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SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM 10-Q
| |x| |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
For the Quarterly Period Ended:
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April 2, 2005
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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 0-11274
|
PHARMACEUTICAL
FORMULATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2367J644
(State or other jurisdiction of
incorporation or organization)
|
22-2367644
(IRS Employer
Identification No.)
|
460 Plainfield Avenue, Edison, NJ
(Address of principal executive offices)
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08818
(Zip code)
|
|
(Registrant's telephone number, including area code)
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(732) 985-7100
|
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
Indicate by check mark
whether the registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2). | | Yes |X| No
The number of shares
outstanding of common stock, $.08 par value, as of April 21, 2005 was
86,160,787.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL
STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
April 2,
2005 January 1,
ASSETS (Unaudited) 2005
------------ ------------
CURRENT ASSETS
Cash $1,000 $47,000
Accounts receivable - net of allowances of $1,150,000 and $1,125,000 8,767,000 9,696,000
Inventories, net 11,989,000 10,962,000
Prepaid expenses and other current assets 410,000 232,000
------------ ------------
Total current assets 21,167,000 20,937,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization
of $27,115,000 and $26,555,000 12,907,000 13,347,000
GOODWILL 2,978,000 2,978,000
TRADEMARKS 1,740,000 1,740,000
OTHER ASSETS 314,000 359,000
------------ ------------
$39,106,000 $39,361,000
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $2,090,000 $1,995,000
Current portion of capital lease obligations 676,000 613,000
Due to ICC Industries Inc. 14,718,000 14,931,000
Accounts payable 10,165,000 8,321,000
Accrued expenses 2,810,000 2,379,000
------------ ------------
Total current liabilities 30,459,000 28,239,000
------------ ------------
LONG-TERM DEBT DUE ICC INDUSTRIES INC 20,774,000 18,604,000
------------ ------------
LONG-TERM DEBT, OTHER 14,374,000 16,161,000
------------ ------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 2,033,000 1,927,000
------------ ------------
STOCKHOLDERS' (DEFICIENCY)
Common stock, par value $.08 per share; 200,000,000 shares authorized;
86,160,787 shares issued and outstanding as of April 2, 2005 and January
1, 2005 6,893,000 6,893,000
Capital in excess of par value 53,195,000 53,195,000
Accumulated deficit
(88,622,000) (85,658,000)
------------ ------------
Total stockholders' (deficiency) (28,534,000) (25,570,000)
------------ ------------
$39,106,000 $39,361,000
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
-------------------------------
April 2, April 3,
2005 2004
------------- ------------
REVENUES
Gross sales $16,248,000 $18,904,000
Less: Sales discounts and allowances 636,000 543,000
------------- ------------
NET SALES 15,612,000 18,361,000
------------- ------------
COST AND EXPENSES
Cost of goods sold 14,294,000 15,711,000
Selling, general and administrative 5,068,000 3,961,000
Research and development 60,000 71,000
------------- ------------
19,422,000 19,743,000
------------- ------------
LOSS FROM OPERATIONS (3,810,000) (1,382,000)
------------- ------------
INTEREST EXPENSE (776,000) (741,000)
------------- ------------
LOSS BEFORE INCOME TAX BENEFIT (4,586,000) (2,123,000)
INCOME TAX BENEFIT 1,622,000 748,000
------------- ------------
NET LOSS $(2,964,000) $(1,375,000)
============= ============
LOSS PER SHARE - BASIC AND DILUTED $(0.03) $(0.02)
============= ============
BASIC AND DILUTED AVERAGE COMMON SHARES
OUTSTANDING 86,161,000 85,756,000
============= ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
-------------------------------
April 2, April 3,
2005 2004
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,964,000) $(1,375,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization
566,000 546,000
Amortization of bond discount and deferred financing costs 20,000 40,000
Amortization of deferred gain on sale/leaseback -- (13,000)
Changes in operating assets and liabilities:
Decrease in accounts receivable 929,000 31,000
(Increase) decrease in inventories
(1,027,000) 426,000
Decrease (increase) in prepaid expenses and other assets (159,000) 331,000
Increase (decrease) in due to ICC Industries Inc. (213,000) 500,000
Increase (decrease) in accounts payable and accrued expenses 2,276,000 740,000
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (572,000) 1,226,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (121,000) (603,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (121,000) (603,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in due to ICC Industries Inc. 2,170,000 700,000
Proceeds from equipment financing 329,000 --
(Repayments) of capital lease obligations (160,000) (650,000)
(Repayments) of long-term debt
(1,692,000) (412,000)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 647,000 (362,000)
------------ ------------
NET (DECREASE) INCREASE IN CASH (46,000) 261,000
CASH, BEGINNING OF PERIOD
47,000 363,000
------------ ------------
CASH, END OF PERIOD $1,000 $624,000
============ ============
SUPPLEMENTAL DISCLOSURE OF INTEREST AND TAXES PAID:
Interest Paid $503,000 $736,000
============ ============
Income Taxes Paid $1,000 $1,000
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
Note 1
|
Basis of Presentation
|
| |
The
accompanying unaudited interim financial statements of Pharmaceutical
