Commission File Number 33-35153-D
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
AMERICAN PHARMACEUTICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 84-1139559
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 Dwight Place, Fairfield, New Jersey 07004
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (973) 276-1310
Check whether issuer (1) filed all reports required to be filed by Section 13 or
15 (d) of the Exchange Act 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. Yes |X| No |_|
4,681,765
Number of shares of Common Stock outstanding as of November 11, 1997
TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES |_| NO: |X|
1
<PAGE>
AMERICAN PHARMACEUTICAL COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 65 $ 94
Accounts receivable, net of allowances
of $35,000 376 475
Inventories 465 517
Prepaid expenses and other current assets 8 11
-------- -------
Total current assets 914 1,097
Fixed assets at cost less accumulated
depreciation and amortization 250 452
Other assets 2 72
-------- -------
$ 1,166 $ 1,621
======== =======
LIABILITIES AND (Capital Deficiency)
Current liabilities:
Accounts payable 1,060 $ 1,240
Notes payable-shareholders 1,720 1,722
Current portion of long term debt 145 145
Accrued expenses and other liabilities 516 289
-------- -------
Total current liabilities 3,441 3,396
Long-term debt, less current portion - shareholders 1,176 575
Long-term debt, less current portion - other 530 581
Dividends in arrears 1,219 921
Commitments, contingencies and other matters
Shareholders' equity:
Preferred Stock, par value $.0001 per share; authorized
10,000,000 shares:
Series A Voting Cumulative Convertible Preferred Stock,
authorized 1,000,000 shares; issued and outstanding
912,000 (aggregate liquidation preference $3,066,000) 2,280 2,280
Series B Voting Cumulative Convertible Preferred Stock,
authorized 1,000,000 shares; issued and outstanding
624,000 (aggregate liquidation value $1,993,000) 1,560 1,560
Common Stock, par value $.01 per share;
authorized 20,000,000 shares; outstanding 4,681,765
shares 47 47
Additional capital 6,446 6,446
Deficit (15,533) (14,185)
-------- -------
Total shareholders' equity (5,200) (3,852)
-------- -------
$ 1,166 $ 1,621
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
AMERICAN PHARMACEUTICAL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
-------------------- --------------------
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 2,664 $ 3,148 $ 794 $ 1,101
Cost of sales 2,476 2,688 654 928
------- ------- ------- -------
Gross profit 188 460 140 173
Operating expenses:
Selling and distribution 440 693 103 232
General and administrative 376 403 96 135
Amortization of intangible assets 160 26 160 8
------- ------- ------- -------
976 1,122 359 375
------- ------- ------- -------
Operating (loss) (788) (662) (219) (202)
Interest expense (262) (163) (91) (71)
------- ------- ------- -------
Net (loss) $(1,050) $ (825) $ (310) $ (273)
======= ======= ======= =======
Net (loss) per share of
Common Stock $ (.22) $ (.18) $ (.07) $ (.06)
======= ======= ======= =======
Weighted average number of
common shares outstanding 4,682 4,682 4,682 4,682
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
AMERICAN PHARMACEUTICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
-------------------
Sept 30, Sept 30,
1997 1996
------- ------
Cash flows from operating activities:
Net (loss) $(1,050) $(825)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization 237 86
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 99 (331)
Decrease in inventories 52 59
Decrease (increase) in prepaid expenses and
other assets 73 (32)
Increase in accounts payable and other
current liabilities 47 174
------- -----
Net cash (used) by operating activities (542) (869)
Cash flows from financing activities:
Principle payments under long-term debt (51) (105)
Loans 600 920
------- -----
Net cash provided by financing activities 549 815
Cash flows from investing activities:
Capital expenditures (36) (22)
------- -----
Net cash (used) by investing activities (36) (22)
Net (decrease) increase in cash (29) (76)
Cash at beginning of period 94 109
------- -----
Cash at end of period $ 65 $ 33
======= =====
The accompanying notes are an integral part of these statements.
4
<PAGE>
AMERICAN PHARMACEUTICAL COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
The Company:
The Company operates in one business segment, the repackaging and distribution
(both domestically and internationally) of over-the-counter and prescription
drugs and vitamin products.
