SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________.
COPLEY PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2514637
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 John Road
Canton, Massachusetts 02021
(Address of principal executive offices) (Zip Code)
Commission file number: 0-20126
Registrant's telephone number, including area code: (617) 821-6111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of the registrant's only class of common
stock as of April 30, 1997 was 19,119,235 shares.
<PAGE 2>
COPLEY PHARMACEUTICAL, INC.
INDEX
For the Three Months Ended March 31, 1997
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1997
and 1996 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Changes in Financial Condition 10 - 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
<PAGE 3>
PART 1. ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Unaudited
(In thousands, except share data) MARCH 31, DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,334 $ 15,974
Available-for-sale securities 15,739 13,757
Accounts receivable, trade, net 23,267 26,963
Accounts receivable, related party --- 61
Inventories:
Raw materials 11,330 12,580
Work in process 4,584 4,390
Finished goods 10,175 10,161
------- -------
Total inventories 26,089 27,131
Current deferred tax assets 6,738 6,548
Other current assets 7,544 4,241
------- -------
Total current assets 89,711 94,675
Property, plant and equipment, net 50,782 52,355
Deferred tax assets 274 215
Other assets 4,372 4,482
------- -------
Total assets $145,139 $151,727
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 3,729 $ 6,360
Accounts payable, related party 8,521 10,948
Current portion of long-term debt 300 300
Accrued compensation and benefits 882 1,398
Accrued rebates 4,356 6,908
Accrued income taxes 978 883
Accrued recall related and litigation expenses 15,638 17,839
Accrued expenses 5,781 1,860
------- -------
Total current liabilities 40,185 46,496
Long-term debt 5,100 5,100
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 77,982 77,875
Unrealized holding loss on available-for
-sale securities (28) ---
Retained earnings 34,206 34,569
Treasury stock, at cost, 6,251,510 and
6,266,258 shares outstanding, at March 31,
1997 and December 31, 1996, respectively (12,560) (12,567)
------- -------
Total shareholders' equity 99,854 100,131
------- -------
Total liabilities and shareholders' equity $145,139 $151,727
======= =======
</TABLE>
[FN]
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE 4>
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the three
months ended
(Unaudited) March 31,
(In thousands) 1997 1996
------ ------
<S> <C> <C>
Net sales:
Manufactured products $15,534 $17,441
Distributed products 10,282 6,906
------ ------
Net sales 25,816 24,347
Cost of goods sold:
Manufactured products 12,970 15,222
Distributed products 8,017 4,477
------ ------
Cost of goods sold 20,987 19,699
Gross profit 4,829 4,648
Operating expenses:
Research and development 2,683 3,904
Selling, marketing and distribution 1,268 2,053
General and administrative 1,478 2,610
Recall related and litigation 199 191
------ ------
Income (loss) from operations (799) (4,110)
Interest and other investment income 303 176
Interest expense (62) (58)
Other income (expense), net 40 (1,031)
------ ------
Income (loss) before income taxes (518) (5,023)
Provision (benefit) for income taxes (155) (1,994)
------ ------
Net income (loss) $ (363) $(3,029)
====== ======
Weighted average common shares outstanding:
Primary 19,119 19,070
Fully diluted 19,119 19,070
Earnings (loss) per share:
Primary $(0.02) $(0.16)
Fully diluted $(0.02) $(0.16)
</TABLE>
[FN]
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE 5>
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the three
months ended
(Unaudited) March 31,
(In thousands) 1997 1996
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (363) $(3,029)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,824 1,921
Realized losses (gains) on sales of assets (141) 238
Change in deferred taxes (249) (498)
Changes in operating assets and liabilities:
Accounts receivable 3,757 8,808
Inventories 1,042 (1,653)
Other current assets (3,303) (3,733)
Other assets, net of amortization 106 (2,045)
Accounts payable (5,058) (5,540)
Accrued income taxes 95 1,178
Accrued expenses (1,348) (192)
------ ------
Net cash provided by (used in) operating
activities (3,638) (4,545)
------ ------
Cash flows from investing activities:
Capital expenditures (286) (2,213)
Purchases of available-for-sale securities (2,470) ---
Proceeds from maturities of available-for-sale
securities 500 5,000
Proceeds from sales of property, plant and equipment 141 ---
------ ------
Net cash provided by (used in) investing activities (2,115) 2,787
------ ------
Cash flows from financing activities:
Issuance of common stock to Employee Stock Purchase Plan 113 151
------ ------
Net cash provided by financing activities 113 151
------ ------
Net increase (decrease) in cash and cash equivalents (5,640) (1,607)
Cash and cash equivalents at beginning of period 15,974 18,950
------ ------
Cash and cash equivalents at end of period $ 10,334 $17,343
====== ======
</TABLE>
[FN]
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE 6>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 1997
NOTE A - GENERAL
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all normal and recurring adjustments necessary to
present fairly the financial position of the Company as of March 31, 1997 and
December 31, 1996 and the results of its operations and cash flows for the
three months ended March 31, 1997 and 1996. While the Company believes that
the disclosures presented are adequate to make the information not misleading,
these financial statements should be read in conjunction with the Notes
included in the Company's Form 10-K for the year ended December 31, 1996. The
results for the three-month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for any future period.
