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 EXCHANGE ACT
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OF 1934
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For the quarterly period ended December 31, 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
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(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
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(Registrant's telephone number, including area code)
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
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<PAGE>
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the Registrant's classes
of Common Stock, as of February 10, 1997:
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*
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Item 1. Financial Statements
(Unaudited)
Balance Sheets - September 30, 1996,
and December 31, 1996
(Unaudited) 4
Statements of Operations - for the three
months ended December 31, 1996 and 1995
(Unaudited) 5
Statement of Stockholders' Equity -
for the period from September 30, 1996
through December 31, 1996 (Unaudited) 6
Statements of Cash Flows - for the three
months ended December 31, 1996 and 1995
(Unaudited) 7
Notes to Condensed Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and
Analysis or Plan of Operation 9
Part II. Other Information
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Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
* The accompanying financial information is not covered by an Independent
Certified Public Accountant's Report.
3
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
1996 September 30, 1996 September 30,
(Unaudited) 1996 (Unaudited) 1996
----------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Current assets: Current liabilities:
Cash and cash equivalents $ 2,893 $ 66,647 Current portion of
Accounts receivable 93,111 236,032 liabilities not subject
Inventories 106,490 104,866 to compromise $ 27,450 $ 26,808
Prepaid expenses 50,579 46,574 Current portion of
----------- ----------- liabilities subject to
compromise 85,708 84,983
Accounts payable and
accrued expenses 66,962 108,091
---------- ----------
Total current assets 253,073 454,119 Total current liabilities 180,120 219,882
---------- ----------
Liabilities not subject to
compromise, non-current 24,945 32,053
---------- ----------
Furniture and equipment, less Liabilities subject to
accumulated depreciation compromise, non-current 70,071 92,298
---------- ----------
($239,716, December 31, 1996;
$232,136, September 30, 1996) 24,344 31,924
Stockholders' equity:
Patent costs, less accumulated Preferred stock, par value $.001,
amortization ($22,905, December 2,000,000 shares authorized
31, 1996; $22,065 September Common stock, par value
30, 1996) 123,839 138,575 $.001, 50,000,000 shares
authorized; 47,516,049 issued
Other assets 6,250 6,250 and outstanding (one vote per
----------- ----------- share 47,516 47,516
Class B common stock; par value
$.001, 5,000,000 shares
authorized; 90,100 shares
issued and outstanding (five
votes per share) 90 90
Additional paid-in capital 14,529,102 14,529,102
Accumulated deficit (14,444,338) (14,290,073)
---------- ----------
Total stockholders'
equity 132,370 286,635
---------- ----------
Total liabilities and
Total assets $ 407,506 $ 630,868 stockholders' equity $ 407,506 $ 630,868
=========== =========== =========== ===========
See notes to financial statements.
4
</TABLE>
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended December 31
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1996 1995
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Revenue $109,920 $ 43,433
Cost of sales 39,086 8,455
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Gross profit 70,834 34,978
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Operating expenses:
Research and development 61,403 494
General and administrative 87,941 89,430
Selling 58,583 60,081
Depreciation and amortization 8,420 11,855
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Total operating expenses 216,347 161,860
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Loss from operations ( 145,513) ( 126,882)
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Other income (expenses):
Interest expense ( 5,706) -
Other income (expense) ( 3,046) -
Reorganization expenses - ( 18,382)
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Total other income (expenses) ( 8,752) ( 18,382)
-------- --------
Loss before extraordinary item ( 154,265) ( 145,264)
Extraordinary gain, net of $0 income taxes - 322,368
-------- --------
Net income (loss) ($154,265) $177,104
======== ========
Earnings per share:
Loss before extraordinary item ($ .0032) ($ .0046)
Extraordinary gain - .0102
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Net income (loss) ($ .0032) $ .0056
======= =======
Weighted average number of shares
outstanding: 47,606,149 31,477,117
========== ==========
See notes to financial statements.
