SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
Commission File Number: 0-13588
FAULDING INC.
(FORMERLY, PUREPAC, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 04-2769995
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Elmora Avenue, Elizabeth, New Jersey 07207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 527-9100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
_______None________ ________________None_____________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding twelve months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
15,007,753
Number of shares outstanding of the Registrant's
common stock as of May 14, 1996.
<PAGE>
FAULDING INC.
(FORMERLY, PUREPAC, INC.)
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1996 and June 30, 1995 . . . . . . . 3
Consolidated Statements of Operations
Three months ended March 31, 1996
and 1995 and nine months ended
March 31, 1996 and 1995 . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Nine months ended March 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 12
PART II - OTHER INFORMATION
ITEMS 1 thru 4 . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEMS 5 thru 6 . . . . . . . . . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . .. . . . . . . . . . . . . . . . . 19
Page 2
<PAGE>
FAULDING INC.
(Formerly, Purepac, Inc.)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, June 30,
1996 1995
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,598,847 $ 1,224,799
Accounts receivable 13,341,619 11,098,542
Inventory (Note 3) 24,390,963 20,838,005
Due from affiliated companies --- 1,312,098
Other current assets 3,853,919 2,298,349
Deferred income taxes (Note 5) 3,261,291 3,513,038
- --------------------------------------------------------------------------
TOTAL CURRENT ASSETS 51,446,639 40,284,831
- --------------------------------------------------------------------------
Property, plant and equipment, net 40,591,325 40,564,604
Other assets 4,245,051 3,595,530
Deferred income taxes (Note 5) 1,024,346 914,346
- --------------------------------------------------------------------------
TOTAL ASSETS $ 97,307,361 $ 85,359,311
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 8,263,160 $ 6,178,923
Due to affiliated companies 512,320 ---
Loan payable to bank --- 2,000,000
Accrued expenses 5,505,830 5,085,452
Accrued preferred dividends 578,220 520,095
- --------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 14,859,530 13,784,470
- --------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 1)
Class A convertible preferred stock;
par value $.01, authorized 1,834,188
shares; issued and outstanding 834,188
(liquidation value $24,995,171) 8,342 8,342
Class B convertible preferred stock;
par value $.01, authorized 150,000
shares; issued and outstanding 150,000
(liquidation value $15,058,125) 1,500 ---
Common stock; par value $.01, authorized
35,000,000 shares; issued and outstanding
14,997,128 at March 31, 1996 and 14,963,128
at June 30, 1995 149,971 149,631
Capital in excess of par value 57,330,115 43,797,870
Retained earnings 24,957,903 27,618,998
- --------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 82,447,831 71,574,841
- --------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,307,361 $ 85,359,311
==========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Page 3
<PAGE>
FAULDING INC.
(Formerly, Purepac, Inc.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 18,513,454 $ 15,029,804 $ 52,211,765 $ 48,519,806
Cost of sales 14,225,447 11,657,472 42,301,051 36,759,369
- ------------------------------------------------------------------------------------------------------------
Gross profit 4,288,007 3,372,332 9,910,714 11,760,437
- ------------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 2,734,808 2,548,593 8,238,636 7,313,600
Research and development 2,647,602 2,041,765 7,740,680 5,593,970
Acquisition expenses (Note 1) 1,017,980 --- 1,017,980 ---
Restructuring costs (Note 6) 78,000 --- 657,574 ---
- ------------------------------------------------------------------------------------------------------------
Total expenses 6,478,390 4,590,358 17,654,870 12,907,570
- ------------------------------------------------------------------------------------------------------------
Income (loss) from operations (2,190,383) (1,218,026) (7,744,156) (1,147,133)
Other income (expense), net (189,983) (30,759) 996,841 (128,327)
- ------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,380,366) (1,248,785) (6,747,315) (1,275,460)
Provision (benefit) for income taxes (Note 5) (266,000) (301,000) (1,081,000) (260,000)
- ------------------------------------------------------------------------------------------------------------
Income (loss) Before Preferred Stock Dividends (2,114,366) (947,785) (5,666,315) (1,015,460)
Preferred stock dividends 578,220 520,095 1,618,410 1,560,285
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS), AVAILABLE FOR COMMON STOCK $ (2,692,586) $ (1,467,880) $ (7,284,725) $ (2,575,745)
============================================================================================================
Primary Earnings Per Common Share (Note 2)
Net income (loss) $ (.18) $ (.10) $ (.49) $ (.17)
- ------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 14,996,754 14,935,753 14,974,255 14,906,373
- ------------------------------------------------------------------------------------------------------------
Earnings Per Share Assuming Full Dilution (Note 2)
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Page 4
<PAGE>
FAULDING INC.
