FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 10549
(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 0-11274
PHARMACEUTICAL FORMULATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2367644
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
460 Plainfield Avenue, Edison, NJ 08818
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code)
(908) 985-7100
_____________________________________________________
(Former name, former address and former fiscal year, if changed
since last report)
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.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of common stock, $.08 par
value, as of May 1, 1995 was 29,042,146.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, June 30,
1995 1994
ASSETS (Unaudited) (Note 1)
CURRENT ASSETS
Cash $ 570,000 $ 1,212,000
Accounts receivable - net of allowance for doubtful
accounts of $226,000 and $188,000 7,392,000 7,494,000
Inventories 13,529,000 11,259,000
Prepaid expenses and other current assets 931,000 822,000
Deferred tax asset 1,000,000 400,000
Total current assets 23,422,000 21,187,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization of
$10,499,000 and $9,503,000 14,294,000 12,190,000
OTHER ASSETS
Deferred financing costs 108,000 155,000
Restricted cash 125,000
Other assets 334,000 88,000
$38,158,000 $33,745,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 507,000 $ 507,000
Current portion of capital lease obligations 1,614,000 1,441,000
Accounts payable 8,529,000 8,078,000
Accrued expenses 985,000 705,000
Income taxes payable 215,000 80,000
Total current liabilities 11,850,000 10,811,000
LONG TERM DEBT 16,553,000 15,276,000
LONG TERM CAPITAL LEASE OBLIGATIONS 9,154,000 8,934,000
DEFERRED GAIN ON SALE/LEASEBACK 492,000 529,000
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - par value $.08 per share
Authorized - 40,000,000 shares
Issued and outstanding - 28,920,419 and
28,870,395 shares 2,315,000 2,311,000
Capital in excess of par value 37,040,000 37,023,000
Accumulated deficit (39,246,000) ( 41,139,000)
Total stockholders' equity (deficit) 109,000 ( 1,805,000)
$38,158,000 $33,745,000
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Net sales $45,796,000 $42,168,000 $13,689,000 $14,310,000
COST AND EXPENSES
Cost of goods sold 35,044,000 32,410,000 10,711,000 10,804,000
Selling, general and
administrative 4,929,000 3,932,000 1,695,000 1,469,000
Research and
development 1,095,000 374,000 347,000 132,000
41,068,000 36,716,000 12,753,000 12,405,000
PROFIT FROM OPERATIONS 4,728,000 5,452,000 936,000 1,905,000
OTHER INCOME (EXPENSE)
Interest expense ( 2,864,000) ( 2,838,000) ( 965,000) (1,030,000)
Other 89,000 99,000 54,000 99,000
( 2,775,000) ( 2,739,000) ( 911,000) ( 931,000)
INCOME BEFORE INCOME
TAXES 1,953,000 2,713,000 25,000 974,000
INCOME TAXES (BENEFIT) 60,000 807,000 ( 300,000) 307,000
NET INCOME $ 1,893,000 $ 1,906,000 $ 325,000 $ 667,000
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 29,890,000 29,232,000 29,965,000 29,781,000
INCOME PER COMMON AND
COMMON EQUIVALENT
SHARE $.06 $.07 $.01 $.02
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine
Months Ended
March 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,893,000 $ 1,906,000
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization of
property, plant and equipment 996,000 797,000
Amortization of bond discount and
deferred financing costs 235,000 210,000
Amortization of deferred gain on
sale/leaseback ( 37,000) ( 39,000)
Deferred tax benefit ( 600,000) ( 125,000)
Common stock issued for services 21,000
Changes in current assets and liabilities
(Increase)/decrease in accounts receivable 102,000 ( 1,036,000)
(Increase) in inventories ( 2,270,000) ( 2,626,000)
(Increase) in other current assets ( 109,000) ( 255,000)
Increase in accounts payable, accrued
expenses and income taxes payable 866,000 2,480,000
Net cash provided from operating
activities 1,097,000 1,312,000
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in other assets ( 246,000) ( 824,000)
(Increase) in property, plant and equipment ( 1,651,000) ( 916,000)
Net cash (used in) investing
activities ( 1,897,000) ( 1,740,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line
of credit 1,440,000 1,514,000
Principal payments of capital lease
obligations ( 1,056,000) ( 803,000)
Principal repayments of long-term debt ( 351,000) ( 373,000)
Receipt of restricted cash 125,000 125,000
Issuance of common stock 366,000
Net cash provided by financing
activities 158,000 829,000
Net increase/(decrease) in cash ( 642,000) 401,000
CASH, beginning of period 1,212,000 239,000
CASH, end of period $ 570,000 $ 640,000
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Interim Financial Reporting
The consolidated balance sheet as of June 30, 1994
has been derived from the audited consolidated
balance sheet for the fiscal year then ended and is
presented for comparative purposes.
