SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Fiscal Year Ended June 30, 1995
Commission File Number: 0-13588
PUREPAC, INC.
(Exact name of registrant as
specified in its charter)
DELAWARE 04-2769995
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Elmora Avenue, Elizabeth, New Jersey 07207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 527-9100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. /X/
12,581,223
Number of shares outstanding of the Registrant's
Common Stock as of September 19, 1995
$ 49,518.221
Aggregate market value of the voting stock held by nonaffiliates
of the Registrant as of September 19, 1995
The following documents are incorporated by reference herein:
Definitive proxy statement to be filed pursuant to Regulation 14A promulgated
under the Securities Exchange Act of 1934 in connection with the 1995 Annual
Meeting of Stockholders of registrant.
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PART I
ITEM 1. BUSINESS
(a) & (b) General Development of Business and Financial Information
About Industry Segments
Purepac, Inc. (the "Company"), through Purepac Pharmaceutical Co.
("Purepac"), a wholly-owned subsidiary, is primarily engaged in the
development, manufacture and sale of generic drug products.
A majority of the outstanding common stock of the Company is owned by
Faulding Holdings Inc. ("Holdings"), a wholly-owned subsidiary of F.H.
Faulding & Co. Limited ("Faulding"), a major Australian pharmaceutical
company.
The Company was incorporated in Delaware on September 2, 1982. On
November 2, 1992, the Company's name was changed from Moleculon, Inc.
to Purepac, Inc. The Company's executive offices and principal research,
manufacturing and distribution facilities are located at 200 Elmora Avenue,
Elizabeth, New Jersey 07207; its telephone number is (908) 527-9100.
As used herein, all references to the Company are deemed to include Purepac,
unless the context indicates to the contrary.
(c) Description of Business
INTRODUCTION
A generic drug contains active drug substances and is the therapeutic
equivalent of a brand name drug for which patent protection, granted by the
United States Patent Office and/or exclusivity granted by the United States
Food and Drug Administration (the "FDA"), has expired. Accordingly, a
generic drug is marketed under its chemical name or under a brand name
promoted by its generic manufacturer. While subject to the same government
standards as its brand name equivalent, a generic drug is usually marketed
at a substantially lower price.
Sales of generic drugs have increased significantly in recent years, due in
substantial part to greater awareness and acceptance of generic drugs by
physicians, pharmacists and the general public. Among the factors
contributing to such increased awareness and acceptance have been the
enactment and modification of laws in most states permitting (or in some
instances requiring) physicians or pharmacists to substitute generic drugs
for brand name drugs, and the publication by the FDA of a list of
therapeutically equivalent drugs which provides physicians and pharmacists
with the approved sources of generic drug alternatives for each drug product.
In addition, since generic drugs are typically sold at prices substantially
below those of brand name
<PAGE>
drugs, the prescribing of generic drugs has been encouraged and, in some
instances, required by various government agencies and by private health
insurers as a cost-saving measure in the purchase of, or reimbursement for,
drug products.
PRODUCTS
The Company markets both prescription drugs and non-prescription drugs, also
called over-the-counter ( "OTC"), in oral solid (tablet and capsule), oral
liquid and topical dosage forms. In accordance with FDA requirements, each
dosage strength and form of a generic drug is considered a separate drug
product. Classification of the Company's generic drug products and their
number can be generally summarized as follows: antibiotic and anti-
ineffective drugs (6); cardiovascular drugs (30); anti-inflammatories (12);
analgesics (10); anti-depressants and tranquilizers (34); and all others
(16).
Sales of generic prescription drug products represented 99% of the Company's
revenue for the years ended June 30, 1995 and 1994, compared with 98% for the
year ended June 30, 1993. The sale of OTC drugs accounted for the balance of
the Company's revenue in each of such years. A majority of the Company's
products is sold under its Purepac Registered Trademark label and the balance
is sold under private label agreements with certain pharmaceutical
distributors.
Nifedipine, the generic version of Pfizer's PROCARDIA Registered Trademark
cardiovascular product, accounted for 12%, 13%, and 30% of the Company's
revenue for its years ended June 30, 1995, 1994 and 1993, respectively. In
1992 and subsequent years, additional companies received approval from the
FDA to sell nifedipine and entered the market. It is typical in the generic
drug industry for the first companies selling a new generic product to
initially have a relatively high profit margin, which then decreases as
selling prices decline when more companies enter the market. Consequently,
such competition continued to erode the Company's gross profit from
nifedipine sales, thereby adversely impacting the Company's net income.
NEW PRODUCT DEVELOPMENT
Research and development expenditures for the years ended June 30, 1995, 1994
and 1993 amounted to $6,741,000, $6,797,000 and $5,944,000, respectively.
During the year ended June 30, 1995, the Company's new product development
program remained focused on AB-rated (substitutable) generic equivalents to a
number of immediate-release and modified-release solid oral prescription
products. At June 30, 1995, the Company had 17 immediate-release and
modified-release products in various stages of product development.
During the year ended June 30, 1995, the Company received FDA approval for
three new immediate-release generic drug products: gemfibrozil tablets,
metoprolol tartrate
<PAGE>
tablets and naproxen sodium tablets. During the year, the Company filed 2
new Abbreviated New Drug Applications ("ANDAs") and at June 30, 1995 had 5
ANDAs pending approval. No assurance can be given as to the receipt or
timing of ANDA approvals and the commercial significance of any products so
approved.
MARKETING AND CUSTOMERS
The Company markets its products primarily through a sales force of 11
people.
The Company's customers include drug wholesalers, national and regional
retail drugstore chains and drug distributors. At June 30, 1995, the Company
had approximately 162 customers. For the year ended June 30, 1995, three
customers each accounted for approximately 13%, 11% and 10% of sales. The
Company believes that the loss of any two or more of these customers could
have a material impact on the Company's financial position, results of
operations and cash flow. For the year ended June 30, 1994, two customers
each accounted for approximately 12% and 11% of sales. One customer
accounted for 10% of the Company's sales in the year ended June 30, 1993.
The backlog of firm orders at June 30, 1995 was $1,050,000, compared with
$3,904,000 at June 30, 1994, and $6,830,000 at June 30, 1993. The Company
does not believe that its backlog is material in the understanding of its
historical and prospective operations as annual fluctuations are primarily
attributable to unpredictable timing differences in receipt of product
orders. The Company anticipates that it will fill all of its June 30, 1995
backlog during its year ending June 30, 1996.
Seasonality is not a factor in the Company's business.
MANUFACTURING AND SOURCES OF SUPPLY
The Company manufactures and packages more than 90% of its products (measured
as a percentage of revenue) in its own manufacturing facilities (Refer to
Item 2 hereof, Properties). The balance of the Company's products are
manufactured to its specifications by a number of outside contractors.
Alternative contract manufacturing sources are available.
Raw materials essential to the conduct of the Company's business are
pharmaceutical chemicals and packaging components which it purchases in bulk
from a variety of sources. Historically, the Company has not experienced any
significant difficulty in obtaining the raw materials it requires. If raw
materials from a current supplier were to become unavailable, approval for a
replacement supplier must be sought from the FDA. The FDA approval process
could cause a delay of several months or longer in the manufacture of the
product so impacted.
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ENVIRONMENTAL MATTERS
The Company's operations require it to comply with a broad variety of laws,
statutes and regulations which are intended to protect both the environment
and the industrial workplace including, among others, the Federal Clean Water
Act, Clean Air Act, Resources Conservation and Recovery Act, Emergency
Planning and Community Right to Know Act, Comprehensive Environmental
Response, Compensation and Liability Act and the Occupational and Safety
Health Act, as well as their state and local equivalents, if any.
The Company believes that it is currently in substantial compliance with all
federal, state and local environmental laws and regulations applicable to its
business as now conducted.
During the years ended June 30, 1995, 1994 and 1993, the Company expended
$30,000, $15,000 and $579,000, respectively, for environmental control
equipment in connection with the expansion of its manufacturing facilities.
Capital expenditures for environmental control equipment for the year ending
June 30, 1996 are estimated to be less than $100,000.
COMPETITION
The Company competes with a number of other generic pharmaceutical companies
in a highly competitive and fragmented segment of the health-care industry.
In addition, many of the brand name companies with substantially greater
financial resources for research, development and marketing are entering that
generic market.
Principal competitive factors in the generic drug market include regulatory
compliance, price, customer service (including prompt fulfillment of orders)
and the ability to introduce generic versions of brand name drugs promptly
after the date of patent expiration granted by the United States Patent
Office and/or exclusivity granted by the FDA.
GOVERNMENT REGULATION
Pharmaceutical manufacturers are subject to extensive regulation by the FDA
and other government agencies and authorities. Various federal laws and
regulations govern the testing, manufacturing, safety, labeling, packaging,
storage, pricing, advertising and promotion of the Company's generic drug
products. Failure to comply with such laws and regulations may result in the
imposition of fines, recall and/or seizure of products, suspension of
manufacturing and FDA refusal to approve new drug applications.
Regulatory Approval Process
The Company's product line primarily consists of generic drug
products which contain the same active ingredient as the innovator
(brand name) product.
<PAGE>
The dosage form, route of administration and strength must be the
same as the innovator's product that was previously approved by the
FDA under a full New Drug Application (NDA). The NDA includes the
results of clinical trials that demonstrate safety and efficacy.
Each generic drug product is subject to prior FDA approval through
the submission of an ANDA. An ANDA must contain essentially the same
information as a full NDA, with the exception of safety and efficacy
data. Since a generic drug product contains the same active
ingredient in the same amount as the innovator product, it is assumed
to have the same safety and efficacy profile. A generic product
must be bioequivalent to the innovator product referenced in the
application. This means that the drug product must demonstrate the
same rate and extent of systemic absorption. An in-vivo
bioavailability study is conducted in healthy human subjects to meet
this requirement. In addition, the generic product must meet
appropriate in-vitro (dissolution) criteria. Quality Control testing
is conducted to ensure that the product meets compendial (United
States Pharmacopeia) standards and in-house specifications, as
applicable.
Recent Trends in FDA Procedures
The FDA has placed greater emphasis on the filing of complete ANDAs
by all generic drug product manufacturers, including the Company, and
has enunciated its position that it will not accept any application
that does not contain all necessary information as specified in the
FDA's current guidelines. In addition, the FDA has imposed more
stringent requirements on various aspects of the product development
process, the need for development of new procedures and increased
documentation, all of which extend the time to file ANDAs.
Another major component of the FDA's review process, applicable to
all generic drug manufacturers, is the product specific pre-approval
inspection in which the FDA focuses on the development of the drug
product, the manufacture of exhibit batches and the applicant's
capability to manufacture that product in accordance with the methods
and specifications defined in the ANDA. This manner of inspection
may also potentially lengthen the approval time for ANDAs.
Good Manufacturing Practices
As a manufacturer of pharmaceutical products, the Company is also
subject to current Good Manufacturing Practices ("cGMP") standards
promulgated by the FDA. Failure to comply with such standards may
result in, among other actions, the suspension of production and
possibly the seizure of non-complying products.
Medicaid Prudent Pharmaceutical Purchasing Act of 1991
Effective January 1, 1991 all generic pharmaceutical manufacturers
were required to pay a rebate, equal to 10% of the manufacturer's
average net selling price, for each prescription of its products
reimbursed by the states under Medicaid. As of January 1, 1994, the
rebate percent increased to 11%.
<PAGE>
Proposed Health Care Regulation
Numerous proposals for health care regulation and reform have
recently been proposed at both the federal and state levels.
These proposals, generally, seek to reduce the cost of health care
and increase its availability and efficiency. It cannot be
determined at this time which, if any, of such proposals will be
enacted and, to the extent enacted, what effect such proposals will
have on the price, distribution and marketing of pharmaceutical
products, including those of the Company.
EMPLOYEES
At June 30, 1995, the Company employed 328 full-time employees. Of these,
38 were executive and administrative personnel. Personnel primarily engaged
in research, product development and regulatory activities totaled 69.
Marketing and sales personnel totaled 27. Production and distribution
personnel totaled 142, while quality assurance and quality control totaled
52. Collective bargaining agreements between the Company and Locals 575 and
815 of the International Brotherhood of Teamsters expiring in January 1997
and January 1996, respectively, covered 116 employees as of June 30, 1995.
The Company has not experienced a material work stoppage in the past five
years and believes that its current labor relations are satisfactory.
PROPOSED ACQUISITIONS
On August 9, 1995, the Company signed a Letter of Intent with its majority
stockholder, Holdings, providing for (a) Holdings to exchange all of the
capital stock of each of Faulding Puerto Rico, Inc., a Delaware corporation
("FPR"), Faulding Pharmaceutical Co., a Delaware corporation ("FPC"), and
Faulding Medical Device Co., a Delaware corporation ("FMDC"), each a wholly-
owned subsidiary of Holdings (collectively, the "Acquired Companies"), for
2,253,521 shares of the Company's Common Stock, subject to adjustment as a
result of changes in the net asset value of the Acquired Companies from
June 30, 1995 through the closing date ("Share Exchange"), and (b) Holdings
to purchase on the closing date of the Share Exchange for an aggregate
purchase price of $15 million, 150,000 shares of a newly designated Series
B Preferred Stock, which shall accrue dividends at the rate of 4.5% per
annum, have a liquidation preference of $100 per share, plus the amount of
any accrued but unpaid dividends, and shall be convertible after the first
anniversary of issuance, at the ratio of 10.433 for one, into shares of
Purepac Common Stock.
Faulding Puerto Rico, Inc. was organized to acquire a parenteral product and
oral liquid pharmaceutical manufacturing facility located in Aguadilla,
Puerto Rico (the "Facility") from the DuPont Merck Pharmaceutical Company and
DuPont Merck Pharma. The Facility, which was acquired in April 1995,
manufactures ampules and vials of 2 ml to 30 ml containing six generic
pharmaceutical products in injectable form: Tridil Registered Trademark,
Intropin Registered Trademark, Bretylol Registered Trademark, acetylcysteine,
metoclopramide and amikacin. In addition to acquiring the Facility, FPR
acquired the intellectual property rights, including the United States
<PAGE>
trademarks for Tridil Registered Trademark and Intropin Registered Trademark,
and the rights to market and sell the majority of such products in the United
States. The Facility also acts as a contract manufacturer for two unrelated
pharmaceutical companies.
