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 September 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 October 31, 1996 was 19,088,579 shares.
<PAGE 2>
COPLEY PHARMACEUTICAL, INC.
INDEX
For the Nine Months Ended September 30, 1996
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30,
1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 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) SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,456 $ 18,950
Trading securities --- 950
Available-for-sale securities 7,614 5,147
Accounts receivable, trade, net 27,380 32,639
Accounts receivable, related party 132 826
Inventories:
Raw materials 14,087 13,634
Work in process 3,452 4,913
Finished goods 10,285 8,679
------- -------
Total inventories 27,824 27,226
Prepaid income taxes --- 3,259
Current deferred tax assets 4,494 2,900
Other current assets 4,755 4,789
------- -------
Total current assets 85,655 96,686
Property, plant and equipment, net 57,114 55,724
Deferred tax assets 79 1,484
Other assets 3,384 1,351
------- -------
Total assets $146,232 $155,245
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 5,509 $ 10,551
Accounts payable, related party 10,021 11,191
Current portion of long-term debt 300 300
Accrued compensation and benefits 1,135 2,003
Accrued rebates 5,145 7,980
Accrued income taxes 980 ---
Accrued expenses 6,049 5,296
------- -------
Total current liabilities 29,139 37,321
Long-term debt 5,100 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 77,801 77,505
Unrealized holding (loss) gain on available-
for-sale securities (16) 108
Retained earnings 46,528 47,242
Treasury stock, at cost, 6,282,166 and
6,307,045 shares outstanding, at September
30, 1996 and December 31, 1995,respectively (12,574) (12,585)
------- -------
Total shareholders' equity 111,993 112,524
------- -------
Total liabilities and shareholders' equity $146,232 $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 nine
months ended months ended
September 30, (Unaudited) September 30,
1996 1995 (In thousands, except per share data) 1996 1995
- - ------- ------- -------- --------
<C> <C> <S> <C> <C>
Net sales:
$19,558 $20,450 Manufactured products $59,607 $ 55,714
13,031 18,782 Distributed products 32,640 49,559
------ ------ ------ -------
32,589 39,232 Net sales 92,247 105,273
Cost of goods sold:
15,998 16,270 Manufactured products 48,134 38,158
8,671 12,155 Distributed products 21,543 32,079
------ ------ ------ -------
24,669 28,425 Cost of goods sold 69,677 70,237
------ ------ ------ -------
7,920 10,807 Gross profit 22,570 35,036
Operating expenses:
3,003 3,804 Research and development 10,205 9,522
Selling, marketing and
1,416 603 distribution 5,087 3,767
3,270 2,256 General and administrative 8,301 7,454
175 12,827 Recall related and litigation, net 111 16,338
------ ------ ------ -------
56 (8,683) Income (loss) from operations (1,134) (2,045)
71 375 Interest and investment income 452 944
(63) (67) Interest expense (182) (215)
1,008 249 Other income (expense), net (311) 228
------ ------ ------ -------
1,072 (8,126) Income (loss) before income taxes (1,175) (1,088)
458 (2,880) Provision (benefit) for income taxes (462) (262)
------ ------ ------ -------
$ 614 $(5,246) Net income (loss) $ (713) $ (826)
====== ====== ====== =======
Weighted average common
shares outstanding:
19,225 19,060 Primary 19,075 18,949
19,261 19,060 Fully diluted 19,075 18,949
Earnings (loss) per share:
$0.03 $(0.28) Primary $(0.04) $(0.04)
$0.03 $(0.28) Fully diluted $(0.04) $(0.04)
</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 nine
months ended
(Unaudited) September 30,
(In thousands) 1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (713) $ (826)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 5,324 3,964
Realized loss on sales of assets 952 2,787
Provision for doubtful accounts 696 ---
Change in deferred taxes (189) (46)
Tax benefit from stock option exercises --- 185
Changes in operating assets and liabilities:
Accounts receivable 5,257 (12,880)
Inventories (598) 7,071
Other current assets 34 (12,508)
Other assets, net of amortization (2,046) 1,059
Accounts payable, trade (5,042) 6,213
Accounts payable, related party (1,170) 4,437
Accrued income taxes 4,239 (1,736)
Accrued expenses (2,442) 1,371
------ ------
Net cash provided by (used in) operating
activities 4,302 (909)
------ ------
Cash flows from investing activities:
Capital expenditures (7,921) (15,357)
Proceeds from sales of property, plant and equipment 10 500
Purchases of available-for-sale securities (7,606) (19,172)
Proceeds from sales of available-for-sale securities 715 42,385
Proceeds from maturities of available-for-sale
securities 5,000 3,224
------ ------
Net cash (used in) provided by investing activities (9,802) 11,580
------ ------
Cash flows from financing activities:
Payments of long-term debt (300) (300)
Stock option exercises --- 344
Issuance of common stock to Employee Stock Purchase Plan 306 301
Proceeds from short-term borrowings --- 4,542
Payments of short-term borrowings --- (4,542)
------ ------
Net cash provided by financing activities 6 345
------ ------
Net (decrease) increase in cash and cash equivalents (5,494) 11,016
Cash and cash equivalents at beginning of period 18,950 6,217
------ ------
Cash and cash equivalents at end of period $ 13,456 $17,233
====== ======
</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 nine months ended September 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 September 30,
1996 and December 31, 1995 and the results of its operations for the three and
nine months ended September 30, 1996 and 1995, and its cash flows for the nine
months ended September 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 nine-month periods ended September 30, 1996
are not necessarily indicative of the results that may be expected for any
future period.
