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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, 1997
Commission File No. 0-13588
FAULDING INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 04-2769995
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
200 ELMORA AVENUE, ELIZABETH, NJ 07207
(Address of principal executive offices) (Zip Code)
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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 $0.01 per share
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No [ ] [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ('SS' 229.405 of this chapter) is not contained herein, and
will not 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. [ ]
20,114,688
Number of shares outstanding of the Registrant's common stock as of
August 8, 1997
$73,979,138
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of August 8, 1997
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FAULDING INC.
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the financial condition, results of operations and business of the
Company (as defined herein), including, without limitation, statements under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and "Legal Proceedings" contained herein.
These forward looking statements involve certain risks and uncertainties. No
assurance can be given that any of such matters will be realized. Factors that
may cause actual results to differ materially from those contemplated by such
forward looking statements include, among others (i) unforeseen competition from
other generic pharmaceutical companies which may be developing similar or
equivalent products to those of the Company, (ii) timing issues involving the
launch of new products into the marketplace including delays by the Company in
receiving FDA approvals of new products and the possibility that other
competitors may receive prior FDA approval of equivalent or competitive
products, (iii) changes in the medical or hospital industries which could
adversely affect buying patterns of pharmacists, hospitals or other healthcare
providers, changes in governmental legislation and regulations which could
adversely affect the approval and marketing of new or existing products, and a
decline in general economic conditions which could adversely affect the sale of
pharmaceutical products. Further information on the other factors that could
affect the financial results of the Company and such forward looking statements
is included in the sections herein entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
"Legal Proceedings."
BASIS OF PRESENTATION
The term "fiscal year" as applied to fiscal years of the Company means any 12
month period ending June 30. The fiscal year ended June 30, 1997 is referred to
as "fiscal 1997" or the "1997 fiscal year" and preceding fiscal years are
referred to in a corresponding manner. References in this Form 10-K to the
"Company" are to Faulding Inc. and its consolidated subsidiaries, and, prior to
February 29, 1996, to Purepac Inc. and its consolidated subsidiaries. Unless
otherwise indicated, references to "Purepac" are to the Company and its
consolidated subsidiaries prior to February 29, 1996, when the Company acquired
Faulding Pharmaceutical Co. ("FPC"), Faulding Puerto Rico, Inc. ("FPR") and
Faulding Medical Device Co. ("FMDC") and changed its name from Purepac Inc. to
Faulding Inc.
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PART 1
ITEM 1. BUSINESS
THE COMPANY
The Company is primarily engaged in the development, manufacture and sale of
human generic pharmaceutical products and medical devices. The operating
subsidiaries of the Company are Purepac Pharmaceutical Co. ("PPC"), for oral
products; FPC and FPR, for injectable products and FMDC, for medical devices.
FPC, FPR and FMDC were acquired by the Company on February 29, 1996, and are
sometimes referred to herein as the "Acquired Companies".
The Company was incorporated in Delaware on September 2, 1982. On February 29,
1996, the Company's name was changed to Faulding Inc. from Purepac Inc. The
Company's executive office and principal facilities are located at 200 Elmora
Avenue, Elizabeth, New Jersey 07207; its telephone number is (908) 527-9100.
The Company operates in one business segment, the pharmaceutical industry. The
Company's oral products operation is involved in the development, manufacture,
marketing and distribution of generic prescription pharmaceutical products,
principally from its Elizabeth, New Jersey facility. The injectable products
business operates a parenteral pharmaceutical manufacturing and development
facility in Aguadilla, Puerto Rico, and also markets, under license, injectable
generic drug products manufactured by FH Faulding & Co. Limited ("Faulding"), an
international pharmaceutical and healthcare company headquartered in Australia.
The medical devices operation designs, develops and commercializes disposable
medical devices and injectable drug delivery systems and is currently located at
Phoenix, Arizona.
Approximately 71.1% of the outstanding common stock, par value $0.01 per share
(the "Common Stock") of the Company is owned by Faulding Holdings Inc.
("Holdings"), a wholly-owned subsidiary of Faulding. On June 30, 1997, Holdings
converted all of its shares of Class A preferred stock, par value $0.01 per
share (the "Class A Preferred Stock"), in the Company into 5,005,128 shares of
Common Stock. Holdings would own approximately 73.1% of the Common Stock upon
the conversion of its Class B preferred stock, par value $0.01 per share (the
"Class B Preferred Stock") in the Company.
On June 3, 1997, the Company received a merger proposal (the "Proposal") from
Faulding. In the Proposal, Faulding offered to acquire all of the outstanding
shares of Common Stock of the Company not currently owned by Holdings at a price
of $12.00 per share in cash (the "Proposed Transaction"). The transaction
contemplated by the Proposal would be structured as a merger pursuant to which a
newly organized United States subsidiary of Holdings would be merged into the
Company as a result of which Holdings would acquire
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all of the issued and outstanding shares of Common Stock that are not currently
owned by it.
The Board of Directors of the Company held a meeting on June 3, 1997 and
appointed a Special Committee of the Board, consisting of Bruce C. Tully and
Joseph C. Minio, who are outside, independent directors of the Company, to
consider whether the proposal is fair to and in the best interest of the Company
and its stockholders, and to recommend whether the Board of Directors should
accept the Proposal. The Special Committee, assisted by independent legal
counsel and independent financial advisors, is currently evaluating the
Proposal.
GENERIC DRUGS
A generic drug product contains the same active drug ingredient(s) as, and is
the therapeutic equivalent of, a brand name drug product for which safety and
efficacy have been previously established. Accordingly, a generic drug product
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 product 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 United States Food and Drug Administration ("FDA") of a
list of therapeutically equivalent drugs which provides physicians and
pharmacists with the approved sources of generic drug alternatives available for
each drug product. In addition, since generic drugs are typically sold at prices
substantially below those of brand name drugs, the prescribing of generic drugs
has been encouraged and, in some instances required, by various government
agencies and private health insurers as a cost-saving measure in the purchase
of, or reimbursement for, drug products.
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PRODUCTS
The Company markets 33 generic solid oral dosage form pharmaceuticals (tablets
and capsules) through its PPC oral operations, 19 generic injectable
pharmaceuticals through its injectable business and one branded medical device,
Safe-Connect'tm' valve, by the medical devices operation. For the year ended
June 30, 1997, 86%, 14% and less than 1% of sales were contributed by orals,
injectables and devices, respectively. For the years ended June 30, 1996 and
1995, oral products contributed 84% and 94% of Company sales, respectively, and
the injectable business contributed 16% and 6% of Company sales, respectively.
See "Item 7 - Management's Discussion And Analysis Of Results Of Operations And
Financial Condition - Results of Operations."
During fiscal year 1997, Purepac marketed 12 cardiovascular products, 11 anti-
arthritic/analgesic products, nine anti-seizure and central nervous system
therapies, four anti-anxiolitic products, and seven other drug products. For the
year ended June 30, 1997, 40% of oral product sales were generated by products
launched in the preceding 18 months. These included diclofenac delayed-release
tablets, the generic equivalent of Voltaren'r' launched in March 1996 (20% of
annual sales); clonazepam tablets, the generic equivalent of Klonopin'r'
launched in February 1997 (12% of annual sales); and etodolac 400 mg tablets,
the generic equivalent of Lodine'r' launched in March 1997 (8% of annual sales).
The injectable operation markets four oncology-related and 14 other injectable
products including a prefilled syringe line of injectable analgesics,
Rapi-ject'r'. For the year ended June 30, 1997, 25% of injectable sales were
generated by new products launched in the preceding 18 months, including
acyclovir sodium, which is generically equivalent to Zovirax I.V.'r' and which
was launched in April 1997 (15% of annual sales), and mitomycin, which is
generically equivalent to Mutamycin'r' and which was launched in April 1996 (8%
of annual sales).
The medical device business began marketing its first product, Safe-Connect'tm'
valve, during the year ended June 30, 1997. Safe-Connect'tm' valve is a
connector for use with needleless syringes and is intended to reduce the
incidence of needle-stick injuries in the administration of intravenous
medications and to offer other improvements over competitive valves.
NEW PRODUCT DEVELOPMENT
Research and development expenditures for the years ended June 30, 1997, 1996
and 1995 amounted to $10.8 million, $10.4 million and $7.7 million,
respectively. During the year ended June 30, 1997, the Company's new product
development program remained focused on AB-rated (substitutable) generic
equivalents to a number of immediate-release and modified-release oral
prescription products, injectable products and drug
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delivery devices.
During the year ended June 30, 1997, the Company received FDA approval for four
new oral generic drug products and four injectable drug products and clearance
from the FDA to market four new medical devices. The oral products approved were
clonazepam tablets, etodolac tablets, captopril tablets and acyclovir tablets.
The injectable products approved during the year ended June 30, 1997 were
iopamidol injection, preserved and unpreserved presentations of atracurium
besylate injection, and acyclovir injection. Since the end of fiscal 1997, the
FDA has approved pentoxifylline extended-release tablets, the generic equivalent
of Trental'r'. This product was launched in July 1997. The medical devices
approved during fiscal 1997 were the Safe-Connect'tm' valve, Safe-Connect'tm' IV
extension sets, Safe-Connect'tm' Spikes for Vials and Safe-Connect'tm' Y-Site
Adapter. At present, the Company has opted not to commercialize captopril
tablets and to discontinue the marketing of iopamidol injection due to erosion
in the market price for both products.
During the year ended June 30, 1997, the Company filed four Abbreviated New Drug
Applications ("ANDAs") for oral products, two ANDAs for injectable products and
four 510K submissions for medical drug devices, as compared to five ANDAs for
oral products, four ANDAs for injectable products and two 510K submissions for
medical drug devices during the year ended June 30, 1996. No assurance can be
given as to the receipt or timing of ANDA approvals and the commercial
significance of any product so approved. See "Government Regulations."
As a matter of general policy, information relating to the Company's development
of new products, including information relating to the identity, prospects and
timing of such products, is considered by the Company to be highly confidential,
and is generally not publicly disclosed prior to the Company's introduction of
such new products on the market. The Company believes that the public disclosure
of such information relating to a new product, prior to the Company's
introduction of the product on the market, could adversely affect the Company's
competitive position, due principally to the overall competitiveness of the
generic drug market and the need to introduce generic versions of brand name
drugs promptly at the expiration of patents granted by the United States Patent
and Trademark Office (the "PTO") and/or the exclusivity granted by the FDA.
MARKETING AND CUSTOMERS
The Company maintains separate and distinct sales forces for the oral business
and injectable and medical devices businesses. Purepac sells directly to drug
wholesalers and distributors, retail chain stores and mail order pharmacies and
indirectly through wholesalers to non-warehousing chains and purchasing groups.
Contract manufacturing is performed for private label distributors.
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The injectables and devices businesses market their products to hospitals and
clinics, through group purchasing organizations and specialty distributors, and
to drug wholesalers. Contract manufacturing is conducted for other companies.
The Company currently sells to approximately 240 customers. For the year ended
June 30, 1997, the top three customers accounted for 16%, 9% and 9% of total
sales, respectively. The Company believes that while the loss of one of these
customers would not likely have a material impact on the Company's financial
position and cash flow, the loss of any two of these customers could have such
an impact. For the year ended June 30, 1996, the top three customers accounted
for 11%, 10% and 10% of total sales, respectively, and for the year ended June
30, 1995, the top three customers accounted for 12%, 11% and 10% of total sales,
respectively. For the years ended June 30, 1997, 1996 and 1995, the top 10
customers of the Company accounted for 70%, 69% and 64% of sales, respectively.
The backlog of firm orders at June 30, 1997 was $1.3 million compared to $1.9
million at June 30, 1996 and $1.1 million at June 30, 1995. Seasonality is not a
factor in the Company's business. The Company does not believe that its order
backlog is material in the context of its historical and prospective operations
since products are shipped (generally from inventory) promptly after the orders
are received.
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. Approximately 6%
are sourced under a licensing agreement with and manufactured by Faulding for
certain generic injectable products, including anti-cancer products. The balance
of the Company's products are manufactured to its specifications by a number of
outside contractors.
Raw materials essential to the conduct of the Company's business are
pharmaceutical chemicals and packaging components which the Company purchases in
bulk from a variety of sources. 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, 1997, 1996 and 1995, the Company expended
$38,000, $106,000 and $55,000, respectively, for environmental control equipment
in connection with the upgrade and expansion of its manufacturing facilities.
Capital expenditures for environmental control equipment for the year ending
June 30, 1998 are expected to be approximately $370,000 due to the planned
expansion of production capabilities at Elizabeth, New Jersey.
COMPETITION
The generic segment of the pharmaceutical industry is highly competitive and
fragmented. Many independent generic companies as well as generic subsidiaries
of research-based, branded pharmaceutical companies compete for a share of the
generic segment. Intense competition on many generic drug products often results
in dramatic discounts in price from the brand product.
Principal competitive factors in the generic market include regulatory
compliance, customer service (including prompt fulfillment of orders) and the
ability to introduce generic versions of branded drugs promptly at the
expiration of patents granted by the PTO and/or exclusivity granted by the FDA.
Due to the importance of introducing generic products promptly at the expiration
of patents granted by the PTO and/or exclusivity granted by the FDA and the
overall competitiveness of the generic drug market, the Company's ongoing
ability to maintain confidentiality of its product development efforts is also
an important competitive factor. See "New Product Development."
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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. 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 or Abbreviated Antibiotic Drug Application ("AADA"). 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.
Applications for most solid oral dosage forms must, therefore, contain data
which demonstrate that the proposed generic drug product has the same rate and
extent of systemic absorption as the innovator product. An in-vivo
bioavailability study is typically conducted in healthy human subjects to meet
this requirement. In addition, the generic product must meet appropriate
in-vitro (dissolution) criteria. For most injectable drug products, an in-vivo
bioequivalence study is not normally required. Quality Control testing of all
drug products 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 required for
manufacturers, including the Company, to prepare and file ANDAs. Further, review
times are also being affected by a reduction in staff levels at the FDA.
Another major component of the FDA's review process, applicable to all generic
drug
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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 used in clinical and stability trials 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 cGMP 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
All generic pharmaceutical manufacturers currently are required to pay a rebate,
equal to 11% of the manufacturer's average net selling price, for each
prescription of its products reimbursed by the states under Medicaid.
