SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
FISCAL YEAR ENDED DECEMBER 31, 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 (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
25 JOHN ROAD 02021
CANTON, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
COMMISSION FILE NUMBER: 0-20126
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 821-6111
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
AGGREGATE MARKET VALUE, AS OF MARCH 14, 1997, OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT:
$56,454,684.00 BASED ON THE LAST REPORTED SALE PRICE ON THE NASDAQ STOCK MARKET.
Number of shares of common stock outstanding on March 14, 1997: 19,119,235
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the twelve-month period ended
December 31, 1996. Portions of such Proxy Statement are incorporated by
reference in Part III of this report.
<PAGE>
PART 1
ITEM 1: BUSINESS
OVERVIEW
Copley Pharmaceutical, Inc. ("Copley" or the "Company"), established in 1972,
develops, manufactures, markets and distributes a broad range of multi-source
pharmaceutical products. These products include prescription and
over-the-counter ("OTC") drugs and are available in a variety of dosage forms
consisting of tablets, solutions, suspensions, syrups, elixirs, jellies, creams
and ointments and powders. The Company's product categories include, among
others, preparations for neoplasms, endocrine system and metabolic diseases,
anti-infective agents, central nervous system and sense organ drugs, respiratory
system drugs, cardiovascular system drugs, vitamins and nutrients, skin
preparations and digestive and genito-urinary system drugs. The Company sells
its products to prescription and OTC drug distributors, retail chains,
wholesalers, hospitals, health maintenance organizations ("HMOs"), other managed
care entities and government agencies.
Multi-source, or generic, drugs are the chemical and therapeutic equivalents
of brand-name drugs. They are required to meet similar governmental standards as
the brand-name drugs and must receive Food and Drug Administration ("FDA")
approval prior to manufacture and sale. Multi-source drugs may be manufactured
and marketed only if relevant patents (and any additional government-mandated
market exclusivity periods) have expired. These drugs are typically sold under
their generic chemical names at prices significantly below those of their
brand-name equivalents.
Statements in this Report on Form 10-K 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 also "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Risk Factors and
Future Trends."
GENERIC DRUG MARKET
Generic pharmaceutical sales have increased significantly in recent years, due
in part to an increased awareness and acceptance among consumers, physicians and
pharmacists that generic drugs are the therapeutic equivalents of brand-name
drugs. Among the factors contributing to this increased awareness are the
passage of state legislation permitting or encouraging substitution by
pharmacists and the FDA publication of a list of therapeutic equivalent drugs,
which provides physicians and pharmacists with generic drug alternatives. In
addition, since generic pharmaceutical products are typically sold at prices
significantly below those of their brand-name equivalents, various government
agencies and many private managed care or insurance programs encourage the
prescribing of generic drugs as a cost-savings measure in the purchase of, or
reimbursement for, prescription drugs. The Company believes that these factors,
coupled with the future patent expirations on widely prescribed brand-name
products, will continue to influence the growth in the market for generic drugs.
PRODUCT DEVELOPMENT STRATEGY AND PRODUCTS
The Company's product development strategy will continue to emphasize multiple
approaches for developing and marketing new drugs. The Company's principal focus
is to obtain FDA approval to market equivalent formulations of prescription
drugs through the Abbreviated New Drug Application ("ANDA") process.
Specifically, the Company will seek a balance between niche products with
limited competition and high-volume pharmaceutical products. Additional
strategies include plans to introduce OTC drugs once their brand-name
equivalents are converted from prescription to OTC status, to market generic
versions of certain drugs now manufactured by Hoechst Marion Roussel, Inc.
("HMRI"), a subsidiary of Hoechst Aktiengesellschaft, the Company's indirect 51%
fully diluted shareholder, pursuant to the Product Agreement(1) between Copley
and Hoechst Corporation ("HC"), and to develop, manufacture and market products
for sale outside of the United States, expanding the Company's business into
markets which are less heavily penetrated and not as highly competitive as the
U.S. market.
(1)In connection with HC's acquisition of its majority interest in the Company,
the Company is party to a Product Agreement with HC pursuant to which the
Company is afforded the opportunity to distribute and market the generic
version of products sold by Hoechst-Roussel Pharmaceutical Inc. ("HRPI"), an
indirect majority owned subsidiary of HC. This Product Agreement has an
initial term of five years, until November 11, 1998, and continues unless
terminated by either party giving one year's notice. On January 1, 1996, HRPI
was merged into HMRI. HMRI has agreed to be bound by the Product Agreement to
the extent that HRPI was bound; that is, the Product Agreement continues to
be in effect for products manufactured by the former HRPI but not for
products manufactured by HMRI prior to the merger with HRPI nor for products
developed by HMRI after January 1, 1996. In furtherance of the Product
Agreement, the Company and HMRI entered into separate contracts relating to
specific products as these products become available for generic
distribution; some of these contracts currently are being renegotiated. Refer
to Note J of the Notes to Consolidated Financial Statements.
1
<PAGE>
ANDA-Approved Drugs
The Company's core business will remain the development and marketing of generic
prescription drugs. The Company will continue to focus on niche products that
offer a significant opportunity for the Company but which may not necessarily
attract larger or numerous competitors, either because the market for such drugs
is relatively small or because the products employ extended release or other
complex delivery systems that are difficult to formulate. The Company will also
focus on high-volume pharmaceutical products to respond to customer demand that
suppliers carry a broad array of products.
Prescription to OTC Conversion
The Company believes that a substantial number of drugs will be reclassified
from prescription to OTC over the next several years. The Company believes the
OTC market will expand as consumers more readily choose self-treatment and as
drug companies and healthcare payors urge the FDA to accelerate the approval of
OTC products. The Company has experience in this marketplace, having marketed
several OTC products, including miconazole nitrate vaginal cream, the generic
equivalent of Ortho McNeil's Monistat(R)7 and minoxidil topical solution 2% for
men, the off-patent version of Pharmacia & Upjohn's Rogaine(R). In addition, the
Company believes that private label store brands will continue to gain market
share within the OTC market.
Generic Versions of HMRI Drugs
The Company's Product Agreement with HC affords the Company the opportunity
under specified conditions to distribute and market certain HMRI drug products
which HMRI desires to sell in generic form or which become subject to
multi-source competition or which HMRI decides to prelaunch in generic version
before the relevant patent expires. The Company markets glyburide, the generic
version of HMRI's DiaBeta(R); HMRI's micronized glyburide, the therapeutic
equivalent of Pharmacia & Upjohn's Glynase(R) and, in the first quarter of 1996,
commenced marketing Evalose(R) and Heptalac(R), the generic versions of HMRI's
Chronulac(R) and Cephulac(R). (Evalose(R) and Heptalac(R) are purchased from
HMRI but are not covered under the Product Agreement.) Additionally, the Company
expects to market pentoxifylline, the generic version of HMRI's Trental(R), some
time after its patent expiration in 1997.
Non-U.S. Markets
The Company plans to continue to develop, manufacture and market products for
sale outside of the United States through its wholly-owned subsidiary, Copley
Pharmaceutical International, Inc. The Company has entered into certain
collaborative arrangements in China and certain republics of the former Soviet
Union. In addition, the Company sells a limited number of its products
internationally through distributors. Refer to Note J of the Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
As of March 14, 1997 the Company's products include the following:
- ------------------------------------------------------------------------------------------------
Number
of Dosage
Products Strengths Brand Name/Company
- --------------------------------------------- ----------- --------------------------------
Preparations for Neoplasms, Endocrine System and Metabolic Diseases
- -------------------------------------------------------------------
<S> <C>
glyburide tablets 3 DiaBeta(R)/HMRI
hydrocortisone enema suspension 1 Cortenema(R)/Solvay
micronized glyburide tablets 2 GluBate(R)/HMRI
Glynase(R)/Pharmacia & Upjohn
Anti-Infective Agents
- ---------------------
amantadine HCl syrup 1 Symmetrel(R)/DuPont Merck
hydroxychloroquine sulfate tablets 1 Plaquenil(R)/Sanofi-Winthrop
mebendazole tablets 1 Vermox(R)/Janssen Research
miconazole nitrate vaginal cream 1 Monistat(R) 7/Ortho McNeil
Central Nervous System and Sense Organ Drugs
- --------------------------------------------
doxepin HCl oral solution 1 Sinequan(R)/Pfizer
ethosuximide syrup 1 Zarontin(R)/Parke-Davis
fluphenazine HCl concentrate oral solution 1 Prolixin(R)/Apothecon
fluphenazine HCl elixir 1 Prolixin(R)/Apothecon
haloperidol oral solution 1 Haldol(R)/McNeil
methazolamide tablets 2 Neptazane(R)/Storz-Lederle
naproxen tablets 3 Naprosyn(R)/Roche
prochlorperazine maleate tablets 2 Compazine(R)/SmithKline Beecham
thioridazine HCl oral solution 1 Mellaril(R)/Sandoz
thiothixene HCl oral solution 1 Navane(R)/Pfizer
valproic acid syrup 1 Depakene(R)/Abbott
- ------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Number
of Dosage
Products Strengths Brand Name/Company
- --------------------------------------------- ----------- -------------------------------------------
<S> <C>
Respiratory System Drugs
- ------------------------
bromatapp extended release ("ER") tablets 1 Dimetapp Extentabs(R)/Whitehall Robins
clemastine fumarate syrup 1 Tavist(R)/Sandoz
doxylamine succinate tablets 1 Unisom(R)/Pfizer
R-tannate pediatric suspension 1 Rynatan(R)/Wallace
R-tannate tablets 1 Rynatan(R)/Wallace
Vitamins and Nutrients
- ----------------------
B-complex vitamins plus tablets 1 Berocca(R) Plus/Roche
fluoride tablets 1 Luride(R)/Colgate
multivitamins with fluoride tablets 2 Poly-Vi-Flor(R) /Mead Johnson
multivitamins with fluoride & iron tablets 2 Poly-Vi-Flor(R)with Iron/ Mead Johnson
potassium chloride ER tablets 1 Slow-K(R)/Summit
prenatal plus iron tablets 1 Stuartnatal(R) Plus/Wyeth-Ayerst
prenatal Rx tablets 1 Natalins(R) Rx/Mead Johnson
prenatal Z tablets 1 Zenate(R)/Solvay
sodium fluoride drops 1 Luride(R)/Colgate
Cardiovascular System Drugs
- ---------------------------
captopril tablets 4 Capoten(R)/Bristol-Myers Squibb
diltiazem HCl tablets 4 Cardizem(R)/HMRI
guanabenz acetate tablets 2 Wytensin(R)/Wyeth-Ayerst
nadolol tablets 3 Corgard(R)/Bristol-Myers Squibb
procainamide HCl ER tablets 3 Procan(R)SR/Parke-Davis
quinidine sulfate ER tablets 1 Quinidex Extentabs(R)/Robins
Skin Preparations
- -----------------
clindamycin phosphate topical solution 1 Cleocin-T(R)/Pharmacia & Upjohn
clobetasol propionate cream 1 Temovate(R)/Glaxo-Wellcome
clobetasol propionate ointment 1 Temovate(R)/Glaxo-Wellcome
lidocaine HCl jelly 1 Xylocaine(R)/Astra
minoxidil topical solution 2% for men 1 Rogaine(R)/Pharmacia & Upjohn
silver nitrate solution 1 silver nitrate
Digestive and Genito-Urinary System Drugs
- -----------------------------------------
cholestyramine powder 1 Questran(R)/Bristol-Myers Squibb
Evalose(R)solution 1 Chronulac(R)/HMRI
Heptalac(R)solution 1 Cephulac(R)/HMRI
Oral and Dental Agents
- ----------------------
acidulated phosphate fluoride oral rinse 1 Phos-Flur(R)/Colgate
Diagnostic Substances
- ---------------------
copper sulfate solution 1 copper sulfate
- -----------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
For the year ended December 31, 1996, preparations for neoplasms, endocrine
system and metabolic diseases, anti-infective agents and central nervous system
and sense organ drugs accounted for 36.8%, 22.8% and 10.6% of net sales,
respectively. Preparations for neoplasms, endocrine system and metabolic
diseases, anti-infective agents and respiratory system drugs accounted for
47.0%, 15.5% and 10.6% of net sales, respectively, for the year ended December
31, 1995. Preparations for neoplasms, endocrine system and metabolic diseases,
respiratory system drugs and vitamins and nutrients accounted for 44.9%, 15.4%
and 12.2% of net sales, respectively, for the eleven-month period ended December
31, 1994. No other single therapeutic category accounted for 10% or more of the
Company's net sales during such periods.
In December 1993, the Company commenced a voluntary recall of certain lots of
its 20 ml vials of albuterol sulfate inhalation solution, 0.5% ("albuterol"). In
January 1994, the Company expanded its recall to all lots of this product and
the FDA assigned a Class I classification to the recall. The Company detected
the presence of microbial organisms in tests of certain vials of the product and
it was determined, in accordance with FDA policies, that a product recall was
appropriate. In connection with the recall, the Company has been served in
numerous lawsuits. The Company has also received grand jury subpoenas from the
United States Attorney's office in Massachusetts for documents relating to this
and other products. Albuterol was not manufactured by the Company after the
recall, and in the third quarter of 1995 the Company announced that it would not
seek to manufacture this product in the future. This decision was based on a
number of factors, including changed market conditions and the availability and
cost of future product liability insurance.
