-----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, A7Hw4BLiMz88r6eawE5oAXU0lCE+3dPIRVCN1koCaKemwn/A4TyWdGm4LkTpfpMx ZXlooRel4AcgOneMGjjorg== 0000926372-97-000009.txt : 19970222 0000926372-97-000009.hdr.sgml : 19970222 ACCESSION NUMBER: 0000926372-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAULDING 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: 97530123 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: PUREPAC INC/ DATE OF NAME CHANGE: 19940908 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 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended December 31, 1996 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-13588 FAULDING INC. (Exact name of registrant as specified in its charter) Delaware 04-2769995 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Elmora Avenue Elizabeth, NJ 07207 (Address of principal executive office) Telephone Number (908) 527-9100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [ ] As of February 6, 1997, there were 15,068,060 shares of the Registrant's Common Stock outstanding. Faulding Inc. INDEX Page No. PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements: Consolidated Balance Sheets December 31, 1996 and June 30, 1996 . . . . . . . . 3 Consolidated Statements of Operations Three months ended December 31, 1996 and 1995 and six months ended December 31, 1996 and 1995 . . . .. . . . . . . . . . 4 Consolidated Statements of Cash Flows Six months ended December 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 . . . 10 PART II - OTHER INFORMATION ITEMS 1 thru 6 . . . . . . . . . . .. . . . . . . . . . . . . 15 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 16 2 CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) December 31, June 30, 1996 1996 (Unaudited) (Audited) - -------------------------------------------------------------------------- ASSETS - -------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 3,007 $ 1,897 Accounts receivable 14,617 17,118 Inventory (Note 4) 28,417 26,496 Due from affiliated companies 537 --- Other current assets 3,266 3,315 Deferred income taxes (Note 6) 2,062 3,225 - -------------------------------------------------------------------------- TOTAL CURRENT ASSETS 51,906 52,051 - -------------------------------------------------------------------------- Property, plant and equipment, net 43,767 41,510 Other assets 4,171 4,279 Deferred income taxes (Note 6) 1,914 838 - -------------------------------------------------------------------------- TOTAL ASSETS $ 101,758 $ 98,678 ========================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------- CURRENT LIABILITIES: Accounts payable $ 6,342 $ 7,553 Due to affiliated companies --- 847 Loan payable to bank 7,000 --- Accrued expenses 5,965 6,666 Accrued preferred dividends 689 689 - -------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 19,996 15,755 - -------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (Note 1 and 2) Class A convertible preferred stock; par value $.01, authorized 1,834,188 shares; issued and outstanding 834,188 (liquidation value $24,995,171) 8 8 Class B convertible preferred stock; par value $.01, authorized 150,000 shares; issued and outstanding 150,000 (liquidation value $15,169) 2 2 Common stock; par value $.01, authorized 35,000,000 shares; issued and outstanding 15,064,560 at December 31, 1996 and June 30, 1996 151 151 Capital in excess of par value 55,865 57,138 Retained earnings 25,736 25,624 - -------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 81,762 82,923 - -------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 101,758 $ 98,678 ========================================================================== The accompanying notes are an integral part of these consolidated financial statements. 3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in thousands, except per share amounts) Three Months Ended Six Months Ended December 31, December 31, ------------------------- ------------------------- 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------- NET SALES $ 22,229 $ 18,126 $ 40,814 $ 33,698 Cost of sales 16,679 14,358 29,692 28,076 - ---------------------------------------------------------------------------------------------------------------- Gross profit 5,550 3,768 11,122 5,622 - ---------------------------------------------------------------------------------------------------------------- Expenses: Selling, general and administrative 3,389 2,651 6,420 5,504 Research and development 1,914 2,863 4,402 5,093 Restructuring costs --- 579 --- 579 - ---------------------------------------------------------------------------------------------------------------- Total expenses 5,303 6,093 10,822 11,176 - ---------------------------------------------------------------------------------------------------------------- Income (loss) form operations 247 (2,325) 300 (5,554) Other income (expense), net (94) 1,466 (113) 1,187 - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 153 (859) 187 (4,367) Provision (benefit) for income taxes (Note 6) 75 (157) 75 (815) - ---------------------------------------------------------------------------------------------------------------- Income (loss) Before Preferred Stock Dividends 78 (702) 112 (3,552) Preferred stock dividends 689 520 1,378 1,040 - ---------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS), AVAILABLE FOR COMMON STOCK $ (611) $ (1,222) $ (1,266) $ (4,592) ================================================================================================================ Primary Earnings Per Common Share (Note 3) Net income (loss) $ (0.04) $ (0.08) $ (0.08) $ (0.03) - ---------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding 15,064,560 15,018,935 15,064,560 15,018,935 ================================================================================================================ The accompanying notes are an integral part of these consolidated financial statements.
