SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file Number 0-15597 MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY (Exact name of registrant as specified in its charter) DELAWARE 11-2718528 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) Building 31, Olney Avenue, Cherry Hill, New Jersey 08003 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(609)424-5600 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 preceding 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 At March 31, 1995 (the close of the Registrant's first fiscal quarter), there were 11,051,562 shares of the Registrant's common stock, par value $. 01 per share (the "Common Stock") outstanding. This report contains a total of 10 pages. MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY INDEX to FORM 10-Q for Quarter ended March 31, 1995 Page Number Part I. FINANCIAL INFORMATION 3 Item 1. Financial Statements Consolidated Statements of Income for 3 the three-month periods ended March 31, 1995 and 1994 (unaudited) Consolidated Balance Sheets as of March 31, 1995 4 (unaudited) and December 31, 1994 Consolidated Statements of Cash Flows for the 5 three-month periods ended March 31, 1995 and 1994 (unaudited) Notes to Consolidated Financial Statements 6 (unaudited) Item 2. Management's Discussion and Analysis 8 of Financial Condition and Results of Operations Part II. OTHER INFORMATION 10 SIGNATURES 10 MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended March 31, 1995 1994 Net revenues $10,595,900 $ 7,074,200 Cost of goods sold 8,117,000 5,159,400 Gross profit 2,478,900 1,914,800 Operating costs and expenses: Selling, general and administrative 1,276,300 987,600 Research and development 781,200 543,800 Total operating expenses 2,057,500 1,531,400 Income from operations 421,400 383,400 Other income, net 787,500 137,800 Income before income taxes 1,208,900 521,200 Provision for income taxes 362,600 10,000 Net income $ 846,300 511,200 Net income per common and common equivalent share $ 0.08 $ 0.05 Weighted average common & common equivalent shares outstanding 11,140,800 11,218,600 See accompanying notes to consolidated financial statements. MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, 1995 December 31, 1994 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 10,658,400 $ 10,470,300 Investments available-for -sale, at fair market value 4,210,000 4,710,000 Accounts receivable, net of reserves of $1,279,100 and $1,222,400 at March 31, 1995 and December 31, 1994 5,977,600 6,147,800 Inventory 11,785,800 10,830,200 Deferred income taxes 529,300 526,400 Other current assets 2,231,300 2,111,800 Total current assets 35,392,400 34,796,500 Property and equipment, net of accumulated depreciation of $7,406,100 and $7,009,200 at March 31, 1995 and December 31, 1994 20,149,400 20,042,100 Deposits for property and equipment 283,600 250,000 Deferred income taxes 172,200 253,200 Other assets 1,484,000 1,520,100 Total assets $ 57,481,600 $ 56,861,900 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,258,700 2,012,500 Accrued compensation 282,100 346,800 Accrued liabilities 1,442,300 1,342,500 Deferred revenue 587,500 1,175,000 Total current liabilities 4,570,600 4,876,800 Long-term liabilities: Deferred compensation 890,200 813,800 Deferred income taxes 13,300 14,500 Total liabilities 5,474,100 5,705,100 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.01 per share; authorized 1,000,000 shares - - Common stock, par value $.01 per share; authorized 30,000,000 shares; issued and outstanding 11,051,562 shares at March 31, 1995 and 11,047,562 shares at December 31, 1994 110,500 110,500 Additional paid-in capital 51,743,900 51,739,500 Retained earnings (deficit) 153,100 (693,200) Total stockholders' equity 52,007,500 51,156,800 Total liabilities and stockholders' equity $ 57,481,600 $ 56,861,900 See accompanying notes to consolidated financial statements. MARSAM PHARMACUETICALS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31, 1995 1994 Cash flows from operations: Net income $ 846,300 $ 511,200 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 396,900 308,300 Deferred compensation expense 76,400 60,000 Deferred tax provision 76,900 - Decrease in accounts receivable 170,200 2,293,800 (Increase) decrease in inventory (955,600) 481,700 (Increase) in other assets (83,400) (45,600) Increase in accounts payable 246,200 758,500 Increase (decrease) in accrued expenses 35,100 (45,200) (Decrease) in deferred liabilities (587,500) (25,000) Net cash provided by operating activities 221,500 4,297,700 Investment activities: Purchase of investments available-for-sale - (404,300) Sale of investments available-for-sale 500,000 - Purchase of property and equipment (504,200) (294,400) Deposits on property and equipment (33,600) (333,800) Net cash used in investment activities (37,800) (1,032,500) Financing activities: Proceeds from issuance of common stock 4,400 66,200 Net cash provided by financing activities 4,400 66,200 Increase (decrease) in cash and cash equivalents 188,100 3,331,400 Cash and cash equivalents, beginning of period 10,470,300 6,836,700 Cash and cash equivalents, end of period $ 10,658,400 $ 10,168,100 See accompanying notes to consolidated financial statements. MARSAM PHARMACEUTICALS INC. & SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation: The accompanying unaudited consolidated financial statements of Marsam Pharmaceuticals Inc. and Subsidiary have been prepared in accordance with generally accepted accounting principles for interim financial information and with the applicable regulations of the Securities and Exchange Commission. 