
Sarbanes-Oxley Act of 2002 (the "SOX Act"), including regulations to be
promulgated thereunder. The SOX Act contains a variety of provisions affecting
public companies, including the relationship with its auditors, prohibiting
loans to executive officers and requiring an evaluation of its internal
disclosure controls and procedures.
The federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA").
Generally, OBRA provides that a generic drug manufacturer must offer the states
an 11% rebate on drugs dispensed under the Medicaid program and must enter into
a formal drug rebate agreement, as the Company has, with the Federal Health Care
Financing Administration. Although not required under OBRA, the Company has also
entered into similar agreements with various states.
ITEM 2. PROPERTIES.
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The Company owns an approximately 92,000 square foot facility built to
Par's specifications that contains its manufacturing and domestic research and
development operations. The building, occupied by Par since fiscal year 1986,
14
also includes packaging and warehouse facilities. The building is located in
Spring Valley, New York, on an approximately 24 acre parcel of land, of which
approximately 15 acres are available for future expansion.
The Company owns another facility in Spring Valley, New York, across the
street from its manufacturing facility, occupying approximately 36,000 square
feet on two acres. This property was acquired in fiscal year 1994 and was
remodeled in fiscal year 2003 for use as research and quality control
laboratories and additional office space.
Par owns a third facility (the "Congers Facility") of approximately 33,000
square feet located on six acres in Congers, New York. In March 1999, Par
entered into an agreement to lease the Congers Facility and related machinery
and equipment to Halsey Drug Co., Inc. ("Halsey"). The lease agreement had an
initial term of three years, with an additional two-year renewal period and
contains purchase options permitting Halsey to purchase the Congers Facility and
substantially all the equipment thereof at any time during the lease terms for a
specified amount. Pursuant to the lease agreement, Halsey paid the purchase
options of $150 and $100, respectively, in March 2002 and 1999. The lease
agreement provides for annual fixed rent of $600 per year during its two-year
renewal period.
In fiscal year 2003, the Company moved its primary warehousing operation
to a facility in Montebello, New York. In August 2002, the Company entered into
a ten-year lease expiring in September 2012 to occupy approximately 190,000
square feet of such facility.
Par occupies approximately 47,000 square feet in a building located in
Spring Valley, New York for warehouse space under a lease that expires in
December 2004. The Company has the option to extend the lease for two additional
five-year periods.
The Company leases office space in Woodcliff Lake, New Jersey covering
approximately 41,000 square feet. The lease expires in January 2010. This
facility houses the majority of the Company's administrative functions.
FineTech entered into a lease in March 2003 covering approximately 11,000
square feet of a building in Nesher, Israel, which contains its laboratories and
administrative offices. The term of the lease is for nine years and 11 months,
with an additional two-year and 11-month renewal period.
The Company believes that its owned and leased properties are sufficient
in size, scope and nature to meet its anticipated needs for the reasonably
foreseeable future (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Financial Condition" and "Notes to
Consolidated Financial Statements - Note 14 - Commitments, Contingencies and
Other Matters-Leases").
ITEM 3. LEGAL PROCEEDINGS.
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On September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in federal district court in
Boston against Par and 12 other leading generic pharmaceutical companies
alleging principally that Par and such other companies violated, through their
marketing and sales practices, state and federal laws, including allegations of
common law fraud and violations of Massachusetts false statements statutes, by
inflating generic pharmaceutical product prices paid for by the Massachusetts
Medicaid program. The Company has waived service of process with respect to the
complaint. The complaint seeks injunctive relief, treble damages, disgorgement
of excessive profits, civil penalties, reimbursement of investigative and
litigation costs (including experts' fees) and attorneys' fees. In addition, on
September 25, 2003, the Company and a number of other generic and brand
pharmaceutical companies were sued by a New York county, which has alleged
violations of laws (including the Racketeer Influenced and Corrupt Organizations
Act, common law fraud and obtaining funds by false statements), related to
participation in the Medicaid program. The complaint seeks declaratory relief;
actual, statutory and treble damages, with interest; punitive damages; an
accounting; a constructive trust and restitution; attorneys' and experts' fees
and costs. This case was transferred to the District of Massachusetts for
coordinated and consolidated pretrial proceedings. Par and the other defendants
involved in the litigation filed a motion to dismiss on January 29, 2004. Par
intends to defend vigorously the claims asserted in both complaints. The Company
cannot predict with certainty at this time the outcome or the effect on the
Company of such litigations. Accordingly, no assurance can be given that such
litigations or any other similar litigation by other states or jurisdictions, if
instituted, will not have a material adverse effect on the Company's financial
condition, results of operations, prospects or business.
15
In October 2003, Apotex filed a complaint against Par in the United States
District Court for the Eastern District of Pennsylvania alleging violations of
state and federal antitrust laws as a result of the Company's settlement with
GSK and the GSK Supply Agreement. Par filed a motion to dismiss the action in
its entirety in December 2003 and a briefing on that motion is expected to be
completed in April 2004. Par intends to defend vigorously this action, and may
assert counterclaims against Apotex and claims against third parties.
In August 2003, Teva Pharmaceuticals USA, Inc. ("Teva USA") filed a
lawsuit against the Company and Par in the United States District Court for the
District of Delaware, after having received approval from the FDA to launch a
generic version of BMS's Megace(R), which generic product will compete with the
Company's megestrol acetate oral suspension product. In the lawsuit, Teva USA
seeks a declaration that its product has not infringed and will not infringe any
of Par's four patents relating to megestrol acetate oral suspension. On August
22, 2003, Par filed a counterclaim against Teva USA alleging willful
infringement of one of its four patents relating to megestrol acetate oral
suspension and moved to dismiss the action with respect to the other three
patents for lack of subject matter jurisdiction. The Company intends to pursue
its counterclaim against Teva USA and to vigorously defend the lawsuit. A trial
date has been scheduled by the Court for April 2005.
On July 15, 2003, the Company and Par (collectively, "Par") filed a
lawsuit against Roxane in the United States District Court for the District of
New Jersey. Par alleged that Roxane infringed Par's U.S. Patents numbered
6,593,318 and 6,593,320 relating to megestrol acetate oral suspension. Roxane
has denied these allegations and has counterclaimed for declaratory judgments of
non-infringement and invalidity of both patents.
On May 28, 2003, Asahi Glass Company ("Asahi Glass") filed a lawsuit
against Par and several other parties in the United States District Court for
the Northern District of Illinois alleging, among other things, violations of
state and federal antitrust laws relating to the settlement of GSK's patent
action against Pentech in respect of paroxetine. Pentech had granted Par rights
under Pentech's ANDA for paroxetine capsules. Pursuant to the settlement,
reached between the parties on April 18, 2003, Pentech and Par acknowledged that
the patent held by GSK is valid and enforceable and would be infringed by
Pentech's proposed capsule product and GSK agreed to allow Par to distribute in
the Commonwealth of Puerto Rico substitutable generic paroxetine immediate
release tablets supplied and licensed from GSK for a royalty payable to GSK. In
addition, Par was granted the right under the settlement to distribute the drug
in the United States if another generic version fully substitutable for Paxil(R)
became available in the United States. Par denied any wrongdoing in connection
with the Asahi Glass antitrust action and filed a motion to dismiss the
complaint on August 22, 2003. In October 2003, the court dismissed all of the
state and federal antitrust claims against Par. The only remaining claim in this
action involving Par is a state law contract claim relating to the payment of
certain attorneys' fees to Asahi Glass in connection with the prior lawsuit. Par
intends to defend vigorously this claim and may assert counterclaims against
Asahi Glass and claims against third parties.
In February 2003, Abbott, Fornier Industrie et Sante and Laboratoires
Fournier S.A. filed a complaint in the United States District Court for the
District of New Jersey against Par, alleging that Par's generic version of
TriCor(R) (fenofibrate) infringes one or more claims of their patents. The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously this lawsuit and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity. At this time, it is not possible for the
Company to predict the outcome of this litigation with certainty.
On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil")
filed a lawsuit against Kali Laboratories, Inc. ("Kali") in the United States
District Court for the District of New Jersey. Ortho-McNeil alleged that Kali
infringed U.S. Patent No. 5,336,691 (the "`691 patent") by submitting a
Paragraph IV certification to the FDA for approval of tablets containing
tramadol hydrochloride and acetaminophen. Par is Kali's exclusive marketing
partner for these tablets. Kali has denied Ortho-McNeil's allegation, asserting
that the `691 patent was not infringed and is invalid and/or unenforceable, and
that the lawsuit is barred by unclean hands. Kali also has counterclaimed for
declaratory judgments of non-infringement, invalidity, and unenforceability of
the `691 patent.
Breath Ltd. of the Arrow Group filed an ANDA (currently pending with the
FDA) for latanoprost (Xalatan(R)), which was developed by Breath Ltd. pursuant
to a joint manufacturing and marketing agreement with the Company, seeking
approval to engage in the commercial manufacture, sale and use of one
latanoprost drug product in the United States. Par subsequently acquired
ownership of the ANDA, which includes a Paragraph IV certification that the
patents in connection with Xalatan(R) identified in "Approved Drug Products with
Therapeutic Equivalence Evaluations" are invalid, unenforceable and/or will not
16
be infringed by Par's generic version of Xalatan(R). Par believes that its ANDA
is the first to be filed for this drug with a Paragraph IV certification. As a
result of the filing of the ANDA, Pharmacia Corporation, Pharmacia AB, Pharmacia
Enterprises, S.A., Pharmacia and Upjohn Company (collectively, "Pharmacia") and
the Trustees of Columbia University in the City of New York ("Columbia"), filed
a lawsuit against Par on December 21, 2001 in the United States District Court
for the District of New Jersey, alleging patent infringement. Pharmacia and
Columbia are seeking an injunction enjoining approval of the Company's ANDA and
the marketing of its generic product prior to the expiration of their patents.
On February 8, 2002, Par answered the complaint and filed a counterclaim, which
seeks a declaration that the patents-in-suit are invalid, unenforceable and/or
not infringed by Par's products and that the extension of the term of one of the
patents is invalid. All parties are seeking to recover their respective
attorneys' fees. Discovery in the case has now been completed and a pretrial
conference has been scheduled for March 15, 2004. Par intends to defend
vigorously against the claims and to pursue its counterclaim. At this time, it
is not possible for the Company to predict the outcome of this litigation with
certainty.
Par entered into a licensing agreement with developer Paddock Laboratories
("Paddock") to market a generic version of Unimed Pharmaceuticals, Inc.'s
("Unimed") product Androgel(R). The product will be manufactured by Paddock and
marketed by Par. Paddock has filed an ANDA (which is currently pending with the
FDA) for the testosterone 1% gel product. As a result of the filing of the ANDA,
Unimed and Laboratories Besins Iscovesco ("Besins"), co-assignees of the
patent-in-suit, filed a lawsuit against Paddock in the United States District
Court for the Northern District of Georgia alleging patent infringement on
August 22, 2003. Par has an economic interest in the outcome of this litigation
by virtue of its licensing agreement with Paddock. Unimed and Besins are seeking
an injunction to prevent Paddock from manufacturing the generic product. On
November 18, 2003, Paddock answered the complaint and filed a counterclaim,
which seeks a declaration that the patent-in-suit is invalid and/or not
infringed by Paddock's product. This case is currently in fact discovery. At
this time, it is not possible for the Company to predict the outcome of this
action.
The Company and/or Par are parties to certain other litigation matters,
including product liability and patent actions; the Company believes that these
actions are incidental to the conduct of its business and that their ultimate
resolution thereof will not have a material adverse effect on its financial
condition, results of operations or liquidity. The Company intends to vigorously
defend or, in cases where the Company is plaintiff, prosecute these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 2003.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------- ----------------------------------------------------------------------
(a) MARKET INFORMATION. The Company's Common Stock is traded on the NYSE
(ticker symbol: PRX). The following table shows the range of the
closing prices for the Common Stock, as reported by the NYSE, for
each calendar quarter during the Company's two most recent fiscal
years.
2003 2002
------------- -------------
QUARTER ENDED (APPROXIMATELY) HIGH LOW HIGH LOW
----------------------------- ----- --- ---- ---
March 31 $42.80 $29.35 $33.20 $16.10
June 30 52.03 37.57 29.00 20.91
September 30 72.30 48.20 28.60 21.85
December 31 74.71 64.30 30.55 20.05
(b) HOLDERS. As of March 10, 2004, there were approximately 1,829 holders
of record of the Company's Common Stock. The Company believes that,
in addition, there are a significant number of beneficial owners of
its Common Stock whose shares are held in "street name".
(c) DIVIDENDS. During fiscal years 2003, 2002 and 2001, the Company did
not pay any cash dividends on its Common Stock. The payment of future
dividends on its Common Stock is subject to the discretion of the
Board and is dependent upon many factors, including the Company's
earnings, its capital needs, the terms of any financing agreements
and its financial condition.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
NUMBER OF
SECURITIES TO BE WEIGHTED AVERAGE
ISSUED UPON EXERCISE PRICE
EXERCISE OF OF OUTSTANDING
OUTSTANDING OPTIONS, NUMBER OF SECURITIES
OPTIONS, WARRANTS WARRANTS AND REMAINING AVAILABLE
PLAN CATEGORY AND RIGHTS RIGHTS FOR FUTURE ISSUANCE
-------------- ---------- ------ -------------------
EQUITY COMPENSATION PLANS
APPROVED BY STOCKHOLDERS:
2001 Performance Equity Plan 2,797 $32.45 1,637
1997 Directors Stock Option Plan 139 $25.98 187
1990 Stock Incentive Plan 2 $4.13 -
EQUITY COMPENSATION PLANS NOT
APPROVED BY STOCKHOLDERS:
2000 Performance Equity Plan 438 $6.81 88
--- --
Total 3,376 $28.83 1,912
In fiscal year 2000, the Board adopted the 2000 Performance Equity
Plan (the "2000 Plan"), which Plan was subsequently amended, making it a
non-qualified, broad-based plan not subject to stockholder approval. The
2000 Plan provides for the granting of incentive and non-qualified stock
options to employees of the Company and others. The 2000 Plan became
effective on March 23, 2000 and will continue until March 22, 2010 unless
terminated sooner. The Company reserved 1,025 shares of Common Stock for
issuance under the 2000 Plan. The maximum term of an option under the 2000
Plan is ten years. Vesting and option terms are determined in each case by
the Compensation and Stock Option Committee of the Board. The maximum term
of the option is reduced to five years if an incentive stock option is
granted to a holder of more than 10% of the total combined voting power of
all the classes of capital stock of the Company.
(e) RECENT STOCK PRICE. On March 10, 2004, the closing price of the
Common Stock on the NYSE was $59.36.
18
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
AS OF AND FOR THE FISCAL YEARS ENDED
12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
-------- -------- -------- -------- --------
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Net product sales $646,023 $380,848 $271,035 $85,022 $80,315
Other product related revenues 15,665 755 - - -
------ ------- ------- ------ ------
Total Revenues 661,688 381,603 271,035 85,022 80,315
Cost of goods sold 378,513 198,313 161,306 62,332 64,140
------- ------- ------- ------ ------
Gross margin 283,175 183,290 109,729 22,690 16,175
------- ------- ------- ------ ------
Operating expenses (income):
Research and development 24,581 17,910 11,113 7,634 6,005
Selling, general and administrative 57,575 40,215 21,878 16,297 13,509
Settlements - (9,051) - - -
Acquisition termination charges - 4,262 - - -
------ ----- ------ ------ ------
Total operating expenses 82,156 53,336 32,991 23,931 19,514
------ ------ ------ ------ ------
Operating income (loss) 201,019 129,954 76,738 (1,241) (3,339)
Other (expense) income (95) (305) (364) 506 906
Interest (expense) income (281) 604 (442) (916) (63)
--- --- --- --- --
Income (loss) before provision
for income taxes 200,643 130,253 75,932 (1,651) (2,496)
Provision for income taxes 78,110 50,799 22,010 - -
------ ------ ------ ----- -----
Net income (loss) $122,533 $79,454 $53,922 $(1,651) $(2,496)
======== ====== ====== ===== =====
Net income (loss) per share of
common stock:
Basic $3.66 $2.46 $1.76 $(.06) $(.08)
===== ==== ==== === ===
Diluted $3.54 $2.40 $1.68 $(.06) $(.08)
===== ==== ==== === ===
Weighted average number of
common shares outstanding:
Basic 33,483 32,337 30,595 29,604 29,461
====== ====== ====== ====== ======
Diluted 34,638 33,051 32,190 29,604 29,461
====== ====== ====== ====== ======
BALANCE SHEET DATA:
Working capital $459,802 $136,305 $102,867 $18,512 $21,221
Property, plant and equipment (net) 46,813 27,055 24,345 23,560 22,681
Total assets 762,812 301,457 216,926 93,844 92,435
Long-term debt, less current portion 200,211 2,426 1,060 163 1,075
Total stockholders' equity 395,081 220,790 138,423 64,779 65,755
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS.
-------------
CERTAIN STATEMENTS IN THIS DOCUMENT MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO
FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES
OF CURRENT PRODUCTS, THE INTRODUCTION OF NEW MANUFACTURED, LICENSED AND
DISTRIBUTED PRODUCTS AND RESEARCH AND DEVELOPMENT EXPENDITURES. SUCH STATEMENTS
INVOLVE RISKS, UNCERTAINTIES, TRENDS AND CONTINGENCIES, MANY OF WHICH ARE BEYOND
THE CONTROL OF THE COMPANY AND COULD CAUSE ACTUAL RESULTS AND PERFORMANCE TO
DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN. THESE STATEMENTS ARE MADE
TYPICALLY BY USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS,"
"ANTICIPATES," "CONTINUING," "COULD," "ONGOING," "EXPECTS," "BELIEVES" OR
SIMILAR WORDS AND PHRASES. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING
STATEMENTS SET FORTH IN THIS DOCUMENT INCLUDE (i) INCREASED COMPETITION FROM NEW
AND EXISTING COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS (ESPECIALLY
UPON COMPLETION OF EXCLUSIVITY PERIODS), (ii) PRICING PRESSURES RESULTING FROM
THE CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (iii) THE
AMOUNT OF FUNDS AVAILABLE FOR, AND THE SUCCESS OF, INTERNAL RESEARCH AND
DEVELOPMENT AND RESEARCH AND DEVELOPMENT JOINT VENTURES, (iv) RESEARCH AND
DEVELOPMENT PROJECT DELAYS OR DELAYS AND UNANTICIPATED COSTS IN OBTAINING
REGULATORY APPROVALS, (v) CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT
AGREEMENTS, (vi) THE CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET
FUTURE DEMAND, (vii) THE COSTS AND OUTCOME OF ANY THREATENED OR PENDING
LITIGATION, INCLUDING PATENT AND INFRINGEMENT CLAIMS, (viii) UNANTICIPATED COSTS
IN ABSORBING ACQUISITIONS, (ix) OBTAINING OR LOSING 180-DAY EXCLUSIVITY ON
PRODUCTS, (x) THE ABILITY OF THE COMPANY TO DIVERSIFY PRODUCT OFFERINGS AND (xi)
GENERAL INDUSTRY AND ECONOMIC CONDITIONS. ANY FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS DOCUMENT ARE MADE ONLY AS OF THE DATE HEREOF, BASED ON
INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF, AND, SUBJECT TO
APPLICABLE LAW TO THE CONTRARY, THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS.
THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS.
OVERVIEW
Although the Company achieved the most successful year in its history in
fiscal year 2003, there are many industry and economic factors and risks that
can affect the growth of the Company. The most significant of these factors
include: (i) intense competition from brand name and generic manufacturers, (ii)
the Company's introduction of new manufactured and distributed products at
selling prices that generate significant gross margins, (iii) resources and/or
funding available to the Company for the research and development of new
products, (iv) the Company's dependence on a limited number of products and the
duration of those products as significant revenue generators, (v) the actions of
brand name manufacturers to introduce their own generic versions of brand drugs
and to prevent or discourage the use of generic equivalent products or delay
and/or prevent entry of the Company's products into the market through
litigation or other means, (vi) funding available to the Company for litigation
which can be protracted and expensive, (vii) the Company's dependence upon
revenues from products distributed through agreements with third parties and
potential supply disruptions resulting from the inability by third party
suppliers to meet expected demand and (viii) the Company's ability to continue
its licensing of authorized generics from brand companies. As described below,
the Company believes it has a comprehensive business plan in place to address
these challenges and mitigate such risks. In order to secure financing to
support the expansion of its business, the Company obtained additional funds
through the issuance of $200,000 of senior subordinated convertible debt in
September 2003. Implementation of these strategies could also require additional
debt and/or equity financing; there can be no assurance that the Company will be
able to obtain any additional required financing when needed and on terms
acceptable or favorable to it.
The pharmaceutical industry is highly competitive. Many of the Company's
competitors have longer operating histories and greater financial, research and
development, marketing and other resources. Consequently, many of the Company's
competitors may be able to develop products and/or processes competitive with,
or superior to, those of the Company. Furthermore, the Company may not be able
to differentiate its products from those of its competitors, successfully
develop or introduce new products that are less costly than those of its
competitors or offer purchasers of its products payment and other commercial
terms as favorable as those offered by its competitors. The Company's principal
strategy, in addressing its competition, is to offer customers a consistent
supply of a broad line of generic drugs at competitive pricing.
20
Revenues and gross margin derived from generic pharmaceutical products
often follow a pattern based on regulatory and competitive factors believed to
be unique to the generic pharmaceutical industry. As the patent(s) for a brand
name product and the related exclusivity period expires, the first generic
manufacturer to receive regulatory approval for a generic equivalent of the
product is often able to capture a substantial share of the market. However, as
other generic manufacturers receive regulatory approvals for competing products,
that market share, and the price of that product, will typically decline
depending on several factors, including the number of competitors, the price of
the brand product and the pricing strategy of the new competitors. A large
portion of the Company's revenues has been derived from the sales of generic
drugs during the 180-day marketing exclusivity period and from the sale of
generic products where there is limited competition. The Company, through its
internal development program and strategic alliances and relationships, is
committed to developing new products that have limited competition and longer
product life cycles. In addition to expected new product introductions as part
of its various strategic alliances and relationships, the Company plans to
continue to invest significantly in its internal research and development
efforts while, at the same time, seeking additional products for sale through
new and existing distribution agreements or acquisitions of complementary
products and businesses, additional first-to-file opportunities, selective
vertical integration with raw material suppliers and unique dosage forms to
differentiate its products in the marketplace.
