<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended August 31, 1997
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) 273-2630
---------------------------------------------------
(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 September 29, 1997
- ------------ ---------------------------------
Common Stock 1,350,000
<PAGE>
FUTUREBIOTICS, INC.
FORM 10-Q
QUARTERLY REPORT
For the Nine Months Ended August 31, 1997
TABLE OF CONTENTS
Page to Page
------------
Financial Statements:
Condensed balance sheets.............................................. 1
Condensed statements of operations.................................... 2
Condensed statements of cash flows.................................... 3
Notes to condensed financial statements............................... 4 - 6
Management's discussion and analysis
of financial condition and results
of operations......................................................... 7 - 8
Legal proceedings..................................................... 9
Signatures............................................................ 10
<PAGE>
FUTUREBIOTICS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, 1997 November 30, 1996
--------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,030,803 $ 484,285
Investment in marketable securities,
at fair value 466,103 1,598,596
Accounts receivable (no allowance for
doubtful accounts) 1,206,703 1,449,650
Inventories (Note 4) 4,636,106 3,261,595
Due from parent 1,046,708 470,356
Prepaid income taxes 153,617 416,685
Prepaid expenses and other current assets 423,142 452,608
Deferred income tax asset (Note 8) 118,000 76,152
------------ ------------
Total current assets 9,081,182 8,209,927
------------ ------------
INVESTMENT IN MARKETABLE SECURITIES 333,625 529,512
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation and amortization
of $169,390 and $117,083, respectively 265,749 313,665
INTANGIBLE ASSETS, net (Note 5) 1,033,301 2,073,805
OTHER ASSETS 598,271 637,072
------------ ------------
$ 11,312,128 $ 11,763,981
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 87,952 $ 85,078
------------ ------------
Total current liabilities 87,952 85,078
------------ ------------
LONG-TERM DEBT (Note 6) 3,000,000 3,000,000
DEFERRED INCOME TAX LIABILITY (Note 8) 71,000 134,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value;
authorized 40,000,000 shares;
1,350,000 issued and outstanding 135 135
Preferred stock, $.0001 par value;
authorized 8,335,000 shares; 8,335,000
issued and outstanding 834 834
Additional paid-in capital 9,395,265 9,395,265
Unearned compensation (1,607,151) (1,823,340)
Retained earnings 364,093 972,009
------------ ------------
8,153,176 8,544,903
------------ ------------
$ 11,312,128 $ 11,763,981
============ ============
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31, August 31, August 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 8,753,561 $ 9,449,321 $ 2,725,500 $ 3,101,474
COSTS AND EXPENSES:
Cost of sales 4,049,656 4,355,837 1,439,666 1,564,829
Selling, general and administrative 5,405,311 5,179,630 1,686,659 1,857,062
Relocation expense -- 135,055 -- --
----------- ----------- ----------- -----------
9,454,967 9,670,522 3,126,325 3,421,891
----------- ----------- ----------- -----------
OPERATING LOSS (701,406) (221,201) (400,825) (320,417)
----------- ----------- ----------- -----------
OTHER:
Loan cost expense 51,097 -- 51,097 --
Interest income (111,906) (84,523) (28,606) (32,345)
Interest expense 219,319 89,299 97,745 34,392
----------- ----------- ----------- -----------
158,510 4,776 120,236 2,047
----------- ----------- ----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES (859,916) (225,977) (521,061) (322,464)
INCOME TAX BENEFIT (252,000) (84,000) (122,000) (128,000)
----------- ----------- ----------- -----------
NET LOSS $ (607,916) $ (141,977) $ (399,061) $ (194,464)
=========== =========== ----------- -----------
LOSS PER SHARE $ (.45) $ (.11) $ (.30) $ (.14)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 1,350,000 1,350,000 1,350,000 1,350,000
----------- ----------- ----------- -----------
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
August 31, August 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (607,916) $ (141,977)
Adjustments to reconcile net loss to net
cash (used in)/provided by operating activities:
Depreciation and amortization 1,259,940 1,047,161
Deferred income tax (benefit) provision (104,848) 207,000
Loan cost expense 51,097 --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 242,947 191,853
Inventories (1,374,511) (2,273,194)
Due to/from parent (576,352) 2,255,850
Prepaid income taxes 263,068 --
Prepaid expenses and other current assets 29,466 (615,559)
Other assets 38,801 (36,935)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 2,874 36,483
