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: OCTOBER 2, 1999
---------------
OR
x 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.
/ / Yes /x/ No
The number of shares outstanding of common stock, $.08 par value, as of October
31, 1999 was 30,253,320.
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PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
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<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS October 2, 1999 July 3,
(Unaudited) 1999
---------------- ---------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 125,000 $ 122,000
Accounts receivable - net of allowance for doubtful
accounts of $255,000 and $238,000 16,066,000 16,600,000
Inventories 17,096,000 17,916,000
Prepaid expenses and other current assets 1,465,000 1,268,000
Income taxes recoverable 947,000 947,000
Deferred tax asset 1,047,000 1,150,000
--------------- ---------------
Total current assets 36,746,000 38,003,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization of
$20,459,000 and $19,663,000 17,988,000 18,636,000
OTHER ASSETS
Deferred tax asset 2,606,000 2,606,000
Other assets 719,000 711,000
--------------- ---------------
$ 58,059,000 $ 59,956,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $ 2,360,000 $ 2,135,000
Current portion of capital lease obligations 2,760,000 2,879,000
Accounts payable 20,979,000 20,800,000
Income taxes payable 210,000 210,000
Accrued expenses 2,096,000 3,498,000
--------------- ---------------
Total current liabilities 28,405,000 29,522,000
--------------- ---------------
LONG-TERM DEBT 26,533,000 26,934,000
--------------- ---------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 6,057,000 6,614,000
--------------- ---------------
DEFERRED GAIN ON SALE/LEASE BACK 373,000 396,000
--------------- ---------------
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 -
30,253,320 shares 2,421,000 2,421,000
Capital in excess of par value 37,493,000 37,493,000
Accumulated deficit (45,723,000) (45,924,000)
--------------- ---------------
Total stockholders' equity (deficiency) (3,309,000) (3,510,000)
--------------- ---------------
$ 58,059,000 $ 59,956,000
=============== ===============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended:
-----------------------------
October 2, September 30,
1999 1998
------------ -------------
REVENUES
<S> <C> <C>
Gross sales $ 22,076,000 $ 19,440,000
Less: Sales discounts and allowance 1,098,000 2,015,000
------------ ------------
NET SALES 20,978,000 17,425,000
------------ ------------
COST AND EXPENSES
Cost of goods sold 16,248,000 16,246,000
Selling, general and administrative 3,055,000 3,654,000
Research and development 150,000 234,000
------------ ------------
19,453,000 20,134,000
------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,525,000 (2,709,000)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (1,245,000) (1,129,000)
Other 24,000 3,000
------------ ------------
(1,221,000) (1,126,000)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 304,000 (3,835,000)
INCOME TAXES (BENEFIT) 103,000 (1,247,000)
------------ ------------
NET INCOME (LOSS) 201,000 (2,588,000)
Preferred stock dividend requirement 50,000 50,000
------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 151,000 $ (2,638,000)
============ ============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ 0.01 $ (0.09)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,253,000 30,253,000
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended:
-----------------------------
October 2, September 30,
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 201,000 $(2,588,000)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization of property, plant
and equipment 804,000 687,000
Amortization of bond discount and deferred
financing costs 71,000 50,000
Amortization of deferred gain on sale/leaseback (24,000) (13,000)
Deferred income taxes 103,000 (1,207,000)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable 534,000 (1,279,000)
Decrease in inventories 820,000 126,000
(Increase) decrease in other current assets (197,000) 9,000
(Decrease)in accounts payable and accrued
expenses and income taxes payable (1,223,000) (2,168,000)
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 1,089,000 (6,383,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in other assets (8,000) (186,000)
(Increase) in property, plant and equipment, net (155,000) (478,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (163,000) (664,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line of credit 186,000 6,227,000
Principal repayments of capital lease obligations (676,000) (687,000)
Principal repayments of long term debt (433,000)
Lease refinancing 925,000
----------- -----------
NET CASH PROVIDED BY (USE IN) FINANCING ACTIVITIES (923,000) 6,465,000
----------- -----------
NET INCREASE (DECREASE) IN CASH 3,000 (582,000)
CASH, BEGINNING OF PERIOD 122,000 608,000
----------- -----------
CASH, END OF PERIOD $ 125,000 $ 26,000
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: INTERIM FINANCIAL REPORTING:
The consolidated balance sheet as of July 3, 1999 has been derived
from the audited consolidated balance sheet for the fiscal year then
ended and is presented for comparative purposes. Certain amounts have
been reclassified to conform with the current period presentation. 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 of
normal recurring accruals plus, for the three months ended September
30, 1998, major costs incurred as a result of the installation of a
new integrated computer system.
