UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
Commission file number 1-14019
SCHEIN PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2726505
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Campus Drive, Florham Park, NJ 07932
- ----------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
973-593-5500
--------------------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 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 ...... No... X...
The number of shares outstanding of the registrant's common stock as of
May 11, 1998 was 32,195,220.
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SCHEIN PHARMACEUTICAL, INC.
INDEX
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Part I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 27, 1997
and March 28, 1998.........................................................3
Condensed Consolidated Statements of Operations for the three
months ended March 29, 1997 and March 28, 1998............................ 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 29, 1997 and March 28, 1998............................ 5
Notes to Condensed Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................................. 9
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................................12
Item 4. Submission of Matters to a Vote of Security Holders.......................12
Item 6. Exhibits and Reports on Form 8-K..........................................12
SIGNATURES..................................................................................13
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
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<CAPTION>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 27, March 28,
1997 1998
-------------------- ----------------------
Assets (unaudited)
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 804 $ 1,203
Accounts receivable, less allowance for possible losses of
$2,260 and $2,145................................................. 88,781 82,788
Inventories.......................................................... 119,142 135,090
Other current assets................................................. 14,035 14,644
--------------- -------------
Total Current Assets........................................... 222,762 233,725
Property, Plant and Equipment, net......................................... 110,432 110,087
Product Rights, Licenses and Regulatory Approvals, net..................... 86,564 93,732
Goodwill, net 98,366 97,283
Other Assets 16,002 20,519
=============== =============
$ 534,126 $ 555,346
=============== =============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses................................ $ 81,478 $ 82,361
Income taxes......................................................... 11,595 19,422
Revolving credit and current maturities of long-term debt............ 56,440 67,800
--------------- -------------
Total Current Liabilities...................................... 149,513 169,583
Long-Term Debt, less current maturities.................................... 198,705 191,435
Other Non-Current Liabilities.............................................. 46,193 45,402
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value; 100,000 authorized shares; issued and
outstanding 28,693 shares at December 27, 1997
and March 28, 1998................................................ 287 287
Additional paid-in capital........................................... 38,494 38,494
Retained earnings.................................................... 99,483 108,605
Accumulated other comprehensive income............................... 1,502 1,540
Other (51) --
..............................................................................
------------------- -------------
Total Stockholders' Equity........................................ 139,715 148,926
------------------- -------------
$ 534,126 $ 555,346
=================== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<CAPTION>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share)
(unaudited)
Three Months Ended
---------------------------------------------
March 29, March 28,
1997 1998
--------------------- ----------------
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Net Revenues.................................................................... $ 131,839 $ 146,678
Cost of Sales................................................................... 87,117 94,793
--------------------- -------------------
Gross profit......................................................... 44,722 51,885
Costs and Expenses:
Selling, general and administrative.................................. 19,942 21,572
Research and development............................................. 6,744 7,147
Amortization of goodwill and other intangibles....................... 2,550 2,574
--------------------- ------------------
.....
Operating Income................................................................ 15,486 20,592
Interest expense, net................................................ 6,884 5,992
Other expenses (income), net......................................... 1,094 (1,522)
--------------------- ------------------
Income Before Provision for Income Taxes........................................ 7,508 16,122
Provision for Income Taxes...................................................... 3,625 7,000
--------------------- -------------------
Net Income...................................................................... $ 3,883 $ 9,122
===================== ===================
Basic and Diluted Earnings Per Share............................................ $ 0.14 $ 0.32
===================== ===================
Weighted Average Common Shares and Equivalents.................................. 28,755 28,819
===================== ===================
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See accompanying notes to condensed consolidated financial statements.
