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, 1998
--------------
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) (732) 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, 1998 was 30,228,320.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1998 1997
ASSETS (Unaudited) (Note 1)
---------------------- --------------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 365,000 $2,087,000
Accounts receivable - net of allowance for doubtful
accounts of $133,000 and $301,000 14,039,000 8,917,000
Inventories 18,718,000 17,708,000
Prepaid expenses and other current assets 999,000 927,000
Deferred tax asset 300,000 300,000
---------------------- --------------------
Total current assets 34,421,000 29,939,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization of
$16,432,000 and $14,574,000 20,091,000 18,075,000
OTHER ASSETS
Deferred financing costs 128,000 79,000
Deferred tax asset 490,000 490,000
Other assets 96,000 151,000
---------------------- --------------------
$ 55,226,000 $48,734,000
====================== ====================
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 472,000 $472,000
Current portion of capital lease obligations 2,847,000 2,104,000
Accounts payable 16,976,000 14,440,000
Accrued expenses 545,000 1,509,000
Income taxes payable 210,000 25,000
----------------------- --------------------
Total current liabilities 21,050,000 18,550,000
LONG TERM DEBT 22,570,000 19,990,000
LONG TERM CAPITAL LEASE OBLIGATIONS 8,276,000 8,744,000
DEFERRED GAIN ON SALE/LEASEBACK 334,000 373,000
STOCKHOLDERS' EQUITY
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 - 30,228,320 and
29,880,350 shares in 1998 & 1997, respectively 2,415,000 2,391,000
Capital in excess of par value 37,463,000 37,412,000
Accumulated deficit (39,382,000) (41,226,000)
---------------------- ---------------------
Total stockholders' equity 2,996,000 1,077,000
---------------------- ---------------------
$ 55,226,000 $48,734,000
====================== =====================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Three Months
ENDED MARCH 31 ENDED MARCH 31
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Gross sales $63,778,000 $58,561,000 $22,084,000 $22,012,000
Less: Sales discounts
and allowances 2,602,000 3,227,000 829,000 1,224,000
--------- --------- ------- ---------
Net sales 61,176,000 55,334,000 21,255,000 20,788,000
COST AND EXPENSES
Cost of goods sold 46,006,000 42,025,000 16,025,000 15,715,000
Selling, general and
administrative 9,010,000 7,822,000 3,158,000 2,895,000
Research and development 822,000 757,000 309,000 337,000
------- ------- ------- -------
55,838,000 50,604,000 19,492,000 18,947,000
INCOME FROM OPERATIONS 5,338,000 4,730,000 1,763,000 1,841,000
OTHER INCOME (EXPENSE)
Interest expense (3,154,000) (2,818,000) (1,081,000) (998,000)
Other 121,000 54,000 100,000 (99,000)
------- ------ ------- -------
(3,033,000) (2,764,000) (981,000) (1,097,000)
---------- ---------- -------- ----------
INCOME BEFORE
INCOME TAXES 2,305,000 1,966,000 782,000 744,000
INCOME TAX PROVISION 461,000 770,000 94,000 290,000
------- ------- ------ -------
NET INCOME $1,844,000 $1,196,000 $688,000 $454,000
Preferred stock dividend
requirement 150,000 150,000 50,000 50,000
------- ------- ------ ------
NET INCOME APPLICABLE
TO COMMON SHAREHOLDERS $1,694,000 $1,046,000 $638,000 404,000
========== ========== ======== =======
BASIC EARNINGS PER SHARE $.06 $.03 $.02 $.01
==== ==== ==== ====
WEIGHTED AVERAGE NUMBER OF
COMMONS SHARES OUTSTANDING 30,156,300 29,525,000 30,228,000 29,559,000
========== ========== ========== ==========
See accompanying notes to consolidated inancial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $1,844,000 $1,196,000
Adjustments to reconcile net income to
net cash provided by (used for) operating activities:
Depreciation and amortization of property, plant
and equipment 1,858,000 1,673,000
Amortization of bond discount and deferred
financing costs 157,000 116,000
Amortization of deferred gain on sale/leaseback (39,000) (40,000)
Deferred income taxes 573,000
Changes in current assets and liabilities
(Increase) in accounts receivable (5,122,000) (3,864,000)
Decrease in income taxes recoverable 1,161,000
(Increase)in inventories (1,010,000) (6,380,000)
(Increase)/ decrease in other current assets (72,000) 68,000
