SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1994 Commission file
number 0-8049
CIRCA PHARMACEUTICALS, INC.
Incorporated under the laws 11-1966265
of the State of New York (I.R.S. Employer Identification
Number)
33 Ralph Avenue 516-842-8383
Copiague, New York 11726 (telephone number)
(address of principal executive offices)
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Class on Which Registered
Common Stock, $.01 par value per share American Stock Exchange
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, and
(2) has been subject to such filing requirement 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 Registrant's knowledge, in the Proxy
Statement incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant
held by non-affiliates was approximately $356,540,337 as of March
17, 1995 (assuming solely for purposes of this calculation that all
directors and officers of the Registrant are "affiliates").
The number of shares of Common Stock outstanding was 21,745,912 as
of March 17, 1995.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Circa Pharmaceuticals, Inc. Annual Report to
Shareholders are incorporated by reference into Parts I, II, and
IV.
Portions of the Circa Pharmaceuticals, Inc. Proxy Statement are
incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. Business
OVERVIEW
Circa Pharmaceuticals, Inc., and subsidiaries (Circa or the
Company), formerly known as Bolar Pharmaceutical Co., Inc., was
organized under the laws of the State of New York in 1960 and is
traded on the American Stock Exchange (symbol: RXC).
The Company had historically been engaged in developing,
manufacturing and marketing solid dosage generic pharmaceuticals,
including prescription and over-the-counter (OTC) products. In
February 1990, as a result of an investigation by the Food & Drug
Administration (FDA), the Company ceased manufacturing and
marketing all pharmaceutical products and was restricted by the FDA
from obtaining scientific review of its applications. In April
1993, following the completion of a comprehensive three year
rehabilitation program, the FDA notified Circa that all regulatory
restrictions were lifted and that it was in compliance with
"current Good Manufacturing Practices" (cGMP) and able to, once
again, operate under the standard framework of the FDA.
In November 1994, the Company received its first product
approval from the FDA since 1989. This approval confirmed the
acknowledgement by the FDA in April 1993 that the Company had been
successfully rehabilitated and validated the Company's Copiague,
New York facility as being in compliance with cGMP.
The Company currently manufactures a generic product and
several OTC products at its Copiague, New York facility and is also
a distributor of a nitroglycerin transdermal system manufactured by
Hercon Laboratories Corporation. Additionally, the Company
provides services for the pharmaceutical industry through its
Pharmaceutical Services Division.
The Company has a 50% interest in Somerset Pharmaceuticals,
Inc. (Somerset), which manufactures and markets Eldepryl.
Eldepryl is used in the treatment of Parkinson's disease and had
sales of $125 million in 1994. The Company also has an agreement
with Rhone-Poulenc Rorer, Inc. (RPR) to participate in the net
sales of DilacorTM XR, which is used in the treatment of
hypertension and angina.
PRODUCTS, PRODUCT DEVELOPMENT AND SERVICES
In November 1994, the Company received approval notification
from the FDA for its Abbreviated New Drug Application (ANDA) for
glipizide. Glipizide is the generic version of Glucotrol and is
used for the treatment of non-insulin-dependent diabetes (Type II
diabetes). The Company's approval in November represented the
second approval for glipizide issued by the FDA for generic
manufacturing, and since then the FDA has approved several other
pharmaceutical companies for the manufacture and distribution of
glipizide. There can be no assurance that the sale of glipizide
will contribute materially to the Company's future operating
results.
During 1994, the Company's research and development program
placed greater emphasis on developing future proprietary and less
competitive generic products. Accordingly, development of several
commodity-oriented generic products were discontinued during 1994.
The continued product development efforts have shifted to more
technology driven products, such as sustained-release dosage forms
and gum technology, which are expected to face less competition.
The Company employs approximately 120 persons, of which 50
are engaged in research and development, including product
identification, market research, product formulation, the
development of methods used to analyze various drugs and regulatory
affairs. In addition, the Company utilizes independent
laboratories to conduct tests and clinical studies, primarily in
connection with the establishment of bioequivalence. The Company
incurred approximately $8 million on research and development in
1994, $5 million in 1993 and $3 million in 1992. The Company is
currently developing certain prescription drug products which have
not previously been approved for proposed use in the United States.
These drug products incorporate chemical entities that have been
approved by the FDA, but are not necessarily the bioequivalent of
any existing brand-name drug. Current research and development is
being conducted at both Circa's Copiague, New York facility and at
other companies through joint venture agreements.
With respect to any product currently being developed by the
Company internally or with joint venture partners, or any product
for which a NDA, IND or patent application has been filed, there
can be no assurance that such applications shall be approved, or if
approved, that such product will contribute materially to the
Company's future operating results.
In July 1994, Circa acquired a 7.5% equity interest in Andrx
Corporation (Andrx). Circa and Andrx plan to jointly develop,
manufacture and market at least six controlled-release generic
pharmaceutical products. Additionally, the Company licensed two
sustained release products from Andrx, which the Company is
currently developing. The Company has additional development
agreements with outside research and development groups to develop
such products.
The Company has progressed in its efforts to develop a gum-
delivery technology. During the past few years, the Company has
been working on a number of pharmaceutical products in this area,
including OTC and prescription products. In 1994, the Company
filed an application with the FDA for nicotine gum. The Company
will be pursuing registration of this product in other countries
over the next several years. The group is currently evaluating
three OTC products using this technology. The Company is also
considering strategic partners to help promote this product line.
The gum development group filed an application to obtain a patent
for a process that describes a dissolvable chewable dosage form,
Quick Dissolve Chewables (QDCTM). The Company intends on employing
this technology for the delivery of both prescription and OTC
products.
In 1993, the Company acquired the rights to manufacture and
market a product under a New Drug Application (NDA) for a widely-
used cardiovascular agent. In November 1994, Circa filed a NDA
seeking approval for a new strength and dosage form of this
product, which the Company believes will fill a need for clinicians
working in the cardiovascular field. If approved, this agent is
expected to receive three years of exclusivity, and will be
manufactured at the Copiague facility.
Circa has a 50% interest in Somerset, which manufactures and
markets Eldepryl for the treatment of Parkinson's disease.
Somerset provided $25 million in earnings to Circa in 1994.
Exclusivity expires for the Eldepryl tablet in June of 1996;
however, Somerset is committed to the development of other
products. Somerset continues with its development program for the
Eldepryl transdermal patch. During 1995, phase II clinical
studies are being conducted on the patch for multiple neurological
disorders. Somerset is also developing ipriflavone, a product for
the treatment of osteoporosis. Ipriflavone is currently marketed
in Japan, Italy, Hungary, and Argentina. An Investigational New
Drug Application (IND) was filed in January 1995 for this product.
(See "Investments In Joint Ventures" below).
Through a partnership agreement with RPR, Circa earns
royalties on the net sales of Dilacor XR. Dilacor XR is used for
the treatment of hypertension and angina. Circa earned a royalty
of 1% in 1994, and will earn royalties of 20% in 1995 and 1996, 22%
from 1997 to 2000, and 3% thereafter. Royalties will first offset
the Company's partnership liability before providing cash flow to
the Company. At December 31, 1994, the partnership liability was
$14 million. For the year ended December 31, 1994, the Company
earned royalties of $1.2 million on the net sales of Dilacor XR of
approximately $120 million. The Dilacor XR product loses
exclusivity in May of 1995; however, at this time we are unaware of
any pending generic applications. Through the partnership
agreement, Circa and RPR will launch a generic Dilacor XR product
as the partners consider appropriate. The profit and losses from
the generic product are to be shared equally by Circa and RPR.
(See "Investments In Joint Ventures" below).
The Company has an agreement with Hi-Tech Pharmacal to develop
ANDAs for five generic solutions/suspensions; as well as a joint
venture agreement with Generics Group BV for the co-development of
several solid-dosage generic products and an aerosol product. The
Company is also working jointly with Packaging Concepts, Inc. to
develop OTC products in aerosol, solution, foam and powder form.
This collaboration has yielded a number of OTC products, including
Miconazole Spray Powder, which is an antifungal used for the
treatment of athletes foot.
The Company continues to manufacture and distribute two solid
dosage OTC products and distributes nitroglycerin transdermal
patches manufactured by Hercon Laboratories Corp.
Circa's manufacturing facilities are currently utilized to
service both Circa and others in the pharmaceutical industry. In
an effort to cover the Company's overhead, contract manufacturing
has been evaluated. This evaluation determined that pharmaceutical
companies are increasingly outsourcing functions. The Company
decided to enter the business of providing services to the
pharmaceutical industry. The Company created the Pharmaceutical
Services Division to specialize in this industry niche. Circa is
able to provide small and large-scale contract manufacturing
services to clients worldwide. At the Copiague facility, the
Company can provide analytical, stability and packaging services to
customers. The Company can assist with pharmaceutical development,
as well as regulatory and quality assurance activities. The
Company can manufacture product lines using solid-dosage and gum
drug-delivery systems. The solid-dosage products manufactured at
Copiague include tablets, capsules, and sustained-release products.
Circa has a 60% equity interest in a company that owns a facility
designed to produce sustained release products. This facility,
located outside of Dayton, Ohio, can provide microencapsulation
capabilities via a coacervation technology; roto-granulations and
drying; and solvent and non-solvent based coatings.
MARKETS AND DISTRIBUTION
Sales of off-patent pharmaceutical products have increased in
recent years. The Company believes that factors contributing to
the increase include (i) the passage of federal regulation which
streamlined procedures, lowered costs and accelerated the approval
process for off-patent drugs; (ii) loss of exclusivity on brand-
name drugs with significant sales; (iii) the transition from health
care cost reimbursement to managed care programs which emphasize
cost control; (iv) the passage of state legislation that permits or
encourages off-patent substitution by pharmacists; (v) large volume
cost conscious drug purchasers; (vi) increased awareness and
acceptance among consumers, physicians and pharmacists that off-
patent drugs are the therapeutic equivalents of brand-name drugs;
and (vii) higher profit margins realized by pharmacists for
dispensing off-patent drugs than are realized on brand-name drugs.
The Company markets its generic products to drug distributors
and pharmaceutical wholesalers. A majority of the Company's
products are sold under private labels. In 1994, the Company
marketed its products to approximately 50 customers throughout the
United States. In 1994, Schein Pharmaceuticals, Inc., Rugby
Laboratories, Inc., and Goldline Laboratories, Inc. accounted for
23%, 19% and 11%, respectively, of the Company's sales. In 1993,
one customer, Rugby-Darby Group Companies, Inc., accounted for
approximately 28% of Company sales. In 1992, Best Generics, Inc.
accounted for approximately 18% of Company sales. There are no
assurances that any customer will account for more than 10% of the
Company's sales in 1995.
The Company markets its contract manufacturing and other
services to pharmaceutical companies who lack the internal capacity
or expertise of a full services pharmaceutical company. This
includes pharmaceutical manufacturers and research and development
operations.
COMPETITION
The Company competes with generic drug manufacturers, brand-
name pharmaceutical companies that manufacture or market generic
drugs, the original manufacturers of brand-name drugs that continue
to market such drugs after patent expirations or introduce generic
versions of their branded products, and manufacturers of new drugs
that may compete with the Company's generic drugs.
The principal competitive factors in the generic
pharmaceutical market are the ability to be among the first to
introduce products after a patent expires, price quality, methods
of distribution, reputation, customer service and breadth of
product line. The Company believes that price is a significant
competitive factor, particularly as the number of generic
manufacturers which produces a particular product increases. As
competition from other manufacturers intensifies, selling prices
typically decline.
REGULATIONS
The development, manufacture, sale and distribution of the
Company's products are subject to comprehensive regulation by the
federal government, principally by the FDA and to a lessor extent,
by state governments. The federal Food, Drug, and Cosmetic Act,
the Controlled Substances Act and other federal statutes and
regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, approval and promotion of
pharmaceutical products. Noncompliance with applicable
requirements can result in fines, seizure of products, suspension
of production, refusal of the government to enter into supply
contracts or to approve new drug applications and criminal
prosecution. In recent years, new regulations require
manufacturers to present substantial evidence for the efficacy, as
well as safety, of their drug products and in some cases have
resulted, and may in the future result, in the discontinuance of
marketing of such products and give rise to claims for damages from
persons who believe they have been injured as a result of their
use.
INVESTMENTS IN JOINT VENTURES
In June 1989, the Company acquired a 50% equity interest in
Somerset following their approval from the FDA to market the
product Eldepryl. Sales of the product, which is used in the
treatment of Parkinson's disease, commenced in August 1989.
Somerset has the exclusive marketing rights to this product in the
United States and certain other countries. In October 1990,
Somerset entered into an agreement with Sandoz Pharmaceutical
Corporation (Sandoz) to co-promote Eldepryl. Somerset's growth
since 1989 has provided increased cash flows to the Company and has
contributed significantly to funding operations during the past
five years. The Company recognized income of $25 million, $24
million and $21 million from Somerset for the years ended 1994,
1993, and 1992, respectively. Somerset continues with its
development program for the Eldepryl transdermal patch. During
1995, phase II clinical studies are being conducted on the patch
for multiple neurological disorders. Somerset is also developing
ipriflavone, a product for the treatment of osteoporosis.
Ipriflavone is currently marketed in Japan, Italy, Hungary, and
Argentina. An Investigational New Drug Application (IND) was filed
in January 1995 for this product. Circa anticipates future
benefits from Somerset's research and development pipeline.
In 1989, the Company and RPR formed a partnership to develop
and market a pharmaceutical product used in the treatment of
hypertension and angina. The partnership agreement was
restructured in April 1993 to allow Circa to earn royalties at the
rate of 1% in 1994, 20% in 1995 and 1996, 22% from 1997 to 2000 and
3% thereafter on the net sales of Dilacor XR. Royalties will first
offset the Company's partnership liability before providing cash
flow to the Company. At December 31, 1994, the partnership
liability was $14 million. For the year ended December 31, 1994,
the Company earned royalties of $1.2 million on the net sales of
Dilacor XR of approximately $120 million. Prior to the
restructured agreements, Circa's share of the partnership's loss
was $7.6 million in 1993 and $15.6 million in 1992. The Dilacor XR
product loses exclusivity in May of 1995; however, at this time we
are unaware of any pending generic applications. The partnership
agreement also provides for the partnership to develop a generic
Dilacor XR product to be launched when the partners consider
appropriate. The profit and losses from the generic product are to
be shared equally by Circa and RPR.
In July 1994, the Company acquired a 7.5% interest in Andrx
Corporation for $6 million. The Company and Andrx also entered
into a joint venture (Ancirc), to develop six generic
pharmaceuticals for world-wide markets utilizing Andrx's
controlled-release technology. Within Ancirc, Andrx will be
responsible for continuing development of the products and
marketing and sales upon approval. Circa will manufacture the
controlled-release products and be responsible for regulatory
services. Andrx and Circa will be responsible for 60% and 40%,
respectively, of all future costs to develop, manufacture and
market the products with the same percentages applicable to the
sharing of income from the joint venture.
RAW MATERIALS
The raw materials essential to the Company's business are
purchased primarily from domestic and foreign manufacturers of bulk
pharmaceutical chemicals and paid for in U.S. dollars. To date,
the Company has experienced no difficulty in obtaining the raw
materials it needs, and it expects that raw materials will continue
to be readily available in the future.
PERSONNEL
As of December 31, 1994, the Company had 120 employees of
which 50 are engaged in research and development, 45 in
manufacturing, and 25 in administration. No employee is
represented by a union. The Company considers employee relations
to be good.
ITEM 2. Properties
The Company's principal facilities are located in Copiague,
New York where it owns and occupies approximately 161,500 square
feet of space consisting of: 10,000 square feet of office space;
63,000 square feet of manufacturing space; 57,500 square feet of
packaging and warehousing space; 18,000 square feet of research and
development space; and 13,000 square feet of space devoted to
employees. There are no outstanding mortgages against these
facilities. The Company believes that its properties are well
maintained, suitable for its business and are adequate for the
Company's reasonably foreseeable operations.
In addition, Circa has a 60% interest in a company that owns
a 26,000 square foot facility outside Dayton, Ohio designed to
produce sustained-release products.
ITEM 3. Legal Proceedings
Settled Litigation
The Company was the plaintiff in a lawsuit filed in September
1992, in the U.S. District Court for the Eastern District of New
York, captioned Bolar Pharmaceutical Co., Inc. v. Robert Shulman
and Charles G. DiCola, No. CV-92-4357. The Company alleged that as
a result of the conduct of Shulman, formerly the President, Chief
Executive Officer and a director of the Company, and DiCola,
formerly Vice President of Operations of the Company, in connection
with the Company's obtaining of approvals to manufacture and sell
certain generic drugs, the manufacture and sale of those drugs and
the subsequent governmental investigations into the Company's
conduct, the Company became liable to various persons and entities
and was required to pay damages and criminal penalties of more than
$76 million. The Company asserted claims against Shulman and
DiCola under the federal RICO statute and for breach of fiduciary
duty, and sought indemnity and contribution from Shulman and DiCola
for amounts paid by the Company in settlement of various actions
brought against it. The Company sought actual damages and treble
damages under the RICO statute, punitive damages, repayment of
compensation paid to Shulman and DiCola, recoupment of attorneys'
fees and other legal expenses, and declaratory relief as to the
Company's rights under certain agreements with Shulman and DiCola.
