SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 18, 1997
DYNAGEN, INC.
-------------
(Exact name of registrant as specified in its charter)
DELAWARE 1-11352 04-3029787
-------- ------- ----------
(State or other jurisdiction of (Commission file number) (I.R.S. Employer
incorporation or organization) Identification No.)
99 Erie Street, Cambridge, MA 02139
----------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (617) 491-2527
No change since last report
---------------------------
(Former name or address, if changed since last report)
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The undersigned registrant ("DynaGen") hereby amends the following
items, financial statements, exhibits and other portions of its Current Report
on Form 8-K dated June 18, 1997 as set forth on the pages attached hereto:
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
This item is amended to provide the following financial
statements relating to the business of Superior Pharmaceutical
Company, which are filed as Exhibit 99.5 to this report and
incorporated herein by reference.
Report of Independent Certified Public Accountants.
Balance Sheet at December 31, 1996 and 1995.
Statement of Earnings for the years ended December
31, 1996, 1995 and 1994.
Statement of Retained Earnings for the years ended
December 31, 1996, 1995 and 1994.
Statement of Cash Flows for the years ended December
31, 1996, 1995 and 1994.
Notes to Financial Statements.
(b) Unaudited Pro Forma Combined Financial Information.
It is impracticable to provide the pro forma financial
information required pursuant to Article 11 of Regulation S-X
at the time this report is filed. Such required pro forma
financial information will be filed under cover of Form 8-K as
soon as practicable but not later than September 1, 1997.
(c) Exhibits.
2.1 Agreement and Plan of Merger dated March 7, 1997
among DynaGen, DynaGen Acquisition Corp., Superior
and the Shareholders (filed as Exhibit 2c to
DynaGen's Transition report on Form 10-K for the
transition period from July 1, 1996 to December 31,
1996).
4.1 Registration Rights Agreement dated June 18, 1997
among DynaGen and the Shareholders (filed as Exhibit
4.1 to DynaGen's Current Report on Form 8-K dated
June 18, 1997).
-3-
4.2 Secured Promissory Note dated June 18, 1997 issued by
DynaGen to Eric C. Hagerstrand (filed as Exhibit 4.2
to DynaGen's Current Report on Form 8-K dated June
18, 1997).
4.3 Secured Promissory Note dated June 18, 1997 issued by
DynaGen to Dennis B. Smith (filed as Exhibit 4.3 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
4.4 Secured Promissory Note dated June 18, 1997 issued by
DynaGen to Thomas L. Canning (filed as Exhibit 4.4 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
4.5 Pledge Agreement dated June 18, 1997 among DynaGen
and the Shareholders (filed as Exhibit 4.5 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
4.6 Secured Promissory Note dated June 18, 1997 issued by
DynaGen to Sirrom (filed as Exhibit 4.6 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
4.7 Secured Promissory Note dated June 18, 1997 issued by
DynaGen to Odyssey (filed as Exhibit 4.7 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
4.8 Stock Purchase Warrant dated June 18, 1997 issued by
DynaGen to Sirrom (filed as Exhibit 4.8 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
4.9 Stock Purchase Warrant dated June 18, 1997 issued by
DynaGen to Odyssey (filed as Exhibit 4.9 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
4.10 Pledge and Security Agreement dated June 18, 1997
between DynaGen and Sirrom (filed as Exhibit 4.10 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
4.11 Subordinated Note dated June 18, 1997 issued by
DynaGen to Coutts & Co. AG (filed as Exhibit 4.11 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
4.12 Bridge Financing Purchase Agreement dated June 16,
1997 between DynaGen and Coutts & Co. AG (filed as
Exhibit 4.12 to DynaGen's Current Report on Form 8-K
dated June 18, 1997).
-4-
4.13 Certificate of Designations, Preferences and Rights
of Series A Preferred Stock of DynaGen (filed as
Exhibit 4.13 to DynaGen's Current Report on Form 8-K
dated June 18, 1997).
