SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 02021
Canton, Massachusetts (Zip Code)
(Address of principal executive offices)
Commission file number: 0-20126
Registrant's telephone number, including area code: (781) 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 August 2, 1999 was 19,343,766 shares.
<PAGE>
COPLEY PHARMACEUTICAL, INC.
INDEX
For the Six Months Ended June 30, 1999
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30,
1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 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 11 - 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
June 30, December 31,
(In thousands, except share data) 1999 1998
----------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,846 $ 13,016
Available-for-sale securities 30,758 30,206
Accounts receivable, trade, net 26,137 33,945
Inventories:
Raw materials 14,164 10,771
Work in process 3,996 3,207
Finished goods 8,519 8,463
--------------- -------------
Total inventories 26,679 22,441
Current deferred tax assets 5,363 5,528
Other current assets 2,442 3,161
--------------- -------------
Total current assets 93,225 108,297
Property, plant and equipment, net 41,483 42,800
Due from related party 2,107 2,107
Other assets 3,200 2,161
--------------- -------------
Total assets $ 140,015 $ 155,365
--------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable, trade $ 3,583 $ 3,703
Accounts payable, related party 4,224 12,382
Current portion of long-term debt 300 300
Accrued compensation and benefits 1,902 2,175
Accrued rebates 6,495 8,037
Accrued income taxes 810 3,527
Accrued recall related and litigation expenses 4,352 8,010
Accrued expenses 320 618
--------------- -------------
Total current liabilities 21,986 38,752
Accrued compensation and benefits 103 98
Deferred tax liabilities 3,519 3,711
Long-term debt 4,500 4,500
Commitments and contingencies (Note C)
--------------- -------------
Total liabilities 30,108 47,061
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 78,501 78,340
Accumulated other comprehensive income (37) 35
Retained earnings 43,700 42,201
Treasury stock, at cost, 6,146,467 and 6,178,168 shares
outstanding, respectively (12,511) (12,526)
--------------- -------------
Total shareholders' equity 109,907 108,304
--------------- -------------
Total liabilities and shareholders' equity $ 140,015 $ 155,365
--------------- -------------
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
3
<PAGE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<C> <C> <S> <C> <C>
(Unaudited) (Unaudited)
For the three months ended For the six months ended
June 30, June 30,
1999 1998 (In thousands, except per share data) 1999 1998
-------------- -------------- --------------- --------------
Net sales:
$ 20,049 $ 18,924 Manufactured products $ 39,333 $ 35,118
4,475 15,803 Distributed products 11,481 27,817
-------------- -------------- --------------- --------------
24,524 34,727 Net sales 50,814 62,935
Cost of goods sold:
11,732 13,693 Manufactured products 25,450 26,721
3,622 12,349 Distributed products 9,220 21,788
-------------- -------------- --------------- --------------
15,354 26,042 Cost of goods sold 34,670 48,509
9,170 8,685 Gross profit 16,144 14,426
Operating expenses:
4,210 2,228 Research and development 7,091 4,850
1,091 1,164 Selling, marketing and distribution 2,091 2,425
2,379 1,496 General and administrative 4,789 2,779
(28) 15 Recall related and litigation, net 64 194
-------------- -------------- --------------- --------------
1,518 3,782 Income from operations 2,109 4,178
464 476 Interest and other investment income 886 906
(82) (157) Interest expense (188) (319)
(318) 15 Other income (expense), net (338) (76)
-------------- -------------- --------------- --------------
1,582 4,116 Income before income taxes 2,469 4,689
620 1,360 Provision for income taxes 970 1,530
-------------- -------------- --------------- --------------
$ 962 $ 2,756 Net income $ 1,499 $ 3,159
-------------- -------------- --------------- --------------
Other comprehensive income, net of taxes
(59) 5 Unrealized gains (loss) on securities (72) 11
Less: reclassification adjustment
--- --- for gains included in net inc --- (2)
-------------- -------------- --------------- --------------
$ 903 $ 2,761 Comprehensive income $ 1,427 $ 3,168
-------------- -------------- --------------- --------------
Weighted average common
shares outstanding:
19,219 19,154 Basic 19,217 19,153
19,459 19,243 Diluted 19,469 19,246
Earnings per share:
$0.05 $0.14 Basic $0.08 $0.16
$0.05 $0.14 Diluted $0.08 $0.16
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
4
<PAGE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
(Unaudited)
For the six months ended
June 30,
(In thousands) 1999 1998
-------------- -------------
Cash flows from operating activities:
Net income $ 1,499 $ 3,159
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,121 3,521
Realized losses (gains) on sales of assets (20) 4
Change in deferred taxes (27) (602)
Changes in operating assets and liabilities:
Decreases (increases) in assets:
Accounts receivable 7,808 (4,015)
Inventories (4,238) (5,220)
Other current assets 719 (1,905)
Other assets, net of amortization (1,109) (20)
Increases (decreases) in liabilities:
Accounts payable (8,278) 6,887
Accrued income taxes (2,717) 3,832
Accrued expenses (5,766) (5,000)
------------ ------------
Net cash provided by (used in) operating activities (9,008) 641
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,609) (1,664)
Purchases of available-for-sale securities (7,860) (9,790)
Proceeds from sales of available-for-sale securities --- 2,410
Proceeds from maturities of available-for-sale securities 7,111 7,440
Proceeds from sales of property, plant and equipment 20 ---
------------ ------------
Net cash provided by (used in) investing activities (2,338) (1,604)
------------ ------------
Cash flows from financing activities:
Proceeds from stock option exercises 65 ---
Issuance of common stock to Employee Stock Purchase Plan 111 90
------------ ------------
Net cash provided by (used in) financing activities 176 90
------------ ------------
Net increase (decrease) in cash and cash equivalents (11,170) (873)
Cash and cash equivalents at beginning of period 13,016 13,847
------------ ------------
Cash and cash equivalents at end of period $ 1,846 $ 12,974
------------ ------------
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
5
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 1999
Note A-General
The accompanying condensed consolidated financial statements are unaudited but
contain all normal and recurring adjustments necessary to present fairly the
financial position of the Company as of June 30, 1999 and December 31, 1998 and
the results of its operations and its cash flows for the three and six months
ended June 30, 1999 and 1998. The year-end condensed balance sheet data was
derived from audited financial statememts but does not include all disclosures
required by generally accepted accounting principles. These consolidated
financial statements should be read in conjunction with the Notes included in
the Company's Form 10-K for the year ended December 31, 1998. The results for
the three-month and six-month period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for any future period.