Faulding Pharmaceutical Co., originally organized as Faulding Hospital
Products, Inc., was recently established to perform the United States sales
and marketing activities for the products produced by FPR at its Aguadilla
facility and for certain of Faulding's products manufactured at its Mulgrave,
Victoria, Australia manufacturing facility, including certain of its anti-
cancer products. The products currently marketed and sold by FPC are
injectable pharmaceutical products; however, additional forms of products,
including oral solids, may be sold by FPC in the future, particularly if such
products are complementary with FPC's injectable product portfolio.
Faulding Medical Device Co., originally organized as DBL Inc., was
established to design, develop, manufacture and market injectable related
disposable devices and drug delivery system devices. The devices are
designed to enhance either the speed, safety, or sterility of injectable drug
delivery. While FMDC has developed and/or acquired the exclusive license in
the United States to several of such products, to date none of such products
is commercially available in the United States and only one of such products
has received FDA marketing approval. However, additional drug-specific
approvals are required from the FDA for this product before the medical
device, pre-filled with a drug, can be sold.
The proposed transactions described above are subject to a number of
conditions, including, without limitation, the approval of the Company's
non-Holdings stockholders and other conditions to closing. It is currently
anticipated that the closing will occur on or about December 31, 1995.
ITEM 2. PROPERTIES
The Company's executive offices, as well as research, production, principal
warehouse and distribution facilities, are housed in a 245,000 square foot
facility with two adjoining acres of parking space in Elizabeth, New Jersey.
In addition, the Company leases a 13,000 square foot distribution center in
Sparks, Nevada and a 38,000 square foot warehouse and office building in
Linden, New Jersey.
The Company believes that its facilities will be sufficient to satisfy its
anticipated needs for the proximate future.
ITEM 3. LEGAL PROCEEDINGS
Purepac, Inc. announced on January 4, 1995 that it had been named as a
defendant in a lawsuit filed in the United States District Court for the
District of New Jersey entitled Dechter vs. Purepac, Inc., Robert H. Bur and
Russell J. Reardon,(94 Civ. 6195). The
<PAGE>
complaint, which purported to be a class action on behalf of purchasers of
Purepac, Inc. common stock, challenged the timeliness of the Company's prior
public disclosure concerning compliance by its wholly-owned subsidiary,
Purepac Pharmaceutical Co., with cGMP and the receipt by that subsidiary of a
warning letter from the FDA. The lawsuit asserted, among other things,
violations of Section 10(b) of the Securities Exchange Act of 1934 and
certain common law claims.
The Company believed the allegations in the complaint to be entirely without
merit, and filed a motion to dismiss the complaint in March 1995. A hearing
before the court was held on the Company's motion to dismiss on Monday,
September 11, 1995. At that hearing, the court granted the Company's motion,
and dismissed the complaint in its entirety, finding that the complaint
failed to allege any actual violation of the U.S. securities laws on the part
of Purepac, Inc. or its senior executives.
The court's dismissal of the complaint technically ends the case. Pursuant
to the court's decision, the plaintiffs have the opportunity to consider
filing a motion with the court for permission to submit a proposed amended
complaint to address the deficiencies that led to the court's dismissal of
the current action. If this occurs, the Company will have the opportunity to
oppose such a motion, and intends to do so vigorously.
On or about June 9, 1995, an action was commenced against the Company in the
United States District Court for the District of Delaware entitled Merck &
Co., Inc. v. Purepac Pharmaceutical Co. (Case No. 95-495). The Complaint
alleges that the Company's recent submission of an ANDA to the FDA for
approval of a generic drug product developed by the Company which would be
the Company's generic version of a branded drug manufactured by Merck
constituted an act of infringement on certain patents owned by Merck with
respect to such product as listed in the FDA's Orange Book of Approved Drug
Products with Therapeutic Equivalence Evaluations (15th ed. 1995).
The complaint alleges that the Company has represented and certified to the
FDA that its proposed generic product is "bioequivalent" to Merck's branded
product, and that by virtue of this representation, Purepac would be able to
rely on Merck's safety and efficacy data for such product rather than having
to conduct its own safety and efficacy studies for submission to the FDA.
The complaint further alleges that Purepac has informed Merck that its
proposed generic drug product will not infringe on the listed patents owned
by Merck with respect to Merck's product on the grounds that the Company's
generic product does not contain all of the elements of the claims of the
listed Merck patents with respect to Merck's products. In the Complaint,
Merck disputes the Company's assertion of non-infringement, and seeks, among
other things, (a) a judgment that the Company's proposed generic product is
covered by Merck's patent, (b) an order delaying any FDA approval of the
Company's ANDA until the expiration of Merck's patents, (c) an order
enjoining the Company from the commercial manufacture
<PAGE>
or sale of any product that infringes on Merck's patents with respect to
Merck's product, and (d) alternatively, an order requiring the Company to
make further disclosure to the FDA regarding the bioequivalence of its
proposed product. Further, the complaint also seeks money damages in an
unspecified amount in the event that the Company manufactures, uses or sells
any product found to infringe Merck's patents.
The Company is involved in litigation incidental to the conduct of its
business, in addition to the above matters, and does not believe that the
ultimate adverse resolutions of any, or all, thereof would have a material
adverse effect on its financial position, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the last quarter
of the fiscal year ended June 30, 1995.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Stock is traded on the NASDAQ National Market System
("NASDAQ/NMS") under the symbol PURE.
The following table sets forth the range of high and low closing sales prices
of the Company's common stock on the NASDAQ/NMS.
FOR THE QUARTER ENDED: HIGH LOW
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FISCAL 1994
September 30, 1993 $ 20.500 $ 8.625
December 31, 1993 25.000 15.000
March 31, 1994 17.000 8.500
June 30, 1994 10.500 7.000
FISCAL 1995
September 30, 1994 14.250 8.000
December 31, 1994 16.250 10.125
March 31, 1995 11.625 8.750
June 30, 1995 11.375 8.375
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(b) Holders of Common Stock
The number of holders of record of the Company's common stock at
September 19, 1995 was 522.
(c) Dividends
The Company has neither declared nor paid any dividends on its shares of
common stock since its inception. Any decision as to the future payment of
common stock dividends will depend on the earnings and financial position of
the Company and such other factors as the Board of Directors deems relevant.
No dividends are payable on the common stock until all declared and accrued
dividends have been paid in full on the Company's issued and outstanding
shares of preferred stock, all of which are owned by Holdings. (Refer to
Note 11 of the Notes to Consolidated Financial Statements).
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA (Dollars in Thousands Except Per Share Amounts)
<CAPTION>
Year Ended June 30,
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1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $ 61,146 $ 70,005 $ 70,508 $ 64,531 $ 52,279
Income (loss) before
preferred stock dividends (847) 4,298 9,160 14,979 4,866
Preferred stock dividends 2,080 2,080 2,080 2,081 2,237
Net income (loss),
available for common
stock $ (2,927) $ 6,367(a) 7,080 $ 12,776(b) $ 5,985(c)
Net income (loss) per
common share, primary $ (.23) $ .51 $ .57 $ 1.05 $ .54
BALANCE SHEET DATA:
Working capital $ 21,811 $ 24,221 $ 23,150 $ 20,460 $ 12,072
Total assets 64,929 67,267 63,017 52,269 35,247
Long-term debt --- --- --- --- ---
Stockholders' equity $ 52,557 $ 54,860 $ 48,060 $ 39,699 $ 24,927
<FN>
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(a) Net income available for common stock for the year ended June 30, 1994
included the cumulative effect of a change in accounting for income
taxes of $4,149.
(b) Net income available for common stock for the year ended June 30, 1992
included the unfavorable cumulative effect on prior years of a change
in the method of accounting for income taxes of $122.
(c) Net income available for common stock for the year ended June 30, 1991
included an extraordinary item - reduction of income taxes due to
carryforward of prior year operating losses of $3,356.
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1995 COMPARED WITH THE YEAR ENDED JUNE 30, 1994
Net sales for the current year ended June 30, 1995 were $61,146,000 compared
with $70,005,000 for the prior year ended June 30, 1994. The decrease
reflects lower sales of certain mature products including nifedipine,
primarily due to declines in selling prices and to a lesser degree volume
reductions of some products as a result of competitive pressures, partially
offset by increased sales of several new products. The nifedipine products
accounted for 12% of net sales for the current year compared with 13% for the
prior year.
Gross profit for the current year was $14,671,000 compared with $22,834,000
for the prior year, a decline of $8,163,000 (36%). The gross profit as a
percent of net sales for the year ended June 30, 1995 was 24% compared with
33% for the prior year ended June 30, 1994. The decline was attributable
primarily to lower sales due to increased competition and to a lesser extent
to higher raw material costs.
The selling, general and administrative expense for the year ended June 30,
1995 was $9,817,000 compared with $9,409,000 for the prior year ended June
30, 1994, an increase of $408,000 (4%). The expense as a percent of net
sales was 16% compared with 13% for the prior year. The increase of
$408,000 is primarily due to higher personnel expenses.
The research and development expense for the current year remained relatively
constant at $6,741,000 compared with the prior year expense of $6,797,000.
The expense as a percent of net sales for the year ended June 30, 1995 was
11% compared with 10% for the prior year ended June 30, 1994. The steady
level of expense reflects the continuing commitment to new product
development.
Other expense of $63,000 for the current year ended June 30, 1995 included
interest expense of $105,000 partially offset by interest income of $42,000.
The corresponding prior year other income of $273,000 included interest
income of $102,000 and income of $200,000 from the sale of the Company's
Poroplastic Registered Trademark technology to Faulding, partially offset by
interest expense of $29,000. The interest income decline was primarily due
to the reduction of cash available for investment. The interest expense for
both years includes the revolving credit agreement fees.
The effective income tax (benefit) rate for the year ended June 30, 1995 was
(57%) compared with 38% for the year ended June 30, 1994 before the
cumulative effect of a change in accounting for income taxes. The current
year tax rate includes a $325,000 benefit related to a reversal of prior
years tax provisions resulting from a favorable resolution of completed
income tax examinations.
<PAGE>
Net loss for the current year before preferred stock dividends was $847,000
compared with net income for the prior year before preferred stock dividends
of $4,298,000.
YEAR ENDED JUNE 30, 1994 COMPARED WITH THE YEAR ENDED JUNE 30, 1993
Net sales for the year ended June 30, 1994 were $70,005,000 compared with
$70,508,000 for the prior year. The decrease reflects a decline in
nifedipine selling prices, partially offset by increased sales of certain
mature products and the introduction of three new products. The three new
products were carbidopa and levodopa, alprazolam and naproxen. The
nifedipine products accounted for 13% of net sales for the current year
compared with 30% for the prior year.
Gross profit for the year ended June 30, 1994 was $22,834,000 compared with
$29,277,000 for the prior year, a decline of $6,443,000 (22%). The gross
profit as a percent of net sales for the year ended June 30, 1994 was 33%
compared with 42% for the prior year ended June 30, 1993. The decline was
primarily attributable to nifedipine price reductions resulting from
increased competition.
The selling, general and administrative expense for the year ended June 30,
1994 of $9,409,000 declined from the prior year expense of $9,858,000 by
$449,000 (5%). The expense as a percent of net sales for the year ended June
30, 1994 was 13% compared with 14% for the prior year ended June 30, 1993.
The decrease is attributable to reductions in advertising, travel and
entertainment expenses.
The research and development expense for the year ended June 30, 1994 was
$6,797,000 compared with $5,944,000 for the prior year ended June 30, 1993.
The expense as a percent of net sales was 10% compared with 8% for the prior
year. The increase of $853,000 (14%) reflects the continuing commitment to
new product development.
Other income of $273,000 for the year ended June 30, 1994, included interest
income of $102,000 and income of $200,000 from the sale of the Company's
Poroplastic Registered Trademark technology to Faulding, partially offset by
interest expense of $29,000. The prior year's other income of $301,000
included interest income of $331,000 less interest expense of $30,000. The
interest income decline was primarily due to the reduction of cash available
for investment. The interest expense, for both years, included the revolving
credit agreement fees.
The effective income tax rate for the year ended June 30, 1994, before the
cumulative effect of a change in accounting for income taxes, was 38%
compared with 34% in the prior year. The rate increase is attributable to
the prior year having the benefit of
<PAGE>
approximately $936,000 for the utilization of net operating loss
carryforwards in accordance with Statement of Financial Accounting Standards
No. 96, "Accounting for Income Taxes" ("SFAS 96"). This was partially
offset by a lower effective state tax rate in the current year due to a
favorable mix of income by state. In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), in
current and subsequent years, the income tax expense provision will not
include the benefit of recognizing available loss carryforwards to the extent
they have already been recognized as a deferred tax asset. Instead, there
will be a reduction in the deferred tax asset when such benefits are utilized
to reduce taxes payable. (Refer to Note 14 of the Notes to Consolidated
Financial Statements).
Net income, available for common stock for the year ended June 30, 1994
included the cumulative effect of a change in accounting for income taxes of
$4,149,000 ($.33 per primary share and $.24 per share on a fully diluted
basis) as a result of the adoption of SFAS 109. Net income before preferred
stock dividends was $4,298,000 for the current year compared with $9,160,000
for the prior year.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had $1,156,000 in cash and cash equivalents at June 30, 1995,
compared with $3,154,000 at June 30, 1994. The current year's decrease of
$1,998,000 resulted primarily from cash used for investments in property,
plant and equipment of $2,954,000 and $1,044,000 used for operating
activities offset by $2,000,000 borrowed from a bank.
A comparison of the balance sheet accounts at June 30, 1995 to the June 30,
1994 balances shows the following to be noteworthy:
Net accounts receivable decreased by $1,270,000 as a result of
lower sales volumes and a $502,000 net increase in the reserves
for doubtful accounts and sales allowances, as described in the
following.
Included in the reserves for doubtful accounts and sales allowances
is the allowance for sales returns, allowances and discounts of
$1,935,000 at June 30, 1995 compared with $1,365,000 at June 30,
1994, an increase of $570,000. This increase is primarily due to
increases of $416,000 in the provision for credits owed to direct
source buying groups and $173,000 in the provision for
returns/allowances. The increase in the provision for such
allowances had an adverse effect on net sales and operations with no
effect on cash flows.
