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, 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 January
31, 1999 was 30,253,320.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
ASSETS (Unaudited) (Note 1)
------ ---------- ----------
CURRENT ASSETS
<S> <C> <C>
Cash $ 64,000 $ 608,000
Accounts receivable - net of allowance for doubtful accounts of
$313,000 and $238,000 16,772,000 14,861,000
Inventories 23,288,000 20,096,000
Prepaid expenses and other current assets 599,000 793,000
Deferred tax asset 300,000 300,000
----------- -----------
Total current assets 41,023,000 36,658,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and
amortization of $18,457,000 and $17,083,000 20,336,000 21,441,000
OTHER ASSETS
Deferred tax asset 1,431,000 1,231,000
Other assets 717,000 534,000
----------- -----------
$63,507,000 $59,864,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 440,000 $ 482,000
Current portion of capital lease obligations 2,712,000 2,898,000
Accounts payable 18,844,000 20,951,000
Income taxes payable 10,000 227,000
Accrued expenses 1,888,000 1,394,000
----------- -----------
Total current liabilities 23,894,000 25,952,000
LONG TERM DEBT 29,373,000 22,983,000
LONG TERM CAPITAL LEASE OBLIGATIONS 8,389,000 7,553,000
DEFERRED GAIN ON SALE/LEASEBACK 295,000 321,000
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 (40,858,000) (39,359,000)
------------ ------------
Total stockholders' equity 1,556,000 3,055,000
------------ ------------
$63,507,000 $ 59,864,000
============ =============
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES
Gross sales $43,956,000 $41,694,000 $24,516,000 $22,649,000
Less: Sales discounts
and allowances 2,429,000 1,773,000 1,575,000 882,000
------------ ----------- ----------- -----------
Net sales 41,527,000 39,921,000 22,941,000 21,767,000
COST AND EXPENSES
Cost of goods sold 32,743,000 29,681,000 18,675,000 16,388,000
Selling, general and
administrative 6,971,000 5,852,000 3,688,000 3,105,000
Research and development 382,000 513,000 148,000 232,000
------------ ---------- ---------- ----------
40,096,000 36,346,000 22,511,000 19,725,000
INCOME FROM OPERATIONS 1,431,000 3,575,000 430,000 2,042,000
OTHER INCOME (EXPENSE)
Interest expense ( 2,174,000) ( 2,073,000) ( 1,045,000) ( 1,051,000)
Lawsuit Settlement ( 1,179,000) ( 1,179,000)
Other 23,000 21,000 20,000 112,000
------------ ----------- ----------- -----------
( 3,330,000) ( 2,052,000) ( 2,204,000) ( 939,000)
INCOME/(LOSS)BEFORE
INCOME TAXES ( 1,899,000) 1,523,000 ( 1,774,000) 1,103,000
INCOME TAXES/(BENEFIT) ( 400,000) 367,000 ( 360,000) 225,000
------------ ----------- ----------- -----------
NET INCOME /(LOSS) ( 1,499,000) 1,156,000 ( 1,414,000) 878,000
Preferred stock dividend
requirement 100,000 100,000 50,000 50,000
------------- ------------- ------------- ------------
Net income/ (loss) attributable to
common shareholders ( $1,599,000) $1,056,000 ( $1,464,000) $828,000
============= ============= ============= ===========
EARNINGS/(LOSS) PER
SHARE-BASIC AND
DILUTED ( $.05) $.04 ( $.05) $.03
======= ===== ======= =====
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 30,253,000 30,120,000 30,253,000 30,228,000
========== ========== ========== ==========
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income/(loss) ($1,499,000) $ 1,156,000
Adjustments to reconcile net income/(loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization of property, plant and equipment 1,374,000 1,238,000
Amortization of bond discount and deferred financing costs 99,000 104,000
Amortization of deferred gain on
sale/leaseback ( 26,000) ( 26,000)
Deferred taxes ( 200,000)
Changes in current assets and liabilities:
(Increase)in accounts receivable ( 1,911,000) ( 5,096,000)
(Increase)in inventories ( 3,192,000) ( 1,380,000)
(Increase)/Decrease in other current assets 194,000 ( 215,000)
Increase/(Decrease)in accounts payable and
accrued expenses and income taxes payable ( 1,830,000) 2,638,000
------------- -------------
Net cash (used in) operating activities ( 6,991,000) ( 1,581,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in other assets ( 183,000) ( 60,000)
(Increase) in property, plant and equipment ( 269,000) ( 1,547,000)
------------ ------------
Net cash (used in) investing activities ( 452,000) ( 1,607,000)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line of credit 6,553,000 2,437,000
Principal payments of capital lease obligations ( 1,350,000) ( 1,109,000)
Principal repayments of long-term debt ( 304,000) ( 202,000)
Issuance of common stock 75,000
Lease refinancing 2,000,000
------------- ------------
Net cash provided by financing activities 6,899,000 1,201,000
------------ ------------
Net increase (decrease) in cash ( 544,000) ( 1,987,000)
CASH, beginning of period 608,000 2,087,000
------------ ------------
CASH, end of period $ 64,000 $ 100,000
============ ============
</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
solely of normal recurring accruals.
