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, 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) (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 January
31, 1998 was 30,228,320.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1997 1997
ASSETS (UNAUDITED) (NOTE 1)
CURRENT ASSETS
<S> <C> <C>
Cash $ 100,000 $ 2,087,000
Accounts receivable - net of allowance for doubtful
accounts of $161,000 and $301,000 14,013,000 8,917,000
Inventories 19,088,000 17,708,000
Prepaid expenses and other current assets 1,142,000 927,000
Deferred tax asset 300,000 300,000
---------- ----------
Total current assets 34,643,000 29,939,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization of
$15,812,000 and $14,574,000 19,788,000 18,075,000
OTHER ASSETS
Deferred financing costs 101,000 79,000
Deferred tax asset 490,000 490,000
Other assets 166,000 151,000
------------ ------------
$ 55,188,000 $ 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 2,543,000 2,104,000
Accounts payable 17,232,000 14,440,000
Income taxes payable 117,000 25,000
Accrued expenses 1,263,000 1,509,000
----------- -----------
Total current liabilities 21,627,000 18,550,000
LONG TERM DEBT 22,306,000 19,990,000
LONG TERM CAPITAL LEASE OBLIGATIONS 8,600,000 8,744,000
DEFERRED GAIN ON SALE/LEASEBACK 347,000 373,000
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 - 30,228,320 and
29,880,350 shares 2,415,000 2,391,000
Capital in excess of par value 37,463,000 37,412,000
Accumulated deficit ( 40,070,000) ( 41,226,000)
----------- -----------
Total stockholders' equity 2,308,000 1,077,000
----------- -----------
$ 55,188,000 $ 48,734,000
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Gross sales $41,694,000 $36,549,000 $22,649,000 $20,724,000
Less: Sales discounts
and allowances 1,773,000 2,003,000 882,000 1,174,000
----------- ---------- ----------- -----------
Net sales 39,921,000 34,546,000 21,767,000 19,550,000
COST AND EXPENSES
Cost of goods sold 29,981,000 26,310,000 16,388,000 14,989,000
Selling, general and
administrative 5,852,000 4,927,000 3,105,000 2,625,000
Research and
development 513,000 420,000 232,000 205,000
----------- --------- --------- ---------
36,346,000 31,657,000 19,725,000 17,819,000
INCOME FROM OPERATIONS 3,575,000 2,889,000 2,042,000 1,731,000
OTHER INCOME (EXPENSE)
Interest expense (2,073,000) (1,820,000) (1,051,000) ( 927,000)
Other 21,000 153,000 112,000 97,000
----------- ---------- ---------- ---------
(2,052,000) (1,667,000) ( 939,000) ( 830,000)
INCOME BEFORE INCOME
TAXES 1,523,000 1,222,000 1,103,000 901,000
INCOME TAXES 367,000 480,000 225,000 370,000
----------- --------- --------- ----------
NET INCOME 1,156,000 742,000 878,000 531,000
PREFERRED STOCK DIVIDEND
REQUIREMENT 100,000 100,000 50,000 50,000
--------- --------- --------- ----------
NET INCOME ATTRIBUTABLE $1,056,000 $642,000 $828,000 $481,000
TO COMMON STOCKHOLDERS =========== ========= ========= =========
BASIC EARNINGS PER $.04 $.02 $.03 $.02
SHARE ========= ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 30,120,000 29,509,000 30,228,000 29,509,000
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
December 31,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $1,156,000 $742,000
Adjustments to reconcile net income to net
cash provided by (used for) operating
activities:
Depreciation and amortization of
property, plant and equipment 1,238,000 1,100,000
Amortization of bond discount and
deferred financing costs 104,000 69,000
Amortization of deferred gain on
sale/leaseback ( 26,000) ( 26,000)
Deferred tax - 480,000
Changes in current assets and liabilities
(Increase) in accounts receivable ( 5,096,000) ( 3,820,000)
Decrease in income taxes recoverable - ( 1,161,000)
(Increase) in inventories
( 1,380,000) 5,114,000)
(Increase) in other current assets ( 215,000) ( 157,000)
Increase in accounts payable, accrued
expenses and income taxes payable 2,638,000 5,113,000
----------- -----------
Net cash (used in) operating activities ( 1,581,000) ( 452,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in other assets ( 60,000) 15,000
(Increase) in property, plant and equipment ( 1,547,000) ( 1,419,000)
----------- -----------
Net cash (used in) investing activities ( 1,607,000) ( 1,404,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line of credit 2,437,000 2,996,000
Principal payments of capital lease
obligations ( 1,109,000) ( 951,000)
Principal repayments of long-term debt ( 202,000) ( 591,000)
Issuance of common stock 75,000 50,000
----------- -----------
Net cash provided by financing
activities 1,201,000 1,504,000
----------- -----------
Net (decrease) in cash ( 1,987,000) ( 352,000)
CASH, beginning of period 2,087,000 1,284,000
----------- -----------
CASH, end of period $ 100,000 $ 932,000
=========== ===========
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 six and three months ended
December 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.
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 alleged 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
is on the "inactive" trial list but the Company understands that
the plaintiff will soon seek to restore the matter to the active
calendar.
