-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AKrjxS6ufvh/WotZgJtnevFrfAbCYXSdnuvxokpVM+74gn3HCPgZDNiGLSSze04w hEnKog8GZ67U/91W0rTItQ== 0000926372-96-000020.txt : 19960518 0000926372-96-000020.hdr.sgml : 19960518 ACCESSION NUMBER: 0000926372-96-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960516 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUREPAC INC/ CENTRAL INDEX KEY: 0000729069 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 042769995 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13588 FILM NUMBER: 96568399 BUSINESS ADDRESS: STREET 1: 200 ELMORA AVE CITY: ELIZABETH STATE: NJ ZIP: 07207 BUSINESS PHONE: 9085279100 MAIL ADDRESS: STREET 1: 200 ELMORA AVENUE STREET 2: 200 ELMORA AVENUE CITY: ELIZABETH STATE: NJ ZIP: 07207 FORMER COMPANY: FORMER CONFORMED NAME: MOLECULON INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MOLECULON BIOTECH INC DATE OF NAME CHANGE: 19860417 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1996 Commission File Number: 0-13588 FAULDING INC. (FORMERLY, PUREPAC, INC.) (Exact name of registrant as specified in its charter) DELAWARE 04-2769995 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Elmora Avenue, Elizabeth, New Jersey 07207 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908) 527-9100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered _______None________ ________________None_____________________ Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of class) 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 and Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 15,007,753 Number of shares outstanding of the Registrant's common stock as of May 14, 1996. FAULDING INC. (FORMERLY, PUREPAC, INC.) INDEX Page No. PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements: Consolidated Balance Sheets March 31, 1996 and June 30, 1995 . . . . . . . 3 Consolidated Statements of Operations Three months ended March 31, 1996 and 1995 and nine months ended March 31, 1996 and 1995 . . . . . . . . . . 4 Consolidated Statements of Cash Flows Nine months ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements . . 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 12 PART II - OTHER INFORMATION ITEMS 1 thru 4 . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEMS 5 thru 6 . . . . . . . . . . . . . . . . . . . . . . . . 19 SIGNATURES . . . . . . . . .. . . . . . . . . . . . . . . . . 19 Page 2 FAULDING INC. (Formerly, Purepac, Inc.)
CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, June 30, 1996 1995 - -------------------------------------------------------------------------- ASSETS - -------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 6,598,847 $ 1,224,799 Accounts receivable 13,341,619 11,098,542 Inventory (Note 3) 24,390,963 20,838,005 Due from affiliated companies --- 1,312,098 Other current assets 3,853,919 2,298,349 Deferred income taxes (Note 5) 3,261,291 3,513,038 - -------------------------------------------------------------------------- TOTAL CURRENT ASSETS 51,446,639 40,284,831 - -------------------------------------------------------------------------- Property, plant and equipment, net 40,591,325 40,564,604 Other assets 4,245,051 3,595,530 Deferred income taxes (Note 5) 1,024,346 914,346 - -------------------------------------------------------------------------- TOTAL ASSETS $ 97,307,361 $ 85,359,311 ========================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------- CURRENT LIABILITIES: Accounts payable $ 8,263,160 $ 6,178,923 Due to affiliated companies 512,320 --- Loan payable to bank --- 2,000,000 Accrued expenses 5,505,830 5,085,452 Accrued preferred dividends 578,220 520,095 - -------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 14,859,530 13,784,470 - -------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (Note 1) Class A convertible preferred stock; par value $.01, authorized 1,834,188 shares; issued and outstanding 834,188 (liquidation value $24,995,171) 8,342 8,342 Class B convertible preferred stock; par value $.01, authorized 150,000 shares; issued and outstanding 150,000 (liquidation value $15,058,125) 1,500 --- Common stock; par value $.01, authorized 35,000,000 shares; issued and outstanding 14,997,128 at March 31, 1996 and 14,963,128 at June 30, 1995 149,971 149,631 Capital in excess of par value 57,330,115 43,797,870 Retained earnings 24,957,903 27,618,998 - -------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 82,447,831 71,574,841 - -------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,307,361 $ 85,359,311 ========================================================================== The accompanying notes are an integral part of these consolidated financial statements.