Basis of Preparation:
The accompanying financial statements as at September 30, 1997 and for the nine
and three month periods ended September 30, 1997 and September 30, 1996 are
unaudited; however, in the opinion of management of the Company such statements
include all adjustments (consisting of normal recurring accruals) necessary to a
fair statement of the information presented therein. The balance sheet as at
December 31, 1996 was derived from the audited financial statements at such
date.
Pursuant to accounting requirements of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-QSB, the accompanying financial
statements and these notes do not include all disclosures required by generally
accepted accounting principles for complete financial statements. Accordingly,
these statements should be read in conjunction with the Company's most recent
annual financial statements.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for a full year.
Significant Accounting Policies:
Amortization:
As a result of the move to a new location (reference Legal proceedings below),
the Company made a one time charge off of the net book value of leasehold
improvements to the 200 Webro Rd. facility totaling $160,000.
Income Taxes:
Income tax benefits associated with the Company's net operating losses have not
been recognized since the likelihood of realization cannot be determined.
Contingencies and Other Matters: Legal proceedings:
The Company's wholly-owned subsidiary, APC, has been named as a defendant in
several product liability cases involving Diethylstilbestrol, or DES, a product
produced by an unrelated corporation which, in 1973, sold certain tangible and
intangible assets to APC. All of the pending cases are being defended by
insurance carriers and in no case has a judgement been entered against APC.
While the lawsuits seek damages in excess of the Company's insurance coverage,
Christian Van Pelt, P.C., General Counsel to the Company has advised the Company
that the likelihood of a successful material judgement against the Company is
remote, accordingly, it is the opinion of management that the outcome of this
litigation will not have a material effect on the Company's financial
statements.
5
<PAGE>
A shareholder of the Company filed a lawsuit in 1995 in the United States
District Court for the Eastern District of Virginia contending that certain
misrepresentations were made to him in the written offering materials circulated
by the Company in connection with the private placement of the Company's
securities. As damages, plaintiff was seeking a return of his investment
(approximately $57,000, plus an unspecified amount of interest). On May 13, 1996
the Court directed a verdict in favor of the Company.
In April, 1996 the former president and director of the Company filed a
complaint against the Company and Christian Van Pelt in the United Stated
District Court for the Southern District of New York. The Company was notified
on August 12, 1996 that Mr. Brown discontinued the complaint.
On September 11, 1997, the Lessor of the premises located at 200 Webro Rd.,
Parsippany, NJ obtained a Consent Judgement for Possession and for Immediate
Issuance of Warrant of Removal against the Company. On October 7, 1997, the
Lessor filed a Notice of Motion to Enforce Settlement Agreement and Enter
Default Judgement in the amount of $379,502 representing past due rent, tax
arrearages, interest, late charges and accelerated damages based on rentals
through July, 1998. The Lessor was granted an Order Enforcing Settlement
Agreement and Entering Default Judgement against the Company for $379,502 which
was filed in Superior Court of New Jersey on October 30, 1997.
The Company moved to occupy a 16,000 square foot building, for the executive
offices, packaging operations and warehouse, located in an industrial park in
Fairfield, New Jersey. The lease for the premises provides for rental payments
in equal monthly installments of $7,333 until the expiration of the lease in
September, 2002. In addition, the Company is required to pay all real estate
taxes and utility expenses associated with the property. The lease may be
renewed for another five year term upon its expiration.
The Company's wholly-owned subsidiary, APC, is in default on certain notes
secured by the assets of APC and has executed an Assignment for the Benefit of
Creditors to Steven Z. Jurista, Esq. as Assignee. This is a Court supervised
liquidation procedure for insolvent corporations under New Jersey Law, N.J.S.A.
2A:19-1 et seq. The assets of APC consist primarily of machinery, equipment,
inventory, and accounts receivable. The assets are subject to security
interests, including a perfected security interest of Belcap Corporation of
approximately $1.5 million.
