SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
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FORM 10-QSB
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
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Commission File Number: 0-18399
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FOUNTAIN PHARMACEUTICALS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1386759
-------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7279 Bryan Dairy Road, Largo, Florida 33777
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(Address of principal executive offices)
(813) 548-0900
--------------
(Registrant's telephone number, including area code)
7279 Bryan Dairy Road, Largo, Florida 34647
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(Former name, former address and former fiscal year
if changed since last report)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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.
(1) Yes X No
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(2) Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Check whether the Registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by court.
Yes X No
----- -----
<PAGE>
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the Registrant's classes
of Common Stock, as of August 6, 1996:
Common Stock, par value $.001 - 47,516,049
Class B Common Stock, par value $.001 - 90,100
Transitional Small Business Disclosure Format:
Yes No X
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2
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
INDEX
Page
----
Part I. Financial Information*
- ------- ----------------------
Item 1. Financial Statements
(Unaudited)
Balance Sheets - September 30, 1995,
and June 30, 1996
(Unaudited) 4
Statements of Operations - for the nine
months ended June 30, 1996 and 1995
(Unaudited) 5
Statement of Stockholders' Equity (Deficit) -
for the period from September 30, 1995
through June 30, 1996 (Unaudited) 6
Statements of Cash Flows - for the nine
months ended June 30, 1996 and 1995
(Unaudited) 7
Notes to Condensed Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and
Analysis or Plan of Operations 10
Part II. Other Information 14
- -------- ----------------- --
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote
of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
* The accompanying financial information is not covered by an Independent
Certified Public Accountant's Report.
3
<PAGE>
<TABLE>
<CAPTION>
FOUNTAIN PHARMACEUTICALS, INC.
BALANCE SHEETS
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, June 30,
1996 September 30, 1996 September 30,
(Unaudited) 1995 (Unaudited) 1995
----------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Current assets: Current liabilities:
Cash and cash equivalents $ 120,481 $ 82,245 Current portion of
Accounts receivable 520,999 67,239 liabilities not subject
Inventories 143,856 182,946 to compromise $ 26,182 $ 16,579
Prepaid expenses 15,135 23,177 Current portion of
----------- -----------
liabilities subject to
compromise 84,276 83,468
Accounts payable and
accrued expenses 277,478 100,505
---------- ----------
Total current assets 800,471 355,607 Total current liabilities 387,936 200,552
---------- ----------
Liabilities not subject to
compromise, non-current 38,995 59,096
---------- ----------
Furniture and equipment, less Liabilities subject to
accumulated depreciation compromise, non-current 113,982 517,426
---------- ----------
($224,951 June 30, 1996;
$216,366 September 30, 1995) 39,109 65,404 Stockholders' equity (deficit):
Patent costs, less Preferred stock, par value $.001,
accumulated amortization 2,000,000 shares authorized
($83,891 June 30, 1996; Common stock, par value
$81,380 September 30, $.001, 50,000,000 shares
1995) 103,364 86,099 authorized; shares issued
and outstanding:
Other assets 8,779 3,965 47,516,049, June
----------- -----------
30, 1996; 22,516,049,
September 30, 1995
(one vote per share) 47,516 22,516
Class B common stock, par
value $.001, 5,000,000
shares authorized; shares
issued and outstanding:
90,100, June 30, 1996
and September 30, 1995
(five votes per share) 90 90
Additional paid-in capital 14,529,102 14,304,102
Accumulated deficit (14,165,898) (14,592,707)
---------- ----------
410,810 ( 265,999)
---------- ----------
$ 951,723 $ 511,075 $ 951,723 $ 511,075
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
4
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $ 887,126 255,768 1,499,232 904,218