Page 3 FAULDING INC. (Formerly, Purepac, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended March 31, March 31, --------------------------- --------------------------- 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------ NET SALES $ 18,513,454 $ 15,029,804 $ 52,211,765 $ 48,519,806 Cost of sales 14,225,447 11,657,472 42,301,051 36,759,369 - ------------------------------------------------------------------------------------------------------------ Gross profit 4,288,007 3,372,332 9,910,714 11,760,437 - ------------------------------------------------------------------------------------------------------------ Expenses: Selling, general and administrative 2,734,808 2,548,593 8,238,636 7,313,600 Research and development 2,647,602 2,041,765 7,740,680 5,593,970 Acquisition expenses (Note 1) 1,017,980 --- 1,017,980 --- Restructuring costs (Note 6) 78,000 --- 657,574 --- - ------------------------------------------------------------------------------------------------------------ Total expenses 6,478,390 4,590,358 17,654,870 12,907,570 - ------------------------------------------------------------------------------------------------------------ Income (loss) from operations (2,190,383) (1,218,026) (7,744,156) (1,147,133) Other income (expense), net (189,983) (30,759) 996,841 (128,327) - ------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (2,380,366) (1,248,785) (6,747,315) (1,275,460) Provision (benefit) for income taxes (Note 5) (266,000) (301,000) (1,081,000) (260,000) - ------------------------------------------------------------------------------------------------------------ Income (loss) Before Preferred Stock Dividends (2,114,366) (947,785) (5,666,315) (1,015,460) Preferred stock dividends 578,220 520,095 1,618,410 1,560,285 - ------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS), AVAILABLE FOR COMMON STOCK $ (2,692,586) $ (1,467,880) $ (7,284,725) $ (2,575,745) ============================================================================================================ Primary Earnings Per Common Share (Note 2) Net income (loss) $ (.18) $ (.10) $ (.49) $ (.17) - ------------------------------------------------------------------------------------------------------------ Weighted average number of common shares outstanding 14,996,754 14,935,753 14,974,255 14,906,373 - ------------------------------------------------------------------------------------------------------------ Earnings Per Share Assuming Full Dilution (Note 2) - ------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these consolidated financial statements.
Page 4 FAULDING INC. (Formerly, Purepac, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended March 31, ----------------------------- 1996 1995 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss), Available for Common Stock $ (7,284,725) $ (2,575,745) Adjustments To Reconcile Net Income (Loss) to Net Cash Provided By (Used For) Operating Activities: Depreciation and amortization 2,345,073 1,756,028 Compensation expense-stock grants 115,798 288,948 Deferred income tax, asset 141,747 52,947 INCREASE (DECREASE) IN CASH FROM: Accounts receivable (2,243,076) 1,744,021 Inventory (3,552,958) 1,044,574 Other current assets (1,152,829) (248,714) Other assets (658,899) --- Accounts payable 2,084,236 (2,125,497) Accrued expenses 420,378 (921,637) Accrued income taxes (366,044) 6,403 Accrued preferred dividends 58,125 --- Due to/from affiliates 565,002 (139,602) - ----------------------------------------------------------------------------- TOTAL ADJUSTMENTS (2,243,447) 1,457,471 - ----------------------------------------------------------------------------- Net Cash Provided By (Used For) Operating Activites (9,528,172) (1,118,274) - ----------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITES: Purchases of property, plant and equipment (2,362,416) (2,413,859) - ----------------------------------------------------------------------------- Net Cash Provided By (Used For) Investing Activities (2,362,416) (2,413,859) - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITES: Borrowings from bank --- 1,000,000 Repayments to