There were 509,729 and 507,588 options outstanding at June 30, 1999 and 1998,
respectively, that were not included in the computation of diluted earnings per
share the options' exercise prices were greater than the average market price of
the common shares and their inclusion would be antidilutive.
Note B - Related Party Transactions
On July 18, 1995, Hoechst Corporation ("HC"), the Company's 51% fully diluted
shareholder, completed its purchase of Marion Merrell Dow, Inc. ("MMD") and
changed MMD's name to Hoechst Marion Roussel, Inc. ("HMRI").
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 expired June 1, 1999. On January 1, 1996, HRPI was merged into HMRI.
HMRI 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 became
available for generic distribution and these separate contracts now continue in
effect beyond the expiration of the Product Agreement. For the six months ended
June 30, 1999 and 1998, approximately $9.2 million and $21.6 million,
respectively, of generic versions of products were purchased from HMRI under
this Product Agreement.
The Company obtains its comprehensive general liability, product liability,
excess liability and all risks property insurance coverage through an insurance
and risk-sharing arrangement with HC and its parent, Hoechst Aktiengesellschaft
("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 $2.3 million, for each of the six month periods ended June 30,
1999 and 1998.
6
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 1999
Note C - Litigation and Contingencies
Albuterol Class Action Lawsuits
In connection with the Company's December 1993 and January 1994 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 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. This Order has become final and nonappealable.
The settlement agreement requires the $150 million maximum contribution to be
funded by a non-refundable $65 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. The Company negotiated
agreements with its insurers pursuant to which the Company and its insurers have
agreed to pay defined percentages of required settlement payments and related
expenses. The minimum contribution of $65 million to the class action settlement
has been funded by cash contributions from the Company ($7.35 million) and its
insurers ($57.65 million). Most of the remaining balance of the $150 million
maximum contribution was secured either by a $21 million cash deposit made
pursuant to court order by the Company ($3.15 million) and one of its insurers
($17.85 million) in a separate account (which also is available to pay other
litigation expenses, judgments and settlements) or by letters of credit or other
security totaling $64 million, $11.7 million of which has been posted by the
Company and $52.3 million of which has been provided by the Company's insurers.
Approximately 6,650 proofs of claim have been filed with the Special Master
appointed by the Court to oversee the Albuterol Settlement Trust Fund. The
Special Master has approved approximately 5,240 class action claims totaling
approximately $75 million. No awards have been made to approximately 1,000
rejected class action claims. Appeals from some of these decisions of the
Special Master are being taken to the Court. The Court has ordered that no
further claims may be submitted. (These figures include approximately 850
clients of Jacoby & Meyers, representing nearly all of that firm's clients who
are not alleging a death caused by albuterol, who 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.) In addition, the Company
has reached settlement agreements with approximately 200 class members alleging
wrongful death; approximately 30 claims of class members alleging wrongful death
remain unresolved.
7
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 1999
The settlement also is subject to certain other contingencies and does not cover
certain individuals who previously opted out of the class action, including 40
people who opted out and never filed suit, some of whom now are barred from
bringing suit by the statute of limitations. The Company continues to be a
defendant in lawsuits that were brought by or on behalf of approximately three
people who properly opted out of the class action while the Company has settled
with 81 litigants who had opted out. There also are two active lawsuits brought
by class members alleging wrongful death who are pursuing litigation under the
terms of the class action settlement agreement.
Grand Jury Investigation
On May 28, 1997, the Company announced that it had entered into a plea agreement
pursuant to which it agreed to waive indictment and plead guilty to a one count
Information charging a violation of Title 18, United States Code, Section 371, a
conspiracy to defraud the United States and one of its agencies, the Food and
Drug Administration ("FDA"). The Information alleged that Copley made changes in
the manufacturing processes for four drugs (only two of which, procainamide 500
mg tablets and potassium chloride tablets, currently are being manufactured by
the Company) without proper notification to the FDA and signed false batch
records with respect to two of these drugs. As part of the plea agreement, the
Company agreed to pay a fine of $10.65 million, which has been paid in full. The
plea was accepted by the United States District Court for the District of
Massachusetts on June 19, 1997.
The plea agreement followed a nearly three-year investigation and 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 complied with the subpoenas and
cooperated with federal authorities throughout the investigation. The
investigation continues with respect to individuals, some of whom are
indemnified by the Company for legal fees and related expenses.
Also on May 28, 1997 the Company announced that it had entered into an agreement
with the FDA providing for an independent audit of 20 of Copley's ANDAs. The
Company is cooperating fully with the FDA, and the independent audit which
commenced in July, 1997 has been substantially completed. The FDA has agreed
that during this audit it will continue to review the Company's pending ANDAs,
accept new ANDAs from the Company and, where appropriate, approve Copley's
ANDAs.