Formulations, Inc. (the "Company", "we" or "us")
have been prepared in accordance with accounting principles generally accepted
in the United States of America and rules and regulations of the Securities and
Exchange Commission for interim financial information. Accordingly, they do not
include all of the information and footnote disclosures required by accounting
principles generally accepted in the United States of America for complete
financial statements. |
| |
In
the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal recurring
entries) necessary to present fairly the Company’s financial position as of
April 2, 2005 and its results of operations and cash flows for the three month
periods ended April 2, 2005 and April 3, 2004. |
| |
The
accounting policies followed by the Company are set forth in Note 3 of the
Company’s consolidated financial statements as contained in the Form 10-K
for the year ended January 1, 2005 filed with the Securities and Exchange
Commission. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company’s Form 10-K
for the year ended January 1, 2005. |
| |
The
results of operations for the three months ended April 2, 2005 are not
necessarily indicative of the results to be expected for the fiscal year ending
December 31, 2005 or any other interim period. |
| |
The
accompanying condensed consolidated financial statements include the accounts of
Pharmaceutical Formulations, Inc. (PFI) and its wholly owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated. |
| |
The Company is majority owned by ICC Industries Inc. (see Note 5).
|
| |
Certain
reclassifications have been made to the prior period financial statements to
conform to the current period presentation. |
| |
As permitted by SFAS No. 123, "Accounting for Stock- Based Compensation", the
Company accounts for stock-based compensation arrangements with employees in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees". Compensation expense for stock
options issued to employees is based on the difference on the date of grant
between the fair value of the Company’s stock and the exercise price of the
option. No stock-based employee compensation cost is reflected in the net loss for
the periods presented, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock at the date of
grant. |
| |
Had compensation cost for the Company’s option plans been determined using
the fair value method at the grant dates, the effect on the Company’s net
loss and loss per share for the three-month periods ended April 2, 2005 and
April 3, 2004 would have been as follows: |
Three Months Ended
-------------------------------
April 2, April 3,
2005 2004
------------- ------------
Net loss as reported $(2,964,000) $(1,375,000)
Deduct: Total stock-based
employee compensation
determined under fair value
method for all awards, net of
related tax effects 7,250 22,00
------------ ------------
Proforma net loss $(2,971,250) $(1,397,000)
Basic and diluted loss per share
As reported $(.03) $(0.02)
Proforma $(.03) $(0.02)
The weighted average assumptions used for the periods presented are as follows:
Three Months Ended
-------------------------------
April 2, April 3,
2005 2004
------------- ------------
Risk-free interest rate 4.3% 3.24%
Expected dividend yield -- --
Expected lives 5 years 5 years
Expected volatility 126% 140%
| |
New Accounting Pronouncements
|
| |
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", which
is a revision of SFAS No. 123 and supersedes Accounting Principles Board ("APB")
Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be valued at fair value on the
date of grant, and to be expensed over the applicable vesting period. The SEC
amended the effective dates for this pronouncement for public companies by
issuing Release 33-8568. This statement is effective as of the beginning of the
first fiscal year that begins after June 15, 2005. The Company does not believe
that adoption of this statement will have a material impact on the
Company’s financial position or results of operations. |
| |
In November 2004, the Financial Accounting Standards Board issued Statement 151,
Inventory Costs, ("SFAS 151") an amendment of ARB No. 43, Chapter 4, which is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The amendments made by Statement 151 will improve financial reporting
by clarifying that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and by requiring the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. The Company
has not completed its evaluation of the impact of SFAS 151 and therefore cannot
determine the effect that adoption of this statement will have on its financial
position and results of operations. |
| Note 2 |
Financial Results and Liquidity
|
| |
As of April 2, 2005, the Company has negative working capital of $9,292,000, an
accumulated deficit of $88,622,000 and a stockholders’ deficit of
$28,534,000. In addition, the Company had a net loss of $2,964,000 for the three
months ended April 2, 2005. In view of these matters, realization of a major
portion of the Company’s assets is dependent upon the Company’s
ability to meet its financing requirements and the success of its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts of
liabilities. Management plans are outlined below. |
| |
We continue to address customer relationship issues and are continuing the
process of rebuilding our sales base through the initiatives detailed below. As
part of these initiatives, we have undertaken the following: |
| |
• |
Continuing to expand our custom manufacturing for some major pharmaceutical
companies.
|
| |
• |
Eliminating several unprofitable product lines consisting mainly of items
purchased from third parties and repackaged end products for smaller customers.
