<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended May 31, 1996
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: 33-78022
FUTUREBIOTICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-3205937
(State or other jurisdiction of (State or I.R.S. Employer
incorporation of organization) Identification Number)
145 Ricefield Lane
Hauppauge, New York
(Address of principal executive offices)
11788
(Zip Code)
(516) 273-6300
(Registrant's telephone number including area code)
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Class Outstanding at July 1, 1996
Common Stock 13,500,000
<PAGE>
FUTUREBIOTICS, INC.
FORM 10-QSB
QUARTERLY REPORT
For the Six Months Ended May 31, 1996
TABLE OF CONTENTS
Page
to
Page
Financial Statements:
Balance sheet............................................................. 1
Statements of earnings.................................................... 2
Statements of cash flows.................................................. 3
Notes to financial statements............................................. 4-6
Management's discussion and analysis
of financial condition and results
of operations............................................................. 7
Legal proceedings......................................................... 8
Signatures................................................................ 9
<PAGE>
FUTUREBIOTICS, INC.
BALANCE SHEET
(Unaudited)
May 31, 1996
ASSETS
CURRENT ASSETS:
Cash $ 1,799,267
Investment in marketable securities 444,019
Accounts receivable 1,764,981
Inventories 3,759,272
Prepaid expenses and other current
assets 1,137,952
------------
Total current assets 8,905,491
------------
INVESTMENTS IN MARKETABLE SECURITIES 362,544
PROPERTY, PLANT AND EQUIPMENT, net 293,666
INTANGIBLE ASSETS, net 2,117,488
OTHER ASSETS 783,730
------------
$ 12,462,919
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 122,316
Due to parent 1,656,486
------------
Total current liabilities 1,778,802
------------
LONG-TERM DEBT 1,750,000
DEFERRED INCOME TAXES 190,848
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value;
authorized 40,000,000 shares; 1,350
13,500,000 issued and outstanding
Preferred stock, $.0001 par value;
authorized 8,335,000 shares; 8,335,000
issued and outstanding 834
Additional paid-in capital 9,394,049
Unearned compensation (1,967,466)
Retained earnings 1,314,502
------------
8,743,269
------------
$ 12,462,919
------------
------------
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<PAGE>
FUTUREBIOTICS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------- ------------------
May 31, May 31,
------- -------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 6,347,847 $ 5,310,208 $ 3,558,594 $ 3,178,622
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 2,791,008 2,709,447 1,526,852 1,720,618
Selling, general and administrative 3,322,568 2,250,542 2,142,126 1,374,548
Relocation expense 135,055 -- -- --
------------ ------------ ------------ ------------
6,248,631 4,959,989 3,668,978 3,095,166
------------ ------------ ------------ ------------
OPERATING INCOME 99,216 350,219 (110,384) 83,456
------------ ------------ ------------ ------------
OTHER:
Interest income (52,178) (127,540) (18,098) (61,035)
Interest expense 54,907 15,279 34,118 12,737
------------ ------------ ------------ ------------
2,729 (112,261) 16,020 (48,298)
------------ ------------ ------------ ------------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 96,487 462,480 (126,404) 131,754
PROVISION/(BENEFIT) FOR INCOME
TAXES 44,000 191,000 (58,000) 62,000
------------ ------------ ------------ ------------
NET EARNINGS $ 52,487 $ 271,480 $ (68,404) $ 69,754
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
EARNINGS PER SHARE $ .00 $ .02 $ .00 $ .00
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 13,500,000 13,071,429 13,500,000 13,500,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
----------------
May 31,
-------
1996 1995
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 52,487 $ 271,480
----------- -----------
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 803,610 265,516
Deferred income tax liability (benefit) 294,000 (46,000)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (331,633) (682,898)
Inventories (1,851,342) (117,707)
Prepaid expenses and other current assets (549,369) (721,562)
Other assets (118,125) (429,978)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 33,484 60,710
Income taxes payable (256,957) (37,235)
Due to/from parent 2,417,381 (453,504)
----------- -----------
Total adjustments 441,049 (2,162,658)
----------- -----------
Net cash provided by (used in) operating activities 493,536 (1,891,178)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in investments 1,686,260 (2,477,240)
Purchase of property, plant and equipment (146,925) (37,467)
Acquisition of intangible assets (1,113,010) (43,039)
----------- -----------
Net cash provided by (used in) investing activities 426,325 (2,557,746)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of note payable, bank 500,000 500,000
Payments of unearned compensation -- (63,480)
----------- -----------
Net cash provided by financing activities 500,000 436,520
----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,419,861 (4,012,404)
Cash and cash equivalents at beginning
of period 379,406 5,457,047
----------- -----------
Cash and cash equivalents at end of
period $ 1,799,267 $ 1,444,643
----------- -----------
----------- -----------
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1996
1. Basis of Presentation:
The interim financial statements furnished reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement of the
financial position and results of operations for the six and three month
periods ended May 31, 1996 and May 31, 1995. The financial statements should
be read in conjunction with the summary of significant accounting policies and
notes to financial statements included in the Company's Form 10-KSB for the
fiscal year ended November 30, 1995. The results of operations for the six
month periods ended May 31, 1996 and 1995 are not necessarily indicative of the
results to be expected for the full year.