SmithKline Beecham Lawsuit
In August 1997, the Company filed an ANDA for nabumetone which certified that
SmithKline Beecham Corporation's ("SB") patent relating to nabumetone was
invalid and unenforceable and that the Company was entitled to manufacture and
sell nabumetone prior to the December 13, 2002 expiration of SB's nabumetone
patent. As a result, on October 31, 1997 the Company was served with a summons
and complaint in a patent infringement action entitled SmithKline Beecham
Corporation and Beecham Group p.l.c. v. Copley Pharmaceutical, Inc. in the
United States District Court for the District of Massachusetts. In their action,
plaintiffs allege that because the Company seeks approval of its ANDA to engage
in the commercial manufacture, use and sale of nabumetone as claimed in their
patent before the patent's expiration, the Company has infringed their
nabumetone patent. Plaintiffs seek damages and an injunction against approval of
the Company's nabumetone ANDA and its sale of nabumetone prior to December 13,
2002. A trial tentatively has been scheduled to begin in October 1999. The
manufacturer and supplier of the nabumetone that the Company has designated for
use in its ANDA has agreed to defend the Company in this action and to indemnify
the Company for any damages that might be assessed as a result of the Company's
sale of nabumetone obtained from the manufacturer. Although the Company believes
that this complaint is without merit and the Company has meritorious defenses to
this action, there can be no assurance that the Company will prevail. A
substantial damages award in this suit could have a material adverse effect on
the Company.
8
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 1999
Shareholder Derivative Actions
On September 2, 1998, the Company was served as a nominal defendant in a
shareholder derivative action against six of its nine current Directors. The
lawsuit, which was brought by Great Neck Capital Appreciation Investment
Partnership, the alleged owner of an unspecified number of Company shares, is
pending in Norfolk County, Massachusetts Superior Court. On October 2, 1998,
plaintiff filed a First Amended Shareholder Derivative Complaint that named HCCP
Acquisition Corporation, Hoechst Corporation and Hoechst Aktiengesellschaft as
additional defendants. The amended complaint's allegations include claims of
alleged breach of fiduciary duty and alleged waste of corporate assets and seeks
unspecified money damages and injunctive relief. According to the amended
complaint, "Copley is named as a defendant herein solely in a derivative
capacity. This action is brought on its behalf, and no claims are asserted
against it." The Company is obligated to defend and indemnify the Director
defendants and has put its directors and officers insurance carrier on notice of
this claim. The Company has been served with motions to dismiss the amended
complaint filed by the other defendants; these motions remain pending as of the
date of this report.
On May 21, 1999, the Company was served with a complaint in a shareholder
derivative action pending in the New Castle County, Delaware Court of Chancery
entitled Parnes v. Hoechst Corp. The Company is named as a nominal defendant;
amongst the other defendants are five current directors of the Company. The
Complaint alleges various breaches of duty by Hoechst Corp. and the named
individual director defendants and seeks a number of equitable remedies,
including an accounting from Hoechst and the appointment of a custodian or
receiver. No monetary damages are sought.
Schering Corporation Lawsuit
In December 1998, the Company filed an ANDA for loratadine syrup which certified
that two of Schering Corporation's patents relating to loratadine syrup were
invalid, unenforceable and/or not infringed and that the Company was entitled to
manufacture and sell loratadine syrup in 2002, following the expiration of one
patent but prior to the expiration of two other of Schering's loratadine
patents. As a result, on March 19, 1999, Schering filed a patent infringement
action entitled Schering Corporation v. Copley Pharmaceutical, Inc. in the
United States District Court for the District of Delaware. In its action,
Schering alleges that because the Company seeks approval of its ANDA to engage
in the commercial manufacture, use and sale of loratadine syrup prior to the
expiration of two patents allegedly relating to loratadine syrup, the Company
has infringed at least one of these patents. Schering seeks an injunction
against approval of the Company's loratadine syrup ANDA and its sale of
loratadine syrup prior to at least April 21, 2004. Although the Company believes
that this complaint is without merit and the Company has meritorious defenses to
this action, there can be no assurance that the Company will prevail. A
substantial damages award in this suit could have a material adverse effect on
the Company.
K-V Pharmaceutical Company Lawsuit
In January 1999 the Company was named as a defendant in a lawsuit entitled K-V
Pharmaceutical Company v. Johnson H. Lim, Hoechst Corporation, and Copley
Pharmaceutical, Inc. pending in the St. Louis, Missouri Circuit Court. Plaintiff
alleges that the Company hired one of its former employees in contravention of
an employment agreement between plaintiff and the individual and seeks actual
damages in excess of $1 million as well as punitive damages and fees and
expenses based on a variety of legal theories. Although the Company believes
that this suit is without merit and the Company has meritorious defenses to this
action, there can be no assurance that the Company will prevail. A substantial
damages award in this suit could have a material adverse effect on the Company.
9
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 1999
Other Legal Proceedings
The Company has $4.4 million of estimated recall related and legal contingency
reserves accrued at June 30, 1999. These reserves reflect the Company's estimate
of its exposure at June 30, 1999 in its various legal proceedings described
above. Actual settlement amounts may differ from amounts estimated. In addition,
the Company from time to time is subject to claims arising in the ordinary
course of business. While the outcome of the claims cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the results of operations and financial condition of the Company.
Note D - Debt
On June 7, 1999 the Company amended its working capital line of credit agreement
to decrease its maximum borrowing capacity from $30 million to $25 million. At
June 30, 1999, the Company had $11.7 million in stand-by letters of credit
related to the Albuterol Settlement Trust Fund outstanding under this working
capital line of credit agreement. The $11.7 million in stand-by letters of
credit will be reduced by $3.06 million to reflect the additional cash deposit
made on August 4, 1999. Refer to Note C of the Notes to Consolidated Financial
statements for further discussion of the Settlement Agreement.
10
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION
Item 2. Management's Discussion and Analysis of Results of Operations and
Changes in Financial Condition
Results of Operations
Net Sales
<TABLE>
<C> <C> <C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the six months ended
June 30, June 30,
1999 1998 Change (Unaudited) 1999 1998 Change
- --------------------------------------------------------------------------------------------------------------------
$20,049 $18,924 5.9 % Manufactured products $39,333 $35,118 12.0%
4,475 15,803 (71.7)% Distributed products 11,481 27,817 (58.7)%
- ---------- -------- ---------- ---------
$24,524 $34,727 (29.4)% Net sales $50,814 $62,935 (19.3)%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Manufactured products net sales for the second quarter of 1999 were $20.0
million, an increase of $1.1 million, or 5.9%, from the same period in 1998.