The accompanying financial statements presume that
users have read the audited financial statements for
the preceding fiscal year. Accordingly, footnotes
which would substantially duplicate such disclosure
have been omitted except for contingencies.
The interim financial statements reflect all
adjustments which are, in the opinion of management,
necessary for a fair statement of the results for
the interim periods presented. Such adjustments
consist solely of normal recurring accruals.
Certain amounts appearing in the March 31, 1995
financial statements have been reclassified to
conform to the prior year presentation. There was
no effect on net income due to the reclassification.
The results of operations for the nine months ended
March 31, 1995 are not necessarily indicative of the
results to be expected for a full year (see
"Management's Discussion and Analysis of Financial
Condition and Results of Operations").
Note 2: Contingencies
Other than described below, no material proceedings to
which the Company is a party, or to which any of its
properties are subject, are pending or are known to be
contemplated, and the Company knows of no material
legal proceedings, pending or threatened, or judgments
entered against any director or officer of the Company
in his or her capacity as such.
In or about October 1991, an action was instituted in
the Superior Court of New Jersey, County of Middlesex,
against the Company by an individual seeking monies
claimed to be due under an alleged employment
agreement. The Company believes that the amount
sought, $3,500,000, has been frivolously asserted to
harass the Company and that the allegations are
completely baseless. The Company has interposed
counterclaims against plaintiff for fraud and related
claims and seeks damages in the amount of $5,000,000.
As a result of plaintiff's poor physical condition, in
April 1994, he moved to transfer the matter to the
"inactive" trial list which motion has been granted.
Accordingly, no further action will be taken by either
party with respect to the matter unless and until
plaintiff seeks to restore the matter to the active
trial calendar.
In or about November 1992, an action was instituted
against the Company in the Supreme Court of New York,
County of New York, by Univest Technologies, alleging
that the Company breached its agreement by refusing to
furnish Soluble Aspirin to such entity. Plaintiff
seeks "consequential damages" of $1,500,000. The
Company denies that any such agreement existed
and vigorously denies that any monies are owed to
plaintiff. The Company moved to dismiss the
complaint, which motion was granted with leave to
replead. Plaintiff served an amended complaint
thereafter and the Company again moved to dismiss the
complaint. The Company is awaiting a decision from
the court with respect to the Company's second motion.
If the complaint is not dismissed, the Company intends
to assert counterclaims against plaintiff for amounts
in excess of the amount sought, on the basis of, among
other things, plaintiff's fraud and misrepresentation.
In or about July 1994, Puritan Quartz, Inc.
("Puritan") brought suit against the Company, in the
U.S. District Court for the Southern District of New
York, alleging breach of (i) the Company's purported
contractual obligations to supply Puritan
with acetaminophen and ibuprofen for resale to an
unaffiliated party; and (ii) related confidentiality
obligations. The complaint seeks damages in the
aggregate amount of $3,600,000, plus $300,000 for each
additional month of continuing breach. The Company
denies that it has any liability to Puritan. The
Company believes that the clear meaning of the
language of the agreement between the parties was that
the agreement had a one year term, ending October 26,
1993, prior to the events of the alleged breach, and
that such agreement was never extended. Accordingly,
in the Company's view, it had no obligation
whatsoever to Puritan at the time of the alleged
breach. The Company further believes that Puritan's
claims as to the aggregate amount of its alleged lost
profits are overstated. The Company has answered the
complaint and served preliminary discovery demands
upon Puritan, which subsequently served an amended
complaint on the Company. The Company has made a
motion for dismissal of the complaint and is awaiting
a decision from the court.
Note 3: Inventories
March 31, June 30,
Inventories consist of the 1995 1994
following:
Raw materials $ 4,762,000 $ 4,216,000
Work in process 525,000 364,000
Finished goods 8,242,000 6,679,000
$ 13,529,000 $ 11,259,000
Note 4: Dividends
No dividends were declared during any period presented.