4 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Six Months Ended December 31, ----------------------------- 1996 1995 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss), Available for Common Stock $ (1,266) $ (4,592) Adjustments To Reconcile Net Income (Loss) to Net Cash Provided By (Used For) Operating Activities: Depreciation and amortization 1,884 1,513 Compensation expense-stock grants 162 103 Deferred income tax, asset 87 165 INCREASE (DECREASE) IN CASH FROM: Accounts receivable 2,501 (545) Inventory (1,921) (1,898) Other current assets --- (1,541) Other assets (43) (1,210) Accounts payable (1,211) 1,653 Accrued expenses (701) 785 Accrued income taxes (10) (980) Due to/from affiliates (1,383) 1,671 - ----------------------------------------------------------------------------- TOTAL ADJUSTMENTS (635) (284) - ----------------------------------------------------------------------------- Net Cash Provided By (Used For) Operating Activites (1,901) (4,876) - ----------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITES: Purchases of property, plant and equipment (3,989) (1,301) - ----------------------------------------------------------------------------- Net Cash Provided By (Used For) Investing Activities (3,989) (1,301) - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITES: Borrowings from bank 7,000 3,000 Proceeds from additions to paid in capital --- 2,906 - ----------------------------------------------------------------------------- Net Cash Provided By (Used For) Financing Activites 7,000 5,906 - ----------------------------------------------------------------------------- Increase (Decrease) In Cash and Cash Equivalents $ 1,110 $ (271) ============================================================================= Cash and cash equivalents, beginning of period 1,897 1,225 - ----------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 3,007 $ 954 ============================================================================= Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Interest $ 123 $ 64 Income Taxes $ --- $ --- - ----------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in Thousands) Notes to the Financial Statements included in Faulding Inc.'s (the "Company") Form 10-K for the year ended June 30, 1996 contain information pertinent to the accompanying financial statements and should be read in conjunction with reading these 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 December 31, 1996, the Consolidated Statements of Operations for the three and six months ended December 31, 1996 and 1995 and the Consolidated Statements of Cash Flows for the six months ended December 31, 1996 and 1995 are unaudited. 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 2,438,712 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, for a total value of $15 million. The acquisition transaction was accounted for as similar to a pooling of interests and, therefore, financial statements for the six months ended December 31, 1995 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. All intercompany transactions and balances have been eliminated. 6 2. A reconciliation of the change in total stockholders' equity is as follows: Par Value of Common and Capital in Total Stock Preferred Excess of Retained -holders' Stock Par Value Earnings Equity ---------- ----------- ---------- ---------- Balance, June 30, 1996 $ 161 $ 57,138 $ 25,624 $ 82,923 Class A preferred stock dividend (1,040) (1,040) Class B preferred stock dividend (338) (338) Stock grant amortization 162 162 Reduction of deferred income tax asset from issuance of stock grants (57) (57) Net Income 112 112 ---------- ----------- ---------- ---------- Balance, December 31, 1996 $ 161 $ 55,865 $ 25,736 $ 81,762 ========== =========== ========== ========== 3. 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 anti-dilutive. Earnings per share assuming full dilution is not presented as the effect would be anti-dilutive. 4. Inventory December 31, June 30, 1996 1996 ---------- ---------- Raw materials $ 9,400 $ 11,160 Work-in-progress 7,405 4,509 Finished goods 11,612 10,827 ---------- ---------- Total $ 28,417 $ 26,496 ========== ========== 5. Capital Stock During the quarter ended December 31, 1996 no additional shares were issued. 6. Accounting for Income Taxes 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. 7 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 is a reduction in the deferred tax asset as such benefits are utilized to reduce taxes payable. The provision (benefit) for income tax expense was comprised of the following: Three Months Ended Six Months Ended December 31, December 31, ---------------------- ---------------------- 1996 1995 1996 1995 ---------- --------- ---------- --------- Current Federal $ 68 $ (132) $ 68 $ (665) State 11 --- 11 (63) ---------- --------- ---------- --------- 79 (132) 79 (728) Deferred Federal (4) --- (4) (24) State --- (25) --- (63) ---------- --------- ---------- --------- Total provisions $ 75 $ (157) $ 75 $ (815) ========== ========= ========== ========= 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 December 31, 1996, for federal tax purposes, the net operating loss and tax credit carryforwards amounted to $14,870 and $707, respectively; they expire through year 2003. The future utilization of the net operating loss carryforwards is subject to limitation under provisions of the Internal Revenue Code. The benefit of net operating losses generated by the Acquired Companies prior to acquisition by the Company cannot be realized until the individual company generates taxable income to utilize such benefit. As of December 31, 1996 this had not occurred, and a full valuation allowance has been provided for these net operating losses. 