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: MARCH 31, 1999
---------------
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 August
31, 1999 was 30,253,320.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 1999 June 30, 1998
(Unaudited) (Note 1)
------------ ------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 53,000 $ 608,000
Accounts receivable - net of allowance for doubtful
accounts of $255,000 and $238,000 17,111,000 14,861,000
Inventories 18,852,000 20,096,000
Prepaid expenses and other current assets 1,291,000 793,000
Income tax recoverable 947,000 --
Deferred tax asset 1,000,000 300,000
--------- -------
Total current assets 39,254,000 36,658,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization of
$19,663,000 and $17,083,000 19,404,000 21,441,000
OTHER ASSETS
Deferred tax asset 2,816,000 1,231,000
Other assets 767,000 534,000
------- -------
$ 62,241,000 $ 59,864,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $ 440,000 $ 482,000
Current portion of capital lease obligations 3,064,000 2,898,000
Accounts payable 21,398,000 20,951,000
Income taxes payable 210,000 227,000
Accrued expenses 4,182,000 1,394,000
Total current liabilities 29,294,000 25,952,000
---------- ----------
LONG-TERM DEBT 28,952,000 22,983,000
---------- ----------
LONG-TERM CAPITAL LEASE OBLIGATIONS 7,211,000 7,553,000
--------- ---------
DEFERRED GAIN ON SALE/LEASEBACK 409,000 321,000
------- -------
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 (46,039,000) (39,359,000)
----------- -----------
Total stockholders' equity (deficiency) (3,625,000) 3,055,000
---------- ---------
$ 62,241,000 $ 59,864,000
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------ ----------------------------
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
REVENUES
<S> <C> <C> <C> <C>
Gross sales $ 66,205,000 $ 63,778,000 $ 22,249,000 $ 22,084,000
Less: Sales discounts and allowance 6,404,000 2,602,000 2,002,000 829,000
------------ ------------ ------------ ------------
NET SALES 59,801,000 61,176,000 20,247,000 21,255,000
------------ ------------ ------------ ------------
COST AND EXPENSES
Cost of goods sold 53,609,000 46,006,000 17,408,000 16,025,000
Selling, general and administrative 11,171,000 9,010,000 3,629,000 3,158,000
Research and development 530,000 822,000 148,000 309,000
------------ ------------ ------------ ------------
65,310,000 55,838,000 21,185,000 19,492,000
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (5,509,000) 5,338,000 (938,000) 1,763,000
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (3,346,000) (3,154,000) (1,172,000) (1,081,000)
Lawsuit settlement (1,179,000) -- -- --
Other 123,000 121,000 100,000 100,000
------------ ------------ ------------ ------------
(4,402,000) (3,033,000) (1,072,000) (981,000)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (9,911,000) 2,305,000 (2,010,000) 782,000
INCOME TAXES (BENEFIT) (3,231,000) 461,000 (662,000) 94,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) (6,680,000) 1,844,000 (1,348,000) 688,000
Preferred stock dividend requirement 150,000 150,000 50,000 50,000
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (6,830,000) $ 1,694,000 $ (1,398,000) $ 638,000
EARNINGS (LOSS) PER SHARE - ============ ============ ============ ============
BASIC AND DILUTED $ (.23) $ .06 $ (.05) $ .02
WEIGHTED AVERAGE NUMBER OF ============ ============ ============ ============
COMMON SHARES OUTSTANDING 30,253,000 30,156,000 30,253,000 30,228,000
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended March 31,
---------------------------
1999 1998
(Unaudited) Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $(6,680,000) $ 1,844,000
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization of property, plant
and equipment 2,086,000 1,858,000
Amortization of bond discount and deferred
financing costs 185,000 157,000
Amortization of deferred gain on sale of leaseback (82,000) (39,000)
Changes in current assets and liabilities:
(Increase) in accounts receivable (2,250,000) (5,122,000)
(Increase) in inventories (1,244,000) (1,010,000)
(Increase) in other current assets (498,000) (72,000)
(Increase) in income tax receivable (947,000) --
Increase in accounts payable and accrued
expenses and income taxes payable 3,218,000 1,757,000
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (6,009,000) (627,000)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in other assets (233,000) (29,000)
(Increase) in property, plant and equipment, net (49,000) (1,869,000)
------- ----------
NET CASH USED IN INVESTING ACTIVITIES (282,000) (1,898,000)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line of credit 5,488,000 2,760,000
