<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, 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: 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 October 7, 1998
- ------------ ------------------------------
Common Stock 1,350,000
<PAGE>
FUTUREBIOTICS, INC.
FORM 10-Q
QUARTERLY REPORT
For the Nine Months Ended August 31, 1998
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.................... 4-5
Management's discussion and analysis
of financial condition and results
of operations.............................................. 6-7
Legal proceedings.......................................... 8
Signatures................................................. 9
<PAGE>
FUTUREBIOTICS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, 1998 November 30, 1997
--------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 423,977 $ 614,617
Investment in marketable securities
at fair value - 1,088,093
Accounts receivable (less allowance for doubtful
accounts of $12,000) 863,308 1,256,639
Inventories (Note 3) 3,797,938 3,288,417
Due from parent 903,796 2,387,739
Prepaid income taxes 21,662 153,617
Prepaid expenses and other current assets 290,629 450,420
Deferred income tax asset (Note 7) 327,000 215,000
------------ ------------
Total current assets 6,628,310 9,454,542
------------ ------------
INVESTMENT IN MARKETABLE SECURITIES - 199,312
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation and amortization
of $200,686 and $187,128, respectively 208,720 256,217
INTANGIBLE ASSETS, net (Note 4) 460,517 561,717
OTHER ASSETS 435,691 503,550
------------ ------------
$ 7,733,238 $10,975,338
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 64,398 $ 127,478
------------ ------------
Total current liabilities $ 64,398 $ 127,478
------------ ------------
LONG-TERM DEBT (Note 5) - 3,000,000
DEFERRED INCOME TAX LIABILITY (Note 7) - 50,000
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 (1,318,906) (1,535,095)
Unrealized loss on marketable securities - (1,050)
Deficit (408,488) (62,229)
----------- -----------
7,668,840 7,797,860
----------- -----------
$ 7,733,238 $10,975,338
=========== ===========
</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,
---------- ----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 7,655,802 $ 8,753,561 $ 2,550,362 $ 2,725,500
COSTS AND EXPENSES:
Cost of sales 4,521,730 4,049,656 1,490,601 1,439,666
Selling, general and administrative 3,581,925 5,405,311 1,110,728 1,686,659
------------ ----------- ----------- -----------
8,103,655 9,454,967 2,601,329 3,126,325
OPERATING LOSS (447,853) (701,406) (50,967) (400,825)
OTHER:
Loan cost expense - 51,097 - 51,097
Interest income (51,202) (111,906) (14,137) (28,606)
Interest expense 120,896 219,319 22,320 97,745
Other (9,288) - (4,482) -
------------ ----------- ----------- ----------
60,406 158,510 3,701 120,236
------------ ----------- ----------- ----------
LOSS BEFORE PROVISION
FOR INCOME TAXES (508,259) (859,916) (54,668) (521,061)
INCOME TAX BENEFIT (162,000) (252,000) (27,500) (122,000)
------------ ---------- ----------- ----------
NET LOSS $ (346,259) $ (607,916) $ (27,168) $ (399,061)
============ ========== =========== ==========
LOSS PER COMMON SHARE $ (.26) $ (.45) $ (.02) $ (.30)
------------ ----------- ------------ ----------
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,
----------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (346,259) $ (607,916)
Adjustments to reconcile net (loss) to net
cash provided by/(used in) operating activities:
Depreciation and amortization 385,104 1,259,940
Deferred income tax benefit (162,000) (104,848)
Loan cost expense - 51,097
Loss on sale of equipment 4,525 -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 393,331 242,947
Inventories (509,521) (1,374,511)
Due to/from parent 1,483,943 (576,352)
Prepaid income taxes 131,955 263,068
Prepaid expenses and other current assets 159,791 29,466
Other assets 67,859 38,801
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (63,081) 2,874
------------ ------------
Total adjustments 1,891,906 (167,518)
------------ ------------
Net cash provided by/(used in) operating activities 1,545,647 (775,434)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investments 1,288,455 1,328,380
Purchase of property, plant and equipment (39,742) (7,295)
Disposal of property, plant and equipment - 2,904
Acquisition of intangible assets - (2,037)
Proceeds from sale of equipment 15,000 -
----------- ------------
Net cash provided by investing activities 1,263,713 1,321,952
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit line - 3,000,000
Repayment of debt (3,000,000) (3,000,000)
----------- -----------
Net cash used in financing activities (3,000,000) -
----------- -----------
Net (decrease)/increase in cash and cash equivalents (190,640) 546,518
Cash and cash equivalents at beginning of period 614,617 484,285
----------- -----------
Cash and cash equivalents at end of period $ 423,977 $ 1,030,803
=========== ===========
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1998
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, 1998 and the results of
operations and statements of cash flows for the nine months ended August 31,
1998 and 1997. The balance sheet as of November 30, 1997 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-K for the fiscal
year ended November 30, 1997. The results of operations and cash flows for the
nine months ended August 31, 1998 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.
3. Inventories:
Inventories, consisting principally of finished goods, at August 31,
1998 have been estimated using the gross profit method.