On October 14, 1997, a Judge for The Superior Court of New Jersey signed an
Order to Show Cause for Emergent Use Pending Sale of Assets and Notice of Sale
of all the assets of APC. The Assignee has accepted an offer, and entered into a
contract with Am Pharm Corp. for the purchase of all of the assets of APC for
the sum of $25,000 subject to the first perfected security interest of Belcap
Corporation, in an amount in excess of $1.5 million, and only if the assets can
be acquired as a going concern. In the interest of full disclosure, please note
that the shareholders of Am Pharm Corp. are also shareholders and principals of
APC, and are therefore "insiders". The Court established November 20, 1997 as
the Return Date for interested parties and creditors to show cause as to why the
Court should not enter an Order authorizing the purchase of assets from the
Assignee.
Management is seeking to attract a new operating entity to merge into the
Company, however, there is no assurance that a new operating entity can be
acquired on acceptable terms.
Debt Restructuring:
In April 1995, the Company and the former shareholders of the Company entered
into an agreement to amend certain agreements relating to the sale and purchase
of the Company in 1992. Pursuant to the agreement, amounts payable to the former
shareholders of $439,000 and $1,229,000 due them pursuant to notes payable and
noncompetition obligations, respectively, were exchanged for $1,000,000 of
modified promissory notes and 267,363 shares of the Company's Common Stock
valued at $2.50 per share. The transaction was accounted for in accordance with
SFAS 15, Accounting for Debt Restructuring.
6
<PAGE>
(1) $805,000 of such amount represents the discounted value of the promissory
notes issued in connection with the debt restructuring and is payable in monthly
installments through 2002. The discount reflects an effective interest rate of
1 1/2%. The notes are subordinated to certain future financings and are
collateralized by substantially all of the assets of the Company. Notes for
$660,000 were exchanged for 267,363 shares of the Company's Common Stock in
April 1995.
Maturities of debt during the next five years, including the portion classified
as current, are $144,000 in 1997, $144,000 in 1998, $144,000 in 1999, $144,000
in 2000, and $137,000 thereafter, less amounts representing imputed interest of
$45,000.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Company's financial
statements and the related notes thereto included elsewhere herein.
Results of Operations:
Sales:
Net sales for the nine and three months ended September 30, 1997 were $2,664,000
and $794,000 compared to $3,148,000 and $1,101,000 in the corresponding period
of the prior fiscal year.
The Company recently appointed a new President and Chief Executive Officer, a
new Vice President of Sales and Marketing to assist management in increasing
sales and improving customer relations and service, and a new Vice President of
Production to reduce costs and shorten inventory turnaround time. Immediate
attention has been given to (I) expanding the Company's customer base, (ii)
evaluating the current product line to eliminate the Company's internal sales
staff evaluating the productivity and geographic dispersion of its independent
sales representatives. In addition, the Company intends to aggressively develop
and promote its sales programs and new product introductions.
While management believe these actions are important steps toward increasing
sales, future increases in sales continue to be dependent on, among other
things, (I) sufficient levels of capital, (ii) increases in repackaging
throughput (see "Gross Margins" below), and (iii) its ability to broaden the
customer base and product line. There can be no assurance that such efforts will
be successful.
Gross Margins:
The Company's gross margin for the nine and three months ended September 30,
1997 decreased to $188,000 and $140,000 compared to $460,000 and $173,000 for
the corresponding period of the prior fiscal year. The decrease in gross margins
were attributable to an unfavorable sales mix, unfavorable absorption resulting
from lower sales volume, and spending variances.
Management, including the recently appointed President and Chief Executive
Officer and new Vice Presidents, are taking steps to improve efficiencies,
reduce costs and enhance customer service. Such steps include new procedures to
ensure that the Company is purchasing quality material at competitive prices,
establishing minimum and maximum inventory levels, establishing larger and
standard batch sizes, establishing "brite" (filled but unlabeled bottles) stock
to expedite filling of customer orders and evaluate the current equipment with
the intention of reducing labor intensive operations. Also, the company will
utilize excess capacity by providing custom packaging of products provided by
the customer (toll packaging). In addition, management expects to work with
employees and their union to develop an incentive plan to increase output and
maintain the quality of the products. There can be no assurance that such
efforts will be successful.