In addition to its own product development program, the Company has
several strategic alliances through which it co-develops and distributes
products. These strategic alliances offer the Company many advantages including
additional resources for increased activity, expertise for dissimilar products
or technologies, and a sharing of both the costs and risks of new product
development. As a result of its internal program and these strategic alliances,
the Company's pipeline of potential products includes 25 ANDAs (five of which
have been tentatively approved), pending with, and awaiting approval from, the
FDA. The Company pays a percentage of the gross profits or sales to its
strategic partners on sales of products covered by its distribution agreements.
Generally, products that the Company develops internally, without having to
split any profits with its strategic partners, contribute higher gross margins
than products covered under distribution agreements. The Company is engaged in
efforts, subject to FDA approval and other factors, to introduce new products
through its research and development efforts and distribution and development
agreements with third parties.
In fiscal year 2003, the Company obtained the marketing rights to
paroxetine, the generic version of GSK's Paxil(R), in connection with the GSK
Settlement between the Company, GSK and certain of its affiliates, and Pentech.
As a result of the settlement, Par and GSK entered into the GSK Supply
Agreement, pursuant to which Par began marketing paroxetine, supplied and
licensed from GSK, in the United States in September 2003 and the Commonwealth
of Puerto Rico in May 2003. The GSK Settlement also provides that the Company's
right to distribute paroxetine will be suspended if at any time there is not
another generic version fully substitutable for Paxil available for purchase in
the United States. On September 8, 2003, another generic drug manufacturer,
Apotex, launched a generic version of Paxil(R). GSK has sued Apotex for patent
infringement and is currently appealing a district court decision adverse to
GSK. In April 2002, GSK launched a longer-lasting, newly patented version of the
drug, Paxil CR(R). The Company expects Paxil CR(R)'s market share to continue to
grow in fiscal year 2004, which may cause the Company's sales of paroxetine
tablets to decrease. The Company understands that other generic drug
manufactures have filed ANDAs in respect of paroxetine and that the marketing
exclusivity period ended on March 8, 2004 but, at this time, cannot predict the
timing of launches by these competitors or the potential effect of such
competition on its sales.
The 180-day marketing exclusivity period in respect of fluoxetine 10 mg
and 20 mg tablets, which Par sells pursuant to a distribution agreement with
Genpharm, and the 180-day marketing exclusivity period granted in respect of
fluoxetine 40 mg capsules, which Par sells pursuant to a development and supply
agreement with Dr. Reddy, both expired at the end of January 2002. In addition,
the 180-day marketing exclusivity period granted to the Company by the FDA in
respect of megestrol acetate oral suspension, which is not subject to any profit
sharing agreement, expired in mid-January 2002. As the Company expected,
additional generic competitors, with products comparable to all three strengths
of its fluoxetine products, began entering the market in the first quarter of
2002, eroding the pricing that the Company had received during the exclusivity
periods, particularly on the 10 mg and 20 mg strengths. Nevertheless, the
Company maintained a significant market share for fluoxetine 40 mg capsules and,
despite FDA approvals for two competing generic megestrol acetate oral
suspension products received in the first quarter of 2002 and the second quarter
of 2003, the Company also maintained a significant share of the market for
megestrol acetate oral suspension as of December 31, 2003. Although megestrol
acetate oral suspension and fluoxetine 40 mg capsules are expected to continue
to contribute significantly to the Company's overall performance in fiscal year
21
2004, the growth of the Company's product line through new product introductions
has somewhat reduced the Company's reliance on these products.
In fiscal year 2003, the Company's top four selling products accounted for
approximately 61% of its total revenues, as compared to 56% and 70%,
respectively, of its total revenues in fiscal years 2002 and 2001. One of the
products, paroxetine, which the Company began marketing in fiscal year 2003, was
not one of the top four products in either of the preceding years and accounted
for approximately 29% of the Company's total 2003 revenues and a significant
portion of its gross margin. The aggregate net sales and gross margins generated
by two other products, fluoxetine and megestrol acetate oral suspension,
accounted for a significant portion of the Company's overall revenues and gross
margins in all three fiscal years and any reduction in pricing for these
products, without the addition of new products, could adversely affect the
Company's overall financial performance. The percentage of the Company's total
revenues that these two products represent, excluding paroxetine, has decreased
to 38% in fiscal year 2003 from 44% and 61%, respectively in fiscal years 2002
and 2001. Although there can be no such assurance, the Company anticipates
continuing to introduce new products in fiscal year 2004 while seeking to
increase sales of certain existing products in an effort to offset sales and
gross margin declines resulting from competition on any of its significant
products. The Company seeks to reduce its financial dependence with respect to
the top four products, by adding additional products through, its internal
development program, new and existing distribution agreements or acquisitions of
complementary products or businesses.
Litigation concerning patents and proprietary rights is often protracted
and expensive. Pharmaceutical companies with patented brand products are
increasingly suing companies that produce generic forms of their patented brand
name products for alleged patent infringement or other violations of
intellectual property rights, which may delay or prevent the entry of such
generic products into the market. Generally, a generic drug may not be marketed
until the applicable patent(s) on the brand name drug expires. When an ANDA is
filed with the FDA for approval of a generic drug, the filing person may either
certify that the patent listed by the FDA as covering the generic product is
about to expire, in which case the ANDA will not become effective until the
expiration of such patent, or that the patent listed as covering the generic
drug is invalid or will not be infringed by the manufacture, sale or use of the
new drug for which the ANDA is filed. Under either circumstance, there is a risk
that a branded pharmaceutical company may sue the filing person for alleged
patent infringement or other violations of intellectual property rights. Also,
other companies that compete with the Company by manufacturing, developing
and/or selling the same generic pharmaceutical products may similarly file
lawsuits against the Company or its strategic partners claiming patent
infringement or invalidity. Because substantially all of the Company's business
involves the marketing and development of off-patent products, the threat of
litigation, the outcome of which is inherently uncertain, is always present.
Such litigation is often costly and time consuming, and could result in a
substantial delay in, or prevent, the introduction and/or marketing of products,
which could have a material adverse effect on the Company's business, condition
(financial and other), prospects and results of operations.
The Company's strategy to broaden its product line also includes the
licensing of authorized generic products from brand companies. On November 28,
2003, the Company commenced shipment of substitutable generic metformin
hydrochloride extended-release tablets supplied and licensed from BMS. Release
of the metformin hydrochloride extended-release tablets occurred simultaneously
with the release of this product by another generic company. Metformin
hydrochloride extended-release tablets are the generic version of BMS's
Glucophage XR(R) tablets, which is used in the treatment of type 2 diabetes.
The Company has broadened its product line by entering into distribution
and marketing agreements, as well as contract manufacturing agreements, through
which it distributes generic pharmaceutical products manufactured by others. The
Company has entered into distribution agreements with several companies to
develop, distribute and promote such generic pharmaceutical products. The
Company cannot give assurance that the efforts of its contractual partners will
continue to be successful or that it will be able to renew such agreements or
that it will be able to enter into new agreements with additional companies. Any
alteration to or termination of the Company's current material distribution and
marketing agreements, or any failure to enter into new and similar agreements,
could materially adversely affect its business, condition (financial and other),
prospects or results of operations. The Company seeks to mitigate potential
supply issues from its third-party suppliers through regular communication and
planning or entering into contracts when possible.
22
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $122,533 in fiscal year 2003 increased $43,079
from $79,454 in fiscal year 2002. Total revenues of $661,688 in 2003 increased
$280,085 from $381,603 in fiscal year 2002, driven primarily by additional net
sales of new products introduced in 2003. The revenue growth produced higher
gross margin dollars in 2003, which increased $99,885 to $283,175, from $183,290
in fiscal year 2002. In addition, the Company continued to invest significantly
in its research and development activities and infrastructure. Spending of
$24,581 on research and development for fiscal year 2003 increased 37% from
$17,910 for fiscal year 2002, while selling, general and administrative costs of
$57,575 for fiscal year 2003 increased $17,360 from the prior year. The Company
believes that the increased costs will be required to support its future growth.
In addition, the Company recorded a charge of $3,712 in selling, general and
administrative expenses in 2003 related to a retirement package for the
Company's former chairman, president and chief executive officer. Fiscal year
2002 results include income from settlements of $9,051 related to the Company's
termination of its litigation with BMS and acquisition termination charges of
$4,262 in connection with its termination of negotiations with International
Specialty Products ("ISP") related to the Company's then proposed purchase of
the combined ISP FineTech fine chemical business based in Haifa, Israel and
Columbus, Ohio.
The Company also experienced significant sales, gross margin and net
income growth in fiscal year 2002 when compared to fiscal year 2001. Net income
of $79,454 for fiscal year 2002 increased $25,532 from $53,922 for fiscal year
2001. Net income in 2001 included the favorable impact on the tax provision
related to the reversal of a previously established valuation allowance of
$9,092 related to net operating loss ("NOL") carryforwards. Net sales of
$381,603 in fiscal year 2002 increased $110,568, or 41%, from fiscal year 2001.
The increased revenues were primarily the result of new product introductions in
fiscal year 2002 combined with the success of megestrol acetate oral suspension,
introduced in the third quarter of 2001. The increase in revenues was achieved
despite lower sales of fluoxetine 10 mg and 20 mg tablets, which were introduced
with 180-day exclusivity in August 2001 and experienced severe price competition
in fiscal year 2002. The sales growth generated increased gross margins of
$183,290, or 48% of net sales, in fiscal year 2002, compared to $109,729, or 40%
of net sales, in 2001. Results for fiscal year 2002 included increased spending
on research and development and selling, general and administrative expenses of
$6,797 and $18,337, respectively, primarily due to increased activity with
development partners, and additional legal fees, personnel costs, product
liability insurance and shipping costs associated with new product launches.
Sales and gross margins of the Company's products are principally
dependent upon (i) the pricing practices of competitors or their removal of
competing products from the market, (ii) the introduction of other generic drug
manufacturers' products in direct competition with the Company's significant
products, (iii) the ability of generic competitors to quickly enter the market
after patent or exclusivity period expirations, diminishing the amount and
duration of significant profits from any one product, (iv) the continuation of
existing distribution agreements, (v) the introduction of new distributed
products, (vi) the consolidation among distribution outlets through mergers,
acquisitions and the formation of buying groups, (vii) the willingness of
generic drug customers, including wholesale and retail customers, to switch
among generic pharmaceutical manufacturers, (viii) the approval of ANDAs and
introduction of new manufactured products, (ix) the granting of potential
marketing exclusivity periods, (x) the extent of market penetration for the
existing product line and (xi) the level and amount of customer service (see
"Business-Competition").
REVENUES
Total revenues of $661,688 for fiscal year 2003 increased $280,085, or
73%, from $381,603 for fiscal year 2002. The revenue growth in 2003 was driven
largely by the September 2003 introduction of paroxetine in the United States,
sold through the GSK Supply Agreement, which totaled approximately $192,500 in
net sales for fiscal year 2003. Additionally, net sales of other new products,
including metformin ER (Glucophage XR(R)), introduced in December 2003 and sold
under a distribution agreement with BMS, tizanidine (Zanaflex(R)), introduced in
July 2002 and sold under a distribution agreement with Dr. Reddy, torsemide
(Demadex(R)) and minocycline (Minocin(R)), introduced in the second quarter of
2003 and manufactured by the Company, contributed to the revenue growth in 2003.
Net sales of fluoxetine and megestrol acetate oral suspension were approximately
$91,100 and $88,200, respectively, for the most recent year, reflecting a small
increase over the prior fiscal year. Net sales of distributed products, which
consist of products manufactured under contract and licensed products, were
23
approximately 69% and 60%, respectively, of the Company's total revenues in
fiscal years 2003 and 2002. The Company is substantially dependent upon
distributed products for its overall sales and, as the Company continues to
introduce new products under its distribution agreements, it expects that this
dependence will continue. Any inability by suppliers to meet expected demand
could adversely affect the Company's future sales.
At this time, it is difficult to predict with accuracy the effects of
potential competition on future sales of paroxetine. Several market
uncertainties currently exist including the possibility and timing of additional
generic competitors entering the market or the ability of GSK, under the GSK
Supply Agreement, to suspend Par's right to distribute paroxetine if at any time
another generic version of Paxil(R) is not being marketed.
Two generic competitors have been granted FDA approval to market generic
versions of megestrol acetate oral suspension since the expiration of the
Company's 180-day marketing exclusivity period, but, as of December 31, 2003,
did not have a significant effect on the Company's net sales of the product. At
this time, the Company cannot accurately predict the effect the generic
competition will have on future periods; however, the Company believes that
megestrol acetate oral suspension will be a significant sales and gross margin
contributor in fiscal year 2004, despite the competition. The Company will
continue to evaluate the effects of such competition and will record a price
protection reserve when, if and to the extent it deems necessary.
As a result of generic competition beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing exclusivity period,
the sales price for fluoxetine had substantially declined from the price that
the Company had charged during the exclusivity period. Accordingly, the
Company's sales and gross margins generated by fluoxetine following the
expiration of the exclusivity period were adversely affected. Despite pricing
declines, fluoxetine 40 mg continued to be a significant sales and gross margin
contributor in fiscal year 2003. If additional competitors enter the market in
fiscal year 2004, the Company expects that its sales and gross margins for the
product will decline.
Pursuant to an agreement with Genpharm, the Company receives a portion of
the profits, as defined in the agreement, generated from Kremers Urban
Development Co.'s ("KUDCo"), a subsidiary of Schwarz Pharma AG of Germany, sale
of omeprazole, the generic version of Astra Zeneca's Prilosec(R). In the third
quarter of 2003, two generic competitors began selling forms of omeprazole that
also compete with the prescription form of Prilosec(R), significantly reducing
the Company's share of profits related to omeprazole from approximately $12,800
for the first six months of fiscal year 2003 to $2,900 for the remainder of the
year. The Company expects that the impact of this competition will continue to
have an adverse effect on its omeprazole revenues in future periods.
Total revenues of $381,603 for fiscal year 2002 increased $110,568, or
41%, from total revenues in fiscal year 2001. The revenue increase was primarily
due to higher net sales of megestrol acetate oral suspension, introduced in late
July 2001, new products introduced in fiscal year 2002, particularly tizanidine
(Zanaflex(R)), metformin (Glucophage(R)), flecainide (Tambocor(R)) and
nizatidine (Axid(R)), sold under distribution agreements with Reddy or Genpharm,
and the addition of five BMS brand products, sold pursuant to an agreement with
BMS. Net sales of fluoxetine and megestrol acetate oral suspension in fiscal
year 2002 were $85,800 and $83,000, respectively, compared to $122,300 and
$43,900, respectively, in the prior year. Net sales of distributed products
represented approximately 60% and 66%, respectively, of the Company's total
revenues in fiscal years 2002 and 2001.
GROSS MARGINS
The Company's gross margin of $283,175 (43% of total revenues) for fiscal
year 2003 increased $99,885 from $183,290 (48% of total revenues) for fiscal
year 2002. The gross margin dollar increase was achieved primarily as a result
of contributions from sales of new products, as described above, and, to a
lesser extent, higher sales of certain existing products and additional revenues
from omeprazole pursuant to an agreement with Genpharm. In accordance with the
GSK Settlement and the Pentech Supply and Marketing Agreement, Par pays
royalties to GSK and Pentech on sales of paroxetine. As a result of these
arrangements, the gross margin as a percentage of total revenues declined as net
sales of paroxetine after profit splits yielded a significantly lower gross
margin percentage than the Company's average gross margin as a percentage of
total revenues of its other products over the last three fiscal years.
24
In fiscal year 2003, a higher gross margin contribution from fluoxetine 40
mg due to increases in net sales and in the Company's profit sharing percentage
under its agreement with Dr. Reddy following the end of the Company's
exclusivity period more than offset lower gross margin contributions from
fluoxetine 10 mg and 20 mg tablets, which are subject to profit sharing
agreements with Genpharm. As discussed above, additional generic manufacturers
introduced and began marketing comparable fluoxetine products following the
expiration of the Company's exclusivity period in January 2002, adversely
effecting the Company's sales volumes, selling prices and gross margins for the
products, particularly the 10 mg and 20 mg strengths. The Company's gross margin
for paroxetine, megestrol acetate oral suspension and fluoxetine 40 mg could
also decline when, and as, additional manufacturers introduce and market
comparable generic products.
The Company's gross margin for fiscal year 2002 of $183,290 (48% of total
revenues) increased $73,561 from $109,729 (40% of total revenues) in the prior
year. The gross margin improvement was achieved primarily through the additional
contributions from sales of higher margin new products, including megestrol
acetate oral suspension and, to a lesser extent, increased sales of certain
existing products. Megestrol acetate oral suspension contributed approximately
$33,600 in additional gross margin for fiscal year 2002 when compared to fiscal
year 2001. The effects of gross margin declines resulting from lower pricing on
the fluoxetine 40 mg capsule were partially offset by an increase in the
Company's profit sharing percentage under an agreement with Dr. Reddy. Although
net sales of the fluoxetine products declined in 2002, the increased profits on
the 40 mg capsule lessened the impact of the lower margin contributions from the
10 mg and 20 mg tablets.
Inventory write-offs were $3,059, $3,096 and $1,790, respectively, for
fiscal years 2003, 2002 and 2001. The inventory write-offs, taken in the normal
course of business, were related primarily to the disposal of finished products
due to short shelf lives and work in process inventory not meeting the Company's
quality control standards. The write-offs in fiscal year 2002 included the
write-off of inventory for a product whose launch was delayed due to unexpected
patent issues and certain raw material not meeting the Company's quality control
standards. The increase from fiscal year 2001 was primarily attributable to
normally occurring write-offs resulting from increased production required to
meet higher sales and inventory levels. The Company maintains inventory levels
that it believes are appropriate to optimize customer service.
OPERATING EXPENSES/INCOME
RESEARCH AND DEVELOPMENT
Research and development expenses of $24,581 for fiscal year 2003
increased $6,671, or 37%, from $17,910 for fiscal year 2002. The higher expenses
were primarily attributable to biostudies, including the Company's share of
Genpharm's biostudy costs for products covered under their distribution
agreements. In addition, higher costs were incurred for raw material and
additional personnel to support increased research and development activity in
fiscal year 2003 and in the future.
Although there can be no such assurance, the Company expects its total
annual research and development expenses for fiscal year 2004 to exceed the
total for fiscal year 2003 by approximately 50%. The increase is expected as a
result of increased internal development activity, third-party projects and
research and development joint venture activity.
The Company currently has 11 ANDAs for potential products (two tentatively
approved) pending with, and awaiting approval from, the FDA as a result of its
own product development program. In fiscal year 2004, the Company expects that
at least ten of the potential products in active development will be the
subjects of biostudies throughout fiscal year 2004.
The Company and Genpharm have entered into a distribution agreement (the
"Genpharm 11 Product Agreement"), dated April 2002, pursuant to which Genpharm
is developing products and submitting the corresponding ANDAs to the FDA and,
subsequently, has agreed to manufacture the potential products covered under the
Agreement. Par will serve as the exclusive U.S. marketer and distributor of the
products, pay a share of the costs, including development and legal expenses
incurred to obtain final regulatory approval, and pay Genpharm a percentage of
the gross profits on all sales of products covered by this Agreement. Currently,
there is one ANDA for a potential product that is covered by the Genpharm 11
Product Agreement pending with, and awaiting approval from, the FDA. The Company
is currently marketing one product and receiving royalties on another product
covered under the Genpharm 11 Product Agreement.
25
The Company and Genpharm have also entered into a distribution agreement
(the "Genpharm Distribution Agreement"), dated March 25, 1998. Under the
Genpharm Distribution Agreement, Genpharm pays the research and development
costs associated with the products covered by the Genpharm Distribution
Agreement. Currently, there are seven ANDAs for potential products (three
tentatively approved) that are covered by the Genpharm Distribution Agreement
pending with, and awaiting approval from, the FDA. The Company is currently
marketing 19 products under the Genpharm Distribution Agreement.
Genpharm and the Company share the costs of developing products covered
under an agreement (the "Genpharm Additional Product Agreement"), dated November
27, 2000. Currently, there is one ANDA for a potential product covered by the
Genpharm Additional Product Agreement pending with, and awaiting approval from,
the FDA. The Company is currently marketing two products under the Genpharm
Additional Product Agreement.
Research and development expenses of $17,910 for fiscal year 2002
increased $6,797, or 61%, from $11,113 for the prior year. The increased costs
were primarily attributable to additional payments of approximately $7,100 for
development work performed for the Company by unaffiliated companies,
particularly Aveva Drug Delivery Systems, (formerly Elan Transdermal
Technologies, Inc.) ("Aveva"), a U.S. subsidiary of Nitto Denko, related to the
development of a clonidine transdermal patch and other products and, to a lesser
extent, higher costs for personnel, the acquisition of FineTech and funding of
SVC Pharma, a joint venture partnership between the Company and Rhodes
Technologies, Inc., an affiliated company of Purdue Pharma L.P. These expenses
were partially offset by lower biostudy costs, primarily related to products
covered under distribution agreements with Genpharm, in fiscal year 2001.
The Company purchased FineTech, based in Haifa, Israel, from ISP in April
2002. One of the Company's potential first-to-file products, latanoprost,
resulted from the Company's relationship with FineTech prior to its acquisition.
In addition, the Company and FineTech are currently collaborating on two
additional products for which ANDAs have already been filed with the FDA (see
"Notes to Consolidated Financial Statements - Note 7 - Acquisition of
FineTech").
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs of $57,575 (9% of total
revenues) for fiscal year 2003 increased $17,360 from $40,215 (11% of total
revenues) for fiscal year 2002. The increase in 2003 was primarily attributable
to higher costs for product liability and directors and officers insurance of
approximately $3,700, a charge of $3,712 related to a retirement package for the
Company's former chairman, president and chief executive officer, and marketing
expenses of approximately $1,100. In addition, the Company incurred increased
expenses it believes are necessary to support the Company's growth, including
costs for additional personnel of approximately $5,000, additional warehouse and
administrative office facilities of $1,800, corporate strategic planning of
$1,700 and information systems assessments. Distribution costs include those
related to shipping products to the Company's customers, primarily through the
use of common carriers or external distribution services. Shipping costs of
approximately $2,700 in fiscal year 2003 were comparable to costs of $2,800 in
fiscal year 2002. Although overall sales volumes increased in fiscal year 2003,
shipping costs remained at approximately the same level as fiscal year 2002 due
to a reduced amount of reliance on an external distribution service. The
Company's legal expenses in fiscal year 2003 were lower than those incurred in
fiscal year 2002 due to the sharing of certain costs with a strategic partner.