7. New Accounting Pronouncements 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 will adopt the disclosure only requirements of SFAS 123, therefore, such adoption will have no effect on the Company's consolidated financial condition or results of operations. 8 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 adopting SFAS 121 for the fiscal year ended June 30, 1997 and anticipates, based upon information currently available, that it will not have a material impact on its results of operations and financial position. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars presented in thousands) Results Of Operations - Three and Six Month Periods Ended December 31, 1996 Compared with the Three and Six Month Periods Ended December 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 2,438,712 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 the three and six month periods ended December 31, 1995 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. 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 Six Months Ended December 31, December 31, ------------------------- ------------------------- 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------- NET SALES $ 19,400 $ 14,522 $ 35,578 $ 28,689 Cost of sales 13,329 11,457 23,494 23,112 - ---------------------------------------------------------------------------------------------------------------- Gross profit 6,071 3,065 12,084 5,577 - ---------------------------------------------------------------------------------------------------------------- Expenses: Selling, general and administrative 2,818 1,980 5,255 4,235 Research and development 1,596 2,596 3,541 4,547 Restructuring costs --- 579 --- 579 - ---------------------------------------------------------------------------------------------------------------- Total Expenses 4,414 5,155 8,796 9,361 - ---------------------------------------------------------------------------------------------------------------- Income (loss) form operations 1,657 (2,090) 3,288 (3,784) Other income (expense), net (94) 1,681 (113) 1,640 - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,563 (409) 3,175 (2,144) - ----------------------------------------------------------------------------------------------------------------
10
STATEMENTS OF OPERATIONS (UNAUDITED) - Acquired Companies Three Months Ended Six Months Ended December 31, December 31, ------------------------- ------------------------- 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------- NET SALES $ 2,829 $ 3,604 $ 5,236 $ 5,009 Cost of sales 3,350 2,900 6,198 4,964 - ---------------------------------------------------------------------------------------------------------------- Gross profit (521) 704 (962) 45 - ---------------------------------------------------------------------------------------------------------------- Expenses: Selling, general and administrative 572 671 1,165 1,268 Research and development 317 267 861 547 - ---------------------------------------------------------------------------------------------------------------- Total Expenses 889 938 2,026 1,815 - ---------------------------------------------------------------------------------------------------------------- Income (loss) form operations (1,410) (234) (2,988) (1,770) Other income (expense), net --- (215) --- (453 - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (1,410) (449) (2,988) (2,223) - ----------------------------------------------------------------------------------------------------------------
The discussion below relates to the segregated results presented above. Purepac Results of Operations Net sales for the three and six month periods ended December 31, 1996 were $19,400 and $35,578, respectively, compared with $14,522 and $28,689 for the corresponding 1995 periods. The increase is primarily due to sales of diclofenac, which was approved by the United States Food and Drug Administration ( FDA") and commercialized in March 1996. Diclofenac sales represented 27% and 25% of the net sales for the current three and six month periods, respectively. In addition to diclofenac, sales of indapamide and diflunisal, which were both approved by the FDA and commercialized in the quarter ended June 30, 1996 and sales related to the contract manufacturing of KADIAN(TM) for Faulding Services Inc. were recorded in the current three and six month periods. Faulding Services Inc. is a wholly-owned subsidiary of Faulding Holdings Inc. Gross profit for the three and six month periods ended December 31, 1996 were $6,071 and $12,084, respectively, compared with $3,065 and $5,577 for the corresponding 1995 periods. Gross profit as a percentage of net sales for the current three and six month periods were 31% and 34%, respectively, compared with 21% and 19% for the corresponding periods in the prior year. The increase was mostly attributable to the sales of diclofenac and indapamide plus contract manufacturing of KADIAN(TM). Selling, general and