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could have a material adverse effect on the Company's
business, financial condition, results of operations and stock price.
Statements in this Report on Form 10-Q which are not historical facts, so-
called "forward-looking statements," are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties, including those detailed in the Company's filings with the
Securities and Exchange Commission. See, for example, "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Risk Factors and Future Trends" contained in the Company's Report on Form 10-K
for the fiscal year ended December 31, 1995.
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 $986,000 and $3.3 million for the nine months
ended September 30, 1996 and 1995, respectively. Total amounts due from Rugby
at September 30, 1996 and December 31, 1995, were $132,000 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 nine months ended September 30, 1996 and 1995,
approximately $22.0 million and $31.9 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 $3.8 million and $1.9 million, respectively, for the
nine months ended September 30, 1996 and 1995. During the third quarter of
1995, HC's insurance subsidiary, as one of the Company's insurers, funded $16
million of the initial cash requirement to the Albuterol Settlement Trust
Fund. See discussion of the albuterol settlement in Note C.
Note C - 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
<PAGE 7>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the nine months ended September 30, 1996
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.
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, filed by one class member, was dismissed in September
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 310 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 nine months ended September 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 any uninsured costs in the Company's financial statements at September 30,
1996. An adverse determination by applicable authorities could result in
sanctions and/or fines which could have a material adverse effect on the
Company's financial condition or results of operations.
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. The case is awaiting trial.
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 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 nine months ended September 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 appeal 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.
Note D - Restructuring Charges in the Fourth Quarter
In response to increasing pricing pressures and eroding margins, the Company
is restructuring its operations resulting in an estimated $3.0 million to $4.0
million before tax charge, or $0.09 per share to $0.13 per share after taxes,
in the fourth quarter of 1996. The restructuring includes the consolidation of
warehouse, manufacturing and office sites as well as the write-off of
underutilized and idle equipment. Some reduction in the work force will also
occur.
<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 nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$19,558 $20,450 (4.4)% Manufactured products $59,607 $ 55,714 7.0 %
13,031 18,782 (30.6)% Distributed products 32,640 49,559 (34.1)%
------ ------ ------ ------
$32,589 $39,232 (16.9)% Net sales $92,247 $105,273 (12.4)%
=======================================================================================
</TABLE>
Net sales for the third quarter of 1996 were $32.6 million, compared to $39.2
million for the same period in 1995. 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. Additionally, another manufacturer launched
a new product which competes directly with a major manufactured product,
miconazole nitrate vaginal cream, the off-patent version of R.W. Johnson's
Monistat (registered trademark) 7, which is a seven-day treatment for vaginal
yeast infections. The launching of this new product, which is a three-day
treatment, negatively impacted the Company's sales and unit volume during the
third quarter. The Company expects this negative impact to continue.
During the third quarter of 1996, the Company launched prochlorperazine
maleate tablets, the off-patent version of SmithKline Beecham's
Compazine(registered trademark). More recently, the Company announced the
Food and Drug Administration approval for its Abbreviated New Drug Application
to manufacture and market cholestyramine powder. Cholestyramine powder is the
off-patent version of Bristol-Myers Squibb Company's Questran (registered
trademark).
The Company's net sales were $92.2 million for the nine-month period ended
September 30, 1996 as compared to $105.3 million for the same period in 1995.
Although the Company has launched six new products and has experienced steady
growth in unit sales during 1996, net sales declined due to intensified
pricing pressure experienced on the Company's product line.