The Company anticipates that it will continue to incur a high level of legal
expenses related to litigations connected with potential new product
introductions (see "Notes to Consolidated Financial Statements- Note 14
- -Commitments, Contingencies and Other Matters-Legal Proceedings"). Selling,
general and administrative costs are expected to increase by 10% to 20% in
fiscal year 2004 primarily due to increased marketing activity.
The Company's former chairman, president and chief executive officer,
Kenneth I. Sawyer, retired, effective July 2003, and resigned from the Board,
effective September 2003. Mr. Sawyer will continue to be available to consult
with the Company through 2004. A charge of approximately $3,712 associated with
Mr. Sawyer's retirement package was recorded in 2003. The retirement package
consists of expenses for accelerated stock options, a severance payment and the
remainder of his 2003 salary and benefits.
Selling, general and administrative costs of $40,215 (11% of net sales)
for fiscal year 2002 increased $18,337 from $21,878 (8% of net sales) for fiscal
year 2001. The increase in 2002 was primarily attributable to additional legal
fees of approximately $6,000, personnel costs of $4,200 and, to a lesser extent,
product liability insurance and distribution costs associated with new product
26
introductions and higher sales volumes. Distribution costs include those related
to shipping products to the Company's customers, primarily through the use of
common carriers or external distribution services. Shipping costs totaled
approximately $2,800 in fiscal year 2002, an increase of $1,500 from the prior
year.
SETTLEMENTS
On March 5, 2002, the Company entered into an agreement with BMS acquiring
the United States rights to five brand products from BMS. The products were the
antihypertensives Capoten(R) and Capozide(R), the cholesterol-lowering
medications Questran(R) and Questran Light(R), and Sumycin(R), an antibiotic. To
obtain the rights to these five products, the Company agreed to terminate its
outstanding litigation against BMS involving megestrol acetate oral suspension
and buspirone, and paid $1,024 in March 2002 and $1,025 in April 2003. The
Company determined, through an independent third-party appraisal, the fair value
of the product rights received to be $11,700, which exceeded the cash
consideration of $2,049 and associated costs of $600 by $9,051. The $9,051 value
was assigned to the litigation settlements and recorded as settlement income in
the first quarter of 2002. The fair value of the product rights received is
being amortized on a straight-line basis over the seven-year period beginning in
March 2002, with the net amount included in intangible assets on the Company's
consolidated balance sheets.
ACQUISITION TERMINATION CHARGES
On March 15, 2002, the Company terminated its negotiations with ISP
related to the Company's purchase of the combined ISP FineTech fine chemical
business, based in Haifa, Israel and Columbus, Ohio. At that time, the Company
discontinued negotiations with ISP as a result of various events and
circumstances that occurred following the announcement of the proposed
transaction. Pursuant to the termination of negotiations, the Company paid ISP a
$3,000 break-up fee in March 2002, which was subject to certain credits and
offsets, and incurred $1,262 in related acquisition costs, both of which were
included in acquisition termination charges on the consolidated statements of
operations in fiscal year 2002.
INTEREST INCOME/EXPENSE
Net interest expense of $281 for fiscal year 2003 includes interest
payable on the convertible debt partially offset by interest income derived
primarily from short-term investments. Net interest income of $604 in fiscal
year 2002 was primarily derived from money market and other short-term
investments. Net interest expense of $442 in fiscal year 2001 was primarily due
to outstanding balances on the Company's line of credit with General Electric
Capital Corporation ("GECC") during the year.
INCOME TAXES
The Company recorded provisions for income taxes of $78,110, $50,799 and
$22,010, respectively, for the fiscal years 2003, 2002 and 2001 based on the
applicable federal and state tax rates for those periods. The provision in
fiscal year 2001 was net of tax benefits of $9,092 related to previously
unrecognized NOL carryforwards (see "Notes to Consolidated Financial Statements
- - Note 13 - Income Taxes").
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $162,549 at December 31, 2003 increased
$97,428 from $65,121 at December 31, 2002, primarily due to cash provided by
operations and, to a lesser extent, proceeds from the issuance of shares of
Common Stock, primarily from the exercise of stock options. The Company invested
$24,035 in capital improvements in fiscal year 2003, up from $6,921 in the prior
year, primarily for the expansion of its laboratories in Spring Valley, New
York, its administrative offices in Woodcliff Lake, New Jersey and its warehouse
facilities in Montebello, New York. In addition, the Company purchased new
production machinery for its packaging lines and made improvements in its
information technology. The Company's cash balances are deposited primarily with
financial institutions in money market funds and overnight investments.
Working capital, which is current assets minus current liabilities, of
$459,802 at December 31, 2003 increased $323,497, from $136,305 at December 31,
2002, primarily due to available for sale securities purchased with the net
proceeds from the issuance of convertible debt, and increases in the Company's
cash position and accounts receivable, partially offset by higher payables due
to distribution agreement partners, particularly those due to GSK. The available
27
for sale securities include debt securities issued by state and local
municipalities and agencies and securities issued by the United States
government and agencies and all are available for immediate sale. The working
capital ratio of 3.75x at December 31, 2003, which is calculated by dividing
current assets by current liabilities, improved from 2.83x at December 31, 2002.
The Company believes that its strong working capital ratio indicates an ability
to meet its ongoing and foreseeable future obligations.
In September 2003, the Company sold an aggregate principal amount of
$200,000 of senior subordinated convertible notes pursuant to Rule 144A under
the Securities Act of 1933, as amended. Net proceeds from the notes of $177,945
were net of underwriting costs of $5,250 and the net payment for the call option
and warrant transactions described below, and were used to purchase available
for sale securities in October 2003. The Company intends to use its current
liquid position to support the expansion of its business, including increasing
its research and development activities, entering into product license
arrangements and possibly acquiring complementary businesses and products, and
for general corporate purposes (see "Notes to Consolidated Financial Statements
- - Note 10 - Long-Term Debt").
Concurrently with the sale of the convertible notes, the Company purchased
call options on its Common Stock (the "purchased call options") that are
designed to mitigate the potential dilution from conversion of the convertible
notes. The cost of the purchased call options of $49,368 was recognized in
additional paid-in-capital on the Company's consolidated balance sheets in
fiscal year 2003. The cost of the purchased call options was partially offset by
the sale of warrants (the "sold warrants") to acquire shares of the Common Stock
to the counterparty with whom the Company entered into the purchased call
options. The gross proceeds from the sale of the sold warrants of $32,563 were
also recognized in additional paid-in-capital on the Company's consolidated
balance sheets in fiscal year 2003.
In October 2003, the Company purchased one million shares of the common
stock of Advancis in its initial public offering of six million shares on
October 16, 2003. The purchase price was $10 per share and the transaction
closed on October 22, 2003. The Company's investment represents an ownership
position of 4.4% of the outstanding common stock of Advancis. Advancis' has
stated that its focus is on developing and commercializing pulsatile drug
products that fulfill unmet medical needs in the treatment of infectious
disease. Unlike immediate release antibiotics, Advancis' antibiotics are
delivered in three to five sequential pulses within the first six to eight hours
following initial dosing. As referred to in "Notes to Consolidated Financial
Statements - Note 8 - Research and Development Agreements", Par and Advancis
have a licensing agreement providing Par the marketing rights to the antibiotic
Clarithromycin XL. Clarithromycin XL is being developed as a generic equivalent
to Abbott's Biaxin XL(R).
As of December 31, 2003, the Company had payables owed to distribution
agreement partners of $88,625, related primarily to amounts due pursuant to
profit sharing agreements, particularly amounts owed to GSK on paroxetine. The
Company expects to pay these amounts out of its working capital during the first
quarter of 2004.
The dollar values of the Company's material contractual obligations and
commercial commitments as of December 31, 2003 were as follows:
AMOUNTS DUE BY PERIOD
---------------------
TOTAL MONETARY 2005 TO 2008 TO 2010 AND
OBLIGATION OBLIGATION 2004 2007 2009 THEREAFTER
- ---------- ---------- ---- ---- ---- ----------
Operating leases $17,795 $3,017 $7,199 $4,485 $3,094
Convertible notes* 200,000 - - - 200,000
Other 333 122 211 - -
--- --- --- - -----
Total obligations $218,128 $3,139 $7,410 $4,485 $203,094
======= ===== ===== ===== =======
*The convertible notes mature on September 30, 2010, unless earlier
converted or repurchased.
In addition to its internal research and development costs, the Company,
from time to time, enters into agreements with third parties with respect to the
development of new products and technologies. To date, the Company has entered
into agreements and advanced funds or has commitments with several
non-affiliated companies for products in various stages of development. These
types of payments or commitments are generally dependent on a third party
achieving certain milestones or the timing of third party research and
development or legal expenses. Due to the uncertainty of the timing or
realization of such commitments, these obligations are not included in the table
28
above; however, agreements that contain such commitments that the Company
believes are material are described below. Payments made pursuant to these
agreements are either capitalized or expensed according to the Company's
accounting policies.
Par and Nortec entered into an agreement, dated October 22, 2003, in which
the two companies agreed to develop additional products that are not part of the
two previous agreements between Par and Nortec. During the first two years of
the agreement, Par is obligated to make aggregate initial research and
development payments to Nortec in the amount of $3,000, of which $1,500 was paid
by Par in fiscal year 2003, $1,000 is due in fiscal year 2004 and $500 is due in
fiscal year 2005. On or before October 15, 2005, Par has the option to either
(i) terminate the arrangement with Nortec, in which case the initial research
and development payments will be credited against any development costs that Par
shall owe Nortec at that time or (ii) acquire all of the capital stock of Nortec
over the subsequent two years, including the first fifty (50%) percent of the
capital stock of Nortec over the third and fourth years of the agreement for
$4,000, and the remaining capital stock of Nortec from its owners at the end of
the fourth year for an additional $11,000. The parties have agreed to certain
revenue and royalty sharing arrangements before and after Par's acquisition, if
any, of Nortec.
In the second quarter of 2002, the Company made non-refundable payments
totaling $1,000 pursuant to other agreements with Nortec, which were charged to
research and development expenses as incurred. Pursuant to the agreements, the
Company agreed to pay a total of $800 in various installments related to the
achievement of certain milestones in the development of two potential products
and $600 for each product on the day of its first commercial sale.
Par entered into the Advancis Licensing Agreement, dated September 4,
2003, with Advancis to market the antibiotic Clarithromycin XL. Pursuant to the
Advancis Licensing Agreement, Advancis is responsible for the development and
manufacture of the product, while Par will be responsible for marketing, sales
and distribution. If certain provisions in the Advancis Licensing Agreement are
met, Par has agreed to pay Advancis an aggregate amount of up to $6,000 based on
the achievement of certain milestones contained in the Agreement. An ANDA for
the product is expected to be submitted to the FDA in the near future. Pursuant
to the Advancis Licensing Agreement, Par agreed to pay Advancis a certain
percentage of the gross profits, as defined in the Agreement, on all sales of
the product if it is successfully developed and introduced into the market.
Par entered into an agreement with BMS, dated August 6, 2003, to license
the brand name Megace(R) to be used for a potential new product currently in
development. The product, if successfully developed, would be a line extension
of the Company's megestrol acetate oral suspension products. Pursuant to this
agreement, Par paid BMS $5,000 in August 2003, which is included in intangible
assets on the Company's consolidated balance sheets at December 31, 2003. As
part of this agreement, Par also provided BMS with funding of approximately $400
in fiscal year 2003 to support the active promotion of the brand, which was
expensed as incurred, and will provide an additional $1,600 throughout 2004 to
help retain brand equity and awareness among physicians.
In November 2002, the Company amended its agreement, dated November 2001,
with Pentech to market paroxetine capsules. Pursuant to the Pentech Supply and
Marketing Agreement, the Company paid all legal expenses up to $2,000, which
were expensed as incurred, to obtain final regulatory approval. Legal expenses
in excess of $2,000 are fully creditable against future profit payments to
Pentech. The Company had agreed to reimburse Pentech for costs associated with
the project of up to $1,300 for fiscal year 2003. In fiscal year 2003, the
Company paid Pentech $771 of these costs, which were charged to research and
development expenses as incurred, pursuant to the Pentech Supply and Marketing
Agreement. The Company is negotiating with Pentech to further amend the Pentech
Supply and Marketing Agreement concerning gross profit splits, reimbursement of
research and development expenses and sharing of legal expenses and other costs
related to paroxetine.
In July 2002, the Company and Three Rivers entered into a distribution
agreement (the "Three Rivers Distribution Agreement"), which was amended in
October 2002, to market and distribute ribavirin 200 mg capsules, the generic
version of Schering's Rebetol(R). Under the terms of the Three Rivers
Distribution Agreement, Three Rivers will supply the product and be responsible
for managing the regulatory process and ongoing patent litigation. Par will have
the exclusive right to sell the product in non-hospital markets upon FDA
approval and final marketing clearance and pay Three Rivers a percentage of the
gross profits (as defined in the Agreement). The Company paid Three Rivers
$1,000 in November 2002, which was charged to research and development expense,
and has agreed to pay Three Rivers $500 at such time as Par commercially
launches the product.
29
Pursuant to the Genpharm 11 Product Agreement, Genpharm has agreed to
develop products, submit all corresponding ANDAs to the FDA and subsequently
manufacture the products covered under the agreement. Par has agreed to serve as
exclusive U.S. marketer and distributor of the products, pay a share of the
costs, including development and legal expenses incurred to obtain final
regulatory approval, and pay Genpharm a percentage of the gross profits, as
defined in the agreement, on all sales of products covered under this agreement.
In the second quarter of 2002, the Company paid Genpharm a non-refundable fee of
$2,000, included in intangible assets on the consolidated balance sheets, for
two of the products. Pursuant to the Genpharm 11 Product Agreement, the
Company's share of development and legal costs related to the other products has
been expensed as incurred. The Company will also be required to pay an
additional non-refundable fee of up to $414 based upon FDA acceptance of certain
filings, as defined in the agreement.
In December 2001, the Company made its first payment of a potential equity
investment of up to $2,438 to be made over a period of time in High Rapids, Inc.
("HighRapids"), a Delaware corporation. High Rapids is a software developer and
the owner of patented rights to an artificial intelligence generator. Pursuant
to an agreement between the Company and HighRapids, effective December 1, 2001,
the Company, subject to its ongoing evaluation of HighRapids' operations, has
agreed to purchase units, consisting of secured debt, evidenced by 7% secured
promissory notes, up to an aggregate principal amount of $2,425 and up to an
aggregate of 1,330 shares of the common stock of HighRapids. HighRapids is to
utilize the Company's cash infusion for working capital and operating expenses.
Through December 31, 2003, the Company had invested $1,386 of its potential
investment. Due to HighRapids' current operating losses and the Company's
evaluation of its short-term prospects for profitability, the investments were
expensed as incurred and included in other expense on the Company's consolidated
statements of operations (see "Notes to Consolidated Financial Statements - Note
14 - Commitments, Contingencies and Other Matters-Other Matters").
In April 2001, Par entered into a licensing agreement with Aveva to market
a generic clonidine transdermal patch (Catapres TTS(R)). Under such agreement,
Aveva is responsible for the development and manufacture of the product, while
Par is responsible for marketing, sales and distribution. Pursuant to the
agreement, Par paid Aveva $1,167 in fiscal year 2001 and $833 in 2002, which
were charged to research and development expenses in the respective years. In
addition, Par has agreed to pay Aveva $1,000 upon FDA approval of the product
and a royalty on all sales of the product.
The Company expects to continue to fund its operations, including research
and development activities, capital projects, and its obligations under the
existing distribution and development arrangements discussed herein, out of its
working capital, including the proceeds from the issuance of its convertible
debt. The Company anticipates that its capital spending in fiscal year 2004 will
not exceed its levels of fiscal year 2003. Implementation of the Company's
business plan may require additional debt and/or equity financing and there can
be no assurance that the Company will be able to obtain any additional required
financing when needed and on terms acceptable or favorable to it.
FINANCING
At December 31, 2003, the Company's total outstanding long-term debt,
including the current portion, was $200,333. The amount consisted primarily of
senior subordinated convertible notes and capital leases for computer equipment.
In September 2003, the Company sold an aggregate principal amount of $200,000 of
senior subordinated convertible notes pursuant to Rule 144A under the Securities
Act of 1933, as amended. The notes bear interest at an annual rate of 2.875%,
payable semi-annually on March 30 and September 30 of each year, with the first
payment due on March 30, 2004. The notes are convertible into Common Stock at an
initial conversion price of $88.76 per share, upon the occurrence of certain
events. The notes mature on September 30, 2010, unless earlier converted or
repurchased. The Company may not redeem the notes prior to their maturity date.
The Company decided not to move a portion of FineTech's operation,
including personnel and technological resources to a laboratory facility in
Rhode Island and, in October 2003, paid the outstanding balance on the
industrial revenue bond that was to be used for this operation.
In December 1996, Par entered into a loan agreement with GECC. The loan
agreement, as amended in December 2002, provided Par with a revolving line of
credit expiring in March 2005, pursuant to which Par was permitted to borrow up
to the lesser of (i) the borrowing base established under the Loan Agreement or
(ii) $30,000. The Company terminated the loan agreement in October 2003.
30
At December 31, 2002, the Company's total outstanding long-term debt,
including the current portion, amounted to $3,022. The amount consisted
primarily of an outstanding mortgage loan with a bank, an industrial revenue
bond and capital leases for computer equipment. The Company paid the remaining
balance on the mortgage loan in February 2003.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policies are those most important to the portrayal of
the Company's financial condition and results of operations, and require
management's most difficult, subjective and complex judgments, resulting from
the need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies, discussed below,
pertain to revenue recognition including the determination of sales returns and
allowances, the determination of whether certain costs pertaining to the
Company's significant development and marketing agreements are capitalized or
expensed as incurred, the valuation and assessment of impairment of intangible
assets, the determination of depreciable and amortizable lives and issues
related to legal proceedings. In applying such policies, management must use
some amounts that are based on its informed judgments and estimates. Because of
the uncertainties inherent in these estimates, actual results could differ from
estimates used in applying the critical accounting policies. The Company is not
aware of any reasonably likely events or circumstances that would result in
different amounts being reported that would materially affect its financial
condition or results of operations.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE AND ALLOWANCES:
The Company recognizes revenues for product sales when title and risk of
loss pass to its customers, and simultaneously records estimates for sales
returns, chargebacks, rebates, shelf-stock or price protection adjustments or
other sales allowances, as reductions in revenues, with corresponding
adjustments to the accounts receivable allowances (see "Notes to Consolidated
Financial Statements- Note 3 - Accounts Receivable"). The Company has the
historical experience and access to other information, including the total
demand for each drug that the Company manufactures or distributes, the Company's
market share, recent or pending new drug introductions, inventory practices of
the Company's customers, resales by its customers to end-users having contracts
with the Company, and rebate agreements with each customer, necessary to
reasonably estimate the amount of such sales returns and allowances. Some of the
assumptions used for certain of the Company's estimates are based on information
received from third parties, such as customer inventories at a particular point
in time, or other market factors beyond the Company's control. The Company
regularly reviews all information related to these estimates and adjusts its
reserves accordingly if and when actual experience differs from previous
estimates. The Company's reserves related to the items described above at
December 31, 2003 and 2002 totaled $139,748 and $113,008, respectively.
Customer rebates are price reductions generally given to customers as an
incentive to increase sales volume. This incentive is based on a customer's
volume of purchases made during an applicable monthly, quarterly or annual
period. Chargebacks are price adjustments given to the wholesale customer for
product it resells to specific healthcare providers on the basis of prices
negotiated between the Company and the providers.
The accounts receivable allowances include provisions for returns. The
Company accepts returns of product according to the following: (i) the returns
must be approved by authorized personnel in writing or by telephone with the lot
number and expiration date accompanying any request, (ii) the Company generally
will accept returns of products from any customer and will give such customer a
credit for such return provided such product is returned within six months prior
to, and until 12 months following, such product's expiration date, (iii) any
product that has more than six months until its expiration date may be returned
to the Company; however, no credit will be issued to the customer and (iv) the
Company will not accept returns of products if such products cannot be resold,
unless the reason that such products cannot be resold is that the expiration
date has passed.
The accounts receivable allowances also include provisions for doubtful
accounts and price adjustments, including terms discounts, sales promotions and
shelf-stock adjustments. Terms discounts are given to customers that pay within
a specific period of time. The Company may conduct sales or trade show
promotions where additional discounts may be given on a new product or certain
existing products as an added incentive for the customer to purchase the
Company's products. Shelf-stock adjustments are typically provided to a customer
when the Company lowers its invoice pricing and provides a credit for the
difference between the old and new invoice prices for the inventory that the
customer had on hand at the time of the price reduction.
31
The Company will generally offer price protection for sales of new generic
drugs for which it has a market exclusivity period. Such price protection
accounts for the fact that the prices of such drugs typically will decline,
sometimes substantially, when additional generic manufacturers introduce and
market a comparable generic product following the expiration of an exclusivity
period. Such price protection plans, which are common in the Company's industry,
generally provide for a shelf-stock adjustment to customers with respect to the
customer's remaining inventory at the expiration of the exclusivity period for
the difference between the Company's new price and the price at which the
Company originally sold the product. The Company may also offer price protection
with respect to existing products for which it anticipates significant price
erosion through an increase in competition. The Company estimates the amount by
which prices will decline based on its monitoring of the number and status of
FDA applications and tentative approvals and its historical experience with
other drugs for which the Company had market exclusivity. The Company estimates
the amount of shelf stock that will remain at the end of an exclusivity period
based on both its knowledge of the inventory practices for wholesalers and
retail distributors and conversations it has with its major customers. Using
these factors, the Company estimates the total price protection credit that it
will have to issue at the end of an exclusivity period and records charges
(reductions of sales) to accrue this amount for specific product sales that will
be subject to price protection based on the Company's estimate of customer
inventory levels and market prices at the end of the exclusivity period. As
noted above, although the Company believes it has the information necessary to
reasonably estimate the amount of such price protection at the time that the
product is sold, there are inherent risks associated with these estimates. The
Company adjusts its price protection reserves accordingly if and when actual
experience differs from those estimates. At December 31, 2003 and 2002, the
Company did not have any significant price protection reserves.
