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, 1997
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 April
30, 1997 was 29,658,814.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1997 1996
ASSETS (Unaudited) (Note 1)
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,194,000 $ 1,284,000
Accounts receivable - net of allowance for doubtful
accounts of $470,000 and $300,000 12,375,000 8,511,000
Income tax receivable 1,161,000
Inventories 16,100,000 9,720,000
Prepaid expenses and other current assets 679,000 747,000
Deferred tax asset 380,000 400,000
------------- --------------
Total current assets 30,728,000 21,823,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization of
$13,976,000 and $12,303,000 17,923,000 16,802,000
OTHER ASSETS
Deferred financing costs 89,000 94,000
Deferred tax asset 197,000 750,000
Other assets 150,000 192,000
------------ ------------
$ 49,087,000 $ 39,661,000
============= ==============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $ 472,000 $ 587,000
Current portion of capital lease obligations
(including $1,173,000 and $1,296,000 due to ICC in
1997 and 1996, respectively) 2,056,000 1,877,000
Accounts Payable 14,502,000 9,441,000
Accrued expenses 1,268,000 1,990,000
----------- -----------
Total current liabilities 18,298,000 13,895,000
LONG TERM DEBT 20,681,000 16,284,000
LONG TERM CAPITAL LEASE OBLIGATIONS (including $2,448,000
and $3,339,000 due to ICC in 1997 and 1996, respectively) 8,838,000 9,468,000
DEFERRED GAIN ON SALE/LEASEBACK 385,000 425,000
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 - 29,658,814 and 29,508,814
shares in 1997 and 1996, respectively 2,373,000 2,361,000
Capital in excess of par value 37,374,000 37,286,000
Accumulated deficit (41,362,000) (42,558,000)
------------- -------------
Total stockholders' equity (deficiency) 885,000 (411,000)
------------- -------------
$ 49,087,000 $ 39,661,000
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
March 31, March 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES
Gross sales $58,561,000 $43,218,000 $22,012,000 $14,051,000
Less: Sales discounts
and allowances 3,227,000 2,497,000 1,224,000 829,000
------------ ------------ ------------ ------------
Net sales 55,334,000 40,721,000 20,788,000 13,222,000
COST AND EXPENSES
Cost of goods sold 42,025,000 33,197,000 15,715,000 10,908,000
Selling, general and
administrative 7,822,000 6,529,000 2,895,000 2,086,000
Special compensation 678,000
Research and development 757,000 703,000 337,000 277,000
------------ ----------- ------------ -----------
50,604,000 41,107,000 18,947,000 13,271,000
INCOME (LOSS) FROM OPERATIONS 4,730,000 (386,000) 1,841,000 (49,000)
OTHER INCOME (EXPENSE)
Interest expense (2,818,000) (2,787,000) (998,000) (876,000)
Other 54,000 61,000 (99,000) 21,000
------------ ----------- ------------ ----------
(2,764,000) (2,726,000) (1,097,000) (855,000)
INCOME (LOSS) BEFORE
INCOME TAXES 1,966,000 (3,112,000) 744,000 (904,000)
INCOME TAX PROVISION (BENEFIT) 770,000 (1,038,000) 290,000 (307,000)
----------- ------------ ------------ -----------
NET INCOME (LOSS) $1,196,000 ($2,074,000) $454,000 ($597,000)
Preferred stock dividend in
arrears 150,000 50,000
----------- ------------ ------------ -----------
NET INCOME (LOSS) APPLICABLE
TO COMMON SHAREHOLDERS $1,046,000 ($2,074,000) $404,000 ($597,000)
============ ============= ============ ============
INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $0.03 ($0.07) $0.01 ($0.02)
============ ============= ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 30,464,000 29,400,000 30,497,000 29,439,000
============ ============= ============ ============
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $1,196,000 ($2,074,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation and amortization of property, plant
and equipment 1,673,000 1,220,000
Amortization of bond discount and deferred
financing costs 116,000 89,000
Amortization of deferred gain on sale/leaseback (40,000) (39,000)
Deferred income taxes 573,000 (150,000)
Non-cash special compensation 678,000
Changes in current assets and liabilities
(Increase) in accounts receivable (3,864,000) (854,000)
(Increase)/decrease in income taxes recoverable 1,161,000 (888,000)
(Increase)/decrease in inventories (6,380,000) 5,246,000
Decrease in other current assets 68,000 87,000
Increase /(decrease) in accounts payable, accrued
expenses and income taxes payable 4,339,000 (921,000)
-------------- -------------
Net cash provided by/(used for) operating activities (1,158,000) 2,394,000
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in other assets 42,000 37,000
(Increase) in property, plant and equipment (1,781,000) (1,501,000)
------------- --------------
Net cash (used for) investing activities (1,739,000) (1,464,000)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in borrowings under line of credit 4,924,000 (895,000)
Principal payments of capital lease obligations (1,465,000) (1,217,000)
Principal repayments of long-term debt (717,000) (454,000)
Refinancing of capital leases 968,000
Increase in deferred financing costs (35,000)
Issuance of common stock 100,000 19,000
------------- ----------------
Net cash provided by/(used for) financing activities 2,807,000 (1,579,000)
------------- ----------------
Net (decrease) in cash (90,000) (649,000)
CASH, beginning of period 1,284,000 655,000
------------- ---------------
CASH, end of period $1,194,000 $6,000
============== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
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 March 31, 1996 and June 30, 1996
financial statements have been reclassified to conform to the
March 31, 1997 presentation. There was no effect on net income due
to the reclassification.