Cost of Products 479,770 97,891 753,282 408,633
----------- ----------- ----------- -----------
Gross Margin 407,356 157,877 745,950 495,585
----------- ----------- ----------- -----------
Operating Expenses:
Research and development 44,025 3,910 60,686 36,746
General and administrative expenses 122,573 77,451 316,367 196,533
Selling expense 58,733 45,851 154,023 128,380
Warehouse expense 20,090 11,696 54,132 24,114
Depreciation and amortization 10,242 13,257 33,647 42,345
----------- ----------- ----------- -----------
Total Operating Expenses 255,663 152,165 618,855 428,118
----------- ----------- ----------- -----------
Other Income (Expenses) ( 10,747) ( 120) ( 14,489) ( 196)
----------- ----------- ----------- -----------
Income before reorganization expenses 140,946 5,592 112,606 67,271
Reorganization Expenses ( 8) ( 3,860) ( 22,843) ( 22,905)
----------- ----------- ----------- -----------
Income before extraordinary item 140,938 1,732 89,763 44,366
Extraordinary Gain 14,678 -- 337,046 --
----------- ----------- ----------- -----------
Net Income $ 155,616 $ 1,732 $ 426,809 $ 44,366
=========== =========== =========== ===========
Earnings per share:
Income before extraordinary item $ .0030 $ .0001 $ .0020 $ .0019
Extraordinary gain .0003 -- .0077 --
----------- ----------- ----------- -----------
Net income $ .0033 $ .0001 $ .0097 $ .0019
=========== =========== =========== ===========
Weighted average number of shares
outstanding 47,606,149 22,606,149 43,977,117 22,606,149
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM SEPTEMBER 30, 1995 THROUGH JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Class B
Common Stock Common Stock Additional
------------------ -------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
---------- ------- ------ ----- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances
October 1, 1995 22,516,049 $22,516 90,100 $90 $14,304,102 ($14,592,707) ($265,999)
Common stock issued
pursuant to
reorganization plan 25,000,000 25,000 -- -- 225,000 -- 250,000
Net income for the
period -- -- -- -- -- 426,809 426,809
---------- ------- ------ ----- ----------- ------------ ---------
Balances
June 30, 1996 47,516,049 $47,516 90,100 $90 $14,529,102 ($14,165,898) $ 410,810
========== ======= ====== ===== =========== ============ =========
</TABLE>
See notes to financial statements.
6
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended June 30
-------------------------
1996 1995
--------- ----------
Cash flows from operating activities:
Net income $ 426,809 $ 44,366
Adjustments to reconcile net income
to net cash used in operating
activities:
Extraordinary gain (337,046)
Depreciation and amortization 33,647 42,345
Loss on disposal of assets 3,010
Increase (decrease) in cash due to
changes in assets and liabilities:
Accounts receivable, trade (453,760) (139,800)
Inventories 39,090 52,246
Other assets ( 4,814) 16,211
Prepaid expenses 8,042 ( 4,283)
Accounts payable and
accrued expenses 176,973 1,746
-------- ---------
Net cash used in
operating activities (108,049) ( 12,831)
-------- ---------
Cash flows from investing activities:
Deferred patent costs incurred ( 19,777) ( 5,114)
Acquisition of furniture and
equipment ( 7,851)
-------- ---------
Net cash provided by (used in)
investing activities ( 27,628) ( 5,114)
-------- ---------
Cash flows from financing activities:
Proceeds from stock offering, net 250,000
Repayment of liabilities under
Reorganization Plan ( 76,087)
-------- ---------
Net cash provided by
financing activities 173,913
-------- ---------
Increase (decrease) in cash ( 38,236) 7,717
Cash at beginning of period 82,245 5,800
-------- ----------
Cash at end of period $ 120,481 $ 13,517
========= ==========
See notes to financial statements.
7
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1. The financial statements and notes thereto should be read in conjunction with
the financial statements and notes for the year ended September 30, 1995.
2. Chapter 11 Reorganization:
On November 30, 1994, the Company filed a voluntary petition for
reorganization under Chapter 11 of Title II of the United States Code ("the
Bankruptcy Code") in the United States Bankruptcy Court for the Middle
District of Florida, Tampa Division (the "Bankruptcy Court").
The Company's Chapter 11 filing resulted primarily from historical losses
incurred by the Company and judgments entered against the Company associated
with default under a lease agreement and default of a settlement of a breach
of employment contract claim.
