<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, 1999
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 April 5, 1999
Common Stock 1,350,000
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FUTUREBIOTICS, INC.
FORM 10-Q
QUARTERLY REPORT
For the Three Months Ended February 28, 1999
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page to Page
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<S> <C>
Financial Statements:
Condensed balance sheets............................................................... 1
Condensed statements of operations..................................................... 2
Condensed statements of cash flows..................................................... 3
Notes to condensed financial statements................................................ 4 - 7
Management's discussion and analysis
of financial condition and results
of operations.......................................................................... 8 - 10
Legal proceedings...................................................................... 10
Signatures............................................................................. 12
</TABLE>
<PAGE>
FUTUREBIOTICS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
February 28, 1999 November 30, 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 83 $ 181
Accounts receivable (less allowance for doubtful
accounts of $12) 1,084 1,030
Inventories (Note 4) 1,989 2,179
Due from parent 2,846 2,533
Property, plant and equipment held for disposal (Note 5) 179 194
Intangible assets held for disposal (Note 6) 405 438
Prepaid income taxes 5 -
Prepaid expenses and other current assets 299 145
Deferred income tax asset (Note 9) 278 326
----------- -----------
Total current assets 7,168 7,026
OTHER ASSETS 142 314
----------- -----------
$ 7,310 $ 7,340
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 204 $ 72
------------ -----------
Total current liabilities $ 204 $ 72
----------- -----------
LONG-TERM DEBT (Note 7) - -
DEFERRED INCOME TAX LIABILITY (Note 9) - 142
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;
authorized 8,335,000 shares; 8,335,000
issued and outstanding 1 1
Additional paid-in capital 9,395 9,395
Unearned compensation (1,162) (1,228)
(Deficit) (1,128) (1,042)
----------- ----------
7,106 7,126
----------- -----------
$ 7,310 $ 7,340
========== =========
</TABLE>
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FUTUREBIOTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
February 28,
1999 1998
---- ----
<S> <C> <C>
NET SALES $ 1,748 $ 2,344
------------ -----------
COSTS AND EXPENSES:
Cost of sales 991 1,376
Selling, general and administrative 937 1,211
------------ -----------
1,928 2,587
OPERATING LOSS (180) (243)
OTHER:
Interest income - (27)
Interest expense - 58
Other - (7)
----------------- ---------------
- 24
----------------- --------------
LOSS BEFORE BENEFIT
FOR INCOME TAXES (180) (267)
INCOME TAX BENEFIT (94) (86)
--------------- ---------------
NET LOSS $ (86) $ (181)
============== =============
LOSS PER COMMON SHARE $ (.06) $ (.13)
============== --------------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 1,350,000 1,350,000
--------- ---------
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
February 28,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (86) $ (181)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 114 158
Deferred income tax benefit (94) (86)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (54) (51)
Inventories 190 (342)
Due to/from parent (313) 625
Prepaid income taxes (5) -
Prepaid expenses and other current assets (12) (103)
Other assets 30 (40)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 132 (13)
---------- ------------
Total adjustments (12) 148
---------- ----------
Net cash used in operating activities (98) (33)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale/maturity of marketable securities - 992
Purchase of property, plant and equipment - (2)
----------- --------------
Net cash provided by investing activities - 990
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt - (1,000)
------------- -----------
Net cash used in financing activities - (1,000)
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Net decrease in cash and cash equivalents (98) (43)
Cash and cash equivalents at beginning of period 181 615
---------- -----------
Cash and cash equivalents at end of period $ 83 $ 572
=========== ==========
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
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, 1999 and the results
of operations and statements of cash flows for the three months ended February
28, 1999 and 1998. The balance sheet as of November 30, 1998 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, 1998. The results of operations and cash flows for the
three months ended February 28, 1999 are not necessarily indicative of the
results to be expected for the full year.
2. Summary of Proposed Transaction:
On March 3, 1999, the Company and PDK entered into an Asset Purchase
Agreement with Nutraceutical Corporation ("Nutraceutical") and FB Acquisition
Corp., a wholly owned subsidiary of Nutraceutical pursuant to which FB
Acquisition Corp. agreed to acquire and the Company agreed to sell, (the
"Transaction") substantially all of the Company's assets (the "Assets").