|
| |
• |
Evaluating product line and customer profitability.
|
| |
• |
Increasing our business supplying other manufacturers with bulk tablets and
capsules, taking advantage of higher volumes and better margins.
|
| |
• |
Exploring opportunities
to expand our product line through joint venture marketing agreements. |
| |
• |
Launching the HealthPharm™ brand of OTC medicines as an Extreme Value Brand
for Dollar Store programs.
|
| |
• |
Exploring exclusive branding opportunities.
|
| |
• |
Exploring opportunities to expand our international sales.
|
| |
• |
Increasing prices where possible.
|
| |
These objectives, along with sustaining market share and increasing sales, are
projected to be driven by the following: |
| |
• |
Re-establishing strong relationships within our distribution network.
|
| |
• |
Controlling and reducing, where appropriate, fixed and variable expenses.
|
| |
• |
Improving manufacturing efficiencies.
|
| |
• |
Shortening delivery time.
|
| |
• |
Improving on-time delivery.
|
| |
• |
Filing ANDAs for new products as they come to the OTC Market.
|
| |
• |
Obtaining marketing rights for products produced by other generic pharmaceutical
manufacturers.
|
| |
We believe that cash flow from operations, our revolving credit facility and
equipment and term loan financing, plus continued financial support from ICC
Industries Inc., our parent company, will be sufficient to fund our currently
anticipated operations, working capital, capital spending and debt service
through March 31, 2006. While no assurance can be given that cash flow will be
sufficient to fund operations, ICC has committed to provide us with the
necessary financing to continue our operations through March 31, 2006. ICC has
supported us in the past by providing loans, replacing loans from our
asset-based lenders and providing us with working capital. Additionally, ICC has
guaranteed up to $2 million of our debt with our major lender. |
| |
With the Company’s less than satisfactory performance in fiscal 2004 (and
the first quarter of fiscal 2005) and the current deterioration of its business,
the level of this support has increased. While ICC has committed to fund the
Company’s operations through March 31, 2006, as noted above, ICC has
requested that the Company consider alternatives to reduce its dependence on ICC
for financial support. The board of directors of PFI is considering the options
available to the Company. On April 20, 2005 a Special Committee of the Board was
appointed consisting of three independent directors to consider various
alternatives, including the possible sale of the Company or its
assets. |
| |
See Note 6 for discussion of defaults under the Company’s credit agreements
with its primary lender and with ICC and the waivers obtained by the Company.
Additionally, see Note 6 for a discussion of modifications of the Company’s
debt agreements and other borrowings. |
| |
In March 2002, action was brought against the Company in the United States
District Court for the Southern District of New York seeking $20 million in
damages and $40 million in punitive damages related to the sales of allegedly
defective products. The Company’s insurer is defending the case at the
insurer’s cost. At this point in time, there is no reasonable basis for an
estimate of the potential liability of the Company, if any.
|
| |
(b) |
Case relating to Max Tesler
|
| |
In May 1998, the Company brought an action in Middlesex County Superior Court,
NJ against one of its former outside corporate counsels seeking damages for
conflict of interest, breaches of fiduciary duty and loyalty, negligence and
malpractice during its representation of the Company. The action has been sent
to binding arbitration, which is expected to commence during the summer or fall
of 2005.
|
| |
The Company is a party to various other legal proceedings arising in the normal
conduct of business. Management believes that the final outcome of all current
legal matters will not have a material adverse effect upon the Company’s
financial position or results of operations.
|
| |
The prior owner of our Edison, New Jersey manufacturing facility, Revco,
conducted a soil and groundwater cleanup of such facility, under the New Jersey
Industrial Site Recovery Act (ISRA), as administered by the New Jersey
Department of Environmental Protection (NJDEP). NJDEP determined that the soil
remediation was complete and approved the groundwater remediation plan, subject
to certain conditions. Revco began operating a groundwater remediation treatment
system in 1995. Although CVS (as the successor to Revco) is primarily
responsible for the entire cost of the cleanup, we guaranteed the cleanup. In
addition, the Company agreed to indemnify the owner of the facility under the
terms of the 1989 sale leaseback. If CVS defaults in its obligations to pay the
cost of the clean-up, and such costs exceed the amount of the bond posted by
Revco, the Company may be required to make payment for any cleanup. The
likelihood of CVS being unable to satisfy any claims which may be made against
it in connection with the facility, however, are remote in the Company’s
opinion. Accordingly, the Company believes that it will not have to bear any
costs associated with remediation of the facility and we will not need to make
any material capital expenditures for environmental control facilities.