Increase in accounts payable, accrued
expenses and income taxes payable 1,757,000 4,339,000
--------- ---------
Net cash (used for) operating activities (627,000) (1,158,000)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in other assets (29,000) 42,000
(Increase) in property, plant and equipment (1,869,000) (1,781,000)
---------- ----------
Net cash (used for) investing activities (1,898,000) (1,739,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line of credit 2,760,000 4,924,000
Principal payments of capital lease obligations (1,730,000) (1,465,000)
Principal repayments of long-term debt (302,000) (717,000)
Increase in deferred financing costs (35,000)
Issuance of common stock 75,000 100,000
------ -------
Net cash provided by financing activities 803,000 2,807,000
------- ---------
Net (decrease) in cash (1,722,000) (90,000)
CASH, beginning of period 2,087,000 1,284,000
--------- ---------
CASH, end of period $365,000 $1,194,000
======== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: INTERIM FINANCIAL REPORTING:
The consolidated balance sheet as of June 30, 1997 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.
The results of operations for the nine and three months ended
March 31, 1998 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.
TESLER CLAIMS:
On July 3, 1997, the Company received an arbitration demand dated
June 27, 1997, from the estate of Dr. Max Tesler, the former
President of the Company who died in December 1996. For alleged
breaches of employment and other agreements between the Company
and Dr. Tesler, the estate is seeking an award of $5,500,000 in
compensatory damages, $10,000,000 in punitive damages, and
$10,000,000 for special damages, and such number of shares of
common stock of the Company as would equal 10% of the total number
of shares outstanding. For claimed tortuous conduct, the estate is
seeking $20,000,000 for intentional infliction of emotional
distress and $10,000,000 for prima facie tort. The estate is also
seeking attorney's fees and a revised warrant agreement pursuant
to claimed antidilution provisions.
The claimed breaches of contract include failure to pay (a) salary
through December 1998, (b) change of control payments on the
assumption that there was a change of control, as defined, in a
1996 annual meeting and (c) death benefits.
With respect to the claim for continuing salary, the Company has
advised the estate of counterclaims which the Company has, which
exceed the amount of such payments. The Company maintains that as
a result of the termination of Dr. Tesler's employment in December
1995, the Company ceased to have any liability under the
change-of-control and death benefit provisions of the various
agreements with Dr. Tesler, as well as having other defenses to
such claims.
It is also the Company's position that certain provisions of the
warrants issued to Dr. Tesler were not as agreed and authorized.
The children and a former spouse of Dr. Tesler (the "Teslers")
have also raised certain claims arising out of the death of Dr.
Tesler. Those claims are contained in a complaint filed in
October 1997 in New Jersey Superior Court, Bergen County, NANCY
L. TESLER, ET AL. V. PHARMACEUTICAL FORMULATIONS, INC. The case
was removed to U.S. District Court, District of New Jersey and
the District Court has ruled that the Teslers' claims are subject
to arbitration.
The Teslers are seeking $1.46 million in death benefits allegedly
due under an employment agreement and $550,000 in benefits
allegedly due under a group life insurance policy. The Teslers are
also seeking punitive damages, interest and attorneys fees in
connection with the failure to pay benefits.
The Company believes the Teslers' claims are without merit and has
asserted affirmative claims against the Teslers which exceed, in
the aggregate, $600,000.
In December 1995, the Company accrued the continuing salary due to
Dr. Tesler for the period through December 1998. It has not made
provisions for any other amounts claimed, nor has it accrued any
amounts due from the estate. As noted above, the Company believes
that the claims in excess of the amount reserved are without merit
and that the Company has valid offsetting claims. The Company
intends to vigorously defend against the claims and to prosecute
its claims against the estate and the Teslers.