5
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM SEPTEMBER 30, 1996 THROUGH DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Class B
Common Stock Common Stock Additional
-------------------- ---------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ------- ------- ------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances
October 1, 1996 47,516,049 $47,516 90,100 $ 90 $14,529,102 ($14,290,073) $286,635
Net loss for the period ( 154,265) (154,265)
---------- ------- ------- ------ ----------- ------------- ---------
Balances
December 31, 1996 47,516,049 $47,516 90,100 $ 90 $14,529,102 ($14,444,338) $132,370
========== ======= ====== ====== =========== ============= ========
</TABLE>
See notes to financial statements.
6
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended December 31
------------------------------
1996 1995
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Cash flows from operating activities:
Net income (loss) ($154,265) $177,104
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Extraordinary gain - ( 322,368)
Depreciation and amortization 8,420 11,855
Increase (decrease) in cash due to
changes in assets and liabilities:
Accounts receivable, trade 142,921 6,205
Inventories ( 1,624) 10,888
Prepaid expenses and
other assets 16,898 2,763
Accounts payable and
accrued expenses ( 41,129) 25,671
-------- -------
Net cash used in
operating activities ( 28,779) ( 87,882)
-------- --------
Cash flows from investing activities:
Deferred patent costs incurred ( 7,007) ( 13,395)
Acquisition of furniture and
equipment - ( 718)
-------- --------
Net cash used in
investing activities ( 7,007) ( 14,113)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit 10,000
Repayment of line of credit ( 10,000)
Proceeds from stock offering, net - 250,000
Repayment of liabilities under
Reorganization Plan ( 27,968) ( 3,141)
-------- --------
Net cash provided by (used in)
financing activities ( 27,968) 246,859
-------- --------
Increase (decrease) in cash ( 63,754) 144,864
Cash at beginning of period 66,647 82,245
-------- --------
Cash at end of period $ 2,893 $227,109
======== ========
See notes to financial statements.
7
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 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,
1996.
2. 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 three months ended December 31, 1996 and 1995 are not
necessarily indicative of the results for a full year.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 December 31, 1996, the Company realized a net
loss of $154,265 on revenues of $109,920, compared to a net income of $177,104
on revenues of $43,433 for the quarter ended December 31, 1995. Such decrease in
income was primarily attributable to an extraordinary gain of $322,368 recorded
in December 31, 1995, as a result of debt reduction pursuant to the Plan.
Revenues for the three months ended December 31, 1996, of $109,920
represented an increase of $66,487 or 153.1% from revenues of $43,433 during the
same period ended December 31, 1995. The increase in revenues was a result,
primarily, of advance orders from a European licensee in anticipation of
sunscreen product promotion for the upcoming summer season. Management believes
that this particular quarter is the low point of its fiscal year due to the
seasonal nature of its principal product, a sunscreen. Management also
anticipates that as its product line and geographic markets expand, this
seasonality will be tempered, however, there can be assurances to that effect.
During the quarter, the Company incurred operating expenses of $216,347, a
33.7% increase over operating expenses of $161,860 for the prior year quarter.
This increase in expenses was primarily due to increased research and
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development activities from the previous year's quarter. Management expects that
operating expenses are likely to increase modestly during the remainder of the
year ending September 30, 1997 ("Fiscal 1997") to reflect the costs of
additional personnel, as well as increased research and development expenses
relating to new projects. Management believes that the Company will realize
revenues during Fiscal 1997 sufficient to satisfy these expenses as well as
other anticipated obligations. However, there can be no assurances to that
effect.
