SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________.
COPLEY PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2514637
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 John Road
Canton, Massachusetts 02021
(Address of principal executive offices) (Zip Code)
Commission file number: 0-20126
Registrant's telephone number, including area code: (617) 821-6111
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
------ ------
The number of shares outstanding of the registrant's only class of common
stock as of July 31, 1996 was 19,073,146 shares.
<PAGE 2>
COPLEY PHARMACEUTICAL, INC.
INDEX
For the Six Months Ended June 30, 1996
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30,
1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Changes in Financial Condition 10 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
<PAGE 3>
PART 1. Item 1. Condensed Consolidated Financial Statements
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Unaudited
(In thousands, except share data) JUNE 30, DECEMBER 31,
1996 1995
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,386 $ 18,950
Trading securities 833 950
Available-for-sale securities 107 5,147
Accounts receivable, trade, net 31,691 32,639
Accounts receivable, related party 392 826
Inventories:
Raw materials 13,549 13,634
Work in process 4,433 4,913
Finished goods 10,110 8,679
------- -------
Total inventories 28,092 27,226
Prepaid income taxes 1,392 3,259
Current deferred tax assets 4,166 2,900
Other current assets 7,384 4,789
------- -------
Total current assets 82,443 96,686
Property, plant and equipment, net 57,136 55,724
Deferred tax assets 339 1,484
Other assets 3,492 1,351
------- -------
Total assets $143,410 $155,245
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 6,013 $ 10,551
Accounts payable, related party 9,790 11,191
Current portion of long-term debt 300 300
Accrued compensation and benefits 1,539 2,003
Accrued rebates 3,605 7,980
Accrued expenses 5,455 5,296
------- -------
Total current liabilities 26,702 37,321
Long-term debt 5,400 5,400
Shareholders' equity:
Preferred stock, $.01 par value; authorized
3,000,000 shares; none issued --- ---
Common stock, $.01 par value; authorized
60,000,000 shares; issued 25,370,745 shares 254 254
Additional paid-in capital 77,652 77,505
Unrealized holding gain on available-for-sale
securities 68 108
Retained earnings 45,915 47,242
Treasury stock, at cost, 6,297,599 and 6,307,045
shares outstanding, at June 30, 1996 and December
31, 1995,respectively (12,581) (12,585)
------- -------
Total shareholders' equity 111,308 112,524
------- -------
Total liabilities and shareholders' equity $143,410 $155,245
======= =======
</TABLE>
[FN]
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE 4>
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the three For the six
months ended months ended
June 30, (Unaudited) June 30,
1996 1995 (In thousands, except per share data) 1996 1995
- - ------- ------- -------- --------
<C> <C> <S> <C> <C>
Net sales:
$22,608 $18,863 Manufactured products $40,049 $35,265
12,703 16,285 Distributed products 19,609 30,776
------ ------ ------ ------
35,311 35,148 Net sales 59,658 66,041
Cost of goods sold:
16,914 12,033 Manufactured products 32,136 21,889
8,395 10,457 Distributed products 12,872 19,924
------ ------ ------ ------
25,309 22,490 Cost of goods sold 45,008 41,813
------ ------ ------ ------
10,002 12,658 Gross profit 14,650 24,228
Operating expenses:
3,298 3,239 Research and development 7,202 5,718
Selling, marketing and
1,618 1,529 distribution 3,671 3,164
2,421 3,588 General and administrative 5,031 5,198
(255) 2,010 Recall related and litigation, net (64) 3,510
------ ------ ------ ------
2,920 2,292 Income (loss) from operations (1,190) 6,638
144 216 Interest income, net 262 421
(288) (43) Other income (expense), net (1,319) (21)
------ ------ ------ ------
2,776 2,465 Income (loss) before income taxes (2,247) 7,038
1,074 960 Provision (benefit) for income taxes (920) 2,618
------ ------ ------ ------
$ 1,702 $ 1,505 Net income (loss) $(1,327) $ 4,420
====== ====== ====== ======
Weighted average common
shares outstanding:
19,269 19,267 Primary 19,071 19,239
19,269 19,326 Fully diluted 19,071 19,292
Earnings (loss) per share:
$0.09 $0.08 Primary $(0.07) $0.23
$0.09 $0.08 Fully diluted $(0.07) $0.23
</TABLE>
[FN]
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE 5>
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the six
months ended
(Unaudited) June 30,
(In thousands) 1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,327) $4,420
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 3,532 2,255
Realized loss on sales of assets 518 221
Change in deferred taxes (121) 42
Tax benefit from stock option exercises --- 185
Changes in operating assets and liabilities:
Accounts receivable 1,382 (3,306)
Inventories (866) 3,349
Prepaid income taxes 1,867 1,056
Other current assets (2,595) (5,651)
Other assets, net of amortization (2,150) 1,177
Accounts payable, trade (4,538) 3,697
Accounts payable, related party (1,401) (80)
Accrued expenses (4,171) (6,935)
------ ------
Net cash (used in) provided by operating
activities (9,870) 430
------ ------
Cash flows from investing activities:
Capital expenditures (5,845) (11,080)
Purchases of available-for-sale securities --- (18,412)
Proceeds from sales of available-for-sale securities --- 19,780
Proceeds from maturities of available-for-sale