On May 15, 1995, the Debtor's Disclosure Statement and Plan of Reorganization
("The Reorganization Plan" or "the Plan") were filed with the Bankruptcy
Court. The Reorganization Plan, as amended August 14, 1995, was confirmed on
November 20, 1995, became effective on December 20, 1995 (the "Effective
Date"), and final decree was entered July 25, 1996. The essential terms of
the Plan are as follows:
Secured claims, principally amounts due pursuant to the Company's lease
agreement for which said amounts were secured by a security interest in
inventory and equipment, will be paid in full with interest at 9 1/2 percent
over a thirty-three month term.
Priority wage claims will be paid in quarterly installments over a six-month
period, without interest.
Unsecured claims will be paid at 50 percent of the allowed amount of such
claim, without interest, in eleven quarterly installments.
Equity security holders will receive no distribution or dividend until and
unless all prior claims are paid in full as provided above. Shareholders will
retain their interest, without alteration, except as follows. Pursuant to the
Plan, the Company has issued 25,000,000 shares of common stock for $.01 per
share, the rate at which the shares were trading as of the date the amended
plan was filed with the Bankruptcy Court, for a total of $250,000. These
shares were issued to an individual who is an existing officer, director and
shareholder of the Company.
At the date of effectiveness of the Plan and thereafter, the Company
continued to account for its assets at their historical cost basis (did not
adopt "Fresh Start" accounting). Liabilities are recorded in the accompanying
June 30, 1996 balance sheet at their allowed amount (allowed by the
Bankruptcy Court). The difference between those amounts and the amounts
previously recorded have been accounted for as a $337,046 extraordinary gain
in the June 30, 1996 statement of operations. Other reorganization costs of
$22,843 and $22,905 (primarily legal fees) are also separately reported in
the June 30, 1996 and 1995 statement of operations respectively.
8
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
2. Chapter 11 Reorganization (continued):
At the date of the Plan's effectiveness (December 20, 1995), the difference
between the net present value of the settled amount of liability and the
estimated allowed amounts was recorded as an extraordinary gain. All
prepetition liabilities are classified in the accompanying June 30, 1996
balance sheet (current or long-term) based upon the terms of the confirmed
Reorganization Plan.
3. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the periods presented have been included. The results of
operations for the nine months ended June 30, 1996 and 1995 are not
necessarily indicative of the results for a full year.
4. Income Taxes
Deferred tax assets result primarily from the use of different methods of
accounting for start-up costs and inventory obsolescence allowances and the
tax benefit of net operating loss caryforwards and tax credit carryforwards
for financial statement and income tax purposes
Deferred tax assets consist of the following:
June 30, September 30,
1996 1995
----------- --------------
Net operating loss carryover $ 0 $ 4,750,000
Tax credit carryforwards 0 250,000
Start-up costs deferred 46,250 185,000
Obsolete inventory allowance 106,000 106,000
Other 61,000 61,000
Valuation allowance (213,250) (5,352,000)
------- ---------
$ 0 $ 0
========= ===========
Income tax (expense) benefit consists of the following:
June 30, September 30,
1996 1995
----------- --------------
Current $ 0 $ 0
---------- ----------
Deferred:
Loss of benefit from net
operating carryforward (5,010,500) 0
Benefit of net operating loss
carryover 138,750 45,750
Other
(Increase) decrease in valuation
allowance 4,871,750 ( 45,750)
----------- ----------
$ 0 $ 0
=========== ==========
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Background
During the quarter ended December 31, 1995, the Company emerged from
bankruptcy proceedings which commenced in November 1994. During and subsequent
to the bankruptcy proceedings, the principal source of the Company's revenues
has been from sales of its sunscreen products to licensees who act as
distributors and from royalties which are earned as the result of the subsequent
sale of these products by such distributors.
During the fiscal year ended September 30, 1995 ("Fiscal 1995") while the
Company was in bankruptcy proceedings, management restructured the Company and
significantly reduced its overall cost structure such that revenues derived from
sales and royalties were sufficient to cover the Company's costs. As such,
management no longer considers itself to be in the development stage.