(Formerly, Purepac, Inc.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
March 31,
-----------------------------
1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss), Available for Common Stock $ (7,284,725) $ (2,575,745)
Adjustments To Reconcile Net Income
(Loss) to Net Cash
Provided By (Used For) Operating Activities:
Depreciation and amortization 2,345,073 1,756,028
Compensation expense-stock grants 115,798 288,948
Deferred income tax, asset 141,747 52,947
INCREASE (DECREASE) IN CASH FROM:
Accounts receivable (2,243,076) 1,744,021
Inventory (3,552,958) 1,044,574
Other current assets (1,152,829) (248,714)
Other assets (658,899) ---
Accounts payable 2,084,236 (2,125,497)
Accrued expenses 420,378 (921,637)
Accrued income taxes (366,044) 6,403
Accrued preferred dividends 58,125 ---
Due to/from affiliates 565,002 (139,602)
- -----------------------------------------------------------------------------
TOTAL ADJUSTMENTS (2,243,447) 1,457,471
- -----------------------------------------------------------------------------
Net Cash Provided By (Used For)
Operating Activites (9,528,172) (1,118,274)
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITES:
Purchases of property, plant and equipment (2,362,416) (2,413,859)
- -----------------------------------------------------------------------------
Net Cash Provided By (Used For)
Investing Activities (2,362,416) (2,413,859)
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITES:
Borrowings from bank --- 1,000,000
Repayments to bank (2,000,000) ---
Proceeds from issuance of preferred stock 15,000,000 ---
Proceeds from additions to paid in capital 4,264,636 ---
- -----------------------------------------------------------------------------
Net Cash Provided By (Used For)
Financing Activites 17,264,636 1,000,000
- -----------------------------------------------------------------------------
Increase (Decrease) In Cash and Cash Equivalents $ 5,374,048 $ (2,532,133)
=============================================================================
Cash and cash equivalents,
beginning of period 1,224,799 3,188,358
- -----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,598,847 $ 656,225
=============================================================================
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest $ 206,188 $ 56,279
Income Taxes $ (856,703) $ ---
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Page 5
<PAGE>
FAULDING INC.
(FORMERLY, PUREPAC, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Notes to the Financial Statements included in Faulding Inc.'s (the "Company")
Form 10-K or the year ended June 30, 1995 contain information pertinent to
the accompanying financial statements. There has been no material change in
the information contained in such footnotes except as set forth below. The
Consolidated Balance Sheet at March 31, 1996, the Consolidated Statements of
Operations for the three and nine months ended March 31, 1996 and 1995 and
the Consolidated Statements of Cash Flows for the nine months ended March 31,
1996 and 1995 have not been audited.
In the opinion of management, all adjustments (consisting only of normal
recurring entries) necessary for a fair presentation of such financial
results have been included.
1. Acquisitions and Consolidation
On February 29, 1996 the Company acquired all of the outstanding capital
stock of each of Faulding Medical Device Co. ("FMD"), Faulding Puerto Rico,
Inc. ("FPR"), and Faulding Pharmaceutical Co. ("FPC"), collectively the
"Acquired Companies,", from Faulding Holdings Inc. (the Company's principal
stockholder) in exchange for 2,381,905 shares of its common stock. As part
of the acquisition, the Company created a Class B Preferred Stock with
150,000 authorized shares, par value at $.01, all of which were issued to
Faulding Holdings Inc. for a cash purchase price of $100 per share.