securities 5,000 2,652
------ ------
Net cash used in investing activities (845) (7,060)
------ ------
Cash flows from financing activities:
Stock option exercises --- 344
Issuance of common stock to Employee Stock Purchase Plan 151 154
------ ------
Net cash provided by financing activities 151 498
------ ------
Net decrease in cash and cash equivalents (10,564) (6,132)
Cash and cash equivalents at beginning of period 18,950 6,217
------ ------
Cash and cash equivalents at end of period $ 8,386 $ 85
====== ======
</TABLE>
[FN]
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE 6>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 1996
Note A - General
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all normal and recurring adjustments
necessary to present fairly the financial position of the Company as of
June 30, 1996 and December 31, 1995 and the results of its operations for
the three and six months ended June 30, 1996 and 1995, and its cash flows
for the six months ended June 30, 1996 and 1995. While the Company believes
that the disclosures presented are adequate to make the information not
misleading, these financial statements should be read in conjunction with
the Notes included in the Company's Form 10-K for the year ended December
31, 1995. The results for the three-month and six-month periods ended June
30, 1996 are not necessarily indicative of the results that may be expected
for any future period.
Note B - Related Party Transactions
On July 18, 1995, Hoechst Corporation ("HC"), the Company's 51% fully-diluted
shareholder, completed its purchase of Marion Merrell Dow, Inc. ("MMD"). This
transaction resulted in a related party relationship between the Company and
its customer Rugby Laboratories ("Rugby"), which was a subsidiary of MMD and
is now a subsidiary of Hoechst Marion Roussel, Inc. ("HMRI"). Net sales to
Rugby totaled approximately $904,000 for the six months ended June 30, 1996.
Total amounts due from Rugby at June 30, 1996 and December 31, 1995, were
$392,000 and $826,000, respectively.
The Company is a party to a Product Agreement with HC pursuant to which the
Company is afforded the opportunity under specified conditions to distribute
and market the generic version of certain products sold by HMRI, a majority-
owned subsidiary of HC. For the six months ended June 30, 1996 and 1995,
approximately $13.4 million and $19.7 million, respectively, of generic
versions of products were purchased from HMRI under this Product Agreement.
The Company obtains its comprehensive general liability, product liability,
excess liability and all risks property insurance coverage through an
insurance and risk-sharing arrangement with HC and its parent, Hoechst
Aktiengesellschaft, and its various subsidiaries. Insurance coverage is
provided by HC through its wholly-owned insurance subsidiary, as well as
by external parties. Total premiums expensed for these insurance policies
aggregated approximately $2,521,000 and $581,000, respectively, for the six
months ended June 30, 1996 and 1995.
Note C - Debt
On July 31, 1996 the Company amended its working capital line of credit
agreement to increase its maximum borrowing capacity from $20.0 million
to $30.0 million. At June 30, 1996 the Company had $17.1 million in
stand-by letters of credit related to the Albuterol Settlement Trust
Fund (see Note D) outstanding under this working capital line of credit
agreement.
Note D - Litigation and Contingencies
Albuterol Class Action Lawsuits
In connection with the Company's product recall of albuterol sulfate
inhalation solution, 0.5% ("albuterol"), the Company has been served
in numerous lawsuits in federal and state court, some of which are on
behalf of numerous claimants. The plaintiffs principally seek compensatory
and punitive damages and allege that injuries and deaths were caused by
inhalation of allegedly contaminated product manufactured and distributed
by the Company.
<PAGE 7>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 1996
The federal court lawsuits were consolidated in the United States District
Court for the District of Wyoming as a multi-district litigation for pre-
trial purposes under the caption "In Re: Copley Pharmaceutical, Inc.
"Albuterol" Products Liability Litigation". The District Court certified
the consolidated actions as a class action. In August 1995 the Company
entered into a settlement agreement with the representative class plaintiffs.
The settlement calls for the Company to receive a general release of all
non-death claims in return for contributions by the Company and its insurers
of a minimum of $65 million and a maximum of $130 million to settle all non-
death claims relating to the Company's manufacture, sale and recall of
albuterol. An additional $20 million is allocated under the terms of the
settlement to settle claims by persons alleging wrongful death, which
claims are limited by the settlement to compensatory damages only and are
subject to nonbinding negotiation and arbitration. Within the Company's
minimum and maximum contributions, the amount to be paid by the Company
is subject to revision based upon the number and seriousness of individual
claims eventually filed. On November 15, 1995, the District Court entered
its Order giving final approval of the settlement; an appeal of this Order
has been filed by one class member and the Company is awaiting disposition
as of August 14, 1996.