4.14 Securities Purchase Agreement dated June 16, 1997
among DynaGen and the purchasers of Series A
Preferred Stock (filed as Exhibit 4.14 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
4.15 Registration Rights Agreement dated June 16, 1997
among DynaGen and the purchasers of Series A
Preferred Stock (filed as Exhibit 4.15 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
4.16 Form of Common Stock Purchase Warrant dated June 18,
1997 issued by DynaGen to the purchasers of Series A
Preferred Stock (filed as Exhibit 4.16 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
4.17 Certificate of Designations, Preferences and Rights
of Series B Preferred Stock of DynaGen (filed as
Exhibit 4.17 to DynaGen's Current Report on Form 8-K
dated June 18, 1997).
4.18 Securities Purchase Agreement dated June 17, 1997
between DynaGen and Julius Baer Securities Inc. as
agent for certain non-U.S. persons (filed as Exhibit
4.18 to DynaGen's Current Report on Form 8-K dated
June 18, 1997).
4.19 Registration Rights Agreement dated June 17, 1997
between DynaGen and Julius Baer Securities Inc. as
agent for certain non-U.S. persons (filed as Exhibit
4.19 to DynaGen's Current Report on Form 8-K dated
June 18, 1997).
4.20 Stock Purchase Warrant dated June 18, 1997 issued by
Superior to Sirrom (filed as Exhibit 4.20 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
4.21 Stock Purchase Warrant dated June 18, 1997 issued by
Superior to Odyssey (filed as Exhibit 4.21 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
4.22 Revolving Note dated June 18, 1997 issued by Superior
to Huntington National Bank (filed as Exhibit 4.22 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
23.1 Consent of Grant Thornton LLP dated July 10, 1997
(filed herewith)
-5-
99.1 Loan Agreement dated June 18, 1997 among DynaGen,
Sirrom and Odyssey (filed as Exhibit 99.1 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
99.2 Security Agreement dated June 18, 1997 among DynaGen,
Sirrom and Odyssey (filed as Exhibit 99.2 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
99.3 Amended and Restated Loan and Security Agreement
dated June 18, 1997 among Huntington National Bank,
Superior and DynaGen (filed as Exhibit 99.3 to
DynaGen's Current Report on Form 8-K dated June 18,
1997).
99.4 Continuing Guaranty Unlimited dated June 18, 1997
from DynaGen to Huntington National Bank (filed as
Exhibit 99.4 to DynaGen's Current Report on Form 8-K
dated June 18, 1997).
99.5 Financial Statements of Superior Pharmaceutical
Company (filed herewith).
-6-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNAGEN, INC.
By:/s/ Dhananjay G. Wadekar
-------------------------------
Title: Executive Vice President
Dated: July 10, 1997
-7-
EXHIBIT INDEX
-------------
Exhibit
Numbers Exhibits
2.1 Agreement and Plan of Merger dated March 7, 1997 among
DynaGen, DynaGen Acquisition Corp., Superior and the
Shareholders (filed as Exhibit 2c to DynaGen's Transition
report on Form 10-K for the transition period from July 1,
1996 to December 31, 1996).
4.1 Registration Rights Agreement dated June 18, 1997 among
DynaGen and the Shareholders (filed as Exhibit 4.1 to
DynaGen's Current Report on Form 8-K dated June 18, 1997).
4.2 Secured Promissory Note dated June 18, 1997 issued by DynaGen
to Eric C. Hagerstrand (filed as Exhibit 4.2 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
4.3 Secured Promissory Note dated June 18, 1997 issued by DynaGen
to Dennis B. Smith (filed as Exhibit 4.3 to DynaGen's Current
Report on Form 8-K dated June 18, 1997).
4.4 Secured Promissory Note dated June 18, 1997 issued by DynaGen
to Thomas L. Canning (filed as Exhibit 4.4 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
4.5 Pledge Agreement dated June 18, 1997 among DynaGen and the
Shareholders (filed as Exhibit 4.5 to DynaGen's Current Report
on Form 8-K dated June 18, 1997).
