UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1995
Commission File Number: 0-13588
PUREPAC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2769995
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Elmora Avenue, Elizabeth, New Jersey 07207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 527-9100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
None None
- ------------------- -------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
12,615,223
----------
Number of shares outstanding of
the Registrant's common stock as of February 5, 1996.
<PAGE>
PUREPAC, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets
December 31, 1995 and June 30, 1995 . . . . . . . . . . . . . 3
Consolidated Statements of Operations
Three months ended December 31, 1995
and 1994 and six months ended
December 31, 1995 and 1994. . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Six months ended December 31, 1995
and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . 9
PART II - OTHER INFORMATION
ITEMS 1 thru 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Page 2
<PAGE>
PUREPAC, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1995 1995
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 764,077 $ 1,156,109
Accounts receivable 9,917,611 9,702,889
Inventory (Note 3) 18,922,633 17,831,934
Due from affiliated companies --- 172,689
Other current assets 3,883,899 1,806,231
Deferred income taxes (Note 5) 3,261,291 3,513,038
- --------------------------------------------------------------------------
TOTAL CURRENT ASSETS 36,749,511 34,182,890
- --------------------------------------------------------------------------
Property, plant and equipment, net 26,377,337 26,603,069
Other assets 4,389,888 3,229,140
Deferred income taxes (Note 5) 1,001,346 914,346
- --------------------------------------------------------------------------
TOTAL ASSETS $ 68,518,082 $ 64,929,445
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 7,521,937 $ 4,843,679
Due to affiliated companies 224,806 ---
Loan payable to bank 5,000,000 2,000,000
Accrued expenses 4,922,575 5,008,267
Accrued preferred dividends 520,095 520,095
- --------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 18,189,413 12,372,041
- --------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 4)
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 at December 31, 1995 and June
30, 1995 125,812 125,812
Capital in excess of par value 23,904,182 24,804,252
Retained earnings 26,290,333 27,618,998
- --------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 50,328,669 52,557,404
- --------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,518,082 $ 64,929,445
==========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Page 3
<PAGE>
PUREPAC, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 14,522,325 $ 15,477,435 $ 28,689,037 $ 32,353,748
Cost of sales 11,457,300 11,540,478 23,111,859 24,219,207
- ----------------------------------------------------------------------------------------------------------------
Gross profit 3,065,025 3,936,957 5,577,178 8,134,541
- ----------------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 2,559,676 2,293,544 4,814,778 4,765,007
Research and development 2,595,783 1,480,438 4,546,374 3,244,971
- ----------------------------------------------------------------------------------------------------------------
Total expenses 5,155,459 3,773,982 9,361,152 8,009,978
- ----------------------------------------------------------------------------------------------------------------
Income (loss) form operations (2,090,434) 162,975 (3,783,974) 124,563
Other income (expense), net (Note 6) 1,680,940 (13,175) 1,640,309 (13,568)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (409,494) 149,800 (2,143,665) 110,995
Provision (benefit) for income taxes (Note 5) (157,000) 55,000 (815,000) 41,000
- ----------------------------------------------------------------------------------------------------------------
Income (loss) Before Preferred Stock Dividends (252,494) 94,800 (1,328,665) 69,995
Preferred stock dividends 520,095 520,095 1,040,190 1,040,190
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS), AVAILABLE FOR COMMON STOCK $ (772,589) $ (425,295) $ (2,368,855) $ (970,195)
================================================================================================================
Primary Earnings Per Common Share (Note 2)
Net income (loss) $ (.06) $ (.04) $ (.19) $ (.08)
- ----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 12,581,223 12,510.098 12,581,223 12,510,098
- ----------------------------------------------------------------------------------------------------------------
Earnings Per Share Assuming Full Dilution (Note 2)
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Page 4
<PAGE>
PUREPAC, INC.
