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, 1996
------------------
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, 1996 was 29,508,814.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
ASSETS (Unaudited) (Note 1)
------ ------------ ---------
CURRENT ASSETS
<S> <C> <C>
Cash $ 346,000 $ 1,284,000
Accounts receivable - net of allowance for doubtful accounts of $360,000
and $300,000 10,341,000 8,511,000
Income tax receivable 1,161,000 1,161,000
Inventories 13,486,000 9,720,000
Prepaid expenses and other current assets 752,000 747,000
Deferred tax asset 400,000 400,000
------------- ------------
Total current assets 26,486,000 21,823,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization of $12,840,000 and
$12,303,000 16,935,000 16,802,000
OTHER ASSETS
Deferred financing costs 70,000 94,000
Deferred tax asset 640,000 750,000
Other assets 207,000 192,000
$ 44,338,000 $ 39,661,000
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
-----------------------------
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 542,000 $ 587,000
Current portion of capital lease obligations 1,926,000 1,877,000
Accounts payable 11,849,000 9,441,000
Accrued expenses 2,151,000 1,990,000
Total current liabilities 16,468,000 13,895,000
LONG TERM DEBT 18,708,000 16,284,000
LONG TERM CAPITAL LEASE OBLIGATIONS 8,950,000 9,468,000
DEFERRED GAIN ON SALE/LEASEBACK 412,000 425,000
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock - par value $1.00 per share;
10,000,000 shares authorized; 2,500,000 shares
issued and outstanding 2,500,000 2,500,000
Common stock - par value $.08 per share
Authorized - 40,000,000 shares
Issued and outstanding - 29,508,814 shares 2,361,000 2,361,000
Capital in excess of par value 37,286,000 37,286,000
Accumulated deficit ( 42,347,000) ( 42,558,000)
Total stockholders' equity (deficiency) ( 200,000) ( 411,000)
$ 44,338,000 $ 39,661,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
1996 1995
(Unaudited) (Unaudited)
----------- -----------
REVENUES
Gross sales 15,825,000 13,395,000
Less: Sales discounts
and allowances 829,000 833,000
---------- ----------
Net sales 14,996,000 12,562,000
COST AND EXPENSES
Cost of goods sold 11,321,000 10,101,000
Selling, general and
administrative 2,302,000 2,187,000
Research and development
215,000 208,000
---------- ----------
13,838,000 12,496,000
PROFIT FROM OPERATIONS 1,158,000 66,000
OTHER INCOME (EXPENSE)
Interest expense ( 893,000) ( 978,000)
Other 56,000 6,000
------------ -----------
( 837,000) ( 972,000)
INCOME (LOSS) BEFORE INCOME TAXES
321,000 ( 906,000)
INCOME TAXES (BENEFIT) 110,000 ( 300,000)
-------- -----------
NET INCOME (LOSS) $211,000 ( $606,000)
======== ===========
INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
$.01 ( $.02)
====== ========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 30,711,000 29,323,000
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995
(Unaudited) (Unaudited)
------------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 211,000 ($ 606,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation and amortization of property, plant and
equipment 537,000 399,000
Amortization of bond discount and deferred financing costs
49,000 81,000
Amortization of deferred gain on sale/leaseback ( 13,000) ( 13,000)
Deferred tax 110,000 --
Changes in current assets and liabilities
(Increase) in accounts receivable ( 1,830,000) ( 546,000)
(Increase)/decrease in inventories ( 3,766,000) 296,000
(Increase)in other current assets ( 5,000) ( 491,000)
Increase/(decrease) in accounts payable and accrued
expenses 2,569,000 ( 324,000)
------------ ------------
Net cash (used in) operating activities ( 2,138,000) ( 1,204,000)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in other assets ( 15,000) -
(Increase) in property, plant and equipment ( 670,000) -
------------- ------------
Net cash (used in) investing activities
( 685,000) -
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line
of credit 2,500,000 686,000
Principal payments of capital lease obligations
( 469,000) ( 382,000)
Principal repayments of long-term debt ( 146,000) ( 145,000)
Increase in long-term debt - 443,000
Issuance of common stock - 19,000
------------ -----------
Net cash provided by financing
activities 1,885,000 621,000
Net (decrease) in cash ( 938,000) ( 583,000)
CASH, beginning of period 1,284,000 655,000
------------ -----------
CASH, end of period $ 346,000 $ 72,000
============= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Interim Financial Reporting:
The consolidated balance sheet as of June 30, 1996 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, 1995 financial
statements have been reclassified to conform to the September 30,
1996 presentation. There was no effect on net income due to the
reclassification.