EMPLOYEES
At June 30, 1997, the Company employed 479 full-time employees. Of these, 58
were executive and administrative personnel. Personnel primarily engaged in
research, product development and regulatory activities totaled 71. Marketing
and sales personnel totaled 28. Production and distribution personnel totaled
235, while quality assurance and quality control totaled 89. Collective
bargaining agreements between the Company and Locals 575 and 815 of the
International Brotherhood of Teamsters collectively covered 124 employees as of
June 30, 1997. The Local 815 contract expires in January 1999. Although the
Local 575 contract expired in January 1997, it is currently being renegotiated.
The Company and the union have agreed that the expired contract shall continue
to apply until the new contract is executed. The Company has not experienced a
material work stoppage in the past five years and believes that its current
labor relations are satisfactory.
ITEM 2. PROPERTIES
The Company's executive offices, as well as research, production, principal
warehouse and distribution facilities, are housed in a Company owned 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, a 3,000 square-foot office and development laboratory in
Scottsdale, Arizona and a 68,000 square-foot facility, comprised of seven
buildings in Aguadilla, Puerto Rico.
The Company believes that its facilities will be sufficient to satisfy its
anticipated needs for the proximate future.
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ITEM 3. LEGAL PROCEEDINGS
The Company is named as a defendant in an action in the United States District
Court for the District of Delaware entitled Purdue Pharma L.P. and The Purdue
Frederick Company vs. Faulding Services Inc., Faulding Inc., Purepac
Pharmaceutical Co. and Zeneca Inc., 96 Civ.427. The complaint alleges that the
manufacture and marketing in the United States of KADIAN'r' sustained release
morphine capsules infringes a patent assigned to one of the plaintiffs and
constitutes unfair competitive practices under Federal and State law. The
Company, through PPC, manufactures KADIAN'r' pursuant to a contract
manufacturing agreement with Faulding Services Inc. ("FSI"), a wholly-owned
subsidiary of Holdings.
The complaint seeks, among other things, an order enjoining the Company from
infringing the subject patent and awarding treble and punitive damages. The
Company believes the allegations in the complaint to be entirely without merit
and intends to defend this action vigorously. The Company has also asserted
counterclaims against Purdue Pharma L.P. and The Purdue Frederick Company
seeking to invalidate the subject patent and also seeking damages against the
plaintiffs for unfair competitive practices under Federal and State law and
violation of the Federal antitrust laws. Pursuant to the terms of the
manufacturing agreement between PPC and Faulding relating to Kadian'r', Faulding
is indemnifying the Company in relation to the costs of defending the action.
See Item 13 - "Certain Relationships and Related Party Transactions."
On February 3, 1997, following the submission by PPC of an ANDA seeking FDA
approval of diltiazem hydrochloride extended-release capsules, USP, the
Company's proposed generic version of Cardizem CD'r', a lawsuit was commenced in
the United States District Court for the District of New Jersey entitled Hoechst
Marion Roussel, Inc. and Carderm Capital L.P. v. Faulding Inc. and Purepac
Pharmaceutical Co., Civil Action No. 97-516 (JAG Jr.). The complaint alleges
that the Company's proposed generic product infringes a patent assigned to
Carderm Capital L.P. and licensed, on a non-exclusive basis, to Hoechst Marion
Roussel, Inc., and seeks to delay the commercial introduction of the Company's
proposed generic product until the expiration of that patent.
The Company believes that its proposed generic product does not infringe the
patent at issue in the lawsuit and, additionally, that the patent is invalid.
The Company therefore intends to defend the lawsuit vigorously. The Company has
asserted a counterclaim against Hoechst Marion Roussel, Inc. alleging that its
sales of Cardizem CD since 1993 have constituted acts of infringement under a
patent licensed to PPC. Pursuant to the terms of the agreement between PPC and
Faulding relating to the transfer of technology for this product, Faulding is
indemnifying the Company in relation to the costs of defending the action. See
Item 13 - "Certain Relationships and Related Party Transactions."
In June 1997, four purported class-action lawsuits were filed in the Delaware
Court of
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Chancery (the "Chancery Court"), under the captions Aimee Dechter v.
Edward D. Tweddell, Richard F. Moldin, Alan G. McGregor, Joseph C. Minio, Bruce
C. Tully, William R. Griffith, Faulding Inc., FH Faulding & Co., Limited [sic],
and Faulding Holdings, Inc., Civil Action No. 15722-NC (6/15/97); Michael J.
Golde I/R/A, et al. v. Faulding Inc., Edward D. Tweddell, Alan G. McGregor,
Richard F. Moldin, David Beretta and Bruce C. Tully, Civil Action No. 15728-NC
(6/6/97); Harbor Finance Partners, et al. v. Edward D. Tweddell, Alan G.
McGregor, Richard F. Moldin, Joseph C. Minio, Bruce C. Tully, William R.
Griffith, F. H. Faulding & Company Limited [sic] and Faulding Inc., Civil Action
No. 15724-NC (6/4/97); and Charles Zimmerman, et al. v. Richard F. Moldin,
Edward D. Tweddell, Alan G. McGregor, Joseph C. Minio, Bruce C. Tully, F.H.
Faulding & Co., Limited, William R. Griffith, Faulding Holdings, Inc. and
Faulding, Inc., Civil Action No. 15723-NC (6/3/97) (the "Actions"). The Actions
challenge certain acts allegedly taken or not taken by the Company and the
members of the Board of Directors in connection with the Proposed Transaction
and the price originally proposed to be paid by Faulding for the Common Stock,
and allege that Faulding, Holdings and the Board breached their fiduciary
obligations to the Company's stockholders. The Company has been informed that
the lawsuits may be consolidated and that the plaintiffs have agreed to postpone
further action pending the consideration of the Proposal by the Special
Committee of the Board. See "Item 13 - Certain Relationships and Related
Transactions." The Actions seek to enjoin the consummation of the Merger, as
well as an award of damages and attorneys fees.
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, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Common Stock was traded on the Nasdaq National Market System ("Nasdaq/NMS")
under the symbol PURE through February 29, 1996.
Effective February 29, 1996, the Company's name was changed from Purepac, Inc.
to Faulding Inc., and the Nasdaq/NMS trading symbol, as of March 1, 1996, was
changed from PURE to FAUL.
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The following table sets forth the range of high and low closing sales prices of
the Common Stock on the Nasdaq/NMS.
FOR THE QUARTER ENDED HIGH LOW
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$ $
FISCAL 1996
September 30, 1995 10.875 7.750
December 31, 1995 8.750 4.625
March 31, 1996 7.750 5.000
June 30, 1996 7.125 4.125
FISCAL 1997
September 30, 1996 7.125 4.000
December 31, 1996 7.500 5.625
March 31, 1997 9.375 5.750
June 30, 1997 13.000 8.250
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(B) HOLDERS OF COMMON STOCK
The number of holders of record of the Common Stock at August 8,1997 was 400.
(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. See "Note 11 of the Notes to Consolidated
Financial Statements." Under the Merger Agreement, the Company covenants and
agrees not to set aside and pay any dividends (other than the regular quarterly
dividends on its Class B Preferred Stock) between the date of the Merger
Agreement and the effective date of the Merger.
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FAULDING INC.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
(Per share amounts in $) $000 $000 $000 $000 $000
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data: (restated (a)) (restated (a))
Net sales 102,127 75,784 64,905 71,952 70,508
Net income (loss) 4,876 (5,001) (1,618) 3,992 9,160
Preferred stock dividends 2,755 2,307 2,080 2,080 2,080
Net income (loss), applicable
to common stock 2,121 (7,308) (3,698) 6,061 (b) 7,080
Primary Earnings Per
Common Share
Net income (loss) $ 0.14 $(0.49) $ (0.25) $ 0.41 $ 0.57
Balance Sheet Data: (restated (a))
Working capital 39,529 36,296 27,005 24,221 23,150
Total assets 119,763 98,678 85,863 67,267 63,017
</TABLE>
(a) The February 29, 1996 acquisition of the Acquired Companies was
accounted for in a method similar to a pooling of interests. Therefore,
financial operating data presented for the years ended June 30, 1995
and 1994 and balance sheet data as of June 30, 1995 have been restated
as if the acquisitions had taken place as of July 1, 1993. The data
reflects the accounts of Faulding Inc., PPC and the Acquired Companies.
Financial operating data presented for the year ended June 30, 1993 and
balance sheet data as of June 30, 1994 and 1993 have not been restated
as the restated amounts would not differ significantly from the amounts
presented.
As FPR and FPC did not commence operations until April 7, 1995, the
restated data for the year ended June 30, 1994 reflects only the
operating results of FMDC. The restated data for the year ended June
30, 1995 reflects the full year's results of FMDC and less than three
months' results of FPR and FPC.
(b) Net income available for Common Stock for the year ended June 30, 1994
included the favorable cumulative effect of a change in accounting for
income taxes of $4,149,000.
14
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997 COMPARED WITH THE YEAR ENDED JUNE 30, 1996
Net sales for the year ended June 30, 1997 were $102.1 million compared with
$75.8 million for the prior year ended June 30, 1996, an increase of $26.3
million or approximately 34.7%. During the 1997 fiscal year, sales for the
orals, injectables and medical devices were $87.4 million, $14.5 million and
$0.2 million, respectively. During the year ended June 30, 1996, such product
sales were $63.8 million, $12.0 million and $0, respectively.
The 1997 fiscal year's net sales increase was due primarily to the commercial
launch of etodolac tablets, clonazepam tablets and acyclovir injection during
the fiscal year, combined with the continued strong sales performance of
diclofenac tablets. For the year ended June 30, 1997, etodolac, clonazepam,
acyclovir injection and diclofenac accounted for 7%, 11%, 2% and 17%,
respectively, of the Company's sales.
Gross profit for the year ended June 30, 1997 was $33.6 million compared with
$17.4 million for the prior year, an increase of $16.2 million or approximately
93.1%. The gross profit as a percent of net sales for the year ended June 30,
1997 was approximately 32.9% compared with approximately 23.0% for the prior
year. Gross profit (loss) for the year ended June 30, 1997 included $33.6
million from oral products, $(0.1) million from injectable products and $0.1
million from medical devices. For the prior year, gross profit for each
operation was $16.7 million, $0.7 million and $0, respectively. The Company's
increase in gross profit in fiscal 1997 was due principally to the contribution
from higher margins on new products released over the preceding 18 months,
principally being etodolac, clonazepam, acyclovir injection and diclofenac. The
loss reported in injectable products in fiscal 1997 was due to price erosion on
products.
The selling, general and administrative expenses for the year ended June 30,
1997 were $15.1 million compared with $11.9 million for the year ended June 30,
1996, an increase of $3.2 million or approximately 26.9%. These expenses as a
percent of net sales for the 1997 fiscal year were 15% compared with 16% for the
prior year. The increase in the expense level was primarily due to higher
personnel expense as well as a provision for bad debt in relation to a customer
that filed for protection under the U.S. Bankruptcy Code.
The research and development expenses for the year ended June 30, 1997 remained
relatively constant at $10.8 million compared with the prior year expense of
$10.4 million an increase of $0.4 million or approximately 3.8%. The expense as
a percent of net
15
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
sales for the year ended June 30, 1997 was 11% compared with 14% for the prior
year. The steady level of expense reflects the continuing commitment to new
product development.
Other income (expense) reflects interest expense and revolving credit agreement
fees offset by interest income. Other income (expense) for the year ended June
30, 1997 was $(0.3) million compared with $1.0 million for the prior year. Other
income for the year ended June 30, 1996 includes the settlement of a
non-recurrent patent litigation by the Company.
Net income (loss) before income tax for the year ended June 30, 1997 was $7.5
million compared with $(5.7) million for the prior year.
The effective income tax expense rate for the year ended June 30, 1997 was 35%
compared with a benefit of 12% for the year ended June 30, 1996. The year ended
June 30, 1996 tax benefit of 12% was adversely affected by the loss of benefit
of utilizing pre-acquisition net operating loss carryforwards (20)% and
non-deductible acquisition expenses (6)%. See Note 14 of Notes to Consolidated
Financial Statements.
Net income (loss) for the year ended June 30, 1997 before preferred stock
dividends was $4.9 million compared with $(5.0) million for the prior year.
Future financial results will continue to be highly dependent on the ability of
the Company to gain approval of and realize income from sales of new products to
counter ongoing price erosion within the industry.
YEAR ENDED JUNE 30, 1996 COMPARED WITH THE YEAR ENDED JUNE 30, 1995
On February 29, 1996, the Company acquired all of the outstanding capital stock
of the Acquired Companies from Holdings and changed its name from Purepac Inc.
to Faulding Inc.
The following tables set forth the pre-tax operating results of Purepac
(excluding the Acquired Companies) and, separately, the Acquired Companies for
the fiscal years ended June 30, 1996 and 1995, respectively.
16
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS - Purepac
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------
1996 1995
$000 $000
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Sales 63,822 61,146
Cost of sales 47 112 46,476
- --------------------------------------------------------------------------------
Gross profit 16,710 14,670
- --------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 8,997 9,817
Research and development 9,054 6,741
Acquisition expenses 1,043
Restructuring costs 842
- --------------------------------------------------------------------------------
Total expenses 19,936 16,558
- --------------------------------------------------------------------------------
Income (loss) from operations (3,226) (1,888)
Other income (expense), net 1,625 (63)
- --------------------------------------------------------------------------------
Income (loss) before income taxes (1,601) (1,951)
- --------------------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS - Acquired Companies
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------
1996 1995
$000 $000
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Sales 11,962 3,759
Cost of sales 11,285 2 812
- --------------------------------------------------------------------------------
Gross profit 677 947
- --------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 2,867 374
Research and development 1,307 988
- --------------------------------------------------------------------------------
Total expenses 4,174 1,362
- --------------------------------------------------------------------------------
Income (loss) from operations (3,497) (415)
Other income (expense), net (603) (326)
- --------------------------------------------------------------------------------
Income (loss) before income taxes (4,100) (741)
- --------------------------------------------------------------------------------
</TABLE>
The discussion below relates to the segregated results presented above for
Purepac (excluding the Acquired Companies) and, separately, the Acquired
Companies for the years ended June 30, 1996 and 1995, respectively.
