<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 February 28, 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
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(Zip Code)
(516) 273-2630
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(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 April 2, 1998
- ------------ ----------------------------
Common Stock 1,350,000
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FUTUREBIOTICS, INC.
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FORM 10-Q
---------
QUARTERLY REPORT
----------------
For the Three Months Ended February 28, 1998
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TABLE OF CONTENTS
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Page to Page
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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
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FUTUREBIOTICS, INC.
-------------------
CONDENSED BALANCE SHEETS
------------------------
<TABLE>
<CAPTION>
February 28, 1998 November 30, 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 572,010 $ 614,617
Investment in marketable securities
at fair value 94,991 1,088,093
Accounts receivable (less allowance for doubtful
accounts of $12,000) 1,308,039 1,256,639
Inventories (Note 4) 3,630,304 3,288,417
Due from parent 1,762,886 2,387,739
Prepaid income taxes 153,667 153,617
Prepaid expenses and other current assets 553,956 450,420
Deferred income tax asset (Note 8) 279,500 215,000
------------------ ------------------
Total current assets 8,355,353 9,454,542
------------------ ------------------
INVESTMENT IN MARKETABLE SECURITIES 200,000 199,312
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation and amortization
of $194,527 and $187,128, respectively 222,759 256,217
INTANGIBLE ASSETS, net (Note 5) 510,906 561,717
OTHER ASSETS 543,831 503,550
------------------ ------------------
$ 9,832,849 $ 10,975,338
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses 114,706 127,478
------------------ ------------------
Total current liabilities 114,706 127,478
------------------ ------------------
LONG-TERM DEBT (Note 6) 2,000,000 3,000,000
DEFERRED INCOME TAX LIABILITY (Note 8) 29,000 50,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value;
authorized 40,000,000 shares;
1,350,000 issued and outstanding
Preferred stock, $.0001 par value; 135 135
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 (1,463,032) (1,535,095)
Unrealized (loss) on marketable securities (814) (1,050)
Retained earnings (243,245) (62,229)
------------------ ------------------
7,689,143 7,797,860
------------------ ------------------
$ 9,832,849 $ 10,975,338
================== ==================
</TABLE>
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FUTUREBIOTICS, INC.
-------------------
CONDENSED STATEMENTS OF OPERATIONS
----------------------------------
(Unaudited)
-----------
Three Months Ended
------------------
February 28, February 28,
------------ ------------
1998 1997
---- ----
NET SALES $ 2,344,537 $ 2,777,760
COSTS AND EXPENSES:
Cost of sales 1,376,074 1,208,651
Selling, general and administrative 1,211,285 1,771,844
----------- -----------
2,587,359 2,980,495
OPERATING LOSS (242,822) (202,735)
OTHER:
Interest income (27,193) (55,057)
Interest expense 58,237 61,106
Other (7,350) --
----------- -----------
23,694 6,049
----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES (266,516) (208,784)
INCOME TAX BENEFIT (85,500) (100,000)
----------- -----------
NET LOSS $ (181,016) $ (108,784)
=========== ===========
LOSS PER COMMON SHARE $ (.13) $ (.08)
----------- -----------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 1,350,000 1 ,350,000
----------- -----------
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FUTUREBIOTICS, INC.
-------------------
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended
------------------
February 28, February 28,
------------ ------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (181,016) $ (108,784)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization 158,398 442,093
Deferred income tax benefit (85,500) (43,000)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (51,400) 115,336
Inventories (341,887) (866,617)
Due to/from parent 624,853 470,356
Prepaid income taxes (50) 52,620
Prepaid expenses and other current assets (103,536) (202,997)
Other assets (40,281) (129,886)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (12,772) (20,709)
----------- -----------
Total adjustments 147,825 (182,804)
----------- -----------
Net cash used in operating activities (33,191) (291,588)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investments 992,650 1,389,783
Purchase of property, plant and equipment (2,066) --
Acquisition of intangible assets -- (2,037)
----------- -----------
Net cash provided by investing activities 990,584 1,387,746
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (1,000,000) --
----------- -----------
Net cash used in financing activities (1,000,000) --
----------- -----------
Net (decrease)/increase in cash and cash equivalents (42,607) 1,096,158
Cash and cash equivalents at beginning of period 614,617 484,285
----------- -----------
Cash and cash equivalents at end of period $ 572,010 $ 1,580,443
=========== ===========
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
THREE MONTHS ENDED FEBRUARY 28, 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 February 28, 1998 and the results of
operations and statements of cash flows for the three months ended February 28,
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
three months ended February 28, 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. Investments in marketable
securities consist primarily of government-backed debt securities and are held
by high quality financial institutions, which mitigates the risk associated with
this concentration.
