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: SEPTEMBER 30, 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
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
The number of shares outstanding of common stock, $.08 par value, as of
October 31, 1995 was 29,438,814.
<PAGE>
<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, June 30,
1995 1995
(Unaudited) (Note 1)
<S> <C> <C>
CURRENT ASSETS
Cash $ 72,000 $ 655,000
Accounts receivable - net of allowance
for doubtful accounts of $301,000 and
$333,0001 8,639,000 8,093,000
Income tax receivable 300,000
Inventories 14,619,000 14,915,000
Prepaid expenses and other current assets 888,000 696,000
Deferred tax asset 400,000 400,000
Total current assets 24,918,000 24,759,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and
amortization of $11,231,000 and
$10,832,000 15,658,000 14,346,000
OTHER ASSETS
Deferred financing costs 112,000 130,000
Deferred tax asset 1,000,000 1,000,000
Other assets 220,000 221,000
$ 41,908,000 $40,456,000
</TABLE>
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 753,000 $ 642,000
Current portion of capital lease 1,511,000 1,529,000
obligations
Accounts payable 9,195,000 9,829,000
Accrued expenses 859,000 549,000
Income taxes payable 38,000 38,000
Total current liabilities 12,356,000 12,587,000
LONG TERM DEBT 19,115,000 18,207,000
LONG TERM CAPITAL LEASE OBLIGATIONS 10,078,000 8,731,000
DEFERRED GAIN ON SALE/LEASEBACK 464,000 477,000
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock - par value $.08 per share
Authorized - 40,000,000 shares
Issued and outstanding - 29,438,814 and
29,311,816 shares 2,355,000 2,347,000
Capital in excess of par value 37,239,000 37,200,000
Accumulated deficit ( 39,699,000) ( 39,093,000)
Total stockholders' equity (deficiency) ( 105,000) 454,000
$41,908,000 $40,456,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES
Net sales $12,562,000 $15,028,000
COST AND EXPENSES
Cost of goods sold 10,681,000 11,455,000
Selling, general and
administrative 1,607,000 1,444,000
Research and
development 208,000 334,000
12,496,000 13,233,000
PROFIT FROM OPERATIONS 66,000 1,795,000
OTHER INCOME (EXPENSE)
Interest expense ( 986,000) ( 942,000)
Other 14,000 16,000
( 972,000) ( 926,000)
INCOME (LOSS) BEFORE
INCOME TAXES (BENEFIT) ( 906,000) 869,000
INCOME TAXES (BENEFIT) ( 300,000) 150,000
NET INCOME (LOSS) ( 606,000) 719,000
INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE ($.02) $0.02
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 29,323,000 30,078,000
</TABLE>
<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30,
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($ 606,000) $ 719,000
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization of
property, plant and equipment 399,000 339,000
Amortization of bond discount and
deferred financing costs 81,000 86,000
Amortization of deferred gain on
sale/leaseback ( 13,000) ( 13,000)
Deferred tax benefit ( 150,000)
Changes in current assets and liabilities
(Increase) in accounts receivable ( 546,000) ( 1,840,000)
Decrease in inventories 296,000 366,000
(Increase)/decrease in other current assets( 491,000) 31,000
Increase/(decrease) in accounts payable,
accrued expenses and income taxes
payable ( 324,000) 861,000
Net cash provided from/(used in) operating
activities ( 1,204,000) 399,000
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in other assets - (135,000)
(Increase) in property, plant and equipment - (528,000)
Net cash (used in) investing
activities - (663,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in borrowings under line
of credit 686,000 ( 18,000)
Principal payments of capital lease
obligations ( 382,000) (362,000)
Principal repayments of long-term debt ( 145,000) (111,000)
Increase in long-term debt 443,000
Issuance of common stock 19,000
Net cash provided by (used for) financing
activities 621,000 (491,000)
Net (decrease) in cash ( 583,000) (755,000)
CASH, beginning of period 655,000 1,212,000
CASH, end of period $ 72,000 $ 457,000
Three Months Ended
September 30,
1995 1995
(Unaudited) (Unaudited)
NON-CASH TRANSACTIONS:
<S> <C> <C>
Capital lease obligations $ 1,711,000 $302,000
Conversion of 8.25% Debentures into common
stock $ 28,000 $ -
Cash paid for interest $ 786,000 $704,000
Cash paid for income taxes $ - $ 10,000
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: INTERIM FINANCIAL REPORTING:
The consolidated balance sheet as of June 30, 1995 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.
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 September 30, 1994 financial
statements have been reclassified to conform to the September
30,
1995 presentation. There was no effect on net income due to the
reclassification.
The results of operations for the three months ended September
30, 1995 are not necessarily indicative of the results to be
expected for a full year.
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 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 1992, 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 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.
Note 3: INVENTORIES:
September 30, June 30,
Inventories consist of the 1995 1995
following:
Raw materials $ 4,806,000 5,321,000
Work in process 689,000 375,000
Finished goods 9,124,000 9,219,000
$14,619,000 $14,915,000
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 for 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.
No effect has been given to shares issuable for common stock
equivalents for the three months ended September 30, 1995 as the
effect would be anti-dilutive.