ROSENBLUM SUIT:
In or about October 1991, an action was instituted against the
Company by an individual seeking monies claimed to be due under an
alleged employment agreement. The Company has interposed
counterclaims against plaintiff for fraud and related claims and
seeks damages in the amount of $5,000,000. This case has been
dismissed, but the plaintiff is expected to file a motion for
reconsideration.
Note 3: INVENTORIES:
<TABLE>
<CAPTION>
March 31, June 30,
Inventories consist of the 1998 1997
------------------- --------
following:
<S> <C> <C>
Raw materials $ 5,119,000 $ 5,707,000
Work in process 678,000 841,000
Finished goods 12,921,000 11,160,000
----------- -----------
$18,718,000 $17,708,000
=========== ===========
</TABLE>
Note 4: DIVIDENDS:
No dividends were declared during any period presented on common
or preferred stock. Preferred stock dividends in arrears total
$400,000 at March 31, 1998.
Note 5: EARNINGS PER SHARE:
The Company has adopted the provisions of Statement of Financial
Accounting Standards number 128-Earnings per share. Earnings per
share-basic are based on the weighted average number of common
shares outstanding for the period. Earnings per share, assuming
full dilution, are not presented since the amounts are
substantially the same as basic 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 as of or for the nine months ended March 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Inventory purchases from ICC $ 832,000 $1,044,000
Interest expense 246,000 335,000
Accounts payable to ICC 675,000 808,000
Equipment lease obligations due ICC 2,448,000 3,621,000
Other receivables from ICC - 213,000
</TABLE>
<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, 1998 were $63,778,000 as
compared to $58,561,000 in the comparable period in the prior fiscal year. The
increase in sales of $5,217,000 or 9% is a result of new customers and increased
sales to existing customers. The private label (store brand)sector of the
business had sales of $54,079,000 for the nine months ended March 31, 1998 as
compared to $48,930,000 in the prior year period, an increase of $5,149,000 or
11%. The bulk and contract manufacturing sector of the business had sales of
$9,699,000 in the current period versus $9,631,000 in the prior period. Two
customers represented 37% of sales for the nine months ended March 31, 1998.
Sales to these two customers, Walgreens Company and Costco Wholesale, were
$23,571,000 or 37% of sales as compared to $17,714,000 or 30% of sales in the
comparable period in the prior fiscal year.
Gross sales for the three months ended March 31, 1998 were $22,084,000 as
compared to $22,012,000 in the comparable period in the prior fiscal year. The
slower sales growth in the third quarter was impacted by a cough / cold season
which was less severe than the prior year and the consolidation in the retail
drug chains which disrupted order patterns. In addition, an industry wide
voluntary recall of laxative products containing the ingredient, phenolphthalein
contributed to the slower sales growth.
Cost of sales as a percentage of net sales was 75.2% for the nine months ended
March 31, 1998 as compared to 75.9% in the comparable period in the prior fiscal
year. Cost of sales as a percentage of net sales was 75.4% for the three months
ended March 31, 1998 as compared to 75.6% for the comparable period in the prior
fiscal year. The increase in cost of sales as a percentage of net sales in the
three months ended March 31, 1998 is mainly due to less bulk and contract
manufacturing sales which generally have a lower cost of sales percentage than
the private label (store brand)sales.
Selling, general and administrative expenses were $9,010,000 or 14.7% of net
sales for the nine months ended March 31, 1998 as compared to $7,822,000 or
14.1% of net sales in the comparable period of the prior fiscal year. The
increase is due to increased marketing, selling and distribution costs to
support the higher sales volume.
Selling, general and administrative expenses were $3,158,000 or 14.9% of net
sales for the three months ended March 31, 1998 as compared to $2,895,000 or
13.9% of net sales in the comparable period of the prior fiscal year. The
increase is mainly due to the reasons stated above.
Research and development costs were $822,000 for the nine months ended March 31,
1998 as compared to $757,000 in the prior year period. Research and development
costs were $309,000 for the three months ended March 31, 1998 as compared to
$337,000 in the comparable period in the prior fiscal year. The increase in
research and development costs for the nine months ended March 31, 1998 reflects
the Company's continued commitment to research and development to develop new
products for future growth.