The results of operations for the three and six months ended December
31, 1998 are not necessarily indicative of the results to be expected
for a full year.
Note 2: CONTINGENCIES:
Other than as described below, no material proceedings to which the
Company is a party, or to which any of its properties are subject, are
pending or are known to be contemplated, and the Company knows of no
material legal proceedings, pending or threatened, or judgments
entered against any director or officer of the Company in his capacity
as such.
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 torteous 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
Company settled these claims in December 1998 with payments to be made
in four installments, the last of which will be due in January 2001.
Accordingly, the Company has recorded a lawsuit settlement expense of
$1,179,000 (which includes legal and other costs related to the
settlement) as of December 31, 1998. The payments made to date were
advanced by ICC on behalf of the Company and are recorded as accounts
payable to ICC.
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 May 1998, the Company brought an action against its former outside
corporate counsel seeking damages for conflict of interest, breaches
of fiduciary duty and loyality, negligence and malpractice during its
representation of the Company.
Note 3: INVENTORIES:
December 31, June 30,
Inventories consist of the 1998 1998
following: ------------ ----------
Raw materials $ 8,688,000 $ 6,589,000
Work in process 1,159,000 717,000
Finished goods 13,941,000 12,790,000
------------ -----------
$23,788,000 $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$550,000 at
December 31, 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 six months ended December 31, 1998 and
1997:
1998 1997
---- ----
Inventory purchases from ICC $ 1,951,000 $ 630,000
Interest charges from ICC $ 123,000 $ 168,000
Accounts payable to ICC $ 1,703,000 $ 681,000
Equipment lease obligations due ICC * $ 2,701,000
*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 six months ended December 31, 1998 were $43,956,000 as
compared to $41,694,000 in the comparable period in the prior fiscal year. The
increase in sales is $2,262,000 or 5%. Private label (store brand) sales were
$40,691,000 as compared to $35,304,000 in the prior year period. The increase of
$5,387,000 or 15% is a result of the addition of new customers, the
introduction of new products, and growth with existing customers. These
increases offset the pressure on shipment levels created by he Company's
conversion to a new software system. The bulk/contract manufacturing sector had
sales of $3,265,000 as compared to $6,390,000 in the prior year period. The
decrease is due to lost business in the bulk/contract manufacturing sector which
has not been replaced in the current fiscal year. Two customers represented 40%
of sales for the six months ended December 31, 1998. Sales to these two
customers, Walgreen Company and Costco Wholesale, were $17,642,000 or 40% of
sales as compared to $15,382,000 or 37% of sales in the comparable period in the
prior fiscal year.
Sales for the three months ended December 31, 1998 were $24,516,000 as compared
to $22,649,000 in the comparable period in the prior fiscal year. The increase
of $1,867,000 or 8% is mainly a result of the items discussed above.
Cost of sales as a percentage of net sales was 79% for the six months ended
December 31, 1998 as compared to 75% in the comparable period in the prior
fiscal year. Cost of sales as a percentage of net sales was 81% for the three
months ended December 31, 1998 as compared to 75% in the comparable period in
the prior fiscal year. 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 planning, production,
inventory control and shipping, leading to a reduction in expected sales 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 addition, the Company recorded a $1,400,000 reserve for obsolete
and excessive inventories primarily due to required F.D.A. labeling charges for
carton and label inventories.
Selling, general and administrative expenses were $6,971,000 or 17% of net sales
for the six months ended December 31, 1998 as compared to $5,852,000 or 15% of
net sales for the comparable period in the prior fiscal year. The increase of
$1,119,000 is mainly a result of increased sales, legal, distribution, and
hiring expenses. The increased distribution costs are related to shipping
problems impacted by the new computer system. The increased hiring costs are due
to the Company's commitment to having qualified people at all levels of the
organization. Selling, general and administrative expenses were $3,688,000 or
16% of net sales for the three months ended December 31, 1998 as compared to
$3,105,000 or 14% of net sales in the comparable period in the prior fiscal
year. The increase of $583,000 is due mainly to the reasons stated above.