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could have a material adverse effect on the Company's
business, financial condition, results of operations and stock price.
Statements in this Report on Form 10-Q which are not historical facts, so-
called "forward-looking statements", are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties, including those detailed in the Company's filings with the
Securities and Exchange Commission. See, for example, "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Risk Factors and Future Trends" contained in the Company's Form 10-K for the
year ended December 31, 1996.
NOTE B - RELATED PARTY TRANSACTION
On July 18, 1995, Hoechst Corporation ("HC"), the Company's 51% shareholder,
completed its purchase of Marion Merrell Dow, Inc. ("MMD") and changed MMD's
name to Hoechst Marion Roussel, Inc. ("HMRI"). This transaction resulted in a
related party relationship between the Company and its customer Rugby
Laboratories ("Rugby"), which was a subsidiary of MMD and is now a subsidiary
of HMRI.
There were no sales to Rugby during the three months ended March 31, 1997.
Net sales to Rugby totaled approximately $268,000 for the three months ended
March 31, 1996.
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
Company expects increased royalty costs which have been reflected in the
current quarter's gross profit results. For the three months ended March 31,
1997 and 1996, approximately $8.2 million and $4.9 million, respectively, of
generic versions of products were purchased from HMRI under this Product
Agreement.
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. Both these
products are in the developmental stage and Copley has not submitted an ANDA
for either product. Copley has agreed to divest its assets relating to
mesalamine and rifampin. In April 1997, the Company completed the sale of its
rifampin assets to a third party. The Company has entered into an agreement
with another third party for the sale of its mesalamine assets which is
awaiting Federal Trade Commission approval. 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.
<PAGE 7>
The Company obtains its comprehensive general liability, product liability,
excess liability and all risks property insurance coverage through an
insurance and risk-sharing arrangement with HC and its parent, Hoechst
Aktiengesellschaft ("Hoechst AG"), and its various subsidiaries. Insurance
coverage is provided by HC through its wholly-owned insurance subsidiary, as
well as by external parties. The Company's total insurance expense for these
insurance policies was approximately $1.2 million and $1.3 million,
respectively, for the three months ended March 31, 1997 and 1996.
During the three months ended March 31, 1997 and 1996, the Company purchased
approximately $10,000 and $370,000, respectively, of bulk raw materials from a
chemical company whose president is a member of the Company's Board of
Directors.
NOTE C - LITIGATION AND CONTINGENCIES
Albuterol Class Action Lawsuits
In connection with the Company's product recall of albuterol sulfate
inhalation solution, 0.5% ("albuterol"), the Company has been served 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 has 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 nonbinding negotiation and
arbitration. Within the Company's minimum and maximum contributions, the
amount to be paid by the Company is subject to revision based upon the number
and seriousness of individual claims eventually filed. On November 15, 1995,
the District Court entered its Order giving final approval of the settlement;
and that Order has become final and nonappealable.