At the effective date of acquisition, the Company changed its name from
Purepac, Inc. to Faulding Inc. and the authorized number of shares of common
stock was increased from 25,000,000 shares to 35,000,000 shares.
The acquisition transaction was accounted for as similar to a pooling of
interests and, therefore, financial statements for all periods presented have
been restated as if the acquisition took place at the beginning of the
earliest period presented. The financial statements reflect the accounts of
Faulding Inc. (including its wholly owned subsidiary, Purepac Pharmaceutical
Co.) and the Acquired Companies.
Page 6
<PAGE>
The combined operations reported in the Company's consolidated financial
statements are comprised as follows (in thousands):
<TABLE>
<CAPTION
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- -------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Faulding Inc.
(Formerly, Purepac, Inc.)
- ----------------------------------
Net Sales $ 15,466 $ 14,473 $ 44,155 $ 46,827
Cost of sales 11,324 10,865 34,435 35,084
Total operating expenses 5,289 4,413 14,650 12,423
Net Income (loss) before preferred
stock dividends (1,078) (514) (2,407) (444)
Combined Operations of
Acquired Companies
- ----------------------------------
Net Sales $ 3,047 $ 557 $ 8,057 $ 1,693
Cost of sales 2,901 793 7,866 1,675
Total operating expenses 1,190 177 3,005 485
Net Income (loss) before preferred
stock dividends (1,036) (434) (3,259) (572)
Consolidated Operations
(as restated)
- ----------------------------------
Net Sales $ 18,513 $ 15,030 $ 52,212 $ 48,520
Cost of sales 14,225 11,658 42,301 36,759
Total operating expenses 6,479 4,590 17,655 12,908
Net Income (loss) before preferred
stock dividends (2,114) (948) (5,666) (1,016)
Note: The Acquired Companies' operations for the three and nine months ended
March 31, 1995 reflect the results of FMD only, as FPR and FPC did not
commence operations until April 7, 1995.
</TABLE>
Since the acquisition transaction was accounted for as similar to a pooling
of interests, the acquisition expenses of $1,018,000 incurred were charged to
results of operations in the three months ended March 31, 1996. The expenses
include $552,000 for financial advisory services and $466,000 for
professional fees.
Page 7
<PAGE>
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
as previously reported $ 134,154 $24,804,252 $27,618,998 $52,557,404
Common stock issued
pursuant to Acquisition 23,819 18,993,618 19,017,437
- ------------------------ ------------ ----------- ----------- -----------
Balance, June 30, 1995 157,973 43,797,870 27,618,998 71,574,841
as restated
Preferred stock Class B
issued 1,500 14,998,500 15,000,000
Common stock issued pursuant
to stock grant plan 340 (340)
Class A preferred stock
dividend (1,560,285) (1,560,285)
Class B preferred stock
dividend (58,125) (58,125)
Stock grant amortization 115,798 115,798
Reduction of income tax
liability from issuance
of stock grants 36,697 36,697
Pooling of interest adjustment 3,005,220 3,005,220
Net Income (Loss) (5,666,315) (5,666,315)
------------- ----------- ----------- -----------
Balance March 31, 1995 $ 159,813 $57,330,115 $24,957,903 $82,447,831
============= =========== =========== ===========
</TABLE>
2. Earnings Per Common Share
Primary earnings per common share is calculated by dividing income
after preferred dividends by the weighted average number of common shares
outstanding during the period. Common stock equivalents are excluded as the
effect is either not material or anti-dilutive. Earnings per share assuming
full dilution is not presented as the effect would be anti-dilutive.
