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, 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 October
31, 1998 was 30,253,320.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1998 1998
ASSETS (Unaudited) (Note 1)
CURRENT ASSETS --------------- --------------
<S> <C> <C>
Cash $ 26,000 $ 608,000
Accounts receivable - net of allowance for doubtful
accounts of $313,000 and $238,000 17,301,000 14,861,000
Inventories 22,148,000 20,096,000
Prepaid expenses and other current assets 784,000 793,000
Deferred tax asset 300,000 300,000
----------- -----------
Total current assets 40,559,000 36,658,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization of
$17,700,000 and $17,083,000 21,672,000 21,441,000
OTHER ASSETS
Deferred tax asset 1,231,000 1,231,000
Other assets 720,000 534,000
------------ ------------
$ 64,182,000 $ 59,864,000
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 482,000 $ 482,000
Current portion of capital lease obligations 2,789,000 2,898,000
Accounts payable 17,797,000 20,951,000
Income taxes payable 187,000 227,000
Accrued expenses 2,049,000 1,394,000
----------- -------------
Total current liabilities 23,304,000 25,952,000
LONG TERM DEBT 29,260,000 22,983,000
LONG TERM CAPITAL LEASE OBLIGATIONS 8,340,000 7,553,000
DEFERRED GAIN ON SALE/LEASEBACK 308,000 321,000
STOCKHOLDERS' EQUITY
Preferred stock - par value $1.00 per share;
10,000,000 shares authorized; 2,500,000 shares 2,500,000 2,500,000
issued and outstanding
Common stock - par value $.08 per share
Authorized - 40,000,000 shares
Issued and outstanding - 30,253,320 shares 2,421,000 2,421,000
Capital in excess of par value 37,493,000 37,493,000
Accumulated deficit (39,444,000) (39,359,000)
------------- -------------
Total stockholders' equity 2,970,000 3,055,000
------------- -------------
$ 64,182,000 $ 59,864,000
============= =============
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
------------ -----------
REVENUES
<S> <C> <C>
Gross sales $19,440,000 $19,045,000
Less: Sales discounts
and allowances 854,000 891,000
------------- -------------
Net sales 18,586,000 18,154,000
COST AND EXPENSES
Cost of goods sold 14,068,000 13,593,000
Selling, general and
administrative 3,283,000 2,747,000
Research and
development 234,000 281,000
------------- -------------
17,585,000 16,621,000
INCOME FROM OPERATIONS 1,001,000 1,533,000
OTHER INCOME (EXPENSE)
Interest expense ( 1,129,000) (1,022,000)
Other 3,000 ( 91,000)
------------- -------------
( 1,126,000) (1,113,000)
INCOME/(LOSS)BEFORE
INCOME TAXES ( 125,000) 420,000
INCOME TAXES/(BENEFIT) ( 40,000) 142,000
------------- -------------
NET INCOME /(LOSS) ( 85,000) 278,000
------------- ------------
Preferred stock dividend
requirement 50,000 50,000
------------- -------------
Net income/(loss)
attributable to common ($ 135,000) $228,000
shareholders ============= =============
EARNINGS/(LOSS) PER
SHARE-BASIC AND
DILUTED ( $.01) $.01
============= =============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 30,253,320 30,012,000
============= =============
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income/(loss) ($ 85,000) $ 278,000
Adjustments to reconcile net income/(loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization of
property, plant and equipment 687,000 612,000
Amortization of bond discount and
deferred financing costs 50,000 53,000
Amortization of deferred gain on
sale/leaseback ( 13,000) ( 13,000)
Changes in current assets and liabilities:
(Increase)in accounts receivable ( 2,440,000) (2,795,000)
(Increase)in inventories ( 2,052,000) ( 881,000)
(Increase)/Decrease in other current assets 9,000 ( 121,000)
Increase/(Decrease)in accounts payable and
accrued expenses and income taxes payable ( 2,539,000) 3,052,000
---------------- -------------
Net cash provided by (used in) operating
activities ( 6,383,000) 185,000
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in other assets ( 186,000) ( 12,000)
(Increase) in property, plant and equipment ( 478,000) ( 875,000)
---------------- ---------------
Net cash (used in) investing
activities ( 664,000) ( 887,000)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line
of credit 6,227,000 1,640,000
Principal payments of capital lease
obligations ( 687,000) ( 555,000)
Principal repayments of long-term debt ( 101,000)
Issuance of common stock 75,000
Lease refinancing 925,000
Net cash provided by financing --------------- -----------------
activities 6,465,000 1,059,000
--------------- -----------------
Net increase (decrease) in cash ( 582,000) 357,000
CASH, beginning of period 608,000 2,087,000
---------------- -----------------
CASH, end of period $ 26,000 $ 2,444,000
================ =================
</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, 1998 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 three months ended September 30,
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.
