SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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(Mark one)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: SEPTEMBER 30, 1997
------------------
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
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PHARMACEUTICAL FORMULATIONS, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-2367644
- --------- -----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
460 PLAINFIELD AVENUE, EDISON, NJ 08818
- -------------------------------- ---------
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (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. /x/ Yes / / No
The number of shares outstanding of common stock, $.08 par value, as of October
31, 1997 was 30,228,320.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
ASSETS (UNAUDITED) (NOTE 1)
------ ------------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,444,000 $ 2,087,000
Accounts receivable - net of allowance for
doubtful accounts of $370,000 and $ 301,000 11,712,000 8,917,000
Inventories 18,589,000 17,708,000
Prepaid expenses and other current assets 1,048,000 927,000
Deferred tax asset 300,000 300,000
----------- -----------
Total current assets 34,093,000 29,939,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and
amortization of $15,186,000 and $14,574,000 18,338,000 18,075,000
OTHER ASSETS
Deferred financing costs 67,000 79,000
Deferred tax asset 490,000 490,000
Other assets 163,000 151,000
----------- ------------
$ 53,151,000 $ 48,734,000
=========== ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $ 472,000 $ 472,000
Current portion of capital lease obligations 2,103,000 2,104,000
Accounts payable 17,374,000 14,440,000
Income taxes payable 42,000 25,000
Accrued expenses 1,610,000 1,509,000
------------- ------------
Total current liabilities 21,601,000 18,550,000
LONG TERM DEBT 21,570,000 19,990,000
LONG TERM CAPITAL LEASE OBLIGATIONS 8,190,000 8,744,000
DEFERRED GAIN ON SALE/LEASEBACK 360,000 373,000
STOCKHOLDERS' EQUITY
Preferred stock - par value $1.00 per share;
10,000,000 shares authorized; 2,500,000 shares
issued and outstanding 2,500,000 2,500,000
Common stock - par value $.08 per share
Authorized - 40,000,000 shares
Issued and outstanding - 30,228,320 and 29,880,350 shares 2,415,000 2,391,000
Capital in excess of par value 37,463,000 37,412,000
Accumulated deficit (40,948,000) (41,226,000)
------------- ------------
Total stockholders' equity 1,430,000 1,077,000
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$ 53,151,000 $ 48,734,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1997 1996
(UNAUDITED) (UNAUDITED)
----------------- ------------
<S> <C> <C>
REVENUES
Gross sales $ 19,045,000 $ 15,825,000
Less: Sales discounts
and allowances 891,000 29,000
----------- -----------
Net sales 18,154,000 14,996,000
COST AND EXPENSES
Cost of goods sold 13,593,000 11,321,000
Selling, general
and administrative 2,747,000 2,302,000
Research and
development 281,000 215,000
----------- ----------
16,621,000 13,838,000
INCOME FROM OPERATIONS 1,533,000 1,158,000
OTHER INCOME (EXPENSE)
Interest expense ( 1,022,000) ( 893,000)
Other ( 91,000) 56,000
------------ ------------
( 1,113,000) ( 837,000)
INCOME BEFORE INCOME
TAXES 420,000 321,000
INCOME TAXES 142,000 110,000
----------- --------
NET INCOME 278,000 211,000
Preferred stock dividend 50,000 50,000
requirement ------------ ------------
Net income attributable
to common shareholders $228,000 $161,000
============ ============
INCOME PER COMMON AND COMMON EQUIVALENT
SHARE $.01 $.01
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING 30,546,000 30,711,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
SEPTEMBER 30,
1997 1996
(UNAUDITED) (UNAUDITED)
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 278,000 $ 211,000
Adjustments to reconcile net income to
net cash provided by (used for) operating
activities:
Depreciation and amortization of
property, plant and equipment 612,000 537,000
Amortization of bond discount and
deferred financing costs 53,000 49,000
Amortization of deferred gain on
sale/leaseback ( 13,000) ( 13,000)
Deferred tax -- 110,000
Changes in current assets and liabilities
(Increase)in accounts receivable ( 2,795,000) ( 1,830,000)
(Increase)in inventories ( 881,000) ( 3,766,000)
(Increase)in other current assets ( 121,000) ( 5,000)
Increase in accounts payable and accrued
expenses and income taxes payable 3,052,000 2,569,000
------------ --------------
Net cash provided by (used in)
operating activities 185,000 ( 2,138,000)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in other assets (12,000) ( 15,000)
(Increase) in property, plant and equipment ( 875,000) ( 670,000)
-------------- ---------------
Net cash (used in) investing
activities ( 887,000) ( 685,000)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings under line of credit 1,640,000 2,500,000
Principal payments of capital lease
obligations ( 555,000) ( 469,000)
Principal repayments of long-term debt ( 101,000) ( 146,000)
Issuance of common stock 75,000 --
-------------- ----------------
Net cash provided by financing
activities 1,059,000 1,885,000
-------------- ----------------
Net increase (decrease) in cash 357,000 ( 938,000)
CASH, beginning of period 2,087,000 1,284,000
-------------- ----------------
CASH, end of period $ 2,444,000 $ 346,000
=============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: INTERIM FINANCIAL REPORTING:
The consolidated balance sheet as of June 30, 1997 has been
derived from the audited consolidated balance sheet for the fiscal
year then ended and is presented for comparative purposes.