Note 3: INVENTORIES:
December 31, June 30,
Inventories consist of the 1997 1997
following:
Raw materials $ 5,663,000 $ 5,707,000
Work in process 798,000 841,000
Finished goods 12,627,000 11,160,000
----------- -----------
$19,088,000 $17,708,000
=========== ===========
Note 4: DIVIDENDS:
No dividends were declared during any period presented on common
or preferred stock. Preferred stock dividends in arrears total
$350,000 at December 31, 1997.
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 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 six months ended December 31, 1997 and
1996:
1997 1996
---- -----
Inventory purchases from ICC $ 630,000 $ 668,000
Interest expense 168,000 232,000
Accounts payable to ICC 681,000 913,000
Equipment lease obligations due ICC 2,701,000 3,967,000
Other receivables from ICC - 213,000
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, 1997 were
$41,694,000 as compared to $36,549,000 in the comparable period in
the prior fiscal year. The increase in sales of $5,145,000 or 14%
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. Two customers represented 37% of
sales for the six months ended December 31, 1997. Sales to these
two customers, Walgreen Company and Costco Wholesale, were
$15,382,000 or 37% of sales as compared to $12,066,000 or 33% of
sales in the comparable period in the prior fiscal year.
Sales for the three months ended December 31, 1997 were
$22,649,000 as compared to $20,724,000 in the comparable period in
the prior fiscal year. The increase of $1,925,000 or 9% is mainly
a result of the items discussed above.
Cost of sales as a percentage of net sales was 75.1% for the six
months ended December 31, 1997 as compared to 76.2% in the
comparable period in the prior fiscal year. Cost of sales as a
percentage of net sales was 75.2% for the three months ended
December 31, 1997 as compared to 76.7% 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.
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
Selling, general and administrative expenses were $5,852,000 or
14.7% of net sales for the six months ended December 31, 1997 as
compared to $4,927,000 or 14.3% of net sales for the comparable
period in the prior fiscal year. The increase of $925,000 is
mainly a result of increased sales and distribution costs due to
the increased sales volume. Selling, general and administrative
expenses were $3,105,000 or 14.3% of net sales for the three
months ended December 31, 1997 as compared to $2,625,000 or 13.4%
of net sales in the comparable period in the prior fiscal year.
The increase of $480,000 is due mainly to the reasons stated
above.
Research and development costs were $513,000 for the six months
ended December 31, 1997 as compared to $420,000 in the comparable
period in the prior fiscal year. Research and development costs
were $232,000 for the three months ended December 31, 1997 as
compared to $205,000 in the comparable period in the prior fiscal
year.
Interest expense was $2,073,000 for the six months ended December
31, 1997 as compared to $1,820,000 in the comparable period in the
prior fiscal year. Interest expense was $1,051,000 for the three
months ended December 31, 1997 as compared to $927,000 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 to support the additional
capital expenditures and working capital requirements to support
the growth in sales.
Income tax expense was $367,000 in the six months ended December
31, 1997 versus $480,000 in the prior year period. The Company
recorded a reduction in the deferred tax valuation allowance due
to management's assessment of the current profitability of the
Company.
Net income for the six and three months ended December 31, 1997
was $1,156,000 and $878,000, respectively, or $.04 and $.03 per
share as compared to a net income of $742,000 and $531,000,
respectively, or $.02 and $.02 per share in the prior fiscal year.
The Company continues to take steps aimed at increasing the
profitability of the Company. 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
At December 31, 1997, the Company had working capital of
$13,016,000 as compared to $11,389,000 at June 30, 1997. The
increase of $1,627,000 is due to the net income for the six months
ended December 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 ($5,096,000) and inventory
($1,380,000) offset by increases in accounts payable of
$2,792,000. The increase in accounts receivable is due to higher
sales. The increase in inventories is necessary to support the
customer service requirements of new customers and increased sales
to current customers.
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 December 31, 1997 (totaling
$350,000) 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 financing or meet working capital needs in the future.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
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
In September 1997, 25,000 shares of common stock were issued
to to an employee in consideration for previously rendered
services having a value of $.375 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 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.
Exhibit 27 - Financial Data Schedule
(b). Reports on Form 8-K
None.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
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 11, 1998 By: /S/CHARLES E. LAROSA
--------------------------
Charles E. LaRosa
Chief Executive Officer and
President
(Principal Executive Officer)
Date: February 11, 1998 By: /S/ FRANK MARCHESE
--------------------------
Frank Marchese
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
<PAGE>
Exhibit Index
27 Financial Data Schedule (in EDGAR copy only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1997 (Unaudited) and the Consolidated
Statement of Operations for the Six Months Ended December 31, 1997 (Unaudited)
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 100,000
<SECURITIES> 0
<RECEIVABLES> 14,013,000
<ALLOWANCES> 161,000
<INVENTORY> 19,088,000
<CURRENT-ASSETS> 34,643,000
<PP&E> 19,788,000
<DEPRECIATION> 15,812,000
<TOTAL-ASSETS> 55,188,000
<CURRENT-LIABILITIES> 21,627,000
<BONDS> 0
0
2,500,000
<COMMON> 2,415,000
<OTHER-SE> 37,463,000
<TOTAL-LIABILITY-AND-EQUITY> 55,188,000
<SALES> 41,694,000
<TOTAL-REVENUES> 0
<CGS> 29,981,000
<TOTAL-COSTS> 36,346,000
<OTHER-EXPENSES> (21,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,073,000
<INCOME-PRETAX> 1,523,000
<INCOME-TAX> 367,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,156,000
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