Sales from new product introductions more than offset lower unit sales and
eroding prices. Distributed products net sales were $4.5 million for the
quarter, a decrease of $11.3 million, or 71.7%. This decrease resulted mainly
from continued erosion of selling prices across the distributed product line as
well as a $3.5 million customer pricing allowance for the market decline in
price on Pentoxifylline. The Company's manufactured net sales were $39.3 million
for the six-month period ended June 30, 1999, an increase of $4.2 million or
12.0% from the same period in 1998. This increase was due to new product
introductions which more than offset lower unit sales and eroding prices.
Distributed product net sales were $11.5 million for the six-months ended June
30, 1999 as compared to $27.8 million for the same period in 1998, a 58.7%
decrease. This $16.3 million decrease resulted mainly from continued erosion of
selling prices across the distributed product line The Company expects continued
pricing pressure on both its distributed and manufactured product lines.
Gross Profit
<TABLE>
<C> <C> <C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the six months ended
June 30, June 30,
1999 1998 Change (Unaudited) 1999 1998 Change
- ------------------------------------------------------------------------------------------------------------------------
$8,317 $5,231 59.0% Manufactured products $13,883 $ 8,397 65.3%
As a % of manufactured
41.5% 27.6% products net sales 35.3% 23.9%
$853 $3,454 (75.3)% Distributed products $ 2,261 $ 6,029 (62.5)%
As a % of distributed
19.1% 21.9% products net sales 19.7% 21.7%
$9,170 $8,685 5.6% Gross profit $16,144 $14,426 11.9%
37.4% 25.0% As a % of net sales 31.8% 22.9%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's gross profit was $9.2 million, or 37.4% of net sales, for the
second quarter of 1999 as compared to $8.7 million, or 25.0% of net sales, for
the same period in 1998. For the six-month period ended June 30, 1999, the
Company's gross profit was $16.1 million, or 31.8% of net sales, as compared to
$14.4 million or 22.9% of net sales a year earlier. Increased margins for the
three and six months ended June 30, 1999 were due primarily to higher margins
realized on new manufactured products, a more favorable manufacturing plant
utilization and a favorable mix of higher margin manufactured products.
11
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COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (continued)
<TABLE>
<C> <C> <C> <S> <C> <C> <C>
Operating Expenses
-------------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the six months ended
June 30, June 30,
1999 1998 Change (Unaudited) 1999 1998 Change
---------------------------------------------------------------------------------------------------------------------------
$4,210 $2,228 89.0% Research and development $7,091 $4,850 46.2%
21.0% 11.8% As a % of net manufactured sales 18.0% 13.8%
$1,091 $1,164 (6.3)% Selling, marketing and distribution $2,091 $2,425 (13.8)%
4.4% 3.3% As a % of net sales 4.1% 3.9%
$2,379 $1,496 59.0% General and administrative $4,789 $2,779 72.3%
9.7% 4.3% As a % of net sales 9.4% 4.4%
$ (28) $15 (286.7)% Recall related and litigation, net $ 64 $194 (67.0)%
0.0% 0.0% As a % of net sales 0.1% 0.3%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Research and development expenses increased to $4.2 million for the second
quarter of 1999 as compared to $2.2 million for the same period of 1998. For the
six-month period, research and development expenses were $7.1 million as
compared to $4.9 million reported in the prior year. These significant increases
were associated with the Company's progress toward its goal of filing eight to
twelve Abbreviated New Drug Application filings targeted for this year.
Selling, marketing and distribution expenses decreased 6.3% to $1.1 million for
the second quarter of 1999 as compared to $1.2 million for the same period of
1998. For the six-month period, selling, marketing and distribution expenses
decreased 13.8% to $2.1 million compared to $2.4 million reported a year
earlier. The decrease in selling, marketing and distribution expenses for the
quarter and six months ended June 30, 1999 resulted from lower personnel costs
associated with the transition of new personnel into the sales department.
General and administrative expenses were $2.4 million for the second quarter of
1999 as compared to $1.5 million for the same period in 1998. For the six-month
period ended June 30, 1999, general and administrative expenses totaled $4.8
million compared to $2.8 million a year earlier. This increase, for both
periods, was primarily attributable to the Company's Year 2000 readiness
program, higher personnel costs and legal and professional fees, including those
associated with new patent litigation. Refer to Note C of the Notes to Condensed
Consolidated Financial Statements for further discussion of these items.
Recall related and litigation expenses for both the second quarter of 1999 and
1998 and the six months ended June 30, 1999 and 1998 were primarily comprised of
uninsured legal expenses incurred by the Company for representation in its
various legal proceedings.
Interest and Other Income (Expense)
<TABLE>
<C> <C> <C> <S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the six months ended
June 30, June 30,
1999 1998 Change (Unaudited) 1999 Change
1998
- -------------------------------------------------------------------------------------------------------------------------
Interest and other
$ 464 $ 476 (2.5)% investment income $ 886 $ 906 (2.2)%
(82) (157) 47.8% Interest expense (188) (319) (41.1)%
(318) 15 (2220)% Other income (expense) (338) (76) 344.7%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (continued)
Interest and other investment income decreased to $464,000 for the second
quarter of 1999 as compared to $476,000 for the same period of 1998. For the
six-month period, interest and other investment income decreased to $886,000 as
compared to $906,000 reported a year earlier. In both cases the decrease was due
to decreased average investment holdings.
Interest expense decreased 47.8% to $82,000 for the second quarter of 1999 as
compared to $157,000 for the same period of 1998. For the six-month period
interest expense decreased 41.1% to $188,000 as compared to $319,000 for 1998.