In September 1994, the Company initiated a Class II voluntary recall of its
Brompheril(R) OTC extended release antihistamine product due to a lack of
assurance that the coating process was conducted in accordance with the
manufacturing batch records. The production and shipment of this product have
been suspended. The Company has received grand jury subpoenas from the United
States Attorney's office in Massachusetts for documents relating to
Brompheril(R) and other products. The Company continues to cooperate with the
United States Attorney's office and is engaged in ongoing discussions about a
possible resolution. Refer to Note L of Notes to Consolidated Financial
Statements for further discussion of the United States Attorney's office
investigation.
RESEARCH AND DEVELOPMENT
For the years ended December 31, 1996 and 1995, and for the eleven-month period
ended December 31, 1994, the Company incurred $13.7 million, $13.3 million and
$9.1 million of research and development expenditures, respectively. This level
of research and development spending as a percentage of manufacturing net sales
exceeds the generic pharmaceutical industry average.
The Company's research and development activities consist primarily of
developing new drug products and improving existing products' manufacturing
processes. The development of new prescription ANDA products, including
formulation, bioequivalence and stability testing and the FDA approval process,
averages from two to five years. The costs associated with establishing and
operating research and development laboratories for analytic chemistry and
formulations, conducting biostudies, complying with FDA procedures, completing
scale-up and process development, building modern manufacturing plants and
hiring, employing and training technical and scientific staff members have
increased in recent years.
STRATEGIC ALTERNATIVES
On October 31, 1996, the Company announced that it had retained Oppenheimer &
Co. to evaluate strategic alternatives for the Company, including possible
business alliances.
MARKETING AND DISTRIBUTION
The Company markets its products to approximately 300 customers. For the year
ended December 31, 1996, 36% of net sales were to drug wholesalers, 35% to
retail chains, 19% to multi-source distributors of the Company's prescription
drugs, 9% to private label store brand distributors of the Company's OTC
products and the remaining 1% to government agencies, hospitals and HMOs. The
Company sells its drug products under its own "Copley" label and through private
label arrangements with multi-source distributors. For the year ended December
31, 1996, no single customer accounted for 10% or more of the Company's net
sales. The Company does not believe that the loss of any one customer would have
a material adverse effect on the Company's business or operations.
4
<PAGE>
Customer service activities are an integral part of the Company's marketing
operations. The Company uses its best efforts to maintain adequate inventories,
make timely delivery of its products and provide technical and other service
support to its customers. The Company has completed the update of its material
requirements planning ("MRP") systems which facilitated the reduction of its
backlog orders and has enhanced its customer service levels.
BACKLOG ORDERS
The net dollar amount of backlog orders for the Company's products as of
December 31, 1996 was approximately $1.0 million as compared with $5.6 million
as of December 31, 1995. The Company's backlog orders consist of those orders
received by the Company but which the Company was unable to ship by the date
requested by its customer. Although these orders are subject to cancellation
without penalty, management expects to fill substantially all of such orders
within the current fiscal year.
RAW MATERIALS
The raw materials essential to the Company's business are purchased primarily
from U.S. distributors of bulk pharmaceutical chemicals manufactured abroad.
Arrangements with foreign raw material suppliers are subject to risk, including
the applicability of FDA, customs and other United States or foreign
governmental statutes, regulations and clearances, the imposition of export and
import duties, political and social instability, possible currency fluctuations
and restrictions on the transfer of funds. In addition, the European Community
regulatory action to extend the exclusivity period of patented pharmaceuticals,
which is dependent upon implementation by the member countries, may make it
increasingly difficult to obtain certain raw materials prior to the expiration
of the applicable European patents. The Company's efforts to develop, to obtain
FDA approval for, and to manufacture new products could be delayed if the
Company were unable to obtain the necessary raw materials from foreign sources.
Since the FDA's drug application process requires specification of raw
material suppliers, if raw materials from a specified supplier were to become
unavailable, the Company would be required to file a supplement to its product
filing and revalidate the manufacturing process using the new supplier's
materials. This could cause a delay of several months in the manufacture of the
drug involved and the consequent loss of potential revenue and market share. The
Company attempts to specify two raw material suppliers in all drug applications
when a second source has been identified.
PERSONNEL
As of February 28, 1997, the Company had 473 full-time and 8 part-time
employees. Of these, 77 were involved in research and development, 210 in
production, 85 in quality affairs, 23 were in sales and marketing, 42 in
administration and 44 in facilities maintenance and engineering.
COMPETITION
The Company competes with the original manufacturers of brand-name drugs that
continue to be produced after patent expirations, brand-name pharmaceutical
companies that manufacture generic drugs, other generic manufacturers and
manufacturers of therapeutically similar drugs that may compete with the
Company's drugs. The principal competitive factors in the generic pharmaceutical
industry are the ability to introduce equivalents of brand-name drugs promptly
after patent expiration, price, product quality, breadth of product line,
customer service and reputation.
A number of the Company's competitors, including generic divisions and
subsidiaries of large brand-name pharmaceutical companies, have substantially
greater resources to devote to product development, manufacturing and marketing
than the Company. The industry is characterized by rapid technological advances
and by the frequent introduction of new products. The Company's competitors may
develop their products more rapidly or complete the regulatory approval process
sooner, and therefore market their products earlier. New drugs, future
developments in alternative drug delivery technologies or other therapeutic
techniques may provide therapeutic or cost advantages to competing products.
Some brand-name competitors try to prevent or discourage the use of generic
equivalents through litigation and negative public relations campaigns. Some
brand-name competitors have bundled the sale of generic and patented products
and also have introduced generic versions of their own branded products prior to
the expiration of the patents for such drugs, which have resulted in a greater
market share for these companies following expiration of the applicable patents.
The Company is witnessing a consolidation of its customers, as chain drug
stores and wholesalers merge or consolidate. In addition, a number of the
Company's customers have instituted source programs which limit the number of
suppliers of generic pharmaceutical products carried by that customer. As a
result of these developments, there is heightened competition among generic drug
producers for the business of this smaller and more selective customer base.
5
<PAGE>
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally the FDA and, to a lesser extent, by state and
local governments. The Federal Food, Drug and Cosmetic Act and other federal
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, recordkeeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production and/or distribution, refusal of the government
to enter into supply contracts or to approve New Drug Applications ("NDA") or
ANDAs, and criminal prosecution. The FDA also has the authority to revoke
previously granted drug approvals. Changes in FDA procedures have increased the
time and expense involved in obtaining ANDA approvals and in complying with the
FDA's current Good Manufacturing Practice ("cGMP") standards. The ANDA drug
development and approval process now averages approximately two to five years.
FDA approval is required before each dosage form of any new drug can be
marketed. Applications for FDA approval must contain information relating to
bioequivalency, product formulation, raw material suppliers, stability,
manufacturing processes, packaging, labeling and quality control. FDA procedures
require full-scale manufacturing equipment to be used to produce test batches
for FDA approval. Validation of manufacturing processes by the FDA also is
required before a Company can market new products. The FDA conducts pre- and
post-approval reviews and plant inspections to implement these rules.
Supplemental filings for approval to transfer products from one manufacturing
site to another may be under review for a year or more, and certain products may
only be approved for transfer if new bioequivalency studies are done. The FDA
also has increased the number of regular inspections to determine compliance
with its cGMP standards.
The Hatch-Waxman Act of 1984 extended the established abbreviated application
procedure for obtaining FDA approval for generic forms of brand-name drugs
originally marketed before 1962 which are off-patent or whose market exclusivity
has expired. This act also provides market exclusivity provisions which could
preclude the submission or delay the approval of a competing ANDA. One such
provision allows a five-year market exclusivity period for NDAs involving new
chemical compounds and a three-year market exclusivity period for new drug
applications (including different dosage forms) containing new clinical
investigations essential to the approval of the application. The market
exclusivity provisions apply equally to patented and nonpatented drug products.
Another provision may extend patents for up to five years as compensation for
reduction of the effective life of the patent as a result of time spent by the
FDA reviewing a drug application. Patents may also be extended pursuant to the
terms of the Uruguay Round Agreements Act.
The Generic Drug Enforcement Act of 1992 establishes penalties for wrongdoing
in connection with the development or submission of an ANDA by authorizing the
FDA to permanently or temporarily debar companies or individuals from submitting
or assisting in the submission of an ANDA, and to temporarily deny approval and
suspend applications to market multi-source drugs. The FDA may suspend the
distribution of all drugs approved or developed in connection with certain
wrongful conduct and also has authority to withdraw approval of an ANDA under
certain circumstances. The FDA can also significantly delay the approval of a
pending NDA or ANDA under its "Fraud, Untrue Statements of Material Facts,
Bribery, and Illegal Gratuities Policy." Manufacturers of drugs must also comply
with the FDA's cGMP standards or risk sanctions such as the suspension of
manufacturing or the seizure of drug products and the FDA's refusal to approve
additional ANDAs.
Products marketed outside the United States which are manufactured in the
United States are subject to various export statutes and regulations, as well as
regulation by the country in which the products are to be sold.
Medicaid, Medicare and other reimbursement legislation or programs govern
reimbursement levels, including requiring that all pharmaceutical manufacturers
rebate to individual states a percentage of their revenues arising from
Medicaid-reimbursed drug sales. The required rebate for generic drug
manufacturers is currently 11% of average net sales price for products marketed
under ANDAs. For products marketed under NDAs, manufacturers are required to
rebate the greater of 15.1% of average net sales price or, the difference
between average net sales price and the lowest net sales price during a
specified period. The Company believes that the federal and/or state governments
may continue to enact measures in the future aimed at reducing the cost of drugs
to the public. The Company cannot predict the nature of such measures or their
impact on the Company's profitability.
The Company is also governed by federal, state and local laws of general
applicability, such as laws regulating working conditions. In addition, the
Company is subject, as are manufacturers generally, to various federal, state
and local environmental protection laws and regulations, including those
governing the discharge of material into the environment. Compliance with such
environmental provisions is not expected to have a material effect on the
earnings, cash requirements or competitive position of the Company in the
foreseeable future. However, no assurance can be given that changes to or
compliance with such environmental provisions will not have a material effect on
the Company's earnings, cash requirements or competitive position.
6
<PAGE>
ITEM 2: PROPERTIES
The Company operates three facilities in the Greater Boston area, including a
251,000 square foot manufacturing facility in Canton, Massachusetts, which
houses research and development, regulatory and quality affairs, production and
corporate offices. The Canton facility is owned by the Company, which financed
its initial acquisition and construction through the issuance of Industrial
Development Revenue Bonds, and is subject to a lien in favor of a commercial
lender. See Note G of the Notes to Consolidated Financial Statements. The
Company owns and operates a 12,000 square foot manufacturing site in South
Boston. The Company entered into a five-year lease with a five-year renewal
option for a 68,000 square foot warehousing and distribution facility in Dedham,
Massachusetts. During the fourth quarter of 1996, the Company, as part of its
restructuring efforts, consolidated its leased warehousing and distribution
facilities into this newly leased warehouse in Dedham, Massachusetts.
Additionally, the Company consolidated a packaging site and administrative
office space from leased facilities to its Canton facility.
During the year ended December 31, 1996, the Company incurred capital
expenditures of approximately $12,000 relating to environmental enhancements to
its waste water treatment equipment.
ITEM 3: LEGAL PROCEEDINGS
The information required under this item is incorporated herein by reference to
the Company's Note L of the Notes to Consolidated Financial Statements contained
in this document on pages 28 - 30.
PART II
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF
SECURITYHOLDERS
No matters were submitted to a vote of securityholders during the last three
months of the Company's year ended December 31, 1996.
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "CPLY." The following table sets forth the range of quarterly high and
low bid information for the common stock for the years ended December 31, 1995
and 1996:
Year Ended December 31, 1995 High Low
- --------------------------------------------------------------------------------
First Quarter $18.75 $13.00
Second Quarter 21.25 14.50
Third Quarter 21.25 17.50
Fourth Quarter 19.25 13.25
Year Ended December 31, 1996 High Low
- --------------------------------------------------------------------------------
First Quarter $20.25 $13.25
Second Quarter 18.75 13.25
Third Quarter 14.25 9.50
Fourth Quarter 15.50 8.75
As of March 14, 1997, there were approximately 275 shareholders of record and at
least 4,300 beneficial holders. The Company has never paid cash dividends on its
common stock. The agreement governing the Company's long-term indebtedness
contains prohibitions on the payment of cash dividends and, as a result, the
Company has no intention of paying dividends in the foreseeable future.