The results of operations for the nine and three months ended
March 31, 1997 are not necessarily indicative of the results to be
expected for a full year.
Note 2: CONTINGENCIES:
Other than as 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.
Note 3: INVENTORIES:
March 31, June 30,
Inventories consist of the 1997 1996
following: --------- ---------
Raw materials $ 6,067,000 $ 3,849,000
Work in process 1,171,000 648,000
Finished goods 8,862,000 5,223,000
------------ ------------
$16,100,000 $ 9,720,000
============ ============
Note 4: DIVIDENDS:
No dividends were declared during any period presented on common
or preferred stock. Preferred stock dividends in arrears total
$200,000 at March 31, 1997.
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 and
preferred stock, computed using the treasury stock method with the
average stock prices for the 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 nine and three months ended March 31, 1996 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 nine months ended March 31, 1997 and
1996:
1997 1996
---- ----
Inventory purchases from ICC $ 1,044,000 $ 493,000
Interest expense 335,000 364,000
Accounts payable to ICC 808,000 178,000
Equipment lease obligations due ICC 3,621,000 4,812,000
Other receivables from ICC 213,000
<PAGE>
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Gross sales for the nine months ended March 31, 1997 were $58,561,000 as
compared to $43,218,000 in the comparable period in the prior fiscal year. The
increase in sales of $15,343,000 or 36% is a result of new customers obtained by
the Company and increased sales to existing customers. All three sectors of the
Company's business-private label (store brand), bulk and contract had an
increase in sales as compared to the prior period. Four customers represented
54% of sales for the nine months ended March 31, 1997. These four customers are
Revco D.S. ("Revco"), Walgreen Company ("Walgreen"), Price-Costco
("Price-Costco") and Leiner Health Products ("Leiner"). Sales to these four
customers were $31,904,000 or 54% of gross sales as compared to $23,782,000 or
55% in the comparable period in the prior fiscal year. One of the Company's
largest customers, Revco, has entered into a merger agreement with CVS
Corporation which is subject to stockholders and regulatory approval. It is too
early to determine the effects, if any, of this possible merger on the financial
position or results of operations of Pharmaceutical Formulations, Inc.
Sales for the three months ended March 31, 1997 were $22,012,000 as compared to
$14,051,000 in the comparable period in the prior fiscal year. The increase of
$7,961,000 or 57% is due mainly to the reasons stated above.
Cost of sales as a percentage of net sales was 76% for the three month and nine
month periods ended March 31, 1997 as compared to 82% in the comparable periods
in the prior fiscal 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 expenses were $7,822,000 or 14% of net sales
for the nine months ended March 31, 1997 as compared to $6,529,000 or 16% of net
sales for the comparable period in the prior fiscal year. The increase of
$1,293,000 is mainly a result of increased sales and distribution costs due to
the increased sales volume. Selling, general and administrative expenses were
$2,895,000 or 14% of net sales for the three months ended March 31, 1997 as
compared to $2,086,000 or 16% of net sales in the comparable period in the prior
fiscal year. The increase of $809,000 is due mainly to the reasons stated above.
The nine months ended March 31, 1996 included an accrual for special
compensation expense of $678,000.
Research and development costs were $757,000 for the nine months ended March 31,
1997 as compared to $703,000 in the comparable period in the prior fiscal year.