Principal repayments of capital leases (2,176,000) (1,730,000)
Increase (decrease) in long-term debt 254,000 (302,000)
Refinancing of capital leases 2,000,000 --
Increase in deferred gain on sale/leaseback 170,000 --
Issuance of common stock -- 75,000
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,736,000 803,000
--------- -------
NET DECREASE IN CASH (555,000) (1,722,000)
CASH, BEGINNING OF PERIOD 608,000 2,087,000
------- ---------
CASH, END OF PERIOD $ 53,000 $ 365,000
=========== ===========
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
solely of normal recurring accruals plus major costs incurred as a
result of the installation of a new computer system,
The results of operations for the three and nine months ended March
31, 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 $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
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 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 recorded a lawsuit settlement expense of
$1,179,000 (which includes legal and other costs related to the
settlement) as of December 31, 1998. 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 loyalty, negligence and malpractice during its
representation of the Company.
Note 3: INVENTORIES:
Inventories consist of the following:
MARCH 31, 1999 JUNE 30, 1998
-------------- -------------
Raw materials $6,098,000 $6,589,000
Work in progress 886,000 717,000
Finished goods 11,868,000 12,790,000
---------- ----------
$18,852,000 $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 $600,000
at March 31, 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 nine months ended March 31, 1999 and 1998:
1999 1998
------ ------
Inventory purchases from ICC $2,297,000 $ 832,000
Interest charges from ICC 169,000 246,000
Accounts payable to ICC 3,126,000 675,000
Equipment lease obligation due ICC * 2,448,000
* The Company assumed direct liability for these leases which were
previously indirectly financed through ICC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Gross sales for the nine months ended March 31, 1999 were $66,205,000 as
compared to $63,778,000 in the comparable period in the prior fiscal year. The
increase in sales of $2,427,000 or 4% is mainly due to an increase in the
private label sector of the business. The private label sales were $59,606,000
as compared to $54,079,000 in the prior year period. The increase of $5,527,000
or 10% 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 the Company's conversion to a new
computer system. The bulk/contract manufacturing sector had sales of $4,454,000
as compared to $9,699,000 in the prior year period. The decrease is due to lost
business in the bulk/contract manufacturing sector which had not been replaced
in the current fiscal year. Two customers represented 34% of sales for the nine
months ended March 31, 1999. Sales to these two customers, Walgreen Company and
Costco Wholesale, were $22,257,000 or 34% of sales as compared to $23,571,000 or
37% of sales in the comparable period in the prior fiscal year.
Gross sales for the three months ended March 31, 1999 were $22,249,000 as
compared to $22,084,000 in the comparable period in the prior fiscal year. The
increase of $165,000 or 1% is mainly a result of the items discussed above.
Net sales for the nine months ended March 31, 1999 were $59,801,000 as compared
to $61,176,000 in the comparable period in the prior year. The decrease was due
to higher sales discounts and allowances net of an increase in gross sales.
Cost of sales as a percentage of net sales was 90% for the nine months ended
March 31, 1999 as compared to 75% in the prior fiscal year. Cost of sales as a
percentage of net sales was 86% for the three months ended March 31, 1999 as
compared to 75% in the comparable period in the prior fiscal year. The increase
is partly 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.
To 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 inventory control,
shipping, production and planning resulting in reduced 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.
Selling, general and administrative expenses were $11,171,000 or 19% of net
sales for the nine months ended March 31, 1999 as compared to $9,010,000 or 15%
of net sales for the comparable period in the prior fiscal year. The increase of
$2,161,000 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 $3,629,000 or
18% of net sales for the three months ended March 31, 1999 as compared to
$3,158,000 or 15% of net sales in the comparable period in the prior fiscal
year. The increase of $471,000 is due mainly to the reasons stated above.