RESEARCH AND DEVELOPMENT AND MARKETING AGREEMENTS:
The Company will either capitalize or expense amounts related to the
development and marketing of new products and technologies through third parties
based on the Company's determination of its ability to recover in a reasonable
period of time the estimated future cash flows anticipated to be generated
pursuant to each agreement. Under the Company's accounting policies, amounts
related to the Company's funding of the research and development efforts of
third parties or to the purchase of contractual rights to products that have not
been approved by the FDA where the Company has no alternative future use for the
product, are expensed and included in research and development costs. Amounts
for contractual rights acquired by the Company to a process, product or other
legal right having multiple or alternative future uses that support its
realizabilty, as well as an approved product, are capitalized and included in
intangible assets on the consolidated balance sheets. The Company records the
value of these agreements based on the purchase price and subsequent milestone
payments related to each agreement. Capitalized costs are amortized over the
estimated useful lives over which the related cash flows are expected to be
generated and charged to cost of goods sold. Market, regulatory or legal
factors, among other things, may affect the realizability of the projected cash
flows that an agreement was initially expected to generate. The Company
regularly monitors these factors and subjects all capitalized costs to periodic
impairment testing.
GOODWILL AND INTANGIBLE ASSETS:
The Company determines the estimated fair values of goodwill and certain
intangible assets with definitive lives based on valuations performed by
independent third-party valuation firms. In addition, certain amounts paid to
third parties related to the development and marketing of new products and
technologies, as described above, are capitalized and included in intangible
assets on the consolidated balance sheets. The goodwill is tested at least
annually for impairment using a fair value approach. Intangible assets with
definitive lives, also tested periodically for impairment, are capitalized and
amortized over their estimated useful lives. As a result of the acquisition of
FineTech in fiscal year 2002, the Company had recorded goodwill of $24,662 at
December 31, 2002. In addition, intangible assets with definitive lives, net of
accumulated amortization, totaled $35,564 and $35,692, respectively, at December
31, 2003 and 2002.
LEGAL PROCEEDINGS:
The Company records its costs, including patent litigation expenses,
related to legal proceedings as incurred in selling, general and administrative
expenses. As discussed in "Notes to Consolidated Financial Statements - Note 14
- - Commitments, Contingencies and Other Matters", the Company is a party to
several patent infringement matters whose outcome could have a material impact
on its future profitability, cash flows and financial condition. The Company is
also currently involved in other litigation matters, including certain patent
actions, product liability and actions by former employees and believes that
these actions are incidental to the business and that the ultimate resolution
thereof will not have a material adverse effect on its future profitability,
cash flows or financial condition. The Company is defending or intends to defend
or, in cases where the Company is plaintiff, prosecute these actions vigorously.
32
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2003, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This statement requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003. The Company completed
its evaluation of the impact of the adoption of this statement and determined
that it did not have a material impact on the Company's consolidated financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement amends
Statement 133 for decisions made (1) as part of the Derivatives Implementation
Group process that effectively required amendments to Statement 133, (2) in
connection with other FASB projects dealing with financial instruments and (3)
in connection with implementation issues raised in relation to the application
of the definition of a derivative, in particular, the meaning of an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors,
the meaning of underlying, and the characteristics of a derivative that contains
financing components. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, certain provisions, which relate to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company determined the adoption of this Statement did
not have a material impact on the Company's consolidated financial position or
results of operations.
In January 2003, the FASB issued Financial Interpretation Number ("FIN")
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements". FIN 46 establishes accounting guidance for consolidation of
variable interest entities that function to support the activities of the
primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46
(revised December 2003) ("FIN 46R"). In addition to conforming to previously
issued FASB Staff Positions, FIN 46R deferred the implementation date for
certain variable interest entities. This revised interpretation is effective for
all entities no later than the end of the first reporting period that ends after
March 15, 2004. The Company does not have any investments in or contractual
relationship or other business relationship with a variable interest entity and,
therefore, the adoption of this interpretation will not have any impact on its
financial position or results of operations.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" ("FIN 45"), an interpretation of FASB Statements No. 5,
57 and 107 and a rescission of FASB Interpretation No. 34. FIN 45 elaborates on
the disclosures required to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. The initial recognition and measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of this interpretation did not have a material
impact on the Company's consolidated financial position or results of
operations.
SUBSEQUENT EVENTS
Par and Advancis have signed a letter of intent, dated March 1, 2004,
subject to execution of a definitive agreement, to enter into an agreement to
develop and market a novel formulation of the antibiotic amoxicillin. The
companies intend to develop a low dose pulsatile form of amoxicillin, utilizing
Advancis' proprietary PULSYS(TM) technology. A 505(b)(2) NDA seeking marketing
clearance for amoxicillin PULSYS(TM) is expected to be submitted to the FDA by
Advancis in 2005. The companies expect to add additional products to their
collaboration in the future.
Under the terms of a definitive agreement, Par would pay Advancis $5,000
over 12 months and fund development expenses going forward. Advancis will grant
Par the exclusive right to sell and distribute the product and the co-exclusive
right to promote and market the product. Advancis will be responsible for the
manufacturing program. Par and Advancis will share equally in marketing expenses
33
and profits. The companies expect to finalize the agreement in the second
quarter of 2004.
On March 9, 2004, the Congress of California Seniors brought an action
against GSK and the Company concerning the sale of paroxetine in the State of
California. The Company intends to defend vigorously the claims set forth in the
complaint.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------
The Company is subject to market risk primarily from changes in the market
values of investments in marketable debt and government agency securities. These
instruments are classified as available for sale securities for financial
reporting purposes and have minimal or no interest risk due to their short-term
nature. Professional portfolio managers managed 100% of these available for sale
securities at December 31, 2003. Additional investments are made in overnight
deposits and money market funds. These instruments are classified as cash and
cash equivalents for financial reporting purposes and have minimal or no
interest risk due to their short-term nature.
The following table summarizes the available for sale securities that
subject the Company to market risk at December 31, 2003 and 2002:
2003 2002
---- ----
Debt securities issued by various state and
local municipalities and agencies $185,450 $-
Securities issued by United States government
and agencies 10,050 -
------
Total $195,500 $-
======= =
AVAILABLE FOR SALE SECURITIES:
The primary objectives for the Company's investment portfolio are
liquidity and safety of principal. Investments are made to achieve the highest
rate of return while retaining safety of principal. The investment policy limits
investments to certain types of instruments issued by institutions and
governmental agencies with investment-grade credit ratings. A significant change
in interest rates could affect the market value of the $195,500 of available for
sale securities that have a maturity greater than one year.
The Company is also subject to market risk in respect of its investment in
Advancis, which is subject to fluctuations in the price of Advancis common
stock, which is publicly traded. The Company paid $10,000 to purchase one
million shares of the common stock of Advancis at $10 per share in its initial
public offering of six million shares on October 16, 2003. The transaction
closed on October 22, 2003. The value of the Company's investment in Advancis as
of December 31, 2003 was $7,500.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- ---------------------------------------------------------
See Index to Consolidated Financial Statements and Schedule.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------- -----------------------------------------------------------
AND FINANCIAL DISCLOSURE.
-------------------------
In May 2002, the Company engaged Deloitte & Touche LLP ("Deloitte &
Touche") to serve as the Company's independent auditor for 2002. Prior to that
date, Arthur Andersen LLP ("Andersen") had served as the Company's independent
public accountants.
The reports by Andersen on the Company's consolidated financial statements
for fiscal year 2001 did not contain an adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. Andersen's report on the Company's consolidated financial
statements for 2001 was issued on an unqualified basis in conjunction with the
filing of the Company's Annual Report on Form 10-K.
During fiscal year 2001, and through the date of the change, there were no
disagreements with Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures that, if not
resolved to Andersen's satisfaction, would have caused them to make reference to
the subject matter in connection with their report on the Company's consolidated
financial statements for such years; and there were no reportable events, as
listed in Item 304(a)(1)(v) of Regulation S-K.
34
The decision to change accountants was recommended by the Audit Committee,
and approved by the Board, on May 1, 2002.
During 2003, there were no disagreements with Deloitte & Touche on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures which, if not resolved to Deloitte & Touche's
satisfaction, would have caused them to make reference to the subject matter in
connection with their report on the Company's consolidated financial statements
for 2003 and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES.
- -------- ------------------------
Based on an evaluation under the supervision and with the participation of
the Company's management, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) were effective as of December 31,
2003 to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms.
There were no changes in the Company's internal control over financial
reporting identified in management's evaluation during the fourth quarter of
fiscal 2003 that have materially affected or are reasonably likely to materially
affect the Company's internal controls over financial reporting.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------- --------------------------------------------------
The Company hereby incorporates by reference the information set forth
under the caption "Election of Directors" from its definitive Proxy Statement to
be delivered to stockholders of the Company in connection with its 2004 Annual
Meeting of Stockholders scheduled to be held on May 26, 2004.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
The Company hereby incorporates by reference the information set forth
under the caption "Executive Compensation" from its definitive Proxy Statement
to be delivered to stockholders of the Company in connection with its 2004
Annual Meeting of Stockholders scheduled to be held on May 26, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
The Company hereby incorporates by reference the information set forth
under the caption "Security Ownership" from its definitive Proxy Statement to be
delivered to stockholders of the Company in connection with its 2004 Annual
Meeting of Stockholders scheduled to be held on May 26, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
The Company hereby incorporates by reference the information set forth
under the caption "Certain Relationships and Related Transactions" from its
definitive Proxy Statement to be delivered to stockholders of the Company in
connection with its 2004 Annual Meeting of Stockholders scheduled to be held on
May 26, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -------- ---------------------------------------
Information required by Item 14 of this Form and the audit committee's
pre-approval policies and procedures regarding the engagement of the principal
accountant is incorporated herein by reference to the caption "Audit Committee
Report - Independent Auditor Fees" from the Company's definitive Proxy Statement
to be delivered to stockholders of the Company in connection with its 2004
Annual Meeting of Stockholders scheduled to be held on May 26, 2004.
36
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ------- ----------------------------------------------------------------
(a)(1)&(2) FINANCIAL STATEMENTS AND SCHEDULES.
See Index to Consolidated Financial Statements and Schedules after
Signature Page.
(a)(3) EXHIBITS.
3 Agreement and Plan of Merger, dated as of May 12, 2003 - previously
filed as an exhibit to the Registrant's Report on Form 8-K dated July
9, 2003 and incorporated herein by reference.
3.1 Certificate of Incorporation of the Company, dated May 9, 2003 -
previously filed as an exhibit to the Registrant's Report on Form 8-K
dated July 9, 2003 and incorporated herein by reference.
3.2 By-Laws of the Company, as last amended on June 18, 2003 - previously
filed as an exhibit to the Registrant's Report on Form 8-K dated July
9, 2003 and incorporated herein by reference.
10.1 1989 Employee Stock Purchase Program of the Company - previously
filed as an exhibit to the Registrant's proxy statement dated August
16, 1990 and incorporated herein by reference.
10.2 1990 Stock Incentive Plan of the Company, as amended - previously
filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the 1997 fiscal year and incorporated herein by reference.
10.3 Amended and Restated 1997 Directors' Stock Option Plan - previously
filed on July 1, 2003 as an exhibit to the Registrant's Registration
Statement on Form S-8 (File No. 333-106685) and incorporated herein
by reference.
10.4 2000 Performance Equity Plan - previously filed as an exhibit to the
Registrant's Annual Report for the 2000 fiscal year and incorporated
herein by reference.
10.5 2001 Performance Equity Plan (As Amended on April 26, 2002, January
14, 2003, May 6, 2003 and June 18, 2003) - previously filed on June
30, 2003 as an exhibit to the Registrant's Registration Statement on
Form S-8 (File No. 333-106681) and incorporated herein by reference.
10.6 Form of Retirement Plan of Par - previously filed as an exhibit to
the Registrant's Registration Statement on Form S-1 (File No.
2-86614) and incorporated herein by reference.
10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984 -
previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the 1990 fiscal year and incorporated herein by
reference.
10.7 Form of Retirement Savings Plan of Par - previously filed as an
exhibit to the Registrant's Registration Statement on Form S-1 (File
No. 2-86614) and incorporated herein by reference.
10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984 -
previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-4533) and incorporated herein by
reference.
10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984 -
previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-4533) and incorporated herein by
reference.
10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985
- previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-4533) and incorporated herein by
reference.
37
10.8 Par Pension Plan, effective October 1, 1984 - previously filed as an
exhibit to the Registrant's Annual Report on Form 10-K for the 1991
fiscal year and incorporated herein by reference.
10.9 Terms of Separation from Employment, Consulting, and Post-Employment
Obligations, dated as of June 18, 2003, between Pharmaceutical
Resources, Inc. and Kenneth I. Sawyer - previously filed as an
exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 29, 2003 and incorporated herein by reference.
10.9.1 Employment Agreement, dated as of February 9, 2004, by and between
Pharmaceutical Resources, Inc., and Scott L. Tarriff.
10.9.2 First Amendment to Employment Agreement, dated as of February 20,
2004, between Pharmaceutical Resources, Inc., and Dennis J. O'Connor.
10.9.3 Employment Agreement, dated as of February 6, 2003, by and between
Pharmaceutical Resources, Inc., and Dennis J. O'Connor - previously
filed as an exhibit to the Registrant's Annual Report for the 2002
fiscal year and incorporated herein by reference.
10.9.4 Employment Agreement, dated as of December 18, 2002, by and between
Pharmaceutical Resources, Inc., and Dr. Arie Gutman - previously
filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 30, 2003 and incorporated herein by
reference.
10.9.5 Employment Agreement, dated as of November 24, 2003, by and between
Pharmaceutical Resources, Inc. and Thomas Haughey.
10.10 Lease Agreement, dated as of January 1, 1993, between Par
Pharmaceutical, Inc. and Ramapo Corporate Park Associates -
previously filed as an exhibit to the Registrant's Annual Report for
the 1996 fiscal year and incorporated herein by reference.
10.11 Lease Agreement, dated as of May 24, 2002, between Par
Pharmaceutical, Inc. and 300 Tice Realty Associates L.L.C.
10.11.1 Second Amendment to Lease Agreement, dated as of December 19, 2002,
between Par Pharmaceutical, Inc. and 300 Tice Realty Associates
L.L.C.
10.11.2 Third Amendment to Lease Agreement, dated as of December 20, 2002,
between Par Pharmaceutical, Inc. and 300 Tice Realty Associates
L.L.C.
10.12 Lease Extension and Modification Agreement, dated as of August 30,
1997, between Par Pharmaceutical, Inc. and Ramapo Corporate Park
Associates - previously filed as an exhibit to the Registrant's
Annual Report for the 1997 fiscal year and incorporated herein by
reference.
10.14 Release and Amendment Agreement, dated as of May 1, 1998, among the
Company, Par Pharmaceutical, Inc., Sano Corporation, and Elan
Corporation, plc - previously filed as an exhibit to the Registrant's
Report on Form 8-K dated June 30, 1998 and incorporated herein by
reference.*
10.19 Distribution Agreement, dated March 25, 1998, between the Company and
Genpharm, Inc. - previously filed as an exhibit to the Registrant's
Report on Form 8-K dated June 30, 1998 and incorporated herein by
reference.*
10.20 Services Agreement, dated June 26, 1998, between the Company and
Merck KGaA - previously filed as an exhibit to Registrant's Report on
Form 8-K dated June 30, 1998 and incorporated herein by reference.
10.21 Services Agreement, dated June 26, 1998, between the Company and
Genpharm, Inc - previously filed as an exhibit to the Registrant's
Report on Form 8-K dated June 30, 1998 and incorporated herein by
reference.
38
10.22 Manufacturing and Supply Agreement, dated April 30, 1997, between Par
and BASF Corporation - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 29, 1997 and incorporated herein by reference.
10.23 Agreement of Lease, dated as of March 17, 1999, between Par
Pharmaceutical, Inc. and Halsey Drug Co., Inc. - previously filed as
an exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 3, 1999 and incorporated herein by reference.
10.24 Manufacturing and Supply Agreement, dated as of March 17, 1999,
between Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended April 3, 1999 and incorporated
herein by reference.
10.25 Letter Agreement, dated as of January 21, 1999, between the
Registrant and Genpharm, Inc. - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 3, 1999 and incorporated herein by reference.*
10.26 License Agreement, dated as of July 9, 2001, between Breath Easy
Limited and Par Pharmaceutical, Inc. - previously filed as an exhibit
to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 29, 2001 and incorporated herein by
reference.
10.27 License and Supply Agreement, dated as of April 26, 2001, between
Elan Transdermal Technologies, Inc. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 29,
2001 and incorporated herein by reference.*
10.28 Development and Supply Agreement, dated as of April 17, 2001, between
Par Pharmaceutical, Inc., Dr. Reddy's Laboratories Limited, and
Reddy-Cheminor, Inc. - previously filed as an exhibit to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 29, 2001 and incorporated herein by
reference.*
10.29 Supply and Marketing Agreement, dated as of November 19, 2001,
between Pentech Pharmaceuticals, Inc. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 29,
2001 and incorporated herein by reference.
10.30 Development, License and Supply Agreement, dated as of December 11,
2001, between Elan Corporation PLC. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 29,
2001 and incorporated herein by reference.*
10.31 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) - previously filed as an exhibit to the
Registrant's Report on Form 8-K dated January 11, 2002 and
incorporated herein by reference.
10.32 Purchase Agreement among ISP Hungary Holdings Limited, ISP
Investments Inc., ISP Chemco Inc. and Par Pharmaceutical, Inc., dated
April 17, 2002 - previously filed as an exhibit to the Registrant's
Report on Form 8-K dated April 17, 2002 and incorporated herein by
reference.
10.35 Asset Purchase Agreement between Bristol-Myers Squibb Company and Par
Pharmaceutical, Inc. in respect of the sale of the Capoten(R),
Capozide(R), Questran(R) and Questran Light(R) Brands - previously
filed as an exhibit to the Registrant's Report on Form 8-K, dated
March 7, 2002, and incorporated herein by reference.
10.36 Asset Purchase Agreement between Bristol-Myers Squibb Company and Par
Pharmaceutical, Inc. in respect of the sale of the Sumycin(R) Brand -
previously filed as an exhibit to the Registrant's Report on Form
8-K, dated March 7, 2002, and incorporated herein by reference.
39
10.37 11 Product Development Agreement, effective April 2002, between
Pharmaceutical Resources, Inc. and Genpharm, Inc. - previously filed
as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002 and incorporated herein by
reference.*
10.38 SVC Pharma LP Limited Partnership Agreement, dated April 2002, among
Par SVC, LLC, SVC Pharma Inc., and UDF LP, a Delaware limited
partnership, and the other parties named therein - previously filed
as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002 and incorporated herein by reference.
10.39 Patent and Know How License Agreement, dated May 24, 2002, among
Nortec Development Associates, Inc. and Par Pharmaceutical, Inc -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 2002
and incorporated herein by reference.*
10.40 Amendment No. 1 to the Patent and Know How License Agreement dated
May 24, 2002 among Nortec Development Associates, Inc. and Par
Pharmaceutical, Inc. - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the
quarter ended June 30, 2002 and incorporated herein by reference.*
10.41 Patent and Know How License Agreement dated June 14, 2002 among
Nortec Development Associates, Inc. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 2002
and incorporated herein by reference.*
10.42 License and Distribution Agreement, dated July 3, 2002, between Par
Pharmaceutical, Inc. and Three Rivers Pharmaceuticals, LLC. -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference. *
10.43 First Amendment to License and Distribution Agreement, dated October
18, 2002, between Par Pharmaceutical, Inc. and Three Rivers
Pharmaceuticals, LLC. - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 and incorporated herein by reference.
10.44 First Amendment to the Supply and Marketing Agreement, dated as of
November 12, 2002, between Pentech Pharmaceuticals, Inc. and Par
Pharmaceutical, Inc. - previously filed as an exhibit to the
Registrant's Annual Report for the 2002 fiscal year and incorporated
herein by reference. *
10.45 Termination Agreement, dated December 20, 2002, relating to
Development, License and Supply Agreement, dated as of December 11,
2001, between Elan Corporation PLC. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to the Registrant's Annual Report for
the 2002 fiscal year and incorporated herein by reference *
10.46 Asset Purchase Agreement, dated December 5, 2002, by and between
Israel Pharmaceutical Resources L.P. and Trima, Israel Pharmaceutical
Products, Maabarot LTD- previously filed as an exhibit to the
Registrant's Annual Report for the 2002 fiscal year and incorporated
herein by reference.
10.47 Supply and Distribution Agreement, dated as of December 20, 2002,
between Genpharm, Inc., Leiner Health Products, LLC and Par
Pharmaceutical, Inc. - previously filed as an exhibit to the
Registrant's Annual Report for the 2002 fiscal year and incorporated
herein by reference. *
10.48 Amended and Restated License and Supply Agreement, dated as of April
16, 2003, among SB Pharmco Puerto Rico Inc., SmithKline Beecham
Corporation, Beecham Group p.l.c. and Par Pharmaceutical, Inc.* -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 29, 2003 and incorporated
herein by reference.
10.49 Amended and Restated Settlement Agreement, dated as of April 16,
2003, among SmithKline Beecham Corporation, Beecham Group p.l.c. and
Par Pharmaceutical, Inc. and Pentech Pharmaceuticals, Inc.* -
40
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 29, 2003 and incorporated
herein by reference.
10.50 License Agreement, dated as of August 6, 2003, by and between Mead
Johnson & Company, Bristol-Myers Squibb Company and Par
Pharmaceutical, Inc.* - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 28, 2003 and incorporated herein by reference.
10.51 Supply and Distribution Agreement, dated as of September 4, 2003, by
and between Advancis Pharmaceutical Corporation and Par
Pharmaceutical, Inc.* - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 28, 2003 and incorporated herein by reference.
10.52 Purchase Agreement between the Company, Bear, Stearns & Co. Inc.,
CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray Inc., dated
September 25, 2003 - previously filed on December 24, 2003 as an
exhibit to the Registrant's Registration Statement on Form S-3 (File
No. 333-111567) and incorporated herein by reference.
10.53 Indenture between the Company and American Stock Transfer & Trust
Company, dated September 30, 2003 - previously filed on December 24,
2003 as an exhibit to the Registrant's Registration Statement on Form
S-3 (File No. 333-111567) and incorporated herein by reference.