Inventory decreased by $1,358,000 principally due to lower sales
volumes.
<PAGE>
Other current assets increased by $1,301,000 primarily due to the
recording of a $1,129,000 federal income tax refund receivable as a
result of the Company carrying back its current year's net operating
loss.
Net property, plant and equipment increased by $898,000 reflecting
the investment in the modified-release manufacturing suite and
additions to the manufacturing facilities.
Accounts payable decreased by $2,207,000 due to both timing
differences in the purchase of materials and the lower inventory
level.
The accrued preferred dividend payable to Holdings was $520,095 for the
three-month period ended June 30, 1995 and was subsequently paid on July 3,
1995.
The Company believes that its current cash resources, anticipated operating
cash flows and funds available under a revolving credit and loan arrangement
with a bank will be sufficient to fund its working capital needs for the
foreseeable future. The loan agreement with the bank permitting the Company
to borrow up to $10,000,000 as of June 30, 1994 was amended to a $15,000,000
borrowing facility in August 1994. As at June 30, 1995, the Company has
committed to expansion of its granulation and oven capacity within the
Elizabeth facility. Total costs are expected to be $1.8 million. Management
regularly reviews its overall facility requirements for the business, taking
into consideration future capacity, compliance and regulatory requirements
necessary within this industry, including production and product development
capabilities.
Funding for the above specific expansion and other expenditures approved by
management or the Board as required is expected to be funded from either
operating profits or further draw down from its borrowing facility. In
addition, as part of the proposed acquisitions as previously stated, the
Company expects to receive an additional $15 million in cash from Holdings
via the issuance of the Series B Preferred Stock. It should be noted,
however, that these funds have been principally designated for the expansion
of the proposed acquired companies, but will be incorporated into the
Company's day to day funding.
NEW ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121 "Accounting For The Impairment Of
Long-Lived Assets" ("SFAS 121") which requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstance indicate
that the carrying amount of an asset may not be recoverable. To determine a
loss, if any, to be recognized, the book value of the asset would be compared
to the market value or expected future cash flow value. The Company is
required to adopt SFAS 121 for the fiscal years beginning after December 15,
1995 (fiscal year ended June 30, 1997 for the Company), although
<PAGE>
earlier implementation is permitted. The Company is evaluating when it will
adopt SFAS 121 and anticipates, based upon information currently available,
that it will not have a material impact on its results of operations and
financial position.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was issued by the Financial Accounting Standards Board in February
1992. SFAS 109 is effective for years beginning after December 15, 1992.
The Company adopted SFAS 109, effective July 1, 1993. This statement
supersedes SFAS 96, "Accounting for Income Taxes." The cumulative effect of
adopting SFAS 109 on the Company's financial statements, for the year ended
June 30, 1994 was to increase income by $4,149,000 with a corresponding
increase in the deferred tax asset. (Refer to Note 14 of the Notes to
Consolidated Financial Statements).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS Page
Report of Independent Public Accountants
Deloitte & Touche LLP........................................18
Consolidated Balance Sheets
June 30, 1995 and 1994.......................................19
Consolidated Statements of Operations
Year ended June 30, 1995, 1994 and 1993......................20
Consolidated Statements of Stockholders' Equity
Year ended June 30, 1995, 1994 and 1993......................21
Consolidated Statements of Cash Flows
Year ended June 30, 1995, 1994 and 1993..................... 22
Notes to Consolidated Financial Statements...........................23
FINANCIAL STATEMENT SCHEDULE
Schedule II: Valuation and Qualifying Accounts
Year ended June 30, 1995, 1994 and 1993......................43
<PAGE>
[ LETTERHEAD OF DELOITTE & TOUCHE ]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of Purepac, Inc.:
We have audited the accompanying consolidated balance sheets of Purepac,
Inc. and subsidiary as of June 30, 1995 and 1994 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the three years in the period ended June 30, 1995. Our audits also included
the financial statement schedule listed in the Index at Item 8. These
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule 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 Purepac, Inc. and its subsidiary
at June 30, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1995 in
conformity with generally accepted accounting principles. Also, in our
opinion, such a financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 14 to the financial statements, the Company changed its
method of accounting for income taxes effective July 1, 1993, to conform with
the Statement of Financial Accounting Standards No. 109.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
August 16, 1995
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30,
--------------------------------------
1995 1994
- - ---------------------------------------------------------------------------
ASSETS
- - ---------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,156,109 $ 3,153,844
Accounts receivable, trade
(less reserves for doubtful
accounts and sales allowances
of $ 2,054,000 and $1,552,000
at June 30, 1995, and 1994,
respectively) 9,702,889 10,973,351
Inventory (Note 3) 17,831,934 19,189,435
Due from affiliated companies
(Note 5) 172,689 ---
Other current assets 1,806,231 504,766
Deferred income taxes (Note 14) 3,513,038 2,806,000
- - ---------------------------------------------------------------------------
TOTAL CURRENT ASSETS 34,182,890 36,627,396
- - ---------------------------------------------------------------------------
Property, plant and equipment,
net (Note 4) 26,603,069 25,705,262
Other assets (Note 5) 3,229,140 3,241,644
Deferred income taxes (Note 14) 914,346 1,693,000
- - ---------------------------------------------------------------------------
TOTAL ASSETS $ 64,929,445 $ 67,267,302
===========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 4,843,679 $ 7,051,025
Due to affiliated companies
(Note 5) --- 119,593
Loan payable to bank (Note 7) 2,000,000 ---
Accrued expenses (Note 6) 5,008,267 4,411,866
Accrued income taxes (Note 14) --- 304,241
Accrued preferred dividends (Note 11) 520,095 520,095
- - ---------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 12,372,041 12,406,820
- - ---------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 12) --- ---
- - ---------------------------------------------------------------------------
"Stockholders' equity (Notes 8, 9, 10 and 11):
Class A convertible preferred stock;
par value $.01, authorized 1,834,188
shares; issued and outstanding 834,188
(liquidation value $24,995,171) 8,342 8,342
Common stock; par value $.01,
authorized 25,000,000 shares;
issued and outstanding 12,581,223
and 12,510,098 at June 30, 1995
and 1994, respectively 125,812 125,101
Capital in excess of par value 24,804,252 26,261,185
Retained earnings 27,618,998 28,465,854
- - ---------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 52,557,404 54,860,482
- - ---------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 64,929,445 $ 67,267,302
===========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended June 30,
------------------------------------------------
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 61,146,088 $ 70,004,673 $ 70,507,655
Cost of sales 46,475,507 47,170,793 41,230,869
- - -----------------------------------------------------------------------------------------------
Gross profit 14,670,581 22,833,880 29,276,786
- - -----------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 9,817,278 9,409,492 9,858,130
Research and development 6,741,066 6,796,967 5,943,651
- - -----------------------------------------------------------------------------------------------
Total expenses 16,558,344 16,206,459 15,801,781
- - -----------------------------------------------------------------------------------------------
Income (loss) from operations (1,887,763) 6,627,421 13,475,005
- - -----------------------------------------------------------------------------------------------
Other income (expense), net (63,093) 272,695 301,043
- - -----------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,950,856) 6,900,116 13,776,048
Provision (benefit) for income taxes
(Note 14) (1,104,000) 2,602,000 4,616,000
- - -----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PREFERRED
STOCK DIVIDENDS (846,856) 4,298,116 9,160,048
Preferred stock dividends 2,080,380 2,080,380 2,080,380
- - -----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING FOR INCOME TAXES (2,927,236) 2,217,736 7,079,668
Cumulative effect of a change in accounting
for income taxes (Note 14) --- 4,149,000 ---
- - -----------------------------------------------------------------------------------------------
NET INCOME (LOSS), AVAILABLE FOR COMMON
STOCK $ (2,927,236) $ 6,366,736 $ 7,079,668
===============================================================================================
PRIMARY EARNINGS PER COMMON SHARE (NOTE 2)
Income (loss) before cumulative effect of
a change in accounting for income taxes $ (.23) $ .18 $ .57
Cumulative effect of a change in accounting
for income taxes (Note 14) --- .33 ---
- - -----------------------------------------------------------------------------------------------
Net income (loss) $ (.23) $ .51 $ .57
===============================================================================================
Weighted average number of
common shares outstanding 12,538,537 12,468,184 12,417,536
- - -----------------------------------------------------------------------------------------------
EARNINGS PER SHARE ASSUMING FULL DILUTION (NOTE 2):
Income before cumulative effect of
a change in accounting for income taxes $ .24 $ .52
Cumulative effect of a change
in accounting for income taxes (Note 14) .24 ---
- - -----------------------------------------------------------------------------------------------
Net income $ .48 $ .52
===============================================================================================
Weighted average number of fully diluted shares 17,558,610 17,520,852
- - -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock Class A Preferred Capital in Retained
(Note 10) Stock (Note 11) Excess of Earnings
Shares Amount Shares Amount Par Value (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1992 12,400,848 $ 124,008 834,188 $ 8,342 $ 28,708,065 $ 10,858,690 $ 39,699,105
- - ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options
(Note 8) 27,000 270 --- --- 48,668 --- 48,938
Class A preferred stock dividend
(Note 11) --- --- --- --- (2,080,380) --- (2,080,380)
Stock grant amortization --- --- --- --- 360,546 --- 360,546
Reduction of income tax liability
from exercise of warrants (Note 10) --- --- --- --- 872,185 --- 872,185
Net income --- --- --- --- --- 9,160,048 9,160,048
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1993 12,427,848 124,278 834,188 8,342 27,909,084 20,018,738 48,060,442
- - ---------------------------------------------------------------------------------------------------------------------------------
Common stock issued pursuant
to stock grant plan (Note 9) 82,250 823 --- --- (823) --- ---
Class A preferred stock dividend
(Note 11) --- --- --- --- (2,080,380) --- (2,080,380)
Stock grant amortization --- --- --- --- 371,126 --- 371,126
Reduction of income tax liability
from exercise of stock options
(Note 8) --- --- --- --- 62,178 --- 62,178
Net income --- --- --- --- --- 8,447,116 8,447,116
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1994 12,510,098 125,101 834,188 8,342 26,261,185 28,465,854 54,860,482
- - ---------------------------------------------------------------------------------------------------------------------------------
Common stock issued pursuant
to stock grant plan (Note 9) 71,125 711 --- --- (711) --- ---
Class A preferred stock dividend
(Note 11) (2,080,380) (2,080,380)
Stock grant amortization --- --- --- --- 366,304 --- 366,304
Reduction of income tax liability
from issuance of stock pursuant
to stock grant plan (Note 9) --- --- --- --- 257,854 --- 257,854
Net income (loss) --- --- --- --- --- (846,856) (846,856)
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 12,581,223 $ 125,812 834,188 $ 8,342 $ 24,804,252 $ 27,618,998 $ 52,557,404
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended June 30,
-------------------------------------------
1995 1994 1993
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss), Available for Common Stock $ (2,927,236) $ 6,366,736 $ 7,079,668
Adjustments To Reconcile Net Income (loss)
To Net Cash Provided By (Used For)
OPERATING ACTIVITIES:
Depreciation and amortization 2,068,534 1,864,240 1,574,657
Compensation expense - stock grants 366,304 371,126 360,546
Provision for deferred taxes (including
cumulative effect of accounting change) --- (2,834,000) ---
Deferred income tax, asset 71,616 --- 951,000
INCREASE (DECREASE) IN CASH FROM:
Accounts receivable, trade 1,270,462 (667,572) (4,052,069)
Inventory 1,357,501 (4,272,320) (2,427,164)
Other current assets (172,465) (231,541) 67,712
Other assets --- --- 183,484
Accounts payable (2,207,346) 107,575 3,781,413
Accrued expenses 596,401 (1,062,799) (698,839)
Accrued income taxes (1,175,387) (1,065,560) (257,000)
Due to/from affiliates (292,282) (314,075) 446,245
- - ------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 1,883,338 (8,104,926) (70,015)
- - ------------------------------------------------------------------------------------------------
Net Cash Provided By (Used For)
Operating Activities (1,043,898) (1,738,190) 7,009,653
- - ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant
and equipment (2,953,837) (5,747,689) (7,429,619)
- - -------------------------------------------------------------------------------------------------
Net Cash Provided By (Used For)
Investing Activities (2,953,837) (5,747,689) (7,429,619)
- - -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock --- --- 48,938
Borrowings from bank 2,000,000 --- ---
- - -------------------------------------------------------------------------------------------------
Net Cash Provided By (Used For)
Financing Activities 2,000,000 --- 48,938
- - -------------------------------------------------------------------------------------------------
Increase (Decrease) In Cash
and Cash Equivalents $ (1,997,735) $ (7,485,879) $ (371,028)
=================================================================================================
Cash and cash equivalents,
beginning of year 3,153,844 10,639,723 11,010,751
- - -------------------------------------------------------------------------------------------------
Cash and Cash Equivalents,
End of Year $ 1,156,109 $ 3,153,844 $ 10,639,723
=================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 77,299 $ 29,253 $ 25,768
Income taxes $ 89,289 $ 2,355,000 $ 3,922,000
- - ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
At June 30, 1995, 1994 and 1993, 54%, 55% and 55%, respectively, of the
outstanding common stock of Purepac, Inc. (the "Company") was owned by
Faulding Holdings Inc. ("Holdings"), a wholly-owned subsidiary of F. H.
Faulding & Co. Limited ("Faulding"), a major Australian pharmaceutical
company.
On November 2, 1992, the Company changed its name from Moleculon, Inc. to
Purepac, Inc.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Purepac Pharmaceutical Co. ("Purepac").
All intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
Sales revenue is recognized upon shipment of the Company's products.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, certificates of deposit and
commercial paper having original maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation and
amortization is computed using the straight-line method over the following
estimated useful lives:
Building and improvements 30 years
Machinery and equipment 4-10 years
Furniture and fixtures 7-10 years
Leasehold improvements Remaining term of lease
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRADEMARKS
Trademarks, included in other assets, are amortized over 40 years using the
straight-line method, consist of the following:
June 30 June 30
1995 1994
------- -------
Cost $ 500,000 $ 500,000
Accumulated amortization 195,000 183,000
Net book value $ 305,000 $ 317,000
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including charges for such services provided
by Faulding, are charged to operations as incurred and represent the
Company's independent research and development efforts.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 statements of operations and statements
of cash flows have been reclassified to conform with the 1995 presentation.