Operating Expenses:
Selling and distribution:
Selling and distribution costs for the nine and three months ended September 30,
1997 decreased $253,000 and $129,000 respectively, from the corresponding period
of the prior fiscal year. The decrease in such costs is primarily attributable
to decreases in personnel costs and the reassignment of personnel to other
departments within the Company. Management expects selling and distribution
costs in the futures to remain, as a percentage of sales, at the level of the
past nine months, but there can be no assurance that such efforts to control
costs will be successful.
8
<PAGE>
General and administrative:
General and administrative costs for the nine and three months ended September
30, 1997 decreased $27,000 and $39,000 respectively, from the corresponding
period of the prior fiscal year. The decreases in such costs are primarily
attributable to decreases in personnel costs and professional fees.
Loss from operations:
Management's effort to achieve profitability is largely dependent on its ability
to increase sales and improve gross margins and control operating costs.
Financial Condition:
Liquidity and Capital Resources:
The Company's working capital decreased $228,000 to ($2,527,000), at September
30, 1997 from ($2,299,000) at December 31, 1996. During the nine months ended
September 30, 1997 the Company received short term loans from shareholders of
$600,000. Since the Company's acquisition, cash expenditures have substantially
exceeded its cash generated from operations and the Company has relied on the
sale of capital stock and capital contributions and loans to fund its operating
activities and capital expenditures. While the Company is taking steps to
generate working capital, increase sales and achieve profitability, the current
level of liquidity and capital resources, is not sufficient to fund the
operations and growth of the Company.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to "Notes to Financial Statements - Contingencies and Other
Matters - Legal proceedings" which are incorporated herein.
ITEM 3. Defaults Upon Senior Securities
Unpaid cumulative dividends on the Company's Series A and Series B Voting
Cumulative Convertible Preferred Stock aggregated $1,219,000 through September
30, 1997.
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
The Company filed current reports on Form 8-K dated October 10, 1997
and October 24, 1997, reporting under Item 5. "Other Events" that
the expiration date of the Company's Class B and Class C Warrants
were extended to April 30, 1998, that the Company moved to occupy
new facilities and that certain legal actions were taken by the
former landlord and by holders of secured notes which were in
default. Reference is made to "Notes to Financial Statements -
Contingencies and Other Matters - Legal proceedings" which are
incorporated herein.
10
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Pharmaceutical Company
-------------------------------
(Registrant)
November 14, 1997 /s/ Alfred C. Bagwell
----------------------------
Alfred C. Bagwell, President
(Chief Executive Officer)
11
EXHIBIT 11
COMPUTATION OF PER SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
---------------------------- ----------------------------
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Loss $(1,050,000) $ (825,000) $ (310,000) $ (273,000)
Preferred Stock dividend (298,000) (292,000) (99,000) (97,000)
----------- ----------- ----------- -----------
Loss applicable to Common Stock $(1,348,000) $(1,117,000) $ (409,000) $ (370,000)
=========== =========== =========== ===========
Primary:
Weighted average number of common
shares outstanding 4,681,765 4,681,765 4,681,765 4,681,765
=========== =========== =========== ===========
Net loss per share of Common Stock
(primary): $ (.29) $ (.24) $ (.09) $ (.08)
=========== =========== =========== ===========
Assuming Full Dilution:
Weighted average number of common
shares outstanding 4,681,765 4,681,765 4,681,765 4,681,765
=========== =========== =========== ===========
Net loss per share of Common Stock
(assuming full dilution) (a) $ (.29) $ (.24) $ (.09) $ (.08)
=========== =========== =========== ===========
</TABLE>
(a) Not presented because dilution is less than 3 percent from primary amounts.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10 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> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 65
<SECURITIES> 0
<RECEIVABLES> 411
<ALLOWANCES> 35
<INVENTORY> 465
<CURRENT-ASSETS> 914
<PP&E> 567
<DEPRECIATION> 317
<TOTAL-ASSETS> 1,166
<CURRENT-LIABILITIES> 3,441
<BONDS> 1,706
0
3,840
<COMMON> 47
<OTHER-SE> (9,087)
<TOTAL-LIABILITY-AND-EQUITY> 1,166
<SALES> 794
<TOTAL-REVENUES> 794
<CGS> 419
<TOTAL-COSTS> 654
<OTHER-EXPENSES> 359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> (310)
<INCOME-TAX> 0
<INCOME-CONTINUING> (310)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (310)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