PUREPAC RESULTS OF OPERATIONS
Net sales for the year ended June 30, 1996 was $63.8 million compared with $61.1
million for the corresponding 1995 period, an increase of $2.7 million or
approximately 4.4.%. The increase over the 1995 period was due principally to
diclofenac sales offset by competition impacting Purepac's other products. In
addition to diclofenac, FDA
17
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
approvals of diflunisal and indapamide were received by Purepac in May and June
1996, respectively. In addition, initial sales from the contract manufacturing
of KADIAN'r' for FSI were recorded in the quarter ended June 30, 1996.
Gross profit for the year ended June 30, 1996 was $16.7 million compared with
$14.7 million for the corresponding 1995 period, an increase of $2.0 million or
approximately 13.6%. Gross profit as a percentage of net sales for the year
ended June 30, 1996 was approximately 26.2% compared with approximately 24.1%
for the prior year. For the year ended June 30, 1996, the increase in gross
profit was due primarily to the sales of diclofenac from late in the third
fiscal quarter.
Selling, general and administrative expenses for fiscal 1996 were $9.0 million
compared to the prior year's $9.8 million, a decrease of $0.8 million or
approximately 8.2%. Such expenses as a percentage of net sales were
approximately 14.1% for the 1996 fiscal year as compared with approximately
16.0% for the prior year. In addition, Purepac incurred $1.0 million in
acquisition expenses in fiscal 1996 related to the purchase of the Acquired
Companies, and an additional $0.8 million in costs related to the restructuring
of the Purepac business, primarily organizational personnel changes. No such
acquisition or restructuring costs were incurred in the prior fiscal year.
Research and development expenses for the year ended June 30, 1996 were $9.1
million, or approximately 14.3% of net sales. Such expenses for the prior year
were $6.7 million or approximately 11.0% of net sales. The increase in research
and development expenses was mainly due to an increase in biostudies costs
required as part of the ANDA submission process to the FDA, and to the
recruitment of key new scientific personnel.
Other income (expense) for the year ended June 30, 1996 was $1.6 million
compared with $(0.1) million in the prior year. The $1.6 million of other income
for the fiscal year was mainly attributable to the settlement of a patent
litigation by Purepac which was recorded in the quarter ended December 31, 1995
and was non-recurrent.
Net income (loss) before income tax for the year ended June 30, 1996 was $(1.6)
million. If the acquisition and restructuring costs were excluded from that
year's reporting, net income would have been $0.3 million. These results compare
to a net income (loss) of $(2.0) million before income tax for the prior year.
The results for the year ended June 30, 1996 were affected by negative pricing
pressures within the oral generic pharmaceutical industry, partly
counterbalanced by new product approvals for diclofenac, diflunisal, indapamide
and contract manufacturing income for KADIAN'r'.
18
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
ACQUIRED COMPANIES RESULTS OF OPERATIONS
The Acquired Companies became wholly-owned subsidiaries of the Company effective
March 1, 1996. FPC and FPR did not commence operations until April 7, 1995;
hence the fiscal 1995 results of operations for the Acquired Companies include
the full-year operating results of FMDC and less than three months operating
results for FPC and FPR. Net sales for FMDC in fiscal 1996 and fiscal 1995 were
derived from a distribution agreement with a third party -- which was terminated
as of December 31, 1995 -- for products sourced from Faulding. The products
previously sold under that agreement, together with additional products sourced
from Faulding, are now being sold by FPC. Consequently, comparison with fiscal
1995 is not representative and the following analysis principally relates to the
fiscal 1996 operating results.
Net sales for the year ended June 30, 1996 were $12.0 million. Of these net
sales, 70% 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 United States. The
majority of the remainder of the net sales comprised products manufactured by
and licensed from Faulding.
Gross profit for the year ended June 30, 1996 was $0.7 million, or approximately
5.8% of net sales. Gross profit was unfavorably impacted by both under
utilization of the production facility in Puerto Rico and production related
expenses incurred by FMDC, which did not record any related net sales during the
periods.
Selling, general and administrative expenses for fiscal 1996 were $2.9 million,
or approximately 24.2% of net sales. They represent principally selling expenses
associated with FPC.
Research and development expenses for the year ended June 30, 1996 were $1.3
million, or approximately 10.8% of net sales. These expenses included the
development costs associated with FMDC.
Net income (loss) before income tax for the year ended June 30, 1996 was $(4.1)
million. Of this, $(3.0) million was incurred prior to the Acquired Companies
becoming wholly-owned subsidiaries of the Company.
CONSOLIDATED INCOME TAX BENEFIT
The calculation of the provision (benefit) for income taxes of the Company,
which includes Purepac and the Acquired Companies, has been prepared in
accordance with accounting for the acquisitions in a method similar to a pooling
of interests consistently applying Statement of Financial Accounting Standard
No. 109 ("SFAS109").
19
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
Purepac's net loss before income tax for the year ended June 30, 1996 resulted
in the recording of an income tax benefit of $0.3 million.
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 $0.4 million has been included for the year
ended June 30, 1996. The income tax benefit due to net losses prior to
acquisition have been fully reserved against, as the recovery of these taxes is
dependent on offsets through future taxable income of each of the respective
companies, which at present cannot be assured.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had $3.8 million in cash and cash equivalents at June 30, 1997,
compared with $1.9 million at June 30, 1996. The 1997 fiscal year's net increase
of $1.9 million resulted primarily from $7.4 million provided by operating
activities and $4.0 million borrowed from a bank, offset by $6.9 million used
for investments in property, plant and equipment and $2.8 million for payment of
preferred dividends.
At June 30, 1997, accounts receivable were $29.2 million as compared to $17.1
million at June 30, 1996, an increase of $12.1 million. This increase was
principally due to higher sales levels, primarily in the last quarter of fiscal
1997.
Inventory at June 30, 1997 was $32.0 million, as compared to $26.5 million at
June 30, 1996, an increase of $5.5 million, due primarily to increased
production for new products launched in the last four months of fiscal 1997 and
products planned for launch early in fiscal 1998.
Net property, plant and equipment was $44.9 million at June 30, 1997, as
compared to $41.5 million at June 30, 1996, an increase of $3.4 million,
reflecting the investment in additional manufacturing facilities, primarily the
construction of an injectable shell glass vial filling facility in Aguadilla,
Puerto Rico.
Amounts due to affiliated companies was $3.9 million at June 30, 1997, as
compared to $0.9 million at June 30, 1996, an increase of $3.0 million, due
mainly to additional products purchased from Faulding, primarily during the last
half of fiscal 1997.
Accrued expenses were $14.6 million at June 30, 1997, as compared to $6.7
million at June 30, 1996, an increase of $7.9 million, primarily due to an
increase of $6.5 million in the reserves for advertising and promotion programs,
an increase of $0.8 million in compensation and payroll tax liabilities, and an
increase of $0.2 million for Medicaid rebate liability.
Accrued preferred dividends of $0.7 million for the three month period ended
June 30, 1997 were paid on July 1, 1997. Holdings converted its Class A
Preferred Stock to
20
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
Common Stock on June 30, 1997, thus terminating the Company's obligation to make
dividend payments in respect of such shares.
The Company believes that its current cash resources, anticipated operating cash
flows and funds available under its existing bank facilities will be sufficient
to fund its working capital needs for the next 24 months. Beyond that, 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 June 30, 1997, the Company had $3.8 million in cash, plus approximately $11.0
million of available borrowings under its existing credit facilities. For the
year ended June 30, 1998, the Company has committed capital expenditures of $2.3
million for the upgrade of facilities at its Elizabeth, New Jersey site.
The Company is currently negotiating expanded credit facilities and it
anticipates negotiations will be concluded soon. In the future, should the
Company require additional cash flow to support the commercialization of new
products following receipt of FDA approval, there can be no assurance that such
financing will be available when required, if at all, or will be available upon
the terms the Company may deem commercially reasonable.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (the "FASB") 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 has adopted the disclosure only
requirements of SFAS 123. As a result, the adoption of SFAS 123 has had no
effect on the Company's consolidated financial position or results of
operations.
In March 1995, the FASB 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. Under SFAS 121, to determine a loss, if any, to be recognized, the
book value of the asset is compared to the market value or expected future cash
flow value of the asset. The Company has adopted SFAS 121 for the fiscal year
ended June 30, 1997, with no material impact on its results of operations and
financial position.
The Company is evaluating the requirements of SFAS No. 128 "Earnings Per Share"
and SFAS No. 129 "Disclosure of Information About Capital Structure," which were
issued by the FASB in February 1997 and must be adopted in fiscal 1998. In June
21
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
1997, the FASB also issued SFAS No. 130 "Reporting Comprehensive Income" ("SFAS
130") and SFAS No. 131 "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 130 must be adopted in fiscal 1999 and SFAS 131
must be adopted in fiscal 1998. The Company currently believes that none of the
foregoing FASB statements will have a material impact on its consolidated
financial position or results of operations.
22
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
PAGE
<S> <C>
Independent Auditors' Report, Deloitte & Touche LLP...........................................................24
Consolidated Balance Sheets as at June 30, 1997 and 1996......................................................25
Consolidated Statements of Operations for the Years Ended June 30,
1997, 1996 and 1995..................................................................................26
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995.............................................................................27
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1996 and 1995.............................................................................28
Notes to Consolidated Financial Statements....................................................................29
FINANCIAL STATEMENT SCHEDULE
Schedule II: Valuation and Qualifying Accounts for the
Years Ended June 30, 1997, 1996 and 1995.................................................................53
</TABLE>
23
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of Faulding Inc.:
We have audited the accompanying consolidated balance sheets of Faulding Inc.
and subsidiaries as of June 30, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997. 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 Faulding Inc. and its subsidiaries
at June 30, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
such 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.
DELOITTE & TOUCHE LLP
August 13, 1997
Parsippany, New Jersey
24
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1997 1996
$000 $000
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 3,846 1,897
Accounts receivable, trade (less reserves for doubtful accounts
and sales allowances of $7,519 and $3,355 at June 30, 1997
and 1996, respectively) 29,187 17,118
Inventory (Note 3) 31,951 26,496
Other current assets 2,031 3,315
Deferred income taxes (Note 14) 4,427 3,225
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 71,442 52,051
- ----------------------------------------------------------------------------------------------
Property, plant and equipment, net (Note 4) 44,911 41,510
Other assets (Note 5) 3,410 4,279
Deferred income taxes (Note 14) 838
- ----------------------------------------------------------------------------------------------
TOTAL NON-CURRENT ASSETS 48,321 46,627
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS 119,763 98,678
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable 7,973 7,553
Due to affiliated companies (Note 5) 3,859 847
Loan payable to bank (Note 7) 4,000
Accrued expenses (Note 6) 14,551 6,666
Accrued income taxes (Note 14) 841
Accrued preferred dividends (Note 11) 689 689
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 31,913 15,755
- ----------------------------------------------------------------------------------------------
NON CURRENT LIABILITIES
Deferred income taxes (Note 14) 2,385
- ----------------------------------------------------------------------------------------------
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 0 and 834,188 at June 30, 1997 and 1996
(liquidation value $0) 8
Class B convertible preferred stock; par value $.01, authorized 150,000
shares; issued and outstanding 150,000 at June 30, 1997 and 1996
respectively, (liquidation value $15,000) 2 2
Common stock; par value $.01, authorized 35,000,000 shares; issued and
outstanding 20,102,188 and 15,064,560 at June 30, 1997 and
1996, respectively 201 151
Capital in excess of par value 54,763 57,139
Retained earnings 30,499 25,623
- ----------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 85,465 82,923
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 119,763 98,678
==============================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
25
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1997 1996 1995
(Per share amounts in $) $000 $000 $000
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales 102,127 75,784 64,905
Cost of sales 68,484 58,397 49,287
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 33,643 17,387 15,618
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses
Selling, general and administration 15,090 11,864 10,191
Research and development 10,752 10,361 7,729
Acquisition expenses 1,043
Restructuring costs 842
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 25,842 24,110 17,920
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 7,801 (6,723) (2,302)
Other income (expense), net (276) 1,021 (390)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 7,525 (5,702) (2,692)
Income tax expense (benefit) (Note 14) 2,649 (701) (1,074)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 4,876 (5,001) (1,618)
Preferred stock dividends (Note 11) 2,755 2,307 2,080
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss), Applicable to Common Stock 2,121 (7,308) (3,698)
Primary Earnings Per Common Share (Note 2):
Net income (loss) $ 0.14 $ (0.49) $ (0.25)
====================================================================================================================================
Weighted average number of common shares outstanding 15,087,347 15,039,391 14,977,248
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share Assuming Full Dilution (Note 2)
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred
(Note 10) Stock (Note 11) Capital in
---------------------------------------- Excess of Retained
Shares Amount Shares Amount Par Value Earnings Total
$OOO $OOO $OOO $OOO $OOO
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 14,948,810 149 834,188 8 45,758 28,466 74,381
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued pursuant
to stock grant plan (Note 9) 71,125 1 (1)
Class A preferred stock dividend (Note 11) (2,080) (2,080)
Stock grant amortization (Note 9) 367 367
Deduction of income tax liability
from issuance of stock pursuant
to stock grant plan (Note 9) 258 258
Pooling of interest adjustment (Note 2) 771 771
(Net Income) (1,618) (1,618)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 15,019,935 150 834,188 8 44,302 27,619 72,079
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock Class B issued 150,000 2 14,998 15,000
Common stock issued pursuant
to stock grant plan (Note 9) 44,625 1 (1)
Class A preferred stock dividend (Note 11) (2,080) (2,080)
Class B preferred stock dividend (Note 11) (227) (227)
Stock grant amortization (Note 9) 110 110
Deduction of income tax liability
from issuance of stock pursuant
to stock grant plan (Note 9) 37 37
Pooling of interest adjustment (Note 2) 3,005 3,005
(Net Income) (5,001) (5,001)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 3O, 1996 15,064,560 151 984,188 10 57,139 25,623 82,923
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued pursuant to
conversion of Class A
Preferred Stock (Note 11) 5,005,128 50 (834,188) (8) (42)
Common stock issued pursuant
to stock grant plan (Note 9) 10,000
Exercise of Stock Options (Note 8) 22,500 154 154
Class A preferred stock dividend (Note 11) (2,080) (2,080)
Class B preferred stock dividend (Note 11) (675) (675)
Stock grant amortization (Note 9) 324 324
Deduction of deferred income tax
asset from issuance of stock grants (Note 9) (57) (57)
Net income 4,876 4,876
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 20,102,188 201 150,000 2 54,763 30,499 85,465
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1997 1996 1995
$000 $000 $000
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) 4,876 (5,001) (1,618)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided By (Used For)
Operating Activities:
Depreciation and amortization 3,811 2,862 2,494
Compensation expense - stock grants 324 110 366
Deferred income tax, asset 2,021 364 72
Increase (Decrease) in Cash From:
Accounts receivable (12,069) (6,020) 481
Inventory (5,455) (5,658) (1,649)
Other current assets 1,284 (928) (661)
Other assets 512 (696) (174)
Accounts payable 420 1,869 (1,383)
Accrued expenses 7,885 1,086 1,168
Accrued income taxes 784 (51) (1,175)
Accrued preferred dividends 169
Due to/from affiliates 3,012 899 (4,907)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Adjustments 2,529 (5,994) (5,368)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used For) Operating Activities 7,405 (10,995) (6,986)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (6,855) (3,795) (15,241)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used For) Investing Activities (6,855) (3,795) (15,241)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from bank 4,000 2,000
Repayments to bank (2,000)
Preferred dividends paid (2,755) (2,307) (2,080)
Proceeds from issuance of common stock 154
Proceeds from issuance of preferred stock 15,000
Proceeds from additions to paid in capital 4,769 20,344
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used For) Financing Activities 1,399 15,462 20,264
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) In Cash and Cash Equivalents 1,949 672 (1,963)
Cash and cash equivalents, beginning of year 1,897 1,225 3,188
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year 3,846 1,897 1,225
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest 321 214 77
Income taxes (1,379) (857) 89
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Faulding Inc. (together with its consolidated subsidiaries, the "Company") is
primarily engaged in the development, manufacture and sale of human generic
pharmaceutical products and medical devices. The operating subsidiaries of the
Company are Purepac Pharmaceutical Co. ("PPC"), Faulding Pharmaceutical Co.
