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 March 31, 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: 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
May 10, 1999:
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-
March 31, 1999 and December 31, 1998 1
Consolidated Condensed Statements of Operations-
Three Months Ended March 31, 1999 and 1998 3
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 4
Notes to Consolidated Condensed Financial
Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information 11
Signatures 12
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
March 31, December 31,
1999 1998
ASSETS (unaudited) *
Current assets
Cash $ 88 $ 119
Accounts receivable, net 13,448 9,697
Inventory (finished goods) 23,784 22,446
Prepaid expenses and other current assets 204 29
----------- ----------
Total current assets 37,524 32,291
--------- ---------
Property, plant and equipment, at cost 1,018 985
Less accumulated depreciation (215) (173)
---------- ---------
803 812
----------- ---------
Other assets 76 76
----------- ----------
$ 38,403 $ 33,179
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1998 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)
March 31, December 31,
1999 1998
(unaudited) *
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 17,651 $ 16,971
Accounts payable and accrued expenses 15,011 10,625
------- --------
Total current liabilities 32,662 27,596
------- ---------
Long-term debt to GP Strategies 5,000 5,000
------- ---------
Stockholders' equity
Common stock 130 130
Capital in excess of par value 7,589 7,589
Accumulated deficit (6,978) (7,136)
--------- ---------
Total stockholders' equity 741 583
---------- ----------
$ 38,403 $ 33,179
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1998 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
March 31,
1999 1998
---------- -------
Sales $ 21,160 $ 167
Cost of goods sold 17,892 121
--------- --------
Gross margin 3,268 46
Selling, general and
administrative expenses (2,553) (232)
Management fee to GP Strategies (30) (30)
Interest expense (422) (92)
---------- ---------
Income (loss) before income taxes
and extraordinary item 263 (308)
Income tax expense (105)
---------- --------
Income(loss) before extraordinary item 158 (308)
Extraordinary item
Early extinguishment of debt (89)
Net income (loss) $ 158 $ (397)
========= =========
Income (loss) per share
Basic and diluted before extraordinary item $ .01 $ (.02)
---------- --------
Basic and diluted net loss per share .01 (.03)
---------- -------
See accompanying notes to the consolidated financial statements.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three months
ended March 31,
1999 1998
Cash flows from operations:
Net income (loss) $ 158 $ (397)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Loss from extinguishment of debt 89
Depreciation and amortization 42 2
Changes in other operating items:
Accounts receivable, trade (3,751) 9
Inventory (1,338) 51
Prepaid expenses and other current assets (175)
Accounts payable and other accrued expenses 4,386 (27)
--------- ---------
Net cash used in operations (678) (273)
---------- ---------
Cash flows from investing activities:
Additions to property plant and equipment (33)
Net cash used in investing activities (33)
Cash flows from financing activities:
Net proceeds from short-term borrowings 680
Loans from GP Strategies 175
---------- ---------
Net cash provided by financing activities 680 175
---------- ---------
Net decrease in cash (31) (98)
Cash at beginning of period 119 225
---------- ---------
Cash at end of period $ 88 $ 127
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 322 $
========= ==========
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of reporting
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, such statements include all adjustments (consisting only of normal
recurring items) which are considered necessary for a fair presentation of the
Company at March 31, 1999, and the results of its operations, changes in
stockholders' equity and cash flows for the three months then ended. The results
of operations for the three months ended March 31, 1999 are not necessarily
indicative of the operating results for the full year. It is suggested that
these financial statements be read in conjunction with the financial statements
and related disclosures for the year ended December 31, 1998 included in the
American Drug Company Form 10-K.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Earnings (loss) per share
Earnings (loss) per share (EPS) for the periods ended March 31, 1999
and 1998 are as follows (in thousands, except per share amounts):
Three months
ended March 31,
1999 1998
Basic EPS
Net income (loss) $ 158 $ (397)
Weighted average shares
Outstanding 13,020 13,020
Basic earnings (loss) per share $ .01 $ (.03)
---------- ---------
Diluted EPS
Net income (loss) $ 158 $ (397)
Weighted average shares
outstanding 13,020 13,020
Dilutive effect of stock options
and warrants 907
Weighted average shares
outstanding, diluted 13,927 13,020
--------- --------
Diluted earnings (loss) per share $ .01 $ (.03)
------------ ---------
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
based upon the weighted average number of common shares outstanding during the
period, assuming the issuance of common shares for all dilutive potential common
shares outstanding.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
On September 30, 1998, a newly formed wholly-owned subsidiary of the Company,
the Five Star Group, Inc. (Five Star) purchased from JL Distributors, Inc. (JL),
(formerly Five Star Group, Inc.) substantially all the operating assets of JL.
