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 June 30, 1997
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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 August 13, 1997:
Series A Preferred Stock, par value $.001 - 2,000,000
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 June 30, 1997
(Unaudited) 4
Statements of Operations - for the nine
months ended June 30, 1997 and 1996
(Unaudited) 5
Statement of Stockholders' Equity -
for the period from September 30, 1996
through June 30, 1997 (Unaudited) 6
Statements of Cash Flows - for the nine
months ended June 30, 1997 and 1996
(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
- -------- -----------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote
of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
* 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
June 30, June 30,
1997 September 30, 1997 September 30,
(Unaudited) 1996 (Unaudited) 1996
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Current assets: Current liabilities:
Cash and cash equivalents $ 3,520 $ 66,647 Notes payable, officer (Note 3) $ 80,000 $
Accounts receivable 429,820 236,032 Current portion of
Inventories 102,800 104,866 liabilities not subject
Prepaid expenses 40,892 46,574 to compromise 28,780 26,808
----------- -----------
Current portion of
liabilities subject to
compromise 90,046 84,983
Accounts payable and
accrued expenses 337,069 108,091
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Total current assets 577,032 454,119 Total current liabilities 535,895 219,882
---------- ----------
Liabilities not subject to
compromise, non-current 10,215 32,053
---------- ----------
Furniture and equipment, less Liabilities subject to
accumulated depreciation compromise, non-current 23,936 92,298
---------- ----------
($251,949, June 30, 1997;
$232,136, September 30, 1996) 12,110 31,924
Stockholders' equity:
Patent costs, less accumulated Preferred stock, par value $.001,
amortization ($24,579, June 2,000,000 shares authorized
30, 1997; $22,065 September Common stock, par value
30, 1996) 138,678 138,575 $.001, 50,000,000 shares
authorized; 47,516,049 issued
Other assets 6,595 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 (14,412,339) (14,290,073)
---------- ----------
Total stockholders'
equity 164,369 286,635
---------- ----------
Total liabilities and
Total assets $ 734,415 $ 630,868 stockholders' equity $ 734,415 $ 630,868
=========== =========== =========== ===========
</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,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 819,403 $ 887,126 $ 1,141,761 $ 1,499,232
Cost of sales 448,204 479,770 597,886 753,282
----------- ----------- ----------- -----------
Gross profit 371,199 407,356 543,875 745,950
----------- ----------- ----------- -----------
Operating expenses:
Research and development 35,863 44,025 147,899 60,686
General and administrative 87,988 122,573 262,246 316,367
Selling 74,697 78,823 204,137 208,155
Depreciation and amortization 5,855 10,242 22,328 33,647
----------- ----------- ----------- -----------
Total operating expenses 204,403 255,663 636,610 618,855
----------- ----------- ----------- -----------
Income (loss) from operations 166,796 151,693 ( 92,735) 127,095
Other income (expenses):
Interest expense ( 9,339) ( 10,523) ( 21,438) ( 14,312)
Other income (expense) ( 4,239) ( 224) ( 8,093) ( 177)
Reorganization expenses ( 8) ( 22,843)
----------- --------- ---------- ----------
Total other income (expenses) ( 13,578) ( 10,755) ( 29,531) ( 37,332)
Income (loss) before extraordinary item 153,218 140,938 ( 122,266) 89,763
Extraordinary gain, net of $0 income taxes 14,678 337,046
---------- ---------- ---------- -----------
Net income (loss) $ 153,218 $ 155,616 ($ 122,266) $ 426,809
========== ========== ========== ===========
Earnings per share:
Income (loss) before extraordinary item $ .0032 $ .0030 ($ .0026) $ .0020
Extraordinary gain .0003 .0077
------- ------- ------- -------
Net income (loss) $ .0032 $ .0033 ($ .0026) $ .0097
======= ======= ======= =======
Weighted average number of shares
outstanding: 47,606,149 47,606,149 47,606,149 43,977,117
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
5
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 30, 1996 THROUGH JUNE 30, 1997
(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 ( 122,266) (122,266)
---------- ------- ------- ------ ----------- ------------ ---------
Balances
June 30, 1997 47,516,049 $47,516 90,100 $ 90 $14,529,102 ($14,412,339) $164,369
========== ======= ====== ====== =========== ============= ========
</TABLE>
See notes to financial statements.
