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: DECEMBER 31, 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 January
31, 1997 was 29,558,814.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1996 1996
ASSETS (UNAUDITED) (NOTE 1)
CURRENT ASSETS
<S> <C> <C>
Cash $ 932,000 $ 1,284,000
Accounts receivable - net of allowance for
doubtful accounts of $421,000 and $300,000 12,331,000 8,511,000
Income tax receivable 1,161,000
Inventories 14,834,000 9,720,000
Prepaid expenses and other current assets 904,000 747,000
Deferred tax asset 400,000 400,000
----------- -----------
Total current assets 29,401,000 21,823,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and
amortization of $13,403,000 and $12,303,000 17,121,000 16,802,000
OTHER ASSETS
Deferred financing costs 75,000 94,000
Deferred tax asset 270,000 750,000
Other assets 177,000 192,000
----------- ------------
$ 47,044,000 $ 39,661,000
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $ 497,000 587,000
Current portion of capital lease obligations 1,879,000 1,877,000
Accounts payable 15,310,000 9,441,000
Accrued expenses 1,234,000 1,990,000
------------ -----------
Total current liabilities 18,920,000 13,895,000
LONG TERM DEBT 18,829,000 16,284,000
LONG TERM CAPITAL LEASE OBLIGATIONS 8,515,000 9,468,000
DEFERRED GAIN ON SALE/LEASEBACK 399,000 425,000
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 - 29,558,814 and
29,508,814 shares in December and June,
respectively 2,365,000 2,361,000
Capital in excess of par value 37,332,000 37,286,000
Accumulated deficit ( 41,816,000) ( 42,558,000)
------------ ------------
Total stockholders' equity (deficiency) 381,000 ( 411,000)
------------ ------------
$ 47,044,000 39,661,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Gross sales $36,549,000 $29,167,000 $20,724,000 $15,772,000
Less: Sales discounts
and allowances 2,003,000 1,668,000 1,174,000 835,000
Net sales 34,546,000 27,499,000 19,550,000 14,937,000
COST AND EXPENSES
Cost of goods sold 26,310,000 22,289,000 14,989,000 12,188,000
Selling, general and
administrative 4,927,000 4,443,000 2,625,000 2,256,000
Special compensation 678,000 678,000
Research and
development 420,000 426,000 205,000 218,000
---------- --------- ---------- ---------
31,657,000 27,836,000 17,819,000 15,340,000
PROFIT (LOSS) FROM
OPERATIONS 2,889,000 (337,000) 1,731,000 (403,000)
OTHER INCOME (EXPENSE)
Interest expense (1,820,000) ( 1,911,000) (927,000) (933,000)
Other 153,000 40,000 97,000 34,000
------------ ------------ ----------- --------
(1,667,000) ( 1,871,000) ( 830,000) (899,000)
------------ ----------- ----------- --------
INCOME (LOSS) BEFORE
INCOME TAXES (BENEFIT) 1,222,000 ( 2,208,000) 901,000 (1,302,000)
INCOME TAXES (BENEFIT) 480,000 (731,000) 370,000 (431,000)
----------- ----------- --------- ----------
NET INCOME (LOSS) $742,000 ($1,477,000) $531,000 ($871,000)
=========== =========== ========= ==========
INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT
SHARE $.02 ($.05) $.02 ($.03)
========= ========== ======== =========
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 30,711,000 29,381,000 30,711,000 29,439,000
=========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
December 31,
1996 1995
---- -----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 742,000 ( $1,477,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization of
property, plant and equipment 1,100,000 805,000
Amortization of bond discount and
deferred financing costs 69,000 57,000
Amortization of deferred gain on
sale/leaseback ( 26,000) ( 26,000)
Deferred tax 480,000 ( 150,000)
Non-cash special compensation 578,000
Changes in current assets and liabilities
(Increase) in accounts receivable ( 3,820,000) ( 2,262,000)
(Increase)/decrease in income taxes
recoverable 1,161,000 (581,000)
(Increase)/decrease in inventories ( 5,114,000) 2,756,000
(Increase)/decrease in other current assets ( 157,000) 69,000
(Increase)/decrease in accounts payable,
accrued expenses and income taxes payable 5,113,000 ( 644,000)
------------- -----------
Net cash (used in) operating actvities ( 452,000) ( 875,000)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in other assets 15,000 ( 6,000)
(Increase) in property, plant and equipment ( 1,419,000) ( 992,000)
------------ -----------
Net cash (used in) investing
activities ( 1,404,000) ( 998,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line of credit 2,996,000 1,803,000
Principal payments of capital lease
obligations ( 951,000) ( 785,000)
Principal repayments of long-term debt ( 591,000) ( 291,000)
Refinancing of capital leases - 968,000
Issuance of common stock 50,000 19,000
------------ -----------
Net cash provided by financing
activities 1,504,000 1,714,000
------------ ----------
Net (decrease) in cash ( 352,000) ( 159,000)
CASH, beginning of period 1,284,000 655,000
------------ -----------
CASH, end of period $ 932,000 $ 496,000
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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 December 31, 1995 financial
statements have been reclassified to conform to the December 31,
1996 presentation. There was no effect on net income due to the
reclassification.