The settlement agreement requires that the $150 million maximum contribution
be funded by an initial $50 million cash deposit and issuance of letters of
credit for the remaining balance, to be held by the Albuterol Settlement Trust
Fund 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 have
been reduced by a like amount.
<PAGE 8>
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 agreement.
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 is also subject to certain other contingencies and does not
cover certain individuals who previously opted out of the class action. The
Company continues to be a defendant in lawsuits that were brought by or on
behalf of approximately 65 people who properly opted out of the class action.
In May 1997, a settlement was concluded in two lawsuits involving
approximately 45 of these persons. The settlement was previously reserved and
will not impact future earnings.
Grand Jury Investigation
The Company has received grand jury subpoenas from the United States
Attorney's Office in Massachusetts for documents focusing particularly on
albuterol and Brompheril(R) products, which were recalled by the Company in
December 1993 and September 1994, respectively, but extending beyond these
products. The Company is complying with the subpoenas and has cooperated with
federal authorities throughout the continuing investigation. The Company is
engaged in ongoing discussions about a possible resolution with the Department
of Justice and other federal authorities. At this time management is unable
to determine the ultimate impact on the Company's financial condition. An
adverse outcome 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 alleged 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. The complaint sought monetary damages in excess of
$10 million, rescission of the November 1991 share repurchase, unspecified
punitive damages and costs, disbursements and attorney's fees. In April 1997,
the Company settled this lawsuit for $525,000. This settlement was previously
reserved and will not impact future earnings.
<PAGE 9>
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,
1996, 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 off-patent
pharmaceutical manufacturers and certain chemical manufacturers, was named as
a respondent in a complaint filed by MMD and Tanabe before the United States
International Trade Commission ("the ITC") captioned Complaint of Marion
Merrell Dow, Inc. and Tanabe Seiyaku Co., Ltd. Pursuant to Section 337 of the
Tariff Act of 1930. The complaint seeks an order (i) prohibiting the
importation of, among other things, the bulk diltiazem purchased by the
Company from Orion, and (ii) requiring the Company to immediately stop selling
its current diltiazem product, which incorporates bulk diltiazem supplied by
Orion, based on the alleged infringement by Orion of a process patent for one
method of manufacturing bulk diltiazem.
On June 1, 1996, 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, 1996, 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.
Warner-Lambert Lawsuit
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. et ano. 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 Company
believes it has meritorious defenses to the claims asserted by the 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.
<PAGE 10>
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 $15.6 million of estimated recall related and legal
contingency reserves accrued at March 31, 1997. These reserves reflect the
Company's estimates of its exposure at March 31, 1997 in its various
outstanding legal proceedings described above. Actual settlement amounts may
differ from amounts estimated.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
Three months ended
March 31,
In thousands 1997 1996 Change
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Manufactured products $15,534 $17,441 (10.9)%
Distributed products 10,282 6,906 48.9 %
------ ------
Net sales $25,816 $24,347 6.0 %
====== ======
</TABLE>
Net sales for the first quarter of 1997 were $25.8 million, an increase of
$1.5 million, or 6.0%, from the same period in 1996. Increased sales volume
in distributed products and new product launches occurring later in 1996 more
than offset volume reductions in base manufactured products.
GROSS PROFIT
<TABLE>
<CAPTION>
Three months ended
March 31,
In thousands 1997 1996 Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Manufactured products $2,564 $2,219 15.5 %
As a % of manufactured
products net sales 16.5% 12.7%
Distributed products $2,265 $2,429 (6.8)%
As a % of distributed
products net sales 22.0% 35.2%
Gross profit $4,829 $4,648 3.9 %
As a % of net sales 18.7% 19.1%
</TABLE>
The Company's gross profit was $4.8 million or 18.7% of net sales for the
first quarter of 1997 compared to $4.6 million or 19.1% of net sales for the
same period of 1996. The lower 1997 gross profit percentage reflects an
estimated accrual for expected increased royalty costs from the renegotiation
of product supply agreements with Hoechst Marion Roussel, Inc. which was
substantially offset by reductions in the cost of manufactured products.