Note 6: RELATED PARTY TRANSACTIONS:
The following transactions with ICC Industries Inc. ("ICC"), an
affiliated Company, are reflected in the consolidated financial
statements as of or for the three months ended September 30,
1995 and 1994:
1995 1994
Inventory purchases from ICC $ 135,000 $ 554,000
Interest expense 90,000 168,000
Accounts payable to ICC 135,000 1,108,000
Equipment lease obligations due ICC 4,924,000 3,277,000
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1995 were
$12,562,000 compared to $15,028,000 in the comparable period in
the prior fiscal year. The decrease in revenues of $2,466,000
is
the result of a significant decrease in contract manufacturing
business in the three months ended September 30, 1995 compared
to
the comparable period in the prior fiscal year. In addition,
there was a reduction in sales in the private label (store
brand)
sector of the business due to an unexpected softening in the
private label market including a reduction in sales to the
Company's largest customer Revco D.S., Inc. ("Revco"). Revco
acquired a large drug chain in the first quarter of the
prior fiscal year. The prior year includes increased sales to
fill the new acquisition's start-up requirements. The lower
sales for Revco were offset somewhat by increased sales to other
private label and bulk business customers. Two customers
represent approximately 31% of the Company's sales
for the three months ended September 30, 1995. These two
customers are Revco and Walgreen Company ("Walgreen"). Sales to
Revco amounted to $1,922,000 for the three months ended
September
30, 1995 or 15% of total sales compared to $4,035,000, or 27% of
total sales in the comparable quarter in the prior
fiscal year. Sales to Walgreen amounted to $2,009,000 or 16% of
total sales for the three months ended September 30, 1995
compared to $1,950,000 or 13% of total sales in the comparable
period in the prior fiscal year.
Cost of sales as a percentage of sales was 85% for the three
months ended September 30, 1995 compared to 76% in the
comparable
period in the prior fiscal year. The increase in cost of sales
as a percentage of sales was due to the reduction in sales
volume
(especially, in the contract manufacturing business, which
typically has the highest profit margin), an increase in
promotional activity to increase volume (coupons, special
promotions, etc.) and an increase in certain operating costs
such
as raw materials, labor rates and warehousing costs. In
addition, the recent plant renovation required an extension in
the annual plant shut-down period and caused certain temporary
operating inefficiencies.
Selling, general and administrative expenses were $1,607,000 for
the three months ended September 30, 1995 compared to $1,444,000
in the comparable period in the prior fiscal year. The increase
of $163,000 is mainly due to increased marketing costs to
continually expand the customer and product base.
Research and development costs were $208,000 for the three
months
ended September 30, 1995 compared to $334,000 in the comparable
period in the prior fiscal year. The decrease of $126,000 is
due
to the fact that certain product research was substantially
completed in fiscal 1995 and research is not being
conducted to the same extent in the three months ended September
30, 1995.
As stated above, revenues decreased by $2,466,000 in the three
months ended September 30, 1995 as compared to the comparable
period in the prior fiscal year. If the Company's bulk and
contract manufacturing business continues to
decline and if the Company's private label (store brand)
business
does not grow above the prior year's levels, there will be a
negative effect on the Company's operating results.
The Company continues to take steps to reduce costs in an
attempt
to improve operating results in subsequent quarters. Subsequent
to September 30, 1995, the order rate and sales forecast for the
private label (store brand) business has increased and the
Company expects higher sales in the second quarter than
in the first although there can be no assurance thereof.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had working capital of
$12,562,000 compared to $12,172,000 at June 30, 1995.
Accounts receivable increased by $546,000 due to the fact that
more of the first quarter sales occurred in the later part of
the
quarter since the facility was shut-down for an extended time
period due to the plant upgrade.
Inventories and accounts payable decreased by $296,000 and
$634,000, respectively as the Company's inventory requirements
were reduced due to sales in the first quarter of the fiscal
year ending June 30, 1996.
The Company incurred $1,711,000 of capital expenditures in the
three months ended September 30, 1995 most of which related to
the plant upgrade of the facility. This was financed through
capital leases entered-into with ICC for a total of $1,711,000.
In addition, the Company borrowed $443,000 from its
institutional lender. Principal payments on capital leases and
long-term debt were $382,000 and $145,000 respectively.
In the three months ended September 30, 1995, certain of the
8.25% Debentures were converted into common stock of the
Company.
The conversion reduced debt and increased stockholders' equity
(deficiency) by approximately $28,000. In addition, ICC
exercised
its' preemptive rights with respect to such conversions and
purchased shares of common stock, which increased stockholders'
equity (deficiency) by $19,000.
The Company's working capital and expected operating results are
considered to be adequate to fund the Company's operating needs
at least through the ensuing twelve months. Significant capital
expenditures, however, will require additional financing through
capital leases, the institutional lender capital equipment line,
or other sources. While the Company has, in the past, had
no difficulty obtaining such financing, there can be no
assurance the Company will obtain the additional financing
necessary for the capital expenditures.
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.
27. Financial Dats Schedule
(b). Reports on Form 8-K
None.
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: November 14, 1995 By: /s/ Max A. Tesler
Max A. Tesler,
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1995 By: /s/ Frank Marchese
Frank Marchese
Chief Financial Officer and Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the Consolidated Balances Sheets at September 30, 1995
(Unaudited) and the Consolidated Statement of Operations for
Three Months Ended September 30, 1995 (Unaudited) and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 72,000
<SECURITIES> 0
<RECEIVABLES> 8,940,000
<ALLOWANCES> 301,000
<INVENTORY> 14,619,000
<CURRENT-ASSETS> 24,918,000
<PP&E> 15,658,000
<DEPRECIATION> 11,231,000
<TOTAL-ASSETS> 41,908,000
<CURRENT-LIABILITIES> 12,356,000
<BONDS> 0
<COMMON> 2,355,000
0
0
<OTHER-SE> 37,239,000
<TOTAL-LIABILITY-AND-EQUITY> 41,908,000
<SALES> 12,562,000
<TOTAL-REVENUES> 12,562,000
<CGS> 10,681,000
<TOTAL-COSTS> 12,496,000
<OTHER-EXPENSES> 972,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 986,000
<INCOME-PRETAX> (906,000)
<INCOME-TAX> (300,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (606,000)
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