The settlement agreement required that the $150 million maximum contribution
be funded by an initial $50 million cash deposit and issuance of letters of
credit for the remaining balance, to be held by the Albuterol Settlement
Trust Fund ("the Settlement Fund") as security for potential future payments.
The Company paid $5.1 million to the Settlement Fund and obtained $17.1
million in irrevocable letters of credit during 1995 to cover its uninsured
obligation to fund the settlement agreement. When the order approving the
settlement becomes final and nonappealable, the Company will be required to
make an additional $2.25 million cash deposit with a corresponding reduction
to its outstanding letters of credit. The Company accrued for this cash
deposit in 1995. These cash contributions totaling $7.35 million will be
nonrefundable pursuant to the terms of the settlement agreement.
The period for filing initial proofs of claim with the Special Master
appointed to oversee the Settlement Fund closed on January 3, 1996 and
approximately 5,220 claims were filed. Another 260 claims, approximately,
were filed late. In addition, approximately 860 clients of Jacoby & Meyers,
representing nearly all of that firm's clients who are not alleging a death
caused by albuterol, have agreed to be treated as if they were class members
and class counsel have agreed that these claimants will be paid out of the
Settlement Fund.
Recourse to the remaining letters of credit will not occur until all claims
are processed and settlement amounts are recommended by the Special Master,
and is contingent on the number of claims filed within certain categories.
Although the total number of claims filed against the Settlement Fund is
less than the number of claims for which the settling parties anticipated
would be necessary to require the maximum funding of the Settlement Fund,
at this time the Company is unable to determine how many of these claims
will be awarded damages by the Special Master and, if awarded damages, how
much will be given to various claimants. In addition, administrative fees
and class action attorney fees and expenses will be paid out of the
Settlement Fund. Accordingly, the Company cannot predict the total amount
to be paid out of the Settlement Fund.
The settlement is also subject to certain other contingencies and does not
cover certain individuals who previously opted out of the class action. The
Company continues to be a defendant in lawsuits that were brought by or on
behalf of approximately 65 people who properly opted out of the class
action. The Company denies liability in these cases and is vigorously
defending itself. The Company reserved $1.1 million during 1995 for the
estimated uninsured costs associated with these cases. The reserve was
based on the number of outstanding opt-out claims, anticipated insurance
coverage and recent settlement amounts. Actual settlement or judgment
amounts may differ from the amounts estimated. There can be no assurance
that the Company will prevail in these lawsuits or that an adverse outcome
would not result in significant monetary damages or have a material adverse
effect on the Company's financial condition or results of operations.
<PAGE 8>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 1996
Grand Jury Investigation
The Company has received grand jury subpoenas from the United States
Attorney's Office in Massachusetts for documents related to its albuterol
and Brompheril (registered trademark) products, which were recalled by the
Company in December 1993 and September 1994, respectively, and extending
beyond these products. The Company is complying with the subpoenas and has
cooperated with federal authorities. This investigation is ongoing and at
this time management is unable to determine the ultimate impact on the
Company's financial condition and results of operations. Accordingly, no
amounts have been accrued for this matter in the Company's financial
statements at June 30, 1996. An adverse determination by applicable
authorities could result in material sanctions and/or fines.
Shareholders' Lawsuit
In April 1993, three former shareholders of the Company filed a lawsuit
against the Company and certain of its officers and directors in the
United States District Court for the Southern District of New York.
Ladenburg, Thalmann & Co., Inc., a former financial advisor to the
plaintiffs, was also named as a defendant in the complaint. The complaint
alleges that the Company and certain of its officers and directors committed
fraud and breached their fiduciary duties to the plaintiffs in connection
with the Company's November 1991 repurchase of shares then representing the
equivalent of 168,750 current shares of common stock from the plaintiffs by
making false and misleading statements and failing to disclose material
facts regarding the Company and its prospects.
The complaint seeks monetary damages in excess of $10 million, rescission
of the November 1991 share repurchase, unspecified punitive damages and
costs, disbursements and attorney's fees. The Company filed a motion for
summary judgment in August 1994 which was granted in part and denied in
part in an opinion dated October 11, 1995. A trial is tentatively scheduled
for 1996.
The Company and its officers and directors believe that they have meritorious
defenses to any claims by the former shareholders based on the November 1991
repurchase, that any such claims are without merit, and that the Company
and its officers and directors should prevail in any such lawsuits. However,
there can be no assurance that the Company and its officers and directors
will prevail in any such lawsuits or that an adverse outcome would not
result in significant monetary damages or have a material adverse effect
on the Company's financial condition or results of operations.