The results of operations for the six and three months ended
December 31, 1996 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.
Two of the legal matters outstanding as of June 30, 1996 have been
settled by the Company. The settlement amounts were not material
to the financial position and results of operations of the
Company.
Note 3: INVENTORIES:
December 31, June 30,
Inventories consist of the 1996 1996
following:
Raw materials $ 6,108,000 $3,849,000
Work in process 944,000 648,000
Finished goods 7,782,000 5,223,000
----------- -----------
$14,834,000 $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 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.
In December 1996, undeclared dividends on preferred stock totaling
$100,000 for the six-months and $50,000 for the three- months then
ended were deducted from net income to determine earnings per
share for common stockholders.
No effect has been given to shares issuable for common stock
equivalents for the six and three months ended December 31, 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 six months ended December 31, 1996 and
1995:
1996 1995
----- -----
Inventory purchases from ICC $ 668,000 $ 315,000
Interest expense 232,000 223,000
Accounts payable to ICC 885,000 144,000
Equipment lease obligations due ICC 3,967,000 5,112,000
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 six months ended December 31, 1996 were $36,549,000 as
compared to $29,167,000 in the comparable period in the prior fiscal year. The
increase in sales of $7,382,000 or 25% is a result of new customers 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 57% of sales
for the six months ended December 31, 1996. These four customers are Revco D.S.
("Revco"), Walgreen Company ("Walgreen"),Price-Costco ("Price-Costco") and
Leiner Health Products ("Leiner"). Sales for these four customers were
$20,988,000 or 57% of sales as compared to $18,889,000 or 65% of sales 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 stockholder 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 December 31, 1996 were $20,724,000 as compared
to $15,772,000 in the comparable period in the prior fiscal year. The increase
of $4,952,000 or 31% is mainly a result of the items discussed above.
Cost of sales as a percentage of net sales was 76% for the six months ended
December 31, 1996 as compared to 81% in the comparable period in the prior
fiscal year. Cost of sales as a percentage of net sales was 77% for the three
months ended December 31, 1996 as compared to 82% in the comparable period 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 $4,927,000 or 14% of net sales
for the six months ended December 31, 1996 as compared to $4,443,000 or 16% of
net sales for the comparable period in the prior fiscal year. The increase of
$484,000 is mainly a result of increased sales and distribution costs due to the
increased sales volume. Selling, general and administrative expenses were
$2,625,000 or 13% of net sales for the three months ended December 31, 1996 as
compared to $2,256,000 or 15% of net sales in the comparable period in the prior
fiscal year. The increase of $369,000 is due mainly to the reasons stated above.
The six and three months ended December 31, 1995 included an accrual for special
compensation expense of $678,000.
Research and development costs were $420,000 for the six months ended December
31, 1996 as compared to $426,000 in the comparable period in the prior fiscal
year. Research and development costs were $205,000 for the three months ended
December 31, 1996 as compared to $218,000 in the comparable period in the prior
fiscal year.
Interest and other expenses were $1,667,000 for the six months ended December
31, 1996 as compared to $1,871,000 in the comparable period in the prior fiscal
year. Interest and other expenses were $830,000 for the three months ended
December 31, 1996 as compared to $899,000 in the comparable period in the prior
fiscal year. The reduction in interest expense is a result of reductions in
capital lease obligations and other long-term debt.
The Company recorded a provision for income taxes of $480,000 and $370,000 in
the six and three months ended December 31, 1996 as compared to a tax benefit of
$731,000 and $431,000 in the comparable periods in the prior fiscal year.