bank (2,000,000) --- Proceeds from issuance of preferred stock 15,000,000 --- Proceeds from additions to paid in capital 4,264,636 --- - ----------------------------------------------------------------------------- Net Cash Provided By (Used For) Financing Activites 17,264,636 1,000,000 - ----------------------------------------------------------------------------- Increase (Decrease) In Cash and Cash Equivalents $ 5,374,048 $ (2,532,133) ============================================================================= Cash and cash equivalents, beginning of period 1,224,799 3,188,358 - ----------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,598,847 $ 656,225 ============================================================================= Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Interest $ 206,188 $ 56,279 Income Taxes $ (856,703) $ --- - ----------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
Page 5 FAULDING INC. (FORMERLY, PUREPAC, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Notes to the Financial Statements included in Faulding Inc.'s (the "Company") Form 10-K or the year ended June 30, 1995 contain information pertinent to the accompanying financial statements. There has been no material change in the information contained in such footnotes except as set forth below. The Consolidated Balance Sheet at March 31, 1996, the Consolidated Statements of Operations for the three and nine months ended March 31, 1996 and 1995 and the Consolidated Statements of Cash Flows for the nine months ended March 31, 1996 and 1995 have not been audited. In the opinion of management, all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of such financial results have been included. 1. Acquisitions and Consolidation On February 29, 1996 the Company acquired all of the outstanding capital stock of each of Faulding Medical Device Co. ("FMD"), Faulding Puerto Rico, Inc. ("FPR"), and Faulding Pharmaceutical Co. ("FPC"), collectively the "Acquired Companies,", from Faulding Holdings Inc. (the Company's principal stockholder) in exchange for 2,381,905 shares of its common stock. As part of the acquisition, the Company created a Class B Preferred Stock with 150,000 authorized shares, par value at $.01, all of which were issued to Faulding Holdings Inc. for a cash purchase price of $100 per share. At the effective date of acquisition, the Company changed its name from Purepac, Inc. to Faulding Inc. and the authorized number of shares of common stock was increased from 25,000,000 shares to 35,000,000 shares. The acquisition transaction was accounted for as similar to a pooling of interests and, therefore, financial statements for all periods presented have been restated as if the acquisition took place at the beginning of the earliest period presented. The financial statements reflect the accounts of Faulding Inc. (including its wholly owned subsidiary, Purepac Pharmaceutical Co.) and the Acquired Companies. Page 6 The combined operations reported in the Company's consolidated financial statements are comprised as follows (in thousands):
Faulding Inc. (Formerly, Purepac, Inc.) - ---------------------------------- Net Sales $ 15,466 $ 14,473 $ 44,155 $ 46,827 Cost of sales 11,324 10,865 34,435 35,084 Total operating expenses 5,289 4,413 14,650 12,423 Net Income (loss) before preferred stock dividends (1,078) (514) (2,407) (444) Combined Operations of Acquired Companies - ---------------------------------- Net Sales $ 3,047 $ 557 $ 8,057 $ 1,693 Cost of sales 2,901 793 7,866 1,675 Total operating expenses 1,190 177 3,005 485 Net Income (loss) before preferred stock dividends (1,036) (434) (3,259) (572) Consolidated Operations (as restated) - ---------------------------------- Net Sales $ 18,513 $ 15,030 $ 52,212 $ 48,520 Cost of sales 14,225 11,658 42,301 36,759 Total operating expenses 6,479 4,590 17,655 12,908 Net Income (loss) before preferred stock dividends (2,114) (948) (5,666) (1,016) Note: The Acquired Companies' operations for the three and nine months ended March 31, 1995 reflect the results of FMD only, as FPR and FPC did not commence operations until April 7, 1995.