Marion Merrell Dow, Inc. Bulk Diltiazem Lawsuit
In November of 1992, a lawsuit was filed against the Company by MMD and
Tanabe Seiyaku Co., Ltd. ("Tanabe") in the United States District Court
for the District of Massachusetts captioned "Marion Merrell Dow, Inc.
and Tanabe Seiyaku Co., Ltd. v. Copley Pharmaceutical, Inc. and Orion
Corporation Fermion". MMD and Tanabe allege that the Company and Orion
Corporation Fermion ("Orion"), the manufacturer of the Company's bulk
diltiazem, are infringing a process patent for one method of manufacturing
bulk diltiazem. MMD and Tanabe have alleged that they are the exclusive
licensee and patentee, respectively, of such process patent. The complaint
seeks a permanent injunction and trebled unspecified monetary damages. The
Company has denied all liability in its answer to the complaint. On May 10,
1993, the Court ordered the case administratively closed, staying the case
until further notice. On June 27, 1995, the parties jointly moved the Court
for an Order further staying the action until 30 days after completion of
the related International Trade Commission proceeding discussed below.
<PAGE 9>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 1996
International Trade Commission Complaint
On February 25, 1993, the Company, together with a number of other off-patent
pharmaceutical manufacturers and certain chemical manufacturers, was named
as a respondent in a complaint filed by MMD and Tanabe before the United
States International Trade Commission ("the ITC") captioned "Complaint of
Marion Merrell Dow, Inc. and Tanabe Seiyaku Co., Ltd.". Pursuant to Section
337 of the Tariff Act of 1930. The complaint seeks an order (i) prohibiting
the importation of, among other things, the bulk diltiazem purchased by the
Company from Orion, and (ii) requiring the Company to immediately stop
selling its current diltiazem product, which incorporates bulk diltiazem
supplied by Orion, based on the alleged infringement by Orion of a process
patent for one method of manufacturing bulk diltiazem.
On June 1, 1995, the ITC issued its Final Determination ordering the
investigation terminated with the finding of no violation of Section 337,
of no patent infringement and taking no position on the issue of patent
validity and enforceability. On July 20, 1995, MMD and Tanabe filed an
appeal with the United States Court of Appeals for the Federal Circuit
seeking review of the ITC's Final Determination. This has been fully
briefed and argued and the parties are awaiting a decision.
Orion has agreed at its expense to defend the Company in this action and
the MMD Bulk Diltiazem Lawsuit discussed previously and to indemnify the
Company for any damages that might be assessed as a result of the Company's
sale of diltiazem obtained from Orion. Although the Company's management
believes that these complaints are without merit, that the Company and
Orion have meritorious defenses to these actions, and that the Company
should prevail in these lawsuits, there can be no assurance that the Company
will prevail or that an adverse outcome would not have a material adverse
effect on the Company's financial condition or results of operations.
Other Legal Proceedings
The Company is subject to other legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management, the
results of such proceedings will not have a material adverse effect on
the Company's financial condition or results of operations.
<PAGE 10>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION
Item 2. Management's Discussion and Analysis of Results of Operations and
Changes in Financial Condition
Results of Operations
<TABLE>
Net Sales
- - ---------------------------------------------------------------------------------------
<CAPTION>
For the quarter For the six
ended (In thousands) months ended
June 30, Increase June 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$22,608 $18,863 19.9 % Manufactured products $40,049 $35,265 13.6 %
12,703 16,285 (22.0)% Distributed products 19,609 30,776 (36.3)%
------ ------ ------ ------
$35,311 $35,148 0.5 % Net sales $59,658 $66,041 (9.7)%
=======================================================================================
</TABLE>
Net sales for the second quarter of 1996 were $35.3 million, compared to
$35.1 million for the same period in 1995. Although the Company's sales
continue to be adversely affected by the significant price decrease on
glyburide, the Company's major distributed product, as well as price erosion
experienced across the Company's product line, new products and overall
volume increases on existing products offset these pricing pressures.
During the second quarter of 1996, the Company launched two new products:
nadolol tablets, the off-patent version of Bristol-Myers Squibb's Corgard
(registered trademark), and minoxidil topical solution 2% for men, the
off-patent version of Pharmacia and Upjohn's Rogaine (registered trademark).
More recently, the Company announced the availability of prochlorperazine
maleate tablets, the off-patent version of SmithKline Beecham's Compazine
(registered trademark).
The Company's net sales were $59.7 million for the six-month period ended
June 30, 1996 as compared to $66.0 million for the same period in 1995.
Although the Company has launched new products during this six-month period,
revenue generated from these products was not sufficient to offset the
overall price erosion on the Company's product line, most notably glyburide.