|
| |
Inventories consist of the following: |
April 2, 2005 January 1, 2005
------------- ---------------
Raw materials $ 4,020,000 $ 4,323,000
Work in progress 935,000 982,000
Finished goods 7,034,000 5,657,000
------------- ---------------
$ 11,989,000 $ 10,962,000
============= ===============
| Note 5 |
Related Party Transactions |
| |
As of April 2, 2005, ICC owned a total of 74,488,835 shares of our common stock,
representing approximately 86.5% of the total number of shares outstanding on
that date. The following additional transactions with ICC and its subsidiaries
are reflected in the consolidated financial statements as of April 2, 2005 and
April 3, 2004 or for the three months ended April 2, 2005 and April 3, 2004:
|
Three Months Ended
-----------------------------------
April 2, 2005 April 3, 2004
-------------- ----------------
Inventory purchases $ 840,000 $1,865,000
Interest charges 453,000 276,000
As of
-----------------------------------
April 2, 2005 January 1, 2005
------------- ---------------
Accounts payable $14,718,000 $ 14,931,000
Note payable 20,774,000 18,604,000
(1) Includes current portion of note payable to ICC
(2) Includes long-term portion of note only
| |
The Company has a revolving credit facility with CIT, which is secured by
accounts receivable and inventory, which expires on December 31, 2006.
|
| |
On August 20, 2004 the Company obtained a waiver and amendment to such credit
agreement. The amendment to the agreement set, effective April 26, 2004, new
financial covenants beginning with July 31, 2004 for minimum tangible net worth
and minimum fixed charge coverage ratio, each calculated on a rolling
three-month basis and additional financial covenants for maximum accounts
payable (other than to CIT or ICC) and minimum borrowing availability as of each
month end beginning July 31, 2004. The parties further amended the agreement to
include an EBITDA covenant as of September 20, 2004.
|
| |
On February 15, 2005 the Company obtained an amendment to the agreement setting
forth revised definitions of the Borrowing Base and Eligible Accounts Receivable
for Konsyl. The revised Borrowing Base includes increased advance rates for
eligible inventory and the Eligible Accounts Receivable was revised to include
foreign sales.
|
| |
As of January 1, 2005, January 29, 2005, February 26, 2005 and April 2, 2005,
the Company was in violation of certain financial covenants (specifically the
minimum tangible net worth, EBITDA, and the maximum accounts payable covenants)
and other provisions within its agreement with CIT as amended. The Company has
obtained a waiver dated April 15, 2005 from CIT waiving such identified events
of default under the financing agreement through April 2, 2005. As a condition
of this waiver, the Company has delivered consolidated financial statements to
CIT by April 20, 2005. The Company paid CIT fees of approximately $15,000
related to this waiver. Additionally, as a condition of the waiver, the Company
agreed to provide revised monthly financial projections to CIT, on or prior to
May 31, 2005, and the failure to deliver such projections would constitute an
event of default under the agreement. The Company has delivered said
projections. The Company also agreed to deliver monthly financial reports to CIT
as required under the agreement on a timely basis beginning with the month of
April 2005. On April 15, 2005, ICC signed this waiver reaffirming its guarantee
of the Company’s debt with CIT up to $2 million. CIT waives only the
specific events of default noted in the waiver and does not waive any other
existing events of default or future events of default. The Company does not
believe that there are any other events of default under the
agreement.
|
| |
The Company has a requirement to maintain a lockbox with the bank; however,
there are no subjective acceleration clauses in the credit agreement.
|
| |
Effective December 31, 2004, the Company further modified its term loan and
security agreement with ICC to extend the final due date for the loan from
January 31, 2005 to January 31, 2006. The loan principal under this agreement
was $22,654,000 as of January 1, 2005. Principal payments were due commencing in
January 2005 at $300,000 per month and in increasing amounts thereafter of
$325,000, $350,000 or $375,000 per month with a final payment of $18,604,000 due
in January 2006. Interest was payable monthly at 1% above the prime rate (6.75%
at January 1, 2005). The Company did not make the principal payments due
commencing in January 2005.
|
| |
Effective March 31, 2005 the Company further modified its term loan and security
agreement with ICC to extend the final due date for the loan from January 31,
2006 to April 30, 2006. The loan principal under this agreement was $24,824,000
as of March 31, 2005. Principal payments are now due commencing in April 2005 at
$300,000 per month and in increasing amounts thereafter of $325,000, $350,000 or
$375,000 per month with a final payment of $20,774,000 due in April 2006.
Interest is payable monthly at 1% above the prime rate (6.75% at March 31, 2005).