4.6 Secured Promissory Note dated June 18, 1997 issued by DynaGen
to Sirrom (filed as Exhibit 4.6 to DynaGen's Current Report on
Form 8-K dated June 18, 1997).
4.7 Secured Promissory Note dated June 18, 1997 issued by DynaGen
to Odyssey (filed as Exhibit 4.7 to DynaGen's Current Report
on Form 8-K dated June 18, 1997).
4.8 Stock Purchase Warrant dated June 18, 1997 issued by DynaGen
to Sirrom (filed as Exhibit 4.8 to DynaGen's Current Report on
Form 8-K dated June 18, 1997).
4.9 Stock Purchase Warrant dated June 18, 1997 issued by DynaGen
to Odyssey (filed as Exhibit 4.9 to DynaGen's Current Report
on Form 8-K dated June 18, 1997).
-8-
4.10 Pledge and Security Agreement dated June 18, 1997 between
DynaGen and Sirrom (filed as Exhibit 4.10 to DynaGen's Current
Report on Form 8-K dated June 18, 1997).
4.11 Subordinated Note dated June 18, 1997 issued by DynaGen to
Coutts & Co. AG (filed as Exhibit 4.11 to DynaGen's Current
Report on Form 8-K dated June 18, 1997).
4.12 Bridge Financing Purchase Agreement dated June 16, 1997
between DynaGen and Coutts & Co. AG (filed as Exhibit 4.12 to
DynaGen's Current Report on Form 8-K dated June 18, 1997).
4.13 Certificate of Designations, Preferences and Rights of Series
A Preferred Stock of DynaGen (filed as Exhibit 4.13 to
DynaGen's Current Report on Form 8-K dated June 18, 1997).
4.14 Securities Purchase Agreement dated June 16, 1997 among
DynaGen and the purchasers of Series A Preferred Stock (filed
as Exhibit 4.14 to DynaGen's Current Report on Form 8-K dated
June 18, 1997).
4.15 Registration Rights Agreement dated June 16, 1997 among
DynaGen and the purchasers of Series A Preferred Stock (filed
as Exhibit 4.15 to DynaGen's Current Report on Form 8-K dated
June 18, 1997).
4.16 Form of Common Stock Purchase Warrant dated June 18, 1997
issued by DynaGen to the purchasers of Series A Preferred
Stock (filed as Exhibit 4.16 to DynaGen's Current Report on
Form 8-K dated June 18, 1997).
4.17 Certificate of Designations, Preferences and Rights of Series
B Preferred Stock of DynaGen (filed as Exhibit 4.17 to
DynaGen's Current Report on Form 8-K dated June 18, 1997).
4.18 Securities Purchase Agreement dated June 17, 1997 between
DynaGen and Julius Baer Securities Inc. as agent for certain
non-U.S. persons (filed as Exhibit 4.18 to DynaGen's Current
Report on Form 8-K dated June 18, 1997).
4.19 Registration Rights Agreement dated June 17, 1997 between
DynaGen and Julius Baer Securities Inc. as agent for certain
non-U.S. persons (filed as Exhibit 4.19 to DynaGen's Current
Report on Form 8-K dated June 18, 1997).
4.20 Stock Purchase Warrant dated June 18, 1997 issued by Superior
to Sirrom (filed as Exhibit 4.20 to DynaGen's Current Report
on Form 8-K dated June 18, 1997).
4.21 Stock Purchase Warrant dated June 18, 1997 issued by Superior
to Odyssey (filed as Exhibit 4.21 to DynaGen's Current Report
on Form 8-K dated June 18, 1997).
-9-
4.22 Revolving Note dated June 18, 1997 issued by Superior to
Huntington National Bank (filed as Exhibit 4.22 to DynaGen's
Current Report on Form 8-K dated June 18, 1997).