In November 1992, Shulman, appearing pro se, moved to dismiss the
Complaint. Shulman also asserted a counterclaim against the
Company seeking a preliminary injunction and order requiring the
Company to deliver to Shulman all stock previously pledged by
Shulman to the Company that was not used to pay Shulman's legal
fees, as well as other compensation allegedly promised to Shulman
at or before his departure from the Company. DiCola did not
respond to the Complaint. The Company filed a reply to Shulman's
counterclaims in which it generally denied any liability to Shulman
and asserted several affirmative defenses, and opposed the motion
for a preliminary injunction. In January 1993, the Company filed
an Amended Complaint, to which neither Shulman nor DiCola have
responded. In April 1993, DiCola's attorney informed the Court
that DiCola had filed for protection under the federal bankruptcy
laws and that the automatic stay of the bankruptcy code stayed
further proceedings against him in this case. By Memorandum and
Order, dated May 7, 1993, the Court denied Shulman's motion for an
injunction in part and granted it in part, to the extent of
directing the Company not to dispose of any of Shulman's stock in
excess of the amount that would offset the Company's expenditures
for legal fees on behalf of Shulman, pending a final determination
on the merits of this action.
In November 1994, the Company and Shulman agreed to settle all
of the claims asserted in Bolar Pharmaceutical Co., Inc. v. Robert
Shulman and Charles G. DiCola, No. CV-92-4357. Under the terms of
the settlement agreement, Shulman, through an escrow agent, sold
all of the shares of Circa's common stock owned by him. The
proceeds from the sale of a substantial portion of such shares,
after payment of expenses and various taxes, were used to settle
the Company's claims and resulted in a gain to the Company of
$2,300,000.
The Company was a third-party defendant in a lawsuit filed in
September 1992 in the United States District Court for the Southern
District of New York, captioned Deloitte & Touche v. Bolar
Pharmaceutical Co., Inc., et al., 90 Civ. 4959 (RWS). In the
underlying action, Ades et al. v. Deloitte & Touche, et al., 90
Civ. 4959 (RWS), plaintiffs, who are investors in promissory notes
of Qmax Technology Group, Inc. ("Qmax"), asserted claims against
Deloitte & Touche for violations of the Federal securities laws,
fraud and deceit, negligence, negligent misrepresentation, and
breach of contract, in connection with Qmax's nonpayment of their
promissory notes. Plaintiffs sought damages of $2,300,000 plus
interest, exemplary and punitive damages in an amount to be
determined at trial, and costs, including attorney's fees. In its
Third-Party Complaint Deloitte & Touche asserted claims for
contribution against the Company, and individual defendants
including, inter alia, Robert Shulman, a former President of the
Company, for violations of the Federal securities laws, common law
fraud and deceit, misrepresentation, and for the acts and omissions
of Robert Shulman under the principle of respondeat superior, in
connection with Deloitte & Touche's reports on Qmax. Deloitte &
Touche sought contribution in the event it is held liable to
plaintiffs in the underlying action. On December 16, 1992, Robert
Shulman filed an Answer denying the allegations in the Third-Party
Complaint and a Cross-Claim against the Company for
indemnification. On January 6, 1993, the Company moved to dismiss
the Third-Party Complaint and Robert Shulman's Cross-Claim. That
motion was denied by an Order, dated September 16, 1993. In
October 1993, Third-Party Defendant Garrett J. Cronin filed a
Cross-Claim against the Company for contribution.
In December 1994, the parties agreed to settle all of the
claims asserted in Deloitte & Touche v. Bolar Pharmaceutical Co.,
Inc., et al., 90 Civ. 4959 (RWS) and Ades et al. v. Deloitte &
Touche, et al.. Under the terms of the settlement agreement, Circa
will pay $190,500. The parties have submitted to the Court a
stipulation dismissing this case with prejudice, which has not yet
been signed by the Court.
The Company and certain of its present and former officers and
directors were defendants in a lawsuit filed in October 1993 in New
York Supreme Court, entitled Bernard Mills v. Finn Andreasen,
Patricia Shukri, Michael Fedida, David Genzler, Stanley B. Grey,
Bruce Hausman, Seymour Inkles, Jack J. Kornreich, Lawrence
Raisfeld, Melvin Sharoky, M.D., and Circa Pharmaceuticals, Inc.,
No. 128824/93 (Sup. Ct. N.Y.). The Complaint purported to be
asserted as a derivative action on behalf of the Company, and
sought to cancel certain employment contracts entered into between
the Board of Directors and certain current and former officers and
directors of the Company, and alleged that the compensation paid
under those contracts is excessive. Plaintiff also purported to
bring an action on behalf of other similarly situated shareholders
for an order directing the individual defendants to dissolve the
Company, or in the alternative, for an order appointing a receiver
to dissolve the Company, and alleged that the future of the Company
as a going concern is uncertain and that its continued existence is
diluting the Company's remaining assets. Plaintiff also sought
attorneys' fees, costs and disbursements in connection with
bringing the action.
In February 1994, Circa and the individual defendants in Mills
brought a motion to dismiss the Complaint. That motion was
granted, and this Complaint was dismissed, by an Order dated
October 31, 1994. Plaintiff's time to file an appeal has expired.
In December 1992, General Generics, Inc., a Mississippi
Corporation engaged in the generic drug distribution business,
filed a class action complaint in the United States District Court
for the Eastern District of New York against the Company based on
alleged price fixing and customer allocation regarding sales of
triamterene with hydrochlorothiazide. Also in December 1992, a
similar class action complaint was filed by Spawd, Inc., a
Pennsylvania Corporation, in the United States District Court for
the District of Maryland. The cases were consolidated in the
District of Maryland and re-named, "In re Generic Dyazide Antitrust
Litigation". In July 1994, the Company settled its Generic Dyazide
civil antitrust litigation. Under the settlement agreement, the
Company paid $1,350,000 into a settlement fund for the benefit of
the class of plaintiffs, and will issue $2,500,000 of coupons
permitting the class of former customers to purchase products from
the Company at a predetermined discount from market prices. The
settlement agreement was accepted by the class of plaintiffs and
implementation was approved by the court. The cost of this
settlement was provided for in 1993.
In October 1993, a class action complaint was filed in the
Circuit Court of Tallapoosa County, Alexander City, Alabama,
alleging a violation of the Alabama antitrust statute styled Mary
Wood, et al. v. Circa Pharmaceuticals, Inc., et al., No. CV-93-150
(the "Wood Action"). This action was brought on behalf of all
indirect purchasers of generic Dyazide located in the State of
Alabama. The Complaint alleges damages less than $49,500 per class
member, exclusive of interest and costs. The number of class
members is not known, however, there are some reasons to believe
that the size of the class is not large.
In April 1994, the Company brought a motion in re Bolar
Pharmaceutical Co., Inc. Generic Drug Consumer Litigation, M.D.L.
No. 849 (E.D. Pa.) ("Consumer Litigation"), which sought, among
other things, an order (1) finding that prosecution of the Wood
Action as a class action on behalf of purchasers of Dyazide, other
than direct purchasers for resale, against the Company and Larry
Raisfeld, a former President of the Company, violated an Order that
had been entered in connection with the settlement of the Consumer
Litigation, and (2) directing the Wood Action plaintiffs to cease
and desist the continued prosecution of the Wood Action on behalf
of or in a representative capacity for members of the class in the
Consumer Litigation, against the Company and Mr. Raisfeld. On July
5, 1994, the District Court entered an order granting the motion.
That order was affirmed on appeal by the Third Circuit Court of
Appeals in February 1995.
Pending Litigation
On January 10, 1995, the Company received a Complaint naming
it as a defendant in an action captioned Reeves V. Circa
Pharmaceuticals, Inc., No. 94-436678 (Circuit Court, Wayne County,
Michigan). The Complaint purports to be brought by Leila Reeves
individually, and as a class action on behalf of all consumers of
Ergoloid Mesylates. The Complaint alleges that the Company used
improper procedures in the production of Ergoloid Mesylates, and
falsified records in connection therewith, and that between 1987
and 1991, plaintiff purchased and used Ergoloid Mesylates
manufactured by the Company. The Complaint further alleges that
Ergoloid Mesylates was sold as a drug to facilitate proper
mentation, but did not assist the plaintiff's mentation, and
purports to allege causes of action in fraud and deceit, violation
of the Michigan Consumer Protection Act, and breaches of various
warranties. This action is in the early stages of discovery.
Contingencies
Certain product liability claims have been filed against the
Company relating to products sold prior to the cessation of sales
by the Company in February 1990.
As of December 31, 1993, the Company has provided an allowance
for the estimated cost of pending litigation. Based upon
information it presently possesses, the Company believes that the
outcome of these cases will not have a material adverse effect on
the Company's consolidated financial position or future operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders for
the fourth quarter of the Company's fiscal year ended December 31,
1994.
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters
The information required by Item 5 is hereby incorporated by
reference to the accompanying Annual Report to Shareholders for the
year ended December 31, 1994.
ITEM 6. Selected Financial Data
The information required by Item 6 is hereby incorporated by
reference to the accompanying Annual Report to Shareholders for the
year ended December 31, 1994.
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information required by Item 7 is hereby incorporated by
reference to the accompanying Annual Report to Shareholders for the
year ended December 31, 1994.
ITEM 8. Financial Statements and Supplementary Data
The information required by Item 8 is hereby incorporated by
reference to the accompanying Annual Report to Shareholders for the
year ended December 31, 1994.
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is hereby incorporated by
reference to the Company's 1995 Proxy Statement, which will be
filed with the Securities and Exchange Commission on or before
April 30, 1995.
ITEM 11. Executive Compensation
The information required by Item 11 is hereby incorporated by
reference to the Company's 1995 Proxy Statement, which will be
filed with the Securities and Exchange Commission on or before
April 30, 1995.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by Item 12 is hereby incorporated by
reference to the Company's 1995 Proxy Statement, which will be
filed with the Securities and Exchange Commission on or before
April 30, 1995.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 is hereby incorporated by
reference to the Company's 1995 Proxy Statement, which will be
filed with the Securities and Exchange Commission on or before
April 30, 1995.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements and the
related report of Coopers & Lybrand L.L.P. dated February 7, 1995
in the 1995 Annual Report to Shareholders are herein incorporated
by reference in this Form 10-K:
Consolidated Balance Sheets as of
December 31, 1994 and 1993
Consolidated Statements of Operations for the years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993, and 1992
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a) 2. FINANCIAL STATEMENT SCHEDULE
Supplemental Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts for
the years ended December 1994, 1993 and 1992
All other schedules are omitted for the reason that they are either
not required, not material, or the information is shown in the
consolidated financial statements or notes thereto.
(a) 3. EXHIBITS
Exhibit No.
3.1 Certificate of Incorporation and Amendments of the
Company are incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989.
3.2 By-Laws restated as of November 1, 1991 are
incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991.
4.1 Stockholder Protection Rights Agreement is incorporated
herein by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1991.
10.1 Stock Purchase Agreement by and among the Capital
Stockholders of Somerset Pharmaceuticals, Inc., Mylan Laboratories,
Inc. and the Company dated March 24, 1989, is incorporated herein
by reference to the Company's Form 8-K dated and filed as of June
21, 1989.
10.2 Articles of Incorporation and By-Laws of Somerset are
incorporated herein by reference to the Company's Form 8-K dated
and filed as of June 21, 1989.
10.3* Agreement between Melvin Sharoky, M.D. and the Company
dated as of April 26, 1991, is incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1991.
10.4* Amended Agreement between Melvin Sharoky, M.D. and the
Company dated as of January 19, 1993, is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.5 Partnership Agreement between Rhone-Poulenc Rorer
Pharmaceuticals, Inc. and the Company dated as of April 27, 1993,is
incorporated herein by reference to the Company's Second Quarter
Report on Form 10-Q for the quarter ended June 30, 1993.
10.6* Retirement Agreement between Seymour Inkles and the
Company dated as of June 30, 1993, is incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
10.7* Agreement between Thomas P. Rice and the Company dated
as of July 1, 1993, is incorporated herein by reference to the
Company's Form 10-K for the year ended December 31, 1993.
10.8* Amended agreements between Thomas P. Rice and the
Company dated as of July 15, 1994, and November 11, 1994, are filed
herein.
10.9* Separation and General Release agreement between
Lawrence Raisfeld and the Company dated as of June 16, 1994, is
filed herein.
10.10* Circa Pharmaceuticals, Inc. 1990 Directors' Plan, is
incorporated herein by reference to the Company's Form S-8
Registration No. 33-53903 filed on May 27, 1994.
10.11* Circa Pharmaceuticals, Inc. Restated Deferred
Compensation Plan, is incorporated herein by reference to the
Company's Form S-8 Registration Statement No. 37-56751 filed on
December 6, 1994.
10.12* Circa Pharmaceuticals, Inc. 1994 Long-Term Incentive
Plan, is incorporated herein by reference to the Company's Form S-8
Registration Statement No. 33-56751 filed on December 6, 1994.
13.2 1994 Annual Report to Shareholders, filed herewith.
22.1 Subsidiaries of the Company, filed herewith.
23.1 Consent of Independent Accountants (Coopers & Lybrand
L.L.P.), filed herewith.
23.2 Consent of Independent Accountants (Deloitte & Touche
LLP), filed herewith.
27.1 Financial Data Schedule, filed herewith.
28.1 Consolidated financial statements of Somerset
Pharmaceuticals, Inc. and Subsidiaries for the years ended December
31, 1994, 1993 and 1992, filed herewith.
*These items are management contracts or compensatory plans.
All other exhibits are omitted for the reason that they are either
not required or not material.
(b)REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CIRCA PHARMACEUTICALS, INC.
Dated: March 27, 1995
by:/s/ Melvin Sharoky, M.D.
MELVIN SHAROKY, M.D., President
Chief Executive Officer
by:/s/ Angelo C. Malahias
ANGELO C. MALAHIAS, Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated:
/s/ Melvin Sharoky, M.D. Date: March 27, 1995
MELVIN SHAROKY, M.D., Director
/s/ Thomas P. Rice Date: March 27, 1995
THOMAS P. RICE, Director
/s/ Michael Fedida Date: March 27, 1995
MICHAEL FEDIDA, Director
/s/ Stanley B. Grey Date: March 27, 1995
STANLEY B. GREY, Director
/s/ Bruce Hausman Date: March 27, 1995
BRUCE HAUSMAN, Director
/s/ Kenneth Siegel Date: March 27, 1995
KENNETH SIEGEL, Director
<PAGE>
SUPPLEMENTAL REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Circa
Pharmaceuticals, Inc.:
Our report on the consolidated financial statements of Circa
Pharmaceuticals, Inc. as of December 31, 1994 and 1993, and for
each of the three years in the period ended December 31, 1994, has
been incorporated by reference in this Form 10-K from the 1994
Annual Report to Shareholders. In connection with our audits of
such financial statements, we have also audited the related
financial statement schedule listed in Item 14(a)2 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information required to be included therein.
Coopers & Lybrand L.L.P.
Melville, New York
February 7, 1995<PAGE>
CIRCA PHARMACEUTICALS, INC .
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Balance Balance
beginning at end
of Year Additions Deductions of Year
Allowance
for
doubtful
accounts:
12/31/94 $195,926 $209,074(a) $405,000
12/31/93 -0- 195,926(b) 195,926
12/31/92 -0- -0-
Allowance
for
inventory
on hand:
12/31/94 -0- 225,000(a) 225,000
12/31/93 1,284,121 1,284,121(d) - 0 -
12/31/92 933,000 1,284,121(c) 933,000(d) 1,284,121
Reserve
for
returns
of
recalled
products:
12/31/94 1,000,000 1,000,000
12/31/93 369,861 750,000(b) 119,861(e) 1,000,000
12/31/92 3,808,926 3,439,065(f) 369,861
(a) Represents additional allowances established in 1994.
(b) Represents additional allowances established in 1993.
(c) Represents inventory for which FDA approval was no longer
being sought and was held for sale.
(d) Represents inventory that was destroyed.
(e) Represents credits issued on recalled products.
(f) Represents credits issued on product returns of $1,675,879,
settlements of $1,371,500 and a reversal into income of
$391,686.
EXHIBIT INDEX
Exhibit No.
3.1 Certificate of Incorporation and Amendments of the
Company are incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989.
3.2 By-Laws restated as of November 1, 1991 are
incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December
31, 1991.
4.1 Stockholder Protection Rights Agreement is incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991.
10.1 Stock Purchase Agreement by and among the Capital
Stockholders of Somerset Pharmaceuticals, Inc., Mylan
Laboratories, Inc. and the Company dated March 24,
1989, is incorporated herein by reference to the
Company's Form 8-K dated and filed as of June 21, 1989.
10.2 Articles of Incorporation and By-Laws of Somerset are
incorporated herein by reference to the Company's Form
8-K dated and filed as of June 21, 1989.
10.3* Agreement between Melvin Sharoky, M.D. and the Company
dated as of April 26, 1991, is incorporated herein by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1991.
10.4* Amended Agreement between Melvin Sharoky, M.D. and the
Company dated as of January 19,1993, is incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.
10.5 Partnership Agreement between Rhone-Poulenc Rorer
Pharmaceuticals, Inc. and the Company dated as of April
27, 1993, is incorporated herein by reference to the
Company's Second Quarter Report on Form 10-Q for the
quarter ended June 30, 1993.
10.6* Retirement Agreement between Seymour Inkles and the
Company dated as of June 30, 1993, is incorporated by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
10.7* Agreement between Thomas P. Rice and the Company dated
as of July 1, 1993, is incorporated herein by reference
to the Company's Form 10-K for the year ended December
31, 1993.
EXHIBIT INDEX
Exhibit No.
10.8* Amended agreements between Thomas P. Rice and the
Company dated as of July 15, 1994 and November 11,
1994, are filed herein.
10.9* Separation and General Release agreement between
Lawrence Raisfeld and the Company dated as of June 16,
1994, is filed herein.
10.10* Circa Pharmaceuticals, Inc. 1990 Directors' Plan, is
incorporated herein by reference to the Company's Form
S-8 Registration No. 33-53903 filed on May 27, 1994.
10.11* Circa Pharmaceuticals, Inc. Restated Deferred
Compensation Plan, is incorporated herein by reference
to the Company's Form S-8 Registration Statement No.
37-56751 filed on December 6, 1994.
