PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
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: APRIL 1, 2000
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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
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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 April
30, 2000 was 30,253,320.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
April 1,
2000
(Unaudited) July 3,
1999
----------------------- ------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 138,000 $ 122,000
Accounts receivable - net of allowance for doubtful accounts of $331,000 12,962,000 16,600,000
and $255,000
Inventories 18,195,000 17,916,000
Prepaid expenses and other current assets 1,053,000 1,268,000
Income taxes recoverable 947,000
Deferred tax asset 1,150,000 1,150,000
----------------------------------------------
Total current assets 33,498,000 38,003,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization of $22,059,000 and 16,436,000 18,636,000
$19,663,000
OTHER ASSETS
Deferred tax asset 2,393,000 2,606,000
Other assets 303,000 408,000
----------------------------------------------
$ 52,630,000 $ 59,653,000
==============================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 2,640,000 $ 2,135,000
Current portion of capital lease obligations 2,449,000 2,879,000
Accounts payable 20,705,000 20,800,000
Income taxes payable 210,000
Accrued expenses 1,904,000 3,195,000
----------------------------------------------
Total current liabilities 27,698,000 29,219,000
---------------------------------------------
LONG-TERM DEBT 22,575,000 26,934,000
---------------------------------------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 4,902,000 6,614,000
----------------------------------------------
DEFERRED GAIN ON SALE/LEASE BACK 325,000 396,000
---------------------------------------------
STOCKHOLDERS' DEFICIENCY
Preferred stock - par value $1.00 per share; 10,000,000 shares authorized; 2,500,000 2,500,000
2,500,000 shares issued and outstanding
Common stock - par value $.08 per share; authorized - 40,000,000 shares; 2,421,000 2,421,000
issued and outstanding - 30,253,320 shares
Capital in excess of par value 37,493,000 37,493,000
Accumulated deficit (45,284,000) (45,924,000)
----------------------------------------------
Total stockholders' deficiency (2,870,000) (3,510,000)
----------------------------------------------
$ 52,630,000 $ 59,653,000
==============================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
--------------------------------------- ----------------------------------
April 1, March 31, April 1, March 31,
2000 1999 2000 1999
------------------ ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
REVENUES
Gross Sales $67,246,000 $66,205,000 $20,205,000 $22,249,000
Less: Sales discounts and
allowances 4,163,000 6,404,000 1,160,000 2,002,000
------------------ ------------------ ------------------ --------------------
NET SALES 63,083,000 59,801,000 19,045,000 20,247,000
------------------ ------------------ ------------------ --------------------
COST AND EXPENSES
Cost of goods sold 48,541,000 53,609,000 14,753,000 17,408,000
Selling, general and
administrative 9,361,000 11,171,000 2,621,000 3,629,000
Research and development 408,000 530,000 130,000 148,000
------------------ ------------------ ------------------ --------------------
58,310,000 65,310,000 17,504,000 21,185,000
------------------ ------------------ ------------------ --------------------
INCOME (LOSS) FROM
OPERATIONS 4,773,000 (5,509,000) 1,541,000 ( 938,000)
------------------ ------------------ ------------------ --------------------
OTHER INCOME (EXPENSE)
Interest expense (3,875,000) (3,342,000) (1,330,000) ( 1,068,000)
Lawsuit settlement (1,179,000)
Other 69,000 119,000 22,000 ( 4,000)
------------------ ------------------ ------------------ --------------------
(3,806,000) (4,402,000) (1,308,000) ( 1,072,000)
------------------ ------------------ ------------------ --------------------
INCOME (LOSS) BEFORE
INCOME TAXES 967,000 (9,911,000) 233,000 ( 2,010,000)
INCOME TAXES (BENEFIT) 327,000 (3,231,000) 77,000 ( 662,000)
------------------ ------------------ ------------------ --------------------
NET INCOME (LOSS) 640,000 (6,680,000) 156,000 ( 1,348,000)
Preferred stock dividend
Requirement 150,000 150,000 50,000 50,000
------------------ ------------------ ------------------ --------------------
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 490,000 ($6,830,000) $ 106,000 ($1,398,000)
================== ================== ================== ====================
EARNINGS (LOSS) PER SHARE
BASIC AND DILUTED $ .02 ($ .23) $ .01 ($ .05)
================== ================== ================== ====================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 30,253,000 30,253,000 30,253,000 30,253,000
================== ================== ================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
---------------------------------------------
April 1, March 31,
2000 1999
---------------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 640,000 ($6,680,000)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization of property, plant and equipment 2,397,000 2,086,000
Amortization of bond discount and deferred financing costs 212,000 185,000
Amortization of deferred gain on sale/leaseback (71,000) (82,000)
Deferred Income Taxes 213,000 (2,285,000)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable 3,638,000 (2,250,000)
(Increase) decrease in inventories (279,000) 1,244,000
(Increase) decrease in other current assets 215,000 (498,000)
(Increase) decrease in income tax receivable 947,000 (947,000)
Increase (decrease)in accounts payable and (1,596,000) 3,218,000
accrued expenses and income taxes payable
---------------------- ----------------------
6,316,000 (6,009,000)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in other assets (106,000) (233,000)
Acquisition of property, plant and equipment, net (197,000) (49,000)
---------------------- ----------------------
(303,000) (282,000)
NET CASH USED IN INVESTING ACTIVITIES
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line of credit 5,488,000
Principal repayments of capital lease obligations (2,143,000) (2,176,000)
Increase (decrease) in long-term debt (3,854,000) 254,000
Increase in deferred gain on sale/leaseback 170,000
Lease refinancing 2,000,000
---------------------- ----------------------
(5,997,000) 5,736,000
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
---------------------- ----------------------
NET INCREASE (DECREASE) IN CASH 16,000 (555,000)
CASH, BEGINNING OF PERIOD 122,000 608,000
---------------------- ----------------------
CASH, END OF PERIOD $ 138,000 $ 53,000
====================== ======================
</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
nine months ended March 31, 1999, major costs incurred as a
result of the installation of a new integrated computer system.