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. In January 1996, the Company entered into a long term
license and supply agreement with the Dermik Laboratories subsidiary of the
Rhone- Poulenc Rorer Corporation. In October 1996, Dermik terminated the
agreement based on their interpretation of a technical provision of the
agreement. The Company is not in agreement with Dermik's interpretation and has
engaged counsel to determine the Company's legal remedies in this regard. The
Company is actively pursuing similar marketing arrangements with other
licensees, including several who had previously expressed interest in the
Company's products. In May 1996, the Company entered into a seven year license
and supply agreement with a pharmaceutical company in Colombia. Revenues from
this agreement are expected to be recognized in the third quarter of Fiscal
1997. However, there can be no assurances to that effect.
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 December 31, 1996, the Company had working capital of $72,953, a
decrease of $161,284 from the level of working capital of $234,237 as of
September 30, 1996, and a decrease of $138,380 from the Company's working
capital of $211,333 as of December 31, 1995. Such decrease in working capital is
10
<PAGE>
primarily attributable to expenses incurred in connection with increased
marketing activity, research and development efforts, European patent fees and
debt obligation under the Plan.
Under the Plan, the Company was subject to $319,278 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
$208,174. Payments pursuant to the Plan were current as of December 31, 1996,
and management expects all such required payments to be made on a timely basis.
As of October 17, 1996, the Company was granted a $100,000 line of credit
at an interest rate of prime plus .5% from First Union National Bank of Florida.
This line of credit is secured by the Company's accounts receivable and
inventory. The Company utilizes this line of credit to purchase additional
inventory and/or fund the Company's research and development efforts, as
necessary.
Providing that 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 1,583,334 common stock warrants
presently vested and outstanding bear exercise prices ranging from $.04 to
$1.12. Given the market price of the Company's Common Stock, it is feasible that
some of these Warrants can be exercised, but there can be no assurance in this
matter.
In addition to the Warrants identified above, the Company has 2,033,333
additional Warrants outstanding, which are held by its existing directors and
certain employees which vest over a two year period commencing in July 1997.
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
11
<PAGE>
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.
Effects of Inflation
The Company does not expect inflation to materially affect 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.
12
<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
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CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
When used in this Quarterly Report on Form 10-QSB and in other public
statements by the Company and Company officers, the words "may", "will",
"expect", "anticipate", "continue", "estimate", "project", "intend", and similar
expressions are intended to identify forward-looking statements regarding events
and financial trends which may affect the Company's future operating results and
financial position. Such statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially. Such factors include, among others: (i) the Company's ability to
retain existing or obtain additional licensees who act as distributors of its
products; (ii) the Company's ability to obtain additional patent protection for
its encapsulation technology; (iii) the potential difficulty the Company may
have in obtaining financing through the placement of securities until the
Company's Common Stock is relisted on the NASDAQ system; and (iv) other
economic, competitive and governmental factors affecting the Company's
operations, market, products and services. Additional factors are described in
the Company's other public reports and registration statements filed with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on forward-looking statements when made, which speak only as of the
date made. The Company undertakes no obligation to publicly release the results
of any revision of these forward-looking statements to reflect events or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
13
<PAGE>
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: The Company filed a current report
on Form 8-K on October 24, 1996, for the purpose of
reporting that the United States Bankruptcy Court, Middle
District of Florida, Tampa Division, 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.
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: February 14, 1997 /s/John C. Walsh
----------------
JOHN C. WALSH,
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FOUNTAIN PHARMACEUTICALS, INC. FOR THE THREE MONTHS
ENDED DECEMBER 31, 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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 93
<ALLOWANCES> 0
<INVENTORY> 106
<CURRENT-ASSETS> 253
<PP&E> 264
<DEPRECIATION> 240
<TOTAL-ASSETS> 408
<CURRENT-LIABILITIES> 180
<BONDS> 0
0
0
<COMMON> 48
<OTHER-SE> 84
<TOTAL-LIABILITY-AND-EQUITY> 408
<SALES> 110
<TOTAL-REVENUES> 110
<CGS> 39
<TOTAL-COSTS> 216
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (154)
<INCOME-TAX> 0
<INCOME-CONTINUING> (154)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (154)
<EPS-PRIMARY> (.003)
<EPS-DILUTED> (.003)
</TABLE>