10.12* Circa Pharmaceuticals, Inc. 1994 Long-Term Incentive
Plan, is incorporated herein by reference to the
Company's Form S-8 Registration Statement No. 33-56751
filed on December 6, 1994.
13.2 1994 Annual Report to Shareholders, filed herewith.
22.1 Subsidiaries of the Company, filed herewith.
23.1 Consent of Independent Accountants (Coopers & Lybrand
L.L.P.), filed herewith.
23.2 Consent of Independent Accountants (Deloitte & Touche
LLP), filed herewith.
27.1 Financial Data Schedule, filed herewith.
28.1 Consolidated financial statements of Somerset
Pharmaceuticals, Inc. and Subsidiaries for the years
ended December 31, 1994, 1993 and 1992, filed herewith.
*These items are management contracts or compensatory plans.
<PAGE>
AMENDED AGREEMENTS
BETWEEN THOMAS P. RICE
AND THE COMPANY
Exhibit 10.8
<PAGE>
AMENDMENT TO THE JULY 1, 1993, EMPLOYMENT AGREEMENT
BETWEEN THOMAS RICE AND CIRCA PHARMACEUTICALS, INC.
The Employment Agreement between Thomas Rice and Circa
Pharmaceuticals, Inc. dated as of July 1, 1993 (the Agreement), for
good and valuable consideration the receipt of which is
acknowledged, is hereby amended as of the date stated below in the
following manner:
1.Subparagraph (a) of paragraph 4 of the Agreement is modified
to read as follows:
"An annual base salary of $200,000 subject to increases
or decreases as the Board may from time to time determine;"
2.Subparagraph (b) of paragraph 6 of the Agreement is deleted
in its entirety, and there shall be no subparagraph (b) of
paragraph 6 in the Agreement. Subparagraph (c) of paragraph 6 of
the Agreement is modified to read as follows:
"If the Employee's death occurs prior to the termination
of this Agreement, Circa shall deliver to the Employee's estate, or
such other beneficiary as the Employee may designate in his Last
Will and Testament, the entire balance of the Common Stock subject
to forfeiture under paragraph 4 (c) above, and such stock will no
longer be subject to forfeiture."
3. Subparagraph (b) of paragraph 8 of the Agreement is
deleted in its entirety, and there shall be no subparagraph (b) of
paragraph 8 in the Agreement. Subparagraph (c) of paragraph 8 of
the Agreement is modified to read as follows:
"If Circa terminates this agreement because of the
Employee's Disability under this paragraph prior to the termination
of this Agreement, Circa shall, at the time of such termination,
deliver to the Employee the entire balance of Common Stock subject
to forfeiture under paragraph 4 (c) above, and such stock will no
longer be subject to forfeiture."
4.Subparagraph (c) (iv) of paragraph 10 of the Agreement is
deleted in its entirety, and in lieu thereof the following
subparagraph shall be included as subparagraph (c) (iv) of
paragraph 10 of the Agreement:
"In lieu of any further salary payments to
the Employee for periods subsequent to the Date of Termination,
Circa shall pay as severance to the Employee a lump sum amount
equal to two and ninety-nine one-hundredths (2.99) times the
Employee's Base Salary, (A) as of the Date of Termination; (B) as
of the date the Change in Control occurred; or (C) during the
twelve (12) months preceding the date of Termination, whichever is
greatest."
5. The amendments described above shall be effective as of
the date stated below in this Amendment, and the Agreement shall
not be deemed amended prior to this date. In all other respects
the Agreement remains unchanged.
Dated: Copiague, New York
July 15, 1994
Circa Pharmaceuticals, Inc.
By:
Melvin Sharoky, M.D. Thomas P. Rice
President
SECOND AMENDMENT TO THE JULY 1, 1993,
EMPLOYMENT AGREEMENT BETWEEN THOMAS RICE
AND CIRCA PHARMACEUTICALS, INC.
The Employment Agreement between Thomas Rice and Circa
Pharmaceuticals, Inc. dated as of July 1, 1993 (as amended by the
first amendment thereto dated July 15, 1994, the "Agreement"), for
good and valuable consideration the receipt of which is
acknowledged, is hereby amended as of the date stated below in the
following manner:
1. Paragraph 4 of the Agreement is amended by adding a new
subparagraph (g) at the end thereof, as follows:
"Notwithstanding anything contained in the Agreement to the
contrary, if (x) the Employee terminates his of any event referred
to in paragraph 10(b) below) but without the reference to there
having occurred any Change in Control as such term is defined in
paragraph 10(a) below) or (y) the Employee is terminated by Circa
without Cause, any and all restrictions with regard to the Common
Stock subject to forfeiture under paragraph 4(c) above shall be
terminated and Employee shall be free to deal with such Common
Stock as he may deem fit, subject only to the Securities Act of
1933, as amended; provided that, if the Employee is terminated by
Circa without Cause prior to a Change in Control, then the
termination of restrictions referred to in clause (y) above shall
be in lieu of any other rights or alleged damages."
2. Subparagraph (c) of paragraph 6 of the Agreement is modified
to read as follows:
"Notwithstanding anything contained in this Agreement to the
contrary, if the Employee should die during the term of this
Agreement, any and all restrictions with regard to the Common Stock
subject to forfeiture under paragraph 4(c) above shall be
terminated and Employee's legal representative shall be free to
deal with such Common Stock as he may deem fit, subject only to the
Securities Act of 1933, as amended."
3. Subparagraph (c) of paragraph 8 of the Agreement is modified
to read as follows:
"Notwithstanding anything contained in this Agreement to the
contrary, if the Employee suffers a Disability during the term of
this Agreement, any and all restrictions with regard to the Common
Stock subject to forfeiture under paragraph 4(c) above shall be
terminated and Employee's legal representative shall be free to
deal with such Common Stock as he may deem fit, subject to the
Securities Act of 1933, as amended."
4. Subparagraph (c)(iii) of paragraph 10 of the Agreement is
deleted in its entirety, and there shall be no subparagraph (c)
(iii) of paragraph 10 of the Agreement.
5. Subparagraph (c)(iv) of paragraph 10 of the Agreement is
deleted in its entirety, and in lieu thereof the following
subparagraph shall be included as subparagraph (c)(iv) of paragraph
10 of the Agreement:
"In lieu of any further salary payments to the Employee for
periods subsequent to the Date of Determination, Circa shall pay as
severance to the Employee a lump sum amount equal to two and
ninety-nine one-hundredths (2.99) times the Employee's "Base
Amount" within the meaning of Section 280(b)(3) of the Internal
Revenue Code of 1986, as amended."
6. Subparagraph (d) of paragraph 11 of the Agreement is deleted
in its entirety, and there shall be no subparagraph (d) of
paragraph 11 of the Agreement.
7. The amendments described above shall be effective as of the
date stated below in this Agreement, and the Agreement shall not be
deemed amended prior to this date. In all other respects the
Agreement remain unchanged.
Dated: Copiague, New York
November 11, 1994
Circa Pharmaceuticals, Inc.
By:
Name: Thomas P. Rice
Title:
SEPARATION AND GENERAL RELEASE AGREEMENT
BETWEEN LAWRENCE RAISFELD AND THE COMPANY
Exhibit 10.9
<PAGE>
SEPARATION AGREEMENT AND GENERAL RELEASE
This Agreement is between Lawrence Raisfeld ("Mr. Raisfeld")
and Circa Pharmaceuticals, Inc., its parents, affiliates,
subsidiaries, shareholders, any and all current and former
directors, officers, employees, agents, and contractors of these
companies, and any and all employee pension or welfare benefit
plans of these companies, including current and former fiduciaries,
trustees and administrators of these plans (hereinafter collec-
tively referred to as "Circa" or the "Company").
WHEREAS, the Company and Mr. Raisfeld (individually a
"Party" and together the "Parties") are Parties to an employment
contract dated January 19, 1993, which contract terminates on
January 31, 1996 (the "Contract"); and
WHEREAS, Mr. Raisfeld has indicated his intention to
resign from employment, and the Company and Mr. Raisfeld wish to
enter into a separation agreement regarding his separation from
employment and the rights and obligations of the Parties in
connection therewith;
NOW, THEREFORE, in consideration of the promises and the
mutual covenants contained herein and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the
Parties agree as follows:
Cancellation of the Contract. All provisions of the Contract,
whether or not such provisions were to continue in effect after Mr.
Raisfeld ceased to be employed by the Company, are canceled as of
the date of this Agreement. Except for the benefits provided in
this Agreement, Mr. Raisfeld waives all rights to any other
payments or benefits under the Contract, and any other payments or
benefits normally provided to employees of the Company; provided
however, that Mr. Raisfeld's rights under any plan of the Company
qualified under the Internal Revenue Code of 1986, as amended,
shall be determined in accordance with the terms of that plan and
his rights, if any, under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), shall be
determined in accordance with such statute.
Severance Benefits.
Mr. Raisfeld hereby resigns from employment with the
Company, effective the date hereof, and shall receive a lump sum
severance payment in the amount of three hundred and thirty-seven
thousand five hundred dollars ($337,500), less required
withholdings, which sum represents payment for accrued and unused
vacation and sick days and severance for his years of dedicated
service. Such lump sum amount shall be payable by wire transfer,
same day funds, as directed by Mr. Raisfeld, upon the execution of
this Agreement and the expiration of the period for revoking his
waiver of rights in accordance with paragraph 9(b) below and
Exhibit A attached hereto.
Mr. Raisfeld shall be eligible to receive his vested
benefits under the Company's pension plan and 401(k) plan in
accordance with the terms of the respective plan.
Circa agrees to provide Mr. Raisfeld and his wife, at
its sole cost and expense, coverage under its medical and dental
benefits plans for the period from the date hereof until the
earlier of (i) January 31, 1996 or (ii) the date Mr. Raisfeld is
eligible for coverage under another medical benefits plan.
Effective February 1, 1996 and for a period of up to 18 months
ending on the earlier of (i) July 31, 1997, or (ii) the date Mr.
Raisfeld is eligible for coverage under another medical benefits
plan, the Company will provide Mr. Raisfeld, at his sole cost and
expense, with continued coverage under the Company's medical and
dental benefits plans in accordance with the requirements of COBRA.
Resignation. Effective on the date hereof, Mr. Raisfeld
shall resign as a director of the Company. Circa and Mr. Raisfeld
mutually agree that the public announcement attached hereto as
Exhibit B shall be issued by the Company concerning Mr. Raisfeld's
resignation from the Company.
Return of Property. Upon the execution of this
Agreement, Mr. Raisfeld will return to the Company all property of
the Company in his possession, including any fax machines or other
equipment which is the property of the Company, any documents,
including publications of any nature which are the sole property of
the Company, any credit cards, and any other property of the
Company in his possession. Mr. Raisfeld represents that he has no
written confidential information, as the term "Confidential
Information" is defined in paragraph 6 of this Agreement, in his
possession, and, except for the property the Parties agree Mr.
Raisfeld can retain as set forth on Exhibit C attached hereto, no
other property of the Company of material value.
Cooperation. Mr. Raisfeld agrees to cooperate with the
Company's efforts to transfer his former duties, responsibilities
and operating authority to anyone designated by the Company and to
effect an orderly transition, and agrees to provide all information
in his possession as may reasonably be requested by the Company
with respect to matters affecting the Company and its business and
affairs. In connection with the agreement to cooperate contained
in this paragraph 5, Mr. Raisfeld specifically agrees that during
the period from the date hereof to December 31, 1994, he will make
himself reasonably available by telephone during regular business
hours and upon reasonable advance notice to debrief the Company and
persons designated by it and impart to the Company his knowledge
regarding the Company's business and affairs. In addition,
Mr. Raisfeld agrees to testify in any litigation or similar
proceeding if requested to do so by the Company. The Company
agrees to reimburse Mr. Raisfeld for any reasonable expenses
incurred by him in connection with providing such testimony.
Covenants of Mr. Raisfeld.
(a)Mr. Raisfeld agrees that for a period ending two
years after the date hereof (the "Restricted Term"), he will not,
directly or indirectly:
(i) Employ, hire, engage or have a business
association with any person who during any part of the preceding
twelve (12) months was employed by or had a business association
with Circa relating to Circa's pharmaceutical system; or
(ii) Solicit the employment of any such person
on his own behalf or on behalf of any other business enterprise.
(b)Mr. Raisfeld further agrees that during the
Restricted Term, he will not accept employment with, or perform
services for or engage in any other activity in connection with any
business which is competitive with the pharmaceutical business in
which Circa is then engaged. The foregoing shall not, however:
(i)Be applicable in the event of the liquidation
of Circa; or
(ii)Prevent Mr. Raisfeld from purchasing,
selling, owning or investing in up to one (1%) of any class of
publicly traded securities.
(c)Mr. Raisfeld recognizes and acknowledges that
various kinds of confidential and proprietary information and trade
secrets, including but not limited to product specifications,
research and development projects, contracts and other business
relationships with third parties, and lists of Circa's customers
and vendors, as they may exist from time to time, are valuable,
special and unique assets of Circa's business. During the
Restricted Term and thereafter, Mr. Raisfeld will not disclose to
any person or entity any Confidential Information (as defined
below) relating to Circa, except at the request of Circa, or as
required by an order of a court or government agency with
jurisdiction. Mr. Raisfeld will give prompt written notice to
Circa of any such requirement, or threatened requirement, by a
court or government agency in order to allow Circa the opportunity
to resist such a request. For the purposes of this subparagraph
6(c), "Confidential Information" shall mean any information
(including without limitation, any formula, pattern, device, plan,
process or compilation of information) which (i) is, or is designed
to be, used in the business of the Company (or any of its
subsidiary or affiliated companies) or results from its or their
research and/or development activities and/or other activities or
any other proprietary information or trade secret and (ii) is
private or confidential in that it is not generally known or
available to the public. "Confidential Information" includes, but
is not limited to: customers and customers lists (including,
without limitation, the identity of customers, names, addresses,
contact persons and the customer's status or needs), research and
product development and related information, actual or potential
business relationships between Circa and any third party, marketing
plans and related information, sales plans and related information,
management organization and related information (including data and
other information related to members of the Board and management),
operating policies and manuals, business plans and related
information, financial records and related information, means of
gaining access to Circa's computer data systems and related
information, computer systems, software, programs and plans,
information relating to litigation to which the Company is, was, or
may be a party, information relating to all other business matters
of the Company, or any other financial, commercial, business or
technical information related to Circa unless such information has
been previously disclosed to the public by Circa, or has become
public knowledge other than by a breach of this Agreement. The
restrictions of this paragraph apply regardless of whether such
Confidential Information is in written, graphic, recorded,
electronic, photographic or any machine readable form or was orally
conveyed to Mr. Raisfeld.
(d) During the Restricted Term and thereafter, Circa
and Mr. Raisfeld agree not to disparage, criticize or ridicule the
other, whether by way of news interviews or the expression of
personal views, opinions or judgments to the news media, to the
employees of Circa or to any individual or entity with whom Circa
has or may have a business relationship, or otherwise.
(e)The provisions of this paragraph 6 shall survive
the termination or expiration of this Agreement.
Remedies.
(a)Mr. Raisfeld acknowledges that a material part of
the inducement for Circa to enter into this Agreement is his
covenants with respect to noncompetition, nondisclosure,
nonsolicitation and no defamation set forth in paragraph 6, above.
Mr. Raisfeld agrees that if he shall breach any of those covenants,
Circa shall have no further obligation to pay him any benefits
otherwise payable hereunder (except as may otherwise be required at
law) and shall be entitled to such other legal and equitable relief
as a court shall determine.
(b) In the event that Mr. Raisfeld shall violate
any provisions of paragraph 6, above, then Mr. Raisfeld hereby
agrees that Circa shall be entitled to a temporary or permanent
injunction against him by any court of competent jurisdiction
prohibiting him from violating such provision. In any proceeding
for an injunction, Mr. Raisfeld agrees that his ability to answer
in damages shall not be a bar or interposed as a defense to the
granting of such temporary or permanent injunction against him.
Mr. Raisfeld further agrees that Circa will not have an adequate
remedy at law in the event of any breach by him hereunder and that
Circa will suffer irreparable damage and injury if he breaches any
of the provisions of paragraph 6 above.
(c) In the event that Circa shall violate any
provisions of paragraph 6(d) above, then Circa agrees that
Mr. Raisfeld shall be entitled to a temporary or permanent
injunction against it by any court of competent jurisdiction
prohibiting it from violating such provision. In any proceeding
for an injunction, Circa agrees that Mr. Raisfeld will not have an
adequate remedy at law in the event of any breach by it hereunder
and that Mr. Raisfeld will suffer irreparable damage and injury if
Circa breaches the provisions of paragraph 6(d) above.
(d) The provisions of this paragraph 7 shall
survive the termination or expiration of this Agreement.
Company Releases, Covenants and Indemnification.
(a) Circa hereby releases Mr. Raisfeld from all
claims, charges or demands Circa may have based on his conduct and
activities in the ordinary course of the Company's business as an
officer, director or employee of the Company during his employment,
except from any claims that may arise from claims which may be
asserted after the date hereof against the Company based on his
acts or omissions as an officer or employee of the Company,
provided that such acts or omissions are not known to the Company
on the date hereof. This release does not include, however, the
Company's right to enforce the provisions of this Agreement.
(b) Circa promises not to file, or permit to be filed on
its behalf, any lawsuit, charge or complaint against Mr. Raisfeld
regarding the claims released in subparagraph 8(a), above.
(c) Circa shall indemnify Mr. Raisfeld for any claim
arising out of or in connection with his service as an officer or
director of the Company or any of the Company's subsidiaries or as
an employee, in the same manner and to the same extent as Circa or
such subsidiary, as the case may be, indemnifies its then current
directors, officers or employees, as the case may be. Without
limiting the foregoing, Mr. Raisfeld shall be entitled to coverage
under Circa's directors' and officers' liability insurance, at any
time such a policy is in effect, and to indemnification under
Circa's by-laws as then in effect, in each case in the same manner
as any other former officer or director of the Company, including,
without limitation, indemnification for legal expenses for any
litigation in which he is named as party by reason of having been
an officer and director of the Company, including the Deloitte,
Woods and Mills litigations, the Antitrust class action and the DLA
proceedings.