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<CAPTION>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
-------------------------------------
March 29, March 28,
1997 1998
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Operating activities:
Net income................................................................... $ 3,883 $ 9,122
Depreciation and amortization.............................................. 7,109 6,357
Deferred income tax benefit................................................ (677) (938)
Gain on sale of marketable securities...................................... -- (2,796)
Other...................................................................... 1,306 1,476
Changes in assets and liabilities:
Accounts receivable........................................................ 3,793 5,793
Inventories................................................................ (5,583) (15,948)
Prepaid expenses and other assets.......................................... 86 (655)
Accounts payable, income taxes, accrued expenses
and other liabilities.................................................. 5,738 8,710
----------------- --------------
Net cash provided by operating activities....................................... 15,655 11,121
----------------- --------------
Cash flows from investing activities:
Capital expenditures, net.................................................. (2,641) (2,808)
Product rights and licenses................................................ -- (8,766)
Investment in Cheminor Drugs Ltd........................................... -- (6,234)
Proceeds from the sale of marketable securities............................ -- 4,107
Other, net................................................................. (82) (609)
----------------- --------------
Net cash used in investing activities........................................... (2,723) (14,310)
Cash flows from financing activities:
Principal payments on, or repayments of, debt.............................. (53,021) (50,025)
Proceeds from issuance of debt............................................. 39,000 54,115
Increase in other non-current assets....................................... -- (502)
----------------- --------------
Net cash provided by (used in) financing activities............................. (14,021) 3,588
----------------- --------------
Net increase (decrease) in cash and cash equivalents............................ (1,089) 399
Cash and cash equivalents, beginning of period.................................. 2,139 804
----------------- --------------
Cash and cash equivalents, end of period........................................ $ 1,050 $ 1,203
================= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1--SUMMARY OF ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results and cash flows for the three month period
ended March 28, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 26, 1998. For further information refer to
the consolidated financial statements and footnotes thereto for the 1997 fiscal
year incorporated by reference in the Company's Registration Statement on Form
S-1 dated April 8, 1998.
Basic earnings per share has been computed using the weighted average number of
shares of common stock outstanding. Diluted earnings per share is the same as
the basic amounts for all periods presented. The assumed exercise of stock
options could potentially dilute earnings per share amounts in the future.
NOTE 2--INVENTORIES
Inventories are summarized as follows:
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<CAPTION>
December 27, March 28,
1997 1998
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(In thousands)
<S> <C> <C>
Finished products...................................... $ 45,568 $ 44,474
Work-in-process........................................ 33,160 44,822
Raw materials and supplies............................. 40,414 45,794
============= =============
$ 119,142 $ 135,090
============= =============
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NOTE 3--STRATEGIC ALLIANCES
In February 1998, the Company entered into a strategic alliance agreement with
Cheminor Drugs Limited and its subsidiaries ("Cheminor") and Dr. Reddy's
Laboratories Limited and its subsidiaries ("Reddy"). Pursuant to the agreement,
Cheminor will make available to the Company its present and future dosage form
generic products on an exclusive basis in the United States and certain other
countries, and the Company will make available to Cheminor and Reddy its present
and future products on an exclusive basis for sale in India and certain other
countries. Cheminor and Reddy will make available to the Company bulk active
pharmaceutical ingredients. As part of the arrangement, the Company purchased 2
million shares of Cheminor (12.79% of the currently outstanding shares of
Cheminor)and other rights for $10 million, of which $6.2 million represents the
fair value of the stock and $3.8 million represents product rights. Under
certain circumstances the Company has the right and/or the obligation to
purchase an additional 1 million shares for $5 million. Cheminor has the right
to make fair market value purchases of the Company's common stock; the purchase
price may be payable from profits otherwise due Cheminor from the alliance. Each
party will also be entitled to representation on the other company's board of
directors consistent with its equity interest.
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SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4--COMPREHENSIVE INCOME
Effective in fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This Statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. The Company's
total comprehensive earnings for the periods indicated were as follows:
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Three Months Ended
-------------------------------------
March 29, 1997 March 28, 1998
-------------- ---------------
(In thousands)
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Net Income............................................................ $ 3,883 $ 9,122
------------- ------------
Other Comprehensive Income, net of tax:
Foreign currency translation adjustments........................ 27 (34)
Unrealized holding gains arising during period.................. 5,028 1,736
Less: Reclassification adjustment for gains
included in net income........................... (1,664)
------------- ------------
Other Comprehensive Income............................................ 5,055 38
------------- ------------
Comprehensive Income.................................................. $ 8,938 $ 9,160
============= ============
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Components of accumulated other comprehensive income, included in the Company's
balance sheet, are as follows:
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December 27, 1997 March 28, 1998
----------------- ---------------
(In thousands)
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Unrealized gains on marketable securities............................... $ 2,286 $ 2,358
Cumulative foreign currency translation adjustment (784) (818)
------------ ---------------
$ 1,502 $ 1,540
============ ===============
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SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 5--SUBSEQUENT EVENTS
On March 31, 1998, the Company entered into an agreement with Elan Corporation
plc covering several products in various stages of development in the areas of
oral sustained-release and transdermal products. Under the agreement, the
Company is obligated to pay $14 million in development and license fees, and
additional development and license fees based on achievement of certain
milestones.