("FPC"), Faulding Puerto Rico, Inc. ("FPR") and Faulding Medical Device Co.
("FMDC").
At June 30, 1997, 1996, and 1995, 71%, 62% and 54%, respectively, of the
outstanding common stock, par value $0.01 per share (the "Common Stock") of the
Company was owned by Faulding Holdings Inc. ("Holdings"), a wholly-owned
subsidiary of F. H. Faulding & Co. Limited ("Faulding"), an international
pharmaceutical and healthcare company headquartered in Australia. On June 30,
1997 Holdings converted all of its shares of Class A preferred stock, par value
$0.01 per share (the "Class A Preferred Stock"), in the Company into 5,005,128
shares of Common Stock. Holdings would own approximately 73.1% of the Common
Stock upon the conversion of its Class B preferred stock, par value $0.01 per
share (the "Class B Preferred Stock").
On February 29, 1996, the Company changed its name from Purepac Inc. to Faulding
Inc. References in these Notes to the "Company" are to Faulding Inc. and its
consolidated subsidiaries, and, prior to February 29, 1996, to Purepac Inc. and
its consolidated subsidiaries. Unless otherwise indicated, references to
"Purepac" are to the Company and its consolidated subsidiaries prior to February
29, 1996.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ACQUISITIONS
On February 29, 1996, the Company acquired all of the outstanding capital stock
of each of FMDC, FPR, and FPC, (collectively the "Acquired Companies") from
Holdings in exchange for 2,438,712 shares of its Common Stock. As part of the
acquisition, the Company created the Class B Preferred Stock, with 150,000
authorized shares, all of which were issued to Holdings for a cash purchase
price of $100.00 per share, for a total value of $15 million.
At the effective date of the acquisition of the Acquired Companies the
authorized number of shares of Common Stock of the Company was increased from 25
million shares to 35 million shares.
29
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRINCIPLES OF CONSOLIDATION
The acquisition of the Acquired Companies was accounted for in a method 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 the Company, including its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements. Such
estimates and assumptions likewise affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosure for financial instruments for which it is practicable to
estimate value. The carrying amounts reflected in the consolidated balance
sheets for cash and cash equivalents, trade receivables and payables approximate
their respective fair values due to the short-term nature of the instruments.
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 value.
30
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 5-10 years
Leasehold improvements remaining term of lease
TRADEMARKS AND PATENTS
Trademarks acquired by the Company, included in other assets, are amortized over
10 years or 40 years using the straight-line method, consist of the following:
June 30, June 30,
1997 1996
$000 $000
-------- ------
Cost 881 881
Accumulated amortization (316) (265)
-------- ------
Net book value 565 616
-------- ------
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.
EARNINGS PER COMMON SHARE
Primary earnings per common share is calculated by dividing income after
preferred dividends by the weighted average number of common shares outstanding
during the period. Common stock equivalents are excluded as the effect is
anti-dilutive. Earnings per share assuming full dilution is not presented as the
effect would be anti-dilutive or not material.
SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 1997 and 1996, the Company recognized a tax
benefit related to the issue of 44,625 and 71,125 shares, respectively, of
Common Stock to employees pursuant to the Company's 1991 Restricted Stock
Incentive Plan. The transactions provided the Company with tax benefits equal to
the fair market value of the
31
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock on the date of issuance. For financial reporting purposes, the tax
benefits were recorded as a reduction of the deferred tax asset to the extent
previously provided and the remainder of the benefit (if any) was recorded as
additional capital in excess of par value.
During the year ended June 30, 1997, the Company recognized a tax benefit when a
holder of nonstatutory stock options purchased 5,965 shares of Common Stock at
$7.125 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. This benefit will result in an income tax deduction
of $8,000 and a reduction of $3,000 in taxes payable in the year ended June 30,
1998.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") 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 has adopted the disclosure only
requirements of SFAS 123. As a result, the adoption of SFAS 123 has had no
effect on the Company's consolidated financial position or results of
operations.
In March 1995, the FASB 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. Under SFAS 121, to determine a loss, if any, to be recognized, the
book value of the asset is compared to the market value or expected future cash
flow value of the asset. The Company has adopted SFAS 121 for the fiscal year
ended June 30, 1997, with no material impact on its results of operations and
financial position.
The Company is evaluating the requirements of SFAS No. 128 "Earnings Per Share"
and SFAS No. 129 "Disclosure of Information About Capital Structure," which were
issued by the FASB in February 1997 and must be adopted in fiscal 1998. In June
1997, the FASB also issued SFAS No. 130 "Reporting Comprehensive Income" ("SFAS
130") and SFAS No. 131 "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 130 must be adopted in fiscal 1999 and SFAS 131
must be adopted in fiscal 1998. The Company currently believes that none of the
foregoing FASB statements will have a material impact on its consolidated
financial position or results of operations.
32
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
3. INVENTORY
June 30, June 30,
1997 1996
$000 $000
-------- --------
Raw materials 10,934 11,160
Work-in-process 7,649 4,509
Finished goods 13,368 10,827
-------- --------
Total 31,951 26,496
-------- --------
4. PROPERTY, PLANT AND EQUIPMENT
June 30, June 30,
1997 1996
$000 $000
-------- --------
Land 2,199 2,199
Buildings and improvements 16,666 16,311
Machinery and equipment 33,238 29,612
Leasehold improvements 7,095 5,100
Construction in progress 1,704 825
-------- --------
Total cost 60,902 54,047
Less accumulated depreciation
and amortization (15,991) (12,537)
-------- --------
Net book value 44,911 41,510
-------- --------
5. RELATED-PARTY TRANSACTIONS
During the years ended June 30, 1997, 1996 and 1995, the Company paid Faulding
$7,010,000, $4,057,000 and $2,289,000, respectively, for materials and finished
goods purchases (pursuant to agreements to market injectable and oral products,
both described herein), $0, $287,000 and $918,000, respectively, for research
and development services, and $0, $603,000 and $326,000, respectively, for
interest expense on loan advances associated with the Acquired Companies prior
to the acquisition of such companies by the
33
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company. In addition, during the years ended June 30, 1997, 1996 and 1995, the
Company paid Faulding Services Inc. ("FSI"), a wholly-owned subsidiary of
Holdings, $0, $296,000 and $266,000, respectively, for business development
services (pursuant to an agreement with FSI which terminated on December 31,
1995 and described herein).
During the years ended June 30, 1997, 1996 and 1995, the Company was reimbursed
$0, $466,000 and $1,919,000, respectively, by Faulding for materials and
services related to research and development projects.
Additionally, during the year ended June 30, 1997 and 1996, the Company recorded
revenues of $1,354,000 and $1,018,000, respectively, for contract manufacturing
of KADIAN'r' (pursuant to an agreement with FSI, described herein).
Included in other assets at June 30, 1997 and 1996 is $2,903,000 paid by the
Company to Faulding in June 1992 to acquire proprietary technology, including
scientific information and expertise, processes and procedures, relating to the
manufacture and sale of the generic version of a modified-release pharmaceutical
product. The acquired technology is restricted to use, on an exclusive basis, in
the United States and its territories. Amortization of this technology commenced
in the 1997 fiscal year. Pursuant to the terms of the agreement between the
Company and Faulding dated December 5, 1992 in which Faulding transferred this
technology to PPC, Faulding is indemnifying the Company in relation to the
Company's costs of defending the action entitled Hoechst Marion Roussel, Inc.
and Carderm Capital L.P. v. Faulding Inc. and Purepac Pharmaceutical Co. See
Note 12 of Notes to Consolidated Financial Statements.
Amounts due from (due to) affiliated companies are payable on demand and were as
follows as of:
June 30, June 30,
1997 1996
$000 $000
------- -------
Faulding (3,886) (1,881)
FSI 27 1,034
------- -------
(3,859) (847)
------- -------
The Company entered into an agreement with Faulding as of December 5, 1992,
pursuant to which PPC 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, 1997, no such services were provided by PPC to Faulding.
34
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company 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 PPC a non-exclusive license
to import, distribute and market an erythromycin oral product in the United
States.
On January 1, 1993, the Company and FSI entered into a consulting agreement,
which terminated on December 31, 1995, pursuant to which PPC retained FSI to
serve as a business development consultant and advisor on a non-exclusive basis.
On August 1, 1993, the Company entered into a 10-year agreement with FSI,
pursuant to which PPC would manufacture KADIAN'r' utilizing Faulding technology,
processes and manufacturing methods licensed to FSI. FSI, at its sole cost, has
sought all necessary approvals and/or registrations from the appropriate
regulatory authority to enable the sale of the product, which was approved by
the FDA on July 3, 1996. The parties amended this agreement in December 1994 to
resolve certain inconsistencies between this agreement and an agreement between
FSI and an unrelated third party, to distribute the product manufactured by PPC.
On June 27, 1995, the Company and FSI entered into a Services Agreement pursuant
to which PPC would provide certain services on FSI's behalf that FSI had agreed
to provide under the agreement with the third party. Pursuant to the terms of
the manufacturing agreement between PPC and Faulding relating to Kadian'r',
Faulding is indemnifying the Company in relation to the costs of defense of the
action entitled Purdue Pharma L.P. and The Purdue Frederick Company vs. Faulding
Services Inc., Faulding Inc., Purepac Pharmaceutical Co. and Zeneca Inc. See
Note 12 of Notes to Consolidated Financial Statements.
On March 15, 1995, the Company and Faulding entered into a three-year license
agreement pursuant to which Faulding granted PPC the non-exclusive right 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 PPC.
The Company and Faulding entered into two agreements as of June 26, 1995 in
relation to two products that had been under ongoing development review for
several years. One is a licensing agreement pursuant to which Faulding granted
to PPC an exclusive ten-year license to utilize certain technology to complete
the development of a modified-release product and to manufacture and sell the
product in the United States. In relation to the development of the product, the
Company paid to Faulding most of the technology licensing fees in the year ended
June 30, 1994 with the balance paid during the year ended June 30, 1996. All
such payments were expensed as research and development costs. In addition, the
Company is obligated under the agreement to pay royalties related to net sales
of the product. As of June 30, 1997, development activity under this agreement
has been discontinued due to changes in market conditions and the viability
35
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the product involved.
The second agreement entered as of June 26, 1995 is a 10-year Co-development,
Supply and Licensing Agreement pursuant to which Faulding is to develop and
deliver a component pellet of a modified-release product for PPC's use in
developing, manufacturing and distributing the product in the United States.
Faulding is to supply the Company with pellets at prices set forth in the
agreement. If the parties later concur that the Company should manufacture the
pellets, Faulding will grant the Company 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 30,
1997, development activity under this agreement has been discontinued due to
changes in market conditions and the viability of the product involved.
On January 23, 1996, the Company and Faulding entered into a Supply Agreement
for injectable products developed and manufactured by Faulding for sale by FPC
in the United States. Supply of six anti-cancer products under this agreement
commenced in fiscal 1996. Abbreviated New Drug Applications ("ANDAs") for
additional products covered by this agreement have been filed with the FDA.
Additional products are under development by Faulding.
On January 23, 1996, the Company and Faulding entered into a Licensing and
Supply Agreement for the medical device products developed by FMDC. Initial
sales were reported in the 1997 fiscal year and products utilizing these
technologies have received regulatory approval in some other markets.
On February 29, 1996, the Company acquired all of the outstanding capital stock
of each of FMDC, FPR, and FPC from Holdings in exchange for 2,438,712 shares of
the Common Stock. As part of the acquisition, the Company created the Class B
Preferred Stock consisting of 150,000 authorized shares, all of which were
issued to Holdings for a cash purchase price of $100.00 per share, resulting in
net proceeds to the Company of $15 million.
On June 3, 1997, the Company received a merger proposal (the "Proposal") from
Faulding. In the Proposal, Faulding offered to acquire all of the outstanding
shares of Common Stock of the Company not currently owned by Holdings at a price
of $12.00 per share in cash. The acquisition contemplated by the Proposal would
be structured as a merger pursuant to which a newly organized United States
subsidiary of Holdings would be merged into the Company as a result of which
Holdings would acquire all of the issued and outstanding shares of Common Stock
that are not currently owned by it.
The Board of Directors of the Company held a meeting on June 3, 1997 and
appointed a
36
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Special Committee of the Board, consisting of Bruce C. Tully and Joseph C.
Minio, who are outside, independent directors of the Company, to consider
whether the proposal is fair to and in the best interest of the Company and its
stockholders, and to recommend whether the Board of Directors should accept the
Proposal. The Special Committee, assisted by independent legal counsel and
independent financial advisors, is currently evaluating the Proposal.