The results of operations for the three months ended September 30,
1996 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, Marvin Rosenblum, 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 unrelated 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 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 on October 16, 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.
Discovery is ongoing and the Company intends to move for summary
judgment at the close of discovery.
In March 1996, the Company was named as a defendant in a lawsuit
filed in the United States District Court for the District of New
Jersey by Gary Sherman Investments, Inc., formerly known as
Polystar Corporation ("GSI"). GSI filed this action against the
Company based on a $400,000 promissory note allegedly executed in
GSI's favor in or about March 1991, seeking to recover the full
face amount of the note plus accrued interest. The Company is
contesting the allegations of this complaint, and has filed a
counterclaim alleging, inter alia, breaches of fiduciary duty and
fraud by GSI. The Company intends vigorously to defend against
GSI's claims and to pursue its counterclaims against GSI.
<PAGE>
Note 3: Inventories:
September 30, June 30,
Inventories consist of the 1996 1996
following: ------------- -----------
Raw materials $ 5,287,000 $ 3,849,000
Work in process 707,000 648,000
Finished goods 7,492,000 5,223,000
----------- -----------
$13,486,000 $ 9,720,000
=========== ===========
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.
In 1996, undeclared dividends on preferred stock totaling $50,000
were deducted from net income to determine net income for common
stockholders.
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, 1996
and 1995:
1996 1995
---- ----
Inventory purchases from ICC $ 275,000 $ 135,000
Interest expense 122,000 90,000
Accounts payable to ICC 329,000 135,000
Equipment lease obligations due ICC 4,304,000 4,924,000
Other receivables from ICC 213,000 --
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Sales for the three months ended September 30, 1996 were $15,825,000 as compared
to $13,395,000 in the comparable period in the prior fiscal year. The increase
of $2,430,000 or 18% is a result of new customers and increased sales to
existing customers, especially in the private label (store brand) sector of the
business. There was a slight increase in the contract manufacturing sector while
the bulk sector was down as compared to the comparable period in the prior
fiscal year. Four customers presently represent approximately 52% of sales for
the three months ended September 30, 1996. These four customers are Revco D.S.
("Revco"), Walgreen Company ("Walgreen"), Price-Costco, Inc. ("Price-Costco")
and Leiner Health Products ("Leiner"). Sales to these four customers were
$8,265,000 or 52% of sales as, compared to $7,084,000 or 53% of sales in the
comparable period in the prior fiscal year.
Cost of sales as a percentage of net sales was 75% as compared to 80% in the
comparable period in the prior year. The reduction in cost of sales as a
percentage of net sales is a result of the increased sales, manufacturing
efficiencies, lower raw material costs and overall cost containment.
Selling, general and administrative costs were $2,302,000 or 15% of net sales
for the three months ended September 30, 1996 as compared to $2,187,000 or 17%
of net sales in the comparable period in the prior fiscal year. The increase of
$115,000 is a result of increased personnel in both sales and marketing to
increase the Company's customer and product base and increased freight costs due
to the increased sales.
Interest and other expenses were $837,000 for the three months ended September
30, 1996 as compared to $972,000 in the comparable period in the prior fiscal
year. The decrease of $135,000 is a result of lower average borrowing amounts in
the three months ended September 30, 1996 as compared to the comparable period
in the prior fiscal year.