<TABLE>
Gross Profit
- - ---------------------------------------------------------------------------------------
<CAPTION>
For the quarter For the nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$ 3,560 $ 4,180 (14.8)% Manufactured products $11,473 $17,556 (34.6)%
As a % of manufactured
18.2% 20.4% products net sales 19.2% 31.5%
- - ---------------------------------------------------------------------------------------
$ 4,360 $ 6,627 (34.2)% Distributed products $11,097 $17,480 (36.5)%
As a % of distributed
33.5% 35.3% products net sales 34.0% 35.3%
- - ---------------------------------------------------------------------------------------
$ 7,920 $10,807 (26.7)% Gross profit $22,570 $35,036 (35.6)%
24.3% 27.5% As a % of net sales 24.5% 33.3%
=======================================================================================
</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 $7.9 million, or 24.3% of net sales, for the
third quarter of 1996 as compared to $10.8 million, or 27.5% of net sales, for
the same period in 1995. The decrease was primarily attributable to narrowing
margins caused by price erosion on the Company's products and an $837,000
charge related to short-dated inventory of a product in a currently saturated
market. The Company's gross profit for the third quarter of 1995 reflected a
$2.5 million write-off of albuterol materials inventory following
management's decision not to reintroduce this recalled product.
For the nine-month period ended September 30, 1996, the Company's gross profit
was $22.6 million, or 24.5% of net sales, as compared to $35.0 million or
33.3% of net sales a year earlier. Intensified price competition, lower
margins on products manufactured in the previous year but not sold until the
current year, and the $1.5 million cumulative charge related to short-dated
inventory of a product in a currently saturated market have all depressed the
Company's gross profit. The current environment of intensified price
competition is anticipated to continue.
<TABLE>
Operating Expenses
- - ---------------------------------------------------------------------------------------
<CAPTION>
For the quarter For the nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$3,003 $ 3,804 (21.1)% Research and development $10,205 $ 9,522 7.2 %
9.2% 9.7% As a % of net sales 11.1% 9.0%
- - ---------------------------------------------------------------------------------------
Selling, marketing and
$1,416 $ 603 135 % distribution $ 5,087 $ 3,767 35.0 %
4.3% 1.5% As a % of net sales 5.5% 3.6%
- - ---------------------------------------------------------------------------------------
$3,270 $ 2,256 44.9 % General and administrative $ 8,301 $ 7,454 11.4 %
10.0% 5.8% As a % of net sales 9.0% 7.1%
- - ---------------------------------------------------------------------------------------
Recall related and
$ 175 $12,827 (98.6)% litigation, net $ 111 $16,338 (99.3)%
0.5% 32.7% As a % of net sales 0.1% 15.5%
=======================================================================================
</TABLE>
For the three months ended September 30, 1996, research and development
expenses were $3.0 million as compared to $3.8 million for the prior year
comparable period. Spending for the third quarter of 1995 included higher
product validation costs related to the two products launched late in the
quarter and the one product launched in October 1995. For the nine-month
period, research and development expenses were $10.2 million as compared to
$9.5 million reported in the prior year. The spending increase was primarily
due to increased personnel expenses.
Selling, marketing and distribution expenses increased to $1.4 million for the
third quarter of 1996 as compared to $0.6 million for the same period in 1995.
The third quarter of 1995 was uncharacteristically low due to the timing of
product promotional expenses. For the nine-month period ended September 30,
1996, selling, marketing and distribution expenses increased to $5.1 million
from $3.8 million reported in the prior year. The increase was primarily
attributable to higher advertising and promotional expenses resulting from the
intensified competitive environment.
General and administrative expenses were $3.3 million for the third quarter of
1996 as compared to $2.3 million for the same period in 1995. For the nine-
month period ended September 30, 1996, general and administrative expenses
totaled $8.3 million compared to $7.5 million a year earlier. The increases
were primarily attributable to charges recorded as a result of a major
customer's filing for bankruptcy protection during the third quarter and for
severance packages for employees who resigned during the quarter.
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 $3.6 million of negotiated insurance recoveries.
Net recall and litigation expenses in 1995 included the following: $5.1
million contributed to Albuterol Settlement Trust Fund; $2.75 million cost to
settle the shareholder class action litigation; $2.9 million in write-offs of
albuterol-related equipment; and approximately $5.6 million in legal expenses
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 nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
Interest and investment
$ 71 $375 (81.1)% income $ 452 $ 944 (52.1)%
- - ---------------------------------------------------------------------------------------
$ (63) $(67) (6.0)% Interest expense $(182) $(215) (15.3)%
- - ---------------------------------------------------------------------------------------
$1,008 $249 --- Other income (expense) $(311) $ 228 ---
=======================================================================================
</TABLE>
Interest and investment income totaled $71,000 for the third quarter of 1996
compared to $375,000 for the same period in 1995. For the nine-month period
ended September 30, 1996, interest and investment income totaled $452,000 as
compared to $944,000 a year earlier. The decreases were primarily attributable
to decreased average cash available to invest.
Other income of $1.0 million for the third quarter of 1996 was primarily
comprised of the settlement of an insurance claim. For the nine months ended
September 30, 1996, other expenses included expenses incurred in connection
with the evaluation of a possible business consolidation which the Company
has decided not to pursue at this time, substantially offset by the settlement
of an unrelated insurance claim.