The decrease for both the quarter and the six-months were due primarily to the
decrease of accrued interest relating to installments payable under the
Company's plea agreement. Refer to Note C of the Notes to Condensed Consolidated
Financial Statements for further discussion of the plea agreement with the U.S.
Attorney.
The Company incurred other expenses of $318,000 for the second quarter of 1999
as compared to other income of $15,000 for the same period of 1998. For the
six-month period ending June 30, 1999, other expense increased to $338,000 as
compared to $76,000 for the same period in 1998. In both periods the Company
incurred increased expenses, primarily relating to costs associated with the
development of strategic alliances with other companies.
<TABLE>
<C> <C> <C> <S> <C> <C> <C>
Taxes and Net Income (Loss)
- ---------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the six months ended
June 30, June 30,
1999 1998 Change (Unaudited) 1999 1998 Change
- ------------------------------------------------------------------------------------------------------------------------
$ 620 $1,360 (54.4)% Income tax expense $ 970 $1,530 (36.6)%
39.2 % 33.0 % Effective tax rate 39.3 % 32.6 %
$ 962 $2,756 (65.1)% Net income $ 1,499 $3,159 (52.5)%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net income for the second quarter of 1999 was $1.0 million or $0.05 per share
compared to a net income of $2.8 million or $0.14 per share for the second
quarter of 1998. For the six-month period ended June 30, 1999, the Company
reported net income of $1.5 million or $0.08 per share as compared to net income
of $3.2 million or $0.16 per share for the same period in 1998. The decrease in
net income related primarily to higher research and development spending and
general and administrative costs.
Changes in Financial Condition
Capital Resources and Liquidity
- ----------------------------------------------------------
June 30, December 31,
In thousands 1999 1998
- ----------------------------------------------------------
(Unaudited)
Cash and short-term
investments $32,604 $43,222
Working capital 71,239 69,545
Long-term debt 4,800 4,800
Shareholders' equity 109,907 108,304
- ----------------------------------------------------------
Working capital increased $1.7 million from December 31, 1998 to $71.2 million
at June 30, 1999 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 $25.0 million. At June 30, 1999, the Company had
$11.7 million of stand-by letters of credit issued under this line of credit.
The $11.7 million in stand-by letters of credit will be reduced by $3.06 million
to reflect the additional cash deposit made on August 4, 1999. 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. Refer to Note C of the
Notes to Condensed Consolidated Financial Statements for further discussion of
the Albuterol Class Action Lawsuits.
13
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (continued)
Year 2000 Readiness
The Company has a Year 2000 Compliance Program, the purposes of which are to
identify important systems that are not yet Year 2000 ("Y2K") compliant; to
initiate replacement or remedial action to assure that key systems will continue
to operate in the Y2K and to test the replaced or remediated systems; to
identify and contact key suppliers, vendors, customers and business partners to
evaluate their ability to maintain normal operations in the Y2K; and to develop
appropriate contingency plans for dealing with foreseeable Y2K complications.
The Company has appointed a Y2K Project Manager who is responsible for the
Company's Y2K Compliance Program and who reports directly to a member of the
Company's executive committee.
Information Technology Systems
The Company's critical internal information technology ("IT") systems consist of
its Prism manufacturing and JD Edwards financial accounting and Harbinger EDI
400 software packages. The Company has contacted the vendors of these systems
and obtained written certification that these IT systems are currently in
material Year 2000 compliance. The Company also has completed a pilot room
testing of these systems. In addition, the Company has nearly completed all Y2K
testing of its other IT applications. The Company, using an outside consultant,
also successfully completed an audit on selected aspects of the Y2K IT
compliance testing program.
Embedded Systems
The Company has completed its assessment of its mission critical embedded
systems such as production equipment, facility control systems, and quality
control and research and development instrumentation. Specifically, working with
an outside consultant in the first quarter, the Company completed a pilot
program in which two products were selected for evaluation of the equipment and
instruments used in their processes. These pilot tests included inventory
assessment, compliance testing and, where indicated, remediation planning on
selected mission critical embedded systems. The Company utilized the pilot
design methodology to complete its Y2K compliance program on the remainder of
the Company's mission critical embedded systems. The Company is now focusing on
remediation steps arising from the Y2K readiness testing program, the majority
of which are in place. The Company's strategy is to continue to focus on mission
critical systems remediation first. Beyond the embedded system Y2K testing pilot
program and the testing program modeled after these pilots, the Company has sent
Y2K compliance inquiries to the vendors of these embedded systems, is tracking
responses to its inquiries and, depending on vendor response, is securing
compliance information through direct contact with the manufacturer or through
research on the manufacturer's web page. The Company has completed its efforts
to secure documented compliance information on mission critical systems. Now the
Company plans to expand its inventory assessment and compliance testing to less
critical systems as appropriate.
14
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (continued)
As a pharmaceutical manufacturer, the Company's research and development and
manufacturing operations are subject to government regulation. Replacement of
equipment for products subject to FDA approval and manufacturing standards
cannot be accomplished without filings and review by FDA. While the Company has
made significant progress in remediation of its mission critical systems, the
failure of the Company to properly and timely identify non-mission critical
equipment that may not function properly as a result of the Y2K Issue could
result in the Company's inability to repair or remediate that non-mission
critical equipment before December 31, 1999. In addition, equipment failures due
to the Y2K issue could result not only in replacement costs to the Company but
also in delays in product shipments while the Company seeks to validate
replacement equipment: while not impacting critical business, these delays could
have an adverse effect on the Company.