10.54 Registration Rights Agreement between the Company, Bear, Stearns &
Co. Inc., CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray
Inc., dated September 30, 2003- previously filed on December 24, 2003
as an exhibit to the Registrant's Registration Statement on Form S -3
(File No. 333-111567) and incorporated herein by reference.
10.55 Product Development and Patent License Agreement, dated as of October
22, 2003, by and between Nortec Development Associates, Inc. and Par
Pharmaceutical, Inc.*
10.56 Stock Purchase and Shareholders Agreement, dated as of October 22,
2003, by and between Nortec Development Associates, Inc., Nortec
Holding LLC and Par Pharmaceutical, Inc.*
21 List of Subsidiaries.
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(a)(4) REPORTS ON FORM 8-K. During the fourth quarter ended December 31,
2003, the Company filed a Current Report on Form 8-K on September
29, 2003.
- ------------------------------------------
* Certain portions have been omitted and have been filed with the Commission
pursuant to a request for confidential treatment thereof.
41
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: March 15, 2004 PHARMACEUTICAL RESOURCES, INC.
------------------------------
(REGISTRANT)
/s/ Scott L. Tarriff
------------------------------
Scott L. Tarriff
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Mark Auerbach Executive Chairman of the March 15, 2004
- ----------------- Board of Directors
Mark Auerbach
/s/ Scott L. Tarriff President, Chief Executive March 15, 2004
- -------------------- Officer and Director
Scott L. Tarriff
/s/ Dennis J. O'Connor Vice President and Chief March 15, 2004
- ---------------------- Financial Officer
Dennis J. O'Connor (Principal Accounting and
Financial Officer)
/s/ John D. Abernathy Director March 15, 2004
- ---------------------
John D. Abernathy
/s/ Arie Gutman Director March 15, 2004
- ---------------
Arie Gutman
/s/ Peter S. Knight Director March 15, 2004
- -------------------
Peter S. Knight
/s/ Ronald M. Nordmann Director March 15, 2004
- ----------------------
Ronald M. Nordmann
/s/ Peter W. Williams Director March 15, 2004
- ---------------------
Peter W. Williams
PHARMACEUTICAL RESOURCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
PAGE
----
INCLUDED IN PART II:
--------------------
Independent Auditors' Reports F-2 and F-3
Consolidated Balance Sheets at December 31, 2003 and 2002 F-4
Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) for the years ended December 31, 2003,
2002 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7 through F-30
INCLUDED IN PART IV:
--------------------
SCHEDULE:
II Valuation and qualifying accounts F-31
-------------------------------------------------
Other financial statement schedules are omitted because the conditions
requiring their filing do not exist or the information required thereby is
included in the financial statements filed, including the notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Pharmaceutical Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Pharmaceutical
Resources, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of operations and
retained earnings (accumulated deficit) and cash flows for the two years in the
period ended December 31, 2003. Our audits also included the financial statement
schedule for the two years in the period ended December 31, 2003, listed in the
Index at Item 15. These consolidated financial statements and the financial
statement schedule are the responsibility of Pharmaceutical Resources, Inc.'s
management. Our responsibility is to express an opinion on the consolidated
financial statements and the financial statement schedule based on our audits.
Pharmaceutical Resources, Inc.'s consolidated financial statements and financial
statement schedule for the year ended December 31, 2001, were audited by other
auditors who have ceased operations. Those auditors' report dated March 26, 2002
expressed an unqualified opinion on those consolidated financial statements,
which included an explanatory paragraph that described a restatement to the
consolidated financial statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Pharmaceutical Resources, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the two years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the financial statement schedule
for the two years ended December 31, 2003, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 25, 2004
F-2
THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED AUDIT REPORT BY
ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Pharmaceutical Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Pharmaceutical
Resources, Inc. (a New Jersey corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations and
retained earnings (accumulated deficit) and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in the Restatement of Results footnote, the 2000 and 1999
consolidated financial statements have been restated to reflect the value of
exclusive U.S. distribution rights obtained by the Company through its strategic
alliance with Merck KGaA.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pharmaceutical Resources, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 26, 2002
F-3
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(In Thousands, Except Share Data)
ASSETS 2003 2002
------ ---- ----
Current assets:
Cash and cash equivalents $162,549 $65,121
Available for sale securities 195,500 -
Accounts receivable, net of allowances of
$40,357 and $36,257 157,707 55,310
Inventories, net 66,713 51,591
Prepaid expenses and other current assets 10,033 6,089
Deferred income tax assets 34,473 32,873
------ ------
Total current assets 626,975 210,984
Property, plant and equipment, at cost, less
accumulated depreciation and amortization 46,813 27,055
Investment - Advancis 7,500 -
Intangible assets, net 35,564 35,692
Goodwill 24,662 24,662
Deferred charges and other assets 6,899 1,064
Unexpended industrial revenue bond proceeds - 2,000
Non-current deferred income tax assets, net 14,399 -
------ -----
Total assets $762,812 $301,457
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $122 $596
Accounts payable 20,157 14,637
Payables due to distribution agreement partners 88,625 18,163
Accrued salaries and employee benefits 7,363 5,175
Accrued expenses and other current liabilities 24,654 10,034
Income taxes payable 26,252 26,074
------ ------
Total current liabilities 167,173 74,679
------- ------
Long-term debt, less current portion 200,211 2,426
Deferred income tax liabilities, net - 3,562
Other long-term liabilities 347 -
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.0001 per share;
authorized 6,000,000 shares; none issued
and outstanding - -
Common Stock, par value $.01 per share;
authorized 90,000,000 shares;
issued and outstanding 34,318,163 and
32,804,480 shares 343 328
Additional paid-in capital 171,931 118,515
Retained earnings 224,480 101,947
Accumulated other comprehensive loss (1,673) -
----- ------------
Total stockholders' equity 395,081 220,790
------- -------
Total liabilities and stockholders' equity $762,812 $301,457
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Thousands, Except Per Share Amounts)
2003 2002 2001
---- ---- ----
Revenues:
Net product sales $646,023 $380,848 $271,035
Other product related revenues 15,665 755 -
------ --- -----------
Total revenues 661,688 381,603 271,035
Cost of goods sold 378,513 198,313 161,306
------- ------- -------
Gross margin 283,175 183,290 109,729
------- ------- -------
Operating expenses (income):
Research and development 24,581 17,910 11,113
Selling, general and administrative 57,575 40,215 21,878
Settlements - (9,051) -
Acquisition termination charges - 4,262 -
------ ----- ------
Total operating expenses 82,156 53,336 32,991
------ ------ ------
Operating income 201,019 129,954 76,738
Other expense, net (95) (305) (364)
Interest (expense) income (281) 604 (442)
--- --- ---
Income before provision for income taxes 200,643 130,253 75,932
Provision for income taxes 78,110 50,799 22,010
------ ------ ------
NET INCOME 122,533 79,454 53,922
Retained earnings (accumulated deficit),
beginning of year 101,947 22,493 (31,429)
------- ------ ------
Retained earnings, end of year $224,480 $101,947 $22,493
======== ======= ======
NET INCOME PER SHARE OF COMMON STOCK:
BASIC $3.66 $2.46 $1.76
==== ==== ====
DILUTED $3.54 $2.40 $1.68
==== ==== ====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 33,483 32,337 30,595
====== ====== ======
DILUTED 34,638 33,051 32,190
====== ====== ======
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Thousands)
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $122,533 $79,454 $53,922
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes 667 1,045 (20,081)
Depreciation and amortization 10,131 5,775 3,349
Inventory reserves (748) 1,073 1,498
Allowances against accounts receivable 4,100 (10,911) 43,214
Settlements - (9,051) -
Stock option activity 4,173 37 -
Other 628 991 181
Changes in assets and liabilities:
Increase in accounts receivable (106,497) (6,390) (58,917)
Increase in inventories (14,374) (21,138) (12,707)
Increase in prepaid expenses and other assets (8,041) (10,634) (4,377)
Increase (decrease) in accounts payable 5,520 (3,469) 6,532
Increase (decrease) in payables due to
distribution agreement partners 70,462 (14,132) 30,607
Increase in accrued expenses and other
liabilities 16,808 7,610 3,569
Increase in income taxes payable 12,794 11,528 26,531
------ ------ ------
Net cash provided by operating activities 118,156 31,788 73,321
------- ------ ------
Cash flows from investing activities:
Capital expenditures (24,035) (6,921 ) (4,622)
Purchases of available for sale securities (195,530) - -
Purchase of investments - Advancis (10,000) - -
Acquisition of FineTech, net of cash acquired - (32,618) -
Proceeds from sale of fixed assets - 751 1,158
------- --- -----
Net cash used in investing activities (229,565) (38,788) (3,464)
------- ------ -----
Cash flows from financing activities:
Proceeds from issuances of Common Stock 34,194 2,656 7,597
Sales of warrants 32,563 - -
Purchase of call options (49,368) - -
Debt issuance costs (5,863) - -
Issuance of long-term debt 200,301 - -
Restricted proceeds from industrial revenue bond - 2,000 -
Net payments from revolving credit line - - (9,666)
Principal payments under long-term debt and other
borrowings (2,990) (277) (268)
----- --- ---
Net cash provided by (used in) financing
activities 208,837 4,379 (2,337)
------- ----- -----
Net increase (decrease) in cash and cash equivalents 97,428 (2,621) 67,520
Cash and cash equivalents at beginning of year 65,121 67,742 222
------ ------ ---
Cash and cash equivalents at end of year $162,549 $65,121 $67,742
======= ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Taxes $64,790 $38,211 $15,620
====== ====== ======
Interest $168 $148 $626
=== === ===
Non-cash transactions:
Tax benefit from exercise of stock options $12,616 $220 $11,765
====== === ======
Tax benefit from purchased call options $19,253 $- $-
====== = =
Decrease in fair value of available for sale
securities $2,530 $- $-
===== = =
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(Amounts in Thousands, Except Per Share Amounts)
Pharmaceutical Resources, Inc. (the "Company" or "PRX") operates primarily
through its wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par"), in one
business segment, the manufacture and distribution of generic pharmaceuticals
principally in the United States. In addition, the Company develops and
manufactures, in small quantities, complex synthetic active pharmaceutical
ingredients through its wholly-owned subsidiary, FineTech Laboratories Ltd.
("FineTech"), based in Haifa, Israel, and sells a limited number of mature brand
name drugs through an agreement between Par and Bristol Myers Squibb ("BMS").
Marketed products are principally in the solid oral dosage form (tablet, caplet
and two-piece hard-shell capsule). The Company also distributes one product in
the semi-solid form of a cream and one oral suspension.
As of June 24, 2003, the Company changed its state of incorporation from
New Jersey to Delaware. The reincorporation was approved by the holders of a
majority of the Company's outstanding shares of common stock, voting in person
or by proxy, at its Annual Meeting of Shareholders held on June 19, 2003. The
reincorporation was effected by merging the Company with and into Pharmaceutical
Resources, Inc., a Delaware corporation and then a wholly-owned subsidiary of
the Company, with the Delaware corporation surviving (the "Merger"). The
reincorporation was effected primarily because the Company's board of directors
believed that governance under Delaware law would permit the Company to manage
its corporate affairs more effectively and efficiently than under New Jersey
law. The reincorporation did not result in any change in the Company's business,
management, assets, liabilities, board of directors or locations of its
principal facilities or headquarters.
Pursuant to the Merger, each share of common stock of the New Jersey
corporation was automatically converted into one share of common stock, $.01 par
value, of the Delaware corporation.
As a result of its reincorporation, the Company became the successor
issuer to the New Jersey corporation under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and succeeded to the New Jersey corporation's
reporting obligations thereunder. Pursuant to Rule 12g-3(a) under the Exchange
Act, the Company's common stock is registered under Section 12(b) of the
Exchange Act.
On May 23, 2003, Par also changed its state of incorporation from New
Jersey to Delaware. The Par reincorporation was effected by merging Par with and
into Par Pharmaceutical, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company, with the Delaware corporation surviving. The Par
reincorporation was approved by the Company as the sole shareholder of each of
the merging entities.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of PRX and its
wholly owned subsidiaries. All intercompany transactions are eliminated in
consolidation. References herein to the "Company" refer to PRX and its
subsidiaries.
On April 17, 2002, the Company purchased FineTech from International
Specialty Products ("ISP"). The acquisition was accounted for as a purchase
under Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and the accompanying consolidated financial statements include
the operating results of FineTech from the date of acquisition.
USE OF ESTIMATES:
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. The consolidated
financial statements include certain amounts that are based on management's best
estimates and judgments. Estimates are used in determining such items as
provisions for chargebacks, rebates, returns, price adjustments, price
protection and other sales allowances, depreciable/amortizable lives, pension
benefits, and amounts recorded for contingencies and other reserves. Because of
the uncertainty inherent in such estimates, actual results may differ from these
estimates. The Company is not aware of reasonably likely events or circumstances
that would result in different amounts being reported that would have a material
impact on its results of operations or financial condition.
F-7
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value. The Company examines inventory levels, including expiration dates
by product, on a regular basis. The Company makes provisions for obsolete and
slow-moving inventories as necessary to properly reflect inventory value.
Changes in these provisions are charged to cost of goods sold. The Company
records distribution costs related to shipping product to the Company's
customers, primarily through the use of common carriers or external distribution
services, in selling, general and administrative expenses. Distribution costs
for fiscal years 2003, 2002 and 2001 were approximately $2,700, $2,800 and
$1,300, respectively.
DEPRECIATION AND AMORTIZATION:
Property, plant and equipment are depreciated on a straight-line basis
over their estimated useful lives that range from three to 40 years. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates long-lived assets, including intangible assets with
definitive lives, for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may no longer be recoverable. If
the estimated future cash flows (undiscounted and without interest charges) from
the use of an asset were less than the carrying value, a write-down would be
recorded to reduce the related asset to its estimated fair value.
RESEARCH AND DEVELOPMENT AND PATENT LITIGATION COSTS:
Costs incurred by the Company's internal product development program to
develop new products and obtain pre-marketing regulatory approval for such
products are expensed as incurred and charged to research and development. The
Company will either capitalize or expense amounts related to the development and
marketing of new products and technologies through third parties based on the
Company's determination of its ability to recover in a reasonable period of time
the estimated future cash flows anticipated to be generated pursuant to each
agreement. Accordingly, amounts related to the Company's funding of the research
and development efforts of others or to the purchase of contractual rights to
products that have not been approved by the United States Food and Drug
Administration (the "FDA") where the Company has no alternative future use for
the product, are expensed and included in research and development costs.
Amounts for contractual rights acquired by the Company to a process, product or
other legal right having multiple or alternative future uses that support its
realizabilty, as well as an approved product, are capitalized and included in
intangible assets on the consolidated balance sheets. The capitalized costs are
amortized on an accelerated basis over the estimated useful life over which the
related cash flows are expected to be generated and the amortization is charged
to cost of goods sold. Patent litigation costs are expensed as incurred and
included in selling, general and administrative expenses.
GOODWILL AND INTANGIBLE ASSETS:
The Company determines the estimated fair values of goodwill and certain
intangible assets with definitive lives based on valuations performed by
independent third party valuation firms. In addition, certain amounts paid to
third parties related to the development and marketing of new products and
technologies, as described above, are capitalized and included in intangible
assets on the consolidated balance sheets. Goodwill is not amortized, but tested
at least annually for impairment using a fair value approach. Intangible assets
with definitive lives are capitalized and amortized over their estimated useful
lives.
INCOME TAXES:
Deferred income tax assets and liabilities are computed annually based on
enacted tax laws and rates for temporary differences between the financial
accounting and income tax bases of assets and liabilities. A valuation allowance
is established, when necessary, to reduce deferred income tax assets to the
amount that is more likely than not to be realized.
F-8
PENSION BENEFITS:
The determination of the Company's obligation and expense for pension
benefits is dependent on its selection of certain assumptions used by actuaries
in calculating such amounts. Those assumptions are described in the Commitments,
Contingencies and Other Matters footnote to the consolidated financial
statements and include, among others, the discount rate, expected long-term rate
of return on plan assets and rates of increase in compensation. In accordance
with accounting principles generally accepted in the United States, actual
results that differ from the Company's assumptions are accumulated and amortized
over future periods and therefore, generally affect the recognized expense and
recorded obligation in future periods. While the Company believes that its
assumptions are appropriate, significant differences in actual experience or
significant changes in assumptions may materially affect pension obligations and
future expense.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE AND ALLOWANCES:
The Company recognizes revenues for product sales when title and risk of
loss pass to its customers, and simultaneously records estimates for sales
returns, chargebacks, rebates, shelf-stock or price protection adjustments or
other sales allowances, as a reduction in revenues, with a corresponding
adjustment to the accounts receivable allowances. Customers are permitted to
return unused product, after approval from the Company, up to 180 days before
and one year after the expiration date for the product's lot. Additionally,
certain customers are eligible for price rebates, offered as an incentive to
increase sales volume, on the basis of the volume of purchases of a product over
a specified period which generally ranges from one to three months, and certain
customers are credited with chargebacks on the basis of their resales to end-use
customers, such as HMOs, which have contracts with the Company. The Company also
generally offers price protection for sales of new generic drugs for which it
has a market exclusivity period. Such price protection accounts for the fact
that the prices of such drugs typically will decline, sometimes substantially,
when additional generic manufacturers introduce and market a comparable generic
product following the expiration of an exclusivity period. Such price protection
plans, which are common in the Company's industry, generally provide for a
shelf-stock adjustment to customers with respect to the customer's remaining
inventory at the expiration of the exclusivity period for the difference between
the Company's new price and the price at which the Company originally sold the
product. The Company may also offer price protection with respect to existing
products for which it anticipates significant price erosion through an increase
in competition. The Company records charges (reductions of revenue) to accrue
this amount for specific product sales that will be subject to price protection
based on the Company's estimate of customer inventory levels and market prices
at the expiration of the exclusivity period. In each of the instances described
above, the Company has the historical experience and access to other
information, including the total demand for each drug the Company manufactures,
the Company's market share, recent or pending introduction of new drugs,
inventory practices of the Company's customers and the resales by its customers
to end-users having contracts with the Company, necessary to reasonably estimate
the amount of such sales allowances and returns, and records reserves for such
sales allowances and returns at the time of sale.
EARNINGS PER COMMON SHARE DATA:
Earnings per common share were computed by dividing earnings by the
weighted average number of common shares outstanding. Earnings per common share
assuming dilution, were computed assuming that all potentially dilutive
securities, including "in-the-money" stock options, were converted into common
shares.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's accounts receivable, accounts
payable and accrued liabilities approximate fair market values based upon the
relatively short-term nature of these financial instruments. The carrying amount
of the Company's long-term debt, including the current portion, approximate fair
market value based upon current borrowing rates available to the Company.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to credit risk
consist of trade receivables. The Company markets its products primarily to
domestic wholesalers, retail drug store chains, managed health care providers
and distributors. The Company believes the risk associated with this
concentration is limited due to the number of wholesalers, drug store chains,
managed health care providers and distributors, and their geographic dispersion
and its performance of certain credit evaluation procedures (see "Note 3 -
Accounts Receivable-Major Customers").
CASH EQUIVALENTS:
The Company considers all highly liquid money market instruments with an
original maturity of three months or less when purchased to be cash equivalents.
At December 31, 2003, cash equivalents were deposited in financial institutions
and consisted of immediately available fund balances.
F-9
MARKETABLE SECURITIES:
The Company determines the appropriate classification of all marketable
securities as held-to-maturity, available-for-sale or trading at the time of
purchase, and re-evaluates such classification as of each balance sheet date in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Investments in equity securities that have readily
determinable fair values are classified and accounted for as available for sale.
The Company assesses whether temporary or other-than-temporary gains or losses
on its marketable securities have occurred due to increases or declines in fair
value or other market conditions. Because the Company has determined that all of
its marketable securities are available for sale, unrealized gains and losses
are reported as a component of accumulated other comprehensive income (loss) in
stockholders' equity.
STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB Opinion 25") and complies
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under APB Opinion 25, compensation expense is based
on any difference, as of the date of a stock option grant, between the fair
value of the Company's common stock and the option's per share exercise price.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123" ("SFAS 148") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Standard amends the disclosure requirements of SFAS 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effects of the method
used on reported results.
The following table illustrates the effects on net income and net income
per share of common stock if the Company had applied the fair value recognition
provisions of SFAS 123 to its stock-based employee compensation:
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Net income as reported $122,533 $79,454 $53,922
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 1,263 - -
Deduct: Stock-based employee compensation
expense determined under the fair value
based method, net of related tax effects (10,372) (7,702) (5,137)
------ ----- -----
Pro forma net income $113,424 $71,752 $48,785
======= ====== ======
Net income per share of common stock:
As reported -Basic $3.66 $2.46 $1.76
==== ==== ====
As reported -Diluted $3.54 $2.40 $1.68
==== ==== ====
Pro forma -Basic $3.39 $2.22 $1.59
==== ==== ====
Pro forma -Diluted $3.27 $2.17 $1.52
==== ==== ====
SEGMENTS OF AN ENTERPRISE:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting of financial information about
operating segments in annual financial statements. The Company's management
considers its business to be a single segment entity.
RECLASSIFICATIONS:
Certain items in the consolidated financial statements and in the Notes to
Consolidated Financial Statements for the prior periods have been reclassified
to conform to the current period's consolidated financial statement
presentation.
F-10
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. This statement requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company completed its
evaluation of the impact of the adoption of this statement and determined that
it did not have a material impact on the Company's consolidated financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement amends
Statement 133 for decisions made (1) as part of the Derivatives Implementation
Group process that effectively required amendments to Statement 133, (2) in
connection with other FASB projects dealing with financial instruments and (3)
in connection with implementation issues raised in relation to the application
of the definition of a derivative, in particular, the meaning of an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors,
the meaning of underlying, and the characteristics of a derivative that contains
financing components. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, certain provisions, which relate to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company determined that the adoption of this Statement
did not have a material impact on the Company's consolidated financial position
or results of operations.