Page 8
<PAGE>
3. Inventory
March 31, June 30,
1996 1995
----------- -----------
Raw materials $11,028,724 $ 6,078,441
Work-in-process 4,384,853 6,113,537
Finished goods 8,977,386 8,646,027
----------- -----------
Total $24,390,963 $20,838,005
=========== ===========
4. Capital Stock
During the quarter ended March 31, 1996 the Company issued 34,000
shares of common stock to employees pursuant to the Company's 1991 Restricted
Stock Incentive Plan. The Company received no proceeds from this transaction.
As a result of the issuance of these shares, the Company will have an income
tax deduction of $200,000 in the fiscal year ending June 30, 1997. The
deduction will result in a reduction in the taxes payable of approximately
$76,000. In the same fiscal year, for financial reporting purposes, the tax
benefit will be recorded as a reduction of the deferred tax asset to the
extent previously provided, and the remainder of the benefit will be recorded
as additional capital in excess of par value. The tax effects will not be
reflected in the reported earnings or the earnings per share calculations.
5. Accounting for Income Taxes
The Company adopted Statement of Financial Accounting Standard No.
109 ("SFAS 109"), "Accounting for Income Taxes," effective July 1, 1993.
Beginning with the adoption of SFAS 109, the income tax expense provision
does not include the benefit of recognizing available loss carryforwards to
the extent they have already been recognized as a deferred tax asset.
Instead, there will be a reduction in the deferred tax asset when such
benefits are utilized to reduce taxes payable.
Deferred income tax assets, both current and non-current, reflect the
net tax effects of (a) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, and (b) operating loss and tax credit carryforwards.
Page 9
<PAGE>
The provision (benefit) for income tax expense was comprised
of the following:
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
1996 1995 1996 1995
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Current
Federal $(218,000) $ (24,000) $(883,000) $ (20,000)
State (25,000) (45,000) (88,000) (39,000)
---------- --------- ---------- ---------
(243,000) (69,000) (971,000) (59,000)
Deferred
Federal (1,000) (232,000) (25,000) (201,000)
State ( 22,000) -0- (85,000) -0-
---------- --------- ---------- ---------
Total provisions $(266,000) $(301,000) $(1,081,000) $(260,000)
========== ========= ========== =========
</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 March 31, 1996, for federal tax purposes, the
net operating loss and tax credit carryforwards amounted to $13,048,000 and
$707,000, respectively; they expire through 2003. The future utilization of
the net operating loss carryforwards is subject to limitation under
provisions of the Internal Revenue Code.
As a result of the acquisition of the Acquired Companies, there are estimated
to be approximately $2,000,000 of additional net operating loss carryforwards
for federal tax purposes at March 31, 1996, generated principally by FMD.
These net operating loss carryforwards are limited to the individual future
taxable income of the respective companies. These net operating loss
carryforwards expire through 2006.
6. Restructuring
In October 1995, the Company made the decision to restructure certain aspects
of its business. This restructure was considered necessary to prepare the
Company to be more competitive in the generic pharmaceutical industry. Costs
associated with this restructuring, including severance payments, were
incurred beginning in October, 1995 and are expected to total less than $1
million. During the nine months ended March 31, 1996 such restructuring
costs totaled $657,000. This restructuring is expected to better position
the Company to integrate the Acquired Companies.
Page 10
<PAGE>
7. New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121 "Accounting For The Impairment Of Long-
Lived Assets" ("SFAS 121") which requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstance indicate that the
carrying amount of an asset may not be recoverable. To determine a loss, if
any, to be recognized, the book value of the asset would be compared to the
market value or expected future cash flow value. The Company is required to
adopt SFAS 121 for the fiscal years beginning after December 15, 1995 (fiscal
year ended June 30, 1997 for the Company), although earlier implementation is
permitted. The Company is evaluating when it will adopt SFAS 121 and
anticipates, based upon information currently available, that it will not
have a material impact on its results of operations and financial position.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 "Accounting For Stock Based
Compensation" ("SFAS 123") which requires that an employer's financial
statements include expanded disclosure regarding stock-based employee
compensation arrangements. The Company is evaluating the requirements of
SFAS 123, which must be adopted by fiscal year 1997.