23.1 Consent of Grant Thornton LLP dated July 10, 1997 (filed
herewith).
99.1 Loan Agreement dated June 18, 1997 among DynaGen, Sirrom and
Odyssey (filed as Exhibit 99.1 to DynaGen's Current Report on
Form 8-K dated June 18, 1997).
99.2 Security Agreement dated June 18, 1997 among DynaGen, Sirrom
and Odyssey (filed as Exhibit 99.2 to DynaGen's Current Report
on Form 8-K dated June 18, 1997).
99.3 Amended and Restated Loan and Security Agreement dated June
18, 1997 among Huntington National Bank, Superior and DynaGen
(filed as Exhibit 99.3 to DynaGen's Current Report on Form 8-K
dated June 18, 1997).
99.4 Continuing Guaranty Unlimited dated June 18, 1997 from DynaGen
to Huntington National Bank (filed as Exhibit 99.4 to
DynaGen's Current Report on Form 8-K dated June 18, 1997).
99.5 Financial Statements of Superior Pharmaceutical Company (filed
herewith).
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Number
33-66826 (dated August 2, 1993 on Form S-8), Number 33-78546 (dated May 2, 1994
on Form S-8), Number 33-71416 (Post-Effective Amendment No. 3 to Form S-1 on
Form S-3 dated May 16, 1995), Number 33-95432 (dated August 4, 1995 on Form
S-8), Number 333-1748 (dated March 28, 1996 on Form S-3) and Number 333-19471
(dated January 9, 1997 on Form S-3) of DynaGen, Inc. of our report dated January
24, 1997 on the balance sheet of Superior Pharmaceutical Company as of December
31, 1996 and 1995 and the related statements of earnings, statement of retained
earnings and cash flows for the three years ended December 31, 1996, appearing
in DynaGen, Inc.'s Current Report on Form 8-K/A dated July 10, 1997.
GRANT THORNTON LLP
Cincinnati, Ohio
July 10, 1997
Suite 900
625 Eden Park Drive
Cincinnati, OH 45202-4181
513 762-5000
FAX 513 241-6125
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS Grant Thornton
SUPERIOR PHARMACEUTICAL COMPANY
December 31, 1996, 1995 and 1994
CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
BALANCE SHEETS 4
STATEMENTS OF EARNINGS 5
STATEMENTS OF RETAINED EARNINGS 6
STATEMENTS OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
Suite 900
625 Eden Park Drive
Cincinnati, OH 45202-4181
513 762-5000
FAX 513 241-6125
Grant Thornton
Board of Directors
Superior Pharmaceutical Company
We have audited the balance sheet of Superior Pharmaceutical Company as of
December 31, 1996 and 1995 and the related statements of earnings, statement of
retained earnings, and cash flows for each of the three years ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the financial position of Superior Pharmaceutical Company
as of December 31, 1996 and 1995 and the results of its operations and cash
flows for each of the three years ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
- -----------------------
Cincinnati, Ohio
January 24, 1997
SUPERIOR PHARMACEUTICAL COMPANY
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS Accounts receivable:
Trade (net of allowance of $47,483 and $15,120 at
December 31, 1996 and 1995, respectively) $ 3,558,227 $ 3,012,126
Related party - CMS, Inc. 62 16,073
Related party - SPC Properties Limited 76,797 -
Employees 12,281 5,587
Rebates 511,475 471,950
------------ ------------
4,158,842 3,505,736
Inventory 7,563,845 4,922,969
Deposit 91,825 -
------------ ------------
Total current assets 11,814,512 8,428,705
PROPERTY AND EQUIPMENT - AT COST
Office equipment 422,161 337,690