Third-Party Suppliers, Vendors and Customers
The Company's Y2K Compliance Program also includes an investigation of the Y2K
compliance of its major suppliers, vendors, customers and business partners. For
example, third parties handle the payroll function for the Company, the vast
majority of the Company's product orders are received by computer over the
telecommunications systems, and the Company also relies on the services of
banks, utilities, and commercial airlines, among others. The Company continues
to seek and obtain assurances from key service providers that there will be no
interruption of service as a result of Y2K. While the Company has contacted its
supply chain business partners, not all third- party suppliers, vendors or
customers have responded. The Company will continue to make efforts to secure
Y2K compliance status from its supply chain, and is addressing contingency
planning in lieu of third party claimed compliance. There can be no assurances
that the contingency plans will adequately prevent a service interruption by one
or more of the Company's third-party suppliers from having a material adverse
effect on the Company.
The Company continues to contact its key bulk chemical and packaging suppliers
to determine their Y2K compliance status. As with certain of its equipment, the
Company cannot change suppliers of bulk active ingredients unless the
alternative supplier has been approved through the FDA regulatory process. Where
possible, the Company tries to qualify two or more sources of supply. However,
certain of the Company's current and future products will depend on a sole
source of raw material supply. Should one or more of these sole source suppliers
become unable to deliver product in a timely manner due to the Y2K Issue, the
Company would need to identify and qualify a new source of supply. This process
would likely involve significant delays and cost and could have a material
adverse effect on the Company. In addition, the Company continues to contact
significant customers to determine their progress towards Y2K compliance and to
identify issues, if any, which might develop because of customers' failure to be
prepared for Y2K. In the event issues are identified, the Company expects to try
to develop procedures to permit the Company to continue to supply the customer
despite Y2K. The Company has been assured by its key financial institutions that
they are currently Y2K compliant.
Year 2000 Costs and Expenses
The Company's policy continues to be to expense currently all costs related to
Y2K compliance unless the useful life of the technological asset is extended or
increased, in which case the Company will capitalize that cost. For 1999 the
Company anticipates expenses relating to Y2K to include key personnel costs,
consultant engagements, software and hardware accommodations, data entry and
business partner communications. Based on currently available information, the
Company believes that these expenses will not exceed $500,000 and will be funded
through operations. Until all remediation is completed on mission critical
systems in the Company's IT and Embedded Systems operations, the potential costs
for any associated remediation cannot be calculated and is not included in the
$500,000. If unforeseen compliance efforts are required or if present compliance
efforts are not completed on time, or if the cost of any required updating,
modification or replacement of the Company's systems or equipment exceeds the
Company's estimates, Y2K could result in material costs and have a material
adverse effect on the Company. From inception, the Company has incurred
approximately $333,000 of expense related to Y2K which consisted mainly of
consulting fees and internal payroll costs.
15
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (continued)
Contingency Plans and Worst Case Scenario
At the present time, the Company has formulated a draft contingency plan
addressing system failures in its business processes due to Y2K. The Company has
received written certifications confirming that its critical internal IT systems
are compliant, and the Company's Y2K IT system audit supported these findings.
As the Company continues its IT and Embedded Systems compliance program
additionally, it is formulating appropriate contingency planning. The integrated
draft contingency plan encompasses all functional areas within the Company,
their business processes and the tasks associated with each process. It
addresses alternate strategies to support critical business functions to
prevent, wherever possible, business interruptions. It is expected that this
draft contingency plan will be revised as the Company's readiness program
concludes and remediation initiatives are completed. Moreover, it is anticipated
that as the Company receives more complete compliance information from its major
suppliers, vendors, customers and business partners, that additional efforts
regarding business interruption prevention and contingency planning will be
undertaken.
The Company has also commenced certain business interruption prevention
initiatives.
One possible worst case scenario for the Company resulting from Y2K would be
that one or more of the Company's sole source bulk chemical suppliers would
become temporarily unable to deliver raw materials to the Company as a result of
a system failure. If this were to happen, the Company would not be permitted to
substitute another manufacturer's raw material for that of its sole source
supplier. The Company would not be able immediately to continue to manufacture
product using that raw material once its inventories of the raw material were
expended. The Company's contingency planning with respect to an important
product may include building up key sole source raw material inventories in
advance of December 31, 1999.
Various statements in this discussion of Y2K are forward-looking statements
(statements which are not historical in fact) within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements include statements of
the Company's expectations, anticipated schedules and expected completion dates,
estimated costs and statements regarding expected Y2K compliance. These
forward-looking statements are subject to various risks which may materially
affect the Company's efforts to achieve Y2K compliance to accomplish its goals
and to meet its expectations with respect to Y2K issues. These risks include the
possibility that the Company will not be able to complete the plans and
modifications that it has identified, on a timely basis, if at all, the
availability of skilled consultants, the difficulty of evaluating and testing
the wide variety of information systems and components, both hardware and
software, that must be evaluated, the variety, number and complexity of
equipment used in the Company's operations and the large number of vendors and
customers with which the Company interacts. The Company's assessment of the
effects of Y2K on the Company are based, in part, upon information received from
third parties and the Company's reasonable reliance on that information.
Therefore, the risk that inaccurate information is supplied by third parties
upon which the Company reasonably relied must be considered as a risk factor
that might affect the Company's Y2K efforts. Further, the delay or failure of
third parties to respond to inquiries will hinder the Company's ability to
evaluate and remediate the Year 2000 issue. The Company has not yet completed
evaluating certain aspects of Y2K and expects that its assessment of Y2K will
continue to evolve as its Y2K compliance program progresses and the evolution
and testing process continues.
16
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (continued)
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has three forms of debt which are subject to interest rate risk.
They are the industrial revenue bonds, the working capital line of credit and
the outstanding letters of credit. The rates on all three instruments are
variable and fluctuate with the prime rate of interest charged by the respective
bank. Carrying value of these instruments which approximates fair value is $4.8
million and principal is payable as follows; $300,000 for each of the next five
years and $3.3 million thereafter. Interest is payable monthly and interest
expense could be substantially higher if the prime rate was to increase in
future periods. The bank's prime rate was 7.75% at June 30, 1999.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See descriptions of legal proceedings in Note C of the Notes to Condensed
Consolidated Financial Statements in Part I of this Form 10-Q, which are hereby
incorporated by reference herein.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on May 27,
1999.