(d) Circa shall provide Mr. Raisfeld with access to such
Company records as he may require in order to defend himself in,
and copies of any settlement agreement entered into by Circa with
respect to, any litigation against Circa in which Mr. Raisfeld is
named as a party by reason of having been an officer, director or
employee of the Company. In addition, Circa shall provide Mr.
Raisfeld with notice of any claim or charge against the Company in
which Mr. Raisfeld is named as a party by reason of having been an
officer, director or employee of the Company.
Releases, Waiver and Covenants of Mr. Raisfeld.
(a) Mr. Raisfeld hereby releases Circa, including,
without limitation, its officers, directors and employees, from all
claims, charges or demands he may have based on his employment and
directorship with the Company, or based on the termination of the
Contract or his resignation from the Company, including a release
of any rights or claims he may have under Title VII of the Civil
Rights Act of 1964, and the Civil Rights Act of 1991, which
prohibit discrimination in employment based on race, color, sex,
religion, and national origin; the Americans with Disabilities Act,
which prohibits discrimination based upon disability; Section 1981
of the Civil Rights Act of 1866, which prohibits discrimination
based on race; Section 1985(3) of the Civil Rights Act of 1861,
which prohibits conspiracies to discriminate; the Employment
Retirement Income Security Act, which prohibits discrimination with
regard to benefits; any federal, state or local laws against
discrimination; or any other federal, state, or local statute, or
common law relating to employment.
This includes a release by Mr. Raisfeld of any claims for
wrongful discharge, breach of contract, torts or any other claims
in any way related to his employment with or his resignation or
separation from employment with Circa, or to the cancellation of
the Contract. Mr. Raisfeld hereby waives and releases Circa from
all other claims for payments or benefits, except as expressly
provided in this Agreement.
This release does not include, however, a release of Mr.
Raisfeld's rights to vested pension benefits, rights under any
applicable 401(k) plan or a waiver of any rights to workers'
compensation or unemployment insurance benefits or to enforce the
provisions of this Agreement.
(b) As a condition precedent to any of his rights under
this Agreement, Mr. Raisfeld agrees to execute an effective waiver
of his rights under the federal Age Discrimination in Employment
Act, which prohibits age discrimination in employment, under the
terms and conditions of the waiver, in the form attached hereto as
Exhibit A.
(c) Mr. Raisfeld promises not to file, or permit to be
filed on his behalf, any lawsuit, charge or complaint against Circa
regarding the claims released in subparagraph 9(a), above. Mr.
Raisfeld also will not permit himself to be a member of any class
seeking relief against the Company regarding any claims released in
subparagraph 9(a). If a court rules that Mr. Raisfeld may not
waive his right to file a lawsuit, charge or complaint arising from
his employment with the Company, Mr. Raisfeld agrees not to accept
any money damages or other relief.
(d) Mr. Raisfeld agrees not to disclose the terms of this
Agreement to anyone except his attorney, financial advisors or his
immediate family (spouse, children, siblings, parents), except as
may be required by law. If he does disclose the terms of this
Agreement to his attorney, financial advisors or immediate family,
he will advise them that they must not disclose the terms of this
Agreement to anyone.
Entire Agreement. This is the entire Agreement
between the Parties with respect to Mr. Raisfeld's employment with
and resignation or separation from employment with the Company and
to his severance arrangement with the Company. No representations
regarding the Company's relationship with, or obligation to, Mr.
Raisfeld have been made, or survive, except as set forth in this
Agreement. This Agreement supersedes all existing agreements,
whether written or oral, between Mr. Raisfeld and the Company
concerning his employment and his severance arrangement with the
Company. No provision of this Agreement may be amended, modified
or waived except as agreed to in writing by the Parties.
(i) Material Breach. Mr. Raisfeld further agrees that
violation by him of any paragraphs or provisions in this Agreement
or an intentional violation of subparagraph 9(d) by his attorney,
financial advisors or immediate family, shall be deemed a material
breach of the Agreement.
(i) Assignability. No rights or obligations under this
Agreement may be assigned or transferred by Mr. Raisfeld.
(i) Non-waiver.
(a) In the event Mr. Raisfeld violates or purports
to violate any of the provisions of this Agreement, the failure of
Circa at any time to enforce any of its rights or remedies with
respect thereto shall not constitute a waiver by Circa of any of
its rights and remedies to enforce this Agreement either with
respect to the same violation or any future violations by Mr.
Raisfeld of any of the provisions of this Agreement.
(b) In the event Circa violates the provisions of
paragraph 6(d) of this Agreement, Mr. Raisfeld's failure at any
time to enforce any of his rights or remedies with respect thereto
shall not constitute a waiver by Mr. Raisfeld of any of such rights
and remedies either with respect to the same violation or any
future violation by Circa of paragraph 6(d) of this Agreement.
(i) Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of New
York without reference to the principles of conflict of laws and
without regard to the state in which the violation or purported
violation of this Agreement may occur.
(i) Venue. The parties agree to submit to the
jurisdiction of the United States District Court for the Southern
District of New York or the Supreme Court of the State of New York,
New York County, for the purpose of any action to enforce any of
the terms of this Agreement.
(i) Survivorship. To the extent contemplated by this
Agreement, the respective rights and obligations of the Parties
shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and
obligations.
(i) Severability. If any provision of this Agreement
is determined by a court of competent jurisdiction not to be
enforceable in the manner set forth in this Agreement, the parties
agree that it is their intention that such provision should be
enforceable to the maximum extent possible under applicable law and
that such provisions shall be reformed to make it enforceable in
accordance with the intent of the parties. If any provisions of
this Agreement are held to be invalid or unenforceable, such
invalidation or unenforceability shall not affect the validity or
enforceability of the other portions hereof.
(i) Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original
but all of which shall constitute the same instrument.
Mr. Raisfeld acknowledges that he has read this Agreement
carefully, fully understands the meaning of the terms of this
Agreement, and is signing this Agreement knowingly and voluntarily.
Circa represents that a majority of the Board of
Directors have given verbal approval to the execution of this
Agreement on Circa's behalf.
IN WITNESS WHEREOF, Mr. Raisfeld and the Company have
caused this Agreement to be executed as of June 16, 1994.
June 16, 1994
Lawrence Raisfeld
Subscribed and sworn to before
me this day of , 1994 Notary Public
June 16, 1994 Circa Pharmaceuticals, Inc.
By:
Subscribed and sworn to before
me this day of , 1994 Notary Public
<PAGE>
EXHIBIT A
WAIVER AND RELEASE OF CLAIMS
UNDER THE FEDERAL AGE DISCRIMINATION IN EMPLOYMENT ACT
Section 7 of the federal Age Discrimination in Employment
Act ("ADEA" or "the Act") requires that you be advised to consult
with an attorney before you waive any claim under the Act. In
addition, ADEA provides you with at least 21 days to decide whether
to waive claims under the Act and seven days to revoke that waiver.
IN CONSIDERATION FOR THE COMPANY'S PAYMENT TO ME
OF SEVERANCE UNDER THE TERMS OF THE SEPARATION AGREEMENT AND
GENERAL RELEASE DATED JUNE 16, 1994 ("AGREEMENT"), I, LAWRENCE
RAISFELD, AFTER A REASONABLE OPPORTUNITY TO CONSIDER THIS AGREEMENT
AND TO CONSULT WITH LEGAL COUNSEL, HEREBY FOREVER WAIVE, RELEASE
AND DISCHARGE CIRCA PHARMACEUTICALS, INC., AND ITS PARENTS,
AFFILIATES, SUBSIDIARIES, SHAREHOLDERS, AND ANY AND ALL CURRENT AND
FORMER DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND CONTRACTORS OF
THESE COMPANIES, AND ANY AND ALL EMPLOYEE PENSION OR WELFARE
BENEFIT PLANS OR POLICIES OF THESE COMPANIES, INCLUDING PLAN OR
POLICY OF THESE COMPANIES, INCLUDING CURRENT AND FORMER
FIDUCIARIES, TRUSTEES AND ADMINISTRATORS OF THESE PLANS, FROM ALL
CLAIMS OR ACTIONS, WHETHER KNOWN OR UNKNOWN ARISING FROM OR IN ANY
WAY RELATED TO MY EMPLOYMENT OR THE TERMINATION OF MY EMPLOYMENT
FOR ANY AND ALL CLAIMS ARISING UNDER THE FEDERAL AGE DISCRIMINATION
IN EMPLOYMENT ACT OR ANY CLAIM FOR ATTORNEYS' FEES, COSTS OR
DISBURSEMENTS. FURTHER, I AGREE TO BRING NO ACTION, CHARGE, SUIT
OR OTHER PROCEEDING BASED ON ANY CLAIM ARISING FROM OR IN ANY WAY
RELATED TO MY EMPLOYMENT OR THE TERMINATION THEREOF.
In addition, by signing below I acknowledge that I have
been advised that I have 21 days to waive any claim under ADEA and
seven days to revoke that waiver.
Agreed:
____________________________
Lawrence Raisfeld
Date:_______________________
EXHIBIT B
Public Announcement of Mr. Raisfeld's Resignation
EXHIBIT C
Company Property to be Retained by Mr. Raisfeld
MacIntosh II Si
MacIntosh Image Writer
Hayes Modem
Compac ProLinea with Monitor
Epson Fx-850 Printer
Canon fax-80
Oldsmobile Wagon 1985
<PAGE>
TO WHOM IT MAY CONCERN:
Please be advised that I hereby resign, effective
immediately, as Vice-President, Financial Affairs and member of the
Board of Directors of Circa Pharmaceutical, Inc.
___________________________
LAWRENCE RAISFELD
Dated: ____________, 1994
Copiague, New York
<PAGE>
TO WHOM IT MAY CONCERN:
Please be advised that I hereby resign, effective
immediately, as an officer and director of American Triumvirate
Insurance Company
___________________________
LAWRENCE RAISFELD
Dated: ____________, 1994
Copiague, New York
<PAGE>
1994 ANNUAL REPORT TO SHAREHOLDERS
EXHIBIT 13.2
CIRCA PHARMACEUTICALS, INC.
1994 ANNUAL REPORT
CIRCA PHARMACEUTICALS, INC.
SELECTED FINANCIAL DATA
Statements of Operations
Years ended December 31,
1994 1993 1992 1991 1990
Net
sales
$ 7,801,481 $3,291,280 $ 89,015 $1,321,649 $15,567,784
Net income
(loss)
17,259,045 8,395,248 (9,684,860) (56,777,340) (27,423,841)
Net income
(loss)
per share* .79 .38 (.44) (2.62) (1.28)
Cash dividends
per share** .04
Balance Sheets December 31,
1994 1993 1992 1991 1990
Current
assets
$57,656,175 $47,828,864 $41,134,525 $28,528,357 $94,188,048
Current
liabilities
6,218,615 13,011,998 18,140,466 12,167,962 29,034,737
Working
capital
51,437,560 34,816,866 22,994,059 16,360,395 65,153,311
Total
assets
103,857,032 102,409,285 99,301,982 98,332,541 151,944,389
Shareholders'
equity
82,001,343 64,030,612 58,112,834 65,457,906 121,305,483
* Net income (loss) per share is computed based on the weighted
average number of shares outstanding.
** The Company has not declared a dividend since 1990.
CIRCA PHARMACEUTICALS, INC.
LETTER TO SHAREHOLDERS
Dear Shareholders,
Success in the healthcare industry, in the next few years and into
the next century, will require companies to reevaluate goals and
objectives much more frequently than they have done in the past.
In our industry, the changes are dramatic and occurring so quickly
that mission statements and long-range plans can become obsolete
overnight. Management must have the courage to respond rapidly and
take advantage of opportunities that, by nature, surface with
changing environments.
In this era of real-time information, and just-in-time
manufacturing, reaction time will determine the winners. The great
hockey players are above the rest of the field because they skate
to where the hockey puck will be, not where it is now. Being able
to categorize a company as generic, proprietary, or consumer-
oriented may be comfortable, but will not guarantee success, and
may allow opportunities outside the "defined" business to be
overlooked. The ongoing consolidations have resulted in a new
playing field. We will grow and prosper by aggressively and
quickly seeking opportunities without predetermined boundaries and
considering all possible strategic alliances.
In my 1993 letter to shareholders, I promised we would continue to
diversify, and in 1994, we moved forward with that plan. Our first
drug approval since 1989 occurred on November 23, 1994, for
glipizide, based on an Abbreviated New Drug Application (ANDA).
This approval validated our facility as being in compliance with
current Good Manufacturing Practices (cGMP) and was a result of our
staff's dedicated efforts. We shipped the product to our customers
on the same day we received the approval letter, the day before
Thanksgiving, because we knew that in order to be competitive we
could not afford complacency. We view the approval and the sales
it will generate as a "shot in the arm." It did not make us a
generic pharmaceutical company. It is one small part of an entire
program of diversification.
In November of 1994, we also filed a New Drug Application (NDA) for
a well-known and frequently-used cardiovascular agent. This
proprietary product has a new strength and dosage form and should
receive three years of exclusivity if approved. We hope this agent
will fill a need for patients and be well received once approval is
obtained. Although a proprietary product, it alone does not make
us a proprietary company.
In 1994, we filed an application with the FDA for a nicotine gum.
We believe that smoking cessation is an area of important health
concern. We believe an alternative to the currently marketed
product should exist. We will be pursuing the registration of this
product in other countries over the next several years. We have
worked for over four years on gum technology, and are committed to
CIRCA PHARMACEUTICALS, INC.
LETTER TO SHAREHOLDERS
the delivery of a number of pharmaceuticals through this process,
both as over-the-counter and prescription products. We have also
submitted an application to obtain a patent for a process that
describes a dissolvable chewable dosage form. In our research and
development program we have shifted our emphasis to more difficult
and more technology-driven products, specifically sustained-
release. In an effort to enter the race for the sustained-release
opportunity with commitment, we purchased a 7.5% equity position in
Andrx Corporation for $6 million. Additionally, the Company and
Andrx entered into a joint venture (Ancirc) to develop six products
utilizing Andrx's sustained-release technology.
We initially considered contract manufacturing in an effort to
cover overhead while we awaited the lengthy research, development,
and approval process for pharmaceuticals of our own. We quickly
realized that pharmaceutical services, represented by product
development, regulatory affairs, analytical services,
manufacturing, and packaging, appeared to be a viable business
opportunity. Companies are increasingly outsourcing these
functions, and we are positioning ourselves through an all-out
effort in 1995 to service the industry.
Somerset, our 50% owned joint venture with another pharmaceutical
company, had another record year in sales, generating $125 million
in net sales, which resulted in $25 million in earnings and $21
million in cash to Circa. We anticipate another good year in 1995
for the sales of Eldepryl, a treatment for Parkinson's disease, as
progress is made in the clinical development program for the
Eldepryl patch for new indications, as well as the development
program for ipriflavone, indicated for osteoporosis. We believe
the opportunity at Somerset goes well beyond the current Eldepryl
tablet, and we expect Somerset's pipeline to have a significant
impact on Circa for years to come.
Dilacor XR, the once-a-day calcium antagonist marketed by Rhone-
Poulenc Rorer, Inc., had net sales of $120 million in 1994 which
generated a royalty to Circa of $1.2 million. Our royalty on net
sales increased from one percent in 1994 to twenty percent on
January 1, 1995 through 1996, and increases to twenty-two percent
of net sales in 1997 through the year 2000. Although the product
loses exclusivity on May 29, 1995, at this time we are unaware of
any pending generic applications.
<PAGE>
CIRCA PHARMACEUTICALS, INC.
LETTER TO SHAREHOLDERS
We ended the year with a strong balance sheet, with cash and
marketable securities of $50 million. We generated a net income of
$17 million for 1994, and ranked fifth on the American Stock
Exchange for return to investors, recording a 90% return in stock
price from December 31, 1993 to December 31, 1994. We have emerged
from our past in a full sprint and will seek out opportunities
wherever they may be, in an effort to continue to deliver quality
products and increasing profitability.
Yours truly,
Melvin Sharoky, M.D.
President and Chief Executive Officer
<PAGE>
CIRCA PHARMACEUTICALS, INC.
During 1994, Circa Pharmaceuticals, Inc. proceeded with its
plan to diversify into various areas of the healthcare industry.
Management sought opportunities that would build on the Company's
experience as a manufacturer of pharmaceutical products, as well as
take advantage of the dramatic changes occurring in the healthcare
field. It is important to recognize that during the process of the
Company's diversification, classical definitions of the
pharmaceutical industry such as generic, proprietary, or consumer-
oriented business operations will no longer apply. Circa is a
company that delivers quality products and services, and is
oriented towards increasing profitability.
The Company's future success will derive from the foundation
offered by a strong balance sheet, manufacturing facilities in full
compliance with current Good Manufacturing Practices (cGMP),
pharmaceutical services, diversified strategic partnerships for
niche products, novel methods of drug delivery, and a team of
trained and responsive personnel.
Circa's Financial Resources Offer Opportunities for Growth
Circa's financial resources include a strong balance sheet, a
50% interest in Somerset Pharmaceuticals, Inc. (Somerset), and a
royalty stream from the sales of Dilacor XR.
Circa's balance sheet includes cash and marketable securities
of approximately $50 million, working capital of $51 million and
shareholders' equity of $82 million with no long-term debt.
Circa's 50% interest in Somerset, which manufactures and
markets Eldepryl for the treatment of Parkinson's disease,
provided $25 million in earnings in 1994, $24 million in 1993 and
$21 million in 1992. Exclusivity expires for the Eldepryl tablet
in June of 1996; however, Somerset is committed to the development
of other products. Somerset continues with its development
program for the Eldepryl patch. During 1995, phase II clinical
studies are being conducted on the patch for multiple neurological
disorders. Somerset is also developing ipriflavone, a product for
the treatment of osteoporosis. Ipriflavone is currently marketed
in Japan, Italy, Hungary, and Argentina. An Investigational New
Drug Application (IND) was filed in January 1995 for this product.