Computer equipment 265,125 241,585
Leasehold improvements 22,813 -
------------ ------------
710,099 579,275
Less accumulated depreciation and amortization 308,790 208,035
------------ ------------
401,309 371,240
OTHER ASSETS
Prepaid expenses and other 4,704 4,704
Organizational fees (net of amortization of $15,000 and
$14,250 at December 31, 1996 and 1995, respectively) - 750
------------ ------------
4,704 5,454
------------ ------------
$ 12,220,525 $ 8,805,399
============ ============
LIABILITIES 1996 1995
---- ----
CURRENT LIABILITIES
Bank overdraft $ 790,823 $ 927,302
Line of credit 5,689,074 3,612,308
Current portion of note payable - bank - 40,000
Accounts payable - trade 1,926,104 1,289,093
Accrued expenses 276,052 244,126
------------- -----------
Total current liabilities 8,682,053 6,112,829
NOTE PAYABLE - BANK - 126,667
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Common stock - authorized, 750 shares without par value; 200 shares
issued and outstanding
at stated value of $5 per share 1,000 1,000
Retained earnings 3,537,472 2,564,903
------------- -----------
3,538,472 2,565,903
------------- -----------
$ 12,220,525 $ 8,805,399
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
SUPERIOR PHARMACEUTICAL COMPANY
STATEMENT OF EARNINGS
For the years ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $32,221,784 $22,256,212 $25,851,601
Cost of goods sold 24,849,369 16,528,309 18,206,039
------------ ------------ ------------
Gross profit on sales 7,372,415 5,727,903 7,645,562
Operating expenses
Salaries and wages 2,083,354 1,815,325 1,676,820
401(k) and profit-sharing 67,875 73,786 76,466
Advertising and promotion 110,511 92,278 346,653
Rebates 123,048 30,416 31,560
Maintenance 81,140 53,527 73,076
Depreciation 100,755 90,110 52,620
Automobiles 23,062 28,107 16,539
Rent 368,452 311,264 112,283
Utilities 164,244 167,887 104,243
Office expense 66,965 62,426 81,058
Professional fees 96,651 130,333 60,017
Insurance
Officers' life 9,567 3,759 12,477
General 20,621 19,954 21,133
Health 140,594 109,909 87,931
Bad debts 117,532 63,541 132,335
Travel and entertainment 69,305 54,628 26,414
Licenses and permits 9,782 5,641 5,335
City, property and payroll taxes 265,351 224,357 154,604
Amortization 750 13,418 28,000
Unclassified 40,737 32,429 26,569
------------ ------------ ------------
Total operating expenses 3,960,296 3,383,095 3,126,133
------------ ------------ ------------
Operating profit 3,412,119 2,344,808 4,519,429
Other income 40,586 3,600 -
Interest expense (Net of interest income of $311 in 1996,
$57 in 1995 and $841 in 1994) (382,658) (315,447) (241,145)
------------ ------------ ------------
NET EARNINGS $ 3,070,047 $ 2,032,961 $ 4,278,284
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
SUPERIOR PHARMACEUTICAL COMPANY
STATEMENT OF RETAINED EARNINGS
For the years ended December 31, 1996, 1995 and 1994
Balance at January 1, 1994 $1,814,961
Net earnings for the year 4,278,284
Distributions to shareholders (2,221,770)
Balance at December 31, 1994 3,871,475
Net earnings for the year 2,032,961
Distributions to shareholders (3,339,533)
Balance at December 31, 1995 2,564,903
Net earnings for the year 3,070,047
Distributions to shareholders (2,097,478)
Balance at December 31, 1996 $3,537,472
=========
The accompanying notes are an integral part of these statements.