The Company did not make the principal payments due commencing in April 2005.
|
| |
The loan, as amended, is secured by a secondary security interest in all of our
assets. Additionally, the agreement with ICC contains certain negative covenants,
including a cross-default provision regarding default in payment of principal of
or interest on any other indebtedness for borrowed money owed by PFI or default
in the performance of observance of the terms of any instrument pursuant to
which such indebtedness was created or secured, the effect of which default is
to cause or permit any holder of any such indebtedness to cause the same to
become due prior to its stated maturity (and whether or not such default is
waived by the holder thereof). On April 11, 2005 the Company obtained a waiver
of current defaults.
|
| Note 7 |
Major Customers and Products and Export Sales |
| |
Sales to customers which represented more than 10% of consolidated gross sales
in the three months ended April 2, 2005 and April 3, 2004, as a percentage of
gross sales, were as follows:
|
Three Months Ended
April 2, 2005 April 3, 2004
------------------------------------
Customer
--------
Dollar General 13% 12%
Target 14% 10%
| |
As of April 2, 2005 and January 1, 2005, the two customers mentioned above
collectively represented 34% and 34% of net accounts receivable, respectively.
|
| |
Sales of ibuprofen represented 23% of net sales for the quarter ended April 2,
2005 and 28% of net sales for the quarter ended April 3, 2004.
|
| |
Sales to customers outside the United States were $404,000 and $234,000 for the
three months ended April 2, 2005 and the three months ended April 3, 2004.
|
| Note 8 |
Dilutive Securities |
| |
As of April 2, 2005 and April 3, 2004, the Company had options and warrants
outstanding that were not considered in diluted loss per share because the
effect would be antidilutive as the Company has losses in all periods presented.
|
| |
The following summarizes the options and warrants outstanding as of the dates
indicated:
|
April 2, 2005 April 3,2004
----------------- ----------------
Options 2,214,000 3,136,750
Warrants 1,310,000 1,310,000
--------- ---------
Total 3,524,000 4,446,750
========= =========
| |
As of April 3, 2004, the Company had convertible debentures outstanding that
were not considered in diluted loss per share because the effect would be
antidilutive. As of April 3, 2004 the conversion of the Company’s
convertible debentures would have resulted in the issuance of 4,513,000 shares.
These debentures were redeemed in December 2004.
|
| |
During the three months ended April 2, 2005, no options were granted under the
2004 Plan and no options were exercised.
|
| Note 10 |
Segment Information |
| |
The operating segments reported below are the segments of the Company for which
separate financial information is available and for which operating results are
evaluated regularly by Senior Management in deciding how to allocate resources
and in assessing performance. Prior to the Konsyl purchase in May 2003, PFI only
had one operating segment. Konsyl differentiated itself from PFI in the fourth
quarter of 2004 by segregating its manufacturing operations, launching a branded
product, and supporting that launch with a significant marketing expenditure.
These actions clearly demonstrated that Konsyl has become an operating segment.
In addition, all intercompany transactions have been eliminated.
|
Dollars in thousands Three months ended
-------------------------------------
April 2, 2005 April 3, 2004
------------- -------------
Net Sales
PFI $ 13,295 $ 15,862
Konsyl 2,317 2,499
-------- --------
Total Net Sales $ 15,612 $ 18,361
-------- --------
(Loss) Income from Operations
PFI $ (3,579) $ (1,609)
Konsyl (231) 227
-------- --------
Total (Loss) from Operations $ (3,810) $ (1,382)
-------- ---------
Interest Expense
PFI $ 745 $ 718
Konsyl 31 23
-------- --------
Total Interest Expense $ 776 $ 741
-------- --------
Depreciation Expense
PFI $ 401 $ 404
Konsyl 165 142
-------- --------
Total Depreciation Expense $ 566 $ 546
-------- --------
(Loss) before Income Tax Benefit
PFI $ (4,075) $ (2,076)
Konsyl (511) (47)
-------- --------
Total (Loss) before Income $ (4,586) $ (2,123)
Tax Benefit -------- --------
Income Tax Benefit
PFI $ 1,441 $ 726
Konsyl 181 22
-------- --------
Total Income Tax Benefit $ 1,622 $ 748
-------- --------
As of As of
April 2, 2005 January 1, 2005
------------- ---------------
Identifiable Assets
PFI $ 29,516 $ 30,536
Konsyl 9,590 8,825
-------- --------
Total Identifiable Assets $ 39,106 $ 39,361
-------- --------
| |
Intersegment sales were $166,000 and $-0- for the three months ended April 2,
2005 and April 3, 2004, respectively
|
| ITEM 2 |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
RESULTS OF OPERATIONS
| |
References to " the Company" include both PFI and Konsyl whereas references to
"PFI" mean the operations of PFI only excluding the Konsyl operations.
|
| |
The Company’s gross sales for the three months ended April 2, 2005 were
$16,248,000 as compared to $18,904,000 in the comparable period in the prior
year, a decrease of $2,656,000 or 14.1%. This decrease in gross sales was
primarily due to the loss of bulk manufacturing customers and lower contract
manufacturing orders at PFI. Konsyl’s gross sales were $2,443,000 in the
current three-month period as compared to $2,568,000 in the prior period. Gross
sales for PFI for the three months ended April 2, 2005 were $13,805,000 as
compared to $16,336,000 in the comparable period in the prior year, a decrease
of $2,514,000 or 15.4 %.