<TABLE>
<CAPTION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
December 31,
-----------------------------
1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss), Available for Common Stock $ (2,368,855) $ (970,195)
Adjustments To Reconcile Net Income
(Loss) to Net Cash
Provided By (Used For) Operating Activities:
Depreciation and amortization 1,039,086 1,040,808
Compensation expense-stock grants 103,423 192,632
Deferred income tax, asset 164,747 284,947
INCREASE (DECREASE) IN CASH FROM:
Accounts receivable (214,722) 816,294
Inventory (1,090,699) 1,583,449
Other current assets (1,061,224) (487,361)
Other assets (1,167,000) ---
Accounts payable 2,678,258 (2,970,617)
Accrued expenses (85,692) (460,658)
Accrued income taxes (979,747) 75,403
Due to/from affiliates 397,495 (260,619)
- -----------------------------------------------------------------------------
TOTAL ADJUSTMENTS (216,075) (185,722)
- -----------------------------------------------------------------------------
Net Cash Provided By (Used For)
Operating Activites (2,584,930) (1,155,917)
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITES:
Purchases of property, plant and equipment (807,102) (1,631,982)
- -----------------------------------------------------------------------------
Net Cash Provided By (Used For)
Investing Activities (807,102) (1,631,982)
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITES:
Borrowings from bank 3,000,000 1,000,000
- -----------------------------------------------------------------------------
Net Cash Provided By (Used For)
Financing Activites 3,000,000 1,000,000
- -----------------------------------------------------------------------------
Increase (Decrease) In Cash and Cash Equivalents $ (392,032) $ (1,787,899)
=============================================================================
Cash and cash equivalents,
beginning of period 1,156,109 3,153,844
- -----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 764,077 $ 1,365,945
=============================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 64,165 $ 25,520
Income Taxes $ --- $ ---
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Page 5
<PAGE>
PUREPAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Notes to the Financial Statements included in Purepac, Inc.'s (the "Company")
Form 10-K for the year ended June 30, 1995 contain information pertinent to
the accompanying financial statements. There has been no material change in
the information contained in such footnotes except as set forth below. The
Consolidated Balance Sheet at December 31, 1995, the Consolidated Statements
of Operations for the three and six months ended December 31, 1995 and 1994
and the Consolidated Statements of Cash Flows for the six months ended
December 31, 1995 and 1994 have not been audited.
In the opinion of management, all adjustments (consisting only of normal
recurring entries) necessary for a fair presentation of such financial results
have been included.
1. Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Purepac Pharmaceutical Co.
("Purepac").
2. Earnings Per Common Share
Primary earnings per common share is calculated by dividing income
after preferred dividends by the weighted average number of common
shares outstanding during the period. Common stock equivalents are
excluded as the effect is either not material or anti-dilutive.
Earnings per share assuming full dilution is not presented as the
effect would be anti-dilutive.
3. Inventory
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
---------- ----------
<S> <C> <C>
Raw materials 9,275,021 4,813,344
Work-in-progress 2,841,462 5,327,342
Finished goods 6,806,150 7,691,248
---------- ----------
Total 18,922,633 17,831,934
========== ==========
</TABLE>
Page 6
<PAGE>
4. Capital Stock
During the quarter ended December 31, 1995, no additional shares were
issued.
A reconciliation of the change in total stockholders' equity is as
follows:
<TABLE> Par Value
of Common Capital in Total Stock-
and Preferred Excess of Retained holders'
Stock Par Value Earnings Equity
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance,
June 30, 1995 $ 134,154 $24,804,252 $27,618,998 $52,557,404
Class A preferred
stock dividend (1,040,190) (1,040,190)
Stock grant amortization 103,423 103,423
Reduction of income tax
liability from issuance
of stock grants 36,697 36,697
Net Income (Loss) (1,328,665) (1,328,665)
------------- ----------- ----------- -----------
Balance,
December 31, 1995 $ 134,154 $23,904,182 $26,290,333 $50,328,669
============= =========== =========== ===========
</TABLE>
5. Accounting for Income Taxes
The Company adopted Statement of Financial Accounting Standard No. 109
("SFAS 109"), "Accounting for Income Taxes," effective July 1, 1993.
Beginning with the adoption of SFAS 109, the income tax expense
provision does not include the benefit of recognizing available loss
carryforwards to the extent they have already been recognized as a
deferred tax asset. Instead, there will be a reduction in the deferred
tax asset when such benefits are utilized to reduce taxes payable.
Deferred income tax assets, both current and non-current, reflect the
net tax effects of (a) temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, and (b) operating loss and
tax credit carryforwards.
Page 7
<PAGE>
The provision (benefit) for income tax expense was comprised of the
following:
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
1995 1994 1995 1994
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Current
Federal $(132,000) $ 10,000 $(665,000) $ 4,000
State --- 8,000 ( 63,000) 6,000
---------- --------- ---------- ---------
(132,000) 18,000 (728,000) 10,000
Deferred
Federal --- 37,000 ( 24,000) 31,000
State ( 25,000) --- ( 63,000) ---
---------- --------- ---------- ---------
Total provisions $(157,000) $ 55,000 $(815,000) $ 41,000
========== ========= ========== =========
</TABLE>
The Company has net operating losses and tax credits available as
carryforwards to reduce future payments of federal income taxes.
State tax losses are also available as carryforwards. At December 31,
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 is subject to limitation under provisions of the Internal
Revenue Code.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 121 "Accounting For
The Impairment Of Long-Lived Assets" ("SFAS 121") which requires that
long-lived assets be reviewed for impairment whenever events or
changes in circumstance indicate that the carrying amount of an asset
may not be recoverable. To determine a loss, if any, to be recognized,
the book value of the asset would be compared to the market value or
expected future cash flow value. The Company is required to adopt
SFAS 121 for the fiscal years beginning after December 15, 1995 (fiscal
year ended June 30, 1997 for the Company), although earlier
implementation is permitted. The Company is evaluating when it will
adopt SFAS 121 and anticipates, based upon information currently
available, that it will not have a material impact on its results of
operations and financial position.