<TABLE>
Gross Profit
- - ---------------------------------------------------------------------------------------
<CAPTION>
For the quarter For the six
ended (In thousands) months ended
June 30, Increase June 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$ 5,694 $ 6,830 (16.6)% Manufactured products $ 7,913 $13,376 (40.8)%
As a % of manufactured
25.2% 36.2% products net sales 19.8% 37.9%
- - ---------------------------------------------------------------------------------------
$ 4,308 $ 5,828 (26.1)% Distributed products $ 6,737 $10,852 (37.9)%
As a % of distributed
33.9% 35.8% products net sales 34.4% 35.3%
- - ---------------------------------------------------------------------------------------
$10,002 $12,658 (21.0)% Gross profit $14,650 $24,228 (39.5)%
28.3% 36.0% As a % of net sales 24.6% 36.7%
=======================================================================================
</TABLE>
<PAGE 11>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (Continued)
The Company's gross profit was $10.0 million, or 28.3% of net sales, for
the second quarter of 1996 as compared to $12.7 million, or 36.0% of net
sales, for the same period in 1995. The decrease was primarily attributable
to narrowing margins caused by intensified price competition on the Company's
products and by increased product liability insurance premiums resulting from
the prior years' legal proceedings. Additionally, the Company's gross profit
for the second quarter of 1996 included a $500,000 inventory write-down of
a product in a currently saturated market.
For the six-month period ended June 30, 1996, the Company's gross profit was
$14.7 million, or 24.6% of net sales, as compared to $24.2 million or 36.7%
of net sales a year earlier. Intensified price competition, lower margins
on products manufactured in the previous year, the $500,000 inventory
write-down, and increased product liability insurance premiums have all
depressed the Company's gross profit.
<TABLE>
Operating Expenses
- - ---------------------------------------------------------------------------------------
<CAPTION>
For the quarter For the six
ended (In thousands) months ended
June 30, Increase June 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$3,298 $3,239 1.8 % Research and development $7,202 $5,718 26.0 %
9.3% 9.2% As a % of net sales 12.1% 8.7%
- - ---------------------------------------------------------------------------------------
Selling, marketing and
$1,618 $1,529 5.8 % distribution $3,671 $3,164 16.0 %
4.6% 4.4% As a % of net sales 6.2% 4.8%
- - ---------------------------------------------------------------------------------------
$2,421 $3,588 (32.5)% General and administrative $5,031 $5,198 (3.2)%
6.9% 10.2% As a % of net sales 8.4% 7.9%
- - ---------------------------------------------------------------------------------------
Recall related and
$ (255) $2,010 (113)% litigation, net $ (64) $3,510 (102)%
(0.7)% 5.7% As a % of net sales (0.1)% 5.3%
=======================================================================================
</TABLE>
For the three months ended June 30, 1996, research and development expenses
were $3.3 million as compared to $3.2 million for the prior year comparable
period. For the six-month period, research and development expenses were
$7.2 million as compared to $5.7 million reported in the prior year. The
spending increase was primarily due to increased product validation costs
and increased personnel expenses.
Selling, marketing and distribution expenses increased to $1.6 million for
the second quarter of 1996 as compared to $1.5 million for the same period
in 1995. For the six-month period ended June 30, 1996, selling, marketing
and distribution expenses increased to $3.7 million from $3.2 million
reported in the prior year. The increase was primarily attributable to
increased advertising and promotional expenses.
General and administrative expenses were $2.4 million for the second quarter
of 1996 as compared to $3.6 million for the same period in 1995. This
decrease was primarily attributable to overall spending reductions. For the
six-month period ended June 30, 1996, general and administrative expenses
totaled $5.0 million compared to $5.2 million a year earlier.
Net recall related and litigation expenses in 1996 were primarily legal
expenses incurred by the Company for representation in its various
outstanding legal proceedings offset by $1.6 million of negotiated
insurance recoveries. Net recall related and litigation expenses in 1995
consisted primarily of legal expenses incurred by the Company for
representation in the albuterol sulfate inhalation solution, 0.5% product
liability claims.
<PAGE 12>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (Continued)
<TABLE>
Interest and Other Income, Net
- - ---------------------------------------------------------------------------------------
<CAPTION>
For the quarter For the six
ended (In thousands) months ended
June 30, Increase June 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$ 144 $ 216 (33.3)% Interest income, net $ 262 $421 (37.8)%
- - ---------------------------------------------------------------------------------------
$(288) $ (43) --- Other income (expense) $(1,319) $(21) ---
=======================================================================================
</TABLE>
Net interest income totaled $144,000 for the second quarter of 1996 compared to
$216,000 for the same period in 1995. For the six-month period ended June 30,
1996, net interest income totaled $262,000 as compared to $421,000 a year
earlier. The decreases were primarily attributable to decreased cash
available to invest.
Other expenses of $1.3 million for the six months ended June 30, 1996 was
primarily comprised of $1.0 million incurred in connection with the
evaluation of a possible business consolidation which the Company has
decided not to pursue at this time.