|
| |
The Company’s net sales for the three months ended April 2, 2005 were
$15,612,000 as compared to $18,361,000 in the comparable period in the prior
fiscal year, a decrease of $2,749,000 or 15%. This decrease in net sales was due
to the loss of bulk manufacturing customers and lower contract manufacturing
orders at PFI. Konsyl’s net sales were $2,317,000 in the current
three-month period as compared to $2,499,000 in the prior period. Net sales for
PFI for the three months ended April 2, 2005 were $13,295,000 as compared to
$15,862,000 in the comparable period in the prior year, a decrease of $2,567,000
or 16.2 %.
|
| |
The Company’s sales discounts and allowances as a percentage of gross sales
in the three months ended April 2, 2005 was 3.9% as compared to 2.9% in the
comparable period in the prior year. Konsyl’s sales discounts and
allowances as a percentage of gross sales was 5.0 % in the three months ended
April 2, 2005 as compared to 2.7% in the prior period due to increased
promotional activity. PFI’s sales discounts and allowances as a percentage
of gross sales for the three months ended April 2, 2005 was 3.7% as compared to
2.9% in the prior period. The Company’s dollar increase, year to year, was
$93,000 resulting from increased allowances given to customers as part of
promotional programs.
|
| |
The Company’s cost of sales as a percentage of net sales was 91.6% for the
three months ended April 2, 2005 as compared to 85.6% in the prior year period.
Konsyl’s cost of sales as a percentage of net sales was 54.9% for the
current three-month period as compared to 50.8% in the prior period due to
unfavorable product mix. PFI’s cost of sales as a percentage of net sales
was 98.0% for the current three-month period as compared to 91.0% in the prior
period. PFI’s cost of sales increased due to decreased production for
certain contract manufacturing and a shift in product mix in both the Private
Label and Contract Manufacturing businesses to lower margin products.
|
| |
Selling, General and Administrative
|
| |
The Company’s selling, general and administrative expenses were $5,068,000
or 32.5% of net sales for the three months ended April 2, 2005 as compared to
$3,961,000 or 21.6% of net sales in the prior year period, an increase of
$1,107,000 or 27.9%. Konsyl’s selling, general and administrative expenses
were $1,276,000 or 55.1% of net sales for the three months ended April 2, 2005
as compared to $878,000 or 35.1% of net sales in the prior period. This increase
was due to Konsyl’s higher advertising and promotional expenses for new and
existing products. PFI’s selling, general and administrative expenses were
$3,742,000 or 28.1% of net sales for the three months ended April 2, 2005 as
compared to $2,025,000 or 12.8% of net sales in the prior period. PFI’s
increase in selling, general and administrative expenses for the three months
period was primarily due to increases in legal fees related to litigation
($167,000), increases in rent due to the expiration of the capital lease on the
Company’s building in Edison, New Jersey in August 2004 and the replacement
with an operating lease ($441,000), and increases in freight expenses due to
higher fuel surcharges and expediting costs ($290,000).
|
| |
Interest expense was $776,000 for the three months ended April 2, 2005 as
compared to $741,000 for the prior year period. The increase in interest expense
in the three month period was primarily attributable to an increase in amounts
due to ICC due both to increased principal amount of borrowings and increases in
the prime rate on which these loans are based.
|
| |
We file a consolidated tax return with ICC Industries Inc., our majority
shareholder. In accordance with a tax sharing agreement between the two
companies, we will be reimbursed for the federal tax savings generated from
ICC’s use of our losses. In addition, the agreement provides for an
allocation of the group’s tax liability, based upon the ratio that each
member’s contribution of taxable income bears to the consolidated taxable
income of the group. In connection with this tax sharing agreement, we recorded
a federal tax benefit of $1,622,000 for the three months ended April 2, 2005 and
a federal tax benefit of $748,000 for the three months ended April 3, 2004.
|
| |
The Company reported a net loss of $2,964,000 or $.03 per share for the three
months ended April 2, 2005 as compared to a net loss of $1,375,000 or $.02 per
share in the prior year period.
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New Accounting Pronouncements
| |
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", which
is a revision of SFAS No. 123 and supersedes Accounting Principles Board ("APB")
Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be valued at fair value on the
date of grant, and to be expensed over the applicable vesting period. The SEC
amended the effective dates for this pronouncement for public companies by
issuing Release 33-8568. This statement is effective as of the beginning of the
first fiscal year that begins after June 15, 2005. We do not believe that
adoption of this statement will have a material impact on our financial position
or results of operations.
|
| |
In November 2004, the Financial Accounting Standards Board issued Statement 151,
Inventory Costs, ("SFAS 151") an amendment of ARB no. 43, Chapter 4, which is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The amendments made by Statement 151 will improve financial reporting
by clarifying that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and by requiring the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. We have not
completed our evaluation of the impact of SFAS 151 and therefore cannot
determine the effect that adoption of this statement will have on our financial
position and results of operations.