Refer to Note B for further discussion of the renegotiation of product supply
agreements.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three months ended
March 31,
In thousands 1997 1996 Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Research and development $2,683 $3,904 (31.3)%
As a % of manufactured
products net sales 17.3% 22.4%
Selling, marketing and distribution $1,268 $2,053 (38.2)%
As a % of net sales 4.9% 8.4%
General and administrative $1,478 $2,610 (43.4)%
As a % of net sales 5.7% 10.7%
Recall related and litigation $ 199 $ 191 4.2 %
As a % of net sales 0.8% 0.8%
</TABLE>
Research and development expenses decreased 31.3% to $2.7 million for the
first quarter of 1997 as compared to $3.9 million for the same period of 1996.
Significant reductions in product validation costs were the primary cause of
this decrease.
<PAGE 11>
Selling, marketing and distribution expenses decreased 38.2% to $1.3 million
for the first quarter of 1997 compared to $2.1 million for the same period of
1996 due to higher advertising and promotional expenses in the prior year and
overall cost reductions.
Overall cost reductions, including significantly lower directors' and
officers' insurance premiums, and efficiency improvements were the primary
reasons for the 43.4% decrease in general and administrative expenses for the
first quarter of 1997 when compared to the same period of 1996.
Recall related and litigation expenses for the first quarter of 1997 and 1996
consist primarily of uninsured legal expenses incurred by the Company for
representation in its various legal proceedings.
INTEREST AND OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Three months ended
March 31,
In thousands 1997 1996 Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other investment income $303 $ 176 72.2 %
Interest expense (62) (58) (6.9)%
Other income (expense) 40 (1,031) 104 %
</TABLE>
Interest and other investment income increased to $303,000 for the first
quarter of 1997 as compared to $176,000 for the same period of 1996 due to
increased average investment holdings.
Other expenses of $1,031,000 for the first quarter of 1996 include
approximately $1.0 million incurred in connection with the Company's
evaluation of a possible business consolidation which the Company decided not
to pursue.
TAXES AND NET INCOME (LOSS)
<TABLE>
<CAPTION>
Three months ended
March 31,
In thousands 1997 1996 Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) $(155) $(1,994) 92.2 %
Effective tax rate (29.9)% (39.7)%
Net income (loss) $(363) $(3,029) 88.0 %
</TABLE>
The effective tax rate for the first quarter of 1997 increased when compared
to the same period of 1996 due primarily to the non-deductible nature of
certain expenses.
The net loss for the quarter of $0.4 million or $0.02 per share improved when
compared to the net loss of $3.0 million or $0.16 per share for the first
quarter of 1996, primarily due to overall cost reductions and efficiency
improvements across all departments.
CHANGES IN FINANCIAL CONDITION
CAPITAL RESOURCES AND LIQUIDITY
<TABLE>
<CAPTION>
March 31, December 31,
In thousands 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Cash and short-term investments $26,073 $29,731
Working capital 49,526 48,179
Long-term debt 5,100 5,100
Shareholders' equity 99,854 100,131
</TABLE>
Working capital increased $1.3 million from December 31, 1996 to $49.5 million
at March 31, 1997 primarily due to working capital generated from operations.
The Company has a working capital line of credit agreement that provides a
maximum borrowing capacity of $30.0 million. At March 31, 1997, the Company
had $17.1 million of stand-by letters of credit issued under this line of
credit. These stand-by letters of credit were obtained by the Company
pursuant to the requirements of the Albuterol Settlement Trust Fund to cover
its uninsured obligation. Recourse to the letters of credit are contingent on
the number of claims filed within certain categories and will not occur until
all claims are processed and settlement amounts are recommended by the Special
Master.
On April 18, 1997, the outstanding stand-by letters of credit were reduced to
$14.85 million to reflect the additional cash funding made to the Settlement
Trust during the first quarter of 1997. Refer to Note C for further
discussion of the Albuterol Settlement Trust Fund.
<PAGE 12>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See descriptions of legal proceedings in Note C of Notes to Condensed
Consolidated Financial Statements in Part I of this Form 10-Q, which are
hereby incorporated by reference herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Letter agreement between the Company and Hoechst Marion
Roussel, Inc. relating to employment for Ken E.