<TABLE>
Income Taxes
- - ---------------------------------------------------------------------------------------
<CAPTION>
For the quarter For the six
ended (In thousands) months ended
June 30, Increase June 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
Income tax expense
$1,074 $ 960 11.9% (benefit) $ (920) $2,618 (135)%
- - ---------------------------------------------------------------------------------------
38.7% 38.9% Effective tax rate (40.9)% 37.2%
- - ---------------------------------------------------------------------------------------
$1,702 $1,505 13.1% Net income (loss) $(1,327) $4,420 (130)%
=======================================================================================
</TABLE>
For the second quarter of 1996, the Company's effective tax rate was 38.7%
versus 38.9% for the prior year comparable period. For the six-month period
ended June 30, 1996, the effective tax rate was (40.9%) versus 37.2% for the
prior year comparable period. The change in effective tax rates was primarily
due to the decline in profitability.
For the second quarter of 1996, the Company's net income totaled $1.7 million
or $0.09 per share as compared to $1.5 million or $0.08 per share for the
same period in 1995. Excluding net recall related and litigation expenses,
net income would have been $1.5 million, or $0.08 per share, and $2.7 million,
or $0.14 per share, for the second quarter of 1996 and 1995, respectively.
Intensified price competition, increased product liability insurance premiums
and a $500,000 inventory write-down contributed to the decline in earnings.
For the six-month period ended June 30, 1996, the Company reported a net
loss of $1.3 million or $0.07 per share as compared to net income of $4.4
million or $0.23 per share for the same period in 1995. Sluggish first
quarter sales hindered by intensified pricing competition depressed the
Company's results for the first half of 1996. The first quarter was also
adversely affected by lower margins on products manufactured in the
previous year.
<PAGE 13>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (Continued)
Changes in Financial Condition
Capital Resources and Liquidity
<TABLE>
<CAPTION>
Unaudited
June 30, December 31,
(In thousands) 1996 1995
--------- ------------
<S> <C> <C>
Cash and short-term investments $ 9,326 $ 25,047
Working capital 55,741 59,365
Long-term debt 5,400 5,400
Shareholders' equity 111,308 112,524
</TABLE>
Working capital decreased $3.7 million from $59.4 million at December 31,
1995 to $55.7 million at June 30, 1996. The decrease was primarily due to
the net operating losses experienced by the Company during the first half
of 1996 as well as investment in planned capital expenditures.
On July 31, 1996 the Company amended its working capital line of credit
agreement to increase its maximum borrowing capacity from $20.0 million
to $30.0 million. At June 30, 1996 the Company had $17.1 million in stand-by
letters of credit related to the Albuterol Settlement Trust Fund outstanding
under this working capital line of credit agreement. These stand-by letters
of credit were obtained by the Company pursuant to the requirements of the
Albuterol Settlement Trust Fund to cover its uninsured obligation. Recourse
to the letters of credit are contingent on the number of claims filed within
certain categories and will not occur until all claims are processed and
settlement amounts are recommended by the Special Master.
The Company believes that its current cash resources, cash generated from
operations and the amount available under its amended working capital line
of credit will be sufficient to meet its anticipated operating needs for
the next twelve months. However, there can be no assurance that events in
the future will not require the Company to seek additional capital sooner,
or, if so required, that such capital will be available on terms favorable
or acceptable to the Company, if at all.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See descriptions of legal proceedings in Note D of Notes to Condensed
Consolidated Financial Statements in Part I of this Form 10-Q, which
are hereby incorporated by reference herein.
<PAGE 14>
PART II. OTHER INFORMATION (Continued)
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on April
30, 1996.
(b) (1) The following individuals were re-elected to the Board of
Directors. The number of votes cast for the re-election of
each of the above directors was as follows:
Director For Against Abstained
-------- ----- ------- ---------
Gabriel R. Cipau * 14,206,777 381,624 11,275
Judith W. Fensterer 14,544,948 44,077 10,651
Alban W. Schuele 14,566,709 20,136 12,831
* Dr. Cipau resigned as an officer and director effective July 9, 1996.
(c) (3) The selection of the firm of KPMG Peat Marwick LLP as auditors
for the fiscal year ending December 31, 1996 was ratified by
the following vote:
Number of Shares
----------------
For 14,555,894
Against 38,313
Abstained 5,469
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Fourth Amendment to Amended and Restated Loan Agreement
dated as of July 31, 1996 by and between the Company
and the First National Bank of Boston ("Bank of
Boston").
10.2 Third Amendment to Amended and Restated Promissory Note
dated as of July 31, 1996 by and between the Company
and Bank of Boston.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE 15>
SIGNATURE
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.
Signature Title
/s/ Barbara Sherrill
- - ------------------------- Executive Vice President-Finance
Barbara Sherrill and Chief Financial Officer
August 14, 1996
EXHIBIT 10.1
FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT
This Amendment is made as of July 31, 1996 by and between
COPLEY PHARMACEUTICAL, INC., a Delaware corporation with its
principal office at 25 John Road, Canton, Massachusetts (the
"Borrower"), and THE FIRST NATIONAL BANK OF BOSTON, a national
banking association with its principal office at 100 Federal
Street, Boston, Massachusetts (the "Bank").