administrative expenses for the current three and six month periods were $2,818 and $5,255, respectively, compared with the corresponding prior period's respective amounts of $1,980 and $4,235. Current periods' expenses as a percentage of net sales were both 15% compared with 14% and 15% for the corresponding prior year's periods. The increase in the expense 11 level for the current three month period was due to higher personnel and promotion expenses as well as an increase in the bad debt provision to provide for a customer who filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Research and development expenses for the current three and six month periods were $1,596 and $3,541, respectively, compared with $2,596 and $4,547 for the corresponding 1995 periods. The current period's expense as a percent of net sales were 8% and 10%, respectively, compared with 18% and 16% for the corresponding prior periods. While the Company is continuing expenditures for product development and associated biostudies, the reduced expenses in the current period reflects mostly timing differences associated with biostudy scheduling. In the three and six month periods ended December 1995, the Company incurred $579 in restructuring costs primarily relating to severance arrangements. No such costs have been incurred in the current year. The other income (expense) reflects interest expense and revolving credit agreement fees versus interest income. Other income (expense) for the current three and six month periods were ($94) and ($113), respectively, compared with $1,681 and $1,640 in the prior year's corresponding periods. The prior year's periods increase in other income versus the current year is primarily attributable to the settlement of a patent litigation by Purepac which was recorded in the quarter ended December 31, 1995. Income before income taxes for the current three and six month periods were $1,563 and $3,175, respectively, compared with a net loss before income taxes of $409 and $2,144 for the corresponding 1995 periods. The results for the three and six month periods ended December 31, 1996 were positively affected by the commercialization of new product approvals for diclofenac, indapamide and income resulting from contract manufacturing of KADIAN(TM), partly offset by negative pricing pressures within the oral generic pharmaceutical industry. The future financial results will continue to be highly dependent on the ability of income from sales of new products to counter ongoing price erosion within the industry. Acquired Companies Results of Operations The Acquired Companies became wholly owned subsidiaries of Faulding Inc. effective March 1, 1996. Net sales for the three and six month periods ended December 31, 1996 were $2,829 and $5,236, respectively, compared with $3,604 and $5,009 for the corresponding 1995 periods. Products manufactured at the FPR production facility in Aguadilla, Puerto Rico represented 62% and 60% of the net sales for 12 the current three and six month periods, respectively, compared to 88% and 84% for the corresponding periods in the prior year. 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 & Co. Limited, the beneficial majority stockholder of the Company ("F H Faulding"). Net sales in the current three and six month periods included mitomycin, which sales commenced in the quarter ended March 31, 1996. The net sales decline in the current quarter was principally due to a reduction of sales under the contract manufacturing agreements most of which is caused by timing of customer orders and lack of availability of one key raw material, since received. Gross (loss) profit for the three and six month periods ended December 31, 1996 were ($521) and ($962), respectively, compared with $704 and $45 for the corresponding 1995 periods. The principal cause of the reduction in gross profit for the current periods versus the prior year's periods was the lower contract manufacturing volume and price erosion on some of the product line. Gross profit was unfavorably impacted in both periods by under utilization of the production facility in Puerto Rico. Selling, general and administrative expenses for the current three and six month periods were $572 and $1,165, respectively, compared with the corresponding prior period's expenses of $671 and $1,268. The expense represent principally selling expenses associated with FPC. Research and development expenses for the current three and six month periods were $317 and $861, respectively, compared with $267 and $547 for the corresponding 1995 periods. The increase in expenses was due to all three Acquired Companies increasing development expenditures. The loss before income taxes for the current three and six month periods were $1,410 and $2,988, respectively, compared with a loss of $449 and $2,223 for the corresponding 1995 periods. The reduction versus last year is mostly due to the reduced contract manufacturing sales recorded by FPR. Consolidated Income Tax Benefit The calculation of the provision (benefit) for income taxes 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 ("SFAS 109"). For the current three and six month periods ended December 31, 1996, the consolidated income before income taxes were $153 and $187, respectively. In the first fiscal quarter, due to permanent tax differences which reduced the 13 the taxable income to breakeven, no consolidated provision was required to be provided. For the Acquired Companies, only the net loss before income tax since acquisition can be consolidated into the Company's income tax returns. 