Since the acquisition transaction was accounted for as similar to a pooling of interests, the acquisition expenses of $1,018,000 incurred were charged to results of operations in the three months ended March 31, 1996. The expenses include $552,000 for financial advisory services and $466,000 for professional fees. Page 7 A reconciliation of the change in total stockholders' equity is as follows: Par Value of Common Capital in Total Stock- and Preferred Excess of Retained holders' Stock Par Value Earnings Equity ------------- ----------- ----------- ----------- Balance June 30, 1995 as previously reported $ 134,154 $24,804,252 $27,618,998 $52,557,404 Common stock issued pursuant to Acquisition 23,819 18,993,618 19,017,437 - ------------------------ ------------ ----------- ----------- ----------- Balance, June 30, 1995 157,973 43,797,870 27,618,998 71,574,841 as restated Preferred stock Class B issued 1,500 14,998,500 15,000,000 Common stock issued pursuant to stock grant plan 340 (340) Class A preferred stock dividend (1,560,285) (1,560,285) Class B preferred stock dividend (58,125) (58,125) Stock grant amortization 115,798 115,798 Reduction of income tax liability from issuance of stock grants 36,697 36,697 Pooling of interest adjustment 3,005,220 3,005,220 Net Income (Loss) (5,666,315) (5,666,315) ------------- ----------- ----------- ----------- Balance March 31, 1995 $ 159,813 $57,330,115 $24,957,903 $82,447,831 ============= =========== =========== ===========
2. Earnings Per Common Share Primary earnings per common share is calculated by dividing income after preferred dividends by the weighted average number of common shares outstanding during the period. Common stock equivalents are excluded as the effect is either not material or anti-dilutive. Earnings per share assuming full dilution is not presented as the effect would be anti-dilutive. Page 8 3. Inventory March 31, June 30, 1996 1995 ----------- ----------- Raw materials $11,028,724 $ 6,078,441 Work-in-process 4,384,853 6,113,537 Finished goods 8,977,386 8,646,027 ----------- ----------- Total $24,390,963 $20,838,005 =========== =========== 4. Capital Stock During the quarter ended March 31, 1996 the Company issued 34,000 shares of common stock to employees pursuant to the Company's 1991 Restricted Stock Incentive Plan. The Company received no proceeds from this transaction. As a result of the issuance of these shares, the Company will have an income tax deduction of $200,000 in the fiscal year ending June 30, 1997. The deduction will result in a reduction in the taxes payable of approximately $76,000. In the same fiscal year, for financial reporting purposes, the tax benefit will be recorded as a reduction of the deferred tax asset to the extent previously provided, and the remainder of the benefit will be recorded as additional capital in excess of par value. The tax effects will not be reflected in the reported earnings or the earnings per share calculations. 5. Accounting for Income Taxes The Company adopted Statement of Financial Accounting Standard No. 109 ("SFAS 109"), "Accounting for Income Taxes," effective July 1, 1993. Beginning with the adoption of SFAS 109, the income tax expense provision does not include the benefit of recognizing available loss carryforwards to the extent they have already been recognized as a deferred tax asset. Instead, there will be a reduction in the deferred tax asset when such benefits are utilized to reduce taxes payable. Deferred income tax assets, both current and non-current, reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. Page 9 The provision (benefit) for income tax expense was comprised of the following: Three Months Ended Nine Months Ended March 31, March 31, ---------------------- ---------------------- 1996 1995 1996 1995 ---------- --------- ---------- --------- Current Federal $(218,000) $ (24,000) $(883,000) $ (20,000) State (25,000) (45,000) (88,000) (39,000) ---------- --------- ---------- --------- (243,000) (69,000) (971,000) (59,000) Deferred Federal (1,000) (232,000) (25,000) (201,000) State ( 22,000) -0- (85,000) -0- ---------- --------- ---------- --------- Total provisions $(266,000) $(301,000) $(1,081,000) $(260,000) ========== ========= ========== =========