Note 5: Earnings per Share
Earnings per share are based on the weighted average number
of common and common equivalent shares outstanding during
the period. Common equivalent shares consist of the
dilutive effect of unissued shares under options, warrants
and, in the case of fully-diluted earnings per share,
convertible debentures, computed using the treasury stock
method with the average stock prices for primary basis and
the higher of average or period-end stock prices for
fully-diluted basis. Fully-diluted earnings per share are
not presented since the amounts are substantially
the same as primary earnings per share.
Note 6: Related Party Transactions
The following transactions with ICC Industries Inc.
("ICC"), an affiliated company, are reflected in the
consolidated financial statements for the nine months ended
March 31, 1995 and 1994:
1995 1994
Sales to ICC $ - $ 7,501,000
Inventory purchases from ICC 1,019,000 10,908,000
Interest expense 444,000 665,000
Accounts payable to ICC 256,000 2,752,000
Equipment lease obligations due ICC 3,910,000 2,629,000
Note 7: Deferred Tax Asset
There was a reduction in the valuation allowance with a
corresponding increase in the deferred tax asset in the nine
months ended March 31, 1995 and 1994 of $600,000 and
$100,000, respectively, resulting from a change in
management's estimate of the utilization of temporary
differences caused primarily by the Company's improved
operating results.
Note 8: Long-Term Operating Lease
On March 28, 1995, the Company entered into a long-term
lease for a building located adjacent to the Company's
present manufacturing facility. The lease term is ten
years with two five-year renewal options. The lease is
classified as an operating lease. The rent payments are
$319,200 per annum for the first five years and $342,000
for the balance of the initial ten year term.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
All sales revenues generated during the nine months ended March
31, 1995 were attributed to the Company's subsidiary, Private
Formulations, Inc. ("PFI"). Revenues for the nine months ended
March 31, 1995 were $45,796,000 compared to $42,168,000 in the
comparable period in the prior fiscal year. The increase in
revenues of $3,628,000 or 9% is the result of increased sales of
existing products to current customers, new customers and line
extensions (more diverse packaging of existing products). The
Company also manufactures branded products for other
pharmaceutical companies, although sales of such products do not
presently represent a material portion of the Company's sales.
Two customers represent approximately 42% of the Company's sales
for the nine months ended March 31, 1995. These two customers
are Revco D.S., Inc. ("Revco") and Walgreen Company
("Walgreen"). Sales to Revco amounted to $12,338,000 for the
nine months ended March 31, 1995 or 27% of total sales compared
to $7,366,000 or 17% of total sales in the comparable period in
the prior fiscal year. Sales to Walgreen amounted to $6,703,000
or 15% of total sales for the nine months ended March 31, 1995
compared to $6,496,000 or 15% of total sales in the comparable
period in the prior fiscal year. The increase in sales for
these two customers as well as increases in other customers was
offset somewhat by a decrease in sales in the Company's bulk
manufacturing business.
Sales for the three months ended March 31, 1995 were $13,689,000
compared to $14,310,000 in the comparable period in the prior
fiscal year. The decrease of $621,000 resulted from an earlier
than anticipated end for the cough-cold season as well as a
reduction in sales in the Company's bulk and contract
manufacturing business. A reduction in bulk and contract
manufacturing business, which traditionally has higher margins,
was partially offset by additional sales of the private label
business which has relatively lower margins.
Cost of sales as a percentage of sales was 77% for the nine
months ended March 31, 1995 which approximates the percentage in
the comparable period in the prior fiscal year. Cost of sales
as a percentage of sales increased by 3% in the three months
ended March 31, 1995 due to the reduction in contract and bulk
manufacturing business and increased selling price pressures in
the market place.
Selling, general and administrative expenses were $4,929,000 for
the nine months ended March 31, 1995 compared to $3,932,000 in
the comparable period in the prior fiscal year. The increase of
$997,000 is due to increased marketing costs as a result of
efforts to continually expand the customer and product base and
increases in administrative costs (salaries, legal, insurance,
etc.) to support the higher sales volume.
Research and development costs were $1,095,000 for the nine
months ended March 31, 1995 compared to $374,000 in the
comparable period in the prior fiscal year. The increase of
$721,000 is due to the Company's continued commitment to
research and development to provide for new products to fund the
Company's future growth.
Selling, general and administrative expenses increased by
$226,000 for the three months ended March 31, 1995 and research
and development costs increased by $215,000 due to the reasons
stated above.