6
SUPERIOR PHARMACEUTICAL COMPANY
STATEMENT OF CASH FLOWS
For the years ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net earnings $3,070,047 $2,032,961 $4,278,284
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 101,505 103,528 80,620
Loss (gain) on sale of property and equipment - (300) 2,629
Changes in assets and liabilities:
Accounts receivable (653,106) 288,313 (544,539)
Inventory (2,640,876) 120,330 326,328
Deposits and prepaid expenses (91,825) - 1,730
Accounts payable 637,011 (1,755,625) 156,937
Bank overdraft (136,479) 821,354 37,532
Accrued expenses 31,926 50,055 (18,926)
------------ ------------ ------------
Net cash provided by operating activities 318,203 1,660,615 4,320,595
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (130,824) (116,358) (198,502)
Proceeds from sale of property and equipment - 300 -
------------ ------------ ------------
Net cash used in investing activities (130,824) (116,058) (198,502)
Cash flows provided by (used in) financing activities:
Line of credit proceeds (payments) - net 1,950,099 2,012,308 (1,900,323)
Note payable - Bank proceeds - 200,000 -
Note payable - Bank payments (40,000) (33,333) -
Payment of debt to shareholders - (384,000) -
Distributions (2,097,478) (3,339,533) (2,221,770)
------------ ------------ ------------
Net cash used in financing activities (187,379) (1,544,558) (4,122,093)
------------ ------------ ------------
Net decrease in cash and cash at the end of the year $ - $ - $ -
============= ============= ============
Cash paid during the year for:
Interest $ 374,596 $ 291,523 $ 241,145
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
7
SUPERIOR PHARMACEUTICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
The Company is engaged in the wholesale distribution of generic
pharmaceuticals to pharmacies, physicians, hospitals and clinics throughout
the United States.
1. Management Estimates and Assumptions
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Accounts Receivable
The Company has established an allowance for doubtful accounts based on
management estimates. If amounts become uncollectible, they will be charged
to the allowance when that determination is made.
The following table summarizes the activity in the allowance for doubtful
accounts for fiscal 1996 and 1995.
Balance at December 31, 1994 $ 22,895
Provision 1995 63,541
Accounts written off (76,138)
Recoveries 4,822
---------
Balance at December 31, 1995 15,120
Provision 1996 117,532
Accounts written off (116,996)
Recoveries 31,827
---------
Balance at December 31, 1996 $ 47,483
=========
3. Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market.
4. Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful lives
of the assets on a straight-line basis.
5. Accrued Rebates
Accrued rebates represent incentives provided by suppliers based on
purchases. Management has estimated its rebates to be received from
suppliers based upon agreements and documented purchases throughout the
year. Actual rebates received could be different due to market volatility
and whether the Company continues purchasing from these suppliers.
8
SUPERIOR PHARMACEUTICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
6. Reclassification
Prior year amounts have been reclassified to conform to the current year
presentation.
NOTE B - LINE OF CREDIT
The Company has available a $7,500,000 line of credit ($6,000,000 in 1995),
of which $5,689,074 is used at December 31, 1996 and $3,612,308 is used at
December 31, 1995. The Company has the option of borrowing at prime, 8.25%
at December 31, 1996 and 8.5% at December 31, 1995, or at LIBOR (the London
Interbank Offered Rate) plus 2%. The LIBOR rate was 5.50% at December 31,
1996. In 1995, the additional rate ranged from 2% to 2.25% depending upon
the length of the LIBOR contract. At December 31, 1995, $3,000,000 was
borrowed at rates varying from 7.78% to 8.0872%. Additionally, $612,308 was
outstanding at the bank's prime rate.
Substantially all assets are pledged as collateral. The line of credit is
personally guaranteed by all of the shareholders.
The debt agreement contains several covenants. The most restrictive of which
are to maintain working capital of $2,175,000 through December 31, 1996 and
$2,350,000 thereafter, tangible net worth of $2,650,000 through December 31,
1996 and $2,750,000 thereafter, and a ratio of total liabilities to net
worth of no greater than 3.25 to 1.0 through December 31, 1996 and 3.0 to
1.0 thereafter. At December 31, 1996, the Company is in compliance with all
covenants.
This loan matures May 5, 1997.
NOTE C - NOTE PAYABLE - BANK
The Company has a commercial loan note with a bank payable in monthly
installments of $3,333 plus interest. Interest is 5.50% through February
1997. At that time, and annually thereafter, the interest rate may be
adjusted to the prevailing Linked Deposit rate for a 12 month period.
