UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 1997
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-13588
FAULDING INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2769995
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Elmora Avenue
Elizabeth, NJ 07207
(Address of principal executive office)
Telephone Number (908) 527-9100
(Registrant's telephone number, including area code)
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 [X] No
As of October 30, 1997, there were 20,127,188 shares of the Registrant's
Common Stock outstanding.
<PAGE>
Faulding Inc.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and June 30, 1997 . . . . . . . .3
Consolidated Statements of Operations
Three months ended September 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
Three months ended September 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements. . . . . . .6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . .9
PART II - OTHER INFORMATION
ITEMS 1 thru 6 . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
Faulding, Inc.
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1997 1997
$000 $000
(Unaudited) (Audited)
Assets
Current assets:
Cash and cash equivalents 3,323 3,846
Accounts Receivable 32,264 29,187
Inventory (Note 4) 34,572 31,951
Other current assets 2,360 2,031
Deferred income taxes (Note 6) 4,554 4,427
Total current assets 77,073 71,442
Non-current assets:
Property, plant and equipment, net 45,550 44,911
Other assets 3,305 3,410
Total non-current assets 48,855 48,321
Total Assets 125,928 119,763
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 7,147 7,973
Due to affiliated companies 2,587 3,859
Loan payable to bank 7,000 4,000
Accrued expenses 15,447 14,551
Accrued income taxes 2,196 841
Accrued preferred dividents 169 689
Total current liabilities 34,546 31,913
Non-current liabiilities:
Deferred income taxes (Note 6) 2,459 2,385
Stockholders' equity (Notes 2 and 5)
Class B convertible preferred stock;
par value $0.01, authorized 150,000
shares; issued and outstanding 150,000
(liquidation value $15,169) 2 2
Common stock; par value $0.01, authorized
35,000,000 shares; issued and outstanding
20,127,188 and 20,102,188 at September
30, 1997 and June 30, 1997, respectively 201 201
Capital in excess of par value 54,800 54,763
Retained earnings 33,920 30,499
Total stockholders' equity 88,923 85,465
Total Liabilities and Stockholders' Equity 125,928 119,763
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Faulding, Inc
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
September 30,
1997 1996
(Per share amounts in $) $000 $000
Net Sales 29,184 18,585
Cost of Sales 16,918 13,013
Gross profit 12,266 5,572
Expenses:
Selling, general and administrative 3,721 3,031
Research and development 3,008 2,488
Total expenses 6,729 5,519
Income from operations 5,537 53
Other income (expense), net (36) (19)
Income before income taxes 5,501 34
Income tax expense (Note 6) 2,080
Net income 3,421 34
Preferred stock dividends 169 689
Net Income (Loss), Applicable to Common Stock 3,252 (655)
Primary Earnings Per Common Share (Note 3)
Net income (loss) 0.16 (0.04)
Weighted average number of common shares
outstanding 20,118,302 15,064,560
Earnings Per Share Assuming Full Dilution (Note 3)
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Faulding, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
September 30,
1997 1996
$000 $000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 3,421 34
Adjustments to Reconcile Net Income to Net Cash
Provided By (Used For) Operating Activities:
Depreciation and amortization 1,043 942
Compensation expense - stock grants 80 82
Deferred income tax, asset (53) 79
Increase (Decrease) in Cash From:
Accounts receivable (3,077) 2,184
Inventory (2,621) (3,767)
Other current assets (329) (498)
Other assets 29 (23)
Accounts payable (826) 722
Accrued expenses 896 (1,114)
Accrued income taxes 1,355 (79)
Accrued preferred dividends (520)
Due to/from affiliates (1,272) 282
Total Adjustments (5,295) (1,190)
Net Cash Provided By (Used For) Operating
Activities (1,874) (1,156)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,606) (1,628)
Net Cash Provided by (Used For) Investing
Activities (1,606) (1,628)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from bank 3,000 4,000
Preferred dividends paid (169) (689)
Proceeds from issuance of common stock 126
Net Cash Provided By (Used For) Financing
Activities 2,957 3,311
Increase (Decrease) In Cash and Cash Equivalents (523) 527
Cash and cash equivalents, beginning of period 3,846 1,897
Cash and Cash Equivalents, end of period 3,323 2,424
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest 50 28
Income taxes 780
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Faulding Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Notes to the Financial Statements included in Faulding Inc.'s (the "Company")
Form 10-K for the year ended June 30, 1997 contain information pertinent to
the accompanying financial statements and should be read in conjunction with
reading these financial statements. There has been no material change in the
information contained in such footnotes except as set forth below. The
Consolidated Balance Sheet at September 30, 1997, the Consolidated Statements
of Operations for the three months ended September 30, 1997 and 1996 and the
Consolidated Statements of Cash Flows for the three months ended September
30, 1997 and 1996 are unaudited.
In the opinion of management, all adjustments (consisting only of normal
recurring entries) necessary for a fair presentation of such financial
results have been included.
1. Organization, Business and Consolidation
Faulding Inc., together with its consolidated subsidiaries, 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").
The financial statements reflect the accounts of the Company, including
its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated.