7
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements and Notes thereto
included in this Report on Form 10-K. The Consolidated Statements of Operations
Data for the years ended December 31, 1996 and 1995, the eleven-month period
ended December 31, 1994, and the fiscal years ended January 31, 1994 and 1993
are derived from audited consolidated financial statements. The Consolidated
Statement of Operations Data for the year ended December 31, 1994 is unaudited
and is presented solely for comparative purposes.
<TABLE>
<CAPTION>
Eleven-month
period ended
Years ended December 31, December 31, Years ended January 31,
----------------------------------------- ------------ -----------------------
(In thousands, except per share data) 1996 1995 1994 1994 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 123,461 $ 142,158 $ 120,348(c) $ 113,973(c) $ 86,268 $ 51,981
Gross profit 29,430 41,269(b) 52,177 48,318 48,895 32,475
Operating expenses:
Research and development 13,682 13,299 9,938 9,057 8,115 8,634
Selling, general and administrative 19,635(a) 16,324 15,319 14,170 11,454 7,660
Recall related and litigation 12,343 17,830 4,691 2,766 4,925 --
Income (loss) from operations (16,230) (6,184) 22,229 22,325 24,401 16,181
Net income (loss) (12,673)(a) (2,543)(b) 15,109(c) 15,007(c) 6,370(d) 12,334(e)
Fully diluted net income (loss)
per share $ (0.66)(a) $ (.13)(b) $ .78(c) $ .78(c) $ .34(d) $ .79(e)
Fully diluted weighted average
common shares outstanding 19,081 18,977 19,309 19,273 18,536 16,074
Balance Sheet Data:
Working capital $ 48,179 $ 59,365 $ 56,704 $ 56,704 $ 55,444 $ 40,336
Total assets 151,727 155,245 152,662 152,662 126,985 85,099
Long-term debt 5,100 5,400 5,700 5,700 6,000 6,300
Total shareholders' equity 100,131 112,524 112,683 112,683 98,588 64,747
<FN>
(a) Includes $3.5 million ($2.1 million after taxes; $0.11 per share) of restructuring expenses.
(b) Includes $2.5 million ($1.5 million after taxes; $0.08 per share) of albuterol materials inventory write-offs incurred as a
result of the Company's decision not to reintroduce this product.
(c) Includes approximately $2.0 million ($1.2 million after taxes; $0.06 per share) of higher than anticipated albuterol product
returns.
(d) Includes $7.9 million ($7.3 million after taxes; $0.40 per share) of litigation settlement expense and $4.9 million ($2.9
million after taxes; $0.16 per share) of expenses associated with the HC tender offer.
(e) Includes income from settlement of litigation of $3.0 million ($1.8 million after taxes; $0.11 per share).
</FN>
</TABLE>
8
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview: The Company reported a net loss of $12.7 million or $0.66 per share
for the year ended December 31, 1996. Excluding product recall, other litigation
and restructure related items, the net loss would have been $0.1 million or
$0.01 per share. The Company experienced substantial increases in sales volumes
of certain existing products, launched seven new products and recognized cost
reductions resulting from improvements in manufacturing processes and inventory
management during 1996. However, significant price erosion, particularly on
glyburide, the Company's major distributed product, continued to offset these
improvements and resulted in a 13.2% decrease in net sales over 1995 net sales
and a reduced gross margin of 23.8% of net sales compared to 29.0% of net sales
a year earlier. Key events during 1996 included:
o The receipt of FDA approval for six ANDAs and the submission of eight new
ANDAs, bringing the total awaiting approval to seventeen.
o The launching of seven new products during the year: prochlorperazine
maleate tablets, cholestyramine powder, minoxidil topical solution 2% for
men, nadolol tablets, captopril tablets, Evalose(R) and Heptalac(R).
o The reorganization of management to meet the current and future needs of the
Company.
o The completion of restructuring efforts to consolidate warehouse,
manufacturing and office sites as well as to write-off underutilized and
idle equipment.
o The retention of Oppenheimer & Co., Inc. to evaluate strategic alternatives
for the Company, including possible business alliances.
NET SALES
<TABLE>
<CAPTION>
(Unaudited) Eleven-month
Year ended Year ended Year ended period ended
December 31, December 31, December 31, December 31,
(In millions) 1996 Change 1995 1994 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Manufactured products $ 79.2 3.8% $ 76.3 $ 70.2 $ 63.9
Distributed products 44.3 (32.8%) 65.9 50.1 50.1
------------------------------------------------------------
Net sales $123.5 (13.2%) $ 142.2 $ 120.3 $ 114.0
</TABLE>
Net sales for 1996 were $123.5 million, a decrease of 13.2% from 1995 net sales
of $142.2 million. Increases in volumes of existing products combined with the
launches of seven new products were insufficient to offset declining prices,
principally for glyburide, the Company's major distributed product. This price
erosion is expected to continue in 1997 as competing products continue to be
launched by other manufacturers and as customers consolidate their supplier
base.
The Company introduced five new manufactured products and two new distributed
products for a total of seven new products during 1996. The five new
manufactured products were: prochlorperazine maleate tablets, the off-patent
version of SmithKline Beecham's Compazine(R); cholestyramine powder, the
off-patent version of Bristol-Myers Squibb's Questran(R); minoxidil topical
solution 2% for men, the off-patent version of Pharmacia & Upjohn's Rogaine(R);
nadolol tablets, the off-patent version of Bristol-Myers Squibb's Corgard(R);
and captopril tablets, the off-patent version of Bristol-Myers Squibb's
Capoten(R). The new distributed products were lactulose solutions, known as
Evalose(R) (laxative) and Heptalac(R) (ammonia detoxification), the off-patent
versions of HMRI's Chronulac(R) and Cephulac(R).
During the year ended December 31, 1995 the Company's net sales increased
18.2% to $142.2 million from $120.3 million for the year ended December 31,
1994. The increase in net sales was the result of new product introductions and
occurred despite significant price erosion on the Company's primary distributed
product, glyburide.
9
<PAGE>
GROSS PROFIT
<TABLE>
<CAPTION>
(Unaudited) Eleven-month
Year ended Year ended Year ended period ended
December 31, December 31, December 31, December 31,
(In millions) 1996 Change 1995 1994 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Manufactured products $15.0 (17.6%) $18.2 $34.3 $30.4
As a % of manufactured products net sales 18.9% 23.8% 48.9% 47.6%
-------------------------------------------------------------
Distributed products $14.4 (37.7%) $23.1 $17.9 $17.9
As a % of distributed products net sales 32.5% 35.0% 35.7% 35.7%
-------------------------------------------------------------
Gross profit $29.4 (28.8%) $41.3 $52.2 $48.3
As a % of net sales 23.8% 29.0% 43.4% 42.4%
-------------------------------------------------------------
</TABLE>
The Company's gross profit decreased to $29.4 million, or 23.8% of net sales,
for the year ended December 31, 1996 as compared to $41.3 million, or 29.0% of
net sales, for the same period in 1995. The decrease was primarily due to the
continued price erosion on the Company's products partially offset by cost
reductions resulting from improvements in manufacturing processes and inventory
management.
Distributed products contributed $14.4 million, or 49%, to the Company's total
gross profit during 1996 versus $23.1 million, or 56%, a year earlier. Glyburide
and micronized glyburide are marketed by the Company and manufactured by HMRI
under contracts with HMRI. Refer to Note J of the Notes to Consolidated
Financial Statements for further discussion of this arrangement. In order to
assure continuity of supply under a variety of circumstances and to provide
other competitive benefits, the Company has agreed to renegotiate the
distribution contracts relating to glyburide and micronized glyburide; as a
result, the profit contribution of these products likely may decrease in the
future.
During 1995, the Company's gross margin decreased to 29.0% from 43.4% for the
same period in 1994 due to increased write-offs of obsolete inventory, the
significant rise in product liability insurance premiums, the increase in
manufacturing capacity without a comparable increase in volume and narrowing
margins due to price erosion on the Company's products. The inventory write-offs
resulted primarily from normal Company operations and management's decision not
to reintroduce albuterol sulfate inhalation solution, 0.5%.
OPERATING EXPENSES
<TABLE>
<CAPTION>
(Unaudited) Eleven-month
Year ended Year ended Year ended period ended
December 31, December 31, December 31, December 31,
(In millions) 1996 Change 1995 1994 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Research and development $13.7 3.0% $13.3 $ 9.9 $ 9.1
As a % of manufactured products net sales 17.3% 17.4% 14.1% 14.2%
-------------------------------------------------------------
Selling, marketing and distribution $ 6.4 18.5% $ 5.4 $ 4.4 $ 4.1
As a % of net sales 5.2% 3.8% 3.7% 3.6%
-------------------------------------------------------------
General and administrative $ 9.7 (11.0%) $10.9 $10.9 $10.1
As a % of net sales 7.9% 7.7% 9.0% 8.9%
-------------------------------------------------------------
Recall related and litigation $12.3 (30.9%) $17.8 $ 4.7 $ 2.8
As a % of net sales 10.0% 12.5% 3.9% 2.5%
-------------------------------------------------------------
Restructuring $ 3.5 - - - -
As a % of net sales 2.8%
-------------------------------------------------------------
</TABLE>
Research and development expenses increased 3.0% to $13.7 million for the year
ended December 31, 1996 as compared to the same period in 1995. The Company
filed eight new ANDAs with the FDA during 1996 bringing its total ANDAs on file
with the FDA to seventeen. During 1995, research and development spending
increased 34.3% to $13.3 million when compared to the year ended December 31,
1994. This increase resulted from the significant costs
10
<PAGE>
incurred in validating new products, and further investments in research,
development and product validation made by the Company during 1995.
Selling, marketing and distribution expenses increased 18.5% to $6.4 million
from $5.4 million a year earlier. The increase was primarily attributable to
higher advertising and promotional expenses resulting from the intensified
competitive environment. During 1995, selling, marketing and distribution
expenses increased 22.7% from $4.4 million a year earlier due to increased
advertising and promotional expenses.
General and administrative expenses decreased 11.0% to $9.7 million as
compared to $10.9 million a year earlier. The decrease is primarily attributable
to overall cost-cutting measures partially offset by charges recorded as a
result of a major customer's filing for bankruptcy protection.
Recall related and litigation expenses for 1996 totaled $12.3 million and
consisted principally of an increase in contingency reserves reflecting changes
in estimates of the Company's exposure in its various outstanding legal
proceedings. Recall related and litigation expenses for 1995 totaled $17.8
million and included the following: the Company's required contribution to the
Albuterol Settlement Trust Fund of $7.35 million; $2.9 million loss on disposal
of albuterol-related equipment; $2.75 million of costs to settle the shareholder
class action litigation; establishment of a $1.1 million reserve for currently
outstanding albuterol-related product liability cases outside of the Albuterol
Settlement Trust Fund; and $3.7 million of litigation expenses incurred by the
Company for representation in its various legal proceedings. Refer to Note L of
the Notes to Consolidated Financial Statements for a further discussion of
outstanding litigation. Recall related and litigation expenses for the period
ended December 31, 1994 were comprised of costs associated with the Company's
recall of albuterol and Brompheril(R).
During the fourth quarter of 1996, the Company recorded a $3.5 million pre-tax
restructuring charge related to the consolidation of warehouse, manufacturing
and office sites as well as the write-off of underutilized and idle equipment
and, to a lesser extent, reductions in the labor force.
INTEREST AND OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
(Unaudited) Eleven-month
Year ended Year ended Year ended period ended
December 31, December 31, December 31, December 31,
(In thousands) 1996 1995 1994 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and other investment income $ 723 $1,089 $1,675 $1,557
Interest expense $ (241) $ (285) $ (248) $ (226)
Other income (expense), net $ (144) $ (175) $ 87 $ 104
</TABLE>
Interest and other investment income decreased $366,000 during 1996 to $723,000
as compared to $1.1 million a year earlier. The decrease was primarily
attributable to decreased average cash available to invest. During 1995,
interest and other investment income, net of realized losses of $383,000,
decreased approximately $600,000 to $1.1 million as compared to $1.7 million in
1994 due to the liquidation of substantially all of the Company's long-term
investment portfolio that resulted in reduced investment earnings. Refer to Note
C of the Notes to Consolidated Financial Statements for more information
regarding the transfer of securities.
Other income (expense) of $(144,000) for the year ended December 31, 1996
included an approximate $1.0 million settlement of an insurance claim related to
prior years' litigation offset by expenses incurred in connection with the
evaluation of a possible business consolidation which the Company has decided
not to pursue at this time.
TAXES AND NET INCOME (LOSS)
<TABLE>
<CAPTION>
(Unaudited) Eleven-month
Year ended Year ended Year ended period ended
December 31, December 31, December 31, December 31,
(In thousands) 1996 1995 1994 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense (benefit) $ (3.2) $ (3.0) $ 8.6 $ 8.8
Effective tax rate (20.3%) (54.2%) 36.4% 36.8%
Net income (loss) $ (12.7) $ (2.5) $15.1 $15.0
</TABLE>
The effective tax rate for 1996 increased when compared to the effective tax
rate for the same period in 1995 due primarily to the non-deductible nature of
certain recall related and litigation expenses. The effective tax rate for 1995
decreased due to the decline in profitability.