The Company recorded a provision for income taxes of $110,000 as compared to a
tax benefit of $300,000 in the comparable period in the prior fiscal year.
Net income for the three months ended September 30, 1996 was $211,000 or $.01
per share as compared to a loss of $606,000 or $.02 per share in the comparable
period in the prior fiscal year.
The Company continues to take steps aimed at increasing sales and reducing costs
to reverse the losses incurred in fiscal year ended June 30, 1996. These steps
include: (a) working to add customers and products to the current business to
increase sales volume, (b) efforts to continue to reduce material costs and (c)
other cost-saving measures as well as other actions to improve profitability.
There can be no assurance that such actions will be successful in enabling the
Company to continue to realize profitable results and return the Company to
profitability for the fiscal year ending June 30, 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of $10,018,000 as
compared to $7,928,000 at June 30, 1996. The increase of $2,090,000 is due to
the net income for the three months ended September 30, 1996 and an increase in
borrowing from the Company's institutional lender to finance the growth in
accounts receivable and inventory. The increase in working capital includes
increases in accounts receivable of $1,830,000 due to the increased sales,
especially in the later part of the quarter. In addition, inventories increased
$3,766,000 to support the sales growth, including expected increases in sales in
the second quarter and the balance of the fiscal year. The increases in accounts
receivable and inventory were offset somewhat by an increase in accounts payable
and accrued expenses of $2,569,000.
Capital expenditures of $670,000 for the three months ended September 30, 1996
were related to the continued efforts to upgrade the manufacturing equipment and
plant facilities. Capital expenditures for the fiscal year ended June 30, 1997
are currently estimated to be approximately $2,500,000.
The Company has a $15,000,000 asset-based line of credit with an institutional
lender. At September 30, 1996, the Company had $1,056,000 of unused availability
under this agreement. The line of credit expires February 4, 1999 and bears
interest at 1 3/4% above the prime lending rate (currently 8 1/4%).
The Company has outstanding 2,500,000 shares of series A cumulative preferred
stock sold to ICC Industries Inc. ("ICC"). Dividends from April 8, 1996 through
September 30, 1996 (approximately $100,000) have accumulated and are in arrears.
There is no intention to pay dividends currently on the preferred stock.
Dividends will continue to accrue at the rate of $50,000 per quarter.
The Company continues to take steps to increase sales and reduce costs to
improve operating results and meet working capital needs. As stated above, the
Company intends to add an estimated $2,500,000 of capital equipment in the
fiscal year ending June 30, 1997 to increase capacity and reduce costs. The
Company intends for these capital expenditures to be financed through capital
leases with either ICC or other parties. While the Company has in the past had
no difficulty in obtaining capital lease financing or meeting working capital
needs, there can be no assurance the Company will obtain the capital lease
financing or meet working capital needs in the future.
<PAGE>
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
See Note 2 to 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: November 12, 1996 By: /s/ Charles E. LaRosa
Charles E. LaRosa
Chief Executive Officer
and President
(Principal Executive Officer)
Date: November 12, 1996 By: /s/ Frank Marchese
Frank Marchese
Chief Financial Officer
and Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 346,000
<SECURITIES> 0
<RECEIVABLES> 11,502,000
<ALLOWANCES> 360,000
<INVENTORY> 13,486,000
<CURRENT-ASSETS> 26,486,000
<PP&E> 16,935,000
<DEPRECIATION> 12,840,000
<TOTAL-ASSETS> 44,338,000
<CURRENT-LIABILITIES> 16,468,000
<BONDS> 0
9
2,500,000
<COMMON> 2,361,000
<OTHER-SE> 37,286,000
<TOTAL-LIABILITY-AND-EQUITY> 44,338,000
<SALES> 14,996,000
<TOTAL-REVENUES> 14,996,000
<CGS> 11,321,000
<TOTAL-COSTS> 13,838,000
<OTHER-EXPENSES> 837,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 893,000
<INCOME-PRETAX> 321,000
<INCOME-TAX> 110,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 211,000
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