EARNINGS PER COMMON SHARE
Primary earnings per common share is calculated by (i) dividing income before
cumulative effect of a change in accounting for income taxes less preferred
dividends by the weighted average number of common shares outstanding during
the year and (ii) by dividing the cumulative effect of a change in accounting
for income taxes, if any, by such average number of common shares. Common
stock equivalents are excluded as the effect is either not material or anti-
dilutive. Earnings per share, assuming full dilution (principally from
convertible preferred shares), is also presented for the years ended June 30,
1994 and 1993 and is based on the assumption that all contingently issuable
shares were outstanding from the beginning of the year to the extent dilution
results. For the current year ended June 30, 1995, fully diluted earnings
per share is not presented as the effect would be anti-dilutive.
SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended June 30, 1995, the Company recognized a tax benefit
when the Company issued 82,250 shares of common stock to employees pursuant
to the Company's 1991 Restricted Stock Incentive Plan. This transaction
provided the Company a tax benefit equal to the fair market value of the
stock on the date of
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issuance. For financial reporting purposes, the tax benefit was recorded as
a reduction of the deferred tax asset to the extent previously provided and
the remainder of the benefit was recorded as additional capital in excess of
par value. It is not reflected in the current tax provision.
During the year ended June 30, 1994, the Company recognized a tax benefit
when a holder of nonstatutory stock options purchased 14,000 shares of common
stock at $1.81 per share. This transaction provided the Company a tax
benefit to the extent that the fair market value of the stock issued on the
exercise date exceeded the option price. For financial reporting purposes,
this benefit was recorded as additional capital in excess of par value and is
not reflected in the current tax provision.
During the year ended June 30, 1993, the Company recognized a tax benefit
when a holder of warrants purchased 300,000 shares of common stock at an
average price of $5.17 per share. This transaction provided the Company a
tax benefit to the extent that the fair market value of the stock issued on
the exercise date exceeded the warrant price. For financial reporting
purposes, this benefit was recorded as additional capital in excess of par
value and is not reflected in the current tax provision.
3. INVENTORY
June 30, June 30,
1995 1994
------------ ------------
Raw materials $ 4,813,344 $ 7,734,277
Work-in-process 5,327,342 3,676,862
Finished goods 7,691,248 7,778,296
------------ ------------
TOTAL $ 17,831,934 $ 19,189,435
============ ============
4. PROPERTY, PLANT AND EQUIPMENT
June 30, June 30,
1995 1994
------------ ------------
Land $ 2,198,968 $ 2,198,968
Buildings and improvements 13,020,845 12,592,250
Machinery and equipment 13,995,485 13,304,732
Construction in progress 6,157,784 4,342,695
------------ ------------
Total cost 35,373,082 32,438,645
Less accumulated depreciation
and amortization (8,770,013) (6,733,383)
------------ ------------
Net book value $ 26,603,069 $ 25,705,262
============ ============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RELATED-PARTY TRANSACTIONS
During the years ended June 30, 1995, 1994, and 1993 the Company paid
Faulding $734,000, $2,536,000, and $2,006,000, respectively, for merchandise
purchases (pursuant to agreements to market erythromycin and doxycycline,
both described herein), $918,000, $1,007,000, and $458,000, respectively, for
research and development services and paid Faulding Services Inc. (Formerly
Faulding Inc.) $225,000, $127,000, and $100,000, respectively, for business
development services (pursuant to an agreement with Faulding Services Inc.,
described herein). Faulding Services Inc. is a 100% owned subsidiary of
Holdings.
Additionally, during the years ended June 30, 1995 and 1994, the Company was
reimbursed $1,919,000 and $486,000, respectively, by Faulding for materials
and services related to research and development projects and $200,000 during
the year ended June 30, 1994 for the sale to Faulding of the Company's
Poroplastic Registered Trademark technology.
During the year ended June 30, 1994, the Company paid Faulding Services Inc.
$623,000 for engineering and consulting services related to the construction
of a manufacturing suite to accommodate the modified-release technology.
During the year ended June 30, 1993, the Company paid Faulding $194,000 for
engineering and consulting services related to the construction of the
manufacturing suite and a $250,000 transfer fee, both to accommodate the
modified-release technology.
Included in other assets at June 30, 1995 and 1994 is $2,903,000 paid by the
Company to Faulding in June 1992 to acquire the proprietary technology,
including the scientific information and expertise, processes and procedures,
for the manufacture and sale of the generic version of certain modified-
release pharmaceutical products. The acquired technology is restricted to
use, on an exclusive basis, in the United States of America and its
territories.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts due from (due to) affiliated companies are payable on demand and were
as follows as of:
June 30, 1995 June 30, 1994
------------- -------------
Faulding $ 200,007 $ (123,455)
Holdings 9,677 3,000
Faulding Services Inc. (36,995 862
------------- -------------
$ 172,689 $ (119,593)
============= =============
Purepac entered into an agreement with Faulding as of December 5, 1992,
pursuant to which Purepac agreed to provide services to Faulding for the
tableting of pellets and micropellets on a time and materials basis. During
the year ended June 30, 1995, no related services were provided by Purepac to
Faulding.
In addition, Purepac and Faulding entered into a three-year agreement, also
dated as of December 5, 1992, which is automatically renewable for successive
two-year periods, pursuant to which Faulding granted Purepac a non-exclusive
license to import, distribute and market an erythromycin product in the
United States and the Latin American Countries, subject to certain minimum
purchase requirements.
On January 1, 1993, Purepac and Faulding Services Inc. entered into a
consulting agreement, which terminates on December 31, 1995, pursuant to
which Purepac retained Faulding Services Inc. to serve as a business
development consultant and advisor on a non-exclusive basis.
On August 1, 1993, Purepac entered into a ten-year agreement with Faulding
Services Inc. to manufacture a specific product utilizing Faulding Services
Inc. technology, processes and manufacturing methods. Faulding Services
Inc., at its sole cost, shall seek all necessary approvals and/or
registrations from the appropriate regulatory authority to enable the sale of
the product and, upon such approval, Purepac's obligation to provide
manufacturing services will commence. The parties amended this agreement in
December 1994 to resolve certain inconsistencies between this agreement and
an agreement with an unrelated third party, to distribute the product
manufactured by Purepac. On June 27, 1995 the Company and Faulding Services
Inc. entered into a Services Agreement pursuant to which Purepac agreed to
provide certain services on Faulding Services Inc.'s behalf that Faulding
Services Inc. had agreed to provide under the agreement with the third party.
On March 15, 1995 Purepac and Faulding entered into a three-year non-
exclusive license agreement for Purepac to import and distribute doxycycline,
a delayed-release product, in the United States in exchange for certain
payments to Faulding for its supply of the product to Purepac.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purepac and Faulding entered into two agreements as of June 26, 1995. One is
a licensing agreement pursuant to which Faulding granted to Purepac an
exclusive ten-year license to utilize certain technology to complete the
development of a modified-release product and manufacture and sell the
product in the United States. Relating to the product development, Purepac
paid to Faulding most of the technology licensing fees prior to June 30, 1994
(expensed as research and development costs) with a projection of
approximately $600,000 still to be paid as incurred . In addition, Purepac
will be obligated to pay royalties related to net sales of the product.
The second agreement dated as of June 26, 1995 is a ten-year Co-development,
Supply and Licensing Agreement whereby Faulding will develop and deliver a
certain component pellet of a modified-release product for Purepac's use in
developing, manufacturing and distributing such product in the United States.
Faulding will supply Purepac with pellets at a price set forth in the
agreement. If the parties later concur that Purepac will manufacture the
pellets, Faulding will grant Purepac an exclusive license to the pellet
technology for the remainder of the term of the agreement in consideration of
a technology transfer fee of $250,000 and ongoing royalty payments.
As of June 26, 1995, Purepac entered into a one-year Services Agreement with
Faulding Pharmaceutical Co., a wholly owned subsidiary of Holdings, for
Purepac to provide certain customer support, warehousing, accounting and
quality assurance services.
The Company believes that the terms of the foregoing agreements are at least
as favorable as those it could have obtained in comparable nonaffiliated
third party transactions.
6. ACCRUED EXPENSES
June 30, June 30,
1995 1994
------------- -------------
Advertising and
promotion programs $ 1,320,489 $ 1,164,038
Medicaid rebate 519,947 654,639
Professional fees 825,205 644,279
Compensation and
payroll taxes 1,299,511 1,024,798
All other 1,043,115 924,112
------------- -------------
Total $ 5,008,267 $ 4,411,866
============= =============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
On May 24, 1990, the Company entered into an uncollateralized financing
agreement with a commercial bank, which agreement was amended on May 24,
1992. The agreement permits the Company to borrow up to $10,000,000, of
which a maximum of $5,000,000 may be borrowed under a term loan facility.
Borrowings under the term loan facility mature five years from the date of
the borrowing. The difference between the total financing agreement of
$10,000,000 and any borrowings under the term loan facility may be utilized
as revolving debt. The Company is required to meet certain financial
covenants, including a minimum debt-to-equity ratio and a minimum aggregate
net asset amount.
In August 1994, the aforementioned agreement was further amended to permit
the Company to borrow up to $15,000,000.
At June 30, 1995, the Company had an outstanding loan from the bank of
$2,000,000 at an interest rate of 6.64% per annum. Due to the short-term
nature of this debt and related interest rates, the Company believes that the
recorded amount is a reasonable estimate of fair value for the outstanding
loan. At June 30, 1995, there were no outstanding letters of credit.
At June 30, 1994, the Company had no outstanding borrowings from the bank and
had an outstanding standby letter of credit of $250,000 for an alcohol
drawback bond.
8. STOCK OPTIONS
1994 STOCK OPTION PLAN
On October 18, 1994, the shareholders approved the 1994 Stock Option Plan
(the "1994 Plan") which provides for issuance of up to 1,000,000 options to
acquire shares of the Company's authorized common stock. The options are
intended to qualify as Incentive Stock Options (statutory options) as defined
by the Internal Revenue Code or as Nonstatutory Stock Options.
Under the 1994 Plan, the Incentive Stock Options may be granted to key
employees of the Company or a subsidiary of the Company and the Nonstatutory
Stock Options may be granted to any key employee, officer, non-employee
director or consultant to the Company or a subsidiary of the Company, with
the exception that Nonstatutory Stock Options may not be granted to a holder
of more than 10% of the total voting power of the Company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The exercise price of all Incentive Stock Options must be at least equal to
the fair market value of such shares on the date of grant. The exercise
price of all Nonstatutory Stock Options granted under the 1994 Plan shall be
determined by the Board of Directors of the Company at the time of grant. No
option granted shall be exercisable after the expiration of ten (10) years
from the date of grant.
During the year ended June 30, 1995, the Company awarded two employees 33,000
Incentive Stock Options exercisable at $9.25 per share. In July 1995, 4,600
of those options were exercisable.
On July 17, 1995 the Company granted Richard Moldin, the Chief Executive
Officer and President of the Company, options to purchase 150,000 shares, of
which 49,382 were Incentive Stock Options and 100,618 were Nonstatutory Stock
Options, all at $10.125 per share. None of the options are currently
exercisable.
INCENTIVE STOCK OPTIONS, TERMINATED YEAR ENDED JUNE 30, 1993
The Company had a Stock Option Plan which was terminated in accordance with
its own provisions on September 1, 1992. Under this plan, incentive stock
options were granted to key employees of the Company at not less than fair
market value as determined by the Board of Directors on the date of the
grant. Nonstatutory options were granted at not less than 50% of the fair
market value, as determined by the Board of Directors on the date of grant.
During the year ended June 30, 1993, an employee exercised options to
purchase 7,000 shares of common stock. This was the last remaining
exercisable incentive stock option. The net proceeds from the 7,000 share
transaction amounted to $12,688.
Information on incentive stock option activity under the Stock Option Plan is
as follows:
Number of Exercise Price
Shares Per Share
--------- --------------
Outstanding at June 30, 1991 10,000 $1.81
---------
Exercised (3,000) 1.81
---------
Outstanding at June 30, 1992 7,000 1.81
---------
Exercised (7,000) 1.81
---------
Outstanding at June 30, 1993, Final -0-
=========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NON-QUALIFIED STOCK OPTIONS, TERMINATED YEAR ENDED JUNE 30, 1993
On January 19, 1988, the Board of Directors granted five-year non-qualified
stock options to a then director to purchase 30,000 shares of common stock at
the fair market value of $1.8125 per share. These options were exercisable
at the rate of 25% per year commencing one year from the date of grant and
expiring five years from the date of grant. During the year ended June 30,
1992, the former director exercised options to purchase 10,000 shares of
common stock. During the year ended June 30, 1993, the former director
exercised the balance of his options and purchased 20,000 shares of common
stock. This was the last remaining exercisable non-qualified stock option.
The net proceeds from the 20,000 shares amounted to $36,250.
9. RESTRICTED STOCK INCENTIVE PLAN
The shareholders approved the Company's 1991 Restricted Stock Incentive Plan
(the "Plan") for key employees of the Company. The Board of Directors have
allotted 465,000 shares for the stock grant plan.
On November 25, 1991, the Company awarded grants aggregating 275,000 shares
of the Company's common stock to 15 employees. Such grants were valued at
$8.125 per share, being the market value thereof on the date of grant.
During the year ended June 30, 1993, due to two resignations, grants totaling
20,000 shares were terminated. During the year ended June 30, 1994, due to
one resignation, grants totaling 20,000 shares were terminated. During the
year ended June 30, 1995, due to two resignations, grants totaling 10,500
shares were terminated.
On March 5, 1993, the Company awarded grants aggregating 50,000 shares of the
Company's common stock to six employees. Such grants were valued at $13.8125
per share, being the market value thereof on the date of grant. During the
year ended June 30, 1994, due to one resignation, grants totaling 7,500
shares were terminated.