It is expected that Somerset's research and development pipeline
will have a significant impact on Circa for many years.
Another positive contribution to Circa is the royalty stream
generated from the sales of Dilacor XR, a treatment for
hypertension and angina, which is marketed by Rhone-Poulenc Rorer,
Inc. (RPR). Circa's royalty from the sales of Dilacor XR increased
from 1% in 1994 to 20% on January 1, 1995. The Dilacor XR product
loses exclusivity in May of 1995; however, at this time we are
unaware of any pending generic applications. In February 1995, RPR
CIRCA PHARMACEUTICALS, INC.
announced that the U.S. International Trade Commission (ITC)
rejected a patent claim filed by Marion Merrell Dow, Inc. (MMD) and
Tanabe Seiyaku Company, Ltd. (Tanabe) concerning diltiazem
hydrochloride. The ITC ruling supports RPR's original position
that Dilacor XR does not infringe the MMD/Tanabe patent under any
circumstances.
With these financial resources, in addition to the income
provided by the recent approval of glipizide, Circa can vigorously
pursue strategic partnerships and acquisitions that will enable it
to complement our existing capabilities.
Generic and Proprietary Product Development
Among the most exciting developments of 1994 was the Food and
Drug Administration (FDA) approval of our Abbreviated New Drug
Application (ANDA) for glipizide, a treatment for
non-insulin-dependent diabetes (Type II diabetes). Glipizide is
the generic version of Glucotrol. The market for the brand name
and generic products has been estimated at $200 million annually.
There can be no assurance that the sale of glipizide will
contribute materially to the Company's future operating results.
While this approval does not indicate that we are a generic
pharmaceutical company, it does signify that our diligence and
commitment in rehabilitating Circa over the past several years has
met with success, and that approvals of generic products will be
one aspect of our operations.
The Company has evaluated the generic industry and the
narrowing margins of generic commodity products. Therefore, a
number of products in our development program have been eliminated.
The Company has shifted its efforts to more technology driven
products, such as sustained-release dosage forms and chewing gum
technology.
In November 1994, Circa filed a New Drug Application (NDA) for
a widely-used cardiovascular agent, seeking approval for a new
strength and dosage form of this product. This agent is expected
to receive three years of exclusivity, and will be manufactured at
our Copiague facility if approved. This product is an example of
the Company's strategy for targeting unique products and
technologies that will face less competition.
Circa's Manufacturing and Personnel Resources Offer Myriad Services
to Customers
Circa's manufacturing facilities are currently utilized to
manufacture products for both Circa and others in the
pharmaceutical industry. In an effort to cover Circa's overhead,
contract manufacturing has been evaluated. Since it has become
CIRCA PHARMACEUTICALS, INC.
evident that companies are increasingly outsourcing functions, a
decision was made to enter the business of providing services to
the pharmaceutical industry. Circa's manufacturing resources
include a 160,000 square foot facility in Copiague, New York. In
addition, Circa has a 60% interest in a 26,000 square foot
microencapsulation facility in Dayton, Ohio. Both facilities,
which are in full compliance with the FDA's CGMP requirements,
enable Circa to provide small and large-scale contract
manufacturing services to clients worldwide.
At Copiague, Circa can provide analytical, stability, and
packaging services to our customers. Our skilled staff can assist
with pharmaceutical product development, as well as
regulatory and quality assurance activities. We can manufacture
product lines using solid dosage and gum drug-delivery systems.
The solid dosage products manufactured at Copiague include tablets,
capsules, and sustained-release products. At Dayton, Circa can
provide microencapsulation capabilities via a coacervation
technology; roto-granulations and drying; and solvent and
non-solvent based coatings.
At these facilities, we expect to address the needs of a
variety of customers in the next several years. For example,
prospective customers might be companies affected by
downsizing in the industry, or they might be small-to-medium size
pharmaceutical or biotechnology companies without their own
full-scale manufacturing facilities.
Additionally, Circa expects to assist foreign companies
requiring a manufacturing presence in the United States, as well as
foreign companies needing our regulatory expertise as they prepare
to meet stringent FDA guidelines.
Circa's Exploration into Novel Dosage Forms
Success in our research efforts directed at drug delivery is
demonstrated by our progress with gum-delivery technology during
the past four years. The Company has been working on a number of
products in this area, including over-the-counter (OTC) and
prescription products. In 1994, an application was filed with the
FDA for nicotine chewing gum. The Company is excited about this
product and will pursue its registration in other countries over
the next few years. The gum development group has also created a
number of other OTC products.
In the fourth quarter of 1994, the gum development group filed
a patent application for Quick Dissolve Chewables (QDC). The
group is currently evaluating three OTC products using this
technology, and strategic partners will be sought to help promote
this product line.
CIRCA PHARMACEUTICALS, INC.
Strategic Partnerships and Niche Product Development
Circa's additional strategic partnerships include those with
Andrx Corporation, Hi-Tech Pharmacal, Generics Group BV, and
Packaging Concepts, Inc. These relationships demonstrate Circa's
emphasis on niche products and our commitment to developing
alternative dosage forms and drug-delivery systems.
In a strategic alliance formed in 1994, Circa announced it had
acquired a 7.5% equity interest in Andrx. It also announced plans
to jointly develop, manufacture, and market at least six
controlled-release generic pharmaceutical products with Andrx.
The Andrx joint venture illustrates Circa's response to
current trends in the pharmaceutical industry. Our agreement with
Andrx will enable Circa to develop products facing less
competition, in this case because they utilize a challenging
delivery system. We will continue to pursue similar arrangements
with other companies.
In the agreement with Hi-Tech Pharmacal, ANDAs for five
generic solutions/suspensions are being developed. Currently, one
ANDA application is pending approval and two ANDA submissions are
anticipated shortly. The joint venture agreement entered with
Generics Group BV is for the co-development of several solid-dosage
generic products and an aerosol product. An ANDA application was
submitted to the FDA for one of the solid-dosage forms during the
fourth quarter of 1994.
Circa is also working jointly with Packaging Concepts to
develop OTC products in aerosol, solution, foam and powder form.
This collaboration has yielded a number of OTC products, including
items such as Miconazole Spray Powder, which is an antifungal used
to treat athlete's foot.
With respect to any product currently being developed by the
Company internally or with joint venture partners, or any product
for which a NDA, IND or patent application has been filed, there
can be no assurance that such applications shall be approved, or if
approved, that such product will contribute materially to the
Company's future operating results.
Our diversified strategic partnerships enable us to reach a
wide variety of market segments with a broad product portfolio.
Circa Prepares to Meet Market Challenges
Success in the healthcare industry in the next few years will
depend on a company's ability to respond to market pressures,
demographic trends, and even governmental legislation quickly and
efficiently. A company will need to have enough working capital to
CIRCA PHARMACEUTICALS, INC.
pursue partnerships and dedicate resources as required.
At Circa, we not only recognize the challenges that lie ahead,
we have the resources required to meet these challenges.
<PAGE>
CIRCA PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In November 1994, the Company received its first product
approval from the Food and Drug Administration (FDA) since 1989.
This approval confirmed the acknowledgement by the FDA in April
1993 that the Company had been successfully rehabilitated and
validated that the Copiague facility is in compliance with "current
Good Manufacturing Practices".
During 1994, the Company recognized $1.2 million of royalty income,
generated from the sales of Dilacor XR, which is marketed by
Rhone-Poulenc Rorer, Inc. (RPR). During 1993, the Company
restructured its agreement with RPR which allows Circa to earn
royalties on the sales of Dilacor XR at the rate of 1% in 1994, 20%
in 1995 and 1996, 22% from 1997 to 2000 and 3% thereafter. As
royalties are earned, they first offset the outstanding partnership
liability before providing cash flow to the Company. At December
31, 1994, the outstanding partnership liability was approximately
$14 million.
The Company has resolved virtually all of its lawsuits and
believes that any remaining unsettled litigation will not have a
material impact upon the Company's financial position and future
operations.
RESULTS OF OPERATIONS
Year Ended December 31, 1994
The Company reported net income of $17,259,000 for the year
ended December 31, 1994, compared to net income of $8,395,000 for
the year ended December 31, 1993. Income in 1994 and 1993 was
primarily attributable to $25,100,000 and $23,800,000,
respectively, of income from Somerset Pharmaceuticals, Inc.
(Somerset), a 50% owned joint venture. The primary reasons for the
increase in net income in 1994 were sales of a generic prescription
product, royalty income from the sale of Dilacor XR, the absence of
a loss recognized from the partnership with RPR and a gain from a
settlement with a former officer. These increases were offset by
a decrease in investment income, principally the sale of shares of
Marsam Pharmaceuticals, Inc. ("Marsam") common stock.
Net sales were $7,801,000 in 1994, compared to $3,291,000 in
1993, an increase of $4,510,000 or 137%. The increase resulted
from the sale of glipizide which commenced immediately after the
Company received approval from the FDA on November 23, 1994.
Additionally, during 1994, RPR reported net sales of Dilacor XR of
approximately $120 million which generated $1,200,000 of royalty
income to the Company. Net sales for 1993 were attributable to
sales of nitroglycerin transdermal patches. Glipizide sales and
the royalties from Dilacor XR also had the effect of increasing the
gross profit percentage from 23% in 1993 to 53% in 1994.
Research and development expenses were $7,891,000 in 1994,
CIRCA PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
compared to $4,983,000 in 1993, representing an increase of
$2,908,000 or 58%. The primary reason for the increase was the
Company's expansion of its research and development program
following the rehabilitation by the FDA in April 1993.
Manufacturing overhead was $3,955,000 in 1994, compared to
$3,999,000 in 1993. As the Company increases its operations,
including production of its own products, contract services and
services to joint ventures, these costs will be absorbed into cost
of sales. Selling and administrative expenses were $7,653,000 in
1994, compared to $10,595,000 in 1993, representing a decrease of
$2,942,000 or 28%. The decrease was primarily attributable to a
reduction in legal expenses, as a significant portion of pending
litigation was resolved in 1993.
In November 1994, the Company settled its litigation with a
former President, who resigned in 1990. The former President sold
all of the 528,108 shares of Circa's common stock owned by him.
The proceeds from the sale of a substantial portion of such shares,
after payment of expenses and various taxes, were utilized to
settle the Company's claim that his conduct damaged the Company and
also to reimburse the Company for $1,331,000 in legal expenses paid
on his behalf in past years. The Company recognized a gain from
settlement of approximately $2,299,000.
Investment income was $6,143,000 in 1994, compared to
$18,535,000 in 1993, representing a decrease of $12,392,000. In
1994, the Company recognized gains of $3,180,000 on the sale of
302,000 shares of its investment in Marsam common stock as compared
to gains of $14,491,000 on the sale of 847,000 shares in 1993.
In 1993, the Company recognized a loss from the partnership
with RPR of $7,644,000. In April 1993, the Company restructured
its agreement with RPR which provides that the Company will no
longer share in the profits and losses of the partnership and
allows the Company to earn royalties from the sale of Dilacor XR.
Other expenses, net were $715,000 in 1994, compared to
$2,070,000 in 1993, representing a decrease of $1,355,000. The
decrease is attributable to the recording of reserves on the
realization of certain assets in 1993, with no such reserves
recorded in 1994.
For the year ended December 31, 1994, the Company has
provided $110,000 for federal and state taxes. At December 31,
1994, the Company's net operating loss carryforward, for federal
income tax purposes was approximately $77,500,000, which, if not
utilized, will begin to expire in the year 2006.
CIRCA PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Year Ended December 31, 1993
The Company reported net income of $8,395,000 for the year
ended December 31, 1993, compared to a net loss of $9,685,000 for
the year ended December 31, 1992. The primary reason for the
increase in net income in 1993 was the increase in investment
income which in 1993 included gains of $14,491,000 on the sales of
shares of Marsam common stock as compared to $1,085,000 in 1992.
Included in the Company's statements of operations for 1993 and
1992 were $23,800,000 and $20,600,000, respectively, of income from
Somerset.
Net sales were $3,291,000 during 1993, compared to $89,000 for
1992. The increase resulted from the sale of transdermal patches
for which the Company became a distributor in January 1993.
Research and development expenses were $4,983,000 in 1993,
compared to $2,861,000 in 1992, representing an increase of
$2,122,000 or 74%. The primary reason for the increase was the
Company's expansion of its research and development program
following the rehabilitation by the FDA in April 1993.
Manufacturing overhead was $3,999,000 in 1993, compared to
$3,892,000 in 1992. As the Company increases operations, these
costs will be absorbed into cost of sales. Selling and
administrative expenses were $10,595,000 in 1993, compared to
$11,385,000 in 1992, representing a decrease of $790,000 or 7%.
Included in selling and administrative expenses were legal costs of
$4,000,000 in 1993 and $4,100,000 in 1992.
The Company resolved several material lawsuits during 1993,
including its alleged violation of Federal Antitrust statutes,
which was settled with the Justice Department for $1,100,000. In
addition, the Company settled separate actions with KV
Pharmaceuticals and Barr Laboratories for an aggregate amount of
$3,690,000. In September 1993, Circa received a $1,100,000 refund
from a settlement fund established in 1991 for a class action
lawsuit against the Company. In October 1993, the Company settled
its suit against a former officer which resulted in the officer
returning 367,308 shares of the Company's common stock for
repayment of legal expenses incurred on his behalf as well as
general damages and recorded a gain of $2,500,000 on the
transaction. Income from these settlements was offset during the
third and fourth quarters of 1993 by an increase in the allowance
for possible future legal settlements.
Investment income was $18,535,000 in 1993 as compared to
$4,069,000 in 1992, representing an increase of $14,466,000. In
1993, the Company recognized a gain of $14,491,000 on the sale of
847,000 shares of its investment in Marsam as compared to a gain of
CIRCA PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
$1,085,000 on the sale of 105,000 shares in 1992.
In 1993, the Company recognized a loss from the partnership
with RPR of $7,644,000 as compared to $15,598,000 in 1992. In
April 1993, the Company restructured its agreement with RPR
effective September 1, 1993, which allows the Company to earn
royalties from the sale of Dilacor XR.
Other expenses, net were $2,070,000 in 1993, as compared to
$780,000 in 1992, representing an increase of $1,290,000. The
increase is attributable to the recording of reserves on the
realization of certain assets in 1993.
At December 31, 1993, the Company's net operating loss
carryforward, for federal income tax purposes was approximately
$76,000,000, which, if not utilized, will begin to expire in the
year 2006.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $34,800,000 at December 31,
1993 to $51,400,000 at December 31, 1994. The increase of
$16,600,000 was primarily attributable to $18,000,000 and
$2,900,000 of Somerset dividends and management fee, respectively,
$8,000,000 on the sale of the Company's 50% interest in a joint
venture, and $3,900,000 from sales of shares of Marsam common
stock. These increases were offset by investments in joint
ventures of $7,500,000 and working capital used for operating
activities.
At December 31, 1994, the Company had commitments of
approximately $2,600,000 to third parties for research and
development. The Company anticipates capital expenditures relating
to its expansion into alternative delivery systems, including
chewables and sustained release products. Research and development
commitments and capital expenditures will be funded through current
working capital. Primary sources of working capital for 1995 will
continue to be dividends and management fees from Somerset.
Additionally, a source of working capital in 1995 will be proceeds
from the sale of the Company's products and services. The Company
anticipates that its existing capital resources are sufficient to
meet its requirements based on its current business plans.