11
<PAGE>
For the year ended December 31, 1996, the Company reported a net loss of
$12.7 million, or $0.66 per share, compared to 1995's loss of $2.5 million, or
$0.13 per share. Excluding product recall, other litigation, and restructure
related items, the net loss would have been $0.1 million, or $0.01 per share.
For the year ended December 31, 1995 the Company reported a net loss of $2.5
million versus net income of $15.1 million for the same period in 1994. Net
income for the year 1995 restated to exclude recall and other litigation related
items would have been $8.2 million or $0.43 per share. The unusual and
significant expenses incurred during 1995 relating to the settlement and defense
of various litigations, the Company's increased insurance premiums, the decision
not to reintroduce albuterol, and the underutilization of the Company's new
manufacturing facility were the primary causes of the decrease in profitability.
RISK FACTORS AND FUTURE TRENDS
The Company's future results of operations depend on its ability to obtain FDA
approval of ANDAs for its new products, its ability to procure a continuous
supply of raw materials, to validate its manufacturing processes used to produce
consistent test batches for FDA approval and to receive continued customer
acceptance of its products. Raw materials are generally available from several
sources; however, this may not always be the case. Since the federal drug
application process requires specification of raw material suppliers, if raw
materials from specified suppliers become unavailable, the Company would be
required to file a supplement to its product filing and revalidate the
manufacturing process using a new supplier's materials. This could cause a delay
of several months in the manufacture of the drug involved and the consequent
loss of potential revenue and market share. Additionally, there is often a time
lag, sometimes significant, between the receipt of ANDA approval and the actual
marketing of the approved product due to this validation process. With the
establishment of a specialized technical and validation services group in the
latter part of 1995, the Company has substantially improved its validation
process.
The Company's future results of operations also may be affected by a variety
of additional factors consistent with the nature of its business, including, but
not limited to, changes in the intensity of competition affecting the Company's
products and customers. Multi-source products with limited competition are
generally sold at higher prices, resulting in relatively high gross margins. As
competition increases, selling prices and gross margins can decline dramatically
and impair overall profitability. The Company is witnessing brand-name
competitors bundling the sale of generic and patented products as well as
introducing generic versions of their own branded products prior to the
expiration of the patents for such drugs, which is resulting in an increasing
market share for these brand-name competitors. The Company also has witnessed a
consolidation of its customers, as chain drug stores and wholesalers merge or
consolidate. Additionally, a number of the Company's customers have instituted
source programs which limit the number of suppliers of generic pharmaceutical
products. Management expects these trends and the resultant price erosion to
continue throughout 1997. The Company will need to provide a continuous stream
of new products and maintain its strong customer relations to offset these
competitive pressures.
The Company's gross margin continues to be depressed by the underutilization
of its manufacturing facility. During 1996, the Company increased its volume of
manufactured products; however, significant increases are still needed to absorb
the substantial overhead. The Company, through its restructuring of operations
undertaken in the fourth quarter of 1996, consolidated some of its facilities in
an attempt to streamline its operations and reduce its overhead. It is
anticipated that the Company's gross margin will continue to be depressed by the
underutilization of its manufacturing facility during 1997 and until such time
as the volume of manufactured products increases significantly.
Continuing compliance with FDA cGMP standards and applicable environmental
regulations will also affect the Company's future results of operations.
Significant investments which increase the Company's overhead need to be made
from time to time to maintain the required infrastructure to comply with the FDA
cGMP standards.
The Company has announced that it retained Oppenheimer & Co. to evaluate
strategic alternatives including possible business alliances. Pursuing these
strategic alternatives could divert management's attention and could result in
significant costs to the Company.
The ongoing grand jury investigation, albuterol related litigation and
various other legal matters remain unresolved. Refer to Note L of the Notes to
Consolidated Financial Statements for further discussion. Although the Company
has established reserves as of December 31, 1996 it believed appropriate for
these matters, the final outcome may exceed the estimates used in establishing
those reserves and may have a material adverse effect on the Company's financial
condition, liquidity and results of operations.
12
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
December 31, December 31,
(In millions) 1996 1995
- --------------------------------------------------------------------------------
Cash and short-term investments $ 29.7 $ 25.0
Working capital 48.2 59.4
Long-term debt 5.1 5.4
Shareholders' equity 100.1 112.5
WORKING CAPITAL
The Company's combined cash and short-term investments were $29.7 million as of
December 31, 1996 compared to $25.0 million a year earlier. The $4.7 million
increase primarily reflects $16.1 million of cash generated from operations
during 1996 offset by $8.4 million of planned capital expenditures and $2.3
million of investments in unconsolidated affiliates. The $16.1 million of cash
provided by operating activities primarily resulted from a $6.4 million decrease
in accounts receivable, $3.3 million of negotiated insurance recoveries, and
$5.1 million of net tax refunds.
During 1996, the Company spent $8.4 million for machinery and equipment
acquisitions and facility enhancements primarily related to the development and
manufacturing of new products. During the year ended December 31, 1995, the
Company spent $21.1 million for capital expenditures which included the $1.9
million buy-out of substantially all of its leased manufacturing and research
and development equipment and the acquisition of parcels of land adjacent to the
Canton, Massachusetts manufacturing facility. During the eleven-month period
ended December 31, 1994, the Company spent $4.6 million to complete the
expansion of the Canton, Massachusetts plant, in addition to $11.4 million of
machinery and equipment acquisitions and facility enhancements to the Company's
existing manufacturing locations. Additions in all years were made from the cash
generated from operations without incurring additional borrowings. The Company
anticipates spending less than $5.0 million for machinery and equipment
acquisitions and facility enhancements during the year ending December 31, 1997.
LIQUIDITY
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 December 31, 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
is contingent upon 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. Refer to Note L of the Notes to Consolidated Financial
Statements for further discussion of the Settlement Agreement. The Company
continues to make annual payments of $300,000 on its outstanding Industrial
Development Revenue Bonds ("the Bonds"), which are due in 2014. These Bonds are
secured by a letter of credit agreement. Subsequent to year end, the Company
received from its lender waivers to its credit agreements with respect to one of
its financial covenants related to profitability, effective December 31, 1996.
There can be no assurance that the Company will not require additional waivers
in the future or, if required, that the lender will grant them. In the event
that the Company is unable to obtain future waivers, if needed, the Company's
debt would be reclassified as short-term debt and the Company could lose its
availability to cash under its line of credit.
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 at terms favorable or acceptable to the
Company, if at all.
RECENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 128 "Earnings per share." This
statement replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS which excludes dilution. This statement requires dual
presentation of basic and diluted EPS as well as a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. This statement is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior-period EPS data presented. Earlier application
is not permitted.
13
<PAGE>
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
COPLEY PHARMACEUTICAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
(In thousands, except share data) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 15,974 $ 18,950
Trading securities -- 950
Available-for-sale securities 13,757 5,147
Accounts receivable, trade, net of allowances for doubtful accounts
of $500 and $500, respectively 26,963 32,639
Accounts receivable, related party 61 826
Inventories 27,131 27,226
Current deferred tax assets 6,548 2,900
Prepaid income taxes -- 3,259
Other current assets 4,241 4,789
----------------------
Total current assets 94,675 96,686
----------------------
Property, plant and equipment, net 52,355 55,724
Deferred tax assets 215 1,484
Other assets 4,482 1,351
----------------------
Total assets $ 151,727 $ 155,245
----------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable, trade $ 6,360 $ 8,301
Accounts payable, related party 10,948 11,191
Current portion of long-term debt 300 300
Accrued compensation and benefits 1,398 2,003
Accrued rebates 6,908 7,980
Accrued income taxes 883 --
Accrued recall related and litigation expenses 17,839 4,767
Accrued expenses 1,860 2,779
----------------------
Total current liabilities 46,496 37,321
----------------------
Long-term debt 5,100 5,400
Commitments and contingencies (Note L)
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 77,875 77,505
Unrealized holding gain on available-for-sale securities -- 108
Retained earnings 34,569 47,242
Treasury stock, at cost, 6,266,258 and 6,307,045 shares
outstanding, respectively (12,567) (12,585)
----------------------
Total shareholders' equity 100,131 112,524
----------------------
Total liabilities and shareholders' equity $ 151,727 $ 155,245
----------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
14
<PAGE>
COPLEY PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Eleven-month
Year ended Year ended period ended
December 31, December 31, December 31,
(In thousands, except per share data) 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
Manufactured products $ 79,201 $ 76,279 $ 63,876
Distributed products 44,260 65,879 50,097
---------------------------------------------
Net sales 123,461 142,158 113,973
---------------------------------------------
Cost of goods sold:
Manufactured products 64,233 58,104 33,703
Distributed products 29,798 42,785 31,952
---------------------------------------------
Cost of goods sold 94,031 100,889 65,655
---------------------------------------------
Gross profit 29,430 41,269 48,318
---------------------------------------------
Operating expenses:
Research and development 13,682 13,299 9,057
Selling, marketing and distribution 6,388 5,384 4,093
General and administrative 9,721 10,940 10,077
Recall related and litigation 12,343 17,830 2,766
Restructuring 3,526 -- --
---------------------------------------------
Income (loss) from operations (16,230) (6,184) 22,325
---------------------------------------------
Interest and other investment income 723 1,089 1,557
Interest expense (241) (285) (226)
Other income (expense), net (144) (175) 104
---------------------------------------------
Income (loss) before income taxes (15,892) (5,555) 23,760
Provision (benefit) for income taxes (3,219) (3,012) 8,753
---------------------------------------------
Net income (loss) $ (12,673) $ (2,543) $ 15,007
---------------------------------------------
Weighted average common shares outstanding:
Primary 19,081 18,977 19,273
Fully diluted 19,081 18,977 19,273
Earnings (loss) per share:
Primary $ (0.66) $ (0.13) $ 0.78
Fully diluted (0.66) (0.13) 0.78
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
15
<PAGE>
COPLEY PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the eleven-month period ended December 31, 1994 and for the years ended December 31, 1995 and 1996
Additional Unrealized Total
Common Stock Paid-In Retained Holding Treasury Stock Shareholders'
(In thousands) Shares Amount Capital Earnings Gain(Loss) Shares Amount Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1994 25,371 $ 254 $ 76,281 $ 34,778 $ -- 6,612 $ (12,725) $ 98,588
Net income (loss) -- -- -- 15,007 -- -- -- 15,007
Adjustment to beginning
balance for change in
accounting principle, net
of taxes of $425 -- -- -- -- 622 -- -- 622
Acquisition of treasury
stock by Employee Stock
Purchase Plan -- -- 308 -- -- (13) 5 313
Stock option exercises -- -- 29 -- -- (1) 1 30
Tax benefit from stock
option exercises -- -- 191 -- -- -- -- 191
Change in unrealized
holding gain (loss) on
available-for-sale securities -- -- -- -- (2,068) -- -- (2,068)
------------------------------------------------------------------------------------------------
Balance, December 31, 1994 25,371 254 76,809 49,785 (1,446) 6,598 (12,719) 112,683
Net income (loss) -- -- -- (2,543) -- -- -- (2,543)
Acquisition of treasury
stock by Employee Stock
Purchase Plan -- -- 290 -- -- (23) 11 301
Stock option exercises -- -- 221 -- -- (268) 123 344
Tax benefit from stock
option exercises -- -- 185 -- -- -- -- 185
Change in unrealized
holding gain (loss) on
available-for-sale securities -- -- -- -- 1,554 -- -- 1,554
------------------------------------------------------------------------------------------------
Balance, December 31, 1995 25,371 254 77,505 47,242 108 6,307 (12,585) 112,524
Net income (loss) -- -- -- (12,673) -- -- -- (12,673)
Acquisition of treasury
stock by Employee Stock
Purchase Plan -- -- 295 -- -- (25) 11 306
Stock option exercises -- -- (5) -- -- (16) 7 2
Tax benefit from stock
option exercises -- -- 80 -- -- -- -- 80
Change in unrealized
holding gain (loss) on
available-for-sale securities -- -- -- -- (108) -- -- (108)
------------------------------------------------------------------------------------------------
Balance, December 31, 1996 25,371 $ 254 $ 77,875 $ 34,569 $ -- 6,266 $ (12,567) $ 100,131
------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
16
<PAGE>
COPLEY PHARMACEUTICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eleven-month
Year ended Year ended period ended
December 31, December 31, December 31,
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(12,673) $ (2,543) $ 15,007
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,092 5,775 3,404
Realized losses on disposals of assets 4,795 3,025 7
Deferred income taxes (2,379) (1,398) 3,203
Tax benefit from stock option exercises 80 185 191
Provision for doubtful accounts 696 -- 250
Proceeds from sales of trading securities 601 -- --
Equity in loss (earnings) of unconsolidated affiliates 54 -- --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 5,745 (6,680) (7,602)
Decrease (increase) in inventories 95 11,236 (14,110)
Decrease (increase) in other current assets 548 (1,885) 2,125
Decrease (increase) in other assets (951) 1,598 (222)
Increase (decrease) in accounts payable (2,184) 3,536 10,632
Increase (decrease) in accrued income taxes 4,142 (59) 1,411
Increase (decrease) in accrued expenses 10,476 (494) 1,250
--------------------------------------------
Net cash provided by operating activities 16,137 12,296 15,546
--------------------------------------------
Cash flows from investing activities:
Capital expenditures (8,401) (21,123) (16,050)
Investments in unconsolidated affiliates (2,252) (753) --
Proceeds from sales of property, plant and equipment 113 500 24
Purchases of available-for-sale securities (13,695) (24,172) (12,556)
Proceeds from sales of available-for-sale securities 114 42,416 14,411
Proceeds from maturities of available-for-sale securities 5,000 3,224 3,005
--------------------------------------------
Net cash provided by (used in) investing activities (19,121) 92 (11,166)
--------------------------------------------
Cash flows from financing activities:
Proceeds from short-term borrowings -- 4,542 284
Payments of short-term borrowings -- (4,542) (284)
Payments of long-term debt (300) (300) (300)
Stock option exercises 2 344 30
Issuance of common stock to Employee Stock Purchase Plan 306 301 313
Draws from restricted cash, net -- -- 14
--------------------------------------------
Net cash provided by financing activities 8 345 57
--------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,976) 12,733 4,437
Cash and cash equivalents at beginning of period 18,950 6,217 1,780
--------------------------------------------
Cash and cash equivalents at end of period $ 15,974 $ 18,950 $ 6,217
--------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
17
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Copley Pharmaceutical, Inc. (the "Company") develops, manufactures, markets and
distributes a broad range of multi-source pharmaceutical products. These
products include prescription and over-the-counter ("OTC") drugs and are
available in a variety of dosage forms.