6
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended June 30
----------------------------
1997 1996
-------- -------
Cash flows from operating activities:
Net income (loss) ($122,266) $426,809
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Extraordinary gain ( 337,046)
Depreciation and amortization 22,328 33,647
Loss on disposal of assets 3,010
Increase (decrease) in cash due to
changes in assets and liabilities:
Accounts receivable, trade ( 193,788) (453,760)
Inventories 2,066 39,090
Prepaid expenses and
other assets 2,720 3,228
Accounts payable and
accrued expenses 228,978 176,973
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Net cash used in
operating activities ( 59,962) ( 108,049)
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Cash flows from investing activities:
Deferred patent costs incurred ( 19,777)
Acquisition of furniture and
equipment ( 7,851)
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Net cash used in
investing activities ( 27,628)
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Cash flows from financing activities:
Proceeds from line of credit 270,000
Repayment of line of credit ( 270,000)
Officer loans and advances 80,000
Proceeds from stock offering, net 250,000
Repayment of liabilities under
Reorganization Plan ( 83,165) ( 76,087)
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Net cash provided by (used in)
financing activities ( 3,165) 173,913
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Increase (decrease) in cash ( 63,127) 38,236
Cash at beginning of period 66,647 82,245
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Cash at end of period $ 3,520 $120,481
======== ========
Interest paid for period $ 17,813 $ 13,486
======== ========
See notes to financial statements.
7
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(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 nine months ended June 30, 1997 and 1996 are not
necessarily indicative of the results for a full year.
3. The Company has obtained short term loans from its president which are
payable upon demand at an interest rate of 10 percent per annum.
4. Subsequent Events:
Subsequent to the quarter ended June 30, 1997, the Company completed a
private placement on July 17, 1997, of 2,000,000 shares of Series A
Convertible Preferred Stock to Fountain Holdings, LLC, an investment group
managed by Eaglestone Capital Services, Inc. As a result of this placement,
the Company obtained additional working capital of $2,500,000, which will
enhance the expansion of the Company's sales and marketing program, as well
as to further the Company's research and development efforts. The placement
was undertaken through the sale of newly designated convertible preferred
stock which permits the holders thereof to convert into approximately 25.3
million shares of the Company's Common Stock, which currently represents
approximately one-third of the Company's outstanding stock on a post
conversion basis. Prior to conversion, the holders of the preferred stock
will have the right to nominate a majority of the Company's Board of
Directors and to vote as a class on all matters that require a vote of
stockholders. As part of this transaction, the company repaid fifty percent
of the short-term loans owed to its president and agreed to repay the
remainder within the next quarter.
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.
Subsequent to the quarter ended June 30, 1997, the Company completed the
sale of $2.5 million of newly designated Series A Convertible Preferred Stock to
a private investment group. (See "Liquidity and Capital Resources").
RESULTS OF OPERATIONS
During the quarter ended June 30, 1997, the Company realized net income of
$153,218 on revenues of $819,403, compared to net income of $155,616 on revenues
of $887,126 for the quarter ended June 30, 1996. The decreases in revenues and
income were primarily attributable to discontinued product lines and services.
The Company expects additional orders from two principal European licensees
during the remaining months of the fiscal year ending September 30, 1997
("Fiscal 1997"). However, there can be no assurances that subsequent orders will
be received.
During the quarter, the Company incurred operating expenses of $204,403, a
20% decrease over operating expenses of $255,663 in the quarter ended June 30,
1996. This decrease in operating expenses was primarily due to a reduction in
salaries, legal fees, and travel activities. Management expects that operating
expenses are likely to increase modestly during the remainder of the year ending
September 30, 1997 due to anticipated increases in research and development
expenses relating to new projects. Management believes that the Company will
realize receipts during that time period sufficient to satisfy these expenses as
well as other anticipated obligations.
9
<PAGE>
During the nine months ended June 30, 1997, the Company incurred a net
loss of $122,266, on revenues of $1,141,761, compared to net income of $426,809
on revenues of $1,499,232 for the comparable period ended June 30, 1996. This
decrease in net income was attributable primarily to decreased revenues during
the nine months ended June 30, 1997 and an extraordinary gain of $337,046
recorded as of June 30, 1996 as a result of debt reduction pursuant to the Plan.
Such decreased revenues were a result, primarily, of discontinued product lines
and services, in addition to the negative impact of adverse climatic conditions
experienced during this period in Europe, which due to the seasonal nature of
its principal product, a sunscreen, resulted in lower sales volume. Management
also anticipates that this seasonality of revenue will be reduced in time as the
Company's product line and geographic expansion continues.