2. Concentration of Credit Risk:
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Accounting Standards
No., 105, include trade accounts receivable. Wholesale distributors of
nutritional supplements account for a substantial portion of trade receivables.
The risk associated with this concentration is limited due to the large number
of distributors and their geographic dispersion. Financial instruments also
include U.S. treasury notes and other government backed securities.
3. Investment in Marketable Securities:
The Company has adopted Financial Accounting Standards Board ("FASB")
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." FASB No. 115 requires that investments in debt and equity
securities be designated as trading, held-to-maturity, or available for sale.
Management considers the Company's marketable securities, consisting
principally of government and government-backed debt securities, to be
available-for-sale. Available-for-sale securities are reported at amounts
which approximate fair value.
4. Inventories:
Inventories, consisting principally of finished goods, at May 31, 1996
have been estimated using the gross profit method.
5. Intangible Assets:
The Company has implemented a marketing program with select retail stores
and distributors in order to obtain premium shelf space. Contracts with
retailers are for a fixed period of not less than one year. Costs associated
with these contracts are being charged to operations ratably over the lives of
the agreements.
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<PAGE>
FUTUREBIOTICS, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1996
(Continued)
6. Revolving Credit Agreement:
The Company has a secured revolving credit agreement with a bank. The
agreement provides that the Company may borrow an aggregate of (i) 80% of
qualified accounts receivable and (ii) the lesser of 50% of its inventory or
$500,000, to a maximum of $3,000,000. All borrowings bear interest at the
bank's prime rate (8.25% at May 31, 1996) or 2% above the Eurodollar rate (at
the Company's option), are collateralized by the Company's assets, and require,
among other things, the maintenance of minimum tangible net worth and
limitations on additional borrowings. The agreement expires on May 31, 1998.
In December 1994, PDK Labs Inc. amended its Revolving Credit Agreement
with a bank in respect to the Company's securitization of PDK. In connection
with PDK's Amended Revolving Credit Agreement, the Company is not a guarantor
and will not become a guarantor unless PDK makes loans or advances to the
Company exceeding $1,500,000 provided that if i) any such loans or advances to
the Company causes the aggregate of all loans or advances made by PDK to exceed
$4,000,000 or ii) the aggregate of all loans made by PDK and the Company
exceeds $5,500,000.
7. Stockholders' Equity:
a. Earnings per share:
Earnings per share were computed by dividing net earnings by the weighted
average number of common shares and equivalents outstanding.
b. Reverse stock split:
In May 1996, the Board of Directors approved a one for ten Reverse Stock
Split of the Company's common Stock. The Reverse Stock Split is subject to the
approval of the Company's shareholders.