Research and development costs were $337,000 for the three months ended March
31, 1997 as compared to $277,000 in the comparable period in the prior fiscal
year.
Interest and other expenses were $2,764,000 for the nine months ended March 31,
1997 as compared to $2,726,000 in the comparable period in the prior fiscal
year. Interest and other expenses were $1,097,000 for the three months ended
March 31, 1997 as compared to $855,000 in the comparable period in the prior
fiscal year. The increase in interest expense is a result of increases in
capital lease obligations and other long-term debt.
The Company recorded a provision for income taxes of $770,000 and $290,000 in
the nine and three months ended March 31, 1997 as compared to a tax benefit of
$1,038,000 and $307,000 in the comparable periods in the prior fiscal year.
Net income for the nine and three months ended March 31, 1997 was $1,196,000 and
$454,000, respectively, or $.03 and $.01 per share as compared to a loss of
$2,074,000 and $597,000, respectively, or $.07 and $.02 per share, respectively,
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) adding new customers and products to increase sales volume, (b)
continuing efforts 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had working capital of $12,430,000 as compared to
$7,928,000 at June 30, 1996. The increase of $4,502,000 is due to the net income
for the nine months ended March 31, 1997 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 $3,864,000 due to the increased sales. In addition, inventories
increased $6,380,000 to support the sales growth in the third quarter and
anticipated increases in sales for the balance of the fiscal year. The increase
in inventory is necessary to support the customer service requirements of the
new customers obtained by the Company and the increased sales to current
customers. The increases in accounts receivable and inventory were offset
somewhat by an increase in accounts payable and accrued expenses of $4,339,000.
Capital expenditures for the nine months ended March 31, 1997 were related to
the continued efforts to upgrade the manufacturing equipment and plant
facilities.
The Company has a $17,500,000 asset-based line of credit with an institutional
lender. At March 31, 1997, the Company had $1,333,000 of unused availability
under this agreement. The line of credit expires February 4, 1999 and bears
interest at 1 1/4% above the prime lending rate (currently 8 1/2%).
The Company has outstanding 2,500,000 shares of series A cumulative redeemable
convertible preferred stock sold to ICC. Dividends from April 8, 1996 through
March 31, 1997 (approximately $200,000) have accumulated and are in arrears.
There is no obligation or intention to pay dividends currently on the preferred
stock. Dividends will continue to accrue at the rate of $50,000 per quarter
until declared and paid.
The Company continues to take steps to increase sales and reduce costs to
improve operating results and increase profitability. The Company intends to add
an estimated $3,000,000 of capital equipment in the fiscal year ending June 30,
1997 to increase manufacturing 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
In March 1997, 100,000 shares in common stock were issued to
Patricia Cohen pursuant to her exercise of a warrant dated March
27, 1992 at $.50 per share. This issuance of such shares was
exempt from registration as a transaction not involving a public
offering of securities.
Item 3: DEFAULTS UPON SENIOR SECURITIES
None.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS
None.
Item 5: OTHER INFORMATION
When used in the Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission, in the Company's
press releases and in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely
result," "are expected to,", "will continue," "is anticipated",
"estimate," "project," "expect," "believe," "hope," or similar
expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place
undue reliance on such forward-looking statements, which speak
only as of the date made.
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 14, 1997 By: /S/CHARLES E. LAROSA
--------------------------
Charles E. LaRosa
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 14, 1997 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 Balance Sheet at March 31, 1997 (Unaudited) and the Consolidated
Statement of Operations for the Three Months Ended March 31, 1997 (Unaudited)
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,194,000
<SECURITIES> 0
<RECEIVABLES> 12,375,000
<ALLOWANCES> 470,000
<INVENTORY> 16,100,000
<CURRENT-ASSETS> 30,728,000
<PP&E> 17,923,000
<DEPRECIATION> 13,976,000
<TOTAL-ASSETS> 49,087,000
<CURRENT-LIABILITIES> 18,298,000
<BONDS> 0
0
2,500,000
<COMMON> 2,373,000
<OTHER-SE> 37,374,000
<TOTAL-LIABILITY-AND-EQUITY> 49,087,000
<SALES> 58,561,000
<TOTAL-REVENUES> 58,561,000
<CGS> 42,025,000
<TOTAL-COSTS> 50,604,000
<OTHER-EXPENSES> 2,764,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,818,000
<INCOME-PRETAX> 1,966,000
<INCOME-TAX> 770,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,046,000
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