The loan is secured by substantially all of the assets of the company.
Subsequent to December 31, 1996, the Company did not renew this note and the
balance of $126,667 was rolled into the line of credit. The financial
statements at December 31, 1996, include the $126,667 note in the line of
credit balance.
9
SUPERIOR PHARMACEUTICAL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE D - GUARANTEE OF DEBT
In 1995, three shareholders personally borrowed $2,500,000 to purchase the
shares of one other shareholder in a transaction effective January 1, 1995.
The bank holds the shareholders' stock in the Company as collateral for this
loan. The Company has guaranteed the payment of the debt should the
shareholders default. The outstanding balance on this loan is $902,778 at
December 31, 1996 and $1,736,111 at December 31, 1995.
NOTE E - RELATED PARTY - CMS, INC.
The owners of the Company are also 40% owners of CMS, Inc. (Contract Medical
Service, Inc.). For the years ended December 31, 1996, 1995 and 1994, the
Company had sales of approximately $252,000, $192,000 and $406,000 to CMS,
Inc. and had receivables of $62 and $16,073 at December 31, 1996 and 1995,
respectively.
NOTE F - RENT AND RELATED PARTY
In 1994, the shareholders of the Company formed SPC Properties Limited, a
limited liability company, to build and own an office and warehouse
facility. In March 1995, the Company entered into a lease agreement with SPC
Properties Limited.
The future minimum lease payments including any non-binding option periods
at December 31, 1996 are as follows:
1997 $ 300,000
1998 300,000
1999 300,000
2000 350,000
2001 360,000
Thereafter 5,375,000
----------
$6,985,000
SPC Properties Limited was paid $300,000 in 1996 and $243,550 in 1995.
The Company also rents various other office space from unrelated companies.
The future minimum lease payments at December 31, 1996 are as follows:
1997 $ 53,750
1998 14,400
1999 14,400
----------
$ 82,550
10
SUPERIOR PHARMACEUTICAL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE G - DEPOSIT
In December 1996, the Company placed a deposit of $91,825 on $893,685 of
inventory to arrive in early January 1997.
NOTE H - INVESTMENT IN BUYING GROUP
The Company owns one-fifteenth of Premier, Inc., which is a buying group of
similar generic pharmaceutical distribution companies and hospital. The
investment is recorded at cost, which approximates market.
NOTE I - STOCK AGREEMENTS
The stockholders have each entered into an agreement amongst themselves to
provide for the sale or purchase of the Company stock at an amount defined
as the fair market of the stock at the end of the month preceding such sale.
NOTE J - NONCOMPETE AGREEMENT
During 1993, the Company entered into a noncompete agreement with a
competitor whose assets the Company purchased. A two year noncompete
agreement was signed with the owner of the competitor for $50,000. This
agreement became fully amortized in 1995.
NOTE K - 401(K) PROFIT SHARING PLAN
The Company provides its employees a 401(k) profit sharing plan. Eligible
participants must be twenty-one years old and have worked for one year.
Employer matching and profit sharing contributions are discretionary. At
December 31, 1996, 1995 and 1994, the Company matched $14,027, $13,786 and
$10,741 and contributed $68,000, $60,000 and $65,725 in profit sharing.
NOTE L - INCOME TAXES
The Company has elected Subchapter S status for income tax purposes.
Therefore, the income of the Company is taxed on the shareholders' personal
returns. Accordingly, no income tax expense has been charged to the Company.
Had the income been taxed at the Company level, Federal income tax expense
would have been approximately $1,000,000, $683,000 and $1,460,000 for the
years ended December 31, 1996, 1995 and 1994.
11
SUPERIOR PHARMACEUTICAL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE M - SUBSEQUENT EVENTS
The Company has entered into discussions with a publicly traded company
which may result in the Company being acquired by the publicly traded
company. As of the date of this report, no final agreement has been signed.
12