The Company's Plan of Reorganization (the "Plan"), which became effective
on December 20, 1995, resulted in, among other things, a substantial reduction
in the Company's outstanding liabilities, infusion of capital by the Company's
Chief Executive Officer through the purchase of newly issued shares of the
Company's Common Stock and the Company's emergence from the bankruptcy
proceedings. The U.S. Bankruptcy Court entered its final decree on July 25,
1996, and as such, the Court no longer has jurisdiction over matters in
connection with the bankruptcy.
Results of Operations
During the quarter ended June 30, 1996, the Company realized net income of
$155,616 on revenues of $887,126, compared to net income of $1,732 on revenues
of $255,768 for the quarter ended June 30, 1995. The increased revenues and net
income were a result, primarily, to the expanding acceptance of the Company's
products by dermatologists in northern Europe.
During the quarter, the Company incurred operating expenses of $255,663, a
68% increase over operating expenses of $152,165 for the prior year quarter.
This increase in expenses was primarily due to legal and accounting fees
relative to regulatory filing requirements, insurance costs, increased marketing
efforts and start up expenses relating to the Company's new R&D facilities.
Management expects that operating expenses are likely to increase modestly
during the remainder of the year ending September 30, 1996 ("Fiscal 1996") to
reflect the costs of additional personnel, as well as increased research and
development expenses relating to new projects. Management believes, however,
that the Company will realize revenues during Fiscal 1996 sufficient to satisfy
these expenses as well as other anticipated obligations under the Plan.
For the nine months ended June 30, 1996, revenues were $1,499,232 and net
income was $426,809, compared to revenues of $904,218 and net income of $44,366
for the nine months ended June 30, 1995. Management believes that the increase
10
<PAGE>
in total revenues for the nine months ended June 30, 1996, does not represent a
trend of increased revenue for the next quarter because the Company would expect
reduced sales levels at this time of year, due to the seasonal nature of its
principal product, a sunscreen. Management also anticipates that this
seasonality of revenues will be reduced in time as the Company's product line
and geographic expansion continues.
The increase in net income for the nine months ended June 30, 1996, was
attributable primarily to an extraordinary gain recorded in December 31, 1995
reflecting a write-down of liabilities to reflect amounts allowed under the
Plan. Exclusive of this gain, a net income of $89,763 would have been recorded
for the nine months ended June 30, 1996, as compared with a net income of
$44,366 for the prior year's nine month period.
For the near term, the Company's operations will continue to focus upon
increasing sales through its existing and new license arrangements and expanding
upon these associations. Management believes that the sales of its products will
continue to increase as the Company gains access through its licensing
arrangements to broader geographic markets such as those offered by a new
license and supply arrangement secured in January 1996 with a major
international pharmaceutical company with markets in the United States, Canada,
Europe, Latin America, the Middle East and parts of Asia. However, there can be
no assurances to this effect, and there will not likely be any significant
revenues from this new agreement during Fiscal 1996.
Liquidity and Capital Resources
From inception through the quarter ended June 30, 1994, the Company's
principal sources of working capital were derived from a series of private
financing transactions and an initial public offering in 1990. As a result of
the Company's declining equity and assets, the Company's securities were
delisted from The NASDAQ SmallCap Market(sm) during May 1994 and the securities
have since traded on the less liquid market of the OTC Bulletin Board, which
would limit the Company's efforts to obtain additional working capital through
the sale of its securities.
During the period from the quarter ended June 30, 1994 throughout the
bankruptcy proceedings, the Company's operations were funded primarily through
sales of products and from royalties. Under the terms of the Plan, the
liabilities of the Company were reduced by approximately 55% and the Company
obtained working capital of $250,000 as the result of the purchase by the
Company's Chief Executive Officer of 25,000,000 shares of the Company's Common
Stock at a purchase price of $.01 per share.
As of June 30, 1996, the Company had working capital of $412,535, an
increase of $129,831 from the level of working capital of $282,704 as of March
31, 1996, and an increase of $1,020,345 from the Company's working capital
deficit of $607,810 as of June 30, 1995. Such increase in working capital is
primarily attributable to the 55% reduction in the Company's liabilities, an
11
<PAGE>
infusion of capital from the sale of the Company's Common Stock pursuant to the
Plan and trade receivables.