Page 11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars presented in thousands)
Results Of Operations - Three and Nine Month Periods Ended March 31, 1996
Compared with the Three and Nine Month Periods Ended March 31, 1995
Overview: Acquisitions and Consolidation
On February 29, 1996 the Company acquired all of the outstanding capital
stock of each of Faulding Medical Device Co. ("FMD"), Faulding Puerto Rico,
Inc. ("FPR"), and Faulding Pharmaceutical Co. ("FPC"), collectively the
"Acquired Companies," from Faulding Holdings Inc. (the Company's majority
stockholder) in exchange for 2,381,905 shares of its common stock. As a
result, the acquisition transaction was accounted for as similar to a pooling
of interests and, therefore, financial statements for all periods presented
have been restated as if the acquisition took place at the beginning of the
earliest period presented. The financial statements reflect the accounts of
Faulding Inc. (including its wholly owned subsidiary, Purepac Pharmaceutical
Co.) and the Acquired Companies. Since the acquisitions were accounted for
as similar to a pooling of interests, acquisition expenses of $1,018 were
charged against the results of operations in the March 31, 1996 quarter.
Results of Operations
The following segregates the results of operations before income taxes for
Faulding Inc. into the Company's business prior to the acquisition,
"Purepac," and the Acquired Companies which became wholly owned subsidiaries
of Faulding Inc. effective March 1, 1996.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (UNAUDITED) - Purepac
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 15,466 $ 14,473 $ 44,155 $ 46,827
Cost of sales 11,324 10,865 34,435 35,084
- ------------------------------------------------------------------------------------------------------------
Gross profit 4,142 3,608 9,720 11,743
- ------------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 2,017 2,549 6,252 7,314
Research and development 2,176 1,864 6,723 5,109
Acquisition expenses 1,018 --- 1,018 ---
Restructuring costs 78 --- 657 ---
- ------------------------------------------------------------------------------------------------------------
Total expenses 5,289 4,413 14,650 12,423
- ------------------------------------------------------------------------------------------------------------
Income (loss) from operations (1,147) (805) (4,930) (680)
Other income (expense), net (40) (10) 1,600 (24)
- ------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,187) (815) (3,330) (704)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Page 12
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (UNAUDITED) - Acquired Companies
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 3,047 $ 557 $ 8,057 $ 1,693
Cost of sales 2,901 793 7,866 1,675
- ----------------------------------------------------------------------------------------------------------------
Gross profit 146 (236) 191 18
- ----------------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 719 --- 1,987 ---
Research and development 471 177 1,018 485
- ----------------------------------------------------------------------------------------------------------------
Total expenses 1,190 177 3,005 485
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from operations (1,044) (413) (2,814) (467)
Other income (expense), net (150) (21) (603) (105)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,194) (434) (3,417) (572)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The discussion below relates to the segregated results presented above.
Purepac Results of Operations
Net sales for the three and nine month periods ended March 31, 1996 were
$15,466 and $44,155, respectively, compared with $14,473 and $46,827 for the
corresponding 1995 periods. The increase in the third quarter's result of
6.9% over the prior year period is primarily due to initial net sales of
diclofenac, which was approved in March 1996. Diclofenac sales in the March
1996 quarter represented 14.9% of the quarter's sales, partly due to filling
the customer supply pipeline. For the nine months to March 31, 1996, net
sales declined by 5.7% caused principally by price erosion due to competition
impacting on Purepac's mature product line, which includes the product
nifedipine. Other than diclofenac, no new product approvals were received by
Purepac during the nine month period to March 31, 1996.