3. Investment in Marketable Securities:
------------------------------------
Investments in debt and equity securities are 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. Temporary
declines in the market value of any available-for-sale security below cost are
charged against stockholders' equity, meanwhile declines deemed other than
temporary are charged to earnings resulting in the establishment of a new cost
basis for the security.
4. Inventories:
------------
Inventories, consisting principally of finished goods, at February 28,
1998 have been estimated using the gross profit method.
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FUTUREBIOTICS, INC.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
THREE MONTHS ENDED FEBRUARY 28, 1998
------------------------------------
(Continued)
-----------
5. Intangible Assets:
------------------
Intangible assets consist of the following:
Nine Months Ended Year Ended
----------------- ----------
February 28, November 30,
------------ ------------
1998 1997
---- ----
(Unaudited)
-----------
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 (1,043,306) (992,495)
----------------- -----------
$ 510,906 $ 561,717
================= ===========
6. 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 February 28, 1998 was 8 1/2%
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FUTUREBIOTICS, INC.
-------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
THREE MONTHS ENDED FEBRUARY 28, 1998
------------------------------------
(Continued)
-----------
7. 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 three months ended
February 28, 1997.
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:
February 28, 1998 November 30, 1997
----------------- -----------------
(Unaudited)
Net Net
--- ---
Deferred Deferred
-------- --------
Income Tax Income Tax
---------- ----------
Asset (Liability) Asset (Liability)
----------------- -----------------
Inventories $ 39,600 $ 39,600
Property, plant and
equipment (35,300) (32,900)
Tax carryforwards 184,800 349,600
Unearned compensation (190,900) (204,900)
Other 55,100 1,000
Intangibles 197,200 187,600
Valuation allowance -- (175,000)
----------------- -----------------
$ 250,500 $ 165,000
================= =================
-6-
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FUTUREBIOTICS, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net sales for the three month periods ended February 28, 1998 and 1997
approximated $2,345,000 and $2,778,000, respectively. Gross profit on these
sales approximated $968,000 (41% of net sales) and $1,569,000 (56% of net sales)
for the three months ended February 28, 1998 and 1997, respectively. 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 were $1,211,000 (52% of
net sales) and $1,772,000 (64% of net sales) for the three month periods ended
February 28, 1998 and 1997, respectively. 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 risks and costs 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 $8,241,000 at
February 28, 1998.
The Company's statement of cash flows reflects cash used in operating
activities of approximately $33,000, which reflects a net loss of approximately
($181,000), increases in accounts receivable ($51,000), inventories ($342,000),
prepaid expenses and other current assets ($104,000), other assets ($40,000),
and an adjustment for deferred income tax benefit ($86,000), offset by a
decrease in due to/from parent ($625,000), and an adjustment for depreciation
and amortization expense of ($158,000).
Net cash provided by investing activities approximated $991,000
principally attributable to the sale and maturity of securities ($993,000), net
of acquisition of fixed assets ($2,000).
-7-
<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
($1,000,000), representing repayments of 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.
-8-
<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.
-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: April 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> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> FEB-28-1998
<CASH> 572,010
<SECURITIES> 94,991
<RECEIVABLES> 1,320,039
<ALLOWANCES> 12,000
<INVENTORY> 3,630,304
<CURRENT-ASSETS> 8,355,353
<PP&E> 417,286
<DEPRECIATION> 194,527
<TOTAL-ASSETS> 9,832,849
<CURRENT-LIABILITIES> 114,706
<BONDS> 2,000,000
0
834
<COMMON> 135
<OTHER-SE> 7,688,174
<TOTAL-LIABILITY-AND-EQUITY> 9,832,849
<SALES> 2,344,537
<TOTAL-REVENUES> 2,344,537
<CGS> 1,376,074
<TOTAL-COSTS> 1,376,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,237
<INCOME-PRETAX> (266,516)
<INCOME-TAX> (85,500)
<INCOME-CONTINUING> (181,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (181,016)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