2. A reconciliation of the change in total stockholders' equity is as
follows:
Par Value of Capital In Total
Common and Excess of Retained Stockholders'
Preferred Stock Par Value Earnings Equity
$000 $000 $000 $000
Balance, June 30, 1997 203 54,763 30,499 85,465
Exercise of stock options 126 126
Class B preferred stock dividend (169) (169)
Stock grant amortization 80 80
Net income 3,421 3,421
Balance, September 30, 1997 203 54,800 33,920 88,923
3. Earnings Per Common Share
Primary earnings per common share is calculated by dividing income after
preferred dividends by the weighted average number of common shares
outstanding during the period. Common stock equivalents are excluded as the
effect is either not material or anti-dilutive. Earnings per share assuming
full dilution is not presented as the effect is either not material or anti-
dilutive.
4. Inventory
September 30, June 30,
1997 1997
$000 $000
Raw Materials 11,082 10,934
Work-in-process 8,947 7,649
Finished goods 14,543 13,368
Total 34,572 31,951
5. Capital Stock
During the quarter ended September 30, 1997 the Company issued 25,000
shares of common stock, par value $0.01 per share (the "Common Stock"), to
employees upon exercise of incentive stock options. The proceeds from these
transactions amounted to $126,000.
6. Accounting for Income Taxes
Deferred income tax assets, both current and non-current, reflect the net
tax effects of (a) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, and (b) operating loss and tax credit carryforwards.
The income tax expense does not include the benefit of recognizing
available loss carryforwards to the extent they have already been recognized
as a deferred tax asset. Instead, there will be a reduction in the deferred
tax asset as such benefits are utilized to reduce taxes payable.
The income tax expense was comprised of the following:
Three Months Ended
September 30,
1997 1996
$000 $000
Current
Federal 1,685 11
State 268 1
Total 1,953 12
Deferred
Federal 123 (11)
State 4 (1)
Total Expense 2,080 0
The Company has net operating losses available as carryforwards to
reduce future federal income taxes. State tax losses are also available as
carryforwards. At September 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 limitation 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 September 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.
7. New Accounting Pronouncements
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.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results Of Operations
Three Month Period Ended September 30, 1997 Compared with the Three Month
Period Ended September 30, 1996
Net sales for the three month period September 30, 1997 were $29.2 million
compared with $18.6 million for the corresponding 1996 period, an increase of
$10.6 million or approximately 57%. During the current three month period,
sales for the orals, injectables and medical devices operations were $25.6
million, $3.6 million and less than $0.1 million, respectively. During the
corresponding 1996 period, such product sales were $16.2 million, $2.4
million and nil, respectively.
The current period's net sales increase was due primarily to the commercial
launch of pentoxifylline extended-release tablets during the current quarter
in addition to continued strong sales of clonazepam tablets and diclofenac
tablets. For the three month period ended September 30, 1997, pentoxifylline,
clonazepam and diclofenac accounted for 15%, 20% and 13%, respectively, of
the Company's sales.
Gross profit for the three month period ended September 30, 1997 was $12.3
million compared with $5.6 million for the corresponding 1996 period, an
increase of $6.7 million or approximately 120%. The gross profit as a
percent of net sales for the three month period ended September 30, 1997 was
approximately 42% compared with approximately 30% for the corresponding 1996
period. Gross profit for the three month period ended September 30, 1997
included $12.9 million from oral products, $(0.3) million from injectable
products and $(0.3) million from medical devices. For the prior corresponding
period, gross profit for each operation was $6.0 million, $(0.4) million and
nil, respectively. The Company's increase in gross profit in the current
period was due principally to the contribution from higher margins on new
products, principally being pentoxifylline and clonazepam. The loss reported
in injectable products in the current period was due to declining prices in the
markets for the Company's products. The medical device business continues to
work towards achieving full commercialization of it's Safe-Connect valve and
related products.
The selling, general and administrative expenses for the three month period
ended September 30, 1997 were $3.7 million compared with $3.0 million for the
corresponding 1996 period, an increase of $0.7 million or approximately 23%.
These expenses as a percent of net sales for the three month period ended
September 30, 1997, were 13% compared with 16% for the prior corresponding
period. The increase in the expense level was primarily due to higher
personnel expense.
The research and development expenses for the three month period ended
September 30, 1997 were $3.0 million compared with the prior corresponding
period of $2.5 million, an increase of $0.5 million or approximately 20%.
The expense as a percent of net sales for the three month period ended
September 30, 1997 was 10% compared with 13% for the corresponding 1996
period. The increased 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
three month period ended September 30, 1997 was $(36,000) compared with
$(19,000) for the corresponding period.
Income before income tax for the three month period ended September 30, 1997
was $5.5 million compared with less than $0.1 million for the corresponding
period.
Net income for the three month period ended September 30, 1997 before
preferred stock dividends was $3.4 million compared with less than $0.1
million for the corresponding 1996 period.
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.