Gross profit for the three and nine month periods ended March 31, 1996 were
$4,142 and $9,720, respectively, compared with $3,608 and $11,743 for the
corresponding 1995 periods. Gross profit as a percentage of net sales for
the three and nine month periods ended March 31, 1996 were 26.8% and 22.0%,
compared with 24.9% and 25.1% for the corresponding periods in the prior year.
For the three and nine month periods respectively, the approval of diclofenac
and price erosion due to competition were the main reasons for the
differences from prior comparable periods.
Page 13
<PAGE>
Selling, general and administrative expenses for the current three and nine
month periods were $2,017 and $6,252, respectively, compared to the
corresponding prior year's respective amounts of $2,549 and $7,314. Current
period expenses as a percentage of net sales were 13.0% and 14.2%,
respectively, compared with 17.6% and 15.6% for the corresponding prior year's
periods. In addition, Purepac incurred $1,018 in acquisition expenses in the
nine months to March 31, 1996 related to the purchase of the Acquired
Companies, and an additional $657 in costs related to the restructuring of
the Purepac business. Of these costs, all the acquisition expenses and $78
of the restructuring costs were expensed in the March 31, 1996 quarter. Some
additional restructuring costs are expected in the June 1996 quarter, with
total restructuring costs for the financial year still projected to be less
than $1,000. No such acquisition or restructuring costs were incurred in
the prior financial year.
Research and development expenses for the current three and nine month periods
were $2,176 and $6,723, respectively. This equates to 14.1% and 15.2% of net
sales. Expenditures for the prior year's corresponding periods were $1,864
(12.9%) and $5,109 (10.9%). The increase in research and development
expenses was mainly due to an increase in biostudies costs required as part
of the Abbreviated New Drug Application ("ANDA") submission process to the
United States Food and Drug Administration ("FDA"), in addition to the
recruitment of key new scientific personnel.
Other income/(expense) for the current three and nine month periods were
($40) and $1,600, respectively, compared with ($10) and ($24), respectively,
in the prior year's corresponding periods. The $1,600 for the current nine
month period is mainly attributable to the settlement of a patent litigation
by Purepac which was recorded in the quarter ended December 31, 1995.
Net loss before income tax for the current three and nine month periods were
$1,187 and $3,330, respectively. If the acquisition and restructuring costs
were excluded for the current year's reported periods, the losses would be
$91 and $1,655. These results compare to net losses before income tax for
the prior year's corresponding periods of $815 and $704.
The results for the three and nine month periods ended March 31, 1996 were
adversely affected by both negative pricing pressures within the oral generic
pharmaceutical industry and delays in new product approvals, with the
exception of diclofenac. The future financial results will continue to be
dependent on the ability of income from sales of new products to counter
ongoing price erosion within the industry.
Page 14
<PAGE>
Acquired Companies Results of Operations
The Acquired Companies became wholly owned subsidiaries of Faulding Inc.
effective March 1, 1996. FPC and FPR did not commence operations until April
7, 1995; hence the prior year comparisons represent only the operating
results of FMD. Current and prior year net sales for FMD relate to a
distribution agreement with a third party -- which was terminated as of
December 31, 1995 -- for products sourced from F.H. Faulding & Co. Limited
("F.H. Faulding"), the beneficial majority stockholder of Faulding Inc.
The products previously sold under that agreement, together with additional
products sourced from F.H. Faulding, are now being sold by FPC. Consequently,
comparison with the prior year is not representative and hence the following
analysis principally relates to current year operating results.
Net sales for the three and nine month periods ended March 31, 1996 were
$3,047 and $8,057, respectively. Of these net sales, 71.9% and 78.3%,
respectively, were related to products manufactured at the FPR production
facility in Aguadilla, Puerto Rico. These products were sold either under
contract manufacturing agreements or by FPC to its customers in the USA. The
majority of the remainder of the net sales comprises products licensed from
F.H. Faulding. Net sales in the current three month period included initial
sales of mitomycin, licensed from F.H. Faulding, which the FDA approved for
marketing in November 1995.