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 each of the respective companies, which at present cannot be assured. Financial Condition, Liquidity And Capital Resources The Company had $3,007 in cash and cash equivalents at December 31, 1996, compared with $1,897 at June 30, 1996. The increase in the current six month period of $1,110 resulted primarily from $7,000 borrowed from a bank offset by $1,901 used for operating activities and $3,989 used for investments in property, plant and equipment. A comparison of the balance sheet accounts at December 31, 1996 to the June 30, 1996 balances shows the following to be noteworthy: Accounts receivable decreased by $2,501 due to improved collections of sales. Inventory increased by $1,921 due primarily to purchases of materials for products planned to be launched in 1997. Net property, plant and equipment increased by $2,257 reflecting primarily the construction of an injectable shell glass vial filling facility in Aquadilla, Puerto Rico. The accrued preferred dividends payable to the Company's majority stockholder, Faulding Holdings Inc., of $689 for the three month period ended December 31, 1996 were subsequently paid on January 2, 1997. 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. Beyond 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 December 31, 1996, the Company had $3,007 in cash and cash equivalents, plus approximately $8,000 of available borrowings under its existing credit facilities. 14 The Company is currently negotiating expanded credit facilities which it anticipates will be successful. In the future, should the Company require additional cash flow to support the commercialization of new products following receipt of FDA approval, 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. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On August 23, 1996, an action was commenced against the Company, Purepac, F H Faulding and Zeneca Inc. in the United States District Court for the District of Delaware entitled Purdue Pharma L.P. and the Purdue Frederick Company v. F. H. Faulding & Company Ltd. [sic], Faulding Inc., Purepac Pharmaceutical Co. and Zeneca Inc. 96 Civ. 427. The complaint alleges that the manufacture and marketing in the United States of KADIAN(TM) infringes a patent assigned to one of the plaintiffs and constitutes unfair competitive practices under Federal and State law. The Company, through Purepac, manufactures KADIAN(TM) pursuant to a contract manufacturing agreement with Faulding Services Inc., a wholly-owned subsidiary of Faulding Holdings Inc. The complaint seeks, among other things, an order enjoining the Company from infringing the subject patent and awarding treble and punitive damages. The Company believes the allegations in the complaint to be entirely without merit and intends, in cooperation with its co-defendants, to vigorously defend this action. The commencement of the action did not impact the launch of KADIAN(TM). On February 3, 1997, following the submission by Purepac of an ANDA seeking FDA approval of Diltiazem Hydrochloride Extended-Release Capsules, USP, the Company's proposed generic version of Cardizem-CD(R), a lawsuit was commenced in the US District Court for the District of New Jersey under the caption Hoechst Marion Roussel, Inc. and Carderm Capital L.P. v. Faulding Inc. and Purepac Pharmaceutical Co., Civil Action No. 97-516(JAG Jr.), alleging that the Company's proposed generic product infringes a patent assigned to Carderm Capital L.P. and licensed, on a non-exclusive basis, to Hoechst Marion Roussel, Inc., and seeking to delay the commercial introduction of the Company's proposed generic product until the expiration of that patent. Cardizem CD(R), which is manufactured and marketed by Hoechst Marion Roussel, Inc., is indicated for the treatment of hypertension and for the management of chronic stable angina and angina due to coronary artery spasm. The Company believes that its proposed generic product does not infringe the patent at issue in the lawsuit and, additionally, that the patent is invalid. The Company therefore intends to defend the lawsuit vigorously. 15 The Company is involved in litigation incidental to the conduct of its business, in addition to the above matters, and does not believe that the ultimate adverse resolutions of any, or all, thereof would have a material adverse effect on its financial position, results of operations or cash flows. Item 2. through Item 4. Not Applicable. Item 5. OTHER EVENTS Not Applicable. 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 February 12, 1997 ------------------------------------- Richard F. Moldin President and Chief Executive Officer (Principal Executive Officer) BY: /s/Lee H. Craker February 12, 1997 ------------------------------------- Lee H. Craker Chief Financial Officer (Principal Accounting Officer) 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUN-30-1997 JUL-01-1996 DEC-31-1996 3,007 0 14,617 0 28,417 51,906 43,767 0 101,758 19,996 0 0 10 151 81,601 101,758 40,814 40,814 29,692 10,822 0 0 113 187 75 112 0 0 0 112 (.08) 0
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