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 the quarter ended June 30, 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: 033-78252
AMERICAN DRUG COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3729186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip code)
(212) 230-9500
(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 (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
Number of shares outstanding of each of issuer's classes of common stock as of
August 12, 1998:
Common Stock 13,020,155 shares
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
June 30, 1998 and December 31, 1997 1
Consolidated Condensed Statements of Operations-
Three Months and Six Months Ended June 30,
1998 and 1997 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 4
Notes to Consolidated Condensed Financial
Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Qualification Relating to Financial Information 11
Part II. Other Information 12
Signatures 13
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
1998 1997
ASSETS (unaudited) *
Current assets
Cash and cash equivalents $ 126 $ 225
Accounts receivable, trade 95 139
Inventory (finished goods) 83 149
Prepaid expenses and other current assets 1 1
-------- --------
Total current assets 305 514
-------- --------
Machinery and equipment, at cost 113 113
Less accumulated depreciation (113) (113)
-------- --------
Other assets 34 38
--------- ---------
$ 339 $ 552
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1997 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date.
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
June 30, December 31,
1998 1997
(unaudited) *
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Customers' deposits $ 23 $ 8
Accounts payable and accrued expenses 11 191
---------- --------
Total current liabilities 34 199
---------- --------
7% convertible notes 1,000
---------- -------
Long-term debt to National Patent 5,290 3,933
---------- -------
Stockholders' deficiency
Common stock 130 130
Capital in excess of par value 2,132 1,762
Deficit (7,247) (6,472)
---------- --------
Total stockholders' deficiency (4,985) (4,580)
---------- -------
$ 339 $ 552
========== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1997 has been
summarized from the Company's audited Consolidated Balance sheet as of that date
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three months ended Six Months ended
June 30, June 30,
1998 1997 1998 1997
------- ----- ----- -----
Revenues
Sales 16 $ 287 158 $ 356
Consulting fees and commissions 55 860 80 967
------- ----- ------ -----
Total revenues 71 1,147 238 1,323
------- ----- ------ -----
Expenses
Cost of goods sold 21 201 142 259
General and administrative
expenses 198 381 430 748
Management fee to GP Strategies 30 30 60 60
Interest expense 85 94 177 185
------- ----- ------ -----
Total expenses 334 706 809 1,252
------- ----- ------ ------
Loss before extraordinary item (263) 441 (571) 71
Extraordinary item
Early extinguishment of debt (115) (204)
Net income (loss) $ (378) $ 441 $ (775) $ 71
======== ======= ======== ======
Basic and diluted income (loss) per
share before extraordinary item $ (.02) $ .03 $ (.04) $ .01
Basic and diluted income (loss)
per share (.03) .03 (.06) .01
======== ======= ======== ======
Weighted average shares outstanding 13,020 13,020 13,020 13,020
-------- ------- ------- ------
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months
ended June 30,
1998 1997
Cash flows from operations:
Net income (loss) $ (775) $ 71
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 5 24
Loss from extinguishment of debt 204
Deferred compensation 40
Changes in other operating items 70 (886)
-------- -------
Net cash used in operations (456) (791)
------ ------
Cash flows from investing activities:
Increase in other assets (1)
Net cash used in investing activities (1)
Cash flows from financing activities:
Loans from GP Strategies 357 318
------- ------
Net cash provided by financing activities 357 318
------- ------
Net decrease in cash (99) (474)
Cash at beginning of period 225 586
------- ------
Cash at end of period $ 126 $ 112
======== ======
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Earnings per share
In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128), as required, and restated the previously reported earnings per share in
conformity with SFAS 128.
2. Long-term debt
On March 17, 1998 and April 2, 1998, the Company was informed by
holders of an aggregate of $1,000,000 of the Company's convertible notes (the
"Notes") that they had elected to convert $1,000,000 of the Notes into 82,306
shares of GP Strategies Corporation ("GP Strategies") common stock. In
accordance with the terms of the original agreement the Company and GP
Strategies had agreed that if the Notes were used to exercise the warrants
issued by GP Strategies in connection with the Note offering, GP Strategies had
the right to receive from the Company in exchange for the Notes, shares of the
Company's common stock at a price equal to 60% of its then current market value.
The Company recognized an extraordinary loss of $204,000 for the six months
ended June 30, 1998, as a result of the write-off of deferred finance costs
related to the Notes.