Under the Plan, the Company was subject to $310,009 of pre- bankruptcy
liabilities to be paid under the Plan over a maximum of thirty-three months
which commenced February 1996. Presently, pre- bankruptcy liabilities amount to
$263,435. Payments pursuant to the Plan were current as of June 30, 1996, and
management expects all such required payments to be made on a timely basis.
Provided operations reflect continued growth, the Company may attempt to
obtain financing through the sale of additional securities. This would require a
restructuring of the Company's capital structure which currently has
insufficient authorized capital stock available to facilitate any such financing
transaction. Additional capital may be utilized to increase the Company's
research and development efforts and to seek collaborative associations with
pharmaceutical companies. Increases in equity and assets may also enable the
Company to relist its securities on NASDAQ and thereby regain access to a more
liquid trading market. However, there can be no assurances that the Company's
business strategy can be realized.
Historically, the Company's unexercised warrants had been a potential
source of capital financing for the Company. However, all previously existing
Class A, B, C and D Warrants have expired. The 1,566,667 common stock purchase
warrants presently vested and outstanding bear exercise prices ranging from $.78
to $2.50. Given the market price of the Company's Common Stock, management
believes that such Warrants are unlikely to be exercised in the near term.
In addition to the Warrants identified above, the Company has also issued
3,050,000 additional Warrants to certain of its existing directors and employees
which vest over a three year period commencing in July 1996.
Based upon the Company's current capital structure, an exercise of all of
the issued and outstanding Warrants would not be possible since the number of
Warrants (assuming full vesting) exceeds the number of shares that remain
authorized and available for issuance. An inability to issue shares upon the
exercise of the Warrants could conceivably delay any funding which the Company
could otherwise receive from the exercise of such Warrants pending adequate
capitalization. Management does not believe this is likely to occur given the
vesting provisions of certain of the outstanding Warrants, the present market
price of the Company's Common Stock and since a restructuring of the Company's
capital structure would likely occur prior to any exercise of such Warrants.
The report of the Company's independent accountants for the year ended
September 30, 1995 contains an explanatory paragraph regarding uncertainties
about the Company's ability to continue as a going concern.
12
<PAGE>
Effects of Inflation
The Company does not expect inflation to materially effect its results of
operations, however, it does expect that its operating costs and the cost of
capital equipment to be acquired in the future may be subject to general
economic and inflationary pressures.
13
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
The United States Bankruptcy Court, Middle District of Florida,
Tampa Division, has issued a final decree on July 25, 1996,
relating to the Company's Chapter 11 Reorganization proceedings,
and as such, the Court no longer has jurisdiction over matters in
connection with the bankruptcy.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 27 - Financial Data Schedule (Electronic filing only).
(b) Reports on Form 8-K: None.
14
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
SIGNATURES
----------
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.
FOUNTAIN PHARMACEUTICALS, INC.
Dated: August 6, 1996
/s/John C. Walsh
-------------------------------
JOHN C. WALSH,
Chief Executive Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FOUNTAIN PHARMACEUTICALS, INC. FOR THE NINE MONTHS
ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 120
<SECURITIES> 0
<RECEIVABLES> 521
<ALLOWANCES> 0
<INVENTORY> 144
<CURRENT-ASSETS> 800
<PP&E> 264
<DEPRECIATION> 225
<TOTAL-ASSETS> 952
<CURRENT-LIABILITIES> 388
<BONDS> 0
0
0
<COMMON> 48
<OTHER-SE> 363
<TOTAL-LIABILITY-AND-EQUITY> 952
<SALES> 1,499
<TOTAL-REVENUES> 1,499
<CGS> 753
<TOTAL-COSTS> 619
<OTHER-EXPENSES> 37
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 427
<INCOME-TAX> 0
<INCOME-CONTINUING> 427
<DISCONTINUED> 0
<EXTRAORDINARY> 337
<CHANGES> 0
<NET-INCOME> 427
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
