<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
COMMISSION FILE NUMBER 0-24496
GEN/Rx, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2728666
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1776 BROADWAY, SUITE 1900, NEW YORK, NY 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212)581-5100
INDICATE BY CHECK (X) WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES AND 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______
18,813,745
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 10 , 1995
<PAGE> 2
THIS IS PAGE 1 OF 11 PAGES. THE EXHIBIT INDEX IS ON PAGE 10.
GEN/Rx, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1995 1994
------ ---------------- ---------------
<S> <C> <C>
Current assets:
Cash $ 226
$4
Certificate of deposit-restricted 100
Accounts receivable, net 671
Inventories 892 753
Prepaid expenses and other current assets 49 31
------- ------
Total current assets 1,938 788
Property, plant and equipment 1,049 23
Intangible assets 4,889
Deposits and other assets 54 1
-------
$7,930 $ 812
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 148
Accounts payable 1,010
Accrued expenses and other current liabilities 886
------
Total current liabilities 2,044
Notes payable--Apotex, USA 1,787 $1,275
Divisional equity (deficit) (463)
------- ------
Shareholders' equity:
Common Stock 83
Additional capital 7,747
Accumulated deficit (3,731)
------
Total shareholders' equity 4,099
------
Total liabilities and equity (deficit) $7,930 $ 812
======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
GEN/Rx, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
JULY 1, 1994
NINE MONTHS (DATE OF INCEPTION) THREE MONTHS ENDED
ENDED TO -----------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1994 1995
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 5,061 $ 1,434
Cost of sales 3,536 1,091
------- -----
Gross profit 1,525 343
Operating expenses:
Product development 573 273
Selling and distribution 1,703 $ 118 401 $ 118
General and administrative 741 39 365 39
Amortization of intangible assets 154 63
Idle facility costs 1,418 605
-------- ------ ------- -----
4,589 157 1,707 157
Operating (loss) (3,064) (157) (1,364) (157)
Interest expense 204 134
-------- ------ ------- -----
Net (loss) $(3,268) $(157) $(1,498) $(157)
======== ======== ======= =====
Net (loss) per share of
Common Stock $ (.17) $ (.07)
======== =======
Weighted average number of
common shares outstanding 18,792 20,879
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
GEN/Rx, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
JULY 1, 1994
NINE MONTHS (DATE OF INCEPTION)
ENDED TO
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,268) $(157)
Adjustments to reconcile net loss
to net cash (used) by operating
activities:
Depreciation and amortization 258
Other 92
Changes in assets and liabilities:
Decrease in accounts receivable (268)
Decrease in inventories 847
(Increase) in prepaid expenses
and other assets (183) (43)
Increase in accounts payable
and other current liabilities 1,237
------- -----
Net cash (used) by operating activities (1,285) (200)
------- -----
Cash flows from financing activities:
Proceeds from advances - Apotex, USA 231
Proceeds from notes payable - Apotex, USA 1,963
Principal payments under long-term debt (333)
------- -----
Net cash provided by financing activities 1,630 231
------- -----
Cash flows from investing activities:
Capital expenditures (119) (28)
------- -----
Net cash (used) by investing activities (119) (28)
------- -----
Net increase in cash 226 3
Cash at beginning of period - 0 - - 0 -
------- -----
Cash at end of period $ 226 $ 3
======= =====
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
GEN/Rx, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
THE COMPANY:
The Company operates in one business segment, the manufacture and distribution
of veterinary and human injectable products (see "Suspension of Manufacturing
Activities" below).