JL is a wholly-owned subsidiary of GP Strategies Corporation (GP Strategies).
The assets were purchased for approximately $16,476,000 in cash and a $5,000,000
unsecured five year senior note. Five Star is a leading distributor of home
decorating, hardware and finishing products in the northeast.
The purchase by the Company of the assets of Five Star has changed the focus of
the Company. The Company plans to focus its efforts in the future on growing the
distribution business, and has taken several steps to reduce its traditional
operations from both a business and cost perspective.
As a result of the purchase of the assets of Five Star, the Company has shut
down its Moscow and Washington offices and scaled back the operations of its
Prague office with respect to the business of NPD Trading.
Liquidity and Capital Resources
At March 31, 1999 the Company had cash of $88,000. Five Star has a $25,000,000
loan and security agreement with a group of banks. The credit facility allows
Five Star to borrow up to 50% of eligible inventory and up to 80% of eligible
accounts receivable. At March 31, 1999, the Company had borrowed $17,651,000 and
had $3,685,000 of additional availability under the loan agreement.
The Company believes that cash generated from operations and borrowing
availability under existing credit agreements will be sufficient to fund the
working capital requirements of Five Star as well as the limited operations of
the Company's Prague office.
Results of Operations
Because of the September 30, 1998 purchase of the assets of Five Star and the
change in focus of the Company, results of operations for the three months ended
March 31, 1999 are not comparable to results for the corresponding period of the
prior year.
Sales
The Company had sales of $21,160,000 for the three months ended March 31, 1999,
all of which were generated by Five Star, compared to sales of $167,000 for the
three months ended March 31, 1998, which related to consulting revenue earned by
the Company.
Gross margin
The Company had gross margin of $3,268,000 for the three months ended March 31,
1999, compared to $46,000 for the three months ended March 31, 1998. The
increased gross margin was the result of the sales volume generated by Five Star
during the first quarter of 1999.
Selling, general and administrative expense
The Company had Selling, general and administrative (SG&A) expense of $2,553,000
for the three months ended March 31, 1999, compared to $232,000 for the three
months ended March 31,1998. The increased SG&A expense in 1999 is attributable
to the operations of Five Star during the first quarter of 1999, partially
offset by reduced SG&A costs incurred by the Company due to the shut down of the
Moscow and Washington D.C. offices, and the scaling back of operations in
Prague.
Interest expense
The Company had interest expense of $422,000 for the three months ended March
31, 1999, compared to interest expense of $92,000 for the three months ended
March 31,1998. The increased interest expense in 1999 is the result of both the
short-term borrowings incurred by Five Star, as well as the interest incurred on
the $5,000,000 unsecured senior note, which agreements were both entered into on
September 30, 1998. The increased interest expense in 1999 was partially offset
by the contribution to Capital in excess of par value of the amount owed by GP
Strategies to the Company during the third quarter of 1998.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
<PAGE>
The Company is utilizing both internal and external resources to identify,
correct or reprogram and test systems for year 2000 compliance. The Company's
primary operating subsidiary, Five Star has during the third quarter of 1998
entered into an agreement to purchase new software that will be year 2000
compliant. This previously planned software upgrade will manage the financial
operations of Five Star including order entry, inventory control and accounts
receivable and payable. Five Star has an implementation team led by the Director
of Information Systems, which began the project on November 1, 1998. Five Star
anticipates that they will complete the implementation of the new software by
October 1, 1999. The cost of the new software, including implementation, is
estimated to be approximately $400,000. Five Star has arranged financing for
approximately $250,000 of the estimated cost over a four year period. In
addition, Five Star's other major information system is its warehouse management
system. Five Star is currently updating this system to a current release that is
year 2000 compliant. There will be no additional cost to this upgrade since all
upgrades related to the warehouse system are included in yearly maintenance.