On April 30, l998, the Company and GP Strategies agreed that instead of
issuing additional shares of the Company's common stock, the Company would
assign to GP Strategies its expected future payments in the amount of
approximately $1,000,000 from ICF Kaiser International as a success fee in
connection with the completion of the Company's consulting project in the Czech
Republic, which is anticipated to be completed in l999.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Liquidity
The Company has incurred losses since inception, and at June 30, 1998
had a capital deficiency of $4,985,000. At June 30, 1998, the Company had
$126,000 of cash. As of June 30, 1998, the Company had borrowed $4,290,000 from
GP Strategies. The indebtedness was comprised of (i) $2,500,000 pursuant to a
$2,500,000 loan agreement with GP Strategies, (ii) cash advances from GP
Strategies totaling $880,000, and (iii) accrued interest of $910,000 at the
prime rate. In addition, as a result of the conversion of $1,000,000 of the 7%
convertible notes and the amendment of the agreement with GP Strategies (See
Note 2), the Company has recorded a $1,000,000 obligation to GP Strategies,
representing their requirement to remit to GP Strategies the first $1,000,000 of
proceeds expected to be received from ICF Kaiser International in relation to a
contingent success fee. In the future the Company believes it should be able to
satisfy its working capital needs as a result of reductions to their level of
operations and their renewed focus on consulting activities and the sales of
medical equipment. There is no assurance, however, that the Company will have
sufficient working capital to support operations. In this event, the Company
will be forced to further curtail its operations or seek alternate sources of
financing.
4. Five Star Group, Inc.
On June 10, 1998, the Company signed a non binding letter of intent to
buy from GP Strategies certain operating assets of the Five Star Group, Inc.
(Five Star), a wholly owned subsidiary of GP Strategies, for approximately
$17,500,000 in cash, subject to certain adjustments, and a $5,000,000 unsecured
senior note. GP Strategies will use the cash proceeds of the transaction to
repay Five Star's existing short-term borrowings. Five Star is a leading
distributor of home decorating, hardware and finishing products in the
northeast. As part of this transaction, GP Strategies intends to sell
approximately 14% of its interest in the Company to the management of Five Star,
bringing GP Strategies interest in the Company to 40%. This transaction is
subject to satisfaction of various conditions including the Company receiving
acceptable financing from the banks. Upon completion of the sale of certain
operating assets, the Company intends to seek stockholder approval to change its
name to the Five Star Group.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Overview
The Company commenced operations in January 1990 as NPD Trading (USA),
Inc., which is now its wholly-owned subsidiary. Since its inception, the Company
has focused on assisting western business to develop trade, manufacturing and
investment opportunities in Russia, the Czech and Slovak Republics and to a
lesser extent, other countries of the CIS. In late 1993, the Company began the
implementation of its plan for the export of American-made generic prescription
drugs and over-the-counter healthcare products in both Russia and the CIS and
has received certain regulatory approvals in 1994, 1995 and 1996 to market its
products.
Despite some initial success, sales of the Company's generic products
declined significantly in 1997. The Company's inability to maintain and expand
sales may be attributed, in part, to deficiencies in the Russian distribution
system. Additionally, the Company did not compete effectively against
international manufacturers of brand name products, which were able to invest
large sums into marketing and distribution in the expectation of long term
rewards.
At the end of 1997, the Company made the decision to concentrate on
consulting and the marketing and sales of medical equipment and related
products, such as hospital furniture and laboratory supplies and to withdraw
from the generic pharmaceutical and over-the-counter (OTC) healthcare product
business because of significantly declining sales of generic products. Sales
activity with respect to generic drugs will be undertaken solely through the
Russian company Akorta. The Company established a relationship with Akorta to
provide support for the importation, clearance and sales of its products. Akorta
has the legal authority to sell products for Russian rubles and transfer those
funds, in dollars, to the Company in the United states. Akorta is a private
company owned by former employees of the Company's Moscow office. In the
short-term, the Company will sell its existing inventory of generic products in
Moscow warehouses through Akorta and other third parties. No additional products
will be purchased in the United States.
Liquidity and Capital Resources
At June 30, 1998, the Company had cash of $126,000 and the Company had
borrowed $2,500,000 pursuant to its $2,500,000 loan agreement from GP
Strategies. These proceeds were used as part of the Company's working capital.
Such borrowings bear interest at the prime rate, with principal and accrued
interest becoming due on August 5, 1999. In addition, after the Company had
borrowed the full $2,500,000 under the loan agreement during the first quarter
<PAGE>
of 1996, GP Strategies continued to fund the operating needs of the Company
until July 1996. In addition, GP Strategies has charged the Company for its
share of the cost of certain personnel, that perform duties for both the Company
and GP Strategies.
As of June 30, 1998, the Company had borrowed $4,290,000 from GP
Strategies. The indebtedness was comprised of (i) $2,500,000 pursuant to a
$2,500,000 loan agreement with GP Strategies, (ii) cash advances from GP
Strategies totaling $880,000, and (iii) accrued interest at the prime rate
totaling $910,000. In addition, as a result of the conversion of $1,000,000 of
the 7% convertible notes and the amendment of the agreement with GP Strategies
(See Note 2), the Company has recorded a $1,000,000 obligation to GP Strategies,
representing their requirement to remit to GP Strategies the first $1,000,000 of
proceeds expected to be received from ICF Kaiser International in relation to a
contingent success fee.
At June 30, 1998, the Company had no additional borrowing capacity
available under the GP Strategies Loan Agreement.
Historically, the Company's revenues, prior to 1994, were derived
primarily from the consulting fees and commissions of its subsidiary, NPD
Trading, which had been earned principally on a contingency fee basis. The
contingency fee payment structure has affected the Company's liquidity and
results of operations because the Company became entitled to payment only upon
successful completion of a business venture.