4. Intangible Assets:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
----------------- ----------
August 31, November 30,
---------- ------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Customer lists $ 384,212 $ 384,212
Covenants not to compete 845,000 845,000
Goodwill 300,000 300,000
Other 25,000 25,000
----------- ----------
1,554,212 1,554,212
Less accumulated amortization (1,093,695) (992,495)
----------- ----------
$ 460,517 $ 561,717
=========== ==========
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1998
(Continued)
5. Long-Term Debt:
The Company and its parent maintain credit facilities with a 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 plus
1.75%, 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, 1998 was 8 1/2%.
6. Stockholders' Equity:
The Company has adopted Financial Accounting Standards Board ("FASB")
Statement No. 128, "Earnings Per Share." Loss per common share is computed by
dividing the net loss by the average number of common shares and common stock
equivalents outstanding during the period. Common stock equivalents are
excluded from the calculation as the effect is antidilutive. The loss per share
was retroactively restated to reflect FASB No. 128 for the nine and three
months ended August 31, 1997.
7. 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, 1998 November 30, 1997
--------------- -----------------
(Unaudited)
Net Net
Deferred Deferred
Income Tax Income Tax
Asset (Liability) Asset (Liability)
----------------- -----------------
<S> <C> <C>
Inventories $ 39,600 $ 39,600
Property, plant and
equipment (40,100) (32,900)
Tax carryforwards 201,000 349,600
Unearned compensation (163,100) (204,900)
Other 73,400 1,000
Intangibles 216,200 187,600
Valuation allowance - (175,000)
------------ -----------
$ 327,000 $ 165,000
============ ===========
</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 months ended August 31, 1998
approximated $7,656,000 and $2,550,000, respectively, as compared to $8,754,000
and $2,726,000 in the corresponding periods. Gross profit on these sales
approximated $3,134,000 (41% of sales) and $1,060,000 (42% of sales) for the
nine and three month periods ended August 31, 1998 as compared to $4,704,000
(54% of sales) and $1,286,000 (47% of sales) in the corresponding period. The
decrease in the gross profit percentage is attributable to changes being
implemented to the Company's price structure and a change in the mix of sales.
Selling, general and administrative expenses approximated $3,582,000
and $1,111,000 for the nine and three months ended August 31, 1998,
respectively. As a percentage of sales, these amounts represent 47% and 44%
respectively, as compared to 62% and 62% in the corresponding period. The
decrease is primarily attributable to a decrease in promotional costs
associated with a marketing program which was discontinued.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are a known risk. The Company is addressing this risk to the availability
and integrity of financial systems and the reliability of operational systems.
The Company has engaged computer consultants and is establishing processes for
evaluating and managing the risk and cost associated with this problem. In the
opinion of management, the costs of addressing this problem will not materially
affect the financial position of the Company.
Liquidity and Capital Resources
The Company had net working capital of approximately $6,564,000 at
August 31, 1998.
The Company's statement of cash flows reflects cash provided by
operations of approximately $1,546,000, which reflects a net loss of
approximately ($346,000), decreases in accounts receivable ($393,000), due from
parent ($1,484,000), prepaid income taxes ($132,000), prepaid expenses and
other current assets ($160,000) and an adjustment for depreciation and
amortization ($385,000), offset by an increase in inventories ($509,000),
accounts payable and accrued expenses ($63,000) and an adjustment for deferred
income tax benefit ($162,000).
Net cash provided by investing activities approximated $1,264,000
principally attributable to the sale and maturity of securities ($1,288,000),
proceeds from sale of property, plant and equipment ($15,000), net of
acquisition of property, plant and equipment ($40,000).
- 6 -
<PAGE>
FUTUREBIOTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The statement also reflects net cash used in financing activities of
($3,000,000), representing repayments on the revolving credit line.
The Company and its parent maintain credit facilities with a bank
which provide for borrowings under a revolving credit agreement (the "Revolving
Agreement") and a term loan (the "Term Agreement").
The Revolving Agreement which expires in 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 Eurodollar rate plus 1.75%,
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. Borrowings are secured by the assets
of the Company and its parent.
The credit facilities contain various covenants pertaining to the
maintenance of certain financial ratio restrictions, limitations on dividends,
and restrictions on borrowings.
The Company expects to meet its cash requirements from operations,
current cash reserves, and existing financial agreements.
- 7 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Reference is made to Item 3 in the Company's Form 10-K for the year
ended November 30, 1997.
- 8 -
<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 13, 1998 By: /Karine Hollander/
------------------------------
Karine Hollander
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> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 423,977
<SECURITIES> 0
<RECEIVABLES> 875,308
<ALLOWANCES> 12,000
<INVENTORY> 3,797,938
<CURRENT-ASSETS> 6,628,310
<PP&E> 409,406
<DEPRECIATION> 200,686
<TOTAL-ASSETS> 7,733,238
<CURRENT-LIABILITIES> 64,398
<BONDS> 0
0
834
<COMMON> 135
<OTHER-SE> 7,667,871
<TOTAL-LIABILITY-AND-EQUITY> 7,733,238
<SALES> 7,655,802
<TOTAL-REVENUES> 7,655,802
<CGS> 4,521,730
<TOTAL-COSTS> 4,521,730
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,896
<INCOME-PRETAX> (508,259)
<INCOME-TAX> (162,000)
<INCOME-CONTINUING> (346,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (346,259)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