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 normal recurring accruals) considered necessary for a fair presentation have been included. For further information, reference is made to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. The consolidated financial statements include the accounts of Marsam Pharmaceuticals Inc. and Subsidiary. All intercompany transactions are eliminated in consolidation. Investments in corporate joint ventures in which the Company has a 20 to 50 percent ownership are accounted for by the equity method. Other investments, less than 20 percent owned, are carried at their original cost. Equity and cost investments are included in other assets in the consolidated financial statements. 2. Inventory: At March 31, 1995 and December 31, 1994, inventory consisted of the following: March 31, 1995 December 31, 1994 Raw Materials (including components) $6,211,000 $5,954,700 Work-in-process 203,400 95,900 Finished goods 5,371,400 4,779,600 11,785,800 $10,830,200 3. Settlement Agreement with Great Lakes Chemical Corporation: On July 18, 1994, the Company and Great Lakes Chemical Corporation (GLCC) executed a comprehensive settlement agreement which resolved the outstanding litigation between them concerning the failure of GLCC to supply the Company certain raw materials. Under the terms of the settlement, GLCC paid $2.35 million to the Company and agreed to begin supplying the Company with the inhaled anesthetic raw material commencing upon the availability of production quantities from its existing facility and continuing for at least five years after completion of a new, larger production facility. The payment, received by the Company on July 19, 1994, is being ratably recognized as income during the period of July 1, 1994 through June 30, 1995, the period during which the Company originally expected to launch the product. For the three-month period ended March 31, 1995, the Company recognized $587,500, of the $2.35 million received from GLCC, as other income. The balance is $587,500 and is included in deferred revenue at March 31, 1995. If GLCC fails to deliver agreed quantities of product by specified dates, or if the product does not receive FDA approval by July 15, 1995, the Company is entitled to be reimbursed for lost profits associated with the inability of the Company to market the product. Such payments can be received until January 15, 1998. 4. Income Taxes: The provision for income tax expenses is based on an estimated full year effective income tax rate. The rate reflects the Company's utilization of certain federal tax credits and its remaining state net operating loss carryforward during 1995. The provision for income tax for the same period in 1994 was insignificant due to the availability of a federal net operating loss carryforward. MARSAM PHARMACEUTICALS INC. & SUBSIDIARY Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company was founded in 1985 and is engaged in the business of developing, manufacturing, marketing and distributing generic injectable prescription drug products. The Company markets penicillin, cephalosporin and other injectable products to pharmaceutical wholesalers and distributors, contract manufacturing customers, hospitals, home infusion companies and other medical facilities. The Company originally sold its products through joint venture distribution agreements and under manufacturing agreements with other pharmaceutical companies. During the last two years the Company has developed its own sales force and sells its products under the Marsam label and private labels. Settlement Agreement with Great Lakes Chemical Corporation On July 18, 1994, the Company and Great Lakes Chemical Corporation (GLCC) executed a comprehensive settlement agreement which resolved the outstanding litigation between them concerning the failure of GLCC to supply the Company certain raw materials. Under the terms of the settlement, GLCC paid $2.35 million to the Company and agreed to begin supplying the Company with the inhaled anesthetic raw material commencing upon the availability of production quantities from its existing facility and continuing for at least five years after completion of a new, larger production facility. The payment, received by the Company on July 19, 1994, is being ratably recognized as income during the period of July 1, 1994 through June 30, 1995, the period during which the Company originally expected to launch the product. For the three-month period ended March 31, 1995, the Company recognized $587,500, of the $2.35 million received from GLCC, as other income. The balance is $587,500 and is included in deferred revenue