Starkweather.
27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated January 13, 1997 - Item 5: Other Events. The
Company announced that Kenneth N. Larsen has retired as
President for health reasons but will continue to serve on
the Board of Directors and will remain its Chairman.
No other reports on Form 8-K were filed during the three
months ended March 31, 1997.
<PAGE 13>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signature Titles Date
- -------------- ----------------------- ------------
/s/ Ken E. Starkweather Vice President-Finance
- ----------------------- and Treasurer May 15, 1997
Ken E. Starkweather (principal financial and
principal accounting officer)
<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>
<CIK> 0000829987
<NAME> COPLEY PHARMACEUTICAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 10334
<SECURITIES> 15739
<RECEIVABLES> 23767
<ALLOWANCES> (500)
<INVENTORY> 26089
<CURRENT-ASSETS> 89711
<PP&E> 71736
<DEPRECIATION> (20954)
<TOTAL-ASSETS> 145139
<CURRENT-LIABILITIES> 40185
<BONDS> 0
0
0
<COMMON> 254
<OTHER-SE> 99600
<TOTAL-LIABILITY-AND-EQUITY> 145139
<SALES> 25816
<TOTAL-REVENUES> 25816
<CGS> 20987
<TOTAL-COSTS> 20987
<OTHER-EXPENSES> 5628
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> (518)
<INCOME-TAX> (155)
<INCOME-CONTINUING> (363)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (363)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
EXHIBIT 10.1
HOECHST MARION ROUSSEL, INC.
Karen J. Weiner
Vice President & Assistant General Counsel
Global Development Center
Route 202-206, P.O. Box 6800
Bridgewater, NJ 08807-0800
March 31, 1997
Copley Pharmaceutical, Inc.
25 John Road
Canton, MA 02021
Attention: Kenneth Larsen, Chairman
This will confirm the terms as between Copley Pharmaceutical, Inc.
("Copley") and Hoechst Marion Roussel, Inc. ("HMRI"), of Copley's employment
of Ken E. Starkweather as Vice President - Finance and Treasurer. Mr.
Starkweather is a longterm HMRI employee who HMRI agreed to ask to move to
Copley to assist Copley after its former CFO resigned. When Mr. Starkweather
was hired by Copley, he did not receive any incentives from Copley. He did not
negotiate an employment agreement with Copley as the other Senior executives
of Copley have. Mr. Starkweather has received no stock options from Copley and
will receive none. Since he has no employment agreement, Mr. Starkweather is
entitled to no severance from Copley.
1. Mr. Starkweather remains an employee of HMRI for payroll purposes.
2. Mr. Starkweather will receive raises and bonuses in accordance with
the system in place at HMRI at the time. Copley will provide
performance appraisal input concerning Mr. Starkweather to HMRI. HMRI
will notify Copley of any changes in Mr. Starkweather's compensation
and bonuses.
3. Copley will reimburse HMRI for Mr. Starkweather's salary and related
benefits and payroll taxes.
4. Copley will reimburse HMRI for Mr. Starkweather's bonuses. Any bonus
that Mr. Starkweather earned before his arrival at Copley will be
paid by HMRI and not reimbursed by Copley.
5. Any severance benefits to which Mr. Starkweather may be entitled are
the obligation of HMRI and not reimbursable by Copley.
6. Mr. Starkweather will not be eligible for any benefits, compensation,
or stock based awards that Copley may offer its employees.
7. Copley has, or will, reimburse HMRI for the costs associated with Mr.
Starkweather's relocation to the Canton, Massachusetts area.
8. Copley will pay directly to Mr. Starkweather the travel and
entertainment expenses he incurs while employed by Copley .
If this accurately reflects our agreement, please sign in the space
provided and return one copy of this letter to me.
Sincerely,
/s/ Karen J. Weiner
Karen J. Weiner
Vice President & Assistant General Counsel
Agreed:
Copley Pharmaceutical, Inc.
By: /s/ Kenneth M. Larsen
-----------------------
Kenneth Larsen, Chairman
Date: 4/10/97
----------------------