(b) (1) The following individuals were elected or re-elected to
the Board of Directors. The number of votes cast for each of
the above directors was as follows:
Director For Withheld
William K. Hoskins 17,435,170 122,412
Daniel L. Korpolinski 17,437,642 119,940
Charles T. Lay 17,502,718 54,864
(c) (3) The selection of the firm of PricewaterhouseCoopers LLP
as auditors for the fiscal year ending December 31, 1999
was ratified by the following vote:
Number of
Shares
For 17,484,182
Against 68,941
Abstained 4,459
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Sixth Amendment to Amended and Restated Loan
Agreement dated June 7, 1999 between the Company and
BankBoston.
10.2 Fourth Amendment to Amended and Restated
Promissory Note dated June 7, 1999 between the Company
and BankBoston.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended June 30, 1999.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signature Title Date
/s/ Daniel M. P. Caron Vice President-Finance, Chief August 9, 1999
- -----------------------
Daniel M. P. Caron Financial Officer and Treasurer
(principal financial and principal
accounting officer)
19
SIXTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
This Amendment is made as of June 7, 1999 by and between COPLEY
PHARMACEUTICAL, INC., a Delaware corporation with its principal office at 25
John Road, Canton, Massachusetts (the "Borrower"), and BANKBOSTON, N.A. (f/k/a
The First National Bank of Boston), a national banking association with its
principal office at 100 Federal Street, Boston, Massachusetts (the "Bank").
R E C I T A L S
A. The Bank and the Borrower are parties to a certain Amended and
Restated Loan Agreement dated August 17, 1993, as amended by a certain First
Amendment to Amended and Restated Loan Agreement dated June 29, 1995, a certain
Second Amendment to Amended and Restated Loan Agreement dated August 30, 1995, a
certain Third Amendment to Amended and Restated Loan Agreement dated March 25,
1996, a certain Fourth Amendment to Amended and Restated Loan Agreement dated
July 31, 1996 and a certain Fifth Amendment to Amended and Restated Loan
Agreement dated August 7, 1997 (as amended, the "Loan Agreement"). Capitalized
terms used herein without definition have the meaning assigned to them in the
Loan Agreement.
B. The Borrower has requested certain amendments to the Loan Agreement
as set forth herein.
C. Subject to certain terms and conditions, the Bank is willing to
agree to the same, as hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
I. AMENDMENTS TO LOAN AGREEMENT.
The Borrower and the Bank agree that the Loan Agreement shall be
amended as follows:
1. Definition of Commitment. The definition of "Commitment" in Section
1.1 of the Loan Agreement is hereby amended to read in its entirety as follows:
"Commitment: $25,000,000."
2. Definition of Maturity Date. The definition of "Maturity Date" in
Section 1.1 of the Loan Agreement is hereby amended to read in its entirety as
follows:
"Maturity Date: October 31, 2001."
3. Deletion of Definitions. The definitions of "Consolidated Current
Assets" and "Consolidated Current Liabilities" are deleted from Section 1.1 in
their entirety.
4. Section 9.2. Section 9.2 of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:
"ss.9.2 Profitability. The Borrower and its Subsidiaries shall earn
Consolidated Net Income of at least $1,000 for each period of four (4)
consecutive fiscal quarters ending December 31, March 31, June 30 and
September 30."
5. Exhibit A. Exhibit A to the Loan Agreement is hereby supplemented by
the Fourth Amendment to Amended and Restated Promissory Note attached hereto as
Exhibit A.
II. NO FURTHER AMENDMENTS.
Except as specifically amended herein, all terms and conditions of the
Loan Agreement shall remain in full force and effect as originally constituted.
Each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof"
or words of like import referring to the Loan Agreement shall mean and be a
reference to the Loan Agreement as amended by this Sixth Amendment, and each
reference in any other Loan Document to the Loan Agreement, "thereunder",
"thereof" or words of like import referring to the Loan Agreement shall mean and
be a reference to the Loan Agreement as amended by this Sixth Amendment.
III. CONDITIONS.
The willingness of the Bank to agree to the foregoing is subject to the
following conditions:
(A) The Borrower shall have executed and delivered to the Bank (or
shall have caused to be executed and delivered to the Bank by the appropriate
persons) the following:
(i) This Sixth Amendment;
(ii) A Fourth Amendment to Amended and Restated Promissory
Note, in the form of Exhibit A hereto;
(iii) True and complete copies of any required directors'
consents and/or resolutions authorizing the execution
and delivery of this Sixth Amendment and the Fourth
Amendment to Amended and Restated Promissory Note and
other documentation referred to herein, certified by
the Secretary of the Borrower; and
(iv) Such other supporting documents and certificates as
the Bank or its counsel may reasonably request.
(B) All legal matters incident to the transactions contemplated hereby
shall be satisfactory to counsel for the Bank.
IV. MISCELLANEOUS.
1. The Borrower represents and warrants that no event has occurred or
failed to occur, which constitutes, or which, solely with the passage of time or
the giving of notice (or both) would constitute, an Event of Default.
2. The execution and delivery of this Sixth Amendment and the Fourth
Amendment to Amended and Restated Promissory Note by the Borrower has been duly
authorized by all requisite corporate action of the Borrower and will not
violate any provision of law, any order, judgment or decree of any court or
other agency of government, or the organizational documents of the Borrower or
any other instrument to which the Borrower is a party, or by which the Borrower
is bound. This Sixth Amendment and the Fourth Amendment to Amended and Restated
Promissory Note constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in accordance with their respective
terms.
3. The representations and warranties contained in Section 6 of the
Loan Agreement are true and correct in all material respects on and as of the
date of this Sixth Amendment as though made on and as of such date (except to
the extent that such representations and warranties expressly relate to an
earlier date or except to the extent variations therefrom have been (i)
permitted under the terms of Loan Agreement, (ii) otherwise approved in writing
by the Bank or (iii) reflected in reports filed by the Borrower with the
Securities and Exchange Commission).