Effective in the forth quarter of fiscal 1999, the Company changed
it's fiscal year end from June 30, 1999 to the 52 or 53-week period
which ends on the Saturday closest to June 30. Accordingly, quarterly
periods will generally be comprised of 13 weeks and end on Saturday.
The impact on the current quarter was not significant.
The results of operations for the three months ended October 2, 1999
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 not less than $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 (approximately 4,000,000 shares, which had a value as of
the alleged "change of control" date of approximately $3.5 million).
Dr. Tesler's estate subsequently increased its claim for shares from
4,000,000 shares (10% of the outstanding stock) to approximately
15,594,000 shares (including shares for claimed interest through
September 30, 1999, which would be approximately 34% of the post
issuance outstanding shares) due to reductions in the value of such
shares from the time when the estate alleges they should have been
issued. 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.
The claimed breaches of contract include failure to pay (a) salary
through December 1998 and (b) changes of control payments on the
assumption that there was a change of control, as defined, at the 1996
annual.
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
provisions of the various agreements with Dr. Tesler, as well as
having other defenses to such claims.
The children and a former spouse of Dr. Tesler had also raised certain
claims arising out of the death of Dr. Tesler. The Company settled
these claims in December 1998. Accordingly, the Company recorded a
lawsuit expense of $1,179,000 which included legal and other costs
related to the settlement recorded in the quarter ended December 31,
1998. Payments were advanced by ICC on behalf of the company.
In December 1995, the Company accrued the continuing salary due to Dr.
Tesler for the period through December 1998. It has not made provision
for any of the 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.
Management believes the final outcome of the above will not have a
material effect upon the Company's financial position, liquidity or
operating results.
The Company is a party to various other legal proceedings arising in
the normal conduct of business. Management believes that the final
outcome of these proceedings will not have a material adverse effect
upon the Company's financial position or results of operations.
Note 3: INVENTORIES:
Inventories consist of the following:
OCTOBER 2, 1999 JULY 3, 1999
--------------- ------------
Raw materials $6,376,000 $6,253,000
Work in progress 878,000 862,000
Finished goods 9,842,000 10,801,000
---------- -----------
$17,096,000 $17,916,000
=========== ===========
Note 4: DIVIDENDS:
No dividends were declared during any period presented on common or
preferred stock. Preferred stock dividends in arrears total $700,000
at October 2, 1999.
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 October 2, 1999 and
September 30, 1998:
1999 1998
------ ------
Inventory purchases from ICC $ 642,000 $ 1,361,000
Interest charges from ICC 118,000 61,000
Accounts payable to ICC 1,364,000 2,739,000
Note payable to ICC 3,000,000 -
Advances from ICC 1,710,000 -
* In connection with the credit line and term loans from a financial
institution, ICC has guaranteed $1,400,000 as of October 2, 1999.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Gross sales for the three months ended October 2, 1999 were $22,076,000 as
compared to $19,440,000 in the comparable period in the prior fiscal year. The
increase in sales of $2,636,000 or 13.6% is mainly due to an increase in the
private label (store brand) sector of the business. The private label (store
brand) sales were $20,223,000 for the three months ended October 2, 1999 versus
$17,875,000 in the prior fiscal year. The increase of $2,348,000 or 13.1% is
primarily a result of new customers, new products, and increased sales to
current customers. The bulk/ contract sector of the business had sales of
$1,853,000 for the three months ended October 2, 1999 as compared to $1,565,000
in the prior fiscal year. Sales to two customers, Walgreen Company and Costco
Wholesale, were $6,857,000 or 31.1% of sales for the three months ended October
2, 1999 as compared to $7,464,000 or 38.4% in the prior year period.
Net sales for the three months ended October 2, 1999 were $20,978,000 as
compared to $17,425,000 in the comparable period in the prior fiscal year. The
increase was due to the increase in gross sales, net of a decrease in sales
discounts and allowances.
Cost of sales as a percentage of net sales was 77.5% for the three months ended
October 2, 1999 as compared to 93.2% in the prior year period. During the first
quarter of fiscal 1999, 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. Also, cost of
sales was affected in fiscal 1999, 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 in 1999.
Selling, general and administrative expenses were $3,055,000 for the three
months ended October 2, 1999 as compared to $3,654,000 in the prior year period.