The accompanying financial statements presume that users have read
the audited financial statements for the preceding fiscal year.
Accordingly, footnotes which would substantially duplicate such
disclosure have been omitted.
The interim financial statements reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of
the results for the interim periods presented. Such adjustments
consist solely of normal recurring accruals.
The results of operations for the three months ended September 30,
1997 are not necessarily indicative of the results to be expected
for a full year.
Note 2: CONTINGENCIES:
Other than as described below, no material proceedings to which
the Company is a party, or to which any of its properties are
subject, are pending or are known to be contemplated, and the
Company knows of no material legal proceedings, pending or
threatened, or judgments entered against any director or officer of
the Company in his capacity as such.
On July 3, 1997, the Company received an arbitration demand dated
June 27, 1997, from the estate of Dr. Max Tesler, the former
President of the Company who died in December 1996. For alleged
breaches of employment and other agreements between the Company and
Dr. Tesler, the estate is seeking an award of $5,500,000 in
compensatory damages, $10,000,000 in punitive damages, and
$10,000,000 for special damages, and such number of shares of common
stock of the Company as would equal 10% of the total number of
shares outstanding. For claimed tortuous conduct, the estate is
seeking $20,000,000 for intentional infliction of emotional distress
and $5,000,000 for prima facie tort. The estate is also seeking
attorney's fees and a revised warrant agreement pursuant to claimed
antidilution provisions.
The claimed breaches of contract include failure to pay (a) salary
through December 1998, (b) change of control payments on the
assumption that there was a change of control, as defined, in a 1996
annual meeting and (c) death benefits.
With respect to the claim for continuing salary, the Company has
advised the estate of counterclaims which the Company has, which
exceed the amount of such payments. The Company maintains that as a
result of the termination of Dr. Tesler's employment in December
1995, the Company ceased to have any liability under the
change-of-control and death benefit provisions of the various
agreements with Dr. Tesler, as well as having other defenses to such
claims. It is also the Company's position that certain provisions of
the warrants issued to Dr. Tesler were not as agreed and authorized.
In December 1995, the Company accrued the continuing salary due to
Dr. Tesler for the period through December 1998. It has not made
provisions for any other amounts claimed, nor has it accrued any
amounts due from the estate. As noted above, the Company believes
that the claims in excess of the amount reserved are without merit
and that the Company has valid offsetting claims. The Company
intends to vigorously defend against the arbitration claim and to
prosecute its claims against the estate.
In or about October 1991, an action was instituted against the
Company by an individual seeking monies claimed to be due under an
alleged employment agreement. The Company has interposed
counterclaims against plaintiff for fraud and related claims and
seeks damages in the amount of $5,000,000. This case has been moved
to the "inactive" trial list. No further action will be taken by
either party unless and until plaintiff seeks to restore the matter.
Note 3: INVENTORIES:
September 30, June 30,
Inventories consist of the 1997 1997
following:
Raw materials $ 5,617,000 $ 5,707,000
Work in process 1,058,000 841,000
Finished goods 11,914,000 11,160,000
----------- -----------
$18,589,000 $17,708,000
=========== ============
Note 4: DIVIDENDS:
No dividends were declared during any period presented on common
or preferred stock. Preferred stock dividends in arrears total
$300,000 at September 30, 1997.
Note 5: EARNINGS PER SHARE:
Earnings per share are based on the weighted average number of
common and common equivalent shares outstanding for the period.
Common equivalent shares consist of the dilutive effect of unissued
shares under options, warrants and in the case of fully-diluted
earnings per share, convertible debentures and preferred stock,
computed using the treasury stock method with the average stock
prices for the primary basis and the higher of average or period end
stock prices for fully-diluted basis. Fully-diluted earnings per
share are not presented since the amounts are substantially the same
as primary earnings per share.