Gross profit for the three and nine month periods ended March 31, 1996 were
$146 and $191, respectively. Gross profit was unfavorably impacted by both
under utilization of the production facility in Puerto Rico and production
related expenses incurred by FMD, which did not record any net sales. Gross
profit in the current three month period included the earnings from the
initial sales of mitomycin.
Selling, general and administrative expenses for the current three and nine
month periods were $719 and $1,987, respectively, representing principally
selling expenses associated with FPR and FPC.
Research and development expenses include the development costs associated
with FMD. Expenses for the current three and nine months were $471 and
$1,018, respectively.
Net loss before income tax for the three and nine month periods to March 31,
1996 was $1,194 and $3,417, respectively. Of the current nine month loss
before income tax, $3,005 was incurred prior to becoming wholly owned
subsidiaries of Faulding Inc.
Page 15
<PAGE>
Consolidated Income Tax Benefit
The calculation of the income tax benefit of the Company, which includes
Purepac and the Acquired Companies, has been prepared in accordance with
accounting for the acquisitions as similar to a pooling of interests
consistently applying Statement of Financial Accounting Standard No. 109
("SFAS109"). Purepac's net loss before income tax resulted in the recording
of an income tax benefit of $108 and $923 for the three and nine month
current periods.
For the Acquired Companies, only the net loss before income tax, since
acquisition, can be consolidated into the Company's income tax returns. As a
result, an income tax benefit of $158 has been included in both the three and
nine month current periods. However, under SFAS109, the income tax benefit of
the net losses prior to acquisition have been fully reserved against as the
recovery of these losses is dependent on future taxable income of the
respective companies, which at present cannot be assured.
Financial Condition, Liquidity And Capital Resources
The Company had $6,599 in cash and cash equivalents at March 31, 1996,
compared with $1,225 at June 30, 1995. The increase in the current nine
month period of $5,374 resulted primarily from $15,000 in cash provided by
the issuance of the Class B Preferred Stock associated with the February 29,
1996 acquisitions and $4,265 provided by additions to paid-in capital. This
was offset by $9,528 used for operating activities, $2,362 for investments in
property, plant and equipment and $2,000 to repay a bank loan.
A comparison of the balance sheet accounts at March 31, 1996 to the June 30,
1995 balances shows the following to be noteworthy:
Accounts receivable increased by $2,243 due to the higher sales level in
the current quarter.
Inventory increased by $3,553 primarily in raw materials in anticipation
of increased production.
Other current assets increased by $1,556 primarily due to the recording
of a federal income tax receivable based on carrying back the current
period's net taxable loss of Purepac and secondarily due to the
recording of a $583 current receivable related to a settlement of
patent litigation.
Accounts payable increased by $2,084 reflecting the increased raw
material purchases in the current quarter.
The accrued preferred dividends payable to the Company's majority stockholder,
Faulding Holdings Inc., of $578 for the three month period ended March 31,
1996 were subsequently paid on April 1, 1996.
Page 16
<PAGE>
In October 1995, the Company made the decision to restructure certain aspects
of its business. This restructuring was considered necessary to prepare the
Company to be more competitive in the oral generic pharmaceutical industry.
Also, this restructuring is expected to better position the Company to
integrate the Acquired Companies. Costs associated with this restructuring,
including severance payments, are expected to total less than $1,000. During
the six months to March 31, 1996, such restructuring expenses totaled $657.
The Company believes that its current cash resources, anticipated operating
cash flows and funds available under a revolving credit and loan arrangement
with a bank will be sufficient to fund its working capital needs for the next
24 months. In addition, it is not anticipated that the Acquired Companies will
generate adequate revenues to finance their combined operating expenses until
at least 1998. Depending upon the timing of the Company's cash flow
requirements, which is highly dependent upon the unpredictable timing of the
receipt of FDA product approvals, the future cash flow needs of the Company
could exceed the Company's current cash resources and its available credit
under its existing credit facilities. As of March 31, 1996, the Company had
$6,599 in cash, plus approximately $15,000 of available borrowings under its
existing credit facilities.