On April 13, 1995, a merger (the "Merger") of GEN/Rx, Inc.'s ("GEN/Rx") newly
formed wholly-owned subsidiary, GEN/Rx Acquisition Subsidiary, Inc., with and
into AUSA, Inc. ("AUSA") was consummated. Pursuant to the Merger, the Company
acquired all the assets of AUSA, a company engaged in the distribution of
injectable drugs to the hospital market. AUSA was a subsidiary of Apotex USA,
Inc. ("Apotex"). As part of the Merger transaction, the Company issued to Apotex
(the former shareholder of AUSA) 13,288,874 shares of its Common Stock and is
obligated to issue to Apotex, an additional 2,064,966 shares as soon as
practicable following an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of common stock. After issuance of
the additional shares, Apotex will own approximately seventy four (74%) percent
of the outstanding Common Stock of the Company. In addition, warrants to
purchase 270,000 shares of common stock of GEN/Rx for $1.50 per share were
issued to various individuals in connection with the Merger.
Since the former shareholders of AUSA own 74% of GEN/Rx, Inc., the transaction
has been accounted for as if AUSA acquired the net assets of GEN/Rx for the
previously issued and outstanding shares of GEN/Rx. The excess of the fair value
of the previously issued and outstanding stock of GEN/Rx, Inc. over the fair
value of its assets has been recorded as goodwill.
In addition, in connection with the merger and pursuant to a Loan Agreement
dated April 13, 1995 between GEN/Rx and Apotex, Apotex agreed to loan the
Company $500,000 represented by a Term Note dated April 13, 1995 and up to
$2,000,000 represented by a revolving line of credit note dated April 13, 1995.
The notes bear interest at 1% over prime and mature on April 13, 1998. These
notes are secured by all of the assets of the Company. In addition, as
additional consideration for the loans, Apotex will receive warrants exercisable
at $1.00 per share to purchase shares of the Company's common stock in an amount
equal to one share for each dollar advanced pursuant to the Loan Agreement. The
warrants expire on April 13, 1998. At October 11, 1995, the Company had borrowed
$2,500,000 pursuant to this Loan Agreement.
BASIS OF PREPARATION:
The accompanying financial statements as at September 30, 1995 and for the nine
and three month periods ended September 30, 1995 are unaudited; however, in the
opinion of management of the Company such statements include all adjustments
(consisting of normal recurring accruals) necessary to a fair statement of the
information presented therein. The balance sheet as at December 31, 1994 was
derived from the unaudited financial statements of AUSA at such date. AUSA
commenced operations as Yorpharm, a division of Apotex, in July 1994. In April
1995, prior to the Merger, the net assets of Yorpharm were transferred to the
newly formed corporation, AUSA.
Pursuant to accounting requirements of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, the accompanying financial
statements and these notes do not include all disclosures required by generally
accepted accounting principles for complete financial statements. Accordingly,
these statements should be read in conjunction with the Company's most recent
annual financial statements.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for a full year.
5
<PAGE> 6
SUSPENSION OF MANUFACTURING ACTIVITIES:
In connection with an inspection of its manufacturing facility from October 1994
through May 1995 by the U.S. Food and Drug Administration ("FDA"), GEN/Rx,
Inc.'s subsidiary, American Veterinary Products, Inc. ("AVP") received a
"warning letter" from the Denver District Office of the FDA setting forth
certain alleged deviations from current good manufacturing practice regulations
and alleged violations of related provisions of the Federal Food, Drug and
Cosmetic Act.
In June 1995, following new management's investigation of the matters set forth
in the warning letter, AVP suspended the manufacture of veterinary products
indefinitely. As a consequence of these events, management is currently
exploring its alternatives with respect to such business, including its
disposition by sale or otherwise or renovation and upgrade of AVP's facility.
Results of operations of AVP since suspension of its operations has been shown
as "Idle facility costs" on the consolidated statement of operations.
POSSIBLE IMPAIRMENT OF GOODWILL:
As of each balance sheet date, management assesses whether there has been an
impairment in the value of excess cost over net assets of an acquired company by
comparing anticipated undiscounted future cash flows from the related operating
activities with the carrying value. The factors being considered by management
in performing this assessment include the length of time since acquisition,
current operating results, trends and prospects, as well as the effects of
obsolescence, demand, competition and other economic factors. Management has not
yet concluded its assessment, however, should it determine that there is an
impairment of goodwill, the Company will take a charge for the write-down of
goodwill and such charge may be material.
SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated statements of operations and cash flows include the accounts of
AUSA from January 1, 1995 and GEN/Rx, Inc., and its wholly-owned subsidiary,
AVP, from the date of GEN/Rx's acquisition on April 13, 1995. Significant
intercompany accounts and transactions have been eliminated in consolidation.
References herein to the "Company" refer to GEN/Rx, Inc. and its subsidiaries,
or GEN/Rx, Inc., as the context may require.
INVENTORIES:
Inventories are stated at the lower cost of (first-in, first-out) or market
basis, and consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
----------- --------------
<S> <C> <C>
Raw material $150
Work in-process and finished goods 742 $753
---- ----
$892 $753
==== ====
</TABLE>
LINE-OF-CREDIT:
In June 1995, the financial institution providing the Company with a line of
credit terminated the
6
<PAGE> 7
financing agreement between it and AVP. The outstanding balance of $103,000
was paid in full.
NOTES PAYABLE--APOTEX:
The balance of $1,787,000 reflected on the consolidated balance sheet at
September 30, 1995 represents the discounted balance of $2,294,000 due Apotex
pursuant to a loan agreement entered into in connection with the Merger. The
original issue discount of $600,000 was the assigned value of the warrants
issued to Apotex in connection with the loan agreement. See "The Company" above.
The discounted balance of the notes reflects an effective interest rate of
approximately 18%.
LEGAL PROCEEDINGS:
The Company is a defendant or plaintiff in certain actions arising in the normal
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material effect on the financial condition or
results of operations of the Company.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In June 1995, the Company made a determination to suspend the operations of
American Veterinary Products, Inc. indefinitely after concluding that the time,
cost and other resources required to address certain regulatory problems set
forth in a warning letter issued by the US Food, Drug and Cosmetic Act ("FDA"),
continue production activities and prepare for a possible upgrade to the
facility and equipment would be too great for it to pursue. As a consequence of
these events, management is currently exploring its alternatives with respect to
such business, including its disposition by sale or otherwise or renovation and
upgrade of AVP's facility. In addition, management is currently assessing the
value of goodwill acquired in connection with the business combination compared
to its carrying value. As a result, the Company may, in the future, take a
charge for the write-down of goodwill. See "Notes to Financial
Statements--Possible Impairment of Goodwill".
Until such time that AVP resumes its operations, product development, selling
and distribution and general and administrative costs will be that of AUSA, a
subsidiary engaged in the distribution of injectable generic drugs primarily to
hospitals. Results of operations of AVP since suspension of its operations has
been shown as "Idle facility costs" on the consolidated statement of operations.
The following should be read in conjunction with the Company's financial
statements and the related notes thereto included elsewhere herein.
RESULTS OF OPERATIONS:
NET SALES:
Net sales for the nine and three month periods ended September 30, 1995 were
$5,061,000 and $1,434,000, respectively. Of such amounts, $779,000 and $0,
respectively, represented sales of products manufactured and sold to the
veterinary market. See "Notes to Financial Statements--Suspension of
Manufacturing Activities".
Sales of injectable products for human use were $4,282,000 and $1,434,000 for
the nine and three months ended September 30, 1995, respectively. The Company's
current injectable product line for human use is purchased for resale from
unrelated manufacturers and consists of six drugs representing approximately
sixteen products. Sales of one of these products accounted for approximately 70%
of net sales during the nine month period. Competition on this product was
minimal during the nine months ended September 30, 1995. Management expects
competition on sales of this product in the near term to intensify, accordingly;
sales and gross margins of this product are expected to decrease from levels
experienced in the current period.
While management expects future sales to increase from current levels, any
increase is dependent on the Company's ability to (i) raise sufficient levels of
capital, (ii) broaden the product line and (iii) expand its customer base. The
Company is currently taking steps to address these issues, however, there can be
no assurance that such efforts will be successful. See "Financial
Condition--Liquidity and Capital Resources and Financing" below.