Interest and other expenses were $2,775,000 for the nine months
ended March 31, 1995 compared to $2,739,000 in the comparable
period in the prior fiscal year. Interest and other expenses
decreased by $20,000 in the three months ended March 31, 1995.
Income tax expense was $60,000 for the nine months ended March
31, 1995 compared to $807,000 in the comparable period in the
prior fiscal year. The decrease in income tax expense of
$747,000 is the result of a lower amount of income before income
taxes and an increase in the deferred tax asset of $600,000 for
the nine months ended March 31, 1995 compared to $125,000 in the
comparable period in the prior fiscal year.
As stated above, revenues increased by $3,628,000 for the nine
months ended March 31, 1995 as compared to the corresponding
period in the prior fiscal year. However, if the Company's bulk
and contract manufacturing business continues to decline,
revenues for the final quarter of the current fiscal year may
fall below the amount of revenues in the comparable period of
the prior fiscal year, and it is possible that the final quarter
may not be profitable.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Company had working capital of
$11,572,000 compared to $10,376,000 at June 30, 1994. The
increase of $1,196,000 is due to the net income for the nine
months ended March 31, 1995 and increased long-term borrowing to
fund the increased sales volume.
Inventory increased from $11,259,000 at June 30, 1994 to
$13,529,000 at March 31, 1995. The increase is a result of an
increase in the Company's private label (store brand) sales
which requires a larger inventory than the bulk manufacturing or
contract manufacturing business.
The Company entered into new capital lease obligations with ICC
for a total value of $1,449,000. Payments on capital leases
were $1,056,000 for the nine months ended March 31, 1995.
Payments on long-term debt totaled $351,000 for the nine months
ended March 31, 1995.
Capital expenditures were $3,100,000 for the nine months ended
March 31, 1995. The capital expenditures have increased the
Company's operating capacity and increased efficiencies (lower
unit costs). The Company believes that other significant
capital expenditures, if any, will be financed through capital
leases, although there can be no assurance thereof.
Stockholder's equity has increased by $1,914,000 from a capital
deficit of $1,805,000 to positive equity of $109,000 at March
31, 1995. The increase was primarily due to the net income
generated for the nine months ended March 31, 1995.
The Company believes its working capital needs will be satisfied
by funds generated from operations at least through March 31,
1996. Significant capital expenditures, however, will require
additional financing through capital leases or other sources.
While the Company has, in the past, had no difficulty obtaining
capital leases for machinery, there can be no assurance the
Company will obtain the additional financing necessary for other
significant capital expenditures.
<PAGE>
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
See Note 2 to the Company's Notes to Consolidated
Financial Statements.
Item 2: Changes in Securities
None.
Item 3: Defaults upon Senior Securities
None.
Item 4: Submission of Matters to a Vote of Securities Holders
None.
Item 5: Other Information
None.
Item 6: Exhibits and Reports on Form 8-K
(a). Exhibits.
None.
(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.
PHARMACEUTICAL FORMULATIONS, INC.
(REGISTRANT)
Date: May 9, 1995 By: /s/ Max A. Tesler
Max A. Tesler,
Chief Executive Officer
(Principal Executive Officer)
Date: May 9, 1995 By: /s/ Anthony Cantaffa
Anthony Cantaffa
Chief Operating and Financial
Officer (Principal Financial
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the Consolidated Balance Sheets at March 31, 1995
(Unaudited) and the Consolidated Statement of Operations for
Nine Months Ended March 31, 1995 (Unaudited) and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 570,000
<SECURITIES> 0
<RECEIVABLES> 7,392,000
<ALLOWANCES> 226,000
<INVENTORY> 13,529,000
<CURRENT-ASSETS> 23,422,000
<PP&E> 14,294,000
<DEPRECIATION> 10,499,000
<TOTAL-ASSETS> 38,158,000
<CURRENT-LIABILITIES> 11,850,000
<BONDS> 0
<COMMON> 2,315,000
0
0
<OTHER-SE> 37,040,000
<TOTAL-LIABILITY-AND-EQUITY> 38,158,000
<SALES> 45,796,000
<TOTAL-REVENUES> 45,796,000
<CGS> 35,044,000
<TOTAL-COSTS> 41,068,000
<OTHER-EXPENSES> 2,775,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,864,000
<INCOME-PRETAX> 1,953,000
<INCOME-TAX> 60,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,893,000
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