Income taxes payable -- (256,957)
----------- -----------
Total adjustments (167,518) 555,702
----------- -----------
Net cash (used in)/provided by operating activities (775,434) 413,725
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investments 1,328,380 1,615,061
Purchase of property, plant and equipment (7,295) (167,136)
Disposal of property, plant and equipment 2,904 --
Acquisition of intangible assets (2,037) (1,795,186)
----------- -----------
Net cash provided by/(used in) investing activities 1,321,952 (347,261)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of note payable, bank -- 1,250,000
Proceeds from revolving credit line 3,000,000 --
Repayment of debt (3,000,000) --
----------- -----------
Net cash provided by financing activities -- 1,250,000
----------- -----------
Net increase in cash and cash equivalents 546,518 1,316,464
Cash and cash equivalents at beginning of period 484,285 379,406
----------- -----------
Cash and cash equivalents at end of period $ 1,030,803 $ 1,695,870
=========== ===========
</TABLE>
-3-
<PAGE>
FUTUREBIOTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1997
1. Basis of Presentation:
The interim unaudited condensed financial statements furnished reflect
all adjustments which are, in the opinion of management, necessary to present
fairly its financial position as of August 31, 1997 and the results of
operations and statements of cash flows for the nine months ended August 31,
1997 and August 31,1996. The balance sheet as of November 30, 1996 has been
derived from the audited balance sheet as of that date. This report should be
read in conjunction with the Company's annual report filed on Form 10-KSB for
the fiscal year ended November 30, 1996. The results of operations and cash
flows for the nine months ended August 31, 1997 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 corporate bonds rated at least "A-1" or the equivalent thereof by
Standard & Poors Corporation.
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 corporate bonds rated at least "A-1" or the equivalent thereof by Standard &
Poors Corporation, 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 August 31,
1997 have been estimated using the gross profit method.
-4-
<PAGE>
FUTUREBIOTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1997
(Continued)
5. Intangible Assets:
Intangible assets consist of the following:
Nine Months Ended Year Ended
August 31, November 30,
1997 1996
---------- ----------
(Unaudited)
Distribution rights $2,562,253 $2,562,253
Customer lists 384,212 384,212
Covenants not to compete 845,000 845,000
Goodwill 300,000 300,000
Other 70,076 68,039
---------- ----------
4,161,541 4,159,504
Less accumulated amortization 3,128,240 2,085,699
---------- ----------
$1,033,301 $2,073,805
========== ==========
The Company has a marketing program with select retail stores and
distributors in order to obtain premium shelf space. Costs associated with these
distribution rights are being charged to operations ratably over the lives of
the agreements. The Company ceased signing on any new customers under this
program as of May 31, 1996.
6. Long-Term Debt
On August 20, 1997, the Company and its parent entered into credit
facilities with a new bank which provide for borrowings under a revolving credit
agreement (the "Revolving Agreement") and a term loan (the "Term Agreement").
The Revolving Agreement which extends through September 2000, provides
for aggregate borrowings of up to $15,000,000 with a sublimit of $4,000,000 for
the Company and $11,000,000 for the parent. Borrowings under the Revolving
Agreement bear interest at the bank's prime rate or the Eurodollar rate, at the
Company's option.
The Term Agreement provides for aggregate borrowings of up to
$8,500,000 for the Company and its parent on a combined basis.
The Company and its parent are jointly and severally liable for the
unpaid balance of the credit facilities. The agreement contains various
covenants pertaining to the maintenance of certain financial ratio restrictions,
limitations on dividends, and restrictions on borrowings.
The prime rate at August 31, 1997 was 8 1/2%
-5-
<PAGE>
FUTUREBIOTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1997
(Continued)
7. Stockholders' Equity:
a. (Loss) Earnings per share
(Loss) earnings per share were computed by dividing net (loss)
earnings by the weighted average number of common shares outstanding.
Outstanding stock options have not been included as their effect on (loss)
earnings per share would have been anti-dilutive.
b. Reverse stock split
On December 30, 1996, the Company's Board of Directors authorized
a one for ten reverse stock split of common stock outstanding. Per share and
weighted average share amounts for the six months ended May 31, 1996 have been
restated to reflect this stock split.