R E C I T A L S
A. The Bank and the Borrower are parties to a certain
Amended and Restated Loan Agreement dated August 17, 1993, as
amended by a certain First Amendment to Amended and Restated Loan
Agreement dated June 29, 1995, a certain Second Amendment to
Amended and Restated Loan Agreement dated August 30, 1995 and a
certain Third Amendment to Amended and Restated Loan Agreement
dated March 25, 1996 (as amended, the "Loan Agreement").
Capitalized terms used herein without definition have the meaning
assigned to them in the Loan Agreement.
B. The Borrower has requested certain amendments to the
Loan Agreement as set forth herein.
C. Subject to certain terms and conditions, the Bank is
willing to agree to the same, as hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
I. AMENDMENTS TO LOAN AGREEMENT. The Borrower and the Bank
agree that the Loan Agreement shall be amended as follows:
1. Definition of Commitment. The definition of
"Commitment" in Section 1.1 of the Loan Agreement is hereby
amended to read in its entirety as follows:
"Commitment: $30,000,000."
2. Definition of Maturity Date. The definition of
"Maturity Date" in Section 1.1 of the Loan Agreement is hereby
amended to read in its entirety as follows:
"Maturity Date: August 2, 1998."
3. Interest. Section 2.3(b) of the Loan Agreement
regarding the rate of interest on LIBOR Loans is hereby amended
to read in its entirety as follows:
"(b) To the extent that all or any portion of the Loan is a
LIBOR Loan, the Loan or such portion shall bear interest
during such Interest Period at the rate per annum equal to the
LIBOR Rate at the inception of such Interest Period plus three-
quarters of one percent (.75%)."
4. Amendment of Financial Covenant. Section 9.1 of the
Loan Agreement is hereby deleted in its entirety and replaced
with the following:
"Section 9.1. Consolidated Tangible Net Worth. The Borrower
shall at all times maintain Consolidated Tangible Net Worth of at
least (i) $80,000,000 plus (ii) fifty percent (50%) of
Consolidated Net Income of the Borrower and its Subsidiaries for
each fiscal quarter ending after September 30, 1995. Any
Consolidated Deficits for a fiscal quarter shall not reduce the
amount of Consolidated Tangible Net Worth to be maintained
pursuant to this Section 9.1."
II. NO FURTHER AMENDMENTS. Except as specifically amended
herein, all terms and conditions of the Loan Agreement shall
remain in full force and effect as originally constituted. Each
reference in the Loan Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Loan Agreement
shall mean and be a reference to the Loan Agreement as amended by
this Fourth Amendment, and each reference in any other Loan
Document to the Loan Agreement, "thereunder", "thereof" or words
of like import referring to the Loan Agreement shall mean and be
a reference to the Loan Agreement as amended by this Fourth
Amendment.
III. MISCELLANEOUS.
1. The Borrower represents and warrants that no event has
occurred or failed to occur, which constitutes, or which, solely
with the passage of time or the giving of notice (or both) would
constitute, an Event of Default.
2. The execution and delivery of this Fourth Amendment by
the Borrower has been duly authorized by all requisite corporate
action of the Borrower, is legal, valid and binding on the
Borrower, and will not violate any provision of law, any order,
judgment or decree of any court or other agency of government, or
the organizational documents of the Borrower or any other
instrument to which the Borrower is a party, or by which the
Borrower is bound.
3. The representations and warranties contained in Section
6 of the Loan Agreement are true and correct in all material
respects on and as of the date of this Fourth Amendment as though
made on and as of such date (except to the extent that such
representations and warranties expressly relate to an earlier
date or except to the extent variations therefrom have been (i)
permitted under the terms of Loan Agreement, (ii) otherwise
approved in writing by the Bank or (iii) reflected in reports
filed by the Borrower with the Securities and Exchange
Commission).
4. As provided in the Loan Agreement, the Borrower agrees
to reimburse the Bank upon demand for all out-of-pocket costs,
charges, liabilities, taxes and expenses of the Bank (including
reasonable fees and disbursements of counsel to the Bank) in
connection with the preparation, negotiation, interpretation,
execution and delivery of this Fourth Amendment and any other
agreements, instruments or documents executed pursuant or
relating hereto.
5. The Borrower represents, warrants, and agrees that the
Borrower has no claims, defenses, counterclaims or offsets
against the Bank in connection with the Loan Agreement or the
Obligations, and, to the extent that any such claim, defense,
counterclaim or offset may exist, the Borrower hereby
affirmatively WAIVES AND RELEASES Bank from the same.
This Fourth Amendment shall take effect as a sealed
instrument under the laws of the Commonwealth of Massachusetts as
of the date first above written.
COPLEY PHARMACEUTICAL, INC.