On April 9, 1998, the Company consummated an initial public offering of 3.45
million shares of common stock which generated net proceeds of approximately $53
million. The majority of the proceeds of the offering were used to retire $50
million of the Company's senior floating rate notes. This will result in an
extraordinary charge of approximately $2 million, net of taxes, for the early
extinguishment of debt in the second quarter of 1998. This extraordinary item is
for the writeoff of non-cash deferred fees and costs associated with the
reacquisition of the notes.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements in this Form 10-Q constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
events or results. These forward looking statements involve certain significant
risks and uncertainties, and actual results may differ materially from the
forward looking statements. Some important factors which may cause results to
differ include: the difficulty of predicting FDA approvals, the uncertainty of
acceptance and demand for the Company's new products, the impact of competitive
products and pricing, the availability of raw materials, uncertainties
associated with litigation (including without limitation patent challenges) and
regulatory matters, and fluctuations in operating results. Other important
factors that may cause actual results to differ materially from the forward
looking statements are discussed in the "Risk Factors" and "Management's
Discussion & Analysis of Financial Condition and Results of Operations" sections
of the Company's prospectus dated April 8, 1998, which is on file with the
Securities and Exchange Commission as part of the Company's Registration
Statement on Form S-1.
Results of Operations:
Three Months Ended March 28, 1998 Compared to Three Months Ended March 29, 1997
The following table sets forth comparisons of net product revenues and
settlement revenues for each of the periods shown:
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Three Months Ended
---------------------------------------
March 29, March 28, 1998
1997
----------------- -----------------
(In millions)
(unaudited)
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Product revenues................................................................ $ 106.8 $ 116.7
Patent reviews: settlement revenues............................................ 25.0 30.0
-------------- ---------------
Total net revenues........................................................ $ 131.8 $ 146.7
============== ==============
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Net revenues for the first three months of 1998 increased $14.9 million, or
11.3%, from $131.8 million in 1997 to $146.7 million in 1998. Product revenues
increased $9.9 million and settlement revenues increased $5.0 million. The
increase in product revenues is attributable to volume increases of $13.7
million partially offset by price erosion of $3.8 million. New generic products
that contributed to increased revenues of $14.0 million were methylphenidate,
ketoprofen ER (both launched in the fourth quarter of 1997) and ranitidine
(launched during the later part of the first quarter of 1998). Settlement
revenues in 1997 and 1998 reflects funds received from a pharmaceutical company
pursuant to an agreement reached with the company in 1994. Under the agreement
the Company received a final payment of $30 million in the first quarter of
1998, half of which was paid to the Company's consultant. In addition to the
amounts paid to the consultant, the Company incurs substantial other costs
related to its patent review activities as part of its overall product
development activities.
Gross profit increased $7.2 million in the first quarter of 1998, or 16.0%, from
$44.7 million in 1997 to $51.9 million in 1998. The gross margin improved from
33.9% in the 1997 interim period to 35.4% in the 1998 period. The increase in
gross profit was principally the result of the volume increases and the increase
in settlement revenues, partially offset by price erosion.
Selling, general and administrative expenses increased $1.7 million, or 8.2%,
from $19.9 million in 1997 to $21.6 million in 1998. Selling, general and
administrative expenses as a percent of net revenues decreased from 15.1% in
1997 to 14.7% in 1998. The increase in selling, general and administrative
expenses was due primarily to an increase in brand selling and marketing
expenses. The Company has begun expanding its brand sales and marketing efforts
to target use of INFeD(R) in the oncology community for the treatment of cancer
patients who are anemic and iron deficient. The expansion is also in preparation
for the launch into the renal care market of Ferrlecit(R), which has been
submitted to the FDA. Ultimately, the Company expects to increase its branded
sales force by about 50% to a total of approximately 30 representatives.
Research and development expenses increased $0.4 million, or 6.0%, from $6.7
million in 1997 to $7.1 million in 1998, as a result of general increases in
research and development activities. During the first quarter of 1998, the
Company and its alliance partners received seven ANDA approvals from the FDA.
Amortization of goodwill and other intangibles was unchanged from the comparable
period in 1997.
As a result of the factors discussed above, operating income increased $5.1
million, or 33.0%, from $15.5 million in 1997 to $20.6 million in 1998.
Interest expense, net, decreased $0.9 million, or 13.0%, from $6.9 million in
1997 to $6.0 million in 1998 principally due to lower debt levels and lower
borrowing rates as higher cost subordinated debt was exchanged for lower cost
senior floating rate notes in December 1997.
Other expenses (income), net, changed by $2.6 million from an expense of $1.1
million in 1997 to income of $1.5 million in 1998 and was due primarily to gains
on the sale of marketable securities of $2.8 million.