Note 6: RELATED PARTY TRANSACTIONS:
The following transactions with ICC Industries Inc. ("ICC"), an
affiliated company, are reflected in the consolidated financial
statements as of or for the three months ended September 30, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Inventory purchases from ICC $ 495,000 $ 275,000
Interest expense 84,000 122,000
Accounts payable to ICC 1,014,000 329,000
Equipment lease obligations due ICC 2,975,000 4,304,000
Other receivables from ICC 0 213,000
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Gross sales for the three months ended September 30, 1997 were $19,045,000 as
compared to $15,825,000 in the comparable period in the prior fiscal year. The
increase in sales of $3,220,000 or 20.3% is a result of new customers obtained
by the Company and increased sales to existing customers. All three sectors of
the Company's business-private label (store brand), bulk and contract had an
increase in sales as compared to the prior period. Two customers represented
37.7% of sales for the three months ended September 30, 1997. These two
customers are Walgreen Company ("Walgreen") and Costco Wholesale ("Costco").
Sales to these two customers were $7,185,000 or 37.7% of gross sales as compared
to $4,642,000 or 29.3% in the comparable period in the prior fiscal year.
Cost of sales as a percentage of net sales was 74.9% for the three month period
ended September 30, 1997 as compared to 75.5% in the comparable period in the
prior fiscal year. The reduction in cost of sales as a percentage of net sales
is a result of the increased sales, manufacturing efficiencies, lower raw
material costs and overall cost containment.
Selling, general and administrative expenses were $2,747,000 or 15.1% of net
sales for the three months ended September 30, 1997 as compared to $2,302,000 or
15.4% of net sales for the comparable period in the prior fiscal year. The
increase of $445,000 is mainly a result of increased sales and distribution
costs due to the increased sales volume.
Research and development costs were $281,000 for the three months ended
September 30, 1997 as compared to $215,000 in the comparable period in the prior
fiscal year. The increase represents the Company's continuing effort to develop
new products to continue the growth in sales and profits.
Interest expense was $1,092,000 for the three months ended September 30, 1997 as
compared to $893,000 in the comparable period in the prior fiscal year. The
increase is a result of increases in the revolving credit facility to finance
increases in accounts receivable and inventory.
The Company recorded a provision for income taxes of $142,000 as compared to
$110,000 in the comparable period in the prior fiscal year.
Net income for the three months ended September 30, 1997 was $278,000 or $.01
per share as compared to $211,000 or $.01 per share in the prior fiscal year.
The Company continues to take steps aimed at increasing the profitability of the
Company. These steps include: (a) seeking new customers and products to increase
sales volume, (b) continuing efforts to reduce material costs and (c) other
cost-saving measures and actions to improve profitability. There can be no
assurance that such actions will be successful in enabling the Company to
continue to realize profitable results.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of $12,492,000 as
compared to $11,389,000 at June 30, 1997. The increase of $1,103,000 is due to
the net income for the three months ended September 30, 1997, and an increase in
borrowing from the Company's institutional lender to finance the growth in
accounts receivable and inventory. The increase in working capital includes
increases in accounts receivable ($2,795,000) and inventory (881,000) offset by
increases in accounts payable of $2,934,000. The increase in accounts receivable
is due to higher sales. The increase in inventories is necessary to support the
customer service requirements of new customers obtained by the Company and
increased sales to current customers.
The Company received $185,000 cash from operations in the three months ended
September 30, 1997. These funds, along with proceeds from the line of credit
were used to purchase property and equipment of $875,000 and pay debt of
$656,000.
The Company has a $17,500,000 asset-based line of credit with an institutional
lender. At September 30, 1997, the Company had $419,000 of unused availability
under this agreement. The line of credit expires February 4, 1999, and bears
interest of 1 1/4% above the prime lending rate (currently 8.5%). The Company
intends to refinance this loan as it has done in the past by extending the debt
agreement or initiating a new loan agreement with another financial institution
and the Company does not expect any problems in obtaining such extension or
replacement financing.
The Company has outstanding 2,500,000 shares of Series A cumulative redeemable
convertible preferred stock sold to ICC. Dividends from April 8, 1996, through
September 30, 1997 (totaling $300,000) have accumulated and are in arrears.
There is no obligation or intention to pay dividends currently on the preferred
stock. Dividends will continue to accrue at the rate of $200,000 per year until
declared and paid.