<TABLE>
Taxes and Net Income (Loss)
- - ---------------------------------------------------------------------------------------
<CAPTION>
For the quarter For the nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1996 1995 (Decrease) (Unaudited) 1996 1995 (Decrease)
- - ---------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$ 458 $(2,880) 116% Income tax expense $(462) $(262) (76.3)%
- - ---------------------------------------------------------------------------------------
42.7% (35.4)% Effective tax rate (39.3)% (24.1)%
- - ---------------------------------------------------------------------------------------
$ 614 $(5,246) 112% Net income (loss) $(713) $(826) 13.7 %
=======================================================================================
</TABLE>
For the third quarter of 1996, the Company's effective income tax (benefit)
rate was 42.7% versus (35.4)% for the prior year comparable period. For the
nine-month period ended September 30, 1996, the effective income tax (benefit)
rate was (39.3)% versus (24.1)% a year earlier. The tax rate differences
resulted from the change in the projected profitability of the Company in 1996
versus 1995.
For the third quarter of 1996, the Company's net income totaled $614,000 or
$0.03 per share as compared to a net loss of $5.2 million or $0.28 per share
for the same period in 1995. Excluding net recall related and litigation
expenses, net income would have been $719,000 or $0.04 per share, and $2.5
million or $0.13 per share, for the third quarter of 1996 and 1995,
respectively. The Company's profitability continues to be adversely affected
by intensified price competition. Other factors affecting the quarterly
results included the negative impact of the filing for bankruptcy by a major
customer offset by the settlement of an unrelated insurance claim.
For the nine-month period ended September 30, 1996, the Company reported a net
loss of $713,000 or $0.04 per share as compared to a net loss of $826,000 or
$0.04 per share for the same period in 1995. Sluggish sales and narrowing
margins both caused by intensified pricing competition continued to depress
the Company's profitability. The net loss reported for 1995 was primarily
caused by unusual and significant expenses incurred related to the settlement
and defense of various litigation matters and the decision not to reintroduce
a recalled product.
<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
September 30, December 31,
(In thousands) 1996 1995
------------- ------------
<S> <C> <C>
Cash and short-term investments $ 21,070 $ 25,047
Working capital 56,516 59,365
Long-term debt 5,100 5,400
Shareholders' equity 111,993 112,524
</TABLE>
Working capital decreased $2.9 million from $59.4 million at December 31, 1995
to $56.5 million at September 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 September 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.
Restructuring Charges in the Fourth Quarter
In response to increasing pricing pressures and eroding margins, the Company
is restructuring its operations resulting in an estimated $3.0 million to $4.0
million before tax charge, or $0.09 per share to $0.13 per share after taxes,
in the fourth quarter of 1996. The restructuring includes the consolidation of
warehouse, manufacturing and office sites as well as the write-off of
underutilized and idle equipment. Some reduction in the work force will also
occur.
Factors Affecting Future Results
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could have a material adverse effect on the Company's
business, financial condition, results of operations and stock price.
Statements in this Report on Form 10-Q which are not historical facts, so-
called "forward-looking statements," are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties, including those detailed in the Company's filings with the
Securities and Exchange Commission. See, for example, "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Risk Factors and Future Trends" contained in the Company's Report on Form 10-K
for the fiscal year ended December 31, 1995.
<PAGE 14>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See descriptions of legal proceedings in Note C of Notes to Condensed
Consolidated Financial Statements in Part I of this Form 10-Q, which are
hereby incorporated by reference herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated July 9, 1996 - Item 5: Other Events. The
Company announced that Kenneth N. Larsen will assume the
office of the President on an interim basis in place of Dr.
Gabriel R. Cipau, who has resigned all positions in the
Company.
Form 8-K dated September 6, 1996 - Item 5: Other Events.
The Company announced that Ken E. Starkweather has accepted
the position of Vice President - Finance, succeeding Barbara
Sherrill, who has resigned all positions in the Company.
<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 Date
/s/ Ken E. Starkweather
- - ------------------------- Vice President-Finance November 14, 1996
Ken E. Starkweather (Principal Financial Officer
and duly authorized officer
of the Registrant)
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 13456
<SECURITIES> 7614
<RECEIVABLES> 28708
<ALLOWANCES> (1196)
<INVENTORY> 27824
<CURRENT-ASSETS> 85655
<PP&E> 78170
<DEPRECIATION> (21056)
<TOTAL-ASSETS> 146232
<CURRENT-LIABILITIES> 29139
<BONDS> 0
0
0
<COMMON> 254
<OTHER-SE> 111739
<TOTAL-LIABILITY-AND-EQUITY> 146232
<SALES> 92247
<TOTAL-REVENUES> 92247
<CGS> 69677
<TOTAL-COSTS> 69677
<OTHER-EXPENSES> 23704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 182
<INCOME-PRETAX> (1175)
<INCOME-TAX> (462)
<INCOME-CONTINUING> (713)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (713)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