In July 1997, the Company received an arbitration demand 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 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. The claim for death
benefits, however, was subsequently released by the Estate.
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 warrants expired October 1, 1998.
The children and a former spouse of Dr. Tesler (the "Teslers") have
also raised certain claims arising out of the death of Dr. Tesler.
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 matter is
presently scheduled for arbitration. The Company believes the
Teslers' claims are without merit and intends to vigorously defend
against the arbitration claims.
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 are without merit and that the Company has valid
offsetting claims. The Company intends to vigorously defend against
the arbitration claim and to prosecute its claims against the
Estate.
In or about October 1991, an action was instituted against the
Company by an individual seeking $3,500,000 in damages and other
relief for breach of an alleged employment agreement. The Company
interposed counterclaims for fraud and related claims and claimed
damages in the amount of $5,000,000. The case was dismissed with
prejudice in April 1998. The plaintiff has filed an appeal seeking
to have the case reinstated. This appeal has been denied.
Note 3: INVENTORIES:
September 30, June 30,
Inventories consist of the 1998 1998
following: ----------------- ------------
Raw materials $ 8,186,000 $ 6,589,000
Work in process 1,123,000 717,000
Finished goods 12,839,000 12,790,000
------------ ------------
$22,148,000 $20,096,000
=========== ===========
Note 4: DIVIDENDS:
No dividends were declared during any period presented on common or
preferred stock. Preferred stock dividends in arrears total
$500,000 at September 30, 1998.
Note 5: 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, 1998
and 1997:
1998 1997
---- ----
Inventory purchases from ICC $ 1,361,000 $ 495,000
Interest charges from ICC $ 61,000 $ 84,000
Accounts payable to ICC $ 2,739,000 $ 1,014,000
Equipment lease obligations due ICC * $ 2,975,000
*The Company assumed direct liability for these leases which were
previously indirectly financed through ICC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Gross sales for the three months ended September 30, 1998 were $19,440,000 as
compared to $19,045,000 in the comparable period in the prior fiscal year. The
increase in sales of $395,000 or 2% is mainly due to an increase in the private
label (store brand) sector of the business. The private label (store brand)
sales were $17,875,000 for the three months ended September 30, 1998 versus
$15,918,000 in the prior fiscal year. The increase of $1,957,000 or 12% is a
result of new customers, new products, and increased sales to current customers.
The bulk/ contract sector of the business had sales of $1,565,000 for the three
months ended September 30, 1998 as compared to $3,127,000 in the prior fiscal
year. Two customers represented 38% of sales for the three months ended
September 30, 1998. These customers are Walgreen Commpany ("Walgreen") and
Costco Wholesale ("Costco"). Sales to these customers were $7,464,000 or 38% of
sales for the three months ended September 30, 1998 as compared to $7,185,000 or
38% in the prior year period.
Cost of sales as a percentage of net sales was 75.7% for the three months ended
September 30, 1998 as compared to 74.9% in the prior period. The increase is due
to the change in sales mix as mentioned above whereby more of the Company's
business is in the private label (store brand) sector, which has a higher cost
of sales percentage than the bulk/contract manufacturing business. In addition,
the Company converted to a new computer system which resulted in disruptions in
shipping, production, and planning leading to a reduction in sales for the
quarter and increased cost of sales. Cost of sales was also affected by the
increased cost of packaging due to new equipment installed in fiscal 1998 which
caused production inefficiencies and higher waste due to the beginning trials of
the equipment. It is anticipated that such inefficiencies and waste levels will
decrease as the equipment is utilized more effectively.
Selling, general and administrative expenses were $3,283,000 for the three
months ended September 30, 1998 as compared to $2,747,000 in the prior year
period. The increase of $536,000 is a result of increased distribution, legal
and hiring expenses. The increased distribution costs are related to shipping
problems due to the new computer system mentioned above. The increased legal
costs related to the litigation outstanding as of September 30, 1998. The
increased hiring costs are due to the Company's commitment to having highly
qualified people at all levels of the organization.
Research and development costs were $234,000 for the three months ended
September 30, 1998 as compared to $281,000 for the comparable period in the
prior fiscal year.