By: /s/ Barbara Sherrill
-----------------------
Barbara Sherrill,
Executive Vice President-Finance and
Chief Financial Officer
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Jeffrey R. Westling
-------------------------
Jeffrey R. Westling,
Director
EXHIBIT 10.2
THIRD AMENDMENT TO AMENDED AND RESTATED PROMISSORY NOTE
This Amendment is made as of July 31, 1996 by and between
COPLEY PHARMACEUTICAL, INC., a Delaware corporation (the
"Borrower"), and THE FIRST NATIONAL BANK OF BOSTON, a national
banking association (the "Bank").
WHEREAS, the Bank and the Borrower entered into a certain
loan arrangement on August 17, 1993, as amended, which is
evidenced, in part, by a certain Amended and Restated Promissory
Note dated August 17, 1993 made by the Borrower, as amended by a
certain First Amendment to Amended and Restated Promissory Note
dated June 29, 1995 and a certain Second Amendment to Amended and
Restated Promissory Note dated August 31, 1995 in the principal
amount of $20,000,000 (as amended, the "Note"), and a certain
Amended and Restated Loan Agreement dated August 17, 1993 between
the Borrower and the Bank, as amended by a certain First
Amendment to Amended and Restated Loan Agreement dated June 29,
1995, a certain Second Amendment to Amended and Restated Loan
Agreement dated August 31, 1995 and a certain Third Amendment to
Amended and Restated Loan Agreement dated March 25, 1996 (as
amended, the "Loan Agreement"); and
WHEREAS, the Bank and the Borrower have on this date amended
the Loan Agreement pursuant to a certain Fourth Amendment to
Amended and Restated Loan Agreement; and
WHEREAS, the Borrower and Bank are desirous of amending the
Note in the manner set forth below:
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
Borrower and the Bank agree as follows:
1. From and after the date hereof, the $20,000,000
principal amount of the Note reflected in the upper left hand
corner thereof shall be amended to read "$30,000,000".
2. The Note is further amended by deleting the first
paragraph thereof in its entirety and replacing it with the
following:
"FOR VALUE RECEIVED, COPLEY PHARMACEUTICAL, INC., a Delaware
corporation having a principal office at 25 John Road, Canton,
Massachusetts (referred to as the "Borrower"), hereby
unconditionally promises to pay to the order of THE FIRST
NATIONAL BANK OF BOSTON (hereinafter, together with its
successors-in-title and assigns the "Bank") at the head office of
the Bank, at 100 Federal Street, Boston, Massachusetts, the
principal sum of THIRTY MILLION DOLLARS ($30,000,000), or, if
less, the aggregate unpaid principal amount of advances hereunder
made by the Bank to the Borrower under the Amended and Restated
Loan Agreement dated August 17, 1973 between the Borrower and the
Bank, as amended by a certain First Amendment to Amended and
Restated Loan Agreement dated June 29, 1995, a certain Second
Amendment to Amended and Restated Loan Agreement dated August 31,
1995, a certain Third Amendment to Amended and Restated Loan
Agreement dated March 25, 1996 and a certain Fourth Amendment to
Amended and Restated Loan Agreement dated June 28, 1996 (as now
or hereafter amended the "Agreement"). Capitalized terms used
herein and not otherwise defined herein shall have the meanings
assigned to them in the Agreement. Unless otherwise provided
herein, the rules of interpretation set forth in Section 1.2 of
the Agreement shall be applicable to this Note."
3. Except as specifically provided herein, all terms and
conditions of the Note shall remain in full force and effect and
are hereby ratified and confirmed. On and after the date hereof,
each reference in the Note to "this Note", "hereunder", "hereof"
or words of like import referring to the Note, shall mean and be
a reference to the Note as amended by this Third Amendment, and
each reference in the Loan Agreement and any other loan documents
between the Borrower and the Bank, to the Note, "thereunder",
"thereof" or words of like import referring to the Note shall
mean and be a reference to the Note as amended by this Third
Amendment.
3. This Third Amendment shall take effect as a sealed
instrument under the laws of the Commonwealth of Massachusetts as
of the date first written above.
COPLEY PHARMACEUTICAL, INC.
By: /s/ Barbara Sherrill
----------------------
Barbara Sherrill,
Executive Vice President-Finance and
Chief Financial Officer
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Jeffrey R. Westling
-----------------------------
Jeffrey R. Westling, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS, STATEMENT OF OPERATIONS AND
STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 8386
<SECURITIES> 940
<RECEIVABLES> 32583
<ALLOWANCES> (500)
<INVENTORY> 28092
<CURRENT-ASSETS> 82443
<PP&E> 76515
<DEPRECIATION> (19379)
<TOTAL-ASSETS> 143410
<CURRENT-LIABILITIES> 26702
<BONDS> 0
0
0
<COMMON> 254
<OTHER-SE> 111054
<TOTAL-LIABILITY-AND-EQUITY> 143410
<SALES> 59658
<TOTAL-REVENUES> 59658
<CGS> 45008
<TOTAL-COSTS> 45008
<OTHER-EXPENSES> 15840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2247)
<INCOME-TAX> (920)
<INCOME-CONTINUING> (1327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1327)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
