SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A - NO. 1
(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.
/ / Yes / x/ No
The number of shares outstanding of common stock, $.08 par value, as of January
31, 1999 was 30,253,320.
<PAGE>
ITEMS 1 AND 2 OF PART I OF THE FORM 10-Q AND EXHIBIT 27 TO THE FORM 10-Q ARE
AMENDED TO READ AS FOLLOWS:
PART I. FINANCIAL INFORMATION
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ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, June 30, 1998
1998 (Note 1)
(Unaudited)
As Restated
(Note 6)
------------------ ----------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 26,000 $ 608,000
Accounts receivable - net of allowance for doubtful
accounts of $313,000 and $238,000 16,140,000 14,861,000
Inventories 19,970,000 20,096,000
Prepaid expenses and other current assets 784,000 793,000
Deferred tax asset 300,000 300,000
------- -------
Total current assets 37,220,000 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 2,438,000 1,231,000
Other assets 720,000 534,000
------- -------
$ 62,050,000 $ 59,864,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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 2,420,000 1,394,000
--------- ---------
Total current liabilities 23,675,000 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/LEASE BACK 308,000 321,000
------- -------
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 -
30,253,320 shares 2,421,000 2,421,000
Capital in excess of par value 37,493,000 37,493,000
Accumulated deficit (41,947,000) (39,359,000)
----------- -----------
Total stockholders' equity 467,000 3,055,000
------- ---------
$ 62,050,000 $ 59,864,000
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
------------------
1998 1997
(Unaudited) (Unaudited)
As Restated
(Note 6)
------------ ------------
REVENUES
<S> <C> <C>
Gross sales $ 19,440,000 $ 19,045,000
Less: Sales discounts and allowance 2,015,000 891,000
--------- -------
NET SALES 17,425,000 18,154,000
---------- ----------
COST AND EXPENSES
Cost of goods sold 16,246,000 13,593,000
Selling, general and administrative 3,654,000 2,747,000
Research and development 234,000 281,000
------- -------
20,134,000 16,621,000
---------- ----------
INCOME (LOSS) FROM OPERATIONS (2,709,000) 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 (3,835,000) 420,000
INCOME TAXES (BENEFIT) (1,247,000) 142,000
---------- -------
NET INCOME (LOSS) (2,588,000) 278,000
Preferred stock dividend requirement 50,000 50,000
------ ------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (2,638,000) $ 228,000
============ ============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ (.09) $ .01
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,253,320 30,012,000
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 31,
-----------------
1998 1997
(Unaudited) (Unaudited)
As Restated
(Note 6)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $(2,588,000) $ 278,000
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization of property, plant 687,000 612,000
and equipment
Amortization of bond discount and deferred 50,000 53,000
financing costs
Amortization of deferred gain on sale of leaseback (13,000) (13,000)
Deferred income taxes (1,207,000) --
Changes in current assets and liabilities:
(Increase) in accounts receivable (1,279,000) (2,795,000)
(Increase) decrease in inventories 126,000 (881,000)
(Increase) decrease in other current assets 9,000 (121,000)
Increase (decrease)in accounts payable and
accrued expenses and income taxes payable (2,168,000) 3,052,000
----------- -----------
NET CASH (USED IN) PROVIDED BY 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, net (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 repayments 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
=========== ===========
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, 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 of
normal recurring accruals plus major costs incurred as a result of the
installation of a new integrated computer system. 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:
Inventories consist of the following:
SEPTEMBER 30, 1998 JUNE 30, 1998
------------------ -------------
Raw materials $7,615,000 $6,589,000
Work in progress 1,123,000 717,000
Finished goods 11,232,000 12,790,000
----------- -----------
$19,970,000 $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.
<PAGE>
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 obligation due ICC * 2,975,000
* The Company assumed direct liability for these leases which were
previously indirectly financed through ICC.
Note 6 RESTATEMENT:
Subsequent to the issuance of the Company's Quarterly Report on Form
10-Q for the three months ended September 30, 1998, and in the course
of reviewing its operations for the year ended July 3, 1999, in
preparation for its annual audit, the Company determined that certain
expenses were incorrectly stated during the first and second quarters
of fiscal 1999. The incorrect reporting on Form 10-Q was primarily
caused by the use of incomplete and inaccurate accounting records
which resulted from the Company's installation of the new computer
system.