OPERATING EXPENSES:
Selling and Distribution:
The Company recently hired a vice president of sales and marketing to assist
management in increasing sales and improving customer service. Immediate
attention has been given to (i) sourcing additional products for distribution,
(ii) expanding the Company's customer base and (iii) reorganizing and increasing
the Company's internal sales staff to optimize their productivity and geographic
dispersion. As a result, management expects selling and distribution costs to
continue to increase in the future.
8
<PAGE> 9
General and Administrative:
Management expects general and administrative costs to increase in the future as
a result of, increases in personnel costs, facility costs, and the design and
implementation of management information systems in anticipation of the growth
of the Company's business.
Product Development:
The Company intends to pursue an aggressive product development strategy,
however; such a strategy is dependent on the Company's ability to raise
sufficient capital to finance the development of targeted products. (see
"Financing" below) The Company is also seeking alternatives to supplement, its
product development efforts, such as distribution agreements, license agreements
and joint ventures. During the current quarter, the Company entered into five
agreements for the development of product that the Company intends to market in
the future. The Company expects to enter into additional product development
agreements in the future.
FINANCIAL CONDITION
Liquidity and Capital Resources
At September 30, 1995, the Company had cash and working capital deficiency of
$226,000 and $106,000, respectively. The Company is dependent on continued
financing from its parent, Apotex, or third parties (see "Financing" below). The
Company's ability to generate profits and working capital is dependent upon (i)
the success of management's efforts to raise capital or secure other forms of
financing to fund future operating losses of its operations, (ii) fund efforts
to broaden the Company's product line including research and development costs
and product acquisitions, and (iii) increase sales, accelerate collections of
accounts receivable and control inventory levels and operating costs.
Financing
In June 1995, the financial institution which had provided the Company with a
line of credit based upon levels of accounts receivable and inventories,
terminated the financing agreement between it and AVP. The Company repaid the
outstanding balance of $103,000 in July.
The Company's current level of liquidity and capital resources is not sufficient
to fund current operating losses and growth of the Company's business. The
Company recognizes the need to raise additional capital and/or arrange for
financing of its operating activities including product development efforts.
The Company and Apotex are currently engaged in discussions relating to an
amendment of the existing Loan Agreement entered into on April 13, 1995 whereby
Apotex would advance the Company additional funds for working capital and other
corporate purposes. In addition, management is seeking alternate sources of
financing its operations including the sale of additional capital stock.
There can be no assurance that the Company and Apotex will be able to agree on a
financing arrangement or that it or other alternative sources of financing would
be available to the Company on terms agreeable to it.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
The Company filed a current report on Form 8-K dated
July 10, 1995 reporting under Item 4, "Changes in
Registrant's Certifying Accountant".
10
<PAGE> 11
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GEN/Rx, Inc.
------------
(Registrant)
November 10, 1995 /s/ John R. Toedtman
--------------------------------------
John R. Toedtman, President
November 10, 1995 /s/ Richard J. Strobel
--------------------------------------
Richard J. Strobel, Vice President
Finance and Administration (Chief
Financial Officer)
11
<PAGE> 12
EXHIBIT INDEX
Exhibit No. Description Page No.
- ---------- ----------- -------
EX-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 226,000
<SECURITIES> 100,000
<RECEIVABLES> 671,000
<ALLOWANCES> 0
<INVENTORY> 892,000
<CURRENT-ASSETS> 1,938,000
<PP&E> 6,113,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,930,000
<CURRENT-LIABILITIES> 2,044,000
<BONDS> 1,787,000
<COMMON> 83,000
0
0
<OTHER-SE> 4,016,000
<TOTAL-LIABILITY-AND-EQUITY> 7,930,000
<SALES> 5,061,000
<TOTAL-REVENUES> 0
<CGS> 3,536,000
<TOTAL-COSTS> 3,536,000
<OTHER-EXPENSES> 4,589,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 204,000
<INCOME-PRETAX> (3,268,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,268,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,268,000
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