Accordingly, the Company may need to seek additional credit facilities or to
seek additional funding from sales of its securities or from other sources.
The Company anticipates that it would be able to increase its credit
facilities or obtain financing from other sources, should it require
additional cash flow to support the commercialization of new products
following receipt of FDA approval therefor. However, there can be no
assurance that such financing will be available when required, if at all, or
will be available upon terms the Company may deem commercially reasonable.
Page 17
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable.
Item 2. through Item 3.
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Company held an Annual Meeting of Stockholders on February 29, 1996. The
following is a summary of the proposals that were voted upon at the meeting
and the voting results therefrom:
Votes Abstentions
Against or and Broker
Proposal Votes For Withheld Non-Votes
- ----------------------------- --------- ---------- -----------
Approval of the acquisition
by the Company, in exchange
for 2,253,521 shares of the
Company's common stock (sub-
ject to adjustment) of the
three following operating
subsidiaries of Faulding
Holdings Inc.:
Faulding Medical Device Co.
Faulding Puerto Rico, Inc.
Faulding Pharmaceutical Co. 9,116,879 226,325 66,385
Approval of the sale by the
Company to Faulding Holdings
Inc. of shares of a new class
of preferred stock of the
Company, bearing an annual
dividend of 4.5% and convertible
into an aggregate of 1,564,950
shares of the Company's common
stock, for $15 million. 9,116,879 226,325 66,385
Approval of an amendment to
the Company's Certificate of
Incorporation to change the
name of the Company to
"Faulding Inc." 9,798,840 155,670 63,880
Approval of an amendment to
the Company's Certificate of
Incorporation to increase
the Company's authorized
common stock from 25,000,000
shares to 35,000,000 shares. 9,458,878 322,768 88,220
Election of five directors
of the Company for the
ensuing year:
Edward D. Tweddell 12,046,819 105,018
Alan G. McGregor 12,043,345 108,492
Richard F. Moldin 12,046,319 105,518
David Beretta 12,047,119 104,718
Bruce C. Tully 12,046,819 105,018
Ratification of Deloitte
& Touche LLP as the Company's
independent auditors for
the fiscal year ending
June 30, 1996. 12,072,472 24,835 56,930
Page 18
<PAGE>
Item 5. OTHER EVENTS
On February 29, 1996 the stockholders approved a change of the Company's name
from Purepac, Inc. to Faulding Inc. effective February 29, 1996. The NASDAQ
trading symbol changed from PURE to FAUL.
Item 6 (a). EXHIBITS
Not Applicable.
Item 6 (b). REPORTS ON FORM 8-K
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAULDING INC.
BY: /s/ Richard F. Moldin May 15, 1996
Richard F. Moldin
President and Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Lee H. Craker May 15, 1996
Lee H. Craker
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,599
<SECURITIES> 0
<RECEIVABLES> 13,342
<ALLOWANCES> 0
<INVENTORY> 24,391
<CURRENT-ASSETS> 51,447
<PP&E> 40,591
<DEPRECIATION> 0
<TOTAL-ASSETS> 97,307
<CURRENT-LIABILITIES> 14,859
<BONDS> 0
0
10
<COMMON> 150
<OTHER-SE> 82,228
<TOTAL-LIABILITY-AND-EQUITY> 97,307
<SALES> 52,212
<TOTAL-REVENUES> 52,212
<CGS> 42,301
<TOTAL-COSTS> 17,655
<OTHER-EXPENSES> (1,750)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 753
<INCOME-PRETAX> (6,747)
<INCOME-TAX> (1,081)
<INCOME-CONTINUING> (5,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,666)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
<FN>
<F1>The Company acquired capital stock of other companies. The acquisition
transaction was accounted for as similar to a pooling of interests and,
therefore, financial statements have been restated as if the acquisition took
place at the beginning of such periods.
</FN>
</TABLE>