In January 2003, the FASB issued Financial Interpretation Number ("FIN")
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements". FIN 46 establishes accounting guidance for consolidation of
variable interest entities that function to support the activities of the
primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46
(revised December 2003) ("FIN 46R"). In addition to conforming to previously
issued FASB Staff Positions, FIN 46R deferred the implementation date for
certain variable interest entities. This revised interpretation is effective for
all entities no later than the end of the first reporting period that ends after
March 15, 2004. The Company does not have any investments in or contractual
relationship or other business relationship with a variable interest entity and,
therefore, the adoption of this interpretation will not have any impact on its
financial position or results of operations.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" ("FIN 45"), an interpretation of FASB Statements No. 5,
57 and 107 and a rescission of FASB Interpretation No. 34. FIN 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The initial recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of this interpretation did not have a material impact on the Company's
consolidated financial position or results of operations.
NOTE 2 - AVAILABLE FOR SALE SECURITIES:
At December 31, 2003, all of the Company's investments in marketable
securities were classified as available-for-sale, and as a result, were reported
at fair value. The following is a summary of the Company's available for sale
securities, classified as short-term, at December 31, 2003:
UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Debt securities issued by various
state and local municipalities and
agencies $185,450 $- $- $185,450
Securities issued by United States
government and agencies 10,080 - (30) 10,050
------ -- -- ------
Total $195,530 - $(30) $195,500
======= == == =======
F-11
All of the securities are available for immediate sale and have been
classified as short-term. There were no proceeds from the sale of securities in
fiscal year 2003. The following table summarizes the contractual maturities of
debt securities at December 31, 2003:
FAIR
COST VALUE
---- -----
Less than one year $10,080 $10,050
Due in 1-2 years - -
Due in 2-5 years - -
Due after 5 years 185,450 185,450
------- -------
Total $195,530 $195,500
======= =======
In addition to the short-term investments described above, the Company
paid $10,000 to purchase one million shares of the common stock of Advancis
Pharmaceutical Corporation ("Advancis"), a pharmaceutical company based in
Germantown, Maryland, at $10 per share in its initial public offering of six
million shares on October 16, 2003. The transaction closed on October 22, 2003.
The Company's investment represents an ownership position of 4.4% of the
outstanding common stock of Advancis. As of December 31, 2003, the fair value of
the Company's investment in Advancis was $7,500 based on the market value of the
common stock of Advancis at that date. The Company recorded an unrealized loss
of $2,500 in the investment that was charged to accumulated other comprehensive
loss, net of taxes of $975, at December 31, 2003. Advancis' has stated that its
focus is on developing and commercializing pulsatile drug products that fulfill
unmet medical needs in the treatment of infectious disease. Unlike immediate
release antibiotics, Advancis' antibiotics are delivered in three to five
sequential pulses within the first six to eight hours following initial dosing.
As referred to in "Note 8 - Research and Development Agreements", Par and
Advancis have entered into a licensing agreement providing Par with the
marketing rights to the antibiotic Clarithromycin XL. Clarithromycin XL is being
developed as a generic equivalent to Abbott Laboratories' ("Abbott") Biaxin
XL(R).
NOTE 3 - ACCOUNTS RECEIVABLE:
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
Trade accounts receivable, net of
customer rebates and chargebacks $196,888 $90,812
Other accounts receivable 1,176 755
----- ---
Allowances:
Doubtful accounts 1,756 1,156
Returns 13,256 18,868
Price adjustments and allowances 25,345 16,233
------ ------
40,357 36,257
Accounts receivable,
net of allowances $157,707 $55,310
======= ======
The trade accounts receivable amounts presented above at December 31, 2003
and 2002 are net of provisions for customer rebates of $23,793 and $13,610, and
for chargebacks of $75,598 and $63,141, respectively. Customer rebates are price
reductions generally given to customers as an incentive to increase sales
volume. Rebates are generally based on a customer's volume of purchases made
during an applicable monthly, quarterly or annual period. Chargebacks are price
adjustments provided to wholesale customers for product that they resell to
specific healthcare providers on the basis of prices negotiated between the
Company and the providers.
The Company accepts returns of product in accordance with the following:
(i) the returns must be approved by authorized personnel in writing or by
telephone with the lot number and expiration date accompanying any request, (ii)
the Company generally will accept returns of products from any customer and will
give such customer a credit for such return provided such product is returned
within six months prior to, and until 12 months following, such product's
expiration date, (iii) any product that has more than six months until its
expiration date may be returned to the Company; however, no credit will be
issued to the customer and (iv) the Company will not accept returns of products
if such products cannot be resold, unless the reason that such products cannot
be resold is that the expiration date has passed.
F-12
In addition to returns, the accounts receivable allowances include
provisions for doubtful accounts and price adjustments. Price adjustments
include terms discounts, sales promotions and shelf-stock adjustments. Terms
discounts are given to customers that pay within a specified period of time. The
Company may conduct sales or trade show promotions where additional discounts
may be given on a new product or certain existing products as an added incentive
for the customer to purchase the Company's products. Shelf-stock adjustments are
typically provided to a customer when the Company lowers its invoice pricing and
provides a credit for the difference between the old and new invoice prices for
the inventory that the customer has on hand at the time of the price reduction.
The Company will generally offer price protection for sales of new generic
drugs for which it has a market exclusivity period. Such price protection
accounts for the fact that the prices of such drugs typically will decline,
sometimes substantially, when additional generic manufacturers introduce and
market a comparable generic product following the expiration of an exclusivity
period. Such price protection plans, which are common in the Company's industry,
generally provide for a shelf-stock adjustment to customers with respect to the
customer's remaining inventory at the expiration of the exclusivity period for
the difference between the Company's new price and the price at which the
Company originally sold the product. In addition, the Company may offer price
protection with respect to existing products for which it anticipates
significant price erosion through increases in competition.
The Company's exclusivity period for megestrol acetate oral suspension,
the generic version of BMS's Megace(R) Oral Suspension, expired in mid-January
2002. Two generic competitors have been granted FDA approval to market generic
versions of megestrol acetate oral suspension, but, as of December 31, 2003, did
not have a significant effect on the Company's net sales of the product. The
Company will continue to evaluate the effects of competition and will record a
price protection reserve when, if and to the extent that it deems necessary.
MAJOR CUSTOMERS:
The Company's top four customers by sales volume accounted for
approximately 17%, 13%, 11% and 11% of net sales in fiscal year 2003, 17%, 16%,
15% and 10% of net sales in fiscal year 2002 and 14%, 14%, 13% and 8% of net
sales in fiscal year 2001.
The amounts due from these four customers accounted for approximately 19%,
17%, 16% and 9% of the accounts receivable balance at December 31, 2003 and 8%,
11%, 7% and 2% of the accounts receivable balance at December 31, 2002.
NOTE 4 -INVENTORIES, NET:
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
Raw materials and supplies, net $21,551 $17,400
Work in process and finished goods, net 45,162 34,191
------ ------
$66,713 $51,591
====== ======
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET:
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
Land $2,231 $2,231
Buildings 26,445 21,509
Machinery and equipment 30,359 21,858
Office equipment, furniture and fixtures 15,271 8,284
Leasehold improvements 4,052 928
----- ---
78,358 54,810
Less accumulated depreciation and amortization 31,545 27,755
------ ------
$46,813 $27,055
====== ======
Depreciation and amortization expense related to the property, plant and
equipment was $3,896, $3,183 and $2,627, respectively, for the years ended
December 31, 2003, 2002 and 2001.
F-13
NOTE 6 - INTANGIBLE ASSETS, NET:
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
Trademark licensed from BMS $5,000 $-
BMS Asset Purchase Agreement, net of
accumulated amortization of $3,064
and $1,393 8,636 10,307
Product License fees, net of accumulated
amortization of $1,135 and $0 9,170 9,199
Genpharm Distribution Agreement, net of
accumulated amortization of $3,972 and $3,250 6,861 7,583
Intellectual property, net of accumulated
amortization of $1,202 and $451 5,378 6,129
Genpharm Profit Sharing Agreement, net of
accumulated amortization of $1,981 and $26 519 2,474
--- -----
$35,564 $35,692
====== ======
Intangible assets include estimated fair values of certain distribution
rights acquired by the Company for equity instruments or in legal settlements,
amounts paid for contractual rights acquired by the Company to a process,
product or other legal right having multiple or alternative future uses that
support its realizabilty and intellectual property. The values of the
distribution rights, pursuant to agreements with BMS and Genpharm Inc.
("Genpharm"), are capitalized and amortized on a straight-line basis over the
products' estimated useful lives of seven to 15 years. The values of the product
license fees, the Genpharm Profit Sharing Agreement and the trademark licensed
from BMS are, or will be, amortized, beginning in the period in which the
product or products are brought to market, over the estimated useful life in
which the related cash flows are generated. The values of the intellectual
property, consisting of trademarks, patents, product and core technology, and
research contracts acquired with the purchase of FineTech, are amortized on a
straight-line basis over their estimated useful lives of six to 10 years. All
capitalized costs are subject to periodic impairment testing. The Company's
intangible assets included on its consolidated balance sheets at December 31,
2003 include the following:
Par entered into an agreement with Mead Johnson & Company ("Mead") and
BMS, dated August 6, 2003, to license the use of the Megace(R) trade name in
connection with a potential new product being developed by Par in exchange for
$5,000 paid by the Company in August 2003. Under the terms of the agreement, Par
provided BMS funding of approximately $400 in fiscal year 2003 to support BMS's
active promotion of Megace O/S(R) (megestrol acetate oral suspension), which was
expensed as incurred, and has agreed to provide an additional $1,600 in fiscal
2004 to help retain its brand awareness among physicians.
In March 2002, the Company entered into an agreement with BMS (the "BMS
Asset Purchase Agreement") and acquired the United States rights to five of
BMS's brand products. Pursuant to the BMS Asset Purchase Agreement, the Company
terminated its outstanding litigation against BMS involving megestrol acetate
oral suspension and buspirone and paid $1,024 in March 2002 and $1,025 in April
2003. The Company determined, through an independent third party appraisal, the
fair value of the product rights received to be $11,700, which exceeded the cash
consideration of $2,049 and associated costs of $600 by $9,051. The $9,051 value
was assigned to the litigation settlements and included in settlement income in
the first quarter of 2002. The fair value of the product rights received is
being amortized on a straight-line basis over seven years beginning in March
2002. The amortization is included as a non-cash charge to cost of goods sold.
In April 2002, the Company entered into an agreement (the "Genpharm 11
Product Agreement") with Genpharm, a Canadian subsidiary of Merck KGaA, to
expand its strategic product partnership. Pursuant to the Genpharm 11 Product
Agreement, the Company paid Genpharm a non-refundable fee of $2,000 in the
second quarter of 2002, included in intangible assets as product license fees,
for two products, loratadine 10 mg tablets and mirtazapine tablets, both of
which were brought to market in fiscal year 2003. The Company is marketing one
of the products and receives a royalty on sales of the other product, which is
being sold by another company.
F-14
In November 2001, the Company entered into a joint development and
marketing agreement with Breath Ltd. of the Arrow Group ("Breath") to pursue the
worldwide distribution of latanoprost ophthalmic solution 0.005%, the generic
equivalent of Pharmacia Corporation's ("Pharmacia") Xalatan(R), a glaucoma
medication. Pursuant to the agreement, the Company has the right to market the
product upon FDA approval in the United States and certain United States
territories while Breath has the rights to all worldwide markets outside of the
United States and such territories. As a result of this agreement, Par filed an
Abbreviated New Drug Application ("ANDA") for latanoprost, including a Paragraph
IV certification that the existing patents for the product will not be infringed
by Par's generic product. Par has reason to believe that its ANDA is the first
to be filed for this drug with a Paragraph IV certification. In December 2001,
Pharmacia, among others, initiated a patent infringement action against Par. Par
intends to vigorously defend its position in the pending litigation with
Pharmacia (see "Note 14 -Commitments, Contingencies and Other Matters-Legal
Proceedings"). Pursuant to this agreement, Par made payments of $2,500 in fiscal
year 2001 and $2,500 in the first quarter of fiscal year 2002 to Breath, which
are included in intangible assets as product license fees.
In April 1999, the Company entered into an agreement with FineTech for the
right to use a process for the pharmaceutical bulk active latanoprost. Pursuant
to this agreement, the Company paid FineTech approximately $2,000 in fiscal
years 2000 and 2001, which is included in intangible assets as product license
fees, for a completed process together with its technology transfer package and
patent. The Company has since purchased FineTech and pursuant to this agreement,
the Company is obligated to pay royalties on gross profits from sales of all
products developed under this agreement to the President of FineTech, Dr.
Gutman, who is a director of the Company. In addition, Dr. Gutman is entitled to
royalties on gross profits from potential sales of several other products
pursuant to agreements made with FineTech prior to the Company's acquisition.
On June 30, 1998, the Company completed a strategic alliance with Merck
KGaA, a pharmaceutical and chemical company located in Darmstadt, Germany.
Pursuant to a Stock Purchase Agreement, dated March 25, 1998, the Company issued
10,400 shares of the Company's Common Stock to Merck KGaA, through its
subsidiary EMD, Inc. ("EMD" formerly known as Lipha Americas, Inc.), in exchange
for cash of $20,800 and the exclusive United States distribution rights to a set
of products covered by a distribution agreement with Genpharm (the "Genpharm
Distribution Agreement") (see "Note 9 - Distribution and Supply
Agreements-Genpharm, Inc."). The Company determined the fair value of the Common
Stock sold to Merck KGaA to be $27,300, which exceeded the cash consideration of
$20,800 received by the Company by $6,500. That $6,500 was assigned to the
Genpharm Distribution Agreement, with a corresponding increase in stockholders'
equity. Additionally, the Company recorded a deferred tax liability of $4,333
and a corresponding increase in the financial reporting basis of the Genpharm
Distribution Agreement to account for the difference between the basis in the
Genpharm Distribution Agreement for financial reporting and income tax purposes
as required by SFAS No. 109, "Accounting for Income Taxes". The aggregate value
of $10,833 assigned to the Genpharm Distribution Agreement is being amortized on
a straight-line basis over 15 years beginning in the third quarter of fiscal
1998. The amortization is included as a non-cash charge in selling, general and
administrative expenses.
In January 1999, the Company and Genpharm, entered into a profit sharing
agreement (the "Genpharm Profit Sharing Agreement") pursuant to which the
Company receives a portion of the profits generated from the sale of omeprazole,
the generic version of Astra Zeneca's Prilosec(R), and 15 other products sold
under a separate agreement between Genpharm and an unaffiliated United
States-based pharmaceutical company in exchange for a non-refundable fee of
$2,500. The fee is being amortized over the estimated useful life in which cash
flows are expected to be generated from products in the agreement.
The Company recorded amortization expense related to intangible assets of
$6,235, $2,592 and $722 respectively, for fiscal years 2003, 2002 and 2001.
Amortization expense related to the intangible assets currently being amortized
is expected to total approximately $5,128 in 2004, $3,792 in 2005, $3,115 in
2006, $3,115 in 2007, $3,115 in 2008 and $5,300 thereafter. Intangible assets
not being amortized were product license fees of $6,999 and a trademark licensed
from BMS of $5,000 at December 31, 2003 and product license fees of $9,199 at
December 31, 2002.
F-15
NOTE 7 - ACQUISITION OF FINETECH:
On March 15, 2002, the Company terminated its negotiations with ISP
related to the Company's proposed purchase of the combined ISP FineTech fine
chemical business, based in Haifa, Israel and Columbus, Ohio. At that time, the
Company discontinued negotiations with ISP as a result of various events and
circumstances that occurred after the announcement of the proposed transaction.
Pursuant to the termination, the Company paid ISP a $3,000 break-up fee in March
2002, which was subject to certain credits and offsets, and incurred
approximately $1,262 in related acquisition costs, both of which were included
in acquisition termination charges on the consolidated statement of operations
for fiscal year 2002.
The Company subsequently purchased FineTech, based in Haifa, Israel, from
ISP in April 2002 for approximately $32,000 and incurred $1,237 in related
acquisition costs, all of which were financed by its cash-on-hand. The Company
acquired the physical facilities, intellectual property and patents of FineTech
and retained all FineTech employees. FineTech specializes in the design and
manufacture of proprietary synthetic chemical processes used in the production
of complex organic compounds for the pharmaceutical industry. FineTech also has
the ability to manufacture in small quantities complex synthetic active
pharmaceutical ingredients at its manufacturing facility in Haifa, Israel.
FineTech is operated as an independent, wholly-owned subsidiary of PRX and
provides immediate chemical synthesis capabilities and strategic opportunities
to the Company and other customers.
The purchase price for FineTech was allocated to assets and liabilities
based on management's estimates of fair value through an independent third-party
valuation firm. The following table sets forth the allocation of the purchase
price:
Current assets $971
Property, plant and equipment 1,046
Intellectual property 6,580
Goodwill 24,662
------
Total assets acquired 33,259
Current liabilities 22
--
Total liabilities assumed 22
--
Net assets acquired $33,237
======
In accordance with SFAS No. 142, "Accounting for Goodwill and Other
Intangible Assets", the goodwill will not be amortized, but will be tested for
impairment using a fair value approach at least annually.
NOTE 8 - RESEARCH AND DEVELOPMENT AGREEMENTS:
To supplement its own internal development program, the Company seeks to
enter into development and license agreements with third parties with respect to
the development and marketing of new products and technologies. To date, the
Company has entered into several of these types of agreements and advanced funds
to several non-affiliated companies for products in various stages of
development. Payments related to these agreements are either expensed as
incurred or capitalized according to the Company's Significant Accounting
Policies. The Company believes that the following product development agreements
are those that are the most significant to its business.
ADVANCIS PHARMACEUTICAL CORPORATION:
Par entered into a licensing agreement (the "Advancis Licensing
Agreement"), dated September 4, 2003, with Advancis, to market the antibiotic
Clarithromycin XL. Clarithromycin XL is being developed as a generic equivalent
to Abbott's Biaxin XL(R). Pursuant to the Advancis Licensing Agreement, Advancis
will be responsible for the development and manufacture of the product, while
Par will be responsible for marketing, sales and distribution. If certain
conditions in the Advancis Licensing Agreement are met, Par has agreed to pay
Advancis an aggregate amount of up to $6,000 based on the achievement of certain
milestones contained in the agreement. Pursuant to the Advancis Licensing
Agreement, the Company has agreed to pay Advancis a certain percentage of the
gross profits, as defined in the agreement, on all sales of the product if the
product is successfully developed and introduced into the market.
F-16
NORTEC DEVELOPMENT ASSOCIATES, INC.:
Par and Nortec Development Associates, Inc. (a Glatt company) ("Nortec")
entered into an agreement, dated October 22, 2003, pursuant to which the two
companies have agreed to develop additional products that are not part of the
two previous agreements between Par and Nortec. During the first two years of
the agreement, Par is obligated to make aggregate initial research and
development payments to Nortec in the amount of $3,000, of which $1,500 was paid
by the Company in fiscal year 2003, $1,000 is due in fiscal year 2004 and $500
is due in fiscal year 2005. On or before October 15, 2005, Par will have the
option to either (i) terminate the arrangement with Nortec, in which case the
initial research and development payments will be credited against any
development costs that Par shall owe Nortec at that time or (ii) acquire all of
the capital stock of Nortec over the subsequent two years, including the first
fifty (50%) percent of the capital stock of Nortec over the third and fourth
years of the agreement for $4,000, and the remaining capital stock of Nortec
from its owners at the end of the fourth year for an additional $11,000. The
parties have agreed to certain revenue and royalty sharing arrangements before
and after Par's acquisition, if any, of Nortec.
In May 2002, Par entered into an agreement with Nortec to develop an
extended release generic version of a currently marketed branded extended
release pharmaceutical product. Under the terms of the agreement, Par obtained
the right to utilize Nortec/Glatt's drug delivery system technology in its ANDA
submission for the potential product covered in the agreement. Par and Nortec
have agreed to collaborate on the formulation, and Par has agreed to serve as
the exclusive marketer and distributor of the product.
In June 2002, Par expanded its collaboration with Nortec to develop an
extended release generic version of another currently marketed, branded extended
release pharmaceutical product. Under the terms of the new agreement, Par also
obtained the right to utilize Nortec/Glatt's drug delivery system technology in
its ANDA submission for the potential product covered in the agreement. Par and
Nortec have agreed to collaborate on the formulation, while Par will serve as
the exclusive marketer and distributor of the product.
Pursuant to the May and June 2002 agreements with Nortec, the Company made
non-refundable payments totaling $1,000, which were charged to research and
development expenses in fiscal year 2002. The Company also agreed to pay a total
of $800 in various installments related to the achievement of certain milestones
in the development of the two potential products and $600 for each product on
the day of the first commercial sale. In addition to these payments, the Company
has agreed to pay Nortec a royalty on net sales of the products, as defined in
the agreements.
THREE RIVERS PHARMACEUTICALS, LLC.
In July 2002, the Company and Three Rivers Pharmaceuticals, LLC ("Three
Rivers") entered into a license and distribution agreement (the "Three Rivers
Distribution Agreement"), which was amended in October 2002, to market and
distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's
("Schering's") Rebetol(R). Under the terms of the Three Rivers Distribution
Agreement, Three Rivers will supply the product and be responsible for managing
the regulatory process and ongoing patent litigation. Upon FDA approval and
final marketing clearance, Par will have the exclusive right to sell the product
in non-hospital markets and will be required to pay Three Rivers a percentage of
the gross profits, as defined in the agreement. In addition, the Company paid
Three Rivers $1,000, which was charged to research and development expenses in
fiscal year 2002, and agreed to pay Three Rivers $500 at such time as Par
commercially launches the product. Three Rivers filed an ANDA with a Paragraph
IV certification with the FDA in August 2001 and is currently in litigation with
the patent holders (see "Note 14 -Commitments, Contingencies and Other
Matters-Legal Proceedings"). According to current FDA practice, Par believes
that it may be entitled to co-exclusively market the generic product ribavirin
for up to 180 days, during which time only one other company could be approved
to market another generic version of the drug.
GENPHARM, INC.:
Under the terms of the Genpharm 11 Product Agreement, Par licensed the
exclusive rights to 11 generic pharmaceutical products currently under
development. Pursuant to the Genpharm 11 Product Agreement, Genpharm has agreed
to develop the products, submit all corresponding ANDAs to the FDA and
subsequently manufacture the products. Par has agreed to serve as exclusive U.S.
marketer and distributor of the products, pay a share of the costs, including
development and legal expenses incurred to obtain final regulatory approval, and
pay Genpharm a percentage of the gross profits, as defined in the agreement, on
all sales of products covered under this agreement. In the second quarter of
2002, the Company paid Genpharm a non-refundable fee of $2,000, included in
intangible assets on the consolidated balance sheets, for two of the products,
both of which were brought to market in fiscal year 2003. The Company is
marketing one of the products and receives a royalty on sales of the other
F-17
product, which is being sold by another company. Pursuant to the Genpharm 11
Product Agreement, the Company's share of development and legal costs related to
the other products has been expensed as incurred. In addition to the two
products noted above, there is one other ANDA for a product covered under the
Genpharm 11 Product Agreement, pending with, and awaiting approval from, the
FDA. The Company will also be required to pay an additional non-refundable fee
of up to $414 based upon FDA acceptance of certain filings, as defined in the
agreement.