6. ACCRUED EXPENSES
June 30, June 30,
1997 1996
$000 $000
-------- --------
Advertising and promotion programs 7,855 1,408
Compensation and payroll taxes 3,208 2,446
Medicaid rebate 911 668
Professional fees 611 402
All other 1,966 1,742
-------- --------
Total 14,551 6,666
-------- --------
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
and again in August 1994. The agreement permits the Company to borrow up to $15
million, of which a maximum of $5 million 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
$15 million 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. The Company is in compliance with the covenants at June 30, 1997.
At June 30, 1997, the Company had an outstanding loan under the revolving credit
facility from the bank of $4 million at an interest rate of 6.24% per annum. At
June 30, 1997, there were no outstanding letters of credit.
At June 30, 1996, the Company had no outstanding borrowings from the bank and no
outstanding letters of credit.
37
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK OPTIONS
1994 STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "1994 Stock Option 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 Stock Option Plan
provides for the granting of up to 1,000,000 options which are intended to
qualify either as incentive stock options, or statutory options, (the "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 (the "Nonstatutory Stock Options").
Under the 1994 Stock Option 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.
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 Stock Option Plan is
determined by the Board of Directors of the Company at the time of grant. No
option granted is exercisable after the expiration of 10 years from the date of
grant. The aggregate fair market value (determined at the date of the option
grant) of shares of Common Stock 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.
In February 1997, the 1994 Stock Option Plan was amended to provide that in the
event that Faulding ceases to beneficially own, or exercise voting or
dispositive control over, at least 50% (percent) of the outstanding Common Stock
of the Company on a fully diluted basis, then all Options then outstanding under
the 1994 Stock Option Plan would become immediately exercisable in full.
During the year ended June 30, 1995, the Company awarded two employees 33,000
Incentive Stock Options under the 1994 Stock Option Plan. During the year ended
June 30, 1996, the Company awarded 27 employees options to purchase 675,000
shares of Common Stock under the plan, of which 496,789 were Incentive Stock
Options and 178,211 were Nonstatutory Stock Options. During the year ended June
30, 1996, due to two resignations and one cancellation, options to purchase
108,000 shares of Common Stock were terminated. During the year ended June 30,
1997, the Company awarded 20 employees Incentive Stock Options to purchase
435,000 shares of Common Stock under
38
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the plan. During the year ended June 30, 1997, due to 10 resignations, options
to purchase 112,500 shares of Common Stock were terminated.
During the year ended June 30, 1997, the Company issued to two employees 22,500
shares of Common Stock upon exercise of 16,535 Incentive Stock Options and 5,965
Nonstatutory Stock Options. The net proceeds from these transactions amounted to
$154,000. As a result of the issuance of the 5,965 shares of Common Stock issued
upon the exercise of the Nonstatutory Stock Options, the Company will have an
income tax deduction of $8,000 in the fiscal year ended June 30, 1998. The
deduction will result in a reduction of taxes payable of approximately $3,000.
Information on the 1994 Stock Option Plan activity is as follows:
<TABLE>
<CAPTION>
Number of Options Awarded
----------------------------------------
No. of Exercisable Incentive Nonstatutory
Employees Price Range Total Stock Options Stock Options
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
June 30, 1995 2 $9.25 33,000 33,000
Options Awarded 27 $4.625 - $10.125 675,000 496,789 178,211
Terminated/Cancelled (3) $6.125 - $9.25 (108,000) (98,304) (9,696)
- ---------------------------------------------------------------------------------------------------
Outstanding at
June 30 1996 26 $4.625 - $10.125 600,000 431,485 168,515
- ---------------------------------------------------------------------------------------------------
Options Awarded 20 $4.25 - $12.625 435,000 435,000
Temminated/Cancelled (10) $4.625 - $7.125 (112,500) (10O.570) (11,930)
Exercised $4.625 - $7.125 (22,500) (16,535) (5,965)
- ---------------------------------------------------------------------------------------------------
Outstanding at
June 30, 1997 36 $4.25 - $12.625 900,000 749,380 150,620
===================================================================================================
</TABLE>
1997 STOCK OPTION PLAN
On February 12, 1997, the stockholders approved the 1997 Stock Option Plan (the
"1997 Stock Option Plan") which provides for the issuance of up to 1,000,000
options to acquire shares of the Company's authorized Common Stock. The
provisions of the 1997 Stock Option Plan are identical to those of the 1994
Stock Option Plan, as amended in February 1997, and as described above. As of
June 30, 1997, no options were issued under the 1997 Stock Option Plan.
39
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized in relation to the Company's stock option
plans. Had compensation cost for the Company's plans been determined based upon
the fair value of the Common Stock at the grant dates for awards under those
plans consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock - Based Compensation" (SFAS 123), the Company's pro forma
net income (loss) and net income (loss) per common share would have been reduced
to the pro forma amounts indicated below:
Year Ended June 30,
------------------------
1997 1996
(Per share amounts in $) $000 $000
- --------------------------------------------------------------------------------
Net income (loss) Applicable to Common Stock:
As reported 2,121 (7,308)
Pro forma 1,489 (7,586)
Net income (loss) per common share:
As reported $0.14 $(0.49)
Pro forma $0.10 $(0.50)
All stock options are granted at fair market value of the Common Stock at the
grant date. The weighted average fair value of the stock options granted during
the years ended June 30, 1997 and 1996 was $7.16. The fair value of each stock
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used: no expected
dividend yield, risk free interest rate of 6.19%, expected life of five years,
and expected volatility of 54%. Stock options granted under the Company's stock
option plans expire 10 years from the date of grant.
9. RESTRICTED STOCK INCENTIVE PLAN
On October 21, 1992, the stockholders approved the Company's 1991 Restricted
Stock Incentive Plan (the "1991 Restricted Stock Incentive Plan") for key
employees of the Company. The Board of Directors have allotted 465,000 shares
for the plan.
On November 25, 1991, the Company awarded grants aggregating 275,000 shares of
the Common Stock to 15 employees under the 1991 Restricted Stock Incentive Plan.
Such grants were valued at $8.125 per share, being the market value thereof on
the date of
40
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
grant. During the year ended June 30, 1993, due to two resignations, grants
totaling 20,000 shares of Common Stock were terminated. During the year ended
June 30, 1994, due to one resignation, grants totaling 20,000 shares of Common
Stock were terminated. During the year ended June 30, 1995, due to two
resignations, grants totaling 10,500 shares of Common Stock were terminated.
During the year ended June 30, 1996, due to seven resignations, grants totaling
43,000 shares of Common Stock were terminated. During the year ended June 30,
1997, due to two resignations, grants totaling 2,500 shares of Common Stock were
terminated.
On March 5, 1993, the Company awarded grants aggregating 50,000 shares of the
Common Stock to six employees under the 1991 Restricted Stock Incentive Plan.
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 of Common Stock were terminated. During the year
ended June 30, 1996, due to one resignation, grants totaling 4,000 shares of
Common Stock were terminated. During the year ended June 30, 1997, no grants
were terminated.
During the years ended June 30, 1997, 1996 and 1995, the Company recognized
$324,000, $110,000 and $366,000, respectively, as compensation expense for the
1991 Restricted Stock Incentive Plan.
During the year ended June 30, 1997, the Company issued 10,000 shares of Common
Stock to employees pursuant to the 1991 Restricted Stock Incentive Plan. As a
result of the issuance of these shares, the Company will have an income tax
deduction of $77,000 for the year ended June 30, 1998. The deduction will result
in a reduction in taxes payable of approximately $28,000. 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.
During the year ended June 30, 1996, the Company issued 44,625 shares of Common
Stock to employees pursuant to the 1991 Restricted Stock Incentive Plan. As a
result of the issuance of these shares, the Company had an income tax deduction
of $272,000 for the year ended June 30, 1997. The deduction resulted in a
reduction in taxes payable of approximately $103,000. In the same 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.
During the year ended June 30, 1995, the Company issued 71,125 shares of Common
41
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock to employees pursuant to the 1991 Restricted Stock Incentive Plan. As a
result of the issuance of these shares, the Company had an income tax deduction
of $759,000 for the year ended June 30, 1996. The deduction resulted in a
reduction in taxes payable of approximately $288,000. In the same 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 1991 Restricted Stock Incentive Plan activity is as follows:
<TABLE>
<CAPTION>
Number of Grants Awarded By Date
------------------------------------
November 25, 1991 March 5, 1993
-------------------------------------
<S> <C> <C>
Outstanding at June 30, 1992 275,O00
Terminated (20,000)
Grants Awarded 50 000
- --------------------------------------------------------------------------------
Outstanding at June 3O, 1993 255,O00 5O,000
Terminated (2O,000) (7,500)
Share Issued (82,250)
- --------------------------------------------------------------------------------
Outstanding at June 3O, 1994 152,750 42,500
- --------------------------------------------------------------------------------
Terminated (10,500)
Shares Issued (56,250) (14,875)
- --------------------------------------------------------------------------------
Outstanding at June 3O, 1995 86,000 27,625
- --------------------------------------------------------------------------------
Terminated (43,000) (4,000)
Shares Issued (34,000) (10,625)
- --------------------------------------------------------------------------------
Outstanding at June 30, 1996 9,000 13,000
- --------------------------------------------------------------------------------
Terminated (2,500)
Shares Issued (3,500) (6,500)
- --------------------------------------------------------------------------------
Outstanding at June 3O, 1997 3,000 6,500
- --------------------------------------------------------------------------------
</TABLE>
10. COMMON STOCK
On June 30, 1997 the Company issued 5,005,128 shares of Common Stock to Holdings
pursuant to the conversion of Holding's 834,188 shares of Class A Preferred
Stock. See Note 11 of Notes to Consolidated Financial Statements.
During the year ended June 30, 1997, the Company issued in aggregate 22,500
shares of Common Stock to two employees pursuant to the Company's 1994 Stock
Option Plan. The net proceeds from these transactions amounted to $154,000. See
Note 8 of Notes to Consolidated Financial Statements.
42
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended June 30, 1997, 1996 and 1995, the Company issued in
aggregate 10,000, 44,625 and 71,125, respectively, shares of Common Stock to
employees pursuant to the 1991 Restricted Stock Incentive Plan. See Note 9 of
Notes to Consolidated Financial Statements.The Company received no proceeds from
these transactions.
During the year ended June 30, 1996, the Company issued 2,438,712 shares of
Common Stock to Holdings pursuant to the acquisition of the Acquired Companies.
See Note 2 of Notes to Consolidated Financial Statements. The Company received
no proceeds from the issuance of such shares.
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.
CLASS A
In 1987, the Company issued and sold to Holdings 834,188 shares of the Class A
Preferred Stock at $29.34 per share, or $23,133,000, net of expenses of
$1,342,000. 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 each of the years ended June 30, 1997, 1996 and 1995, the Company paid
dividends on the Class A Preferred Stock totaling $2,080,000 per year. The
dividend of $520,000 for the quarter ended June 30, 1997 was declared and
accrued at June 30, 1997 and paid on July 1, 1997.
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.
Each share of Class A Preferred Stock may be convertible, at the election of the
holder, into six shares of Common Stock. On June 30, 1997, Holdings converted
all of the 834,188
43
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<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of the Class A Preferred Stock that it held into 5,005,128 shares of
Common Stock. As a result of this conversion, there are currently no shares of
Class A Preferred Stock outstanding and no further dividends will be paid on
Class A Preferred Stock.
CLASS B
On February 29, 1996, as part of the acquisition of the Acquired Companies, the
Company created the Class B Preferred Stock with 150,000 authorized shares, all
of which were issued to Holdings for a cash price of $100.00 per share or an
aggregate of $15 million. These shares pay an annual dividend of $4.50 per share
or an aggregate of $675,000 per year. Dividends accrue on each share of Class B
Preferred Stock on a daily basis at 4.5% per annum of liquidation value and are
payable quarterly on the first days of January, April, July and October,
beginning April 1, 1996. 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 year ended June 30, 1997, the Company paid dividends on the Class B
Preferred Stock totaling $675,000. The dividend of $169,000 for the quarter
ended June 30, 1997 was declared and accrued at June 30, 1997 and paid on July
1, 1997.
On or after the first anniversary of the date of issuance, each share of Class B
Preferred Stock may be converted, at the election of the holder, into 10.433
shares of Common Stock. At June 30, 1997, 1,564,950 shares of Common Stock were
reserved for issuance under the terms of the Class B Preferred Stock.
In the event of any liquidation, dissolution or winding up of the Company, the
holders of Class B 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 $100.00
per share plus all accrued and unpaid dividends.
On or after February 29, 1999, the Company may, at its election, redeem any or
all shares of Class B Preferred Stock. For each share of Class B Preferred Stock
redeemed, the Company shall be obligated to pay a redemption price of $100.00
per share plus any accrued and unpaid dividends.
44
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company through FPR has a lease for a seven building facility in Aguadilla,
Puerto Rico from the Port Authority of the Commonwealth of Puerto Rico which
expires in the year 2020.
For the years ended June 30, 1997, 1996 and 1995, total rental expense for
operating leases amounted to $943,000, $867,000 and $556,000, respectively. The
following table is a schedule of future minimum rental payments under such
operating leases:
Rental
Year Ended June 30, $000
------------------------------------------------
1998 757
1999 601
2000 325
2001 218
2002 196
Thereafter 3,207
LITIGATION
The Company is named as a defendant in an action in the United States District
Court for the District of Delaware entitled Purdue Pharma L.P. and The Purdue
Frederick Company vs. Faulding Services Inc., Faulding Inc., Purepac
Pharmaceutical Co. and Zeneca Inc., 96 Civ.427. The complaint alleges that the
manufacture and marketing in the United States of KADIAN'r' infringes a patent
assigned to one of the plaintiffs and constitutes unfair competitive practices
under Federal and State law. The Company, through PPC, manufactures KADIAN'r'
pursuant to a contract manufacturing agreement with FSI.
The complaint seeks, among other things, an order enjoining the Company from
infringing the subject patent and awarding treble and punitive damages. The
Company believes the allegations in the complaint to be entirely without merit
and intends to defend this action vigorously. The Company has also asserted
counterclaims against Purdue Pharma L.P. and The Purdue Frederick Company
seeking to invalidate the
45
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subject patent and also seeking damages against the plaintiffs for unfair
competitive practices under Federal and State law and violation of the Federal
anti-trust laws. Pursuant to the terms of the manufacturing agreement between
PPC and Faulding relating to Kadian'r', Faulding is indemnifying the Company in
relation to the costs of defending the action. See Note 5 of Notes to
Consolidated Financial Statements.