Page 8
<PAGE>
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 "Accounting For Stock Based Compensation"
("SFAS 123") which requires that an employer's financial statements include
expanded disclosure regarding stock-based employee compensation arrangements.
The Company is evaluating the requirements of SFAS 123, which must be adopted
by fiscal year 1997, and currently believes that SFAS 123 will not have a
material impact upon its results of operations or financial condition.
6. Legal Settlement
Other income (expense) consists substantially of the settlement of an
outstanding litigation matter with respect of an ANDA filing lodged with the
FDA during 1995. Under the agreement, effective December 31, 1995, the
proceeds will be received in three equal annual installments.
7. Restructuring and Proposed Acquisitions
In October 1995, the Company made the decision to restructure certain aspects
of its business. This restructure was considered necessary to prepare the
Company to be more competitive in the oral generic pharmaceutical industry.
Costs associated with this restructuring, including severance payments, were
incurred beginning in the quarter ended December 31, 1995 and are expected
to total less than $1 million. During the quarter such restructuring expenses
totaled $580,000. This restructuring is expected to better position the
Company to integrate the proposed acquisitions from Faulding Holdings Inc.,
which were announced in August 1995. These acquisitions are subject to
approval by the Company's stockholders which approval will be sought at the
February 29, 1996 Annual Meeting of Stockholders.
Page 9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results Of Operations - Three and Six Month Periods Ended December 31, 1995
Compared with the Three and Six Month Periods Ended December 31, 1994
Net sales for the three and six month periods ended December 31, 1995 were
$14,522,000 and $28,689,000, respectively, compared with $15,477,000 and
$32,354,000 for the corresponding 1994 periods. The declines in both periods
reflect lower sales of nifedipine and certain mature products. The
nifedipine products accounted for 6% and 7% of net sales for both the
current three and six month periods, respectively, compared with 12% for
both corresponding prior periods. The decrease in net sales is primarily
due to declines in selling prices and, to a lesser degree, volume reductions
of some products as a result of competitive pressure, and the absence of
newly approved product introductions during such period.
Gross profit for the current three and six month periods was $3,065,000 and
$5,577,000, respectively, compared with $3,937,000 and $8,135,000 for the
corresponding 1994 periods. Gross profit as a percent of net sales was 21%
and 19% for the current three and six month periods, respectively, compared
with 25% for both corresponding prior periods. The gross profit declines
were attributable to a combination of higher raw material costs and lower
selling prices for nifedipine and several other products. Decreasing gross
profits, as well as net sales, can be expected to continue until such time
as Purepac receives FDA approvals for new products.
Selling, general and administrative expenses for the current three and six
month periods of $2,560,000 and $4,815,000, respectively, increased over the
corresponding prior period expenses of $2,294,000 and $4,765,000, respectively.
The expenses as a percent of net sales were 18% and 17% for the current three
and six month periods, respectively, compared with 15% for both corresponding
1994 periods. The increase in the expense level for the current three month
period reflects $580,000 of severance payments related to the Company's
restructuring plan. (See "Financial Condition, Liquidity and Capital
Resources").
Research and development expenses for the current three and six month periods
were $2,596,000 and $4,546,000, respectively, compared with $1,480,000 and
$3,245,000 in the corresponding prior periods. The expenses as a percent of
net sales were 18% and 16% for the current three and six month periods,
respectively, compared with 10% for both corresponding 1994 periods.
The upward trend in the expense levels for both the current and six month
periods reflects increased clinical expenses and additions of scientific
personnel.
Page 10
<PAGE>
Other income for the current three and six month periods was $1,681,000 and
$1,640,000, respectively, compared with other expense of $13,000 and $14,000
for the corresponding prior periods. These increases are attributable to the
settlement of a litigation by the Company recorded in the quarter ended
December 31, 1995. Also, other income (expense) reflects net interest
expense and revolving credit agreement fees in excess of interest income.
The net loss before preferred stock dividends for the current three and six
month periods were $252,000 and $1,329,000, respectively, compared with the
net income before preferred stock dividends of $95,000 and $70,000 for the
corresponding 1994 periods.
The results of operations for the three and six month periods ended December
31, 1995 were adversely affected by both negative pricing pressures within
the oral generic pharmaceutical industry and delays in new product regulatory
approvals which did not allow the Company to offset those declines. The
continuation of delays in new product approvals could adversely impact on
fiscal 1996 results.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had $764,000 in cash and cash equivalents at December 31, 1995,
compared with $1,156,000 at June 30, 1995. The decrease in the current six
month period of $392,000 resulted primarily from cash used for operating
activities of $2,585,000 and investments in property, plant and equipment of
$807,000 offset by $3,000,000 borrowed from a bank.