AVEVA DRUG DELIVERY SYSTEMS (FORMERLY ELAN TRANSDERMAL TECHNOLOGIES, INC.):
In April 2001, Par entered into a licensing agreement with Aveva Drug
Delivery Systems, (formerly Elan Transdermal Technologies, Inc.) ("Aveva"), a
U.S. subsidiary of Nitto Denko, to market a clonidine transdermal patch, a
generic version of Boehringer Ingelheim's Catapres TTS(R). Aveva filed an ANDA
for the product with the FDA earlier in fiscal year 2001, including a Paragraph
IV certification, certifying that the product did not infringe the branded
product's formulation patent, which expired in May 2003. Aveva will be
responsible for the development and manufacture of the products, while Par will
be responsible for marketing, sales and distribution. Par has agreed to
reimburse Aveva for research and development costs and Aveva will receive a
royalty from the sale of the product. Pursuant to the agreement, the Company
paid Aveva $1,167 and $833, respectively, in fiscal years 2001 and 2002, which
was charged to research and development expenses. In addition, Par has agreed to
pay to Aveva $1,000 upon FDA approval of the product, and a royalty on all
future sales of the product.
NOTE 9 - DISTRIBUTION AND SUPPLY AGREEMENTS:
The Company enters into marketing and license agreements with third
parties to market new products and technologies in an effort to broaden its
product line. To date, the Company has entered into and is selling product
through several of these agreements. The Company believes that the following
agreements are those that are the most significant to its business.
SMITHKLINE BEECHAM CORPORATION.
In connection with the legal settlement referred to in "Note 14 -
Commitments, Contingencies and Other Matters-Legal Proceedings", Par and
GlaxoSmithKline ("GSK") and certain of its affiliates entered into a license and
supply agreement (the "GSK Supply Agreement"), dated April 16, 2003, pursuant to
which Par is marketing paroxetine, supplied and licensed from GSK, in the United
States, including the Commonwealth of Puerto Rico. Under the GSK Supply
Agreement, GSK has agreed to manufacture the product and Par has agreed to pay
GSK a percentage of Par's net sales of the product, as defined in the agreement.
Pursuant to the GSK Supply Agreement, GSK is entitled to suspend Par's right to
distribute paroxetine if at any time another generic version of Paxil(R) is not
being marketed.
PENTECH PHARMACEUTICALS, INC.:
In November 2002, the Company amended its agreement (the "Pentech Supply
and Marketing Agreement") with Pentech Pharmaceuticals, Inc. ("Pentech"), dated
November 2001, to market paroxetine capsules. Pursuant to the Pentech Supply and
Marketing Agreement, the Company paid all legal expenses up to $2,000, which
were expensed as incurred, to obtain final regulatory approval. Legal expenses
in excess of $2,000 are fully creditable against future profit payments to
Pentech. The Company had agreed to reimburse Pentech for costs associated with
the project of up to $1,300. In fiscal year 2003, the Company paid Pentech $771
of these costs, which were charged to research and development expenses as
incurred. Pursuant to the Pentech Supply and Marketing Agreement, the Company
had agreed to pay Pentech a percentage of the gross profits, as defined in such
agreement, on all its sales of paroxetine. The Company is negotiating with
Pentech to further amend the Pentech Supply and Marketing Agreement concerning
the gross profit splits, reimbursement of research and development expenses and
sharing of the legal expenses and other costs related to paroxetine.
DR. REDDY'S LABORATORIES LTD.:
In April 2001, the Company and Dr. Reddy's Laboratories Ltd. ("Dr.
Reddy"), a producer of bulk active ingredients for the pharmaceutical industry
and a developer and manufacturer of finished dosage forms located in India,
entered into a broad-based co-marketing and development agreement (the "Reddy
Development and Supply Agreement") covering up to 14 generic pharmaceutical
products to be marketed exclusively by Par in the United States and certain
other United States territories. Four products covered under this agreement are
being marketed by Par. Dr. Reddy is required to use commercially reasonable
efforts to develop the products covered by the Reddy Development and Supply
Agreement, and is responsible for the completion of product development and for
obtaining all applicable regulatory approvals. The products covered by the Reddy
Development and Supply Agreement are in addition to four products being marketed
by the Company under prior agreements with Dr. Reddy. Pursuant to these
agreements with Dr. Reddy, the Company has agreed to pay Dr. Reddy a certain
F-18
percentage of the gross profits, as defined in each agreement, on sales of
products covered by such agreements.
GENPHARM, INC.:
Pursuant to the Genpharm Distribution Agreement, the Company has the
exclusive distribution rights within the United States and certain United States
territories to approximately 40 generic pharmaceutical products. To date, 19 of
such products have obtained FDA approval and are currently being marketed by
Par. The remaining products are either being developed, have been identified for
development or have been submitted to the FDA for approval. Currently, there are
seven ANDAs for potential products (three of which have been tentatively
approved) that are covered by the Genpharm Distribution Agreement pending with,
and awaiting approval from, the FDA. Genpharm is required to use commercially
reasonable efforts to develop the products and is responsible for the completion
of product development and obtaining all applicable regulatory approvals. The
Company has agreed to pay Genpharm a percentage of the gross profits, as defined
in the agreement, on sales of products covered by the Genpharm Distribution
Agreement.
The Company and Genpharm entered into a distribution agreement (the
"Genpharm Additional Product Agreement"), dated November 27, 2000, pursuant to
which Genpharm granted the Company exclusive distribution rights within the
United States and certain other United States territories with respect to five
generic pharmaceutical products not included in the Company's other distribution
agreements with Genpharm. To date, two of such products have obtained FDA
approval and are currently being marketed by Par. The remaining products are
either being developed or have been identified for development. Genpharm and the
Company are sharing the costs of developing the products and obtaining all
applicable regulatory approvals. The Company has agreed to pay Genpharm a
percentage of the gross profits, as defined in the agreement, on sales made by
the Company of products included in the Genpharm Additional Product Agreement.
PAYABLES DUE TO DISTRIBUTION AGREEMENT PARTNERS:
Pursuant to these distribution agreements, the Company pays its partners a
percentage of gross profits as defined in each agreement. As of December 31,
2003 and 2002, the Company had payables due to distribution agreement partners
of $88,625 and $18,163, respectively. The increase was related primarily to
amounts due pursuant to new profit sharing agreements, particularly amounts owed
to GSK in respect of paroxetine.
NOTE 10 - LONG-TERM DEBT:
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
Senior subordinated convertible notes (a) $200,000 -
Industrial revenue bond (b) - $2,000
Mortgage loan (c) - 809
Other (d) 333 213
--- ---
200,333 3,022
Less current portion (122) (596)
--- ---
$200,211 $2,426
======= =====
(a) Senior subordinated convertible notes in the aggregate principal
amount of $200,000. The notes bear interest at an annual rate of
2.875%, payable semi-annually on March 30 and September 30 of each
year, with the first payment due on March 30, 2004. The notes are
convertible into the Common Stock at an initial conversion price of
$88.76 per share, upon the occurrence of certain events. The notes
mature on September 30, 2010, unless earlier converted or
repurchased. The Company may not redeem the notes prior to their
maturity date.
(b) The Company decided not to move a portion of FineTech's operation,
including personnel and technological resources to a laboratory
facility in Rhode Island and, in October 2003, paid the remaining
balance on the industrial revenue bond that was to be used for this
operation.
(c) The Company paid the remaining balance on the mortgage loan in
February 2003.
(d) Includes primarily amounts due under capital leases for computer
equipment.
In December 1996, PRX and Par entered into a loan agreement with General
Electric Capital Corporation. The loan agreement, as amended in December 2002,
provided Par with a revolving line of credit expiring in March 2005, pursuant to
which Par was permitted to borrow up to the lesser of (i) the borrowing base
established under the Loan Agreement or (ii) $30,000. The Company terminated the
loan agreement in October 2003.
F-19
Long-term debt maturities during the next five years, including the
portion classified as current, are as follows: $122 in 2004, $75 in 2005, $77 in
2006 and $59 in 2007. In addition, the Company has senior subordinated
convertible notes in the aggregate principal amount of $200,000 that will mature
on September 30, 2010, unless earlier converted or repurchased.
During fiscal years 2003, 2002 and 2001, the Company incurred interest
expense of $1,606, $148 and $626, respectively. In fiscal year 2003, interest
accrued on the senior subordinated convertible notes is payable on March 30,
2004.
NOTE 11 - EARNINGS PER SHARE:
The following is a reconciliation of the amounts used to calculate basic
and diluted earnings per share:
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
NET INCOME $122,533 $79,454 $53,922
BASIC:
Weighted average number of common
shares outstanding 33,483 32,337 30,595
------ ------ ------
NET INCOME PER SHARE OF COMMON STOCK $3.66 $2.46 $1.76
==== ==== ====
ASSUMING DILUTION:
Weighted average number of common
shares outstanding 33,483 32,337 30,595
Effect of dilutive options 1,155 714 1,595
----- --- -----
Weighted average number of common and
common equivalent shares outstanding 34,638 33,051 32,190
------ ------ ------
NET INCOME PER SHARE OF COMMON STOCK $3.54 $2.40 $1.68
==== ==== ====
Outstanding options of 175, 2,298 and 2,056 as of December 31, 2003, 2002
and 2001, respectively, were not included in the computation of diluted earnings
per share because the exercise prices were greater than the average market price
of the Common Stock during the respective periods and, therefore, would have
been anti-dilutive. In addition, outstanding warrants sold concurrently with the
sale of the subordinated convertible notes were not included in the computation
of diluted earnings per share as of December 31, 2003. The warrants are
exercisable for an aggregate of 2,253 shares at an exercise price of $105.20 per
share.
NOTE 12 - STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
In 1990, the Company's stockholders authorized 6,000 shares of a newly
created class of preferred stock, par value $.0001 per share. The preferred
stock is issuable in such classes and series and with such dividend rates,
redemption prices, preferences and conversion, and other rights as the Company's
board of directors (the "Board") may determine at the time of issuance. At
December 31, 2003 and 2002, the Company did not have preferred stock issued and
outstanding.
DIVIDEND:
The Company did not pay any dividends on its Common Stock in fiscal years
2003, 2002 and 2001.
F-20
CHANGES IN SHAREHOLDERS' EQUITY:
Changes in the Company's Common Stock and Additional Paid-in Capital
accounts during fiscal years 2003, 2002 and 2001 were as follows:
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE
SHARES AMOUNT CAPITAL LOSSES
------ ------ ------- ------
Balance, January 1, 2001 29,647 $297 $96,142 $-
Exercise of Genpharm warrants 250 2 2,095 -
Exercise of Genpharm stock options 351 4 699 -
Exercise of Merck KGaA stock options 820 8 1,632 -
Exercise of stock options 961 9 3,092 -
Issuance of stock options - - 129 -
Tax benefit from exercise of stock
options - - 11,765 -
Employee stock purchase program 6 - 56 -
------ --- -- -
Balance, December 31, 2001 32,035 320 115,610 -
Exercise of stock options 761 8 2,471 -
Employee stock purchase program 8 - 177 -
-
Tax benefit from exercise of stock
options - - 220 -
Compensatory arrangements - - 37 -
------ --- -- -
Balance, December 31, 2002 32,804 328 118,515 -
Comprehensive income:
Defined benefit pension plan - - - (118)
Unrealized losses on marketable
securities, net of tax - - - (1,555)
Exercise of stock options 1,506 15 33,871 -
Sold warrants - - 32,563 -
Purchased call options - - (49,368) -
Tax benefit from purchased call
options - - 19,253 -
Tax benefit from exercise of stock
options - - 12,616 -
Employee stock purchase program 8 - 308 -
Compensatory arrangements - - 4,173 -
------ --- ----- -----
Balance, December 31, 2003 34,318 $343 $171,931 $(1,673)
====== === ======= =====
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Comprehensive income:
Net income $122,533 $79,454 $53,922
Other comprehensive losses:
Defined benefit pension plan (118) - -
Unrealized loss on marketable
securities, net of tax (1,555) - -
-----
Other comprehensive losses (1,673) - -
----- - -
Comprehensive income $120,860 $79,454 $53,922
======= ====== ======
Concurrently with the sale of the subordinated convertible notes described
above, the Company purchased call options on its Common Stock (the "purchased
call options") designed to mitigate the potential dilution from conversion of
the convertible notes. Under the terms of the purchased call options, the
Company has the right to purchase from an affiliate of one of the initial
purchasers (the "counterparty") at a purchase price of $88.76 per share the
aggregate number of shares that the Company would be obligated to issue upon
conversion of the convertible notes, which is a maximum of 2,253 shares. The
Company has the option to settle the purchased call options with the
counterparty through a net share settlement or net cash settlement, either of
which would be based on the extent to which the then-current market price of the
Common Stock exceeds $88.76 per share. The cost of the purchased call options of
$49,368 was recognized as additional paid-in-capital on the Company's
consolidated balance sheets. The cost of the purchased call options was
partially offset by the sale of warrants (the "sold warrants") to acquire shares
of the Common Stock to the counterparty with which the Company entered into the
purchased call options. The sold warrants are exercisable for an aggregate of
2,253 shares at an exercise price of $105.20 per share. The sold warrants may be
settled, at the Company's option, either through a net share settlement or a net
cash settlement, either of which would be based on the extent to which the
F-21
then-current market price of the Common Stock exceeds $105.20 per share. The
gross proceeds from the sale of the sold warrants of $32,563 were recognized as
additional paid-in-capital on the Company's consolidated balance sheets. The net
effect of the purchased call options and the sold warrants is to either reduce
the potential dilution from the conversion of the convertible notes if the
Company elects a net share settlement or to increase the net cash proceeds of
the offering, if a net cash settlement is elected if the convertible notes are
converted at a time when the market price of the Common Stock exceeds $88.76 per
share. If the market price of the Common Stock at the maturity of the sold
warrants exceeds $105.20, the dilution mitigation under the purchased call
options will be capped, meaning that there would be dilution from the conversion
of the convertible notes to the extent that the then market price per share of
the Common Stock exceeds $105.20 at the time of conversion.
EMPLOYEE STOCK PURCHASE PROGRAM:
The Company maintains an Employee Stock Purchase Program (the "Program").
The Program is designed to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as amended. It enables
eligible employees to purchase shares of Common Stock at a discount of up to 15%
of the fair market value. An aggregate of 1,000 shares of Common Stock have been
reserved for sale to employees under the Program. Employees purchased 8 shares
in each of fiscal years 2003 and 2002. At December 31, 2003, 805 shares remain
available for issuance and sale under the Program.
STOCK OPTIONS:
The following is a summary of stock option activity in each of the periods
as follows:
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 3,764 $23.04 3,754 $18.88 2,197 $3.40
Granted 1,242 $38.38 891 $23.99 2,576 $25.95
Exercised (1,506) $22.56 (761) $3.26 (961) $3.23
Canceled/Surrendered (124) $24.69 (120) $25.38 (58) $5.73
--- --- --
Outstanding at
end of year 3,376 $28.83 3,764 $23.04 3,754 $18.88
===== ===== =====
At December 31, 2003, 2002 and 2001 exercisable options amounted to 463,
931 and 834, respectively. The weighted average exercise prices of the options
for these periods were $24.18, $20.23 and $2.76, respectively. Exercise price
ranges and additional information regarding the 3,376 options outstanding at
December 31, 2003 were as follows:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------- -------------------
EXERCISE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE RANGE OF OPTIONS EXERCISE PRICE REMAINING LIFE OF OPTIONS EXERCISE PRICE
----------- ---------- -------------- -------------- ---------- --------------
$1.50 to $4.13 28 $2.38 4.0 years 26 $2.25
$5.13 to $7.63 435 $6.67 6.8 years 92 $6.18
$21.65 to $24.33 403 $22.16 8.3 years 1 $22.68
$25.85 to $29.90 278 $26.80 5.9 years 50 $28.46
$30.55 to $36.60 1,947 $31.14 7.1 years 294 $31.06
$41.12 to $71.01 285 $60.95 8.0 years - -
In fiscal year 2001, the Company's stockholders approved the 2001
Performance Equity Plan (the "2001 Plan"), which was subsequently amended at the
2003 Annual Meeting of Shareholders. The 2001 Plan provides for the granting of
incentive and non-qualified stock options to employees of the Company or to
others. The 2001 Plan became effective July 12, 2001 and will continue until
July 11, 2011 unless terminated sooner. Pursuant to the amendment, the Company
increased the shares of Common Stock reserved for issuance under the 2001 Plan
to 5,500. The maximum term of an option under the 2001 Plan is ten years.
Vesting and option terms are determined in each case by the Compensation and
Stock Option Committee of the Board.
F-22
In fiscal year 2000, the Board adopted the 2000 Performance Equity Plan
(the "2000 Plan"), which plan was subsequently amended, making it a
non-qualified, broad-based plan not subject to stockholder approval. The 2000
Plan provides for the granting of incentive and non-qualified stock options to
employees of the Company and to others. The 2000 Plan became effective March 23,
2000 and will continue until March 22, 2010 unless terminated sooner. The
Company has reserved 1,025 shares of Common Stock for issuance under the 2000
Plan. The maximum term of an option under the 2000 Plan is ten years. Vesting
and option terms are determined in each case by the Compensation and Stock
Option Committee of the Board. The maximum term of the option is reduced to five
years if an incentive stock option is granted to a holder of more than 10% of
the total combined voting power of all the classes of capital stock of the
Company.
In fiscal year 1998, the Company's stockholders approved the 1997
Directors' Stock Option Plan (the "1997 Directors' Plan"), which was
subsequently amended at the 2003 Annual Meeting of Shareholders, pursuant to
which options are granted to non-employee directors of the Company. The 1997
Directors' Plan became effective October 28, 1997 and will continue until
October 28, 2013 unless terminated sooner. Options granted under the 1997
Directors' Plan will become exercisable in full on the first anniversary of the
date of grant, provided that the eligible director has not been removed "for
cause" as a member of the Board on or prior to the first anniversary of the date
of grant. The maximum term of an option under the 1997 Directors' Plan is ten
years. Pursuant to the amendment, the Company increased the number of shares of
Common Stock for issuance under the 1997 Directors' Plan to 650 and extended the
expiration date of the 1997 Directors' Plan from October 28, 2007 to October 28,
2013.
Under all the stock option plans, the stock option exercise price of all
the option grants equaled the market price on the date of grant. At December 31,
2003 and 2002, options for 1,911 and 1,330 shares, respectively, were available
for future grant under the Company's various stock option plans.
As permitted under SFAS 123, the Company elected to follow APB Opinion 25
and related interpretations in accounting for stock-based compensation to its
employees. Pro forma information regarding net income is required by SFAS 123,
as amended by SFAS 148. This required information is to be determined as if the
Company had accounted for its stock-based compensation to employees under the
fair value method of that Standard. The fair value of the options granted during
each of the years ended December 31, 2003, 2002 and 2001 has been estimated at
the date of grant using the Black-Scholes stock option pricing model, based on
the following assumptions:
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Risk-free interest rate 4.0% 4.3% 4.5%
Expected term 4.8 years 5.5 years 5.2 years
Expected volatility 61.2% 68.6% 69.4%
It is assumed that no dividends will be paid for the entire term of the
option. The weighted-average fair value of options granted in fiscal years 2003,
2002 and 2001 were $24.04, $14.89 and $15.74, respectively.
NOTE 13 - INCOME TAXES:
The components of the Company's provision for income taxes for the years
ended December 31, 2003, 2002 and 2001 are as follows:
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Current income tax provision:
Federal $66,915 $43,682 $34,807
State 10,528 6,072 5,723
------ ----- -----
77,443 49,754 40,530
------ ------ ------
Deferred income tax provision
(benefit):
Federal 581 938 (16,075)
State 86 107 (2,445)
-- --- -----
$78,110 $50,799 $22,010
====== ====== ======
F-23
Deferred tax assets and (liabilities) as of December 31, 2003 and 2002 are
as follows:
DEFERRED TAX ASSET, NET:
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
CURRENT DEFERRED ASSETS:
Accounts receivable $28,559 $29,608
Inventories 2,152 2,076
Accrued expenses 1,768 913
Purchased call options 1,689 -
Other 305 276
--- ---
34,473 32,873
NON-CURRENT DEFERRED ASSETS:
Purchased call options 16,496 -
Investments 975 -
Asset impairment reserve 381 431
Research and development expenses 377 377
BMS asset purchase agreement 637 -
Other 988 487
--- ---
19,854 1,295
------ -----
DEFERRED TAX ASSETS 54,327 34,168
------ ------
DEFERRED LIABILITIES:
Fixed assets (1,674) (1,900)
Genpharm distribution agreement (2,676) (2,957)
FineTech intangible assets (1,105) -
----- --------
(5,455) (4,857)
----- -----
Net deferred tax asset $48,872 $29,311
====== ======
The exercise of stock options in fiscal years 2003 and 2002, respectively,
resulted in credits to additional paid-in capital of $12,616 and $220. In
addition, due to the recognition of the benefit associated with net operating
losses prior to fiscal year 2001 relating to employee stock options, $1,561 was
credited to additional paid-in capital in fiscal year 2001.
The table below provides a reconciliation between the statutory federal
income tax rate and the effective rate of income tax expense for each of the
years shown as follows:
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Federal statutory tax rate 35% 35% 35%
State tax - net of Federal benefit 4 4 3
Other - - 3
Decrease in valuation
reserve for deferred tax assets - - (12)
- - --
Effective tax rate 39% 39% 29%
=== === ===
NOTE 14 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
LEASES:
At December 31, 2003, the Company had minimum rental commitments
aggregating $17,795 under non-cancelable operating leases expiring through
fiscal year 2013. Amounts payable thereunder are $3,017 in 2004, $2,559 in 2005,
$2,490 in 2006, $2,150 in 2007, $2,239 in 2008 and $5,340 thereafter. Rent
expense charged to operations in fiscal years 2003, 2002 and 2001 was $2,820,
$1,513 and $611, respectively.