8. Income Taxes:
The tax effects of temporary differences that give rise to the net
deferred income tax asset (liability) are comprised of the following:
<TABLE>
<CAPTION>
August 31, 1997 November 30, 1996
(Unaudited)
Net Net Net Net
Deferred Deferred Deferred Deferred
Income Tax Income Tax Income Tax Income Tax
Asset (Liability) Asset (Liability)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Inventories $ 54,300 $ -- $ 41,825 $ --
Property, plant and
equipment -- (30,400) -- (24,667)
Tax carryforwards 123,700 -- 54,000 --
Unearned compensation -- (218,700) -- (275,340)
Other 15,000 -- (19,673) 8,890
Intangibles -- 178,100 -- 157,117
Valuation allowance (75,000) -- -- --
--------- --------- --------- ---------
$ 118,000 $ (71,000) $ 76,152 $(134,000)
========= ========= ========= =========
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales for the nine and three month periods ended August 31, 1997
approximated $8,754,000 and $2,726,000 respectively, as compared to $9,449,000
and $3,101,000 in the corresponding periods. The overall decrease in sales is
attributable to the Company discontinuing an aggressive marketing program which
was in place in 1996.
Gross profit for the nine and three month periods ended August 31, 1997
amounted to approximately $4,704,000 (54% of sales) and $1,286,000 (47% of
sales), respectively as compared to $5,093,000 (54% of sales) and $1,537,000
(50% of sales). The Company has maintained its gross profit levels for the nine
and three month periods ended August 31, 1997 as compared to the corresponding
period in 1996.
Selling, general and administrative expenses approximated $5,405,000
and $1,687,000 for the nine and three month periods ended August 31, 1997,
respectively. As a percentage of sales, these amounts represent 62% and 62%
respectively, as compared to 55% and 60% in the corresponding periods. The
increase is principally attributable to an increase in the amortization of
promotional costs incurred in connection with an aggressive sales program
designed to obtain shelf space at selected retailers. The increase in
amortization is principally attributable to additional contracts with customers
being signed in the first six months and the cost of this promotion being
charged to operations on a straight line basis which is not necessarily
proportional to sales generated under the program. The Company ceased signing on
any new customers under this program as of May 31,1996.
Liquidity and Capital Resources
The Company had net working capital of approximately $8,993,000 at
August 31, 1997.
The Company's statement of cash flows reflects cash used in operating
activities of approximately $775,000, which reflects a net loss of approximately
($608,000), increases in operating assets, such as inventories ($1,375,000), and
due from parent ($576,000), offset by a decrease in accounts receivable
($243,000), prepaid income taxes ($263,000), depreciation and amortization
expense ($1,260,000) and an adjustment for loan costs of ($51,000). In addition,
the statement reflects cash provided by investing activities of approximately
($1,322,000), principally attributable to the sale and maturity of securities
($1,328,000), net of the purchase of property, plant and equipment of ($7,000).
-7-
<PAGE>
FUTUREBIOTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
On August 20, 1997, the Company and its parent entered into credit
facilities with a new bank which provide for borrowings under a revolving credit
agreement (the "Revolving Agreement") and a term loan (the "Term Agreement").
The Revolving Agreement which extends through September 2000 provides
for aggregate borrowings of up to $15,000,000 with a sublimit of $4,000,000 for
the Company and $11,000,000 for the parent. Borrowings under the Revolving
Agreement bear interest at the bank's prime rate or the Eurodollar rate, at the
Company's option.
The Term Agreement provides for aggregate borrowings of up to
$8,500,000 for the Company and its parent on a combined basis.
The Company and its parent are jointly and severally liable for the
unpaid balance of the credit facilities.
The Company expects to meet its cash requirements from operations,
current cash reserves, and its existing financial arrangements.
-8-
<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, 1996.
-9-
<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: October 15, 1997 By: /s/ Karine Hollander
------------------------
Karine Hollander
Chief Financial Officer
-10-
<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> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 1,030,803
<SECURITIES> 466,103
<RECEIVABLES> 1,206,703
<ALLOWANCES> 0
<INVENTORY> 4,636,106
<CURRENT-ASSETS> 9,081,182
<PP&E> 435,139
<DEPRECIATION> 169,390
<TOTAL-ASSETS> 11,312,128
<CURRENT-LIABILITIES> 87,592
<BONDS> 3,000,000
0
834
<COMMON> 135
<OTHER-SE> 8,152,207
<TOTAL-LIABILITY-AND-EQUITY> 11,312,128
<SALES> 8,753,561
<TOTAL-REVENUES> 8,753,561
<CGS> 4,049,656
<TOTAL-COSTS> 4,049,656
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 219,319
<INCOME-PRETAX> (859,916)
<INCOME-TAX> (252,000)
<INCOME-CONTINUING> (607,916)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (607,916)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