For the near term, the Company will continue to focus upon increasing
sales through its existing and new license arrangements and expanding upon these
associations.
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.
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, 1997, the Company had working capital of $41,137, a
$193,100 decrease from working capital of $234,237 as of September 30, 1996, and
a $371,398 decrease from the Company's working capital of $412,535 as of June
30, 1996. Such decrease in working capital is primarily attributable to expenses
incurred in connection with increased marketing activity, research and
development efforts, and European patent fees, in addition to debt obligations
under the Plan, line of credit, and delays in orders from the Company's European
licensees due to adverse climatic conditions.
10
<PAGE>
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
$152,977. Payments pursuant to the Plan were current as of June 30, 1997, and
management expects all such required payments to be made on a timely basis.
During the periods covered by this report, the Company's principal sources
of working capital were derived from revenues, a $100,000 line of credit, and
short term advances of $80,000 from the Company's Chief Executive Officer.
Subsequent to the quarter ended June 30, 1997, the Company completed a
private placement on July 17, 1997, of 2,000,000 shares of Series A Convertible
Preferred Stock to Fountain Holdings, LLC, an investment group managed by
Eaglestone Capital Services, Inc. As a result of this placement, the Company
obtained additional working capital of $2,500,000, which will enhance the
expansion of the Company's sales and marketing program, as well as to further
the Company's research and development efforts. The placement was undertaken
through the sale of newly designated convertible preferred stock which permits
the holders thereof to convert into approximately 25.3 million shares of the
Company's Common Stock, which currently represents approximately one-third of
the Company's outstanding stock on a post conversion basis. Prior to conversion,
the holders of the preferred stock will have the right to nominate a majority of
the Company's Board of Directors and to vote as a class on all matters that
require a vote of stockholders.
Historically, the Company's unexercised warrants had been a potential
source of capital for the Company. However, all previously existing Class A, B,
C and D warrants have expired. The 3,450,001 common stock warrants presently
vested and outstanding bear exercise prices ranging from $.04 to $.78. Given the
market price of the Company's Common Stock, it is feasible that some of these
warrants could be exercised, but there can be no assurance in this matter.
Based upon the Company's current capital structure, an exercise of all of
the issued and outstanding warrants, notwithstanding market conditions, 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.
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.
11
<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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a. Change in Board of Directors
----------------------------
Concurrent with the closing of the sale of 2 million shares of convertible
preferred stock to Fountain Holdings, LLC ("Holdings"), the Company accepted the
resignation of James Vatell and James Goddard, M.D., from its Board of
Directors. These vacancies were filled by the appointment to the Board of
Directors of Dr. Christopher Brown and Joseph Schuchert, nominees of Holdings.
As reconstituted, the Company's Board of Directors presently consists of John C.
Walsh, Chairman and Chief Executive Officer, James Fuchs, Dr. Christopher Brown
and Joseph Schuchert.
b. Patents
-------
The Company was granted a Norwegian patent on June 18, 1997 (No. 180771).
This patent is a counterpart to the already-granted patents in the Company's
portfolio which cover a method for making Solvent Dilution Microcarriers. This
patent will remain in effect for twenty years from the date of filing (June 8,
1989) until June 8, 2009.
c. General
-------
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
12
<PAGE>
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; and (iii) 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.
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 July 31, 1997, for
the purpose of reporting the sale of $2.5 million of Series A
Convertible Preferred Stock to Fountain Holdings, LLC, an investment
group managed by Eaglestone Capital Services,Inc., and the
appointment of Mr. Joseph Schuchert and Christopher C. Brown, M.D.,
to the Board of Directors, to fill vacancies on the Board created by
the resignations of Mr. James Vatell and James Goddard, M.D.
13
<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 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 NINE MONTHS ENDED
JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 430
<ALLOWANCES> 0
<INVENTORY> 103
<CURRENT-ASSETS> 577
<PP&E> 264
<DEPRECIATION> 252
<TOTAL-ASSETS> 734
<CURRENT-LIABILITIES> 536
<BONDS> 0
0
0
<COMMON> 48
<OTHER-SE> 117
<TOTAL-LIABILITY-AND-EQUITY> 734
<SALES> 1,142
<TOTAL-REVENUES> 1,142
<CGS> 598
<TOTAL-COSTS> 637
<OTHER-EXPENSES> 8
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> (122)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (122)
<EPS-PRIMARY> (.003)
<EPS-DILUTED> (.003)
</TABLE>