The Company continues to take steps to increase sales and reduce costs to
improve operating results and increase profitability. The Company intends to add
an estimated $3,000,000 of capital equipment in the fiscal year ending June 30,
1998 to increase manufacturing capacity and reduce cost. The Company intends for
these capital leases to be financed through ICC or other parties. While the
Company has in the past had no difficulty in obtaining lease financing or
meeting working capital needs, there can be no assurance the Company will obtain
the capital lease financing or meet working capital needs in the future.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
See Note 2 to Notes to Consolidated Financial Statements.
Item 2: CHANGES IN SECURITIES
In August 1997, 300,000 shares in common stock were issued to
an individual pursuant to the exercise of a warrant dated July 1993
at $.25 per share. The issuance of such shares was exempt from
registration as a transaction not involving a public offering of
securities.
Item 3: DEFAULTS UPON SENIOR SECURITIES
None.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
Item 5: OTHER INFORMATION
An amendment to the Corporation's 1994 Stock Option Plan to increase
the number of shares in the plan from 1,000,000 to 1,500,000 and the
adoption of the Corporation's 1997 Incentive Plan were approved at
the 1997 Annual Meeting of Stockholders held on October 15, 1997.
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.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits.
10.14 1997 Stock Incentive Plan.*
(b). Reports on Form 8-K
A Form 8-K was filed on July 8, 1997 reporting under Item 5
certain arbitration proceedings instituted by the estate of
Dr. Max Tesler.
* Management contracts or compensating plan
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
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: November 12, 1997 By: /S/ CHARLES E. LAROSA
-------------------------------------
Charles E. LaRosa
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 12, 1997 By: /S/ FRANK MARCHESE
------------------------------------
Frank Marchese
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Exhibit 10.14
ADOPTED: 10/15/97
APPROVED BY STOCKHOLDERS: 10/15/97
PHARMACEUTICAL FORMULATIONS, INC.
1997 STOCK INCENTIVE PLAN
1. PURPOSE. The purpose of this plan (the "Plan") is to provide a means
whereby Pharmaceutical Formulations, Inc. (the "Company") may, through the grant
to employees of and certain consultants and advisors to the Company shares of
the Company's Common Stock (as defined below) as compensation ("Stock Grants"),
attract and retain persons of ability (including officers and directors who are
also employees) of the Company and of any Subsidiary (as defined below), as key
employees, consultants and advisors and motivate such employees, consultants and
advisors to exert their best efforts on behalf of the Company and any
Subsidiary.
As used herein, the term "Subsidiary" shall mean any corporation which at
the time of the making of a Stock Grant qualifies as a subsidiary of the Company
under the definition of "subsidiary corporation" in Section 425(f) of the
Internal Revenue Code of 1986 (the "Code"), or any similar provision hereinafter
enacted.
2. NUMBER OF SHARES AVAILABLE UNDER PLAN; RECIPIENTS. Stock Grants may be
made by the Company under the Plan from time to time to key employees of the
Company or any Subsidiary, and to individual consultants and advisors to the
Company or any Subsidiary who have provided BONA FIDE services which are not in
connection with the offer or sale of securities in capital-raising transactions
(such persons receiving Stock Grants being hereafter referred to as
"recipients") with respect to up to and including an aggregate of 200,000 shares
of Common Stock ($.08 par value) of the Company (the "Common Stock") for all
recipients and 200,000 such shares shall be reserved for grant under the Plan
(subject to adjustment as provided in paragraph 7). Shares, if any, which have
been forfeited under any conditions imposed pursuant to the Plan may be
re-granted only if the recipient received no benefits of ownership (including
dividends but excluding voting rights) prior to forfeiture.
3. ADMINISTRATION. The Plan shall be administered by a Stock Incentive
Committee (the "Committee") consisting of not less than two directors of the
Company appointed by the Board of Directors of the Company (the "Board"), which
members shall, to the extent that such persons are available, be "non-employee
directors" (as defined below). A member of the Board shall be deemed to be a
non-employee director only if he or she satisfies (a) such requirements as the
Securities and Exchange Commission may establish for non-employee directors
administering plans intended to qualify for exemption under Rule 16b-3 (or its
successor) under the Securities Exchange Act of 1934, as amended, and (b) such
requirements as the Internal Revenue Service may establish for outside directors
acting under plans intended to qualify for exemption under Section 162(m) (4)(C)
of the Code. The Board may also appoint one or more separate committees of the
Board, each composed of one or more directors of the Company who need not be
non-employee directors, who may administer the Plan with respect to recipients
who are not considered officers or directors of the Company under Section 16 of
the Exchange Act, may make grants under the Plan to such recipients and may
determine all terms of such grants. If the Company does not have at least two
directors who satisfy the non-employee director standard, as defined above,
awards granted under the Plan may not qualify under Rule 16b-3 or be deemed to
be performance-based compensation under regulations issued pursuant to Section
162(m) of the Code. The Board may at any time remove any member of the Committee
with or without cause. Any vacancy occurring in the membership of the Committee
shall be filled by appointment by the Board.