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
1994 1993
ASSETS
Current assets:
Cash and cash equivalents $ 19,666,933 $ 2,410,819
Marketable securities 30,533,630 36,182,077
Securities held as collateral 5,000,000
Accounts receivable, net 3,629,728 638,242
Inventory 1,697,710 1,820,883
Other current assets 2,128,174 1,776,843
Total current assets 57,656,175 47,828,864
Property, plant and equipment, net 12,488,120 12,535,586
Investments in joint ventures 31,824,227 29,473,160
Securities held as collateral 9,147,156
Other assets 1,888,510 3,424,519
$103,857,032 $102,409,285
<PAGE>
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,218,615 $ 5,102,659
Current portion of legal settlements 7,909,339
Total current liabilities 6,218,615 13,011,998
Deferred partnership liability 14,032,912 15,242,000
Legal settlements 7,603,845
Deferred income 1,604,162 2,520,830
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value
$.01 per share; authorized
10,000,000 shares Common stock,
par value $.01 per share;
authorized 70,000,000 shares;
issued and outstanding
22,110,120 in 1994 and 22,083,420
in 1993 221,101 220,834
Capital in excess of par value 62,825,255 62,570,547
Retained earnings 25,745,891 8,486,846
Less:
Unrealized loss on
marketable securities (808,542)
Treasury stock, at
cost; 367,308 shares (3,168,031) (3,168,031)
Unearned compensation-
stock awards (2,814,331) (4,079,584)
Total shareholders' equity 82,001,343 64,030,612
$103,857,032 $102,409,285
See accompanying notes to consolidated financial statements
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1994 1993 1992
Net sales $ 7,801,481 $3,291,280 $ 89,015
Operating costs and
expenses:
Cost of goods sold 3,629,297 2,530,630 38,497
Research & development 7,890,549 4,982,720 2,861,195
Manufacturing overhead 3,955,245 3,999,075 3,891,644
Selling and
administrative 7,653,303 10,595,150 11,384,847
Loss from operations (15,326,913) (18,816,295) (18,087,168)
Equity in earnings of
joint ventures 24,968,460 24,687,636 20,711,672
Gain from (provision for)
legal settlements 2,298,921 (6,296,969)
Investment income 6,143,469 8,535,100 4,068,783
Partnership loss (7,644,000) (15,598,000)
Other expenses, net (714,892) (2,070,224) (780,147)
Income (loss) before
income taxes 17,369,045 8,395,248 (9,684,860)
Income taxes 110,000
Net income (loss) $17,259,045 $8,395,248 ($9,684,860)
Net income (loss) per share $.79 $.38 ($.44)
Weighted average shares
outstanding 21,725,531 22,047,209 22,152,329
See accompanying notes to consolidated financial statements
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31,
1994 1993 1992
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $17,259,045 $8,395,248 ($9,684,860)
Items not affecting cash:
Depreciation 1,434,796 1,496,023 1,661,753
Amortization of unearned
compensation, net 1,491,191 1,470,724 2,593,581
Amortization of
deferred income (916,668) (916,668) (916,668)
Equity in net earnings
of joint ventures (20,944,863) (20,796,016) (17,193,221)
Decrease in joint
venture liability (1,209,088)
Partnership loss 7,644,000 15,598,000
Gain on sale of shares
of Marsam common stock (3,179,697) 14,490,801) (1,085,595)
Gain on settlements with
former officers (2,298,921) (3,415,531)
Gain on sale of
Puerto Rico facility (950,000)
Allowance for
recalled products 750,000 (2,271,529)
Change in assets and liabilities:
Increase in accounts
receivable, net (2,991,486) (638,242)
(Increase) decrease
in inventory 123,173 (795,507) (322,440)
(Increase) decrease
in other assets (27,774) 1,062,740 (893,478)
Increase in accounts payable
and accrued expenses 114,507 3,243,182 2,493,911
Legal settlements (10,881,062) (5,255,990) (6,864,201)
Decrease in income
taxes refundable 8,885,357
Receipt of deferred income 2,750,000
Cash used for
operating activities ($22,026,847) ($22,246,838) ($6,199,390)
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
Years Ended December 31,
1994 1993 1992
CASH FLOW FROM INVESTING ACTIVITIES
Dividends received
from joint venture $18,000,000 $17,688,078 $18,692,124
(Increase) decrease
in marketable securities
and securities held
as collateral 18,297,727 (4,478,991) (20,086,764)
(Additions to) disposals
of property, plant and
equipment, net (1,387,330) (528,639) 322,645
(Increase) decrease in
investments in joint
ventures (7,517,987) 676,416 574,416
Proceeds from sale of
shares of Marsam
common stock 3,869,031 16,428,074 1,325,625
Proceeds from sale
of a joint venture 7,992,483
Payment to partnership (8,000,000)
Proceeds from sale of
Puerto Rico facility 7,000,000
Cash provided by
investing activities 39,253,924 21,784,938 7,828,046
Exercise of stock options 29,037 17,338 107,907
Purchase and retirement
of stock (825,000) (86,700)
Cash provided by (used for)
financing activities 29,037 (807,662) 21,207
Increase (decrease) in
cash and cash equivalents 17,256,114 (1,269,562) 1,649,863
Cash and cash equivalents
at beginning of year 2,410,819 3,680,381 2,030,518
Cash and cash equivalents
at end of year $19,666,933 $ 2,410,819 $ 3,680,381
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
Cash paid during the year for:
Interest (imputed) $591,448 $483,000 $236,000
Income taxes
See accompanying notes to consolidated financial statements
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital Unrealized
Common in excess Loss on
Stock of Par Retained Marketable
Shares Amount Value Earnings Securities
Balance
December
31, 1991 22,096,198 $220,962 $61,890,936 $9,776,458
Shares issued
upon exercise
of stock
options 12,022 120 107,787
Shares issued
to employees 55,000 550 738,825
Cancellation of
shares
issued to
employees (6,800) (68) (86,632)
Amortization
of unearned
compensation
Net loss (9,684,860)
Balance
December
31, 1992 22,156,420 221,564 62,650,916 91,598
Shares issued
upon exercise
of stock
options 4,500 45 17,293
Shares issued to
employees 400,000 4,000 2,858,500
Cancellation of
shares
issued to
employees (477,500) (4,775) (2,956,162)
Amortization of
unearned
compensation
Stock settlement
with former officer
Net income 8,395,248
Balance
December
31, 1993 22,083,420 220,834 62,570,547 8,486,846
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Continued)
Capital Unrealized
Common in excess Loss on
Stock of Par Retained Marketable
Shares Amount Value Earnings Securities
Shares issued upon
exercise of stock
options 4,200 42 28,995
Shares issued to
employees 30,000 300 325,950
Cancellation of shares
issued to
employees (7,500) (75) (100,237)
Amortization of
unearned
compensation
Unrealized loss on
marketable
securities ($808,542)
Net income 17,259,045
Balance
December
31, 1994 22,110,120 $ 221,101 $62,825,255 $25,745,891 ($808,542)
<PAGE>
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Continued)
Unearned Total
Treasury Compensation Shareholders'
Stock Stock Awards Equity
Balance
December 31, 1991 ($6,430,450) $65,457,906
Shares issued
upon exercise
of stock options 107,907
Shares issued to
employees (739,375)
Cancellation of
shares issued
to employees (86,700)
Amortization of un-
earned compensation 2,318,581 2,318,581
Net loss (9,684,860)
Balance
December 31, 1992 (4,851,244) 58,112,834
Shares issued
upon exercise
of stock options 17,338
Shares issued to
employees (2,862,500)
Cancellation of shares
issued to employees 2,163,437 (797,500)
Amortization of
unearned
compensation 1,470,723 1,470,723
Stock settlement
with former officer ($3,168,031) (3,168,031)
Net income 8,395,248
Balance
December 31, 1993 (3,168,031) (4,079,584) 64,030,612
<PAGE>
CIRCA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Continued)
Unearned Total
Treasury Compensation Shareholders'
Stock Stock Awards Equity
Shares issued upon
exercise of stock
options 29,037
Shares issued to
employees 326,250
Cancellation of
shares issued
to employees 80,249 (20,063)
Amortization
of unearned
compensation 1,185,004 1,185,004
Unrealized
loss on
marketable
securities (808,542)
Net income 17,259,045
Balance
December 31, 1994 ($3,168,031) ($2,814,331) $82,001,343
See accompanying notes to consolidated financial statements
<PAGE>
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts
of Circa Pharmaceuticals, Inc. and its wholly owned subsidiaries
(the "Company" or "Circa"). All significant intercompany
transactions and balances have been eliminated.
Cash Equivalents
The Company considers money market funds and highly liquid
debt instruments purchased with original maturities of three months
or less, to be cash equivalents.
Marketable Securities
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities",which is effective for fiscal years beginning after
December 15, 1993. SFAS No. 115 requires that marketable equity
securities and all debt securities be classified into three
categories; (i) held to maturity securities, (ii) trading
securities and (iii) available for sale securities. The Company's
marketable securities are classified as available for sale and
accordingly, unrealized gains and losses are reported as a separate
component of shareholders' equity. The cost related to marketable
securities sold is determined utilizing the specific identification
method.
Inventory
Inventory is stated at the lower of cost or market. The cost
of raw materials is determined on the specific identification
method. Labor and overhead costs included in inventory are
determined on the average cost basis.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost.
Expenditures for major renewals and improvements to property and
equipment are capitalized, and expenditures for maintenance and
repairs are charged to operations as incurred. When assets are
retired or otherwise disposed of, their cost and related
accumulated depreciation are eliminated from the accounts. Any
resulting gain or loss is included in the consolidated statements
of operations. Depreciation is provided using the straight-line
method. Estimated lives are between five and thirty-three years.
Unearned Compensation
The Company maintains stock award plans which provide for the
issuance of shares of common stock to key employees and officers.
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
If the recipients of such shares leave the Company's employment
prior to certain agreed upon dates, they must return some or all of
the awarded shares to the Company. Unearned compensation is
recorded as a separate component of shareholders' equity for the
fair market value of the shares issued and such amounts are charged
on a straight-line basis to selling and administrative expenses
over the related vesting periods.
Income Taxes
Provision for income taxes is based on income and expenses
reported in the consolidated financial statements. Deferred income
taxes result from differences in recording assets and liabilities
for financial reporting and tax purposes. The Company adopted SFAS
No. 109 "Accounting for Income Taxes" for the year ended December
31, 1993. The effect of adopting SFAS No. 109 in 1993 was not
material to the Company's financial position.
Research and Development
Research and development costs are expensed as incurred.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average
number of common shares and equivalents outstanding for each year.
The effect of stock options was less than 3% of the weighted
average shares outstanding in 1994 and 1993, and was antidilutive
in 1992. Accordingly, all common share equivalents were excluded in
earnings per share for the years ended December 31, 1994, 1993 and
1992.
Concentration of Credit Risk
For the year ended December 31, 1994, sales to three
customers were approximately 23%, 19% and 11% of net sales. For
the years ended December 31, 1993 and 1992 sales to one customer
were approximately 28% and 18%, respectively, of net sales. During
the year ended December 31, 1994, the Company sold pharmaceuticals
and related over-the-counter products primarily to distributors
throughout the United States.
2. MARKETABLE SECURITIES
Effective January 1, 1994, the Company adopted the provisions
of SFAS No. 115. The Company's marketable securities are
classified as available for sale, and accordingly, the unrealized
loss at December 31, 1994 was recorded as a separate component of
shareholders' equity. If the Company had adopted SFAS No. 115 as
of December 31, 1993, shareholders' equity would have increased by
approximately $12 million. SFAS No. 115 would not have resulted in
a material impact on the consolidated statement of operations for
the year ended December 31, 1993.
Prior to January 1, 1994, the Company accounted for
CIRCA PHAMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
marketable securities under the provisions of SFAS No. 12
"Accounting for Certain Marketable Securities". Investments in
United States government securities, municipal bonds and other
investments were valued at cost. Investments in equity securities
were valued at the lower of aggregate cost or market.
At December 31, 1994 and 1993, the Company owned
approximately 334,000 and 635,000 shares, respectively, of Marsam
Pharmaceuticals, Inc. ("Marsam") common stock, a publicly traded
company formed to develop and manufacture injectable generic
pharmaceutical products. During the years ended December 31, 1994,
1993 and 1992 the Company sold approximately 302,000, 847,000 and
105,000 shares of Marsam common stock and recorded gains of
approximately $3,180,000, $14,491,000 and $1,085,000 included as
investment income within the consolidated statements of operations.
Marketable securities at December 31, 1994 and 1993 are
summarized as follows:
December 31, 1994
UNREALIZED
MARKET HOLDING
COST VALUE GAIN (LOSS)
Fixed income securities $25,931,312 $23,321,036 ($2,610,276)
Equity securities 4,648,296 3,876,794 (771,502)
Marsam 762,564 3,335,800 2,573,236
$31,342,172 $30,533,630 ($ 808,542)
December 31, 1993
CARRYING MARKET
VALUE VALUE
Fixed income securities $17,654,441 $17,790,301
Equity securities 17,075,761 17,075,761
Marsam 1,451,875 13,652,500
$36,182,077 $48,518,562
As of December 31, 1994, gross unrealized gains and losses on
fixed income securities were $21,856 and $2,632,132, respectively.
As of December 31, 1994, excluding Marsam common stock, gross
unrealized gains and losses on equity securities were $74,820 and
$846,322, respectively.
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 1994 maturity dates on fixed income
securities ranged from 1995 to 2024.
As of December 31, 1993, marketable securities with an
aggregate cost of $14,147,156 and aggregate market value of
$14,286,836 were classified as securities held as collateral,
pursuant to the provisions of two prior and then outstanding legal
settlements.
3. INVENTORY
Components of inventory are summarized as follows:
December 31,
1994 1993
Raw materials $ 152,434 $ 132,841
Work in process 268,223 67,207
Finished goods 1,277,053 1,620,835
$1,697,710 $1,820,883
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
December 31,
1994 1993
Land $ 1,049,189 $ 1,049,189
Buildings 12,612,158 12,434,245
Vehicles 92,836 92,836
Machinery and equipment 14,593,506 13,496,285
Furniture and fixtures 1,784,514 1,672,318
30,132,203 28,744,873
Less, accumulated depreciation (17,644,083) (16,209,287)
$ 12,488,120 $ 12,535,586
5. INVESTMENTS IN JOINT VENTURES
Somerset Pharmaceuticals, Inc. ("Somerset")
In June 1989, the Company acquired a 50% interest in the
outstanding common stock of Somerset following their approval from
the Food and Drug Administration ("FDA") to market the product
Eldepryl. Sales of this product, which is used in the treatment
of Parkinson's Disease, commenced in August 1989. The Company
utilizes the equity method of accounting for its investment in
Somerset.
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has recognized income from Somerset of
approximately $25,089,000, $23,787,000 and $20,563,000 for the
years ended December 31, 1994, 1993 and 1992, respectively. Income
includes 50% of Somerset's earnings, ongoing management fees, and
amortization of deferred income, offset by amortization of
goodwill. At December 31, 1994 and 1993, the remaining excess cost
of this investment over its net assets was $9,411,000 and
$10,400,000, respectively, which is being amortized on a straight-
line basis over fifteen years.
Condensed balance sheets and statements of operations
information of Somerset is as follows:
December 31,
1994 1993
Current assets $ 48,770,000 $35,248,000
Non-current assets 6,380,000 6,165,000
Total assets $ 55,150,000 $41,413,000
Current liabilities $29,211,000 $23,417,000
Non-current liabilities 292,000 458,000
Shareholders' equity 25,647,000 17,538,000
Total liabilities and equity $ 55,150,000 $41,413,000
Years Ended December 31,
1994 1993 1992
Net revenues $124,566,000 $118,998,000 $104,071,000
Costs and expenses $ 59,557,000 $55,825,000 $47,266,000
Income taxes $ 20,900,000 $21,408,000 $20,736,000
Net income $ 44,109,000 $41,765,000 $36,069,000
American Triumvirate Insurance Company ("ATIC")
Prior to December 21, 1994, the Company had a 50% ownership
with another pharmaceutical company in ATIC, a captive insurance
company, which underwrote product liability insurance policies for
each of the companies and Somerset. This investment was being
accounted for utilizing the equity method. The Company recognized
$759,000, $901,000 and $848,000 for the years ended December 31,
1994, 1993 and 1992, respectively, as its equity in ATIC's
earnings.
On December 21, 1994, the Company sold its 50% interest in
ATIC to the other owner for a selling price valued at 50% of ATIC's
shareholders' equity at December 31, 1994 or $8,166,000. The
Company received $7,992,000 in cash and established a receivable
for $174,000. For financial reporting purposes, the sale of ATIC
did not result in a gain or loss to the Company.
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Andrx Corporation ("Andrx")
In July 1994, the Company acquired a 7.5% interest in Andrx
for $6,000,000. In addition, the Company may acquire a further
interest by exercise of certain warrants. The Company utilizes the
cost method to account for its investment in Andrx. The Company and
Andrx also entered into a joint venture ("Ancirc"), which will
develop generic pharmaceuticals for worldwide markets utilizing
Andrx's controlled-release technology. Within Ancirc, Andrx will be
responsible for continuing development of the products, and
marketing and sales upon approval. Circa will manufacture the
controlled-release products and be responsible for regulatory
services. Andrx and Circa will be responsible for sixty and forty
percent, respectively, of all future costs to develop, manufacture
and market the products with the same percentages applicable to the
sharing of income from the joint venture. Circa made an initial
equity contribution into Ancirc of $200,000 and utilizes the equity
method to account for this joint venture. For the year ended
December 31, 1994, Circa recorded $220,000 as its equity in
Ancirc's loss.
BQ Pharmaceutical Realty Co., Inc. ("BQ")
Circa holds a 60% equity interest in a company that owns a
facility designed to produce sustained-release products. The
Company's net investment of $2,616,000 as of December 31, 1994 and
1993 is being accounted for using the equity method as neither
company controls BQ due to equal representation on its board of
directors.
COMBINED RESULTS FOR UNCONSOLIDATED INVESTMENTS IN JOINT VENTURES
The following aggregate information is provided for
unconsolidated investments in joint ventures accounted for
utilizing the equity method:
December 31,
1994 1993
Current assets $49,473,000 $50,735,000
Non-current assets 6,516,000 6,165,000
Total assets $55,989,000 $56,900,000
Current liabilities $30,201,000 $24,000,000
Non-current liabilities 292,000 458,000
Shareholders' equity 25,496,000 32,442,000
Total liabilities and equity $55,989,000 $56,900,000
<PAGE>
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended December 31,
1994 1993 1992
Net revenues $126,726,000 $121,202,000 $106,210,000
Gross profit $109,979,000 $107,158,000 $93,539,000
Net income $ 44,409,000 $ 43,567,000 $37,766,000
6. PARTNERSHIP WITH RHONE-POULENC RORER, INC. ("RPR")
In July 1989, the Company and RPR formed a partnership to
develop and market a pharmaceutical product used in the treatment
of hypertension. Dilacor XR was launched by RPR during 1992.
Circa's share of the partnership's loss for the years ended
December 31, 1993 and 1992 was $7,644,000 and $15,598,000,
respectively. The partnership agreement was amended in April 1993,
such that after September 1, 1993 the Company's financial
participation would be to earn a royalty from the future sales of
the branded product, Dilacor XR. For the year ended December 31,
1994, the Company earned a royalty of 1% on the net sales of
Dilacor XR which will increase to 20% for the years ending December
31, 1995 and 1996, 22% for the years ending December 31, 1997
through 2000 and 3% thereafter. Royalties are initially applied to
repay the Company's partnership liability to RPR. On September 1,
1993, the Company made the only required payment to RPR of
$8,000,000. For the year ended December 31, 1994 the Company
earned royalties of $1,209,000 which are included in net sales in
the consolidated statements of operations. Additionally, the
partnership agreement provides for the partnership to develop a
generic version of Dilacor XR to be launched as the partners
consider appropriate. The profits and losses from the sale of the
generic product are to be shared equally by the Company and RPR.
7. INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109.
There was no effect on the Company's financial position as of
December 31, 1993 related to the adoption of SFAS No. 109 as the
Company established a valuation allowance for the amount of the
deferred tax asset at January 1, 1993 of $36,000,000. The
principal deferred tax asset was approximately $71,000,000 of net
operating loss carryforward for federal income taxes which will
expire beginning in 2006.
For the year ended December 31, 1994, the Company provided
$110,000 for federal alternative minimum taxes and state taxes.
The Company's income before taxes of approximately $17,400,000 was
reduced to a federal operating loss of $1,500,000 primarily due to
non-taxable joint venture income of $19,200,000, attributable to
the federal dividend exclusion. The Company's taxable income was
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
additionally reduced by deductible expenses for tax purposes of
$4,000,000 which was offset by not currently deductible allowances
of $1,300,000 and a taxable gain on the sale of ATIC of $3,000,000.
For the year ended December 31, 1993, the Company was not
required to provide for federal or state taxes. The Company's net
income of approximately $8,400,000 was reduced to a federal net
operating loss of $5,000,000 primarily due to non-taxable joint
venture income of $19,300,000, attributable to the federal dividend
exclusion. The Company's taxable income was additionally reduced
by deductible expenses for tax purposes of $3,300,000 which was
offset by not currently deductible allowances of $9,200,000.
For the year ended December 31, 1992, the Company was not
required to provide for federal or state taxes due to its net
operating loss.
Deferred taxes arise due to differences in the basis of assets
and liabilities for financial reporting and income tax purposes.
The significant components of net deferred tax assets and
liabilities as of December 31, 1994 and 1993 are as follows:
Years ended December 31,
1994 1993
Operating loss carryforward $ 30,469,000 $ 29,856,000
Tax credit carryforward 3,048,000 3,048,000
Expenses not
currently deductible 3,139,000 3,495,000
Other 744,000 401,000
Total deferred tax assets 37,400,000 36,800,000
Valuation allowance (37,400,000) (36,800,000)
Net deferred tax asset $ 0 $ 0
At December 31, 1994, the Company has a net operating loss
carryforward of approximately $77,500,000 for federal income tax
purposes which, if not utilized, will begin to expire in 2006. At
December 31, 1994, the Company has $3,048,000 of federal tax
credits available for use in future years which expire beginning in
2001.
8. COMMITMENTS AND CONTINGENCIES
Settlements
On November 30, 1994, the Company settled its litigation with
a former President, who resigned in 1990. Under the terms of the
agreement, the former President, through an escrow agent, sold all
of the 528,108 shares of Circa's common stock owned by him. The
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
proceeds from the sale of a substantial portion of such shares,
after payment of expenses and various taxes, were utilized to
settle the Company's claim that his conduct damaged the Company and
also to reimburse the Company for $1,331,000 of legal expenses paid
on his behalf in past years. The Company recognized a gain on
settlement of $2,298,921.
In July 1994, the Company settled civil antitrust claims
brought against it in a class action in the U.S. District Court in
Maryland with respect to the sale of generic Dyazide. Under the
settlement agreement, the Company paid $1,350,000 into a settlement
fund for the benefit of the class of plaintiffs, and will issue
$2,500,000 of coupons permitting the class of former customers to
purchase products from the Company at a predetermined discount from
market prices. The settlement agreement was accepted by the class
of plaintiffs and implementation was approved by the court. The
cost of such settlement was provided for in 1993.
In December 1994, the Company paid its outstanding
installment obligations related to two prior legal settlements with
total cash disbursements of $7,560,000. The Company did not
recognize a gain or loss on the settlement of the installment
obligations. Marketable securities collateralizing the installment
obligations were released from the trusts.
In October 1993, the Company settled its case with the
Antitrust Division of the Justice Department. The Company entered
a plea of Nolo Contendere and paid a fine of $1,100,000. Also,
during 1993 the Company settled actions against it by KV
Pharmaceuticals and Barr Laboratories. These separate actions were
settled in the total amount of $3,690,000.
In September 1993, Circa received a $1,100,000 refund from a
settlement fund established in 1991 for a class action lawsuit
against the Company. In November 1993, the Company settled its
action against a former officer who returned to the Company 367,308
shares of Circa's common stock which was placed in treasury and was
valued at $3,168,000 on the date of transfer to the Company. A
gain of $2,500,000, net of legal expenses paid by the Company, was
included within the consolidated statements of operations for this
settlement. Income from these events was offset by the Company
during the third and fourth quarters of 1993 by an increase in the
liability for future legal settlements.
Contingencies
Certain product liability claims have been filed against the
Company relating to products sold prior to the cessation of sales
by the Company in February 1990.
As of December 31, 1993, the Company had provided an
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
allowance for the estimated cost of pending litigation. Based upon
information it presently possesses, the Company believes that the
outcome of these cases will not have a material adverse effect on
the Company's consolidated financial position and future
operations.
Commitments
As of December 31, 1994, the Company had commitments of
approximately $2,600,000 for research and development projects to
third parties, which will be expended over the next three years.
9. SHAREHOLDERS' EQUITY
Stock Award Plans
The Company maintains a Restricted Stock Award Plan which
provides for the issuance of shares of common stock to key
employees which was adopted by the Board in 1984. A total of
464,000 shares of common stock were reserved for issuance under the
plan. The plan provides that if recipients leave the Company's
active employment prior to age 62 they must return previously
awarded shares to the Company. As of December 31, 1994, there were
157,000 shares issued under this plan. In 1994, the Board of
Directors elected to discontinue the issuance of awards from this
plan.
The Company maintains a Deferred Compensation Plan for the
benefit of eligible key employees and officers. A total of
1,300,000 shares of common stock were reserved for issuance under
the plan. If the recipients of such shares leave the Company's
employment prior to certain agreed upon vesting dates, they must
return some or all of the awarded shares to the Company. The
Company awarded 30,000, 400,000 and 55,000 shares of common stock
to certain employees during the years ended December 31, 1994,
1993, and 1992, respectively. During the years ended December 31,
1994, and 1993, 7,500 and 477,500 shares, respectively, were
canceled. As of December 31, 1994, 2,015,000 shares were issued,
830,000 shares were canceled and 115,000 shares were available for
future issuance.
Stock Option Plans
At the 1994 Annual Meeting, the shareholders approved the
1994 Long-Term Incentive Plan ("1994 Incentive Plan"). A total of
1,400,000 shares of common stock were reserved for stock option
grants, stock appreciation rights and stock awards to officers and
selected employees. The 1994 Incentive Plan provides that the
exercise price of each option will be 100% of the fair market value
of the common stock on the date of grant. As of December 31, 1994,
537,200 options were issued, 35,000 options were forfeited and
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
897,800 shares were available for future issuance.
The Company maintains a Directors' Stock Option Plan
("Directors' Plan") for the benefit of directors of the Company who
are not eligible to receive options under any other plan adopted by
the Company. This non-qualified plan was adopted by the Board and
approved by the shareholders in 1990. The Directors' Plan provides
that the exercise price of each option will be 100% of the fair
market value of the common stock on the date of grant and is
exercisable in full on the first anniversary of the date of grant.
A total of 500,000 shares of common stock were reserved for
issuance under the plan. During the year ended December 31, 1994,
options for 20,000 shares of the Company's common stock were issued
under the plan. As of December 31, 1994, 107,500 options were
issued under the plan, of which 2,500 options have been exercised
and 392,500 options were available for future issuance.
At the 1988 Annual Meeting, the shareholders approved an
Incentive Compensation Plan ("1988 Plan") which provided for annual
contingent awards of stock options to officers, directors and key
employees to be granted only if earnings per share of the Company's
common stock exceeded pre-established goals set by the Compensation
Committee. The 1988 Plan provides that the exercise price of each
option is no less than 100% of the fair market value
of the Company's common stock at date of grant. A total of 900,000
shares of the Company's common stock are subject to options under
this plan. During the year ended December 31, 1994, 26,937 options
expired. As of December 31, 1994, 214,445 options were issued
under the plan, of which 57,381 options have been exercised and
157,064 options were canceled. In 1994, the Board of Directors
elected to discontinue the issuance of awards from this plan.
The Company has an Employee Stock Purchase Plan ("Employee
Plan") for employees other than officers, directors or key
employees. The Employee Plan is intended to be a "Qualified Plan"
within the meaning of Section 423 of the Internal Revenue Code. A
total of 628,980 shares of the Company's common stock were reserved
for purposes of this Plan. The options have a life of five years
from the date of each grant and are exercisable on or before the
option expiration date. During the year ended December 31, 1994,
7,300 options were issued, 4,200 were exercised and 2,500 expired.
As of December 31, 1994, 151,355 options were issued under the
plan, of which 98,776 options have been exercised and 35,479
options were canceled. In 1994, the Board of Directors elected to
discontinue the issuance of awards from this plan.
Other non-qualified options of 50,000 and 21,250 were issued
during the years ended December 31, 1994 and 1993, respectively,
and are still outstanding.
CIRCA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of changes in outstanding options is summarized as
follows:
Number of Option
Shares under Price Per
Option Share
Outstanding December 31, 1991 329,482 $ 2.50- 26.25
Options granted 37,200 $ 8.88- 9.50
Options exercised 12,022 $ 4.63- 22.25
Options expired or forfeited 230,145 $ 4.63- 22.25
Outstanding December 31, 1992 124,515 $ 2.50- 26.25
Options granted 56,450 $ 5.75- 6.88
Options exercised 4,500 $ 2.50- 9.50
Options expired or forfeited 26,778 $ 4.63- 26.25
Outstanding December 31, 1993 149,687 $ 2.50- 26.25
Options granted 614,500 $10.88- 17.75
Options exercised 4,200 $ 4.63- 11.50
Options expired or forfeited 64,437 $ 5.75- 26.25
Outstanding December 31, 1994 695,550 $ 2.50- 17.75
11.OTHER INCOME (EXPENSE)
Years Ended December 31,
1994 1993 1992
Imputed interest expense
on legal settlements ($591,448) ($997,025) ($1,515,016)
Gain on sale of property,
plant and equipment 39,964 962,160
(Increase) decrease in
provision for
recalled products (750,000) 391,686
Allowance for inventory
obsolescence (481,984) (351,000)
Other, net (163,408) 158,785 (267,977)
($714,892) ($2,070,224) ($780,147)
CIRCA PHARMACEUTICALS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Circa
Pharmaceuticals, Inc.,
We have audited the accompanying consolidated balance sheets
of Circa Pharmaceuticals, Inc. and Subsidiaries as of December 31,
1994 and 1993, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial
statements of Somerset Pharmaceuticals, Inc. (Somerset), an entity
which is 50% owned by the Company. The Company's investment in
Somerset constitutes 22% and 19% of consolidated total assets in
1994 and 1993, respectively. In 1994, 1993 and 1992, the Company
has recorded income from Somerset of $25,089,000, $23,787,000 and
$20,563,000, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Somerset, is
based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Circa Pharmaceuticals, Inc. and Subsidiaries
as of December 31, 1994 and 1993, and the consolidated results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in notes 1 and 2, the Company changed its method
of accounting for investments in marketable securities effective
January 1, 1994.
Coopers & Lybrand L.L.P.
Melville, New York
February 7, 1995
CIRCA PHARMACEUTICALS, INC.
REPORT OF MANAGEMENT
To the Shareholders of Circa Pharmaceuticals, Inc.,
Management of Circa is responsible for preparing the
accompanying consolidated financial statements and for assuring
their integrity and objectivity. The financial statements were
prepared in accordance with generally accepted accounting
principles and fairly represent the transactions and financial
position of the Company. The financial statements include amounts
that are based on management's best estimates and judgements.
The Company's financial statements have been audited by
Coopers & Lybrand L.L.P., independent auditors, selected by the
Audit Committee and approved by shareholders. Management has made
available to Coopers & Lybrand L.L.P. all of the Company's
financial records and related data, as well as the minutes of
shareholders' and directors' meetings.
Management of the Company has established and maintains a
system of internal accounting controls that is designed to provide
reasonable assurance that assets are safeguarded, transactions are
properly recorded and executed in accordance with management's
authorization, and the books and records accurately reflect the
disposition of assets. The system of internal controls includes
appropriate division of responsibility.
The Audit Committee is composed of Directors who are not
officers or employees of the Company. It meets regularly with
members of management and the independent accountants to discuss
the adequacy of the Company's internal controls, financial
statements and the nature, extent and results of the audit effort.
The independent accountants have free and direct access to the
Audit Committee without the presence of management.
Melvin Sharoky, M.D. Angelo C. Malahias
President and Vice President and
Chief Executive Officer Chief Financial Officer
CIRCA PHARMACEUTICALS, INC.
STOCK MARKET INFORMATION
1994 High Low
First Quarter 15 1/8 8 5/8
Second Quarter 12 1/8 8 3/4
Third Quarter 15 3/8 9 1/8
Fourth Quarter 18 1/8 14 1/8
1993 High Low
First Quarter 9 5 3/4
Second Quarter 7 7/8 4 1/8
Third Quarter 8 7/8 5 7/8
Fourth Quarter 13 5/8 8 1/4
The common stock of Circa Pharmaceuticals, Inc. is traded on
the American Stock Exchange, trading symbol: RXC.
As of February 28, 1995, the Company had 2,269 shareholders
of record. There are a significant number of beneficial
owners of Circa stock whose shares are held in "street
name." No cash dividends have been declared by the Company
for the fiscal years 1994 and 1993, and the Company does
not intend to declare cash dividends in the foreseeable
future.
CIRCA PHARMACEUTICALS, INC.
QUARTERLY DATA (UNAUDITED)
1994 1993
March 31st
Net sales $1,234,209 $357,716
Gross profit 449,358 51,310
Net income (loss) 3,874,480 (4,411,739)
Income (loss) per share $.18 ($.20)
June 30th
Net sales $ 961,289 $837,148
Gross profit 341,328 216,711
Net income (loss) 2,308,590 (1,194,425)
Income (loss) per share $.11 ($.06)
September 30th
Net sales $1,320,178 $1,002,833
Gross profit 676,227 231,102
Net income 3,598,904 6,656,877
Income per share $.17 $.30
December 31st
Net sales $4,285,805 $1,093,583
Gross profit 2,705,271 261,526
Net income 7,477,071 7,344,535
Income per share $.34 $.34
CIRCA PHARMACEUTICALS, INC.
OFFICERS OF THE COMPANY
Melvin Sharoky, M.D.
President and
Chief Executive Officer
Director
Dr. Sharoky, 44, joined the Company in 1988 as Medical Director and
subsequently served as Executive Vice President, Director of
Research and Development before being appointed by the Board of
Directors to President and Chief Executive Officer in 1993. Prior
to joining Circa, Dr. Sharoky was Senior Vice President of Contract
Development for a drug research and testing organization. He
currently serves on the Board of Directors of Circa and Somerset
Pharmaceuticals, Inc.
Thomas P. Rice
Executive Vice President and
Chief Operating Officer
Director
Mr. Rice, 44, joined Circa in July 1993. Prior to joining Circa,
Mr. Rice served as Vice President and Chief Financial Officer for
a pharmaceutical research organization, and as a senior manager
with Deloitte & Touche LLP. He currently serves on the Board of
Directors of Circa and Somerset Pharmaceuticals, Inc.
John Botek
Vice President
Operations and Administration
Mr. Botek, 38, joined Circa in April 1994. Prior to joining Circa,
Mr. Botek held senior management positions with a management and
systems consulting company and a pharmaceutical research
organization.
Gwen Gerrick
Corporate Secretary
Director of Investor Relations
Ms. Gerrick, 29, joined the Company in 1988 and currently serves as
Corporate Secretary and Director of Investor Relations. She
previously served as Assistant to the President.
CIRCA PHARMACEUTICALS, INC.
OFFICERS OF THE COMPANY
(Continued)
Ed Haley
Vice President
Sales and Marketing
Mr. Haley, 51, joined Circa in May 1994. Prior to joining Circa,
Mr. Haley was Vice President of Sales with Bausch & Lomb Oral Care
and held various key management positions with Colgate Palmolive
Company.
Nicholas A. LaBella, Jr.
Vice President
Director of Research and Development
Mr. LaBella, 39, joined Circa in 1989 as the Director of Regulatory
Affairs, and in 1993 he became Vice President, Director of Research
and Development. Prior to joining Circa, Mr. LaBella held various
positions in Regulatory Affairs and Project Coordination for
research based pharmaceutical organizations. He also serves on the
Board of Directors of Somerset Pharmaceuticals, Inc.
Angelo C. Malahias
Vice President
and Chief Financial Officer
Mr. Malahias, 33, joined Circa in July 1994 as Controller and in
January 1995 became Vice President and Chief Financial Officer.
Prior to joining Circa, Mr. Malahias served as a senior manager
with KPMG Peat Marwick LLP.
Steve Martinez
Vice President
and General Manager
Mr. Martinez, 45, joined Circa in December 1994 as General Manager
and Vice President. Prior to joining Circa, he worked for eighteen
years for several major drug and device manufacturers, rising to
director level positions.
CIRCA PHARMACEUTICALS, INC.
BOARD OF DIRECTORS
Melvin Sharoky, M.D.
President and
Chief Executive Officer
Thomas P. Rice
Executive Vice President and
Chief Operating Officer
Michael Fedida
Registered Pharmacist
Consultant and Owner of Retail Pharmacies
Stanley Grey
Certified Public Accountant
Trustee and Treasurer, Long Island Jewish Medical Center
Bruce Hausman
Attorney
Director, Plastigone Technologies, Inc.
Honorary Trustee, Beth Israel Medical Center
Director, Daltex Medical Sciences, Inc.
Kenneth Siegel
Managing Director
Wertheim Schroder & Co., Incorporated
CIRCA PHARMACEUTICALS, INC.
FORM 10-K
A copy of the Company's annual report on form 10-K filed with the
Securities and Exchange Commission is available to shareholders
upon request. For a copy of Form 10-K, please write to Investor
Relations.