As consideration for the Assets, FB Acquisitions Corp. has agreed to
pay in cash (i) $3,700,000, (ii) the value of purchased inventory up to
$1,500,000, and (iii) the net book value of accounts receivable up to a
maximum of $725,000. The purchase price is subject to adjustment in the event
that the proceeds actually received from collecting the purchased accounts
receivables differ from the amount of purchased accounts receivable.
The closing ("Closing") of the Transaction is subject to approval of
the Company's stockholders and the satisfaction of other customary conditions.
PDK, the majority stockholder of the Company has agreed to vote the shares of
the Company's capital stock held by it in favor of the Transaction. The
Company anticipates closing the Transaction during the second quarter of 1999.
Following the Closing, the Company shall be restricted from engaging
in merchandising distribution or sale of (i) a broad line of branded
nutritional supplements, other than to mass merchandisers, or (ii) any of the
Company's proprietary products and/or formulations. As a result, the Company
intends to commence a new business.
Net assets to be disposed of in connection with this transaction have
been classified as current assets in the accompanying balance sheet as of
February 28, 1999.
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FUTUREBIOTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
(Continued)
3. 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.
4. Inventories:
Inventories, consisting principally of finished goods, at February
28, 1999 have been estimated using the gross profit method.
5. Property, Plant and Equipment:
Property, plant and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
February 28, November 30,
1999 1998
---- ----
(in thousands) (in thousands)
(unaudited)
<S> <C> <C>
Equipment $ 34 $ 34
Office equipment and fixtures 368 368
Leasehold improvements 8 8
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410 410
Less accumulated depreciation and amortization 231 216
-------- --------
179 194
Less assets held for disposal 179 194
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$ - $ -
=========== ===========
</TABLE>
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<PAGE>
FUTUREBIOTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
(Continued)
6. Intangible Assets:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
February 28, November 30,
1999 1998
---- ----
(in thousands) (in thousands)
(unaudited)
<S> <C> <C>
Covenants not to compete $ 845 $ 845
Goodwill 300 300
Other 34 34
------------ -------------
1,179 1,179
Less accumulated amortization 774 741
----------- ------------
405 438
Less assets held for disposal 405 438
----------- ------------
$ - $ -
============== ==============
</TABLE>
7. 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, as amended, which extends through September
2000, provides for aggregate borrowings of up to $10,000,000 with a sublimit
of $4,000,000 for the Company. 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, 1999 was 7.75%.
8. Stockholders' Equity:
The 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 have been excluded from the
calculation as the effect is antidilutive.
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<PAGE>
FUTUREBIOTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
(Continued)
9. 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>
Net Net
Deferred Deferred
Income Tax Income Tax
Asset (Liability) Asset (Liability)
February 28, 1999 November 30, 1998
----------------- -----------------
(unaudited)
(in thousands) (in thousands)
<S> <C> <C>
Inventories $ 142 $ 144
Property, plant and equipment (35) (35)
Tax carryforwards 579 528
Unearned compensation (130) (142)
Intangibles 201 199
Valuation allowance (479) (510)
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$ 278 $ 184
========== =========
</TABLE>
10. Major Customer:
Sales to a major customer approximated 10% of total sales for the
three month period ended February 28, 1999.
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<PAGE>
FUTUREBIOTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; uncertainties relating to global economic
conditions; market acceptance of competing products; the availability and cost
of raw materials, the Company's ability to succfessfully maintain or increase
market share in its core business while expanding its product base into other
markets; the strength of its distribution channels; and the Company's ability to
manage fixed and variable expense growth relative to revenue growth.
Results of Operations
Net sales for the three month periods ended February 28, 1999 and
1998 approximated $1,748,000 and $2,344,000, respectively. Gross profit on
these sales were approximately $757,000 (43% of sales) and $968,000 (41% of
sales) for the three months ended February 28, 1999 and 1998, respectively.