During the year ended June 30, 1995, the Company issued 71,125 shares of
common stock to employees pursuant to the Plan. As a result of the issuance
of these shares, the Company will have an income tax deduction of $759,063 in
the year ending June 30, 1996. The deduction will result in a reduction in
taxes payable of approximately $288,000. In the same year, for financial
reporting purposes, the tax benefit will be recorded as a reduction of the
deferred tax asset to the extent previously provided and the remainder of the
benefit will be recorded as additional capital in excess of par value. It
will not be reflected in the reported earnings or the earnings per share
calculations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1994, the Company issued 82,250 shares of
common stock to employees pursuant to the Plan. As a result of the issuance
of these shares, the Company had an income tax deduction of $1,346,844 in the
year ended June 30, 1995. The deduction resulted in a reduction in taxes
payable of approximately $512,000. In that year, for financial reporting
purposes, the tax benefit was recorded as a reduction of the deferred tax
asset to the extent previously provided and the remainder of the benefit was
recorded as additional capital in excess of par value. It was not reflected
in the reported earnings or the earnings per share calculations.
Information on the Restricted Stock Incentive Plan activity is as follows:
Number of Grants Awarded, by Date
-------------------------------------
November 25, 1991 March 5, 1993
----------------- -------------
Outstanding at June 30, 1992 275,000
-------
Terminated (20,000)
Grants awarded --- 50,000
------- ------
Outstanding at June 30, 1993 255,000 50,000
------- ------
Terminated (20,000) (7,500)
Shares Issued (82,250) ---
-------- ------
Outstanding at June 30, 1994 152,750 42,500
-------- ------
Terminated (10,500) ---
Shares Issued (56,250) (14,875)
-------- ------
Outstanding at June 30, 1995 86,000 27,625
======== ========
10. COMMON STOCK AND WARRANTS
On February 1, 1987, the Company granted to Allen & Company Incorporated
five-year warrants to purchase an aggregate of 400,000 shares of common stock
of which 200,000 were exercisable at $4.00 per share (Series A Warrants) and
200,000 at $10.00 per share (Series B Warrants). Pursuant to a written
agreement entered into in January 1992, the Series B Warrants originally
issued to purchase 200,000 shares at $10.00 per share were amended to
purchase 100,000 shares at $7.50 per share. In addition, the amendment
extended the expiration date of exercise of both series of warrants from
February 1, 1992 to a period of 90 days commencing on the effective date of
the related Form S-3 Registration Statement. The Form S-3 and related
prospectus became effective on April 24, 1992 and, during the year ended June
30, 1992, the warrants were exercised to purchase 300,000 shares of common
stock. The gross proceeds from this transaction amounted to $1,550,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1993, the Company issued in aggregate 27,000
shares of common stock upon exercises of both incentive stock options and
non-qualified stock options discussed in Note 8. The net proceeds from these
transactions amounted to $48,938.
During the year ended June 30, 1994, the Company issued in aggregate 82,250
shares of common stock to employees, pursuant to the Company's 1991
Restricted Stock Incentive Plan discussed in Note 9. The Company received no
proceeds from this transaction.
During the year ended June 30, 1995, the Company issued in aggregate 71,125
shares of common stock to employees, pursuant to the Company's 1991
Restricted Stock Incentive Plan discussed in Note 9. The Company received no
proceeds from this transaction.
11. PREFERRED STOCK
The authorized but unissued preferred stock may be issued from time to time,
in one or more series, by the Board of Directors.
In 1987, the Company issued and sold to Holdings 834,188 shares of the Class
A preferred stock at $29.34 per share, or $23,133,223, net of expenses of
$1,341,853. These shares provide for a cumulative dividend of 8.5% per
annum, which dividend accrues until such time as the Company shall have
profits, surpluses or other funds legally available for payment of dividends.
Dividends accrue on each share of Class A preferred stock on a daily basis
at 8.5% per annum of liquidation value and are payable quarterly on the first
days of January, April, July and October, beginning in January 1988. If any
accrued dividends, for any reason, are not paid on these days, then such
dividend shall be considered in arrears and, until paid, shall continue to be
accrued on the liquidation value (purchase price less dividends paid) plus
dividends in arrears.
During the years ended June 30, 1995, 1994 and 1993, all current year
preferred dividends totaling $2,080,380, each year were paid. The quarterly
dividend of $520,095 was declared and accrued at June 30, 1995 and
subsequently paid on July 3, 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each share of Class A preferred stock may be converted, at the election of
the holder, into six shares of common stock. At June 30, 1995, 5,005,128
shares of common stock were reserved for issuance under the terms of the
Class A preferred stock.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Class A preferred stock shall be entitled to be paid out of
the assets of the Company available for distribution to its stockholders,
whether from capital, surplus or earnings, amounts in cash equal to the sum
of $29.34 per share plus all accrued and unpaid dividends.
On or after December 1, 1997, the Company may, at its election, redeem any or
all shares of Class A preferred stock. For each share of Class A preferred
stock redeemed, the Company shall be obligated to pay a redemption price of
$29.34 per share plus any accrued and unpaid dividends.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain of its equipment and property under operating
leases which provide for monthly lease payments and, in certain instances,
provide options to purchase the property at fair market value. For the years
ended June 30, 1995, 1994 and 1993, total rental expense for operating leases
amounted to $427,000, $315,000 and $341,000, respectively. The following is
a schedule of future minimum rental payments under such operating leases:
Fiscal Year Ending June 30,
---------------------------
1996 $ 362,000
1997 297,000
1998 209,000
1999 34,000
2000 0
In prior years, the Company had a contingent liability associated with a
property lease it had previously occupied in Cambridge, Massachusetts.
During the year ended June 30, 1995, this property was purchased by the
tenant, thereby extinguishing that contingent liability.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LITIGATION
Purepac, Inc. announced on January 4, 1995 that it had been named as a
defendant in a lawsuit filed in the United States District Court for the
District of New Jersey entitled Dechter vs. Purepac, Inc., Robert H. Bur and
Russell J. Reardon,(94 Civ. 6195). The complaint, which purported to be a
class action on behalf of purchasers of Purepac, Inc. common stock,
challenged the timeliness of the Company's prior public disclosure concerning
compliance by its wholly-owned subsidiary, Purepac Pharmaceutical Co., with
current good manufacturing practices and the receipt by that subsidiary of a
warning letter from the U.S. Food and Drug Administration ("FDA"). The
lawsuit asserted, among other things, violations of Section 10(b) of the
Securities Exchange Act of 1934 and certain common law claims.
The Company believed the allegations in the complaint to be entirely without
merit, and filed a motion to dismiss the complaint in March 1995. A hearing
before the court was held on the Company's motion to dismiss on Monday,
September 11, 1995. At that hearing, the court granted the Company's motion,
and dismissed the complaint in its entirety, finding that the complaint
failed to allege any actual violation of the U.S. securities laws on the part
of Purepac, Inc. or its senior executives.
The court's dismissal of the complaint technically ends the case. Pursuant
to the court's decision, the plaintiffs have the opportunity to consider
filing a motion with the court for permission to submit a proposed amended
complaint to address the deficiencies that led to the court's dismissal of
the current action. If this occurs, the Company will have the opportunity to
oppose such a motion, and intends to do so vigorously.
On or about June 9, 1995, an action was commenced against the Company in the
United States District Court for the District of Delaware entitled Merck &
Co., Inc. v. Purepac Pharmaceutical Co. (Case No. 95-495). The complaint
alleges that the Company's recent submission of an Abbreviated New Drug
Application ("ANDA") to the FDA for approval of a generic drug product
developed by the Company which would be the Company's generic version of a
branded drug manufactured by Merck constituted an act of infringement on
certain patents owned by Merck with respect to such product as listed in the
FDA's Orange Book of Approved Drug Products with Therapeutic Equivalence
Evaluations (15th ed. 1995).
The complaint alleges that the Company has represented and certified to the
FDA that its proposed generic product is "bioequivalent" to Merck's branded
product, and that by virtue of this representation, Purepac would be able to
rely on Merck's safety and efficacy data for such product rather than having
to conduct its own safety and efficacy studies for submission to the FDA.
The complaint further alleges that Purepac has informed Merck that its
proposed generic drug product will not infringe on the listed
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
patents owned by Merck with respect to Merck's product on the grounds that
the Company's generic product does not contain all of the elements of the
claims of the listed Merck patents with respect to Merck's products. In the
complaint, Merck disputes the Company's assertion of non-infringement, and
seeks, among other things, (a) a judgment that the Company's proposed generic
product is covered by Merck's patent, (b) an order delaying any FDA approval
of the Company's ANDA until the expiration of Merck's patents, (c) an order
enjoining the Company from the commercial manufacture or sale of any product
that infringes on Merck's patents with respect to Merck's product, and
(d) alternatively, an order requiring the Company to make further disclosure
to the FDA regarding the bioequivalence of its proposed product. Further,
the complaint also seeks money damages in an unspecified amount in the event
that the Company manufactures, uses or sells any product found to infringe
Merck's patents.
The Company is involved in litigation incidental to the conduct of its
business, in addition to the above matters, and does not believe that the
ultimate adverse resolutions of any, or all, thereof would have a material
adverse effect on its financial position, results of operations or cash
flows.
13. EMPLOYEE BENEFIT PLANS
In January 1990, the Company adopted a defined benefit pension plan (the
"Plan"). The Plan covers employees who have one year or more of credited
service and whose employment is not governed by a collective bargaining
agreement. Net periodic pension cost is comprised of the components listed
below, as determined using the projected unit credit actuarial cost method.
The Company's funding policy is to make annual contributions to the Plan in
such amounts necessary to fund benefits provided under the Plan on the basis
of information furnished by the Company's actuary.
Year Ended June 30,
--------------------------------
Net Periodic Pension Cost 1995 1994 1993
-------- -------- --------
Service cost for benefits earned
during the period $298,412 $327,922 $234,223
Interest cost on projected
benefit obligation 151,444 118,241 82,294
Return on plan assets (87,570) (63,115) (34,228)
Amortization of prior service cost 18,423 26,737 26,737
Amortization of actuarial loss 561 33,037 11,918
-------- -------- --------
TOTAL $381,270 $442,822 $320,944
======== ======== ========
June 30, June 30,
----------- -----------
Funded Status and Obligations of the Plan 1995 1994
----------- -----------
Actuarial present value of accumulated
benefit obligations $ 1,080,476 $ 965,302
Vested benefits included in above $ 962,519 $ 828,390
- - --------------------------------------------------------------------------
Projected benefit obligation $ 2,342,912 $ 2,265,250
Plan assets at fair value (1,446,850) (1,056,776)
Unrecognized prior service cost (158,606) (293,504)
Unrecognized net gain (loss) (198,720) (610,429)
----------- -----------
ACCRUED PENSION OBLIGATION $ 538,736 $ 304,541
=========== ===========
The discount rate used in determining the projected benefit obligations was
8% at June 30, 1995, an increase of 1.5% from June 30, 1994. The rate of
increase in future compensation levels used in the determination was 5.5% and
4.5% for June 30, 1995
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and 1994, respectively. The expected long-term rate of return on the Plan's
assets used in determining pension cost was 8% for both years.
The Company also has a 401(K) savings and investment plan established January
1, 1990, which allows employees to defer up to 15% of their salary, with the
Company matching 25% of employees' contributions not exceeding 5% of their
salary. The plan was amended, effective January 1, 1991, to increase the
Company match from 25% to 50% of the first 5% of employees' contribution and,
effective July 1, 1991, to increase the Company matching contribution to 50%
of each employee's contribution not exceeding 6% of an employee's salary.
The Company's contribution charged to operations for the years ended June 30,
1995, 1994 and 1993 was $222,000, $197,000 and $183,000, respectively.
14. INCOME TAXES
The Company adopted Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("SFAS 109"), effective July 1, 1993. This
statement supersedes Statement of Financial Accounting Standard No. 96,
"Accounting for Income Taxes" ("SFAS 96"). The cumulative effect of adopting
SFAS 109 on the Company's financial statements for the year ended June 30,
1994, was to increase income by $4,149,000 ($.33 per primary common share and
$.24 per share on a fully diluted basis) with a corresponding increase in the
deferred tax asset.
Deferred income tax assets, both current and non-current, reflect the net tax
effects of (a) temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) operating loss and tax credit carryforwards.
In current and subsequent years, the income tax expense provision will not
include the benefit of recognizing available loss carryforwards to the extent
they have already been recognized as a deferred tax asset. Instead, there
will be a reduction in the deferred tax asset when such benefits are utilized
to reduce taxes payable.
The decrease in the current year's deferred tax assets resulted primarily
from the recognition of tax deductible items in the current year.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net deferred tax assets consisted of the following as of:
June 30, June 30,
1995 1994
------------ ------------
Current Deferred Tax Asset:
Reserve for doubtful accounts $ 779,000 $ 589,000
Reserve for inventory obsolescence 509,000 623,000
Sundry accruals 557,000 656,000
Stock grant amortization --- 97,000
Federal operating loss carryforwards 1,021,000 533,000
Federal tax credit carryforwards 707,000 404,000
State operating loss carryforwards 198,000 ---
------------ ------------
3,771,000 2,902,000
------------ ------------
Current Deferred Tax Liability:
Stock grant amortization 158,000 ---
Prepaids 96,000 77,000
Property, plant and equipment 4,000 19,000
------------ ------------
258,000 96,000
------------ ------------
NET CURRENT DEFERRED TAX ASSET $ 3,513,000 $ 2,806,000
============ ============
Non-Current Deferred Tax Asset:
Stock grant amortization $ 392,000 $ 252,000
Federal operating loss carryforwards 3,416,000 3,904,000
Federal tax credit carryforwards --- 303,000
------------ ------------
3,808,000 4,459,000
------------ ------------
Non-Current Deferred Tax Liability:
Property, plant and equipment 2,609,000 2,591,000
License amortization 285,000 175,000
------------ ------------
2,894,000 2,766,000
------------ ------------
NET NON-CURRENT DEFERRED TAX ASSET $ 914,000 $ 1,693,000
============ ============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes was comprised of the following:
Year Ended June 30,
--------------------------------------------
1995 1994 1993
Current ------------ ----------- -----------
Federal $ (1,026,000) $ 1,047,000 $ 2,580,000
State (150,000) 366,000 1,085,000
------------ ----------- -----------
(1,176,000) 1,413,000 3,665,000
Deferred
Federal 61,000 1,149,000 951,000
State 11,000 40,000 ---
------------ ----------- -----------
TOTAL PROVISION (BENEFIT) $ (1,104,000) $ 2,602,000 $ 4,616,000
============ =========== ===========
The current year's provision for income taxes includes a $325,000 benefit
related to a reversal of prior years tax provisions resulting from completed
income tax examinations.