Effective in the fourth quarter of fiscal 1999, the Company
changed its fiscal year end from June 30 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 periods was
not significant.
The results of operations for the three months and nine
months ended April 1, 2000 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, a former President of the
Company, who died in December 1996. For breaches of employment
and other agreements between the Company and Dr. Tesler, the
Estate claimed an award of compensatory damages, punitive
damages, a certain number of shares of common stock of the
Company and attorneys' fees. In December 1995 the Company accrued
the continuing salary claimed to be due Dr. Tesler for the period
through December 1998. Details of the Estate's claims are set
forth in the Company's Forms 10K for the fiscal year ended July
3, 1999 and 10Q for the quarter ended January 1, 2000. The
Company also brought counterclaims against the Estate.
In March 2000, the American Arbitration Association panel in
New York awarded amounts to both the estate of Dr. Tesler and the
Company. The arbitration panel awarded the Estate the amount of
Tesler's salary for two years and a portion of it's legal fees.
The award dismissed all other of the Estate's claims and also
ruled in favor of the Company on certain of its counterclaims.
The net result of the arbitrators' award was that the Company
paid the Estate $45,000 and will pay a portion of its legal fees.
The amount recorded by the Company in 1995 more than offset the
amount paid the Estate and the legal fees to be paid.
The final outcome did not have a material effect upon the
Company's financial position 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.
In May 1998, the Company brought an action against one of
its former outside corporate counsels seeking damages for
conflict of interest, breaches of fiduciary duty and loyalty,
negligence and malpractice during its representation of the
Company. The action is still pending.
Note 3: INVENTORIES:
Inventories consist of the following:
APRIL 1, 2000 JULY 3, 1999
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Raw materials $ 6,811,000 $ 6,253,000
Work in progress 704,000 862,000
Finished goods 10,680,000 10,801,000
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$18,195,000 $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 $800,000 at April 1, 2000.
Note 5: RELATED PARTY TRANSACTIONS:
The following transactions with ICC, an affiliated company,
are reflected in the consolidated financial statements as of or
for the nine months ended April 1, 2000 and March 31, 1999:
APRIL 1, 2000 MARCH 31, 1999
Inventory purchases from ICC $2,280,000 $2,297,000
Interest charges from ICC 474,000 169,000
Accounts payable to ICC 4,609,000 3,126,000
Note payable to ICC 3,000,000
Advances from ICC 1,400,000
* In connection with the credit line and term loans from a
financial institution, ICC has guaranteed $2,500,000 as of May
19, 2000.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Gross sales for the nine months ended April 1, 2000 were $67,246,000 as compared
to $66,205,000 in the comparable period in the prior fiscal year. The increase
in sales of $1,041,000 or 2% is mainly due to an increase in the private label
(store brand) sector of the business. The private label sales were $61,266,000
for the nine months ended April 1, 2000 versus $59,606,000 in the prior year
period. The increase of $1,660,000 or 3% 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 $5,980,000 for the nine months ended April 1, 2000
as compared to $6,599,000 in the prior year period. The decrease of $619,000 was
due to lost business which had not been replaced in the current fiscal year.
Sales to two customers, Walgreen Company and Costco Wholesale, were $20,837,000
or 31% of sales as compared to $22,257,000 or 34% of sales in the comparable
period in the prior fiscal year.
Gross sales for the three months ended April 1, 2000 were $20,205,000 as
compared to $22,249,000 in the comparable period in the prior fiscal year. The
decrease of $2,044,000 or 9% is mainly due to the discontinuation of sales to
several small customers and reduced orders from other customers.
Net sales for the nine months ended April 1, 2000 were $63,083,000 as compared
to $59,801,000 in the comparable period in the prior year. Net sales for the
three months ended April 1, 2000 were $19,045,000 as compared to $20,247,000 in
the comparable period in the prior year. These changes resulted primarily from
the decrease in sales discounts and allowances.