A comparison of the balance sheet accounts at December 31, 1995 to the June
30, 1995 balances shows the following to be noteworthy:
Inventory increased by $1,091,000 primarily in raw materials in
anticipation of increased production.
Other current assets increased by $2,078,000 primarily due to the
recording of a federal income tax receivable based on the Company
carrying back the current period's net operating loss and secondarily
due to the recording of a $583,000 current receivable related to a
settlement of a lawsuit. (See Part II, Item I. "Legal Proceedings").
Other assets increased by $1,161,000 due to the recording of the non-
current portion of the receivable related to the settlement of the above-
mentioned lawsuit.
Accounts payable increased by $2,678,000 reflecting the increased raw
material purchases in the current quarter.
Page 11
<PAGE>
The accrued preferred dividend, payable to the Company's principal stockholder,
Faulding Holdings Inc., of $520,095 for the three month period ended December
31, 1995 was subsequently paid on January 2, 1996.
In October 1995, the Company made the decision to restructure certain aspects
of its business. This restructure was considered necessary to prepare the
Company to be more competitive in the oral generic pharmaceutical industry.
Costs associated with this restructuring, including severance payments, were
incurred beginning in the quarter ended December 31, 1995 and are expected to
total less than $1 million. During the quarter such restructuring expenses
totaled $580,000. This restructuring is expected to better position the
Company to integrate the proposed acquisitions from Faulding Holdings Inc.,
which were announced in August 1995. These acquisitions are subject to
approval by the Company's stockholders which approval will be sought at the
February 29, 1996 Annual Meeting of Stockholders.
The Company believes that its current cash resources, anticipated operating
cash flows and funds available under a revolving credit and loan arrangement
with a bank will be sufficient to fund its working capital needs for the next
24 months. Depending upon the timing of the Company's cash flow requirements,
which is highly dependent upon the unpredictable timing of the receipt of FDA
product approvals, the future cash flow needs of the Company could exceed the
available credit under its existing credit facilities. As of December 31,
1995, the Company had approximately $10.0 million of available borrowings
under its existing credit facilities.
In addition, it is not anticipated that the businesses it plans to acquire
("Acquisitions") will generate adequate revenues to finance their combined
operating expenses until at least 1998. The Company expects to receive $15.0
million from the sale of additional preferred stock directly associated with
these Acquisitions. Although proceeds from the preferred stock will be used
in substantial part for this purpose, additional funding is likely to be
required. The issuance of the preferred stock and the purchase of the
Acquisitions are subject to the approval by the Company's stockholders which
approval will be sought at the February 29, 1996 Annual Meeting of
Stockholders.
The use of the Company's credit facilities and other sources of capital to
finance any shortfalls in the cash flow needs of the Acquisitions would
diminish funding available to the Company to sustain or expand its current
business operations. Consequently, there can be no assurance that the
Company's operating results will be sufficient to permit it to adequately
fund the Acquisitions, or that satisfying such financing obligations will
not adversely affect its ongoing business operations or its ability to
finance its current long range objectives. Accordingly, the Company may be
forced to seek additional credit facilities or to seek additional funding
from sales of its securities or from other sources.
Page 12
<PAGE>
The Company anticipates that it would be able to increase its credit
facilities or obtain financing from other sources, should it require
additional cash flow to support the commercialization of new products
following receipt of FDA approval therefor. However, there can be no
assurance that such financing will be available when required, if at all, or
will be available upon terms the Company may deem commercially reasonable.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Pursuant to an agreement dated as of December 31, 1995, the Company has settled
certain litigation entitled Merck & Co., Inc. v. Purepac Pharmaceutical Co.,
Case No. 95-495, in the United States District Court for the District of
Delaware. In accordance with such agreement, the Company is to receive a cash
settlement. The proceeds of which is payable in three equal annual
installments. In addition, the Company has agreed not to pursue the marketing
or sale of the pharmaceutical product which was the subject of the litigation
in the United States until 2006.
Item 2. through Item 4.
Not Applicable.
Item 5. OTHER EVENTS
Not Applicable.
Item 6 (a). EXHIBITS
Not Applicable.
Item 6 (b). REPORTS ON FORM 8-K
Not Applicable.
Page 13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUREPAC, INC.
BY: /s/ Richard F. Moldin February 15, 1996
-------------------------------------
Richard F. Moldin
President and Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Lee H. Craker February 15, 1996
-------------------------------------
Lee H. Craker
Chief Financial Officer
(Principal Accounting Officer)