Interest expense was $1,129,000 for the three months ended September 30, 1998 as
compared to $1,022,000 for the prior year period. The increase in interest
expense is a result of increased capital equipment financing and an increase in
borrowing under the line of credit to support the increased working capital
needs of the Company. The increased equipment financing is to provide the
equipment to expand the business and to reduce costs of operation.
The Company recorded a tax benefit of $40,000, which is related to the net loss
for the three months ended September 30, 1998 as compared to a tax provision of
$142,000 in the prior year period.
The Company reported a net loss of $85,000 or $.01 per share as compared to net
income of $278,000 or $.01 per share in the prior year period.
The Company's business continues to shift from the higher margin bulk/ contract
business to the store brand (private label) business, which has lower profit
margins and is extremely competitive. The Company continues to take steps aimed
at increasing profitability. These steps include: (a) seeking new customers and
products to increase sales volume and (b) continuing efforts to reduce material
costs and other costs. There can be no assurance that such efforts will be
successful.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $17,255,000 as
compared to $10,706,000 at June 30, 1998. Working capital at September 30, 1998
includes $17,301,000 of accounts receivable as compared to $14,861,000 at June
30, 1998. The accounts receivable increase of $2,440,000 is a result of higher
sales, especially sales which occurred in the last month of the quarter. Working
capital also includes $22,148,000 of inventory as compared to $20,096,000 at
June 30, 1998. The inventory increase of $2,052,000 is a result of higher sales
and the need to maintain inventories to support new customers and increased
purchases by other customers. Working capital also includes $17,797,000 of
accounts payable as compared to $20,951,000 at June 30, 1998.
The Company utilized $6,383,000 in cash from operations in the first quarter of
1998. This utilization was financed primarily with proceeds from the line of
credit of $6,227,000.
Capital expenditures for the first quarter ended September 30, 1998 were
$478,000. Such expenditures related primarily to the continuing upgrade of the
Company's manufacturing equipment and plant facilities. In addition, the Company
is refining and improving its information systems to better serve its customers
and meet its continuing information system needs.
On August 7, 1998, the Company modified its line of credit and equipment term
loan with its financial institution. The maximum amount available under the line
of credit and term loan is $25,000,000. At September 30, 1998, the Company
borrowed $24,727,000. Borrowings under the modified agreement, which expires
August 7, 2001, bear interest at the prime rate of interest less 3/4%.
The Company has outstanding 2,500,000 shares of Series A cumulative redeemable
convertible preferred stock sold to ICC. Dividends from the date of issue (April
8, 1996) through September 30, 1998 totaling $500,000 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 has a deferred tax asset of $1,831,000, before the valuation
allowance at September 30, 1998, which consists of future tax benefits of net
operating loss carry forwards and various other temporary differences. The
benefits of net operating loss carry forwards and other temporary differences
that will take more than a few years to realize can not be reasonably determined
at this time. Accordingly, a valuation allowance of $300,000 was recorded at
September 30, 1998 to provide for this uncertainty. The realization of this
asset in future periods will improve the liquidity of the Company.
The Company continues to take steps aimed at increasing sales and reducing costs
to increase profitability. The Company intends to spend an estimated $5,000,000
on capital improvements in the fiscal year ending June 30, 1999 to increase
manufacturing capacity and reduce costs. It is anticipated that these capital
expenditures will be funded through equipment lease financing. While the Company
has in the past had no difficulty in obtaining such financing or meeting working
capital needs there can be no assurance that it will obtain the financing or
meet working capital needs in the future.
YEAR 2000 COMPLIANCE
Reference is made to Item 7 of the Company's Form 10-K for the year ended June
30, 1998 for a discussion under the caption "Year 2000 Compliance"
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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
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: November 12, 1998 By: /S/ CHARLES E. LAROSA _
--------------------------
Charles E. LaRosa
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 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 September 30, 1998 (Unaudited) and the
Consolidated Statement of Operations for the Three Months Ended September 30
1998 (Unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 17,301
<ALLOWANCES> 313
<INVENTORY> 22,148
<CURRENT-ASSETS> 40,559
<PP&E> 21,672
<DEPRECIATION> 17,700
<TOTAL-ASSETS> 64,182
<CURRENT-LIABILITIES> 23,304
<BONDS> 0
<COMMON> 2,421
0
2,500
<OTHER-SE> (1,951)
<TOTAL-LIABILITY-AND-EQUITY> (4,182)
<SALES> 19,440
<TOTAL-REVENUES> 19,440
<CGS> 14,068
<TOTAL-COSTS> 17,585
<OTHER-EXPENSES> (3)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,129
<INCOME-PRETAX> (125)
<INCOME-TAX> (40)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (135)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