4. As provided in the Loan Agreement, the Borrower agrees to reimburse
the Bank upon demand for all out-of-pocket costs, charges, liabilities, taxes
and expenses of the Bank (including reasonable fees and disbursements of counsel
to the Bank) in connection with the preparation, negotiation, interpretation,
execution and delivery of this Sixth Amendment and any other agreements,
instruments or documents executed pursuant or relating hereto.
5. The Borrower represents, warrants, and agrees that the Borrower has
no claims, defenses, counterclaims or offsets against the Bank in connection
with the Loan Agreement or the Obligations, and, to the extent that any such
claim, defense, counterclaim or offset may exist, the Borrower hereby
affirmatively WAIVES AND RELEASES Bank from the same.
6. This Sixth Amendment may be executed in any number of counterparts
and by different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which counterparts taken
together shall be deemed to constitute one and the same agreement.
7. This Sixth Amendment shall take effect as a sealed instrument under
the laws of the Commonwealth of Massachusetts as of the date first above
written.
COPLEY PHARMACEUTICAL, INC.
By: /s/ Daniel M.P. Caron
-----------------------
Daniel M.P. Caron, CFO
BANKBOSTON, N.A.
By: /s/ Jeffrey R. Westling
-----------------------
Jeffrey R. Westling, Director
FOURTH AMENDMENT TO
AMENDED AND RESTATED PROMISSORY NOTE
This Amendment is made as of June 7, 1999 by and between COPLEY
PHARMACEUTICAL, INC., a Delaware corporation (the "Borrower"), and BANKBOSTON,
N.A. (f/k/a The First National Bank of Boston), a national banking association
(the "Bank").
WHEREAS, the Bank and the Borrower entered into a certain loan
arrangement on August 17, 1993, as amended, which is evidenced, in part, by a
certain Amended and Restated Promissory Note dated August 17, 1993 made by the
Borrower, as amended by a certain First Amendment to Amended and Restated
Promissory Note dated June 29, 1995, a certain Second Amendment to Amended and
Restated Promissory Note dated August 31, 1995 and a certain Third Amendment to
Amended and Restated Promissory Note dated July 31, 1996 in the principal amount
of $30,000,000 (as amended, the "Note"), and a certain Amended and Restated Loan
Agreement dated August 17, 1993, as amended between the Borrower and the Bank
(as amended, the "Loan Agreement"); and
WHEREAS, the Bank and the Borrower have on this date amended the Loan
Agreement pursuant to a certain Sixth Amendment to Amended and Restated Loan
Agreement; and
WHEREAS, the Borrower and Bank are desirous of amending the Note in the
manner set forth below:
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
1. From and after the date hereof, the $30,000,000 principal amount of
the Note reflected in the upper left hand corner thereof shall be decreased and
amended to read "$25,000,000".
2. The Note is further amended by deleting the first paragraph thereof
in its entirety and replacing it with the following:
"FOR VALUE RECEIVED, COPLEY PHARMACEUTICAL, INC., a Delaware corporation
having a principal office at 25 John Road, Canton, Massachusetts
(referred to as the "Borrower"), hereby unconditionally promises to pay
to the order of BANKBOSTON. N.A. (f/k/a The First National Bank of
Boston) (hereinafter, together with its successors-in-title and assigns
the "Bank") at the head office of the Bank, at 100 Federal Street,
Boston, Massachusetts, the principal sum of TWENTY-FIVE MILLION DOLLARS
($25,000,000), or, if less, the aggregate unpaid principal amount of
advances hereunder made by the Bank to the Borrower under the Amended and
Restated Loan Agreement dated August 17, 1973, as amended between the
Borrower and the Bank, (as now or hereafter amended, the "Agreement").
Capitalized terms used herein and not otherwise defined herein shall have
the meanings assigned to them in the Agreement. Unless otherwise provided
herein, the rules of interpretation set forth in Section 1.2 of the
Agreement shall be applicable to this Note."
3. Except as specifically provided herein, all terms and conditions of
the Note shall remain in full force and effect and are hereby ratified and
confirmed. On and after the date hereof, each reference in the Note to "this
Note", "hereunder", "hereof" or words of like import referring to the Note,
shall mean and be a reference to the Note as amended by this Fourth Amendment,
and each reference in the Loan Agreement and any other loan documents between
the Borrower and the Bank, to the Note, "thereunder", "thereof" or words of like
import referring to the Note shall mean and be a reference to the Note as
amended by this Fourth Amendment.
3. This Fourth Amendment shall take effect as a sealed instrument under
the laws of the Commonwealth of Massachusetts as of the date first written
above.
COPLEY PHARMACEUTICAL, INC.
By:/s/Daniel M.P. Caron
---------------------------
Daniel M. P. Caron, CFO
BANKBOSTON, N.A.
By:/s/ Jeffrey R. Westling
---------------------------------
Jeffrey R. Westling, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS, 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
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,846
<SECURITIES> 30,758
<RECEIVABLES> 26,637
<ALLOWANCES> (500)
<INVENTORY> 26,679
<CURRENT-ASSETS> 93,225
<PP&E> 76,830
<DEPRECIATION> (35,347)
<TOTAL-ASSETS> 140,015
<CURRENT-LIABILITIES> 21,986
<BONDS> 4,500
0
0
<COMMON> 254
<OTHER-SE> 109,653
<TOTAL-LIABILITY-AND-EQUITY> 140,015
<SALES> 50,814
<TOTAL-REVENUES> 50,814
<CGS> 34,670
<TOTAL-COSTS> 34,670
<OTHER-EXPENSES> 14,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 188
<INCOME-PRETAX> 2,469
<INCOME-TAX> 970
<INCOME-CONTINUING> 1,499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,499
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