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Critical Accounting Estimates
| |
Our critical estimates are discussed in our Form 10-K for the year ended January
1, 2005. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying financial statements and related notes. In preparing these
financial statements, our management has made its best estimates and judgments
of certain amounts included in the financial statements, giving due
consideration to materiality. We believe that the critical accounting policies
discussed in our Form 10-K affect our more significant estimates used in the
preparation of financial statements. Management has discussed the development
and selection of the critical accounting estimates with the audit committee of
our Board of Directors, and the audit committee has reviewed our disclosures in
the 10-K relating to these estimates. There have been no changes during the
quarter in our identification of critical accounting policies and estimates.
|
| |
As of April 2, 2005, our commitments are as follows:
|
Operating
Lease Capital Lease Long-Term
Fiscal year: Obligations Obligations(1) Debt(2) Total
----------------------------------------------------------------------------
2005 $ 1,502,000 $ 611,000 $ 5,901,000 $ 8,014,000
2006 1,964,000 797,000 33,717,000 36,478,000
2007 1,964,000 717,000 1,864,000 4,545,000
2008 1,856,000 551,000 96,000 2,503,000
2009 1,764,000 358,000 - 2,122,000
Thereafter 17,052,000 7,000 - 17,059,000
----------------------------------------------------------------------------
Total Payments $26,102,000 $ 3,041,000 $41,578,000 $70,721,000
============================================================================
1 Amounts include principal payments of $2,709,000 and interest payments of $332,000.
2 Includes note payable amounts due to ICC Industries Inc. of $25,114,000.
LIQUIDITY AND CAPITAL RESOURCES
| |
As of April 2, 2005, we had negative working capital of $9,292,000, an
accumulated deficit of $88,622,000 and a stockholders’ deficit of
$28,534,000. In addition, we had a net loss of $2,964,000 for the three months
ended April 2, 2005. In view of these matters, realization of a major portion of
our assets is dependent upon our ability to meet its financing requirements and
the success of our future operations.
|
| |
We continue to address customer relationship issues and are continuing the
process of rebuilding our sales base and to pursue our plan to increase revenues
and improve operational efficiencies to restore profitability. To carry out
these plans, we have set forth certain initiatives, objectives and actions
detailed in Note 2 to the Notes to the Condensed Consolidated Financial
Statements.
|
| |
We are relying on the financial support of ICC, our majority stockholder, to
fund operations, working capital, capital spending and debt service. We believe
that cash flow from operations, our revolving credit facility and equipment and
term loan financing, plus continued financial support form ICC will be
sufficient to fund our currently anticipated operations, working capital,
capital spending and debt service through March 31, 2006. While no assurance can
be given that cash flow will be sufficient to fund operations, ICC has committed
to provide us with the necessary financing to continue our operations through
March 31, 2006. ICC has supported us in the past by providing loans, replacing
loans from our asset-based lenders and providing us with working capital. With
our less than satisfactory performance in fiscal 2004 (and the first quarter of
fiscal 2005) and the current deterioration of our business, this level of
support has increased. ICC has requested that we consider alternatives to reduce
its dependence on ICC for financial support and a special committee of the Board
was appointed to consider various alternatives including the possible sale of
the Company or our assets.
|
| |
See Note 6 to the Notes to the Condensed Consolidated Financial Statements for a
discussion of defaults under our credit agreements with our primary lender and
with ICC and the waivers obtained by us. Additionally, see Note 6 for a
discussion of modifications of our debt agreements and other borrowings.
|
| |
Cash decreased by $46,000 during the three months ended April 2, 2005.
|
| |
Total cash used in operating activities was $572,000 for the three months ended
April 2, 2005. This was attributable to a net loss of $2,964,000, an increase in
prepaid expenses and other assets of $159,000, an increase in inventories of
$1,027,000 and a decrease in due to ICC of $213,000 partially offset by non-cash
charges of $586,000 for depreciation and amortization, an increase in accounts
payable and accrued expenses of $2,276,000 and a decrease in accounts receivable
of $929,000.
|
| |
Net cash used in investing activities for the nine months ended April 2, 2005
was $121,000, attributable to expenditures for capital equipment.
|
| |
Net cash provided by financing activities for the three months ended April 2,
2005 was $647,000 due to equipment financing of $329,000 and an increase in due
to ICC of $2,170,000 partially offset by repayments of long term debt of
$1,692,000 and capital lease obligations of $160,000.