RETIREMENT PLANS:
The Company has a Retirement Savings Plan (the "Retirement Savings Plan")
whereby eligible employees are permitted to contribute from 1% to 25% of their
compensation to the Retirement Savings Plan. The Company contributes an amount
F-24
equal to 50% of up to the first 6% of compensation contributed by the employee.
Participants in the Retirement Savings Plan become vested with respect to 20% of
the Company's contributions for each full year of employment with the Company
and thus become fully vested after five full years. The Company also may
contribute additional funds each fiscal year to the Retirement Savings Plan, the
amount of which, if any, is determined by the Board in its sole discretion. The
Company's provisions for these plans and the defined benefit plan discussed
below were $2,046 in fiscal year 2003, $1,895 in fiscal year 2002 and $559 in
fiscal year 2001. In fiscal year 1998, the Company merged a defined contribution
social security integrated retirement plan into the Retirement Savings Plan. In
February 2003 and June 2002, respectively, the Company made discretionary
contributions to the Retirement Savings Plan of approximately $1,500 for Plan
year 2002 and $600 for Plan year 2001.
The Company maintains a defined benefit plan (the "Pension Plan") that
covers eligible employees, as defined in the Pension Plan. The Pension Plan has
been frozen since October 1, 1989. Since the benefits under the Pension Plan are
based on the participants' length of service and compensation (subject to
Employee Retirement Income Security Act of 1974 and Internal Revenue Service
limitations), service costs subsequent to October 1, 1989 are excluded from
benefit accruals under the Pension Plan. The funding policy for the Pension Plan
is to contribute amounts actuarially determined as necessary to provide
sufficient assets to meet the benefit requirements of the Pension Plan retirees.
For fiscal 2004, the contribution is estimated to be $9. The measurement date of
November 1 is used to value the assets and liabilities each year.
The primary investment objectives of the Pension Plan are as follows: (i)
to obtain a reasonable long-term return consistent with the level of risk
assumed (specific return objectives may include fund performance that exceeds
the rate of inflation, the assumed actuarial discount rate and/or the total fund
policy return, which is typically defined as the return of a passively managed
benchmark comprised of the target portfolio weights to each asset class); (ii)
to control the cost of funding the Pension Plan within prudent levels of risk
through the investment of Pension Plan assets; and (iii) to provide
diversification of assets in an effort to avoid the risk of large losses and to
maximize the investment return to the Pension Plan consistent with market and
economic risk.
The majority of the Pension Plan assets are invested in short-term, high
quality debt securities including money market funds, stable value funds, and
guaranteed interest arrangements. The fair value of the assets of the Pension
Plan at December 31, 2003 and 2002 are set forth in the table below.
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
Equity securities $243 $217
Debt securities 1,894 1,931
----- -----
Total assets $2,137 $2,148
===== =====
Net pension expense for fiscal years 2003, 2002 and 2001 included the
components set forth in the table below.
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Interest cost $130 $125 $132
Expected return on Pension Plan
assets (135) (216) (405)
Recognized actuarial loss - - 2
Net amortization and deferral
asset gain - 78 290
Amortization of initial unrecognized
transition obligation 51 51 51
-- -- --
Net pension expense $46 $38 $70
== == ==
The weighted-average assumptions used to determine benefit obligations for
the Pension Plan at December 31, 2003 and 2002 included discount rates of 5.75%
and 6.5% respectively. The weighted-average assumptions used to determine the
net periodic benefit cost for the years ended December 31, 2003, 2002 and 2001
included discount rates of 6.5%, 6.25% and 6.75%, respectively, and the expected
long-term rates of return on plan assets of 6.5%, 7% and 7%, respectively.
F-25
The following provides a reconciliation of the Pension Plan's benefit
obligations, assets and funded status.
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning of
the year $2,063 $2,070
Interest cost 130 125
Actuarial loss 176 4
Benefits paid (141) (136)
--- ---
Benefit obligation at the end of the year $2,228 $2,063
===== =====
CHANGE IN PLAN ASSETS
Fair value of Pension Plan assets at the
beginning of the year $2,148 $2,051
Actual return on assets 118 216
Employer contributions 12 17
Benefits paid (141) (136)
--- ---
Fair value of Pension Plan assets at the
end of the year $2,137 $2,148
===== =====
FUNDED STATUS OF PLAN
Over/(under) funded status $(91) $85
Unrecognized net actuarial loss (gain) 118 (75)
Unrecognized transition obligation 229 280
--- ---
Net amount recognized $256 $290
=== ===
Amounts recognized in the consolidated balance sheets consist of:
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
(Accrued) prepaid benefit cost $(91) $290
Intangible assets 229 -
Accumulated other comprehensive loss 118 -
--- ---
Net amount recognized $256 $290
=== ===
Pension benefits payable under the Pension Plan are expected to be $180 in
2004, $230 in 2005, $230 in 2006, $240 in 2007, $250 in 2008 and $1,280 in the
aggregate from 2009 through 2013.
In accordance with SFAS No. 87, "Employer's Accounting for Pensions", the
Company recorded an additional minimum pension liability for underfunded plans
of $347 for fiscal year 2003 representing the excess of underfunded accumulated
benefit obligations over previously recorded pension cost liabilities. A
corresponding amount is recognized as an intangible asset, except to the extent
that these additional liabilities exceed related unrecognized prior service cost
and net transition obligation, in which case the increase in liabilities would
be charged directly to shareholders' equity. As of December 31, 2003, $118 of
the excess minimum pension liability resulted in a charge to equity. As of
December 31, 2002, the Company had no additional minimum pension liability
because the Pension Plan Assets exceeded the benefit obligations at the end of
such year.
LEGAL PROCEEDINGS:
On September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in federal district court in
Boston against Par and 12 other leading generic pharmaceutical companies
alleging principally that Par and such other companies violated, through their
marketing and sales practices, state and federal laws, including allegations of
common law fraud and violations of Massachusetts false statements statutes, by
inflating generic pharmaceutical product prices paid for by the Massachusetts
Medicaid program. The Company has waived service of process with respect to the
complaint. The complaint seeks injunctive relief, treble damages, disgorgement
of excessive profits, civil penalties, reimbursement of investigative and
litigation costs (including experts' fees) and attorneys' fees. In addition, on
September 25, 2003, the Company and a number of other generic and brand
pharmaceutical companies were sued by a New York county, which has alleged
violations of laws (including the Racketeer Influenced and Corrupt Organizations
Act, common law fraud and obtaining funds by false statements), related to
participation in the Medicaid program. The complaint seeks declaratory relief;
actual, statutory and treble damages, with interest; punitive damages; an
accounting; a constructive trust and restitution; attorneys' and experts' fees
and costs. This case was transferred to the District of Massachusetts for
coordinated and consolidated pretrial proceedings. Par and the other defendants
involved in the litigation filed a motion to dismiss on January 29, 2004. Par
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intends to defend vigorously the claims asserted in both complaints. The Company
cannot predict with certainty at this time the outcome or the effect on the
Company of such litigations. Accordingly, no assurance can be given that such
litigations or any other similar litigation by other states or jurisdictions, if
instituted, will not have a material adverse effect on the Company's financial
condition, results of operations, prospects or business.
In October 2003, Apotex Pharmaceutical Healthcare, Inc. ("Apotex") filed a
complaint against Par in the United States District Court for the Eastern
District of Pennsylvania alleging violations of state and federal antitrust laws
as a result of the Company's settlement with GSK and the GSK Supply Agreement.
Par filed a motion to dismiss the action in its entirety in December 2003 and a
briefing on that motion is expected to be completed in April 2004. Par intends
to defend vigorously this action, and may assert counterclaims against Apotex
and claims against third parties.
In August 2003, Teva Pharmaceuticals USA, Inc. ("Teva USA") filed a
lawsuit against the Company and Par in the United States District Court for the
District of Delaware, after having received approval from the FDA to launch a
generic version of BMS's Megace(R), which generic product will compete with the
Company's megestrol acetate oral suspension product. In the lawsuit, Teva USA
seeks a declaration that its product has not infringed and will not infringe any
of Par's four patents relating to megestrol acetate oral suspension. On August
22, 2003, Par filed a counterclaim against Teva USA alleging willful
infringement of one of its four patents relating to megestrol acetate oral
suspension and moved to dismiss the action with respect to the other three
patents for lack of subject matter jurisdiction. The Company intends to pursue
its counterclaim against Teva USA and vigorously defend the lawsuit. A trial
date has been scheduled by the Court for April 2005.
On July 15, 2003, the Company and Par (collectively, "Par") filed a
lawsuit against Roxane Laboratories, Inc. ("Roxane") in the United States
District Court for the District of New Jersey. Par alleged that Roxane infringed
Par's U.S. Patents numbered 6,593,318 and 6,593,320 relating to megestrol
acetate. Roxane has denied these allegations and has counterclaimed for
declaratory judgments of non-infringement and invalidity of both patents.
On May 28, 2003, Asahi Glass Company ("Asahi Glass") filed a lawsuit
against Par and several other parties in the United States District Court for
the Northern District of Illinois alleging, among other things, violations of
state and federal antitrust laws relating to the settlement of GSK's patent
action against Pentech in respect of paroxetine. Pentech had granted Par rights
under Pentech's ANDA for paroxetine capsules. Pursuant to the settlement,
reached between the parties on April 18, 2003, Pentech and Par acknowledged that
the patent held by GSK is valid and enforceable and would be infringed by
Pentech's proposed capsule product and GSK agreed to allow Par to distribute in
Puerto Rico substitutable generic paroxetine immediate release tablets supplied
and licensed from GSK for a royalty payable to GSK. In addition, Par was granted
the right under the settlement to distribute the drug in the United States if
another generic version fully substitutable for Paxil(R) became available in the
United States. Par denied any wrongdoing in connection with the Asahi Glass
antitrust action and it filed a motion to dismiss the complaint on August 22,
2003. In October 2003, the court dismissed all of the state and federal
antitrust claims against Par. The only remaining claim in this action involving
Par is a state law contract claim relating to the payment of certain attorneys'
fees to Asahi Glass in connection with the prior lawsuit. Par intends to defend
vigorously this claim and may assert counterclaims against Asahi Glass and
claims against third parties.
In February 2003, Abbott, Fornier Industrie et Sante and Laboratoires
Fournier S.A. filed a complaint in the United States District Court for the
District of New Jersey against Par, alleging that Par's generic version of
TriCor(R) (fenofibrate) infringes one or more claims of their patents. The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously this lawsuit and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity. At this time, it is not possible for the
Company to predict the outcome of this litigation with certainty.
On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil")
filed a lawsuit against Kali Laboratories, Inc. ("Kali") in the United States
District Court for the District of New Jersey. Ortho-McNeil alleged that Kali
infringed U.S. Patent No. 5,336,691 (the "`691 patent") by submitting a
Paragraph IV certification to the FDA for approval of tablets containing
tramadol hydrochloride and acetaminophen. Par is Kali's exclusive marketing
partner for these tablets. Kali has denied Ortho-McNeil's allegation, asserting
that the `691 patent was not infringed and is invalid and/or unenforceable, and
that the lawsuit is barred by unclean hands. Kali also has counterclaimed for
declaratory judgments of non-infringement, invalidity, and unenforceability of
the `691 patent.
F-27
Breath Ltd. of the Arrow Group filed an ANDA (currently pending with the
FDA) for latanoprost (Xalatan(R)), which was developed by Breath Ltd. pursuant
to a joint manufacturing and marketing agreement with the Company, seeking
approval to engage in the commercial manufacture, sale and use of one
latanoprost drug product in the United States. Par subsequently acquired
ownership of the ANDA, which includes a Paragraph IV certification that the
patents in connection with Xalatan(R) identified in "Approved Drug Products with
Therapeutic Equivalence Evaluations" are invalid, unenforceable and/or will not
be infringed by Par's generic version of Xalatan(R). Par believes that its ANDA
is the first to be filed for this drug with a Paragraph IV certification. As a
result of the filing of the ANDA, Pharmacia Corporation, Pharmacia AB, Pharmacia
Enterprises, S.A., Pharmacia and Upjohn Company (collectively, "Pharmacia") and
the Trustees of Columbia University in the City of New York, ("Columbia"), filed
a lawsuit against Par on December 21, 2001 in the United States District Court
for the District of New Jersey, alleging patent infringement. Pharmacia and
Columbia are seeking an injunction enjoining approval of the Company's ANDA and
the marketing of its generic product prior to the expiration of their patents.
On February 8, 2002, Par answered the complaint and filed a counterclaim, which
seeks a declaration that the patents-in-suit are invalid, unenforceable and/or
not infringed by Par's products and that the extension of the term of one of the
patents is invalid. All parties are seeking to recover their respective
attorneys' fees. Discovery in the case has now been completed and a pre-trial
conference has been scheduled for March 15, 2004. Par intends to defend
vigorously against the claims and to pursue its counterclaim. At this time, it
is not possible for the Company to predict the outcome of this litigation with
certainty.
Par entered into a licensing agreement with developer Paddock Laboratories
("Paddock") to market a generic version of Unimed Pharmaceuticals, Inc.'s
("Unimed") product Androgel(R). The product will be manufactured by Paddock and
marketed by Par. Paddock has filed an ANDA (which is currently pending with the
FDA) for the testosterone 1% gel product. As a result of the filing of the ANDA,
Unimed and Laboratories Besins Iscovesco ("Besins"), co-assignees of the
patent-in-suit, filed a lawsuit against Paddock in the United States District
Court for the Northern District of Georgia alleging patent infringement on
August 22, 2003. Par has an economic interest in the outcome of this litigation
by virtue of its licensing agreement with Paddock. Unimed and Besins are seeking
an injunction to prevent Paddock from manufacturing the generic product. On
November 18, 2003, Paddock answered the complaint and filed a counterclaim,
which seeks a declaration that the patent-in-suit is invalid and/or not
infringed by Paddock's product. This case is currently in fact discovery. At
this time, it is not possible for the Company to predict the outcome of this
action.
The Company and/or Par are parties to certain other litigation matters,
including product liability and patent actions; the Company believes that these
actions are incidental to the conduct of its business and that their ultimate
resolution thereof will not have a material adverse effect on its financial
condition, results of operations or liquidity. The Company intends to vigorously
defend or, in cases where the Company is plaintiff, prosecute these actions.
OTHER MATTERS:
In June 2003, the Company received notice from the U.S. Congress that the
Committee on Energy and Commerce (the "Committee") had begun an industry-wide
(brand and generic) investigation into pharmaceutical reimbursements and rebates
under Medicaid, to which the Company has responded. In order to conduct the
investigation, the Committee has requested certain pricing and other
information, which the Company delivered in August 2003, relating to certain
drugs produced by these pharmaceutical manufacturers. Because the investigation
has only recently begun, it is premature to speculate what action, if any, the
federal government may take and what impact such action could have on the
Company's business, prospects or financial condition.
On July 15, 2003, the Company announced that two additional patents
relating to megestrol acetate oral suspension have been issued to it by the U.S.
Patent Office. The Patent Office has issued U.S. Patent Nos. 6,593,318 and
6,593,320 to the Company. The Company presently holds four patents relating to
megestrol oral suspension. The first two patents, U.S. Patent No. 6,028,065 and
U.S. Patent No. 6,268,356, were issued on February 22, 2000 and July 31, 2001,
respectively.
The Company's former chairman, president and chief executive officer,
Kenneth I. Sawyer, retired, effective July 2003, and resigned from the Board,
effective September 2003. Mr. Sawyer is available to consult with the Company
through fiscal year 2004. The Company recorded a charge of $3,712, included in
selling, general and administrative expenses on its consolidated statements of
operations, in 2003 for Mr. Sawyer's retirement package, consisting of expenses
for accelerated stock options, a severance payment, the remainder of his 2003
salary and benefits. In September 2003, the Board selected Mark Auerbach to the
position of executive chairman of the Board and Scott Tarriff to the positions
of president and chief executive officer of the Company. Mr. Tarriff and Arie L.
Gutman, Ph.D., President and Chief Executive Officer of the Company's FineTech
subsidiary, both report to Mr. Auerbach. In December 2003, the Company announced
Peter W. Williams had been selected to its Board. Mr. Williams has recently
F-28
joined the law firm of Winston & Strawn LLP, following his retirement as a
partner in the law firm of Clifford, Chance, Rogers & Wells, LLP.
In December 2001, the Company made its first payment of a potential equity
investment of up to $2,438 to be made over a period of time in HighRapids, Inc.
("HighRapids"), a Delaware corporation. High Rapids is a software developer and
the owner of patented rights to an artificial intelligence generator. Pursuant
to an agreement between the Company and HighRapids, effective December 1, 2001,
the Company, subject to its ongoing evaluation of HighRapids' operations, has
agreed to purchase units, consisting of secured debt, evidenced by 7% secured
promissory notes, up to an aggregate principal amount of $2,425 and up to an
aggregate of 1,330 shares of the common stock of HighRapids. HighRapids is the
surviving corporation of a merger with Authorgenics, Inc., a Florida
corporation. HighRapids is to utilize the Company's cash infusion for working
capital and operating expenses. Through December 31, 2003, the Company had
invested $1,386. Due to HighRapids' current operating losses and the Company's
evaluation of its short-term prospects for profitability, the investment is
expensed as incurred and included in other expense on the consolidated
statements of operations. As of December 31, 2003, the Company held
approximately 44% of the outstanding common stock of HighRapids, and it has the
exclusive right to market to the pharmaceutical industry certain regulatory
compliance and laboratory software currently in development. HighRapids has
provided, and is currently providing, certain software services to the Company.
The Company and Three Rivers entered into a license and distribution
agreement under which the Company has agreed to market and distribute ribavirin
200 mg capsules, the generic version of Schering's Rebetol(R), which is
indicated for the treatment of chronic hepatitis, following its approval by the
FDA. In February 2003, Three Rivers reached a settlement with Schering in a
patent litigation case involving Rebetol(R) brand ribavirin. Under the terms of
the settlement, Schering provided a non-exclusive license to Three Rivers for
all its U.S. patents relating to this product. In return for this license, Three
Rivers has agreed to pay Schering a reasonable royalty based upon net sales of
Three Rivers' and Par's generic ribavirin product. The parties were in
litigation in the U.S. District Court for the Western District of Pennsylvania.
On July 16, 2003, the Company announced that the United States District
Court for the Central District of California had granted a summary judgment of
non-infringement against ICN Pharmaceuticals Inc. ("ICN") in favor of Three
Rivers regarding ribavirin. The District Court determined that Three Rivers'
ribavirin product does not infringe any of the three patents asserted by ICN in
the litigation. Par has exclusive marketing rights for Three Rivers' ribavirin
product. Three Rivers had earlier reached a settlement of its patent litigation
with Schering. The Company believes that this decision appears to resolve the
remaining ongoing patent barriers to FDA approval of the ANDA filed by Three
Rivers in respect of ribavirin. Such decision by the District Court is subject
to affirmance by the Court of Appeals for the Federal Circuit, and ICN has taken
that appeal. The timing of any launch by Par of this product is uncertain at
this time. Three Rivers has not obtained FDA approval of the ANDA, and the FDA
has not made a determination of whether a generic 180-day exclusivity period
will be awarded solely to a generic competitor involved in the lawsuit or Three
Rivers jointly with one or both of the other two generic competitors involved in
the lawsuit.
NOTE 15 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA:
Unaudited selected quarterly financial data for fiscal years 2003 and 2002
is included in the table below:
FISCAL QUARTERS ENDED
------------------------------------------------------------
MARCH 30, 2003 JUNE 29, 2003 SEPT. 28, 2003 DEC. 31, 2003
-------------- ------------- -------------- -------------
Net sales $106,412 $115,861 $216,635 $222,780
Gross margin 55,303 60,970 84,926 81,976
Net income 22,433 23,146 38,742 38,212
Net income per
common share:
Basic $.68 $.70 $1.15 $1.12
Diluted $.67 $.68 $1.11 $1.08
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FISCAL QUARTERS ENDED
------------------------------------------------------------
MARCH 31, 2002 JUNE 30, 2002 SEPT. 30, 2002 DEC. 31, 2002
-------------- ------------- -------------- -------------
Net sales $80,508 $101,755 $100,237 $99,103
Gross margin 39,275 46,415 46,952 50,648
Net income 20,760 20,380 19,643 18,671
Net income per
common share:
Basic $.65 $.64 $.60 $.57
Diluted $.63 $.62 $.59 $.56
NOTE 16 - SUBSEQUENT EVENTS
Par and Advancis have signed a letter of intent, dated March 1, 2004,
subject to execution of a definitive agreement, to enter an agreement to develop
and market a novel formulation of the antibiotic amoxicillin. The companies
intend to develop a low dose pulsatile form of amoxicillin, utilizing Advancis'
proprietary PULSYS(TM) technology. A 505(b)(2) New Drug Application ("NDA")
seeking marketing clearance fOR amoxicillin PULSYS(TM) is expected to be
submitted to the FDA by Advancis in 2005. The companies expect to aDD additional
products to their collaboration in the near future.
Under the terms of a definitive agreement, Par would pay Advancis $5,000
over 12 months and fund development expenses going forward. Advancis will grant
Par the exclusive right to sell and distribute the product and the co-exclusive
right to promote and market the product. Advancis will be responsible for the
manufacturing program. Par and Advancis will share equally in marketing expenses
and profits. The companies expect to finalize the agreement in the second
quarter of 2004.
On March 9, 2004, the Congress of California Seniors brought an action
against GSK and the Company concerning the sale of generic paroxetine in the
State of California. The Company intends to defend vigorously the claims set
forth in the complaint.
F-30
SCHEDULE II
PHARMACEUTICAL RESOURCES, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- --------- -------- ---------- ------
Allowance for doubtful accounts:
Year ended December 31, 2003 $1,156 $600 - $1,756
Year ended December 31, 2002 $998 $547 $389(a) $1,156
Year ended December 31, 2001 $914 $84 - $998
Allowance for returns and price
adjustments:
Year ended December 31, 2003 $35,101 $119,184 $115,684(b) $38,601
Year ended December 31, 2002 $46,170 $113,281 $124,350(b) $35,101
Year ended December 31, 2001 $3,040 $79,239 $36,109(b) $46,170
(a) Write-off of uncollectible accounts.
(b) Returns and allowances charged against allowance provided therefor.
F-31