The Company has net operating losses and tax credits available as carryforwards to reduce future payments of federal income taxes. State tax losses are also available as carryforwards. At March 31, 1996, for federal tax purposes, the net operating loss and tax credit carryforwards amounted to $13,048,000 and $707,000, respectively; they expire through 2003. The future utilization of the net operating loss carryforwards is subject to limitation under provisions of the Internal Revenue Code. As a result of the acquisition of the Acquired Companies, there are estimated to be approximately $2,000,000 of additional net operating loss carryforwards for federal tax purposes at March 31, 1996, generated principally by FMD. These net operating loss carryforwards are limited to the individual future taxable income of the respective companies. These net operating loss carryforwards expire through 2006. 6. Restructuring In October 1995, the Company made the decision to restructure certain aspects of its business. This restructure was considered necessary to prepare the Company to be more competitive in the generic pharmaceutical industry. Costs associated with this restructuring, including severance payments, were incurred beginning in October, 1995 and are expected to total less than $1 million. During the nine months ended March 31, 1996 such restructuring costs totaled $657,000. This restructuring is expected to better position the Company to integrate the Acquired Companies. Page 10 7. New Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 121 "Accounting For The Impairment Of Long- Lived Assets" ("SFAS 121") which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. To determine a loss, if any, to be recognized, the book value of the asset would be compared to the market value or expected future cash flow value. The Company is required to adopt SFAS 121 for the fiscal years beginning after December 15, 1995 (fiscal year ended June 30, 1997 for the Company), although earlier implementation is permitted. The Company is evaluating when it will adopt SFAS 121 and anticipates, based upon information currently available, that it will not have a material impact on its results of operations and financial position. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 "Accounting For Stock Based Compensation" ("SFAS 123") which requires that an employer's financial statements include expanded disclosure regarding stock-based employee compensation arrangements. The Company is evaluating the requirements of SFAS 123, which must be adopted by fiscal year 1997. Page 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars presented in thousands) Results Of Operations - Three and Nine Month Periods Ended March 31, 1996 Compared with the Three and Nine Month Periods Ended March 31, 1995 Overview: Acquisitions and Consolidation On February 29, 1996 the Company acquired all of the outstanding capital stock of each of Faulding Medical Device Co. ("FMD"), Faulding Puerto Rico, Inc. ("FPR"), and Faulding Pharmaceutical Co. ("FPC"), collectively the "Acquired Companies," from Faulding Holdings Inc. (the Company's majority stockholder) in exchange for 2,381,905 shares of its common stock. As a result, the acquisition transaction was accounted for as similar to a pooling of interests and, therefore, financial statements for all periods presented have been restated as if the acquisition took place at the beginning of the earliest period presented. The financial statements reflect the accounts of Faulding Inc. (including its wholly owned subsidiary, Purepac Pharmaceutical Co.) and the Acquired Companies. Since the acquisitions were accounted for as similar to a pooling of interests, acquisition expenses of $1,018 were charged against the results of operations in the March 31, 1996 quarter. Results of Operations The following segregates the results of operations before income taxes for Faulding Inc. into the Company's business prior to the acquisition, "Purepac," and the Acquired Companies which became wholly owned subsidiaries of Faulding Inc. effective March 1, 1996.
STATEMENTS OF OPERATIONS (UNAUDITED) - Purepac Three Months Ended Nine Months Ended March 31, March 31, --------------------------- --------------------------- 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------ NET SALES $ 15,466 $ 14,473 $ 44,155 $ 46,827 Cost of sales 11,324 10,865 34,435 35,084 - ------------------------------------------------------------------------------------------------------------ Gross profit 4,142 3,608 9,720 11,743 - ------------------------------------------------------------------------------------------------------------ Expenses: Selling, general and administrative 2,017 2,549 6,252 7,314 Research and development 2,176 1,864 6,723 5,109 Acquisition expenses 1,018 --- 1,018 --- Restructuring costs 78 --- 657 --- - ------------------------------------------------------------------------------------------------------------ Total expenses 5,289 4,413 14,650 12,423 - ------------------------------------------------------------------------------------------------------------ Income (loss) from operations (1,147) (805) (4,930) (680) Other income (expense), net (40) (10) 1,600 (24) - ------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (1,187) (815) (3,330) (704) - ------------------------------------------------------------------------------------------------------------
Page 12