In order to upgrade services to customers, improve operating
efficiencies and insure year 2000 compliance, the Company, during
fiscal 1999, installed and implemented a new integrated computer
system. This major system conversion caused serious disruptions in
shipping, production and planning resulting in reduced sales and
increased cost of sales. In addition, the Company experienced delays
in billings and collections which required increased borrowing
resulting in additional interest expense.
As a result, the Company's financial statements for the three months
ended September 30, 1998, have been restated from the amounts
previously reported to reflect the timing of certain expenses between
quarters. The effect of the restatement is as follows:
At September 30, 1999 As
Previously
Reported As Restated
- -------------------------------------------- ---------------- --------------
Accounts receivable $17,301,000 $16,140,000
Inventories 22,148,000 19,970,000
Deferred tax asset-non-current 1,231,000 2,438,000
Accrued expenses 2,049,000 2,420,000
Accumulated deficit 39,444,000 41,947,000
For the three months ended September 30, 1998 As
Previously
Reported As Restated
- -------------------------------------------- ---------------- --------------
Sales discounts and allowances $854,000 $2,015,000
Cost of goods sold 14,068,000 16,246,000
Selling, general and administrative 3,283,000 3,654,000
Income tax benefit 40,000 1,247,000
Net loss 85,000 2,588,000
Net loss attributable to common shareholders 135,000 2,638,000
Loss per share-basic and diluted $ .01 $ .08
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIO 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 Company ("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.
Net sales for the three months ended September 30, 1998 were $17,425,000 as
compared to $18,154,000 in the comparable period in the prior fiscal year. The
decrease was due to the increase in sales discounts and allowances net of an
increase in gross sales.
Cost of sales as a percentage of net sales was 93.2% for the three months ended
September 30, 1998 as compared to 74.9% in the prior year 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 in the current year.
Selling, general and administrative expenses were $3,654,000 for the three
months ended September 30, 1998 as compared to $2,747,000 in the prior year
period. The increase of $907,000 is a result of increased distribution, legal
and hiring expenses. The increased distribution costs are primarily 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 operations.
The Company recorded a tax benefit of $1,247,000, 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 $2,588,000 or ($.09) 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 $13,545,000 as
compared to $10,706,000 at June 30, 1998. Working capital at September 30, 1998
includes $16,140,000 of accounts receivable as compared to $14,861,000 at June
30, 1998. The accounts receivable increase of $1,279,000 is a result of higher
sales, especially sales which occurred in the last month of the quarter. Working
capital also includes $19,970,000 of inventory as compared to $20,096,000 at
June 30, 1998. 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 had
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 $3,402,000, 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 $664,000 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 $2,000,000
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"
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: OCTOBER 29, 1999 By: /S/ CHARLES E. LAROSA
----------------- --------------------------------------
Charles E. LaRosa
Chief Executive Officer and President
(Principal Executive Officer)
Date: OCTOBER 29, 1999 By: /S/ CLIFFORD H. STRAUB, JR.
----------------- --------------------------------------
Clifford H. Straub, Jr.
Chief Financial Officer and Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1998
<CASH> 26,000
<SECURITIES> 0
<RECEIVABLES> 16,453,000
<ALLOWANCES> 313,000
<INVENTORY> 19,970,000
<CURRENT-ASSETS> 37,220,000
<PP&E> 39,372,000
<DEPRECIATION> 17,700,000
<TOTAL-ASSETS> 62,050,000
<CURRENT-LIABILITIES> 23,675,000
<BONDS> 6,018,000
0
2,500,000
<COMMON> 2,421,000
<OTHER-SE> 37,493,000
<TOTAL-LIABILITY-AND-EQUITY> 62,050,000
<SALES> 19,440,000
<TOTAL-REVENUES> 17,425,000
<CGS> 16,246,000
<TOTAL-COSTS> 20,134,000
<OTHER-EXPENSES> (3,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,129,000
<INCOME-PRETAX> (3,035,000)
<INCOME-TAX> (1,247,000)
<INCOME-CONTINUING> (2,588,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,588,000)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