The Company's effective tax rate is higher than the statutory rate due to the
effect of significant non-deductible expenses, which is largely comprised of
amortization of intangibles. The effective tax rate decreased from 48.3% in 1997
to 43.4% in 1998, primarily as a result of higher income offsetting fixed
non-deductible expenses.
Liquidity and Capital Resources
Net cash provided by operating activities was $11.1 million for the three months
ended March 1998. The net cash provided by operating activities during 1998 was
attributable to net income as adjusted for non-cash charges of $13.2 million, an
increase in accounts payable and accrued expenses and a decrease in accounts
receivable of $14.5 million, offset by an increase in inventories and prepaid
expenses and other assets of $16.6 million.
Net cash used in investing activities was $14.3 million for the three months
ended March 1998. Cash used in investing activities consisted of the investment
in Cheminor of $6.2 million, payment for product rights and licenses of $8.8
million, and capital expenditures of $2.8 million, offset by the proceeds from
sales of marketable securities of $4.1 million.
<PAGE>
Net cash of $3.6 million provided by financing activities for the three months
ended March 1998 was derived primarily from borrowings on the Company's line of
credit reduced by the long term debt.
On April 9, 1998, the Company consummated an initial public offering of 3.45
million shares of common stock which generated net proceeds of approximately $53
million. The majority of the proceeds of the offering were used to repay $50
million of the Company's senior floating rate notes. This will result in an
extraordinary charge in the second quarter of 1998 for the writeoff of non-cash
deferred fees and the costs associated with the reacquisition of the notes
amounting to approximately $2 million, net of taxes. It is anticipated that this
will save the Company approximately $3.3 million in interest expense for the
remainder of the current fiscal year.
The Company believes that cash generated from operations and existing credit
facilities are sufficient to finance its current level of operations through the
next twelve months. In the event that the Company makes any significant
acquisitions, it may be required to obtain additional funds. There can be no
assurance that such funds, if required, would be available or, if available,
would be on terms acceptable to the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 9, 1998, the Company consummated an initial public offering of its
common stock, pursuant to Registration Statement No. 333-41413 (covering
3,450,000 shares sold by the Company) filed with and declared effective by the
Securities and Exchange Commission on April 8, 1998. The managing underwriters
were Cowen & Co., Bear Stearns & Co. Inc., and Smith Barney Inc. At the initial
offering price of $17 per share, the common shares sold for an aggregate of
$58.6 million with underwriters' discount and commissions of $4.1 million and
other costs and expenses of approximately $1.5 million. Net proceeds to the
Company, after deducting underwriters' discount and commissions and other costs
and expenses of the offering, were approximately $53 million. Of the net
proceeds to the Company, $50 million was used to retire a portion of Company's
senior floating rate notes with the remainder used to reduce borrowings under
its revolving credit agreement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 20, 1998, prior to the Company's initial public offering, the Annual
Meeting of the Stockholders of the Company was held in Florham Park, NJ. A
quorum was present at the meeting and acting throughout. The following items
were approved by all the shares represented at the meeting, which were a
majority of the shares outstanding at that date:
1. Restatement of the Company's Certificate of Incorporation; and
2. Election of the following individuals to the Board of Directors
of the Company: Martin Sperber, Richard Goldberg (terms expiring
in 1999), Dariush Ashrafi (term expiring in 2000), Paul Feuerman
and David Ebsworth (terms expiring 2001).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
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.
Schein Pharmaceutical, Inc.
(Registrant)
By: MARTIN SPERBER
-------------------------------------------
Martin Sperber
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
By: DARIUSH ASHRAFI
-------------------------------------------
Dariush Ashrafi
Chief Financial Officer and
Executive Vice President
(Principal Financial and Accounting Officer)
Dated: May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-28-1998
<CASH> $1,203
<SECURITIES> 0
<RECEIVABLES> 84,933
<ALLOWANCES> (2,145)
<INVENTORY> 135,090
<CURRENT-ASSETS> 233,725
<PP&E> 185,207
<DEPRECIATION> 75,120
<TOTAL-ASSETS> 555,346
<CURRENT-LIABILITIES> 169,583
<BONDS> 191,435
0
0
<COMMON> 287
<OTHER-SE> 148,639
<TOTAL-LIABILITY-AND-EQUITY> 555,346
<SALES> 146,678
<TOTAL-REVENUES> 146,678
<CGS> 94,793
<TOTAL-COSTS> 94,793
<OTHER-EXPENSES> 29,771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,992
<INCOME-PRETAX> 16,122
<INCOME-TAX> 7,000
<INCOME-CONTINUING> 9,122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,122
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