STATEMENTS OF OPERATIONS (UNAUDITED) - Acquired Companies Three Months Ended Nine Months Ended March 31, March 31, --------------------------- --------------------------- 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------- NET SALES $ 3,047 $ 557 $ 8,057 $ 1,693 Cost of sales 2,901 793 7,866 1,675 - ---------------------------------------------------------------------------------------------------------------- Gross profit 146 (236) 191 18 - ---------------------------------------------------------------------------------------------------------------- Expenses: Selling, general and administrative 719 --- 1,987 --- Research and development 471 177 1,018 485 - ---------------------------------------------------------------------------------------------------------------- Total expenses 1,190 177 3,005 485 - ---------------------------------------------------------------------------------------------------------------- Income (loss) from operations (1,044) (413) (2,814) (467) Other income (expense), net (150) (21) (603) (105) - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (1,194) (434) (3,417) (572) - ----------------------------------------------------------------------------------------------------------------
The discussion below relates to the segregated results presented above. Purepac Results of Operations Net sales for the three and nine month periods ended March 31, 1996 were $15,466 and $44,155, respectively, compared with $14,473 and $46,827 for the corresponding 1995 periods. The increase in the third quarter's result of 6.9% over the prior year period is primarily due to initial net sales of diclofenac, which was approved in March 1996. Diclofenac sales in the March 1996 quarter represented 14.9% of the quarter's sales, partly due to filling the customer supply pipeline. For the nine months to March 31, 1996, net sales declined by 5.7% caused principally by price erosion due to competition impacting on Purepac's mature product line, which includes the product nifedipine. Other than diclofenac, no new product approvals were received by Purepac during the nine month period to March 31, 1996. Gross profit for the three and nine month periods ended March 31, 1996 were $4,142 and $9,720, respectively, compared with $3,608 and $11,743 for the corresponding 1995 periods. Gross profit as a percentage of net sales for the three and nine month periods ended March 31, 1996 were 26.8% and 22.0%, compared with 24.9% and 25.1% for the corresponding periods in the prior year. For the three and nine month periods respectively, the approval of diclofenac and price erosion due to competition were the main reasons for the differences from prior comparable periods. Page 13 Selling, general and administrative expenses for the current three and nine month periods were $2,017 and $6,252, respectively, compared to the corresponding prior year's respective amounts of $2,549 and $7,314. Current period expenses as a percentage of net sales were 13.0% and 14.2%, respectively, compared with 17.6% and 15.6% for the corresponding prior year's periods. In addition, Purepac incurred $1,018 in acquisition expenses in the nine months to March 31, 1996 related to the purchase of the Acquired Companies, and an additional $657 in costs related to the restructuring of the Purepac business. Of these costs, all the acquisition expenses and $78 of the restructuring costs were expensed in the March 31, 1996 quarter. Some additional restructuring costs are expected in the June 1996 quarter, with total restructuring costs for the financial year still projected to be less than $1,000. No such acquisition or restructuring costs were incurred in the prior financial year. Research and development expenses for the current three and nine month periods were $2,176 and $6,723, respectively. This equates to 14.1% and 15.2% of net sales. Expenditures for the prior year's corresponding periods were $1,864 (12.9%) and $5,109 (10.9%). The increase in research and development expenses was mainly due to an increase in biostudies costs required as part of the Abbreviated New Drug Application ("ANDA") submission process to the United States Food and Drug Administration ("FDA"), in addition to the recruitment of key new scientific personnel. Other income/(expense) for the current three and nine month periods were ($40) and $1,600, respectively, compared with ($10) and ($24), respectively, in the prior year's corresponding periods. The $1,600 for the current nine month period is mainly attributable to the settlement of a patent litigation by Purepac which was recorded in the quarter ended December 31, 1995. Net loss before income tax for the current three and nine month periods were $1,187 and $3,330, respectively. If the acquisition and restructuring costs were excluded for the current year's reported periods, the losses would be $91 and $1,655. These results compare to net losses before income tax for the prior year's corresponding periods of $815 and $704. The results for the three and nine month periods ended March 31, 1996 were adversely affected by both negative pricing pressures within the oral generic pharmaceutical industry and delays in new product approvals, with the exception of diclofenac. The future financial results will