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| |
We intend to spend up to an estimated $1,000,000 for capital improvements during
the fiscal year ending December 31, 2005 to increase manufacturing capacity and
reduce manufacturing costs. We anticipate that these capital expenditures will
be funded through equipment lease financing and working capital. While we have
in the past had no difficulty in obtaining such financing, there can be no
assurance that we will obtain the financing in the future.
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| ITEM 3 |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
| |
PFI would be adversely affected by an increase in interest rates. Each 1% change
in the prime rate will change the Company’s annual interest expenditures by
approximately $384,000, based on current levels of borrowing and related base
interest rates.
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| ITEM 4 |
CONTROLS AND PROCEDURES |
| |
We have carried out an evaluation under the supervision of our management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of April 2, 2005, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed by us in the reports filed or submitted under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC, and include
controls and procedures designed to ensure that information required to be
disclosed by us in such reports is assembled and reported to our management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures.
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| |
Our independent registered public accounting firm, Grant Thornton LLP, has
advised management and the audit committee of our board of directors of two
matters that it considered to be material weaknesses in our internal controls,
as that term is defined under standards established by the Public Company
Accounting Oversight Board (United States): (i) the lack of adequate preparation
of account reconciliations and analysis necessary to accurately prepare annual
financial statements and (ii) the lack of sufficient qualified personnel in the
accounting department.
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| |
We considered these matters in connection with the quarter-end closing process
and the preparation of the consolidated financial statements for the quarter
ended April 2, 2005 included in this Form 10-Q and believe that the concerns
identified by our auditors have not impaired or prevented our ability to report
accurately our financial condition and results of operations for the periods
covered by this report. Management is actively working to assess and correct the
conditions reported by our auditors and we plan to implement certain
enhancements to our disclosure controls and our internal controls over financial
reporting in 2005 which we believe should address the issues identified by Grant
Thornton.
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| |
Our efforts to-date have included reinforcing existing policies and procedures,
undertaking timely accounting reconciliations, and hiring additional personnel
in the accounting department. The additional personnel include a Corporate
Controller who has focused on consolidations, financial reporting, financial
analysis and initiating new accounting policies and procedures as well as a
Divisional Controller for Konsyl.
|
PART II OTHER INFORMATION
| |
See Note 3 to Notes to Condensed Consolidated Financial Statements.
|
| ITEM 2 |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
| ITEM 3 |
DEFAULTS UPON SENIOR SECURITIES
|
| ITEM 4 |
SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
|
| |
When used in the Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, in the Company’s press releases and in
oral statements made with the approval of an authorized executive officer, the
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated", "estimate," "project," "expect," "believe," "hope," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
such forward-looking statements, which speak only as of the date made.
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| |
10.1 |
Waiver between the CIT Group/Business Credit, Inc., Pharmaceutical Formulation,
Inc. and Konsyl Pharmaceuticals, Inc. dated April 15, 2005 amending and waiver
of certain terms of the First Amended and Restated Financing Agreement between
the CIT Group/Business Credit, Inc. successor by merger to the CIT/Credit
Finace, Inc. and assignee of Fidelcor Business Credit Corporation (as Lender)
and Pharmaceutical Formulations, Inc. (successor by merger to Private
Formulations, Inc. f/k/a PharmaControl Corp) and Konsyl Pharmaceuticals, Inc.,
jointly and severally (collectively as Borrower) dated as of May 15, 2003.
|
| |
10.2 |
Term Loan and Security Agreement dated as of March 31, 2005 between ICC and the
Registrant.
|
| |
31 |
Certifications of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| |
32 |
Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
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.
PHARMACEUTICAL FORMULATIONS, INC.
(REGISTRANT)
|
Date: June 1, 2005
|
By: /s/ James Ingram
James Ingram
Chairman and Chief Executive Officer
(Principal Executive Officer)
|
|
Date: June 1, 2005
|
By: /s/ A. Ernest Toth, Jr.
A. Ernest Toth, Jr.
Chief Financial Officer
(Principal Accounting Officer)
|
EXHIBIT INDEX
| 10.1 |
Waiver between The CIT Group/Business Credit, Inc., Pharmaceutical Formulations,
Inc. and Konsyl Pharmaceuticals, Inc. dated April 15, 2005 amending and waiver
of certain terms of the First Amended and Restated Financing Agreement between
The CIT Group/Business Credit, Inc. successor by merger to The CIT Group/Credit
Finance, Inc. and assignee of Fidelcor Business Credit Corporation (as Lender)
and Pharmaceutical Formulations, Inc. (successor by merger to Private
Formulations, Inc. f/k/a PharmaControl Corp.) and Konsyl Pharmaceuticals, Inc.,
jointly and severally (collectively as Borrower) dated as of May 15, 2003.
|
| 10.2 |
Term Loan and Security Agreement dated as of March 31, 2005 between ICC and the
Registrant.
|
| 31 |
Certifications of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| 32 |
Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|