The Company has net operating losses and tax credits available as
carryforwards to reduce future federal income taxes. State tax losses are
also available as carryforwards. At June 30, 1995, for federal tax purposes,
the net operating loss and tax credit carryforwards amounted to $13,048,000
and $707,000, respectively; they expire through 2003. The future utilization
of the net operating loss carryforwards by the Company is subject to
limitation under provisions of the Internal Revenue Code. In addition, the
Company will carryback its current year's federal net operating loss and
recover approximately $1,000,000 of federal income tax.
A reconciliation of the statutory federal rate to the effective tax rate is
as follows:
Year Ended June 30,
---------------------------
1995 1994 1993
------ ------ ------
Statutory federal rate (34%) 34% 34%
State taxes net of federal benefit (4) 4 6
Benefit of utilizing net operating
loss carryforwards --- --- (7)
Reversal of prior year provisions (17) --- ---
Other (2) --- 1
------ ------ ------
EFFECTIVE TAX RATE (57%) 38% 34%
======= ====== ======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SEGMENT INFORMATION
The Company operates in one business segment, i.e., the manufacture and sale
of generic pharmaceutical products. For the year ended June 30, 1995, three
customers each accounted for approximately 13%, 11% and 10% of sales. Sales
to the three customers were $7.8 million, $6.9 million and $6.3 million,
respectively. For the year ended June 30, 1994, two customers each accounted
for approximately 12% and 11% of sales. Sales to the two customers were
$8.3 million and $8.1 million, respectively. For the fiscal year ended June
30, 1993, one customer with sales of $7.1 million accounted for 10% of sales.
16. SUBSEQUENT EVENTS
On August 10, 1995, the Company announced its intent to (a) execute a Stock
Purchase Agreement with its majority stockholder, Holdings, providing for
Holdings to exchange all of the capital stock of each of Faulding Puerto
Rico, Inc., a Delaware corporation ("FPR"), Faulding Pharmaceutical Co., a
Delaware corporation ("FPC"), and Faulding Medical Device Co., a Delaware
corporation ("FMDC"), each a wholly-owned subsidiary of Holdings
(collectively, the "Acquired Companies"), for 2,253,521 shares of the
Company's Common Stock, subject to adjustment as a result of changes in the
net asset value of the Acquired Companies from June 30, 1995 through the
closing date ("Share Exchange"), and (b) execute a Preferred Stock Purchase
Agreement providing for Holdings to purchase on the closing date of the Share
Exchange for an aggregate purchase price of $15 million, 150,000 shares of a
newly designated Class B Preferred Stock, which shall accrue dividends at the
rate of 4.5% per annum, have a liquidation preference of $100 per share, plus
the amount of any accrued but unpaid dividends, and shall be convertible
after the first anniversary of issuance, at the ratio of 10.433 for one, into
shares of Purepac Common Stock.
Faulding Puerto Rico, Inc. was organized to acquire a small volume parenteral
product and oral liquid pharmaceutical product manufacturing facility located
in Aguadilla, Puerto Rico (the "Facility") from the DuPont Merck
Pharmaceutical Company and DuPont Merck Pharma. The Facility, which was
acquired in April 1995, manufactures ampules, syringes and vials of 2 ml to
30 ml containing six generic pharmaceutical products in injectable form,
Tridil Registered Trademark, Intropin Registered Trademark, Bretylol
Registered Trademark, acetylcysteine, metoclopramide and amikacin.
In addition to acquiring the Facility, FPR acquired the intellectual property
rights, including the United States trademarks for Tridil Registered
Trademark and Intropin Registered Trademark, and the rights to market and
sell the majority of such products in the United States. The Facility also
acts as a contract manufacturer for two unrelated pharmaceutical companies.
Faulding Pharmaceutical Co., originally organized as Faulding Hospital
Products, Inc., was recently established to perform the United States sales
and marketing activities for the products produced by FPR at its Aguadilla
facility and for certain of Faulding's
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
products manufactured at its Mulgrave, Victoria, Australia manufacturing
facility, including certain of its anti-cancer products. The products
currently marketed and sold by FPC are injectable pharmaceutical products,
however, additional forms of products, including oral solids, may be sold by
FPC in the future, particularly if such products are complementary with FPC's
injectable product portfolio.
Faulding Medical Device Co., originally organized as DBL Inc., was
established to design, develop, manufacture and market injectable related
disposable devices and drug delivery system devices. The devices are
designed to enhance either the speed, safety, or sterility of injectable drug
delivery. While FMDC has developed and/or acquired the exclusive license in
the United States to several of such products, to date none of such products
is commercially available in the United States and only one of such products
has received FDA marketing approval. However, additional drug-specific
approvals are required from the FDA for this product before the medical
device, pre-filled with a drug, can be sold.
The proposed transactions described above are subject to a number of
conditions, including, without limitation, the approval of the Company's non-
Holdings stockholders and other conditions to closing. It is currently
anticipated that the closing will occur on or about December 31, 1995.
<PAGE>
SCHEDULE II
<TABLE>
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Balance at Charged to Balance
For the Year Ended Beginning Costs and at End
June 30, 1995: of Year Expenses Deductions of Year
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for sales returns
allowances and discounts $ 1,365,047 $ 12,312,300 $ 11,741,952 $ 1,935,395
Allowance for doubtful
accounts 187,000 (68,000) --- 119,000
- - ------------------------------------------------------------------------------------------
TOTAL $ 1,552,047 $ 12,244,300 $ 11,741,952 $ 2,054,395
==========================================================================================
Balance at Charged to Balance
For the Year Ended Beginning Costs and at End
June 30, 1994: of Year Expenses Deductions of Year
- - ------------------------------------------------------------------------------------------
Allowance for sales returns
allowances and discounts $ 2,194,956 $ 9,016,190 $ 9,846,099 $ 1,365,047
Allowance for doubtful
accounts 254,000 (67,000) --- 187,000
- - ------------------------------------------------------------------------------------------
TOTAL $ 2,448,956 $ 8,949,190 $ 9,846,099 $ 1,552,047
==========================================================================================
Balance at Charged to Balance
For the Year Ended Beginning Costs and at End
June 30, 1993: of Year Expenses Deductions of Year
- - ------------------------------------------------------------------------------------------
Allowance for sales returns
allowances and discounts $ 2,297,308 $ 7,540,958 $ 7,643,310 $ 2,194,956
Allowance for doubtful
accounts 431,000 (177,000) --- 254,000
- - ------------------------------------------------------------------------------------------
TOTAL $ 2,728,308 $ 7,363,958 $ 7,643,310 $ 2,448,956
==========================================================================================
</TABLE>
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, OFFICERS AND SIGNIFICANT EMPLOYEES
The directors of Purepac are as follows:
Common Stock
Beneficially
Company Owned as of
Name Office(s) Since Age Sept. 19, 1995
- - ------------------------------------------------------------------------------
Edward D. Tweddell Director/Chairman 1990 54 -0-(1)
Alan G. McGregor Director 1988 59 -0-(1)
David Beretta Director 1989 67 -0-
Bruce C. Tully Director 1989 46 -0-
Michael R. D. Ashton Director 1989 49 -0-
Richard F. Moldin President, Chief 1995 47 -0-(2)
Executive Officer,
Acting Chief
Operating Officer
- - ---------------------
(1) Mr. McGregor and Dr. Tweddell are directors of Faulding, the parent
of Holdings, the principal stockholder of the Company. See "Principal
Stockholders" of Purepac and "Compensation Committee Interlocks and
Insider Participation".
(2) Excludes 150,000 shares issuable upon the exercise of stock option
awards, not presently exercisable, that have been made to Mr. Moldin
under the Company's 1994 Stock Option Plan. See "Compensation of
Executive Officers".
EDWARD D. TWEDDELL, M.D., was elected a director in November 1990 and was
subsequently elected Chairman of the Board. He joined Faulding as Managing
Director of its Faulding Pharmaceuticals Division in September 1988. He was
elected to the Board of Directors of Faulding in March 1989 and served as
Executive Director of the Faulding Pharma Group from 1990 to November 1993
when he was appointed Group Managing Director and Chief Executive Officer of
Faulding. From July 1987, until joining Faulding, he held the position of
Chairman and Chief Executive Officer of Pharmol Pacific Ltd., an Australian
biotechnology company.
<PAGE>
Prior thereto and from April 1986, he was President and Chief Executive
Officer of Homecare Japan, LTD. Dr. Tweddell, who holds a Bachelor of
Science degree in addition to an honors degree in Medicine, spent his early
career in medical practice and, in 1976, joined the multinational
pharmaceutical company, Pfizer International Inc. ("Pfizer"), where he held a
number of senior management positions.
ALAN G. MCGREGOR, a director of the Company since June 1988, is Chairman of
Faulding. Mr. McGregor is also a director of James Hardie Industries Ltd.,
Burns, Philp & Co. Ltd. and other companies. He has served as a partner in
two major Adelaide, South Australia law firms and was a Crown Prosecutor with
the South Australian Crown Solicitor's Office.
DAVID BERETTA, a director of the Company since April 1989, is President of
Executive Consulting Inc., a business consulting firm in Jamestown, Rhode
Island. Mr. Beretta is, and since April 1991 has been, Vice Chairman and
President of Amtrol Inc., a concern engaged in the manufacture of products
used in flow control, storage, heating and other treatment of fluids in the
water systems market and selected sectors of the heating, ventilating and air
conditioning market in West Warwick, Rhode Island. Until 1982, he was
Chairman of the Board of Uniroyal, Inc. and remained a director until 1987.
He is also a director of Chartel Power Systems Inc.
BRUCE TULLY, a director of the Company since April 1989, has been a Managing
Director of BT Securities Corporation, a subsidiary of Bankers Trust New York
Corporation in New York, New York, since September 1989. Prior thereto and
from October 1986, he was Managing Director of Bankers Trust Company and for
four years prior thereto, was a Vice President thereof.
MICHAEL R.D. ASHTON has been a director of the Company since April 1989.
Until his resignation on January 1, 1993, he had been Chief Executive Officer
of the Company since April 1989 and President and Chief Executive Officer of
the Company's subsidiary, Purepac since acquisition by the Company on October
31, 1989. He has been Chairman and Chief Executive Officer of Holdings,
Faulding Services Inc. and FMDC, wholly-owned subsidiaries of Holdings, since
February 1, 1989, May 15, 1990 and May 9, 1989, respectively. From 1984
until joining the Company, he was Director of Business Development for
Europe/Canada for Pfizer, and, for approximately eight years prior thereto,
held other management positions with Pfizer and its affiliated companies.
RICHARD F. MOLDIN was appointed President and Chief Executive Officer of the
Company and President of Purepac on July 17, 1995 and was appointed to serve
as a director and acting Chief Operating Officer of the Company on July 24,
1995 upon Robert H. Bur's resignation from such positions. Prior to joining
the Company and from October 1994 he served as Managing Director, Australia &
New Zealand for Wellcome Australia Limited. From May 1993 until his
appointment as Managing Director, he was Divisional Manager, Primary
<PAGE>
Manufacturing, for Wellcome Foundation Limited, U.K. Prior thereto
and from September 1979, he served in various executive positions at
Burroughs Wellcome Co., U.S.A., including from October 1991 to February 1993
as Vice President, Logistics & Primary Manufacturing.
Set forth below is certain information with respect to Purepac's executive
officers who are not serving as a director.
LEE CRAKER, age 40, was appointed Chief Financial Officer of the Company on
May 26, 1995. Mr. Craker has held various positions with Faulding, or
certain of its affiliates, dating from his initial employment by Faulding in
1973. From May 1985 to May 1990 he served as Finance and Administration
Manager of David Bull Laboratories Pty. Ltd., a wholly-owned subsidiary of
Faulding. From May 1990 to June 1994, he was Finance and Administration
Manager of the Faulding Pharma Group and from July 1994 until joining the
Company in May 1995 he was Finance and Administration Manager of Faulding
Services Inc.
GARTH BOEHM, Ph.D., age 45, joined the Company as Vice President - Scientific
Affairs in April 1990 and was elected Executive Vice President in October
1991. He was Deputy Research Director of Faulding Pharmaceuticals, a
division of Faulding, from July 1989 to April 1990. From 1985 to June 1989,
he held senior management positions at Enterovax Limited, a joint venture of
Faulding, the University of Adelaide and the Australian Industry Development
Corporation. Prior thereto and from 1981, he was Development Scientist of
the R&D Division of Faulding.
RUSSELL J. REARDON, age 45, was appointed Vice President of Administration of
the Company on May 26, 1995. He has served as Treasurer of the Company since
March 1991. From February 1991 to the date of his appointment as Vice
President of Administration he also served as the Company's Chief Financial
Officer. He held the position of Secretary of the Company from March 1991
until October 1993. From March 1988, until joining the Company, he was Chief
Financial Officer of Chase Chemical Company, L.P.
WILLIAM R. GRIFFITH, age 47, was elected Secretary of the Company in October
1993. Mr. Griffith is a member of Parker Duryee Rosoff & Haft, counsel to
the Company. Mr. Griffith has been a practicing attorney for more than ten
years.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
Set forth below is the aggregate compensation for services rendered in all
capacities to the Company during its fiscal years ended June 30, 1995, 1994
and 1993 by each of its executive officers who served as an executive officer
on June 30, 1995 and whose compensation exceeded $100,000 during its fiscal
year ended June 30, 1995:
Summary Compensation Table
Annual Compensation
Name and Fiscal Other Annual
Principal Position Year Salary Bonus Compensation
- - ----------------- ------ ------ ----- ------------
Michael R.D. Ashton (2)
Chief Executive Officer
and President 1995 (2) (2) (2)
1994 (2) (2) (2)
1993 (2) (2) (2)
Robert H. Bur (3)
Chief Operating Officer 1995 $ 222,153 $ -0- (1)
1994 $ 195,356 $ 60,120 (1)
1993 $ 148,000 $ 48,000 (1)
Garth Boehm
Executive Vice President 1995 $ 160,814 $ 7,450 (1)
1994 $ 156,344 $ 29,930 (1)
1993 $ 143,108 $ 35,000 (1)
Russell J. Reardon (4)
Vice President of
Administration 1995 $ 135,992 $ 6,650 (1)
1994 $ 128,214 $ 34,020 (1)
1993 $ 120,002 $ 35,000 (1)
<PAGE>
- - ----------------------
(1) Such amounts for each of the named executive officers listed in the
Summary Compensation Table are less than 10% of the total annual salary
and bonus reported for each such executive officer.