continue to be dependent on the ability of income from sales of new products to counter ongoing price erosion within the industry. Page 14 Acquired Companies Results of Operations The Acquired Companies became wholly owned subsidiaries of Faulding Inc. effective March 1, 1996. FPC and FPR did not commence operations until April 7, 1995; hence the prior year comparisons represent only the operating results of FMD. Current and prior year net sales for FMD relate to a distribution agreement with a third party -- which was terminated as of December 31, 1995 -- for products sourced from F.H. Faulding & Co. Limited ("F.H. Faulding"), the beneficial majority stockholder of Faulding Inc. The products previously sold under that agreement, together with additional products sourced from F.H. Faulding, are now being sold by FPC. Consequently, comparison with the prior year is not representative and hence the following analysis principally relates to current year operating results. Net sales for the three and nine month periods ended March 31, 1996 were $3,047 and $8,057, respectively. Of these net sales, 71.9% and 78.3%, respectively, were related to products manufactured at the FPR production facility in Aguadilla, Puerto Rico. These products were sold either under contract manufacturing agreements or by FPC to its customers in the USA. The majority of the remainder of the net sales comprises products licensed from F.H. Faulding. Net sales in the current three month period included initial sales of mitomycin, licensed from F.H. Faulding, which the FDA approved for marketing in November 1995. Gross profit for the three and nine month periods ended March 31, 1996 were $146 and $191, respectively. Gross profit was unfavorably impacted by both under utilization of the production facility in Puerto Rico and production related expenses incurred by FMD, which did not record any net sales. Gross profit in the current three month period included the earnings from the initial sales of mitomycin. Selling, general and administrative expenses for the current three and nine month periods were $719 and $1,987, respectively, representing principally selling expenses associated with FPR and FPC. Research and development expenses include the development costs associated with FMD. Expenses for the current three and nine months were $471 and $1,018, respectively. Net loss before income tax for the three and nine month periods to March 31, 1996 was $1,194 and $3,417, respectively. Of the current nine month loss before income tax, $3,005 was incurred prior to becoming wholly owned subsidiaries of Faulding Inc. Page 15 Consolidated Income Tax Benefit The calculation of the income tax benefit of the Company, which includes Purepac and the Acquired Companies, has been prepared in accordance with accounting for the acquisitions as similar to a pooling of interests consistently applying Statement of Financial Accounting Standard No. 109 ("SFAS109"). Purepac's net loss before income tax resulted in the recording of an income tax benefit of $108 and $923 for the three and nine month current periods. For the Acquired Companies, only the net loss before income tax, since acquisition, can be consolidated into the Company's income tax returns. As a result, an income tax benefit of $158 has been included in both the three and nine month current periods. However, under SFAS109, the income tax benefit of the net losses prior to acquisition have been fully reserved against as the recovery of these losses is dependent on future taxable income of the respective companies, which at present cannot be assured. Financial Condition, Liquidity And Capital Resources The Company had $6,599 in cash and cash equivalents at March 31, 1996, compared with $1,225 at June 30, 1995. The increase in the current nine month period of $5,374 resulted primarily from $15,000 in cash provided by the issuance of the Class B Preferred Stock associated with the February 29, 1996 acquisitions and $4,265 provided by additions to paid-in capital. This was offset by $9,528 used for operating activities, $2,362 for investments in property, plant and equipment and $2,000 to repay a bank loan. A comparison of the balance sheet accounts at March 31, 1996 to the June 30, 1995 balances shows the following to be noteworthy: Accounts receivable increased by $2,243 due to the higher sales level in the current quarter. Inventory increased by $3,553 primarily in raw materials in anticipation of increased production. Other current assets increased by $1,556 primarily due to the recording of a federal income tax receivable based on carrying back the current period's net taxable loss of Purepac and secondarily due to the recording of a $583 current receivable related to a settlement of patent litigation. Accounts payable increased by $2,084 reflecting the increased raw material purchases in the current quarter. The accrued preferred dividends payable to the Company's majority stockholder, Faulding Holdings