The Company's customers include retail chains, wholesalers, distributors,
hospitals, health maintenance organizations ("HMOs"), other managed care
entities and government agencies. For the years 1996 and 1995 and for the
eleven-month period ended December 31, 1994, no single customer accounted for
10% or more of total net sales.
The Company not only distributes multi-source products that it manufactures,
it also, as part of a distribution arrangement, markets and distributes
multi-source versions of certain drugs now manufactured by Hoechst Marion
Roussel, Inc. ("HMRI"), a subsidiary of Hoechst Aktiengesellschaft ("Hoechst
AG"), the Company's indirect 51% fully diluted shareholder. One of these drugs,
glyburide, accounted for 27% and 41% of the Company's 1996 and 1995 net sales,
respectively. This product had limited competition until late in 1995, when
competing products became available resulting in significant erosion of this
product's selling price and related gross profit. Given this intensified
competitive environment and the renegotiation of the distribution contracts
relating to glyburide and micronized, management expects continued decline in
this product's net sales and related gross profit in 1997. Refer to Note J for
further discussion of the distribution arrangement.
Historically, the Company's sales have been predominantly in the United
States. During 1995, the Company formed a wholly-owned subsidiary to focus on
foreign expansion opportunities. Refer to Note J for further discussion of the
Company's foreign investments. Due to the length of time it takes to establish,
register and receive approvals to manufacture or distribute products in a
foreign country, it may be an extended period of time before the Company
generates material international revenue.
The raw materials essential to the Company's business are purchased primarily
from U.S. distributors of bulk pharmaceutical chemicals manufactured abroad.
Such raw materials are generally available from several sources; however, this
may not always be the case. Since the federal drug application process requires
specification of raw material suppliers, if raw materials from specified
suppliers became unavailable, the Company would be required to file a supplement
to its product filing and revalidate the manufacturing process using a new
supplier's materials. This could cause a delay of several months in the
manufacture of the drug involved and the consequent loss of potential revenue
and market share.
As a multi-source drug manufacturer, the Company is subject to extensive
regulation by the Food and Drug Administration ("FDA"). Noncompliance with
applicable requirements can result in fines, recall or seizure of products,
total or partial suspension of production and/or distribution, refusal of the
government to enter into supply contracts or to approve New Drug Applications
("NDA") or Abbreviated New Drug Applications ("ANDA") and criminal prosecution.
The FDA also has the authority to revoke previously granted drug approvals.
Changes in FDA procedures have increased the time and expense involved in
obtaining ANDA approvals and in complying with the FDA's current Good
Manufacturing Practice ("cGMP") standards. The ANDA drug development and
approval process currently averages approximately two to five years.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Copley
Pharmaceutical, Inc. and its wholly-owned subsidiaries. Significant intercompany
transactions have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
In 1994, the Company had changed to a calendar year reporting basis from a
fiscal year ending January 31 reporting basis. This change in fiscal year end
reporting resulted in a transition period of eleven months which began on
February 1, 1994 and ended December 31, 1994. Presented below is financial data
for the years ended December 31, 1996, 1995 and 1994.
18
<PAGE>
Comparative Consolidated Statements of Operations
Years ended December 31,
---------------------------------
(Unaudited)
(In thousands, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------
Net sales $ 123,461 $ 142,158 $ 120,348
Cost of goods sold 94,031 100,889 68,171
---------------------------------
Gross profit 29,430 41,269 52,177
---------------------------------
Operating expenses:
Research and development 13,682 13,299 9,938
Selling, marketing and distribution 6,388 5,384 4,386
General and administrative 9,721 10,940 10,933
Recall related and litigation 12,343 17,830 4,691
Restructuring 3,526 -- --
---------------------------------
Income (loss) from operations (16,230) (6,184) 22,229
---------------------------------
Interest and other investment income 723 1,089 1,675
Interest expense (241) (285) (248)
Other income (expense), net (144) (175) 87
---------------------------------
Income (loss) before income taxes (15,892) (5,555) 23,743
Provision (benefit) for income taxes (3,219) (3,012) 8,634
---------------------------------
Net income (loss) $ (12,673) $ (2,543) $ 15,109
---------------------------------
Weighted average common shares outstanding:
Primary 19,081 18,977 19,309
Fully diluted 19,081 18,977 19,309
Earnings (loss) per share:
Primary $ (0.66) $ (0.13) $ 0.78
Fully diluted (0.66) (0.13) 0.78
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Available-for-Sale Securities
Available-for-sale securities include the Company's investments in equity and
debt securities for which the Company does not have the positive intent or
ability to hold to maturity. Available-for-sale securities are carried at market
value, with unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. Gross realized gains and losses on the sales
of available-for-sale securities are determined on the specific identification
method and are included in interest and other investment income.
Trading Securities
Trading securities include the Company's investment in debt securities held for
sale in the near term. Trading securities are recorded at market value with
unrealized and realized gains and losses recorded in interest and other
investment income. Gross realized gains and losses on the sales of trading
securities are determined on the specific identification method.
Accounts Receivable and Revenue Recognition
Revenue is recognized upon product shipment. Provisions for rebates, returns and
other adjustments are provided for in the same period as the related sales are
recorded. The Company's accounts receivable balance reflects the amount due from
its customers based on actual outstanding invoices less estimates of credits
that may be issued against these invoiced amounts including, but not limited to,
price adjustments and returned goods. The Company estimates credits to be issued
for price adjustments and returned goods incurred but not currently identified.
At December 31, 1996 and 1995 the estimated incurred costs were $2.4 million and
$1.6 million, respectively. Additionally, the Company provides for an allowance
for uncollectible accounts. The Company has experienced insignificant account
write-offs in the past; however, during 1996, one of the Company's major
customers filed for bankruptcy protection. These estimates are made by
management based on past experience and current trends. Actual results may
differ from these estimates.
19
<PAGE>
Inventories
The Company values its inventories at the lower of cost or market on a first-in,
first-out basis. Management estimates the lower of cost or market based on
various assumptions about the future demand for the Company's products,
remaining products' shelf lives, and the future selling price and pricing
environment for the products. Actual results may differ from these estimates.
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost or, if the estimated
cash flows from the asset exceed the carrying value, the asset's fair value.
Maintenance and repairs which neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as incurred.
Tooling costs are also expensed as incurred. Upon retirement or other
disposition, the cost and related accumulated depreciation are eliminated from
the accounts and the resulting gain or loss is included in income from
operations. Depreciation of property, plant and equipment is computed using the
straight-line method over the following estimated useful lives:
Estimated Useful Life
- --------------------------------------------------------------------------------
Building and improvements 25 years
Machinery and equipment 5-10 years
Motor vehicles 3-5 years
Furniture and fixtures 5 years
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the term of the lease. Interest is capitalized in connection with
construction of major facilities. The capitalized interest is recorded as part
of the asset to which it relates and is amortized over the asset's estimated
useful life.
Research and Development
Company sponsored research and development costs are expensed as incurred. Costs
related to contracted research and development are included in other assets and
charged to research and development upon recognition of related revenue.
Advertising and Promotion
All costs associated with advertising and promoting products are expensed in the
year incurred.
Income Taxes
Deferred tax assets and liabilities have been established for the expected
future tax consequences of events that have been recognized in the Company's
consolidated financial statements and tax returns. These deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using
currently enacted tax rates that are expected to be in effect during the years
in which the differences are anticipated to reverse. Deferred tax provision
(benefit) represents the change in the deferred tax asset balance. Tax credits
are treated as reductions of income taxes in the year in which the credits
become available for income tax purposes.
Earnings (Loss) Per Share
Earnings (loss) per share is computed by dividing earnings (loss) by the
weighted average number of common shares and common share equivalents, if
dilutive, outstanding during the period. Common share equivalents are calculated
under the treasury stock method and consist of unexercised employee stock
options.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 128 "Earnings per share." This
statement replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS which excludes dilution. This statement requires dual
presentation of basic and diluted EPS as well as a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. This statement is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior-period EPS data presented. Earlier application
is not permitted.
20
<PAGE>
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of trading and available-for-sale securities and
trade account receivables. It is the Company's policy to invest excess cash
primarily in investment-grade marketable securities. Concentrations of credit
risk with respect to trade account receivables are limited due to the large
number of customers comprising the Company's customer base and their dispersion
across different geographies.
Reclassifications
Certain reclassifications have been made to prior period consolidated financial
statements to conform to the current presentation.
C. SECURITIES
Available-For-Sale Securities
<TABLE>
<CAPTION>
1996 1995
------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
(In thousands) Cost Gain Loss Value Cost Gain Loss Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In Current Assets:
Debt securities:
State and municipal
securities $ 8,136 $ 7 $ -- $ 8,143 $ -- $ -- $-- $ --
U.S. Treasury and
government agencies 4,871 1 (5) 4,867 -- -- -- --
-------------------------------------------------------------------------------------------
Other securities:
Marketable equity
securities -- -- -- -- 39 88 -- 127
Bank certificates of deposit 750 -- (3) 747 -- -- -- --
Other securities -- -- -- -- 5,000 20 -- 5,020
-------------------------------------------------------------------------------------------
Total current available-
for-sale securities $13,757 $ 8 $ (8) $13,757 $ 5,039 $ 108 $-- $ 5,147
-------------------------------------------------------------------------------------------
</TABLE>
Gross gains of $75,000 and gross losses of $0 were realized on sales of
available-for-sale securities in 1996, gross gains of $275,000 and gross losses
of $409,000 were realized on sales of available-for-sale securities in 1995 and
gross gains of $55,000 and gross losses of $47,000 were realized on sales of
available-for-sale securities during the eleven-month period ended December 31,
1994.
Trading Securities
At December 31, 1995, the Company transferred government agency securities with
a market value of $950,000 from available-for-sale securities to trading
securities as the Company was holding these securities for sale in the near
term. In 1995, a loss of $248,000 was recognized upon transfer of these
securities and was included in interest and other investment income. In 1996,
these securities were sold and an additional loss of $349,000 was realized.
21
<PAGE>
D. INVENTORIES
December 31, December 31,
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Raw materials $12,580 $13,634
Work in process 4,390 4,913
Finished goods 10,161 8,679
-----------------------
Total inventories $27,131 $27,226
-----------------------
During the third quarter of 1995, the Company wrote off $2.5 million of
albuterol-related materials inventory after the decision was made by management
not to reintroduce albuterol. This write-off was included in the cost of goods
sold for manufactured products.
E. PROPERTY, PLANT AND EQUIPMENT
December 31, December 31,
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Land $ 3,335 $ 3,232
Building and improvements 31,700 28,454
Machinery and equipment 31,020 28,479
Motor vehicles 58 53
Furniture and fixtures 4,940 4,815
Leasehold improvements 100 986
-----------------------
71,153 66,019
Less: accumulated depreciation and amortization (19,109) (16,063)
-----------------------
52,044 49,956
Construction in process 311 5,768
-----------------------
Total property, plant and equipment $52,355 $55,724
-----------------------
At December 31, 1995 the Company had $140,000 of deposits related to committed
construction projects of $433,000.
During 1995, the Company realized a loss of $2.9 million on the disposal of
equipment related specifically to the manufacture of albuterol after the
decision was made by management not to reintroduce this recalled product. This
loss was included in recall related and litigation expenses.