(2) Michael R.D. Ashton served as President and Chief Executive Officer of
the Company from January 25, 1995 until his resignation, effective July
17, 1995. Mr. Ashton previously served from April 1989 to January 1,
1993, as Chief Executive Officer of the Company. During the Fiscal Year
ended June 30, 1995 and the six-month period ended January 1, 1993, Mr.
Ashton, who also served as Chairman and Chief Executive Officer of
Faulding Services Inc., Holdings and FMDC, was compensated by Faulding
Services Inc. Purepac and Faulding Services Inc. are parties to a
Consulting Agreement pursuant to which Faulding Services Inc. renders
business consultancy services, including the services of Mr. Ashton, to
Purepac. See "Certain Relationships and Related Transactions".
(3) Robert H. Bur served as the Company's President and CEO until his
resignation from such offices in January 1995. He resigned his position
of Chief Operating Officer of the Company on July 24, 1995.
(4) Russell J. Reardon was appointed Vice President of Administration of the
Company on May 26, 1995. From February 1991 to the date of his
appointment as Vice President of Administration, he served as the
Company's Chief Financial Officer.
STOCK OPTIONS AND BONUS PLANS
The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the
Board of Directors on August 16, 1994 and by a majority in interest of the
stockholders of the Company on October 18, 1994. The 1994 Plan provides for
the granting of up to 1,000,000 options which are intended to qualify either
as incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986 or as options which are not
intended to meet the requirements of such section ("Nonstatutory Stock
Options"). The total number of shares of Common Stock reserved for issuance
under the 1994 Plan is 1,000,000. Options to purchase shares may be granted
under the 1994 Plan to persons who, in the case of Incentive Stock Options,
are employees (including officers) of the Company, or, in the case of
Nonstatutory Stock Options, are employees (including officers) or non-
employee directors of the Company.
The 1994 Plan is administered by a committee appointed by the Board of
Directors, which has discretionary authority, subject to certain
restrictions, to determine the number of shares issued pursuant to Incentive
Stock Options and Nonstatutory Stock Options and the individuals to whom, the
time at which, and the exercise price for which options will be granted.
The exercise price of all Incentive Stock Options granted under the 1994 Plan
must be at least equal to the fair market value of such shares on the date of
the grant or, in the case of Incentive Stock Options granted to the holder of
more than ten percent of the Company's Common Stock, at least 110% of the
fair market value of such shares on the date of the grant. The maximum
exercise period for which Incentive Stock Options may be granted is ten years
<PAGE>
from the date of grant (five years in the case of an individual owning more
than 10% of the Company's Common Stock). The aggregated fair market value
(determined at the date of the option grant) of shares with respect to which
Incentive Stock Options are exercisable for the first time by the holder of
the options during any calendar year shall not exceed $100,000.
The following table sets forth certain information with respect to options
granted to the officers, directors and employees of the Company and its
subsidiaries under the 1994 Plan during the fiscal year ended June 30, 1995.
The dollar value set forth below reflects the difference between the
aggregate exercise price of the options and the estimated value of Purepac
Common Stock at June 30, 1995.
Fiscal Year End Option Values
Name of Value of
Unexercised Options Unexercised Options
Name at June 30, 1995 at June 30, 1995
- - -------------------- --------------------------- -------------------
Exercisable Unexercisable
----------- -------------
All Non-Executive
Employees as a Group 4,200 28,800 $24,750
None of the executive officers of the Company named in the Summary
Compensation Table holds options to purchase shares of the Company's Common
Stock. Upon commencing employment as the Company's Chief Executive Officer
and President, Richard F. Moldin, who currently is also the acting Chief
Operating Officer of the Company, a director of the Company, and President of
Purepac Pharmaceutical Co., was granted an Incentive Stock Option under the
1994 Plan to purchase 150,000 shares of the Company's Common Stock at $10.125
per share. His option is not currently exercisable.
<PAGE>
1991 RESTRICTED STOCK INCENTIVE PLAN
The Company's 1991 Restricted Stock Incentive Plan (the "1991 Plan") was
adopted by the Board of Directors on November 25, 1991 and ratified by a
majority in interest of the stockholders of the Company on October 21, 1992.
The stated intent of the 1991 Plan is to induce persons of outstanding
ability and potential to join and remain with the Company and to enable key
employees, who make substantial contribution to the Company, to acquire
proprietary equity interests in the Company.
The Board of Directors chooses the Committee, whose members are ineligible to
receive stock awards under the 1991 Plan, to administer the Plan. The
Committee determines the employees to whom awards of Common Stock will be
granted and the amount, size and terms of each such award.
A total of 465,000 shares of Common Stock of the Company were reserved for
issuance under the 1991 Plan, of which aggregate grants of 275,000 and 50,000
were awarded in November 1991 and March 1993, respectively, at the respective
values of $8.125 and $13.8125, being the respective market value thereof on
the date of the grant. During the year ended June 30, 1994, due to one
resignation, grants totaling 7,500 shares were terminated. During the year
ended June 30, 1995, the Company issued 71,125 shares of Common Stock to
employees pursuant to the 1991 Plan.
AGREEMENTS WITH OFFICERS
Michael R.D. Ashton had served as President and Chief Executive Officer of
Purepac from April 1989 to January 1993 and from January 1995 to July 1995.
Mr. Ashton has entered into a consulting agreement with Purepac and Faulding
pursuant to which Mr. Ashton will provide certain consulting services to such
companies. Pursuant to such agreement, Purepac is obligated to pay an
aggregate of $150,000 to Mr. Ashton, payable during 1996. All other
compensation under such agreement is the responsibility of Faulding.
On July 24, 1995 the Company entered into an agreement with Robert H. Bur,
the Company's Chief Operating Officer, under which the Company has agreed to
pay Mr. Bur severance equal to one year's salary, plus his accrued vacation,
in twelve monthly payments. The Company has also agreed to continue Mr.
Bur's medical and dental plan coverage for a period ending on the earlier of
twelve months after the date of the agreement or Mr. Bur's enrollment in
another medical plan, and to permit Mr. Bur to have continued use of a
Company car until October 24, 1995.
<PAGE>
PENSION PLAN
The Company maintains a defined benefit pension plan, fully paid for by the
Company, for the benefit of eligible employees. All non-union employees
become eligible for participation in the pension plan on January 1 or July 1,
as applicable, following completion of one year of service. 159 persons were
participants in the pension plan as of June 30, 1995.
A participant in the Company's pension plan will receive retirement income
based on .91% of his final average annual compensation, defined in the
pension plan as including salary, bonuses, overtime and commissions, plus
.52% of his final average annual compensation in excess of Social Security
covered compensation, multiplied by years of credited service up to 35 years.
Years of service for benefit accrual purposes are only after January 1, 1976.
Final average compensation is defined in the pension plan as the average of a
participant's total compensation received during the highest paid five
consecutive plan years during the last 10 consecutive plan years immediately
prior to retirement. A participant is 100% vested in his accrued pension
benefit after five years of service as defined in the plan. The vested
benefit of many participants employed prior to October 31, 1989, are provided
through both the Purepac pension plan and the Solvay Group pension plan, the
predecessor Company's plan.
<PAGE>
The following table indicates the estimated annual plan benefits payable upon
retirement as of June 30, 1995 at age sixty-five after fifteen, twenty,
twenty-five, thirty and thirty-five years of credited service to the Company:
PENSION PLAN TABLE
Average
Compensation Annual Benefit Based on Years of Service
15 20 25 30 35
------- ------- ------- ------- -------
$125,000 ........ $24,916 $33,222 $41,527 $49,832 $58,138
150,000 ........ 30,279 40,372 50,464 60,557 70,650
175,000 ........ 30,279 40,372 50,464 60,557 70,650
200,000 ........ 30,279 40,372 50,464 60,557 70,650
225,000 ........ 30,279 40,372 50,464 60,557 70,650
250,000 ........ 30,279 40,372 50,464 60,557 70,650
300,000 ........ 30,279 40,372 50,464 60,557 70,650
350,000 ........ 30,279 40,372 50,464 60,557 70,650
400,000 ........ 30,279 40,372 50,464 60,557 70,650
450,000 ........ 30,279 40,372 50,464 60,557 70,650
500,000 ........ 30,279 40,372 50,464 60,557 70,650
At June 30, 1995, the credited years of service under the pension plan for
Messrs. Bur and Reardon were fifteen and four, respectively. Dr. Boehm is
not a participant in the pension plan.
SAVINGS PLAN
The Company has a savings plan, implemented as of January 1, 1990, covering
all non-union employees of the Company and its subsidiaries. Under the
savings plan, employees may defer up to 15% of their salary, to a maximum of
$9,240 per annum. The Company makes an annual matching contribution equal to
50% of an employee's contribution, not exceeding 6% of the employee's salary.
Matching contributions are vested at the rate of 20% per annum commencing
upon one year's participation in the savings plan. All vested amounts in a
participant's account, including earnings, may be distributed only following
hardship, retirement, death, permanent or total disability or termination of
employment.
<PAGE>
For the three year period ended June 30, 1995, the Company had contributed an
aggregate of $628,367 to the savings plan (net of forfeitures of non-vested
amounts), for the respective accounts of 153 participants. Of such
$628,367, an aggregate of $35,250 has been credited to the accounts of all
current executive officers as a group, being $14,798, $6,847, and $13,605 for
the respective accounts of Mr. Bur, Dr. Boehm and Mr. Reardon.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL COMPENSATION POLICIES
The Company's Compensation Committee (the "Committee") is responsible for
establishing, approving and administering the policies which govern annual
executive salary levels, increases/adjustments, incentive payments the award
of stock grants under the Company's 1991 Restricted Stock Incentive Plan and
the award of stock options under the Company's 1994 Stock Option Plan. The
Committee is composed of three members, all of whom are non-employee
directors. See "Compensation Committee Interlocks and Insider
Participation".
In setting salary levels, providing incentives and granting stock and option
incentives, the objectives of the Committee are to encourage profitable
growth of the Company in a mutuality of interest between the Company's
executives and stockholders and to balance competitive pay with the Company's
overall performance. Specifically, the Committee attempts to provide levels
of compensation to the President/Chief Executive Officer and the Company's
other executive officers which reflect the contribution of such executives to
the Company's growth in sales, earnings and market share, the development of
stockholder value as reflected in the increase in the Company's stock price
and the implementation of corporate strategies consistent with the growth of
the Company.
Growth in earnings is a significant factor in determining compensation. In
addition, contribution to the development of new product opportunities, the
progress of bioavailability and other studies and of development activities
required to bring products to market and the successful marketing of the
Company's primary products are evaluated in setting compensation policy. As
well, to assure the Company's ability to attract, motivate and retain
talented executives, the Committee attempts to keep the Company's levels of
executive compensation competitive with that of other health care companies
of comparable size and performance.
<PAGE>
PRESIDENT/CHIEF EXECUTIVE OFFICER AND EXECUTIVE OFFICERS COMPENSATION
The Company's executive compensation program consists of three key
components: base salary, a cash incentive scheme and long term incentives
through the awards of restricted stock grants and stock options. The
incentive payments have two performance components: (a) a financial budget
achievement target based on net profit before taxes and (b) achievement of
specific job-related objectives. The underlying principle for the design and
implementation of the Company's incentive scheme is based on the concept that
the Company commit in advance to predetermined annual levels of performance.
Actual results achieved are measured against that commitment.
The Company's long term incentives to date have been in the form of
restricted stock and stock option grants. The object of this program has
been to advance the longer term interest of the Company and its stockholders.
Equity compensation is an important element of the performance-based
compensation of the executive officers and helps to ensure that management's
interests remain closely aligned with those of the Company's stockholders.
The Committee is of the view that restricted stock awards and stock option
grants provide the Company's key employees an opportunity for increased
equity ownership and help to create an incentive to remain with the Company
for the long term, since the grants vest over a four to six year period.
Prior to the last six months of the fiscal year ended June 30, 1995, the
compensation of the Company's President and Chief Executive Officer has
reflected the Committee's assessment of the Company's overall financial
performance and of his leadership in strengthening the position of the
Company. Robert H. Bur was President and Chief Executive Officer of the
Company until his resignation from such positions in January 1995. He
remained as the Company's Chief Operating Officer until July 24, 1995.
Mr. Bur's compensation package for the fiscal year ended June 30, 1995 was
established in July 1994. He was granted a base salary of $215,000. He was
also awarded a cash incentive award of $60,120 in September 1994 in respect
of work he had performed for the fiscal year ended June 30, 1994. Mr. Bur's
leadership contribution to the implementation of the Company's programs
during the fiscal year ended June 30, 1994 was the primary criterion used in
determining his compensation package.
In January 1995, Michael R.D. Ashton was appointed President and Chief
Executive Officer of the Company. His yearly salary as President of Faulding
Services Inc.
<PAGE>
had already been established by the directors of Faulding and was not altered
upon his acceptance of his additional responsibilities as President and CEO
of the Company. During the period from his appointment in January 1995
through the end of the 1995 fiscal year, Faulding Services Inc. paid Mr.
Ashton's compensation. Purepac and Faulding Services Inc. are parties to a
Consulting Agreement dated January 1, 1993 pursuant to which Faulding
Services Inc. provides consulting services to Purepac, including, among other
services, the services of Mr. Ashton.
On July 17, 1995, the Company appointed Richard F. Moldin as President and
Chief Executive Officer of the Company. It is contemplated that his
continued compensation will reflect the performance-based factors used by
the Company in previous financial years.