The Company believes it should be able to satisfy its working capital
needs through its operating activities, as a result of reductions to their level
of operations and their renewed focus on consulting activities and the sales of
medical equipment. There is no assurance, however, that the Company will have
sufficient working capital to support operations. In this event, the Company
will be forced to further curtail its operations or seek alternate sources of
financing.
The Company does not manufacture, and does not anticipate
manufacturing, any of its products. As a consequence, the Company has not made,
and does not anticipate making, any major capital expenditures.
Results of Operations
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Revenues. In the quarter ended June 30, 1998, the Company had revenues
of approximately $71,000 as compared to revenues of approximately $1,147,000 for
the quarter ended June 30, 1997. The decrease in revenues of $1,076,000 was
primarily due to consulting revenues recognized in 1997 in the form of a success
fee relating to a project with ICF Kaiser International (ICF Kaiser) in the
Czech Republic as well as the increased sales in the quarter ended June 30, 1997
of medical equipment and generic drugs in the Commonwealth of Independent
States. The sales of medical equipment and generic drugs, resulted in $5,000 of
<PAGE>
negative gross margin in the second quarter of 1998, compared to $86,000 of
gross margin in the second quarter of 1997. The negative gross margin in 1998
was the result of adjusting existing inventory to the lower of cost or market
value.
General and Administrative Expenses. General and administrative
expenses consist primarily of office rent, salaries, travel and related costs
and legal expenses. Direct costs relating to consulting revenues are included in
general and administrative expenses. The Company's general and administrative
expenses decreased to $198,000 in the second quarter of 1998 from $381,000 in
the second quarter of 1997. This decrease in general and administrative expenses
in 1998 was primarily due to reduced consulting and personnel costs.
Net Income. The Company's loss before extraordinary item was $263,000
for the second quarter of 1998 as compared to net income of $441,000 in the
second quarter of 1997. The income for the quarter ended June 30, 1997 was
primarily the result of increased consulting revenues and increased sales and
the corresponding gross profit. The loss before extraordinary item for the
quarter ended June 30, 1998 was due to the reduced sales and consulting fees and
gross margin.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues. For the six months ended June 30, 1998, the Company had
revenues of approximately $238,000, compared to revenues of approximately
$1,323,000 for the six months ended June 30, 1997. The decreased revenues in
1998 were primarily due to $860,000 recognized in 1997 in the form of a success
fee related to a project with ICF Kaiser International in the Czech Republic
partially offset by reduced sales of medical equipment and generic drugs in the
Commonwealth of Independent States. The sales of medical equipment and generic
drugs resulted in $16,000 of gross margin for the six months ended June 30,
1998, compared to $97,000 for the six months ended June 30, 1997.
General and Administrative Expenses. General and administrative
expenses consist primarily of office rent, salaries, travel and related costs
and legal expenses. Direct costs relating to consulting revenues are included in
general and administrative expenses. The Company's general and administrative
expenses decreased from $748,000 for the six months ended June 30, 1997 to
$430,000 for the six months ended June 30, 1998 as a result of reduced
consulting, personnel costs and facility costs in Moscow and Washington D.C.
Net Loss. The Company had a net loss before extraordinary item of
$571,000 for the six months ended June 30, 1998 compared to net income of
$71,000 for the six months ended June 30, 1997. The loss before extraordinary
item for the six months ended June 30, 1998 was the result of reduced revenues,
partially offset by reduced general and administrative expenses.
Recent accounting pronouncement
The Financial Accounting Standards Board issued Accounting Standards
(SFAS 130), "Reporting Comprehensive Income", in June 1997 which requires a
<PAGE>
statement of comprehensive income to be included in the financial statements for
fiscal years beginning after December 15, 1997. The Company has adopted this
Statement and has no other comprehensive income, therefore comprehensive income
is the same as net income (loss).
In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information'. SFAS 131 requires
disclosure of certain information about operating segments and about products
and services, geographic areas in which a company operates and their major
customers. The Company is presently in the process of evaluating the effect that
this new standard will have on disclosures in the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company will adopt SFAS No. 133 by
January 1, 2000. The Company is currently evaluating the impact the adoption of
SFAS No. 133 will have on the consolidated financial statements.
Forward-Looking Statements. This report contains certain
forward-looking statements reflecting management's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements, including, but
not limited to the Company's ability to reverse its history of operating losses;
the Company's ability to complete the Five Star transaction; the Company's
ability to fund its operations; and the Company's ability to secure additional
financing on acceptable terms.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
QUALIFICATION RELATING TO FINANCIAL INFORMATION
June 30, 1998
The financial information included herein is unaudited. In addition,
the financial information does not include all disclosures required under
generally accepted accounting principles because certain note information
included in the Company's Annual Report has been omitted; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods. The results for the 1998
interim period are not necessarily indicative of results to be expected for the
entire year.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
June 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
AMERICAN DRUG COMPANY
DATE: August 14, 1998 BY: Martin M. Pollak
President &
Chief Executive Officer
DATE: August 14, 1998 BY: Scott N. Greenberg
Chief Financial Officer
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