Depreciation expense was $7,135,000, $5,745,000 and $3,271,000 for the years
ended 1996 and 1995 and the eleven-month period ended December 31, 1994,
respectively.
F. INCOME TAXES
The effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
(In thousands) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Acquired joint product development rights $ 973 $ 1,026
Tender offer costs 1,972 1,966
Recall and litigation accrual 3,257 905
Operating loss and tax credit carryforwards 1,235 824
Charitable contribution carryforwards 620 551
Difference in accounting for inventory and accounts receivable 871 259
Difference in cost recognition basis, accrual for books and cash for tax 565 360
---------------------
Total deferred tax assets 9,493 5,891
Deferred tax liabilities:
Depreciation (2,730) (1,507)
---------------------
Total net deferred tax assets $ 6,763 $ 4,384
---------------------
</TABLE>
22
<PAGE>
Deferred tax assets are expected to be realized through the reversal of existing
deferred tax liabilities and from the recognition of future taxable income.
Realization of the deferred tax assets is dependent on generating sufficient
future taxable income or the availability of carryback provisions. Although
realization is not assured, management believes that it is more likely than not
that all of the deferred tax assets will be realized and accordingly has not
provided a valuation allowance. The amount of deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
Provision for (benefit of) income taxes consist of the following:
Eleven-month
Year ended Year ended period ended
December 31, December 31, December 31,
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Current income taxes (benefit):
Federal $(1,033) $(1,701) $ 4,999
State 193 87 551
---------------------------------------
(840) (1,614) 5,550
---------------------------------------
Deferred income tax expense (benefit):
Federal (1,272) (26) 2,550
State (1,107) (1,372) 653
---------------------------------------
(2,379) (1,398) 3,203
---------------------------------------
Total:
Federal (2,305) (1,727) 7,549
State (914) (1,285) 1,204
---------------------------------------
$(3,219) $(3,012) $ 8,753
---------------------------------------
The income tax expense (benefit) for the years ended 1996 and 1995 and the
eleven-month period ended December 31, 1994, varied from the amount computed by
applying the statutory income tax rate to income (loss) before taxes. The
reasons for the differences are as follows:
<TABLE>
<CAPTION>
Eleven-month
period ended
Year ended December 31, Year ended December 31, December 31,
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate $(5,562) (35%) $(1,944) (35%) $ 8,316 35%
Increases (decreases) in taxes resulting from:
State income taxes, net of
federal tax benefit (594) (4%) (835) (15%) 783 3%
Research tax credits (200) (1%) (163) (3%) (222) (1%)
Tax-exempt interest and dividends (136) (1%) (102) (2%) (316) (1%)
Nondeductible portion of recall related
and litigation expenses 3,127 20% -- -- -- --
Other, net 146 1% 32 1% 192 1%
--------------------------------------------------------------------
$(3,219) (20%) $(3,012) (54%) $ 8,753 37%
--------------------------------------------------------------------
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $7,954,000 which are available to offset future state taxable
income through the year ended December 31, 2001. In addition, at December 31,
1996, the Company had approximately $1,536,000, $386,000 and $859,000 of
charitable contribution carryforwards, research credits carryforwards and
investment credits carryforwards, respectively, that are available to offset
future state taxable income through the years 2001, 2011 and 1999, respectively.
23
<PAGE>
G. DEBT
December 31, December 31,
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Industrial Development Revenue Bonds (a) $5,400 $5,700
Less: current portion (300) (300)
---------------------
$5,100 $5,400
---------------------
(a) Interest is payable monthly at a floating rate based on the prime rate. The
effective interest rate for the Bonds approximated 4.3%, 4.7% and 3.9% for
the years ended 1996 and 1995 and the eleven-month period ended December 31,
1994, respectively.
The Industrial Development Revenue Bonds (the "Bonds") were issued for the
initial acquisition and construction of the Company's headquarters building and
principal manufacturing site at 25 John Road, Canton, Massachusetts. The Bonds
would have originally matured on August 1, 2004; however, in July 1990, the
Bonds were amended to extend the maturity date to August 1, 2014. Scheduled
repayments of the debt are: 1997, $300,000; 1998, $300,000; 1999, $300,000;
2000, $300,000; 2001, $300,000; 2002 and thereafter, $3,900,000.
In order to secure the timely payment of principal and interest on the Bonds,
the Company has entered into a letter of credit agreement with its primary
financial institution. The letter of credit agreement imposes minimum
requirements on the maintenance of working capital and certain financial ratios
and includes restrictions on cash dividends, repurchases of the Company's
capital stock, certain investments, advances, guarantees and borrowings. The
Letter of Credit and the Bonds are collateralized by the Company's property at
25 John Road, Canton, Massachusetts, including land, buildings and equipment
thereon and are further collateralized by an assignment of leases and rents on
the Company's South Boston property.
Costs of $704,000 associated with the issuance of the Bonds are being
amortized to interest expense over the 25-year life of the Bonds. The
unamortized balance of $319,000 and $337,000 at December 31, 1996 and 1995,
respectively, is included in other assets.
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. On August 30, 1995, the Company had amended this working capital line
of credit agreement to increase its maximum borrowing capacity from $7.5 million
to $20.0 million. This amendment also provided for the issuance of standby
letters of credit and includes related provisions for payment of letter of
credit fees equal to 1% of the face amount of outstanding standby letters of
credit. At December 31, 1996 and 1995, the Company had $17.1 million in
outstanding standby letters of credit related to the Albuterol Settlement Trust
Fund. Refer to Note L for more information on the Albuterol Settlement Trust
Fund.
Borrowings under the working capital line of credit agreement are due on
demand and bear interest, payable monthly, at the bank's prime rate. The prime
rate was 8.25%, 8.5% and 8.5% at December 31, 1996, 1995 and 1994,
respectively. Borrowings are collateralized by the Company's property at 25 John
Road, Canton, Massachusetts, including land, buildings and equipment thereon.
The line of credit imposes restrictive covenants regarding the sale or
encumbrance of the land and the building as well as minimum requirements on the
maintenance of working capital and certain financial ratios and includes
restrictions on cash dividends. Subsequent to year end, the Company received
from its lender waivers to its credit agreements with respect to one of its
financial covenants related to profitability, effective December 31, 1996. There
can be no assurance that the Company will not require additional waivers in the
future or, if required, that the lender will grant them. In the event that the
Company is unable to obtain future waivers, if needed, the Company's debt would
be reclassified as short-term debt and the Company could lose its availability
to cash under its line of credit.
H. COMMON AND PREFERRED STOCK
At December 31, 1996 the Company had 1,995,204 shares reserved for future
issuance in connection with the Company's stock option plans. The Board of
Directors has not assigned any terms to the authorized but unissued 3,000,000
shares of preferred stock.
I. EMPLOYEE BENEFITS
Stock Option Plans
Under the 1992 Stock Plan ("1992 Plan"), the Compensation Committee of the Board
of Directors may grant to any employee, consultant or officer, incentive stock
options or nonqualified stock options to
24
<PAGE>
purchase the Company's common stock. The Compensation Committee has the
authority to select optionees and determine the terms of the options granted.
Under the 1992 Stock Plan, the options generally become exercisable
cumulatively, beginning on the date of grant, in equal annual installments of
25%, and expire ten years from the date of grant. In 1995, the shareholders
approved an amendment to increase the maximum number of shares available to be
granted under the 1992 Plan from 1,023,750 to 1,523,750 shares. At December 31,
1996 the Company had 644,675 shares available to grant under this plan.
On May 24, 1995, the Board of Directors voted to allow all nonofficer option
holders under the 1992 Plan to elect to exchange their existing options with an
exercise price in excess of $16.50 per share for options with an exercise price
of $16.50 per share, the closing price on May 23, 1995, provided they forfeit
25% of the shares covered by the options elected to be repriced. Total options
elected to be repriced were 212,875, approximately 75% of the eligible shares.
In May 1995, the shareholders voted to replace the 1992 Non-Employee Directors
Stock Option Plan with the 1995 Non-Employee Directors Stock Option Plan ("the
Director Plan"). Under the Director Plan, upon initial election or appointment
to the Board, the Company automatically grants to its non-employee directors,
excluding directors of affiliated companies, nonqualified stock options to
purchase 15,000 shares of the Company's common stock. This initial grant vests
in equal annual installments of 33 1/3% beginning on the date of grant. After
this initial vesting period, on each subsequent anniversary date, non-employee
directors receive fully vested nonqualified stock options to purchase 3,333
shares of the Company's common stock. The stock options are granted at an
exercise price equal to the fair market value of the Company's common stock on
the date of grant and expire ten years from the date of grant. The Director Plan
authorized the issuance of 250,000 shares of common stock. At December 31, 1996
the Company had 233,335 shares available to grant under this plan.
The Company has an Employee Stock Purchase Plan that authorizes the issuance
of a maximum of 450,000 shares of common stock pursuant to the exercise of
nontransferable options granted to participating employees. At December 31, 1996
the Company had 380,460 shares available to grant under this plan.
Stock option activity during the eleven-month period ended December 31, 1994,
and the years ended 1995 and 1996 was as follows:
Option Price
Shares Per Share
- --------------------------------------------------------------------------------
Outstanding at January 31, 1994 721,626 $ 0.16 - $42.75
---------------------------------
Options granted 400,000 14.75 - 23.50
Options exercised (1,248) 23.50
Options forfeited (113,500) 23.50 - 42.75
---------------------------------
Outstanding at December 31, 1994 1,006,878 0.16 - 36.50
---------------------------------
Options granted 554,656 14.00 - 21.00
Options exercised (267,514) 0.16 - 16.50
Options forfeited (253,375) 10.00 - 36.50
---------------------------------
Outstanding at December 31, 1995 1,040,645 0.16 - 23.50
---------------------------------
Options granted 16,666 14.00 - 17.75
Options exercised (15,908) 0.16
Options forfeited (304,669) 10.00 - 23.50
---------------------------------
Outstanding at December 31, 1996 736,734 $ 0.93 - $23.50
---------------------------------
The following table summarizes information about the Company's stock options
outstanding at December 31, 1996:
Year of expiration Shares Option Price per share
- --------------------------------------------------------------------------------
1999 35,888 $ 0.93
2000 69,757 0.93
2002 216,819 10.00
2004 225,938 16.50 - 23.50
2005 171,666 14.00 - 17.75
2006 16,666 14.00 - 17.75
---------
736,734
---------
25
<PAGE>
At December 31, 1996, 1995 and 1994, exercisable options totaled 608,453,
625,301 and 704,253, respectively. Treasury shares of common stock have been
used upon exercise of stock options. The difference between the cost of the
treasury stock used and the total option price of shares exercised have been
reflected in additional paid-in capital.
During 1996, the Company adopted the disclosure-only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation," but, as permitted, continues to
apply Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option plans. If the Company had elected to recognize
compensation expense for the stock option plans based on the fair value at the
grant dates for awards under those plans consistent with the method prescribed
by SFAS No. 123, the Company's results would have reflected additional
compensation expense of approximately $1,106,000 and $1,618,000 for 1996 and
1995, respectively. Net income(loss) and earnings (loss) per share would have
been changed to the pro forma amounts indicated below.
Year ended Year ended
December 31, December 31,
(In thousands, except per share data) 1996 1995
- --------------------------------------------------------------------------------
Net income (loss):
As reported $(12,673) $(2,543)
Pro forma (13,333) (3,508)
- --------------------------------------------------------------------------------
Earnings (loss) per share:
As reported $ (0.66) $ (0.13)
Pro forma (0.70) (0.18)
As the provisions of SFAS No. 123 have not been applied to options granted prior
to January 1, 1995, the resulting pro forma compensation expense may not be
representative of that to be expected in future years.
The fair value of the Company's stock options used to compute pro forma net
income (loss) and earnings (loss) per share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1996 and 1995: dividend yield of 0%;
expected volatility of 60%; a risk free interest rate of 6.3% and the expected
holding period of 5 years.
Savings Plan
The Company has a defined contribution plan that qualifies under Section 401(k)
of the Internal Revenue Code for the benefit of substantially all full-time,
eligible employees. Employees may contribute between 1% and 15% of their salary
up to the dollar maximum allowed by the Internal Revenue Service. Company
contributions were voluntary and made at the discretion of the Board of
Directors. In January 1996, the Board of Directors voted to amend the plan to
assure a minimum Company contribution of 2% of qualified compensation up to the
limits allowed by the Internal Revenue Service. The Company expensed $123,000,
$500,000 and $600,000 for contributions under this plan for the years ended 1996
and 1995 and for the eleven-month period ended December 31, 1994, respectively.
Effective January 1, 1994, the Company's Employee Stock Ownership Plan ("ESOP")
was merged into the savings plan.
Deferred Compensation Plan
The Company established an unfunded deferred compensation plan in August 1995 to
allow for certain of its management or highly compensated employees to defer the
receipt of specified compensation under Sections 201(2), 301(a)(3) and 401(a)(1)
of the Employee Retirement Income Security Act of 1974.