8. Income Taxes:
The tax effects of temporary differences that give rise to the deferred
tax liability at May 31, 1996 consist of the following:
Net Deferred
Income Tax Liability
Property, plant and equipment $ 18,000
Intangible assets (143,000)
Unearned compensation 316,000
---------
$ 191,000
---------
---------
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<PAGE>
FUTUREBIOTICS, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1996
(Continued)
9. Commitments:
Pursuant to employment agreements entered into with certain key employees
in December 1995, the Company has granted options to purchase 50,000 shares of
the Company's common stock at any time commencing two years from the date of
the agreements, at an exercise price of $1.00 per share.
The Company's aggregate commitment under such agreements which expire in
December 1997 is approximately $280,000.
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<PAGE>
FUTUREBIOTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales for the six and three month periods ended May 31, 1996
approximated $6,348,000 and $3,559,000, respectively, representing increases of
20% and 12% over the corresponding periods in 1995. The increase is
principally attributable to continued expansion of advertising and marketing
efforts.
Gross profit for the six and three month periods ended May 31, 1996
amounted to approximately $3,557,000 (56% of sales) and $2,032,000 (57% of
sales), respectively as compared to $2,601,000 (49% of sales) and $1,458,000
(46% of sales) in the corresponding periods in the prior year. The increase in
gross profit is attributable to the Company's restructured sales and management
agreement with its parent.
Selling, general and administrative expenses approximated $3,323,000 and
$2,142,000 for the six and three month periods ended May 31, 1996,
respectively. As a percentage of sales, these amounts represent 52% and 60%
respectively, as compared to 42% and 43% in the corresponding periods in the
prior year. The increase in selling, general and administrative expenses is
principally attributable to promotional costs incurred in connection with an
aggressive sales program designed to obtain shelf space at selected retailers
for a contract period of not less than one year. The cost of this promotion is
being charged to operations on a straight line basis which is not necessarily
proportional to sales generated under the program. As of May 31, 1996, the
Company is no longer signing on any new customers under this program.
The Company realized approximately $135,000 in expenses related to the
relocation of its sales offices from Vermont to New York.
Liquidity and Capital Resources
The Company had net working capital of approximately $7,127,000 at May 31,
1996.
The Company's statement of cash flows reflects cash provided by operating
activities of approximately $494,000 which reflects increases in operating
assets and payables such as accounts receivable ($332,000), inventories
($1,851,000) and prepaid expenses and other current assets ($549,000) offset by
an increase in amounts due to parent ($2,417,000) and an adjustment for
amortization expense ($804,000). In addition, the statement reflects cash
provided by investing activities of approximately ($426,000) principally
attributable to the purchase of government securities ($1,686,000) net of
acquisition of intangibles of approximately ($1,113,000).
The cash flow statement also reflects cash of $500,000 provided by
financing activities resulting from borrowings under a secured revolving credit
agreement with a bank.
On June 11, 1996, the Company amended its Revolving Credit Agreement with
a bank providing for borrowings up to $3,000,000 which expires on May 31, 1998.
The Company expects to meet its cash requirements from operations, current
cash reserves, and its existing financial arrangements.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Reference is made to Item 3 in the Company's Form 10-KSB for the year
ended November 30, 1995.
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<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.
FUTUREBIOTICS INC.
Dated: July 9, 1996 By: /s/ /Michael B. Krasnoff/
--------------------------
Michael B. Krasnoff
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> MAY-31-1996
<CASH> 1,799,267
<SECURITIES> 806,563
<RECEIVABLES> 1,764,981
<ALLOWANCES> 0
<INVENTORY> 3,759,272
<CURRENT-ASSETS> 8,905,491
<PP&E> 380,834
<DEPRECIATION> 87,168
<TOTAL-ASSETS> 12,462,919
<CURRENT-LIABILITIES> 1,778,802
<BONDS> 1,750,000
0
834
<COMMON> 1,350
<OTHER-SE> 8,741,085
<TOTAL-LIABILITY-AND-EQUITY> 12,462,919
<SALES> 6,347,847
<TOTAL-REVENUES> 6,347,847
<CGS> 2,791,008
<TOTAL-COSTS> 6,248,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,907
<INCOME-PRETAX> 96,487
<INCOME-TAX> 44,000
<INCOME-CONTINUING> 52,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,487
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