Net income for the six and three months ended December 31, 1996 was $742,000 and
$531,000, respectively, or $.02 per share as compared to a loss of $1,477,000
and $871,000, respectively, or $.05 and $.03 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 and return the Company to profitability for the
fiscal year ending June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $10,481,000 as compared
to $7,928,000 at June 30, 1996. The increase of $2,553,000 is due to the net
income for the six months ended December 31, 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 $3,820,000 due to the increased sales. In addition,
inventories increased $5,114,000 to support the sales growth, including expected
increases in sales in the third 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 $5,113,000.
Capital expenditures of $1,419,000 for the six months ended December 31, 1996
were related to the continued efforts to upgrade the manufacturing equipment and
plant facilities. Capital expenditures for the fiscal year ending June 30, 1997
are currently estimated to be approximately $2,500,000.
The Company had a $15,000,000 asset-based line of credit with an institutional
lender. At December 31, 1996, the Company had $660,000 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 %). In January
1997, the Company negotiated a reduction in interest rate with this lender from
1 3/4 % above the prime lending rate to 1 1/4 %, subject to certain conditions.
In addition, the line of credit was increased to $17,500,000.
The Company has outstanding 2,500,000 shares of series A cumulative preferred
stock sold to ICC. Dividends from April 8, 1996 through December 31, 1996
(approximately $150,000) 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 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.
On December 30, 1996, the Company settled the Gary Sherman
Investments, Inc. lawsuit. The settlement included (1) $50,000
in cash, (2) 50,000 shares of the Company's common stock and
(3) an option to purchase 100,000 shares of the Company's
common stock exercisable until December 30, 2000.
In January 1997, the Company settled the Puritan-Quartz
lawsuit for an undisclosed sum of money.
The above two lawsuit settlements were not material to the
financial position or results of operations of the Company.
Item 2: CHANGES IN SECURITIES
50,000 shares of the Common Stock of the Company were issued
to FIFO, Inc. on December 30, 1996 as part of a settlement of
a pending litigation with Gary Sherman Investments, Inc. (see
Item 1 above.) As part of such settlement, the Company also
issued an option to FIFO, Inc. to purchase 100,000 shares of
the Company's Common Stock at a price of $1.00 per share,
exercisable until December 30, 2000. The issuance of such
shares was, and the issuance of the shares pursuant to
exercise of such options is conditioned upon such issuance
being, 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
At the Company's 1996 Annual Stockholders Meeting held on
November 6,1996, stockholders approved (i)the election of Ray W.
Cheesman, Paul Falick, Charles E. LaRosa, Frank Marchese, John L.
Oram and John Scagnelli to the Company's Board of Directors (after
the stockholders meeting, the Board of Directors unanimously voted
to reduce the size of the Board to three directors and Frank
Marchese, Paul Falick and John Scagnelli resigned their positions
as directors after the Board of Directors meeting) and (ii) the
ratification of the re-election by the Company of BDO Seidman,
LLP, independent certified public accountants, to audit the
financial statements of the Company for the year ending June
30,1997.
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.
27 - Financial Data Schedule
(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: February 10, 1997 By: /S/ CHARLES E. LAROSA
--------------------------
Charles E. LaRosa
Chief Executive Officer and President
(Principal Executive Officer)
Date: February 10, 1997 By: /S/ FRANK MARCHESE
--------------------------
Frank Marchese
Chief Financial Officer and Treasurer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 932,000
<SECURITIES> 0
<RECEIVABLES> 12,331,000
<ALLOWANCES> 421,000
<INVENTORY> 14,834,000
<CURRENT-ASSETS> 29,401,000
<PP&E> 17,121,000
<DEPRECIATION> 13,403,000
<TOTAL-ASSETS> 47,044,000
<CURRENT-LIABILITIES> 18,920,000
<BONDS> 0
0
2,500,000
<COMMON> 2,365,000
<OTHER-SE> 37,332,000
<TOTAL-LIABILITY-AND-EQUITY> 47,044,000
<SALES> 34,546,000
<TOTAL-REVENUES> 34,546,000
<CGS> 26,310,000
<TOTAL-COSTS> 31,657,000
<OTHER-EXPENSES> 1,667,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,820,000
<INCOME-PRETAX> 1,222,000
<INCOME-TAX> 480,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 742,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