Employee Bonus Plan
The Company maintains a bonus plan which provides cash awards to employees, at
the discretion of the Board of Directors, based upon operating results and
employee performance. Net bonus expense was $315,000, $181,000 and $464,000 for
the years ended 1996 and 1995 and for the eleven-month period ended December 31,
1994, respectively.
J. RELATED PARTY TRANSACTIONS
In 1993, Hoechst Corporation ("HC"), through an indirect wholly-owned
subsidiary, completed a tender offer and acquired 51% of the fully diluted
shares of the Company.
On July 18, 1995, HC completed its purchase of Marion Merrell Dow, Inc.
("MMD") and changed MMD's name to Hoechst Marion Roussel, Inc. ("HMRI"). The
acquisition of MMD and the formation of HMRI 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 HMRI. Net sales to
Rugby were approximately $1.0 million and $4.1 million for the years ended 1996
and 1995, respectively. Total amounts due from Rugby at December 31, 1996 and
1995 were approximately $61,000 and $826,000, respectively.
26
<PAGE>
In connection with HC's acquisition of its majority interest in the Company, 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 products sold by Hoechst-Roussel Pharmaceuticals Inc.
("HRPI"), which was an indirect majority-owned subsidiary of HC. This Product
Agreement has an initial term of five years, until November 11, 1998, and
continues unless terminated by either party giving one year's notice. On January
1, 1996, HRPI was merged into HMRI. HMRI has agreed to be bound by the Product
Agreement to the extent that HRPI was bound; that is, the Product Agreement
continues to be in effect for products manufactured by the former HRPI but not
for products manufactured by HMRI prior to the merger with HRPI nor for products
developed by HMRI after January 1, 1996. In furtherance of the Product
Agreement, the Company and HMRI entered into separate contracts relating to
specific products as these products become available for generic distribution.
In order to assure continuity of supply under a variety of circumstances and to
provide other competitive benefits, the Company has agreed to renegotiate the
distribution contracts relating to glyburide and micronized glyburide; as a
result, the profit contribution of these products likely may decrease in the
future. For the years ended 1996 and 1995 and the eleven-month period ended
December 31, 1994, approximately $30,814,000, $42,470,000 and $33,131,000,
respectively, of generic versions of products were purchased from HMRI.
Under the Product Agreement the Company also is afforded the opportunity to
purchase bulk pharmaceutical ingredients under certain circumstances. During
1996 and 1995, the Company purchased approximately $230,000 and $37,000,
respectively, of bulk products under these agreements.
In connection with HC's acquisition of MMD, on December 5, 1995 the Federal
Trade Commission issued its Decision and Order ("Order") which, among other
things, requires either HC or MMD to divest its assets relating to research,
development, manufacture and sale of the compounds mesalamine and rifampin. For
purposes of the Order, Copley is considered part of HC. Copley has agreed to
divest its assets relating to mesalamine and rifampin and has entered into
agreements for the sale of these assets which are awaiting Federal Trade
Commission approval. Both these products are in the developmental stage and the
Company has not submitted an ANDA for either product. The Company expects that
it will be compensated by its majority owner if it is not able to obtain a
satisfactory price for these assets.
The Company obtains its comprehensive general liability, product liability,
umbrella liability and all risks property insurance coverage through an
insurance and risk sharing arrangement with HC and its parent, Hoechst AG, and
its various subsidiaries. Insurance coverage is provided by HC, through its
wholly-owned insurance subsidiary, as well as by external parties. Total
premiums paid by the Company for these insurance policies aggregated to
approximately $5,140,000 and $3,210,000 for the years ended 1996 and 1995,
respectively, compared to approximately $193,000 for the eleven-month period
ended December 31, 1994.
For the years ended 1996 and 1995, the Company purchased approximately
$265,000 and $808,000, respectively, of bulk raw chemicals from a chemical
company whose president is a member of the Company's Board of Directors.
For the years ended 1996 and 1995 and the eleven-month period ended December
31, 1994, the Company invested $59,000, $485,000 and $25,000, respectively, in a
multi-source pharmaceutical company, MIR Pharmaceutical, whose senior vice
president is a member of the Company's Board of Directors. This company was
founded in 1993 to market multi-source drugs, including products manufactured by
the Company, in certain republics of the former Soviet Union. This investment is
accounted for under the cost method.
At December 31, 1996, the Company was a 49% owner of Chia Tai Copley
Pharmaceutical ("CTCP") which, in turn, was an 85% owner of Wuxi Chia Tai Copley
Pharmaceutical ("WCTCP"). CTCP and WCTCP were formed to manufacture and market
multi-source drug products in the People's Republic of China. The Company's
investment in CTCP totaled $2.4 million and $218,000 at December 31, 1996 and
1995, respectively.
During 1995, the Company's Board of Directors voted to decrease the Company's
financial commitment to and deemphasize the Company's role in CTCP and WCTCP.
Subsequently a subsidiary of Hoechst AG indicated its desire to purchase an
interest in WCTCP and it is anticipated that if this transaction is completed,
the Company will receive the return of approximately $2.1 million of its
investment in CTCP and will experience a corresponding reduction in its
ownership interest in CTCP. This investment is accounted for under the equity
method.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
these instruments.
27
<PAGE>
Securities
The fair values of those instruments are estimated based on quoted market prices
for these or similar investments.
Long-term Debt
The fair value of the Company's long-term debt is estimated by discounting cash
flows based on similar current rates offered to the Company for debt of the same
remaining maturities.
December 31, 1996 December 31, 1995
-----------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
- --------------------------------------------------------------------------------
Cash and cash equivalents $15,974 $15,974 $18,950 $18,950
Available-for-sale securities 13,757 13,757 5,147 5,147
Trading securities -- -- 950 950
Long-term debt 5,400 5,400 5,700 5,700
L. COMMITMENTS AND CONTINGENCIES
Leases
During 1996, the Company restructured its operations by consolidating
warehouse, manufacturing and office sites. The Company consolidated its
warehouse and distribution operations into one location under a noncancelable
operating lease with a third-party lessor. This lease is for five years with a
five-year renewal option and requires the payment of insurance, real estate
taxes and other operating expenses. Additionally, during 1996 the Company
leased, on a monthly basis, a warehouse and packaging site from a real estate
trust that is 50% owned by a member of the Company's Board of Directors; by year
end the Company consolidated these operations into the existing facilities and
terminated this lease. The Company also leases vehicles and office equipment
under one-to five-year operating leases.
Net rental expense was $1,053,000, $1,720,000 and $1,519,000 for the years
ended 1996 and 1995, and the eleven-month period ended December 31, 1994,
respectively, which included related party rental expense of $180,000, $171,000
and $145,000, respectively. Additionally, the Company expensed $236,000 as a
restructuring charge in 1996 for future lease commitments on locations that were
vacated in the consolidation effort.
Future minimum lease payments under noncancelable operating leases are as
follows:
(In thousands)
- --------------------------------------------------------------------------------
1997 $ 562
1998 541
1999 532
2000 527
2001 476
Thereafter --
-------
Total minimum lease payments $2,638
-------
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 with complaints 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.
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 a partial class
action for determination of liability only and commenced a jury trial in June
1995. In August 1995, prior to the conclusion of the jury trial, the Company
entered into a settlement agreement with the representative plaintiffs in the
class action lawsuit. 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 as an estimate of the cost of settling claims by persons alleging
wrongful death, which claims are limited by the settlement to compensatory
damages only and are subject to non-binding negotiation and arbitration. Within
the Company's minimum and maximum contributions, the amount to be paid by the
Company is subject to revision based
28
<PAGE>
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 and that Order has become final and nonappealable.
The settlement agreement requires that the $150 million maximum contribution
to 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 as security for potential future payments. During the third quarter of
1995, the Company paid $5.1 million to the Albuterol Settlement Trust Fund and
obtained approximately $17.1 million in irrevocable stand-by letters of credit
to cover its uninsured obligation to fund the settlement agreement. The
settlement agreement required an additional $15.0 million cash deposit after the
order approving the settlement became final and nonappealable, which occurred in
late December 1996. In January 1997, the Company made an additional $2.25
million cash deposit and its stand-by letters of credit will be reduced by a
like amount. The balance of the additional $15.0 million cash deposit is to be
funded by a draw upon a letter of credit previously provided by one of the
Company's insurers. The $7.35 million cash contributions by the Company are
nonrefundable pursuant to the terms of the settlement agreements.
Approximately 5,530 proofs of claim have been filed with the Special Master
appointed by the Court to oversee the Albuterol Settlement Trust Fund. 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 Albuterol Settlement Trust Fund.
Proofs of claim also have been filed on behalf of approximately 485 people
alleging wrongful death.
Recourse to the remaining letters of credit in the class action settlement
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 Albuterol Settlement Trust Fund is less than the number of claims
for which the settling parties anticipated would be necessary to require the
maximum funding of the Albuterol Settlement Trust 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 Albuterol Settlement Trust Fund. Accordingly,
the Company cannot predict the total amount to be paid out of the Albuterol
Settlement Trust Fund.
The settlement also is 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; a
tentative settlement was reached in two lawsuits involving approximately 45 of
these persons in the first quarter of 1997.
Grand Jury Investigation
The Company has received grand jury subpoenas from the United States Attorney's
Office in Massachusetts for documents related to albuterol and Brompheril(R)
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 continues and the Company is engaged in ongoing discussions about
a possible resolution with federal authorities. At this time management is
unable to determine the ultimate impact on the Company's financial condition. An
adverse outcome of these proceedings 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. The case is awaiting trial which now is
scheduled to begin in late April 1997.
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
this lawsuit 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.
29
<PAGE>
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.
International Trade Commission Complaint
On February 25, 1993, the Company, together with a number of other multi-source
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. On March 7, 1997, the United States Court of Appeals for
the Federal Circuit affirmed the ITC's decision finding no infringement. The
time for further appeal has not expired.
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 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.
Subsequent Event
On January 29, 1997, the Company was served with a complaint in an action
pending in the New Jersey Superior Court, Morris County, captioned
Warner-Lambert Company v. Copley Pharmaceutical, Inc. and Shubha Chungi. The
plaintiff alleges that the Company obtained access to the plaintiff's formula,
process and sustained release technology for a procainamide product through
improper means. The Company has been marketing its product since 1985. The
individual named as a defendant is a former employee of the plaintiff who joined
the Company in 1984. The Company believes it has meritorious defenses to the
claims asserted by plaintiff and will vigorously defend the case. However, there
can be no assurance that the Company will prevail in the lawsuit 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.
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.
The Company has $17.8 million of estimated legal contingency reserves accrued
at December 31, 1996. These reserves reflect the Company's estimates of its
exposure at December 31, 1996 in its various outstanding legal proceedings
described above. Actual settlement amounts may differ from amounts estimated.
M. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning disclosure of cash flow
activities:
30
<PAGE>
Eleven-month
Year ended Year ended period ended
December 31, December 31, December 31,
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Cash paid (refunded) during the period for:
Interest $ 241 $ 280 $ 225
Income taxes (5,062) (1,741) 3,948
N. RESTRUCTURING
In response to increasing pricing pressures and eroding margins, the Company
restructured its operations in the fourth quarter of 1996. The restructuring
included the consolidation of warehouse, manufacturing and office sites as well
as the write-off of underutilized and idle equipment and, to a lesser extent,
reductions in the labor force.
O. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three-month Periods Ended
--------------------------------------------------------- Total
March 31, June 30, September 30, December 31, December 31,
(In thousands, except per share data) 1996 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 24,347 $ 35,311 $ 32,589 $ 31,214 $ 123,461
Gross profit 4,648 10,002 7,920 6,860 29,430
Recall related and litigation expenses 191 (255) 175 12,232 (a) 12,343
Net income (loss) (3,029) 1,702 614 (11,960)(b) (12,673)
Net income (loss) per share $ (0.16) $ 0.09 $ 0.03 $ (0.63) $ (0.66)
</TABLE>
<TABLE>
<CAPTION>
Three-month Periods Ended
--------------------------------------------------------- Total
March 31, June 30, September 30, December 31, December 31,
(In thousands, except per share data) 1995 1995 1995 1995 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 30,893 $ 35,148 $ 39,232 $ 36,885 $ 142,158
Gross profit 11,570 12,658 10,807 6,234(c) 41,269
Recall related and litigation expenses 1,500 2,011 12,827 1,492 17,830
Net income (loss) 2,915 1,505 (5,246) (1,717) (2,543)
Net income (loss) per share $ 0.15 $ 0.08 $ (0.28) $ (0.09) $ (0.13)
</TABLE>
(a) Includes an increase in contingency reserves reflecting changes in estimates
of the Company's exposure in its various outstanding legal proceedings.
(b) Includes $3.5 million ($2.1 million after taxes) of restructuring expenses.
(c) Includes increased inventory write-offs and increased accounts receivable
allowances. The inventory write-offs resulted primarily from normal Company
operations and management's decision to discontinue certain of its products
during the fourth quarter. The accounts receivable allowances resulted
primarily from pricing adjustments related to competitive pressures and from
increased government rebates and returns recognized during the fourth
quarter.