Research and development costs were $530,000 for the nine months ended March 31,
1999 as compared to $822,000 for the comparable period in the prior fiscal year.
Research and development costs were $148,000 for the three months ended March
31, 1999 as compared to $309,000 in the comparable period in the prior fiscal
year.
Interest expense was $3,346,000 for the nine months ended March 31, 1999 as
compared to $3,154,000 in the comparable period in the prior fiscal year.
Interest expense was $1,172,000 for the three months ended March 31, 1999 as
compared to $1,081,000 in the comparable period in the prior fiscal year. As a
result of the implementation of the new computer system the Company experienced
delays in billings and collections which caused a substantial increase in
accounts receivable which required increased borrowing and additional interest
expense. The increase in interest expense is partly 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 partially 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 nine months ended March 31, 1999.
The Company recorded a tax benefit of $3,321,000 for the nine months ended March
31, 1999 due to the loss for the period.
Net loss for the nine and three months ended March 31, 1999 was $6,680,000 and
$1,348,000 respectively, or ($0.23) and ($.05) per share as compared to net
income of $1,844,000 and $688,000, respectively, or $.06 and $.02 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 March 31, 1999, the Company had working capital of $9,960,000 as compared to
$10,706,000 at June 30, 1998. Working capital at March 31, 1999 includes
$17,111,000 of accounts receivable as compared to $14,861,000 at June 30, 1998.
The accounts receivable increase of $2,250,000 is partly a result of higher
sales, especially sales which occurred in the last month of the period. In
addition, the implementation of the Company's new computer system caused
problems with cash collections from customers which also increased the accounts
receivable balance. Working capital also includes $18,852,000 of inventory as
compared to $20,096,000 at June 30, 1998. Working capital also includes
$21,398,000 of accounts payable as compared to $20,951,000 at June 30, 1998.
The Company utilized $6,009,000 in cash from operations in the nine months ended
March 31, 1999. This utilization was financed primarily with proceeds from the
line of credit of $5,488,000.
Capital expenditures for the nine months ended March 31, 1999 were $586,000.
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 March 31, 1999, the Company had
borrowed $23,352,000. Borrowings under the modified agreement, which expires
August 7, 2001, bear interest at the prime rate of interest less 3/4%.
On April 1, 1999, the Company entered into a term loan and security agreement
with ICC for $3,000,000 with interest at the rate of 1% above the prime rate.
ICC also provided a temporary guarantee on $1,500,000 in advances from a lending
institution on April 1, 1999.
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 March 31, 1999 totaling $600,000 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 $4,480,000, before the valuation
allowance at March 31, 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
March 31, 1999 to provide for this uncertainty. The realization of this asset in
future periods will improve the liquidity of the Company.
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".
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
DATE OF REPORT
May 18, 1999 Restatement of quarterly results
June 15, 1999 Delay in interest payment on debentures
July 14, 1999 Payment of interest on debentures
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL FORMULATIONS, INC.
(REGISTRANT)
Date: 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> 9-MOS
<FISCAL-YEAR-END> JUL-3-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> MAR-31-1999
<CASH> 53,000
<SECURITIES> 0
<RECEIVABLES> 17,366,000
<ALLOWANCES> 255,000
<INVENTORY> 18,852,000
<CURRENT-ASSETS> 39,254,000
<PP&E> 39,067,000
<DEPRECIATION> 19,663,000
<TOTAL-ASSETS> 62,241,000
<CURRENT-LIABILITIES> 29,294,000
<BONDS> 5,702,822
0
2,500,000
<COMMON> 2,421,000
<OTHER-SE> 37,413,000
<TOTAL-LIABILITY-AND-EQUITY> 62,241,000
<SALES> 22,249,000
<TOTAL-REVENUES> 20,247,000
<CGS> 17,408,000
<TOTAL-COSTS> 21,185,000
<OTHER-EXPENSES> (100,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,172,000
<INCOME-PRETAX> (2,010,000)
<INCOME-TAX> (662,000)
<INCOME-CONTINUING> (1,348,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,348,000)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