SHAREHOLDER INFORMATION
Investor Relations
Circa Pharmaceuticals, Inc.
33 Ralph Ave.
P.O. Box 30
Copiague, NY 11726-0030
(516) 842-8383
STOCK TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
New York, New York
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P.
Melville, New York
<PAGE>
SUBSIDIARIES OF THE COMPANY
EXHIBIT 22.1
Exhibit 22.1
SUBSIDIARIES OF THE COMPANY
1. Bol, Inc. incorporated in the state of Delaware
2. BLR Enterprises, Inc. incorporated in the state of Delaware
3. Circasub., Inc. incorporated in the state of New York
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
(COOPERS & LYBRAND L.L.P.)
Exhibit 23.1
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the Incorporation by reference of the following into
the registration of Circa Pharmaceuticals, Inc. (formerly Bolar
Pharmaceutical Company, Inc.) Employee Stock Purchase Plan on Form
S-8 Number 2-70586, Circa Pharmaceuticals, Inc. 1990 Directors'
Stock Option Plan on Form S-8 Number 33-53903 and Circa
Pharmaceuticals, Inc. 1994 Long-Term Incentive Plan and Circa
Pharmaceuticals, Inc. Restated Deferred Compensation Plan Number
33-56751:
1. Our report dated February 7, 1995 on our audits of the
consolidated financial statements of Circa Pharmaceuticals, Inc. as
of December 31, 1994 and 1993, and for each of the three years in
the period ended December 31, 1994, which report is included in the
Company's Annual Report to Shareholders for the year ended December
31, 1994; and,
2. Our supplemental report on the financial statement
schedule dated February 7, 1995 included in this Annual Report on
Form 10-K for the year ended December 31, 1994.
Coopers & Lybrand L.L.P.
Melville, New York
February 7, 1995
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
(DELOITTE & TOUCHE LLP)
Exhibit 23.2
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements No. 2-70586, No. 33-56751, and No. 33-53903 of Circa
Pharmaceuticals, Inc. on Forms S-8 of our report dated February 3,
1995 (relating to the financial statements of Somerset
Pharmaceuticals, Inc. and Subsidiaries) appearing in this Annual
Report on Form 10-K of Circa Pharmaceuticals, Inc. for the year
ended December 31, 1994.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 24, 1995
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, 1992
Exhibit 28.1
<PAGE>
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1994, 1993 and 1992, and
Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Somerset Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of
Somerset Pharmaceuticals, Inc. and subsidiaries as of December 31,
1994 and 1993, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Somerset Pharmaceuticals, Inc. and subsidiaries as of December 31,
1994 and 1993, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
1994 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
February 3, 1995
<PAGE>
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
Assets 1994 1993
Current Assets:
Cash and cash equivalents $17,529,000 $10,281,000
Investment securities 3,338,000 3,470,000
Accounts receivable (net of
allowance for doubtful
accounts of $100,000) 20,653,000 16,095,000
Inventories 5,293,000 3,820,000
Prepaid expenses and
other current assets 1,957,000 1,582,000
Total current assets 48,770,000 35,248,000
Property and Equipment-Net 4,266,000 2,762,000
Intangible Assets-Net 1,644,000 1,987,000
Other Assets 470,000 1,416,000
$55,150,000 $41,413,000
<PAGE>
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
(Continued)
1994 1993
Liabilities and
Stockholders' Equity
Current Liabilities:
Accounts payable $ 292,000 $ 205,000
Note payable - 253,000
Accrued marketing costs 11,000,000 9,100,000
Royalty payable 5,850,000 4,780,000
Other accrued expenses 2,833,000 2,070,000
Accrued research and
development 1,901,000 2,046,000
Income taxes payable 5,017,000 2,900,000
Amounts due to related
parties 2,318,000 2,063,000
Total current liabilities 29,211,000 23,417,000
Deferred Revenue 292,000 458,000
Stockholders' Equity:
Common stock, $.01 par
value; 13,719
shares authorized,
11,297 shares issued - -
Retained earnings 26,099,000 17,990,000
Less treasury stock,
644 shares at cost (452,000) (452,000)
Total stockholders' equity 25,647,000 17,538,000
$55,150,000 $41,413,000
See notes to consolidated financial statements.
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements Of Income
Years ended December 31, 1994, 1993 and 1992
1994 1993 1992
Net sales $124,566,000 $118,998,000 $104,071,000
Costs and Expenses:
Cost of sales 16,399,000 13,991,000 12,552,000
Marketing 23,457,000 25,826,000 23,415,000
Research and
development 10,424,000 9,134,000 5,580,000
Administrative 9,845,000 8,005,000 6,736,000
60,125,000 56,956,000 48,283,000
64,441,000 62,042,000 55,788,000
Other income 568,000 1,131,000 1,017,000
Income before 65,009,000 63,173,000 56,805,000
income taxes
Provision for
income taxes 20,900,000 21,408,000 20,736,000
Net income $ 44,109,000 $41,765,000 $36,069,000
See notes to consolidated financial statements.
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1993 and 1992
Common Stock Treasury Stock
Shares Amount Shares Amount
Balance,
December 31, 1991 11,297 $ - 644 $(452,000)
Accretion of the
carrying value of
the redeemable
preferred stock - - - -
Dividends - - - -
Net income - - - -
Balance,
December 31, 1992 11,297 - 644 (452,000)
Accretion of the
carrying value of
the redeemable
preferred stock - - - -
Dividends - - - -
Net income - - - -
Balance,
December 31, 1993 11,297 - 644 (452,000)
Dividends - - - -
Net income - - - -
Balance,
December 31, 1994 11,297 $ - 644 $(452,000)
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1993 and 1992
(Continued)
Retained Stockholders'
Earnings Equity
Balance,
December 31, 1991 $7,900,000 $7,448,000
Accretion of the
carrying value of
the redeemable
preferred stock (122,000) (122,000)
Dividends (41,207,000) (41,207,000)
Net income 36,069,000 36,069,000
Balance,
December 31, 1992 2,640,000 2,188,000
Accretion of the
carrying value of
the redeemable
preferred stock (15,000) (15,000)
Dividends (26,400,000) (26,400,000)
Net income 41,765,000 41,765,000
Balance,
December 31, 1993 17,990,000 17,538,000
Dividends (36,000,000) (36,000,000)
Net income 44,109,000 44,109,000
Balance,
December 31, 1994 $26,099,000 $25,647,000
See notes to consolidated financial statements.
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
1994 1993 1992
Cash Flows from Operating
Activities:
Net income $44,109,000 $41,765,000 $36,069,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 587,000 285,000 229,000
Deferred tax
expense (benefit) 862,000 (800,000) 20,000
Deferred revenue (166,000) (167,000) (166,000)
Changes in operating
assets and liabilities:
Accounts receivable (4,558,000) (1,872,000) (3,989,000)
Inventories (1,473,000) (1,578,000) 614,000
Prepaid expenses and
other current assets (375,000) 352,000 (249,000)
Accounts payable 87,000 (227,000) (1,121,000)
Royalty payable 1,070,000 190,000 901,000
Accrued marketing costs 1,900,000 1,386,000 2,074,000
Accrued research and
development (145,000) 981,000 -
Other accrued expenses 763,000 201,000 1,338,000
Income taxes payable 2,117,000 570,000 (177,000)
Amounts due to related
parties 255,000 278,000 542,000
Net cash provided by
operating activities 45,033,000 41,364,000 36,085,000
Cash Flows From
Investing Activities:
Net decrease (increase)
in investment securities 132,000 2,006,000 (1,685,000)
Purchase of property
and equipment (1,898,000) (2,690,000) (127,000)
Decrease (increase) in
other assets 234,000 (268,000) 23,000
Net cash used in
investing activities $(1,532,000) $(952,000) $(1,789,000)
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
(Continued)
1994 1993 1992
Cash Flows From Financing Activities:
Redemption of preferred
stock $ - $(1,149,000) $ (1,149,000)
Dividends paid on
preferred stock - (176,000) (85,000)
Dividends paid on
common stock (36,000,000) (35,200,000) (36,300,000)
Net (decrease)
increase in note
payable (253,000) 253,000 -
Net cash used in
financing activities (36,253,000) (36,272,000) (37,534,000)
Net increase (decrease)
in cash and cash
equivalents 7,248,000 4,140,000 (3,238,000)
Cash and cash equivalents,
beginning of year 10,281,000 6,141,000 9,379,000
Cash and cash equivalents,
end of year $17,529,000 $10,281,000 $6,141,000
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 7,000 $ 5,000 $ -
Income taxes $17,683,000 $21,259,000 $20,992,000
Supplemental disclosure of noncash financing activities:
During 1992, the Company recorded $8,800,000 of dividends payable
on common stock which had not been paid as of the end of that year.
See notes to consolidated financial statements.
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. PRINCIPLES OF CONSOLIDATION AND OPERATIONS
The consolidated financial statements include the accounts of
Somerset Pharmaceuticals, Inc. (the Company) and its wholly
owned subsidiaries, Somerset Pharmaceuticals Holding Company
and Somerset Caribe, Inc. The Company is jointly owned by
Mylan Laboratories, Inc. and Circa Pharmaceuticals, Inc., with
each owning 50% of all the outstanding common stock of the
Company. All significant intercompany accounts and
transactions have been eliminated in consolidation. The
Company, incorporated in February 1986, is engaged in the
development, testing and marketing of drugs to be used in the
treatment of various human disorders. Currently, the Company
manufactures, markets and sells Eldepryl, which is used as a
treatment for Parkinson's Disease.
The Company is party to an exclusive 14-year agreement (through
November 22, 2003) with Chinoin Pharmaceutical Company
(Chinoin) of Budapest, Hungary under which Eldepryl and other
new potential drugs resulting from Chinoin research are made
available for licensing by the Company. The license agreement
requires the Company to pay royalties equal to 7% of net sales
of Eldepryl including sub-license revenues. The Company
incurred royalty expense of approximately $9,983,000,
$8,383,000 and $8,105,000 for the years ended December 31,
1994, 1993 and 1992, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Cash and Cash Equivalents - The Company generally considers
debt instruments purchased with a maturity of three months
or less to be cash equivalents.
b. Investment Securities - Effective January 1, 1994, the
Company adopted Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The effect of adopting SFAS No.
115 on the Company's financial statements was not material.
During the current year, gross proceeds from sales and
maturities of investments approximated $797,000 and
$750,000, respectively, and realized gains or losses were
not material. At December 31, 1994, the investment
securities were available for sale, and there were no
material unrealized gains or losses.
At December 31, 1993, investment securities included both
debt and equity instruments which were valued at the lower
of cost or market with cost approximating market.
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
c. Inventories - Inventory is stated at the lower of cost or
market, with cost determined on a first-in, first-out
basis.
d. Property and Equipment - Property and equipment are stated
at cost. Depreciation is provided over the estimated
useful lives of the assets by the straight-line method.
Estimated useful lives are five to seven years for
machinery and equipment and thirty-five years for the
building.
e. Intangible Assets - Intangible assets are amortized on a
straight-line basis over 14 years.
f. Research and Development - Research and development costs
are expensed as incurred.
3. INVENTORY
Inventory consists of the following at December 31:
1994 1993
Raw material $4,686,000 $ 2,864,000
Work in process 375,000 470,000
Finished goods 232,000 486,000
Total $5,293,000 $ 3,820,000
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
1994 1993
Land $ 300,000 $ 300,000
Building
2,067,000 1,638,000
Machinery and equipment 2,410,000 963,000
Furniture and fixtures 87,000 65,000
4,864,000 2,966,000
Less accumulated
depreciation (598,000) (204,000)
Property and equipment -
net $4,266,000 $2,762,000
5. SUB-LICENSE OF RIGHTS
On February 9, 1988, the Company granted a sub-license to its
exclusive right and license to use its technology to Draxis
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Health Inc. (formerly Deprenyl Research Limited) to
commercialize certain drugs in Canada for 15 years. The
Company receives a royalty of 11% of Draxis Health Inc.'s net
sales over the license period.
Royalty income, less related royalty expense to Chinoin,
included in other income for the years ended December 31, 1994,
1993 and 1992 was approximately $199,000, $357,000 and
$414,000, respectively.
6. INTANGIBLE ASSETS
Intangible assets primarily represent the cost of a
modification to the terms of the Chinoin Agreement, less
accumulated amortization of $1,061,000 and $868,000 at December
31, 1994 and 1993, respectively.
7. CO-PROMOTIONAL AGREEMENT
Effective October 1, 1990, the Company entered into an
agreement with Sandoz Pharmaceuticals Corporation (Sandoz) to
co-promote the product Eldepryl. Under the terms of the
agreement, the Company is required to make certain payments to
Sandoz in the event sales of Eldepryl exceed certain predefined
minimums. The agreement requires Sandoz, among other things,
to expend, at a minimum, a predetermined amount for advertising
during each year of the agreement. Once the predetermined
levels of sales are exceeded, the Company is required to pay
Sandoz for advertising expenditures made on behalf of the
Company. After Sandoz's advertising expenses are reimbursed,
any additional amounts are shared by Sandoz and the Company
based upon the terms of the agreement. During 1994, 1993 and
1992, the Company expensed approximately $22,360,000,
$24,260,000 and $22,321,000, respectively, pursuant to the
agreement. Additionally, certain co-promotional fees paid by
Sandoz at the commencement of the agreement are being
recognized ratably by the Company during the term of the
agreement (six years), and certain costs associated with the
procurement, negotiation and execution of the agreement by the
owners of the Company are being incurred by the Company in
approximately the same amount.
In December 1994, the Company amended its co-promotional
agreement with Sandoz. The amended agreement eliminated
certain residual period payments to Sandoz, shortened the term
to March 31, 1996, eliminated certain sales force detail
requirements and requires certain payments to be made to the
Company if a predetermined level of sales is not achieved.
8. NOTE PAYABLE
On June 30, 1993, the Company entered into a one-year
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
$1,500,000 line of credit agreement with a bank in conjunction
with the renovation of the Company's research facility.
Interest on amounts drawn on the line of credit was payable
monthly at the bank's prime rate (6% at December 31, 1993) less
0.25%. Pursuant to the agreement, all borrowings under this
line of credit were paid off in 1994.
9. REDEEMABLE PREFERRED STOCK
The Class A and B redeemable preferred stock were fully
redeemed during 1993.
The Class A stock, ($.10 par value, 1,950 shares authorized and
488 shares outstanding at December 31, 1992) was carried at
redemption value plus undeclared dividends.
The Class B stock ($.10 par value, 2,850 shares authorized and
issued and 661 shares outstanding at December 31, 1992) was
convertible into common stock based on a conversion price set
by the Board of Directors and subject to adjustment from time
to time.
10. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes" effective January
1, 1993. As permitted by SFAS No. 109, prior-year financial
statements have not been restated to reflect the change in
accounting method. The cumulative effect of adopting SFAS No.
109 on the Company's financial statements was not material.
The income tax provision consists of the following for the
years ended December 31:
1994 1993 1992
Current tax expense:
Federal $15,025,000 $17,938,000 $18,540,000
State 4,899,000 4,124,000 2,050,000
Foreign 114,000 146,000 126,000
20,038,000 22,208,000 20,716,000
Deferred tax expense (benefit):
Federal 754,000 (700,000) 20,000
State 108,000 (100,000) -
862,000 (800,000) 20,000
Total provision for
income taxes $20,900,000 $21,408,000 $20,736,000
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The tax effects of significant
items comprising the Company's deferred taxes (which are
included in "Other Assets" in the balance sheet) as of December
31, 1994 are as follows:
Deferred tax assets:
Deferred revenue $110,000
Deferred compensation 228,000
Chargeback allowance 152,000
Other 42,000
532,000
Deferred tax liabilities:
Excess of tax amortization over reporting
amortization 165,000
Net deferred tax assets $367,000
The statutory federal income tax rate is reconciled to the
effective tax rate as follows for the years ended December 31:
1994 1993 1992
Tax at statutory rate 35.0% 35.0% 34.0%
State income tax (net of
federal benefit) 3.5 4.1 2.4
Tax credits (9.9) (7.2) (.2)
Tollgate tax 3.9 2.0 -
Other (.4) - .3
Effective tax rate 32.1% 33.9% 36.5%
Tax credits result principally from operations in Puerto Rico.
11. RELATED PARTY TRANSACTIONS
The Company incurs expenses for ongoing management services and
over a six year period for specific services related to the
procurement, negotiation and execution of the co-promotion
agreement by the owners of the Company. The Company also
incurs other expenses from one or both of its owners as
detailed below for the years ended December 31:
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
1994 1993 1992
Management fees $6,228,000 $5,950,000 $5,204,000
Research and development 1,020,000 835,000 239,000
Inventory handling and
distribution fees 650,000 750,000 331,000
Rent - equipment and
facilities 1,065,000 647,000 -
Product liability
insurance 618,000 675,000 675,000
During 1993, the Company purchased $696,000 of equipment from
one of its owners.
At December 31, 1994 and 1993 the balance of amounts due to
related parties represents rent, research and development,
distribution and management fees payable to the owners of the
Company.
12. SIGNIFICANT CUSTOMERS
The Company had sales to certain customers which individually
exceeded 10% of net sales. Three customers represented 57% of
net sales for the year ended December 31, 1994 and two
customers represented 45% and 41% of net sales for the years
ended December 31, 1993 and 1992, respectively.
13. COMMITMENTS
As of December 31, 1994, the Company is committed to fund
approximately $5,160,000 for various research and development
studies through 1995.
14. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution profit sharing plan
covering substantially all employees. Contributions are made
at the discretion of the Board of Directors. Additionally,
during 1994, the Company initiated a deferred compensation plan
for select key employees. Contributions are based on
profitability levels for the year. During 1994, 1993 and 1992,
the Company recorded expense of $755,000, $100,000 and $-0- for
these plans, respectively.
* * * * * *