The decrease of $599,000 in the current fiscal quarter is a result of decreased
distribution, and legal expenses. The decreased distribution costs are primarily
related to shipping problems that occurred in the prior fiscal year, due to the
new computer system mentioned above. The decreased legal costs related to the
settlement of litigation in fiscal 1999.
Research and development costs were $150,000 for the three months ended October
2, 1999 as compared to $234,000 for the comparable period in the prior fiscal
year. Interest expense was $1,245,000 for the three months ended October 2, 1999
as compared to $1,129,000 for the prior year period. The increase in interest
expense is primarily a result of increased interest rates as compared to the
prior quarter The Company recorded a tax provision of $103,000, which is related
to the net profit for the three months ended October 2, 1999, as compared to a
tax benefit of $1,247,000 recorded in the prior year period.
The Company reported net income of $201,000 or $.01 per share as compared to net
loss of $2,588,000 or $.09 per share in the prior year period.
The Company continues to take steps aimed at increasing profitability. These
steps include: (a) seeking new customers and products to increase sales volume,
(b) discontinuing marginal products and customers and (c) 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 October 2, 1999, the Company had working capital of $8,341,000 as compared to
$8,481,000 at July 3, 1999. Working capital at October 2, 1999 includes
$16,066,000 of accounts receivable as compared to $16,600,000 at July 3, 1999.
The accounts receivable decrease of $534,000 is a result of improved collections
and a decrease in sales from the prior quarter. Working capital also includes
$17,096,000 of inventory as compared to $17,916,000 at July 3, 1999. The
decrease is related to the disposal of shortdated products and improved
management of physical quantities. Working capital also includes $23,075,000 of
accounts payable and accrued expenses as compared to $24,298,000 at July 3,
1999. The decrease of $1,223,000 in payables is primarily due to payment of
accrued expenses.
The Company produced $1,089,000 in cash from operations in the first quarter of
1999, as a result of the above.
Capital expenditures for the first quarter ended October 2, 1999 were $155,000.
Such expenditures related primarily to the continuing upgrade of the Company's
manufacturing equipment and plant facilities.
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 October 2, 1999, the Company had
borrowed $20,829,000. Borrowings under the modified agreement, which expires
August 7, 2001, bear interest at the prime rate of interest less 3/4%. Such
borrowing rate was increased by 2% effective April 1, 1999. In addition, the
Company has convertible subordinated debentures outstanding and capitalized
lease obligations which have a substantial impact on the working capital
requirements in terms of required principal and interest payments.
The Company has outstanding 2,500,000 shares of Series A cumulative redeemable
convertible outstanding preferred stock sold to ICC. Dividends from the date of
issue (April 8, 1996) through October 2, 1999 totaling $700,000 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. In addition, in April 1999, the
Company entered into a loan agreement with ICC for $3,000,000 with interest at
1% above the prime rate.
The Company has a deferred tax asset of $4,317,000, before the valuation
allowance at October 2, 1999, 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 $664,000 was recorded at
October 2, 1999 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 $1,500,000
for capital improvements in the fiscal year ending July 1, 2000 to increase
manufacturing capacity and reduce costs. It is anticipated that these capital
expenditures will be funded through equipment lease financing and working
capital. 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 July
3, 1999 for a discussion under the caption "Year 2000 Compliance"
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
<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
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>
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: November 9, 1999 By: /S/ CHARLES E. LAROSA
-------------------------------
Charles E. LaRosa
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 9, 1999 By: /S/ CLIFFORD H. STRAUB, JR.
--------------------------------
Clifford H. Straub, Jr.
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 October 2, 1999 (Unaudited) and the Consolidated
Statement of Operations for the Three Months Ended October 2, 1999 (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> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> OCT-02-1999
<CASH> 125,000
<SECURITIES> 0
<RECEIVABLES> 16,321,000
<ALLOWANCES> 255,000
<INVENTORY> 17,096,000
<CURRENT-ASSETS> 36,746,000
<PP&E> 38,447,000
<DEPRECIATION> 20,459,000
<TOTAL-ASSETS> 58,059,000
<CURRENT-LIABILITIES> 28,405,000
<BONDS> 4,504,000
0
2,500,000
<COMMON> 2,421,000
<OTHER-SE> 37,493,000
<TOTAL-LIABILITY-AND-EQUITY> 58,059,000
<SALES> 22,076,000
<TOTAL-REVENUES> 20,978,000
<CGS> 16,248,000
<TOTAL-COSTS> 19,453,000
<OTHER-EXPENSES> (24,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,245,000
<INCOME-PRETAX> 304,000
<INCOME-TAX> 103,000
<INCOME-CONTINUING> 201,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 201,000
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