31
<PAGE>
COPLEY PHARMACEUTICAL, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Copley Pharmaceutical, Inc.:
We have audited the accompanying consolidated balance sheets of Copley
Pharmaceutical, Inc. and subsidiaries ("the Company") as of December 31, 1996
and 1995 and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Copley
Pharmaceutical, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/S/KPMG Peat Marwick LLP
Boston, Massachusetts
January 29, 1997
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements and other financial information contained
in this annual report on Form 10-K were prepared by management in conformity
with generally accepted accounting principles. In preparing these financial
statements, reasonable estimates and judgments have been made when necessary.
Management is responsible for establishing and maintaining a system of
internal control, designed to provide reasonable assurance as to the integrity
and reliability of the financial records. The concept of reasonable assurance
recognizes that there are inherent limitations in any control system and that
the cost of maintaining a control system should not exceed the expected benefits
to be derived therefrom. Management believes its system of internal control
effectively meets its objective of reliable financial reporting.
The Audit Committee of the Board of Directors is comprised solely of
non-employee directors and meets periodically with management and the
independent accountants to review and discuss audit findings and other financial
and accounting matters. The independent accountants have free access to the
Audit Committee, with and without management present, to discuss the results of
their audit work.
The Company's independent accountants are engaged to audit the Company's
consolidated financial statements, in accordance with generally accepted
auditing standards for the purpose of expressing an opinion on the consolidated
financial statements.
/S/Ken E. Starkweather
Vice President-Finance and Treasurer
32
<PAGE>
COPLEY PHARMACEUTICAL, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Copley Pharmaceutical, Inc.:
We have audited the consolidated statement of operations, shareholders' equity
and cash flows of Copley Pharmaceutical, Inc. for the eleven-month period ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Copley Pharmaceutical, Inc. for the eleven-month period ended December 31, 1994
in conformity with generally accepted accounting principles.
/S/Coopers & Lybrand L.L.P
Boston, Massachusetts
January 25, 1995
33
<PAGE>
ITEM 9:CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Coopers & Lybrand L.L.P. were previously the principal accountants for the
Company. On September 6, 1995, that firm's appointment as principal accountants
was terminated and KPMG Peat Marwick LLP were engaged as principal accountants
by the Company's Board of Directors.
In connection with the audit of the eleven-month period ended December 31,
1994 and during the interim period from December 31, 1994, the date of the last
audited financial statements, to September 6, 1995, the date of dismissal, there
were no disagreements with Coopers & Lybrand L.L.P. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of disagreement.
The audit report of Coopers & Lybrand L.L.P. on the financial statements of
Copley Pharmaceutical, Inc. for the eleven-month transition period ended
December 31, 1994 did not contain any adverse opinion or disclaimer of opinion.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The information concerning directors and executive officers of the Company
required under this Item is incorporated herein by reference to the Company's
definitive proxy statement pursuant to Regulation 14A, to be filed with the
Commission not later than 120 days after the close of the Company's year ended
December 31, 1996, under the headings "Occupations of Directors and Executive
Officers" and "Management and Principal Shareholders."
ITEM 11: EXECUTIVE COMPENSATION
The information required under this Item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the Commission not later than 120 days after the close of the Company's
year ended December 31, 1996, under the heading "Compensation and Other
Information Concerning Directors and Officers."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required under this Item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the Commission not later than 120 days after the close of the Company's
year ended December 31, 1996, under the heading "Management and Principal
Shareholders."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The information required under this Item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the Commission not later than 120 days after the close of the Company's
year ended December 31, 1996, under the heading "Certain Relationships and
Related Transactions."
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a)1. CONSOLIDATED FINANCIAL STATEMENTS
For the following financial information included herein see Part II. Item 8
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995
Consolidated Statements of Operations for the years ended December 31, 1996
and 1995 and the eleven-month period ended December 31, 1994
Consolidated Statements of Shareholders' Equity for the eleven-month period
ended December 31, 1994 and the years ended December 31, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1995 and the eleven-month period ended December 31, 1994
Notes to Consolidated Financial Statements
Reports of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are not submitted because they are not
applicable, not required or because the information is included in the
Consolidated Financial Statements or Notes to the Consolidated Financial
Statements.
3. LIST OF EXHIBITS
Exhibit No. Description
-----------------------------------------------------------------------------
3.1**** Amended and Restated Certificate of Incorporation of the
Company, as amended.
3.2* Amended and Restated By-Laws of the Company.
4**** Description of Capital Stock contained in the Company's
Amended and Restated Certificate of Incorporation, as amended,
filed as Exhibit 3.1.
10.1* Subordinated Convertible Debenture Purchase Agreement between
the Company and certain investors dated November 15, 1991.
10.2* Registration Rights Agreement between the Company and certain
investors dated November 22, 1991.
10.3* Industrial Revenue Bond Agreements executed by the Company
dated July 15, 1989.
10.4* 1986 Incentive Stock Option Plan.
10.5* 1990 Stock Plan.
10.6++ Amended and Restated 1992 Stock Plan.
10.7* 1992 Non-Employee Director Stock Plan.
l0.8* 1992 Employee Stock Purchase Plan.
10.9* Employee Stock Ownership Plan.
10.10**** Profit Sharing and 401(k) Savings Plan, as amended.
10.11* Research & Development Cross License and Option to Purchase
with Copley R&D Limited Partnership II.
10.12* Form of Indemnity Agreement with Directors and Certain
Officers.
10.13** Employment Agreement, dated as of October 8, 1993, between the
Company and Jane C.I. Hirsh.
10.14** Form of Employment Agreement between the Company and certain
employees.
34
<PAGE>
Exhibit No. Description
-----------------------------------------------------------------------------
10.15** Acquisition Agreement, dated as of October 8, 1993, by and
among the Company, Hoechst Celanese and HCCP Acquisition
Corporation.
10.16**** Corporate Governance and Standstill Agreement, dated as of
October 8, 1993, by and among the Company, Hoechst Celanese
and HCCP Acquisition Corporation, as amended.
10.17** Stock Purchase Agreement, dated as of October 8, 1993, by and
among Hoechst Celanese Corporation, HCCP Acquisition
Corporation, Jane C.I. Hirsh, Mark Hirsh, and Advent VI L.P.,
Advent Atlantic and Pacific Limited Partnership, Advent
Atlantic and Pacific II Limited Partnership, Advent New York
L.P., Advent Industrial II, L.P., TA Venture Investors Limited
Partnership, Chestnut III Limited Partnership and Chestnut
Capital International Partnership.
10.18** Product Agreement, dated as of October 8, 1993, between
Hoechst Celanese Corporation and the Company.
10.19** Confidentiality Agreement, dated as of September 10, 1993,
between the Company and Hoechst Celanese Corporation.
10.20*** Amended and Restated Loan Agreement dated August 17, 1993
between Copley Pharmaceutical, Inc. and The First National
Bank of Boston.
10.21***** Resignation Agreement dated December 22, 1994 between Anthony
A. Bonelli and Copley Pharmaceutical, Inc.
10.22+ 1995 Non-Employee Director Stock Option Plan.
10.23+ First Amendment to Amended and Restated Loan Agreement dated
as of June 29, 1995 by and between the Company and the First
National Bank of Boston ("Bank of Boston").
10.24+ First Amendment to Amended and Restated Promissory Note dated
as of June 29, 1995 by and between the Company and Bank of
Boston.
10.25+ First Amendment to Reimbursement Agreement dated as of June
29, 1995 by and between the Company and Bank of Boston.
10.26++ Agreement of Compromise and Settlement dated August 22, 1995.
10.27++ Supplement to August 22, 1995 Agreement of Compromise and
Settlement.
10.28++ Escrow and Trust Agreement dated August 28, 1995.
10.29++ Second Amendment to Amended and Restated Loan Agreement dated
as of August 30, 1995 by and between the Company and Bank of
Boston.
10.30+++ Stipulation of Compromise and Settlement dated November 17,
1995.
10.31+++ Third Amendment to Amended and Restated Loan Agreement dated
as of March 25, 1996 by and between the Company and Bank of
Boston.
10.32++++ Fourth Amendment to Amended and Restated Loan Agreement dated
as of July 31, 1996 by and between the Company and Bank of
Boston.
10.33++++ Third Amendment to Amended and Restated Promissory Note dated
as of July 31, 1996 by and between the Company and Bank of
Boston.
21 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule.
* Previously filed as exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-60324) filed on March 31,
1993 and incorporated herein by reference.
** Previously filed as exhibits to the Company's Solicitation/
Recommendation Statement on Schedule 14D-9 dated October 14,
1993 and incorporated herein by reference.
*** Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31,
1993 and incorporated herein by reference.
**** Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1994
and incorporated herein by reference.
***** Previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the eleven-month period ended December 31,
1994 and incorporated herein by reference.
+ Previously filed as exhibits to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995 and
incorporated herein by reference.
++ Previously filed as exhibits to the Company's Quarterly Report
on Form 10-Q of the quarterly period ended September 30, 1995
and incorporated herein by reference.
+++ Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference.
++++ Previously filed as exhibits to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1996 and
incorporated herein by reference.
(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.
No other reports on Form 8-K were filed during the year ended December 31,
1996.
(c)EXHIBITS
The Company hereby files as exhibits to this Report on Form 10-K those
exhibits listed in Item 14(a)(3), above.
(d)FINANCIAL STATEMENT SCHEDULES
The Company hereby files as financial statement schedules to this Report on
Form 10-K those financial statement schedules, if any, listed in Item
14(a)(2), above.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Copley Pharmaceutical, Inc.
By: /S/ KENNETH N. LARSEN
-------------------------
Kenneth N. Larsen
Chairman of the Board
(principal executive officer)
By: /S/ KEN E. STARKWEATHER
---------------------------
Vice President-Finance and Treasurer
(principal financial and accounting officer)
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title(s) Date
- --------------------------------------------------------------------------------
/S/KENNETH N. LARSEN
- --------------------
Kenneth N. Larsen Chairman of the Board and Director March 28, 1997
(principal executive officer)
/S/KEN E. STARKWEATHER
- ----------------------
Ken E. Starkweather Vice President-Finance and Treasurer March 28, 1997
(principal financial and accounting officer)
/S/ JUDITH FENSTERER
- --------------------
Judith Fensterer Director March 28, 1997
/S/ JANE C.I. HIRSH
- -------------------
Jane C.I. Hirsh President of Copley Pharmaceutical March 28, 1997
International, Inc. and Director
/S/ PETER W. LADELL
- -------------------
Peter W. Ladell Director March 28, 1997
/S/JAMES P. MITCHUM
- -------------------
James P. Mitchum Director March 28, 1997
/S/ AGNES VARIS
- ---------------
Agnes Varis Director March 28, 1997
/S/ MARTIN ZEIGER
- -----------------
Martin Zeiger Director March 28, 1997
36
EXHIBIT 21
COPLEY PHARMACEUTICAL, INC.
SUBSIDIARIES OF THE COMPANY
NAME JURISDICTION OF INCORPORATION
Copley Pharmaceutical Securities Corporation. . . . . . . . Massachusetts
Copley Pharmaceutical International, Inc. . . . . . . . . . . Delaware
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Copley Pharmaceutical, Inc.
We consent to incorporation by reference in registration statements (No.
33-54707), (No. 33-96122) and (No. 33-96118) on Form S-8 of Copley
Pharmaceutical, Inc. of our report dated January 29, 1997, relating to the
consolidated balance sheets of Copley Pharmaceutical, Inc. and subsidiaries as
of December 31, 1996 and 1995 and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1996 and 1995, which report appears in the December 31, 1996 annual report on
Form 10-K of Copley Pharmaceutical, Inc.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 27, 1997
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Copley Pharmaceutical, Inc.
We consent to incorporation by reference in registration statements of Copley
Pharmaceutical, Inc. on Form S-8 (File Nos. 33-54707, 33-96122 and 33-96118) of
our report dated January 25, 1995, on our audits of the consolidated statements
of income, changes in shareholders' equity and cash flows of Copley
Pharmaceutical, Inc. for the eleven-month period ended December 31, 1994, which
report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> COPLEY PHARMACEUTICAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 15974
<SECURITIES> 13757
<RECEIVABLES> 27024
<ALLOWANCES> (500)
<INVENTORY> 27131
<CURRENT-ASSETS> 94675
<PP&E> 71464
<DEPRECIATION> (19109)
<TOTAL-ASSETS> 151727
<CURRENT-LIABILITIES> 46496
<BONDS> 0
0
0
<COMMON> 254
<OTHER-SE> 99877
<TOTAL-LIABILITY-AND-EQUITY> 151727
<SALES> 123461
<TOTAL-REVENUES> 123461
<CGS> 94031
<TOTAL-COSTS> 94031
<OTHER-EXPENSES> 45660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 241
<INCOME-PRETAX> (15892)
<INCOME-TAX> (3219)
<INCOME-CONTINUING> (12673)
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<CHANGES> 0
<NET-INCOME> (12673)
<EPS-PRIMARY> (0.66)
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