Five Star has also identified various ancillary programs that need to be updated
and has contracted with third parties for this work to be completed within the
next six months. It is expected that the cost of these modifications will be
approximately $10,000.
In addition, Five Star is examining their exposure to the year 2000 issue in
other areas of technology. These areas include telephone and E-mail systems,
operating systems and applications in free standing personal computers and other
areas of communication. A failure of these systems may impact the ability of
Five Star to service their customers which could have a material effect on their
results of operations. These issues are being handled by the information systems
and finance team at Five Star by identifying the problems and obtaining from
vendors and service providers either the necessary modifications to the software
or assurances that the systems will not be disrupted. Five Star believes that
the cost of the programming and equipment upgrades will not be in excess of
$50,000. In addition, certain personal computers and other equipment that is not
year 2000 compliant will be upgraded through Five Star's normal process of
equipment upgrades. Five Star believes that the evaluation and implementation
process will be completed no later than the second quarter of 1999. Over the
next year, Five Star plans to concentrate its efforts on the implementation of
its new data processing systems, but it will also continue to develop and
implement other information technology projects needed in the ordinary course of
business.
Five Star expects to finance these expenditures from a combination of working
capital and operating leases for a portion of the new computer equipment and
software. Therefore, Five Star does not expect the year 2000 issue to have a
material adverse impact on its financial position or results of operations.
Like other companies, the Company relies on its customers for revenues and on
its vendors for products and services of all kinds; these third parties all face
the year 2000 issue. An interruption in the ability of any of them to provide
goods or services, or to pay for goods or services provided to them, or an
interruption in the business operations of our customers causing a decline in
demand for services, could have a material adverse effect on the Company in
turn.
<PAGE>
In addition, there is a risk, the probability of which the Company is not in a
position to estimate, that the transition to the year 2000 will cause wholesale,
perhaps prolonged, failures of electrical generation, banking,
telecommunications or transportation systems in the United States or abroad,
disrupting the general infrastructure of business and the economy at large. The
effect of such disruptions on the Company could be material.
The Company's various departments are communicating with their principal
customers and vendors about their year 2000 readiness, and expect this process
to be completed no later than the third quarter of 1999. None of the responses
received to date suggests that any significant customer or vendor expects the
year 2000 issue to cause an interruption in its operations which would have a
material adverse impact on the Company. However, because so many firms are
exposed to the risk of failure not only of their own systems, but of the systems
of other firms, the ultimate effect of the year 2000 issue is subject to a very
high degree of uncertainty.
The Company believes that its preparations currently under way are adequate to
assess and manage the risks presented by the year 2000 issue, and does not have
a formal contingency plan at this time.
The statements in this section regarding the effect of the year 2000 issue and
the Company's responses to it are forward-looking statements. They are based on
assumptions that the Company believes to be reasonable in light of its current
knowledge and experience. A number of contingencies could cause actual results
to differ materially from those described in forward-looking statements made by
or on behalf of the Company.
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, all of which are difficult to predict and many of
which are beyond the control of the Company, but not limited to the risk that
Five Star will not achieve the projected levels of profitability and revenues,
the risk that the Company might be unable to further scale down its operations
in Prague, the risk that the Company's preparations with respect to the risks
presented by the year 2000 issue will not be adequate, and those risks and
uncertainties detailed in the Company's periodic reports and registration
statements filed with the Securities and Exchange Commission.
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
b. Reports on Form 8-K
None
<PAGE>
AMERICAN DRUG COMPANY AND SUBSIDIARIES
March 31, 1999
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: May 14, 1999 BY: Richard T. Grad
President
DATE: May 14, 1999 BY: Cynthia Krugman
Vice President
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<PERIOD-END> MAR-31-1999
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<ALLOWANCES> 1630
<INVENTORY> 23784
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