Research and development costs were $382,000 for the six months ended December
31, 1998 as compared to $513,000 for the comparable period in the prior fiscal
year. Research and development costs were $148,000 for the three months ended
December 31, 1998 as compared to $232,000 in the comparable period in the prior
fiscal year.
Interest expense was $2,174,000 for the six months ended December 31, 1998 as
compared to $2,073,000 in the comparable period in the prior fiscal year.
Interest expense was $1,045,000 for the three months ended December 31, 1998 as
compared to $1,051,000 in the comparable period in the prior fiscal year. The
increase in interest expense is a result of increases in capital lease
obligations and borrowings under the revolving credit agreement to support the
additional capital expenditures and working capital requirements of increased
receivables and inventory offset by reduced interest rates on the new revolving
credit agreement.
The Company settled claims relating to the children and a former spouse of Dr.
Tesler, the former President of the Company who died in December 1996. (See Note
2: Contingencies). Accordingly, the Company has recorded a lawsuit settlement
expense of $1,179,000 for the six and three months ended December 31, 1998.
The Company recorded a tax benefit of $400,000 for the six months ended December
31, 1998 due to the loss for the period.
Net loss for the six and three months ended December 31, 1998 was $1,499,000 and
$1,414,000, respectively, or $.05 per share as compared to a net income of
$1,156,000 and $878,000, respectively, or $.04 and $.03 per share in the prior
fiscal year.
The Company continues to take steps aimed at increasing profitability. These
steps include: (a) seeking new customers and products to increase sales volume,
(b) continuing efforts to reduce material costs and (c) other cost-saving
measures. There can be no assurance that such actions will be successful in
returning the Company to profitability.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $17,129,000 as compared
to $10,706,000 at June 30, 1998. Working capital at December 31, 1998 includes
$16,772,000 of accounts receivable as compared to $14,861,000 at June 30, 1998.
The accounts receivable increase of $1,911,000 is a result of higher sales,
especially sales which occurred in the last month of the quarter. In addition,
the Company's new computer system caused problems with cash collections from
customers which increased the accounts receivable balance. Working capital also
includes $23,288,000 of inventory as compared to $20,096,000 at June 30, 1998.
The inventory increase of $3,192,000 is a result of higher sales and the need to
maintain inventories to support new customers and increased purchases by other
customers. In addition, the Company's new computer system caused problems in
planning and purchasing of materials which increased the inventory balance.
Working capital also includes $18,844,000 of accounts payable at December 31,
1998 as compared to $20,951,000 at June 30, 1998.
The Company utilized $6,991,000 in cash from operations in the six months ended
December 31, 1998. This utilization was financed primarily with proceeds from
the line of credit of $6,553,000.
Capital expenditures for the six months ended December 31, 1998 were $269,000.
Such expenditures related primarily to the continuing upgrade of 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 December 31, 1998, the Company
borrowed $24,834,000. 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 December 31, 1998 totaling $550,000 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 $1,731,000, net of the valuation
allowance at December 31, 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
June 30, 1998 to provide for this uncertainty. The realization of this asset
in future periods,if any, will improve the liquidity of the Company.
The Company continues to take steps aimed at increasing sales and reducing costs
to return to 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."
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.
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 22, 1999 By: /S/ CHARLES E. LAROSA
----------------------
Charles E. LaRosa
Chief Executive Officer and
President (Principal Executive Officer)
Date: February 22, 1999 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 December 31, 1998 (Unaudited) and the Consolidated
Statement of Operations for the Six Months Ended December 31, 1998 (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-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 64,000
<SECURITIES> 0
<RECEIVABLES> 16,772,000
<ALLOWANCES> 313,000
<INVENTORY> 23,288,000
<CURRENT-ASSETS> 41,023,000
<PP&E> 20,336,000
<DEPRECIATION> 18,457,000
<TOTAL-ASSETS> 63,507,000
<CURRENT-LIABILITIES> 23,894,000
<BONDS> 0
0
2,500,000
<COMMON> 2,421,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,493,000
<SALES> 41,527,000
<TOTAL-REVENUES> 41,527,000
<CGS> 32,743,000
<TOTAL-COSTS> 40,096,000
<OTHER-EXPENSES> 3,330,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,174,000
<INCOME-PRETAX> (1,899,000)
<INCOME-TAX> (400,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,499,000)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