$1,000,000 LIMIT ON TAX DEDUCTIBLE COMPENSATION
As part of the Omnibus Budget Reconciliation Act passed by Congress in 1993,
a new limit has been created for the deductibility of compensation paid to
certain officers. These officers are the Chief Executive Officer and the
next four most highly compensated officers in office at the end of the year.
Compensation paid to these officers in excess of $1,000,000, that is not
performance-based, cannot be claimed by the Company as a tax deduction.
It is the Committee's intention to continue to utilize performance-based
compensation. Accordingly, these regulations should not impact the
compensation paid by the Company to its officers.
Edward D. Tweddell
Alan G. McGregor Members of the Compensation Committee
David Beretta August 10, 1995
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dr. Tweddell is Group Managing Director and Chief Executive Officer and a
Director of Faulding. He is also a Director of Holdings, which owns
approximately 54.4% of the Company's Common Stock, plus preferred stock
convertible into additional shares of the Company's Common Stock. Alan
McGregor is Chairman of the Board and a Director of Faulding. See "Principal
Stockholders" and "Certain Relationships and Related Transactions."
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS OF PUREPAC
The following table sets forth certain information regarding shares of the
Company's outstanding Common Stock beneficially owned on September 19, 1995,
(i) by each person who is known by the Company to beneficially own or
exercise voting or dispositive control over more than 5% of the Company's
Common Stock, and (ii) by each of the Company's Directors, and (iii) by all
executive officers and Directors of the Company as a group:
Name of Number of Shares Percentage
Beneficial Owner Beneficially Owned of Class
- - ------------------------ ------------------ ----------
Faulding Holdings Inc. 11,845,108(1) 67.4%(1)
529 Fifth Avenue
8th Floor
New York, New York 10017
All executive officers 5,250(2) *
and directors as a Group
(9 persons)
- - ------------------------
(1) Includes 5,005,128 shares issuable upon conversion of 834,188 shares
of the Company's Class A Preferred Stock.
2) Mr. McGregor is Chairman and a director, and Dr. Tweddell is Group
Managing Director, Chief Executive Officer and a director,
respectively, of Faulding, the sole stockholder of Holdings. Dr.
Tweddell is also a director of Holdings. Each of Dr. Tweddell and
Mr. McGregor, however, disclaims any beneficial interest in or voting
or dispositive control over the shares of the Company's Common Stock
owned by Holdings. Excludes (a) 18,000 shares issuable upon
presently unvested stock awards made to Mr. Reardon under the
1991 Plan, and (b) 150,000 shares issuable to, but not presently
exercisable by, Mr. Moldin under the 1994 Stock Option Plan.
Faulding disclaims any beneficial interest in or voting or
dispositive control over any such shares.
* Equals a percentage less than 1% of the outstanding shares of the
Company's stock.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED-PARTY TRANSACTIONS
During the years ended June 30, 1995, 1994, and 1993 the Company paid
Faulding $734,000, $2,536,000, and $2,006,000, respectively, for merchandise
purchases (pursuant to agreements to market erythromycin and doxycycline,
both described herein), $918,000, $1,007,000, and $458,000, respectively, for
research and development services and paid Faulding Services Inc. (Formerly
Faulding Inc.) $225,000, $127,000, and $100,000, respectively, for business
development services (pursuant to an agreement with Faulding Services Inc.,
described herein). Faulding Services Inc. is a 100% owned subsidiary of
Holdings.
Additionally, during the years ended June 30, 1995 and 1994, the Company was
reimbursed $1,919,000 and $486,000, respectively, by Faulding for materials
and services related to research and development projects and $200,000 during
the year ended June 30, 1994 for the sale to Faulding of the Company's
Poroplastic Registered Trademark technology.
During the year ended June 30, 1994, the Company paid Faulding Services Inc.
$623,000 for engineering and consulting services related to the construction
of a manufacturing suite to accommodate the modified-release technology.
During the year ended June 30, 1993, the Company paid Faulding $194,000 for
engineering and consulting services related to the construction of the
manufacturing suite and a $250,000 transfer fee, both to accommodate the
modified-release technology.
<PAGE>
Included in other assets at June 30, 1995 and 1994 is $2,903,000 paid by the
Company to Faulding in June 1992 to acquire the proprietary technology,
including the scientific information and expertise, processes and procedures,
for the manufacture and sale of the generic version of certain modified-
release pharmaceutical products. The acquired technology is restricted to
use, on an exclusive basis, in the United States of America and its
territories.
Amounts due from (due to) affiliated companies are payable on demand and were
as follows as of:
June 30, 1995 June 30, 1994
------------- -------------
Faulding $ 200,007 $ (123,455)
Holdings 9,677 3,000
Faulding Services Inc. (36,995) 862
------------- -------------
$ 172,689 $ (119,593)
============= =============
Purepac entered into an agreement with Faulding as of December 5, 1992,
pursuant to which Purepac agreed to provide services to Faulding for the
tableting of pellets and micropellets on a time and materials basis. During
the year ended June 30, 1995, no related services were provided by Purepac to
Faulding.
In addition, Purepac and Faulding entered into a three-year agreement, also
dated as of December 5, 1992, which is automatically renewable for successive
two-year periods, pursuant to which Faulding granted Purepac a non-exclusive
license to import, distribute and market an erythromycin product in the
United States and the Latin American Countries, subject to certain minimum
purchase requirements.
<PAGE>
On January 1, 1993, Purepac and Faulding Services Inc. entered into a
consulting agreement, which terminates on December 31, 1995, pursuant to
which Purepac retained Faulding Services Inc. to serve as a business
development consultant and advisor on a non-exclusive basis.
On August 1, 1993, Purepac entered into a ten-year agreement with Faulding
Services Inc. to manufacture a specific product utilizing Faulding Services
Inc. technology, processes and manufacturing methods. Faulding Services
Inc., at its sole cost, shall seek all necessary approvals and/or
registrations from the appropriate regulatory authority to enable the sale of
the product and, upon such approval, Purepac's obligation to provide
manufacturing services will commence. The parties amended this agreement in
December 1994 to resolve certain inconsistencies between this agreement and
an agreement with an unrelated third party, to distribute the product
manufactured by Purepac. On June 27, 1995 the Company and Faulding Services
Inc. entered into a Services Agreement pursuant to which Purepac agreed to
provide certain services on Faulding Services Inc.'s behalf that Faulding
Services Inc. had agreed to provide under the agreement with the third party.
On March 15, 1995 Purepac and Faulding entered into a three-year non-
exclusive license agreement for Purepac to import and distribute doxycycline,
a delayed-release product, in the United States in exchange for certain
payments to Faulding for its supply of the product to Purepac.
Purepac and Faulding entered into two agreements as of June 26, 1995. One is
a licensing agreement pursuant to which Faulding granted to Purepac an
exclusive ten-year license to utilize certain technology to complete the
development of a modified-release product and manufacture and sell the
product in the United States. Relating to the product development, Purepac
paid to Faulding most of the technology licensing fees prior to June 30, 1994
(expensed as research and development costs) with a projection of
approximately $600,000 still to be paid as incurred . In addition, Purepac
will be obligated to pay royalties related to net sales of the product.
The second agreement dated as of June 26, 1995 is a ten-year Co-development,
Supply and Licensing Agreement whereby Faulding will develop and deliver a
certain component pellet of a modified-release product for Purepac's use in
developing, manufacturing and distributing such product in the United States.
Faulding will supply Purepac with pellets at a price set forth in the
agreement. If the parties later concur that
<PAGE>
Purepac will manufacture the pellets, Faulding will grant Purepac an
exclusive license to the pellet technology for the remainder of the term of
the agreement in consideration of a technology transfer fee of $250,000 and
ongoing royalty payments.
As of June 26, 1995, Purepac entered into a one-year Services Agreement with
Faulding Pharmaceutical Co., a wholly owned subsidiary of Holdings, for
Purepac to provide certain customer support, warehousing, accounting and
quality assurance services.
The Company believes that the terms of the foregoing agreements are at least
as favorable as those it could have obtained in comparable nonaffiliated
third party transactions.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of This Report
1. FINANCIAL STATEMENTS
Report of Independent Public Accountants - Deloitte & Touche LLP.
Consolidated Balance Sheets - June 30, 1995 and 1994.
Consolidated Statements of Operations - Year ended June 30, 1995, 1994
and 1993.
Consolidated Statements of Stockholders' Equity - Year ended June 30, 1995,
1994 and 1993.
Consolidated Statements of Cash Flows - Year ended June 30, 1995, 1994
and 1993.
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULE
Schedule II: Valuation and Qualifying Accounts - Year ended June 30, 1995,
1994 and 1993.
All other schedules to the consolidated financial statements are omitted
since the required information is either inapplicable or the information is
presented in the financial statements or related notes.
3. Exhibits
Exhibit Number Description of Document
(3) (i) Certificate of Incorporation filed September 2, 1982 (1).
(ii) Certificate of Amendment to Certificate of Incorporation
filed June 30, 1983 (1).
(iii) Certificate of Amendment to Certificate of Incorporation
filed November 13, 1987 (3).
(iv) By-laws (1).
(4) (i) Copy of Specimen Stock Certificate (1).
(iv) Forms of Series A and Series B Warrants sold to Allen &
Company Incorporated (5).
(10) (i) Stock Purchase and Stockholders' Agreement dated
September 2, 1987, among the Company, Moleculon Research
Company, Arthur S. Obermayer and Faulding Holdings Inc.,
formerly Faulding U.S.A. Inc. (4).
(vii) 1991 Restricted Stock Incentive Plan (7).
(viii) Agreement dated as of December 5, 1992, between F. H.
Faulding & Co. Limited and Purepac Pharmaceutical Co. (8).
(ix) Agreement dated December 5, 1992, between F. H. Faulding &
Co. Limited and Purepac Pharmaceutical Co. (8).
(x) Agreement dated as of December 5, 1992, between F. H.
Faulding & Co. Limited and Purepac Pharmaceutical Co. (8).
(xi) Consulting Agreement dated January 1, 1993, between
Purepac Pharmaceutical Co. and Faulding Inc. (8).
(xii) Toll Manufacturing Agreement dated as of August 1, 1993
between Faulding Inc. and Purepac Pharmaceutical Co., as
amended as of December 22, 1994 (9).
(xiii) Letter agreement dated as of June 29, 1994, between
Purepac, Inc. and F.H. Faulding & Co. Limited (10).
(xiv) 1994 Stock Option Plan (11).
(xv) Agreement dated as of March 15, 1995 between F.H.
Faulding & Co. Limited and Purepac Pharmaceutical Co.
(xvi) License Agreement dated June 26, 1995 between F.H.
Faulding & Co. Limited and Purepac Pharmaceutical Co.
<PAGE>
(xvii) Services Agreement dated as of June 26, 1995 between
Faulding Hospital Products, Inc. and Purepac
Pharmaceutical Co.
(xviii) Services Agreement dated as of June 26, 1995 between
Faulding Inc. and Purepac Pharmaceutical Co.
(xix) Co-Development, Supply and Licensing Agreement dated as
of June 26, 1995 between F.H. Faulding & Co. Limited and
Purepac Pharmaceutical Co.
(xx) Letter of Intent between F.H. Faulding & Co. Limited and
Purepac, Inc. dated August 9, 1995 (12).
(11) Computation of Earnings Per Share.
(11.1) Computation of Earnings Per Share Assuming Full Dilution.
(21) Subsidiaries of Registrant.
- - --------------------------
(1) Previously filed as an Exhibit to Registration Statement 2-87116 on
Form S-1, filed with the Securities and Exchange Commission (the
"Commission") on October 12, 1983 and incorporated herein by
reference.
(2) Previously filed as an Exhibit to Annual Report on Form 10-K for the
fiscal year ended November 30, 1984 and incorporate herein by
reference.
(3) Previously filed as an Exhibit to Current Report on Form 8-K filed
with the Commission on November 25, 1987 and incorporated herein by
reference.
(4) Previously filed as Exhibit to Schedule 13D filed with the Commission
by Faulding Holdings Inc. (formerly Faulding U.S.A. Inc.) on or about
September 15, 1987 and incorporated herein by reference.
(5) Previously filed as an Exhibit to Annual Report on Form 10-K for the
fiscal year ended November 30, 1986 and incorporated herein by
reference.
(6) Previously filed as Exhibit to Annual Report on Form 10-K for the
transition period ended June 30, 1990 and filed with the Commission
on or about September 26, 1990 and incorporated herein by reference.
<PAGE>
(7) Previously filed as Exhibit to Registration Statement on Form S-8
filed with the Commission on or about August 18, 1993 and
incorporated herein by reference.
(8) Previously filed as an Exhibit to Annual Report on Form 10-K for the
fiscal year ended June 30, 1993 and incorporated herein by reference.
(9) Previously filed as an Exhibit to Annual Report on Form 10-K for the
fiscal year ended June 30, 1994 and incorporated herein by reference.
Amendment dated as of December 22, 1994 filed herewith.
(10) Previously filed as an Exhibit to Annual Report on Form 10-K for the
fiscal year ended June 30, 1994 and incorporated herein by references.
(11) Previously filed as an Exhibit to the Proxy Statement filed with the
Commission on September 17, 1994 and incorporated herein by reference.
(12) Previously filed as an Exhibit to Current Report on Form 8-K filed
with the Commission on August 17, 1995 and incorporated herein by
reference.
(b) Reports on Form 8-K
Current Reports on Form 8-K filed with the Commission during July 1,
1994, through June 30, 1995:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PUREPAC, INC.
/s/Edward D. Tweddell
Date: September 28, 1995 ----------------------
Edward D. Tweddell,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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/Richard F. Moldin
Date: September 28, 1995 ----------------------
Richard F. Moldin,
President and Chief Executive
Officer (Principal Executive
Officer)
/s/Lee H. Craker
Date: September 28, 1995 ---------------------
Lee H. Craker,
Chief Financial Officer
(Principal Accounting Officer)
/s/Michael R.D. Ashton
Date: September 28, 1995 ----------------------
Michael R.D. Ashton, Director
/s/David Beretta
Date: September 28, 1995 ----------------------
David Beretta, Director
/s/Bruce C. Tully
Date: September 28, 1995 ----------------------
Bruce C. Tully, Director