at March 31, 1995. If GLCC fails to deliver agreed quantities of product by specified dates, or if the product does not receive FDA approval by July 15, 1995, the Company is entitled to be reimbursed for lost profits associated with the inability of the Company to market the product. Such payments can be received until January 15, 1998. Results of Operations During the three-month period ended March 31, 1995, the Company had revenues of $10,595,900, consisting of Marsam-label sales of $7,526,100 and contract sales of $3,069,800. During the same period in 1994, the Company had revenues of $7,074,200 consisting of Marsam-label sales of $5,110,000 and contract sales of $1,964,200. Revenues increased in the three-month period ended March 31, 1995 as compared to the same period in 1994 due primarily to increased market penetration of Marsam-label products, as well as increased demand for contract business. Gross profit margin decreased in the three-month period ended March 31, 1995 when compared to the same period in 1994, from 27.1% to 23.4%. The decrease is attributable mainly to increased expenses in the New Facility associated with increased utilization of that plant, product mix, and an increased level of contract sales, which have a lower selling price than Marsam-label products. Selling, general, and administrative costs increased during the three- month period ended March 31, 1995 compared to the same period in 1994 due mainly to increases of $123,200 in administrative personnel and personnel-related expenses, and $112,700 in sales and marketing personnel and personnel-related expenses. Research and development costs increased during the three-month period ended March 31, 1995 as compared to the same period in 1994 as the result primarily of increases in personnel and personnelrelated expenses and development material expenses. Other income for the three-month period ended March 31, 1995 consisted of interest income of $200,000 and income recognized as a result of the settlement agreement with GLCC of $587,500. (See Note 3 of the Notes to Consolidated Financial Statements). For the same period in 1994, other income consisted entirely of interest income of $137,800. Interest income increased for the three-month period ended March 31, 1995 as compared to the same period in 1994 due primarily to higher interest rates, partially offset by lower levels of cash and cash equivalents. The provision for income taxes for the three-month period ended March 31, 1995 is based on an estimated full year effective income tax rate. The provision for income taxes was $362,600. The rate reflects the Company's utilization of certain federal tax credits and its remaining state net operating loss carryforward during 1995. The provision for income tax for the same period in 1994 was insignificant due to the availability of a federal net operating loss carryforward. The ratio of net income to net sales increased from 7.2% to 8.0% for the three month period ended March 31, 1995, as compared to the same period in 1994. Capital Resources and Liquidity As of March 31, 1995, the Company had cash, cash equivalents, and investments available for sale of $14,868,400 as compared to $15,180,300 at December 31, 1994. Cash, cash equivalents, and investments available for sale generated during the three-month period ended March 31, 1995 were primarily from income from operations and interest income. Cash, cash equivalents, and investments available-for-sale were used during this same period mainly to increase inventory levels, and to equip the Company's manufacturing and distribution facilities. Working capital increased from $29,919,700 at December 31, 1994 to $30,821,800 at March 31, 1995, as a result primarily of increased inventory levels and decreased deferred revenue related to the Great Lakes settlement. In January 1994, the Company entered into an agreement to purchase a property which includes a total of approximately 109,800 square feet on approximately 8.5 acres of land, in March 1997. This property is being utilized for product development laboratories and as the Company's distribution center. The purchase price is $5,319,000 and includes a $250,000 deposit which was paid during the first quarter of 1994 and two installment payments of $3,000,000 in March 1997 and $2,069,000 in October 1997. Management believes that the Company's capital resources are adequate to meet the Company's needs for the foreseeable future and that, because of the Company's overall financial condition, the Company will have access to additional capital in the form of debt or equity. Inflation has not had a significant impact on the Company's revenues or retained earnings. Part II. OTHER INFORMATION Items 1-5 Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Not applicable. (b) Not applicable. SIGNATURES Pursuant to 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. Marsam Pharmaceuticals Inc. (Registrant) Date: May 12, 1995 By: /S/ Marvin Samson Marvin Samson President, Treasurer and Chief Executive Officer Date: May 12, 1995 By: /S/ Richard Baron Richard Baron Vice President, Finance and Chief Financial Officer