Selling, general and administrative expenses were $937,000 (54% of
sales) and $1,211,000 (52% of sales) for the three month periods ended
February 28, 1999 and 1998, respectively. The decrease is primarily
attributable to the consolidation of sales territories and increased
telemarketing efforts with a resulting decrease in sales force salaries and
expenses.
On March 3, 1999, the Company and PDK entered into a binding Asset
Purchase Agreement with Nutraceutical Corporation ("Nutraceutical") and FB
Acquisition Corp., a wholly owned subsidiary of Nutraceutical pursuant to
which FB Acquisition Corp. agreed to acquire and the Company agreed to sell,
(the "Transaction") substantially all of the Company's assets (the "Assets").
As consideration for the Assets, FB Acquisitions Corp. has agreed to
pay in cash (i) $3,700,000, (ii) the value of purchased inventory up to
$1,500,000, and (iii) the net book value of accounts receivable up to a
maximum of $725,000. The purchase price is subject to adjustment in the event
that the proceeds actually received from collecting the purchased accounts
receivables differ from the amount of purchased accounts receivable.
The closing ("Closing") of the Transaction is subject to approval of
the Company's stockholders and the satisfaction of other customary conditions.
PDK, the majority stockholder, of the company has agreed to vote the shares of
the Company's capital stock held thereby in favor of the Transaction. The
Company anticipates closing the Transaction during the second quarter of 1999.
Following the Closing, the Company shall be restricted from engaging
in merchandising, distribution or sale of (i) a broad line of branded
nutritional supplements, other than to mass merchandisers, or (ii) any of the
Company's proprietary products and/or formulations. As a result, the Company
intends to commence a new business.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the 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 as to the
availability and integrity of financial systems and reliability of operational
systems. The Company is developing a plan to ensure that its systems are
compliant with the requirements to process transactions in the Year 2000. The
plan consists of four phases: assessment, remediation, testing and
implementation, and encompasses internal information technology (IT) systems and
non-IT systems, as well as third party exposures. The Company has completed the
assessment of its IT systems and non-IT systems and is in the process of making
remedial changes to its existing software. In addition, the Company has
requested from a majority of its
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FUTUREBIOTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
principal suppliers and vendors written statements regarding their plan for
meeting Year 2000 requirements. To date, the Company has not received adequate
response to such requests.
Management of the Company believes that it is working on an effective
program to resolve the Year 2000 issue in a timely manner and that the costs
of implementing this program will not materially affect the financial position
of the Company. The Company has not yet completed all necessary phases of the
Year 2000 program. In the event that the Company does not complete any
additional phases, the Company could experience business interruptions. In
addition, disruptions in the economy generally resulting from the Year 2000
issues could also materially adversely affect the Company. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Liquidity and Capital Resources
The Company had net working capital of $6,964,000 at February 28,
1999.
The Company's statement of cash flows reflects cash used in
operations of approximately $98,000 which reflects a net loss of approximately
($86,000), increases in operating assets such as accounts receivable
($54,000), due from parent ($313,000), prepaid and other current assets
($12,000) and an adjustment for deferred income tax benefit ($94,000), offset
by a decrease in inventories ($190,000), other assets ($30,000), increase in
accounts payable and accrued expenses ($132,000) and an adjustment for
depreciation and amortization ($114,000).
The Company and its parent are party to 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, as amended, which expires in September 2000
provides for aggregate borrowings of up to $10,000,000 with a sublimit of
$4,000,000 for the Company. 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.
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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-K for the year
ended November 30, 1998.
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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: April 13, 1999 By: /s/ Karine Hollander
------------------------
Karine Hollander
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> FEB-28-1999
<CASH> 83
<SECURITIES> 0
<RECEIVABLES> 1,096
<ALLOWANCES> 12
<INVENTORY> 1,989
<CURRENT-ASSETS> 7,168
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,310
<CURRENT-LIABILITIES> 204
<BONDS> 0
0
1
<COMMON> 0
<OTHER-SE> 7,105
<TOTAL-LIABILITY-AND-EQUITY> 7,310
<SALES> 1,748
<TOTAL-REVENUES> 1,748
<CGS> 991
<TOTAL-COSTS> 991
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (180)
<INCOME-TAX> (94)
<INCOME-CONTINUING> (86)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