Interest and other expenses was $3,033,000 for the nine months ended March 31,
1998 as compared to $2,764,000 in the comparable period in the prior fiscal
year. The increase is due to additional debt necessary to fund growth in working
capital and new equipment to support increased sales.
Interest and other expense was $981,000 for the three months ended March 31,
1998 as compared to $1,097,000 in the prior year period. The decrease is due
primarily to a litigation settlement included in the prior year period for
approximately $200,000.
Income tax provision was $461,000 for the nine months ended march 31, 1998 as
compared to $770,000 in the prior year period. The reduction in income taxes is
a result of alternative minimum tax credits and other tax benefits utilized in
the current period which were not recognized in the prior year period.
Income tax provision was $94,000 for the three months ended March 31, 1998 as
compared to $290,000 in the prior year period. The reduction in income taxes is
mainly due to the reasons stated above.
The Company continues to take steps aimed at increasing profitability. These
steps include: (a) seeking new customers and products to increase sales volume,
(b) continuing efforts to reduce material costs and (c) other cost-saving
measures and actions aimed at improving 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
Accounts receivable increased $5,122,000 due to the higher sales especially in
the month of March 1998. Inventory increased $1,010,000 to support the increased
sales volume. Accounts payable increased $2,536,000 due to the increased
accounts receivable and inventory balances.
Property and equipment increased by $3,874,000 in the nine months ended March
31, 1998 reflecting the Company's continued commitment to upgrade it's
manufacturing facility to increase capacity and reduce costs. The Company
expects to spend in excess of $4,000,000 in capital expenditures in the fiscal
year ending June 30, 1998.
The increase in borrowing under the line of credit of $2,762,000 for the nine
months ended March 31, 1998 was to support the increased accounts receivable and
inventory balances.
The Company has a $17,500,000 asset-based line of credit with an institutional
lender. The line of credit expires February 4, 1999, and bears interest of 1
1/4% above the prime lending rate (currently 8.5%). The Company intends to
refinance this loan as it has done in the past by extending the debt agreement
or initiating a new loan agreement with another financial institution and the
Company does not expect any problems in obtaining such extension or replacement
financing.
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, 1998 (totaling $400,000) 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 $200,000 per year 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 $4,000,000 of capital equipment in the fiscal year ending June 30,
1998 to increase manufacturing capacity and reduce cost. The Company expects
these capital expenditures to be financed through capital lease obligations.
While the Company has in the past had no difficulty in obtaining lease financing
or meeting working capital needs, there can be no assurance the Company will
obtain the capital lease finance or meet working capital needs in the future.
Item 3. Quantitative Disclosures About Market Risk.
The Company does not have any material market risk sensitive instruments.
<PAGE>
PART II. OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
See Note 2 to Notes to Consolidated Financial Statements.
Item 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3: DEFAULTS UPON SENIOR SECURITIES
None.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY 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.
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: May 12, 1998 By: /S/ CHARLES E. LAROSA
--------------------------
Charles E. LaRosa
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 12, 1998 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, 1998 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
OF PHARMACEUTICAL FORMULATIONS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 365,000
<SECURITIES> 0
<RECEIVABLES> 14,039,000
<ALLOWANCES> 0
<INVENTORY> 18,718,000
<CURRENT-ASSETS> 34,421,000
<PP&E> 20,091,000
<DEPRECIATION> 16,432,000
<TOTAL-ASSETS> 55,226,000
<CURRENT-LIABILITIES> 21,050,000
<BONDS> 0
0
2,500,000
<COMMON> 2,415,000
<OTHER-SE> 37,463,000
<TOTAL-LIABILITY-AND-EQUITY> 55,226,000
<SALES> 63,778,000
<TOTAL-REVENUES> 63,778,000
<CGS> 46,000,000
<TOTAL-COSTS> 55,838,000
<OTHER-EXPENSES> 3,033,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,154,000
<INCOME-PRETAX> 2,305,000
<INCOME-TAX> 461,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,844,000
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