Inc., of $578 for the three month period ended March 31, 1996 were subsequently paid on April 1, 1996. Page 16 In October 1995, the Company made the decision to restructure certain aspects of its business. This restructuring was considered necessary to prepare the Company to be more competitive in the oral generic pharmaceutical industry. Also, this restructuring is expected to better position the Company to integrate the Acquired Companies. Costs associated with this restructuring, including severance payments, are expected to total less than $1,000. During the six months to March 31, 1996, such restructuring expenses totaled $657. The Company believes that its current cash resources, anticipated operating cash flows and funds available under a revolving credit and loan arrangement with a bank will be sufficient to fund its working capital needs for the next 24 months. In addition, it is not anticipated that the Acquired Companies will generate adequate revenues to finance their combined operating expenses until at least 1998. Depending upon the timing of the Company's cash flow requirements, which is highly dependent upon the unpredictable timing of the receipt of FDA product approvals, the future cash flow needs of the Company could exceed the Company's current cash resources and its available credit under its existing credit facilities. As of March 31, 1996, the Company had $6,599 in cash, plus approximately $15,000 of available borrowings under its existing credit facilities. Accordingly, the Company may need to seek additional credit facilities or to seek additional funding from sales of its securities or from other sources. The Company anticipates that it would be able to increase its credit facilities or obtain financing from other sources, should it require additional cash flow to support the commercialization of new products following receipt of FDA approval therefor. However, there can be no assurance that such financing will be available when required, if at all, or will be available upon terms the Company may deem commercially reasonable. Page 17 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Not Applicable. Item 2. through Item 3. Not Applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: The Company held an Annual Meeting of Stockholders on February 29, 1996. The following is a summary of the proposals that were voted upon at the meeting and the voting results therefrom: Votes Abstentions Against or and Broker Proposal Votes For Withheld Non-Votes - ----------------------------- --------- ---------- ----------- Approval of the acquisition by the Company, in exchange for 2,253,521 shares of the Company's common stock (sub- ject to adjustment) of the three following operating subsidiaries of Faulding Holdings Inc.: Faulding Medical Device Co. Faulding Puerto Rico, Inc. Faulding Pharmaceutical Co. 9,116,879 226,325 66,385 Approval of the sale by the Company to Faulding Holdings Inc. of shares of a new class of preferred stock of the Company, bearing an annual dividend of 4.5% and convertible into an aggregate of 1,564,950 shares of the Company's common stock, for $15 million. 9,116,879 226,325 66,385 Approval of an amendment to the Company's Certificate of Incorporation to change the name of the Company to "Faulding Inc." 9,798,840 155,670 63,880 Approval of an amendment to the Company's Certificate of Incorporation to increase the Company's authorized common stock from 25,000,000 shares to 35,000,000 shares. 9,458,878 322,768 88,220 Election of five directors of the Company for the ensuing year: Edward D. Tweddell 12,046,819 105,018 Alan G. McGregor 12,043,345 108,492 Richard F. Moldin 12,046,319 105,518 David Beretta 12,047,119 104,718 Bruce C. Tully 12,046,819 105,018 Ratification of Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending June 30, 1996. 12,072,472 24,835 56,930 Page 18 Item 5. OTHER EVENTS On February 29, 1996 the stockholders approved a change of the Company's name from Purepac, Inc. to Faulding Inc. effective February 29, 1996. The NASDAQ trading symbol changed from PURE to FAUL. Item 6 (a). EXHIBITS Not Applicable. Item 6 (b). REPORTS ON FORM 8-K Not Applicable. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FAULDING INC. BY: /s/ Richard F. Moldin May 15, 1996 Richard F. Moldin President and Chief Executive Officer (Principal Executive Officer) BY: /s/ Lee H. Craker May 15, 1996 Lee H. Craker Chief Financial Officer (Principal Accounting Officer) EX-27 2
5 1,000 9-MOS JUN-30-1996 MAR-31-1996 6,599 0 13,342 0 24,391 51,447 40,591 0 97,307 14,859 0 0 10 150 82,228 97,307 52,212 52,212 42,301 17,655 (1,750) 0 753 (6,747) (1,081) (5,666) 0 0 0 (5,666) (.49) (.49) The Company acquired capital stock of other companies. The acquisition transaction was accounted for as similar to a pooling of interests and, therefore, financial statements have been restated as if the acquisition took place at the beginning of such periods.
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