On February 3, 1997, following the submission by PPC of an ANDA seeking FDA
approval of diltiazem hydrochloride extended-release capsules, USP, the
Company's proposed generic version of Cardizem CD'r', a lawsuit was commenced in
the United States District Court for the District of New Jersey entitled Hoechst
Marion Roussel, Inc. and Carderm Capital L.P. v. Faulding Inc. and Purepac
Pharmaceutical Co., Civil Action No. 97-516 (JAG Jr.). The complaint alleges
that the Company's proposed generic product infringes a patent assigned to
Carderm Capital L.P. and licensed, on a non-exclusive basis, to Hoechst Marion
Roussel, Inc., and seeks to delay the commercial introduction of the Company's
proposed generic product until the expiration of that patent.
The Company believes that its proposed generic product does not infringe the
patent at issue in the lawsuit and, additionally, that the patent is invalid.
The Company therefore intends to defend the lawsuit vigorously. The Company has
also asserted a counterclaim against Hoechst Marion Roussel, Inc. alleging that
its sales of Cardizem CD since 1993 have constituted acts of infringement under
a patent licensed to PPC. Pursuant to the terms of the agreement between PPC and
Faulding relating to the transfer of technology for this product, Faulding is
indemnifying the Company in relation to the costs of defending the action. See
Note 5 of Notes to Consolidated Financial Statements.
In June 1997, four purported class-action lawsuits were filed in the Delaware
Court of Chancery (the "Chancery Court"), under the captions Aimee Dechter v.
Edward D. Tweddell, Richard F. Moldin, Alan G. McGregor, Joseph C. Minio, Bruce
C. Tully, William R. Griffith, Faulding Inc., FH Faulding & Co., Limited [sic],
and Faulding Holdings, Inc., Civil Action No. 15722-NC (6/15/97); Michael J.
Golde I/R/A, et al. v. Faulding Inc., Edward D. Tweddell, Alan G. McGregor,
Richard F. Moldin, David Beretta and Bruce C. Tully, Civil Action No. 15728-NC
(6/6/97); Harbor Finance Partners, et al. v. Edward D. Tweddell, Alan G.
McGregor, Richard F. Moldin, Joseph C. Minio, Bruce C. Tully, William R.
Griffith, F. H. Faulding & Company Limited [sic] and Faulding Inc., Civil Action
No. 15724-NC (6/4/97); and Charles Zimmerman, et al. v. Richard F. Moldin,
Edward D. Tweddell, Alan G. McGregor, Joseph C. Minio, Bruce C. Tully, F.H.
Faulding & Co., Limited, William R. Griffith, Faulding Holdings, Inc. and
Faulding, Inc., Civil Action No. 15723-NC (6/3/97) (the "Actions"). The Actions
challenge that certain acts allegedly taken or not taken by the Company and the
members of the Board of Directors in connection with the Proposed Transaction
and the price originally proposed to be paid by Faulding for the Common Stock,
and allege that Faulding, Holdings and the Board breached their fiduciary
46
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
obligations to the Company's stockholders. The Company has been informed that
the lawsuits may be consolidated and that the plaintiffs have agreed to postpone
further action pending the consideration of the Proposal by the Special
Committee of the Board. See Note 5 of Notes to Consolidated Financial
Statements. The Actions seek to enjoin the consummation of the Merger, as well
as an award of damages and attorneys fees.
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
"Pension Plan"). The Pension 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 Pension Plan in
such amounts necessary to fund benefits provided under the Pension Plan on the
basis of information furnished by the Company's actuary.
Year ended June 30,
--------------------------------
Net Periodic Pension Cost 1997 1996 1995
$ 000 $ 000 $ 000
------- ------- -------
Service cost for benefits earned
during the period 482 506 305
Interest cost on projected
benefit obligation 216 194 154
Return on plan assets (196) (138) (88)
Amortization of prior service cost 20 19 19
Amortization of actuarial loss 34 1
------- ------- -------
Total 522 615 391
------- ------- -------
47
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Funded Status and Obligations of the Plan June 30, June 30,
1997 1996
$000 $000
------- -------
Actuarial present value of accumulated
benefit obligations 2,007 1,703
Vested benefits included in above 1,886 1,538
- --------------------------------------------------------------------------------
Projected benefit obligation 3,575 3,373
Plan assets at fair value (2,933) (2,191)
Unrecognized prior service cost (143) (155)
Unrecognized net gain (loss) (118) (709)
Additional Liability 2
------- -------
Accrued Pension Obligation 381 320
------- -------
The discount rate used in determining the projected benefit obligations was
7.50% at June 30, 1997, an increase of 0.25% from June 30, 1996. The rate of
increase in future compensation levels used in the determination was 5.5% for
both June 30, 1997 and 1996. The expected long-term rate of return on the
Pension Plan's assets used in determining pension cost was 8% for both years.
The Company also has a 401(k) savings and investment plan (the "401(k) Plan"),
established on January 1, 1990, which allows all non-union employees to defer up
to 15% of their salary, up to a maximum of $9,500 per annum, with the Company
matching 25% of employees' contributions not exceeding 5% of their salary. The
401(k) Plan was amended, effective January 1, 1991, to increase the Company's
matching contribution from 25% to 50% of the first 5% of employees' contribution
and, effective July 1, 1991, to increase the Company's 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,
1997, 1996, and 1995 was $241,000, $230,000 and $224,000, respectively.
14. INCOME TAXES
Deferred income tax assets and liabilities, 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.
48
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities consisted of the following as of:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
$ 000 $ 000
------- -------
<S> <C> <C>
Current
Current Deferred Tax Asset:
Reserve for doubtful accounts and sales allowances 2,886 989
Reserve for inventory obsolescence 561 298
Sundry accruals 816 542
Federal operating loss carryforwards 488 1,197
Federal tax credit carryforwards 707
State operating loss carryforwards 168
------- -------
4,751 3,901
------- -------
Current Deferred Tax Liability:
Stock grant amortization 336
Receivables 216
Prepaids 324 68
Property, plant and equipment 56
------- -------
324 676
------- -------
Net Current Deferred Tax Asset 4,427 3,225
======= =======
Non-Current
Non-Current Deferred Tax Asset:
Stock grant amortization 359
Federal operating loss carryforwards 3,929 4,677
State operating loss carryforwards 790 63
------- -------
4,719 5,099
Valuation allowance (1,795) (740)
------- -------
2,924 4,359
------- -------
Non-Current Deferred Tax Liability:
Receivables 217
Property, plant and equipment 4,929 2,919
License amortization 380 385
------- -------
5,309 3,521
------- -------
Net Non-Current Deferred Tax Asset (Liability) (2,385) 838
======= =======
</TABLE>
Income tax expense (benefit) does not include the benefit of recognizing
available loss
49
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income tax expense (benefit) was comprised of the following:
Year Ended June 30,
--------------------------------------
1997 1996 1995
$ 000 $ 000 $ 000
------- ------- --------
Current
Federal 429 (1,340) (1,026)
State 199 (120)
------- ------- --------
628 (1,340) (1,146)
Deferred
Federal 2,015 716 61
State 6 (77) 11
------- ------- --------
Total Expense (Benefit) 2,649 (701) (1,074)
------- ------- --------
The Company has net operating losses available as carryforwards to reduce future
federal income taxes. State tax losses are also available as carryforwards. At
June 30, 1997, for federal tax purposes, the net operating loss carryforwards
amounted to $12,991,000; they expire through year 2003. The future utilization
of the net operating loss carryforwards by the Company is subject to limitations
under various provisions of the Internal Revenue Code.
The benefit of net operating losses generated by each of FPC, FPR and FMDC prior
to its acquisition by the Company cannot be realized until it generates taxable
income to utilize such benefit. As of June 30, 1997, certain of these net
operating losses had been utilized, with a corresponding decrease of the
previously recorded valuation. A full valuation allowance has been provided for
the remaining net operating loss carryforwards of FPR and FMDC.
50
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the statutory federal rate to the effective tax rate is as
follows:
Year Ended June 30,
-----------------------------
1997 1996 1995
----- ----- -----
Statutory federal rate 34% (34%) (34%)
State taxes net of federal benefit 2% (4%) (4%)
Loss of benefit of utilizing pre-acquisition
net operating loss carryforwards 20%
Non-deductible acquisition expenses 6%
Other (1%) (2%)
----- ----- -----
Effective Tax Rate 35% (12%) (40%)
----- ----- -----
15. SEGMENT INFORMATION
The Company operates in one business segment, the pharmaceutical industry. The
Company is primarily engaged in the development, manufacture and sale of human
generic drug products and medical devices.
For the year ended June 30, 1997, one customer accounted for approximately 16%
of sales. Sales to the customer were $17.3 million. For the year ended June 30,
1996, three customers each accounted for approximately 11%, 10%, and 10% of
sales. Sales to the three customers were $8.7 million, $7.4 million and $7.4
million, respectively. For the year ended June 30, 1995, three customers each
accounted for approximately 12%, 11% and 10% of sales. Sales to the three
customers were $7.8 million, $6.9 million and $6.3 million, respectively. For
the years ended June 30, 1997, 1996 and 1995, the top 10 customers of the
Company accounted for 70%, 69% and 64% of sales, respectively.
16. SUBSEQUENT EVENTS
On June 3, 1997, the Company received a merger proposal (the "Proposal")
from Faulding. In the Proposal, Faulding offered to acquire all of
the outstanding shares of Common Stock of the Company not currently owned by
Holdings at a price of $12.00 per share in cash. The transaction contemplated by
the Proposal would be structured as a merger pursuant to which a newly organized
United States subsidiary of Holdings would be merged into the Company as a
result of which Holdings would acquire all of the issued and outstanding shares
of Common Stock that are not currently owned by it.
The Board of Directors of the Company held a meeting on June 3, 1997 and
appointed a Special Committee of the Board, consisting of Bruce C. Tully and
Joseph C. Minio, who are outside, independent directors of the Company, to
consider whether the proposal is
51
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<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair to and in the best interest of the Company and its stockholders, and to
recommend whether the Board of Directors should accept the Proposal. The Special
Committee has hired the law firm of White & Case to act as its independent legal
counsel and Oppenheimer & Co. Inc. to act as its independent financial advisor
to assist it in its evaluation of the Proposal.
Following public announcement of the Proposal, four lawsuits, all brought as
purported class actions, were filed in the Delaware Chancery Court, naming the
Company, the members of the Board of Directors of the Company, Faulding and
Holdings as defendants. See Note 12 of Notes to Consolidated Financial
Statements.
The Company has been informed that the lawsuits may be consolidated and that
the plaintiffs have agreed to postpone further action pending the consideration
of the Proposal by the Special Committee.
The Board of Directors of the Company held a meeting on June 3, 1997 and
appointed a Special Committee of the Board, consisting of Bruce C. Tully and
Joseph C. Minio, who are outside, independent directors of the Company, to
consider whether the proposal is fair to and in the best interest of the Company
and its stockholders, and to recommend whether the Board of Directors should
accept the Proposal. The Special Committee, assisted by independent legal
counsel and independent financial advisors, is currently evaluating the
Proposal.
52
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
$OOO $OOO $OOO $OOO
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended June 30, 1997:
Allowances for sales returns,
allowances and discounts 3,135 40,063 35,879 7,319
Allowance for doubtful
accounts 220 (20) 200
- --------------------------------------------------------------------------------------------------------------
Tota1 3,355 40,043 35,879 7,519
==============================================================================================================
For the Year Ended June 30, 1996:
Allowances for sales returns,
allowances and discounts 2,497 17,324 16,686 3,135
Allowance for doubtful
accounts 119 101 220
- --------------------------------------------------------------------------------------------------------------
Total 2,616 17,425 16,686 3,355
==============================================================================================================
For the year Ended June 30, 1995:
Allowances for sales returns,
allowances and discounts 1,365 12,874 11,742 2,497
Allowance for doubtful
accounts 187 (68) 119
- --------------------------------------------------------------------------------------------------------------
Total 1,552 12,806 11,742 2,616
==============================================================================================================
</TABLE>
53
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
ITEM 9. DISAGREEMENTS ON ACCOUNT AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, OFFICERS AND SIGNIFICANT EMPLOYEES
DIRECTORS
The directors of the Company are as follows:
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned
Name Company Office(s) Since Age As Of Aug 1, 1997
<S> <C> <C> <C> <C>
Edward D. Tweddell(1) Director/Chairman 1990 56 -0-
Richard F. Moldin(2) Director, Chief Executive 1995 49 82,500
Officer, President, Chief
Operating Officer
William R. Griffith Director 1997 49 -0-
Alan G. McGregor(1) Director 1988 61 -0-
Joseph C. Minio(3) Director 1997 53 -0-
Bruce C. Tully Director 1989 48 -0-
</TABLE>
(1) Dr. Tweddell and Mr. McGregor are directors of Faulding, the parent of
Holdings, the principal stockholder of the Company. See "Item 11 -
Executive Compensation, Compensation Committee Interlocks and Insider
Participation" and "Item 12 - Security Ownership of Certain Beneficial
Owners and Management - Principal Stockholders of the Company."
(2) Includes 72,500 shares issuable upon the exercise of stock option awards
presently exercisable that have been made to Mr. Moldin under the
Company's 1994 Stock Option Plan. Excludes 127,500 shares issuable upon
the exercise of such awards that are not presently exercisable.
(3) Mr. Minio was appointed to the Board on January 3, 1997 to replace Mr.
David Beretta, who died in September 1996.
EDWARD D. TWEDDELL, M.D., was elected a director in 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 Office of Faulding. From July 1987, until
joining Faulding, he held the position of Chairman and Chief Executive Officer
of Pharmol Pacific Ltd.,
54
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<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
an Australian biotechnology company. Prior thereto and from April 1986, he was
President and Chief Executive Office 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., where he held a
number of senior management positions.
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 Chief Operating Officer of the Company on July 24, 1995. 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 as Divisional Manager, Primary
Manufacturing, for Wellcome Foundation Limitation, 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.