Cost of sales as a percentage of net sales was 77% for the nine months ended
April 1, 2000 as compared to 90% in the comparable period in the prior fiscal
year. Cost of sales as a percentage of net sales was 77% for the three months
ended April 1, 2000 as compared to 86% in the comparable period in the prior
fiscal year. During fiscal 1999, the Company converted to a new computer system
which resulted in disruptions in shipping, inventory control, production, and
planning leading to a reduction in sales and increased cost of sales. Also,
fiscal 1999 was impacted by the increased cost of packaging due to the new
equipment installed in 1998 which caused production inefficiencies and higher
waste due to the beginning trials of the equipment in 1999.
Selling, general and administrative expenses were $9,361,000 or 15% of net sales
for the nine months ended April 1, 2000 as compared to $11,171,000 or 19% of net
sales for the comparable period in the prior fiscal year. The decrease of
$1,810,000 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 and settlement of the arbitration case in March 2000. Also included
in the current nine month period is $300,000 in connection with the termination
of employment of Mr. Charles LaRosa, the past President of the Company. Selling,
general and administrative expenses were $2,621,000 or 14% of net sales for the
three months ended April 1, 2000 as compared to $3,629,000 or 18% of net sales
in the comparable period in the prior fiscal year. The decrease of $1,008,000 is
due mainly to the reasons stated above.
Research and development costs were $408,000 for the nine months ended April 1,
2000 as compared to $530,000 for the comparable period in the prior fiscal year.
Research and development costs were $130,000 for the three months ended April 1,
2000 as compared to $148,000 in the comparable period in the prior fiscal year.
Interest expense was $3,875,000 for the nine months ended April 1, 2000 as
compared to $3,342,000 in the comparable period in the prior fiscal year.
Interest expense was $1,330,000 for the three months ended April 1, 2000 as
compared to $1,068,000 in the comparable period in the prior fiscal year. The
increase in interest expense is primarily a result of increased interest rates
plus increased borrowing in the first half of fiscal 2000 to meet working
capital needs.
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.
Accordingly, the Company recorded a lawsuit settlement expense of $1,179,000 for
the period ended December 31, 1998.
The Company recorded a tax provision of $327,000, which is related to the net
profit for the nine months ended April 1, 2000, as compared to a tax benefit of
$3,231,000 for the nine months ended March 31, 1999 due to the loss for the
period. The Company recorded a tax provision of $77,000 which is related to the
net profit for the three months ended April 1, 2000, as compared to a tax
benefit of $662,000 for the three months ended March 31, 1999 due to the loss
for the period.
The Company reported net income of $640,000 and $156,000 for the nine and three
months ended April 1, 2000, respectively, or $.02 and $.01 per share as compared
to net loss of $6,680,000 and $1,348,000, respectively, or $.23 and $.05 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) 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 April 1, 2000, the Company had working capital of $5,800,000 as compared to
$8,784,000 at July 3, 1999. Working capital at April 1, 2000 included
$12,962,000 of accounts receivable as compared to $16,600,000 at July 3, 1999.
The accounts receivable decrease of $3,638,000 is primarily a result of improved
collections. Working capital also included $18,195,000 of inventory as compared
to $17,916,000 at July 3, 1999. The increase is related to seasonal demand for
product. Working capital also included $22,609,000 of accounts payable and
accrued expenses as compared to $23,995,000 at July 3, 1999. The decrease of
$1,386,000 is primarily due to payment of accrued expenses.
The Company generated $6,316,000 in cash from operations for the nine months
ended April 1, 2000, as a result of the above.
Capital expenditures for the nine months ended April 1, 2000 were $197,000. 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 April 1, 2000, the Company had
outstanding borrowings under this facility of $17,045,000. Borrowings under the
modified agreement, which expires August 7, 2001, bear interest at the prime
rate less 3/4%. The 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 working capital
requirements in terms of required principal and interest payments.
The Company has outstanding 2,500,000 shares of Series A cumulative redeemable
(at the Company's option) convertible preferred stock sold to ICC. Dividends
from the date of issue (April 8, 1996) through April 1, 2000 totaling $800,000
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. Also, the Company has, from time to time,
received advances from ICC. As of April 1, 2000, the outstanding advances
amounted to $1,400,000.
The Company has a deferred tax asset of $4,207,000 before the valuation
allowance at April 1, 2000, 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 are estimated to take more than a few years to realize cannot be
reasonably determined at this time due to the inconsistent operating results in
the past. Accordingly, a valuation allowance of $664,000 was recorded at April
1, 2000 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 $400,000
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
The Company did not experience any material difficulties in connection with the
onset of the year 2000.
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 - The Registrant filed the following
report on Form 8-K during and since the quarter ended April
1, 2000:
DATE OF REPORT ITEM NUMBER (SUMMARY)
-------------- -----------------------
January 13, 2000 5 (regarding payment of
interest on debentures)
March 29, 2000 5 (regarding award in
arbitration brought by
the estate of Dr.
Max Tesler)
<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: JUNE 15, 2000 By: /S/ R. BRADLEY CONNER
----------------------------------------
R. Bradley Conner
Chief Financial Officer and Treasurer
(Principal Financial Officer)