Financial Condition, Liquidity and Capital Resources
The Company had $3.3 million in cash and cash equivalents at September 30, 1997,
compared with $3.8 million at June 30, 1997. The current three month period's
net decrease of $0.5 million resulted primarily from $3.0 million borrowed
from a bank, offset by $1.9 million used for operating activities and $1.6
million used for investments in property, plant and equipment.
At September 30, 1997, accounts receivable were $32.3 million as compared to
$29.2 million at June 30, 1997, an increase of $3.1 million. This increase
was principally due to higher sales levels.
Inventory at September 30, 1997 was $34.6 million, as compared to $32.0
million at June 30, 1997, an increase of $2.6 million, due primarily to
increased production for new products launched in the current three month
period and products planned for launch in the current financial year.
Accrued preferred dividends of $169,000 for the three month period ended
September 30, 1997 were paid on October 1, 1997.
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 September 30, 1997, the Company had $3.3
million in cash, plus approximately $8.0 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.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 certain acts allegedly taken or not
taken by the Company and the members of the Board of Directors in connection
with the proposed transaction pursuant to which Faulding Holdings Inc.
("Holdings"), a wholly-owned subsidiary of FH Faulding & Co. Limited
("Faulding"), would acquire the outstanding Common Stock of the Company that
it did not already own and thereby become the sole stockholder of the Company.
The Actions also challenge 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
Actions seek to enjoin the consummation of the transaction, and seek an award
of damages and attorneys' fees.
On September 28, 1997, the parties to all of the Actions executed a Memorandum
of Understanding setting forth the terms of their agreement in principle to
settle the Actions. Subject to final Court approval, the Memorandum of
Understanding provides for the dismissal of the Actions with prejudice and
the release of any known or unknown claims, state or federal, that have been
or could have been brought in any court by any member of the proposed class
against defendants in the Actions and their predecessors, successors, parents,
subsidiaries, affiliates, agents or other persons relating to the
transaction or any matters that were or could have been asserted in the
Actions arising out of the subject matter thereof. The Memorandum of
Understanding acknowledges that Faulding took into account the desirability of
addressing the claims asserted in the Actions in agreeing to the enhanced terms
of the transactions. The Memorandum of Understanding also provides that
settling plaintiffs may seek up to $695,000 in attorney's fees and expenses.
The Memorandum of Understanding contemplates discovery to be
conducted by the plaintiffs to confirm the fairness and reasonableness of
the settlement, and the drafting and execution of a Stipulation of Settlement
by the parties, which is expected to be presented to the Chancery Court for
approval at a hearing to be conducted to approve the Settlement.
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 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 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 ,
Faulding is indemnifying the Company in relation to the costs of defending
the action.
On February 3, 1997, following the submission by PPC of an Abbreviated New Drug
Application seeking FDA approval of diltiazem hydrochloride extended-release
capsules, USP, the Company's proposed generic version of Cardizem CD , 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
also 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.
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 2 through Item 4.
Not Applicable.
Item 5. OTHER EVENTS
On September 29, 1997, the Company, Faulding and Holdings entered into an
Agreement and Plan of Recapitalization (the "Recapitalization Agreement")
pursuant to which the Company, subject to shareholder approval, will enact
an amendment to its Certificate of Incorporation (the "Recapitalization
Amendments") to effect a recapitalization (the "Recapitalization") which will
result in Holdings becoming the sole stockholder of the Company and each other
existing holder of Common Stock of the Company becoming entitled to receive a
cash payment of $13.50 per share of Common Stock (the "Transaction
Consideration"). The Recapitalization will be effected through a reverse stock
split of the Company's Common Stock (the "Reverse Stock Split") whereby each
7,924,385 issued and outstanding shares of Common Stock as of the effective
time of the Recapitalization will be combined into one validly issued share of
common stock ("New Common Shares") having a par value per share equal to the
quotient obtained by dividing (x) the product of (1) the total number of shares
of Common Stock issued and outstanding immediately prior to the effective time
of the Recapitalization, multiplied by (2) $0.01, by (y) the number of
New Common Shares to be issued and outstanding immediately following the
effective time of the Recapitalization. As a result of the Reverse Stock Split,
holders of less than 7,924,385 shares of Common Stock will be entitled to
receive, in lieu of fractional New Common Shares, the Transaction Consideration
multiplied by the number of shares of Common Stock held by such holders
immediately prior to the effective time of the Recapitalization. The
Recapitalization is subject to certain conditions, including the
condition that the Recapitalization Amendment and the Recapitalization
Agreement be approved and adopted by the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock other than shares of
Common Stock held by Faulding and its affiliates. The Company anticipates
presenting the Recapitalization Agreement and the transactions contemplated
thereby to stockholders for approval at a Special Meeting of Stockholders on
December 15, 1997.
Item 6 (a). EXHIBITS
Not Applicable.
Item 6 (b). REPORTS ON FORM 8-K
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAULDING INC.
BY: /s/Richard F. Moldin November 4, 1997
Richard F. Moldin
President and Chief Executive Officer
(Principal Executive Officer)
BY: /s/Paul Astley November 4, 1997
Paul Astley
Chief Financial Officer
(Principal Accounting Officer)
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