The Committee may interpret the Plan, prescribe, amend, and rescind any
rules and regulations necessary or appropriate for the administration of the
Plan, and make such other determinations and take such other action as it deems
necessary or advisable, except as such action may be otherwise expressly
reserved in the Plan to the Board. Any interpretation, determination, or other
action made or taken by the Committee shall be final, binding and conclusive.
Any decision or determination reduced to writing and signed by all members of
the Committee shall be fully as effective as if made by unanimous vote at a
meeting duly called and held.
The Committee may employ such legal counsel, consultants and agents as it
may deem desirable for the administration of the Plan and may rely upon any
opinion received from any such counsel or consultant and any computation
received from any such consultant or agent.
No member or former member of the Committee or of the Board shall be liable
for any action or determination made in good faith with respect to the Plan or
any Stock Incentive awarded under it. To the maximum extent permitted by
applicable law, each member or former member of the Committee or of the Board
shall be indemnified and held harmless by the Company against any cost or
expense (including counsel fees, which fees may be advanced by the Company), or
liability (including any sum paid in settlement of a claim with the approval of
the Company) arising out of any act or omission to act in connection with the
Plan unless arising out of such member's or former member's own fraud or bad
faith. Such indemnification shall be in addition to any rights of
indemnification the members or former members may have as directors or under the
Certificate of Incorporation or By-Laws of the Company.
4. ELIGIBILITY AND AWARDS. Subject to the provisions of the Plan, the
Committee shall have the power to (a) authorize the Stock Grants; (b) determine
and designate from time to time those employees of or consultants or advisors to
the Company or of any Subsidiary to whom Stock Grants are to be made; (c)
determine the number of shares to be granted or the basis, if any, on which such
number shall be calculated; (d) determine whether any grant shall be subject to
any conditions, including any (i) holding period requirement, (ii) length of
service ("vesting") requirement or (iii) surrender or sale ("forfeiture")
requirement upon leaving the employ or retainer of the Company or a Subsidiary
or under other conditions (and if any such conditions are imposed, what
restrictions on transfer and requirements for legending certificates shall be
required or whether any escrow of such shares shall be required during any
vesting or forfeiture period). All recipients shall be given the opportunity to
decline any Stock Grant awarded to them. The Committee may include among the
conditions for a stock grant the requirement that the performance of the Company
or a business unit of the Company (as determined by the Company's independent
auditors) for a specified period of one or more years equal or exceed a target
determined in advance by the Committee. Such target shall be based on one or
more of the financial, operational and marketing criteria set forth in Schedule
A. The Committee shall determine whether any such target has been met not later
than the 90th day of such period. In no event shall the number of shares of
stock granted which are subject to performance-based vesting conditions and
which are granted to any recipient in a single calendar year exceed 1% of the
Common Stock of the Company outstanding on the date of approval of the Plan by
the stockholders of the Company, subject to adjustment in accordance with
Section 7. To the extent that a Stock Grant is made in the form of newly issued
shares of Common Stock, the recipient, as a condition to such grant, shall be
required to provide consideration to the Company in the form of cash or services
previously rendered in an amount equal to the par value of such shares; to the
extent that a grant is made from the Company's treasury, no consideration shall
be required of the recipient.
5. FORM OF AGREEMENT. Each Stock Grant under the Plan shall be evidenced by
an agreement, in form approved by the Committee, which shall include such terms
and conditions as the Committee may deem appropriate.
6. NO RIGHTS AS A STOCKHOLDER. No recipient shall have any rights as a
stockholder with respect to any shares of Common Stock subject to a Stock Grant
prior to the date of issuance of a certificate or certificates for such shares.
7. ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK. In the event of any
change in the Common Stock of the Company by reason of any stock dividend,
recapitalization, reorganization, merger, consolidation, split-up, combination,
or exchange of shares, or rights offering to purchase Common Stock at a price
substantially below fair market value, or of any similar change affecting the
Common Stock, the number and kind of shares which thereafter may be issued upon
the issuance of Stock Grants shall be appropriately adjusted consistent with
such change in such manner as the Committee may deem equitable to prevent
substantial dilution or enlargement of the rights granted to, or available for,
recipients under the Plan.
8. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, and the Stock
Grants thereunder and the obligation of the Company to deliver shares of Common
Stock pursuant to such Stock Grants, shall be subject to all applicable federal
and state laws, rules and regulations and to such approvals by any government or
regulatory agency as may be required. No Stock Grant may be made pursuant to the
Plan when such Stock Grant, or the granting thereof, would result in the
violation of any law or governmental order or regulation. The Plan is intended
to enable the Plan to comply with the requirements of Rule 16b-3 under the
Exchange Act (or any successor provision thereto), and any provision
inconsistent with such Rule shall be inoperative and shall not affect the
validity of the Plan. If at any time the Committee shall determine in its
discretion that the listing, registration or qualification of the shares covered
by the Plan upon any national securities exchange or under any state or federal
law, or the consent or approval of any government regulatory body, is necessary
or desirable as a condition of, or in connection with, the issuance of shares
under the Plan, no shares will be delivered unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained, or otherwise provided for, free of any conditions not acceptable to
the Committee. If shares are not required to be or have not been registered, the
Company may require each recipient, as a condition of Recipient's acceptance, to
represent that the shares are being acquired for investment only and not with a
view to their sale or distribution, and make such other representations and
furnish such information deemed appropriate by counsel to the Company and stock
certificates evidencing unregistered shares acquired pursuant to the Plan may be
subject to stop orders and shall bear any legend required by or appropriate
under applicable securities laws.
9. NO RIGHTS TO CONTINUED EMPLOYMENT. The Plan and any Stock Grant under
the Plan shall not confer upon any recipient or other employee any right with
respect to continuance of employment by the Company or any Subsidiary, nor shall
they affect in any way the right of the Company or any Subsidiary by which a
recipient is employed to terminate such person's employment at any time.
10. WITHHOLDING. The Committee in its discretion may cause to be made as a
condition precedent to the issuance of any Stock Grant appropriate arrangements
for the withholding of any federal, state, local or foreign taxes.
11. AMENDMENT, SUSPENSION AND DISCONTINUANCE. Except as hereinafter
provided, the Board of Directors or the Committee may at any time withdraw or
from time to time amend the Plan as it relates to, and the terms and conditions
of, any Stock Grant not theretofore made, and the Board of Directors or the
Committee, with the consent of the affected recipient of a Stock Grant, may at
any time withdraw or from time to time amend the Plan as it relates to, and the
terms and conditions of, any outstanding Stock Grant. An amendment of the Plan
shall be subject to the approval of the Company's stockholders only to the
extent required by applicable law, regulations or rules or as otherwise decided
by the Board of Directors.
12. EFFECTIVE DATE AND TERM. The effective date of the Plan shall be date
on which it is approved by the stockholders of the Company. The Plan shall
terminate on and no Stock Grant shall be made after the expiration of ten years
from the effective date of the Plan.
13. NAME. The Plan shall be known as the " Pharmaceutical Formulations,
Inc. 1997 Stock Incentive Plan."
<PAGE>
SCHEDULE A
Financial Operating Cash Flow
Net Income
Earnings Per Share
Return on Assets
Return on Equity
Revenue Growth
Economic Value Added
Operational New Products
Marketing Market Share
Margins
Customer Satisfaction
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at September 30, 1997 (Unaudited) and the
Consolidated Statement of Operations for the Three Months Ended September 30,
1997 (Unaudited) 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> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,444,000
<SECURITIES> 0
<RECEIVABLES> 11,712,000
<ALLOWANCES> 370,000
<INVENTORY> 18,589,000
<CURRENT-ASSETS> 34,093,000
<PP&E> 18,338,000
<DEPRECIATION> 15,186,000
<TOTAL-ASSETS> 53,151,000
<CURRENT-LIABILITIES> 21,601,000
<BONDS> 0
0
2,500,000
<COMMON> 2,415,000
<OTHER-SE> 37,463,000
<TOTAL-LIABILITY-AND-EQUITY> 53,151,000
<SALES> 19,045,000
<TOTAL-REVENUES> 19,045,000
<CGS> 13,593,000
<TOTAL-COSTS> 16,621,000
<OTHER-EXPENSES> 1,113,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,022,000
<INCOME-PRETAX> 420,000
<INCOME-TAX> 142,000
<INCOME-CONTINUING> 278,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278,000
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