WILLIAM R. GRIFFITH was elected a Director of the Company in February 1997. He
served as Secretary of the Company from October 1993 to February 12, 1997. Mr.
Griffith is a member of Parker Duryee Rosoff & Haft and has been a practicing
attorney for more than 10 years. Parker Duryee Rosoff & Haft serves as primary
U.S. counsel to Faulding, and has also served as counsel to the Company.
ALAN G. MCGREGOR, a director of the Company since June 1988, is Chairman of
Faulding. Mr. McGregor is also Chairman and a director of James Hardie
Industries Ltd. and Burns Philp & Co. Limited and a director of other companies.
He has also 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.
JOSEPH C. MINIO has been a Director of the Company since his appointment on
January 3, 1997. He has been President and Chief Executive Officer and a
Director of Belle Haven Management, Ltd. in Greenwich, Connecticut since 1986.
Belle Haven is engaged in the business of acquiring controlling positions in,
and assuming management control over, small and medium-sized performance
companies. He also served as President and Chief Executive Officer and a
Director of Interstate Distribution, Inc., a wholesale distributior of health
and beauty aids, fragrances and pharmaceuticals from 1990 to 1991. In addition,
he served as President and Chief Executive Officer and a Director of Intelligent
Business Communications Corporation ("IBC") from 1986 to 1989. IBC was engaged
in the design, development, manufacture and marketing of advanced satellite data
control equipment, as well as vertical circuit switches and T-1 multiplexers for
both data and voice communications. From 1981 until 1986, Mr. Minio was
President and Chief Executive Officer and a Director of Publicker Industries,
Inc. of Greenwich, Connecticut, which was a manufacturer of
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FAULDING INC.
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alcohol and related products. Since 1983, he has served as a Director of
Alba-Waldensian, Inc. and since 1993 he has served as a Director of Wellco
Enterprises, Inc.
BRUCE C. 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.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the Company's executive
officers who are not serving as directors.
PAUL ASTLEY, 50, was appointed Chief Financial Officer of the Company on March
25, 1997. Mr. Astley has had various positions with Faulding since commencing at
Faulding in 1973. From June 1984 to February 1988, he was the Chief Accountant
for Faulding. From February 1988 to November 1993, he was Manager for Accounting
and Information Services at Faulding Corporation Head Office, and from November
1993 until joining the Company in March 1997, he was General Manager, Group
Accounting at Faulding Corporate Head Office.
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, 1997, 1996 and
1995 by each of its executive officers who served as an executive officer during
fiscal 1997 and whose compensation exceeded $100,000 during its year ended June
30, 1997:
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
- --------------------------------------------------------------------------------------------------------
Other Annual
Fiscal Salary Bonus Compensation
Name and Principal Position Year $000 $000 $000
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard F. Moldin
Chief Executive Officer, 1997 318 175 (1)
President and Chief 1996 285 105
Operating Officer 1995
Lee Craker(2) 1997 131 (1)
Chief Financial Officer and 1996 158 38
Treasurer 1995
</TABLE>
(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) Lee Craker resigned his position as of March 25, 1997. Paul Astley was
appointed to succeed Mr. Craker on March 25, 1997.
STOCK OPTIONS AND BONUS PLANS
1994 STOCK OPTION PLAN
The Company's 1994 Stock Option 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 Stock Option Plan provides for the granting of up
to 1,000,000 options which are intended to qualify either as Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue Code of 1986
or Nonstatutory Stock Options. The total number of shares of Common Stock
reserved for issuance under the 1994 Stock Option Plan is 1,000,000. Options to
purchase shares of Common Stock may be granted under the 1994 Stock Option Plan
to persons who, in the case of Incentive Stock Options, are key employees of the
Company, or, in the case of Nonstatutory Stock Options, are key employees
(including officers) or non-employee directors 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.
In February 1997, the 1994 Stock Option Plan was amended to provide that in the
event that Faulding ceases to beneficially own, or exercise voting or
dispositive control over, at least 50% of the outstanding Common Stock of the
Company on a fully diluted basis, then all Options then outstanding under the
1994 Stock Option Plan would become immediately exercisable in full.
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The 1994 Stock Option 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 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 Stock Option Plan is
determined by the Board of Directors of the Company at the time of grant. No
option granted is exercisable after the expiration of 10 years from the date of
grant. The aggregate fair market value (determined at the date of the option
grant) of shares of Common Stock 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.
No grants of Incentive Stock Options or Nonstatutory Stock Options were made to
executive officers in fiscal 1997 under the 1994 Stock Option Plan.
The following table sets forth certain information with respect to Incentive
Stock Options or Nonstatutory Stock Options granted to the officers, directors
and employees of the Company and its subsidiaries under the 1994 Stock Option
Plan during the fiscal year ended June 30, 1997. The dollar value set forth
below reflects the difference between the aggregate exercise price of the
options and the estimated value of the Common Stock at June 30, 1997.
OPTION VALUES YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Name Options at June 30, 1997 Options at June 30, 1997
- -----------------------------------------------------------------------------------------------
Exercisable Unexercisable
Exercisable Unexercisable $000 $000
------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
Richard F. Moldin 42,500 157,500 140 483
Chief Executive Officer,
President and Chief Operating
Officer
All Non-Executive Employees 50,000 650,000 484 3,313
as a Group
</TABLE>
1997 STOCK OPTION PLAN
On February 12, 1997, the stockholders approved the 1997 Stock Option Plan which
provides for issuance of up to 1,000,000 options to acquire shares of the Common
Stock.
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The provisions of the 1997 Stock Option Plan are identical to those of the 1994
Stock Option Plan, as amended in February 1997, and as described above. As of
June 30, 1997, no options were issued under the 1997 Stock Option Plan.
1991 RESTRICTED STOCK INCENTIVE PLAN
The Company's 1991 Restricted Stock Incentive 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
Restricted Stock Option 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 Restricted Stock Incentive 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 Restricted Stock Incentive Plan. Grants of 275,000 and
50,000 shares of Common Stock were awarded under the plan 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 two resignations, grants totaling 27,500 shares of
Common Stock were terminated, and 82,250 shares of Common Stock were issued
under the plan. During the year ended June 30, 1995, due to two resignations,
grants totaling 10,500 shares of Common Stock were terminated, and 71,125 shares
of Common Stock were issued under the plan. During the year ended June 30, 1996,
due to eight terminations, grants totaling 47,000 shares of Common Stock were
terminated, and 44,625 shares of Common Stock were issued under the plan. During
the year ended June 30, 1997, grants totaling 2,500 shares of Common Stock were
terminated, and 10,000 shares of Common Stock were issued under the plan.
PENSION PLAN
The Company maintains a defined benefit pension plan, fully paid for by the
Company, for the benefit of eligible employees (the "Pension Plan"). 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.
As of June 30, 1997, 173 persons were participants in the Pension Plan.
A participant in the Company's Pension Plan will receive retirement income based
on 0.91% of his final average annual compensation, defined in the Pension Plan
as including salary, bonuses, overtime and commissions, plus 0.52% of his final
average annual compensation in excess of Social Security covered compensation,
multiplied by years of
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credited service up to 35 years. Years of service for benefit accrual purposes
are only those 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.
The following table indicates the estimated annual plan benefits payable under
the Pension Plan upon retirement as of June 30, 1997 at age 65 after 15, 20, 25,
30 and 35 years of credited service to the Company:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Average
Compensation Annual Benefit Based on Years of Service
- ------------ --------------------------------------------------------------------------------
15 20 25 30 35
$000 $000 $000 $000 $000
---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C>
$125,000 ....... 25 33 41 49 58
$150,000 ....... 30 40 50 60 70
$175,000 ....... 30 40 50 60 70
$200,000 ....... 30 40 50 60 70
$225,000 ....... 30 40 50 60 70
$250,000 ....... 30 40 50 60 70
$300,000 ....... 30 40 50 60 70
$350,000 ....... 30 40 50 60 70
$400,000 ....... 30 40 50 60 70
$450,000 ....... 30 40 50 60 70
$500,000 ....... 30 40 50 60 70
</TABLE>
At June 30, 1997, Mr. Moldin had two credited years of service under the Pension
Plan. Mr. Astley was not a participant in the Pension Plan.
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SAVINGS PLAN
The Company has a 401(k) savings and investment plan (the "401(k) Plan"),
implemented as of January 1, 1990, covering all non-union employees of the
Company. Under the 401(k) Plan, employees may defer up to 15% of their salary,
up to a maximum of $9,500 per annum. The Company makes a 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 401(k) 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.
For the three year period ended June 30, 1997, the Company had contributed an
aggregate of $689,000 to the 401(k) Plan (net of forfeitures of non-vested
amounts), for the respective accounts of 201 participants. Of such $689,000, an
aggregate of $0 has been credited to the accounts of all current executive
officers as a group, (being $0 for the respective accounts of each of Mr. Moldin
and Mr. Astley).
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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 and 1997 Stock
Option Plan. During the year beginning July 1, 1996 until the death of David
Beretta on September 16, 1996, the Committee was composed of three members, all
of whom were non-employee directors. Thereafter, Alan G. McGregor and Edward D.
Tweddell, the two remaining members continued to serve until February 12, 1997.
On that date, the three current members of the Compensation Committee were
appointed, all of whom are non-employee directors and have served continuously
since that date. See "Compensation Committee Interlocks and Insider
Participation".
In setting salary levels, providing incentives and granting stock 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/CEO 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 healthcare companies of comparable
size and performance.
PRESIDENT/CEO 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 award
of 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
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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 are currently in the form of 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 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.
The base salary of Richard F. Moldin the President and Chief Executive Officer
as of July 1, 1996 was $300,000. He received a cash incentive award of $105,000
in September, 1996 and in October, 1996 his base salary was increased to
$318,000. His additional compensation reflected the Committee's assessment of
Mr. Moldin's leadership in strengthening the position of the Company, his
efforts in broadening the Company's base of operations to include the generic
injectable business and his leadership contribution in implementing the
Company's programs during the fiscal year ended June 30, 1996.
$1 MILLION 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 million, 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.
Bruce C. Tully) Members of the
Joseph C. Minio) Compensation Committee
Edward D. Tweddell) July 30, 1997
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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 beneficially owns
approximately 73% of the Common Stock. Alan McGregor is Chairman of the Board
and a Director of Faulding. See "Item 12 - Security Ownership of Certain
Beneficial Owners and Management - Principal Stockholders of the Company" and
Item 13 - "Certain Relationships and Related Transactions."
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Set forth below is a line graph comparing the cumulative stockholder return on
the Common Stock against the cumulative total return of the Nasdaq United States
Index and the Nasdaq Pharmaceutical Index for the Company's fiscal years ended
June 30, 1997, June 30, 1996, June 30, 1995, June 30, 1994 and June 30, 1993,
respectively.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG FAULDING INC.
THE NASDAQ UNITED STATES INDEX AND THE NASDAQ PHARMACEUTICAL INDEX
<TABLE>
<CAPTION>
6-92 6-93 6-94 6-95 6-96 6-97
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Faulding Inc. 100 68 59 73 32 90
Nasdaq United States 100 126 127 169 218 265
Nasdaq Pharmaceutical 100 87 73 97 142 145
</TABLE>
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*100 Invested on 6/30/92 in Stock or Index
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL STOCKHOLDERS OF THE COMPANY
The following table sets forth certain information regarding shares of the
Company's outstanding Common Stock beneficially owned on August 8, 1997 by (i)
each person who is known by the Company to beneficially own or exercise voting
or dispositive control over more than 5% of the Common Stock, (ii) each of the
Company's Directors, (iii) each named executive officer, and (iv) all executive
officers and Directors of the Company as a group:
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Percentage
NAME OF BENEFICIAL OWNER Beneficially Owned of Class
- ------------------------- ------------------ -----------
<S> <C> <C>
Faulding Holdings Inc. 15,848,770(1) 73.1%(1)
529 Fifth Avenue, 8th Floor
New York, NY 10017
Edward D. Tweddell -0-(2) *
Alan G. McGregor -0-(2) *
Joseph C. Minio -0- *
Bruce C. Tully -0- *
Richard F. Moldin 82,500(3) *
William R. Griffith -0- *
All executive officers and directors as
a Group (7 persons) 82,500(2)(3) *
</TABLE>
(1) Includes 1,564,950 shares issuable under conversion of 150,000 share of
the Company's Class B 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 Common Stock owned by Holdings.
(3) Includes 72,500 shares issuable upon the exercise of stock option awards
presently exercisable, that have been made to Mr. Moldin under the 1994
Stock Option Plan. Excludes 127,500 shares issuable upon the exercise of
such awards that are not presently exercisable.
* Equals a percentage less than 1% of the outstanding shares of the Common
Stock.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FAULDING INC.
- --------------------------------------------------------------------------------
RELATED-PARTY TRANSACTIONS
During the years ended June 30, 1997, 1996 and 1995, the Company paid Faulding
$7,010,000, $4,057,000 and $2,289,000, respectively, for materials and finished
goods purchases (pursuant to agreements to market injectable and oral products,
both described herein), $0, $287,000 and $918,000, respectively, for research
and development services, and $0, $603,000 and $326,000, respectively, for
interest expense on loan advances associated with the Acquired Companies prior
to the acquisition of such companies by the Company. In addition, during the
years ended June 30, 1997, 1996 and 1995, the Company paid FSI, a wholly-owned
subsidiary of Holdings, $0, $296,000 and $266,000, respectively, for business
development services (pursuant to an agreement with FSI which terminated on
December 31, 1995 and described herein).
During the years ended June 30, 1997, 1996 and 1995, the Company was reimbursed
$0, $466,000 and $1,919,000, respectively, by Faulding for materials and
services related to research and development projects.
Additionally, during the year ended June 30, 1997 and 1996, the Company recorded
revenues of $1,354,000 and $1,018,000, respectively, for contract manufacturing
of KADIAN'r' (pursuant to an agreement with FSI, described herein).
Included in other assets at June 30, 1997 and 1996 is $2,903,000 paid by the
Company to Faulding in June 1992 to acquire proprietary technology, including
scientific information and expertise, processes and procedures, relating to the
manufacture and sale of the generic version of a modified-release pharmaceutical
product. The acquired technology is restricted to use, on an exclusive basis, in
the United States and its territories. Amortization of this technology commenced
in the 1997 fiscal year. Pursuant to the terms of the agreement between the
Company and Faulding dated December 5, 1992 in which Faulding transferred this
technology to PPC, Faulding is indemnifying the Company in relation to the
Company's costs of defending the action entitled Hoechst Marion Roussel, Inc.
and Carderm Capital L.P. v. Faulding Inc. and Purepac Pharmaceutical Co. See
Note 12 of Notes to Consolidated Financial Statements.
Amounts due from (due to) affiliated companies are payable on demand and were as
follows for the 1996 and 1997 fiscal years:
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June 30, June 30,
1997 1996
$000 $000
-------- --------
Faulding (3,886) (1,881)
FSI 27 1,034
-------- --------
(3,859) (847)
-------- --------
The Company entered into an agreement with Faulding as of December 5, 1992,
pursuant to which PPC 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, 1997, no such services were provided by PPC to Faulding.
In addition, the Company 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 PPC a non-exclusive license
to import, distribute and market an erythromycin oral product in the United
States.
On January 1, 1993, the Company and FSI entered into a consulting agreement,
which terminated on December 31, 1995, pursuant to which PPC retained FSI to
serve as a business development consultant and advisor on a non-exclusive basis.
On August 1, 1993, the Company entered into a 10-year agreement with FSI,
pursuant to which PPC would manufacture KADIAN'r' utilizing Faulding technology,
processes and manufacturing methods licensed to FSI. FSI, at its sole cost, has
sought all necessary approvals and/or registrations from the appropriate
regulatory authority to enable the sale of the product, which was approved by
the FDA on July 3, 1996. The parties amended this agreement in December 1994 to
resolve certain inconsistencies between this agreement and an agreement between
FSI and an unrelated third party, to distribute the product manufactured by PPC.
On June 27, 1995, the Company and FSI entered into a Services Agreement pursuant
to which PPC would provide certain services on FSI's behalf that FSI had agreed
to provide under the agreement with the third party. Pursuant to the terms of
the manufacturing agreement between PPC and Faulding relating to Kadian'r',
Faulding is indemnifying the Company in relation to the costs of defense of the
action entitled Purdue Pharma L.P. and The Purdue Frederick Company vs. Faulding
Services Inc., Faulding Inc., Purepac Pharmaceutical Co. and Zeneca Inc. See
Note 12 of Notes to Consolidated Financial Statements.
On March 15, 1995, the Company and Faulding entered into a three-year license
agreement pursuant to which Faulding granted PPC the non-exclusive right 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 PPC.
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The Company and Faulding entered into two agreements as of June 26, 1995 in
relation to two products that had been under ongoing development review for
several years. One is a licensing agreement pursuant to which Faulding granted
to PPC an exclusive ten-year license to utilize certain technology to complete
the development of a modified-release product and to manufacture and sell the
product in the United States. In relation to the development of the product, the
Company paid to Faulding most of the technology licensing fees in the year ended
June 30, 1994 with the balance paid during the year ended June 30, 1996. All
such payments were expensed as research and development costs. In addition, the
Company is obligated under the agreement to pay royalties related to net sales
of the product. As of June 30, 1997, development activity under this agreement
has been discontinued due to changes in market conditions and the viability of
the product involved.
The second agreement entered as of June 26, 1995 is a 10-year Co-development,
Supply and Licensing Agreement pursuant to which Faulding is to develop and
deliver a component pellet of a modified-release product for PPC's use in
developing, manufacturing and distributing the product in the United States.
Faulding is to supply the Company with pellets at prices set forth in the
agreement. If the parties later concur that the Company should manufacture the
pellets, Faulding will grant the Company 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 30, 1997, development activity under this agreement has been
discontinued due to changes in market conditions and the viability of the
product involved.
On January 23, 1996, the Company and Faulding entered into a Supply Agreement
for injectable products developed and manufactured by Faulding for sale by FPC
in the United States. Supply of six anti-cancer products under this agreement
commenced in fiscal 1996. Abbreviated New Drug Applications ("ANDAs") for
additional products covered by this agreement have been filed with the FDA.
Additional products are under development by Faulding.
On January 23, 1996, the Company and Faulding entered into a Licensing and
Supply Agreement for the medical device products developed by FMDC. Initial
sales were reported in the 1997 fiscal year and products utilizing these
technologies have received regulatory approval in some other markets.
On February 29, 1996, the Company acquired all of the outstanding capital stock
of each of FMDC, FPR, and FPC from Holdings in exchange for 2,438,712 shares of
the Common Stock. As part of the acquisition, the Company created the Class B
Preferred Stock consisting of 150,000 authorized shares, all of which were
issued to Holdings for a cash purchase price of $100.00 per share, resulting in
net proceeds to the Company of $15 million.
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On June 3, 1997, the Company received a merger proposal (the "Proposal") from
Faulding. In the Proposal, Faulding offered to acquire all of the outstanding
shares of Common Stock of the Company not currently owned by Holdings at a price
of $12.00 per share in cash. The acquisition contemplated by the Proposal would
be structured as a merger pursuant to which a newly organized United States
subsidiary of Holdings would be merged into the Company as a result of which
Holdings would acquire all of the issued and outstanding shares of Common Stock
that are not currently owned by it.
The Board of Directors of the Company held a meeting on June 3, 1997 and
appointed a Special Committee of the Board, consisting of Bruce C. Tully and
Joseph C. Minio, who are outside, independent directors of the Company, to
consider whether the proposal is fair to and in the best interest of the Company
and its stockholders, and to recommend whether the Board of Directors should
accept the Proposal. The Special Committee, assisted by independent legal
counsel and independent financial advisors, is currently evaluating the
Proposal.
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
Independent Auditors' Report - Deloitte & Touche LLP.
Consolidated Balance Sheets - June 30, 1997 and 1996.
Consolidated Statements of Operations - Year ended June 30, 1997, 1996
and 1995.
Consolidated Statements of Stockholders' Equity - Year ended June 30,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows - Year ended June 30, 1997, 1996
and 1995.
Notes to Consolidated Financial Statements.
70
<PAGE>
<PAGE>
2. FINANCIAL STATEMENT SCHEDULE
FAULDING INC.
- --------------------------------------------------------------------------------
Schedule II: Valuation and Qualifying Accounts - Year ended June 30,
1997, 1996 and 1995.
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) Certificate of Amendment to Certificate of
Incorporation filed February 29, 1996.
(v) 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).
Stock Purchase and Stockholder's Agreement dated
September 2, 1987, among the Company, Moleculon
Research Company, Arthur S. Obermayer and Faulding
Holdings Inc., formerly Faulding U.S.A. Inc.
(vii) 1991 Restricted Stock Option Incentive Plan(7).
(viii) Agreement dated as of December 5, 1992, between FH
Faulding & Co. Limited and Purepac Pharmaceutical
Co.(8)
(ix) Agreement dated December 5, 1992, between FH
Faulding & Co. Limited and Purepac Pharmaceutical
Co.(8)
(x) Agreement dated as of December 5, 1992, between FH
Faulding & Co. Limited and Purepac Pharmaceutical
Co.(8)
(xi) Consulting Agreement dated January 1, 1988, between
Purepac Pharmaceutical Co. And FSI, formerly
Faulding Inc.(8)
(xii) Toll Manufacturing Agreement dated as of August 1,
1993 between FSI, formerly Faulding Inc. and Purepac
Pharmaceutical Co., as amended as of December 22,
1994(9).
(xiii) Letter agreement dated as of June 29, 1994, between
Faulding Inc., formerly Purepac, Inc. and FH
Faulding & Co. Limited(10).
(xiv) 1994 Stock Option Plan(11).
(xv) Agreement dated as of March 15, 1995 between FH
Faulding & Co. Limited and Purepac Pharmaceutical
Co.(13)
71
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
(xvi) License Agreement dated June 26, 1995 between FH
Faulding & Co. Limited and Purepac Pharmaceutical
Co.(13)
(xvii) Services Agreement dated as of June 26, 1995 between
Faulding Pharmaceutical Co., formerly Faulding
Hospital Products, Inc. and Purepac Pharmaceutical
Co.(13)
(xviii) Services Agreement dated as of June 26, 1995 between
FSI, formerly Faulding Inc. and Purepac
Pharmaceutical Co.(13)
(xix) Co-Development, Supply and Licensing Agreement dated
as of June 26, 1995 between FH Faulding & Co.
Limited and Purepac Pharmaceutical Co.(13)
(xx) Letter of Intent between FH Faulding & Co. Limited
and the Company dated August 9, 1995(12)
(xxi) Stock Purchase Agreement dated as of January 23,
1996 between Faulding Holdings Inc. and Purepac,
Inc.(14)
(xxii) Preferred Stock Purchase Agreement dated as of
January 23, 1996 between Faulding Holdings Inc. And
Purepac, Inc.(14)
(xxiii) Development and Distribution Agreement, dated as of
January 23, 1996 between FH Faulding & Co. Limited
and Faulding Pharmaceutical Co.(15)
(xxiv) Licensing and Supply Agreement dated as of January
23, 1996 between FH Faulding & Co. Limited and
Faulding Medical Co.(15)
(xxv) License Agreement, dated as of February 29, 1996
between FH Faulding & Co. Limited and Purepac, Inc.
(15)
(xxvi) [Agreement and Plan of Merger]
(11) Computation of Earnings Per Share
(11.1) Computation of Earnings Per Share Assuming Full
Dilution
(21) Subsidiaries of Registrant
(27) Financial Data Schedule
- ----------
(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 incorporated 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.
72
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
(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.
(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 reference.
(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.
(13) Previously filed as an Exhibit to Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 and incorporated herein by reference.
(14) Previously filed as an Exhibit to the Proxy Statement filed with the
Commission on January 30, 1996 and incorporated herein by reference.
(15) Previously filed as an Exhibit to Annual Report on Form 10-K for the
fiscal year ended June 30, 1996.
B. REPORTS ON FORM 8-K
Current Reports on Form 8-K filed with the Commission during July 1,
1996 through June 30, 1997:
Report Items Reported Financial Statements
------ -------------- --------------------
1. Filed June 20, 1997 Item 5 None
INDEX TO EXHIBITS
(10) (xxvi) [Agreement and Plan of Merger]
(11) Computation of Earnings Per Share
(11.1) Computation of Earnings Per Share Assuming Full
Dilution
(27) Financial Data Schedule
73
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
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.
FAULDING INC.
DATE: August 29, 1997
/s/ Edward D. Tweddell
--------------------------------------
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 by the following persons on behalf of the registrant
and the capacities and on the dates indicated.
DATE: August 29, 1997
/s/ Richard F. Moldin
--------------------------------------
Richard F. Moldin,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: August 29, 1997
/s/ Paul Astley
--------------------------------------
Paul Astley,
Chief Financial Officer
(Principal Accounting Officer)
DATE: August 29, 1997
/s/ Alan G. McGregor
--------------------------------------
Alan G. McGregor,
Director
/s/ Bruce C. Tully
--------------------------------------
DATE: August 29, 1997 Bruce C. Tully,
Director
74
<PAGE>
<PAGE>
FAULDING INC.
- --------------------------------------------------------------------------------
/s/ Joseph C. Minio
--------------------------------------
DATE: August 29, 1997 Joseph C. Minio,
Director
/s/ William R. Griffith
--------------------------------------
DATE: August 29, 1997 William R. Griffith,
Director
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as ............... 'tm'
The registered trademark symbol shall be expressed as .... 'r'
The section symbol shall be expressed as ................. 'SS'
<PAGE>
<PAGE>
EXHIBIT 11
EXHIBIT (11)
COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
DATA AS TO EARNINGS:
Income (loss) 4,876 (5,001) (1,618)
Less: preferred stock dividends (2,755) (2,307) (2,080)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) applicable to common and
common equivalent shares 2,121 (7,308) (3,698)
- ------------------------------------------------------------------------------------------------------------------------------------
DATA AS TO NUMBER OF COMMON SHARES:
Weighted average shares outstanding 15,087,347 15,039,391 14,977,248
Common equivalent shares relating to
contingent issuance 48,250 35,877
- ------------------------------------------------------------------------------------------------------------------------------------
Average number of common shares and
common share equivalents 15,135,597 15,039,391 15,013,125
====================================================================================================================================
PRIMARY EARNINGS PER COMMON SHARE:
Net income (loss) $ 0.14 $ (0.49) $ (0.25)
====================================================================================================================================
EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT (Note 1 below)
Net income (loss) $ 0.14 $ (0.49) $ (0.25)
====================================================================================================================================
</TABLE>
Note 1: Common share equivalents in the aggregate dilute the primary earnings
per common share by less than 3 percent.
<PAGE>
<PAGE>
EXHIBIT 11.1
EXHIBIT (11.1)
COMPUTATION OF EARNINGS PER SHARE ASSUMING FULL DILUTION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DATA AS TO EARNINGS:
Income (loss) 4,876 (5,001) (1,618)
- ------------------------------------------------------------------------------------------------------------------------------------
DATA AS TO NUMBER OF COMMON SHARES:
Average number of common shares and
common share equivalents (Exhibit 11) 15,135,597 15,039,391 15,013,125
Additional shares assuming full dilution 1,649,667 6,570,078 5,005,490
- ------------------------------------------------------------------------------------------------------------------------------------
Average number of common shares assuming
full dilution 16,785,264 21,609,469 20,018,615
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE ASSUMING
FULL DILUTION (ALL YEARS - ANTIDILUTIVE):
Net income (loss) $ 0.29 $ (0.23) $ 0.08
====================================================================================================================================
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<PERIOD-TYPE> YEAR
<CASH> 3,846
<SECURITIES> 0
<RECEIVABLES> 29,187
<ALLOWANCES> 7,519
<INVENTORY> 31,951
<CURRENT-ASSETS> 71,442
<PP&E> 44,911
<DEPRECIATION> 0
<TOTAL-ASSETS> 119,763
<CURRENT-LIABILITIES> 31,913
<BONDS> 0
<COMMON> 201
0
2
<OTHER-SE> 85,262
<TOTAL-LIABILITY-AND-EQUITY> 119,763
<SALES> 102,127
<TOTAL-REVENUES> 102,127
<CGS> 68,484
<TOTAL-COSTS> 25,842
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (276)
<INCOME-PRETAX> 7,525
<INCOME-TAX> 2,649
<INCOME-CONTINUING> 4,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,876
<EPS-PRIMARY> .14
<EPS-DILUTED> 0
</TABLE>
